In the recent case of Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340, the Court of First Instance (the “CFI“) offered useful guidance on the consensus for mutual recognition of and assistance to insolvency proceedings between the courts of the Mainland and Hong Kong (the “Cooperation Mechanism“).  Since the Cooperation Mechanism came into place in 2021, the Hong Kong court had only recognised and provided assistance to the administrators appointed by the courts in the Mainland in two instances in Re HNA Group Co., Ltd [2021] HKCFI 2897 and Re Peking University Founder Group Company Limited [2021] HKCFI 3817.

In the present case, the administrator appointed by the Guangzhou Intermediate People’s Court of Guangdong Province (the “Guangzhou Court“) over Guangdong Overseas Construction Corporation (the “Company“), a company established in the Mainland, applied for recognition and assistance from the Hong Kong court.  The CFI considered whether the Guangzhou Court, which is a court outside the 3 Pilot Areas designated by the Supreme People’s Court ^[1], may initiate a request for assistance to the Hong Kong court in light of the terms of the Cooperation Mechanism.

The CFI first reiterated that the jurisdiction to recognise and assist foreign office-holders appointed by a court of another jurisdiction derives from common law.  The Cooperation Mechanism and the “Procedures for a Mainland Administrator’s Application to the Hong Kong SAR Court for Recognition and Assistance – Practical Guide” (the “Practical Guide“) only serve the purpose of prescribing the procedure and the manner in which an application is to be made.  As such, even though the Cooperation Mechanism does not extend to a Mainland court outside the Pilot Areas (such as the Guangzhou Court in the present case), this would not be a factor taken into account by the court since reciprocity is not a requirement for recognition and assistance under common law, and it would be for the Supreme People’s Court to decide whether it is appropriate for courts outside the Pilot Areas to apply for recognition and assistance from the Hong Kong court.  With that said, the CFI noted that, as a matter of practice and to ensure consistency, applicants seeking recognition and assistance should follow the Practical Guide when a letter of request is issued by a court outside the Pilot Areas in the future.

Having considered the above principles, the CFI granted an order to recognise the liquidation of the Company and the appointment of the administrator, and to provide the necessary assistance to the administrator, being satisfied that:

1. The insolvency proceeding of the Company is a collective insolvency proceeding under the supervision of the Guangzhou Court;
2. The insolvency proceeding is conducted in the Mainland, which is both the place of incorporation of the Company and its centre of main interest;
3. The Company has valuable asset in Hong Kong which necessitated assistance for the administrator to carry out his duties; and
4. The order made is consistent with the substantive law and public policy of the court.

To conclude, the fact that a request for recognition and assistance is initiated by a Mainland court outside the Pilot Areas does not prevent the Hong Kong court from exercising its common law jurisdiction to provide assistance.  After all, the test adopted by the court is to assess whether the criteria for recognition and assistance are satisfied on a case-by-case basis.

^[1] Namely, the People’s Courts in Shanghai Municipality, Xiamen Municipality in Fujian Province and Shenzhen Municipality in Guangdong Province.

Further to our news update, on 4 May 2023, the Court of Final Appeal handed down its judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9, affirming the earlier decision of the Court of Appeal to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. In so doing, the Court of Final Appeal put an end to the longstanding debate on the effectiveness of an exclusive jurisdiction clause in bankruptcy context.

In the judgment by Mr Justice French NPJ (with whom Cheung CJ, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, and Mr Justice Lam PJ agree), it was held that the “established approach” (i.e. a petitioner will ordinarily be entitled to a bankruptcy/winding up order if the petition debt is not subject to a bona fide dispute on substantial grounds) is not appropriate where an exclusive jurisdiction clause is involved.  Where the underlying dispute of the petition debt is subject to an exclusive jurisdiction clause, the court should generally dismiss the petition and hold the parties to their contract, unless there are countervailing factors, such as the risk of insolvency affecting third parties, a frivolous defence, or an abuse of process.

In so finding, the Court of Final Appeal noted that the jurisdiction of the Courts in bankruptcy matters is conferred by statute and is not amenable to exclusion by contract. However, the parties’ agreement to refer their disputes to a foreign court is relevant to the court’s exercise of its discretion to decline jurisdiction. Furthermore, the determination of whether there is a bona fide dispute on substantial grounds, while being a necessary element of the court’s jurisdiction, is a threshold question. It is at that stage that public policy consideration comes into play and the court will adopt a multi-factorial approach. Where a bankruptcy petition is brought by one creditor against another and there is no evidence of a creditor community at risk, the significance of public policy of the legislative scheme for bankruptcy jurisdiction is much diminished.

While the Court of Final Appeal makes clear that its findings do not cover the case where an exclusive jurisdiction clause requires bankruptcy proceedings to be instituted in a foreign court, this decision will likely have far-reaching impact not only in bankruptcy proceedings but also on the treatment of arbitration clauses in bankruptcy or insolvency context.

For further details, the full judgment can be found here.

A brokerage firm (the “Firm“) has been recently reprimanded and fined HK$6 million by the Securities and Futures Commission (the “SFC“) for various regulatory breaches committed in the course of acting as the placing agent in a share placement between November and December 2019.

During the relevant period, the Firm acted as the placing agent for the majority shareholder (the “Shareholder“) of a listed company in Hong Kong (the “Company“) to procure not less than six placees to subscribe for the shares of the Company. In the absence of the Shareholder’s consent, the Firm (i) entered into bought and sold notes in respect of the shares on behalf of the Shareholder with the placees, where the transaction prices were inconsistent with the placing price agreed with the Shareholder, and (ii) transferred the shares from the Shareholder’s account to the placees’ accounts, hoping that the placees would sell the shares on the market to settle the placing price with the Shareholder.

Upon investigation, the SFC found that in failing to safeguard the assets of its client and acting beyond the client’s authorities and instructions, the Firm was grossly negligent and it breached certain provisions of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission in relation to safeguarding client assets, and acting with proper authorization. Nevertheless, the SFC acknowledged that there was no sufficient evidence to support a finding of dishonesty or recurrent breaches on the part of the Firm.

This case serves as a helpful reminder to all licensed firms that it is important to act within their authorities, including verifying whether the instructions they were acting on were given by the person ultimately responsible for the origination of the instructions, and to act with due care and in the best interests of the clients (which is fundamental to the fitness and properness of licensed corporations).

Recently, the Labour Department has revoked the employment agency (“EA“) license of Lifree Employment Agency Limited (“Lifree”) and reminded operators of EAs to conduct their business in compliance with the law and the requirements of the Code of Practice (“Code“) for EAs at all times.  This has been the third case of revocation of an EA license in 2023.

The basis of such revocation stems from sections 53(1)(c)(iva) and 53(1)(c)(v) of the Employment Ordinance (“EO“) – the Commissioner for Labour (“Commissioner“) may revoke the licence of an EA if she is satisfied that the licensee concerned has not complied with the Code, or the licensee concerned is not a fit and proper person to operate an EA.  In the current case, Lifree failed to meet the requirements set out in the Code, including failing to ensure that any information that is made available to employers or to job seekers is consistent with the facts made known to it, failing to include all required items in the service agreements drawn up with employers, failing to provide payment receipts to employers, etc.  In addition, Lifree was considered not a fit and proper person to operate an EA.

It may be helpful to note that section 53(1) of the EO also lists out various grounds (including the ones mentioned above) on which the Commissioner may revoke a licence, such as a contravention of any provisions of Part XII of the EO (i.e. the section on Employment Agencies) or any regulation made under section 62 of the EO, such as overcharging job seekers or operating an EA without a licence.  Any person aggrieved by a decision of the Commissioner taken in respect of him under section 53(1) may, within 28 days after he is notified of the decision, appeal to the Administrative Appeals Board.

On 25 April 2023, the Stock Exchange of Hong Kong Limited (Exchange) issued a Statement of Disciplinary Action against S&S Intervalue China Limited (Delisted, Previous Stock Code: 8506) (Company) and five of its former and current directors (Directors).

Summary of facts

During 2018 to 2020, the Company’s subsidiary (Subsidiary) entered into unauthorised transactions (Unauthorised Transactions) under which the Subsidiary provided a loan (Loan) and multiple bank guarantees for the due performance of certain liabilities owed by third parties. There was no justifiable commercial reason for the Unauthorised Transactions, which caused the Company to suffer significant loss.

The Company claimed that the Unauthorised Transactions were not reported to, nor authorised by, the Board, and were arranged, inappropriately, by two former executive directors without the Board’s knowledge and attributed the occurrence of the Unauthorised Transactions to their misconduct.

Listing Committee’s key findings

The key findings made by the Listing Committee include:

1. The Unauthorised Transactions constituted discloseable and major transactions. The Company breached the announcement, circular and shareholders’ approval requirements under Chapter 19 of the GEM Listing Rules (GLRs) in connection with the Unauthorised Transactions.
2. There were material deficiencies in the Company’s internal controls, which contributed to the Company’s failure to comply with the GLR requirements applicable to the Unauthorised Transactions.
   1. The Subsidiary adopted a sole-directorship system which led to a concentration of power in the sole director, which led to a deterioration in corporate governance and internal control at the subsidiary level.
   2. The Company did not have any proper system in respect of management appointments or to define the limits of management power.
   3. The disclosure system was ineffective due to inadequacies in reporting lines, compliance culture, and director/staff training. The governance policies which the Company had in place were incomplete and out-of-date, and had neither been circulated nor followed.
   4. The Company’s financial reporting function was ineffective and its financing activities were unmonitored.
   5. The Company had no policy or practice to prepare and circulate monthly updates to the Board.
3. All Directors breached GLR 5.01 and their Undertakings with regard to Directors (Undertakings) to (i) comply with the GLR to the best of their ability and (ii) use their best endeavours to ensure that the Company had adequate and effective internal controls, including those relevant for the Company’s compliance with the GLR.
4. The compliance officer of the Company breached GLR 5.20 by failing to advise the Company in respect of the GLR requirements applicable to, at least, the Loan approved by her.
5. Certain Directors’ failure to respond to the Division’s investigation and reminder letters constituted a breach of their Undertakings as well as the GLR.

Key takeaways from this decision

The Exchange wishes to send a strong message to the market that “[d]irectors, whether executive or non-executive, are collectively and individually responsible for overseeing the company’s corporate governance matters.  Even where non-executive directors are not involved in the day-to-day operations, they are expected to proactively seek sufficient information for the proper discharge of their directors’ duties.“

Undetected misconduct by senior management of a company poses a question as to whether the board of directors put in place adequate oversight mechanisms and policies to mitigate the risk of misconduct. In this regard, the Exchange expects the independent directors to perform their monitoring role on behalf of the shareholders and other stakeholders to ensure compliance.