China & HK Agree Cross-border Insolvency Framework

Hong Kong courts and Chinese courts in pilot cities will be able to recognise insolvency, bankruptcy and restructuring proceedings under each other’s laws.

China’s Supreme People’s Court has designated Shanghai, Xiamen and Shenzhen as pilot cities where relevant Intermediate People’s Courts and Hong Kong courts will be allowed to mutually recognise and assist in bankruptcy, insolvency and restructuring procedures.

Under the new framework, liquidators from Hong Kong can apply to Mainland courts for recognition of insolvency proceedings under Hong Kong law, and be granted assistance for the discharge of the liquidator’s duties.

Likewise, bankruptcy administrators from the Mainland can apply to Hong Kong’s High Court for recognition of bankruptcy proceedings in the Mainland, and be granted assistance for the discharge of the administrator’s duties.

The framework facilitates the rescue of financially troubled businesses, provides better protection of the assets of the debtor company, and better safeguards the interests of creditors, the Hong Kong government said in an official statement.

The framework expressly covers bankruptcy compromise and reorganisation in the Mainland as well as debt restructuring in Hong Kong, and therefore encourages the use of restructuring of debts to revive businesses – including to facilitate consensus among creditors from the Mainland, Hong Kong and abroad.

“This may open up more opportunities for the debtor company to look for a successful rescue,” the official statement says. “In the long run, the framework will give additional assurance to investors and further improve the business environment in the Mainland and Hong Kong.”

A set of opinions from the Supreme People’s Court and a practical guide from the Hong Kong government have been issued to provide guidance on the procedures used for handling applications seeking mutual recognition and assistance in bankruptcy/insolvency proceedings.

Shanghai, Xiamen and Shenzhen were selected as the initial pilot cities given their close trade ties with Hong Kong and their status as popular investment destinations for Hong Kong residents. The arrangement will gradually extend beyond these pilot areas.

The “ground-breaking” cross-border protocol is intended to address the gap which exists in co-ordinating insolvency and restructuring processes between Hong Kong and the mainland, says Jonathan Leitch, a Hong Kong-based restructuring partner at Hogan Lovells.

“Now where a liquidator appointed in Hong Kong applies to the people’s court of China for recognition and assistance, provided the liquidator can demonstrate that the debtor’s ‘centre of main interests’ is in Hong Kong, there are good grounds for the people’s court to provide assistance,” he says.

“This judicial mechanism represents a significant enhancement on the current status quo where a Hong Kong liquidator’s efforts to access assets in the mainland and monetise these for the benefit of all creditors are often frustrated. In addition, foreign investors and offshore creditors of Chinese companies may now have more of a say in what happens when an insolvency situation arises.”

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