Asia restructuring and insolvency briefing - Hong Kong

Publication | December 2008, Issue 4


Welcome to the fourth of our Asia restructuring and insolvency briefings - this note focuses on Hong Kong.

This briefing complements our other publications on corporate restructuring and the sale or purchase of distressed assets.

What types of debt restructuring are available in Hong Kong?

There is no specific legislation on restructuring in Hong Kong; neither is there a statutory corporate rescue regime, such as administration in the UK. Most restructurings take place by way of informal workouts, compositions and arrangements essentially made by agreement of the parties concerned. Alternatively a Scheme of Arrangement under the provisions of the Companies Ordinance (Cap. 32) may be proposed.

How does informal contractual debt restructuring work?

In Hong Kong informal restructurings are possible and common. The aim of any restructuring is to rearrange the debtor’s finances so that it is able to continue as a viable business (see briefing 1). In Hong Kong most informal restructurings are achieved by all the relevant parties (i.e. the company and all its creditors) agreeing a financial restructuring arrangement through a standstill agreement and, where relevant, a restructuring agreement. This, as with all such agreements, must be agreed unanimously by all the creditors.

The Hong Kong Monetary Authority and The Hong Kong Association of Banks have jointly issued formal but non-statutory guidelines setting out how banks and other regulated financial institutions should deal with customers in difficulties when it involves a multiple bank restructuring. These guidelines are contained in the Hong Kong Approach to Corporate Difficulties (62kb, pdf).

What are the formal procedures if an informal contractual arrangement cannot be agreed?

There is no statutory corporate rescue regime in Hong Kong. The only formal procedure capable of being used to bind all creditors of a Hong Kong company is a Scheme of Arrangement under s.166 Companies Ordinance.

There is no segregated bankruptcy court. The Court of First Instance hears applications in relation to schemes of arrangement and all petitions for winding-up.

How does a Scheme of Arrangement work?

If there are dissenting creditors then a Scheme is an option as, if approved, it will bind all creditors. It is a court process (and hence time consuming) but it can accommodate a wide range of variations in the structure of the restructuring.

How can a company implement a Scheme of Arrangement?

The company (which does not need to be insolvent) can make an application to the Court of First Instance to summon a meeting of each class of its creditors. The creditors are then provided with the proposed Scheme of Arrangement and any other relevant information so that they can make an informed decision whether to approve or reject the scheme.

If the scheme is approved by each class of creditor (approval being a simple majority of the relevant creditors present representing at least 75 per cent in value of the claims of those creditors), an application can be made to the court for it to sanction the scheme. Once sanctioned by the court it becomes binding on all the creditors, whether they voted in favour of it or not. The court order sanctioning the Scheme is only effective when a copy is delivered to the Registrar of Companies for registration.

Does a Scheme of Arrangement bind creditors?

Once approved, sanctioned by the court and registered a Scheme is binding on all creditors.

However, there is no automatic statutory moratorium under the Companies Ordinance to facilitate a Scheme of Arrangement. Until the court sanctions the Scheme and makes an order under the Companies Ordinance, there is nothing to prevent dissentient creditors from taking enforcement action or petitioning to wind up the company.

One possible way to circumvent this problem might be to deploy an indirect moratorium. This could be achieved by arranging for a winding up petition to be presented and at the same time seeking the appointment of a provisional liquidator. Once a provisional liquidator has been appointed, no action or proceedings shall be proceeded with or commenced against the company except with the leave of the court. The provisional liquidator could then apply to the court for the stay or adjournment of the petition pending the implementation of the restructuring exercise.

What happens if restructuring is not successful?

If the restructuring is unsuccessful (or was not an option for the company) then the company may be wound up. There are two methods of winding up a company in Hong Kong: a voluntary winding-up and a compulsory winding-up.

How does voluntary winding-up work?

There are two types of voluntary winding-up. A members’ voluntary winding-up may be initiated if the company is still solvent and the directors of the company make a certificate of solvency. The company would then decide on the nomination of the liquidator.

The alternative is a creditors’ voluntary winding-up. This applies to an insolvent company or one where the directors are not prepared to make a certificate of solvency. The proceedings are initiated by the company passing a resolution for voluntary winding-up and convening a creditors’ meeting. The creditors and shareholders at their respective meetings may nominate a person to be liquidator. If they nominate different persons, the creditors’ nominee will be appointed. If no person is nominated by the creditors, the shareholders’ nominee will be the liquidator.

In general, a voluntary winding-up is more informal and cost-effective than a compulsory winding-up. A voluntary winding-up is appropriate for cases where there is little dispute between the parties interested in the winding-up and where there is no reason to suspect any serious prior misconduct on the part of the company’s officers. A voluntary winding-up may be converted into a compulsory winding-up by an application to the court. A voluntary winding-up does not carry with it an automatic stay on proceedings.

How is compulsory winding-up started?

A compulsory winding-up is initiated by a winding-up petition made to the Court of First Instance. The winding-up petition can be presented by several parties including a creditor of the company, the contributories of the company or the Financial Secretary. The choice of liquidator is also made under order of the court and, if there are no objections, is usually nominated by the party presenting the winding-up petition.

The party presenting the winding-up petition to the Court of First Instance for the compulsory winding-up will usually rely on the ground that the company is unable to pay its debts. This is usually proved by service of a statutory demand on the company which is not satisfied after 21 days or by some other proof of insolvency.

How is a compulsory liquidation different from a voluntary winding-up?

The court is more active in its supervision of a compulsory winding-up compared to a voluntary winding-up as the former is considered a judicial proceeding. The court will make the winding-up order and appoint the liquidator.

There is also a more comprehensive set of statutory provisions and subsidiary legislation which applies to procedures in a compulsory winding-up. For example, there are provisions that restrict the disposition of the company’s assets after the presentation of a winding-up petition.

Under a compulsory liquidation order if there is concern that the assets or business of the company may not be well managed by the company during the period between the filing and hearing of the winding-up petition, the court may on an urgent application appoint a provisional liquidator to maintain the assets of the company during that interim period.

What does the liquidator do?

Once the winding-up of the company has started, the liquidator will take custody and control of all the company’s property. The liquidator will then manage the company’s assets and replace the directors. The company will stop trading, unless the liquidator believes that continuing will benefit the winding-up of the company. The corporate personality of the company remains in existence until dissolution, and property remains vested in it. There is also a stay of actions and proceedings against the company upon the appointment of a provisional liquidator or when a winding up order has been made.

A liquidator is an officer of the court in a compulsory winding up and an agent for the company in a voluntary winding up. His functions are to secure that the company’s assets are got in, realised and distributed to the company’s creditors and, in discharging his function, he is required to ascertain the wishes of the creditors and contributories, and if necessary, apart from the calling of meetings of creditors and contributories, directions may be sought from the court. Certain provisions in the Companies Ordinance will invalidate certain transactions if they infringe the rules of equal and pari passu distribution in the insolvency regime. Certain other provisions in the Companies Ordinance also seek to increase the estate of the company for the purpose of distribution. The liquidator can use these provisions to ascertain whether the company has any claim against its officers or related parties, and he may bring legal proceedings against them to recover damages or the company’s property for the benefit of the creditors.

Can the Hong Kong Court issue a winding-up order for a foreign company?

Yes, the court has the discretion to wind-up a foreign company and can exercise that discretion if it considers the company has a sufficient connection with Hong Kong. The company may be deemed to have sufficient connection if among other factors it has a registered or branch office, carries on business or has assets in Hong Kong and it would benefit the creditors of the company if the company was wound up.



Stephen Begley

Stephen Begley

Peter Haslam

Peter Haslam

Hong Kong
Yu-En Ong

Yu-En Ong