Under s.268 of the Hong Kong Companies Ordinance
("CO"), the Hong Kong Court has a discretion to grant
leave to Liquidators to disclaim "onerous property"
within a 12 month time limit (or such extended period as granted by
the Court). The categories of what "onerous property"
might be disclaimed under s.268 CO includes "unprofitable
contracts". Although s.268 CO has been a part of Hong Kong
insolvency law since 1933, there is very limited Hong Kong
authority on its application. Until now, there has been no clear
Hong Kong authority on the application of s.268 CO insofar as
"unprofitable contracts" are concerned.
In a High Court decision made on 19 May 2010, following an
application made under s.268 CO by the Liquidators of Lehman
Brothers Commercial Corporation Asia Limited (In Liquidation)
("LBCCA") to disclaim certain structured
finance/securitisation contracts, the Honourable Mr Justice Barma
affirmed the following principles as being applicable in
determining what constitutes "unprofitable contracts"
capable of being disclaimed under s.268 CO (adopting the principles
laid down in the Australian case of Transmetro Corporation Ltd
v Real Investments Pty Ltd & Anor  17 ACLC 1314 as
were approved by the English Court of Appeal in Re SSSL
Realisations (2002) Ltd (In Liquidation) & Anor  1 BCLC
a contract is unprofitable if it imposes on the company
continuing financial obligations or liabilities which may be
regarded as detrimental to the creditors, which is to say that the
contract confers no sufficient reciprocal benefit;
before a contract may be unprofitable it must give rise to
contracts which delay the winding up of a company's affairs
because they are to be performed over a substantial period of time
and will involve expenditure that may not be recovered are
no case has decided that a contract is unprofitable merely
because it is financially disadvantageous. It is necessary to focus
upon the nature and cause of the disadvantage; and
a contract is not unprofitable merely because the company could
have made or could make a better bargain.
This decision provides new and important authority under Hong
Kong law on the application of s.268 CO. The Liquidators' power
to disclaim under s.268 CO is expected to become more significant
and prominent, especially during this ongoing global credit crisis.
In some cases (especially in the context of structured finance and
derivative contracts), disclaiming an unprofitable contract may be
the only available option to cease ongoing contractual obligations
of an insolvent entity and facilitate its liquidation.
Mayer Brown JSM represented the Liquidators of LBCCA and
successfully appeared before the Court and obtained leave to
disclaim in this matter.
Copyright 2010. JSM, Mayer Brown International LLP
and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a
global legal services organization comprising legal practices that
are separate entities ("Mayer Brown Practices"). The
Mayer Brown Practices are: JSM, a Hong Kong partnership, and its
associated entities in Asia; Mayer Brown International LLP, a
limited liability partnership incorporated in England and Wales;
and Mayer Brown LLP, a limited liability partnership established in
the United States. The Mayer Brown Practices are known as Mayer
Brown JSM in Asia.
This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications Disclaimer.
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