Should Hong Kong Reform its Insolvency Law in Times of COVID-19?

Abstract

With the onset of the COVID-19 pandemic, the number of insolvency filings by otherwise economically viable firms globally is expected to rise significantly. Hong Kong will not be an exception. Hong Kong does not currently propose to enact legislation to impose a universal standstill of contractual obligations in response to COVID-19, as is the case in other jurisdictions. Once Hong Kong Monetary Authority’s (HKMA’s) measures for the banks to support the small and medium size enterprises (SMEs) and the Hong Kong Government’s economic relief packages come to an end, an enormous wave of defaults will come. The collapse of SMEs will have a serious impact in Hong Kong as SMEs account for 45% of the private sector total employment and 98% of all of the business establishments.

The Hong Kong Government is proposing to enact legislative reforms to allow for provisional supervision and corporate rescue, which are out-of-court procedures, to facilitate restructuring if the major secured creditor consents. The proposed corporate rescue framework is long overdue. In recent years, many common law jurisdictions, including Singapore and the UK, have reconsidered and modernised their insolvency framework to include debtor-in-possession features in court-supervised restructurings that are based on Chapter 11 of the US Bankruptcy Code 1978 (Chapter 11). These features include an automatic moratorium or stay of proceedings and the ability to cram-down dissenting creditors not only within the same class but across classes of creditors. Further, specifically in response to COVID-19, several jurisdictions have enacted or are in the process of enacting insolvency legislation that allows SMEs and small businesses to access the bankruptcy or restructuring provisions more speedily.

The question that arises whether even if the provisional supervision and corporate rescue framework is enacted, whether Hong Kong should make other more far-reaching reforms, particularly to its court-supervised restructuring framework. This article proposes that urgent consideration be given to simplify and modernize the insolvency and restructuring framework in Hong Kong.