Hong Kong: Restructuring & Insolvency

This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Hong Kong.

Hong Kong is a leading global financial center that is routinely ranked by the World Bank Group as one of the top three jurisdictions for ease of doing business. The 2020 rankings reflect this commercial reality. Hong Kong is a Special Administrative Region (SAR) of the People’s Republic of China.

With the establishment of the Hong Kong SAR in 1997 following its transfer back to the People’s Republic of China by the United Kingdom, the “Basic Law” of Hong Kong was enacted by the National People’s Congress in accordance with the Constitution of the People’s Republic of China and took effect as a mini-constitution for Hong Kong. The Basic Law ensures that Hong Kong, as a special administrative region, will maintain separate governing and economic systems from those of mainland China for 50 years after the establishment of the Hong Kong SAR in accordance with the principle of “one country, two systems”. For such period of time, save for any law contravening the Basic Law and subject to any amendment that may passed by Hong Kong legislature, all laws in force prior to the establishment of the Hong Kong SAR (including common law, rules of equity, ordinances, subordinate legislation and customary law) will be retained and national laws of the People’s Republic of China will not be applied in Hong Kong (except for a number of laws relating to defense and foreign affairs). Article 8 of the Basic Law maintains the common law system that has been practiced in Hong Kong for more than 170 years and makes Hong Kong the only common law jurisdiction within China. This legal reality has not changed, and is unlikely to change in the near future.

The restructuring and insolvency legal framework of Hong Kong is principally set out in: (i) the new Companies Ordinance (Cap. 622), which took effect on 12 July 2012 and provides the general framework for the incorporation and operation of companies in Hong Kong; (ii) the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the Winding-Up Ordinance) and subsidiary legislation (including the Companies (Winding-Up) Rules (Cap. 32H)), dealing with corporate insolvency (i.e. the winding up of Hong Kong companies and foreign corporations registered in Hong Kong); (iii) the Bankruptcy Ordinance (Cap. 6) and the Bankruptcy Rules (Cap. 6A) that apply to individual bankruptcy (as opposed to corporate insolvency), although the Winding-Up Ordinance applies by reference to insolvent companies certain provisions of the Bankruptcy Ordinance; (iv) the Rules of the High Court (Cap. 4A) in respect of procedural matters; and (v) the Conveyancing and Property Ordinance (Cap. 219), which regulates the ownership, proof of title, transfer, and mortgaging of properties in Hong Kong.

The Winding-Up Ordinance (as amended in 2016 with effect on 13 February 2017 to increase the protection of creditors against asset depletion) generally reflects the English Companies Acts of 1929 and 1948, but without English insolvency law revisions for administration. It provides for three types of liquidation: members’ voluntary liquidation, creditors’ voluntary liquidation and compulsory liquidation. Voluntary administration or “Chapter 11” procedures are not available in

Hong Kong. The government may petition for the winding up of a company if considered expedient in the public interest.

The Bankruptcy Ordinance, offers a modern regime of bankruptcy for individuals that was introduced on 1 April 1998 and later amended in 2016 to facilitate the administration of the bankruptcy estate. It contemplates voluntary arrangements for both bankrupts and non-bankrupts.

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?

  13. What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

  18. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

  19. Is it a debtor or creditor friendly jurisdiction?

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?