1. According to judicial interpretation currently in force, “unable to repay a due debt” entails that:

• The debt relationship has been legally established;
• The time limit for repayment of the debt has expired; and
• The debtor has not fully repaid the debt.

2. In support of the application, the creditor should submit evidence to show that the debtor is “unable to repay a due debt”. It should be noted that, in perspective, the facts and grounds underlying the application, namely the circumstances as prescribed by Article 2 of the Enterprise Bankruptcy Law (see “Criteria for acceptance” below), should be set out. As demonstrated below, this in effect raises the bar for a creditor’s bankruptcy application to a new level.

1. Bankruptcy of individuals vs Winding-up of companies

Unlike the Mainland (where bankruptcy against individuals is not recognized), in Hong Kong, a creditor can petition to the court to bankrupt an individual debtor on grounds and procedure which are similar to that of petitioning to wind up a company.

2. Statutory Demand

Under Hong Kong law, if the petitioning creditor has served on the debtor a statutory demand (in prescribed form) requiring him/it to pay a liquidated debt, and the debtor has neither complied with it nor set it aside within 21 days of the service, the debtor is deemed unable to pay the debt whereupon the creditor may petition to the court to bankrupt/wind up the debtor.

Under Article 2, two scenarios are recognized, namely where a debtor is “unable to repay due debt and its assets are insufficient to pay off all the debt” and where a debtor is “unable to repay due debt and obviously incapable of clearing off its debts”. It is only with the existence of at least one of these scenarios may the court “accept” a bankruptcy application.

1. Before deciding to “accept” a bankruptcy application, the court will conduct a review on 2 levels. The first level of review involves confirming the creditor-debtor relationship including ascertaining whether the debt is due and has not been paid off. This review replaces the usual civil litigation procedures / arbitration procedures for the adjudication and determination of the creditor-debtor relationship. Therefore, in theory, the creditor needs no judgment / arbitral award before commencing bankruptcy proceedings.

The second level of review goes to the sufficiency of the debtor’s assets to pay off the debt and/or the debtor’s capability to clear off the debt.

2. In practice, however, the PRC court tends to look for the existence of a judgment / arbitral award or even failed attempts to enforce the judgment debt as the pre-condition to any “acceptance” of bankruptcy application. This is because matters to be determined in the first level of review (i.e. the creditor-debtor relationship, repayment period, repayment status etc.) would already have been determined in an existing judgment/ arbitral award.

Likewise, practicing lawyers tend to apply for bankruptcy only after obtaining valid judgment/ arbitral award, so as to ensure that the court will “accept” the bankruptcy application.

Generally speaking, in the PRC, it is commonly agreed that the “acceptance” of a bankruptcy application by the court is difficult to achieve both in theory and practice. “Acceptance” by the court requires overcoming 2 hurdles of review both in substance and form. Furthermore, there is no unified criteria on “acceptance” for the great many courts in the PRC, and the review time is lengthy, not to mention the courts also take into account the effect of bankruptcy cases on society. All these factors render it difficult to obtain “acceptance” of bankruptcy application by PRC courts, which deters creditors from making use of the bankruptcy procedure to enforce their rights.

If the debtor has not disputed the debt or has no honest (bona fide) defence of substance to it, the creditor may go straight to the court with a petition to bankrupt/wind up the debtor without having to engage in any laborious or prolonged legal process for obtaining a monetary judgment/arbitral award in the first instance. This is so regardless of whether there is any arbitration agreement with the debtor, or even any ongoing arbitration proceedings in Hong Kong or elsewhere (see the “LeTV” case below).

As demonstrated in the opposite column and those above, by comparison, the legal procedure for insolvency proceedings in Hong Kong is less onerous than its Mainland counterpart. According to the Hong Kong Official Receiver’s Office, there were 3,256 bankruptcy/winding-up cases between January and May 2018, and the courts heard on average 42 cases per week.

1. Filing a petition: If the debtor, for 21 days after service of the statutory demand, fails to repay the debt or make any settlement proposal to the reasonable satisfaction of the creditor, the creditor may proceed with the following procedures to commence winding-up proceedings against it :
   • Deposit with the Official Receiver’s Office a sum of HK$11,250 for the purpose of covering its fees and expenses;
   • File a petition with the High Court Registry and pay the prescribed court fee of HK$1,045;
   • Obtain a date for the first hearing (usually 4-6 weeks after the filing of the petition);
   • File an affidavit verifying the petition;
   • Serve the petition on the debtor and advertise and gazette the petition.

2. Pausing here, after commencement of the winding-up proceedings (i.e. after the filing of the petition), any disposition of the property of the debtor company shall be void pursuant to section 182 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance. In other words, there can be no transfer of the company’s assets, and the company’s bank account(s) will likely be frozen by the banks.

3. The straight-to-the-lair and high-profile nature associated with the relevant service and presentation of the bankruptcy/winding-up petition (see above) will invariably attract mass attention including that of the business community and particularly the financial institutions. The resultant pressure on a debtor who happens to be evasive and yet carrying on business activities will be significant. Consequently, it helps improve the prospects of early settlement and saving on legal costs.