Compromise needed on corporate rescue law
Many of Hong Kong's key institutions are averse to change and beholden to vested interests. In this, we are, perhaps, no different from most other places where decision makers and influential people are welded to the status quo. Good ideas take a long time to be put in practice, if at all; progress, even when made, comes at a snail's pace. One of these is a US-style Chapter 11 bankruptcy protection law for distressed companies.
Our city is one of the few advanced economies that do not offer such protection. A proposal was first put forward by the Law Reform Commission more than a decade ago to rectify the situation. Two attempts to turn it into law failed because of widespread opposition from the accounting, legal and business communities over the levels of compensation for employees before a company is allowed to seek bankruptcy protection. A third attempt is now being made by the government. It deserves support.
Most companies that go under usually deserve their fate. Market forces have made the final decision for them. Some, however, deserve breathing space to restructure, raise funds or attract a white knight to help resuscitate their business. The idea is not to bail out the owners or top executives who run their business into the ground. It is to give workers a chance to keep their jobs, or if not, get back more of their wages; and to help creditors, investors and bondholders to rescue, or at least recover, some of their investment so they will not lose everything. Given their conflicting interests, it has been proposed that during bankruptcy protection proceedings, no single creditor could apply for a winding-up order.
There appears to be broad support for the basic principles enunciated in the government consultation paper. Clearly, the current financial crisis has brought home the danger of people losing their jobs and businesses going under. Finance officials, therefore, deserve some praise for the good timing they have chosen to make their third attempt. The trouble, however, is always in the details.
What killed the first two attempts was the good but unrealistic intention to offer an extraordinary level of protection for employees. The 2000 draft law required a company to pay all its workers wages and entitlements in full before being allowed to seek bankruptcy protection. If a company could do that, it may not be so financially distressed after all. The proposal was also most unusual in putting employees well ahead of all creditors, investors and bondholders. Predictably, the business and legal sectors shot it down.
The next attempt, in 2003, made a compromise and capped an employee's payouts at HK$258,500. Even so, it was rejected. This time, opposition is likely to come from workers and their union representatives. The latest compromise proposal would give a six-week grace period to pay workers, and initial payments would be capped at HK$36,000. If creditors approved the rescue plan, the company would have a year to pay its full debts to workers. If not, the company goes bust and workers get only a maximum of HK$36,000 from the Protection of Wages on Insolvency Fund.
At the moment, the proposal would protect low-wage workers the most and may be inadequate to help higher-income earners. The three-month consultation will, hopefully, gauge an acceptable level of worker compensation to help break the impasse. It is impossible to satisfy all sides completely. Given the importance of such a law for our economic health, it is time for a grand compromise to help turn this proposal into law.