Wednesday, 08 Sep 2010
China: Cross-border insolvencies - assets at risk?
06 February 2009
The Bund, Shanghai
The global credit crisis is widely expected to trigger an increase in corporate insolvencies. Foreign creditors seeking recovery against assets located in China should beware. Despite recent changes to China’s insolvency regime, it will remain difficult to obtain enforcement in China of an insolvency judgment or ruling made by a foreign court.
For inbound cross-border insolvency cases, the PRC Enterprise Insolvency Law sets out onerous conditions that will make it extremely difficult for a foreign insolvency officer to obtain recognition and enforcement in China of an insolvency judgment made by a foreign court. The PRC Enterprise Insolvency Law provides that any insolvency proceedings commenced outside the PRC will only be binding on the assets of the debtor in the PRC if the People’s Court determines that the five following conditions are satisfied:
- the foreign court’s decision does not violate the “fundamental principles” of the laws of the PRC;
- the foreign court’s decision is not detrimental to the sovereignty of the PRC;
- the foreign court’s decision is not detrimental to the national security of the PRC;
- the foreign court’s decision is not detrimental to the “social public interests” of the PRC; and
- the foreign court’s decision is not prejudicial to the rights and interests of creditors in the PRC.
The People’s Court must also determine that there are relevant treaties or reciprocal relations between such country and the PRC. However, China is not a signatory to any significant international treaty relating to insolvency.
It remains to be seen to what extent the People’s Courts will rely on these conditions to resist allowing a foreign insolvency officer to secure an insolvent debtor’s assets in China and repatriate such assets (or the proceeds from the sale of such assets). The Chinese rules will also be tested in the context of overseas sales of financially distressed companies in court-supervised auctions.
Foreign insolvency proceedings may cause the termination of joint venture contracts to which the foreign debtor is a party. In some cases, the Chinese partner will have the option to buy out the foreign partner. Depending on the laws of the jurisdiction of the insolvent company, the insolvent company or its court appointed insolvency officer may have to be involved in the negotiations leading to the buy-out by the Chinese partner.
This article was written by Jim James, a partner at the Shanghai office of law firm Norton Rose.
