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AVAILABLE ONLINE AT WWW.PRACTICALLAW.COM/RESTRUCTURE-MJG Country Q&A . Charges with Immovable );

) if: See above, see Question 4 Immovable property www.practicallaw.com/1-502-0035 The most common types of security If a company incorporated or registered registered or incorporated company a If This is a charge over a class of assets (such See above, . Legal mortgages must be created by deed. see above, Movable property The has a right to possess the pledged charge documents) to crystallise the immediately; circumstances arise which lead to automatic crystallisation (such as the ceasing business). a specified in the charge document takes place. The creditor can then appoint a receiver to take control of the charged asset ( the creditor exercises a right (commonly included in „ „ „ „ Pledge. asset and sell it to recover a debt. It is created by actual it until the who holds delivery of the asset to the creditor, Legal and equitable mortgages. property Fixed charge. and, to avoid a power of attorney must be created by deed arguments over consideration, it is recommended that all third party charges (and preferably all charges) be executed as a deed. Floating charge. as trading stock, current assets or bank accounts). A debtor can continue to deal with the assets in the ordinary course of business until the charge crystallises and the creditor takes steps to enforce it. A floating charge crystallises, and changes into a fixed charge ( „ „ „ „ „ „ „ provided the contract is in writing and signed by both Otherwise parties. the contract is not specifically enforceable, and does over the land. not create an equitable charge or mortgage Movable property Common forms of security. for movable property are: „ „ „ Effects of non-compliance. of Effects Companies the at charge registrable a register to fails void Kong rendered Hong in be will charge the creation, of days 35 within Registry the against and any However, of creditor the company. a against and parties the between enforceable remains charge the charge the to subject property the purchases later who party third to by the repay secured money The obligation from the company. enforceable. immediately is and affected not is charge the If a charge over land and buildings is registered more than one month after the date of creation, the charge is not void, but the priority may be affected. charge’s created not is which buildings and land over mortgage or charge A mortgage, or charge equitable an as effect take still may deed by and is reproduced with the permission of the publisher, Practical Law Company. Company. Law Practical publisher, the of permission the with reproduced is and The most common types of security © This article was first published in the Restructuring and Insolvency multi-jurisdictional guide 2012/13 2012/13 guide multi-jurisdictional Insolvency and Restructuring the in published first was article This © This transfers the beneficial interest in This transfers legal title to a debtor’s This transfers legal title to a debtor’s This is created where a debtor provides Charges from companies incorporated or registered these formalities? immovable and movable property? Are there formalities that the security documents, the or the with debtor non-compliance of effect the is What with? comply must What are the most common forms of security granted over cannot deal with the asset without the creditor’s consent. cannot deal with the asset without the creditor’s A fixed charge binds subsequent . If the debtor defaults, the creditor can apply for a court order to sell the charged asset or appoint a receiver to take possession of it. the creditor with an immediate proprietary interest in an the creditor with an immediate proprietary ownership and asset but retains control of it. The asset’s but the debtor possession are not transferred to the creditor, necessary to create a legal mortgage (for example, if they do necessary to create a legal mortgage (for example, not execute a deed). Fixed charge. Equitable mortgage. mortgage An equitable property to the creditor. a debtor’s formalities can arise if parties do not comply with the Legal mortgage. that property property to the creditor with a right to sell returned to the if the debtor defaults. Legal title must be debtor when the debt is paid.

„ „ „ Charges and mortgages over land and buildings must be created by deed. Therefore, an unregistered charge may still be enforceable against a a against bona enforceable be fidestill may purchaser or charge mortgagee for unregistered an valuable consideration. Therefore, chargor. the of representative personal or donee priority over subsequent charges. However, a document creating a creating a document However, charges. subsequent over priority has, charge the until registered be cannot land over charge floating and land over Charges crystallised. chargor, the on served notice against by void only are Registry Land the with registered not buildings Charges over land and buildings in Hong Kong must also be registered registered be also must Kong Hong in buildings and land over Charges to one of month guarantee within creation with the Land Registry within 35 days of creation. Registration applies to Hong companies Kong and foreign companies registered in Kong, Hong Hong in registered not Kong. companies foreign to It apply not does even if they have a place of business in Hong Kong. Formalities. in Hong Kong must be registered with the Companies Registry „ „ „ Immovable property Common forms of security. for immovable property are: 1. FORMS OF SECURITY Philip Gilligan and Teresa Lau* and Teresa Philip Gilligan Deacons RESTRUCTURING AND INSOLVENCY AND RESTRUCTURING Kong Hong MULTI-JURISDICTIONAL GUIDE 2012/1 Country Q&A take effectasanequitablemortgage. A legal mortgage or charge which is not created by deed may still the chattels comprisedtherein. of respect in execution after days seven within Court High the of Registrar the with registered and attested duly not is it if void is Kong Hong in chattels personal over mortgage written A mortgage. equitable an as valid be still not may mortgage have the observed, formalities been registration the and mortgage legal no is there If valid. remains ship a of mortgage legal unregistered An above, companyliquidatoragainstcreditoranyvoidthe( and be will charge over movable property at the Companies Registry, theEffects chargeof non-compliance. „ „ „ „ „ may apply: Formalities. „ RESTRUCTURING AND INSOLVENCY MULTI-JURISDICTIONAL GUIDE 2012/1 GUIDE MULTI-JURISDICTIONAL „ „ „ „ „ „ companies andforeignregisteredinHongKong 35 daysofcreation.RegistrationappliestobothHongKong Kong mustberegisteredwiththeCompaniesRegistrywithin property ofcompaniesincorporatedorregisteredinHong Fixed charge. terminates whentheassetsarereturnedtodebtor. isbasedonpossessionofthegoodsbycreditor, it items toberepaired)untiladebthasbeenpaid.Since a debtor’s assetsthatarealreadyinitspossession(suchas Lien. asset. debt issettled.Thedebtorretainslegaltitletothepledged within sevencleardaysafteritsexecution. attested andregisteredwiththeRegistrarofHighCourt of sale.Themortgagemustbeinthestatutoryform,duly most personalchattelsinHongKongisconsideredabill Mortgage overpersonalchattels. Where themortgagorisacompany, seeabove, person, themortgagecouldberegistrableasabillofsale. Kong. Where(unusually)themortgagorisanindividual requirements forregistrationofaircraftmortgagesinHong Civil Aviation Department,buttherearenospecificlegal Mortgage overaircraft. irrespective ofthedatetheyweremadeorexecuted. by referencetotheorderofregistrationmortgages, the sameship,priorityamongmortgageesisdetermined If twoormoremortgageshavebeenregisteredinrespectof „ „ „ Shipping Register. Themortgageinstrumentmust: Mortgage overships. Floating charge. ( see above,ImmovableProperty INFORMATION „ „ „

Immovable Property the specifiedmanner. be dulyexecutedbyoronbehalfofeachmortgagorin mortgagee (amongotherthings);and set outthenameandaddressofeachmortgagor be inthespecifiedform; Thisgivesthecreditorarighttoretain,butnotsell, Depending on the type of asset, the following formalities Fixedandfloatingchargesovermostmovable Seeabove, FOR MORE Thismustalsobeenteredinthe ). If a company fails to register a registrable Thiscanberegisteredwiththe Fixed charge ). Awrittenmortgageover about Practical Law Company,visit Law please Practical about visit please publication, this about . Fixed charge see . „ „ „ „ each case.However, thegeneralorderofpriorityis: of circumstances the on depends partly creditors of ranking The refers tocorporateinsolvency. The term refers to personal insolvency and 2. RANKING SHAREHOLDER AND CREDITOR „ „ secure to mechanisms unpaid debts: following the use can creditors Trade 3. RECOVERY AND DEBTS UNPAID „ „ „ „ „ „ „ „ „ „

charge if all preferential creditors have been paid in full. erty Floating chargeholders. claims forbusinessesinHongKong. pay. Thesameruleappliestoinsuranceandreinsurance some amountsowedtothem,suchaswagesandholiday Preferential creditors. costs ofwinding-uppetitionsandrealisationcosts. Liquidation costs. fixed charges over the same asset rank in the order of creation. assets. Equitable mortgages rank behind legal mortgages, and the costs of realisation) from the sale proceeds of the charged charge ( Secured creditors. „ from thedebtor. Therighttotitleis lost ifthegoodsare: If paymentisnotmade,thecreditor canrecoverthegoods „ „ retain titletogoodsuntilthedebtorhasboth: included inasupplyagreementandallowsthecreditorto Retention oftitleclause( Lien. shareholders’ capitalcontributions. Shareholders. meet theirclaimsinfull. on aproportionalbasisifthereareinsufficientassetsto Unsecured creditorsrankequallyforpayment,andarepaid to othercreditors. floating chargeholdershavebeenpaidinfullisdistributed Unsecured creditors. the creditor can claim the balance as an . tion. If the sale proceeds are not sufficient to pay the debt, Floating charges over the same asset rank in order of crea hr d ceios n saeodr rn o a company’s a on rank shareholders and creditors do Where a tae rdtr ue n mcaim t scr unpaid secure to mechanisms any use creditors trade Can insolvency? of thesemechanisms? debts? Are there any legal or practical limits on the operation

„ „ „ www.practicallaw.com/restructure-mjg . These are only paid from the sale proceeds of a floating altered; fully repaidalloutstandingsums. fully paidforthegoods; See see Question 1, Immovable property

www.practicallaw.com/about/practicallaw Question 1,Movableproperty Anyremainingassetsareusedtorepaythe Theseincludetheliquidator’s fees,the Debts secured by a mortgage or a fixed Anysurplusremainingafterthe Employeescan,forexample,claim See Romalpa clause Question 1, Immovable prop .

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Is state support for distressed businesses available? Is state support for distressed needs of SMEs. Refrain from hasty and indiscriminate withdrawal or reduction of credit lines. Continue to support their SME customers. Be accommodating and flexible in relation to the funding Acquire business installations and equipment. Meet working capital needs.

„ „ „ „ „ „ They were also reminded to follow Corporate Difficulties The The TID also introduced a time-limited special loan guarantee scheme in December 2008 which enterprises aims to secure to loans help of Hong up enterprise to Kong to HK$12 million meet for general each business financialcrisis,operations with needs the up guaranteeing government business to 80% during of substantive the with companies global All loans. approved in Hong Kong and registered in Hong and Kong companies under listed for the except Business apply, can Ordinance Registration associates). their (and institutions lending commercial their at generally are policies lending banks’ Although discretion, the Hong Kong Monetary Authority (HKMA) and the published jointly Banks of Association Kong Hong Approach to Difficulties Corporate (but non-statutory) guidelines where (Guidelines) difficulties on financial in borrowers how corporate with deal institutions should the borrower is dealing with multiple banks. The Instead, Guidelines ask trouble. of sign first the at facilities withdraw to not banks continues company the ensure to together work to advised are they reached. be can prospects its of view considered a while trade to The HKMA adopted a series of measures to alleviate the culties diffi facing businesses during the global financial crisis. This included issuing circulars to all banks, strongly suggesting that they: „ „ brought brought or is contingency fulfilledat a later the date. Generally, possible not is it and mandatory are insolvency on set-off on rules them. of out contract to STATE SUPPORT 5. small by faced difficulties the about concerned is government The and medium-sized enterprises (SMEs). The Trade and Industry Department (TID) provides SMEs with free business information and practical consultation services, including offering advice to deal with business operation problems. The TID operates a SME Loan Guarantee Scheme which aims to help loans of up SMEs to HK$12 million to (as at secure 1 March 2012, US$1 was about HK$7.8) for each enterprise, from participating lending institutions to: „ „ The government guarantees 50% of approved loans, subject to a maximum of HK$6 million. All SMEs with substantive business operations in Hong Kong and registered in Hong Kong under the Business Registration Ordinance can apply.

to ) Romalpa injunction) Question 6 Mareva about this publication, please visit about Practical please Law visit Company, Question 1, Movable

see FOR MORE FOR . ) clauses can secure debts. Those that secure debts. Those clauses can ). Attempts to claim sale proceeds through ). Attempts to claim sale Romalpa see Question 2 Question see INFORMATION used to create other goods; used to create acting in good faith. debtor to a third party sold by the „ „ rescue or insolvency procedures described in recover their debt? Is there a mandatory set-off of debts on insolvency? mutual Can creditors invoke any procedures (other than the formal must be between the same persons and in the same right. The claims must be provable in the winding up. There must be credits, debts or other dealings between the insolvent company and creditor. The credits, debts or other dealings must be mutual, so they Real danger of the debtor dissipating its assets. Good arguable case with a substantive claim. Property clauses rarely succeed. claim title over the sale proceeds of goods are interpreted claim title over the sale Unless registered, these are void when as floating charges. ( the debtor goes into liquidation „ „ Not all

„ „ „ „ „ MULTI-JURISDICTIONAL GUIDE 2012/1 must exist is the date of the winding up order. Therefore, provided provided Therefore, order. up winding the of date the is exist must date the at existed liability contingent a or claims mutual the that of the winding up the order, set-off can apply when the claim is However, a creditor cannot claim the benefit of any set-off if he had, had, he if set-off any of benefit the claim cannot creditor a However, at the time of that notice the to credit giving petition the debtor, claims mutual the which at date effective The presented. been had „ „ „ Mandatory set-off of mutual debts The following conditions must be satisfied for a set-off to apply insolvency: on a company’s The appointment of a receiver often liquidation. leads to the company’s terms terms of a floatingcharge, his appointmentis likely owed to debt the coincide paying Before charge. the of crystallisation the with to the charge the holder, receiver must firstpay any preferential ( creditors A A receiver must realise the the company’s assets under and appointed is he pay If him. the appointed debt who party the to owed challenged in court (for example, if security is not validly taken). The court can also appoint a receiver under a charging order order in The property. disputed safeguard to or actions recovery debt appointing the receiver sets out his powers. to the debtor. The receiver can choose to safeguard these assets, these safeguard to choose can receiver The debtor. the to or to receive income from or dispose of them. Court approval is not required to appoint a receiver, but the appointment can be Most security documents allow a receiver to be A agreed. as payment appointed make not does debtor the or if occurs default a receiver can usually take possession of specific assets belonging „ „ An unsecured creditor can begin legal proceedings to recover its debt. A creditor can seek a formal a until claimed) freezing amount the to (up order assets debtor’s ( the over a: both is there that court the satisfy can it if place, takes hearing Procedures to recover debt 4. RESTRUCTURING AND INSOLVENCY AND RESTRUCTURING Country Q&A MULTI-JURISDICTIONAL GUIDE 2012/1 GUIDE MULTI-JURISDICTIONAL h Gieie d nt ae tttr fre n compliance the and on obligation no force is there Therefore, voluntary. statutory is them with have not do Guidelines The bank a use workout arrangement. can lenders multiple with Companies procedure. use and quickly, act workout the of experience have that advisers and representatives should banks that state Guidelines The supportive. be to expected initially is which banks, of meeting Initiation. to company rescue itsbusiness. the enable lenders, and its liquidation prevent of to group aims which a and company a between compromise Objective. Bank workout proceedings ifitdoesnotagreetotheworkout( liquidation begin can creditor any moratorium, no is there since However, arrangement. workout the of terms the under operate and exist to continue normally will company the liquidation, into Since the aim of a workout is to prevent the company from going its monitor often creditors implementation throughacommitteeofcreditors. agreed, is its workout implement a and Once arrangement terms. workout the sign parties the when concludes procedure The workout. a of terms the approve Conclusion. often takes months or years. no is there Asmoratorium, workout. a quick conclusion a is advisable. of However, terms the the process agree must parties the procedure. of Length from creditors enforcing theirclaims. prevent to moratorium no is there creditors, its creditors. from Protection with the creditors. negotiation of period the during place in remains management to head the negotiations with the company. The company’s existing Supervision and control. must meetbeforeitcannegotiateaworkout. tests. Substantive company canmakeaworkoutarrangement. Any proceedings. insolvency begin and creditors of of majority the wishes the against go can creditors dissenting moratorium, no is there As agreement. an reaching on depends success and to creditors its or involved not company are courts The workout. a for negotiations into enter the on obligation no is there and voluntary is process The begin. proceedings liquidation before Initiation. liquidation andenablethecompanytorescueitsbusiness. prevent to aims which creditors, its all and company a between Objective. Workout 6. PROCEDURES INSOLVENCY AND RESCUE RESTRUCTURING AND INSOLVENCY

What arethemainrescueandinsolvencyprocedures? INFORMATION When a company is in financial difficulty, it calls a itcalls difficulty, financial in is company a When A company can negotiate with its creditors at any time A workout is a contractual arrangement or compromise bn wrot s cnrcul ragmn or arrangement contractual a is workout bank A The company and all its creditors must unanimously There is no substantive test that a company a that test substantive no is There There is no required time frame in which in frame time required no is There FOR MORE The creditors can nominate a lead creditor During the period of negotiation with negotiation of period the During about Practical Law Company,visit Law please Practical about visit please publication, this about see above ). h sern cmite e b oe f h bns oios its monitors banks the of implementation. one by led committee and steering agreement, the the restructuring a agreed, sign is lenders workout its and a company Once position. their review should minority the that recommend strongly Guidelines the favour, in are banks of majority clear a If workout. a of terms the approve Conclusion. Bank workoutscanbetime-consumingandexpensive. procedure. of Length usually is their agreed betweenthelenders. arrangement enforcing standstill informal from or banks formal A the claims. prevent to moratorium no is Protectionfromcreditors. during theperiodofnegotiationwithbanks. the banks. The company’s existing management remains in place of one by led committee, steering a as known committee, small control. and Supervision Substantive tests. that theyrepresentacceptedbankingpracticeinHongKong. However, workout. a banks are initiate generally expected to follow to the Guidelines on creditors the basis bank its or company is required to ensure fairness. If creditor approval is unanimous, is approval creditor If fairness. ensure to required is be made to the court to sanction the scheme. The court’s then approval must application an meetings, the at proposal the shareholders approve and creditors the If meetings. respective their at and value in 75% 50% in number of the classes of least creditors or shareholders voting at by approved be must scheme The called. are meetings the obtained, is approval and If creditors shareholders. of classes respective the of meetings the call to approval court’s the obtain must it company, the by formulated been has proposal a Once court. the by supervised substantially control. and Supervision reorganisations, group mergers anddemergersoftenuseschemesofarrangement. in companies Solvent debts. its pay to for a company to show that it is unable or likely to necessary become unable not is It meet. must shareholders or creditors its and tests. Substantive the of Companies Ordinance. XI Part under registered companies overseas Kong, including Hong in registered company any to relation in made be can arrangement of scheme A so. do to party any on obligation begin negotiations for a scheme at any time, although there is no Initiation. must court The liquidation. company’s approve aschemeofarrangement. the prevent to aims which shareholders, or creditors its and company the between Ordinance (Cap. 32), Laws of Hong Kong Objective. Scheme ofarrangement any standstillarrangementexpiresoristerminated. exist. to However, continue the creditors are free normally to begin going liquidation proceedings if will company company the the prevent liquidation, to into is workout a of aim the Since

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see above, Protection from creditors from Protection above, see The company is unable to pay its debts. This is presumed debts. This is presumed is unable to pay its The company mini debt of a specified fails to satisfy a if the company March 2012, HK$10,000 (about mum amount (as at 1 days of a statutory demand, or if a US$1,282)) within 21 satisfied in whole or in part. In these judgment debt is not does not need to prove insolvency circumstances, a creditor a separate ground). (proof of insolvency is liquidation has been passed by at A special resolution for votes cast. least 75% of shareholders’ to liquidate the company. It is just and equitable „ „ „ creditors and the conduct of Each company. creditor must file a proof of debt to proceedings claim in the by Creditors merits. or its on considers liquidator the against which liquidation, the within claim their of rejection liquidator’s the against appeal can 21 days of being notified of this. The court can order HK$200,000 (about US$25,641) for to be conducted assets summarily, worth in which case the first creditors’ meeting is not held less than by the creditors to take control of the company and the directors’ the and company the of control take to creditors the by powers cease. Protection from creditors. restrain proceedings against the company after presentation of deemed the winding up is petition, but before a up winding up order has winding been the made, is order up winding a When made. petition the of presentation the of time the at commenced have to and there is an automatic stay on any actions proceeded with or commenced against the company (unless the court consents to the claims). The court rarely gives consent and the company’s affairs are resolved using the rules applicable to liquidation. A with affairs, company’s the of conduct the investigates liquidator a view to maximising the return to creditors made. is order up procedure. of Length further winding a the take before months often will several be to likely is it contributories eight and to six creditors least at with take can meetings The process entire the Therefore, months. two complete. to months Conclusion. to consents court the unless company, the against proceedings on ( claims A creditors’ committee (committee of inspection), which usually representatives, their or creditors five and two between comprises supervises and meeting, creditors’ first the at appointed usually is the liquidator. In particular, it must approve agreements with Substantive Substantive tests. most common are: grounds. The „ „ „ Supervision and control. provisional a made, is order up winding a and presented is petition The assets. can to the be company’s protect appointed liquidator up winding the after continues appointment liquidator’s provisional another or liquidator the becomes person that until made, is order the is appointed, liquidator If is no person appointed. provisional becomes the provisional liquidator until he, or liquidator. appointed is person, another must liquidator provisional the made, is order up winding the After convene separate meetings of the creditors appointed and is liquidator a meetings, these At months. contributories three within about this publication, please visit about Practical please Law visit Company, FOR MORE FOR Initiation of the of scheme the of Initiation ). Concluding schemes of arrangement can Question 2

Once approved, the scheme is binding on the company company the on binding is scheme the approved, Once The aim of compulsory liquidation is to realise a A winding-up petition must be presented to the court INFORMATION see The company’s directors. The company’s creditors. The company’s Certain government officials. The company. Payment of final dividends. Final arrangements on conclusion of the scheme. Early termination (for example, through a creditors’ vote). Early termination (for example, through a „ „ „ „ „ „ „ MULTI-JURISDICTIONAL GUIDE 2012/1 Any company can be compulsorily liquidated (whether registered (whether liquidated compulsorily be can company Any in Hong Kong or elsewhere), provided it is connected with the jurisdiction. necessary), to maintain a company’s existing rescue plan is arranged. position until a assets are being dissipated, the court can appoint a provisional liquidator to protect these continues until assets. the court has The dealt with (whenever liquidators the appointment provisional appoint petition. to court It the usually for is common also not received payment within 21 days. company’s a that evidence is there if presented, is petition a After There is no obligation on any petition. party Most to compulsory present and demand statutory liquidations a a served have who creditors by winding-up or are creditors, begun by unpaid „ „ „ by any of the following parties: „ company’s company’s assets and distribute them to creditors in priority ( order of Initiation. Compulsory liquidation Objective. Since the purpose of an insolvent company entering into a scheme a into entering company insolvent an of purpose the Since of arrangement is usually to avoid compulsory liquidation, the company normally continues to exist. „ „ A scheme generally concludes when its terms have been implemented. implemented. been have terms its when concludes generally scheme A to: relating provisions usually are There „ and all creditors or shareholders. Under the terms of the scheme, scheme, of the terms the Under or shareholders. creditors all and an administrator (who is usually arrangement. an the implement to appointed insolvency accountant) is through a separate document called an explanatory statement. explanatory an called document separate a through Conclusion. take take more than a creditor of year, and classes be the because expensive of carefully the define court’s to need the and involvement creditors to to explained which the clearly scheme applies. There be is must no it form prescribed but for a arrangement, of scheme prepared together with a . prepared together with Length of procedure. does not trigger a moratorium on creditor no claims. moratorium, As there any is dissenting creditor can proceedings begin against liquidation the company, which from being concluded. prevents mitigate To this, a scheme is a sometimes scheme the court will be reluctant to reject a scheme. process. place throughout the remains in existing management The company’s creditors. from Protection RESTRUCTURING AND INSOLVENCY AND RESTRUCTURING Country Q&A MULTI-JURISDICTIONAL GUIDE 2012/1 GUIDE MULTI-JURISDICTIONAL the companyonsuchtermsasit thinksfit. any contributory or creditor, the court can stay any action against against the company. However, on the application of the liquidator, Protection from creditors. inspection orcreditorssanctionotherwise. liquidator,appointmentthe committeeonof of the whereexcept cease powers directors’ The liquidator. the of appointment the control. and Supervision Substantive tests. more than five persons. no of consisting committee inspection prevails. an appoint choice canCreditors creditors’ the agree, cannot shareholders and resolution) special elect by a startedliquidator is liquidationat their if shareholders, respective (and Creditorsmeetings. If creditors within 28 days of filing the statutory declaration.within14days. Creditors’ and shareholders’ meetings are then heldof the commencement of the winding up in the Thedirectors must appoint provisionala liquidator, and, give notice things, the company cannot continue business because(signedthebydirectors, of its debts).recording theresolution resolution,that, statements verifying written this among other of days seven within statutoryA declaration Companies the filed with be Registry must is not reasonably achievable to wind up becausethe company it bycannot other means.pay its debts. shareholders,This resolution on groundscan onlythat thebe companypassedpass cannotboardaif resolution itcontinue towind upbusinessthe company, directors canwithout majority of consulting procedure, special a Alternatively, a by committee ofinspection). a possibly (and liquidator a appoint to resolution this of day one by at least 75% of votes cast. A creditors’ meeting is held within shareholders, which must pass a special resolution for winding up debts. The directors convene an extraordinary general meeting of its paying company the of prospect real no is there that believe Initiation. up acompanywithoutinvolvingthecourt. Objective. Creditors’ voluntaryliquidation brings thecompanytoanend. days. 14 within Registry Companies the to order this the proceedings are complete. The liquidator must send a copy of the liquidator, the court orders the company to be dissolved when this is published in the When the court has granted a release to the liquidator, a notice of liquidation. the in payments and receipts all creditors of summary a all with to given be should application the of notice Prior been have assets release. his for the court the to apply can liquidator and the distributed, complete is liquidation the When with thecourt’s approval. ( liquidation voluntary creditors’ a to liquidation compulsory a convert to possible is It and/or theinspectioncommittee. liquidator the is appoint creditors the This than rather order.court the regulating where a under conducted be to liquidation the order can court the creditors, of number large a is there If RESTRUCTURING AND INSOLVENCY INFORMATION A company’s directors can begin the procedure if they if procedure the company’sbegin A can directors The aim of a creditors’ voluntary liquidation is to wind Seeabove, see below,see FOR MORE Government Gazette There is no moratorium on proceedings h drcos ean n oto until control in remain directors The Initiation Creditors’ voluntary liquidation voluntary Creditors’ . about Practical Law Company,visit Law please Practical about visit please publication, this about . On application from GovernmentGazette )

declaration of solvency within five weeks before liquidation before weeks five within solvency of declaration Initiation. to and full in distribute anysurplustotheshareholders. creditors company’s the all pay to business, in up a company when its shareholders no longer wish it to continue Objective. Solvent voluntaryliquidation registered. Dissolutionbringsthecompanytoanend. been has account the after months three dissolved is company liquidator the meetings, Registry.Companies the to account the of these copy a The send must of week one its Within and company creditors. the of meetings call also must He assets. of an account of how he has conducted the liquidation and disposed When the company is fully wound up, the liquidator must prepare of the company’s assets as possible for distributionliquidator’s to itspowers creditors. differ slightly. TheConclusion. liquidator must realise as many where there may be a risk of dissipation of the company’s assets. cases, emergency in company the of assets the protect to is this a of appointment liquidator is procedure, likely to be much faster. The underlying rationale for special the Under weeks. to three two in appointed be can liquidator a procedure, liquidation procedure. of Length company meetingisrequired above, See of liquidation beginning. months 12 within full in for, provided or paid, are creditors Conclusion. months ofthedateonwhichspecialresolutionwaspassed. procedure. of Length voluntary liquidation ( Theliquidation thenisconducted theinsamecreditors’ way aas meeting. creditors’ a call immediately must he this, achieve to time,anyatIf,liquidatorthe discovers assetstheinsufficientare even if the overall liquidation, liquidation of start process the fromtakes monthslonger 12 than within full12 months. in creditors tests. Substantive ( test substantive the meets it provided liquidated, voluntarily be can Kong Hong in registered company Any liquidation. voluntary members’ a commence to person any on obligation no is There „ „ at least 21days’notice).Atthismeeting,shareholdersmustboth: (with convened is meeting general extraordinary An begins. liquidation: Protectionfromcreditors creditors. from Protection sanctions theircontinuance. liquidator the or meeting general a in company the where except The directors’ powers cease on the appointment of the liquidator, liquidator. the of appointment the until company the of control control. and Supervision see below, Substantivetests „ „ Appoint aliquidator. Pass aspecialresolutionbyatleast75%ofvotescast.

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section 182, Companies Ordinance set aside? If so, who can challenge these transactions, when set aside? If so, who affected? rights parties’ third Are circumstances? what in and Can an insolvent company’s pre-insolvency transactions be valid (this can be done either before or after the disposal). The court only declares a disposal valid if it is satisfied that the transfer does not have the effect of reducing the assets available for distribution to creditors. years if it relates to an associate) before its liquidation. An years if it relates to an associate) before its include a parent associate is widely defined, but does not are presumed to involving associates Transactions company. be an unfair preference. has been given, If the court finds that an unfair preference the position to it can make any order it thinks fit to restore not been given what it would have been if that creditor had the court will not make this the unfair preference. However, will be affected. order if the rights of innocent third parties Floating charges. liquidation are invalid months of an insolvent company’s unless money is and can be set aside by the liquidator, the advanced to the company at the same time as, or after, charge is created. the liquidator will bring the application to Typically, challenge a charge by summons. If a floating charge is found to be invalid, it is invalid even only against a third party assignee of the charge. However, the charge is invalid, so the obligation on the company to repay remains effective. Disposals. company property between the presentation of a petition and the making of a liquidation order by the court is void ( or assets transferred must return them to the liquidator, unless the recipient applies to court to declare the disposal Unfair preferences. out another insolvent company makes a payment, or carries than it would act, that puts a creditor in a better position only an unfair otherwise have held. A transaction is usually rather than preference if made voluntarily by the company, as a result of a threat of creditor action. an unfair A liquidator can apply to court to set aside months (or two preference made by the company within six

„ „ „ If, after presentation of the winding-up petition, no liquidator has liquidator no petition, winding-up the of presentation after If, made payments challenge can petitioner the appointed, been yet by the After company. the winding-up order has been made, the „ „ If company accounts and records are destroyed, or falsified before before falsified or destroyed, are records and accounts company If or after winding-up begins, the party responsible (whether a past can be fined or imprisoned. officer or shareholder) or present A parent company is a separate legal entity and is not liable for an insolvent subsidiary’s debts, unless it has given a guarantee for those debts. SETTING ASIDE TRANSACTIONS 9. entered Transactions into by a company that subsequently goes circumstances: into liquidation can be set aside in the following „ about this publication, please visit about Practical please Law visit Company, FOR MORE FOR INFORMATION party be held liable for an insolvent company’s debts? party be held liable for an insolvent company’s outcome of a restructuring or insolvency procedure? a restructuring or insolvency outcome of Can a director, parent company (domestic or foreign) or other or foreign) or (domestic company parent director, a Can Which stakeholders have the most significant role in the He has misapplied or retained the company’s property for He has misapplied or retained the company’s his personal benefit (). liquidation has been in progress for several years. He (or a shadow director) has breached his fiduciary duties to the company and its shareholders. Business was carried out with intent to defraud creditors, or for any other fraudulent purpose, and he was knowingly a party to the fraud. The standard of proof of intent to defraud is high and difficult to establish, particularly when He has given a personal guarantee for company debts. The director is liable to the creditor to whom the guarantee was made. assets. Repay or restore property to the company. Provide compensation or contribute to the company’s

„ „ „ „ „ „ Directors are also criminally liable for certain offences (such as for which misappropriation they of can property, be imprisoned). „ „ „ „ A director can be personally liable if: „ „ Directors and officers of a company are liable to the liquidator if they commit offences such as fraud or deception. In a number of situations, a liquidator can also seek a court order requiring certain directors or officers to either: LIABILITY 8. liquidator and the nomination takes precedence over appoint also any can creditors other The company. the by nominated person liquidation. a committee of inspection to supervise the appoint the liquidator and the committee of creditors’ a In creditors. of comprised inspection is liquidator the supervises which voluntary liquidation, the creditors have the right to nominate a In a compulsory liquidation or creditors’ voluntary liquidation, the creditors also have the most significant role in the outcome of the liquidation. In a compulsory liquidation, it creditors who is initiate the process. often In addition, the creditors the can against the company as there is no moratorium. against the company Insolvency procedures majority (in the case of required. scheme In addition, if of no liquidation arrangement) proceedings against consent the is company have yet been started, take action to recover any its debts or begin liquidation proceedings dissenting creditor can In a non-statutory workout or a statutory scheme of arrangement, of scheme statutory a or workout non-statutory a In the of outcome the in role significant most the have creditors the rescue as their unanimous (in the case of workout) or special Restructuring procedures STAKEHOLDERS’ ROLES 7. RESTRUCTURING AND INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2012/1 Country Q&A „ „ „ „ liable toreturnthemtherecipient. is party third that party, third a to transferred been have assets recipient the or funds liquidator.the However,the assets, where to them return must or funds transferred has company the If certain payments madebythecompanyarevoid. that declaration a for court the to apply can liquidator RESTRUCTURING AND INSOLVENCY MULTI-JURISDICTIONAL GUIDE 2012/1 GUIDE MULTI-JURISDICTIONAL „ „ „ „ „ „ „ liquidation beginning.Onerouspropertyincludes: can disclaimonerouspropertywithin12monthsofthe Onerous property. contributory ofthecompanycan applytothecourtfora The OfficialReceiver, liquidator, orany creditor or debts. party toth the courtcandeclarethataperson whowasknowinglya creditors oranyotherperson,forfraudulentpurpose, business ofthecompanytookplacewithintenttodefraud . property totheliquidator. the surrender to required be may transaction credit the of purposes the for security as property holds who person any so rights, parties’ third affecting orders make can court The The applicationcanbemadebytheliquidatoronly. „ „ facilities grantedtothecompany)ifboth: or tovarythetermsofacredittransaction(thatis,loan liquidated, thecourtcanmakeanordereithertosetaside Extortionate credittransactions. who did not have notice of the intent to defraud the creditors. of for valuable consideration and in good faith to a person A transaction will not be avoided if the property was disposed The liquidatororanycreditorcanapply. or become insolvent as a result, to set aside the transaction. does not need to be insolvent at the time of the transaction transaction occurred shortly before liquidation. The company transactions, but a claim is more likely to succeed if the creditors’ reach. There is no time limit for challenging took place with the aim of placing company assets beyond can be set aside if a liquidator can prove to the court that it Assets placedbeyondthereachofcreditors. deemed tobeacreditorofthecompany. Any personwhosufferslossbythedisclaimerofpropertyis disclaimed propertybevestedintheappropriateperson. can makeanapplicationtothecourtfororderthat Therefore, anypersoninterestedinthedisclaimedproperty parties’ interestsunderadisclaimerofonerousproperty. The courtgenerallyseekstominimisetheeffectonthird Only theliquidatormaymakeapplication. INFORMATION „ „ „ „ „ contravenes ordinaryprinciplesoffairdealing. it involvesexorbitantpaymentsorotherwisegrossly liquidation; the companyenteredintoitwithinthreeyearsbefore leases madeonunfavourableterms. the paymentofanysummoney; the possessortoperformanceofanyonerousact,or property thatcannotberealisedbyreasonofitsbinding unprofitable contracts; at businessispersonallyliablefor thecompany’s With thecourt’s approval,aliquidator FOR MORE During liquidation,ifitappearsthatany Ifacompanyisbeing about Practical Law Company,visit Law please Practical about visit please publication, this about A transaction and dutiesaresetoutintheschemedocument. rights whose administrators, by implemented and administered usually is scheme the this, After approved. is scheme a before arrangement. of Scheme Bank workout. creditors, thecompanycancontinuecarryingonbusiness. Workout. Circumstances 10. INSOLVENCY DURING BUSINESS ON CARRYING In addition, if the licence contains such terms, it may also be terminable bythelicensoron occurrenceofliquidation. also may it terms, such contains licence the if addition, In See „ „ the contracteither: if property, onerous as licence a such disclaim potentially may property,intellectual liquidator of the licensee a is company a If Intellectual propertylicences See above, Authority/supervision liquidation liquidation. voluntary Solvent business inthesecircumstances. on carry to required not is committee inspection or court the of approval The the liquidation. the to benefit to necessary except is this business, extent on carrying cease must company the liquidation. voluntary Creditors’ on carrying continuebusiness, unless tothe court order appointing power them states otherwise. no have liquidators provisional necessaryisbenefit to winding-upthe company.the of Generally, given,theliquidator cancontinue business only tothe extent this approval of the court or the committee the of with inspection. company’s business If the approval onis carry only can liquidator A provisional liquidator takes control liquidator or appointed,of the all been the provisionalcompany’s liquidator has a property.or liquidation. Compulsory „ „

Question9 third party, the third party is not requiredup the to loss. disgorge Where the the benefit. benefit has been passedpersonally to an innocentliable for fraudulent trading, thatIf the person court must has makemade a declaration that a person should be the fraudulenttradingarepersonallyliable. declaration thatanypersonswhowereknowinglypartiesto licence fees) act orpaymentofanysummoney(suchas Binds thecompanytoperformanceofanyonerous Is unprofitable. n ht icmtne cn cmay otne o carry to continue company a can circumstances what In company’s businessandwhatrestrictionsapply? In proceedings? the on rescue carry or supervise particular,to authority the has who or insolvency during business on

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see Question 12 Question see concluded that Hong Kong should wait for further development development further for wait should Kong Hong that concluded implementation national Law before Model of the UNCITRAL ( consultation in late 2012 to consult the public on the major consultation in late 2012 to consult the public it will aim to legislative proposals. Once these are finalised, quarter of introduce a revised Bill to Legco by the second 2014. Insolvent trading. This provides introduction of insolvent trading provisions. directors and shadow directors will be that a company’s in certain personally liable to compensate the company senior management will be circumstances. However, Liability will excluded from liability under insolvent trading. trading and arise if they allowed the company to continue or ought reasonably to have incur debt when they knew, known that it was insolvent, or that there was no reasonable prospect of avoiding insolvency. A provision on provisional of context insolvent the in only not trading and generally companies is intended to serve effectively would apply provisions these However, to supervision. to resort to not persons responsible induce to incentive an as insolvent trading before liquidation, but rather initiate the provisional supervision at an earlier stage. Consolidating legislation. insolvency legislation relating to individuals (regulated by the Bankruptcy Ordinance (Cap. 6), Laws of Hong Kong) and companies (regulated by the Companies Ordinance) into a single ordinance. UNCITRAL Model Law. supervisor, who will take control of the company and will take control of who supervisor, proposal for creditors, voluntary arrangement formulate a there will be Importantly, court involvement. with minimal time within a specified on creditors’ claims a moratorium frame. provisional supervision procedure The introduction of the the Law Reform Commission in was recommended by to the Legislative Council 1996 and was first introduced it has stalled on a number of (Legco) in 2000. However, diverse views of a large number of occasions due to the the most controversial issues attracting stakeholders. One of employees’ outstanding claims public debate was whether in full or up to a certain limit, should be paid, either begin this rescue procedure. In before the company could Bureau Services and Treasury October 2009, the Financial on (FSTB) conducted a three-month public consultation The FSTB a further attempt at launching this legislation. in July 2010. finalised its conclusions from the consultation to employees’ latest proposal relating the FSTB’s However, Under outstanding claims is likely to remain controversial. need to set the proposal, the insolvent company will still outstanding aside a substantial amount of funds to cover wages employee entitlements such as arrears of wages, payments, in lieu of notice of termination and severance before provisional supervision can proceed. a public The FSTB has indicated that it plans to launch The assistance of Tiffany Cheung in the preparation of this chapter chapter this of preparation the in Cheung Tiffany of assistance The „ „ „ * acknowledged. is „ „ „ about this publication, please visit about Practical please Law visit Company, A provisional supervision rescue FOR MORE FOR ). INFORMATION see Question 2 Question see and international treaties in multinational cases? What are the are What cases? multinational in treaties international and procedures for foreign creditors? financing or equivalent)? Is special repayment of this finance? priority given to the obtain additional finance (for example, debtor-in-possession Are there any proposals for reform? What are the rules regarding recognition, concurrent proceedings proceedings concurrent recognition, regarding rules the are What Can a company that is subject to insolvency proceedings are having difficulties, but which have strong underlying businesses. The procedure will be conducted through the a provisional appointment of an independent third party, Provisional supervision. procedure has been proposed to be used by companies that

„ Proposals for reform have been made for the following: „ 13. REFORM Procedures for foreign creditors The same procedures apply to both local and foreign creditors. Hong Kong is not party to any international treaty relating to insolvency insolvency to relating treaty international any to party not is Kong Hong and 1997 the Model Law Insolvency UNCITRAL on Cross-Border Model (UNCITRAL Law) has not yet been in implemented Hong Kong. foreign court. International treaties Concurrent proceedings In practice, if there are proceedings both abroad, the court has shown a willingness to co-operate with the in Hong Kong and could be unfairly prejudiced. Surprisingly, even Kong is part though of China, there is no formal Hong basis on which a Hong Kong liquidation can be recognised in China. their discretion as a matter of comity. However, the court must to need the with jurisdiction foreign the to obligations its balance ensure that Hong Kong creditors receive fair treatment. Foreign judgments are unlikely to be enforced if Hong Kong creditors only be enforced in Hong Kong if proceedings. the court When recognises asked those to procedure, the Hong Kong courts will generally do so, recognise exercising a foreign insolvency Recognition Court orders obtained in foreign insolvency proceedings can 12. MULTINATIONAL CASES on on the security of the assets of The the security company. takes creditor of priority on rules general the with accordance in priority ( claims There There liquidation is compulsory in liquidator no the Further, provision finance. additional prohibiting a company from has the obtaining liquidation power to voluntary and raise money creditors’ ADDITIONAL FINANCE 11. RESTRUCTURING AND INSOLVENCY AND RESTRUCTURING MULTI-JURISDICTIONAL GUIDE 2012/1 Country Q&A RESTRUCTURING AND INSOLVENCY MULTI-JURISDICTIONAL GUIDE 2012/1 GUIDE MULTI-JURISDICTIONAL „ „ „ „ „ Recent transactions infrastructure; corporatefinance. Areas ofpractice. 1990 Qualified. „ „ „ „ „ INFORMATION of itsHongKongfranchisee. Advising aUSfoodservicefranchisorontheliquidation investors onmattersarisingoutoftheLehmancollapse. derivatives counterparties,investorsandpotential Advising numerous funds, prime brokers, administrators, liquidation ofanairline. Advising twocreditcardcompaniesinrelationtothe operations ofaEuropeanluxuryfashionbrand. Advising thepurchaseronrescueofHongKong products company. Advising thelenderonrestructuringofaconsumer Hong KongSAR,1995;EnglandandWales, FOR MORE Restructuring andinsolvency;finance; PHILIP GILLIGAN PHILIP W E F T Deacons

+852 28100431 +852 28259716 www.deaconslaw.com [email protected] about Practical Law Company,visit Law please Practical about visit please publication, this about CONTRIBUTOR DETAILS CONTRIBUTOR „ „ „ Recent transactions corporate finance. Areas ofpractice. 2008 Qualified. „ „ „ „ „ „ „ Advising theadministratorsofastatutoryscheme Hong Kongretailer. Advising aluxurywatchcompanyoninsolvencyof Kong group. on restructuringandsubsequentliquidationofaHong Advising theJapaneselenderandpreferredshareholder Advising onmattersarisingoutoftheLehmancollapse. liquidation ofaHongKongassociatedcompany. Advising thetrusteeofaUSChapter11bankruptcyon company onclaimsadjudication. arrangement withrespecttoaHongKongequipment

www.practicallaw.com/restructure-mjg Hong KongSAR,2003;EnglandandWales,

www.practicallaw.com/about/practicallaw Restructuring andinsolvency;finance; W E F T Deacons LAU TERESA

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