Research paper series
Should Hong Kong Reform its Insolvency Law in Times of COVID-19?
Written by WAN Wai Yee
Company Lawyer (Forthcoming, 2021)
City University of Hong Kong School of Law Legal Studies Research Paper No. 2021(1)-002
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) 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 is whether even if the provisional supervision and corporate rescue framework are 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.
Link to the SSRN website:
Mandatory Disclosure in Corporate Debt Restructuring via Schemes of Arrangement: A Comparative Approach
Written by WAN Wai Yee and Casey WATTERS
International Insolvency Review (2021)
City University of Hong Kong School of Law Legal Studies Research Paper No. 2021(1)-001
Abstract
Creditors often face significant information asymmetry when debtor companies seek to restructure their debts. In the United Kingdom, it is mandatory for debtor companies, seeking to invoke the courts’ jurisdiction to restructure their debts via schemes of arrangement (schemes), to disclose material information in the explanatory statement to enable the creditors to make an informed decision as to how to exercise their votes in creditors’ meetings.
The English schemes have been transplanted into common law jurisdictions in Asia, including Hong Kong and Singapore. However, due to the differences in the shareholding structures and the kinds of debts that are sought to be restructured in the UK and Hong Kong/Singapore, this transplantation gives rise to the question as to whether information asymmetry is in fact adequately addressed in the scheme process. Drawing from the experiences of Hong Kong and Singapore, we argue that there are three principal concerns in the current disclosure regimes: how debtors disclose the liquidation analysis or alternative to restructuring via schemes; how debtors disclose advisors’ fees; and the equality of provision of information in the scheme process.
Link to the SSRN website:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3807669
Link to the Wiley Online Library:
Transplantation of Voluntary Supervision and Insolvent Trading Provisions into Hong Kong’s Corporate Rescue Regime
Written by Ivan SIN
Company Lawyer (Forthcoming, 2021)
Abstract
Critically assesses the transplantation of voluntary supervision and insolvent trading provisions into Hong Kong's corporate rescue law under the Companies (Corporate Rescue) Bill 2021.
Link to the SSRN website:
Governmental Responses Mitigating the Impact of COVID-19 on Small and Medium-sized Enterprises and the Case for Insolvency Law Reforms in Hong Kong
Written by Wai Yee WAN
International Insolvency Review (Forthcoming, 2023)
Abstract
The COVID-19 crisis has triggered unprecedented governmental responses around the world to mitigate the effects of the pandemic, with particular attention being given to small and medium-sized enterprises (SMEs). Governments around the world have implemented economic measures in the form of direct subsidies or government-guaranteed loans, and legislated to provide mandatory relief from contractual obligations. In addition, increasing recognition of the limitations of insolvency regime in addressing the crisis for SMEs prompted many jurisdictions to change their laws.
However, consistent with its free market principles, Hong Kong has only adopted economic measures and has provided limited contractual relief in favour of SME tenants. There is no SME-specific insolvency law nor is the Hong Kong government currently considering any such law reform. This paper reviews the need for a temporary insolvency regime to cater to distressed but economically viable SMEs restructure their debts. Drawing on a set of interviews with Hong Kong SME owners, this author finds that they are often unaware of how insolvency law operates, their unsecured creditors are apathetic, and bankruptcy stigmatism is high. Based on a review of the frameworks in the other advanced common law jurisdictions such as the United States, Australia and Singapore, a recommendation for a simplified restructuring and liquidation framework is developed. The process is designed to be simplified and expedited and it incentivises early negotiations with creditors.
Link to the SSRN website:
https://ssrn.com/abstract=4450005 or http://dx.doi.org/10.2139/ssrn.4450005
Bankruptcy Reforms and Corporate Debt Structure
Xiaotian Liu (Shanghai University of International Business and Economics)
Yaxuan Qi (City University of Hong Kong (CityU) - Department of Economics & Finance)
Wai Yee Wan (City University of Hong Kong; City University of Hong Kong - Centre for Chinese & Comparative Law)
Abstract
A growing number of jurisdictions have adopted bankruptcy law reforms to aid debt restructuring. By utilizing a difference-in-differences model based on bankruptcy law reforms across six economically advanced jurisdictions, we discover that firms adopt more diversified debt instruments following the law reforms. This impact is predominantly observed in firms that are more vulnerable to potential tightening of credit supply due to the law reforms. Such firms also decrease their overall debt borrowing and investment. Moreover, we find that affected firms rely less on secured debt, aligning with the idea that these legal reforms diminish the protection of secured creditors. Our findings also indicate that borrowing costs rise and debt maturities shorten after the reforms, implying that creditors may adjust debt contract terms to counterbalance the reduced legal protection. Overall, our analysis suggests that bankruptcy law reforms promoting debt restructuring could potentially negatively impact credit supply and impede the debt financing of some types of firms.
Keywords: bankruptcy law, debt structure, borrowing cost, creditor rights
Links: https://ssrn.com/abstract=4224738 or http://dx.doi.org/10.2139/ssrn.4224738
Incentivising Early-Stage Debt Restructuring for Large Firms: A Study of Hong Kong and some United Kingdom Comparisons
Wai Yee Wan (City University of Hong Kong; City University of Hong Kong - Centre for Chinese & Comparative Law)
Phyllis Mo (City University of Hong Kong)
Gerard McCormack (University of Leeds)
(Forthcoming Journal of Corporate Law Studies)
Abstract
Financially distressed companies are more likely to be rescued as going concerns if they enter into debt restructuring early whilst still high up on the ‘demise curve’. In Hong Kong, early-stage non-consensual debt restructuring is effected via the scheme of arrangement. Yet, despite the similarities in the legislative framework, Hong Kong is less successful than the United Kingdom (UK) in using the scheme for early going-concern restructuring as the directors often invoke the scheme only when their company is far down the demise curve. We address the reasons for the difference based on the comparative outcomes of the schemes and interviews with insolvency professionals. Our results show that the reasons are attributed less to the differences in directors’ duties in the zone of insolvency but the perception on how these duties are enforced. Urgent law reform is thus required to incentivise directors to address the problems early.