SECTION 1: Market overview
1.1 Please provide a brief overview of your jurisdiction's corporate insolvency and restructuring environment and its versatility in cross-border cases. Are there any significant current concerns/debates taking place in the market?
Hong Kong does not have a statutory corporate rescue regime. The court appointment of a provisional liquidator, which displaces the company's directors and brings about a statutory stay on proceedings, has been used as a means to facilitate a corporate rescue. 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. It is often coupled with a scheme of arrangement, which contains no moratorium preventing creditor action.
There are no statutory provisions for the court to provide assistance on cross-border insolvencies and Hong Kong is not party to the UNCITRAL Model Law on Cross-Border Insolvency. The court has an inherent power to recognise and grant assistance to foreign insolvency proceedings under the common law principle of modified universalism.
The Financial Services and Treasury Bureau is preparing an amendment bill to introduce a new statutory corporate rescue procedure for Hong Kong, which is currently expected to become law in the 2018/19 legislative session.
1.2 What have been the key recent market trends and/or legal developments in the area that practitioners should be aware of?
Amendments to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the Ordinance) came into effect in 2017. These amendments provide better creditor protection, streamline the winding up process and remedy certain anomalies in the previous insolvency regime.
1.3 Please review any major (recent/current) restructuring cases or initiatives that are influencing activity or court decisions regarding insolvency and/or restructuring cases that have set precedents.
The court has jurisdiction to wind up a foreign debtor as an unregistered company. This is a discretionary jurisdiction. Previously the court was more willing to exercise jurisdiction to wind up foreign companies in Hong Kong, but recently the court has been more inclined to the view that ordinarily the appropriate jurisdiction to wind up a company is its place of incorporation. The court is then willing to recognise the foreign liquidators' appointment, so that they can exercise the powers available to a Hong Kong liquidator under the Ordinance.
The trend of using parallel schemes of arrangement in Hong Kong and relevant offshore jurisdictions to effect a restructuring has developed. In the case of Re Z-Obee Holdings Limited HCMP 1563/2017, the court granted an order sanctioning parallel schemes of arrangement in Hong Kong and Bermuda after the appointment of provisional liquidators in Bermuda and the recognition of the appointment in Hong Kong to effect the restructuring of Z-Obee Holdings Limited, a Hong Kong-listed company incorporated in Bermuda. Bermuda law permits such an appointment for the purpose of exploring a restructuring even where there is no evidence of jeopardy to assets of the sort required in Hong Kong following the 2006 case of Re Legend International Resorts Ltd 2 HKLRD 192.
SECTION 2: Processes and procedures
2.1 What restructuring and insolvency processes are typically available for financially troubled debtors in your jurisdiction? Do groups of companies receive special treatment?
There is only one formal collective insolvency procedure under the Ordinance: liquidation.
Liquidation 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.
A compulsory liquidation is commenced by filing a winding-up petition at court and is usually presented on the grounds of insolvency.
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) insolvent liquidations.
A statutory scheme of arrangement may also be used to achieve a corporate rescue. In the absence of such a scheme, any restructuring will need to be achieved consensually, whether using the contractual powers under an intercreditor agreement to implement the solution or otherwise.
Receivership is a secured creditor's enforcement remedy and is not a collective insolvency procedure.
Generally, a group of companies does not receive special treatment. Hong Kong does not have legislation under which a pooling order may be made.
2.2 What is the impact on creditors of a formal filing? Are contractual termination rights affected? Are security or individual enforcement actions stayed?
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) or (ii) in a voluntary winding up.
When a court makes a winding-up order or a provisional liquidator is appointed over the company, section 186 of the Ordinance 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, such as the appointment of a receiver. Where a secured creditor's security enforcement involves an action or proceeding, the court's leave must be sought and will usually be given.
Unlike the US Bankruptcy Code, the stay in Hong Kong does not prevent counterparties from terminating contracts with the company.
2.3 Can a creditor or a class of creditors be crammed down?
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 any other 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.
2.4 Is there a process or practice 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 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.
A liquidator may sell 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.
A provisional liquidator will need to apply to the court for permission to sell the company's assets, if such power is not included in the appointing order.
A receiver appointed by the holder of the security 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.
2.5 What are the duties of directors of a company in financial difficulty?
The court has power to declare that any persons who were knowingly parties to carrying on the company's business with an intent to defraud creditors are personally responsible for all or any part of the company's debts. Such liability only arises where the company has entered liquidation. Successful actions in this regard are rare, due to the need to establish actual dishonesty or fraud.
There are currently no wrongful or insolvent trading provisions similar to those in England or Australia (although such provisions are to be introduced with the new corporate rescue legislation).
Where a company enters into an insolvent liquidation within one year from the date on which payment out of capital was made to a shareholder or a former shareholder in connection with a redemption or buy-back of the company's shares, any director who made the required solvency statement will be jointly and severally liable with the recipient of the funds to contribute assets to the company up to an amount not exceeding the relevant payment out of capital.
2.6 How can any of a debtor's transactions be challenged on insolvency?
By the following grounds:
- Transaction at an undervalue: a transaction at an undervalue entered into by the debtor within five years of the commencement of its winding up.
- Unfair preference: the debtor making payment to a creditor by which the recipient is put in a better position than it would otherwise be if the debtor went into insolvent liquidation and the court were satisfied that the debtor was "influenced by a desire" to create that preference. The clawback period is two years before the commencement of the winding up in the case of a person connected with the debtor and six months in all other cases.
- Floating charge: a floating charge created within 12 months of commencement of the debtor's winding up will be invalid, except where the debtor has received valuable consideration in exchange for its creation. The clawback period is two years for floating charges created in favour of a person connected with the debtor and 12 months in all other cases.
The court will not make any order in respect of a transaction at an undervalue, an unfair preference or an invalid floating charge (other than, in the case of a floating charge, in favour of a connected person) unless the debtor was unable to pay its debts, or the debtor became unable to pay its debts, as a result of the relevant transaction.
The court can also set aside (i) extortionate credit transactions, being a transaction requiring grossly exorbitant payments to be made in respect of the provision of credit or otherwise grossly contravening ordinary principles of fair dealing and (ii) fraudulent conveyances, being a disposition of property with the intent to defraud creditors.
2.7 What priority claims are there and is protection available for post-petition credit?
In liquidation, 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). Preferential claims primarily comprise certain amounts owed to employees and the government.
For proceeds of realisation of unsecured assets, the payment order in a liquidation is as follows:
- the liquidator's costs and expenses;
- preferential claims; and
- unsecured claims (which rank pari passu).
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. 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 creditors.
2.8 Are there any sectors or industries with their own or modified insolvency and restructuring regimes?
The Banking Ordinance and Insurance Ordinance contain special provisions in respect of authorised institutions and insurers respectively which supplement, modify or dis-apply general corporate insolvency laws.
The Financial Institutions (Resolution) Ordinance came into force in 2017. It provides a framework for the orderly resolution of financial institutions. The Insurance Authority, the Monetary Authority and the Securities and Futures Commission act as resolution authorities for the financial institutions under their respective purviews.
SECTION 3: Cross-border cases
3.1 Can restructuring or insolvency proceedings be opened in respect of a foreign debtor?
As discussed above, the court has jurisdiction to wind up a foreign debtor as an unregistered company, based principally on a sufficient connection test.
The court has jurisdiction to sanction a scheme concerning a foreign company where there is a sufficient connection with Hong Kong. A connection which is insufficient to satisfy the sufficient connection test for winding up may be sufficient connection to establish jurisdiction to sanction a scheme. A common connection is that the debt is governed by Hong Kong law.
3.2 What recognition and assistance can be given to foreign insolvency or restructuring proceedings?
The court will recognise and assist foreign insolvency practitioners if a number of conditions are met, including that: (i) the laws of the foreign insolvency proceedings are substantially similar to Hong Kong insolvency law; and (ii) the order sought is available under the laws of the jurisdiction of appointment (usually an offshore jurisdiction) and the jurisdiction of assistance (i.e. Hong Kong)
SECTION 4: Other material considerations
4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Employees, the government or regulatory bodies (such as the Stock Exchange in the case of a listed company) may have an impact on the outcome of a restructuring depending on the particular situation. The transferee may in certain circumstances become liable for employment claims of the transferor under the Transfer of Businesses (Protection of Creditors) Ordinance.
There could also be sector-specific or political issues to consider.
SECTION 5: Outlook 2018
5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?
The amendment bill to introduce a new statutory corporate rescue procedure is expected to be introduced into the Legislative Council in the 2018/19 session. The Government has been considering proposals for a statutory corporate procedure since 1994 and it would not be surprising if there was further delay.
|About the author|
David Kidd is a partner based in Linklaters' Hong Kong office who leads the firm's AsiaPac restructuring and insolvency practice. He has been recognised as one of the leading restructuring and insolvency practitioners in the region for the last 18 years.
Kidd's clients have included private equity investors, creditors and debtors, banks and funds, directors and shareholders, receivers and liquidators. He 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. Kidd has worked in all the significant Asian jurisdictions including China, Korea, Thailand, the Philippines, Indonesia, Vietnam and India.
More recently, Kidd has acted on restructurings for the bondholders and provisional liquidators (PLs) of China Sun, the banks and PLs of Tack Fat (led by Fubon Bank), the CS-led bank lenders to Evergrande, the PIK noteholders of Asia Aluminum, the trustee and receivers of the Lehman minibonds and two PE funds in respect of their rights to obtain control onshore through exercise of convertible bond rights. Kidd has recently acted for a Chinese state-owned enterprise to protect its investment in an insolvent African iron ore mine and is currently acting for the offshore lenders to Jindal Power & Steel.
|About the author|
Cathy To is an associate at Linklaters. She has experience advising companies and financial institutions on enforcement of security and insolvency matters. She has acted for a variety of stakeholders in restructuring. These include creditor groups, banks, trustees, liquidators and distressed companies.