RE THE JOINT PROVISIONAL LIQUIDATORS OF MOODY TECHNOLOGY HOLDINGS LTD (滿地科技股份有限公司) (IN PROVISIONAL LIQUIDATION FOR RESTRUCTURING PURPOSES)

HCMP 2271/2019

[2020] HKCFI 416

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2271 OF 2019

__________________________

________________________

__________________________

________________________________

REASONS FOR DECISION

________________________________

Application

1.  On 10 December 2019, the Joint and Several Liquidators (the “JPLs”) of Moody Technology Holdings Limited (the “Company”) appointed by the Order of the Supreme Court of Bermuda (the “Bermuda Court”) dated 24 October 2019, by an Ex Parte Originating Summons, applied to this Court for the recognition of their appointment and their powers as set out in the Letter of Request issued by the Chief Justice of the Supreme Court of Bermuda dated 20 November 2019.

Background and Procedural History

2.  The Company is a company incorporated in the Cayman Islands on 29 April 2013.  On 23 May 2019, the Company changed its domicile to Bermuda, and it now continues as an exempted company under the laws of Bermuda.

3.  The Company is listed on the Main Board of Hong Kong Stock Exchange (“HKSE”) with stock code 1400 since 25 April 2014, and it is a China-based investment holding company principally engaged in manufacturing and sales of fabrics and yarns, which also engages in shoes and clothes trading.

4.  On 29 September 2019, a winding up petition was presented against the Company in Hong Kong by Mr Su Dajie, the Petitioner in HCCW No.283 of 2019 (the “Petition”) on the ground that the Company has failed and refused to settle a debt due to the Petitioner in the sum of HK$2,890,247.13.

5.  On 10 October 2019, the Company presented a winding up petition against itself to the Supreme Court of Bermuda (the “Bermuda Petition”).

6.  On 15 October 2019, the Company made an application for the appointment of joint and several provisional liquidators on a “light touch” basis for restructuring purposes.

7.  On 20 November 2019, the Chief Justice of the Bermuda Court made an Order (the “Letter of Request Order”) that a Letter of Request directed to the Hong Kong Court seeking its assistance and recognition of the appointment of the JPLs in aid of the Bermuda Court proceedings be issued (the “Letter of Request”).

8.  Mr Tai for the JPLs drew this Court’s attention to the details of the restructuring proposal and submitted that judicial assistance and recognition should be given pursuant to the Letter of Request.

9.  As a recognition order by this Court would inevitably affect the interest of the Petitioner, the supporting creditor and the Company, I directed that notice be given to parties to the Petition.  At the hearing on 24 January 2020, both the Petitioner and the supporting creditor, Mr Wang Zhiyong, through their solicitors’ letters, informed this Court that they adopt a neutral stance to the recognition application.

10.  It is clear that the JPLs are attempting to restructure the Company and its debts in Bermuda.  The question is whether Hong Kong Courts should give recognition to the same when it entails a moratorium.  Further, under our current law, provisional liquidators cannot be appointed for the sole purpose of propounding a scheme of arrangement.  (See Re Legend International Resorts Ltd [2006] 2 HKLRD 192)

Legal Analysis

11.  In Re Joint Provisional Liquidators of Hsin Chong Group Holdings Ltd [2019] HKCFI 805, Harris J recognised provisional liquidators appointed in Bermuda on a soft-touch basis and granted restructuring powers to the provisional liquidators by way of common law assistance.

12.  Mr Justice Harris recognised and assisted the Bermuda soft-touch provisional liquidators even though the Hong Kong Court could not appoint provisional liquidators solely for the purpose of enabling a corporate rescue to take place.  At §9, the learned Judge said:

“ …It is not in my opinion inconsistent with Hong Kong law for restructuring powers to be granted by way of assistance to a provisional liquidator appointed over a foreign company by the court of its place of incorporation, in which a soft-touch provisional liquidation is permissible, as such powers can be granted, albeit in the more limited circumstances discussed in China Solar, to a Hong Kong provisional liquidator.”

What is soft-touch provisional liquidation?

13.  As the High Court of the British Virgin Islands (“BVI”) explained in Re Constellation Overseas Ltd (5 February 2019) at §3 per Adderley J:

“ The essence of a “soft touch” provisional liquidation is that a company remains under the day to day control of the directors, but is protected against actions by individual creditors.  The purpose is to give the Group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation.  It may be appropriate where there is no alleged wrongdoing of the directors.” (Emphasis added.)

14.  However, because of the Court of Appeal decision in Re Legend International Resorts Ltd (supra), soft-touch provisional liquidation is at present impermissible in Hong Kong.

15.  In this regard, the present Hong Kong position is an uncommon and peculiar one in the common law world.  As the authorities reviewed in Re Constellation Overseas Ltd show, soft-touch provisional liquidation is consistent with the insolvency legislation in England, Bermuda, the Cayman Islands and BVI, which is in pari materia with section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”).  Indeed soft-touch provisional liquidation is commonplace in offshore jurisdictions.

What is ‘recognition’ and ‘assistance’ in the context of cross-border insolvency?

16.  In Re Da Yu Financial Holdings Ltd [2019] HKCFI 2531 at §§ 49-50, I explained the notion of recognition in the context of cross-border insolvency thus:

“ Requiring foreign office-holders to commence parallel proceedings is the very antithesis of cross-border insolvency cooperation. A crucial feature of cross-border insolvency cooperation is the recognition of foreign proceedings. In Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), the learned author at p. 61 said:

‘Recognition of international bankruptcy orders and judgments is particularly needed because the equitable and orderly distribution of a debtor’s property requires assembling all claims against the limited assets in a single proceeding.’

The raison d’être for recognising foreign proceedings is the avoidance of parallel proceedings. As pointed out by Lord Hoffmann in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007]1 AC 508 at §22, “[t]he purpose of recognition is to enable the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum”.”

17.  Recognition carries with it the active assistance of the recognising Court (Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36; [2015] AC 1675 at §19 per Lord Sumption).

18.  In Re CEFC Shanghai International Group Limited [2020] HKCFI 167 at §§10-11, Harris J explained the notion of cross-border assistance as follows:

“ Upon the foreign insolvency proceedings being recognised, the Court will grant assistance to the foreign officeholders by applying Hong Kong insolvency law…

The Companies Court does not, however, grant a foreign liquidator, whose appointment it has recognised all the powers available to a liquidator appointed by it pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 ... The principles that circumscribe the limits of the common law power of assistance are explained by Lord Sumption in Singularis Holdings Ltd v PricewaterhouseCoopers … :

(a) The power of assistance exists for the purpose of enabling foreign courts to surmount the problems posed for a world-wide winding up of the company’s affairs by the territorial limits of each court’s powers. Therefore, the power of assistance is not available to enable foreign officeholders to do something which they could not do even under the law by which they were appointed.

(b) The power of assistance is available only when it is necessary for the performance of the foreign officeholder’s functions.

(c) An order granting assistance must be consistent with the substantive law and public policy of the assisting court.”

19.  However, it is important to note that despite obtaining recognition and assistance from Hong Kong Courts, the foreign officeholders will not be acting as, acting in the capacity of, or having the status of officeholders appointed by Hong Kong Courts in a domestic insolvency.

20.  In this regard, the English Court of Appeal decision in Candey Ltd v Crumpler [2020] EWCA Civ 26 is instructive.  The material facts for present purposes are these.  In February 2016, the BVI court wound up a BVI incorporated company and appointed liquidators.  Shortly afterwards, the BVI liquidators obtained recognition and assistance from the English court under the Cross-Border Insolvency Regulations 2006 (“CBIR”) which implemented the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain.

21.  On behalf of the company, the BVI liquidators engaged in litigation in England with the company’s former solicitors (“Candey”) in respect of Candey’s unpaid fees.  The proceedings commenced by the BVI liquidators against Candey included applications to seek directions under Article 21(1)(g) of Schedule 1 to CBIR and/or section 168(3) of the UK Insolvency Act 1986.  Article 21(1)(g) of Schedule 1 to CBIR permits the English court to grant “any additional relief that may be available to a British insolvency officeholder under the law of Great Britain”.  Section 168(3) of the UK Insolvency Act 1986 is in pari materia with section 200(3) of the Ordinance.

22.  To participate in the litigation, Candey entered into a conditional fee agreement (“CFA”) with its solicitors which required Candey to pay a success fee to its solicitors.

23.  As the BVI liquidators lost some of the proceedings they issued and were ordered to pay some of Candey’s legal costs, the issue was whether the BVI liquidators could be required to pay the success fee which Candey had to pay its solicitors under the CFA.  Section 44 of the UK Legal Aid, Sentencing and Punishment of Offenders Act 2012 prevents a court from making a costs order which requires the payment by one party of a success fee payable by another party under a conditional fee agreement unless the relevant proceedings are “proceedings in England and Wales brought by a person acting in the capacity of a liquidator of a company which is being wound up in England and Wales” (Article 4(c)(i) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013 (SI 2013/77)).

24.  Therefore, the issue before the court turned on whether, in issuing applications for directions under Article 21(1)(g) of Schedule 1 to CBIR and/or section 168(3) of the UK Insolvency Act 1986, the BVI liquidators were acting in the capacity of a liquidator of a company which is being wound up in England and Wales (“English Liquidator”).

25.  The English Court of Appeal concluded that the BVI liquidators were not acting in the capacity of an English liquidator and reasoned as follows (at §§18-23 per Rose LJ):

“ An analysis of the CBIR shows that the recognition order does not have the effect that the foreign representatives are thereafter treated as either acting as or acting in the capacity of an English liquidator. The CBIR provide that the Model Law has the force of law in Great Britain in the form set out in Schedule 1 to the Regulations. Article 1 of Schedule 1 provides that the Model Law applies where assistance is sought in Great Britain by a foreign representative in connection with the foreign proceeding. A foreign representative is defined in article 2(j) as including a person or body authorised in a foreign proceeding to administer the liquidation of the debtor's assets or affairs. This can be contrasted with the definition of a ‘British insolvency office holder’ defined as including a person acting as an insolvency practitioner within the meaning of section 388 of the IA 1986, other than an administrative receiver.

Article 12 of Schedule 1 provides that upon recognition of a foreign proceeding, the foreign representative is entitled to participate in a proceeding regarding the debtor under British insolvency law defined, in relation to England and Wales, as law made by or under the IA 1986, subject to certain exceptions. Chapter III of Schedule 1 deals with the recognition of the foreign proceeding and provides that a foreign proceeding shall be recognised if it meets the criteria set out in Article 17. Article 20 then imposes a stay on the commencement or continuation of proceedings against the debtor upon recognition of the foreign proceeding. The stay is described as being ‘the same in scope and effect’ as if the debtor had been made the subject of a winding up order under the IA 1986: see Article 20(2)(a). Article 20(5) provides that the recognition of the foreign proceeding does not affect the right to request or otherwise initiate the commencement of a proceeding under British insolvency law or the right to file claims in such a proceeding.

Article 21 deals with the power of the court to grant any appropriate relief at the request of the recognised foreign representative where necessary to protect the assets of the debtor or the interests of creditors. That relief includes providing for the examination of witnesses, the taking of evidence or the delivery of information and entrusting the administration or realisation of the debtor's assets located in Great Britain to the foreign representative. The appropriate relief that can be granted by the court also includes, at Article 21(1)(g) ‘any additional relief that may be available to a British insolvency officeholder under the law of Great Britain including any relief provided under paragraph 43 of Schedule B1 to the Insolvency Act 1986’. Article 23 then provides expressly that upon recognition of a foreign proceeding, the foreign representative has standing to make an application to the court for an order under or in connection with a list of specified provisions of the IA 1986.

It was common ground between the parties before us that the relief available to a recognised foreign representative who applies to the court under Article 21 of Schedule 1 is the relief that is available to a British insolvency officer; the court cannot award any other relief that might be available to the foreign representative according to the domestic law of the court where the foreign proceedings are taking place...

I agree with the judge’s conclusion at para. 39(4) of his judgment that the effect of recognition is to confer on the foreign representatives the right to request or initiate proceedings under the IA 1986. When foreign representatives make such an application, they are exercising the right conferred on them by Article 21(1)(g) of Schedule 1 and not the right conferred on them by section 168 IA 1986. The fact that the Liquidators’ Application referred to section 168 as well as to Article 21 does not affect the legal analysis of the powers that are available to them. Indeed, if the effect of the recognition order was generally to deem a foreign representative to have the same abilities, capacities and powers of a British insolvency practitioner, Article 21 would be redundant because the foreign representative would automatically have the powers that the Schedule expressly confers on him.

There is nothing in the structure or wording of Schedule 1 that supports the contention that a recognised foreign representative is to be treated as a British insolvency officeholder or that he acts in the capacity of a British insolvency officeholder.” (emphasis added).

26.  While Candey Ltd v Crumpler concerns recognition of foreign officeholders under CBIR, the reasoning above applies mutatis mutandis to the effect of common law recognition of foreign officeholders.  In particular:

(a)     the relief that may be granted under CBIR is very similar to the common law cross-border assistance often granted by Hong Kong Courts;

(b)     just as under CBIR, foreign officeholders granted common law recognition in Hong Kong do not have all the powers available to a Hong Kong-appointed officeholder;

(c)     just as foreign officeholders recognised under CBIR derive their powers from CBIR (rather than the UK Insolvency Act 1986), foreign officeholders granted common law recognition in Hong Kong derive their powers from the common law recognition order (rather than the Ordinance).

27.  Therefore, foreign provisional liquidators recognised in Hong Kong will not be acting as, acting in the capacity of, or having the status of provisional liquidators appointed by Hong Kong Courts.  It follows that the fact that Hong Kong Courts may not appoint domestic soft-touch provisional liquidators cannot constitute a bar to recognising and assisting foreign soft-touch provisional liquidators.

28.  To say that recognising foreign soft-touch provisional liquidators would be to bypass and circumvent the Hong Kong domestic provisional liquidation regime would be to misunderstand the true notion of recognition.

Universalism mandates the recognition of foreign soft-touch provisional liquidators

29.  It is well established that the rationale underlying the common law power of assistance is modified universalism (eg Re Joint Liquidators of Supreme Tycoon Ltd [2018] HKCFI 277; [2018] 1 HKLRD 1120 at §12 per Harris J).

30.  Applying the universalism rationale, the authorities show that, in order to be eligible for recognition, a foreign insolvency proceeding needs to meet the following criteria (eg Re CEFC Shanghai International Group Limited [2020] HKCFI 167 at §8 per Harris J):

(a)     the foreign insolvency proceeding is a collective insolvency proceeding; and

(b)     the foreign insolvency proceeding is opened in the company’s country of incorporation.

31.  The eligibility criteria do not require the foreign insolvency proceeding to be capable of being opened in Hong Kong.

32.  To add an eligibility criterion that there must be complete identity between Hong Kong insolvency law and foreign insolvency law would be to undermine the universalism rationale.

33.  Indeed, one commentator has expressed the logical conclusion of universalism thus:

“ [R]ecognition may be given even though there does not exist under local insolvency law a procedure equivalent to the foreign insolvency proceeding” (Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), p. 142).

34.  Copious authorities bear out the above proposition.

35.  In Tacon v Nautilus Trust Company Limited [2007] JRC 107, the Royal Court of Jersey recognised a provisional liquidator appointed by the BVI court even though Jersey law did not have a provisional liquidation procedure.  The Royal Court of Jersey made these pertinent remarks (§§26 and 37):

“ The person entitled under BVI law to act on behalf of Montrow is Mr Tacon as provisional liquidator. The Court should therefore recognise him even though Jersey does not have the concept of a provisional liquidator. The same point would arise in respect of a duly appointed administrator of an English company. Jersey does not have the concept of placing a company in administration but, given that under English law, an administrator once appointed is the person empowered to act for the company, this Court would, in conformity with the remarks of Lord Hoffmann [in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26; [2007] 1 AC 508], recognise the administrator of an English company as being the person entitled to act on behalf of that company…

The BVI Court has maintained the appointment of Mr Tacon and has not withdrawn its Letter of Request to this Court.  Montrow is a BVI company.  Decisions relating to matters such as whether there should be a liquidation, whether a provisional liquidator should be appointed, the powers which should be conferred on such provisional liquidator and the nature of his role are therefore matters of BVI law for determination by the BVI Court.  Whilst of course this Court retains a discretion as to whether it should assist an overseas court in such matters and, if so, the nature and degree of such assistance, the fact remains that this Court is playing a secondary role and it is merely assisting the BVI court insofar as concerns matters within Jersey.  We should therefore pay considerable regard to any relevant decisions of the BVI Court.”

36.  In the United Kingdom, there is no debtor-in-possession regime like the United States Chapter 11 regime.  But in Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112, the English court was prepared to assist the operation of Chapter 11 proceedings.  Hoffmann J (at pp. 117-118) said:

“ This court is not of course bound by the stay under United States law but will do its utmost to co-operate with the United States Bankruptcy Court and avoid any action which might disturb the orderly administration of Inc in Texas under ch 11. This court has jurisdiction to make interlocutory orders for the preservation of Inc’s property in this country by way of assistance to the United States Bankruptcy Court …”

37.  These authorities amply confirm that cross-border recognition premised on universalism does not require foreign insolvency law and local insolvency law to be identical twins.  In this case, failing to recognise foreign soft-touch provisional liquidation just because Hong Kong domestic law contains no such regime would be to fail to appreciate, adhere to, and apply the universalism rationale.

Recognising foreign soft-touch provisional liquidation is consistent with Hong Kong private international law and cross-border insolvency policy

38.  While soft-touch provisional liquidation is per se impermissible in Hong Kong, “[i]t is well established that where the circumstances warrant the appointment of provisional liquidators, the provisional liquidators may be granted powers to explore and facilitate a restructuring of the company” (Re China Solar Energy Holdings Ltd (No 2) [2018] HKCFI 555; [2018] 2 HKLRD 338 at §26 per Harris J).

39.  Therefore, soft-touch provisional liquidation and Hong Kong provisional liquidation differ only on the scope of the provisional liquidators’ powers; they differ only in degree, not in kind.  Both are species of collective insolvency proceedings.  This is borne out by the US Bankruptcy Court’s remarks on the function of typical soft-touch provisional liquidators as follows:

“ The JPLs are conducting the BVI Proceedings as so-called “soft-touch” provisional liquidations in which the JPLs will independently oversee the restructuring of the BVI Debtors while leaving the form and terms of that restructuring to be proposed by the BVI Debtors …

The JPLs are officers of the BVI Court whose function is to represent the collective interests of the creditors of each debtor for which they are appointed, in particular by overseeing and protecting from undue dissipation the assets of that debtor and protecting the interests of creditors in the course of restructuring negotiations… In this way, they are a voice for the collective creditors of each BVI Debtor...” (In re Serviços de Petróleo Constellation S.A., 600 B.R. 237, 253-254 (Bankr. S.D.N.Y. 2019) per Judge Martin Glenn).

40.  In these circumstances, recognising and assisting foreign soft-touch provisional liquidation can hardly be described as contrary to Hong Kong insolvency policy.

41.  What is more, refusing to recognise foreign soft-touch provisional liquidation on the basis that Hong Kong domestic law does not have soft-touch provisional liquidation will create discriminatory consequences which have been rejected by authorities.  For example, it is well established that if a foreign officeholder is recognised one would normally expect assistance, which may extend to granting orders that give the foreign officeholder substantially similar powers to, for example, investigate the affairs of the company as would be available to a local liquidator if the foreign jurisdiction has similar provisions in its insolvency regime (Re China Fishery Group Ltd [2019] HKCFI 174; [2019] 1 HKLRD 875 at §26 per Harris J).

42.  Provisional liquidators often have the same need to investigate the debtor’s affairs, whether or not they were appointed on a soft-touch basis.  If the Hong Kong Court refuses to assist foreign provisional liquidators simply on the basis that they were appointed on a soft-touch basis, it would constitute an unwarranted discrimination.

43.  This is demonstrated in Re Joint Liquidators of Supreme Tycoon Ltd [2018] HKCFI 277; [2018] 1 HKLRD 1120 which held that a BVI voluntary liquidation is eligible for recognition in Hong Kong.  In the course of his Lordship’s reasoning, Harris J (at §16) approved the following proposition in Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), p. 230:

“ It is suggested that the discrimination against non-court appointed officeholders is unhelpful. Insolvency representatives may be officers of the court without court appointment and they need the same information for the performance of their functions as their court-appointed counterparts.”

44.  In other words, Supreme Tycoon stands for the proposition that, in determining whether recognition and assistance should be granted to foreign officeholders, Hong Kong Courts would not countenance any discrimination based on the mode of their appointment abroad.  Just as it would be wrong to discriminate against foreign officeholders appointed out-of-court, so it would be wrong to discriminate against foreign provisional liquidators appointed on a soft-touch basis.

45.  A potential criticism premised on legal consistency is this: Hong Kong domestic insolvency law does not permit the appointment of provisional liquidators for the sole purpose of granting them restructuring powers, but Hong Kong cross-border insolvency law permits the recognition of foreign provisional liquidators for the sole purpose of granting them restructuring powers.  A vivid example is Re Z-Obee Holdings Ltd [2018] 1 HKLRD 165.  Thus, so the criticism goes, Hong Kong cross-border insolvency law simply circumvents and bypasses the restrictions on provisional liquidator’s powers under Hong Kong domestic insolvency law.

46.  In my view, on proper analysis, there is nothing in this criticism.  In recognising foreign provisional liquidators appointed in the company’s country of incorporation and granting them restructuring powers, Hong Kong Court is merely recognising the provisional liquidators’ status as agents of the company, and giving effect to their management and governance powers under the law of the company’s incorporation (Re Z-Obee Holdings Ltd [2018] 1 HKLRD 165 at §13 per Harris J).  This is orthodox and well established.  As pointed out by Lord Sumption in Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36; [2015] AC 1675 at §12:

“even 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.”

47.  Therefore, with or without getting a technical recognition order in Hong Kong, foreign provisional liquidators – as agents and managers of the foreign company – may promulfate a restructuring scheme of arrangement in Hong Kong.  See, for example, Re LDK Solar Co Ltd [2015] 1 HKLRD 458 and Re China Lumena New Materials Corp [2020] HKCFI 338.  Recognising and assisting foreign soft-touch provisional liquidators is thus to a large extent merely applying orthodox principles of private international law.  Hence, there is no conceptual or legal inconsistency at all.

48.  It follows that recognising and assisting foreign soft-touch provisional liquidators are fully consistent with Hong Kong private international law and cross-border insolvency policy.  Failing to do so would create a discriminatory environment which would be unjust, unprincipled, and unsupported by authorities.

49.  Whilst our insolvency, in particular, corporate rescue regime is in need of reform for many years, there is no legitimate reason, policy or otherwise, why Hong Kong Courts should not recognise foreign provisional liquidators appointed on a soft-touch basis.

50.  Hence, I am of the view that Harris J’s statements of the law in Re Joint Provisional Liquidators of Hsin Chong Group Holdings Ltd (supra) are correct and sound. 

Disposition

51.  For all the reasons stated above, a recognition order, with limited powers, as revised during the hearing, was granted.

52.  Finally, it remains for me to thank Mr Tai for his very helpful assistance to this Court.