Hong Kong
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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
Liquidation
Liquidation describes the process of “winding up” the affairs of a company through the appointment of liquidators. If the company holds assets, they will be distributed amongst the creditors and members of the company in accordance with a statutory order of priority. Once the liquidation of a company is completed, it ceases to exist.
Under Hong Kong law, there are three types of liquidation – compulsory liquidation (where the court makes an order to wind up the company pursuant to a petition, usually initiated by a creditor), creditors’ voluntary liquidation ((“CVL”) where the company is insolvent and the company’s members (or, less commonly, its directors) take steps to wind up the company), and members’ voluntary liquidation ((“MVL”) which is only available where the company is solvent pursuant to a resolution of the company’s members).
Receivership
Receivership, in this context, concerns the appointment of a third party as a receiver by a secured creditor of a company in accordance with the terms of a debenture or charge. The role of a receiver is to take control of the secured asset and realise its value with a view to discharging the debt owed to the secured creditor. As a result, the appointment of a receiver under the terms of a debenture or charge does not result in control of the company being lost by its directors. Given their role, a receiver primarily owes duties to the appointing secured creditor (not the company or the company’s general creditors). Further, the appointment of a receiver will not result in a moratorium preventing the company from entering liquidation.
Scheme of Arrangement
A scheme of arrangement is a statutory process by which a company can reach a binding compromise or arrangement with its members and/or creditors. It may be utilised in solvent and insolvent scenarios. A scheme binds all of a company’s creditors (even if they are dissenting) if i) it has been agreed by at least 75% in value and 50% in number of the creditors of each class voting at the relevant scheme meetings, and ii) it is approved by the Hong Kong court. However, unlike other jurisdictions, the initiation of a scheme does not trigger a moratorium on creditor actions. As a result, notwithstanding the scheme, a company may still face a winding up petition (by way of example).
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
As noted above, there is no mechanism by which a company may obtain a moratorium from the Hong Kong court to allow a restructuring plan to be prepared.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
Generally, we would expect a company to enter liquidation within 12 weeks of service of a statutory demand in respect of an undisputed debt.
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
There is no legal framework for a “pre-pack” or “pre-packaged” sale of a business/assets in Hong Kong. As a result, Hong Kong companies do not enjoy a specific statutory regime for sale of a business/assets in distressed scenarios.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
A liquidator may not be an undischarged bankrupt, subject to a disqualification order, found to be mentally incapable and/or subject to guardianship order under the Mental Health Ordinance (Cap. 136), or a body corporate. For compulsory liquidation and CVL, creditors, debtors, current or former directors, current or former company secretaries, auditors within two years before the commencement of the winding up, and receivers or managers of the property of a company are disqualified from being appointed as liquidators, unless permitted by the court. This rule does not apply to MVL. Prior to appointment, a liquidator must also provide a disclosure statement which discloses the extent of a liquidator’s relationship with the insolvent company.
With respect to receivership, a receiver may not be an undischarged bankrupt, subject to a disqualification order or a body corporate.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
This depends on the process:
For receivership, the receiver is appointed by the secured creditor pursuant to the terms of a debenture or charge.
For compulsory liquidation, the Official Receiver will either act as the provisional liquidator or appoint an insolvency practitioner to act in this capacity. The appointment of a different liquidator may then be voted for by the members and creditors. The power to appoint a liquidator rests with the court.
For voluntary liquidation, shareholders appoint the liquidator in the case of a MVL while creditors may appoint a liquidator in the case of a CVL.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
In Hong Kong, insolvency cases are typically heard by the Companies Judge in the Court of First Instance. The Companies Judge, currently Madam Justice Linda Chan, has specialist insolvency experience. Insolvency cases fall under a specialist court list within the Court of First Instance.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
This varies among each of the procedures:
In compulsory liquidation, the powers of the directors cease upon the making of the winding up order. In voluntary liquidation, the powers of the directors cease upon passing of a resolution for voluntary winding up, except with the sanction of the court. However, any disposition of the property of a company that is in liquidation and any transfer of shares, or alteration in the status of the members of the company, made after the presentation of the winding up petition, shall be void, unless the court otherwise orders.
During a scheme of arrangement, directors retain control of the company’s affairs.
In receivership, the powers of the directors are only suspended to the extent that they conflict with the receiver’s right to exercise the powers granted to him over the relevant secured asset(s).
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
There are no circumstances where a director is obliged by law to file for insolvency. However, directors owe both statutory and fiduciary duties to act in the best interests of the company and its shareholders. Therefore, directors will have to consider these duties in the context of whether a company should continue to trade.
3.3 – What are the risks facing the directors of an insolvent company?
The most common risks are breach of fiduciary duty and involvement in unlawful conduct leading to losses of the company.
Directors may also be found criminally liable for fraudulent trading and misfeasance.
In particular, a liquidator may apply to the court for an order of director disqualification for up to 15 years on the grounds of fraudulent trading, breach of directors’ duty or other conduct that renders an individual unfit to participate in the management of a company.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
The main forms of security over immovable property include legal and equitable mortgages, and fixed charges.
The main forms of security over movable property include mortgages, fixed charges and floating charges (in particular floating charges over accounts receivables), pledges, liens and security over personal chattels.
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
This depends, to some extent, on the procedure:
In a scheme of arrangement, secured creditors may continue to enforce their security against the company until the moment the scheme binds all creditors.
In receivership, any secured creditors who did not appoint the receiver can enforce their security subject to the priorities applying between the securities.
In liquidation, generally, a secured creditor’s rights will be unaffected. They are usually entitled to enforce their security notwithstanding any winding up proceedings.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
Yes. Secured creditors may prove under the following three situations:
- where the secured creditor realises his security and proves for the balance due after deducting the net amount realised;
- where the creditor proves for his whole debt upon voluntarily surrendering his security to the trustee for the general benefit of the creditors; and
- where the creditor proves for the unsecured balance upon estimating the value of his security in his proof and the particulars.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
Preferential creditors are given priority. In particular, statutory claims such as preferential debts to employees within statutory limits, followed by government and statutory debts such as rates and taxes etc.
Claims of floating charges holders are subordinated to those of preferential creditors, and claims of shareholders of the company (e.g. in respect of dividends which have been declared but not paid) are subordinated to the claims of unsecured creditors.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
There is no absolute timeline for creditors to make claims.
But note, in a compulsory liquidation, the court has the power to fix a date by which creditors must submit their proofs. Failing of which would result in exclusion from the next distribution and previous distribution(s).
In any winding up, the liquidator has the power to give a minimum 14 days’ notice requiring creditors to prove their claims by a specified date, failing of which would lead to exclusion from distribution, as is the case above.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
No. Contractual rights of set-off are not applicable in the event that a company enters liquidation. However, contractual set-off rights are replaced by a set-off which automatically applies under Hong Kong law on the date of commencement of winding up in respect of i) mutual credits; ii) mutual debts; and iii) other mutual dealings between the company and the creditor.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
Yes. Freedom of contract is generally considered a fundamental principle of Hong Kong law. There is no Hong Kong case law or statutes that restrict the effectiveness of such clause.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
In principle, yes.
However, not all clauses are effective on insolvency. Retention of title will fail if the goods are sold to a third-party bona fide purchaser for value without notice of the clause or if the goods are incorporated into other products such that they lose their identity.
4.9 – Are foreign creditors treated equally to domestic creditors?
Generally yes, save that foreign tax claims are not provable in a Hong Kong insolvency.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
The following may be challenged or set aside by the liquidator:
- Unfair preference – an unfair preference arises when a company, influenced by a desire to prefer, puts a creditor in a better position in the event of insolvency than that it would otherwise have been. The period within which an unfair preference can arise is six months (or two years in the case of a connected person) of the commencement of a winding-up.
- Transactions at an undervalue – a gift or a transaction at a value significantly less than the consideration provided. Such a challenge may be made in relation to transactions that take place in the five years prior to the commencement of winding-up.
- Extortionate credit transaction – a credit transaction that involves the making of grossly exorbitant payments or that grossly contravenes ordinary principles of fair dealing. A challenge may be made in relation to transactions that take place in the three years prior to the commencement of winding-up.
- Floating charges – a floating charge created within 12 months prior to the commencement of winding up (or two years in the case of a connected person as charge-holder) will be invalid unless it is proved that the company was solvent immediately after the creation of the charge.
- Fraudulent conveyances or fraudulent trading – any conveyances or business of the company carried on with the intention to defraud creditors in the course of a winding-up.
5.2 – Who is entitled to challenge transactions under these provisions?
Usually, any challenge would be commenced by the liquidator, but in the case of fraudulent trading, the challenge may also be commenced by the Official Receiver or any contributory or creditor.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Generally yes if the Court can be satisfied that:
- The foreign insolvency proceedings are collective insolvency proceedings which include proceedings opened in a civil law jurisdiction;
- The foreign insolvency proceedings are conducted in the jurisdiction in which the company’s centre of main interest is located (where the foreign insolvency proceedings are conducted in the place of incorporation, recognition and assistance may still be granted if (1) it is limited to the recognition of the liquidator’s authority to represent a company and orders incidental to that authority which may be described as “managerial assistance” or (b) a liquidator requires recognition and limited and carefully prescribed assistance as a matter of practicability); and
- The assistance is necessary for the administration of a foreign winding up or the performance of the office-holder’s functions, and the order is consistent with the substantive laws and public policy of the assisting court.
Further, there is also a specific cooperation framework established between parts of the Mainland China and Hong Kong regarding the mutual recognition of and assistance to insolvency proceedings in those jurisdictions.
6.2 – If so, what assistance can your courts provide, following recognition?
Hong Kong courts can provide assistance including taking control of the assets of the company, staying local court proceedings against the assets of the company and obtaining and gathering information and documents relating to the company from third parties.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
Yes. The Hong Kong court will exercise its jurisdiction to wind up a foreign company if: i) there is a sufficient connection to Hong Kong; ii) there is a reasonable possibility that the winding-up order would benefit those applying for it; and iii) the Hong Kong court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
Hong Kong is a relatively creditor-friendly jurisdiction with only limited mechanics available to debtors who wish to restructure their debts. The origins of Hong Kong insolvency law lie in the laws of England and Wales. However, Hong Kong as a common law jurisdiction will have regard to other common law judgments where relevant. Please note that Hong Kong has not adopted and implemented in local legislation the UNCITRAL Model Law on Cross-Border Insolvency.
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
In general, restructuring in Hong Kong is not subject to any approval by any governmental or regulatory bodies other than the court.
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
In 2020, the Hong Kong government announced its plans to introduce the Companies (Corporate Rescue) Bill in 2021, which intends to introduce a statutory corporate rescue procedure and insolvent trading provisions into Hong Kong law.
However, at the time of writing, no concrete schedule for the plans has been announced.
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