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ABSTRACT
Financially distressed companies are more likely to be rescued as going concerns if they enter into debt restructuring early whilst still high up on the ‘demise curve’. In Hong Kong, early-stage non-consensual debt restructuring is effected via the scheme of arrangement. Yet, despite the similarities in the legislative framework, Hong Kong is less successful than the United Kingdom (UK) in using the scheme for early going-concern restructuring as the directors often invoke the scheme only when their company is far down the demise curve. We address the reasons for the difference based on the comparative outcomes of the schemes and interviews with insolvency professionals. Our results show that the reasons are attributed less to the differences in directors’ duties in the zone of insolvency but the perception on how these duties are enforced. Urgent law reform is thus required to incentivise directors to address the problems early.
Acknowledgement
The work described in this paper was fully supported by the Collaborative Research Fund award from the Research Grants Council of the Hong Kong Special Administrative Region, China under Grant (Project No. CityU C1115-20GF). We thank our team of research assistants including Xin Yan, Kin On Li, Ivan Sin and Chloe Chan. We are profoundly indebted to the insolvency practitioners and lawyers in Hong Kong who have participated in the survey as well as to the bank officers and other market participants who have spent time with the research team explaining the practice of restructuring in Hong Kong and have issued pointers as to the sources of information. We also thank the anonymous reviewers for their constructive suggestions. We are grateful to Sarah Paterson, Terry Kan, Andrew Godwin, Tiffany Wong and Daniel Chow, and other commentators who have reviewed the earlier drafts of this paper at the academic roundtable and conference held at City University of Hong Kong in March 2022 and in June 2023 respectively, and Joan Loughrey for sharing part of the dataset in A Keay, J Loughrey, T McNulty, F Okanigbuan and A Stewart, ‘Business judgment and director accountability: A study of case-law over time’ (2020) 20 JCLS 359. All errors are the authors’.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 See generally, J Payne, Schemes of Arrangement: Theory, Structure and Operation (2nd edn, CUP, 2021) 229.
2 For a discussion on the corporate demise curve, see below. Adam Sutton and Richard Setchim, ‘Valuing Sponsor Support’ (2014) 19(2) British Actuarial Journal 404. See also e.g. Deloitte, ‘A rise in financial restructuring scenarios is predicted’ <https://www2.deloitte.com/content/dam/Deloitte/za/Documents/za-Deloitte-NED-programme-event-summary.pdf>.
3 See e.g. Donald Hambrick and Richard D'Aveni, ‘Large Corporate Failures as Downward Spirals’ (1988) 33 Administrative Science Quarterly 1; William McKinley, Scott Latham and Michael Braun, ‘Organizational Decline and Innovation: Turnarounds and Downward Spirals’ (2014) 39 Academy of Management Review 88; Jenny Rudolph and Nelson Repenning, ‘Disaster Dynamics: Understanding the Role of Quantity in Organizational Collapse’ (2002) 47 Administrative Science Quarterly 1; William Weitzel and Ellen Jonsson, ‘Decline in Organizations: A Literature Integration and Extension’ (1989) 34 Administrative Science Quarterly 91.
4 See e.g. S Paterson, Corporate Reorganization Law and Forces of Change (OUP 2020) chs 2–4.
5 See e.g. Payne (n 1); S Paterson, ‘Reflections on English Schemes of Arrangement in Distress and Suggestions for Reform’ (2018) 15(3) European Company and Financial Law Reform 472.
6 Corporate Insolvency and Governance Act 2020 (CIGA), discussed Section 5.1 below.
7 See discussion below in n 18 and accompanying text.
8 ‘Leading financial centers globally as of March 2022’ (Statista 2022) <https://www.statista.com/statistics/270228/top-financial-centers-on-the-global-financial-centres-index/>.
9 WY Wan, Court-Supervised Restructuring of Large Distressed Companies in Asia (Hart Publishing 2022) 130–31 (referencing the schemes of arrangement in Hong Kong where trade creditors get their debts compromised); WY Wan and C Watters, ‘Mandatory Disclosure in Corporate Debt Restructuring via Schemes of Arrangement: A Comparative Approach’ (2021) 30 International Insolvency Review S111.
10 Wan (ibid) 46–47; 84–85. The listing status of a company on the Hong Kong Stock Exchange is a valuable asset, and is recognised judicially in Re China Solar Energy [2017] HKCFI 700; [2017] 2 HKLRD 1074; HCCW 108/2015 at [24]. While the listing status is a valuable asset, it does not belong to the company but to its creditors and contributors; see Longrun Tea Group Co Ltd v The Stock Exchange of Hong Kong [2021] HKCFI 1883; HCAL 3809/2019, at [112]. We use the terms ‘reverse takeovers’ and ‘back-door listing’ interchangeably.
11 See e.g. C Qu, ‘Towards An Effective Scheme-Based Corporate Rescue System for Hong Kong’ (2012) 12 JCLS 85, fn 62 citing the successful schemes of arrangement in Hong Kong and discussed in Section 2.2 below.
12 See e.g. A Gurrea-Martinez, ‘Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach’ (2021) 21 (2) JCLS 365; see e.g. Wan (n 9) 271–73, pointing out the relative weak enforcement of directors’ duties ‘on the books’ in Hong Kong.
13 UNCITRAL, Legislative Guide on Insolvency Law (2004, New York) 20, 162–65.
14 E.g. Qu (n 11); see also Re Legend International Resorts [2006] 2 HKLRD 192; Re China Solar Energy Holdings Ltd [2017] 2 HKLRD 1074; Re China Solar Energy Holdings Ltd [ 2018 ] HKCU 938 . See CZ Qu, ‘The Court’s Power to Appoint Provisional Liquidators to Carry Out Rescue Roles: Rethinking Legend’ (2019) 28 International Insolvency Review 86.
15 E.g. Qu (n 11).
16 E.g. Wan (n 9) 271–73.
17 Hong Kong has proposed a formal rescue framework since 1996: see Financial Services and Treasury Bureau, legislative Proposals on the Companies (Corporate Rescue) Bill, LC Paper No. CB(1)48/20-21(03) (22 October 2020). See also P Smart and CD Booth, ‘Reforming Corporate Rescue Procedures in Hong Kong’ (2001) 1 JCLS 485.
18 For company voluntary arrangements (CVAs), there is no requirement that the company must be insolvent but in practice, CVAs are only used when the company is insolvent because it is hard to survive a challenge to the CVA when the company is still solvent; see K Stephenson and Z Stembridge, ‘Market Development’ in E Nolan and T Smith (eds), Company Voluntary Arrangements: Law and Practice (OUP 2022), ch 1, para 1.09. For new restructuring plan under Part 26A of the Companies Act 2006 introduced by the 2020 reforms, the new restructuring plan can only be used when the company has or is encountering financial difficulties that affect the company’s ability to carry on business as a going concern. See also Re Gategroup Guarantee Limited [2021] EWHC 775 (Ch).
19 M C Jensen and W H Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305.
20 P Aghion and P Bolton, ‘An Incomplete Contracts Approach to Financial Contracting’ (1992) 59 Review of Economic Studies 473; P Aghion and P Bolton, ‘Incomplete Contracts and the Theory of the Firm: What have we Learned Over the Past 25 years’ (2011) 25(2) Journal of Economic Perspectives 181.
21 Aghion and Bolton, ‘Incomplete contracts and the theory of the firm: what have we learnt over the past 25 years’, ibid.
22 Eg TH Jackson, The Logic and Limits of Bankruptcy Law (Harvard University Press, Cambridge 1986); see also TH Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ Bargain’ (1982) 91 Yale Law Journal 857.
23 P Aghion, O Hart and J Moore, ‘The Economics of Bankruptcy Reform’ (1992) 8 Journal of Law, Economics and Organization 523.
24 Ibid.
25 For example, see Douglas G Baird, ‘The Uneasy Case for Corporate Reorganizations’ (1986) 15 Journal of Legal Studies 127, 134. US Chapter 11 is regarded the most progressive pro-reorganisation regime; in the past two decades, several jurisdictions have reformed their insolvency and restructuring laws along the lines of Chapter 11, including the United Kingdom (via the enactment of CIGA).
26 R Squire, Corporate Bankruptcy and Financial Reorganizations (New York, Wolters Kluwer 2016) chs 22–23.
27 The figure is adapted from the references in note 3.
28 The term ‘control watershed’ is used by PWC in describing the shift in control from the debtor management to the creditors and other stakeholders. See Gilbertson, ‘What is driving the change in UK retail market’ (2007) 32 Real Estate Issues 41.
29 For instance, Chapter 11 of the US Bankruptcy Code 1978 allows for the debtor to petition for bankruptcy, and the directors remain in possession whilst driving the restructuring. See generally, Squire (n 26).
30 [2022] UKSC 25.
31 Sequana, [2022] UKSC 25 para [81]. The case has generated an extensive literature with many issues for discussion and reflection.
32 See KJ Delaney, Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage, Berkeley: University of California Press, 1992.
33 Deloitte, n 2.
34 Even in the state of insolvency, if what is relied on is cash-flow insolvency, it is often not possible to determine precisely when the debtor reaches an insolvent state: see e.g. Davies, n 52 below.
35 See also BTI v Sequana, note 31.
36 HKMA, ‘Hong Kong Approach to Corporate Difficulties’ (2008) <https://www.hkma.gov.hk/eng/regulatory-resources/regulatory-guides/circulars/2008/11/circu_20081119-1/>. For a discussion on corporate restructuring in Hong Kong until the early 2000s, also A Tang, Insolvency in China and Hong Kong: A Practitioner’s Perspective (Sweet & Maxwell Asia 2005).
37 British Bankers’ Association, ‘Description of London Approach’ (Quality Bulletin 1993); J Armour and S Deakin, ‘Norms in Private Insolvency Procedures: The “London Approach” to the Resolution of Financial Distress’ (2001) 1 JCLS 21.
38 Payne (n 1) and Armour and Deakin, ibid (for UK); WY Wan (n 9) 109–10 and C Qu, ‘Towards An Effective Scheme-Based Corporate Rescue System for Hong Kong’ (2012) 12 JCLS 85 (Hong Kong).
39 Companies Act 2006, pt 26 ss 895–99 (UK); Companies Ordinance, Cap 622, ss 668–74 (Hong Kong).
40 See generally C Pilkington, Schemes of Arrangement in Corporate Restructuring (2nd edn, Sweet & Maxwell 2017); G O’Dea, J Long and A Smyth, Schemes of Arrangement Law and Practice (Oxford University Press 2012); Payne (n 1); See also LC Ho, ‘Making and enforcing international schemes of arrangement’ (2011) 26 JIBLR 434; J Payne, ‘Cross-Border Schemes of Arrangement and Forum Shopping’ (2013) 14 EBOR 563.
41 Sir Kenneth Cork, Insolvency Law and Practice: Report of the Review Committee (Cmnd 8558, H.M.S.O 1982) para 419 and see also, ‘Report of the Joint DTI/Treasury Review of Company Rescue and Business Reconstructions Mechanisms’ (The Insolvency Service 2000) para 43.
42 Re Van Gansewinkel Groep BV [2015] EWHC 2151, [5].
43 Payne (n 1). However, the position may be somewhat changed due to COVID-19 where more restructurings involving operational creditors happen, such as Re MAB Leasing [2021] EWHC 379 (Ch).
44 Insolvency Act 1986, pt I.
45 Companies Act 2006 (UK), pt 26A (UK).
46 Hong Kong Companies Ordinance, pt 13.
47 Companies Act 2006 (UK), pt 26.
48 See UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; Anglo-Continental Supply Co Ltd [1922] 2 Ch 723.
49 The test has been pointed out is not whether the opposing creditors have reasonable objections to the scheme as a creditor might be acting equally reasonably in voting either for or against the scheme. In these circumstances, the English courts consider that creditor democracy should prevail: see Re British Aviation Insurance Co Ltd [2005] EWHC 1621, [75].
50 Insolvency Act 1986, pt II.
51 For a discussion on the obligation to file in continental European jurisdictions, see A Martinez, n 12 above.
52 P Davies, ‘Directors’ Creditor-regarding Duties in Respect of Trading Decisions taken in the Vicinity of Insolvency’ (2006) 7 EBOR 301, 313–14 (comparing the positions in the UK and in Germany and arguing that such a mandatory filing will be inconsistent with a rescue culture).
53 Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), s 275.
54 Insolvency Act, section 214 applies to a company in liquidation and section 246ZB applies to a company administration.
55 Insolvency Act 1986, s 213; s 246ZA. In the UK there is potential criminal liability for fraudulent trading (s 993 Companies Act 2006) but not for wrongful trading.
56 West Mercia Safetywear v Dodd [1988] BCLC 250; [1988] 4 BCC 30; BTI v Sequana SA. [2022] UKSC 25. West Mercia applies in Hong Kong: see Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2014] 17 HKCFAR 466; Re China Bozza Development Holdings Ltd [2021] HKCFI 1235; [2021] 4 HKC 560; HCMP 172/2021 (11 May 2021). For general analysis see R T Langford and I Ramsay, ‘The Creditors’ Interests Duty: When Does it Arise and What Does it Require’ (2019) 135 LQR 385; K van Zwieten, ‘Disciplining the Directors of Insolvent Companies: Essay in Honour of Gabriel Moss QC’ (2020) 33(1) Insolvency Intelligence 2; P Watts, ‘Why as a Matter of English-law Principle Directors do not Owe a Duty of Loyalty to Creditors upon Insolvency’ (2021) JBL 103.
57 K van Zwieten, ‘Director Liability in Insolvency and Its Vicinity’ (2018) 38 OJLS 382.
58 Companies Winding-up and Miscellaneous Provisions Ordinance, s 168H.
59 Company Directors Disqualification Act 1986, s 15A (amended in 2015). The first case brought under the provision was The Secretary of State for Business, Energy and Industrial Strategy v. Kevin William Eagling [2019] EWHC (ch) 2806.
60 See n 14 and accompanying text above.
61 Insolvency Act 1986, pt II.
62 Insolvency Act 1986, Part A1.
63 Insolvency Act 1986 (UK), ss 233A and 233B.
64 US Chapter 11, s 364.
65 It could be argued however that in a UK administration different forms of post-commencement finance could have super-priority under para 99 Schedule B1 Insolvency Act 1986. Moreover, under the new Part A1 moratorium, ‘moratorium debts’ have priority in subsequent insolvency proceedings.
66 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate Governance: Government Response (26 August 2018).
67 For instance, in Re Virgin Atlantic [2021] EWHC 1246 (Ch), a case under Part 26A, the restructuring plan involves the provision of new money by existing shareholders and secured creditors, together with haircut for unsecured creditors, for the company that offers gymnasium services to be revived. However, certain classes of the unsecured creditors were not offered the opportunity to participate in the new money and failed to take advantage of the restructuring surplus which would have gone to the shareholders that rank behind these unsecured creditors. See also Re Houst Limited [2022] EWHC 1941 (Ch).
68 See nn 179–86 and accompanying text.
69 West Mercia Safetywear v Dodd (n 56); BTI v Sequana SA. [2022] UKSC 25.
70 Qu (n 11). Qu identifies that only approximately a third (10 out of 28) of successful schemes of arrangement are controlled by pre-petition (debtor in possession) management during the 1989–2009 period. Out of the 10 cases identified, the seven cases are Re Kosonic Industries Ltd [1999] HKEC 1183; UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; Re Yetyue Ltd [2001] HKEC 1156; Re CIL Holdings Ltd [2003] HKEC519; Re APP (Hong Kong) Ltd [2005] HKEC 1583; Re Stereo Ltd [2005] HKEC 1085; Re Sun Motor Industrial Co Ltd [2008] HKEC 2006.
71 E.g. Qu (n 11); Wan (n 9).
72 E.g. Wan (n 9), finding 8 sanctioned Hong Kong schemes of arrangement over 6-year period (or 1.33 schemes a year); Qu (n 11), 53 Hong Kong schemes of arrangement proposed over a 20-year period (or 2.65 schemes a year).
73 As at 31 December 2020, 58% and 20% of the listed companies are incorporated in Cayman Islands and Bermuda respectively, as compared with 8% of the companies incorporated in Hong Kong. See Stock Exchange of Hong Kong, Listing Regime for Overseas Issuers (March 2021), available at https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/March-2021-Listing-Regime/Consultation-Paper/cp202103.pdf.
74 See e.g. Payne (n 1) 13–14.
75 Recent Hong Kong court decisions also remind practitioners parallel schemes (in both the place of incorporation and Hong Kong) should only be pursued if they are necessary. See e.g. Da Yu Financial Holdings Limited [2019] HKCFI 2531; Re China Oil Gangran Energy Group Holdings Ltd [2021] HKCFI 1592; Re Grand Peace Group Holdings Ltd [2021] HKCFI 1563.
76 Supra, n 72.
77 See Stock Exchange of Hong Kong (n 73).
78 The Hong Kong Stock Exchange classifies as a reverse takeover if, among others, it is a very substantial acquisition were the equity share capital issued is increased by 100% or more (r 14.06B) and that there is a change in control. Assuming that the equity share capital is increased by 100% or more, the dilution of existing shareholder will be at least 50%. A higher dilution figure of 80% is used in Wan (n 9) 85 as it would be a clearer case involving a massive injection of assets.
79 See note 10 and accompanying text.
80 Financial Conduct Authority, Listing Rules, r 5.6.
81 See the Hong Kong Stock Exchange, ‘Consultation Conclusions: Backdoor Listing, Continuous Listing Criteria and other Rule Amendments’ (July 2019). See also Securities and Futures Commission, ‘Statement on the SFC’s approach to backdoor listings and shell activities’ (26 July 2019).
82 Re China Solar Energy [2018] HKCFI 555 [39].
83 Currently, the SEHK will cancel the listing after a trading suspension of 18 months. See SEHK listing rules, ch 6.
84 SEHK, Practice Note 17.
85 Kaisa Group, Yestar Healthcare Holdings, Hilong Holdings and GCL-Poly New Energy Holdings. A perusal of the explanatory statements showed that the companies have significant Mainland operations: Explanatory statements, copies on file with the authors.
86 Explanatory statements of the four companies, copies on file with the authors.
87 Interview with L1 (HK, 6 May 2021); L2 (HK, 10 August 2021); P5 (HK, 10 August 2021); P8 (HK, 31 August 2021); P10 (HK, 2 September 2021); P14 (HK, 18 October 2021).
88 Interview with L1, ibid; P13 (HK, 5 October 2021); P5, ibid.
89 Ibid.
90 They were identified as Hong Kong and Shanghai Banking Corporation and Standard Chartered Bank.
91 Interview with P8 (n 87); P5 (n 87); P4 (HK, 23 July 2021).
92 Interview with L2 (n 87).
93 Interview with P4 (n 91); L1 (n 87).
94 Interview with L2 (n 87); P2 (HK, 13 May 2021).
95 Interview with P12 (HK, 14 September 2021); P10 (n 87) (mentioning 50–100 possible bondholders in one single restructuring). References are also found in the case law in Li Yiqing v Lamtex Holdings Ltd [2021] HKCFI 622; [2021] 2 HKLRD 177; HCCW 263/2020 (11 March 2021).
96 Interview with P10 (n 87).
97 Interview with P10 (n 87); P12 (n 95); P13 (n 88) (who said that even for listed companies which have professional managers, the management often only seek external advice when they are close to default on their loans or after the winding-up petitions are served).
98 Interview with P13 (n 88); P11 (HK, 14 September 2021); P1 (HK, 30 April 2021).
99 Interview with P10 (n 87); P8 (n 87); P14 (n 87).
100 Interview with P12 (n 95), P9 (HK, 31 August 2021); L2 (n 87); P5 (n 87); P14 (n 87).
101 Interview with P12 (n 95), P13 (n 88): L1 (n 87); P14 (n 87).
102 Interview with P4 (n 91).
103 Interview with P2 (n 94).
104 The background has to do with how Chinese operating companies (Opcos) raise financing from offshore investors (that is, outside Mainland China). These Opcos have parent companies incorporated offshore and listed in Hong Kong and which issue bonds to offshore investors. The Opcos are prohibited from giving guarantees or collateral directly to the offshore investors under Chinese law and would also have borrowed money from onshore (Chinese) lenders. Hence, the offshore investors take security only over assets located outside China and the shares of the opcos. If the only security is the shares of the Opcos that go into default, the offshore investors are structurally subordinated to the onshore creditors. In theory, separate restructurings will be required for the onshore and offshore creditors. For an account, see M Fucci and N Moore, ‘Is it the structure? Chinese onshore bankruptcies and offshore bond default’ Global Restructuring Review (15 November 2016).
105 Interview with P10 (n 87).
106 Interview with P13 (n 88).
107 Interview with P13 (n 88); P11 (n 98); P3 (HK, 20 July 2021).
108 Interview with P3 (n 107); P1 (n 98).
109 Interview with P8 (n 87); P2 (n 94) (mentioning that at times, creditor banks believe that the management has been fraudulent).
110 Interview with P5 (n 87).
111 Interview with P8 (n 87); P9 (n 100).
112 Interview P5 (n 87).
113 Interview with P12 (n 95) (giving the example of obtaining a hearing date 3 months after the petition is filed in the offshore jurisdiction versus 6 months in Hong Kong).
114 Interview with P5 (n 87); P4 (n 91).
115 Interview with P9 (n 100); P13 (n 88).
116 Interview with P5 (n 87) (mentioning that litigation funders take a 50% cut in the recovery); L3 (HK, 12 August 2021).
117 Cap 32 (HK).
118 Interview with P5 (n 87).
119 Interview with P5 (n 87); P14 (n 91).
120 Interview with P5 (n 87); L2 (n 87).
121 Hong Kong SAR is under a ‘one country, two system’ principle. While Hong Kong has entered into a series of mutual legal assistance with Mainland China, none of them relate to disqualification orders. In particular, Article 3 of the 2019 Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between Hong Kong SAR and Mainland China explicitly excludes insolvency matters. The only agreement relating to mutual assistance on insolvency matters is the Record of Meeting of the Supreme People’s Court and the Government of the Hong Kong SAR on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong SAR but the assistance and recognition relate to the collective insolvency proceedings, not to directorial disqualification.
122 Interview with P8 (n 87); L2 (n 87); L4 (HK, 24 September 2021).
123 E.g. Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338, para 39.
124 Interview with P10 (n 87); P12 (n 95); P4 (n 91).
125 Interview with P13 (n 88).
126 Interview with P9 (n 100); P10 (n 87); P12 (n 95); P6 (HK, 13 August 2021); L3 (n 116); L4 (n 122); P14 (n 91).
127 Ibid; Interview with P6, ibid, pointed out that a standstill could take three to nine months to negotiate.
128 Interview with P7 (HK, 31 August 2021). Interviewee P6 also pointed out that in many cases, the creditors make a number of demands before agreeing to a standstill (e.g. continuation of payment of interest, provision of additional security from the company or its shareholders and payment of costs).
129 Interview with P6 (n 126) (where security is provided by the debtor in exchange of the standstill); L4 (n 122).
130 Interview with P10 (n 87) (arguing for 6 months); P12 (n 95) (arguing for 12 months); L3 (n 116) (arguing for 4–5 months).
131 Interview with P5 (n 87); P14 (n 87); L2 (n 87); L4 (n 122).
132 Interview with P6 (n 126).
133 See Interview with L1 (n 87); P10 (n 87), P7 (n 128).
134 See Interview with L1 (n 87); P6 (n 126).
135 Interview with L1 (n 87).
136 See Interview with P4 (n 91), P12 (n 95), P9 (n 100) (who gave an example where the debtor provides a charge over unencumbered assets in favour of the creditor extending new loans), with the consent of the other creditors; L3 (n 116).
137 Interview with P4 (n 91); L2 (n 87); P5 (n 87); L3 (n 116); L4 (n 122); P14 (n 87) (pointing out that where bondholders are concerned, they are not as keen to provide further financing).
138 The first decision that allows for a cross-class cramdown was Re Deep Ocean I UK Ltd [2021] EWHC 138 (Ch), whose judgment was delivered in January 2021.
139 S Paterson, Corporate Reorganization Law and Forces of Change (OUP 2020).
140 S Paterson, ‘Reflections on English Schemes of Arrangement in Distress and Suggestions for Reform’ (n 5).
141 The total outstanding amount of bonds listed in Hong Kong has grown from HK$392 billion in 2009 to HK$5,205 billion in 2019. This figure was partly attributable to the issuance of offshore RMB bonds in Hong Kong by issuers in the Mainland, Hong Kong and overseas. See SEHK, ‘The Rising On-Exchange Bond Market in Mainland China and Hong Kong’ (Research Report, 2020) <https://www.hkex.com.hk/-/media/HKEX-Market/News/Research-Reports/HKEx-Research-Papers/2020/CCEO_ExBond_202009_e.pdf?la=en>.
142 Paterson, n 140.
143 Maintenance financial covenants typically require the debtor to maintain specified levels of debt or cash flows at periodic intervals during the life of the loan and the failure to comply with these covenants will alert the lenders as to the financial conditions of the debtors. See S Nebitt, ‘Covenants and the Loan Agreement’ in Private Debt: Opportunities in Corporate Direct Lending (John Wiley & Sons, Inc) 79–82.
144 See Olivier Darmouni and Kerry Siani, Bond Market Stimulus: Firm-Level Evidence from 2020–21 (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=3693282.
145 See also M Bradley and MR Roberts, ‘The Structure and Pricing of Corporate Debt Covenants’ (2015) Quarterly Journal of Finance 5.
146 Following Bradley and Roberts, ibid, we count those loans with more than two accounting ratios as having among the relevant covenants.
147 See notes 116–22 and accompanying text.
148 The UK also has criminal liability for fraudulent trading under Companies Act 2006, s 993.
149 J Armour and others, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’ (2008) 6 JELS 687.
150 Richard Williams, ‘What Can We Expect to Gain from Reforming the Insolvent Trading Remedy?’ (2015) 78 MLR 55; R Mokal, Corporate Insolvency Law (OUP, 2005); see A Keay, J Loughrey, T McNulty, F Okanigbuan, and A Stewart, ‘Business judgment and director accountability: A study of case-law over time’ (2020) 20 JCLS 359 (finding 10 cases for wrongful trading for the 2011–2018 period); van Zwieten, ‘Director Liability in Insolvency and Its Vicinity’ (2018) 38 OJLS 382.
151 P Davies, ‘Directors’ creditor-regarding duties in respect of trading decisions taken in the vicinity of insolvency’(note 52) above.
152 Williams (n 150). Department for Business, Innovation and Skills, ‘Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Businesses’ (Discussion Paper, July 2013) [11.1–11.12]; Department for Business, Innovation and Skills, ‘Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Businesses’ (Government Response, April 2014) p 66.
153 ‘Insolvency Service Enforcement Outcomes: 2020/21’ (Statistics on new outcomes resulting from the enforcement activities of the Insolvency Service, 22 April 2022) <https://www.gov.uk/government/statistics/insolvency-service-enforcement-outcomes-202021>.
154 Company Director Disqualification Act 1986, ss 15A-B. See Noble Vintners [2019] EWHC 2806 (Ch).
155 Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021.
156 WY Wan, C Chen and SH Goo, ‘Public and Private Enforcement of Corporate and Securities Laws: An Empirical Comparison of Hong Kong and Singapore’ (2019) EBOR 319.
157 Cap 571 (HK).
158 Cap 32 (HK), s 276.
159 See above, n 56 and accompanying text.
160 Cyberworks Audio Video Technology Ltd v Mei Ah (HK) Co Ltd [2020] HKCFI 398; Wing Hong Construction Ltd v Hui Chi Yung [2020] HKCFI 2985.
161 SFO, Section 214(1)(a).
162 SFO, Section 214(2)(b)-(e).
163 See Wan et al., note 156; see also Re Styland Holdings (No 2) [2012] 2 HKLRD 325; Securities and Futures Commission v Yeung Chung Lung & Ors [2013] HCMP 205.
164 See Re Minth Group [2019] HKCFI 2735.
165 [2021] HKCA 897.
166 Ibid, para 32.
167 Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), s 275.
168 A search on the judgments with Hong Kong Legal Information Institute and LexisNexis did not reveal any prosecution under the provision.
169 See notes 96–105 and accompanying text.
170 Companies (Winding-up and Miscellaneous Provisions) Ordinance, Cap 32.
171 They are Carillion plc and Thomas Cook plc. See Online Appendix.
172 The London and Hong Kong Stock Exchanges have 1,976 and 2,568 listed companies, respectively, as of June 2021. Source: World Federation of Exchanges. Number of listed companies in the UK is going down
173 Re Victory City International Holdings Ltd [2021] HKCFI 1370; Re Lerthai [2021] HKCFI 207.
174 Re Lamtex Holdings Ltd [2021] HKCFI 622; Re Trinity Management Services [2021] HKCFI 2207.
175 Eg Re China Bozza [2021] HKCFI 1235 (no consultation was made with the creditors).
176 Re Trinity Management Services; Re Lerthai Group Limited [2021] HKCFI 207. See also Re GTI Holdings Limited [2022] HKCFI 2598; HCMP 1556/2020 (19 August 2022).
177 The cases are China Bozza[2021] HKCFI 1235; Re Lerthai [2021] HKCFI 207; Re Trinity Management Services [2021] HKCFI 2207; Re Victory City International Holdings Ltd [2021] HKCFI 1370; RE GTI Holdings [2021] HKCFI 3647; HCCW 51/2020. The data on filing of petition or service of statutory demand are found on the case law and the stock exchange data.
178 They are Re Lerthai; Re Trinity Management; Re GTI Holdings, ibid. In the other two cases, the bank creditors opposed the recognition of the provisional liquidation made by the Caribbean courts (but did not petition specifically for winding-up order) in Hong Kong.
179 Insolvency Act 1986, ss A34 to A41.
180 Re Minor Hotel Group [2022] EWHC 340 (Ch).
181 Insolvency Act 1986, s A6.
182 Ibid, s A38.
183 For instance, a debtor which is a party to a capital market instrument (e.g. having issued bonds), will not be able to invoke the moratorium: see Insolvency Act 1986, sch ZA1. See also P Walton and L Jacobs, Corporate Insolvency and Governance Act 2020 – Final Evaluation Report November 2020 (December 2020), available at UK Insolvency Service, https://www.gov.uk/government/publications/corporate-insolvency-and-governance-act-2020-evaluation-reports/corporate-insolvency-and-governance-act-2020-final-evaluation-report-november-2022 (the survey indicated that the moratorium was not used as often as would be expected).
184 Insolvency Act 1986, s A6.
185 Cf J Payne, ‘An Assessment of the UK Restructuring Moratorium’ (2021) Lloyds Maritime and Commercial Law Quarterly 455.
186 For the UK, see G McCormack, ‘Schemes, Plans and International Recognition’, Gore-Browne on Companies Special Release 2022, p SR81. See also UK Insolvency Service, Implementation of Two UNCITRAL Model Laws on Insolvency (7 July 2022), stating that ‘[g]lobal cooperation allows international businesses to choose to restructure in the UK, knowing that this will lead to the best result for their creditors, shareholders and management, with confidence that the outcome will be accepted both in their local courts and across the world’. Changes in EU procedures as well as reforms in other countries have led to increased competition for restructurings and the changes contained in the 2020 Act were probably needed even if Brexit had not occurred.
187 Insolvency, Restructuring and Dissolution Act 2018, s 64 (the company can apply for a moratorium if it proposes or intends to propose a compromise or an arrangement with the creditors).
188 See e.g., K Ayotte and D Skeel, ‘Bankruptcy Law as a Liquidity Provider’ (2013) 80 University of Chicago Law Review 1557.
189 Department for Business, Energy & Industrial Strategy, Insolvency and Corporate Governance: Government Response (26 August 2018).
190 See the discussion in, inter alia, Re Houst Ltd, 2022] EWHC 1941 (Ch) and the discussion of the implications of the case in https://www.pwc.co.uk/services/business-restructuring/insights/restructuring-plans-what-difference-year-makes.html and https://www.kirkland.com/-/media/publications/alert/2022/07/houst---english-court-approves-sme-restructuring-plan_final.pdf
191 Manju Dalal, ‘Chinese defaults shape new restructuring landscape’ GlobalCapital Asia (22 December 202).
192 Re Cyberworks Audio Video Technology Ltd [2010] HKCFI 404; [2010] 2 HKLRD 1137; HCCW 1113/2002 (4 May 2010).
193 C Chen, WY Wan and W Zhang, ‘Board Independence as a Panacea to Tunneling? An Empirical Study of Related-Party Transactions in Hong Kong and Singapore’ (2018) 15 Journal of Empirical Legal Studies 987.
194 Chan, R. S. Y., Ho, D., & Young, A. ‘Rethinking the Relevance or Irrelevance of Directors’ Duties in China: The Intersection between Culture and Laws’ (2014) 1 Asian Journal of Law and Society 183–203.
195 S Chen, Y Ye, F Jia and C Wang ‘Accounting for the Role of Culture in Board Directors’ Dissent’ (2022) 61 Research in International Business and Finance, 101652. See also J C Pang and S M Lo, ‘Effect of Place of Incorporation, Chinese Culture, and Business Practices on Corporate Fraud: Evidence from Hong Kong Listed Companies’ (2017) 46(2) Asia-Pacific Journal of Financial Studies 221–45.
196 See n 154 and accompanying text. The provision allows for compensation to be made not only to the company but also to creditors. For critique of the complexity of Sections 15A-B, see K van Zwieten, ‘Disciplining the Directors of Insolvent Companies: An Essay in Honour of Gabriel Moss QC’ (2020) 33 Insolvency Intelligence 2.
197 For examples of how civil penalty provisions can provide the incentives, see Wan et al (n 156).
198 See n 17 and accompanying text.
199 The bill has not yet been published and the reference to insolvency is drawn from Financial Services and Treasury Bureau, legislative Proposals on the Companies (Corporate Rescue) Bill, LC Paper No. CB(1)48/20-21(03) (22 October 2020).
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Notes on contributors
Wai Yee Wan
Wai Yee Wan is Professor, School of Law, City University of Hong Kong.
Phyllis Mo
Phyllis Mo is Professor, Department of Accountancy, City University of Hong Kong.
Gerard McCormack
Gerard McCormack is Professor, School of Law, University of Leeds.