Updates to the Winding-up Provisions of C(WUMP)O – An Opportunity Lost?

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By Stephen Briscoe

The Administration has now posted its first substantive response to issues raised in front of the LegCo Bills Committee back in November 2015. Here is a link to the response, but in truth it paints quite a dismal picture.

First Meeting of Creditors in a Creditors’ Voluntary Liquidation (CVL)

Concerns have been expressed regarding the changes to the rules relating to the commencement of a CVL. The Administration’s response fails to address those concerns, instead simply referring to there being “… similar requirements in the UK and Australia…”.

However, there are significant differences. Both those jurisdictions have a comprehensive system of licensing of Insolvency Practitioners thus ensuring that all liquidations are properly investigated, failing which a liquidator could lose his/her licence and thus their livelihood. Second, both jurisdictions have, particularly in recent years, made sure that their regulators are properly resourced to prosecute and/or disqualify directors who break the rules. Contrast this with Hong Kong where it seems that the Official Receiver’s Office resources to pursue delinquent directors are under constant pressure from the Administration. As a result, the numbers of disqualification orders in Hong Kong is relatively low and the fines levied for liquidation offences are little more than a slap on the wrist.

Regardless, if the changes go through as proposed, it will create an opportunity for unscrupulous directors to act in a manner that could disavantage stakeholders, particularly creditors and employees. Arguments that other provisions will prevent abuse miss the point. Once the abuse has been perpetrated, liquidators are likely to be left with an uphill task trying to undo its effects, but in all probability having no funds, because they have been spirited away from the control of the liquidator. A classic case of “locking the stable door….”.

Removal of Liquidators

In justifying Clause 76, which allows a creditor or contributory to apply for the removal of a CVL liquidator, the Administration’s response is unfortunately wide of the mark. It points to the fact that similar provisions exist in respect of solvent windings up – a fact which no one disputes – but which is like comparing apples with oranges. In a solvent winding up there is rarely, if ever, the necessity for an agrieved person to want to remove a liquidator.

However, in an insolvent liquidation there are almost always aggrieved parties. If this change is implemented as proposed it will open up the possibility, the strong possibility, that someone who is a creditor, but against whom a liquidator is taking action for the purpose of benefiting the general body of creditors, can try to remove that liquidator without the liquidator having any right of recourse. Accepted, this removal has to be done at a meeting of creditors and a majority in number and three quarters in value of those creditors who attend must vote in favour of the removal. However, almost every liquidator in Hong Kong has come across situations where they have a right of action which if pursued could swell the assets of the company for the benefit of creditors. Those claims are often against people who are also creditors! What better way to defend or stifle such an action by a liquidator than by trying to remove him and replace him with someone more compliant.

Liquidators are not asking for a right of veto; all they are seeking is the right to be heard by the court in order to prevent the abuse which will almost certainly occur if the new clause is implemented as proposed.

Disclosure Requirements for Liquidators

Implementation of this clause is likely to be extremely onerous particularly for large firms. New systems will have to be introduced so that they can comply not only with the initial requirements but with the ongoing requirements of the new section.

Again, the Administration seems to have turned a deaf ear to the practical problems which have been pointed out by the profession and appears reluctant to engage with stakeholders to produce a practical and workable solution.

Other Issues

The Administration dismisses the issues of licensing for insolvency practitioners, implementation of the UNCITRAL Model Law or provisions similar to s.426 of the UK Insolvency Act. (This latter suggestion would be likely to assist in the facilitation of cross-border insolvency).

It seems quite clear, despite the form of words put forward by the Administration, that these issues have not been seriously considered. Suggestions that they “must be reviewed”, should be treated with caution given the speed with which updates to Hong Kong legislation are brought forward. In reality, the chances of any of these issues being considered by LegCo at any time in the foreseeable future are about as likely as turkeys voting for Christmas!


In light of the Administration’s responses to the issues raised both at the Bills Committee hearing and previously, it seems clear that, absent any surprise last minute developments, the Bill will go through substantially unchanged. Does this mean that Hong Kong’s insolvency legislation is better prepared to meet the challenges of the 21st century? Unfortunately, I believe the answer to that question is probably not – at least not materially. The changes are mainly band-aids rather than major surgery and taken as a whole it is difficult to see them, (with the obvious exceptions of the changes to the Unfair Preference provisions and the introduction of Transactions At An Undervalue), significanlty improving the corporate recovery and liquidation regimes by delivering improved recoveries for creditors.

A lost opportunity indeed!!

Briscoe Wong Advisory