Cross-Border Assistance in Insolvency Proceedings

Ian Mann, Partner and Alexandra Murphy, Associate, Harneys Litigation and Restructuring Dept, Hong Kong

The Common Law and Recognition of Foreign Liquidation Proceedings

Hong Kong is not a signatory to the UNCITRAL Model Law concerning cross-border insolvencies, and nor are various offshore jurisdictions. For example, the common law jurisdiction of the Cayman Islands is not a signatory, Bermuda is not a signatory; and whilst the British Virgin Islands (“BVI”) has signed up, it has not put the enabling statute into effect. These common law jurisdictions are, as is well recognised, very frequently involved as jurisdictions of incorporation of companies with Hong Kong connections and business.

Within the common law world, the Caribbean Courts and the Hong Kong Courts are clearly open to the incremental increase in their power to assist with foreign insolvency proceedings, seemingly despite the recent apparent mauling of the principle “modified universalism” in the UK Supreme Court decision of Singularis Holdings Limited v PricewaterhouseCoopers [2014] UKPA 597. It should be noted that the principle of modified universalism at least still exists according to the dicta of Lord Sumption in Singularis and is said to be “part of the common law”. However, and although this is not the place for a comprehensive analysis, Singularis has put serious restrictions on the utility of modified universalism.

Despite this, it may be that the common law courts of the non-Model Law jurisdictions will strain at the bit in the next few years to do everything possible to make cross-border insolvency and restructuring effective for a company or group of companies across borders. The limits of this are still being tested.

Hong Kong

For example, in a Hong Kong Companies Court case called Joint Official Liquidators of A Co. v B [2014] 4 HKLRD 374, Mr.Justice Harris found:

  • The common law provides the court with power to recognise foreign liquidators and to assist the courts of the place of the company’s incorporation to properly investigate the affairs of that company, provided that this foreign jurisdiction operates a similar insolvency regime;
  • The law of the place of the company’s incorporation was determinative of who was entitled to act on behalf of a corporation. If a liquidator was appointed over a company pursuant to that law, his authority to act would be recognised in Hong Kong; and
  • The Hong Kong Companies Court could, and should, pursuant to a letter of request from a common law jurisdiction with similar insolvency law, make an order of a type which was available to a liquidator or a provisional liquidator under Hong Kong’s insolvency regime.

Therefore, whilst there are certain limitations, the Hong Kong courts are willing and open to providing assistance to other common law jurisdictions with their domestic insolvency proceedings.

BVI

In the BVI, Part XIX of BVI’s Insolvency Act 2003 provides a framework enabling the BVI Court to provide assistance in foreign insolvency proceedings in relation to BVI companies or assets of a foreign company subject to BVI law or held within the BVI. It operates on an application-by-application basis for recognition and gives a foreign representative express rights to apply to the court for orders in aid, but without conferring status (Irving H Picard v Bernard L Madoff Investment Securities LLC (BVIHCV 0140/2010)). Part XIX allows a foreign representative from certain jurisdictions (including Hong Kong) who has been appointed as a result of foreign proceedings to apply to the BVI court for assistance.

Cayman Islands

In the Cayman Islands, Part XVII of the Companies Law codifies the Grand Court’s powers to make orders in aid of foreign insolvency proceedings, and does so in terms substantially similar to the key tenets of the UNCITRAL Model Law. However, under Part XVII, the Grand Court at all times retains its discretion in relation to making orders ancillary to or in assistance of a foreign proceeding.

African Minerals

In a recent case from the High Court of Hong Kong, The Joint Administrators of African Minerals Ltd (in administration) v Madison Pacific Trust Ltd and Shandong Steel Hong Kong Zengli Limited [2015] HKEC 608 (“African Minerals”), Mr.Justice Harris was asked to decide whether the Hong Kong Companies Court should provide assistance to insolvency proceedings in London – in this case an administration under the supervision of the English High Court. The company in administration, African Minerals Ltd (the “Company”), was incorporated in Canada and continued in Bermuda. It was thus neither a Hong Kong nor an English company.

The Company was involved in the exploration of minerals and development in Sierra Leone, and operated through Bermudian subsidiaries. Pursuant to a finance facility, the Company acted as guarantor and had charged the shares it owned in two of its Bermudian subsidiaries (the “Shares”) in favour of the facility lenders. At the time of the application, a Hong Kong incorporated company, Madison Pacific Trust Ltd (“Madison”), was the agent and security agent in respect of the finance facility.

The Administrators were appointed over the Company by the High Court of England, and they were concerned that the interests of the unsecured creditors and shareholders may be prejudiced by the sale of the charged shares at an undervalue by Madison. A moratorium was imposed, and the terms provided that “no step may be taken to enforce security over the Company’s property”, subject to the exceptions of where the Administrators’ had provided consent, and with the court’s permission.

The Administrators of the Company applied ex parte on notice to the Hong Kong court, initially by way of a letter of request issued by the English High Court, seeking an order to restrain the enforcement of the security over the shares. It had not yet been finally determined whether the moratorium of the administration would apply extra-territorially, and the application was made pending this decision.

Mr. Justice Harris found that whilst the courts are able to take a “generous view of its power to assist a foreign liquidation process this is limited by the extent to which the type of order sought is available to a liquidator in Hong Kong under [its] insolvency regime and common law and equitable principles”. In doing so, he cited the decision of Lord Sumption in Singularis where it was held that the common law empowered courts to recognise and grant assistance to foreign office-holders in insolvencies with an international element. Recognition of a foreign insolvency carries with it the active assistance of the court. However, the principle is subject to local law, and to local public policy: a court can only act within the limits of its own statutory and common-law powers.

Lord Sumption recognised that such common law assistance cases took a variety of forms, including “the vesting of English assets in a foreign office-holder, or the staying of local proceedings, or orders for examination in support of the foreign proceedings, or orders for the remittal of assets to a foreign liquidation.” In each case, the foreign court was one of “competent jurisdiction” in that “the bankrupt was domiciled in the foreign country or, if a company, was incorporated there.”

In African Minerals, the Administrators had not sought an injunction to prevent an alleged breach of an obligation or duty, but had sought recognition of the English proceedings, along with an order restraining the enforcement of the security on the same terms as the order from the English High Court. Mr.Justice Harris identified that Hong Kong does not currently have any equivalent procedure to administration, and no statutory provision for a moratorium on the enforcement of a secured debt.

Mr. Justice Harris considered that only in limited circumstances could a Hong Kong company or liquidator seek an order to achieve the effect of that sought by the Administrators, for example if the proposed enforcement would improperly prejudice the equity of redemption, or if it would be inequitable to allow enforcement of the security because the Company was now in a position to meet its payment obligations. In each case, the application would be for an injunction, which was not sought. He therefore found that to grant the order as sought “would be an impermissible extension of the common law principle that requires the court to recognise foreign liquidators and assist them”.

The next question must surely be whether a Hong Kong, BVI or Cayman Islands Court would recognise foreign liquidation proceedings in a country other than that of the company’s incorporation, where the decision turns on this question. For example, would these Courts recognise an English Court appointed liquidator appointed over a Bermuda company? There seems no reason in principle why recognition and concomitant assistance should not be granted in these circumstances all being equal.

However, in Rubin v Eurofinance [2013] 1 AC 236 Lord Collins identified the general rule that “the English court recognises at common law only the authority of a liquidator appointed under the law of the place of incorporation (Dicey, 15th ed, para. 30R-100)”, and contrasted this position with the “modern approach in the primary international and regional instruments, the EC Insolvency Regulation on Insolvency Proceedings (Council Regulation (EC) No 1346/2000 (“the EC Insolvency Regulation”) and the Model Law, which is that the jurisdiction with international competence is that of the country of the centre of main interests of the debtor (an expression not without its own difficulties).”

Conclusion

It remains to be seen how the courts will treat foreign liquidation proceedings in a country other than that of the company’s incorporation, where the decision turns on this question.

Jurisdictions: