It is 21 years since China resumed its sovereignty over Hong Kong with the establishment of the Hong Kong Special Administrative Region of the People's Republic China on 1 July 1997.
Hong Kong operates a free trade economic system with minimal government intervention. A primary attraction remains Hong Kong's legal system, based on English common law and rules of equity, involving adherence to the principles of the rule of law and judicial independence.
Given its proximity to and relationship with mainland China, Hong Kong is often regarded as the primary intermediary platform for trade between the mainland 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 remains a key offshore capital-raising centre for Chinese enterprises. As of December 2017, 1,051 mainland companies were listed in Hong Kong, with total market capitalisation of around US$2.9 trillion, or 66 per cent of the market total.
Shanghai-Hong Kong Stock Connect was launched in late 2014 to establish mutual stock market access between Hong Kong and the Chinese mainland, with Shenzhen-Hong Kong Stock Connect following in 2016, consolidating Hong Kong's development as the global offshore yuan business hub.
A new mutual market access scheme, Bond Connect, was launched in July 2017, to allow investors from China and overseas to trade in each other's bond markets through connection between the related mainland and Hong Kong financial infrastructure institutions. At present, overseas investors from Hong Kong and other regions may invest in the Chinese interbank bond market through mutual access arrangements in respect of trading, custody and settlement.
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.
In addition to voluntary or compulsory liquidation, restructuring methods include workouts and schemes of arrangement.
Hong Kong operates a generally creditor-friendly approach to distressed enterprises but without the benefit of any statutory corporate rescue procedures (such as administration). However, statistics from the Official Receiver's Office
show that the number of compulsory winding-up petitions presented and orders made has broadly continued to decline. For example, the annual total of petitions presented during 2003 was 1,451, of which 1,248 received orders to be wound up, whereas in 2017, the annual total was 404, of which 296 were ordered into liquidation.
While the government announced that it intends to introduce an insolvency reform bill that will provide for the introduction of a provisional supervision regime, akin to English administration, and the concept of insolvent trading, the timetable for such a bill's introduction remains uncertain.
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 multi-bank creditor groups or other creditor constituencies. 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.
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,
restructuring alone is not sufficient to allow for the appointment of provisional liquidators, so an applicant will still have to show concern as to, for example, potential jeopardy to the company's assets.
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). Consequently, the courts must rely on common law principles and the ingenuity of practitioners.
However, 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.
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.
Recent developments and significant cases
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 – whether listed in Hong Kong or not – will often do so using corporate structures involving several jurisdictions. In addition, the assets underpinning those businesses are frequently situated outside Hong Kong.
Bank resolution regime
In the wake of the recent global financial crisis, the G20 tasked the Financial Stability Board with developing a robust approach to allow systemically important financial institutions to fail safely. The board concluded that each of its member jurisdictions needs to establish a resolution regime providing relevant authorities with certain powers to implement an orderly resolution of a failing institution, stabilising and securing continuity for key parts of the business.
Given Hong Kong's status as an international financial centre and a Financial Stability Board member jurisdiction, the Financial Institutions (Resolution) Ordinance (the FIR 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 finalisation of additional rules).
The FIR Ordinance is intended to establish a cross-financial sector resolution regime that is designed to strengthen the resilience of the Hong Kong 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 to:
- impose a write-off or conversion of capital instruments issued by authorised institutions;
- resolve a holding company or group company of a within-scope entity; and
- give effect to a resolution action taken by an overseas counterpart.
Where a failing financial institution operates in more than one sector, one of the authorities will coordinate the resolution as lead resolution authority.
The FIR Ordinance provides for various stabilisation options, which the relevant resolution authority can apply individually or in combination. Broadly these options include:
- transfer of the failing financial institution, or some or all of its business, to a commercial purchaser, a bridge institution or an asset management vehicle;
- statutory bail-in; and
- as a last resort, taking the institution into temporary public ownership (involving the use of public funds).
Given the intention of enabling an orderly resolution, the FIR Ordinance provides that a person intending to wind up a financial institution or its holding company within the scope of the regime, must notify the resolution authorities in writing of the intention to do so before presenting the petition, and the resolution authority has a period in which to decide whether to initiate resolution.
A critical element for regimes around the world will be, when a resolution is cross-border in nature, whether foreign jurisdictions will recognise each other's resolutions. The FIR Ordinance provides for recognition to give effect to measures adopted by a foreign authority and measures by the Hong Kong authorities to support the resolution action being taken by the foreign authority.
Recognition of foreign proceedings
In Singularis Holdings Ltd v PwC,
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. The application of such a power has resonated with similar common law jurisdictions globally.
The Companies Court in Hong Kong has relied on and developed common law increasingly since 2014, recognising in Hong Kong the appointment of foreign liquidators without the need for expensive and time-consuming winding-up proceedings in Hong Kong and including the grant of certain investigative powers.
Where a UK administrator sought assistance from the Hong Kong court in recognising a moratorium created by an administration order in the United Kingdom to prevent disposal of the company's assets, the court concluded that it could not provide that 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 United Kingdom, with a moratorium on the enforcement of secured debt, and thus the order was not one that wou6ld be available to a Hong Kong office holder.
In BJB Career Educational Co Ltd (in provisional liquidation) v Xu Zhendong,
the court noted that:
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 as follows:
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 approach in BJB was also followed in Re Pacific Andes Enterprises (BVI) Ltd.
In Bay Capital Asia,
Recognition of voluntary liquidations
In a precedent-setting decision,
the Hong Kong Court of First Instance granted a recognition order in favour of foreign liquidators appointed in an insolvent liquidation commenced by a shareholders' resolution. In so recognising the foreign liquidators, the Court confirmed that its exercise of the common law power of assistance extends to foreign insolvent voluntary windings-up, an issue that has been in doubt following the obiter dicta views expressed by Lord Sumption in the widely cited Singularis decision.
In reaching this decision, the judge made the observation that:
what matters for cross-border insolvency assistance is not whether the foreign insolvency officeholder is or is not an officer of the foreign court. What matters is whether the foreign proceeding is collective in nature, in the sense that it is 'a process of collective enforcement of debts for the benefit of the general body of creditors' . . . . It is with collective insolvency proceedings that the principle of modified universalism is concerned.
The judge therefore concluded that recognition should not be provided to liquidators appointed in a foreign solvent liquidation on the basis that it is not a collective insolvency proceeding but rather 'more akin to the “private arrangement”the Privy Council was referring to [in Singularis]'.
This approach is consistent with the principle of modified universalism, the rationale underlying the common law power of assistance and the means by which, absent being a party to the UNCITRAL Model Law on cross-border insolvency, the Hong Kong Companies Court is able to recognise and grant assistance to foreign insolvency proceedings.
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 in appropriate circumstances.
Restructuring powers of Hong Kong provisional liquidators
As noted above, schemes remain an important restructuring tool in Hong Kong but the absence of a statutory moratorium means that corporate debtors have frequently sought provisional liquidation to provide a stay on proceedings while a restructuring is mapped out through a proposed scheme.
However, the Hong Kong Court of Appeal's 2006 decision in the liquidation of Legend International Resorts Limitedspan id="endnote-014-backlink">14
cast some doubt on the role of provisional liquidators in restructurings in Hong Kong. In the words of Kwan J (as her ladyship then was) in the subsequent case of Re Plus Holdings Limited,
16th–19th Floors, Prince’s Building
10 Chater Road, Central
Tel: +852 2843 2211
Mayer Brown is an international law firm noted for its commitment to client service and its ability to solve the most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half the world’s largest banks. Because of our commitment to client service, we are routinely named in the BTI Client Service A-Team, an annual ranking of the top 30 law firms based on independent survey feedback from corporate counsel at global and Fortune 1000 companies.
The Mayer Brown practices comprise more than 1,500 lawyers – one of the largest law firms globally. We operate in the world’s principal financial centres in the Americas, Europe, Asia and the Middle East, and collaborate with internationally experienced lawyers in other countries with whom we have worked closely for many years. Our presence and network in the world’s leading markets enables us to offer clients access to local market knowledge combined with a global reach.
In Asia, Mayer Brown JSM was established in 1863 in Hong Kong and now has offices in Hong Kong, mainland China (where we also operate in association with Jingtian & Gongcheng), Singapore, Thailand, and Vietnam. Our on-the ground presence enables us to offer clients access to local market knowledge on a global basis. Mayer Brown JSM has handled some of the region’s most sizeable and headline-grabbing restructurings over the years. Our integrated contentious and non-contentious team is adept at advising our clients on high-profile international restructurings and insolvencies as well as dealing with domestic insolvencies in key jurisdictions across Asia.