In Detail: Hong Kong-Mainland Agreement Opens Door to Solving China’s Cross-Border Bankruptcy Problems

Just after the South Korean company Hanjin Shipping Co. Ltd. bankruptcy protection in its home country in August 2016, the company took court action in 43 countries to try to prevent creditors from seizing its ships.

One place it ultimately did not seek protection was China, even though the world’s seventh largest container shipper had hundreds of creditors with potential claims over its substantial assets in the country.

As a result, many of the Seoul-based company’s assets in China, including its ships, ended up being sold to repay some of its Chinese creditors. At the same time, some of Hanjin’s small and medium-sized creditors in China struggled to collect what was owed to them.

There were a total of 129 cases involving Hanjin and its subsidiaries filed in Chinese maritime courts between August 2016 and February 2017, when it was declared bankrupt in South Korea. The total amount of claims reached about 1 billion yuan ($ 154 million), according to a document (link in Chinese) published in The People’s Judicature, a legal journal affiliated with the Supreme People’s Court of China.

Hanjin’s chaotic and high-profile demise – one of the shipping industry’s biggest collapses – was among incidents that have prompted Chinese academics and judges to repeatedly call on China to create a bankruptcy system cross-border involving businesses and assets both inside and outside the country.

The Chinese mainland took a step towards establishing such a system last month with the signing of a deal with Hong Kong on cross-border bankruptcy and restructuring proceedings which aims to give liquidators better access to the information necessary to maximize the value of recovered assets.

The agreement, which Supreme People’s Court Vice President Yang Wanming and Hong Kong Justice Secretary Teresa Cheng signed in Shenzhen on May 14, designated three cities – Shanghai, Xiamen and Shenzhen – as the first pilot areas of the agreement, given their close economic ties with Hong Kong.

Although the current plan only covers Hong Kong and the three pilot cities, a cross-border bankruptcy system established in China could potentially make it easier for domestic creditors to claim some of the overseas assets of a bankrupt company, as well. than for foreign creditors. to claim these assets on the Chinese mainland.

Hong Kong liquidators have long been frustrated when investigating, appraising and recovering assets on the mainland so that they can be sold to pay off creditors.

“Previously, although we were appointed provisional liquidators by the courts in Hong Kong, without a court in mainland China recognizing our duties and rights, we could not even get information from mainland banks, and still less manage the mainland assets of the insolvent company, ”Tiffany said. Wong, Managing Director of Alvarez & Marsal’s Restructuring Practice in Hong Kong.

The ability to make such claims is becoming more and more pressing as more and more Chinese companies have expanded internationally, investing and establishing subsidiaries abroad. The mainland’s outward non-financial direct investment reached $ 110 billion in 2020, nearly double the $ 59 billion recorded in 2010, according to Ministry of Commerce data (link in Chinese).

“In the long run, there will be greater involvement of mainland Chinese companies in overseas bankruptcy cases,” wrote Song Jianli, former senior judge of the Supreme People’s Court. Popular justice (link in Chinese) in 2018. “It is likely that there will be more and more (domestic) insolvency proceedings that require recognition from foreign courts, which may help Chinese companies recover their assets. debtors located outside the continent.

Neither the Chinese central government nor the Hong Kong government has adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, which provides a framework for foreign courts to cooperate in proceedings. cross-border insolvency. Countries like the United States, United Kingdom, Australia and Singapore have signed the model law, according to the UNCITRAL.

Under Article 5 of the Corporate bankruptcy law, the main legislation governing cross-border insolvency cases, the government allows a foreign court’s decision in bankruptcy if the case concerns assets held by a debtor within its borders, provided that certain conditions are met.

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In practice, however, while courts in some foreign countries have already recognized and helped enforce judgments in bankruptcy cases handled by Chinese courts, it has not really been a two-way street. Foreign bankruptcy judgments or rulings have rarely been recognized by Chinese courts in the past, according to one International Insolvency and Restructuring Report published in June 2020 by the financial research firm Capital Markets Intelligence.

There has been only one recorded case since the corporate bankruptcy law came into force in 2007, notes the report, in which the Wuhan Intermediate People’s Court upheld a 2012 bankruptcy decision. by a German court.

“Section 5 of the current Business Bankruptcy Law is far from sufficient to provide legal support as it is only a provision of principle. We need further clarification and a full set of specific mechanisms for content, such as how to determine the competent court, whether to report to the Supreme Court and the standards for recognition, ”said Chi Weihong, partner and director of bankruptcy reorganization 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 of improving cross-border bankruptcy laws and regulations, he added.

Song, the former judge, also sees the possibilities.

“The establishment of a system of cross-border bankruptcy cooperation is conducive to the protection of the property rights of Chinese investors and creditors, and will also allow Chinese debtors to carry out a smooth restructuring by integrating economic resources global… building a positive, friendly and open environment. the relevant legal environment will help promote and serve transnational economic activities, ”Song wrote.

Contact reporter Kelsey Cheng (kelseycheng@caixin.com) and editor-in-chief Michael Bellart (michaelbellart@caixin.com)

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