THE UNIVERSITY OF HONG KONG FACULTY OF LAW
ASIAN INSTITUTE OF INTERNATIONAL FINANCIAL LAW
April symposium 18-19 April 2002
RECENT CROSS-BORDER INSOLVENCY DEVELOPMENTS
IN HONG KONG
By Prue Mitchell, head of Corporate Recovery and Reconstruction,
CMS Cameron McKenna
For the next 15 minutes, I am going to briefly review some recent developments on the Hong
Kong insolvency scene. The first development concerns the bankruptcy of GITIC in the PRC.
The second development looks at the jurisdiction of the Hong Kong Court to wind up foreign
companies and some of the ways that the procedure is being used by imaginative creditors.
Guangdong International Trust & Investment Corporation was incorporated in Guangdong in the
PRC as a state-owned enterprise (“GITIC”). It was registered in Hong Kong under Part XI of
the Companies’ Ordinance as an oversea-company. GITIC entered into a letter of undertaking
with a creditor, inter alia, undertaking to ensure that GITIC HK (the actual borrower) would be
able to pay all sums due to the creditor under a large US$ million facility. GITIC HK went into
voluntary liquidation and shortly thereafter, GITIC was declared bankrupt in the PRC by the
People’s Higher Court of Guangdong Province. GITIC was declared bankrupt under the
Enterprise Bankruptcy Law of the People’s Republic of China (for Trial Implementation) 1985 (the
“Enterprise Bankruptcy Law”). The Enterprise Bankruptcy Law applies exclusively to state-
owned enterprises in the PRC. GITIC was not in liquidation in Hong Kong.
At the end of July 2001, judgment in the GITIC case was handed down by the High Court of Hong
Kong. Although the facts are rather mundane, the case involved complex cross-border
insolvency issues never before tested in Hong Kong. In this case, the creditor who had
obtained a default judgment against GITIC in the High Court of Hong Kong, sought to attach
property of GITIC in Hong Kong by way of a garnishee order, notwithstanding its bankruptcy in
the PRC. The property sought to be attached was a receivable owed by GITIC’s subsidiary in
Hong Kong which was in liquidation in Hong Kong (“GITIC HK”). If successful, the creditor
would have been entitled to the dividends from GITIC HK’s liquidation, as opposed to GITIC.
The dividends may have been substantial. The creditor’s proof of debt in the GITIC PRC
bankruptcy had been rejected by the liquidation committee of GITIC on the basis, inter alia, that
PRC law did not recognise this type of claim, even though the claim was governed by Hong Kong
law. GITIC did not defend the proceedings in Hong Kong until the eleventh hour at which time
it applied to show cause why the garnishee order should not be made absolute.
In summary form, there were two issues to be resolved :
1. whether it was possible in view of various, somewhat ancient, UK and Australian
authorities to, effectively, attach a dividend declared by a liquidator of an insolvent
2. if possible, whether the Hong Kong Court should exercise its discretion to make the
garnishee order obtained by the creditor, absolute.
Deputy Judge Gill had little difficulty in deciding that the debt due from GITIC’s insolvent Hong
Kong subsidiary (in liquidation) was capable of being garnisheed. From our survey of the
authorities on this topic, this is the first time that such a proposition has been clearly decided in
the affirmative. It was also the first time that proceedings had been framed in such a way, so as
to avoid the negative conclusions reached in the earlier authorities.
The second issue was the more difficult issue. Deputy Judge Gill accepted what he saw as a
fundamental principle of Hong Kong bankruptcy and liquidation law, that a creditor should never
be allowed to exploit the judicial process so as to achieve an unfair advantage over the general
body of creditors, since the principle of pari passu distribution is the most jealously-guarded
principle in this area of the law (see Prichard v. Westminster Bank Limited  1 WLR 547).
Although Deputy Judge Gill recognised the GITIC bankruptcy was being administered as a PRC
bankruptcy and not a Hong Kong liquidation, he was of the view that the principle of fairness
amongst creditors of equal rank was the same. The Judge accepted the creditors’ proposition
that it was necessary for the Hong Kong Court to examine whether the Enterprise Bankruptcy
Law had extra-territorial effect. That is whether the Enterprise Bankruptcy Law purports to apply
extra-territorially to assets of GITIC outside the PRC, so as to subject them to the liquidation
regime in the PRC, wherever they are situated.
Many days of the trial were spent adducing the evidence of four experts in PRC Bankruptcy Law
on this topic. The Enterprise Bankruptcy Law is silent as to any extra-territorial application.
However, in practice, the Judge concluded that the approach taken by Courts in the PRC did not
provide a clear conclusion. This was despite evidence about the liquidation of the BCCI
Shenzhen branch in the PRC in the early 90s and despite the case of Liwan District Construction
Co. v. Euro-American China Property Ltd., 6 China Law & Practice 27 1990. These two cases
clearly established that PRC Courts, in practice, adopt a territorial approach as opposed to a
universal approach to bankruptcy.
In the BCCI case, the liquidation committee of the BCCI branch in Shenzhen appointed by a
Shenzhen Court distributed that branch’s assets amongst PRC creditors only and did not allow
the assets to be made available in the global (excluding the PRC) liquidation of BCCI. BCCI’s
liquidators had entered into a series of pooling agreements whereby assets from various
jurisdictions were amalgamated and distributed to world-wide creditors. Not so with the PRC.
However, PRC creditors did not participate in the global liquidation of BCCI.
In the Liwan case, a PRC party sued a Hong Kong party in liquidation in Hong Kong in the
Guangdong People’s Court. The Guangdong Court refused to recognise the Hong Kong
liquidators’ authority in the PRC and refused to recognise the Hong Kong liquidators’ claims to
assets of the company located in the PRC.
In the GITIC case, Deputy Judge Gill did not reach a firm conclusion about whether the
Enterprise Bankruptcy Law had or purported to have extra-territorial effect. Rather, his
discretion in refusing to make the garnishee order absolute was exercised primarily based upon a
principle of international comity of nations. His Honour concluded that it was a rule of
international law that where there is already pending a process of universal distribution of a
bankrupt’s effects in a foreign jurisdiction, the local Court should not allow steps to be taken
within its jurisdiction which would interfere with that process; Galbraith v. Grimshaw  AC
508. His Honour followed one of the principles in a similar case on this issue in Hong Kong,
Modern Terminals (Berth 5) Ltd. v. States Steamship Co.  HKLR 5.2.
In Modern Terminals, a local Hong Kong creditor was given judgment against a US defendant
which was subject to Chapter 11 proceedings under the Federal Bankruptcy Act of the US. The
Court found that the Court of the Northern District of California had obtained exclusive jurisdiction
of the defendant and its property wherever situated. A stay of the proceedings sought by the
US defendant was refused and judgment entered in favour of the local plaintiffs. However, a
stay of execution of the Hong Kong judgment was granted. It was clearly decided in Modern
Terminals that the US Bankruptcy Law expressly conferred extra-territorial jurisdiction and
purported to have extra-territorial effect.
Lastly, His Honour Deputy Judge Gill relied on the more recent Hong Kong decision on the
recognition of foreign insolvency proceedings of Chen Li Hung v. Ting Lei Miao  3 HKC
119. His Honour relied on a passage in Ting Lei Miao in which Godfrey J A said at page 135
“Not surprisingly, therefore, it is not a condition precedent to recognition by our [Hong
Kong] Courts of a foreign insolvency proceeding [in this case a Taiwanese bankruptcy
proceeding] that it, too should operate to vest the bankrupt’s property in his trustees by
way of assignment.....”
Ultimately, after hearing many days of conflicting expert evidence on whether the Enterprise
Bankruptcy Law had, or purported to have, extra-territorial effect, His Honour stated :
“It seems clear to me that whatever has been decided before and whatever may
happen in the future, the GITIC liquidation is being pursued, without challenge, on the
basis of a universal collection and distribution of assets and that the paramount
principle of pari passu distribution is strictly being adhered to. The making absolute
of a garnishee order will interfere with that process”.
The Judge in exercising his discretion against the creditor, placed a great deal of weight on the
fact of the PRC liquidation and the pursuit of the universal pari passu principle by the liquidation
committee of GITIC. The fact that the liquidation committee behaved as if the Enterprise
Bankruptcy Law had extraterritorial effect appeared to be sufficient even though there was no
finding that the Enterprise Bankruptcy Law did have that effect.
The case does not establish that a Hong Kong Court will recognise any PRC insolvency
proceeding. Rather, it should be restricted to its limited facts, bearing in mind that the Judge
was called upon to exercise a discretion at first instance. Most importantly, the GITIC case is
not authority in Hong Kong for the proposition that the Enterprise Bankruptcy Law has extra-
What seems clear is a recent tendency of the Hong Kong Court to find that if a principle of
fairness exists in the conduct of a foreign bankruptcy which might be offended if a Hong Kong
Court interfered, then it will not interfere.
In summary, His Honour concluded that to have granted the creditor’s application would have
offended the principle of equality in that the creditor would have received an unfair preference
ahead of those ranking at the same level. As already mentioned, his primary reason for
refusing to make the garnishee order absolute was a finding that the PRC liquidation was being
pursued on the basis of a universal collection and distribution of assets and that the creditors
worldwide were to be paid pari passu. Whether the Enterprise Bankruptcy Law has extra-
territorial effect does not appear determinative. The Judge also commented that :-
“the concept of comity of nations is not of itself a reason to turn away a litigant with a
bona fide claim, that should otherwise be granted on the merits. Where a foreign
jurisdiction is actively and openly pursuing a liquidation in which it says it intends to
treat all creditors, domestic and foreign alike, and then patently does so, it is not, I
believe, for the Courts of Hong Kong to interfere with that process”.
Winding up foreign companies in Hong Kong – s. 327 Companies’ Ordinance
As it is increasingly apparent that creditors of PRC entities are rarely successful in litigation in the
PRC and PRC Courts freely admit that they suffer from parochialism, litigation in the PRC is
usually a creditor’s last resort. Creditors are becoming increasingly imaginative as a result of
the risks of litigating in the PRC. Consequently, it is becoming more common for creditors to
seek to recover something from PRC entities by taking steps in the Courts of other jurisdictions
such as Hong Kong. One of the ways in which this can be done is by way of s. 327 of the
Companies’ Ordinance. That section applies to foreign companies registered under Part XI of
the Companies’ Ordinance (“oversea-companies”). It also applies to foreign companies that
are not registered in Hong Kong (“foreign companies”) together defined in the section as
“unregistered companies”. The winding up of unregistered companies can only be achieved by
way of Court application as s.327(2) prohibits the voluntary winding up of unregistered companies
in Hong Kong.
Like the provisions applying to companies incorporated in Hong Kong for winding up, an
unregistered company can be wound up under this section on the ground, inter alia, that it is
unable to pay its debts. An unregistered company is deemed unable to pay its debts if a
creditor serves on the principal place of business of the company (in the case of an oversea-
company) or delivers to any officer of the company, a demand requiring the company to pay the
sum due to it. If the company fails for three weeks after the service of the demand to pay the
sum due, or to secure or compound for it to the satisfaction of the creditor, the company is
deemed to be unable to pay its debts and the creditor is at liberty to present a winding up petition
to the High Court of Hong Kong.
Whilst the Courts in Hong Kong have long exercised jurisdiction to wind up foreign companies
under various previous versions of the Companies’ Ordinance, as the making of the winding up
order is discretionary, the Courts have had regard to various factors when considering whether to
exercise that discretion in favour of the petitioning creditor.
Some determining factors which have emerged are :
the absence or presence of company assets within Hong Kong;
whether it has carried on business in the jurisdiction;
whether there is a sufficient connection between the debtor company and the creditor
and Hong Kong;
whether the debt upon which the petition is based was incurred in Hong Kong;
whether some foreign Court would be a more appropriate forum;
whether there is a reasonable possibility of benefit accruing to creditors from the making
of a winding up order; and/or
whether one or more persons interested in the distribution of the assets of the company
is a person over whom the Court can exercise jurisdiction.
Not all of these factors are required to be present for a winding up order to be made in respect of
a foreign company. Clearly, the most useful evidence in support of the winding up petition will
be evidence of assets in the jurisdiction. However, that is not always easy to demonstrate,
particularly where a company is foreign and is not carrying on its principal business in Hong
Kong. In Hong Kong, it would seem that the threshold for persuading the Court to make an
order is quite low as shown in the decision of Rogers J. in China Tianjin.
In Re China Tianjin International and Co-Operative Corporation  2 HKLR 327, the Hong
Kong Court wound up what appears to be the equivalent of a state-owned enterprise in Hong
Kong at the request of a creditor which had a registered UK judgment. Rogers J held following
the then seminal case Re A Company  Ch 210, that the jurisdiction to wind up a foreign
company was flexible. The case established for Hong Kong that what was important was that
there is a sufficiently close connection with Hong Kong and that there is a reasonable possibility
of benefit for the creditors from the winding up. The evidence established that there was one
share in a company incorporated in Hong Kong. Even though there was a suggestion that the
one share was held on trust for some other person, his Honour proceeded on the basis that
China Tianjin owned the share unless and until it was established to the contrary. The objects
of China Tianjin showed that it had a wide range of interests including interests which entailed it
having assets and a business overseas. In various materials which China Tianjin published itself,
it claimed to have an office in Hong Kong and information networks covering all major areas of
This gave rise to a prima facie presumption that China Tianjin did in fact have assets in Hong
Kong. In His Honour’s view there must have been a reasonable prospect of there being
substantial assets which were liable to be recovered if a winding up order was made, which it
This case is particularly useful for Hong Kong as pre-1997, many Hong Kong companies
restructured so that the shares of public companies listed on the Hong Kong Stock Exchange are
typically shares in companies incorporated in Bermuda, the British Virgin Islands, the Cayman
Islands and now, more commonly the PRC – (H shares). Akai is a good example of this.
Akai had substantial business in Hong Kong and its shares were listed on the Hong Kong Stock
Exchange. However, Akai was incorporated in Bermuda. At the hearing of the winding up
petition against Akai, Akai’s counsel (by way of defence!) informed Madam Justice Le Pichon that
this was the largest corporate loss in Hong Kong’s history. Yet, the Akai Hong Kong liquidation
is, in theory, an ancillary liquidation (Akai was subsequently placed into liquidation in Bermuda).
This insolvency scenario is or will become common place in Hong Kong due to the large number
of public companies trading here, but incorporated offshore.
Since China Tianjin, there has been a surprising lack of reported cases in this area. However,
there has been recent excitement in the press about the case of Northeast Electrical
Transmission & Transformation Machinery Manufacturing Company (“NEMM”). NEMM is a
large state-owned enterprise and an oversea-registered company in Hong Kong. It is a matter
of public record that shares of NEMM are listed on the Hong Kong Stock Exchange as H shares
and that its shares were being traded.
A creditor is presently seeking to wind up NEMM in Hong Kong under s.327 of the Companies’
Ordinance. The hearing was scheduled a couple of weeks ago before Master Ho in the High
Court of Hong Kong. At the hearing, the creditor applied for an adjournment of the proceedings,
effectively, to explore options with NEMM and test the viability of those options. The
proceedings are not defended by NEMM. The adjourned hearing is now before Madam
Justice Yuen in the High Court in the near future.
One of the legal issues which arises from any case with facts similar to the above is whether an
H-listing or other listing held by a foreign company, on the Hong Kong Stock Exchange, is an
asset of the company with that public listing. At first blush, one might safely assume that a
listing is not an asset of any sort and it is certainly not an asset of the company whose shares are
listed. Two recent decisions of Madam Justice Le Pichon considered this very point, namely Re
Rhine Holdings Ltd (in liq)  3 HKC 543 and Re Yaohan Hong Kong Corp Ltd (in liquidation)
3 HKC 554 in July of the same year.
The case of Re Rhine Holdings involved an application by the liquidators of the company under s.
182 of the Companies’ Ordinance for the Court to sanction a transfer of the shares of the public
company to an investor pursuant to a scheme of arrangement. The scheme of which the judge
was scathing, provided for shareholders to receive a large amount of money and the creditors to
receive 20% more than the shareholders, in return for the investor acquiring (effectively) the
listing of the public company. Had this scheme not been put in place, the shareholders would
have received nothing as the company was insolvent and the creditors would have received very
little or nothing. Clearly, the co-operation of the shareholders was needed in order for the
creditors to get anything much at all.
Madam Justice Le Pichon found that the liquidators’ analysis of what the investors were to
acquire was misconceived. She found that it was not the shares that would be of interest to the
investor, but the ability to facilitate a listing of the investor. This facilitation of a listing of the
investor was derived from the fact that the company was a listed company. Consequently, Her
Honour found that the listing was itself a corporate asset of the company. According to her
Honour the assets to be realised had the unusual feature that they could only be realised with the
co-operation of the shareholders and that there was therefore some justification for providing the
shareholders with a “sweetener”. She found that the apportionment between the shareholders
and the creditors was not fair and reasonable, but that withholding the Court’s sanction would
deprive the creditors of receiving any dividend distribution at all. With the greatest reluctance,
she approved the liquidators’ application subject to the liquidators’ undertaking to add $1 million
to the fund for the creditors. So, it seems that a listing will be treated as a corporate asset, at
least for the purposes of s. 182 of the Companies’ Ordinance. But see now Re Albatronics (Far
East) Co. Ltd. per Yuen J. 19 June 2001.
It remains open as to whether the listing would be treated in the same way by Hong Kong Courts
for the purposes of s.327 of the Companies’ Ordinance. However, the decisions of Madam
Justice Le Pichon certainly pave the way for the argument that there is a reasonable prospect in
the case of companies with a public listing of a benefit accruing to creditors, if a winding up order
is made and an investor wants the listing.
In Hong Kong of late there is a vibrant market for these sorts of transactions which can only be
viewed, in most cases, as a win-win situation for all concerned, despite the reservations of
Madam Justice Le Pichon. Such reservations could be addressed by a more fair and
reasonable division of benefits between shareholders and creditors, in any event.
As an additional factor which Courts should consider when exercising their discretion to wind up a
foreign public company, it is suggested that a Hong Kong Court should be slow to sanction the
trading of an insolvent company on the Stock Exchange of Hong Kong, wherever it was
incorporated. In my view, even if a listing is not treated as a corporate asset for the purposes of
s.327 Companies’ Ordinance, in the interests of public policy, a winding up order should be made
so as to prevent the trading of insolvent companies on the Stock Exchange. In the case of
NEMM, we will simply have to watch that space.
As a procedural aside, in winding up proceedings, including proceedings for the winding up of
unregistered companies, the first hearing is before a Master. If the proceedings are not
defended, as is often the case with PRC and other foreign entities which are the debtor
defendants, a winding up order is made by the Master on the first return date. It is perhaps a
little breathtaking that large foreign companies can be wound up without hesitation or comment
before a Master of the High Court of Hong Kong.
I recently wound up a Cayman Islands incorporated company before the Master. I am not even
sure whether it was appreciated that the company was being wound up under s. 327 of
Companies’ Ordinance. Certainly, no person present in the busy Master’s Court would realise
that a rather extraordinary and far-reaching discretion was being exercised when the Master
made the winding up order. Further, I can only wonder whether the Court (or any body in it)
realised what complexities and cross-border nightmares were born upon the making of that
winding up order. In the case of a PRC state-owned enterprise, the effect of the making of a
winding up order against it in Hong Kong, is that the SOE is in liquidation in Hong Kong and
under the control of a Hong Kong liquidator with respect to any assets worldwide, in jurisdictions
which will recognise his authority. Meanwhile, the SOE continues to trade happily in the PRC.
It will be fascinating to watch whether the moral and political responsibilities of the PRC
attaching to the PRC’s accession to the WTO, will effect the attitude of large PRC entities who
are able to ignore, locally, the ability of creditors to place it in liquidation in many jurisdictions in
the world, including Hong Kong.
17 April 2002