i Statutory framework and substantive law

Hong Kong insolvency law and practice is substantially based on insolvency law and practice in the United Kingdom. However, it does not benefit from the extensive reforms introduced in the United Kingdom by the Insolvency Act 1986 so that, for example, in Hong Kong there is, currently, no rescue procedure akin to administration in the United Kingdom. The concept of wrongful trading has also not been legislated for in Hong Kong.

Corporate insolvency in Hong Kong remains primarily governed by the remaining provisions of the old Companies Ordinance, renamed the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), as amended by the Companies (Winding Up and Miscellaneous Provisions) Amendment Ordinance (the Amendment Ordinance), which came into effect on 13 February 2017.

The bulk of the provisions set out in the specialist resolution regime for financial institutions in Hong Kong (FIRO) came into effect on 7 July 2017,2 meaning that Hong Kong has now largely met its obligations as a member of the Financial Stability Board. Accordingly, while in theory the winding up in Hong Kong of an international bank remains possible, in the case of its financial distress, some form of resolution under FIRO is the most likely scenario. Although the Hong Kong Monetary Authority, the Securities and Futures Commission (SFC) and the Insurance Authority retain statutory powers to commence administrative proceedings, such as the appointment of special managers, as these powers do not relate to insolvency processes, they are generally beyond the scope of this chapter.

ii Policy

The Hong Kong legislature has not modernised Hong Kong insolvency law to keep pace with an increasingly globalised world. A corporate rescue regime was first raised in 1996: the Companies (Corporate Rescue) Bill was then proposed in 2001 but failed to gain legislative acceptance. The Bill remains on the drawing board. Despite this lack of modernisation, Hong Kong has a workable restructuring culture largely as a result of judicial pragmatism. This pragmatism is in evidence all the more frequently as Hong Kong has not implemented the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), and consequently there is no statutory process for the formal recognition of foreign proceedings.

The lack of any rescue procedure in Hong Kong leaves creditors with a stark choice: seek to agree an out-of-court restructuring or turn to a formal liquidation process that will mean the demise of the corporate entity and is likely to present severe difficulties in saving the underlying business. Prior to 2006, accepted practice in Hong Kong had been to appoint provisional liquidators (PLs) with a view to implementing a restructuring by way of a scheme of arrangement. However, in the decision in Re Legend International Resorts Ltd (Court of Appeal),3 the Court of Appeal effectively closed off this avenue for companies in distress if creditors could not also show a jeopardy to assets at the time of the PL appointment.

In recent years, there have been a number of cases in which the Hong Kong judiciary has shown itself to be proactive in developing procedures for assisting the restructuring of companies with a Hong Kong connection through a flexible interpretation of the existing legal framework, edging closer to the pre-Legend position. Rather than appoint a PL in Hong Kong,4 the current approach is to appoint PLs in the jurisdiction of incorporation, where soft-touch or restructuring PLs are either not prohibited or expressly permitted for the purpose of promulgating a restructuring. The PLs can then approach the Hong Kong court with letters of request and seek recognition orders for general or specific requirements. This is particularly relevant given the prevalence in Hong Kong for companies operating or listed in Hong Kong (or both) to have been incorporated in offshore jurisdictions such as the British Virgin Islands, the Cayman Islands or Bermuda.5

Notwithstanding these developments, Hong Kong remains desperately in need of legislative reform for its insolvency processes. In this regard, there may be some light at the end of the tunnel. The Financial Services and the Treasury Bureau continues to consult with stakeholders on certain issues to be addressed in the amendment bill, the most recent consultation having taken place in April 2018. There is an intention to introduce a corporate rescue and insolvent trading bill to the Legislative Council during the 2018–2019 session.6

The proposals are intended to introduce a method of corporate rescue (to be known as provisional supervision) akin to administration in the United Kingdom, with a moratorium on the commencement and continuation of proceedings. Critically, this would include the enforcement of security by secured creditors and would start automatically on the entry of the company into provisional supervision. An independent person (the provisional supervisor) would be appointed to take temporary control of the company and consider options for rescuing it. The proposed insolvent trading regime would make a director of a company civilly liable for its insolvent trading, and require the director, on the order of the courts, to pay compensation to the company's stakeholders. It is currently uncertain whether any bill will include proposals to implement the Model Law.

iii Insolvency procedures

Leaving aside less formal restructuring processes (which are fairly prevalent in the absence of a statutory corporate rescue regime), the insolvency regime in Hong Kong still revolves primarily around liquidation and provisional liquidation. These formal procedures are often combined with a scheme of arrangement to effect a cramdown of dissenting creditors within the same class where necessary. Hong Kong law relating to schemes of arrangement is largely based on English law, and the body of cases coming out of that jurisdiction are persuasive in Hong Kong. We do not discuss schemes of arrangement in any more detail in this chapter.


Liquidation is also referred to as winding up, of which there are two types:

  1. a compulsory winding up or winding up by the courts; and
  2. a voluntary winding up:
    • members' voluntary winding up (i.e., solvent liquidation), which is not an insolvency process as the directors must file a declaration of solvency; and
    • creditors' voluntary winding up (CVL), initiated by the shareholders of an insolvent company, once it is considered that there is no prospect of a viable restructuring.

Power also exists under Section 228A of the CWUMPO for a director (without first consulting shareholders) to commence a voluntary winding up of the company and seek the appointment of a provisional liquidator. This is rarely used, owing to the particular statutory requirement that no other form of winding up should be reasonably practicable, which the directors must state to be the case (with appropriate justification) in the winding-up statement to be delivered to the Registrar of Companies.

Provisional liquidation

The appointment of PLs can be sought at the time of the presentation of a winding-up petition by the official receiver or any creditor or contributory. The primary objective of such an appointment is to preserve the assets and records of a company, for the benefit of its creditors, in the interim period between the presentation of the winding-up petition and the granting of a winding-up order by a court. It is common for PLs to be appointed in this interim period when the winding-up petition is disputed, but stakeholders can also seek the appointment of PLs as an end in itself, provided the necessary criteria are met. The application to the courts for the appointment of PLs is often underpinned by a desire to combat the perceived risk that directors (or shareholders) may dissipate assets of the company in the period before a winding-up order is made and, indeed, it is necessary to satisfy the court that the assets of the company are in jeopardy for the appointment to be made. There is no moratorium on the enforcement of security by secured creditors during the period between the presentation of the petition for winding up and the making of the order for winding up, or when PLs have been appointed, or when a winding-up order has been made. However, there is a general stay on proceedings against a company on the making of a winding-up order and on the appointment of PLs.7

In Re Legend International Resorts Ltd (Court of Appeal),8 it was held first that the traditional basis in Hong Kong for the appointment of PLs under Sections 192 and 193 of the CWUMPO (that there had to be a showing of assets in jeopardy) still had direct application. Further, the wording of Section 192 was very clear: the appointment of PLs had to be for the purposes of the winding up. Provided that purpose existed, there would be no objection to giving PLs restructuring powers as well.9 Second, there was still a significant difference between the appointment of PLs on the basis that a company was insolvent and that its assets were in jeopardy, which was permissible, and the appointment of a PL solely for the purpose of enabling a corporate rescue to take place, which was not. Finally, there was no basis in the particular circumstances for the appointment of PLs as the assets of the company were not shown to be in jeopardy.10 While the principles in Re Legend remain the law in Hong Kong, in the case of Re China Solar Energy Holdings Ltd,11 the court confirmed that PLs may continue in office to implement a restructuring once those asset preservation concerns cease to apply, holding that this did not defeat the principle of requiring the appointment to be for the purposes of the winding-up.

An alternative approach was adopted in Z-Obee Holdings Ltd,12 in which the Hong Kong winding-up petition of a company incorporated in Bermuda was stayed and the Hong Kong-appointed PLs ultimately dismissed to allow the appointment of PLs with a specific restructuring power (as allowed under the Bermudian legislation) in Bermuda. Once appointed, the Bermudian PLs were granted recognition in Hong Kong. The court subsequently approved a scheme of arrangement in Hong Kong promoted by the PLs appointed in Bermuda.13 This is of particular importance given that the rule in Gibbs14 continues to apply in Hong Kong, thereby preventing a foreign law scheme of arrangement from being used to compromise Hong Kong-law-governed debt.

Ancillary proceedings

Local procedures15 allow for ancillary proceedings when main proceedings are pending in another country. In this regard, unregistered companies (for example, a Hong Kong branch of a company incorporated overseas) that have some sufficient connection with Hong Kong can be wound up in what are called concurrent proceedings (see Section I.vii).

iv Starting proceedings

Creditors' voluntary winding up

The CVL process is commenced by the passing of a special resolution to wind up the company at a general meeting of the members.16 A meeting of creditors (to be held in accordance with Section 241 of the CWUMPO) should then take place on a date not later than 14 days after the day of the meeting of members, and notice should be given of the meeting to all creditors at least seven days before the day on which the meeting is to be held.

The chair (usually a director of the company) will take creditors' alternative nominees for the liquidator's role (if any) – an initial nomination will have been made by the members at the general meeting – and a vote will be taken. In the event of any conflict, the creditors' choice will prevail.17 The usual practice in Hong Kong is for two liquidators to be appointed who will act jointly and severally. A committee of inspection (COI) may also be established, which will take a prominent advisory role in the CVL, exercising a degree of supervision and control over the liquidator.

Court winding up

The vast majority of winding-up petitions are presented by unsecured creditors, and are most frequently brought on the grounds that a company is unable to pay its debts. However, it should be noted that winding up by the court is not limited to instances of a company being insolvent; a petition can be made to the court when there are 'just and equitable grounds' to do so,18 as in cases involving suspected fraud.

Under Section 178 of the CWUMPO, a company is deemed unable to pay its debts, in summary, when:

  1. the company fails to satisfy – within three weeks of the service of a notice in the prescribed form – a debt exceeding HK$10,000;19
  2. the enforcement of a judgment of the court against the company has not been satisfied; or
  3. it appears to the court that the company is unable to pay its debts, taking into account the contingent and prospective liabilities of the company. Often, the test relied upon is a cash-flow test, but a balance-sheet test may also be used.

A total of 458 winding-up petitions were presented to the Hong Kong High Court in 2016, 403 were presented in 2017 and 213 were presented between the beginning of 2018 and 1 August 2018.20

The potential time lapse between the presentation of a winding-up petition and the declaring of a winding-up order may stretch to several months, in particular if the petition is opposed. This may present difficulties for creditors and directors, particularly in light of the retrospective calculation of the date of the commencement of the winding-up (deemed to be the date of the presentation of the petition).

Presentation of a winding-up petition

The following parties may present a winding-up petition:

  1. the company;
  2. any creditor or creditors;
  3. a contributory or contributories;
  4. the official receiver in respect of a company that is being wound up voluntarily;
  5. the Registrar of Companies;
  6. the Financial Secretary (in a case falling within Section 879, Paragraph (1) or (3) of the Companies Ordinance, for example, where it is expedient in the public interest);
  7. the SFC can petition in the public interest in respect of listed companies21 and leveraged foreign exchange traders; and
  8. the Insurance Authority can petition in relation to insurers under the Insurance Companies Ordinance.

Appointment of a liquidator

On the making of a winding-up order, the official receiver becomes the liquidator of the company, pending (unless one has been previously appointed) separate meetings of creditors and contributories of the company to determine who will act as liquidator. Where no agreement can be reached, the official receiver will offer the name of the next person on the rota system of the Administrative Panel of Insolvency Practitioners for Court Windings Up (also known as Panel A or the 'cab rank' system). If further disputed, the court will decide who is to be appointed as it sees fit, in the interests of all parties, and it need not have regard for the recommendations of the meetings of either creditors or contributories.

v Control of insolvency proceedings

The making of a winding-up order results in the termination of the company directors' powers of management; the subsequent question of who will exercise control over the company and of the liquidation differs, to a degree, between a CVL and a court winding up.

Creditors' voluntary winding up

Liquidators have wide-ranging statutory powers as regards the realisation of the assets of the company and the winding up of its affairs. However, those powers that are exercisable without an element of supervision, or prior sanction or permission, are narrowly defined (although more extensive in the context of a CVL). Under Section 199(2) of, and Schedule 25 to, the CWUMPO, a liquidator has the power to, inter alia, sell company property, execute documents and claim in the insolvencies of debtor companies and individuals. A creditor or contributory can refer questions on the exercise of these powers to the court.22

The COI, if appointed, will take a general supervisory role and the liquidator will report to or seek advice from the COI on the conduct of the liquidation. The COI also has the power to fix the remuneration of the liquidator.23 The liquidator can only take specified actions if he or she has first obtained the sanction of the COI or the court (or, if there is no COI, at a meeting of the creditors), for example, to pay any class of creditors in full or to make a compromise or arrangement with creditors.24 The potential exists, however, for the liquidator to apply to the court for such a sanction if this is not forthcoming from the COI, which may be granted if deemed in the best interests of the company.25 The Amendment Ordinance provides for the composition of the COI and procedures in relation to a COI meeting. A COI must consist of not less than three and not more than seven members, with the possibility that this might be varied upon application by the liquidator to the court.26

Court winding up

Court supervision of the conduct of a liquidation is more far-reaching in the context of a compulsory winding up. Examples of the powers available to the court include the following:

  1. Summary cases: In instances where the assets of an insolvent company are likely not to exceed HK$200,000, the court may make an order for the company to be wound up in a summary manner;27 the order may be rescinded should further assets of the company come to light.28
  2. Regulating orders: In the interest of efficiency or expediency, the court has the power to dispense with some of the procedural requirements (i.e., for certain meetings to take place).29
  3. Staying the winding up: With good reason, the court has a general power to stay the winding-up proceedings at any time after a winding-up order has been made, either altogether or for a limited time.30
  4. Conversion of a compulsory liquidation into a CVL: This concept is unusual, and it has rarely been used.31

The powers that may be exercised by a liquidator without sanction are fewer in the case of a compulsory winding up. The general powers of a liquidator under Section 199 of the CWUMPO (which have been reframed by the Amendment Ordinance) are subject to the control of the court, and a request for the review by the court of any action of a liquidator may be submitted by any creditor or contributory.32

The court also has the power to remove a liquidator. Creditors may apply for a liquidator to be removed, and may choose to do so if they were unable to secure the initial appointment of their preferred liquidator.33

Guidance notes as regards a liquidator's role and his or her investigation of the affairs or assets of a company have been produced by the Hong Kong Institute of Certified Public Accountants. The Amendment Ordinance expands the list of people disqualified from appointment as a liquidator or PL to avoid conflicts of interest.

Reviewable transactions

A liquidator in Hong Kong may seek to challenge the actions of a company (e.g., by invalidating security or voiding transactions) taken during the applicable risk period prior to the company commencing winding up. The length of the risk period varies, depending on the type of challenge and the circumstances of the transaction. The main reviewable transactions are summarised below, the notable exception being that Hong Kong has no wrongful trading provisions.

Unfair preferences

An unfair preference is an act (e.g., granting of security or guarantee) that has the effect of putting a creditor, a surety or a guarantor in a better position than it would otherwise have been in upon a winding up of the company. The general risk period is six months, but is increased to two years if the unfair preference is granted to a person who is connected with the company.

Transactions at an undervalue

A transaction is at an undervalue if the company makes a gift, or if there is no consideration, or if the consideration is significantly less than the value of the consideration provided by the company. The risk period is five years from the commencement of the winding up and the company must have been unable (or became unable) to pay its debts at the time of the transaction. It is a defence to show that the company entered into the transaction in good faith and for the purpose of carrying on its business and there were at the time reasonable grounds for believing that the transaction would benefit the company.

Avoidance of floating charges

A floating charge will be invalid except, broadly, to the extent of any consideration received by the company at the same time as, and in exchange for, the creation of the charge. The risk period is 12 months, or two years for a transaction with a connected party, from the date of the winding up. The company must also have been unable (or became unable) to pay its debts at the time of creation of the charge.

Extortionate credit transactions

A credit transaction is extortionate if (taking into consideration the credit risks) credit is provided for grossly exorbitant payments (either actual or contingent, e.g., on default) or the transaction grossly contravenes principles of fair dealing. The risk period is three years.

Fraudulent conveyances

Although rarely invoked, this transaction provides for the voidability of dispositions made with the intent to defraud creditors. There is no time limit, and the transaction applies whether or not the company making the disposition is being wound up or insolvent.

vi Special regimes

As stated in Section I.iv, the SFC has unique statutory power to commence liquidation proceedings in respect of particular types of entities. Hong Kong also now has a specialist resolution regime for financial institutions under FIRO.

Although the detail of FIRO and the changes wrought by its introduction are outside the scope of this text, it is useful to understand the broad scope of FIRO when considering the landscape of insolvency-related measures available in Hong Kong.

FIRO provides a comprehensive resolution regime for the banking, insurance, securities and futures sectors, including branches of financial institutions incorporated outside Hong Kong, locally incorporated holding companies and associated operating entities, clearing houses and recognised exchanges. FIRO provides a full menu of stabilisation options that are available to the resolution authority to use if:

  1. a within-scope financial institution has ceased, or is likely to cease, to be viable;
  2. there is no reasonable prospect that private sector measures outside resolution would result in the institution becoming viable again within a reasonable period; and
  3. the non-viability of the institution poses risks to the Hong Kong financial system.

These options include the transfer of the failing financial institution or some or all of its businesses to a commercial purchaser, the transfer of some or all of its businesses to a bridge institution, the transfer to an asset management vehicle, the statutory bail-in of certain obligations and, as a last resort, taking the financial institution into temporary public ownership. The objectives throughout are to promote the stability and effective working of the financial system in Hong Kong (including the continuity of critical financial functions), to protect deposits and insurance policies, to protect client assets and, subject to satisfying the preceding objectives, to protect public funds by containing the costs of resolution. Recognising the cross-border nature of the business of many financial institutions operating in Hong Kong, FIRO also gives the resolution authority the ability to recognise a foreign resolution process and to exercise its powers in support of a foreign resolution process.

vii Cross-border issues

As has already been noted, the Hong Kong courts have wide discretionary powers to wind up a company incorporated outside Hong Kong if the relevant company has some suitable connection with Hong Kong. Recent cases have confirmed that the court will examine closely the need for such proceedings.

In Re Pioneer Iron and Steel Company Limited,34 the Court of First Instance reiterated that:

a Section 327, Paragraphs (1) and (3) of the CWUMPO give the courts a discretionary jurisdiction to wind up an unregistered company; and

b its jurisdiction would be exercised if the following three core requirements, which had been stated in Re Yung Kee Holdings,35 were satisfied:

  • there is a sufficient connection with Hong Kong. In the context of insolvency there is commonly the presence of assets, but this is not essential;
  • there is a reasonable possibility that the winding-up order would benefit those applying for it; and
  • the court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company's assets.

The Court also stated that an exceptional case could arise when the connection with Hong Kong was so strong and the benefits of a winding-up order for the creditors of a company so substantial that the court would be willing to exercise its jurisdiction despite the third criterion not being satisfied. This was then tested in Re China Medical Technologies Inc.36 Here the Court of First Instance rejected a petition for winding up where it was not satisfied that it would be able to exercise jurisdiction over one or more persons interested in the distribution of the company's assets (determining that a Hong Kong-based creditor with a low-value claim was not sufficient to meet this requirement) and that the connection with Hong Kong was not strong enough and the benefits of a winding up to the creditors of the company were not so substantial so as to enable the court to exercise its jurisdiction without the third criterion being satisfied. A few months later, new evidence came to light that suggested that persons and bank accounts in Hong Kong had played a key role in a suspected fraud in Hong Kong. The Cayman liquidators sought to reopen the hearing of the petition on the basis that a sufficient connection to Hong Kong was established by the presence of these persons and accounts; the Court held that the new evidence showed that there was a sufficient connection with Hong Kong and there was a benefit in making a winding-up order, and so an order was made, notwithstanding that the third core requirement was not satisfied. The Court of Appeal in Hong Kong has subsequently confirmed that this decision was correct, in particular noting that there did not need to be evidence of persons interested in the distribution of assets in Hong Kong to sustain such an outcome.37

The three-part test set out above was affirmed by the Court of Final Appeal in the long-running Yung Kee Holdings38 case; that Court also held that the same test applies whether the winding-up petition has been presented by a creditor or a shareholder. However, the Court noted that the factors to which a court will look in determining whether there is a sufficient connection between a (solvent) foreign company and Hong Kong in the context of a shareholders' petition are different from those to which it looks in the context of a creditors' petition to wind up an (insolvent) company because the nature of the dispute and the purpose for which the winding-up order is sought are different.

Two cases demonstrate that the court takes a dim view of what it sees as deliberate attempts to avoid its jurisdiction to wind up foreign companies. In Penta Investments Advisers Ltd v. Allied Weli Developments Ltd,39 the Court of Appeal found that (among other things) moving the company's operations out of Hong Kong to the Marshall Islands to claim that it did not presently have a sufficient connection would not prevent a winding-up order being made. As the Court said: 'The connection, once established, remains even after the matters giving rise to the original connection have ceased to exist.' In Re Shandong Chenming Paper Holdings Ltd v. Arjowiggins HKK 2 Ltd,40 the company, which was listed in Hong Kong, had both refused to pay an undisputed judgment debt and attempted to remove its connection to Hong Kong by way of a corporate reorganisation. The Hong Kong court was not impressed with this behaviour and declined to make an order preventing the creditor from bringing a winding-up petition (see Section III.vi for more details).

While Hong Kong does not have a statutory provision enabling the courts to assist foreign insolvency proceedings,41 in addition to the power to wind up unregistered companies, as a matter of common law, the court has the power to recognise and grant assistance to foreign insolvency proceedings. In Joint Official Liquidators of A Co v. B,42 the Court of First Instance took the opportunity to issue a reminder that a court may, pursuant to a letter of request from a common law jurisdiction with a similar insolvency law, make an order of a type that is available to a provisional liquidator or liquidator under Hong Kong's insolvency regime. In this case, a request had been made by the liquidators of a Cayman company, on a letter of application from the Grand Court of the Cayman Islands, for the production of certain documents to the liquidators. In making the order requested, the Hong Kong court noted that the status of a foreign liquidator of a foreign company is the same as that held by the directors of that company prior to the winding up, but that a distinction needed to be made between information and assets, and that in the case of property, an application would need to be made by the foreign liquidator for an order vesting him or her with title to the local property. This approach was followed, and the scope of the order granted was expanded, in a series of cases, including Re Centaur Litigation SPC.43 In making the requested orders in Re Centaur, the court included a provision that would require any person wishing to commence proceedings in Hong Kong against any of the companies to first obtain the court's leave. The judge who made the order stated that the intention was to broadly replicate the impact of the making of a winding-up order in Hong Kong without the need for a petition and the engagement of the entire Hong Kong insolvency regime. Interestingly, in Re Supreme Tycoon Ltd, the court held that a foreign insolvent liquidation commenced in the British Virgin Islands by way of a shareholders' resolution was eligible for recognition by the Hong Kong court (see Section III.iv).

In The Joint Administrators of African Minerals Ltd (in administration) v. Madison Pacific Trust Ltd,44 the Court of First Instance was asked, pursuant to a letter of request from the High Court of England and Wales, to consider providing assistance to insolvency proceedings in England that took the form of an administration of a non-English entity under the supervision of the High Court of England and Wales. The assistance sought was the recognition of the English proceedings and an order restraining the enforcement over security granted by the company in administration (the secured creditor being incorporated in, and carrying on business in, Hong Kong). For the purposes of the decision, the Court assumed (but without deciding) that the Hong Kong court can, in principle, recognise liquidators appointed in a jurisdiction other than the place of incorporation or administrators appointed by the High Court of England and Wales. However, the Court reiterated that although the Hong Kong court can take a generous view of its power to assist a foreign liquidation process, this is limited by the extent to which the type of order sought is available to a liquidator in Hong Kong under Hong Kong's insolvency regime, common law and equitable principles: as Hong Kong does not have any statutory provision that provides for a moratorium on the enforcement of a secured debt, the court could not make the orders sought.

An important practical issue that arose during the course of 2016 was whether in addition to ordering the production of documents that a liquidator would expect to obtain as a matter of course, the court's common law power extended to ordering the production of documents or examination of persons that would historically have required an application under Section 221 of the CWUMPO.45 In BJB Career Education Co Ltd,46 the Court of First Instance made an order, following a request from the Cayman Islands court for recognition and assistance, for the delivery of documents, answers to questions and oral examination of a director without requiring the foreign liquidators to commence an action under Section 221. This approach was followed in Re Pacific Andes Enterprises (BVI) Ltd.47 The court went further in Bay Capital Asia Fund LP v. DBS Bank (Hong Kong) Ltd,48 chastising the defendant bank (and its solicitor) for refusing to hand over documents relating to bank accounts that would ordinarily be freely available to the director of a company.

In practical terms, it is important to remember that Hong Kong does not have a specialist insolvency court. In practice, petitions for winding up and related insolvency law cases appear to be primarily directed to a handful of judges who have experience in this area.


There continues to be a distinct lack of significant formal liquidation processes in Hong Kong. As an indication of how the Hong Kong insolvency regime is viewed externally, the lowest score Hong Kong received from the World Bank's Doing Business report 201849 was in the resolving insolvency section, ranking 43rd, compared to its overall ease of doing business ranking of 5.

The Hong Kong economy remains reasonably buoyant and there are, as a consequence, limited defaults on debt obligations. However, there has been a recent increase in defaults by companies either listed in or with connections to Hong Kong with significant business operations in China. This is considered further in Section V.


i Re Z-Obee Holdings Ltd

The Z-Obee case50 is a good example of both the flexibility of the Hong Kong courts and of judicial cooperation across common law jurisdictions. Initially, provisional liquidators had been appointed in Hong Kong to Z-Obee Holdings Limited (a Bermuda-incorporated, Hong Kong overseas registered company). However, concern about the impact of Re Legend51 (see Section I.iii, 'Provisional liquidation') and the inability to appoint PLs solely for the purpose of restructuring in Hong Kong meant that the parties had to adopt an unusual and novel approach to the restructuring.

A successful application was made by the company to appoint PLs in Bermuda for the purpose of facilitating a restructuring. (There is no equivalent restriction in Bermuda on appointing PLs solely for the purpose of restructuring, i.e., the restrictions in Re Legend do not apply.) The Bermudian PLs were then granted recognition by the Hong Kong court, which at the same time discharged the PLs who had been appointed in Hong Kong. The recognition expressly recognised that the Bermudian PLs had the power to carry out a restructuring of the company. The Hong Kong court then approved a scheme of arrangement proposed by the Bermudian PLs in Hong Kong.

This case is interesting for its novel and pragmatic approach to facilitating restructurings in Hong Kong in the absence of a formal corporate rescue regime and while the restrictions of Re Legend apply.

ii Re China Solar Energy Holdings Ltd

A creditor of China Solar Energy Holdings Ltd, a company incorporated in Bermuda and listed on the Hong Kong Stock Exchange (HKSE), issued a summons to remove the PLs who had been appointed to the company on the grounds that their sole remaining function was to complete the company's restructuring. The main thrust of the creditor's argument was that the decision in Re Legend52 prevented PLs from being appointed solely for the purpose of restructuring in Hong Kong. It should be noted that the PLs were originally appointed on asset preservation grounds but were also granted powers to promulgate a restructuring.

The court in this case53 disagreed with the creditor's interpretation of Re Legend and held that there was nothing in Hong Kong to prevent PLs, properly appointed on asset preservation grounds, from both being granted restructuring powers (as explicitly stated in Re Legend) and using those powers to complete a restructuring. The asset in question was the listing status of the company, and the PLs were appointed in part to protect that listing status. As such, granting the liquidators restructuring powers in connection with preserving that asset was entirely appropriate.

iii Re China Lumena New Materials Corp

This case54 clarified the requirements for foreign PLs to obtain the prior approval of the Hong Kong court to deal with assets of a company located in Hong Kong. Whereas the position in Hong Kong as regards information requests has been well established for a few years (see, for example, Bay Capital Asia Fund LP v. DBS Bank (Hong Kong) Ltd,55 in which the court held it was necessary to obtain a court order to obtain documents relating to a company's bank accounts from the bank in question), the position around assets has been less clear.

By way of background, China Lumena New Materials Corp was a Cayman Islands company to which PLs had been appointed in that jurisdiction. The PLs had been granted formal recognition in Hong Kong but had sought a specific order to transfer amounts held in accounts of the company in Hong Kong out of the jurisdiction. Mr Justice Harris held that transferring assets out of the jurisdiction was a step too far for PLs to take without an order of the court. This tracked the position under the Model Law (albeit that it has not been implemented in Hong Kong).

iv Re Supreme Tycoon Limited

The court in Hong Kong declined to follow the Privy Council's decision in Singularis Holdings Ltd v. PricewaterhouseCoopers56 that common law powers of recognition in cross-border insolvency cases would not extend to voluntary liquidations. This was in line with the decision of the Singapore court in Re Gulf Pacific Shipping Ltd.57 The Hong Kong court held that a voluntary liquidation was still a collective insolvency proceeding for the benefit of the general body of creditors, and as such it was open to the Hong Kong court to recognise the proceedings under the principle of modified universalism. The court did state, however, that this would not be the case for a solvent winding up, which was more akin a private arrangement.

This case58 concerned a company, Supreme Tycoon Ltd, incorporated in the British Virgin Islands in respect of which the joint liquidators of its parent company had passed a shareholders' resolution to place it into voluntary liquidation in the British Virgin Islands. The liquidators of Supreme Tycoon then sought a recognition order from the Hong Kong Court to obtain information, books and records about the company from third parties in Hong Kong. The case is of interest as it is the first time a court in Hong Kong has granted such a recognition order when a company has been placed into a voluntary liquidation process.

v Re Southwest Pacific Bauxite (HK) Ltd

A creditor of Southwest Pacific Bauxite (HK) Ltd issued a petition to wind up the company on the basis of an unpaid statutory demand. Southwest Pacific opposed the petition on the basis that the debt was the subject of a bona fide dispute on substantial grounds and relating to a management services agreement between the parties that contained a clause requiring any disputes to be resolved by arbitration.

The status of the law in Hong Kong as regards such a situation was that a company, in order to defeat a winding up petition after non-payment of a statutory demand, would have to demonstrate to the court a bona fide defence against the debt: the existence of an arbitration clause in the underlying contract would not itself be sufficient to stay the petition to allow for arbitration to be carried out. However, in this case,59 the court held that a petition should generally be dismissed when the following three elements are present:

  1. a company disputes the debt relied on by the petitioner;
  2. the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
  3. the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process and files an affirmation that demonstrates this.

The court also stressed that this was not a firm rule and that the court continued to retain its discretion whether or not to admit a petition, for example, to appoint PLs on asset preservation grounds notwithstanding that the above-mentioned tests were met.

vi Shandong Chenming Paper Holdings Ltd

Shandong Chenming Paper Holdings Ltd is a conglomerate with interests in papermaking, forestry, finance and real estate. The company is incorporated in China and listed on both the Shenzhen and Hong Kong stock exchanges. In November 2015, a creditor of Shandong Chenming obtained an arbitral award in Hong Kong and was subsequently granted leave by the Hong Kong court to enforce the award. The creditor served a statutory demand, which was not paid. However, the company first obtained an ex parte injunction to prevent the creditor from issuing a winding-up petition and subsequently sought a declaration from the Hong Kong court that the three core requirements to wind up an unregistered company would not be met, so as to prevent the creditor from presenting a petition. This was partly based on the company having undertaken a corporate restructuring whereby a direct subsidiary of the company incorporated in Hong Kong was moved to become an indirect subsidiary.

The court dismissed the company's request for such a declaration.60 The court did so for a number of reasons and made its views on the company's conduct very plain indeed.

The case turned on the second of the three core requirements: whether the creditor would derive sufficient benefit from the order (the other two requirements being accepted as having been met). The court found that such a benefit could well be derived from the pressure it would place on the company that was solvent and had not disputed its ability to pay the debt in question, given the severe consequences to the company of the appointment of a liquidator. Further, the court rebuked the company for its unethical conduct and found that there was a public interest reason to dismiss the application (over and above the requirement to demonstrate a benefit to the creditor), namely to prevent foreign companies listing on the HKSE but refusing to abide by the laws of Hong Kong. The following passage bears being quoted in full:

The Company has chosen to have a second primary listing in Hong Kong. An arbitration award has been made against it, which has now become enforceable as a judgment of this Court. The Company does not suggest that it cannot pay the Award. It simply refuses to do so and takes the position that there is nothing the defendant can do about it in Hong Kong. This seems to me to be unacceptable. The Company wishes to take advantage of Hong Kong's financial system and the legal system that underpins it. Hong Kong's legal system and courts provide investors both domestically and internationally with confidence in the reliability and integrity of the financial system. The Company's refusal to honour the Award shows disregard for the integrity of our legal system and, in a non-technical sense at least, contempt for the High Court of Hong Kong. If the Company wishes to be listed in Hong Kong, it should honour the Award . . . There is a public interest in steps being taken to remedy this conduct and to disabuse other Mainland companies of the idea that they can take the benefit of access to Hong Kong's financial system without the burden of complying with our laws. In the circumstances of this case, the obvious and appropriate step is the winding up of the Company in Hong Kong and the delisting of its H shares.61

Ultimately, the petition was adjourned, with Shandong Chenming being required to pay into court the amount of the statutory demand plus interest, totalling HK$389,112,432.44. To date, no winding up of the company has been commenced in Hong Kong.


The key cases involving ancillary insolvency proceedings in Hong Kong are discussed in Section I.vii.


There is general anticipation that insolvency activity in Hong Kong will increase during the coming year. This is largely as a consequence of the commonly held view that the economic cold winds in China will inevitably lead to an upturn in formal insolvency processes in Hong Kong, given that there are a number of Hong Kong-incorporated entities and overseas incorporated entities that have their principal place of business in Hong Kong but conduct their key business activities in mainland China. Witness the continued growth in the number of bond defaults in China, hitting around 28.5 billion yuan by the end of July 2018.62 This has fed into defaults by companies with connections to Hong Kong. For example, Hsin Chong Group Holdings Limited, listed on the HKSE with substantial exposures in China, failed to redeem its US$300 million 8.75 per cent senior notes in May 2018; a subsidiary of China Energy Resources Chemicals Group missed a redemption payment in May 2018 on its US$350 million 5.25 per cent guaranteed bonds due in 2018 (the notes are listed on the HKSE); and a subsidiary of CW Group Holdings Limited, listed on the HKSE, failed to pay interest on its S$75 million 7 per cent notes due in June 2018.


1 Scott Bache is a partner, Joanna Charter is a consultant and Robert Child is a senior associate at Clifford Chance. Scott, Joanna and Robert would like to acknowledge the original author of this chapter, Mr Mark Hyde, with whom Joanna co-authored the second, third and fourth editions of this text.
The information in this chapter was accurate as at September 2018.

2 The operation of certain provisions (including those relating to clawback of remuneration, loss-absorbing capacity, the requirement for contractual bail-in and the suspension of termination rights) will come into force when further secondary rules are made or on a date to be appointed by the Secretary for Financial Services and the Treasury. Since the enactment of the Law, only provisions relating to the designation of lead resolution authorities for financial institutions have become effective.

3 Civil Appeal Nos. 207 and 210 of 2005 [2006] HKCA 75 and [2006] 2 HKLRD 192.

4 Note, however, the decision in Re China Solar Energy Holdings Ltd [2018] 2 HKLRD 338, in which the Hong Kong Court clarified that the decision in Re Legend did not prevent provisional liquidators [PLs] appointed on traditional asset preservation grounds from being granted restructuring powers and implementing such a restructuring through a scheme of arrangement.

5 For example, as at the end of 2017, of the 1,794 companies listed on the Main Board of the Hong Kong Stock Exchange, approximately 47 per cent were incorporated in the Cayman Islands and 26 per cent were incorporated in Bermuda (http://www.hkex.com.hk/-/media/HKEX-Market/Market-Data/Statistics/Consolidated-Reports/HKEX-Fact-Book/HKEX-Fact-Book-2017/FB_2017.pdf?la=en).

6 Meeting minutes of the Panel on Administration of Justice and Legal Services dated 25 June 2018 on the 'Implementation of the recommendations made by the Law Reform Commission' (https://www.hkreform.gov.hk/en/docs/ajls2018.pdf).

7 Companies (Winding Up and Miscellaneous Provisions) Ordinance [CWUMPO], Section 186.

8 Civil Appeal Nos. 207 and 210 of 2005 [2006] HKCA 75, [2006] 2 HKLRD 192.

9 Re Keview, Re Luen Cheong Tai International Holdings Ltd [2002] 3 HKLRD 610 considered.

10 Securities & Futures Commissioner v. Mandarin Resources Corp Ltd & Another [1997] HKLRD 405, Re Luen Cheong Tai International Holdings Ltd considered.

11 Re China Solar Energy Holdings Ltd [2017] 2 HKLRD 1074 and Re China Solar Energy Holdings Ltd [2018] 2 HKLRD 338.

12 HCMP 663/2017.

13 Re Z-Obee Holdings Ltd [2018] 1 HKLRD 165.

14 Antony Gibbs and sons v. La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399. Broadly, the rule is that, as matter of English law, a debt governed by English law may only be validly compromised by an English law process.

15 CWUMPO, Section 327.

16 ibid., at Section 230: the special resolution is one pursuant to CWUMPO, Section 228(1)(b) that the company be wound up voluntarily. The meeting is called by the directors of the company, in the case of a limited company, on 14 days' notice (or such longer period as is prescribed in the company's articles of association); see also Companies Ordinance, Sections 562, 564 and 571.

17 CWUMPO, Section 242.

18 Under CWUMPO, Section 177(1)(f) .

19 The Amendment Ordinance has introduced a prescribed form of statutory demand.

20 Numbers are taken from copies taken of the cause book for Company Winding-up Proceedings at the Hong Kong High Court. These numbers do not give an indication of how many of these companies were subsequently wound up, nor under which statutory grounds the petitions were submitted.

21 The Securities and Futures Commission used its powers under Section 212 of the Securities and Futures Ordinance in July 2013 for the first time in relation to China Metal Recycling (Holdings) Limited: on 26 February 2015, the Hong Kong High Court ordered that China Metal Recycling (Holdings) Limited be wound up in the public interest.

22 Such a power exists under CWUMPO, Section 255(1) in respect of a creditors' voluntary winding up.

23 CWUMPO, Section 244(1); in the absence of the committee of inspection, the creditors may fix the remuneration of a liquidation.

24 CWUMPO, Section 251(1)(a) and Schedule 25.

25 Re Luen Lick Water Drainage Works Ltd, CFI HCCW 209 [2002].

26 CWUMPO, Section 243, Paragraphs (1) and (1A).

27 This could include the OR or existing PL being the liquidator without holding a meeting of creditors, and there being no COI. The goal of this approach is to minimise the costs of the liquidation.

28 Power of the court exists under CWUMPO, Section 227F.

29 Power of the court exists under CWUMPO, Section 227A.

30 Power of the court exists under CWUMPO, Section 209.

31 Power of the court exists under CWUMPO, Section 209A.

32 Creditors or contributories (or a liquidator himself or herself) may refer questions to the court on the conduct of a court winding up under Section 200 of the CWUMPO.

33 Power to remove a liquidator exists under the CWUMPO – Section 252 (CVL) and Section 196(1) (court winding up).

34 HCCW 322/2010 unreported judgment of 6 March 2013.

35 [2012] 6 HKC 246.

36 [2014] HKCU 900.

37 China Medical Technologies, Inc v. Samson Tsang Tak Yung [2018] HKEC 392.

38 Kam Leung Sui Kwan v. Kam Kwan Lai and Ors (FACV No. 4 of 2015).

39 [2017] HKEC 1475.

40 [2017] 4 HKLRD 84.

41 Similar, for example, to Section 426 of England's Insolvency Act 1986.

42 [2014] HKEC 1244.

43 HCMP 3389/2015, 3391/2015 and 3391/2015, [2016] HKEC 576.

44 [2015] HKCU 875.

45 CWUMPO, Section 221 empowered the court to order the production of documents relating to a company or to summon any person who has information about a company's affairs for an examination; the Amendment Ordinance repealed this section and replaced it with new Sections 286B and 286C.

46 [2017] 1 HKLRD 113.

47 HCMP 3560/2016, [2017] HKEC 146.

48 [2016] HKEC 2377.

50 [2018] 1 HKLRD 165.

51 [2006] HKCU 357.

52 Civil Appeal Nos. 207 and 210 of 2005 [2006] HKCA 75, [2006] 2 HKLRD 192; see also Section I.iii.

53 [2018] 2 HKLRD 338.

54 [2018] HKCFI 276.

55 [2016] HKEC 2377.

56 [2014] UKPC 36.

57 [2016] SGHC 287.

58 [2018] HKCFI 277.

59 [2018] 2 HKLRD 449.

60 Shandong Chenming Paper Holdings Ltd v. Arjowiggins HKK 2 Ltd [2017] 4 HKLRD 84.

61 ibid., at Paragraph 30.

62 Bloomberg (2018) China's Downgrade-Free Defaults Put Focus on Rating Firms (https://www.bloomberg.com/news/articles/2018-07-23/china-s-downgrade-free-defaults-put-spotlight-on-rating-firms?).