Good faith in bad times

Can a good faith obligation under PRC law preclude a party from bringing a winding up petition in Hong Kong? A recent Hong Kong Court of First Instance suggests not.

In Harbor Prosper (HK) Investments Ltd v. Elegant Profit (Hong Kong) Ltd [2020] HKCFI 2261, the respondent to a winding up petition argued that it had a “bona fide defence on substantial grounds” because the petitioner was bound by a good faith obligation under PRC law not to frustrate the purpose of a related debt restructuring by seeking a winding-up order in Hong Kong.

The Court dismissed this argument and concluded there is no direct authority to support the proposition that a non-contractual obligation under foreign law can preclude a party from bringing a winding up petition in accordance with its statutory rights under Hong Kong law.

Background

The respondent was part of the Yihe group of PRC companies. The petitioner held a senior guaranteed note (the “Note”) issued by another Yihe group company, in respect of which the respondent gave a corporate guarantee.

The petitioner and the respondent later agreed to extend the maturity date of the Note subject to certain conditions precedent, one of which was an undertaking by the respondent’s connected party (“PRC Yihe”) to pledge its shareholding in another Mainland entity (“Hangzhou Qingcheng”) in favour of the petitioner (the “Pledge”). PRC Yihe then failed to register the Pledge with Mainland authorities. The petitioner issued an notice of acceleration on the basis that such failure constituted an event of default. This eventually led to the service of a statutory demand on the respondent, in reliance on which the winding up petition was brought.

Separately, the petitioner, Hangzhou Qingcheng, the issuer of the Note, PRC Yihe and other parties (except the respondent) entered into a debt restructuring agreement governed by PRC law (the “Restructuring Agreement”). The Restructuring Agreement was not yet effective because certain of its conditions precedent had not yet been fulfilled. The parties filed expert evidence on PRC law on the nature and effect of the Restructuring Agreement.

Among other arguments, the respondent relied on the Restructuring Agreement to claim that it had a “bona fide defence on substantial grounds” against the petition.  The respondent claimed that the Restructuring Agreement precluded the petitioner from seeking repayment, as PRC law imposed a good faith obligation upon the petitioner not to jeopardise or frustrate the purpose of the Restructuring Agreement after it had been established (成立), even if it was not yet effective (生效).

Decision

The Court asked how such alleged good faith obligation, even if it were established as a matter of PRC law, could impact upon the petitioner taking steps in Hong Kong to wind up the respondent, given that the respondent was not party to the Restructuring Agreement. The Court opined that “there is no direct authority to support the proposition that a non-contractual foreign law governed obligation can preclude a party from bringing a winding up petition as per its statutory rights”. The Court further recognised there are well-settled principles including “an unpaid creditor is entitled to a winding-up order ex debito justitiae”. In the face of these principles, the Court concluded that “there is no justification nor scope for applying … [the respondent’s propositions] to preclude or otherwise fetter the statutory right in Hong Kong.”

Comments

The Court reaffirmed the principle that the right to petition for winding up is a statutory right in Hong Kong and that it is contrary to public policy to preclude or fetter the exercise of such right, even when the petitioner is potentially bound by a non-contractual obligation under foreign law. As the cooperation between Hong Kong and Mainland China becomes closer in the insolvency and restructuring field (see Hong Kong Court continues to recognise and assist Mainland insolvency proceedings), this decision provides an additional perspective on defending winding-up petitions in a cross-border context.