Stop, Collaborate And Listen: First Recognition And Assistance Granted To Mainland Liquidators In Hong Kong

In a long-awaited development of cross-border insolvency cooperation between Hong Kong and Mainland China, the Hong Kong Court has granted recognition and assistance to Mainland liquidators for the first time in Joint and Several Liquidators of CEFC Shanghai International Group Ltd [2020] HKCFI 167.

Background

CEFC Shanghai International Group Ltd ("CEFC"), a company incorporated in Mainland China, was wound up on the grounds of insolvency by the Shanghai Intermediate People's Court and liquidators were appointed. Upon their appointment, the liquidators discovered that CEFC's assets included a claim against its Hong Kong subsidiary, Shanghai Huaxin Group (Hong Kong) Limited ("SHG"), amounting to some HK$7.2 billion (the "SHG Receivable"), for which CEFC had filed a proof of debt in SHG's liquidation. They also discovered that, prior to liquidation, one of CEFC's creditors (the "Creditor") had obtained default judgment against CEFC in Hong Kong for approximately Euro 29 million, and subsequently a garnishee order nisi in respect of the SHG Receivable. In order to prevent the Creditor from obtaining a garnishee order absolute, CEFC's liquidators made an urgent application to the Hong Kong Court for recognition and assistance and to stay the Creditor's garnishee proceedings.

The Hong Kong Court granted the recognition and assistance requested by the Mainland liquidators and the garnishee proceedings were successfully stayed.

Garnishee orders in light of foreign bankruptcies and insolvencies

Notably, Mr Justice Harris rejected the application in Hong Kong of the longstanding English House of Lords case of Galbraith v Grimshaw [1910] AC 508. In Galbraith, the House of Lords decided that where a foreign bankruptcy proceeding (in that case a Scottish 'sequestration') occurred after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy. In effect, the domestic insolvency proceeding 'trumped' the foreign insolvency proceeding. In CEFC Shanghai, Mr Justice Harris held that the analysis in Galbraith was inconsistent with contemporary cross-border insolvency law and its reasoning was inapplicable to modern common law cross-border insolvency assistance.

Applicable principles on recognition

Mr Justice Harris held that the following criteria must be satisfied before recognition and assistance is granted to insolvency proceedings that were opened in a civil law jurisdiction:

the foreign insolvency...