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COMI Is First Port Of Call – A Modified Framework For Recognising Foreign Insolvency Proceedings In Hong Kong – Insolvency/Bankruptcy

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Historically, the common law has only recognised foreign
insolvency proceedings commenced in the jurisdiction in which the
company is incorporated. This may no longer be the case in Hong
Kong. Going forward, a Hong Kong court will now recognise foreign
insolvency proceedings in the jurisdiction of the company’s
“centre of main interests” (COMI).
Indeed, it will not be sufficient, nor will it be necessary, that
the foreign insolvency process is conducted in a company’s
place of incorporation.

The decision in Provisional Liquidator of Global Brands Group
Holding Ltd v Computershare Hong Kong Trustees Ltd
[2022]
HKCFI 1789
signals an advance to align Hong Kong’s common
law recognition regime with the global trend of embracing a
COMI-based approach.

Background

Global Brands Group Holdings Limited (Company)
was an investment holding company incorporated in Bermuda which,
along with its subsidiaries (Group), were engaged
in the business of branded apparel, footwear, accessories and
related lifestyle products in North America and Europe. The Company
was also listed on the Hong Kong Stock Exchange
(HKEX). Such use of a holding company incorporated
in an offshore jurisdiction by a business group whose operating and
asset-owning companies are either in Hong Kong or Mainland China is
a factual pattern familiar to insolvency practitioners in Hong Kong
and Mainland China.

The Group faced immense financial difficulties following the
Covid-19 pandemic. Whilst exploring restructuring options, on 10
September 2021, the Company presented an application for appointing
a “soft-touch” provisional liquidator with limited powers
to help restructure the Company (during which time the management
of the Company would remain in control). Attempts to restructure
proved unsuccessful and the Company ultimately obtained a winding
up order from the Bermudan Court, on 5 November 2021. The
provisional liquidator continued in office on the making of the
winding-up order. Since his appointment in September 2021, the
provisional liquidator had been trying to take possession of the
Company’s assets in Hong Kong. These included cash balances
representing a surplus from sale of shares in the Group’s
employee share schemes and monies held in the Company’s local
bank accounts.

The provisional liquidator sought an order from the Hong Kong
Court for recognition and assistance in order to take control of
the relevant assets.

The circumstances of the application provided the Court with an
opportunity to consider in detail how in future the Hong Kong court
will recognise and assist a foreign insolvency process.

Decision

Mr Justice Harris held that the correct approach for assessing
whether or not a foreign liquidation should be recognized in Hong
Kong is first to determine if, at the time of the application for
recognition, the foreign liquidation is taking place in the
jurisdiction of the company’s COMI. In this case, the
Company’s provisional liquidator accepted that, before the
Bermuda liquidation, the Company’s COMI was probably in Hong
Kong.

If the foreign liquidation is not taking place in the
jurisdiction of the company’s COMI, then recognition and
assistance ought to be declined unless the application falls in one
of the following two categories:

  1. If the liquidator is appointed in the place of incorporation,
    the application is limited to recognising a liquidator’s
    authority to represent a company and seeking orders that are an
    incident of that authority, which Mr Justice Harris described as
    managerial assistance“. On the facts of this
    case, the Court granted an order of recognition of the provisional
    liquidator of the Company in order for the provisional liquidator
    to receive and transfer out the relevant assets located in Hong
    Kong.

  2. If the liquidator is appointed in the place of incorporation
    and the circumstances do not fall within the first exception above,
    then recognition and only limited and carefully prescribed
    assistance may be given as a matter of practicality.

We anticipate that the second of the two exceptions will not be
commonly be used in applications going forward as most applications
should likely fall under the COMI category or the first exception
where the liquidator is appointed in the place of
incorporation.

Ascertaining COMI

Mr Justice Harris has also considered a list of non-exhaustive
factors that a Hong Kong court will look at to determine a
company’s COMI. These include the location where a company: (i)
conducts its management and operations; (ii) has offices; (iii)
holds its board meetings; (iv) has its officers residing; (v) has
its bank accounts; (vi) maintains its books and records; and (vii)
has conducted or is conducting its restructuring activities.

Moving towards a COMI approach

This decision is an extension of the principles stated in Re
Lamtex Holdings Ltd
[2021] HKCFI 622 and Re Ping An
Securities Group (Holdings) Ltd
[2021] HKCFI 651, about which
we wrote here. The position under Hong Kong common law
has now moved firmly towards a COMI-centred approach.

The Hong Kong Court has long worked with practitioners to use
common law techniques to help facilitate debt restructurings of
offshore-incorporated companies in Hong Kong, so far as the common
law permits. However, Mr Justice Harris recognised that there have
been two major problem areas:

  1. The restrictions that exist on winding up a foreign
    incorporated company. These restrictions were demonstrated in the
    long-running saga of Shandong Chenming (although the Court of Final
    Appeal was able to take a practical approach in interpreting the
    second core requirement, as we previously blogged);

  2. The lack of any legislation in Hong Kong facilitating the debt
    restructuring and rehabilitation of financially distressed
    companies.

In respect of the second difficulty, a practice was developed of
companies incorporated in offshore jurisdictions being put into a
form of soft-touch provisional liquidation in their jurisdictions
of incorporation followed by the provisional liquidators seeking
recognition in Hong Kong and seeking assistance from the Hong Kong
Court in the form of the limited powers necessary for them to
participate in the restructuring process in Hong Kong.

As noted by the Court in this case and in Re Lamtex, in
recent years many HKEx-listed companies regularly employed this
tactic to obtain a moratorium on creditor actions in Hong Kong. In
most of these cases the company had no material economic connection
to those offshore jurisdictions other than being incorporated
there. As Mr Justice Harris stated in the judgment, treating the
place of incorporation in such circumstances as being the natural
home or commercially most relevant jurisdiction for the purpose of
determining which jurisdiction is the appropriate place for the
seat of a principal liquidation is highly artificial.

Mr Justice Harris also considered that the Hong Kong –
Mainland Cross-Border Insolvency Cooperation Mechanism (see here), which permits Mainland Courts to
recognise Hong Kong-appointed liquidators over companies whose COMI
is in Hong Kong, was relevant to a consideration of the development
of common law assistance in Hong Kong. In the absence of relevant
legislation, embracing a COMI-based approach would bring Hong Kong
in line with the approach in the Mainland and indeed the approach
adopted by other jurisdictions such as Singapore.

Insight

In short, this decision signals a new and more principled
approach for recognising foreign insolvency proceedings in Hong
Kong. The common law of Hong Kong in this area remains very much
alive and keeps developing. It will be interesting to see if this
judgment will open up new possibilities such as cross-border
restructuring led by liquidators in the COMI of a multinational
group with creditors in Hong Kong. In the meantime, there is no
doubt that the Hong Kong Court will continue to give short shrift
to the once-popular technique of appointing “soft-touch”
liquidators in offshore jurisdictions if such appointment is
artificial and devoid of real connections to the company’s
activities in its COMI.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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