As celebrations go, the 20th anniversary of Hong Kong's wages protection fund has been conspicuously bereft of revelry. Set up in 1985, the Protection of Wages on Insolvency Fund (PWIF) was to provide a safety net to help workers when a company went bust. Lately, however, there is a wariness that the fund is increasingly taking on the appearance of a convenient cash machine for directors who run their businesses into the ground. Employees of the Ocean Palace Restaurant and Nightclub in Tsim Sha Tsui's Harbour City were last week highlighting the potential for abuse: they believe their boss has fobbed off his statutory obligations to pay staff, knowing the fund will do so. The workers are owed an estimated $5 million in severance payments; they are now looking at a four-week wait for compensation from the fund and a sizeable haircut on the money owed to them. The suspicion is that their boss called in the liquidators to shirk liability over the outstanding wages, with the knowledge that the fund would soften the blow to staff. There is, they claim, a distinct possibility that the restaurant may miraculously re-invent itself in another part of town, where the rents are cheaper. The cornerstone of the insolvency fund, namely that it foster 'harmonious employer-employee relations' has fast been taking on shades of irony. While there is a consensus that it is a noble mechanism, some feel the fund could be ripe for a fine-tuning. Insolvency practitioners such as John Lees, director of John Lees and Associates, question whether a $600 flat rate annual levy on each business registration certificate - the mechanism of funding - is reasonable. 'The restaurant trade has been paying the same levy for so many employees, but only about one in 40 companies in Hong Kong have staff,' he notes. Last year, restaurant workers filed 5,333 applications to the fund, accounting for 39 per cent of claims. They also represented 30 per cent, or $115 million, of the total payouts of $380 million. The fund had by the end of last year returned to the black for the first time since the Asian financial crisis, with a surplus of $76 million. Reserves stood at $877 million in the 1996/1997 financial year. In the case of the Ocean Palace Restaurant, the Labour Department - which operates the fund - has said it will refer the case to police if there is any evidence of fraud or the illegal transfer of assets. Restaurant owners may also face a blacklist if they repeatedly declare themselves insolvent, under a package of measures being considered to prevent abuse of the fund. As the government attempts to micro-manage abuses, some feel it is neglecting the bigger picture. To truly tackle the problem, notes Ernst & Young managing director Kenneth Yeo Boon-ann, directors need to be deterred from running the company dry in the first place. 'They should go to the root of the problem, which is insolvent trading,' he said. This is when companies incur debts and liabilities after it becomes obvious it can no longer pay its debts when they become due. Jurisdictions such as Australia and Britain have laws making directors personally liable for insolvent trading on their statute books. Hong Kong has talked about it since 1995. The aim of insolvent trading law is to encourage troubled companies to start debt restructuring early. 'It's a very big deterrent, so you would think twice when you know the business is failing,' Mr Yeo said. 'People should be made aware that if they continue when they are insolvent, there are serious consequences ... you can't just continue for five years struggling, there should be a cutoff point.' A bill that would make directors personally liable for insolvent trading has twice been presented to legislators, but has failed to culminate in any law. Bundled in the contentious corporate rescue bill, it has been subject to criticism from all corners, to the extent that the draft law has been indefinitely put on hold. According to the Financial Services Bureau, the bill was last presented to legislators in June last year. It informed a Bills Committee that given the lack of consensus, further work would need to be done. 'There would be a need to review, in light of developments in other jurisdictions [on the corporate rescue and insolvent trading matters], the need for the proposed corporate rescue and insolvent trading provisions and if so, how best they should be taken forward,' a spokeswoman said. Protagonists such as Gabriel Tam Chi-kok, a partner at KPMG Financial Advisory Services, believe it is a law worth having. 'It would encourage directors to take more prompt action,' he said. 'If you don't have that sort of penalty, people don't take action until the very last minute, and that's too late.' From his experience as a liquidator, smaller operators are more prone to run a company into the ground, whereas creditors such as banks would be more alert to larger firms' financial woes and would try to stem losses as early as possible. There are, however, often honest intentions behind insolvent trading, as Alan Tang Chung-wah, a partner at Grant Thornton explains. While supporting a law against it, he notes: 'There are genuine business difficulties and failures ... to most honest businessmen, they would try to salvage the operations, go speak to bankers.' The small- and medium-sized enterprises lobby has in particular baulked at the idea of a law against insolvent trading, the phenomenon often being inevitable as firms desperately seek new funds. There is also the reality of enforcement: at the end of the day, liquidators would have to consider if a director had the financial ability to pay before taking any action, says Eammon O'Connell, Hong Kong's Official Receiver. Creditors would have to fund any legal action, which is no easy task. 'One of the problems time and time again is reluctance on the part of creditors to put this money up,' he notes.
