Legal framework between China and HK SAR courts establishes mutual recognition and assistance in filling for cross-border bankruptcy.
On 14th May 2021, the Secretary for Justice of Hong Kong and the Vice-President of the Supreme People’s Court (SPC) of China signed a record meeting on the mutual recognition of and assistancein filing for cross-border bankruptcy between the courts of the Mainland and Hong Kong (‘Recognition’).
Intermediate People’s Courts in Shanghai, Xiamen, and Shenzhen were designated as pilot cities to cooperate with HK SAR court for cross-border bankruptcy proceedings.
The Importance of Cross-border Bankruptcy Proceedings
Companies may consider filing for bankruptcy to protect company assets. Namely, bankruptcy permits shareholders of an insolvent company (‘debtors’) to sell company assets and pay creditors as accordingly to the bankruptcy proceedings. With the Recognition in place, debtors from one jurisdiction can file for bankruptcy recognition and assistance in the court of the other jurisdiction.
For example, bankruptcy liquidation administrators can be appointed by debtors in Shanghai to request the High Court of HK SAR to recognise and assist in the bankruptcy proceedings of their insolvent company in HK SAR and vice versa.
Under the Recognition framework, debtors can protect the assets of the insolvent company from being seized by creditors and liquidate or restructure such a company accordingly to the relevant laws.
Recognition and Assistance Definitions
The Recognition defines the following recognition and assistance in China and HK SAR:
A liquidator or provisional liquidator in Hong Kong may apply to the appropriate Intermediate People’s Court for recognition of:
- compulsory winding-up proceedings;
- creditors’ voluntary winding-up proceedings;
- corporate debt restructuring proceedings;
- his office as a liquidator or provisional liquidator; and
- grant of assistance for discharge of his duties.
An administrator in China bankruptcy proceedings may apply to the High Court of Hong Kong for recognition of:
- bankruptcy liquidation;
- reorganisation and compromise proceedings under the Enterprise Bankruptcy Law (“EBL”) of the PRC;
- his office as an administrator; and
- grant of assistance for discharge of his duties as an administrator.
The peoples’ court can refuse to recognise or assist HK SAR in filing for bankruptcy proceedings in China. Specifically, the SPC’s Opinion (“Opinion”) on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in HK SAR provisions the people’s court to refuse recognition of and assistance in HK SAR bankruptcy proceedings when the centre of main interests of the debtor is not situated in Hong Kong or it has been situated in the Hong Kong for less than six months continuously. Generally, the ‘centre of main interests’ refers to the place of incorporation of the debtor, however, the court may consider other factors of the debtor including but not limited to the following:
- place of the principal office
- principal place of business
- place of principal assets
- Article 2 of the EBL is not satisfied;
- mainland creditors are unfairly treated;
Lastly, this recognition is a legal tool for companies to initiate with financial difficulties in Mainland or HK SAR. Before the Recognition, the differences between Hong Kong and the Mainland bankruptcy laws were a major obstacle in activating cross-border bankruptcy proceedings. The new framework facilitates debtors in both jurisdictions – namely debt restructuring and protection of debtor interests and assets.