Hong Kong's insolvency system is famous for its lack of statutory corporate rescue procedure (“CRP”). Owing to the lack of CRP, financially distressed companies may only recourse to rescue their business with (i) a non-statutory consensual agreement with major creditors to restructure debts, or (ii) a scheme of arrangement under the Companies Ordinance (Cap. 622). These options, however, have many problems such as being expensive, impracticable, inflexible and tedious.

Earlier this year, the Hong Kong government has announced the plan to revive the corporate rescue bill for the introduction of, among other things, a statutory CRP in Hong Kong.  The Companies (Corporate Rescue) Bill (“Bill”) is intended to commensurate with international practice and standard. We provide an outline of the latest legislative proposal below.

Initiation of provisional supervision

Under the Bill, a company which is insolvent or will likely become insolvent may commence a CRP and appoint an independent professional third party as a provisional supervisor (“PS”) who must be either a certified public accountant or a solicitor. The PS will act as the agent of the company during the moratorium period (also known as the period of provisional supervision), which is proposed to be set at 45 business days. During the moratorium period, the company will carry on with its business as a going concern whilst the PS will devise a rescue plan (called voluntary arrangement “VA”) for consideration at a creditors’ meeting at the end of the provisional supervision. The creditors will decide whether to approve the VA proposal by resolution. If approved, the VA will be implemented under the supervision of the PS.

Availability of statutory moratorium

The introduction of statutory moratorium is another important proposal under the Bill. It is proposed that, subject to certain exemptions as provided in the Bill, there should be a statutory moratorium on civil proceedings and actions against the company and its property during the period of provisional supervision. That is to say, no resolution for voluntary winding-up can be passed and no application to the court for winding-up can be made against the company, whereas winding-up proceedings that had already commenced will be suspended. Further, unless with leave of the court, no enforcement process in relation to any company property and no proceedings except for criminal proceedings can be brought against or continued with the company.

Appointment and duties of provisional supervisor

Prior to the appointment of a PS, a notice of intention to appoint a PS should be given to the major secured creditor (“MSC”) of the company. The MSCs can issue a written notice to object to the appointment. Provided that the MSCs raise no objection, the provisional supervision may then be initiated. The PS will summon and preside at the first creditors’ meeting, which will be held within 10 business days from the date of commencement of provisional supervision. During the meeting, the creditors may determine, among other things, whether the appointed provisional supervisor should be removed, and if so, who is to be appointed instead.

During the period of provisional supervision, the PS is entitled to exercise the following non-exhaustive powers:

1.      take control of and manage the company’s business, property and affairs;

2.      continue to run the company and make decisions regarding the company’s business and property;

3.      remove and appoint a director of the company;

4.      execute documents and take legal actions on behalf of the company;

5.      for the purposes of considering plausible rescue proposals and making a decision at the final creditors’ meeting, the PS should be able to conduct investigation of the company’s business, property, affairs and financial position;

6.      perform any other function that the company or its officers could if the company were not under provisional supervision;

It is notable that the PS may also make an application to the court for examining certain people, including an officer of the company, a debtor of the company, any person who is known or suspected to be in possession, custody or control of any property belonging to the company and any person who is, in the opinion of the court, in a position to give information concerning the company.

PS’ recommendations

Under the Bill, the PS is required to make recommendations on whether the company should:

1.      be wound up in accordance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”);

2.      enter into a VA, which is a rescue plan devised by the PS; or

3.      end the company’s provisional supervision.

The PS’ recommendations will be considered at the final creditors meeting and a resolution may be passed to approve the proposed VA. If the proposed VA is approved, the PS will act as the Supervisor of the VA, unless the creditors appoint another qualified person. The VA will bind the following parties:

1.      creditors of the company in relation to a specified claim against the company which arises on or before the commencement of provisional supervision, as well as a claim for phased payments;

2.      the Supervisor;

3.      the members and officers of the company; and

4.      the company itself.

Creditors who are subject to the VA are prohibited from making winding-up applications to the court or commencing or continuing with any proceedings or enforcement process against the company or any of its property unless with leave of the court.

Protection for employees

With a view to protecting employees from being affected by the statutory moratorium, the Bill also contains sufficient safeguard to prevent abuse by employers to evade their obligations to pay employees’ entitlement. Under the Bill, the outstanding entitlements of employees owed by a company as at the commencement of provisional supervision should be paid in accordance with a phased payments scheme, as follows:-

If the company fails to make a phased-payment as set out above, the moratoria will no longer apply to the relevant employee, who can then present a winding-up petition to the court.

Eligibility of registered non-Hong Kong companies (“RNHKCs”)

Under the Bill, the proposed CRP would be applicable to local companies as well as RNHKCs. The Legislative Council considered that the inclusion of RNHKCs important as Hong Kong is a major international financial centre and business hub and there is a considerable number of RNHKCs operating in Hong Kong in one form or another.

Legislative timetable

The government plans to introduce the Bill into the Legislative Council in early 2021. Meanwhile, it is preparing the subsidiary legislation on various operational matters such as the holding of creditors’ meetings, organisation of committee of creditors, preparation of statements of affairs and report etc. The subsidiary legislation is expected to be tabled for negative vetting a few months after the enactment of the Bill.