The context

1. Currently, companies facing difficulty in Hong Kong have little choice other than liquidation or receivership. The only way to save a company in difficulty is through the procedure as set out in Section 166 of the Companies Ordinance. However, the Section 166 process is cumbersome, expensive and time-consuming. It is ineffective for many practical cases. The result is that a lot of companies that could otherwise have been saved have gone into liquidation.

2. In October 1996 the Law Reform Commission published a Report on Corporate Rescue and Insolvent Trading. In the report a new rescue procedure was proposed for companies in financial difficulty. The report included a draft Provisional Supervision Bill, which was modeled upon the UK's Administration Act. The legislation has not, however, been submitted to the Legislative Council.

3. An effective rescue procedure exists in other jurisdictions, such as the US (Chapter 11 of the Bankruptcy Act), UK and Australia (the process of “Administration”). In the case of Australia, the introduction of the corporate rescue regime has led to a marked decrease in the number of receiverships (from 380 cases in the year ended March 1997 to 240 the following year) and a rise in the number of “administrations” (from 421 in 1997 to 503 in 1998).

4. An effective rescue procedure is an important part of the legal and regulatory framework for corporate governance. It has an added significance in the current economic downturn, which has proven to be more severe than anticipated. The latter unfortunately means an accelerating rate of bankruptcies and liquidation can be expected. Already the number of liquidations has gone up considerably in Hong Kong, the highest number of bankruptcies having been recorded recently. The Provisional Supervision Bill is therefore more important than ever before, and should be introduced to LegCo urgently.

The proposal

Provisional supervision

5. For a variety of reasons, many companies that are otherwise sound may face insolvency at some stage of their development. They may be forced into court liquidation with no way out, yet what is needed may be no more than the introduction of proper management. These companies should be given a chance to work out a way to survive. If successful, jobs will be saved and the economy as a whole will benefit.

6. In our view, a good rescue procedure should involve the court as little as possible and should give more regard to proper management instead. Accordingly, we support the scheme proposed by the Law Reform Commission and detailed in the Provisional Supervision Bill as drawn up by the LRC.

7. Under the new proposal, companies facing difficulty will be given an opportunity to restructure. This will be in the form of a moratorium or stay of proceedings for an initial period of 30 days. The moratorium could be extended, through application to the court, to six months and beyond, so as to give the company an opportunity to plan a “scheme of arrangement” for rescuing the company either in whole or in part. With the moratorium nobody could take action, including the landlord. Qualified professionals will be appointed as independent “provisional supervisors” or “administrators” to help restructure the company. The emphasis of the arrangement is on cooperation between banks, creditors, management and corporate rescue professionals.

8. Needless to say, rescue is not always guaranteed under this arrangement. But there will be an opportunity for companies to revive the business, for jobs to be preserved, for debts to be satisfied, and in the event that liquidation is inevitable, for a better return to be provided for creditors.

Insolvency practitioners

9. An important part of the new scheme is the role of the independent rescue professionals, the insolvency practitioners. Unlike liquidators whose interest is mainly to protect creditors, the provisional supervisors and administrators would be concerned with protecting shareholders and employees as well as creditors.

10. To ensure the quality of the administrators, we believe a licensing system for insolvency practitioners should be designed by professionals in related fields (accountants, lawyers and management consultants) in conjunction with the Official Receiver's Office. There should be an emphasis on business experience, as the primary concern is not of closing down but introducing good management into the company. Eventually, a professional qualification could be developed for insolvency practitioners.

Insolvent trading

11. In addition to corporate rescue, the Law Reform Commission has also made new proposals with respect to insolvent trading. Under these proposals directors or “responsible persons” would be liable for insolvent trading if they allowed the business to trade whilst insolvent, or if they continued to trade with no prospects of preventing the company's insolvency. This would encourage directors and “responsible persons” to face up to the company's  problems earlier rather than later, thus giving the company a better chance of survival.

12. One result of the proposal is that additional pressure will be put on non-executive directors. The latter may not have a full picture of the day-to-day operation of the company, and yet are expected to exercise a similar standard of care, and with similar liability, as executive directors. Nevertheless, we are of the view that their check-and-balance role should not be compromised, and the apparently greater pressure on non-executive directors should be addressed through making them more aware of their responsibilities. To that end, organisations like the Hong Kong Institute of Directors could be an appropriate vehicle for the development of programmes for non-executive directors.

Conclusion

13. In conclusion, there is a need for government to put the legislation to LegCo, and for the latter to consider it, sooner rather than later. There are many problems current in the business scene today but these proposals are needed now rather than when the economic crisis is over.

(Ends)