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Jane Moir

IN A PRAGMATIC  world, bankruptcy would be but a phone call away. Simple cases would be outsourced to the private sector. No judge would be needed. Sworn statements would suffice. The slate could be wiped clean in 12 months.

Tax dollars could be spent more prudently on investigating the illicit cases rather than plodding along for four years in a vain exercise of divvying up non-existent assets.

But this is 'sensitive' Hong Kong. The number of bankruptcies has swollen. The financial sector is feeling the profit pinch. Rising defaults have cast a pall over banks' lucrative credit-card operations.

Bankruptcy has taken on emotive proportions. It is too easy, it is open to abuse, fraud is rife. Banks in the meantime are fighting for positive credit data while legislators and consumer groups chide their reckless lending practices.

It may not be the best time for a proposal to slash the automatic bankruptcy discharge from four years to 12 months.

A pity. Because it makes a lot of economic sense.

A consultants' report on the work of the Official Receiver's Office, released on Friday, has taken the bold step of suggesting a reduced discharge period.

The government-commissioned report, by Arthur Andersen, says Hong Kong is above international norms with its four years.

In Britain, it is currently three (although it is reduced to 12 months for no-fault cases - ie, first-timers or non-contentious cases) and typically less than six months in the United States.

In the case of Hong Kong: 'At present it would appear that an extended discharge period for such bankrupts meets more of a punitive than practical purpose, but at a consequent cost to the public purse that may exceed its practical benefits,' the report notes.

To set the scene, consider the scenario of the Official Receiver's Office (ORO) and its increased workload over the past few years.

With more than 10,000 new cases last year - compared to an average of a few hundred back in the mid-1990s - the time and resources needed to process the work has placed a 'significant burden' on the existing infrastructure.

It also limits the extent of investigation.

'Simply accepting the current trend is likely to overstretch the capacity of the ORO, with potentially serious consequences for the effectiveness and credibility of the bankruptcy process,' the report concludes.

A fast-track option would lighten the load. The simple cases - where assets are limited and the bankruptcy is 'clean' - could also be outsourced to the private sector.

Of last year's cases, 91 per cent involved bankrupts with assets of less than HK$50,000. Once you have discovered this limited value, why prolong the bankruptcy process?

In theory, the four years is time used to obtain further assets for the creditors, and protect them by limiting a bankrupt's ability to obtain further credit.

Shortening the time for discharge 'recognises the limited benefit of an extended bankruptcy period where no additional assets are likely'.

The report points out: 'No additional purpose is served by lengthy or extensive bankruptcy procedures. The costs will exceed the assets available, and have to be borne by a third party [typically the public purse].'

The fast-track option could be limited to these debtors - the cases that require no further investigation or administration.

Self-certification is another option. The debtor makes a sworn declaration of their assets and liabilities, and the discharge period is cut.

Britain has it. A telephone interview system for consumer bankruptcies is even being explored. Australia offers a discharge after six months in certain cases.

Shorter case duration equals reduced cost.

Investigations could be limited to the cases that actually need it.

Hong Kong could also tighten the penalty regime for the reckless and abusers.

'This would move the position away from a presumption of equal investigation of all cases, to one of limited investigation in summary cases unless there were specific grounds or creditors' concern,' the report states.

The role of the court has also been broached.

Consider the case load last year; a 140 per cent increase in bankruptcy cases at the Court of First Instance.

Direct applications could instead be made to the ORO, slashing the role of the courts. If the case did not go according to plan, it could be converted into a full, court-supervised bankruptcy.

More time could be devoted to inquiry and enforcement. This column has explored shortcomings in the current enforcement system - against misbehaving directors in particular - on several occasions.

To say that penalties are low is an understatement. They are also out of step with the cost of taking these directors to task in the first place.

'The level of penalty achieved has reached the nonsensical position where it is cheaper not to comply with a statutory requirement and pay a court penalty than to incur the costs of complying in the first instance,' the report says.

It also appears clear that 'the current level of fine and disqualification is unlikely to prove an effective deterrent to rogue directors and bankrupts'.

The report suggests setting up a specialist unit to investigate these cases, and a modification of prosecution policy.

Bankruptcy-bashers take note, the level of prosecutions of insolvent individuals 'also seemed low'.

Less than six cases in every 1,000 ended in prosecutions last year.

Still, complaints by creditors are rare.

The enforcement dilemma is unlikely to be resolved without increased funds. And there perhaps lies the crunch. Unless the infrastructure gets the overhaul suggested, and releases funds to this area, the problem will continue.

Something has to give.

Graphic: stat04gbz



Bankruptcy costs weigh heavy