Covering Ears To Steal Bells: Ignoring Insolvency At Risk Of Liquidation

• Published date: 23 October 2020
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Conyers
• Author: Mr Alex Potts QC and Norman Hau

The closest Chinese equivalent to the English idiom of 'sticking one's head in the sand' is 'covering one's ears to steal bells'.

Both idioms express the received wisdom that it is unproductive to ignore objective reality.

In other words, it is better to face difficult facts and to engage with them, as soon as possible.

This is certainly true in the case of financially distressed or insolvent companies doing business in the PRC, incorporated in offshore jurisdictions such as Bermuda or the Cayman Islands, and whose shares are listed on the Hong Kong Stock Exchange.

Take Action Sooner Rather than Later

In light of COVID-19, the Courts of Hong Kong, Bermuda, and the Cayman Islands have been keen to get the message out to indebted Hong Kong and PRC based corporate groups that it is best to engage, as soon as possible, with legal, financial, and restructuring advisors (and with offshore creditors) to reduce the risk of a compulsory liquidation of an offshore holding company, and to increase the prospect of an effective and successful restructuring.

In other words, don't just ignore payment deadlines; offshore creditors' claims; statutory demands; or winding up petitions.

Take advice!

The following Court judgments from the past 12 months are noteworthy in this respect.

In Re Chase On Development Ltd [2020] HKCFI 629, Harris J wound up the Company immediately, despite a last-minute application by the Company to adjourn the hearing to allow a potential restructuring of its parent company, Sun Cheong Creative Development Holdings Limited (a Cayman Islands company), to take place.

Harris J noted that, in cases in which (a) a company is clearly insolvent and (b) a petitioner's debt is not in dispute, an important consideration, when a court is being asked to adjourn a winding-up petition in order to allow the Company time to attempt to restructure its debt, are the views of the Company's unsecured creditors.

If the creditors take different views, the Court will normally take into account all the circumstances of the case, including the following considerations:

(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against, or the proportion of the value of the debt they hold;

(b) The reasons put forward by the supporting and opposing creditors; and

(c) The feasibility of the proposed restructuring.

In this respect, the Hong Kong Court has cited, with approval, the decision of Mr. Justice Segal of the Grand Court of the Cayman Islands in Re Grand T G Gold Holdings Ltd, 30 August 2016¹

In the case of Chase On Development Ltd, however, the Company was unable to produce a single letter from an unsecured...