- The payment behaviour of domestic companies is acceptable, taking 30 to 90 days on average. However, delays are frequent and late payments are not regulated by law.
- Hong Kong courts are reliable and swift in dealing with business claims. However, when it comes to dealing with insolvent debtors, the law provides no formal procedures to achieve a restructuring of the company’s debts.
Collecting in Hong Kong
Availability of financial information
Disclosure of financial information in Hong Kong is much more generalized and reliable than in Mainland China because the place is a regional hub where the free circulation of capitals governs. In practice, financial information is disclosed at least twice a year by listed companies and is available publicly, but non-listed companies have no such obligations.
Allianz Trade cross verifies data sourced from various providers and allocates each company a grade reflecting its financial health and how it conducts business. Grades represent a core of Allianz Trade’ knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to- date information to support management decisions.
Main corporate structures
Liability for business debts is determined by legal structures, which may be described as follows:
- Proprietorship is commonly relied upon for small scale operations because it is based on the personal qualities of the sole proprietor who personally owns the business assets. As a result, the proprietor is fully liable for the business‘ activities and debts.
- Partnerships allow two or more people to share ownership and responsibilities (partners are jointly and individually liable for the actions of the other partners) without incorporating a company.
- Private Limited Companies are in practice the most commonly used business entities as they only require a director (non-residents are eligible) whose liability is limited to its contribution and a company secretary (whether an individual, or another company). There is a HK$ 1 minimum (approx. EUR 110,000) capital requirement. Public Limited Companies are available when raising equity requires shares to be publicly traded. These entities are thus preferred by large businesses.
- Given the quantity of cross-border businesses in Hong Kong, Branch Offices are very common even though such entities are not separate from the parent company’s legal structure and thus offer no liability limitations. Subsidiaries therefore tend to be set up through Private Limited Companies. There are no specific structures for Joint-Ventures, which tend to be built through partnerships. Representative Offices are also used in order to explore the market but cannot engage in profit-making activities.
The legal system of Hong Kong is based on the British Common Law. Business claims tend to be settled efficiently, but courts can differ due to amounts at stake.
Claims not exceeding HK$75,000 (approx. EUR 8,000) would fall under the jurisdiction of the Small Claims Tribunals, which usually treat claims quickly, informally and at a low cost insofar as legal representation is simply not available. Claims up to HK$3,000,000 (approx. EUR 325,000) would rather be treated by District Courts, whilst High Courts would deal with the largest commercial claims (intellectual property, real property, contract breaches, insolvency, insurance, etc.) in excess of HK$3,000,000 (approx. EUR 325,000). Since 2009, the Rules of the High Court have been improved to reduce complexity, delays and costs in civil litigation proceedings. Hong Kong finally has a Closer Economic Partnership Arrangement (CEPA) free trade agreement, as well as a Double Taxation Avoidance Agreement with Mainland China.
Days Sales Outstanding (DSO)
Late payment interest
Late payment interest is not regulated by law and remains a matter of negotiation between the contractual parties. Therefore, failure to clearly state the parties‘ common position regarding late payment interest in a contract could complicate the debt collection process.
In fact, many trades involve no written sales contracts and would in practice rely mainly on purchase orders, email orders or verbal orders which normally do not include a late payment interest clause.
Debt collection costs
Retention of Title (RoT) contractual provisions ensuring that a trade partner shall only acquire ownership of goods once payment has been received in full are admissible, whilst extended clauses may furthermore help preserving ownership over transformed goods as long as the debt has not been fully paid for.
Having said this, RoT agreements are not used commonly by small and medium companies. Furthermore, the courts have not given them much consideration so far and it would seem delicate to predict how they would enforce them in practice.
For this reason, the clauses are not efficiently used to recover goods as part of pre-legal proceedings, but would give a certain degree of priority during insolvency proceedings (it would then be advisable to register RoT agreements with the Registrar of Companies).
The most common payment methods are as follows:
Bank transfers are amongst the most popular payment means as they are fast, secured, and supported by an increasingly developed banking network internationally and domestically. Export transactions are usually guaranteed through an Export Credit Insurance policy, which helps minimize the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well-being of your customers and grants them a specific credit limit up to which you may trade and claim should something go wrong.
Alternatively, Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) constitute reliable guarantees which can be interpreted as a sign of good faith since they can be triggered as a ‘payment of last resort’ if the client fails to fulfil a contractual commitment. Irrevocable and confirmed Documentary
Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) is also common.
Generally speaking, bank guarantees may be obtained rapidly, which does not prevent from negotiating down payments, depending on the amounts at stake. By contrast with Bills of Exchange, cheques are also very common.
Having said this, legal dunning ought to start by serving a Writ of Summons recalling to the debtor its obligation to pay the principal together with late payment interest (as contractually agreed). Once served, the debtor may agree to settle the debt or decide to file a defence. In this case, the claim will be considered more extensively through formal legal proceedings.
Ordinary legal action in Hong Kong is effective and fairly reasonable in terms of costs and timing, but it should only commence when amicable collection has failed. As previously mentioned, indeed, the judges increasingly encourage mediation in order to solve disputes ‘Out-of-Courts’, and tend to impose cost sanctions to parties which unreasonably reject amicable negotiation.
Once summons is served to the debtor, the latter must acknowledge it within 14 days and bring a defence within 28 days. This process based on the exchange of a series of written claims and counterclaims between the parties may lead to a compromise, otherwise the claimant may request the court to take on a case management role and hearings shall be organized. Failure to bring a defence however entitles the claimant to request a default judgment, and summary judgments may also be available when the case is not disputed. The courts would usually order remedies in the form of damages, specific performance, injunctions, declarations, etc. Punitive damages are very rarely awarded.
Lodging an appeal
Appeal against decisions rendered in first instance may generally be lodged within twenty-eight days with the Court of Appeal, which will review the claim on factual and legal grounds. Similarly, the decision rendered in second instance may be appealed against before the Court of Final Appeal.
At both levels, the claimant must however file a petition, and it is for the court to grant a leave for appeal.
Enforcing court decisions
Enforcement may commence once a judgment is final (i.e. no appeal is lodged within twenty-eight days). If the debtor fails to satisfy the judgment, it is possible to request an enforcement order from the court. The latter would usually render a garnishee order (allowing the claimant to obtain payment of the debt from a third-party owing money to the debtor), a Fieri Facias order (allowing a bailiff to seize and sell the debtors tradable goods) or a charging order (allowing seizing and selling the debtor’s property to satisfy the debt). The court may also appoint a receiver in charge for conducting the execution proceedings, and it may order insolvency proceedings. A prohibition order may also be requested to prevent the debtor from leaving Hong Kong.
If necessary, the courts may also issue Examination Orders allowing verbal interviews with the Director of the debtor firm in order to obtain further information on the financial status of the company.
How long could legal action take?
Summary judgement would take 6 to 12 months on average whilst obtaining (and enforcing) a final judgment would take 1 to 3 years. However, most of the cases may be recommended by courts to go for mediation and would thus take a relatively shorter time to settle (2 to 3 months depending on the parties’ willingness to settle amicably).
Domestic courts would normally make no difference between domestic and transnational litigation proceedings; however, delays may be increased when it is necessary to obtain documents, evidence or statements from abroad.
How much could this cost?
The cost of legal proceedings is normally significant, but the winning party may obtain from the court all costs deemed necessary to defend the claim be paid by the defeated party.
Conditional arrangements whereby attorneys are not paid upfront but rather receive of a fixed sum upon success (i.e. ‘no-win-no-fee’) and contingent fees whereby the legal professionals are entitled to receiving a percentage on the final award are strictly prohibited.
Alternatives to legal action
Alternative Dispute Resolution methods (ADR)
Alternative Dispute Resolution (mediation, arbitration) is strongly encouraged by courts. Mediation involves the nomination of a mediator who is given responsibility for helping the parties to reach a compromise. In other words, the mediator has no authority to decide on the behalf of the parties and they cannot bind the parties with a decision. An agreement is only binding if a settlement agreement is entered into between the parties at the end of the mediation. The mediator really acts as a facilitator to settlement.
Arbitration rather involves the parties agreeing to rely on an independent and impartial third-party arbitrator, who is given authority to settle their dispute on their behalf. The arbitrator’s decision will be binding on the parties.
As an out-of-court settlement method, ADR can be cost-effective, generally reduces delays, allows preservation of confidentiality and offers a binding decision which may then be enforced before the courts if necessary. When international transactions are involved, international arbitration may also be considered. As a general rule, the best way to approach ADR is to include this possibility as a contractual matter, thus making it clear that normal proceedings will be avoided if possible. Again, specialized legal advice must be obtained.
Enforcing foreign awards
Foreign judgments would usually be enforced under the Foreign Judgments (Reciprocal Enforcement) Ordinance. Going through a verification phase (exequatur) is mandatory, but in practice a foreign decision issued in a country with which Hong Kong has signed a reciprocity treaty (Australia, Belgium, Bermuda, Brunei, France, Germany, India, Israel, Italy, Malaysia, The Netherlands, New Zealand and Singapore) would merely be registered prior to becoming enforceable automatically.
Otherwise, enforcement may be requested before the court, which would verify, amongst other points, that the foreign judgment is final in the issuing jurisdiction before recognizing it and allowing enforcement.
It should also be emphasized that the ‘Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters’ (REJA) of 2006 has been specifically concluded with China in order to make judgments rendered in Mainland China and Hong Kong automatically enforceable by the courts of the other contracting party. Given the difficulty in enforcing decisions in Mainland China, this means that Hong Kong has in time become a diversion route to enforce rights in Mainland China, but the contracts need to be drafted accordingly.
The law provides no formal procedures to achieve a restructuring of the company’s debts. Thus, restructuring proceedings take place through informal workouts (i.e. contractual arrangements approved by 100% of the creditors), compositions and Schemes of Arrangement between the parties concerned.
A company may thus enter into a binding compromise with its shareholders and/or creditors in respect of its debts, at all times. The Directors may be appointed as the Scheme Administrators. There is however no moratorium to prevent creditors from enforcing their claims against the debtor company.
Priority rules normally apply whilst distributing the proceeds to the creditors. Costs relating to the insolvency proceedings are given top priority over secured creditors. Wages and government debts are given a preferential status and thus have priority over unsecured claims.
RoT agreements would essentially give the debtor a priority to get goods out of the debtor’s inventory prior to liquidating its assets.