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.
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  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 a foreign incorporated company, as a Hong Kong winding-up order would not benefit the petitioner because:
- other than the listing status, the debtor company had no assets in Hong Kong;
- the petitioner did not produce evidence showing that there was a real prospect that the value of the debtor company's listing status could be realised by liquidators for any meaningful amount; and
- liquidators appointed by a Hong Kong court would be unable to take control of the debtor company's operating subsidiaries in mainland China because the Hong Kong liquidators would be unable to take control of the company's direct subsidiaries in the BVI; as Hong Kong liquidators of a Cayman company, they would not be able to change control of the company's direct BVI subsidiaries – and accordingly a winding up of the company in Hong Kong would not assist in recovering assets in mainland China and so was not a benefit to the petitioner.
Subsequent to Huiyuan Juice, a series of Hong Kong Companies Court cases have outlined some nuances in approach.
FDG Electric Vehicles Limited
Hong Kong's legislative framework does not include a statutory mechanism by which a foreign liquidator seeking insolvency-related relief may be recognised or assisted in Hong Kong. Over recent years, the Hong Kong Companies Court has instead exercised its inherent, common law jurisdiction to recognise and assist overseas liquidators where appropriate.
Also absent from Hong Kong's insolvency regime are corporate rescue procedures or pre-insolvency provisions or mechanisms directed to providing a softer-touch approach to a distressed debtor in advance of, or instead of, formal insolvency proceedings.
Light touch provisional liquidation – available in similar but slightly differing forms in the Cayman Islands, Bermuda and the BVI7, but not in Hong Kong – may allow a debtor company to benefit from a moratorium and allow breathing space to attempt a restructuring of its debts.
An application to appoint light touch provisional liquidators can be a defensive response to insolvency proceedings commenced against a debtor company in another jurisdiction, such as Hong Kong. For the relevant offshore court, that may raise the question whether it should make the appointment even if insolvency proceedings are on foot in another jurisdiction; and also critically, whether recognition of the appointment and accompanying moratorium will be given in that other jurisdiction.
The Hong Kong Court's recently developed standard form recognition order has often contained a paragraph in broadly the following terms: "For so long as the Company remains in liquidation in [relevant jurisdiction], no action or proceedings shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Honourable Court, except with the leave of this Honourable Court and subject to such terms as this Honourable Court may impose." Such a general stay is now unlikely to be granted as a matter of course in Hong Kong following the Hong Kong Court's decision in FDG Electric Vehicles Limited.8
FDG Electric Vehicles Limited was a Bermuda incorporated company to which provisional liquidators had been appointed by the Bermuda Court. The joint provisional liquidators applied to the Hong Kong Court for an order of recognition and assistance inter alia for the purpose of allowing the joint provisional liquidators to take control of all directly and indirectly owned subsidiaries of the company and for an order staying existing or prospective proceedings against the company in Hong Kong.
In essence, it appears the position adopted by the Hong Kong Court was that it is not yet accepted or clear that a light-touch provisional liquidation – often ordered with a view to facilitating a restructuring of the debtor company's debts rather than a collection and distribu tion of assets under a single system – would in all cases be treated as a collective insolvency proceeding. An additional consideration will arise where debts are governed by Hong Kong law because the rule in Gibbs9 would mean that a general stay in Hong Kong should not be granted to establish in another jurisdiction a payment right under a Hong Kong law governed arrangement.
As to the recognition order sought for the purpose of allowing the provisional liquidators to control the debtor company's subsidiaries, it was held that the provisional liquidators' powers should be restricted to assets in Hong Kong, the reasoning being that subsidiaries incorporated abroad are not assets in Hong Kong since the shareholdings in the foreign subsidiaries are located in their jurisdiction of incorporation.
Whilst application of the modified universalist approach in Hong Kong has generally given primacy to a debtor company's jurisdiction of incorporation, in Re Lamtex10 the Hong Kong Companies Court determined that consideration of the company's centre of main interest (COMI) should also be given weight when considering the conflict between competing jurisdictions. Lamtex was a Bermuda incorporated company, listed in Hong Kong. It carried on a variety of businesses in mainland China and also Hong Kong. The Hong Kong Court accepted that the COMI of the company was in Hong Kong and it appears that it was not argued that if the company is to be wound up this should be done in Bermuda or that a winding up order in Hong Kong would be futile. The Court also gave weight to the views of the company's creditors who were pressing for a winding up in Hong Kong. Ultimately the Hong Kong Court refused to adjourn the Hong Kong winding up petition notwithstanding the fact that Bermudan appointed provisional liquidators were seeking recognition and assistance in Hong Kong to effect a restructuring of the company in Bermuda.
An interesting aspect for future consideration is the question of how a debtor entity's COMI will be determined in various situations but in particular as regards an assertion that Hong Kong, rather than the place of incorporation, is the COMI when primary operations, assets and decision-makers are situated in mainland China (the very fact pattern of concern to the Hong Kong Companies Court in these cases).
Re Samson Paper
In Re Samson Paper11, the Hong Kong Court for the first time issued a letter of request to a court in mainland China under the new cross- border mutual recognition, assistance and cooperation arrangement between Hong Kong and mainland China. The company itself, Samson Paper Company Limited, was incorporated in Hong Kong. It was part of a corporate group headed by Samson Paper Holdings Limited ("Holdings"), a Bermuda incorporated company listed in Hong Kong. The Bermuda Court had appointed provisional liquidators to Holdings and the Hong Court Court had recognised the appointment. The company itself had been placed into liquidation by resolution of the intermediate group subsidiary, which held the voting shares in the company and liquidators had been duly appointed.
In Re Samson Paper, the COMI determination was considered relatively clear particularly given the debtor's incorporation in Hong Kong. However, a footnote in the decision refers to the explanation of the criteria for assessing COMI given in the English case of Re Melars Group Ltd12, which may be a pointer to the approach which the Hong Kong Court may adopt in the future.
The emphasis on COMI may also come under further scrutiny in the context of whether it is appropriate for insolvency officers appointed in a jurisdiction outside that of the debtor company's place of incorporation to be recognised in another common law jurisdiction (such as Hong Kong): a position which the decision in Lamtex suggests would be permissible in Hong Kong, whereas it seems the position in England remains that common law recognition would not be expected to extend beyond the established criteria that a liquidator in the place of incorporation should be recognised13.
Re China Bozza14
China Bozza is incorporated in the Cayman Islands and listed on the GEM Board of the Stock Exchange of Hong Kong. The company was an investment holding company and its business operations were mainly conducted in mainland China through companies incorporated there and held indirectly by the company through intermediate holding companies incorporated in the British Virgin Islands. In this case, the Cayman Court had appointed joint provisional liquidators. The application before the Hong Kong Court, which was supported by a letter of request from the Cayman Court, was for an order for recognition and assistance of the joint provisional liquidators in Hong Kong. The order granted by the Hong Kong Companies Court was limited to recognition of offshore light-touch provisional liquidators but without significant assistance at the initial stage, with general liberty to apply for assistance if required and justified. The Hong Kong Court felt concerned to ensure that creditors' interests – paramount once a company is insolvent – should be protected where directors looking for a restructuring might otherwise be protecting shareholders' interests.
No blanket stitch
In the most recent cases of Grand Peace Group Holdings Limited ("Grand Peace")15 and Up Energy Development Group Limited ("Up Energy")16, the Hong Kong Court considered again the second core requirement for the Hong Kong winding-up jurisdiction of a foreign incorporated company and declined to wind up the offshore-incorporated, Hong Kong listed companies.
Grand Peace is a Bermuda-incorporated, Hong Kong-listed company. The petition against the company in Hong Kong has been adjourned a number of times with a view to allowing the company to restructure its debt. In the interim, the Listing Committee determined that the company's shares should be delisted; and the company's appeal of that decision was dismissed. One of the company's creditors was dissatisfied with the petition's adjournments and applied to be substituted as the petitioner to persuade the Hong Kong Court to make an immediate winding up order. The only issue that the Hong Kong Court had to determine was jurisdiction.
Referring to its decision in China Huiyuan Juice, the Hong Kong Court considered that based on private international law principles the authorities in offshore jurisdictions establish that the courts in the BVI would not recognise liquidators appointed in Hong Kong over a company incorporated in, for example, Bermuda as having the authority to take control of a subsidiary of a company incorporated in the BVI: it is therefore futile to appoint liquidators over a company incorporated in Bermuda in order to take control of its subsidiaries incorporated in the BVI with the ultimate aim of taking control of subsidiaries in mainland China owned by the BVI companies; and the correct course is to wind up the holding company in its place of incorporation.
The Hong Kong Court took the view that even if the above approach is not an impediment to making an order in respect of assets within its jurisdiction, it would be highly questionable whether it should do so in respect of an asset in another jurisdiction particularly if that jurisdiction's own substantive law would not recognise the Hong Kong winding up.
In its Up Energy decision relating to the petitioner's further amendments to the winding up petition against the Bermuda-incorporated, Hong Kong-listed debtor company, the Hong Kong Court returned to certain of its comments in Grand Peace (and indeed China Huiyuan Juice, noting17:
"A creditor of a holding company incorporated in an offshore jurisdiction, which owns a subsidiary incorporated in another offshore jurisdiction, which in turn owns operating and asset owning companies in the Mainland should normally petition to wind up the holding company in its place of incorporation unless the creditor can demonstrate that a liquidator appointed in Hong Kong will probably be able to obtain control of the Mainland subsidiaries. The creditor is unlikely to be able to do this unless: (1) The intermediate offshore subsidiary's centre of main interest is in Hong Kong and thus recognition in the Mainland is possible under the cooperation arrangement signed on 14 May 2021 by the Secretary for Justice and the Supreme People's Court; and (2) A liquidator appointed over the holding company can petition to wind up an offshore subsidiary in Hong Kong as a creditor. Unless this can be demonstrated fairly easily a creditor should be advised that a petition should be issued in the place of incorporation because this is more straightforward and effective."
Wind the bobbin up
Pulling some of the threads together:
- Whilst noise has been generated about possible 'unscrupulous' activities designed to frustrate legitimate creditor winding-up proceedings, in practice the matter fairly for consideration is usually whether the defensive approach of seeking a moratorium in the place of incorporation is appropriately requested and should therefore be recognised in Hong Kong, because there is a realistic prospect of a restructuring that is something to which the debtor company and its directors have genuinely turned their minds rather than a simple payment avoidance/delay strategy.
- It will be interesting to see how the courts of the offshore jurisdictions react to Lamtex and some of the other recent lines of authority in Hong Kong. Would they be prepared to provide recognition and assistance to insolvency officers appointed outside the place of incorporation of a debtor company (including one that is not their own jurisdiction) if it were to purport to exercise primary insolvency jurisdiction over a company? For example, in In the matter of China Agrotech Ltd,18 the Hong Kong liquidators of China Agrotech Holdings Limited, a Cayman Islands company, were – based on the particular circumstances put before the Court - granted permission from the Grand Court of the Cayman Islands to promote a scheme of arrangement in the Cayman Islands between China Agrotech and its creditors in the Cayman Islands. Similarly, in Sun Cheong19, the Cayman Chief Justice indicated20 that "the Grand Court will be slow to give primacy to pure winding up proceedings brought overseas in respect of a Cayman Islands company where it is satisfied that there is an intention on the part of the company to present a plan of reorganisation for the benefit of its creditors."
- Whilst some emphasis on considerations of COMI is consistent with the UNCITRAL model law, the model law recognises the continued differences among national procedural laws and instead of attempting the unification of substantive insolvency law, focuses on encouraging cooperation and coordination between jurisdictions.
- That an application for recognition of offshore provisional liquidators is proposed merely as an attempt to defeat or delay a creditor's application for winding up in Hong Kong will be the exception rather than the norm and there is no reason to adopt as a starting point to any review that a recognition application to the Hong Kong Court will be without regard to the interests of creditors. The jurisdiction of incorporation in any given case will be relevant when considering the rights of creditors who ought to have been aware of the capital structure with which they were dealing when entering into their arrangements with debtor(s) and in formulating appropriate restructuring options.
- That said, where there is both an application in Hong Kong for recognition of and assistance to offshore insolvency officers and a concurrent Hong Kong winding up petition, the debtor company and its offshore provisional liquidators will generally want to demonstrate that efforts have already been made to propound a viable restructuring proposal and that it is one that recognises creditors' interests above those of any other stakeholders.
- The new mutual recognition and assistance regime recorded with Hong Kong and the pilot cities of Shanghai, Shenzhen and Xiamen may have a role to play in shaping how jurisdictional oversight and involvement are applied. For example, whilst a Hong Kong Court- sanctioned scheme of arrangement can be recognised by the mainland pilot cities, the scheme must be promoted by a Hong Kong liquidator or provisional liquidator; and given that provisional liquidators cannot be appointed in Hong Kong for the sole purposes of a restructuring, there may well continue to be a need for light-touch appointments offshore to be coupled with subsequent Hong Kong liquidator appointments to assist in enabling the propounding of mainland China-recognisable schemes. This approach would also be helpful to satisfy the requirement for a Hong Kong insolvency process to be on foot and with considerations regarding COMI for the required six months prior to the recognition application in mainland China.
- The Grand Peace and Up Energy decisions indicate difficulties with winding up in Hong Kong foreign incorporated companies which hold operating and asset-owning subsidiaries in mainland China through intermediate subsidiaries incorporated in offshore jurisdictions (frequently the BVI); and that petitioning creditors may need to show that liquidators appointed in Hong Kong will be able to obtain control over the mainland Chinese subsidiaries. More broadly, as a matter of Hong Kong law generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation21.
- Conflicts of laws issues will not address more fundamental creditor issues, such as structural subordination and the absence of meaningful recourse to asset-holding entities within a structure.
1. Singularis Holdings Limited v PricewaterhouseCoopers  UKPC 36;  AC 1675
2. HIH Casualty & General Insurance Ltd, Re  1 WLR 852, 861 at 
3. On 14 May 2021, the Supreme People's Court of the People's Republic of China and the Government of the Hong Kong Special Administrative Region signed the "Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region"
4. "Economic and Trade Information on Hong Kong" (30 August 2021) Hong Kong Trade Development Council (www.hktdc.com/Research)
5. Re China Huiyuan Juice Group Limited  HKCFI 2940 at 
6. See footnote 5
7. There is no statutory automatic moratorium available in the BVI
8.  HKCFI 2931
9. Antony Gibbs & Sons v La Société Industrielle et Commerciale Des Métaux (1890) 25 QBD 399 – the principle drawn from this case is broadly that a debt governed by one law cannot be discharged or compromised by a foreign insolvency proceeding under another law
10.  HKCFI 622
11. Re Samson Paper Company Limited (in Creditors' Voluntary Liquidation)  HKCFI 2151
12.  EWHC 1523 (Ch)
13. Rubin v Eurofinance SA  1 AC 236
14.  HKCFI 1235
15.  HKCFI 2361
16.  HKCFI 2595
17. Ibid at 
18. Unreported, 19 September 2017, Segal J
19. Sun Cheong Creative Development Holdings Limited Cause No. FSD 169 of 2020 FSC (ASCJ)
20. Ibid at 
21. Joint Official Liquidators of A Co v B  4 HKLRD 374 at 
Article originally published in INSOL International September 2021 news update
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.