25 March, 2020
In the first ever application of its kind from administrators of a company in liquidation in the PRC, the Hong Kong Court of First Instance in Re CEFC Shanghai International Group Limited (In Liquidation in the Mainland of the People’s Republic of China) [2020] HKCFI 167 recognised PRC liquidation proceedings and granted assistance to PRC administrators, including a stay of proceedings against the insolvent company in Hong Kong.
Background
CEFC Shanghai International Group Limited (the “Company”) is an investment holding company incorporated in the PRC. In November 2019, the Shanghai No. 3 Intermediate People’s Court ordered the Company to be put into insolvent liquidation and appointed PRC administrators (the “PRC Administrators”).
One of the Company’s primary assets in Hong Kong was a receivable of approximately HKD7.2 billion due from its subsidiary, Shanghai Huaxin Group (Hong Kong) Limited (the “HK Receivable”), which was subject to a garnishee order nisi obtained by a Hong Kong judgment creditor prior to the commencement of the PRC liquidation proceedings.
In order to prevent the judgment creditor from obtaining a garnishee order absolute, the PRC Administrators applied to the Hong Kong courts for recognition of their appointment and assistance on the back of a letter of request issued by the Shanghai Court.
Hong Kong Court’s recognition of PRC liquidation proceedings
At the outset, Mr Justice Harris confirmed that the well-settled principle of recognising foreign insolvency proceedings that are (i) collective insolvency proceedings and (ii) opened in the company’s country of incorporation applies equally to insolvency proceedings commenced in civil law jurisdictions.
Harris J went on to conclude that the Company’s liquidation in Mainland China was a collective insolvency proceeding opened in its country of incorporation considering that it encompassed the entirety of the Company’s assets and that the PRC and Hong Kong insolvency regimes shared marked similarities in respect of the powers of liquidators, stay on creditor action and the requirement of pari passu distribution of assets. He therefore conferred on the PRC Administrators the conventional powers of assistance sought, including a stay of proceedings against the Company in Hong Kong.
However, Harris J remarked, as obiter comment, that whether greater assistance would be granted by the Hong Kong Courts to PRC liquidators would likely be influenced by the extent to which the PRC system promotes “a unitary approach to transnational insolvencies” in the same way as Hong Kong does. He noted that whilst Article 5 of the PRC Enterprise Bankruptcy Law (the “EBL”) envisages that there will be recognition of foreign insolvency proceedings, the PRC courts have yet to recognise a foreign insolvency proceeding pursuant to Article 5 of the EBL.
A garnishee order nisi preceding a foreign liquidation
Turning to the garnishee order, Harris J refused to make the garnishee order nisi absolute, thereby departing from the maligned House of Lords’ decision in Galbraith v Grimshaw [1910] AC 508, which held that a judgment creditor who obtained an English garnishee order nisi prior to the commencement of Scottish bankruptcy proceedings would prevail over the Scottish trustee in bankruptcy. In particular, Harris J concluded that Galbraith v Grimshaw was “inconsistent with contemporary cross border insolvency law and its reasoning is inapplicable to modern common law cross-border insolvency assistance” and that it would be more desirable for all of the Company’s assets, including its receivables, to be under of the control of the Administrators.
Conclusion
The decision provides welcome clarity on whether PRC liquidation proceedings may be deemed as foreign insolvency proceedings for the purposes of seeking recognition and assistance from the Hong Kong courts.
What is equally important is the fact that this decision leaves open the possibility of greater assistance being afforded to PRC liquidators if the Hong Kong courts are satisfied that their “unitary approach to transnational insolvencies” is shared by the PRC courts.
There is therefore much hope that this case signifies the beginning of mutual recognition of liquidations by the courts in both Hong Kong and the PRC, which would provide a badly-needed solution to the obstacles commonly faced by Hong Kong liquidators when seeking to recover assets of companies in liquidation that have onshore subsidiaries or have conducted business with PRC entities. At present, the lack of standing in the PRC courts, as well as the absence of cooperation from the legal representatives of a company’s onshore subsidiaries often pose difficulties for Hong Kong liquidators who wish to assume control over the management and affairs of such onshore subsidiaries or bring proceedings in the PRC courts in the name of the onshore subsidiaries to recover company assets misappropriated from them.
For further information, please contact:
Melvin Sng, Partner, Head of Dispute Resolution, Asia, Linklaters
melvin.sng@linklaters.com
