**************************************

Following is the speech by the Acting Secretary for Financial Services, Ms Au King-chi, in moving the second reading of the Companies (Corporate Rescue) Bill in the Legislative Council today (May 23):

Madam President,

I move that the Companies (Corporate Rescue) Bill be read the second time. The Bill seeks to implement the recommendations of the Law Reform Commission (LRC) that a statutory corporate rescue procedure should be introduced in Hong Kong and that provisions should be added to the Companies Ordinance to impose liability on the responsible persons of a company which traded while insolvent.

At present, section 166 of the Companies Ordinance provides for a company in financial difficulty to agree to an arrangement with its creditor or members. There is a shortcoming in this provision as the company may, at any time in the process of reaching such an agreement, be subject to its creditors' legal action to apply to the court to wind up the company thereby frustrating the company's effort to turn around by restructuring its debts.

To address this issue, the LRC recommended in 1996 the introduction of a corporate rescue procedure to enable companies with good potential but in financial difficulty to turn around. It recommended introducing a moratorium during which there will be a stay of all proceedings against the company and the company will be put under the control of an independent provisional supervisor whose main task is to formulate a voluntary arrangement for the company and its creditors.

The introduction of a corporate rescue procedure could give companies in financial difficulty an opportunity to turn around and continue to operate as a going concern, in whole or in part. It would be a win-win situation for the three parties, namely, the creditors, shareholders and employees. The creditors and shareholders would get a better return, whereas the employees might retain their jobs. Past experience has it that in a cyclical economic downturn, some companies might face short-term cash flow problems. Allowing those companies with good potential to formulate voluntary arrangements with their creditors would give them some breathing space, thereby helping to relieve us from some of the pressure in an economic downturn.

The provisions in this Bill on corporate rescue originally formed part of the Companies (Amendment) Bill 2000, which was introduced into the Legislative Council in January 2000. The then Bills Committee was generally supportive of introducing a statutory corporate rescue procedure. However, having regard to the complexity of the provisions and time constraints, its Members suggested and we agreed that the provisions be excised from the Companies (Amendment) Bill 2000.

Some Members of the Bills Committee expressed reservation about the requirement placed on a company to set aside sufficient funds, before commencing the corporate rescue procedure, to settle all arrears of wages, severance pay, etc, that it owed to its employees. They proposed that the Administration should consider introducing some flexibility to the requirement with a view to allowing employers and employees to settle the arrears of wages by other means and consult the Labour Advisory Board (LAB) on this matter.

We consulted the Protection of Wages on Insolvency Fund (PWIF) Board and the LAB in late 2000 on a proposal of allowing employers and employees to settle the arrears of wages through deferred payment or payment in lieu of cash and if this proposal was accepted, on whether the employees should be allowed to claim the PWIF in respect of the deferred payments or benefits traded in if the rescue failed and the company had to be liquidated. While both bodies supported the introduction of a corporate rescue procedure in Hong Kong, they objected to the proposal. They considered that the proposal would erode the protection afforded to employees under the existing labour legislation and that it was inconsistent with the objective of the PWIF. The PWIF has been set up to provide prompt relief in the form of ex-gratia payment to employees of insolvent employers and not to bail out companies in financial difficulties. They also pointed out that the proposal would give rise to additional financial burden for the PWIF. We have therefore retained the original proposal on the settlement of arrears of wages in this Bill.

The provisions in the present Bill are broadly the same as the relevant provisions in the Companies (Amendment) Bill 2000. The Bill sets out the details of the corporate rescue procedure; the appointment of a provisional supervisor and his powers and responsibilities; creditors' rights; and the arrangements for creditors' meetings. Moreover, after taking into account the views from professional bodies and trade organisations on the Companies (Amendment) Bill 2000, we have amended the relevant provisions as appropriate. For example, the Bill now provides that secured creditors, be they major or minor, have the right not to accept the voluntary arrangement proposed by the provisional supervisor. We also propose that if a member of a company considers that his interests are adversely affected by a resolution on the voluntary arrangement, he may apply to the court for a determination on the resolution.

The LRC has also recommended that provisions on insolvent trading be introduced to impose liability on the directors and senior management of a company if they permit the company to continue to trade while insolvent, thereby resulting in its eventual liquidation. Unless they can prove that they have given appropriate warning to the company or taken appropriate action, they will be required to be responsible for paying compensation to the company. This provision will help to encourage the directors and senior management of a company in financial difficulty to be more alert and take prompt actions, including initiating a corporate rescue procedure, to address the fact that the company is slipping into insolvency.

Since the LRC recommended introducing a statutory corporate rescue procedure in 1996, we have conducted two rounds of consultation on the details of the procedure, one in 1998 and the other in 2000. Although the community supports the introduction of a corporate rescue procedure, there have been different views on the detailed arrangements. This is inevitable because the details of the procedure would affect the interests and rights of creditors; shareholders and employees and professionals (in the capacity of provisional supervisors) would also have a role to play in this process.

Madam President, we do not think this should impede the implementation of the recommendation. In preparing the present Bill, we have adopted a pragmatic and cautious approach, taking into account the views received on this matter in the past four years and striking a balance between the interests of all the parties concerned. I hope Members will support the Companies (Corporate Rescue) Bill so that we can make the first, and important, step towards introducing a statutory corporate rescue procedure in Hong Kong.

Thank you, Madam President.

End/Wednesday, May 23, 2001

NNNN