RE THE JOINT PROVISIONAL LIQUIDATORS OF SEAHAWK CHINA DYNAMIC FUND (in provisional liquidation in the Cayman Islands)

HCMP 503/2022

[2022] HKCFI 1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 503 OF 2022

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R E A S O N S  F O R  D E C I S I O N

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Introduction

1.  This is an application for recognition and assistance. The Company, a Cayman-incorporated entity, is solvent and in provisional liquidation in the Cayman Islands. The Joint Provisional Liquidators (the “JPLs”) appointed by the Grand Court of the Cayman Islands (the “Cayman Court”) on 10 February 2022 wish to exercise the Company’s management’s powers, including controlling the Company’s assets in Hong Kong. The JPLs believe that none of the Company’s shareholders and creditors oppose this application, which is supported by a letter of request issued by the Cayman Court dated 21 February 2022 (“Letter of Request”). No creditor or shareholders appeared at the hearing before me.

2.  The Company’s background is in brief as follows:

(1)  The Company was incorporated in the Cayman Islands on 21 August 2017 and is a registered mutual fund.

(2)  The Company carries out its investment activity by using financial institutions whose service team are mainly (if not all) based in Hong Kong. The investment activity is managed by the Company’s investment manager—Gold Dragon Worldwide Asset Management Limited (“Manager”). The Manager is a Hong Kong-incorporated company holding the relevant licences granted under the Securities and Futures Ordinance (Cap. 571).

(3)  The Company is solvent, with net assets amounting to approximately US$346 million as of 8 April 2022.

(4)  The Company’s assets include approximately US$35 million in cash held in accounts with various financial institutions situated and serviced in Hong Kong.

3.  The background to the Company’s Cayman Islands winding-up proceedings is explained in the Cayman Islands decision in Re Seahawk China Dynamic Fund (the Cayman Court, 16 February 2022) (“Cayman Judgment”). In brief:

(1)  On 7 February 2022, a contributory of the Company (“Petitioner”) presented a winding-up petition against the Company in the Cayman Islands (“Petition”) on just and equitable grounds.

(2)  On 7 February 2022, the Petitioner also applied for the appointment of the JPLs.

(3)  On 10 February 2022, the Cayman Court appointed the JPLs on the following grounds:

“[T]he appointment of the JPLs is necessary to prevent the dissipation and or misuse of the Company’s assets and to prevent mismanagement and or misconduct on the part of Mr Liang, one of the Company’s directors…

There are serious concerns over the assets of the Company. Moreover, it is important that all the Company’s books, documents and records are secured…

[T]wo of the risks set out (namely dissipation and, or, misuse of the Company’s assets and mismanagement and/or misconduct on the part of Mr Liang) are present in this case.

There is strong evidence presently before the Court which reveals that there are serious risks in respect of the dissipation and/or misuse of the Company’s assets and mismanagement and/or misconduct on the part of Mr Liang…

[O]n the facts and circumstances of the case presently before the Court, an urgent independent investigation is plainly required and must start forthwith. The appointment of JPLs should also assist in dealing with the confusion/near paralysis that appears to exist across a number of the Company’s brokerage accounts as to whether instructions should be taken from the Manager or Mr Liang” (Cayman Judgment at [44], [45], [47], [48] and [50]).

4.  Both the Petitioner and Mr Liang (one of the Company’s directors who the Petitioner alleges to have committed various misconduct) consented to the Cayman Court issuing the Letter of Request. The directors have provided their consent to the JPLs exercising their powers over the assets of the Company. The Manager has also confirmed that should the JPLs need assistance from the Manager as the Company’s investment manager to take possession of the assets of the Company, the Manager is willing to accommodate the JPLs’ requests.

5.  There is litigation in Hong Kong which is relevant to the Petition and the appointment of the JPLs:

(1)  On 28 December 2021, the Manager (the board of which comprises, amongst others, the Petitioner and Mr Liang) commenced legal proceedings in Hong Kong against Mr Liang and the Company (HCA 1935/2021).

(2)  On 30 December 2021, the Manager obtained an ex parte injunction against Mr Liang and the Company.

6.  Since their appointment, the JPLs have been trying to take possession of the Company’s assets in Hong Kong. However, the JPLs have faced several obstacles:

(1)  Certain financial institutions holding the Company’s cash have taken the position that they would accept instructions from the JPLs only after the JPLs obtain a Hong Kong recognition order.

(2)  Several financial institutions have terminated the Company’s accounts. The JPLs require the recognition order to gain access to some of these accounts.

The Issues

7.  The application gives rise to two issues. First, whether the court should provide recognition and assistance to the liquidators of a solvent company? The JPLs accept the process that they are conducting is not a collective insolvency process. Secondly, whether in the light of my decision in the Provisional Liquidators of Global Brands Group Holding Limited v Computershare Hong Kong Trustees Limited & The Hong Kong and Shanghai Banking Corporation Limited[1], namely, that subject to certain limited exceptions the Hong Kong court should only recognise a collective insolvency process taking place in a company’s centre of main interests (“COMI”), the application should be granted as the JPLs accept that the COMI is not in the Cayman Islands.

Recognition of a foreign solvent liquidation

8.  There are dicta in English and Hong Kong authorities suggesting that the Court would not grant insolvency assistance to foreign officeholders if the company is solvent. In Singularis Holdings Ltd v PricewaterhouseCoopers[2], Lord Neuberger said:

“Companies may be in court-imposed liquidation in many jurisdictions when it is ‘just and equitable’ to wind them up, even if they are solvent: I do not see why liquidators in such a case should be able to invoke the Power when other people running solvent companies could not do so.”

In Re Joint Liquidators of Supreme Tycoon Ltd[3], I explain why this in my view is correct in [17].

“[I]f the foreign liquidation is a solvent liquidation (for instance, a members’ voluntary liquidation), it would not fall within the principle of modified universalism. A foreign solvent liquidation is not a collective insolvency proceeding, and is more akin to the ‘private arrangement’ the Privy Council [in Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36; [2015] AC 1675] was referring to.”

9.  As I understand it most other jurisdictions adopt the position that only foreign insolvent liquidation processes will be recognised. This is the case, for example, in the Mainland. The reason for this is, as I explain in Global Brands, that underpinning the common law principle of recognition and assistance is the principle of modified universalism[4]. Most jurisdictions take the view that modified universalism is, as I explain in the passage from Supreme Tycoon quoted above, concerned with insolvency. As I note in [14] of Supreme Tycoon there are, however, exceptions, namely, the United States and Singapore.

10.  In In re Betcorp Ltd[5] Judge Markell decided that recognition and assistance of a foreign solvent liquidation process was available under Chapter 15 of the United States Bankruptcy Code. This approach was followed by Abdullah JC in Re Gulf Pacific Shipping Ltd[6]in which he recognised a Hong Kong creditors voluntary liquidation.

11.  The decision in Betcorp was considered in detail in the judgment of Chief ICC Judge Briggs in Re Sturgeon Central Asia Balanced Fund Ltd (No 2)[7]. The case concerned an application by a provisional liquidator appointed in Bermuda following a decision by the Bermuda Court of Appeal that the company should be wound up on the just and equitable ground. The judge summarised the question for determination by him and his decision in [3]–[8].

“The key question this application raises is whether the winding up in Bermuda should continue to be recognised in this jurisdiction. This raises the issue as to whether those proceedings are a ‘foreign proceeding’ for the purposes of the Model Law and the CBIR. To assist the reader, I have summarised my conclusions in this respect immediately below. I have concluded that the proceedings in question should not be so recognised.

The Model Law, as enacted in Great Britain, is set out in Sch 1 to the CBIR; unless otherwise stated, references in this judgment to articles of the Model Law are to the text as set out in Sch 1. Article 2(i) defines a ‘foreign proceeding’. It means a ‘collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.’ The purpose of the Model Law is to promote modern and fair legislation for cases where an insolvent debtor has assets in more than one State.

It would be contrary to the stated purpose and object of the Model Law to interpret ‘foreign proceedings’ to include solvent debtors and more particularly include actions that are subject to a law relating to insolvency which have the purpose of producing a return to members not creditors.

Read in context and employing a purposive approach, the words ‘for the purpose’ in art 2(i) should be read as meaning the purpose of insolvency (liquidation) or severe financial distress (reorganisation).

For recognition to be ordered in England and Wales, the proceedings in respect of which recognition is sought, must relate to the resolution of the debtor’s insolvency or the debtor’s financial distress.

As the foreign proceedings in this case are for the purpose of winding up a solvent company, which is not in financial distress, the recognition order should be terminated. I shall now set out my reasoning in this respect in further detail, starting with a consideration of the background to the winding up.”

12.  The question concerned the implementation and application of the UNCITRAL Model Law for Cross-Border Insolvency implemented in England and Wales (and Scotland) by the Cross-Border Insolvency Regulations 2006. Judge Briggs considers comprehensively the Model Law and how it is understood by various jurisdictions and scholars. This takes him to the decision in Betcorp, which he explains in [90]–[91] along with the controversy to which it gave rise:

“In Re Betcorp Ltd (2009) 400 BR 266 an Australian company had entered voluntary liquidation in Australia. The Australian liquidator applied for the proceedings to be recognised as a foreign main proceeding under Ch 15 of the US Bankruptcy Code. Recognition was contested by an American company, 1^st Technology LLC. Judge Bruce A Markell set out the argument against recognition:

‘[1^st Technology LLC] asserts, correctly, that (i) there is no lawsuit or legal proceeding pending in an Australian court (or anywhere else except the United States) involving any of Betcorp’s creditors; (ii) Betcorp is not a bankrupt or in administration under Australian bankruptcy laws, or any other bankruptcy laws; and (iii) there is no lawsuit or other legal process by which a judge or other judicial officer directly supervises the liquidators’ actions in the winding up. Based upon these facts, 1^st Technology contends that Betcorp’s actions are nothing more than a unilateral cessation of business followed by a private and unregulated settling of accounts.’

The Judge considered the 1997 Guide having regard to the definition of ‘foreign proceeding’ and breaking down the elements required for recognition: (i) a proceeding; (ii) that is either judicial or administrative; (iii) that is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to insolvency or the adjustment of debts; (vi) in which the debtor’s assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation. The Judge found the elements made out, that the proceedings were collective by nature and commenced pursuant to a law relating to insolvency or the adjustment of debts.”

13.  It is not necessary for me to repeat the detailed and highly instructive analsyis by Judge Briggs, which led him to his conclusion. Hong Kong has not adopted the Model Law and, therefore, the analysis based on it is relevant to the extent that it demonstrates current international thinking on recognition and assistance rather than being directly relevant. I will, however, quote the Judge’s conclusions in [117] and [123]:

“It would be contrary to the stated purpose and object of the Model Law to interpret ‘foreign proceeding’ to include solvent debtors and more particularly include actions that are subject to a law relating to insolvency but have the purpose of producing a return to members not creditors…

The [Cross-Border Insolvency Regulations 2006] only relates to debtors that are insolvent or in severe financial distress. The Company was undoubtedly solvent having been wound up on just and equitable grounds.”

Consideration of the issue by the Hong Kong court does not require an assessment of the Model Law or any statutory provisions. Recognition and assistance in Hong Kong are matters purely of common law. In my view it is clear that the common law principles of recognition and assistance that apply to foreign collective insolvencies processes and which are based on the common law principle of modified universalism[8] have no application to solvent liquidations. The principles that are engaged are those of conflict of laws applicable to corporations, which are independent of those of cross-border insolvency. They are summarised in various authorities. It is sufficient to quote passages from them. In Re Grand Peace Group Holdings Ltd[9], I held what I understand to be uncontroversial, namely, that:

“[A]s a matter of Hong Kong law 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.”

Similarly, in Re China Bozza Development Holdings Ltd[10], I explain that:

“[A]s a matter of private international law, a liquidator, including a provisional liquidator, should be recognised as having the powers to act on behalf of the company over whom they are appointed that have been bestowed on them by the courts of the place of incorporation.”

Lord Sumption explains the principle in broader terms in Singularis[11]:

“[E]ven without a winding up, the court could, on ordinary principles of private international law, have recognised as a matter of comity the vesting of the company’s assets in an agent or office-holder appointed or recognised under the law of its incorporation. For many years before a corresponding rule was recognised for the winding up of foreign companies, the principle had been applied in the absence of any statutory powers to the English moveable assets of a foreign bankrupt which had been transferred to an office-holder in an insolvency proceeding under the law of his domicile.”

14.  It seems to me that the question that the application requires to be answered is not whether a foreign liquidator appointed by the court of the place of a company’s incorporation should be recognised, but the more general question of what relief, if any, a foreign liquidator of a solvent company should seek and be able to obtain if a party within Hong Kong, for example a bank, refuses to accept that the foreign liquidator is the agent of the company, entitled to represent it and require its rights to, for example, access a bank account, to be honoured. I addressed this issue in the context of foreign insolvencies in A Co v B[12] and Bay Capital Asia Fund LP v DBS Bank (Hong Kong) Ltd[13], and in my view the position is not materially different in the case of a solvent liquidation. The issue is whether or not the foreign liquidator is entitled to represent a company in the same or a similar way to that its board of directors is entitled to do. This is a matter of the law of the place of incorporation. If a foreign court of a company’s place of incorporation has made an order appointing a liquidator, the liquidator will be able to act as the agent of the company with the powers, which the liquidator has as a consequence of his appointment. The relevant question is what relief should a foreign liquidator seek if a person in Hong Kong refuses to act on a request made by the liquidator on behalf of a company, which the liquidator believes he has the power to make? The obvious answer is for the liquidator to seek an order that the person does what has been requested. The approach, which the JPLs have taken is to seek a more general order that largely replicates the type of order providing for common law recognition and assistance that the court grants to foreign liquidators conducting a foreign collective insolvency process. This seems to me implicitly to mischaracterise the application. What in substance the JPLs are asking for is a declaration that the JPLs are able to act as the agent of the Company in Hong Kong with the consequence that they are entitled to make certain requests and take certain action on behalf of the Company.

15.  It should be clear to banks and other sophisticated organisations that the JPLs are able to exercise in Hong Kong the more conventional powers of a company’s agent such as taking control of its books and records particularly as they are expressly provided for in the order appointing the JPLs[14]. Banks, I assume, do not feel constrained from acting in accordance with a Cayman company’s board resolution without the Hong Kong court’s imprimatur and if banks feel comfortable opening and operating bank accounts for companies incorporated in offshore jurisdictions they should not require foreign liquidators to come to court to obtain orders confirming that the liquidators have common and anodyne powers. I understand that banks and other entities may require confirmation that they may act in accordance with a foreign liquidators’ instructions when it comes to transfers of assets, however, if banks and other sophisticated entities insist on an order when it is not necessary then, as I explain in [4] of Bay Capital[15], if they are made a respondent they should anticipate being made to bear the costs of the application.

Is COMI relevant?

16.  The second issue that I mention in [7] is whether the fact that the Company’s COMI is not in the Cayman Islands is relevant and, if so, how. It seems to me that this is irrelevant if a liquidator of a solvent company is seeking an order confirming that he has particular powers by virtue of his appointment in the company’s place of incorporation. As I explain in [8]–[9] insolvency principles are not engaged by the application and, therefore, neither are the considerations discussed in Global Brands[16], which led me to conclude that the Hong Kong court should, subject to limited exceptions, which themselves arise by virtue of principles of conflicts of law, only recognise a foreign insolvency process commenced in a company’s COMI.

Disposition

17.  I will make an order in the form of the draft appended to this decision. The order confirms that the JPLs may exercise the powers specified in the order, which they have by virtue of the order appointing them in the Cayman Islands. I have made no order as to costs. Given the basis for making the order it does not seem to me appropriate to order, as has been sought, that the costs be paid out of the assets of the Company. This is a matter for the Cayman Court.

Appendix

Order

UPON THE APPLICATION of the Applicants by way of Ex-Parte Originating Summons filed herein on 3 May 2022 and the Summons filed herein filed on 4 May 2022.

AND UPON READING the Affidavit of So Kit Yee Anita filed herein on 3 May 2022 together with the exhibits referred thereto and the Letter of Request issued by the Grand Court of the Cayman Islands (the “Cayman Court”) dated 21 February 2022.

AND UPON HEARING counsel for the Applicants.

IT IS ORDERED THAT:-

1.  Mr. Tsui Chi Chiu and Ms. So Kit Yee Anita of Ernst & Young Transactions Limited, 27/F, One Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong and Ms. Eleanor Grace Fisher of EY Cayman Ltd., 62 Forum Lane, Camana Bay, PO Box 510, George Town, KY1-1106, Grand Cayman, Cayman Islands, appointed as the Joint Provisional Liquidators of (the “Company” and “JPLs” respectively), pursuant to the order of the Cayman Court dated 10 February 2022 (as amended on 23 March 2022) have the power and authority to act as the agent and on behalf of and in the name of the Company in the Hong Kong Special Administrative Region and to do the following:

(a)  to locate, protect, secure and take into their possession and control all assets and property within the jurisdiction of this Court to which the Company is entitled;

(b)  to locate, protect, secure and take into their possession and control the books, papers, and records of the Company including the accountancy and statutory records within the jurisdiction of this Court. The books, records and documents of the Company include:

(i)  Emails exchanged and other correspondence between the Company and its auditors, and between the Company and other third parties; and

(ii)  Documents and information provided by the Company to its auditors and provided by the auditors to the Company in relation to the audit work;

(c)  to take all necessary steps to prevent any disposal of the Company’s assets and, in particular, to secure any credit balances in any bank, brokerage and/or securities accounts in the name or under the control of the Company within this jurisdiction;

(d)  to operate and open or close any bank, brokerage and/or securities accounts in the name and on behalf of the Company for the purpose of collecting the assets and paying the costs and expenses of the JPLs;

(e)  to retain and employ barristers, solicitors or attorneys, accountants and/or such other agents or professional persons as the JPLs consider appropriate for the purpose of advising or assisting in the execution of their powers and duties under this Order;

(f)  to make applications to this Court; and

(g)  to participate in the name of the Company in the legal proceedings in the High Court with case number HCA 1935/2021 if the JPLs deem necessary;

2.  The JPLs do have liberty to apply; and

3.  There be no order as to costs.