The Hon. Mr. Justice Jonathan Harris, who sits as a judge in the Court of First Instance, Companies Court of Hong Kong, describes his career progression and speaks frankly about a variety of insolvency and restructuring issues Hong Kong currently faces and how they might be addressed.
“I was initially thinking in terms of a two-year period,” said Justice Jonathan Harris, current Companies and Insolvency Judge of the High Court, when discussing his decision to move from London to Hong Kong in 1983 as a trainee solicitor. Thirty-four years later, he sits in his chambers reflecting on his work as a Hong Kong solicitor, barrister and judge. What becomes clear as he continues to describe his distinguished career is that he has remained flexible and curious throughout his journey, approaching each transition with a willingness to make and remake himself so that he can pursue the work he finds most interesting.
For instance, he shared that he left his practice at a major international firm to join the Bar because it appeared it would offer a much better opportunity to do a more varied selection of commercial work. Not only was his assessment correct, but his work at the Bar also lead him to take up company and corporate insolvency and securities work, which he discovered he enjoyed more than the work he undertook as a solicitor. Equally fulfilling has been his move from the Bar to the Judiciary. “Advocacy and arguing with people had lost its novelty, so accepting the appointment was an obvious next step. It presented me with a worthwhile and valuable way to contribute to a place where I have spent for all practical purposes my entire working life,” he said.
In reflecting on his time with the Judiciary, he explained: “one of the things that I appreciate the longer I do this job is that what I find most satisfying is solving problems. Advocacy doesn’t involve solving problems – rather you are taking part in an intellectual competition. Whilst that was stimulating when I was younger, as I have gotten older, I have become more interested in identifying efficient and effective ways to solve the types of commercial problems companies’ activities give rise to and corporate insolvency, in particular. The corporate insolvency and restructuring field is about helping parties solve practical commercial issues.”
One collaborative initiative in which Justice Harris has been involved is the Judicial Insolvency Network (“JIN”). JIN is a Singapore-led initiative that was launched in the face of a growing volume of international work insolvency courts have faced over the last decade to facilitate a sustained and continuous dialogue among judges from various jurisdictions. Through JIN, it is hoped that new ideas and areas for judicial cooperation can be identified and best practices can be developed. One of the network’s early successes is the JIN Guidelines, which were drafted last October at the culmination of JIN’s inaugural conference in Singapore. The conference attendees included judges from key jurisdictions that hear international insolvency matters, such as Singapore, Hong Kong, the Cayman Islands, British Virgin Islands, Australia, Canada, England & Wales, and the US.
In discussing the Guidelines, Justice Harris noted that they were drafted with the aim of improving the efficiency and effectiveness of cross-border proceedings relating to insolvency or adjustment of debt opened in more than one jurisdiction (parallel proceedings) by enhancing coordination and cooperation amongst courts under whose supervision such proceedings are being conducted. These Guidelines represent best practice for dealing with parallel proceedings and are in line with and further the objectives of the UNCITRAL Model Law on Cross-Border Insolvency, in that they both aim to reduce the amount of legal costs incurred during cross-border insolvency proceedings, and in doing so, preserve the value of financially distressed businesses and their assets.
To date, Singapore, Bermuda, Delaware (US) and the Southern District of New York (US) have adopted the JIN Guidelines. In addressing whether Hong Kong should also adopt the Guidelines by way of Practice Direction, Justice Harris indicated it was likely not necessary. “The Guidelines are mainly of assistance in that they spark discussion and get people to think creatively. Out of that process, people can come up with innovative solutions to issues and problems they are encountering including court-to-court communication. If practitioners and the court think that a protocol based on the Guidelines providing for court-to-court communication is sensible and desirable, then such a protocol can be adopted just as past protocols have been adopted in Hong Kong in cross-border insolvency matters.”
As for the utility of one of the most ambitious aspects of the Guidelines, the provision for joint hearings, Justice Harris’ views are similarly tempered. While useful, in that the provision encourages stakeholders and judges to be innovative, he explained that cases that may require joint hearings are extremely uncommon in Asia. First, he noted that many cases are non-contentious. For those, stakeholders are just trying to work out the best way forward as quickly and efficiently as possible. Second, he explained that even where there are contentious parallel proceedings, issues which arise and require a joint consideration by the judges of the most effective way of managing the proceedings can generally be resolved via email or a short telephone conversation. As for joint hearings to determine substantive issues, Justice Harris thought many things militate against these being realistic, such as differences in substantive or procedural law; different time zones and languages used by participants; as well as the possibility of different judges reaching different decisions. “Joint hearings sounds like a new and exciting initiative, but I think they will be very rare.”
Justice Harris noted that as far as he is aware the only joint trial that has taken place is the Nortel proceedings and that involved Delaware (US) and Ontario (Canada).
Elephant in the Room
Turning the focus to substantive issues, Justice Harris spoke of the law in Hong Kong on corporate rescue. In prefacing the discussion, he explained the impact of Re Legend Int’l Resorts Ltd  2 HKLRD 192 (“Legend”), a Court of Appeal decision issued in 2006 that held that the statutory power to appoint provisional liquidators under s. 193 of the Companies Ordinance (Cap. 32) to restructure a company’s debt is not permissible. Previously, it was thought that the courts had the inherent power to appoint provisional liquidators for the purpose of working out corporate rescue and this could be used to create a de facto moratorium. At present, Hong Kong lags behind a number of jurisdictions that provide effective corporate rescue tools, such as the US with its “debtor-in-possession” Chapter 11 Bankruptcy Code and the UK with its administration to facilitate the rescue of an insolvent company. In Bermuda and the Cayman Islands, provisional liquidation can be used expressly for restructuring.
Many have called for the introduction of a statutory corporate rescue regime in Hong Kong (for quite some time), as demonstrated by the comments of speakers at the inaugural Annual Insolvency Law and Practice Conference hosted by the Hong Kong Law Society’s Academy of Law in early March. It is hoped such legislation will be introduced by 2018.
Turning back to Legend, Justice Harris explained that while the decision has generally been viewed as “unhelpful in terms of restructuring”, some of the restructuring-related problems that arose in its wake are not insurmountable. For the last decade, Legend has lurked like an “elephant in the room”, he said. If people had “directly addressed” the issues it created, instead of “fudging them”, it would have become apparent earlier that there are alternative techniques that can be used that are consistent with basic common law principles in Hong Kong. For instance, the recent case of Z-Obee Holdings Ltd (2016: No. 183) (“Z-Obee”) illustrates that solutions are available.
Cutting the Gordian Knot
Z-Obee is among Justice Harris’ recent series of judgments dealing with cross-border and restructuring issues that have attracted much praise for recognising and assisting foreign liquidators. In Z-Obee, his Lordship adjourned a petition to wind up a Bermuda company in Hong Kong so that the Hong Kong provisional liquidators could apply to Bermuda to be appointed as restructuring provisional liquidators. Subsequently, the Bermuda court appointed the Hong Kong provisional liquidators as the joint provisional liquidators of the company for the express purpose of initiating a restructuring, which is a permissible purpose under the law of Bermuda.
Justice Harris explained that the next step will be for the Hong Kong provisional liquidators to be discharged and for the joint provisional liquidators appointed in Bermuda to seek recognition of their appointment here and then introduce parallel schemes to effect the restructuring in Hong Kong and Bermuda. “That has never been done before. It illustrates how you can use recognition and assistance techniques as an alternative to a domestic winding up to mitigate the effects of the Legend decision in an intended restructuring of a foreign company listed in Hong Kong.”
In addressing the praise he has received for this judgment and others, he noted that it may be attractive to say these decisions are cutting edge, as it tends to suggest that that Hong Kong is being innovative. However, he does not describe his approach as such. “In reality, what has happened is that I have encouraged practitioners to focus on the underlying principles that govern winding up of foreign companies and consider creatively how judicial assistance and recognition can be used to find simpler and cheaper solutions to common issues that historically they have tried to address by issuing a winding-up petition in Hong Kong and appointing provisional liquidators. What has become apparent is that there are tools available within the common law that allow many of the issues that have historically been fudged, namely, jurisdiction and Legend to be avoided. In a few years’ time, this may all be book standard and people may ask why we have to do things initially in the Cayman Islands, BVI or Bermuda and then come to Hong Kong. The answer is because we do not have a statutory regime which clearly states we can do what this particular technique allows us to do, because we do not have cross-border recognition provisions like they do in England, because we cannot rely on the UNCITRAL Model Law on Cross-Border Insolvency and we have Legend hovering over us.”
“This is obviously not an ideal way to work. It would be better if we had a statutory framework which was crafted to meet the needs of companies, particularly transnational companies that need to restructure sizable amounts of debt, but we don’t have that and, therefore, we are left to work with the common law techniques when developing or crafting solutions. In the Hong Kong context, Z-Obee may appear a clever way of cutting this particular Gordian knot.”
A Greater Role for Hong Kong
In addressing the need for legislative reform, the conversation transitioned into a discussion about the future of restructuring work in the region and how well Hong Kong is positioning itself to capture new work.
“There’s a certain amount of work that you would expect to be dealt with in Hong Kong because it is naturally Hong Kong-based work. Restructuring debt of companies whose place of incorporation is Hong Kong would be an example. However, there are instances where people look overseas to see if there are jurisdictions that would provide them with a greater amount of assistance to achieve what they would like to achieve. Applying for Chapter 11 protection in the US would be one example, because Hong Kong currently does not have a comparable moratorium regime. Or, take Singapore for example, which is trying to recreate itself as a restructuring hub by introducing major law reforms. Their new regime adopts a number of concepts from the US’s Chapter 11 process (including concepts of super-priority debtor-in-possession financing, a strengthened and broad reaching ‘world-wide’ moratorium and a cram-down mechanism for approval over the dissent of certain creditors, among many others provisions), all designed to increase their jurisdictional appeal.”
What does all of this mean for Hong Kong? First, these developments suggest that Hong Kong may lose out on work that it naturally would be expected to pick up, Justice Harris explained. “Implementing reforms would obviously stop some of the seepage Hong Kong currently faces and could generate a bit more work. However, not all restructuring is court supervised; some is consensual. What is fundamental if Hong Kong is to remain a competitive restructuring hub is for it to position itself to capture new work in the face of aggressive competition from other jurisdictions. It is unclear whether this is appreciated by the Administration. Of course, if Hong Kong can innovate and introduce the necessary tools, it will become the principle restructuring destination in Asia, particularly for work generated in the Greater China region.”
Expanding on the latter point, Justice Harris noted that there are currently a large number of large business groups from the Mainland with some form of listing in Hong Kong. “A number of these business groups will run into serious financial issues that will need to be addressed by sophisticated techniques. To address this issue, Mainland officials have been exploring what lessons they can learn from the restructuring tools available in the US under Chapter 11 (the US Bankruptcy Code) and from the UK’s schemes of arrangements (a statutory court supervised restructuring tool), with a view to formulating their own tools. This appears to be a priority for Mainland officials, who indicated their commitment to establishing and improving their bankruptcy system and mechanisms at the 2016 G20 Hangzhou Summit, held last September. While these officials are undertaking this research, it would make sense for Hong Kong to offer to help or think about whether it is in a position to restructure that type of debt here. There is potentially a large reservoir of work and it is an area where Hong Kong could find a constructive role to play in terms of its interface and relationship with the Mainland,” Justice Harris said.
Thoughts on the Judiciary
In the wake of recent negative comments in the press about foreign judges and the role they should play in the Hong Kong judiciary, Justice Harris offered a few remarks. “These articles are unhelpful and disappointing to judges, who like myself, have lived here almost 34 years and think of Hong Kong as our home. However, the number of Caucasian judges in the High Court will decline over the next 5 or so years. I am the youngest and when I retire there may be no more of us. It is surprising anybody thinks our presence is an issue. My concern is not so much about the impact these comments have on current judges, but how they are interpreted by members of the profession who may be thinking of joining the High Court judiciary. It is well known that there is a shortage of judges in the High Court, and this reflects a difficulty in attracting talent. Criticism of any judge risks being interpreted as an attack on the type of Judiciary Hong Kong currently has: independent and apolitical. My impression is that there is a very strong desire on the part of practitioners to maintain the current type of Judiciary and if they are concerned that it is under attack they may be reluctant to join it.”
Readers interested in a recent lecture by Justice Harris on cross-border insolvency can read the published version in Hong Kong Law Journal at “Understanding Cross-Border Insolvency in the Hong Kong Context” (2017) 47 HKLJ 55–71.