Distributing Mainland Cash In Hong Kong Liquidation: Yuan More Reason To Depart From The Pari Passu Principle.

Legal News & Analysis - Asia Pacific - Hong Kong - Insolvency & Restructuring

24 December, 2018


Re Guangdong International Trust & Investment Corp Hong Kong (Holdings) Ltd [2018] HKCFI 2498




A recent decision of the High Court of Hong Kong examined a liquidator’s powers to distribute a Hong Kong company’s assets in the PRC (being an RMB balance held in a Mainland bank account, a chose in action governed by Mainland law and subject to foreign exchange restrictions). Particularly, the Court looked at an unusual set of facts which meant there was some doubt as to whether the liquidator’s proposed distribution was in keeping with the key insolvency principles of:


  • collectivity;
  • the principle that liquidation does not create new substantive rights or destroy the existing ones; and
  • the principle of pari passu distribution.




On 12 October 1998, Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited (the “Company”) was placed into creditors’ voluntary liquidation. At that time, the Company had cash assets in both Hong Kong and Mainland bank accounts. Due to regulatory issues in the PRC, the Mainland bank account which contained an RMB balance (the “PRC Asset”), could only be distributed to creditors who held Mainland bank accounts. The Hong Kong assets of the company were available for distribution in the ordinary way.


The liquidators sought a direction from the Court in Hong Kong that they be permitted (amongst other things) to distribute, on a pari passu basis:


  • the PRC Asset only to creditors who held Mainland bank accounts (i.e. a distribution that excluded creditors who did not hold Mainland bank accounts); and
  • the Company’s cash assets in Hong Kong to all creditors of the Company (i.e. a distribution to all creditors, including those who received a distribution from the PRC Asset).


The key concern for the liquidators was in relation to the seemingly unfair distribution of the PRC Asset, which excluded creditors who did not hold Mainland bank accounts.


This concern was of a very technical nature: the evidence before the Court was that all the creditors of the Company would receive an equal dividend (on a pari passu basis) because any distribution from the Hong Kong assets to creditors who received a distribution from the PRC asset would be subject to the hotchpot rule (i.e. any distribution of the Company’s assets in Hong Kong would be offset by any distribution they had received from the PRC Asset).




The Court held that the directions sought by the liquidators were consistent with principles of insolvency law in Hong Kong for the following reasons:


1. the distribution of the PRC Asset as proposed in the order would result in the liquidators remaining in charge of the whole distribution process and thus the principle of collectivity would be maintained throughout;


2. the proposed distribution respected the inherent limitations on the Company’s ability to use the PRC Asset and as such the order respected the principle that liquidation does not create new rights or obligations for the Company or its creditors; and


3. the order was consistent with the pari passu principle, as the distribution of the PRC Asset was capable of two alternative analyses, neither of which constituted a breach of the principle:


i. every creditor who held a Mainland bank account was entitled to pari passu distribution from the PRC Asset – the criterion of having a Mainland bank account was to be regarded as merely a procedural requirement which did not detract from the substance of pro rata division of the PRC Asset among all eligible creditors; or


ii. the pari passu principle applied only to assets that are available for pari passu distribution. As a matter of conflicts of law, Hong Kong insolvency law would not override the Mainland limitations attached to the PRC Asset. The pari passu principle in respect of the PRC Asset had to be qualified as the PRC Asset was essentially a flawed asset arrangement as the PRC Asset was not freely available to the liquidators.

In any event, notwithstanding that the Court found that the proposed distribution was consistent with the pari passu principle, the Court found this would be a proper case to depart from the pari passu principle, for the following reasons:


1. the pari passu principle is not inflexible and is capable of judicial departures;


2. the liquidators had no other avenue by which to distribute the PRC Asset;


3. permitting the proposed distribution of the PRC Asset would facilitate closure of the long-running liquidation and would be in the best interests of the creditors as a group; and


4. permitting the liquidators’ distributions would be consistent with:


i. the general principle that liquidation, being an administrative process, does not expand or diminish the Company’s substantive rights and obligations; and


ii. the general principle that, ultimately, insolvency is concerned with the distribution of the debtor’s uncharged assets among his unsecured creditors.




While the practical outcome of the proposed distribution of the assets of the company was that creditors ultimately received a distribution from the assets of the company on a pari passu basis (notwithstanding the issues with the PRC Asset), the effect of the judgment is that, in certain circumstances, the Court will allow for a distribution of assets which is not strictly consistent with a pari passu distribution.


herbert smith Freehills


For further information, please contact:


Gareth Thomas, Partner, Herbert Smith Freehills