RE THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF FDG ELECTRIC VEHICLES LIMITED (PROVISIONAL LIQUIDATORS APPOINTED)

HCMP 1308/2020

[2020] HKCFI 2931

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1308 OF 2020

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BY

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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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The application

1.  FDG Electric Vehicles Limited (“Company”) has been put into provisional liquidation in Bermuda where it is incorporated.  The Joint and Several Provisional Liquidators (“PLs”) applied in writing for an order of recognition and assistance.  As there were a number of matters arising from the form of the order that was sought about which I had questions I directed that a hearing take place.  At the hearing an opposing subsidiary (FDG Kinetic Limited) appeared through Mr Look Chan Ho to address some of the matters about which I had questions.  There is no suggestion that the PLs should not be recognised and some assistance granted.  The two issues, which require consideration are as follows:

(a) Should the order contain a paragraph, which on its face gives the PLs the power to take control of all directly and indirectly owned subsidiaries of the Company?

(b) What, if any, stay should be ordered in respect of existing or prospective proceedings against the Company in Hong Kong?

2.  As it transpired there was no issue in respect of the first matter as Mr Tom Ng, who appeared for the PLs, accepted Mr Ho’s submissions that the power to take control of subsidiaries should be limited to those which are incorporated in Hong Kong and held either directly or, if indirectly, through Hong Kong incorporated intermediate subsidiaries.  The reason for this is as follows.

What assets can a foreign liquidator be empowered to take control of?

3.  When the court recognises foreign corporate insolvency proceedings, the court may permit the foreign liquidator to take control of the Company’s assets in Hong Kong.  This will extend, if relevant, to shareholdings in Hong Kong incorporated companies.  It appeared initially that the PLs were seeking the power to take control of subsidiaries incorporated in other jurisdictions such as Bermuda.  Mr Ho characterised this as being akin to asking the court to empower a foreign liquidator take control of the Company’s bank account in another jurisdiction, which would be impermissible judicial overreach.  I agree.

4.  The assumption that an order could be obtained giving a power to take control of subsidiaries without a jurisdictional qualification came, so it would appear, from my decision in Re Shenzhen Everich Supply Chain Co Ltd [1]. It is correct as can be seen from [2(vi)] that the express power did not contain any jurisdictional qualification.  However, the power, which was sought was directed to Hong Kong subsidiaries (see [7] of the decision) and [2] of the order commences with “The Liquidator do have and may exercise in the Hong Kong Special Administrative Region the following powers”.

5.  This application as originally formulated seemed to envisage a power to take control of foreign incorporated subsidiaries and in so doing overlooked the significance of two conflict of laws rules.  First, property and contractual claims to shares in a company should be determined by the lex situs, and shares have their situs in the place of incorporation of the company: Chen Lingxia v 中國金谷國際信託有限責任公司[2].  Secondly, the question of whether foreign liquidators are agents of the debtor company is governed by the law of a company’s incorporation (lex incorporationis): Re Moody Technology Holdings Limited [3].

6.  As originally formulated the application overlooked both that the scope of the PLs powers as representatives of the Company are governed by the law of Bermuda not Hong Kong law, and that the relevant Bermuda subsidiary is owned through the British Virgin Islands (“BVI”) subsidiaries.  To take control of the Bermuda subsidiary thus involves taking control of the BVI subsidiaries.  Assuming that the powers granted to the PLs extends to obtaining control of the BVI subsidiaries, whether the PLs are able to obtain control of the BVI subsidiaries is a matter of BVI law not Hong Kong law.  One can test this by considering what the BVI registrar of companies is likely to want to see if the PLs attempt to change ownership of shares in the BVI companies and register the changes [4]. It seems to me obvious that the BVI registrar of companies would be interested in the powers conferred by the order appointing the PLs in Bermuda.  He would have no interest in the powers purportedly conferred on the PLs in Hong Kong.

Staying proceedings in Hong Kong

7.  The recognition orders that have until recently been granted have contained a paragraph in the following terms:  “For so long as the Company remains in liquidation in [relevant jurisdiction], no action or proceedings shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Honourable Court, except with the leave of this Honourable Court and subject to such terms as this Honourable Court may impose”.  This was intended to be in the nature of a case management provision, which would ensure that action would not take place in Hong Kong without the relevant parties being aware of the impact of the foreign insolvency proceedings and, if appropriate, a stay granted.  However, I recognise that there are a number of questions that the order so worded gives rise to.  First, that if (which was not the case with the initial orders that were granted) there are already proceedings on foot in Hong Kong, one would expect an application for a stay to be made in those proceedings.  Secondly, whether or not it is appropriate to grant a stay in respect of unidentified prospective proceedings about which, necessarily, nothing is known.  Both Mr Ng and Mr Ho agreed that the paragraph was more appropriately drafted in terms, which did not purport to impose a stay, but required appropriate applications in High Court proceedings to be issued and returnable before the judge granting the recognition order. The order that I will grant in the present case, and be amenable to granting in the future, is as follows:

“If the Provisional Liquidators wish to apply for a stay or other directions in respect of proceedings in the High Court of any sort as a consequence of the recognition of their appointment by this order such application shall be listed before the Honourable Mr. Justice Harris or such other judge as he shall direct. The Provisional Liquidators shall write to the clerk to the Honourable Mr. Justice Harris seeking case management directions for the determination of any application that they wish to make pursuant to this order”.

I note in passing that in a recent recognition and assistance decision in the Cayman Islands, Mr Justice Segal granted a similar order [5].

8.  This order does not assist if the proceedings are in the District Court.  It may also commonly be the case that other parties and their legal advisers are not familiar with the law in this area.  It will, therefore, be useful if I say something about the court’s power to stay proceedings in Hong Kong in aid of foreign liquidations.

9.  It is well established that the court has a power at common law to assist a foreign liquidation by ordering a stay of proceedings within its jurisdiction.  This is explained by Lord Collins in [54] of his judgment in Singularis Holdings Ltd v PricewaterhouseCoopers [6]:

“Most of the cases fall into one of two categories. The first group consists of cases where the common law or procedural powers of the court have been used to stay proceedings or the enforcement of judgments. Several of these cases were mentioned in Rubin v Eurofinance SA [2013] 1 AC 236, para 33. They include (subject to what is said below) In re African Farms Ltd [1906] TS 373, where execution in Transvaal by a creditor in proceedings against an English company in liquidation in England was stayed by the Transvaal court, which was applied in Turners & Growers Exporters Ltd v The Ship ‘Cornelis Verolme’ [1997] 2 NZLR 110 (Belgian shipowner in Belgian bankruptcy: ship released from arrest); and Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112, where an English injunction again a Texas corporation in Chapter 11 proceedings was discharged; and two cases in Hong Kong: Modern Terminals (Berth 5) Ltd v States Steamship Co [1979] HKLR 512 (stay in Hong Kong of execution against Nevada corporation in Chapter 11 proceedings in United States federal court in California), followed in CCIC Finance Ltd v Guangdong International Trust & Investment Corpn [2005] 2 HKC 589 (stay of Hong Kong proceedings against Chinese state-owned enterprise in Mainland insolvency).”

10.  The underlying rationale for the common law power of assistance is modified universalism.  I explain this in [10] of my judgment in Joint Official Liquidators of A Co v B [7], quoting from Lord Collins judgment in Rubin v Eurofinance SA [8]:

“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.  It follows from this that the common law power exists to assist collective insolvency processes.  If an application for recognition is made by liquidators, or their equivalent, appointed over a company that has been wound up for the purpose of collecting a company’s assets and distributing them amongst its creditors, it is likely that the court will accept that it is being asked to use its common law powers for the purpose that it is intended, namely, to ensure that all a company’s assets are distributed to its creditors under a single system of distribution.  However, it is important to understand that many of the applications that have been made to the court since Joint Official Liquidators of A Co v B was decided in 2014 have not been made by liquidators for this purpose.  Many have been made by provisional liquidators appointed in the place of incorporation on a soft-touch basis with a view to facilitating a restructuring of a company’s debt using a scheme of arrangement introduced in both the jurisdiction of incorporation and Hong Kong.  This technique is often referred to by the name of the case in which it first emerged:  Z-Obee [9]. It was developed to overcome difficulties created by the Court of Appeal’s decision in  Legend International Resorts Limited [10], which rejected the appointment of provisional liquidators as a means to restructure debt.  The recognition of the foreign appointments is justified by reference to the principles of private international law discussed in Joint Official Liquidators of A Co v B [11]. Assistance in the form of powers to facilitate a restructuring in Hong Kong is justified by the application of the common law principles most recently discussed in Re Moody Technology Holdings Ltd [12] in which DHCJ William Wong SC considers in detail recognition of soft-touch provisional liquidators appointed for the purposes of restructuring.  The Deputy Judge agreed with my conclusion in Re Joint Provisional Liquidators of Hsin Chong Group Holdings Limited [13], namely, that [9]:

“….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.”

12.  However, the fact that the courts have found that the common law principles support assisting a soft-touch provisional liquidation does not mean that the courts have accepted that a foreign soft-touch provisional liquidation is for all purposes to be treated as a collective insolvency process. 

13.  If soft-touch provisional liquidation is properly characterised (viewed from the perspective of the Hong Kong statutory insolvency regime), as a collective insolvency process it would suggest that there is nothing objectionable in appointing provisional liquidators in Hong Kong with a view to them restructuring the debt of a company including restructuring through introduction of a scheme of arrangement.  I note in passing that Glenn J in the Southern District of New York accepted in Re Winsway Enterprises Holdings Ltd [14] that for the purposes of an application for a stay under Chapter 15 of the US Bankruptcy Code a scheme is a collective insolvency process.  However, if this is the case it would suggest that Legend was wrongly decided.  This way of viewing the character of the jurisdiction is not considered in the judgment in which the Court of Appeal proceeds on the basis that provisional liquidation is to be used only for the purpose of protecting assets prior to a winding-up order being made.  It is, however, difficult to see why, if a soft-touch provisional liquidation is a collective insolvency process, appointment of a provisional liquidator for such a purpose pursuant to s193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 is impermissible.

14.  The relevance of this issue in the present context is as follows.  The passages that I have quoted in [9] from Singularis[15] envisage a stay being granted in aid of a collective insolvency process.  It is not clear that if the foreign proceedings have a different character a stay can be justified. This is not an issue that I have to decide in this case, because the PLs are content with a case management direction, but it would require further consideration if an application for a stay of particularly proceedings, including a Hong Kong winding up petition, were to be sought in these or other proceedings.

15.  Another consideration is the impact of the English court of Appeal’s decision in Antony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux [16]. In short this decision, which is followed in Hong Kong, establishes that the discharge or compromise of liabilities under a contract is governed the law of the contract.  It follows that the fact that a foreign incorporated company is subject to a foreign collective insolvency process does not prevent a Hong Kong creditor attempting to establish a right to payment in Hong Kong [17].  Consequently, it would seem that a stay should not be granted in respect of, for example, an action to establish a right to payment under a contract governed by Hong Kong law in aid of a foreign insolvency process.  Whether or not once a judgment has been obtained the creditor should be able to take enforcement action is a different question.  In the absence of full argument it is not a question at this stage I will comment on other than to draw attention to the decision of the English Court of Appeal in             Re OJSC International Bank of Azerbaijan [18].  The Court of Appeal confirmed that it is the practice of the court when exercising its insolvency jurisdiction not to grant a stay (going beyond the automatic stay under art 20 of the Model Law) where to do so would in substance prevent English creditors from enforcing their English law rights in accordance with the Rule in Gibbs.  However, in [95] Henderson LJ envisaged circumstances in which to a limited extent the Rule in Gibbs might be qualified by permitting assets within the jurisdiction of the English court to be remitted to a foreign liquidator.  Henderson LJ may have seen this as a qualification (although it is not clear from the decision) because it would be likely that the creditor would receive less as a result of having to prove in the foreign liquidation in which the Rule in Gibbs would not apply than the creditor would if he was able to enforce the against the asset all the time it remained located in England.  This would seem to involve a recognition of the creditor’s right to enforce directly against the asset, which could only be interfered with to a limited extent by the court making orders facilitating steps in the foreign liquidation intended to result in a pari passu distribution of assets.  This is an issue, which if it arises will require careful consideration.  It is a further reason why it would be wrong for the court in my view to make orders staying proceedings other than as a result of an applications to the court for an order at which the party effected will have the opportunity to argue the alternative.