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LW3902 LAW RELATING TO COMPANIES

LECTURE 10: LIQUIDATION

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Liquidation
• Definition
• A process whereby a liquidator is appointed to take
control of the company to collect in and realize the
company’s assets for distribution, in an orderly and fair
manner to creditors and shareholders with the company
dissolved at the end of the process.
• Purpose
• To bring the company’s existence to an end.
• Types
• Solvent / insolvent
• Voluntary / compulsory
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Types Of Winding Up Mechanisms

Cap 32. s.169
Modes of winding up:

C(WUMP)O s.169(1) - Compulsory

cheapest one w/u (s.177)
The winding up of a company
may be either— Members’ Creditors’
voluntary voluntary
(a)by the court; or w/u (s.228) w/u (s.233)
(b)voluntary
Winding
up
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Voluntary winding up by members

Cap. 32 s.228
• Ordinary Resolution* by the General Meeting
• (1)(a): Fixed period for the duration of the company provided in the articles of
association OR the occurrence of dissolving events provided in the articles of
association.
• Special Resolution* by the General Meeting
• (1)(b): by the will of the shareholders
• Directors’ Decision
• (1)(d): the directors deliver to the Registrar a winding-up statement under s.228A**

https://www.elegislation.gov.hk/hk/cap32!en?xpid=ID_1438402996086_00
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* Deliver a copy of the resolution to the Registrar 15 days after it is passed.

**The Government of Hong Kong Special Administrative Region Gazette is an official channel for promulgating
information (e.g. legislation, public notices and appointments) which is required for statutory or other reasons to be
made public.
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Voluntary winding up by members

• Members voluntary winding up only possible when the company is
solvent. s.233(1)
• When a voluntary liquidation is proposed, the directors (or the
majority of them) may at a meeting of the directors issue a
“certificate of solvency” to the effect that: sign in the company minutes book

(i) they have made a full inquiry into the affairs of the company,
and
(ii) they have formed the opinion that the company will be able to
pay its debts in full within such period not exceeding 12 months
from the commencement of the winding up.
• Voluntary winding-up deemed to commence at time of passing
resolution. s.230 meeting no more than 5 weeks before the resolution

• A liquidator can be appointed by ordinary resolution of shareholders.

s.235(1)
• Directors’ powers cease on appointment of liquidator. s.235(2)
can keep the liquidator by own company instead of by creditors parent and subsidiary relationship
can keep both of two <- cost$$ may be one of them cannot survive -> voluntary wind up
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Voluntary winding up by members

Directors’ Decision s.228A
“(1) The directors of a company or, in the case of a company having
more than 2 directors, the majority of the directors, may, if they have
formed the opinion that the company cannot by reason of its
liabilities continue its business, — By director, why or when?
they will not raise further finance,
(a) pass a resolution to the effect that— not giving support to shareholders

(i) the company cannot by reason of its liabilities continue its

business;
(ii) they consider it necessary that the company be wound up and
that the winding up should be commenced under this section
because it is not reasonably practicable for it to be commenced
under another section of this Ordinance; and
(iii) meetings of the company and of its creditors will be summoned
for a date not later than 28 days after the delivery of the winding-up
statement to the Registrar.”
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Voluntary winding up by members

Directors’ Decision s.228A the decision can be challenged

• Rationale: speed up appointment of a liquidator in emergency.

• May only be invoked if other modes of winding-up
impracticable or impossible.
• Because members are excluded from the decision-making process
• SEG Investment Ltd v SEG Int’l Securities [2005] HKEC 1633 (next
slide).
• A provisional liquidator holds office until meeting of creditors
summoned. s.228A(14)
• Impose criminal liability on a director if he forms the opinion
without reasonable grounds. s.228A(4)
• Commencement of the winding up: at the time of the delivery
of winding-up statement to the Registrar. s.228A(5)
• The provisional liquidator has to be either a solicitor, or a
certified public accountant. s.228A(8)
• All the powers of the directors cease during the period of the
provisional liquidator’s appointment. s.228A(15)
SEG Investment Ltd v SEG Int’l Securities
[2005] HKEC 1633
• The shareholder who had control over the board sought to put
an end to the company one day before a shareholders’ meeting
when she knew she would be in imminent danger of losing her
control over the board.
• Held: There is no genuine reason for the urgent decision to
wind up the company. The court held that the resolution was
null, void and invalid and invalidate the decision of the directors
to wind up company.
• s.228A can only be invoked where other modes of winding-up
are impracticable if not impossible.
• Directors has to show “some urgency” for winding-up the
company through the shorter and simpler route of winding-up
under s228A. not the decision making
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Voluntary winding up by creditors

meeting within 28 days after the opinion
7 days of notice
• No certificate of solvency: s.233 (4)
• In a member’s voluntary winding up under s228, if the
directors cannot issue a certificate of solvency, then the
winding-up should proceeds as a creditors’ voluntary
winding-up.
• Liquidator’s judgement on the company’s state of
solvency: s.237A (1)
• Liquidator must summon meeting of creditors if during
course of liquidation becomes of opinion that company will
not be able to pay debts in full within the period stated in the
certificate of solvency.
1G :

s. 237A(2)
can replace liquidator
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Compulsory winding up - s.177(1)

• (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 event, if any, occurs on the occurrence of which the
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. next lecture: minority
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s.177(1)(d) “unable to pay its debts”

• Who can petition? (s.179) Mainly by the company, creditors, or contributories
(s.170)
• s.178(1): deemed to be unable to pay its debts if:
(a) creditor served a written demand on company and for 3 weeks after the
to
service of the demand failed o pay. The sum due must be at least $10,000
(s.178(3)), or as specified by the Financial Secretary (s.178(4)).
(b) if execution of a judgment, decree or order of court in favour of creditor
returned unsatisfied
(c) if proved to the court that company unable to pay its debts (taking into
account contingent and prospective liabilities). s.178(1)(c): Cash-flow test or
balance sheet test? In Re Wah Nam Group Ltd [2000] HKEC 875, Hong
Kong court applied both tests.
• s.184(2) “commencement of winding up”: the date on which petition is
presented.
• After commencement of winding-up, any disposition of company property void:
s.182.
• Stay of proceedings: No action or proceedings can commence against
company without leave of the court: s.186.
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Creditor protection under the new regime

• Introduces the concept of “transactions at an undervalue” providing for the
court to set aside transactions at an undervalue entered into by a company
within 5 years prior to commencement of its winding up (s.265D).
• Provides for standalone provisions for the court to set aside unfair
preference transactions entered into by the company within 2 years prior to
commencement of winding up for connected persons and 6 months for
others (s.266).
• Attaches liability to directors and members in receipt of the proceeds of any
share buy-back or redemption from the company’s own capital that occurs
within 1 year of the commencement of the company’s winding up. In such
instances the respective directors or members are liable to repay the
amounts received (new s.170A, amended s.171 and s.179)
• Seeks to minimize the potential for abuse of a director-initiated creditors’
voluntary up by amending existing s.228A to set out more clearly the
process of initiating such a liquidation. Introduces a new section 228B
setting out the powers, duties and liabilities of a provisional liquidator
appointed under s.228A. whose interest need to be added in?
creditors
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Distribution – Priority of Claims

1. Property owned by others: Property, which is in the possession of a company but is in fact owned
by someone else (e.g., the supplier under an effective retention of title clause), is not part of the
company’s assets and should, therefore, be redelivered to its owner and not retained subject to the
claims of company creditors.
2. Fixed charges: As discussed above, one advantage of having a security is that secured creditors
can stand outside the insolvency by enforcing their secured claims against the company property
subject to fixed charges, if its value is sufficient to cover the debt.
3. Cost of Liquidation: The costs, charges, and expenses properly incurred in the winding up,
including the remuneration of the liquidator must be met first out of the company’s remaining assets
[Rule 179 of the Companies (Winding Up) Rules (Cap. 32H)]. However, if the assets are insufficient to
meet these liabilities, the court may order payment in such order of priority as it thinks just.
4. Preferential Payments (s.265)
(i) Category A – relating to employees: the wages/salary of employees for a specified period of
amount, severance payment, long-service payment, wages in lieu of notice;
(ii) Category B – relating to the Government: all statutory debts (i.e. tax and rates) due and
payable by the company to the Government within the 12 months before the appointment of a
provisional liquidator, or the date of winding up commencement
(iii) Category C – relating to small depositors (max.$500,000) of licensed banks (the companies
being wound up)
(iv) Category D – relating to the claims against the insurers (the companies being wound up)
5. Floating charges*
6. Unsecured creditors: pari passu principle
s.250: “Subject to the provisions of this Ordinance as to preferential payments, the property of a
company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject
to such application, shall, unless the articles otherwise provide, be distributed among the members
according to their rights and interests in the company.”
6. Members: Finally, the remaining company’s assets (if any) will be divided amongst the members
according to their rights (stipulated in the articles) on liquidation.