Latest trends in cross-border bankruptcy between the mainland and Hong Kong

By Xu Bangwei, Jingtian & Gongcheng
0
178

As the economic and trade exchanges between mainland China and Hong Kong have become more frequent, in recent years the number of issues that need to be resolved through cross-border cooperation in bankruptcy cases has also increased. Although the Arrangements for Mutual Recognition and Enforcement of Judgments in Civil and Commercial Cases by Courts of the mainland and Hong Kong Special Administrative Region issued in January 2019 did not included bankruptcy (winding-up) cases, some cases occurred in recent years where the courts in the mainland and Hong Kong recognized each other’s bankruptcy (winding-up) procedures as well as the status of each other’s bankruptcy administrator (liquidator). This new trend deserves the attention of cross-border investors.

cross-border
Xu Bangwei
Partner
Jingtian & Gongcheng

Mainland’s attitude towards Hong Kong’s winding-up procedures. According to the interpretation of the Supreme People’s Court of article 5 of the Enterprise Bankruptcy Law in 2011, the “winding-up order” made by Hong Kong courts is not a “judgment or ruling of foreign courts” that can be recognized and enforced by courts in the mainland.

However, the Sino-Environment Technology Group Limited case concluded by the Supreme People’s Court in 2014 created the possibility for Hong Kong liquidators to represent liquidated companies in cases heard by mainland courts.

The plaintiff in this case was a Singaporean company that had entered the bankruptcy proceeding abroad. The Supreme People’s Court cited the provisions of article 14 of the Law on the Choice of Law Concerning Foreign-Related Civil Relations and held that the determination of the litigation status and related powers of the plaintiff’s foreign representative should be governed by the law of the plaintiff’s place of registration, i.e., the law of Singapore. According to this ruling, courts of the mainland may apply the law of the place of registration, i.e., the law of Hong Kong, to a Hong Kong company that has been wound up, to determine the litigation status and related rights of Hong Kong liquidators in the cases heard by courts of the mainland, thereby enabling Hong Kong liquidators to represent liquidated companies to participate in the proceedings of courts in the mainland.

Hong Kong’s attitude towards mainland bankruptcy proceedings. As early as 2001, Hong Kong courts had provided judicial assistance to the mainland’s bankruptcy proceedings according to common law rules. In the case of CCIC Finance Limited v Guangdong International Trust and Investment Corporation (Guangxin) and its Hong Kong subsidiary, Guangxin was declared bankrupt by the High People’s Court of Guangdong Province, and thus its liquidation group applied to the Hong Kong court for an order to stop all legal proceedings against Guangxin and its Hong Kong subsidiary. The Hong Kong court finally approved the application, making the case the first where the Hong Kong court approved the mainland’s bankruptcy liquidation procedure.

In the next decade or so, we have not seen the Hong Kong court make a judgment similar to the Guangxin case. However, since the beginning of 2020, the High Court of Hong Kong has successively recognized the mainland’s bankruptcy liquidation procedures in the CEFC case (HCMP 2295/2019) and the Nianfu case (HCMP 2295/2020), and granted judicial assistance to the mainland administrators. This new trend has aroused widespread concern in practice. In the CEFC case, the High Court of Hong Kong admitted that CEFC Shanghai International Group Limited (CEFC) was in bankruptcy liquidation on the mainland, and suspended the lawsuit filed by creditors of CEFC in Hong Kong at the request of its administrator. The main reason was that the bankruptcy liquidation on the mainland was a collective liquidation procedure and therefore eligible to be recognized in Hong Kong.

In the Nianfu case, the High Court of Hong Kong, at the request of Shenzhen Intermediate Court, not only recognized the bankruptcy liquidation procedure Nianfu had undergone on the mainland, but also provided judicial assistance for its administrator to fully perform its duties in Hong Kong. The administrator was allowed to fully exercise the rights of Nianfu’s subsidiaries in Hong Kong on behalf of Nianfu. The successive appearance of these two judgments is believed to symbolize that the judicial institutions of the mainland and Hong Kong have begun to explore closer cooperation in the field of bankruptcy.

Other forms of bankruptcy cooperation. In addition to the above cases, the mainland and Hong Kong have also explored other avenues of cooperation in the field of bankruptcy in recent years. For example, in the winding-up case of China Medical Technologies Inc in Hong Kong, the investigation and collection of evidence were conducted on the mainland. The administrator of Lo Siu Fai’s bankruptcy in Hong Kong, with the assistance of the autonomous organization of Shenzhen’s bankruptcy administrators, applied the bankruptcy estate disposal model of the Shenzhen court, and five bankruptcy properties including the special Hong Kong vehicle licence plate numbers were auctioned on the online platform Alibaba Auction.

The impact of new cross-border bankruptcy trends on cross-border investors. If the cross-border bankruptcy cooperation between the mainland and Hong Kong continues to deepen, it will bring about some major changes. Firstly, after the debtor enters bankruptcy proceedings in one place, the administrator can exercise the right to collect the debtor’s property and debts, and suspend litigation involving the debtor, and may even include the affiliates of the debtor in another place in the consolidated bankruptcy. Secondly, since Hong Kong has established a relatively mature bankruptcy system for natural persons, with the gradual establishment of the bankruptcy system for natural persons on the mainland, after corporate debtors in one place go bankrupt, it may become possible that creditors can use the cross-border bankruptcy mechanism to recover debts from natural-person guarantors in another place. Thirdly, mutual cooperation in investigating and collecting evidence and selling the bankruptcy estate will make it more difficult for debtors to transfer and hide property across borders, and make the auction and sale of the bankruptcy estate more efficient and convenient. The above three situations will undoubtedly have a direct impact on the scope of the debtor’s estate and the creditor’s satisfaction rate.

To sum up, the cross-border cooperation between the mainland and Hong Kong in bankruptcy is a common reality between the two places and is expected to enter accelerated development in the next few years. Therefore, the author recommends that cross-border investors pay close attention to the relevant trends in this field. If in practice the debtor or its related entities have assets or operations in both places, investors may try to use this mechanism to protect their investment interests.

Xu Bangwei is a partner at Jingtian & Gongcheng

cross-border

Jingtian & Gongcheng
34/F, Tower 3, China Central Place
77 Jianguo Road, Beijing 100025, China
Telp: +86 10 5809 1266
Fax: +86 10 5809 1100
E-mail:
xubangwei@jingtian.com
www.jingtian.com