I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i Hong Kong
China resumed its sovereignty over Hong Kong with the establishment of the Hong Kong Special Administrative Region of the PRC on 1 July 1997. The Basic Law - part of the constitution of Hong Kong - was adopted on 4 April 1990 by the National People's Congress of China and provides for a 50-year period during which Hong Kong will be allowed to retain its current political, social, commercial and legal systems, including those that have made it an international financial and business centre.
Hong Kong operates a free trade economic system with minimal government intervention. A primary attraction is Hong Kong's legal system, based on English common law and rules of equity, involving strict adherence to the principles of the rule of law and judicial independence.
Many head offices and holding vehicles for Chinese and foreign multinational corporations, financial institutions and regional investors with operations in China and South East Asia, have long maintained their base in Hong Kong. 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 China.
Given its proximity to and relationship with China, Hong Kong is often regarded as the primary intermediary platform for trade between mainland China and the rest of the world, and therefore serves a dual role as both conduit for access to the mainland Chinese market and a springboard for Chinese businesses to gain exposure to international markets.
Hong Kong has also pioneered offshore yuan business, being the first offshore market to launch in 2004. As China's economy increasingly integrates with the rest of the world's markets, the yuan will see increasing use as a payment currency. During April 2017, 5,441,688 million yuan was converted into Hong Kong dollars and other currencies, and an equivalent of 5,437,158 million yuan of Hong Kong dollars and other currencies was converted into renminbi through authorised institutions engaged in renminbi business. There were 40,672 renminbi remittance transactions from Hong Kong to mainland China, amounting to 1,100,765 million yuan.2
ii Economic conditions
Globally, financial markets have seen modest recoveries with ongoing financial volatility. Outside of Asia, the United Kingdom's ongoing negotiation with the European Union on the terms of its withdrawal from the bloc and the unpredictable policy agenda of the Trump administration in the United States have created economic uncertainties. In China, its very high level of debt coupled with an economic slowdown continues to pose an elevated risk to financial wellbeing of the country and, by extension, that of Hong Kong as a result of the city's exposure to the mainland market. Moody's Investors Service has recently downgraded both China's and Hong Kong's credit ratings.3 Hong Kong cannot ignore these global concerns, not least because of China's impact on its regional neighbours.
China continues to rebalance its economy, moving towards one increasingly driven by domestic consumers. Through the ‘Belt and Road' initiative, China has pledged more than US$100 billion of investments in infrastructure projects, which span countries in Asia, Africa and Europe. Whether the Belt and Road initiative will help China alleviate its overcapacity through exports, time will tell. The continued uncertainty about China's shifting exchange rate policy has also contributed to the overall economic uncertainties.
iii Market trends
A general shift from bank lending to alternative credit providers, which has been in evidence over the last few years, continues, but it appears that even with substantial cash reserves available there is uncertainty over how to deploy that capital. This is largely for two reasons: the weight of available capital and low interest rates have meant that the cost of borrowing has been low, keeping returns depressed; and uncertainty over the ability to enforce security close to the assets in the relevant Asian jurisdictions combined with unfavourable local court processes have muddied the risk-to-reward analysis.
A notable result of the move from credit provided by banks to alternative providers is that restructurings may in some circumstances appear to be merely a repackaging, enabling onward sale of relevant debt instruments to other alternative credit providers, allowing profits to be made but also ailing enterprises to survive but not prosper - the zombie company phenomenon.
Hong Kong operates on the basis of the English law approach to distressed enterprises (that is, generally a creditor-friendly approach) but without the benefit of any statutory corporate rescue procedures (such as administration). However, the trend has been away from liquidation and towards refinancing. Notwithstanding a small increase in 2009 following the global financial crisis, statistics from the Official Receiver's Office4 show the number of compulsory winding-up petitions presented and orders made has broadly continued to decline. So where, for example, in 2003 the annual total petitions presented was 1,451 of which 1,248 received orders to be wound up, in 2016 the annual total petitions presented was 456, of which 325 were ordered into liquidation. Whether the current turmoil in the world's economies will to some extent reverse that trend remains to be seen.
In Hong Kong, the scheme of arrangement has long been an important restructuring tool and that continues to be the case. As a number of entities listed on the Hong Kong Stock Exchange and otherwise are incorporated offshore, parallel schemes running in Hong Kong and the relevant offshore jurisdictions have become more common.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
Provisions covering the winding up of Hong Kong companies and foreign corporations registered in Hong Kong and the insolvency-related regime are found in the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (the Winding-Up Ordinance) and subsidiary legislation. The Winding-Up Ordinance was recently amended by the Companies (Winding-Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (the Amendment Ordinance) and the new changes came into effect on 13 February 2017.
The statutory provisions applicable to individual bankruptcy as opposed to corporate insolvency are contained in the Bankruptcy Ordinance. Discussions below focus on corporate insolvency.
Insolvency of a Hong Kong company will generally result in a company being wound up by either voluntary or compulsory liquidation, the latter occurring pursuant to court order on a winding-up petition against the company. There are additional statutory provisions that are applicable in the case of certain regulated industries, such as banking and insurance, and there is also power for the government to petition for the winding up of a company if considered expedient in the public interest.
i Voluntary winding up
Voluntary liquidation may occur when the company is solvent, which is known as a members' winding up; or when the company is insolvent, which is known as a creditors' voluntary winding up.
A voluntary liquidation is started by a members' resolution and then will become a members' winding up if a certificate of solvency is issued by a majority of the company's directors, noting their opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up specified in the certificate. If no certificate of solvency is made or if it is not effective because other prescribed criteria are not satisfied, the winding up will be a creditors' voluntary winding up. The Amendment Ordinance has enhanced the requirements relating to the first creditors' meeting upon the commencement of a creditors' voluntary winding up.
The legislation also, uniquely, provides for a procedure allowing directors of a company to commence voluntary liquidation without holding a shareholders' meeting. Instead, the voluntary liquidation is initiated by a directors' meeting, resolving (among other things) that the company cannot by reason of its liabilities continue its business, the directors consider it necessary to be wound up and that it is not reasonably practicable for the company to be wound up under any of the other procedures prescribed in the legislation, giving supporting reasons. The Amendment Ordinance has introduced additional safeguards to reduce the risk of abuse in a director-initiated creditors' voluntary winding up. In any event, the procedure is not frequently used, given the general availability of other procedures.
ii Compulsory winding up
Compulsory winding up pursuant to a court order is based on a petition presented usually by a creditor, although a shareholder or the company itself may also petition in appropriate circumstances. The legislation provides various grounds upon which a petition can be presented, the most common of which is an inability of the company to pay its debts, a matter that may either be proved on the balance of probabilities by the petitioner or deemed where the company has failed to pay or otherwise satisfy a statutory demand within three weeks of that demand being served on the company; and another of which is that it is just and equitable for the company to be wound up.
The legislation does not provide a specific definition of ‘insolvency', instead, referring to the inability to pay debts, which is deemed to have occurred on satisfaction of one or more of the bases prescribed in Section 178 of the Winding-Up Ordinance. In considering an inability to pay debts, the court may consider applying either the cash flow or the balance sheet test.
For a creditor to bring a winding-up petition, there must be a debt (present, contingent or prospective) for a liquidated sum due from the debtor company to the creditor. Where the debt is not yet due, but is to fall due in the future or is contingent, the court will not hear the petition unless security for costs are provided and a prima facie case for winding up is demonstrated. If a debt is the subject of a genuine dispute, it cannot found the basis of a winding-up petition. Further, for the debt to be capable of supporting a winding-up petition, it must be at least HK$10,000.
iii The liquidator and committee of inspection
In Hong Kong there is no requirement for liquidators to be licensed, as is the case in certain other jurisdictions. Even so, in practice, appointed liquidators are licensed insolvency practitioners, accountants or other professionals with the requisite commercial experience.
In general terms, a court-appointed liquidator is required to investigate the affairs of the company in order to get in and realise its assets, before applying those realisations in discharge of the company's liabilities, which will include investigating the conduct of the company's past and present office holders to consider whether any wrongful conduct or criminal offence has been committed against the company.
In fulfilling these functions, liquidators have broad powers at their disposal, some that require sanction of the court or of a committee of inspection (if there is one) before being exercised (such as making any compromise or arrangement with the company's creditors, contributories, claimants or debtors, and disclaiming onerous property); and some that do not (such as realising the property of the company and dealing with proofs of debt).
The committee of inspection is appointed at a meeting of creditors and is intended to be representative of the creditors of the company and capable of taking decisions in the interests of all creditors. Outside the powers only exercisable with sanction, it is for the liquidator to decide how frequently the committee of inspection is to be consulted. The Amendment Ordinance introduced a number of changes aimed at simplifying the proceedings of the committee of inspection and promoting court-free procedures, thereby potentially reducing the time and costs involved in the winding-up process.
iv Other restructuring methods
Workout arrangements, pursuant to which a debtor company enters into contractual arrangements with its bank and other creditors, continue in Hong Kong and may be used in conjunction with a scheme of arrangement, as discussed above. The non-statutory guidelines issued jointly by the Hong Kong Association of Banks and the Hong Kong Monetary Authority provide principles as to how banks should deal with customers in financial difficulty, encouraging a standstill, during which an information gathering assessment can be undertaken with a view to reaching an informal decision as to the customer's long-term future. Although non-statutory, banks are expected to adhere to the guidelines and to act cooperatively and in an expeditious manner in trying to agree a restructuring plan, and will be subject to scrutiny from the regulators if they fail to do so.
However, the guidelines are applicable only to banks and, therefore, other creditors such as bondholders, hedge funds, employees and trade creditors may proceed with enforcement actions during the period in which banks are seeking to implement a restructuring plan with the debtor company.
Scheme of arrangement
While a mechanism referred to as ‘provisional supervision' was put forward by the government more than 15 years ago, Hong Kong continues to operate without a formal procedure by which a distressed company can reorganise its debt obligations and trade out of difficulties, such as administration in the UK or Chapter 11 in the United States.
The primary restructuring tool available, therefore, remains the scheme of arrangement, which can be used for both insolvent and solvent companies. Schemes may be used to supplement informal contractual workouts implemented by multibank creditor groups or other creditor constituencies.
As schemes of arrangement do not provide a statutory moratorium, there remains a risk of a creditor taking enforcement action, including winding-up proceedings, after a scheme of arrangement has been initiated. For this reason, schemes of arrangement in the insolvency context are frequently undertaken in conjunction with provisional liquidation (where appropriate) or liquidation, to create the necessary moratorium. As a result of the Legend case,5 it currently appears clear that restructuring alone is not sufficient to found the appointment of provisional liquidators so that an applicant will still have to show concern as to, for example, potential dissipation of the company's assets and that it may reasonably be expected that liquidation will ultimately ensue.
For a foreign company incorporated outside Hong Kong, whether it is possible to have provisional liquidators appointed in its jurisdiction of incorporation for the purpose of facilitating a corporate restructuring will depend on the law of that jurisdiction. If provisional liquidators are appointed to a foreign company where it was incorporated, and the provisional liquidators would like their appointment to be recognised in Hong Kong, they can obtain a letter of request from the court of the jurisdiction where they were appointed, and then apply to the Hong Kong court for an order to this effect.6
If the company is being wound up, an application to court to convene a creditors' meeting to propound a scheme must be made by the liquidator or provisional liquidator. The court will consider whether the terms of the scheme are fair and could be supported by creditors exercising reasonable judgment. However, Hong Kong has not fully moved with the updated position in England so the court at the first hearing is not obliged to consider whether the classes of creditors involved in the scheme have been appropriately constituted. Therefore, there remains the risk of creditor classification being called into question at the second hearing, at which sanction is sought. The scheme will be legally binding on the company and the scheme creditors - including those scheme creditors who voted against the scheme and those who do not vote - if at the scheme meeting, the requisite majority representing a majority in number and at least 75 per cent in value of the creditors present and voting, in person or by proxy, at the meeting vote in favour of the scheme; the court sanctions the scheme; and an office copy of that order is registered by the registrar of companies in Hong Kong.
Hong Kong law recognises four forms of consensual security: the mortgage, the charge, the pledge and the lien. The formalities required for effective security, such as registration, will depend on the form of security. Failure to register a registrable charge will result in the charge being ineffective against a liquidator and any creditor of the company, although it will not affect the validity of the charge itself as between the parties to the security. Certain classes of assets (such as maritime vessels and aircraft) have separate registries, and registration will be required or expected at the relevant registry.
Secured creditors having a fixed charge will rank first for distributions from a company in liquidation. They are generally entitled to claim as unsecured creditors for any balance that remains unpaid after realisation of the security.
Where a company has granted a fixed and floating charge debenture (usually in favour of its bankers) over its undertaking, property and assets, the usual method of enforcement is through the appointment of a receiver. A receiver may be appointed outside liquidation but receivership is often indicative of insolvency. The validity of a floating charge created within 12 months if the person in favour of whom the floating charge is created is not connected with the company (or within two years if the person in favour of whom the floating charge is created is connected with the company) prior to the company's winding up may be susceptible to challenge by the company's liquidator to the extent that new monies were not advanced.
vi Duties of directors
Directors' duties (statutory and fiduciary) are owed to the company. While a company is solvent, the duty to act in the company's best interests is generally assessed by reference to the interests of shareholders, whereas upon insolvency the interests of creditors will supersede those of shareholders in that assessment.
The codification of the duty of care, skill and diligence for directors now found in the Companies Ordinance7 is based on Section 174 of the UK Companies Act 2006 and therefore applies a dual objective/subjective standard to directors' duty of care.
The Winding-Up Ordinance8 provides a summary method of enforcing existing duties owed by past and present officers (who include directors, managers and company secretaries) of a company subject to winding-up proceedings. Conduct that may give rise to liability under this section might include a breach of directors' duties, or claims arising from preferences or fraudulent trading.
A liquidator is the agent of the company and on appointment displaces the directors and assumes their powers and functions in respect of the company. The directors remain obliged to assist the liquidator in the course of the winding up, and failure to provide the required assistance may result in civil and criminal penalties being imposed on the offending directors. In contrast, the liquidator does not owe duties to the directors of the company and is not required to keep the directors apprised of his activities.
vii Clawback actions
As a starting point, there are two main categories of actions that a liquidator can bring:
- a Company actions - The liquidator can commence proceedings in the name of the company to enforce rights and claims vested in the company prior to liquidation: the claim exists and can be pursued irrespective of whether or not the company is insolvent, and the proper plaintiff is the company.
- b Liquidator actions - In addition to company actions, there are a number of special powers given to a liquidator that can be invoked to avoid or reverse the effect of certain transactions that would have remained binding on the company but for its liquidation. These ‘avoidance powers' are available only in the context of winding-up proceedings and are contained in legislation.
If a company is compulsorily wound up within one year of a payment out of capital under statutory procedures for redemption or buy-back of any of its own shares, the Amendment Ordinance now provides that directors who signed the solvency statement in relation to the payment out of capital and past shareholders will be jointly and severally liable to contribute to the assets of that company. It is a defence for a director to show that he or she had reasonable grounds for believing his opinion expressed in the solvency statement.
The Amendment Ordinance has updated Hong Kong's antecedent breach legislation, including the introduction of undervalue transactions for corporate insolvency (the concept is well known but previously only applicable in personal bankruptcy). Pre-insolvency transactions that can be challenged or set aside by the liquidator include:
- a Transactions at an undervalue - Transactions entered into by a company for which the company received no consideration or consideration that is significantly less than that given by the company. A transaction at an undervalue will be liable to be set aside by a court unless the court is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business, and at the time the company did so, there were reasonable grounds for believing that the transaction would benefit the company. The look-back period for transactions at an undervalue is five years.
- b Unfair preferences - Action taken by the company, influenced by a desire to prefer, that puts one creditor in a better position in the event of insolvency than it would otherwise have been. A transaction will be liable to be set aside by a court if there is evidence that the desire to prefer the recipient influenced the company's decision to enter into the transaction (or make the subject payment) and if ‘…it was one of the factors which operated on the minds of those who made the decision'.9 The desire to prefer the recipient does not have to be the dominant factor; it may simply be one of a number of matters considered by the company. Transactions involving a person connected with the company (other than by reason of being its employee) are presumed to be an unfair preference. The look-back period in respect of transactions entered into between an insolvent company and a person connected with the insolvent company (other than by reason of being its employee) is two years, and in any other case of an unfair preference, the look-back period is six months.
- c Extortionate extensions of credit to the company - The terms of the transaction are, or were, such as to require grossly exorbitant payments to be made or it otherwise grossly contravenes ordinary principles of fair dealing.
- d Floating charges - The Winding-Up Ordinance invalidates a charge created as a ‘floating charge' within two years prior to the commencement of the winding up if the floating charge was granted to a person connected with the company (other than by reason of being its employee) or within one year prior to the commencement of the winding up if the floating charge was granted to any person other than a person connected with the company, provided that, in either case, the company subject to winding up was insolvent when the charge was created, or, alternatively, the company became insolvent as a consequence of granting the charge.
- e Transactions made with the intention of defrauding creditors - The standard of proof is high and consequently it can be difficult to pursue this action.
III RECENT LEGAL DEVELOPMENTS
Hong Kong is a gateway to business around Asia and investors continue to appreciate the certainty of its legal system and application of the rule of law. For a variety of reasons, including legal and tax considerations, enterprises running businesses through Hong Kong will often do so using corporate structures involving several jurisdictions. In addition, the assets underpinning those businesses are frequently situated outside Hong Kong.
It is inevitable, therefore, that the growing global trend of cross-border insolvencies is also being felt in Hong Kong. Two associated aspects have been the subject of continued judicial consideration: jurisdiction of the Hong Kong courts to wind up foreign companies and recognition of foreign liquidation proceedings.
Legislative developments include changes to the Winding-Up Ordinance through the Amendment Ordinance referred to above and the introduction of Hong Kong's bank resolution regime.
i Winding up foreign companies
Hong Kong courts have power under the legislation to wind up a foreign company, including one that is not registered in Hong Kong.
The courts will not exercise the power lightly and will determine the position on a case-by-case basis. The courts have formulated three core requirements for exercising their power to wind up a foreign company:10
- a there has to be a sufficient connection with Hong Kong, although this does not necessarily have to consist of the presence of assets within the jurisdiction;
- b there must be a reasonable possibility that the winding-up order would benefit those applying for it; and
- c the court must be able to exercise jurisdiction over one or more persons in the distribution of the company's assets.
The fact that the court considers itself to have jurisdiction does not mean that it will make a winding-up order and will maintain discretion whether or not to do so.
In the high-profile Yung Kee case,11 the Court of Final Appeal (CFA) reversed the lower courts' decisions and decided Yung Kee Holdings Limited (Yung Kee), incorporated in the BVI and indirectly holding the well-known Yung Kee restaurant in Hong Kong, has sufficient connection with Hong Kong to trigger the Hong Kong court's winding-up jurisdiction, and to do so on just and equitable grounds.
Considering jurisdiction from a winding-up perspective, the CFA focused on the first core requirement, namely a ‘sufficient connection with Hong Kong', holding that the test is whether the petitioner will derive significant benefit from a winding-up order in Hong Kong, even though the company is incorporated elsewhere.
In Shandong Chenming Paper v Arjowiggins,12 a Chinese company argued that the Hong Kong courts lacked jurisdiction to wind it up and that the ‘benefit test' (core requirement (b) above) would not be satisfied without the Chinese company having assets in Hong Kong available for distribution to creditors.
A dispute had arisen between a Chinese Hong Kong/Shenzhen listed paper conglomerate and its Hong Kong joint venture party, with subsequent arbitration resulting in a substantial award in favour of the Hong Kong company.
The court broadly concluded that the pressure produced by a winding up was sufficient to constitute a benefit to the Hong Kong company in its efforts to enforce the arbitral award; and that as a matter of public policy a company who has chosen to list its shares in Hong Kong should not then be able to refuse to honour an award required under Hong Kong law.
ii Recognition of foreign proceedings
In Singularis Holdings Ltd v. PwC,13 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, consistent with local law and local public policy, to ensure that a company's assets are distributed under a single system), and held by a majority that there was 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 liquidation under which they were appointed.
In Hong Kong, where a UK administrator sought assistance from the Hong Kong court in recognising the moratorium created by the administration order in the UK to prevent disposal of the company's assets, the court concluded that it could not provide the assistance because to do so would be an impermissible extension of common law principles: Hong Kong currently has no procedure analogous to administration in the UK and thus the order was not one that would be available to a Hong Kong office holder.14
… in the exercise of its common law powers the Hong Kong Companies Court can order the oral examination of a director of a Cayman Island company in liquidation in the Cayman Islands if satisfied that it is necessary and that it would not infringe the established limitations on the exercise of the power conferred by section 221 [of the Winding Up Ordinance].
That common law power did not contravene Article 96 of the Basic Law, which provides: ‘With the assistance or authorisation of the Central People's Government, the Government of the Hong Kong Special Administrative Region may make appropriate arrangements with foreign states for reciprocal juridical assistance.'
The Companies Court reiterated its view in Bay Capital Asia17 that banks should give assistance to foreign liquidators seeking information on receipt of a letter of request, albeit without a Hong Kong court order, having satisfied themselves that the liquidators have been appointed by the court of the place of the company's incorporation.
The continued line of decisions shows that to the extent established common law principles require the Hong Kong court to recognise foreign liquidators, it is both prepared and willing to provide assistance to them.
iii Bank resolution regime
In the wake of the recent global financial crisis, the Financial Stability Board was tasked with developing a robust approach to allow systemically important financial institutions to fail safely.
Given Hong Kong's status as an international financial centre and a Financial Stability Board member jurisdiction, the Financial Institutions (Resolution) Ordinance was enacted by the Legislative Council on 22 June 2016 and its commencement date was designated as 7 July 2017 (with the exception of certain provisions, which require the finalisation of additional rules).
The Ordinance is intended to establish a cross-financial sector resolution regime that is designed to strengthen the resilience of Hong Kong's financial system and operates in the banking, insurance and securities and futures sectors.
The Hong Kong Monetary Authority, the Insurance Authority and the Securities and Futures Commission are given powers as resolution authorities, including the powers to: impose a write off or conversion of capital instruments issued by authorised institutions; resolve a holding company or group company of an entity within scope; and give effect to a resolution action taken by an overseas counterpart. Where a failing financial institution operates across more than one sector, one of the authorities will coordinate resolution as lead resolution authority.
Various stabilisation options are provided under the Ordinance, which the relevant resolution authority can apply individually or in combination, broadly: transfer of the failing financial institution, or some or all of its business, to a commercial purchaser, a bridge institution or asset management vehicle; statutory bail-in; and, as a last resort, taking the institution into temporary public ownership (involving the use of public funds).
Where a resolution process is cross-border in nature, a key question is whether foreign jurisdictions will recognise each other's resolutions. The Ordinance provides for recognition to give effect to measures adopted by the foreign authority and supportive measures by the Hong Kong authorities to support the resolution action being taken by the foreign authority.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i Schemes of arrangement
A foreign compromise does not necessarily discharge a debt unless it is discharged under the law governing the debt. In a creditors' scheme purporting to vary contractual rights, the effectiveness of the scheme may require that the debtor seeks not only the sanction of the court in its jurisdiction of incorporation but also of the courts in the jurisdictions that govern its contractual debt obligations, to ensure that dissenting creditors cannot enforce their claims against the debtor company in jurisdictions other than that of its incorporation.18
Recent examples of schemes are becoming increasingly cross-border in nature given the mix of creditor constituencies involving bank debt as well as bonds subject to, for example, New York law. The result increasingly requires parallel schemes in Hong Kong, the relevant offshore jurisdiction (such as Bermuda, the Cayman Islands or British Virgin Islands, where companies listed in Hong Kong are frequently incorporated) together with Chapter 15 recognition in the United States, with a view to ensuring that claims in all relevant jurisdictions are extinguished.
Kaisa Group Holdings Limited
Kaisa Group is one of the leading Chinese real-estate property developers listed on the Hong Kong Stock Exchange, with interest-bearing borrowings in the billions of dollars, and has borrowings in China and offshore, through a mixture of bank and bond debt. Its default is the first time that a major property company operating exclusively in the PRC has defaulted on its offshore debt. Schemes of arrangement were sanctioned in both Hong Kong where Kaisa was listed and the Cayman Islands where it was incorporated; and the United States Bankruptcy Court for the Southern District of New York provided recognition of the scheme of arrangement proceedings then pending before the High Court of Hong Kong under Chapter 15 of Title 11 of the United States Code.
In the Lehman Brothers liquidations in Hong Kong, schemes of arrangement have recently been used19 to help accelerate the liquidation process.
One scheme was proposed with the objective of reducing the company's creditor constituency and thereby simplifying its liquidation and reducing costs, providing for the full and final discharge of the scheme claims by the scheme creditors in return for them receiving a payment that, together with the interim dividends in the past, will give them the anticipated total recovery (calculated on a best-case basis) much earlier than if the liquidation were to continue without the scheme.
At the sanction hearing, the key legal issue was whether (moving on from Garuda)20 it is permissible to have a scheme of arrangement between an insolvent company and only some (i.e., not all) of its unsecured creditors, having regard to the principle of pari passu distribution in insolvency law. The liquidators relied on English and Hong Kong authorities to the effect that a scheme of arrangement can be used to achieve a departure from the pari passu principle in a liquidation and, although all creditors in a class must have similar rights, not all creditors with similar rights have to be joined in a class, notwithstanding the insolvency of the debtor.
Another addressed the uncertainties and litigation risk in connection with questions of payment priority with regard to post liquidation interest, matters forming the basis for many months of court time in the English ‘Waterfall' cases.21
Both schemes operated to impose a cut-off date by which creditors must, if not already admitted in the relevant company's liquidation, submit claims against it, failing which they would be barred from participating in the scheme or the liquidation.
ii Addressing Legend22
Since the Legend decision, the general view has been that Hong Kong law does not strictly allow ‘soft touch' provisional liquidation to restructure a company. Rogers VP pithily noted that ‘… [t]he power of the court … is to appoint a [provisional] liquidator … for the purposes of the winding-up not for the purposes of avoiding the winding-up … Restructuring a company is an alternative to a winding-up'.23
In an ongoing restructuring case, the initial appointment of Hong Kong provisional liquidators (PLs) to Z-Obee, a Bermuda-incorporated company listed in Hong Kong, satisfied the ‘jeopardy to assets' test of Legend but that state of affairs disappeared following their appointment.
The patience of the Hong Kong court began to wear thin with the company's lengthy status in provisional liquidation for the, now sole, purpose of restructuring through a white knight investment and a battle to convince the Hong Kong Stock Exchange to allow a resumption of trading, which is inconsistent with Legend.
The Hong Kong judge was asked to adjourn the winding-up hearing further, whereafter the appointment of soft touch PLs was sought in Bermuda, with a subsequent discharge of the Hong Kong PLs and their appointment in Bermuda recognised in Hong Kong, allowing them to continue with the proposed restructuring and mitigating the impact of Legend.
The Companies Judge also directed the parties to consider how the recent Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters formulated by the Judicial Insolvency Network could potentially be applied in this case. The guidelines aim to enhance the efficiency in the administration of parallel insolvency proceedings by establishing a framework for close cooperation between courts of different jurisdictions.
i UNCITRAL Model Law
The United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law in light of the increasing incidence of cross-border insolvencies; and because national insolvency laws were recognised to have limited provision for cases of a cross-border nature, resulting in inconsistent legal approaches.
Currently, there is no statutory provision empowering a Hong Kong court to render assistance to a foreign court in an insolvency matter, as Hong Kong has not adopted the Model Law in its domestic legislation, or any other legislation to similar effect (except with regard to certain aspects of arbitration).
ii The Hong Kong courts' approach
The approach taken by the Hong Kong courts to cross-border insolvencies has been pragmatic. There is increasing acknowledgement of the need for courts from different jurisdictions to assist one another where possible and to address the common law recognition of foreign liquidators (see Section III, supra).
The Hong Kong courts have a broad jurisdiction to wind up companies in Hong Kong. This extends not only to companies that are incorporated in Hong Kong, but also to overseas companies registered in Hong Kong and unregistered companies, providing certain requirements are met.
In the Lehman Brothers liquidations, where there are a number of office holders in different countries, the Hong Kong liquidators of certain key affiliates were instrumental in implementing a cross-border protocol for dealing with information sharing and creditor resolution proposals.
VI FUTURE DEVELOPMENTS
i Corporate rescue procedure
Notably absent from the Amendment Ordinance is any provision for some form of statutory corporate rescue procedure.
Recently, the Hong Kong Financial Services and the Treasury Bureau indicated that their target is to table a bill to the Legislative Council in 2018 for the introduction of a statutory corporate rescue procedure and insolvent trading provisions.24
1 Tom Pugh is a partner at Mayer Brown JSM.
2 Table 3.3 : Customer deposits by type, Monetary Statistics for March 2017, The Hong Kong Monetary Authority.
3 ‘Hong Kong Becomes Collateral Damage After Moody's China Cut', Bloomberg News, 25 May 2017.
4 See www.oro.gov.hk/cgi-bin/oro/stat.cgi.
5 Re Legend International Resorts Ltd  2 HKLRD 192.
6 Joint Official Liquidators of A Co v. B Co  4 HKLRD 374; and see Section IV, infra.
7 Section 465, Companies Ordinance.
8 Section 276, Winding-Up Ordinance.
9 Re MC Bacon Ltd (No. 1)  BCLC 324 at 336.
10 As summarised by Kwan J (as she then was) in Re Beauty China Holdings Ltd  6 HKC 351.
11 Kam Leung Sui Kwan, personal representative of the estate of Kam Kwan Sing, the deceased v. Kam Kwan Lai & Ors (FACV 4/2015, on appeal from CACV 266/2012, HCCW 154/2010).
12 Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited (HCMP 3060/2016).
13  UKPC 36.
14 The Joint Administrators of African Minerals Ltd (in administration) v. Madison Pacific Trust Ltd and Shandong Steel Hong Kong Zengli Limited  HKEC 608.
15  HKCU 2797.
16 Ibid at Paragraph 7.
17 Bay Capital Asia LP v. DBS Bank (Hong Kong) Ltd  HKEC 2377.
18 See Re Drax Holdings Ltd  1 WLR 1049.
19 For example: HCMP 2762/2015; and  HKCFI 203.
20 Sea Assets Ltd v. Penerbangan Garuda Indonesia  EWCA Civ 1696.
21 For example:  UKSC 38.
22  2 HKLRD 192.
23 Ibid at paragraph 36.
24 See www.hkreform.gov.hk/en/implementation.