In the recent case of Re CEFC Shanghai International Group Limited  HKCFI 167, with reasons for its decision delivered on 13 January 2020, the Hong Kong Court granted its first recognition order of Administrators appointed in the Mainland. The possibility of such recognition has been a popular subject amongst restructuring professionals in Hong Kong for some time and has formed a lively subject topic for debate at recent industry conferences. The question now is how this will be developed going forward.
CEFC Shanghai International Group Limited (the Company) is a Mainland-incorporated investment holding company with subsidiaries in Hong Kong. On 24 November 2019 the Shanghai Court appointed Administrators to the Company under the Enterprise Bankruptcy Law (the EBL). The Administrators have for all material purposes the same functions as liquidators in the Hong Kong system.
The Company’s assets include HK$7.2 billion of receivables (the Receivables) owed by its Hong Kong subsidiary (now in liquidation). The Company had submitted a proof of debt in the Hong Kong subsidiary’s liquidation but before the Shanghai Court appointed Administrators to the Company, a creditor of the Company obtained a garnishee order nisi in respect of the Receivables. The Administrators sought the recognition order to stop the creditor from obtaining a garnishee order absolute and to preserve the Receivables for the benefit of all creditors.
In granting the recognition order, the Hong Kong Court was satisfied that the Mainland liquidation is a collective insolvency proceeding because it encompasses all of the debtor’s assets under Article 30 of the EBL. It also satisfied the general criteria that the foreign insolvency proceedings were opened in the Company’s country of incorporation. The application was supported by the Shanghai Court’s letter of request to maintain the principle of collectivity and pari passu distribution.
More importantly, the Hong Kong Court noted that the purpose of a recognition order is to facilitate one overall liquidation to realise the debtor’s assets, to determine creditors’ claims and to distribute all available assets to creditors on a pari passu basis under the control of insolvency practitioners appointed under one insolvency regime. Accordingly, the recognition order granted imposed a stay of the garnishee proceedings in Hong Kong to promote a worldwide orderly liquidation or restructuring.
The Hong Kong Court also considered that the House of Lords decision in Galbraith v Grimshaw  AC 508, which was decided on narrow grounds, did not preclude the Hong Kong Court from assisting Mainland insolvency proceedings. In Galbraith, it was held that where a Scottish bankruptcy occurred after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy. The Hong Kong Court held that this is “inconsistent with contemporary cross-border insolvency law and its reasoning is inapplicable to modern common law cross-border insolvency assistance.”
However, of particular import is Mr. Justice Harris’ concluding comment that the extent to which the Hong Kong Court will provide assistance in the future must be decided on a case by case basis and the development of the law in this area is likely to be influenced by the whether or not the Mainland promotes a unitary approach to cross border insolvencies. The position on that currently, is far from clear.
The decision is a major landmark for Hong Kong as one of the most developed jurisdiction in cross-border restructuring. It is a true reflection that universalism is the fundamental purpose of cross-border insolvency assistance.