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Insolvency procedures

What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Liquidation
  • Scheme of arrangement

Liquidation – There are three types of liquidation:

  • members’ voluntary liquidation (MVL): solvent, commenced by a resolution of the shareholders
  • creditors’ voluntary liquidation (CVL): insolvent, commenced by a resolution of the shareholders
  • compulsory liquidation: insolvent, commenced by court order

The liquidator realises the assets of the company and distributes the proceeds to its creditors. In an MVL the surplus is paid to the shareholders. At the end of the process, the company is dissolved and ceases to exist.

Scheme of Arrangement – Where a company is in financial difficulties, it can propose a compromise of its debts to its members and creditors.

Creditors’ schemes must be approved by a majority of creditors in number and 75% in value.

Members’ schemes must be approved by 75% of the members and all members must vote.

Special rules apply where the scheme is used to effect a takeover.

Can a company obtain a moratorium whilst it prepares a restructuring plan?

There is generally no moratorium where a company is preparing a restructuring plan, although appointment of a provisional liquidator would effectively provide one.

To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

On making of an order for compulsory liquidation by the court the directors’ powers of management cease.

In a voluntary liquidation the directors’ powers cease on appointment of a liquidator, although the shareholders or creditors can sanction the continuance of the directors’ powers.

In a scheme the directors remain in control of the company.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Around eight to ten weeks.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

There is no legislation in relation to cross-border insolvency, however, the Hong Kong court generally recognises overseas insolvency proceedings.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over immovable property is taken by a mortgage.

Security over moveable property is taken by:

  • fixed charge
  • floating charge
  • pledge

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

Preferential debts include:

  • payments to employees in respect of severance, long service, notice, holiday and statutory compensation, subject to certain limits
  • all statutory debts owed to the State

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?


Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?


Retention of title
Are retention of title clauses effective?

Yes, provided that such clauses are incorporated into contracts that are valid under Hong Kong law.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

A liquidator can challenge:

  • fraudulent preferences
  • floating charges granted in the 12 months prior to the company going into liquidation. The court will avoid the charge unless the chargeholder can prove that following the grant of the
  • charge the company remained solvent

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be found civilly liable for losses caused to the company by:

  • breach of fiduciary duty
  • fraudulent trading

Directors can be held criminally liable for fraudulent trading and punished by an unlimited fine and upto five years imprisonment.