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Foreign investors in failed Chinese groups may be given powers to liquidate the continent’s assets with Hong Kong, which aims to boost business confidence in the country’s legal system.
The mechanism will force the courts of Shanghai, Shenzhen and Xiamen to recognize the bankruptcy orders filed by the creditor companies in Hong Kong, a channel for Chinese companies raising money from global investors. This means that investors can more easily seek out Chinese business assets on the mainland to recoup their money. The scheme could be extended to more Chinese cities in the future.
The scheme was launched this month as international investors increase their exposure to China. He hit the country at the same time the default set and corporate restructuring. The Chinese judicial system, which is controlled by the ruling Communist Party, has not historically recognized bankruptcy decisions made in Hong Kong and elsewhere.
“This is potentially a step towards changing this game,” said Patrick Cowley, head of restructuring services at KPMG’s Asian company.
The lack of agreement was sticky for investors. Hong Kong Court condemn The investor made a request to Huiyuan Juice Group, one of China’s largest juice manufacturers, in November after prioritizing its bonds. The court believed that it would be difficult to accept Hong Kong-appointed liquidators in mainland China.
Lawyers said this left the creditors without much resources.
This is Hong Kong’s position as a global financial center be under pressure after Beijing enacted a controversial national security law last year, the city’s legal trading system remains well-regarded.
The deal “has put the company’s assets on the mainland for the first time in the hands of liquidators outside of China,” the Hong Kong veteran bankruptcy lawyer said.
The mechanism will also allow Hong Kong courts to recognize certain insolvency proceedings in the mainland legal system.
“Once a creditor has appointed a liquidator to a Hong Kong group, that liquidator can sue mainland Chinese courts for equal rights over the group’s property on the peninsula,” said Kevin Song, a bankruptcy practitioner specializing in Beijing’s restructuring of Borrelli Walsh.
However, the scheme has not been tested and does not guarantee that all requests made through it will be granted. Lawyers say China needs to prove that international creditors can reclaim the assets of the continent’s competitive groups, and warned that some will try to argue that they are outside the jurisdiction of the agreement.
The mainland courts may also refuse to assist Hong Kong-appointed liquidators, which would violate “public order or good morals” or “treat the peninsula’s creditors unfairly,” according to a legal opinion issued by China’s Supreme Court. .
“What we need now is to find the right cases to take to the courts in Shenzhen, Shanghai or Xiamen… To set examples and show that it works,” KPMG’s Cowley said.
An expert on bankruptcy in mainland China warned that authorities would also look into the scheme if it had a detrimental economic impact.
“There will be concerns about potential consequences, such as bankruptcy in Chinese companies, as foreign creditors want to take control of assets such as factories or warehouses that employ large numbers of people,” the expert said. “This could destabilize the local economy.”
However, lawyers believe the deal will boost Hong Kong’s reputation as a platform for investing in Chinese companies.
“They’re investing in the moment and it’s a bit of a gamble,” said Davyd Wong, a bankruptcy specialist at the YTL law firm. “When [Chinese companies] sell shares or bonds in Hong Kong. . . the collateral provided for these debts is a lien on the peninsula’s assets. “
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