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Another major breakthrough: Mutual assistance in cross-border insolvency between China Mainland and Hong Kong

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This article is written by Barbara Chiu, Nichole Hou, and Tony Gu. 

Introduction

The recent decision by the Hong Kong* court in Re Ando Credit Ltd [2020] HKCFI 2775 marks its first appointment of provisional liquidators[1] over a Hong Kong company with the express purpose of allowing the liquidators to seek recognition in China Mainland.

This represents a major breakthrough in judicial cooperation over cross-border winding up[2], demonstrating China Mainland and Hong Kong's key efforts in facilitating mutual assistance for winding up matters. We understand that the Mainland and Hong Kong have begun to discuss a bilateral mechanism to recognise and assist companies in winding up matters, and we look forward to seeing the arrangement in operation as soon as possible.

Background

The winding up of Hong Kong companies is governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and is generally divided into voluntary winding up and compulsory winding up. This article focuses on compulsory winding up – if a company is unable to pay its debts, its creditors may petition the court for an order of compulsory winding up and the appointment of a liquidator. One of the liquidator's major duties is to investigate the assets of the company in liquidation, recover such assets, and repay debts to the creditors based on the pari passu principle.

In theory, a winding up order issued by Hong Kong courts covers worldwide assets. In other words, all assets of the company in liquidation, regardless of the location, are subject to the winding up laws of Hong Kong. However, in practice, the actual execution of a Hong Kong winding up order in other jurisdictions requires judicial recognition from that particular jurisdiction.

Although Article 5 of the PRC Enterprise Bankruptcy Law[3] allows PRC courts , without contravening fundamental principles and relevant practices of the PRC laws, to recognise and enforce judgements of foreign courts, we understand that the provision does not apply to winding up orders issued by Hong Kong courts. A letter from  the Supreme People's Court of the PRC in 2011[4]  explicitly stated that there is no legal basis for the PRC courts to recognise winding up orders of Hong Kong courts, and the Arrangement on Reciprocal Recognition of Judgments in Civil and Commercial Matters[5] is similarly not applicable.

Given the absence of a mechanism for recognising the Hong Kong's winding up process in China Mainland, liquidators appointed by Hong Kong courts often face difficulty when investigating and recovering assets north of the border. In order to resolve problems resulting from this, Hong Kong courts have indicated in different cases that there is an urgent need to establish a statutory cross-border insolvency mechanism[6]. Recent cases[7] have also reflected Hong Kong courts' desire actively to facilitate cooperation in cross-border insolvency.

The judgment of Re Ando

In Re Ando Credit Ltd, the applicant made an ex parte application to the court to appoint a provisional liquidator for a Hong Kong company Ando Credit Limited (安道信貸有限公司) ("Ando"). The application was made with the express purpose of seeking recognition in China Mainland, with a view to facilitating the Hong Kong liquidator to recover the very substantial receivables believed to be owed to Ando by its debtors in China Mainland.

The Companies Judge, Harris J, acknowledged the possibility of recognition of Hong Kong appointed liquidators under the PRC Enterprise Bankruptcy Law, citing the article "Exploration into the practice of cross-border bankruptcy between Mainland and Hong Kong" (《内地与香港跨境破产的实践探索》). That article reflected the increasingly open attitude towards the recognition and assistance with China Mainland insolvency proceedings by the Hong Kong courts and also the likelihood of PRC courts providing assistance based on the principle of reciprocity. The court noted that in the near future, an agreement may be entered into between the Hong Kong Government and the PRC Supreme People's Court which will provide a clear statutory basis for such mutual recognition.

The court granted the application and specifically ordered the inclusion of an express provision permitting the provisional liquidators to make an application for recognition to the Shenzhen Bankruptcy Court, subject to the Hong Kong court's approval of the various stages of the application.

Insights from Re Ando

The Re Ando decision showcased another significant step in promoting judicial cooperation regarding cross-border insolvency. Given the unprecedented nature of the case, it remains to be seen whether and how the appointment of the provisional liquidators is to be recognised by the Shenzhen Bankruptcy Court, and the degree of scrutiny by the Hong Kong courts during the various stages. In any event, the decision should be welcomed by creditors and insolvency practitioners, especially in light of the growing number of cross-border financial arrangements with debtors based in China Mainland.

In line with the recent trend, the Legislative Council Panel on Administration of Justice and Legal Services in Hong Kong issued a policy paper in June 2020 proposing a possible framework for co-operation between Hong Kong and China Mainland on recognition of and assistance in corporate insolvency matters. It is hoped that any such a formal framework would simplify the mutual judicial recognition of insolvency proceedings and afford better protection of the assets of the debtor company as well as the interests of the creditors.

 

*In this article, any references to "Hong Kong" and the "Hong Kong Special Administrative Region" shall be construed as referring to the "Hong Kong Special Administrative Region of the People's Republic of China".

 

[1] Known as "bankruptcy administrator" or "liquidation group" in China Mainland

[2] Known as "enterprise bankruptcy" in China Mainland

[3] Article 5 of the Enterprise Bankruptcy Law: "Where any legally effective judgment or ruling made by a foreign court involves any debtor's assets within the territory of the People's Republic of China and if the debtor applies with or requests the people's court to confirm or enforce it, the people's court shall, according to the relevant international treaties that China has concluded or acceded to or according to the principles of reciprocity, conduct an examination thereon and, when believing that it does not violate the basic principles of the laws of the People's Republic of China, does not damage the sovereignty, safety or social public interests of the state, does not damage the legitimate rights and interests of the creditor within the territory of the People's Republic of China, grant confirmation and permission for enforcement." (English translation)

[4] "The Supreme People's Court's Reply Letter Regarding Norstar Automobile Industrial Holding Limited's Request for Application for Recognition of An Order of the Courts of the Hong Kong Special Administrative Region" (《最高人民法院关于北泰汽车工业控股有限公司申请认可香港特别行政区法院命令案的请示的复函》) [2011] Civ 4 Others No. 19

[5] The full name is "Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region" (《内地与香港特别行政区法院相互认可和执行当事人协议管辖的民商事案件判决的安排》)

[6] Re Cw Advanced Technologies Ltd [2018] 3 HKLRD 552, para 35, "From the perspective of Hong Kong policy-makers, this case underscores again the urgent need to enact a statutory cross-border insolvency regime" and Re Da Yu Financial Holdings Limited (in liquidation) [2019] HKCFI 2531, paras 46 and 53

[7] Since the beginning of 2020, the High Court of Hong Kong have begun to recognize China Mainland liquidators, and cases include the CEFC case (Re CEFC Shanghai International Group Ltd [2020] 1 HKLRD 67) and the Everich case (Re The Liquidator of Shenzhen Everich Supply Chain Co, Ltd [2020] HKCFI 965)

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