Hong Kong Companies Court Judge Calls for Restructuring Powers “Immediately”

Harley Schumann and Franklin Koo

Although Hong Kong Courts lack the power to appoint provisional liquidators solely to facilitate restructuring and corporate rescue (so called “soft touch liquidators”), recent cases have held that this does not prevent the court from recognising and assisting foreign liquidators appointed for this purpose abroad.  In this case, the Companies Judge, Harris J, granted recognition and assistance to soft touch liquidators appointed in Cayman, and took the occasion to make an emphatic call for urgent legislation that would allow Hong Kong Courts to do the same thing domestically.

Background – “Soft Touch” Provisional Liquidation

In a soft-touch provisional liquidation, liquidators are given limited powers necessary to effect a restructuring while the directors maintain day-to-day control of the company.  During the restructuring, the company is protected against legal actions by individual creditors for the purpose of providing the company an opportunity to restructure its debts.  These procedures can be a powerful tool to restructure and rescue a company in financial difficulties in order to achieve a better outcome for creditors than a full winding up.

However, following the decision of the Court of Appeal in Re Legend International Resorts Ltd [2006] 2 HKLRD 192 (“Re Legend”), soft touch liquidations for the purpose of restructuring are essentially not possible in Hong Kong.  In that case, the Court held that the statutory power to appoint provisional liquidators in Hong Kong can only be used where the assets of the company are in jeopardy, not solely for the purpose of facilitating a corporate rescue.

Notwithstanding that the Re Legend decision essentially prevents soft touch provisional liquidation in Hong Kong, recent decisions have held that the Court does have jurisdiction at common law to recognise and assist provisional liquidators appointed abroad on a soft-touch basis (at [3]).

The odd consequence of all this is that soft touch restructuring is able to happen in Hong Kong, so long as the company is not a Hong Kong company.

The Decision

In this case, the Cayman court appointed soft-touch provisional liquidators over China Oil Gangran Energy Group Holdings Limited, a company incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange.  The Cayman provisional liquidators then applied in the Hong Kong Court for recognition and assistance.

The Companies Judge, Harris J, granted the order recognising the foreign provisional liquidation.  As in previous cases, Harris J did not consider it problematic that the Court was lending its assistance to a kind of liquidation that, following the Re Legend case, is not possible in Hong Kong (at [3] to [8] and [12]).

Most importantly, in reaching his decision, Harris J made an urgent and emphatic plea for legislative reform to allow for soft touch provisional liquidators in Hong Kong, saying (at [9]):

As is well known, other than schemes of arrangement Hong Kong has no legislation that provides for corporate debt restructuring or rehabilitation. This unsatisfactory state of affairs has been the subject of much invariably adverse comment for two decades now. It is brought into unforgiving focus by the economic problems that Covid‑19 is causing. It makes it all the more important that the courts of Hong Kong and the Special Administrative Region’s practitioners rise to the challenges we now face to find, within the flexibility of the common law, mechanisms to address the financial problems companies face. It is fortunate that great strides have been made in this regard in recent years as illustrated by the authorities referred to earlier in this decision. That having been said it is clearly desirable that some steps are taken immediately to improve the legislative position. Immediate (by which I mean the kind of alacrity shown in other major financial centres around the World in the last couple of months) amendment to section 193 of the Ordinance to provide expressly for provisional liquidators to be given restructuring powers is desirable.”

Comment

As Harris J points out, demands for legislative reform in the area of restructuring and cross border insolvency have been going on in Hong Kong for decades.  The Law Reform Commission made recommendations to legislate for corporate restructuring in Hong Kong back in 1996.  In fact, the common law jurisdiction of recognition and assistance which Harris J was exercising in this case, has only become necessary because there is no legislation facilitating cross border insolvency cooperation in Hong Kong.  Harris J has repeatedly called for legislative reform on this issue as well (Joint Official Liquidators of A Co v B [2014] 4 HKLRD 374 at [19]; Re CW Advanced Technologies Ltd [2018] 3 HKLRD 552 at [35]).  Unfortunately, these proposals were left out when the winding up legislation was significantly reformed in a number of respects in 2017.

Harris J’s comments in this case however, seem to be even more forceful and urgent then previous statements.  The urgency, as his Lordship points out, is compounded given the wave of companies in financial difficulty which is expected to result from the Covid-19 pandemic.  In light of these challenges, one would hope (now more than ever) that legislators would heed statements like this from such a highly regarded Companies Judge.

Unfortunately, history suggests that prompt reform in this area is unlikely.  In the meantime, practitioners will need to rise to Harris J’s challenge to use the Court’s common law powers in innovative and flexible ways to fill the space left by the legislative lacuna.

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