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Legal Update

Disclaiming Unprofitable Contracts by Liquidators in Hong Kong

24 May 2010
Mayer Brown JSM Legal Update

Under s.268 of the Hong Kong Companies Ordinance (“CO”), the Hong Kong Court has a discretion to grant leave to Liquidators to disclaim “onerous property” within a 12 month time limit (or such extended period as granted by the Court). The categories of what “onerous property” might be disclaimed under s.268 CO includes “unprofitable contracts”. Although s.268 CO has been a part of Hong Kong insolvency law since 1933, there is very limited Hong Kong authority on its application. Until now, there has been no clear Hong Kong authority on the application of s.268 CO insofar as “unprofitable contracts” are concerned.

In a High Court decision made on 19 May 2010, following an application made under s.268 CO by the Liquidators of Lehman Brothers Commercial Corporation Asia Limited (In Liquidation) (“LBCCA”) to disclaim certain structured finance/securitisation contracts, the Honourable Mr Justice Barma affirmed the following principles as being applicable in determining what constitutes “unprofitable contracts” capable of being disclaimed under s.268 CO (adopting the principles laid down in the Australian case of Transmetro Corporation Ltd v Real Investments Pty Ltd & Anor [1999] 17 ACLC 1314 as were approved by the English Court of Appeal in Re SSSL Realisations (2002) Ltd (In Liquidation) & Anor [2007] 1 BCLC 29), namely:

  1. a contract is unprofitable if it imposes on the company continuing financial obligations or liabilities which may be regarded as detrimental to the creditors, which is to say that the contract confers no sufficient reciprocal benefit;
  2. before a contract may be unprofitable it must give rise to prospective liabilities;
  3. contracts which delay the winding up of a company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable;
  4. no case has decided that a contract is unprofitable merely because it is financially disadvantageous. It is necessary to focus upon the nature and cause of the disadvantage; and
  5. a contract is not unprofitable merely because the company could have made or could make a better bargain.

This decision provides new and important authority under Hong Kong law on the application of s.268 CO. The Liquidators’ power to disclaim under s.268 CO is expected to become more significant and prominent, especially during this ongoing global credit crisis. In some cases (especially in the context of structured finance and derivative contracts), disclaiming an unprofitable contract may be the only available option to cease ongoing contractual obligations of an insolvent entity and facilitate its liquidation.

Mayer Brown JSM represented the Liquidators of LBCCA and successfully appeared before the Court and obtained leave to disclaim in this matter.

For inquiries related to this Legal Update, please contact:

Restructuring, Bankruptcy & Insolvency:

Richard Tollan ( )

Justine Lau ( )

Structured Finance & Derivatives:

Kingsley Ong ( )

Learn more about our Hong Kong office, Corporate & Securities, Capital Markets and Restructuring, Bankruptcy & Insolvency practices.

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