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Hong Kong Corporate Rescue Recent Developments

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The Law Reform Commission of Hong Kong (the LRC) appointed a subcommittee on insolvency in 1990, which divided its work into three areas—namely personal insolvency, corporate rescue and companies winding up. The subcommittee issued a consultative paper in each of these three areas, which in turn was followed up by a report of the LRC.

Major amendments to personal insolvency law were made to the Bankruptcy Ordinance (Cap 6) in 1996, which came into operation on April 1, 1998, and which also affected Hong Kong avoidance powers generally. These matters were discussed in earlier articles (see Booth, Charles D., "Leaping Forward to 1997: Bankruptcy Law Reform in Hong Kong," 6 International Insolvency Review 183 (1997); Booth, Charles D., and Smart, Philip St. J., "Retroactive or Prospective? Determining the Scope of Hong Kong's New Insolvency Law," 8 International Insolvency Review 27 (1999); and Booth, Charles D., and Smart, Philip St. J., "The New Avoidance Powers under Hong Kong Insolvency Law: A Move from Territoriality to Extraterritoriality," 34 International Lawyer 255 (2000)).

The Companies (Amendment) Bill 2000 was introduced to the Hong Kong Legislative Council in January 2000 to address arguably the most important area of reform—corporate rescue—and to amend some areas of the law involving companies winding up and other areas of company law including shareholders' meetings and share capital. The bill also proposed a new civil offense of insolvent trading that would impose liability on "responsible persons"—persons who were at fault when a company incurred a debt at a time that the company was unable to pay its debts as they fell due. However, after serious opposition was raised against the corporate rescue proposals, those provisions in the bill relating to corporate rescue were deleted (as were the insolvent trading provisions). The remaining portions of the bill were enacted by the Legislative Council as the Companies (Amendment) Ordinance 2000 and brought into operation on July 1, 2000. However, it is clear that the government has much work to do if a corporate rescue procedure is to get enacted.

The primary intention of the bill was to establish an effective corporate rescue procedure for Hong Kong, to be called "provisional supervision." The proposed procedure envisaged the out-of-court appointment of an insolvency specialist (the provisional supervisor), who would manage the company and prepare a plan for voluntary arrangement to be put to creditors for a vote within six months of the commencement of provisional supervision.

Provisional supervision was to be available to a variety of companies both solvent and insolvent, local and overseas. In a typical case, the procedure would be initiated by a majority of the directors or the company members by ordinary resolution. However, a provisional supervision would only be able to be commenced where the company had either: (1) paid off all debts and liabilities owed to its employees under the Employment Ordinance (Cap 57) as of the commencement date, or (2) opened a trust account with a bank containing sufficient funds to pay off all such debts and liabilities.

The provisional supervisor would ordinarily be chosen from a panel of insolvency practitioners (comprising accountants, solicitors and workout specialists). Upon a provisional supervisor taking control of the company, the powers of directors would be suspended. To assist the provisional supervisor in achieving his goals, a moratorium would come into effect upon the commencement of provisional supervision. The moratorium would initially apply for 30 days, but could be renewed by the court for up to six months, and after that period only with the agreement of creditors. The moratorium would apply to both secured and unsecured creditors. However, a select group of secured creditors—called "major secured creditors" (defined to include any creditor holding a charge over the whole or substantially the whole of the company's property, so long as the creditor's claim under the charge equaled at least 1/3 of the company's liabilities immediately prior to the commencement of the provisional supervision)—would have the right to elect whether or not to participate in the provisional supervision. The election by a major secured creditor not to participate would lead to the cessation of the provisional supervision; the election to participate (or the failure to make an election) would subject the creditor to the moratorium. Where a provisional supervision proceeded and the provisional supervisor prepared a plan of voluntary arrangement, the creditors would vote on the plan in a single class.

Although there was general support in Hong Kong for the enactment of a corporate rescue procedure, the bill quickly encountered serious criticism. Among the most serious shortcomings of the proposed provisional supervision procedure are the following:

  • There is no provision that prevents creditors from passing a proposal for a voluntary arrangement that impairs the rights of secured creditors without first gaining their consent. The proposed procedure thereby goes too far in interfering with the rights of secured creditors and would have serious adverse consequences for bank lending in Hong Kong.
  • It may prove very difficult for a provisional supervisor to ascertain whether a creditor is in fact a major secured creditor and holds at least 1/3 of the total outstanding liabilities of the company as of the commencement of provisional supervision.
  • By requiring such comprehensive protection for the pre-commencement debts of employees, the bill almost guarantees that many companies would be unable to utilize the proposed procedure.
  • The proposed procedure does not permit a provisional supervisor to exercise powers relating to unfair preferences, extortionate credit transactions, fraudulent trading or the proposed offense of insolvent trading.
  • The proposed procedure significantly alters the balance of interests that prevail elsewhere in Hong Kong insolvency law and fails to provide creditors with confidence that their interests will take priority over the comfort level of directors.

Further discussion of these issues may be found in Smart, Philip, and Booth, Charles D., "Corporate Rescue: This Year, Next Year," Hong Kong Lawyer 50 (June 2000) ( Of all these issues, the matters involving secured creditors and the protection of employees have provoked the greatest criticism and are most in need of an amendment if the government hopes to get a revised bill enacted.

Journal Date: 
Wednesday, November 1, 2000

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