The new Hong Kong Companies Ordinance is planned to come into operation in the first quarter of 2014. This wholesale renovation of the law governing the operation of companies in Hong Kong repeals almost all of the existing provisions of the Companies Ordinance with a few exceptions, including the existing insolvency and winding-up provisions. These will remain in their current form and be retitled as the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
As the current insolvency and winding-up provisions date back to 1984, the Government recently launched a comprehensive exercise to improve Hong Kong's insolvency and winding up regime. In mid-April 2013, it published the Consultation Document on Legislative Proposals for the Improvement of Corporate Insolvency Law ("Consultation Document"). An amendment bill is expected to be introduced in the Legislative Council by 2014/2015.
In parallel, the Government announced its plan to introduce a statutory corporate rescue procedure to address Hong Kong's lack of a statutory moratorium for companies in financial difficulties wishing to consider rescue plans and avoid liquidation. Detailed proposals are expected to be announced later this year.
Top Ten Proposals for Improvement of Corporate Insolvency Law
Major highlights of the legislative proposals set out in the Consultation Document include:
- providing a prescribed form for a statutory demand by creditors;
- introducing self-contained provisions on unfair preference in the Companies Ordinance (as opposed to the present position of relying on cross-references to relevant provisions of the Bankruptcy Ordinance) and modifying and broadening the definition of "associate" to cater to the application of the definition in a winding up context;
- improving the effectiveness and flexibility of the provisions for invalidating floating charges created before the winding up of a company by adding new provisions in relation to floating charges created by a company in favour of persons who are connected with the company, and to expand the scope of the exemption for genuine credit transactions from invalidation by broadening the forms of consideration for the creation of valid charges;
- enhancing creditor and asset protection by inserting new provisions relating to a company's transactions at an undervalue to enable the Court to avoid transactions conducted by a company for a consideration significantly less than the value of the consideration provided by the company;
- codifying the common law position that a person being summoned for a private or public examination by the Court pursuant to a liquidator's investigative powers cannot invoke the privilege against self-incrimination during the examinations, but subject to certain exemptions for subsequent criminal proceedings if certain conditions are satisfied;
- widening the scope of application of the public examination procedure by removing the requirement for the Official Receiver or a liquidator to allege that fraud had been committed in its investigative report prior to initiating the public examination procedure, and to add further categories of persons who may be subject to a public examination, including a former liquidator or receiver of the company or a person who is or has been concerned, or has taken part, in the management of the company;
- restricting the powers of a provisional liquidator in a voluntary winding up to reduce risk of abuse of procedure, changing the relevant notice provisions to enhance creditor and shareholder protection and to retain the voluntary winding up procedure as a method of "last resort";
- expanding the list of persons disqualified for appointment as liquidator or provisional liquidator, such as those with a conflict of interest or subject to a disqualification order pursuant to the Companies Ordinance; and
- enhancing the regulation of liquidators by enforcing liquidators' liabilities notwithstanding their release by the Court.
The Consultation Document was published on 16 April 2013 and the Government will run a three-month public consultation on the proposals before preparing the necessary bill to be presented to the Legislative Council.
A new Bill on Corporate Rescue?
We will keep a keen eye on developments for the proposed statutory corporate rescue procedure. It has long been considered one of the shortcomings of the current Hong Kong regime that there is no statutory moratorium available to bind creditors and protect struggling companies while they formulate and implement corporate rescue plans. While provisional liquidator procedures have in the past been flexibly employed to facilitate corporate rescues, the courts have made it clear that this is not the intended use of those procedures, and in practice they are not a satisfactory stop gap.
Along with accompanying insolvent trading provisions, the Government has twice previously attempted to introduce corporate rescue provisions, firstly as part of the Companies (Amendment) Bill in 2000 and again as a separate Companies (Corporate Rescue) Bill in 2001. The unsuccessful proposals were also re-examined in 2009, when the global financial crisis highlighted the need for short-term assistance for companies with long-term viability. One of the major hurdles was the handling of employees' outstanding entitlements. Following the consultation in 2009/2010, it was intended that a bill be introduced in early 2011 but this did not happen.
The Government now plans to take forward the proposals for a new corporate rescue procedure and insolvent trading provisions as part of the overall corporate insolvency law improvement exercise, and plans to further consult stakeholders in 2013/2014.