Home' A Plus Magazine : May 2013 Contents Rewriting chapters
Informal restructuring avoids the liquidation process, but creditors,
such as banks, need to agree to provide the company’s managers and
shareholders time to effect certain operational and financial changes
that would then enable the company to settle or compromise debt.
The usual route is through a Scheme of Arrangement process, as
set out in section 166 of the Companies Ordinance. Hong Kong does
not have a proceeding similar to Chapter 11, which refers to a por-
tion of the United States Bankruptcy Code that permits debtors to
reorganize a business. (Similar processes include administration in
the United Kingdom and Australia and judicial management
The U.S. business bankruptcy system is more
forgiving towards the debtor, allowing it to
continue its business while formulating a
reorganization plan with its creditors.
A Chapter 11 filing prevents credi-
tors from taking further action
against the insolvent company to
Unlike Chapter 11, Schemes of
Arrangement do not create a morato-
rium from creditors and do not require a
settlement to be offered to employees.
Attempts to reproduce a Chapter 11
framework in Hong Kong have foundered be-
cause of government insistence that employees’
full entitlements be accorded priority through a
dedicated trust account. Chapter 11 limits employees’
claims to US$10,000 and ranks them behind lawyers and
accountants in the order of payment priority.
In the absence of a formal corporate rescue procedure, a
Scheme of Arrangement process is the only practical tool available
to facilitate the rescue and restructuring of distressed companies
in Hong Kong.
However, informality doesn’t come cheaply in Hong Kong. “ The
Scheme of Arrangement process involves a lot of court time and
therefore it is also very costly in comparison with the corresponding
Ideally, Hong Kong would have
an explicit restructuring law
rather than just working
around the insolvency options.
claims of offshore bondholders will be treated,” says Gary Lau, man-
aging director of corporate finance at Moody’s Investor Ser vice in
Restructuring experts say it is possible that Suntech will be
merged into a healthier competitor, or taken over by a state-owned
enterprise. “One solution we’ve seen in China is that the govern-
ment will be actually helping to engineer who will come in as a white
knight,” says Ted Osborn, who leads the business recovery ser vices
practice at PricewaterhouseCoopers in Hong Kong. “Often it will be
a state-owned enterprise that takes over the debt and ensures that
factories keep running and
people keep being employed.”
CPAs taking control
In Hong Kong, the formal route to re-
structuring involves starting liquidation
proceedings. “Most countries have a formal
restructuring law – we don’t,” says Lees at JLA.
The process is usually started by a creditor,
who applies to a court for a winding-up order
under section 193 of the Companies Ordinance,
resulting in the appointment of a provisional
liquidator, whose main function is to ensure
the security of the company ’s assets.
“ This section was not intended to be used as
a corporate restructuring legislation,” cautions
Annie Chan, managing director of Mazars
Corporate Recovery and Forensics in Hong
Kong and an Institute member. “ Therefore,
there is no guarantee that the court would
grant such an order as sought.”
Once an order is made, Hong Kong’s Official Receiver is appointed
provisional liquidator. (There are also voluntary winding-up peti-
tions available to directors of companies under section 228 of the
The Official Receiver then must decide whether to call a meet-
ing of creditors to appoint a private-sector insolvency practitioner
– u s u ally an Institute member – to act as provisional liquidator.
“If a company is distressed and its creditors are pursuing it, it’s of-
ten necessary to appoint a provisional liquidator because that creates
a moratorium,” explains Stephen Briscoe, managing director of Bris-
coe Wong Ferrier, a specialist corporate advisory ser vice provider.
“ You have a court order that effectively stops creditors from pursuing
the company while it tries to restructure itself.”
The accountant ’s role as provisional liquidator is to go into the
company and effectively take control. “He will retain certain ele-
ments of senior management as the provisional liquidator is not
going to be hands-on day-to-day at every level of the company,”
says Briscoe, who is also a member of the Institute’s restructuring
and insolvency faculty executive committee. “His role is to ensure
the company runs smoothly as possible, safeguard the assets of the
company and then prepare the company for a new investor.”
If the restructuring has been successfully completed, instead of
proceeding with the liquidation process, the provisional liquidator
then seeks a stay of the winding-up proceedings.
“We make do with what we have and there has been a number of
successful restructurings in Hong Kong through existing formal pro-
cesses,” notes Arboit at FTI Consulting, who is also chairman of the
Institute’s restructuring and insolvency faculty executive committee.
16 May 2013
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