5 Impactful R&I Cases From 2024

1. Re Simplicity & Vogue Retailing (HK) Co Ltd; and
2. Re Shandong Chenming Paper Holdings Ltd

1. [2024] HKCA 299, [2024] 2 HKLRD 1064; and
2. [2024] HKCA 352, [2024] 2 HKLRD 1040

1. CA (Kwan VP (giving the unanimous judgment), Barma JA and G Lam JA); and
2. CA (Kwan VP, Barma JA and G Lam JA (giving the unanimous judgment))

These decisions were handed down simultaneously and both concerned the applicability of the Guy Lam approach (see our article last year) in winding up cases involving arbitration agreements. In both cases, the debtors argued that winding up petitions should be stayed/dismissed based on the existence of arbitration agreements. The debtors contended that the Guy Lam approach regarding exclusive jurisdiction clauses in bankruptcy proceedings should equally apply to arbitration agreements in winding-up proceedings. A distinct feature in Re Shandong Chenming was that it concerned whether the Guy Lam approach would apply to a debtor's cross-claim which was based on a contract subject to an arbitration agreement.

The CAheld in both cases that the Guy Lam approach is applicable in the context of arbitration agreements and also in situations where the arbitration agreement relates to a debtor's cross-claim. Importantly, the CA emphasised that the Guy Lam approach still involves the exercise of discretion and that the court would take a "multi-factorial" approach in dealing with each case. In doing so, the CA rejected one of the appellant's arguments that the Guy Lam approach is limited to the question of locus. However, it is clear that exclusive jurisdiction clauses and arbitration agreements will be given considerable weight when the court is asked to exercise its insolvency jurisdiction. As to relevant factors in the "multi-factorial" approach, the court will take into account the "Lasmos requirements" (including whether the debtor had taken steps to arbitrate), merits of the defence raised, timing of raising the defence (especially as regards cross-claims), and the presence (or absence) of support from other creditors.

1. Angela Barkhouse, the Official Liquidator of Bridge Global Absolute Return Fund SPC (In Official Liquidation) v Leading Securities Company Ltd and Others; and
2. The Joint Liquidators of Bull's-Eye Ltd (in liquidation) v Changjiang Securities Brokerage (HK) Ltd and Others

1. [2024] HKCFI 1160; and
2. [2024] HKCFI 3000, [2024] 5 HKLRD 371

1. 26 April 2024; and
2. 23 October 2024

1. Linda Chan J; and
2. DHCJ Le Pichon

Both cases concerned foreign officeholders seeking recognition and assistance in Hong Kong.

Bridge Global was one of the vehicles used by the 1MDB fraudsters to perpetrate a fraud where Malaysian public funds of US$7.65 billion were misappropriated. Its liquidator (Angela Barkhouse of Kroll) found that several service providers in Hong Kong had been involved in the process and thus sought documents and information from those parties. The liquidator was able to obtain relevant documents and information from some third parties voluntarily but not from others despite repeated requests. Following the guidance of Re Up Energy and Re Global Brands, the liquidator then commenced proceedings by naming those non-responsive parties as defendants. The court accepted that the company's COMI was likely Hong Kong and thus granted an order to recognise and assist the liquidator. In doing so, the court made an order for the production of documents within the body of the order. In terms of the scope of disclosure, the court accepted that the principles set out by the CFA in Re Kong Wah were equally applicable in this scenario. This case led to the making of a "one stop" order dealing with both recognition/assistance and production of documents which has been adopted in subsequent cases (see Robert Scott Woods v ICBC below).

Bull's-Eye Limited is a company incorporated and subsequently wound up in the BVI. It held a substantial amount of securities and cash with 9 securities companies in Hong Kong. The liquidators (Michael Chan and Colin Wilson of Kroll) required assistance from the Hong Kong court to take control of those assets. Given the shift to the COMI test after Re Global Brands, there was a challenge to persuade the court to grant recognition and assistance notwithstanding the presence of the 9 securities accounts in Hong Kong. In this regard, the liquidators successfully relied on those passages in Re Global Brands whereby the court confirmed that the COMI requirement is not necessarily required where the assistance sought was incidental to the liquidators' authority to represent the company and was needed as a matter of practicality.

The companies involved were within the same group and were issuers of 8 series of bonds. Certain bonds maturing in May 2018 were issued by SPV2 and the group lacked funds to repay the outstanding principal plus interest in full. The group only managed to raise US$120m out of the US$350m required. The funds raised were then paid by the group's treasury company into an account maintained by another group company, SPV1. SPV1 was the issuer of other bonds, maturing in 2022. As insufficient funds were raised to pay the 2018 bonds, this triggered cross-defaults in all 8 series of bonds.

The trustee of the 2022 bonds obtained judgment against SPV1 and a garnishee order nisi over the US$120m (namely, the funds that had been raised to pay the 2018 series and which had been paid into the SPV1 account). The trustee claimed that those funds beneficially belonged to SPV1 and thus the garnishee order should be made absolute in its favour, with the result that the US$120m could be used to satisfy claims under the 2022 bonds. SPV2 argued that the US$120m was subject to a Quistclose trust for the purpose of paying the 2018 bonds and since those bonds went into default and the money not used for that purpose, it should be returned to the treasury company.

The Court of First Instance and the CA both rejected the Quistclose trust argument and held that the trustee was entitled to a garnishee order absolute over the US$120m. However, the CFA found in favour of the appellants and held that there was indeed a Quistclose trust. The CFA disagreed with the courts below in holding that it was a necessity for there to be an express stipulation that the funds were to be used for a specific purpose. It held that a Quistclose trust could arise where the evidence objectively points to this restrictive intention, whether expressly or by implication, and that it follows logically that the money is not intended to form part of the recipient's general assets to be at its free disposal.

Shortly after the Guy Lam approach was endorsed and clarified by the CA in Re Simplicity and Re Shandong Chenming (as discussed above), the UK Privy Council (on an appeal from the BVI) declined to adopt the same position in Re Sian Participation [2024] UKPC 16 (see our article). Instead, the Privy Council held that even where the parties are bound by an arbitration agreement or an exclusive jurisdiction clause and the debt is disputed, the correct test for the court to apply is whether the debt is disputed on genuine and substantial grounds.

The facts of this case are uncontroversial and involve the relevant debtors (the company as primary obligor and the individual as guarantor) relying on an arbitration agreement to oppose the petitions. This decision is important in addressing the impact of Re Sian Participation in light of Re Guy Lam and Re Simplicity / Re Shandong Chenming. The court confirmed that as a matter of stare decisis, the Guy Lam approach should continue to be followed in Hong Kong and thus the "multi-factorial" approach discussed in the summary of Re Simplicity and Re Shandong Chenming remains the relevant test. Applying that approach, the court held that the debtors' dispute "necessitated a careful examination of all relevant oral and documentary evidence" and therefore stayed the petitions.

Judgment in the amount of HK$664,900,126.57 plus interest was made against Phillip Kingston in Australia. The judgment debtor was subsequently adjudged bankrupt in Australia. The Australian bankruptcy trustee found that the bankrupt held bank accounts with the Industrial and Commercial Bank of China (Asia) Limited ("ICBC") in Hong Kong, which accounts had been used for substantial transactions. ICBC informed the trustee that it could not comply with the request for documents without a Hong Kong court order. The trustee then commenced proceedings to seek recognition and assistance in Hong Kong against ICBC. ICBC adopted a neutral position.

The court confirmed that it has power under the common law to recognise and give effect to foreign bankruptcy proceedings. To do so, it would apply established principles set out in recent cases such as Re Guangdong Overseas Construction Corporation and Re Bridge Global (see above). The only difference in a bankruptcy context is that instead of COMI considerations (which would of course not apply to an individual), the applicant will have to establish that the debtor is domiciled in the jurisdiction of the foreign bankruptcy proceedings or has submitted to that jurisdiction. The court granted a recognition order on the basis that the Australian bankruptcy proceedings are collective insolvency proceedings, the bankrupt was domiciled in Australia, the assistance was necessary for the administration of the trustee's function and the order sought is consistent with the insolvency laws of Australia.