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Jane Moir

WHATEVER HAPPENED TO Hong Kong's Chapter 11?

Eight years ago, there was a bright idea to enact a law - similar to those in Britain, the United States or Singapore - that would help rescue flagging companies. The Law Reform Commission was put on the case and came up with a plan in 1996.

Three years later, the government managed to scrape together a consultation paper on provisional supervision, a procedure that would allow companies breathing space in which to devise a rescue.

By late 1999, a bill was ready to be submitted to the Legislative Council.

There was a slight problem, however. The banks, accountants, lawyers and academics all hated it. Labour groups had 'hijacked' the bill: this piece of legislation went above and beyond usual labour laws in securing workers' payouts.

All salaries would have to be settled before provisional supervision could take place.

Years of hissing and jostling ensued between the two camps. The government decided to re-draft the bill. When it  returned it to the Legco table, however,  the most controversial provision was intact.

The critics hammered home the reality: ailing companies simply would not  have the cash to pay off employees  in full. Potential white knights would think twice about stepping in.

Frustration set in and enthusiasm began to wane. By the time the government came up with a compromise last summer - capping the  payouts at HK$258,500 per employee - apathy had set in.

The very fact that this mediocre bill has sat idly on the Legislative Council list ever since suggests even the fiercest of critics have become tired of this play.

In any case, a rescue culture started to gather pace in the courts. Existing laws on insolvency were being tweaked to promote a de facto Chapter 11 situation. A number of judges have taken the view that provisional liquidators should be empowered to explore rescue proposals.

As long as there has been  majority support for a scheme of arrangement, the courts have tended to give their blessing.

However, a case involving a French bank and a fraud-infested chaebol may  throw a spanner in the works, or at the very least throw the spotlight on  some of the drawbacks of this 'virtual Chapter 11'. Credit Lyonnais has been filling the coffers of lawyers in recent weeks as it seeks to enforce a US$8 million judgment against the Hong Kong arm of South Korea's third-largest conglomerate, SK Global.

The sum was not disputed. Judgment was granted. But the possibility that SK Global Hong Kong may be part of a restructuring of the global group has made it tricky for the French bank to enforce the debt.

The Hong Kong subsidiary of SK Global says it is unfair for Credit Lyonnais to enforce its claim - in all likelihood by seeking to liquidate the company - while the rest of the foreign creditors of the company are holding back, pending the outcome of restructuring talks.

Credit Lyonnais has  been ordered by the courts in Hong Kong to hold off until July 21. But it intends to take its case against the 'Chapter 11' of SK Global Hong Kong to the Court of Appeal. Its argument is simple: there is no chapter 11 legislation in Hong Kong. The courts cannot fill in the gap. The courts cannot rewrite the Companies Ordinance to compensate for the farcical lack of a corporate rescue law. It has a right to enforce its judgment.

The law as it stands does say that if a company owes money to somebody and it cannot pay it back, that company deserves to be wound up. If that is  not allowed  to happen,  creditors could get back a lot less. Others will argue that liquidation takes years and usually offers lower returns.

It is worth taking a look at the performance of some of these companies post-workout. Many have survived by the skin of their teeth only to hobble along for a few years before running into trouble again.

The 'Chapter 11' issue,  however, will ultimately be one of judicial discretion when deciding how much consideration to  show to a restructuring proposal.

But the argument will be strongly made that the courts have been supplementing perceived deficiencies in the statute books. This does not put policy-makers in a flattering light.



A sorry chapter for corporate rescue bill