The government has proposed measures to provide greater protection for creditors and simplify company liquidations in the first reform of the city's insolvency laws in almost 30 years.
Under the reform, companies are banned from selling their assets at below market prices up to five years before they wind up.
"This will prevent situations like where some restaurant owners sell their the kitchen equipment at an extremely low price to their partners or related persons and open another restaurant shortly after," said Patrick Ho Chung-kei, the Deputy Secretary for Financial Services and the Treasury, who released a consultation paper that will canvass public comment over the next three months.
Such below-market transactions mean companies can unload all valuable assets and leave too little for creditors such as employees, bankers or suppliers.
Companies being wound up are also banned from giving some creditors "unfair preferences" putting them in a better positions than other creditors. The court could cancel such transactions to ensure fair treatment is accorded to all creditors.
Companies which want to make unsecured creditors secured creditors, effectively allowing them to jump the queue in the priority to share the companies' assets, will be banned from doing so two years before any winding-up. The prohibition period is only one year now. Other proposals would include simplifying procedures for winding-up.
"Overall, the new proposals match with the international requirements of Britain, Australia and Singapore," Ho said.
He also said the government would this year hold another round of consultation on the long-awaited corporate rescue bill. If possible, the bill would be combined with the proposed insolvency law changes as a single bill to be submitted to the Legislative Council next year.
Hong Kong currently has no bankruptcy protection, so companies can be wound up by a single creditor. The corporate rescue bill is aimed at giving troubled companies six months to restructure or find a buyer. During the grace period, the company cannot be wound up by creditors.
The government first mulled the corporate rescue bill in 2001 and then in 2003 but failed to proceed. In the first attempt, the law would have required that employees receive all unpaid salary before a corporate rescue could begin, but liquidation professionals said companies that could comply with this were not in trouble. The second attempt tried to cap staff payments, but employees opposed it.
The latest and the third attempt, in 2009, envisaged a corporate rescue could begin the rescue process and then repay workers in phases. Ho said that based on the result of the 2009 consultation, the second round of consultation this year would collect views on details and concerns of the bill, such as the liability of directors in a company winding-up.
Legislator Sin Chung-kai supported the reform. "The government has taken too long. It should introduce the corporate rescue bill as soon as possible," he said.