C(WUMP)O: The Dark Side

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By Stephen Briscoe

Our previous posts have focused on the proposed changes to Hong Kong’s insolvency regime which are scheduled to come before LegCo in the next few months. This post is going to look at the “darker side”, (no, not Kowloon) to use the Star Wars metaphor; i.e. what is missing from the proposals; what could have been done better; and what is likely to happen in the event that there are problems with the updates to the legislation.

The two most glaring omissions from the proposals are the lack of any suggestion of implementation of the UNCITRAL Model Law for insolvency, even in the future, and the failure to introduce licensing for insolvency practitioners. There is also the “elephant in the room” that is provisional supervision and insolvent trading. This post looks at each of these in turn.

The UNCITRAL Model Law

The UNCITRAL Model Law for insolvency was first adopted in 1997 and has since been implemented by 20 jurisdictions, a number that is increasing as time goes on. In basic terms, The Model Law is a protocol designed to facilitate cooperation between insolvency courts in different jurisdictions. It arose out of the increasing number of cross-border insolvencies and restructurings and the lack of any formal process for facilitating such cooperation. Its purpose is to make it easier and more cost-effective for an office-holder in one jurisdiction to obtain recognition of his appointment in another jurisdiction. It would seem to be blindingly obvious, given the significant level of Hong Kong cross-border insolvency involving the PRC, other Asian jurisdictions, Europe, Australia and Caribbean jurisdictions such as the BVI and the Cayman Islands, that Hong Kong would stand to benefit from implementing the Model Law.

And yet nowhere does it appear in the Administration’s vocabulary. As things stand at present, cross-border law is developing through the courts, but recent judgments (including the Singularis decision, which although a Privy Council decision and thus not binding in Hong Kong, may well be persuasive in Hong Kong), suggest that recognition of foreign office holders in Hong Kong may become more problematic. If that turns out to be the case, it is increasingly likely that a foreign office holder will be faced with having to commence separate proceedings in Hong Kong with the time delays and increase in costs that will follow.

For the avoidance of doubt, the Model Law is implemented by different jurisdictions in different ways, depending on local requirements. It is not set in stone – in other words, it could be implemented in a manner that would work for Hong Kong without impacting on the independence of the Hong Kong courts. It is this that makes it all the more difficult to understand the failure to address this issue.

The story is that the introduction of the Model Law would be too difficult/too time consuming/not necessary/not appropriate – choose any of these. Regardless of the reasons, it seems that the failure to introduce the Model Law is a lost opportunity and raises the likelihood that, given the lack of speed with which Hong Kong’s legislation is usually updated, it will never be implemented.

Licensing of Insolvency Practitioners

Unfortunately, yet another lost opportunity. Many similar sized jurisdictions have some form of licensing for insolvency practitioners, but it seems that the Administration did not even consider this in its proposals. The ostensible reason was that the market for insolvency professionals is too small to warrant the setting up a system of licensing. This does not seem to have stopped jurisdictions such as the BVI, the Cayman Islands and, dare one say, Singapore, from implementing some form of “licensing” designed to ensure that those who undertake this technically demanding work have the required skill set to perform it in a competent and professional manner.

The HKICPA’s Professional Diploma in Insolvency is now a well established training course for insolvency practitioners who want to develop the skills and technical expertise in insolvency and restructuring and could be used as a basis for a form of licensing. I’m not speaking for the HKICPA when I say this, merely pointing out that there is already a structure in place, that, with some thought, might be capable of supporting training in support of a licensing system.

For those who are interested, the details of the latest offering of the Diploma can be found here.

Provisional Supervision and Insolvent Trading

Unfortunately the current position is that this essential piece of legislation has been delayed yet again. From being re-introduced as “an emergency piece of legislation” in 2008 to cope with the expected fall out from the failure of Lehman Bros, to it being relegated yet again to “the next session of LegCo” (2016 – 2020), seems to exemplify the lack of genuine progress in bringing Hong Kong’s insolvency and restructuring regime in to the 20th Century!! Indeed, there is a growing belief among many that it will never see the light of day, which, if true, would represent a major setback for the prospects of improving corporate governance in Hong Kong.

What Could Have Been Done Better

A “root and branch” approach to bring Hong Kong’s insolvency regime into the 21st Century.

The Administration could have opted to update our laws based on one of many other similar common law jurisdictions that have taken the step in recent years. Instead it chose simply to tinker with the legislation. That it has failed to pursue genuine modernisation leaves Hong Kong with an insolvency regime just about “fit for purpose” and with the strong likelihood of no modern corporate recovery procedure. How does that fit in with the description of Hong Kong as “Asia’s World City”.

As a result, a once in a generation opportunity has probably been lost. Experience tells us that the distinctly unglamorous subject of reform of corporate recovery and insolvency law is unlikely to grace Hong Kong’s legislative chamber again any time soon.

What Happens If There Are Problems

lacuna” – Def: a gap or missing part, as in a manuscript, series, or logical argument

With the introduction of any new legislation there is the chance that minor, but sometimes very important issues, can arise which need “fixing” by amending the legislation.

The obvious example is that of the problems resulting from the changes to the unfair preference provisions that were introduced in 1998. Very soon after the new provisions had been introduced it came to light that, as a result of a drafting error, there was a major deficiency in that a parent company was not seen as being an associate of its subsidiary This left parent companies free to manipulate matters to their benefit and to the detriment of creditors of their subsidiaries and there are plenty of examples of them having done so. Despite being aware of this lacuna in the legislation the Administration has done nothing in the last 17 years to resolve the situation. This compares poorly with other jurisdictions which have shown an ability to move quickly to deal with problems of this nature as and when they come to light.

The concern is that if there are any more lacunas which come to light following the implementation of the proposals, will the Administration be able to act in a timely manner to resolve them. Unfortunately, based on experience to date, the answer is probably no. All the more reason for making sure that the changes that are put through are fully considered from every angle before they hit the statute book.

This is the final article in a series that has dealt with the proposed changes to the winding-up provisions of C(WUMP)O which are likely to go before LegCo in the next few months. If you have any questions about the proposals please feel free to call any of your contacts at Briscoe Wong and we’ll be happy to try to answer them.