First Hong Kong Decision Refusing to Assist Offshore Soft-Touch Provisional Liquidators: Re China Bozza Development Holdings Ltd

12 May 2021

Hot on the heels of a trio of decisions concerning offshore provisional liquidation, which opened a new and commendable era for Hong Kong’s cross-border insolvency regime (see https://dvc.hk/en/news/cases-detail/heralding-a-new-and-healthy-era-of-cross-border-insolvency-recognition-in-hong-kong-re-fdg-electric-vehicles-ltd-re-lamtex-holdings-ltd-and-re-ping-an-securities-group-holdings-ltd/), Mr Justice Harris has continued this trend in Re China Bozza Development Holdings Ltd [2021] HKCFI 1235 where his Lordship granted an order limited to the recognition of offshore soft-touch provisional liquidators (“SPLs”), but without assistance. This is because the Court had concerns about the protection of creditors’ interests.

The Judgment is commendably correct, well-reasoned, and well-written.

The familiar background of Hong Kong winding-up petition followed by offshore soft-touch provisional liquidation

China Bozza Development Holdings Limited (“Company”), a Cayman company listed in Hong Kong, was in financial distress.

In May 2020, the Company became subject to a Hong Kong winding-up petition.

In December 2020, the Company obtained a Cayman court order appointing SPLs over itself. The SPLs then sought recognition and assistance in Hong Kong.

The Judgment

Mr Justice Harris granted recognition to the SPLs, recognising their status as such, but without granting any assistance. Instead, the SPLs were granted general liberty to apply for assistance if they require it and can justify it in future.

His Lordship’s reasoning strongly emphasised the need to protect creditors’ interests. That is because when a company is insolvent, the interest of its creditors become paramount, and the directors’ fiduciary duties are owed to the general body of the company’s creditors, rather than to the shareholders. Consistent with these principles, creditors should have a central role in the development of any restructuring plan (at [12]-[16]).

However, recent cases coming before the Companies Court were very different. In many of these cases, the owners and boards of these companies were more interested in avoiding liquidation and the creditors were not involved in or driving the restructuring process. There was a real concern that the creditors, whose interests were paramount, were not being considered and/or adequately protected (at [12], [18] and [22]).   

His Lordship concluded that the Court should police closely the use of soft-touch provisional liquidation in future to prevent it from being abused and to ensure that the creditors are not exploited.  In the present case, his Lordship was not prepared to grant an order providing general assistance to the SPLs because of concerns about the way in which the SPLs were approaching the case and other cases (at [22] and [23]).

Commentary

This decision is yet another classic from Mr Justice Harris, further strengthening Hong Kong’s cross-border insolvency regime and ensuring its proper use in future cases.

As his Lordship pointed out before, the whole point of offshore soft-touch provisional liquidation for Hong Kong listed companies is to get recognition and assistance in Hong Kong:

“Recognition and assistance has come to be used in one of two situations. The first is to avoid arguments over jurisdiction that can arise if a winding-up petition is presented in Hong Kong. The second involves the use of soft-touch provisional liquidation in the jurisdiction of incorporation, which has come to be used as technique to overcome the limitations in Hong Kong’s own system. As will be apparent from this summary the applications are not driven by events occurring in the offshore jurisdictions. They are driven by events occurring in Hong Kong and the Mainland and techniques developed in Hong Kong” (Re Agritrade Resources Ltd [2020] HKCFI 1967; [2020] 4 HKLRD 616 at [4] (emphasis added)).

It is thus apt that the Hong Kong Court must ensure that the recognition of offshore soft-touch provisional liquidation is consonant with general insolvency law and principles in Hong Kong, in particular the need to protect Hong Kong creditors’ interests.

Indeed, his Lordship’s emphasis on directors’ duty to creditors is sorely needed. In view of the current Hong Kong corporate governance culture, one can reasonably anticipate that the Hong Kong Court might soon stop recognising offshore soft-touch provisional liquidation as a matter of policy, except in special circumstances. Z-Obee itself would probably fall within the category of special circumstances.

This approach would tie in the Hong Kong Court’s continued willingness to recognise offshore liquidators and assist in the proper performance of their functions, such as protecting the companies’ assets for the benefit of creditors. A recent example is Re The Joint Liquidators of Nuoxi Capital Ltd [2021] HKCFI 572; [2021] HKCLC 205 where the Hong Kong Court recognised the BVI liquidators to protect the company’s assets, being the proceeds of claims against Peking University Founder Group.

Look-Chan Ho authored this article and acted for the BVI liquidators in Re The Joint Liquidators of Nuoxi Capital Ltd [2021] HKCFI 572; [2021] HKCLC 205

Terrence Tai acted for the soft-touch provisional liquidators in Re China Bozza Development Holdings Ltd [2021] HKCFI 1235.

 

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