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The Art of Dispute: Key case law and recent developments in dispute resolution
Our newsletter provides practical advice and a concise analysis of key case law and recent developments in dispute resolution.
In our Q1 2021 Issue of the International Restructuring Newswire, we outlined the existing approach to recognition and cooperation in cross-border insolvency matters in Hong Kong and the limitations of that approach.
Specifically, Hong Kong currently relies on a dated common law recognition and cooperation framework, under which the Companies Court is willing to recognise foreign insolvency processes for entities that are incorporated outside Hong Kong but only to the extent that those processes are consistent with Hong Kong's own local insolvency laws and public policy.
On that basis, while the Companies Court has recognised foreign administration, liquidation and provisional liquidation processes previously, it has not been willing to allow foreign administrators the benefit of a stay on the enforcement of secured creditors' rights, nor the operation of cram-down provisions in facilitating a reorganisation plan. That is because Hong Kong insolvency law does not provide for a reorganisation process that incorporates the kind of enforcement moratoria and comprehensive restructuring provisions found in many other jurisdictions globally, including the United States, Singapore, the United Kingdom and, since 2006, the People's Republic of China (PRC).
The limited nature of Hong Kong's recognition and cooperation framework is in contrast to the broad-based approach under the United Nations Commission on International Trade Law Model Law on Cross Border Insolvency (Model Law).
Notably, a foreign insolvency process will be recognised under the Model Law on objective grounds simply when a debtor has its centre of main interests (COMI) (which provides a basis for recognition as a 'foreign main proceeding') or otherwise has an 'establishment' (which provides a basis for recognition as a 'foreign non-main proceeding') in the relevant foreign jurisdiction. There is a limited basis for a local court to refuse recognition on public policy grounds, but the Guide to Enactment and Interpretation for the Model Law recommends that signatory nations should only do so in exceptional circumstances. The Model Law also sets out provisions for courts in signatory nations to cooperate and communicate to enhance efficiency in cross-border matters.
The Hong Kong Court has however in the recent decision of Re Lamtex Holdings Ltd [2021] HKCFI 622 accepted for the first time that the Court may look to and rely on a company's COMI or a jurisdiction with which it has a sufficiently strong connection to justify recognition of liquidations commenced in those foreign jurisdictions. This is a welcomed decision and one-step closer to the approach under the Model Law. The authors believe that Hong Kong's willingness to move towards adoption of principles under the Model Law would provide a more comprehensive and predictable framework, which would foster greater international investment and further promote Hong Kong as a regional restructuring hub by providing local and international businesses with access to cheap, flexible and efficient insolvency processes.
In Re CEFC Shanghai International Group Limited [2020] HKCFI 167 (Re CEFC), the Companies Court recognised a liquidation process in Mainland China for the first time and ordered a stay on garnishee proceedings that had been commenced by a creditor after obtaining a default judgment against the debtor company in Hong Kong. However, this was on the basis that a comparable liquidation process existed in Hong Kong, and the decision accordingly did not represent any advance on the ability to obtain recognition and assistance to bind secured creditors under a reorganisation process under the current common law approach. Importantly, in his reasons for decision, Harris J also emphasised that, in any future recognition hearing in other matters, the Court's willingness to provide assistance to Mainland administrators would 'have to be decided on a case by case basis', and would depend on 'the extent to which the Court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transactional insolvencies'.
In our Q2/Q3 2020 issue of the International Restructuring Newswire, we summarised how the Companies Court also signalled that it views cross-jurisdiction recognition as a "two way street", and would expect Mainland courts to also recognise and provide assistance to non-Mainland insolvency proceedings. In this connection, while Article 5 of the 2006 Enterprise Bankruptcy Law of the Mainland envisages the possibility of recognition of foreign liquidators by the Mainland courts, there have been cases where the Mainland courts have refused to recognise Hong Kong insolvency proceedings. It was therefore unclear how the Mainland courts would generally approach applications for recognition and assistance by foreign liquidators.
The above limitations—at least in relation to Mainland China—have now been addressed in a significant recent development that should provide both predictability and efficiency in recognition proceedings and enhance cooperation between insolvency Courts in the Mainland and Hong Kong.
Specifically, on 14 May 2021, the Hong Kong Government and the Supreme People's Court (SPC) of the PRC signed a joint record of meeting on mutual recognition of and assistance to bankruptcy and insolvency proceedings between the courts of the Mainland and of Hong Kong (Record of Meeting). Details of the implementation of the arrangement are also set out in an Opinion of the Supreme People's Court and a Practical Guide issued by the Hong Kong Government.
According to the proposed arrangements:
As a result, pending implementation of the relevant arrangements for the co-operation framework, it will now be possible for reorganisation processes for debtors incorporated in Mainland China to be recognised in Hong Kong, overcoming the existing limitation in the common law framework. Correspondingly, it will also be possible for Hong Kong insolvency processes to be recognised in Mainland China, overcoming the previous inertia that motivated Harris J's remarks in Re CEFC. The arrangement would give Hong Kong a boost to becoming a regional restructuring hub, particularly where a vast number of Hong Kong listed entities have their business operation based in Mainland China, and Hong Kong has been one of Mainland's largest source of and top destinations for foreign direct investment.
The above developments coupled with the Hong Kong government's plans to relaunch the long awaited Companies (Corporate Rescue) Bill, which envisages a comprehensive corporate rescue regime with accompanying insolvent trading provisions that assists viable entities to restructure their affairs in circumstances of financial difficulty, would create a modernised, effective and efficient insolvency regime favourable for doing business and investment.
There is indeed now an even stronger incentive for Hong Kong to do so with the continued economic and financial impact of COVID-19, and the importance that effective insolvency processes play as a major contributor to long term economic growth and financial stability.
Stay tuned for further developments with Hong Kong poised to join other jurisdictions that have added new and upgraded restructuring laws in recent years geared to corporate rescue.
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