MUTUAL RECOGNITION OF INSOLVENCY IN HONG KONG AND MAINLAND CHINA – FIRST STEPS

On 14 May 2021, the Vice-President of the Supreme People's Court of the PRC and the Hong Kong Secretary for Justice signed a brief Record of Meeting, setting out a consensus on the mutual recognition of and assistance to insolvency proceedings between the Mainland China and Hong Kong.

The new arrangement will apply first to certain pilot areas in Mainland China, namely Shanghai, Xiamen and Shenzhen. There are plans to progressively expand the scope of the pilot areas.

Recognition of Hong Kong insolvency proceedings in Mainland China

Under the new arrangement, a Hong Kong liquidator or provisional liquidator may apply to the relevant Intermediate People’s Court in a pilot area for recognition of "collective insolvency proceedings" commenced under the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Companies Ordinance. These include:

• compulsory winding-up;
• creditors’ voluntary winding-up;
• scheme of arrangement;
• recognition of the liquidator's or provisional liquidator's office; and
• grant of assistance for discharge of the liquidator's or provisional liquidator's duties.

The new arrangement will apply to proceedings in which the debtor company's centre of main interests (COMI) is in Hong Kong. While COMI generally means the place of incorporation, the Mainland courts are entitled to take into account other factors including the locations of the principal office, business and assets of the subject company.

Recognition of Mainland insolvency proceedings in Hong Kong

We previously wrote about Re CEFC Shanghai and Re Shenzhen Everich, where the Hong Kong Court granted recognition and assistance to Mainland administrators on the basis of the common law principles of recognition of foreign insolvency proceedings. The new arrangement will formalise this position, in that an administrator in Mainland bankruptcy proceedings may apply to the Hong Kong High Court for recognition of proceedings under the PRC Enterprise Bankruptcy Law. These include:

• bankruptcy liquidation
• reorganisation proceedings
• compromise proceedings,
• recognition of the administrator's office; and
• grant of assistance for discharge of his duties as an administrator.

Insight

The application of the new arrangement to "collective insolvency proceedings" echoes common law recognition principles and is consistent with the underlying rationale for the power of recognition, i.e. modified universalism. The new arrangement therefore excludes solvent proceedings, e.g. members' voluntary liquidation. Whether there will be further Mainland-Hong Kong cooperation in this regard remains to be seen.

The use of the COMI test also opens the door to recognition of Hong Kong insolvency proceedings relating to companies incorporated offshore. This is highly practical and welcome – most HKEx-listed companies are not incorporated in Hong Kong, but may have their COMIs in Hong Kong. Insolvency proceedings relating to these companies form a significant portion of insolvency proceedings in Hong Kong.

Further, the new arrangement expressly contemplates mutual recognition of debt restructurings and business reorganisations. This potentially means that it is possible for Mainland creditors to be crammed down by a Hong Kong scheme of arrangement (and vice versa). This may in turn encourage more use of this procedure.

Cooperation between the Mainland and Hong Kong courts continue to strengthen. It will also be of interest to see whether there will be further arrangements for a Hong Kong provisional supervision or voluntary arrangement envisaged under the Companies (Corporate Rescue) Bill – if that is passed – to be recognised in Mainland China.