Bankruptcies in China pose challenge for foreign creditors

The expected increase in corporate bankruptcies in China will draw attention to the challenge of asset recovery between different legal jurisdictions, according to liquidation experts.

Hong Kong creditors and their international counterparts, will find big differences between their home and the mainland in terms of court proceedings and the legal protections given to mainland firms filing for bankruptcy, according to Derek Lai Kar-yan, the managing partner of Deloitte China.

Hong Kong bankruptcies have very clear procedures on when and how the liquidators can sell the assets as well as how to handle the asset sales of bankrupt companies. However, Chinese rules were different and not so clear, and that could prove challenging, Lai said.

Johnson Kong Chi-how, the managing director of accounting firm BDO, said a major challenge was the fact China law did not recognise the rights of Hong Kong liquidators appointed by creditors to handle liquidations in China.

Kong said that once the city's liquidators received approval from courts in Hong Kong, they could directly take over all a company's assets, including its machinery, property or cash in Hong Kong, arrange the sale of those assets and deliver the proceeds to creditors.

However, if any of the assets were in China, the rights of Hong Kong liquidators were not recognised and any assets could not be touched without approval from a court in China.