Diverse interests

In the case of Re Jiang Wenyu [2021] HKCFI 2897, HNA Group Co., Limited, was the holding company of a substantial business group based in Hainan with interests extending to aviation and investments in hotel and golf courses among others.

The company encountered serious financial difficulties in the past few years which culminated in an application to the Hainan Province Higher People's Court by a creditor seeking bankruptcy reorganization of the company on the grounds of insolvency.

The Honorable Mr. Justice Harris reviewed the order of the Hainan Province People's Court and the relevant provisions (Articles 22(i) and 24(i)) of the Enterprise Bankruptcy Law together with Article 18 and 19 of the Provisions of the Supreme People's court which provide for the appointment of an administrator during the course of Enterprise Bankruptcy cases. Harris J said it was his understanding that it was necessary for a mainland court to order that a reorganization process should commence for it to be demonstrated that the company was insolvent.

The court order established a liquidation group which was formally appointed as the company's administrator and which was tasked with a broad range of duties including taking over the debtor's assets and company documents, investigating the debtor's financial position, and managing and disposing of the debtor's assets.

The administrator applied to the Hainan Province Higher People's Court for a letter of request directed to the Hong Kong High Court seeking recognition of the reorganization in the mainland and providing conventional powers of assistance to three representatives of the administrator in Hong Kong, two being lawyers and the third an office of the Hainan Province Legal Administrative Office.

Issues to determine

Harris J said there were a number of issues which had to be considered before he could determine that this was a proper case in which to make a recognition and assistance order.

The first concerned the process that the court was being asked to recognize as the Hong Kong court would only recognize what constituted a collective insolvency process, when assessed by Hong Kong legal principles.

The second was that foreign insolvency proceedings should be opened in the company's country of incorporation or where it has its center of main interests (see Hogan Lovells client alert Real and discernible benefit – Hong Kong court sets out principles for winding up offshore holding companies). Harris J said this would be uncontroversial as the company was incorporated in the mainland. The first, however, required due consideration.

Collective insolvency

Harris J said that reorganization as provided for by Chapter 8 of the Enterprise Bankruptcy Law is a mechanism which allows a debtor or creditor to apply to the court for recognition of a formal reorganization process, which is intended to restructure debt and rehabilitate a company's business thereby avoiding liquidation.

If the court approves the reorganization proposal, but it turns out it is not possible to implement it successfully, then according to Article 88 the PRC court intervenes and terminates the procedure and declares the company bankrupt. Harris J explained there is no directly comparable procedure in Hong Kong.

It seemed clear to Harris J in the present case that the mainland reorganization concerned all of the company's creditors and so should properly be described as a collective insolvency procedure which was capable of being recognized in Hong Kong.

The fact that some of the company's subsidiaries remained managed by their directors was not inconsistent with treating the company's reorganization as a collective insolvency process. The Hong Kong court considered that what was principally relevant was the effect the process has on the company's debt and creditors rather than the management of its business and assets.

Reciprocity not required

The third issue concerned the applicability to the present case of the cross-border insolvency co-operation mechanism which came into effect in May 2021 (see Hogan Lovells client alert Hong Kong and Mainland China agree new co-operation mechanism for cross-border insolvency).

This co-operation mechanism provides for recognition and assistance of insolvency proceedings specifically between Hong Kong and the (i) Shenzhen, (ii) Shanghai and (iii) Xiamen Intermediate People's Courts in Mainland, which does not extend to Hainan.

However, Harris J stated that, under the common law,  there is no requirement of reciprocity for recognition and assistance in Hong Kong, as per his earlier decision in Re CEFC Shanghai International Group Limited [2020] HKCFI 167 (see Hogan Lovells client alert A welcome red packet – Hong Kong court recognises mainland Chinese administrators for first time). The Hong Kong court could still grant recognition at the request of the Hainan court even if the Hainan court would not recognize Hong Kong insolvency proceedings and liquidators.

Considering that the substantive terms of the order that was sought by the applicants were conventional, Harris J granted the order sought.

Future cross-border arrangement

Having recently granted the liquidators' application for a letter of request to be issued to the Shenzhen Intermediate People's court seeking the Shenzhen court's assistance in the liquidation of a paper company incorporated in Bermuda (see Hogan Lovells client alert Hong Kong court approves first use of new Hong Kong – Mainland China insolvency mechanism), the decision in Re Jiang Wenyu demonstrates the willingness of the courts to further the interests of creditors in cross-border liquidations, using all the tools available under the common law and the new mechanism.

What is still to come, however, is the first recognition of a Hong Kong liquidator by a mainland court under the insolvency mechanism, something which it is hoped should not be too long in the offing.

Authored by Jonathan Leitch and Nigel Sharman.