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Formalization of Mutual Recognition of Insolvency Proceedings between Hong Kong and Mainland China
3 June 2021

On 14 May 2021, the Department of Justice of the Hong Kong Special Administrative Region (“Hong Kong”) and the Supreme People’s Court of the Mainland China signed the Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) proceedings between the Courts of the Mainland China and Hong Kong, allowing liquidators from Hong Kong to apply to Mainland China courts for recognition of insolvency proceedings in Hong Kong. Likewise, bankruptcy administrators from the Mainland China may apply to the High Court in Hong Kong for recognition of bankruptcy proceedings in the Mainland China.

Why a Formalization and not Breakthrough ?

The Record is hailed as a breakthrough as Hong Kong becomes the only jurisdiction outside the Mainland China where mutual recognition of and assistance to insolvency proceedings are allowed. Unlike the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of Mainland China and Hong Kong signed in 2006 and the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap 597) in Hong Kong which came to effect on 1 August 2008, the Record in fact formalizes the common law principles of recognition of foreign insolvency proceedings as applied by the Hong Kong Courts (see CEFC Shanghai International Group Ltd [2020] HKCFI 167 and China Oil Gangran Energy Group Holdings [2020] HKCFI 825).

It is nonetheless significant due to the substantial number and scale of cross border investments and business dealings between the two places and a major step for the protection of investors and creditors towards evasive debtors. The Record also makes it possible for recognition of Hong Kong Insolvency Proceedings relating to companies incorporated offshore including Hong Kong listed companies.

Applying for Recognition and Assistance from the Mainland China

Following the Record and on the basis of the relevant laws including the Civil Procedure Law and the Enterprise Bankruptcy Law both of the PRC, the Supreme People’s Court formulated the Opinion on Taking Forward a Pilot Measure in relation the recognition of and assistance to bankruptcy (insolvency) proceedings in Hong Kong. The key points to note in the Opinion are :-

1. The courts designated for the pilot measures are the People’s Courts in Shanghai, Xiamen and Shenzhen Municipalities meaning the debtor’s principal assets, place of business or representation should be in one of the pilot areas; and
2. The Opinion refers to Hong Kong Insolvency Proceedings where Hong Kong is the centre of main interests of the debtor.

“Hong Kong Insolvency Proceedings” means the collective insolvency proceedings commenced in accordance with Companies (Winding Up Miscellaneous Provisions) Ordinance (Cap 32) and the Companies Ordinance (Cap 622) of Hong Kong, which include compulsory winding up, creditors’ voluntary winding up and scheme of arrangement promoted by a liquidator or provisional liquidator and sanctioned by a Hong Kong Court in accordance with section 673 of the Companies Ordinance. Solvent proceedings eg. members’ voluntary winding up are excluded.

“Centre of main interests” generally means the place of incorporation of the debtor. At the same time, the People’s Court would take into account other factors including place of principal office, principal place of business and place of principal assets etc. of the debtor and the centre of main interests shall have been in Hong Kong for at least 6 months as at the date of the application for recognition and assistance.

An application for recognition and assistance shall be submitted in accordance with Articles 6 and 7 of the Opinion. Interested parties including known creditors may object to the application and put forward the objections in writing to the People’s Court within 7 days from the date of receipt of the notification of the recognition and assistance application.

When a People’s Court decides to recognize the Hong Kong Insolvency Proceedings, it shall at the same time decide upon application to recognize the status of the Hong Kong Administrator (Article 10). It appears that another application is necessary to allow the Hong Kong Administrator to perform his duties in the Mainland China including taking over the property, seals, account books, documents and other data of the debtor, investigating into the financial position of the debtor and managing and disposing of the debtor’s property etc.

If the Hong Kong Administrator performs any duty that involves waiver of property rights, creation of security on property, loan, transfer of property out of the Mainland China and other acts for disposing of the property that has a major impact on creditors’ interest, it requires separate approval by the People’s Court.

After the People’s Court recognizes the Hong Kong Insolvency Proceedings, it may, upon application, grant further assistance concerning the realization of bankruptcy property, distribution of bankruptcy property, debt restructuring arrangement, termination of bankruptcy proceedings etc. Where any interested party has objections to such an application, the party may put forward the objections in writing to the People’s Court within 7 days from the date of announcement of receipt of the application.

A People’s Court may refuse to recognize or assist the Hong Kong Insolvency Proceedings if, upon examination of the evidence adduced by an opposing interested party, it is satisfied that :-

(1) the centre of main interests of the debtor is not situated in the Hong Kong or it has been situated in the Hong Kong for less than 6 months continuously;
(2) Article 2 of the Enterprise Bankruptcy Law of the PRC is not satisfied;
(3) Mainland China creditors are unfairly treated;
(4) there is fraud; or
(5) there is any other circumstance where the People’s Court considers that recognition or assistance shall not be rendered.

The People’s Court may also refuse to recognize or assist the Hong Kong Insolvency Proceedings if it considers that such recognition or assistance would violate the basic principles of the law of Mainland China or offend public order or good morals without any interested party opposing or adducing any evidence (Article 18).

Applying for Recognition and Assistance from Hong Kong

On the Hong Kong side, an administrator in Mainland China bankruptcy proceedings may apply to the High Court of Hong Kong for recognition of bankruptcy liquidation, reorganization and compromise proceedings under the Enterprise Bankruptcy Law, recognition of his office as an administrator and grant of assistance of discharge of his duties as an administrator. The Department of Justice has also issued a Practical Guide (which appears to be a more straight forward document) to outline the procedures for the application for recognition and assistance in Hong Kong. Relevant sample documents have also been provided for use by practitioners.

If you have any questions on the above or other issues concerning cross border litigation matters, experienced lawyers in our Litigation and Dispute Resolution Department will be happy to assist.

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