A new cooperation arrangement for mutual recognition of and assistance to cross-border corporate insolvency and debt restructuring proceedings has been established between Mainland China and Hong Kong (the Cooperation Arrangement).
The Cooperation Arrangement is provided in a Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (the ROM) signed by the Mainland’s Supreme People's Court (SPC) and Hong Kong’s Department of Justice on 14 May 2021.
The Cooperation Arrangement Background
The Cooperation Arrangement allows liquidators from Hong Kong to apply to Intermediate People's Courts in pilot areas of the Mainland designated by the SPC for recognition of Hong Kong insolvency proceedings. Corporate insolvency administrators from the Mainland may also apply to the High Court of Hong Kong for recognition of corporate insolvency proceedings in the Mainland.
To give effect to the Cooperation Arrangement, the SPC and the Hong Kong Government respectively issued an ‘Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the HKSAR' (the Opinion) and a 'Practical Guide' setting out procedures for a Mainland administrator's application to Hong Kong courts for recognition and assistance (the Practical Guide).
In this update, we provide a summary of the key features of the Cooperation Arrangement. In coming updates, we will examine the Cooperation Arrangement in further detail and provide commentary on some practical issues – notably the scope of its application; the meaning and effect of a Mainland court recognizing insolvency proceedings commenced in Hong Kong and/or administrators appointed by Hong Kong courts, based on Hong Kong laws, and vice versa; and how these may affect the rights of creditors and interested parties in the two jurisdictions.
Recognition of Hong Kong Insolvency Proceedings in the Mainland
The Opinion sets out details of the arrangement applicable to applications by Hong Kong Administrators to relevant People's Courts in the Mainland for recognition and assistance. Several material features are summarized below:-
- Shanghai, Xiamen and Shenzhen are the Pilot Areas, the People's Court of which are designated by the SPC to take forward pilot measures on recognition of and assistance to "Hong Kong Insolvency Proceedings".
- "Hong Kong Insolvency Proceedings" means collective insolvency proceedings commenced in accordance with the Companies (Winding Up and 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.
- Liquidators and provisional liquidators in Hong Kong Insolvency Proceedings ("Hong Kong Administrators" referred to in the Opinion) may apply to the Intermediate People's Court of the relevant Pilot Area for (i) recognition of the Hong Kong Insolvency Proceedings, (ii) recognition of his office as a liquidator or provisional liquidator, and (iii) grant of assistance to discharge his duties as a liquidator or a provisional liquidator.
- For the Cooperation Arrangement to apply, the relevant debtor's centre of main interests (COMI) must have been in Hong Kong continuously for at least six months. COMI generally means the place of incorporation of the debtor. But the relevant People's Court of the Pilot Area may 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. Further, the debtor's principal assets in the Mainland must be in a Pilot Area, or it has a place of business or representative office in a Pilot Area.
- On application, interim preservation measures can be imposed by the relevant People's Court in accordance with the relevant provisions of Mainland law, pending determination of an application for recognition and assistance filed by a Hong Kong administrator.
- The People's Courts retain wide power to refuse the granting of recognition or assistance on various grounds. Among others, include the situation where "it considers such recognition or assistance violates the basic principles of the law of the Mainland or offend public order or good morals".
- The property of debtor in the Mainland shall first satisfy preferential claims under the laws of the Mainland. 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.
Recognition of Mainland Corporate Insolvency Proceedings in Hong Kong
Hong Kong’s existing common law in relation to recognition of foreign insolvency proceedings will continue to apply. But the ROM and Practical Guide will provide a framework for Mainland bankruptcy administrators to apply to the High Court of Hong Kong for recognition and assistance.
On application, the High Court may grant (i) recognition of bankruptcy liquidation, reorganization and compromise proceedings under the Enterprise Bankruptcy Law of the People's Republic of China, (ii) recognition of a Mainland bankruptcy administrator's office as an administrator, and (iii) assistance for discharge of the bankruptcy administrator's duties as an administrator.
The Cooperation Arrangement marks a major breakthrough for cross-border corporate insolvency and debt restructuring matters of the Mainland and Hong Kong, as it is the first cooperation arrangement for mutual recognition of and assistance to corporate insolvency and debt restructuring proceedings entered into by either the Mainland or Hong Kong with any other jurisdiction.
Stay tuned to our coming updates for further commentary on practical issues concerning the Cooperation Arrangement.