The recognition of an offshore provisional liquidation does not automatically stay proceedings in Hong Kong
In the recent case of Re FDG Electric Vehicles Limited  HKCFI 2931, the Court held that when the Hong Kong court recognises offshore provisional liquidation, there would not be an automatic stay of proceedings in Hong Kong.
FDG Electric Vehicles Limited (the “Company”) was put into provisional liquidation in Bermuda where it was incorporated. The Joint and Several Provisional Liquidators (the “JPLs”) applied to the Hong Kong Court for an order of recognition and assistance. The two issues before the Court were as follows:
1. Should the order give the JPLs the power to take control of all directly and indirectly owned subsidiaries of the Company?
2. What, if any, stay should be ordered in respect of existing or prospective proceedings against the Company in Hong Kong?
Scope of power of a foreign liquidator
When the court recognises foreign corporate insolvency proceedings, the court may permit the foreign liquidator to take control of the Company’s assets in Hong Kong. This will extend, if relevant, to shareholdings in Hong Kong incorporated companies.
The Court found that the application seemed to envisage a power to take control of foreign incorporated subsidiaries and in so doing overlooked the significance of two conflict of laws rules. First, property and contractual claims to shares in a company should be determined by the lex situs, and shares have their situs in the place of incorporation of the company - Chen Lingxia v 中國金谷國際信託有限責任公司  HKCFI 379, . Secondly, the question of whether foreign liquidators are agents of the debtor company is governed by the law of the place of a company’s incorporation (lex incorporationis) - Re Moody Technology Holdings Limited  2 HKLRD 187, .
The Court held that the application overlooked both that the scope of the JPLs’ powers as representatives of the Company are governed by the law of Bermuda but not Hong Kong law, and that the relevant Bermuda subsidiary is owned through subsidiaries incorporated in the British Virgin Islands (the “BVI”). To take control of the Bermuda subsidiary thus involves taking control of the BVI subsidiaries. Assuming that the powers granted to the JPLs extends to obtaining control of the BVI subsidiaries, whether the JPLs are able to obtain control of the BVI subsidiaries is a matter of BVI law but not Hong Kong law.
In light of the Court’s comments, the JPLs and the Bermuda subsidiary came to an agreement that the power to take control of subsidiaries should be limited to those which are incorporated in Hong Kong and held either directly or, if indirectly, through Hong Kong incorporated intermediate subsidiaries.
Stay of proceedings in Hong Kong
The standard recognition orders that have until recently been granted contained a paragraph in the following terms:
For so long as the Company remains in liquidation in [relevant jurisdiction], no action or proceedings shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Honourable Court, except with the leave of this Honourable Court and subject to such terms as this Honourable Court may impose.
The order so worded gives rise to two questions. First, if there are already proceedings on foot in Hong Kong, one would expect an application for a stay to be made in those proceedings. Secondly, whether or not it is appropriate to grant a stay in respect of unidentified prospective proceedings about which, necessarily, nothing is known.
It is well established that the court has a power at common law to assist a foreign liquidation by ordering a stay of proceedings within its jurisdiction. The underlying rationale for the common law power of assistance is modified universalism. If an application for recognition is made by liquidators, or their equivalent, appointed over a company that has been wound up for the purpose of collecting a company’s assets and distributing them amongst its creditors, it is likely that the court will accept that it is being asked to use its common law powers for the purpose that it is intended, namely, to ensure that all a company’s assets are distributed to its creditors under a single system of distribution.
Considerations relevant to the propriety of stay
In considering whether a stay is appropriate, the Court would consider two questions - the first concerns whether offshore soft-touch provisional liquidation should be treated as a collective insolvency process for all purposes. It is observed that many of the applications have been made to the court with a view to facilitating a restructuring of a company’s debt using a scheme of arrangement introduced in both the jurisdiction of incorporation and Hong Kong. However, the fact that the courts have found that the common law principles support assisting a soft-touch provisional liquidation does not mean that the courts have accepted that a foreign soft-touch provisional liquidation is for all purposes to be treated as a collective insolvency process.
Another consideration is the impact of the English Court of Appeal’s decision in Antony Gibbs & Sons v La Société Industrielle et Commerciale Des Métaux  25 QBD 399. The Gibbs rule states that a foreign insolvency proceeding does not discharge or compromise a debt unless it is discharged under the law governing the debt.
The Court left these questions open in Re FDG, but stated that they should be argued on a case-by-case basis. It would thus be wrong for the court to make orders staying proceedings other than as a result of an application and where the parties concerned would have the opportunity to argue the alternative.
The Court therefore held that the order would be more appropriately drafted in terms, which did not purport to impose a stay, but required appropriate applications in High Court proceedings to be issued and returnable before the judge granting the recognition order. Harris J therefore granted an order as follows:
If the Provisional Liquidators wish to apply for a stay or other directions in respect of proceedings in the High Court of any sort as a consequence of the recognition of their appointment by this order such application shall be listed before the Honourable Mr. Justice Harris or such other judge as he shall direct. The Provisional Liquidators shall write to the clerk to the Honourable Mr. Justice Harris seeking case management directions for the determination of any application that they wish to make pursuant to this order.
The decision of Harris J has cleared up some confusion and is to be welcomed. It is now settled that the recognition of offshore soft-touch provisional liquidation does not automatically stay proceedings in Hong Kong and the provisional liquidators who wish to stay such proceedings must make the appropriate application to the Court.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020