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Hong Kong Voluntary Liquidation: recognition granted in landmark US Bankruptcy Court ruling

  • Hong Kong
  • China
  • Restructuring and insolvency

01-03-2018

Re Manley Toys Limited, Case No. 16-15374
(United States Bankruptcy Court, District of New Jersey) 

On 13 February 2018, following a heavily contested US Chapter 15 bankruptcy recognition proceeding, the United States Bankruptcy Court (District of New Jersey) granted a recognition order in favour of Hong Kong liquidators appointed in a Hong Kong voluntary liquidation.

This is the first case in history where the US Bankruptcy Court had to consider a contested recognition application by Hong Kong liquidators appointed in a Hong Kong voluntary liquidation. It was also a difficult case, with the contesting parties alleging that the Company’s decision to enter into voluntary liquidation was taken in bad faith with intention of fraud.

This important decision, which supports the Hong Kong voluntary liquidation regime, will be of particular interest among insolvency practitioners in both the US and Hong Kong. It is also relevant to insolvency practitioners worldwide, as the voluntary liquidation regime is a common feature of many jurisdictions, and US Chapter 15 is an essential element of US adoption of the UNCITRAL Model Law on Cross-Border Insolvency which allows foreign liquidators access to the US bankruptcy system (including US automatic stay to protect the assets of the foreign debtor within the USA). 

Kingsley Ong, partner of Eversheds Sutherland Hong Kong office, acted as the Hong Kong law expert witness for the Hong Kong liquidators.

Hong Kong Voluntary Liquidation regime

Under Hong Kong law, a company may be wound up on a compulsory or voluntary basis.

Unlike compulsory liquidation (where the company is wound up by a court order following the petition of an interested party), voluntary liquidation is a process by which a company is wound up at the company’s own instigation, by the shareholders of the company passing a special resolution.

The voluntary liquidation regime has been previously described as “essentially a private arrangement and although subject to the directions of the court is not conducted by or on behalf of an officer of the court1.

Background

In March 2016, the shareholders of Manley Toys Limited, a Hong Kong company (the “Company”) passed a shareholders resolution to put the Company into voluntary liquidation, and appointed Mat Ng and John Lees of JLA Asia as the Hong Kong liquidators.

As the Company had assets in USA, the Hong Kong liquidators sought recognition from the US Bankruptcy Court under Chapter 15 of the US Bankruptcy Code.

This application was heavily opposed by Aviva Sports Inc. (“Aviva”) and Toys “R” Us, Inc. (“TRU”), both of whom claimed to be US creditors of the Company.

In order to successfully achieve recognition in US, the Hong Kong Liquidators and their lawyers had to satisfy the US Bankruptcy Court that the conditions for foreign recognition are met. Among other things, the Liquidators had to satisfy the US Court that the Hong Kong voluntary liquidation is a “foreign proceeding”, which is defined as:

"a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control and supervision by a foreign court, for the purpose of reorganization or liquidation”. 2

Opposing Arguments

Aviva and TRU tried to argue, among other things, that: 

  1. Hong Kong voluntary liquidation regime is not “collective” in nature, because:
    • The US creditors did not receive timely notice of the creditors’ meeting and did not have opportunity to participate; and
    • The intercompany affiliates of the Company (i.e. insiders) controlled the creditors’ meeting.
  2. Hong Kong voluntary liquidation regime is not a “judicial or administrative proceeding”, as there is no court supervision of a Hong Kong voluntary liquidation.
  3. Recognition of Hong Kong liquidators appointed in this Hong Kong voluntary liquidation is manifestly contrary to US public policy:
    • It was alleged that the Company is an alter ego of another solvent company, and the Company’s decision to enter into liquidation is an effort to avoid ongoing enforcement of pre-existing adverse court orders in USA by Aviva and TRU; and
    • Hong Kong voluntary liquidation was “procedurally unfair” because remedies available to US creditors under Hong Kong law was insufficient (e.g. compared to US law, Hong Kong law makes it more difficult to prove a fraudulent transfer because Hong Kong law requires the showing of intent)

Decision

In granting the recognition order, the learned Judge Jerrold Poslusny Jr held that:

  1. The Hong Kong voluntary liquidation regime is collective in nature. The US Bankruptcy Court noted that the Hong Kong liquidators owed a duty to all creditors (including non-Hong Kong creditors) under Hong Kong law. In addition, notwithstanding that the US creditors did not receive notice of the creditors’ meeting, the Hong Kong voluntary liquidation regime provided sufficient safeguards to ensure the US creditors had access to Hong Kong courts to seek redress if necessary. 
  2. The Hong Kong voluntary liquidation regime is judicial or administrative in nature. The US Bankruptcy Court found that the Hong Kong voluntary liquidation regime was “largely administrative in nature”, and interested parties also had access to Hong Kong courts to ensure that the liquidation complies with Hong Kong law. The US Court also found that Hong Kong voluntary liquidation regime provided the necessary legal framework which “courts, merchants and creditors can know them in advance, and apply them evenly in practice”.  
  3. Recognition of Hong Kong liquidators appointed in this Hong Kong voluntary liquidation was not manifestly contrary to US public policy:
    • The existence of differences between Hong Kong law and US law per se does not mean that recognition is manifestly contrary to US public policy.
    • Even though the Company’s actions in other courts appear to have been improper, the Company is still entitled to its right to decide to enter liquidation.
    • Hong Kong liquidators appointed under a Hong Kong voluntary liquidation are subject to a duty to investigate any allegations of wrongdoing as a matter of Hong Kong law.

In arriving at its conclusions, the US Bankruptcy Court was persuaded by (and cited extensively in its judgment) the expert testimony provided by Kingsley Ong.

US counsel for the Hong Kong Liquidators were Mr Stephen Packman and Mr Douglas Leney (Archer & Greiner P.C.) and Mr Daniel Glosband (Goodwin Procter LLP).


1 Per Lord Sumption of the Privy Council in Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda) [2015] AC 125, at paragraph 25 (Lord Neuberger dissenting). The case concerned recognition of a Cayman Islands voluntary liquidation.

2 Section 101(23) of the US Bankruptcy Code, which is essentially identical to the UNCITRAL Model Law Article 2(a).


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