This content is from: Local Insights

Hong Kong

The Law Reform Commission has announced a plan that will give financially distressed companies the chance of avoiding insolvency proceedings by providing the company with a court-sanctioned moratorium from creditors while a provisional supervisor takes control of the company to restructure its debt.

Under the proposal, a majority of the directors or qualified members of the company (but not creditors) would initiate the company rescue procedure by filing certain documents with the Supreme Court Registry and the Companies Registry. Companies will be given an initial period of 30 days' protection by the courts from any creditors filing suit against it. The moratorium period may be extended for up to six months from the date the supervision starts. This period may be extended even longer, subject to approval by the creditors. During this period, no application for winding the company up by the courts may be started or continued.

However, a qualified provisional supervisor, who is expected to be from a panel of accounting or legal practitioners specializing in insolvency, will be appointed by the court to attempt to put together a suitable credit and pay-back arrangement by the company to its creditors. Directors of the company will automatically release control of the company to the provisional supervisor once this process starts. The company may also borrow money during the moratorium, but creditors extending loans during this period will enjoy super-priority over all existing debts, except fixed charges.

The proposal, if adopted, will be important in providing companies with a chance to restructure rather than dissolve operations when they are in financial difficulties, like Chapter 11 of the US Bankruptcy Code and insolvency laws in effect in other countries. Section 166 of the Hong Kong Companies Ordinance, which governs companies in financial distress, does not at present offer this option to financially distressed companies.

Anne W Y Chen and Steve S F Woo

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