China – PRC Court Makes First Recognition Order Under New Hong Kong – PRC Insolvency Arrangement.

The decision available here is an important one in the developing law and practice concerning cross-border insolvency and will be welcomed by investors.

Co-operation in practice

The new insolvency co-operation mechanism concluded on 14 May 2021 allows for cooperation between Hong Kong and the Intermediate People’s Courts in three pilot areas, Shanghai, Xiamen, and Shenzhen  (see Hogan Lovells publication Hong Kong and mainland China agree new cooperation mechanism for cross-border insolvency).

Assistance was granted following a formal letter of request issued by the Hong Kong High Court (Hong Kong court) to the Bankruptcy Court of the Shenzhen court.

The liquidators’ application

The liquidators of Samson Paper Co. Ltd. (the company), a Hong Kong incorporated company and part of a group incorporated in Bermuda and listed on the Hong Kong Stock Exchange (holding company), were appointed liquidators of the holding company by the Supreme Court of Bermuda, and had their appointment recognized by the Hong Kong court.

After their appointment, they identified substantial assets in the mainland, principally located in Shenzhen and consisting of, amongst other things, a wholly-owned subsidiary incorporated and registered in Shenzhen with its place of business in Shenzhen (Shenzhen Subsidiary), another subsidiary and branches, a property in Beijing as well as receivables owing in excess of US$50 million.

The liquidators formed the view that they required formal recognition and assistance in the mainland to deal with these assets and applied to the Hong Kong court for a letter of request to be issued to the Shenzhen court under the new co-operation mechanism.

The liquidators’ application was granted by the Hong Kong court on 21 July 2021 and a formal letter of request was issued to the Shenzhen court (see Hogan Lovells publication, Hong Kong court approves first use of new Hong Kong – mainland China insolvency mechanism).

Following the grant of the letter of request on 30 August 2021, the liquidators filed an application to the Shenzhen court for an order that:

1. The creditors’ voluntary winding up of the company in Hong Kong and their appointment as liquidators of the company be recognized.
2. That they be permitted to carry out various duties as liquidators in the mainland.

On 1 September 2021, the Shenzhen court formally accepted the liquidators’ application.  The company’s creditors and subsidiaries were informed of the application a few days later on 6 September 2021 and raised no objection to the application. On 10 September 2021, the Shenzhen court considered evidence in relation to the application by way of a hearing.

The Shenzhen court judgment

Jurisdiction

The Shenzhen court was satisfied that it had jurisdiction to deal with the liquidators’ application on the basis that the Shenzhen Subsidiary was the main asset of the company in the mainland.

Recognition of the Hong Kong liquidation and the liquidators

The Shenzhen court noted that (i) the company was incorporated in Hong Kong in 1981; (ii) it had been carrying on business in Hong Kong for more than 40 years; and (iii) it had its main assets in Hong Kong. The Shenzhen court was therefore satisfied that Hong Kong was the company’s centre of main interest, or COMI. The location of an entity’s COMI is a key eligibility requirement under the new mechanism.

Permission for the liquidators to carry out their duties in the mainland

The Shenzhen court noted that the liquidators had expressly applied for permission to:

1. Take over the company’s assets, seals, books, documents and other materials.
2. Decide the company’s internal management affairs.
3. Decide the company’s daily expenses and other necessary expenses.
4. Manage and dispose of the company’s assets.

The Shenzhen court noted that (i) these powers had already been expressly authorised by the company’s creditors, (ii) the powers were in compliance with the relevant laws of Hong Kong, the Mainland Enterprise Bankruptcy Law, the new mechanism, and (iii) the powers did not violate any basic principles of mainland law and did not contravene any public order or good morals in the mainland.  It was therefore satisfied with the liquidators’ application and made an order in terms, granting all four powers.

Implications

This is an important first step in the development of co-operation between Hong Kong and the three pilot areas, Shanghai, Xiamen, and Shenzhen and potentially marks an evolution in offshore creditors’ rights. We will need to wait and see whether the liquidators encounter resistance in exercising their powers and require further assistance from the Shenzhen court.

However, the case does provide guidance as to the type of powers that Hong Kong liquidators may be given in carrying out their duties in the mainland. It remains to be seen whether this marks a new level of certainty for creditors (who may still be watching developments with Evergrande with apprehension) with Hong Kong liquidators being empowered by the mainland courts to undertake a more effective and efficient insolvency process for the benefit of all creditors without the barriers typically faced in trying to secure control of companies and assets in the mainland.

The Shenzhen court judgment dated 15 December 2021 is available here: https://www.szcourt.gov.cn/article/906503549358080.

Authored by Jonathan Leitch, Yolanda Lau, and Nigel Sharman.