Shareholders, secured creditors, unsecured creditors and employees of distressed companies will all end up with better outcomes under the proposed corporate rescue procedure.
Hong Kong’s government has proposed to introduce legislation that will bring into force a corporate rescue procedure and insolvent trading regime.
Hong Kong has made unsuccessful attempts in 2000-2001, 2008-2009, and 2014 to introduce a statutory corporate rescue procedure. “Now – with Covid-19 severely impacting the economy – the government has finally tabled the Companies (Corporate Rescue) Bill,” the international law firm Hogan Lovells says in a recent client note.
It points to a LegCo paper published by the FSTB (Financial Services and Treasury Bureau), which argues that the existing options for distressed companies do not provide for a stay of proceedings that would prevent creditors from applying for a winding up of a company, hence “hindering the effectiveness of any rescue plan”.
A new corporate rescue procedure regime, with a statutory moratorium, would provide the necessary breathing space for financially distressed companies to preserve assets and formulate a rescue plan, the paper says, adding that any new regime should provide a “timely and useful option” for companies experiencing short-term difficulties” brought about by impacts from Covid-19.
The paper also says shareholders, secured creditors and unsecured creditors will all end up with better outcomes under the new corporate rescue procedure, which will also enable many employees to retain their jobs as distressed companies continue to operate.
The proposed corporate rescue procedure will allow the appointment of a provisional supervisor to act as a distressed company’s agent while it is continuing to act as a going concern.
The period of provisional supervision is set at 45 days to allow enough time for a rescue plan to be drawn up, but this can be extended up to six months, with consent from creditors, or for more than six months upon a successful court application.
The Bill also includes insolvent trading provisions to ensure that directors are held responsible if they have not acted promptly where a company is slipping into insolvency. The court will also have a role in preventing abuse and maintaining the integrity of the corporate rescue process, while also placing a check on provisional supervisors to prevent abuse.
The proposed regime will apply to both local companies and registered non-Hong Kong companies, which includes unregistered companies.
The Bill is expected to be introduced into LegCo in early 2021, and the necessary subsidiary legislation will be tabled a few months after the Bill is enacted.
“The introduction of the Bill represents a major step forward for Hong Kong, which has long been seen as falling behind its peers in its lack of a statutory [corporate rescue procedure],” the client note says.
The client note referenced above was authored by Hogan Lovells Partner Jonathan Leitch and Senior Knowledge Lawyer Nigel Sharman.