Provisional Supervision in Hong Kong: Employees’ Pre-Appointment Entitlements

By Stephen Briscoe

The treatment of employees and their pre-appointment entitlements is the issue which has caused the previous two failures of this legislation to pass through LegCo.

Before considering the current provisions it is worth asking why this part of the proposed legislation has caused so much angst and why it has delayed the implementation of the bill for so long.

The original proposals, back in the mists of time, provided for all the entitlements, of all employees, (including those of the directors), to be paid in full before (my emphasis) Provisional Supervision could even start.  The natural argument against this was – how can a company which is so financially distressed that it needs to seek protection from its creditors pay all the claims of its employees? Doesn’t make a lot of sense really.

Subsequent iterations of the draft legislation simply tinkered with this proposal and for this reason were seen by many stakeholders as being unworkable. These same stakeholders are unanimous in their agreement that the rights of employees, probably the must vulnerable of all those involved in the corporate rescue process, must be properly protected. However the proposals as they were originally formulated would, in the opinion of many, simply have resulted in a piece of legislation that was simply not fit for purpose.

What Is On The Table Now

The latest version of these provisions seeks to strike a fair balance between protecting the rights of employees and at the same time facilitating the rescue of an insolvent employer. As a side note, it would have been easy for this issue to have been resolved many years previously had the Administration been prepared to allow employees of companies entering into provisional supervision to make claims against the Protection of Wages on Insolvency Fund Board. After all, the employer is insolvent and the purpose of the fund is to protect the interests of employees!

Unfortunately, the approach of the administration seems to be not to use public funds to facilitate the rescue of distressed companies, even though by doing so it might contribute to their rescue. The other side of this argument is that if a company fails because it can’t meet the claims of employees as set out in the revised framework, then its employees will still have claims against the fund and any economic benefit from the continuation of the business will be lost. The administration, however, has throughout opposed this approach and accordingly has come up with a revised framework to deal with the claims of employees.

The revised framework envisages the following:

  • For current employees, that is someone employed on the date the provisional supervisor is appointed, any arrears of wages due before the commencement the provisional supervision must be paid by the 30th day after the appointment of the provisional supervisor. (It’s not clear if this is working days, but in keeping with the way other timings are set out in the proposals, it’s probably simply 30 days.) The amount to be paid will be up to the limits currently prescribed by the PWIF.  This is described as the first phased payment.

  • The second phased payment, which has to be made within 45 days after the voluntary arrangement has been approved, or such other time to which it has been extended, is in respect of the employees’ statutory entitlements to wages-in-lieu of notice, severance pay and holiday pay (again up to the limits set out in the PWIF); and

  • Any further entitlements are to be paid within 12 months after the voluntary arrangement has been approved. This is known as the third phased payment.

It’s important to note that if this phased payment schedule is not adhered to, the employees would be no longer bound by the moratorium and would be entitled to, among other things, apply to the court to wind-up the company.

What does not appear to be dealt with is any claims that employees, and in particular directors, may have in respect of other relationships which they have with the company. For example, a director who has a service contract with the company which runs for a period of years would, in theory, have a claim against the company for the residual amount due under the remaining period of the contract. This does not appear to come under any of the above headings/phased payments – unless it is part of the third phased payment. It remains to be seen whether, when the draft bill is published, it places any limits on the amount employees can claim perhaps by reference to claims pursuant to the PWIF.

Directors

At present, the PWIF does not make any payments out of the Fund to directors of companies, although directors still have a right to make a claim in a liquidation to be paid alongside all other creditors. It will be interesting to see how the draft bill approaches this issue, if at all. In the absence of any statutory provision, it appears that directors will be able to be paid out their entitlements in full in a provisional supervision, but not in a liquidation.

If this is the case, it is possible that there will be a predisposition on the part of directors of insolvent companies to opt for provisional supervision as opposed to liquidation. After all, even if the provisional supervision fails after a few months, the directors entitlements to their wages, pay-in-lieu, severance pay and holiday pay may all have been met out of the company’s funds prior to the company going into liquidation.

As they say, “the devil is in the detail.”

And finally, the concluding article on the subject in two weeks time will cover the issue of Insolvent Trading – in other words the circumstances where a director or shadow director can have personal liability imposed on him by the Court for some of the company’s debts, because he allowed the company to continue to trade, even though he knew it was insolvent.