On May 14, 2021, the Department of Justice of the government of the Hong Kong Special Administrative Region announced that the Secretary for Justice of Hong Kong and the Vice-president of the Supreme People's Court (the "SPC") had signed the 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"). The ROM concerns the commencement and implementation of the much anticipated cross-border mutual recognition, assistance and cooperation arrangement between Hong Kong and mainland China (the "Mainland") in relation to corporate insolvency and restructuring matters (the "Cooperation Arrangement").
To give effect to this milestone agreement, on the same day the SPC issued 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 (the "SPC Opinion") and the Hong Kong government issued a Practical Guide setting out the procedure for a Mainland administrator's application to the Courts of Hong Kong for recognition and assistance (the "Guide").
The Cooperation Arrangement will initially be implemented as a pilot program by the people's courts in Shanghai Municipality, Xiamen Municipality in Fujian Province and Shenzhen Municipality in Guangdong Province (together the "Pilot Courts") given their close financial and business connections with Hong Kong. It is anticipated that other Mainland courts will be added to the arrangement in the future if the pilot program is successful.
This is a groundbreaking development as it is the first time that either the Mainland or Hong Kong has entered into a cooperation framework with any other jurisdiction in respect of cross-border insolvency and restructuring matters. The true implications of this development for creditors and market participants in Hong Kong-China restructuring and insolvency matters will, however, only become clear once the first test cases begin to emerge and we see how the Cooperation Arrangement is applied in practice.
While we await further clarification and guidance from those cases, we highlight in this article the key features of the Cooperation Arrangement and consider how it compares to the recognition and assistance mechanisms available under chapter 15 of the United States ("U.S.") Bankruptcy Code ("chapter 15"), which was enacted following the adoption by the U.S. of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency (the "Model Law") in 2005. The Model Law is a framework for dealing with cross-border insolvency and restructuring matters that has so far been adopted in 49 States in a total of 53 jurisdictions around the world1. Finally, we consider the potential ramifications of the Cooperation Arrangement for offshore creditors and insolvency officeholders in Hong Kong..
Although the Cooperation Arrangement does have some limitations relative to chapter 15, it is an important and positive development for the Hong Kong-China insolvency and restructuring landscape and will give Hong Kong insolvency officeholders an advantage in Chinese group failures that have a sufficient nexus to Hong Kong and one or more of the Pilot Court jurisdictions.
Recognition of Mainland Insolvency Proceedings in Hong Kong
Hong Kong has not adopted the Model Law, nor does it have any statutory mechanism to deal with cross-border insolvency and restructuring matters. Instead, the Hong Kong courts have, over the years, developed and refined a common law framework for addressing such issues. An overview of the relevant common law principles can be found in our recent Client Alert.
These common law principles have already been successfully applied on at least two occasions to recognize Mainland insolvency proceedings, in the decisions of Re CEFC Shanghai International Group Limited2 and Shenzhen Everich Supply Chain Co, Ltd3.
The ROM and the Guide contemplate that the recognition of Mainland insolvency proceedings in Hong Kong will continue to be dealt with under the existing common law framework in Hong Kong. The procedure for seeking recognition of a Mainland insolvency proceeding will continue to involve the issuance of a letter of request by a Mainland court addressed to the Hong Kong Companies Court for the purpose of seeking recognition and assistance, usually on terms that reflect the Hong Kong Companies Court standard order (unless there is a good reason to deviate from those terms in a particular case).
Under the Cooperation Arrangement, the Hong Kong Companies Court may grant (i) recognition of bankruptcy liquidation, reorganization and compromise proceedings under the Enterprise Bankruptcy Law of the People's Republic of China (the "EBL"); (ii) recognition of a Mainland bankruptcy administrator's office as an administrator; and (iii) assistance with the discharge of the bankruptcy administrator's duties as an administrator.
Footnotes
1 https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency/status
2 [2020] 1 HKLRD 676.
3 [2020] HKCFI 965.
To view in full, click here
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.
