Spotlight on Hong Kong: Local and global connectivity in action

This article is based on a series of presentations made at Quantuma’s Navigating the unique structures and stakeholder interests in insolvency and restructuring in Asia-Pacific seminar, which was held in London in November 2024.

Why are insolvency and default risks rising?

In markets across the Asia-Pacific and beyond, high inflation and interest rates have heightened the challenges of securing finance and servicing debts.

Within the Chinese economy, default risks have been exacerbated by the continuing fragility within the property sector. In turn, exporters face the impact of higher tariffs and other trade restrictions being imposed by the US administration.

For creditors and investors, further challenges centre on the sheer size of China’s economy and geography. In an illustration of just how vast China is, here at Quantuma we have been involved in cases where the person receiving the funds has simply disappeared, requiring a significant amount of investigation to track and trace missing funds.

How easy is it to secure recovery?

When it comes to restructuring and asset recovery, Hong Kong has a number of important advantages, both in domestic and international cases.

First is well-developed legislation and case law. The scope and procedures within Hong Kong’s insolvency regime would be familiar to lawyers in other jurisdictions applying common law. They include scheme of arrangement provisions similar to those in the UK’s Insolvency Act and US Chapter 11.

Although Hong Kong has not adopted mutual recognition and enforcement under the United Nations Commission on International Trade Law (UNCITRAL) model law, practitioners can seek mutual recognition of restructuring processes initiated in foreign jurisdictions. There are provisos, however. To be recognised, the practitioner would need to either demonstrate that the centre of main interests (COMI) is in Hong Kong, or the Court may offer “managerial assistance” to the foreign liquidators. The orders sought also need to be available under Hong Kong's local laws. Demonstrating this to the satisfaction of a Hong Kong Court is generally straightforward, but can at times turn out to be a difficult and lengthy process. Where a company has a significant presence and assets in Hong Kong, a more direct and certain route would therefore be to initiate proceedings in Hong Kong itself. Recent Hong Kong case law supports this option by focusing designations of the COMI on the principal location of assets, operations and control, rather than just incorporation.

When pursuing restructuring and recovery in the PRC, Hong Kong has the advantage of its close links with the mainland. In 2021, cooperation was bolstered by an agreement on mutual recognition and assistance in insolvency proceedings. There have already been several cases where Hong Kong insolvency proceedings have been recognised by a mainland Chinese Court, or application has been made to the Chinese Court. However, the agreement currently only applies to Shanghai, Xiamen and Shenzhen, as part of a pilot implementation.

Looking at recognition of mainland proceedings in a Hong Kong Court, the options are broader. In particular, the application of common law would allow mutual recognition to apply to companies in regions outside the initial pilot area. Landmark rulings include a successful letter of request obtained by an administrator from the Guangzhou Court to take control of shares in a Hong Kong company held by the Guangdong Overseas Construction Corporation (GOCC) , and Re China Electronics Leasing Company Ltd.

How can you and your clients boost your chances of recovery?

Our team at Quantuma is routinely called in to work on the most complex restructuring, insolvency and recovery cases across the Asia-Pacific region, with many involving Hong Kong and the PRC. This gives us unique insights into what works, what doesn’t and why. Four priorities stand out:

1. Access on the ground expertise
   Being able to work with insolvency practitioners based locally not only helps to provide a realistic understanding of the legal processes and possibilities on the ground, but also the relationships and cultural nuances that can be just as important in determining and achieving the best outcome.

   Looking at the PRC in particular, the bankruptcy law could be interpreted and applied in slightly different ways across the country’s vast court system. A good understanding of these variations is crucial in judging how to proceed and then preparing a viable case. To support this, we at Quantuma work closely with lawyers who have experience of different local courts and understand the attitudes of the judges within them.

2. Reach out globally
   Many companies operating in both China and Hong Kong are incorporated in, or have significant interests in, offshore centres including Bermuda, the Cayman Islands and the British Virgin Islands (BVI) [link through to Caribbean article]. Restructuring and asset recovery therefore need to take account of the complex corporate structures and connections running through this Asia-Pacific corridor.

   Our work on the liquidation of Agritrade Resources Limited, a Bermudian incorporated Hong Kong listed energy company, highlights the importance of global reach. The company’s widely spread interests included two coal mines in Indonesia and a large power plant located in India. In addition to its energy assets, the company was engaged in trading, shipping and logistics. We were called in to replace previous liquidators with a mandate to take control and drive the restructuring of the wider group. Following our appointment, we carried forward multiple litigation and arbitration proceedings in Hong Kong, Singapore, Bermuda and India. We also replaced the board of directors, formed a restructuring committee and successfully oversaw the creation of a restructuring plan for the company.

3. Pick your spot
   In any multinational insolvency case, it is important to determine the COMI and seek to instigate initial proceedings in the relevant jurisdiction. However, complex multinational structures mean that determining the COMI is not always clear cut. The fact that so many Chinese and Hong Kong companies are incorporated in the Caribbean, but maintain both control and their principal assets closer to home, underlines this. That is why it is so important to unravel the entity structures and relationships between them to establish where the principal funds are held, and key decisions are made.

4. Track down hidden assets
   The complexities of insolvency and recovery can be compounded by organised efforts to conceal assets, move them offshore or dissipate them amongst family and friends. Investigative support is therefore crucial.

   The benefits of forensic investigation can be seen in the ongoing liquidation of the Labuan-based City Credit Investment Bank and its Caribbean subsidiaries. Our forensic team has been playing a key role in tracing dissipated assets and tracking key individuals across multiple jurisdictions including Hong Kong, Malaysia, Indonesia, Japan, BVI and the Cayman Islands, as well as the UK and USA.

   Forensic investigation is a rapidly developing field. Augmenting traditional investigative techniques with AI-assisted e-discovery and open-source intelligence analysis allows us to take a faster and more closely targeted approach to evidence review and gathering, while helping to identify crucial links between seemingly unconnected people and evidence. In the City Credit Investment Bank case, this tech-assisted detective work has enabled us to efficiently sift through more than two terabytes of emails, phone messages and other electronic data to establish relationships, locate assets, search for evidence of negligence and possible fraud and support applications for recognition and legal proceedings in other offshore jurisdictions.

Here to help

Hong Kong is one of the 26 offices in our internationally integrated network of insolvency and restructuring teams, who work with investors, creditors and their legal representatives around the world to protect value and recover assets.

We work with clients to deal with all aspects of insolvency work, from distressed M&A to regulatory and contentious litigation and investigation. We recognise that complex situations involving multiple jurisdictions require a thorough understanding of the legal, commercial and cultural challenges at play in order to deliver the best outcomes.

Our global network brings together both the people on the ground and the international connectivity to manage complex cross-border assignments. Our hands-on approach and ability to collaborate closely across different jurisdictions greatly enhances the likelihood of success for our clients.

All our fees are tailored to the nature and complexity of the assignment. In addition to retainers, we can often offer flexible performance-related fee structures, including equity arrangements and milestone payments.

If you would like to discuss any of the issues raised in this article or find out how we can help you or your clients to trace and reclaim missing assets, please get in touch.

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