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Li Yiqing v Lamtex Holdings Ltd

Judgment Cited authorities 22 Cited in 16 Precedent Map Related
Vincent
Judgment Date11 March 2021
Neutral Citation[2021] HKCFI 622
Citation[2021] 2 HKLRD 177
Judgement NumberHCCW263/2020
Subject MatterCompanies Winding-up Proceedings
CourtCourt of First Instance (Hong Kong)
HCCW263/2020 LI YIQING v. LAMTEX HOLDINGS LTD

HCCW 263/2020

[2021] HKCFI 622

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 263 OF 2020

________________

IN THE MATTER of section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

and
IN THE MATTER of the Lamtex Holdings Limited(林達控股有限公司) (Company No F 8057)
________________
BETWEEN
LI YIQING (李益清) Petitioner

and
LAMTEX HOLDINGS LIMITED
(林達控股有限公司)		 Respondent

________________

Before: Hon Harris J in Court

Date of Hearing: 28 January 2021

Date of Decision: 11 March 2021

________________

D E C I S I O N

________________

Introduction

1. The Petition before me, which was issued on 20 August 2020, gives rise to an issue of some importance in the development of the principles, which guide the Hong Kong court in dealing with cross-border insolvency and, in particular, cross-border debt restructuring. The company which is the subject of the Petition, Lamtex Holdings Limited, (“Company”) is incorporated in Bermuda and listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”). Until it encountered the problems that have caused its current financial difficulties, which it is not in dispute have rendered it insolvent, it carried on a series of unrelated businesses in the Mainland and Hong Kong: loan financing, securities brokerage, trading and manufacturing electronic businesses in the Mainland and Hotel operations also in the Mainland.

2. It is subject to two winding-up petitions. The present Petition has been issued by Li Yiqing, whose undisputed debt of HK$10,200,000 as at 2 July 2020 arises under a series of bonds governed by Hong Kong law issued very largely to individuals resident in the Mainland. The attraction of the bonds is that they satisfy Hong Kong Immigration’s investment requirements and are capable of supporting an application for the right to reside in the SAR. Six other bond holders support Ms Li’s Petition for an immediate winding up order. No creditors of the Company oppose Ms Li’s application.

3. On 30 October 2020 the Company presented a petition in Bermuda seeking a winding up order and also an order appointing Osman Mohammed Arab and Wong Kwok Keung of RSM as provisional liquidators for restructuring purposes. On the same day the Company issued an application for Messrs Arab and Wong’s appointment as soft-touch provisional liquidators (“JPLs”). On 10 November 2020 the Chief Justice granted that application. The application was unopposed, although given the short notice of the application given to the bondholders, who I am told by the JPLs constitute nearly the Company’s entire debt, and the fact that they are individuals resident in the Mainland, this is unsurprising particularly given the complications created by COVID-19.

4. A letter of request seeking the recognition and assistance of the JPLs by the High Court of Hong Kong was issued by the Chief Justice. On 23 November 2020 I granted the application made by the JPLs for their recognition and assistance in progressing a restructuring of the Company’s debt.

5. What I am required to do is to determine whether to put the Company into immediate liquidation in Hong Kong or to adjourn the Petition in order to allow the Company and the JPLs the opportunity to restructure the debt. In practice I understand that this is likely to involve the Company’s principal shareholder finding another investor who with him will subscribe for new shares in sufficient value to repay the bondholders. I will explain how the attempts to achieve this have developed later in this Decision.

6. It is not in dispute that Ms Li and the supporting creditors are owed the sums they claim. Neither is it in dispute that the Petition satisfies the three core requirements that guide the court in determining whether to exercise its discretionary jurisdiction to wind up a company incorporated in a foreign jurisdiction. Ms Li is on the face of the matter entitled to a winding up order ex debito justitae unless the Company can demonstrate some relevant and persuasive reason to adjourn the Petition. Various issues require consideration in order to determine the Petition:

(1) The private international law principles governing recognition of a foreign winding up order.

(2) The impact of a winding up order on a company’s assets and their distribution during a liquidation.

(3) Recognition and assistance of a foreign insolvency process generally at common law.

(4) How a dispute over which jurisdiction is to be the primary one to conduct an insolvency process is to be resolved.

(5) The application of the principles applied to the facts of this case.

Recognition of a foreign winding up order

7. A winding up in a company’s country of incorporation will as a matter of Hong Kong rules of private international law be given extra-territorial effect in Hong Kong [1]. This is a consequence of the more general established principles of private international law that apply to foreign companies. This is demonstrated by rules 175 to 179 in The Conflict of Laws, Dicey, Morris and Collins (15th ed.,). These rules recognise that, as one would expect, generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation. The authors of Conflict of Laws explain in [3-102] of the 2nd volume that Rule 179 is justified because the law of the place of incorporation determines who is entitled to act on behalf of a corporation and in footnote 430 various authorities are cited as establishing this principle. Consistent with this, as a general principle the domiciliary law of a company is the appropriate law and system under which to liquidate a company [2]. Section 327 of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance, Cap 32 (“Ordinance”), which gives the Court of First Instance the jurisdiction to wind up a company incorporated in a foreign jurisdiction, is a statutory exception to this principle. The authors of the Conflicts of Laws in [3-102] go on to explain in the same paragraph that “If under that law [the law of the place of incorporation] a liquidator is appointed to act then his authority should be recognised here”.

8. From this foundation the common law has developed a doctrine commonly referred to as “modified universalism”, which guides courts determining cross-border issues arising in transnational insolvencies. Its principal feature is the requirement that so far as consistent with justice and public policy the courts in the local jurisdiction (in this case Hong Kong) cooperate with the courts in the country of the principal liquidation to ensure that all of a company’s assets are distributed to its creditors under a single system of distribution [3]. The present case requires consideration of the extent to which the principles of private international law and modified universalism require primacy to be given to a company’s place of incorporation in the process of determining which single system is to be recognised by courts in different jurisdictions dealing with transnational insolvencies. The facts of this case require consideration of a refinement of that issue, namely, whether primacy is to be accorded to the proceedings in the place of incorporation if it is not a winding up, but a soft-touch provisional liquidation. That issue itself requires further refinement as the local jurisdiction (Hong Kong) is the one which for the purposes of liquidation of the Company’s assets and distributions to creditors the Company has the closest connection.

Effect of a winding up order on a company’s assets

9. I have already explained that under Hong Kong rules of private international law a winding up in a company’s place of incorporation will be given extra-territorial effect in Hong Kong. The effect extends to the distribution of a company’s assets to its creditors.

10. The making of a winding up order divests a company of its beneficial ownership of its assets and subjects to them to a statutory trust for their distribution in accordance with the rules of distribution in the Ordinance. This applies to assets wherever they are located. This follows from the language of section 197 of the Ordinance [4]. As Lords Sumption and Toulson explain in Stichting Shell[5] this “…reflects the ordinary principle of private international law that only the jurisdiction of a person’s domicile can effect a universal succession to its assets. They will fall to be distributed in the BVI liquidation pari passu among unsecured creditors and, to the extent of any surplus, among its members.”[6]

11. Their Lordships continue:

“15. The necessarily excludes a purely territorial approach in which each country is regarded as determining according to its own law the distribution of the assets of an insolvent company located within its territorial jurisdiction. The lex situs is of course relevant to the question what assets are truly part of the insolvent estate. It will generally determine whether the company had at the relevant time a proprietary interest in an asset, and if so what kind of interest. Thus, if execution is levied on an asset of the company within the territorial jurisdiction of a foreign court before the company is wound up, it will no longer be regarded by the winding up court as part of the insolvent estate. But short of a transfer of a proprietary interest in the asset prior to the winding up order, it is generally for the law of that jurisdiction to determine the distribution of the company’s assets among its creditors and members, at any rate where the company is being wound up in the jurisdiction of its...

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    ...7 Harris J had earlier expressed understandable concerns about the abuse of the Z-Obee technique in Li Yiqing v Lamtex Holdings Limited [2021] HKCFI 622. This Court is bound to take these concerns into account in considering whether to sanction a “ light touch” provisional liquidation in ai......
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