The First Hong Kong Liquidation Proceedings Recognized by Chinese Mainland Court under New Mutual Recognition Framework

Derek Lai - Deloitte Global Belt & Road Leader and Vice Chair of Deloitte China; and Glen Ho - National Leader of Restructuring Services of Deloitte China were appointed as Joint and Several Liquidators (the "Liquidators") of Samson Paper Company Limited ("Samson") which was placed into Creditors' Voluntary Liquidation¹ in Hong Kong by virtue of a shareholder’s resolution on 14 August 2020.  In Re Samson Paper Company Limited [2021] HKCFI 2151, upon the application of the Liquidators in accordance with the Record of Meeting (as defined below), the High Court of Hong Kong, on 20 July 2021, granted an order and issued a Letter of Request to the Shenzhen Municipal Intermediate People’s Court (‘the Shenzhen Court’) appealing to the Shenzhen Court to recognize the appointment of the Liquidators, and to allow the Liquidators to exercise their powers in the Chinese Mainland. Subsequently, on 15 December 2021, the Shenzhen Court handed down its ruling, recognizing for the first time a Hong Kong bankruptcy (insolvency) proceedings, and the role of Hong Kong-appointed liquidators.

This recognition originated from the Record of Meeting of the Supreme People’s Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (‘Record of Meeting’), signed on 14 May 2021, and The Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region.  The Samson instance has significance in being the first case where a Letter of Request was issued by the High Court of Hong Kong to its counterpart in Mainland China, and the first time Hong Kong-appointed liquidators were recognized in the Mainland.

Ever since the signing of the Record of Meeting, there has been widespread attention paid to the actual implementation of such a pilot scheme. As leading practitioners in corporate restructuring, Derek Lai and Glen Ho have long paid close attention to the development of bankruptcy (insolvency) regimes in both jurisdictions. In the Samson instance, the Deloitte China team - led by engagement partner Cindy Sun (Shenzhen office) and Forrest Kam (Hong Kong office) - explored possible avenues to put the pilot scheme in practice. The successful application of cross-border mutual recognition was also contributed to by the guidance and support of the Hong Kong and Shenzhen courts.

The Samson instance is an active exploration of cross-border bankruptcy assistance between the two jurisdictions and a breakthrough in the practice of cross-border bankruptcy (insolvency) law. By bringing the mutual judicial recognition and assistance between the two jurisdictions into actual operation, the Samson instance is of exemplary significance to cross-border restructuring.

Enhanced efficiency: Before the establishment of the mutual recognition mechanism, Hong Kong-appointed liquidators encountered multiple obstacles when performing their duties in the Mainland. The Samson instance means that, with the assistance and approval of the Courts of the two jurisdictions, liquidators can perform their duties more effectively in the Mainland in realizing or preserving a company's assets and protecting the rights and interests of creditors. 

Cohesion of the two jurisdictions: As a pilot measure for cooperation between the two jurisdictions, it is an important exploration of the cohesion of rules and mechanisms between Hong Kong and the Mainland, and has important practical significance for promoting mutual judicial recognition and assistance in bankruptcy (insolvency) proceedings between the two jurisdictions.  This mutual recognition mechanism illustrates legal collaboration under the “One Country, Two Systems” framework.  

Optimizing the business environment: The implementation of this mechanism means the two jurisdictions have made a major step forward in jointly establishing a fair, orderly and effective market exit and corporate rescue mechanism. It also means improved protection to investors and lenders through tighter cross-border judicial cooperation, which is conducive in creating a market-oriented, international business environment with the robust rule of law, that boosts the confidence of Hong Kong and foreign investors to invest in the Mainland. 

Promoting integration of the Greater Bay Area (GBA): At present, the construction of the Guangdong-Hong Kong-Macao Greater Bay Area is progressing steadily. To further deepen cooperation between Hong Kong and cities in the GBA, more cohesion of rules and mechanisms is needed.  Against the background of increasingly close cooperation in the GBA, the promulgation of such pilot measure and the implementation of the first mutual recognition case promote further cooperation under various jurisdictions in different regions of GBA.  It is believed that with the introduction of this mechanism, cooperation between Hong Kong and the GBA will become closer. 

Deepen international legal cooperation: Under the Belt and Road Initiative, an effective cross-border judicial cooperation mechanism is of great significance in developing international economic and trade cooperation and protecting the interests of international investors. The successful implementation of the first cross-border bankruptcy (insolvency) case between the Mainland and Hong Kong lays the foundation for the establishment of cross-border bankruptcy cooperation with countries along the Belt and Road in future.  With the progression of globalization, the discussion and practice of cross-border bankruptcy has been risen up the agenda. The cross-border bankruptcy (insolvency) assistance mechanism of the two jurisdictions can provide a model to explore the integration of relevant fields with the international community.

Reference:

1: referred to a winding up pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance of the Laws of Hong Kong where the directors of the company form the view that that company will not be able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up