The latest piece in the jigsaw of Hong Kong's corporate winding-up regime is the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 ("Amendment Ordinance"), which enters into legal effect as of today, 13 February 2017.
Whilst the Amendment Ordinance may arguably add an extra layer of complexity when interpreting the rules, the result is that the existing winding-up regime, as contained in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32), has been revamped and modernised. The mechanisms for winding-up are not set to change, but what is changing, are the tools and resources available to the parties involved and the regulation of those in control of the winding-up procedure.
1. Additional protection for creditors
Transactions that may be liable to be set aside
A mixture of new and updated claw-back mechanisms are introduced, improving the Hong Kong court's powers to look further back in the period leading up to the commencement of winding-up for transactions that may be liable to be set aside.
(i) Transactions at an undervalue
New powers have been granted to the court to set aside transactions at an undervalue entered into by a company within a five year period prior to the commencement of its winding-up. A definition of "transaction at an undervalue" is introduced, being transactions that involve gifts by the company or where the company receives consideration the value of which (in money or money's worth) is significantly less than the consideration provided by the company (sections 265D and 265E).
Currently, the court can claw back floating charges created by a company within the preceding 12 months of the commencement of winding-up. This time period has been extended, allowing the court to look back up to two years in respect of floating charges where the creator is a connected person to the company (section 267A).
The existing unfair preference rule was dealt with by signposting to the relevant provisions in the Bankruptcy Ordinance (Cap. 6). The new standalone rule in the Amendment Ordinance includes a definition of "unfair preference" and "associate" and allows the court to look back up to two years, ensuring that no particular creditor is given preference over others (sections 265B and 266A).
Improved Creditors' Voluntary Winding-Up
Significant amendments have been made to provide welcome structure in respect of creditors' rights in a creditors' voluntary winding-up. The first creditors meeting must now be summoned for a date no later than 14 days after the date of the company meeting where the resolution to wind-up was proposed and creditors must be given at least seven days' prior notice (sections 241(1)(a) and (b)).
At the meeting itself, a full statement of the position of the company's affairs must be provided at the meeting, the contents of which is now clearly particularised. Any director that fails to comply with these requirements commits an offence and is liable on conviction (sections 241(3A) and 241(6)).
2. Regulation of Director-initiated Voluntary Winding-Up
Under the previous rules, directors could commence the winding-up of a company without any requirement to consult or meet with the company's members. This led to a risk of abuse of process by directors. New safeguards have been put in place by a new section 228A, where directors are required, before a winding-up statement is delivered, to:
(i) cause a meeting of the company to be summoned, for a date not later than 28 days after delivery of the statement of winding-up (section 228A(1)(b)); and
(ii) appoint a provisional liquidator with effect from the commencement of the winding-up (section 228A(1)(c)).
Directors are required to sign a statement, contained in the winding-up statement, confirming that these requirements have been met. They then have a duty to cause a meeting of the creditors for not later than 28 days after the winding-up statement is delivered. This serves to better protect the interests of both members and creditors.
It is not just directors that are under closer scrutiny. The provisional liquidator appointed by a director in a director-initiated winding-up is also under a duty to comply with the duties and provisions set out in the new section 228B. Their power is restricted so that they may only exercise powers of a liquidators with the sanction of the court (subject to limited exceptions) and they are under an obligation to attend the first meeting of creditors and report on any exercise of their power.
3. Regulation of the powers and duties of liquidators
New safeguards have been put in place to ensure that liquidators and provisional liquidators are accountable for their actions. These range from a requirement to disclose potential conflicts of interest (sections 262A to 262G), a restriction on offers of inducement for the appointment as a liquidator or provisional liquidator (section 278A) and remaining liable for misfeasance, breach of duty or breach of trust despite having been released by the Court after completion of a winding up (sections 205 and 276).
One notable protection introduced for liquidators is the ability to appoint a solicitor for assistance in carrying out their duties, which are now more clearly set out in a new schedule 25.
4. Streamlining the process
The Amendment Ordinance has introduced provisions that better reflect modern practices, including the ability to use electronic means of communication.
The main beneficiary of these provisions is the Committee of Inspection ("COI"), which represents creditors and supervises the liquidators. The COI, which is now restricted to between three and seven members, has been given more autonomy, which should, in turn, reduce the amount of time and costs spent during the process.
For example, there is no longer a requirement that the COI must meet at least once per month (section 206A), and new provisions allow members of the COI to attend meetings remotely using technology and procure written resolutions by electronic means (sections 207B to 207K). Communications generally between other parties (liquidators, members, COI) may also be by electronic means (sections 296A-296E). Some may be pleased to learn that the COI may now approve bill of costs and charges of agents appointed by liquidators (such as solicitors) in a court winding-up without additional taxation by the court (section 176(2)).
5. New procedural forms
Last but certainly not least, the Amendment Ordinance introduces changes to some of the procedural forms. Two important forms that must be used from today onwards include:
(i) a revised Form NW2 (the winding-up statement); and
(ii) a new Form 1A, which is the new, prescribed form for statutory demands. It is strongly advisable that going forwards, all statutory demands are in the new prescribed form so as to avoid disputes over validity further down the line.
Whilst the changes implemented by the Amendment Ordinance are not necessarily ground breaking, there are enough tweaks here and there and new provisions to potentially trip up those that are unaware. Directors and liquidators in particular ought to be alive to the duties, obligations and liabilities imposed by the Amendment Ordinance to ensure that they are acting appropriately in the event of a winding-up.