Winding up here…and there
On 22 November 2021, the Hong Kong court made a winding-up order against the company which was listed on the Hong Kong stock exchange and which carried on financing activities in Hong Kong, finding it "grossly insolvent".
The PLs then sought to reverse the findings "through the backdoor" by asking the Cayman court to approve a proposed scheme of arrangement and requesting the Hong Kong court to assist them in carrying out their work in Hong Kong. They did this by engineering an "urgent" hearing and filing two affirmations which Linda Chan J observed contained a number of significant misrepresentations.
The company procured a bondholder investor to whom the company owed HK$21.2 million to apply for a regulating order under section 227A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), the purpose of which the court said was "no more than an attempt to bypass the creditors' statutory rights."
The investor funded the work of the PLs and the PLs continued to work with the investor and the directors of the company to "ensure they could remain in office".
The PLs sought a hearing of the winding up petition by the Cayman court on 22 February 2022, making representations among other that due notice of the hearing had been given to the creditors and that the Hong Kong court had been notified of the hearing but had not provided a response.
On the basis of the representations and submissions, the Cayman court made a winding up order which had the effect of appointing the PLs as joint official liquidators (JOLs) of the company. Linda Chan J said it was clear that significant information had been withheld from the attention of the Cayman judge when he made the order.
On 18 March 2022, the JOLs placed an "ex parte Summons" before the Honourable Mr. Justice Harris seeking recognition and assistance, including to take all steps necessary to implement the debt restructuring plan and seeking an urgent hearing. Harris J directed that the Official Receiver should be notified of the application and given the opportunity to state her preliminary views.
On 8 April 2022, Harris J informed the parties that in light of the response received from the Official Receiver, the papers had been passed to the court of the main winding-up action.
A "complete turn"
Matters then "took a complete turn" with the JOLs no longer asking the court to deal with the application urgently and instead informing the court that they were abandoning the application, as the investor had "decided not to fund the Application due to commercial concerns".
What was described as the "complete volte-face" on the part of the JOLs showed "that the JOLs would only pursue the Application if it was heard by their chosen Judge" and outside the main winding-up proceedings.
Linda Chan J said it was a "matter of grave concern" that the JOLs had chosen to act in this way. Despite the JOLs' offering to pay the costs of the application, Linda Chan J said it was "for the court to uphold the high standards required of officers of the court".
She then went on to remind the parties of the duties of PLs, including the duty to act honestly and to exercise powers bona fide for the purpose for which they are conferred and not for any private or collateral purpose. A liquidator should "at all times act with complete impartiality as between the various persons interested in the property and liabilities of the company".
Where liquidators accept appointments on the basis that their remuneration depends on the approval of a funder, there risked the impression that "they had subjected themselves to the control or influence of the funder".
The court commented that the JOLs had not disclosed to the court the terms of the funding agreement, illustrating a wider problem, namely where foreign-appointed provisional liquidators/liquidators are given certain powers by the Hong Kong court through a recognition order obtained outside the main winding-up proceedings. Such persons "are able to act as provisional liquidators/liquidators in Hong Kong but are not subject to the supervision and control of the liquidators" under CWUMPO.
This was illustrated in the present case, where one of the PLs had ignored the winding-up judgment and "put forward the contrary views and contentions" which the investor and directors wanted him to say – despite these views being misleading or inaccurate.
An unnecessary application
The obvious route for the PLs to have pursued, would have been to request the Official Receiver to appoint them as her special managers for the purpose of pursuing the scheme of arrangement. Had the Cayman court been alerted to this possibility, it would have concluded that there was "no justification for the PLs to take the elaborate (and costly) steps of seeking orders from the Cayman court for the purpose of pursuing the Scheme".
All the time and costs incurred could have been avoided had the PLs and their legal representatives paid heed to the statutory scheme under CWUMPO. As such, the court took the view that the PLs should not be allowed to recover the costs of the application from the assets of the company.
The court went further, saying that in light of the misconduct on the part of the JOLs, this was a case where the court should exercise the discretion to disallow the JOLs' right to receive remuneration and to recover any costs incurred in making the application, as a means of making doubly sure that the JOLs would not look to the assets of the company to pay their costs.
Pause for reflection
The decision is noteworthy not only for the criticism of the insolvency practitioners involved, but also for the wider questions to which it alludes in terms of the interplay between the Hong Kong insolvency regime and the laws of offshore jurisdictions.
It is another reminder that the Hong Kong courts will carefully examine the viability of proposed restructurings and that the bar is set high, where the interests of the general body of creditors is concerned (see our alert "A magical incantation" – Hong Kong court warns it will carefully examine restructuring viability").
Authored by Jonathan Leitch and Nigel Sharman.