UNDERSTANDING CROss-BORDER

INSOLVENCY IN THE HONG KONG CONTEXT

O1

Hon Mr Justice Harris*

The author, the Companies Judge of the Court of First Instance of the High
Court, examines the issues arising in recent years concerning cross-border
insolvency in the Hong Kong context. This article is the text of a lecture
delivered by the author at the University of Hong Kong on 17 November 2016.

1. Introduction

I would like to discuss today some of the more important issues that
have arisen in recent years in Hong Kong concerning liquidations
and restructuring of foreign incorporated companies. We are not here
concerned with the simple case of an insolvent business conducted solely
in Hong Kong through the medium of a company incorporated in, say,
the British Virgin Islands because of its owner's preference for an opaque
business structure. Such cases pose no difficulties. For reasons that will
become apparent later, a winding-up order can readily be justified.
I am concerned with more complex cases, which have come before
the Companies Court with increasing frequency in recent years. A typical
case would be this: a business group whose principal commercial activities
take place in the Mainland decides to list in Hong Kong. For the purposes
of the listing, a holding company is incorporated in one of the popular
Caribbean jurisdictions. The listing takes place in Hong Kong. The listed
company raises funds through an issue of notes in New York governed by
the laws of the State of New York. The company later runs into financial
difficulties. In these kinds of situations, the Court can find itself faced
with broadly three types of applications:

(1) A petition to wind up the company in Hong Kong.

(2) An application for judicial assistance by the court of its place of
incorporation in which it is being compulsorily wound up, for
example, an order for the production of documents.

Judge of the Court of First Instance of the High Court, Hong Kong.
 (3) The introduction of a scheme of arrangement to restructure the
foreign company's debt.

Each type of application gives rise to different issues.

2. Winding Up a Foreign Company

A petition to wind up a company in a jurisdiction other than its place of

incorporation is, on the face of the matter, unusual. This is a consequence
of the established principles of private international law that:

(1) the domiciliary law of the place of incorporation of a company

determines the validity of its formation and continued existence
as a legal person; and
(2) the authority of a liquidator appointed under the law of the
place of incorporation is recognised in Hong Kong.

English authorities such as the English Court of Appeal's decision in

Stocznia Gdanska SA v Latreefers Inc (No 2)' state that the exercise of the
jurisdiction to wind up a foreign company is exceptional. The principle
text books that touch on this subject state the same view.' In the joint
judgment of Chief Justice Ma and Lord Millett in Kam Leung Sui Kwan v
Kam Kwan Lai, which I shall refer to as Yung Kee, they suggest that it
is unhelpful to use such expressions, although as I read the judgment,
at [19], they confirm the established view that, and I quote, "the most
appropriate jurisdiction to wind up a company is the jurisdiction where it
is incorporated".
However, it is clear that the Court has the power by virtue of s 327 of
the Companies (Winding Up and Miscellaneous Provisions) Ordinance
(Cap 32), to wind up a foreign incorporated company. The material issue
is: in what circumstances? The Court of Final Appeal (CFA) in Yung Kee
confirms, at [20], that the jurisdiction is exercised by reference to what
have come to be known as the three core requirements, namely:

(1) There is sufficient connection with Hong Kong.

(2) There must be a reasonable possibility that the winding-up order
would benefit those applying for it.
(3) The court must be able to exercise jurisdiction over one or more
persons in the distribution of the company's assets.

I [2001]2BCLC116.
2 For example, Ian Fletcher, The Law of Insolvency (London: Sweet and Maxwell, 4th ed.,
2009),
 para 30-025; Robert Hollington, Shareholders' Rights (7th ed., 2013), para 12-05.
(2015) 18 HKCFAR 501.

56 Jonathan Harris J

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The CFA confirmed the view that I had taken at first instance following
the decision of Lawrence Collins J (now Lord Collins) in Re Drax
Holdings Ltd,' at [24], that the three core requirements go to discretion
and not to jurisdiction. Yung Kee was a shareholders' dispute concerning a
solvent company, and consequently, it contains little consideration of the
complexities of demonstrating sufficient connection in the insolvency
context. In [26], Chief Justice Ma and Lord Millett recognise that
the considerations are different because the nature of the dispute and
the purpose for seeking a winding-up order are different. However, the
following principles emerge from the judgment:

(1) The first core requirement is satisfied if sufficient connection is

demonstrated to justify the court setting in motion its winding-
up procedures over a body which prima facie is beyond the limits
of territoriality [21].
(2) The presence of significant assets will commonly satisfy the
requirement, but it is not essential [22].
(3) That in the context of a creditor's petition in deciding whether
sufficient connection has been demonstrated [24]:

"The fact that there is a reasonable prospect that the petitioner

will derive a sufficient benefit from the making of a winding-up
order, whether by the distribution of its assets or otherwise, will
always be necessary and will often be sufficient."

I would suggest that the latter principle is not as obvious as it sounds.

Almost necessarily in the insolvency context if a petitioner will derive
benefit from a winding-up order, it will be because there is sufficient
connection between the company and Hong Kong, for example,
the company has assets in Hong Kong. The opposite, however, is not
necessarily true. I have an interesting case, which will be heard in the
New Year, in which sufficiency of connection arising from a listing in
Hong Kong is accepted, but benefit is not.
Re China Medical Technologies Inc' (which has been upheld on
appeal although the reasons have not been delivered) is an example of
how difficult this area can become. The Company was incorporated in
the Cayman Islands. Its business was developing, manufacturing and
marketing advanced surgical and medical equipment, and its business was
conducted in the Mainland through Mainland subsidiaries. It was listed
on NASDAQ. Between 2005 and 2010, it raised US$677 million by way

[2004] 1 WLR 1049.

[2014] 2 HKLRD 997 and (HCCW 435/2012, [2014] HKEC 1438) (Second decision, 28
August
2014).

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Cross Border Insolvency in Hong Kong 57

of share offerings and three offerings of convertible notes in New York.

The Company became insolvent in circumstances, which suggested that
approximately US$400 million had been misappropriated.
It was wound up in the Cayman Islands and by the Bankruptcy Court
in the Southern District of New York. The Cayman liquidators then
sought to wind up the Company in Hong Kong. Initially, I declined to
do so. I accepted that sufficient connection with Hong Kong had been
demonstrated: the Company had an office in Hong Kong, where the
Company's investor relations manager was based. The Company held a
number of board meetings in Hong Kong, where its auditors were based
and two of its more significant directors were resident here. I also accepted
that a benefit had been demonstrated, namely, the powers of investigation
given to a liquidator which would advance the liquidators' investigations
into the suspected fraud.
However, I was not satisfied that the third core requirement had been
met, namely, it had not been demonstrated that there was somebody
other than the petitioner who had a material interest in the distribution
of the Company's assets over whom jurisdiction could be exercised.
I had previously held in Re Pioneer Iron and Steel Group Co Ltd6 that
the core requirements constitute guidance as to how the discretion
should be exercised and their application should be moderated if the
circumstances clearly called for it and that there might be cases where
the connection was so strong and the benefits of granting a winding-
up order are sufficiently substantial, that the court would grant an order
despite the third core requirement not being satisfied. An example would
be a company with substantial operations in Hong Kong but, because of
the nature of its business, there were no material creditors here. Despite
this, a winding up in Hong Kong would have most of the features of the
winding up of a local company.
As I note in China Medical and Pioneer Iron, and the CFA confirms
in Yung Kee, at [21], the Court is concerned to ascertain whether there is
justification for making an order, which engages the whole of the Hong
Kong insolvency regime. The clearer the connection or the benefit, the
more likely it becomes that a winding-up order will be made despite
the third core requirement not being met. In practice, the stronger
the connection, the greater the likelihood of substantial benefit and
vice versa.
As I have mentioned earlier, I initially refused to wind up China
Medical. However, after the hearing and I had given my decision, but

6 (HCCW 322/2010, [2013] HKEC 317), [27].

58 Jonathan Harris J

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before I had delivered my reasons, the Cayman liquidators acquired further

evidence demonstrating that the suspected fraud had been implemented
through Hong Kong by using a bogus business acquisition and Hong Kong
bank accounts. I was persuaded that, in the light of this new evidence,
the connection to Hong Kong had been demonstrated to be sufficiently
strong and the benefits sufficiently substantial, to justify making an order.

3. Judicial Assistance

In China Medical, the purpose of seeking a winding-up order was mainly

to allow the liquidators to use s 221 of the Companies (Winding Up
and Miscellaneous Provisions) Ordinance to obtain documents and to
examine people who they suspected had knowledge of the mechanics of
the fraud. The petition proceedings were expensive and time-consuming,
which invites the question: was there some cheaper, quicker alternative
mechanism by which the court could assist their investigations?
Hong Kong does not have an equivalent of England's s 426 of the
Insolvency Act 1986, which provides for judicial assistance to bankruptcy
courts in other jurisdictions. Unfortunately, this situation will continue
even after the introduction of the new Companies (Winding Up and
Miscellaneous Provisions) Amendment Ordinance. This omission is
an extraordinary abnegation of responsibility by the administration,
particularly given the increasing focus internationally on measures
intended to encourage efficiency in cross-border insolvency and Hong
Kong's status as an international financial centre. Instead practitioners and
the courts are left to look to the common law to find tools to assist them.
One can find a case as early as 1929 of the Hong Kong High Court
providing assistance to a foreign liquidator: Re Russo-Asiatic Bank.' As
the name suggests, the bank was incorporated in Russia. Following the
revolution and establishment of the Soviet government, the bank's
operations and assets were confiscated in Russia, but there was no
evidence that the bank had been dissolved or in any conventional sense
liquidated. Prior to the revolution, branches had been established in
London, Hong Kong and Shanghai. The bank was wound up in Hong
Kong. The creditors in Hong Kong were paid in full and a balance of
E300,000 remained in the hands of the Official Receiver. The bank
had also been wound up in London. In Shanghai, it appeared that
following the revolution its business had been taken over by its former
management and formed into a separate legal entity, which subsequently

(1929-1930) 24 HKLR 16.

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went into liquidation. A dispute arose between liquidators of the bank

in London and Shanghai as to their respective entitlement to the
surplus funds held in Hong Kong. The liquidators in Shanghai argued
that the liquidation in Hong Kong should be treated as ancillary to
that in Shanghai as the bank had operated in Hong Kong prior to its
liquidation as part of the new entity that had been established after the
revolution. Sir Henry Gollan CJ rejected this argument. He recognised
that the established principle of private international law, namely, that
the authority of a liquidator appointed in the place of incorporation had
no application to the Shanghai liquidators. He also recognised that the
rule that the liquidation in Hong Kong of a branch of a foreign company
should be ancillary to liquidation in the country of its domicile also
had no application. He consequently rejected the Shanghai liquidators'
claim, but allowed the London liquidators to put in proofs on behalf of
their creditors. Why the same course was not taken in respect of the
Shanghai liquidation was not clear.
The same principle was recognised in BCCI (Overseas) Ltd v BCCI
(Overseas) Ltd-Macau Branch.' The bank was incorporated in the
Cayman Islands. There was also a Macau branch. There was a deposit in
Hong Kong to which both the Macau liquidator and Cayman liquidators
made claims. The Court of Appeal held that "the Cayman liquidators
now have a prior claim to the funds in court than that of the Macau
liquidator" (309G).
The Hong Kong courts have also been prepared to provide judicial
assistance by giving effect to foreign moratoriums: Modern Terminals
(Berth 5) Ltd v States Steamship Co9 (stay of execution against a Nevada
corporation in Ch 11 proceedings in the US federal court in California);
CCIC Finance Ltd v Guangdong International Trust and Investment Corpo
(stay of proceedings against the state-owned enterprise in Mainland
liquidation); Hong Kong Institute of Education v Aoki Corp" (recognising
that the court had the discretion to refuse execution of a local judgment if
a foreign discharge had consequences for a debtor's assets in Hong Kong).
Despite the existence of these decisions, which could have served as
a reminder to practitioners of the scope for using the common law power
of judicial assistance to obtain the help that foreign liquidators require as
an alternative to presenting a petition, there has been an obvious absence
of examples of practitioners doing so. Ian Fletcher suggests the following

8 [1997]HKLRD304.
9 [1979] HKLR 512.
10 [2005] 2 HKC 589.
" [2004] 2 HKLRD 760.

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explanation for the failure to do so in the English context in Insolvency in
Private International Law:

"However, certain factors appear to militate against the English courts'

powers of assistance being more frequently invoked, even against a
background of steady growth in the numbers of insolvencies with cross-
border aspects. One reason is the relatively under-publicised state of the
law, much of which is contained in reports of cases originally decided many
years ago. Unfamiliarity with these Common Law precedents and with
their significance from the standpoint of obtaining active assistance from
the English courts is likely to be one reason for their underutilisation..."

In my experience, the observation made by Ian Fletcher is correct. In

addition, there have probably been a number of other reasons for the
underutilisation of common law precedents in Hong Kong. Generally,
petitioners have sought to wind up foreign companies because they
believe that there are assets in Hong Kong. Commonly the foreign
company will have been used as an alternative to a Hong Kong company
by its shareholders, because of perceived advantages such as lower taxes,
ease of changing capital structure and opaqueness of ownership and
control rather than because of any genuine international component. As
a result, satisfying the three core requirements has been straightforward
particularly if the petition is unopposed as was the case in Re Beauty
China Holdings Ltd," cited in Yung Kee at [20]. So far as I am aware the
first case in which jurisdiction was declined was in Re Gottinghen Trading
Ltd,13 which was a shareholders' dispute, and in that case, the jurisdiction
objection was taken at my suggestion.
In China Medical, an application was made at my suggestion, after
the initial dismissal of the petition, for recognition and production of
documents. This was one of the sources of the new evidence, which the
liquidators relied on in support of their application for me to reconsider
my initial decision on the petition. The application for recognition
produced my decision in Joint Official Liquidators of A Co v B14 (A Co
being China Medical). This was an opportunity to set out the principles
that guide judicial recognition and assistance of foreign liquidators.
It is an established principle of private international law that if, under
the law of the place of incorporation, a liquidator is appointed to act,
then his authority should be recognised here. It follows that, once it
is demonstrated that this has taken place, then a person dealing with
12 [2009]6 HKC 351.
13 [2012] 3 HKLRD 453.
14 [2014] 4 HKLRD 374.

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the liquidator should respond to his requests in the same way he would
if he was dealing with a Hong Kong liquidator appointed over a Hong
Kong company unless there are some unusual features. In practical terms,
they should respond as they would do to a request from the board of the
company. In [4] of the judgment, I thought I made this clear:

"It follows that if a person in Hong Kong receives a request or instruction

from a liquidator of a foreign corporation, with which if it had come from
the board of directors of that foreign corporation he would have complied,
he should once he is satisfied that the liquidator was properly appointed in
the place of incorporation act upon the request or instruction. In practice
this is not what happens. It appears to be a common response of banks and
other parties to a request for information from a foreign liquidator, and
was so in the present case, that his appointment is not effective in Hong
Kong and that they require an order from the Hong Kong courts before
they will act."

However, I was wrong. In Bay Capital Asia Fund LP v DBS Bank (Hong
Kong) Ltd,15 I was faced with an argument that I could not have meant
what I said because if I had I would have dismissed the application and
not granted an order. As I hope I have now made plain in Bay Capital
Asia, I expect parties such as a bank, which apparently is capable of
determining whether a Cayman Island company has validly resolved
to open an account and authorised signatories to operate it, to be also
capable of satisfying itself, if needs be by asking the liquidators to obtain
an opinion, that they have been validly appointed by the courts of the
place of incorporation, prior to handing over the bank records. There
may be cases in which a party receives a request from a liquidator from
a jurisdiction with which they have little familiarity, and in that case,
it would be legitimate to request a recognition order first, but I would
expect that to be the exception to the general rule.
As my comments suggest, something as straightforward as a request
for bank records should not require judicial assistance, but obtaining
documents and information from other sources probably will. Lord Collins
considers comprehensively the subject of international cooperation and
assistance in Rubin v Eurofinance SA,16 explaining that many jurisdictions
now deal with this by domestic legislation or the UNCITRAL Model
Law. As I have already explained, Hong Kong does not have the benefit of
these developments, and we have to fall back on the common law powers
to recognise and grant assistance to foreign insolvency proceedings. In

15 (HCMP 3104, [2016] HKEC 2377).

16 [2013] 1 AC 236.

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fact, the power to provide assistance is not a new one. As long ago as 1764
in Solomons v Ross," the English Court allowed a Dutch curator, who
served a similar function to a trustee in bankruptcy, to recover an English
debt owed to a bankrupt domiciled in Holland. Since then, common law
assistance has been provided in many different forms to a foreign officer
in the jurisdiction in which a bankrupt is domiciled or an insolvent
company is incorporated; and in [32]-[33], Lord Collins gives extensive
examples of how the common law power has been used.
In Hong Kong, we are still at the stage of developing the use of judicial
assistance. Since A Co, there have been a series of applications for assistance
from foreign liquidators, which has allowed the development of a standard
order, which the Court will normally be prepared to grant on receipt of a
letter of request in support of an application for recognition and assistance.
In Re Centaur Litigation SPC," I granted an order, which is appended to the
decision and is intended to serve as a precedent for future orders. It expressly
empowers a foreign liquidator without further order of the court to take
possession and control of the company's property and investigate its affairs
and to bring proceedings to facilitate these processes. The order provides
for an automatic stay of the commencement or continuation of proceedings
against the company or its assets in Hong Kong without the leave of the
Court. This is intended to broadly replicate the impact of the making of
a winding-up order in Hong Kong without the need for a petition and
engagement of our entire insolvency regime, thereby saving time and costs.
An important practical issue is whether, in addition to ordering the
production of documents that a local liquidator would expect to obtain
routinely, the common law power extends to ordering the production of
documents or examination in situations that in the domestic context
would require an application under s 221 of the Companies (Winding
Up and Miscellaneous Provisions) Ordinance. Section 221 empowers the
court to order the production of documents relating to the company or to
summon any officer or person suspected of having in their possession the
property of a company or is capable of giving information about its affairs
and direct that he be examined.
Prior to the decision of the UK's Privy Council in Singularis Holdings
Ltd v PricewaterhouseCoopers,19 there were two reported cases in which an
order for the production of documents or information had been made by
way of common law assistance: Moolman v Builders & Developers (Pty) Ltd,20

17 (1764)1 HBl 131.

I (HCMP 3389, 3391 and 3393/2015, [2016] HKEC 576).
19 [2015] AC 1675.
20 [1990] 2 All SA 77.

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a decision of the Supreme Court of South Africa; and Re Impex Services

Worldwide Ltd," a decision of the High Court of the Isle of Man. In Singularis,
the Privy Council considered that these decisions were correct in principle,
although not that part of their reasoning that explained the power to make
the orders for examination by applying statutory powers by analogy.
In [25] of the judgment, Lord Sumption explains the conditions to be
satisfied before the court exercises its common law powers of assistance
by ordering production of information in an oral or documentary form,
which is necessary for the administration of the foreign winding up. The
conditions are as follows:

(1) The power exists for the purpose of enabling courts to surmount
problems posed for a transnational liquidation by the territorial
limits of court powers. It is not, therefore, available to enable
liquidators to do something that they could not do under the law
by which they were appointed.
(2) It must also be consistent with the substantive law and policy of
the assisting court.
(3) It is not available for purposes that are properly the subject of
other schemes for compulsory provision of information.
(4) It cannot be used to obtain material for use in actual or antici-
pated litigation.

Tomorrow will be handed down my decision in BJB Career Education Co

Ltd." In that case, the company is incorporated in the Cayman Islands
and is in compulsory liquidation in that jurisdiction. The provisional
liquidators obtained a letter of request from Mr Justice Segal seeking
recognition and assistance by way of production of documents, answers to
interrogatories and oral examination of the company's principal director.
I granted the order for the reasons explained in that decision. In summary,
I was satisfied that the conditions described by Lord Sumption in [25] of
Singularis were met.
It is apparent from the cases mentioned earlier that there is now
a significant body of authorities in Hong Kong that have established
the court's broad power to assist; and consequently, the Companies
Court can and will provide assistance to foreign liquidators. Once this
is recognised, one would expect those advising foreign liquidators to

21 [2004] BPIR 564.

22 [2017] 1 HKLRD 113; see also Re Pacific Andes Enterprises (BVI) Ltd (HCMP 3560/2016,
[2017] HKEC 146) (27 January 2017) which was delivered subsequent to this lecture and the
authorities referred to in [5].

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consider carefully seeking recognition and assistance as an alternative
to a winding up.
It will be appreciated that the ability of the court to provide effective
assistance to a foreign liquidator is relevant in determining whether the
second core requirement is satisfied. It seems to me that if a winding-up
order is sought to access s 221, it follows that if an effective alternative is
available at common law, then this is relevant to any consideration of the
benefit to be obtained from granting a winding-up order. If, as the CFA
has confirmed, the most appropriate jurisdiction in which to wind up a
company is its place of incorporation, in my view if a petitioner will not
obtain any advantages on a winding-up in Hong Kong additional to those
the court can confer through use of its common law powers to assist a
liquidator appointed in the jurisdiction of incorporation, generally it will
not be a proper case to order a winding-up. If this is correct, in the future,
a case such as China MedicalP may be decided differently.

4. Schemes of Arrangement

I would now like to turn to a different aspect of cross-border insolvency:

restructuring through the use of schemes of arrangement. Hong Kong has
considerable experience in this area. Since the Asian Financial Crisis
of 1997-1998, we have been regularly using the statutory mechanism in
what is now s 673 of the Companies Ordinance (Cap 622) to restructure
the debt of companies listed in Hong Kong, but incorporated elsewhere.
Moreover, with the prevalence of the listing of Mainland business groups
in Hong Kong since the early 1990s, the requirement for effective
mechanisms for restructuring debt of companies for whom Hong Kong
is central to their capital, and debt raising exercises is obvious and
critical. The significance of this is highlighted by the initiatives being
taken in the Mainland to address the problems of moribund business
enterprises, both state and privately owned. The importance the Central
People's Government attaches to addressing these issues is evidenced
by the G20 Communique, "the Chinese Outcome List of the Meeting
between President Xi and President Obama Following the G20 Summit
in Hangzhou" in September 2016.4

23 28 August 2014 decision.

24I am grateful to Look Chan Ho of Freshfields for bringing this to my attention - and this is
perhaps a convenient time to give his new book a plug - the title leaves little to the
imagination:
 Cross-border Insolvency: Principles and Practice (Hong Kong: Sweet and Maxwell, 1st ed.,
2016).

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Cross Border Insolvency in Hong Kong 65

There are frequent references in the G20 Communique to the

importance the Central People's Government attaches to initiatives in
this area: I will quote one passage that catches the spirit of the thing:

"China attaches great importance to resolving excess capacity through

the systems and mechanisms relating to mergers and acquisitions;
restructuring; and bankruptcy reorganization, bankruptcy settlement,
and bankruptcy liquidation, according to its laws. In the process of
addressing excess capacity, China is to implement bankruptcy laws by
continuing to establish special bankruptcy tribunals, further improving
the bankruptcy administrator systems and using modern information
tools. China and the United States commit to, starting as early as 2016,
conduct regular and ad hoc communication and exchanges regarding
the implementation of our respective bankruptcy laws through forums
or mutual visits."

Clearly, Hong Kong has a significant role to play in the case of Mainland
businesses that are listed here. Recent cases provide a comprehensive road
map of how schemes of arrangement can be used in the particular kinds
of transnational and interregional restructuring that seem to be becoming
increasingly common.
We are concerned with the restructuring of offshore debt. (Onshore
debt is dealt with separately in the Mainland.) The jurisdictions involved
are (1) the place of incorporation (commonly the Cayman Islands or the
British Virgin Islands), (2) the jurisdiction in which the holding company
is listed (Hong Kong) and (3) jurisdictions associated in some way with
the debt (commonly Hong Kong, the United States and/or England).
The principal issue is how the debt may be compromised in the different
jurisdictions? As a matter of the common law, a foreign composition does
not discharge a debt unless it is discharged under the law governing the
debt: Antony Gibbs & Sons v La Societe Industrielle et Commerciale des
Metaux." It follows that at least so far as the common law jurisdictions
that adopt this rule are concerned (England, Hong Kong, Australia,
New Zealand and the Caribbean jurisdictions; but not Singapore26), it is
necessary that the scheme is introduced and sanctioned in the jurisdiction
of the law governing the debt.
Hong Kong, the Cayman Islands, the British Virgin Islands, Bermuda
Australia, New Zealand and England have schemes of arrangement. The
first issue that arises for consideration is whether the court has jurisdiction
to sanction a scheme. This issue has been addressed thoroughly in three

25 (1890) 25 QBD 399.

26 Pacific Andes Resources Development Ltd [2016] SGHC 210 (Kannan Ramesh JC).

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decisions in Hong Kong: LDK Solar Co Ltd;" Winsway Enterprises Holdings

Ltd;" and Kaisa Group Holdings Ltd.29 LDK is a judgment of Lam J. LDK
Solar was incorporated in the Cayman Islands and listed in New York. It
had debt arising under various instruments, some of which were governed
by Hong Kong law. A scheme creditor, under a series of redeemable
convertible preferred shares which were governed by Hong Kong law,
opposed sanction of the scheme. The scheme creditor argued that
s 673(2) should be read as providing that jurisdiction is only established
for the purposes of s 673(2) if it has been demonstrated that the three core
requirements for winding up a foreign company are satisfied. The scheme
creditor argued that the 3 core requirements were not satisfied in LDK.
Lam J rejected this argument and held, following similar reasoning in
Drax Holdings,30 that the justification for exercising the power to sanction
a scheme of arrangement in relation to a foreign company is to be found
in the connection that the scheme has with Hong Kong.
As Lam J pointed out at [40]-[41], the scheme creditor's argument
wrongly equated the jurisdiction to wind up a foreign company with
the jurisdiction to sanction a scheme. They serve materially different
purposes and consequently give rise to materially different considerations.
On the one hand, a winding-up order engages the entire Hong Kong
statutory insolvency regime. On the other hand, a scheme of arrangement
to compromise debt serves a more focused and limited purpose. The
connection between the scheme and its function and Hong Kong is the
most relevant consideration. A connection which is insufficient to satisfy
the first core requirement for exercising the discretion to wind up might
alone be sufficient for the purposes of establishing jurisdiction to sanction
a scheme.
A connection which demonstrates that the restructuring will be
facilitated by the scheme is another relevant consideration. That can be
achieved in various ways. The sanctioning of a scheme in Hong Kong
may be of assistance by protecting a company listed in Hong Kong from
enforcement action within the jurisdiction. This was one of the principal
connections in Winsway and Kaisa, which are both listed on the Main
Board of The Stock Exchange of Hong Kong Ltd.
But those cases also illustrate another way in which sanctioning
of a scheme in Hong Kong may be of assistance and justify the court
exercising jurisdiction. In both cases, a significant proportion of the debt

27 [2015] 1 HKLRD 458.

28 [2017] 1 HKLRD 1.
29 [2017] 1 HKLRD 18.
30 See Drax Holdings (n 4 above).

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was governed by the law of the State of New York. As you will be aware,
the United States Bankruptcy Code does not contain an equivalent to a
scheme of arrangement. However, in both cases, the Bankruptcy Court in
New York accepted (in advance of the sanction hearings) that, by virtue
of the companies' listings in Hong Kong, the proceedings to introduce
the scheme constituted "foreign non-main proceedings" for the purposes
of Ch 15 of the United States Bankruptcy Code. The consequence of
this ruling was that if the scheme were sanctioned by me, it was likely, as
proved to be the case, that the court in New York would, on an application
for ancillary relief, grant orders that would give effect to the terms of
the scheme. Through this indirect route, the schemes had the effect of
imposing a compromise on the creditors holding debt governed by New
York law.
Another common connection is that the debt is governed by
Hong Kong law, which in isolation would probably be an insufficient
connection for the purposes of a winding-up petition. As mentioned
earlier, as a matter of Hong Kong law, a foreign composition of debt
does not discharge a debt unless it is discharged under the law governing
the debt. As David Richards J observed in Re Magyar Telecom BV," the
importance of this connection is the effect which foreign courts may be
expected to give to an alteration of those rights in accordance with Hong
Kong law. The significance of the law governing the relevant debt being
that of the jurisdiction in which a scheme is introduced is illustrated by
the recent line of authorities in England of which Magyar forms part,
culminating in the judgment of Richard Hildyard J in Re Apcoa Parking
(UK) Ltd." Apcoa Parking involved nine schemes of arrangement to
restructure the debt of a group of companies, only two of which were
incorporated in England. The business group's centre of main interest was
not in England. The facilities agreements under which the relevant debt
arose was originally governed by German law. The governing law and
jurisdiction clause were changed to English law in accordance with the
provisions of the agreements that allowed this. Hildyard J was satisfied that
the relevant foreign courts would recognise a court order sanctioning the
schemes. Hildyard J was satisfied that the governing law and jurisdiction
clause gave rise to sufficient connection with England to justify the court
exercising jurisdiction to sanction the schemes.
The assumption that the compromise of a creditor's rights, in accordance
with the laws which govern them, will be recognised in jurisdictions in
which a creditor would otherwise be likely to seek enforcement is crucial

31 [2014] BCC 448.

3 [2014] 4 All ER 150.

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(2017) HKLJ

to the efficacy of schemes in a transnational context where the company

has little or no other connection with England. As Lawrence Collins J
explains in Drax Holdings at [30]:
 "In the case of a creditors' scheme, an important aspect of the
international effectiveness of a scheme involving the alteration of
contractual rights may be that it should be made, not only by the court
in the country of incorporation, but also (as here) by the courts of the
country whose laws governs the contractual obligations. Otherwise
dissentient creditors may disregard the scheme and enforce their claims
against assets (including security for the debt) in countries outside the
country of incorporation."

It seems to me that the rule in Gibbs, which as I have already mentioned

is that as a matter of the common law, a foreign composition of debt
does not discharge a debt unless it is discharged under the law governing
the debt, underpins the developments in restructuring in recent years
in London. It is the assumption that a contractual debt should be
compromised under the law, which governs it, which justifies treating the
governing law as sufficient connection to exercise jurisdiction to sanction
a scheme. However, the rule in Gibbs has been subject to recent criticism
most prominently in Kannan Ramesh JC's judgment in Pacific Andes33 -
much of the criticism is taken from Look's book.4
In summary, the criticism is that Gibbs hinges on analysing the issue in
contractual terms: the parties agreed to the transaction being governed by
Hong Kong law and possibly subject to the exclusive jurisdiction of Hong
Kong courts, and the insolvent party should be held to that bargain.
This is clearly supportable when the parties are solvent, but not so when
one of them ceases to be so. Once a bankruptcy arises, a claimant's pre-
insolvency entitlement is determined by the statutory insolvency regime
and ceases to be a purely consensual matter.
It is out of step with the trend towards modified universalism to decline
to recognise a compromise sanctioned by a bankruptcy court whose
orders would normally be recognised and implemented. By modified
universalism, I mean the administration of multinational insolvencies by
a leading court applying a single bankruptcy law (to borrow from Lord
Collins, at [16] of Rubin).
I think the point can also fairly be made that as the courts have been
willing in cases such as Aoki to manage the impact of Gibbs and prevent
it from being used to allow a local creditor to obtain an advantage over

See Pacific Andes (n 26 above).

See Antony Gibbs (n 25 above).

Vol 47 Part 1

Cross Border Insolvency in Hong Kong 69

international creditors, by ordering a stay of the enforcement of a local
judgment, continued adherence to it appears artificial in a liquidation.
Kannan Ramesh JC suggests that the reformulation of the rule in Gibbs
suggested by Professor Ian Fletcher in Insolvency in Private International
Law has much to commend it:

"In the case of a contractual obligation which happens to be governed by

English law, a further rule should be developed whereby, if one of the parties
to the contract is the subject of insolvency proceedings in a jurisdiction
with which he has an established connection based on residence or ties of
business, it should be recognised that the possibility of such proceedings
must enter into the parties' reasonable expectations in entering their
relationship, and as such may furnish a ground for the discharge to take
effect under the applicable law."

However, this reformulation would be of limited assistance in the context

of restructuring in Hong Kong because a scheme of arrangement is not
an insolvency proceeding: the relevant provisions are not included in the
Companies (Winding Up and Miscellaneous Provisions) Ordinance, but
the Companies Ordinance and schemes can (as in Winsway and Kaisa)
be introduced to compromise contractual debts of companies that are not
subject to insolvency proceedings.
Gibbs does not seem to pose a problem in the case of restructuring in
the Hong Kong context as demonstrated in LDK, Winsway and Kaisa.
The reason it has attracted attention recently is perhaps to be found in
[51] of Pacific Andes:

"The reformulation of the principle in Gibbs is an important and timely

step in the global insolvency landscape as it may otherwise prove to be an
impediment to 'good forum shopping'."

What is "good forum shopping"? Newey J in his December 2015 decision

in Re Codere Finance (UK) Ltd" talked in terms of it being an attempt:

"to achieve a position where resort can be had to the law of a particular
jurisdiction, not in order to evade debts but rather with a view to achieving
the best possible outcome for creditors. If in those circumstances it is
appropriate to speak of forum shopping at all, it must be on the basis that
there can sometimes be good forum shopping."
That may make sense in an environment where there is limited
competition between jurisdictions for court supervised restructuring
processes - and there is limited competition between England, Europe or

[2015] EWHC 3778 (Ch), [18].

70 Jonathan Harris J

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Vol 47 Part 1 Cross-Border Insolvency in Hong Kong 71

the United States because none of the continental European jurisdictions

or the United States have schemes of arrangement or mechanisms of
comparable effectiveness - but that is not the case in this region or the
Caribbean.

5. Conclusion

Viewed from a judicial perspective, what is desirable is cooperation

in developing and improving the tools that we have for facilitating
restructuring. Encouraging commercial competition between similarly
placed jurisdictions is potentially counterproductive, and in my view, it
should be approached with caution.

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