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Hong Kong Court Recognises Foreign Court Orders Despite Local Limitations
15 June 2020

In the decision of Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd [2020] HKCFI 825 on 21 May 2020, Mr Justice Harris, the current Companies Court Judge, reaffirmed the Court’s trend of recognizing foreign soft-touch provisional liquidators following decisions like Re Joint Provisional Liquidators of Moody Technology Holdings [2020] HKCFI 416 despite that soft-touch liquidation is not permissible under Hong Kong insolvency law.  However, the recognition is without prejudice to and could not overwide the existing Hong Kong winding up petition against China Oil.

Background

China Oil Gangran Energy Group Holdings Limited (the “Company”), incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange, was in financial difficulties and became subject to a winding-up petition in Hong Kong on 24 April 2019.  The Company’s shares were suspended from trading on 2 July 2019.

On the Company’s own application on 5 November 2019, the Cayman court appointed soft-touch provisional liquidators over the Company.  This type of liquidation allows a company to remain under the day-to-day control of its own directors while being protected against creditors’ actions, thereby allowing the Company to explore restructuring.  The Company then put forward a restructuring plan in order to resume trading of its shares.

The Cayman soft-touch provisional liquidators applied for recognition and assistance in Hong Kong in April 2020.

The Decision

In the Harris J’s judgment, the Court discussed at length the underlying rationale for recognition despite the limitations in granting similar powers to local provisional liquidators appointed by a Hong Kong Court as a result of Re Legend International Resorts Ltd [2006] 2 HKLRD 192.  In particular, the impermissibility to appoint soft-touch provisional liquidators should not bar a Hong Kong Court from recognizing foreign soft-touch provisional liquidators because they will not be acting in the capacity of provisional liquidators appointed by Hong Kong Courts, but as agents of the company, recognition of which is in line with private international law, and there is no legal inconsistency.  Since all types of provisional liquidators have the same need to investigate a debtor’s affairs, it would constitute an unwarranted discrimination if the Court refused to assist foreign provisional liquidators simply on the basis that they were appointed on a soft-touch basis.

In the present seminal case, Mr Justice Harris further referred to case law precedents in the United States and Jersey to demonstrate the common law’s recognition of foreign insolvency mechanisms which have no local equivalent in the jurisdiction of the recognizing Court to justify the propriety of the recognition regime in Hong Kong.

Slippery slope implication?

The recognition regime of Hong Kong Courts may have given the expectation that an offshore debtor subject to a Hong Kong winding-up petition could stay the petition proceedings simply by engaging in offshore soft-touch provisional liquidation.  However, as expressly stated in Mr Justice Harris’ decision, the recognition order is without prejudice to the pending winding-up petition against the Company.  Clearly, while the Court is happy to follow the robust approach of other common law jurisdictions that better facilitates cross-border insolvencies which are increasingly common in the current global economy, it is not prepared to allow the mere existence of foreign soft-touch provisional liquidation to constitute a ground of opposition against a Hong Kong winding-up petition.

His Lordship also commented that the lack of legislation, other than schemes of arrangement, in Hong Kong for corporate debt restructuring or rehabilitation is an unsatisfactory state of affairs that creates more burden on the economy amidst the current COVID-19 pandemic.  It is insufficient that only the Courts are taking great strides in these cases to match common law’s flexibility and his Lordship urged that immediate steps should be taken to improve the legislative position.  He also appends the modified standard-form order to his Reasons for Decision in order to provide guidance for practitioners and facilitate future grant of recognition orders.

Conclusion

This case further strengthens the recognition regime being developed by the Hong Kong Courts.  The Courts’ practice reflects an encouraging commitment to pragmatism, common law’s flexibility and facilitating cross-border restructurings, but also highlights the deficiencies in Hong Kong’s insolvency law and an urgent need for reform of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, (Cap 32).

If you have any questions about the above eNews or queries relating to insolvency or dispute resolution generally, experienced lawyers in our Litigation team will be happy to assist you.

 

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