14 January 2020
In Re CEFC Shanghai International Group Limited  HKCFI 167, the Hong Kong Court scored a number of important firsts.
For the first time, the Hong Kong Court recognised and assisted Mainland liquidators.
For the first time, the Hong Kong Court concluded that the infamous House of Lords decision in Galbraith v Grimshaw  AC 508 is now anachronistic and does not represent Hong Kong law.
And, most importantly, for the first time, the Hong Kong Court sent a message to the world that while the Hong Kong Court adopts an open and universalist attitude to cross-border insolvency assistance, it expects foreign courts, whose officeholders come to seek recognition, to maintain an equally open and universalist attitude. Foreign courts with a territorialist bent should not expect universalist assistance granted by the Hong Kong Court.
The facts in brief
CEFC Shanghai International Group Limited (“Company”) was incorporated in the Mainland, an investment holding company, and part of a conglomerate whose business included capital financing, petroleum refining and infrastructure.
In November 2019, the Shanghai court wound up the Company on insolvency grounds and appointed Mainland liquidators. The Mainland liquidators then discovered the following. The Company’s assets included a claim against its Hong Kong subsidiary, Shanghai Huaxin Group (Hong Kong) Limited (“HK Subsidiary”), amounting to some HK$7.2 billion (“HK Receivable”). As the HK Subsidiary was in liquidation in Hong Kong, the Company had already a submitted a proof of debt.
However, before the Company’s liquidation, one creditor of the Company had obtained a default judgment in Hong Kong and a garnishee order nisi in respect of the HK Receivable to enforce the default judgment.
In order to prevent the creditor from obtaining a garnishee order absolute, the Mainland liquidators applied to the Hong Kong Court for recognition and assistance.
The Hong Kong Court’s decision
Mr Justice Harris granted the recognition and assistance sought by the Mainland liquidators. In particular, the recognition order imposes a stay on proceedings against the Company as if the Company were in liquidation in Hong Kong.
In granting the recognition, the Court was satisfied that the Mainland liquidation was a collective insolvency proceeding and thus qualified for recognition in Hong Kong. As the Mainland liquidation requires pari passu distribution of the Company’s assets, the pending garnishee proceedings violated the pari passu principle and the principle of collectivity. Thus the garnishee proceedings ought to be stayed immediately.
In the course of its reasoning, the Court disapproved the House of Lords decision in Galbraith v Grimshaw. There a creditor obtained a monetary judgment against the debtor in Scotland, and the judgment was extended to England under the Judgments Extension Act 1868. The creditor then served a garnishee order nisi on a firm who owed a debt in England to the judgment debtor. After the service of the garnishee order nisi, the judgment debtor was adjudicated bankrupt in Scotland, resulting in his estate being sequestered and transferred to the Scottish trustee in bankruptcy. The Scottish trustee in bankruptcy then brought interpleader proceedings in England to determine his rights and that of the judgment creditor with respect to the garnished debt. The House of Lords decided that where a Scottish sequestration occurred about a fortnight after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy.
If Galbraith v Grimshaw were to be followed, one could conclude that where a Hong Kong garnishee order nisi had preceded a foreign liquidation, the Hong Kong Court’s recognition of the foreign liquidation would not prevent the creditor from obtaining a garnishee order absolute. However, Mr Justice Harris concluded that the House of Lords decision “is inconsistent with contemporary cross border insolvency law and its reasoning is inapplicable to modern common law cross border insolvency assistance”.
This decision is a most welcome and important development of common law cross-border insolvency assistance.
No less important is this obiter comment: “The extent to which greater assistance should be provided to Mainland administrators in the future will have to be decided on a case by case basis and the development of recognition is likely to be influenced by the extent to which the court is satisfied that the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.”
As Hong Kong is now the most advanced jurisdiction in the world in terms of common law cross-border insolvency assistance, this is an important message to the world and reminds the world of the true rationale of cross-border insolvency assistance: universalism.
Taken to its logical conclusion, this is also a message that territorialist courts should not take the Hong Kong Court’s openness and universalist attitude for granted.