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6 March 2025

Rules On Mainland Asset Disposal And The Practice Of Judicial Assistance By Mainland Courts In Hong Kong Company Bankruptcy

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Following the liquidation order from the Hong Kong High Court on January 29, 2024, against China Evergrande Group Corporation, on September 12, 2024, China Evergrande Group filed a liquidation petition for its wholly owned subsidiary...
China Insolvency/Bankruptcy/Re-Structuring

Following the liquidation order from the Hong Kong High Court on January 29, 2024, against China Evergrande Group Corporation, on September 12, 2024, China Evergrande Group filed a liquidation petition for its wholly owned subsidiary, CEG Holdings (BVI) Limited, which has been scheduled a hearing on February 17, 2025. In the liquidation process of a Hong Kong company, the maintenance and realisation of the company's assets and the return of the value to its creditors and other stakeholders are key concerns. Clarifying the rules and procedures for the disposal of the company's assets in Mainland of China under the Hong Kong company liquidation order is of great significance for reducing the uncertainty and risks in commercial activities and enhancing the confidence of market entities.

一、Legal Consequences of a Winding-Up Order by the Hong Kong High Court

According to Section 178 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (hereinafter referred to as the "Winding Up Ordinance"), if a company owes an amount equal to or exceeding USD 10,000 in debts to creditors that are due for payment, any one or more creditors, contributories (persons liable to contribute to the company's assets in the event of liquidation), or the trustee or personal representative of a contributory may jointly or separately file a winding-up petition. The issuance of a winding-up order has the following main legal consequences:

1. Actions stayed on winding-up order

According to Section 186 of the Winding Up Ordinance, once a winding-up order is issued or a provisional liquidator is appointed, no legal actions or proceedings shall be proceeded with or commenced against the company except by leave of the court. Any permitted actions must comply with the terms imposed by the court, except in cases involving national security.

2. Cessation of Business Operations

According to Section 194/228 of the Winding Up Ordinance,Upon the issuance of a winding-up order by the Hong Kong High Court, the company must cease all business activities (unless the liquidator allows continued operations to facilitate the liquidation). All company assets and affairs will be taken over by the court-appointed liquidator, and the directors and shareholders will lose control of the company. However, directors may need to cooperate with the liquidator by providing financial records and other relevant information. All company assets will be frozen, and the liquidator has the authority to dispose of these assets to repay the debts. Any prior disposal of company assets (e.g., transactions before the winding-up order) may be reviewed by the liquidator and potentially reversed if fraud or misconduct is involved.

3. Protection of Employee Rights

According to Section 265 of the Winding Up Ordinance,The employment relationship between the company and its employees will generally terminate upon liquidation, resulting in employee layoffs. The company is required to pay wages, severance compensation, and other entitlements as prescribed by law. Employee wages and social security claims are paid in priority to all other debts. However, if the company's assets are severely insufficient, employee rights may not be fully protected.

4. Initiation of Debt Repayment Mechanisms

According to Section 199B of the Winding Up Ordinance,After the court appoints a liquidator, the liquidator is responsible for managing the liquidation process, including recovering company assets such as fixed assets, liquid assets, and intangible assets to determine the quantity, value, and ownership of these assets. The liquidator will verity the assets, dispose of them, repay the debts and distribute the assets accordingly.

5. Benefit to All Stakeholders

According to Section 187 of the Winding Up Ordinance,An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if made on the joint petition of a creditor and of a contributory. Once the petition is issued, any creditor has the right to file a claim for the debts owed. However, the priority of claims varies according to statutory rules. Under the Winding-Up Ordinance, liquidation costs and liquidator remuneration are prioritized, followed by employee wages and severance compensation. Then, creditors with mortgages or pledges over company assets have priority in repayment, as do government tax claims. Ordinary creditors are repaid proportionally after satisfying the above priorities, while shareholders' interests are last in line.

二、The Asset Scope and Judicial Assistance Practice of Hong Kong Liquidated Companies in Mainland of China

According to Article 5 of the the Supreme People's Court's 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 (hereinafter referred to as the "Pilot Opinion"), if the debtor's principle assets in the Mainland are in pilot area, or it has a place of business or a representative office in a pilot area, the Hong Kong Administrator may apply for recognition of and assistance to the Hong Kong Insolvency proceedings in Mainland courts. Accurately defining the scope of a debtor's assets in Mainland of China under a Hong Kong winding-up order is essential for ensuring a fair and effective liquidation process. The debtor's assets is extensive, covering both tangible and intangible assets, which are crucial for repaying debts and protecting creditors' rights. Based on cases recognized and enforced by Mainland courts, the following provides a preliminary overview of the assets of Hong Kong companies in liquidation in Mainland of China.

1. Shenzhen Intermediate People's Court Recognizes and Assists Samson Paper Company's Hong Kong Liquidation Procedure

On August 14, 2020, the A-share shareholders of Samson Paper Company Limited passed a written resolution to voluntarily wind up the company and make the appointment of a liquidator. On August 30, 2021, the liquidator applied to the Shenzhen Intermediate People's Court for recognition of the liquidator's status and permission to perform duties in Mainland of China. The application mentioned that Samson Paper's main assets in Mainland of China included equity investments, property assets, and accounts receivable. The equity investments were primarily in its wholly-owned subsidiaries in Mainland of China, the property asset was an apartment in Beijing, and the accounts receivable were payments due from related parties in Mainland of China. On December 15, 2021, the Shenzhen Intermediate People's Court issued Civil Ruling (2021) Yue 03 Ren Gang Po No. 1, allowing the liquidator to perform duties in Mainland of China, including taking over, managing, and disposing of Samson Paper's assets.

2. Shanghai Intermediate People's Court Recognizes and Assists Hong Kong Ze International Group's Liquidation Proceedings

On March 17, 2021, following an application by a creditor (a Hong Kong branch of a bank), the Hong Kong High Court issued a winding-up order (HCCW 429/2020), initiating the liquidation procedure for Hong Kong Ze International Group. The liquidator considered the significant value of the company's direct investments in Mainland of China and thus filed an application with the Hong Kong High Court. Hong Kong Ze International Group had four wholly-owned subsidiaries in Shanghai and held shares in three other companies in Shaanxi Province.

On March 30, 2023, the Shanghai No. 3 Intermediate People's Court issued Civil Ruling (2022) Hu 03 Ren Gang Po No. 1, allowing the liquidator to perform duties in Mainland of China, including taking over, managing, and disposing of company's assets and investigating its property. The court consider that the equity of four wholly-owned subsidiaries of Hong Kong's Ze Company registered in Shanghai is the main property of Hong Kong's Ze Company in mainland of China.

3. Xiamen Intermediate People's Court Recognizes and Assists Husk's Green Technology Holdings' Liquidation Proceedings

On October 26, 2022, the Hong Kong High Court issued a compulsory winding-up order against Husk's Green Technology Holdings Co., Ltd. On January 17, 2023, creditors applied to convert the compulsory liquidation into a voluntary liquidation. In the judicial assistance request letter from the Hong Kong High Court, it was stated that Husk's Green Technology's main assets in Mainland of China were its wholly-owned subsidiaries, including five subsidiaries, four of which were located in Xiamen.

The Hong Kong High Court requested that the Xiamen Intermediate People's Court permit the liquidator to take over all assets and properties related to these subsidiaries in Mainland of China, investigate their affairs, and initiate legal proceedings in Mainland courts.

In 2024, the Xiamen Intermediate People's Court issued Civil Ruling (2024) Min 02 Ren Gang Po No. 1, determining that Husk's assets in Mainland of China were limited to the equity of its wholly-owned subsidiaries. The Xiamen court did not narrowly define "principal assets" as traditional tangible assets but explored and recognized a broader and more diverse forms of assets. This suggests that Mainland courts may further expand the scope of "principal assets" in the future to include various forms of indispensable corporate assets.

From the above cases, it can be seen that at current stage the scope of assets of Hong Kong liquidated companies in Mainland of China primarily involves equity investments, real estate, and accounts receivable, with wholly-owned subsidiaries being the main assets. After obtaining recognition and assistance from pilot region courts, liquidators have the authority to investigate and manage the company's assets in Mainland of China. However, pilot region courts retain the right to approve significant asset disposals, such as relinquishing property rights, creating security interests, borrowing, or transferring assets out of Mainland of China. With the development of IP and AI technologies, the scope of corporate asset recognition will continue to expand.

三、Rules for Disposing of Mainland Assets in Hong Kong Company Liquidations

1. Preservation Arrangements Before Allowing Liquidators to Take Over Mainland Assets

After submitting a request for recognition and assistance to a pilot court under the Pilot Opinions, if the Hong Kong liquidator applies for asset preservation, the People's Court will handle the matter in accordance with Mainland laws. Specifically, the application for preservation measures must be made to the court with jurisdiction over the location of the assets to be preserved, the domicile of the respondent, or the court with jurisdiction over the case, and appropriate guarantees must be provided. Once the People's Court recognizes the Hong Kong bankruptcy proceedings, preservation measures on the Hong Kong company's Mainland assets will be lifted.

2. Application of Mainland Bankruptcy Laws to the Disposal of Mainland Assets

According to the Pilot Opinions, after recognizing Hong Kong bankruptcy proceedings, the People's Court may appoint a Mainland administrator upon application by the Hong Kong liquidator or creditors. After the designation, the Mainland administrator will assume the responsibilities of managing and disposing of the Hong Kong company's Mainland assets as permitted by the pilot court. The debtor's affairs and assets in Mainland of China will be governed by the Enterprise Bankruptcy Law of the People's Republic of China, which the bankrupt enterprise may sell its assets either in whole or in part, with intangible assets and other properties potentially sold separately. Assets that are prohibited from being auctioned or restricted from transfer under national regulations must be handled in accordance with the prescribed legal procedures.

Regarding the Mainland assets of the Hong Kong companies in liquidation, prioritized Mainland debts must be paid first, and the remaining assets will be distributed and repaid under the Hong Kong liquidation process. Therefore, the scope of assets available for debt repayment in Hong Kong liquidation proceedings will be subject to coordination between the liquidators and the administrators of both jurisdictions in practice.

四、Key Points of Collaboration between Hong Kong Administrators and Mainland Administrators Regarding Hong Kong Bankruptcy Procedures

1. Collaboration on the Declaration of Claims by Mainland Creditors

In the liquidation cases of Hong Kong companies, creditors can declare their claims through the website of the Official Receiver's Office of the Hong Kong Special Administrative Region. After the liquidation order is issued, creditors can submit a claim request by filling out the "Proof of Debt" Form. The Proof of Debt can be submitted by the creditor themselves, or by a person authorized by the creditor or on behalf of the creditor and having knowledge of the facts. There is no distinction made regarding the geographical location of the creditors. In terms of judicial practice, mainland creditors or their authorized representatives can register their claims with the Official Receiver's Office directly.

According to section 14 of Pilot Opinions, after recognizing the bankruptcy proceedings in Hong Kong, the people's court may, upon application, rule to allow the Hong Kong administrator to perform duties in mainland of China, including accepting and reviewing claims from mainland creditors. If a mainland administrator is designated upon the request of the Hong Kong administrator or creditors, the relevant duties shall be undertaken by the mainland administrator. That is, in cases where a Hong Kong liquidation is recognized and assisted by a pilot court in the mainland, the relevant creditors may file their claims and be reviewed through the designated mainland administrator.

According to Article 69 of the Hong Kong "Bankruptcy Ordinance", in the calculation and distribution of a dividend the trustee shall make provision for debts provable in bankruptcy appearing from the bankrupt's statements, or otherwise, to be due to persons resident in places so distant from Hong Kong that in the ordinary course of communication they have not had sufficient time to tender their proofs or to establish them if disputed, and also for debts provable in bankruptcy the subject of claims not yet determined. This clause also reflects the arrangement for protecting the rights and interests of creditors outside of Hong Kong.

2. Collaboration on the Investigation, Management, and Disposal of the Debtor's Assets in the Mainland

Upon request from the Hong Kong liquidator or provisional liquidator, a mainland administrator may be appointed to investigate the asset status of the debtor, and manage and dispose of the debtor's property in mainland. If the debtor's assets in the Mainland mainly involve wholly-owned subsidiaries, generally, the mainland administrator can obtain information on the financial status and relevant assets of the subsidiaries through the local administration for market regulation, taxation bureau, and banks where the subsidiaries are located. Additionally, information about the employees may be obtained through the company's internal channels or the human resources and social security departments.

The mainland administrator can also examine the intellectual property assets under the company's name through platforms such as the Ministry of Industry and Information Technology's government service platform, the Trademark database of the China National Intellectual Property Administration, the China Copyright Protection Center, and the Patent Search and Analysis Website of the China National Intellectual Property Administration. Furthermore, by consulting platforms like the China Judgments Online, the mainland administrator can review the litigation status of the debtor's mainland subsidiaries to assess whether there are any accounts receivables or other disposable assets.

3. Collaboration in Representing the Debtor in Litigation, Arbitration and other Judicial Proceedings

The mainland administrator appointed upon the application of the Hong Kong liquidator or provisional liquidator can represent the debtor in litigation, arbitration, preservation measures and enforcement procedures related to the debtor's property in the mainland. In such Judicial cooperation, the mainland administrator should promptly communicate and record in a timely manner with the Hong Kong liquidator regarding the judicial procedures of the case and legal issues under Chinese law, so as to properly promote the management and disposal of the debtor's assets.

五、Conclusion

The Evergrande Group liquidation case highlights the challenges posed by the massive scale of debt and the legal and judicial cooperation barriers between Mainland of China and Hong Kong, leading to slow progress in asset disposal. The Samson Paper case, where the Shenzhen Intermediate People's Court recognized Hong Kong bankruptcy proceedings and the liquidator's status, setting a precedent for cross-border bankruptcy assistance. However, during the execution process, issues such as inadequate information sharing and difficulties in procedural coordination were revealed. The disposal of Mainland assets of Hong Kong companies in liquidation will continue to be a key issue for the liquidators in both jurisdictions to jointly explore and cooperate on.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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