Who can be Appointed as Provisional Supervisor in Hong Kong?

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By Stephen Briscoe

Based on the Hong Kong government’s latest proposals, the only people who will be eligible to be appointed as provisional supervisors will be Certified Public Accountants or solicitors with practising certificates. They will be regulated respectively by the HKICPA and the Law Society of Hong Kong.

Surprisingly, in view of the potential complexity of the type of work involved, there is nothing in the current proposals which provides for the provisional supervisor to have any experience of undertaking work of this highly specialised nature. It is unfortunate that the Administration appears to be unwilling to allow people with experience of this type of work, but who may not be members of either of the above two bodies, to be appointed as provisional supervisors.

It is likely that further submissions will be made to LegCo during the Bill stage on this particular issue given the number of experienced people in Hong Kong who would be excluded by this provision. However, as these submissions have already been made previously it seems increasingly likely that they will again be ignored.

Effects of the Appointment of the Provisional Supervisor

Immediately on the appointment of a provisional supervisor, a moratorium will come into effect. In practice, this will mean that virtually all legal proceedings against the company will be stayed, and except with the consent of the court, creditors will not be able to commence any new proceedings. If a receiver has previously been appointed, he will not be able to exercise any of his functions and the provisional supervisor has the right to take over any company property held by the receiver. He may even request the receiver to vacate office. In addition, any transaction relating to the disposal of the company’s property after the appointment of the provisional supervisor will be void, unless entered into by the provisional supervisor or approved by the court.

In practical terms this means that the provisional supervisor will exercise almost total control over the affairs of the company immediately following his appointment. The implementation of the moratorium will then give the provisional supervisor a period during which to assess the financial position of the company and, hopefully, formulate a rescue plan to be put before the company’s creditors in due course.

However, the moratorium will not apply to certain claims by employees, which if not dealt with according to the phased payment schedule proposed, (which will be looked at in a subsequent post), will allow an employee to, for example, petition for the winding-up of the company.

Provisional Supervisor’s Powers and Duties

According to the draft proposals, the key duties of the provisional supervisor are to review the financial affairs of the company and decide whether it is in the best interests of the creditors to:

  • implement a voluntary arrangement;
  • wind-up the company; or
  • bring the provisional supervision process to an end.

The provisional supervisor will be required to lodge reports with the Official Receiver’s Office if he believes that any past or present officers of the company have been guilty of offences in relation to its formation and its operations. Although the draft legislation does not specify these offences, it appears that they are likely to be those presently set out in sections 271, 276 and 277 of the existing legislation. However, we will have to wait for the publication of the draft bill before knowing this for certain.

The provisional supervisor will also be responsible for calling the first and final meetings of creditors and reporting to creditors on the outcome of those meetings.

The powers of the provisional supervisor appear to be quite wide ranging. He will be able to continue to run the business, closing or disposing of any part of it as he sees fit; he will be able to appoint and remove directors; seek directions of the court and effectively do whatever is necessary for the purpose of the provisional supervision.

He will also have the power to dispose of any property which is the subject of a floating charge, although the floating charge holder will be entitled to the proceeds of sale of such property.

Personal Liability of the Provisional Supervisor

A provisional supervisor will be personally liable for any new contracts entered into by him following his appointment. This includes any contracts of employment. He will also be personally liable for any pre-appointment contracts, (and this again includes contracts of employment), which are adopted by him in writing. It is proposed that he will have 16 business days from the commencement of the provisional supervision to decide whether to adopt any pre-appointment contracts. Key here appears to be that he will not be deemed to be personally liable if he does not take positive steps to adopt the contracts. Previous iterations of the draft legislation appeared to envisage that he would be deemed to be personally liable in the absence or taking positive steps to avoid personal liability. This is seen as a significant change in the drafting, reflecting concerns expressed by a number of those who would be tasked with implementing provisional supervision in practice.

Interestingly, the period for which the provisional supervisor will be personally liable is potentially quite limited. It is from the date on which he adopts the contract to the end of the provisional supervision period.  It would therefore seem that in practice the period for which he is personally liable should be relatively short in duration. This will of course depend on time it takes for any voluntary arrangement to be approved by creditors.

The provisional supervisor will have the right to contract out of personal liability if this can be agreed with the contracting party. He will also have an indemnity out of the assets of the company in respect of any liabilities which he assumes personally. This indemnity will be in priority to the claims of all floating charge and unsecured creditors.

Our next post will deal with:

  • the meetings of creditors that must be convened by the provisional supervisor;
  • the voting procedures and majorities required; and
  •  the effect of the various resolutions that might be considered and passed at the meetings.