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Hong Kong Law Reform Commission |
“There is ... concern that licensing might enable fees to be maintained at a high level, which is not in the interests of anyone except licensed practitioners. As the majority of liquidations and receiverships are properly conducted, the need for a new regime of licensing and regulations and the expenses which this will entail have to be carefully considered.... Creditors should be free to appoint a person whom they consider to be suitable. ”
3.3 We
suggest that the concerns expressed are adequately covered as a system of
licensing would increase transparency and the Panel recommended in the chapter
on the remuneration of insolvency practitioners would also serve as a check on
the escalation of costs. We also note the Registrar of Companies’
proposal for the establishment of a simplified method for the dissolution of
companies.[14]
3.4 In 1996,
the Official Receiver established and now manages two “Administrative
Panels of Insolvency Practitioners for the Court Winding-up of
Companies”. The “Administrative Panels” are based
on similar regulatory provisions that have been established in the United
Kingdom and Australia and these recommendations are based on those
provisions.[15]
3.5 The
Administrative Panels originally consisted of member firms of the Hong Kong
Society of Accountants which were deemed to possess the necessary expertise and
resources to be appointed as special managers or liquidators of companies
wound-up by the court having estimated realisable assets of more than $200,000
after deduction of the Official Receiver’s fees for acting as the
provisional liquidator.
3.6 All cases with realisable assets of more
than $200,000 are considered to be “non-summary” whereas
cases which are defined as “summary” cases under section 227F
were, until recently, wound-up by the Official Receiver as liquidator in a
summary manner.[16]
3.7 The Official Receiver has now expanded the contracting out scheme
to summary cases by the establishment of a second panel of practitioners to act
as special managers in summary cases, with the Official Receiver remaining as
liquidator and in overall control of a summary liquidation. The two panels are
now known as the “List A Panel” and the “List B
Panel”. There are about 15 firms licensed under the contracting out
scheme on each of the List A Panel and the List B Panel and about 18 firms
overall.
3.8 The Official Receiver makes appointments from the List A
Panel on a roster basis if the statutory meeting of creditors does not appoint a
liquidator of its choice. Appointments from the List B Panel are also made on a
roster basis.
3.9 The main criteria for membership of the List A Panel
are that members must have at least four professional accountants who are
members of the Hong Kong Society of Accountants, and two of those accountants
must be recognised by the Official Receiver as insolvency professionals with a
minimum number of 600 chargeable hours in the last three years or 750 chargeable
hours in the last five years of relevant insolvency work, which excludes
members' (solvent) voluntary windings-up, in addition to other requirements.
The requirements for the List B Panel are a reduced number of qualifying hours
in creditors' (insolvent) voluntary windings-up, compulsory windings-up or in
receiverships, with some qualifying hours in members’ (solvent) voluntary
winding-up work, among other requirements.
3.10 These additional
requirements include undertaking to accept any cases allocated by the Official
Receiver, unless there are good reasons which preclude a member from taking an
appointment, the carrying out of a minimum standard of statutory investigation,
and to continue to handle a case until its reasonable conclusion. Remuneration
of liquidators and special managers appointed from the Panels is set down in
scales of fees which are reviewed annually by the Official
Receiver.[17]
3.11 The
winding-up of companies and other insolvency related appointments require high
standards of liquidators and other insolvency practitioners as it is they who
are charged with realising, managing or re-organising assets and with
distributing assets to those entitled to them.
3.12 There has been
anecdotal evidence of abuse where assets in windings-up have been diverted by
unscrupulous liquidators, usually by selling the assets at low prices to persons
connected with the directors. In addition, there has also been some evidence
over the last several years of receivers and liquidators being appointed who
have had only a vague idea of their functions and obligations.
3.13 We
consider that although the majority of liquidations and receiverships are
properly conducted, there is a need to regulate appointments to act in
insolvency or insolvency related matters and we recommend the
introduction of a new two tier system of licensing of insolvency practitioners
to be established and operated by the Official Receiver: “Licensed
Insolvency Practitioners” who would act in all forms of liquidation,
receivership, provisional supervision and bankruptcy and “Registered
Insolvency Practitioners” who would act in members’ (solvent)
voluntary winding-up, creditors’ (insolvent) voluntary winding-up and
individual voluntary arrangements in
bankruptcy.[18] The establishment
of a system of licensing would have the effect of enhancing the power of
insolvency practitioners and reducing the potential for abuse. In a climate
where the court has expressed scepticism as to bills of costs presented by
partners of the largest accounting firms in the world, it is logical to conclude
that there is a need to introduce greater regulation of appointments of all
office-holders.
3.14 Appointments to the new Administrative Panel would
be made by the Official Receiver, based on the qualifying criteria for
appointments under the current Administrative Panels. In addition to the
current situation where only accountants can be appointed to the List A Panel,
members of the Law Society and any additional categories of persons with the
requisite experience would be entitled to apply to the Official Receiver to be
licensed to act as Licensed Insolvency Practitioners or Registered Insolvency
Practitioners. In addition, members of the Hong Kong Institute of Company
Secretaries would be entitled to be appointed as Registered Insolvency
Practitioners once they have fulfilled the qualifying criteria set down for
Registered Insolvency Practitioners.
3.15 In calculating the number
of hours for qualification as Licensed and Registered Insolvency Practitioners,
we suggest that the criteria should be broadly based on the criteria applied to
the current requirements for appointment under the existing Administrative
Panels.
3.16 The ultimate aim, however, would be to introduce
professional insolvency practitioner qualifications based on examinations that
would be established by the Official Receiver and the relevant bodies at a later
date.
3.17 The licensing system should be tiered so that the most
difficult forms of insolvency work should be carried out by those best qualified
to do it, that is, by Licensed Insolvency Practitioners. In saying this, we
recognise that some members’ (solvent) voluntary winding-up cases and
summary compulsory winding-up cases produce difficulties and challenges for
practitioners just as complicated as those that are more often encountered in
non-summary compulsory windings-up. There is a need to grade the various kinds
of work, however, and we consider that the model recommended should generally
ensure that the most difficult work is carried out by Licensed Insolvency
Practitioners.
3.18 We have included company secretaries following a
submission by the Hong Kong Institute of Company Secretaries, which is the
representative body for company secretaries in Hong Kong. The Institute
submitted that its members were adequately qualified to carry out windings-up
and we accept the Institute’s contention that company secretaries already
carry out a large number of liquidations. Members of the Institute are trained
in a broad range of legal and accountancy management subjects and are also
required to address insolvency issues in the Institute’s corporate law and
company secretarial practice examinations.
3.19 The authorities which
would sanction inclusion as Licensed Insolvency Practitioners would be the Hong
Kong Society of Accountants for accountants and the Law Society for solicitors.
The authority for inclusion as Registered Insolvency Practitioners would lie
with the Hong Kong Society of Accountants, the Law Society and the Hong Kong
Institute of Company Secretaries. The exception would be the current List A
Panel which would form the basis of the initial list of Licensed Insolvency
Practitioners. The new Administrative Panel should then be expanded to include
Registered Insolvency Practitioners.
3.20 We received a submission from
the Association of Insolvency Officers, which is the representative body of
Insolvency Officers grade working in the Official Receiver's Office. The
Association submitted that Insolvency Officers should, as with their
counterparts in the private sector, be eligible to obtain licences under the
proposed licensing scheme. Their working hours on insolvency work should be
recognised as the qualifying hours. We would support this submission provided
insolvency officers could satisfy the requirements set out
above.[19]
3.21 Only Licensed Insolvency Practitioners, and, in exceptional
cases, company doctors,[20] that is
persons who can demonstrate that in a particular circumstance they are the most
appropriate persons to act as provisional supervisor, can act as provisional
supervisor. A provision for the appointment of company doctors has already been
recommended in the Commission’s Report on Corporate Rescue and
Insolvent Trading. In practice, we anticipate that a proposed company
doctor who sought to act as a provisional supervisor would look to the Official
Receiver for licence approval before going to the court for
sanction.
3.22 In addition to those practitioners who are already on the
Administrative Panels, we are aware that there are also a number of qualified
and experienced practitioners working in Hong Kong at present who might not be
in a position to comply with the criteria for qualification set down for
inclusion on the Administrative Panels. We recommend that, in
establishing the expanded Administrative Panel, the Official Receiver should
have the power, for a limited period, to appoint those experienced practitioners
to the Administrative Panel even though they do not conform with the criteria
set down for admission.
3.23 We put forward the
“grandfather” exemption with the aim of securing for the
Administrative Panel people of proven ability and experience in Hong Kong. The
pool of professional insolvency talent in Hong Kong is relatively small and we
consider that it would be short-sighted to exclude persons with proven ability.
The “grandfather” exemption would have a precedent in the
Insolvency Act which established the insolvency practitioner provisions in the
United Kingdom. We would note that the “grandfather”
exemption might also apply to the most experienced Insolvency Officers of the
Official Receiver's Office.
3.24 We do not make any recommendations for training and continuing
education. We consider that these recommendations are just a start and that
ultimately the Law Society, the Hong Kong Society of Accountants and the Hong
Kong Institute of Company Secretaries will establish examinations, as has been
the case in the United Kingdom and Australia.
3.25 We considered whether it should be a requirement that two
Licensed Insolvency Practitioners from each firm should be available for any
appointment from the Administrative Panels, that is, in respect of work that
would be carried out by Licensed Insolvency Practitioners. It has, however,
been pointed out that even large firms could have difficulties in this regard.
We therefore recommend that, as a practical solution, one Licensed
Insolvency Practitioner and one Registered Insolvency Practitioner may be
appointed from a firm in cases where a Licensed Insolvency Practitioner must be
appointed.
3.26 The question of indemnity and bonding is being considered at
present by the Official Receiver and other bodies. There are proposals to
replace bonding with professional indemnity insurance. The details are not
finalised as there are unresolved issues and we consider that this is a matter
that is best left to the Official Receiver and the professional bodies
concerned.
3.27 We note that the Bankruptcy Ordinance would need to be amended
to accommodate these recommendations.
[13] See Chapter 4.
[14] See paragraph 17.25 to 17.31.
[15] See the Insolvency Act, sections 387 to 398, and the Insolvency Practitioners Regulations under Statutory Instruments Numbers 1995 of 1986 and 439 of 1990 in respect of England and Wales.
[16] See section 227F, paragraphs 14.116 to 14.119.
[17] Note also the comments on remuneration in Chapter 4.
[18] The Consultation Paper proposed the use of the expressions “Official Liquidators” and “Registered Liquidators” but these have been replaced because the word “Official” suggested a Government role, such as an association with the Official Receiver's Office, and “Liquidator” was replaced because more than just liquidation work would be undertaken. We are aware of the unfortunate acronyms, “RIPS” and “LIPS”.
[19] See paragraph 3.9.
[20] A company doctor refers to an experienced businessman, with no particular professional qualifications, who is brought into an established, but uncompetitive or unprofitable, company to restore the company to a competitive and/or profitable situation.
[21] Note the recommendation at paragraph 12.31.