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The Hong Kong Court of First Instance, in Lead Good Group Ltd v Royue Ltd and others [2025] HKCFI 3646, has provided guidance on the treatment of charging orders where the debtor is subject to foreign insolvency proceedings that have not been recognised in Hong Kong.
Background
The case involves an appeal by Royue Limited (the "Company"), a company incorporated in the British Virgin Islands (the "BVI"), against a charging order obtained by Lead Good Group Limited (the "Creditor"). The order gives the Creditor security over the Company's beneficial interest in 1,890,826,000 shares of Zhenro Properties Group Limited ("Zhenro"), a company listed in Hong Kong.
The Creditor had previously obtained an arbitral award against the Company and sought to enforce it by applying for a charging order over the shares. In parallel, the Company entered provisional liquidation in the BVI and a winding up order was made, but no application was made to recognise the foreign insolvency proceedings in Hong Kong.
The Court considered three principal issues:
- Whether unrecognised foreign insolvency proceedings could be relied upon to resist the making of a charging order absolute.
- Whether granting the charging order absolute (i.e. a final charging order) would cause "undue prejudice" to other creditors of the Company.
- If the balance would tilt in favour of the Company, whether there are exceptional circumstances justifying the making of the order absolute.
Decision
1. Unrecognised foreign insolvency proceedings
It is well established that if a winding up order is made in Hong Kong, the Hong Kong Courts will decline to make a charging order absolute, on the basis that the principle of pari passu distribution should be preserved for all creditors and that no creditor should be allowed priority over the others. The same principle applies if foreign insolvency proceedings have been recognised by the Hong Kong Courts.
In circumstances where foreign insolvency proceedings have not been recognised in Hong Kong (as is the case here), the Court confirmed that the "first past the post" principle applies (following English law authorities: British Arab Commercial Bank plc v Algosaibi and Bros Co [2011] 2 CLC 736 and OOO Nevskoe v UAB Baltijos [2023] BCC 689).
The Court explained that a creditor who acts promptly and diligently to enforce their judgment should be entitled to benefit from their enforcement efforts and should not be disadvantaged simply because there are unrecognised foreign insolvency proceedings. In other words, such a creditor may "harvest its fruits" despite the existence of unrecognised foreign insolvency proceedings.
2. Undue prejudice to other creditors
Relying on British Arab Commercial, the Court further held that the mere fact that granting a charging order would give one creditor priority over other creditors is not "undue prejudice". The inevitable disadvantage to other creditors that arises from granting a charging order is not enough to justify refusing the application. Instead, the Court must be satisfied that there is some additional, exceptional prejudice over and above the prejudice they would inevitably suffer if a charging order was made.
The Court also considered whether the Company had engaged in any "sharp conduct", such as acting with undue haste or unfairly seeking to secure a preferred position over other creditors. However, there was no evidence of such behaviour. The Company's efforts to enforce its arbitral award were legitimate and did not amount to exceptional circumstances that would justify refusing the charging order.
3. Exceptional circumstances
Given the Court's findings on the first two issues, it was unnecessary to consider whether exceptional circumstances justified the making of the order absolute.
In view of the above, the Company's appeal was therefore dismissed.
Comments
This decision provides certainty for creditors seeking to enforce arbitral awards or Court judgments in Hong Kong against debtors subject to foreign insolvency proceedings that have not been recognised locally. The Court's confirmation of the "first past the post" principle means that, unless and until foreign insolvency proceedings are formally recognised in Hong Kong, diligent creditors can pursue enforcement and secure priority through charging orders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
