Connecting PRC Insolvency Proceedings with the Hong Kong Assets

In December 2019, the Hong Kong Court delivered a groundbreaking decision in the case of Re CEFC Shanghai International Group Limited [2020] HKCFI 167.  The Hong Kong Court, for the very first time, granted a common law recognition order for the appointment of PRC Court-appointed administrators of a Mainland company in liquidation (the “Company”).  This is a remarkable development because although the possibility of the Hong Kong Court making such order has been an increasingly popular topic as more troubled companies have assets in both the Mainland and Hong Kong, the City’s Court had never made such order before.

Background

In November 2019, Mainland administrators (who have similar functions as Hong Kong liquidators) were appointed by the Shanghai Court over the Company.  Amongst the Company’s assets, there is a claim against its Hong Kong subsidiary, Shanghai Huaxin Group (Hong Kong) Limited, for receivables of over HK$7 billion (the “HK Receivable”).  Following their appointment, it came to the Company’s administrators’ knowledge that a creditor had previously obtained a default judgment against the Company and also a garnishee order nisi in respect of the HK Receivable.

To prevent the creditor from obtaining a garnishee order absolute, the administrators made an urgent application to the Hong Kong Court for recognition and assistance (including, specifically, an order to stay the garnishee proceedings). In support of the recognition application, the Shanghai Court also issued a letter of request to maintain the principle of collectivity and pari passu distribution.  

The Hong Kong Court held that the following necessary criteria for recognition and assistance were satisfied:-

1. The Company’s PRC liquidation is a collective insolvency proceeding, as demonstrated by the liquidation proceeding’s encompassing all of the debtor’s assets pursuant to the relevant PRC insolvency law (it is generally desirable that all debtor’s assets are taken into the foreign liquidators’ control); and
2. The Company’s liquidation was opened in the Company’s place of incorporation, i.e. Mainland China.

The Court also noted that if the Company were in liquidation in Hong Kong, no garnishee proceedings regarding the Company’s receivables could continue, whether the garnishee order nisi was obtained before or after the liquidation.  Staying the garnishee proceedings would be consistent with the principles underlying the recognition of foreign insolvency proceedings.  Accordingly, the Court granted the recognition and assistance order which, amongst other things, recognised the PRC liquidation and stayed the garnishee proceedings in Hong Kong, effectively preserving the HK Receivable for the wider interest of the general creditors.

Nevertheless, it remains to be seen whether the principles and considerations taken into account by the Hong Kong Court in this decision will be applicable to all similar cases because at the end of the decision, the Court added that the extent to which greater assistance should be provided to Mainland administrators in the future will have to be decided on a case by case basis and the development of recognition is likely to be influenced by the extent to which the Court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.  Whilst there is clearly a great room for development of the law on this subject, the decision is undoubtedly a good start.