The implications of Brexit for the Restructuring and Insolvency industry in Hong Kong10月072017
This was first published as part of the International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL) collection of essays on the implications of Brexit for the industry. Members may read the full collection of essays here.
Although it is now more than 20 years since the Handover, when Hong Kong ceased to be a British Dependent Territory, reference to Hong Kong as “the former British colony” is still something one often sees. There is still a sizeable community of British citizens living and working in Hong Kong. English remains one of the official languages. Importantly, and not merely in the context of this article, the Hong Kong legal system has continued to be a strong advantage for Hong Kong over other Asian jurisdictions, taking strength from its English law roots, with which it is still very much in touch.
With all this in mind, it would perhaps be thought that the Brexit vote had (and Brexit itself will have) a substantial effect on Hong Kong, including the insolvency and restructuring community. Certainly, feelings between the “leavers” and the “remainers” did run high from time to time when the referendum took place (even though many of us were not eligible to vote). However, what has been the real effect on Hong Kong as a result of the Brexit vote? And importantly for what we are considering for this discussion, what effect are we likely to see on the areas of restructuring and insolvency when the UK has actually left the EU?
In short, my view is that the answer to this question is that there is likely to be very little impact.
ECONOMIC LINKS BETWEEN HONG KONG AND THE UK
Economically, notwithstanding the historical links between the UK and Hong Kong, the UK has become a relatively minor (albeit still important) trading partner for Hong Kong. For 2016, exports to the UK accounted for only 1.4% of Hong Kong’s total exported goods by value.1 This represented the third highest out of the EU countries (Germany representing 1.9% of exports and the Netherlands 1.6% in 2016).2 The latest figure for export of services is higher but still not significant (6.6% in 2014).3 Exports to the EU as a whole accounted for 9.3% (goods) and 14.9% (services). 4 By way of comparison, in 2015, the US accounted for 9.5% of Hong Kong’s exports (goods), and China accounted for 53.7%. 5 As the Hong Kong Dollar is pegged to the US Dollar, the fall in the British pound after the Brexit vote will likely have had a negative impact on exports, but in economic terms (i.e. ignoring any political uncertainty concerns) may have a possible positive impact on outward investment from Hong Kong to the UK. That said, even with regard to the latter, the latest figure available, for 2015, shows that the UK was the destination for only 2.1% of Hong Kong’s outward direct investment.6
Another indicator of the limited effect can be seen by looking at the Hang Seng Index at around the time of the vote. In common with the markets in other major financial centres, the Index took a fall after the vote, being around 4% down by the Monday following the result. However, it recovered very quickly; by the end of July it was more than 5% higher than its pre-vote levels (so a 9% increase from the trough which immediately followed the vote). Of course, in an increasingly global marketplace the uncertainty associated with Brexit could very well cause difficulties for Hong Kong-based businesses. However, the (admittedly simple) data referred to in the previous paragraph helps to demonstrate that it is likely the impact on Hong Kong will be limited.
HONG KONG’S LEGAL SYSTEM
Hong Kong has for many years had its own legislation, even prior to the Handover on 1 July 1997 (when the People’s Republic of China assumed sovereignty over Hong Kong). After the Handover, the common law continued to apply in Hong Kong. In this regard, Article 8 of the Basic Law 7 reads:
“The Laws previously in force in Hong Kong, that is, the common law, rules of equity, ordinances, subordinate legislation and customary law shall be maintained, except for any that contravene this law, and subject to any amendment by the legislature of the Hong Kong Special Administrative Region.”
Decisions of the Privy Council on Hong Kong appeals delivered before 1 July 1997 remain binding in Hong Kong, but other decisions of the Privy Council or House of Lords (now the Supreme Court) of the United Kingdom are of persuasive authority only.8 It has been made clear in Hong Kong’s highest court (the Court of Final Appeal (“CFA”)) that the Hong Kong court will continue to respect and have regard to decisions of the English Courts. In practice, the common law in Hong Kong has continued to develop and the courts will commonly gain assistance from decisions in other common law jurisdictions, not just English decisions. That said, great weight is still given to decisions from the English House of Lords (now the Supreme Court). This is important in the fields of restructuring and insolvency given, as we see below, the lack of specific corporate rescue legislation, coupled with the fact that (a) certain relevant Hong Kong legislation remains almost identical to that in England; and (b) other common law based jurisdictions are frequently involved in Hong Kong insolvency and restructuring matters, including jurisdictions where the Privy Council remains the highest appellate court.
HONG KONG’S INSOLVENCY AND RESTRUCTURING REGIMES
Hong Kong’s insolvency legislation is of considerable vintage. It is largely based on the English legislation that was in place prior to the Insolvency Act 1986. The relevant statute is the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (“CWUMPO”). CWUMPO was recently the subject of various amendments (taking effect from February 2017) but these were not extensive. Even after these amendments, the legislation has no provisions dealing with restructuring / corporate rescue and no provisions dealing with cross-border situations. As to restructuring / corporate rescue, there have been stop-start attempts (mostly stop) to introduce specific legislation for over 20 years. The Hong Kong Government has recently indicated that a new Bill should go to our Legislative Council in early 2018, but I think it is fair to say that most professionals involved in the industry here are not holding their breath.
Cross-border issues are important for Hong Kong given the number of companies incorporated outside Hong Kong but which have substantive Hong Kong connections. By way of example, over 87% of the companies listed on the main board of the Hong Kong Stock Exchange are incorporated outside of Hong Kong. That number rises to almost 97% in relation on the Growth Enterprise Market (or GEM), being Hong Kong’s “second” board.9 Between them, the Cayman Islands and Bermuda (which will be familiar jurisdictions for most practitioners here) account for over 73% of the companies listed on the main board.10
The Hong Kong court does have jurisdiction to wind up a company which is not incorporated here, including where such company is not even registered as carrying on business here. A lot has been written about this in the recent past and I do not propose to repeat the position in any detail. In short, the court has power to wind up an “unregistered company”11 if 3 core requirements are met. These can be summarised as:
• There needs to be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction;
• There must be a reasonable possibility that a winding up order would benefit those applying for it; and
• The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.
There are a number of examples where this jurisdiction has been used to appoint provisional liquidators here in Hong Kong over foreign companies, with powers being given to those provisional liquidators to explore a restructuring.12 An example is Re Z-Obee Holdings Limited13 where provisional liquidators were appointed in Hong Kong over a Bermudian company, with the Judge stating “any negotiation with creditors or for further restructuring will be better carried out by the provisional liquidators…”.
Importantly, the Hong Kong court has also made great strides in recent years in recognising office holders from other jurisdictions (and also recognising the proceedings by which they were appointed). There are several examples from before the Handover of the Hong Kong courts using common law powers of assistance to aid foreign liquidators, but the court has now developed a well established practice of giving formal recognition, provided the powers sought are available to such an office holder in the jurisdiction of incorporation and would also be available in a Hong Kong proceeding.14 This is a welcome development because notwithstanding the pre-Handover examples of assistance, until the recent decisions referred to, the practice had been to seek an ancillary winding up here in Hong Kong. This was much more cumbersome and time-consuming.
Although the recognition of foreign insolvency proceedings is based on common law principles, and in many instances the foreign jurisdiction involved is also a common law jurisdiction, the principle is not based on reciprocity or restricted to those jurisdictions.15
Given these general principles, it is not easy to see what effect Brexit will have in this regard. There is no specific treaty or legal principle that deals with recognition of Hong Kong proceedings in the UK or the EU, with the exception of section 426 of the UK Insolvency Act 1986. Broadly, that section provides that the UK court shall assist courts with jurisdiction in relation to insolvency matters where those courts are in another part of the UK or in a relevant country or territory. The relevant countries and territories listed in the subsidiary legislation are largely Commonwealth or former Commonwealth jurisdictions. The list includes Hong Kong. The English court has allowed use of this section for Hong Kong proceedings in at least one case after the Handover,16 notwithstanding that from 1 July 1997 Hong Kong became an entirely different territory and part of a different country (being a Special Administrative Region of the People’s Republic of China). There is no equivalent provision in the Hong Kong legislation. Had there been a similar “free-standing” legislative provision in Hong Kong, permitting statutory assistance to the UK court, then notwithstanding the provisions of Article 8 of the Basic Law, such provision would have ceased to have effect from 1 July 1997 (unless there was reciprocity). This is because the Reunification Ordinance amended the Interpretation and General Clauses Ordinance (Cap. 1) by adding a new section (section 2A), which reads, at section 2A(2 (b):
“…provisions conferring privileges on the United Kingdom or other Commonwealth countries or territories, other than provisions giving effect to reciprocal arrangements between Hong Kong and the United Kingdom or other Commonwealth countries or territories shall have no further effect.”
Further, and importantly for our discussion, the Hong Kong court has jurisdiction to give effect to schemes of arrangement where the company concerned is a foreign company. The legislation relating to schemes of arrangement makes clear that it applies to a company “liable to be wound up” under CWUMPO17 and therefore extends to “unregistered” (including foreign) companies. The Court has made clear that this does not mean that the applicant must show that the company would be wound up in Hong Kong, just that it is a company which may be wound up by the court in Hong Kong. As regards schemes, the court has adopted the reasoning of English decisions, namely that it must be shown that there is sufficient connection between the scheme and Hong Kong.18 The Hong Kong legislation relating to schemes is almost identical to that in the UK, although there are procedural differences.
Before sanctioning a scheme, the Hong Kong court will want evidence that the scheme will have the effect intended. Where the governing law of the debt which is to be varied by the scheme is a law other than Hong Kong law, this will require evidence from the relevant jurisdiction that such jurisdiction will recognise the scheme. This is because the law in Hong Kong follows the Gibbs19 principle that a debt can only be discharged or varied by the court of the jurisdiction of the governing law. It is not uncommon for businesses in this part of the world to raise capital in the international debt markets and the governing law for such debt is commonly New York law. Fortunately, the courts in New York have been willing to recognise Hong Kong schemes through the Chapter 15 mechanism (of the US Bankruptcy Code).20 As to restructurings concerning offshore incorporated companies, a common mechanism is for there to be parallel schemes in Hong Kong and the jurisdiction of incorporation, e.g. Cayman.
EFFECT OF BREXIT ON THE POSITION
As will be apparent from the discussion above, the principles applied, both in connection with the recognition of Hong Kong proceedings elsewhere (including the UK) and for Hong Kong recognising “incoming” proceedings, are not reliant on the UK being part of the EU and are not affected by the EU Insolvency Regulations. In those circumstances, it is difficult to see how Brexit will have any effect on Hong Kong insolvency and restructuring matters. I can see that it is possible for a Hong Kong incorporated company to have its COMI in the UK, with operations or assets in other parts of the EU, with the result that it could at present take advantage of the EU Insolvency Regulations by starting an insolvency process in the UK. In that situation, there may also be the need for Hong Kong proceedings too (for example, perhaps because there is Hong Kong law governed debt). In that scenario, post- Brexit the company would not of course be able to use the EU Regulations, so that would change, but the Hong Kong end would remain the same.
In the circumstances, although Brexit may have an effect on the economy in Hong Kong, that effect is likely to be limited. A greater focus economically for Hong Kong is likely to be the so-called “Belt and Road Initiative” announced by President Xi Jinping a few years ago. In terms of insolvency and restructuring, there is no evidence that the principles applied and the mechanisms available in Hong Kong will change after Brexit comes into effect. What may be possible is that uncertainty created around Brexit could perhaps take the shine off London as a premier hub for restructuring, thus giving an opportunity for other jurisdictions to take a more prominent role. It is clear that the recent changes to the regime in Singapore are aimed at creating a debt restructuring hub, and practitioners there will no doubt be looking to Brexit to give some momentum to those initiatives. My own view is that the UK (and London in particular) will remain a pre-eminent centre for a number of reasons, including its position as a major financial zone; the strength and depth of the insolvency profession there; the preeminence of its judiciary; the scheme legislation that will continue to exist; the Cross-Border Insolvency Regulations which will remain unaffected; and for US law governed debt, there is no indication that the US courts will treat UK schemes any differently post-Brexit.
In any event, as for Hong Kong, it is likely that the lack of specific corporate rescue legislation will mean that Hong Kong is less likely to be in a position to take advantage of any opportunity that does present itself. However, as we have already seen, a lot of the cross-border issues faced by Hong Kong practitioners concern the offshore jurisdictions such as Cayman, Bermuda and the BVI. This will not be affected by Brexit. The bigger challenge for practitioners in this part of the world is in relation to the recognition problems that still exist when assets of a troubled company are located in the Mainland of the People’s Republic of China.
As a final comment, as this article is being prepared, there are various reports in the UK press regarding concerns about the European Court of Justice having a continued influence in relation to UK matters post-Brexit. However, the Hong Kong experience post-Handover could hopefully be of some comfort here. Our common law has developed rationally and as required by Hong Kong, with that development being assisted on many occasions by reference to decisions of the English courts, notwithstanding that no UK judgment post-1 July 1997 can have a binding effect here. In other words, Hong Kong has continued to benefit from UK legal developments even though the Handover was Hong Kong’s own kind of Brexit. In certain areas, I see no reason why the UK could not benefit in a similar way by reference to European Court jurisprudence.
For more information on the implications of Brexit for the restructuring and insolvency industry, please contact:
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
1 “Brexit: Recent Developments and Potential Repercussions” (HKTD Research 19 April 2017) accessed 28 August 2017.
3 “Half-Yearly Economic Report 2016: Brexit and its possible impacts on the Hong Kong economy” (Hong Kong Economy
August 2016) accessed 28 August 2017.
4 For 2015 and 2014 respectively, see “Half-Yearly Economic Report 2016: Brexit and its possible impacts on the Hong Kong economy” (Hong Kong Economy August 2016) accessed 28 August 2017
5 “Brexit and its Implications” (HKTD Research 28 June 2016) accessed 28 August 2017.
6 “Brexit: Recent Developments and Potential Repercussions” (HKTD Research 19 April 2017) accessed 28 August 2017.
7 The Basic Law in effect forms a “mini-constitution” for Hong Kong, which is a Special Administrative Region of the People’s Republic of China.
8 China Field Limited v Appeal Tribunal (Buildings) and Building Authority (2009) 12 HKCFAR 342.
9 The Stock Exchange of Hong Kong Limited, Hong Kong Exchange Fact Book, 2016.
10 In addition, the BVI is commonly used as the jurisdiction of incorporation for intermediate holding companies.
11 Section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).
12 Indeed, the use of the appointment of provisional liquidators to effect a restructuring was a tool commonly used in Hong Kong (particularly in the wake of the 1997/8 Asian Financial Crisis). Although that practice was scaled back after the widely reported decision of the Court of Appeal in Re Legend International Resorts  2 HKLRD 192 (where the court held that it was not proper to appoint provisional liquidators for the sole purpose of a restructuring), it is still legitimate for the court to give restructuring powers to provisional liquidators where there is a case to be made that they should be appointed on the “traditional” grounds, such as to protect assets in jeopardy.
13 Unreported, 27 June 2014.
14 The decisions in this regard start with Joint Official Liquidators of A Co v B  5 HKC 152 and have recently been reiterated in Re Pacific Andes Enterprises (BVI) Limited (unrep.; 27 January 2017). A helpful discussion of the approach appears in BJB Career Education Company Limited (in provisional liquidation)  1 HKLRD 113.
15 See e.g., Hong Kong Institute of Education v Aoki Corporation  2 HKLRD 760, referring to Japanese rehabilitation proceedings.
16 Re The New China Hong Kong Capital Ltd  EWHC 1573.
17 Section 668 of the Companies Ordinance (Cap. 622).
18 See for example, Re LDK Solar Co Ltd  1 HKLRD 458 (“LDK”); Re Winsway Enterprises Holdings Limited  1 HKLRD 1(“Winsway”); and Re Kaisa Group Holdings Ltd  1 HKLRD 18(“Kaisa”).
19 Antony Gibbs & Sons v Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.
20 Again, see LDK; Winsway; and Kaisa, supra note 18.