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Hong Kong Law Reform Commission |
5.5 The Consultation Paper proposed that the Government should
consider allocating a fixed proportion of the business registration fee in order
to assist in the funding of the Official Receiver's Office and implied that the
proportion should be taken out of that part of the fee that was allocated to the
Protection of Wages on Insolvency Fund. The business registration fee is an
annual registration fee charged on every company. Currently, the fee stands at
$2,250 per annum of which $250 is diverted to the Protection of Wages on
Insolvency Fund.
5.6 We have received considerable opposition to the notion of funding
the Official Receiver's Office from that part of the business registration fee
that is paid to the Protection of Wages on Insolvency Fund and we retreat from
that proposal.
5.7 We remain of the view that the Official Receiver's
Office should be adequately funded and we set out below options that should be
considered by the Government. The Official Receiver has a role to play in the
administration of business in that it is involved in all aspects of the
winding-up of companies, both as a liquidator and as a regulator. There is even
a business interest in the administration of bankruptcy, albeit less distinct,
in that many bankruptcies relate to the bankrupting of individuals operating
their own businesses.
5.8 The winding-up of companies relates directly to the
administration of businesses. This point was brought out in the Cork
Report in the following terms:
“It is sometimes argued that the function of insolvency law is simply the distribution of the proceeds of the insolvent’s assets amongst his creditors, giving him, where appropriate, personal relief from their claims. This has never been the English approach. The policy of our insolvency laws has always been far more complex; at least two other major objectives will be found to have existed:
(a) the insolvency laws are treated by the trading community as an important instrument in the process of debt recovery; the threat or imminence of insolvency proceedings as a weapon in persuading a defaulting debtor to pay or make proposals for the settlement of a debt cannot be underestimated as it constitutes, in the majority of cases, the sanction of last resort for the enforcement of obligations;
(b) the insolvency laws, through their investigative processes, are the means by which the demands of commercial morality can be met; any disciplinary measures against the debtor which may appear necessary in the light of this investigatory process can be imposed either inside the insolvency proceedings themselves or outside, for example, by the machinery of the criminal law or by professional disciplinary bodies.” [32]
5.9 We
submit that Hong Kong insolvency law operates on the same basis as the English
insolvency process. We also submit that the termination of businesses relates
directly to the administration of business. The Official Receiver's
Office, however, receives no benefit from the business registration fee, the
balance of which, we understand, is paid to the Inland Revenue Department.
5.10 This point is relevant to an issue raised by the Secretary for
Financial Services in a submission on the Consultation Paper proposals.
In his submission, the Secretary for Financial Services referred to the question
of the funding of the Official Receiver's Office:
“ ...as I see it, the funding issue is more conspicuous with the ‘non-remunerative or ‘summary’ cases. In this connection, I would like to share some facts and figures of the Official Receiver's Office. In 1997 alone, 87% of the compulsory winding-up cases were administered under the summary procedure as provided under section 227F of the Companies Ordinance where the assets of the company concerned are not likely to exceed $200,000 in value. In over 80% of the compulsory winding-up cases, the actual amount of assets realised is less than $50,000 - the benchmark figure below which the assets recovered would not be sufficient even to cover the Official Receiver's fees and costs, let alone distribution to the creditors.
As Hong Kong's economy has become highly service-oriented and an average company nowadays does not necessarily need to have much assets for production, it is likely that the trend of increase in both the number and proportion of ‘non-remunerative’ cases will continue. This phenomenon explains why the Official Receiver's Office has been operating with an increasing annual deficit. Chapter 26 of the Consultation Paper refers to the Pilot Scheme launched by the Official Receiver's Office since September 1997 to contract out summary cases to private sector practitioners. I would like to add that under the Scheme, the Government pays a subsidy of not more than $60,000 per case where the assets realised in such cases are insufficient to cover the fees chargeable by the private sector practitioner.
If the Pilot Scheme is to be expanded into a regular contracting out scheme and the existing practice of providing a fixed subsidy continues, substantial amounts of money from the General Revenue will continue to be needed to fund the scheme. Although this would mean additional expenditure, ‘contracting out’ is still a far more preferable option than the other (only) alternative, which is to continuously expand the Official Receiver's Office thus increasing the overall expenditure (especially on the recurrent side) of the department year over year. This option is also unrealistic because resources are not unlimited and any increase in staff can never catch up with the speed of increases in workload.
The Sub-committee has proposed that the Government should consider ‘allocating a fixed proportion of the business registration levy’ in order to assist in the funding of the Official Receiver’s Office. I see two matters of principle in this proposal.
First, the proposal would bring about a fundamental change to the purpose for which the levy was introduced. The purpose of the levy is to establish the Protection of Wages on Insolvency Fund (‘the Fund’’) in order to provide ex-gratia payment to employees who are owed arrears of wages by their insolvent employers. The Sub-committee's proposal will be tantamount to using the levy to subsidise employers and creditors in winding up failed businesses. I cannot agree to the proposed change in the use of the levy in the absence of any compelling justification, especially on grounds of public interest.
Second, I wonder whether the ‘problem’ could be tackled at its root. As mentioned above, over 80% of the company winding-up cases are either ‘non-remunerative’ or ‘assetless’. It may be worthwhile to explore the possibility of streamlining or fast-tracking certain statutory procedures for processing these summary cases with a view to saving both the time and cost of the liquidator, cutting down the expenditure of the Official Receiver's Office and helping reduce the amount of Government subsidy to the insolvency service. In addition and more specifically, I would like the Sub-committee to look at the possibilities of reducing the statutory role of the Official Receiver in the administration of insolvency cases, and, as a connected matter, the scope for private sector practitioners, under some form of authorisation, to take over some of the statutory duties of the Official Receiver.”
5.11 We
respectfully take issue with some of the comments of the Secretary. The
Secretary stated that the proposal for funding from the business registration
fee would be tantamount to using the fee to subsidise employers and creditors in
winding-up failed businesses. The Secretary could not agree to the use of the
fee in the absence of any compelling justification, especially on the grounds of
public interest.
5.12 While we acknowledge that the idea of taking
money from that part of the business registration fee that is paid to the
Protection of Wages on Insolvency Fund is misconceived, we can see a direct
connection to the use of some of the balance of the business registration fee
being used to fund the Official Receiver's Office.
5.13 For years there
have been collapses of large companies and financial institutions in Hong Kong
which have attracted no deep investigation as the regulatory provisions have not
been in place. We state, unreservedly, that there is a vital public interest in
having a clean and open insolvency regime with a proper investigatory framework.
We consider that the need for enhancing the role of the Official Receiver's
Office so as to be capable of fulfilling this role is of great importance for
the business community and the society of Hong Kong as a whole.
5.14 The Secretary also referred to the case of assetless companies and
asked the Insolvency Sub-committee to look at the ways of streamlining the
statutory procedures for processing assetless cases, for ways in which the
statutory role of the Official Receiver's Office could be reduced in the
administration of insolvency cases and to look at ways for private insolvency
practitioners to take over some of the statutory duties of the Official
Receiver.
5.15 These comments are at odds with the direction we
consider should be taken. In terms of the winding-up of insolvent companies, we
do not agree that the statutory investigation of these companies should be
compromised by streamlining. All that would create would be opportunities for
dishonest directors, and there are many, to use their companies to accumulate
debt and go into liquidation, thereby cheating their creditors without much
concern about statutory redress. This problem persists and it cannot be tackled
without a commitment from Government to allocate resources to proper regulation.
That function should be carried out by the Official Receiver. It is not a
function for private sector liquidators, whose role should be to recover assets.
We have commented on this elsewhere in this report and we note that the Hong
Kong Association of Banks agreed with us on this important
issue.[33]
5.16 We would be
concerned if the comments of the Secretary for Financial Services represent a
Government policy of reducing the statutory regulation of insolvent companies.
We consider that such regulation should, as a matter of policy and practice, be
a policy of Government and should be carried out by Government through the
Official Receiver's Office.
5.17 The question of how this should be
funded follows on from this standpoint. We have pointed out that the $2,000
remaining from the business registration fee paid by each company would be
appropriately applied to business if part of it is used to adequately fund the
Official Receiver's Office to a level where it could fulfil its statutory
requirements. Since the Protection of Wages on Insolvency Fund received $181.1
million in respect of its levy from the business registration fee in 1997/98 it
would appear that the balance that went to the Inland Revenue Department would
have been $1.341
billion.[34]
5.18 The
question of how the Official Receiver's Office should be funded is, however, a
matter for the Government and we can only point towards certain options. In
addition to the business registration fee, we note that the Companies Registry,
which is a trading fund within the terms of the Trading Funds Ordinance (Cap.
430), achieved a surplus of $56 million in the year 1997/98, which was a
decrease of 16% from the previous financial
year.[35] We mention the Companies
Registry’s profitability merely to demonstrate that other aspects of the
administration of companies are profitable and that there is a strong argument
that some of the monies collected from companies should be used in the
administration of the termination of businesses. The fact that the Companies
Registry and the Official Receiver's Office are different Government Departments
is neither here nor there in term of the proper administration of companies from
cradle to grave and proper commitment and allocation of resources should be
committed to the final part of the process.
5.19 A further option for
the funding of the Official Receiver's Office would be to increase the fee that
the Official Receiver's Office can charge on interest earned on investments
under section 295 of the Companies Ordinance. At present, the Official
Receiver's Office is entitled to charge 1.5% per annum on interest earned. We
note that the Insolvency Service in the United Kingdom is entitled to charge the
equivalent of 2.5% per annum on interest earned and that in both 1996/97 and
1997/98, the fee on interest earned represented over 55% of the total income of
the Insolvency Service.[36] The
Official Receiver’s Office’s income from fee on interest earned
represented 31% of total revenue in the financial year 1997/98 and 33% in
1996/97.[37]
5.20 If the fee
on interest earned by the Official Receiver's Office of 1.5% had been 2.5%, the
Official Receiver's Office would have increased revenue from bank interest from
$26.6 million to $44.3 million, a difference of $17 million, which would have
virtually wiped out the actual deficit of $20.2 million. We note, however, that
the 1.5% fee has been vigorously opposed by practitioners on the ground that
creditors in a liquidation are already unlikely to recover the full amount of
their debts. We also note that the Official Receiver has, in some large
liquidations, reduced the amount of his fee, with the prior approval of the
Financial Secretary.
5.21 A further option that may be considered would
be increasing the petitioner’s deposit which currently stands at $12,100
under the Companies (Winding-up) Rules, rule 22A. We would advise against the
petitioner’s deposit being increased significantly as a means of funding
the Official Receiver's Office.
[31] Note the recommendation made in paragraph 11.42 and the comments in paragraphs 11.41 and 11.42.
[32] The Cork Report, paragraph 235.
[33] See paragraph 11.42.
[34] See the Inland Revenue Department, Annual Report, 1997/98, page 8.
[35] Companies Registry Annual Report 1997/98, page 5.
[36] The Insolvency Service, Annual Report and Accounts 1997/98, page 50.
[37] Official Receiver's Office, Annual Departmental Reports for 1997/98 and 1996/97, Annex 17.