Glossary of Insolvency Terms
Bankruptcy Ordinance
Primary legislation covering personal insolvency in Hong Kong. Updated in 1998, but still has the penal approach which it adopted from the UK Bankruptcy Act of 1914 and 1926 on which it was based. It is more up to date than the Companies Ordinance, but in international terms it is already dated.
Companies Ordinance
The primary legislation governing corporate insolvency in Hong Kong. A very tired piece of legislation (closely modelled on the 1948 UK Companies Act), which is badly in need of updating. However, it’s difficult to see this happening within the next 5 years.
Companies Winding up Rules
Secondary legislation governing corporate insolvency. See Companies Ordinance.
Creditors’ Voluntary Liquidation - CVL
A liquidation process initiated by the directors of the company. It starts with them deciding that the company is insolvent and cannot continue trading and that it should be wound up. The directors then hold meetings of shareholders (often referred to as contributories) and creditors at which a liquidator is appointed.
Fixed Charge
Most commonly occurs when a company gives a fixed charge to its bankers as security for loans. A fixed charge will usually be secured on land and buildings. It usually contains the power to appoint a receiver.
Floating Charge
Floating charges are less common in Hong Kong. It is a charge over what are usually known as revolving assets, that is those such as stock, work-in-progress, debtors and plant and machinery, which the company is free to dispose of as it sees fit, without any interference from the chargeholder. The proceeds of realisation of floating charge assets are firstly available to the preferential creditors and only once they have been paid, can the balance be paid to the floating charge holder. A floating charge will usually contain the power to appoint a receiver and manager.
Not defined in the legislation, but usually considered to be either:-
being unable to pay debts as and when they become due -the cash flow test; or
not having sufficient assets to pay debts in full - the balance sheet test
Insolvency Practitioner (IP)
Usually an accountant who specialises in insolvency and corporate recovery assignments. Unlike in many other jurisdictions, the IP does not need to have a specialist qualification to act as a liquidator or trustee. However, this area of work is becoming more and more complex with the result that most liquidations of any size are dealt with by experienced IP’s.
IVA
A Court supervised alternative to bankruptcy where the debtor usually agrees to repay his creditors either in full, or where the return for creditors is better than bankruptcy. It needs to be approved by creditors representing 75% or more in value of the creditors who are entitled to vote at the meeting of creditors.
IVA Nominee
The IP who assists the debtor in setting up the IVA and who administers it after its approval by creditors.
Liquidator
Appointed either by the Court or creditors. His role is to realise the assets, distribute them among the Company’s creditors in line with their statutory priorities, investigate the causes of failure and report as appropriate to the Court and the Official Receiver.
Members’ Voluntary Liquidation - MVL
Where a company is solvent, i.e. it has sufficient assets to meet its liabilities, it can be wound up using what is known as the MVL process. The principal criteria, along with payment of all creditors, is that they must be paid within 12 months of the start of the liquidation.
A civil servant. The Official Receiver’s Office is responsible for the administration of bankruptcies and compulsory liquidations in Hong Kong and acts as a de facto regulator of those professionals who are appointed in Court supervised insolvencies
Protection of Wages on Insolvency Fund
When a Company fails, it is often the employees who are the first to suffer. The PWIF was set up to provide a measure of protection for employees by enabling this body to make payments to employees dismissed as a result of insolvency. The PWIF would then stand in the shoes of the employees in respect of their claims against the company. In practice, it often takes several months for employees to be paid by the PWIF. It only applies to court supervised insolvencies. Payments to employees of a company going into Creditors’ Voluntary Liquidation are still only made on an “ex gratia” basis.
The fund itself became insolvent a few years ago and had to be bailed out by the government!!
Take your choice
Unfortunately in Hong Kong there are a number of varieties of provisional liquidators. It could be the Official Receiver who automatically becomes the provisional liquidator when a winding up order is made. It could be a private sector insolvency practitioner appointed by the Official Receiver pursuant to Section 194(1A) - what is known as a Panel T appointment. It could be a private sector insolvency practitioner appointed by the Court under Section 193 or he could be appointed by the directors through Section 228A.
For more details of provisional liquidators click here.
Receiver
Can be appointed by the Court or by a lender who has a legal charge which gives the power to appoint a Receiver. The Receiver’s powers are governed either by the Court order under which the appointment takes place or by the charge document under which he is appointed. The role of the Receiver is usually to recover money owed to the chargeholder, or in the case of a Court appointed Receiver it is usually to recover and protect assets which may be in jeopardy.
Receivership
This refers to the process where a creditor who has some form of security, often a fixed charge, appoints someone - a Receiver (usually, but not always an insolvency practitioner) - to realise his security on his behalf, sell it and pay him the proceeds. A Receiver can also be appointed by the Court in certain circumstances.
Stakeholders
A bit of a vague phrase which can encompass creditors, shareholders, employees and could be extended to other third parties who may be affected by the insolvency. For example, in a construction insolvency, employers for whom the insolvent company is working and the eventual owner(s) of a building being constructed could all be thought of as stakeholders.
Trustee in Bankruptcy
The Trustee is either the Official Receiver or a private sector insolvency practitioner whose role is to investigate the affairs of the bankrupt, realise the bankrupt’s assets and distribute them to creditors in accordance with their priorities. A private sector Trustee is usually an accountant or a solicitor and is appointed by the Court.
This is filed with the Court by a creditor. If a winding up order is eventually made, then the start of the winding up proceedings dates back to the date on which the petition is presented.
This is the order made by the Court following the hearing of the winding up petition.
