A crucial step – mutual recognition and assistance in insolvency / bankruptcy proceedings between Hong Kong and the mainland
On May 14, 2021, the HKSAR government and the Supreme People’s Court signed the “Proceedings of the Meeting of the Supreme People’s Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition and Assistance in Bankruptcy (Insolvency) Proceedings Between Courts of the Mainland and the Special Administrative Region of Hong Kong ” which establishes a cooperation mechanism enabling Hong Kong liquidators and mainland administrators to seek mutual recognition and assistance. This is undoubtedly a significant development in the pursuit of judicial cooperation in cross-border insolvency matters between jurisdictions.
The new cooperation mechanism (the “new mechanism”)
In accordance with “The Supreme People’s Court Opinion on the Implementation of a Pilot Measure Regarding the Recognition and Assistance of Insolvency Proceedings in the Hong Kong Special Administrative Region” (the “Notice“) a Hong Kong liquidator or provisional liquidator may seek recognition and assistance from the mainland courts. Likewise, mainland bankruptcy administrators can do the same in reverse. Personal bankruptcy is not included in the new mechanism.
The main highlights of the opinion are as follows: –
1. “Hong Kong Insolvency Proceedings” covers (i) forced liquidation; (ii) voluntary liquidation of creditors; and (iii) schemes of arrangement: provided that Hong Kong is the main areas of interest of the liquidated company / of the debtor (collectively referred to as “Debtor“) for at least 6 consecutive months before the submission of the application.
2. “Center of main interests” designates the debtor’s place of incorporation, but the Supreme People’s Court will take into account other factors in making the final decision, including: (i) location of primary office; (ii) the main business establishment; and (iii) the location of the debtor’s main assets.
3. Both liquidators and provisional liquidators in Hong Kong, insolvency proceedings can go to mainland courts for recognition and assistance.
4. The Supreme People’s Court initially designated Shanghai, Xiamen and Shenzhen as the pilot areas. It is expected that the cooperation mechanism will gradually extend beyond these areas.
5. Claims can be filed under the new mechanism when the principal assets, place of business or representative office of the debtor are located in a pilot area.
6. The procedures for requesting recognition must be carried out in accordance with the rules of the pilot zone concerned.
7. After the mainland recognition of the insolvency proceedings in Hong Kong (i) the payment of debts made by the debtor to individual creditors will be invalid; (ii) civil proceedings or arbitration involving the debtor which have not yet been concluded will be suspended; and (iii) continental measures for the preservation of the debtor’s property will be lifted and all execution suspended (in other words, a moratorium on creditors).
8. A request for recognition and mutual assistance may be refused by the continental court for one of the following reasons:
a. Hong Kong is not the center of the debtor’s main interests or it has been located in Hong Kong for less than 6 months without interruption before the filing of the application;
b. Article 2 of the Business Bankruptcy Law of the People’s Republic of China is not observed. Article 2 sets out the circumstances under which a debtor can file for bankruptcy with the People’s Court, namely when the debtor cannot repay his debts owed and his assets are not sufficient to pay all the debts, or he apparently does not have the capacity to repay his debts;
vs. Mainland Chinese creditors are treated unfairly;
re. There is fraud (presumably committed by the debtor although this is not expressly stated in the notice); or
e. Other circumstances in which the Supreme People’s Court considers that recognition or assistance should not be granted (for example, recognition or assistance may “violate the basic principles of Mainland Chinese law or disturb public order. public or morality ”).
Details of the new mechanism, including the documents required to submit an application and the powers of Hong Kong recognized liquidators and mainland administrators are set out in the Notice and one Practical Guide issued by the HKSAR government.
Importance of the new mechanism
There is no doubt that the new mechanism marks an important development in the Hong Kong R&I market.
It has long been recognized that it would be desirable to introduce a formal insolvency recognition regime between Hong Kong and mainland China given the size and interconnected nature of their economies. In the absence of a formal mechanism, Justice Harris of the Hong Kong High Court adopted, developed and relied on a number of basic common law principles to recognize and provide assistance to foreign liquidators. More recently, His Honor recognized the appointments of bankruptcy administrators made by the courts of the continent:
- Re CEFC Shanghai International Group Limited (in liquidation on the mainland of the People’s Republic of China)  HKCFI 167 – Hong Kong court for the first time issued an order requiring a continental administrator appointed above a Chinese company to be recognized in Hong Kong. Harris J. concluded that before the Court recognizes foreign liquidators and provides necessary legal assistance, the following criteria must be met:
- Foreign insolvency proceedings are collective insolvency proceedings in the sense that they are a process of collective debt collection for the benefit of all creditors; and
- Foreign insolvency proceedings are opened / initiated in the country of incorporation of the company.
Click here to see our customer alert on “Hong Kong Court’s First Recognition Order Granted to PRC Insolvency Practitioners“
- Re Shenzhen Everich Supply Chain Co. Ltd (in liquidation in the mainland of the People’s Republic of China)  HKCFI 965 – the Hong Kong court recognized and assisted an administrator appointed by the Shenzhen court.
For mainland businesses outside the pilot areas, the Hong Kong Court will continue to adopt the above case law when considering a recognition request.
The new mechanism is precisely what the Hong Kong R&I market has been waiting for for many years. The reach of Hong Kong’s liquidators will now extend across the border to the mainland: a right that is not granted to overseas appointment-makers and thus makes Hong Kong the main hub. restructuring of Greater China.