Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
In Re CEFC Shanghai International Group Limited (HCMP 2295/2019) ("Decision"), the Hong Kong court has for the first time granted recognition and assistance to bankruptcy administrators appointed for a company in insolvency proceedings in mainland China ("Mainland").
The Decision will have a significant impact on insolvency cases spanning the Mainland and Hong Kong (and elsewhere). Given the size of the Mainland economy and the international scope of many Mainland enterprises, we can expect to see an increasing number of applications for recognition and assistance by Mainland insolvency officeholders in Hong Kong and other jurisdictions.
In connection with the Decision, however, the Hong Kong court signalled that it views cross-jurisdiction recognition as a "two way street"–namely that one would expect Mainland courts to also recognise and provide assistance to non-Mainland insolvency proceedings given the transnational business conducted by many Mainland businesses and Article 5 of the Enterprise Bankruptcy Law which envisages the possibility of recognition of foreign liquidations by Mainland courts. How the Mainland courts will approach applications for recognition and assistance by foreign liquidators and more generally how receptive they are to the principle of modified universalism is an open question.
Stay tuned for further developments as the Hong Kong court reacts to how Mainland courts approach these issues in the future.
It is clear that the Hong Kong court has the power to wind up a foreign incorporated company under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. However, the difficulty is that generally the so called three core requirements must be satisfied namely:
Further, winding up petition proceedings are generally expensive and time-consuming.
Therefore, a generally cheaper and quicker alternative is for a company to enter into foreign insolvency proceedings and then to seek the recognition and assistance of the Hong Kong courts.
While Hong Kong is not a party to the UNCITRAL Model Law on cross border insolvency and Hong Kong's insolvency legislation does not contain provisions dealing with cross-border insolvency, the Hong Kong court has made clear in its 2014 decision of Joint Official Liquidators of A Company v B & C that it has power to recognise and grant assistance to foreign insolvency proceedings.
The underlying principle is the "principle of modified universalism" derived from the English case law, which in general terms requires the courts to, so far as is consistent with justice and public policy, cooperate with the courts in the country of the principal liquidation to ensure that all the company's assets are distributed to its creditors under a single system of distribution. This is to ensure fairness between creditors such that no one should have an advantage because such a creditor happens to live in a jurisdiction where there are more assets or fewer creditors.
Since the 2014 decision, the Hong Kong court has received a large number of applications for recognition and assistance. Many of these applications concern insolvency proceedings in common law jurisdictions such as the Cayman Islands, Bermuda and the British Virgin Islands as many Hong Kong listed companies are incorporated in one of those jurisdictions. In the decision of Re Mr Kaoru Takamatsu in 2019, the court has also recognised and provided assistance to a trustee in bankruptcy appointed in Japan, a civil law jurisdiction.
The law is well-settled that the Hong Kong court will recognise foreign insolvency proceedings that comply with the following criteria:
Upon recognition of the foreign insolvency proceedings, the court will grant assistance to the foreign officeholders by applying Hong Kong insolvency law. However, there are limits to the power that can be granted to the foreign officeholders as follows:
As the law is well-settled and there has been an increasing number of applications for recognition and assistance, the court has developed a standard-form recognition order and such applications may be granted quickly on a written application.
The company involved in the Decision is CEFC Shanghai International Group Limited (the "Company") which is a Mainland-incorporated investment holding company and is part of a conglomerate whose business includes capital financing, petroleum refining and infrastructure. Pursuant to an order of the Shanghai No 3 Intermediate People's Court, the Company went into insolvent liquidation and administrators were appointed ("Administrators") under the Enterprise Bankruptcy Law ("EBL"). The Company has substantial assets in Hong Kong which include a claim against its Hong Kong subsidiary, amounting to some HK$7.2bn "(HK Receivable").
After their appointment, the Administrators discovered that a creditor of the Company obtained a default judgment against the Company in Hong Kong. To enforce the judgment, the creditor obtained a garnishee order nisi in respect of the HK Receivable. In order to prevent the creditor from obtaining a garnishee order absolute, the Administrators made an urgent application to the Hong Kong court for recognition and assistance, supported by a letter of request from the Shanghai court.
The court found that the case satisfies the relevant principles for making an order of recognition and assistance:
Although the court held that recognition and assistance do not require reciprocity to be demonstrated, the court noted that the foreign jurisdiction under consideration should also aim to promote a single bankruptcy when faced with the insolvency of a company with assets and creditors in jurisdictions other than its own. Otherwise multiple liquidations would need to be undertaken in different jurisdictions undermining the underlying rationale for providing recognition and assistance. The court noted that while it is not clear at present what attitude the Mainland courts will take under the EBL to foreign liquidations, it is clear that Article 5 of the EBL envisages that there will be recognition of foreign liquidators.
Consistent with the court's standard form recognition order, the court also imposed a stay on all the proceedings against the Company in Hong Kong, including the garnishee proceedings. The court held that such stay should be imposed even though the creditor has obtained the garnishee order nisi in Hong Kong before the commencement of the Mainland liquidation. Such an approach would generally be consistent with the principles that bankruptcy proceedings should have universal application to ensure fairness between creditors.
There have been discussions in Hong Kong about potential reforms to its insolvency and restructuring regime for more than 20 years. However, while other jurisdictions such as Singapore have made significant changes to its insolvency and restructuring regime in order to promote itself as an international centre for restructuring, no significant reforms have so far been implemented in Hong Kong. It has recently been reported in the press that the Hong Kong government intends to hold a new round of consultation in the coming months and to introduce a draft corporate rescue bill to the Legislative Council in the first half of the 2020-21 legislative session. This is welcome news to the insolvency and restructuring community given the long history of the introduction of the corporate rescue bill since the Law Reform Commission's first recommendation in 1996 before the onset of the Asian financial crisis, and the failure to pass the same in subsequent years despite multiple modifications in 2003 through the SARS outbreak and 2008 through the global financial crisis. While details of the draft bill have not been published as at the date of this publication, they will likely include a statutory corporate rescue procedure with a statutory moratorium on all legal actions and proceedings against a company for a certain period while an independent third party (known as the provisional supervisor) is appointed to take temporary control of the company, consider options for rescuing the company and prepare proposals for a voluntary arrangement within a specified period for creditors' approval. A reform to the law is urgently needed especially in light of the significant economic impact brought by the Hong Kong anti-government protests, the US/China trade war and the coronavirus outbreak.
Against this background of Hong Kong's inertia in reforming its insolvency and restructuring regime, there is an active body of case law from the Hong Kong court on recognition and assistance of foreign insolvency proceedings. The Decision marks a milestone in the development of such case law. Given the size of the Mainland economy and that Mainland enterprises increasingly have assets located overseas, we can expect to see an increasing number of applications for recognition and assistance by Mainland insolvency officeholders in Hong Kong and other jurisdictions. As noted in the Decision, there are in recent years at least two cases of recognition of Mainland insolvency proceedings in the US under Chapter 15 of the United States Bankruptcy Code. Mainland officeholders may have greater ease of access to assets of Mainland enterprises located outside of the Mainland. On the other hand, while Article 5 of the EBL clearly envisages the possibility of recognition of foreign liquidators by the Mainland courts, it remains to be seen how the Mainland courts will approach applications for recognition and assistance by foreign liquidators and more generally how receptive they are to the principle of modified universalism. As noted at the end of the Decision, this will in turn have a knock on effect on the extent of assistance provided by the Hong Kong court to Mainland administrators.
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