IF the significant number of bankruptcies and companies being wound up in the past year shows anything, it is that new insolvency legislation is needed in the territory, Hong Kong accountants say. The most recent statistics from the Official Receiver's Office, a government bureau which acts as liquidator in compulsory liquidations, show that the number of companies going bust are the highest they have been in a decade. Accountants and solicitors are concerned there appears to be a gap in the territory's bankruptcy laws which give cash-strapped enterprises no alternative but to liquidate, either voluntarily or by court order, or go into receivership. A compulsory liquidation, conducted under the supervision of the High Court, often starts when a creditor of a troubled company petitions the court. A liquidator goes into the company to wind it up by selling its assets and distributing the proceeds to creditors in order of preference. The tax authorities and secured creditors rank above ordinary shareholders or suppliers, for instance. Companies that could have been saved, had there been some plan early enough, go the same way as firms in dire straits. That is why accountants are eagerly waiting for a report by the Law Reform Commission due later this month, calling for a 30-day breathing space for companies, in which time the firm can call in a 'professional supervisor', namely a qualified accountant, to rescue the company or help restructure it. The report follows last year's proposal by the Law Reform Commission's insolvency law reform subcommittee, entitled 'Corporate Rescue and Insolvent Trading', and will give directors leeway to appoint someone. 'If this process begins early enough, the supervisor can assess the company's financial situation and determine if there's a viable business to save,' Darach Haughey, senior manager of corporate restructuring and insolvency services at Deloitte Touche Tohmatsu, said. The 30-day period is effectively a moratorium, during which time creditors are not allowed to take legal action against the company. There is no doubt such legislation, already present in Britain and Australia, is needed. In the 12 months to June 30, the Official Receiver's Office reported 1,048 insolvencies, the highest in 10 years. In the first half of this year, 271 of those were new compulsory liquidation orders, compared with 222 last year, while 271 were personal bankruptcy orders, against 208. That jump alone was a 26.05 per cent rise in insolvencies over the first half of 1995. Most of these businesses were those affected by the slowdown in spending, such as garment and knitting manufacturing, importers and exporters, restaurants and canteens, consumer credit, construction and engineering, electrical and electronic manufacturing, as well as transport and godowns. A lot of this could have been avoided if Hong Kong had some form of bankruptcy legislation giving companies time to turn themselves around. Such legislation would also give troubled enterprises more incentive to reveal the extent of their difficulties before a rescue would be too late. 'The stigma of liquidation or receivership can prevent a company from turning itself around,' Gabriel Tam Chi-kok, a partner at KPMG Peat Marwick, said. 'It's easier to rescue a surviving company than one that's liquidated, since assets under a forced-sale situation always generate less.' Companies, of course, do have a recourse. Section 166 of the Companies Ordinance stipulates that the creditors of a company can get together and formulate a rescue plan, or scheme of arrangement, that allows creditors to accept a percentage of the debt as final payment. The technicalities, however, are more difficult. The scheme must be approved by a majority of the creditors attending the meeting, as well as by more than 50 per cent of the creditors, who together make up at least two-thirds of the value of the creditors voting for the plan. Not only is getting agreement from such a large number difficult, the costs of putting together such a scheme often inhibit such arrangements. In the first half of this year, the High Court approved just seven schemes of arrangements. But no one is expecting the report to become legislation for a while. Deloitte's Mr Haughey said mid-1997 would be the earliest, although KPMG's Mr Tam said he expected it to become law by the end of next year.