The interplay between an arbitration clause and a creditor’s winding up petition is a vexed question which has given rise to a string of cases, including Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449, Re Asia Master Logistics Ltd [2020] 2 HKLRD 423 and But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 873.

In Re China Huiyuan Juice Group Limited [2020] HKCFI 2940, Harris J discussed in detail the difficulties which liquidators appointed in Hong Kong over a foreign incorporated holding company may have in obtaining control of operating subsidiaries in the Mainland, if the group’s structure includes intermediate subsidiaries incorporated in the British Virgin Islands (the “BVI”).

A trio of landmark decisions by Mr Justice Harris have altered and hugely improved the scheme of arrangement practice in Hong Kong. The new scheme practice points are in brief thus:

First, where an offshore incorporated company seeks to restructure its debts by means of a Hong Kong scheme of arrangement, it should not at the same time pursue a parallel offshore scheme just because it is incorporated offshore. Any such parallel scheme must be justified. Pursuing an unnecessary parallel scheme could entail the following consequences:

A trio of landmark decisions by Mr Justice Harris have altered and hugely improved the scheme of arrangement practice in Hong Kong. The new scheme practice points are in brief thus:

First, where an offshore incorporated company seeks to restructure its debts by means of a Hong Kong scheme of arrangement, it should not at the same time pursue a parallel offshore scheme just because it is incorporated offshore. Any such parallel scheme must be justified. Pursuing an unnecessary parallel scheme could entail the following consequences:

 A Word of Counsel 9 1. In Hung Yip (HK) Engineering Company Ltd v Kinli Civil Engineering Ltd [2021] HKCFI 153, Harris J reminded practitioners of the true principles applicable to an injunction restraining the presentation of a winding-up petition. Prior to this judgement, it would be fair to say that a number of practitioners had proceeded on the assumption that the hurdle for an applicant to cross was effectively the same as that to defeat a creditor's petition. Introduction 2.

Puncturing a popular myth, Mr Justice Harris in Re FDG Electric Vehicles Limited [2020] HKCFI 2931 held that when the Hong Kong court recognises offshore provisional liquidation orders (“PL Order”), there would not be an automatic stay on proceedings in Hong Kong.

Further, any assistance granted to the offshore provisional liquidators must be restricted to assets in Hong Kong.

The decision is sound in principle and sits well with international insolvency standards.

The Myth

NEWSLETTER A WORD OF COUNSEL 1st Edition 2021 (12th Issue) ww.dvc.hk IN THIS ISSUE Who was appointed to act as a provisional liquidator for UA Cinemas? PAGE 54 Who from DVC appeared in this year's inaugural edition of the Legal 500 (2020-2021) Hong Kong Edition? PAGE 56 What are the limits to the Irregularity Principle and what remedies are available to an aggrieved Director? PAGE 33 Why is reform needed in HK's mental health arena?

On 8 March 2021, the iconic UA Cinemas closed down, and Mr Justice Harris appointed provisional liquidators instantly to protect creditors' interests once again demonstrating the best traditions of the Hong Kong Companies Court in meeting acute business challenges.

Background

Bonds that are traded via clearing houses, such as Euroclear and Clearstream, often contain terms providing that there will be a trustee for the issue, who may be appointed by the participants in the relevant clearing system or by the beneficial owners.

Quite often, the terms of the bonds will contain so-called “no-action clauses”, pursuant to which the trustee may be accorded certain rights and powers to take action on behalf, and instead, of the beneficial bondholders.

In recent years, it has become increasingly common for companies seeking to avoid an immediate winding-up order, particularly listed companies, to pray in aid of alleged efforts to restructure their debts in a bid to obtain adjournments of a winding-up petition. All too often, these valiant attempts fail: see Re Chase On Development Limited [2020] HKCFI 629, Re SMI Holdings Group Limited [2020] HKCFI 824 and Re REXLot Holdings Ltd [2020] HKCFI 2212 to name a few.