In a recent decision of the Grand Court of the Cayman Islands (the "Grand Court") in the matter of Sun Cheong Creative Development Holdings Limited (FSD 160 of 2020), the Chief Justice considered the principles applicable to the appointment of "soft touch" provisional liquidators to effect the restructuring of a Hong Kong-listed Cayman Islands company where two competing winding up petitions were filed before the High Court of Hong Kong (the ("HK Petitions" and the "HK Court" respectively). His Lordship held that the Grand Court would be slow to give primacy to pure winding up proceedings of a Cayman Islands company before a foreign court where the company intended to present a reorganisation plan for the benefit of its creditors as a whole.
By way of background, Sun Cheong Creative Development Holdings Limited (the "Company") is a Cayman Islands-incorporated holding company registered in Hong Kong and listed on the Hong Kong Stock Exchange. Its corporate group had historically been profitable until it began to face severe financial difficulties in 2019 and the Company itself was admittedly cash flow insolvent as at the date of the application. The HK Petitions were listed to be heard in August and September respectively and the Company petitioned for its own winding up in the Cayman Islands immediately before the first of the HK Petitions was to be heard. On the same date, the Company applied on an urgent ex parte basis for the postponement of its own petition and the appointment of "soft touch" joint provisional liquidators ("JPLs") under section 104(3) of the Companies Law to allow it to present a restructuring proposal to its creditors.
The Company's restructuring proposal contemplated that proceeds from a "white knight" investor were to be used, amongst other things, to fund a creditors' settlement and to invest in new business lines to enable the Company to continue trading. This was to be contrasted with an official liquidation where the likely distribution to creditors was estimated at 1 cent on the dollar. Given the decision to appoint the JPLs would result in the adjournment of the HK Petitions in circumstances where the Company was admittedly insolvent, the Grand Court had to consider whether, notwithstanding the likely objections of the Hong Kong petitioning creditors, the interests of the majority of the Company's creditors would be better served by a restructuring rather than an official liquidation in Hong Kong. The Grand Court ultimately found that the appointment of JPLs to pursue the restructuring proposal would be in the best interests of the Company's stakeholders.
Where a creditor has submitted a winding up petition in respect of an undisputed debt, the primary approach of the court is that the creditor will be entitled to a winding up order "as of right" unless special reasons can be shown why the relief should not be granted. The Chief Justice noted that, had the Hong Kong petitioning creditors petitioned in the Cayman Islands, he would have considered their application in light of the Grand Court's previous decisions where it had been willing to offer assistance to distressed companies by permitting a court-supervised restructuring which protects the interest of the creditors as a whole. Given a "white knight" had been identified, a detailed restructuring plan was in place, and independent evidence as to its viability and benefit to the creditors as a whole was before the court, his Lordship was satisfied that the jurisdiction to appoint "soft touch" liquidators to implement the compromise had been engaged. Accordingly, the Chief Justice considered there were compelling reasons to make an order in the Cayman Islands appointing the JPLs (effectively adjourning the HK Petitions).
In deference to the HK Court, the Chief Justice considered it necessary to consider the question of comity and found that while there was a well-established practice in Hong Kong of recognising the appointment of foreign office holders appointed in the country of incorporation, the converse (i.e. the Grand Court's jurisdiction to grant reciprocal recognition of foreign office holders appointed in a country other than the company's place of incorporation) was far more limited. Where the Grand Court has granted such assistance in the past, the cases demonstrate that it will be more willing to grant recognition where the purpose is to facilitate a restructuring or otherwise to avoid a winding up where that is in the best interests of the company's stakeholders. On the other hand, it will be slow to prefer a pure official liquidation of a Cayman Islands company before a foreign court where it is satisfied that there is an intention to present a restructuring plan of greater benefit to its creditors.
The decision is a helpful reminder that where a company is cash flow insolvent, the interests of the creditors as a whole will be of paramount importance even where questions of comity arise. The decision also confirms that where a compromise is to be presented, and it is in the best interests of a company's creditors, in appropriate circumstances the Grand Court will effect a court-supervised restructuring in the company's home jurisdiction.
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