Hong Kong: Revisiting The Reform For Corporate Rescue Procedure

Last Updated: 5 January 2010

Unlike in countries like the America, UK and Australia, there are very limited legal mechanisms available to a company in Hong Kong to rescue itself from financial distress. The options currently available in Hong Kong to rescue a company include one of the following 3 options :-

  1. a "non-statutory arrangements" with creditors on a voluntarily basis;
  2. binding compromise or arrangement with its creditors under section 166 of the Companies Ordinance (Cap 32); and
  3. appointment of a provisional liquidator with the power to carry out a corporate rescue under a scheme of arrangement.

Unfortunately, the earlier 2 options do not prevent an unwilling creditor from opting out of the negotiations and commencing winding up petition against the company. As for the last option, there is a Court's decision that restricts the appointment of a provisional liquidator to an insolvent whose assets are in jeopardy and not solely for the purpose of a corporate rescue.

Due to the above drawbacks, in 1996 the Law Reform Commission recommended a corporate rescue procedure called "provisional supervision" providing a moratorium on legal action to a company in financial difficulty and the appointment of an independent professional third party to take control of the company during the provisional supervision period and formulate a voluntary arrangement proposal to creditors within a specified time frame. The proposal was included in the Companies (Corporate Rescue) Bill 2001 ("Bill") but due to diverse views from various interested parties, the bill was not passed.

Now, awakened by the effects of the recent financial crisis, the Financial Services and Treasury Bureau seeks to introduce legislative reforms aimed at assisting companies with long term business prospect that suffer short term financial distress.

Proposed Corporate Rescue Procedure

The corporate rescue procedure known as "provisional supervision" has been resurrected to allow directors, provisional liquidators or liquidators of a company in financial distress to apply for such supervision. Under the provisional supervision, a third party will be appointed as the provisional supervisor to manage and control the company. To simplify the corporate rescue procedure, provisional supervision is commenced by filing necessary documents with the Companies Registry without the need to obtain an order from the Court.

Once the provisional supervision commences, the provisional supervisor will be responsible to prepare "voluntary arrangement" of the company's debts which will be put to the vote by its credits.

Moratorium : Grace Period

There will be a moratorium of 45 days from the commencement of the provisional supervision during which no winding up petition and commencement or continuation of proceedings against the company will be allowed except in very limited circumstances. The moratorium allows the provisional supervisor to focus his resources and time to formulate the voluntary arrangement proposal to creditors rather than defending against proceedings and/or winding up petitions. The moratorium period can be extended up to 12 months if required by application to the Court.

Employees' Outstanding Entitlements

The proposal reform covers the entitlements of employees, such as outstanding wages and MPF. To ensure employees' outstanding entitlements are protected, 2 proposals are made, namely :-

  1. exclusion of current or former employees from the moratorium so that they will be entitled to petition for a winding up of the company notwithstanding any commencement of provisional supervision. This is to encourage the company to give priority to the settlement of employees' entitlements;
  2. treating any outstanding employees' entitlement before the commencement of provisional supervision as a "protected debt", capped at the amount under the Protection of Wages on Insolvency Ordinance at HK$278,500 and requiring any voluntary arrangement put forward to the company's creditors to contain a term that the protected debt shall be fully paid by the company on or before the commencement of the voluntary arrangement and any balance of the employees' entitlement not covered under the protected debt shall be paid within 12 months.

Insolvent Trading

Further, to promote directors to act more responsibly during the course of running the business of the company and to employ the corporate rescue mechanism earlier rather than incurring further debts while the company is already insolvent, a proposal has been made to make directors personally liable for the company's debts if they cause the company to trade while it is insolvent.

The proposed test for insolvent trading is that if a director and/or shadow director fails to take steps to prevent the company from insolvent trading while he knew or ought reasonably know that (a) the company was insolvent; or (b) there was no reasonable prospect that the company could avoid becoming insolvent, then that director would be personally liable for the company's debts.

Comments

This corporate rescue procedure may prove to be useful to companies that are in financial distress. The procedure aims to relieve companies that have a long-term viable business operation that could interest and give confidence to its creditors to restrain from exercising their rights under the debt temporarily.

Currently, the Financial Services and the Treasury Bureau are inviting public comments and opinion to its proposal on the provisional supervision and it is expected that the public consultation stage would conclude in mid 2010. If any proposal on provisional supervision is to be passed by the Hong Kong Legislative Council, we anticipate that it would be likely be by late next year.

Experienced lawyers in our litigation practice are able to assist clients not only in litigation and arbitration but also in alternative dispute resolutions. If you have any question on the above Article, or on any mediation or other dispute matters, please do not hesitate to contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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