Governmental responses mitigating the impact of COVID‐19 on small and medium‐sized enterprises and the case for insolvency law reforms in Hong Kong

Abstract

The COVID‐19 crisis has triggered unprecedented governmental responses around the world to mitigate the effects of the pandemic, with particular attention being given to small and medium‐sized enterprises (SMEs). Governments around the world have implemented economic measures in the form of direct subsidies or government‐guaranteed loans, and legislated to provide mandatory relief from contractual obligations. In addition, increasing recognition of the limitations of insolvency regime in addressing the crisis for SMEs prompted many jurisdictions to change their laws. However, consistent with its free market principles, Hong Kong has only adopted economic measures and has provided limited contractual relief in favour of SME tenants. There is no SME‐specific insolvency law nor is the Hong Kong government currently considering any such law reform. This article reviews the need for a temporary insolvency regime to cater to distressed but economically viable SMEs restructure their debts. Drawing on a set of interviews with Hong Kong SME owners, this author finds that they are often unaware of how insolvency law operates, their unsecured creditors are apathetic, and bankruptcy stigmatism is high. Based on a review of the frameworks in the other advanced common law jurisdictions such as the United States, Australia and Singapore, a recommendation for a simplified restructuring and liquidation framework is developed. The process is designed to be simplified and expedited and it incentivises early negotiations with creditors.