More Disclosure by Liquidators of Hong Kong Companies Ordinance

More Disclosure for Liquidators; Should Insolvency Practitioners be Licensed? – (The Correct Answer is Yes!)

By Stephen Briscoe

Who Can Act As A Liquidator

This section of the Administration’s proposals focuses on the appointment and control of provisional liquidators and liquidators. There are a number of sensible suggestions about establishing those categories of people who should not be able to act in either capacity. The stated intention is to disqualify from acting, people who might have a conflict of interest in taking up such appointments. In practice, these categories are not significantly different to those already established by the HKICPA in its guidelines dealing with professional ethics in liquidation and insolvency.

The proposals are more equivocal when it comes to who might be appointed as a receiver and unfortunately leave open the possibility that with the approval of the Court, someone who had acted as receiver of a company could subsequently be appointed as its liquidator. Whilst acknowledging the checks and balances that automatically come with an appointment by the Court, there remain strong arguments for simply prohibiting such appointments. It is just impossible to see how a liquidator can properly investigate the actions of a receiver when he is one and the same.  As Homer Simpson would say – DOH!!!!

Disclosure Requirements For Prospective Liquidators

The proposals will also require future liquidators to positively confirm to all the stakeholders that they do not have a conflict of interest when it comes to acting as liquidators. This is a welcome development as the necessity of making that written statement, which must be presented to the meeting of creditors, should serve to ensure that before accepting an appointment, proper consideration has been given to the issue of any potential conflict of interest. Putting something in writing confers much more responsibility than simply going through the thought process.

As with all these proposals, it will be necessary to look carefully at the wording of the draft legislation. The current proposals appear to focus on situations where a proposed liquidator may have a conflict of interest because of work that he or his firm have previously done for the company i.e as auditors or financial advisors; or situations where the proposed liquidator may have a personal or family relationship with the company or someone at the company. However, another potential issue which arises is whether or not such a conflict would be perceived to have arisen as a result of a creditor putting a liquidator in funds to investigate the affairs of a company. On the face of it, this does not create a conflict, but the question that may arise is whether or not the proposed liquidator should disclose any funding arrangement, particularly in light of the proposed criminal sanctions associated with non-disclosure.

Should These Amendments Be Part Of Primary Legislation

Two issues come immediately to mind in respect of the proposals that relate to who may be appointed as a liquidator and their fitness to be appointed.

Much of what is suggested is to be included in amendments to the primary legislation. The problem with this approach is that Hong Kong’s record of amending primary legislation with any degree of urgency, is not good. Witness for example the current unfair preference provisions, first implemented in 1998. Soon after their implementation it became very clear that there was a lacuna in particular insofar as a subsidiary company was not deemed to be “associated” with its parent company. This was a problem because even if a parent company (which of course controls its subsidiary) caused the subsidiary to enter into transactions that in other circumstances would be considered to be unfair preferences, it would not be possible (where the transactions took place more than six months before the start of the liquidation), for a liquidator to unwind those transactions because the parent company was not considered to be an associate – clearly not what was envisaged when the legislation was enacted. It could and should have been easy for emergency legislation to be introduced to remedy this defect. This happens in other countries. However, nothing was done in Hong Kong and the defects in the legislation remain to this day. Updating legislation relating to corporate insolvency is not a sexy subject, and the chances of amendments to primary legislation being pushed through, even if the legislation is flawed, seem to be somewhat slim.

The suggestion has been that detail of this nature should be included in the subsidiary legislation, which in theory is easier to amend. Unfortunately, the Administration remains of the view that these detailed provisions should be part of the primary legislation.

Licensing Of Insolvency Practitioners

In many other common law jurisdictions, the issue of the control of insolvency practitioners is dealt with through a licensing regime. Whilst a number of suggestions were made in support of a licensing regime being introduced in Hong Kong, the Administration has made it clear that this is not an option. From the perspective of an insolvency practitioner this is, to say the very least, unfortunate. The HKICPA has in place a rigorous insolvency diploma course and it is difficult to see why this could not be used as the basis for some form of regulation of insolvency practitioners. Rather than consider this option, the Administration summarily dismisses the possibility of a licensing regime in one short paragraph claiming, with no supporting evidence, that Hong Kong’s population of insolvency practitioners is too small and therefore it would not be cost-effective to have a licensing regime.

In the next post we will look at the definition of a liquidator – yes, in the past it has been an issue; and the welcome changes to the operation of Committees of Inspection.