(a) Are there instances of fraud in relation to a corporate debtor in this economy?

Yes, there are some reported instances of fraud in relation to a corporate debtor. One commentator observed that the majority of fraud is soft fraud involving cooking the numbers' so a company can get by.

(b) If so, is it usual that instances of such fraud will be revealed when a corporate debtor is in financial difficulty or becomes insolvent?

It would be most common for instances of such fraud to come to light during an investigation of a debtor during a workout or in the process of a formal liquidation.

(c) What is the attitude that is normally taken to such fraud in this economy?

The problems involving fraud in an environment of family controlled business are complicated by the fact that the fraudster (perhaps a director or a controlling shareholder) may well be both part of the problem and part of the solution. In a workout scenario, creditors may well have to choose between moral or financial satisfaction: the aggressive pursuit of criminal sanctions against the fraudster may well lead to the collapse of a potential corporate rescue. Similarly, in a liquidation there are incentives for a liquidator to focus more on collecting assets than on investigating and reporting criminal activity. See Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 17.50 at 139-40. Thus, pragmatic creditors and liquidators might well rely on civil, rather than criminal, sanctions and seek recovery from the relevant parties.

(d) Is it the case, for example, that 'soft' fraud may be overlooked (or not pursued) and 'hard' fraud may more likely be pursued in this economy?

Both types of fraud will be pursued although more frequently through civil, rather than criminal, channels.

If there have been instances of fraud:

(i) does the insolvency law (or other civil law) provide for possible recovery of the proceeds of (or damage caused by) the fraud;

Recovery can be sought to enable the repayment to be made to creditors and criminal cases may be referred to the Secretary for Justice or the Commercial Crime Bureau ('CCB'). At present, civil recoveries in instances involving fraud probably occur in only 1-2 case per year. Few directors are prosecuted for fraud.

Section 60 of the CPO (discussed in Section K2 above) enables a liquidator (and creditors) to attack fraudulent conveyances.

(ii) does the criminal law provide for possible sanctions;

Yes, prosecutions can result. As noted in Section M below, Section 277(1) of the Companies Ordinance provides that if, in the course of a winding up by the court, it appears that any director has committed a criminal offence then the liquidator may be directed to refer the matter to the Secretary for Justice. A similar obligation is imposed in Section 277(2)) upon a liquidator in a voluntary liquidation. In practice, reports will also be made to the CCB. Interestingly, there is no statutory requirement for a liquidator to make a report of criminal behaviour to the police. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 17.42 at 138.

(iii) how effective is the application of these laws in practice?

The existing system is reasonably effective. However, the Sub-Committee on Insolvency, in its Consultation Paper on the Winding Up Provisions of the Companies Ordinance has recently noted the 'need for a general reconsideration of how dishonesty on the part of company directors might be addressed more effectively' (para 17.48 at p 139) and suggests that 'the reporting of crime should attract a higher priority than appears to be the case at present.' Id, para 17.49 at p 13.

The enactment of a corporate avoidance power regarding transactions at an undervalue would also enable a liquidator to respond more effectively in many instances.

(e) Would it be common or usual that instances of fraud would:

(i) be largely ignored;

(ii) settled by negotiation; or

(iii) pursued through either civil or criminal law sanctions?

Thus, the overall result in most cases would be that the fraudulent actions would not be ignored. Negotiation would be the preferred option, but if an agreement could not be reached with the fraudster, recovery would be pursued through civil remedies. Criminal prosecution would be rare.