Hk Cross Border Insolvency Regime

1. Introduction

Over the past few decades, there is a continuing global expansion of trade and investment. As there are more and more companies doing business not only in their home country, they may have assets and/or establishment in other countries, or even their activities take place other than the company has its registered office. In case of insolvency of such a company, many legal issues arise. Therefore, a well-equipped national insolvency laws dealing with such cases is needed.

Without national insolvency laws kept pace with the trend, countries are ill equipped to deal with cases of a cross-border nature. This would result in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to fair and efficient administration of cross-border insolvencies, impede the protection of assets of the insolvent debtor against dissipation, and hinder maximization of the value of those assets.

2. Definition of “cross-border” insolvency

Cross-border insolvency is a term used to describe circumstances in which an insolvent entity has assets or debts in more than one country or jurisdiction. Many businesses have interests expanding beyond their home jurisdictions. More and more companies would like to organize their business activities on a global scale and forming production chains including inputs that cross national boundaries. As the advent of sophisticated communications and information technology, it is no longer for reserving the cross border trade of the large multi-national corporations. These led to an increasing trend for businesses, which are involved in matters where cross border insolvency issues arise.

3. Legal issues arise

If an insolvent company has assets in more than one country, it is most likely that separate independent proceedings will be initiated in every concerned country. By doing so, the costs of various proceedings are much higher, the proceedings are much more complicated, and many issues arise. Thus the reason for having cross border insolvency regime is to deal with these legal issues and therfore it is the most essential element in the regime.

3.1 Conflicting insolvency law in different jurisdictions

There is a territorial limitation of the effects of the insolvency laws of the home jurisdiction of an insolvent internationally active institution. The insolvent company may have assets abroad, as well as subsidiaries, which might themselves be insolvent. Therefore, the insolvency proceedings might begin concurrently in several jurisdictions.

However, the rules regarding the treatment of subsidiaries within a group of insolvent companies have not been harmonized in all countries. Some jurisdictions apply the law of the main place of establishment to the insolvency of all entities within a group of companies affected by the insolvency while some countries do not have any provisions addressing the insolvency of a group of companies.

As the jurisdictions are not harmonized in all countries, we have to consider which country’s laws should apply to a particular issue, which country’s courts are competent to deal with a specific matter, as well as whether a judgment or decision made by a judicial authority recognized and enforceable in a specific other country.

3.2 Incentive for companies to transfer assets from one country to another

Since the cross-border insolvency proceedings involved many countries, and there is a territorial limitation of the effects of the insolvency laws of the home jurisdiction, companies may have incentive to transfer assets from its home country to another country in order to evade the obligation to pay the creditors.

By transferring the assets outside the home countries, the insolvent company would have fewer assets to pay the creditors, or even have no assets to pay them. Therefore, in order to protect the creditors, we should avoid the incentive for companies to transfer their assets one country to another.

3.3 “Forum Shopping”

Forum shopping is the informal name given to the practice adopted by some litigants to get their legal case heard in the court thought most likely to provide a favorable judgment. Since some countries have plaintiff-friendly jurisdictions while other countries have not, the creditors may have incentives to sue the companies in country where there is a plaintiff-friendly jurisdiction in order to get more.

In case of cross-border insolvency, the creditors would prefer suing companies in a country with plaintiff-friendly jurisdiction in order to take advantage of the more generous awards of damages, extensive discovery rules, and the contingent fee system. However, we should avoid the creditors being “forum shopping” in order to avoid the plaintiff-friendly jurisdiction being abuse.

3.4 Priority of payment

Because of the territorial limitation of the effects of the insolvency laws of the home jurisdiction, which mentioned above, the issue of priority of payment is arisen. In case of the cross-border insolvency, many countries involved. The insolvent parent company as well as the insolvent subsidiaries will be wound-up; the creditors from different countries would entitle to claim damages. However, who should claim first?

Should the creditors of each country claim in the host country proceeding, or should the worldwide creditors claim upon the assets of the parent company as well as that of subsidiaries?

4. Cross-Border Insolvency Regime adopted in other countries

In order to address the legal issues arisen from cross-border insolvencies, many countries have already adopted cross-border insolvency regime, namely United Nations Commission on International Trade Law (UNCITRAL Model Law), EU regime on Cross Border Insolvency, and Private International Law.

4.1 United Nations Commission on International Trade Law

The UNCITRAL Model Law is prepared in 1997. It aims to provide mechanisms for dealing with cross-border insolvency cases in order to promote cooperation between courts in different jurisdictions, legal certainty for investor, fair and efficient administration of cross-border insolvency proceedings and facilitation of the rescue of financially troubled enterprises. UNCITRAL does not attempt a substantive unification of insolvency law, and respects the differences between national