Debt Recovery Agency Hong Kong

• Domestic corporations' payment behaviour is appropriate, taking an average of 30 to 90 days but delays are common, and late payments are not regulated by law.

• Hong Kong courts are effective and fast when coping with company claims; nevertheless, in interacting with insolvent debtors, the legislation does not provide for structured processes to pursue debt restructuring.

1. Summary

1.1. General financial information

Financial information transparency in Hong Kong is much more comprehensive and accurate than in mainland China as it is a regional hub overseeing the free movement of money.

By fact, financial information is published by listed companies at least twice a year, and is publicly available, but unlisted entities do not have such commitments.

1.2. Key legal structures

1.2.1. Corporate debt liability is determined by legal structures which are described as follows:

• Proprietorship is commonly relied on for small-scale operations as it is based on the qualities of the sole proprietor who owns the business assets personally. The proprietor is therefore fully liable for the activities and debts of the enterprise.

• Partnerships require two or more people to share control and liabilities (partners are collectively and separately responsible for other partners' actions) without forming a company.

• Private Limited Companies are, in fact, the most commonly employed business entities, as they need only a director (non-residents are eligible) whose responsibility is limited to their donations and a company secretary (whether person or other). There is a minimum capital allowance of HK$1. Public Limited Companies are essential where capital raising requires public exchange in securities. Thus these entities are preferred by big companies.

• In view of the quantity of cross-border companies in Hong Kong, branch offices are very normal even though those organizations are not independent from the legal structure of the parent company and therefore do not give any restrictions on liability. Therefore, subsidiaries continue to be formed by private limited companies. Joint Ventures do not have unique frameworks and appear to be developed by partnerships. Representative offices are also used to explore the market but are not allowed to engage in profitable activities.

1.3. Regulatory framework

1.3.1. The Hong Kong legal system is based on British Common Law. Business demands to be effectively resolved but courts may vary due to atstake numbers. Claims not reaching HK$ 50,000 will come within the scope of the Small Claims Tribunals, which typically treat claims efficiently, informally and at low cost insofar as there is no legal representation.

1.3.2. District courts would rather handle claims up to HK$1 million, while high courts would contend with the largest commercial lawsuits (intellectual property, real property, violations of contract, insolvency, compensation, etc.) above HK$1 million. The High Court's Rules have been revised since 2009 to reduce ambiguity, uncertainties and expenses of civil litigation procedures. Finally, Hong Kong has a Free Trade Agreement for a Closer Economic Partnership (CEPA), as well as a Double Tax Avoidance Treaty with mainland China.

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2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Transactions in Hong Kong are rendered on average from 30 and 90 days. Domestic corporations ' payment conduct is appropriate since delays exceeding 30 to 60 days will occur on a regular basis even if default were uncommon.

2.2. Late interests

2.2.1. Late payment interest is not regulated by law and remains an issue between private parties agreement. Consequently, failure to state clearly the common position of the parties about late payment interest on a contract may complicate the debt collection method.

2.2.2. Nonetheless, certain transactions require no formal selling agreement and in practice will rely primarily on purchase orders, email orders or verbal orders that do not usually include a late payment interest provision.

2.3. Costs of debt collection

2.3.1. Likewise, the debt collection costs can not be paid to the claimant unless this option is clearly mentioned in a contractual agreement. By fact, the delinquent rarely pays for the collection costs.

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2.4. Protecting ownership

2.4.1. Retention of title (RoT) contractual requirements requiring that a trading partner only acquires possession of assets after payment has been obtained in full are admissible, although additional clauses may also seek to retain ownership of converted products as long as the debt has not been paid out in full.

2.4.2. Today, RoT arrangements are not widely used by small and medium-sized businesses. Furthermore, although the RoT provision is applicable under Hong Kong law, it is difficult to predict how the courts will view and enforce such a clause since there is only little case law on the matter.

2.4.3. For this purpose, the contracts are not used successfully as part of pre-legal proceedings to reclaim property, but would offer a degree of preference during insolvency proceedings (it would then be prudent to sign RoT agreements with the Registrar of Companies).

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2.5. Payments

2.5.1. The most common methods of payment are as follows: Bank transfers are among the most prominent means of payment, as they are quick, protected and sponsored internationally and domestically by an increasingly integrated banking network. Export sales are usually guaranteed via an Export Credit Insurance policy, which tends to minimize the risk of immediate or accidental insolvency of customers.

2.5.2. Additionally, Standby Letters of Credit (a bank guarantees the creditworthiness and redemption ability of the debtor) are valid assurances that can be interpreted as a sign of good faith as they can be enabled as a' payment of last resort' if the borrower fails to fulfill a contractual obligation. Often popular is the irrevocable and verified Documentary Letters of Credit (a debtor promises that a certain amount of money will be made available to a borrower through a bank once certain provisions have been specifically agreed upon by the parties.

2.5.3. In general, bank guarantees can be quickly obtained which does not prevent the negotiation of down payments depending on the amounts involved. Checks are also very common, in contrast to Bills of Exchange.

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3. Collecting payments

3.1. Amicable action

3.1.1. While Hong Kong courts are competent and swift in coping with business disputes, it is prudent to find comfortable mediation options as an alternative to formal litigation in the first instance. However, while the statute does not recognize conciliation or mediation as a requirement for formal legal proceedings, in fact, the courts are generally urging participants to partake in alternate dispute resolution approaches until lawsuits are launched. In fact, the courts also tend to impose financial sanctions on any party who unreasonably refuses to go through formal processes of negotiation.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. That said, legal dunning will commence by issuing a Writ of Summons advising the debtor of their obligation to pay the principal together with interest on late payment (as decided by contract). The claimant can agree to settle the debt or plan to bring a lawsuit if served. In this situation the argument will be more thoroughly considered by formal legal processes.

3.2.2. Ordinary litigation in Hong Kong is cost-effective and relatively practical, but it should only begin when nice compilation fails. Nonetheless, as mentioned previously, the judges are gradually facilitating negotiations to resolve disputes out of litigation, and continuing to place expense penalties on parties unreasonably refusing amicable negotiation. Once the debtor is presented with the warrant, the debtor must accept it within 14 days and submit a response within 28 days.

3.2.3. This procedure, centered on the negotiation of a collection of written charges and counterclaims between the parties, may end in a settlement, otherwise the complainant may ask the court to assume the role of case management, and hearings are conducted. In the absence of a defense, the claimant is entitled to request a default judgment, and summary judgments may also be available where the case is not disputed. Typically the courts will grant relief in the form of fines, actual results, injunctions, declarations, etc. Punitive damages are paid quite seldom.

3.2.4. Required documents. Copies of any records supporting the claim, such as purchase orders, invoices, account statements, distribution contracts and evidence of delivery.

3.2.5. Time limits. Legal and litigation cases must be filed within six years, starting with the due date specified on the invoice. Claims on deeds must be filed within 12 years of the date of the violation.

3.2.6. Temporary measures can help to preserve the status quo awaiting a final and enforceable decision. In addition, the courts may also impose an ex parte temporary prohibitory or mandatory injunction (without the claimant being present) as a means of preventing irreparable harm, preserving properties or protecting facts (Anton Piller orders).

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3.2.7. Injunctions may be issued on the same day, but a certain degree of urgency must then be shown and the creditor will generally be expected to provide expense security to protect the debtor against reckless behavior.

3.2.8. Appeal lodging. An appeal against first-instance rulings will usually be filed with the Court of Appeal within 28 days, which will examine the argument on empirical and legal grounds. Similarly, the second instance rendered decision may be brought before the Court of Final Appeal against it. The applicant will file a petition at both rates, and it is for the judge to issue an appeal to leave.

3.2.9. Enforcing court decisions. Once a judgment becomes definitive (i.e. no challenge is lodged within 28 days) compliance can proceed. If the defendant fails to comply with the judgment, court can seek a compliance order. Usually, the latter would issue a garnishee order (allowing the claimant to receive payment of the debt from a third party owing money to the debtor), Fieri Facias order (allowing the bailiff to seize and sell the debtor's tradable goods) or a charge order (allowing the debtor to seize and sell the debtor's property to meet the debt).

3.2.10. The court may also appoint a receiver in charge of carrying out the enforcement proceedings, and may order insolvency proceedings. Often, a ban order may be applied for to discourage the debtor from entering Hong Kong. Where required, the courts may also impose review orders requiring verbal interviews with the debtor firm's director for further details on the company's financial position

3.2.11. Duration of a legal action. Summary judgment would take on average six to 12 months, while it would take one to three years to obtain (and enforce) a final judgement. Nonetheless, most disputes would be advised by courts to go for settlement and thus require a relatively short time to resolve (two or three months based on the ability of the parties to settle in a friendly manner).

3.2.12. Domestic courts will usually not differentiate between domestic and transnational legal proceedings; however, delays can escalate when receiving documentation, testimony or comments from abroad is required. The expense of legal proceedings is usually small, but the successful party may get the court to order any expenses that the losing party deems necessary for fighting the lawsuit.

3.2.13. Conditional arrangements whereby lawyers are not paid in advance but rather receive a fixed amount on success (i.e.' no-win-no-fee') and contingent fees whereby legal professionals are strictly prohibited from receiving a percentage of the final award.

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution (ADR). Alternative Dispute Resolution (mediation, arbitration) are strongly encouraged by trial. Mediation requires the selection of a mediator who is in control of having the sides reach a compromise. In other terms, the mediator has no policy-making powers on behalf of the parties and they can not commit the parties to a judgment. The arbitration is only binding where a settlement agreement is reached at the conclusion of the negotiations between the parties. The mediator really does serve as mediation facilitator.

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3.3.2. Alternatively, arbitration includes the parties agreeing to rely on a neutral, unbiased third-party arbitrator, allowed to resolve their disagreement on their behalf. The decision of the arbitrator shall be binding upon the parties.

3.3.3. ADR can be cost-effective as an out-of-court mediation process, usually minimizing appeals, enabling secrecy to be maintained and delivering a legal judgment that can then be applied before the courts when appropriate. The legal tribunal may also be regarded when including international transactions. As a general rule, consideration of this option as a contractual issue is the best way to approach ADR, thereby making it clear that regular litigation will be stopped if necessary. Also, you have to get professional legal advice.

3.3.4. Foreign forums. Although it is not appropriate since domestic courts are effective in providing prompt rulings, the parties can instead decide to settle their legal conflicts in an international venue (i.e. under foreign law or before a foreign court), because domestic courts usually accept foreign jurisdiction clauses.

3.3.5. There are some exceptions, especially where implementing a foreign law is contradictory to Hong Kong law or public policy, or when using a foreign law to circumvent a more stringent Hong Kong rule. Furthermore, courts may refuse international jurisdiction when the conflict has a clear connection with Hong Kong (party domiciliation, contract realization, land-related issues, etc.). It is a requirement that matters relating to foreign forums be included in the contract of the parties, while specialized legal advice can not be considered optional.

3.3.6. Enforcing foreign awards. Usually foreign judgments under the Foreign Judgments (Reciprocal Enforcement) Ordinance would be enforced. Going through a review process (exequatur) is mandatory, but in reality an international judgment taken in a nation with which Hong Kong has ratified a reciprocity arrangement (Australia, Belgium, Bermuda, Brunei, France, Germany, India, Israel, Italy, Malaysia, The Netherlands, New Zealand and Singapore) will merely need to be registered before actually being enforceable.

3.3.7. Alternatively, compliance may be pursued before the appeal, which would check, inter alia, that the international decision is definitive in the granting jurisdiction before it is accepted and applied. It should also be noted that the 2006 Reciprocal Recognition and Compliance of Decisions in Civil and Commercial Matters (REJA) was expressly agreed with China with a view to making judgments made in mainland China and Hong Kong immediately enforceable by the other negotiating party's courts. This means that Hong Kong has in time become a diversion route to enforcing rights in mainland China, given the difficulty of enforcing decisions in mainland China, but the contracts need to be drawn up accordingly.

4. Managing insolvent debtors

4.1. Insolvency in Hong Kong

4.1.1. Insolvency management of insolvent debtors is not specified in the Companies Ordinance or under the Companies (Winding-up) Regulations, but a corporation is generally considered insolvent if it is unable to pay its debts.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. Although out-of-court trials that help the parties negotiate a debt settlement arrangement to prevent going to court, the law does not provide any structured process for securing a debt restructuring for the business. Restructuring proceedings are therefore carried out through informal workouts (i.e. contractual arrangements approved by 100% of creditors), compositions and arrangement schemes between the parties involved.

4.2.2. Therefore, a corporation should, at all occasions, enter into a contractual agreement with its owners and/or investors about its debts. Scheme Administrators may be named as the administrators. However there is no ban to prohibit investors from pursuing their debtor business statements.

4.2.3. The winding-up proceedings under the Companies Ordinance & Companies Rules (Chapter 32) may be initiated at the request of either the debtor (Voluntary Winding-up) or the creditor (Compulsory Winding-up). In this situation, they name a liquidator. The investors have to lodge their cases with the liquidator, who then manages the sale of assets and the allocation of the profits to the creditors. There is a delay on litigation against the client, unless the judge consents to the charges.

4.2.4. Priority rules. The priority rules normally apply while the creditors distribute the proceeds. Costs related to the insolvency proceedings are given to oversecured creditors of highest priority. Wages and policy loans are granted priority treatment and therefore take precedence over unsecured debts.

4.2.5. RoT agreements would give the debtor, in essence, priority to get goods out of the debtor's inventory before liquidating his assets.

4.2.6. Cancelation of suspicious transactions. In addition, the liquidator is entitled to set aside various types of transactions concluded by the debtor over a suspicious period of between six months and two years prior to the insolvency proceedings. Actually, any contract considered illegal, unequal, excessive (unfair loans), or misguided insofar as it favoured one borrower over the other, as well as some floating charges will usually be invalid.

4.2.7. Required documents. Copies of any documentation documenting the debtor's insolvency and allegations such as notification of commencement in insolvency proceedings, evidence of bankruptcy settlement, loan certification provided by insolvency practitioners, purchase orders, invoices, account statements, selling contracts and proof of execution.