In the recent case of Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340 (17 May 2023), the Hon Linda Chan J confirmed the Hon Harris J’s decision in Re Global Brands Group Holding Ltd (in liquidation) [2022] 3 HKLRD 316 in introducing centre of main interest principles in assessing whether or not the Hong Kong court should recognise a foreign liquidation and assist a foreign office-holder. In addition, parties to a liquidation proceeding in non-pilot areas under the mutual recognition and assistance in insolvency proceedings between the courts of mainland China and Hong Kong (Cooperation Mechanism) can also obtain recognition and assistance of Hong Kong courts under the “Procedures for a Mainland Administrator’s Application to the Hong Kong SAR Court for Recognition and Assistance – Practical Guide”.

Background of Re Guangdong

In Re Guangdong, the administrator of a private company (in liquidation) incorporated under the laws of Mainland China applied to the Hong Kong court for recognition and assistance in relation to its liquidation proceedings commenced in the Guangzhou Intermediate People’s Court. Notwithstanding that there was a formal letter of request issued by the Guangzhou Court requesting recognition and assistance, the Hong Kong court was of the view that the application fell outside the scope of the Cooperation Mechanism, as the Guangzhou Court did not belong to one of the specific pilot areas designated by the Supreme People’s Court, but proceeded to consider whether recognition and assistance should be granted despite this.

The decisions

Liquidation in non-pilot areas under the Cooperation Mechanism

Despite the application falling outside the scope of the Cooperation Mechanism, Linda Chan J cited Re HNA Group Co., Ltd [2021] HKCFI 2897 and confirmed that (1) reciprocity is not a requirement for recognition and assistance under common law; and (2) the issue whether it is appropriate for a court outside the pilot areas is a matter for the Supreme People’s Court. Linda Chan J was of the view that the Supreme People’s Court had been informed about the letter of request before it was issued to the Hong Kong courts, particularly in light of the relatively few applications made under the Cooperation Mechanism. As a matter of practice and consistency, her ladyship went on to give guidance to the profession and clarify that future applications should still be prepared in adherence to the Practical Guide, even if the letter of request is issued by a court outside the pilot areas.

COMI as the appropriate test for recognising and providing assistance in a liquidation initiated by a foreign jurisdiction

In assessing whether to recognise the Mainland liquidation and assist the administrator, Linda Chan J considered the rationale of Harris J in Re Global Brands Group Holding Ltd (in liquidation) [2022] 3 HKLRD 316 which followed the principles found in the UNCITRAL Model Law on Cross Border Insolvency:

• The power at common law to recognise and assist a foreign office-holder does not depend on winding-up proceedings having been commenced against the company in the assisting court, as the courtis asked to recognise the office-holder appointed in the place of incorporation as the lawful agent in accordance with the principle of private international law.
• The applicant has to satisfy the court that:
  • the foreign insolvency proceedings are collective insolvency proceedings which include proceedings opened in a civil law jurisdiction;
  • the foreign insolvency proceedings are conducted in the jurisdiction in which the company’s COMI is located; and
  • the assistance is necessary for the administration of a foreign winding-up or the performance of the office-holder’s functions, and the order is consistent with the substantive law and public policy of the assisting court so it is not available for purposes which are properly the subject of other schemes.

Harris J suggested that insolvency proceedings should only be recognised where they take place in a jurisdiction with which the company has material economic ties. His lordship rejected the soft-touch provisional liquidation method¹ as having been abused by insolvency practitioners and offshore law firms. His Lordship was of the view that recognising insolvency practitioners appointed in a “letter box jurisdiction” had the effect of circumventing the proper oversight of the insolvency by the courts of the COMI jurisdiction and therefore rejected such recognition.

This is consistent with Linda Chan J’s position in rejecting other applications for recognition of foreign insolvency proceedings including Re Rare Earth Magnesium Technology Group Holdings Ltd [2022] HKCFI 1686, Re Up Energy Development Group Limited [2022] HKCFI 1329 and Re GTI Holdings Ltd [2021] HKCFI 3647. In the absence of recognition, a winding-up by a Hong Kong court which will allow the liquidation to be overseen by the Hong Kong courts continues to be an option available to insolvency practitioners. Linda Chan J also clarified that, where a foreign company has been ordered to be wound up by the court in its place of incorporation, the Hong Kong court is barred from making a winding-up order, provided that the three core requirements in Kam Leung Siu Kwan v. Kam Kwan Lai (2015) 18 HKCFAR 501 are satisfied. The three core requirements are as follows:

• there must be a sufficient connection with Hong Kong, but it does not necessarily have to consist of the presence of assets within the jurisdiction;
• there must be a reasonable possibility that the winding-up order will benefit those applying for it; and
• the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

Applying COMI principles to the Re Guangdong case, her Ladyship granted orders including to recognise the liquidation and appointment of the Administrator and the insolvency proceedings of the Company conducted in the Mainland, which was both the place of incorporation of the Company and its COMI.

Key takeaways

In summary, Linda Chan J in Re Guangdong confirmed that (1) COMI is the appropriate test for recognising and providing assistance to a liquidation initiated in a foreign jurisdiction; and (2) Mainland insolvency practitioners appointed in non-pilot areas under the Mainland China and Hong Kong Cooperation Mechanism can also apply for recognition and assistance in Hong Kong.

This decision brings the two judges who handle the majority of corporate insolvency matters into alignment on the matter of recognition which has, in recent times, been the source of significant uncertainty for insolvency practitioners. It also provides important guidance for cross-border insolvencies and restructuring cases involving Hong Kong and Mainland China. The decision clarifies that the Hong Kong court is willing to consider applications that do not strictly fall within the scope of the Cooperation Mechanism. Despite this, the court recommends that applicants from non-pilot areas in Mainland China should still adhere to the Practical Guide when making their applications for recognition and assistance. As a result, we can anticipate an increase in recognition and assistance applications to the Hong Kong court from overseas-appointed liquidators and non-pilot areas in Mainland China in the near future.

Furthermore, the adoption of COMI provides a clear and objective criterion for determining the jurisdiction where insolvency proceedings should be conducted. As set out in Re Global Brands, this decision gives a strong signal that only insolvency proceedings in a company’s COMI jurisdiction will be recognised and assistance offered to the relevant insolvency practitioner ensuring a predictable and consistent approach to cross-border insolvencies. The test also facilitates international cooperation and coordination in insolvency cases. It encourages communication and collaboration between courts and insolvency practitioners in different jurisdictions, enabling the efficient resolution of cross-border insolvency issues and the maximisation of asset recovery.

A trainee, Jacky Cheung is one of the authors.

1. The concept of a “soft touch” provisional liquidation has been developed in offshore jurisdictions as a debtor in possession process to ensure “that a company remains under the day to day control of the directors, but is protected against actions by individual creditors” (Re Constellation Overseas Ltd [2019])