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Hong Kong recognises administrators appointed under the Enterprise Bankruptcy Act of the People’s Republic of China

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02 March 2020

On 15 January 2020, we published a newsflash regarding the decision of the Hong Kong Court of First Instance dated 13 January 2020 (Decision) on the recognition of the appointment of bankruptcy administrators of CEFC Shanghai International Group Limited (Company) in the mainland of the People's Republic of China (Mainland). This was the first – and so far only – application in Hong Kong made by Mainland administrators for recognition of their appointment and judicial assistance at common law.

This follow-up client bulletin seeks to analyse the Decision in greater depth and to put into context not only its immediate significance but also its importance in furthering judicial co-operation between the Hong Kong and Mainland courts in the granting of reciprocal recognition of insolvency office holders appointed under the different insolvency regimes.

Speed read

  • Mainland administrators can now apply for moratorium recognition and to exercise investigative powers in Hong Kong.
  • When structuring facilities to (or acquiring debt claims against) a Mainland debtor, credit analysis should now factor in Hong Kong assets potentially being subject to a Mainland insolvency process.
  • Of greater significance to Hong Kong practitioners is that recognition of Mainland administrators may pave the way towards reciprocal recognition of Hong Kong insolvency office holders in the Mainland, which will greatly expand the options available to creditors.

Background

The Company is incorporated in the Mainland, an investment holding company, and part of a conglomerate whose business includes capital financing, petroleum refining and infrastructure. The Company went into insolvent liquidation in the Mainland and bankruptcy administrators (Administrators) were appointed by the Shanghai No. 3 Intermediate People’s Court (Shanghai Court) on 24 November 2019.

The Company’s assets included a HK$7.2 billion claim (HK Receivable) against its Hong Kong subsidiary.  The Administrators discovered that one of the Company’s creditors had obtained a default judgment against the Company and was seeking to enforce it against the HK Receivable by obtaining a garnishee order absolute from the Hong Kong court (Court) after a garnishee order nisi was obtained in August 2019.

The Administrators therefore made an urgent application, supported by a letter of request issued by the Shanghai Court, to the Court for recognition and assistance in Hong Kong. An order of recognition and assistance (Recognition Order) was made by the Court on 18 December 2019 which included the standard stay on proceedings against the Company in Hong Kong and thus preserved the status quo.

The Decision provides:

  • a concise summary of the principles for granting recognition of foreign insolvency proceedings and,
  • while not a matter we address in this bulletin, an important clarification of the principles applicable to a stay of garnishee proceedings in the context of recognition of cross border insolvency proceedings.

Criteria for recognition and assistance

In the Decision, the Court applied two well-settled criteria, both of which must be satisfied before recognition and assistance will be granted in Hong Kong:

  • the foreign insolvency proceedings are collective insolvency proceedings[1]
  • the foreign insolvency proceedings have been opened in the company’s country of incorporation[2]

If these criteria are satisfied, the Court may recognise insolvency proceedings opened, including in a civil law jurisdiction such as the Mainland[3].

However, the powers that can be granted to foreign office holders under the common law power of assistance are subject to the three, equally well-settled, limits[4]:

  • the assistance must not enable the foreign office holders to do something which they could not do under the insolvency regime of their home jurisdiction;
  • the power of assistance is available only when it is necessary for the performance of the foreign office holders’ functions; and
  • an order granting assistance must be consistent with the substantive law and public policy of the assisting court.

Accordingly, the ability under common law to grant assistance applies only to the extent that (a) the foreign insolvency regime is similar to the insolvency regime in Hong Kong, and (b) in granting any specific power sought, a substantially similar power is available in both regimes[5].

Similarities between Mainland and Hong Kong insolvency regimes

The Court found that the Mainland insolvency regime fulfilled the criteria for recognition and assistance set out above. In particular the Court found that:

  • the Company’s Mainland liquidation was undoubtedly a collective insolvency proceeding, relying on Article 30 of the Mainland Enterprise Bankruptcy Law (EBL), which provides that the Mainland insolvency proceedings encompasses all of the debtor’s assets; and
  • the powers sought by the Administrator were consistent with Mainland insolvency law and the standard-form recognition order for foreign liquidators, relying on the following similarities between the EBL and Hong Kong insolvency law:

a. Article 25 of the EBL which sets out the Administrators’ powers and duties, which correspond to a Hong Kong liquidator’s powers and duties;

b. Article 19 of the EBL which imposes a stay, corresponding to the Hong Kong liquidation stay; and

c. Article 113 of the EBL which sets out the requirement of pari passu distribution of the debtor’s assets, which is consistent with the Hong Kong insolvency regime.

Foreign jurisdiction must promote single bankruptcy

The Court noted that it was not a requirement under common law principles that recognition and assistance be reciprocal. Rather, the principle behind recognising and assisting a foreign liquidation is to make it possible for there to be one bankruptcy. Therefore, in addition to the requirement for the foreign jurisdiction to operate an insolvency regime which is similar to the Hong Kong insolvency regime, that foreign jurisdiction must also, if faced with the insolvency of a company with assets and creditors in other jurisdictions, aim to promote one bankruptcy with the aim of avoiding the need for separate liquidations in multiple jurisdictions.

It was noted in the Decision that the issue of whether the Mainland insolvency regime promotes one bankruptcy in a transnational context is uncertain given the lack of any statutory provision of law or decision on point of the Supreme People’s Court. However, the Court expressly noted that the EBL clearly envisages the possibility of recognising foreign liquidators given the extent to which transnational business is conducted by Mainland businesses.

Key takeaways from the Decision and the Recognition Order

The key effect of the Recognition Order is that administrators of companies in insolvent liquidation in the Mainland can now apply to have the Mainland insolvency moratorium extended to Hong Kong and to exercise their investigative powers in Hong Kong.

But of particular note is that, while these powers include requests for document production and information from third parties, if the Recognition Order is read together with the decisions of The Joint Provisional Liquidators of China Lumena New Materials Corp (In Provisional Liquidation)[6]  and Bay Capital Asia Fund, LP v DBS Bank (Hong Kong) Ltd[7], it would now seem that Mainland administrators (like foreign insolvency office holders generally) have the power to request documents and information in Hong Kong without the need for a recognition order from the Court. This is obviously an important tool for Mainland administrators to conduct cross-border investigation in Hong Kong.

The Recognition Order is also of effect to enable the Administrators to proceed to locate, protect, secure and take control of all assets and property within Hong Kong to which the Company is, or appears to be, entitled. But one unsettled question is the extent to which, given that the priority for distributions under the Mainland insolvency regime is different from that in Hong Kong, an administrator appointed in the Mainland will be entitled to remit the proceeds of assets realised in Hong Kong to the Mainland for distribution in accordance with the Mainland insolvency regime (see Lord Hoffman’s decision in Re HIH Casualty & General Insurance Ltd[8] to allow certain remittance of proceeds of assets realised in Hong Kong to the Mainland notwithstanding these differences).

Recognition of Hong Kong insolvency office holders in the Mainland

While there are on-going discussions between the Hong Kong Government and the Central Government on mutual recognition and assistance in insolvency-related proceedings, no formal arrangement has as yet been entered into between Hong Kong and the Mainland.

Even so, Article 5 of the EBL provides for the possibility of foreign insolvency proceedings being recognised in the Mainland in accordance with the principle of reciprocity, and it is on this point that the Decision has implications beyond its facts.

The importance of the Decision in this context should not be underestimated: the Hong Kong Court has demonstrated its commitment to the principle and has, in effect, invited the Mainland Courts to respond in kind. It would now seem simply a matter of time before an application, supported by a letter of request, is made to the Mainland courts for an order granting recognition of and assistance to Hong Kong liquidators of a Hong Kong company.

It is difficult to predict whether and to what extent the Mainland courts will respond to the Decision and modify their approach towards recognition of a Hong Kong insolvency process. Whilst it may still be unlikely for Hong Kong insolvency office holders to be granted unfettered access to assets located in the Mainland, it may at least become possible for them to be recognised as having standing to request documents and information from third parties, apply for a Hong Kong moratorium to be extended to the Mainland, or perhaps even to commence a Mainland bankruptcy in the name of the company being wound up in Hong Kong.

Comments

This decision is a long awaited one and a milestone in the administration in Hong Kong of cross border insolvencies and shows that the Hong Kong Court is committed to applying the doctrine of modified universalism and assisting insolvency practitioners appointed in foreign jurisdictions. 

Hong Kong has for over 20 years been looking to update its laws on insolvency and it is nothing short of ground breaking that, without any statutory basis, the Hong Kong Court has, through incremental developments in jurisprudence, reached a position where there is in Hong Kong a simple and robust process for recognising foreign insolvency processes, which has now been extended to Mainland insolvencies and opened the door for reciprocal recognition. Something for which, it almost goes without saying, considerable credit should be given to the present Hong Kong Company’s Judge, the Honourable Mr Justice Harris.

For insolvency practitioners, possibility of mutual recognition of insolvency processes between Hong Kong and the Mainland offers a number of interesting options for creditors in terms of choice of insolvency regime and access to possibly otherwise remote lines of recourse, but also for the very same reasons, a number of new challenges in credit analysis, all of which are, as ever, amenable to creative solutions.

Allen & Overy is advising a major creditor of Shanghai Huaxin Group (Hong Kong) Limited, the Hong Kong subsidiary of the Company which was the catalyst for the application for recognition being made and which is now in  liquidation in Hong Kong.

Footnotes

  1. Re Joint Provisional Liquidators of China Lumena New Materials Corp [2018] HKCFI 276
  2. Re Joint Liquidators of Supreme Tycoon Ltd [2018] HKCFI 277; [2018] 1 HKLRD 1120 at [12]
  3. Re Takamatsu [2019] HKCFI 802; [2019] 5 HKC 505
  4. Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36; [2015] AC 1675 at [25]
  5. Supreme Tycoon Ltd (n 2) [12]
  6. [2018] HKCFI 276
  7. [2016] HKEC 2377
  8. [2008] UKHL 21