The Companies Judge Mr. Justice Harris has recently held in Re FDG Electric Vehicles Limited (“FDG”) [2020] HKCFI 2931 that there would no longer be an automatic stay of proceedings in Hong Kong when the Hong Kong Court grants orders recognising foreign insolvency proceedings.  This is an interesting development in the area of cross-border insolvency law in Hong Kong.

Pre-FDG era

Before the FDG case, the standard-form recognition order would commonly contain a general stay provision to the effect of staying Hong Kong proceedings in favour of foreign insolvency proceedings. 

The FDG case

FDG, a company incorporated in Bermuda and listed in Hong Kong, went into provisional liquidation in Bermuda.  The Bermuda provisional liquidators (“PLs”) then applied for an order of recognition in Hong Kong.  FDG has an indirect subsidiary (FDG Kinetic Limited) (“Subsidiary”) which is also a Bermuda-incorporated company listed in Hong Kong.

While it is not disputed that the PLs should be recognised, one of the issues before the Hong Kong Court was whether a stay should be ordered in respect of existing or prospective proceedings against FDG in Hong Kong.   Another issue before the Hong Kong Court was whether the PLs should control all direct and indirect subsidiaries of FDG.  This was opposed by the Subsidiary. 

First Issue – stay of proceedings in Hong Kong

The Court held that no general stay provision would be granted. Instead, if the PLs would like to apply for an order staying particular proceedings, they should apply to the Companies Judge for directions.

As a starting point, the Hong Kong Court acknowledged that the standard general stay provision was intended to be a case management provision (which is more appropriate), which would ensure that action would not take place in Hong Kong without the relevant parties being aware of the impact of the foreign insolvency proceedings and any stay granted.     The Hong Kong Court will have to consider, on a case-by-case basis, whether a stay is appropriate and hence should be granted.

In considering whether a stay is appropriate and hence should be granted, the Hong Kong Court would have regard to the following considerations:-

1. Whether offshore soft-touch provisional liquidation should be treated as a collective insolvency process for all purposes. 
2. Whether the stay would violate the rule in Antony Gibbs & Sons v La Société Industrielle et Commerciale Des Métaux [1890] 25 QBD 399 (i.e. the Gibbs rule), which states that a foreign insolvency proceeding does not discharge or compromise a debt unless it is discharged under the law governing the debt.

Second issue – control over subsidiaries

Apart from considering the propriety of any stay, the Hong Kong Court has also considered the PLs’ request to include a provision in the recognition order that would allow the PLs to control all direct and indirect subsidiaries of FDG. 

The Court considered that the above provision sought was too broad because the PLs’ powers should be restricted to assets in Hong Kong. Subsidiaries incorporated abroad are not assets in Hong Kong because, as a matter of conflict of laws, the shareholdings in the foreign subsidiaries are located in their country of incorporation.

Post-FDG era

The FDG case has clarified the Hong Kong Court’s position in relation to its power to stay proceedings in Hong Kong in aid of foreign liquidation.  Stay of proceedings would no longer be “automatic” when the Hong Kong Court grants orders recognizing foreign insolvency proceedings.  Instead, the Court will consider the propriety of any stay on a case-by-case basis upon appropriate applications being made to the Companies Court and returnable before the Judge granting the recognition order.  

This is article is not and does not purport to be legal advice. For any enquiries related to this article, please contact Ms. Jennifer Li of our firm.