Section 1: PROCESSES AND PROCEDURES
1.1 What reorganisation and bankruptcy processes
are available for financially troubled debtors?
Only one formal collective insolvency procedure exists under
the Companies (Winding Up and Miscellaneous Provisions)
Ordinance (the Act): liquidation.
Liquidation is a terminal procedure typically resulting in
the piecemeal sale of assets (rather than the business),
distribution of the proceeds to creditors and dissolution of
the company. It may be compulsory or voluntary. Voluntary
liquidations can be either a members' voluntary liquidation
(MVL) or a creditors' voluntary liquidation (CVL). In any form
of liquidation, a court supervised liquidator is appointed and
the directors lose control.
There is no formal rescue procedure available, although
there are proposals to introduce legislation in the
consultation and drafting phrase. In the absence of a formal
rescue procedure, the court appointment of a provisional
liquidator, which displaces the company's directors and brings
about a statutory stay on proceedings, has been used in the
past as a means to facilitate a corporate rescue. It is often
coupled with a scheme of arrangement. However this is a
somewhat limited rescue device as the court has made it clear
that a provisional liquidator can only be appointed where the
company's assets are in jeopardy.
A compulsory liquidation is commenced by filing a winding-up
petition at court. A creditor generally presents the petition.
A petition is usually presented on the grounds of insolvency
(which is tested on a current or near future inability to pay
debts as they fall due or, on a longer-term basis, where the
company's liabilities exceed its assets).
MVLs and (subject to one limited exception) CVLs are
commenced by shareholder resolution. MVLs are a solvent
liquidation process - all creditors are to be paid in full and
any surplus distributed to shareholders. CVLs are (generally)
The Banking Ordinance and Insurance Ordinance contain
special provisions in respect of authorised institutions and
insurers respectively which supplement, modify or disapply
general corporate insolvency laws.
A statutory scheme of arrangement may also be used to
achieve a corporate rescue. The scheme is a creature of general
company law rather than insolvency law (a state of insolvency
is unnecessary to support a filing for a scheme), but it
provides an important tool where there are minority dissenting
In the absence of a scheme, any restructuring will need to
be achieved consensually, whether using the contractual powers
under an intercreditor agreement to implement the solution or
Receivership is a secured creditor's enforcement remedy; it
is not a collective insolvency procedure. A receiver is
typically appointed out of court by the holder of the security
under the contractual powers contained in the relevant security
agreement. The receiver's principal role is typically to sell
the secured asset and account to the secured creditor for the
1.2 Is a stay on creditor enforcement action
When a court makes a winding-up order or a provisional
liquidator is appointed over the company, section 186 of the
Act provides that no action or proceeding may be commenced or
continued against the company, except by leave of the court.
Leave will generally be refused if the issues in the action or
proceeding can be dealt with more conveniently and with less
expense and delay in the winding-up proceedings.
However, section 186 will not prevent a secured creditor
enforcing its security through any out of court process. For
example, by appointing a receiver under contractual powers
within the relevant security agreement. Where a secured
creditor's security enforcement involves an action or
proceeding, and is caught within section 186 of the Act, leave
will usually be given.
No automatic procedural stay applies: (i) in the period
between the presentation of a winding-up petition and the court
making a winding-up order (except where a provisional
liquidator has been appointed). The company, any creditor or
contributory can however apply to the court to stay or restrain
pending proceedings (but not the commencement of new
proceedings) against the company; or (ii) in a voluntary
winding up. However a liquidator, contributory or creditor may
apply to the court for a stay on any action or proceeding.
In either case, a stay will not usually be granted where a
secured creditor is seeking to enforce its security.
While a scheme of arrangement contains no moratorium
preventing creditor action, the appointment of provisional
liquidators allows the company to benefit from the automatic
procedural stay on proceedings described above. The court may,
in any event, be prepared to grant a temporary stay of creditor
action where a scheme is being implemented and appears to have
a reasonable chance of success with majority creditor
In an informal restructuring where provisional liquidators
have not been appointed, there are no procedures applicable in
respect of stays. However, for large financial restructurings,
financial creditors tend to refrain voluntarily from bringing
disruptive action or may agree to a temporary stay
contractually to assist stability during the negotiation of a
The proposed provisional supervision rescue procedure is
expected to include a moratorium on creditor action for a
finite period during which the company and its creditors would
need to negotiate and implement a proposal for
1.3 What are the key features of a reorganisation
plan and how is it approved?
A scheme of arrangement may be proposed by the company or
any of its creditors with the company's consent.
For the most part, the terms of a scheme are not restricted
by legislation and offer a lot of flexibility. For example,
debt write-offs, debt for equity conversions and asset
disposals are all possible. Further, a scheme may bind secured
creditors without their individual consent.
In a scheme, creditors are divided into classes. For each
class, approval of the scheme requires a majority in number
representing 75% in value of the creditors in that class
present and voting at the relevant creditors' meeting, either
in person or by proxy, to vote in favour. The scheme will also
need to be sanctioned by the court and a copy delivered to the
registrar of companies before it becomes binding. The rules
regarding identification of classes have evolved in the course
of recent English court decisions and are likely to be highly
persuasive in Hong Kong.
1.4 Can a creditor or a class of creditor be
A scheme of arrangement can bind dissenting or non-voting
unsecured and secured creditors. While creditors within a class
may be crammed-down in a scheme, it is not possible to
cram-down an entire class, since each class must vote in favour
of the scheme for the court to sanction it and for it to take
effect against that class.
If the relevant creditors' meetings vote in favour of the
scheme, the court will then need to decide whether to sanction
it. In particular, the court needs to be satisfied that the
relevant statutory requirements have been complied with, the
classes of creditors were properly identified, each class was
fairly represented by those attending the creditors' meeting,
the statutory majority was acting bona fide in the interests of
the class and the approval of the scheme is reasonable.
1.5 Is there a process for facilitating the sale of
a distressed debtor's assets or business?
There is no specific legislation permitting pre-packaged
sales. Pre-packaged sales by provisional liquidators have only
been allowed in exceptional circumstances and there is no way
in which the scheme timetable can be truncated.
While there is no legislation which expressly permits
credit-bidding or stalking-horse bids, they are generally
permissible. The liquidators, provisional liquidators,
receivers or directors as applicable have discretion to
determine the way in which a sales process is conducted.
In a liquidation, a liquidator may sell, by auction, tender
or private treaty, the whole or any part of the business or
assets of the company without court approval and without
sanction from the creditors' committee of inspection. However
the liquidator may seek court approval to ensure that their
actions in dealing with the assets are not vulnerable to a
subsequent claim that the transaction was invalid.
A provisional liquidator will need to apply to the court for
permission to sell the company's asset, if such power is not
included in the appointing order.
A receiver appointed out of court by the holder of the
security under the contractual powers contained in the relevant
security agreement will derive his powers from that security
agreement, and will typically include the power to sell the
secured asset without court approval.
There is no legislation which permits liquidators,
provisional liquidators or receivers to sell the company's
assets free and clear of existing claims.
1.6 What are the duties of directors of a company
in financial difficulty?
Directors of a solvent company have a duty to act in the
interests of the company and its shareholders. When the company
nears insolvency, creditors' interests intrude on this duty;
the duties of the directors shift from advancing the interests
of the shareholders as a whole towards protecting the interests
of creditors as a class.
In addition, section 275(1) of the Act provides that the
court has the power on the application of the liquidator or any
creditor or contributory of the company to declare that any
persons who were knowingly parties to carrying on the company's
business with an intent to defraud creditors will be personally
responsible for all or any part of the company's debts. Such
civil liability only arises where the company has entered
liquidation. There is a similar criminal offence under section
275(3) of the Act that applies whether or not the company has
been, or is in the course of being, wound up.
Successful actions under section 275 and their equivalents
elsewhere are rare, due to the need to establish actual
dishonesty or fraud.
This issue has been addressed in respect of directors in
England following the introduction of a wrongful trading
provision under section 214 of the Insolvency Act 1986 that
imposes personal liability on directors without the need to
prove fraud. Directors (including shadow directors) can be
personally liable to contribute to an insolvent company's
assets if, before the commencement of the winding up, the
director knew or ought to have concluded that there was no
reasonable prospect that it would avoid going into insolvent
liquidation, and, once aware (or deemed aware), the director
failed to take every step with a view to minimising the
potential loss to the company's creditors which they ought to
have taken. The government is looking at introducing similar
1.7 What priority claims are there and is
protection available for post-petition credit?
Where a company has entered liquidation, a secured creditor
may elect to enforce their security, rather than leaving the
liquidator to realise the secured asset. Regardless, secured
creditors' claims, in respect of the proceeds of realisation of
assets secured in their favour, rank ahead of all other claims,
save for: (i) costs of preserving and realising such assets;
and (ii) preferential claims, when the proceeds of realisation
of assets are subject to floating security (if the free assets
are insufficient to pay those preferential claims). Any balance
owed to secured creditors are unsecured claims and will be
subject to the priority claims described below.
Preferential claims primarily comprise certain amounts owed
to employees and the government. There are additional
categories of preferential claims in the winding up of banks
and insurance companies.
For proceeds of realisation of unsecured assets, the payment
order in a liquidation is as follows: (1) the liquidation's
costs and expenses; (2) preferential claims; and (3) unsecured
claims (which rank pari passu).
All sums owed as a result of mutual dealings between each
creditor and the company must be set-off; the creditor pays to
or claims from the company only the net sum. Such set-off is
wide-ranging, automatic, self-executing as at the commencement
of the liquidation and cannot be excluded by contract.
For post-petition credit, a liquidator can raise money on
the security of the company's assets without court approval and
without sanction from the committee of inspection. A
provisional liquidator can raise funds on the security of the
company's assets if granted this power by the court. Such funds
rank as an expense of the liquidation (unless raised by the
provisional liquidator and his appointment is not followed by a
liquidation; such funds would need to be repaid as a condition
of his discharge from liability). Within the category of
expense claims, such new funding will be a super-priority
expense claim, payable in priority to the liquidator's
remuneration. Unlike the US Bankruptcy Code, there is no
legislation permitting the security granted in respect of such
new money to have priority over existing security; any such
priority would require the agreement of the relevant secured
Whether or not the company is in liquidation, where a
receiver is appointed over assets secured by a floating charge,
the proceeds of realisation of those assets will be used to
satisfy the claims of the secured creditor in whose favour that
asset is secured, which will rank ahead of all other claims,
save for those described in 1.7(a) (i) and (ii). Any surplus is
paid to the company.
1.8 Is there a different regime for banks and other
The Banking Ordinance gives the Hong Kong Monetary Authority
(HKMA) the authority to exercise certain powers in relation to
an authorised institution (AI) that is likely to be unable to
meet its obligations, is insolvent or is about to suspend
These powers include, following consultation with the
Financial Secretary, the right to: (i) impose restrictions on
such AI; (ii) appoint an adviser from whom the relevant AI will
be required to seek advice on management of its affairs,
business and property; and (iii) appoint a manager who will
manage the affairs, business and property of the AI. Where the
courts have granted an order for the winding-up of an AI, the
right to appoint an adviser or manager cannot be exercised by
There have been consultations on establishing an effective
resolution regime for financial institutions (FIs), including
financial market infrastructures (FMIs). The proposed
resolution regime seeks to bring Hong Kong in line with the
Financial Stability Board's Key Attributes of Effective
Resolution Regimes for Financial Institutions, which put in
place reforms so that future banking failures can be safely
managed without recourse to public funds. The first
consultation was released on 7 January 2014 by HKMA, the
Securities and Futures Commission (SFC) and the Insurance
Authority (IA). The second consultation was launched on 21
January 2015 and one more consultation is expected this year
with the aim to introduce legislative proposals into the
Legislative Council by the year-end.
The scope of the resolution regime should cover: (i) all
AIs; (ii) licensed corporations designated as non-bank
non-insurer global systemically important FIs; (iii) licensed
corporations that are subsidiaries or branches of groups which
are identified as being or containing global systemically
important FIs; (iv) FMIs designated under the Clearing and
Settlement Systems Ordinance or recognised as clearing houses
under the Securities and Futures Ordinance; and (v) certain
A single resolution framework would be established for FIs
in different sectors, with the HKMA, SFC and IA designated as
the resolution authority for FIs operating under their
Section 2: INTERNATIONAL/CROSS-BORDER ISSUES
2.1 Can bankruptcy or reorganisation proceedings be
opened in respect of a foreign debtor?
The court has jurisdiction to wind up a foreign debtor as an
unregistered company, based principally on a sufficient
Exercise of the winding-up jurisdiction remains
discretionary. The same approach applies in respect of the
court's jurisdiction to appoint provisional liquidators to
For a foreign debtor, the most common ground on which a
petition is usually presented is insolvency.
There is no ability for an unregistered company to be wound
up voluntarily under the Act.
The court has jurisdiction to sanction a scheme for any
company liable to be wound up under the Act. While the Act
specifies three grounds, including insolvency, on which a
foreign company may be wound up, it seems unlikely based on the
English position and obiter comments from Judge Lam in Re
LDK Solar  that the court would require these to
be met. Nevertheless, it appears that the court will generally
only exercise its discretion to take jurisdiction where there
is a sufficient connection. While the court accepted that the
sufficient connection test was met on the basis of a Hong Kong
governing law provision in the relevant agreement, it remains
to be seen whether it will follow the English court's approach
to the sufficient connection test, which has gradually weakened
2.2 Can recognition and assistance be given to
foreign bankruptcy or reorganisation proceedings?
There are no statutory provisions for the courts to provide
assistance on cross-border insolvencies and Hong Kong is not
party to the Uncitral Model Law on Cross-Border Insolvency.
The courts have an inherent power to recognise and grant
assistance to foreign insolvency proceedings under the common
law principle of modified universalism. In Joint Official
Liquidators of A Co and B (2014), it was held that the
courts have the power under common law to recognise and grant
assistance to foreign insolvency proceedings, but only if a
number of conditions are met, including that: (i) the law of
the foreign insolvency proceedings is substantially similar to
Hong Kong insolvency law; and (ii) the order sought is
available under Hong Kong insolvency law. However, recent
judicial authority has shown the common law power of assistance
to be limited and any assistance provided must be available in
the jurisdiction of the foreign insolvency proceedings. In a
recent case, the court declined to act on a letter of request
from the English court for assistance available under English
law to be provided to English office holders where such
assistance would not be available to office holders under Hong
Hong Kong has entered into reciprocal enforcement treaties
with a number of foreign jurisdictions and applications can be
made to the court to register certain foreign judgments under
the Foreign Judgments (Reciprocal Enforcement) Ordinance. Hong
Kong has also entered into an arrangement with China regarding
recognition and enforcement of judgments in civil and
Section 3: OTHER MATERIAL CONSIDERATIONS
3.1 What other major stakeholders (such as
governmental or regulatory institutions) could have a material
impact on the outcome of the reorganisation?
Employees, the government or regulatory bodies may have an
impact on the outcome of a restructuring depending on the
particular situation. For example, on a transfer of a business,
the transferee may in certain circumstances become liable for
employment claims of the transferor under the Transfer of
Businesses (Protection of Creditors) Ordinance (TOBO).
TOBO is a piece of legislation that is perhaps unique to
Hong Kong; its effect is, subject to certain exceptions and
requirements, to make the transferee of a business liable for
the debts of (including employment claims against) the
transferor. TOBO will not apply where the business is sold by a
court-appointed liquidator or by a receiver who is selling
under a charge which has been registered for at least one year.
However, no such exemptions apply for the sale of a business by
a liquidator in a CVL or MVL.
Restructuring a listed company dependent on the listed
status being retained will often depend on persuading the SFC
that the company should be allowed to resume trading on the
There could also be sector-specific or political issues to
Section 4: CURRENT TRENDS
4.1 Outline any bankruptcy and reorganisation
trends specific to your jurisdiction.
The Law Reform Commission first recommended that corporate
rescue laws were needed back in 1996. The latest attempt to
translate that recommendation into reality seems to be
gathering momentum. In May 2014, the Financial Services and
Treasury Bureau and the official receiver's office jointly
released a framework of proposals and quickly set up meetings
with market participants to discuss outstanding issues. In its
2015 policy address, the Legislative Council Panel on Financial
Affairs said that it hopes to introduce an amendment bill in
this legislative session.
Under the proposals, companies in financial difficulty will
be able to appoint provisional supervisors out of court. A
mandatory stay on proceedings and other legal processes will
immediately result, providing a window to facilitate the
preparation of a voluntary arrangement (VA). The process is
conditional on written consent from any major secured creditor.
Employee rights are protected by the requirement that all
pre-appointment employee claims should be paid in instalments
within set periods after the process begins and a VA is
Another impending legislative addition is the introduction
of an insolvent trading law under which a director or shadow
director may be ordered to pay compensation to a company in
liquidation where the company incurred debt while insolvent (or
which caused insolvency) and the director knew or ought
reasonably to have known of the insolvent state or potential
insolvent state. A defence will be that the director took all
reasonable steps to prevent the company from incurring the
This law is intended to encourage directors to act on
insolvency earlier and take steps to protect creditors'
interests. Both the provisional supervision and insolvent
trading laws will be welcome tools with which to rescue
distressed companies where possible and hold directors
accountable. This aims to incentivise better behaviour in a
market where companies have often been allowed to trade long
past the point at which remedial action should have been
T: +852 2901 5558
David Kidd is a partner at Linklaters and leads the
Asia-Pacific restructuring and insolvency practice. He
has been recognised as one of the leading restructuring
and insolvency practitioners in the region for the past
17 years. His clients have included private equity
investors, creditors and debtors, banks and funds,
directors and shareholders, receivers and
Kidd has acted on some of the world's largest
restructurings and insolvencies including GDE,
Evergrande and Lehman in Asia and Dubai World/Nakheel
in the Middle East. He has worked in all the
significant Asian jurisdictions including China, Korea,
Thailand, Philippines, Indonesia, Vietnam and India.
His more recent restructuring work includes acting for
the bondholders and provisional liquidators of China
Sun, the payment-in-kind noteholders of Asia Aluminium,
the trustee and receivers of the Lehman minibonds,
Suzlon on the restructuring of its foreign currency
convertible bonds (the largest Indian bond
restructuring to date) and Shandong Iron and Steel
Group (China) on the protection of its $1.5 billion
investment in a Sierra Leone iron ore project.