After abortive attempts in 2000-2001, 2008-2009, and 2014 to introduce a statutory corporate rescue procedure, the Hong Kong Government has recently announced in a paper submitted to the Legislative Council that it will present the Companies (Corporate Rescue) Bill (the “Bill”) to the Legislative Council in early 2021. Once enacted, the Bill will introduce a corporate rescue procedure and insolvent trading provisions in Hong Kong. This is a timely move in light of the recent economic difficulties.

Why does Hong Kong need a corporate rescue procedure?

For years, practitioners, judges and academics alike have bemoaned the lack of any corporate rescue mechanism in Hong Kong (for a recent judicial fulmination, see our previous article here).

For businesses in financial distress hoping to restructure their debts, the options currently available in Hong Kong are limited and inadequate. Putting non-statutory workouts to one side, statutory schemes of arrangement do not provide for an automatic moratorium (stay of proceedings).  At any time before the scheme obtains the necessary approvals and sanctions, creditors remain free to pursue all enforcement options available to them, including petitioning for winding up or commencing debt recovery proceedings. This gives dissenting creditors significant leverage to hold the company and other consenting creditors to ransom and otherwise encourages “rogue” behaviour by them, which in turn jeopardises the restructuring efforts. This often leads to a worse outcome for all interested parties where there is a genuine prospect that the restructured business would be able to trade out of its difficulties.

We highlight the key points in the legislative proposals below.

The proposed corporate rescue procedure

The procedure of provisional supervision lies at the heart of the proposal.

Who can initiate provisional supervision?

Under the Bill, a company which is insolvent or likely to become insolvent, or a liquidator or provisional liquidator of a company may initiate provisional supervision. Both Hong Kong and registered non-Hong Kong companies will be able to do so (leave of the Court is required in the latter case).

Importantly, the company will need to solicit the support of its “major secured creditor” (if any) before initiating provisional supervision, as the major secured creditor has a veto. A major secured creditor is defined as a person who holds charge(s) on the whole or substantially the whole of the company’s property.

What will be the provisional supervisor?

The provisional supervisor is an independent professional third party who must be a certified public accountant or a person qualified to act as a solicitor.

The company’s choice of the provisional supervisor will be considered at the first creditors’ meeting (held within 10 business days from the commencement of provisional supervision). The creditors can vote to replace the provisional supervisor.

What happens during provisional supervision?

The provisional supervisor will:

  • act as the company’s agent to carry on the business as a going concern;
  • investigate the company’s business, property, affairs and financial circumstances;
  • consider options for restructuring the company or whether it should be wound up; and
  • where appropriate, prepare a rescue proposal (referred to as a “Voluntary Arrangement”).

During provisional supervision, there will be a moratorium on civil proceedings and actions against the company and its property – including winding up petitions. This is the cornerstone of the proposed regime.

How long is the provisional supervision period?

The initial period of provisional supervision is 45 business days. The initial period is relatively short to facilitate speedy determination of the future of a company. It is possible to extend it up to 6 months with the consent of creditors in the form of a creditors’ resolution and even beyond 6 months for complex cases with leave of the court.

What happens at the end of provisional supervision?

The Voluntary Arrangement will be presented to the creditors of the company at a creditors’ meeting at the end of the provisional supervision. The creditors will decide whether to approve the Voluntary Arrangement by resolution. The Voluntary Arrangement will then be implemented under the supervision of a Supervisor who must also be a certified public accountant or solicitor. The Provisional Supervisor will be taken to be the Supervisor unless another person is appointed as the Supervisor.

Employee protection

Besides shareholders and commercial creditors, employees will also benefit from the proposed regime, which envisages a phased payments scheme regarding outstanding entitlements owed to employees at the commencement of provisional supervision. In relation to these pre-commencement entitlements, the employee(s) will be bound by the moratorium, but a failure to make a phased payment will render the moratorium ineffective as against the concerned employee(s) who can then petition to wind up the company. Further, if a company fails to pay entitlements arising after the commencement of provisional supervision, the employee(s) concerned can also petition to wind up the company.

Court supervision

Under the proposed regime, the Court will not be actively involved in provisional supervision, because court proceedings are usually time consuming and costly. However, in cases of abuse of the process by the company or of the powers of the provisional supervisor, the Court retains the power to intervene, such as by giving directions, examining the conduct of a provisional supervisor, and in appropriate cases, ending the provisional supervision.

Proposed liability for insolvent trading

Currently in Hong Kong, directors may be exposed to personal criminal and civil liability for fraudulent trading – that is, if they engage in carrying on any business of a company with intent to defraud creditors or for any fraudulent purpose. However, permitting trading while the company is insolvent does not, in and of itself, lead to any criminal or civil liability for directors.

The Bill seeks to introduce insolvent trading provisions to make the Hong Kong regime more in line with international counterparts (such as the UK regime). The proposal is that a director should be responsible for insolvent trading and liable to make a contribution to the company’s assets if he or she knew or ought to have known that the company was insolvent when the debt was incurred, or would become insolvent by incurring the debt.

The Bill proposes some statutory defences. If the director has taken all reasonable steps to prevent the company from incurring the debt concerned, or when the debt was incurred the director believed in good faith that it was incurred for the purposes of returning the company to a state of solvency within a reasonable period, there were reasonable grounds for believing that the incurrence of the debt would benefit the company and that the company was likely to return to a state of solvency within a reasonable period. In assessing reasonableness, on top of his or her actual knowledge, skill and experience, the Court will impute the director with the general knowledge, skill and experience that may be reasonably expected of a person in his or her position.


Unlike the US Chapter 11 regime, the proposed regime is not a debtor-in-possession approach, which allows the debtor, usually the management of the company, to remain at the helm to operate the business. Rather, the provisional supervisor will displace the directors and management of the company. This creditor-friendly approach is more akin to Hong Kong’s current insolvency regime, but a debtor-in-possession approach is sometimes thought to be more likely to preserve the company as a going concern.

The proposed moratorium does not purport to extend to other jurisdictions, so creditors will be able to commence proceedings against the company and enforce against its assets outside Hong Kong. If the company has significant operations and assets outside Hong Kong, the need for parallel restructuring processes remains in order to protect the offshore assets from predatory creditors.

After so many abortive attempts, it is hoped that the legislative effort this time will come to fruition –the unprecedented economic difficulties over the past year or so will no doubt have focused the mind of the government on the need for change.


Gareth Thomas
Gareth Thomas
Partner, Head of commercial litigation, Hong Kong
+852 2101 4025
Alexander Aitken
Alexander Aitken
Partner, Hong Kong
+852 2101 4019
Peter Ng
Peter Ng
Senior Associate, Hong Kong
+852 2101 4238