HONG KONG COMPANY WINDING UP PROCEDURES

Introduction

Only a limited company can be wound-up. The term “winding-up” (or “wound-up”) bears a similar meaning of “liquidation”. It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end.

A limited company is a company that is registered under the Companies Ordinance (Cap. 32 of the Laws of Hong Kong). It is a separate legal entity (i.e. it can sue or be sued in legal proceedings). The liabilities of shareholders are limited to the value of the company’s shares held by them (limited by shares). Another situation, which is not common in commercial organizations, is that the liabilities of shareholders are limited to the amount in which the shareholders have agreed to contribute to the company's assets if the company is being wound-up (limited by guarantee).

An “unlimited company” or a sole trader is not a “company” in a strict sense. It is a business operated in the form of a sole proprietorship. In other words, the business is owned by an individual. A sole proprietor is solely and personally responsible for the liability of the business.

A partnership is a form of business owned by two or more persons (partners). The partners are personally jointly and severally liable (i.e. every partner should be liable) for the liability of the business.

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 $85. 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.hk for 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”.