On 14 May 2021, the Supreme People’s Court (SPC) and the Hong Kong Special Administrative Region (HKSAR) government signed the Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and the Hong Kong Special Administrative Region (the “Record of Meeting”). In order to further refine the cooperative framework for insolvency matters in both places, the SPC has issued the Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region (the “Pilot Opinion”), which provides innovative guidelines for insolvency cases cross border of Mainland and HKSAR, the scope and legal effect of mutual recognition, and the cooperate method of both judicial. Starting from the background of the Pilot Opinion, we, as a law firm specializing in debt restructuring in the China Mainland and Hong Kong SAR, analyse the innovative highlights of the Pilot Opinion and look ahead at the prospect of cooperation on cross- border insolvency developments.
I. Background of the Pilot Opinion
Under the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, Hong Kong may render judicial assistance through consultation with judicial organs in other parts of the country. In terms of mutual recognition and enforcement of judgments and arbitral awards, eight arrangements for judicial assistance in civil and commercial matters have been signed between the Mainland and Hong Kong, but bankruptcy matters had been excluded from the judicial assistance scope before. Article 5 of the Enterprise Bankruptcy Law of the People’s Republic of China (the “Enterprise Bankruptcy Law”) contains principled provisions on cross-border bankruptcy, but there is no systematic judicial document in this area. The promulgation of the Pilot Opinion is an expanded exploration of judicial assistance in the bankruptcy sector. It is undoubtedly an inspiration for cross-border insolvency practice, preservation of estate, involvement in derivative litigation and arbitration, and foreign creditors’ participation in insolvency proceedings.
Simultaneously, cross-border trade and investment have raised actual demands for collaboration in cross-border insolvency practice. Statistics show that in 2018, Hong Kong set up about 40,000 enterprises in the Mainland and the Mainland’s non-financial direct investment in Hong Kong were more than USD 70 billion. Frequency investment activities will inevitably be accompanied by the withdrawal of some enterprises. Therefore, the demand for mutual assistance in debt restructuring judicial proceedings is no longer a matter in theory. Prior to the signing of the Record of Meeting, bankruptcy practitioners in both places were “struggling” in individual cases and were unable to find the golden rule. With the signing of the Record of Meeting, the Pilot Opinion was issued timely to boost the confidence of cross-border investors, offer stable expectations for parties involved in cross-border transactions, and provide a fair model for dealing with cross-border bankruptcy cases.
II. Interpretation of innovation points of the Pilot Opinion
The Pilot Opinion contains innovative provisions regarding the model, the scope of applicable cases, the legal effect, the application materials to be submitted by Hong Kong liquidators and the termination of assistance. This article analyses the innovative provisions based on the specific provisions of the Pilot Opinion as follows:
(I) Scope of the pilot
Articles 1 and 5 of the Pilot Opinion provide for the applicable territorial scope and competent court, which designates Shanghai Municipality, Xiamen Municipality in Fujian Province and Shenzhen Municipality in Guangdong Province as pilot areas in the Mainland. The intermediate people’s courts of the three pilot cities may recognize and assist with the Hong Kong insolvency proceedings in accordance with the Pilot Opinion. Shanghai, Shenzhen and Xiamen were chosen for the reason that they are the top three cities that accommodate most places of business, representative offices or assets of debtors in the Hong Kong insolvency proceedings, and that there are many Hong Kong-invested enterprises in the three regions. In 2019 and 2020, the Shanghai Third Intermediate People’s Court and the Shenzhen Intermediate People’s Court respectively obtained bankruptcy assistance from the High Court of the Hong Kong Special Administrative Region (the “High Court”), which have gained experience on a case-by-case basis.
Hong Kong courts, in accordance with common law principles, recognize and assist the insolvency proceedings in the Mainland not limited to the insolvency proceedings conducted by people’s courts in the aforesaid pilot areas. In fact, in the previous bankruptcy liquidation cases of CEFC Shanghai International Group Limited (“CEFC”) and Shenzhen Everich Supply Chain Co., Ltd. (Everich), Hong Kong courts recognized the position and power of Mainland administrators in Hong Kong, on the grounds that the insolvency proceedings of the two places were highly compatible, and that they did not harm the interests of creditors. Therefore, with the precedents and later regulations, it would be more convenient for Mainland administrators to apply for the judicial recognition and assistance of bankruptcy cases to the Hong Kong courts.
(II) Types of applicable cases
Articles 2 to 4 of the Pilot Opinion set out the applicable types of cases. Firstly, the Pilot Opinion applies to 1) similar collective debt liquidation procedures in the two places, including bankruptcy proceedings (bankruptcy liquidation, reorganization and settlement proceedings) in the Mainland, under which the debtor must satisfy the bankruptcy requirements under Article 2 of the Enterprise Bankruptcy Law; and 2) compulsory winding up, creditors’ voluntary winding up and scheme of arrangement approved by court of Hong Kong in accordance with section 673 of the Companies Ordinance of the HKSAR. Secondly, the so-called “Centre of main interests” principle, which means the Pilot Opinion applies to Hong Kong insolvency proceedings where the HKSAR has been the centre of main interests of the debtor continuously for at least 6 months. And “Centre of main interests” generally means the place of incorporation of the debtor. At the same time, the people’s court shall take into account other factors including the place of principal office, the principal place of business, the place of principal assets etc. of the debtor.
(III) Application materials
Articles 5 to 8 of the Pilot Opinion stipulate what materials Hong Kong liquidators shall submit and what information shall be specified in their application when they apply to mainland courts for recognition of and assistance to Hong Kong insolvency proceedings. Article 8 stipulates that the people’s court shall make a notification and announcement within five days from the date of receiving the application for recognition and assistance, and that interested parties shall have the right to put forward objections in writing.
(IV) Legal effect
Articles 9 to 15 of the Pilot Opinion describe the legal effect of the Mainland’s recognition of and assistance to the Hong Kong insolvency proceedings. Generally speaking, mailing an application for recognition and assistance in enforcement by a Hong Kong administrator to a People’s Court in the Mainland has almost the same effect of the insolvency proceedings in the Mainland under the Enterprise Bankruptcy Law. On one hand, after the people’s court recognizes the Hong Kong insolvency proceedings, individual repayment will be deemed invalid. On the other hand, any civil action or arbitration involving the debtor that has started but has not yet been concluded shall be suspended; however, such action or arbitration can proceed after the Hong Kong administrator takes over the debtor’s property. Additionally, the measures for preserving the property of the debtor by the courts of the Mainland shall be lifted and the procedure for execution shall be suspended. The Hong Kong liquidator shall not perform his duties beyond the scope provided by the Enterprise Bankruptcy Law and the law of the HKSAR. In other words, the Hong Kong liquidator is not allowed to enjoy any preferential treatment that goes beyond the extent permitted by applicable laws in bankruptcy proceedings in the Mainland on the ground that it complies with Hong Kong laws. Especially when the Hong Kong liquidator performs any duty that involves waiver of property rights, creation of security on property, loan, transfer of property out of the Mainland and other acts for disposing of the property that has a major impact on the creditors’ interest, it requires separate approval by the people’s court. The Pilot Opinion also innovatively proposes the “two-administrator model”, which means that for a case where the people’s court recognizes the Hong Kong insolvency proceedings, it may, upon an application by the Hong Kong liquidator or a creditor, designate a Mainland administrator, whose duties and affairs shall be dealt with in accordance with the Enterprise Bankruptcy Law, instead of laws of the HKSAR.
(V) Termination of proceedings
Articles 17 to 18 of the Pilot Opinion stipulate that under what circumstances that a people’s court may modify or terminate any recognition or assistance. Such circumstances include: the centre of main interests of the debtor is not situated in the HKSAR or it has been situated in the HKSAR for less than six months continuously; Article 2 of the Enterprise Bankruptcy Law of the People’s Republic of China is not satisfied; Mainland creditors are unfairly treated; there is fraud; there is any other circumstance where the people’s court considers that recognition or assistance shall not be rendered and the people’s court shall refuse to recognise or assist the Hong Kong Insolvency Proceedings if it considers that such recognition or assistance violates the basic principles of the law of the Mainland or offend public order or good morals.
(VI) Ways of paying off creditor’s rights
According to Article 20 of the Pilot Opinion, if a people’s court recognizes and assists the Hong Kong insolvency proceedings, the bankruptcy property of the debtor in the Mainland shall first satisfy preferential claims under the law of the Mainland. The remainder of the property is to be distributed in accordance with the Hong Kong Insolvency Proceedings provided that creditors in the same class are treated equally. It is intended to maintain the principle of complying with the substantive provisions of the laws and regulations of the Mainland. Where a creditor’s claims have the priority to be paid substantively based on security interests, priority of construction proceeds and other provisions in accordance with the laws and regulations of the Mainland, the creditor continues to enjoy its rights based on the nature of the security interests or construction proceeds. Such rights are derived from the substantive provisions of the laws of the Mainland, and therefore will not be affected by the bankruptcy proceedings outside the territory. In addition, the balance of insolvency estate shall be distributed and liquidated in accordance with the Hong Kong insolvency proceedings based on the principle of equal liquidation.
III. Significance of the Pilot Opinion to bankruptcy practitioners in the Mainland and Hong Kong
(I) Response to judicial practice exploration
Prior to the promulgation of the Pilot Opinion, there had been precedents of mutual recognition of Insolvency proceedings between the Mainland and the HKSAR in practice. The typical cases were bankruptcy liquidation of CEFC and Everich.
In the CEFC bankruptcy liquidation, CEFC’s administrator applied to the High Court for recognition of Insolvency proceedings in the Mainland. Upon examination of the relevant evidence, Justice Jonathan Harris of the High Court held that since the domestic insolvency proceedings are collective liquidation (or reorganization) proceedings involving all creditors and the insolvency proceedings are opened by the company’s in its place of incorporation (Mainland China), given the compatibility between the Enterprise Bankruptcy Law and the Hong Kong bankruptcy law, the insolvency proceedings in the Mainland may cover the debtor’s assets, liabilities and affairs in Hong Kong. Meanwhile, Justice Harris specifically pointed out in the decision that, without the special permission of the High Court, any person other than the administrators shall not file any lawsuit relating to CEFC, as long as CEFC is still under the insolvency and liquidation proceedings in the Mainland.
In the Everich bankruptcy liquidation case, the Hong Kong court also held that the insolvency proceedings initiated in the Mainland were the whole insolvency proceedings for the disposal and takeover of the debtor (i.e. the Collective Insolvency Proceedings, the identification standard of which was to determine whether the insolvency proceedings were made for the interests of all creditors), and the insolvency proceedings were initiated in the place of incorporation of the debtor. Therefore, the Hong Kong court granted Everich’s administrators various administrative duties as well as rights, including but not limited to receiving the information of the company, investigating the property of the company, preventing the property disposal of the debtor, taking over the assets and accounts of the debtor, and filing a lawsuit in the name of the debtor. The effectiveness of Mainland administrators’ actions in Hong Kong was recognized.
(II) Opportunities and challenges for future cooperation on cross-border insolvency
It should be noted that Article 14 of the Pilot Opinion sets forth restrictive provisions for the Hong Kong administrator on the waiver of property rights, creation of security on property, loan, transfer of property out of the Mainland and other acts for disposing of the property that has a major impact on the creditors’ interest. This article maintains certain equivalence with the aforesaid case provisions of Hong Kong courts recognizing insolvency proceedings in the Mainland. However, Article 15 of the Pilot Opinion provides an innovative model for the Mainland administrator and Hong Kong liquidator to assist with the bankruptcy of the debtor in the Mainland, i.e. the people's court may, upon an application by the Hong Kong liquidator or a creditor, designates a Mainland administrator to take charge of the insolvency affairs of the debtor in the Mainland, which imposes a higher requirement on practitioners’ familiarity with the laws of both places, as well as on cross-border asset disposal and participation in litigation.
IV. Prospects for cooperation between the two places on insolvency matters
In summary, the Pilot Opinion provides clear guidelines for the transition of mutual recognition and assistance, and for the mutual assistance of bankruptcy administrators in insolvency proceedings in both the Mainland and Hong Kong. It is undoubtedly a significant achievement of judicial assistance in the bankruptcy sector between the Mainland and the HKSAR. For the bankruptcy practitioners in the Mainland and the HKSAR, we believe that as economic exchanges between the two places deepen, the Pilot Opinion will certainly apply to more cases and provide more extensive and clear guidance for the future assistance in cross-boundary insolvency, which will in turn improve the business environment.
HCMP 2295/2019, by the High Court of the Hong Kong Special Administration Region Court of First Instance
HCMP 708/2020, IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE.
