The Secretary for Financial Services and the Treasury recently announced that the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance (the “Amendment Ordinance”) will come into operation on 13 February 2017. The Amendment Ordinance introduces a more efficient administration of the winding-up process and streamlines the procedures in line with international developments. The new legislation also aims to further protect creditors against asset depletion of insolvent companies.
Our alert discusses these developments.
Implications for creditors and other stakeholders
A significant feature of the Amendment Ordinance is greater protection for creditors by extending the avoidance provisions to include transactions at an undervalue. A “transaction at an undervalue” takes place when the company makes a gift or enters into a transaction on terms providing for no consideration to the company; or enters into a transaction for a consideration the value of which is significantly less than the value of the consideration provided by the company.
We have extracted some of the key features of the Amendment Ordinance in the following table and have highlighted our comments in relation to these developments.
|Key features of the Amendment Ordinance|
|1. New and improved avoidance provisions|
|i) The court has power to make orders (for example, to invalidate a transaction) in relation to a company which has entered into a transaction at an undervalue before its winding-up. The “relevant time” for a transaction at an undervalue to be caught is any time within the period of five years ending with the commencement of the winding-up, but only if at that time the company was unable to pay its debts or became unable to pay its debts as a result of the transaction.
ii) There is now a self-contained provision on unfair preference applicable to companies. Previously, the provisions on unfair preferences had simply been incorporated by reference from the Bankruptcy Ordinance (Cap. 6) (which deals with individuals only). The new self-contained provision largely mirrors that of the Bankruptcy Ordinance and further clarifies the law for companies.
iii) “Connected persons” and “associates” for both transactions at an undervalue and unfair preferences have been elaborately defined, and include:
Comment – The previous legislation did not include any avoidance provision for transactions at an undervalue for companies and also lacked a self-contained provision on unfair preferences. The expanded provisions on “associates” and “connected persons” will provide more parameters with respect to which persons and entities will be caught.
|2. New liability of past shareholders and directors for share redemption or buy-back out of capital|
|i) Past shareholders and the directors (who made the relevant solvency statement for the payment out of capital without having reasonable grounds for the opinion expressed in the statement) will be jointly and severally liable to contribute to the assets of the company an amount not exceeding the payment in respect of the shares.
ii) This can occur where (a) a company has redeemed or bought back its own shares by payment out of its capital and (b) the company became insolvent and was wound up within one year of the redemption or buy-back.
Comment – Shareholders and directors should ensure that they are properly acquainted with the company’s financial state and that the company has sufficient assets prior to any redemption or buy-back of capital.
|3. Enhanced creditor protection in a creditors’ voluntary winding-up|
|i) The first creditors’ meeting must be held on a day not later than 14 days after the members’ meeting.
ii) There will be a minimum notice period of 7 days for calling the aforesaid first creditors’ meeting.
iii) The powers of the liquidator appointed by the members during the period before the holding of the first creditors’ meeting will be limited.
iv) The powers of the directors will be restricted before the appointment of a liquidator.
Comment – The above measures ensure that creditors have sufficient time to prepare for the first creditors’ meeting while reducing the time for a company to commence a creditors’ voluntary winding-up.
|4. New provisions on provisional liquidators and liquidators|
|i) The list of persons disqualified from acting as a provisional liquidator or liquidator have been expanded to include certain persons with a conflict of interest and those subject to a disqualification order.
ii) A provisional liquidator or liquidator (excluding those appointed for a members’ voluntary winding-up) must file a disclosure statement disclosing specified relationships (e.g. creditor, debtor or auditor, etc. of the company).
iii) The prohibition on touting has been expanded to any person who offers an inducement to anyone to secure or prevent an appointment or nomination as a provisional liquidator or liquidator.
iv) An order for release of a liquidator will not absolve the liquidator from liabilities arising from his misfeasance or breach of duty or trust.
Comment – These provisions improve the transparency and integrity of the winding-up process for the benefit of creditors.
Actions to consider
Businesses should seek advice when negotiating transactions especially in volatile times to ensure that the transactions are not eventually found to be at an undervalue. This may include conducting professional valuations.
Creditors receiving payments or security from companies that may be under financial distress should be wary of the risk of the payment or security being an unfair preference. Advice should be sought early on as the surrounding circumstances of the payment or granting of the security (e.g. reasons for providing the credit/security, how demands were made, etc.) can have a substantial impact on whether a Court finds that there has been an unfair preference.
As the Hong Kong corporate insolvency landscape continues to evolve, we hope to see legislation introduced in the area of cross-border insolvency in the near future. We are monitoring developments on reform in relation to a statutory corporate rescue procedure which will provide further remedies for creditors and investors seeking to restructure a troubled company. We will provide further updates in due course.