Speed read

On 7 February 2018, the Court of First Instance (CFI) published reasons for its decision in China Lumena New Materials Corp¹. Justice Harris reaffirmed his earlier decision² and held that where foreign insolvency officeholders are appointed by the court in the country of incorporation of the company, their ability to obtain documents relating to the company’s bank accounts located in Hong Kong is generally not dependent on getting a prior Hong Kong court order. However, if they would like to deal with assets located in Hong Kong, they should obtain a prior Hong Kong court order. This decision is aligned with the established practice in Hong Kong and clarifies the stance that banks should take when faced with requests by foreign insolvency officeholders for information or to transfer account balances.

Background

On 25 February 2015, the Grand Court of the Cayman Islands (the Cayman Court) ordered the provisional liquidation of the China Lumena Materials Corp (the Company) and appointed joint provisional liquidators of the Company (the Provisional Liquidators).

Following their appointment, the Provisional Liquidators sought to take control of the Company’s bank accounts in Hong Kong. However, some of the Hong Kong banks stated that they would not transfer the Company’s credit balances without a Hong Kong court order requiring them to do so.

Accordingly, the Provisional Liquidators applied to the Cayman Court to issue a letter of request to the Hong Kong court for recognition of their terms of appointment on terms that would allow them to advance their efforts to collect the Company’s assets, including the credit balances held in Hong Kong bank accounts. They also applied to the CFI for an equivalent recognition order and sought the CFI’s clarification on whether a court order authorising the transfer of the Company’s funds from its accounts with the banks in Hong Kong was required.

Access to information and dealing with assets – a clear distinction

The CFI had to decide whether it was necessary for the Provisional Liquidators, and for foreign insolvency officeholders in general, to obtain a court order recognising their appointment in Hong Kong on terms that would allow them to deal with the Hong Kong based assets of a company in liquidation.

The Provisional Liquidators submitted that there should be no meaningful distinction made between information and assets. It is well established that provisional liquidators can request banks to provide bank account documents without a prior Hong Kong court order given that the directors of the company would be entitled to obtain the documents from the banks. The Provisional Liquidators argued that logically, therefore, they could also request the banks to transfer the credit balances without a prior Hong Kong court order because the directors of the company would be entitled to make the same request.

Harris J noted that if the Provisional Liquidators’ argument was pursued to its logical conclusion, foreign insolvency officeholders appointed in the country of incorporation of a company would be able to do everything in Hong Kong that is within the powers of the company’s directors without a prior Hong Kong court order. That, in his view, would be going too far. A balance has to be struck between: (a) the foreign insolvency officeholders’ need for convenience; and (b) the need for court supervision which the company’s creditors may expect. The court therefore drew a distinction between the right of foreign insolvency officers to be able to obtain information from third parties and the right to take possession of or deal with assets in Hong Kong. The former would not require a prior Hong Kong court order whereas the latter would. The court did not consider that this would impose a significant burden on foreign insolvency officeholders given it has already developed a standard practice regarding applications for recognition orders and such applications may be granted very quickly.

Implications

The decision reinforces the established practice that the foreign insolvency officeholders must first apply to a Hong Kong court for an order if they want to deal with and/or take possession of Hong Kong based assets of insolvent companies. The investigative functions of the foreign insolvency officeholders, however, remain unaffected and Hong Kong banks are required to provide information to them without an order from the Hong Kong court.

The full judgment can be found here.

1. The Joint Provisional Liquidators of China Lumena New Materials Corp (In Provisional Liquidation) (HCMP 494 of 2017) [2018] HKCFI 276
2. Bay Capital Asia Fund, LP v DBS Bank (Hong Kong) Ltd [2016] HKEC 2377