Vol 8 (2011) - Issue 1

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Provisional Supervision in Hong Kong: Third Time Lucky?

Introduction

Provisional supervision (PS) is Hong Kong’s proposed new corporate rescue procedure. In essence, it is a procedure for the preparation by a professional, usually an accountant or a solicitor, of a proposal for a voluntary arrangement, supported by a moratorium. There should be little court involvement in the process and it is anticipated that the costs and delays of the process would be less than alternate, currently available procedures. This article will retrace some of the key events and issues arising from the numerous policy and legislative debates about PS in Hong Kong. At present the Hong Kong government is in the midst of drafting a new Bill on corporate rescue procedure to be introduced to the HKSAR Legislative Council. This will be the third attempt. Setting aside the controversies and the content of this new effort by the Hong Kong administration, the Global Financial Crisis in 2008 has signalled to the international policy and business community, free markets alone cannot be an effective regulatory mechanism. Having legal safeguards and clear rules to regulate procedures and conduct of market participants are imperative to avoid future financial meltdowns.

Background

PS was the recommendation of the Law Reform Commission of Hong Kong (LRC) and its sub-committee on insolvency, arising out of a reference to the LRC in 1990 to review the Bankruptcy Ordinance 1931 and the winding-up provisions of the Companies Ordinance 1932 and to consider corporate rescue legislation in other jurisdictions, in particular the UK Insolvency Act 1986 and Chapter 11 of the US Bankruptcy Code. The latter topic was considered important by the Administration, because during the shipping slump in the mid 1980s a number of major Hong Kong shipping companies (not least Orient Overseas Container Lines, the group headed by Tung Chee Wah, who after the handover in 1997 became the Chief Executive, formerly the Governor, of Hong Kong) had only narrowly escaped liquidation, emphasising the inadequacies of the existing law.

As a result of the reference to the LRC Hong Kong’s bankruptcy law was reformed by the Bankruptcy (Amendment) Ordinance, No 76 of 1996, following the LRC’s Report on Bankruptcy published in May 1995 (the provisions of the Amendment Ordinance came into force on 1 April 1998); in October 1996 the LRC issued a Report on Corporate Rescue and Insolvent Trading, which has not resulted in any new legislation (more on this below); then in July 1999 the LRC issued a Report on the Winding-up Provisions of the Companies Ordinance containing over 200 recommendations, few of which have yet resulted in legislation, because the Companies Ordinance as a whole subsequently became the subject of the Companies Ordinance Rewrite (see <wwwfstb.gov.hk/fsb/co_rewrite>), for which Liquidation is Phase 2 and has not yet commenced.