By Stephen Briscoe
Conduct of the Winding Up
Committee Of Inspection
As part of the proposed changes, the Administration has made a number of sensible suggestions that are likely to improve the interaction between liquidators and Committees Of Inspection.
For the sake of clarity, the new proposals will provide for the minimum and maximum number of members to be set at three and seven respectively, for both voluntary and compulsory liquidations, with the power for the court to vary these numbers.
The draft legislation will also allow meetings of the CoI to be held in two or more places at the same time through the use of technology. Written notice of meetings of the CoI can be given by the liquidator by electronic means and the proposals will also allow for written resolutions to be passed by a majority of the members of the CoI.
Whilst seemingly obvious, these changes simply reflect the reality of the way in which much of the business of a CoI is presently conducted.
At the moment, although a CoI can approve the remuneration of the liquidator, it is not in a position to approve the remuneration of the liquidators’ agents – usually solicitors employed to assist the liquidator. Instead, it is necessary for these fees to be sent to the Court for taxation. This is both a time consuming and potentially costly process which also delays the administration of the estate.
It is proposed that in future it will only be necessary to send the agents fees for taxation if they cannot be determined by agreement between the liquidator and the CoI. It seems however that it will still be necessary for them to be subject to taxation when they are working for a provisional liquidator appointed pursuant to s.193.
The present insolvency provisions of the Ordinance stem from a time in the dim and distant past when computers did not even exist. As said previously, they are based on the 1948 Companies Act from the UK. All communication with creditors was mandated to be in writing as in reality there was no alternative. However, the Administration has recognised that it is appropriate to bring the legislation into the 21st-century by, among other things, allowing liquidators to communicate with stakeholders by electronic means. The Administration says that it intends these proposals to be flexible, but they will also give stakeholdes the opportunity to opt to continue to receive information by “snail mail”.
The difficulty faced by the Administration is how to craft flexible procedures which are commensurate with ensuring all stakeholders are kept advised of progress, but which at the same time are able to accommodate future methods of communication, some of which probably do not exist at the moment. It will be a difficult task and as they say, “the devil is in the detail”.
Transactions At An Undervalue
The concept of a “transaction at undervalue” has been part of Hong Kong personal insolvency legislation since 1998. At long last, the Administration proposes introducing the same concept to corporate insolvency. The provisions will allow a liquidator to go back as far as five years to review what a liquidator considers to be suspicious transactions whereby “the consideration received by the company is ‘significantly’ less than the value of the consideration provided by the company“. In other words, if an asset is sold for a figure materially less than its true value the transaction will be susceptible to challenge and may be overturned. Quite rightly, the Administration does not seek to put numbers on “significant” or “material” as every case will have to be treated on its merits. However, from a practical and commercial point of view, a starting figure of 15% -20% less than an asset’s true value may not be too far off the mark.
To establish that it is a transaction at an undervalue, it will be necessary for the liquidator to establish that at the time it took place the company was insolvent or became insolvent as a result. If the transaction took place with an associated party, there will be a presumption that the company was insolvent at the time of the transaction.
We understand that the new ordinance will contain definitions of what constitutes connected or associated parties, separate from those presently contained in the Bankruptcy Ordinance, thus avoiding the problems that this currently creates in the area of unfair preferences.
It is important to be clear that the proposals are not intended to attack transactions that have been entered into by the company in good faith and for fair value. Rather, the intention is to attack those transactions which are clearly not in the interests of creditors generally.
As indicated previously, the current provisions regarding unfair preferences are flawed, primarily because of the cross-references to the Bankruptcy Ordnance when defining connected persons. At long last, the Administration has decided to introduce a “stand-alone” definition of connected persons which will apply to liquidations that will not make any cross reference to the Bankruptcy Ordinance, and which hopefully will remove the limits placed on the effectiveness of the current unfair preference provisions caused by previous poor drafting.
As part of this, the Administration has produced a definition of “persons who are connected with a company” and “associates” which largely follow the current provisions of s.50B of the Bankruptcy Ordinance. However, instead of adopting the requirement of “one third or more of the voting power” for determining control of a company when defining an associate, the Administration has decided to adopt the requirement of “more than 30%” thus aligning the new provisions with those of the new Companies Ordinance and the Stock Exchange listing rules.
The next post will deal with a variety of issues including invalid floating charges, public and private examinations and possible claims arising from a buy-back of shares out of capital. The final post will then deal with what we think is missing from the current round of proposals.