corporate restructuring

[Judgment] First Recognition under the Mainland – HKSAR Arrangement for Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings

January 4, 2022

On 15 December 2021, the Shenzhen Intermediate People’s Court (Shenzhen Court), pursuant to the Enterprise Bankruptcy Law of the People’s Republic of China and the Opinions of the Supreme People’s Court on Implementing the Pilot Arrangement for Recognition of and Assistance to Bankruptcy Proceedings in the Hong Kong Special Administrative Region (Opinions), issued civil ruling (2021) 粤03认港破1号 (2021) Yue 03 Ren Gang Po No. 1 to recognise:

(1) the creditors’ voluntary winding up of Samson Paper Company Limited (Company) in Hong Kong SAR; and

(2) Lai Kar Yan (Derek) and Ho Kwok Leung Glen of Deloitte Touche Tohmatsu as liquidators of the Company (Liquidators).

The ruling also allows the Liquidators to perform the following duties in the Mainland:

(1) take over the Company’s assets, seals, books, documents and other materials;

(2) decide the Company’s internal management affairs;

(3) decide the daily expenses and other necessary expenses of the Company; and

(4) manage and dispose of the Company’s assets.

Nevertheless, the Liquidators must report to the people’s court for approval separately if any of their acts to dispose of the Company’s assets during the performance of duties in the Mainland has a material impact on the rights of the Company’s creditors.

Background

The Company appointed the Liquidators and commenced creditors’ voluntary winding up in Hong Kong SAR in August 2021. Its key assets in the Mainland include equity investment, real estate and accounts receivable. In particular, the Company has, among others, a wholly-owned subsidiary in Shenzhen (Shenzhen Subsidiary) which is operating as normal.

Following application by the Liquidators, the Hong Kong High Court issued a letter of request for judicial assistance under the Pilot Measures in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative to the Shenzhen Court to request that it act in aid of the proceedings in Hong Kong SAR and in aid of the Liquidators. The Liquidators accordingly submitted an application to the Shenzhen Court on 30 August 2021.

Reasoning

Among others, the Shenzhen Court found:

The Shenzhen Subsidiary is registered in Shenzhen and has its place of business in Shenzhen. The Company holds the entire equity of the Shenzhen Subsidiary, and this equity holding is the Company’s main asset in the Mainland. Therefore, the Shenzhen Court has jurisdiction of the application.

The Company’s centre of main interest (COMI) is in Hong Kong SAR because it was incorporated in Hong Kong SAR in 1981, has been engaging in paper business for over 40 years in Hong Kong SAR, and has substantial assets in Hong Kong SAR. COMI is a key eligibility requirement under the Mainland-Hong Kong SAR arrangement. The appointment of the Liquidators has gone through appropriate procedures pursuant to relevant legislation of Hong Kong SAR.

The Liquidators applied for assistance in their performance of duties in the Mainland, specifically the four items mentioned above. Those items have been authorized by the Company’s creditors’ meeting and are in compliance with relevant legislation of Hong Kong SAR, the Enterprise Bankruptcy Law and the Opinions.

Finally, the application of the Liquidators is not against the basic principles of Mainland laws or any public order or good moral in the Mainland.

Commentary

This is the first recognition granted by a designated court in the Mainland after the Record of Meeting of the Supreme People’s Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region was signed in May 2021.

This successful attempt has shed more light on how the arrangement between the Mainland and Hong Kong SAR may work in practice and may also provide guidance for future applications by Hong Kong liquidators who need to perform duties in the Mainland so as to better preserve the assets of companies and protect creditors’ rights. This is particularly meaningful as economic integration continues to deepen between the Mainland and Hong Kong SAR, in particular in the Greater Bay Area.

More broadly speaking, the effective implementation of the Mainland – Hong Kong SAR arrangement may serve to boost the confidence of overseas investors and lenders in terms of investing in the Mainland as they may feel they are now better protected when it comes to market exit and company rescue.

ABLI is grateful to be provided with a copy of the ruling of the Shenzhen Court for this update by Mr Justice Jonathan Harris who issued the letter of request referred to above.

Whilst every effort has been made to ensure that the information contained in this update is correct, the Asian Business Law Institute disclaims all liability and responsibility for any error or omission in this update, and in respect of anything, or the consequences of anything, done or omitted to be done by any person in reliance, whether wholly or partially, upon the whole or any part of the contents of this update.