Latest developments regarding Mainland/Hong Kong cross-border and offshore insolvency proceedings

Mutual recognition and assistance in cross-border insolvency proceedings between Mainland and Hong Kong

14 May 2021 saw the Mainland and Hong Kong sign a “meeting record” signifying the long-awaited implementation of an official arrangement regarding mutual recognition and assistance in insolvency proceedings between the two jurisdictions.  

Whilst the relevant principles and procedural guidelines regarding Mainland officeholders’ application for recognition and assistance in Hong Kong can be seen in the recent decisions in Re CEFC Shanghai International Group Limited [2020] HKCFI 167 and Re Shenzhen Everich Supply Chain Co, Ltd [2020] HKCFI 965, the Supreme People’s Court’s Opinion on the arrangement  serves as a very helpful primary guideline on how Hong Kong liquidators may seek to be recognised and assisted by the Mainland courts.  We summarise below some of the points set out in the Opinion:

  1. The pilot cities to which the arrangement will apply currently are Shenzhen, Shanghai and Xiamen;
  2. In addition to compulsory winding up and creditors’ voluntary winding up, Hong Kong insolvency proceedings covered by the arrangement includes schemes of arrangement;
  3. The “centre of main interests” of the debtor company should be Hong Kong and should have remained so continuously for at least 6 months. Whilst “centre of main interests” generally means the place of incorporation, the Mainland courts shall also consider other factors such as the location of principal office, principal place of business and principal assets etc.;
  4. If the debtor company’s principal assets are in or has a place of business or a representative office in a pilot city, the Hong Kong liquidator may seek recognition and assistance in the Mainland courts;
  5. Upon receipt of the application, the Mainland courts will notify interested parties (e.g. known creditors) and announce receipt of the application in 5 days. An interested party may then submit written objections to the application within 7 days.  The Mainland courts will decide whether a hearing is needed;
  6. Upon being recognised, the Hong Kong liquidators may be empowered to perform duties similar to what would be allowed under Hong Kong law.

Notably, the Mainland courts retain a discretion under the arrangement to refuse a recognition and assistance application under certain circumstances, and one of the expressly specified situations is where “Mainland creditors are unfairly treated”. 

Re China Bozza Development Holdings Ltd [2021] HKCFI 1235

This resonates with the Hong Kong Companies Court’s recent and first ever decision to refuse granting assistance to offshore soft-touch provisional liquidators in Re China Bozza Development Holdings Ltd [2021] HKCFI 1235, where Mr Justice Harris, in a rather critical (yet arguably well-justified) tone, reminded insolvency practitioners and legal advisers of the seemingly obvious, yet often ignored, importance of safeguarding creditors’ interests.

The decision is concerned with a financially troubled company (“China Bozza”), which is incorporated in Cayman and listed in Hong Kong. Its main business operations and major assets are in the Mainland.  Shortly after seeing a winding up petition being presented against China Bozza in Hong Kong, a director presented a winding up petition against the company and the company sought appointment of soft-touch provisional liquidators (including Hong Kong based and Cayman based liquidators, collectively “JPLs”) in Cayman purportedly with a view to restructuring its debts.  The JPLs then applied for recognition and assistance in Hong Kong.

Despite making an order to recognise the JPLs, the court refused to grant the assistance they sought.  Some of the salient observations/rulings made by Mr Justice Harris are summarised below:

  1. The court observed an increasing trend of such applications being made after a petition had been presented in Hong Kong. The court is concerned that the Z-Obee technique[1] is being abused to obtain de facto moratorium of enforcement actions by creditors in Hong Kong;
  2. There is no evidence that the Board had anything one could sensibly describe as a plan to restructure the company's debt or business. “Simply referring to a possible ‘debt restructuring’ and treating the expression as a kind of magical incantation” is inadequate;
  3. Mr Justice Harris placed a great deal of emphasis on the fundamental importance of the creditors’ interests: “What a company should be advised once it appears likely that it is insolvent is that the interests of the creditors become paramount”, “Various other authorities include dictum to the effect that once a company becomes insolvent the directors' fiduciary duties are owed to the general body of creditors not to the shareholders”;
  4. The wording of the board resolution passed in relation to seeking soft-touch provisional liquidation in Cayman evidences a failure to understand to whose interests, namely the creditors, the Board need to have regard;
  5. The company and its advisers focused on trying to avoid a liquidation and retain some shareholder value, but overlooked the need for the creditors’ financial interests to take priority to other considerations;
  6. Despite the above misgivings, the JPLs should be recognised as a matter of private international law – but the court refused to grant assistance due to concerns about the way in which the JPLs are approaching this and other cases.

The decision, once again, demonstrates that the Hong Kong court can readily adopt a proactive and robust approach in dealing with cross-border insolvency cases when necessary and serves as yet another critical reminder to insolvency practitioners and lawyers of the importance of having proper regard to the relevant guiding principles in similar scenarios.

[1] A technique that had been developed in order to address the problems faced by a company attempting to restructure its debt caused by the absence in Hong Kong of any statutory mechanism, which provides for restructuring under the supervision of independent professionals.