Hong Kong Court Refused To Wind Up A Foreign Company As Liquidators Would Not Have Any Power Over Offshore Subsidiaries

• Published date: 03 February 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: Herbert Smith Freehills
• Author: Mr Gareth Thomas, Alexander Aitken, Jojo Fan and Peter Ng

In Re Grand Peace Group Holdings Limited [2021] HKCFI 2361, the Hong Kong Court refused to exercise its discretionary jurisdiction to wind up an offshore holding company due to difficulties in the recognition of Hong Kong liquidators in the BVI.

Background

The company was incorporated in Bermuda (the Company) and had been delisted from the Hong Kong Stock Exchange. The Company had subsidiaries incorporated in the British Virgin Islands (the BVI subsidiaries) that owned some companies in Mainland China (the Mainland subsidiaries). The BVI subsidiaries also carried on funeral and money lending business in Hong Kong. The Mainland subsidiaries did not have any assets.

A petition to wind up the Company was presented in December 2019 (the Petition) and had been adjourned to facilitate restructuring. A creditor of the Company, Mr Chan (the Applicant), became dissatisfied with the progress of the restructuring and applied to be substituted as the petitioner.

Issue

The issue in this application was whether the Court should exercise its discretionary jurisdiction to wind up a foreign incorporated company. The Court agreed that the appropriate course seemed to be to make a usual winding up order given the lack of a feasible restructuring plan. However, as the Company was not incorporated in Hong Kong, the three usual core requirements must be satisfied before the Court would exercise its discretion to wind up this foreign incorporated company, namely:

• a sufficient connection with Hong Kong;
• a reasonable possibility that the winding up order would benefit those applying for it. The benefit must be real and discernible; and
• the ability of the court to exercise jurisdiction over one or more persons in the distribution of the company's assets.

The crux of the dispute was the second core requirement. The Court noted that, prior to the signing of a cooperation agreement by the Secretary for Justice and the Supreme People's Court for mutual recognition of insolvency processes on 14 May 2021 (the Cooperation Mechanism), a Mainland court would recognise the status of a foreign liquidator of a company only if the latter was appointed by the courts of the place of incorporation of that company. At the same time, it appeared from Bermuda, Cayman and BVI case law that a BVI court would not recognise liquidators appointed in Hong Kong over a company incorporated in Bermuda or Cayman Islands. The cumulative effect was that if the Hong Kong Court appointed liquidators over the...