Vol 4 (2007) - Issue 5

Article preview

Insolvent Liquidation in Hong Kong: A Crisis of Confidence

Hong Kong is frequently portrayed1 as a modern international city at the cutting edge of the twenty-first century, the so-called ‘Asian century’. Yet Hong Kong’s corporate insolvency law remains very much rooted in mid-twentieth century England. Indeed, a UK insolvency practitioner – or, more precisely, a middle-aged UK insolvency practitioner – looking at the winding-up provisions of the Companies Ordinance2 in Hong Kong, will at once be struck as to their apparent similarity to the corresponding provisions of the old Companies Act 1948 (UK). Thus one finds in the Companies Ordinance (‘CO’) – there is no ‘Insolvency Ordinance’ in Hong Kong – not only the familiar distinctions between compulsory and voluntary liquidations,3 but also virtual replicas of the old UK provisions on receivership. For Hong Kong never troubled itself with replacing receivership with administrative receivership, then grappling with the merits and demerits of administrative receivership in comparison with administration; rather Hong Kong, even though still a British colony at the time of the 1986 UK reforms, did not take on board either administrative receivership or administration. Indeed, conspicuously absent from the Hong Kong statute book is any modern corporate rescue regime5 – despite the best efforts of the Law Reform Commission of Hong Kong in the mid-1990s.

The purpose of this article is not to point out that UK practitioners hankering after the good old/bad old days of Centrebinding, phoenix companies and committees of inspection – not to mention the absence of a statutory licensing system for liquidators – can yet relive their formative years in Hong Kong. Rather this article seeks to illustrate how regulators and practitioners have, in light of the historical origins of the primary legislation and Hong Kong’s severe economic downturn during 1998-2003, sought to tackle the contemporary realities of insolvent liquidations in Hong Kong. The conclusion the authors reach is that the funding and administrative arrangements now in place for the handling of small- or no-asset insolvent liquidations in Hong Kong are seriously flawed; and, as a result, the integrity of the insolvent liquidation process has been damaged. In short, insolvent liquidation in Hong Kong is facing a grave crisis. The authors propose that the government must immediately re-evaluate the financial arrangements for small- and no-asset cases, with a view to providing for increased levels of investigation of such activity by directors of insolvent companies. Better policing of wrongful or inappropriate activity by directors of insolvent companies will serve as a deterrent to other directors and correspondingly improve corporate governance standards in Hong Kong.

A. Insolvent liquidations: an overview

During the period 1998-2003 Hong Kong experienced a severe economic recession, initially triggered by the Asian financial crisis but later compounded by the outbreak of SARS in the territory. As evidenced by Table A below, there was a significant rise in the level of corporate insolvency peaking in 2002, and not returning to pre-1998 levels until 2006.