24 October 2016
Hong Kong’s insolvency arrangements have too much focus on penalising and stigmatising failure, not enough on rehabilitation and rescue. Photo:
Hong Kong’s insolvency arrangements have too much focus on penalising and stigmatising failure, not enough on rehabilitation and rescue. Photo:

How HK’s outdated insolvency law is hindering innovation

The Hong Kong government is right to draw a link between innovation, international competitiveness and future prosperity.

Chief Executive CY Leung believes innovation enhances quality of people’s lives and supercharges our economic engine.

In competition with markets like Singapore, he wants to win the race to develop high value-added innovation and technology industries and make Hong Kong the region’s innovation hub.

The establishment of the Innovation and Technology Bureau and the Academy of Sciences last year is evidence of a real commitment to staying ahead of the innovation curve.

The focus on innovation in Financial Secretary John Tsang’s budget speech in February this year was noted and welcomed by the business community.

However, there is a key policy area which is consistently overlooked and has the potential to impede Hong Kong’s progress — the urgent need for reform of the corporate rescue provisions.

Hong Kong may well be the most competitive place in the world to do business but its insolvency regime is out of date and increasingly out of step with international best practice.

Critically, it is also falling behind more progressive regimes in competitor markets.

Hong Kong’s insolvency law is based on the old UK regime that existed prior to the major reforms in that country in 1986.

The 1996 HK Law Reform Commission review and subsequent consultations failed to produce substantive change.

And while amendments were made to the winding up provisions of the Companies Ordinance earlier this year, they did not include any provisions relating to corporate rescue.

The current arrangements are heavily weighted towards liquidation.

They have too much of a focus on penalising and stigmatising failure, not enough on rehabilitation and rescue, providing more time for troubled, though viable companies to attract new investors and trade out of difficulties.

Taking a serious look at the way insolvency laws are structured, with a view to providing alternatives to liquidation, facilitating a “business turnaround” mentality and encouraging a greater degree of risk-taking can assist with fostering a culture of entrepreneurship and innovation.

Adhering to a 30-year old regime, while insolvency laws in other common law jurisdictions have changed considerably, blunts Hong Kong’s real competitive edge in global commerce.

Look no further than Singapore.

CPA Australia’s recent economic sentiment survey revealed concerns about Hong Kong’s international competitiveness, with 56 per cent of respondents expecting it to decline in 2017 and many seeing the biggest threat coming from Singapore.

It is noteworthy that after a three-year review, reforms to Singapore’s corporate rescue framework have already started.

The new regime is considered to be more progressive than that in Hong Kong and may well give Singapore a competitive edge.

The key recommendation from CPA Australia’s survey was for the SAR government to provide even greater support to spur businesses and entrepreneurs to undertake innovation in Hong Kong.

In all the circumstances, there is a strong case to move beyond the recent amendments with their focus on incremental change and revisit the elusive task of overhauling Hong Kong’s insolvency regime.

Issues to be considered include whether Hong Kong’s insolvency laws are adequate for the digital age, the appropriateness of the current creditor protections, whether penalties for directors for insolvent or wrongful trading should be introduced and if reforms are needed to assist business turnaround.

It would be sensible to look at pre-insolvency intervention where a company is under financial stress but not irretrievably insolvent, the robustness of the rules to deal with abuse such as stripping assets from one company only to appear under a new company to deny creditors and whether Hong Kong should adopt the UNCITRAL Model Law on cross-border insolvency, which has been adopted in 41 jurisdictions.

Often at the heart of the discussion around corporate insolvency reform is how to strike an ideal balance between creditor and debtor interests.

This is difficult and what is the ideal balance shifts over time, however it is a discussion that needs to be had.

With innovation as a central policy agenda, rapid advances in insolvency regimes in comparable jurisdictions and the imperative for action to preserve Hong Kong’s competitive edge, there are welcome indications that the government is actively developing options for a revamped corporate rescue regime.

After 20 years stuck on the policy drawing board, real progress at last could prove to be transformational.

– Contact us at [email protected]


Chief Executive of CPA Australia

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