Authored by: Richard Hudson and Cathy Wu
The recent decision of Mr Justice Harris in Nuoxi Capital Ltd v Peking University Founder Group Co Ltd [2021] HKCFI 3817 shows the tension between the Hong Kong’s courts willingness to recognise foreign insolvency proceedings and the contractual rights of creditors who sought to enforce exclusive jurisdiction clauses in favour of Hong Kong. As is noted in the Judgment, this was the first time that these issues had arisen in Hong Kong and are issues of some importance in the context of cross-border insolvency, a subject which the Hong Kong courts are having to deal with on an increasingly frequent basis.
Background
Peking University Founder Group Co Ltd (PUFG) was an investment holding company incorporated in the Mainland. In February 2020, the Beijing No.1 Intermediate People’s Court issued an order that PUFG should commence reorganisation pursuant to the Enterprise Bankruptcy Law (Mainland Reorganisation). Administrators (Administrators) were appointed to oversee PUFG’s reorganisation.
Prior to its insolvency, PUFG had issued bonds through various BVI subsidiaries (Issuers), which were guaranteed by various Hong Kong subsidiaries (Guarantors).
In support of these bonds, PUFG had executed keepwell deeds (Keepwell Deeds) in favour of the Issuers and Guarantors (collectively the Plaintiffs). The Keepwell Deeds were governed by English law and contained exclusive jurisdiction clauses in favour of the Hong Kong courts. They also provided that PUFG must cause each of the Plaintiffs to (a) have a consolidated net worth of at least US$1 at all times, and (b) have sufficient liquidity to ensure timely payment by each of the Plaintiffs of any amounts payable by them under the bonds.
The Plaintiffs subsequently defaulted on the bonds and were wound up in their own respective jurisdictions. The Plaintiffs in turn claimed that PUFG had defaulted on its obligations to them under the Keepwell Deeds. They initially lodged claims with the Administrators in Beijing on the basis of the Keepwell Deeds, but those claims were rejected by the Administrators.
The Plaintiffs then issued proceedings against PUFG in Hong Kong (Hong Kong Actions) and requested that (a) there be an expedited trial of the Hong Kong Actions (as they were concerned funds would not be set aside for them by the Administrators in PUFG’s reorganisation) and (b) a declaration of their rights as a matter of English law (as opposed to an order that PUFG should pay them, which the Plaintiffs accepted the Hong Kong courts will not be in a position to give).
The Administrators applied to the Hong Kong Court for a stay of the Hong Kong Actions and recognition and assistance in respect of PUFG’s Beijing reorganisation proceedings, utilising a letter of request from the Beijing No.1 Intermediate People’s Court.
The Court’s Decision
Having examined the procedures utilised in PUGF’s Mainland Reorganisation, Mr. Justice Harris found that the Mainland Reorganisation was a set of “collective insolvency proceedings”, and could therefore be recognised by the Hong Kong Courts following the established common law principles.
However, Mr. Justice Harris refused to impose a stay of the Hong Kong Actions for the following reasons:-
- The Court would not deprive a party of its right to rely on an exclusive jurisdiction clause unless a compelling reason was demonstrated.
- The Administrators had not demonstrated a compelling reason for the Court to depart from the exclusive jurisdiction clause. In making this ruling, Mr. Justice Harris dismissed the Administrators’ argument that the Hong Kong Actions should be stayed because the Plaintiffs had submitted proofs of debt in the Mainland Reorganisation, ruling that there was a distinction between legal proceedings to adjudicate contractual rights and proceedings to recover a debt from a debtor subject to foreign insolvency proceedings, and the submission of a claim in foreign insolvency proceedings did not create an absolute bar to a creditor seeking adjudication of the claim in another jurisdiction unless they were trying to obtain more than they would obtain if they proved in the insolvency proceedings. The Plaintiffs only sought declaratory relief establishing their rights under English law in relation to the Keepwell Deeds: hence they only sought to invoke a purely adjudicatory jurisdiction of the Hong Kong Courts.
- Many of the issues central to the determination of the Hong Kong Actions were matters of English Law, and for a number of reasons the Hong Kong courts would be better placed than the Beijing courts to determine issues of English law. Mr. Justice Harris said that it would be “extraordinary” and would “demonstrate a startlingly lack of comity” if the Beijing No.1 Intermediate People’s Court did not give weight to a decision of the High Court of Hong Kong on a contractual dispute under English law determined pursuant to an exclusive jurisdiction clause.
Finally, Mr. Justice Harris suggested that it might be possible for the Beijing No.1 Intermediate People’s Court and the Hong Kong Court to agree a way to move forward cooperatively. He said that cross-border insolvency and assistance of foreign proceedings “does not involve a contest between courts” and instead “the courts aim to work together to implement fair and efficient insolvency processes whilst respecting the substantive law and procedure of each other’s jurisdiction”. The Judge observed that it appeared that the Administrators had not complied with the request he had made in a call over hearing to explain to the Beijing No.1 Intermediate People’s Court the difficulties created in relation to the recognition application by the Keepwell Deeds and the possibility of the two Courts co-operating to resolve these issues.
Implications
The authors take the view that Mr Justice Harris’s decision makes the best of a difficult situation. Using English and Commonwealth authority (from both the pre- and post-Handover period) he has granted the recognition to the Administrators that Hong Kong case law and international comity demands, but at the same time has respected the exclusive jurisdiction clause and carved out the Keepwell Deeds issue for adjudication in the Hong Kong courts.
Were the PUFG Mainland Reorganisation taking place in a common law jurisdiction, it might be hoped that the courts of the relevant country would respect this decision and work with the Hong Kong court as desired by the Judge. It remains to be seen how the Beijing No.1 Intermediate People’s Court, operating in a Civil law jurisdiction without a strong insolvency tradition, will react to the decision. The decision may pave the way for the Hong Kong and Mainland courts to work together in a more coordinated approach in the management of this matter and other cross border insolvencies, or may precipitate a jurisdictional war. We suspect that similar cases will arise in the future, and the attitude of the PRC courts will be critical.
Richard Hudson, Partner, Deacons
richard.hudson@deacons.com.hk
