Uploaded by Yvonne Ku

Corporate & Commercial Transactions - Outline on Corportate Insolvency & Liquidation

Solvent Companies – (1) Deregistration of Companies: s291AA CO
Application by (1) company; (2) a director; OR (3) SH to CR
o ALL SH must agree
o Either (1) company never commenced biz/ operation; or (2) ceased to carry biz > 3 months
o Company has no outstanding liabilities (including tax liability)
o Application by (1) Form DR1 + (2) notice of no objection from Inland Revenue Department
o CR publishes notice in Govt Gazette for objection to be received in 3 months
o CR publishes notice of deregistration if no notice received & co is dissolved on this date
 All assets of dissolved co are deemed to be bona vacantia (given to Govt)!
 So get assets out before deregistration!
Dissolved co may be reinstated within 20 years: s291AB
Solvent Companies – (2) Members’ Voluntary Winding-up
Application by SH
o SH passes a special resolution to wind up the company: s288(1)(b)
 File special resolution w/ CR
o Winding-up commences on passing of special resolution: s184(1)
o Certificate of solvency signed by majority of Ds that co can pay off its debt w/I 12 months of
winding-up: s233
 File certificate of solvency w/ CR
o Within 12 months of winding-up, creditors must be paid off
 If co cannot pay off, must convert to Creditors’ Voluntary Winding-up: s237A
o Liquidator calls general meeting of co at end of each year the winding-up continues: s238
o Liquidator calls final general meeting of co as soon as affairs of co are fully wound up: s239
o Within 1 week of final meeting, liquidator delivers a/c & a return of meeting to CR to register
o On expiration of 3 mths after registration of a/c & return, co is dissolved
Points to note
o Costly
o Time-consuming: around 6-9 months for Members’ Voluntary Winding-up to take place since
liquidator needs to be appointed
Solvent Companies – (3) Winding-up by Court on Non-insolvency Grounds (rare!)
Co wound up by Court: s177(1)(a)
o Either (1) co does not commence its biz within 1 year of its incorporation; or (2) co suspends
its biz for 1 year: s177(1)(b)
 But in fact co will go for deregistration
o Co has no SH: s177(1)(c)
Winding-up upon
o Occurrence of an event stipulated in MA/ AA of co for dissolution of co: s177(1)(e)
o Just & equitable grounds: s177(1)(f)
 Loss of substratum – when main object is abandoned by co
 Quasi-partnerships – co has nature of partnerships so co allows winding-up
Points to note
o Rarely used in practice
Insolvent Companies – (1) Creditors’ Voluntary Winding-up
Winding up by
o SH passes a special resolution to wind up co
 File special resolution w/ CR
o BUT directors can proceed winding-up w/o meeting of SH in emergencies: see s228A below
o Winding-up commences on passing of special resolution: s184(1)
o (No need certificate of solvency)
o A meeting of the creditors MUST be called: s241
o Creditors may form a committee of inspection to work w/ liquidator to wind up co: s243
 To set aside past transactions to call back any $/ assets
o Liquidator calls (1) general meeting of co + (2) meeting of creditors at end of each year the
winding-up continues: s247
o Liquidator calls (1) final general meeting of co + (2) final meeting of creditors, as soon as affairs
of co are fully wound up: s248
o Within 1 week of final meeting, liquidator delivers a/c & a return of meeting to CR to register
o On expiration of 3 mths after registration of a/c & return, co is dissolved
Points to note
o S228A: Liquidation special procedure allows Ds to proceed to winding-up w/o a meeting of SH
when co cannot continue because of its liabilities; however it is of limited use – only in
emergencies when it is impossible/ impracticable for any other form of winding-up to take place
Insolvent Companies – (2) Winding-up by Court on Insolvency Ground: s177(1)(d)
Petition filed w/ Court on ground that ‘co is unable to pay its debt’
o Co is deemed unable to pay its debt if
 (1) Co [1] unable to satisfy a [2] statutory demand for a [3] debt of [4] not less HK$10,000
within 3 weeks of the date of the demand: s178(1)(a)
 [1] If co disputes liability, then appropriate grounds must be set out
 [2] No prescribed form for statutory demand but must:
o Specify amount of debt;
o Demand for payment; and
o Alert co that its default in payment may result in winding-up petition
being filed
o Must be served at registered address of co
 [3] Debt must be a liquidated sum + a debt now due & not due in the future
o Creditor includes a contingent creditor
 [4] Employees may aggregate their claims to meet the minimum HK$10,000:
 (2) Judgment against the co is returned unsatisfied in part/ in whole: s178(1)(b)
 (3) Proved to the satisfaction of court that co is unable to pay its debts: s178(1)(c)
o A ‘commencement deposit’ of $12,150 to be deposited w/ the Official Receiver before petition
is filed to cover fees & expenses incurred by the Official Receiver: Rule 22A, Companies
(Winding-up) Rules
o Winding-up commences on filing of the winding-up petition: s184(2)
o Court may appoint provisional liquidator to take/ protect assets of co either before or at the
hearing of the winding-up petition
 Test: Whether co is in danger of losing assets before the winding-up petition?
o At hearing of winding-up petition, court may (1) dismiss the petition; (2) adjourn the hearing
(e.g. there may be a corporate rescue); or (3) make a winding-up order when the relevant
ground is made out: s180(1)
Provisional liquidator calls meeting of creditors & contributories (= persons liable to contribute
to assets of an insolvent co like SH)
Creditors & contributories may w/ court’s endorsement appoint liquidators to replace
provisional liquidator
Creditors must file formal proofs of debt w/ liquidator
Court may upon liquidator’s application order dissolution of co, as soon as affairs of co are fully
wound up: s227
 Court’s winding-up under a regulatory order where no of creditors is large: s227A-E
 Court’s winding-up by summary procedure where co’s assets not likely to exceed
HK$200,000: s227F
Consequences of Winding-up
Attachment/ execution against co after commencement of winding-up is void: s183
Disposition of property of co after commencement of winding-up is void: s182
All co’s property goes into custody/ control of provisional liquidator/ liquidator
o Unlike bankruptcy, co’s property is not automatically vested in liquidator unless specifically
applied for – rarely done: s198
Legal proceedings MAY be stayed after filing of winding-up petition: s181
After winding-up order is made, no action/ proceedings can be proceeded w/ agains co except w/
leave of court: s186
o At any time after filing of winding-up petition & before making winding-up order, Court may
appoint a provisional liquidator (often a accountancy firm) & prescribe his powers: s193
o Administration of co’s affairs pass to liquidator: s235(2) & s244(2)
Liquidator vs receiver
Appointment & duty
 Appointed under debentures creating
fixed/ floating charge
 Agent of security holder
 Duty is to protect interests of security
holder only
Effect on company
 When appointed, co needs NOT go into
 Trading may continue after appointment
 Appointment does not terminate Board’s
management powers unless receiver
appointed for all assets of co
Powers of liquidator: extensive!
o (1) Examination powers
 Appointed by Court
 Officer of court
 Duty is to protect unsecured creditors
 Liquidator is appointed only when co is in
 Appointment terminates trading power of
 Appointment terminates Board’s
management powers
Public examination of directors or officers before judge/ master where liquidator is of
opinion there is fraud of a prima facie case of liability to disqualification: s222 (fairly
 Private examination of officer or any person known or suspected to have in his
possession property of co/ info relating to affairs of co: s221 (much wider)
 Court may require officer/ person summoned to produce books & papers in his
custody/ power relating to co
 BUT docs need only be broadly identified as the object is to give liquidator
access to all docs & info relating to the co: The Joint & Several Liquidators of
Kong Wah Holdings v The Grande Holdings
 Examination is usually conducted in chambers
 Examination is assist liquidator to collect assets, pay off debts, estimate costs,
and investigate the cause of the failure of the co
(2) Avoidance powers: set aside past transactions!
 Set aside floating charge under s267?
 Floating charge created within 12 months of commencement of winding-up is
void unless the money advanced is new monies or it is proved that co was
solvent immediately after the creation of the charge: s267
 Steps to go through to see if floating charge is valid:
o (a) Check date of creation of floating charge
 If beyond 12 months of commencement of winding-up: valid
 If within 12 months commencement of winding-up: see (b)
o (b) Check if the $ advanced to co is old $ or new $
 If new: valid & secured
 If old: see (c)
o (c) Check if co was insolvent immediately after creation of the charge
 Factual evidence
 Set aside extortionate credit transactions under s264B?
 Yes if they are:
o Grossly exorbitant payments made for the provision of credit or grossly
contravenes ordinary principles of fair dealing
o Credit transactions entered into during the 3-year period before
 Set aside unfair preferences under s266B?
 Yes if 5 requirements are met:
o (a) There was an existing creditor-debtor relationship: s50(3)(b) BO
o (b) Creditor being preferred: s50(3)(b) BO
 E.g. from unsecured to secured: put in a better position
o (c) Co was influenced by a desire to prefer creditor: s50(4) BO
 BUT repayment made under pressure/ threats of litigation
would NOT be set aside
 Desire is PRESUMED if creditor is an associate
 Desire NOT PRESUMED if associate is only an
‘associate’ by reason of being an employee – e.g.
directors: s51B(4) BO
 A co is an associate of a debtor if that debtor by himself
or together with his associates have control of it: s51B(6)
o (d) Such preference occurs within 6 months before commencement of
winding-up: s266B(1)(b)(i); OR 2 years if associates: s266B(1)(b)(ii)
o (e) Co was insolvent at the time the preference occurs
 Insolvent = unable to pay debts or has negative net asset value:
s51(3) BO
Court may make various orders in the case of an unfair preference being found:
s51A BO
Set aside fradulent conveyances under s60 CPO? (not really an avoidance power coz
can be done by any person)
 Disposition of property w/ intent to defraud creditors shall be voidable
o Does not extend to estate/ interest in property disposed of for value
consideration & in good faith & no notice of the intent to defraud
Issues in Insolvency Winding-up
Priority of claims: Re Leyland Daf; s79 CO; s265 CO
o (1) Co’s assets subject to a fixed charge
o (2) Liquidation expenses
 Cost of preserving & realising the assets
 Liquidator’s remuneration
 Costs & expenses of winding-up
o (3) Preferential debts
 Wages due to employees
 Debts rank equally among themselves: s265(3)
 Wages due for the 4 months before commencement of winding-up subject to a
maximum claim of HK$8,000/ person w/ the excess being unsecured: s265(1B)
 Protection of Wages on Insolvency Fund: see LG11.13
 Statutory debts due to Govt
 For banks: bank deposits
 For insurance co: insurance claims
 Note: if preferential debts are paid out of co’s assets subject to floating charge, the
charge hoder is able to recoup such amounts out of the free assets of co
o (4) Co’s assets subject to a floating charge
 Obligation to pay preferential creditors: s79 & s265
o (5) Unsecured ordinary creditors
o (6) The company
Fraudulent trading: s275
o See LG2&3.13
Corporate rescue: s166
o Schemes of arrangement
 Application to court to convene meeting of creditors
 Requires consent of 75% in value & 50% in numbers of creditors
 Requires Court approval
 Scheme once approved binds all creditors
 Time-consuming & costly
 No moratorium before scheme is sanctioned by Court
o See LG11.14-15