The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (CAP 32) (the “Amendment Ordinance”) came into force on 13 February 2017. One of the key objectives of the Amendment Ordinance is to increase protection of creditors. Under the Amendment Ordinance, liquidators are given the avoidance power to set aside transactions at an undervalue and unfair preferences.
Transaction at an undervalue: The Amendment Ordinance allows the courts of Hong Kong, upon application of liquidators, to set aside transactions at an undervalue entered into by the liquidating company within 5 years before the commencement of its winding-up, provided that the company was insolvent at the time of the transaction or became insolvent as a result of the transaction. A transaction is regarded as “undervalue” if (a) the company receives no consideration in the transaction or (b) the value of the consideration the company receives is significantly less than the value of the consideration provided by the company. The only defence available is that the company entered into the transaction in good faith for the purpose of carrying on its business and there were reasonable grounds for believing that the transaction would benefit the company.
Unfair preferences: The Amendment Ordinance introduces a standalone unfair preference rule, empowering the liquidators to apply to the court for an order to set aside unfair preferences provided by the liquidating company within 6 months before the commencement of its winding-up, provided that the company had a desire to prefer the recipient and that the company was insolvent at the time of the transaction or became insolvent as a result of the transaction. If the unfair preferences were given to a person connected to the company (otherwise than being its employee), then the relevant period would be within 2 years before the commencement of its winding-up. A company is regarded to have given unfair preference to a person if the person is the company’s creditor or a surety or guarantor for any of the company’s debt and the company does anything which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position that person who have been in if that thing had not been done. A person who received an unfair preference from the company in good faith will not be subject to court orders.
Court orders: If the Court considers that a transaction entered into by the winding-up company was at an undervalue or the company has given unfair preferences to a person, it can make such order it thinks fit to restore the position to what it would have been if the company had not entered into that transaction. Orders which the Court will make include, for example, (a) orders requiring any property transferred as part of the transaction to be re-vested in the company; (b) orders requiring the release or discharge of any security given by the company; and (c) orders requiring any person to pay to the liquidator the benefits received from the company.