China has created a special bankruptcy court in Shenzhen to handle “cross-border” cases, but experts have said it will not extend the mainland’s judicial reach into Hong Kong. However, the Shenzhen Bankruptcy Court will help officials in Guangdong trace the assets of bankrupt businesses in the mainland which have been transferred to Hong Kong, according to those familiar with the sector. Closer economic ties between the mainland and Hong Kong fostered in recent years have led to a growing number of cross-border commercial legal disputes. Meanwhile, as China’s growth slows, mainland bankruptcy cases have soared. Chinese courts settled 6,257 bankruptcy cases in 2017, up 73 per cent year on year. According to data from the Supreme People’s Court, 6,647 bankruptcy cases were settled in the first 10 months of 2018. Many of the companies involved have subsidiaries and assets overseas, which can be hard for bankruptcy officers to track down, industry sources say. Trump’s trade war tariffs send firms to Hong Kong for a little-known legal loophole A mainland businessperson, for instance, can transfer assets to subsidiaries in Hong Kong, saddling its mainland entities with the liabilities and subsequently declaring bankruptcy in China. Zhang Lili, a partner at the Goldsun law firm in Guangdong, which handled over 30 enterprise bankruptcy cases last year, said: “Many bankrupt Chinese enterprises often have lot of assets in Hong Kong.” “The lack of mutually acceptable rules and cross-border cooperation framework made it difficult for us to get the assets back in many cases. Shenzhen’s court will be a really helpful and practical way to improve the settlement of these cases,” she said. The Shenzhen Bankruptcy Court will provide “powerful judicial services and guarantees for Greater Bay Area development”, according to a statement on the official website. This refers to China’s strategy of integrating Guangdong, Hong Kong and Macau into one economic bloc. The court will mainly handle bankruptcy filings in Shenzhen. Why the US-China dispute is about so much more than a trade imbalance It has also been directed by China’s Supreme Court in Beijing to rule on cross-border cases and “other cases that fall into its jurisdiction”. It will “show the world China’s legal progress and improve the international credibility and influence of Chinese court bankruptcy rulings”, according to the statement. However, it would not extend the reach of the mainland judiciary into Hong Kong, which will remain a separate jurisdiction. Since 2006, Hong Kong and mainland China have signed five agreements on mutual help, two of which are concerned with civil and commercial cases. There is no existing framework for both courts to mutually recognise insolvency orders. In July 2018, Hong Kong’s justice department said it was launching a public consultation to study such a mechanism. The department said it aimed to launch the consultation at the first half this year. Even if such an agreement is reached, a mainland judgment would not automatically apply in Hong Kong. It must first be brought before a Hong Kong court. The same situation applies for a Hong Kong judgment in mainland China. For instance, an agreement signed in 2017 means courts in both Hong Kong and China recognise matrimonial orders, but both reserve the right to refuse to honour a particular judgment if it contravenes the legal principles of that jurisdiction. Accountancy lawmaker Kenneth Leung, who is also a lawyer, said the main challenge to cross-border civil matters were never in Hong Kong, but in China’s north. “It’s easy for mainlanders to bring a judgment and enforce in Hong Kong court,” Leung said. “It’s very common that a Hong Kong judgment is not enforced by mainland courts.” The 21st Century Business Herald , a Chinese business newspaper, reports that the court is also “exploring Hong Kong-mainland cross-border bankruptcy mechanism” and “setting up mutually acceptable rules and review procedures”. No details are given on how that alignment would work. Hi-tech Shenzhen charges ahead in China with all-electric taxi fleet Under the “one country, two systems” arrangement, Hong Kong will maintain its judicial independence until 2047. The new bankruptcy court will help to set up a special administrative branch to manage bankruptcy matters, promote the separation of bankruptcy and administration, and set up rules against abusing the bankruptcy procedure It will promote personal bankruptcy protection, applicable to individual plaintiffs, the court’s statement said. Although China has 92 bankruptcy courts located in major cities across the country, they tend to reject most liquidation requests under the duress of local governments, which prefer to draw up restructuring plans that would satisfy their own aims. China is lumbered with widespread and deep-rooted financial risks, many of which are linked to heavily indebted state-owned companies. Local governments are often reluctant to see these industrial behemoths go bust, since they are an important source of tax revenue and jobs, which help stifle social unrest. Legal scholars say that an independent bankruptcy court would help kill off China’s “zombie firms”. Li Shuguang, dean of the graduate school at China University of Political Science and Law in Beijing previously told the South China Morning Post : “We must set up an independent bankruptcy court system, ideally under the existing circuit courts, to prevent local protectionism and defend investors’ interests.” Meanwhile, a court that would hear personal bankruptcy cases would help protect middle class people who are mired in cash flow problems, Luo Aiping, a Guangzhou-based lawyer. “I receive increasing queries from individuals, many young people trapped or ruined by usurious debts, asking whether they can go bankrupt in the mainland,” she said.