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Jane Moir

Proposed provisions in the corporate rescue bill, which may be in place within 12 months, could help to curb fraudulent trading by holding directors liable and hitting them in the pocket.

Under present legislation, fraudulent trading is difficult to prove and cases are rarely successful, an insolvency conference was told yesterday. Lovells reconstruction and insolvency lawyer Stephen Brammar described the legislation as 'blunt and rusty', citing the subjective hurdle of intent, which must be proved.

Prosecutors must show that a director actually intended to defraud creditors by trading when insolvent.

Deputy Secretary for Financial Services Susie Ho Shuk-yee said that because of this cases were few and far between.

'Only on very, very rare occasions is this invoked,' she said, citing the 'intent' test.

The Government hopes to introduce provisions to the corporate rescue bill which will arm liquidators and creditors with the ability to hold directors personally liable for debts incurred by companies which trade while insolvent.

Under the proposed provisions, directors and shadow directors could be hauled into the civil courts and ordered to compensate creditors.

Insolvency practitioner Stephen Briscoe, of BDO McCabe Lo & Co, said the new provisions could be 'a bit of a saviour'.

'The real question is whether the directors are aware of insolvency,' Mr Briscoe said.

'If the directors allow the company to continue trading, that is the point at which the provisions can start to kick in.'

However, lawyers were less optimistic about the usefulness of the Government's original corporate rescue bill, especially over the provisional supervision of cash-strapped companies.

Mr Briscoe described this as a 'potentially fatally flawed piece of legislation', with only a small likelihood of being used by distressed companies.

'Very few companies will be able to use it as a rescue procedure,' he explained. 'We have lost an opportunity in Hong Kong to create a workable statutory moratorium.'

The bill was attacked by the insolvency profession when it was introduced into the Legislative Council last year.

The requirement for flagging companies to pay off employees in full before any provisional supervision could take place came under hefty fire, rendering it unworkable in the eyes of professionals.

'The legislation is designed to try to save jobs,' Mr Briscoe said. 'But it will result in just the same number of companies filing [for liquidation] and the same amount of jobs lost.'

The bill was mooted as a solution for ailing companies in desperate need of breathing space to work out a restructuring plan.

Most recently, financial inspector Richard Farrant said it could have made a significant difference in the Peregrine case.

The collapsed investment bank would not have been saved, but 'it might well have been possible to realise more value from the assets and derivative positions', he said.



Provisions make directors liable for payments due by companies continuing to trade while insolvent