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Journal of Corporate Law Studies Volume 12, 2012 - Issue 1
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Original Articles

Towards An Effective Scheme-Based Corporate Rescue System for Hong Kong

Charles Zhen Qu Associate Professor, Griffith Business School, Griffith University.
Pages 85-127 | Published online: 07 May 2015

  • D Milman, “Scheme of Arrangement and Other Restructuring Regimes under UK Company Law in Context” (2011) 301 Company Law Newsletter 1. For the meaning of corporate rescue, see V Finch, Corporate Insolvency Law: Perspectives and Principles (Cambridge University Press, 2nd edn, 2009), 243–44; R Parry, Corporate Rescue (London, Thomson Sweet & Maxwell, 2008), 2. The term “corporate rescue” is used in this article to mean not only saving the company as a going concern but also (i) “[a] more advantageous realisation of the company's property than would be effected on a winding up of the company” and (ii) “the more advantageous satisfaction, in whole or in part, of the debts and other liabilities of the company”, which are among the stated purposes in the corporate rescue procedure (Provisional Supervision) proposed for Hong Kong: Financial Services and the Treasury Bureau, “Review of Corporate Rescue Procedure Legislative Proposals: Consultation Paper” (Hong Kong, October 2009), 2–3.
  • The UK SOA provision (Companies Act 2006, s 895) does not provide for a moratorium. Nor does Hong Kong's equivalent provision (Companies Ordinance, s 166), which is of British lineage: EL Tyler (ed), Hong Kong Company Law Handbook (Hong Kong, LexisNexis, 11th edn, 2009), 757–58. For views on SOA as a rescue procedure see Finch, Ibid, 483; EL Tyler, “Proposals for a New Corporate Rescue Procedure in Hong Kong” in G Wang and Z Wei (eds), Legal Developments in China: Market Economy and Law (Hong Kong, Sweet & Maxwell Asia, 1996), 55–56; S Smith, “Some Problems in Reorganising Insolvent Companies” in M Merry (ed), Law Lectures for Practitioners (1983), available at http://sunzi.lib.hku.hk/hkjo/article.jsp?book=14andissue=140006 (accessed on 12 August 2011), 245; P Smart and CD Booth, “Reforming Corporate Rescue procedures in Hong Kong” (2001) 1 Journal of Corporate Law Studies 485, 487 (“the deficiency of the scheme of arrangement as a corporate rescue mechanism require no elaboration”); CD Booth, “Hong Kong Insolvency Law Reform: Preparation for the Next Millennium” (2001) The Journal of Business Law 126, 147–48; CD Booth et al., “Corporate Rescue in Hong Kong” in R Olivares-Caminal (ed), Expedited Debt Restructuring: An International Comparative Analysis (The Hague, Kluwer Law International, 2007), 297, 301. See also DG Baird, Elements of Bankruptcy (Washington DC, BeardBook, 5th edn, 2010), 237; LM LoPucki and GG Triantis, “A System Approach to Comparing US and Canadian Reorganization of Financially Distressed Companies” in JS Ziegel (ed), Current Developments in International Comparative Corporate Insolvency Law (Oxford, Clarendon Press, 1994), 109, 163, 171. Note, however, that the SOA provisions in jurisdictions where this procedure is of Australian lineage does provide for an interim moratorium: see n 192 below.
  • See infra Section C.
  • infra text to n 35.
  • Eg Tyler (1996), supra n 2; Smart and Booth, supra n 2; CD Booth, “Hong Kong Insolvency Law Reform: Preparing for the Next Millennium” [March 2001] Journal of Business Law 126; EL Tyler, “Insolvency Law in Hong Kong” in R Tomasic (ed), Insolvency Law in East Asia (Aldershot, Ashgate, 2006), 213; CD Booth and TN Lain, “Rescuing Hong Kong Companies with Provisional Supervision: Proposals that Workers and Management can Support” (2010) 40 Hong Kong Law Journal 271.
  • Although there is a small body of literature on SOA as a rescue device in Singapore, little has been done on Hong Kong's SOA-based rescue system. For literature on SOA in Singapore, see Lee Eng Beng, “Recent Developments in Insolvency Laws and Business Rehabilitations—National and Cross-Border Issues”, available at http://www.aseanlawassociation.org/docs/w6_sing.pdf (accessed on 12 August 2011); TE Chan, “Schemes of Arrangement as a Corporate Rescue Mechanism: The Singapore Experience” (2009) 18 International Insolvency Review 37. For a recent article on the utility SOA as a restructuring device in the UK, see Milman, supra n 1.
  • Triantis identifies a number of the “cornerstones” of a reorganisation regime (G Triantis, “Mitigating the Collective Action Problem of Debt Enforcement through Bankruptcy Law: Bill C-22 and its Shadow” (1992) 20 Canadian Business Law Journal 246, 248–49). One of these is “provisions that preserve and maximise the going-concern surplus of the business during the reorganisation process”. The debtor's timely commencement of the reorganisation process is crucial to the preservation of its going concern value premium (D Hahn, “Concentrated Ownership and Control of Corporate Reorganisations” (2004) 4 Journal of Corporate Law Studies 117, 139). The ultimate purpose of any corporate insolvency regime is to reallocate the assets of uncompetitive entities (AJ Kammel, “The Law and Economics of Corporate Insolvency—Some Thoughts” in PJ Omar (ed), International Insolvency Law: Themes and Perspectives (Aldershot, Ashgate, 2008) 61–62). A rapid redeployment of the assets of inefficient firms to higher value uses is conducive to economic growth and helps maximise the resources available for the payment of creditors' claims (KE Davis and MJ Trebilcock, “Legal Reforms and Development” [February 2001] Third World Quarterly 21, 21–23). A decision made by pre-petition management and creditors on the deployment of the debtor's assets can, however, be distorted by the stakeholders' strategic behaviour: see J Armour, “The Law and Economics of Corporate Insolvency: A Review”, ESRC Centre for Business Research, University of Cambridge Working Paper No 197, available at http://www.cbr.cam.ac.uk/pdf/wp197.pdf (accessed on 7 October 2011); JJ Quinn, “Corporate Reorganisation and Strategic Behaviour: An Economic Analysis of Canadian Insolvency Law and Recent Proposals for Reform” (1985) 23 Osgoode Hall Law Journal 1; Hahn, Ibid. A central task of a corporate reorganisation project is therefore to correctly identify the higher value uses and determine how the debtor's assets should be allocated accordingly. To combat creditors' hold-out behaviour and to prevent the company from dismembered by individual enforcement actions, it is imperative for any reorganisation regime to provide for a stay of proceedings (Triantis, Ibid).
  • See Appendix I. These cases, which were decided between 1989 and 2009, are collected from the Hong Kong Collection of the Westlaw International database. Some of these decisions relate to different aspects of using SOA as a rescue procedure with regard to the same matter (eg decisions on the initial and subsequent adjournment applications and on the petition for the sanction of the proposed scheme).
  • EL Tyler, “Current Issues in Insolvency” in Commercial Law (1991) 20–22; Tyler, “Proposals for a New Corporate Rescue Procedure”, supra n 2, 52. The likely reasons included the draconian debt enforcement procedures (both legal and extra-legal), the flexibility of Hong Kong Chinese businesses, and the extended family financing and support.
  • AC Tang, Insolvency in China and Hong Kong (Hong Kong, Thomson Sweet & Maxwell Asia, 2005), 35.
  • Ibid.
  • Ibid.
  • Ibid.
  • A workout is “[a]n out of court agreement between the stakeholders of a company on a mutually acceptable course of action, with the aim of rescuing an enterprise with a commercially viable future”: S Chatterji and P Hedges, Loan Workouts and Debts for Equity Swaps (Chichester, John Wiley & Sons, 2001), 21.
  • “By this method, a new subsidiary is formed and the assets of a viable business (including current contracts) are transferred to it for valuation. The shares of the subsidiary are then sold to a purchaser who thus takes over the new hive-down company free of the burden of the earlier liabilities. The insolvent company receives the consideration, which may represent a better and speedier realisation of assets for the benefit of the ordinary creditors than a break up sale of assets”: A Hick, “Reforming Insolvency Law—Company Rescues” (1986) 7 Singapore Law Review 128, 132. On the use of the hive down technique by a receiver to effect a corporate rescue see J Brewer, The Law and Practice of Hong Kong Companies (Hong Kong, Thomson Sweet & Maxwell, 2nd edn, 2009), 296–97; Tyler, Hong Kong Company Law Handbook, supra n 2, 1262.
  • The Hon Madam Justice Kwan et al (ed), Company Law in Hong Kong—Insolvency Part 11 Receivership (2005, loose-leaf) 11.001.
  • Tyler, Hong Kong Company Law Handbook, supra n 2, 1262 et seq.
  • Eg Triantis, supra n 7.
  • An example of a debtor company that has a large number of creditors is CP Pokphand. That company, which was reorganised in the 1990s, had more than 250 creditors (interview with Mr Stephen Briscoe, Managing Director, Briscoe and Wong Ltd, 29 September, 2010, Hong Kong).
  • There is evidence in the UK that it is possible to reduce the coordination problem in cases where workouts are conducted under the so-called “London Approach”, which is a set of selfenforcing informal reorganisation conventions (J Armour and S Deakin, “Norms in Private Insolvency: the ‘London Approach' to the Resolution of Financial Distress” (2001) 1 Journal of Corporate Law Studies 21). In fact, the London Approach has been adopted in Hong Kong. In November 1999, the Hong Kong Association of Banks (HKAB) and the Hong Kong Monetary Authority (HKMA) jointly issued a non-statutory guideline called “Hong Kong Approach to Corporate Difficulties” (The Hong Kong Approach Guidelines). In terms of the way in which it works, the Hong Kong Approach is similar to the London Approach (see D Carse, speech at the Seminar on Hong Kong Approach to Corporate Difficulties, 29 November 1999, available at http://www.info.gov.hk/hkma/eng/speeches/speechs/david/speech_291199b.htm (accessed on 9 October 2011). The role of the Hong Kong Approach in facilitating workouts in Hong Kong, however, appears to be limited. First, the number and diversity of banks involved in some workouts means that it can be extremely difficult to achieve consensus on restructuring proposals. In Hong Kong, it is not unusual to find even medium-sized companies with dozens of lenders. Troubled companies may find it difficult to maintain the loyalty and support of all of their banks. Lenders that do not have long-term relationships with companies may try and protect themselves by pulling the line at the first sign of trouble (Ibid). Also, a number of foreign banks began to reduce their commitment to Hong Kong since the late 1990s. Some of these banks tend to take a hard line and head offices of these companies, which may not be located in Hong Kong (and hence will pay less heed to the conventions established by the Hong Kong Approach), sometimes encourage this attitude (Ibid). Secondly, the Hong Kong Approach guidelines only apply to bank lenders, but in Hong Kong an ailing company often has a considerable number of non-bank creditors, especially where the company is in the construction sector (Booth et al., supra n 2, 311). Finally, markets for distressed debts may have destabilising consequences for the norms that have established by the London Approach (hence Hong Kong Approach), as “vulture” investors are less likely to repeat business with bank lenders in question (Armour and Deakin, Ibid, 48, 49). Such markets have developed in Hong Kong and there is evidence on the pattern of behaviour of “vulture” investors that Armour and Deakin have described. In Re Legend International Resorts Ltd [2005] 3 HKLRD 16 CFI, for example, a Morgan Stanley vulture fund purchased the participation of a financial institution creditor in September 2004 and then proceeded to apply for the winding up of the debtor, which was a Hong Kong company the assets and operations of which are in the Philippines. Subsequent to the presentation of the petition, the vulture fund acquired the entire participation of a consortium of lenders. When the company petitioned for corporate rehabilitation in the Philippines, the vulture fund investor applied for the appointment of a provisional liquidator in Hong Kong, contending that the Philippine court did not have jurisdiction to entertain the Rehab petition. The vulture investor in this case obviously did not pay any heed to the Hong Kong Approach guidelines.
  • R Goode, Principles of Corporate Insolvency Law (London, Thomson Sweet & Maxwell, 3rd edn, 2005), 247–48.
  • Although receivership is by no means useless for corporate rescue in Hong Kong. This is evidenced in the cases where SOA rescue schemes are organised by receivers and managers appointed to the debtor: Re X10 Ltd [1989] HKLY 108; Re Interform Ceramics Technologies Ltd [2001] HKEC 469; Re S Megga Telecommunications Ltd [2002] HKEC 1344; Re Music Trading On-Line (HK) Ltd [2008] HKEC 2110.
  • See Tyler, “Proposals for a New Corporate Rescue Procedure”, supra n 2, 51, 56; Tang, supra n 10, 63–90.
  • Tyler, Ibid, 57.
  • The Law Reform Commission of Hong Kong, “Report on Corporate Rescue and Insolvent Trading” (October 1996), [1.1]—[1.7].
  • See Tyler, supra n 5, 222; Booth and Lain, supra n 5, 272.
  • EL Tyler and A Young, “Provisional Supervision in Hong Kong: Third Time Lucky?” (2011) 8 International Corporate Rescue, available at http://www.chasecambria.com/site/journal/icr.php?vol=9andissue=1 (accessed on 12 August 2011); anonymous, “Proposed Trust Fund Cause for Concern”, South China Morning Post, 12 December 2001, 7. The government only provides able-bodied unemployed persons aged between 15 and 59 with employment assistance and very modest temporary financial assistance. For details see “Comprehensive Social Security Assistance (CSSA) Scheme”, available at http://www.swd.gov.hk/en/index/site_pubsvc/page_socsecu/sub_comprehens/ (accessed on 1 March 2012).
  • The amount of PWIF payment that an employee is entitled to is several times larger than their preferential entitlement: for details see Tang, supra n 10, 461.
  • The Law Reform Commission of Hong Kong, supra n 25, [5.40]–[5.43].
  • P Smart, “Reforming Corporate Rescue Procedures in Hong Kong” (2001) 1 Journal of Corporate Law Studies 485, 495.
  • Companies (Amendment) Bill 2000, s 168ZA(c)(iv); P Smart and CD Booth, “Provisional Supervision and Workers' Wages: An Alternative Proposal” (2001) 31 Hong Kong Law Journal 188, 189.
  • Tyler and Young, supra n 27.
  • See http://www.legco.gov.hk/yr00-01/english/bc/bc12/papers/bc12cb1-2185-1e.pdf.
  • Financial Services and the Treasure Bureau, Hong Kong SAR, “Review of Corporate Rescue Procedure Legislative Proposals: Consultation Conclusions”, available at http://www.fstb.gov.hk/fsb/topical/review_crplp.htm, 15–16.
  • This appears to be the view of most of the insolvency and restructuring professionals who made a submission to Hong Kong's Financial Services and Treasury Bureau (FSTB) in response to the FSTB's Consultation Paper on Review of Corporate Rescue Procedure Legislation Proposals (available at http://www.fstb.gov.hk/fsb/ppr/consult/doc/review_crplp/Anonymous%20D.pdf). See, eg the submissions by Borrelli Walsh (an experienced specialist insolvency and restructuring firm) (“The alternatives put forward in the Consultation Paper will (both) unreasonably restrict the use of provisional supervision where a company, [sic] in financial distress has difficulty in finding sufficient cash to settle employees outstanding claims or may divert cash which may best be used to ensure the continuation of the business as a going concern”), F Hodgson (“Companies in financial difficulties are unlikely to have sufficient cash available to pay or meet such entitlements. Given the proposed insolvent trading amendments, what does a company do if it cannot pay these entitlements before entering into PS? It will have no alternative than to seek liquidation when it could not possibly be otherwise saved by PS”), KK Yeung Management (an experienced workout specialist) (“We would not prefer any of the three options namely the 2003 Proposal, Alternative A or Alternative B. We consider all the options to be unduly complicated and to a large extent, impracticable. Also, we consider that public funds like PWIF should not be used outside their currently established purposes for which the funds were set up”), Deloitte (“[U]nder this proposal, the possibility of rescuing the company will still be subject to the risk that the company may not have sufficient cash flow to settle the employees' outstanding entitlements”), WMF Wong (a barrister practising in the area of corporate insolvency) (“[A]lthough one is inclined to support an option that will grant full payment to employees albeit within 12 months, the reality … is that if Alternative B (the alternative that has been recommended in the Consultation Conclusion)) is implemented, investors or white knights will simply buy out all the assets of the company at a certain price instead of taking over the company as a whole. They will then offer new contracts to the existing employees … To be pragmatic, one must realise that to insist on full payment to employees' outstanding claims may not be beneficial both to the underlying objective of corporate rescue and the interest of employee” (original emphasis)), Rupert Purser (a shareholder and director of a private equity fund that invests in distressed companies) (“However, if employees are to be paid …a preferential amount that does not reflect a strict liquidation right of payment in accordance to a company's available assets that would be available to a liquidator, then the Government should provide funding for these payments.”). See also the view of Briscoe Wong Ferrier (one of the most respected insolvency firms in Hong Kong): “Provisional Supervision And (More Importantly) Insolvent Trading”, available at http://www.briscoewongferrier.com/web/?p=468 (“The problem continues to be, how can a company that is hopelessly insolvent come up with sufficient cash to meet employee liabilities, particularly those which have to be paid under (1) and (2) above, within such a tight timeframe. This is likely to limit the use of the legislation, as many companies will not have the funds available to satisfy these requirements. In those cases, the outcome is likely to be liquidation and the loss of jobs rather than the company being rescued”). Business owners appear to share the views of insolvency professionals. For example, the Hong Kong Small and Medium Enterprises Association has also expressed its concerns, in its submission to FSTB, about the need to make full payments to employees, pointing out that the very reason that some firms choose to wind up is precisely the inability to discharge their debts to employee creditors.
  • Tyler, Hong Kong Company Law Handbook, supra n 2, 758–60.
  • See supra n 2.
  • See infra Section G.1.
  • V Finch, “Control and Coordination in Corporate Rescue” [2005] Legal Studies 347, 348.
  • See generally Hahn, supra n 7, 133.
  • Ibid, 139–40.
  • Ibid, 139.
  • Ibid, 141.
  • “[I]nsolvency procedures, once opened, can have a negative impact on goodwill and on the value of the business”: Parry, supra n 1, 16.
  • Hahn, supra n 7, 145.
  • Ibid, 145–46. For the advantages of a DIP regime, see also Booth and Lain, supra n 5.
  • Hahn, Ibid, 146.
  • Ibid, 138.
  • G Moss, “Chapter 11: An English Lawyer's Critique” (1998) 11 Insolvency Intelligence 17, 19.
  • MJ Bienenstock, “Conflicts between Management and the Debtor-in-Possession's Fiduciary Duties (1992) 61 University of Cincinnati Law Review 543, 545; Hahn, supra n 7, 131.
  • Hahn, Ibid, 131.
  • Ibid, 133.
  • FH Buckley, “The American Stay” (1993–94) 3 Southern California Interdisciplinary Law Journal 45; M Trebilcock and J Katz, “The Law and Economics of Corporate Insolvency: A North American Perspective” in C Rickett (ed), Essays on Corporate Restructuring and Insolvency (Wellington, Brooker's, 1996) 1, 8; Hahn, supra n 7, 133.
  • Hong Kong Society of Accountants, “Second Report of the Corporate Working Group” (Hong Kong, 1997), 4.
  • Corporate Governance Review by Hong Kong's Standing Committee on Company Law Reform, Consultation Paper, Phase I, available at www.info.gov.hk/cr/download/scclr/Rpt_e.pdf (accessed on 12 August 2011), 4–5.
  • P Lawton and EL Tyler, “Division of Duties and Responsibilities between the Company Secretary and Directors in Hong Kong: Final Report” (Hong Kong, Hong Kong Institute of Company Secretaries, 2001) 16.
  • SH Goo and A Carver, Corporate Governance: the Hong Kong Debate (Hong Kong, Thomson Sweet & Maxwell Asia, 2003), 35–36.
  • Lawton and Tyler, supra n 56, 14.
  • As in Re Beauforte Investors Corp Ltd [2008] HKEC 1003; Re Kosonic Industries Ltd [1999] HKEC 1183; Re Sun Motor Industrial Co Ltd [2008] HKEC 2006; Re Team Concepts Manufacturing Ltd [2001] 3 HKLRD K7.
  • Re Yetyue Ltd [2001] HKEC 1156.
  • See Appendix II.
  • Re Kosonic Industries Ltd [1999] HKEC 1183; Re Team Concepts Manufacturing Ltd [2001] 3 HKLRD K7; 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; Re Perfect Sense Group Ltd [2007] HKEC 966; Re Beauforte Investors Corp Ltd [2008] HKEC 1003.
  • This is Re Stereo Ltd [2005] HKEC 1085. The judgment of this case does not mention the cause of the company's distress. The time at which the company experienced financial difficulty (2003), however, indicates a likelihood that the debtor's stress is caused by the financial downturn caused by this deadly epidemic disease prevailed in Hong Kong in 2003.
  • UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634, para 6.
  • Re Yetyue Ltd [2001] HKEC 1156, para 3.
  • Re Perfect Sense Group Ltd [2007] HKEC 966.
  • Re Sun Motor Industrial Co Ltd [2008] HKEC 2006.
  • In that case, the assets were held by the subsidiary (G Co) of one of the subsidiaries (O Co) of the company. O Co sold its shareholdings in G Co to an unrelated company, T Co, which was to make the payment by way of a promissory note secured by the G Co shares. The promissory note was payable about eight months after the date of contract. T Co defaulted and the ownership of G Co shares reverted to O Co through the enforcement of the security. It appears that the assets held by G Co were dissipated before O Co resumed its control over G Co.
  • Re Beauforte Investors Corp Ltd [2008] HKEC 1003.
  • Re Yetyue Ltd [2001] HKEC 1156; Re APP (Hong Kong) Ltd [2005] HKEC 1583.
  • Re Stereo Ltd [2005] HKEC 1085.
  • Although it is possible for the debtor management to resist a winding-up application by petitioning an adjournment of the proceeding: see Section F.1 infra.
  • See, for example, Tang's comments on the utility of provisional liquidation for rehabilitating ailing companies: Tang, supra n 10, 113.
  • The extent to which the main task of IPs is going concern or asset sales in Hong Kong can be gleaned from a review of the 28 sanctioned cases mentioned above. In 16 of these cases, the restructuring of the debtor was managed by IPs (see the asterisked items in Appendix II). With the exception of two cases (Re Sharp Brave Co Ltd [1999] HKEC 368 and Re Merchants (Hong Kong) Ltd [2005] HKEC 594), the restructurings in all 16 cases was organised to effect a sale of going concern or asset, or both.
  • See Cork Committee's comments on receivers' ability to dispose the whole or part of the debtor's business as a going concern: “Insolvency Law and Practice: Report of the Review Committee”, Cmnd 8558 (the Cork Report), 1982, 117.
  • DG Baird, The Elements of Bankruptcy (New York, Foundation Press, 3rd edn, 2010) 169; LoPucki and Triantis, supra n 2, 110, 117.
  • TH Jackson, The Logic and Limits of Bankruptcy Law (Washington DC, BeardBooks, 1986) 10–11.
  • Ibid, 10–13.
  • Re X10 Ltd [1989] HKLR 306 HC.
  • Ibid per Jones J, [3].
  • Ibid.
  • [1996] HKLY 203 CA.
  • Re UDL Holdings Ltd [1999] 2 HKLRD 817 per Le Pichon J, 822–23.
  • Re APP (Hong Kong) Ltd [2004] HKEC 522 per Kwan J, [23], [26].
  • Re UDL Holdings Ltd [1999] 2 HKLRD 817; Re CIL Holdings Ltd [2002] HKEC 97; Re APP (Hong Kong) Ltd [2004] HKEC 522; Re Advanced Wireless Group Ltd [2007] HKEC 764.
  • Re Hong Kong Brewing and Restaurants Ltd [1999] HKEC 637 (pinpoint reference unavailable).
  • Re Advanced Wireless Group Ltd [2007] HKEC764 (liquidation scenario: in the range of 1.68–3.01%; restructuring scenario: in the range of 9.99–16.52%); Re APP (Hong Kong) Ltd [2004] HKEC 522 (liquidation scenario: in the range of 2.6–4%; restructuring scenario: immediate 10% return or one new share of par value HK 1 for every HK 1 of their admitted claims, such shares ranking pari passu to the existing shares).
  • Re UDL Holdings Ltd [1999] 2 HKLRD 817 per Le Pichon J, 828.
  • In Re Advanced Wireless Group Ltd [2007] HKEC 764 the company was granted a number of adjournments between October 2006 and July 2007. The shortest adjournment granted was 1 week (see [4] in the judgment); the longest, 3 months (see [53]).
  • For example, in Re CIL Holdings Ltd [2003] HKEC 519 the winding-up petition was presented on 11 May 2001 and the proposed scheme was sanctioned on 2 April 2003. The total period of stay granted through extending adjournments amounted to close to 23 months.
  • See Re UDL Argos Engineering and Heavy Industries Co Ltd [1999] HKEC 1054; Re UDL Holdings Ltd [1999] 2 HKLRD 817; Re CIL Holdings Ltd [2002] HKEC 97; APP (Hong Kong) Ltd [2004] HKEC 522; Re Advanced Wireless Group Ltd [2007] HKEC764. Re
  • Eg Re UDL Holdings Ltd [1999] 2 HKLRD 817; Re UDL Argos Engineering and Heavy Industries Co Ltd [1999] HKEC 1054; Re CIL Holdings Ltd [2002] HKEC 97; Re APP (Hong Kong) Ltd [2004] HKEC 522; Re Advanced Wireless Group Ltd [2007] HKEC764.
  • CO, s 186.
  • Ibid, s 193.
  • Ibid, s 192.
  • CM Schmitthoff (ed), Palmer's Company Law (London, Stevens & Sons, 24th edn, 1987), 1394; G Lightman and G Moss, The Law of Receivers of Companies (London, Sweet & Maxwell, 2nd edn, 1994), 19–20; L Sealy and D Milman, Annotated Guide to the Insolvency Legislation (London, Sweet & Maxwell, 9th edn, 2006), 166; P Kwan, Hong Kong Corporate Law (LexisNexis, Hong Kong 2006) 1283; M Philips and G Moss, “Provisional Liquidators: New Uses for an Old Remedy” (1993) 6 Insolvency Intelligence 1; Re Dry Docks Corporations of London (1888) 39 Ch D 306 per Kay J at first instance; Re Hammersmith Town Hall Company (1877) 6 Ch D 112; Re Carpark Industrial Pty Ltd [1967] 1 NSWR 337, 341.
  • [1985] 1 WLR 149.
  • Re Highfield Commodities Ltd [1985] 1 WLR 149, 159C—F.
  • Re English and American Insurance Co Ltd [1994] 1 BCLC 649 per Harman J, 650; Smith v UIC Insurance Co Ltd [2001] BCC 11 per Judge Dean QC, 20–21.
  • Re English and American Insurance Co Ltd [1994] 1 BCLC 649 per Harman J, 650; Re Hawk Insurance Co Ltd [2001] EWCA Civ 241 per Chadwick LJ, para 8; Smith v UIC Insurance Co Ltd [2001] BCC 11 per Judge Dean QC, 20–21.
  • [2005] 3 HKLRD 16 CFI.
  • Re Legend International Resorts Ltd [2005] 3 HKLRD 16, 49.
  • Re Legend International Resorts Ltd [2006] 2 HKLRD 192, 203.
  • Re Legend International Resorts Ltd [2006] 2 HKLRD 192 CA, 203–04.
  • See Booth, et al., supra n 2, 308–09; DW Arner et al., “Property Rights, Collateral, Creditor Rights, and Insolvency in East Asia” (2007) 42 Texas International Law Journal 515, 554; A Hargoven, “Shareholders as Creditors in Hong Kong Corporate Insolvency: Myth or Reality?” (2008) 38 Hong Kong Law Journal 685, 703.
  • Financial Services and the Treasure Bureau, Hong Kong SAR, supra n 1, 7.
  • Re Legend International Resorts Ltd [2006] 2 HKLRD 192 CA, 203.
  • In six out of the 53 cases referred to in Section A the scheme was proposed for the purpose of rehabilitating the companies: Re Sharp Brave Co Ltd [1999] HKEC 368; Re Team Concepts Manufacturing Ltd [2001] 3 HKLRD K7; UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; Re Yetyue Ltd [2001] HKEC 1156; Re APP (Hong Kong) Ltd [2004] HKEC 522; Re Merchants (Hong Kong) Ltd [2005] HKEC 594. The scheme in none of these cases was devised or managed by provisional liquidators.
  • Tang, supra n 10, 113.
  • [2007] 2 HKLRD 725.
  • Re Plus Holdings Ltd [2008] HKEC 1327.
  • CO, s 186.
  • For case examples where the restructuring plans initiated/organised by liquidators of the companies in liquidation see Kansa General International Insurance Co Ltd [1999] 2 HKLRD 429; Re Yaohan Hong Kong Corp Ltd [2001] 1 HKLRD 363; Re Akai Holdings Ltd [2002] HKEC 1365; Re Akai Holdings Ltd [2002] HKEC 1365; Re Albatronics (Far East) Co Ltd [2002] HKLRD (Yrbk) 180; Re Wah Nam Group Ltd [2002] HKEC 1090; Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 363; Re Dickson Group Holdings Ltd [2008] HKEC 899; Re; Re Zhu Kuan (Hong Kong) Co Ltd [2007] HKEC 1947.
  • Eg Re Kansa General International Insurance Ltd [1999] 2 HKLRD 429; Re Sharp Brave Co Ltd [1999] HKEC 368; Re Akai Holdings Ltd [2002] HKEC 1365.
  • Eg Re Dickson Group Holdings Ltd [2008] HKEC 899.
  • Eg Re Wah Nam Group Ltd (No 2) [2003] 1 HKLRD 282.
  • See Re Sharp Brave Co Ltd [1999] HKEC 368.
  • Re Akai Holdings Ltd [2002] HKEC 1365; Re Albatronics (Far East) Co Ltd [2002] HKLRD (Yrbk) 180. Listing status is not a form of corporate asset for accounting purposes in the sense that it is not listed in the company's balance sheet. It is, however, legally recognised as a company's asset (In Re Plus Holdings Ltd [2007] 2 HKLRD 725, for example, Kwan J approved an application for the appointment of a provisional liquidator on the basis of the need for protecting the company's “assets”—its listing status). Investors in Hong Kong are willing to purchase a failed listed company's listing status. In Hong Kong, “it has historically been technically easier, if not always cheaper, to take over and revive an existing company by restructuring it and injecting new assets than to go for the alternative, a new floatation by way of a new issue or offer for sale” (Smith, supra n 2). A further reason why investors are willing to “purchase” a company's listing status lies in the considerable goodwill attached and the spread of shareholders that, at least in certain cases, goes with it (Ibid).
  • Re Dickson Group Holdings Ltd [2008] HKEC 899, [17].
  • See Re Dickson Group Holdings Ltd [2008] HKEC 899, [17].
  • See supra text to n 53.
  • These two methods are also used in America and Canada to monitor the debtor in possession: LoPucki and Triantis, supra n 2, 150–51.
  • Re UDL Holdings Ltd [1999] 2 HKILRD 817; Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104 per Rogers V-P, 113; The Cheery City Contractors Ltd [2004] HKEC 50 per Kwan J 4, para 28.
  • Re Golden Dragon Land Development Ltd [1999] 3 HKLRD J4; Re Koldtech Development (International) Ltd [2005] HKEC 1190; Re Luen Fai Piecegoods and Cloths Co Ltd [2010] HKEC 323.
  • GB Parker and M Buckley, Buckley on the Companies Act (London, Butterworths, 14th edn, 1981), 473–74.
  • Ibid, 473–74.
  • Ibid.
  • CO, s 166A.
  • Ibid, s 166A(1)(a).
  • Where the proposer of a scheme fails to disclose the required information in the statement, the proposed scheme cannot proceed: Re Cherry City Contractors Ltd [2004] HKEC 504; Re Koldtech Development (International) Ltd [2005] HKEC 1190.
  • See supra text to n 89.
  • See supra text to n 83.
  • Eg where the company fails to (i) adduce evidence that it has forwarded a rescue proposal, which has the “in principle” support of the scheme participants, or (ii) provide the court with its financial statements: Re Beauty China Holdings Ltd [2009] HKEC 1499; Re China Motor Vehicle Economic Development Co Ltd [2000] HKEC 61; In the Matter of Gold-Face Holding Ltd [2006] HKEC 1795; Re Greater Beijing First Expressways Ltd [2000] HKEC 651; Re Hong Kong Brewing and Restaurants Ltd [1999] HKEC 637; Re Koldtech Development (International) Ltd [2005] HKEC 1190; Re Luen Fai Picegoods and Cloths Co Ltd [2010] HKEC 323; Re Tse Yu Hong Ltd [1999] HKEC 1048. A debtor company also fails to meet the disclosure requirements if the disclosure documents contain misleading information on the rights of scheme participants in a liquidation and a restructuring scenario: Re Cheery City Contractors Ltd [2004] HKEC 504.
  • The rigour with which the reorganisation cases are screened at the pre-confirmation phase means that, when a case reaches the sanctioning stage, most of the ineligible firms would have been sifted out of the reorganisation process. That notwithstanding, court appearances at the confirmation stage still play a valuable gatekeeping role. An example is Re S Megga Telecommunications Ltd [2002] HKEC 1344, where the court refused to sanction the proposed scheme on the ground that a certain class of creditors was classified with the general unsecured creditors when they should have been allowed to vote as a separate class. Admittedly, Re S Megga is about the fair treatment of different classes of creditors, rather than protecting the scheme participants from the overreaching conduct of company controllers.
  • Corporations Act 2001, part 5.3A, divisions 6 and 7 (moratorium); ss 436E and 439A (creditors' meetings).
  • YT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 140 FLR 247 per Powell JA, 251.
  • Eg McVeigh and McDonald v Linen House Pty Ltd and Rugs Galore Australia Ltd (2000) 18 ACLC 311 (failure of the Administrator to inform creditors of material information); MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 140 FLR 247 (failure on the part of the debtor management to execute the Company Deed of Arrangement within the statutorily imposed time limit); Australasian Memory Pty Ltd v Brien (1998) 29 ACSR 344 (convening a creditors' meeting on a date earlier than the earliest date permitted under the Corporations Act 2001).
  • For example, the Corporations Act 2001, s 446A provides that a company is taken to have passed into liquidation where the provision (s 444B(2)) on the time of executing the Company Deed of Arrangement is not complied with. The company in Myt Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78 entered into liquidation against the creditors' collective decision to reorganise the company precisely for this reason.
  • Australasian Memory Pty Ltd v Brien (1998) 29 ACSR 344 per Powell JA, 347 (commenting on the possible outcome of the appeal to the High Court by the appellant company in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78).
  • See Parliamentary Joint Committee on Corporate and Financial Services, “Corporate Insolvency Laws: a Stocktake” (Canberra, June 2004), 74.
  • See supra text to n 62.
  • Although, in a legal sense, the company itself will remain the owner of the assets even when it is in a compulsory winding up (Ayerst (Inspector of Taxes) v C and K (Construction) Ltd [1976] AC 167; Franklin's Selfserve Pty Ltd v Commissioner of Taxation (1970) 125 CLR 52; Commissioner of Taxation v Linter Textiles Australia Ltd (In Liq) (2005) 220 CLR 592), the shares in such a company have no intrinsic value and any disposal of the company's assets would necessarily be for the benefit of the creditors (Re Yaohan Hong Kong Corp Ltd [2001] 1 HKLRD 363 CA).
  • J Quinn, “Corporate Reorganization and Strategic Behaviour: an Economic Analysis of Canadian Insolvency Law and Recent Proposals for Reform” (1985) 23 Osgoode Hall Law Journal 1, 3; Tyler, supra n 15, 758.
  • Triantis, supra n 7, 246.
  • RA Posner, Economics Analysis of Law (Beijing, CITIC, 6th edn, 2003), 422; Quinn, supra n 143, 24.
  • That is, claimants who do not have an interest in the survival of the company.
  • Quinn, supra n 143, 3–4.
  • On the rules on the sanction of a proposed s 166 scheme, see supra text to n 125.
  • Tyler, supra n 15, 761.
  • Ibid.
  • Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 per Bowen LJ, 583. Lopucki and Triantis, supra n 2, 171. See also the discussion below on the role of class meeting in controlling creditor opportunism against fellow creditors: see n 170 infra and accompanying text.
  • See supra n 2.
  • See Finch, supra n 2, 483. See also Smith, supra n 2, 245; Smart and Booth, supra n 2, 487 (“the deficiency of the scheme of arrangement as a corporate rescue mechanism require no elaboration”); Booth, supra n 2, 147–48; Booth et al., supra n 2, 300–01.
  • In re Industrial Equity (Pacific) Ltd [1991] 2 HKLR 614; UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] HKEC 1440.
  • Thus, where the proposed scheme involves a compromise with creditors who have recourse against both the borrowing company and the guarantor, which was the parent company of the borrower, it is unnecessary to include creditors who have recourse to the borrower but not the guarantor: Re Jinro (HK) International Ltd [2004] HKEC 519.
  • In Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [2010] BCC 209 (ChD), for example, Mr Justice Mann held that the valuation reports that were prepared by the scheme companies on a going concern basis could be used to determine the economic interests of subordinated creditors whereas the report prepared by the subordinated creditors was not good enough to establish what they sought to establish. The reason why the former was appropriate was that it was comprehensible and related to a real point, namely, how much a purchaser would pay for the corporate group. The latter, in contrast, was a mechanical and non-judgmental assessment, which was unsuitable in a case where a real world judgment as to what is likely to happen was called for.
  • This is the position in all but one case where the proposed schemes have been sanctioned by the Hong Kong courts since the 1990s. The only case where more than one class meetings were required is Re Plus Holdings Ltd [2008] HKEC 1327.
  • For an example, see UDL Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] HKEC 1440.
  • Quinn, supra n 143, 4.
  • But note that, as mentioned in Section C supra, because of the possibility of a PWIF payment where the company is wound up, employees in Hong Kong tend not to have a collateral interest in an inefficient reorganisation.
  • See Quinn, supra n 143, 4. See also Baird, supra n 2, 327.
  • See Quinn, Ibid, 5–6.
  • Ibid, 24.
  • See supra n 28.
  • Protection of Wages on Insolvency Ordinance 1985, s 16(1)(b).
  • Tang, supra n 10, 462.
  • Quinn, supra n 143, 4. The irony in Hong Kong is that the desire to obtain a share of the debtor's assets that a claimant is not entitled to under the statutory distribution system, where the claimant is an employee, is excited and supported by a different statutory rule—the provisions on PWIF.
  • Quinn, supra n 143, 5.
  • Ibid, 24.
  • See supra n 149.
  • See supra text to n 155.
  • Argos Engineering and Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634.
  • “In Chapter 11, judges have extraordinary power to approve plans of reorganisation that impose significant concessions on dissenting creditors, shareholders, and others. Colloquially, this power is called ‘cram down'”: J Friedman, “What Courts Do to Secured Creditors in Chapter 11 Cram Down” (1994) 14 Cardoso Law Review 1496, 1496.
  • The function of the classification rules should be read together with the rules on the sanction of an SOA scheme: see supra text to nn 125–27.
  • Quinn, supra n 143, 6.
  • See HTC Hu and B Black, “Equity and Debt Decoupling and Empty Voting II: Importance and Extensions” (2007–08) 156 University of Pennsylvania Law Review 625, 728, 731.
  • Ibid, 728.
  • CO, s 166(2).
  • See supra text to n 163.
  • supra n 143.
  • Ibid, 25.
  • Re UDL Holdings Ltd [2000] HKEC 429; Re Interform Ceramics Technologies Ltd [2001] HKEC 469; Re Dickson Group Holdings Ltd [2008] HKEC 899.
  • Re UDL Holdings Ltd [2000] HKEC 429; Re Dickson Group Holdings Ltd [2008] HKEC 899.
  • Financial Services and Treasury Bureau, supra n 1, 22.
  • [2002] HKEC 1344.
  • See comments made by Wong, supra n 35, para 21.
  • See supra n 157.
  • The Law Reform Commission of Hong Kong, “Report on Corporate Rescue an Insolvent Trading” (October 1996), 8.
  • See supra text to nn 43–44.
  • See supra Section F.
  • See Lee, supra n 6, 339.
  • A Chan (ed), Law and Practice of Corporate Insolvency (Singapore, LexisNexis, 2005), [750].
  • CA (Sing), s 210 (1); see also Chan, supra n 6, 42.
  • See Lee, supra n 6, 338–41.
  • These also include Malaysia.
  • Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180, 182.
  • Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180, 183.
  • Playcorp Pty Ltd v Venture Stores (Retailers) Pty Ltd (1992) 7 ACSR 193, 198.
  • See Lee supra n 191, 338–41; Chan, supra n 6.
  • See Hahn, supra n 7, 141.

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