When the Hong Kong Court recognises offshore soft-touch provisional liquidation, will there be an automatic stay of proceedings in Hong Kong?

Recently, in Re FDG Electric Vehicles Limited [2020] HKCFI 2931, the Companies Court answered “no”. In doing so, the Court revisited the wording of the standard-form recognition order.

Soft-touch provisional liquidations

A soft-touch provisional liquidation is a common restructuring tool. In a soft-touch liquidation of an offshore company over which the Hong Kong courts have jurisdiction, provisional liquidators are given limited restructuring powers, while the directors remain in day-to-day control of the company. During the restructuring, the company is protected against actions by individual creditors.

Soft-touch provisional liquidations are impermissible in relation to Hong Kong companies as a result of the Court of Appeal’s decision in Re Legend International Resorts Ltd [2006] 2 HKLRD 192. It is however well established that the Hong Kong Court will recognise and assist a soft-touch provisional liquidators appointed to a foreign company by the court of its place of incorporation. In practice, this commonly arise in the context of companies incorporated in an offshore jurisdiction and listed on the Hong Kong Stock Exchange.

Re FDG is yet another incidence of this familiar scenario. The facts are largely unremarkable. Mr Justice Harris however took the chance to clarify a few matters of principle.

Standard recognition order

The Court has developed a standard practice for applications for the recognition of foreign insolvency proceedings. The standard-form recognition order includes a paragraph as follows:

For so long as the Company remains in liquidation in [the relevant jurisdiction], no action or proceeding shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of the courts of Hong Kong, except with leave of this Court and subject to such terms as this Court may impose (the “Hong Kong Proceedings Paragraph”)

It was sometimes thought that the Hong Kong Proceedings Paragraph operated to stay proceedings (such as a winding up petition) against the company in Hong Kong. Re FDG has now confirmed that this is not the case.

Re FDG

In Re FDG, the Court explained that the Hong Kong Proceedings Paragraph was intended to be in the nature of a case management provision. It was intended to ensure that action would not take place in Hong Kong without the relevant parties being aware of (i) the impact of the foreign insolvency proceedings and, (ii) if appropriate, any stay that may have been granted.

Whether or not a stay (if sought) is appropriate in any particular case requires further consideration. The Court explained that, in considering whether a stay is appropriate, two questions arise in the context of a soft-touch provisional liquidation:

  1. Is a soft-touch provisional liquidation “collective insolvency proceedings”? The underlying rationale for the common law power of assistance is modified universalism. Modified universalism requires that the courts should, so far as is consistent with justice and public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution (i.e. a “collective insolvency process”). The Court noted that the view that a soft- provisional liquidation is a “collective insolvency process” might be inconsistent with the Court of Appeal’s decision in Re Legend.
  1. Will allowing a stay in Hong Kong in aid of a foreign soft-touch provisional liquidation violate the Gibbs rule? The Gibbs rule states that discharge or compromise of liabilities under a contract is governed the law of the contract.

The Court left these questions open in Re FDG, but stated that they should be argued on a case-by-case basis, and the creditors affected should be able to make representations. An automatic stay in all cases is therefore inappropriate.

A new form of order

For the reasons above, the Court granted the following order instead of the Hong Kong Proceedings Paragraph, and indicated that this would be the usual form of order going forward:

If the Provisional Liquidators wish to apply for a stay or other directions in respect of proceedings in the High Court of any sort as a consequence of the recognition of their appointment by this order such application shall be listed before the Honourable Mr. Justice Harris or such other judge as he shall direct. The Provisional Liquidators shall write to the clerk to the Honourable Mr. Justice Harris seeking case management directions for the determination of any application that they wish to make pursuant to this order”.

Commentaries

The decision in Re FDG has cleared up some confusion and this is to be welcomed. It addresses the concern that the Hong Kong Court’s pragmatic and universalist attitude might be exploited by debtor companies through an offshore soft-touch provisional liquidation, to the detriment of creditors in Hong Kong.

The approach taken in this case is also consistent with that in Re China Oil, where the Hong Kong Court recognised soft-touch provisional liquidators of a Cayman company without prejudice to a winding up petition that had already been presented against it in Hong Kong (read about this in our earlier blog post here).

 

Gareth Thomas

Gareth Thomas
Partner, Head of commercial litigation, Hong Kong
+852 2101 4025

Alexander Aitken

Alexander Aitken
Partner, Hong Kong
+852 2101 4019

Peter Ng

Peter Ng
Senior Associate, Hong Kong
+852 2101 4238