Corporate rescue bill not worth saving

Liquidators have urged the government to speed up the legislative process for a proposed corporate rescue bill to allow troubled companies more time to find white knights. They say the city lags other markets in terms of a liquidation law for firms.

SCMP, June 3

And will lag it forever is my guess. Very little gets through the Legislative Council any longer. My crystal ball tells me that in years to come Hong Kong post-1997 will be held up in political science classes around the world as an example of a completely unworkable political system.

But this salvaged corporate rescue bill is likely to sink again before it gets to Legco. The reason is the rule in corporate bankruptcies that taxes and wages must be paid first out of what is left after dissolution, and shareholders' equity paid out last. I am not overly bothered about when tax is paid. Government never struggles to pay the rent. But people do and there is a strong undercurrent of suspicion in this town that in practice it is shareholders who are paid out first and wages last.

It is why we have a Protection of Wages on Insolvency Fund, financed by an annual levy of HK$250 on each business registration certificate. If your employer goes bust and vanishes, leaving your wages unpaid, the fund will make it up to you for up to four months' pay. But who will speak for unpaid wages if we now adopt an American-style Chapter 11 form of pre-bankruptcy in which companies can go into never-never land and continue to operate for years, ignoring all previous obligations?

Guarantee unpaid wages and you can have your legislation, say the unionists, but supporters of the bill object. A firm that can guarantee wages would never need corporate rescue in the first place, they say. This is where the legislation ran itself on the rocks 10 years ago and where it is still stuck now and will remain. In my opinion, the only move it can make is to roll over and sink.

And you will not find me among the mourners. I think the existing bankruptcy provisions in law are just fine for the purpose and that Chapter 11 is a fudge that allows smooth-talking operators to continue losing other people's money long after they should be cut off.

The Chapter 11 line holds that it is unfair to allow any single unpaid creditor to put a company into bankruptcy, as the law at present allows, when that company may still be able to pay its debts if given a period of recovery time in which creditors cannot demand their money back.

In practice it rarely happens that way. There may be cases in which a single creditor bankrupts a company out of pique but he pays a high price to do it. Other creditors will invariably pay him off if the thing has any hope of surviving. Only one unpaid creditor is needed for bankruptcy but he almost always has the tacit agreement of the others.

If the thing has a hope of surviving it will survive anyway. The receiver will quickly know if it makes money on an operating basis. The existing shareholders will then lose all, the creditors will lose some, the business stays in business and the customers will not even know it went bankrupt.

It then becomes an object lesson to equity investors not to scorn debt as a sub-species of investment. As a bank depositor whose money it likely was in the first place, I am all in favour of such object lessons. No unavoidable economic damage was incurred. Why then grant Chapter 11-style special favours?

On another plane, this is all of a piece with other measures such as deposit protection insurance to try to eliminate risk from investment, all as futile as the perpetual motion machine.

They just reduce risk in one place to create more of it in another. All that Chapter 11 does is raise the cost of debt financing to compensate lenders for the extra risk of not being able to recover their money when the need arises. And note that bit about "the city lags other markets". Once again we have the nonsense of doing something because Singapore does it.

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