In March, Quentin Pak, Emily Tillett and Matt Lee directed questions concerning key insolvency trends and developments to a respected group of insolvency experts in Hong Kong, Australia and Singapore.
Hong Kong has seen an increasing number of winding-up cases where the underlying agreement includes an arbitration clause; however, recent case law has created a lack of clarity on when winding up petitions give way to arbitration. How does this uncertainty affect parties with such agreements?
Georgia Chow: This has been an area of uncertainty since Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426, though the decision in Re Hong Kong Bai Yuan International Business Co., Ltd [2022] HKCFI 960 noted that whilst considerable weight would be given to an arbitration clause, it would not be exercised one way, and in that case, the respondent company was ordered to pay the debt within 14 days to avoid a winding up order.
The ongoing uncertainty for parties with arbitration clauses in their agreements makes it harder for creditors to decide whether to enforce or not as they face potentially high legal fees if the debtor seeks to dispute the position and argue for arbitration. Creditors could find this frustrating where they believe they have a straightforward debt claim against an insolvent debtor or one simply unwilling to pay. The delays to the issuing of a winding up order may also lead to the debtor company having reduced or dissipated assets by the time a liquidator is appointed, further financially impacting the petitioner and other creditors.
Hong Kong has become more willing to provide recognition and assistance to cross-border insolvency proceedings. How will its cross-border insolvency law develop further in 2023?
Georgia Chow: The matter of recognition and assistance to cross-border insolvency proceedings in Hong Kong is in a state of flux. The Hong Kong court has recently moved away from recognizing offshore appointed “soft touch” provisional liquidations.
There is also a general move by the Hong Kong court towards parallel and ancillary winding ups of offshore companies already in liquidation in the jurisdiction of incorporation. See, for example, the decision handed down on March 3, 2022, in Re Guoan International Limited [2023] HKCFI 666.
The Hong Kong court is also taking a robust position against what it considers to be unreasonable opposition to winding up petitions to delay enforcement actions in the Hong Kong court against offshore companies. In the August 2022 decision in Carnival Group International Holdings Limited [2022 HKCFI 3097, the court ordered that the directors of the company be personally liable for costs given the role that they played in the company’s continued opposition to the winding up petition. It would seem that the Hong Kong courts are becoming more “creditor friendly” and we expect them to continue this approach going forward in 2023.
Looking closer to home, in relation to the PRC and Hong Kong governments’ arrangement to mutually recognize and give assistance to insolvency proceedings between PRC and Hong Kong, initially in three “pilot areas” in PRC, we expect to see more applications being made to the respective courts given the removal of cross border travel and Covid restrictions generally.
In 2022, Hong Kong Courts sanctioned their first guarantor-led scheme of arrangement in Re Unity Group Holdings International Ltd. How does this scheme-structure benefit creditors, and what, if any, are the drawbacks of guarantor-led schemes?
Georgia Chow: In the case of Re Unity Group Holdings Limited, the Hong Kong court confirmed the ability for a scheme of arrangement to release debts of third-party obligors that were guaranteed by the scheme company without requiring a deed of contribution, which is commonly used in the English courts for such purposes. This appears to be a helpful decision which recognizes that a release of guarantees issued by other group entities will often be necessary for a scheme of arrangement to be viable. The court followed the approach of Singapore in not requiring a deed of contribution with the Honourable Justice Harris seeing "no reason to distinguish between, for example, a release of the obligations of a third-party guarantor of a company's debts, which is necessary to make a scheme effective…and a release of a principal obligor’s liability, which has been guaranteed by the company".
Given that the effectiveness of its corporate insolvency laws came into question in 2022, how do you expect Australia to catch up to more progressive, rescue-focused insolvency regimes like Singapore and the UK?
Ryan Eagle: The Australian turnaround and restructuring framework has evolved in recent years with the introduction of the safe harbor legislation and the general focus among the community for corporate turnaround. Through the use of the voluntary administration regime and schemes of arrangement, the Australian corporate insolvency regime provides the opportunity for corporates and advisors to turnaround and rescue business experiencing financial distress.
Dominic Emmett: The government’s announcement of a review of Australia’s corporate insolvency laws was really no more than an announcement of intent. No indication as to how the current regime might change was given. Australia has fared well with its existing restructuring and insolvency regime. This regime, with its embedded threat of a formal insolvency, encourages a consensual solution between corporates and their financial creditors, generally resulting in no impact on trade and operational creditors.
In February 2023, The High Court of Australia abolished the “peak indebtedness rule” and applied the “ultimate effect” doctrine instead. How will this change impact creditors and liquidators?
Ryan Eagle: Overall I see this as a positive outcome. The benefit of the recent High Court of Australia’s ruling is that it provides clarity for creditors and liquidators as to the legal position. It also provides clarity for stakeholders and advisors dealing with stressed corporates who may enter into liquidation the future. This certainly is likely to result in cost efficiencies.
Dominic Emmett: Assuming a trading creditor during a running account is aware of the risk of a future claw back, it might be more comfortable accepting a higher level of indebtedness from the company in the knowledge that it is only the net level of indebtedness that could be clawed back. This might result in more flexible trade terms, longer periods prior to payment and so forth.
For liquidators, the impact is more immediate in that an inability to apply the peak indebtedness rule could be the deciding factor in whether there is any incentive to bring a preference claim. The High Court’s decision will likely decrease the number of preference claims pursued.
Following the enactment of the Insolvency, Restructuring and Dissolution Act (IRDA), we have seen growing interest among local and international companies in using Singapore’s expanded toolkit for facilitating corporate restructuring. What steps could be taken by companies and insolvency practitioners so that more foreign parties know of and qualify for the benefits offered by the debtor-friendly mechanisms in the IRDA?
Kwan Kiat Sim: The IRDA came into effect in July 2020 but the key changes to the restructuring and insolvency regime, which introduced much of the expanded toolkit, came about in 2017. Since then, the toolkit has been fairly well utilized and we have seen several Singapore court decisions providing helpful guidance on the operation of the tools, including cases on the automatic moratorium for a proposed or intended scheme of arrangement, rescue financing, pre-pack schemes and the UNCITRAL Model Law on Cross-Border Insolvency.
The restrictions on ipso facto clauses were introduced in 2020. Even though the scheme of arrangement, the main restructuring tool, is in essence a debtor-in-possession process, the Singapore courts monitor and supervise the process quite closely to make sure matters progress. It is a dynamic and symbiotic process—the restructuring and insolvency community finds guidance from the courts on how the tools are meant to work, and the courts consider how things work in practice in arriving at their decisions.
Since 2017, debtors, including foreign debtors, have had more options and tools for their proposed debt restructuring. Foreign debtors must have a substantial connection with Singapore to utilize the options and tools under the IRDA. A foreign debtor can do so in different ways, for instance, by having its center of main interests, its business or assets here, or having Singapore law govern its loans and transactions.
There are different reasons and considerations in a debtor’s choice of venue for its debt restructuring. They include the governing law of key contracts, the location of major creditors, or a desire to utilize a regime with the necessary tools and environment conducive for debt restructuring. Some foreign debtors may be under the impression that they can’t commence a process here because they have no presence or business here.
We do not advocate that a debtor shifts its location or center of main interests for improper purposes or to evade its obligations, but the analysis goes beyond the shift itself and into the reasons and motivations for it. A foreign debtor should be able to select a venue which best suits the purposes of the restructuring. Practitioners can help to propagate the notion that there is nothing wrong with that in principle, so long as it is a choice made in good faith and with the intention to facilitate the restructuring and benefit the creditors.
Helpfully, we also saw the use of legal finance in the insolvency space being codified in the legislation, although Singapore courts have long been supportive of this type of funding for liquidators and judicial managers. Will the availability of litigation funding further enhance the appeal of Singapore as a restructuring and insolvency hub?
Kwan Kiat Sim: It is likely to do so. Conceptually, litigation funding in insolvency makes sense and can be useful. Its availability and usage indicate a growing level of maturity and sophistication in the restructuring and insolvency regime. In line with the general approach in restructuring and insolvency matters, I believe the Singapore courts will continue to be supportive so long as there is no abuse and what is proposed ultimately results in a better recovery for creditors in general. I anticipate further discussion and developments on this front.
What other trends in the restructuring space do you expect to see in 2023 and beyond?
Kwan Kiat Sim: First, the Singapore International Commercial Court (SICC) will now hear international restructuring and insolvency matters and may allow the participation of foreign counsel, particularly on questions of foreign law. This is an important milestone which primes the SICC as a forum for developing cross-border insolvency law and practice. Second, global markets seem to have slowly moved on from recent developments following the Silicon Valley Bank collapse, but generally it seems a fair amount of uncertainty and unease remain. Market sentiments don’t appear better compared with last year even as the world gradually continues to adapt to the pandemic. There may be a tightening of credit, resulting in increased demand for alternative funding and financing solutions, including litigation funders. Third, on a more specific level, for schemes of arrangement, I expect a growing awareness and use of specific facilitative tools, such as lock-up agreements and rescue financing to the extent possible.
What trends are you seeing in cross-border/transnational insolvency-related cases?
Ryan Eagle: There has been an increase in the recognition of UNCITRAL law around the region because of an increasing level of distress across multijurisdictional industries such as aviation and shipping. This has included jurisdictions other than the traditional financial hubs such Indonesia.
Dominic Emmett: The two more prominent trends we are seeing in cross-border and transnational insolvency-related cases are, first, keeping Australian subsidiary entities out of offshore processes, particularly Chapter 11 and, second, offshore corporations closing down their Australian operations leaving unpaid creditors, thereby taking on greater risk of personal liability for directors and offshore parents given the strict insolvent trading legislation in Australia.
How do you foresee increasing acceptance and use of legal finance impacting the insolvency and restructuring landscape in your region?
Ryan Eagle: Market participants in recent times have become more accustomed to the use of litigation funding. Legal finance has the obvious benefit of providing distressed companies, liquidators and stakeholders with access to capital they may not otherwise have had and pursue claims they may otherwise have not been able to pursue. From an insolvency practitioner’s perspective, readily available funding increases the avenues of recovery for creditors.
Georgia Chow: Litigation funding is still in a relatively early stage in Hong Kong and continues to grow. Insolvency practitioners and creditors recognise the need for external sources of funding in the absence of funds in an insolvency estate. Following the May 2020 decision in Re Patrick Cowley and Lui Yee Man ([2020] HKCFI 922), where the court clarified that liquidators do not require sanction before they enter into a litigation funding arrangement, it is now much easier and quicker for insolvency practitioners to access litigation funding when required. The increased use of litigation funding should allow for more claims to be pursued on behalf of creditors, ultimately improving the overall returns to creditors.
Dominic Emmett: The increasing use of legal finance will likely result in an increase in office holders looking to challenge antecedent transactions and pursuing recoveries against directors. The prospect of this may even see creditors deciding to put more companies into liquidation to pursue such challenges and recoveries as opposed to accepting the often minimal returns that deeds of company arrangement provide for.
About the participants
Georgia Chow is a Managing Director in Grant Thornton Hong Kong’s Recovery and Reorganization practice. Prior to joining Grant Thornton, she was part of the advisory team in a “Big Four” firm in Hong Kong for 12 years, focusing on asset realizations for the Lehman portfolio. She has more than 15 years of experience in cross-border M&A, restructuring and insolvency work.
Ryan Eagle is a partner at KPMG Australia with over 20 years' experience in corporate restructuring, turnaround, distressed and special situation advisory and insolvency services. His experience includes a wide variety of insolvency and corporate restructuring roles.
Dominic Emmett is the partner who heads Gilbert + Tobin’s restructuring and insolvency practice in Sydney. He brings over 30 years of significant local and international experience, including acting on some of Australia’s largest workouts and insolvencies.
Kwan Kiat Sim heads Rajan & Tann’s restructuring and insolvency practice group, which is the largest dedicated legal practice in Singapore dealing with banking and financing disputes, corporate insolvencies, business advisory, workouts and debt restructuring and enforcement of creditors rights.
Director
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Quentin Pak is a Director who leads Burford’s office in Singapore with responsibility for expanding Burford’s resources to support clients in Asia. Prior to joining Burford, he was the head of the Asia commodities business at Commonwealth Bank of Australia.
Vice President
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Emily Tillett is a Vice President at Burford with responsibility for leading its investment activity and operations in Hong Kong. Prior to joining Burford, she was Of Counsel at Allen & Overy in Hong Kong, where she focused on representing clients in litigation, regulatory investigations and arbitration, including contentious insolvency and fraud matters.
Principal
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Matt Lee is a Principal at Burford with responsibility for leading its investment activity and operations in Australia and focused on working with companies, funds, investors and law firms engaged in complex commercial litigation and arbitration in Australia and abroad.