Having to chase payments or handle breaches in settlement plans is a nightmare for any business. At Slotine, we believe in alleviating legal burdens and finding a swift resolution for our clients by taking a holistic and action-oriented approach. This entails a thorough understanding of our client’s background, their relationship to the debtor and other potential affiliated parties, as well as the features of the relevant jurisdiction.
Taking legal action in Hong Kong
There is no minimum debt amount for starting court proceedings in Hong Kong, but that doesn’t mean it’s always the best course of action. If you are trying to recover a debt, you ought to consider whether it would be cost-effective to take your debtor to court, bearing in mind a number of key factors.
The amount due determines the civil court before which proceedings should be initiated, which in turn affects the time and financial costs for the creditor. In Hong Kong, claims of HK$75,000 (US$9,500) or less are handled by the Small Claims Tribunal, where legal representation is not allowed and litigants must therefore appear in person. Claims of HK$75,001 to HK$3,000,000 (more than US$9,500 but less than US$380,000) are brought before the District Court, while claims exceeding HK$3,000,000 (US$380,000) are the remit of the High Court (Court of First Instance). In these two courts, litigants may be represented by solicitors and barristers. When deciding whether or not to start court proceedings, you should account for the cost of legal representation, which is usually billed on an hourly basis in Hong Kong. Moreover, success fees – a legal funding arrangement available in some jurisdictions – are forbidden in Hong Kong for all litigations.
Besides legal fees, you may need to make additional investments of time and money to work with your legal team, such as in the preparation of discovery (all documents relevant to the claim). Furthermore, if you are a foreign creditor, you will likely be required to travel to Hong Kong to give evidence at trial.
Then there’s the risk of being ordered to shoulder the defendant’s legal costs if your claim is unsuccessful, or on any other grounds as decided by the court. At the request of the defendant, the court may even order you to make a security payment upfront in order to guarantee that those legal costs will be covered pending the decision. This security is unavoidable for foreign creditors.
One particular aspect to note is that under Hong Kong legislation, the conduct of the litigants is a factor in the court’s assessment of how much you may be entitled to if your claim is successful, or, conversely, how much you must pay if the claim is unsuccessful. Litigants may be penalised if the court finds that they failed to take steps to mitigate legal costs. For example, in Pfeiffer Gmbh v Cheung Hay Kit trading as Sun Wai Construction [2014] HKCU 2498, the court did not award the full amount to the successful plaintiff because they had not issued a warning letter for debt collection before pursuing legal action, even though Hong Kong legislation does not formally require creditors to do so.
At Slotine, we carefully advise our clients on all the potential benefits and risks of legal action, taking into account the specificities of their case.
Best practices for creditors
There are a number of best practices that you can adopt to manage the risk of non-payment. Naturally, these practices should be tailored to the needs of your business and set out in the form of internal procedures that are subject to periodic review.
Credit control
Conduct Know Your Client (KYC) checks at the outset of any commercial relationship and periodically over time. This should also be done prior to accepting any unusually significant orders. To avoid trade debt from snowballing and exposing your company to risk, set a debt threshold and hold on the provision of services or goods when this threshold is met until outstanding invoices have been paid. When trade debt is overdue, escalate the matter internally by having the finance or legal department send a formal letter immediately.
Documentation
Keep records of all emails and documents regarding each order, from the final and agreed version of the purchase order to proof of delivery, including invoices and receipts.
Factoring
Factoring is a type of debtor finance whereby a business sells its invoices to a third party in order to meet its short-term liquidity needs. The factor would then pay the amount due on the invoices minus its commission or fees. Factoring is expensive in Hong Kong and only available for larger client accounts that meet the minimum invoice amounts.
Trade credit insurance
Trade credit insurance is designed to protect the insured from non-payment of accounts receivable. In Hong Kong, this is offered by private companies such as Allianz, Coface and Marsh 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 that the goods belong to the seller until the seller has received full payment for the goods supplied. The clause should be stated clearly and visibly in standard terms of sale and commercial documents – especially the invoice.
All monies clause
An all-monies clause reserves the seller’s ownership of the goods supplied until the buyer has paid not only the price for the goods but all sums due to the seller.
Cash-on-delivery payment terms
Cash-on-delivery (COD) payment terms are effective but create an administrative burden. A large and trusted workforce would be needed to collect the cash for each delivery, which may become difficult or unfeasible with increased order volumes. COD may also reduce your competitiveness if other businesses have more flexible payment terms.
Procedures for international debt collection
There are typically two types of procedures for international debt collection in Hong Kong depending on whether or not the creditor has already obtained a judgment overseas.
If you have not obtained a judgment outside of Hong Kong, you may hire a local solicitor to collect information on the debtor and determine if their business is being wound-up; review documentation pertaining to the debt and your company’s history of debt collection, including correspondence and any partial payments; and issue a letter of demand (i.e. warning letter).
In the absence of settlement or agreement on settlement terms following the letter of demand, you will have to decide how to pursue debt recovery. Options are to continue with further letter(s) of demand; to issue a statutory demand, a provision under Hong Kong law that deems a debtor insolvent if they fail to pay a debt with a minimum amount of HK$10,000 (US$1,200) within 21 days; or to commence legal proceedings with the relevant court, as detailed above. If the debtor is deemed insolvent due to their failure to pay a statutory demand, the creditor that issued the statutory demand may engage a local solicitor to file a petition in court for the winding-up of the debtor.
If you have already obtained a judgment outside Hong Kong for the debt, you will need to hire a local solicitor to conduct a registration proceeding in a Hong Kong court. The judgment must have been made by a foreign jurisdiction that has an agreement with Hong Kong for reciprocal recognition of judgments; be for money; and be enforceable and final. You should be prepared to provide evidence that these conditions have been met, including evidence of service of the claim (especially if the foreign judgment was made by default); a legalised or apostilled copy of the judgment (the latter applies to judgments made on apostille in member jurisdictions of the Hague Convention); evidence of service of the judgment; and evidence that no appeal has been filed.
What happens after the first demand for payment?
In Hong Kong, letters of demand issued by solicitors are usually taken seriously by debtors and answered by their legal representatives. The solicitors of the parties usually run two threads of correspondence in parallel: official letters with parties’ arguments that may be presented in court if court proceedings should commence; and letters “without prejudice” or “without prejudice save as to costs”, which involve settlement offers made in good faith and represent genuine attempts to settle the dispute.
The creditor and the debtor may also agree to attempt mediation, which may or may not be assisted by their respective solicitors. Mediation as an alternative dispute resolution method is promoted in Hong Kong by the Department of Justice, which launched a “Mediate First” campaign in May 2009.
Note that interim measures before any court proceedings have been initiated are notoriously difficult to obtain before the Hong Kong courts, except where similar measures have already been granted in foreign jurisdictions. Interim measures remain challenging to obtain during court proceedings and also lead to a considerable increase in legal costs.
In the event that debt recovery is unsuccessful, accounting rules that are applicable to the foreign creditor can be referred to for writing the debt off as bad debt. A winding-up judgment would generally support a write-off. Otherwise, the letter of demand and further relevant correspondence would be counted as evidence of unsuccessful attempts at collection and back up the decision to consider the debt irrecoverable.
Debt collection can be a protracted process involving complex considerations. Every company is different, necessitating a strategic approach to maximise the chance of a desired outcome. Whether your business is trying to mitigate risks of non-payment or currently in the midst of debt collection attempts, it is important to seek appropriate legal assistance that responds to the unique aspects of your situation.
Slotine is a partner of Debitura since April 2024.
