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On 11 June 2014, the Supreme People’s Court will hear a shareholders dispute. The facts of the case (described below) are familiar to the Hong Kong and Singapore legal and investment community. They touch on the power of overseas insolvency/bankruptcy professionals to take over assets in China.
The parties to the case are Sino-Environment Technology Group Limited (Sino-Environment Tech) (a company originally listed in on the main board in Singapore (but now in liquidation) and one of its wholly owned subsidiaries, Thumb Env-Tech Group (Fujian) Co., Ltd (Thumb Env-Tech).
The case has all the elements of a China deal gone very, very bad.
What we know
The case was originally brought in the Fuzhou Intermediate Court by Thumb Env-Tech (i.e., the original management group). It challenged the right of the judicial manager (later the liquidator) (appointed by the Singapore High Court) to remove the original legal representative and directors. Thumb Env-Tech alleged that the judicial manager had no right to remove the directors and legal representative and it was arbitrarily implementing an order of a Singapore court, violating China’s judicial sovereignty. The Fuzhou Intermediate Court rejected Thumb Env-Tech’s claim, determining that it was not a proper party.Thumb Env-Tech appealed to the Fujian Higher People’s Court. The decision can be found here, on the court’s website. The Fujian Higher People’s Court rejected Thumb Env-Tech’s appeal, stating that the case is not a simple matter of private rights but involves issues of public policy, and that Article 119 of the Civil Procedure Law did not permit Thumb Env-Tech to bring the case. Thumb Env-Tech has brought a petition to have the case reviewed by the Court. (summary from the Fujian Higher Court decision)
Sino-Environment Technology Group Limited was a listed Singapore company that was principally engaged in the provision of environmental protection and waste recovery through its subsidiaries in PRC with over SG$165 million debt. Its liquidators investigated SG$84 million worth of suspicious transactions undertaken by the group, taking steps to secure control over the company’s PRC subsidiaries by removing all existing legal representatives and directors of the PRC subsidiaries and commencing legal proceedings against them, securing the company’s cash held with a PRC bank and assessing and defending legal proceedings. (from the liquidator’s website)
Morgan Stanley sold $US 109 million in Sino-Environment Technology Group Limited convertible bonds. The company defaulted on repayment of the bonds. (from a first press report and a second press report.)
Related litigation in the Hong Kong courts can be found here.
What will the outcome be?
We will wait the outcome of this case in the Court. It is a “typical case” in its own way, because there are many cases in which foreign companies with Chinese subsidiaries, some of them listed, get into financial difficulties. It is part of international insolvency practice that bankruptcy trustees/judicial managers/administrators/liquidators appointed by foreign courts will take over control of subsidiaries in China. Chinese law and practice do not make this an easy process. This a classic example of why Chinese legal experts, as well foreign governments, Taiwan, and Hong Kong need to persuade the Chinese government that it is important for China that it become an active part of the international legal framework governing bankruptcy (insolvency) proceedings.