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February 2019 – Violation of Court Order Triggers Public Policy Exception


A trio of decisions in the U.S., Singapore and Hong Kong confirm that violating a court order is never a good idea and will result in denial of assistance in a cross-border insolvency situation.Article 6 of the UNCITRAL Model Law on Cross-Border Insolvency sets forth the public policy exception:

Article 6. Public policy exception. Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State. The requirements for recognition of a foreign proceeding are contained in Article 17, which begins “Subject to article 6…”

The Guide to Enactment and Interpretation of the Model Law notes that the inclusion of the term “manifestly” is intended to narrow the scope of the public policy exception:
104. The purpose of the expression “manifestly”, used also in many other international legal texts as a qualifier of the expression “public policy”, is to emphasize that public policy exceptions should be interpreted restrictively and that article 6 is only intended to be invoked under exceptional circumstances concerning matters of fundamental importance for the enacting State.

As a consequence of the restrictive public policy standard, recognition or judicial assistance to a foreign proceeding is rarely denied for public policy reasons.  However, one fact pattern has triggered denial of recognition or judicial assistance on public policy grounds by courts in three countries.[1]  When the foreign proceeding was commenced in the courts of one country (the “Foreign Proceeding Country”) in contravention of an order of the court in the country in which recognition or judicial assistance is sought (the “Host Country”), then recognition will be denied as manifestly contrary to public policy of the Host Country.

The first example of this fact pattern appears in the 2009 U.S. of Gold & Honey, Ltd.  (“GH Ltd”).[2]  GH Ltd was an Israeli company with affiliates and manufacturing operations in New York and was one of two affiliated debtors in consolidated chapter 11 reorganization proceedings pending in the U.S. bankruptcy court.  The primary lender to GH Ltd, an Israeli bank, in was served with notice of the chapter 11 filings  – including the broad automatic stay of §362 – and nonetheless pursued and obtained the appointment of receivers in Israel.  When the receivers sought recognition of the Israeli receivership proceeding in the same court in which the chapter 11 proceedings were pending, the court denied recognition on several grounds including that commencement and prosecution of the receivership in violation of the automatic stay was manifestly contrary to the public policy of the United States:
A petition for recognition should be denied if recognition would be manifestly contrary to the public policy of the United States. 11 U.S.C. § 1506. Recognition of the Israeli Receivership Proceeding as a foreign proceeding would be manifestly contrary to the public policy of the United States because such recognition would reward and legitimize [the bank’s] violation of both the automatic stay and this Court’s Orders regarding the stay.

In a slightly different factual and legal context, the High Court of the Republic of Singapore came to essentially the same conclusion – recognition will not be granted when the foreign proceeding involved violation of a Singapore court order.  In Zetta Jet Pte. Ltd, the court considered an application for recognition by a chapter 7 (liquidation) trustee who had been appointed after conversion of chapter 11 (reorganization) proceedings filed by Zetta Jet, a Singapore corporation, and its U.S. subsidiary.[3]  Shortly after the chapter 11 cases were filed, holders of over 60% of Zetta Jet’s shares sued the minority shareholders, alleging that the chapter 11 filing breached a governing Shareholders’ Agreement.  The Singapore court enjoined Zetta Jet and the minority holders from taking any further steps in the U.S. bankruptcy cases.  To adopt a popular phrase, nonetheless, they persisted.

Due to lack of financing for the reorganization, the U.S. cases were converted to liquidations.  A chapter 7 trustee was appointed and he sought recognition under the Singapore version of the Model Law.  Singapore omitted the word “manifestly” from its public policy exception and the court ruled that a less dramatic breach of public policy might suffice to deny recognition or relief.  However, the court decided that even had the “manifestly” standard applied, recognition should be denied:
I cannot on this occasion lay down specifically what would trigger the public policy bar in Singapore. But at the very least, I would interpret it as requiring denial of an application for recognition by foreign insolvency representatives appointed under proceedings enjoined by a Singapore court. Ignoring an injunction granted by a Singapore court undermines the administration of justice. Orders issued by a court are to be complied with. Those who do not comply are rightly subject to penalties. In particular, they cannot generally seek the assistance of the courts unless the non-compliance is rectified or purged. While the court’s power to refuse recognition under Article 6 of the Singapore Model Law is discretionary, it would be rare for the court not to refuse recognition where there has been non-compliance with a Singapore court order.

In January of 2019, the High Court of the Hong Kong Special Administrative Region joined the U.S. and Singapore in applying the public policy hatchet to a request for cross-border assistance that followed violation of a Hong Kong court order.[4]   The chapter 11 trustee (“Trustee”) of CFG Peru Investments Pte Limited (Singapore) (“CFG”), a member of the China Fisheries group of companies (“Group”), asked the Hong Kong court to grant him access to a non-public order discharging provisional liquidators; the provisional liquidators had been appointed in Hong Kong winding up proceedings of the Group commenced by HSBC.  The Trustee sought the non-public order to assist him in determining whether CFG and affiliated chapter 11 debtors had claims or defenses against HSBC.

HSBC initially appealed the order discharging the liquidators but withdrew its appeal based on a “deed of undertakings” governed by Hong Kong law (“Deed”) in which the debtors’ management agreed to a sale process, the appointment of a CRO, the appointment of independent reporting accountants and consent to the re-appointment of the liquidators if HSBC was not paid by a date certain.  The Deed was given force by orders of both the Hong Kong and Cayman courts.  The debtors commenced the chapter 11 cases to avoid their obligations under the Deed.
While no application for recognition was filed, the court – at the urging of the Trustee’s counsel – treated the Trustee’s request as one for judicial assistance under common law principles.  The court reasoned in part by analogy to the Model Law and concluded that the debtors had no connection to the U.S. other than the ever-popular retainer account held by its U.S. counsel and that the debtors’ COMI was not in the U.S., so there was no basis for providing assistance under common law principles.

More significantly, the Hong Kong court considered that the entire chapter 11 process rested on a violation of public policy:
However, it does seem to me that the Chapter 11 proceedings have a further relevance.  As I have explained it seems clear that they were commenced in order to prevent enforcement by HSBC of the Deed.  The Deed contained undertakings to this Court.  It is self-evidently objectionable and an affront to this Court for the Companies having submitted to this jurisdiction by signing the Deed which contains a Hong Kong governing law clause and given undertakings to this Court, to commence proceedings in another jurisdiction with a view to hindering enforcement of the Deed.

After favorably discussing the Zetta Jet decision, the court noted:
Although there is no recognition application before me, in my view a similar position exists in the present case.  The Trustee was appointed in Chapter 11 proceedings, which were commenced to thwart HSBC taking action on the Deed in this jurisdiction….  This application invites me to overlook the Companies conduct and proceed on the basis that it has nothing to do with the Trustee.  It seems to me that this approach ignores the fact that the Chapter 11 proceedings, and consequently the Trustee’s appointment, is the consequence of what appears to be a conscious fraud on the part of the Ng family on HSBC and this Court. Public policy considerations weigh heavily in favor of declining to provide any form of assistance to a process that arises in this way….

[1] The U.S., Singapore and Hong Kong (Hong Kong has not adopted the Model Law but the court applied the public policy exception to a request for judicial assistance under common law principles).
[2] In re Gold & Honey, Ltd., 410 B.R. 357 (Bankr. E.D.N.Y. 2009).  The decision may be downloaded or viewed by clicking here. 
[3] In the matter of Zetta Jet Pte. Ltd, et al, [2018] SGHC 16 (Singapore High Court Jan. 24, 2018).  The decision may be downloaded or viewed by clicking here. 
[4] In the matter of China Fishery Group Limited, et al, [2019] (High Court of the Hong Kong Special Administrative Region; date of decision, 9/17/2018; date of reasons for decision, 1/14/19). The decision may be downloaded or viewed by clicking here. 


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By Dan Glosband