On 15 September 2022, the Competition Commission (the “Commission“) commenced proceedings in the Competition Tribunal (the “Tribunal“) against The Tien Chu (Hong Kong) Company Limited (“Tien Chu“) for imposing minimum resale prices in the supply of a monosodium glutamate (“MSG”) powder to its two main local distributors.

Notably, this is the first case brought by the Commission against an undertaking for its engagement in resale price maintenance (“RPM“), which occurs whenever a supplier establishes a fixed or minimum resale price to be observed by the distributor when it resells the product affected by the RPM obligation.  Vertical price restrictions of this kind are regarded by the Commission as having the object of harming competition at both the supplier and distributor levels, thereby in contravention of the First Conduct Rule of the Competition Ordinance (Cap. 619) (the “Ordinance“).  For example, RPM arrangements may undermine suppliers’ incentives to offer lower prices to distributors as well as distributors’ incentives to negotiate lower wholesale prices, which may result in end-customers paying higher prices than they would absent the RPM arrangements.

The Commission’s case is that Tien Chu continued to give effect to and/or engage in RPM arrangements since the Ordinance came into effect on 14 December 2015 until at least 27 September 2017 by establishing minimum resale prices for its MSG powder to be charged by its two main local distributors at the time.  Specifically, Tien Chu signed distribution agreements containing a requirement to “avoid improper price competition” with each of the distributors, and subsequently issued notices, reminders and warnings to ensure that the distributors would not sell the MSG powder for less than a particular price.  Further, in response to the complaint by one of the distributors in 2016 that the other was snatching customers with lower pricing, Tien Chu took action to secure compliance with the minimum resale prices it had set by using, among other things, disincentives, threats and/or penalties.

The Commission is of the view that Tien Chu intended to, through the above RPM arrangement, prevent its two distributors from offering sub-distributors a discount on the resale price set by Tien Chu for the MSG powder.  It has reasonable cause to believe that Tien Chu has contravened the First Conduct Rule and engaged in serious anti-competitive conduct (as defined in section 2 of the Ordinance).

The Commission is seeking before the Tribunal, among other things, an order for pecuniary penalty to be imposed on Tien Chu, and has decided not to pursue the two distributors.

The Competition Commission (the “Commission”) published an Advisory Bulletin on 29 August 2022 to provide guidance on the application of the Competition Ordinance to employers’ conduct in joint negotiations with employee bodies on employment matters (“joint negotiations”), and the Commission’s enforcement priorities regarding such joint negotiations.

In a joint negotiation, a number of employers may jointly negotiate with employee bodies for the purpose of determining employment conditions.  Under the present framework of Hong Kong competition law, such joint negotiations may involve forming an agreement on or the sharing of competitively sensitive information on employment conditions, which may give rise to a concern under the First Conduct Rule under the Competition Ordinance.

In the Advisory Bulletin, the Commission states that it does not presently have an intention to commence investigations or take enforcement actions against employers for certain conduct in the context of joint negotiations.  However, this is subject to the condition that the joint negotiations with employee bodies are justifiable, having regard to the following factors:

(i)            industry characteristics;

(ii)           purpose of the conduct, whether it is to improve relevant employment conditions; and

(iii)          whether the employee bodies are genuine participants in the joint negotiations.

Employers should note that the above is applicable to the following situations:

(i)            the making of compensation recommendations by groups of employers to their members which include the results of joint negotiations with employee bodies (e.g. to adjust compensation at a certain rate without fixing the level of salary itself); and

(ii)           if necessary for the preparation for or during joint negotiations, the sharing of expectations about future compensation among employers.

The Commission may revisit its position in the future. Therefore, employers should keep an eye on developments and publications issued by the Commission from time to time.

As reported in our prior news updates on 4 August 2021 and 25 October 2021, under the new inspection regime, the usual residential addresses of directors and full identification numbers of directors, company secretaries and some other individuals such as authorized representatives and liquidators (collectively, the “Protected Information”) are no longer required to be disclosed as part of the filings to the Companies Registry (the “Registry”) and in the Register of Directors kept by the Company.

The new regime will be implemented in 3 phases. Phase 2 of the new regime will commence on 24 October 2022. Upon the commencement of Phase 2 of the new regime:

(1) A new set of company filing forms[1] will be used and companies will only be required to fill in a correspondence address of the directors, which could be the registered office address (for Hong Kong companies) or principal place of business (for non-Hong Kong companies), as well as a partial identification numbers of the directors and other individuals.

Company secretaries are reminded that the Registry will only accept the revised forms from 24 October 2022 onwards.

(2) “Specified persons“[2] can apply to the Registry for access to the Protected Information.

(3) Any typographical or clerical error in documents already registered with the Registry can be rectified using a new administrative Form AD[3].

Form AD applies not only to the Protected Information as mentioned, but also other general rectifications that do not involve Protected Information. Companies should note that the Registry in processing their application for rectification, may further request for an explanatory letter to provide particulars of and the circumstances leading to the error(s).

[1] Link to the new Filing Forms: https://www.cr.gov.hk/en/legislation/nir/forms.htm

[2] as specified in the Companies (Residential Addresses and Identification Numbers) Regulation (Chapter 622N of the Laws of Hong Kong) when it comes into effect

[3] See Circular: https://www.cr.gov.hk/en/publications/docs/ec6-2022-e.pdf ; Link to Form AD: https://www.cr.gov.hk/en/legislation/nir/formad.htm

Schemes of Arrangement are used to compromise debts, as a way to restructure an insolvent company.  In the case of a listed company, a Scheme could assist it to lift its trading suspension and avoid delisting.  However, a question arises as to what debts are being compromised by the Scheme.  Pertinently, could a creditor with a debt governed by foreign law, nevertheless, present or continue a winding-up petition in Hong Kong?

The recent case of Re Rare Earth Magnesium Technology Group Holdings Ltd. [2022] HKCFI 1686 considered these questions.

Rare Earth Magnesium is a typical offshore (Bermuda) incorporated entity, whose shares are listed on the Main Board of the Hong Kong Stock Exchange. Soft-touch provisional liquidators were appointed to the Company in Bermuda in July 2020 and were subsequently recognised by the Hong Kong Court in August 2020.

The Company’s principal indebtedness arose from its unsecured interest-bearing bonds, which were governed by Hong Kong law.  It sought to avoid liquidation and return it to a solvent going concern, by discharging its unsecured indebtedness and restructuring its debts by way of a Scheme of Arrangement. The Scheme was approved by the requisite majority creditors.

In considering whether or not to sanction the Scheme, Harris J considered the principles in Re China Singyes Solar Technologies Holdings Ltd [2020] HKCFI 467, in particular:-

 whether the Scheme was for a permissible purpose;

• whether creditors who were called on to vote as a single class had sufficiently similar legal rights such that they could consult together with a view to their common interest at a single meeting;
• whether the meeting was duly convened in accordance with the Court’s directions;
• whether creditors had been given sufficient information about the Scheme to enable them to make an informed decision on whether or not to support it;
• whether the necessary statutory majorities had been obtained;
• whether the Court would be satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the Scheme; and
• in an international case, whether there was sufficient connection between the Scheme and Hong Kong, and whether the scheme was effective in other relevant jurisdictions.

 The Judge was satisfied with the Scheme meeting the requirements, and consequently, sanctioned the Scheme.

 Of interest is the Judge’s discussion of the debts that were being compromised by the Scheme and whether parallel Schemes were necessary elsewhere.  This issue raises the rule in Gibbs (named after the English case).

The Rule in Gibbs provides that a debt is treated as discharged if compromised in accordance with the law of the jurisdiction which governed the instrument giving rise to the debt. Harris J held that the scheme would therefore be recognised and effective abroad given that the debt to be compromised by the scheme was largely governed by Hong Kong law, i.e. the discharge would occur as a matter of substantive Hong Kong law, and therefore no parallel scheme of arrangement would be required in any jurisdiction. In addition, the Judge noted that Bermuda, Cayman Islands and other offshore jurisdictions all follow the Rule in Gibbs, making the scheme effective in these jurisdictions as well.

Harris J further added that if a creditor submits to the jurisdiction of a foreign insolvency process, he is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency process. Consequently, a scheme sanctioned by the court of an offshore jurisdiction compromising debt governed by Hong Kong law will be treated in Hong Kong as binding on a creditor, who submitted to the foreign jurisdiction. It will not bind a creditor who did not participate in the scheme proceedings or any associated insolvency process in the foreign jurisdiction.

But, what about a creditor whose debt is governed by, say, US law and who has not submitted to the US insolvency process or participated in the Hong Kong Scheme of Arrangement?  Can he still present or continue a winding-up petition against the company in Hong Kong?

Notably, it is common for Mainland business groups listed in Hong Kong to raise debts governed by US law, and then using schemes of arrangement in offshore jurisdictions recognised by Chapter 15 of the US Bankruptcy Code to compromise the debt.  In such circumstances, Harris J considered (in obiter) that, as recognition under Chapter 15 merely operates procedurally to prevent any action by a creditor against a debtor’s property in the US and it does not discharge the debt (as opposed to Chapter 11), it does not prevent that creditor from presenting a winding-up petition against the company in Hong Kong.

Subsequent to Harris J’s obiter comments in Rare Earth Magnesium, the case of Re Modern Land (China) Co. Ltd 2022 WL 2794014 in the US considered the issue.  In that case, Judge Martin Glenn held a different view on the effect of Chapter 15.  There, the company sought recognition of a scheme of arrangement sanctioned by the Cayman Islands Court which modified or discharged New York law governed debts.

In deciding whether the Cayman Scheme could be recognised and enforced abroad, Judge Martin Glenn referred to Harris J’s obiter in Rare Earth Magnesium, and was of the opposing view that debts governed by US law, of which the discharge was recognised and enforced by a US bankruptcy court through Chapter 15 could be treated as properly discharged abroad, provided that:

• the foreign court properly exercises jurisdiction over the foreign debtor in an insolvency proceeding; and
• the foreign court’s procedures comport with broadly accepted due process principles, a decision of the foreign court approving a scheme or plan that modifies or discharges New York law governed debt is enforceable.

In addition, Judge Martin Glenn stated that “Chapter 15 limits a US bankruptcy court’s authority to enjoin conduct outside the territorial jurisdiction of the United States, but it does not make a discharge of New York law governed debt any less controlling [sic].”

Given that the US Court has confirmed that Chapter 15 procedure could compromise or discharge debts governed by US law, it would appear that a creditor with such a debt should not be able to petition for winding-up in Hong Kong.

On 30 August 2022, the Court of Appeal handed down its judgment for the case of Re Guy Kwok-Hung Lam [2022] HKCA 1297, allowing the appeal and reversing the lower court decision dated 21 July 2021.  In doing so, the Court of Appeal upheld the effect of an exclusive jurisdiction clause and dismissed the bankruptcy petition on the basis that there is a dispute which ought to be determined first in accordance with the jurisdiction agreement.

At the heart of the case was a credit agreement under which the respondent petitioner advanced various term loans to a company called CP Global Inc. with the appellant as personal guarantor.  The agreement contained an exclusive jurisdiction clause in favour of New York for all legal proceedings arising out of or relating to the agreement.  Upon the default of the loans, the respondent, among other things, presented a petition to the Hong Kong court seeking a bankruptcy order against the appellant.  Linda Chan J granted the bankruptcy order and the appellant appealed.  The issue before the Court of Appeal was therefore whether the bankruptcy order should be set aside in light of the exclusive jurisdiction clause.

In the leading judgment by G Lam JA (with whom Barma JA agrees), it was held that the same approach as in the stay of ordinary actions based on exclusive jurisdiction clause should apply to winding up or bankruptcy proceedings.  The exclusive jurisdiction clause should ordinarily be given effect unless there are strong reasons to the contrary.  A winding up or bankruptcy petition should not be allowed to proceed if the underlying debt is disputed and the parties are bound by the clause.  In particular:

• As to whether the underlying debt is disputed, G Lam JA rejected the argument that there is no dispute if there is no bona fide defence, instead finding that the court should not embark upon a review of the merits in the first place.
• As to strong reasons to the contrary, while it was not possible nor desirable to define them, it was suggested that reasons may include, among others, where the debtor is incontestably and massively insolvent apart from the disputed debt, where there may be other creditors seeking winding up which are not subject to jurisdiction agreement, or where the assets may be in jeopardy.

While Chow JA agreed that the appeal should be allowed, his Lordship expressed reservation as to whether the approach in the stay of ordinary actions should be applied to winding up and bankruptcy proceedings, taking into account the well-recognised distinction and the wider public interest considerations pertaining to a bankruptcy/winding up petition.  His Lordship is also not prepared to accept that the Lasmos approach (which concerns the effect of arbitration clauses on winding up and bankruptcy petitions and its correctness is yet to be directly ruled on) should be extended and applied to exclusive jurisdiction clause context.  Chow JA found that the appeal should be allowed on a narrower basis that the lower court judge adopted a wrong approach in exercising of her discretion by allowing the petition to proceed unless it can be shown that there is a bona fide dispute of the debt on substantial grounds.

While this case concerns an exclusive jurisdiction clause in bankruptcy proceedings, the leading judgment contained a detailed analysis on the effect of arbitration clauses on winding up petitions, including the Lasmos approach and the argument on the fettering of statutory rights.  As suggested by the judgment itself, the law in this area is in a state of flux: this decision represents a step in its coherent development and can be expected to be applied in a wider context.

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