Hong Kong Company Maintenance and Compliance Guide (15) - Closing Down a Company in Hong Kong by Liquidation (Winding up)

Closing down a company in Hong Kong involves a certain number of formal steps and the overall process can take many months to complete.

The most common reasons for closing a company are:

• failure of the company to carry on business
• company is no longer profitable
• inability to pay its debts
• falling out between shareholders
• non-compliance with statutory requirements, including mis-management of company affairs
• corporate restructuring of the group to which the company belongs

Companies can be closed down either by "Deregistration" or "Winding Up". Although both the procedures will result in the dissolution of a company, the processes they entail are significantly different. This part deals with the liquidation of a Hong Kong private company.

1. Types of Winding up Available to a Hong Kong Company

There are two paths to winding up a company in Hong Kong - voluntary winding up or compulsory winding up.

Voluntary winding up of a Hong Kong company can be initiated either by members (shareholders) or creditors.

The voluntary winding up of a company begins by a special resolution being passed for the company to be voluntarily wound up and publishing this information in the Gazette within 14 days. The winding up is said to begin on the date on which the resolution is passed.

Members?Voluntary Winding Up

A members voluntary winding up of a company can be carried out if the directors believe that the company will be able to pay its debts, in full, within 12 months after the commencement of the winding up.

To initiate such a winding up, a directors?meeting must first be convened where majority of the directors must make a statutory Declaration of Solvency. The Declaration of Solvency must also contain the statement of assets and liabilities, based on the most recent financial statements of the company.The Declaration must be delivered to the Companies Registry within seven days after the date on which it was made.

The directors should proceed to appoint a provisional liquidator, who is generally a solicitor or professional accountant and must give his consent to act as the provisional liquidator in writing. The notice of the appointment of the provisional liquidator and notice of the commencement of the winding up by virtue of delivery of the Declaration to the Companies Registry must be published in the Gazette within 14 days of the appointment of the provisional liquidator. The provisional liquidator must also notify the Companies Registry of his appointment within 14 days after the date of his appointment.

Within 28 days of delivering the Declaration of Solvency to the Companies Registry, the directors must convene an Extraordinary General Meeting (EGM). The purpose of the EGM is for passing a Special Resolution to wind up the company, and an Ordinary Resolution appointing the liquidators (and approving their remuneration). The company should, within 14 days of passing the special resolution for voluntary winding up, give notice of the resolution by advertising in the Gazette. The voluntary winding up is deemed to have commenced with the passing of the special resolution at the EGM. The liquidator, or provisional liquidator will proceed to wind up the affairs of the company and file the necessary notifications required under the Companies Ordinance.

When the liquidation process takes more than a year, the liquidator must hold a general meeting every year to keep the members informed of the winding up process. Once the company’s affairs are fully wound up, the liquidator must prepare a final account of the winding up, showing how the property of the company has been disposed off and how the winding up has been conducted. The account must be presented at a final general meeting. The meeting has to be called by advertising in the Gazette, one month prior to the scheduled date. A copy of the account, along with a return stating that the meeting was held, must be sent to the Companies Registry within one week after the meeting. The company will be dissolved three months after the Registry receives the documents or at a later date as set by a court order in Hong Kong.

Creditors' Voluntary Winding Up

If the company cannot make a Declaration of Solvency, a creditors' voluntary winding up will have to be executed. Soon after the meeting at which the resolution for a voluntary winding up is made, a creditors?meeting should be convened. The company must advertise notice of this meeting in the Gazette and two Hong Kong newspapers (one English language paper and one Chinese). The directors must present a complete picture of the company’s affairs, along with a list of creditors of the company and the estimated amount of their claims. The creditors will then proceed to appoint a liquidator and may also appoint a committee of inspection whose role is to act in concert with the liquidator. The liquidation process is similar to that of a members voluntary winding up, as mentioned above.

Effects of Voluntary Winding Up

• With effect from the commencement of the winding up, the company must cease to carry on its business except insofar as it is required for the beneficial winding up.
• The directors?powers will cease, except under circumstances where the liquidator has resolved that the directors should continue to have such powers.
• Any transfer of shares is void unless made to, or sanctioned by the liquidator, and the status of the members cannot be altered.

(2) Compulsory Winding Up (Court Ordered Winding Up)

Reasons for Compulsory Winding Up

The most common circumstances under which a Hong Kong Court can order a compulsory winding up of a company in Hong Kong are:

• the company is unable to pay a debt of HKD 10,000 or above
• the court is of the opinion that it is just and equitable that the company should be wound up
• the company has by special resolution resolved that the company be wound up by the court

A creditor, a shareholder or the company itself can file a winding-up petition against the company, by appointing a solicitor. The petition must be prepared in accordance with the Companies Winding Up Rules. The petition must be advertised in the Gazette at least seven clear days before the hearing date and once at least in two Hong Kong daily newspapers (one Chinese and one English). A sealed copy of the petition must be delivered to the registered office or principal place of business of the company and an affidavit verifying the petition must be filed.

Once a winding-up petition is filed in the court, the winding-up of the company shall be deemed to commence and a court hearing will take place. At the hearing, the court will make a winding up order (if it deems fit) and the Official Receiver becomes the provisional liquidator (unless a provisional liquidator has already been appointed prior to the making of the winding-up order), until a liquidator is appointed. The provisional liquidator will take over control of the company including its assets and accounting records and will proceed to investigate the company’s affairs.

If the property of the company is not likely to exceed in value HKD200,000, the provisional liquidator is appointed as the liquidator. If the property of the company is likely to exceed in value HKD200,000, the provisional liquidator will hold meetings of creditors and contributories for the purpose of appointing a liquidator and a committee of inspection. The liquidator continues to investigate the company’s affairs, realises and disposes off the company’s assets and pays dividend to the creditors (if possible). Once the company’s affairs are completely wound up, it will be dissolved.

Effects of Compulsory Winding Up

(a) Once a winding-up petition is filed in the court, the winding-up of the company shall be deemed to commence.
(b) Once the winding up commences any disposition of the property of the company, including any transfer of shares or alteration in the status of the shareholders of the company, unless the court orders otherwise, is void.
(c)The company or any creditor or shareholder may apply to the court to stay or restrain any pending action or proceeding against the company.
(d) If the petitioner believes that the assets of the company are in jeopardy, he may apply to the court, after the filing of the winding-up petition, for the appointment of a provisional liquidator to safeguard the assets of the company prior to the hearing of the petition.

2. Overview of Winding-up Procedures

The procedures described below apply to court ordered winding up:
(1) Issuing a written demand for debt repayment to the target company
(2) Presenting a winding-up petition to the Court and the company (Note)
(3) Court hearing for the petition
(4) Granting of winding-up order by the Court
(5) Meeting of creditors and other relevant parties
(6) Appointment of liquidator
(7) Realization and distribution of company’s assets to the creditors
(8) Release of duties for liquidator
(9) Dissolution of the company

Note: The winding-up proceedings should be deemed to commence at the time of presenting the winding-up petition to the Court.

Search of Winding-up Records

A request to search the compulsory company winding-up records is available at the Official Receiver’s Office at a search fee of HKD85. The relevant application form is available at the website of the Official Receiver’s Office. You can contact the staff of the Official Receiver’s Office at 28672448, or e-mail at oroadmin@oro.gov.hkfor more details. You may also conduct a search of compulsory winding-up proceedings via the internet at http://www.esdlife.com/gov_depts/eng/dep_oro.asp.

Please note that the Official Receiver’s Office does not keep records of companies being wound-up voluntarily (not wound-up by court order) You must contact the Companies Registry for information related to the voluntary winding-up of a particular company.

Consequences of the Presentation of a Winding-up Petition

After the commencement of winding-up proceedings (that is, after the presentation of the winding-up petition), all dispositions of the property of the company is void pursuant to s. 182 of the Companies Ordinance. In other words, no transfer of any property of the company is allowed. Therefore, banks will usually freeze a company’s account when they know that a winding-up petition has been presented against that company.

Alternatives to Winding-up

In addition to winding-up, alternatively, the company can propose a scheme of arrangement under section 166 of the Companies Ordinance. Upon application by the company, the creditors, or the liquidator (in the case where a winding-up order has been granted), the Court may order a meeting of all the relevant parties be held to discuss and negotiate the details of an arrangement for debt repayment.

If a majority in number representing three-fourths in value of the creditors (who are voting either in person or by proxy at the meeting) agree to any compromise or arrangement, the compromise or arrangement shall be binding on all the creditors if it is also sanctioned by the court. Sometimes the approved arrangement may involve the re-organization or transfer of the company’s share capital, or even the merging of 2 or more companies.

The above procedures are complex and are usually carried out with the assistance of lawyers and professional financial advisors.

Voluntary winding-up by the Company Itself

No matter whether the company is in financial difficulty or not, it may hold a general meeting of its shareholders to bring itself to an end by winding-up procedures. If a special resolution is passed for winding-up, the company may then apply to the Court for a winding-up order (via procedures similar to a creditor’s petition). Alternatively, a special resolution that the company be wound up voluntarily may be passed. In that case, no winding-up order from the Court is necessary.

Grounds for Making a Winding-up Order

The usual circumstances under which the Court would make a winding-up order are:
(a) the company itself has, by a special resolution of the members (subscribers or shareholders), resolved that the company be wound up by the Court;
(b) the company does not commence its business within a year from its date of incorporation, or suspends its business for a whole year;
(c) the company has no subscriber or no shareholder;
(d) the company is unable to pay its debts;
(e) An event occurs on the occurrence of which the company’s memorandum or articles of association provides that the company is to be dissolved; or
(f) the Court is of an opinion that it is just and equitable (reasonable) to do so. A winding-up order may also be made if it is proved that the affairs of the company have been conducted in a manner unfairly and prejudicial to the interest of some shareholders of the company, or its shareholders generally.

In considering these grounds, the Court will usually take into account the circumstances of the company including whether it is insolvent and whether there is an alternative solution to the dispute, such as buying out the shares of a disgruntled/dissatisfied shareholder.

Consequences of Making a Winding-up Order

(1) On the legal proceedings related to the company, debtors of the company or liquidators

When a winding-up order has been made, no legal proceeding shall be continued or commenced against the company without approval from the Court. In other words, all the other legal proceedings against the company will be automatically stayed or “frozen" upon the making of a winding-up order.

(2) On creditors or employees of the company

After a winding-up order has been granted by the Court, the company’s creditors will be asked to attend the "First Meeting of Creditors and Contributories". A statement of the company’s affairs (Form 23), which is prepared by the director or responsible officer of the wound-up company, will be presented at the meeting. This statement is similar to a balance sheet of the company and contains details of all the company’s assets and liabilities.

Furthermore, resolutions may be passed in relation to the further conduct of the winding-up, such as whether or not to apply for the appointment of a liquidator in place of the provisional liquidator, and whether or not to appoint a committee of inspection.

If the creditors wish to attend the meeting but are unable to do so, they may send proxies to represent their interests and to vote on behalf of them. A creditor can appoint someone to attend the meeting and to vote on the creditor’s behalf by completing either a General Proxy From or a Special Proxy Form (if the creditor has a decision on a particular resolution), and return the relevant form to the Official Receiver’s Office.

(3) On shareholders or directors of the company

After the granting of winding-up order, the shareholders?liabilities are limited to the value of shares held by them (limited by shares). In this case, there will be no liability further than the value of any shares in the relevant shareholders?names in which they have not yet paid for at the time the company is wound up. Another case, which is not common in the commercial field, is that the liabilities of shareholders are limited to the amount in which they have agreed to contribute to the company’s assets if the company is being wound-up (limited by guarantee).

Directors will not be subject to personal liability unless they have obtained advantages from the company unlawfully or in breach of the duties as a director. The powers of all directors of the company will cease after the making of a winding-up order.

Conclusion of Winding-up

When will the liquidator be released from the relevant duties in a winding-up proceedings? When will the company be dissolved?

The liquidator can apply to the Court for the release of the duties once the followings have been accomplished:
- all the assets of the company have been realized (i.e. all assets have been sold and converted to cash);
- investigations related to the winding-up proceedings are completed; and
- a final dividend (if any) has been paid to the creditors to settle the debts

The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator.

After obtaining the order for release from the court, the liquidator will file a "Certificate of Release of Liquidator" with the Registrar of Companies. The company shall be dissolved two years after the filing of the "Certificate of Release of Liquidator".