The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (Amendment Ordinance), gazetted on 3 June 2016, will come into effect on a date to be appointed by the Secretary for Financial Services and the Treasury. It amends the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32. This article is the first in a series, highlighting the major changes to be introduced.
Aims of Amendment Ordinance
The Amendment Ordinance aims to:
- increase creditor protection;
- streamline the winding-up process; and
- strengthen regulation under the winding-up regime.
This article looks at the changes aimed at increasing creditor protection.
Transactions at an undervalue
Currently, the Court does not have power to set aside transactions at an undervalue entered into by a company that is subsequently wound up, although such a power exists in relation to such transactions entered into by bankrupts. Under the Amendment Ordinance, the Court will have power to set aside transactions at an undervalue, entered into by a company within 5 years before commencement of its winding-up, on the condition that at the time of the transaction, the company was unable to pay its debts or became unable to pay them as a result of the transaction. Transactions at an undervalue include gifts or transactions where the company receives no consideration or receives consideration of a value (in money’s or money’s worth) which is significantly less than the consideration provided by the company.
Orders which the Court will be able to make to restore the company to its pre-transaction position will include, for example, orders requiring any property transferred as part of the transaction to be re-vested in the company and orders requiring a person who has received benefits as a result of the transaction to make a payment to the liquidator. The Court will not make such orders when satisfied 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.
Currently, the Court’s power to set aside unfair preferences is provided by reference to unfair preference provisions in the Bankruptcy Ordinance. The Amendment Ordinance introduces its own stand-alone provisions, which removes certain anomalies arising out of the reliance on bankruptcy legislation. An unfair preference will arise where the company does anything which has the effect of putting a person (a creditor of the company or surety/guarantor for any of the company’s debts or liabilities), in the event of the company’s insolvent liquidation, in a better position than he would have been in had that thing not been done. The Court will have power to set aside an unfair preference (which is not a transaction at an undervalue) given to a person who is connected to the company (otherwise than being its employee), if given within 2 years before commencement of the winding-up. In any other case of an unfair preference (where the transaction is not one at an undervalue), the Court will have power to set aside where it was entered into within 6 months before commencement of the winding up. A pre-requisite to the setting aside is that at the time the unfair preference was given, the company was unable to pay its debts or became unable to pay them as a result of the unfair preference. The Court can make various types of orders to restore the company to the position it would have been in had the unfair preference not been made.
Currently, a floating charge created on an undertaking or property of a company within 12 months of commencement of its winding up is invalid, unless it is proved that the company was solvent immediately after the charge was created. There is an exemption for “new money”, i.e. any cash paid to the company at the time of or subsequent to the creation of, and in consideration for the charge. Under the Amendment Ordinance, the 12 month time period is changed so that a floating charge created by the company “at a relevant time” will be invalid. “Relevant time” will depend upon whether the person in favour of whom the floating charge is created is connected with the company or not. For persons connected with the company, the relevant time has been extended to 2 years before commencement of the winding up. For persons other than those connected with the company, the period remains as within 12 months before commencement of the winding-up. The exemption referred to above is extended to property and services supplied to the company, as well as cash.
Redemption or buy-back of company’s shares out of capital
Under a new provision, directors (who signed the solvency statement in relation to the payment out of capital) and past shareholders will be jointly and severally liable to contribute to the assets of a company which has made payment out of its capital in respect of the redemption or buy-back of any of its own shares, in cases where the company is wound up within one year of the relevant payment out of capital. It will be a defence for a director to show that he had reasonable grounds for believing his opinion expressed in the solvency statement.
Director-initiated creditors’ voluntary winding-up
Currently, if the directors of a company (or majority of directors, where the company has more than two directors) have formed the opinion that the company cannot by reason of its liabilities continue its business, they may resolve at a meeting of directors to wind-up the company and deliver a winding-up statement to the Registrar of Companies certifying that such a resolution has been passed. The winding-up of the company commences when the winding-up statement is so delivered and no members’ meeting is required to have been summoned before that. Under a revised procedure, additional safeguards are introduced, namely:
- A meeting of the company must have been summoned and a provisional liquidator appointed before commencement of the winding-up (i.e. before delivery of the winding-up statement to the Registrar).
- The winding-up statement must be in a specified form and certify that:-
- A resolution has been passed to wind up the company;
- A meeting of the company has been summoned for a date and time stated in the winding-up statement; and
- A provisional liquidator (with name and address stated) has been appointed with effect from commencement of the winding-up.
- A new provision restricts the powers of the Provisional Liquidator (with a few specified exceptions, e.g. disposal of perishable goods of the company and actions to protect company assets), so that he may only exercise powers conferred on a liquidator after obtaining the Court’s sanction.
- The Provisional Liquidator must attend the first creditors’ meeting and report on any exercise of his powers.
- If a director or the appointed provisional liquidator fails to comply with the above requirements without reasonable excuse, he will be liable on conviction to a fine.
Creditors’ voluntary winding-up and calling of first creditors’ meeting
Currently, a company is only required to convene the first creditors’ meeting on the same day as, or the next following day after, the company’s meeting at which the resolution for voluntary winding-up is to be proposed and there is no minimum period of notice required for calling the first creditors’ meeting. Under the Amendment Ordinance, a minimum notice period of 7 days for calling the first creditors’ meeting is required, and the meeting must be held within 14 days after the company meeting at which the resolution for voluntary winding-up was proposed. This is to ensure that creditors have sufficient time to prepare for the first creditors’ meeting and to make informed decisions.
Safeguards are also introduced for the period before the first creditor’s meeting. Save for certain specified exceptions, there will be restrictions on the powers of the members-nominated liquidator, in that he cannot exercise them without the Court’s sanction.
Similarly, in respect of a members’ voluntary winding-up, there will be restrictions on the powers of the directors during the period between the members’ meeting and nomination or appointment of a liquidator, in that they can only exercise their powers with the Court’s sanction.
Liquidators or directors failing to comply with the relevant requirements will be liable on conviction to a fine.
The above new or revised provisions are aimed at increasing the pool of an insolvent company’s remaining assets and ensuring that they are preserved as far as possible and distributed fairly to its creditors. Our next article in the series, will looks at changes introduced to streamline the winding up process including, for example, court free procedures and improvements to the proceedings of Committees of Inspection.