The concept of “property of the estate” is important in bankruptcy because it determines what property can be used or distributed for the benefit of the debtor’s creditors. Defined by section 541 of the Bankruptcy Code, “property of the estate” broadly encompasses the debtor’s interests in property, with certain additions and exceptions provided for in the Code. See 11 U.S.C. § 541. Difficult questions can arise in a contractual relationship between a debtor and a counterparty about whether an entity actually owns a particular asset or merely has some contractual right.

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

We have previously blogged about Siegel v. Fitzgerald, the Supreme Court decision last June that invalidated the 2018 difference in fees between bankruptcy cases filed in Bankruptcy Administrator judicial districts and U.S. Trustee judicial districts.

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.

To encourage parties to transact with debtors in bankruptcy, the Bankruptcy Code in corporate bankruptcies provides highest priority to “administrative expenses,” which include “the actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b); id. § 507(a)(2).

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.

We have previously written about Siegel v. Fitzgerald, No. 21-441, the Supreme Court case considering the question of whether the 2018 difference in fees between Bankruptcy Administrator judicial districts and U.S. Trustee judicial districts was consistent with the Constitution’s uniformity requirement for bankruptcy laws.