Many people might have a negative impression on corporate insolvency and debt restructuring. Some even avoid talking about them. But from the legal perspective, a modernised and efficient insolvency regime is in fact favourable for business and investment. On May 14, the Department of Justice (DoJ) and the Supreme People's Court signed the Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) proceedings between the Courts of the Mainland and the Hong Kong Special Administrative Region (HKSAR), allowing liquidators from Hong Kong to apply to Mainland courts for recognition of insolvency proceedings in Hong Kong. Likewise, bankruptcy administrators from the Mainland may apply to the High Court in Hong Kong for recognition of bankruptcy proceedings in the Mainland.
This new cooperation mechanism comes with three advantages, two breakthroughs and one goal. The advantages include:
(1) Balance and protect the interests of creditors and debtors: the establishment of a system for mutual recognition of insolvency proceedings and assistance to liquidators between the two places avoids the inability to fully recover the debtors’ assets due to lack of mechanism, thereby enhancing the protection of the interests of debtors and creditors which is conducive to the orderly and fair handling of the relevant stakeholders’ interests.
(2) Make use of debt restructuring to reduce unemployment: it encourages enterprises to make use of debt restructuring procedures to facilitate creditors to reach a consensus on the restructuring plan as soon as possible. Companies under financial distress can reduce the risk of liquidation through debt restructuring and therefore prevent layoffs.
(3) Further improve business environment and encourage investment: the mechanism collectively built by the two places will give additional assurance to creditors and investors, thus further improving the investment and business environment.
The cooperation mechanism, implemented through pilot cities, connecting the procedures and rules between Hong Kong and the Mainland, marks an important move for judicial assistance between the two places and has achieved two breakthroughs:
(1) The signing of the record of meeting signifies a major breakthrough by fully reflecting the uniqueness of “one country, two systems” as Hong Kong becomes the only jurisdiction outside the Mainland where mutual recognition of and assistance to insolvency proceedings are allowed. It highlights the trust of our country in Hong Kong’s judicial system and the firm support for Hong Kong to become an international legal hub.
(2) In devising the cooperation mechanism, reference has been made to relevant international rules, including certain principles in the UNCITRAL (United Nations Commission on International Trade Law) Model Law on Cross-Border Insolvency issued in 1997. However, the mechanism is much more extensive and in-depth, and is more in line with the needs and development of the two places. The cooperation mechanism expressly covers bankruptcy compromise and reorganization in the Mainland as well as debt restructuring in Hong Kong, which allow debtors, creditors and other stakeholders to understand the scope of application of it, thereby encouraging the rescue of enterprises through reorganization or restructuring.
Through the implementation of the “one country, two systems” policy and leveraging Hong Kong’s uniqueness as the only common law jurisdiction in China, the most important aim of the cooperation mechanism is to explore the rules governing cross-border insolvency at first, and then further provide high quality cross-boundary legal and dispute resolution services with a view to contributing to the promotion of rule of law involving foreign parties and the building of rule of law in China.
On the day of signing the record of meeting, the Shenzhen Intermediate People's Court held a forum on legal and practical issues concerning cross-boundary insolvency co-operation between the Mainland and Hong Kong and introduced the co-operation mechanism, with over 500 registrations for attendance. About half of them came from Hong Kong. Meanwhile, the DoJ has issued a practical guide to briefly explain the key procedure of applying for recognition and assistance from Hong Kong courts. We are exploring the opportunity of organizing another seminar to further explain the relevant information and operational details of the cooperation mechanism between the two places to the legal sector.
In the long run, more businesses will be attracted to invest in Hong Kong, which in turn will consolidate the city's role as a platform for enterprises to tap into the Mainland market. Also, businesses may choose Hong Kong law as the applicable law for their contracts when investing in the Mainland. To give a better understanding of the advantages of using Hong Kong law, the DoJ will hold a webinar entitled "Why Use Hong Kong Law" on May 31. Representatives from legal sector will present an objective analysis and exchange views with the audience.
May 19, 2021