Hong Kong Court Recognises Mainland Insolvency Proceedings

Harley Schumann and Elizabeth Carroll-Shaw

Unlike many other developed legal systems, Hong Kong lacks any legislative power to recognise and assist foreign insolvencies.  Accordingly, a foreign insolvency officeholder (such as a liquidator) who wishes to take advantage of liquidator powers in Hong Kong must rely on the Court’s common law jurisdiction.  Although relatively new, this jurisdiction is now well-established and routinely exercised.  Before an order will be made, the officeholder must establish that he or she was appointed in a country with a “similar” insolvency regime.  There has therefore been some degree of uncertainty as to which countries’ systems would satisfy this test.  This case represents the first time a Hong Kong court has extended recognition and assistance to an insolvency officeholder from Mainland China.

Facts

CEFC Shanghai International Group Limited (“Company”) was incorporated in the Mainland. It was placed into insolvent liquidation and Administrators were appointed by the Shanghai No. 3 Intermediate People’s Court in November 2019.

Following their appointment, the Mainland Administrators discovered that one of the Company’s creditors had obtained default judgment against the Company in Hong Kong and had obtained a garnishee order nisi, which would soon become absolute.

If the creditor were permitted to execute the garnishee order against the Company’s Hong Kong assets, this may result in the creditor obtaining a better outcome than it would if the assets were collected and distributed under a single global winding up.

The Mainland Administrators made an application to the Hong Kong Court seeking an order recognising the Mainland insolvency in Hong Kong because the standard form of the recognition order creates a stay of all proceedings in the jurisdiction, which would include the garnishee proceedings.

Procedure and Test for Recognition and Assistance

Justice Harris took the opportunity to summarise the now well-settled procedure and test for applying to the Hong Kong Court for orders of recognition and assistance.

The foreign officeholder will first obtain a letter of request from the Court in which he or she is appointed, requesting recognition and assistance from the Hong Kong Courts. The officeholder will then seek orders from the Hong Kong Court, commonly in writing and in a standard form which has been set out in previous decisions.

His Lordship explained that the following principles apply to such an application:

  1. the foreign insolvency proceedings seeking recognition must be “collective insolvency proceedings” (at [8(a)]);
  2. the insolvency must be taking place in the company’s country of incorporation (at [8(b)]);
  3. the country of incorporation must be a jurisdiction with a similar insolvency regime to Hong Kong (at [12]);
  4. whilst there is no requirement of reciprocity (ie no requirement that the foreign jurisdiction must also recognise Hong Kong officeholders), the country of incorporation must be one that aims to promote a unitary approach (ie a single international insolvency proceeding), and the degree to which the foreign jurisdiction recognises Hong Kong officeholders may be relevant to this question (at [25]);
  5. the assistance sought must be a power available under the Hong Kong insolvency legislation and the regime of the foreign insolvency (at [11(a)]);
  6. the assistance sought must be necessary for the performance of the foreign officeholder’s functions (at [11(b)]); and
  7. the order granting assistance must be consistent with the substantive law and public policy of the assisting court (at [11(c)]).

Findings in this Case

Justice Harris held that all the requirements for an order of recognition and assistance were met and therefore made the order.

Importantly, because this was the first reported decision in which the Hong Kong Court has recognised a Mainland insolvency, Harris J gave particular consideration to whether the insolvency regime of the Mainland and the powers of the Administrators in the Mainland were sufficiently similar to Hong Kong’s regime and the assistance sought. Following a review of the key provisions of the Mainland Enterprise Bankruptcy Law (“EBL”), his Lordship found that there was sufficient correspondence between the two systems (at [24]).

Harris J then considered whether the Mainland Court was one which aims to promote a single insolvency in cross border insolvencies.  His Lordship did not have the benefit of any expert evidence on Mainland law, but noted that it was generally uncontroversial that there is no statutory provision or decision of the Supreme People’s Court which explains with certainty whether the Mainland adopts a unitary approach to transnational insolvency (at [26]).  Nor is there any case in which a Mainland Court has recognised a foreign insolvency proceedings pursuant to the EBL (at [27]).

However, having regard to the Mainland legislation and the cases available to the Court, his Lordship was satisfied that the Mainland insolvency regime does aim to promote a single cross border insolvency (at [26]-[33]).

Comment

This decision represents an important and welcome development in Hong Kong’s cross-border insolvency.  Recognition of insolvency officeholders between Hong Kong and the Mainland is key to ensuring effective and efficient resolution of winding up and restructuring in the region.

However, a notable aspect of the judgment is that Harris J’s conclusion was, on one view, provisional.  His Lordship was prepared to accept on the evidence available that the Mainland courts promote a unitary approach to cross border insolvency, but he left open the possibility that this might change in the future if the Mainland courts in the future do not display such an approach (for example by failing to recognise Hong Kong officeholders). Harris J concluded (at [33]):

“The extent to which greater assistance should be provided to Mainland administrators in the future will have to be decided on a case by case basis and the development of recognition is likely to be influenced by the extent to which the court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.”

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