After several unsuccessful legislative endeavors in 2000-2001, 2008-2009 and 2014, the Hong Kong government plans to relaunch the much-anticipated Companies (Corporate Rescue) Bill (the “ Bill “) in 2021.
The Bill addresses a number of shortfalls of the current regime highlighted in our previous client alert. On top of the list is the lack of a statutory moratorium (stay of proceedings), which often results in one or more creditor claims derailing any potential rescue plan to keep the subject company afloat. With a statutory moratorium outlined below in Part 1, and other measures summarized below in Part 2, the Bill now pledges to provide companies in distress with the necessary breathing space to preserve assets while restructuring their finances to maximize chances of survival.
Part 1 – Statutory Moratorium
Initiating a provisional supervision
When a company is in financial trouble, its members, directors or (if winding-up is already commenced) provisional liquidators/liquidators may appoint a provisional supervisor (” PS “) without going to the courts.
To do that, a company must notify each “major secured creditor” (” MSC “) of its intention to appoint a PS. If there is no MSC or no objection is raised by a MSC within 5 business days, the company may appoint a certified public accountant or solicitor to be the PS. In this regard, the Bill adopts the proposal from the 2014 consultation and defines MSC as a person holding charge(s) on the whole or substantially the whole of the company’s assets.
Provisional supervision and voluntary arrangement
Provisional supervision runs for an initial period of 45 business days, and may be extended up to 6 months with the creditors’ consent. Further extension has to be approved by the court.
By the end of the provisional supervision period, the PS will present to the creditors a rescue plan (known as a voluntary arrangement, “Voluntary Arrangement”) together with its recommendations at a creditor’s meeting for approval. The Voluntary Arrangement, once approved (with or without modifications), will be implemented under the supervision of a Supervisor, who must also be a certified public accountant or solicitor.
General ban on claims against a company under provisional supervision
At the commencement of the provisional supervision period, creditors are generally not allowed to sue or wind up the subject company. This will allow the PS to investigate the company’s affairs, property, business and financial circumstances and formulate the Voluntary Arrangement.
With such statutory moratorium in place, any transaction affecting the company’s assets during such period would be void unless it is entered into by the PS or with the PS’s prior consent or under a court order or unless otherwise permitted by the Bill.
The statutory moratorium will continue to bind the relevant creditors while the Voluntary Arrangement is still in place. However, it does not prevent the passing of a resolution to terminate the Voluntary Arrangement and wind up the company at a creditors’ meeting.
Specified exemptions from the statutory moratorium are provided in the Bill, such as criminal proceedings, actions under various ordinances and certain employees claims (see below).
Protection of Employees’ interests
With employees’ interests being one of the most controversial issues in the past consultations, the Bill now includes a number of safeguards to allay their concerns.
First and foremost, a company under Voluntary Arrangement must settle outstanding entitlements of employees accrued as at the commencement of provisional supervision. This will allow the employees to receive arrears of wages, severance payment and outstanding mandatory provident fund contributions, in 3 different phases, each subject to a prescribed timeframe. Employee entitlements arising after the commencement of provisional supervision will be paid in compliance with the relevant statutory provisions and terms/conditions of the employment contracts.
Failure to make any of the above payments would render the moratorium ineffective against the relevant employee, who may then present a winding-up petition against the company.
Employees will also benefit from relevant exemptions to the statutory moratorium, so that they can still claim for statutory employees’ compensation, actions to recover severance payments or that the company has dismissed employees or varied their employment terms for the purposes of evading the statutory obligations imposed on employers.
Part 2 Ancillary Measures
The Bill also imposes liabilities on directors who have not acted promptly or properly when the company is on the verge of insolvency. They will now be captured by the proposed insolvent trading provisions and liable to make a contribution to the company’s assets, if they knew or ought to have known that the company was insolvent when a debt was incurred or would become insolvent by incurring the debt.
Certain statutory defenses are available based on reasonableness and the director’s actual knowledge, skill and experience and the actual knowledge, skill and experience that maybe reasonably expected of a person in his/her position.
Additional requirements for Registered Non-Hong Kong Companies
In addition to the above prerequisites for commencing provisional supervision, registered non-Hong Kong companies are required to obtain leave from the court before appointing a PS. The court may grant leave only if it is satisfied that the requirement of “no objection” from the MSCs has been complied with by way of a statutory declaration.
While it is very common for Hong Kong companies to have assets and operation in Mainland China as well as other jurisdictions, there is no indication in the proposal that the statutory moratorium will be extended to jurisdictions outside Hong Kong. Essentially, parallel restructuring procedures in other jurisdictions remain crucial to fend off hostile creditors while companies reorganize their finances in different countries.
The Bill is a significant step forward for Hong Kong to align its corporate rescue regime with other more-established jurisdictions. More importantly, the corporate rescue option offer a timely and effective relief for companies in these challenging times.