A recent case in Hong Kong, has demonstrated both the ability and willingness of common law courts to recognise insolvency appointments made by the courts of the People's Republic of China ('PRC'), and to grant appropriate assistance at common law. It is to be hoped that this proven track record will pave the way for easier recognition of common law court appointed liquidators in PRC, where, unlike in common law countries, such recognition is subject to the principle of reciprocity.
In Re CEFC Shanghai International Group Limited (in Liquidation in the Mainland of the People's Republic of China)1 ('CEFC Shanghai') Harris J, sitting in the High Court of Hong Kong, granted recognition and assistance to a Chinese company's Mainland administrators appointed by the Chinese court in order to protect the company's assets in Hong Kong.
CEFC Shanghai was a PRC company in insolvent liquidation in PRC under the Enterprise Bankruptcy Law, with substantial assets in Hong Kong, namely a HK$7.2 billion claim against its Hong Kong subsidiary which was in liquidation in Hong Kong (The 'HK Receivable'). Administrators (the PRC equivalent of liquidators) had been appointed by the Shanghai No.3 Intermediate Court. They applied to the Hong Kong Court for recognition and assistance in order to protect the Hong Kong receivable from enforcement by a creditor who had obtained a garnishee order nisi, and who was seeking to take the receivable by having the garnishee order made absolute. The application was supported by a Letter of Request from the Shanghai Court.
This was the first time an application for recognition and assistance had been received from PRC, but not the first time an application had been received from a Civil Law system.2 Accordingly, the outcome of the application was never in any doubt. In accordance with well-established principles, the Court asked itself two questions:
- Are the PRC insolvency proceedings 'collective insolvency proceedings'?
- Are the PRC insolvency proceedings opened in the company's country of incorporation?
The answer to the second question was self-evidently affirmative.
The answer to the first question was also straightforward in that, under the Enterprise Bankruptcy Law of the PRC, the liquidation proceedings include all of the debtor's assets and these are to be distributed on a pari passu basis.
Common law assistance
It is well settled that when granting assistance at common law the Hong Kong court does not extend to the foreign liquidators all the powers which would be available to Hong Kong liquidators under the domestic rules.
The three underlying principles governing the scope of the common law power of assistance were identified by Lord Sumption in Singularis Holdings Ltd v PricewaterhouseCoopers: 3
- The power of assistance exists for the purpose of enabling foreign courts to surmount the problems posed for a world-wide winding up of the company's affairs by the territorial limits of each court's powers. Therefore, the power of assistance is not available to enable foreign officeholders to do something which they could not do even under the law by which they were appointed.
- The power of assistance is available only when it is necessary for the performance of the foreign officeholder's functions.
- An order granting assistance must be consistent with the substantive law and public policy of the assisting court.
In Hong Kong, there is a standard-form recognition order containing a suite of the usual powers which will be granted by way of assistance, and this includes a stay on proceedings against the company in Hong Kong.
Encouragement to PRC courts
Harris J took the opportunity to set out these principles in more detail than otherwise strictly necessary because this was the first case of a recognition and assistance request from PRC Administrators in Hong Kong. He was keen to stress that the principles which govern common law recognition and assistance do not require reciprocity to be demonstrated, unlike in the case for recognition of foreign judgments and court orders in the PRC, and also to highlight what is known or understood in relation to PRC decisions which have involved some element of recognition. He referred to Article 5 of the Enterprise Bankruptcy Law which provides:
'The bankruptcy proceedings initiated in accordance with the provisions of this Law shall have an effect on the debtor's property beyond the territory of the People's Republic of China.
Where an application or request is made to the people's court for recognition or enforcement of a legally effective judgment or written order of a bankruptcy case made by a foreign court, in which the debtor's property within the territory of the People's Republic of China is involved, the people's court shall, in accordance with the international treaties concluded or acceded to by the People's Republic of China or with the principle of reciprocity, examine the judgment or written order and make an order to recognize and enforce it, provided that the said judgment or written order does not contradict the basic principles of the law of the People's Republic of China, nor violates State sovereignty, security and social and public interests of country, and nor infringes upon the lawful rights and interests of the creditor within the territory of the People's Republic of China.
As far as is known this is not a provision which has yet been applied by the PRC court to recognise a foreign liquidator, but as Harris J pointed out, the power is clearly there in PRC law and the provision envisages that recognition should be granted. He did observe in this connection that although in the present case it was appropriate to grant recognition and assistance in conventional terms 'The extent to which greater assistance should be provided to Mainland administrators in the future will have to be decided on a case by case basis and the development of recognition is likely to be influenced by the extent to which the court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.'
This judgment is a clear encouragement to the PRC courts to grant recognition to Hong Kong liquidators in the future, the Hong Kong court having taken the first step and granted recognition and assistance in this case.
No priority for Judgment Creditor with garnishee order nisi
Although the recognition and assistance aspect of this judgment was straightforward, Harris J also tackled the potentially more difficult question of whether having regard to the fact that a judgment creditor had obtained a garnishee order nisi in respect of the HK Receivable prior to the commencement PRC liquidation, the judgment creditor should be permitted to obtain a garnishee order absolute, or whether the garnishee proceedings should be stayed so that the HK Receivable would be dealt with in the insolvency.
In Galbraith v Grimshaw, 4 a case of personal bankruptcy, the House of Lords held that where an English garnishee order nisi was obtained before a Scottish bankruptcy, the judgment creditor prevailed over the Scottish trustee in bankruptcy. It did so on the basis that the English rules of relation-back did not apply to a Scottish bankruptcy, and the Scottish rules of relationback are not recognised by the English court. Harris J observed that this analysis is inconsistent with contemporary cross-border insolvency law, and is inapplicable to modern cross-border insolvency assistance. It was a case to be confined to its own facts and as authority only for the limited principle that local courts do not recognise foreign rules of relation-back. Fairness between creditors requires that insolvency proceedings have universal application so that all creditors are entitled to prove against one estate so that there is no advantage to be gained from being in a jurisdiction with more of the assets or fewer creditors.
Harris J followed the approach of Brereton J, sitting in the Supreme Court of New South Wales in ML Ubase Holdings v Trigem Computer, 5 where the court refused to make a garnishee order absolute even though it had been obtained prior to a Korean insolvency in respect of which recognition and assistance was sought in the New South Wales court. By so doing he adopted an approach which was consistent with the position of a Hong Kong company in liquidation.6 It was plainly the appropriate approach, and any other decision would have produced an anomaly.
This judgment serves as a useful reminder that the common law principles of recognition and assistance in respect of the insolvency of foreign companies apply irrespective of the jurisdiction of the court which appointed the insolvency practitioner. They apply equally to civil law and common law jurisdictions and are independent of reciprocity. Nevertheless it is to be hoped that this judgment will pave the way for greater recognition and assistance in PRC of common law appointed liquidators, especially those appointed by the Hong Kong court.
1.  HKCFI 167 (13 January 2020).
2. See 'Recognition of Foreign Insolvency in Hong Kong' (Japan Life Co. Ltd (application by Mr. Kaoru Takmatsu))  Vol.16 ICR Issue 5.
3.  UKPC 36.
4.  AC 508 (HL)
5.  NSWSC 859.
6. Credit Lyonnais v SK Global Hong Kong Ltd.  HKC 104
Originally published by Chase Cambria.
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