Maritime cross‐border insolvency in China

• Author: Jingchen Xu
• Date: 01 May 2020
• Published date: 01 May 2020
• DOI: http://doi.org/10.1002/iir.1374

RESEARCH ARTICLE

Maritime cross-border insolvency in China

Jingchen Xu

Centre for Maritime Law, Faculty of Law,

National University of Singapore,

Singapore, Singapore

Correspondence

Jingchen Xu, Centre for Maritime Law,

Faculty of Law, National University of

Singapore, Singapore, Singapore.

Email: xu.jingchen@nus.edu.sg

Abstract

Due to the high degree of mobility of ships and the spe-

cial operational structures of shipping companies, it is

difficult to harmonise the cross-border insolvency

regime with the maritime law regime governing ships.

One of the typical examples is the recent bankruptcy of

Hanjin Shipping Co Ltd. Chinese creditors were

heavily affected by the bankruptcy of Hanjin. However,

Hanjin never filed an application to have its Korean

insolvency proceeding recognised in the People's

Republic of China (PRC). Nor did it commence any

ancillary insolvency application under the Enterprise

Bankruptcy Law of the PRC. Taking Hanjin's bank-

ruptcy as an example, this article examines the current

statutory regime of cross-border insolvency in the PRC

in detail and analyses the approach adopted by the Chi-

nese courts to resolve the conflicts that arise between

the cross-border insolvency and maritime law regimes.

1|INTRODUCTION

As a consequence of “the Great Recession”(2008–2011), the demand for export and import of

goods has sharply declined. Shipping companies have struggled to remain afloat amongst rap-

idly declining demand and freight prices. This in turn has resulted in many shipping companies

being forced to utilise reorganisation or other insolvency proceedings to try to extricate them-

selves from their financial difficulties. One of the typical examples is the recent bankruptcy of

Hanjin Shipping Co Ltd (Hanjin). Prior to its bankruptcy, Hanjin was the largest container

shipping line in Korea and the seventh-largest container shipping line in the world. It operated

approximately 60 container lines, with about 140 vessels.

1

Hanjin had nine offices in the PRC.

2

In addition, its wholly owned subsidiary, Hanjin Shipping (China) Co Ltd (Hanjin China), was

Received: 8 July 2019 Revised: 30 December 2019 Accepted: 1 April 2020

DOI: 10.1002/iir.1374

© 2020 INSOL International and John Wiley & Sons Ltd

118 Int Insolv Rev. 2020;29:118–137.wileyonlinelibrary.com/journal/iir

headquartered in Shanghai with 11 branches located in several important coastal cities.

3

Hanjin

China conducted business between China and Korea through vessels owned or operated by

Hanjin.

However, Hanjin was seriously affected by the 2008 financial crisis and saw a “deep deterio-

ration”in both its “performance and financial standing.”

4

On August 31, 2016, Hanjin filed an

application for rehabilitation protection in the Korean Bankruptcy Court. At the time of its

application for rehabilitation, the claims against Hanjin totaled approximately USD 5.5 billion.

5

From the creditors' claims report issued by Hanjin's administrator, the company had approxi-

mately 3,600 creditors, of which more than 300 were Chinese companies.

6

Most of these Chi-

nese creditors' claims against Hanjin were for breach of maritime contracts, such as unpaid

brokerage fees, wharf fees, stevedore fees and port charges.

7

Although Hanjin had many assets

and creditors in the PRC, Hanjin neither applied to have its Korean insolvency proceeding

recognised in the PRC nor commenced any ancillary insolvency application under the Enter-

prise Bankruptcy Law of the People's Republic of China (EBL).

8

Thus, Hanjin did not enjoy any

bankruptcy protection in the PRC, such as a consolidation of proceedings and a stay order

against creditors' enforcement actions. Upon the applications of creditors, most of Hanjin's

assets within the PRC, including vessels, bank accounts, stocks and its containers, were

arrested, frozen and eventually distributed by creditors. Instead of a single and consolidated

proceeding, Hanjin's vessels were arrested individually and sold on a case-by-case basis.

9

Taking Hanjin's bankruptcy as an example, this article examines the current statutory cross-

border insolvency regime in the PRC and analyses how Chinese courts deal with the conflicts

that arise between the cross-border insolvency and maritime law regimes. Part 1 has provided

an overview of the facts of Hanjin's bankruptcy proceedings in the PRC. Part 2 will examine the

current statutory regime of Chinese cross-border insolvency and the criteria adopted by Chinese

courts in deciding whether to recognise foreign insolvency proceedings. Part 3 will analyse the

two main questions arising from conflicts between maritime claims and the cross-border insol-

vency framework. First, will the arrest proceedings commenced by maritime claimants be

allowed to proceed regardless of the pending or subsequent insolvency proceedings? Secondly,

which courts will have jurisdiction over maritime claims in insolvency proceedings: maritime

courts or bankruptcy courts? Finally, Part 4 will conclude that, in the process of improving its

cross-border insolvency regime, the PRC should pay attention to the unique features of mari-

time claims and the conflicts between maritime law and insolvency law.

2|THE CROSS-BORDER INSOLVENCY REGIME IN

THE PRC

The PRC has not adopted the United Nations Commission on International Trade Law

(UNCITRAL) Model Law on Cross-border Insolvency (the Model Law).

10

Traditionally, China

adopted a strict territorial approach in respect of insolvency matters.

11

However, in 2006, China

enacted a revised version of the Enterprise Bankruptcy Law (EBL). The only provision in the

EBL that deals with the issue of cross-border insolvency is Article 5, which is:

“a tentative attempt to [honour] China's commitment to the World Trade Organi-

zation (WTO) and to transition from command to market economy.”

12

Article 5 of the EBL provides that:

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