Hong Kong Monetary Authority Guidelines on Standstill and Workouts

Background

The guidelines were originally issued in 1997, but were revised in late 1999 as a consequence of the experience gained since their original publication.

They do not carry the force of law, but because they are issued by what is in effect the “Central Bank” of Hong Kong, banks are expected to take them into consideration when dealing with customers in difficulties.

The guidelines seek to promote a supportive environment within which companies in difficulties are able to work through their problems and hopefully become rehabilitated in due course.

A full copy can be obtained from the HKMA website but the following is a brief summary of the contents.

The guidelines were jointly issued by the HKMA and the Hong Kong Association of Bankers (HKAB).

In Hong Kong there is no formal rescue procedure and accordingly a culture of “workouts” has developed, as an alternative to liquidations where the rate of return is generally quite low.

The Guidelines

The guidelines recognise that the workout process can only work in an atmosphere of co-operation and a “recognition of shared interests”.

The workout procedure has a long history in Hong Kong, but it is only recently that the HKMA/HKAB have issued these guidelines as a way of codifying the principles that govern the process. The guidelines are non-statutory and compliance is therefore voluntary. However, they are supported by both HKMA and HKAB and banks are expected to act according to the principles.

It is envisaged that the lead bank, the steering committee, the company and its advisers will be responsible for the detailed negotiations relating to the workout. However, in the event of disputes the HKMA are prepared to assist in resolving differences which might threaten a successful workout.

The guidelines envisage that banks can take the following steps:

Strengthen their workout teams and where necessary take steps to create specialised debt recovery units.

Ensure

that when they are involved in a workout, their representatives on the Steering Committee have the requisite level of knowledge and experience to support the workout process.

that banks are able to provide timely decisions in order to speed up the process.

that the spirit of the guidelines should be adhered to and that negotiations should not be by ultimatum.

Banks should be pragmatic and realistic about the likely outcome of the workout process. It is often unrealistic to expect a recovery in full.

The HKMA also expresses the hope that banks will look at how to identify such problems at an earlier stage.