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.

A “pre-pack” is a sale of all or part of a distressed company’s business or assets, negotiated before the company enters a formal insolvency process and executed by the appointed insolvency practitioner immediately after the insolvency process begins.

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.

On Monday, the High Court handed down its decision in (1) Lazari Properties 2 Limited, (2) The Trafford Centre Limited, (3) LS Bracknell Limited and 10 Others and (4) Fort Kinnaird Nominee Limited and 20 Others v (1) New Look Retailers Limited, (2) Daniel Francis Butters and (3) Robert Scott Fishman [2021] EWHC 1209 (Ch) considering the various grounds of challenge raised by the applicants in relation to the New Look CVA. Mr Justice Zacaroli rejected each of the grounds of challenge leaving the New Look CVA intact.

Despite the scale of the pandemic and resulting build-up of Covid related rent arrears, currently estimated at around £4.5bn, business restructuring has been relatively muted. This is partly explained by the moratorium on forfeiture and other restrictions on landlords’ remedies, combined with unprecedented government financial support for struggling businesses.

But rent arrears cannot be pushed down the track indefinitely. As restrictions are eased and focus turns to tackling this debt, business restructuring activity will no doubt intensify.

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.

Introduction

On 28 March 2020, the UK Government announced upcoming insolvency law reforms in response to Covid-19, intended to help companies and directors.

On 23 April 2020, the UK Government announced further measures to protect the UK high street from aggressive rent collection by prohibiting the use of statutory demands and winding up petitions to collect rent which was unpaid due to difficulties caused by Covid-19. However, at the time, it was unclear from the announcement as to whether these prohibitions would extend beyond unpaid rent to other debts.

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.