New corporate restructuring law in HK 'will be welcomed'
Although Hong Kong was affected by the global financial crisis, it has fared relatively well compared with its Western counterparts in terms of bankruptcies and foreclosures.
Hong Kong-based Michael Barker, head of Herbert Smith's restructuring and insolvency practice in Asia, said: 'There have been a small number of insolvencies or restructurings over the past few months [as] abundant liquidity in Asia has enabled many otherwise struggling companies to keep going.'
Moreover, high business and asset valuations - especially for property - have enabled banks to avoid problems.
However, Barker conceded that some 'subordinated lenders', such as bondholders and private equity firms, have had a few defaults.
Nevertheless, Hong Kong lacks an administration scheme to allow distressed companies a moratorium opportunity before liquidation, and is considering formulating its own rehabilitation law.
The main difficulty in restructuring in Hong Kong is the cumbersome legal system in which a formal restructuring is conducted.
'The provisional liquidation route has sometimes worked in the past where this has been used as a tool to allow a restructuring scheme or arrangement to be put in place,' said Bruce Cooper, a finance partner with Freshfields Bruckhaus Deringer. 'But there are technical doubts as to whether it can be made to work in all circumstances, as it depends on showing, in general terms, a danger to assets.'
'The Companies (Corporate Rescue) Bill, which would have introduced the provisional supervision of companies, had been gathering dust in the Legislative Council since 2001.
'It has now been dusted off, amended and is going through a consultation process,' said Graham Ridler, head of restructuring and insolvency at DLA Piper Hong Kong.
Cooper believes that the recent release of new proposals by Legco 'resurrects and improves' the 2001 draft bill.
'This may become law within months, which will be welcomed,' he said.
However, Ridler is not as optimistic and thinks the bill will not become legislation until late-2010 at the earliest, but agreed 'the contents are fairly encouraging'.
Until then, practitioners will have to continue to use a combination of the appointment of a provisional liquidator to create a moratorium and put together a scheme of arrangement - neither of these procedures are being used for their original purpose, which can lead to various practical and procedural problems.
To that end, Ridler recommended conducting informal restructurings because it was less costly and cumbersome 'if you can avoid the courts altogether'.
This year also saw the first high profile usage of the mainland's new company rehabilitation law in the Ferro China case.
However, Cooper does not see the mainland's new bankruptcy law as a complete solution.
'There is a lack of transparency in the new Enterprise Bankruptcy Law.' He also cited the lack of domestic experience in bankruptcy, though, he conceded, it was improving.
There were also concerns about whether it was useful to foreign joint ventures on the mainland because, generally, the law had not been extensively used by foreigners, Cooper said.
'Otherwise, [on the mainland], the significant de-facto control of onshore company officers translates into real issues if foreign lenders wish to enforce over domestic assets or companies,' Cooper said. His point is salient because mere possession of the company 'chop' of itself gives one significant power for obstruction.
Ridler also acknowledged that the difficulty was recovering assets on the mainland, where 'courts exercise considerable local protectionism - despite there being a reasonably good legal framework'.
Complexities arise when the company has assets or operations in several countries, and lenders, creditors and stakeholders operating under different laws and seeking to use different legal systems and processes to improve the viability of their claims.
Some large insolvencies can become real feeding frenzies, according to Hong Kong-based Christopher Stephens, a partner with Orrick, Herrington & Sutcliffe.
'The rules in some countries are often inconsistent with the rules in other countries, and lining up the stakeholders in a large-scale restructuring requires a well-considered strategic approach, supported by sound legal and financial analysis,' he said.
In some parts of Asia there was a lack of transparency, minimal local experience and high domestic legal barriers to enforcement insofar as the local judiciary might be unable or unwilling to overcome local practical obstructions put up by distressed companies and their officers, Cooper said.
Barker agreed that cross-border recognition and co-operation within Asia remained poor in bankruptcy matters, with only Japan and South Korea having adopted the UNCITRAL Model Law in this area - and the mainland and Hong Kong providing limited recognition and co-operation to other countries.
Problematic sectors in the next 12 months might be shipping and airlines as they appeared to be 'experiencing challenging business conditions', said Barker.