In detail: Deal between Hong Kong and the mainland opens the door to solving China’s cross-border bankruptcy problems

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Shortly after the South Korean Hanjin Shipping Co. Ltd Bankruptcy protection In its home country, the company filed for courts in 43 countries in August 2016 to prevent creditors from seizing its ships.

One place it ended up not seeking refuge was China, although what was once the world’s seventh largest container shipper had hundreds of creditors with potential claims on its sizable assets in the country.

As a result, many of the Seoul-based company’s assets in China, including its ships, were sold to repay some of its Chinese creditors. At the same time, some of the small and medium-sized Hanjin creditors in China struggled to reclaim their debts.

Between August 2016 and February 2017, a total of 129 cases were filed against Hanjin and its subsidiaries in the Chinese maritime courts. Declared bankrupt in South Korea. The total amount of claims reached approximately 1 billion yuan ($ 154 million). a piece of paper (Link in Chinese) published in The People’s Judicature, a legal journal affiliated with the Supreme People’s Court of China.

The chaotic and high profile demise of Hanjin – one of the largest collapses in the shipping industry – was one of the incidents that prompted repeated calls by Chinese scholars and judges to China to create a system of cross-border bankruptcies, involving businesses and assets both inside and outside of the country.

Mainland China signed the an agreement with Hong Kong on a cross-border bankruptcy and restructuring process aimed at providing liquidators with better access to information necessary to maximize the value of recovered assets.

The agreement signed by Vice President of the Supreme People’s Court Yang Wanming and Hong Kong’s Justice Minister Teresa Cheng on Jan. intended three cities – Shanghai, Xiamen and Shenzhen – as the first pilot zones for the agreement due to their close economic ties with Hong Kong.

Although the current plan only affects Hong Kong and the three pilot cities, an established cross-border bankruptcy system in China could ultimately make it easier for domestic creditors as well as foreign creditors to reclaim some of the foreign assets of a bankrupt company to claim such assets in mainland China.

Hong Kong liquidators have long been frustrated examining, valuing, and collecting mainland assets for sale to repay creditors.

“Although we were appointed provisional liquidators by Hong Kong courts without a Chinese mainland court recognizing our duties and rights, we could not even obtain information from mainland banks, let alone manage the insolvent company’s mainland assets,” said Tiffany Wong, Managing Director of Restructuring Practice of the consulting firm Alvarez & Marsal in Hong Kong.

The ability to assert such claims is becoming more and more urgent as more and more Chinese companies expand, invest and establish subsidiaries abroad. Mainland non-financial direct investment rose to $ 110 billion in 2020, almost double the $ 59 billion in 2010, so Department of Commerce data (Link in Chinese).

“In the long term, there will be greater involvement of mainland Chinese companies in overseas bankruptcy cases,” wrote Song Jianli, a former senior judge at the Supreme People’s Court The people’s jurisdiction (Link in Chinese) in 2018. “It is likely that there will be an increasing number of (domestic) bankruptcy proceedings that require recognition by foreign courts, which can help Chinese companies recover the assets of their debtors outside the mainland.”

Neither China’s central government nor the Hong Kong government has adopted the United Nations Commission on International Trade Law (UNCITRAL) model law on cross-border bankruptcy, which provides a framework for foreign courts to cooperate in cross-border bankruptcy proceedings. Countries like the US, UK, Australia and Singapore have signed the model law UNCITRAL.

According to Article 5 of the Chinese Bankruptcy law for companies, the main piece of legislation governing cross-border bankruptcy proceedings, the government allows a foreign court’s bankruptcy decision to take effect on assets owned by a debtor within its borders, provided certain conditions are met.

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In practice, while courts in several other countries have previously recognized and assisted enforcement in bankruptcy cases processed by China’s courts, it has not been a one-way street. Judgments or verdicts from foreign bankruptcy proceedings have rarely been recognized by Chinese courts in the past, according to one International bankruptcy and restructuring report published in June 2020 by financial research firm Capital Markets Intelligence.

According to the report, in which the Intermediate People’s Court in Wuhan recognized an insolvency ruling by a German court in 2012, only one such case has been registered since the Corporate Insolvency Act came into force in 2007.

“Article 5 of the current Corporate Insolvency Act is by no means sufficient to provide legal support, as it is only a fundamental provision. We need further clarification and a full set of specific mechanisms for the content, such as determining the competent court, reporting to the Supreme Court and standards for recognition, ”said Chi Weihong, partner and director of bankruptcy recovery at Tiantong Law Firm in Beijing .

The agreement between the Supreme People’s Court and the Hong Kong Ministry of Justice will be a valuable practical test for the refinement of cross-border bankruptcy laws and regulations, he added.

Song, the former judge, also sees the possibilities.

“Establishing a cross-border bankruptcy cooperation system will help protect the property rights of Chinese investors and creditors and will also enable Chinese debtors to complete a smooth restructuring by integrating global economic resources … building a positive, friendly and open legal environment on this matter will help promote and support transnational economic activities, ”wrote Song.

Contact reporter Kelsey Cheng ([email protected]) and editor Michael Bellart ([email protected])

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