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Following is the speech (translation) delivered by the Acting Secretary for Financial Services, Mrs Rebecca Lai, in moving the second reading of the Companies (Amendment) Bill 2000 in the Legislative Council today (Wednesday):

Madam President,

I move that the Companies (Amendment) Bill 2000 be read the second time.

The Bill has two objectives - firstly, to implement the Law Reform Commission's proposal on the introduction of a statutory corporate rescue procedure in Hong Kong and to introduce a provision on insolvent trading making responsible persons of a company personally liable; and secondly, to implement the various amendments to the Companies Ordinance recommended by the Standing Committee on Company Law Reform (SCCLR), with a view to making the Ordinance more user and business friendly, and facilitating the daily operation of the Companies Registry and the Official Receiver's Office.

I shall first give a brief explanation on the recommendations of the Law Reform Commission (the LRC). At present, there is already a provision in the Companies Ordinance which allows companies in financial difficulties to negotiate with their creditors on re-structuring or arrangements. However, the existing mechanism does not have a legally binding effect on creditors. Thus, in some cases, a company that would have otherwise been viable was forced to close down because a single creditor might decide to apply to court for its winding-up before an agreement on re-structuring was reached.

In view of this, we agree to the recommendation put forward by the LRC in 1996 that on top of the existing mechanism, a statutory rescue procedure be introduced to provide a breathing spell for a financially ailing company with viable business to restructure and to survive as a going concern.

In accordance with the LRC's proposal, the Bill prescribes that a company or a company director may initiate a moratorium to protect the debtor company from petition by creditors to wind up the company. the moratorium would last for 30 days initially and thereafter an extension of up to six months from the commencement of the moratorium can be made, subject to the court's approval. During the moratorium, an independent third party professional, the provisional supervisor, will take over the control of the company and formulate a voluntary arrangement proposal for consideration by the creditors within the specified time-frame.

The provisional supervisor will play a critical role in the rescue procedure. He has to come to grasp with the company's situation and gain the trust and cooperation of creditors within a very tight time-frame. He is also responsible for the daily operation of the company during the moratorium. In this regard, provisional supervisors must possess the necessary expertise and integrity. It is recommended in the Bill that provisional supervisors should only be selected from a panel of practitioners operated by the Official Receiver and comprising solicitors and professional accountants, or other qualified independent persons who can satisfy the Official Receiver that they possess the necessary skills.

The provisions prescribing the procedures for initiating corporate rescue, the implementation of the moratorium, the appointment of provisional supervisors and their role in the company, powers, duties and liabilities during the moratorium, the rights of the creditors, the requirements and procedures of creditors' meetings, the respective priorities of secured and unsecured debts of the company, and the arrangements after the approval of the voluntary arrangement are set out in new Part IVB in Clause 24. I do not intend to go through them in detail here.

While accepting the LRC's proposals, we have also made amendments to some of its recommendations. Specifically, the LRC has proposed in its report to widen the present scope of the Protection of Wages on Insolvency Fund (PWIF), so that employees who are laid off by a company undergoing corporate rescue and are owed wages can apply for ex-gratia payment from the PWIF. We conducted a consultation exercise on this subject in 1998. The findings revealed that both employers and employees groups unanimously objected to any change in the use of PWIF. Therefore, the Bill now proposes that a company must clear all arrears of wages, severance pay and other statutory compensations owed to its employees, as a going concern, before it can initiate the rescue procedure.

We also have reservation about the LRC's recommendation that the corporate rescue procedure should not apply to banks but should cover insurance companies and registered entities in the securities and futures industry. We are of the view that the three categories of organisations mentioned above are subject to similar regulatory regimes under the existing legislation which empowers the respective regulators to assume control of the regulated entity or oblige the entity to act in a certain manner in case the entity has financial difficulty. We, therefore, propose in the Bill that the corporate rescue procedure should not be applicable to authorized institutions regulated under the Banking Ordinance, insurers under the Insurance Companies Ordinance, registered dealers and other persons under the Securities Ordinance and the Commodities Trading Ordinance, and licensed leveraged foreign exchange traders under the Leveraged Foreign Exchange Trading Ordinance.

Madam President, I want to emphasize that the objective of the proposed introduction of a statutory corporate rescue is to rescue "viable" businesses which are facing short term financial difficulties or an economic setback. The proposed Bill is not a magical solution. It cannot revive doomed companies, nor should it be used to help debt-ridden corporations to linger on before their eventual demise. We hope that through the introduction of the statutory stay of proceedings, efforts of the professional provisional supervisors and co-operation of the creditors, viable companies can survive and do not have to go down the path of liquidation, so that at least some employment opportunities can thus be retained, and that shareholders and creditors will also benefit.

I would now turn to another recommendation of the Law Reform Commission, which is the introduction of the "insolvent trading" provisions. The provisions stipulate that should a responsible person of a company allows the company to engage in insolvent trading which leads to the company's subsequent winding up, he is liable to pay compensation to the company, unless he can prove that he has given due warning to the company and has proposed appropriate action to be taken. The relevant recommendation is at Clause 44 of the Bill. The objective of the provision is to encourage responsible persons and senior management of a company to face up to the situation early, before the financial situation of the company deteriorates to the stage of beyond rescue.

Madam President, the other objective of the Bill is to implement the various recommendations made by the SCCLR. These include, among others, Clauses 7 to 11, 15, 46 to 49 which seek to reduce the filing requirements for local and oversea companies.

Clause 14 introduces a new provision for companies to approve a written resolution without the need to convene a general meeting if unanimous consent is obtained from all members of the company. Smaller companies will particularly benefit because they can reduce the number of formal meetings.

Clause 13 proposes to lower the threshold for the requisition for convening an extraordinary meeting from the present requirement of members holding not less than one-tenth of the paid-up share capital to one-twentieth. This will help protect the interests of minority shareholders and will also enhance corporate governance.

The Bill also introduces a number of technical amendments to rectify certain omissions and to streamline and update some other provisions.

With these remarks, I urge Members to support the Companies (Amendment) Bill 2000. Thank you, Madam President.

End/Wednesday, January 19, 2000

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