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China – Update Statistics & Procedurals of Trademark Administrative Litigation

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With the high-speed development and improvement of China’s economic and judiciary practice, both Chinese substantive law and procedural law have been broadly developed in recent 20 years, particularly in respect of administrative litigation proceedings. 

LATEST STATISTICS

According to the latest monthly report issued by China Intellectual Property Administration (“CNIPA”) on trademark review cases (No. 2020.07), during the period of 16 June – 15 July 2020, the number and rate of administrative litigation got a rise. The detailed statistics are as follows:

Trademark Cases in relation to administration litigation

Court Level

Year over year rate

Month over month rate

1,894

The First Instance

Increase by 10.24%

Increase by 9.67%;

 

467

The Second Instance

Decrease by 28.37%

Increase by 40.66%;

20

Retrial, The People’s Supreme Court (“PSC”),

Decrease by 72.60%

Decrease by 67.74%.

The CNIPA also released total number and rate of administration litigation cases between the period of January – July 2020, namely:

Trademark Cases in relation to administration litigation

Court Level

Year over year rate

7,238

The First Instance

Decrease by 10.75%

2,990

The Second Instance

Decrease by 10.29%;

404

Retrial, The People’s Supreme Court (“PSC”),

Increase by 15.10%.

PROCEDURALS

If CNIPA maintains our application for review of refusal/non-use cancellation/invalidation unfavorable to our clients in the administrative examination proceedings, how can we seek judiciary remedy further? 

An appeal against such unfavorable decisions before the Beijing Intellectual Property Court (“Court”), i.e. an administrative lawsuit, can be lodged at a prescribed time.

THE FIRST INSTANCE

If an(a) applicant/registrant/opponent/petitioner is not satisfied with CNIPA’s decision on application/cancellation/opposition/revocation of the mark in connection with their rights, they are allowed to initiate an administrative lawsuit against CNIPA’s decision within 30 days (for foreign individual/companies/entities), and which is calculated from date receipt of the decision (or 15 days for domestic applicant) before the Beijing Intellectual Property Court (“Court”).

After initiating the appeal by the afore-mentioned deadline, the Court will grant the plaintiff (foreign individual/companies/entities) 3 months’ time to supplement notarized and legalized Power of Attorney (“PoA”) and personal identity/company documents to the Court as follows:

1.    PoA – signed by the representative of the company;

2.    Certificate of Legal Representative –signed by the said representative;

3.    Articles of Incorporation or Certificate of Incorporation of the plaintiff, showing the said representative has the authority to sign legal documents on behalf of the plaintiff; and

4.    Personal ID/passport (individual)/Certificate of Good Standing (company/entity) of plaintiff, indicating the current status of the plaintiff i.e. the company is subsisting on the register and active; the company is not subject to dissolution; and the company has not been liquidated, bankrupt, under custody or revoked. 

In general, the local Registrar of Companies (Companies House/Registry), who has issued a “Certificate of Incorporation of the company”, can issue document 4 above.

If all these notarized and legalized documents are in order, the Court will issue a notice of acceptance and set down a hearing for the case in around 1.5 months’ time, and make a decision in 2 – 3 months’ time.

Points to note:

  • It is advisable to send us copies of documents 3 and 4 above by email first, so we can ascertain whether they are in order before notarizing and legalizing by the Chinese Consulate to save time and cost. 
  • For Hong Kong companies/individuals, the said documents need to be notarized by a Hong Kong Lawyer who is appointed by the Ministry of Justice of China, i.e. China-Appointed Attesting Officer, and legalized and stamped by China Legal Services (Hong Kong) Co., Ltd. with their special seal for Hong Kong notarization.
  • In view of the Court may change their practices from time to time, and it needs time to arrange for official translation by the designated translation agent to prepare Chinese translation as requested by the Court, if any, it is advisable to have the notarized and legalized documents in hand preferably a month prior to the deadline, so we can confirm with the Court and therefore work with the translation agent.

THE SECOND INSTANCE

If any party is dissatisfied with the decision made in the First Instance, the party can appeal to the Beijing High Court (“High Court”) within 30 days (for foreign individual/companies/entities), which is calculated from date receipt of the decision (or 15 days for domestic applicant) from the CNIPA. 

There is no requirement of any further notarized and legalized documents from the plaintiff/applicant to appeal to the Hight Court. 

The High Court usually conducts paper examination under the appeal, grounds and evidence submitted by the parties, and seldom sets down a hearing unless it is necessary.

It takes the High Court 3-6 months’ time to issue an appeal decision. Once the appeal decision is issued, it becomes final.  

RETRIAL 

As you may note, retrial proceedings are exceptional to the two instance of court proceedings. General speaking, the chance of success in retrial proceedings before the Supreme People’s Court (“SPC”) is not optimistic. In addition, the SPC will even dismiss a retrial request directly.

Nevertheless, if there are obvious mistakes either in substantive rights or procedural rights that affected the decision issued in the Second Instance, requesting the SPC to retry the case is a remedy for the judge to correct the mistakes in the retrial proceedings.

From the second table above, there were 404 retrial cases between January – July 2020, which indicates the year over year increase by 15.10%. This is a significant number that shows a chance of success in overturning a final decision by way of retrial. In fact, the SPC did overturn many cases e.g. the landmark PRETUL case (the Supreme People’s Court – No. 2014 – 38). The SPC re-tried the case, and overturned the final decision. 

Moreover, could precedents be applied when ruling a case in the said Court proceedings above?

Although case law is not binding in China, based on the current practices, the judge tends to take into account of a precedent when ruling the case, if the plaintiff/defendant cites the precedent. This means precedents would facilitate to overturn the case in the Court proceedings above, which requests the Court to adopt the same reasoning.

This tendency has been indeed improved and ascertained by the SPC in its ‘Guidance on the Application of Law to Strengthen Research of Similar cases (Trial)’ coming into effect since 31 July 2020 (“Guidance”). For more details of the Guidance, please see the SPC’s official publication in Chinese at http://www.court.gov.cn/fabu-xiangqing-243981.html.

Thanks for reading and we will keep you updated of further interesting/meaningful development of PRC administrative lawsuits. 

Should you have any inquires pertaining to trademark right and protection in China, please contact evelyne.yeung@oln-law.com or angel.luo@oln-law.com, and we will be pleased to answer and assist.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

在民事和行政诉讼中处理无理诉讼人

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一位无理缠绕的诉讼人（“无理诉讼人”）是一位经常采取法律诉讼但没有足够法律理据支持这些诉讼的人。他们通常具有以下特征：

  • 给被告造成不便，使其遭受骚扰，或无理诉讼人可能获得的收益与诉讼的正本完全不成比例 (Attorney General v Barker [2001] WL 191122 (English Queen’s Bench)) ；
  • 对同一个被告重复相同的诉讼，可能在理据上有微小的变化 (Barker, supra)；
  • 立即上诉或挑战每个法院的判决 (Barker, supra)；
  • 未能注意到或不遵守法院的命令 (Barker, supra)；
  • 不遵守程序, 例如最后一刻才提交证据、延迟/不遵守期限、不遵守法院命令、不遵守送达法律文件的程序或完全无视送达法律文件的要求、或抱怨其他人不应该根据相关的程序把法律文件送达给他；
  • 出席聆会时，无法以礼节行事，而且可能向对方或法官做出侮辱的行为或说出侮辱的言论 (Ng Yat Chi v Max Share Ltd et al [2005] 1 HKLRD 473 (CFA))；
  • 很多时候，总是没有律师代表或被拒绝法律援助的申请 (Ng Yat Chi, supra) ；
  • 欺诈行为 (Yuen Oi Yee Lisa v Charoen Sirivadhanabhakdi & Ors [2015] HKDC 1336)；
  • 同一时间，用不同的途径要求上诉，而结果是法院在不知情的情况下进行多项诉讼，向行政机构投诉，在地区法院或高等法院把已被判了败诉的案件从新开始诉讼，以及向上诉法院和终审法院寻求上诉 (X v MM and Anor [2018] HKDC 215)。

无理诉讼人可能会尝试申请法律援助，但是即使他满足经济审查，也可能不能通过诉讼具有合理理据的检测。

以下是受害者对付无理诉讼人的一些办法及工具：

1. 禁制令

禁制令是一个法院的命令，要求当事人避免在特定时期内做出特定行为（禁止性禁令）或要求当事人做出特定行为（强制性禁令）。

在无理诉讼中被禁止的行为的例子：

  • 向无关的第三方披露机密/个人讯息（用这些信息寻求法律建议除外）；
  • 骚扰无辜的一方（例如通过发送信件/电子邮件/电话、短讯）；
  • 作出/发布诽谤性言论，针对无辜的一方；
  • 公开被禁制令保护的信息。

2. 剔除申请

法院可自动或应要求，在诉讼的任何阶段，剔除申索陈述书或状书的任何内容。做这类型申请的理据如下：

(a) 该状书或注明并无披露合理的诉讼因由或抗辩（视属何情况而定）；
(b) 该状书或注明属于恶意中伤、琐屑无聊或无理缠扰；
(c) 该状书或注明可能会对有关诉讼的公平审讯造成损害、妨碍或延迟；
(d) 在其他方面而言该状书或注明是滥用法庭的法律程序。

如果该申索曾经被法院作出判决，法院不会允许原告往后再提起同一个申索。

3. 限制申请令/限制程序令/《高等法院条例》（第4章）第27条

实务指示11.3建立了两个命令，让法院可以制止无理诉讼人继续提出诉讼：限制申请令（RAO）可以限制无理诉讼人进行当前诉讼，而限制诉讼令（RPO）可以限制无理诉讼人进行已经启动的多重诉讼。

《高等法院条例》（第4章）第27条提供另外一个很好的方法制止无理诉讼人在将来继续提出诉讼。根据这一个条例作出的判决，无理诉讼人不得进行任何未来的诉讼程序，除非获得法院的预先许可。

4. 欠缺状书/缺席判决

因为无理诉讼人通常不依照程序或时间表做事，根据《高等法院规则》（第4A章）第13和19条，被告人可以申请拿一个缺席判决，是一个快速完结诉讼的好办法。

5. 除非命令

如果不希望直接申请删除/简易判决，无辜的一方可以选择申请 “除非命令”，并利用无理诉讼人未能遵守法院的指示，继续采取行动或做出最终判决。

6. 简易判决

根据《高等法院规则》（第4A章）第14条，无辜的一方可以申请简易判决。

7. 交付羁押

根据《高等法院规则》（第4A章）第52条，法院有权根据鄙视法院的行为作出羁押的命令（鄙视法院的行为包括违反禁制令）。如果无理诉讼人始终不遵守法院命令，法院有权判监。

8. 禁止发布命令和匿名命令

匿名命令和禁止发布命令能够帮助保护无辜者的身份，并减少对无辜者在声誉上受到的损害。

如果您想了解更多有关如何处理无理诉讼人的法律意见，请随时与我们的诉讼合伙人赵君宜律师谈谈。

赵君宜律师
+852 2186 1885
合伙人，争议解决
高李严律师事务所
2020年7月31日

中国 – 商标网上服务系统

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作者：宋静妍及罗杰

中国国家知识产权局（“国知局“）制定了《关于商标电子申请的规定》（第323号），于2019年8月27日发布，自2019年9月1日起施行。据此，现在大多数于商标有关的业务都可以通过国知局的商标网上服务系统填写和递交，例如商标注册申请，转让，名称/地址更改，注册续展和商品/服务删除，有关更多业务，请参阅以下列表。商标网上服务系统显然更加方便和高效，尤其是在当今，新冠病毒（COVID-19）爆发和大流行期间，为减少人员接触，各政府及机构要求或建议进行远程工作的情况下。

电子填写商标业务：

•    商标注册申请；及撤回商标注册申请
•    更改注册人/申请人的名称/地址
•    变更名义/地址/管理规则/成员名单申请；及撤回变更
•    变更代理人/文件接收人；及撤回变更
•    删减商品/服务项目；及撤回删减
•    商标转让/移转；及撤回转让/移转
•    商标注销申请；及撤回商标注销
•    商标使用许可备案；及撤回备案
•    变更许可人/ 被许可人备案
•    商标使用许可提前终止备案
•    出具优先权证明申请商标注册证
•    马德里国际商标出具商标注册证明
•    商标更正
•    补发商标注册证
•    补发变更转让续展证明
•    代理人变更（代理人名称/地址的变更）
•    商标驳回申请

此外，通过商标网上服务系统提交申请，国知局提供给申请人10％的官方费用折扣。我们列出了电子申请使用最为广泛的商标注册申请，即电子提交与纸质提交的对比流程如下：

流程电子申请纸质申请
申请表网上填写申请表原件
提交日期网上提交 – 工作天20:00之前亲自送达 – 工作天16:30之前；或郵寄送达 –  但申请日为国知局的确认收件日
通信/通知商标注册申请受理通知书/改正通知书（如有）/驳回通知书（如有）/公告/注冊 电子通知纸质通知
官方費用人民币270一个申请人民币300一个申请

上述比较表明，电子申请不仅更加灵活，而且在时间和费用上都更具成本效益。

因此，除非另有指示，否则我们将使用电子申请，或者在某些情况下不适用电子申请，例如，商品/服务描述不规范等情形下。

如果您对中国商标注册申请策略和保护有任何问题或疑问，请联系vera.sung@oln-law.com或angel.luo@oln-law.com，我们将很乐意为您提供帮助。

Emigration from Hong Kong to Taiwan: The Importance of Pre-Migration Tax Planning (6)

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Among all the destinations, Taiwan is always one of Hong Kong people’s favorite choice for emigration, likely because of its relatively affordable living standard, similar language and culture and democratic lifestyle. According to data from Taiwan’s Ministry of the Interior, immigration from the Hong Kong to Taiwan has increased by 28 percent from January to July in 2019. 

This article will examine from a taxation perspective the considerations which a person should pay due regard to before emigration, so as to better plan for future taxes which might arise at the time of and after the emigration to Taiwan.

Overview of Ways to Obtain Taiwan Citizenship

Taiwan offers a number of pathways to citizenship through permanent residency, covering family, study, business innovation, investment, and employment.

Individuals who wish to immigrate to Taiwan shall first obtain the Alien Resident Certificate (similar to the green card in the United States). This Alien Resident Certificate allows individuals to legally stay in Taiwan based on the fact that they are working in Taiwan under the permission, or being married to a Taiwanese spouse, or being an investor having invested over a certain amount of capital with the approval by the relevant authorities in Taiwan etc.. 

1.    Investment

If you opt for the investment route, you shall first apply for a resident visa for investment and then the Alien Resident Certificate. The criteria for obtaining an investment visa in Taiwan is relatively less demanding comparing with some other popular choices for migration, especially for applicants from Hong Kong and Macau. 

Applicants from Hong Kong and Macau may make an investment of at least NTD6 million (i.e. around USD200,000 or HKD1.5 million) in a private Taiwanese company in order to be eligible for making an application for the investment visa and the Alien Resident Certificate. They may then apply for naturalization as Taiwanese directly after:- (a) 1 year of legal residency, during which the applicant cannot leave Taiwan for more than 30 days; or (b) 2 consecutive years of legal residency and having been physically present in Taiwan for at least 270 days per year.

Non-Hong Kong and Macau applicants may opt for the following alternative route for obtaining an Alien Permanent Resident Certificate (the “APRC”) (i.e. permanent residence permit) thus Taiwanese citizenship, in which case the applicant will not be required to be physically present in Taiwan during his residency:-

a. Making an investment of NTD15 million in a Taiwanese business which creates 5 or more full-time jobs for Taiwan nationals for over 3 years, in which case the applicant is required to have held the Alien Resident Certificate for over 3 years before making the application for the APRC; or

b.  Making an investment of NTD30 million in the government bonds of Taiwan for over 3 years, in which case the applicant is required to have held the Alien Resident Certificate for over 5 years before making the application for the APRC.

Foreign nationals who own the APRC and have legally and continuously resided in Taiwan for 5 years and having been physically present in Taiwan for at least 183 days per year can apply for naturalization as Taiwanese.

2.    Studies

Graduates from universities in Taiwan may apply for permit to work locally thus residency in Taiwan. Permanent residency and naturalization as Taiwanese may then be applied for after the applicant resides in Taiwan for 5 years legally and continuously and having been physically present in Taiwan for at least 183 days per year. 

Alternatively, graduates from universities in Taiwan may first return to their home place of residence to work for 2 years or more, and apply for permit to work locally thus residency in Taiwan. Permanent residency and naturalization as Taiwanese may then be applied for after 1 year in fastest cases. 

3.    Business innovation

You may apply for a Taiwan entrepreneur visa and residency if any of the following requirements is met:-

a. Having received venture capital investment or international fundraising in your business innovation of more than NTD2 million;

b. Having received approval to reside at a recognized innovation park or incubator in Taiwan;

c. Having obtained patent rights or professional skills certificate;

d. Having been awarded in a leading startup or design competition, or has been involved in a foreigner entrepreneurship project in Taiwan;

e. Having been or is currently located in a startup accelerator recognized by the Taiwanese government;

f. The enterprise or the person in charge of the enterprise has been nominated or awarded in a film festival;

g. Having received innovation subsidy of at least NTD3 million from the central government or at least NTD1 million from the local government;

h. Having possessed innovation capability specified or recommended by the Taiwanese government; or

i. Legal representative, manager or director of an established enterprise with innovation capability in Taiwan with an investment of at least NTD1 million.

Permanent residency and naturalization as Taiwanese may then be applied for after 5 years in the fastest cases. 
 
4.    Skilled immigrants

Applicants being professional at certain fields, including accountants, lawyers, medical practitioners, architects etc. may apply for Taiwan residency through its skilled immigration program.

They may then apply for naturalization as Taiwanese after:- (a) 1 year of legal residency, during which the applicant cannot leave Taiwan for more than 30 days; or (b) 2 consecutive years of legal residency and having been physically present in Taiwan for at least 270 days per year.

5.    Family reunion

Like other countries, one may also immigrate to Taiwan on the basis of family reunion, if he has a direct relative or a spouse with Taiwan citizenship. 

Overview of Taxation in Taiwan 

For personal income tax, the progressive tax rates of personal income tax in Taiwan range from 5% to 40%. Similar to Hong Kong, Taiwan levies personal income tax on a territorial basis (i.e. only Taiwan sourced income (for both resident and non-resident) is subject to income tax in Taiwan). That being said, for Taiwan resident whose income is derived from sources outside Taiwan, such income is subject to alternative minimum tax (“AMT”).[1] As for capital gain, Taiwan does not tax capital gains separately. All gains, unless otherwise specifically exempted by the applicable laws, are taxed as ordinary income.

For corporate income tax, a Taiwan resident company is taxed on its worldwide income. The current corporate income tax rate is 20%. Similar to the treatment on individuals, there is also no separate capital gains tax in Taiwan for companies.

Hong Kong currently does not have a comprehensive treaty for double taxation with Taiwan. This essentially means that, for example, in the absence of bilateral tax concessions, a Hong Kong citizen or alien in Taiwan whose income has a Hong Kong source can be taxed twice, once in Hong Kong based on Hong Kong’s territorial source principle of taxation, and another time on AMT paid in the Taiwan. That being said, Taiwan provides unilateral tax credit relief in respect of foreign-sourced income – income tax paid in other countries on income derived outside Taiwan may be credited against one’s total income tax liability in Taiwan. It is also worth noting that double taxation on the income received by people and companies across Taiwan and China is alleviated by the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, but Hong Kong is not a party thereto.

Pre-migration Tax Planning

Pre-migration tax planning is particular important to people (especially Hong Kong resident) who are planning to immigrate to Taiwan for the following reasons:-

1. Taiwan has a higher corporate tax rate and individual income tax rate compared to Hong Kong;

2. There is no capital gain tax in Hong Kong, whilst capital gain is taxed as ordinary income and subject to personal income tax as high as a rate of 40% (compared to the cap of 17% in Hong Kong) or corporate income tax of 20%;

3. There is no tax on dividends in Hong Kong, whilst dividends can be taxable in Taiwan; and

4. There is no estate duties in Hong Kong, whilst the same exists in Taiwan (which will be further discussed below).

We list out hereinbelow some of the pre-emigration preparation which one may need to consider in order to properly plan his/her tax affairs before immigrating to Taiwan.  

Trust 

Unlike Hong Kong, estate tax exists in Taiwan and the same will be levied on the following estate properties:-

1. Property remained by the deceased who was a Taiwan citizen and regularly resided in Taiwan, regardless of the location of the property; and

2. Property left by the deceased who was a Taiwan citizen but resided outside Taiwan regularly, or who was not a Taiwan citizen, if the property is located within Taiwan.

Estate tax rates in Taiwan range from 10% for net taxable estate amount of or under NTD50,000,000, to 20% for net taxable estate amount of or over NTD100,000,001. Accordingly, for individuals (especially high-net worth individuals with properties located in other countries) who are planning to immigrate to Taiwan and acquire Taiwan citizenship, it would be advisable to set up a trust before the migration, such that estate taxes can be saved in respect of the trust assets.

How the trust shall be structured is another important issue. Under Taiwan tax laws, gift tax would be levied for:-

1. Gift made by a donor who is a Taiwan citizen who regularly resides in Taiwan, regardless of the location of the gifted property; 

2. Gift made by a donor who is not a Taiwanese citizen or a Taiwanese citizen residing outside of Taiwan as long as the property is located within Taiwan. In determining whether the property is located in Taiwan, a gifted property to a trust would be deemed as locating in Taiwan (even though it might not be physically present in Taiwan) if the residence of the trustee is Taiwan. The donor i.e. the settlor of such trust in the circumstance would then be subject to gift tax. 

Gift tax rates in Taiwan range from 10% for net taxable gift amount of or under NTD25,000,000, to 20% for net taxable gift amount of or over NTD50,000,001. Accordingly, one would need careful consideration and shall seek professional advice on the trust structure (including timing of settling the trust (i.e. whether the settlement shall be done before acquiring Taiwan citizenship), choice of settlor, choice of trustee, choice of trust assets etc.) so as to minimise any gift tax arising from the settlement of the trust.

Capital Gains and land value increment tax for real estates

If one intends to acquire real estates in Taiwan, he may also need to consider the holding structure of such properties as any transfer of real estates in Taiwan is subject to, inter alia, significant land value increment tax and capital gain tax, and that there are also different tax treatments in relation to the rental income generated from these real estates by corporate/individual, or Taiwan/non-Taiwan residents. 

Land value increment tax is computed based on the increase in the assessed value of the relevant land since the last ownership transfer. Land value increment tax rates vary from 20% to 40%, while capital gain tax rates in respect of transaction of real estates in Taiwan range from 15% to 45%, depending on the holding period and the residence of the parties. 

Conclusion

As could be seen above, however attractive the “Formosa” might be, in terms of taxation, Taiwan is a less friendly jurisdiction to taxpayers compared to Hong Kong. Accordingly, careful pre-migration tax planning is required and tax advice shall be sought before one moves to Taiwan.

OLN provides a range of migration, corporate restructuring and tax advisory services.  If you have any questions on the above, please contact one of the members of our Tax Advisory Team. 

Disclaimer: This article is for reference only. Nothing herein shall be construed as Taiwan or Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

[1] Residents with AMT taxable income exceeding NTD6.7 million is subject to an AMT tax rate calculated by the following formula:- (Income subject to AMT – NTD6.7 million)x20%. Separately, any overseas income exceeding NTD1 million is reportable.

Assistance from Hong Kong Courts Available to Foreign Liquidators

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It is not uncommon that foreign administrators/liquidators see the needs to seek enforcement or exercise their power in Hong Kong. The legal position in this regard is by and large aligned with the rest of the common law world in that Hong Kong Courts would recognize and assist foreign liquidators upon conditions being satisfied. The liquidator will then be able to exercise powers as if it were a local liquidator subject to certain limits. Importantly, this includes power to initiate actions.

Can Foreign Administrators/Liquidators put forward Corporate Rescue Plans in Hong Kong?

Many jurisdictions have formal corporate rescue regimes aiming at helping companies survive financial distress by letting those companies reorganize debts and trade out of difficulties, such as the Chapter 11 procedures in the United States and administration in the United Kingdom. Hong Kong lacks such formal corporate rescue framework. The closest alternative available is a “scheme of arrangement”, which is neither an insolvency nor a bankruptcy process, and can be used by both solvent and insolvent companies. 

Most recently in January this year, the Legislative Council Panel on Financial Affairs tabled a proposal to revive a corporate rescue scheme similar to the US Chapter 11 scheme which was previously examined after SARS. Key features include having the company file documents with the Companies Registry, appoint a provisional supervisor, and that there will be a moratorium on legal actions against the company. Only time will tell what other features the scheme will embody, such as whether the moratorium will enable cross-border actions to protect a Hong Kong company’s overseas assets. In the meantime, the primary restructuring tool in Hong Kong remains the scheme of arrangement.   

How does a Scheme of Arrangement Work?

A company in fiscal difficulty might compile a proposal for its creditors, proposing terms for a compromise of the company’s debts so that creditors may accept a lesser amount in full settlement of the debt. It should be noted that even where a company is undergoing a winding-up procedure, the liquidator has power to initiate a scheme of arrangement.

Once the proposal has been finalized, the application is made to the Court for its approval to convene meeting of each class of affected creditors. In each of the meetings, the scheme must be approved by both a majority of at least 50% in number, and a majority in number presenting at least 75% in value of the voting creditors. Then, upon the Court’s approval, an order sanctioning the scheme will be made. Such order will bind all creditors of the company, even if they did not vote. 

Comparison with the UK CVA

Laws of Hong Kong relating to insolvency are derived from that of the UK. The latter has evolved with progressive development whereas the HK’s insolvency regime is lagging behind. In the UK, in addition to the scheme of arrangement which largely resemble that in Hong Kong, financially-stricken companies might also opt for company voluntary arrangement (“CVA”). 

A CVA allows a company to agree a composition or an arrangement with its creditors in satisfaction of some, or all, of its debts. To be effective, a CVA requires the approval of the requisite majorities of the company’s creditors and shareholders. In the case of creditors, a majority of three-quarters or more (in value) of those responding must vote in favour of the proposals to approve the CVA. As for shareholders, it requires more than half in value of the company’s shareholders present in person or by proxy and voting at a meeting on the resolution to approve the CVA.

Once the CVA is approved by both creditors and shareholders, it binds all the company’s unsecured creditors who were entitled to vote at the meeting (even if they did not vote). However, a CVA cannot bind secured or preferential creditors without their consent. In addition, it must not unfairly prejudice the interests of any creditor.

The below table sets out key differences between schemes of arrangement (whether in Hong Kong or the UK) and the UK CVA:-

 Scheme of arrangementCVA
Court involvementExtensive court involvementCourt involvement only if the CVA is challenged
Shareholders & creditors involvementOnly creditors vote on the scheme of arrangementShareholders’ majority also required
Effect over secured and preferential creditorsSecured and preferential creditors can be bound by a schemeSecured and preferential creditors not bound by CVA without consent
MoratoriumLacks the ability to impose a moratorium on creditor actionsStatutory moratorium only available for small companies (turnover ≤ £10.2m; balance sheet assets ≤ £5.1m; and ≤ 50 employees)
Effect on contractsMight not trigger insolvency-related cross-defaults; outside the scope of statutory insolvency regimeWould trigger insolvency-related cross-defaults in company contracts

What kind of company can invoke a scheme in Hong Kong?

Apart from companies incorporated under the Companies Ordinance in Hong Kong, the Courts of Hong Kong may also approve schemes of arrangement having a “sufficient connection” with Hong Kong, as evidenced by factors such as listing on the Hong Kong Stock Exchange, having creditors/management located in Hong Kong etc. In other words, foreign-incorporated companies, such as those in offshore jurisdictions, can also apply for approval of the scheme (as long as they can establish a sufficient connection with Hong Kong). It is therefore common for a foreign company with debts and liabilities in Hong Kong to seek the Court’s sanction for a scheme of arrangement in Hong Kong.

If you as a receiver or liquidator of a foreign-incorporated company would like to seek approval for a scheme of arrangement in Hong Kong, our firm’s team of experienced lawyers will be able to assist in matters including but not limited to devising a restructuring strategy, advising on each step of the restructure, negotiations with creditors if necessary, as well as preparation of proposed terms of the scheme. We will also be able to offer bespoke advice on the suitability of implementing a scheme and whether other alternatives are available to the company, so as to tailor to the specific needs of each company.  

Is Statutory Moratorium Available in HK? 

There is no statutory moratorium on creditor actions prior to a scheme of arrangement becoming effective, which practically means that any creditor can take legal action against the company. The company, during the process of restructuring, is therefore still susceptible to enforcement action by creditors or winding up petition and might still be exposed to risk of its restructuring efforts being thwarted.

In view of the lack of moratorium in schemes in the insolvency context, often case companies negotiating a scheme might at the same time initiate a provisional liquidation/liquidation to effectively create the necessary moratorium. By virtue of section 186, Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)(“CWUMPO”), when a winding-up order has been made, or a provisional liquidator has been appointed, no proceeding shall be proceeded with or commenced against the liquidating company (except with leave of Court). This in effect creates a moratorium on creditor actions against a company which has entered liquidation/appointed a provisional liquidator. 

What if a Foreign Statutory Moratorium is sought to be enforced on Hong Kong assets/liabilities?

There are limits to the Hong Kong Court’s ability to provide assistance to foreign office holders. For instance, in Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd where a UK administrator sought assistance from the Hong Kong Court in recognising a UK moratorium, the Hong Kong Court refused to provide assistance because the Court’s power to assist foreign liquidation was limited to the type of order available to a liquidator in Hong Kong. At present, Hong Kong does not have any equivalent mechanism to administration, and in particular there is no statutory provision which provides for a moratorium on the enforcement of a secured debt. Providing assistance to the administrator to enforce a moratorium would be an impermissible extension of common law principles.

As to what might happen if a foreign liquidator seeks a court order imposing moratorium over a Hong Kong company as part of a group restructure, the issue was considered in Re CW Advanced Technologies Limited, which involved a Hong Kong company, being part of a Singapore-headquartered corporate group held by a Cayman holding company. The group applied to the Singapore court for a 6-month moratorium (“SG Moratorium”) while it underwent restructuring. The group and the company’s largest creditor, Bank of China, took out an application to appoint provisional liquidators over the Hong Kong company. Harris J held that provisional liquidators be appointed, but did not give them power to pursue debt restructuring (e.g. by using the SG Moratorium). 

For the Hong Kong Court to recognize and assist foreign office holders in liquidation, certain conditions must be met (for details, please see our article “Legal Update: Hong Kong Court Recognizes Application by Shanghai Liquidators”). It was unclear whether the SG Moratorium was a collective insolvency proceeding for common law recognition purposes. Even if it was, there was no Hong Kong authority on whether the court may recognize a foreign insolvency proceeding where the foreign jurisdiction was not the country of incorporation. And even if the SG Moratorium was eligible for recognition, there was no Hong Kong authority on whether the court may assist by appointing provisional liquidators. In the end, the Court left open the issue whether it should recognise foreign moratoriums in the future. 

Whether the Hong Kong Court will recognize foreign moratoriums largely depends on the facts of each case. Factors to be considered include the place of incorporation of that company in liquidation, the processes taking place in Hong Kong, and eligibility of foreign creditors for Hong Kong Court’s assistance. If the company in question does not have tangible existence in its place of incorporation (i.e. it is a mere brass-plate), and that no winding-up proceedings are taking place in Hong Kong where it has no material assets/creditors, it might just be that foreign liquidation is the most appropriate way to wind-up the company. In such circumstance, recognition will likely not be granted to a foreign moratorium. 

What Enforcement Actions may be taken in Hong Kong?

Given that Hong Kong does not have debtor protection insolvency regimes like the US Chapter 11 regime or UK administration, rights of secured creditors in Hong Kong are generally unaffected by liquidation or schemes because neither a liquidation (until winding up order has been made or provisional liquidator appointed) nor a scheme (until implemented) provides for a stay or moratorium on security enforcement. Commencement of insolvency procedures does not affect a secured creditor’s rights as they are entitled to be paid out of the proceeds of their security (unless transaction is subject to claw back by liquidator e.g. in unfair preference, undervalue transactions, extortionate credit transactions, dispositions in compulsory liquidation etc.) 

Generally, once a security is enforceable (e.g. upon default), the lender can enforce its security immediately. Depending on the nature of the security, enforcement could be by way of appointment of a receiver, foreclosure or taking possession. As for enforcement of judgments, the enforcement methods depend on the nature of the judgment. Where a judgment or order is for payment of money (not payment into court however), the judgment may be enforced by a Writ of fieri facias, garnishee proceedings, charging order or appointment of receiver (also in the case of judgment or order is for payment of money into court). Judgments for possession of land are enforced by a Writ of possession.  

a.    Receivership – whereby a receiver would be appointed to take physical possession of and sell a collateral.

b.    Foreclosure – empowering mortgagee to take possession of mortgaged property and become the absolute owner of the foreclosed property, extinguishing the equitable rights of redemption by the debtor i.e. the mortgagor. 

c.    Possession and distraint order – commonly used by landlord to regain possession of premises where the debtor fails to pay rent.

d.    Garnishee order – Court order which would direct a third party such as bank to pay any amount owed to the debtor to the creditor directly.

e.    Writ of Fieri Facias – Writ which allows goods to be seized and sold by public auction. and the proceeds of sale handed to the judgment creditor.

If you have any question regarding the topic discussed above, please contact our partner Anna Chan at anna.chan@oln-law.com for further assistance.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

Litigation funding and financial provision payments for children of unmarried parents

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This is the second in a series of articles where we examine recent trends in Family Law issues which have a broad impact on the community. The initial article discussed recent developments in divorce law and procedure in England and Wales regarding “no fault” divorce. This article relates to litigation funding and maintenance payments for children of unmarried parents.  

The Family Law Department of OLN headed by Partner and Head of Department Stephen Peaker has been closely involved for several years in a long-running series of court hearings regarding various cutting edge issues in an evolving area of law: (1) the rights of a child to certain financial provision irrespective of its parents’ marital status, (2) the breadth of discretion of the court to award such payments, and (3) the availability of litigation funding to finance a party’s legal costs in securing such payments.   

Background

The hearings all relate to the same case, a dispute between two unmarried parents. The parties to the dispute were in a four year relationship and had a daughter. They never married, but cohabited for a period of time. A year after their daughter was born, the relationship broke down and the mother moved out with their daughter. The father made regular payments to the mother for rent and her and their daughter’s expenses. The mother subsequently applied for custody and related financial provision and included in the application an order that either the father buy or transfer to her a property outright for their child to live in, or he pay a lump sum to purchase a property to accommodate her and their child which would be held in trust for her child until she reached 18 or completed full time education, and then revert to the father. 

Rights of children of unmarried couples

The application was brought under the Guardianship of Minors Ordinance Cap 13 (“GMO”) as opposed to the Matrimonial Property and Proceedings Ordinance Cap 192 (“MPPO”) as the MPPO currently is limited to children born to married parents.     

The mother argued that either the property should be purchased outright pursuant to s10(2)(a) GMO as there was an “immediate and non-recurring need”, failing which it should be purchased on trust with a reversionary interest pursuant to s10(2)(e) GMO (on the basis that the language “property to which such parent or either of such parents is so entitled” means money to purchase property, i.e. a property which could be purchased in the future). The father’s argument was that accommodation was not an immediate and non-recurring need but an ongoing, everyday need and consequently the mother’s application was based on an incorrect interpretation of the GMO. HHJ Bruno Chan (in IDC v SSA [2013] HKFLR @ 61) agreed with the father and consequently held that the court had no power to make an award, dismissing this limb of the mother’s claim for financial provision.

The mother appealed at the Court of Appeal (“CA”) (IDC v SSA CACV [2014] HKFLR @ 267) arguing that the lower court had erred in not accepting that s10(2) was broad enough to allow the court to grant an order, and that the relevant legislation discriminated between children of cohabitants in favour of a married couple because such an order would have been available under the MPPO. The CA, in reviewing the relevant legislation, determined that the language in the relevant provisions of the GMO was not intended to, and did not in fact, discriminate between the two classes of children. It also found that the lower court erred in its reading of s10(2)(e) GMO and that it could in fact have made such an order as the language was indeed broad enough to encapsulate money to purchase a property. It is now clear that the court has power under the GMO to order a financial provision including a lump sum to purchase a property upon trust, with a reversionary interest to the parent providing the funds.    

However, on the particular facts of the case the CA held that the original decision not to make the order was correct notwithstanding the judge did not consider making such an order at the time of the trial in 2013 as he proceeded on the basis that he had no jurisdiction to do so. This was an important point to note as the CA has not only confirmed the current statutory interpretation but it also affirmed that the lower court has discretion on the facts of the case to order a lump sum in the future.  

The mother then applied to the Court of Final Appeal (“CFA”) (IDC v SSA  [2015] HKFLR @158 ) for leave to appeal on grounds that there were issues of great general or public importance at stake. She argued that the CA erred in not using the principle of the fairness approach when considering the quantum of financial provision in cases involving a child of unmarried parents as opposed to married parents. Ma CJ dismissed the application. He found that there were no issues of great general or public importance at stake and that at best this was a complaint that the CA had incorrectly exercised its discretion. He added that the court had looked at the correct cases and referred to the principles set out in the cases. In this case, the answer was dependent on the underlying facts of the case at the date of the trial in 2013.

In a related and subsequent hearing to this case, HHJ Bruno Chan J (in IDC v SSA (Relocation of a Child) [2015] HKFLR @ 404) in granting the mother’s application to relocate to London, commented on  the issues raised in the  related financial provision litigation between the mother and father, saying the issues were “in my view [issues which] desperately require to be addressed by legislation and serious soul-searching by society”. Highlighting that a dependent cohabitant of a deceased person had the right under statute to make a claim for financial provision from the estate, he found it illogical that current law would offer a dependent legal remedies on the death of a cohabitant but no such remedy whilst the cohabitant was still alive. He added that “it is time that some workable scheme or system should be put in place through legislation to help individual cohabitants and their children for financial provision and adjustment of property right between cohabiting couples on separation…”. 

Litigation Funding

In April 2018, the father applied to vary downwards and/or discharge the earlier 2013 maintenance order. Around the same time the mother applied to vary the same 2013 order, seeking a variation which would provide inter alia a lump sum payment and property transfer order in the name of the child and/or the mother. These applications are currently progressing through the Family Court system. 

However, in a more recent reported judgment (In the matter of Z [2019] HKFC255) between the same parties on an interlocutory matter, the court was asked to determine whether the mother could apply for litigation funding to cover her legal costs in continuing litigation with the father. HHJ C.K. Chan first considered whether disputed legal costs should be dealt with under s10(2) GMO (final orders) or s13(3) GMO (interim orders). He confirmed that where costs are not agreed by the parties they cannot be dealt with under s10(2) which presumes a cost or expense is final and therefore agreed, so must therefore come under s13(3). 

He subsequently confirmed the principle that “…in considering whether such a litigation funding order should be made, the principles as set out in Currey v Currey [2006] EWCA Civ 1338 are applicable, despite the fact that these are not matrimonial proceedings”.        

In brief, the Currey principles are: (1) that the applicant spouse has no assets, or none that can be reasonably deployed; (2) that she can provide no security for borrowing, or none which can reasonably be offered; (3) that she cannot reasonably obtain legal services by offering a charge on the outcome of the litigation; (4) that she cannot secure publicly funded legal help “at a level of expertise apt to the proceedings”. 

On the facts of the dispute, the court decided that the mother did satisfy the Currey test, and would need further funding to have “some equality of arms before the court”. HHJ C.K. Chan then set out his rationale calculating the quantum of the award.  

This is an important confirmation of the current law and is consistent with the other recent judgments in this area involving litigation funding for financial provision cases involving an unmarried party.

OLN is proud to have been able to play a role in the development of an important area of the law regarding financial provision for a child of unmarried parents. In the 2015 case cited above, HHJ Bruno Chan’s concluding words were “…it is time that some workable scheme or system should be put in place through legislation to help individual cohabitants and their children for financial provision and adjustment of property right between cohabiting couples on separation….”. Commenting on his team’s work on these long-running cases, Stephen Peaker remarked “it is very satisfying to see such positive decisions from the courts on these types of issues and I hope that we will see progress in the legislation in due course. My team and I have been working hard to fight for many clients who currently face significant disadvantages as the law currently stands, and we would welcome further positive developments in this area of law”.  

June 2020

Stephen Peaker, Partner and Head of Family Law
Michael Openshaw, Consultant
Family Law Department
Oldham, Li & Nie

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.