A company can be wound up by the Court if it is unable to pay its debts. It is deemed to be unable to pay its debts if a creditor to whom it owes a sum in excess HK$10,000 serves a written demand, known as a Statutory Demand (in the prescribed form) requiring payment and if the company fails to pay within 21 days.

It is also possible for a winding up petition to be founded on an unsatisfied judgment for a sum in excess of HK$10,000.

Another reason for winding up a company is the “Just and Equitable” basis. This usually occurs when there is a dispute between shareholders and where a minority shareholder claims that he (or she) is being oppressed by one or other larger shareholders.

The other circumstances under which a company can be wound up include:

• a special resolution is passed that the company be wound up by the Court;

• being a public company registered as such on incorporation it has not been issued with a certificate relating to share capital requirements within a year of being so registered;

Winding up petition

A petition to wind up a company may be presented either by the company, or the directors, or by any creditor or creditors (including any contingent or prospective creditor), contributory or contributories or by any combination of those parties.

It can also be presented by The Securities and Futures Commission under the The Securities and Futures Commission Ordinance; The Financial Secretary under either the Banking Ordinance or The Companies Ordinance; or by The Official Receiver where a company is being wound up voluntarily.

A copy of the petition must be served on the company at its registered office and it must be advertised in the Government Gazette. The company or any of its creditors may oppose the petition or, alternatively, any creditor may support the petition. Provisions exist for substituted service otherwise than at the registered office if this is not practicable, or if there is no registered office in Hong Kong.

Provisional liquidators

At any time after the presentation of a petition, the Court can appoint a provisional liquidator who can be either the Official Receiver or another suitable person. In practice, this is almost always a {{private sector insolvency practitioner LINK to glossary}} The powers of the provisional liquidator are limited to those conferred on him by the order under which he is appointed.

The Court will usually only take this extreme course of action if it can be shown to the satisfaction of the Court that the assets of the company are in jeopardy and/or are likely to be dissipated during the period between the presentation of the petition and the date of hearing of the petition.

There is a high burden of proof placed on the petitioner where he seeks to have a Provisional Liquidator appointed prior to the hearing of the petition.

See here for a more detailed discussion of the present position regarding the appointment of provisional liquidators.

Special Manager

There are also provisions whereby the Provisional Liquidator, following his appointment, can apply to the Court for the appointment of a Special Manager. Historically, Special Managers have usually been private sector Insolvency Practitioners appointed where the Official Receiver was already acting as Provisional Liquidator. However, in view of the fact that under the current scheme, most Provisional Liquidators are already private sector Insolvency Practitioners, it is unlikely that it will be necessary, in all but the most exceptional cases, for a Special Manager to be appointed.

Panel T Scheme

Otherwise known as the Panel B Scheme.

The Official Receiver automatically becomes the provisional liquidator of every company which is wound up until another person is appointed. However, under the current scheme, in the majority of cases, as soon as a winding up order is made, the Official Receiver appoints an outside Insolvency Practitioner to act as Provisional Liquidator.

See here for more details of the Panel T scheme

The Provisional Liquidator must decide within 12 weeks from the date of the winding up order whether he should call meetings of creditors and contributories for the purpose of choosing a liquidator other than himself. He will only usually convene meetings if he is of the opinion that the assets of the company are likely to exceed HK$200,000 - the summary case limit.

If he decides not to summon such meetings he must give notice of his decision to all creditors together with an explanation to the creditors that they have the power to request that creditors’ and contributories’ meetings be held.

The Provisional Liquidator only has a duty to summon these meetings if so requested by one-quarter in value of the company’s creditors.

If he decides to summon meetings he must do so within three months from the date of the winding up order. If the meetings are convened at the request of creditors, they must be held within three months of receipt of the request.

Creditors and contributories must be given at least 7 days notice of the meetings and the notice must specify the date, time and place for the meetings. Notice of the meeting must also be publicly advertised in one English and one Chinese newspaper as well as in the Government Gazette. Meetings are supposed to be held at a time and place convenient for creditors.

The notices must specify a time and date, not more than four days before the date of the meeting, by which proofs of debt and proxies must be lodged for creditors to be entitled to vote at the meeting. Usually, the notice will specify that the proof and proxy must be lodged no later than either 12.00 noon on the day before the meeting, although it can be two working days before the meeting if there are numerous creditors. The same applies to contributories and their proxies.

The only resolutions that can be taken at the first meeting are:

• to appoint one (or more-usually 2) insolvency practitioner(s) as liquidator(s);

• to establish a Committee of Inspection, or if no Committee of Inspection is appointed to decide the terms on which the liquidator is to be remunerated,;

• where joint liquidators are appointed, to determine which acts are to be done by each of them;

• to authorise payment of the costs of summoning and holding the meeting if requisitioned by creditors in accordance with the provisions of the Act;

• to adjourn the meeting for not more than three weeks;

• any others which the Official Receiver/Provisional Liquidator thinks it right to allow; i.e. to make an application under S.209A of the Companies Ordinance for the Compulsory Liquidation to be converted to a Voluntary Liquidation.

Voting

If, on any vote there are two nominees for appointment,

the person who obtains the most support is appointed:
in a winding up by the Court the support must represent a majority in value of all those present in person or by proxy and entitled to vote;

if there are three or more nominees, and one of them has a clear majority over both or all the others together, that one is appointed;

until a clear majority is obtained for any one nominee the chairman of the meeting shall continue to take votes (disregarding at each vote any nominee who has withdrawn and, if no nominee has withdrawn, the nominee who obtained the least support last time);

the chairman may at any time put to the meeting a resolution for the joint appointment of any two or more nominees.

A resolution for the appointment of the Official Receiver as liquidator may not be proposed. However, if the creditors do not pass a resolution for the appointment of a liquidator, the Provisional Liquidator will remain liquidator.

In the case of a resolution for the appointment of a liquidator, at a creditors’ meeting, a person is only entitled to vote if

a proof of debt has been lodged and the claim has been admitted for voting purposes by the chairman of the meeting;

and a valid proxy has been lodged;

(there is currently a filing fee of HK$40 for all proofs of debt in Compulsory Winding up proceedings). This filing fee does not apply to clams filed by employees.

A creditor holding security must deduct the value of his security from his total claim and he can then vote for the residual amount.

A creditor is not entitled to vote in respect of an unliquidated claim, or if the value of the debt is unascertained. However, he can vote if the chairman agrees to put on the debt an estimated minimum value for voting purposes.

A ‘proof’ must be in the form known as a ‘Proof of Debt’ (as sent to every creditor known to the Official Receiver/Provisional Liquidator) and must be signed by the creditor or someone authorised to sign on his behalf. This rule is the same for proxies.

Full particulars of the debt must be stated in the proof and there also needs to be specified any documents by which the debt can be substantiated.

Good examples are the liquidations of BCCI in Hong Kong where the company had numerous creditors/depositors and the recent failure of Oasis Airlines with many unpaid ticket holders.

Another interesting example of a regulating order was in the case of Legend International Resorts Ltd where there were only a small number of creditors. The Regulating Order was made with a view to expediting the appointment of a liquidator, where for a variety of reasons it was not possible to appoint a private sector liquidator, in order to safeguard assets of the company. It’s not clear that the Court will allow the use of the Regulating Order procedure in any other than the most exceptional of cases.

The Committee of Inspection is appointed at the first meeting of creditors and its members are confirmed by the Court at the time it confirms the appointment of the liquidator. It must comprise a minimum of two and a maximum of five members and can only act when at least a majority of its members are present at a meeting.

The Ordinance provides for meetings of the Committee to be held each month, although in practice a resolution is usually passed at the first meeting of the Committee that future meetings will be held at the request of either the Liquidator or a member of the Committee.

A member of the Committee of Inspection may resign by notice in writing to the liquidator. The liquidator can apply to Court for a replacement member to be appointed. Indeed, in cases where a majority of the committee have resigned the Court may order that a meeting of creditors be held to appoint a new committee.

Membership is automatically terminated if the member ceases to be or is found not to have been a creditor or becomes bankrupt (in which case his trustee in bankruptcy replaces him) or compounds or arranges with his creditors.

Membership can also be terminated if the member misses five consecutive meetings of the committee.

There is no Committee of Inspection when the Official Receiver is liquidator of the company and it is rare for there to be a Committee in a Summary case.

The committee’s function is to advise and assist the liquidator generally in relation to the winding up.

Certain powers of the liquidator are exercisable only with the sanction of the committee. These include:

• paying any class of creditors in full;

• employing solicitors to act on behalf of the company in liquidation

• making any compromise or arrangement with creditors;

• compromising any debts and liabilities due to the company;

• bringing or defending any legal proceedings on behalf of the company; and

• carrying on the business of the company.

The Committee of Inspection is also responsible for auditing the six (6) monthly receipts and payments account which the liquidator is required to submit to the Official Receiver’s Office pursuant to S.203.

A liquidator must give notice to the committee if he disposes of any property of the company to a connected person.

Any reasonable expenses directly incurred by members of the committee in attending committee meetings shall be paid out of the company’s assets.

The Ordinance also states that no committee member or his associate or any person who has been a member of the committee within the previous 12 months or any such member’s representative shall receive payment for goods or services supplied in connection with the winding up, obtain any profit or acquire any assets from the company without prior leave of the Court or sanction of the Committee of Inspection, except in the case of urgency when retrospective sanction of the Court must be obtained.

This is to avoid the possibility of conflicts of interest arising. Therefore, in situations where a member may be interested in acquiring assets of the company, it would be best if he resigned from the committee.

Section 209A of the Companies Ordinance is quite unique in that it allows the conversion of a court supervised liquidation to a voluntary process subject to the scrutiny of creditors.

However, the conversion can only take place in limited circumstances, so it is still within the power of the Court to stop conversion taking place, even though the creditors have approved it and when the cost savings arising will be passed on to creditors in the form of an increased dividend.

Firstly, I’d like to look at the circumstances where a conversion can take place and where it is appropriate, then move on to the conversion process and finally look at the Court’s approach based on the relatively few occasions that this issue has come before it.

Why Convert

The insolvency provisions of the Companies Ordinance are, to put it mildly, getting on in years.  It is after all based on the 1948 Companies Act from the UK.  One of the results is that the compulsory liquidation process, designed for a time when quill pens were still in use, has not caught up with the 20th century, let alone the 21st century.  It’s requirements result in a process which has built-in inefficiencies, which does not operate in the interests of creditors and which because of the high level of Court and Official Receiver’s Office involvement, is costly to operate.  The end result is that dividends in compulsory liquidations are likely to be lower than in a voluntary liquidation and are likely to take longer to be paid.

The cost savings which can be achieved in a voluntary liquidation can sometimes be sufficient to have a material effect on the level of the distribution.

In particular, in a compulsory liquidation all realisations are subject to what has been referred to as a tax on creditors.  It is a sliding scale set out in the Fees and Percentages Order (just rolls of the tongue, doesn’t it??) and is applicable to all asset realisations in every compulsory liquidation.

Let’s be clear about this, the creditors gain no benefit for this payment to the HKSAR, it simply goes into the government’s coffers.   However, in a voluntary liquidation, this Ad Valorum Duty, as it is known, is not payable and so all the realisations are available to the creditors.

When is Conversion Appropriate

From the point of view of the creditors, a conversion would seem to be a good idea provided it results in an increased dividend, which hopefully will be paid sooner than would be the case in a compulsory liquidation.

The liquidator’s perspective is likely to be that the voluntary liquidation process is more user friendly.  Whilst on the face of it, the liquidator’s fees are likely to be lower if the compulsory liquidation is converted to voluntary, the lower level of bureaucracy associated with the voluntary process, makes it the favoured option for most insolvency practitioners.

The Court’s View

In reaching its decision on an application for conversion, the court will bear in mind a number of factors.  These will include, but are not limited to:-

Benefits to creditors

If the liquidation is converted, will it be of benefit to the creditors of the company.  If the answer is no, then a conversion application should never have been made in the first place.

Conduct of Directors

The Court will want to hear from the liquidators as to whether the directors have been involved in any conduct which might result in adverse reports being made to the Official Receiver which might result in the directors being disqualified. 

Antecedent Transactions

If there have been any transactions which are capable of being attacked by a liquidator, it is likely that an application for conversion would not succeed.  If however, steps are taken to ensure that the interests of creditors are not prejudiced, for example by repatriating funds to the Company for the benefit of creditors, then the Court are likely to look more favourably on an application.

Other Factors

The Court has the final say as to whether a conversion application should be sanctioned. The Ordinance does not set down any hard a fast rules as to the circumstances in which a conversion should take place.  Accordingly, the Court can, and does, take into account “other factors”.  For example in an application by the liquidators to convert one of the Peregrine companies to a voluntary liquidation, the Court took into account the “public interest” as one of the reasons for refusing to sanction the conversion.

There was also a strong suspicion that the Court wanted to keep an eye on the Peregrine liquidations because of the issues raised by the Court regarding the level of the liquidators’ remuneration in what was an extremely complex group of liquidations.

Practical Considerations.

In practical terms the process of converting a liquidation is hedged around with some quite strict and demanding time limits.

In particular, an application must be made within 3 months of the date of the first meeting of creditors.  It is of course always possible to get a resolution passed at the first meeting that an application be made for conversion.  However, there is a short period of time between the date of the meeting and the hearing of the application for conversion.  That leaves the liquidator with only a short space of time within which to satisfy himself that the circumstances are such that a conversion application is likely to be successful.  Depending upon a number of factors, including the cooperation of the directors, the complexity of the affairs of the company and the outcome of the liquidators’ investigations, the liquidators must make a decision on whether to proceed with the application.

The benefits of a s.209A conversion are clear, particularly for the creditors.  However, the liquidator must take into account a wide variety of factors before deciding whether or not to proceed with such an application.

If the application is successful, the court can make an order disqualifying a director for a minimum of 1 year and up to a maximum of 15 years.

The effect of a disqualification order is that anyone who is subject to the order cannot act as director of a limited company, cannot act as a liquidator or a receiver of a company and cannot be directly or indirectly involved in the formation or management of a company.

In addition, anyone who acts in contravention of a disqualification order or acts on the instructions of someone who they are aware is subject to a disqualification order can be made personally liable for the debts of the company. The purpose of this provision is to try to prevent the practice of a disqualified person using another person as a “front” for their activities.

The principal reasons for which a director may be disqualified are as follows:

• where a person is convicted of an indictable offence in connection with the promotion, formation, management or liquidation of a company, or with the receivership or management of a company’s property, or any other indictable offence which involves dishonesty.

• where it appears that a person has been persistently in default in relation to provisions of the companies legislation requiring any return, account or other document to be filed with, delivered, or sent, or notice of any matter to be given, to the Registrar of Companies.

‘Persistent default’ may be conclusively proved by showing 3 or more defaults in the 5 years prior to the disqualification application.

A director may also be disqualified if he has been found guilty of fraudulent trading under provisions of S.275 of the Companies Ordinance or if he has been found guilty of any fraud or breach of fiduciary duty whilst acting as an officer of the company or as its receiver and manager.

The Ordinance states that a disqualification order must be made where the court is satisfied that a person:

• is or has been a director (this will include a de facto director) of a company which has at any time become insolvent (whether while he was a director or subsequently); and

• his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company;

Insolvency is defined as going into insolvent liquidation or where a receiver is appointed.

In any case where it is assessing ‘unfitness’ the court will consider:

• any misfeasance (i.e. breach of fiduciary duty or misapplication of funds)

• any obligations to account to the company for its property etc

• non-compliance with specified Companies Ordinance requirements

• non-compliance with duties in respect of company accounts.

If the company is insolvent the court will also consider the following matters

• responsibility for the insolvency

• responsibility for non-delivery of paid for goods or services

• responsibility for preferences (s.266) and transactions in breach of s.182

• responsibility for non-compliance with s.241 (calling of creditors meeting where voluntary winding up)

• responsibility of non-compliance with specified Companies Ordinance requirements

• failing to lodge a statement of affairs pursuant to s.190 of the Companies Ordinance failure to deliver company property to the liquidator pursuant to s.211

• failure by directors to convene meeting of creditors after commencing liquidation pursuant to s.228A

• failure to convene a meeting of creditors pursuant to s.241

• failure to keep proper books of account pursuant to s.274

• s.300A (report where receiver or manager appointed)

Shadow Directors

A shadow director is defined as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’ (S.168C).

The wording of S.182 of the Companies Ordinance is to all intents and purposes the same as the relevant provisions that are found in the UK Insolvency Act 1986.

Over subsequent years, there have been a number of decided cases which have dealt with specific circumstances under which a Court would validate dispositions after the presentation of the petition and the application of this section to bank accounts which were in credit at all times. Meanwhile, a number of Australian authorities have developed and confirmed the view that it is the recipient, not the bank who should be liable to repay dispositions.

The most recent UK case is that of Bank of Ireland -v- Hollicourt the decision in which was handed down by the Court of Appeal in the UK. The Court has taken the view that the recipient of any payment after the presentation of the petition is the person against whom the liquidator should take action for recovery. The decision sided with the Australian authorities, which also take the view that it is the recipient who is liable to repay and not the bank. Liquidators’ Investigations.

It would seem that this decision, if followed in Hong Kong, will severely limit the ability of liquidators to recover payments made after the presentation of petition. In particular, it is likely that in the context of Hong Kong, where many companies trade with trading partners in other jurisdictions in South East Asia, it will be very difficult to effect recovery unless the recipient is based in Hong Kong.

See here for a wider discussion of the increased use of section 221 in recent years.

Liquidators are empowered to go back six months to review such transactions. However, if it appears that the unfair preference has taken place in favour of a connected or associated person, the liquidator has the power to go back as far as two years. In such a case, the onus to show that a preference has not occurred is then placed on the recipient, not on the liquidator.

However, read on, as although the purpose behind the legislation is clear, because of deficiencies in the wording of the Ordinance, its implementation is fraught with difficulties.

The problem is twofold. Firstly, the provisions which define what constitutes an associated person are, to put it mildly badly implemented. One of the more egregious problems these provisions create is that a parent company is not deemed to be an associate of its subsidiary. This has led to the nonsensical situation in Hong Kong whereby although a parent company, which obviously controls its subsidiary, forces the subsidiary to make payments to the parent, it is not deemed to be an associate for the purpose of this section.

Connected and associated persons are defined as including any blood relative, spouse, partner, relative of spouse or partners, a company which the debtor controls either on his own or together with an associate, employer or employee.

For a more detailed review of the difficulties in relation to unfair preference claims see here (link to Unfair Preferences main page)