The Court of Appeal decision in Re Legend International Resorts [2006] 2 HKLRD 192 had caused many to doubt if provisional liquidators appointed in Hong Kong could play a restructuring role at all. Twelve years later, in Re China Solar Energy Holdings [2018] HKCFI 555, Harris J has clarified that provisional liquidators need to be appointed on such conventional grounds as asset preservation. But where the circumstances warrant it, the provisional liquidators may be given restructuring powers and may pursue the company’s restructuring exercise to fruition.

The China Solar facts and decision

China Solar Energy Holdings Limited (“Company”) was incorporated in Bermuda and listed on the Hong Kong Stock Exchange (“HKSE”), but trading in the Company’s shares had been suspended since August 2013.

Since January 2015 the Company had been in various stages of the delisting procedure because of the Company’s failure to comply with the listing requirements. In August 2015, on the Company’s application, provisional liquidators (“PLs”) were appointed to the Company on the basis that the PLs were needed to (a) safeguard the Company’s assets (including the Company’s listing status) which were in jeopardy, and (b) investigate certain suspicious transactions entered into by the Company.

The PLs’ terms of appointment included the power to pursue the Company’s restructuring. Thus from the outset, the PLs intended to procure a restructuring with a view to the Company resuming the trading of its shares. Together with a potential investor, the PLs had been working on various re-listing proposals to be submitted to HKSE.

In February 2017, however, the petitioner (a shareholder of the Company), who in fact supported the Company’s application for provisional liquidation and intended to invest in the Company’s restructuring, applied to the court to remove the PLs. The petitioner argued that, because the PLs had finished their asset preservation tasks, the PLs’ primary remaining role would be to pursue the Company’s restructuring.

That, according to the petitioner, would not be permissible under Legend because Legend held that provisional liquidation must be for the purpose of a winding-up, up and not for the purpose of avoiding a winding up. A successful restructuring of the Company would avoid a winding-up.

Harris J dismissed the petitioner’s application. His Lordship reasoned and explained the effect of Legend as follows. The court may appoint provisional liquidators only on conventional grounds, such as the need to preserve the company’s assets. In other words, provisional liquidators may not be appointed solely for the purpose of restructuring.

Where the circumstances so warrant, however, the provisional liquidators may be given restructuring powers. The provisional liquidators will be permitted to complete the company’s restructuring, even if they have completed their other tasks, such as asset preservation. Terminating the provisional liquidators just because their remaining primary task concerns restructuring would be detrimental to the creditors’ collective interest. This would not be consistent with the statutory purpose underlying the appointment of provisional liquidators.

Comments

This decision is a much-welcome clarification of Legend. For practitioners, the decision stands for the following propositions:
1. The Hong Kong court may appoint provisional liquidators only on conventional grounds, such as asset preservation and investigation.
2. In the right circumstances (such as the existence of strong creditor support), provisional liquidators may be given powers to restructure the company’s business and indebtedness.
3. Provisional liquidators with restructuring powers may focus on restructuring even if they have completed the other tasks for which they were appointed.
4. Thus the Hong Kong provisional liquidation regime may sometimes help a foreign company achieve a restructuring, as the facts in China Solar demonstrate.

DVC members involved in this case are:

José-Antonio Maurellet SC, John Hui and Jonathan Chan for the petitioner.
John Scot SC for the Company.
Clifford Smith SC and Alexander Tang for the provisional liquidators.
Patrick Chong for an investor.
William M F Wong SC and Look Chan Ho co-authored this Case Report.

The China Solar case recently won the GRR Award 2018 for Most Significant Restructuring or Insolvency Litigation. Click here to read more:  http://www.dvc.hk/news/news-detail/dvc-wins-grr-award

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Posted by William M.F. Wong SC

Dr. Wong has been in practice in Hong Kong since 1998. In 2010, he was also called to the Bar of the British Virgin Islands. In 2013, Dr. Wong was appointed as a Senior Counsel in Hong Kong. He is also presently an Non-Executive Director of the Securities and Futures Committee and one of the Vice Chairmen of the Board of Review of the Inland Revenue. Dr. Wong’s practice covers a wide spectrum of contentious commercial litigation. He has a special focus and substantial experience in the areas of company, insolvency and securities law. He frequently represents clients in contentious shareholders and/or investors disputes and disputes in liquidation. He is the first Hong Kong barrister to be admit, on ad hoc basis, in the Bermudian courts to conduct trials and appeals. He is experienced in offshore litigation. He also acted as an expert witness on HK company law in the People’s Republic of China, and international arbitration. Dr. Wong also sits as an arbitrator in international commercial arbitration. Dr. Wong also specializes in contentious trusts and probate matters. His case of Chow Siu Po v. Wong Ming Fung [2003] 1 HKC 146 establishes the burden of proof in propounding a will. He has also given legal opinion on various trust and probate matters. He was instructed to advise and work on a number of substantial trusts litigation and related matters. On non-contentious work, Dr. Wong specializes in corporate restructuring and capital reduction. He was involved in the capital reduction of CLP, Guangdong Investment and Hong Kong Construction. He was also involved in the PCCW privatization, the Denway Motors privatization, the Stone Group privatization, the Sunlife Insurance Transfer Scheme and the 3D Gold Scheme. Academically, Dr. Wong graduated from the Business Faculty of the Chinese University of Hong Kong in 1994 as the Rhodes Scholar of the year. In 1996, he obtained his degree in Jurisprudence from Wadham College, Oxford. In 2004, he also obtained his LL.M degree from the Peking University. In 2012, he was awarded the Doctoral Degree from the Peking University with a dissertation on corporate insolvency laws. Dr. Wong also serves on a number of special sub-committees of the Hong Kong Bar Council. He is the Chairman of the China Practice Development Committee. He is the Vice Chairman of the Committee on Overseas Lawyers Examination and the Committee of Mainland Affairs. He is also an advisor to the Middle Temple Society in Hong Kong. Dr. Wong has also published widely. He was one of the editors of Hong Kong Civil Procedure 2001 and Hong Kong Civil Procedure 2002. He also published together with Dato Loh Siew Cheang, one of the leading Hong Kong texts on company law: “Company Law – Powers andAccountability.” (2003) The book was translated into Chinese in 2005 - «公司法 – 權力與責任», 法律出版社. He subsequently co-authored "Company Law - Powers and Accountability" 2nd Edition with Dato Loh Siew Cheang and DVC's Kerby Lau in 2017.

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