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Research blog: Cross-border insolvency between mainland China and Hong Kong: what’s ahead?

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Cross-border insolvency (CBI) is becoming increasingly important in the People’s Republic of China (PRC). In 2021, the Supreme People’s Court of PRC and the Hong Kong Government entered into the Cooperation Mechanism to further how CBI cases are handled. This blog will first briefly focus on the CBI between Mainland China (China) and Hong Kong S.A.R. (HK) before enacting the Cooperation Mechanism. Second, it will analyse the main contents, the gaps and the future developments of the Cooperation Mechanism.  

The Cooperation Mechanism consists of (i) an arrangement – the Record of Meeting on Mutual Recognition of the Assistance to Bankruptcy (Insolvency) Proceedings between the Court of the Mainland and the Hong Kong S.A.R. –, (ii) a guiding opinion by the Supreme People’s Court (SPC Opinion), and (iii) a practical guide by the Hong Kong Government (HK Practical Guide). Taking inspiration from the United Nations Commission on International Trade Law Model Law on Cross-border Insolvency (UNCITRAL MLCBI) and the European Insolvency Regulation (848/2015) (EIR 2015), the Cooperation Mechanism not only admits the coexistence between main and secondary insolvency proceedings, it also introduces the concept of centre of main interest (‘COMI’) and furthers cooperation and communication between courts as well as between courts and foreign insolvency administrators/liquidators.

The opposite approach adopted by Mainland China and Hong Kong S.A.R. on CBI until 2021

Until 2006, there was a lack of provisions for CBI in China. The gap was filled by the Intermediate People’s Courts which initially adopted territorialism (Liwan Construction v. Euro-America China; BCCI (Shenzhen branch)) and later adhered to universalism (B&T Ceramic Group S.r.l.; Guangdong International Trust and Investment Corporation (GITIC)). In this change of route, Italy has played a crucial role. The first foreign insolvency proceeding (formally) recognized in China was opened by the Milan Court in 1997 (No. 951/1997).

This recognition together with other factors (including e.g., the entry of PRC into the World Trade Organizationled China to adopt Art. 5 on CBI in the Enterprise Bankruptcy Law, 2006 (‘EBL 2006’). Apart from Art. 5.1 on the outbound effects, Art. 5.2 on the inbound effects is much more interesting. At a first glance, China seems to recognize the insolvency proceedings opened in another country

Unfortunately, because the provision refers to the word ‘country’, it prevents the recognition of insolvency procedures opened in HK. Furthermore, the additional conditions (e.g., the international treaties or the (de-facto) reciprocity and the broad concept of public policy) prevent the recognition of foreign insolvency procedures: this is the so-called concept of masked territoriality. 

Like China, HK has not transposed the UNCITRAL MLCBI. Perhaps this is because it is a special administrative region or, according to some scholars, because non-adoption is a consequence of a wait-and-see approach. HK has neither developed a statutory corporate rescue regime or a statutory role on CBI. This distinguishes HK, the world’s third international financial centre, from the UK and the US. This CBI gap has been filled by common law. As Judge Harris stated in Re A Company v. B., HK adheres to universalism. A foreign insolvency proceeding is recognised in HK if it is opened in a company’s place of incorporation (Re A Company v. B.) and constitutes a collective insolvency process (Re Joint Liquidators of Supreme Tycoon Ltd.). Since Re GITIC, HK has recognized Chinese insolvency proceedings and the assistance to Chinese administrators has been granted since Re CEFC Shanghai International Group Ltd. This last case, together with other factors (e.g. Paper 22nd June 2020 by the HK Department of Justice), paves the way for signing of the CBI arrangement because it promotes integration and cooperation between the two economies through the One Country, Two Systems principle and – as Justice  Harris has declared – it underlines the urgent need to adopt a unitary approach to transnational insolvencies. 

The Cooperation Mechanism: the long-awaited step forward

In 2021, after lengthy negotiations and under Art. 95 of the HK Basic Law, China and HK entered into the Cooperation MechanismTaking inspiration from the UNCITRAL MLCBI and EIR 2015, the Cooperation Mechanism (in particular, the SPC Opinion) introduces some provisions on the coexistence between main and secondary insolvency proceedings in line with modified universalism, a specific procedure for recognition, cooperation and communication between the courts as well as between the courts and foreign administrators/liquidators, the public policy exception and the COMI concept to determine the main proceeding. 

The latter merits a closer examination. Inspired by Art. 3 of the EIR 2015 and CJEU judgments, Art. 4 of the SPC Opinion sets up a rebuttable presumption, lists some of the key elements (e.g., place of the principal business) to rebut the presumption, and defines a continuing period of (at least) six months (the look-back period) in order to determine if COMI of the insolvent company is in HK. It is not mentioned whether the ascertainability of third parties could be a result of an SPC choice. The HK Practical Guide does not provide any provision on COMI. This gap is filled by the HK High Court which: 1) confirms the adoption of COMI toguarantee (through a company’s place of incorporation) legal certainty, and (through a company’s nerve centre) prevent a forum shopping, and 2) does not provide a look-back period (Re Global Brands Holding Ltd.).

A milestone, albeit not an endpoint

The Cooperation Mechanism marks an important milestone for CBI, albeit not an endpoint. It cannot be deemed an endpoint for the following gaps: 

  • the cooperation and the communication is merely announced. This approach, in line with the UNCITRAL MLCBI but not with the EIR 2015, does not set up any legal obligation between parties (e.g. administrators or liquidators, Courts); 
  • unlike EIR 2015, there are no statutory rules on the groups of company insolvency; 
  • there is no provision about when the secondary procedure can be opened (could the establishment fill this gap?); 
  • contrary to the UNCITRAL MLCBI and the EIR 2015, in the public policy exception lacks the expression “manifestly contrary” to limit its application; 
  • the COMI concept is not yet clearly defined; and 
  • last but not least, it cannot be applied in the entire PRC territory (it is limited to the designated Intermediate People’s Court of the pilot areas: Shenzhen, Shanghai, Xiamen). 

While waiting for an upcoming recast to close the aforementioned gaps, it is important to note that the Cooperation Mechanism seizes a central role as due to COVID-19, HK and China are dealing with two emergencies: the increasing number of insolvency proceedings, and the decrease of foreign direct investments. Moreover, the announcement of the Greater Bay Area could pave the way for the adoption of an interregional arrangement among the PRC’s jurisdictions and could be the stepping stone for China to sign CBI arrangements/international treaties as well as for both HK/China to reform their insolvency laws.

*This research blog was written by Marta Cirillo, PhD Candidate at the University of Trento.

About BWILC and the PhD Workshop

This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.

Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations.

For information about the next PhD Workshop, click here.