Back to business guide - Hong Kong - MAY 2020 - DLA Piper
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Back to business guide – Hong Kong
MAY 2020
UpAgain Hong KongHONG KONG BACK TO BUSINESS GUIDE Contents Summary................................................................................................................................................ 03 Workforce and employment............................................................................................................... 04 Real estate and commercial contracts.............................................................................................. 07 Corporate, governance, disclosure and risk management........................................................... 15 Finance, restructuring and transactions.......................................................................................... 16 Government, regulatory and tax....................................................................................................... 20
DLAPIPER.COM
Summary
Hong Kong is on the path to recovery. As the territory The revival of Hong Kong’s economy calls for decisive
emerges from lockdown, businesses must act with action and inspired leadership. As a global law firm,
purpose to prioritise the health, safety and wellbeing we are dealing with these issues directly ourselves in
of employees while navigating economic uncertainty. real-time all over the world. As companies consider how
they can prepare for a return to business, they should
This Hong Kong Back to Business Guide provides advice take measured steps to overcome the immediate and
for companies to make those decisions and outlines longer-term challenges. This guide will help businesses
the key measures announced by government, from to navigate that journey.
financial support and business protection, through to
employment and access to justice.
You will find answers to all legal questions for resuming
operations, employee health and safety, data privacy,
performance and termination of commercial contracts,
and government relief programs in a frequently asked
questions (FAQ) format.HONG KONG BACK TO BUSINESS GUIDE
Workforce and employment
What legal requirements should employers What if employees refuse to take the requested
follow before they reopen physical premises and medical tests or provide the requested medical test
employees return to work? results or certificates before returning to work?
The Hong Kong government has so far not introduced Without express, voluntary consent it is likely to be
any statutory requirements or guidelines on returning viewed as excessive and unreasonable to require
to work. employees to undergo testing as a pre-condition to
returning to work, and an employer would face potential
Before doing so, employers will need to be able to claims if it refuses to allow employees who are otherwise
satisfy themselves that they have taken all reasonably ready and willing to return to work to do so.
practicable steps to ensure the safety and health of
employees and anyone else working on the premises. The Hong Kong Labour Department has encouraged
This will ensure they meet their general duty to maintain employers to show compassion and flexibility to
healthy and safe workplaces for employees. This will employees during this period. Any contemplated
vary by employer and by location, but generally speaking disciplinary action should therefore be handled with
employers should consider maintaining existing health caution and only after seeking legal advice.
and safety processes for an interim period such as
taking temperature checks, requiring visitors to declare If there are employees who still need to stay at
travel and medical histories, providing face masks and home due to school closures or to look after sick
hand sanitisers, and requiring employees to notify relatives, is the employer obliged to pay them?
the employer if the employee has tested positive or is If the employee is not sick and is staying at home to
displaying symptoms. Employers should also consider attend to childcare responsibilities or look after sick
whether any further measures are appropriate, such as relatives then, strictly speaking, there is no obligation to
social distancing of desks, requiring phased return provide full pay, and any such period of homeworking
to work or split shift working. Employees should be would require the employer's consent. Having said that,
reminded to stay vigilant and to continue to take the employers are being encouraged to treat employees
measures seriously. with compassion and flexibility. Employers should
consider home working arrangements wherever
As we reopen post-COVID-19 lockdown, what are possible. If this is not possible, then the parties may
the health and safety obligations employers need to want to consider other alternatives e.g. reduced working
consider around the physical premises? hours, reduced salary, unpaid leave – but these would all
As noted above, it would be prudent for employers be subject to agreement.
to continue existing protocols for an interim period.
Increased cleaning of premises is a further measure for If there are employees who still fear contracting
employers to consider. COVID-19, can they refuse to show up to work in
the office?
Can employers ask employees to take medical tests Employees can refuse to come to work if they
or show test results or medical certificates before reasonably believe there is a risk to their health and
returning to work? safety. What will be considered "reasonable" should
Full medical testing/screening should only be carried out be assessed on a case-by-case basis and it would
with an employee’s express, voluntary consent. It may be be prudent to have discussions with employees to
possible to implement less intrusive medical screening understand their concerns and see if these can be
measures without individual consent and provided the reasonably addressed.
employer complies with applicable data privacy laws,
e.g. temperature checks and travel declaration forms.
4DLAPIPER.COM
Can an employee refuse to attend a business Is it possible to temporarily suspend work for
meeting with someone from out of town employees due to the business downturn as a result
or overseas? of COVID-19?
It needs to be discussed on a case-by-case basis. This is only permissible with the employee’s express,
If the person from out of town or overseas has voluntary consent.
completed their quarantine period according to local
rules or there is no reasonable suspicion that the If the employer needs to suspend business operations
person has tested positive, is a suspected patient or a without obtaining consent, this would give rise to
close contact, then the employee is generally not able to redundancies and may trigger liability to pay statutory/
refuse to attend the business meeting. If the employee’s contractual severance payments to eligible employees.
concern appears to be reasonable, then the employer
should try to make alternative arrangements where In addition, an employee is considered to have been
possible e.g. arrange a dial-in. “laid off” if they are not provided with work/pay for:
• more than 1/2 of the total number of working days in
Can employers adopt flexible work options such as
any period of 4 consecutive weeks; or
imposing part time or shorter hours?
Yes, but only with the employee’s express, • more than 1/3 of the total number of normal working
voluntary consent. days in any period of 26 consecutive weeks.
Can an employer require employees to notify the Lay-offs are treated as redundancies for all intents and
employer in the event they test positive or display purposes, and will give rise to liability to pay statutory
symptoms of COVID-19? severance to eligible employees as set out above.
Yes, this is a reasonable request and employees should
be required to do so. Can employers request employees to take annual
leave due to the business downturn as a result
There is no express obligation to notify government of COVID-19?
authorities that an employee has tested positive. For statutory annual leave, yes – employers are generally
However, employers should be prepared to cooperate with free to determine the dates on which employees must
the Department of Health in case of an investigation and use their statutory paid accrued annual leave provided
required contact tracing (both social and close contacts). they have consulted with them in advance and given
them not less than 14 days' written notice. There is no
If, however, an employee contracts or suspects having definition of what amounts to sufficient "consultation" –
contracted COVID-19 by accident arising out of and in provided the employer has entered into some form of
the course of his/her employment, then the employer is dialogue with the employee and allowed them some
required to notify the Labour Department of the “injury” – time to consider their views, this should be sufficient.
as this would potentially allow the employee to bring
a claim under the statutory employees’ compensation For contractual accrued annual leave (i.e. anything
regime in Hong Kong. If there is any doubt as to whether over and above the statutory minimum), the treatment
the employee contracted the virus during work or outside would depend on the employee’s employment
work, the prudent course of action would be to notify the contract/applicable annual leave policy.
Labour Department.
Can employers ask employees to take unpaid leave?
Is it possible to reduce the salary of the employees This is only permissible with the employee’s express,
to offset the lost profitability due to effects voluntary consent.
of COVID-19?
This is only permissible with the employee’s express,
voluntary consent.
5HONG KONG BACK TO BUSINESS GUIDE
In terms of employee payroll costs, are there any Is notice and/or consent required to collect
government assistance program/relief measures to personal data in the context of COVID-19
assist employers that continue to do business? prevention and control?
The Hong Kong government recently announced a Yes, however, whether consent will be required will
HKD137.5 billion package of relief measures to tackle depend on the measures adopted and whether
the COVID-19 outbreak. This includes an HKD80 billion these are necessary, appropriate and proportionate.
Employment Support Scheme to encourage employers The Privacy Commissioner for Personal Data in
to retain staff through the provision of a wage subsidy Hong Kong has released a statement recognising the
which is expected to benefit 1.5 million employees. need for employers to collect and process additional
All private sector employers who have been making data during this time but stressed that this must be
Mandatory Provident Fund/other occupational related to and used for purposes in relation to public
retirement scheme contributions are eligible to health and such use should be limited in duration and
claim up to 50% of the employee’s monthly salary. scope. Any collection and processing of personal data
This is capped at HKD18,000 per employee per month in this context must also not be excessive and still be
(i.e. HKD9,000 per employee per month) for a necessary, appropriate and proportionate.
period of 6 months. The subsidy will be disbursed in
two tranches, with the first disbursement to occur no Can organisations disclose to colleagues and
later than June 2020. The subsidy is conditional upon third parties (visitors/management office),
the employer undertaking that they will not implement the identity of the employees that have tested
any redundancies during the subsidy period. positive for COVID-19 for the purpose of prevent
further infection?
At the time of publication, the Government has said it Organisations should not disclose the identity
is liaising with Mandatory Provident Fund trustees and of the underlying individual, however, from a practical
relevant stakeholders to work out the implementation perspective, organisations are able to notify colleagues
details which will be announced before application for and relevant third parties that there has been a positive
the first tranche is invited. case and that appropriate remediation measures are
being taken.
There are a series of one-off grants for the hardest
hit sectors including tourism, aviation, catering/F&B Are security measures necessary in processing
and education. the personal data?
Yes, organisations should continue to adopt
Should we divide people in groups and stagger appropriate technical and organisational measures
their return to work? (such as encryption, access control, ID verification,
Social distancing requirements may still be in place etc.), to protect the to protect personal data collected
and should be observed. For example, at the time of against unauthorised or accidental access, erasure,
publication there is currently a ban on gatherings loss or use. This is particularly important where more
of more than 8 people in public places, but this does sensitive information is being collected, such as
not apply to the workplace. health information.
Some employers have already implemented staggered/ What privacy issues may arise by allowing our
phased working operations, although there is no legal personnel to work from home? How can we
requirement to do so. If this has been working well manage these?
without business interruption, then it would be sensible Working from home arrangements may increase
to continue these arrangements for an interim period. the risks in privacy and cyber related incidents.
It is therefore important that organisations ensure there
Does the Personal Data (Privacy) Ordinance is proper communication and reminders to employees
remain applicable? around maintaining compliance with internal protocols
Yes, organisations should continue, as far as possible, and procedures. Organisations should also ensure that
to comply with relevant data protection laws. This said, IT software and security systems are up-to-date and
there are circumstances in which, given the current proper technical measures are adopted to minimise
situation, entities (in particular government and the occurrence and impact of any incident.
healthcare bodies) may not need to full comply with
all privacy obligations in the context of COVID-19
prevention and control.
6DLAPIPER.COM
Real estate and commercial contracts
Are there any specific requirements for landlords, Bar and pubs
tenants or visitors with respect to the use or re-use
• Subject to the same obligations as operators of other
and decontamination of premises?
catering businesses plus the obligations set out below;
Specific and detailed obligations, liabilities and/or duties
in respect of landlords/tenants/operators of businesses • Maximum headcount is 4 per table;
are imposed based on the type of business conducted
• Bars and pubs must be operating at no more than
and they are different for different industries.
50% of their respective seating capacities;
These obligations, liabilities and/or duties are specified • There should be no live performances or dancing.
under a number of subsidiary legislations, including
the Prevention and Control of Disease (Requirements Fitness centres
and Directions) (Business and Premises) Regulation
• Customers must wear a mask except when they
(Cap. 599F) and the Prevention and Control of
are exercising;
Disease (Prohibition on Group Gathering) Regulation
(Cap. 599G). • Screening of body temperature must
be implemented;
According to these subsidiary legislations, as of
• Hand sanitiser must be provided;
8 May 2020, catering businesses (including restaurants,
bar and pubs), amusement game centres, fitness • Fitness stations, machines and equipment in
centres, places of amusement, places of public use must be placed 1.5 meters apart from each
entertainment, beauty parlours and massage other or must be effectively partitioned from
establishments, club-houses, and mah-jong-tin kau each other;
premises may be open for business subject to specific
• Fitness station, machine and equipment must be
regulations, while bathhouses, party rooms, clubs or
cleaned and disinfected before and after each use;
nightclubs and karaoke establishments should remain
closed. As of 8 May 2020, no restrictions are placed in • There must be no more than 8 persons in each group
respect of operating businesses other than the types training or classes, including the coach;
of business identified immediately above.
• Steam and sauna facilities must remain closed.
With respect to specific obligations, for example:
Places of public entertainment
Catering businesses excluding bars and pubs
• Customers must wear a mask except when they are
(includes restaurants)
doing exercises;
• Customers must wear a mask except when
• Screening of body temperature must
consuming food/drink;
be implemented;
• Screening of body temperature must
• Hand sanitiser must be provided;
be implemented;
• Entertainment stations, machines and facilities next
• Hand sanitiser must be provided;
to one another must not be made available for use at
• Tables must be placed 1.5 meters apart from the same time unless there is some form of effective
each other or must be effectively partitioned partitioning between each;
from each other;
• For cinemas, in addition to the above:
• Maximum headcount is 8 per table;
• Cinemas must be operating at no more than
• Karaoke activities must remain suspended. 50% of their respective seating capacity;
• There should be no more than 8 consecutive seats
in the same row;
7HONG KONG BACK TO BUSINESS GUIDE
• No eating or drinking inside a house; Otherwise, rent suspension and/or rental concession is
a matter freely negotiable between the landlord and the
• Catering premises to comply with the applicable
tenant. There is no definitive rule or overarching practice
directions mentioned above;
on the payment mechanism and the timing agreed
• Cleaning and disinfection of each house must be between the landlord and the tenants.
carried out after each screening.
Are there specific tax reliefs on payment or
The Centre for Health Protection, Department of collection of rent instalments? Do they apply subject
Health of Hong Kong also issues non-binding advice to actual payment or regardless? Do they apply
on prevention of COVID-19 in relation to different generally or only to specific asset classes?
businesses and workplaces, including recommendations
on cleaning and maintenance of the premises which can There are no specific tax reliefs on payment or collection
be found at https://www.chp.gov.hk/en/resources/346/ of rent instalments.
index.html.
However, for the four quarters of 2020-2021, the rates
Are there any rent suspension measures and/or of domestic properties are waived, subject to a
stay of recourses and actions (including eviction) ceiling of HKD1,500 per quarter, while the rates of
or any government support initiatives, such as a non-domestic properties are waived subject to a ceiling
furloughed building grant scheme? When rent of HKD5,000 per quarter in the first two quarters and
suspension measures are available, what is the HKD1,500 per quarter for the remaining two quarters
usual payment mechanism and timing agreed to by (as announced in the 2020-21 Budget).
the parties?
There are no general rent suspension measures Are there any credit facilities in place to mitigate
applicable to all tenants. However, the government loss of income for landlords?
of Hong Kong has provided some rental suspension or There are no official credit facilities offered to landlords
rental concession to specific groups of tenants: to mitigate the loss of income.
• tenants and start-ups at the Hong Kong Science The Hong Kong Monetary Authority (“HKMA”)
Park, industrial estates and Cyberport would have a (the regulator of banks and money lending institutions
6-month rental waiver (effective as of 1 April 2020); in Hong Kong) introduced measures to increase the
banking sector’s liquidity to support local economic
• cruise lines and cruise terminal tenants would have
activities. These measures include obtaining US dollars
a fee and rental reduction for a period of 6 months
through repo transactions with the U.S. Federal Reserve
(as announced in the 2020-21 Budget);
for lending to local banks, clarifying aspects of the
• short-term tenancies tenants and holders of waivers HKMA’s Liquidity Facilities Framework to make it
for varying the terms of land grants under the easier to use by banks, and further explaining HKMA’s
Lands Department (such as catering facilities, shops, supervisory expectations on liquidity regulatory
workshops, public fee-paying carparks, welfare requirements so as to encourage banks to deploy
facilities, depots for public transport operators, their liquidity buffers more flexibly to support lending
public utilities, petrol filling stations, driving schools, and other business activities. Also, the current level of
advertising facilities) would have a 75% rental regulatory reserves will be reduced by half to release
concession (from April to September 2020); if such a total of HKD200 billion of lending capacity, providing
tenants and waiver holders are ordered to close or banks with more room on their balance sheets to
have chosen to close due to the government’s closure cater for future financing needs. (As announced by the
orders or other restrictions for safeguarding public HKMA on 3 April 2020.)
health, they may apply to the Lands Department
for full rental or fee concession for the duration of Each bank has introduced its own measures including
the closure; providing loans and/or other credit facilities, details of
which are set out in each of their websites.
• tenants of EcoPark, country parks and Hong Kong
Wetland Park have a rental concession of 75% from
April to September 2020 (increased from 50%
from October 2019 to March 2020).
8DLAPIPER.COM
Is there any relief from loan repayments/ For execution of documents, while electronic signatures
enforcement of loans secured against properties? and electronic execution of documents are recognised
There is no relief from loan repayments/enforcement of in a variety of contexts under the Electronic Transactions
loans secured against properties. Ordinance (Cap. 553), electronic execution is not
available and electronic signatures are not valid for
However, the HKMA and the Banking Sector SME executing any instrument which is required to be
Lending Coordination Mechanism launched a stamped or endorsed under the Stamp Duty Ordinance
Pre-approved Principal Payment Holiday Scheme for (Cap. 117), any deed, conveyance or other document or
all corporate customers that have an annual sales instrument in writing required to be filed to the Land
turnover of HKD800 million or less and that have no Registry under Land Registration Ordinance (Cap. 128),
outstanding loan payments overdue for more than any assignment, mortgage or legal charge within the
30 days. Under this scheme, all loan principal payments meaning of Conveyancing and Property Ordinance
of eligible customers falling due within a 6-month (Cap. 219) or other contract relating to or effecting the
period between 1 May 2020 and 31 October 2020 will disposition of immovable property or an interest in
be pre-approved for deferment. Principal payments immovable property.
of loans (including revolving facilities) will generally be
deferred by 6 months, whereas trade facilities, given Are contractors who were carrying out works within
their short-term nature, will be deferred by 3 months. the premises obliged to resume them? Can building
(As announced by the HKMA on 17 April 2020). sites reopen after they have been closed down? Are
there any specific provisions in relation to certain
Although not law, Authorised Institutions have asset classes authorising continuation/resumption
introduced temporary relief for their customers of works (e.g. healthcare structures)?
which include principal ‘holidays’ for residential and There was no mandatory ceasing of carrying out works
commercial mortgages, reduction of fees for credit in premises, building sites or any other kind of property.
cards and proposed restructuring of corporate loans The arrangements on carrying out works would be
through agreed repayment schedules. Each Authorised provided under the relevant contract. Contractors and
Institution has introduced their own measures which are employers may agree to make special arrangements in
available on their respective websites. relation to carrying out works as they deem fit.
Are public services necessary to complete the sale, Are there remedies or contractual arrangements
acquisition or other operation of real estate assets available to address impossibility or delay for a
or companies or to establish the right to open for party to handover premises to another which are/
business (planning authorities, notary public, Land were to be constructed or refurbished, or for such
Registry, Companies’ Registry, etc.)? other party to take over those premises?
As of 8 May 2020, the Buildings Department, the Lands Force majeure
Department, the Planning Department, the Land
Depending on the specific contract involved, the duty to
Registry, the Town Planning Board, the Companies
handover premises (which may or may not be required
Registry, the Inland Revenue Department and the
to be in a particular state) or to take over the premises
Stamp Office are open for business1. Details of special
may be suspended by an operation of a force majeure
arrangements, if any, may be found on the respective
clause if the impossibility or delay is attributed to a
websites of these bodies.
force majeure event under such clause.
Are there any specific processes or protocols
There is no statutory or common law definition of
available to consummate real estate operations
force majeure, and Hong Kong law does not imply the
enabling them to comply with any required social
concept of force majeure into commercial contracts.
distancing (e.g. electronic signature, etc.)?
Parties may include a force majeure clause in their
There are no specific processes or protocols available
contract with their own definition of what would
to consummate real estate operations to enable
constitute a force majeure event. Such clauses are
compliance with social distancing rules.
enforceable provided that they are not uncertain in their
1 https://www.info.gov.hk/gia/general/202004/29/P2020042900180.htm; https://www.info.gov.hk/gia/general/202004/29/P2020042900540.htm;
https://www.cr.gov.hk/en/publications/news-press/press/20200429.htm; https://www.ird.gov.hk/eng/ppr/archives/20042902.htm
9HONG KONG BACK TO BUSINESS GUIDE
terms. The force majeure clauses must be construed in Given that the hurdle of invoking the doctrine of
each case with due regard to the nature and general frustration is high, that COVID-19 has only been a recent
terms of the contract and, in particular, with regard to issue, and that Hong Kong did not prohibit construction
the precise words of the clause. and/or refurbishment to be carried out, unless there are
more drastic events preventing the performance of the
In general, even where there is such a clause in the relevant contract, it is unlikely that the doctrine
relevant contract, a party may not be able to invoke of frustration would apply.
the force majeure clause by reason of the COVID-19
pandemic, as words such as “pandemic” or “epidemic” Has the duration of validity of administrative
in the force majeure clause are required for such an authorisations pertaining to development/
event to be covered. Detailed analysis of the specific construction of real estate assets (in particular
contract is required to determine whether the force planning authorisations) been extended?
majeure clause could be applied with regards to the The Lands Department will offer extension of the period
COVID-19 pandemic. to complete development projects according to the
relevant building covenant under a government lease
Frustration at nil premium for up to 6 months for all leases with
building covenants that has not yet been discharged as
If the handover of premises or the taking over of
at 8 April 2020.
premises is made impossible due to the COVID-19
pandemic, a party may rely on the doctrine of frustration
Is the use of disclaimers for visitors or others
to discharge its duties under the contract.
coming on to the site of business useful for limiting
potential future COVID-19 claims?
Hong Kong law recognises the doctrine of frustration,
A disclaimer itself cannot limit potential future
but it is practically difficult to demonstrate that a
COVID-19 claims.
contract has been frustrated. The doctrine applies where
a party is prevented from performing its obligations
Pursuant to the Control of Exemption Clauses
due to a supervening event and such event makes
Ordinance (Cap. 71), a person cannot by reference to a
performance physically or commercially impossible
notice (such as a disclaimer) given to persons exclude
or the event has rendered further performance of the
or restrict his business liability for death or personal
contract so radically or fundamentally different from
injury resulting from negligence. “Personal injury”
that originally contemplated, such that the party may
includes any disease and any impairment of physical or
be discharged from its obligations under the contract.
mental condition, which would include being infected
with COVID-19.
Note, however, that where the parties have made other
provisions, such as a force majeure clause, to apply to a
That being said, duty of care owed to a visitor or others
supervening effect, the doctrine of frustration may have
coming on the site of a business is a duty to take
no application because such event may no longer be
such care as in all the circumstances of the case as is
said to radically alter the basis or nature of the contract.
reasonable to see that the visitor will be reasonably
However, these clauses will be construed strictly and
safe in using the premises for the purposes for which
if a force majeure clause is not deemed to apply, then
he is invited or permitted by the occupier to be there.
the application of the doctrine of frustration will not
If the site of business follows local governmental rules/
be excluded.
guidelines that are in force and adopt all mandatory/
recommended COVID-19 preventive measures, coupled
Much would depend on how the force majeure clause
with a disclaimer notice, it can be strong evidence that
(if any) is worded to determine if the doctrine of
the business fulfilled their duty of care to the visitor.
frustration has been excluded.
Even if the doctrine of frustration is not excluded,
the mere change in the profitability of a contract or an
increase of the burden upon a party to a contract is not
enough to discharge a party from the performance of
the contract.
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Navigating the supply chain in a distressed market: The doctrine of frustration is an established part
a. How can goods suppliers mitigate risk exposure of common law. A contract is frustrated where an
to prevent insolvency? event has happened which makes it impossible to
carry out such obligations or makes it only possible
As a practical matter, suppliers should examine existing
to carry out the obligations in a way that is very different
credit terms and consider whether to reduce the period
from what was originally contemplated. In such cases,
of credit.
the contract will be at an end and the parties discharged
from any further obligations.
Suppliers should ensure that the contractual terms
permit them to apply set-off of credit balances (if any)
Going back to the above example, if Party A relies on the
against any indebtedness outstanding.
doctrine of frustration, then it would generally claim that
the distribution contract had come to an end at the time
Any well drafted supply contract should contain
when the frustrating event happened, namely, at the
a retention-of-title (“ROT”) clause. ROT clauses
time when the gathering restrictions were imposed.
enable the supplier to retain ownership over goods
The parties’ respective obligation under the contract
(and, in certain circumstances, the proceeds of sale)
will be not be resumed when the gathering restrictions
until the goods have been fully paid.
are lifted. Once a contract is frustrated, the parties are
discharged from the contract.
b. Can companies that rely on goods/services
suppliers take steps take to mitigate risk and
On the other hand, commercial parties may prefer
prevent insolvency?
greater contractual certainty by including express
Ensure that all goods that have been paid for and not termination rights in contracts by virtue of force
delivered are clearly marked and identified as belonging majeure clauses. Force majeure clauses operate so
to the buyer. as to excuse performance of particular contractual
obligations on the happening of certain specified events
The buyer should also ensure that the contract for sale outside the control of one or more parties and makes
includes a right to inspect the warehouse of the supplier the situation impossible for one or more parties to
to ensure that the goods are properly identified. perform their obligations under the contract (i.e. force
majeure events). It should be noted that there is no
How will legal disputes that have arisen as a result legal definition of “force majeure” and what constitutes
of COVID-19 or its effects (for instance, in relation “force majeure” is a matter of contract between the
to force majeure) be affected by restrictions being parties and the wording of the force majeure clause.
lifted and resuming business operations in whole Subject to specific wording of the force majeure clauses
or in part? concerned, performance of the contract is usually
COVID-19 may have resulted in the imposition of suspended for a short period or the duration of the
restrictions (e.g. travelling and gathering restrictions) force majeure event (“Suspension Period”). If the force
and/or cessation of business operations which may lead majeure event is prolonged or permanent then the
to legal disputes. force majeure clause may allow either party to terminate
the contract.
By way of example, one party (“Party A”) may seek
to rely on the doctrine of frustration (see below for Going back to the above example, if Party A relies on a
meaning of the doctrine of frustration) or a force force majeure clause of a distribution contract instead of
majeure clause (see below for meaning of a force the doctrine of frustration and assuming that the lifting
majeure clause) distribution contract as a result of the of the gathering restrictions occurred before the end
imposition of gathering restrictions. Legal disputes of the Suspension Period (i.e. before the termination of
may arise when the other party (“Party B”) the contract is triggered), then the parties’ performance
considers otherwise. of the distribution contract may be resumed as a result
of the lifting of the gathering restrictions. The effect to
11HONG KONG BACK TO BUSINESS GUIDE
the parties’ performance of the distribution contract (if Special attention should be given to the following areas:
any) will be subject to the specific wording of the force
• Review the relevant clauses under the contracts,
majeure clause concerned. In such circumstances, the
such as:
dynamics of the legal disputes will likely be affected
while its extent will very much depend on the facts of • governing law – you should check the governing
each case. law of the relevant contract, and the jurisdiction(s)
where the obligations are to be performed (especially
How should you manage those disputes once regarding any statutory or administrative restrictions
COVID-19 restrictions are lifted? regarding production, export/import and travel bans);
First, we recommend that you review your existing
• force majeure events – you should review the relevant
contracts to identify the force majeure clause, consider
contracts to check (i) whether there is any force
whether it applies as a result of the imposition of
majeure clause; (ii) if there is one, whether its wording
restrictions and if yes, the extent of its application.
is sufficient to cover the outbreak of COVID-19 and
If your existing contracts do not include a force majeure
any restrictions imposed by government authorities
clause, then you may consider whether the doctrine of
as a result; (iii) if it is sufficient, whether any notification
frustration applies the imposition of restrictions and
and timing requirements for reporting the event are
if yes, the extent of its application.
to be complied with upon invoking the clause; and
(iv) the consequences of the force majeure event;
Second, we recommend that you identify and
implement measures which can mitigate any potential • Material adverse effect – parties may be entitled
consequences (in particular, any potential effects to the terminate the contract if there is an event that has
parties’ performance of your existing contracts) arising material adverse effect; and
from the lifting of restrictions.
• Variations – amendments agreed due to COVID-19
outbreak may need to be made in accordance with
Third, we recommend that you follow closely to the
any contract variations clause (e.g. in writing).
developments of the imposition and lifting of restrictions
so that appropriate measures can be implemented at a • Assess how the performance of the relevant contract
suitable time once the circumstances change. is affected by COVID-19, and whether or not any steps
should be taken if it is desirable and legally feasible to
Fourth, we recommend that you review the dispute terminate or vary the contract. Inaction for a prolonged
resolution clause in your existing contracts and period may be viewed as a waiver, and you should
develop a commercial strategy to try to resolve legal therefore start planning a roadmap as soon as possible.
disputes that have arisen or may arise as a result of the
• Consider whether you or your counterparties are
imposition of restrictions and the subsequent lifting
required to take and have taken steps to mitigate the
of restrictions.
impact of CVOID-19. For example:-
Fifth, if the parties want to continue working together • where production halt has not been mandated in the
in the future and the shared objective is to resume applicable jurisdiction, what the affected party could
performance as soon as possible, in circumstances have done to continue production during COVID-19
where no party is at fault, we recommend that the (e.g. protective measures, redeploying staff, recruiting
parties try to communicate and understand more about part-time staff).
the situations of both sides. Collaboration rather than
• the affected party could have switched suppliers (e.g.
confronted legal battles may be the way forward.
used an alternative transportation company that is still
in operation).
What should you do when restrictions are lifted if
you have suffered loss under a contract as a result • Retain documentary evidence of steps you or your
of COVID-19 or the restrictions, but have not yet counterparties have taken, the reasons surrounding
taken legal action in relation to that loss? those steps and steps taken to mitigate losses.
If you have not taken any steps to review your contracts,
• If the contract contains notice provision on claims, notice
and especially your rights and obligations under
should be issued on timely basis and in accordance with
the contracts, we would recommend that you do
the requirements of the contract.
so immediately.
12DLAPIPER.COM
In our experience, very often supply chain contracts In the event that the amendments, on their face, would
would involve parties from different jurisdictions with benefit only one contracting party but not the other, it is
multiple places of performance. This may lead to advisable to record the amendments by way of a deed
complex legal issues concerning conflict of laws. to avoid any arguments of a lack of consideration.
We recommend that you consult a lawyer if that
is the case. If any amendment has been agreed by the parties, it is
also advisable that the parties review the entire contract
Is there any risk of mass claims being brought to ensure that the amended clauses are compatible with
against your business? If so, how would such claims the rest of the contract.
be brought? Are third party funders able to fund
such claims? Any return to normal will likely not be as immediate
At the time of writing, the risk of mass claims in as the impact of COVID-19 when it started
Hong Kong is low, if not nil. (e.g, sales/orders will take time to ramp up,
raw materials will take time to flow through supply
Whilst Hong Kong's common law legal system is well chains, etc.) How can companies best manage this
established, its class actions framework remains rather return through existing contracts?
largely undeveloped. Unlike various other jurisdictions First, we recommend that you review your existing
with similarly advanced legal systems, Hong Kong contracts to identify your rights and obligations
currently does not have specific legal regime governing contained therein, consider whether they have
class actions or a set of procedures providing for been affected by COVID-19 and if yes, the extent
separate forms of class action litigation, other than the of the impacts.
only type of collective actions which exists in the form
of representative proceedings under Order 15 Rule 12 Second, we recommend that you consider moving
of the Rules of the High Court (Cap. 4A). to shorter term contracts (e.g. 3-6 months) with your
customers and/or suppliers/providers to provide greater
As of today, maintenance and champerty still stand flexibility for adjusting the pricing decision according to
as criminal offences and torts in Hong Kong and the then supply/demand situation in the market.
would render a litigation funding agreement largely
unenforceable in Hong Kong (except for claims brought Third, we recommend that you identify alternatives
by insolvent companies under limited circumstances, in the supply chain and consider including terms into
and for arbitration proceedings). Third party funding is contracts that can make use of such alternatives at time
only permissible in arbitration but not court litigation of disruption. For example, a supplier/provider may
in Hong Kong. consider including provisions which give more leeway to
the date of delivery should anything happens that delays
What should companies do about recording the production and delivery of goods. On the other
contractually or otherwise any of the changes put in hand, a customer may consider including provisions that
place during the COVID-19 lockdown period? can allow it to use an alternative supplier at time when
Parties to a contract may agree to vary contract terms, the supplier/provider’s goods cannot be supplied as the
but the variation must be recorded in accordance with production is too slow to meet demand, or when goods
the terms of the relevant contract. For example, there are unable to reach the designated destination due to
may be a clause specifying that amendments are only border controls.
valid if agreed in writing by authorised representatives
of the parties. Fourth, we recommend that you enhance
communication and/or consider including terms to
If the contract does not specify any requirement for that effect into contracts with your customers and/or
amendments, we would still recommend that the suppliers/providers for the purpose of better managing
parties record in writing (and signed by authorised the impacts of disruption together and minimising the
representatives) any amendment terms as agreed, risks of disputes.
so as to avoid any potential disputes in the future.
Whilst oral agreements are generally enforceable in
Hong Kong, disputes often arise as to issues such as
(a) the existence of such oral agreement, and (b) what
has been agreed.
13HONG KONG BACK TO BUSINESS GUIDE
What additional protections or changes to existing That being the case, arguably it would be better for
provisions (e.g. force majeure) should companies parties to include a “force majeure” clause so as to agree
put into any new supply arrangements? in advance the consequences of the occurrence of such
Some contractual provisions may set out the an event, e.g. whether the time for a party to perform
consequences in case an unforeseen event occurs. its obligations is to be extended, or the parties are
These are usually referred to as “force majeure” clauses. discharged from further performance.
Such clauses would typically contain the How the “force majeure” clause is to be drafted would
following elements: depend on whether you are a supplier/provider or a
customer under the contract.
• a range of non-exhaustive events that would be
classified as “force majeure” events;
For example, if you are a supplier/provider and you
• under what circumstances would the “force majeure” foresee that the occurrence of a pandemic may
clause be triggered; make performance more difficult but not impossible
(e.g. it would be more difficult to source raw material,
• how the parties may trigger the operation of this
and also at a much higher price), then the clause could
clause, including any notice requirements; and
be drafted in a way that the “force majeure” clause can
• the consequences of the occurrence of such events. be triggered in the event of a pandemic, which renders
performance (i.e. the supply of goods) delayed.
No matter if you are signing a contract as a customer
or a supplier/provider, before you enter into a new On the other hand, if you are a customer, you should
contract, it is important that you review the draft probably advocate for a more limited scope, so that the
contract to check: clause would only be triggered if, for example,
the supplier/provider is unable to perform in the event
• whether there is a “force majeure” clause; of a pandemic. This would make it much harder for the
supplier/provider to take advantage of the clause.
• whether the non-exhaustive examples of “force
majeure” events or the definition of a “force majeure”
As for the consequences of the occurrence of a
event would likely cover epidemics/pandemics
“force majeure” event, to allow for maximum flexibility,
(i.e. including COVID-19).
a customer may want to insert an option of terminating
the contract if performance of the contract by the
If the contract does not contain a force majeure clause,
supplier/provider (e.g. the supply of goods) has been
in the event of an epidemic/pandemic like COVID-19,
delayed for over a certain period of time due to the
the contract may nonetheless be discharged under
“force majeure” event (e.g. COVID-19).
the common law doctrine of frustration, if the court
is convinced that the event (e.g. the COVID-19) would
render performance of the contract physically or
commercially impossible, or radically different from what
the parties have agreed.
14DLAPIPER.COM
Corporate governance, disclosure
and risk management
What are the key topics that boards should focus Should Boards adopt particular governance
on to ensure proper discharge of their duties practices in this context?
as directors, as their businesses return to work In the present economic climate where there are
following a lockdown? widespread liquidity concerns, directors should
All directors have a duty to act in the best interests of pay close attention to whether cost control measures
the company. Directors should examine the financial are in place and whether the company’s liabilities are
condition of the company and whether it can continue at sustainable levels. When a company is unable to pay
to trade as a going concern. See responses to “What are its debts, the directors must focus on the best interests
the repercussions for continuing to operate your of creditors.
company?” for more details on what directors should
consider if the company is facing liquidity concerns. The Board should also ensure that management
frequently prepares cash flow projections and budget
If the company is listed on an exchange, the company plans; and carries out regular stress-testing on
should consider if there have been any significant the same. The Board should also be mindful that the
developments during the lockdown period that have company does not incur new credit unless there is a
a material impact on its business (e.g. termination of reasonable expectation that it will be repaid.
key contracts). These may constitute ‘inside information’
that have to be announced to the public, unless a
‘safe harbour’ exception applies.
From an operational perspective, directors also consider
inter alia:
• whether the lockdown has impacted its ability to
fulfil its contractual obligations to its customers and
suppliers; and
• whether any policies of the company have to be
revised to reflect Government regulations such as
social distancing policies.HONG KONG BACK TO BUSINESS GUIDE
Finance, restructuring
and transactions
Your company is facing liquidity issues as a result Notwithstanding, where the directors have failed to have
of COVID-19: regard to the company’s financial status and caused the
a. What are the repercussions for continuing to company to enter into certain transactions in breach
operate your company? of their fiduciary duties and losses were incurred,
the directors can be liable for such losses! See Moulin
All directors have a duty to act in the best interests of
Global Eyecare Holdings Limited (In Liquidation) & Ors
the company. When a company is unable to pay its
v Olivia Lee Sin Mei [2019] HKCU 2763.
debts as they fall due the directors must continue to act
in the best interests of the company but the paramount
b. Do you have to file for insolvency if your company
consideration for the directors is the best interests of
cannot pay all its debts as they fall due?
creditors taken as a whole.
Unlike certain civil jurisdictions, strictly, there is no
The transition from solvent ‘going concern’ to insolvent obligation to commence a liquidation because of an
entity is called the twilight zone. Directors operating in illiquidity problem. However, given the critical absence of
the twilight zone need to be prudent – it is important to any formal rescue regime in Hong Kong, the underlying
appoint an experienced professional team and ensure legal regime effectively causes companies to file unless:
that all financial information about the business is
• the company extends the terms of their outstanding
current, accurate and reviewed frequently.
obligations by agreement;
Hong Kong’s insolvency laws are outdated; there is no • seeks to effect a standstill or forbearance with
equivalent of ‘wrongful trading’ provisions in Singapore/ creditors (may be, in due course, a Restructuring
UK or similar ‘insolvent trading’ provisions in Australia. Support Agreement (“RSA”);
However, directors may be subject to both civil and
• seeks to effect a Scheme of Arrangement;
criminal penalties and possibly a disqualification order
if they engage in fraudulent trading (note that the civil • seeks to appoint provisional liquidators in Hong Kong
and criminal penalties apply to any persons who were (or so called ‘soft touch’ provisional liquidators
knowingly parties to the fraudulent trading, rather in offshore jurisdictions such as Cayman Islands
than being limited to directors). Fraudulent trading or BVI); or
arises where any business of the company has been
• seeks to use ‘insolvency tourism’ to obtain protection
carried on with the intent to defraud creditors of the
in another jurisdiction e.g. under Chapter 11 of the
company or creditors of any other person or for any
US Bankruptcy Code.
fraudulent purpose.
In practical terms, fraudulent trading is likely only to
The civil penalty is that the Court may declare that any
arise where new liabilities have been assumed by the
persons who were knowingly parties to the fraudulent
company and the directors then took (perhaps, an
carrying on of the business to be personally liable,
improper) step which ensured those liabilities could not
without limit, for all or any of the debts or other
be repaid.
liabilities of the company.
Directors need to act prudently in conjunction with
This civil penalty is only applicable if the fraudulent
an experienced professional team. The reality is that
trading becomes apparent in the course of the
outdated legalisation in Hong Kong makes it difficult
winding-up/liquidation of the company.
for directors to navigate the way forward in these
complex modern times on their own.
The criminal penalty may consist of a fine and/or a
jail sentence of up to 5 years. There is no limit on the
fine. The criminal penalty may apply whether or not
the company is being wound up.
16DLAPIPER.COM
c. Are there any steps that should be taken to How will funding a return to business, including
minimise the risk of your actions as director taking on additional indebtedness, impact on your
being challenged? financial or other covenants?
Businesses should consider how a fall in revenue due to
The Hong Kong regime revolves around directors acting the COVID-19 outbreak may have impacted their ability
“reasonably” in the prevailing circumstances taking into to comply with any financial covenants in their finance
account any special knowledge/skill set the individual documentation. Depending on the businesses’ credit
director may have. history with their lenders, lenders may be receptive to a
covenant waiver for the March to May testing dates.
In the current climate, directors may ultimately be
afforded more latitude. However, there are a number Moving forward, businesses should also consider
of steps directors may take in order to try and protect whether a wavier, or indeed full covenant re-set, will be
themselves from future challenge and personal liability needed for future test dates (and then also consider
(e.g. misfeasance claims). These are: when would be an appropriate time to try to determine
what those re-set covenants should be). Particular
• hold regular board meetings especially given how
considerations include (i) the decrease in revenue/
fast matters are moving/developing and ensure
EBITDA over the period where the business was
decisions are minuted with reference to all factors
disrupted, (ii) any likely tapered increase in revenue/
considered/taken into account;
EBITDA as business operations resume (iii) costs for
• ensure that all directors have full information from the restarting the business and (iv) payment of any deferred
business (i.e. all accounts and financial statements, payments (e.g. rental payments, utility charges).
key contracts, pipeline);
Are there any remedies such as equity cure or
• monitor compliance with financial covenants in
margin ratchets that you should be checking on to
finance documentation and, if non-compliant, procure
provide liquidity to prevent a default or improve
that the company informs the relevant lender;
their financial position?
• consider whether there are any ways of delaying Equity cure and margin ratchet provisions are not
incurrence of new credit or minimising losses (e.g. common in term loan or revolving credit facility
temporarily closing down non-core operations); and documentation. In the case of the former, debtors
may rely on an equity injection to maintain financial
• seek professional advice from financial advisors
covenants. For the latter, debtors should note the exact
and lawyers.
trigger conditions for margin increase.
d. Will your company be wound up if you fail to
What practicalities do companies need to consider
make payments when due?
in relation to audit requirements?
As a matter of law, unpaid creditors are entitled to Businesses should take into account whether
a winding-up order (unless the debt is disputed on social-distancing/work-from-home measures will
bona fide substantial grounds) where a company is hamper the audit process, and constantly engage
unable to pay its debts as they fall due taking into with lenders on the expected timetable for when
account all contingent and prospective liabilities. the audited financial statements can be published.
However, once a winding-up petition is presented to the In this regard, it should be noted that the Hong Kong
Court, no winding-up order will be made immediately. Stock Exchange has allowed listed companies to delay
Unless there is a dispute or the Court exercises its the publication of certain audited financial statements
discretion to adjourn, there is generally a period of (which were due by 31 March 2020), provided the
6 weeks between the presentation of the petition and companies published a preliminary unaudited results
the winding-up order being made. announcement, or management accounts.
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