In Joint Provisional Liquidators of Moody Technology Holdings Ltd [2020] HKCFI 416, the Hong Kong Court of First Instance (the “Hong Kong Court”) granted a recognition order to foreign provisional liquidators who were appointed on a soft-touch basis, to explore and facilitate the restructuring of a company. The order was made despite soft-touch provisional liquidation being per se impermissible in Hong Kong.
Background
The Joint and Several Provisional Liquidators (the “JPLs”) of Moody Technology Holdings Limited, a company incorporated in Bermuda, applied to the Court for the recognition of their appointment and their powers as set out in a Letter of Request issued by the Supreme Court of Bermuda.
The key question before the Hong Kong Court was whether it should give recognition to the JPLs, so giving effect to a moratorium where, under current Hong Kong law, provisional liquidators cannot be appointed for the sole purpose of propounding a scheme of arrangement in Hong Kong.
What is soft-touch provisional liquidation?
The essence of a "soft-touch" provisional liquidation is that a company remains under the day-to-day control of the directors, but is protected against actions by individual creditors. The purpose is to give the group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation (Re Constellation Overseas Ltd BVIHC (Com) 2018/0206, 0207, 0208, 0210 and 0212).
Is soft-touch provisional liquidation permissible in Hong Kong?
Following the Court of Appeal’s decision in Re Legend International Resorts Ltd [2006] 2 HKLRD 192, soft-touch provisional liquidation is at present impermissible in Hong Kong in respect of Hong Kong companies.
However, this position has been viewed as an uncommon and peculiar one amongst common law jurisdictions and the Hong Kong Court has in the past recognized by way of common law assistance provisional liquidators appointed on a soft touch basis overseas (see for example Re Joint Provisional Liquidators of Hsin Chong Group Holdings Ltd [2019] HKCFI 805 - Bermuda).
In Moody, the Hong Kong Court held that, where the circumstances warrant the appointment of provisional liquidators, they may be granted powers to explore and facilitate a restructuring of the overseas company. The Court discussed at length the underlying rationale of granting such powers:
- it avoids the need of parallel proceedings;
- it is mandated by the principle of universalism; and
- it is consistent with Hong Kong private international law and cross-border insolvency policy.
Avoidance of parallel proceedings
The purpose of recognising foreign proceedings is to enable the foreign office holder or the creditor to avoid parallel insolvency proceedings. It also provides them with remedies to which they would have been entitled had such parallel proceedings been instituted.
The Hong Kong Court highlighted that foreign provisional liquidators recognised in Hong Kong would not be (i) acting as, (ii) acting in the capacity of, or (iii) having the status of officeholders appointed by Hong Kong Courts in a domestic insolvency. Logically, the fact that Hong Kong Courts may not appoint soft-touch provisional liquidators to a Hong Kong company could not constitute a bar to recognising and assisting foreign soft-touch provisional liquidators.
Universalism
The Hong Kong Court recognised that the rationale underlying the common law power of assistance is modified universalism. Cross-border recognition premised on universalism does not require foreign insolvency law and local insolvency law to be identical twins. To add such an eligibility criterion would be to fail to appreciate and apply the universalism rationale.
Consistent with Hong Kong private international law and cross-border insolvency policy
The Hong Kong Court observed that soft-touch provisional liquidation and Hong Kong provisional liquidation differ only in the scope of the provisional liquidator’s power. Both types of provisional liquidation are species of collective insolvency proceedings – they differ only in degree, but not in kind.
It would appear that refusing to recognise foreign soft-touch provisional liquidation on the basis that Hong Kong domestic law does not have soft-touch provisional liquidation will create discriminatory consequences which have been rejected by legal authorities.
Therefore, it was held that foreign provisional liquidators may promulgate a restructuring scheme of arrangement in Hong Kong with or without getting a technical recognition order in Hong Kong.
Conclusion
The above reasoning is generally welcomed as it confirms that Hong Kong Courts should recognise foreign provisional liquidators appointed on a soft-touch basis where appropriate. The current situation, in which businesses with Hong Kong operations and listings are often required to use offshore regimes to conduct debt restructuring, is far from ideal.
Indeed, the Hong Kong Court has for many years recognised that the corporate rescue regime in Hong Kong is in need of reform. In this light, it is encouraging to see that the Hong Kong government is now planning to hold a consultation on a corporate rescue bill. The move underlines the government’s effort to protect companies from creditors’ hostile acts while they reorganise their finances, which will hopefully mitigate the risk of large-scale corporate failures in Hong Kong.
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