Introduction

Following the Court of Appeal’s decision in Re Legend International Resorts Ltd [2006] 2 HKLRD 192, it is well established in Hong Kong that the appointment of provisional liquidators under section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong) (the “CWUMPO”) to restructure a company is not allowed. This presented difficulty to provisional liquidators who consider that restructuring, rather than winding up a company, would be more advantageous to the creditors. However, for companies incorporated outside Hong Kong, a solution may have presented itself on 21 February 2017 when the Supreme Court in Bermuda (the “Supreme Court”) handed down its judgment in In the matter of Z-Obee Holdings Limited and in the matter of the Companies Act 1981 [2017] SC (Bda) 16 Com, which indicates that companies in Hong Kong incorporated in Bermuda can avoid being caught by Legend by appointing provisional liquidators in Bermuda for restructuring purposes.

Background

The petitioner is Z-Obee Holdings Limited (the “Company”), a company incorporated in Bermuda and listed on the Hong Kong Stock Exchange. Since 27 June 2014, the Company has been in provisional liquidation, but recently, the Hong Kong joint provisional liquidators (the “JPLs”) found a potential investor to rescue the Company and hence the JPLs sought to have the Company restructured rather than wound up. By an Ex Parte Summons issued on 9 February 2017, the Company applied to appoint the JPLs as Bermuda JPLs for the explicit purpose of restructuring the Company. If the application was granted, it was anticipated that the present Hong Kong winding-up proceedings would be discontinued and that the Bermuda JPLs would apply to the Supreme Court for the issue of a Letter of Request to the Hong Kong Court for assistance in the form of promoting a parallel scheme of arrangement in Hong Kong, serving as the additional liquidation forum, to the scheme that the JPLs would seek to implement in Bermuda.

Judgment

The Supreme Court granted the Company’s application to appoint JPLs for restructuring purposes. Highlights of the decision are as follows:

Established practice in Bermuda of appointing
provisional liquidators to manage restructuring

The judgment contained two cases which exemplify the Bermudian Courts’ established practice of using provisional liquidation in a wide range of circumstances as a mechanism to implement financial or operational restructurings to effect corporate rescues. The first case, Re Up Energy Development Group Limited [2016] SC (BDA) 83 Com, entailed a restructuring plan which contemplated an eventual winding-up order. It was held that such factor was not pivotal to the analysis and that the Bermudian Court has jurisdiction to appoint provisional liquidators in wide-ranging situations, including companies which are not inevitably liable to be wound-up or where there is no need to displace the existing management altogether. Such arrangement is colloquially referred to as “soft” monitoring powers given to provisional liquidators where pre-existing management is kept in place, and the monitoring powers are designed to reassure the creditors and the Court that assets are not being dissipated.

The other case is Re Titan Petrochemicals Limited [2013] Bda LR 76 in which the anticipated outcome was not a relevant consideration in appointing provisional liquidators to restructure a company and it appeared that the majority of creditors favoured a restructuring over a winding-up. It was held that the powers of the Bermudian Courts to adjourn winding-up petitions to enable restructurings have been exercised in various cases for more than 10 years. Hence, the practice of using provisional liquidation proceedings in aid of restructurings is too well established to be departed from, even though the practice is only expressly supported by local first instance decisions.

Statutory jurisdiction to appoint provisional liquidators
to implement a restructuring

As seen from the above two cases, Bermudian Courts have a broad discretion to adjourn a petition for good reason, and such power is flexible enough to include adjournment to enable alternatives to a winding-up to be explored. Sections 164(1) and 170(3) of the Bermuda Companies Act 1981 were quoted to show that the language of the section is expressed broadly enough for the Court to consider a restructuring when hearing a winding-up petition. For example, section 164(1) of the Bermuda Companies Act 1981 provides that the Court may, on hearing a winding-up petition, dismiss it, adjourn the hearing conditionally or unconditionally, “or make any interim order, or any other order that it thinks fit…”. Evidently, the primary purpose of the winding-up jurisdiction of protecting the best interests of the general body of unsecured creditors includes considering the alternative option of restructuring.

Conclusion

As a great number of Hong Kong listed companies are incorporated in Bermuda, this decision opens the way for the restructuring of these companies when they are in financial trouble by way of appointment of provisional liquidators by the Bermuda court. Hong Kong’s inflexible approach enshrined by the Legend decision appears to be not in line with international trend.