Hong Kong companies court reaffirming the future of Mainland-Hong Kong cross-border insolvencies

Shortly after its “first of its kind” decision in Re CEFC Shanghai International Group Limited [2020] HKCFI 167 delivered at the beginning of this year, the Hong Kong Court, in its most recent decision in Re Shenzhen Everich Supply Chain Co, Ltd [2020] HKCFI 965, once again made an order recognising the liquidation of a PRC company (the “Company”) in the Mainland and the appointment of the Company’s administrator (the “Liquidator”) by the Shenzhen Court.

In applying the same criteria adopted in Re CEFC, Mr Justice Harris expressly noted that the winding-up in the Mainland is a collective insolvency proceeding in the Company’s place of incorporation and, accordingly, granted an order for the recognition of the winding-up and the Liquidator.

Some readers may recall that in Re CEFC, the court remarked towards the end of the decision that 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.  To that end, one thing on which the Re Shenzhen Everich decision supplements the guidance offered by the Hong Kong court in Re CEFC is that it gives a further example of how the court may exercise its common law power of assistance - this relates to the Company’s two subsidiaries in Hong Kong, whose respective sole directors had been arrested in the Mainland.  In the absence of management, the Liquidator had no way to access and deal with the substantial funds in local bank accounts and external trade receivables owned by the two subsidiaries.

As such, in addition to the same order as that made by Mr Justice Harris in Re CEFC, the Liquidator in Re Shenzhen Everich requested the court to also empower it to “take control of and exercise all rights that the Company may have in relation to any of its subsidiaries, joint ventures, associated companies or other entities in which the company has an interest (whether directly or indirectly)”. Given the problem faced by the Liquidator, Mr Justice Harris found it necessary to grant the power they sought.

The decision also offers a practical tip on how an application for recognition and assistance should be made. An application of this sort requires, amongst other things, a letter of request issued by the foreign court which appointed the liquidator in question.  In the decision, the court expressly noted that whilst the Shenzhen Court’s letter of request in substance sought the granting of same powers by Hong Kong court, it did not track the order in Re CEFC, which was appended to that decision to show the standard powers of assistance which the Hong Kong court is willing to order.  Lawyers representing Mainland administrators are advised that “it would be helpful” if the letter of request is framed in terms which track the order in Re CEFC.

With the second Mainland liquidator recognition order emerging just four months after the first of its kind in Hong Kong’s judicial history (and let’s not forget the Hong Kong court has suspended its operation for 3 months after Re CEFC due to COVID-19), we can clearly see the Hong Kong court’s willingness to recognise the Mainland’s insolvency regime to facilitate Mainland liquidators in the administration of troubled Mainland corporations.  Given the global economic downturn, we expect to see more cases of this sort in the very near future.