Briefings

Case update: Cross-border insolvency, November 2016

In The Joint Provisional Liquidators of BJB Career Education Company Limited (In Provisional Liquidation) v Xu Zhendong¹, the Court of First Instance considered the Hong Kong courts' common law powers to recognise and assist foreign courts and insolvency practitioners overseeing non-Hong Kong insolvency proceedings.

The questions considered by the court were:

1. Specifically, whether the Hong Kong courts' common law powers permitted the court to make orders compelling a former officer of an insolvent company to assist its liquidators.
2. More generally, whether assisting foreign courts overseeing non-Hong Kong insolvency proceedings is permitted under Hong Kong's Basic Law.

In a welcome judgment, the court concluded that the answer was 'yes' on both counts.

Facts and background

In July 2016, BJB Career Education Company Limited (BJB), a company incorporated in the Cayman Islands, was put into liquidation by an order of the Grand Court of the Cayman Islands.

During the Cayman insolvency process, the Cayman court issued a 'letter of request' requesting the Hong Kong courts' assistance specifically, the exercise of their common law powers to make various orders sought by the Cayman provisional liquidators against the respondent Xu Zhendong, the former chairman and director of BJB.

These orders were similar in nature to the types of order which the Hong Kong courts can make in domestic insolvency proceedings pursuant to section 221 Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (the Ordinance). They sought, amongst other things, to require Mr Xu to attend an oral examination by the Cayman provisional liquidators and to deliver up to the provisional liquidators any property or documents in his custody belonging to BJB.

The court had to decide whether under Hong Kong law it could make these orders in respect of foreign insolvency proceedings.

Common law 'power of assistance’

The first question addressed by the court was whether its common law power to assist foreign insolvency proceedings, referred to as the 'power of assistance', extended to making orders requiring officers of foreign companies in non-Hong Kong insolvency proceedings to attend for oral examination by liquidators and to deliver up company documents and property to them, such as orders which would, in Hong Kong insolvency proceedings, be made under the section 221 of the Ordinance.

The power of assistance allows the Hong Kong courts, pursuant to a letter of request from a foreign jurisdiction with a similar substantive insolvency law to that of Hong Kong, to make orders of the type available to liquidators under Hong Kong's own insolvency regime.

Although the power of assistance is now well-accepted, it had not previously been considered in the specific context of orders analogous to those envisaged by section 221 of the Ordinance sought in foreign insolvency proceedings.

Following decisions in other common law jurisdictions, the court concluded that such orders can be made by the Hong Kong courts pursuant to the power of assistance, provided that:

1. The power to make the relevant order exists in the jurisdiction of the liquidation (in BJB's case, the Cayman Islands).
2. That jurisdiction is the same as the jurisdiction where the insolvent company is incorporated (again, the Cayman Islands).
3. The power to make the order sought exists in Hong Kong.

As all of these conditions were met, the court found that it had the power at common law to make the orders sought by the Cayman court and the Cayman provisional liquidators.

The Basic Law

The second question addressed by the court considered whether the orders in question were prohibited by Article 96 of the Basic Law (Hong Kong's constitution), which states:

“With the assistance or authorisation of the Central People’s Government, the Government of the Hong Kong Special Administrative Region may make appropriate arrangements with foreign states for reciprocal juridical assistance.”

The court therefore considered whether granting an order under the power of assistance was caught by Article 96 as "reciprocal juridical assistance". This consideration was not limited to section 221-style orders, but concerned the power of assistance more generally.

Again reviewing other common law judgments, the court held that the exercise of the power of assistance is not reciprocal. Rather it is founded on the public interest in supporting foreign courts to supervise orderly insolvency proceedings involving companies with transnational assets, knowing that they will be recognised and effective internationally. In these circumstances, it is a court's duty to assist its international counterpart.

Accordingly, the court found that it was able to make the orders requested by the Cayman court.

Conclusion

This is an important judgment which will give comfort to practitioners in foreign insolvency proceedings seeking relief in Hong Kong. The court's judgment emphasises the importance of assisting foreign courts and insolvency practitioners. Its reaffirms that, although lacking a comprehensive statutory cross-border insolvency framework, the Hong Kong courts have developed a collaborative approach when their assistance is sought by foreign courts overseeing insolvency proceedings in other jurisdictions.

Footnote

1. (許振東) (2016) HCMP 1139/2016