Insolvency law back on the agenda after financial crisis

Hong Kong is taking a second look at the Companies Ordinance proposals as the economy is limping back to normal. The enacting of an insolvency law is a well-visited proposition in Hong Kong.

Such a law was proposed in 2000 and again in 2003, but was not enacted by the Legislative Council. Hong Kong had just gone through economic downturns - the Asian financial crisis and the period during the severe acute respiratory syndrome epidemic. But as the economy recovered after each crisis, the sense of urgency behind having a restructuring law quickly faded.

A year ago, amid the global financial crisis, Hong Kong's lack of optimal market rescue procedures brought provisional supervision back into focus as part of the revised Companies Ordinance. Provisional supervision allows a company to appoint a provisional supervisor, an individual, to help prepare a proposal for creditors and shareholders to restructure the business. In providing a moratorium period it allows a company in distress the time needed to focus on restructuring, as opposed to winding it up, with the goal of returning it to financial solvency.

'I think Hong Kong probably does feel it's lagging behind because there are corporate rescue procedures enacted in lots of places around the world, China being one of them,' says Anthony Boswell, partner at PricewaterhouseCoopers Hong Kong.

The mainland's enterprise bankruptcy law was introduced in June 2007. It has three major provisions: first, you can close down a company because it is insolvent; the second provides the framework for restructuring the company; and the third provides a scheme where creditors and debtors can agree on a plan. The mainland's law enables restructuring where either creditors or the debtor can apply for a court order. The court in turn can appoint an administrator.

The legislation is independent of the mainland's company law, unlike the proposed Hong Kong provisional supervision which would be part of the Companies Ordinance.

Boswell acknowledges that while the lack of corporate restructuring is probably seen as a gap within the legislative framework in Hong Kong, the city is such a special and dynamic environment that a large number of companies have been able to restructure through an informal work out process.