Introduction
Aims
Winding-up process
Timescale
Missed opportunity?
Comment


Introduction

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 introduces important changes to the administration of the winding-up process, although it is unclear when the changes will come into force. Following on from "Key changes to winding-up and insolvency law", this update focuses on the changes which are designed to improve the integrity of existing processes rather than implement radical reforms. It also addresses whether the introduction of the somewhat limited new legislation represents a significant missed opportunity to modernise Hong Kong's antiquated corporate insolvency regime.

Aims

According to the government, the aim of the new 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".

To achieve this aim, the 2016 amendment includes new provisions that:

  • allow the setting aside of transactions at an undervalue within five years of a winding up;
  • rectify the existing law on unfair preferences (making it more user friendly); and
  • create liabilities for directors and members to contribute to the assets of a company regarding a redemption or buy-back of the company's own shares within one year of the winding up.

The 2016 amendment also attempts to enhance the integrity of the winding-up process itself.

Winding-up process

New safeguards in voluntary winding up
The 2016 amendment introduces safeguards to reduce the risk of abuse by directors in a voluntary winding up. Under the existing Section 228A (which took effect in 2003), if directors believe that the company cannot continue business because of its liabilities, they may resolve at a directors' meeting to commence a voluntary winding up.

Section 228A can be useful when it is obvious that:

  • the company is insolvent and creditors have started enforcement action; and
  • any delay to the winding up would upset the equal distribution of assets to the company's creditors.

Under the revised Section 228A procedure, directors must deliver a winding-up statement to the registrar and hold meetings of the members and creditors no later than 28 days after delivery of the winding-up statement. The directors must declare that the winding up should be commenced under the Section 228A procedure, as it would not be reasonably practicable to proceed under another section of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).

Previously, directors had only to appoint a provisional liquidator 'forthwith'. This procedure was open to potential abuse, giving unscrupulous directors the opportunity to:

  • appoint their own chosen liquidator, without referring to the creditors; and
  • take advantage of the window between the members' meeting and the subsequent creditors' meeting in a creditors' voluntary liquidation. During this period, a liquidator appointed by the company at the behest of its directors could act to the detriment of the creditors – for example, by selling the company's assets and business at a reduced price to a connected party.

Such practice was considered in Re Centrebind Ltd (England and Wales, [1966], 3 All ER 889), which held that the acts of a liquidator appointed at a members' meeting are still valid if the liquidator is removed at the subsequent creditors' meeting.

The changes under the 2016 amendment mean that the appointment of the provisional liquidator will commence on delivery of the winding-up statement to the registrar (amended Section 228A), thereby ensuring that directors cannot delay the appointment. The provisional liquidator must be a solicitor or a certified public accountant (amended Section 228A(8)(b)).

Hong Kong has no regulated insolvency profession and it can be strongly argued that this is a deficiency which should be remedied.

Powers and duties of liquidator nominated by company
As a further protection, a person who is nominated by the company to be its liquidator can exercise only limited powers without the court's approval. These include:

  • taking the company's property and assets into custody;
  • disposing of perishable goods; and
  • taking actions necessary to protect the company's assets (new Section 243A).

Directors' powers before nomination or appointment of liquidator
In a members' voluntary (ie, solvent) winding up, the directors may exercise their powers only with court approval before the appointment of a liquidator (new Section 250A(1)).

In a creditors' voluntary winding up, the directors may exercise their powers with court approval and as necessary for the purpose of enabling them to call a creditors' meeting (new Section 250A(2)).

In both situations, the directors may dispose of perishable goods or do anything necessary to protect the company's assets, without court approval.

Provisional liquidators
The 2016 amendment revises the Companies (Winding Up and Miscellaneous Provisions) Ordinance to set out more clearly the duties, basis for determining remuneration and tenure of office of a provisional liquidator in a court-ordered winding up (amended Section 193).

The new Section 199B also sets out more clearly the statutory powers of provisional liquidators in a court-ordered winding up. It provides a template for court applicants to use, thereby seeking to avoid unnecessary customisation in individual applications.

Liquidator liabilities
Section 276 of the ordinance provides that if it appears that a past or present liquidator of the company has become liable or accountable for any money or property of the company – or has been guilty of a misfeasance or breach of duty in relation to the company – the court may order the liquidator to repay or restore the money or property.

However, at present, the application of Section 276 of the ordinance is limited by Section 205, which provides that once a liquidator has been validly discharged by the court and the company has been wound up, the liquidator is discharged from liability regarding any act or default made in the administration of the affairs of the company or as liquidator.

As amended, Section 276 brings the liability limitation period of liquidators in line with other professional sectors where liability is subject to the limitation period set out in the Limitation Ordinance (Cap 347). Misfeasance is often discovered only after the grant of release. As well as being subject to the usual limitation periods, any action to hold former liquidators accountable for past wrongdoings will require leave of the court to discourage frivolous litigation.

Some practitioners may feel this is unwelcome, as many liquidations take place in a hurried atmosphere when urgent commercial decisions need to be made, which – it can be argued – should not be subject to a hindsight test.

Conflicts of interest
Provisional liquidators or liquidators with a conflict of interest will be disqualified from taking office, except with leave of the court. A person subject to a disqualification order will be barred from serving as a liquidator (provisional or otherwise) (new Section 262B).

Disclosure statement
Liquidators (including prospective provisional liquidators) will have to make a disclosure statement confirming that:

  • they are not disqualified from taking up office; and
  • they have no relationships that would present a conflict of interest (new Sections 262C and 262D), including through being a creditor, debtor or legal or financial adviser of the company, its holding company or its subsidiary.

Failure to make adequate disclosure is an offence.

Removal and resignation of liquidator in voluntary winding up
Section 244A has been added to the ordinance to specify the circumstances in which a liquidator may be removed. This can happen if no less than 10% in value of the company's creditors request that a creditors' meeting be convened to consider the removal of a liquidator.

The new Section 154A sets out how the resignation of a liquidator in a creditors' voluntary winding up should be handled. The liquidator must summon a creditors' meeting, which may then agree by resolution to accept the resignation.

Prohibition on inducement to secure appointment
The existing prohibition on offering an inducement to a member or creditor to secure appointment as liquidator is expanded to include an inducement offered to any person. The prohibition now extends to the appointment of provisional liquidators (amended Section 278A).

Private examination by liquidator
Sections 286A to 286E have been added to the ordinance to improve the public examination procedures of promoters and directors. The sections codify the existing common law position, whereby the right against self-incrimination is abrogated (new Section 286D).

Inspection committees
The 2016 amendment contains provisions:

  • prescribing the maximum and minimum number of members of inspection committees (amended Sections 206 and 243); and
  • amending the ordinance to streamline and rationalise the proceedings of inspection committees (new Section 206A and amended Section 207), allowing for remote attendance at inspection committee meetings (new Section 207B) and enabling an inspection committee to make decisions through written resolutions (new Section 207D).

In relation to the business of the committee, inspection committee members can be represented by a person authorised by the member for that purpose (new Section 207A).

Timescale

The 2016 amendment's enforcement date will be set by the secretary for financial services and the treasury. At present, there is no public information as to when this will be or if the changes will be introduced in stages.

Missed opportunity?

As discussed in "Key changes to winding-up and insolvency law", the 2016 amendment includes no provisions relating to corporate rescue or delinquent directors. These are areas where Hong Kong's corporate insolvency regime has for some considerable time lagged behind other jurisdictions within the region (most notably Singapore) and internationally, such as England and Wales.

At present, provisional liquidation is often used as a tool for implementing measures pertaining to corporate rescue. Under this procedure, a winding-up petition is made to the court; the petitioner may then request the court to appoint a provisional liquidator solely at the court's discretion and require that it be demonstrated that assets are in jeopardy. The petitioner or provisional liquidators then request the court to adjourn the petition hearing to give the provisional liquidator time to propose an arrangement scheme with the creditors of the insolvent company. If the arrangement scheme is approved, the winding-up petition will be withdrawn. If not, the court will grant a winding-up order.

This 'make-do' solution is far from ideal and is often seen as excessive, as it limits the powers of provisional liquidators and involves close court supervision.

It has been 30 years since the UK Insolvency Act 1986 (subsequently amended) radically overhauled UK insolvency law (then similar to Hong Kong law) by introducing:

  • the corporate rescue procedure of administration;
  • the company voluntary arrangement procedure; and
  • wrongful trading, under which – in certain prescribed circumstances – directors of an insolvent company can be personally liable for the company's debts.

A statutory director disqualification regime was also introduced at the same time.

No such important changes have been made to Hong Kong's insolvency law.

Comment

While the government has said that it is developing detailed proposals on corporate rescue, the practical reality is that such proposals have been in the making since the Asian financial crisis and, despite various consultation processes, nothing substantive has yet been forthcoming.

While key changes are to be made to Hong Kong corporate insolvency law, it is a concern that Hong Kong's existing corporate insolvency laws and procedures are not fit for purpose. In the evolving world of cross-border insolvency and forum shopping, there is a risk that Hong Kong will come up short.