In a landmark decision, the Shenzhen Intermediate People’s Court (Shenzhen Court) ordered the formal recognition on the mainland of Hong Kong-appointed liquidators. This is the first time that a court in mainland China has officially recognized and granted assistance to liquidators in Hong Kong, expressly granting them the power to deal with assets located on the mainland under the new mechanism for cooperation in matters of insolvency concluded between Hong Kong and the mainland.
The decision available here is important in the development of cross-border insolvency law and practice and will be welcomed by investors.
Cooperation in practice
The new insolvency cooperation mechanism concluded on May 14, 2021 enables cooperation between Hong Kong and the Intermediate People’s Courts in three pilot areas, Shanghai, Xiamen and Shenzhen (see Hogan Lovells publication Hong Kong, mainland China agree new cross-border insolvency cooperation mechanism).
The assistance was granted following a formal request by the Hong Kong High Court (Hong Kong Court) to the Bankruptcy Court of the Shenzhen Court.
The liquidators’ request
The liquidators of Samson Paper Co. Ltd. (the company), a company incorporated in Hong Kong and part of a group incorporated in Bermuda and listed on the Hong Kong Stock Exchange (holding company), have been appointed liquidators of the holding company by the Supreme Council. Court of Bermuda, and had their appointment recognized by the Court of Hong Kong.
After their appointment, they identified substantial assets on the mainland, mainly located in Shenzhen and consisting of, among others, a wholly-owned subsidiary incorporated and registered in Shenzhen with its head office in Shenzhen (Shenzhen subsidiary), another subsidiary and branches, property in Beijing as well as outstanding receivables of more than US$50 million.
The liquidators felt that they needed formal recognition and assistance on the mainland to manage these assets and asked the Hong Kong court for a demand letter to be sent to the Shenzhen court under the new cooperation mechanism.
The liquidators’ request was granted by the Hong Kong court on July 21, 2021 and an official letter of request was sent to the Shenzhen court (see the publication Hogan Lovells, Hong Kong court approves first use of new Hong Kong – Mainland China insolvency mechanism).
Following the granting of the letters rogatory on August 30, 2021, the liquidators filed an application with the Shenzhen Court for an order which:
- The voluntary liquidation by creditors of the company in Hong Kong and their appointment as liquidators of the company be recognized.
- That they be authorized to exercise various functions of liquidators in mainland France.
On September 1, 2021, the Shenzhen court formally accepted the liquidators’ request. The company’s creditors and subsidiaries were notified of the request a few days later, on September 6, 2021, and raised no objections to the request. On September 10, 2021, the Shenzhen court considered the evidence relating to the claim in a hearing.
The judgment of the Shenzhen court
The Shenzhen court was satisfied that it had jurisdiction to deal with the liquidators’ claim on the grounds that the Shenzhen subsidiary was the company’s main mainland asset.
Acknowledgment of Hong Kong Liquidation and Liquidators
The Shenzhen court noted that (i) the company was incorporated in Hong Kong in 1981; (ii) it had been doing business in Hong Kong for more than 40 years; and (iii) it had its principal assets in Hong Kong. The Shenzhen court was therefore satisfied that Hong Kong was the company’s center of primary interest, or COMI. The location of an entity’s center of main interests is a key eligibility condition under the new mechanism.
Authorization for liquidators to exercise their functions in mainland France
The Shenzhen court noted that the liquidators specifically requested permission to:
- Take back company assets, seals, books, documents and other materials.
- Decide on the internal management affairs of the company.
- Decide on daily business expenses and other necessary expenses.
- Manage and dispose of company assets.
The Shenzhen court noted that (i) these powers had already been expressly authorized by the company’s creditors, (ii) the powers complied with the relevant laws of Hong Kong, the Mainland Enterprise Bankruptcy Law, the new mechanism, and ( iii) the powers have not violated any fundamental principle of continental law and have not breached any public order or good morals on the continent. It was therefore satisfied with the request of the liquidators and issued an order in the terms, granting the four powers.
This is an important first step in the development of cooperation between Hong Kong and the three pilot areas, Shanghai, Xiamen and Shenzhen, and potentially marks an evolution of the rights of offshore creditors. We will have to wait and see if the liquidators encounter resistance in exercising their powers and require further assistance from the court in Shenzhen.
However, the case provides some insight into the kind of powers Hong Kong liquidators may receive in carrying out their duties on the mainland. It remains to be seen whether this marks a new level of certainty for creditors (who may still be watching developments with Evergrande with apprehension), with Hong Kong liquidators empowered by mainland courts to undertake insolvency proceedings more effective and efficient for the benefit of all creditors without the hurdles typically encountered when trying to obtain control of businesses and assets on the continent.
The judgment of the Shenzhen Court dated December 15, 2021 is available here: https://www.szcourt.gov.cn/article/906503549358080.