New rules on cross-border assistance in HK, mainland bankruptcies

By Zhang Guanglei and Cai Xiaoxia, Jingtian & Gongcheng
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Recently, the Supreme People’s Court (SPC) and the government of Hong Kong Special Administrative Region signed the Minutes on Mutual Recognition and Assistance of Bankruptcy Proceedings by the Courts of the Mainland and the Hong Kong Special Administrative Region. The SPC subsequently issued the Opinions on the Pilot Project of Recognition and Assistance of Bankruptcy Proceedings in the Hong Kong Special Administrative Region, which made specific provisions on the recognition and assistance of bankruptcy proceedings in Hong Kong by the mainland courts.

张光磊, Zhang Guanglei, Partner, Jingtian & Gongcheng
Zhang Guanglei
Partner
Jingtian & Gongcheng

Before these new regulations, the only principal regulations on cross-border judicial assistance in bankruptcy proceedings were found in article 5 of the Enterprises Bankruptcy Law.

While clarifying that the effect of mainland bankruptcy proceedings extends to the debtor’s extraterritorial property, article 5 provides that mainland courts shall review whether to recognise and enforce judgments and rulings made by overseas courts in bankruptcy cases according to international treaties or the principle of reciprocity.

The SPC clearly pointed out, in its No. 19 reply letter in the case of Min Si Ta Zi (2011), that that article was a provision on the recognition and enforcement of judgments made by overseas courts and did not apply to winding-up orders of Hong Kong.

Further, there was no legal basis for mainland courts to recognise winding-up orders made by Hong Kong courts. Although there are individual cases of Hong Kong courts recognising and assisting mainland bankruptcy proceedings – for example, the bankruptcy of Guangdong International Trust and Investment Co in 2001, the bankruptcy of CEFC Shanghai International Group in 2019, and the bankruptcy of Shenzhen Everich Supply Chain in 2020 – no mainland court has to date provided recognition and assistance to Hong Kong bankruptcy proceedings.

The introduction of the minutes and opinions filled the legal gap in terms of judicial assistance in bankruptcy proceedings between the two places. It also provided a clear normative basis as well as practical guidelines for mainland courts to recognise and assist in Hong Kong bankruptcy proceedings.

蔡晓霞, Cai Xiaoxia, Associate, Jingtian & Gongcheng
Cai Xiaoxia
Associate
Jingtian & Gongcheng

So, what are the key points of the new regulations?

The pilot areas and courts of jurisdiction. The minutes and opinions specify that the mainland adopts a pilot approach and designates the Intermediate People’s Courts of Shanghai, Xiamen and Shenzhen as pilot courts to recognise and assist bankruptcy proceedings in Hong Kong. The pilot court has jurisdiction on the premise that the pilot region is the location of the debtor’s principal property, place of business or representative office.

The scope of application. First, the bankruptcy proceedings in Hong Kong should be against companies, including compulsory liquidation, voluntary liquidation of creditors of companies, and reorganisation of debts of companies initiated by liquidators, or provisional liquidators and approved by the High Court of Hong Kong under section 673 of the Companies Ordinance, rather than personal bankruptcy proceedings against natural persons.

Second, the nature of the proceedings in Hong Kong should be “collective liquidation proceedings”, rather than individual or partial creditors’ individual applications for enforcement.

Regarding the scope of the debtor, the debtor in a recognised and assisted Hong Kong bankruptcy proceeding should have had its centre of main interests in Hong Kong for at least six months at the time of application. In determining the centre of main interests, the place of registration is presumed to be the centre of main interests in the first place, while the location of the principal office, the principal place of business and the location of the principal property should also be considered.

The protection of creditors’ interests and interim remedies. Unlike mainland bankruptcy cases, which are only announced and notified to creditors after the ruling of acceptance, the opinions provide that the court shall notify creditors and other interested parties and announce within five days from the date of receipt of the application for recognition and assistance in bankruptcy proceedings in Hong Kong, and give interested parties the right to object and hearings. To prevent individual enforcement of the debtor’s property by creditors, the opinions specifically provide that the court may, upon receipt of the application for recognition and assistance, and before making a ruling, take measures to preserve property on the application of the Hong Kong administrator.

Clarification of the legal effect. The opinions provide that the recognition of the Hong Kong bankruptcy proceedings by the mainland courts will have effects similar to those of the commencement of bankruptcy proceedings in the mainland, including the invalidation of the debtor’s discharge to individual creditors, the suspension of any pending civil litigation or arbitration concerning the debtor, the lifting of preservation measures concerning the debtor’s property, and the suspension of enforcement proceedings.

However, the opinions do not provide for the retroactive effect after the recognition of bankruptcy proceedings in Hong Kong, i.e., they do not include the bankruptcy revocation regime, which aims to maintain the stability of the order of mainland transactions and the expectations of parties to mainland transactions.

The manner of assistance. The opinions provide for two ways of assisting Hong Kong bankruptcy proceedings. First, they allow Hong Kong administrators to perform their duties in the mainland upon application. The opinions set out the scope of duties of the Hong Kong administrator and give discretionary power to the mainland court.

It is stipulated that the scope of duties of the Hong Kong administrator shall not exceed the intersection of the laws of the two places, and for major matters such as waiver of property interests, creating security over security, borrowing, transferring property out of the mainland, etc., separate approval from the mainland court is required.

Second, in terms of the appointment of a mainland administrator to perform its duties upon application, the opinions provide that the mainland administrator shall handle the debtor’s affairs and property in the mainland according to the Enterprise Bankruptcy Law, and that the administrators of the two places shall strengthen communication and co-operation. However, there are no provisions on the co-ordination between the administrators of the two places, which will be further explored in future practice.

Rules for the distribution of the bankruptcy estate. The opinions provide that the debtor’s estate on the mainland shall be used first to satisfy claims that have priority under mainland law, and the remaining property shall be distributed according to Hong Kong bankruptcy procedures on the premise that creditors of the same class are treated equally.

Zhang Guanglei is a partner and Cai Xiaoxia is an associate at Jingtian & Gongcheng

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