China – Hong Kong – First Recognition Order Granted By The Hong Kong Court To PRC Insolvency Practitioners.

28 January, 2020

 

CEFC Shanghai International Group Limited (in Liquidation in the Mainland of the People’s Republic of China) [2020] HKCFI 167 (date of judgement 13 January 2020)

 

This is the first case in which the Hong Kong Court granted a recognition order to administrators of a PRC company appointed by a PRC Court.   The case also considered whether a garnishee order nisi should be made absolute if a foreign bankruptcy order is made after the service of the garnishee order nisi.

 

Background

 

CEFC Shanghai International Group Limited (CEFC) is a PRC incorporated investment holding company and is part of a conglomerate whose business includes capital financing, petroleum refining and infrastructure.  In November 2019, the Shanghai No. 3 Intermediate People’s Court (Shanghai Court) ordered CEFC to be put into insolvent liquidation and appointed joint administrators (Administrators).

 

CEFC’s assets include a substantial claim against its Hong Kong subsidiary Shanghai Huaxin Group (Hong Kong) Limited (HK Subsidiary) which is in liquidation.  CEFC has filed a proof of debt in respect of that claim.

 

Upon their appointment, the Administrators discovered that a party had obtained a default judgment against CEFC in Hong Kong and a garnishee order nisi had been made against the HK Subsidiary.  The Administrators made an urgent application to the Companies Court in Hong Kong for recognition and assistance primarily to stay the garnishee proceedings.  The Administrator’s application was supported by a letter of request from the Shanghai Court.  Harris J granted a recognition order to the Administrators, with the effect that all proceedings (including the garnishee proceedings) in Hong Kong against CEFC are now stayed.

 

Principles of recognition of foreign insolvency proceedings in Hong Kong

 

Harris J summarised the legal principles adopted in Hong Kong on common law recognition and assistance:

 

1. The foreign insolvency proceedings have to be (a) collective insolvency proceedings; and (b) are opened in the company’s country of incorporation.
2. Recognition is not limited to insolvency proceedings opened in common law jurisdictions.  Provided the criteria in (1) are satisfied, the Court may recognise insolvency proceedings opened in a civil law jurisdiction.1
3. Assistance to foreign officeholders may extend to granting orders that give the foreign officeholders powers which are substantially similar to those of a Hong Kong liquidator.
4. Assistance is not available to enable foreign officeholders to do something which they could not do under the law by which they were appointed.
5. The power of assistance is available only when it is necessary for the performance of the foreign officeholder’s functions.
6. The order granting assistance must be consistent with the substantive law and public policy of the assisting court.
7. Common law recognition and assistance does not require reciprocity between the relevant jurisdictions.

 

Stay of proceedings

 

Harris J explained that the purpose of a stay of proceedings in Hong Kong against a foreign company in liquidation is to provide a mechanism which allows the Court to oversee creditor action with a view to promoting an orderly liquidation or restructuring in a similar way as a domestic liquidation.

 

In the early 20th century case of Galbraith v Grimshaw2, the House of Lords decided that where a Scottish bankruptcy occurred about a fortnight after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy.  Harris J declined to follow the Galbraith decision:

 

1. His Lordship noted that the decision has been subject to academic and judicial3 criticisms which eventually led to the present approach of common law cross border insolvency assistance developed in the Privy Council case of Cambridge Gas4; 
2. It is settled law that garnishee proceedings should not be permitted to proceed if it is commenced after the commencement of the foreign insolvency proceedings.  His Lordship considered that it is consistent with principles governing the recognition of foreign insolvency proceedings that even if a creditor has obtained a garnishee order nisi in Hong Kong before the commencement of the foreign insolvency proceedings, the Court still retains a discretion to decline to make a garnishee order absolute5;
3. His Lordship concluded that the Galbraith decision is inconsistent with contemporary cross border insolvency law.

 

Recognition and assistance

 

Upon considering the provisions in the PRC Enterprise Bankruptcy Law, Harris J accepted that CEFC’s liquidation in the PRC is a collective insolvency proceeding, and that the PRC and Hong Kong insolvency regimes are similar in respect of liquidators’ powers and duties, stay of creditor action and parri passu distribution of assets.   Harris J therefore granted the recognition and assistance sought by the Administrators.  The orders granted were essentially the same as those set out in the standard form recognition order developed previously in a number of Hong Kong cases.

 

Other comments by the Court

 

It is clear that provisions in the PRC Enterprise Bankruptcy Law provide for recognition of foreign liquidators.  That said, Harris J noted that there have not yet been any reported case in which a PRC Court recognized foreign insolvency proceedings.  Harris J commented that the extent to which greater assistance should be provided to PRC administrators in 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 PRC, like Hong Kong, promotes a unitary approach to transnational insolvencies.

 

Takeaway points

 

• This is a welcoming decision and a significant development in common law cross border recognition and assistance in Hong Kong.  It is hoped that assistance to PRC administrators will be further developed in future cases.
• Harris J hinted that recognition between the PRC and Hong Kong ought to be a two way street; having some bearing on future PRC recognition applications. 
• Harris J’s decision and comments show that Hong Kong is a universalistic jurisdiction and foreign courts seeking assistance from the Hong Kong Court are expected to promote universalism in cross border insolvency. 

 

Click here to see the judgement