Draft Changes to HK’s Insolvency Regime – Part V

The 5th article in our series on proposed changes to Hong Kong’s insolvency regime.

By Stephen Briscoe

Floating Charges

At present, if a floating charge is created within 12 months of the commencement of the liquidation it is deemed to be invalid except to the extent of any new money advanced at the time of its creation. This amendment will extend the period to 2 years if the floating charge has been created in favour of someone who is connected with the company. This is in line with the existing provisions in the UK and represents a further tightening up of provisions, the purpose of which is to protect the interests of creditors of financially distressed companies.

A further amendment would allow for the floating charge to be valid even in circumstances where money has not necessarily been paid to the company, but paid at the direction of the company. This makes sense insofar as it reflects commercial reality, particularly when a company may be financially distressed as is often the case where a floating charge is being granted.

Private Examination – Section 221

The administration proposes to expressly set out in the legislation the common law position that a person who is subject to a private examination pursuant to s.221 cannot invoke the privilege against self-incrimination during the examination. It seems clear that this is the well established position in Hong Kong and for that reason many people are of the view that “if it isn’t broken-don’t fix it”. The concern expressed by a number of professionals is that unless any changes are very carefully implemented it could lead to increased uncertainty regarding the circumstances in which s.221 examinations can take place and the information that a liquidator can discover from them. There does not seem to be any particular reason why it is necessary to implement this change and so once more the drafters of the legislation must be very careful.

Public Examination – Section 222

It is fair to say that whilst s.222 is on the statute book, it is a provision that in corporate insolvency has been all but irrelevant. It appears that the Administration wishes to change that and to give the section a few more teeth, presumably in the hope that it will be used more frequently.

At present, s.222 can only be used where an allegation of fraud has already been made.

The proposal is that going forward it will not be necessary for either the liquidator or the Official Receiver to have alleged fraud in order for a public examination to be conducted by either of them. The rationale set out by the Administration appears to envisage invoking this section against liquidators who do not properly perform their duties, as well as suggesting that it may be a way of bringing to the attention of the community at large the circumstances surrounding a company’s failure where perhaps there has been no allegation of fraud. Whilst this may seem superficially to be a useful power to have, it is difficult to envisage, except in extremely rare circumstances, situations in which this power might be invoked.

Section 221 continues to exist in circumstances where a liquidator wishes to obtain information in the context of a private examination such that the information is not disclosed to the public in order not to impact on the liquidators’ ability to investigate the affairs of the company and realise assets for the benefit of its creditors. Whilst the proposed changes to s.222 can possibly be justified in the context of the public interest, it is difficult to see circumstances in which a liquidator would want to invoke the provisions, bearing in mind the likely cost implications, with little or no prospect of the public examination resulting in additional recoveries for the benefit of creditors.

Providing For Liability Of Past Directors And Members In Connection With A Redemption Or Buy-back Of Shares Out Of Capital.

Under this proposal it is suggested that if a company is wound up within a year of its shares being redeemed or bought-back by a payment out of capital, the recipients of the payment and the directors making the solvency statement in respect of the redemption should be required to contribute to the assets of the company for an amount not exceeding the payment made by the company in respect of the shares. This would go towards meeting the deficiency in the company’s assets.

The rationale is to protect the interests of creditors by ensuring that the company’s paid-up capital is preserved and not returned to its members in the period leading up to a winding-up. Following on from this proposal, anyone who becomes a contributory as a result of the new liability arising from the claw-back will be able to petition for the winding-up the company on the basis of that debt.

Conclusion

The proposals that have been summarised over the last two or three months are currently being turned into a draft bill by the Administration’s legal draftsmen with the intention that they will be put before Legco and passed into law before the end of the current session in 2016. In the normal course of events, interested parties will have the opportunity to comment on the draft bill. However, it seems likely, as is all too often the case in Hong Kong, that the time frame for comments will be limited given the time constraints associated with getting the legislation through Legco. Once the amendments have been passed, that will not be the end of things. At that point, the Administration will then start the task of amending the Companies Winding-up Rules to reflect the changes to the Ordinance – not a straightforward task, but one that is every bit as important as the changes to the Ordinance.

Our final post on the subject will come out after the summer holidays and will focus on some of the key issues that have not been included in the proposed amendments, together with some thoughts on why that might be the case.