The mechanism will force courts in Shanghai, Shenzhen and Xiamen to recognize insolvency orders filed by creditors of companies in Hong Kong, led for Chinese companies raising funds from global investors. This means that investors can more easily seek to liquidate the assets of Chinese companies on the mainland to get their money back. The program could be extended to more Chinese cities in the future.
The program, which launched this month, comes as international investors increase their exposure to China. At the same time, the country was hit by a wave of defaults and corporate restructuring. The Chinese court system, which is controlled by the ruling Communist Party, has historically failed to recognize insolvency rulings made in Hong Kong and elsewhere.
“This is potentially a game-changing step,” said Patrick Cowley, head of restructuring services in Asia at KPMG.
The lack of a deal had been a sticking point for investors. A Hong Kong court denied a petition from investors to liquidate Huiyuan Juice Group, one of China’s largest juice makers, in November after defaulting on its obligations. The court ruled that the liquidators appointed in Hong Kong were unlikely to be recognized in mainland China.
This has left his creditors with little recourse, lawyers said.
While Hong Kong’s status as a global financial center came under pressure after Beijing imposed a controversial national security law last year, the city’s commercial legal system remains well regarded.
The deal “brought the company’s mainland assets within reach of liquidators outside of China for the first time,” said a Hong Kong insolvency veteran.
The mechanism also means that Hong Kong courts will recognize certain insolvency proceedings in the mainland legal system.
“Once a creditor has appointed liquidators for a group in Hong Kong, that liquidator can apply to mainland Chinese courts to have equal rights to the group’s assets on the mainland,” said Kevin Song, a practitioner. insolvency at the restructuring specialist Borrelli Walsh in Beijing.
However, the system has not been tested and it does not guarantee that all applications submitted through it will be accepted. Lawyers said China has yet to demonstrate that international creditors can recover the assets of insolvent mainland groups, warning some may attempt to argue that they fall outside the jurisdiction of the agreement.
Mainland courts can also refuse to help liquidators appointed in Hong Kong if they believe it “would undermine public order or good morals” or if “mainland creditors are being treated unfairly”, according to an opinion. legal issued by the Supreme People’s Court, China’s highest court. .
“What we’re going to need now is to present the right cases to take to the courts in Shenzhen, Shanghai or Xiamen. . . to give examples and show that it works, ”said Cowley of KPMG.
An insolvency expert in mainland China has warned that authorities will also review the system for any detrimental economic repercussions.
“There will be concerns about potential consequences such as the bankruptcy of Chinese companies as foreign creditors seek to take control of assets such as factories or warehouses that employ large numbers of people,” he said. ‘expert. “It could destabilize local economies.”
Still, lawyers believe the deal will boost Hong Kong’s reputation as a platform for investing in Chinese companies.
“Right now they’re investing and it’s a bit of a gamble,” said Davyd Wong, insolvency specialist at law firm YTL. ” When [Chinese companies] sell stocks or bonds in Hong Kong. . . the guarantee given for these debts is pledges of assets on the continent. “