The government is currently consulting on its latest proposals to reform Hong Kong’s corporate insolvency and winding-up regime. CSj interviewed the Financial Services and Treasury Bureau about the aims of these reform proposals.

W hat are the aims of the new legislative proposals set out incorporate insolvency consultation?

‘The underlying objectives of the corporate insolvency law improvement exercise are to facilitate more efficient administration of the winding-up process and increase protection of creditors through streamlining and rationalising the company winding-up procedures and enhancing regulation of the winding-up process having regard to international experience. An effective company winding-up process with due regard to the protection of creditors will facilitate the development of Hong Kong as a global major business centre and reinforce our position as an international financial centre.’

Why does the current consultation not include proposals for a statutory corporate rescue procedure and insolvent trading provisions?

‘The government included legislative proposals on corporate rescue and insolvent trading as part of the Companies (Amendment) Bill 2000. However, due to time constraints and the complexity of the issues involved, the relevant provisions on corporate rescue and insolvent trading were removed from the Bill.

The government then introduced the Companies (Corporate Rescue) Bill into the Legislative Council in 2001 with a view to introducing a statutory corporate rescue procedure into our corporate insolvency regime. However, due to concerns of Legislative Council members at that time on a number of issues including, for example, how to deal with employees’ outstanding entitlements under the proposed corporate rescue procedure, the Bill was not enacted.

Having critically reviewed the previous proposals, the government conducted a public consultation in late 2009 on the conceptual framework and a number of specific issues relating to the corporate rescue procedure and insolvent trading provisions. Since the publication of the consultation conclusions on the review in July 2010, the government has been studying the various other key issues and is working further on detailed proposals. We plan to take forward the proposals of a new corporate rescue procedure and insolvent trading provisions as part of the corporate insolvency law improvement exercise. We will further consult stakeholders on the detailed proposals in 2013/ 2014.’

Can you explain the thinking behind the new provisions regarding ‘transactions at an undervalue’?

‘At present, there is no provision in the Companies Ordinance which is specifically designed to enable the court, on application by the liquidator, to avoid ‘transactions at an undervalue’. Such provisions can be found in legislation in the UK and Australia. There are also similar provisions in the Bankruptcy Ordinance of Hong Kong.

For the better protection of creditors against depletion of the assets of an insolvent company, we propose to introduce in our corporate insolvency law new provisions regarding transactions at an undervalue, that is, an outright gift given by the company or transactions entered into by the company on terms that provide for the company to receive no consideration or for a consideration the value of which is significantly less than the value of the consideration provided by the company. This proposal will make up for the deficiency that currently exists in our law.’

Can you discuss the proposals concerning the appointment, powers etc, of provisional liquidators and liquidators?

‘There is currently no express provision in the Companies Ordinance disqualifying a person for appointment as a liquidator or a provisional liquidator where his relation with the company could constitute a conflict of interest or where he is mentally incapable of doing so. There is also no express provision in the Companies Ordinance stating that a person subject to a disqualification order made by the court is not qualified to be appointed, and the effect or consequence of an appointment of such person. Therefore, we propose to expand the provisions on disqualification of persons for appointment as a provisional liquidator or liquidator to cater for the above.

Further, in order to enhance transparency in the appointment process and to enable the appointing parties to make an informed decision on the appointment of provisional liquidators or liquidators, we propose to introduce a new statutory disclosure system whereby prospective provisional liquidators or liquidators are required to disclose information on potential conflicts of interest.

As regards powers of provisional liquidators and liquidators, we propose to set out the powers now found in sections 199(1) and (2) of the Companies Ordinance in tabulated form in a Schedule in order
to improve the clarity of the provisions. In addition, as it is very common for a liquidator to engage a solicitor to assist him in the performance of his duties, and sanction is usually given for the liquidator to exercise the power to appoint one in a normal court winding-up case, we propose to remove the current requirement for the liquidator to apply to the court or the committee of inspection for exercising the power to appoint a solicitor in order to streamline the process and reduce costs. However, the liquidator must give notice of his exercise of this power to the committee of inspection or, where there is no committee of inspection, to the creditors.’

What is the purpose of the introduction of self-contained provisions on ‘unfair preference’ in the Companies Ordinance?

‘At present, the Companies Ordinance does not have self-contained provisions on unfair preferences concerning companies being wound-up. Instead, the Companies Ordinance applies the provisions on unfair preferences in the Bankruptcy Ordinance. When these Bankruptcy Ordinance provisions are applied in the company winding-up context, a number of problems arise. For example, while the expression “debtor” refers to the bankrupt in the bankruptcy context, the same expression can only mean the debtor company but not a director of the debtor company in the context of company winding-up. As
a result, the term “associate”, which covers the spouse and relatives of the debtor (the bankrupt) when applied in bankruptcy context, does not cover the spouse and relatives of a director of the debtor company when applied in company winding-up context. This is clearly not desirable as the spouse and relatives of a director of the debtor company are likely recipients of unfair preferences.

New self-contained provisions on “unfair preference” are proposed to address the anomalies relating to the application of the bankruptcy provisions in the winding- up context. The new provisions would make reference to a “person connected with the company” which includes an “associate” and we also propose a separate definition of “associate” which would also cover associated companies.’

Can you discuss the provisions for a prescribed form for a statutory demand by a creditor?

‘At present, there is no prescribed form in the Companies Ordinance for a statutory demand, so a company may be tempted to challenge the validity and effect of a purported statutory demand it is served with. Further, companies which fail to appreciate the serious consequence of a statutory demand could be caught up in winding-up proceedings. Therefore, we propose to adopt a prescribed form of statutory demand, which should contain a statement of the consequences of ignoring the demand, so that a debtor company would be alerted to the consequence of ignoring the demand and also unnecessary and costly dispute over the validity and effect of any purported statutory demand could be avoided.’

What legislative timetable is the government hoping to achieve for the current consultation proposals?

‘Subject to the outcome of the consultation, the government plans to introduce an amendment bill into LegCo in 2014/ 2015.’

Is Hong Kong lagging behind other major jurisdictions in terms of its corporate insolvency legislation?

‘The corporate insolvency and winding- up provisions in Hong Kong were first introduced in 1865 and those in the Companies Ordinance now are broadly based on the Companies Act 1929 and the Companies Act 1948 of the UK. The last major review of these provisions was conducted back in 1984. While a number of amendments have been made to various insolvency and winding-up provisions in the Companies Ordinance since then with focus on specific issues, some common law jurisdictions have embarked upon more extensive exercises to reform their corporate insolvency and winding-up laws. For example, in the UK, the Insolvency Act 1986 was enacted and substantial amendments were made to the Australian corporations law in 1993.

Hence, there is a need to conduct a comprehensive review of the corporate insolvency and winding-up provisions in the Companies Ordinance in Hong Kong to ensure that our legislation provides an effective process of liquidation in Hong Kong and does not lag behind other major jurisdictions.’

The consultation paper, available on the Financial Services and Treasury Bureau website (www.fstb. gov.hk), closes 15 July 2013.

SIDEBAR: Cap 32

At present, the statutory provisions relating to Hong Kong’s corporate insolvency and winding-up regime are principally contained in the old Companies Ordinance (Cap 32). The Companies Bill, which is the result of a comprehensive review of the provisions concerning the operation of live companies in

the Companies Ordinance, was enacted on 12 July 2012 as the new Companies Ordinance. When the new Companies Ordinance comes into operation, currently planned for the first quarter of 2014, most of the provisions concerning the operation of live companies in the old Companies Ordinance will be repealed and the remaining provisions, including the insolvency and winding-up provisions, will be retitled as the Companies (Winding Up and Miscellaneous Provisions) Ordinance.

The old Companies Ordinance will therefore become the repository for the two major areas excluded from new ordinance – the prospectus regime and the winding-up and insolvency provisions. However, both these areas are currently under re-examination and are unlikely

to stay in their current form. The Securities and Futures Commission plans to move the provisions relevant to the prospectus regime into the Securities and Futures Ordinance and the government has now put up for public consultation new proposals on how to reform Hong Kong’s winding- up and insolvency provisions.

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