Hk Cross Border Insolvency Regime

1. Introduction
Over the past few decades, there is a continuing global expansion of trade and investment. As there are more and more companies doing business not only in their home country, they may have assets and/or establishment in other countries, or even their activities take place other than the company has its registered office. In case of insolvency of such a company, many legal issues arise. Therefore, a well-equipped national insolvency laws dealing with such cases is needed.

Without national insolvency laws kept pace with the trend, countries are ill equipped to deal with cases of a cross-border nature. This would result in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to fair and efficient administration of cross-border insolvencies, impede the protection of assets of the insolvent debtor against dissipation, and hinder maximization of the value of those assets.

2. Definition of “cross-border” insolvency
Cross-border insolvency is a term used to describe circumstances in which an insolvent entity has assets or debts in more than one country or jurisdiction. Many businesses have interests expanding beyond their home jurisdictions. More and more companies would like to organize their business activities on a global scale and forming production chains including inputs that cross national boundaries. As the advent of sophisticated communications and information technology, it is no longer for reserving the cross border trade of the large multi-national corporations. These led to an increasing trend for businesses, which are involved in matters where cross border insolvency issues arise.

3. Legal issues arise
If an insolvent company has assets in more than one country, it is most likely that separate independent proceedings will be initiated in every concerned country. By doing so, the costs of various proceedings are much higher, the proceedings are much more complicated, and many issues arise. Thus the reason for having cross border insolvency regime is to deal with these legal issues and therfore it is the most essential element in the regime.

3.1 Conflicting insolvency law in different jurisdictions
There is a territorial limitation of the effects of the insolvency laws of the home jurisdiction of an insolvent internationally active institution. The insolvent company may have assets abroad, as well as subsidiaries, which might themselves be insolvent. Therefore, the insolvency proceedings might begin concurrently in several jurisdictions.

However, the rules regarding the treatment of subsidiaries within a group of insolvent companies have not been harmonized in all countries. Some jurisdictions apply the law of the main place of establishment to the insolvency of all entities within a group of companies affected by the insolvency while some countries do not have any provisions addressing the insolvency of a group of companies.

As the jurisdictions are not harmonized in all countries, we have to consider which country’s laws should apply to a particular issue, which country’s courts are competent to deal with a specific matter, as well as whether a judgment or decision made by a judicial authority recognized and enforceable in a specific other country.

3.2 Incentive for companies to transfer assets from one country to another
Since the cross-border insolvency proceedings involved many countries, and there is a territorial limitation of the effects of the insolvency laws of the home jurisdiction, companies may have incentive to transfer assets from its home country to another country in order to evade the obligation to pay the creditors.

By transferring the assets outside the home countries, the insolvent company would have fewer assets to pay the creditors, or even have no assets to pay them. Therefore, in order to protect the creditors, we should avoid the incentive for companies to transfer their assets one country to another.

3.3 “Forum Shopping”
Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment. Since some countries have plaintiff-friendly jurisdictions while other countries have not, the creditors may have incentives to sue the companies in country where there is a plaintiff-friendly jurisdiction in order to get more.

In case of cross-border insolvency, the creditors would prefer suing companies in a country with plaintiff-friendly jurisdiction in order to take advantage of the more generous awards of damages, extensive discovery rules, and the contingent fee system. However, we should avoid the creditors being “forum shopping” in order to avoid the plaintiff-friendly jurisdiction being abuse.

3.4 Priority of payment
Because of the territorial limitation of the effects of the insolvency laws of the home jurisdiction, which mentioned above, the issue of priority of payment is arisen. In case of the cross-border insolvency, many countries involved. The insolvent parent company as well as the insolvent subsidiaries will be wound-up; the creditors from different countries would entitle to claim damages. However, who should claim first?

Should the creditors of each country claim in the host country proceeding, or should the worldwide creditors claim upon the assets of the parent company as well as that of subsidiaries?

4. Cross-Border Insolvency Regime adopted in other countries
In order to address the legal issues arisen from cross-border insolvencies, many countries have already adopted cross-border insolvency regime, namely United Nations Commission on International Trade Law (UNCITRAL Model Law), EU regime on Cross Border Insolvency, and Private International Law.

4.1 United Nations Commission on International Trade Law
The UNCITRAL Model Law is prepared in 1997. It aims to provide mechanisms for dealing with cross-border insolvency cases in order to promote cooperation between courts in different jurisdictions, legal certainty for investor, fair and efficient administration of cross-border insolvency proceedings and facilitation of the rescue of financially troubled enterprises. UNCITRAL does not attempt a substantive unification of insolvency law, and respects the differences between national procedural laws. As from 25 June 2007, the members of UNCITRAL, and the years when their memberships expire are as follows:
Algeria (2010) Gabon (2010) Nigeria (2010)
Armenia (2013) Germany (2013) Norway (2013)
Australia (2010) Greece (2013) Pakistan (2010)
Austria (2010) Guatemala (2010) Paraguay (2010)
Bahrain (2013) Honduras (2013) Poland (2010)
Belarus (2010) India (2010) Republic of Korea (2013)
Benin (2013) Iran (Islamic Republic of) (2010) Russian Federation (2013)
Bolivia (2013) Israel (2010) Senegal (2013)
Bulgaria (2013) Italy (2010) Serbia (2010)
Cameroon (2013) Japan (2013) Singapore (2013)
Canada (2013) Kenya (2010) South Africa (2013)
Chile (2013) Latvia (2013) Spain (2010)
China (2013) Lebanon (2010) Sri Lanka (2013)
Colombia (2010) Madagascar (2010) Switzerland (2010)
Czech Republic (2010) Malaysia (2013) Thailand (2010)
Ecuador (2010) Malta (2013) Uganda (2010)
Egypt (2013) Mexico (2013) United Kingdom of Great Britain and Northern Ireland (2013)
El Salvador (2013) Mongolia (2010) United States of America (2010)
Fiji (2010) Morocco (2013) Venezuela (Bolivarian Republic of) (2010)
France (2013) Namibia (2013) Zimbabwe (2010)

The UNCITRAL address the issues of cross-border insolvency by providing access for the person administering a foreign insolvency proceeding to the courts of the enacting state and allowing the courts in the enacting state to determine what relief is warranted for optimal disposition of the insolvency; determining when a foreign insolvency proceeding should be accorded recognition and what the consequences of recognition may be; providing a transparent regime for the right of foreign creditors to commence, or participate in an insolvency proceeding in the enacting state; permitting courts in the enacting state to cooperate more effectively with foreign courts and foreign representatives involved in an insolvency matter; authorizing courts in the enacting state and persons administering insolvency proceedings in the enacting state to seek assistance abroad; providing for court jurisdiction and establishing rules for co-ordination where an insolvency proceeding in the enacting state is taking place concurrently with an insolvency proceeding in a foreign; and establishing rules for co-ordination of relief granted in the enacting state in favor of two or more insolvency proceedings that take place in foreign states regarding the same debtor.

By providing clear guidance concerning the foreign proceedings, there would be no arbitration regarding the difference in jurisdictions. It is clear that the courts in the enacting state are competent to deal with particular cross-border insolvency proceedings. As the courts in the enacting state and persons administering insolvency proceedings in the enacting state are authorized to seek assistance abroad, which in order words, the judgment or decision made by the courts in enacting states are recognized and enforceable in other countries concerned.

However, according to UNCITRAL Model Law Article 19(4), the UNCITRAL Law introduces a distinction between normal foreign proceedings and such proceedings that are qualified as “main” proceedings (proceedings take place in the country where the debtor has its centre of main interests), which may affect the nature and scope of the relief accorded to the foreign representative.

4.2 EU regime on Cross-Border Insolvency
As the costs of various proceedings are much higher if initiating proceedings in every concerned country, it is desirable that only one insolvency order would be adjudicated even when a company with assets in various states is to be liquidated.

The EU regime within the European Union is an important set of recently adopted legal rules addressing specifically cross-border insolvency issues applicable within a region consisting of several countries. It becomes applicable with effect from 31 May 2002. Countries adopted the EU regime included Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom. The widely adopted EU regime ensures the mutual recognition and coordination of national insolvency proceedings.

The underlying principles of the EU regime are unity and universality. According to these principles, a single set of insolvency rules can apply to the enforcement of all creditors’ claims, and decisions of the competent authority have universal application. For instance, the proceedings has effect within the territory of all Contracting States without any further recognition or enforcement proceedings being necessary, and the appointed trustee of the insolvent estate is expected to obtain all property belonging to the estate and conduct an orderly realization of all assets for the benefit of the creditors. Hence, the application of this principle could address many of the issues arising in cross-border insolvencies.

The EU regime is applicable if the debtor’s main interest is situated in a Contracting State. Pursuant to Article 3 (1) EU Convention, the bankruptcy proceedings are to take place in the state “in which the centre of the debtor’s interest is situated”. There would be no doubt deciding which country’s law should apply to a particular issue, and which country’s courts are competent to deal with a specific matter. As only one insolvency order is adjudicated, the conflicting insolvency law in different jurisdictions is eliminated and the costs of various proceedings are lowered.

Besides, in the case that there are branches in other EU member states becomes insolvent; they will be subject to a single insolvency proceeding in the member state where it has its registered office. Because the insolvency proceedings in all EU member state are more or less the same, this discourages the party to transfer its assets from one member state to another, and discourages the party to choose the jurisdiction in which to initiate insolvency proceedings in order to obtain the most favorable legal position.

However, there is a presumption that the place of the registered office is the place of the debtor’s main interest. The EU regime has a relatively narrow scope and only an impact on insolvency proceedings where the debtor has assets in more than one Contracting State and/or an establishment in another country than its main interest is located.

4.3 Private International Law
Private International Law is the legal framework composed of conventions, protocols, model laws, legal guides, uniform documents, as well as other documents and instruments, which regulates relationships between individuals in an international context. It forms part of the legal regime of each country and is domestic in nature and can differ from country to country. The Department of International Legal Affairs plays a central role in the harmonization and codification of Private International Law in the Western Hemisphere.

Private International Law fundamentally addresses the issue of conflict of laws. There are two major systems applicable in cases of international insolvency. The first one is the principle of the unity of insolvency, which means that there is only one competent court to decide on the bankruptcy of the debtor, namely the court of the country where the debtor has its head or registered office. Under this system, all assets of the entity, as well as that of subsidiaries, are encompassed in the liquidation and all worldwide creditors can prove their claims in that proceeding. As a general rule, claims of creditors of a particular subsidiary would not obtain priority over claims of creditors of other branches in the liquidation.

The second system is the principle of plurality or territoriality of insolvency, whereby insolvency proceedings are effective only in the country in which they are initiated and proceedings therefore also have to be initiated in every country in which insolvency party holds realizable assets. For each country, courts will apply their own laws and will appoint their own liquidator. Under this system, a domestic entity of an international company is liquidated as if it were a separate entity. All assets of the subsidiary, and also all assets of the affiliated companies in the host country are encompassed in the liquidation proceeding, but only creditors of the subsidiary in that host country can prove their claims in the host country proceeding. If the assets of the subsidiary are insufficient, the creditors of that subsidiary might be able to prove their claims in other jurisdictions.

As mentioned above, the Private International Law just forms part of the legal regime of each country, it is not a harmonization of insolvency laws, and the application of the systems is dependent on the laws of the country. However, the two systems would help solving the issue of priority of payment.
5. Do HK need a cross border insolvency regime?
The treatment of cross-border insolvency is especially important in Hong Kong as Hong Kong is an international business and financial centre. With the increasing globalization and international trade, more and more companies listed in Hong Kong are registered abroad and a large and growing number of other companies, both private and public, are also registered outside Hong Kong. There are more companies that have assets and creditors in more than one jurisdiction.

5.1 Current situation in HK
While we need cross-border insolvency regime to be implemented to protect the local and foreign creditors, the present provisions in the Companies Ordinance (CO) have presented some degree of cross-broader insolvency regime; but it is not enough to satisfy the need of the creditors who desired for an added dimension to any purely domestic insolvency and a more clear concept on the legal issues is needed. Since Hong Kong is not a party to any transnational insolvency treaties, we lack international legal and institutional framework addressing the potential problems and discrepancies that may arise between jurisdictions. That is the reason why statuary cross border insolvency provision is imperative to be promulgated in HK to promote international trading efficiency, and to reduce potential legal uncertainties and transaction costs

5.2 Existing provisions for cross border insolvency in CO.
The relevant sections for winding up foreign companies are included in Part X of the H.K. CO., which is entitled as "Winding Up Of Unregistered Companies." in s.327, and s.327A is entitled "Oversea companies may be wound up although dissolved," some detail are provided as follows11(http://www.legislation.gov.hk/eng/home.htm):

As defined in s.326, "unregistered company" includes any partnership, whether limited or not, any association and any company except those are properly registered under the CO or Limited Partnerships Ordinance or a partnership, association or company which consists of less than 8 members and is not formed or established outside Hong Kong. And to avoid doubt it is declared clearly in subsection (2) of s326 that, "unregistered company" includes an oversea company which is certified under section 333(3) as being registered under Part XI.

Under s.327, subject to the provisions of this Part [X], any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section. No unregistered company shall be wound up voluntarily under this Ordinance and the grounds for an unregistered company to be wound up are as follows -
(a) If the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
(b) If the company is unable to pay its debts;
(c) If the court is of opinion that it is just and equitable that the company should be wound up.

In practice, s327A is rarely used as it limited itself to the foreign company "which has been carrying on business in Hong Kong, ceases to carry on business in Hong Kong." Rather, s.327 provides boarder coverage of the unregistered company that may be wound up under the H.K. CO; that’s why Hong Kong courts will usually wind up a foreign company as an "unregistered company" pursuant to s.326 and 327 of Part X of the HK CO.

The inelegantly drafted provisions in Part X of the CO causes much confusion. For instance, in reference to the equivalent English provision to the title of s.327 and s.327A, the use of the term "oversea company" is inappropriate. This term generally refers to a foreign company that has established a place of business in Hong Kong, but a company incorporated outside Hong Kong need not have an established place of business to carry on business in Hong Kong.12(LIVING IN UNCERTAIN TIMES: THE NEED TO STRENGTHEN HONG KONG TRANSNATIONAL INSOLVENCY LAW Charles D. Booth)

Even though there are provisions in the CO to deal with the cross border insolvency issues, the provisions are rather confusing and incomplete, it left a great amount of relevant issues that are to be determined by case law, e.g. the enforcement of judgment in other jurisdictions, the jurisdiction to wound up a foreign company that did not established a place of business in HK, and the ability of HK liquidators for execution and attachment in other jurisdiction

5.3 Discussion on legal issues with reference to case law
Here are some examples of the legal issues that exist in HK and we are going to discuss the HK situation regarding to these issues with reference to cases in UK, Austria and HK.

5.3.1 The first issue is “whether a judgment or decision make in HK enforceable in other countries? “ Take the scheme of arrangement as an example. Under s.166 of the CO. a scheme would be binding to all creditors even for those who disagree with the scheme or who did not vote at or attend the meeting. However, foreign courts may refuse to recognize the scheme to the extent that it attempts to modify or discharge contracts that are governed by non-Hong Kong law13(THE TRANSNATIONAL ASPECTS OF HONG KONG INSOLVENCY LAW Charles D. Booth). To illustrate this, we can refer to the case New Zealand Loan and Mercantile Agency Co Ltd v Morrison. In this case, the Privy Council held that an English scheme under the Joint Stock Companies Arrangement Act was not binding in Victoria and did not affect a contract governed by the law of Victoria. Accordingly, a creditor may not be affected by a HK scheme as long as his debt was aroused under a contract governed by foreign law. HK can relevant to the rules in Private International Law to schemes of arrangement, and in light of this, cases can be found in which schemes have been sanctioned in different jurisdictions (e.g. Re Kailis Groote Eylandt &Fisheries Pty Ltd).

5.3.2 The second issue is “does the HK court have jurisdiction to wound up a ‘foreign company’ except for situation in s.327A?” (It talks about an unregistered company "which has been carrying on business in Hong Kong ceases to carry on business in Hong Kong,") The CO did not include any provision regarding the jurisdictional connection that must exist between an unregistered company and HK to enable the company to be wound up in HK.

Since the leading case, Banque des Marchands de Moscou v. Kindersley, it has been settled that a foreign company with assets in HK may be wound up in HK. This rule had been further extended in Re Compania Merabello San Nicholas S.A. In the case, the court held that for the purposes of establishing jurisdiction in a case involving a foreign company:
(1) There is no need to establish that the foreign company ever had a place of business here.
(2) There is no need to establish that the company ever carried on business here, unless perhaps the petition is based upon the company carrying on or having carried on business.
(3) A proper connection with the jurisdiction must be established by sufficient evidence to show
(a) That the company has some asset or assets within the jurisdiction, and
(b) That there are one or more persons concerned in the proper distribution of the assets over whom the jurisdiction is exercisable.
(4) It suffices if the assets of the company within the jurisdiction are of any nature; they need not be "commercial" assets, or assets which indicate that the company formerly carried on business here.
(5) The assets need not be assets which will be distributable to creditors by the liquidator in the winding up: it suffices if by the making of the winding up order they will be of benefit to a creditor or creditors in some other way.
(6) If it is shown that there is no reasonable possibility of benefit accruing to creditors from making the winding up order, the jurisdiction is excluded.

It is clear from the case law that a company with assets in HK can be wound up here (e.g. HK case, Re Irish Shipping Ltd). In addition, to prove there exist of sufficient connection, the assets-based test which derived from the case Okeanos Maritime Corp. had been called into question. 3 elements are needed to found jurisdiction,
1) There had to be sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction
2) There must be a reasonable possibility that the winding-up order would benefit those applying for it; and
3) The court must be able exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.

1. Although this test is already quite clear in case law, unnecessary confusion may still arise when determining whether there is proper jurisdiction to wound up a foreign company. Jurisdictional factors should be clear cut to make it easier for creditors, foreign representatives, and foreign companies to understand the conditions that a foreign company can be wound up in HK14 (Cross-Border Insolvency, Philip St. J. Smart). Therefore, HK should also incorporate this test into the CO to determine jurisdiction rather than just based on the concept of “carrying on of business” in s.327A.

5.3.3 The third issue is about “the ability of HK liquidators for execution and attachment in other jurisdiction”. The CO did not included any provision concerning the extraterritorial jurisdiction of HK liquidations, however it is clear from the case American Express International Banking Corp v Johnson that:
1. Hong Kong liquidator may go abroad to protect the assets of a Hong Kong, company that is in liquidation in Hong Kong;
2. Liquidator may also seek the return of overseas assets so they may be distributed in the Hong Kong proceeding;
3. HK liquidators can seek judicial assistance abroad with respect to a company being wound up in Hong Kong.

However, it also determined that s.269 of the CO, which governs matters involving uncompleted attachments and executions, does not have extraterritorial effect. In the court's view, therefore, s.269 of the HK CO does not govern transactions abroad; rather, those matters arising in liquidations involving executions and attachments are to be decided by the lex situs of the property in question15(THE TRANSNATIONAL ASPECTS OF HONG KONG INSOLVENCY LAW). That’s means, HK liquidators do not have to power to execute against goods or land or attachments of debts in other countries unless with the order from the foreign court. But of course, if the actions or proceedings commenced abroad prove successful, the Hong Kong liquidator may return to Hong Kong with the foreign assets.

5.4 Other element that should be incorporated in the HK regime
In addition to the legal issues mentioned above, there are some other essential elements that should be incorporated into the regime.

For instance, there should be an effective communicate channel dealing with the court to court communications in cross border cases. It is because one of the most essential elements of in cross-border cases is cooperation and communication among the administrating authorities of the countries involved. Because of the importance of the courts in insolvency and reorganization proceedings, it is even more essential that the supervising courts be able to coordinate their activities to assure the maximum available benefit for the stakeholders of financially troubled enterprises. We suggest HK can make relevant to the “Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases” when implementing the cross broader regime, it is especially importance to have a strong communication channel with the China’s court as HK is now having a closer and closer relationship with China in terms of economical and political issues.

On the other hand, some other procedures and rules regarding the co-operation between jurisdictions should also be included, for instance the recognition of foreign insolvency proceedings; Claims against local assets by a foreign insolvency administrator; Coordination of insolvency proceedings in different jurisdictions; Concurrent insolvency administrations.

6. Conclusion
The need for HK to have a cross border insolvency regime is beyond dispute, and the legal issues that we have mentioned in part 3, 5.3 & 5.4 would be the essential elements that should be incorporated into HK regime.

In addition to referencing to the existing case law, HK regime can also make reference to the existing international Cross-Border Insolvency Regime adopted in other countries as mentioned in part 4 above.

One last thing we want to emphasis here is that, we are not suggesting a comprehensive legislation as it is not desirable. The legislative framework should leave considerable discretion in the hands of the court so that the court would have power to react according to different circumstances.