Déjà vu? Hong Kong court orders liquidation of Bermuda-based listco despite objections from PL | Hogan Lovells

A former listco

Up Energy Development Group Limited (Company) is an investment holding company incorporated in Bermuda with shares formerly listed on the Hong Kong Stock Exchange (HKEx). It has significant assets located in mainland China, while the majority of its financing activities have been conducted in Hong Kong.

In 2016, HEC Securities Limited (petitioner) filed a petition against the company in Hong Kong for failing to comply with a legal request. Meanwhile, another unpaid creditor has filed a petition against the company in Bermuda and Provisional Liquidators (PLs) have been appointed to oversee the company’s restructuring. The company had already been placed in the first stage of delisting from HKEx and was subject to various conditions before trading in its shares could resume.

In August 2017, PL obtained orders recognizing their appointment from the Hong Kong court and began to take elaborate steps to resume trading on HKEx. In September 2019, a plan of arrangement had been approved by the company’s creditors and sanctioned by the court in Bermuda. This eventually lapsed due to the company’s failure to meet HKEx’s required takeover conditions.

Notwithstanding the loss of listing, the Petitioner and supporting creditors did not seek a winding-up order against the company, with the Petitioner and PLs filing numerous consent citations without the consent of the creditors who had notified their intention to appear. This caused the petition to be adjourned several times.

Eventually, the case was taken to the Hong Kong court for a substantive hearing in April 2022. The petitioner and the PLs requested an order dismissing the petition.

The court’s findings

By the time the petition was heard in the Hong Kong court, the Bermuda court had issued a winding-up order against the company (which was granted on March 11, 2022). It was therefore not disputed that the company was insolvent and should be liquidated.

Various grounds of objection were advanced with respect to the court’s jurisdiction to make winding-up orders against foreign companies, but a common ground relied on by both the petitioner and the PLs was the ground ancillary winding up – whether an ancillary winding up order should be made by the Hong Kong court given that the company had already been wound up by the Bermuda court.

The jurisdiction of the court to liquidate a foreign company – the three basic requirements

Referring to Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, Honorable Madam Justice Linda Chan clarified that “the imposition of the 3 core requirements was in recognition of the fact that prima facie the most appropriate to liquidate a foreign company is the place of its incorporation and the domestic court would give primacy to that court.” However, there is “no separate or additional requirement” for denying a winding-up order against a foreign company on the grounds that the company has been or will be wound up instead of incorporation.

As established in Re Real Estate Development Co [1991] BCLC 210, provided that once satisfied that the company is insolvent and the three basic requirements are met, the court will be prepared to grant a winding-up order unless the required majority of creditors support the proposed restructuring or the evidence suggests that there are other sources available to repay debts (see Hogan Lovells client alert Hong Kong court sets high bar for injunctions restricting presentation of liquidation petitions for a more in-depth discussion of the three basic requirements).

In the case of a non-Hong Kong company whose primary listing had been on HKEx, the court noted that it would not be difficult for an applicant to meet these three basic requirements. Indeed, the company would invariably have a principal place of business in Hong Kong and is committed to compliance with listing rules, maintained a sufficient management presence in Hong Kong, raised funds through public offerings, borrowed from banks and financial institutions in Hong Kong and should have complied with the requirements of the Companies Ordinance and the Securities and Futures Ordinance.

With respect to offshore companies listed in Hong Kong with direct subsidiaries, assets and operations in Hong Kong, the court noted that it would be “unreal or contrived to suggest that the court should disregard all business conducted by the company in Hong Kong and the corresponding need to investigate them and leave the control and supervision of the liquidation to the court of the place of incorporation, especially where the company has been incorporated in offshore jurisdictions such as BVI, Cayman Islands and Bermuda which do not require the company to carry on any commercial or significant activity at the place of incorporation other than the appointment of officers to process the company’s documents and maintain the register of members, directors and offices. »

The court was satisfied that the facts of the present case were a “paradigm example” of this – other than maintaining its records and complying with legal filing requirements in Bermuda, the company had not engaged in any business or other activity.

The Ancillary Clearance Ground

The ancillary ground for liquidation was relevant to an argument advanced by the petitioner that, if necessary, liquidators appointed by the court in Bermuda can seek recognition and assistance granted by the court in Hong Kong, and it was therefore not not necessary to grant an ancillary winding-up order.

The practice of liquidating companies at their place of incorporation and only asking the Hong Kong court to recognize and assist overseas-based liquidators – known as “soft touch” provisional liquidation – had been tested in recent decisions, such as Re Lamtex Holdings Ltd [2021] 2 HKLRD 17.

In Lamtex the court “decided not to give primacy to the liquidation proceedings over the place of incorporation where the company’s center of main interests was located in Hong Kong and a ‘soft touch’ restructuring had been abused to arrange a de facto moratorium when there was no credible plan for restructuring.” (see Hogan Lovells Customer Alert A Magical Incantation – Hong Kong Court Warns It Will Carefully Consider Viability of Restructuring).

However, the court noted that the substantive powers available to liquidators under the provisions of the CWUMPO when the court issues a winding-up order could not be conferred by way of recognition or assistance by the Hong Kong court. The “mere fact” that a foreign company was liquidated at its place of incorporation did “not preclude the need for a winding-up order in other jurisdictions”. If assets were available in the national jurisdiction (which would normally suffice to satisfy the second fundamental requirement”), “these assets will be taken and dealt with by the liquidators appointed in that jurisdiction and the liquidation will be continued as [an] accessory liquidation. »

Taking a hands-on approach, the court noted that “if the company was not liquidated by the court, multiple proceedings would ensue, which, in turn, would increase the time and cost of business administration in Hong Kong” and that it cannot be in the interests of the Company’s creditors to have to bear the additional time and costs associated with the successive applications for recognition orders.

Since there was no question of insolvency and being satisfied that the three basic requirements were met, the court issued a winding-up order against the company.

Deja vu again?

The Hong Kong court has in recent years criticized companies for abusing the soft restructuring regime.

The Court of Appeal, for example, in Silver Starlight Ltd v China Citic Bank Corp Ltd [2021] HKCA 1248, dismissed the plaintiff’s appeal against the CFI’s decision dismissing its application for an injunction prohibiting the defendant banks from bringing a claim against it (see Hogan Lovells Client Alert Hong Kong court sets high bar for injunctions restricting liquidation petitions).

In this sense, the decision of Up to the energy may mark a return to an earlier era and deference to foreign courts of the offshore company‘s place of incorporation may fade in considering whether or not to issue a winding-up order in Hong Kong under the Section 327 CWUMPO.

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