Hope for troubled firms gathers dust in backlog
Jake van der Kamp
One of the things that makes Hong Kong's financial troubles worse than they could be at the moment is that no formal system exists for working out the financial difficulties of companies that face insolvency but can still be saved.
When banks come together to work out a rescue for a troubled company to which they all have credit lines, any one of them can destroy the rescue. As soon as one jumps to call in its loan, they all have to do so or risk losing any share of the remaining assets. It means that a company's chance of survival is only as good as the most timid of its creditors perceives it to be.
It is particularly a problem at the moment because many foreign banks have taken fright about Asian risk and treat all their Asian assets as dubious without discriminating sufficiently between them. It does no good for such a bank's local man to argue that the good is being abandoned along with the bad. It is a head office decision and head office is far away.
The solution is gathering dust at the moment in the Government's backlog of legislation. It is the Provisional Supervision Bill, modelled on the United Kingdom's Administration Act.
Under this system, a troubled company can apply to the courts to have an administrator or supervisor appointed in charge of its affairs. The supervisor is then given a stipulated period of time in which to formulate a rescue plan and submit it to the creditors. If a majority of them approve it, they are all bound by it and cannot petition to wind up the company unless the plan fails or the company does not comply with it.
It differs from Chapter 11 proceedings in the US in that approval of a majority of creditors is required. In Chapter 11, the courts approve such plans.
The bill was first submitted before the handover last year but was stalled by proposals for amendments. One suggestion from the Labour Department was that supervisors be made responsible for payment of wages.
This is unlikely to work. Supervisors would be agents working for fees. Few would be prepared to take on such work if they were also forced to bear the cost of unpaid wages. They would want very high fees to compensate them for such a risk and would have to consider taking out insurance policies against it.
But the delay mostly results from the fact that the Provisional Legislative Council, appointed on July 1 last year, was only prepared to deal with the most pressing legislation and this did not seem pressing at the time.
It certainly is now but now the bill is unlikely to surface before spring.
This is unfortunate. Accountants who have braced themselves for a flood of insolvency work since the economy faltered last year have seen less of it than they expected, but the figures are definitely rising and there is a growing number of companies that could benefit from passage of the legislation.
Without it there will almost certainly be unnecessary insolvencies this year. Jobs that could be saved in a time of rising unemployment will instead be lost, banks will have weakened themselves needlessly and financial confidence will be shaken when it could be strengthened.
It is time for someone in government to dust off this legislation and bring it to the front of the queue. It is an essential feature of a modern financial system and much too long delayed.
If Hong Kong is to emerge from the present troubles with its reputation as a regional financial centre intact, this will have to be part of it.
And it will never be needed so much as it is needed now.