News & Insights

Hong Kong to introduce Corporate Rescue Bill in early 2021

At present, Hong Kong does not have any statutory corporate rescue regime. A financially distressed company may try to rescue its business by entering into (i) private debt restructuring agreement(s) with its major creditors; or (ii) a scheme of arrangement under the Companies Ordinance (Cap. 622), which allows for a compromise between the company and its shareholders and creditors. However, these two options are far from ideal, as they do not provide for any moratorium for the company against actions by creditors, who may still bring proceedings against the company or seek to wind it up, thereby jeopardising the effectiveness of any corporate rescue / restructuring plan. This deficiency in Hong Kong’s corporate rescue regime has been demonstrated during the COVID-19 pandemic.  Businesses face immense financial challenges, yet lack the breathing space and measures to facilitate attempts to survive as going concerns.

The Hong Kong Government has recently announced its plan to introduce the Companies (Corporate Rescue) Bill (Bill) into the Legislative Council in early 2021. The Bill aims to introduce a statutory corporate rescue procedure and insolvent trading provisions into Hong Kong law. This article provides an overview of the major legislative proposals in the Bill.

Provisional Supervision

The Bill introduces a new corporate rescue mechanism whereby a company (or the liquidator / provisional liquidator of the company if it has already entered into liquidation or is subject to winding-up proceedings) which is insolvent or will likely become insolvent, may initiate Provisional Supervision through the appointment of a provisional supervisor (PS).

To strike a balance between protecting the interests of any major secured creditor (MSC) of a company and to ensure the efficacy of Provisional Supervision, it is proposed under the Bill that:

  1. A written notice of intention to appoint a PS should be given to the MSC of the company;
  2. The MSC has a right to object to the appointment within a specified time; and
  3. In the absence of any objection from the MSC, Provisional Supervision may be initiated.

If there is more than one MSC, the procedure must be gone through with each of them. There are protections for MSCs throughout the Provisional Supervision process – for example, their security rights are preserved (albeit subject to the moratorium).

During the Provisional Supervision period, the PS (who must be either a certified public accountant or a solicitor) will take control of the company, consider the options for rescuing the company and prepare proposals for a voluntary arrangement (VA) for consideration and decision at a final creditors’ meeting. To enable the PS to perform such functions, it is proposed under the Bill that the PS should be empowered to investigate the company’s business, affairs and financial circumstances as soon as possible after appointment in order to assess the company’s financial position. Meanwhile, to maintain the confidence of third parties trading with a company in Provisional Supervision, the Bill proposes that subject to certain exceptions, the PS will be personally liable for the following categories of contracts:

  1. Any contract entered into by the PS in the performance of his / her function as PS; and
  2. Any pre-appointment contract adopted by the PS in writing within 16 business days from the date of appointment as PS.

The proposed period of Provisional Supervision is 45 business days, which may be extended up to 6 months with the consent given at a creditors’ meeting. An application can be made to the court if a time extension beyond 6 months is required. The Bill further proposes the following defined timeline to facilitate speedy determination of the way forward for the company:

  1. The PS must summon the first creditors’ meeting to be held within 10 business days from the date of commencement of Provisional Supervision;
  2. During the first creditors’ meeting, the creditors may determine, amongst other matters, whether the appointed PS should be removed, and if so, who is to be appointed in their place; and
  3. Prior to the end of the Provisional Supervision period, a final creditors’ meeting be held to determine the way forward for the company.

Under the Bill, the PS is required to make recommendations on the following alternative outcomes for consideration and decision at the final creditors’ meeting, i.e. whether:

  1. The company should enter into a VA;
  2. The company should be wound up; or
  3. The Provisional Supervision should end.

At the final creditors’ meeting, if the VA is approved by the creditors, they must also appoint a supervisor of the VA (Supervisor), who must be either a certified public accountant or a solicitor. The PS will become the Supervisor unless another person is appointed by the creditors. 

Generally, the VA will be binding on the following persons:

  1. A creditor of the company in respect of (i) a specified claim against the company which arises on or before the commencement of Provisional Supervision; and (ii) a claim for phased payments (see “Protection of Employees’ Entitlements” below);
  2. The company;
  3. The Supervisor; and
  4. The members and officers of the company.

Statutory Moratorium

A prominent feature of Provisional Supervision under the Bill is the imposition of a statutory moratorium preventing civil proceedings and actions being brought against the company and its property. A statutory moratorium has a two-fold effect:

  1. To suspend the rights of creditors; and
  2. To preserve the company’s property to allow it to continue trading as a going concern and to enable the PS to formulate a rescue plan for the company.

With a moratorium in place,

  1. No resolution can be passed for a company to be wound up voluntarily;
  2. No application to the court can be made for the compulsory winding-up of a company;
  3. All winding-up proceedings commenced before Provisional Supervision has begun will be suspended;
  4. No court proceedings (except for criminal proceedings) against a company or its property can be commenced or continued with, except with the consent of the PS or leave of the court; and
  5. No enforcement process in relation to a company’s property can be commenced or continued with, except with leave of the court.

The Bill, however, provides for certain exemptions from the moratorium during Provisional Supervision on public policy or public interest grounds (for instance, protection of employees’ entitlements – see below).

Protection of Employees’ Entitlements

In previous rounds of public consultations, the labour sector opined that the Provisional Supervision regime should have adequate protection to ensure that employers do not evade their obligations to pay employees’ entitlements; on the other hand, there were concerns that imposing too onerous requirements on financially distressed companies to safeguard employees’ interests would undermine the attractiveness of Provisional Supervision.

Under the Bill, it is proposed that employees’ outstanding entitlements owed by a company as at the commencement of Provisional Supervision be paid in accordance with the following phased payment scheme.

Where a company in Provisional Supervision fails to make a phased payment, the employee concerned will no longer be bound by the statutory moratorium and may petition to wind up the company.

Applicability to Registered Non-Hong Kong Companies (RNHKCs)

It is proposed under the Bill that the Provisional Supervision will be applicable to local companies and RNHKCs. To ensure a level playing field, RNHKCs will generally be required to satisfy the same set of conditions for commencing Provisional Supervision as local companies. RNHKCs will further be required to obtain leave of the court before commencing Provisional Supervision in Hong Kong.

Insolvent Trading Provisions

The Bill also introduces another concept which has been the object of legislation in other common law countries – insolvent trading. Under the Bill, a director (who includes a shadow director) of a company is responsible for insolvent trading of the company if the company owes a debt whilst it is insolvent (or becomes insolvent as a result of incurring this debt, or other debts at the same time) and if the director at the material time knew or ought to have known that the company:

  1. was insolvent at the time when the debt was incurred; or
  2. would become insolvent by incurring the debt; or
  3. would become insolvent by incurring at the time when the debt concerned is incurred, other debts including the debt concerned.

If the company goes into insolvent liquidation, the court may, on application by the liquidator, declare that a director of the company responsible for insolvent trading is liable to make such contribution to the company’s assets that the court considers appropriate.

The Bill proposes some statutory defences to provide recourse to directors to avoid being caught inadvertently.  These defences include:

  1. The director had taken all reasonable steps to prevent the company from incurring the debt concerned; or
  2. When the debt was incurred,

a. the director believed in good faith that the debt was incurred by the company for the      purposes of returning the company to solvency within a reasonable period; and
b. there were reasonable grounds for having such belief.

This legislation, if enacted, is likely to have an impact on the way directors approach trading when their companies are in difficulty, as personal liability could result from any bad decision.


The Government’s announcement of its plan to introduce the Bill in early 2021 is welcome news for the business and legal sectors (although the insolvent trading provisions will likely not be welcomed by directors). The Bill, if passed, will be a significant step forward in the legislative development of the corporate insolvency regime in Hong Kong.  The introduction of a statutory corporate rescue mechanism and insolvency trading provisions will bring Hong Kong on par with other common law countries. Provisional Supervision has been the subject of possible legislation for over 2 decades (one of the authors recalls attending lectures concerning the topic in 1999) and it is to be hoped that legislation in this area will finally be enacted this year.

Related Services and Sectors:

Litigation and Dispute Resolution

Portfolio Builder

Select the legal services that you would like to download or add to the portfolio

Download    Add to portfolio   
Title Type CV Email

Remove All


Click here to share this shortlist.
(It will expire after 30 days.)