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Page 1

THE LAW REFORM COMMISSION OF HONG KONG

REPORT

CORPORATE RESCUE AND INSOLVENT TRADING

This report can be found on the Internet at:

OCTOBER 1996

Page 2

The Law Reform Commission was established by His Excellency the
Governor in Council in January 1980. The Commission considers such
reforms of the laws of Hong Kong as may be referred to it by the
Attorney General or the Chief Justice.


The members of the Commission at present are:



The Secretary of the Commission is Mr Stuart M I Stoker and its offices
are at:

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9.9 Again, in this context, we must emphasise that a provisional
supervisor would be a highly qualified professional who would be attempting
to keep a company in operation. In such circumstances a provisional
supervisor would not seek to reject or vary contracts other than contracts that
would not benefit a company. A company in provisional supervision must
continue to do business and supply and receive goods otherwise the
procedure would be pointless. All parties involved would need to be flexible,
hence we would prefer to allow a provisional supervisor the flexibility to deal
with contracts in whichever way he considered fit.


Disclaimer of onerous property

9.10 We note that there is a difference between the disclaimer of
onerous property provisions in the Bankruptcy Ordinance, section 58, and the
Companies Ordinance, section 268. Under the Bankruptcy Ordinance a
trustee may disclaim in writing without the leave of the court, while a liquidator
has to obtain the leave of the court before he can disclaim. We recommend
that the Bankruptcy Ordinance provision be followed as it should lead to
savings in time and costs over the Companies Ordinance provision.




9.11 A problem arises, however, in relation to new obligations taken
on by the provisional supervisor after his appointment and before a voluntary
arrangement, if any, is agreed. A proposal for a voluntary arrangement would
need to contain provisions for the payment of fresh debt in priority to existing
debt otherwise it is unlikely that a company could keep trading. Those who
do business with the provisional supervisor after his appointment would want
assurances that they would be paid for their goods or services in full as they
would be apprehensive about receiving payment when the existing creditors
were subject to a moratorium on their debts. There is no simple solution to
this problem. If the company is to survive it must continue trading.3

9.12 This problem was identified by the Harmer Report4 which noted
that, in some cases, priority rights of payment in schemes of arrangement had
proved worthless. The Harmer Report recommended that an administrator
should be liable for debts incurred by the administrator in the course of an
administration for services rendered, goods purchased or property hired,
leased, used, or occupied. Debts incurred without the administrator's
knowledge or approval would not give rise to liability. The Harmer Report
also recommended that the personal liability of the administrator should
extend to liability for rent or similar obligations in respect of possession, use
or occupation of property during the administration but that this liability should


3 See Chapter 12 on super priority.
4 The Harmer Report, paragraphs 88 to 93.

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Chinese Gold & Silver Exchange Society

Chinese University of Hong Kong

Companies Registry

Education and Manpower Branch

Federation of Hong Kong and Kowloon Labour Unions

Government Supplies Department

Hong Kong Association of Banks

Hong Kong Bar Association

Hong Kong Coalition of Service Industries

Hong Kong Democratic Foundation

Hong Kong Exporters’ Association

Hong Kong Federation of Insurers

Hong Kong Institute of Company Secretaries

Hong Kong Management Association

Hong Kong Monetary Authority

Hong Kong Productivity Council

Hong Kong Shipowners Association Ltd

Hong Kong Society of Accountants

Hong Kong Tourist Association

Housing Department

Inland Revenue Department

Labour Department

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