Types of liquidation and reorganisation processes

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

There are two different procedures for the voluntary liquidation of a company: a members’ voluntary liquidation (MVL) (which is a solvent liquidation) and a creditors’ voluntary liquidation (CVL) (typically an insolvent liquidation).

 

Members’ voluntary liquidation

If the directors of the company issue a certificate of solvency, a company can be placed into MVL. The MVL is commenced once a 75 per cent majority of the shareholders has resolved to place the company into liquidation. The MVL commences from that date and the shareholders choose the liquidator. On the appointment of the liquidator, the powers of the company directors will cease.

If the liquidator subsequently determines that the company is in fact insolvent, the MVL should be converted into a CVL.

 

Creditors’ voluntary liquidation

If the company is insolvent, or if a certificate of solvency has not been issued, a company can be placed into CVL. Again, a resolution must be passed by a 75 per cent majority of the members to place the company into liquidation. The CVL commences on the date on which the shareholders pass this resolution. The shareholders will also appoint a liquidator, but until the creditors’ meeting referred to below has taken place, the powers of that liquidator will be limited.

The directors must then hold a creditors’ meeting on the same day or on the next day, at which the creditors will be given information on the company (a statement of affairs). The creditors may also appoint a liquidator if a resolution is passed by a majority by value of the creditors present and voting. If the shareholders have previously appointed a liquidator, the creditors’ choice of liquidator will prevail.

Section 228A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O) is a ‘special procedure’ that allows the directors, in limited circumstances, to commence a voluntary winding up if they have formed the opinion that the company cannot, as a result of its liabilities, continue its business. This procedure may be used in limited circumstances only because the directors would have to declare that the winding up should be commenced under section 228A because it would not be reasonably practicable to proceed under another section of the C(WUMP)O. A creditors’ meeting will be held, and the winding-up process will, in general, follow that of a CVL.

Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

There is currently no statutory corporate reorganisation procedure (eg, a company voluntary arrangements or administrations procedure) in Hong Kong. However, where provisional liquidators are appointed pursuant to section 193 of the C(WUMP)O, the provisional liquidators may be granted powers to explore and facilitate a reorganisation of the company (see, eg, Re China Solar Energy Holdings Ltd [2018] HKCFI 555).

 

Schemes of arrangement under section 669 of the Companies Ordinance

The scheme of arrangement (scheme) legislation under section 669 provides a mechanism to enable a company to enter into a compromise or arrangement with its creditors. This process is commenced by an application to the court, by either the company or any creditor (or, where relevant, the liquidator), for an order that a meeting of creditors is summoned. Any proposed compromise or arrangement will become binding on the creditors if it is approved by 75 per cent in value and the majority in number of each class of creditors present and voting, and it is then sanctioned by the court. A company may also enter into a scheme with its shareholders as part of a reorganisation, though a more detailed consideration of shareholder schemes is outside the scope of this chapter.

It is open to creditors to challenge the scheme in court at either the hearing for permission to convene the scheme meetings or the hearing to sanction the scheme. The usual grounds for challenge are that the meetings were improperly constituted, the creditors were not given sufficient information, or the scheme is unfair. During the scheme process, there is no statutory protection for the company from its creditors.

In terms of schemes of foreign companies, Hong Kong law is similar to English case law, which provides that a foreign company is entitled to enter into a scheme if it is capable of being wound up in England and Wales. Case law has clarified the position further, confirming that a company could be wound up in England and Wales if it could be said to have ‘sufficient connection’ with England and Wales.

The question as to what constitutes ‘sufficient connection’ is one that is dependent on the facts in each case. For example, the Hong Kong courts have found that factors such as the existence of debts governed by Hong Kong law (Re LDK Solar Co, Ltd (In Provisional Liquidation) [2015] 1 HKLRD 458) and being listed in Hong Kong (Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1) constituted a sufficient connection with Hong Kong to give the courts jurisdiction to sanction a scheme in relation to a foreign company.

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability and, if so, in what circumstances?

When an insolvent company proposes a scheme, it should be compared against the ‘liquidation analysis’ (ie, the rights that the creditors would have against the company in an insolvent liquidation). The rights of creditors under a scheme can differ from those creditors would have if the company went into insolvent liquidation; indeed, the purpose of many schemes is to produce an arrangement that differs from an insolvent liquidation. Depending on the differences, however, this may have an impact on the analysis of which creditors form a separate class for the purposes of the scheme meeting and whether the scheme is fair and should be sanctioned. If the differences apply equally to all creditors, no question of separate classes arises. If the differences produce a result that affects the rights of one group of creditors differently from another then, subject to questions of materiality, they should form separate classes.

In a scheme, the process is commenced by an application to the court, by either the company or any creditor (or, where relevant, the liquidator or provisional liquidator), for an order that a meeting of creditors is summoned. There are separate creditors’ meetings for each class of creditors. It is the responsibility of the party proposing the scheme to determine the correct classes. If incorrect class meetings are held, then the court will not have the jurisdiction to sanction the scheme.

The classic test for determining the constitution of classes is that a class should comprise ‘those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’ (UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] HKCFA 19). Each class is determined in accordance with the creditors’ rights under the scheme, as opposed to broader collateral interests. It should be noted that a broad view should be taken of the meaning of class; whether a group of creditors forms a single class depends on the analysis of:

  • the rights that are to be released or varied under the scheme; and
  • the new rights (if any) that the scheme gives, by way of compromise or arrangement, to those whose rights are to be released or varied.

 

It can be seen from this that in many cases it is not possible to be certain that a particular type of claim constitutes a class of creditors. In certain cases, however, the distinction is relatively clear-cut; for example, secured creditors and unsecured creditors will almost certainly constitute separate classes.

For any proposed compromise or arrangement put forward under a scheme to become binding on the creditors, it must be approved by 75 per cent in value and the majority in number of each class of creditors present and voting, and then sanctioned by the court. The scheme will not be sanctioned unless it is fair – that is, a scheme that an intelligent and honest person, a member of the class concerned and acting in their best interests, might reasonably approve.

The English court has confirmed (see La Seda de Barcelona SA [2010] EWHC 1364 (Ch)) that, in the case of an English scheme of arrangement, guarantors that are themselves not bound by the scheme of arrangement can have their guarantees released under the terms of the scheme. The court was particularly influenced by the fact that, in return for gaining the benefit of those releases, the guarantor company was itself releasing various group companies from outstanding intercompany debt obligations. This element of ‘give and take’ was seen as important in establishing a benefit to the scheme creditors and satisfying the court that its sanction of such releases would be appropriate. This approach was followed by the Hong Kong courts in Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1 and Re China Singyes Solar Technologies Holdings Ltd [2020] HKCFI 467.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

If a creditor seeks to place a company into involuntary liquidation (which is usually called compulsory liquidation or winding up by the court), that creditor has to petition the court to have the company wound up. The most likely ground upon which a creditor would successfully petition the court for a winding-up order is that the company is unable to pay its debts.

If the court makes a winding-up order, the winding up is deemed to commence at the time of the presentation of the winding-up petition rather than on the date of the order. Any disposition of the company’s property and any transfer of shares made after the commencement of the winding up is, unless the court orders otherwise, void (section 182 of the C(WUMP)O).

Once the winding-up order has been made or a provisional liquidator has been appointed by the court, no action may be started or proceeded against the company without the permission of the court. The directors’ powers will also cease on that date. Also, the business of the company ceases except to the extent necessary for it to be wound up.

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

There is currently no statutory corporate reorganisation procedure in Hong Kong. However, where provisional liquidators are appointed pursuant to section 193 of the C(WUMP)O, the provisional liquidators may be granted powers to explore and facilitate a reorganisation of the company.

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Many reorganisations result from informal negotiations with creditors outside any formal insolvency or restructuring procedures. As a consequence, the terms of the reorganisation and, therefore, any provisions as to the timetable for the reorganisation are subject to negotiation between all relevant parties.

There are no statutory provisions for the expedition of schemes of arrangement using ‘prepackaged’ reorganisations, and the implementation time for a scheme is a matter for the court’s discretion and will depend on the scheme’s complexity and any urgency. The court has been willing to hear applications on an expedited basis where there is an urgent requirement to do so.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

A proposed scheme of arrangement can be defeated if it does not obtain the statutory majority of creditors voting in favour of it. Assuming that the requisite majorities vote in favour at the scheme meeting, a scheme will be defeated if the court refuses to sanction the scheme either because it does not have the jurisdiction to sanction it, for example, because the classes are incorrectly constituted or because it is unfair.

A dissenting creditor can defeat an informal reorganisation by refusing to take part or, where appropriate, by applying for the company to be wound up (although the court has to exercise its discretion when making a winding-up order).

If a scheme of an insolvent company is defeated, then unless new reorganisation proposals can be agreed with the requisite majorities of creditors, it is likely that the company will be placed in liquidation.

If there is a default by the debtor in performing an approved plan in a scheme, the consequences of default will usually be set out in the scheme document. The consequences of a breach by the debtor of any informal agreement will depend on the terms of the agreement but will usually result in the creditor having all its previous rights restored.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

In addition to an MVL, a company may be dissolved under section 750 of the Companies Ordinance without the need for a formal liquidation procedure if all the shareholders agree, the company has never commenced business or operations or ceased carrying on business or operations longer than three months ago, and the company has no outstanding liabilities.

Pursuant to section 760, such companies, as well as companies that have been dissolved following liquidation, may also be restored to the Companies Register following an application to the court by an interested party within 20 years of the date of dissolution.

The court will make an order for restoration if, at the time of the striking off, the company was carrying on business or in operation or if the court considers it just to do so.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

In the case of a voluntary winding up, once the company’s affairs are fully wound up, the liquidator must present the final accounts, showing how the liquidation has been conducted, to a meeting of creditors. After the meeting, the liquidator will send a copy of the accounts to the Registrar of Companies. The company is then deemed dissolved after three months.

In the event of a compulsory liquidation, if the liquidator is not the Official Receiver, once the winding up of the company is complete (for practical purposes), the liquidator must summon a final general meeting of creditors. The liquidator will present their report of the winding up to the creditors. The liquidator must then notify the Registrar of Companies that the final meeting of creditors has been held. The company is deemed dissolved three months after the Registrar of Companies registers this notice. If the liquidator is the Official Receiver, the liquidation will end three months after the Official Receiver notifies the Registrar of Companies that the winding up is complete. Alternatively, if the company has insufficient assets to cover the costs of the liquidation and it appears to the Official Receiver that the affairs of the company do not require any further investigation, the Official Receiver may apply to the Registrar of Companies for early dissolution of the company in liquidation.

Schemes of arrangement and informal reorganisations, if successful, will end in accordance with their terms.