Key legal and regulatory developments driving and shaping M&A
For countries that have adopted, and implemented in local legislation, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (Model Law), there is a streamlined process which enables a liquidator, or other insolvency administrator, of a company in a foreign jurisdiction to apply to the court in the Model Law jurisdiction to:
Where an insolvency process is taking place in a Model Law jurisdiction, the Model Law also contains provisions which give foreign creditors the same rights as local creditors to participate in the insolvency process, for example by lodging a proof of debt and voting.
Importantly, there is no requirement of reciprocity in either of these cases, insofar as the foreign jurisdiction need not have itself adopted the Model Law for a foreign insolvency administrator and foreign creditors to have substantive rights in the Model Law jurisdiction.
Singapore adopted the Model Law with the passage of the Singapore Companies (Amendment) Act 2017, which came into force on 23 May 2017. This was part of an effort by the Singapore Government to position the country as a leading hub for insolvency and restructuring in the Asia-Pacific, and the adoption of the Model Law has helped Singapore to achieve that goal in the three years since.
Indeed, for every country, an efficient, fair and effective insolvency regime, which provides means for coordinated cross-border rescue and restructuring processes for global enterprises and preserves the value of foreign creditors' rights if a venture does not have the success intended, is critical in driving foreign investment in support of innovation, value creation and growth. With the rapid pace of globalisation continuing – notwithstanding the immediate impact of the pandemic – and supporting the expansion of multi-national corporations and business operations, countries that implement best-practice cross-border insolvency processes will enhance their attraction as primary destinations for the flow of foreign capital.
Recognising this important link, Myanmar is the most recent jurisdiction to have adopted the Model Law, implementing it as part of its new Insolvency Law 2020, which is now becoming a model for developing and developed nations alike in the Asia-Pacific region in adopting best practice domestic and cross-border insolvency processes.
In contrast, Hong Kong has still not adopted the Model Law. While the courts have made significant progress in establishing a common law framework for the recognition of foreign insolvency proceedings and the administration of creditors' claims in Hong Kong, there are ongoing substantive and procedural limitations which act as a deterrent to business investment.
The formal adoption and implementation of the Model Law in Hong Kong would help to sustain foreign investment as an important feature of economic and financial system stability as the challenges of the pandemic continue across the globe over the next year and beyond.
As noted, Hong Kong has not adopted the Model Law, nor are there any other statutory provisions which give Hong Kong courts the express power to recognise foreign insolvency proceedings and make orders assisting foreign insolvency administrators and creditors. Nevertheless, the common law continues to apply in Hong Kong, and it was affirmed in Joint Official Liquidators of A Co v B & C1 that the Hong Kong Companies Court, if issued with a formal letter of request to provide assistance from a foreign court, may recognise foreign insolvency proceedings and provide assistance in their discretion in accordance with the principle of modified universalism. This was also recently affirmed in Re CEFC Shanghai International Group Limited,2 in which the Hong Kong Companies Court for the first time granted recognition and assistance to bankruptcy administrators appointed to a Chinese company.
However, the current position of the Hong Kong Companies Court is that assistance will not be provided to a foreign insolvency administrator unless the orders sought would be available to an insolvency representative under Hong Kong's local laws. This is on the basis that the courts are bound by the limits of their own statutory and common law powers.
Thus, in Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd,3 the English High Court issued a letter requesting that the Hong Kong Companies Court make orders recognising an administration occurring under the supervision of the English High Court and preventing a Hong Kong entity from enforcing a security interest over the shares of the foreign company in administration. Justice Harris declined to do so on the basis that, in the absence of an administration regime in Hong Kong, including moratoria restricting the enforcement rights of secured creditors, granting the requested orders would enable the administrators to exercise powers not available to a liquidator appointed to an insolvent company in Hong Kong.
While it may be possible for a foreign rescue process to be recognised if the relief sought is an order restricting the enforcement of unsecured creditors' claims (with a moratorium of that kind already part of the liquidation process in Hong Kong), the inability to obtain a cram down order preventing secured creditors from enforcing their claims during the negotiation of a restructure and the implementation of a restructuring plan is problematic. The implementation of stronger rescue processes is currently being prioritised by multiple jurisdictions across the world as one of the key ways to assist businesses impacted by the pandemic. Indeed, where a company or business is viable, notwithstanding an existing period of financial distress, a successful restructure is in the interests of all creditors, secured and unsecured alike, not only in ensuring the payment of their current outstanding debts but also in preserving an ongoing trading relationship. Recent amendments in the United Kingdom, which among other things introduce a pre-formal insolvency enforcement moratorium binding on secured and unsecured creditors where that is likely to result in a successful corporate or business rescue attempt, as well as a new restructuring plan formal rescue alternative which includes a cross-class cram down permitting the court to order a plan to take effect against the wishes of different classes of creditors, will become a model for other jurisdictions globally.4 Singapore's even broader restructuring laws, introduced in May 2017 and based on the United States Chapter 11 process (including a worldwide enforcement moratorium that also applies to secured creditors),5 will likewise influence the law reform process in the region as stronger rescue laws are being encouraged by the World Bank, INSOL International and UNCITRAL as part of its Working Group V.
If Hong Kong not only does not adopt laws incentivising both informal and formal rescue and restructuring for distressed but viable businesses and companies, but continues to rely on a common law cross-border recognition process which does not permit orders to be made implementing broad-based enforcement moratoria necessary to support a restructuring attempt, there will be a significant deterrent for both:
These limitations are echoed in UNCITRAL's Guide to the Enactment of the Model Law, in which it is noted that:
The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investment. However, national insolvency laws have by and large not kept pace with the trend, and they are often ill-equipped to deal with cases of a cross-border nature. This frequently results in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to a fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation and hinder maximisation of the value of those assets. Moreover, the absence of predictability in the handling of cross-border insolvency cases impedes capital flow and is a disincentive to cross-border investment.6
This indeed has been the primary incentive for the adoption of the Model Law now in 51 jurisdictions, including the United States, the United Kingdom, Australia, New Zealand, Singapore, the Republic of Korea, South Africa, Japan, Canada and the Philippines.
Singapore's progress in particular to become a leading insolvency and restructuring hub in the Asia-Pacific region since adopting the Model Law as part of its progressive restructuring reform package is testament to the efficiency and investment growth facilitated by the Model Law's cooperative and flexible framework.
With the regional consensus on the need for efficient and effective cross-border laws, particularly as an adjunct to flexible rescue and restructuring processes, and the dynamic and evolving insolvency law reform agenda underway in response to the pandemic, Hong Kong cannot afford to be left behind.
Hong Kong's common law recognition process has nevertheless resulted in benefits for foreign liquidators and creditors. Foreign liquidations have been recognised and foreign liquidators have obtained a range of orders to support their investigations and expand the pool of assets available for distribution to creditors in the foreign liquidation, including:
Hong Kong courts have also developed a standard-form order to guide applications for recognition and assistance from foreign liquidators, designed to facilitate the grant of orders on the papers where possible.10 This significantly increases efficiency and reduces costs, preserving capital for the benefit of creditors. At the same time, however, Justice Harris cautioned in Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd11 that while he personally was familiar with applications for recognition and assistance, 'they will not necessarily be familiar to other judges who hear company matters'. Indeed, there is no specialist insolvency list in Hong Kong courts and the number of judges with specific insolvency expertise, let alone cross-border experience, remains limited. This tempers, to some degree, the potential for continued efficiency benefits for foreign liquidators, and also raises the prospect of inconsistent judgments that could be avoided with the adoption of the Model Law. Doing so would also ensure a specific method for cooperation and communication between Hong Kong courts and foreign courts, in place of the more cumbersome and inefficient letter of request process mandated under Hong Kong's current common law recognition regime.
While there have been important efficiency and cost benefits from the Hong Kong Companies Court's recognition, under common law principles, of foreign liquidation proceedings and its willingness to make orders allowing foreign liquidators to conduct investigations and pursue enforcement options concerning the company in Hong Kong, there are substantive and procedural limitations from the common law regime.
Substantively, in the absence of similar local laws in Hong Kong, the broad-based enforcement moratoria applying to the claims of secured creditors in other jurisdictions cannot be ordered under the common law recognition framework in Hong Kong. Procedurally, the absence of a Model Law-type cooperation process between Hong Kong and foreign courts, and the potential for inconsistency between different judges in Hong Kong in the application of the developing common law recognition framework, undermines efficiency and cost savings.
These limitations compromise confidence in Hong Kong's insolvency regime and deter foreign investment in Hong Kong from businesses, creditors and shareholders. This is reflected in measurable terms. For example, in the World Bank's 2020 Ease of Doing Business rankings, Hong Kong ranked 45th out of 190 nations in the perceived strength and efficiency of its insolvency laws and processes, compared to its overall ranking of 3rd, while Singapore, which has adopted the Model Law, ranked 18 places higher for its insolvency regime with an overall rating of 2nd.
Now is the time for Hong Kong to revisit its stalled insolvency law reform process. Only by doing so will Hong Kong keep pace with a global push for nations to adopt streamlined cross-border insolvency processes under the Model Law, in conjunction with local laws incentivising corporate and business rescue, and in turn develop a best-practice insolvency regime to position itself as a rival to Singapore and other nations as a leading insolvency and restructuring hub in the Asia-Pacific. That would provide an important building block for enduring economic growth in the years ahead.
The authors wish to thank Mr Look-Chan Ho, Barrister, Des Voeux Chambers, Hong Kong, for his helpful comments in the preparation of this article.
This article first appeared in Volume 17, Issue 6 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.
1 2014 4 HKLRD 374.
2 2020 HKCFI 167.
3 2015 HKEC 641.
4 These reforms were introduced under the Corporate Insolvency and Governance Act 2020 (UK), which came into effect on 26 June 2020.
5 These laws were introduced under the Companies (Amendment) Act 2017.
6 UNCITRAL, Guide to the Enactment of the Model Law, .
7 See, for example, Joint Official Liquidators of Centaur Litigation SPC 2016 HKEC 576; Rennie Produce (Aust) Pty Ltd 2016 HKEC 2012.
8 See, for example, Joint Official Liquidators of Centaur Litigation SPC 2016 HKEC 576; BJB Career Education Co Ltd 2017 1 HKLRD 113.
9 See, for example, Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Ltd 2017 HKEC 1461
10 Re Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Ltd 2020 HKCFI 825, .
11 2020 HKCFI 825, .
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© Norton Rose Fulbright LLP 2021