LCQ9: Winding-up and cessation of business for airlines

    Following is a question by the Hon Howard Young and a written reply by the Secretary for Transport and Housing, Ms Eva Cheng, at the Legislative Council meeting today (May 21):


    It has been reported that owing to high oil prices and keen competition in the aviation industry, a number of overseas airlines announced earlier that there were risks of ceasing business due to operating difficulties. Such airlines were allowed to continue operation under bankruptcy protection orders to minimise the impact of immediately ceasing business. However, an airline in Hong Kong recently announced its immediate winding-up and cessation of business, affecting more than 30 000 passengers, some travel agents were also affected, and hundreds of million dollars were involved. In this connection, will the Government inform this Council:

(a)  whether it will consider making reference to overseas practices and introduce bankruptcy protection to prevent the recurrence of cases in which airlines with operating difficulties wind up and cease business immediately, which will have serious impact on the passengers, travel agents, and employees concerned, as well as tarnish the reputation of Hong Kong's aviation industry; and

(b)  given that under the existing winding-up arrangements, which are applicable to airlines, passengers and travel agents, not being preferential creditors, may ultimately not be awarded any compensation if an airline is unable to pay its debts with all its assets, whether the Government has made reference to the arrangements of the Travel Industry Compensation Fund and considered setting up a fund to protect passengers and travel agents against losses due to closing down of airlines; if such consideration has been made, when the relevant plan will be implemented; if not, of the reasons for that?


Madam President,

    After consulting the Financial Services and the Treasury Bureau and the Commerce and Economic Development Bureau, we would like to reply as followsˇV

(a)  Airlines are regulated by companies legislation in Hong Kong in the same manner as other companies.  There is already a mechanism under the companies legislation in Hong Kong which provides for companies in financial difficulties to continue their businesses while repaying their debts.  Under section 166 of the Companies Ordinance (Cap 32), a company in financial difficulties may enter into a scheme of arrangement with its members or creditors including its employees for repayment of its debts. A scheme of arrangement agreed by the majority representing three-fourths in value of debt of the creditors or value of shares of the members shall, if sanctioned by the court, be binding on all the creditors or members. The company may then continue its business and repay its debts in accordance with the scheme of arrangement approved by the court. The scheme of arrangement procedure may be invoked even after a winding up order has been made in respect of the company. If the scheme of arrangement is approved by the requisite majority of creditors or members and sanctioned by the court, the winding up proceedings will be stayed and the company may continue with its business and repay its debts in accordance with the scheme of arrangement.

    In case where the assets of the company in financial difficulties are in jeopardy, section 193 of the Companies Ordinance provides for the court, on application either by a creditor or the company itself, to appoint a provisional liquidator for the purpose of protecting and preserving the company's assets. If it is considered to be in the best interest of the creditors of the company, the court may empower the provisional liquidator to enter into discussions and negotiations for the purpose of restructuring the company's business and indebtedness or for the sale of the business of the company to interested investors. 

    As part of the Phase II of the Companies Ordinance rewrite exercise which will formally commence next year, the Financial Services and the Treasury Bureau will also review the above and other winding-up related provisions in the Companies Ordinance.

(b)  The Government at present has no plans to set up a compensation fund specifically for compensating travellers and travel agents in the event of the closure of an airline. At present, airlines in the market are vastly different in scale and internationally there is no precedent for reference when it comes to the setting up of this type of compensation funds. Significant implementation difficulties are envisaged.  Moreover, the levy of any compensation fund would often be borne by consumers and is very likely to lead to increases in airfares. We would thus need to consider this carefully with a view to balancing the development of the industry and the need to protect the interests of consumers and travel agents.

Ends/Wednesday, May 21, 2008
Issued at HKT 15:26