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Text of an address to a colloquium "Chinese Insolvency Law Symposium: Developing an Insolvency Infrastructure" held at the University of Hong Kong, 17-18 November 2000
The colloquium was organised by the Asian Institute of International Financial Law and co-sponsored by the Department of Politics and Law, China University of Politics and Law, Duke University Global Markets Centre, Hong Kong Society of Accountants, Inter-Pacific Bar Association, and Pepperdine University School of Law. The colloquium involved discussions among academics, insolvency practitioners, judges and government officials from mainland China, Hong Kong SAR and overseas, on issues of PRC insolvency law reform and cross-border insolvency between China and Hong Kong SAR.
Paul Heath QC
Law Commissioner1
Introduction
The New Zealand Law Commission2 is currently involved in the review of New Zealand's insolvency law. To date, two substantive reports have been presented by the Commission: NZLC R52 Cross-Border Insolvency: Should New Zealand Adopt the UNCITRAL Model Law on Cross-Border Insolvency?3 and NZLC SP2 Priority Debts in the Distribution of Insolvent Estates.4 The latter was an advisory report prepared for the Ministry of Commerce (as the Ministry of Economic Development was then known). The Ministry of Economic Development is the lead Ministry for insolvency law in New Zealand.
As part of the Commission's involvement with the reform of New Zealand insolvency law, I had the privilege of attending the December 1999 session of the United Nations Commission on International Trade Law's (UNCITRAL) Working Group on Insolvency Law as a New Zealand delegate. I draw on that experience when discussing the direction of UNCITRAL's future work on insolvency law.
This Symposium addresses cross-border insolvency issues at two quite distinct levels. First, there are the particular issues of cross-border insolvency involving the Hong Kong Special Administrative Region and the People's Republic of China. When addressing that issue it is necessary to have regard to matters which would affect an approach to domestic insolvency law reform. In that context the special relationship which exists between the People's Republic of China and the Hong Kong Special Administrative region (the "one country, two systems" approach) is an important factor to bear in mind. The second issue, however, is wider in its scope. It concerns the direction of future international work about to be undertaken by UNCITRAL on insolvency law and the factors to which reference should be made when considering insolvency law from an international perspective.
It is helpful to consider the two issues together because the factors which are relevant to domestic insolvency law reform can be compared to the factors which should be taken into account at an international level. A joint consideration of the issues also tends to focus upon common goals and the need for domestic laws to work adequately within what has become a truly global market place.
This commentary addresses two issues:
1. An approach which could be taken by UNCITRAL in its future work on insolvency law which would both encourage greater harmonisation in the use of insolvency regimes yet assist States to tailor domestic insolvency laws to meet their own economic, legal, commercial, social and cultural needs.5
2. Whether there are any lessons to be learnt from the recent judgments of the Courts of the Hong Kong Special Administrative Region in the Chen Li Hung6 litigation which involved an attempt by trustees in bankruptcy appointed by the District Court in Taipei to gain access to assets of the bankrupt in the Hong Kong Special Administrative Region. These decisions will be noted because they raise an unusual issue in the context of cross-border insolvency law. My questions are: (a) Have the Hong Kong courts resolved the issue adequately? and (b) what lessons can be learnt from the litigation?7
Future UNCITRAL Work
Background
On 15 December 1997, the General Assembly of the United Nations passed a resolution (inter alia) recommending that all States review their legislation on cross-border aspects of insolvency to determine whether the legislation met the objectives of a modern and efficient insolvency system. The resolution went on to ask that States give favourable consideration to enacting the Model Law on Cross-Border Insolvency which had been developed by the Working Group on Insolvency Law and adopted by UNCITRAL, "bearing in mind the need for an internationally harmonised legislation governing instances of cross-border insolvency".
The Model Law did not attempt any substantive harmonisation of insolvency law. Indeed, it was recognised in the course of the Working Group meetings that, in some cases, it was necessary to defer to national laws (for example on the questions of priority debts) in order to achieve agreement on processes which would enable the efficient and effective resolution of cross-border insolvency cases. The Guide to Enactment of the Model Law noted that while the increasing incidence of cross-border insolvencies reflected continuing global expansion of trade and investment, national insolvency laws had not kept pace with that trend and were often ill-equipped to deal with cases of a cross-border nature. The Guide went on to note a number of consequences flowing from these inadequate and inharmonious legal approaches which:8
a. Hampered the rescue of financially troubled businesses;
b. Were not conducive to a fair and efficient administration of cross-border insolvencies;
c. Impeded the protection of the assets of the insolvent debtor against dissipation;
d. Hindered maximisation of the value of the assets of the insolvent debtor.
Further, it was noted that the absence of predictability in the way in which cross-border insolvency cases were administered both (i) impeded capital flows and (ii) acted as a disincentive to cross-border investment.9
Another problem was the increase in fraud by insolvent debtors and the increasing ability (and ease) for fraudsters to conceal assets or to transfer them to foreign jurisdictions. The Guide to Enactment noted that this was an increasing problem both in terms of frequency and magnitude. The Guide continued:10
The modern, interconnected world makes such fraud easier to conceive and carry out. The cross-border co-operation mechanisms established by the Model Law are designed to confront such international fraud.
In order to deal with these difficulties, the Model Law provided better access for foreign insolvency representatives to the courts of the State in which assets were located.11 It also devised processes designed to recognise foreign insolvency proceedings and to give effect to them within the State in which assets were located.12 These processes included the ability for the courts of the States in which application was made to grant relief on the application of the foreign insolvency representative.13
Another important element of the Model Law was the emphasis placed upon co-operation between courts in different jurisdictions and the insolvency representatives themselves.14 The whole topic of direct communication and co-operation is one on which a lengthy article or commentary could be written but it is sufficient for my present purposes to note that the Model Law has acted as an impetus to the holding of joint audio and video conferences among courts in different jurisdictions in an endeavour to deal in a pragmatic way with the difficult issues which arise in cross-border insolvency cases. In particular, these rules assist in the expeditious completion of an insolvency regime and facilitate early payment of dividends to creditors. A good deal of work has already been done to build upon this aspect of the Model Law: in particular I refer to American Law Institute's Transnational Insolvency Project which, in appendix 2, sets out suggested guidelines applicable to Court-to-Court communications in cross-border cases.15
The Next Phase of UNCITRAL Work
The UNCITRAL Working Group on Insolvency Law met in Vienna, 6-17 December 1999. In its report the Group made the following recommendation to UNCITRAL:16
The Working Group recommends that the Commission give it the mandate to prepare: a comprehensive statement of key objectives and core features for strong insolvency, debtor-creditor regime, including consideration of out-of-court restructuring; a legislative guide containing flexible approaches to the implementation of such objectives and features, including a discussion of the alternative approaches possible and the perceived benefits and detriments of such approaches. A legislative guide similar to that being prepared by the Commission for privately financed infrastructure projects would be useful and could contain model legislative provisions, where appropriate.
Should the Commission decide to undertake such a project, the Working Group should be mindful in carrying out this task of the work underway or already completed by other organizations, including the International Monetary Fund, the World Bank, the Asian Development Bank, the International Bar Association and INSOL International. The Working Group should seek their collaboration in order to benefit from the expertise these organizations can provide and to build on their efforts and should commence its work after receipt of the reports currently being prepared by the World Bank and the Asian Development Bank.
That recommendation was received by UNCITRAL at its plenary session held in June and July 2000 in New York. There was general agreement in the Commission that a single model law on insolvency was neither feasible nor necessary. Nevertheless, it was accepted that a legislative guide similar to that adopted by UNCITRAL for privately financed infrastructure projects would be useful and could contain model legislative provisions, where appropriate. Further, the Working Group was directed to be mindful of the work underway or already completed by other organisations, including the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB), INSOL International and the International Bar Association. The Secretariat was asked to organise a colloquium before the next session of the Working Group17 in co-operation with INSOL International and the International Bar Association.18
A number of the reports to which UNCITRAL referred, stress the need for strong insolvency systems to act as important pillars of support for the financial system as a whole and the efficient flow of international capital in particular. By way of example, in the report by the Legal Department of the IMF, Orderly and Effective Insolvency Procedures: Key Issues it was said:19
Over the years, the IMF has become increasingly involved in the promotion of orderly and effective insolvency systems among its members. Experience has demonstrated that reform in this area can play a major role in strengthening a country's economic and financial system.…Insolvency reform can be particularly relevant for economies in transition, where it can play a critical role in addressing the problems of insolvent State-owned enterprises. In the context of financial crises, an orderly and effective insolvency system can provide an important means of ensuring adequate private sector contribution to the resolution of such crises. Finally, although insolvency procedures are implemented through the courts, the very existence of an orderly and effective insolvency system establishes incentives for negotiations between debtors and their creditors, which may lead to out of court agreement being reached "in the shadow" of the law.
In the New Zealand Law Commission's report on Cross-Border Insolvency20 we, in an endeavour to add value to the Model Law, sought to identify factors in favour and against reform of the law by adoption of the UNCITRAL Model Law. We identified three factors in favour of reform:21
•Globalisation Factors: these factors arise from the desirability to synthesise international commercial law given the nature of the global markets in which trading entities operate; special consideration needs to be given to the ease with which many enterprises may carry on cross border trade through the use of modern communication technologies;
•Fiscal Factors: these factors impinge upon policy reasons for not discriminating against foreign investors or lenders. In particular, we referred to analysis by economists stressing the need for fair treatment of foreign creditors.22 In this context the ability to obtain credit from foreign companies may be undermined by an approach to cross border insolvency which does not include an element of reciprocity. As matters presently stand article 8 of the Draft Bankruptcy Law of the People's Republic of China would deny a foreign insolvency administrator access to Chinese assets located within the territory of the People's Republic of China.
•Efficiency and Fairness Factors: these factors go to the process by which relief can be sought when cross-border insolvent issues arise.
Two factors were identified which militated against reform:
•Adequacy of Existing Legislation: plainly, if existing legislation was adequate there is unlikely to be a need to reform the law;
•Sovereignty Factor: this factor goes to the question whether it is appropriate for a particular country to adopt an international regime rather than a domestic regime which may better suit or protect its citizens.
Building on the Model Law
The report of the UNCITRAL Working Group on Insolvency Law's December 1999 meeting concentrated on two distinct issues: the identification of -
a.key objectives for insolvency law23 and
b.core features of an efficient and effective insolvency law.24
The Working Group Report makes it clear that objectives of insolvency law should not be treated as polarising insolvency laws into liquidation (on the one hand) and rehabilitation procedures (on the other). What was more important was:25
… a more broadly phrased 'arrangement' or 'method' which was aimed at maximising the return and minimising the effects of insolvency and [which] would include the range of possible insolvency techniques.
And, to emphasise the point, the Working Group later noted, in the context of discussing the relationship between liquidation and rehabilitation procedures, that:26
… what was required was a balance between different insolvency procedures, however they may be arranged in the insolvency law (such as unitary proceedings or otherwise). As noted in the discussion on key objectives, there should not be a polarisation of proceedings into liquidation on the one hand and rehabilitation on the other, but inclusion of a range of possible insolvency techniques that could be used to achieve the objective of maximising the value of the assets.
I interpolate some comments about terminology. The literature refers to "reorganisation", "rehabilitation" and "rescue" procedures almost interchangeably. Indeed, there is some inconsistency in the UNCITRAL material in that article 2(a) of the Model Law on Cross-Border Insolvency (which defines the term "foreign proceeding") refers to the notion of "reorganisation" whereas the Working Group discussion in December 1999 focused upon "rehabilitation". Whichever term is used, it is necessary to focus attention on the business of the entity rather than on the entity itself. In truth, it is more likely that the business operated by the entity can be saved by utilising a procedure which enables it to be sold as a going concern. It is important not to fudge the distinction between salvaging a business (which may involve sale of the business by the insolvent entity as a going concern with resulting liquidation of the entity) and resuscitation of the insolvent entity itself. For consistency, I use the term "rehabilitation".
There was general agreement at the UNCITRAL Working Group on Insolvency Law as to the core features of a liquidation regime. Thus, I propose to leave those matters to one side. I do that because, in my view, it is far more important for UNCITRAL to debate and reach conclusions on the essential nature of a rehabilitation regime both to assist States in developing their domestic rehabilitation regimes and also to ensure that those States which adopt the Model Law on Cross-Border Insolvency have laws in place which will be effective when one comes to deal with them under the Model Law.
It is the collective nature of an insolvency procedure which is the cornerstone on which the Model Law on Cross-Border Insolvency is built. Foreign insolvency proceedings will only be recognised if they fall within the definition of the term "foreign proceeding" set out in article 2(a) of the Model Law. Use of the term "collective" distinguishes between a regime operating for the benefit of creditors as a whole and a regime which operates for the benefit of a particular creditor. An example of the latter is a floating charge debenture pursuant to which a secured creditor may appoint a receiver and manager over the undertaking of the debtor business. Such a security, while well known in insolvency systems based on the United Kingdom model, is not a creature known to United States' law.
The definition of the term "foreign proceeding" is:
A collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation:…
The elements of the definition (in the context of a rehabilitation regime) can be summarised as follows:
•The proceeding must be a collective proceeding in nature; such a proceeding is designed to give effect to what has been called the "creditors' bargain" - the implicit agreement between creditors that there are economies of scale in having one office to administer the proceeding and pay creditors according to a set statutory schedule of priority.28
•The collective proceeding must arise out of a law relating to insolvency;
•Pursuant to that law, the assets and affairs of the debtor must be subject to control or supervision by a court for the purpose of a rehabilitation regime.
The different constituent elements of a rehabilitation procedure were emphasised recently in the ADB report.29 I retain the references in paragraphs 37-39 of that report to "rescue" rather than "rehabilitation":
37. In the context of this report "rescue" means any form of process, by whatever name called, which provides for the continuation (and not the liquidation) of an insolvent corporate debtor. This may take the form of a composition, by which the debtor and creditors agree to a simple compounding of debts. For example, the creditors agree to receive a percentage of the debts they are owed in full, complete and final satisfaction of those debts. The debts of the corporation are thus reduced or satisfied, it becomes solvent and may continue on.
38. A rescue might also take the form of a complex reorganisation under which, for example, the debts of the debtor are restructured (extended length of loan, extended period in which to make payment, deferral of payment of interest, possible change in the identity of lenders and so forth); the possible conversion of some debts to equity together with a reduction (or, even, extinguishment) of existing equities; the sale of some of its non-core assets; and the closure of non profitable business activities.
39. However, rescue does not imply that the corporation, its creditors and its shareholders are or will be completely restored. Nor does rescue necessarily mean that ownership and management of an insolvency corporation will maintain and preserve their respective position. In general, however, rescue does imply that under whatever form of plan, scheme, or arrangement is agreed, the creditors will eventually receive more than if the corporation was immediately or soon liquidated.
The ADB report acknowledges that a rehabilitation process is not as universal as that of liquidation and, therefore, does not follow a common pattern or process. Nevertheless, the authors suggest that "key or essential elements" include:30
•the voluntary submission by a corporation to the process (which may or may not involve judicial proceedings and thereafter judicial control or supervision);
•an automatic stay or suspension of actions and proceedings against the property of the debtor affecting all creditors for a limited period of time;
•the continuation of the business of the debtor either by the existing management, an independent manager or a combination of both;
•the formulation of a plan which proposes the manner in which creditors, equity holders and the debtor itself (including its business and assets) will be treated;
•the consideration of and voting on acceptance of the plan by creditors;
•possibly, the judicial sanction of an accepted plan; and
•the implementation of the plan.
At paragraph 43 of the ADB report it is suggested that legal theory maintains that rehabilitation procedures require laws which:
•permit quick and easy access to the process;
•provide sufficient protection for all of those involved in the process (which primarily includes the corporation and its property and the various ranks and classes of creditors);
•provide a structure which permits the negotiation of a commercial plan;
•enables a majority of creditors in favour of a plan or other course of action to find all other creditors by the democratic exercise of voting rights; and
•provide for judicial or other supervision to ensure that the process is not subject to unfair manipulation or abuse.
In paragraphs 44 and 46 of the ADB report there are three propositions put forward:
1.It is of critical importance to the rehabilitation process that the opportunity, whether prompted by possible sanction or encouraged by possible benefit, should be available to a debtor in financial difficulty to commence the process before it is too late.31
2.It is critical to the modern rehabilitation process that attempts by creditors, whether secured or otherwise, to intervene upon the process and pursue their independent individual rights should be restrained, by automatic operation of the legislation, as far as possible.
3.While, in a market based economy, liquidation and rehabilitation should not be the subject of political or government influence or intervention, the presence of some exceptional economic, social or other such circumstance might sometimes justify a special process and the involvement or intervention of Government; eg where the banking sector is itself in financial difficulty.
It is helpful to have these three propositions as a starting point and the work of the ADB should be applauded for providing a platform from which further analysis can be undertaken.
In my view, the primary task of UNCITRAL in its future work will be to determine whether the three ADB propositions to which I have referred have sufficient support to justify acceptance as core (or minimum) features of a rehabilitation process. A particular issue arises in respect of the second proposition and its reference to automatic stays against both secured and unsecured creditors.32
There is no doubt that a number of countries operate collective rehabilitation procedures which fall squarely within the propositions put forward in the ADB report. Nevertheless, there are also countries which operate rehabilitation procedures which do not fall within those criteria. New Zealand is one.
Yet, I would argue that New Zealand, while needing improvements to its insolvency law, has a sound structure in place which generally meets the needs of those doing business in the country.33 There is no provision under New Zealand's insolvency law, whether for individuals or companies, for either an administrative or judicial collective process which would create an automatic stay so far as secured creditors are concerned. The New Zealand approach has always been to regard secured creditors as falling outside of the insolvency law framework as they, in effect, contract out of insolvency laws by taking security and reserving to themselves the right to take action against some or all of the assets of the debtor should the debt not be repaid on due date or should there be some other default under the security arrangement. There are, I accept, two exceptions to that general proposition in New Zealand. Both are termed "statutory management" but fall to be determined under different statutes. The first is the statute designed to prevent systemic failure (the Reserve Bank of New Zealand Act 1989); the second, and more problematic, is the Corporations (Investigation and Management) Act 1989 which is more wide-ranging in its nature. Both statutes permit Government intervention by the making of an Order-in-Council placing an entity under statutory management and, once that is done, mandatory stays arise both in respect of secured and unsecured debts.34
I do not propose to proffer an answer to the question whether the ADB propositions are correct. Rather, I prefer to raise questions about the ways in which rehabilitation regimes might be viewed from both a domestic and an international perspective. The answers to those questions (and, in particular, the differences highlighted by the answers) should help shape a statement of the minimum elements required for a rehabilitation process to be effective both domestically and internationally.
Questions from Domestic Perspective
(a) How should a particular State view its insolvency law and consider reform?
If the State has no insolvency law traditions or infrastructure, it may well be possible to start from scratch with no adverse consequences. If, however, that State has a sound insolvency system which has worked well, there is a risk that domestic financiers used to operating under existing laws might increase the cost of credit should new laws be enacted which would restrict the circumstances in which securities could be readily enforced.
There is also the risk that foreign investors would see inexperience in operating a new regime as a reason for increasing the interest rate of return sought. This may lead to a question of confidence in the necessary infrastructures. Countries such as the United States of America which have well developed rehabilitation laws also have the advantage of having worked under those laws for a long time and having specialised courts with a specialist bar to service the courts. The same cannot be said in developing or small States. For example, in a State the size of New Zealand (population approximately 3.6 million) it would be impossible to develop the type of specialist bar or bench which operates in the United States. Each State must tailor its insolvency laws to fit, primarily, its own needs while, of course, paying heed to standards required in the international arena.
(b) To what extent are States likely to take account of competitive advantages to be derived from the way in which their rehabilitation laws are expressed?
On this point it is important to bear in mind that if a particular State sees that it can gain a competitive advantage in attracting investment due to the way in which it organises its domestic law (eg tax havens) it is likely to do so. State X may see it as advantageous to have rehabilitation regimes which are particularly advantageous to debtors (for cultural or social policy reasons) while State Y may frame its insolvency laws with a bias towards secured creditors by omitting mandatory stays from the regime as it affects secured debt.
There is also a respectable argument that the absence of an automatic stay in respect of secured debt will encourage more realistic rehabilitation plans because proponents are aware that they must pass muster with secured creditors in order to proceed.
If the absence of an automatic stay for secured creditors can be supported as a proper choice at a domestic level, how can a mandatory stay in respect of secured debt be regarded as a core or minimum element of a rehabilitation procedure at an international level?
(c) How can proper incentives be provided for debtors to take advantage of rehabilitation processes?
In Australia, abolition of the taxation debt priorities was followed by statutory requirements for directors to place companies into a form of insolvency regime if tax debts could not be met within particular times; if advantage was not taken to use an insolvency regime, the director could find himself or herself liable personally for the taxation debt. This proved to be a good incentive.
But there is a wider question. Outside of insolvency processes creditors are encouraged to act quickly so that they may gain the fruits of a judgment before other creditors. Yet, once collective procedures are put in place there are often disincentives to those who seek early payment; eg the use of voidable transaction legislation.
A policy question is whether it is more desirable to encourage debtors to face all creditors at the earliest possible time (through use of collective insolvency procedures) or to encourage creditors to obtain payment if they move quickly and efficiently. That is a major policy choice. If policy shifted towards the former, one way of achieving change would be to ensure that an examination as to means took place immediately upon a judgment being entered with the possible consequence of a collective insolvency regime being imposed if the debtor was plainly insolvent.
(d) To what extent should political or Government involvement in insolvency processes be permitted?
Different cultures and different social systems will place greater or lesser emphasis on the need for political or Government influence or intervention - even in a market based economy. The issues appear more starkly in China's "socialist market economy".
Consideration needs to be given to what constitutes a sufficient reason for Governments to intervene to prevent a collective insolvency procedure from taking effect. Examples might be protection of the financial system or other essential industries. In that regard, the UNCITRAL Model Law on Cross-Border Insolvency expressly contemplates banks or insurance companies as the types of business which may fall outside the scope of the Model Law.35 However, how far can this be taken? Can it legitimately apply to companies which manage funds in which people may invest for their retirement? Should it extend to essential industries? What about hospitals, schools and other community services? And, does it matter whether the businesses are run by the public or private sector?
Questions from an International Perspective
From an international perspective, the questions become slightly different. For example:
(a) What should be the minimum requirements for a rehabilitation regime to be given effect under the UNCITRAL Model Law on Cross-Border Insolvency?
From an international perspective one can put to one side purely domestic considerations and consider what types of proceedings should be enforced throughout the world if minimum criteria are met.
(b) How, from an international perspective, should one deal with extraordinary remedies which permit political or Government influence or intervention upon the insolvency of a debtor due to domestic circumstances in a particular State?
That question was avoided in the Model Law: for good reason because the Model Law was not an attempt to harmonise substantive law. There are plainly cases in which the Law was not intended to apply.36 I query whether the question can properly be avoided in UNCITRAL's future work.
Looking at the issues from an international perspective, it would seem appropriate for UNCITRAL to address those two questions early in its work on insolvency law. They are difficult questions but, to a large extent, individual States may find it easier to answer questions from a domestic perspective once the international solution becomes clearer. And, equally, they are questions which may be more readily answered at an international rather than a domestic level.
The Chen Li Hung Litigation
Chen Li Hung was an unusual case in the context of cross-border insolvency. It started life in the High Court of Hong Kong prior to resumption of sovereignty by the People's Republic of China over Hong Kong on 1 July 1997. Appeals to the Court of Appeal and the Court of Final Appeal of the Hong Kong Special Administrative Region were both heard and determined after resumption of sovereignty.
The facts were relatively simple. There was a bankruptcy order made by the Taipei District Court. A trustee in bankruptcy was appointed in Taiwan. The bankrupt had assets in Hong Kong. The trustee sought recourse to those assets through the Hong Kong so that the assets could be realised and distributed among creditors of the bankrupt. The question which arose in the proceedings was whether it was appropriate for the courts in Hong Kong to recognise and give effect to the bankruptcy order made in Taipei given that -
a.prior to 1 July 1997 the United Kingdom Government did not recognise authorities in Taiwan either as a de jure or de facto Government; and
b.after 1 July 1997 the authorities in Taiwan, in the eyes of a Chinese court, should be regarded as nothing more than rebel authorities having regard to the terms of the Constitution of the People's Republic of China.
In one sense the case was only a truly "cross-border" case before 1 July 1997 as, after that date, the Hong Kong courts were obliged to respect the claims of the People's Republic of China to sovereignty over Taiwan. Nevertheless, having regard to the "one country, two systems" concept it would be artificial not to regard this case as being governed by cross-border principles.
In the High Court, Patrick Chan J held that because the United Kingdom Government did not recognise the authorities in Taiwan as a de jure or de facto Government, the courts in Hong Kong should not recognise the acts of the Taiwanese courts which were not considered as lawfully and properly constituted.37 After resumption of sovereignty over Hong Kong by the People's Republic of China in July 1997, the case came before the Court of Appeal of Hong Kong. Both Mortimer VP and Godfrey JA were of the view that the appeal should be allowed because, while the Constitution of the People's Republic of China asserted sovereignty over Taiwan38 the case fell within the principles enunciated by the House of Lords, in Carl Zeiss Stiftung v Rayner and Keeler (No 2) [1964] 1 AC 853. In that case the House of Lords made it plain that even though Government X may not recognise Government Y the Courts of X should strive to give effect to the laws of Y where failure to do so would affect private rights and to give effect to such laws would not be inimical to the interests of the State claiming sovereignty or otherwise contrary to its public policy. Rogers JA took a different view which is encapsulated in the following passage from his judgment:39
… it would in my view be open to the Court to recognise the existing state of affairs even in that part of the sovereign territory where the authority of the sovereign is disputed. This would include recognition of marriages, divorces and the transfer of property. However, as I have already pointed out that is not the question which arises on the first preliminary issue in this case. The draft Statement of Claim does not rely upon an allegation that any right of property vests in the trustees but rather having referred to the Order of the Taiwan Court on 20 October 1990 the claim is that the trustees have the right and capacity to bring legal proceedings for the purpose of recovering the assets of the bankrupt. If the court were to accede to this application, it seems to me, that the court in Hong Kong would be assisting in the distribution of assets of Mr Ting being undertaken by a Government which is not merely an unrecognised Government but is exercising power in the Republic of China contrary to the wishes and intent of the sovereign Government. If the court were so to act, it seems to me, it would unwittingly become part of the judicial process of Taiwan, namely the process of administration of assets and what is, in effect, a rebel territory under the control of a court of the rebel Government. [emphasis added]
The Court of Final Appeal unanimously upheld the majority decision of the Court of Appeal for substantially the same reasons given by the majority in the Court of Appeal. The Final Court of Appeal relied upon the Carl Zeiss Stiftung case in holding that it was appropriate for the Hong Kong courts to give effect to the orders made by the Taiwanese court. In the leading judgment, Bokhary PJ held that courts in Hong Kong would give effect to the orders of non-recognised courts where -
•the rights conferred by those orders were private rights;
•giving effect to such orders accorded with the interests of justice, the dictates of common sense and the needs of law and order; and
•giving them effect would not be inimical to the sovereign's interests or otherwise contrary to public policy.
In a separate judgment Lord Cooke of Thorndon NPJ, while agreeing with the judgment of Bokhary PJ, made two observations of importance in relation to trans-national insolvency cases. First, His Lordship noted (in relation to articles 2, 8, 82 and 159 of the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China) that the common law was to be maintained in Hong Kong except to the extent that it contravened the Basic Law and was not amended by the legislature of the Special Administrative Region. Lord Cooke then said:
Having regard to those provisions and to the purposes of the Basic Law as a whole, I think that it may be inferred that, in appropriate cases, a function of a judge from other common law jurisdictions is to give particular consideration to whether a proposed decision of this court is in accord with generally accepted principles of the common law.
In the present case I have no hesitation in answering that question affirmatively together with my colleague. At international level, the relevant principle goes back at least to the 17th century and Grotius. It is sometimes described as the principle of implied mandate, but that is perhaps not a happy description, because the application of the principle does not depend on interpreting anything that the lawful sovereign says or does.
Second, Lord Cooke of Thorndon said:
Viewing the case from a different perspective, the issue is essentially between the Taiwan creditors on the one hand and Mr Ting, Madame Chen and Mr Chan on the other. It is not an issue with which national politics had any natural connection. They should not be allowed to intrude into or overshadow a question of the private rights and day to day affairs of ordinary people. The ordinary principles of private international law should be applied without importing extraneous high level public controversy.
I suggest that the Court of Final Appeal's judgment in Chen Li Hung is both sensible and in accordance with the expectations of those who invest and trade internationally. Because the case involves a balancing of competing public policy factors, it is an interesting case study in the application of both domestic and international policy factors discussed earlier in this paper in the context of insolvency law reform.
Viewed from a domestic perspective, there are three competing public policy factors at work in a case such as this. The first involves fiscal factors, including the need to encourage capital flows;40 the second involves the need to give effect to organs of a de facto regime in order to ensure that business and family life can go on without concern about over-riding political considerations;41 the third is the sovereignty factor to which Rogers JA referred in his dissent in the Court of Appeal and to which both the majority in the Court of Appeal and the Court of Final Appeal itself addressed by holding that there was nothing "inimical to the interest of the sovereign power" in giving effect to the Taiwanese order.42 There are also international public policy considerations at work. From an international perspective the focus shifts to the factors discussed in paras 13 and 14 of UNCITRAL's Guide to Enactment of the Model Law;43 ie in general terms, the need for efficient international processes (a) to resolve cross-border insolvency issues (b) to secure prompt distributions to creditors and (c) to confront increasing cross-border fraud.
The real difference between the majority and minority in the Court of Appeal in Chen Li Hung was that Rogers JA (in his dissent) placed greater emphasis on the sovereignty factor. In Rogers JA's view if the Hong Kong courts were "to recognise" the Taiwanese order they would become "unwitting" accessories to the judicial organs of the "rebel" Taiwanese Government to an extent inconsistent with the Constitution of the People's Republic of China. Although not put this way in his judgment, in effect, Rogers JA was saying that to give effect to the Taiwanese bankruptcy order would be inimical to the public policy of the People's Republic of China. On the other hand, both the majority in the Court of Appeal and the Court of Final Appeal itself by placing more emphasis on the need to provide mechanisms to assist cross-border claimants to recover their money held expressly that giving effect to the Taiwanese order was not inimical to the public policy of the People's Republic of China.
Looking at the case from an international perspective, it would seem that the ultimate decision in the Court of Final Appeal reflected an appropriate balancing of policy factors. In effect, the decision took account of both domestic and international policy concerns. I offer no opinion as to whether that decision represented an appropriate weighing of domestic policy factors; nor do I offer any view as to whether the decision was right or wrong as a matter of Hong Kong law. I am plainly not qualified to comment on such matters. Neither is it my place to do so.
What lessons, if any, can be learnt from the decisions of the Hong Kong courts in the Chen Li Hung litigation? May I offer the following tentative suggestions:
a.Although the case may be regarded as addressing an unusual issue, recent developments in the former Yugoslavia and in Indonesia (with East Timor) suggest that fragmentation of Nation States could provide more cases in which the issue will be raised. As mentioned earlier in this commentary, cross-border mechanisms are needed to ensure fair and efficient administration of cross-border insolvencies and to maximise the value of the assets of the insolvent debtor so that those assets can be realised and distributed among all creditors. The solution offered in the Chen Li Hung litigation through the ultimate decision of the Court of Final Appeal applies a principle which recognises the need for pragmatism in dealing with cross-border insolvency cases. That, I suggest, is the right emphasis.
b.Looking at the issue from an international perspective, the judgment of the Court of Final Appeal, in placing emphasis on the rights of creditors to gain access to assets of the debtor in a different location, applied the principles which underpin the Model Law on cross-border insolvency without, in the particular case, referring to them either expressly or by necessary implication. It is interesting to note that article 6 of the Model Law only permits a Court to refuse relief if, to do so, would be "manifestly contrary to the public policy" of the enacting state; that formulation of the principle is not too different from the principles applied by the Final Court of Appeal.
c.The case demonstrates that cross-border insolvency problems arise not only in a truly international context but also in the context of cross-border claims within either a Federal jurisdiction (where insolvency jurisdiction is exercised by member States), where rebel Governments exist or indeed where local and national courts both have prescribed jurisdictions. There is no reason in principle why the same principles should not be applied equally in all circumstances.
Notes
1. Paul Heath QC, Hamilton, New Zealand; Commissioner, New Zealand Law Commission, Wellington, New Zealand. The views expressed do not necessarily reflect the views of the Commission.
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2. The Law Commission was established by the Law Commission Act 1985. Deliberately the word "reform" was omitted from its name. The functions of the Commission are set out in s 5(1); the principal functions are (a) to take and keep under review in a systematic way the law of New Zealand; (b) to make recommendations for the reform and development of the law of New Zealand; (c) to advise on the review of any aspect of the law of New Zealand conducted by any Government department or organisation and on proposals made as a result of the review; (d) to advise the Minister of Justice on ways in which the law of New Zealand can be made as understandable and accessible as is practicable. In making its recommendations the Commission is obliged to take into account te ao Maori (the Maori dimension) and to give consideration to the multi-cultural character of New Zealand society; in addition, the Commission must have regard to the desirability of simplifying the expression and content of the law, so far as that is practicable: s 5(2). Unlike many other similar bodies, the Commission can self-refer projects: under s 6(2)(a) and (b) the Commission has power to initiate proposals for the review, reform or development of any aspect of the law of New Zealand and to receive and consider proposals made or referred to it by any person. It may also initiate sponsor and carry out such studies and research as it thinks expedient for the proper discharge of its functions.
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3. NZLC R52, February 1999; this report is available on the Commission's website http://www.lawcom.govt.nz under the heading "Publications".
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4. NZLC SP2, October 1999; this paper is available on the Commission's website http://www.lawcom.govt.nz under the heading "Publications".
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5. See also Asian Development Bank, Office of the General Counsel, Law and Policy Reform at the Asian Development Bank: Report on RETA 5795: Insolvency Law Reforms in the Asian and Pacific Region (April 2000), para 22, 13.
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6. See Ting Lei Miao v Chen Li Hung [1997] 2 HKC 779 (Patrick Chan J); Ku Chia Chun v Ting Lei Miao [1998] 3 HKC 119; [1999] 1 HKLRD 123 (CA) and Chen Li Hung v Ting Lei Miao [2000] 1 HKC 461 (CFA).
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7. General Assembly Resolution 52/158 of 15 December 1997 is set out as an Annex to the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment (United Nations, New York 1999), 93-94.
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8. Guide to Enactment of Model Law on Cross-Border Insolvency para 13, 23-24.
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9. Above n 8.
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10. Above n 8, para 14; see also Millett, Tracing the Proceeds of Fraud (1991) 107 LQR 71.
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11. Generally, articles 9-14 of the Model Law.
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12. Generally, articles 15-24 of the Model Law.
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13. Articles 19 and 21 of the Model Law.
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14. Generally, articles 25-27 of the Model Law.
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15. American Law Institute, Transnational Insolvency Project, Principles of Co-Operation in Transnational Insolvencies Cases Among the Members of the North American Free Trade Agreement (2000).
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16. Report of the Working Group on Insolvency Law on the Work of its 22nd Session (Vienna, 6-17 December 1999) A/CN.9/469, para 140, 33.
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17. The next Working Group session is to be held in New York from 26 March to 6 April 2001. The Colloquium is being held in Vienna, 4-6 December 2000.
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18. A/55/17 Report of the United Nations Commission on International Trade Law on the work of its 33rd session (New York, 12 June - 7 July 2000), para 409.
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19. Legal Department of IMF, Orderly and Effective Insolvency Procedures: Key Issues (1999) vii.
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20. Above n 3.
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21. These factors are summarised in the Executive Summary to Cross-Border Insolvency: Should New Zealand Adopt the UNCITRAL Model Law on Cross-Border Insolvency? (NZLC R52), paras E3 and E4; see also the discussion of these factors in chapter 3.
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22. For example, Bebchuk & Guzman An Economic Analysis of Transnational Bankruptcies (National Bureau of Economic Research, Working Paper 6521, Cambridge, 1998), 19-23.
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23. A/CN.9/469, Report of the Working Group on Insolvency Law on the Work of its 22nd Session (Working Group Report), paras 21-31.
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24. Working Group Report, paras 32-124.
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25. Working Group Report, para 21.
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26. Working Group Report, para 38.
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27. Working Group Report, paras 39-62.
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28. See generally, MJ Ross Political Expediency and Misguided Insolvency Reform - The New Zealand Experience with the Corporations (Investigation and Management) Act 1989 (1994) 2 Insolvency LJ 25, 27.
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29. Above n 5.
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30. Above n 5, para 41.
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31. In this paper I propose to refer to the term "debtor" although the ADB paper is restricted to "corporations".
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32. The lack of consensus on this point was noted in para 68 of the Working Group Report.
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33. Provisions for corporate rehabilitation can be found in Parts XIV and XV of the Companies Act 1993 (New Zealand) - neither of which allow for automatic stays in respect of secured debt.
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34. I do not debate the appropriateness of those procedures; they are being considered at present as part of work on rehabilitation procedures which is being undertaken by the Law Commission at the request of the Ministry of Economic Development: the Law Commission is to report to the Ministry of Economic Development by 28 February 2001 and it is likely that the Commission's report will be published by May/June 2001. It is likely to be published in the Commission's Study Paper series.
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35. See article 1(2) of the Model Law.
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36. Above n 35.
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37. (1997) 2 HKC 779, 792.
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38. Preamble to the Constitution of the People's Republic of China.
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39. [1999] 1 HKLRD 123, 146-147.
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40. See the discussion of fiscal factors in Cross-Border Insolvency (NZLC R52), paras E3, E4 and 76-100.
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41. In the Court of Final Appeal, Bokhary PJ put it this way: "When the doctrine of public policy is raised in the courts, it is usually in regard to whether a contract should be refused effect on public policy grounds. The contractual objects which invalidate contracts on those grounds, include (as the learned editors of 'Chitty on Contracts', 28th ed (1999) put it in vol 1, 838, para 17-005) 'objects injurious to good Government either in the field of domestic or foreign affairs'. This goes to show that Mortimer VP was proceeding in conformity with established principles when he addressed the question of whether 'recognition of the rights of the trustees in bankruptcy to sue in Hong Kong [would be] in any way inimical to the interests of the sovereign power'. If I may say so, the learned Vice President's terminology expresses very neatly one of the public policy considerations which arise in situations like the present; and I gratefully adopt his terminology".
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42. Above n 41; see also, the observations of Lord Cooke of Thorndon cited above. In addition, in the New Zealand context, see the discussion of the sovereignty factor in Cross-Border Insolvency (NZLC R52), paras E3, E4 and 104-105.
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43. Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, 23-24; see also discussion above.
DISCLAIMER
This article is intended to provide general information and should not be construed as legal advice. Parties who require clarification on issues raised in this article should take their own legal advice.