Editor's Note: The Third Seminar of the International Commercial Expert Committee of the Supreme People's Court and Reappointment Ceremony of the First Group of Expert Members was held successfully on Augest 25, 2022. Over 40 experts from more than 20 countries and regions focused on the theme of the Development, Challenges and Countermeasures of Cross-Border Commercial Disputes during the seminar. Extensive and in-depth discussions were held within the framework of four specific issues. The texts of speeches delivered by the participants would be posted on the CICC's website.
CROSS-BORDER INSOLVENCY IN CHINA: THE STATUS QUO, TREND, AND SUGGESTIONS
Professor at Law School of Renmin University of China
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.
II. The Suggestions for Improving China's Cross-border Insolvency Recognition and Assistance: Adopting the UNCITRAL Model Law
The United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Cross-border Insolvency (hereinafter referred to as the "Model Law") in 1997, which has become the most important legal document on cross-border insolvency cooperation in the world. Thus far, the Model Law has been adopted in 55 jurisdictions, including the major trading and investment partners of the PRC. The adoption of the Model Law as soon as possible is of great significance for improving China's cross-border insolvency legislation and judicial practice.
II.1 It is in the Interest of China to Adopt the Model Law
With the continuous advancement of China's reform and opening up policy and the "Belt and Road" initiative, China has transformed herself from a traditional capital importing country to a capital exporting country in 2015. Judging from the decisions and experiences of the United States, the United Kingdom, Singapore, Japan, and South Korea in adopting the Model Law, international cooperation on cross-border insolvency issues is increasingly in line with China's interests. Especially in the context of promoting the "Belt and Road Initiative", promoting the cooperation among different jurisdictions in the field of cross-border insolvency is of great importance to China in attracting more international investment and trade.
The Supreme People's Court has attached more and more importance to cross-border insolvency issues in recent years. In addition to the Minutes of Meetings promulgated mentioned above, actively engaging itself in the revision of the EBL also constitutes a key step. Furthermore, the SPC will discuss and deal with such core issues as the jurisdiction of cross-border insolvency, the status and treatment of foreign bankruptcy representatives and creditors, the conditions and methods of granting judicial assistance to foreign bankruptcy proceedings, etc. And a group of judges proficient in foreign law and international commercial dispute resolution will be trained in an effort to strengthening international cooperation in the area as well.
II. 2Adopting the Model Law does no Harm to China's Interests
The international cooperation advocated by the Model Law is based on pragmatic considerations. Access, recognition, relief, coordination and cooperation are the four main elements of the Model Law. The Model Law establishes simplified procedures for foreign insolvency proceedings and recognition of foreign representatives, providing a degree of certainty as to whether the court will make a decision on recognition. Reliefs are divided into four categories, including automatic relief, discretionary relief, interim relief, and relief that grant foreign representatives the standing to participate in various domestic bankruptcy proceedings. The Model Law separates recognition from relief, granting the judges with flexible discretion, allowing the stakeholders to initiate parallel insolvency proceedings, and also giving judge the freedom to modify or terminate relief where necessary, among others. In addition, the framework established by the Model Law supports communication and cooperation between courts in different jurisdictions, as well as between courts and foreign administrators, in order to handle cross-border insolvency cases in a more efficient way.
As a golden international norm and the best model for coping with cross-border insolvency cooperation, the Model Law strikes a delicate balance between encouraging international cooperation and protecting the interests of enacting States: on the one hand, it only coordinating proceedings in different jurisdictions from procedural angles, without touching on the complex substantive laws; on the other hand, it focuses on protecting the core interests of the enacting states in cross-border insolvency cases, including national sovereignty, core values and employees' rights and interests, etc. Based on this flexibility, when China adopts the Model Law, in maintaining the basic spirit of cooperation and coordinated framework, it can make necessary and flexible adjustments to relevant provisions according to its practical needs, in order to ensure that China's interests are not harmed.
In conclusion, as one of the important indicators of the country's legal and business environment, the bankruptcy system has a huge impact on economic development. From the perspective of international practice in recent years, the international competition in cross-border insolvency and reorganization has become increasingly fierce. Singapore has in recent years committed itself to becoming a new international bankruptcy and reorganization center, and Singapore International Commercial Court recently brought in a retired US bankruptcy judge to strengthen its trial power in cross-border insolvency matters. China should recognize the importance of cross-border insolvency cooperation in creating a more competitive economic and trade environment, and in line with the current needs of improving bankruptcy legislation and judicial practice, take the opportunity of revising the EBL to adopt the Model Law. After becoming a jurisdiction adopting the "Model Law", China may further improve the domestic bankruptcy regulations, actively promote the two-way recognition and assistance in cross-border insolvency cooperation, and finally promote the healthy development of China's international investment and trade.
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*The original text is Chinese and has been translated into English for reference only. If there is any inconsistency or ambiguity between the Chinese version and the English version, the Chinese version shall prevail.