How Chinese Judges Recognize Foreign Bankruptcy Judgments

Key takeaways:

In 2021, Xiamen Maritime Court ruled, based on the principle of reciprocity, to recognize the order of the High Court of Singapore, which designated an insolvency officeholder. The trial Judge shares his view on reciprocity review in applications for recognition of foreign bankruptcy judgments.
The requirements for Chinese courts to recognize and enforce foreign bankruptcy judgments under Enterprise Bankruptcy Law are almost the same as those for recognizing other foreign civil and commercial judgments under the Civil Procedure Law, except that for foreign bankruptcy judgments, there exists an additional requirement, i.e., the protection of the interests of creditors in the territory of China.
In the view of the trial Judge from Xiamen Maritime Court, when it comes to foreign bankruptcy judgments recognition and enforcement based reciprocity, the principle of reciprocity should be manifested as de facto reciprocity test first and presumptive reciprocity test as a supplement. Furthermore, the court shall take the initiative to ascertain the reciprocal relationship ex officio.

In our previous post, we introduced that a Chinese court recognized a Singapore’s bankruptcy judgment for the first time. On 18 Aug. 2021, the Xiamen Maritime Court of China made a ruling based on the principle of reciprocity in a case, hereinafter the ‘Xiamen Case’, recognizing the order of the High Court of Singapore, which designated an insolvency officeholder for a Singapore company (see In re Xihe Holdings Pte. Ltd. et al. (2020) Min 72 Min Chu No. 334 ((2020)闽72民初334号)).

Judge Xia Xianpeng (夏先鹏) of Xiamen Maritime Court, the judge in the first-instance, published an article titled “Reciprocity Review in Applications for Recognition of Foreign Bankruptcy Judgments” (申请承认外国破产裁判中的互惠审查) in “People’s Judicature” (人民司法) (No. 22, 2022), expressing his views towards the case, mainly as follows:

I. Legal basis

In the Xiamen Case, the court held that, the application for recognition of foreign bankruptcy judgment should be reviewed in accordance with the PRC Enterprise Bankruptcy Law (企业破产法).

Pursuant to the Paragraph 2 of Article 5 of the Enterprise Bankruptcy Law of China, where a legally effective judgment or ruling on a bankruptcy case made by a foreign court involves the debtor’s property within the territory of China, and an application or request for recognition and enforcement of the judgment or ruling is filed with the court, the court shall examine the application or request in accordance with the international treaty concluded or acceded to by China or with the principle of reciprocity. Where the court deems that the act does not violate the basic principles of Chinese laws, does not impair the sovereignty, security and public interests of China, and does not impair the legitimate rights and interests of the creditors within the territory of China, it shall rule to recognize and enforce the judgment or ruling.

The requirements for Chinese courts to recognize and enforce foreign bankruptcy judgments are almost the same as those for recognizing other civil and commercial judgments of foreign courts in accordance with the PRC Civil Procedure Law (CPL), except that for foreign bankruptcy judgments, there exists an additional requirement, i.e., the protection of the interests of creditors in the territory of China.

There were different opinions among Chinese courts on the legal basis of such cases before the Xiamen Case. Some believe that given the to-be-further-improved provisions of the Enterprise Bankruptcy Law, the recognition of foreign bankruptcy judgments should be based on the CPL.

China’s first case of recognition of foreign bankruptcy judgment based on the principle of reciprocity, namely the case of recognition and enforcement of a German bankruptcy judgment heard by Wuhan Intermediate People’s Court of Hubei Province, was ruled by the judge in accordance with the CPL rather than the Enterprise Bankruptcy Law.

However, in the Xiamen Case, the judge believed that the legal basis should be the Enterprise Bankruptcy Law given its more detailed requirements on this aspect, i.e., the Enterprise Bankruptcy Law specifically emphasizes that foreign judgments shall not harm the interests of creditors in the territory of China.

II. Reciprocity tests for bankruptcy judgments

According to the Enterprise Bankruptcy Law, the prerequisite for Chinese courts to recognize foreign bankruptcy judgments is that there exists an international treaty or reciprocal relationship between China and the country where the judgment is rendered.

To date, China and 39 States have concluded bilateral judicial assistance treaties, among which 35 bilateral treaties include the judgment enforcement clauses. For more information, please read “List of China’s Bilateral Treaties on Judicial Assistance in Civil and Commercial Matters (Enforcement of Foreign Judgments Included)“. Besides, China has not yet reached a specific treaty with any country dedicated to the recognition and implementation of cross-border bankruptcy proceedings.

Therefore, in addition to the judgments of the above-mentioned 35 countries, China’s review of foreign bankruptcy judgments is mainly based on the principle of reciprocity, such as the Singapore bankruptcy judgment in the Xiamen Case.

In the Xiamen Case, the Xiamen Maritime Court held that in reviewing foreign bankruptcy judgments, the principle of reciprocity should be manifested as de facto reciprocity test first and presumptive reciprocity test as supplement.

Traditionally, Chinese courts adopted the de facto reciprocity test, that is, only when a foreign court has previously recognized and enforced a Chinese judgment, will Chinese courts recognize the existence of reciprocity between the two countries, and further recognize and enforce the judgments of that foreign country.

The Xiamen Maritime Court further stated that, in the absence of de facto reciprocity, the court should apply the presumptive reciprocity test, rather than directly refusing to recognize foreign bankruptcy judgments on the ground of non-existence of de facto reciprocity between the two countries.

The presumptive reciprocity test was first proposed in the Nanning Statement of the 2nd China ASEAN Justice Forum, namely:

Two countries may presume the existence of their reciprocal relationship, when it comes to the judicial procedure of recognizing or enforcing such judgments made by courts of the other country, provided that the courts of the other country had not refused to recognize or enforce such judgments on the ground of lack of reciprocity.

It is worth noting that the Judge Xia Xianpeng does not mention the new principle of reciprocity adopted by Chinese courts in the recognition and enforcement of civil and commercial judgments since 2022.

Starting from 2022, Chinese courts adopt new reciprocity rules for the recognition and enforcement of foreign judgments. The rules come from an SPC’s conference summary on cross-border civil and commercial litigation, which established the consensus of Chinese judges on such cases. For more information, please read “China Introduces New Reciprocity Rules for Enforcing Foreign Judgments, What Does It Mean? “

This is because the new principle of reciprocity is not applicable to bankruptcy cases. See “How Chinese Courts Review Applications for Enforcement of Foreign Judgments: Criteria and Scope of Application”.

III. How Chinese courts apply the principle of reciprocity

The Xiamen Maritime Court discovered that Singapore had recognized China’s general civil and commercial judgment and bankruptcy judgment respectively, and accordingly found that there was a reciprocal relationship between Singapore and China regarding the recognition of general civil and commercial judgments and bankruptcy judgments respectively. This shows that the Xiamen Maritime Court believes that civil and commercial judgments are different from bankruptcy judgments.

Even if the country where the judgment is rendered has established a reciprocal relationship with China regarding civil and commercial judgments, it does not necessarily mean that it has established a reciprocal relationship with China regarding bankruptcy judgments. Chinese courts will determine the existence of a reciprocal relationship regarding bankruptcy judgments on a case-by-case basis.

In addition, the Xiamen Maritime Court held that the court was obligated to ascertain the reciprocal relationship. Therefore, in the Xiamen Case, even though the applicant did not produce evidence to prove the existence of a reciprocal relationship between Singapore and China on the recognition and enforcement of bankruptcy judgments, the court shall still take the initiative to ascertain the reciprocal relationship ex officio.

The court held that the court could not deny the existence of a reciprocal relationship just because the parties failed to prove it.

IV. Comments

We believe that the Xiamen Case provides some insights into how foreign bankruptcy judgments can be recognized and enforced in China.

According to our understanding of Chinese courts’ operating mechanism, we believe that the Xiamen Maritime Court may have consulted the SPC before making the judgment. Therefore, the conclusion of the Xiamen Case may represent the views of the SPC as well.

These views are as follows:

1. The legal basis for the recognition and enforcement of foreign bankruptcy judgments in China is the PRC Enterprise Bankruptcy Law.

2. When it comes to determining the existence of a reciprocal relationship between China and the country where the judgment is rendered, a prerequisite for foreign bankruptcy judgment recognition and enforcement, the Chinese courts will conduct a review based on de facto reciprocity test first and presumptive reciprocity test as a supplement.

3. Where the parties fail to prove the existence of a reciprocal relationship, the court shall take the initiative to ascertain the same ex officio, rather than directly denying the existence of a reciprocal relationship just because the parties fail to do so.

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