YTL LLP secures a landmark ruling which safeguards Hong Kong liquidators’ ability to properly conduct winding up of non-Hong Kong company
Introduction
YTL LLP on behalf of the Joint and Several Liquidators of China Properties Group Ltd (in liquidation) (Liquidators) secured a groundbreaking victory in the first of a kind action in the High Court of Hong Kong on 15 September 2023 (Re China Properties Group Limited (in Liquidation) [2023] HKCFI 2346).
China Properties Group Ltd (Company) was incorporated in the Cayman Islands and was, until its liquidation, listed on the Main Board of the Hong Kong Stock Exchange. Its principal business was real estate development in Mainland China and, as typical for listed companies in Hong Kong, conducted its operations through a series of offshore, onshore and Hong Kong subsidiaries.
These typical corporate structures while useful for facilitating cross border finance, they create complex and difficult cross-border issues when the Company goes into insolvency and can put creditors in the middle of a jurisdictional tussle. The situation is equally difficult for liquidators, who then have to contend with the possibility of being dragged into various proceedings in multiple jurisdictions as happened to the Liquidators in this case.
Eventful liquidation
The Company was incorporated in the Cayman Islands and has established a principal place of business in Hong Kong. It had four wholly owned BVI companies (BVI Subsidiaries), which in turn held various Hong Kong subsidiaries that held the subsidiaries in Mainland China. The subsidiaries on the Mainland owned and operated the substantive real estate assets.
In February 2022, the petitioner presented a winding up petition against the Company to the Hong Kong court which was heavily contested. Ultimately, on 31 May 2022, the court granted a winding-up order. On 23 June 2023, the Petitioner with the support of the Official Receiver then obtained a Regulating Order to appoint the Liquidators. The petitioner did not pursue any winding up in the Cayman Islands.
Since their appointment, however, the Liquidators immediately encountered difficulties in attempting to take control over the Company from the former management including its former executive director (Former Director), who commenced various proceedings including an attempt to injunct the Liquidators from acting in contravention of the directors’ rights over the BVI subsidiaries, unless and until they have obtained orders of recognition and assistance from the BVI Courts.
Notwithstanding these ongoing challenges, the Liquidators managed to get the Registered Agent of the BVI Subsidiaries to change the directors, replacing the Former Director with one of the Liquidators in his place as sole director.
Challenge from Former Director
On 30 August 2023, the Former Director then caused the BVI Subsidiaries to commence proceedings in the Eastern Caribbean Supreme Court of the British Virgin Islands against the Liquidators and the Registered Agent challenging the appointment of the Liquidator as director and to restrain the Liquidators (BVI Proceedings).
In response, the Liquidators filed an urgent summons before the Hong Kong court seeking immediate interim relief against the Former Director. Relying on the fact that the Former Director was a Hong Kong resident and in the jurisdiction, the Liquidators sought mandatory injunctions against him compelling him to sign resolutions to duly acknowledge and irrevocably ratify the appointment of one of the Liquidators as the sole director of the BVI Subsidiaries.
The Liquidators sought these orders to give effect to the Hong Kong winding up and to allow them to discharge their duties as officers of the Court in view of the various steps and proceedings taken out by the Former Director to stymie the progress of the liquidation.
On 15 September 2023, the High Court of Hong Kong granted the relief we sought on behalf of the Liquidators.
Implications of the Decision and Key Takeaways
- The Hong Kong courts will exercise their jurisdiction to give effect to their orders
The Court emphasized that Hong Kong courts have both (i) a supervisory jurisdiction over liquidations in Hong Kong and render assistance to cross-border insolvencies worldwide within the four corners of the law; and (ii) a duty to assist and facilitate liquidators appointed by Hong Kong Courts to effectively and efficiently discharge their duties in the best interest of the creditors.
The Court was satisfied that in light of the Former Director’s conduct in commencing the various proceedings against the Liquidators, it was necessary to grant the mandatory injunctions sought in order to make the underlying assets of the Company available to the Liquidator so that they could do their job. This was especially so where (i) a company has representatives and officers who reside in Hong Kong and (ii) such representatives and officers are subject to the in personam jurisdiction of the Hong Kong Courts.
- Parallel proceedings are not required
Given the BVI Proceedings were also on foot, the Former Director argued that the proceedings in Hong Kong were an abuse and an attempt to usurp the BVI Court. The Court rejected the Former Director’s contention, holding that the need for the Liquidators to seek the assistance of the Hong Kong court was caused by the Former Director commencing the BVI Proceedings.
- Recognition and assistance based on Centre of Main Interest (COMI)
The Court ruled that it is indisputable that Hong Kong is the COMI of the Company and so it was more reasonable to expect that the BVI Courts would give assistance to not disturb the orders made by Hong Kong Courts, and to assist the Liquidators to conduct the liquidation effectively.
This is the first case that a Hong Kong Court has made such order in aid of its own winding up ruling against a non-Hong Kong company. This sends a strong message to directors of insolvent companies (wherever they are incorporated) that they need to assist rather than resist the liquidators.
The case was led by Davyd Wong (special counsel) with Andy Kwan (associate) and Ariel Kong (trainee solicitor).
The full judgement can be viewed here.
If you would like to find out more about the contents in this note or other issues pertaining to insolvency and restructuring matters, please contact us.
YTL LLP is a law firm headquartered in Hong Kong, China with expertise in, among others, restructuring and insolvency. This article is general in nature is not intended to constitute legal advice.
