Chapter 11 expected to face stiff opposition
A third attempt by the government to introduce United States Chapter 11-style bankruptcy protection in Hong Kong is likely to face opposition from legislators and accountants, who still have doubts about the proposal.
The government yesterday released a consultation paper on its revised draft of the Corporate Rescue Bill that aims to give troubled companies a six-month breathing space to restructure or find a white knight, during which no single creditor could apply for a winding-up order.
If the three-month consultation receives a positive response, the government will set about bringing an end to one of the longest debates on law changes, with a bill to be tabled by the end of next year or early 2011, according to John Leung Chi-yan, the deputy secretary for Financial Services and the Treasury.
The Law Reform Commission first proposed a corporate rescue procedure in 1996 and the government submitted its first draft to the Legislative Council in 2000, but it failed to win support from accountants, lawyers and the business community, who were against requiring firms to pay all employee wages and entitlements in full before they could begin seeking a rescue plan.
In 2003, the government added a HK$270,000 cap on the pay-outs, but this was rejected, too.
'The current global financial crisis points to this being the right time to reconsider introducing bankruptcy protection in Hong Kong,' Leung said.
A new proposal to address the key issue of payments to employees suggests giving companies a 60-day grace period in which to give each employee up to HK$36,000 of unpaid wages. If a rescue plan is later approved, then the company would have a year to pay any outstanding amounts.
If no rescue plan emerges, employees could claim money from the Protection of Wages on Insolvency Fund for a maximum of HK$36,000.
Trade union legislator Lee Cheuk-yan said the proposal failed to give sufficient protection to employees.
'I think the initial cap should be at least HK$100,000 for each employee. The cap of HK$36,000 could be good enough for low-paid staff but not good enough for the middle management,' Lee said.
'The government should make sure employees receive better treatment in a corporate rescue than in a winding-up situation.'
John Lees, a director of John Lees Associates, which handles liquidations, said the proposal did not address the situation where many Hong Kong companies had their assets and operations on the mainland.
'It's not much use restructuring the Hong Kong balance sheet if all the operating assets and trade creditors are across the border,' Lees said.
Bankers and brokers, however, welcomed the proposal.
Chan Tze-ching, an adviser to Bank of East Asia, said introducing bankruptcy protection gave lenders more time to reach agreement with indebted companies.
'From the US experience, the bankruptcy protection order would increase the chances of a company being rescued. Hong Kong is an international city and it should match international practices,' Chan said.
Legislator Chim Pui-chung, who represents the brokerage community, also supported the proposal.
'If a company is wound up, shareholders usually get nothing back. If bankruptcy protection can help a company restructure and continue trading, it would at least reduce the loss to shareholders,' he said.