Demystifying Chinese Insolvencies – All Roads Lead to the Mainland


When a Mainland Chinese business fails, what happens to its assets outside of Mainland China? Are they dealt with piecemeal in satellite insolvency proceedings or can they be brought under the control of the main Chinese proceedings? Given the scale of Chinese investment overseas and the financial problems currently being experienced by many Mainland businesses, these are certainly not hypothetical questions.

Two recent decisions – one in Hong Kong and one in New York – address these issues and point to a growing demystification and recognition of Chinese insolvency law outside Mainland China. What they also show is that creditors outside Mainland China may increasingly find that their only route to recover debts from a failed Chinese business is to engage with the Chinese insolvency process.

An international Free-For-All?

When a business goes into liquidation in China, its creditors are prevented from taking individual actions against the business’ Chinese assets. Instead, they have to participate in a collective liquidation process. However, what about assets located outside Mainland China? Can foreign creditors ignore the Chinese liquidation process and enforce their claims against the foreign assets?

Re CEFC Shanghai International Group Limited

Mr Justice Harris in the Hong Kong Court of First Instance had to consider this issue in a judgment delivered in January (Re CEFC Shanghai International Group Limited [2020] HKCFI 167). CEFC, a Shanghai-based investment company, was placed into liquidation in Mainland China in November 2019. Its assets included a debt claim against its Hong Kong-incorporated subsidiary (the “HK Debt Claim”). Prior to CEFC’s liquidation, a creditor had obtained a default judgment against CEFC in Hong Kong and a garnishee order nisi in respect of the HK Debt Claim. To prevent the creditor from enforcing over the HK Debt Claim (by obtaining a garnishee order absolute) the Chinese court-appointed administrators of CEFC applied to the Hong Kong court for assistance and recognition of the Chinese liquidation. Although the Hong Kong courts have routinely recognised foreign insolvencies, this was the first application for recognition of a Mainland insolvency.

The court considered three main questions. First, should it recognise the Chinese insolvency proceedings? Second, if recognised, what assistance should the Chinese administrators be granted? And third, how would this affect the creditor’s claim for a garnishee order absolute?


Two criteria must be satisfied before recognition may be granted to insolvency proceedings opened in a civil law jurisdiction:

  • the foreign proceedings must have been opened in the company’s country of incorporation; and
  • the foreign insolvency proceedings must be collective insolvency proceedings.

The first requirement was met, as CEFC was incorporated in China where the insolvency proceedings had been commenced. In relation to the second requirement, the court noted that Chinese insolvency proceedings are intended to deal with all of a debtor’s assets. Thus, there was little doubt, the court said, that they were collective proceedings. Indeed, the reason why recognition was being sought was to maintain that collectivity to ensure equal treatment of creditors. As both criteria were met, the Hong Kong court was prepared to recognise the Chinese proceedings.


The second issue for the court was what assistance to offer the Chinese administrators? The Hong Kong court will grant assistance to a non-Hong Kong officeholder by applying Hong Kong insolvency law, although it will not grant them all the same powers as a liquidator appointed under Hong Kong law (namely the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32). Rather the powers granted must be:

  •  limited to allowing the officeholder to exercise in Hong Kong the powers they were granted in their home jurisdiction (but not the powers to do something they would not be able to do in their home jurisdiction);
  • necessary for the officeholder to carry out their other functions; and
  • consistent with Hong Kong law.

One of the most notable aspects of this decision is that the Judge, when answering this second question, sought to draw out some of the key similarities between Hong Kong and the Mainland’s insolvency laws. In particular, he noted that both the PRC Enterprise Bankruptcy Law (the relevant Mainland insolvency legislation) and Hong Kong insolvency law provided for:

  • a stay on creditor claims;
  • all of a debtor’s assets to be encompassed in the proceedings and to be distributed to creditors on a parri passu basis; and
  • the appointed insolvency officeholders to have similar powers and duties.

Given these similarities between the two regimes, the court was prepared to extend to the Mainland Chinese administrators the same assistance as it would to officeholders from other jurisdictions. Most importantly, this included a stay on proceedings against CEFC in Hong Kong as if the company were in liquidation in Hong Kong. Such a stay provides a mechanism for the Hong Kong court to restrain and oversee creditor action while the company undergoes an orderly liquidation in its home jurisdiction.

Garnishee orders and Galbraith

The final issue was whether the moratorium granted by the court ought to prevent the creditor from obtaining its garnishee order absolute over the HK Debt Claim. This issue involved consideration by the court of the House of Lords decision in Galbraith v Grimshaw [1910] AC 508. In Galbraith, a creditor obtained a judgment against a Scottish debtor. To enforce the judgment, the creditor sought to obtain from the English court a garnishee order nisi over an English debt owed to the debtor. However, after the garnishee order had been served, the debtor was adjudicated bankrupt in Scotland resulting in his estate being transferred to the Scottish bankruptcy trustee. The House of Lords in Galbraith decided, however, that the prior English garnishee order prevailed over the foreign (ie Scottish) bankruptcy proceedings. Thus, the creditor could enforce over the English debt claim (by obtaining the garnishee order absolute) despite the bankruptcy proceedings in Scotland.

Harris J noted that Galbraith was “inconsistent with contemporary cross border insolvency law and its reasoning […] inapplicable to modern common law cross-border insolvency assistance.” He was therefore not prepared to follow it and instead decided that the Mainland insolvency should prevail over the Hong Kong garnishee proceedings. This was consistent with recognising the Mainland proceedings in Hong Kong.

Mainland Insolvency

One eye-catching aspect of this decision is that it seems clearly aimed, at least in part, at a Mainland audience. There are two reasons for inferring this. First, Harris J addressed the thorny mirror issue of whether a Mainland court would ever be prepared to recognise a foreign insolvency. None has done so to date, despite the fact that the main Chinese insolvency legislation – the Enterprise Bankruptcy Law (at Article 5) – expressly envisages such recognition. The Judge noted that in Hong Kong there is no legal requirement for reciprocity when recognising a foreign insolvency. Nevertheless, he stated that the extent to which greater assistance is provided to Mainland insolvencies by Hong Kong (and other) courts in the future is likely to be influenced by the level of cooperation and recognition given by Mainland courts to foreign insolvencies. Second, unlike in Hong Kong, reciprocity is a prerequisite to recognition of foreign proceedings for Mainland courts. It must therefore be hoped that the Mainland courts can take some comfort from the recognition given to Mainland proceedings by the Hong Kong court in this decision when they come to consider in the future whether to recognise Hong Kong insolvency proceedings in China.

In re Reward Science and Technology Industry Group Co., Ltd

The CEFC decision came only a few months after the decision of the US Bankruptcy Court for the Southern District of New York to grant Chapter 15 protection to Reward, a Chinese-incorporated consumer goods group. This meant that Reward’s offshore creditors, some of whom had contested the application, were prevented from enforcing their claims against Reward’s assets in the US. This is understood to be the first contested Chapter 15 application for a Chinese company.

Reward had debts of US$1.3bn, which prompted a liquidity crisis leading to an insolvency filing in Beijing in April last year. US$200m of that debt was comprised of US dollar-denominated offshore notes, with the remainder of the debt arising from borrowing in China. Despite the Chinese insolvency, two groups of noteholders launched proceedings in New York. The Chinese court-appointed administrator applied to the US Bankruptcy Court to recognise the Chinese proceedings under Chapter 15 to stay all claims against the debtor in the US.

The noteholders objected to the application, raising a number of arguments including that, as non-Chinese creditors, they were receiving discriminatory treatment in the Chinese insolvency proceedings. The US Bankruptcy Court, nonetheless, made the Chapter 15 order in Reward’s favour. This meant that the offshore creditors could not enforce their claims against Reward’s offshore assets but instead had to participate – together with Reward’s onshore creditors – in its Chinese liquidation process.

Freshfields in New York and Hong Kong acted for the Chinese administrator that made the Chapter 15 application.

Growing Engagement and Cooperation

Both of these decisions show that foreign courts are increasingly prepared to engage with and seek to understand the Chinese insolvency process. Given the growing financial problems being faced by many Chinese businesses, this trend is likely to continue. How far it will go, however, will depend on whether foreign creditors are seen to be treated fairly in Chinese insolvencies and whether there is similar engagement and understanding by the Chinese courts. As Mr Justice Harris observed in CEFC:

The extent to which greater assistance should be provided to Mainland [insolvencies] 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 [Hong Kong] court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies. 



Counsel, Freshfields’ Asia restructuring and insolvency and dispute resolution practices

Nick Stern is a counsel in Freshfields’ Asia restructuring and insolvency and dispute resolution practices. He is based in Hong Kong. Nick has a broad practice involves advising corporates, banks, funds and insolvency practitioners on restructuring and insolvency matters. He has particular experience with insolvency or restructuring-related disputes, typically where there are cross-border elements, shareholder disputes, schemes of arrangement or other court-led restructurings. In addition, he advises on a broad range of disputes and contentious regulatory matters, particularly within the financial services sector. Before relocating to Asia, Nick spent almost 10 years in our London office. He is recognised in Asia Legal 500 for restructuring and insolvency.