The application of insolvency clawbacks to derivatives and financing transactions

The provision of collateral as credit support is common in derivatives and financing transactions.  An issue of concern to banks and other credit providers taking collateral is what would happen when the collateral provider goes insolvent.  In Hong Kong, when a company goes into winding-up, certain transactions may be set aside or voided on the grounds provided in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32, Laws of Hong Kong) (the “Winding Up Ordinance”).  The provision of collateral may be susceptible to these statutory clawbacks when the collateral provider goes into winding-up.  Collateral takers would be well advised to understand how these clawbacks operate. 

We review in this Bulletin two of these statutory clawbacks, namely, unfair preferences and transactions at an undervalue, where some interesting judgments have been decided by the courts recently.

This is a complex area of the law.  Application of principles from caselaw is very much dependent on the facts and different courts may take slightly different approaches.  Market participants navigating this area of law would be well advised to seek legal advice at an early stage.