Where a distressed or special-situations acquisition in Greater China stands now

The deal everyone wants to do is the one no one can execute cleanly. A distressed asset in Greater China – a Mainland operating company with offshore holding layers, a BVI vehicle whose underlying assets sit in Guangdong, a restructuring that requires coordinated insolvency recognition across three systems simultaneously – combines the commercial urgency of distress with the structural complexity of cross-border M&A. The combination is rarely forgiving.

A distressed or special-situations acquisition in Greater China turns on the alignment of three elements: the acquisition vehicle and its governing law, the insolvency or enforcement mechanism through which the asset is accessed, and the clearance and recognition pathways that connect the Mainland, Hong Kong and any offshore centre in the deal perimeter. No single instrument controls all three. The practical outcome depends on which element falls out of sequence first.

This analysis maps the current position across those three dimensions. It addresses the governing mechanisms, the cross-border interface between the Mainland and Hong Kong, where the structural risk sits in current market conditions, and what the practical acquisition sequence looks like for a buyer or creditor entering now.

What is commercially at stake – and why Greater China makes it harder

Distressed acquisitions in most markets reward speed. The asset deteriorates, counterparties drift, and the window in which value can be preserved is short. Special-situations transactions – distressed-debt acquisitions, pre-pack arrangements, enforcement sales and secondary credit plays – share that characteristic. The buyer or creditor who moves first, with a clean vehicle and a credible enforcement route, typically captures the position.

Greater China adds a layer that most Western distressed-desk teams underestimate. The capital and operating structure of a typical Mainland-exposed group runs through at least two legal systems before you reach the asset. A Cayman or BVI holding entity sits above a Hong Kong intermediate company, which in turn holds equity in a wholly foreign-owned enterprise or a variable interest entity structure on the Mainland. Each tier answers to a different insolvency regime, a different set of regulatory clearances, and a different enforcement creditor hierarchy.

When distress hits at the operating level, the creditor is rarely positioned where the value sits. The bond is issued out of the offshore entity. The guarantee runs from a Cayman subsidiary. The real property – the asset that retains value – is in a Mainland entity subject to the Enterprise Bankruptcy Law. The gap between where the creditor sits and where the asset sits is the structural problem. It is not a documentation problem alone; it is a jurisdictional one.

In our cross-border M&A practice, we see this misalignment most acutely in situations involving Mainland real property, manufacturing assets, and licensed operating businesses. The buyer entering at the offshore level acquires the equity of a shell. The buyer who wants the underlying asset must engage with the Mainland regime – and that engagement carries its own approval, recognition, and timing requirements.

The governing instruments and where they apply

No omnibus treaty governs cross-border insolvency recognition between the Mainland and Hong Kong. The position is more granular. Several overlapping mechanisms apply depending on the type of claim, the forum in which the matter is progressing, and whether the acquisition route runs through enforcement or a consensual restructuring.

For arbitral awards arising from commercial disputes connected to the transaction – a seller's warranty claim, a completion-accounts dispute, or a pre-default debt enforcement – the mutual recognition regime between the Mainland and Hong Kong operates under the 1999 Arrangement and its 2020 Supplemental Arrangement. Since the amendment that took effect from 2021, simultaneous enforcement applications in both jurisdictions are permitted. That is a material change: a creditor with assets in Hong Kong and on the Mainland no longer has to elect a single enforcement route and exhaust it before turning to the other.

For court judgments, the position shifted significantly with the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance, which came into force on 29 January 2024. Under that regime, an effective Mainland civil or commercial judgment can be registered with the Court of First Instance in Hong Kong without the prior exclusive-jurisdiction requirement that limited the old arrangement. The connection-based test that replaced it is wider in scope. For the distressed acquirer, this matters at two points: when trying to enforce a Mainland judgment against assets held in Hong Kong, and when working through whether a Hong Kong court order will travel in the other direction.

For Hong Kong-seated arbitration, the Arbitration Ordinance (Cap. 609) provides the governing framework, modelled on the UNCITRAL Model Law. The HKIAC Administered Arbitration Rules – the 2024 Rules, effective 1 June 2024 – are the current operative set for institutional proceedings. Emergency-relief applications under those Rules are ordinarily completed within 14 days of file transmission. For a distressed acquirer who needs interim measures quickly – to freeze assets ahead of a formal enforcement step – that timeline matters more than any other figure in the scheme.

For Mainland interim measures sought in support of a Hong Kong-seated arbitration, the Arrangement on Mutual Assistance in Court-ordered Interim Measures has been in effect since 1 October 2019. This allows a party to a Hong Kong-seated arbitration administered by a designated institution – including the HKIAC – to apply directly to a Mainland people's court for preservation measures before or during the arbitration. The practical utility in a distressed context is considerable: an acquirer or creditor can lock up Mainland assets through a Hong Kong arbitral process without having to initiate parallel Mainland litigation.

None of these instruments provides a route into the Mainland insolvency estate directly. For that, the buyer must engage with the Mainland courts under the Enterprise Bankruptcy Law, or structure the acquisition to avoid that engagement altogether – typically by buying at the offshore holding level and accepting that the underlying asset is subject to the Mainland regime.

How the cross-border interface bites: the three-system problem in practice

The structural complexity that characterises most Greater China distressed situations is not simply a matter of multiple governing laws. It is a sequencing problem. The actions available in one system constrain or preclude actions in another. Getting the sequence wrong – filing too early in one jurisdiction, or too late in another – can foreclose the best outcome entirely.

Consider a mid-market situation our desk has analysed repeatedly: an offshore bondholder group holding notes issued by a BVI entity, secured by a share pledge over a Hong Kong intermediate company, with the value sitting in a Mainland operating subsidiary. The bondholder's enforcement path runs: (a) accelerate the BVI notes; (b) enforce the share pledge over the Hong Kong intermediate; (c) deal with what the Hong Kong intermediate actually holds, which is equity in a Mainland entity. Step (c) is where the system changes. The bondholder who acquires the Hong Kong intermediate company acquires an entity that owns Mainland equity – but whether that equity can be exercised, transferred, or monetised depends on Mainland regulatory approval. Foreign-invested enterprise rules, strategic-sector restrictions, and any pre-existing Mainland security interests all interact at that point.

A European credit fund entered a similar situation in 2024. The fund had acquired the offshore paper at a discount and expected to enforce through the BVI-to-Hong Kong route. What the fund encountered was a Mainland operating company where local creditors had already registered security over the underlying assets. The offshore enforcement gave the fund the equity of the Hong Kong intermediate company. It did not give the fund priority over the Mainland secured creditors. The acquisition price had not reflected that split.

This is the three-system problem in concrete form. Offshore documents give comfort that does not reach through the Mainland regulatory perimeter. The acquirer who understands this in advance – who has mapped the creditor hierarchy at each tier before pricing – is in a materially different position from one who discovers it post-acquisition.

The cross-border interface also bites at the regulatory clearance level. A foreign buyer acquiring equity in a Mainland entity through a distressed process requires the same foreign-investment regulatory approvals that apply to a clean acquisition. Distress does not create a simplified route. In sectors subject to negative-list restrictions, the clearance requirement can make an otherwise viable acquisition structurally impossible for a foreign buyer – redirecting the opportunity to a domestic buyer who can move without that constraint.

The comparative read: Hong Kong vs the Mainland on the acquirer's decision

For a buyer or creditor structuring a Greater China distressed acquisition, the choice of forum and governing law at each tier of the structure is effectively a decision about risk allocation. Hong Kong and the Mainland offer different tools, different timelines, and different enforcement cultures.

Hong Kong operates a common-law system with a well-developed restructuring practice, an internationally recognised court hierarchy culminating in the Court of Final Appeal, and a body of creditor-protection doctrine that is familiar to institutional lenders and bond investors. The courts apply binding precedent, and judgments of the Court of First Instance and above carry weight in other common-law jurisdictions. For an offshore creditor seeking to coordinate a restructuring across the Cayman and BVI layers, Hong Kong is frequently the most effective forum for recognition and coordination proceedings.

The Mainland operates under a distinct civil-law tradition. The Enterprise Bankruptcy Law provides the governing regime for insolvency at the operating-company level. Mainland courts administer the estate, and the priority waterfall – secured creditors, employees, tax authorities, and then unsecured creditors – follows Mainland statutory rules. A foreign acquirer who wishes to participate in a Mainland insolvency process as a creditor must engage with the Mainland procedural rules, and recognition of foreign insolvency proceedings by the Mainland courts is not yet governed by any bilateral treaty with Hong Kong. The position is developing through pilot-programme arrangements in certain Mainland courts, but the current state of play requires verification before relying on it for any live matter.

The practical implication of this divergence is that a Greater China distressed acquisition rarely has a single governing forum. The offshore restructuring – amending indentures, completing the scheme of arrangement, addressing the BVI or Cayman holding layer – runs in one set of courts. The Mainland enforcement or asset acquisition runs in another. Coordinating both simultaneously, without the actions in one system prejudicing the position in the other, is the core legal challenge of the practice area.

We regularly advise creditor groups and acquirers on how to structure the sequencing across both systems. The sequencing decisions are not intuitive. A step that is routine in a purely Hong Kong restructuring – an interlocutory injunction freezing the target's bank accounts – can, if executed incorrectly, trigger a Mainland regulatory review that freezes the underlying operating company's business activities. The intersection requires a careful read of both systems together, not a sequential handoff between counsel in each jurisdiction.

Where the risk sits now: our read on the current environment

The Greater China distressed-acquisition market has been shaped by a set of conditions that are, as of late 2025 and into 2026, still working through their consequences. The correction in the Mainland property sector produced a volume of offshore-bond defaults concentrated in BVI and Cayman holding entities with Mainland asset bases. Most of those situations share a structural profile: large offshore bondholder groups, minimal unencumbered assets at the offshore level, and Mainland operating companies where local creditors, local governments, and in some cases Mainland insolvency administrators have already asserted priority.

What this has produced is a generation of offshore creditors who are, in practical terms, equity holders in holding companies that hold Mainland equity that is itself contested or encumbered. The enforcement route that appeared available from the offshore documents – enforce the share pledge, acquire the Hong Kong entity, monetise the Mainland assets – has proved considerably more complex in execution than in theory.

The risk concentration is now visible. It sits not in the offshore enforcement step, which is typically achievable, but in the gap between offshore enforcement and Mainland asset monetisation. That gap is where the acquirer needs to operate with the most precision, and it is where the least standardised legal infrastructure exists to assist.

For buyers entering now – secondary-market acquirers of offshore paper, or trade creditors pursuing enforcement – the practical questions are: what is the actual creditor hierarchy at the Mainland operating level? What approvals are required for any transfer of Mainland equity? What Mainland court or administrative proceedings are already on foot? And what is the timeline for any Mainland bankruptcy process relative to the offshore enforcement step?

The answers to those questions cannot be read from the offshore documents. They require engagement with the Mainland regulatory and judicial position, coordinated with the offshore analysis, before a position is taken on value or strategy.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. For a structured assessment of your cross-border distressed or special-situations position, write to us at info@lockhartyip.com.

The practical acquisition sequence for a buyer entering today

Mapping the acquisition sequence in advance is the single most important step a buyer can take in a Greater China distressed situation. The sequence is not dictated by the documents alone. It is dictated by the interaction of the documents, the available forums, the regulatory perimeter, and the state of the Mainland operating entity at the time of entry.

A functional sequence for a foreign buyer entering at the offshore level runs broadly as follows. First, map the full creditor and security hierarchy across all tiers – offshore, Hong Kong, and Mainland – before taking a position on value or structure. Second, identify what Mainland regulatory approvals are required for any transfer of Mainland equity, and whether those approvals are available to a foreign buyer in the relevant sector. Third, assess whether any Mainland court or administrative proceedings are on foot that could affect the priority of the offshore claim or the availability of the underlying assets. Fourth, establish the appropriate acquisition vehicle – typically a new holding entity in Hong Kong or an existing offshore vehicle – and confirm its fitness for purpose before the enforcement step.

Fifth, consider whether any interim measures are needed to preserve asset value during the acquisition process, and if so, whether the Hong Kong arbitration route – with access to the Mainland interim-measures arrangement in effect since 1 October 2019 – provides a faster and more effective mechanism than parallel Mainland litigation. Sixth, execute the offshore enforcement or acquisition step in coordination with the Mainland process, with both teams operating from a shared understanding of the sequencing constraints.

The decision matrix in prose form is as follows. For a creditor holding offshore paper with share-pledge security over a Hong Kong intermediate entity and a Mainland operating subsidiary: the governing instrument at the offshore level is typically a New York or English law indenture; enforcement runs through the courts of the relevant offshore jurisdiction; recognition in Hong Kong is available through the common-law courts; access to Mainland assets requires separate Mainland regulatory engagement and, where insolvency proceedings are on foot, participation in those proceedings under the Enterprise Bankruptcy Law. For a trade creditor with a Mainland contract claim and an arbitral award: the recognition route into Hong Kong runs under the 1999 Arrangement and its 2020 Supplemental Arrangement; simultaneous enforcement in both jurisdictions is permitted since the 2021 amendment; the enforcement timeline depends on the court's calendar and the availability of the debtor's assets in each jurisdiction.

A second scenario: a strategic buyer seeking to acquire a Mainland operating company directly through a Mainland insolvency process, using a Hong Kong entity as the acquisition vehicle. That buyer's regulatory exposure includes foreign-investment approval, possible sector clearance, and confirmation that the acquisition price paid in the insolvency process will receive court approval. The Hong Kong entity is a structurally neutral vehicle – it does not reduce the Mainland regulatory burden – but it simplifies the post-acquisition holding structure for an international group that will need to repatriate returns or refinance the acquisition debt in the offshore markets.

If an earlier filing, structure or enforcement attempt produced an adverse or stalled result, a second read can identify the strategic error and the routes still open. Write to us at info@lockhartyip.com.

What foreign counsel get wrong – and what the acquirer can do about it

The most consistent error we see from foreign counsel entering Greater China distressed situations is treating the offshore enforcement step as the transaction. Acquiring the BVI or Cayman holding entity – through a scheme of arrangement, a share transfer following pledge enforcement, or a secondary purchase – is a legal event in the offshore jurisdiction. It changes the ownership of the entity. It does not change the position of that entity's subsidiary in the Mainland regulatory system.

A European restructuring team that executes a textbook Cayman scheme of arrangement may hand its client a clean offshore entity whose Mainland subsidiary is simultaneously subject to a Mainland bankruptcy application filed by local creditors. The offshore work product is legally sound. The commercial outcome depends entirely on what happens in a system the offshore team did not engage with.

A second error is the assumption that English or New York governing law in the transaction documents provides a reliable enforcement route into Mainland assets. It provides a reliable route to a judgment or award. That judgment or award then needs to travel through the recognition mechanisms – the Cap. 645 regime for court judgments, the 1999 and 2020 Arrangements for arbitral awards – and its utility depends on where assets are located when enforcement is sought. An award against a Mainland entity, enforced in Hong Kong, only captures assets in Hong Kong. For Mainland assets, separate Mainland enforcement proceedings are required, and those proceedings run in the Mainland courts under Mainland procedural rules.

A third error is pricing the transaction without accounting for the full regulatory clearance burden. Foreign-investment approvals, sectoral restrictions, and any applicable merger-control filing requirements are not automatic deductions from value. They are conditions that may prevent the transaction from completing at all. An acquirer who prices the asset on the assumption that approvals will be granted, without having assessed the regulatory position in advance, has taken an undisclosed risk onto the acquisition price.

The acquirer who avoids these errors – who maps the full creditor hierarchy, assesses the Mainland regulatory position, and sequences the offshore and Mainland steps together – is in a materially stronger position. Not a guaranteed outcome. A stronger position, going in, on questions that cannot be recovered post-acquisition.

The interaction with holding structure, tax position, and enforcement exit

A distressed acquisition is not simply a liability problem. The buyer who acquires the asset must also manage what happens after acquisition – how returns are repatriated, how the holding structure is maintained, and how the exit will be executed. In a Greater China context, each of those questions has a cross-border dimension.

Hong Kong's territorial tax regime – with profits tax applying only to Hong Kong-sourced profits, and no capital gains tax, withholding tax on dividends, or sales tax – makes it a structurally attractive holding location for a post-acquisition group. The two-tier profits tax rate of 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above applies per group, with only one connected entity eligible for the lower rate. The foreign-sourced income exemption regime, in force from 1 January 2023 and subsequently amended, imposes economic-substance conditions on the exemption for certain categories of income. A post-acquisition holding structure that routes income through a Hong Kong intermediate must satisfy those conditions if the income is to be treated as exempt.

For groups within scope of the Pillar Two minimum top-up tax – which applies to multinational enterprise groups with consolidated revenue at or above EUR 750 million for fiscal years beginning on or after 1 January 2025 – the effective tax rate across the full post-acquisition structure is a live consideration from day one of ownership. Acquiring a distressed Mainland operating company through a Hong Kong vehicle does not simplify the Pillar Two analysis; it adds a jurisdiction to the calculation.

The enforcement exit – selling the acquired asset or the holding entity at the end of the investment period – raises the same recognition and regulatory questions in reverse. A sale of Mainland equity to a third party requires the same foreign-investment regulatory approval process that applied to the original acquisition. A sale of the offshore holding entity may avoid that requirement, but only if the buyer for the offshore entity is comfortable acquiring the same three-tier structure that created the original complexity.

For holding structure questions that arise from or are connected to a distressed or special-situations acquisition, see our M&A & Transactions practice. For related cross-border acquisition analysis from comparable structures, our briefing on acquiring a United Kingdom target through a Hong Kong vehicle and our guide on acquiring a Singapore target through a Hong Kong vehicle address structurally adjacent questions.

The objection: "We can handle the offshore piece ourselves"

Many sophisticated buyer groups enter Greater China distressed situations with strong offshore counsel already in place. The BVI or Cayman restructuring team is credible and experienced. The indenture trustee has a relationship with New York counsel. The fund has done this before in a different market. The objection to coordinated cross-border engagement is usually framed as: we can handle the offshore piece ourselves; we need someone to manage the Mainland interface when we get there.

The problem with that framing is that the Mainland interface is not a subsequent step. It is a concurrent constraint. Decisions made in the offshore documentation – which entity is the borrower, how the security package is structured, which jurisdiction is named in the arbitration clause – have direct consequences for what is available in the Mainland. Those consequences cannot be corrected after the offshore documents have been executed and the enforcement step has been taken.

The cross-border read is needed at the structuring stage, not the enforcement stage. By the time enforcement is on foot, the sequence of constraints is largely fixed. What remains is execution within those constraints – which is valuable, but less valuable than having shaped the constraints in advance.

What the acquirer needs at entry is a team that reads the offshore documents, the Mainland regulatory position, and the Hong Kong recognition mechanisms together, and identifies the points at which each system constrains the others. That is a different exercise from managing the offshore piece and coordinating the Mainland counsel reactively.

Related practices

• Holding Structures – structuring acquisition vehicles and holding layers across Hong Kong and offshore centres
• Disputes & Arbitration – enforcing awards and judgments across the Mainland–Hong Kong interface
• Tax Positions – FSIE, Pillar Two and profits tax analysis for post-acquisition groups

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.