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Winding up and Insolvency Law in Hong Kong – Key Changes in 2016 1

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Winding up and Insolvency Law in Hong Kong – Key Changes in 2016 1 Winding up and insolvency law in Hong Kong – key changes in 2016 1 Client Briefing June 2016 Winding up and insolvency law in Hong Kong – key changes in 2016 After many months of consultation and debate, the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (the Amendment Ordinance) has been published. In the first of two briefings looking at the effects of the new legislation, we focus on the major changes brought about by the Amendment Ordinance as it affects the protection of creditors and the winding up process. We also look at what is still to come in the changing landscape of insolvency law in Hong Kong. A transaction at an undervalue occurs Overview when a company makes a gift to, or Key issues In the press release accompanying enters into a transaction with, a the publication, a Government person on terms that provide for the The aim of the legislation is to spokesperson said "The company to receive no consideration; "improve and modernise Amendment Ordinance will or enters into a transaction with a Hong Kong's corporate improve and modernise Hong person for a consideration (to be winding-up regime by Kong's corporate winding-up assessed in terms of money or providing measures to regime by providing measures to money's worth) the value of which is increase protection of increase protection of creditors significantly less than the value of the creditors and further enhance and further enhance the integrity of consideration provided by the the integrity of the winding-up the winding-up process." company (new section 265E, process." CWUMPO). It intends to achieve this with Protection of Creditors The "relevant time" for a transaction new provisions concerning transactions at an The Amendment Ordinance aims to at an undervalue to be caught is any undervalue, changes to the achieve better creditor protection in time within five years before the law on unfair preferences and various ways. commencement of the winding up, but only if at that time the company was new liabilities attaching to Transactions at an undervalue unable to pay its debts or became directors and members in connection with a redemption Historically, Hong Kong's corporate unable to pay its debts as a result of or buy-back of shares out of insolvency law has had no separate the transaction (new section 266B, capital. concept of transactions at an CWUMPO). Long overdue detailed undervalue, although there is such a As a safeguard and reassurance to proposals on a new statutory concept for personal bankruptcy as concerned directors, the Court will not corporate rescue procedure provided for in the Bankruptcy make a remedial order restoring the are in preparation. Ordinance (Cap 6). The concept is company to the position it would have now included in the Companies been in if it had not entered into the No date has been set for the (Winding Up and Miscellaneous transaction, if it is satisfied that the new law to come into Provisions) Ordinance (CWUMPO). company entered into the transaction operation. in good faith for the purpose of 2 Winding up and insolvency law in Hong Kong – key changes in 2016 carrying on its business and there the basis of the bankrupt as an Liabilities of directors and were reasonable grounds for individual. members believing that the transaction would Under CWUMPO, a person may be The Amendment Ordinance contains benefit the company (new section an associate of a company if he (i) is new provisions for civil liability on 265D, CWUMPO). a director, shadow director or other directors and members in connection Unfair Preferences officer of the company; or (ii) has with a redemption or buy-back of control of the company, by himself or shares out of capital. The Amendment Ordinance together with his associates, either by addresses a long-standing anomaly in Where a company has redeemed or having control over the board of the corporate unfair preference bought back its own shares by directors or by being entitled to regime by introducing a standalone payment out of its capital and the exercise, or control the exercise, of power for the Court to set aside company has been wound up within more than 30% of the voting power at transactions entered into by a one year of the redemption or buy any general meeting of the company company prior to its winding up that back, the recipient of the payment of or of another company which has unfairly puts a particular creditor in a the redeemed or bought-back shares control of it. In addition, two better position than other creditors and the directors who made the companies may be associates of (new section 266, CWUMPO). solvency statement are made jointly each other if they are under common Previously, the unfair preference and severally liable to contribute to control (section 265C, CWUMPO). concept in the corporate arena was the assets of the company an amount inelegantly linked to that relating to Floating Charges not exceeding the payment in respect individuals under the Bankruptcy of the shares (new section 170A, The Amendment Ordinance changes Ordinance. CWUMPO). the law in respect of floating charges A company gives an unfair preference and when they may be set aside. The change is intended to protect the to a person if that person is one of the interests of creditors by ensuring that CWUMPO aims to prevent the company's creditors or a surety or the company's paid-up capital is mischief of last minute floating guarantor for any of the company's preserved and not returned to its charges being created by directors or debts or liabilities, and the company members immediately before the controllers of companies in favour of does anything or suffers anything to insolvent winding up of the company themselves. Liquidators have been be done which has the effect of at the expense of the company's able to treat floating charges made putting that person into a position creditors. within 12 months of the which, in the event of the company commencement of the winding up as going into liquidation, would be better The Winding up Process invalid as a security unless the than the position that person would company was solvent immediately The Amendment Ordinance includes have been in if that thing had not after the creation of the charge. changes made with the aim of been done (new section 266A, improving the integrity of the winding CWUMPO). The new section 267 CWUMPO up process. These include new follows the recommendation of the Definition of "Associate" provisions: Law Reform Commission in extending The definition of "associate" for the the "relevant time" for a floating setting out more clearly the provisions on transactions at an charge created in favour of a powers of provisional liquidators undervalue and unfair preferences is connected person to two years prior in a court ordered winding up, now broadened and includes to the commencement of the winding together with provisions on the categories of persons which are up. It also allows liquidators to take basis for remuneration and formulated with specific regard to the into account the provision of property tenure of office; usual manner in which corporations and services as well as cash by way simplifying the procedure for a operate. This is in contrast to the old of consideration for the amount of the liquidator to appoint a solicitor to definition under the Bankruptcy charge. assist in a court ordered winding Ordinance, which was formulated on up by giving advance notice to the Committee of Inspection; Winding up and insolvency law in Hong Kong – key changes in 2016 3 restricting the powers of the detailed proposals on corporate members-appointed liquidator rescue, providing an option for and the directors before the companies in short-term financial holding of the first creditors' difficulties to commence a new meeting and the appointment of a statutory corporate rescue procedure liquidator in a voluntary winding with a view to reviving the business of up; the company instead of the rather expanding the list of people drastic alternative of immediate disqualified for appointment as a liquidation possibly proceeded by a provisional liquidator or liquidator provisional liquidation process. to avoid conflicts of interest; It is important not only for troubled setting out the procedures for companies, but equally importantly for removal and resignation of a their creditors, to have an effective liquidator in a voluntary winding alternative to liquidation so as to up; and encourage a rescue culture with the improving the procedures for aim of allowing companies to survive private and public examinations. with the benefit of a statutory regime that provides a real alternative to These amendments will be examined liquidation and which is almost always more fully in the second of our a value destructive process. It is very briefings. much hoped therefore that relevant proposals will be brought before the Timescale Legislative Council in the 2017/18 session. The Amendment Ordinance will come into operation on a day to be appointed by the Secretary for Financial Services and the Treasury. Currently, there is no public information as to when this will be or if the changes will be introduced in stages. Changes Ahead The Amendment Ordinance does not include any provisions relating to corporate rescue or to delinquent directors, both areas where Hong Kong's corporate insolvency regime has for some time lagged behind other jurisdictions both within the region (most notably Singapore) and internationally, such as England and Wales. This is despite various consultation processes in Hong Kong over a number of years dating back to the Asian financial crisis.
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