18 May 2021
Mutual Recognition of and Assistance to Insolvency Proceedings in Mainland China and the Hong Kong Special Administrative Region
According to the Government of the Hong Kong Special Administrative Region ("HKSAR"), the Secretary for Justice, Ms Teresa Cheng, SC, and Vice-president of the Supreme People's Court ("SPC") Mr Yang Wanming signed the record of meeting concerning mutual recognition of and assistance to insolvency proceedings between the courts of the Mainland and the HKSAR on 14 May 2021. Under this agreed mechanism, liquidators from the HKSAR may apply to Mainland courts for recognition of insolvency proceedings in the HKSAR, while bankruptcy administrators from the Mainland may apply to the High Court in the HKSAR for recognition of bankruptcy proceedings in the Mainland.
Following the signing of this record of meeting, the SPC, in a document titled Opinions of the Supreme People's Court on the Pilot Work of Recognizing and Assisting Bankruptcy Proceedings in the Hong Kong Special Administrative Region ("Opinions"), sets out detailed rules on the recognition of, and assistance to, bankruptcy proceedings in the HKSAR by people's courts.
According to the Opinions, intermediate people's courts in Shanghai, Xiamen and Shenzhen have been designated as "pilot courts" for this work. It is believed that the three locations are chosen because of a relatively large presence of Hong Kong businesses there and the prior experiences of the relevant courts in relevant cases. A liquidator or provisional liquidator in corporate insolvency proceedings in the HKSAR may apply to a pilot court for recognition of compulsory winding-up, creditors' voluntary winding-up and corporate debt restructuring proceedings as sanctioned by the HKSAR High Court according to HKSAR law. Such an application is, however, subject to several conditions, one of which is the centre of main interest ("COMI") test. Specifically, the debtor's COMI must be in the HKSAR for at least six months.
Once recognition of, and assistance to, the proceedings in the HKSAR are granted, the debtor's repayment to an individual creditor will be invalid, pending civil litigation or arbitration involving the debtor will be stayed until the Hong Kong administrator has taken over the debtor's assets, and the preservation measures or enforcement measures taken by the Mainland court against the debtor's assets shall be lifted or stayed.
While the Hong Kong administrator is allowed to perform a wide range of duties after recognition and assistance are granted, separate court approvals must be sought and obtained if the performance of duties involves waiving property rights, instituting property guarantees, borrowing money, transferring assets out of the Mainland or disposing of assets in other ways that will have a material impact on the interests of creditors.
In terms of the distribution of assets, after the debtor's bankruptcy assets in the Mainland have been used to pay off debts in the Mainland that enjoy priority in accordance with Mainland laws, the remaining assets shall be distributed and used for repayment according to the bankruptcy proceedings in the HKSAR as long as creditors of the same class are treated equally.
The Opinions also includes a number of provisions on the procedures and materials required for an application for recognition of, and assistance to, bankruptcy proceedings in the HKSAR.
Meanwhile, the HKSAR Government has issued a Practical Guide, outlining the procedures by which a Mainland bankruptcy administrator may apply to the High Court for recognition and assistance. The Practical Guide includes templates of application documents that Mainland bankruptcy administrators may refer to in their applications.
photo credit: Jerome Favre/EPA