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. Hong Kong’s legal system continues to be a primary attraction, 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 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 2018, 1,146 mainland companies were listed in Hong Kong, with total market capitalisation of around US$2.6 trillion, or 68 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 amended by the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016, 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 2018, the annual total was 367, of which 255 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 (the 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 broad jurisdiction to wind up companies in Hong Kong. This extends to companies incorporated in Hong Kong as well as 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 (HKMA), 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.
As a resolution authority under the FIR Ordinance, the HKMA published the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements – Banking Sector) Rules (LACR Rules), which came into force on 14 December 2018. The LACR Rules aim to limit potential harm to the public as a result of the failure of a financial institution. In keeping with international standards set by the Financial Stability Board, the LACR Rules prescribe minimum loss-absorbing capacity requirements for authorised institutions and their group companies. The HKMA has further supplemented the LACR Rules with a Code of Practice, providing guidance to financial institutions on complying with the LACR Rules. The LACR Rules require that banks maintain sufficient financial resources so that in the event of difficulty, losses are suffered by shareholders and creditors instead of a public bail-out.
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 would 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, the Companies Court repeated that banks should give assistance to foreign liquidators seeking information on receipt of a letter of request, having satisfied themselves that the liquidators have been appointed by the court of the place of the company’s incorporation, without the need for a Hong Kong court order.
The Hong Kong Financial Services and Treasury Bureau (FSTB) has published a consultation paper on a statutory reciprocal judgment regime between China and Hong Kong, including reciprocity in insolvency law. A primary difficulty is the jurisdictional barrier between the two regions, preventing Hong Kong-appointed provisional liquidators from pursuing assets in the mainland. The FSTB recognised the growing necessity and urgency for a reciprocal recognition regime for insolvency matters, which was echoed by the Hong Kong Institute of Certified Public Accounts and the Hong Kong Law Society.
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 Limited 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, the Legend decision:
held that the statutory power to appoint provisional liquidators under section 193 must be for the purposes of the winding up and that there is a significant difference between appointing provisional liquidators on the basis that the company is insolvent and assets are in jeopardy, which is permissible, and appointing provisional liquidators solely to facilitate a corporate rescue, which is not permissible.
It is only when ‘the purposes of the winding up’ exist that ‘there is no objection to extra powers being given to the provisional liquidators, for example those that would enable the presentation of an application under section 166 [of the old Companies Ordinance to propose and seek sanction of a scheme of arrangement]’. As Rogers VP pithily put it:
The power of the court . . . is to appoint a [provisional] liquidator . . . for the purposes of the winding-up not for the purposes of avoiding the winding-up . . . . Restructuring a company is an alternative to a winding-up.
Since the Legend decision, the general view has been that Hong Kong law does not strictly allow ‘soft touch’ provisional liquidation to restructure a company.
Z-Obee Holdings Limited
In Z-Obee Holdings Limited, a winding-up petition was initially presented in Hong Kong for the winding up of the company, and on the same day a summons was filed seeking the appointment of provisional liquidators so as to preserve the assets of the company.
The Hong Kong provisional liquidators were subsequently appointed as provisional liquidators by the Bermuda court in the company’s place of incorporation and obtained recognition in Hong Kong by a letter of request in a procedure that is now well-established in the Hong Kong Companies Court. The Hong Kong provisional liquidators were then discharged, the Hong Kong winding-up petition stayed, and a restructuring of the company proceeded with the company having the protection of a statutory moratorium by reason of it being in provisional liquidation in Bermuda. This alternative process mitigated the risk that the Hong Kong court might proceed with the winding-up of the company, which would preclude any restructuring; and avoided concerns over potential limitations on provisional liquidator-driven restructuring. The schemes to implement the restructuring were then sanctioned by the courts of both Hong Kong and Bermuda, and the shares of the restructured Hong Kong-listed company resumed trading.
Changgang Dunxin Holdings Limited
A similar scenario arose for Changgang Dunxin Holdings Limited, incorporated in the Cayman Islands. To address the potential limitations provided by Legend, the Hong Kong-appointed provisional liquidators sought their appointment as Cayman provisional liquidators to enable them to exercise the broader restructuring powers more clearly available in that jurisdiction.
This proposal was sanctioned by the Hong Kong court, leading to:
- an application for common law recognition of the Hong Kong provisional liquidators’ powers as foreign liquidators to act in the name and on behalf of the company for the limited purpose of making an application to wind it up in the Cayman Islands and to be appointed as Cayman provisional liquidators;
- following recognition being granted in the Cayman Islands, the presentation of a winding-up petition in the Cayman Islands and the issue of an application for the appointment of the Hong Kong provisional liquidators as Cayman provisional liquidators; and
- with a subsequent discharge of the Hong Kong provisional liquidators and their Cayman appointment recognised in Hong Kong, the Cayman provisional liquidators will then be able to undertake preparation and promotion of parallel schemes of arrangement in the Cayman Islands and Hong Kong if required.
It was unclear whether common law recognition could be used to permit foreign insolvency representatives (ie, appointed somewhere other than the place of incorporation of the company) to present a petition to wind up a company in its place of incorporation and seek their own appointment as provisional liquidators. In Singularis Holdings Ltd v PwC, the Privy Council held that liquidators appointed in the Cayman Islands (the place of incorporation) could not be treated as if they had been appointed in Bermuda, where the relevant statutory power was broader; the Supreme Court of Bermuda could only provide assistance if the Cayman court could make the equivalent order. By contrast, Changgang’s Hong Kong provisional liquidators were seeking to bring the proceedings back to the place of incorporation and to be appointed provisional liquidators there. Therefore the restrictions set out in Singularis were not applicable to their application.
China Solar Energy Holdings Limited
In Re China Solar, the Hong Kong Companies Court (at first instance) has determined that where warranted by the circumstances, provisional liquidators may be given restructuring powers and pursue the restructuring through to completion, clarifying the position post-Legend.
Provisional liquidators were appointed to China Solar Energy Holdings Limited (China Solar), a Bermuda-incorporated, Hong Kong-listed company, on the basis that provisional liquidators were needed to safeguard the company’s assets and to investigate transactions entered into by the company. Their powers on appointment included an ability to pursue a restructuring.
A creditor later issued a summons for, inter alia, the winding up of the company and the discharge of the provisional liquidators, arguing that because they had finished their asset preservation role, the primary remaining focus would be the company’s restructuring, which should be impermissible as a result of the Legend decision.
In dismissing the application, the Companies Court judge confirmed that provisional liquidators should not be appointed for the sole purpose of restructuring; however, provisional liquidators may be given restructuring powers in appropriate circumstances and should be permitted to complete the restructuring, even if they have completed asset preservation and other tasks. Termination of their office because restructuring is the remaining primary task would be inconsistent with the statutory purpose underlying their appointment.
In two subsequent cases, the Companies Court judge reaffirmed his decision in Re China Solar by granting restructuring powers to the provisional liquidators when considered appropriate.
In Re CW Advanced Technologies Ltd, the judge noted at paragraph 27:
The terms of the order of appointment here does not confer on the provisional liquidators any powers to pursue debt restructuring. This is not to say that they may not apply for an extension of their powers in future. It is well established that where the circumstances warrant the appointment of provisional liquidators, the provisional liquidators may be granted powers to explore and facilitate a debt restructuring. Of course whether such powers should be granted and the scope of the powers would depend on the particular circumstances such as the existence of creditor support.
In Hsin Chong Group Holdings Ltd, at paragraph 9:
The powers in sub-paras 2(i)–2(vi) of the order sought are not in the standard order and are required for the purposes of the restructuring. They are specifically requested in the letter of request. For the reasons explained in my decision in Re China Solar Energy Holdings Ltd (No. 2) it is not permissible to appoint provisional liquidators in Hong Kong in order to restructure the debt of the company. It is, and I summarise, permissible to appoint provisional liquidators for orthodox reasons and, after the provisional liquidators have familiarised themselves with the affairs of the company, for an interested party (commonly the provisional liquidators) to apply to court if it is thought desirable for restructuring powers to be granted to the provisional liquidators. It is not in my opinion inconsistent with Hong Kong law for restructuring powers to be granted by way of assistance to a provisional liquidator appointed over a foreign company by the court of its place of incorporation, in which a soft-touch provisional liquidation is permissible, as such powers can be granted, albeit in the more limited circumstances discussed in China Solar, to a Hong Kong provisional liquidator.
While the place of incorporation is frequently considered the appropriate forum for the winding up of a company, many Caribbean-incorporated companies are registered in Hong Kong with listings, creditors and assets there, and it seems that the Hong Kong provisional liquidation regime can continue to aid such companies to achieve a restructuring without the need for recognitive contortions.
Proposed amendments to Listing Rules affecting reverse takeovers
In Hong Kong, successful restructurings have often involved the resumption in trading of shares of Hong Kong listed companies in provisional liquidation, where broadly an investor has been willing to inject capital and, where appropriate, assets in exchange for shares in the company, subject to regulatory approvals and ultimately confirmation of the intended resumption. The company’s listing status may be considered the primary asset available to enable any meaningful restructuring to generate recovery for creditors.
A consultation paper (Consultation Paper) was issued by the Exchange in June 2018 seeking to address the Exchange’s concern ‘to curtail the injection of ineligible new business into listed shells through backdoor listings without restricting legitimate business expansion or diversification’. Many of the proposals in the Consultation Paper are codifications of current practice and previous guidance. The consultation period closed on 31 August 2018 and the Exchange plans to publish its conclusions in 2019.
Listing Rule 14.06(6) applies to treat as a reverse takeover an acquisition, or series of acquisitions, of assets that in the Exchange’s opinion constitutes an attempt to effect a listing of the assets while circumventing the requirements for new applicants under the Listing Rules. The Exchange considers certain criteria when deciding whether a proposed transaction would involve an unacceptable circumvention. A listed issuer proposing a reverse takeover will generally be treated as if it were a new listing applicant: under the existing rules, the enlarged group or the assets to be acquired must meet the track record requirements for new applicants and the enlarged group must meet all other new listing requirements under Chapter 8 of the Listing Rules.
In distressed resumption proposals, the listed issuer often has insufficient operations or assets to warrant the continued listing of its shares and intends to acquire a profitable business through a very substantial acquisition constituting a reverse takeover: currently the target must comply with the three-year profits requirement for a new listing application (so that, in effect, the injection is not a circumvention of the new listing requirements). The impact of certain proposed changes to Listing Rules 13.24 and 14.54 appear to make it difficult for such a reverse takeover to be viable if the distressed listed company made a loss in any of the previous three years since, for example, each of the acquisition targets and the enlarged group would need to meet all the new listing requirements set out in Chapter 8 of the Rules.
 Re Legend International Resorts Ltd  2 HKLRD 192.
  UKPC 36.
 The Joint Administrators of African Minerals Ltd (in administration) v Madison Pacific Trust Ltd and Shandong Steel Hong Kong Zengli Limited  HKEC 608.
  HKCU 2797.
 Ibid at paragraph 7. Section 221 referred to is now found in sections 286A–C of the Winding Up Ordinance.
  HKEC 146.
 Bay Capital Asia LP v DBS Bank (Hong Kong) Ltd  HKEC 2377.
 Re Supreme Tycoon Limited  HKCFI 277.
  AC 1675 at .
 This view diverges from that expressed by the Singapore High Court in Re Gulf Pacific Shipping Ltd  SGHC 287, which relied on a US Bankruptcy Court of Nevada decision concerning recognition of an Australian members’ voluntary liquidation under Chapter 15 of the US Bankruptcy Code.
  2 HKLRD 192.
  2 HKLRD 725.
 Paragraph 7, Plus Holdings.
 Paragraph 35, Legend.
 Paragraph 36, Legend.
  1 HKLRD 165.
  UKPC 36.
  HKCFI 555.
  HKCFI 1705.
  HKCFI 805.
 In China Solar  HKCFI 555, at paragraph 39(5), the companies judge noted that ‘Many authorities have referred to a company’s listing status as the company’s asset, although they have not considered in any detail a listing status’ legal attributes and character’. The authorities mentioned were, at footnote 29: ‘For example, Re Yaohan Hong Kong Corp Ltd  1 HKLRD 363; Re Albatronics (Far East) Co Ltd  4 HKC 99; Re I-China Holdings Ltd  HKEC 1844; Re Plus Holdings Ltd  2 HKLRD 725; Re Plus Holdings Ltd  HKEC 2397; Re China Medical and Bio Science Ltd  HKEC 2679.’
 Consultation Paper on Backdoor Listing, Continuing Listing Criteria and Other Rule Amendments.
 See Listing Rule 14.54.
 See Listing Rule 13.24.
 See Consultation Paper, paragraph 69.