The new Companies Ordinance (Cap 622) enacted in 2012 was the first part of the effort to rewrite the statutory provisions relating to the incorporation and operation of companies. The remaining task of updating the winding up and insolvency provisions was completed in May 2016, when amendments to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO) were passed into law. Although the implementation date of these amendments are to be announced by the government, it is time to look at the significant changes ahead.

Commencement of Winding Up

The commencement date of a winding up is a significant milestone date that determines the validity of both pre- and post-winding up transactions of the company.

A common trigger leading to a winding up order is a creditor serving statutory demand on a company debtor. The debtor’s failure to satisfy such statutory demand entitles the creditor to obtain a winding up order. To enhance certainty and avoid potential disputes, a prescribed form of statutory demand will be introduced.

Under the existing regime, Directors may also initiate the winding up process by passing a resolution to the effect that the company cannot, by reason of its liabilities, continue business, and that it is not reasonably practicable to use other statutory winding up options. In such case, the date the directors deliver a winding up statement in prescribed form to the Companies Registrar will be the commencement date of winding up. The voluntary winding up of a company initiated by its directors has been criticized as being subject to abuse, as the winding up becomes effective before a members’ meeting is summoned or a provisional liquidator is appointed. These loopholes will be fixed under the reform.

Shareholders may also initiate a winding up voluntarily, insofar as the company is solvent.

Pre-winding Up Transactions That Are Liable to Be Set Aside

Previously, there had been no statutory power for Hong Kong courts to set aside pre-winding up transactions at an undervalue, except where the transaction constituted an unfair preference or a fraudulent conveyance of property could be established in accordance with Section 60 of the Conveyancing and Property Ordinance (Cap 219).

To align with the personal bankruptcy regime, the courts will be given power to set aside a transaction at an undervalue. A transaction that involves a gift by the company, or that provides for a consideration substantially less than the value provided by the company, will be subject to be set aside. There are statutory safeguards to protect transactions that are entered into by the company in good faith and for the purpose of carrying out its business or with a reasonable belief that they will benefit the company. The courts will have substantial discretion in terms of the orders they may grant which require the transfer of any property or the payment of any sum to the company.

For the existing “unfair preference” rule, the amended CWUMPO will incorporate standalone provisions that are substantially the same as those in the Bankruptcy Ordinance (Cap 6), so that no particular creditor, surety, or guarantor will be put in a better position than the others.

The claw-back period, i.e., how far the courts can look back before winding up for questionable transactions, varies depending on the type of voidable transactions and the circumstances. For transactions at an undervalue, the claw-back period is five years. For unfair preference cases, the claw-back period is six months or, where the person receiving the preference is an associate of the company, two years. In this connection, the definition of “associate” has been expanded and includes directors or other officers of the company and other persons having control over the company and other companies under common control with the company.

Other Protections of Shareholders and/or Creditors

Under the current CWUMPO, liquidators may only invalidate floating charges created within 12 months prior to the commencement of winding up. This will be extended to 24 months if a floating charge is created in favor of a connected person. On the other hand, the amount of the value of property and services provided to the company in consideration of the charge will, in addition to any cash amount, be recognized by the liquidators.

The creditors’ right in a winding up will be improved, as any person who received payments from the company within 12 months before the commencement of winding up for the redemption or buy-back of the company’s shares may be subject to a contribution order. In addition, the directors who made the solvency statements will bear joint and several liability to make the required contribution. These new provisions should prevent a company’s paid-up capital from being returned to its shareholders before the insolvent winding up of a company.

The CWUMPO amendments also include provisions to improve the winding up process, such as those that prescribe the minimum notice period for convening the first creditors’ meeting, improve the operation of the committee of inspection, clarify the powers of provisional liquidators, and expand the list of persons disqualified from being appointed as liquidators in order to avoid potential conflicts.