3/18/2024

LW4657/LW5657 Company Law II

Corporate Rescue – Schemes

Prof Alexander Loke

School of Law
City University of Hong Kong

March 2023

Arrangements and Compromises

Cap. 622 Pt 13 Div 2
(sections 668-677)

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Application of Division
Cap. 622 s. 669
This Division applies if an arrangement or
compromise is proposed to be entered into
by a company with either or both of the
following—
(a) the creditors, or any class of the creditors,
of the company;
(b) the members, or any class of the
members, of the company.

Court may sanction arrangement or compromise

Cap. 622 s. 673
(1) This section applies if the creditors or the
class of creditors, or the members or the class
of members, or both, with whom the
arrangement or compromise is proposed to
be entered into, agree or agrees to the
arrangement or compromise.
(2) The Court may, on application made for
the purposes of this subsection, sanction the
arrangement or compromise.
***
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What is an “arrangement”?
Cap. 622 s. 688
(1) . . . arrangement includes a reorganization
of the company’s share capital by the
consolidation of shares of different
classes, or by the division of shares into
different classes, or both . . .

“this implies some element of accommodation or “give and take” between the
parties”
Re Wah Nam Group Ltd (No. 2) (2003), Citing Re National Farmers Union
Development Trusts [1972] 1WLR 1548 p. 1555, per Brightman J).

Different uses of Schemes of Arrangement

Company in distress:
Compromise with creditors Avoidance of uncertainties and
See :
UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin (2001, HK) unnecessary litigation
Re Megga Telecommunications (2002, HK)
See Re British Aviation Insurance Co Ltd (2006, EW)
Re Wah Nam Group (No. 2) (2003, HK)
RBS v TT International (2012, SG) Re Lehman bros Futures Asia Ltd (2017, HK)
KB(Asia) Ltd (2014, HK)

Re-organisation Solvent Run-off

See Re Cheung Kong (Holdings) Ltd (2015, HK) See Re British Aviation Insurance Co Ltd (2006, EW)

Takeover/General Offer Going private

See Re Savoy Hotel Ltd (1981, EW) See Re PCCW (2009, HK)
Re Cheung Kong (Holdings) Ltd (2015, HK) Re Wheelock Properties Ltd (2010, HK)
Re Chong Hing Bank Ltd (2021, HK)

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Provision supplementary to section 673(1):

What constitutes agreeing to an arrangement or compromise?
Cap. 622 s. 674
creditors

(1) For the purposes of section 673(1)—

(a) the creditors agree to the arrangement or compromise if, at
a meeting of the creditors summoned under section 670, a
majority in number representing at least 75% in value of the
creditors present and voting, in person or by proxy, agree to
the arrangement or compromise;
(b) [class of creditors]
***

Provision supplementary to section 673(1):

What constitutes agreeing to an arrangement or compromise?
Cap. 622 s. 674
members
(1) For the purposes of section 673(1)—
(c) subject to subsection (2)(a), the members agree to the
arrangement or compromise if, at a meeting of the members
summoned under section 670—
(i) members representing at least 75% of the voting rights of the
members present and voting, in person or by proxy, agree to the
arrangement or compromise; and
(ii) unless the Court orders otherwise, a majority in number of the
members present and voting, in person or by proxy, agree to the
arrangement or compromise;
(d) [class of members]
***
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Provision supplementary to section 673(1):

What constitutes agreeing to an arrangement or compromise?
Cap. 622 s. 674 Takeover
offer/
General offer
(2) However, where the arrangement involves a general offer within the meaning of
section 707 or a takeover offer —
(a) the members agree to the arrangement if—
(i) at a meeting of the members summoned under section 670, members
representing at least 75% of the voting rights of the members present
and voting, in person or by proxy, agree to the arrangement; and
(ii) the votes cast against the arrangement at the meeting do not exceed
10% of the total voting rights attached to all disinterested shares in the
company;
(a) [class of creditors]
***
See application in Re Cheung Kong (Holdings) Ltd [2015] 2 HKC 567
9

Creditor context

Getting from…
Proposal to enter
into arrangement

Value > 75%

Number >50%

to … Court sanction
(s. 673)

Cap. 622 s.674(1)(a) 10

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The three step procedure

Re Hawk Insurance Co Ltd
[2001] 2 BCLC 480 at [11], per Chadwick LJ

First, there must be an application to the court under s 425(1) of

[the 1985 UK Act] for an order that a meeting or meetings be
summoned. It is at that stage that a decision needs to be taken
as to whether or not to summon more than one meeting; and, if
so, who should be summoned to which meeting.
Second, the scheme proposals are put to the meeting or
meetings held in accordance with the order that has been made;
and are approved (or not) by the requisite majority in number
and value of those present and voting in person or by proxy.
Thirdly, if approved at the meeting or meetings, there must be a
further application to the court under s 425(2) of [the 1985 UK
Act] to obtain the court’s sanction to the compromise or
arrangement.

11

The purposes served by the 3-step procedure

Re Hawk Insurance Co Ltd
[2001] 2 BCLC 480 at [12], per Chadwick LJ

It can be seen that each of those stages serves a distinct purpose.

At the first stage the court directs how the meeting or meetings are to be
summoned. It is concerned, at that stage, to ensure that those who are to be
affected by the compromise or arrangement proposed have a proper
opportunity of being present (in person or by proxy) at the meeting or
meetings at which the proposals are to be considered and voted upon.
The second stage ensures that the proposals are acceptable to at least a
majority in number, representing three-fourths in value, of those who take
the opportunity of being present (in person or by proxy) at the meeting or
meetings.

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The HK Court’s checklist in determining whether to sanction the scheme @ the 3rd step

Re China Agri-Industries Holdings Limited

[2020] HKCFI 570, Harris J

(1) Whether the scheme is for a permissible purpose;

(2) Whether members who were called on to vote as a single class had
sufficiently similar legal rights that they could consult together with a view
to their common interest at a single meeting;
(3) Whether the meeting was duly convened in accordance with the
Court’s directions;
(4) Whether members have been given sufficient information about the
scheme to enable them to make an informed decision whether or not to
support it;
(5) Whether the necessary statutory majority has been obtained; and
(6) Whether the Court is satisfied in the exercise of its discretion that an
intelligent and honest man acting in accordance with his interests as a
member of a class within which he voted might reasonably approve the
scheme (strategic action against minority)

Echoes: Re Wheelock Properties Ltd [2010] 6 HKC 106 (HKCFI)l, Harris J

Affirmed: Re Chong Hing Bank Ltd [2021] HKCFI 3091, Linda Chan J. 13

The HK Court’s approach in determining whether to sanction the scheme

Re China Agri-Industries Holdings Limited
[2020] HKCFI 570, Harris J

(2) Whether members who were called on to vote

as a single class had sufficiently similar legal rights
that they could consult together with a view to their
common interest at a single meeting

What does this phrase

mean?

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Classification of Creditors
Prevents collective decision-making from being
exploited by strategic actors to benefit themselves
at the expense of other scheme participants.

If the scheme meetings are not properly conducted,

the court has no jurisdiction to sanction the
proposed scheme:
UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi
Lin [2001] 3 HKLRD 634

How should one group/classify the creditors?

15

Classification of creditors
Sovereign Life Assurance v Dodd (1892)

Insurance policies
1879-1888.
If Def still alive, Plf
promises to pay Def 2 x
£1000

4/1887 D obtained 2 loans upon mortgage of life policies

(£570 + £600). Maturity: 5/1888
8/1887 Petition for winding up – Prov. Liq. Appointed
7/5/1888 D stopped paying premiums
7/1888 Winding up order
4/1890 “Arrgt” under Joint Stock Company Act 1870
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Classification of creditors
Sovereign Life Assurance v Dodd (1892)

Nature of arrangement:
• Insurer surrenders policies to Sun Life
• Insureds get reduced payments 17

Classification of creditors
Sovereign Life Assurance v Dodd (1892)

6/1890 Court sanction

12/1890 P sued D for loans/D pleaded set-off.
Held: (1) D entitled to set-off
(2) Meeting must distinguish between:
(a) matured policies, and
(b) unmatured policies

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Classification of creditors
Sovereign Life Assurance v Dodd (1892)
“What is the proper construction of that statute?
It makes the majority of the creditors or of a class
of creditors bind the minority;
it exercises a most formidable compulsion upon
dissentient, or would-be dissentient, creditors; and
it therefore requires to be construed with care, so
as not to place in the hands of some of the creditors
the means and opportunity of forcing dissentients
to do that which it is unreasonable to require them
to do, or of making a mere jest of the interests of
the minority.”
per Bowen LJ (QB at 582-583)
19

Classification of creditors
Sovereign Life Assurance v Dodd (1892)

“… we must give such a meaning to the term

"class" as will prevent the section being so
worked as to result in confiscation and injustice,
and that it must be confined to those persons
whose rights are not so dissimilar as to make it
impossible for them to consult together with a
view to their common interest.”
per Bowen LJ (QB at 583)

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The HK Court’s approach in determining whether to sanction the scheme

Re China Agri-Industries Holdings Limited
[2020] HKCFI 570, Harris J

(2) Whether members who were called on to vote

as a single class had sufficiently similar legal rights
that they could consult together with a view to their
common interest at a single meeting

Derived from Sovereign Life v Dodd (1892)

21

Classification of Creditors

The Common Right rule

Dissimilarity in Dissimilarity in
claimholders’ vs claimholders’
rights interests

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Classification of Creditors

The Common Right rule

Unsecured creditors and …

• Preferential creditors
• Secured creditors who relinquish
their security

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UDL Argos Engrg & Heavy Industries v Li Oi Lin

[2001] 3 HKLRD 634 (CFA)

Lord Millet NPJ at [27]: * * *

(2) Persons whose rights are so dissimilar that they cannot
sensibly consult together with a view to their common
interest must be given separate meetings. Persons whose
rights are sufficiently similar that they can consult together
with a view to their common interest should be summoned to
a single meeting.
(3) The test is based on similarity or dissimilarity of legal rights
against the company, not on similarity or dissimilarity of
interests not derived from such legal rights. The fact that
individuals may hold divergent views based on their private
interests not derived from their legal rights against a company
is not a ground for calling separate meetings.

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UDL Argos Engrg & Heavy Industries v Li Oi Lin

[2001] 3 HKLRD 634 (CFA)

Lord Millet NPJ at [27]: * * *

(4) The question is whether the rights which are to be released or
varied under the Scheme or the new rights which the Scheme
gives in their place are so different that the Scheme must be treated
as a compromise or arrangement with more than one class.
(5) The Court has no jurisdiction to sanction a Scheme which does not
have the approval of the requisite majority of creditors voting at
meetings properly constituted in accordance with these principles.
Even if it has jurisdiction to sanction a Scheme, however, the Court
is not bound to do so.

25

UDL Argos Engrg & Heavy Industries v Li Oi Lin

[2001] 3 HKLRD 634 (CFA)

Lord Millet NPJ at [27]: * * *

(6) The Court will decline to sanction a Scheme unless it is satisfied,
not only that the meetings were properly constituted and that the
proposals were approved by the requisite majorities, but that the
result of each meeting fairly reflected the views of the creditors
concerned. To this end it may discount or disregard altogether
the votes of those who, though entitled to vote at a meeting as
a member of the class concerned, have such personal or special
interests in supporting the proposals that their views cannot be
regarded as fairly representative of the class in question.

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Classification of creditors
Re S Megga Telecommunications Ltd
[2003] 2 HKLRD 583, CFI.

Arrangement –
Company voted upon by
one class of
creditors

Former employees
with preferential debts
(equiv. Cap 32 s. 265)

Did the employees constitute a separate class of creditors?

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Classification of creditors
Re S Megga Telecommunications Ltd
[2003] 2 HKLRD 583

• Ex-employees were a separate class of

creditors from ordinary unsecured creditors
• Preferential rights not enjoyed by ordinary
unsecured creditors (esp where they were not
paid in full)
Held: The scheme was a compromise with more
than one class of creditors; court had no
jurisdiction to sanction the scheme.

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Classification of Creditors: the Common Right rule

Royal Bank of Scotland v TT International
[2012] 2 SLR 213 at [140] (Sing. Court of Appeal)

“[T]he dissimilarity principle … means that if a

creditor’s … position will improve or decline to
such a different extent vis-à-vis other creditors
simply because of the terms of the scheme (and
not because of its own unique circumstances, ie,
its “private interests”) assessed against the most
likely scenario in the absence of scheme
approval (“the appropriate comparator”), then it
should be placed in a different voting class from
the other creditors.”
- per V K Rajah JA
29

Classification of Creditors: the Common Right rule

Royal Bank of Scotland v TT International
[2012] 2 SLR 213 at [140] (Sing. Court of Appeal)

Classification:
 Contingent creditors in insolvent
litigation
 Shareholders claims for dividends
subject to the (equiv. of Cap. 32 s.
170(1)(g)) (subordinated claims)

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Classification of Creditors: the Common Right rule

Royal Bank of Scotland v TT International
[2012] 2 SLR 213 at [140] (Sing. Court of Appeal)

Discount votes of:

 Related party creditors
 Wholly owned subsidiaries

Consequence: the Scheme did not have

the approval of the requisite majority.

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What if the asset held by the secured creditor is worthless?

Can the secured creditor be classed with the unsecured creditors?
Re KB (Asia) Ltd [2014] HKEC 1192
Co

• Family owned firm

• Electronics trading
Rak
Fam Creditor
FLC chargee over worthless asset
Inspur

Other fam. creditors

Judgment creditor for US$1.73M

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Re KB (Asia) Ltd [2014] HKEC 1192

1. Secured creditor (FLC) functionally

unsecured?
2. Rights vs Interests: stage at which
dissimilarity problem is addressed.
3. Discount family creditors’ votes to zero.
Why?

Held:
(1) Creditors not properly classified. Court has not jurisdiction to sanction.
(2) (Alternative Ground) Requisite threshold not met after discounting
family creditors’ votes.

33

Classification of Creditors

The Common Right rule

Dissimilarity in Dissimilarity in
claimholders’ vs claimholders’
rights interests

For dissimilar
interests, seek to
discount the vote
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Re Century Sun International Ltd

[2021] HKCFI 2928 (Harris J).

Related Related
Creditors Creditors
Related
Creditors
Creditors in the same gp
Co
Scheme: 30c to $1 Related
Liquidation: 14% to $1 CS
Mauritius company

Opposing
Creditors

• Under proposed scheme, unsecured creditors will obtain

about 30c to $1 debt owed.
• Opposing creditors: “Under the Scheme, we are required to
cancel our service agreement with CS Mauritius.”
35

Re Century Sun International Ltd [2021] HKCFI 2928 (Harris J).

Learning Points
1. Inclusion of creditors’ rights against third parties
Schemes regime to deal with rights between a company and its creditors.
However, it is permissible to include the release of contractual rights of
action against related third parties necessary to give effect to the
proposed scheme. Examples:
• Guarantors (who guaranteed co’s debt to creditor). Otherwise creditor might
undermine scheme by suing the guarantor (‘ricochet claim’)
• Third parties who are jointly and severally liable as primary obligors for the same
debt.
• Third parties who are directors, legal advisors, financial advisors and other
intermediaries

Principle: release of third party liabilities limited to those necessary in

order to give the scheme efficacy: [19].
(cf. 3P exploiting a fortuitous opportunity to escape unrelated liabilities.)
Here legitimate release of CS Mauritius to return the Group to financial
viability.

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Re Century Sun International Ltd [2021] HKCFI 2928 (Harris J).

Learning Points
2. Constitution of the voting class
‘Similarity of a creditor’s legal rights against the company’
Opposing Creditors’ Argument: We should vote in a
separate class because we have guarantees from third
parties and the proposed Scheme purports to release
these rights.
Basis of argument:
• The appropriate comparator is the ‘liquidation scenario’.
• In a liquidation, we’ll obtain more by reason of our guarantees.

Held: Only rights against the company are relevant when

evaluating the ‘similarity of a creditor’s legal rights (with others).

37

Re Century Sun International Ltd [2021] HKCFI 2928 (Harris J).

Learning Points
3. Did the approval fairly reflect the interest of the Scheme Creditors?

Opposing Creditors’ Argument:

• The approving creditors are part of the Group;
• They are motivated by additional reasons eg.
Advancing the wider business plan of the group
• Hence, their votes should be discounted.
Held:
1. Primary motivation cannot be something other than “an assessment of
whether or not the benefits of the scheme were more attractive than the
likely outcome if the company were to go into liquidation.”
2. Focus on why a creditor might support the scheme (rather than why a
creditor might not).
Test: If he did not have the ‘special interest’, would he have voted differently?
3. Group creditors’ vote NOT discounted.

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Can a class of creditors be excluded from the scheme?

Functional Cramdown … exclude a junior class from scheme

Re Bluebrook (2010, EWHC)

Co

Scheme:
1. Assets hived off to newcos without
Senior debt £313m
consent of junior creditors
Junior debt £119m
2. Senior debt to take up equity (debt-
equity swap)
3. Small amount of senior debt to
remain in co. Only senior debt
involved in scheme.

Held: Not necessary to consult with creditors whose rights are

39
unaffected and who have no economic interest in the company

Classification of Creditors:
When should classification determination be made by
the court?

After the creditors’ meeting –

At the initial application to vs when the court is asked to
call a creditors’ meeting?
sanction the scheme?

 Re Hawk Insurance Co Ltd  UDL Argos v Oi (2001, HKCFA)

(2001, EWCA)  KB (Asia) Ltd (2014, HKCFI)
 Royal Bank of Scotland v TT
International (2012, SGCA)

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The HK Court’s checklist in determining whether to sanction the scheme

Re China Agri-Industries Holdings Limited
[2020] HKCFI 570, Harris J

(1) Whether the scheme is for a permissible purpose;

(2) Whether members who were called on to vote as a single class had
sufficiently similar legal rights that they could consult together with a view
to their common interest at a single meeting;
(3) Whether the meeting was duly convened in accordance with the
Court’s directions;

(4) Whether members have been given

sufficient information about the scheme to
enable them to make an informed decision
whether or not to support it;
(5) Whether the necessary statutory majority has been obtained; and
(6) Whether the Court is satisfied in the exercise of its discretion that an
intelligent and honest man acting in accordance with his interests as a
member of a class within which he voted might reasonably approve the
scheme (strategic action against minority) 41

Inadequate disclosure to creditors

Re Century Sun International Ltd [2021] HKCFI 2928 (Harris J).

Learning Points

4. Explanatory Statement inadequate

Held:
1. Last two years (2019/2020 and 2020/2021)
were Unaudited statements.
Why? No explanation.

2. Comparison between scenario under (a)

scheme, and (b) liquidation.
Minimal information and
liquidation scenario not independently by an insolvency
practitioner (or other suitable professional).

3. Order to convene another meeting with

adequate information provided. 42
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Inadequate disclosure to creditors - consequences

Royal Bank of Scotland v TT International
[2012] 4 SLR 1182

co

“Value-added Fee” (VAF)

Betw S$15m-S$30m

nTan Corp Adv

nTan One of various “excluded” creditors.

Issue:
(1) whether commercial practice not to disclose to scheme creditors
and/or the court was contrary to law?
(2) If yes, what are the consequences?

43

Inadequate disclosure to creditors - consequences

Royal Bank of Scotland v TT International
[2012] 4 SLR 1182
Held: (1) The law does not allow the device of
“excluded creditors” to keep hidden substantial
actual or contingent liabilities.
(2) SM is fiduciary: duty of good faith – duty to
avoid conflict of interest.
(3) Breach of duty to disclose material information.
Scheme could have been set aside. Scheme not set
aside as it had been in implementation for 2 years.
(4) Monitoring Committee to negotiate new
agreement. Failing which global fees to be assessed
by court.
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Court’s additional powers to facilitate

Reconstruction or Amalgamation
Cap. 622 s. 675

(1) This section applies if—

(a) an application is made for the purposes of
section 673(2) to sanction the arrangement or
compromise; and
(b) it is shown to the Court that—
(i) the arrangement or compromise is proposed for
the purpose of, or in connection with, a scheme for
the reconstruction of one or more companies, or
for the amalgamation of 2 or more companies; and
(ii) under the scheme, the property or undertaking
of any company concerned in the scheme, or any
part of that property or undertaking, is to be
transferred to another company. * * *
45

Court’s additional powers to facilitate

Reconstruction or Amalgamation
Cap. 622 s. 675
***
(2) If the Court sanctions the arrangement or compromise, it may, by the
order or a subsequent order, make provision for any or all of the
following—
(a) the transfer of the transferor’s property, undertaking or liabilities,
or any part of it or them, to the transferee;
(b) the allotting or appropriation by the transferee of any shares,
debentures, policies, or other like interests in the transferee which,
under the arrangement or compromise, are to be allotted or
appropriated by the transferee to or for any person;
(c) the continuation by or against the transferee of any legal
proceedings pending by or against the transferor;
(d) the dissolution, without winding up, of the transferor;

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Court’s additional powers to facilitate

Reconstruction or Amalgamation
Cap. 622 s. 675

***
(2) If the Court sanctions the arrangement or compromise, it
may, by the order or a subsequent order, make provision for any
or all of the following—
***
(e) the provision to be made for any person, who within the
time, and in the manner, that the Court directs, dissents
from the arrangement or compromise;
(f) the transfer or allotting of any interest in property to any
person concerned in the arrangement or compromise;
(g) any incidental, consequential and supplemental matters
that are necessary to ensure that the reconstruction or
amalgamation is fully and effectively carried out.
***

47

Provisional liquidation
Cap. 32 s. 193

- A mechanism for corporate rescue?

- Use P/L to obtain ’stay of proceedings

Cap 32 s. 186
“When a winding-up order has been made, or a provisional
liquidator has been appointed, no action or proceeding shall
be proceeded with or commenced against the company except
by leave of the court, and subject to such terms as the court
may impose.

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Moratorium (stay) operates upon appointment

of provisional liquidator
Cap 32 s. 186
• Re Legend International Resorts Ltd [2005] 3
HKLRD 16 at 92 (CFI, Kwan J):
“… it is within the jurisdiction of the court to appoint
provisional liquidators to explore, formulate and pursue
a corporate rescue.”
• Re Legend International Resorts Ltd [2006] 2
HKLRD 192 at 203 (CA, Rogers V-P):
“The power of the court under s.192 is to appoint a
liquidator or liquidators for the purposes of the winding-
up, not for the purposes of avoiding the winding-up.

49

Re Plus Holdings (2007)

[2007] 2 HKLRD 275U

Facts:
• Asset in jeopardy – listing status suspended on
17/12/2004
• Delisting procedures 29/3/2007
• Management in disarray
Held: Kwan J granted the petition to appoint a
provisional liquidator

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Re China Solar Energy Holdings Ltd (No. 2)

[2018] 2 HKLRD 338
Facts:
• BVI incorporated company listed on HK Stock
Exchange. Trading suspended since 8/2013.
• 8/2015. P/L appointed (a) safeguard assets, (b)
investigate certain suspicious transaction. Terms of
appointment included restructuring.
• 2/2017. Shareholder (who initially supported P/L
application) applied to remove P/L. Argument:
i. PL has finished task of asset preservation.
ii. Remaining role is restructuring.
iii. This is not permissible under Re Legend.

51

Re China Solar Energy Holdings Ltd (No. 2)

[2018] 2 HKLRD 338

Held (Rogers J):

P/L permitted to complete the restructuring even though
they have completed the task of asset preservation.
Otherwise, it would be detrimental to creditors’ collective
interest. This would be inconsistent with the underlying
statutory purpose for appointment of P/L.

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Foreign Companies:

• Application of the HK Schemes of Arrangement

Regime?
• Winding Up of Foreign Companies by HK Courts
• ‘Soft-touch’ Provisional Liquidation: Recognition
& Assistance in HK?
• Foreign Insolvency Proceedings: Recognition &
Assistance in HK?

53

Re Z Obee Holdings [2018] 1 HKLRD 165

Foreign Companies: Application of the HK SOA Regime

1. Need for sufficient nexus before the court

will assume jurisdiction.
2. Who has standing to apply for the SOA
before the HK courts?
3. Principles for determining whether court
should sanction
+

+
• application to wind-up F Co
• Jurisdiction to wind up: Re Yung
Kee Holdings Ltd [2015] 6 HKC 644 (CFA)
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Wind-up of Foreign Companies in Hong Kong

Re Yung Kee Holdings Ltd (aka Kam Leung Sui Kwan v Kam Kwan Lai [2015]
6 HKC 644 (CFA) [21-24]

Jurisdiction to Windup in Hong Kong?

Shareholder petition for just and equitable windup

Analogizes to standards for creditor windup petitions (foreign company):

•“sufficient connection with Hong Kong”
•“reasonable possibility that the winding-up order would benefit
petitioners”

Held: Windup granted w/option for buyout

• Sufficient connection to HK (incl s/h & Ds)
• Considerations of personal character, parties’ relationship

55

Desire for a ‘Soft-touch’ Provisional

Liquidation
The problem posed by Re Legend International
Resorts Ltd [2006] 2 HKLRD 192 (HKCA)
• The use of a foreign jurisdiction which allows
for stay of proceedings with a view to
restructuring.
• Seek recognition of foreign insolvency
proceeding in HK
 Obtain stay of proceedings in HK
 Transfer of assets etc.

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Recognition and Assistance of Foreign

Insolvency Proceedings
Examples of what the company and insolvency
practitioners seek from local court:
• vesting assets in foreign office-holder,
• stay of local proceedings,
• order for examination in support of foreign
proceedings,
• order for remittal of assets to foreign liquidation.

57

Tension Between HK Winding-up and Foreign

Insolvency Proceeding
Re China Bozza Development Holdings Ltd [2021] 4 HKC 560
Z-Obee Approach Post-windup
Facts: HK windup for insolvency  seeks soft-touch PL for
restructuring in Caymans; no HK windup petition
Issue: Should PL application for recognition and
assistance be granted?
Concerns: Restructuring petition with no plan presented,
no consideration of HK or Mainland creditors; no
mechanism to supervise Z-Obee approach
Held: Grants recognition but only limited assistance.
Case Aftermath: Re China Bozza Development Holdings Ltd. [2023]
HKCFI 1620.

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Recognition and Assistance of foreign insolvency proceedings

Cf. Recognition of and Assistance to foreign-appointed liquidator
Re Global Brands Group Holding Ltd (in Liq) [2022] 3 HKLRD 316
at [33-50], per Harris J.
Facts:
• Bermuda-incorporated investment Holdco, listed in Hong Kong.
• PL appointed in Bermuda for restructuring purposes (cf. Z-Obee)
• Company wound up in Bermuda  PL seeks R&A to take possession of
HK assets

Problem! Power of the liquidator authorized under Cap. 32? Scope of

common law power of assistance?

Issue: Criteria for granting assistance to foreign liquidator

Held: Grants order for recognition with only limited “managerial”
assistance
Rationale?

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Recognition and Assistance of foreign insolvency proceedings

Cf. Recognition of and Assistance to foreign-appointed liquidator
Re Global Brands Group Holding Ltd (in Liq) [2022] 3 HKLRD
316 at [33-50], per Harris J.
Is the foreign insolvency proceeding taking place in the COMI?

Center of Main Interests (COMI)

Key factors: location of creditors, clients,
operations, central management (Ds, officers,
meetings), governing law, assets & liabilities,
restructuring activities, incorporation
Referencing Opti-Medix Ltd. [2016] SGHC 108; UNICTRAL Model Law on Cross-Border
Insolvency

Comity
“Modified Universalism” – per CL, “there should be a unitary
bankruptcy proceeding in the court of the home insolvency jurisdiction that
receives worldwide recognition” and “applies universally to all the
bankrupt’s assets”  court’s common law power to assist foreign windup
proceedings [23] (citing Singularis Holdings v PWC [2014] UKPC 36). 60
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Recognition and Assistance of foreign insolvency proceedings

Cf. Recognition of and Assistance to foreign-appointed liquidator

Is the foreign insolvency proceeding taking place in the COMI?

Yes
1. Recognize and assist as an
No
Decline to recognize and assist
ancillary liquidation.
liquidator unless:
2. Orders extend to:
(a)Managerial assistance (authority
• Taking possession of
under law of place of incorporation); or
debtor’s assets
(b)‘Necessary for practical reasons’.
• Gather information from
Premised on:
Third Parties
i. there being no adverse effect on
• Stay of local proceedings
the interest of the forum,
ii. Foreign insolvency process is in
place in the place of incorporation
Re Global Brands Group Holding Ltd (in Liq)
[2022] 3 HKLRD 316 at [47-50], per Harris J. 61

What if COMI of Foreign Co is Hong Kong?

Re Global Brands at [32]/ Re Yung Kee Holdings Ltd [2015] 6
HKC 644 CFA

• Court may exercise its discretion to make a

winding up order against the foreign incorporated
company Liquidator accesses the statutory
powers available under Cap. 32. At [32].
• Court has statutory discretion to confer the
authority for those matters that require its
sanction
• Mainland Courts would recognize the HK
insolvency proceedings given that COMI is in HK.
62