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LW5962 LAW RELATING TO BUSINESS &

COMPANIES

SEMINAR 10: LIQUIDATION

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The Objectives of Corporate Insolvency

Law
• To restore the co to profitable trading
• To maximize returns to creditors
• To provide a fair and equitable system for the
ranking of claims
• To identify causes of the co’s failure and to
impose sanctions for culpable management by co
directors and other officers

(Professor R M Goode, Principles of Corporate Insolvency Law, 4th

edn, 59-63)
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The Objectives of Corporate Insolvency

Law
• Insolvency law aims at preventing conflicts
between creditors by providing an orderly
administration of the insolvent “estate”, i.e. to
collect the assets, sell them and use the
proceeds to pay the costs of the administration
and any debts, as far as possible.
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Instruments of Corporate Insolvency

• Placing the co (and its assets) under external
management (e.g., winding up, receivership)
• Replacing individual rights of pursuit with
collective action (e.g. appointment of a liquidator)
• Statutory distribution system
• The co assets are distributed to the unsecured
creditors on a pari passu principle – in proportion to
the amount of their debts.
• Avoidance of transactions and recovery of
misapplied assets
• Sanctioning of delinquent directors
Liquidation
• Definition
• A process whereby a liquidator is appointed to take
control of the company to collect in and realise the
company’s assets for distribution, in an orderly and fair
manner, to creditors and shareholders, with the
company dissolved at the end of the process.
• Purpose
• To bring the company’s existence to an end.
• Types
• Solvent / insolvent
• Voluntary / compulsory
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Key legislation
• Companies (Winding Up and Miscellaneous Provisions)
Ordinance (Cap 32)
• Winding-up provisions ‘survived’ the Companies Ordinance revision
in 2014 and remained in Cap 32
• Recent amendment of Cap. 32
• Companies (Winding Up and Miscellaneous Provisions)
(Amendment) Ordinance 2016, which came into effect on 13
February 2017.
• The 2016 amendment is a major revision of corporate winding-up
regime in Hong Kong since 1984.
• The aim of the legislation is to "improve and modernise Hong
Kong's corporate winding-up regime by providing measures to
increase protection of creditors and further enhance the integrity of
the winding-up process."
Types Of Winding Up Mechanisms
Cap 32. s169

Compulsory
w/u (s. 177)

Members’ Creditors’
voluntary voluntary
w/u (s. 228) w/u (s. 233)

Winding
up
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Voluntary winding up by members

Cap. 32 s228
• Ordinary Resolution by the General Meeting
• (1)(a): Fixed period for the duration of the co provided in the articles
of association;
• (1)(a): the occurrence of dissolving events provided in the articles
of association.
• Special Resolution by the General Meeting
• (1)(b): by the will of the shareholders

• Directors’ Decision
• (1)(d): the directors deliver to the Registrar a winding-up statement
under section 228A
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Voluntary winding up by members

• Members voluntary winding up only possible
when the company is solvent. s233(1)
• When a voluntary liquidation is proposed, the directors
(or the majority of them) may at a meeting of the
directors issue a “certificate of solvency” to the effect
that
(i) they have made a full inquiry into the affairs of the
company, and
(ii) they have formed the opinion that the company will
be able to pay its debts in full within such period not
exceeding 12 months from the commencement of the
winding up.
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Voluntary winding up by members

• Voluntary winding-up deemed to commence at
time of passing resolution. s.230
• A liquidator can be appointed by ordinary
resolution of shareholders. s.235(1)
• Directors’ powers cease on appointment of
liquidator. s.235(2)
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Voluntary winding up by members

Directors’ Decision s.228A
“(1) The directors of a company or, in the case of a company having
more than 2 directors, the majority of the directors, may, if they have
formed the opinion that the company cannot by reason of its liabilities
continue its business, —
(a) pass a resolution to the effect that—
(i) the company cannot by reason of its liabilities continue its
business;
(ii) they consider it necessary that the company be wound up and
that the winding up should be commenced under this section
because it is not reasonably practicable for it to be commenced
under another section of this Ordinance; and
(iii) meetings of the company and of its creditors will be summoned
for a date not later than 28 days after the delivery of the winding-up
statement to the Registrar.”
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Voluntary winding up by members

Directors’ Decision s.228A
• Rationale: speed up appointment of a liquidator
in emergency situation.
• May only be invoked if other modes of winding-
up impracticable or impossible.
• Because members are excluded from the decision-
making process
• SEG Investment Ltd v SEG Int’l Securities [2005]
HKEC 1633.
• A provisional liquidator holds office until meeting
of creditors summoned. s.228A(14)
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Voluntary winding up by members

Directors’ Decision s.228A
• Impose criminal liability on a director if he forms the
opinion without reasonable grounds. s.228A(4)
• Commencement of the winding up: at the time of the
delivery of winding-up statement (清盤陳述書) to the
Registrar. s.228A(5)
• The provisional liquidator has to be either a solicitor,
or a certified public accountant. s.228A(8)
• All the powers of the directors cease during the
period of the provisional liquidator’s appointment.
s.228A(15)
SEG Investment Ltd v SEG Int’l Securities
[2005] HKEC 1633
• The shareholder who had control over the board sought to put
an end to the co one day before a shareholders’ meeting when
she knew she would be in imminent danger of losing her
control over the board.
• Held: There is no genuine reason for the urgent decision to
wind up the co. The court held that the resolution was null, void
and invalid and invalidate the decision of the directors to wind
up co.
• s228A can only be invoked where other modes of winding-up
are impracticable if not impossible.
• Directors has to show “some urgency” for winding-up the co
through the shorter and simpler route of winding-up under
s228A.
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Voluntary winding up by creditors

• No certificate of solvency: s.233 (4)
• In a member’s voluntary winding up under s228, if the
directors cannot issue a certificate of solvency, then the
winding-up should proceeds as a creditors’ voluntary
winding-up.
• Liquidator’s judgement on the co’s state of solvency:
s.237A (1)
• Liquidator must summon meeting of creditors if during
course of liquidation becomes of opinion that co will not be
able to pay debts in full within the period stated in the
certificate of solvency.
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Advantages of voluntary winding up

• The main advantages of a voluntary winding up
are that control stays with the members (in a
members’ voluntary winding up) or with the
creditors (in a creditors’ voluntary winding up).
• These processes are often quicker and cheaper
than a compulsory winding-up where the court
takes control and appoint liquidator.
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Compulsory winding up
s.177(1) six grounds
• (a) the company has by special resolution resolved that the
company be wound up by the court;
• (b) the company does not commence its business within
a year from its incorporation, or suspends its
business for a whole year;
• (c) the company has no members;
• (d) the company is unable to pay its debts;
• (e) the event, if any, occurs on the occurrence of which the
articles provide that the company is to be dissolved;
• (f) the court is of opinion that it is just and equitable that
the company should be wound up.
• Yung Kee Restaurant Liquidation (鏞記燒鵝清盤案)
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“unable to pay its debts”

• Most common ground.
• Usually initiated by unsecured creditors.
• S178(1): deemed to be unable to pay its debts if
(a) creditor served a written demand on co and co failed to pay
for 3 weeks. The sum due must be at least $10,000. (s178(3))
(b) if execution of a judgment, decree or order of court in
favour of creditor returned unsatisfied
(c) Where proved to the court that co unable to pay its debts
(taking into account contingent and prospective liabilities)
• s178(1)(c): Cash-flow test or balance sheet test?
• In Re Wah Nam Group Ltd [2000] HKEC 875, Hong Kong
court applies both tests.
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Compulsory winding up
• Who can petition? s.179
• Mainly by the company, creditors, or contributories (s170)

• If the court is satisfied that the company is unable to pay

its debt, the court will make a winding up order against
the company.
• s.184(2) “commencement of winding up”: the date on
which petition is presented.
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Compulsory winding up
• After commencement of winding-up, any disposition of
co property void: s.182
“In a winding up by the court, any disposition of the property of the
company, including things in action, and any transfer of shares, or
alteration in the status of the members of the company, made after
the commencement of the winding up, shall, unless the court
otherwise orders, be void.”
• Stay of proceedings: No action or proceedings can
commence against co without leave of the court. s.186
“When a winding-up order has been made, or a provisional
liquidator has been appointed, no action or proceeding shall be
proceeded with or commenced against the company except by
leave of the court, and subject to such terms as the court may
impose.”
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Compulsory winding up
• The most important feature of compulsory winding up is
that the liquidator is acting on behalf of all the creditors
and contributories of the company, not just the one
presenting the winding up petition to the court. (s187)
• Once the winding up order is made, a liquidator will be
appointed and the liquidator will take custody or control
of all property of co. (s.197)
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Process of winding up
• Liquidator to take possession of co assets: s 197
• Carrying on the co’s business so far as necessary for beneficial
winding up of the co: s 199(2), Part 2 of Schedule 25
• Asia TV Liquidation (亞洲電視清盤案)

• With the sanction of the court, liquidator can take actions to

realise the assets: s 199(4), Part 3 of Schedule 25
• Identify the creditors
• Proofs of debt: Companies (Winding Up) Rules rr 79, 94, 95
• Distribution to creditors and contributories
• Dissolution of the co: s 227
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Creditor protection under the new regime

• Introduces the concept of “transactions at an undervalue”
providing for the court to set aside transactions at an
undervalue entered into by a company within five years
prior to commencement of its winding up (new sections
265A to 265E, 266C and 266D).
• Provides for standalone provisions for the court to set
aside pre-winding-up transactions entered into by the
company which are unfair preferences (new sections 266
and 266A to 266D)
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Creditor protection under the new regime

• Attaches liability to directors and members in receipt of the
proceeds of any share buy-back or redemption from the
company’s own capital that occurs within one year of the
commencement of the company’s winding up. In such
instances the respective directors or members are liable to
repay the amounts received (new section 170A, amended s171
and s179)
• Seeks to minimize the potential for abuse of a director-initiated
creditors’ voluntary up by amending existing section 228A to
set out more clearly the process of initiating such a liquidation.
Introduces a new section 228B setting out the powers, duties
and liabilities of a provisional liquidator appointed under section
228A.
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Creditor protection under the new regime

Effect of floating charge in winding up
• Amended s 267 and added s267A
• To prevent the mischief of last minute floating
charges being created by directors or controllers
of companies in favour of themselves.
• When a co goes into liquidation, a floating charge
is invalid if it was created within 12 months before
the winding up commences and the co is unable
to pay its debt at that time or becomes unable to
pay its debt in consequence of the transaction.
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Creditor protection under the new regime

Effect of floating charge in winding up
• New s267A extends the period to two years for
a floating charge created in favour of a
connected person.
• s267(3) provides exceptions to the amount of
the consideration for the creation of the charge
in the form of money paid to or property or
services supplied to the co at the same time.
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Liquidator
• Role of liquidator:
• To investigate as to the reasons why a company had
failed; to get in, protect, and realise the company’s
assets; and to distribute the proceeds of realization in
accordance with the statutory distribution rules.
• Powers of liquidator
• Investigate the behaviour of those responsible for the
business (i.e. the directors and other officers of the
company) and to discover whether any misconduct on
their part may have led to the insolvency of the
company.
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Liquidator
• Powers of liquidator
• Trace assets that have been dissipated or disposed of,
and has power to take legal action against directors
for fraudulent trading or delinquent officers. (s.275-
276).
• Require the production of information and documents,
and to examine the directors and other officers, or
have them examined by the court.
• Set aside dispositions of company assets made
shortly before the company’s winding up: s.266 –
unfair preferences; and s.267– charges created as
floating charges.
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Distribution – Priority of Claims

1. Property owned by others: Property, which is in the
possession of a company but is in fact owned by
someone else (e.g. the supplier under an effective
retention of title clause), is not part of the company’s
assets and should, therefore, be redelivered to its
owner and not retained subject to the claims of
company creditors.
2. Fixed charges: As discussed above, one advantage of
having a security is that secured creditors can stand
outside the insolvency by enforcing their secured claims
against the company property subject to fixed charges,
if its value is sufficient to cover the debt.
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Distribution – Priority of Claims

3. Cost of Liquidation: The costs, charges, and
expenses properly incurred in the winding up, including
the remuneration of the liquidator must be met first out
of the company’s remaining assets [Rule 179 of the
Companies (Winding Up) Rules (Cap. 32H)]. However,
if the assets are insufficient to meet these liabilities, the
court may order payment in such order of priority as it
thinks just.
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Distribution – Priority of Claims

4. Preferential Payments (s265)
(i) Category A – relating to employees: the wages/salary of
employees for a specified period of amount (4 months;
$8,000), severance payment (max. $8,000), long-service
payment (max. $8,000), wages in lieu of notice (max. one
month; $2,000). [s.265(1)(b), (c), (ca) to (cj) & 1B, Cap 32]
(ii)Category B – relating to the Government: all statutory debts
(i.e. tax and rates) due and payable by the company to the
Government within the 12 months before the appointment of a
provisional liquidator, or the date of winding up
commencement [s.265(1)(d)].
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Distribution – Priority of Claims

4. Preferential Payments (s265)
(iii) Category C – relating to small depositors (max.$100,000) of
licensed banks (the companies being wound up) [s.265(1)(db),
(5D), (5E), (5F) & (6)]
(iv) Category D – relating to the claims against the insurers (the
companies being wound up) [s.265(1)(e), (ea) & (f)]

• Note: The debts in each category rank equally among

themselves and must be paid in full unless the assets are
insufficient to meet them, in which case they will abate in
equal proportions [ss.265(3), (3A), (3AAA)].
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Distribution – Priority of Claims

5. Floating charges
6. Unsecured creditors: pari passu principle
s.250: “Subject to the provisions of this Ordinance as to preferential
payments, the property of a company shall, on its winding up, be
applied in satisfaction of its liabilities pari passu, and, subject to such
application, shall, unless the articles otherwise provide, be
distributed among the members according to their rights and
interests in the company.”
7. Members: Finally, the remaining company’s
assets (if any) will be divided amongst the
members according to their rights (stipulated in
the articles) on liquidation.