Introduction

In the cross-border winding-up of a company with multi-national businesses, where foreign insolvency proceedings have been commenced in the jurisdiction of the company’s main place of business, the need for concurrent liquidations in other jurisdiction depends on the circumstances.For example, if the company’s assets in Hong Kong are not too substantial, a foreign liquidator may exercise his power in relation to the Hong Kong assets with a Hong Kong court’s recognition.However, if the Hong Kong assets are substantial or large number of creditors are involved, separate liquidation proceedings and appointment of liquidators in Hong Kong may be required.

Insolvency protocol

Concurrent liquidations in cross-border insolvency can be dealt with by two different approaches.First, the Hong Kong liquidators may apply to the court to determine any questions on the administration of the Hong Kong insolvency proceedings.The court will deal with the questions by identifying the principal and ancillary jurisdictions, and adopting the principle of comity.This process is time-consuming and cannot fully address the need for restructuring under modern insolvency regime.Alternatively, foreign and Hong Kong liquidators may agree on an insolvency protocol, which is a private agreement for resolving any overlap and conflict in relation to litigation, information, administration and ultimately, costs, of concurrent insolvency proceedings in different jurisdictions.In Hong Kong, there is no legislation that deals with matters affecting cross-border liquidation.The Hong Kong courts have in recent years adopted the approach of approving cross-border insolvency protocols by liquidators to deal with such situations.

By agreeing on an insolvency protocol, the global assets may be maximised for the benefit of creditors worldwide.The advantages and applications of insolvency protocol have been much discussed and this article briefly dealswith the legal status of insolvency protocol.

Enforceability

From the perspective of liquidators, the biggest reservation in agreeing to an insolvency protocol with foreign liquidators is the risk of compromising the interests of the local creditors and breaching their primary obligation to the court appointing them and thus attracting claims and liabilities.Therefore, enforceability of an insolvency protocol is important, as it not only ensures commitment of each liquidator to coordinate concurrent insolvency proceedings, but also justify a liquidator’s decision to entering into and acting on an insolvency protocol.

Court approval

How can a liquidator ensure the enforceability of an insolvency protocol in Hong Kong? Strictly speaking, an insolvency protocol is not legally binding nor legally enforceable.However, liquidators may apply to a court in Hong Kong under section 200(3) of the Companies Ordinance for approval of an insolvency protocol and authority to enter into and implement the protocol.By getting approval of the protocol from the Hong Kong court, a liquidator can better protect himself in the event of creditors’ challenge for his entering into and acting on the protocol.On the other hand, anyone aggrieved by the Hong Kong liquidator not abiding by the protocol may apply to the court for directions under section 200(5) of the Companies Ordinance.

Hong Kong court’s approach

Given the limited legal provisions for cross-border insolvency, the Hong Kong court is generally open to consider applications for approval of insolvency protocol agreed between Hong Kong and foreign liquidators.For example, in Re Kong Wah Holdings Ltd & Another [2004] 1 HKLRD C9 and C11, a case that involved cross-border liquidation in Hong Kong and Bermuda, the court adopted an approach as follows: first, in ordinary situation, the court would be ready to accept the professional judgment of insolvency practitioners in agreeing on an insolvency protocol to coordinate concurrent liquidation.Second, the Hong Kong court would generally take a limited supervisory role in approving an insolvency protocol, but still has to be satisfied that the protocol is consistent with the notion of comity.The Hong Kong court, in adopting the view of the United States Court of Appeal in Cunard Steamship Company Limited v. Salen Reefer Services AB 773F 2d 452 (1985) observed that the granting of comity to an insolvency proceeding is to enable the company’s assets to be dispersed in an equitable, orderly, and systematic process.

From the court’s approach in Kong Wah, to seek the Hong Kong court’s approval of an insolvency protocol in an uncontroversial case, the protocol should (1) be consistent with the relevant provisions of Hong Kong and the other jurisdictions’ laws and rules; (2) have the objective of administering concurrent insolvency proceedings in an economical manner to reduce conflicts and complications for the benefit of creditors; and (3) observe the principle of equality of treatment for all creditors without dis-applying the Hong Kong statutory scheme of distribution.Further, the Hong Kong and foreign liquidators should have consensually adopted the protocol without either party seeking to impose terms on another.

Conclusion

By adopting insolvency protocol, liquidators benefit from the flexibility of this private agreement in saving duplicated effort and avoiding the need to determine difficult questions of conflict of laws that arise in cross-border insolvency.However, given each liquidator’s primary obligation to the court and creditors within the jurisdiction he was appointed, he has a legitimate need to ascertain the enforceability of an insolvency protocol.In Hong Kong, seeking the court’s approval of a protocol would optimise its utility in cross-border insolvency and protect the liquidator at the same time.