CHINA: An Introduction to Dispute Resolution: Litigation (International Firms)
Dispute Resolution: Litigation (International Firms) - China
Renowned for its well-established and robust legal framework, Hong Kong is always considered as an international dispute resolution centre and a prime venue for international arbitration. In this overview, we will outline some recent developments and trends in the dispute resolution regime in Hong Kong and discuss how these developments will affect litigants from China, enabling them to adopt necessary measures to pre-empt potential disputes and safeguard their legal interests.
Recent trends and developments of litigation in Hong Kong and China
While companies in Hong Kong and China are still recovering from the unprecedented impacts caused by the COVID19 pandemic and we are experiencing an economic downturn, we have seen marked uptake of litigations and developments in the dispute resolution regime in Hong Kong, which would likely affect litigations having China elements significantly. The key takeaway and trends are:
1. Reciprocal enforcement of judgments between Hong Kong and China
The Mainland Judgment in Civil and Commercial matters (Reciprocal Enforcement) Ordinance (Cap. 645) ( “New Ordinance”) came into force on 29 January 2024, which supersedes the existing regime under the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597). Key amendments include:
(a) Removal of exclusive jurisdiction requirement: the New Ordinance no longer requires that the underlying disputes have to be subject to an exclusive jurisdiction clause (“EJC”) in favour of Mainland courts and vice versa. Mainland applicants seeking to enforce a Mainland judgement in Hong Kong only have to show that (i) the dispute is not subject to the exclusive jurisdiction of Hong Kong courts; and (ii) there is a connection between the dispute and China. For example, the defendant’s place of residence was in China, or the place of performance of the contract was in China.
(b) Expanded scope of enforceable judgments and remedies: the New Ordinance is expanded to cover both monetary and non-monetary reliefs (eg an order for specific performance), except for claims for infringement of intellectual property rights and trade secrets.
(c) Broadened scope of applicable judgments: the New Ordinance covers all subject matters of civil and commercial nature unless expressly excluded, as contrasted against the previous statutory regime which only covers commercial judgments.
These changes make it easier for Mainland litigants to enforce Mainland judgments in Hong Kong and reduce their needs to re-litigate the same claim in Hong Kong. It is anticipated that the governments of Hong Kong and China will continue to improve the mutual legal assistance arrangements in civil and commercial matters between Hong Kong and China. Notably, as announced in the 2024 Action Plan on the Construction of Rule of Law in the Guangdong-Hong Kong-Macao Greater Bay Area, there have been active discussions between the Department of Justice and the Judiciary and the Supreme People's Court (“SPC”) to improve the mechanism for mutual service of judicial documents in civil and commercial proceedings between Hong Kong and China by increasing the modes of service of court documents.
2. Mutual recognition and assistance of debt restructuring and bankruptcy (insolvency) proceedings between Hong Kong and China
In debt restructuring and bankruptcy (insolvency) context, a cooperation mechanism on mutual recognition and assistance to bankruptcy (insolvency) proceedings between the courts in Hong Kong and China was implemented in 2021. Such mechanism allows Hong Kong liquidators to apply for recognition of Hong Kong bankruptcy (insolvency) proceedings in Shanghai, Shenzhen and Xiamen (“Pilot Cities”). Similarly, PRC administrators may apply to the Hong Kong courts to seek recognition of PRC bankruptcy (insolvency) proceedings.
Since the mechanism came into force, we have seen instances (Re HNA Group Co., Ltd [2021] HKCFI 2897 and Re Peking University Founder Group Company Limited [2021] HKCFI 3817), where the Hong Kong courts provided assistance to PRC administrators for recognition of PRC bankruptcy (insolvency) proceedings. More recently, in Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340, the Hong Kong court confirms that its power to recognize and assist PRC bankruptcy (insolvency) proceedings is not limited to the Pilot Cities and that PRC administrators outside the Pilot Cities may still initiate a letter of request to the Hong Kong court for recognition of the PRC bankruptcy (insolvency) proceedings.
3. Keepwell deeds are enforceable in Hong Kong
Due to the previous restrictions on repatriating funds raised offshore by Mainland companies, Mainland companies often rely on keepwell deeds as financial backing to its offshore subsidiaries. Under a keepwell deed, the Mainland parent company will undertake that its offshore subsidiary is solvent, and has sufficient liquidity to satisfy the payment obligations under the bonds issued by its offshore subsidiary.
The enforceability of these keepwell deeds have been recently examined by Hong Kong courts. This issue is first addressed in Nuoxi Capital Ltd & Others v Peking University Founder Group Company Limited [2023] HKCFI 1350, where Harris J clarifies that keepwell deeds are enforceable in Hong Kong. While Harris J’s decision has recently been overturned in Re Peking University Founder Group Company Limited [2024] HKCA 445, the Court of Appeal endorses the position that keepwell deeds are enforceable in Hong Kong, and only disagrees with Harris J’s assessment of the scope of the rights and obligations under the keepwell deeds.
Therefore, the position in Hong Kong remains that keepwell deeds are binding and enforceable. Creditors can enforce keepwell deeds against the keepwell providers in Hong Kong and keepwell providers cannot escape from those liabilities by entering into a reorganisation in China. While the decisions of the Hong Kong courts appear to be creditor-friendly, Mainland creditors shall note that the nature of obligations under each keepwell deed (including the best efforts qualification) could be different, which may lead to different outcomes.
4. Effect of arbitration clause in winding-up and bankruptcy proceedings
Under "One Country, Two Systems", Hong Kong enjoys a unique position and is a well-recognised hub for international arbitration. Against such backdrop, we have seen growing number of insolvency disputes involving Mainland litigants, whereby the underlying agreements are subject to arbitration clauses. Traditionally, the rule of practice in Hong Kong is that a petition for bankruptcy and insolvency will only be dismissed in favour of an arbitration if the debtor can show a bona fide dispute of the debt on substantial grounds.
Recently, the Hong Kong courts examined the impact of such arbitration clauses in bankruptcy and insolvency context:
(a) The Court of Final Appeal in Re Guy Lam Kwok Hung [2023] HKCFA 9 (“Guy Lam”) clarifies that a winding-up petition will be dismissed where the dispute over the petition debt is subject to an EJC in favour of a foreign court, unless there are countervailing factors, such as “the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process”.
(b) The Court of Appeal in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 and Arjowiggins HKK 2 Ltd v Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 endorses the position in Guy Lam and clarifies that a winding-up petition may be dismissed or stayed pending arbitration if (i) there is an arbitration agreement in the contract; (ii) there is a bona fide dispute of the debt on substantial grounds; and (iii) the debtor has a genuine intention to arbitrate.
While an arbitration clause will not automatically result in a stay or dismissal of a bankruptcy (insolvency) petition in Hong Kong (as the Court will take into account the nature and merits of the defence or cross-claim), it is clear that an arbitration clause may give a debtor a better chance to seek to dismiss or stay a bankruptcy (insolvency) petition pending arbitration. Therefore, in negotiating the dispute resolution clause, Mainland companies should carefully consider whether it is suitable to incorporate an arbitration clause as this could lead to potential difficulties in case one would want to commence bankruptcy (insolvency) proceedings directly (before solving the underlying dispute by arbitration).
Conclusion
While the market is still recovering from the COVID19 pandemic and the effect of the recent developments in Hong Kong may take some time to materialise, the developments are much welcomed as they foster the cooperation between the courts in Hong Kong and China and build a more comprehensive cross-border cooperation mechanism. Looking forward, we remain optimistic that the Hong Kong government will continue to leverage the distinctive advantage of the Hong Kong’s legal system under the “One Country, Two Systems” and maintain its position as Asia’s leading international dispute resolution centre.