Hanjin Shipping’s hurdles for Chinese bankruptcy recognition highlight country’s cross-jurisdictional challenges

28 September 2016

by Zhou Ping

 

Hanjin Shipping’s attempts to win Chinese recognition of its South Korean bankruptcy proceedings would be a challenging endeavor even if it weren’t for the neighboring nations’ lack of a judicial reciprocity agreement, according to Chinese restructuring experts including a judge, two lawyers and an advisor.

 

The South Korean maritime transportation company has been denied access to the ports of the world’s largest exporting nation since being admitted into court receivership on 1 September in Seoul. Recognition of the South Korean process by China would ease the bottleneck of Hanjin’s container ships at Chinese ports, in part because the company wouldn’t worry that vessels would be arrested there.

 

While China’s bankruptcy regime, implemented in 2007, provides for extra-territorial recognition, the country has rarely, if ever, put this into action, said all the sources, who weren’t aware of any precedents. Even if there were precedents, this case doesn’t seem to be covered by the rules, they said.

 

That leaves Hanjin with a Hail Mary attempt of a high-level diplomatic request for a breakthrough, according to Ji Nuo, a Shanghai-based insolvency and restructuring partner at Chinese law firm Fangda Partners.

 

“If approaching in a diplomatic way, Hanjin could argue that China’s reputation as an international trade partner could be hurt if the lack of recognition causes chaos,” Ji said. “But its request would be considered in the broader context of international relations as opposed to just a legal question.”

 

Hanjin has mandated Zhong Lun Law Firm as legal advisor on PRC law, according a press release on the Beijing-headquartered law firm’s website on 23 September.

 

Hanjin could not be reached for comment.

 

US bridge

 

China’s bankruptcy rules list six conditions for a court to consider granting recognition of foreign proceedings: that the proceedings don’t threaten Chinese national security and public interests; don’t impair the legitimate rights of Chinese creditors; don’t breach Chinese laws; that an effective order has already been made on the case; that the debtors have assets in China; and that there is a cross-jurisdictional recognition agreement or, at the judge’s discretion, that the foreign jurisdiction had previously recognized a Chinese court ruling.

 

The six provisions are included in a vague one-line clause. As such, before the rules could be implemented, China’s Supreme Court would need to provide guidance, the judge and the lawyer sources said. Among the issues that need to be clarified are whether an “effective order” includes only a final ruling on a restructuring plan or also for a bankruptcy process and how to determine whether a foreign process is impairing the rights of Chinese creditors, they said. Another issue that needs clarification is what kind of foreign recognition would enable a Chinese judge to recognize a foreign bankruptcy order.

 

Su Xiaoling, a former Chinese judge, suggested in a personal blog post about the Hanjin case that the South Korean administers could try to win recognition by noting that Seoul Central District Court, in 1999, rejected a lawsuit petition on the grounds that a court in Weifang, Shandong had already dealt the with the matter and that its ruling was effective in South Korea as well. That case, however, was not about bankruptcy, diminishing its ability to serve as the bridge.

 

If there is a jurisdiction ripe for recognition, it is the US, according to Liu Jingtao, a partner of Zhong Lun based in Qingdao, Shandong province.

 

That is because on 12 August 2014, the US bankruptcy court for the district of New Jersey granted an order recognizing bankruptcy proceedings in China of Zhejiang Topoint Photovoltaic Co. The order was the first time a US court gave Chapter 15 recognition to a bankruptcy process in China as the “foreign main proceedings”, including accepting the Haining, Zhejiang court-appointed bankruptcy administrator as the “foreign representative”.

 

As such, a US case would have a better chance in setting the precedent in China for foreign recognition, Liu said.

 

In a positive sign, “the importance of the establishment and improvement of impartial bankruptcy systems and mechanisms” was unusually among the items highlighted in a press release posted on Chinese state news outlet Xinaunet.com about the talks between the US and Chinese presidents ahead of the G20 Summit in Hangzhou early this month.

 

“No matter whether symbolic or real, such a ‘gesture’ gives grass-root players some leverage, support and tools to move things ahead on the ground, Yang Wantao, a partner of Zhong Lun based in Shanghai, said. “In China, changes made from the top down are more likely to work.”

 

Surge

 

Hanjin has so far obtained protective recognition of it domestic process from Germany, the US, Japan and the UK, enabling it to unload containers from its vessels in ports in these countries without concerns of enforcement action, according to numerous media reports. It has also formally filed for provisional protection orders in Singapore and Belgium and plans to file in Spain, Italy and Mexico.

 

All the countries that granted recognition so far, as well as South Korea, are signatories to the UNCITRAL Model Law on Cross-Border Insolvency, endorsed by the general assembly of the United Nations in 1997, providing “procedural mechanisms to facilitate more efficient disposition of cases in which an insolvent debtor has assets or debts in more than one state”, according to The Judicial Perspective regarding the law in 2012.

 

China is not.

 

While the Hanjin case highlights the absence of a practical cross-border insolvency mechanism in China, a more pressing challenge is the country setting up a functioning regime even to handle just domestic cases at a time when Beijing is pushing to curtail oversupplied sectors, according to all the sources.

 

“Chinese courts are already under pressure in the face of surging domestic defaults so the Hanjin case may not be top of their list,” the first lawyer source said.

 

Professor Li Shuguang, an INSOL China board member and leading voice in the country for insolvency reform, has used the Hanjin case as an opportunity to press Beijing to move ahead assertively in adopting internationally recognized insolvency mechanisms, including by rapidly setting up specialized bankruptcy courts. In a widely broadcast blog posting dated 23 September, the academic at China University of Political Science & Law’s Bankruptcy Law & Restructuring Research Centre in Beijing argued that this was the only way the country could develop a coherent bankruptcy system. As it is, domestic bankruptcy proceedings are handled by courts that deal with domestic matters while courts overseeing international disputes would hear a foreign recognition petition, he noted.

 

While China’s Supreme People’s Court in early August ordered that specialized bankruptcy courts be set up to handle the rising tide of corporate defaults, the plan is largely just that. So far, only Guangdong and Beijing have headed the call—at least in announcing that they have set up such courts, though no cases have yet been processed. Shanghai expects to inaugurate one by year-end, the judge and the first lawyer source said.

 

“So far we don’t have an idea who is going to be sitting on that [Shanghai] court,” the judge said. He noted that such a posting would be unpopular because of the challenges judges on bankruptcy cases face in coalescing a cross-section of government agencies—including the police—to enforce on or protect assets. “The court order is just a piece of paper,” the judge said.

 

In addition, the performance of judges in China is measured in part by the number of cases they complete and bankruptcy proceedings usually drag on for years, the Shanghai-based restructuring advisory source said.

 

“That’s part of the reason for the Supreme Court pushing for bankruptcy courts,” the advisory source said. “It is launching a new centralized system on the web for bankruptcy rulings, notices and debtors information with an eventual goal of urging participants update the status of insolvency proceedings timely, not to set it aside forever.”