Recognising Offshore Provisional Liquidation and Querying Offshore Forum Shopping Tactic: Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd

21 May 2020

In Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd [2020] HKCFI 825, Mr Justice Harris reconfirmed the propriety of recognising foreign soft-touch provisional liquidation in Hong Kong, and called into question the idea that foreign soft-touch provisional liquidation would override Hong Kong winding-up petitions.

The facts and decision

China Oil Gangran Energy Group Holdings Limited (“Company”) is incorporated in the Cayman Islands, listed on the Hong Kong Stock Exchange, and in financial difficulties.

On 2 July 2019, the Company’s shares were suspended from trading.

On 24 April 2019, the Company was subject to a winding-up petition in Hong Kong (“Petition”).

On 5 November 2019, upon the Company’s own application, the Cayman court appointed soft-touch provisional liquidators over the Company.

In March 2020, as the Company put forward a restructuring plan with a view to resuming the trading of its shares, the court adjourned the hearing of the Petition till August 2020.

In April 2020, the Cayman provisional liquidators applied for recognition and assistance in Hong Kong.

Mr Justice Harris granted the recognition order and approved the court’s past practice of recognising foreign soft-touch provisional liquidation, eg Re Joint Provisional Liquidators of Moody Technology Holdings Ltd [2020] HKCFI 416.

His Lordship also commented that, despite the Hong Kong domestic prohibition on appointing soft-touch provisional liquidators, Hong Kong’s approach in recognising foreign soft-touch provisional liquidators finds comparative support in In re Olinda Star Ltd (Bankr. SDNY, 3 April 2020) and Representation of Lydian International Limited [2020] JRC 049.

In Olinda, the US Bankruptcy Court recognised the BVI soft-touch provisional liquidation as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code. The Olinda decision thus confirms that soft-touch provisional liquidation is a collective insolvency proceeding.

In Lydian, the Royal Court of Jersey recognised at common law the Canadian debtor-in-possession proceeding coupled with the appointment of a monitor in respect of a Jersey-incorporated company, even though Jersey law does not have the same insolvency procedure. The Jersey approach is analogous to the Hong Kong recognition of foreign soft-touch provisional liquidation.

Implications for debtors’ offshore forum shopping

Hong Kong has an established practice of recognising foreign insolvency proceedings and granting a standard recognition order which stays proceedings against the debtor company.

This established practice led some quarters to expect that a Hong Kong-based, offshore incorporated debtor subject to a Hong Kong winding-up petition could outsmart creditors by simply getting an offshore soft-touch provisional liquidation order. The idea is that once the soft-touch provisional liquidation is recognised in Hong Kong, the Hong Kong winding-up petition will be stayed and sent into abeyance.

But the recognition order granted in this case expressly says it is “[w]ithout prejudice to the pending [Petition]”. Such recognition order is what “the Hong Kong Court … will normally be prepared to grant” in respect of foreign soft-touch provisional liquidation (at [12]).

The implication is that where debtors seek to oppose a Hong Kong winding-up petition in future, their ground of opposition cannot be the mere existence of foreign soft-touch provisional liquidation.

Commentary

This decision reaffirms Hong Kong’s commitment to universalism and shows the pragmatism of facilitating cross-border restructurings. Just because Hong Kong domestic law does not permit soft-touch provisional liquidation is no bar to the Hong Kong court recognising foreign soft-touch provisional liquidation.

But this decision suggests that the Hong Kong court’s universalist attitude will not extend to allowing foreign soft-touch provisional liquidation to stonewall creditors and stall legitimate Hong Kong proceedings.

Finally, this decision demonstrates again the need for insolvency law reform in Hong Kong. Mr Justice Harris commented that while the Hong Kong common law cross-border insolvency regime has helped secure many restructurings, it does not detract from the deficient state of Hong Kong domestic law. His Lordship thus issued an unmistakably urgent call to amend section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), thereby reversing the decision in Re Legend International Resorts Ltd [2006] 2 HKLRD 192.

Look-Chan Ho acted for the Cayman provisional liquidators

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