Hong Kong and mainland China agree new co-operation mechanism for cross-border insolvency

In a ground-breaking arrangement, Hong Kong and the Mainland have agreed a new co-operation mechanism for cross-border insolvency.

Under the protocol, liquidators from Hong Kong may apply to certain mainland courts for recognition of insolvency proceedings in Hong Kong, whilst bankruptcy administrators from the mainland can apply to the Hong Kong High Court for recognition of bankruptcy proceedings in the mainland.

In a statement, the Hong Kong government said the new co-operation framework expressly covers bankruptcy compromise and reorganization in the mainland as well as debt restructuring in Hong Kong, thereby encouraging the restructuring of debt in order to revive businesses with a view to reaching consensus among creditors from both places and abroad.

Under the protocol, the SPC has designated a number of pilot areas where the relevant Intermediate People's Courts and HKSAR courts will now work towards mutual recognition of and assistance in insolvency proceedings in accordance with the laws. The initial pilot areas are Shanghai, Xiamen and Shenzhen given the close trade ties with Hong Kong.

An opinion and a practical guide have been issued giving further details and model documents to be used when making applications before the relevant court.

The announcement of the mechanism comes as the Hong Kong courts have taken welcome steps to develop the common law principles relating to cross-border recognition and assistance in insolvency proceedings between Hong Kong and the mainland.

Foreign investors and offshore creditors of Chinese companies may now have more of a say in what happens when an insolvency situation arises. This cross border protocol is intended to address the gap which exists in co-ordinating insolvency and restructuring processes between Hong Kong and the mainland.  Now, where a liquidator appointed in Hong Kong applies to one of the three designated courts in the mainland, provided the liquidator can demonstrate that the debtor’s “centre of main interests” (typically the country in which the debtor has been incorporated) is in Hong Kong, and has been in Hong Kong for at least six months, there are good grounds for the mainland court to provide assistance.  This judicial mechanism represents a significant enhancement on the current status quo where a Hong Kong liquidator’s efforts to access assets in the mainland and monetise these for the benefit of all creditors are often frustrated.