Should Hong Kong reform its insolvency law in times of COVID-19?

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 the Hong Kong Monetary Authority’s (HKMA’s) measures for the banks to support the small and medium sized enterprises (SMEs) and the Hong Kong Government’s economic relief packages come to an end, an enormous wave of defaults will come. SMEs are defined by the Hong Kong Government to mean enterprises (outside of manufacturing) with fewer than 50 employees or, in the case of manufacturing, with fewer than 100 employees.
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. This proposal is not new; it first appeared in the recommendations of the Law Reform Commission5 has been attempted in 2000 and 2001, during the period immediately post-Asian financial crisis of 1997.6 Other previous consultations took place in 2009/20107 (2010 Consultation Conclusions), to address the economic fallout post-2008 global financial crisis, but did not lead to legislative change.8 As at the date of writing, the draft bill relating to the proposed provisional supervision and corporate rescue has not yet been published.
The proposed corporate rescue framework is long overdue. In recent years, many common law jurisdictions, including Singapore9 and the UK,10 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. For example, in Singapore, in October 2020, the Singapore Government introduces the Insolvency, Restructuring and Dissolution (Amendment) Act12 which enable micro and small companies (defined as companies with annual revenue of less than $1 million and $10 million respectively) to access the process that will enable to restructure more cheaply and speedily. In the US, the Small Business Reorganizations Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act allow smaller businesses access to less expensive and speedier bankruptcy processes in the courts.