As is the case for many businesses, Hong Kong is a destination for private credit providers primarily as a hub for Northeast Asia. That is not to say that there are no opportunities within Hong Kong itself. Indeed, some high-profile situations have been seen, such as The Corniche, but by and large, the main opportunity set for private credit in Hong Kong is China. No surprise then that macro-economic headwinds and geopolitical tensions have served to temper investment appetite. The main opportunities within Hong Kong itself have been in the real estate sector.

The public debt markets in Asia are very much centred on large corporates and global or established regional financial sponsors and unlike other parts of the world, loans (and not bonds) represent the majority of the debt market. When those markets are open for business, they will be more competitive than private credit, and whilst it appears that public debt markets in Asia have showed signs of recovery towards the end of 2024, they have not come back in a way which would result in such refinancings being commonplace.

Bank lending remains the dominant and, for many sponsors, the preferred form of acquisition financing in Hong Kong, Singapore and the boarder Asia market. The space for private credit in these situations mainly lies in subordinated tranches in the capital structure.

Challenges to the expansion of the private credit market include the following:

• Hong Kong’s status as a gateway to the PRC has served it well in the past, but with investor sentiment having cooled on China, activity levels have dipped;
• bank loans remain the dominant/preferred option for many issuers; and
• pricing/perceived relative value.

It is not so easy to dissect the private credit market in Asia by reference to categories which are more established in other parts of the world (eg, direct lending, distressed). Perhaps the best way to describe the majority of the private credit demand in the region is “opportunistic”. This is reflective of the bespoke nature of each investment case which is rarely “cookie cutter” in the same way as, for example, direct lending strategies elsewhere in the world.

Junior and hybrid products certainly form part of the regional private credit universe which can also include preferred equity.

Private credit providers in Hong Kong are not focused primarily on private equity sponsors and their portfolio companies, not do they provide capital to public companies and/or founder-owned companies. There are a number of private credit fund managers who will gravitate towards that segment but given the competition which they can face (from the bank loan markets in particular), it is not the primary focus for many of the funds.

Private credit providers are not active in recurring revenue financings in Hong Kong.

It is difficult to speak of typical size limits for private credit transactions in Hong Kong, Singapore and other parts of Asia. Most of the volume lies in the mid-market where a bilateral loan by a single private credit fund (or a small club) is most common. That said, given the right opportunity, large cheques can be written and although there are a handful of funds which may have the firepower to take on these larger situations by themselves, they will typically be syndicated across a number of investors.

A correlation can be drawn between deal sizes and the size of the relevant economy where the investment opportunity resides. The PRC represents the biggest regional economy so it is no surprise that (until its recent economic malaise), the biggest deals were being transacted there. The other regional economies are smaller by comparison so it is more rare to come across similarly sized investments in issuers based in those other economies.

The regional fundraising environment has remained challenging with macro-economic headwinds, the prevailing geopolitical environment and the downturn in the regional property market weighing on investor appetite. Generally speaking, there has been a flight towards the larger fund managers operating global strategies.

See 2.2 Regulators of Private Credit Funds.

Lending in Hong Kong

There are three main pieces of legislation in Hong Kong which regulate the activities of banks, money brokers and money lenders:

• the Banking Ordinance (Cap. 155);
• the Securities and Futures Ordinance (Cap. 571); and
• the Money Lenders Ordinance (Cap. 163).

The extent to which a private credit lender is required to be licensed will depend on the types of activities which they wish to engage in and the extent to which they can rely on exemptions specified within the relevant ordinances.

Whilst not specific to private credit funds, registration requirements under the following ordinances may also be relevant:

• the Business Registration Ordinance (Cap. 310); and
• the Companies Ordinance (Cap. 622) (“CO”).

Taking of Security Situated in Hong Kong

There is no general requirement for a lender to obtain a licence or regulatory approval solely by reason of taking the benefit of security over assets located in Hong Kong.

The Hong Kong Monetary Authority (HKMA) is the main regulatory body overseeing banking activities in Hong Kong and regulating institutions involved in credit markets, especially from the perspective of managing financial stability and ensuring prudent lending practices. The Securities and Futures Commission (SFC) is the primary regulator for the securities and futures markets in Hong Kong.

Whilst there is currently no specific regulatory body or legislation specifically targeted at private credit funds in Hong Kong, whether the activities of a private credit fund fall within the purview of the HKMA or SFC will depend on the types of investment activities in which they engage.

In 2024, the HKMA issued a research memorandum exploring the financial stability implications of the private credit market in Asia-Pacific, and noted that the systematic risks in the private credit sector “may have remained contained so far”.

There are no specific restrictions on foreign investment in private credit funds in Hong Kong

There are no compliance and reporting requirements which apply specifically to private credit providers in Hong Kong (ignoring, for this purpose, requirements which may apply to private funds generally regardless of whether private credit, private equity, etc, and any applicable financial reporting and tax filings applicable to businesses generally).

Should the nature and investment activities of a private credit lender fall to be regulated by the HKMA or SFC, certain ongoing reporting requirements will apply (eg, if it is the private credit arm within a bank, then it will generally be subject to requirements to submit periodic reports to the HKMA).

Hong Kong imposes limits on usury activities. Under the Money Lenders Ordinance (Cap. 163), it is illegal to lend or offer to lend money at any effective rate of interest which exceeds 48% per annum.

The authors are not aware of any recent antitrust cases in Hong Kong where the principal antitrust regulator, the Hong Kong Competition Commission, has expressed any particular concerns with respect to the private credit market.

Given so many private credit investments in Asia are bespoke arrangements to suit a particular need and will need to be sensitised to local laws and regulations (such as cross-border foreign exchange controls and limitations on cross-border guarantees and security), it is difficult to generalise and comment on “common” structures. Indeed, with so many deals being cross-border in nature, one of the principal external factors which drives changes to the structuring of private credit deals is the changing legal and regulatory landscape – eg, whether local laws permit cross-border property mortgages to be granted in favour of a foreign lender, revisions to foreign exchange rules which may be tightened or loosened according to the views of the current administration, etc.

Looking at a purely domestic Hong Kong senior secured situation, the structure will be very similar to that adopted by commercial bank lenders, albeit, for example, a private credit fund may offer higher LTVs than a commercial bank lender may be prepared or (in the real estate context) permitted to agree.

Investments in the form of junior debt may be in the form of holdco loans without any direct credit support from the underlying assets or business such that intercreditor arrangements with underlying senior debt tranches are not always required.

Most private credit transactions are term loan facilities and may be delayed draw depending on the circumstances. Revolving credit facilities are not generally seen to be provided by private credit funds, although the authors have come across structures which enable capital to be recycled under certain circumstances. These will not be typical working capital style revolving credit facilities.

The key documentation involved in a private credit transaction is similar to that of a bank loan. For example, in the case of a senior secured transaction, there will be a facility agreement which incorporates any guarantees to be provided (sometimes there will be a separate local law governed guarantee), the form of security documents will vary depending on the nature, type and location of the underlying collateral and any contractual subordination arrangements will take the form of an intercreditor or subordination agreement.

In the Asia context, where recourse to individual founders or “promoters” may be considered important to the credit, personal guarantees are often sought.

Where an important component of the structure is the establishment and operation of controlled bank accounts, there will often be account bank agreements with third-party service providers (typically the agency business of a commercial bank or an independent service provider).

“First-out, last-out” or other transactions which require an agreement among lenders are not very common in Asia, but have featured in investments in Australia where unitranche structures are more common.

As noted above, the structuring of private credit investments in Asia will be heavily influenced by local laws and regulations and this will inevitably affect the documentary terms. Within the direct lending context where private credit is being provided to financial sponsors to finance an acquisition, the latest market terms on leveraged and acquisition financings can be expected to influence terms. The Asia market tends to be more conservative in this space than the US or UK/Europe, but global sponsors in particular continue to seek equivalent terms wherever they invest in the world.

No, foreign lenders are not restricted in any way from providing private credit or taking security.

There are no restrictions on the borrower's use of proceeds from private credit transactions.

The authors are not aware of any take-private financings in Hong Kong being provided by a private credit fund, so it remains to be seen whether financial advisers will seek to conduct due diligence on such funds in the certain funds context in the same way as they would for the equity component being provided by a private equity sponsor bidder. There are no particular challenges applicable to a private credit fund specifically (versus, for example, a bank lender) in providing acquisition financing on a private M&A.

This is a matter for negotiation on a case-by-case basis.

There are no recent legal or commercial developments that have required changes to legal documentation. Some private credit funds prefer to provide their investment in the form of notes rather than loans, but this tends to be more a matter of form over substance.

Junior tranches which are introduced to pre-existing structures are typically holdco loans without any direct recourse to the underlying assets or business, usually because such assets and business have already been secured in favour of the first-ranking senior tranche. As a commercial matter, such senior lenders will rarely consent to second-ranking claims even if an intercreditor agreement is proposed.

If a financing is originated with a multi-tiered financing solution in mind, then whether the junior tranche will benefit from second-ranking guarantees and security will vary on a case-by-case basis. Some or all of the junior tranche may be in the form of a convertible and/or carry an equity warrant.

Private credit transactions in Asia are usually structured as bullet term loans. Whether there is any current pay will depend on the asset or business being financed, but payment-in-kind structures are regularly seen.

Other than to say that call protection in some shape or form is a common feature, there is no universal market standard on call protection for private credit investments. The precise terms will be negotiated on a deal-by-deal basis.

There is generally no withholding tax payable on principal repayments or interest payments under loans or notes in Hong Kong.

There are nominal charges for registering certain types of security at the Hong Kong Companies Registry and Hong Kong Land Registry.

Interest paid to foreign private credit lenders is generally not tax deductible in Hong Kong for a Hong Kong borrower.

There are presently no specific tax incentives available for private credit lenders lending into Hong Kong. However, in November 2024, the Hong Kong government released a consultation paper proposing certain changes to the tax regime with the aim of advancing Hong Kong’s attractiveness to private credit lenders. These proposed changes include expanding the list of qualifying assets under the “unified fund exemption” regime to include loans and private credit investments as well as the interest income from such investments, such that those transactions would be eligible for the profits tax exemption under the unified fund exemption regime. It remains to be seen to what extent the relevant proposals will be implemented.

There are no additional tax considerations necessary for non-bank lenders.

The assets over which security can typically be taken and the relevant formalities and perfection requirements are discussed below.

As a general note, in addition to any other security registration requirements set out below, if (i) the security provider is a company incorporated in Hong Kong or registered in Hong Kong as a “non-Hong Kong company” under the CO, and (ii) the asset which is to be charged falls into one of the registrable categories specified in the ordinance (and in the case of an asset charged by a non-Hong Kong company, such asset is located in Hong Kong), a certified copy of the instrument creating or evidencing such security, together with a statement of the particulars of that security, must be registered within one month after the date of creation at the Hong Kong Companies Registry (HKCR). The cost of such registration as of January 2025 is HKD340. If a company fails to make the registration within the statutory timeframe, the company and its responsible person will be liable to default fines and the charge will be void against any liquidator and creditors of the company.

Real Property

Security over real property may be taken either by way of a legal mortgage or equitable charge. A legal mortgage over real property is created by way of a “legal charge”, in writing and must be executed as a deed. A charge which does not satisfy all of the requirements for a legal mortgage will take effect as an equitable charge.

Security over real estate may need to be registered at the Hong Kong Land Registry. As of January 2025, the fees for doing so may either be HKD230 for property transactions with value of consideration not exceeding HKD750,000 and HKD450 for those over HKD750,000.

Plant, Machinery and Tangible Assets

The usual form of security over plant and machinery is by way of a charge. Such charge can be fixed (provided that the chargee exerts sufficient control over the secured asset such that any dealings by the chargor with respect to that asset requires the consent of the chargee) or floating (a charge over a fluctuating pool of assets which remains under the day-to-day control of the chargor such that assets may be added or taken out of such pool despite the existence of the charge).

Where it is intended to take a fixed charge over the asset, as part of seeking to exercise control as a practical matter, the chargee may require signs or plaques to be affixed which clearly state that the asset is subject to a fixed charge and that any dealing with such asset will require the consent of the chargee.

Receivables, Book Debts and Other Choses in Action

Security over receivables, book debts and other choses in action is commonly taken through an assignment by way of security. In doing so it is important to ensure that there are no prohibitions or restrictions on assignment in the underlying agreement giving rise to the chose in action as otherwise such assignment will be invalid.

An assignment may be legal or equitable. In order to take effect as a legal assignment, (i) the assignment must be in writing; (ii) the assignment must be absolute; (iii) the assignment must be notified in writing to the counterparty in the underlying agreement; (iv) the assignment must not purport to be by way of charge only; and (v) the intention of the assignor to transfer ownership rights to the assignee must be clear. If any of these requirements are not met, the assignment will be an equitable assignment.

Intellectual Property Rights

Security over intellectual property is usually taken by way of a fixed or floating charge, and depending on the type of intellectual property, may be registrable. As of January 2025, the fees for registering a security document at the Trade Marks Registry is HKD800, at the Patents Registry is HKD325 and at the Designs Registry is HKD470.

Shares

Security over shares can be taken by way of a legal mortgage or equitable charge. Legal mortgages entail legal title to the shares being transferred to the mortgagee and as such, equitable charges are the more common form of security over shares.

A number of ancillary documents will be required to be delivered in connection with the charge: (i) the original share certificate(s), (ii) pre-signed but undated instrument(s) of transfer and contract notes; (iii) pre-signed but undated letters of resignation from each of the directors of the subsidiary whose shares are being charged; (iv) pre-signed but undated board resolutions of the chargor approving the transfer of the subsidiary shares; and (v) letters of authorisation from each of the directors of the subsidiary to date the letters of resignation upon an enforcement sale. The articles of association of the subsidiary whose shares are being charged is also usually amended to remove any transfer restrictions that may hamper a lender’s enforcement of the security.

To the extent the shares are listed in Hong Kong, the scope of charge will extend to the chargor’s claims against the Central Clearing and Settlement System and the broker’s account in which the shares are held. When taking security over listed shares, additional care should be taken to ensure the relevant disclosure and reporting requirements are complied with.

Floating charges are recognised under Hong Kong law.

Whether private credit lenders will insist on fixed versus floating charges will depend on the situation. As for commercial bank loans, it is generally recognised that a business will need sufficient flexibility to operate. Therefore, a nuanced approach is usually adopted, depending on the type of asset.

For example, floating charges will be taken over operating accounts, but fixed charges will be taken over specific “control” accounts which have been established to underpin the lending structure. Floating charges can be expected for trading stock. Fixed charges will be taken over real estate and shares, etc.

Subject to the following, it is generally permissible for Hong Kong companies to give downstream, upstream and cross-stream guarantees:

• any restrictions under that company’s articles of association;
• the general requirement for corporate benefit; and
• financial assistance rules (see 5.4 Restrictions on the Target).

Under the CO, if a person is acquiring shares in a Hong Kong-incorporated company, neither that company nor any of its subsidiaries shall directly or indirectly provide financial assistance for the purpose of such acquisition. This prohibition applies before or at the time of the acquisition, as well as after acquiring shares.

The legislation clarifies that a company is not prohibited from giving financial assistance for the purpose of an acquisition of shares in its holding company, if such holding company is incorporated outside Hong Kong.

The CO sets out certain exceptions to the financial assistance rule and additionally sets out a whitewash procedure which can be adopted to overcome the general prohibition outlined above. Such procedure requires:

• a resolution of the directors that the company should give the financial assistance, that the giving of such financial assistance is in the bests interests of the company and the terms and conditions under which the assistance is to be given is fair and reasonable;
• a solvency statement on the same day as the above resolutions are passed made by each of the directors who voted in favour of giving the financial assistance;
• the proposed financial assistance is approved by written resolution of all members of the company; and
• the financial assistance is given not more than 12 months after the date on which the solvency statements are made.

Some variations to the above are possible but the above steps are generally preferred as they are usually most easily satisfied.

Unless the parties are operating in a regulated sector (eg, insurance), there are no particular consents required for the grant of security or guarantees.

Hardening Periods

Hardening periods in Hong Kong are as follows.

• transactions at an undervalue – within five years before the commencement of the winding-up of the company;
• unfair preference – within six months before commencement of winding-up proceedings. This period is extended to two years if the unfair preference is given to a person connected with the company;
• avoidance of floating charges – within 12 months before commencement of winding up proceedings. This period is extended to two years if the floating charge is created in favour of a person connected with the company;
• extortionate credit transactions – within three years before liquidation; and
• fraudulent conveyance (Section 60 CPO) – no hardening period.

Retention of Title

Hong Kong recognises “retention of title” clauses with the primary legislation having application to such concepts being the Sale of Goods Ordinance (Cap. 62). Retention of title clauses may not work where the original buyer has on-sold the relevant goods to a third-party bona fide purchaser for value without notice. The effectiveness of such provisions may also be limited in an insolvency of the buyer where the relevant goods have been transformed or incorporated into other products.

Anti-Assignment

Hong Kong law recognises anti-assignment provisions. As such, if security is intended to be taken over contractual rights, the underlying contract should be examined to ensure that there are no such provisions or if they exist, relevant consents are obtained. In addition, rights under contracts that are “personal” to the contracting parties (eg, an employment contract) are not assignable.

For completeness, the authors also note that, as a matter of public policy, it is not generally possible to assign (by way of security) a bare right to sue or litigate.

Security is typically released by way of a deed of release between the parties in respect of which the security was entered into.

For any registrations applicable to the grant of security which are noted in 5.1 Assets and Forms of Security, there will be a corresponding de-registration process.

Under Hong Kong law, it is possible for chargors to grant multiple charges over the same asset. The rules governing priority of competing security interests are complex but some general rules are as follows:

• as between two fixed charges, the fixed charge which has been granted earlier in time takes priority over the other, provided that if they are registrable, both fixed charges have been registered within any applicable time limits;
• a floating charge becomes a fixed charge only upon crystallisation and ranks behind other fixed charges even if such fixed charges were created after the floating charge (but before it crystallises); and
• in respect of assignments and charges over the same chose in action, the starting point is that priority is determined by the creditor that serves notice first on the contract counterparty, provided that at the time of the assignment or the creation of the charge, that creditor did not have any notice of any earlier assignment or charge over that chose in action to any other assignee or chargee and was acting in good faith and gave good value for that assignment/charge.

Where multiple charges are granted over the same asset, the parties should enter into an intercreditor or subordination agreement. As of the time of writing, there is no direct case law on whether such arrangements would survive insolvency, but the market practice is to operate on the basis that they do (there are some helpful English law decisions in this area, which may be persuasive).

Whilst by definition such form of subordination means there will not be any competing claims, structural subordination is also often employed.

There is no general statutory framework in Hong Kong which can be relied upon to prime a lender’s lien in the same way as the Bankruptcy Code in the US.

ICA terms for regulating second-ranking security typically include the following with exceptions and standstill periods negotiated on a case-by-case basis:

• restrictions on payments;
• restrictions on enforcement action;
• provisions regulating voting on an insolvency; and
• provisions regulating amendments to the first-ranking and second-ranking documentation.

A key area of focus for the second lien creditors is the timing of and their ability to enforce their security rights independently of the first lien and the extent to which they can influence the manner and terms of enforcement.

Cash pooling arrangements exist. Private credit lenders (and indeed bank lenders) will usually accept that the account bank with which operating accounts are maintained will, by virtue of its status as account bank, have priority for any unpaid bank account fees, etc. Cash pooling in itself will not necessarily be problematic if, for example, security has been taken over all relevant accounts, including the main pooling account. Given the nature of these arrangements, security will be of a floating rather than fixed nature. Lenders will generally recognise the working capital efficiency and benefits of cash pooling and cash management arrangements.

Treatment of hedging will vary from deal to deal, taking into account its commercial significance (for both the issuer and the lender) and the extent to which a hedging provider would be willing to provide hedging without the benefit of the transaction security.

As mentioned in 2.1 Licensing and Regulatory Approval, there is no general requirement for a lender to obtain a licence or regulatory approval solely by reason of taking the benefit of security over assets located in Hong Kong.

Lenders in a syndicate can (and, in fact, customarily do) appoint a trustee to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate. There is no requirement in Hong Kong for security to be granted directly to each individual lender in a syndicate.

The finance documents will set out the circumstances in which a secured lender (whether bank or non-bank) can enforce its collateral. There will, in the usual way, be a suite of representations and warranties, undertakings, financial covenants and events of default with an ability by the lender to accelerate the loan upon a breach.

There are no particular formalities which are required to make a demand under a loan or a guarantee, provided that the specified conditions for a demand have been met – eg, non-payment.

There are two main ways in which security can be enforced: (i) exercising a power of sale, or (ii) foreclosure.

Power of Sale

Whilst a power of sale can arise by statute (under the Conveyancing and Property Ordinance (Cap. 219)) the power of sale is almost always explicitly granted by contract pursuant to the provisions of the relevant security agreement. In exercising such power, the chargee is bound to act in good faith and is under a duty to obtain a proper price.

Rather than exercise the power of sale directly, the chargee may (and usually will) appoint a receiver to conduct the sale.

Foreclosure

Foreclosure is a process by which the chargee becomes the absolute owner of the charged/mortgaged property. It will extinguish the chargor’s equity of redemption and must be sanctioned by a court order. This is not an enforcement method which is commonly pursued on account of the need for court proceedings and creditor concerns around consolidation.

Receivers

A creditor may appoint a receiver to safeguard its interests either by making an application to the court or, if the contractual terms of the relevant security document grant a right of appointment to the creditor, pursuant to such contractual terms. In order to avoid a court application, most security agreements will provide for the appointment of a receiver including the terms of any such appointment.

The receiver’s powers are generally regulated by the underlying security documents and normally include powers to take possession of and to sell the property.

It is not really possible to speak of a “typical” restructuring. For example, lenders under an ABL structure will be focused on enforcing security over bank accounts and the receivables. Where the main security asset is real estate, enforcement of the property mortgage may be foremost in the lender’s mind. Share pledges can certainly be expected to play an important role; especially to deal with structurally subordinated creditors and where the view is that the maximum realisation value lies in a sale of the business as a going concern.

Foreign Governing Law and Submission to Jurisdiction

Hong Kong courts usually recognise and apply the parties’ choice of law to govern the substantive merits of a claim subject to certain exceptions, for example:

• when the choice of foreign law is not bona fide; and
• when the choice of foreign law contradicts public policy.

It should be noted that Hong Kong courts will apply local law in relation to procedural rules, revenue matters, penalties or confiscation of property.

Waiver of Immunity

The Foreign State Immunity Law (FSI) in the PRC came into force on 1 January 2024. Whilst its precise application in Hong Kong remains to be seen, FSIL has opened the possibility for contractual and treaty-based waivers of immunity from both suit and execution to be recognised and upheld by the courts in Hong Kong. This is in contrast to the common law position before the FSIL which provided that contractual waivers of immunity were not effective and that immunity could only be waived “in the face of the court” after the lawsuit or enforcement action had been commenced.

It is important to remember that the new rules only apply to foreign states and that the PRC government continues to enjoy absolute immunity from suit and execution in Hong Kong.

There are two general routes to enforcement of foreign judgments in Hong Kong which are explained below, followed by a third route which exists for PRC judgments.

The Foreign Judgments (Reciprocal Enforcement) Ordinance

Under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) (FJREO), a judgment creditor can apply to the Court of First Instance, ex parte, for registration of a judgment to which the FJREO applies, within six years after the date of the judgment, provided it meets certain requirements including the following:

• the judgment is final and conclusive as between the parties thereto;
• there is payable thereunder a sum of money, not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty; and
• the judgment is given after the coming into operation of the order directing that the provision of the FJREO shall extend to that foreign country.

As of writing, this registration scheme under the FJREO applies to judgments from the superior courts of 15 countries including Australia, Singapore, France and Germany (but not the US or English courts).

Common Law Regime

In a common law action for enforcement of a non-Hong Kong judgment for a debt or a fixed sum of money to which no statutory registration scheme in Hong Kong applies, a judgment creditor can apply to have such judgment enforced by commencing fresh proceedings which involves issuing a writ of summons together with a short statement of claim. The proceedings will run as any other debt claim would. The judgment creditor may be able to shorten the process by applying for summary judgment and exhibiting the original judgment as proof of debt. Such a judgment will be enforced in Hong Kong by common law subject to a number of conditions including the following:

• the judgment was not obtained by fraud;
• the judgment was rendered by a court of competent jurisdiction;
• the judgment is final and conclusive; and
• the enforcement in recognition of the judgment is not contrary to public policy.

Recognition and Enforcement of PRC Judgments

Under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) (MJREO), a judgment creditor under a Mainland Judgment (being a judgment by a court in the Mainland, but does not include a ruling given in respect of an interim measure) in a civil or commercial matter can apply to the Court of First Instance (the “Court”), ex parte, for registration of the judgment provided it meets certain requirements set out under the MJREO.

Recognition and Enforcement of Arbitral Awards

Hong Kong is a member of The Convention of Recognition and Enforcement of Foreign Arbitral Awards (the “New York Arbitration Convention”) by virtue of (and subject to the same reservation as) the PRC being party to the New York Convention.

There are no restrictions of a generic nature on a foreign private credit lender’s ability to enforce its rights under a loan or security agreement.

Almost all security enforcement processes by a secured creditor will entail the appointment of a receiver. Such appointment process need not be very lengthy and certain lenders may well have a history of appointing certain receivers which can be expected to expedite the process.

Assuming the enforcement is not contested, the most time-consuming aspect to enforcement is the process of ensuring that the duty to obtain a proper price is discharged. Typically, this will be achieved by running a public auction process which can take several months or longer, depending on the prevailing economic conditions, the business or asset concerned, and market interest.

The costs and expenses of a restructuring will usually include lender fees, receiver fees, legal fees and advisory fees. Depending on the situation, there may be other fees and expenses related to the restructuring (eg, broker fees for marketing a property).

For private credit investments in Asia, one of the first considerations will be the robustness and predictability of the judicial systems regulating the obligors and the transaction security. A well-structured investment will have already taken this into consideration, particularly when formulating the collateral package, but it will not always be possible to avoid jurisdictional “hotspots” where any enforcement action is likely to be contested and can be expected to take an extensive amount of time to resolve (without much visibility on the likely outcome).

Taking a step back, in terms of a more generic assessment, there will be two main considerations for a secured creditor (with a level of tension with each other). Firstly, the time it will take to realise value and secondly ensuring that the enforcement action is not vulnerable to challenge – in Hong Kong, this invariably goes to a secured creditor’s duty to obtain a proper price on any enforcement sale.

Where a willing buyer has already been secured, a consensual enforcement sale can be implemented fairly quickly. Against that, the lender will need to be comfortable that it has discharged its duty to obtain a proper price. Whilst it is not always necessarily the case, generally speaking, the best way to demonstrate that such duty has been discharged will be to run a marketing process and invite bids. Of course, even such limited processes will take time (and money) and the relative benefits must be weighed up on a case-by-case basis.

As discussed in 6.1 Enforcement of Collateral by Non-Bank Secured Lenders, in the event of an enforcement of security over their collateral, the secured creditor will normally enforce its security by appointing a receiver to get in and enforce the security (by exercising the power of sale and applying the proceeds to the settlement of the secured debt). In such circumstances, the secured lender does not come into possession of the secured asset, and claims and obligations that attach to or arise from ownership of the asset do not pass to the secured creditor that is enforcing its security. For example, a secured lender enforcing its security over shares in a company by appointing a receiver to exercise the power of sale should not be liable for obligations of the secured company to it employees.

Generally speaking, under Hong Kong’s environmental laws and regulations, the occupier of a property will have primary responsibility for complying with such laws and regulations. This means that, where a secured lender simply holds the benefit of the security, it is not likely to be in the firing line when it comes to environmental liability in Hong Kong. However, for the same reason, caution will need to be exercised where the secured lender is planning on taking possession of the property which will result in the lender effectively becoming the occupier and exercising operational control of the property in question.

One of the in-court insolvency processes available to lenders is a compulsory liquidation where the company is wound up by the court. The typical ground for winding up of a company in an insolvency scenario is the inability of the company to pay its debts, although this is not the only ground on which a court has the discretionary power to order a company to be wound up.

The commencement of winding up proceedings does not have any effect on the lender’s right to enforce its loan, security or guarantee, as it may still proceed to do so while the proceedings are ongoing, unless that loan, security or guarantee is not valid or liable to be set aside under one of the grounds for voidable transactions further discussed in 7.6 Transactions Voidable Upon Insolvency.

There is no automatic or formal moratorium which comes into effect upon the commencement of winding-up proceedings under Hong Kong law, unless a provisional liquidator is appointed. However, once a winding-up petition is presented, the company which is the subject of the insolvency proceedings as well as any creditor or persons obliged to contribute to the assets of the company may apply to the court for a stay of proceedings. This means that in practice, there may be a moratorium against legal claims and proceedings being brought against the company between the commencement of the winding up proceedings and the making of the winding up order. This does not, however prevent a secured creditor from enforcing its security.

Other categories of in-court insolvency processes are a members’ voluntary liquidation (in respect of solvent companies) and a creditors’ voluntary liquidation. Both of these procedures are initiated by the company (at least initially) and are not as relevant for present purposes.

Creditors are typically paid in the following order on a company’s insolvency.

• First, secured creditors are entitled to the proceeds of the sale of their secured assets (subject to the receiver’s costs and expenses being paid from the proceeds of the sale). If the proceeds from the sale of the secured assets are insufficient to satisfy the debt in full, the secured creditors are entitled to claim as unsecured creditors for the balance of the unpaid debt.
• Second, payment of the costs and expenses of winding up, as well as payments to preferential creditors such as employees (in respect of payments related to wages, provident fund, severance, long service and employee compensation) and the government.
• Third, floating charge holders are entitled to the proceeds of the sale of the assets subject to the floating charge, but only after all preferential claims have been met.
• Fourth, any remaining surplus will be shared across the unsecured creditors on a pro rata basis in the event the surplus is insufficient to meet all of their claims
• Finally, any remaining balance is distributed to shareholders.

The time taken to complete an insolvency process in Hong Kong depends on the particular facts of each case, including the complexity, size, type of business and assets involved, the type of insolvency process and the amount of time that may be spent attempting any potential restructuring plans, workouts or corporate rescue, before resorting to an insolvency process.

A key determinant of the timescale is also the type of stakeholders involved on the debtor side and their willingness to achieve a swift resolution. 

Although not an insolvency process, there is no prescribed timeframe for a scheme of arrangement, but great speed can be achieved with willing and well-advised parties. A general reference for a relatively straightforward scheme of arrangement for an uncomplicated business is three to six months.

There is no statutory basis for corporate rehabilitation or corporate rescue in Hong Kong. The key company rescue or restructuring procedures outside of insolvency proceedings in Hong Kong are as follow.

Informal Workouts

A workout is an entirely voluntary process available at any time through which the company and its creditors agree to vary the terms of the financings and any security arrangements on a negotiated basis. Under an informal workout, the management of the company typically does not change, and following the agreement of the terms of the workout, the company will continue operating on the basis of the terms of the newly agreed arrangements.

Schemes of Arrangement

A scheme of arrangement is a legally binding arrangement or compromise arrived at between a company and its creditors (or a class of them) and which must be approved by the court. A scheme of arrangement is available to companies at all times and insolvency is not required.

In general, a proposed scheme of arrangement has to be approved by all classes of affected creditors before coming into effect. The scheme has to be approved by at least 75% in value and more than 50% in number of each class of creditors voting. The key advantage of a scheme of arrangement is that, provided the requisite majority in each class of creditors approves a scheme, that scheme may be used to restructure the claims of both secured and unsecured creditors. A scheme administrator will typically be appointed to monitor the implementation of the scheme.

From a procedural perspective, a scheme brings with it the ability to also compromise the debt of the minority/dissenting creditors, provided that the relevant voting thresholds are achieved and the reviewing court is satisfied that the scheme is not unfair and otherwise procedurally compliant.

Security granted in favour of a lender over an asset is, assuming perfection, generally “ring fenced” from unsecured creditors in an insolvency situation. Secured creditors are generally entitled to the proceeds of the sale of their secured assets outside of the order of priority of payment on a company’s insolvency.

However, as stated above at 7.2 Waterfall of Payments, a secured creditor may need to petition as an unsecured creditor if the security enforcement proceeds are not sufficient to repay its secured debt in full. In that eventuality, any recoveries will be subject to the prescribed order of priority of payments on a company’s insolvency.

Another risk area for lenders if a borrower, security provider or guarantor were to become insolvent arises from the avoidance of transactions. Upon insolvency, it is possible that certain transactions in favour of the lenders may be challenged in court and unwound or modified pursuant to the avoidance provisions discussed further under 7.6 Transactions Voidable Upon Insolvency. This might mean that certain payments or transfers to lenders or grant of security to the lenders may be reversed.

Transaction at an Undervalue in Respect of a Company (Sections 265D and 265E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO)

Where a debtor is being wound up by the Hong Kong courts and has entered into a transaction with any person within the period of five years before the commencement of the winding-up (which as a matter of Hong Kong law, constitutes a transaction at an undervalue), it may be set aside on application to the Hong Kong courts by the liquidator. A debtor company enters into a transaction with a person at an undervalue if:

• that debtor company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for that debtor company to receive no consideration; or
• that debtor company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by that debtor company.

It is also necessary for the liquidator to establish that at the time the transaction took place, the debtor company was, or became in consequence of the transaction, unable to pay its debts (within the meaning of Section 178 of the CWUMPO).

Unfair Preferences (Sections 266 to 266B CWUMPO)

A liquidator may apply to the Hong Kong courts to set aside a transaction where a company which is being wound up has given an unfair preference to a person within six months before the commencement of its winding-up proceedings. The period is extended to a period of two years if the preferred party is a connected person. A debtor gives an unfair preference to a person if:

• that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities; and
• the company does anything or suffers anything to be done which has the effect of putting that person into a position which is better than the position it would have been in if that thing had not been done,

and the company was influenced, in deciding to give that unfair preference, by a desire to procure the effect under the second bullet point above.

It is also necessary for the liquidator to establish that at the time the preference was given, the debtor company was, or became in consequence of the transaction, unable to pay its debts (within the meaning of Section 178 of the CWUMPO).

Avoidance of Floating Charges (Sections 267 and 267A CWUMPO)

To the extent a security document creates a floating charge over the assets and undertakings of a company, the floating charge may be partially or wholly held to be invalid. If it is created within the period of 12 months ending with the day on which the winding up of the company commences and the company, at the point of creation, or in consequence of the transaction pursuant to which the charge is created, is unable to pay its debts (within the meaning of Section 178 of the CWUMPO).

However, the floating charge survives to the extent of (i) the amount of any new money paid to, or at the direction of, the chargor at the time of, or subsequent to, the creation of the floating charge; or (ii) any property or services supplied to the company at the same time as, or after, the creation of the floating charge. In each case, interest is payable under the terms of the charge or the underlying transaction document at the lesser of the rate specified in the charge or transaction document and 12% per annum.

The look-back period is extended from 12 months to two years if the floating charge is created in favour of a person connected with the company as defined in Sections 265A(3), 265B and 265C of the CWUMPO.

Extortionate Credit Transactions (Section 264B CWUMPO)

A liquidator may challenge a transaction where credit was provided to the insolvent company on the grounds that it was an extortionate transaction. The liquidator or administrator will need to establish that:

• the transaction was entered into in a period of three years ending with the day on which the company went into liquidation; and
• having regard to the risk accepted by the credit provider, the terms of the transaction were such as to require grossly exorbitant payments to be made in respect of the provision of the credit or it otherwise grossly contravened ordinary principles of fair dealing.

Fraudulent Conveyance (Section 60 CPO)

Any disposition of property made with intent to defraud creditors is voidable on the application of any person prejudiced by the disposition.

Set-off on insolvency is recognised in Hong Kong. There must be a mutuality in respect of obligations, dealings or credits between the creditor and the debtor company prior to the commencement of liquidation.

As discussed in 6.1 Enforcement of Collateral by Non-Bank Secured Lenders, there is no “typical restructuring” beyond a recognition that the prevalent form of restructuring is via informal workouts. These will necessarily be situation specific and driven by a number of factors ranging from the commercial considerations around creditors’ recovery and the debt profile needed for the company to remain a going concern. However, it is not unusual for such arrangements to include debt-for-equity swaps, reprofiling of debt and the grant of new security.

Being a consensual process, a work-out requires the co-operation of all stakeholders in order for it to be agreed and executed.

A scheme of arrangement offers the advantages mentioned above, particularly the ability to override dissenting minorities (subject to the conditions mentioned above).

In order for a scheme of arrangement to pass, it must be approved by 75% in value of participating creditors and a majority in number of creditors in each class. As such, it is possible to pass a scheme of arrangement over the objections of any dissenting lenders provided that the approval threshold in each class has been satisfied.

There is no formal statutory basis in Hong Kong for a pre-packaged restructuring. It is therefore more challenging to achieve a pre-packaged restructuring in Hong Kong than in other jurisdictions where this type of restructuring procedure is provisioned for.

A key challenge to pre-packaged restructuring in Hong Kong is the ruling of the court in Re Legend International Resorts Ltd [2006] 2 HKLRD 192 where the court held that a provisional liquidator could not be appointed for the sole purpose of a restructuring or to avoid a winding up and that a pre-packaged restructuring is not a winding up but rather an alternative to winding up. This removes the ability of using the appointment of a provisional liquidator and the moratorium it brings as a primary means of creating the breathing space needed to pull together a pre-agreed scheme of arrangement.

Nevertheless, pre-packaged restructurings are attempted in Hong Kong and can be achieved if properly structured with a willing cohort of creditors and on the basis of sound legal advice in order to deliver a well-executed and pre-packaged outcome.

Private credit deals are by their nature private and confidential. The authors are not aware of any notable litigation having been reported in the public domain.

See 8.1 Notable Case Studies.

See 8.1 Notable Case Studies.