China’s Recognition of and Assistance to HKSAR Insolvency Proceedings

For Chinese companies to expand global presence and for international investors to enter into the Mainland China market, Hong Kong is arguably the most preferred middle place. In an economic downturn, especially in recent years due to Covid impact, it is not unusual for companies to initiate insolvency proceedings. However, according to the PRC Enterprise Bankruptcy Law, PRC courts will only recognise and enforce a foreign court ruling in relation to insolvency cases based on international treaties or the principle of reciprocal treatment. To date, Mainland China has not entered into any international treaty or established systematic rules to implement the principle of reciprocal treatment.

Due to Hong Kong’s unique position, a part of the sovereign territory of China but with separate and independent legal system, in order to promote judicial assistance system, in May 2021, the Supreme People’s Court of the PRC (SPC) and the Secretary of Justice of Hong Kong signed the record of meeting concerning mutual recognition of and assistance to insolvency proceedings between the courts of Mainland China and Hong Kong (Meeting Records) to facilitate the mutual recognition of and assistance to insolvency proceedings between the two jurisdictions. Following the Meeting Records, the SPC issued the Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region (Pilot Opinion) in the same month to specify mechanisms and rules for Mainland China’s courts to recognize and assist Hong Kong insolvency proceedings. Courts in Shanghai, Xiamen and Shenzhen are designated by SPC to participate in the pilot program.

Since the release of the Meeting Records and the Pilot Opinion, there are published cases where the Mainland China courts issued orders to recognise and assist Hong Kong insolvency proceedings. Such published cases will provide more specific guidance over how a Mainland China court will make a ruling in similar cases although Mainland China does not have a case law tradition. And the pilot program may also in the long run be referenced by foreign courts of other countries or jurisdictions in handling insolvency cases in relation to Mainland China.

Key factors to obtain recognition and assistance by Mainland China courts

Mainland China courts will, among others, review the following two factors before granting recognition and assistance to Hong Kong insolvency proceedings.

• Centre of main interests – the debtor’s centre of main interests needs to be located in Hong Kong at least for six months. According to the Pilot Opinion, the centre of main interests generally means the place of incorporation of the debtor. At the same time, the Mainland China court will take into account other factors including the place of principal office, the principal place of business, the place of principal assets, etc. of the debtor. For example, in a recent case, the Hong Kong High Court confirms that although the debtor Ozner Water International Holding Limited (a Hong Kong listed company) is incorporated in the Cayman Islands, such company’s centre of main interests has been in Hong Kong because such company has always been run out of Hong Kong (more details available via the link).

• Connections with pilot areas – the debtor shall have connections with the pilot areas, ie Shanghai, Xiamen or Shenzhen. According to the Pilot Opinion, only if the debtor’s principal assets in Mainland China are in a pilot area, or it has a place of business operation or a representative office in a pilot area, an application for Mainland China court recognition and assistance is allowed. After satisfying any of the aforementioned connections, assets within Mainland China could be enforced in the insolvency proceedings. For example, in the first published insolvency case where Hong Kong liquidators successfully obtained recognition and assistance from a Mainland China court since the release of the Meeting Records and Pilot Opinion, the debtor Samson Paper Company Limited (Samson) has significant assets in Shenzhen and other places in Mainland China, including account receivables in Tianjin, Shandong and Jiangsu and real estate asset in Beijing. In the ruling made by the Shenzhen Intermediate People’s Court (Shenzhen Court) (more details available via the link), the court recognised the Hong Kong liquidators and confirmed their rights to manage and dispose of assets in Mainland China, including assets located outside of Shenzhen.

Limitations of the Meeting Records and Pilot Opinion

Although the Meeting Records and Pilot Opinion are intended to bridge the mutual assistance of insolvency proceedings between Mainland China and Hong Kong, a Hong Kong liquidator must be aware of certain limitations which we have summarised below:

• Separate approval of transferring property out of Mainland China

The Pilot Opinion stipulates that any transfer of debtor’s bankruptcy property out of Mainland China requires separate approval by competent court in Mainland China. In the Samson case, the Shenzhen Court specifically stated this rule. However, at present stage, detailed procedures and requirements to apply for such separate approval are not released.

• Mainland China preferential claims

According to Clause 20 of the Pilot Opinion, if a Mainland China court recognises and assists the Hong Kong insolvency proceedings, the bankruptcy property of the debtor in the Mainland China shall first satisfy preferential claims within Mainland China under the law of Mainland China. The remainder of the property is to be distributed in accordance with the Hong Kong insolvency proceedings provided that creditors in the same class are treated equally. However, the scope of preferential claims is not specified in the Pilot Opinion or PRC Enterprise Bankruptcy Law and thus there may be certain uncertainties to apply this clause.

• Bankruptcy circumstances

Article 2 of the PRC Enterprise Bankruptcy Law requires that a debtor may apply the insolvency proceedings only when it fails to clear off its debt as due, and its assets are not sufficient to pay off all the debts or it is obviously incapable of clearing off its debts, which is also referenced and adopted by the Pilot Opinion. In other words, Hong Kong insolvency proceedings occurred due to other reasons, such as the debtor does not commence its business within a year from its incorporation, or suspends its business for a whole year (please refer to article 177 of Hong Kong Cap. 32 Companies Ordinance) may not be valid grounds for a Hong Kong liquidator to seek recognition and assistance from a Mainland China court in accordance with the Meeting Records and Pilot Opinion.