New era of judicial co-operation between Hong Kong and mainland China in cross-border insolvency within the Greater Bay Area
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The Greater Bay Area (GBA) initiative is an ambitious scheme to link the nine cities in Guangdong’s Pearl River Delta, Hong Kong and Macau into an integrated economy and world class business hub. Leveraging each city’s individual strengths, the project will oversee improved transport infrastructure, the creation of an international innovation and technology centre, and the development of a globally competitive modern industrial system, while promoting the free flow of people, goods, capital and information within the region (Constitutional and Mainland Affairs Bureau, ‘Greater Bay Area Overview’).
As major trading partners, trade between Hong Kong and mainland China is strong. Hong Kong has always been one of the mainland’s largest sources of foreign direct investment and, similarly, Hong Kong has been a major recipient of direct investment from the mainland. For example, mainland China’s share of Hong Kong’s global trade was at 50.8% (USD$544.8 billion) in 2019 and Hong Kong was the mainland’s second largest export market accounting for 11.2% (USD$278.3 billion) of its total exports in 2019 (Constitutional and Mainland Affairs Bureau, ‘Greater Bay Area – Hong Kong’).
Mainland companies also maintain a strong physical presence in Hong Kong. As at June 2020, mainland companies had established 1986 regional headquarters/regional offices/local offices in Hong Kong.
However, unlike other famous Bay Areas such as the Tokyo Bay Area and the San Francisco Bay Area, each of which have a unitary legal and political system, the GBA has a unique socio-economic and legal profile including three different legal systems, currencies and customs.
To further complicate matters in an insolvency context, neither Hong Kong nor the mainland have adopted the UNCITRAL Model Law on Cross-border Insolvency (UNCITRAL Model Law). They also have not yet entered into any formal protocols or arrangements to facilitate the smooth and consistent handling of liquidations of companies with business and assets traversing the territorial borders within the GBA. Stakeholders within the legal, accountancy and business sectors generally accept that there is an urgent need for some sort of bilateral arrangement between Hong Kong and the mainland to facilitate insolvency and restructuring matters (Department of Justice, “Legislative Council Panel on Administration of Justice and Legal Services - Proposed Framework for Co-operation with the Mainland in Corporate Insolvency Matters”, June 2020).
Practical problems arise from what is essentially a legal ‘void’ or lack of legal mechanism for mutual recognition of insolvency proceedings and assistance to enable insolvency office holders to exercise their powers.
There is no statutory provision in Hong Kong mandating the recognition of the appointment of a company’s insolvency office holder (eg trustee in bankruptcy, liquidator, provisional liquidator or administrator) appointed in insolvency proceedings outside Hong Kong, or providing judicial assistance to them. Rather, the High Court of Hong Kong (Hong Kong Court) has developed a set of common law principles to assist in this area of cross-border insolvency.
A series of judgments from the Hong Kong Court (discussed below) in recent years confirms that the Hong Kong Court can and will recognise collective insolvency proceedings commenced in a company’s place of incorporation outside Hong Kong.
The Hong Kong Court has even developed a standard practice on applications for recognition and assistance including a ‘standard-form recognition order’, which is set out in Re Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Ltd [2017] HKCU 245 and further revised in Re Joint Provisional Liquidators of Hsin Chong Group Holdings Ltd [2019] HKCFI 805. The standard-form order empowers the insolvency office holder to take possession and control of the company’s property in Hong Kong, investigate its affairs in Hong Kong, bring proceedings in Hong Kong, and provides for a stay of the commencement or continuation of proceedings against the company or its assets in Hong Kong except with the leave of the Hong Kong Court.
The Hong Kong Court has adopted the legal concept of ‘modified universalism’ in relation to corporate insolvency (which broadly underpins the UNCITRAL Model Law) to ‘recognise and assist’ foreign insolvency office holders. This essentially means that the Hong Kong Court will, so far as is consistent with justice and public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors through a single system of distribution. It is important to note that the Hong Kong Court does not currently require mutual reciprocity with relevant foreign ‘lead’ jurisdictions.
Likewise, the mainland court has to explore the possibility of utilising built-in provisions of its Enterprise Bankruptcy Law (EBL), which came into force in the mainland on 1 June 2007. Insolvency practitioners in Hong Kong are still eagerly waiting for the first successful case for recognition of a Hong Kong insolvency office holder in the mainland. We elaborate on this further below.
There can be no doubt that a practical and positive attitude towards co-operation between the Courts in the mainland, Hong Kong and Macao will significantly promote the effective handling of any cross-border insolvency of companies with business and assets within the GBA.
Recognition of mainland insolvency proceedings by the Hong Kong Court
On 18 December 2019, the Hong Kong Court heard the first ever application by mainland administrators for recognition of their appointment and judicial assistance in Hong Kong under common law - Re CEFC Shanghai International Group Limited [2020] HKCFI 167 (mainland liquidation).
CEFC Shanghai International Group Limited (CEFC), a mainland-incorporated investment holding company, was placed into liquidation by the Shanghai No.3 Intermediate People’s Court (Shanghai Court). The Shanghai Court appointed three law firms in the mainland as administrators (CEFC Administrators). The CEFC Administrators perform a similar role to court appointed liquidators in Hong Kong.
CEFC’s assets in Hong Kong included a significant claim (HK$7.2 billion) against its Hong Kong subsidiary (CEFC HK Subsidiary). The CEFC Administrators discovered that a creditor of CEFC had obtained a default judgment in Hong Kong against CEFC, and successfully obtained a garnishee order nisi against the CEFC HK Subsidiary. Given the pending ‘show cause’ hearing for a garnishee order to be made absolute, the CEFC Administrators urgently applied to the Hong Kong Court for recognition and assistance in order to stay the garnishee proceedings to maintain fairness between all CEFC’s creditors. The Shanghai Court also issued a letter of request to support the application by the CEFC Administrators.
The Hong Kong Court re-affirmed that before it would recognise foreign court appointed administrators or liquidators and provide necessary judicial assistance, the following criteria must be satisfied:
- The foreign insolvency proceedings are collective insolvency proceedings
- The foreign insolvency proceedings have been opened in the company’s country of incorporation
The criteria remain the same whether the recognition request comes from a common law jurisdiction (eg Cayman Islands) or a civil law jurisdiction (eg mainland).
With respect to the ‘collective insolvency proceedings’, the Hong Kong Court stated that ‘[t]he company’s mainland liquidation is undoubtedly a collective insolvency proceeding. This is demonstrated by the fact that the liquidation proceeding encompasses all of the debtor’s assets (Article 30 of the [EBL]).’
The Hong Kong Court also stated that recognising foreign insolvency proceedings and providing assistance did not mean that the Court would grant a foreign liquidator/administrator all the powers that are available to liquidators in Hong Kong under the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO). The common law power of assistance is subject to three limitations:
- The power of assistance is not available to enable the foreign office holder to do something that they could not do under the insolvency law of their ‘home’ jurisdiction.
- The power of assistance is available only when it is necessary for the performance of the foreign office holders’ functions.
- An order granting assistance must be consistent with the substantive law and public policy of the assisting court (ie the Hong Kong Court).
The Hong Kong Court also made the following observations on key similarities between insolvency regimes in the mainland and Hong Kong:
- Article 25 of the EBL sets out the powers and duties of administrators that correspond to the powers and duties of liquidators in Hong Kong.
- Article 19 of the EBL imposes a stay of proceedings, which is similar to the Hong Kong liquidation stay.
- Article 113 of the EBL requires pari passu distribution of the debtor’s assets which is consistent with the Hong Kong insolvency regime.
The Hong Kong Court concluded that the powers sought by the CEFC Administrators were consistent with the mainland insolvency law and the standard-form recognition order. The Hong Kong Court agreed to recognise the CEFC Administrators and granted them the conventional powers set out in the standard-form recognition order (Conventional Powers).
There is no requirement under common law principles that recognition and assistance require demonstration of reciprocity. However, the Hong Kong Court emphasised that any future development of recognising administrators appointed by the mainland court will depend on the extent to which the mainland courts promote a unitary approach to cross-border insolvency (to avoid having separate liquidations in multiple jurisdictions).
Within three months after the judgment in Re CEFC Shanghai International Group Limited, there was another application for recognition of an insolvency appointment from a mainland administrator to the Hong Kong Court – Re Shenzhen Everich Supply Chain Co Ltd [2020] HKCFI 965 (in liquidation in the Mainland).
Shenzhen Everich Supply Chain Co, Ltd (Shenzhen Everich) is a mainland-incorporated company, which had been placed into liquidation by the Bankruptcy Court in Shenzhen (Shenzhen Bankruptcy Court). The administrator of Shenzhen Everich (Everich Administrator) was required to take control and manage the affairs of two Hong Kong subsidiaries as part of the liquidation of Shenzhen Everich. These subsidiaries held substantial assets in Hong Kong (cash in bank accounts and substantial external trade receivables).
In addition to the Conventional Powers, the Everich Administrator asked the Hong Kong Court for the express power ‘to take control of and exercise all rights that the company may have in relation to any of its subsidiaries, joint ventures, associated companies or other entities in which the company has an interest (whether directly or indirectly)’. The Everich Administrator intended to use this express power primarily to gain control of the company’s subsidiaries in Hong Kong that held very significant external trade receivables.
The Hong Kong Court applied the principles in Re CEFC Shanghai International Group Limited, and ordered that the Everich Administrator should be recognised. The court also granted the Everich Administrator the Conventional Powers and the express power to take control of the subsidiaries in Hong Kong.
The Hong Kong Court took the opportunity to reiterate that future applications and letters of request issued by the mainland court should be drafted in a way that reflects the form of order approved in Re CEFC Shanghai International Group Limited.
Current position in Hong Kong
It now seems settled that the Hong Kong Court accepts that insolvency proceedings in the Mainland are ‘collective insolvency proceedings’. As such, for companies incorporated in the Mainland, insolvency proceedings in the Mainland do satisfy the two essential criteria to enable insolvency office holders to obtain recognition and assistance from the Hong Kong Court i.e. (a) the foreign insolvency proceedings are collective insolvency proceedings; and (b) the foreign insolvency proceedings were opened in the company’s country of incorporation.
With respect to the express power granted to the Everich Administrator, it is arguable that such power was not strictly necessary since the Conventional Powers would allow the Everich Administrator to ‘take into possession and control all assets in Hong Kong of the company under liquidation’ (which would include any subsidiaries of Shenzhen Everich in Hong Kong).
In any event, the willingness of the Hong Kong Court to be flexible when considering requests from mainland insolvency office holders for express powers, other than the Conventional Powers, is a positive development. The Hong Kong Court will usually always expect a foreign insolvency office holder to support a request with credible evidence on the relevant legal regime to substantiate the requests. Given these recent developments as regards requests from mainland insolvency office holders, it seems reasonable to expect there to be further positive developments as regards judicial co-operation with the mainland albeit such evolution may be driven by the extent to which the mainland court demonstrates reciprocity in future as regards requests for recognition and assistance from Hong Kong insolvency office holders.
Potential recognition of Hong Kong insolvency proceedings by the mainland court
In Re CEFC Shanghai International Group Limited, the Hong Kong Court noted that Article 5 of the EBL appears to be the closest statutory provision that will potentially empower the mainland court to recognise foreign insolvency proceedings.
Article 5 of the EBL (The State Council of the People’s Republic of China, “Enterprise Bankruptcy Law of the People’s Republic of China”) states:
‘Once the procedure for bankruptcy are initiated according to this Law, it shall come into effect in respect of the debtor’s property outside of the territory of the People’s Republic of China.
‘Where a legally effective judgment or ruling made on a bankruptcy case by a court of another country involves a debtor’s property within the territory of the People’s Republic of China and the said court applies with or requests the people’s court to recognize and enforce it, the people’s court shall, according to the relevant international treaties that China has concluded or acceded to or on the basis of the principle of reciprocity, conduct examination thereof and, when believing that the said judgment or ruling does not violate the basic principles of the laws of the People’s Republic of China, does not jeopardize the sovereignty and security of the State or public interests, does not undermine the legitimate rights and interests of the creditors within the territory of the People’s Republic of China, decide to recognize and enforce the judgement or ruling.’ (emphasis added)
Importantly, the ‘principle of reciprocity’ is a relevant factor for the mainland court to recognise a ‘judgment or ruling made on a bankruptcy case by a court of another country’.
Relevantly, back in September 2011, a Hong Kong liquidator applied to the mainland court to recognise a winding-up order issued by the Hong Kong Court. Both the Beijing Intermediate People’s Court and the Beijing Higher People’s Court had conditionally approved the application. However, due to complex legal issues and lack of precedents for such recognition, the Higher People’s Court requested the Supreme People’s Court (SPC) to confirm inter alia what mainland law would be applicable to recognise the winding-up order issued by the Hong Kong Court. (Isheng.net “Reply of the Supreme People’s Court to the request for instructions for the application from Norstar Automobile Industrial Holdings Ltd to recognise a court order of the Hong Kong Special Administrative Region”).
The SPC subsequently indicated in an official reply that there was no legal basis for the mainland courts to recognise the particular winding-up order issued by the Hong Kong Court and, more generally, that a winding up order did not constitute a foreign judgment for the purpose of Article 5 of the EBL.
However, there has been a further interesting recent development. Three judges of the Shenzhen Bankruptcy Court (which is part of the Shenzhen Intermediate People’s Court) wrote an article in September 2020, first published online on 11 September 2020) indicating that the mainland courts may have changed course and that future recognition of Hong Kong liquidators can be anticipated. Referring to earlier judgments of the Hong Kong Court, they concluded the Article by stating:
‘The Hong Kong Courts in the Nianfu case, and previously in Guangxin case and Huaxin case have shown an open attitude towards recognition and assistance to mainland insolvency proceedings. This provides a basis for the mainland courts to hear applications for recognition and assistance from Hong Kong liquidators in the future on the principle of reciprocity. The exploration and accumulation of mutual recognition and assistance by the courts of the two places will inevitably promote future promulgation of cross-border judicial cooperation arrangements for insolvency matters across the border.’ (The People’s Judicature, “Practical exploration of cross-border bankruptcy between the Mainland and Hong Kong”)
It is relevant to note also that the Shenzhen Bankruptcy Court was established fairly recently (2019) with a mandate from the SPC to rule on ‘cross-border’ cases and ‘other cases that fall within its jurisdiction’ . The Shenzhen Bankruptcy Court states that it will provide “powerful judicial services and guarantees for Greater Bay Area development”. (South China Morning Post, “Shenzhen’s new bankruptcy court could track assets transferred to Hong Kong”, 17 January 2019)
The comments from the judges of the Shenzhen Bankruptcy Court provide both insight and optimism for how the Bankruptcy Court may handle future cross-border insolvency cases from Hong Kong.
Potential ‘test case’ for reciprocity in the mainland
On 23 October 2020, the Hong Kong Court ruled on the first ever application by a petitioner for the appointment of provisional liquidators (over a Hong Kong-incorporated company) with the express purpose of seeking recognition of their appointment in the mainland. The provisional liquidators asked for this power to enable them to seek to recover substantial receivables owed to the company by its debtors in the mainland - Re Ando Credit Limited [2020] HKCFI 2775.
The Hong Kong Court referred to the ‘Proposed Framework for Co-operation with the Mainland in Corporate Insolvency Matters’ (Proposed Framework) dated 22 June 2020 issued by the Department of Justice, which states:
‘It is anticipated that in the near future a protocol will be entered into between Hong Kong and the [SPC] which will provide for such mutual recognition. Any application made by the provisional liquidators of [Ando Credit Limited] is likely to move in tandem with the finalisation and implementation of that protocol.’
The Proposed Framework specifically referred to the SPC’s decision in 2011 that Article 5 of the EBL ‘does not appear to apply to the recognition of a winding-up order given by a Hong Kong court’.
The Hong Kong Court also referred to the Article (an English translation of the Article is appended to the written decision) and granted the application to appoint provisional liquidators.
Time will tell whether Re Ando Credit Limit will become the ground-breaking case for the mainland court to recognise Hong Kong insolvency office holders. However, the fact that the Hong Kong Court agreed to appoint the provisional liquidators for the express purpose of seeking recognition in the mainland may suggest that the Hong Kong Court is optimistic that the Hong Kong provisional liquidators will ultimately be recognised by the mainland court.
The decision in Re Ando Credit Limit may perhaps also suggest that there has been some positive developments ‘behind the scenes’ with the negotiation of the protocol for mutual recognition between Hong Kong and the mainland.
As at the date of this article, we have been unable to identify any judgment or decision from the mainland court/Shenzhen Bankruptcy Court involving the recognition of the provisional liquidators appointed by the Hong Kong Court in the Re Ando Credit Limit.
Other forms of judicial assistance by the mainland court
While the mainland court has yet to formally recognise liquidators appointed by the Hong Kong Court, the mainland court has already offered some limited degree of informal ‘assistance’ to Hong Kong insolvency office holders.
Use of the mainland’s bankruptcy auction platform
The Hong Kong trustee of a Hong Kong bankrupt applied to the Shenzhen Intermediate People’s Court for an order that the trustee shall be allowed to use the mainland’s bankruptcy auction platform to sell the bankrupt’s assets situated in Hong Kong. The trustee explained that this could increase success and recovery rates as Hong Kong does not have a similar auction platform. (Guangdong-Hong Kong-Macao Greater Bay Area, “The Guangdong Higher People’s Court released the second batch of profile cases on cross-border civil disputes in the Guangdong-Hong Kong-Macao Greater Bay Area”).
The Shenzhen Intermediate People’s Court instructed the Shenzhen Bankruptcy Administrators’ Autonomous Organization to assist the Hong Kong trustee in auctioning the assets through the auction platform.
This was the first time a mainland online bankrupt auction platform had ever been used to sell assets situated outside mainland china.
Recognition of liquidators to represent a company in court action
In Yue 0391 Min Chu No.1267 [2016], the mainland court considered the Hong Kong Bankruptcy Ordinance (Cap. 5) and CWUMPO, and confirmed that Hong Kong liquidators appointed by the Hong Kong Court for a Hong Kong-incorporated company have the right to represent the company in handling civil claims, in a similar capacity to a company’s legal representative under Chinese law.
As such, the mainland court allowed the liquidators to represent the company to handle all matters relating to the civil claim in the mainland, including personality service of mainland court documents on the Hong Kong liquidators.
Conclusion
The milestone case of Re CEFC Shanghai International Group Limited is the first formal recognition by the Hong Kong Court of a mainland insolvency proceeding and it represents a significant leap forward as regards judicial co-operation between Hong Kong and the mainland.
The subsequent case of Re Shenzhen Everich Supply Chain Co Ltd also shows that the Hong Kong Court continues to be flexible and adaptable to accommodate the practical needs of mainland administrators to perform their duties for the benefit of creditors.
Whether the mainland court will accept the ‘olive branch’ from the Hong Kong Court and more generally permit reciprocal recognition of Hong Kong insolvency office holders remains to be seen.
Given the encouraging comments from the Shenzhen Bankruptcy Court, there seems to be a real prospect that the appointment of provisional liquidators of Ando Credit Limited could represent the first formal recognition of a Hong Kong insolvency office holder in the mainland pursuant to Article 5 of the EBL (assuming the Hong Kong provisional liquidators make such an application).
However, even if the mainland court allows recognition pursuant to Article 5 of the EBL, this is arguably only a temporary ‘fix’ for a wider commercial problem. The financial and business community requires legal transparency and certainty to assess risk informatively and to make investment decisions. It remains essential in the longer term to have a formal mandatory protocol or framework for mutual co-operation between the mainland and Hong Kong in corporate insolvency matters. This will create a modern, effective and efficient insolvency process for doing business and making investments and to better protect the assets of a debtor company (whether situated in Hong Kong or the mainland) as well as better protect creditors’ interests.
The recognition of Hong Kong insolvency office holders in the mainland whether pursuant to the EBL or a formal protocol or arrangement would undoubtedly reinforce Hong Kong’s position as a major financial and debt restructuring centre. Judicial co-operation between the Hong Kong Courts and the mainland courts is essential for Hong Kong to maintain its status as one of the world’s leading financial centres and a true ‘gateway’ to the mainland for many years to come.
