A former listco
Up Energy Development Group Limited (company) is an investment holding company incorporated in Bermuda and whose shares were previously listed on the Hong Kong Stock Exchange (HKEx). It has substantial assets located in mainland China, whilst the majority of its financing activities were conducted in Hong Kong.
In 2016, HEC Securities Limited (petitioner) presented a petition against the company in Hong Kong on the ground that it had failed to satisfy a statutory demand. Meanwhile, another unpaid creditor presented a petition against the company in Bermuda and provisional liquidators (PLs) were appointed to oversee the company's restructuring. The company had already been placed into the first stage of delisting from HKEx and was subject to various conditions before trading in its shares could resume.
In August 2017, the PLs obtained orders recognizing their appointment from the Hong Kong court and proceeded to take elaborate steps with a view to a resumption of trading on HKEx. By September 2019, a scheme of arrangement had been approved by the company's creditors and sanctioned by the Bermuda Court. This eventually lapsed due to the company's failure to satisfy the resumption conditions required by HKEx.
Notwithstanding the loss of listing status, the petitioner and the supporting creditors did not seek a winding up order against the company, with the petitioner and the PLs filing numerous consent summonses without the consent of the creditors who had given notice of intention to appear. This resulted in the petition being adjourned many times.
Eventually, the matter came before the Hong Kong court for substantive hearing in April 2022. Both the petitioner and the PLs sought an order that the petition be dismissed.
The court's findings
By the time the petition was heard before the Hong Kong court, the Bermuda court had made a winding up order against the company (which was granted on 11 March 2022). There was therefore no dispute that the company was insolvent and should be wound up.
Various grounds of opposition were advanced in relation to the court's jurisdiction to grant winding up orders over foreign companies but a common ground relied on by both the petitioner and the PLs was the ancillary winding up ground - 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 court's jurisdiction to wind up a foreign company – the three core requirements
Referring to Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, the Honourable 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 place to wind up 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" to decline a winding up order against a foreign company on the ground that the company has been or will be wound up in the place 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 core requirements are satisfied, the court will be prepared to make a winding up order unless the requisite majority of creditors support the proposed restructuring or the evidence suggests that there are other sources available to pay off the debts (see Hogan Lovells client alert Hong Kong court sets high bar for injunctions restraining presentation of winding-up petitions for further discussion on the three core 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 a petitioner to satisfy these three core requirements. This was because the company would invariably have a principal place of business in Hong Kong and have given an undertaking to comply with the Listing Rules, maintained a sufficient management presence in Hong Kong, raised funds through public offerings, borrowed loans from banks and financial institutions in Hong Kong and would have had to comply with the requirements of the Companies Ordinance and the Securities and Futures Ordinance.
In respect of offshore companies listed in Hong Kong with direct subsidiaries, assets and operations in Hong Kong, the court noted that it would be "unreal or artificial to suggest that the court should ignore all the affairs carried out by the company in Hong Kong and the corresponding need to investigate them, and leave the control and supervision over the winding up to the court of the place of incorporation. This is particularly so where the company was incorporated in offshore jurisdictions like the BVI, Cayman and Bermuda which do not require the company to carry on any business or meaningful activity in the place of incorporation other than appointing agents to deal with the corporate filings and maintaining the registry of members, directors and charges."
The court was satisfied the facts of the present case was a "paradigm example" of this - other than maintaining its registers and complying with statutory requirements of filings in Bermuda, the company had not carried on any business or other activities.
The ancillary winding up ground
The ancillary winding up ground was relevant to an argument advanced by the petitioner that if so required, liquidators appointed by the Bermuda court may seek recognition and assistance granted by the Hong Kong court, and therefore there was no need to grant an ancillary winding up order.
The practice of companies being wound up in their place of incorporation and for the Hong Kong court only being asked to provide recognition and assistance to the offshore-based liquidators – which came to be 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 winding up proceedings in the place of incorporation where the COMI of the company was located in Hong Kong and a "soft touch" restructuring had been abused to engineer a de facto moratorium when there was no credible plan for restructuring." (see Hogan Lovells client alert A magical incantation – Hong Kong court warns it will carefully examine restructuring viability).
However, the court noted that the substantial powers available to the liquidators under the CWUMPO provisions when the court makes 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 being wound up in its place of incorporation did not "obviate the need for a winding up order in other jurisdictions." If assets were available within the domestic jurisdiction (which ordinarily would suffice to satisfy the second core requirement"), "those assets will be taken and dealt with by the liquidators appointed in that jurisdiction and the liquidation will be carried on as [an] ancillary liquidation."
Adopting a practical approach, the court noted "if the Company were not wound up by the court, multiple proceedings would ensue which, in turn, would increase the time and costs for administering the affairs in Hong Kong" and that it cannot be in the interests of the Company's creditors to have to bear the extra time and costs in making successive applications for recognition orders.
Given that there was no question of insolvency, and being satisfied that the three core requirements were met, the court granted a winding up order against the company.
Deja vu all over again?
The Hong Kong court has in recent years been critical of companies which abuse the soft-touch restructuring regime.
The Court of Appeal, for example, in Silver Starlight Ltd v China Citic Bank Corp Ltd [2021] HKCA 1248, rejected the plaintiff's appeal against the CFI's decision dismissing its application for an injunction restraining the defendant banks from presenting a petition against it (see Hogan Lovells client alert Hong Kong court sets high bar for injunctions restraining presentation of winding-up petitions).
In this sense, the decision in Up Energy may mark a return to an earlier era and deference to the overseas courts of the place of incorporation of the offshore company may be on the wane in considering whether or not to make a winding-up order in Hong Kong under section 327 CWUMPO.
Authored by Jonathan Leitch, Yolanda Lau, Nigel Sharman, and Fiona Wong.
