In Short

The Situation: Insolvency officeholders increasingly find their investigations into a company's affairs frustrated by the comingling of records on a "group" server. Claims to privilege by other group entities (or even third parties) are then advanced as an obstacle to delivering company records to the officeholder, leading to expensive and logistically complex inspection and review processes that can be a burden on insolvent estates.

In Re Unity Group Holdings International Ltd [2022] HKCFI 3419, the Hong Kong court has for the first time sanctioned a scheme of arrangement that releases debts of third-party obligors that were guaranteed by the scheme company without requiring a deed of contribution. The Honourable Mr. Justice Harris deviated from the English law approach and ruled that a deed of contribution will no longer be necessary for the release of a principal obligor's liability that has been guaranteed by the scheme company.

A going concern

Even before chapter 15 of the Bankruptcy Code was enacted in 2005 to govern cross-border bankruptcy proceedings, the enforceability of a foreign court order approving a restructuring plan that modified or discharged U.S. law-governed debt was well recognized under principles of international comity. The U.S. Bankruptcy Court for the Southern District of New York recently reaffirmed this concept in In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022).

As discussed in previous installments of this White Paper series, the Lummis-Gillibrand Responsible Financial Innovation Act (the “Bill”)¹ proposes a comprehensive statutory and regulatory framework in an effort to bring stability to the digital asset market. One area of proposed change relates to how digital assets and digital asset exchanges would be treated in bankruptcy. If enacted, the Bill would significantly alter the status quo from a bankruptcy perspective

OVERVIEW OF DIGITAL ASSETS IN BANKRUPTCY

The Hong Kong Court of Appeal has confirmed that the court should respect the effect of an exclusive jurisdiction clause in bankruptcy proceedings, just as it does in ordinary civil actions. To do otherwise, it said, it would be illogical.

Directors who oppose company windings up with little more than a hope that a restructuring proposal may bear fruit may have to weigh their actions carefully going forward, following a recent decision by the Hong Kong Companies Court.

A Hong Kong court has severely criticised the provisional liquidators (PLs) appointed by the court in the company’s place of incorporation in the Cayman Islands, for trying to interfere with the rights of creditors in Hong Kong and to bypass the statutory scheme of winding-up in Hong Kong. In GTI Holdings Limited [2022] HKCFI 2598, the Honourable Madam Justice Linda Chan said it was a matter of concern to see that solicitors and counsel engaged by the PLs in Hong Kong "did not bring home to the provisional liquidators their duties owed to the creditors and to this court".

The Hong Kong court has sanctioned a scheme of arrangement for a Hong Kong-listed, Bermuda-incorporated fertilizer manufacturer based in the mainland. In doing so, the Honorable Mr Justice Harris also warned holders of U.S. denominated debt that where they use offshore schemes of arrangement, they run the risk of individual creditors presenting winding-up petitions in Hong Kong. The view has however been queried in recent U.S. authority.

The Hong Kong court has confirmed that – going forward – the court is ready to recognize and assist a foreign insolvency process conducted in the company’s center of main interests (COMI) and that it will no longer be necessary for the foreign insolvency process to be carried out in a company’s place of incorporation. The judgment sets out a practical roadmap for the future of cross-border insolvency in Hong Kong, where listed companies that use complex holding company structures find themselves in difficulty.

The Court of First Instance held in Re Up Energy Development Group Limited [2022] HKCFI 1329 that where the three core requirements for winding-up a foreign company under section 327(1) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) are satisfied, the mere fact that the foreign company has been ordered to be wound up by the court in its place of incorporation is not a ground for the Hong Kong court to decline the making of a winding up order.

A former listco