LCQ4: Mechanism for rescuing corporates in financial difficulties
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Question:
While the Government indicated its intention to introduce legislation for a statutory corporate rescue procedure in 2020, it has not yet submitted the relevant bill to this Council to date. There are views that the absence of a statutory corporate rescue mechanism in Hong Kong not only increases the risk of viable companies being forced into winding-up, but also affects Hong Kong's competitiveness as an international financial and legal services centre. In this connection, will the Government inform this Council:
(1) of the progress of drafting the aforementioned bill and the legislative timetable; whether it has assessed the impact on the continued operation of corporates, the protection of the rights and interests of shareholders and employees, as well as the overall debt recovery rate for creditors under the current situation where there is no statutory corporate rescue procedure;
(2) of the legal framework that the Government will adopt when studying the corporate rescue regime, in order to balance the rights of the various parties involved in debt restructuring, including whether it will establish a moratorium on winding-up and appoint professional third parties to intervene to assist corporates in restructuring their businesses; how such a regime will effectively address conflicts of interest among creditors and ensure that the rights and interests of corporate directors, shareholders and employees are adequately protected; and
(3) whether it will include provisions in the bill to prevent abuse of the regime, and set up a special task force comprising representatives from government departments and professional bodies to take forward the legislative work?
Reply:
President,
The Government has been committed to enhancing the regime for corporate insolvency and restructuring in Hong Kong to protect the interests of shareholders, creditors and employees, while strengthening the city's competitiveness as an international business and financial centre.
Our consolidated reply to the various parts of the question is as follows:
The Financial Services and the Treasury Bureau and the Official Receiver's Office have previously conducted multiple rounds of consultation on a statutory corporate rescue procedure (CRP), including a consultation with the Panel on Financial Affairs of the Legislative Council (LegCo) on the legislative proposal in 2020, as well as the collection of views from various stakeholders. Despite the support from the accountancy and legal sectors, our proposal was met with objection and strong reservation from a number of LegCo Members and major stakeholders.
The labour sector was concerned that the statutory CRP might be abused to divert company assets, thereby avoiding the payment of employees' entitlements. Moreover, the corporate rescue, if failed, might impede the progress of employees' applications for ex gratia payments from the Protection of Wages on Insolvency Fund, and hence delaying when employees could receive financial assistance. There were also opinions expressing concerns that the provisional supervisors, upon taking control of the company, might prioritise corporate survival over adequate protection of employees when formulating the rescue plans.
In addition, there were concerns that debtors might exploit the moratorium under the statutory CRP to delay the legitimate debt recovery by creditors. Moreover, where any independent third-party professionals were appointed as provisional supervisors to take control of the company in the statutory CRP, they might not be as familiar with the company's business operations as the management, making it difficult for them to provide targeted and practical recommendations. Representatives of small and medium enterprises (SMEs) also expressed worries that due to the relative complexity of the CRP in the legislative proposal and the potential involvement of costly professional fees, only a small number of large companies would use the CRP. As many SMEs would become unsecured creditors in the CRP and would have relatively weaker bargaining power, they might have to accept significant haircuts on debts owed to them under the rescue plan, thereby undermining their interests. Therefore, after taking into account the views of all stakeholders on the statutory CRP, we have decided to maintain the existing market-led scheme of arrangement as the statutory debt restructuring regime.
In fact, under Hong Kong's common law system and the judicial system which aligns with international standards, companies are currently provided with attractive and highly effective restructuring options. The scheme of arrangement provided under the Companies Ordinance (Cap. 622) has long been utilised by the market to bring about successful debt restructuring for a number of companies. Over the past five years, the courts of Hong Kong have sanctioned over 40 schemes of arrangement for debt restructuring, covering companies in industries such as aviation, mining, and real estate. It is also noted that schemes of arrangement sanctioned by Hong Kong courts have been recognised and adopted in parallel with similar procedures in other jurisdictions in recent years, thereby facilitating cross-border debt restructuring.
Under court supervision, the existing scheme of arrangement effectively supports viable companies in debt restructuring and reduces their risks of being forced into winding-up. Specifically, before a restructuring proposal can be sanctioned by the court, a meeting of creditors or different classes of creditors must be convened, and the proposal must be approved by a majority in number representing at least 75 per cent in value of the claims of the creditors present and voting at the meeting. In addition, employees with outstanding entitlements (such as unpaid wages) are generally regarded as a separate class of creditors. This mechanism can effectively handle conflicts of interests among different creditors, while protecting the interests of corporate directors, shareholders and employees during restructuring, and providing companies with more flexible and practical restructuring options with the support of the common law system.
Under the scheme of arrangement, a company may appoint an independent third-party restructuring consultant (usually a lawyer or an accountant) to assist in drawing up restructuring plans while maintaining normal operations during restructuring. If a winding-up order is issued against the company, the restructuring work will be undertaken by a liquidator, who may apply to the court for continuation of the company's business operations if necessary. The existing scheme of arrangement, with its flexibility and practicality, has gained recognition from the international community and the market. It provides effective support for viable enterprises to sustain operations while striking a proper balance among the interests of different parties.
The Hong Kong Special Administrative Region Government is now focusing on building a vibrant economy, striving for development, and promoting high-quality development of the financial market to create a more favourable business environment for enterprises, aiming for better alignment with our country's development strategies of promoting high-standard opening up during the 15th Five-Year Plan period. We will keep an open mind and continue to proactively collect and evaluate views from various stakeholders on the CRP or the existing winding-up regime through different channels, with a view to making the insolvency and restructuring regime more pragmatic and efficient, thereby benefiting market participants.
Thank you, President.
Ends/Wednesday, April 1, 2026
Issued at HKT 13:18
Issued at HKT 13:18
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