There have been new and much welcomed developments in the area of cross-border insolvency between Hong Kong and the PRC. Traditionally, a foreign liquidator (such as a Hong Kong court appointed liquidator) often faces difficulties for him to be recognised in the PRC and to carry out his work in the Mainland, even though the company to which he was appointed a liquidator is the parent company of the PRC operating subsidiaries, or where the assets in the Mainland clearly belonged to the liquidated company. A breakthrough came in May 2021 when the Vice-President of the Supreme People’s Court of the PRC and the Hong Kong Secretary of Justice signed a Record of Meeting, setting out a consensus on the mutual recognition and assistance to insolvency proceedings between the PRC and Hong Kong.  Initially, this new arrangement will apply to the Intermediate People’s Court in three pilot areas, namely Shanghai, Xiamen and Shenzhen, with a view to expanding the areas progressively.

Under the arrangement, certain requirements must be satisfied in order for Hong Kong insolvency proceedings to recognised in the PRC. One notable requirement is that the liquidated company must have a centre of main interests (COMI) in Hong Kong for at least 6 months at the time of the recognition application. COMI is generally considered to be the place of incorporation, but may also include considerations as the place of business, principal office and assets.

There have been some recent judgments in Hong Kong which have provided guidance on the operation of mutual arrangement between Hong Kong and the PRC Courts recognising each other’s liquidators.

In the judgments of Re Joint and Several Liquidators of Ozoner Water International Holding Ltd (in liquidation) [2022] HKCU 940, Re Edward Simon Middleton and Others [2022] HKCU 352 and Re Samson Paper Company Limited [2021] HKCFI 2151, the Hong Kong Court in each case granted an application by the liquidators to issue a letter of request to the Shenzhen Intermediate People’s Court to recognise the liquidators and grant them assistance, pursuant to the mutual arrangement. In Harris J’s judgments, he set out the principles for such an application of a letter of request to be issued to the PRC Court.

For instance, in addition to the requirement that the company’s COMI must be in Hong Kong, the Court would also consider whether the company’s assets which the liquidators wish to have control over are in the PRC in order to ensure that the PRC Court is the most appropriate forum to decide the liquidators’ powers over such assets.

Following the decisions in Hong Kong to issue a letter of request for recognition and assistance to the PRC Court, there has only been one case (Samson Paper Company Limited) so far where the Shenzhen Intermediate People’s Court allowed the Hong Kong liquidators to be recognised in the PRC and be provided with assistance. This may not come as a surprise because it is clear that Samson Paper Company Limited’s COMI is in Hong Kong where it was incorporated.  It remains to be seen whether the PRC Court will similarly grant recognition and assistance to the Hong Kong liquidators of Ozoner Water International Holding Ltd, which was incorporated in the Cayman Islands.

On 17 March 2022, the Securities and Futures Commission (SFC) publicly censured Wonderful Sky Financial Group Holdings Limited (Wonderful Sky) and Liu Tianni and publicly criticised Liu Kiki Ching Tung for breaching the Code on Share Buy-backs.  Wonderful Sky (stock code: 1260), a consultancy firm principally engaged in the provision of financial public relations services and the organisation and coordination of international roadshows, was listed on the Main Board of the Stock Exchange of Hong Kong Limited in 2012.

Wonderful Sky bought back 42,500,000 shares by block trade in March 2020 which was pre-arranged and pre-agreed between Wonderful Sky and the vendor. This constituted an off-market share buy-back and therefore requires the approval of the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director and of Wonderful Sky’s disinterested shareholders. However, no such approval was obtained.

Liu Tianni, the Chairman, Chief Executive Officer and an executive director of Wonderful Sky being the main decision maker for the buy-back and Liu Kiki Ching Tung, a deputy general manager of Wonderful Sky at the material time participating in implementing the buy-back under Liu Tianni’s instructions accepted that they failed to comply with the Code on Share Buy-backs and consented to the disciplinary action taken against them.

This enforcement action reflects that compliance with the Code on Share Buy-backs is one of SFC’s areas of focus. Practitioners and parties who are actively engaged in the securities market must comply with the Share Buy-backs requirements and seek professional advice as and when needed.

Please visit this link for more details.

On 18 February 2022, the Hong Kong Court of First Instance handed down its reasons for the judgment in Hypertec Systems Inc. v Yifim Limited [2022] HKCFI 482, in which the Court affirmed its jurisdiction to grant vesting orders to help victims of cyber fraud cases recover their money transferred to bank accounts.

In this case, as a result of an email fraud, the plaintiff was deceived into transferring funds into the two defendants’ bank accounts in Hong Kong.  The Court first recognised that since there was a transfer and receipt of money by way of fraud, by the operation of law, the defendants were holding the money on a constructive trust for the plaintiff, and hence the money in the bank accounts was recoverable and traceable in equity.  On this basis, the Court went on to consider whether it had jurisdiction to grant vesting orders so as to compel the bank to return the funds to the plaintiff.

The legal basis for a vesting order can be found in section 52 of the Trustee Ordinance (Cap.29), the relevant part of which is restated as follows:-

“(1) In any of the following cases, namely –

[…]

(e) where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient, the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the court may appoint,

[…]

(5) The court may make declarations and give directions concerning the manner in which the right to transfer any stock or thing in action vested under the provisions of this Ordinance is to be exercised.” [emphasis supplied in bold]

Recently, the statutory basis, and thus the jurisdiction of the court to grant vesting orders in cyber fraud cases, has been a subject of debate.  Earlier, in 800 Columbia Project Company LLC v Chengfang Trade [2020] HKCFI 1293, the Court of First Instance held that the Court’s jurisdiction under section 52(1)(e) above was not engaged to justify the making of a vesting order to recover the plaintiff’s money transferred due to fraud and landed in the hands of the defendant recipients, on the basis that the statutory provision did not contemplate a constructive trustee in such circumstances.  800 Columbia Project Company LLC decision received support in Tokić DOO v Hongkong Shui Fat Trading [2020] HKCFI 1822 and Essilor Manufacturing (Thailand) v G Doulatram [2020] HKCFI 1790.

In Wismettac Asian Foods v United Top Properties [2020] HKCFI 1504, however, the Court of First Instance considered the 800 Columbia Project Company LLC case and other cases along its line, but it had instead taken a liberal approach to construe section 52(1)(e) and held that the term “trustee” extends to a constructive trustee and the expression “by way of mortgage or otherwise” includes vesting by way of operation of law (i.e. constructive trust).  This has been adopted in the present Hypertec Systems Inc. case (as well as in Star Therapeutics Inc v. Leabon Technology (HK) Ltd [2021] HKCFI 1715 and Lexcom Informationssysteme GmbH v Hongkong Joyee Holdings Co Ltd [2021] HKCFI 3389), and the Court of First Instance held that:-

“Section 52(1)(e) should apply, so that a vesting order may be made upon proof that a constructive trust arose by operation of law in respect of the money extracted from the Plaintiff by fraud or mistake which ended up in the recipient’s bank account now subject to the trust.”

Nonetheless, the Court reiterated that in order for a vesting order to be made in cyber fraud cases, the following conditions must be satisfied:-

• it can be proved that the funds in the bank account represents the victim’s monies or traceable proceeds, and
• the court finds it expedient to grant such an order, meaning that without such an order, it would be impossible or difficult to deal with those monies or proceeds.

If the above two conditions are satisfied, the Court has the jurisdiction to grant the vesting order under section 52(1)(e).  Under section 52(5), the effect of such an order is that the funds can be directly vested in the victim.  In other words, the bank will be compelled to transfer the funds back to the victim as  beneficiary under the constructive trust.  Despite the recent debate in the Court of First Instance, vesting orders will likely remain as a powerful tool for cyber fraud victims to recover their money fraudulently transferred to other bank accounts.

On 4 March 2022, the Chief Justice announced a GAP period between 7 March and 11 April 2022 in response to the ongoing COVID-19 pandemic in Hong Kong.

During the GAP period, the capacity and operations of the judiciary will be substantially reduced, and all hearings of the courts and tribunals originally listed in the GAP period will be generally adjourned, subject to directions from the courts and the exceptions set out in the announcement, which include :

1. hearings for civil and criminal proceedings and appeals that had already commenced and are ongoing,
2. hearings for civil and criminal proceedings scheduled to commence in the GAP period but which are directed by the court to be dealt with remotely,
3. urgent applications to the Duty Judge and Duty Master, and
4. urgent appeals and applications to the Court of Appeal.

In addition, all registries, accounts and other court offices will be closed during the GAP period except for, amongst other things, supporting court business that will continue during the GAP period or filing of urgent applications subject to limitation periods or other time limits imposed by court orders or legislation.

The full list of court business that will continue during the GAP period are set out in the judiciary’s announcement (link).

On 9 February 2022, the Hong Kong International Arbitration Centre (“HKIAC“) has published its dispute resolution data for 2021.

Compared with the statistics in 2020, although the number of arbitrations submitted to HKIAC has returned to the 10-year average level after reaching its 10-year peak in 2020, there is an upward trend with the total number of dispute resolution cases submitted last year. In particular, there is a drastic 51% increase in the number of domain name disputes submitted last year.

The percentage of international arbitrations (where at least one party was not based in Hong Kong) amongst all arbitrations submitted has also seen an increase of around 10%, from 72.3% in 2020 to 81.6% in 2021. Despite the influence of the COVID-19 epidemic, the data demonstrates that Hong Kong remains and continues to be a favourable destination for resolution of international disputes.

The effectiveness of conducting arbitration in Hong Kong has also been strengthened by its tightened connection with mainland China through the implementation of the “Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region”. Last year, the HKIAC has handled almost twice as many applications for the preservation of evidence, assets or conduct in the mainland made under the above arrangement than in 2019.

The Law Reform Commissions’ recommended in its report in December 2021, that the existing legal rules be amended to allow lawyers to charge in “outcome related fee structures” in arbitration taking place in and outside Hong Kong. This is envisaged to bring Hong Kong in line with other major arbitral seats and further enhance Hong Kong’s competitiveness as international dispute resolution centre.

Please refer to the HKIAC’s website for the full statistics of 2021 here.