Hong Kong Court calls for “immediate” improvements to insolvency legislation

In The Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Limited [2020] HKCFI 825, the Hong Kong Court continued a trend of recognising foreign soft-touch provisional liquidators.

In this case, the Joint and Several Provisional Liquidators (the “JPLs”) were appointed over China Oil Gangran Energy Group Holdings Limited (“China Oil”), (a company incorporated in the Cayman Islands), by the Cayman court, with a view to pursuing a debt restructuring. The JPLs applied to the Hong Kong Court for recognition of their appointment.

Applying the principles of recognition of foreign insolvency proceedings (principally those explained in the case of Joint and Several Liquidators of CEFC Shanghai International Group Ltd [2020] HKCFI 167, about which we wrote here), the Hong Kong Court had no difficulties recognising the JPLs. In particular, as we explained in our earlier blog post on Joint Provisional Liquidators of Moody Technology Holdings Ltd [2020] HKCFI 416, the fact that soft-touch liquidation is not permissible in Hong Kong does not prevent the Hong Kong Court from recognising foreign soft-touch provisional liquidation.

Since there was an existing winding-up petition in Hong Kong against China Oil, the Hong Kong Court made the recognition order without prejudice to the petition. This means that China Oil cannot oppose the winding up petition merely on the ground that it was in soft-touch provisional liquidation. In this case, the petitioner was aware of the recognition application, and had no objection to it.

The Court’s decision ended with the oft-repeated criticism of the “unsatisfactory state of affairs” of Hong Kong insolvency law, namely that it has no legislation that provides for corporate debt restructuring, other than through schemes of arrangement. Noting the improvements to insolvency law in the other major financial centres around the world in the past months in response to the economic impact of Covid-19, the Court suggested that there should similarly be an “immediate” amendment to Hong Kong insolvency legislation.

While the factual scenario and the legal principles in this case are familiar, never before has the Hong Kong Court called for insolvency law reform so urgently. It remains to be seen whether that call will be answered - while the Government indicated in March this year that it intended to hold a new round of consultation on a proposed plan to introduced a Chapter 11-style regime, little has yet emerged by way of concrete plans and details.