(a) Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods?

Yes, negotiation would almost always occur between an unsecured creditor and the corporate borrower before the creditor invoked legal recovery methods.

(a) What mechanisms are available under the legal system of this economy for unsecured creditors to collect debts owed to them by the corporate debtor?

Unsecured creditors may sue the company and, if successful, try to enforce their judgments through a variety of means including the following:

(1) interim attachment of the company's property (Rules of the High Court, O 44A, r 7);

(2) a writ of execution (id, O 46, 47);

(3) garnishee proceedings (id, O 49);

(4) a charging order or stop order (id, O 50);

(5) an examination of the officers of the company (id, O 48).

A creditor may also seek injunctive relief, including the entry of a stay of Hong Kong, China proceedings or an execution (see Modern Terminals (Berth 5) Ltd v States Steamship Company [1979] HKLR 512) or the entry of a Mareva injunction. A Mareva injunction is an interlocutory order sought by a petitioner to prohibit a defendant from dealing with his assets and trying to move them out of the jurisdiction. It does not serve as security for the petitioner, but rather protects the assets for creditors generally.

Hong Kong, China law also provides for a variety of harsh legal methods for collecting debts, including arresting a company director to secure attendance at an Order 48 examination Halsbury's Laws of Hong Kong, China, Volume 5: Civil Procedure, para [90.1215] at 1040 (1997).

 

(b) In practice, which method(s) of recovery of unsecured debts are most commonly employed by unsecured creditors of a corporate debtor?

As noted in E1 above, negotiation is almost always the preferred option, but eventually a creditor may need to bring additional pressure upon the company. Threatening to sue might prove sufficient, but if not, a creditor will have no choice but to sue on its debt and try to enforce the judgment through the channels noted immediately above in Section E2(a). Suits by banks against their customers are generally uncommon.

Some unsecured creditors (including banks) hire debt collection agencies that at times use aggressive debt collection techniques. Some of these agencies resort to harassment, coercion, and the public humiliation of the debtor - and in some instances even arson - in demanding repayment. To respond to some of the more egregious acts involving agencies hired by banks, in 1997 the HKAB and the Hong Kong Association of Restricted License Banks and Deposit-Taking Companies jointly issued a non-statutory Code of Banking Practice 1997 that included provisions regarding the collection of debts by such agencies.

E3. Effectiveness of judicial system

(a) How effective is the judicial and court system for the purposes of debt collection?

The answer to the question in part is related to the size of one's debt. For large debts, creditors generally consider the Hong Kong, China legal system for debt collection to be effective and efficient. However, given the high costs involved in debt collection, the same cannot be claimed when speaking of the collection of smaller debts. The fact that many individuals and even some companies rely on debt collection companies that use high pressure (and at times illegal) debt collection techniques demonstrates some dissatisfaction with the effectiveness and/or cost efficiency of the appropriate legal channels.

The Law Reform Commission recently established a Sub-Committee on Debt Collection to examine the existing non-judicial debt collection procedures in Hong Kong, China.

(a) What effect, if any, does the commencement of insolvency proceedings against a corporate debtor have on debt recovery proceedings?

As noted above in Section C5(a), in a compulsory winding up (pursuant to Section 181), at any time after the filing of a winding up petition but before the making of a winding up order or the appointment of a provisional liquidator, the company or any creditor or contributory may apply to the appropriate court to stay or restrain any action or proceeding against the company on such terms as the court thinks fit. Pursuant to Section 182, after the commencement of a winding up any disposition of the property of the company is void unless the court orders otherwise. In 1997/98, there were three applications under Section 182 to sanction dispositions made after the commencement of winding up. Official Receiver's Office, Annual Departmental Report 1997/98, supra, Annex 14.

Pursuant to Section 255, in a voluntary winding up the liquidator has the power to apply to the court to seek assistance, which would include seeking a stay of an action or proceeding against the company.

In contrast, the commencement of a voluntary winding up or of a Section 166 scheme has no formal effect on debt recovery proceedings. The Bar Association made a submission to the Sub-Committee on Insolvency that Section 181 should be extended to apply to Section 166, but both the Law Reform Commission and the Sub-Committee rejected the suggestion. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 5.21-.26 at 20-21.

Under the Law Reform Commission's proposed provisional supervision procedures, upon the commencement of provisional supervision, a moratorium will take effect that will prevent both unsecured and secured creditors (with the exception of 'major secured creditors') from taking actions to collect their debts. (There will be limited exemptions for 'eligible financial contracts.' See Report on Corporate Rescue and Insolvent Trading, supra, paras 5.26-.31, at 38-40.) The moratorium will last for an initial thirty-day period. If the provisional supervisor is unable to formulate a plan within this period, he may apply to the court for an extension or extensions of the moratorium for up to six months. Beyond that time, the moratorium may only be extended with the agreement of creditors.

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on debt recovery proceedings?

As noted in Section C5(b) above, in a compulsory winding up (pursuant to Section 186), after the making of a winding up order or the appointment of a provisional liquidator, creditors may not proceed with or commence actions or proceedings against the company except by leave of the court and subject to such terms as the court may impose.

There is no formal pronouncement in a voluntary winding up or a Section 166 scheme, nor will there be in provisional supervision. See Section C5(b) above.