The Hong Kong Court of Appeal has finally laid to rest the vexed issue of whether an arbitration agreement or a winding-up petition should take precedence in an insolvency situation. In two parallel decisions, the Court of Appeal ruled that an arbitration agreement should be treated in the same way as an exclusive jurisdiction clause and that the principle should be given a wide interpretation.

According to a recent report, nearly 6,000 construction companies in the UK are in danger of going out of business. In Hong Kong, a major contractor has lost its licence and was removed from the government's registered list of contractors on 16 November 2023, with the company being given only a month to settle five private residential and commercial projects. When construction companies become insolvent, a host of tricky legal and practical issues come into play.

A bleak picture

Three recent Hong Kong first instance court decisions have left undecided the question of whether a winding-up petition will trump an agreement to arbitrate when it comes to a winding-up and particularly in the context of cross-claims. A Court of Final Appeal decision this spring had seemed to provide pointers that the parties' agreement would be upheld but the issue – particularly when it comes to unmeritorious and late arbitration applications – is dividing the courts.

For the first time in England & Wales, a court has ordered the winding-up of a listed plc on the grounds of loss of substratum – the abandonment of the company's original main object and purpose. If Hong Kong follows this decision, it would be very welcome to minority shareholders who would have an additional option to retrieve their investment monies from companies that embark on a completely different path to that for which they initially signed up.

In a pair of recent contrasting judgments, Re Agritrade Resources Ltd [2020] HKCFI 1967 and Re Rare Earth Magnesium Technology Group Holdings Ltd [2020] HKCFI 2260, the Hong Kong Court has once again confirmed its pragmatic approach towards applications by foreign liquidators and provisional liquidators for recognition and assistance in Hong Kong. The judgments emphasize the importance of adhering to the standard forms of order adopted by the Hong Kong courts in respect of such applications, and the need for any departure from the standard form to be fully justified.

Just in time for the Chinese New Year, a Hong Kong court has taken a major step forward in the developing law on cross-border insolvency by recognizing a mainland Chinese liquidation for the first time. In the Joint and Several Liquidators of CEFC Shanghai International Group Ltd [2020] HKCFI 167, Mr. Justice Harris granted recognition and assistance to mainland administrators in Hong Kong so they could perform their functions and protect assets held in Hong Kong from enforcement.

Scope 

The recast EIR continues to apply to all European member states other than Denmark and has been extended in scope to new categories of proceedings, including rehabilitation proceedings, which are set out in annex A. The emphasis remains on collective proceedings and, consequently, the UK’s receivership and administrative receivership regimes remain outside the scope of the recast regulation. 

Cross-border insolvency of multinational groups

WGV aims to agree a set of key principles and draft text for a regime to address crossborder insolvency in the context of enterprise groups (defined widely to mean any entity, regardless of its legal form, that is engaged in economic activities and may be governed by insolvency law). This has started to take a form most suited to a stand-alone supplement to the Model Law. The Group’s secretariat produced a draft legislative text, incorporating three principles agreed by WGV. The three principles are:

Shortly before insolvency, financially distressed companies often receive monies which appear "morally" to be due to third parties, such as customer deposits or monies due to be received by the company as agent on behalf of its principal. If the company then enters an insolvency process, can it keep the money, leaving the customer/principal with no more than the right to prove, as an unsecured creditor in the insolvency? Or should the money be protected by some form of trust in favour of the "morally entitled" recipient?