Hong Kong does not have an equivalent regime to the United States “debtor in possession” Chapter11 Bankruptcy Code or United Kingdom administration to facilitate the rescue of an insolvent company. Nor does it have a debtor-driven restructuring provisional liquidation tool (see Re Legend International Resorts Ltd  2 HKLRD 192). However, in Bermuda and the Cayman Islands, through the common law, and legislative provision, respectively, there is a bespoke restructuring provisional liquidation tool. This tool has recently proved useful for stakeholders in relation to Bermuda and Cayman Islands companies publicly listed in Hong Kong.
In Bermuda, the Supreme Court of Bermuda has used provisional liquidation as a mechanism by which to implement financial or operational restructurings in order to effect corporate rescues, preserve value in the business for stakeholders, and ensure the company/group in question is able to continue as a viable enterprise going forward. The seminal judgment laying the foundation for the use of a restructuring provisional liquidator is the judgment of Ward CJ (as he then was) in Re ICO Global Communications (Holdings) Ltd  Bda LR 69 (see also In The Matter Of Titan Petrochemicals Limited  SC (Bda) 74 Com). In order to appoint provisional liquidators with soft powers, for example to monitor the management while restructuring takes place, it is first necessary to present a winding-up petition to the Court under s. 161 of the Companies Act 1981. The Company can then make an application to appoint a provisional liquidator with limited powers, based on the Court’s powers under ss. 164 and 170 of the Companies Act 1981. In Bermuda, the situation is more flexible than the Cayman Islands, and a restructuring provisional liquidator can in theory be appointed by, not only the company, but also the creditors.
In the Cayman Islands, companies can seek to appoint provisional liquidators pursuant to Part V of the Companies Law (2013 Revision) (“Companies Law”), specifically s. 104(3), to assist the company in promoting a compromise or arrangement with its creditors or members. An application under s.104(3) can where appropriate be made by the company on an ex parte basis on the grounds that the company is or is likely to become unable to pay its debts as they fall due and, as mentioned above, the company intends to present a compromise or arrangement to its creditors and investors – most commonly by the promotion of a scheme of arrangement pursuant to s. 86 of the Companies Law.
The Companies Law in its current state does not specifically provide for a creditor or contributory or the Cayman Islands Monetary Authority (in the case of regulated entities) to seek the appointment of provisional liquidators to promote a “light-touch restructuring” similar to s. 104(3). Instead, to have provisional liquidators appointed, these parties must first demonstrate that there are prima facie grounds to wind-up the company, and that the appointment of provisional liquidators is necessary to prevent the dissipation or misuse of assets, oppression of minority shareholders or mismanagement or misconduct by the company’s directors (s. 104(2) of the Companies Law). In such cases, the powers of the incoming provisional liquidators will be limited to safeguarding the assets on behalf of those with a financial interest and preventing any further oppression or misconduct pending the hearing of the winding-up petition.
Observations for Both Jurisdictions
In both jurisdictions, on the appointment of provisional liquidators, the Court will determine which corporate powers will remain with the directors and which will be vested in the provisional liquidators. The appointment of provisional liquidators invokes the statutory moratorium on any proceedings, including winding-up proceedings by a disgruntled creditor, being brought against the company. A moratorium is also available for risk of dissipation provisional liquidators.
In neither jurisdiction, does the moratorium prohibit secured creditors from enforcing their security. The “light touch” restructuring procedure is recognised as a robust, flexible restructuring tool that can allow the company time to put in place, for example, new funding, negotiate the cram down of debts with its creditors, release of claims and to ultimately continue as a going concern. Upon the appointment of provisional liquidators, the hearing of the winding-up petition will most likely be adjourned.
A provisional liquidator can only carry out such functions conferred on him and his powers may be limited by the order appointing him. This means that a company, working closely with its legal advisers, can request that the Court make an order in such terms that the directors of the company, subject to suitable Court supervision, remain key to managing the company’s affairs and give effect to any proposed restructuring. As such, the provisional liquidator’s powers may be tailored to the company’s needs.
Whilst the powers of a provisional liquidator are wide-ranging and similar in some ways to those which may be bestowed on official liquidators, (unless the powers have been limited by the Court as mentioned above) the effect of a winding-up order over an insolvent company is drastically different to the appointment of provisional liquidators. A winding up order would simply lead to a liquidation of the company, and in most cases a diminution in asset value, whereas provisional liquidators would attempt to restructure the debts of the company in order to potentially increase the return to creditors.
We now turn to two recent examples of successful restructurings using offshore Court provisional liquidation as a pivot, and the Hong Kong Courts in an equally important support function. The essential idea is to use the greater flexibility of offshore restructuring tools to effect a cross-border rehabilitation of global assets and liabilities.
Restructuring of LDK Solar Co Ltd
The restructuring of LDK Solar Co Ltd’s US$700 million of offshore claims provides a useful and recent example of parallel schemes of arrangement being successfully implemented in multiple jurisdictions, and is regarded as one of the headline restructurings of 2014. At its zenith, LDK Solar was the largest solar cell manufacturer in the PRC and was listed on the New York Stock Exchange. The restructuring of the LDK group is regarded as the first judicially approved, multi-jurisdictional debt restructuring of a China-based group, with two schemes of arrangement being sanctioned by the Grand Court of the Cayman Islands, three schemes of arrangement being sanctioned by the Hong Kong courts, a plan approved under Chapter 11 of the US Bankruptcy Code and an application under Chapter 15 of the US Bankruptcy Code for recognition of the Cayman scheme.
In April 2013, the company announced partial non-payment of its 4.75 percent convertible bonds due later that month. This was followed by several months of further negotiations with its creditors and the eventual appointment of joint provisional liquidators pursuant to s.104(3) of the Companies Law. With the support of the provisional liquidators, the company entered into negotiations with the holders of its 10 percent senior notes and its convertible preferred shareholders, and sought emergency funding. The successful recognition of a scheme of arrangement in a number of jurisdictions can be of significant importance to ensure that creditors cannot take unilateral action against a debtor’s assets in those jurisdictions.
In LDK Solar, where parallel schemes were successfully promoted in the Cayman Islands and in Hong Kong, each scheme being linked and inter-conditional insofar as it only took effect if the other schemes were also sanctioned by the courts. The Hong Kong courts were also satisfied that Hong Kong had jurisdiction to sanction the schemes of arrangement in respect of the foreign company (the Cayman Islands incorporated LDK Solar), and that there was “sufficient connection” with Hong Kong, citing the test in the English case of Re Rodenstock  EWHC 1104 (Ch). No single criterion, however, is to be considered an essential precondition for meeting the requirement of sufficient connection. Rather, it is a matter of judgment to be made in light of the evidence presented to the court and in light of the object and purposes of the jurisdiction invoked. “Sufficient connection” for these purposes has been found where key finance documents were governed by English law. The Hong Kong courts also consider other factors, such as whether it is likely that the scheme will achieve its purpose. The courts have to be satisfied that the scheme will be effective in practice to bind creditors opposing a variation of their rights, and that the scheme will have “substantial effect”. In considering whether a scheme will serve its purpose, the courts will also consider whether it will be recognised in those jurisdictions, for example, in which substantial assets of the company are located.
In the Matter of Contel Corporation Limited
In the Matter of Contel Corporation Limited  Bda LR 13, the Bermuda Supreme Court was asked on an ex parte application to recognise a scheme of arrangement in respect of a Bermudian-incorporated company listed on the Singapore Stock Exchange that had been sanctioned by the Singapore courts. The Bermuda court recognised the scheme, relying upon the “extremely wide” common law discretionary power to recognise foreign restructuring orders made in respect of local companies. In a scheme that seeks to alter contractual rights, the effectiveness or “efficacy” of the scheme internationally probably requires that the debtor seek not only the sanction of the court in its country of incorporation, but also of the court in the country whose law governs the contractual obligations, to ensure that dissenting creditors cannot enforce their claims against the debtor’s assets in countries other than that of its incorporation.
Common law co-operation (the UNCITRAL Model Law on Cross Border Insolvency not being applicable) between the offshore Courts and the Hong Kong Courts is highly advantageous to all stakeholders in insolvent companies. Using the higher degree of flexibility pursuant to Bermuda or Cayman Islands law to slingshot flexible restructuring into a Hong Kong context epitomises creative and modern restructuring solutions.
|The benefits of Bermuda and Cayman Islands “Light-Touch Restructuring” to an insolvent company|