Ince & Co

IntroductionIn the landscape of cross-border insolvency, a common misconception persists that the domestic recognition of a foreign insolvency officer acts as an automatic rubber stamp for their entire corporate rescue plan. However, as articulated by the Hong Kong Court of First Instance in the landmark ruling RE USUM INVESTMENT GROUP LTD [2026] HKCFI 1320, the law draws a strict, unyielding line between the concept of "recognition" and the act of "assistance." This distinction preserves Hong Kong’s legal independence while facilitating international judicial cooperation.BackgroundUSUM Investment Group Limited (“the Company”) was a major Mainland Chinese private investment company that fell into severe financial distress. To save the business from collapsing, its shareholders and lenders agreed to put the Company through a court-supervised "pre-restructuring plan", similar to a corporate rescue process, which was approved by the court in Chongqing.Apart from approving the applications for judicial bankruptcy restructuring, the Chongqing court also appointed a team of administrators under the Mainland Enterprise Bankruptcy Law (“EBL”) to take the reins, manage the Company's properties, and coordinate a plan to pay back creditors.While the administrators successfully took control of all assets inside Mainland China, they hit a major roadblock on the company's most valuable offshore asset: a Hong Kong subsidiary (USUM HK) that held a 60.95% controlling stake in a company listed on the Hong Kong Stock Exchange.The primary difficulty blocking the administrators from implementing the restructuring plan—stems from the company’s former director, Mr. Tu, who resisted the rescue plan. When the administrators tried to replace local management to secure the shares in Hong Kong, Mr. Tu blocked the paperwork at the Hong Kong Companies Registry and launched a wave of lawsuits challenging the administrators' authority. With the multi-billion-dollar restructuring frozen by this legal gridlock, the Mainland administrators were forced to turn to the Hong Kong High Court to formally confirm their right to act.“Recognition” vs “Assistance”The Court drew a distinction between recognizing an administrator's credentials and enforcing their restructuring plan. In the present case, the Court was satisfied that it was appropriate to grant a "recognition" order based on the two distinct legal frameworks:1.       “Recognition”“Recognition” is a well-established principle of ordinary private international law that serves a purely confirmatory function. When a Hong Kong court recognizes foreign administrators, it is merely validating their official status and confirming their baseline authority to manage the company's affairs as an agent.Crucially, the court emphasized that liquidators or restructuring administrators do not inherently require a prior court order to act in Hong Kong. In typical, unopposed scenarios, presenting their original foreign appointment documents is legally sufficient.A formal recognition application becomes necessary only when local institutions (such as banks), public registries, or hostile stakeholders actively refuse to cooperate—as was precisely the case here.2.       “Assistance"“Assistance,” by contrast, requires additional legal inquiries. While recognition looks backward to validate a status already granted abroad, assistance looks forward, asking the domestic court to take positive action to help the administrators carry out specific duties.At present, Hong Kong has no legal mechanism to simply "import" or automatically execute a foreign court's restructuring roadmap, unlike jurisdictions that adopt the UNCITRAL Model Law or the s426 of the UK Insolvency Act 1986.At such, the Hong Kong court cannot give effect to a restructuring plan without first proving the plan be consistent with Hong Kong's own substantive legal standards and public policy. Any schemes of arrangement, for example, in this case, canceling local debts or forcibly transferring the ownership of Hong Kong shares, must be independently scrutinized under the Court’s common law powers, even if it had beeen approved by a foreign courtThe Court’s DecisionThe Court of First Instance acknowledged that the Mainland administrators were ultimately not asking the Hong Kong court to substantively enforce or execute the specific terms of the Chongqing court's restructuring plan.Instead, the administrators only sought “recognition” of their appointment and their baseline powers under the EBL. As the present application successfully satisfied the following four thresholds required under Hong Kong common law, the Court decided to grant formal “recognition” to the Mainland administrators:1. A Genuinely "Collective" Process: The restructuring under the Mainland's EBL is a unified, court-supervised mechanism that treats all creditors within the same class equally, freezes assets, and prohibits individual debt enforcement. Despite the company being balance-sheet solvent, the court recognized its severe lack of liquidity and clear inability to pay maturing debts.2. Jurisdictional Connection: The legal proceedings were properly centered in Mainland China, which serves as both the company’s place of incorporation and its Centre of Main Interest (COMI).3. No Public Policy Conflict: The restructuring involved proper creditor notices and voting rights under continuous judicial supervision. The administrators acted transparently for the general body of creditors, presenting no conflict with Hong Kong public policy.4. Necessity: Mr. Tu’s actions had blocked the administrators' paperwork at the Hong Kong Companies Registry and sparked lawsuits challenging their standing, effectively preventing the administrators from gaining control over USUM HK and its underlying listed asset in the listed company. Resolving this deadlock was the sole outstanding matter remaining for the completion of the restructuring plan.SignificanceWhile Hong Kong courts remain highly cooperative in confirming the status of Mainland administrators to break local administrative deadlocks, they will not allow corporate rescue plans to be back-door enforced under the guise of mere recognition.Any substantive measures that affect local assets or modify creditor rights against resistance, such as forcing share transfers or canceling local liabilities, must still clear a separate, rigorous common law hurdle and fully comply with Hong Kong's local legal standards and public policy.Our Restructuring & Insolvency team has extensive experience in handling cross-border insolvency matters, including the recognition of foreign insolvency office holders.  In case of doubt, legal advice should be sought.If you have any inquiries, please feel free to contact us for more informationManaging Partner: Ian LoEmail: [email protected]: Anderson SiuEmail: [email protected]

Introduction In a recent decision, the Hong Kong Court examined the interplay between arbitration agreements and cross-border insolvency proceedings. This decision highlights the divergence between Hong Kong’s pro-arbitration stance, whereby winding-up proceeding will be stayed in favour of arbitration unless there is abuse (see Re Guy Kwok Hung Lam (2023) 26 HKCFAR 129) and the creditor-friendly approach in the UK and other common law jurisdictions, whereby the debtor is required to show the usual bona fide dispute on substantial grounds to compel arbitration (see Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16). Facts Hyalroute Communication Group Limited (“Hyalroute”), a company incorporated in the Cayman Islands, applied to the Hong Kong Courts for an anti-suit injunction to restrain a creditor, Industrial and Commercial Bank of China (Asia) Limited (the “Bank”), from presenting any winding-up petition against it in the Cayman Islands. The dispute arose from a Term Facility Agreement (“TFA”), under which Hyalroute guaranteed a US$100 million loan to its subsidiaries. A 2021 military coup in Myanmar disrupted one subsidiary’s operations, which hindered the subsidiaries’ repayments under the TFA.  To mitigate risks, the Bank secured a MIGA Insurance, which covered war and currency restrictions, with premiums paid by Hyalroute and its subsidiaries.  Under the TFA, Hyalroute may make a Covered Risk Application to suspend its guarantee obligations.  Hyalroute claimed that it had made such application in February 2021 and its liabilities were suspended as a result.  Despite this, the Bank served a statutory demand pursuant to the Cayman law.  Hyalroute argued that the dispute fell within the TFA’s arbitration clause, which mandates that “[a]ny dispute, controversy or claim arising in any way out of or in connection with [the TFA] … shall be referred to and finally resolved by binding arbitration …” at the HKIAC. Analysis It is well-established that foreign proceedings in breach of a valid and binding arbitration agreement or exclusive jurisdiction clause will be ordinarily restrained unless strong reasons to the contrary are shown by the defendant (Giorgio Armani SpA v Elan Clothes Co Ltd [2019] 2 HKLRD 313).  Contractual anti-suit injunctions, as sought in this case, focus on enforcing the parties’ agreement to arbitrate. In non-contractual anti-suit injunctions, where no contractual breach is involved, the focus would then be shifted to whether the foreign proceedings are vexatious, oppressive, or inconsistent with the principles of forum non conveniens. The arbitration clause in the TFA imposes (1) a positive obligation on the parties to have disputes within the scope of the clause (i.e. dispute, controversy or claim arising in any way out of or in connection with the TFA) finally resolved by arbitration; and (2) a negative obligation on the parties to preclude them from having disputes finally resolved in a non-contractual forum. The critical issue is, whether the Cayman winding-up proceedings would have the effect of finally resolving the dispute on Hyalroute’s indebtedness, thereby breaching the arbitration clause.  The concept of “final resolution” of a dispute means that the process is capable of giving rise to an estoppel in relation to the precise issues decided. The Bank contended that in considering this issue, the Court should consider Cayman law; and under Cayman law, winding-up proceedings do not resolve the substantive debt dispute.  Therefore, the Bank’s intended presentation of the Cayman winding-up petition would not breach the TFA. In contrast, Hyalroute argued that as Hong Kong law is the governing law under the TFA, Hong Kong law should take precedence over Cayman law regardless of the position under Cayman law; and under Hong Kong law (Re Guy Lam), winding-up proceedings determine parties’ rights and obligations, which could have the effect of “finally resolving”. Therefore, the Bank’s intended winding-up proceedings in the Cayman Islands would be in breach of the TFA. The Hong Kong Court decided that the Bank’s contention is correct and accord with common and commercial sense.  Lacking expert evidence on Cayman law, the Hong Kong Court directly considered the relevant materials on Cayman law and applied its own knowledge and reasoning of the common law to analyse the position.  The Hong Kong Court found that under Cayman law, the Cayman Court in winding-up proceedings only determine the threshold question of whether a debt is bona fide disputed on substantial grounds, but not the substantive dispute itself. Thus, such proceedings do not “finally resolve” the dispute within the meaning of the arbitration clause. The Bank’s intended presentation of a Cayman winding-up petition would not amount to any breach of the TFA. Additionally, the defence relied by Hyalroute about the suspension of its guarantee obligations under the TFA were found to be frivolous and abusive. There was no finding that any formal Covered Risk Application was made, and there were only informal discussions.  The MIGA insurance policy was also terminated in 2022 due to unpaid premiums, hence there could not be any suspension of guarantee obligations. As such, the Hong Kong Court dismissed Hyalroute’s application for an anti-suit injunction, as there was no breach of the arbitration agreement, and Hyalroute failed to demonstrate any strong reasons for granting the injunction. Key Takeaways The Hyalroute decision offers critical insights for navigating arbitration and insolvency in cross-border contexts: Foreign Law Considerations: The ruling clarifies that Hong Kong courts will not automatically apply Re Guy Lam’s pro-arbitration stance to foreign winding-up proceedings. When assessing whether foreign proceedings breach an arbitration agreement, Hong Kong courts may consider the foreign jurisdiction’s law to determine the proceedings’ effect, even if the arbitration agreement is governed by Hong Kong law. Drafting arbitration clauses: Parties are reminded to draft arbitration clauses with precision.  In this case, the phrase “finally resolved” was pivotal, limiting the clause’s application to proceedings that determine disputes with res judicata or estoppel. Explicit references to “insolvency proceedings” should be included if so intended, especially in cross-border contexts involving offshore jurisdictions. Ambiguities may limit enforceability of such clause against winding-up petitions. If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

In Re Success Lane Development Limited [2025] HKCFI 1121, the Companies Court considered whether a company could resist a winding-up petition presented based on outstanding interlocutory costs orders (payable forthwith or within 14 days upon summary assessment) by relying on a cross-claim for damages in ongoing legal proceedings. Background The dispute between the Petitioner and the debtor Company  arose over a "Long Stay Room Contract" under which the Company rented a hotel room for storage purposes.  In the District Court, the Petitioner alleged that the Company had damaged various items stored in the hotel room, and claimed against the Petitioner for damages in the sum of at least HK$3,000,000. The Petitioner had obtained various costs orders against the Company as a result of interlocutory applications in the District Court proceedings.  The costs orders are all payable forthwith in the total sum of HK$697,534.66 plus judgment interest (the “Costs Orders”). Based on the unpaid Costs Orders, the Petitioner served a Statutory Demand on the Company.  Shortly after the expiry of the Statutory Demand, the Company applied to set aside and stay the Costs Orders by commencing a separate set of District Court proceedings.  Yet, the said applications were also dismissed. As of the date of the Petition hearing, the Costs Order were either orders not appealed against, or orders against which leave to appeal had been refused by the Court of Appeal.  The main issue at the hearing was whether the Company could resist the Petition (based on Costs Orders payable forthwith) with a cross-claim (for damages in the sum of at least HK$3,000,000 in the ongoing District Court proceedings, the “Cross-claim”). The Court’s Reasons The Companies Court held that the Company could not resist the Petition with the Cross-claim for the following reasons:- (1)         The underlying policy of making costs orders payable forthwith is to deter parties from commencing unmeritorious interlocutory applications.  To uphold this policy, the Court should regard such costs orders as free-standing, and though such costs orders are not equivalent of cash, it should be as readily enforceable almost as readily cash-able as cheques.  In this case, the Company should not be allowed to use the Cross-claim to resist the Petition. (2)         There could be no injustice done to the Company if it is to be wound up, because if the Company has a valid claim against the Petitioner, the Company in liquidation could still pursue it. (3)         On the contrary, it would be unjust if the Company could resist the Petition based on the Corss-clam, as (a) it would in effect confer a right on the Company to retain the Petitioner’s money as a security for its Cross-claim, and (b) the Costs Orders, being free-standing and supposed to be readily enforceable, have nothing to do with the Cross-claim, in the sense that even if the Company eventually succeeds in its claim in the District Court, the Company would still have to pay the Costs Orders. Having said that, the Companies Court also indicated that its decision was made based on the present facts, and that there may be different considerations if, e.g. the District Court main proceedings are not ongoing but finally concluded, or the receiving party may be to blame for not enforcing any immediately payable costs orders earlier. In view of this case, company debtors should note that the existence of a cross-claim against the petitioner generally would not constitute a valid ground to oppose a winding-up petition presented based on costs orders payable forthwith.  As such, it is advisable for company debtors to settle any costs orders payable forthwith as soon as possible to avoid winding-up petitions being presented against them.  In case of any doubt, legal advice should be sought. If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

When a company goes into liquidation, shareholders often feel frustrated if they believe wrongdoing has occurred but no action is being taken.  A recent Hong Kong Court of Appeal decision (Chu Kong v Lau Wing Yan [2026] HKCA 1004) has provided an important reminder: once liquidators are appointed, shareholders generally cannot bring derivative actions on the company’s behalf. What Happened?The case involved a shareholder who sought to bring a claim on behalf of a BVI company and its Hong Kong subsidiary, both of which were already in liquidation. The shareholder alleged that the liquidators and others had breached their duties in handling the companies' affairs.However, similar allegations had previously been raised before the BVI courts, where the shareholder attempted to remove the liquidators but failed. The shareholder then attempted to frame those complaints as claims for breaches of directors' duties and equitable relief and pursue the same through derivative proceedings in Hong Kong. The Court of First Instance struck out the claim, and the Court of Appeal upheld that decision.Why Did the Court Reject the Claim?Derivative actions are designed for situations where the people who are allegedly responsible for wrongdoing remain in control of the company and can prevent the company from taking action itself.The Court held that this concern generally falls away once a company enters into liquidation. At that point, control passes to the liquidators, who act under the supervision of the court. As a result, shareholders usually cannot bypass the liquidation process by bringing derivative claims in the company's name.Instead, concerns about a liquidator's conduct should normally be raised within the liquidation process or before the court supervising the liquidation.A Reminder about Cross-Border InsolvencyThe decision is also significant for companies and stakeholders involved in cross-border insolvencies.The liquidators in this case had been appointed by the BVI court. The Hong Kong Court of Appeal emphasised that complaints about their conduct should generally be addressed by the court overseeing the liquidation – i.e., the BVI court. Allowing parallel challenges in other jurisdictions could lead to inconsistent decisions and disrupt the orderly administration of the liquidation.Litigation Must Come to an EndThe Court also made clear that parties cannot endlessly repackage previously rejected arguments.Many of the shareholder's complaints had already been considered in the previous BVI proceedings. The Court held that those issues could not be re-litigated in a different form through fresh proceedings. Finality in litigation remains an important principle, particularly in complex commercial disputes that span multiple jurisdictions.Key TakeawaysThis decision provides several practical lessons for shareholders, directors and insolvency practitioners:Ø  Shareholders generally cannot pursue derivative actions on behalf of a company once liquidators have been appointed.Ø  Concerns about a liquidator's conduct should normally be raised through the insolvency process and before the supervising court.Ø  Courts are increasingly reluctant to allow parties to re-litigate issues that have already been determined elsewhere.Ø  In cross-border insolvencies, courts will generally respect the supervisory role of the court conducting the main liquidation.ConclusionThe Hong Kong Court of Appeal's decision reinforces a straightforward principle: once a company enters liquidation, disputes about how its affairs should be managed belong within the insolvency framework. Shareholders who disagree with a liquidator's decisions should usually seek remedies through the liquidation process rather than attempting to bring separate derivative proceedings.Businesspersons, investors and stakeholders involved in distressed or insolvent companies should seek legal advice at an early stage to understand the options available and the proper forum for raising concerns.If you have any inquiries, please feel free to contact us for more informationManaging Partner: Ian LoEmail: [email protected]: Anderson SiuEmail: [email protected]

Factual Background Up Energy Development Group Ltd (the “Company”) was incorporated in Bermuda and listed on the Hong Kong Stock Exchange. It entered into provisional liquidation in October 2016 and was eventually wound up in Bermuda Court on 11 March 2022.  In Hong Kong, the winding up order was made on 6 May 2022. At the Hong Kong Court of First Instance (the “CFI”), the Company’s provisional liquidators (“PLs”) appointed by the Bermuda Court submitted that they anticipated winding-up order would be made shortly in Bermuda (which did materialize), and they did not need an additional ancillary winding-up order in Hong Kong as there were no benefits.  However, the CFI found otherwise. Ince represents the opposing creditor (the “Appellant”), in its appeal against the winding-up order made by the CFI.   Legal Position in Hong Kong for Winding Up Foreign Incorporated Companies In asking Hong Kong courts to exercise their discretion to wind up foreign incorporated companies, petitioners must satisfy the 3 threshold requirements below:- There must be a sufficient connection with Hong Kong; There must be a reasonable possibility that the winding-up order would benefit those applying for it; and The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets. The 3 threshold requirements represent the Hong Kong courts’ self-imposed restraints emanated from the Hong Kong Court of Final Appeal’s decision in Kam Leung Sui Kwan v Kam Kwai Lai (2015) 18 HKCFAR 501, which considered the need to avoid exorbitantly usurping the jurisdiction where the company is incorporated, as it is supposedly the most appropriate jurisdiction to wind up a company. Amongst the aforesaid requirements, the 2nd threshold requirement faces the most contention in terms of its factual application. The legal principles are, however, quite settled, and will be satisfied as long as the benefit is of “real possibility”, rather than merely a “theoretical” one when assessed by a “pragmatic” lens. (see Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Ltd (2022) 22 HKCFAR 98).   Findings of the Court of Appeal (“CA”) While CA agrees it was unsatisfactory that the petitioner did not plead how the 2nd threshold requirement was met and only mentioned such matters in its skeleton arguments, which afforded no opportunity for the PLs and the Appellant to properly respond, this alone was not determinative of the appeal. Rather, the crux lies in whether the CFI was correct in finding that the 2nd threshold requirement is satisfied on the evidence. In this connection, CA answered in the negative. First, CA found there were “real problems” with respect to the assets relied on by CFI. (1) In respect of the Company’s bank deposit: about HK$170,000 out of the HK$200,000 is due to the bank, which left only HK$30,000 of cash, which is negligible in the scheme of things. (2) In respect of the Company’s cash funds: whilst CFI found the Company would presumably have substantial cash funds as it had incurred substantial legal costs in dealing with resumption of trading, the Scheme, the petition and the Bermuda Proceedings, and remuneration paid to PLs. However, CA agreed with the Appellant that the petitioner did not raise evidence or even in its skeleton submissions any of such matters, and it would thus be speculative to assume that such cash funds (which were derived from loans as submitted by the PLs) would necessarily belong to the Company rather than, for example, held on trust for the loan funders. (3) Further, 2 of the 3 companies which CFI thought were “direct subsidiaries” of the Company were in fact only indirectly held by the Company through BVI companies. In this regard, even the petitioner’s own BVI legal expert considered that a HK winding up order would be unlikely to be recognised in the BVI, and thus would not really derive benefit for the creditors. The only remaining subsidiary UE Finance, is dwarfed by liabilities, and there is accordingly no basis to regard Company’s shareholding in UE Finance as a meaningful asset to produce value for its creditors. Second, CA accepted that the “full suite of powers” enjoyed by liquidators under Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) are only theoretical in the present case, as the petitioner did not explain why such powers are needed or would benefit the creditors.  In particular, CA placed significance in the PL’s stance that they did not see any specific matter that called for investigation, especially because they had been in their office for several years and would have acquired considerable familiarity with the affairs of the Company.  In other words, there was no factual basis for saying that there is reasonable possibility for real benefit for the petitioner from the winding up. Third, whilst the status of the Company as a HK listed company might theoretically entail the following 6 matters (as found by CFI):- (1) The Company maintained principal place of business in HK and has given an undertaking to comply with the Listing Rules; (2) The Company maintained sufficient management presence in HK; (3) The Company raised funds through the issue of shares; convertible notes or bonds and benefited from ability to trade on HKEx; (4) The Company borrowed loans from banks and other financial institutions in HK; (5) The Company had an obligation to comply with the provisions under the Companies Ordinance which apply to non-HK company; and (6) The Company had an obligation to comply with Securities and Futures Ordinance, CA found that the above factors do not justify that there is a reasonable possibility of real benefit derived from the availability of more extensive powers on winding up. CA found that the above factors do not justify that there is a reasonable possibility of real benefit derived from the availability of more extensive powers on winding up.   Conclusion Although the CA maintains even the most contentious 2nd threshold requirement remains a “low” test with many types and ranges of benefits already explored and accepted by case precedents, factual circumstances must still be applied in support of the argument that there are real benefits from a winding up order in Hong Kong. Any creditor seeking to wind up a company in Hong Kong should also properly plead matters related to the 3 threshold requirements to avoid the argument of procedural unfairness. In case of doubt, legal advice should be sought. The full CA judgment can be accessed here.   If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

Overview of Reverse Takeovers (“RTOs”) With the prevalence of backdoor listings in recent years whereby investors acquire control of a listed issuer primarily for its listing status, the Hong Kong Stock Exchange (“HKEX”) has highlighted the associated risks of market manipulation, particularly when new businesses are commenced after a takeover but insufficient information is disclosed publicly, particularly in relations to its business sustainability. This may lead to increased risks for existing minority shareholders and undermine investors’ confidence in Hong Kong’s capital markets. Although the SFC’s Takeovers Code already provides detailed provisions requiring new controlling shareholders, as offerors, to make a mandatory general offer, issues arise post-acquisition when the listed issuer commences a new area of business or carry out a substantial acquisition on a new business area initiated by the new controlling shareholder. In these cases, HKEX may consider the transaction as RTO by the listed issuer, the consequence of which is that the listed issuer must re-issue a listing document containing disclosure information matching that required for a new listing application, as well as the requirement to appoint a sponsor to conduct due diligence. The procedure must be approved by the HKEX Listing Committee, and the RTO must be conditional on shareholders’ approval at a general meeting. This article explores the key rules and cases on RTO to assist investors as new controlling shareholders as well as listed issuer to understand the legal implications of changing listed companies’ principal businesses and launching new operations. What constitutes RTO? Bright Line Test Generally, HKEX views the following transactions as RTOs ("Bright Line Test"): Transactions that involve a change in control (i.e. 30%) of the listed issuer (except at the subsidiary level); and a very substantial acquisition (i.e., acquisition where the applicable percentage ratio of the size test is 100% or more) occurs at the time of, or within 36 months of the change in control of the listed issuer. Principle-Based Test In addition to the Bright Line Test, if HKEX considers that the transaction is one or a series of transactions intended to achieve the listing of acquired assets while circumventing the new listing requirements (“Principle-Based Test”), it will also be treated as RTO even if there has not been a change in control. In assessing the Principle-Based Test, HKEX will consider the following factors: Size of acquisition relative to the issuer: Whether after the issuer undertakes an acquisition of significant size, its existing principal business will become immaterial after the transaction; Acquisition resulting in a fundamental change in the issuer’s principal business: Whether the issuer acquires a target business that is completely different from its existing business and that target business is substantially larger than its existing business; Fundamental change refers to acquisitions that are not part of the issuer’s business strategies or is unrelated to the issuer’s existing business, (i.e. transactions that do not involve expansion or diversification of existing businesses, or acquisitions that are inconsistent with the issuers’ size and resources); Nature and scale of the issuer’s business before the acquisition: Whether the scale of the issuer’s existing business is small, and the issuer would in substance be changed to operating the new target business after acquisition; Quality of the acquisition targets: Whether the target business is itself suitable for listing, such as acquisitions of early exploration companies or businesses that contravene laws and regulations; Change in control or de facto control of the listed issuer: Whether there is a change in the controlling shareholder, single largest substantial shareholder who is able to exercise effective control, directors and/or senior management; and Events and transactions which together with the acquisition form a series of transactions and/or arrangements to circumvent the RTO Rules: Whether the transactions and arrangements form a part of the series by taking place in reasonable proximity to each other (normally within a 36-month period) or are otherwise related. Restrictions on Disposal The Listing Rules also impose restrictions on disposal or distribution in specie (or a series of disposals or distributions) that involves all or a material part of the issuer’s existing business at the time of, or within 36 months from the change in control. The restrictions on disposal are intended to supplement the Bright Line Test to prevent investors from re-sequencing RTO transaction by acquiring a new business before disposing its original business, thereby circumventing the Bright Line Test. Additionally, the Listing Rules impose prohibitions on large-scale issuances of securities for cash that involve or lead to a change in control or de facto control of the listed issuer, when the proceeds are used for acquisitions and/or to launch new businesses that are expected to be significantly larger than the issuer's existing principal businesses. II. Compliance Requirements of RTO Where a transaction is ruled as RTO, the listed issuer will be treated as if it were a new listing applicant. Rule 14.54(1) requires that: The acquisition target(s) must meet the suitability listing requirements (Rule 8.04) and the new listing track record requirements (Rule 8.05, 8.05A or 8.05B); and The enlarged group must meet all the new listing requirements under Chapter 8 of the Listing Rules (except Rule 8.05). Where HKEX considers that a series of transactions and/or arrangements constitute RTO or an extreme transaction, the entire series of acquisitions should, as a whole, meet the new listing requirements of Rule 8.05. The issuer is required to provide sufficient information to HKEX to demonstrate that the acquisition targets can meet Rule 8.05, including financial information of the targets based on accountant’s report or audited financial information. RTO must be made conditional on approval by shareholders in general meeting and any shareholder and his close associates who have a material interest in the transaction will be required to abstain from voting on the relevant resolution. III. Recent Listing Decisions on RTOs Discloseable Transaction amounting to RTO (Case 1 of HKEX-GL104-19) In sample case 1 of HKEX-GL104-19, HKEX deemed a discloseable transaction to be RTO. This is contrary to the common accepted view that RTO applies only to very substantial acquisition or at least a major transaction under the Listing Rules. Company A, a hotel business operator, proposed to acquire a majority stake in the target company that was newly formed to carry out a natural gas project. The target company has signed contracts but has yet to commence operations or record revenue. The acquisition was a disclosable transaction based on the size test. HKEX considered that the acquisition was an attempt to circumvent new listing requirements under the Principle-Based Test under Rule 14.06B: i. The target company’s projected profitability would be significantly larger than Company A’s existing business; ii. The target company’s natural gas business was different from, and unrelated to, Company A’s existing business; iii. The acquisition would lead to a fundamental change in Company A’s principal business given the target company’s significant size of business; and iv. The target company had not generated any revenue. 2) Target Company Meeting New Listing Requirements (Case 15 of HKEX-GL104-19) In sample case 15 of HKEX-GL104-19, Company A operates a property leasing and education equipment business, contributing over 95% of its revenue in recent years. Company A proposed to acquire a target company from Company X (who has been Company A’s controlling shareholder for over three years). The target company primarily engages in financial leasing and factoring services in the PRC, and it is 10 to 35 times the size of Company A’s existing business. While HKEX considered the proposed acquisition would have the effect of achieving a listing of the target company’s business, it agreed to classify the transaction as an extreme transaction, rather than a RTO, as: 3) i. The target company could meet the new listing requirements (Rule 8.05(1)) and the suitability for listing requirement; and ii. Company A met the eligibility criterion set out in Rule 14.06C(1)(a) as it had been under control of Company X for more than 36 months and the proposed acquisition would not result in a change in control of Company A. 3) No Fundamental Change to Principal Business – (Case 11 of HKEX-GL104-19) In sample case 11 of HKEX-GL104-19, Company A, a listed company, operated port terminals in the PRC and proposed a merger with the target company which also operated port terminals in the PRC. The target company is controlled by Company X and Company X is the controlling shareholder of Company A. About a year ago, Company Y acquired 51% equity interest in Company X which constituted a change in control of Company A. The proposed merger would constitute RTO under the Bright Line Test as it was a very substantial acquisition from Company X (being an associate of Company Y) within 36 months of Company Y gaining control of Company A through Company X. Ultimately, HKEX agreed that the proposed merger was not a backdoor listing of new business by the incoming controlling shareholder as: The proposed merger would not result in a fundamental change to Company A’s principal business, and was in line with Company A’s strategies to expand its port terminal business; and The proposed merger represented an internal restructuring of the port-related businesses held under Company X which controlled Company A and the target company before the proposed merger and would continue to do so after the merger. There was no injection of asset or business from Company Y. 4) Conspiracy to defraud over secret backdoor listing – (HKSAR v Chim Pui-chung & Chim Kim-lun & Wong Poe-lai [2024] HKDC 2085) In July 2013, Chim Pui Chung and his son Ricky Chim, who were respectively the substantial shareholder and chairman of Asia Resources Holdings Limited (“Asia Resources”), and businessman Ma Zhonghong agreed to a secret backdoor listing arrangement to sell Asia Resources to Ma. It was also agreed among the trio that Ma would pay Chim Pui Chung a sum of approximately HK$210 million to control 70% to 75% of the issued share capital of Asia Resources and Ricky Chim as the chairman of Asia Resources would use his powers to procure placing of HK$535.5 million convertible notes of Asia Resources to nominees of Ma, including Wong Poe Lai. In HKSAR v Chim Pui-chung & Chim Kim-lun & Wong Poe-lai [2024] HKDC 2085, Chim Pui-chung, Ricky Chim and Ma were jointly charged with two counts of conspiracy to defraud, contrary to common law and may be penalised under section 159C(6) of the Crimes Ordinance (Cap. 200). Ma and Wong were jointly charged with one count of dealing with property known or reasonably believed to represent proceeds of an indictable offence, contrary to section 25(1) of the Organized and Serious Crimes Ordinance (Cap. 455). The Court held that whilst shell acquisition transactions were common in the financial market and not inherently illegal, Ricky Chim had not disclosed the real purposes for issuing convertible bonds at two board meetings he chaired in late July and early August 2013, which eventually caused the board to pass the resolution without taking into account all relevant factors.  Further, Chim Pui Chung and Ricky Chim had also dishonestly concealed from HKEX the purpose of the capital-raising, causing HKEX to approve the publication of the relevant announcements and circulars, thereby depriving HKEX of its ability to properly perform its regulatory role. On 3 February 2025, Chim Pui Chung, Ricky Chim and Wong were sentenced to imprisonment for 34 months, 37 months and 24 months, respectively. In addition, each of Chim Pui Chung and Ricky Chim was also disqualified from being a company director for 3 years. Key Takeaways The current Listing Rules on RTO, together with enforcement actions taken by HKEX and the Securities and Futures Commission demonstrate that the Listing Rules are not intended to unduly restrict legitimate business expansion or diversification by listed issuers, provided such activities occur over a reasonable period and are accompanied by appropriate disclosure, as well as legal compliance. With the Hong Kong capital market now showing robust momentum, listed companies should exercise caution in transactions involving significant changes to shareholdings or principal businesses to avoid inadvertently triggering the RTO provisions and breaching the disposal restrictions. Early legal and regulatory advice are recommended to navigate these requirements successfully so as to balance growth initiatives with compliance obligations. For further guidance on navigating RTO and Listing Rules, contact Ince & Co to ensure compliance and strategic alignment with this evolving landscape. Feel free to contact Partner Kevin Woo for more details. email: [email protected]