Keeping the door open: Hong Kong Court reaffirms commitment to mutual recognition of insolvency proceedings with Mainland China

Two recent cases, Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340 (the "GOCC Case") and Re Trinity International Brands Limited [2023] HKCFI 1581 (the "Trinity Case"), reaffirm the commitment of the Hong Kong Court to cooperating with the Mainland Court in terms of mutual recognition and assistance of insolvency proceedings.

These cases show that the Hong Kong Court will look at the Mainland-Hong Kong mutual recognition arrangement for insolvency proceedings (the "Cooperation Mechanism", which we summarised here), regardless of whether the case falls within its scope (as in the Trinity Case) or outside its scope (as in the GOCC Case).

The GOCC Case: from Mainland China to Hong Kong

Background

The administrator appointed by the Guangzhou Court applied to the Hong Kong Court for recognition and assistance of Mainland insolvency proceedings of Guangdong Overseas Construction Corporation ("GOCC"). The purpose was to take control of the shares held by GOCC in a Hong Kong company. To support the application, the administrator had obtained a letter of request from the Guangzhou Court.

Jurisdiction Conferred by Common Law, not by Cooperation Mechanism

The Cooperation Mechanism did not apply in the GOCC Case because Guangzhou is not one of the designated pilot areas, i.e. Shanghai, Xiamen and Shenzhen (the "Pilot Area(s)"). That said, a Mainland court outside the Pilot Areas may still request for assistance of the Hong Kong Court because:

1. the jurisdiction of the Hong Kong Court to recognise and assist insolvency proceedings in another jurisdiction derives from common law (citing Re CEFC Shanghai International Group Ltd [2020] HKCFI 16, which we considered here). The Cooperation Mechanism and the Practical Guide issued by the Department of Justice of Hong Kong merely prescribe the procedure and the manner of making an recognition application; and
2. reciprocity is not a requirement for recognition and assistance under common law, and the issue of whether it is appropriate for a court outside the Pilot Areas to request for such assistance is a matter for the Supreme People's Court of the PRC (the "SPC") (citing Re HNA Group Co., Ltd [2021] HKCFI 2897, which we discussed here).

Having said that, as a matter of practice and for consistency, it is "desirable" (as Linda Chan J explained in the GOCC Case) for the applicant to follow the Practical Guide when making the application even though the Mainland Court concerned is outside the Pilot Areas.

Summary of Approach

Linda Chan J summarised the criteria for the Court to grant recognition and assistance of foreign insolvency proceedings as follows:

1. the foreign insolvency proceedings are “collective insolvency proceedings”, which can include proceedings opened in a civil law jurisdiction, such as Mainland China;
2. the foreign insolvency proceedings are conducted in the company’s centre of main interest (“COMI”) (we discussed here the Hong Kong Court’s trend to embrace a COMI-based approach);
3. the assistance is necessary for administrating the foreign winding up or performing the officeholder’s functions; and
4. the order sought is consistent with the substantive law and public policy of the assisting court.

Applying these criteria, Linda Chan J considered the GOCC Case a proper one to provide recognition and assistance as sought because:

• the insolvency proceedings of GOCC were collective proceedings under the supervision of the Guangzhou Court;
• they were conducted in the Mainland as GOCC's place of incorporation and its COMI;
• the assistance sought was necessary given GOCC's valuable assets in Hong Kong, which the administrator had a duty to take control of; and
• the order sought was consistent with the substantive law and public policy of Hong Kong.

The Trinity Case: from Hong Kong to Mainland China

Background

The Hong Kong liquidators of Trinity International Brands Limited ("Trinity") applied to the Hong Kong Court for a letter of request to the Shanghai Court. They sought recognition in Shanghai of Trinity's liquidation and assistance in taking control of Trinity's Shanghai subsidiary ("Trinity Shanghai"), whose management had been withholding its information and transferring assets away.

Summary of Approach

The power of the Hong Kong Court to issue a letter of request also derives from common law. But, in contrast to the GOCC Case, the Cooperation Mechanism applied in the Trinity Case because Shanghai is one of the Pilot Areas.

Linda Chan J summarised the criteria for the Court to grant a letter of request as follows:

1. the requirements under the Cooperation Mechanism are satisfied (the "Stipulated Requirements"); and
2. the recognition and assistance sought is necessary for the liquidators to carry out their duties in the Mainland (the "Necessity Requirement").

The liquidators' duties to be performed are also relevant. They should include in the letter of request a description of their duties under Hong Kong Law, which cannot go beyond the scope of the duties specified in paragraph 14 of the SPC Opinion.

In the Trinity Case, the Hong Kong Court had no difficulty issuing a letter of request to the Shanghai Court because:

• the application complied with the Stipulated Requirements, i.e. (i) the liquidators made the application in Hong Kong insolvency proceedings; (ii) the recognition was sought from the a Court in a Pilot Area (the Shanghai Court); (iii) the order sought was to recognise the liquidators' office, and grant assistance in the discharge of their duties; (iv) Trinity's COMI was Hong Kong; and (v) Trinity's principal asset, i.e. the 100% equity in Trinity Shanghai, was located in the Pilot Area;
• the liquidators had been unable to take control of Trinity Shanghai, which is a common example to satisfy the Necessity Requirement; and
• the terms of the letter of request properly specified the liquidators' duties.

The Trinity Case is yet another one in the long lines of cases where the Hong Kong Court issued letters of request under the Cooperation Mechanism. Previous cases include Re Ozner Water International Holding Limited [2022] HKCFI 363 (which we considered here) and Re Samson Paper Co Ltd [2021] HKCFI 2151 (which we discussed here).

Comments

The two cases provide comfort and certainty to insolvency practitioners, both in the Mainland and Hong Kong.

The GOCC Case also made clear that, the Hong Kong Court’s power to recognise and assist Mainland insolvency proceedings is not restricted to proceedings in the Pilot Areas under the Cooperation Mechanism. It also confirmed the continued relevance of case law on recognition that has developed in Hong Kong in the past years.

For more information, please contact Gareth Thomas, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, or your usual Herbert Smith Freehills contact.