Chapter 11 bill set for new try in HK
A third effort to introduce Chapter 11-style bankruptcy protection for Hong Kong companies in financial difficulties begins today - 13 years after law reformers proposed the measure and nearly a decade after the government's first draft law was rejected.
Public consultation is to start on a revised draft of the Corporate Rescue Bill, which aims to give companies breathing space to restructure and raise funds to continue as a going concern.
An accounting industry source involved in the proposal said the government wants a company in trouble to get six months' bankruptcy protection to allow it to reach a deal with creditors, or find a 'white knight' to rescue the firm, and head off its liquidation.
Previous drafts of the bill have foundered on disagreement over when and how much a company seeking such protection would have to pay its employees. The measure has been withdrawn, modified and subjected to public consultation several times.
Hong Kong is one of the few major jurisdictions without corporate rescue procedures to prevent companies simply collapsing. In the United States, indebted companies can file for what is known as Chapter 11 bankruptcy protection; Britain, Singapore, Japan, Australia and Canada have similar systems. According to the Companies Registry, 832 Hong Kong companies were wound up in the first nine months of this year, compared with 921 in the whole of last year and 900 in 2007.
The Law Reform Commission first proposed a corporate rescue procedure in 1996 and the government submitted its first draft Corporate Rescue Bill to Legco in 2000.
That draft was widely opposed by accountants, lawyers and the business community because it required firms to pay employees their wages and entitlements in full before they could begin seeking a rescue plan. In 2003, the government came up with a compromise proposal to cap payouts at HK$258,500 per employee, but that, too, was rejected.
The global financial crisis last year highlighted the need to revisit the idea of a corporate rescue plan and the government duly dusted off the bill. It has sought the views of industry experts over the past few months.
The accountant involved in formulating the consultation paper said the new proposal sought to break the deadlock over pay by giving companies a grace period of around six weeks from the initiation of corporate rescue procedures to pay some of the debts it owed employees. These initial payments would be capped at HK$36,000 per employee.
If a rescue plan were approved, a company would have a year to pay amounts in excess of that. If creditors did not approve a rescue plan and the firm went bust, employees could claim money from the Protection of Wages on Insolvency Fund up to a maximum of HK$36,000.
A government official with knowledge of the proposal said the aim of such a law would be to 'provide an opportunity for companies with viable long-term business prospects but with short-term financial difficulties to restructure their debts'.
However, there are already signs the new proposal may get short shrift in some quarters. Abraham Razack, the lawmaker representing the real estate and construction sector, said Hong Kong's legal and business systems were different from overseas markets and corporate rescue procedures might not suit the city.
Bankruptcy is the only option for firms in strife
In 2008 the number to do so was: 921