Historically, the Hong Kong courts have generally recognised foreign insolvency proceedings commenced in the jurisdiction in which the company is incorporated. This may no longer be the case in Hong Kong following the recent decision of Provisional Liquidator of Global Brands Group Holding Ltd v Computershare Hong Kong Trustees Ltd  HKCFI 1789 (Global Brands).
In the Global Brands decision Justice Harris has suggested that in future a Hong Kong court will now recognise foreign insolvency proceedings in the jurisdiction of the company’s “centre of main interests” (COMI). Indeed, it is suggested that it will not be sufficient, nor will it be necessary, that the foreign insolvency process is conducted in a company’s place of incorporation.
Much of the discussion in the case appears to have been obiter dictum, as Global Brands Group Holdings Limited (the Company) was incorporated and being wound up in Bermuda, and therefore recognition of the Bermudan proceedings aligned with the traditional common law basis for recognition based on the jurisdiction of incorporation.
However, the decision nevertheless indicates judicial support for a significant shift in Hong Kong’s common law recognition regime. The approach to common law recognition suggested by Harris J is substantially similar to that taken by the Singapore Court in Re Opti-Medix Ltd (in liquidation)  SGHC 108 (which we discussed here). It also aligns with the global trend of embracing a COMI-based approach to recognition, including in the UNCITRAL Model Law on Cross-Border Insolvency which has now been incorporated into domestic legislation of many countries around the world.
The Company was an investment holding company incorporated in Bermuda which, along with its subsidiaries (the Group), were engaged in the business of branded apparel, footwear, accessories and related lifestyle products in North America and Europe. The Company was also listed on the Hong Kong Stock Exchange (HKEX). Such use of a holding company incorporated in an offshore jurisdiction by a business group whose operating and asset-owning companies are either in Hong Kong or Mainland China is a factual pattern familiar to insolvency practitioners in Hong Kong and Mainland China.
The Group faced immense financial difficulties following the Covid-19 pandemic. Whilst exploring restructuring options, on 10 September 2021, the Company presented an application to the Bermudan court for the appointment of a “soft-touch” provisional liquidator in Bermuda (the Provisional Liquidator) with limited powers to help restructure the Company (during which time the management of the Company would remain in control). The appointment was made on 16 September 2021.
Attempts to restructure proved unsuccessful and the Company ultimately obtained a winding up order from the Bermudan Court, on 5 November 2021. The Provisional Liquidator continued in office as liquidator on the making of the winding-up order. Since his appointment in September 2021, the provisional liquidator had been trying to take possession of the Company’s assets in Hong Kong. These included cash balances representing a surplus from sale of shares in the Group’s employee share schemes and monies held in the Company’s local bank accounts.
The Provisional Liquidator sought an order from the Hong Kong Court for recognition and assistance in order to take control of the relevant assets of the Company.
Order and decision
Justice Harris of the Hong Kong Court of First Instance (the Court) made the order recognising the Provisional Liquidator and the Bermuda provisional liquidation and liquidation processes. He made further orders allowing the Provisional Liquidator to (among other things) take possession of the assets and records of the Company (including in particular certain bank balances) and to dispose of those assets.
This recognition and assistance was granted on the basis that the Court may recognise a foreign insolvency regardless of whether or not the company may be wound up in Hong Kong. The liquidator was the lawful agent of the Company as a matter of the law of its place of incorporation (and entitled to direct that its assets are transferred from accounts in Hong Kong to accounts in Bermuda).
The order confirming that the Provisional Liquidator had power to secured and obtain the Company’s assets and documents in Hong Kong was “simply confirming the position under orthodox principles of private international law and gives the Provisional Liquidator assistance, which might fairly described as more managerial in nature than of a type associated specifically with insolvency.”
Commentary on recognition approach going forwards
Notwithstanding the relatively limited scope of the actual decision in Global Brands, Harris J used the decision as an opportunity to set out his views as to the appropriate approach to be adopted by the Court when determining applications for recognition and assistance going forwards.
Mr Justice Harris indicated that the correct approach for assessing whether or not a foreign liquidation should be recognized in Hong Kong is first to determine if, at the time of the application for recognition, the foreign liquidation is taking place in the jurisdiction of the company’s COMI.
If the foreign liquidation is not taking place in the jurisdiction of the company’s COMI, then recognition and assistance ought to be declined unless the application falls in one of the following two categories:
- If the liquidator is appointed in the place of incorporation, the application is limited to recognising a liquidator’s authority to represent a company and seeking orders that are an incident of that authority, which Mr Justice Harris described as “managerial assistance“. On the facts of this case, the Court granted an order of recognition of the provisional liquidator of the Company in order for the Provisional Liquidator to receive and transfer out the relevant assets located in Hong Kong.
- If the liquidator is appointed in the place of incorporation and the circumstances do not fall within the first exception above, then recognition and only limited and carefully prescribed assistance may be given as a matter of practicality.
Mr Justice Harris has also considered a list of non-exhaustive factors that a Hong Kong court will look at to determine a company’s COMI. Drawing on the United States decision of Judge Martin Glenn in In re Ocean Rig UDW Inc (2017) 570 BR 687 (Bankr SDNY), he indicated these factors included the location where a company:
- conducts its management and operations;
- has offices;
- holds its board meetings;
- has its officers residing;
- has its bank accounts;
- maintains its books and records; and
- has conducted or is conducting its restructuring activities.
Harris J also considered the relevant date for determining COMI. In this regard he indicated a preference for the date on which the foreign office-holder’s Hong Kong recognition application is made, noting that this would be consistent with the position under Article 6 of The Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region. It would also be consistent with the approach taken by the Singapore courts in Re Zetta Jet  SGHC 53.
Moving towards a COMI approach
The approach in the Global Brands case is an extension of the principles stated in Re Lamtex Holdings Ltd  HKCFI 622 and Re Ping An Securities Group (Holdings) Ltd  HKCFI 651, about which we wrote here. The position under Hong Kong common law has now moved firmly towards a COMI-centred approach. It also adopts a similar approach to recognition at common law as taken by the courts in Singapore, as decided in Re Opti-Medix Ltd (in liquidation)  SGHC 108 which we wrote about here.
The Hong Kong Court has long worked with practitioners to use common law techniques to help facilitate debt restructurings of offshore-incorporated companies in Hong Kong, so far as the common law permits. However, Mr Justice Harris recognised that there have been two major problem areas:
- the restrictions that exist on winding up a foreign incorporated company. These restrictions were demonstrated in the long-running saga of Shandong Chenming (although the Court of Final Appeal was able to take a practical approach in interpreting the second core requirement, as we previously blogged); and
- the lack of any legislation in Hong Kong facilitating the debt restructuring and rehabilitation of financially distressed companies.
An end to recognition of offshore ‘soft-touch’ provisional liquidators?
In respect of the second difficulty, a practice was developed of companies incorporated in offshore jurisdictions being put into a form of soft-touch provisional liquidation in their jurisdictions of incorporation followed by the provisional liquidators seeking recognition in Hong Kong and seeking assistance from the Hong Kong Court in the form of the limited powers necessary for them to participate in the restructuring process in Hong Kong.
As noted by the Court in this case and in Re Lamtex, in recent years many HKEx-listed companies regularly employed this tactic to obtain a moratorium on creditor actions in Hong Kong. In most of these cases the company had no material economic connection to those offshore jurisdictions other than being incorporated there. As Mr Justice Harris stated in the judgment, treating the place of incorporation in such circumstances as being the natural home or commercially most relevant jurisdiction for the purpose of determining which jurisdiction is the appropriate place for the seat of a principal liquidation is highly artificial.
Harris J indicated his concern that this approach had led to abuse, stating at :
Unfortunately, it has become increasingly apparent that what is commonly referred to as the Z-Obee technique has been abused by certain insolvency practitioners and offshore law firms. It seems to me tolerably clear that many of the offshore soft-touch provisional liquidators adopt a debtor in possession model, which has been rejected in Hong Kong, the principal purpose of which, viewed from the Company’s point of view, is to obtain so far as possible a moratorium on action being taken to recover unpaid debts. The application to appoint provision liquidators in the present case would appear to be an example.
Accordingly, he indicated a reluctance to grant such recognition in future:
Although it is not an issue that I need to decide in the present case and is one which requires detailed consideration, my preliminary view is that in future the Hong Kong court should generally decline to recognise soft-touch provisional liquidators appointed by offshore jurisdictions on the kind of terms I have summarised.
Cooperation with Mainland Courts
Mr Justice Harris also considered that the Hong Kong – Mainland Cross-Border Insolvency Cooperation Mechanism (see here), which permits Mainland Courts to recognise Hong Kong-appointed liquidators over companies whose COMI is in Hong Kong, was relevant to a consideration of the development of common law assistance in Hong Kong. In the absence of relevant legislation, embracing a COMI-based approach would bring Hong Kong in line with the approach in the Mainland and indeed the approach adopted by other jurisdictions such as Singapore.
In short, this decision signals a new approach for common law recognition of foreign insolvency proceedings in Hong Kong based on COMI. Whilst most of the commentary in the decision was, strictly, obiter dictum, given the important role that Harris J plays in determining Hong Kong insolvency cases we expect that this approach will be built upon in future decisions.
The common law of Hong Kong in this area remains very much alive and keeps developing. It will be interesting to see what impact this decision has on Hong Kong restructuring practice, which in recent years has featured significant involvement of offshore insolvency and restructuring processes. This and other decisions indicate that we may expect restructuring and insolvency matters to be addressed under Hong Kong law to a greater extent in the future. In the meantime, it seems the Hong Kong Court will continue to give short shrift to the once-popular technique of appointing “soft-touch” liquidators in offshore jurisdictions especially where such appointment is considered by the Court to be artificial or devoid of real connections to the company’s activities in its COMI.