Provisional Liquidators’ role and powers clarified – China Solar Energy Holdings Limited HCCW 108/2015, [2018] HKCFI 555

The Court of Appeal held in Re Legend International Resorts [2006] 2 HKLRD 192 that the ‘primary purpose of appointing provisional liquidators must always be the purposes of the winding-up’, not for the purposes of avoiding the winding-up, and that ‘restructuring a company is an alternative to a winding up’.

These statements cast doubt on whether and the extent to which provisional liquidators are allowed to carry out restructuring, which would have the effect of preserving and extending the life of a company and thus preventing winding-up.

In China Solar, the Court of First Instance has made clarifications on this issue. The trading of the company’s shares listed on the Hong Kong Stock Exchange had been suspended. The provisional liquidators (“PLs”) were appointed on the basis, inter alia, that the company’s assets were in jeopardy, and the PLs were also granted restructuring powers. Since the appointment, the PLs have put in extensive efforts and resources to restructure the company with a view to apply for resumption of trading of the company’s shares.

The Petitioner sought to discharge the PLs, arguing that when the provisional liquidation had come to a point where the sole or primary function of the PLs was to carry out restructuring, it could not be permitted to continue. The Petitioner also argued that restructuring by definition means avoiding winding-up, which is contrary to Re Legend.

In his detailed judgement, the Honourable Mr. Justice Harris surveyed the case law on the powers of provisional liquidators and dismissed the Petitioner’s application for dismissal. The following are the Judge’s key findings:

1. Where the matters associated with a winding-up are absent, in particular where the company’s assets are not in jeopardy, it would not be appropriate to order a provisional liquidation, despite the company’s general need for a restructuring.

2. When the Court of Appeal said in Re Legend that provisional liquidation “must be for the purposes of the winding-up”, it was referring to matters associated with a winding-up, which could include asset preservation. It could not have meant to say that the intended result of provisional liquidation must be a winding-up. In fact, the intended result could be the avoidance of winding-up. Otherwise, it would be contrary to the Court of Appeal’s own endorsement of the practice that when provisional liquidators were appointed on asset preservation grounds, they could be granted restructuring powers.

3. There was nothing in the statutory regime of provisional liquidation that the provisional liquidators’ appointment is to be restricted in the manner suggested by the Petitioner in order to increase the likelihood of a winding-up, which is likely to be destructive of the creditors’ collective interests. In fact, terminating the provisional liquidators’ appointment would seem inconsistent with the purpose of protection of company assets and value.

4. The law has never been that provisional liquidation is meant to lead to a winding-up. Provisional liquidation is meant to ensure that the operation of a winding-up would not be frustrated, if there is a winding-up.

Following China Solar, therefore, it would seem that provisional liquidators can be appointed for matters associated with a winding-up, including asset preservation, but not solely for restructuring when the matters associated with a winding-up are absent. Following the appointment, provisional liquidators can carry out restructuring, even when that becomes their sole remaining function.

Written by: Paul Lui, Partner; Henry Ma, Partner and Irene Lai, Trainee Solicitor