Wynne Mok, Partner, Ruby Chik, Associate, Jason Cheng, Associate, and Kathleen Poon, Associate, Slaughter and May, consider some of the main issues and implications involved in cross-border insolvency from the point of view of a creditor.

With the global economic downturn, businesses may begin to show signs of insolvency. Indeed, we have seen an increasing number of applications for compulsory winding-up processed by the Hong Kong courts. 

If you are a creditor, you will naturally be concerned with making the right move when your debtor defaults in repaying the loan. Situations can be tricky if the debtor is an offshore company. As demonstrated in several recent cases regarding companies listed on the Stock Exchange of Hong Kong, but incorporated in other jurisdictions and with assets and key businesses in the Mainland, creditors will have to ponder a number of important issues when dealing with companies with similar tiered structures. This article discusses these issues and considerations.

Winding up a company

If your debtor has defaulted in making payment, you will start to contemplate your options, one of which might be to wind up the company. However, there are issues you should weigh up before embarking on such a course of action.

Winding up in Hong Kong

Is the debt disputed on substantial grounds? 

In this case, you would rely on the debtor’s inability to pay debts to wind up the debtor company, in accordance with Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). This is usually established by the fact that the debtor has failed to settle the debt within three weeks after it had been served with a statutory demand.

Before issuing a winding-up petition, you should, first and foremost, seek legal advice as to whether the debtor will be able to raise a substantive defence. Creditors normally enter into correspondence with debtors before issuing a winding-up petition, through which creditors can draw out any arguments that the debtors may have in respect of the debt. If the debtor advances any credible arguments, you should think twice before commencing or even threatening to commence winding-up proceedings. A winding-up petition should not be used as a tool to exert pressure on the debtor to pay, especially if there is no genuine concern as to the company’s solvency. Otherwise, the debtor may apply for an injunction to bar you from issuing a winding-up petition on the grounds of abuse of process. As demonstrated in Hung Yip (HK) Engineering Co Ltd v Kinli Civil Engineering Ltd [2021] HKCFI 153, you may be ordered to pay the debtor’s costs on an indemnity basis.

The three core requirements associated with the winding-up of foreign companies 

You should also assess whether there are good reasons for the Hong Kong court to exercise its jurisdiction to wind up the debtor company, while bearing in mind that the place of incorporation is generally deemed to be the most appropriate forum to wind up a company by the courts. In this regard, there are three ‘core requirements’ to satisfy:

  • the foreign company must have a sufficient connection with Hong Kong
  • there must be a reasonable possibility that the 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.

It should be relatively straightforward to satisfy the first and third core requirements if the company is listed, or has substantial assets and businesses in Hong Kong, and there is more than one creditor who is subject to the jurisdiction of the Hong Kong court.

As for the second core requirement, the petitioner has to establish that there is a real benefit in granting the winding-up order. 

The case Re China Huiyuan Juice Group Ltd [2020] HKCFI 2940 (China Huiyuan) demonstrates the complication with meeting the second core requirement in the case of an offshore company. China Huiyuan, which was incorporated in the Cayman Islands and listed in Hong Kong, had its core businesses and assets in the Mainland through intermediate holding companies incorporated in the British Virgin Islands (BVI) and operating subsidiaries in the Mainland. A creditor attempted to wind up this listed company in Hong Kong. As it appeared that the laws of the Mainland (the legal position of which has recently changed – see section entitled ‘Mainland–Hong Kong arrangement on mutual recognition of and assistance to insolvency proceedings’ below), the Cayman Islands and the BVI did not recognise the appointment of liquidators by the Hong Kong court where Hong Kong was not the place of incorporation, even if the Hong Kong court were to make a winding-up order, the Hong Kong–appointed liquidators would not be able to take control of the subsidiaries and ultimately reach the assets in the Mainland. The second core requirement was therefore not met. 

The creditor in China Huiyuan also sought to argue that the listed status of China Huiyuan constituted a real benefit. In rejecting this argument, Justice Harris observed that the listed status was unlikely to have any residual value once the company was wound up. Justice Harris reminded future petitioners that if they wish to rely on a listed status to meet the second core requirement, they would have to adduce evidence to establish a real prospect that the realised listing of the debtor would produce a meaningful financial return to creditors. 

As shown above, if your debtor does not have strong connections with Hong Kong, you should seek advice early on before choosing the venue to issue a winding-up petition, bearing in mind that the satisfaction of the three core requirements is not a matter of course.

What to do if the company seeks adjournment of the winding-up

Unlike Hong Kong, many common law jurisdictions allow ‘soft-touch’ provisional liquidation. Soft-touch provisional liquidators (PLs) are appointed to facilitate corporate restructuring while the board maintains the day-to-day management of the company. The debtor, if incorporated in one of these jurisdictions, may appoint soft-touch PLs in its place of incorporation and seek to adjourn the insolvency proceedings in Hong Kong.

The court, as illustrated in Li Yiqing v Lamtex Holdings Ltd [2021] HKCFI 622 (Lamtex), would approach the question of whether to adjourn winding-up proceedings in Hong Kong in favour of restructuring as follows:

  • Generally, the place of incorporation should be the primary insolvency jurisdiction.
  • However, if the company’s centre of main interest (COMI) is elsewhere, the court would look at:
  1. the extent to which giving primacy to the place of incorporation is artificial by taking into account the strength of connection of the company with its COMI versus the place of incorporation
  2. whether the group structure requires the place of incorporation to be the primary jurisdiction to effectively liquidate or restructure the group – the appointment of liquidators in the company’s COMI may not bring about an effective liquidation of the company if the company has assets in jurisdictions which do not recognise liquidators appointed by the court of a place other than the place of incorporation 
  3. the views of creditors, and
  4. the feasibility of the restructuring plan.

As in Lamtex, the court will not hesitate to wind up the debtor company if Hong Kong is the COMI, the creditors support the winding-up, and the restructuring proposal lacks specifics and is merely an attempt to derail the liquidation in Hong Kong. Further, even if the court initially adjourned the insolvency proceedings upon satisfaction of a viable restructuring plan, as in Re Ping An Securities Group (Holdings) Ltd [2021] HKCFI 1394, a winding-up order against the debtor may still be made in the end if the progress of the restructuring is unsatisfactory. 

Winding up in the place of incorporation and seeking recognition and assistance in Hong Kong

If you anticipate difficulties with satisfying one or more of the three core requirements discussed above, a safer course could be to wind up in the debtor company’s place of incorporation. Liquidators appointed there may then seek recognition and assistance of foreign insolvency proceedings from the Hong Kong courts to avail themselves of the powers under Hong Kong law, which include the power to take possession and control of the company’s assets and to investigate its affairs.

Corporate restructuring and rescue

Even if you have every right to wind up the debtor, you may still wish to explore, with the debtor, the possibility of a corporate restructuring or rescue over simple liquidation. This is especially when the debtor has a profit-making business or a business with great potential.

Scheme of arrangement

There is at present no dedicated statutory corporate rescue mechanism in Hong Kong. Currently, the only way to effect a binding debt restructuring in Hong Kong is by way of a scheme of arrangement under the Companies Ordinance (Cap 622). A binding compromise on a company’s debts enables the debtor company to resume operations as a going concern. If successful, a scheme may yield better returns to unsecured creditors than an immediate liquidation of the debtor. A foreign company with sufficient Hong Kong connections may also enter into such a scheme.

The company would first formulate a proposal seeking to compromise on the company’s debts. It should then seek the court’s sanction to convene meetings of creditors and members for approval of the scheme. The company needs to secure approval of at least 50% in number, representing at least 75% in value or voting rights of each class of the creditors or members present and voting. Even if the proposal is approved by the creditors and members, it should eventually be sanctioned by the court.

As a creditor, you should note the following:

  • The scheme process may require substantial time and resources to bring to fruition.
  • There are uncertainties in the process. Even if the scheme is approved by the requisite number of creditors and members, the court may refuse to sanction the scheme if the conduct of meetings lacks procedural fairness, or if the scheme offends public policy or is ultra vires. Dissenting creditors will only be bound when the scheme is eventually sanctioned by the court.
  • The commencement of the scheme of arrangement process does not trigger a moratorium on civil proceedings. (In contrast, where a PL is appointed or a winding-up order is made, no action can be continued or commenced against the company except with the leave of the court.) Therefore, before the scheme is eventually sanctioned by the court, a dissenting creditor, even if holding an insignificant portion of the company’s debt, can bring a claim or wind up the company.

Mainland–Hong Kong arrangement on mutual recognition of and assistance to insolvency proceedings

Many businesses in Hong Kong have close ties with the Mainland. Having a legal framework for reciprocal cooperation in insolvency between Hong Kong and the Mainland has become increasingly important. 

On 14 May 2021, The HKSAR Government and the Mainland’s Supreme People’s Court entered into an arrangement on mutual recognition of and assistance to insolvency proceedings (the Arrangement). The Arrangement provides a mechanism whereby three pilot courts (Intermediate People’s Courts in Shanghai, Xiamen and Shenzhen) will consider applications for recognition of and assistance to insolvency proceedings commenced in Hong Kong in respect of companies that have COMI in Hong Kong for at least six months prior to application, and which have principal assets, or business operations or representative offices, in one of these pilot areas. Once the Mainland courts recognise the Hong Kong insolvency proceedings, the Hong Kong liquidators, upon application, may take over the property of the debtor in the Mainland and investigate the debtor’s affairs. The Mainland courts may also designate local administrators to exercise these powers at the request of the liquidator or the creditor. 

Likewise, a Mainland administrator may apply to the Hong Kong courts for recognition of liquidation, reorganisation and compromise proceedings commenced in the Mainland. 

Outlook – Companies (Corporate Rescue) Bill 2021

Towards the end of last year, The HKSAR Government announced that it would present the Companies (Corporate Rescue) Bill to the Legislative Council in early 2021 to introduce a corporate rescue procedure with a statutory moratorium, with the following terms:

  • A company that is insolvent or will likely become insolvent may initiate a corporate rescue procedure and appoint a certified public accountant or solicitor as the provisional supervisor. The provisional supervisor will take over the management of the company and act as the company’s agent.
  • The provisional supervisor will have 45 business days to propose a rescue plan for consideration at the creditor’s meeting and, if approved, to implement the plan.
  • The commencement of the provisional supervision will bring about a moratorium (creditors cannot commence any action against the company in Hong Kong, subject to specifically exempted proceedings such as criminal proceedings and employment actions). However, creditors are not prevented from pursuing against the debtor in other jurisdictions.

While it is unlikely that the bill will be passed in time to apply to the wave of insolvencies arising from the current economic downturn, this is still a significant development that major creditors should watch out for.


In summary, where you are owed sums by a defaulting company with an offshore corporate structure, you should:

  • consider whether restructuring or immediate liquidation would yield better returns and more advantageous recovery by critically assessing the company’s restructuring proposal and its financial status
  • where you find immediate liquidation is a better route, ascertain, if possible, that the debtor company is indeed insolvent and the debt is not disputed by the company on substantial grounds before issuing the winding-up petition
  • consider which venue would be most appropriate for bringing the insolvency proceedings, in light of factors such as the corporate structure of the debtor and the laws on recognition of foreign insolvency proceedings of the jurisdictions where the company’s main assets are located
  • bring insolvency proceedings in the place of incorporation if Hong Kong–appointed liquidators will not be able to gain control of the main operating subsidiaries overseas or otherwise yield real benefit to creditors
  • check if there is any extant winding-up petition issued by other creditors and, if there is, consider appearing on the first petition as supporting creditor, rather than issuing a separate petition, which would be viewed unfavourably by the court, and 
  • prepare for an application of adjournment by the company in favour of a restructuring attempt. In such a case, it is important to coordinate with other creditors to assess the credibility of the restructuring proposal and continue to pursue the winding up of the company where the proposed restructuring is not credible.

Wynne Mok, Partner, Ruby Chik, Associate, Jason Cheng, Associate, and Kathleen Poon, Associate

Slaughter and May

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