Are bilateral agreements the way forward for cross-border insolvency? An analysis of the China-Hong Kong Cooperation Mechanism

Are bilateral agreements the way forward for cross-border insolvency? An analysis of the China-Hong Kong Cooperation Mechanism

By Sean Lee (Singapore Global Restructuring Initiative)


On 14 May 2021, the Government of Hong Kong and the Supreme People’s Court (“SPC”) signed the Record of Meeting of the SPC and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (“Cooperation Mechanism”). Essentially a bilateral agreement, the Cooperation Mechanism allows for Hong Kong liquidators and Mainland Chinese administrators to seek mutual recognition and assistance in insolvency proceedings. The decision to enter into the Cooperation Mechanism could evidence China’s intention to forge a new insolvency regime with her economic partners rather than conform to the reigning trends as a mere signatory to the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”). 

Recognition of foreign proceedings under the Enterprise Bankruptcy Law

Currently, the only provision in the Enterprise Bankruptcy Law dealing with the issue of cross-border law is Article 5, which serves as a broad and general framework for cross-border insolvency by allowing the SPC to “according to the relevant international treaties that China has concluded to or acceded to or according to the principles of reciprocity, conduct an examination thereon”, grant recognition and permission for enforcement. As a condition for recognition and enforcement, the foreign judgment must not
(i)    Violate the basic principles of laws of Mainland China;
(ii)    Damage the sovereignty, safety or social public interests of the State; or
(iii)    Damage the legitimate rights and interests of the debtors within the Mainland.

Furthermore, Article 5 indicates the outbound access of Chinese insolvency proceedings, stating that the procedures for bankruptcy “shall have binding force over the assets of the relevant debtor beyond the territory of the People’s Republic of China”. 

Despite this broad and clear mechanism to recognise and provide judicial assistance to foreign insolvency proceedings, evidence of such recognition were previously either scant or simply not well recorded or discussed. In a recent article, Dr Zhang Zinian compiled a list of foreign judgment recognition applications taking place in China from 1994 to 2018, and found only 13 out of 30 applications were successful.  

Two cases emerge as noteworthy – the first is the recognition of a judgment from the Milan Court over an Italian company B&T Ceramic Group s.r.l (“B&T”). While there was a relevant international treaty in this case (namely the Treaty on Judicial Assistance in Civil Matters between the People’s Republic of China and the Republic of Italy), and the Foshan Court recognised the validity of the Italian bankruptcy judgment and adjudication orders, it is curious that B&T ultimately realised its rights “through diplomatic approaches instead of pursuing further judicial proceedings”, marking it as a lost opportunity to examine the practice of a Chinese court with regard to cross-border insolvency.

The restructuring of Taizinai Group, whose Cayman Islands holding company was wound up by investors, is noteworthy for a different reason. When dealing with the insolvency assets in Mainland China, the management group of Taizinai claimed it had no legal effect there. Ultimately, through the intervention of the Chinese government, the local court reached an agreement with the foreign liquidator for the local court to start a reorganisation procedure. Due to such intervention, it was unclear whether the Cayman Islands judgment would have been recognised pursuant to Article 5 of the Enterprise Bankruptcy Law. It has been argued that recognition would probably not have been granted – there was no reciprocity relationship or bilateral agreement about judicial assistance between Mainland China and the Cayman Islands. Furthermore, given that the group had business all over Mainland China, with creditors and employees in difference provinces, the Chinese court would also have refused the recognition “based on the reason that the liquidation of such large-scale enterprise would be harmful to social stability and the interests of Chinese creditors”.

Despite the above, there is strong evidence that China is committed to participation in foreign insolvency proceedings. First, the establishment of the China International Commercial Court in 2018 evidences that China understands the importance of international dispute resolution as she grows economically. Second, Judge Liu Guixiang, in a keynote speech in 2019, recognised that co-operation among countries in the field of cross-border insolvency is necessary under the Belt and Road Initiative (“BRI”), and has signalled that the SPC is actively promoting the revision of the Enterprise Bankruptcy Law, to standardise and refine recognition and enforcement of foreign judgments and rulings.

The Cooperation Mechanism

In what appears to be Mainland China’s first bilateral agreement for mutual recognition and assistance in insolvency proceedings, the Cooperation Mechanism marks a significant step forward in China’s commitment to cross-border insolvency disputes. 

Under the Cooperation Mechanism, a Hong Kong liquidator or provisional liquidator may apply to the relevant Intermediate People’s Court for recognition of “collective insolvency proceedings” commenced under the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Companies Ordinance, which include (i) compulsory winding up proceedings, (ii) creditors’ voluntary winding up proceedings; and (iii) schemes of arrangements promoted by a liquidator or provisional liquidator. 

Similarly, an administrator in a Chinese bankruptcy proceeding may apply to the High Court of the Hong Kong Special Administrative Region for recognition of bankruptcy liquidation, reorganisation and compromise proceedings under the Enterprise Bankruptcy Law of the People’s Republic of China, recognition of his office as an administrator, and grant of assistance for discharge of his duties as an administrator. 

According to the Supreme People’s Court’s Opinion (“SPC Opinion”) drafted in the spirit of the Cooperation Mechanism, the Cooperation Mechanism will apply to proceedings in which the debtor company’s centre of main interests (“COMI”) is in Hong Kong continuously for at least 6 months at the time application is made for recognition and assistance. Commentators have noted that the use of the COMI test to take into account factors such as the place of the principal office, business and assets of the debtor company and not merely the place of incorporation is a practical one since “most HKEx-listed companies are not incorporated in Hong Kong”.

Not long after entering into the Cooperation Mechanism, the Hong Kong court has issued the first letter of request to the Shenzhen Intermediate People’s Court for the recognition of insolvency proceedings over Samson Paper Company Limited (in Creditors’ Voluntary Liquidation). Should the Court approve the application, this will be the first case in which a court in the Mainland has formally recognised and assisted a liquidator appointed by the Hong Kong Court.

Comparison with the Model Law 

On first review, the Cooperation Mechanism (and SPC Opinion) appears to take clear inspiration from the ideals present in the Model Law. In terms of protection to the debtor, Article 9 of the SPC Opinion provides that, at the time of receipt of application for recognition and assistance, the court shall deal with any application for preservation measures, somewhat mirroring Article 19 of Model Law, which allows the court to grant interim relief upon application for recognition of foreign insolvency proceedings. 

After recognition of the Hong Kong Insolvency Proceedings, Article 14 of the SPC Opinion states the SPC may then decide to allow the Hong Kong liquidator to perform duties in the Mainland such as taking over property of the debtor, commencing investigations into the financial position, deciding on internal management, managing and disposing of property, participation in legal actions and adjudicating creditor claims. In addition, payment of debts to individual creditors shall be invalid, civil action or arbitration involving the debtors shall be suspended (though these actions can be recommenced after the Hong Kong liquidator has taken possession of the debtor), and preservation measures in respect of the debtor’s property can be lifted, allowing the Hong Kong liquidator to deal with them. These duties and rights appear to be rather similar to the list of relief available to the foreign representative under Article 21 of the Model Law. Furthermore, the Hong Kong liquidator’s power of “participating in in legal actions, arbitrations or any other legal proceedings on behalf of the debtor” could potentially include the power to avoid acts detrimental to creditors (similar to Article 23 of the Model Law).

In terms of creditor protection, the SPC Opinion states that when the Hong Kong liquidator performs any action under Article 14 of the SPC Opinion that involves any waiver of property rights, creation of security on property, loan, transfer of property out of the Mainland and other acts for disposing of the property that “has a major impact on the creditors’ interest”, separate approval by the court is required. Article 22 of the Model Law, which provides that any relief granted should take into account the interest of the creditors and other interested persons, shares the same spirit of allowing the courts to evaluate relief granted to the debtor on the basis of creditor protection. 

However, despite such similarities, the Cooperation Mechanism remain uniquely Chinese. Article 18 of the SPC Opinion states that the Court shall refuse to recognise or assist Hong Kong Insolvency Proceedings if
(i)    The COMI of the debtor is not in Hong Kong or situated in Hong Kong for at least 6 continuous months;
(ii)    Article 2 of the Enterprise Bankruptcy Law (which states that a pre-condition for liquidation or restructuring of a debtor is the inability to pay off debts as they fall due) is not satisfied;
(iii)    Creditors in Mainland China are unfairly treated;
(iv)    There is fraud; 
(v)    There is any other circumstances where the SPC considers that recognition or assistance shall not be rendered; or
(vi)    Such recognition or assistance violates the basic principles of the law of Mainland China or offend public order or good morals.

Despite a laundry list of grounds to refuse recognition, it appears tempting to argue that last 4 grounds could be described as falling under the public policy exception as stated in Article 6 of the Model Law. Yet the UNCITRAL guidelines indicate that “the intention is that the [public policy] exception be interpreted restrictively” and for Article 6 to be used “only in exceptional and limited circumstances”. This marks a clear contrast with that of Article 18 of the SPC Opinion, which is likely drafted to safeguard Chinese sovereignty. In line with this notion of sovereignty, it is also not surprising that Article 20 provides that the assets of a debtor in the Mainland shall first satisfy any preferential claims under the law of Mainland China (such as under Article 113 of the Enterprise Bankruptcy Law), before distributing such assets in accordance with the Hong Kong Insolvency Proceedings. 

Are bilateral insolvency agreements the way forward? 

It is possible to interpret the Cooperative Mechanism as part of China’s domestic strategy in improving the insolvency co-operation with Hong Kong. But in light of the BRI, and China’s willingness to participate in international insolvency proceedings (as set out above), could the Cooperative Mechanism set the beginnings of a path in China’s international strategy to position itself as a prominent figure in the international insolvency arena; and would similar co-operative insolvency agreements become the new normal?

There may be good reasons for other countries to consider entering into co-operative insolvency agreements in the near future. Using the Cooperative Mechanism as a template, similar cooperative insolvency agreements may not become statutory law, but rather be used to “pave[] the way for future cooperation”. Countries seeking to improve recognition and enforcement of foreign insolvency proceedings with their key economic trading partners could consider such agreements to test out their appetite for the recognition and provision of assistance to foreign insolvency proceedings. 

Entering into cooperative insolvency agreements could also generate political goodwill between nations, which might be a good reason for economic trading partners to consider such agreements. In the case of China, who has signed judicial assistance treaties with various nations, it might be a logical next step for China to enter agreements for judicial co-operation with regard to insolvency proceedings with its trading partners in the BRI.

Co-operative insolvency agreements also provide a stark contrast to the wholesale adoption of the Model Law. While the Model Law is not based on the principle of reciprocity between states, the co-operative nature of bilateral insolvency agreements would put reciprocity at the foreground. While some countries like Singapore have opted against the imposition of a reciprocity requirement, other countries might prefer to have reciprocity as a pre-condition to the recognition of foreign insolvency proceedings to incentivise foreign jurisdictions to confer similar recognition and assistance to their domestic insolvency proceedings. For such countries, the wholesale adoption of the Model Law might remain unattractive, though co-operative insolvency agreements might be a more palatable alternative.

Furthermore, as compared to cross-border protocols, which are agreements reached between insolvency practitioners to address a specific insolvency case, a bilateral co-operative insolvency agreement could provide certainty in the recognition of foreign insolvency proceedings while maintaining some degree of flexibility with regard to the specific assistance provided towards the foreign insolvency proceedings. 

Ultimately perhaps, like the establishment of the BRI, China’s refusal to adopt the Model Law might be driven more so by a deliberate decision to draw a contrast between China and her economic rivals primarily in the West (many of which have adopted the Model Law).  Given that there are cogent reasons that the adoption of the Model Law will not prejudice China’s interest, China’s decision to enter into the Cooperative Mechanism with Hong Kong (another famous non-adoptee of the Model Law) is likely indicative of a confident and calculated refusal to adopt the Model Law and instead carve out a cross-border insolvency regime which are better suited to her political and economic interest.


At this point, it might be too early to determine the impact of Cooperation Mechanism on China or the international insolvency arena just yet. Theoretically, the Cooperative Mechanism certainly marks a significant development of cross-border cooperation on corporate insolvency, and positions Hong Kong uniquely as the only jurisdiction to have an established co-operation mechanism for mutual recognition of and assistance in insolvency proceedings with Mainland China. Whether its success will spark a new era of bilateral insolvency agreements remains to be seen.