The value of consistency – the Hong Kong Court’s approach to applications for recognition and assistance

When is consistency a virtue? Certainly in recognition applications to the Hong Kong Companies Court, and for good reason.

A recent pair of contrasting decisions from the Hong Kong Companies Court should be required reading for foreign officeholders seeking recognition of their appointments in Hong Kong.

Re Rare Earth Magnesium Technology Group Holdings Ltd (in provisional liquidation in Bermuda) [2020] HKCFI 2260 (“Re Rare Earth”) and Re Agritrade Resources Ltd (in provisional liquidation in Bermuda) [2020] HKCFI 1967 (“Re Agritrade”) are two applications where the Bermudan-appointed provisional liquidators of a Hong Kong listed company sought recognition and assistance from the Hong Kong Companies Court. While recognition and assistance was granted in both cases, the Honourable Mr. Justice Harris highlighted the need for a consistent approach to such applications.

In both cases, the application was supported by a letter of request issued by the Bermudan Court. The terms of the letters of request however differed.

In Re Rare Earth, the letter of request was in a form consistent with Hong Kong Companies Court’s standard form of order for recognition and assistance. Consequently, Harris J had no difficulty in granting an order in those terms, in the Hong Kong standard form of order amended slightly to reflect the fact that the provisional liquidators were appointed on a soft-touch basis to facilitate a restructuring, and hence were not granted full control of the company.

By way of contrast, in Re Agritrade, the letter of request was in terms materially different from the standard form of order. The solicitors for the provisional liquidators sought to justify the departure on the ground that confusion might ensue if the Bermudan provisional liquidation order and the Hong Kong order differed materially. This argument was flatly rejected by Harris J. Harris J explained that the Hong Kong Companies Court’s procedure and standard forms for granting recognition of and assistance to foreign officeholders have been developed, out of necessity, to provide for a quick, cost-effective and, so far as possible, uncontroversial process. Compliance with the procedures and standard orders is therefore important in the development of this process.

Harris J suggested that foreign courts should be informed of the Hong Kong standard order and be invited to issue letters of request consistent with it.

Harris J recognised, however, that there will be cases in which the form of order needs to be departed from. But any such departure should be fully justified. For example, the slight departure from the standard form in Re Rare Earth was such a case. This was not the case in Re Agritrade.

Accordingly, in Re Agritrade, Harris J was only prepared to grant an order in the standard form.

Comments

The practice of seeking recognition and assistance by overseas appointed liquidators and provisional liquidators has become commonplace in Hong Kong in recent years. Factors contributing to this proliferation include:

1. the corporate structure typical of many Hong Kong-listed business groups;
2. a lack of any purpose-built corporate restructuring regime in Hong Kong; and
3. the impact of the Hong Kong Court of Appeal’s decision in Re Legend International Resorts Ltd [2006] HKCA 75, which decided that soft-touch provisional liquidation is impermissible in Hong Kong in respect of Hong Kong companies.

In light of this, a uniform and consistent approach when applying the workaround developed by the Court is clearly preferable. The Court’s message essentially is that changes to the standard form of order should be the result of careful consideration and not a failure to understand why a uniform practice is desired. This is a message that insolvency practitioners would do well to heed.