What You Need to Know About Corporate Rescue/Restructuring in Hong Kong
Unlike in other parts of the world, there isn’t a formal corporate rescue regime in Hong Kong. So, what can be done if your company is in distress?
With rising inflation, rocketing energy prices and a looming recession on the horizon, businesses everywhere are feeling the pinch. Despite being a global financial hub with a well-established capital market and stock exchanges, Hong Kong has always had limited mechanism and regime available when it comes to corporate rescue, which makes it a little bit trickier for companies to seek breathing room to turnaround their businesses, which often leave them vulnerable to individual creditor actions such as a petition to wind up the company.
Traditionally, corporate rescue in Hong Kong can be done in two ways:
one way of doing it is following a “scheme of arrangement” (“SOA”) process set out in Part 13 of the Companies Ordinance. Using an SOA, a company can, with help from its financial and legal advisors, prepare and present a turnaround plan to its creditors. If the plan is approved by a majority in number representing 75% in value of the creditors or each class of voting creditors (in other words, 100% creditor support is not required) present and vote in person or by proxy, and approved by the court, a restructure plan via an SOA can be implemented.
alternatively, corporate restructuring could also be pursued by the provisional liquidators, appointed on conventional grounds of the need to preserve the company’s assets, who are also given the restructuring power by the Hong Kong Court.
The options present different challenges:
for an SOA, its lack of moratorium (temporary freeze of all legal actions against the company in the lead up to an approval and implementation of any restructuring plan) can leave the company exposed to individual creditor action; as the SOA process can be time consuming and take months, this ongoing exposure presents a significant risk to the successful completion of the SOA process. Any legal action against the company during the process may terminate the SOA and cause all efforts and costs be wasted.
conducting a corporate rescue within a provisional liquidation creates a de facto moratorium However, the appointment of the provisional liquidators solely for the purpose of corporate rescue was held as not being appropriate by the Court of Appeal in Legend International Resorts Ltd CACV 210/2005. As such, any application for the appointment of the provisional liquidators must be made on a basis of a need to protect a company’s assets that are subject to risk of dissipation. By doing so, the company restructuring falls within the scope of a provisional liquidator’s duty to protect the assets, hence a provisional liquidator has been given the power to restructure the company if deemed to be in the collective interests of the creditors.
Assuming there are grounds to seek the appointment of a provisional liquidator, another consideration is that the company needs to locate a friendly creditor to make a winding-up petition against it in order to commence the court process. This can add another layer of complexity to the process.
While there has been extensive discussion over many years regarding the introduction of a proper restructuring regime, or at least a modification to the law to specifically allow a provisional liquidation appointment for the purposes of aiding a restructuring, no such changes have been implemented and there is no indication that this will alter in the foreseeable future.
With decades of experience in corporate rescue/restructuring involving cross border elements that helped many distressed companies get back on their feet, Perun Consultants is the leading independent advisory in the field to advise you every step of way through this complex process.
Contact us to find out how we could help you.