Demystifying Chinese insolvencies—all roads lead to the Mainland

Demystifying Chinese insolvencies—all roads lead to the Mainland  

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. 

An international free-for-all?

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?

The Hong Kong angle—Re CEFC Shanghai International Group Limited

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:

  • have the foreign proceedings been opened in the company’s country of incorporation? (CEFC was incorporated in China and so this requirement was met)—and  
  • are the proceedings collective insolvency proceedings?

One of the most notable aspe

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.