Topic 15 - Company Insolvency and Liqidation - Student - 27april2023

27/04/2023
BUSI3803 Company Law Semester 2 (2022-23)
Topic 15: Company Insolvency and Liquidation
& Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap.32)
Course Instructor: Dr. Ida Mak
© Copyright 2019 - 2023 Dr. Ida Mak, The University of Hong Kong. All Rights Reserved. 1
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Table of Contents
01 02 03
Role and Powers of Voluntary
A Defunct Company
the Liquidators Winding-up
04 05 06
Compulsory Realisation and
Dissolution
Winding-up Distribution of Assets
01
A Defunct Company
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A Defunct Company
A company is defunct if the company

is not in operation or carrying on
business.
Ways to Dissolve a Defunct Company
1. Striking off A 2. Deregistration 3. Winding-up or

Defunct Company Liquidation
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1. Striking Off A Defunct Company
● The Registrar may strike the name of a defunct company off the companies register and
arrange for its dissolution in the following circumstances:
o Where the Registrar has reasonable cause to believe that the company is not carrying
on business or in operation ;
o Where the Registrar has reasonable cause to believe that no liquidator, or provisional
liquidator, is acting or that the company’s affairs are fully wound up; or
o The Registrar may apply to the court to strike off a company (s.748).
2. Deregistration
● Deregistration is where a company is removed from the companies register

maintained by the Hong Kong Companies Registry.
● The following companies are eligible for deregistration if they are defunct,
and solvent:
o Private companies, or
o Companies limited by guarantee (s.749).
● Public companies and companies registered under Part 16 of the Companies

Ordinance (Non-Hong Kong companies) are excluded.
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Restoration to the Companies Register

● A deregistered Hong Kong company can be restored.
● There are two ways of restoration:
1. Administrative Restoration
o Administrative Restoration is a process to restore a company by the Registrar of
Companies.
2. Court Ordered Restoration

o An application to the court for the restoration of a company to the Companies Register
may be made by a person who was a director or member or creditor of a company or by
any other person, including the Government, who appears to the court to have an
interest in the matter.
o The company may grant an application if satisfied that the company was, at the time its
name was struck off, in operation or carrying on business or it is otherwise just that the
company be restored.
3. Winding-up or Liquidation
● Winding-up, or liquidation refers to a process in which the assets of the
company are collected and realised (i.e., sold off and converted to cash) through
a legal process in order to repay its debts.
● The end result of liquidation or winding-up is that the affairs of the company are
wound up, and the company ceases to exist when it is dissolved.
The principle statute that governs liquidation is:
Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32).
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Modes of Winding-up
A company may be wound up either:
● by the company voluntarily (voluntary winding-up)

For voluntary winding-up, this can be initiated either by:
o Members (shareholders), or
o Creditors.
● by the Court (Compulsory winding-up)
02
Role and Powers of the Liquidators
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Role of a Liquidator
● A liquidator is the officer appointed when a company goes into
liquidation.
● The key function of a liquidator is to protect and realise the
corporate assets, and has to distribute the proceeds from
realisation of the sale of the liquidation assets in accordance to
the order of priority.
Powers of the Liquidators

● Liquidators are conferred a wide range of powers necessary for the discharge of their roles.
This includes but not limited to the followings:
Liquidators can exercise power to compromise with company's’ creditors

through a scheme of arrangement procedure.
Liquidators have power to conduct corporate proceedings in name of company.
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03
Voluntary Winding-up
Voluntary Winding-up
1. Members’ Voluntary Winding-up 2. Creditors’ Voluntary Winding-up
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Commencing A Voluntary Winding-up
1. Members’ Voluntary Liquidation
Requirements for Members’ Voluntary Liquidation
A special resolution, which must be approved by three-quarters of the shareholders

present at a meeting of shareholders (s.228(1)(b)).
When a voluntary liquidation is proposed, the directors of the company sign a “certificate
Certificate of
Solvency
of solvency”, to the effect that they have made a full inquiry into the company’s affairs and
have formed the opinion that the company will be able to pay its debts in full within a
maximum of 12 months after the commencement of liquidation (s.233).
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Appointment of the Liquidator in a Members’ Voluntary Liquidation

● In the case of a members’ voluntary winding-up, the liquidator is appointed by the members in general meeting
by an ordinary resolution.
● On the appointment of a liquidator, all the powers of the directors cease, except in so far as the company in
general meeting or the liquidator sanctions their continuance.
Powers
Directors Liquidators
● The principle role of the liquidator in a voluntary winding-up is to realised the company’s assets and apply the
company’s property ‘in satisfaction of its liabilities pari passu, and, subject to such application’ to distribute its
assets ‘among the members according to their rights and interests in the company’ (s.250).
2. Creditors’ Voluntary Winding-up
A creditors’ voluntary winding-up is usually commences when the

directors of the company realise that the company is insolvent and is
unable to trade out of its financial difficulties.
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Meeting of Creditors (s.241)
● In the case of a creditors’ voluntary winding-up, a meeting of creditors must be called within 14 days at which the
resolution for voluntary winding-up is to be proposed.
● Notice of the meeting of creditors must be sent by post to creditors at least 7 days before the meeting (s.241(1)).
● At that meeting, the directors must lay before it a full statement of the position of the company’s affair, including the
followings (s.241(3A)(a) to (e)):
o The particulars of the company’s assets, debts and liabilities;
o The names of the company’s creditors and the estimated amount of the claim of each of the creditors;
o The securities held by each of the creditors;
o The date on which each of the securities was given; and
o Any further or other information as may be prescribed.
● This section also requires notices of the creditors meeting to be sent by post to the creditors not less than 7 days
before the day on which that meeting is to be held and that the meeting be advertised in the Gazette and in at least
an English language newspaper and a Chinese language newspaper circulating in Hong Kong.
Appointment of the Liquidator in a Creditors’ Voluntary Liquidation
● In the case of a creditors’ voluntary winding-up, the liquidator is appointed in different way.
● At the respective meetings of the company and the creditors, a person may be nominated to
be liquidator for the purpose of winding-up the company’s affairs and distributing its assets
(s.242).
● Creditors have top priority to appoint liquidator if different persons are nominated as the
company’s liquidator.
● Section 242 goes on to provide that the case of different persons being nominated any
director, member, or creditor of the company may, within 7 days of the creditors’
nomination, apply to the court for an order either that company’s nominee shall become the
liquidator or join liquidator with the creditors’ nominee, or that some other person to be
liquidator.
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The Committee of Inspection

● The creditors in a creditors’ voluntary winding-up have the right to appoint a committee of inspection of at
least 3 but not more than 7 creditors (s.243(1)).
● If no such committee is appointed by the creditors, the company may appoint but the maximum number of
members of the committee is 7 (s.243(1)).
● However, the liquidator may apply to the court for an order to vary the minimum or maximum number of
creditors in forming the committee (s.243(1A)).
● A body corporate may be a member of a committee of inspection but can act only as an authorized
representative under s.207.
● The committee of inspection is granted various powers under statute, including:
o Fixing the liquidators’ remuneration (s.244(1));
o Dispensing with the audit of the liquidators’ account (s.255A(2)(b)(i));
o Directing the disposal of the company’s books and papers upon dissolution (s.283(1)(b)).
Commencing a Creditors’ Voluntary Liquidation by Directors
● S.228A gives the power to the directors, or where the company has more than two directors, the
majority of the directors, to resolve at a meeting of the directors to commence the process of
members’ voluntary winding-up by filing a winding-up statement with the Registrar.
● The winding-up statement must be in specified form and certify that a resolution has been passed
to the effect that:
o The company cannot by reason of its liabilities continue its business;
o It is necessary that the company be wound-up and that the winding-up should be commenced
under s.228A as it is not reasonably practicable for it to be commenced other modes of
winding-up under Cap.32; and
o The meetings of the company and of its creditors will be called within 28 days after the delivery
of a winding-up statement to the Registrar.
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Commencing a Creditors’ Voluntary Liquidation by Liquidators
● The liquidator must call a meeting of creditors if during course of liquidation

becomes of opinion that the company will NOT be able to pay its debts in full
within the period as stated in the certificate of solvency.
● In addition, the liquidator must lay before the meeting a statement of the assets
and liabilities of the company (s.237A(1)).
04
Winding-up by the Court
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The Effect of a Compulsory Winding-up

Company
winding-up order
Powers
+
Fiduciary duties
Directors Liquidators
See Measures Bros Ltd v Measures (1910) 2 Ch 248
Grounds for Compulsory Liquidation

There are 6 grounds on which the court may order a company to be wound up. These are set out in
s.177(1) of the Cap.32.
a. The company has by special resolution resolved that the company be wound up by the court;
b. The company does not commence its business within a year from its incorporation, or
suspends its business for a whole year;
c. The company has no members;
d. The company is unable to pay its debts;
e. The company’s articles provide that the company is to be dissolved ;
f. The court is of opinion that it is just and equitable that the company should be wound up.
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An Overview of A Compulsory Winding-up
A written demand for A winding-up order is

A winding-up petition Court hearing
debt repayment granted by the Court
Realisation and
Dissolution of the Release of duties Appointment of
distribution of
company for liquidators Liquidators
company’s assets
Inability To Pay Debts as a Ground for Winding-up
The debt ground (Cap. 32, s.178)
Three situations in which a company will be deemed to be insolvent:

● A creditor, to whom a sum exceeding the specified amount (i.e., $10,000) is owned, has served on
the company at its registered office a written demand, in the prescribed form, requiring the
company to pay the debt & the company has for 3 weeks thereafter neglected to pay; or
● An execution or other process issued on judgement in favor of a creditor of the company is
returned unsatisfied in whole or in part; or
● The court is satisfied that the company is unable to pay its debts, including contingent and
prospective liabilities, as they fall due.
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Persons who may present a

winding-up petition (Cap.32, s.179)
The Company Any creditor Any contributor
Court’s Power on Hearing of Petition
● S.180 lays down the powers of the court on hearing a petition.

The court may:
o dismiss the petition;
o adjourn the hearing conditionally or unconditionally;
o make any interim order, or any other order that it thinks fit.
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Commencement of a Compulsory Winding-up
● A compulsory winding-up is deemed to commence at the time the

petition is presented to the court, s.184(2).
● However, where before the presentation of a petition for a voluntary
winding-up, the winding-up of the company shall be deemed to have
commenced at the time of the passing of the resolution, and all
proceedings taken in the voluntary winding-up are deemed to be valid
(s.184(1)).
Appointment of a Provisional Liquidator (Cap.32, s.193) (Optional)
● A provisional liquidator may be appointed by the court at any time from the commencement
of the winding up. Cap.32, s.193(1).
● He or she will take charge of the company’s affairs, and thus prevent the company’s property
form being lost between the date of the petition and that of the winding-up order.
● The court may appoint either the Official Receiver or a private insolvency practitioner to be
the provisional liquidator (Cap.32, s.193(2)).
● The court may limit the provisional liquidator’s powers, impose the performance of certain
duties on the provisional liquidator, and determine how the provisional liquidator, other than
Official Receiver, is to be remunerated (Cap.32, s.193(3) to (5)).
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Appointment of a Liquidator (Cap.32, s.194)
● The provisional liquidators continued to act as such until he or another

person becomes the liquidator (s.194(1)(aa).
● Otherwise, the Official Receiver will be appointed as provisional
liquidator upon the winding-up order was made by the court and will
continue to act as such until a liquidator is appointed (s.194(1)(a)).
Statement of Affairs
● The Statement must be in a prescribed form (Form 23),, and must include particulars of the
company’s assets, debts, liabilities, the names, addresses, and occupations of its creditors
and any security which they hold.
● The statement must be submitted and verified by one or more of the company’s directors and
by the company secretary.
● The statement of affairs must be submitted within 28 days after he has been appointed or
the winding-up order has been made.
● Following both receipt of the statement of affairs and the making of the winding-up order,
the liquidator must investigate the causes of failure of the company (if applicable) and the
affairs of the company and present a report (i.e., preliminary report) thereon to the Court.
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Preliminary Report
● When a winding-up order is made, the liquidator must submit a preliminary report to the court
as soon as it is practicable after the receipt of the statement of affairs (Cap.32, s.191(1)).
● The report must include the followings:
o The amount of capital issued, subscribed for, and paid-up, and the estimated amount of
assets and liabilities;
o If the company has failed, the causes of the failure; and
o Whether in the opinion of the liquidator further inquiry is desirable as to any matter relating
to the promotion, formation, or failure of the company, or the conduct of the business of
the company.
05
Realisation and Distribution of
Assets
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Proof of Debt
● In every winding-up, all debts payable on a contingency, and all claims against the
company, present or future, certain or contingent, ascertained or sounding only in
damages, shall be admissible to proof against the company (Cap.32, s.263).
● In a compulsory liquidation each creditor must submit a formal written

proof of debt.
● Only creditors who have successfully proved for their debt may receive payment from the
liquidator out of the realised assets of the company.
The Order of Distribution
● Once the liquidator has gathered the company’s assets, he is under a duty to realise and
distribute those assets to the creditors and contributories .
● Key to the distribution of the company’s assets is the pari passu rule, which provides that if the
assets of the company are insufficient to fully pay off all the company’s creditors, then the
creditors will receive an equal percentage of debt owed to them. However, the pari passu rule
is subject to the following major exceptions:
o A creditor can prioritize his claim by obtaining some form of security.
o Statute provides that certain debts rank ahead of, or behind, other debts.
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Realisation of Assets
● Assets that are realised by the liquidator can be distributed to the creditors and
shareholders.
● Creditors are entitled to payment before the shareholders.
● The order of payment to creditors depends on whether the payments are made
from “secured assets” or from the company’s “free assets”.
● Secured assets are not dealt with in the liquidation itself.
● However, Cap 32, s265 allows certain creditors (i.e., the preferential creditors)
to claim payment out of assets subject to floating charges in priority to the
holders of the floating charges.
Assets subject to Fixed Charge

Step 1: Determining the order of payment to fixed charge holders:
The order of distribution is as follows:

1. Receiver + the costs and expenses of realisation
2. Fixed Charge holders
Step 2: Any surplus arising on the realisation of the assets subject to fixed charge:
● If there is a surplus after payment of the amounts due to the chargee, the surplus forms part of
the free assets available for the general creditors.
● In the absence of such a surplus, the liquidator is not entitled to claim his or her fees and
expenses out of the charged assets.
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Assets Subject to Floating Charge

● Apparently, assets subject to floating charges are not available to the general (unsecured)
creditors.
● However, floating charge holders may be proponed and paid only after the preferential
creditors if the free assets available to the general creditors are NOT enough to satisfy the
claims of the preferential creditors.
● In such case, the assets subject to a floating charge would be available to meet those claims of
preferential creditors in priority to the charge (Cap.32, s. 265).
Step 1: Determining the order of payment to floating charge holders:
The order of distribution is as follows:

1. Receiver + the costs & expenses of realisation
2. Preferential creditors
3. Floating charge holders
Assets Subject to Floating Charge (Continued)

Step 2: Any surplus arising on the realisation of the assets subject to floating charge:
● Surplus after payment to chargee forms part of free assets available for general
creditors. If there is a surplus after payment of the amounts due to the chargee, the
surplus forms part of the free assets available for the general creditors.
● However, the liquidator is not entitled to claim payment out of the assets under the
floating charge for the general costs of the winding-up in priority to the preferential
creditors or the floating charge holders.
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Preferential Payments
Small depositors of
Category A Amounts owing to employees Category C licenced bank
Government and statutory debts Claims relating to insurers

Category B (such as unpaid tax & rates) Category D
Please refer to Cap.32, s.265 for details!

General (Free) Assets

● Free assets are available to ordinary (unsecured) creditors.
● The order of distribution is:
1. Costs and expenses of the liquidation
2. Preferential creditors
3. General (unsecured)creditors
Note
Secured creditors are generally entitled to pay themselves out of their security. However, they
rank as unsecured creditors for any balance remaining unpaid.
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06
Dissolution
Dissolution: Voluntary Winding-up
● In case of a voluntary winding-up, the company is dissolved three

months after the registration of the return made by the liquidator
following the holding of the final meeting of the company and in
case of creditors’ voluntary winding-up.
● The final meetings are held once the affairs of the company are
fully wound-up.
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Dissolution: Compulsory Winding-up
● Where the affairs of the company have been completely wound-up in a

compulsory liquidation, the court is to make an order for dissolution of the
company upon application by the liquidator.
● Alternatively, Cap.32, s.226A can be relied upon for automatic dissolution
without the need for application to the court.
Automatic Dissolution: Court’s Power
● The court may make an order deferring the date of automatic dissolution.
● Relevant factors in the exercise of the court’s discretion include the interests
of creditors, the public interest (including the need for investigations into
possible past misconduct) and whether there is likely to be determent to any
party by deferring the dissolution.
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Dissolution Declared Void

● If a company is dissolved following compulsory or voluntary liquidation, the
court may declare the dissolution void on the application of any person
interested, within 2 years of the date of dissolution (s.290(1)).
● Factors in which the court will exercising its discretion under s.290 are: whether
the dissolution was for the purpose of escaping the company’s liabilities;
prejudice to the company; whether the applicants had made a claim in the
winding-up of the company; futility of revival; and delay (see The Commissioner
of Inland Revenue Hong Kong v The Registrar of Companies (1998) 1 HKLRD 875).
26

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27/04/2023

BUSI3803 Company Law Semester 2 (2022-23)

Topic 15: Company Insolvency and Liquidation

& Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap.32)

Course Instructor: Dr. Ida Mak

Any further reproduction or communication of this material by you may be the

Do not remove this notice

A company is defunct if the company

Ways to Dissolve a Defunct Company

1. Striking off A 2. Deregistration 3. Winding-up or

1. Striking Off A Defunct Company

● Deregistration is where a company is removed from the companies register

o Companies limited by guarantee (s.749).

● Public companies and companies registered under Part 16 of the Companies

Restoration to the Companies Register

2. Court Ordered Restoration

The principle statute that governs liquidation is:

Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32).

A company may be wound up either:

● by the company voluntarily (voluntary winding-up)

Powers of the Liquidators

Liquidators can exercise power to compromise with company's’ creditors

Liquidators have power to conduct corporate proceedings in name of company.

1. Members’ Voluntary Winding-up 2. Creditors’ Voluntary Winding-up

Commencing A Voluntary Winding-up

1. Members’ Voluntary Liquidation

Requirements for Members’ Voluntary Liquidation

A special resolution, which must be approved by three-quarters of the shareholders

Appointment of the Liquidator in a Members’ Voluntary Liquidation

2. Creditors’ Voluntary Winding-up

A creditors’ voluntary winding-up is usually commences when the

Meeting of Creditors (s.241)

Appointment of the Liquidator in a Creditors’ Voluntary Liquidation

The Committee of Inspection

Commencing a Creditors’ Voluntary Liquidation by Directors

Commencing a Creditors’ Voluntary Liquidation by Liquidators

● The liquidator must call a meeting of creditors if during course of liquidation

The Effect of a Compulsory Winding-up

See Measures Bros Ltd v Measures (1910) 2 Ch 248

Grounds for Compulsory Liquidation

An Overview of A Compulsory Winding-up

A written demand for A winding-up order is

Inability To Pay Debts as a Ground for Winding-up

The debt ground (Cap. 32, s.178)

Three situations in which a company will be deemed to be insolvent:

Persons who may present a

The Company Any creditor Any contributor

Court’s Power on Hearing of Petition

● S.180 lays down the powers of the court on hearing a petition.

Commencement of a Compulsory Winding-up

● A compulsory winding-up is deemed to commence at the time the

Appointment of a Provisional Liquidator (Cap.32, s.193) (Optional)

Appointment of a Liquidator (Cap.32, s.194)

● The provisional liquidators continued to act as such until he or another

● In a compulsory liquidation each creditor must submit a formal written

The Order of Distribution

Assets subject to Fixed Charge

The order of distribution is as follows:

2. Fixed Charge holders

Assets Subject to Floating Charge

Step 1: Determining the order of payment to floating charge holders:

The order of distribution is as follows:

3. Floating charge holders