Milestone in Cross-Border Insolvency: A Successful Application Under the Pilot Measure from Hong Kong to Mainland China

Jones Day

In Short

The Situation: Following the signing of a record of a meeting between the Secretary for Justice of Hong Kong and the vice-president of the Supreme People's Court ("SPC") in May 2021, which set out a consensus on the mutual recognition of and assistance to insolvency proceedings between Mainland China and Hong Kong, an Opinion of the SPC and a Practical Guide of the Hong Kong Government were issued to implement the arrangement ("Pilot Measure"). The liquidators of a company recently applied to the Hong Kong High Court for the issuance of a letter of request, under the Pilot Measure, to the Shenzhen Court to facilitate the liquidators' performance of their functions in Mainland China.

The Result: The Hong Kong Court agreed that the recognition and assistance from Mainland China was needed for the liquidators to recover the Company's assets in Mainland China and issued a letter of request to the Shenzhen Court consistent with the governing principles.

Looking Ahead: It's worth watching how the Shenzhen Court accords recognition and grants authority to the Liquidators. In particular, does the Shenzhen Court grant assistance to the liquidators for assets outside the Pilot Area (e.g., an apartment in Beijing) and in areas outside Shenzhen (e.g., entities located in Xiamen, which is also in the Pilot Area)?

Background of the Pilot Measure

The mechanism set out in "The Supreme People's Court's Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region" (the "Pilot Measure") aims to recognise and assist Hong Kong insolvency proceedings in three cities in Mainland China: Shanghai, Xiamen, and Shenzhen ("Pilot Area"). It applies to proceedings if the debtor's center of main interests ("COMI"), which generally refers to the place of incorporation, has been in Hong Kong for at least six months and the debtor's principal assets are located in the Pilot Area, or if the debtor has a place of business or a representative office in the Pilot Area. To apply for recognition and assistance, a letter of request in simplified Chinese issued by the Hong Kong High Court ("Hong Kong Court"), along with a copy of the judgment in simplified Chinese, must be submitted to the People's Court of Mainland China.

Background of Samson Paper Company Limited's Liquidation

On 18 July 2020, Samson Paper Holdings Limited ("SPHL"), a company incorporated in Bermuda and listed on The Stock Exchange of Hong Kong Limited, filed a petition in Bermuda for the winding up of SPHL and the appointment of Bermudan joint provisional liquidators ("JPLs") for the purposes of effectuating a "light touch" restructuring. On 13 August 2020, the Hong Kong Court recognized the appointment of the JPLs and entered an order staying all actions or proceedings against SPHL's assets or affairs in Hong Kong absent leave of the Hong Kong Court. On 14 August 2020, the shareholder (an indirect and wholly owned subsidiary of SPHL) passed a special resolution of Samson Paper Company Limited ("Samson" or the "Company"), an entity engaged in paper products training with its principal place of business in Hong Kong, to wind up the Company by way of creditors' voluntary liquidation and Messrs. Lai Kar Yan (Derek) and Ho Kwok Leung Glen were appointed as Joint and Several Liquidators of the Company (the "Liquidators"). The Company had substantial assets located in Mainland China—including wholly owned subsidiaries in Shenzhen (which also owned subsidiaries in Xiamen and Shanghai), receivables from Mainland-incorporated entities totaling more than HK 420 million, and an apartment in Beijing—and the Liquidators decided to seek Mainland assistance and recognition to take possession and control of the Company's Mainland China assets. The Liquidators made an application to the Hong Kong Court seeking a letter of request to the Bankruptcy Court of the Shenzhen Intermediate People's Court ("Shenzhen Court") to act in aid of the liquidation proceedings by: (i) recognizing the liquidation proceedings and the appointment of the Liquidators in the Shenzhen Court; and (ii) ordering and directing that the Liquidators may exercise such powers as are available to them under Hong Kong law, and to the fullest extent permitted by Mainland law.

Case Reasoning

As an initial matter, the Hong Kong Court was of the view that because the Company's assets were principally located in Shenzhen, recognition and assistance to the Liquidators was desirable so that they could collect the assets within the jurisdiction of the Shenzhen Court. Secondly, as the Company was incorporated in Hong Kong and had always been run out of Hong Kong, the COMI requirement was satisfied. Further, the court believed the principles governing the grant of a letter of request were well-established in Re Sea Containers Ltd [2012] SC (Bda) 26 Com, Re China Agrotech Holdings Ltd [2017] HKCLC 365 and Re Southern Pacific Personal Loans Ltd [2014] Ch 426. Pursuant to those cases, the court ruled that it had inherent jurisdiction to grant a letter of request to permit Hong Kong liquidators to seek recognition and assistance in another jurisdiction. The court asked which jurisdiction was the most appropriate or convenient forum for the determination of the issue in question, applying generally applicable jurisdictional principles. The court believed those jurisdictional principles had been satisfied, noting that the Liquidators had a duty to collect the Company's assets and they were empowered by the statute to commence legal proceedings for asset collection.

Legal Implications

As the Honourable Mr. Justice Harris stated, this case "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" and is indeed "of significance in the development of cooperation between Hong Kong and the Mainland in the sphere of corporate insolvency". The present case sets a precedent for insolvency practitioners, and it is anticipated that many will follow suit in the future.

Given that the Company is incorporated in Hong Kong, there was not much discussion in the court's opinion on COMI, one of the main requirements under the Pilot Measure. However, the court did take the opportunity to consider Re Melars Group Ltd [2021] EWHC 1523 (Ch), in which Deputy ICC Judge Baister of the Business and Property Courts of England and Wales sets out the criteria for determining the location of COMI. That case should have great relevance for practitioners when the issue of COMI arises in future cases.

Three Key Takeaways

  1. This is the first case in Hong Kong seeking the issuance of a letter of request by the Hong Kong Court to a Mainland court for recognition and assistance to Hong Kong liquidators pursuant to the Pilot Measure.
  2. As it is an ex parte application, applicants need to prepare a detailed affirmation in support to satisfy the usual duty of full and frank disclosure. Further, various draft documents, including a draft letter of request in both English and simplified Chinese, need to be prepared before the hearing for the court's consideration.
  3. Practitioners should keep in mind that the Pilot Measure is only applicable when the debtor's principal assets or place of business or representative office is located in Shanghai, Xiamen, or Shenzhen in Mainland China.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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