Client Alert The New Cross-Border Arrangement Between Hong Contact Information Kong and Mainland China on Insolvency and If you have any questions concerning this update, Restructuring Matters – A Comparison with please contact: Chapter 15 of the United States Bankruptcy Code Naomi Moore May 31, 2021 Partner [email protected] On May 14, 2021, the Department of Justice of the government of the Hong Kong Hong Kong +852 3694.3050 Special Administrative Region announced that the Secretary for Justice of Hong Kong and the Vice-president of the Supreme People’s Court (the “SPC”) had signed the Abid Qureshi Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy Partner (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong [email protected] Special Administrative Region (the “ROM”). The ROM concerns the commencement New York and implementation of the much anticipated cross-border mutual recognition, +1 212.872.8027 assistance and cooperation arrangement between Hong Kong and mainland China (the “Mainland”) in relation to corporate insolvency and restructuring matters (the Liz Osborne Partner “Cooperation Arrangement”). [email protected] To give effect to this milestone agreement, on the same day the SPC issued The London +44 20.7661.5347 Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Daniel Cohen Special Administrative Region (the “SPC Opinion”) and the Hong Kong government Partner issued a Practical Guide setting out the procedure for a Mainland administrator’s [email protected] application to the Courts of Hong Kong for recognition and assistance (the “Guide”). Hong Kong +852 3694.3032 The Cooperation Arrangement will initially be implemented as a pilot program by the people’s courts in Shanghai Municipality, Xiamen Municipality in Fujian Province and Jeremy Haywood Shenzhen Municipality in Guangdong Province (together the “Pilot Courts”) given their Counsel close financial and business connections with Hong Kong. It is anticipated that other [email protected] Mainland courts will be added to the arrangement in the future if the pilot program is Hong Kong +852 3694.3019 successful. This is a groundbreaking development as it is the first time that either the Mainland or Jingli Jiang Hong Kong has entered into a cooperation framework with any other jurisdiction in Counsel [email protected] respect of cross-border insolvency and restructuring matters. The true implications of Beijing this development for creditors and market participants in Hong Kong-China +86 10.8567.2229 restructuring and insolvency matters will, however, only become clear once the first 1 test cases begin to emerge and we see how the Cooperation Arrangement is applied in practice. While we await further clarification and guidance from those cases, we highlight in this article the key features of the Cooperation Arrangement and consider how it compares to the recognition and assistance mechanisms available under chapter 15 of the United States (“U.S.”) Bankruptcy Code (“chapter 15”), which was enacted following the adoption by the U.S. of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency (the “Model Law”) in 2005. The Model Law is a framework for dealing with cross-border insolvency and restructuring matters that has so far been adopted in 49 States in a total of 53 jurisdictions around the world1. Finally, we consider the potential ramifications of the Cooperation Arrangement for offshore creditors and insolvency officeholders in Hong Kong. Although the Cooperation Arrangement does have some limitations relative to chapter 15, it is an important and positive development for the Hong Kong-China insolvency and restructuring landscape and will give Hong Kong insolvency officeholders an advantage in Chinese group failures that have a sufficient nexus to Hong Kong and one or more of the Pilot Court jurisdictions. Recognition of Mainland Insolvency Proceedings in Hong Kong Hong Kong has not adopted the Model Law, nor does it have any statutory mechanism to deal with cross-border insolvency and restructuring matters. Instead, the Hong Kong courts have, over the years, developed and refined a common law framework for addressing such issues. An overview of the relevant common law principles can be found in our recent Client Alert. These common law principles have already been successfully applied on at least two occasions to recognize Mainland insolvency proceedings, in the decisions of Re CEFC Shanghai International Group Limited2 and Shenzhen Everich Supply Chain Co, Ltd3. The ROM and the Guide contemplate that the recognition of Mainland insolvency proceedings in Hong Kong will continue to be dealt with under the existing common law framework in Hong Kong. The procedure for seeking recognition of a Mainland insolvency proceeding will continue to involve the issuance of a letter of request by a Mainland court addressed to the Hong Kong Companies Court for the purpose of seeking recognition and assistance, usually on terms that reflect the Hong Kong Companies Court standard order (unless there is a good reason to deviate from those terms in a particular case). Under the Cooperation Arrangement, the Hong Kong Companies Court may grant (i) recognition of bankruptcy liquidation, reorganization and compromise proceedings under the Enterprise Bankruptcy Law of the People’s Republic of China (the “EBL”); (ii) recognition of a Mainland bankruptcy administrator’s office as an administrator; and (iii) assistance with the discharge of the bankruptcy administrator’s duties as an administrator. Recognition of Hong Kong Insolvency Proceedings in the Mainland Since 2007, the Mainland has had a statutory mechanism available to deal with cross- border insolvency matters in the form of Article 5 of the EBL. This gives the Mainland © 2021 Akin Gump Strauss Hauer & Feld LLP 2 courts discretion to recognize and enforce judgments or rulings in foreign bankruptcy cases according to international treaties or on the basis of the principle of reciprocity. Recognition and enforcement on this basis is subject to the proviso that the judgment or ruling does not violate the basic principles of Mainland law, does not jeopardize the sovereignty and security of the state or public interests and does not undermine the legitimate rights and interests of creditors in the Mainland. The Mainland has not signed any international treaties with other jurisdictions in respect of cross-border insolvency and restructuring matters (other than the recent Cooperation Arrangement with Hong Kong) and, to date, Article 5 has had very limited utility in practice, notwithstanding that Mainland bankruptcy proceedings have been granted recognition in a small number of cases in foreign jurisdictions. Unlike Hong Kong, the Mainland does not have a common law system, and its courts are not formally bound by rigid precedent as they are in Hong Kong. Consequently, a different approach was required for a recognition and assistance regime to operate effectively in the Mainland compared with the common law precedent-based approach in Hong Kong. Although the Mainland has not adopted the Model Law, certain features of the Mainland recognition and assistance regime as contemplated by the Cooperation Arrangement have been influenced by the Model Law, although, as we highlight below, it deviates from the Model Law in a number of significant respects. A Comparison of Chapter 15 and the Cooperation Arrangement in the Mainland The high-level comparison table below illustrates the key similarities and differences between chapter 15 in the U.S. (which enacted the Model Law without any material deviations) and the Mainland recognition and assistance regime under the Cooperation Arrangement (according to the terms of the SPC Opinion): Chapter 15 Cooperation Arrangement Proceedings that “Foreign proceedings,” being Hong Kong collective can be recognized judicial or administrative insolvency proceedings, proceedings in a foreign including: country under a law relating to Compulsory winding up insolvency or adjustment of Creditors’ voluntary debt in which the debtor’s winding up assets and affairs are subject Schemes of arrangement to control or supervision by a for restructuring debt, foreign court for the purpose of promoted by a liquidator or reorganization or liquidation. provisional liquidator and sanctioned by the Hong Kong court. Representatives “Foreign representative,” being A liquidator or provisional that can be a person or entity authorized liquidator appointed by the recognized in the foreign proceeding to Hong Kong court. © 2021 Akin Gump Strauss Hauer & Feld LLP 3 Chapter 15 Cooperation Arrangement administer the reorganization or liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding. Jurisdiction Debtor has its: Debtor has its: center of main interests COMI in Hong Kong. (“COMI”) or Principal assets, a place of an establishment (being a business or a place where the debtor representative office in carries out non-transitory Shenzhen, Shanghai or economic activity) Xiamen. in the place where the foreign proceedings sought to be recognized have been commenced. Date at which COMI The date of the filing of the At least six months prior to the is determined chapter 15 petition, although a commencement of the U.S. Bankruptcy Court