Experienced insolvency practitioners in Hong Kong are all familiar with Hong Kong Court of Appeal's decision of 1 March 2006 in the liquidation of Legend International Resorts Limited1. In the words of Kwan J (as her Ladyship then was) in the subsequent case of Re Plus Holdings Limited2, 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"3.
It is only when "the purposes of the winding up" exist that "there is no objection to extra powers being given to the provisional liquidator(s), 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]"4. 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"5.
In the 11 years after the Legend decision, the general understanding of insolvency practitioners has been that Hong Kong law does not allow what is colloquially referred to as "soft touch" appointment of provisional liquidators to restructure a company.
In an ongoing restructuring case illustrating the difficulty posed by Legend, a Bermuda-incorporated company, registered under Part XI of the old Hong Kong Companies Ordinance and listed on the Hong Kong Stock Exchange, has had provisional liquidators (the "HK PLs") appointed in Hong Kong since June 2014. The initial appointment of the HK PLs satisfied the "jeopardy to assets" (to paraphrase) test of Legend but, necessarily, this state of affairs disappeared immediately upon the appointment of a provisional liquidator. Despite having its shares suspended from trading, a potential white knight investor emerged and the HK PLs consider that restructuring the company would be more advantageous to the creditors than winding it up. However, time was not on the company's side due to a very protracted relisting process with the Hong Kong Stock Exchange.
In a recent hearing of the winding-up petition, the patience of the Hong Kong court was beginning to wear thin with the company's lengthy status in provisional liquidation for the, now sole, purpose of restructuring, which is inconsistent with Legend. The Honourable Mr Justice Harris was invited to consider an alternative being to allow the HK PLs to obtain an equivalent appointment in Bermuda, where the provisional liquidation regime can be invoked to facilitate a restructuring. His Lordship adjourned the hearing so that the alternative approach could be pursued.
On 17 February 2017, the Bermudian court appointed the HK PLs as the joint provisional liquidators of the company with the power to (among others) carry out a restructuring. The next step is for the HK PLs to be discharged and the joint provisional liquidators appointed in Bermuda to seek recognition of their appointment by the Hong Kong court and then continue to effect the restructuring in Hong Kong.
As the timetable for the enactment of a statutory corporate rescue regime remains uncertain, this case illustrates how the effect of the Legend decision could be mitigated in an intended restructuring of a foreign company which is liable to be wound up in Hong Kong, by having provisional liquidators appointed in the company's place of incorporation. Companies incorporated in Hong Kong will continue to be subject to Legend in the meantime.
His Lordship also directed the parties to consider how the recent Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters formulated by the Judicial Insolvency Network could potentially be applied in this case. The guidelines aim to enhance the efficiency in the administration of parallel insolvency proceedings by establishing a framework for close cooperation between courts of different jurisdictions.
Mayer Brown is advising the provisional liquidators of the company.