In the recent case of The Joint Official Liquidators of a Company v B & C HCMP 902/2014, Harris J has aligned Hong Kong’s position with the rest of the common law world in deciding that the courts of Hong Kong will recognise and assist foreign liquidators in obtaining information and documents in Hong Kong.

Background

Liquidators of a Cayman Islands company wound up by the order of the Grand Court of the Cayman Islands (the “Cayman Court”) made applications for the following orders to the Hong Kong court:

1. A confidentiality order;
2. Recognition of the liquidation in the Cayman Islands and the appointment by the Cayman Court of the liquidators;
3. An order that the respondents produce certain documents to the liquidators concerning details of bank accounts into which substantial sums of money were paid by the company suggesting fraud.

The applications were made pursuant to a letter of request by the Cayman Court requesting the High Court of Hong Kong to make the orders described above.

Trouble Spots

Harris J remarked that there is a “lack of cooperation from banks… and… auditors” when faced with a request or instruction from a liquidator of a foreign corporation to act upon a request or instruction for information. The typical response from these parties would be that the liquidator’s appointment is not effective in Hong Kong and that they require an order from the Hong Kong courts before they will act, which has been cited as one of the reasons why a foreign liquidator has sought to wind up in Hong Kong the company over which he has been appointed in its place of incorporation.

Such a state of events was dissatisfactory, as Harris J held that “it should not be necessary to do this [wind the company up in Hong Kong] simply to enable a foreign liquidator to obtain information and documents in Hong Kong” but noted that there is an important distinction between information and assets in insolvency. In terms of assets, a foreign liquidation has no automatic consequences in relation to the property of a foreign company in a local jurisdiction and in consequence, an application needs to be made by a foreign liquidator for an order vesting him with title to the local property. However, when it comes to information, there should be no need to wind the company up in Hong Kong in order to get information here.

In his judgment, Harris J explored the principles of private international law and recent case law in other commonwealth jurisdictions applying to foreign companies before deciding to grant the orders sought.

Principles

Dicey, Morris & Collins

The Court adopted as its starting point the rules in The Conflict of Laws, Dicey, Morris & Collins, 15 ed:

1. Rule 174 – the existence or dissolution of a foreign corporation duly created or dissolved under the law of a foreign country is recognized in England;
2. Rule 175 – (i) the capacity of the corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question; (ii) all matters concerning the constitution of the corporation are governed by the law of the place of incorporation;
3. Rule 179 – the authority of the liquidator appointed under the law of the place of incorporation is recognized in England.

In sum, the essence of the rules stated above is that the constitution and management of the affairs of a foreign company are determined by the laws of its place of incorporation. The laws of the place of incorporation determine who is entitled to act on behalf of the company. Consequently, if a person in Hong Kong receives a request or instruction from a liquidator of a foreign corporation, he should, once satisfied that the liquidator was properly appointed in the place of incorporation, act upon the request or instruction.

Universalism

Harris J then went to discuss the concept of “universalism” or “modified universalism”, citing the case of Rubin v Eurofinance SA [2013] 1 AC 236. It was held in that case that there was a need for international cooperation in cross-border insolvencies and the trend in the common law world known as “universalism” or “modified universalism”. That trend requires cooperation by the courts of one jurisdiction with 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. Harris J also mentioned that the US courts have adopted modified universalism as the approach to international insolvency, which means that assets should be collected and distributed on a worldwide basis but local courts may reserve discretion to evaluate the fairness of home country procedures and protect the interests of local creditors.

Case Law

Honing in on Hong Kong after an examination of the relevant principles and concepts, Harris J remarked that Hong Kong is not a party to the UNCITRAL Model Law on cross-border insolvency and that our legislation contains no provisions dealing with cross-border insolvency. Notwithstanding, the court has power to recognize and grant assistance to foreign insolvency proceedings under common law. Two cases from commonwealth jurisdictions were cited in support of this proposition.

In re Impex Services Worldwide Ltd [2004] BPIR 564

Impex Services is a case in the Isle of Man where the Manx High Court was faced with a letter of request from the English High Court at the instigation of the provision liquidator requesting assistance to facilitate the examination and production of documents by various Manx parties. Like Hong Kong, the Isle of Man does not have statutory provisions dealing with assistance to foreign liquidators, making the case of relevance to Hong Kong.

The request was granted at common law, it being held that Manx common law had previously shown its ability to adapt to the changing needs of justice and the international business community and could offer the assistance requested by a friendly court. Granting the request was appropriate given that the subject matter was a potential VAT fraud and it had been shown to the satisfaction of the English High Court that the Manx parties should be examined and produce documents. The importance of the information sought and the interests of those requesting it had to be balanced against any issues of confidentiality and the court was obliged to exercise its discretion to assist judicially and with caution.

Re Founding Partners Global Fund Ltd [2011] Bda LR 22

Founding Partners involved a consideration of competing claims to assets of a Cayman Islands company situated in Bermuda. The competing claims were between the Cayman provisional liquidators and a receiver from Florida. Bermuda (like the Isle of Man and Hong Kong) has no legislation dealing specifically with cross-border insolvency and thus the court was required to apply the rules of private international law.

Applying the Dicey, Morris & Collins’ formulation above that the authority of the liquidator appointed under the law of the place of incorporation is recognized in England, the Bermudan court held that it had a positive duty to assist the liquidators appointed by the Cayman Court and recognize them as entitled to control the company’s assets located in Bermuda. The factors to take into consideration are that: (i) the foreign substantive law (under which the claims are available to the Caymanian provisional liquidators) to be applied is broadly similar to local insolvency law and (ii) the specific relief which is sought is available under local law.

Conclusion

Harris J concluded the review of the cases with the finding that both cases demonstrated how courts in different common law jurisdictions adopt a consistent and expansive view of the extent to which established common law principles require the court to recognize foreign liquidators and allow the court to provide assistance to them. He held that Hong Kong courts should adopt a similar approach to applications for recognition and assistance as the Bermudan court. Lastly, in view of the ongoing review of Hong Kong’s existing insolvency legislation, he opined that Hong Kong’s new insolvency legislation should include provisions dealing expressly with cross-border insolvency such as that found in the UK’s section 426 of the Insolvency Act 1986, which allows for judicial comity between the UK Courts and those of relevant countries or territories as designated under UK law.