Bermuda Court exercises discretion by declining to appoint nominees of first creditors' meeting

In Re Ping An Securities Group (Holdings) Limited [2022] SC (Bda) 25 Com (8 April 2022), the Supreme Court of Bermuda (the “Bermuda Court”) declined to appoint the nominee of a first creditors’ meeting, instead appointing a minority nominee in furtherance of the proper operation of the process of liquidation. The decision serves as a useful reminder of the facts that the jurisdiction to appoint liquidators following first meetings is discretionary and that creditor autonomy in the matter of appointments is not unlimited.

Earlier chapters in the history of the insolvency of Ping An Securities Group (Holdings) Limited (the “Company”) formed part of a trend (along with Re Lamtex Holdings Ltd. [2021] HKCFI 622 and Re China Bozza Development Holdings Ltd [2021] HKCFI 1394) of stricter scrutiny shown by the Hong Kong Court towards the “light touch” provisional liquidation procedure used in Bermuda and the Cayman Islands, sometimes referred to in Hong Kong as the “Z-Obee technique”.

In Re Ping An Securities Group (Holdings) Limited [2022], the Bermuda Court made judicious use of its appointment discretion to respond to this changing landscape while upholding traditional principles of private international law.

Background

The Company is an exempted company incorporated in Bermuda with its shares listed on the Main Board of The Stock Exchange of Hong Kong. Through subsidiaries indirectly held via entities in the British Virgin Islands, it operated securities brokerage businesses in Hong Kong and held assets in the People’s Republic of China.

A creditor’s winding up petition was presented in Hong Kong in July 2020 in respect of the Company. In September 2020, the Company presented a winding up petition in Bermuda and made a successful application to the Bermuda Court for orders appointing individuals of RSM in Hong Kong and Rawlinson & Hunter in Bermuda as joint provisional liquidators of the Company with “soft” powers for restructuring purposes (the “JPLs”).

At a hearing of the Hong Kong petition in March 2021, Harris J sitting in the Hong Kong Court of First Instance (“Hong Kong Court”) granted orders for recognition of and assistance to the JPLs upon being satisfied that there was a tangible prospect of a restructuring. 

However, he subsequently wound up the Company in May 2021, finding that a self-imposed timeline had not been adhered to, that the petitioner had not received from the JPLs all information that she should have and that the JPLs had filed evidence out of time before the hearing. 

Upon the winding up of the Company in Hong Kong, the Official Receiver of Hong Kong (“ORHK”) became the provisional liquidator. At the first meeting of creditors in July 2021, the votes of the holders of the majority of proofs of debt approved resolutions to appoint the JPLs as permanent liquidators. A competing resolution to appoint the Deloitte partners did not achieve a majority.

However, notwithstanding the outcome of the meeting, the ORHK applied to the Hong Kong Court for a Regulating Order (which dispenses with the need for first meetings) supported by a report claiming that the JPLs were not suitable as liquidators of the Company and recommending the appointment of alternatives. 

Deloitte partners were then appointed as permanent liquidators by a Regulating Order of the Hong Kong Court made on 19 August 2021 (the “Hong Kong Liquidators”).

The orders of the Hong Kong Court kicked the provisional liquidation in Bermuda into touch and the JPLs applied to the Bermuda Court for orders winding up the Company and directing the summoning of the first creditors’ meeting. The Bermuda Court made the orders and, mindful of developments in Hong Kong, directed that the Hong Kong Liquidators be notified of the first creditors’ meeting.

At the meeting, the majority in value of votes cast again approved the appointment of the JPLs. A minority of votes cast approved the nomination of the Hong Kong Liquidators.

The JPLs made an appointment application to the Bermuda Court to give effect to the result of the vote, pursuant to Section 171.

Concerned to avoid the potential risk of duplicative costs of parallel liquidations with distinct firms, the Hong Kong Liquidators applied under Section 171 (“Section 171”) of the Companies Act 1981 for orders of the Bermuda Court:

• Exercising its discretion not to appoint the JPLs as permanent liquidators of the Company (notwithstanding the result of the first creditors’ meeting); and
• Appointing the Hong Kong Liquidators as permanent liquidators of the Company.

Submissions at the hearing of the appointment order applications

The competing appointment applications came before the Honourable Narinder K. Hargun, Chief Justice of Bermuda. At the hearing, the JPLs argued that:

• The Bermuda Court had no jurisdiction or discretion to appoint persons other than those determined by the majority at the creditor or contributory meeting;
• The Hong Kong Liquidators lacked standing to make representations to the Bermuda Court in relation to who should be the permanent liquidators of the Company, as only creditors of the Company have standing;
• There would be no disadvantage in two sets of liquidators in parallel proceedings; and
• The Hong Kong Court’s orders winding up the Company and appointing the Hong Kong Liquidators were contrary to ordinary principles of private international law because the Hong Kong Court should have deferred to the Bermuda Court’s provisional liquidation as the principal proceeding.

The Hong Kong Liquidators argued that:

• The Bermuda Court had jurisdiction to decline to appoint JPLs and (instead) to appoint any person the Bermuda Court considers appropriate in the circumstances (including a nominee of minority creditors);
• On a correct reading of the authorities, the Hong Kong Liquidators, as appointees in Hong Kong, had a legitimate interest in the appointment of permanent liquidators in Bermuda and thus had standing to appear on the JPLs’ Summons and to make their own application under Section 171;
• As the Hong Kong Court had “ruled out” appointment of the JPLs as liquidators in Hong Kong, their appointment as permanent liquidators in Bermuda would not be conducive to the proper operation of the process of liquidation; and
• To have two sets of liquidators in parallel proceedings is wasteful of resources in relation to a company which is already comprehensively insolvent.

Court’s discretion under Section 171

Section 171 provides, in relevant part, as follows (underline added): “The following provisions with respect to liquidators shall have effect on a winding up order being made: a. If the Court has appointed no other provisional liquidator prior to the winding-up order being made the Official Receiver shall become the provisional liquidator and he or the provisional liquidator appointed by the Court shall continue to act as provisional liquidator until another person becomes liquidator and is capable of acting as such; b. The provisional liquidator shall summon separate meetings of the creditors and contributories of the company for the purpose of determining whether or not an application is to be made to the Court for appointing a liquidator in the place of the provisional liquidator; c. The Court may make any appointment and order required to give effect to any such determination and, if there is a difference between the determinations of the meetings of the creditors and contributories in respect of the matter aforesaid, the Court shall decide the difference and make such order thereon as it thinks fit; d. In a case where a liquidator is not appointed by the Court, the Official Receiver shall be the liquidator of the company.”

The Bermuda Court considered authorities on the language of Section 171(c) and equivalents in the legislation of other jurisdictions and agreed with the Hong Kong Liquidators that the Bermuda Court was not bound to appoint the person nominated by the majority at the first meetings, and instead may appoint another person (including a person nominated by minority creditors at the meeting).

Having concluded that it had discretion, the next question was what principles governed the exercise of its discretion.

The Bermuda Court adopted the principles identified by HH Judge Maddocks in Fielding v Seery [2004] BCC 315 Ch D at para 33, as summarised in Stanley International Betting Ltd v Stanleybet UK Investments Ltd [2011] BCC 691 Ch D by Stuart Isaacs QC, sitting as a Deputy High Court Judge:

The Bermuda Court adopted the principles identified by HH Judge Maddocks in Fielding v Seery [2004] BCC 315 Ch D at para 33, as summarised in Stanley International Betting Ltd v Stanleybet UK Investments Ltd [2011] BCC 691 Ch D by Stuart Isaacs QC, sitting as a Deputy High Court Judge: "1. The test in relation to the appointment of a liquidator is whether it will be conducive to both the proper operation of the process of liquidation and to justice as between all those interested in the liquidation. 2. Although the majority vote of the creditors will in the normal course prevail, creditors holding the majority vote do not have an absolute right to the choice of liquidator. 3. A liquidator should not be a person nor be the choice of a person who has a duty or purpose which conflicts with the duties of the liquidator. He should in particular not be the nominee of a person against whom the company has hostile or conflicting claims or whose conduct in relation to the affairs of the company is under investigation. That is, except where before the presentation of the petition the company has passed a resolution for voluntary winding up, in which case the winding up will be deemed to have commenced at the time of the passing of the resolution. 4. By contrast, it is not an objection to a liquidator that he is allied to or the choice of a person who is concerned to pursue the claims of the company through the liquidator."

The Bermuda Court found that, having regard to the number of connections with and the value of assets located in Hong Kong (even if via intermediate subsidiaries), the proper operation of the process of liquidation required that any liquidator appointed in Bermuda be recognised by the Hong Kong Court and receive the necessary assistance there.  

The Chief Justice accepted the submission of Counsel for the Hong Kong Liquidators that the Regulating Order was a serious hurdle for the JPLs to surmount in obtaining recognition, not least because the JPLs had apparently waived the right to review the ORHK’s recommendations, and thus it was unlikely that the Hong Kong Court would (or there was an appreciable risk it would not) recognise the JPLs, if appointed as permanent liquidators by the Bermuda Court.

Compatibility with ordinary principles of comity and co-operation

Counsel for the JPLs sought to characterize the Hong Kong Court’s orders as a subversion of the ordinary principles of private international law, arguing that the Hong Kong Court should have deferred to the Bermuda Court, the court of the jurisdiction of incorporation and the natural seat of the principal winding up, in matters concerning the global insolvency. For the Bermuda Court to make appointments to conform to the Hong Kong Court’s orders would be to allow a usurpation of the principal liquidation.

In this respect, Counsel for the JPLs relied on the almost contemporaneous judgment of the Grand Court of the Cayman Islands in In the matter of GTI Holdings Ltd FSD 102 [2020]. In that case, the Hong Kong Court had made a winding up order in respect of a Cayman company despite the existence of a pending provisional liquidation in the place of the company’s jurisdiction of incorporation. The ORHK became the provisional liquidator. 

The apparent concern of Doyle J, sitting in the Grand Court of the Cayman Islands, was whether, in the light of the orders made in Hong Kong, it would be appropriate for the court, having regard to principles of comity and cooperation, to wind GTI up in the Cayman Islands.

Doyle J concluded that, as the court seised with the primary liquidation according to ordinary principles, the Grand Court could and should make orders winding up the company and looked to the Hong Kong Court to ensure that the Hong Kong winding up was ancillary to the Cayman winding up.

In Re Ping An Securities Group, the Chief Justice endorsed Doyle J’s analysis of ordinary principles but found that the appointment orders he proposed to make were entirely compatible with those principles. His decision was merely that it was not conducive to the proper operation of the liquidation of the Company to appoint JPLs as permanent liquidators on the basis that they were unlikely to be recognized in Hong Kong.

On the other hand, the Chief Justice considered that questions of comity and cooperation did prevent him from considering afresh (as the JPLs had requested) whether the objections which led the Hong Kong Court to make its Regulating Order had any validity, noting that:

• The JPLs declined to exercise any relevant right of appeal in HK; and
• Barring exceptional circumstances, the Bermuda Court will give due deference to the orders made by the Hong Kong Court, in relation to the same matter.

Standing

The Chief Justice rejected the submission of the JPLs that only a creditor was qualified to seek relief under Section 171. The Chief Justice found that, as liquidators engaged in ancillary winding up proceedings in Hong Kong, the Hong Kong Liquidators had a legitimate interest in the relief since the identity of the liquidators appointed in Bermuda may have a bearing on the proper operation of the liquidation of the Company.

Undesirability of parallel appointments

Counsel for the JPLs had submitted that there was nothing undesirable per se about parallel appointments involving distinct firms.

Such an outcome was likely lead to duplication of work and result in waste of limited resources. It might also lead to conflict between the two sets of liquidators. Such an outcome was clearly not in the interests of the creditors or the efficient operation of the liquidation process and so should be avoided.

Conclusion

The orders of the Bermuda Court were a pragmatic solution that helped to avoid further detriment to the interests of creditors without departing from the ordinary principles of private international law.

It is important to remember that the Bermuda Court has discretion, in exceptional circumstances, to make an appointment order for the proper operation of the liquidation that departs from the outcome of the first meeting. Indeed, professional liquidators in Bermuda should be mindful of the proper operation of the process of the liquidation when determining what orders and directions to seek following first statutory meetings, although this is unlikely to give rise to practical issues in any but the most exceptional cases.

However, as the Chief Justice implicitly (and rightly) recognized, the fact that the occasion for a departure from the outcome of a first meeting is a decision of an ancillary winding-up court does not mean that the Bermuda Court cedes its status as the principal winding-up court by making that departure where this serves the proper operation of the process of the liquidation.