With the situation surrounding the 2019 Novel Coronavirus rapidly changing, key practical considerations for financial institutions regulated by the Hong Kong Securities and Futures Commission and Hong Kong Monetary Authority include business continuity planning, contract issues, and notification and filing requirements.
Both the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have provided clear guidance on their expected scope ofbusiness continuity planning for financial institutions (FIs). The ultimate responsibility for putting in place effective business continuity plans rests with directors or senior management of the FIs. During this period, an FI must ensure that one or more members of senior management are in charge of implementing its business continuity plan and that there is clear communication across all levels of the FI. An FI is required to notify the HKMA promptly if it activates its business continuity plan and must provide the HKMA with periodic progress reports until business activities return to normal.
Regarding business continuity planning, most FIs in Hong Kong can permit staff to work remotely from home during this period. It is important for FIs to ensure they will be able to fulfill the regulatory requirements applicable to document and email retention and telephone recording, and that remote working arrangements will not compromise the security and confidentiality of the FIs’ and clients’ data and information.
FIs should consider how the outbreak may affect the ability of their suppliers and customers to perform commercial and lending contracts. A party to a contract may avoid its performance obligations by relying on the following common law principles (assuming such contract is governed by Hong Kong or English law).
Force Majeure
A force majeure clause typically excuses one or both parties from performance of the contract following the occurrence of certain events. A party affected by the 2019 Novel Coronavirus (COVID-19) outbreak will need to show the outbreak falls within the scope of the force majeure clause. In considering whether a party may be excused from performance, the first issue is whether a pandemic is covered by the definition of force majeure in the relevant contract, whether the COVID-19 outbreak has resulted in events that are expressly stipulated in the clause, and whether the drafting of the force majeure clause includes general language (e.g., “any causes beyond the reasonable control of the party”). There are suggestions that whether an event is beyond the reasonable control of a party would require comparison with actions taken after the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003. The word “reasonable” will need to be considered objectively.
The second issue to consider is how the force majeure clause operates. If the clause provides that the force majeure event “prevents” performance, the party seeking to rely on the force majeure clause must establish that performance is legally or physically impossible, not just difficult or unprofitable. By contrast, if the clause includes words like "hinder" and "delay," this may have a wider scope, but the affected party must demonstrate that performance is substantially more onerous—a mere increase in cost is not sufficient.
In addition, the affected party must also show that it has taken all reasonable steps to avoid or mitigate the event and the effect of such event on the party's contractual performance.
Frustration
A party may be discharged from performance of the contract if something occurs after the formation of the contract that makes it physically or commercially impossible to complete the contract, or transforms the obligation to perform into a radically different situation. Much will depend on the length and intensity of the events in question, and whether these can be overcome with time. The threshold for establishing frustration is high and the courts are typically reluctant to find that a contract has been frustrated.
Please note we have set out the general principles only. Considering whether a party may avoid its performance obligations will still require a careful assessment of the facts and circumstances, the intentions of the parties, and all other relevant factors on a case-by-case basis in order to form a view on whether the argument may succeed.
Lending contracts often include a material adverse change clause. For example, a lending agreement may allow a lender to call a default if there is a material adverse change in the borrower’s ability to perform its obligations under the finance documents. Whether the COVID-19 outbreak has triggered the material adverse change clause will involve similar considerations as set out above. Given material adverse change clauses are often heavily negotiated, this will need to be analyzed on a case-by-case basis.
The SFC stated in a press release regarding arrangements relating to the SFC’s public services that it expects all licensed corporations to make all reasonable efforts to maintain “business as usual” in relation to their regulatory obligations and all regulatory filing, reporting, and other deadlines. However, if any of the licensed corporations encounter specific difficulties arising from the COVID-19 outbreak, they are encouraged to communicate promptly with their usual contact points at the SFC.
Licensed corporations must be aware that under the Securities and Futures (Licensing and Registration) (Information) Rules, if there are significant changes in the nature of the business carried on or to be carried on and the types of services provided or to be provided by a licensed corporation, the SFC must be notified within seven business days after the occurrence of the event. If as a result of COVID-19, a licensed corporation is unable to provide the services that it previously provided to clients (or if the licensed corporation will need to significantly reduce the scope of services), the licensed corporation should contact the SFC as soon as practicable. Other relevant notification requirements include if there are significant changes in the business plan of a licensed corporation covering its internal controls, organizational structure, contingency plans, and related matters.
Similarly, the HKMA has noted in its circular, Requirements under Section 60 of the Banking Ordinance and Disclosure Requirements under the Banking (Disclosure) Rules, that if banks have difficulty in meeting filing deadlines under the applicable laws and rules as a result of the COVID-19 outbreak, they may apply to the HKMA as soon as practicable.
Please refer to our LawFlash, Responding to the 2019 Novel Coronavirus: Guidance for Multinational Employers in Hong Kong, which discusses existing employment laws and legislation in Hong Kong, including previous guidelines issued by the Hong Kong Labour Department on labor-related matters arising from the SARS outbreak in 2003. This will be relevant to FIs that are affected by the COVID-19 outbreak.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Chris Warren-Smith