"As is well known, other than schemes of arrangement Hong Kong has no legislation that provides for corporate debt restructuring or rehabilitation. This unsatisfactory state of affairs has been the subject of much adverse comment for two decades now is brought into unforgiving focus by the economic problems that Covid-19 is causing. It makes it all the more important that the courts of Hong Kong and the Special Administrative Region's practitioners rise to the challenges we now face to find, within the flexibility of the common law, mechanisms to address the financial problems companies face. It is fortunate that great strides have been made in this regard in recent years as illustrated by the authorities referred to earlier in this decision. That having been said it is clearly desirable that some steps are taken immediately to improve the legislative position. Immediate (by which I mean the kind of alacrity shown in other major financial centres around the World in the last couple of months) amendment to section 193 of the Ordinance to provide expressly for provisional liquidators to be given restructuring powers is desirable.1"
Restructuring Reform
With the quote set out above, Mr Justice Harris, the Companies Court judge of the Hong Kong High Court, Court of First Instance, shone a spotlight yet again on a vexing issue that has persisted for many years in Hong Kong and in many offshore jurisdictions: the lack of any legislated, purpose-built corporate restructuring regime other than schemes of arrangement. This is in contrast to, for example, the United States' Chapter 11 process, the administration regimes in the UK and Australia and the new restructuring regime introduced in Singapore in 2017. Legislative reform in the area of restructuring and cross border insolvency has been mooted in Hong Kong for decades, with the Law Reform Commission having made recommendations to implement corporate restructuring legislation as far back as 1996. A similar push towards implementing a new corporate restructuring regime that operates outside of the context of liquidation has been gathering steam in the Cayman Islands for several years. Those efforts have most recently culminated in proposals that would allow Cayman companies to formally restructure their debts outside of a formal insolvency process under the supervision of a qualified insolvency practitioner acting in the capacity of a 'restructuring officer'. The restructuring officer would fill a role similar to that of a 'soft touch' (or 'light touch') provisional liquidator but without the stigma (and potential triggering of ipso facto clauses) that is attached to the liquidation process. There would be a standalone moratorium imposed to protect the company from creditor action during the period of the restructuring. When, or if, the current proposals might be formalised and put to the Cayman Islands Legislative Assembly for consideration remains uncertain, but the Cayman profession remains eternally optimistic that reforms will be progressed in the relatively near future.
'Soft Touch' Provisional Liquidations in Offshore Jurisdictions
In the meantime, the Cayman Islands will continue to implement corporate restructurings through the use of schemes of arrangement, supported by 'soft touch' provisional liquidations. Bermuda largely follows the same process for the restructuring of companies in its jurisdiction. The scheme of arrangement regimes in both the Cayman Islands and Bermuda are largely modelled on the provisions of Part 26 of the UK Companies Act 2006 and the general processes and procedures for putting a scheme into place will therefore be familiar to English practitioners. English scheme case law is highly persuasive in the offshore jurisdictions and will be followed unless there are any particular local aspects that would justify divergence, which would be quite unusual.
It is possible for a well organised and pre-planned restructuring to be completed relatively quickly in the Cayman Islands, where the time from the filing of a scheme petition to the granting of court sanction of a scheme of arrangement can be as little as 12 weeks. Where, however, the scheme is complex, recognition of the scheme or parallel schemes are required to be implemented in other jurisdictions, or there is active and vocal dissent by creditor groups, the restructuring process can easily run its course over a much longer period. The breathing room offered by a provisional liquidation moratorium on claims during that period is therefore invaluable.
During the period where a restructuring proposal is being developed and promoted by the company, a practice has developed in the Cayman Islands and Bermuda (and more recently in the British Virgin Islands, as seen in the 2019 Constellation decision2 ) to seek the appointment of 'soft touch' provisional liquidators.
The High Court of the British Virgin Islands described 'soft touch' provisional liquidation in its decision in Constellation (at [3]) as follows:
The essence of a 'soft touch' provisional liquidation is that a company remains under the day to day control of the directors, but is protected against actions by individual creditors. The purpose is to give the Group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation. It may be appropriate where there is no alleged wrongdoing of the directors.
The powers of 'soft touch' provisional liquidators are determined by the terms of the appointment order made by the Court and therefore each case will operate along a spectrum of debtor control.
At one end of the spectrum are cases where the directors' powers are suspended for the duration of the provisional liquidation and the provisional liquidators have full control of the restructuring process (for example, in the Cayman restructuring of LDK Solar3 ), which arguably is not actually 'soft touch' at all. At the other end of the spectrum are cases where the provisional liquidators' role and powers are expressly limited to the monitoring and supervision of the company's directors as the directors develop and promote a restructuring (for example, in the Cayman restructuring of Arcapita Investment Holdings Limited4 ), which is more akin to a traditional debtor-in-possession regime. The Court appointment order, and the powers granted to the provisional liquidators, will be typically be tailored to meet the requirements of the particular case.
The advantages that 'soft touch' provisional liquidations bring to a restructuring derive primarily from the statutory moratorium that is imposed on creditor action following the appointment of provisional liquidators (although secured creditors continue to be entitled to enforce their security). While provisional liquidators are appointed, no suit, action or other proceeding may be continued or commenced against the company except with leave of the Court and subject to such terms and the Courtmay impose. This allows a distressed company time to develop and promote a restructuring plan, which will most frequently take the form of a scheme of arrangement.
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Footnotes
1. 5 May 2020, Mr Justice Harris, High Court of Hong Kong Special Administrative Region in The Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Limited (in provisional liquidation in the Cayman Islands) [2020] HKCFI 825 at [9].
2. Re Constellation Overseas Ltd, Lone Star Offshore Ltd, Gold Star Equities Ltd, Olinda Star Ltd, Snover International Inc and Alpha Star Equities Ltd BHIHC(COM) 2018/0206, 0207, 0208, 0210 and 0212.
3. FSD 14 of 2014.
4. FSD 45 of 2012].
Originally published by South Square Digest.
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