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Derek Lai is no stranger to the vagaries of China's legal system. A few years back, when he tried to gain control of a factory owned by a Chinese company he was liquidating, he discovered a creditor was already seeking to auction the plant. Eventually Mr Lai, deputy managing partner of reorganisation services at Deloitte Touche Tohmatsu, reached an agreement with the judge involved in the sale and blocked it just as the factory was about to change hands.
Other bankruptcy specialists have similar tales to tell -- former managers of bankrupt factories calling in gangs to disrupt operations; assets and funds disappearing before a company is taken over; receivers being assaulted verbally and even physically.
Those difficulties highlight an important risk for international investors in Hong Kong-listed Chinese companies: when things go wrong, recovering funds and assets is much more difficult than in the west. Many market observers believe that unless Hong Kong regulators can increase co-operation with their mainland counterpart, the territory's efforts to beat competition from New York and London to become the market of choice for large Chinese groups could be disrupted by a corporate governance scandal.
So far, those concerns have been overshadowed by the spectacular success of Chinese listings in Hong Kong. Over the past 12 years, mainland companies have raised more than HK$1,000bn (US$129bn) in the former British colony, mostly from international fund managers. There have been relatively few significant scandals, at least in the larger companies.
But as the number of Chinese groups seeking to tap the Hong Kong market grows -- and the proportion of lesser-known, smaller Chinese companies increases -- so do the risks that companies might run into trouble, leaving investors to shoulder large losses.
Hong Kong regulators point out that companies go bust across the globe. But in the case of an overseas-listed Chinese company, most assets, operations and directors are likely to be on the mainland, out of reach for Hong Kong watchdogs and liquidators.
Recovering troubled companies' assets has proved tricky in the past, due to China's unclear regulations, fragile legal system and sensitive political climate. Although Hong Kong is part of China, the "one country, two systems" policy means that even if most Chinese companies consider Hong Kong as a "home market" for their primary listings, the territory's regulators have no authority to take action over directors or assets on the mainland.
China does not recognise cross-border liquidators or receivers. This means they can assume control of companies only with the support of the board. This can be difficult, however, as directors are often related to companies' owners. "I have come across a board whose members are either brothers, brothers-in-law or friends of the owner. Why would they listen to me?" asks a Hong Kong-based auditor who has restructured Chinese companies.
Once they have assumed their legal rights, liquidators and receivers face other challenges. In March, Ernst & Young, receivers for Shanghai Land, a Hong Kong-listed property company, gave up control of one of its main assets after a series of threats and physical assaults on its staff. E&Y was trying to auction off a hotel owned by Shanghai Land to repay debts. The company was eventually de-listed from the Hong Kong Stock Exchange.
In 2004 Euro-Asia, an orchid grower, was wound up by a Hong Kong court after its provisional liquidators failed to seize the company's assets on the mainland.
Liquidators and receivers often have to put up with unco-operative management and confusing accounts. "I once found three books in a company: one for the creditors, one for the tax office and one for the minority shareholders. Which one of them is real? Probably none," says Deloitte's Mr Lai.
Kenneth Yeo, managing director at E&Y Transactions and one of Shanghai Land's receivers, says more cross-border recognition of regulatory and enforcement processes between Hong Kong and China could help resolve some of the issues. He also says China needs a well-defined and consistent bankruptcy law.
"No one wants to see a liquidation but an effective bankruptcy regime is required. Otherwise how do you exit in an orderly and speedy manner when things go wrong?" says Mr Yeo For Hong Kong regulators and international investors in the territory's exchange, that remains an uncomfortable but critical question.
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Under syndication arrangement with FE
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