Pre-pack insolvency and restructuring options in Hong Kong

Hong Kong is the only common law jurisdiction within the People’s Republic of China and one of the few financial centres in the world without a formal rescue mechanism in its legislation. Hong Kong has not enacted legislation to recognise corporate rescue over simple liquidation.

There is no specific legal framework for pre-pack insolvency available in Hong Kong, nor are there any informal guidelines specifically covering pre-pack insolvency issued by industry bodies in Hong Kong. Pre-pack insolvency has been attempted in Hong Kong, but is more difficult to achieve than in other jurisdictions due to the lack of any real equivalent to procedures such as English administration in the UK, United States Chapter 11 procedures or judicial management in Singapore. Attempts have met with some judicial resistance, which is understandable given the reliance by Hong Kong law on formal procedures such as liquidation.  

This article is structured in two parts. The first part discusses where Hong Kong stands in pre-pack insolvency before and after the Re Legend case. The second provides an overview of the restructuring options available in Hong Kong and the latest development of corporate rescue in Hong Kong.

Re Legend – provisional liquidators are appointed for the purposes of winding up

Prior to the Hong Kong Court of Appeal decision in the case of Re Legend International Resorts Ltd [2006] 2 HKLRD 192, companies in distress and insolvency practitioners in Hong Kong attempted corporate rescue by way of provisional liquidation. In Re Legend, it was held that the appointment of provisional liquidators is not permissible if their sole function is to carry out restructuring. The Court held that provisional liquidators must be appointed “for the purposes of winding up” and not avoiding winding up, and restructuring “is an alternative to a winding-up”. Therefore, in Hong Kong it is not permissible to appoint provisional liquidators solely for the purpose of pre-packaged sales for the company. 

Since the Re Legend case, there have been a number of cases in which provisional liquidators were appointed in circumstances where some form of rescue was part of the outcome. For example, in Re Plus Holdings Ltd [2007] 2 HKLRD 725 the judge granted an application by a creditor petitioner for the appointment of a provisional liquidator, although one of the purposes of the proposed appointment was to facilitate a corporate rescue. In Re China Solar Energy Holdings Ltd [2017] 2 HKLRD 1074, the outcome clarified that Re Legend does not prohibit provisional liquidators from pursuing restructuring in the best interests of the company and its creditors. Notwithstanding these cases, the principles laid down by Re Legend remain the law in Hong Kong.

Hong Kong restructuring options – Scheme of arrangement and upcoming legislation

There are no formal procedures available to achieve a restructuring of the company’s debts in Hong Kong, except for one exception: a scheme of arrangement, which is sanctioned by the court.

Scheme of arrangement

Section 666 to 675 of the Companies Ordinance (Cap. 622) sets out a procedure whereby a company can broker a binding compromise or arrangement with its shareholders and/or creditors, which when sanctioned by the court, will become binding on dissenting creditors. It is worthwhile to note that the procedure is not limited to insolvent companies and a number of schemes of arrangements have involved solvent companies that wish to re-organise their capital structure, although schemes of arrangement have increasingly been linked to the rescue of insolvent companies to bind dissenting creditors to accept restructuring proposals. In recent months, there are several PRC property giants, including the China Evergrande, that are attempting schemes of arrangement with their creditors in order to avoid liquidation and winding up in Hong Kong.

Legislative reforms in Hong Kong

As early as 1996, the Hong Kong Law Reform Commission tried to introduce a corporate rescue legal framework in Hong Kong, whereby provisional supervision could be adopted as a statutory corporate rescue mechanism in Hong Kong. The Companies (Corporate Rescue) Bill 2001 was put before the Legislative Council but failed to gain support due to contention concerning the inclusion of onerous provisions regarding employee entitlements.

In the middle of the COVID-19 pandemic, the Hong Kong government announced that it was drafting a new Companies (Corporate Rescue) Bill, which it would introduce to the Legislative Council in the 2020/2021 legislative session. However, to date there has not been any further updates on the legislative timetable.

In the interim, the Hong Kong government may also consider reversing the decision of Re Legend to facilitate corporate rescue in Hong Kong.

For more information on insolvency procedures in Hong Kong, contact your CMS client partner or these CMS experts.