Passing The Golden Thread Through The Eye Of A Needle - Observations On Recent Approach As Between Hong Kong And Offshore Jurisdictions

• Published date: 05 October 2021
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Walkers
• Author: Tom Pugh

In Singularis¹, as is well known, the Privy Council Board considered the doctrine of modified universalism whereby, broadly speaking, a court will give such assistance as it can to foreign insolvency proceedings, as is consistent with local law and local public policy, so as to ensure that a company's assets are distributed under a single system; and held by a majority that there is a common law power to assist a foreign insolvency, although the power could not be used to enable foreign liquidators to do something that they could not do under the law of the jurisdiction under which they were appointed; the principle is concerned with cooperation rather than interference with foreign laws. The application of such a power has resonated with similar common law jurisdictions globally.

Lord Hoffmann referred to the principle as "... the golden thread running through English cross-border insolvency law since the 18th century."² With the increasingly international nature of insolvency law, threading the needle over the extent to, and conditions under, which foreign insolvency proceedings and judgments should be given effect in jurisdictions outside that in which they are being conducted can be challenging.

Whilst as a starting point the place of incorporation is taken as the appropriate forum for the winding up of a company, the prevalence of offshore incorporated holding vehicles for operations headquartered in financial centres like Hong Kong gives rise to recognition considerations and the need to utilise the available regime most appropriate to the circumstances.

At its most basic, the question of where an insolvent debtor's assets lie and the ability to recover them for the benefit of creditors as a whole, rather than to allow first-movers to make disproportionate recovery at the expense of other creditors, means that grappling with the primacy of any jurisdiction is complex. The tension that arises is that between the perceived preference for a single worldwide asset collection and distribution process whilst recognising foreign courts' entitlement to protect local creditors where permissible in their own jurisdictions. Deciding who is best placed to administer an orderly wind down for the benefit of creditors can therefore be a difficult question: the shortfall of assets in an insolvency will highlight jurisdictional differences in approach as to questions of priority, potentially territorial rather than universalist.

As the questions of asset and creditor location continue to come to the fore and the prospect of greater assistance among certain mainland Chinese municipalities and Hong Kong has been formally recorded³, some recent decisions highlight various considerations under exploration.

Bermuda Triangle

Businesses running operations through Hong Kong for a variety of reasons will often employ multi-jurisdictional structures, whilst the primary underlying assets may also be situated outside Hong Kong. Bermuda, BVI and Cayman Islands -incorporated companies are often favoured as holding and intermediate entities in such structures.

The Hong Kong Stock Exchange is one of the largest globally and a significant proportion of the companies listed on it hold assets and operations in mainland China. Accordingly, Hong Kong remains a key offshore capital-raising centre for Chinese enterprises and also acts as a conduit for access to the mainland Chinese market. As of the end of 2020, 1,431 mainland Chinese companies were listed in Hong Kong, with total market capitalisation of around USD4.9 trillion, or 80 per cent. of the total market capitalisation.⁴

This naturally informs the basis on which principles of insolvency law often fall to be applied in Hong Kong: addressing the failures of Hong Kong-listed, Bermuda/Caribbean -incorporated entities with assets predominantly in mainland China and foreign-law (often English or New York law) governed debts.

In China Huiyuan Juice⁵, the Hong Kong Companies Judge noted that: "[s]ince the court resumed hearings in May [2020] more than half of the petitions I have heard have involved listed companies. Remarkably petitions to wind-up Hong Kong incorporated companies operating domestic businesses are currently a minority. In addition I have received weekly applications for recognition and assistance by soft-touch provisional liquidators of companies incorporated in one of the offshore jurisdictions and listed here ...".

Moving the needle

A foreign incorporated company can be wound up in Hong Kong if three core requirements can be satisfied: (i) the company has a sufficient connection with Hong Kong (which may not require assets in Hong Kong); (ii) there is a real possibility that a winding-up order would benefit the petitioner; and (iii) the Hong Kong court is able to exercise jurisdiction over one or more persons in the distribution of the company's assets.

China Huiyuan Juice⁶

In China Huiyuan Juice, the debtor company did not dispute the relevant debt, but sought to have the Hong Kong winding up petition adjourned pending a restructuring of its debts propounded by its onshore creditors in mainland China. The Hong Kong Companies Court held that the debtor company would not be liable to be wound up in Hong Kong because the petition did not meet the second core requirement (see above) for the Hong Kong winding-up jurisdiction of...