Clock Runs Out on Troubled Hong Kong Businesses as Court Reopens

(Bloomberg) -- With plenty of Hong Kong companies on their last legs, landlords, suppliers and other creditors are eager to collect on unpaid bills. For three months, there's been no relief: the court that presides over failing businesses has been effectively closed.

Now, with the court scheduled to resume Monday, lawyers and restructuring experts are expecting a flood of unhappy lenders to ask for a forced liquidation of hundreds of small- and medium-sized businesses in the city.

Unless a company agrees to sell off its assets, a court-ordered liquidation is lenders' only formal recourse in Hong Kong, alone among global economies to deny bankruptcy protection for businesses. The current double economic whammy of political unrest and the global pandemic has sparked new frustration with decades of failed efforts to create a more robust process.

“The absence of any restructuring regime doesn't help,” said Jonathan Leitch, a Hong Kong-based partner at law firm Hogan Lovells. “The government has announced it will start a consultation process for corporate rescue regime, but it will likely be a number of years before anything comes into fruition, if at all.”

The last few months have given indebted companies unusual breathing room. After it was closed in late January, the court appointing liquidators reopened for emergency requests in March. It's granted just two, to applicants who could prove the company's assets are in jeopardy—in danger of fraud, for example.

Creditors, though, say the three-month freeze has raised legal costs and threatened asset recovery. “The control of insolvent company remains in the hands of the debtors without supervision, which is clearly unfair to the creditors,” said Kenneth Chen, a partner at Zanhol Advisory & Forensic in Hong Kong. “Delinquent directors would have ample time to siphon off assets from creditors.”

Bad actors aside, it also shifted the balance of power to the city's small and mid-sized businesses. The only viable option for landlords was to help struggling tenants survive, said Edwin Lee, founder of Bridgeway Prime Shop Fund Management Ltd, which owns a portfolio of Hong Kong properties.

For Lee, that remains the best course of action even with the court reopening.

“Landlords should opt for cutting rents,” said Lee, who says he's sponsored bubble tea and ramen give-aways to help his tenants draw customers. “Seeking a court remedy doesn't only take years, but it could mean several times the loss to landlords rather than to simply reduce rents.”

There's no record of how much delinquent businesses owe in total or how much creditors recover each year, but at the end of 2019, Hong Kong banks reported almost HK$59 billion ($8 billion) in debt at least three months overdue.

Big bank lenders, including HSBC Holdings Plc, have also stepped in with support, agreeing to cut fees and defer loan payments to keep its borrowers afloat. But that has only helped alleviate some of the pain.

More Unstable

The courts are bracing for a flood of new creditor petitions. Christopher So, a partner of PwC's restructuring and insolvency practice in Hong Kong, said he expected cases this year to return to levels last seen during the global financial crisis, as much as an 81% increase over 2019.

“The surge in time-lagged cases will likely give a perception that economic prospects and confidence are even more unstable,” he said.

Even with a full reopening of the court, it typically takes as long as nine months to get a liquidator in place after a petition is filed. So the hearings that had been scheduled for February or March had stemmed from petitions filed last fall; they've since been deferred.

Unsecured creditors are typically lucky to recover 10% to 20% of what they're owed, according to Tiffany Wong, Hong Kong-based managing director at Alvarez & Marsal's Restructuring Practice.

But there are also more amicable solutions. More than 160 companies submitted to a voluntary winding up proceeding in the first three months of the year, according to the city's company registry.

As the court suspension gives businesses a window to try to negotiate some kind of repayment plan with their creditors, lawyers and restructuring experts are skeptical the government's renewed interest in a more developed rescue regime will amount to anything.

“Change has been resisted for years,” Hogan Lovells' Leitch said. “I expect Covid-19 to pass in six months and the government will breathe a sigh of relief and put the notion of introducing rescue regimes back on the shelf for a few more years.”

A government spokesman said it's committed to getting a bill in place “as soon as practicable” for an introduction late this year or early next year.