China and Hong Kong: Mainland and Hong Kong agree framework for mutual judicial recognition and assistance in corporate insolvency and debt restructuring

In brief

On 14 May 2021, the Supreme People’s Court (SPC) and the Hong Kong government agreed a framework (“Framework”) for judicial cooperation in corporate insolvency and debt restructuring.  Under the Framework:

  • A Mainland bankruptcy administrator may apply to the Hong Kong High Court for recognition of and assistance to Mainland bankruptcy proceedings.
  • A Hong Kong liquidator or provisional liquidator may apply to the Intermediate People’s Court at a designated pilot area for recognition of and assistance to Hong Kong insolvency proceedings and debt restructuring (scheme of arrangement).

The pilot areas currently include the Shanghai, Xiamen and Shenzhen municipalities.


Contents

Key takeaways

For Mainland bankruptcy administrators, the Framework largely formalizes the Hong Kong court’s pre-existing approach at common law for recognizing and assisting bankruptcy proceedings in the Mainland.

For liquidators and provisional liquidators appointed in Hong Kong insolvency proceedings, the SPC’s opinion issued on 14 May 2021 (pursuant to the Framework) offers authoritative guidance – not available to insolvency officer-holders appointed in other jurisdictions – on the circumstances in which the designated Mainland courts would recognize the Hong Kong proceedings, The opinion also gives counsel on what judicial assistance a liquidator or provisional liquidator could obtain in order to discharge their duties in the Mainland.

Another groundbreaking development brought by the Framework is that a scheme of arrangement in Hong Kong can now be used to compromise debt governed by Mainland law.

In more detail

Mainland bankruptcy administrators carrying out duties in Hong Kong

A bankruptcy administrator appointed to a Mainland company is responsible to deal with its assets and creditors in Hong Kong, and potentially to investigate its affairs in Hong Kong, if any.  In two cases decided in 2020, the Honorable Mr. Justice Harris granted orders recognizing and assisting bankruptcy administrators appointed in Shanghai and Shenzhen, respectively.

In Re Founder Information (Hong Kong) Limited [2021] HKCFI 1508, the company’s liquidators sought leave to bring an action against a group company undergoing bankruptcy administration in Beijing.  The Honorable Mr. Justice Harris noted that if the bankruptcy administrators of the intended defendant would like to defend the proceedings, they would need to demonstrate their status as its duly authorized agents.  His Lordship suggested that one option was for the bankruptcy administrators to seek formal recognition and assistance in Hong Kong, as was done in the precedent cases in 2020.

These authorities indicate the Hong Kong court’s open-mindedness toward Mainland bankruptcy administrators discharging their duties in Hong Kong.  This is consistent with the principle of modified universalism under Hong Kong insolvency law.

Hong Kong liquidators and provisional liquidators carrying out duties in the Mainland

The converse scenario involves a Hong Kong liquidator or provisional liquidator who would like to deal with the company’s assets and creditors in the Mainland, and potentially to investigate its affairs in the Mainland, if any.  A common example is when a Hong Kong company has a wholly owned subsidiary in the Mainland, which operates a factory there: the shareholding in the subsidiary is the company’s asset in the Mainland.

In the past, without the Framework, such a liquidator or provisional liquidator often encountered practical difficulties in carrying out their duties in the Mainland, because Mainland law had no established and comprehensive mechanism to recognize their status as the insolvency office-holder of the Hong Kong company in question.  In the above example, therefore, the Mainland administrative authorities might not readily accept that the liquidator or provisional liquidator had the authority to act on behalf of the shareholder company to, say, replace the directors and personal representative of the Mainland subsidiary.

The Framework

The Framework brings welcome clarity to both scenarios discussed earlier.

As far as Mainland bankruptcy administrators are concerned, the Framework is assurance that they can apply for the Hong Kong court’s recognition and assistance by following the procedure adopted in the precedent cases.  The Practical Guide issued by the Department of Justice on 14 May 2021 confirms that a bankruptcy administrator should first obtain the Mainland court’s letter of request, and then apply to the Hong Kong court (by ex-parte originating summons with affidavit/affirmation evidence) for a standard-form order.

To Hong Kong liquidators and provisional liquidators, the Framework is a long-awaited breakthrough.  The SPC issued an opinion on 14 May 2021 to put flesh on the bone, stipulating the following pre-requisites for the Framework to apply:

  • The subject company must have its center of main interests (COMI) in Hong Kong continuously for at least six months.
  • The company’s principal assets in the Mainland must be in a pilot area (Shanghai, Xiamen or Shenzhen), or it must have a place of business or a representative office in a pilot area.

Under the opinion, the Mainland court may, if applied for, impose measures for preserving the company’s property before an application for recognition and assistance is decided.  In addition, upon the Mainland court recognizing the Hong Kong insolvency proceedings in a given case:

  • Purported repayment of debt to individual creditors shall be invalid.
  • Any ongoing civil action or arbitration involving the company shall be suspended until after the liquidator or provisional liquidator takes over its property.
  • Any measures for preserving the company’s property shall be lifted and the procedure for execution shall be suspended.
  • The liquidator or provisional liquidator may be allowed to perform various duties in the Mainland as particularized in the opinion, such as taking over the company’s property and ascertaining its financial position.
  • A Mainland bankruptcy administrator may be designated.
  • Further judicial assistance may be granted regarding issues such as the realization and distribution of bankruptcy property.

Significance of the Framework from Hong Kong’s perspective

In terms of Hong Kong insolvency proceedings, the Framework applies to compulsory windings-up, creditors’ voluntary windings-up, and schemes of arrangement promoted by a liquidator or provisional liquidator and sanctioned by the Hong Kong court.  Two points can be made:

  • The inclusion of creditors’ voluntary windings-up reflects the latest jurisprudence (see Re Joint Liquidators of Supreme Tycoon Ltd. [2018] 1 HKLRD 1120) and extends the Framework to many more potential cases than if only compulsory windings-up are covered.
  • The inclusion of schemes of arrangement means that, as the Honorable Mr. Justice Harris observed in Re China Oil Gangran Energy Group Holdings Limited (Provisional Liquidators Appointed) (For Restructuring Purposes) [2021] HKCFI 1592, "it is now possible for a Hong Kong scheme to compromise debt governed by Mainland law."  Where such debt is involved, Hong Kong is, with the benefit of the Framework, well placed to be the jurisdiction of choice to coordinate a debt restructuring.

Issues awaiting judicial guidance

At the same time, judicial guidance would be helpful on a number of issues arising from the SPC’s opinion.  For instance:

  • The opinion provides that a company’s COMI generally means its place of incorporation, but the Mainland court shall take into account other factors, including the company’s place of principal office, principal place of business, place of principal assets, etc.  Conceptually, the Framework can apply to a company that was incorporated in, say, an offshore jurisdiction or even the Mainland, but has its COMI and insolvency proceedings in Hong Kong.  Is the Framework intended to be so flexible?
  • The opinion does not require the Hong Kong insolvency proceedings of a company in question to be commenced after the Framework took effect on 14 May 2021.  Does the Framework apply to Hong Kong insolvency proceedings commenced before that date?
  • At present, only the courts in the pilot areas would grant recognition and assistance to a Hong Kong liquidator or provisional liquidator.  Under the opinion, a successful applicant may be allowed to perform various duties in the Mainland.  Does this mean they can do so throughout the Mainland, with the Mainland courts outside the pilot areas further assisting as appropriate?

In our view, the Framework would be the most effective if the answers to these questions are “yes.”  Meanwhile, we look forward to the SPC designating, in due course, more pilot areas for the purposes of the Framework.

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