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The Hong Kong Court suggests adopting COMI as the criteria for recognising and assisting foreign insolvency proceedings

Posted on 3 August 2022

Key takeaways

In Provisional Liquidator of Global Brands Group Holding Ltd (In Liq) v Computershare Hong Kong Trustees Ltd,1 the Honourable Mr Justice Harris modified the test for when the Hong Kong Court would recognise and assist a foreign liquidator. 

Traditionally, the Hong Kong Courts have recognised and granted assistance to a foreign liquidator if the foreign insolvency proceedings were (1) collective insolvency proceedings; and (2) opened in the company’s place of incorporation. But Justice Harris held that this legal test failed to reflect the present commercial and insolvency environment in Hong Kong. He instead held that the company’s centre of main interests ("COMI”) should be the primary criteria for recognition and assistance.

Background

In the absence of any legislative framework in Hong Kong dealing with cross-border insolvency matters, it has been largely left to the Courts to use common law tools to address issues in this area.

An exception to this approach is the arrangement2 for the mutual recognition and assistance of insolvency proceedings between the Mainland and Hong Kong Courts (“Cooperation Mechanism”). The Cooperation Mechanism permits the relevant Mainland Courts3 to recognise Hong Kong liquidators of companies whose COMI is in Hong Kong at the time the application is made. See our earlier post here.

Court’s Judgment 

The present case concerned a company ("Global Brands”) incorporated in Bermuda and listed in Hong Kong, which was wound up by the Bermuda Court in November 2021. The Provisional Liquidator was appointed by the Bermuda Court and sought recognition and assistance from the Hong Kong Court to take possession of cash balances held on behalf of Global Brands in Hong Kong. The Court took this opportunity to revisit the principles of recognition and assistance.

Adopting the COMI criteria in Hong Kong

The Court observed the widespread commercial practice of holding companies incorporated in offshore jurisdictions controlling intermediate subsidiaries that conducted business activities in Hong Kong and the Mainland. In these corporate structures, the connection between those offshore holding companies and their place of incorporation is entirely formal. As such it was highly artificial to treat the company’s place of incorporation as being the appropriate jurisdiction for the seat of the principal liquidation.  

Instead, the Court held that the appropriate jurisdiction for the seat of the principal liquidation should primarily be determined by the location of a company’s COMI. This criteria would better deal with the circumstances in which transnational insolvencies typically arise in Hong Kong, and would bring Hong Kong in line with the Mainland’s approach.

Considerations of COMI

The Court then discussed the principles for determining the company’s COMI:

  • The relevant date for determining COMI is the date the foreign liquidator applies for recognition and assistance in Hong Kong.
  • Factors relevant to identifying a company’s COMI include the location of the company’s principal office, principal place of business, principal assets, clients and creditors, where the company’s board meetings were held and where its bank accounts, books and records were maintained.

Lastly, the Court stated two exceptions in which it would allow the application if it was made by a liquidator appointed in the place of the company’s incorporation and where that place differed from the company’s COMI:

  1. The liquidator seeks managerial-type assistance that is incidental to the authority granted by the foreign Court. 
  2. The liquidator seeks limited assistance that is carefully prescribed and it is essential as a matter of practicality.

Application of the reformulated principle

In the present case, the winding-up proceedings were conducted in Bermuda. The Court accepted that COMI was in either Hong Kong or Bermuda. However, it did not need to decide between the two because in either case it would grant the Provisional Liquidator’s application. The Court gave the following reasons.

First, the Court held that the COMI test is “relevant in cases in which a foreign liquidator requires more than an order that confirms the liquidator’s status and rights arising from his appointment in the place of incorporation… and seeks a power necessary to exercise a right in furtherance of a liquidation”. Here, the Court considered that the Provisional Liquidator required only an order to demonstrate to the holders of Global Brands’ funds in Hong Kong that he was entitled to take possession of those funds (i.e. assistance that was managerial in nature). Accordingly, the Court applied the first exception of the COMI test and granted recognition and assistance. This was justified on established principles of private international law.

Second and alternatively, the Court held that it was necessary as a matter of practicality to allow the application in this case because the Provisional Liquidator was the lawful agent of Global Brands as a matter of Bermuda law, and was accordingly entitled to direct its assets to be transferred out of Hong Kong. 

  1. [2022] HKCFI 1789
  2. Record of Meeting of the Supreme People’s Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region
  3. The People’s Courts in Shanghai, Xiamen, and Shenzhen