Legal update: The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance – A weak attempt to modernize Hong Kong’s Winding Up Regime30Aug2017
After the enactment of the Companies Ordinance (Cap. 622) on 3 March 2014, Hong Kong’s legislation regarding the winding up of Companies remained in the (newly named) Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”). For some time, there had also been discussion as to how that legislation could be improved. This process led to the introduction of the CWUMPO (Amendment) Ordinance (“Amendment Ordinance”).
The Amendment Ordinance came into effect on 13 February 2017 (“Commencement Date”) and sought to improve CWUMPO and its subsidiary legislation, the Companies (Winding-up) Rules (Cap. 32H) (“CWUR”). Although the Amendment Ordinance has introduced some useful practical elements, it would perhaps have been better for a new Ordinance entirely to be enacted. This would reduce the possibility of confusion that will remain given the layout of the current legislation (for example, the legislation has around 200 sections simply marked “repealed”) and could also have been a platform to add in future other much needed substantive legislation, such as corporate rescue and rehabilitation legislation, and legislation to deal with cross-border issues.
Highlights of the Amendment Ordinance
The Law Reform Commission targeted three main areas for reform:
- increasing creditor protection;
- streamlining the winding up process; and
- strengthening regulation under the winding up regime.
Below are certain highlights of the Amendment Ordinance dealing with each of these areas:
Increasing Creditor Protection
Transactions at an Undervalue – section 265D
Although Hong Kong legislation for personal bankruptcy has long had a provision to allow trustees to attack transactions at an undervalue, this has not been part of our legislation relating to the winding up of companies. This is the case even though similar jurisdictions (such as England, Singapore and Australia) do have such provisions. Pursuant to new provisions introduced by the Amendment Ordinance, the courts now have the power to set aside transactions at an undervalue entered into by a company within 5 years prior to the date of the commencement of the winding up of the company.
A transaction is considered to be at an undervalue if:
- the company makes a gift to a person or otherwise enters into a transaction with a person on terms that provide for the company to receive no consideration; or
- the company enters into a transaction with a person for a consideration the value of which (in money or money’s worth) is significantly less than the value of the consideration provided by the company (section 265E).
Further, it must be demonstrated that the company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of the transaction (section 266B).
If it is found that the company entered into the transaction in good faith and for the purpose of carrying on its business and at the time there were reasonable grounds for believing that the transaction would benefit the company, the court will not set aside the transaction at an undervalue.
The new legislation empowers the court to make various orders if it is established that a transaction occurred at an undervalue. For example, orders requiring the person receiving the benefit of the transaction to pay any sums to the liquidator, or orders requiring that any part of the property the subject of the transaction be vested in the company. That a transaction at an undervalue can include security given by a company is recognised by section 266C(1)(e) which provides that the court may order the release or discharge of any security given by a company in the relevant circumstances.
This new provision is only applicable to undervalue transactions made on or after the Commencement Date.
Unfair Preferences – section 266
A welcome improvement introduced by the Amendment Ordinance is an independent unfair preference provision. Previously, the provision dealing with unfair preferences in the context of the liquidation of companies required the reader to cross-reference the Bankruptcy Ordinance (Cap. 6). Under the new provisions, the court will still have the power to set aside an unfair preference made within 2 years of the commencement of the winding up for a person who is connected with the company or within 6 months for others.
A company gives an unfair preference to a person if that person is one of the company’s creditors (or is a surety or guarantor for any of the company’s debts or other liabilities) and the company does anything or suffers anything to be done 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 would have been in if that thing had not been done.
A key improvement is that the winding up legislation now has its own provisions dealing with who should be considered a “connected person”. Previously, one had to use the bankruptcy legislation, which was aimed at individuals and not corporate entities, with some anomalous results.
There is a presumption that an unfair preference is given to a person connected with the company (excluding employees). Under sections 265A to 265C, a person is connected with the company if that person is an associate of a director or shadow director of the company or an associate of the company. Rather than rely on the bankruptcy legislations’ definition of “associate” of the debtor, the Amendment Ordinance has now introduced CWUMPO’s own definition of “associate” of the company and has also expanded the definition as follows:
- a company is an associate of another company if:
- the same connected person has control of both; or
- a person has control of one company and persons who are associates of that person (or that person and his associates have control of the other; or
- if a group of 2 or more persons has control of each company, and both groups (1) consist of the same persons; or (2) would consist of the same persons if (in one or more cases) a member of either group were replaced by a person who is an associate of that member;
- a company is an associate of another person if:
- that person has control of the company; or
- that person and persons who are associates of that person together have control of the company; and
- a person is an associate of another person if, inter alia, that person is a relative (or cohabitant) of the first person of the first person’s spouse or cohabitant.
For these purposes, a person has control of a company if the directors are accustomed to act in accordance with that person’s instructions, or that person controls more than 30% of the votes in a general meeting of the company.
It can be seen that the legislation in this regard (which is only summarised above) still takes a bit of navigating but it is still an improvement on the previous position.
As to the remedies available for unfair preferences, similar to the provision in relation to transactions at an undervalue, the court has a wide discretion to make any order it thinks fit for restoring the position to what it would have been if the company had not given that unfair preference. Note, however, that a liquidator must still demonstrate that the company was influenced, in deciding to give the unfair preference, by a desire to produce the effect of putting the recipient in a better position in any involvement liquidation. In the past, it has been difficult for liquidators to prove this desire, and the difficulty looks set to remain.
This new provision is, again, only applicable to unfair preferences made on or after the Commencement Date. In the circumstances, irrespective of when a liquidation starts, if a liquidator needs to examine an event that took place before the Commencement Date then he will need to do so with regard to the old legislation.
Floating Charges – sections 267 to 267A
Under the previous legislation, a liquidator could challenge a floating charge created within 12 months prior to the commencement of the liquidation if it could be shown that the company was insolvent immediately after the creation of the charge, save to the extent of any new monies provided to the company in return for the company granting the charge. The Amendment Ordinance has extended that period to 2 years in respect of floating charges created in favour of persons who are connected with the company. This amendment will provide another useful tool for provisional liquidators and liquidators to secure further assets of the company. The relevant period in respect of a floating charge created in favour of persons not connected with the company remains at 12 months before the commencement of the winding up.
Streamlining the Winding Up Process
Improvements as regards Committees of Inspection (“COI”)
The Amendment Ordinance has sought to introduce/confirm practical changes to COI such as:
- a COI must consist of not less than 3 and not more than 7 members;
- liquidators can hold COI meetings by remote attendance;
- a COI member can appoint a representative in relation to the business of the COI by general power of attorney or letter of authority;
- COIs can perform their functions and make decisions by written resolutions;
- members of the COI and the liquidator can communicate by electronic means; and
- importantly, bills of costs or charges of persons employed by the liquidator in a court winding up, where such costs exceed HK$3,000, will no longer be required to be taxed by the court if they have been approved by the COI.
Creditors’ Meetings for Voluntary Liquidations – section 241
Section 241 now provides that the company shall cause a meeting of the creditors of the company to be summoned not later than 14 days after the day the company has held a general meeting where the special resolution for voluntary winding up was proposed. The previous legislation provided that the creditors’ meeting had to be on the same day as (or the day following) the meeting at which the shareholders’ resolution for voluntary winding up is to be proposed.
Prescribed Form for a Statutory Demand – section 178(1) and Form 1A CWUR
The Amendment Ordinance has introduced a prescribed form for a statutory demand (there was none before, but there was a prescribed form for a bankruptcy statutory demand). This should help avoid disputes concerning whether a statutory demand is “valid” or not; in the past, we have seen various arguments in this regard, almost all of which have failed but have nevertheless added to the costs of winding up proceedings.
Strengthening Regulation under the Winding Up Regime
Additional Measures for Winding Up by ‘Special Procedure’ – section 228A
The Amendment Ordinance has introduced additional measures for winding up by ‘special procedure’ where directors have formed the opinion that the company cannot continue its business. Once the directors pass a resolution to wind up the company, they must now appoint a person who will act as the provisional liquidator in the winding up of the company with effect from the commencement of the winding up (section 228A(1)(c)). Also, the directors may only deliver a winding up statement to the Registrar after they have passed a resolution to wind up the company, caused a meeting of the company to be summoned no later than 28 days after the delivery of the winding up statement, and appointed a provisional liquidator.
One of the directors must sign the winding up statement delivered to the Registrar and, if that director signs without having reasonable grounds for the certification, they may be found liable to a fine and imprisonment (section 228A(4)(c)).
Liquidators- Section 199 and Schedule 25
A liquidator’s powers are tidied up a little and are now set out in Schedule 25. A practical amendment provides that liquidators now have the power to appoint a solicitor without sanction of the court or COI in a court winding up, although 7 days’ notice must first be given to the COI or, if none, to the creditors.
The legislation is silent as to what a COI or the creditors can do on receipt of such notice – presumably make application under section 199(6) if they do not agree with the proposed appointment.
No system for qualification or registration of insolvency practitioners was introduced by the Amendment Ordinance.
Liquidator’s Disclosure Statement- Sections 262C and 262D
Before a person may be appointed as a provisional liquidator or liquidator, the person must make a disclosure statement disclosing whether the nominated person has had a relationship (such as has been a member, creditor, debtor, director or company secretary of the company) within 2 years before making the statement and if so, the reasons why he/she believes there is no conflict of interest. There is also a requirement for continuous disclosure of any change to the liquidator’s disclosure statement.
Improvements to Public and Private Examination Procedures – Sections 286A to 286D
The Amendment Ordinance has introduced new provisions to replace the previous sections 221 and 222 to clarify and improve the public and private examination procedures. In the previous section 222, the Court had to consider whether a fraud had been committed by any person in the promotion or formation of the company or officer of the company before ordering a public examination. However, section 286A has now done away with this specific requirement.
Another improvement would be that section 286A has widened the definition of persons who may be subject to public examination so as include provisional liquidators or liquidators of the company or receivers or managers of the property of the company.
A notable amendment to public and private examinations is the introduction of section 286D concerning the privilege against self-incrimination. This section clarifies the position that a person is not excused from attending or answering questions under sections 286A to 286C only on the ground that to do so might tend to incriminate that person. If a person is required to answer or submit an affidavit that might incriminate him or her, neither the answer nor affidavit are admissible in evidence against the person in criminal proceedings other than in respect of offences of perjury or making false statements.
Ad Valorem Fee payable by Provisional Liquidators under Section 193
The Amendment Ordinance clarified the definition of a “liquidator” under section 2(1) to include provisional liquidators appointed by way of S 194(1)(a), 194(1)(aa) and 194(1A), which provisions follows the Court of Appeal’s interpretation in Re MF Global Holdings HK Ltd (No 3)  2 HKC 424 (Re MF Global). In this case, it was interpreted that the definition of a liquidator under section 2(1) included provisional liquidators appointed before a winding up order was made pursuant to section 193 CWUMPO and it was held that all the asset realisations made by such provisional liquidators were chargeable with ad valorem fees. This amendment clarifies an apparent inconsistency between the Re MF Global decision and a decision of the court in the Re Lehman Brothers Securities Asia Ltd (No 2)  1 HKLRD 58.
Comments on the Amendment Ordinance
The Amendment Ordinance makes a few welcome additions to Hong Kong insolvency law (eg. as to transactions at an undervalue, and unfair preferences). However, the legislation remains a little disjointed and it would in our view have been preferable for a new piece of legislation to be enacted. Further and importantly, Hong Kong’s legislation still does not address corporate rescue or cross-border issues arising in insolvency or rehabilitation proceedings. [For our comments on the lack of Hong Kong legislation dealing with these two concepts, please see our article of 19 October 2015 here.] In summary:
Corporate rescue legislation was first recommended by the Law Reform Commissions as long ago as 1996. A Bill was introduced to the Legislative Council (LegCo) but it made little substantive progress and it formally lapsed in 2004. The Financial Services and the Treasury Bureau (FTSB) recently announced that legislation should be introduced in 2018 and that “drafting instructions” are being prepared. It is understood that the draft bill will address insolvent trading provisions (also missing from Hong Kong’s legislation) as well as corporate rescue.
Cross-Border Insolvency and Rehabilitation Proceedings
It is also regrettable that the new legislation does not address at all the issues that arise in cross-border situations. This omission is particularly visible given that a considerable number of insolvency matters dealt with in Hong Kong have a cross-border element. It should be added, however, that the Hong Kong Companies Court has made great strides in this area with a series of decisions relating to common law recognition. More could be written on this but it is beyond the scope of this article.
Overall, notwithstanding some improvement, our view is that the Amendment Ordinance has missed an opportunity to give a much needed overhaul of Hong Kong insolvency law. We look forward to seeing the proposed legislation dealing with corporate rescue and cross-border issues, both as mentioned in a recent speech by the Secretary for the FTSB.
Robin Darton / Tara Chan
For more information on the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance and its implications for you or your business, please contact:
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.