Judicial Recognition Mechanism Required for Hong Kong-China Cross-Border Insolvencies

Written by Emily Lee, Assistant Professor Faculty of Law at The University of Hong Kong

The signing of the Sino-British Joint Declaration on 19 December 1984 declared that Hong Kong would be returned to China as the Hong Kong Special Administrative Region (“HKSAR”) on 1 July 1997 and that Hong Kong’s freedoms and pluralism under the rule of law would remain unchanged for 50 years.

Within six years of the handover, on 29 June 2003, the Mainland and the HKSAR sought to foster and facilitate bilateral trade between the two economic entities by signing the Closer Economic Partnership Arrangement (“CEPA”) which laid out the basis for economic integration between the HKSAR and the Mainland under the political arrangement of the “One Country, Two Systems” principle so that the HKSAR’s capitalist and the Mainland’s socialist economies can co-exist under the same sovereign nation but operate within separate legal and business frameworks. Yet the Mainland and the HKSAR still remained, and continue to remain, two separate judicial jurisdictions. As a result, judicial recognition of court judgments and orders remains a problem between the HKSAR and the Mainland.

After Hong Kong became the HKSAR, the first formal judicial recognition mechanism for cross-border instances lies with the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned (also known as the “2006 Arrangement”), which was signed in the HKSAR on 14 July 2006 and took effect on 1 August 2008. However, as suggested by its name, the 2006 Arrangement applies only to civil and commercial matters and does not cover cross-border corporate insolvencies between the HKSAR and the Mainland (“HK-China CBI”). It is important to note that the 2006 Arrangement cannot be adapted to create a new judicial recognition mechanism for HK-China CBI cases unless it is revised. The 2006 Arrangement builds around the parties’ choice of jurisdiction (to be in either the HKSAR or the Mainland); this is not suitable for cross-border insolvency matters because in many of these cases, the court’s jurisdiction is established on a non-consensual basis.

The problems of HK-China CBI issues have direct relevance to the needs of the HKSAR in maintaining its reputation as a key international financial centre in the world while maintaining strong economic ties with the Mainland. The HK-China CBI judicial recognition mechanism should be made available for companies and insolvency practitioners in the HKSAR and the Mainland so as to simplify as well as unify the insolvency procedures in both jurisdictions. Otherwise, insolvency practitioners must be innovative and strategically plan for any subsequent insolvency proceedings to take place in the Mainland: changing legal representatives and management personnel of Chinese subsidiary companies is one important way to achieve this aim, although this would mean that administrative measures would be employed to achieve a result that a clearly stated insolvency procedure should bring forth as a matter of course and with legal certainty for all concerned parties.

Judicial recognition for cross-border insolvency cases is strongly desired for simplifying and expediting the insolvency procedure, without which creditors in the HKSAR, in order to enforce a favourable judgment (ruled by the HKSAR courts), would be forced to pursue another insolvency procedure in the Mainland. The dangers of duplicated law suits are not merely wasted judicial resources, time and costs; without judicial recognition, similarly-situated creditors may be awarded different judgments by different courts, creating an incentive for forum shopping by creditors.