Rely on the most comprehensive, up-to-date legal content designed and curated by lawyers for lawyers
Work faster and smarter to improve your drafting productivity without increasing risk
Accelerate the creation and use of high quality and trusted legal documents and forms
Streamline how you manage your legal business with proven tools and processes
Manage risk and compliance in your organisation to reduce your risk profile
Stay up to date and informed with insights from our trusted experts, news and information sources
Access the best content in the industry, effortlessly — confident that your news is trustworthy and up to date.
Find up-to-date guidance on points of law and then easily pull up sources to support your advice with Lexis PSL
Check out our straightforward definitions of common legal terms.
Our trusted tax intelligence solutions, highly-regarded exam training and education materials help guide and tutor Tax professionals
Access our unrivalled global news content, business information and analytics solutions
Insurance, risk and compliance intelligence using big data, proprietary linking and advanced analytics.
A leading provider of software platforms for professional services firms
In-depth analysis, commentary and practical information to help you protect your business
LexisNexis Blogs shed light on topics affecting the legal profession and the issues you're facing
Legal professionals trust us to help navigate change. Find out how we help ensure they exceed expectations
Lex Chat is a LexisNexis current affairs podcast sharing insights on topics for the legal profession
Discuss the latest legal developments, ask questions, and share best practice with other LexisPSL subscribers
Nick Stern of Freshfields Bruckhaus Derringer LLP says Chinese firms acquiring foreign assets has been a hot topic for some time. But one often overlooked question is what happens to those overseas assets if the Chinese business fails? Given the scale of Chinese investment overseas and the financial problems currently being experienced by many Mainland businesses, this question is of growing importance. Two recent decisions—one in Hong Kong and one in New York—address this issue and point to the growing demystification and recognition of Chinese insolvency law outside China. What these decisions also show is that creditors outside China may increasingly find that their only way to recover debts is to engage with the Chinese insolvency process.
When a business goes into liquidation in China, its creditors are prevented from taking individual actions against the business’ Chinese assets. Instead they have to participate in a collective liquidation process. However, what about assets located outside China? Can foreign creditors ignore the Chinese liquidation process and enforce their claims against the foreign assets?
Mr Justice Harris in the Hong Kong Court of First Instance had to consider this issue in a judgment delivered recently (Re CEFC Shanghai International Group Limited, 13 January 2020). CEFC, a Shanghai-based investment company, is in liquidation in Mainland China, but has substantial assets in Hong Kong. A creditor was seeking to enforce against those Hong Kong assets. As a result, the Chinese court-appointed administrators of CEFC applied to the Hong Kong court to recognise the Chinese liquidation and protect the Hong Kong assets from pending enforcement. Despite the Hong Kong court routinely recognising foreign insolvencies, this was the first application to the Hong Kong court to recognise a Mainland insolvency.
The legal test for recognition involves two questions:
One of the most notable aspects of this decision is that the judge, when answering this second question, sought to draw out some of the key similarities between Hong Kong and the Mainland’s insolvency laws. In particular, he noted that insolvency law under both systems provides for:
As a result, in his view, there was no doubt that the Chinese insolvency proceedings were collective in nature and should be recognised, thereby protecting CEFC’s Hong Kong assets against enforcement by creditors. Another eye-catching aspect of this decision is that it seems clearly aimed, at least in part, at a Mainland audience.
There are two reasons for inferring this. First, Harris J addressed the thorny mirror issue of whether a Mainland court would ever be prepared to recognise a foreign insolvency. None has done so to date, despite the fact that the main Chinese insolvency legislation—the Enterprise Bankruptcy Law (at Article 5)—expressly envisages such recognition.
The judge noted that in Hong Kong there is no legal requirement for reciprocity when recognising a foreign insolvency. Nevertheless, he stated that the extent to which greater assistance is provided to Mainland insolvencies by Hong Kong (and other) courts in the future is likely to be influenced by the level of cooperation and recognition given by Mainland courts to foreign insolvencies. Second, unlike in Hong Kong, reciprocity is a prerequisite to recognition of foreign proceedings for Mainland courts. It must therefore be hoped that the Mainland courts can take some comfort from the recognition given to Mainland proceedings by the Hong Kong court in this decision when they come to consider in the future whether to recognise Hong Kong insolvency proceedings in China.
The CEFC decision comes only a few months after the decision of the US Bankruptcy Court for the Southern District of New York to grant Chapter 15 protection to Reward, a Chinese incorporated consumer goods group. This meant that Reward’s offshore creditors, some of whom had contested the application, were prevented from enforcing their claims against Reward’s assets in the US. This is understood to be the first contested Chapter 15 application for a Chinese company. Reward had debts of US$1.3bn, which prompted a liquidity crisis leading to an insolvency filing in Beijing in April last year. US$200m of that debt was comprised of US dollar-denominated offshore notes, with the remainder of the debt arising from borrowing in China. Despite the Chinese insolvency, two groups of noteholders launched proceedings in New York. The Chinese court-appointed administrator applied to the US Bankruptcy Court to recognise the Chinese proceedings under Chapter 15 to stay all claims against the debtor in the US.
The noteholders objected to the application, raising a number of arguments including that, as non-Chinese creditors, they were receiving discriminatory treatment in the Chinese insolvency proceedings. The US Bankruptcy Court, nonetheless, made the Chapter 15 order in Reward’s favour. This meant that the offshore creditors could not enforce their claims against Reward’s offshore assets but instead had to participate—together with Reward’s onshore creditors—in its Chinese liquidation process.
Both of these decisions show that foreign courts are increasingly prepared to engage with and seek to understand the Chinese insolvency process. Given the growing financial problems being faced by many Chinese businesses, this trend is likely to continue. How far it will go, however, will depend on whether foreign creditors are seen to be treated fairly in Chinese insolvencies and whether there is similar engagement and understanding by the Chinese courts.
Creditors outside China may increasingly find that their only way to recover debts is to engage with the Chinese insolvency process.
Freshfields in New York and Hong Kong acted for the Chinese administrator that made the Chapter 15 application.
This article first appeared on the websites of Freshfields Bruckhaus Derringer LLP and INSOL International and is republished with permission.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Free trials are only available to individuals based in the UK
* denotes a required field
0330 161 1234