Cross-border insolvency is an inevitable outcome of economic globalization. International cooperation in cross-border insolvency cases is of great value in creating a fair, just and transparent business environment in China and promoting international economic and trade activities. As the world's largest trade exporter, the world's second largest economy, and along with the implementation of the "Belt and Road Initiative", cross-border investment and trade activities have become increasingly frequent, and more and more cross-border insolvency cases have appeared in recent years in China. In the recent high-profile reorganization cases such as "Peking University Founder Group", "Tsinghua Unigroup", "HNA Group", as well as other bankruptcy cases such as the debt crisis of Evergrande and other real estate companies, there are a large number of overseas creditors, litigation or arbitration proceedings in foreign jurisdictions. At present, China's legislation and judicial response to cross-border insolvency cases and the relevant international cooperation are obviously insufficient, which does not match China's status as the world's second largest economy. In the promotion of the foreign-related rule of law that President Xi Jinping has repeatedly emphasized, China should attach more importance to improving the legislation and judicial practice related to cross-border insolvency, enhance the awareness of international cooperation in this field, and increase professional capacity building as well.
I. The Status Quo and Problems of Cross-border insolvency Cooperation in China
I.1 Legislative Provisions and the Associated Problems
Article 5 of the 2006 Enterprise Bankruptcy Law (EBL) is the only legislative provision on cross-border insolvency in China. Paragraph 1 of this Article stipulates that a bankruptcy proceeding opened by the PRC courts shall extend to the overseas property of the debtor. This unilateral declaration cannot empower the bankruptcy proceeding commenced by the PRC courts automatically extend to the debtor's overseas assets, but depending on whether the foreign court grants recognition and relief to the proceeding. Paragraph 2 of Article 5 stipulates that the PRC courts shall review foreign bankruptcy judgments and rulings in accordance with international treaties or the principle of reciprocity, and consider whether it violates the basic legal principles of the PRC, and whether it does harm to national sovereignty, security and social and public interests, and whether the legitimate rights and interests of Chinese creditors are protected, and then make the ruling as to whether to recognize and assist a foreign insolvency proceeding.
As an only provision concerning cross-border insolvency in the EBL, Article 5 is more about the principle than the concrete guidance on cross-border insolvency cooperation. It is also not in conformity with the generally-recognized international practice in the field, and therefore gives rise to many difficult issues in practice. First, this Article mainly follows the provisions of "Civil Procedure Law of the PRC" on the recognition and enforcement of foreign civil and commercial judgments, while a bankruptcy proceeding, as a collective proceeding dealing with the debtor's assets and the claims from all creditors, is quite different from common civil and commercial proceedings. When it comes to the recognition and assistance in cross-border insolvency cases, it is also distinct from a general civil and commercial case. This explains why the conventions or treaties on mutual legal assistance in international civil and commercial matters usually exclude their application to bankruptcy cases. Such examples include but not limited to the 1968 Brussels Convention on Jurisdiction in Civil and Commercial Matters and the Enforcement of Judgments, the 1998 Lugano Convention on Jurisdiction in Civil and Commercial Matters and the Recognition of Judgments, as well as the 2019 Hague Association for Private International Law on the Recognition and Enforcement of Foreign Nationals Commercial Judgments Convention, etc. In addition, due to the complexity of cross-border insolvency, apart from the EU Bankruptcy Regulations 2000 (2015 Recast), there are no other multilateral treaties in this area, and even bilateral treaties are extremely rare in this field.
Secondly, the recognition and assistance of foreign bankruptcy proceedings stipulated in Article 5 requires reciprocity. In the case of requiring factual reciprocity, it is often likely to lead to a deadlock in judicial assistance. It should be noted that in 2015, the Supreme People's Court has softened the requirement of reciprocity in the "Several Opinions on People's Courts Providing Judicial Services and Safeguarding the implementation of the "Belt and Road Initiative", and to a certain extent, has also authorizes the PRC courts to seek judicial cooperation where appropriate. On June 8, 2017, the "Nanning Statement" issued at the 2nd China-ASEAN Justice Conference also conveyed the spirit of applying presumed reciprocity in practice. These changes should apply to cross-border insolvency cases, while from the perspective of international practice, cross-border insolvency cooperation is not premised on reciprocity.
Third, it is not easy to conduct an assessment as to whether recognition and assistance of a foreign insolvency proceeding does harm to China's sovereignty, security and the protection of Chinese creditors' interests in a given case.
The Supreme People's Court issued the "Minutes of the National Court Bankruptcy Trial Work Conference" in March 2018, which emphasized the importance of advancing cross-border insolvency trials in accordance with Article 5 of the EBL. But overall, Article 5 is considered to lack operability and cannot meet the growing demand for international cooperation in cross-border insolvency cases in China.
I.2 Judicial Practice in cross-border insolvency and the Problems
Cross-border insolvency cooperation is two-way, including not only the recognition and assistance of bankruptcy proceedings commenced by the PRC courts in foreign jurisdictions, but also whether the PRC courts recognize and how to assist an insolvency proceeding commenced in a foreign jurisdiction. At present, China's cross-border insolvency judicial practice has exhibited an obvious unbalanced status between these two kinds, leaving room to further improvement.
I.2.1 Outbound Cases
By the end of July 2022, there have been eight cases in which China's bankruptcy proceedings were recognized and assisted in foreign jurisdictions, including four cases by Hong Kong court, three by the U.S. Bankruptcy Courts, and one by the Singapore court. Indeed, among the ten cases in which bankruptcy administers appointed by the PRC courts applied for recognition and relief, eight cases were successfully awarded recognition and relief, only except for the "Jiangsu Dewei" case which was refused recognition and assistance by the U.S. court due to the complex disputes between shareholders concerned, and the "Tsinghua Unigroup" case in which the administrator did not apply to the Hong Kong court for recognition and relief.
In addition, in the reorganization case of “Peking University Founder" and “Tsinghua Unigroup", the lawsuit related to the “keepwell deed" attracted global attention. The governing law of such transaction contracts agreed by the parties is English law, and the Hong Kong court is given the exclusive jurisdiction by the parties. This gives rise to a conflict between the contractual rights of the parties and the centralized jurisdiction of bankruptcy court provided in Article 21 of the EBL. In the "Shanghai Huaxin" case, after the Hong Kong court made a default judgment on the keepwell agreement, the Shanghai Financial Court recognized the judgment, and the overseas creditors were able to file their claims.
In addition, in recent years, there have been many high-profile bankruptcy cases concerning Chinese enterprises, such as Evergrande, Zhenro, Aoyuan, Fantasia, Kaisa, etc., in the real estate field, and MI Energy Holdings Co., Ltd., Ruixing Coffee, Huiyuan Juice Co. Ltd., in other fields. Most of these cases are handled as offshore bankruptcy cases. The main feature in these cases is that the debtor's main business is located in the Mainland China, listed in Hong Kong or has its headquarters and subsidiaries in Hong Kong, and with the holding company in Virgin Island, Cayman Island and some other offshore places. Debtors are mostly applied for reorganization or liquidation in overseas courts, and are recognized and assisted by some other overseas courts. The actual operations and profit of these enterprises are mainly in the mainland, but the mainland courts have basically not participated in these cases, raising issues such as the protection of the rights of Chinese creditors.
I.2.2 Inbound Cases
There are currently only two cases in which the PRC courts (Xiamen Maritime Court and Shen Intermediate Court respectively), referring to Article 5 of the EBL, recognized and assisted an insolvency proceeding commenced in foreign jurisdictions, one is from Hong Kong SAR, the other was from Singapore. In sharp contrast, during the period of October 2005 to March 2022, the U.S. Bankruptcy Court accepted 2,397 Chapter 15 cases, of which recognition and assistance were granted to foreign bankruptcy proceedings in the vast majority, including three of the four applications filed by Chinese administrators.
(to be continued...)