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Asia - An international perspective – Views on key issues from around the globe

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  • Asia

    01-09-2020

    Supply chain disruption
    Insolvency and restructuring
    Health and Safety issues
    Restrictive covenant enforcement
    Employment tribunals and employee relations
    Impact on your insurance
    Increasing risk of fraud
    Class actions
    Construction issues
    Real estate
    Operational resilience

    Supply chain disruption

    China went into and emerged from lockdown more quickly than and some considerable time before many jurisdictions elsewhere around the globe. This has meant that the disruption to its manufacturing base was less prolonged and happened earlier than in many other jurisdictions. However, many of the same supply chain issues have affected Hong Kong, China and Asia generally as they have affected the rest of the world.

    Hong Kong is a common law jurisdiction and closely follows English law in the application of the concepts of force majeure and frustration. However, China is a civil code jurisdiction and force majeure is a codified concept under Chinese law. Relief may therefore be available to a party in default even if the relevant force majeure event and its consequences are not specified in the contract. The terms of the contract only define whether a specified event, if it takes place, will constitute force majeure. In addition, the China Council for the Promotion of International Trade has been offering force majeure “shield” certificates to China-based companies which are seeking to defend an inevitable suspension of performance under their contractual obligations as a result of the COVID-19 outbreak.

    The certificates are not a definitive ruling which absolves a Chinese company holding one of all contractual obligations. Rather, the certificates serve an evidentiary purpose which will ultimately be considered amongst all relevant factors by the court or arbitration tribunal of competent jurisdiction on a case-by-case basis. To date there is only limited anecdotal evidence both of the availability and effectiveness of these certificates, but it does not appear that they are being widely deployed by Chinese companies looking to avoid liability.

    Finally, parties may also seek to rely on the principle of “change in circumstances” under Chinese law. A claim in force majeure requires a total frustration of the purpose of a contract whereas a “change in circumstances” means that the continued performance of contractual obligations will be grossly unconscionable to a party on the basis that it can only be achieved at an extremely high cost.

    Courts in China are increasingly recognizing that the two remedies identified above are equally applicable where the impact of COVID-19 amounts to a force majeure event and a “change in circumstances.”

    For more information on how force majeure and related concepts operate in Hong Kong, China and more than 15 other jurisdictions in Asia please see our Asia Pacific Guide to Force Majeure.



    Mark Hughes
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    +852 6056 6300
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    Insolvency and restructuring

    China

    China’s insolvency legal framework is set out in the 2006 PRC Enterprise Bankruptcy Law. The PRC Supreme People’s Court has so far promulgated three judicial interpretations on the 2006 PRC Enterprise Bankruptcy Law, which all courts in China should follow. China’s main insolvency-related regimes include liquidation, reorganization (moratorium) and conciliation.

    Although there has been no equivalent to date in China similar to the CIGA, the PRC Supreme People’s Court issued the Guiding Opinion on Several Issues Concerning the Proper Trial of Civil Cases related to COVID-19 Pandemic (II) (the “Opinion”) on 19 May 2020 which is a mandatory guideline for all courts in China. Articles 17 to 23 of the Opinion provide guidelines for how the courts should deal with insolvency-related cases during the COVID-19 pandemic. Highlights of the Opinion are set out below:

    • if a company is unable to repay its debts due to COVID-19 or COVID-19 prevention and control measures, and a creditor petitions for bankruptcy, the court shall actively guide the company and the creditor to negotiate with each other to eliminate the cause of the bankruptcy petition by measures such as allowing payment instalments, extending time limits for performance of contractual obligations and adjusting the contractual price
    • when reviewing whether a company meets the conditions for bankruptcy, the court shall take into consideration whether the company’s distress is caused by COVID-19, rather than simply deciding that a company should enter into the bankruptcy process based on its interim cash flow status and assets/ liability position during the pandemic
    • the court shall actively guide the parties to modify or extend the period for any reorganization plan or settlement agreement that has been affected by the COVID-19 pandemic and hence is unable to be performed within the intended timeframe.

    Hong Kong

    Hong Kong law is based on the English common law system and Hong Kong has the following modes for winding up:

    • compulsory liquidation by the court
    • voluntary liquidation: Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation

    Hong Kong currently does not have any statutory corporate rescue procedure.

    In March 2020, the Hong Kong Government announced a plan to revive the previously shelved Corporate Rescue Bill. Similar corporate rescue legislative proposals were considered before during previous crises in 2003 and 2009, and also in 2014, but eventually failed to be passed.

    Unlike some other common law jurisdictions, such as the UK and Singapore, no mandatory forbearance laws have been introduced in Hong Kong so far in response to the COVID-19 outbreak. However, there was a de facto forbearance due to the Hong Kong Courts’ extended closure (from 24 January 2020 till 4 May 2020) as a result of COVID-19. This effectively extended some forbearance to debtors.

    The Hong Kong Monetary Authority (the “HKMA”) has introduced a series of measures to alleviate enterprises’ debt pressure during COVID-19. For instance, on 1 May 2020, the HKMA launched the Pre-approved Principal Payment Holiday Scheme for eligible corporate customers. Under the Scheme, banks in Hong Kong will offer principal payment holidays to covered corporate borrowers on a pre-approval basis. Banks have continued to provide relief offers such as delay in repayments, extension of loan tenures or reduction of fees to keep in line with the HKMA’s initiatives.



    Kingsley Ong
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    Health and Safety issues

    Hong Kong

    The Hong Kong position is similar to the UK: the employer’s duty to maintain a reasonably safe workplace for the employee has not been altered by the COVID-19 pandemic.

    The Occupational Safety and Health Council has issued guidance on specific measures to be taken in respect of health and safety issues relating to the COVID-19 pandemic which may be found here: http://www.oshc.org.hk/eng/main/hot/infection_ctrl/.

    There has been no change in the legislation with regard to the issuance of death certificates in Hong Kong in relation to the COVID-19 pandemic or the rules on civil litigation in Hong Kong.

    China

    Starting in January this year, when the outbreak of COVID-19 pandemic had just begun to worsen in mainland China, the PRC State Council issued a series of guidelines aimed at controlling and preventing further outspread of the disease. These included workplace social distancing and work safety requirements. Fortunately, as at the time of writing, the situation in mainland China appears to have been brought more under control (save for some mini clusters of the COVID-19 virus appearing in some cities).

    The general economy and business activities are recovering closer to normal, leading to many of the above-mentioned requirements now being relaxed. Therefore, whilst measures are still being taken to avoid the emergence of a new wave of the virus, the general health and safety issues relating to the COVID-19 pandemic are now not perceived as pressing in mainland China as they are in many other jurisdictions.



    Jennifer Van Dale
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    Jack Cai
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    Restrictive covenant enforcement

    Hong Kong

    The Hong Kong position is very similar to the UK. The main difference is that there is no legislation similar to the TUPE. If the employee’s employing entity changes as a result of a business transfer, it is recommended that a new set of restrictive covenants be entered into to ensure enforceability.

    An issue which we have observed in Hong Kong is that many employers have allowed employees to work remotely from overseas locations. This may present new challenges to the geographical scope of their restrictive covenants. Before allowing employees to work remotely from overseas locations, employers should review the geographical scope of the restrictive covenants to which their employees are subject. Each employer should ensure that the scope of its employees’ respective restrictive covenants is sufficient to protect the employer’s legitimate interests.

    China

    Like Hong Kong, there is no legislation or legal concept similar to the TUPE. In mainland China, some post-termination covenants applicable to ex-employees, such as confidentiality and non-solicitation obligations, are similar to those incorporated into many employee arrangements in the UK or Hong Kong. However, there is at least one significant difference in terms of the enforceability of a non-compete obligation in mainland China. During the relevant covenant period, employers who require their ex-employees to perform their non-compete obligations must make a non-compete compensation payment to such ex-employees on a monthly basis. The practical steps considered prudent for businesses in the UK are also generally applicable to businesses in mainland China.



    Jennifer Van Dale
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    +852 9021 5236
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    Jack Cai
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    +86 189 3080 1987
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    Employment tribunals and employee relations

    Hong Kong

    In Hong Kong, the Labor Tribunal is broadly similar to the Employment Tribunal in the UK and has jurisdiction over statutory or contractual claims arising from the Employment Ordinance or the terms of the employment contract. Unlike the Employment Tribunal, legal representation is not allowed in the Hong Kong Labor Tribunal. Parties are required to make their representations in the tribunal by themselves or their employees and officers. The Hong Kong Labor Tribunal has not implemented phone or video-conferencing hearing arrangements. As a result, hearings have often been adjourned as a result of the intermittent closure of the office of the Labor Tribunal during the pandemic period. This has caused a backlog of cases and litigants in the Labor Tribunal can expect longer waiting times than usual.

    Further, the Labor Relations Division of the Labor Department usually attempts to mediate between an employer and employee to explore whether a settlement can be reached before referring the parties to file a claim in the Labor Tribunal. The closure of the Labor Department’s office due to the COVID-19 situation has caused a delay of several months in this process which has delayed the dispute resolution process.

    Hong Kong employees do not have the right to collective bargaining or collective consultation, and employees’ protection from redundancy is very limited. The Hong Kong Government has not introduced any new employment legislation to protect employees from dismissal. The Government has introduced an Employment Support Scheme for the purpose of assisting employers to pay wages. It does not, however, confer any right to any individual employees to receive the subsidy as it is structured as a payment to business owners. As a result, we do not expect a significant uptick in Labor Tribunal claims in relation to COVID-19 specific issues.

    China

    In mainland China, the Labor Dispute Arbitration Committee (“LDAC”) exercises a similar function to the Employment Tribunal in the UK.

    Between February and March this year, when the COVID-19 situation had reached its peak in mainland China, the local labor bureau and high court in many provinces issued a series of guidelines and judicial interpretations on how employment disputes relating to COVID-19 pandemic should be handled.

    The Government’s position is that disputes between employers and employees should be avoided as much as possible and the parties should try to resolve them through mediation in the first place. Now that the COVID-19 situation in Mainland China has been well contained, and the economy restored to better order, following the guidance of the Government considerable numbers of conflicts which otherwise would have escalated were resolved by way of the relevant parties reaching a settlement plan. Therefore, given the relatively stable situation, and similar to the position in Hong Kong, we do not expect a significant increase in LDAC claims pertaining to COVID-19 issues going forward.



    Jennifer Van Dale
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    +852 9021 5236
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    Jack Cai
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    +86 189 3080 1987
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    Impact on your insurance

    As is the case in England and Wales, in Hong Kong and China, businesses that hold business interruption coverage are likely to advance claims related to COVID-19 in circumstances where their business has been closed on either a mandatory or voluntary basis. Having experienced the SARS outbreak in the early 2000s, we anticipate that some insurers may be able to rely upon specific bacterial and virus exclusion clauses in their policies. COVID-19 will represent the first time such exclusion clauses are potentially tested before the Courts in Hong Kong and China.

    Businesses should therefore examine their policy wording carefully to determine whether any losses arising from COVID-19 are covered. The cause of such loss must also be carefully considered. For example, compulsory closure of business premises may receive coverage but the position is likely to be different in respect of temporary closures which are not required by the Government.

    In Hong Kong, COVID-19 presents the first significant challenge for Hong Kong’s newly established insurance regulator, the Hong Kong Insurance Authority. In response to the virus outbreak, the Insurance Authority has introduced temporary relaxations (termed temporary facilitative measures) concerning the regulation of the sale of certain types of long-term insurance products. In particular, non face-to-face methods of distributing of such products are now permitted in limited circumstances with the aim of reducing the risk of virus infection. These measures will last until 30 September 2020 or such later date as prescribed by the Insurance Authority.



    Duncan Watt
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    Increasing risk of fraud

    Our office in Hong Kong has assisted victims in Europe to track down and try to secure the return of illicit funds remitted there by fraudsters.

    Practical measures can be effective if implemented sufficiently quickly including alerting banks promptly so that there is an opportunity for funds to be frozen during transfer and/or informing law enforcement authorities in the jurisdictions to which funds may have been remitted. Again, by way of example, it is common practice promptly to inform the Hong Kong Police upon discovering that illicitly obtained funds have been transferred into a Hong Kong bank account. The Police may be able to take action to freeze the funds pending the defrauded party obtaining an injunction.



    John Siu
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    +852 9033 1561
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    Class actions

    In Hong Kong, the manner in which a class action may be brought is more limited than in England and Wales. The only mechanism for formulating a representative or ‘class action’ is through the use of Order 15, Rule 12 of the Rules of the High Court (Cap 4A). This rule permits proceedings brought by numerous people with the “same interest” in a similar manner to the CPR 19.6 regime.

    In 2012, the Law Reform Commission recommended the introduction of a more comprehensive regime for multi-party litigation, partly with respect to consumer cases. However, notwithstanding 30 meetings of a cross-sector working group that was set up to consider the Law Reform Commission’s report, no recommendations have been made to the Hong Kong Government to advance new legislation in this area. Consequently, the scope for class actions in Hong Kong remains limited and we therefore do not expect COVID-19 to result in a large number of claims of this nature. Instead, individual litigants are likely to be forced to advance claims related to COVID-19 in their own capacity.

    In China, a class action (termed a representative action under China’s Civil Procedure Law as amended in 1991) may be initiated with the consent of the court in prescribed circumstances including where (a) the subject of the action is the same or of the same category, (b) a party consists of numerous people and (c) the parties with the same interest consent to the use of a representative action. However, the PRC courts have been cautious in accepting and hearing proceedings in the form of representative actions, as reflected by the limited reported cases in the PRC since 1991.

    Recent developments have shown the PRC Government’s increasing willingness to promote representative actions. In particular, on 31 July 2020, the Supreme People’s Court promulgated the Regulations on Issues Concerning Representative Action in Securities Disputes《关于证券纠纷代表人诉讼若干问题的规定》to allow representative actions for cases involving false statements, insider trading and market manipulation of the securities market. In the context of COVID-19, this trend may see more litigants seek to resort to representative actions under the Civil Procedure Law.



    Duncan Watt
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    +852 6392 8672
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    Construction issues

    The Construction Industry Council in Hong Kong published the 2020 Major Work Plans in January 2020, just as the COVID-19 pandemic took hold in Asia, identifying “declining productivity, high construction costs, labor shortage” as the challenges faced by the construction industry.

    China meanwhile went into and emerged from COVID- 19-related lockdown more quickly and some considerable time before many countries elsewhere in Asia and around the globe. While this meant that construction and infrastructure projects continued to progress in China and abroad under the guise of China’s ‘Belt and Road Initiative’, these works were still, in some ways, dependent on sub-contractors and sub-suppliers situated in jurisdictions that had prolonged lockdowns, which caused work suspensions and disruption. Furthermore, travel restrictions have also meant that contractors have not been able to gain entry to jurisdictions where projects are being developed.



    Wesley Pang
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    +852 6295 8110
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    Real Estate

    Hong Kong

    Owing to the impact of COVID-19, it is widely predicted that there will be a short-term downturn in the Hong Kong real estate market. Unlike the UK, there is no new COVID-19 legislation in Hong Kong to assist business tenants, which means landlords and tenants have had to resort to the traditional routes to resolve tenancy disputes. Where disputes arise, landlords and tenants must turn to their respective rights and obligations under the commercial lease; for example, whether the definition of ‘force majeure’ is clear enough to include situations where there is an outbreak of an infectious or pandemic disease. Without such specific terms, business tenants wishing to terminate their leases may have few options unless they are fortunate enough to be able to rely on the doctrine of frustration, although the threshold for establishing such a case is very high.

    When negotiating rent relief in an existing lease or payment terms in a new lease, we believe more flexible rental options will emerge for landlords and tenants, including:

    • rent payment restructuring, for example higher fixed rent amounts / temporary removal of turnover rent with an increase of base rent / higher rent for a shorter term or lower rent for a long-term
    • one-off waivers instead of amending the lease
    • rent reduction in exchange for introducing a break clause exercisable by the landlord only

    Subject to mutual agreement between the parties, landlords may also wish to negotiate to incorporate COVID-19 related clauses, for example:

    • to exclude the landlord’s liability for a tenant’s economic loss and damage arising from any outbreak of epidemic or disease
    • to waive the tenant’s right to request a rental adjustment for economic reasons, whether or not caused by epidemic or disease
    • negative covenants on the tenant to prohibit pipe alterations and positive covenants on the tenant to take precautions in pipe maintenance to prevent the spread of disease

    Looking longer term, we do not anticipate that the leasing market in Hong Kong will be significantly affected by the temporary impacts of COVID-19. Pre-COVID-19 there had been another challenge to the Hong Kong retail leasing market due to the ongoing protests. Some large shopping center landlords responded by allowing rent-free periods or rent reductions for tenants during mall closures. While expected to be at a slower pace, we hope to see the Hong Kong market following the UK trend in taking a more balanced, flexible and adaptive approach while preserving certainty of occupation, in order to create a friendly commercial environment for both landlords and tenants.

    China

    Following the outbreak of COVID-19, China’s central Government announced a series of guidelines (with the latest guidance being released on 9 May 2020) aimed at bringing preferential treatment to “small and medium-sized business” tenants (the “SM Tenants”). The measures included:

    (i) deduction of/exemption from rent for SM Tenants leasing state-owned properties/premises
    (ii) encouraging deduction of/exemption from rent, management fees and other expenses by private landlords to SM Tenants who are leasing their properties. Those landlords who take the initiative to exempt/ reduce the rent payable by their SM Tenants, subject to certain restrictions, may apply for tax reductions for the corresponding amount
    (iii) encouraging preferential treatment (for example interest, renewals) for SM Tenants on their bank loans
    (iv) support for the settlement of lease disputes involving SM Tenants arising from COVID-19 related causes

    Respective Local Governments have been actively responding to these initiatives from the Central Government. More practically, we have seen tenants (including those ineligible for the incentives mentioned above) negotiating with their landlords to seek rent deductions or exemptions for periods when their business was affected by the COVID-19 pandemic.



    George Cheung
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    +852 6391 0260
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    Jerry Wang
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    +86 21 6137 1003
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    Operational resilience

    Firms with a global footprint will likely experience something different in the various jurisdictions where they maintain operations. However, the general principles remain the same. Financial regulators in Hong Kong, principally the Securities and Futures Commission (SFC) and the HKMA, have published statements emphasizing areas where firms and banks (respectively) should remain vigilant (which are similar to those mentioned above). At the same time, they have encouraged regulated entities to discuss any practical difficulties or challenges actually faced. It is therefore important for firms to continue assessing their operations and take appropriate steps to mitigate any emerging risks and problems.

    Meanwhile, in mainland China, the five key financial regulators, the National Development and Reform Commission (NDRC), the Ministry of Finance (MoF), the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE) have between them announced more than 30 measures to be taken in the financial sector to help respond to the outbreak of COVID-19. These include measures to keep liquidity at a reasonably ample level, apply favorable credit policies to small-and-micro-sized enterprises in the regions severely hit by the pandemic, extend support to the roll-over or renewal of due loans for enterprises facing liquidity difficulties in such regions, maintain normal provision of financial services and safety of financial infrastructures via reasonable resources allocation, safeguard the stable operations of financial markets.

    The CSRC, for example, has announced that it is monitoring the market closely to safeguard market stability and improve systemic resilience. It has apparently been paying special attention to key risk areas such as stock pledged loans, margin trading and short selling, and bond defaults. In the regions which have been hard hit by the virus, measures were adopted to support market players to rollover stock pledge agreements, to avoid mandatory liquidation for clients involved in margin trading and short selling and to offer certain extensions for clients to pay in additional margin deposits.



    John Siu
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    +852 9033 1561
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