Better late than never: amendments to the Companies (Winding Up and Miscellaneous Provisions) Ordinance gazetted

By now, you will all be aware of the recently gazetted the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 ("Amendment Ordinance"), heralding as it does a much anticipated refreshment and modernisation of the Companies (Winding Up and Miscellaneous Provisions) Ordinance ("CWUMPO") and the Companies (Winding up) Rules ("CWUR").

Given that the last major amendments to the corporate winding-up regime in Hong Kong occurred in 1984, reform in this area is long overdue.   

While the date of commencement of the Amendment Ordinance is yet to be announced, we have set out below a summary of the "big ticket" items included in it.

Key Amendments

The Court's power to set aside transactions at an undervalue – section 265D of the amended CWUMPO

While similar provisions are commonplace in the United Kingdom and Australia, the Amendment Ordinance introduces a power for the Court, upon application of a liquidator, to set aside transactions at an undervalue.

A company enters into a transaction with a person at an undervalue if—

1. the company makes a gift to any person, or otherwise enters into a transaction with any person on terms that provide for the company to receive no consideration; or

2. the company enters into a transaction with any person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.

The relevant period within which the transaction can occur is 5 years from the date of the commencement of the winding up of the company (266B(a) of the amended CWUMPO).

Pursuant to section 266B(2) of the amended CWUMPO, there is also a requirement that the company was insolvent at the time of the transaction, or became insolvent as a result of the transaction.

The Court's power under section 265D(3) of the amended CWUMPO allows it to make any order that it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction (such as to order the transfer of the relevant asset back to the Company). 

A party the subject of a liquidator's claim that they were the beneficiary of a transaction at an undervalue is, however, provided with a defence under section 265D(4) of the amended CWUMPO.  Thus, if it can be shown that:

1. the company entered into the transaction in good faith and for the purpose of carrying on its business; and

2. at the time the company of entering into the transaction, there were reasonable grounds for believing that the transaction would benefit the company,

the Court will not able to make an order under Section 265D(3) of the amended CWUMPO.

Standalone unfair preference provisions – Section 266 of the CWUMPO

A longstanding criticism of the unfair preference regime in Hong Kong has been its reliance on and application of the provisions of the Bankruptcy Ordinance.

The amended CWUMPO will now include standalone unfair preference provisions which will operate in the same manner as those currently in operation.  The Amendment Ordinance does, however, include new, workable and applicable definitions in respect of a person "connected with company".  Previously, the unfair preference provisions relied on the definition of an "associate"  in the Bankruptcy Ordinance and tried to apply that definition in the context of corporate insolvency (often with nil effect).

A person "connected with the company" is defined in the amended CWUMPO to include (amongst others):

1. a director, shadow director or other officer of the company;

2. another company in control of director, shadow director or other officer of the company;

3. an employee or employer of a director or shadow director of the company;

4. a spouse (including a former spouse) or cohabitant (including a former cohabitant)  of a director or shadow director of the company;

5. a relative of a director or shadow director of the company;

6. a relative of a spouse or cohabitant of a director or shadow director of the company; and

7. a spouse or cohabitant of the relative of a director or shadow director of the company.

The expansive definition of a person "connected with the company" (and accompanying presumption of a desire to prefer) will greatly assist liquidators in their recovery of unfair preferences from parties which might otherwise have been outside the scope of the current provisions.

The Committee of Inspection

The Amendment Ordinance will revamp a number of committee of inspection ("COI") procedures to bring Hong Kong's insolvency regime in line with other jurisdictions.  These changes will help to streamline liquidations and the performance of the liquidators duties.  The changes to the COI procedures include:

1. Amendments to rules 176 and 179 of the CWUR to provide the COI with the power to approve payments of the bill of costs of an agent of the liquidator without taxation and to remove the requirement for taxation. 

2. Liquidators in a court winding-up may exercise the power to appoint a solicitor to assist in performing the liquidator’s duties by giving seven days’ advance notice to the COI – section 199 of the amended CWUMPO.

3. Allowing communications by a liquidator with members of the COI, creditors and contributories by electronic means with their prior consent.

4. Streamlining and rationalising the proceedings of COIs, by:

   1. allowing remote attendance at meetings of COIs – section 207B of the amended CWUMPO;

   2. enabling COIs to perform their functions and make decisions through written resolutions sent by post or electronic means – section 207D to 207K of the amended CWUMPO; and

   3. prescribing the maximum (7) and minimum (3) numbers of members of COIs – section 206(3) of the CWUMPO.

Prescribed form of statutory demand section 178(1) of the amended CWUMPO

From the time of Commencement of the Amendment Ordinance, creditors hoping to take advantage of the statutory demand regime will be required to comply with rule 3B of the amended CWUR.  The amendment to introduce rule 3B, which mandates that a statutory demand must be in the prescribed form, will hopefully lead to fewer disputes as to the validity or effect of a demand.

Due to the seriousness of the consequences of failing to comply with a statutory demand, as is the case in other jurisdictions, including Australia, it is likely that this requirement will be strictly enforced by the Courts with a creditor's failure to comply with the prescribed form and language at risk of having its statutory demand set aside for procedural discrepancies.

New section 228A of the CWUMPO safeguards

A winding up commenced under section 228A of the CWUMPO has been frequently criticised as a source of abuse by directors.  This criticism appears to have been heard as under the Amendment Ordinance as the amended CWUMPO provisions will require the:

1. directors of the company to appoint a provisional liquidator at the time of delivering the winding up statement to the Registrar of Companies (previously provisional liquidators were only required to be appointed forthwith); and

2. the winding up statement to be provided to the Registrar of Companies must state that a meeting of the company and its creditors had been called (on a date within 28 days from the date the statement is delivered), a provisional liquidator had been appointed and that the appointment of the provisional liquidator would take effect from the time the winding up statement was delivered

Further, provisional liquidators appointed under section 228A of the CWUMPO will have severely limited powers.  Without sanction of the Court, a provisional liquidator appointed under section 228A of the CWUMPO is only empowered to:

1. take into their custody, or control, all the property and things in action to which the company is or appears to be entitled;

2. dispose of perishable goods and other goods that are likely to diminish in value if not immediately disposed of; and

3. do anything that may be necessary to protect the company’s assets.

Liquidator's disclosure statement

The new section 262D disclosure statement is required to be made by all prospective liquidators and provisional liquidators (except in relation to a members' voluntary winding up) and delivered to the Court before the appointment or tabled at the meeting at which their appointment is to be considered (as applicable).

The section 262D Disclosure Statement is similar to the Declaration of independence, relevant relationships and indemnities required to be disclosed by liquidators in Australia.In Hong Kong, the disclosure statement (made by the prospective liquidator or provisional liquidator) must contain:

1. a confirmation that:

   1. he or she is not disqualified under section 262B (which disqualifies creditors, debtors, directors, secretaries, auditors and receivers of the company from acting as the liquidator of the company as well as body corporates and undischarged bankrupts);

   2. if he or she is disqualified under sections 262B subject to leave being sought from the company, whether leave has been obtained from the Court;

2. a disclosure as to whether he or she is or was within 2 years before making the statement:

   1. a member, creditor, debtor, director, company secretary, employee, legal advisor or financial advisory of the company, its holding company or its subsidiary;

   2. an auditor, receiver and manager, provisional liquidator or liquidator of the Company;

   3. the prospective liquidator or provisional liquidator is the immediate family member of a person who held the position listed above or is the partner in a firm in which another partner held one of those positions.

3. if he or she hold one of the above positions within 2 the two years before the making of the statement (or they were the immediate family member or partner of a person who did), the reasons why the prospective liquidator does not believe that they have a conflict of interest in acting as liquidator or provisional liquidator.

A liquidator, once appointed, is under a duty to update the disclosure statement within 14 days if he or she becomes aware of an error in the statement of if new facts or relationships become known.

Liquidators should take great care in preparing their disclosure statements prior to accepting an appointment to avoid any allegation of a conflict of interest.

What's next on the reform agenda?

While the amendments to the CWUMPO and the CWUR will, one enacted have modernised and refreshed Hong Kong's restructuring and insolvency regime, it is hoped that the next round of reforms (which are hopefully not another 24 years away) include further improvements in the areas of cross border insolvency and statutory restructuring mechanisms, which are desperately required.

If you would like to discuss any of the new amendments to the CWUMPO and the CWUR made by the Amendment Ordinance, please contact Gareth Thomas or Jeremy Haywood.