On 11 May 2021, the Supreme People’s Court (“SPC”) the SPC promulgated the Opinion on Taking Forward a Pilot Measure about the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region (“Pilot Opinions”). Later, on 14 May 2021, SPC and the Government of the Hong Kong Special Administrative Region (“HKSAR”) held talks and consultations on the mutual recognition and assistance of insolvency proceedings between the courts of the Mainland and Hong Kong, and signed the Record of Meeting of the SPC and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (“Record of Meeting”). Prior to the Record of Meeting and the Pilot Opinions, there was no clear legal basis under the existing laws of either Hong Kong or the Mainland for the courts to recognize the insolvency representatives (liquidators) appointed by the other party’s courts and provide them with assistance accordingly. The relevant contents of the Record of Meeting and the Pilot Opinions have basically resolved the obstacles and provided clear rules and guidelines on mutual assistance and recognition of insolvency proceedings between the courts of the Mainland and Hong Kong.
On 29 January 2024, Hong Kong High Court expressed in the hearing involving China Evergrande, the famous Mainland China based developer, that China Evergrande’s debt restructuring plan lacked progress, and the company was insolvent. The court formally ordered Evergrande to be wound up and issued written reasons for the order. The court stated in Judgments HCCW220/2022:
“I do not see any proper ground for the court to grant a further adjournment of the Petition, which has been ongoing for over 19 months. Company has not demonstrated that there is any useful purpose for the court to adjourn the Petition - there is no restructuring proposal, let alone a viable proposal which has the support of the requisite majorities of the creditors. The Company has not demonstrated that there is any useful purpose for the court to adjourn the Petition - there is no restructuring proposal, let alone a viable proposal which has the support of the requisite majorities of the creditors. better protected if the Company is wound up by the court, so that independent liquidators can take control over the Company, secure and preserve its assets and review and formulate a restructuring proposal. It seems to me that the interests of the creditors will be better protected if the Company is wound up by the court, so that independent liquidators can take control over the Company, secure and preserve its assets and review and formulate a restructuring proposal if they consider that such course is appropriate. It is not uncommon for a company to put forward and implement a scheme of arrangement after it is wound up by the court. Indeed, in respect of the Company, this has the additional advantage of putting the Company out of the control of Mr Hui. Indeed, in respect of the Company, this has the additional advantage of putting the Company out of the control of Mr Hui, which had hitherto been one of the regulatory hurdles preventing the Company from issuing new debt instruments or new shares. shares.”
China Evergrande is a company incorporated in the Cayman Islands with limited liability. On 5 November 2009, China Evergrande Group was listed on the Hong Kong Stock Exchange under the “Red Chip Structure” (“Red Chip Structure” refers to a Chinese company whose main operating assets and business are located in China but which is indirectly traded on foreign exchanges, such as the Hong Kong Stock Exchange, in the name of an offshore company registered in a foreign offshore jurisdiction, such as Cayman, Bermuda or the British Virgin Islands). On 28 June 2022, China Evergrande issued a listed company announcement stating that its Petitioners had filed a winding-up petition in the Hong Kong High Court regarding debts amounting to HK$862.5 million.
As China Evergrande’s significant assets are located in the Mainland and the scope of laws applicable in Hong Kong differs from that of the Mainland, the subsequent execution of the winding up mentioned above order and the liquidation process will involve the recognition and enforcement by the Mainland courts. This article will interpret the system of recognizing and assisting insolvency proceedings in the Hong Kong Special Administrative Region from the Evergrande winding-up order case.
1. Legal basis for Hong Kong courts to make winding-up orders against companies incorporated outside Hong Kong, China
Section 327(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)of the Hong Kong Special Administrative Region provides that “Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section.” Therefore, the Hong Kong courts have jurisdiction to wind up an unregistered company (Unregistered Company). Unregistered Company includes Non-Hong Kong Company and Registered Non-Hong Kong Company “a Registered Non-Hong Kong Company is a company incorporated outside Hong Kong, China, which has established a place of business in Hong Kong and has been registered with the Hong Kong Companies Registry in accordance with the law).
Although the Hong Kong courts have discretionary power to wind up companies incorporated outside Hong Kong, China, under the above provisions, when the courts look at whether a winding-up order should be made against a company incorporated outside Hong Kong, the Hong Kong courts will generally follow three core requirements in assessing whether the Hong Kong courts are justified in exercising their jurisdiction over these unincorporated companies to make a winding-up order, which are set out below:1) the unincorporated company must have a substantial connection with Hong Kong, China, but does not necessarily have to have assets in Hong Kong, China;2) the winding-up order must be reasonably likely to benefit the winding-up petitioner and;3) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s property to justify the company’s winding up in Hong Kong, China.
The presiding Judge, Linda Chan, held that there was no dispute that China Evergrande’s case adequately satisfied the three core requirements set out above despite China Evergrande being incorporated in the Cayman Islands. Linda Chan elaborated on the Judgment:
“Although the Company is incorporated in the Cayman Islands, there is no dispute that the 3 core requirements for the court to exercise its discretion over the Company are satisfied. Although the Company is incorporated in the Cayman Islands, there is no dispute that the 3 core requirements for the court to exercise its(1) The Company is a listed company in Hong Kong, has a principal place of business of Hong Kong and some of its senior management are based in Hong Kong. The Company has served as a director of the Hong Kong Institute of Certified Public Accountants (HKICPA) for over 20 years. The Company has servedas one of the main platforms in raising capital for the Group in Hong Kong.(2) The Company has substantial assets within the jurisdiction, primarily in the form of subsidiaries incorporated in Hong Kong and receivables owed by such subsidiaries to the Company.(3) There are many creditors within or have submitted to the jurisdiction including the Petitioner and the ad hoc group of creditors , who hold US$2 billion in aggregate principal amount of CEG Notes and US$1 billion in aggregate principal amount of SJ Notes ..."
2. Recognition and enforcement of winding-up orders of Hong Kong courts in the Mainland
As China Evergrande’s significant properties are located in the Mainland, even if the Hong Kong court has issued a winding-up order against China Evergrande, the winding-up award must be recognized and enforced by the People’s Courts in China before it can finally take effect.
1） Relevant legal basis
Currently, the Pilot Opinions and the Record of Meeting provide main legal basis for the current “mutual recognition and assistance in insolvency proceedings between the Mainland and Hong Kong”.
According to Article 2 of the Record of Meeting, “A liquidator or a provisional liquidator in insolvency proceedings in the Hong Kong Special Administrative Region may apply to the relevant Intermediate People’s Court at a pilot area in the Mainland for recognition of compulsory winding up, creditors’ voluntary winding up and corporate debt restructuring proceedings brought by a liquidator or provisional liquidator as sanctioned by a court of the Hong Kong Special Administrative Region in accordance with the laws of the Hong Kong Special Administrative Region, recognition of his office as a liquidator or a provisional liquidator, and grant of assistance for discharge of his duties as a liquidator or a provisional liquidator” As a result, both the official receiver in Mainland insolvency proceedings and the liquidator or provisional liquidator in Hong Kong insolvency proceedings may apply to the court of the other place for mutual recognition and assistance in the liquidation of an enterprise in insolvency.
2） Requirements for Recognition and Enforcement of Winding-up Orders of Hong Kong Courts in the Mainland
Article 1 of the Pilot Opinions provides that: “The Supreme People’s Court designates the People’s Courts of Shanghai Municipality, Xiamen Municipality of Fujian Province and Shenzhen Municipality of Guangdong Province to carry out the pilot work of recognizing and assisting Hong Kong insolvency proceedings.” Besides, Article 5 provides: “ If the debtor’s principal assets in the Mainland are in a pilot area, or it has a place of business or a representative office in a pilot area, the Hong Kong Administrator may apply for recognition of and assistance to the Hong Kong Insolvency Proceedings in accordance with this Opinion. The intermediate people’s courts in the pilot areas shall have jurisdiction over cross-boundary insolvency assistance cases heard in accordance with this Opinion.”
Article 4 of the Pilot Opinion provides that “[t]his opinion applies to insolvency proceedings in Hong Kong where the Hong Kong Special Administrative Region is the location of the debtor’s center of main interests. The Pilot Opinions further provide that “[t]he ‘center of main interests’ referred to in this Opinion generally refers to the place of registration of the debtor. At the same time, the People’s Court shall take into account factors such as the location of the debtor’s principal office, principal place of business and principal property to determine this. At the time the Hong Kong administrator applies for recognition and assistance, the debtor’s center of main interests should have been in existence in the Hong Kong Special Administrative Region for a continuous period of more than six months.”
Article 18 of the Pilot Opinions provides that: “A people’s court shall refuse to recognise or assist the Hong Kong Insolvency Proceedings, upon examination of the evidence adduced by an interested party to the satisfaction of the court of any of the following: (1) the centre of main interests of the debtor is not situated in the Hong Kong Special Administrative Region or it has been situated in the Hong Kong Special Administrative Region for less than six months continuously; (2) Article 2 of the Enterprise Bankruptcy Law of the People’s Republic of China is not satisfied; (3) Mainland creditors are unfairly treated; (4) there is fraud; (5) there is any other circumstance where the people’s court considers that recognition or assistance shall not be rendered.”
Article 20 of the Pilot Opinions provides that “If a people’s court recognises and assists the Hong Kong Insolvency Proceedings, the bankruptcy property of the debtor in the Mainland shall first satisfy preferential claims under the law of the Mainland. The remainder of the property is to be distributed in accordance with the Hong Kong Insolvency Proceedings provided that creditors in the same class are treated equally.”
According to the above relevant provisions, the basic requirements for the recognition and enforcement of winding-up orders of Hong Kong courts in the Mainland include:a) The centre of main interests of the debtor in Hong Kong insolvency proceedings should be in Hong Kong;b) the debtor’s centre of main interests has been continuously present in the HKSAR for more than six months at the time the Hong Kong administrator applies for recognition and assistance; andc) the debtor’s principal property in the Mainland should be located in the pilot region (i.e. Shanghai, Xiamen in Fujian Province and Shenzhen in Guangdong Province) or the debtor should have a place of business or representative office in the pilot region; and
China Evergrande is incorporated in the Cayman Islands. However, it is listed on the Hong Kong Stock Exchange. Although, the issuance of a winding-up order by the Hong Kong High Court against China Evergrande is tantamount to recognizing a substantial connection between China Evergrande and Hong Kong. At this stage, the criteria for the People’s Courts of the Pilot Areas to determine the center of the debtor’s main interests are unclear. Therefore, there is uncertainty as to whether the People’s Courts in the Mainland will be able to determine that China Evergrande’s “center of main interests” is located in Hong Kong after careful consideration.
In addition, according to Article 18 of the Pilot Opinions, the People’s Courts of the Pilot Areas, in reviewing the recognition and assistance of a winding-up order in Hong Kong, will need to give full consideration to whether the execution of the order will prejudice the interests of the Mainland’s creditors, thereby subjecting the Mainland’s creditors to unfair treatment. In addition, according to Article 20 of the Pilot Opinions, the debtor will first repay debts with priority under mainland laws and regulations, e.g., debts based on security rights, payments for works, etc.. The remainder of the debtor’s property will be distributed and discharged in accordance with Hong Kong’s insolvency procedures in compliance with the principle of equal liquidation in insolvency proceedings.
According to the relevant laws, a party who has been ordered to be wound up by the High Court may appeal against the judgment if it is dissatisfied with the judgment. Still, it must provide valid evidence to prove that the winding-up order is erroneous to overturn the judgment. Therefore, Evergrande can still appeal against the judgment but cannot stop the liquidation process from proceeding.
At present, it is uncertain whether the execution of Evergrande’s winding-up order can be recognized and assisted in the Mainland by the courts in the pilot region. The Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) was implemented simultaneously in Hong Kong and the Mainland on 29 January 2024. Yang Wanming, Vice-President of the SPC states that the implementation of the New Arrangement will greatly enhance the likelihood of mutual recognition and enforcement of court judgments in the two places, about 90% of the judgments in civil and commercial cases handed down by the courts of the Mainland and Hong Kong after the implementation of the New Arrangement will be expected to be mutually recognized and enforced. However, the implementation of the New Arrangement may not have too much impact on the winding-up order in the Evergrande case at the present time. Article 3 of the New Arrangement provides that for the time being, the New Arrangement does not apply to judgments in “bankruptcy (winding-up) cases”. Therefore, the mutual recognition and enforcement of Evergrande’s winding-up orders will continue to be mainly governed by the relevant provisions of the “Pilot Opinions” and the “Record of Meeting”. Still, due to the massive scale of its debts, the huge and complex assets, and the complicated negotiations among its creditors, experts expect the completion of the winding-up process to be over five years or more. Suppose the winding-up order can eventually be recognized and assisted in the Mainland. In that case, it will provide and improve the practical experience in cases of mutual recognition and assistance in insolvency proceedings between the Mainland and Hong Kong.