Debt Collection in Hong Kong

In Hong Kong, there is no minimum amount for starting court proceedings.

Creditors should consider whether it would be cost effective to start court proceedings, taking in consideration:

• the cost of legal representation which is usually billed on hourly rate in Hong Kong and will likely involve both solicitor’s and barrister’s fees;
• success fees are forbidden in Hong Kong for all litigations and imposing such fee arrangement constitutes to the crime of champerty and maintenance as per Winnie Lo v HKSAR [2012] 15 HKCFAR 16;
• the investment from the creditor and/or its team to work with the legal team, including the preparation of discovery (i.e., all documents relevant to the claim) and come to Hong Kong for trial (evidence is expected to be given in person);
• the payment of a security for costs (i.e., a payment into court ordered by the court at the request of the defendant to guarantee the payment of the legal costs of the defendant in the event the claim is unsuccessful, or the claimant has to pay the defendant’s costs on any other ground) that will be unavoidable for a foreign claimant;
• the risk to be ordered to pay the defendant’s legal costs in the event the claim is unsuccessful, or the court decides it would be fair considering the claimant’s behaviour during the proceedings.

The amount due determines the court before which proceedings should be initiated. The table below gives an overview of the civil courts competences as well as the rules regarding representation (i.e., whether litigants are allowed or obligated to be represented by lawyers or they must appear in-person).

These are some key features of civil courts in Hong Kong:

• small claims tribunal are competent for claims of HK$75,000 or less (about US$9,500 or less)
• the District Court is competent for claims of an amount between HK$75,001 and HK$3,000,000 (more than US$9,500 but less than US$380,000)
• High Court (the court of First Instance) is competent for claims above the amount of HK$3,000,000 (more than US$380,000).

For small claims tribunal, representation is in-person only, while for District Court and High Court trials representation shall be made by Barristers and solicitor-advocates. For administrative hearings (such as extension of time) both barristers and solicitors may represent their respective parties.

The legislation in Hong Kong does not require creditors to issue warning letters for debt collection. It is nevertheless highly recommended to do so as the absence of warning letter may have expensive consequences in the event of court proceedings if the court finds that legal costs may have been avoided by doing so such as in the case of Pfeiffer Gmbh v Cheung Hay Kit trading as Sun Wai Construction [2014] HKCU 2498 where the court did not award all the costs to the plaintiff that succeeded in the claim because of the conduct of the plaintiff to insist on pursuing legal action.

Hong Kong legislation provides that parties pre-action conduct is a factor when the court assesses how much costs the creditor may be entitled to if the claim is successful, or how much costs the creditor has to pay if the claim is unsuccessful.

The list of best practices below shall be adapted to the creditor’s business, ideally in the form of internal procedures subject to periodical review.

Credit control

• “know your client” checks at the outset of the commercial relationship and on a regular basis and/or prior to accepting unusually significant orders;
• set a threshold of trade debt and hold on the provision of services or goods when the threshold is met subject to payment of outstanding debts: this can avoid the trade debt becoming too large and increase the client’s risk;
• escalate matters internally quickly internally when a trade debt is overdue by having the finance or legal department sending a formal letter.

Documentation

Keep records of emails and all documents regarding each order: from the final and agreed version of the purchase order to the evidence of delivery, including invoices issued and payments made.

Factoring

Factoring is a type of finance in which a business would sell its accounts receivable (invoices) to a third party to meet its short-term liquidity needs. Under the transaction between both parties, the factor would pay the amount due on the invoices minus its commission or fees.

Factoring is expensive in Hong Kong and only available subject to minimum invoice amounts and for the larger clients ‘accounts.

Trade credit insurance

According to the Association of British Insurers, trade credit insurance protects the insured from non-payment of account receivables in the event a customer cannot pay. Credit insurance is available in Hong Kong, both from private companies (Allianz, Coface, Marsh etc.) as well as The Hong Kong Export Credit Insurance Corporation Ordinance which is a semi-governmental body.

Retention of title clause

A retention of title clause provides the goods belong to the seller until the seller has received full payment for the goods supplied. The clause should be stated clearly in standard terms of sale and commercial documents, especially the invoice – in a visible manner.

All monies clause

An all-monies clause reserves the seller’s ownership of the goods supplied until the buyer has paid all sums due to the seller (and not only the price for the goods).

Cash on delivery payment terms

Cash on delivery payment terms are effective but cause an administrative burden as it requires a lot of trustworthy manpower to collect the cash for each delivery and will be difficult when there is a voluminous amount of orders. It may also reduce the competitiveness of the seller’s business if other competitors are more flexible on payment terms.

There are typically two types of procedures for international debt collection in Hong Kong, depending on whether the creditor obtained a judgment oversea or not.

First scenario: the creditor has not yet obtained a judgment outside Hong Kong for the debt

The creditor may consider instructing a local solicitor to proceed with the steps below:

• collect information on the debtor and check whether it is not being wound-up;
• review the documentation for the debt and the history of the debt collection (correspondence and partial payments if any);
• issue a letter of demand (i.e., a warning letter).

In the absence of settlement or agreement on settlement terms following the letter of demand, the creditor will have to decide how to pursue the debt collection efforts:

• continue with further letter(s) of demand;
• issue a statutory demand, i.e., a demand for payment in a form prescribed by Hong Kong law which has the legal consequence that the debtor’s failure to pay a debt for a minimum amount of HK$10,000 (about US$1,200) within 21 days is deemed insolvent;
• commence court proceedings with the relevant court (see first and second questions for details).

When a debtor is deemed insolvent, absent payment of a statutory demand, the creditor that issued the statutory demand is at liberty to file a petition in court for the winding-up of the debtor. The winding-up petition shall be prepared by a local solicitor.

A foreign creditor may seek a local solicitors’ firm in Hong Kong after exhausting all internal avenues such as reminder letters and emails and letters of demand.

Second scenario: the creditor has obtained a judgment outside Hong Kong for the debt

Any foreign judgment shall be registered by the Hong Kong court prior to being capable of enforcement. The registration is a court proceeding that shall be conducted by a local solicitor. Registration is subject to conditions that the foreign judgment:

• has been made by a foreign jurisdiction which has an agreement with Hong Kong for reciprocal recognition of judgments;
• is for money; and
• is enforceable and final (i.e., no appeal is possible).

An apostilled copy of the judgment shall be provided (for judgments made in jurisdictions member of the Hague Convention on apostille), or a legalised copy.

With reference to the scenaris considered in the question above:

First scenario: the creditor has not yet obtained a judgment outside Hong Kong for the debt

The creditor should provide all relevant information to prepare a letter of demand and possibly issue a winding-up petition or commence court proceedings, including:

• information on the debtor;
• documentation for the debt and the history of the debt collection: correspondence and partial payments if any.

Second scenario: the creditor has obtained a judgment outside Hong Kong for the debt

The creditor should be prepared to provide evidence that conditions for the registration of the foreign judgment in Hong Kong are met, including:

• evidence of service of the claim (especially if the foreign judgment was made by default);
• an apostilled copy of the judgment for judgments made in jurisdictions member of the Hague Convention on apostille, or a legalised copy;
• evidence of service of the judgment; and
• evidence that no appeal has been filed.

Letters of demand issued by a local solicitor in Hong Kong are usually taken seriously by debtors and answered by another local solicitor instructed by the debtor. The solicitors will usually run two threads of correspondence in parallel:

• official letters with parties’ arguments that may be presented in court if court proceedings should be commenced; and
• “without prejudice” or “without prejudice save as to costs” letters with settlement offers which shall be made in good faith and represent genuine attempts to settle the dispute.

The creditor and the debtor may also agree to attempt mediation – assisted or not by their respective solicitors. Mediation as an alternative dispute resolution method is promoted in Hong Kong by the Department of Justice which has launched a “mediation first” campaign since May 2009.

Interim measures before any court proceedings are commenced are notoriously difficult to obtain before the Hong Kong courts, except in the event where similar interim measures have been obtained already before foreign jurisdictions.

Once court proceedings are commenced, interim measures remain challenging to obtain and lead to considerable increase in legal costs.

Accountancy rules applicable to the foreign creditor apply to the write-off bad debt. Where the debtor is being wound-up, the winding-up judgment shall support the write-off. Otherwise, the letter of demand and further correspondence for the debt collection shall evidence the unsuccessful attempts to collect the debt and the decision to consider it is irrecoverable.