A real possibility of benefit – New Mainland-Hong Kong mutual insolvency recognition arrangement considered

We recently wrote about the New Arrangement for mutual recognition of insolvency processes between certain pilot areas in the Mainland (i.e. Shanghai, Xiamen and Shenzhen) and Hong Kong (New Arrangement).

Re China All Access (Holdings) Ltd  (HCCW 431/2020, 21 June 2021) is an early case that sheds light on how the New Arrangement may facilitate the winding-up in Hong Kong of foreign holding companies with assets in the Mainland.

Background

The Company was incorporated in the Cayman Islands. The majority of the Company's assets were in Shenzhen.

The Petitioner sought to wind up the Company in Hong Kong. This was opposed by the Company.

It is well-established that three "core requirements" should usually be met before the Hong Kong Court will exercise its discretionary jurisdiction to wind up a company incorporated in a foreign jurisdiction (these core requirements have been discussed in our previous blog post here).

Arguments

The Company argued that the Petitioner could not demonstrate the winding up order posed "a real possibility of benefit to the petitioner", and thus failed to satisfy the second of the three requirements for the winding-up of foreign companies by the Hong Kong court.

Citing Harris J's judgment in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940 (discussed in our previous blog post here), the Company contended that liquidators appointed by Hong Kong courts (HK liquidators) would face difficulties in obtaining control of the company's assets in Shenzhen, given that the Company's group structure involved intermediate subsidiaries incorporated in British Virgin Islands (BVI subsidiaries) that separated the operating subsidiaries from the holding company.

Decision

However, Harris J rejected the Company's agreement. He observed that the situation has "moved on substantially" with the imposition of the New Arrangement. Under the New Arrangement, regardless of the place of incorporation of the company, HK liquidators could be recognized by the Mainland courts in the three jurisdictions if the company's centre of main interest had been located in Hong Kong in the six-month period before an application for recognition was made (which was indeed the case here).

Such recognition might remove the difficulties previously faced by HK liquidators in obtaining control of the Mainland-located assets of foreign companies, such that winding-up petitions of companies posed "a real possibility of benefit to the petitioner".  Specifically, given that both the Company and its BVI subsidiaries had their centres of main interest (COMI) in Hong Kong, it was likely that HK liquidators appointed over the Company and the BVI subsidiaries by the Court could be recognised in Shenzhen. The HK liquidators appointed over the BVI subsidiaries could then take steps to obtain control of the Mainland subsidiaries.

Thus, Harris J found that the second of the three core requirements for the Hong Kong court's exercise of its discretionary jurisdiction to wind up foreign companies could be satisfied – the test being one on the balance of probabilities.

However, Harris J added that, given its brevity, the present decision was "not a through consideration of the impact and implications of the New Arrangement", and that would be a matter for him to "explore in more detail on another occasion".

Insight

The decision could be significant for the winding up of foreign companies with Mainland assets.

The decision highlights how the previous evidential challenges for the second core requirement for winding up foreign companies with Mainland-located assets could potentially be overcome by the New Arrangement.

In similar cases in the future, it will likely be helpful for petitioners to put forward evidence to the extent available on the applicability of the New Arrangement to their situation, e.g. the company's assets being located in one of the pilot areas, the COMI of the company in the last six months, in support of their winding petitions.

Yet, as Harris J observed, the full impact of the New Arrangement remains to be seen and are eagerly awaited.