Vol 17 (2020) - Issue 6

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Cross-Border Insolvency in Hong Kong: Common Law Limitations and How the Model Law Could Drive Foreign Investment and Economic Growth

Synopsis
For countries that have adopted, and implemented in local legislation, the United Nations Commission on International Trade Law (‘UNCITRAL’) Model Law on Cross-Border Insolvency (‘Model Law’), there is a streamlined process which enables a liquidator, or other insolvency administrator, of a company in a foreign jurisdiction to apply to the court in the Model Law jurisdiction to:
– have the foreign insolvency proceeding recognised;
– take control of assets of the foreign company located in the Model Law jurisdiction; and
– pursue investigations and institute recovery
proceedings, for example in relation to voidable transactions and breach of directors’ duties, in the Model Law jurisdiction according to the local insolvency laws of that jurisdiction.
Where an insolvency process is taking place in a Model Law jurisdiction, the Model Law also contains provisions which give foreign creditors the same rights as local creditors to participate in the insolvency process, for example by lodging a proof of debt and voting.
Importantly, there is no requirement of reciprocity in either of these cases, insofar as the foreign jurisdiction need not have itself adopted the Model Law for a foreign insolvency administrator and foreign creditors to have substantive rights in the Model Law jurisdiction.
Singapore adopted the Model Law with the passage of the Singapore Companies (Amendment) Act 2017, which came into force on 23 May 2017. This was part of an effort by the Singapore Government to position the country as a leading hub for insolvency and restructuring in the Asia-Pacific, and the adoption of the Model Law has helped Singapore to achieve that goal in the three years since.
Indeed, for every country, an efficient, fair and effective insolvency regime, which provides means for coordinated cross-border rescue and restructuring processes for global enterprises and preserves the value of foreign creditors’ rights if a venture does not have the success intended, is critical in driving foreign investment in support of innovation, value creation and growth. With the rapid pace of globalisation continuing – notwithstanding the immediate impact of the pandemic – and supporting the expansion of multinational corporations and business operations, countries that implement best-practice cross-border insolvency processes will enhance their attraction as primary destinations for the flow of foreign capital.
Recognising this important link, Myanmar is the most recent jurisdiction to have adopted the Model Law, implementing it as part of its new Insolvency Law 2020, which is now becoming a model for developing and developed nations alike in the Asia-Pacific region in adopting best practice domestic and cross-border insolvency processes.
In contrast, Hong Kong has still not adopted the Model Law. While the courts have made significant progress in establishing a common law framework for the recognition of foreign insolvency proceedings and the administration of creditors’ claims in Hong Kong, there are ongoing substantive and procedural limitations which act as a deterrent to business investment.
The formal adoption and implementation of the Model Law in Hong Kong would help to sustain foreign investment as an important feature of economic and financial system stability as the challenges of the pandemic continue across the globe over the next year and beyond.