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By LTLawyers Posted July 18, 2018 In News  3

Part 1Comparison of the bankruptcy/winding-up regimes in the PRC and Hong Kong respectively

Grounds to apply  for compulsory bankruptcy: the debtor is unable to repay a due debt1. According to judicial interpretation currently in force, “unable to repay a due debt” entails that:The debt relationship has been legally established;The time limit for repayment of the debt has expired; andThe debtor has not fully repaid the debt.2. In support of the application, the creditor should submit evidence to show that the debtor is “unable to repay a due debt”. It should be noted that, in perspective, the facts and grounds underlying the application, namely the circumstances as prescribed by Article 2 of the Enterprise Bankruptcy Law (see “Criteria for acceptance” below), should be set out. As demonstrated below, this in effect raises the bar for a creditor’s bankruptcy application to a new level.Grounds for petition: the company is unable to pay its debts (being a liquidated sum then due that equals or exceeds HK$10,000)1. Bankruptcy of individuals vs Winding-up of companiesUnlike the Mainland (where bankruptcy against individuals is not recognized), in Hong Kong, a creditor can petition to the court to bankrupt an individual debtor on grounds and procedure which are similar to that of petitioning to wind up a company.2. Statutory DemandUnder Hong Kong law, if the petitioning creditor has served on the debtor a statutory demand (in prescribed form) requiring him/it to pay a liquidated debt, and the debtor has neither complied with it nor set it aside within 21 days of the service, the debtor is deemed unable to pay the debt whereupon the creditor may petition to the court to bankrupt/wind up the debtor.
Criteria for “acceptance” (受理): Before ruling on whether or not to “accept” a bankruptcy application, the PRC court will make a determination on the issues stipulated in Article 2 of the Enterprise Bankruptcy Law, i.e. (i) whether the debtor is unable to repay due debt, and (ii) whether the debtor has insufficient assets to pay off all the debt or is obviously incapable of clearing off its debts.Under Article 2, two scenarios are recognized, namely where a debtor is “unable to repay due debt and its assets are insufficient to pay off all the debt” and where a debtor is “unable to repay due debt and obviously incapable of clearing off its debts”. It is only with the existence of at least one of these scenarios may the court “accept” a bankruptcy application.Before deciding to “accept” a bankruptcy application, the court will conduct a review on 2 levels. The first level of review involves confirming the creditor-debtor relationship including ascertaining whether the debt is due and has not been paid off. This review replaces the usual civil litigation procedures / arbitration procedures for the adjudication and determination of the creditor-debtor relationship. Therefore, in theory, the creditor needs no judgment / arbitral award before commencing bankruptcy proceedings.The second level of review goes to the sufficiency of the debtor’s assets to pay off the debt and/or the debtor’s capability to clear off the debt.In practice, however, the PRC court tends to look for the existence of a judgment / arbitral award or even failed attempts to enforce the judgment debt as the pre-condition to any “acceptance” of bankruptcy application. This is because matters to be determined in the first level of review (i.e. the creditor-debtor relationship, repayment period, repayment status etc.) would already have been determined in an existing judgment/ arbitral award.Likewise, practicing lawyers tend to apply for bankruptcy only after obtaining valid judgment/ arbitral award, so as to ensure that the court will “accept” the bankruptcy application.Generally speaking, in the PRC, it is commonly agreed that the “acceptance” of a bankruptcy application by the court is difficult to achieve both in theory and practice. “Acceptance” by the court requires overcoming 2 hurdles of review both in substance and form. Furthermore, there is no unified criteria on “acceptance” for the great many courts in the PRC, and the review time is lengthy, not to mention the courts also take into account the effect of bankruptcy cases on society. All these factors render it difficult to obtain “acceptance” of bankruptcy application by PRC courts, which deters creditors from making use of the bankruptcy procedure to enforce their rights.The notion of “acceptance” (受理) under the PRC law does not apply to Hong Kong. The Hong Kong court will not conduct any substantive review of a creditor’s petition when it is presented. Whether or not the grounds for winding-up have been established will be dealt with later by the court at the substantive hearing of the petition.If the debtor has not disputed the debt or has no honest (bona fide) defence of substance to it, the creditor may go straight to the court with a petition to bankrupt/wind up the debtor without having to engage in any laborious or prolonged legal process for obtaining a monetary judgment/arbitral award in the first instance. This is so regardless of whether there is any arbitration agreement with the debtor, or even any ongoing arbitration proceedings in Hong Kong or elsewhere (see the “LeTV” case below).As demonstrated in the opposite column and those above, by comparison, the legal procedure for insolvency proceedings in Hong Kong is less onerous than its Mainland counterpart. According to the Hong Kong Official Receiver’s Office, there were 3,256 bankruptcy/winding-up cases between January and May 2018, and the courts heard on average 42 cases per week.Filing a petition: If the debtor, for 21 days after service of the statutory demand, fails to repay the debt or make any settlement proposal to the reasonable satisfaction of the creditor, the creditor may proceed with the following procedures to commence winding-up proceedings against it :Deposit with the Official Receiver’s Office a sum of HK$11,250 for the purpose of covering its fees and expenses;File a petition with the High Court Registry and pay the prescribed court fee of HK$1,045;Obtain a date for the first hearing (usually 4-6 weeks after the filing of the petition);File an affidavit verifying the petition;Serve the petition on the debtor and advertise and gazette the petition.Pausing here, after commencement of the winding-up proceedings (i.e. after the filing of the petition), any disposition of the property of the debtor company shall be void pursuant to section 182 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance. In other words, there can be no transfer of the company’s assets, and the company’s bank account(s) will likely be frozen by the banks.The straight-to-the-lair and high-profile nature associated with the relevant service and presentation of the bankruptcy/winding-up petition (see above) will invariably attract mass attention including that of the business community and particularly the financial institutions. The resultant pressure on a debtor who happens to be evasive and yet carrying on business activities will be significant. Consequently, it helps improve the prospects of early settlement and saving on legal costs.

Part 2:Outline of Recent Hong Kong Winding-up Cases

Date of Decision2 March 20184 June 2018
Key factsLasmos, the Petitioner, sought payment of around US$26 million said to arise under an agreement with Southwest.Lasmos first issued a statutory demand to Southwest, and then issued a petition to wind up Southwest relying on a statutory demand.Southwest disputed the debt.The said agreement between the parties out of which the debt arose contained an arbitration clause, to the effect that if the dispute is not settled by mediation, any party may by written notice to the other parties refer the dispute to arbitration.Pursuant to an agreement between the petitioners and LeTV, LeTV shall repay a debt of around US$40 million to the petitioners in 4 tranches. However, LeTV only repaid 2 tranches, leaving arrears of around US$13 million.The petitioners commenced arbitration proceedings against LeTV in Singapore for the said debt. At the same time, the petitioners commenced winding-up proceedings against LeTV in Hong Kong.
The Court’s DecisionLasmos’ winding-up petition was dismissedA winding-up order against LeTV was granted
Reasons for decisionThe Hon. Mr Justice Jonathan Harris of the Court of First Instance (“Harris J”) considered that in circumstances where (1) Southwest disputed the debt (i.e. no agreement had been reached as to the calculation and repayment of the debt); (2) the agreement under which the debt is alleged to arise contains an arbitration clauseand (3) Southwest required the dispute to be resolved in accordance with the said arbitration, the winding-up petition should be dismissed.Harris J considered that LeTV failed to adduce any evidence to demonstrate a bona fide defence on substantial grounds (i.e. an honest, genuine defence of substance) to the petitioners’ claim for the said debt of around US$13 million, and saw no justification for requiring the parallel arbitration be completed before winding-up LeTV.
Author’s ObservationsGenerally speaking, unless overruled by the Court of Appeal, the decisions of Harris J, being a Companies Judge in the Court of First Instance (presiding over cases against companies, including compulsory winding-up petitions), constitute binding precedents on the Court of First Instance and all lower courts.Reading the foregoing 2 recent decisions by Harris J in conjunction, it appears that neither an arbitration clause nor ongoing arbitration proceedings will save an insolvent debtor, without honest defence in substance, from a winding-up/ bankruptcy order being made against it by the court.


Corporate Bankruptcy & Liquidation in the PRC: Yan Penghe Harvey, Managing Partner of ZHONGYIN LAW FIRM;

Compulsory Winding-up of Hong Kong companies and Outline of Recent Hong Kong Winding-up Cases: KM Liew, Principal of LT LAWYERS

18 July 2018


The above contents reflect the author’s own personal opinions only, and by no means constitute any legal advice or recommendation by LT LAWYERS or ZHONGYIN LAW FIRM or any other legal team. If reprint or other usage of the above contents or any part thereof is desired, please contact privately to discuss authorization, and specify at the forefront of any and all such reprint the source of such contents, namely “Team of LT LAWYERS and ZHONGYIN LAW FIRM” as well as the author’s name. Without LT LAWYERS’ authorization, no reprint or usage of any of the above contents is permitted, including audiovisual materials such as diagrams, images, etc. If you are interested in engaging in further discussion on related topics, you are welcome to contact KM Liew and team at LT LAWYERS and Harvey Yan and team at ZHONGYIN LAW FIRM.


KM Liew
Hong Kong LT Lawyers, Principal
Practice Foci: International Dispute Resolution, Audit & Financial Reporting Investigation, Financial Regulatory & Compliance


Harvey Yan
Beijing Zhong Yin Law Firm, Managing Partner
Practice Foci: Investment and M&A, Securities and capital  markets, Company comprehensive business

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