Hong Kong collection profile

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.

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 0.11) 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.

Debt and other basic contractual / tort claims not exceeding HK$75,000 (approx. EUR 8,000) typically fall under the jurisdiction of the Small Claims Tribunal, which usually deals with such claims quickly, informally and at a low cost as legal representation is not allowed. Claims over HK$75,000 but not exceeding HK$3,000,000 (approx. EUR 325,000) would be dealt with in the District Courts, whilst the High Court deals with nearly all claims (including intellectual property, real property, contract breaches, insolvency, insurance, etc.) in excess of HK$3,000,000 (approx. EUR 325,000). Since the 2009 Civil Justice Reform, the Rules of the High Court have been amended to reduce complexity, delays and costs in civil litigation proceedings. Hong Kong also has a Closer Economic Partnership Arrangement (CEPA) free trade agreement, as well as a Double Taxation Avoidance Agreement, with Mainland China.

Similarly, debt collection costs cannot be charged to the debtor unless a contractual agreement clearly mentions this possibility. In practice, collection costs are seldom paid by the debtor.

But as mentioned above, the Hong Kong courts are prepared to award costs (incurred in the litigation) to the successful party to a litigation (typically around 60% will be recoverable).

Furthermore, if the underlying contract provides that the debtor party agrees to indemnify the creditor party for any reasonable costs incurred in pursuing claims for breach of the contract, the courts may be prepared to give effect to such an indemnity clause.

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.

Concerns have been raised amongst practitioners that retention of title clauses may involve the formation of security. As such, retention of title provisions may be void as against liquidators of the buyer company if not properly registered.

It is also notable that retention of title clauses can be difficult if not impossible to enforce in certain circumstances, such as when the goods are on-sold to a bona fide purchaser for value, or when the goods are no longer identifiable (having been used in manufacturing or having been mixed with other goods). 

For this reason, understanding of such clauses in Hong Kong is still in its infancy, and may not be suitable for all transactions.

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.

Although Hong Kong courts are reliable and swift in dealing with business claims, it is advisable to first consider amicable settlement opportunities as an alternative to formal proceedings. Indeed, although the law does not designate conciliation or mediation as prerequisites to formal legal action, in practice the courts increasingly encourage parties to have Alternative Dispute Resolution methods prior to commencing or during the course of litigation. In fact, the courts are known to sanction (by way of costs orders) any party who unreasonably refuses to engage in mediation.

Having said this, legal dunning ought to start by serving a pre-action letter against the debtor, recalling its obligation to pay the principal together with late payment interest (as contractually agreed).

If the pre-action letter is ignored or not properly met, the claimant may issue and serve a Writ of Summons on the debtor. 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 the Writ of Summons is served on the debtor, the latter must acknowledge it within 14 days and bring a defence within 28 days thereafter (subject to time extensions that may be agreed or granted by the Court). This process of exchanging written claims and counterclaims between the parties (called ‘pleadings’) 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 there is no arguable defence to the claim. The courts would usually order remedies in the form of damages and other equitable remedies (such as specific performance, injunctions, declarations, etc). Punitive damages are very rarely awarded. 

Copies of any documents that support the claim, such as purchase orders, invoices, statements of accounts, sales contracts and delivery evidence.  Note that claimants and defendants alike should be aware that once litigation is in reasonable contemplation, they will be under a duty to preserve all documents and evidence that may be relevant to the parties’ dispute.  

Commercial and tort claims must be brought within six years, typically starting from the due date mentioned on the invoice (though the starting date can be later or the 6-year period ‘refreshed’ under certain circumstances). Claims on deeds must be brought within twelve years from the date of the breach.

Provisional measures may help to preserve the status quo pending a final and enforceable judgment. For example, the courts may issue an interim prohibitory or mandatory injunction on an ex parte basis (without the debtor being present) as a means to prevent irreparable harm, the dissipation of assets (Mareva injunctions), to protect assets (asset preservation orders) or to protect evidence (Anton Piller orders). Injunctions may be obtained in very short order (often on the same day of the application), but it is then necessary to demonstrate a certain degree of emergency and the claimant would usually be required to provide an undertaking or security to indemnify the debtor in case the injunction was wrongful.

District Court decisions and judgments may be subject to appeal. The dissatisfied party will need to apply to the judge who made the initial decision for leave to appeal within 28 days of the judgment being finalised. If leave is refused, the party can apply to the Court of Appeal within 14 days of the refusal (for the same leave). The decision of the Court of Appeal on leave will be final and is not appealable.

Once permission is granted, the appellant will need to file a Notice of Appeal within 7 days, and thereafter: (i) submit the relevant documents; and (ii) fix a date for hearing.

For final decisions and judgments made in the Court of First Instance of the High Court, no prior leave is required (except for appeals on decisions on costs or on interlocutory matters), but the Notice of Appeal must still be lodged within 28 days.

Appeals to the Court of Appeal are generally heard by a panel of two or three Justices of Appeal and proceed by way of rehearing, based on the documents and evidence presented at the original trial. The Court of Appeal will then review whether the lower court’s decision was wrong. 

Further appeals may be made to the Court of Final Appeal, but only with leave to appeal (granted by either the Court of Appeal or of Final Appeal). Leave is usually only given if the case involves a question of great general or public importance.

Once a judgment is obtained, and the debtor fails to satisfy the same, a variety of enforcement options will become available to the judgment creditor. For example, the judgment creditor may apply for a garnishee order (allowing the judgment creditor to intercept wages or funds held in a bank account from the debtors’ employer or bank in full or partial settlement of the judgment debt), a Fieri Facias order (allowing a bailiff to seize and sell the debtor’s chattels and other tangible assets, such as money and bonds), or a charging order (placing a charge on the debtor’s property to secure, and eventually satisfy, the judgment debt). The court may also, under certain circumstances, order the winding up of the company.

Other less commonly utilized “enforcement” options include:
- prohibition orders preventing the debtor from leaving Hong Kong; and examination orders against the judgment debtor to attend before the Court Registrar (or other officer of the Court) to be orally examined on what other debts are owed by the debtor and what assets are available to satisfy those debts.

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 (depending on the parties’ willingness to settle amicably).

Domestic courts do not normally distinguish between domestic and cross-border litigation proceedings. However, if the claimant is based outside Hong Kong and does not have assets within the jurisdiction, then the defendant may apply for an order requiring the claimant to provide security for costs. On the flip side, if the defendant is based outside Hong Kong, then the claimant will need to apply for leave to serve the Writ of Summons outside the jurisdiction, which will add to the overall costs and duration of the litigation.

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 (typically around 60%).

Conditional arrangements whereby attorneys are only paid in the event of a successful outcome (i.e. ‘no-win-no-fee’) and contingent fees whereby the legal professionals are entitled to receive a percentage on the final award are strictly prohibited, subject to certain exceptions (e.g. third party funding of claims brought by companies in liquidation, and arbitration proceedings).

Alternative Dispute Resolution (e.g. 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 he or she 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. This can be a cost- and time-effective solution.

Arbitration 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, and enforceable in most jurisdictions. Furthermore, arbitration allows the parties to preserve their confidentiality.

When international transactions are involved, arbitration may be preferred as the parties will be able to resolve their disputes on more neutral ground.

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. 

Although this is not necessary because domestic courts are efficient in delivering timely decision, the parties may alternatively agree to solve their business disputes in a foreign forum (i.e. before a foreign court). If the parties have contractually agreed to resolve their disputes in a foreign forum, the domestic courts will—in nearly all cases—respect the parties’ choice and give effect to their agreement.

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 in Hong Kong. As for other jurisdictions such as the US and the UK, a judgment creditor would rely on the common law procedure to seek recognition and enforcement in Hong Kong.

In seeking recognition and enforcement in Hong Kong, the foreign judgment must be final and conclusive in the issuing jurisdiction (i.e. not subject to further appeal), and calls for the payment of a sum of money. There are also other rules relating to recognition and enforcement, and grounds for setting aside an order granting the same, but they go beyond the scope of this note.

It should also be emphasized that Mainland China and Hong Kong have their own rules and regulations on mutual recognition and enforcement of judgments. Given the difficulty in enforcing decisions in Mainland China, Hong Kong has in time become a diversion route to enforce rights in Mainland China, but the contracts need to be drafted accordingly.

Finally, as for enforcing arbitral awards, the courts are generally supportive of enforcing arbitral awards issued within and outside Hong Kong. The legal framework for recognition and enforcement of arbitral wards can be found in the Arbitration Ordinance (Cap 609). As a signatory of the New York Convention, awards issued in New York Convention jurisdictions (other than the People’s Republic of China) require a simple two-stage process for recognition and enforcement. There is also a similar and straightforward process for recognition and enforcement of awards issued in Mainland China and Macao. As for awards issued in other jurisdictions, recognition and enforcement can still be sought, albeit further requirements need to be met. 

The courts may refuse enforcement on largely procedural grounds, such as jurisdictional concerns, lack of procedural fairness, and etc. Once recognition and leave to enforce has been granted, the Hong Kong court will issue a judgment in terms of the award, and this judgment will be enforceable just like any other issued in Hong Kong.

A company is usually insolvent if it is “unable to pay its debts”. In turn, a company is deemed “unable to pay its debts”.

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 all concerned creditors) and Schemes of Arrangement (which is a statutory and court-driven process, and will typically involve the appointment of insolvency practitioners and/or lawyers to assist with the process).

A company may thus enter into a binding compromise with its shareholders and/or creditors in respect of its debts any time. Note, however, that in neither scenario will there be a moratorium to prevent creditors from enforcing their claims against the debtor company.

Liquidation (Winding up) under the Companies (Winding-up and Miscellaneous Proceedings) Ordinance (Chapter 32) may be initiated by either the debtor (Members’ Voluntary Winding-up) or a creditor (Creditors’ Voluntary Winding-up or Compulsory Winding-up). In either case, one or more (joint) liquidator(s) will be appointed to handle the liquidation process.

Once a winding-up order is made, there will be a moratorium on proceedings against the company. There will also be restrictions on the execution against the company’s assets. However, secured creditors and their rights over secured assets will largely be unaffected by the winding-up of the company.

After a winding-up order has been made, creditors will also be asked to file their claims (in the form of a Proof of Debt) with the liquidators, who is then responsible for: (i) identifying and realising the company’s assets, (ii) adjudicating the creditors’ claims; and (iii) distributing the company’s assets to the (unsecured) creditors of the company on a pro rata basis.  This process is likely to take several years, especially if the company in question holds significant non-cash assets and/or account receivables.

As mentioned above, secured debts and assets that have been secured against the company’s debts will fall outside the scope of the distribution waterfall.

Priority rules normally apply whilst distributing the proceeds to the creditors. Generally speaking:

• - Costs and expenses incurred by the liquidators in realizing the assets of the company, and costs and expenses incurred by the petitioning creditor in obtaining a winding-up order, are given top priority.
  - Next in priority are the costs and expenses of the liquidators.
  - Wages and government debts are given preferential status and have priority over unsecured claims, which in turn rank at the bottom of the waterfall.

In addition, the liquidator is entitled to set aside various types of transactions concluded by the debtor during a period ranging from six months to two years prior to the insolvency proceedings. In particular, any transaction deemed fraudulent or with intent to defraud, entered into at an undervalue (e.g. disproportionate  and unfair loans), or unfair insofar as they favoured one creditor over the others, as well as certain floating charges would typically be voidable. Furthermore, outgoing payments and transactions made following the commencement of the winding up (which, following the making of a winding up order, will be the date when a winding up petition is presented) may also be void.

Pre-insolvency: copies of any documents that support the existence of the debt, such as purchase orders, invoices, statements of accounts, sales contracts, evidence of delivery of goods, evidence of previous payments, and correspondence with debtor(s).

Post-insolvency: Completed proof of debt form.