The Hong Kong court in Re Lai Kar Yan Derek [2021] HKCFI 2151 has for the first time invoked the new insolvency co-operation mechanism between Hong Kong and mainland China (see Hogan Lovells client alert: Hong Kong and mainland China agree new cooperation mechanism for cross-border insolvency).
The Honorable Mr. Justice Harris granted the liquidators' application for a letter of request to be issued to the Shenzhen Intermediate People's Court seeking the Shenzhen court's assistance in the liquidation of Samson Paper Co. Ltd. (the company), a Hong Kong incorporated company and part of a corporate group incorporated in Bermuda and listed on the Hong Kong Stock Exchange (holding company). In doing so, Harris J gave the first in-depth analysis of how, in his view, the new mechanism is intended to operate.
Formal recognition by the Shenzhen Intermediate People's Court (one of three courts designated to trial the procedure in the Supreme People's Court's Opinion1) would be the first occasion on which a court in the mainland has formally recognized and assisted a liquidator appointed by the Hong Kong High Court.
Arrangement formalized
Prior to 14 May 2021, when the new mechanism came into effect, there had been two instances in which Harris J had made orders for recognition and assistance on the application of administrators (管理人) in the mainland with the support of letters of request from the relevant Intermediate People's Courts (see Hogan Lovells client alerts: A welcome red packet – Hong Kong court recognises mainland Chinese administrators for first time; and Round 2 – Hong Kong court grants recognition of mainland insolvency proceedings for the second time).
As explained in his decision in the first instance, Re CEFC Shanghai International Group Ltd. [2021] 1 HKLRD 676, a liquidator appointed by the Hong Kong High Court or a court outside the People's Republic of China, had never been formally recognized by a mainland court.
The application which is now destined to be heard by the Shenzhen court, would be the first occasion on which a court on the mainland would have formally recognized and assisted a liquidator appointed by the Hong Kong court.
Harris J said the present application, therefore, would "be of some significance in the development of cooperation between Hong Kong and the Mainland in the sphere of corporate insolvency."
Assets in Shenzhen
The liquidators – who had already been appointed liquidators of the holding company by the Supreme Court of Bermuda, and whose appointment had been recognized by the Hong Kong court – formed the view that they needed to obtain recognition and assistance in order to deal with the company's substantial assets in the mainland consisting primarily of wholly-owned subsidiaries, including subsidiaries and/or branches in Shenzhen, Nanning, and Xiamen, receivables in the sum of HK$422 million due from affiliated companies incorporated in the mainland and an apartment in Beijing.
Harris J said he was satisfied that the liquidators' appointment should be recognized and assistance provided in Shenzhen by the Shenzhen court so that the liquidators could collect in the assets within the jurisdiction of the Shenzhen court.
Jurisdiction and COMI
Article 4 of the Opinion requires the debtor's center of main interests (COMI) to have been in Hong Kong continuously for at least six months in order for the arrangement to apply. Based on the evidence before him, Harris J was satisfied that the company had always been run out of Hong Kong. It followed that ordinarily the Opinion would apply to the company and that this was a proper case in which to seek recognition and assistance.
Letter of request
In order for an application to be granted it was necessary for the Hong Kong court to provide two documents, a letter of request and a judgment determining that a letter of request should be issued.
Harris J said the law was well settled that the court has an inherent jurisdiction to grant a letter of request in order to permit Hong Kong liquidators to seek recognition and assistance in another jurisdiction. He noted that the court has to consider "which jurisdiction is the most appropriate or convenient forum for the determination of the issue in question applying generally applicable jurisdictional principles" and formed the view that the granting of a letter in this case would be consistent with those principles.
Specifically, he noted that the liquidators in the present case had a duty to collect in the company's assets and the assistance being sought in the mainland related to conventional asset collection action.
Harris J expressly summarized the liquidators' powers and functions under Hong Kong law in his decision "for the benefit of the Judge of the Shenzhen Court." He thought it desirable that the liquidators should be able to exercise the same functions and powers in Shenzhen as in Hong Kong "to the extent that the laws of the Mainland provide that an administrator in the Mainland has the same or substantially similar functions and powers."
He also noted, by the same token, that "The Hong Kong Court would, as the decisions in CEFC Shanghai and Shenzhen Everrich demonstrate, in similar circumstances recognize a letter of request from the Shenzhen Court and provide such recognition and assistance as may be requested subject to the compliance with the procedure stipulated in the SPC Opinion and any applicable limitations under Hong Kong law."
As the letter of request would be directed to a court in the mainland, Harris J agreed it was appropriate that the letter of request – and the order of the court – should be attached to the judgment in both English and simplified Chinese.
Earlier hint
The decision in Samson Paper came shortly after Harris J hinted at the potential application of the new arrangement in another case, Re China All Access (Holdings) Limited [2021] HKCFI 1842 (China All Access).
The case involved a Cayman Islands-incorporated holding company with the majority of its assets located in Shenzhen. Its operating subsidiaries were also separated from the holding company by intermediate subsidiaries incorporated in the British Virgin Islands (BVI). A petition issued against China All Access was adjourned for two weeks to give the company the opportunity to repay the debt, which the company failed to do following which the petitioner sought an immediate winding-up order.
Harris J anticipated the likely recognition of Hong Kong liquidators in Shenzhen who could then take steps to take control of the mainland subsidiaries. In the eyes of the court, the petitioner had demonstrated a real possibility of benefiting from the making of a winding up order, the second core requirement which must be satisfied before the court may exercise its discretionary jurisdiction to wind up a company incorporated in a foreign jurisdiction (see Hogan Lovells client alert: What's good for the goose – Hong Kong court revisits iconic insolvency decision).
Harris J noted that much had changed since his decision in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940 (see Hogan Lovells client alert: Managing misconceptions – Hong Kong court issues dual warning over cross-border insolvency). In this earlier judgment, the court observed that the complex offshore structuring of mainland business groups "creates a significant barrier to steps being taken by creditors and shareholders to enforce rights using the courts of Hong Kong."
Harris J further clarified that since the majority of the board of the company reside in Hong Kong, they would be subject to the in personam jurisdiction of the Hong Kong court. Hong Kong liquidators could therefore seek orders from the Hong Kong court requiring the directors of the company to execute documents necessary to enable the Hong Kong liquidators to take control of mainland subsidiaries.
Cross-border action awaited
How the Shenzhen court makes use of its new powers will be keenly awaited. On paper at least, the new arrangement represents a significant enhancement on the current status quo where a Hong Kong liquidator's efforts to control mainland subsidiaries and its assets are often frustrated.
The new arrangement should create an effective and efficient insolvency process for businesses and provide additional certainty for investors to make informed decisions, which will ultimately reinforce Hong Kong's position as the leading financial center and gateway to mainland China (see Hogan Lovells client alert: Getting a seat at the table – foreign creditors get more say under new Hong Kong – mainland China insolvency arrangement).
Authored by Yolanda Lau and Nigel Sharman.
