THE JOINT OFFICIAL LIQUIDATORS OF A COMPANY v. B AND ANOTHER

HCMP 902/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 902 OF 2014

_________________

_________________

_________________

___________________________

REASONS FOR DECISION

___________________________

1.  I have before me a number of applications made by the liquidators of a company incorporated in the Cayman Islands which has been wound up by order of the Grand Court of the Cayman Islands, which I shall refer to as the “Cayman Court”. Given the confidential nature of the applications I will refer to the company in liquidation simply as the “Company”. The applications were for the following orders:

(1) A confidentiality order.

(2) Recognition of the liquidation in the Cayman Islands and the appointment by the Cayman Court of the liquidators.

(3) An order that the respondents produce certain documents to the liquidators concerning the details of bank accounts into which substantial sums of money were paid by the Company in circumstances, which suggest they may have been part of a fraudulent scheme.

2.  The applications were made pursuant to a letter of request.  By that letter the Cayman Court requested the High Court of Hong Kong to make the orders briefly described above.  In substance the third order sought was of the type made in Hong Kong under section 221(3) of the Companies Ordinance, cap. 32, in a domestic liquidation on the application of a liquidator or a provisional liquidator.  A similar provision exists in section 103 of the Companies Law (Cayman Islands).  The respondents did not oppose the applications and I granted the orders.  These are my reasons for doing so.

3.  Perhaps surprisingly this appears to be the first application of this sort to the Companies Court in Hong Kong, at least of which I am aware, although Mr. Karas told me that he had experience of similar applications in the 1990s in connection with the collapse of the Bond Group, but reasons for the orders that were granted appear not to have been produced.  It is helpful to start by recalling the established principles of private international law that apply to foreign companies.  This is most conveniently approached by reference to the rules set out in The Conflict of Laws, Dicey, Morris & Collins, 15 ed:

(1) Rule 174 - the existence or dissolution of a foreign corporation duly created or dissolved under the law of a foreign country is recognised in England.

(2) Rule 175 – (i) the capacity of the corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question; (ii) all matters concerning the constitution of the corporation are governed by the law of the place of incorporation.

(3) Rule 179 - the authority of the liquidator appointed under the law of the place of incorporation is recognised in England.

4.  These rules recognise that, as one would expect, generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation. The authors of Conflict of Laws explain in paragraph 30‑102 of the 2^nd volume that Rule 179 is justified because the law of the place of incorporation determines who is entitled to act on behalf of a corporation and in footnote 430 various authorities are cited as establishing this principle.  The authors go on in the same paragraph to explain that “If under that law [the law of the place of incorporation] a liquidator is appointed to act then his authority should be recognised here”.  It follows that if a person in Hong Kong receives a request or instruction from a liquidator of a foreign corporation, with which if it had come from the board of directors of that foreign corporation he would have complied, he should once he is satisfied that the liquidator was properly appointed in the place of incorporation act upon the request or instruction.  In practice this is not what happens.  It appears to be a common response of banks and other parties to a request for information from a foreign liquidator, and was so in the present case, that his appointment is not effective in Hong Kong and that they require an order from the Hong Kong Courts before they will act.

5.  This lack of cooperation from banks, and also in my experience auditors, has been cited to me on a number of occasions as one of the reasons why a foreign liquidator has sought to wind up in Hong Kong the company over which he has been appointed in its place of incorporation.  It should not be necessary to do this simply to enable a foreign liquidator to obtain information and documents in Hong Kong.  The reason in my experience why the Companies Court receives petitions to wind up foreign companies, which can be problematic because of the restricted circumstances in which the Court will wind up a foreign company[1], rather than applications for more focused assistance is identified, in my view correctly, by Professor Ian Fletcher at paragraph 4.02 of the second edition of Insolvency in Private International Law:

“However, certain factors appear to militate against the English courts’ powers of assistance being more frequently invoked, even against a background of steady growth in the numbers of insolvencies with cross-border aspects. One reason is the relatively under-publicised state of the law, much of which is contained in reports of cases originally decided many years ago. Unfamiliarity with these Common Law precedents and with their significance from the standpoint of obtaining active assistance from the English courts is likely to be one reason for their underutilisation ……….”

6.  A distinction does, however, need to be made between information and assets.  Unlike the position in personal bankruptcy the common law maintains that a foreign liquidation has no automatic consequences in relation to the property of a foreign company in a local jurisdiction[2].  As a consequence an application needs to be made by a foreign liquidator for an order vesting him with the title to the local property. 

7.  The present application is important for two reasons.  First, because it provides an opportunity to state, what should never have been in doubt, namely, that Rule 179 applies in Hong Kong.  Secondly, because it demonstrates that there is in Hong Kong a mechanism available to foreign liquidators for obtaining information and documents without having to wind up a company.

8.  Applications of the sort before me are commonly made in other common law jurisdictions and granted.  The reasons and justification for so doing are considered in paragraphs 11 to 34 of the judgment of Lord Collins in Rubin v Eurofinance SA [3].  These paragraphs repay careful study.  I would emphasise a number of matters discussed in those paragraphs.

9.  Lord Collins in paragraph 14 draws attention to the pressing need for international cooperation in cross-border insolvencies.  This is becoming the case in Hong Kong as the Companies Court receives increasingly frequent applications which have a cross-border dimension.  A recent example is Re China Medical Technologies Ltd [4]; a company incorporated in the Cayman Islands, listed on NASDAQ and having its operating subsidiaries in the Mainland.

10.  The trend, certainly in the common law world, towards what is commonly referred to as “universalism” or “modified universalism”.  In the case of personal bankruptcy the idea that there should be one process for the distribution of a bankrupt’s property, and that it should be administered by his place of domicile, has a long history starting with Solomons v Ross[5]. In paragraphs 19 and 20 of his judgment Lord Collins summarises how far this trend has developed in England and the United States:

“19. In HIH [2008] 1 WLR 852, para 30, Lord Hoffmann said:

‘The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the 18^th century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution.’

And in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc (“Cambridge Gas”) [2007] 1 AC 508, para 16 he said, speaking for the Privy Council:

‘The English common law has traditionally taken the view that fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated.’

20. The US Bankruptcy Court accepted in In re Maxwell Communication Corpn (1994) 170 BR 800 (Bankr SDNY) that the United States courts have adopted modified universalism as the approach to international insolvency:

‘the United States in ancillary bankruptcy cases has embraced an approach to international insolvency which is a modified form of universalism accepting the central premise of universalism, that is, that assets should be collected and distributed on a worldwide basis, but reserving to local courts discretion to evaluate the fairness of home country procedures and to protect the interests of local creditors.’ ”

11.  Hong Kong is not a party to the UNCITRAL Model Law on cross‑border insolvency and at the time of writing there is no prospect of it becoming so in the near future.  Hong Kong’s insolvency legislation contains no provisions dealing with cross-border insolvency.  However, at common law the court has power to recognise and grant assistance to foreign insolvency proceedings.  In paragraph 31 Lord Collins explains how extensive those powers are: “the common law assistance cases had been concerned with such matters as the vesting of English assets in a foreign office holder, or the staying of local proceedings or orders for examination in support of the foreign proceedings, or orders for the remittal of assets to a foreign liquidation, and have involved cases in which the foreign court was a court of competent jurisdiction in the sense that the bankrupt was domiciled in the foreign country or, if a company, was incorporated there.”  Of the various cases cited in the judgment illustrating this In re Impex Services Worldwide Ltd [6] is particularly relevant because it was an application to the Manx High Court, which like Hong Kong does not have any statutory provisions dealing with assistance to foreign liquidators.

12.  In Impex Services the English High Court had issued a letter of request at the instigation of the provisional liquidator to the Manx High Court seeking assistance to facilitate the examination of, and production of documents, by various parties based in the Isle of Man.  The High Court of the Isle of Man had earlier recognised the appointment and powers of the provisional liquidator.  That order had not been challenged by the respondents. The respondents did, however, resist the petition seeking assistance over the matter of their examination.  His Honour Deemster Doyle held that the High Court had no jurisdiction under section 206 of the Companies Act (Isle of Man) 1931 to grant such an order as the company was not a “company" for the purposes of that provision.  The judge further held that the inherent jurisdiction of the court did not form a basis for granting the order sought by the provisional liquidator pursuant to the letter of request.  The judge, however, was satisfied that at common law the Manx court could offer such assistance at the request of the English High Court.  In paragraphs 87 to 105 of his judgment His Honour Deemster Doyle considers cases from various common law jurisdictions as well as academic works to establish the extent to which assistance was permissible and determine what the position in Manx common law is, which he sets out in paragraph 106.  The judge’s analysis is entirely consistent, as one would expect, with the general statement of principle contained in Lord Collin’s judgment quoted above.  It is not necessary for me to set out the analysis here.  It is sufficient to say that a review of the authorities and the commentaries contained in academic work establishes that the common law has developed to the point at which the courts in common law jurisdictions consider that they can assist the courts of the place of incorporation of an insolvent company which operates a similar insolvency regime in ensuring that the affairs of the company are properly investigated.

13.  A more recent example of this is the judgment of Kawaley J (as he then was) in Re Founding Partners Global Fund Ltd [7].  This case involved a consideration of competing claims to assets of a company incorporated in the Cayman Islands situated in Bermuda advanced respectively by the provisional liquidators appointed by the Cayman Court and a receiver appointed by order of the US District Court for Florida.  Bermuda has no legislation dealing specifically with cross‑border insolvency and as a consequence the applications before the Court required it to apply the rules of private international law.  In paragraph 38 of his decision Kawaley J explained the nature of the controversy to which the applications gave rise:

“38. Thecompetitionbetweenthe JOLsandtheReceiverover the Bermuda assets does not raise the same issues as arose in the House of Lords in the HIH case. There the question was whether assets under the control of liquidators appointed in ancillary liquidation proceedings should, instead of distributing the assets in the local ancillary proceedings, remit the assets to the primary Australian liquidation Court instead. Here the true controversy turns, in the first instance at least, on competing claims to control assets belonging to the foreign insolvent company which are located in a jurisdiction where no ancillary liquidation proceedings have been commenced. The dispute centres, in effect, on the more fundamental question of who has the best claim to be recognised as agents or representatives of the Company. Dicey & Morris’ Rule 160 in the present context is in my judgment brought into play: “The authority of a liquidator appointed under the law of the place of incorporation is recognised in England”. This rule is, according to the learned authors, “justified because the law of the place of incorporation determines who is entitled to act on behalf a corporation. If under that law a liquidator is appointed to act then his authority should be recognised here” (Dicey & Morris, 12^th edition, page 1137). Liquidators appointed in other jurisdictions will generally only be recognised as competent to act on behalf of the foreign company in circumstances where such authority will likely be recognised under its domiciliary law.”

14.  The judge concluded that applying settled principles the Bermudan Court had a positive duty to assist the liquidators appointed by the Cayman Court and recognise them as entitled to control the company’s assets located in Bermuda unless there is reason to the contrary[8].

15.  In paragraphs 56 to 64 of his judgment Kawaley J considered the precise parameters of the Bermudan Court’s common law jurisdiction to assist the foreign liquidators appointed by the court of the place of incorporation of the company, although as the Judge acknowledged, it did not strictly arise for determination.  After identifying the principles as they emerge from Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc and other [9], the Court of Appeal’s decision in Rubin v Eurofinance [10] and The Conflict of Laws, Kawaley J concluded in paragraph 60:

“60. To my mind this Court, applying these principles, could validly recognise the JOLs and empower them to assert in Bermuda whatever claims are available to them under Caymanian law, provided that (a) the foreign substantive law to be applied is broadly similar to local insolvency law, and (b) the specific relief which is sought is available under local law. Without in anyway prejudging the application of these broad-brush assertions in relation to any future applications for assistance, it is at the very least arguable that foreign liquidators from jurisdictions with similar insolvency law frameworks can at common law seek to deploy all of the remedial powers conferred on liquidators under Part XIII of our Companies Act without commencing ancillary winding‑up proceedings here. The original recognition Order of June 19, 2009 was on this basis probably formulated in somewhat crude and simplistic terms, justifying (at least in part) the doubts about its validity which were helpfully drawn to the Court's attention to by Mr. Woloniecki.”

16.  As Kawaley J explains in the following paragraph this question is particularly important in the Bermuda context because unlike England and Hong Kong, Bermuda has no statutory provision expressly empowering the Court to wind up a foreign incorporated company.

17.  The significance of Kawaley J’s decision and Impex Services is that they serve to demonstrate the extent to which the courts in different common law jurisdictions, which do not have provisions similar to section 426 of the Insolvency Act 1986 in England, are adopting a consistent and expansive view of the extent to which established common law principles require the court to recognise foreign liquidators and allow the court to provide assistance to them. 

18.  In my view the Hong Kong Companies Court can and should adopt a similar approach to applications for recognition and assistance to that described in paragraph 60 of Kawaley J’s judgment.  The Companies Court may pursuant to a letter of request from a common law jurisdiction with a similar substantive insolvency law make an order of a type which is available to a provisional liquidator or liquidator under Hong Kong’s insolvency regime.  For this reason I granted the orders referred to at the beginning of this decision.

19.  I would end with this observation.  A comprehensive review of Hong Kong’s insolvency legislation is currently underway and a consultation document has been produced.  In my view it is highly desirable that the new legislation includes provisions dealing expressly with cross-border insolvency of the type to be found in section 426 of the Insolvency Act 1986.  A failure to do so would in my view be a regrettable missed opportunity to ensure that Hong Kong’s insolvency legislation is consistent with the principles to which that I have referred in this decision and the needs of international commerce, which is so important to Hong Kong.  It would also invite the argument that the failure to make such an obvious amendment indicated that Hong Kong’s courts should take a more restrictive view of the extent to which they should assist foreign liquidators from other common law jurisdictions.