Legal development

Hong Kong affirms ancillary liquidations for offshore incorporated HK listed companies

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    The High Court of Hong Kong has reaffirmed that it will readily make winding up orders in respect of offshore incorporated companies listed in Hong Kong, even in circumstances where the company is already subject to a winding up order in its jurisdiction of incorporation.

    The decision is of importance as it confirms the utility of parallel or ancillary winding up orders, particularly where liquidators appointed in Hong Kong are likely to benefit from the exercise of their powers under Hong Kong legislation or where there are directors and assets in Hong Kong subject to the jurisdiction of the Hong Kong courts. It also demonstrates that creditors who do not support a "soft touch" offshore restructuring can bring significant commercial pressure on debtors listed in Hong Kong by seeking a winding up in Hong Kong.

    Background

    NewOcean Energy Holdings Limited is a Bermuda incorporated company listed on the Hong Kong Stock Exchange, with its primary business operations based in Mainland China. From late 2019 NewOcean's financial position deteriorated and it was in breach of its obligations to both bank and trade creditors. One of the trade creditors was Kuwait Petroleum Corporation, which was owed debts in respect of LPG supply contracts.

    In October 2021, one of NewOcean's bank creditors petitioned for its winding up in Bermuda and sought the appointment of provisional liquidators. NewOcean opposed the Bermuda petition on the basis that a proposed restructuring would be more beneficial to its bank creditors. The Supreme Court of Bermuda appointed provisional liquidators for restructuring purposes only, and the petition was adjourned a number of times to permit the company's management to attempt the restructuring, notwithstanding that the majority of bank creditors opposed this and sought an immediate winding up.

    NewOcean's debts to Kuwait Petroleum remained unpaid. It therefore commenced a separate winding up petition in Hong Kong in April 2022. NewOcean resisted Kuwait Petroleum's Hong Kong petition on three main grounds:

    • There was a genuine dispute as to whether it owed debts to Kuwait Petroleum and it had commenced arbitral proceedings to dispute the debts (albeit after the petition was presented);
    • Winding up in Hong Kong would not be of benefit to NewOcean's general body of creditors; and
    • NewOcean should be permitted to continue with its restructuring efforts.

    On 26 July 2022, the Bermuda Court of Appeal allowed an appeal in respect of the bank creditor's petition and ordered the immediate winding up of NewOcean, with the Bermuda appointed provisional liquidators remaining in place with full powers (i.e. no longer limited to restructuring purposes only).

    At the first hearing of the Hong Kong petition before Linda Chan J on 8 August 2022, a purported creditor, Victory Mountain, appeared to oppose the Hong Kong petition on the basis that (i) Hong Kong appointed liquidators would not be able to take control of offshore subsidiaries and (ii) Bermuda was the appropriate jurisdiction for the winding up of the company as it was its place of incorporation, and as a winding up order had already been made there the Hong Kong court should not exercise its discretion to make a winding up order in Hong Kong.

    The Hong Kong winding up order was made

    Linda Chan J made an order for the immediate winding up of NewOcean in Hong Kong.

    With respect to the three grounds of opposition relied on by NewOcean's former management, the judge considered that these were "no longer pursued" on the basis that (i) NewOcean's solicitors, who had been instructed by its former management, informed the Court they no longer had authority to act and (ii) the Bermuda appointed provisional liquidators supported the making of a winding up order in Hong Kong and considered such an order would assist in the liquidation of NewOcean given that the majority of its assets were located in Hong Kong and the Mainland.

    Linda Chan J considered the view of the provisional liquidators to be justified given NewOcean's substantial connections with Hong Kong as "matters which need to be reviewed and administered by the liquidators in Hong Kong."

    Victory Mountain's opposition was also rejected by Linda Chan J. There was no evidence before the Court in respect of Victory Mountain's alleged debt, so the judge was not satisfied it was a creditor with standing to appear.

    Linda Chan J further held that even if Victory Mountain was a creditor, its grounds of opposition were not valid.

    Whether Hong Kong appointed liquidators would be able to gain control of offshore subsidiaries was a question of fact, and the judge noted that the Hong Kong courts have previously wound up companies incorporated in other jurisdictions where liquidators were able to get control over offshore subsidiaries, and that the directors of offshore subsidiaries can and do cooperate and often "are based in Hong Kong and subject to the jurisdiction of the Court."

    Linda Chan J also rejected Victory Mountain's argument that, as NewOcean did not appear to have significant assets in Hong Kong, that it was uncertain there would be any utility in making an ancillary winding up order. The judge noted that this type of argument was often made by offshore incorporated companies listed in Hong Kong, which by their nature often have real and substantial connections with Hong Kong. The judge also noted that, as in this case, listed companies seeking to oppose winding up orders in Hong Kong in favour of their place of incorporation often sought to appoint Hong Kong-based provisional liquidators, which indicates that the companies themselves consider there are substantial matters that need to be dealt with in Hong Kong.

    Furthermore, Linda Chan J considered that for NewOcean, the company had valuable sub-subsidiaries incorporated in Hong Kong that liquidators would be able to take control of pursuant to their statutory powers in Hong Kong, or to bring proceedings in Hong Kong against any uncooperative directors of those sub-subsidiaries, holding "The reality is that there are substantial steps which need to be taken by the liquidators appointed under the CWUO in Hong Kong and that there is a useful purpose for the Court to make a winding up order…"

    Key takeaways

    The judgment demonstrates that the Hong Kong courts will readily wind up offshore incorporated companies, particularly where they are listed in Hong Kong. Those companies often have substantial connections with Hong Kong and assets or individuals relevant to a winding up within the jurisdiction of the Court. Liquidators appointed in Hong Kong will therefore benefit from the exercise of their statutory powers in Hong Kong, without needing to separately seek recognition in Hong Kong of their appointment in the company's jurisdiction of incorporation.

    The judgment also demonstrates that commercial pressure can still be brought to bear on debtors through the Hong Kong courts, even where they have sought to restructure or have provisional liquidators appointed in their jurisdiction of incorporation for restructuring purposes. Given the absence of general "soft touch" provisional liquidations in Hong Kong, a successful petition in Hong Kong will provide for the immediate winding up of a company and remove control of the company from its management.

    Ashurst acted for Kuwait Petroleum, led by dispute resolution partner James Comber; assisted by senior associate Benjamin Ng. Restructuring partner Sophie Lyall also advised.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.