Winding Up – Moving Colonial Legislation into the New Century

By Stephen Briscoe 

The existing provisions dealing with the winding-up of companies in Hong Kong are still largely based on the 1948 Companies Act from the UK. Of course, there have been changes over the years, but generally these haven’t been material and so we continue to use the legislation first enacted almost 70 years ago and probably written 20 years before that!

Whilst the legislation itself is relatively robust, it was of course never designed to deal with many of the types of companies trading in the early part of the 21st-century, particularly those in industries which could never have been dreamed of 70 years ago. Moreover, the legislation could never have envisaged the types of communications we have available to us in this day and age. Accordingly we remain tied to ’snail mail” for most, if not all of our communications.

In 1998, the Law Reform Commission Report on the winding-up provisions of the then Companies Ordinance was published with a number of very sensible suggestions as to how the legislation could be modernised. Unfortunately, that report was consigned to the cupboard to gather dust and was effectively ignored with the result that the legislation continues unchanged to this day.

As part of the Administration’s review of the Companies Ordinance generally, there has been a further review of the winding-up provisions and in April 2013 it published a consultation document entitled “Improvement of Corporate Insolvency Law – Legislative Proposals”. The purpose of this review was to suggest ways in which the legislation could be updated to resolve certain lacunas which had come to light and to modernise the legislation to make it more “fit for purpose” for the 21st-century. Whether the new proposals which have been put forward and which will form the basis of a bill scheduled to go before Legco in 2015, achieve that is for you the reader to decide. In order for you to consider the question, over the next few weeks, we will publish a plain English summary of the Administration’s proposals, together with our comments and in particular with reference to areas where we believe more could have been done or where we just plain disagree!

The Administration’s review has come up with key areas where it believes change is needed. These are:

  • Commencement of the Winding-up;
  • Appointment, Powers, Vacation of Office And Release of Provisional Liquidators and Liquidators;
  • Conduct of the Winding-up; and
  • Voidable Transactions, Investigations and Offences during the Winding-up.

We will take a look at each of these areas with specific reference to the Administration’s proposals, key comments which came to the fore during the consultation process, the government’s response to those comments and, where appropriate, where we believe the changes go too far, do not go far enough or are simply misconceived.

We will also comment on some of the most glaring omissions from the proposals of which ufortunately there is a number.

We will start this week with the commencement of the winding-up. The Administration’s proposals deal with three key areas.

The Statutory Demand

The Statutory Demand, or the 21 day notice as it has become known, is often the starting point of the liquidation process. Since 1998, with the introduction of the Bankruptcy Amendment Ordinance, there has been a statutory prescribed form of Statutory demand in personal insolvency preceedings. Unfortunately, for whatever reason, the government has chosen not to legislate for a similar provision in relation to the winding-up of companies. As part of these proposed changes, the government has indicated that it will prescribe a standard form for the Statutory Demand. This is probably one of the least controversial issues in relation to the proposed amendments, and for that reason we will say no more than welcome this proposal.

Section 228 A – Appointment of a Liquidator

Hong Kong is somewhat unusual in that it has a statutory provision allowing the appointment of a liquidator by the directors of the company without immeidate reference to either the shareholders or the creditors. This is Section 228A (see here for more details) and in the UK is known by the somewhat derogatory term, “Centrebinding”, after the decided case of that name.

It has become popular to suggest that the use of this procedure has been abused, but when those who make the suggestion are challenged to produce evidence, they are rarely able to do so. That is not to say that there has been no abuse of the process, rather that such cases are less common than is often suggested. With that in mind, the Companies Amendment Ordinance 2000 took steps to tighten up the circumstances in which directors could make use of this provision. As part of these latest proposals, the government intends to further limit the circumstances in which this procedure can be used and to, in their words, further protect the interests of creditors.

The three suggestions that have been put forward as follows:

  1. To require directors, at the same time that they take steps to commence a liquidation, which is done by presentation of the winding-up statement to the Registrar of Companies, to have already taken steps to convene a meeting of creditors. At the moment, the only requirement is that a meeting of creditors must be held within 28 days of the delivery of the winding-up statement to the Registrar.
  2. The proposals will also require that the winding-up statement confirms that a provisional liquidator has been appointed and presumably (our assumption) would be required to identify the provisional liquidator. The supposed rationale behind this would seem to be to prevent “rogue directors” from dealing with the assets of the company during the period between the delivery of the statement to the Registrar, (the commencement of the liquidation), and the appointment of the provisional liquidator.
  3. The third leg of the proposals would place a statutory restriction on the powers of the provisional liquidator who would only be able to exercise the powers of the liquidator with the sanction of the court, except to the extent where it may be necessary to dispose of perishable goods or other assets that may diminish in value if not immediately dealt with.

All of these suggested amendments appear reasonable in the circumstances. However, in reality, any abuses of the process will not be prevented until such time as there is a protocol in place whereby the use of this procedure is adequately monitored and where those who do abuse it (and there have been cases of this in the past) are brought to account.

Unfortunately, where the Administration has failed to act is in relation to those people who can act as provisional liquidators. At the moment, s.228A of the Ordinance will only allow a professional accountant or a solicitor to act as a provisional liquidator. One of the suggestions put forward during the consultation period was that experienced insolvency practitioners, not necessarily members of the HKICPA or the Hong Kong Law Society, should also be allowed to take such appointments. Unfortunately the Administration has rejected this proposal for no readily apparent reason.

First Meeting of Creditors in a Creditors Voluntary Winding-up

The good news here is that the Administration has identified another long known lacuna in the legislation which, in theory, could allow a company to be placed into creditors voluntary liquidation with virtually no notice being given to its creditors. The bad news is that its proposed resolution of this problem is unnecessarily complicated and, in our opinion, is only likely to open the door to a potential abuse when there is a much simpler option available.

The Administration proposes to remove the requirement for holding the first meeting of creditors on the same or the day following the shareholders meeting and at the same time remove the requirement that notices of the two meetings be sent out at the same time. Unfortunately the proposals then go on to say that the shareholders can pass a resolution placing the company into liquidation, but do not have to hold a meeting of creditors for at least 14 days. There will be a statutory provision providing for creditors to be given at least seven days notice of the regional creditors. However, we then have a potential “hiatus” period between the date of the shareholders meeting and the date of the creditors meeting during which the directors remain in control of the company.

The logical solution would be to follow the provisions of section 96 of the Insolvency Act in the UK whereby notices of the two meetings still have to be sent out at the same time, the meetings still need to held on the same or consecutive days, but where creditors have to be given at least seven days notice of the meeting. It’s not brain surgery!

The administration acknowledges that these proposals increase the risk of Centrebinding (in our opinion a bad thing!) and then seek to introduce additional provisions to protect the interests of creditors. None of this would be necessary if a simpler process, along the lines of that outlined above, were to be adopted.

In the next post in a couple of weeks time we will look at the Administration’s proposals regarding the appointment, powers, vacation of office and release of provisional liquidators and liquidators.