28 January, 2020
In a long-awaited development of cross-border insolvency cooperation between Hong Kong and Mainland China, the Hong Kong Court has granted recognition and assistance to Mainland liquidators for the first time in Joint and Several Liquidators of CEFC Shanghai International Group Ltd [2020] HKCFI 167.
Background
CEFC Shanghai International Group Ltd (“CEFC“), a company incorporated in Mainland China, was wound up on the grounds of insolvency by the Shanghai Intermediate People’s Court and liquidators were appointed. Upon their appointment, the liquidators discovered that CEFC’s assets included a claim against its Hong Kong subsidiary, Shanghai Huaxin Group (Hong Kong) Limited (“SHG“), amounting to some HK$7.2 billion (the “SHG Receivable“), for which CEFC had filed a proof of debt in SHG’s liquidation. They also discovered that, prior to liquidation, one of CEFC’s creditors (the “Creditor“) had obtained default judgment against CEFC in Hong Kong for approximately Euro 29 million, and subsequently a garnishee order nisi in respect of the SHG Receivable. In order to prevent the Creditor from obtaining a garnishee order absolute, CEFC’s liquidators made an urgent application to the Hong Kong Court for recognition and assistance and to stay the Creditor’s garnishee proceedings.
The Hong Kong Court granted the recognition and assistance requested by the Mainland liquidators and the garnishee proceedings were successfully stayed.
Garnishee orders in light of foreign bankruptcies and insolvencies
Notably, Mr Justice Harris rejected the application in Hong Kong of the longstanding English House of Lords case of Galbraith v Grimshaw [1910] AC 508. In Galbraith, the House of Lords decided that where a foreign bankruptcy proceeding (in that case a Scottish ‘sequestration’) occurred after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy. In effect, the domestic insolvency proceeding ‘trumped’ the foreign insolvency proceeding. In CEFC Shanghai, Mr Justice Harris held that the analysis in Galbraith was inconsistent with contemporary cross-border insolvency law and its reasoning was inapplicable to modern common law cross-border insolvency assistance.
Applicable principles on recognition
Mr Justice Harris held that the following criteria must be satisfied before recognition and assistance is granted to insolvency proceedings that were opened in a civil law jurisdiction:
- the foreign insolvency proceedings are collective insolvency proceedings; and
- the foreign insolvency proceedings are opened in the company’s country of incorporation.
Both criteria were satisfied in this case.
Mr Justice Harris went on to explain that recognising foreign insolvency proceedings and providing assistance does not mean that the Hong Kong Companies Court will grant a foreign liquidator all the powers available to liquidators in Hong Kong under the Companies (Winding Up and Miscellaneous Provisions) Ordinance. The common law power of assistance is limited to:
- enabling foreign officeholders to do something which they can do under the law by which they were appointed (and does not extend to additional powers under another country’s insolvency regime);
- only when it is necessary for the performance of the foreign officeholders functions; and
- consistency with the substantive law and public policy of the assisting court.
In circumstances where liquidators are appointed in jurisdictions with similar insolvency regimes to Hong Kong, Mr Justice Harris held that the assistance may extend to granting orders that give the foreign liquidators substantially similar powers.
Ordering recognition and assistance in conventional terms on the facts of this case, Mr Justice Harris recognised that Mainland insolvency law corresponds to Hong Kong insolvency law in terms of the liquidator’s powers and duties and imposition of stay. The Court did strike a note of caveat though in holding that for greater level of assistance to be provided to the Mainland liquidators in the future, there ought to be reciprocity and therefore future similar matters will be decided on a case by case basis.
This is a very significant case demonstrating the closer collaboration between the Mainland and Hong Kong judicial authorities in relation to insolvency matters. It is, in fact, the first case where a Hong Kong Court has recognised and assisted Mainland liquidators. It will be very interesting to see how far the Mainland Courts will go in providing recognition/assistance to Hong Kong insolvency officeholders going forward. The further development of cross-border recognition and cooperation in this area will likely be dependent on how far the Hong Kong Court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to cross-border insolvencies.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
