Directors' duties
- Key duties in this context:
- To act bona fide for the benefit of the company
- To exercise powers for their proper purpose
- Not to allow any conflict between duties as directors and personal interests
- A director's duty is to the individual company, not the
group
- If a company is insolvent or nearly insolvent, directors'
duty to the company includes an obligation to ensure creditors'
interests are protected. The duty is not owed to the creditors
directly, so creditors do not have standing to bring an action
against directors for breach of duty
- Because directors owe duties to the company, in the event of
breach of duty, it is the company which should sue the
directors
- Director may be liable for damages / account of profits /
disqualification
- Any provision in the articles or other agreement is void if it purports to exempt, or provide an indemnity in favour of, a director from any liability for negligence, default, breach of duty or breach of trust towards the company. The company can purchase insurance for a director for liabilities to the company except where liability arises from the director's fraud. A company can however indemnify a director for a director's liabilities to third parties, subject to certain exceptions (eg. criminal and regulatory fines)
Transactions subject to potential challenge and key offences
Unfair preference (formerly called fraudulent preference)
- Company should treat creditors fairly before a winding-up
- Company gives an unfair preference if it does anything which
puts a creditor into a position which, in the event of an insolvent
liquidation, will be better than the position creditor would have
been in if that thing had not been done
- There must be a desire to produce the effect in question (ie,
subjective test). Such desire is presumed where the preferred
person is an "associate" of the company
- Look back period of 6 months (2 years in the case of a
preference to an associate) before commencement of liquidation.
Company must have been insolvent at the time of the transaction or
become insolvent as a consequence
- Court may make such order as it sees fit to restore position to pre-unfair preference position. This will often involve setting aside the transaction
Transactions at an undervalue
- Court may set aside a transaction at an undervalue (eg. a gift
or where there is disproportionately low consideration) entered
into within 5 years of commencement of winding-up if company was
insolvent at the time of the transaction or became insolvent as a
consequence
- Court may make such order as it sees fit to restore the
position to what it would have been had the transaction not been
entered into - eg. unwinding the transaction and returning the
property / money to the company, although a third party bona fide
purchaser will not be requested to retransfer the property
- Directors may be personally liable for breach of duty to
protect creditors' interests and to pay compensation for loss
caused
- It is a defence if the company entered into the transaction in good faith, believing the transaction would benefit the company, but better to ensure the company is not insolvent and that the consideration is adequate rather than seek to rely on this
Floating charges
- If a floating charge is created within 12 months (24 months
where the floating charge is given in favour of someone connected
to the company) of the commencement of winding-up, it is invalid
except (i) if the company was solvent immediately after its
creation, or (ii) to the extent cash is paid to the company at the
time of, or subsequent to, the creation of the charge and in
consideration of the charge
- Aim is to prevent an insolvent company from creating floating charges to secure past debts and thus prefer certain creditors
Other offences
Fraudulent Trading
- If in the course of a winding-up, it appears the business has been carried on with an intent to defraud its creditors, any person who knows the business has been carried on in this manner may be personally liable without limit for the debts or other liabilities of the company. Note in particular:
- Fraudulent trading occurs when there is "no reasonable
prospect of the creditors receiving payment of their
debts"
- Actual dishonesty / recklessness are essential
- Paying one creditor knowing the company is unable to pay all creditors is not fraudulent if directors generally believe that the company will be able to satisfy all creditors in the future
Failure to keep proper books of account
- Failure to keep proper books of account through 2 years prior to winding-up may result in every defaulting officer being liable for a fine or imprisonment unless they can show they acted honestly and the default was excusable
Attempting to put assets beyond reach of creditors
- If an officer, with intent to defraud creditors, made a gift or transfer of, or charged, the property of the company or conceded or removed any part of the property of the company within 2 months of any judgement or order for payment against the company, and if the company is subsequently wound up, he / she is liable to a fine and imprisonment
Misfeasance
- Any past or present officer who has misapplied money or property of the company, may be compelled to repay / restore the money or property, or otherwise contribute to the assets of the company
Practical stuff
- When a company is being wound up, every business communication (including invoices, orders and business letters) issued by or on behalf of the company must contain a statement that the company is being wound up. Any officer who knowingly or willfully authorises a default will be fined
Winding-up processes
Members' voluntary liquidation
- Directors, having prepared recent financial statements, issue a
certificate of solvency that, after full inquiry, they believe the
company to be solvent and able to pay its debts in full within 12
months
- Certificate must be issued within 5 weeks preceding special
resolution to wind-up the company and appoint a liquidator
(although often it is on the same day)
- From passing of the special resolution, liquidation commences
and company will cease to carry on business except so far as
necessary for winding-up. Powers of directors cease immediately
upon appointment of liquidator
- Solvency certificate must be filed with Companies Registry no
later than when the resolution is filed (ie within 15 days of
resolution)
- Publish notice of resolution approving liquidation in the
Gazette within 14 days
- Liquidator must notify the Companies Registry of appointment
and publish appointment in the Gazette within 21 days
- The main cause of any delay in concluding an MVL is seeking tax
clearance from the IRD. For straightforward matters, this typically
takes 3-4 months
- Liquidator settles company's debts, collects in funds,
liquidates assets and settles list of contributories etc. as per
the prescribed order (see below), then makes up an account for how
things have been wound up and lays it before a general meeting,
notice of which has been advertised in the Gazette at least one
month before the meeting
- Once approved by the general meeting, the liquidator files the account with the Companies Registry within 1 week of the meeting, and 3 months after registration the company is dissolved
Creditors' voluntary liquidation
- Directors prepare financial statements to form the opinion that
the company is not solvent (both on the balance sheet test and
because the company cannot pay debts as they fall due)
- Company must arrange meeting of creditors on the same day or
day after the general meeting approving the liquidation and
appointing liquidator
- Notice of the creditors meeting should be sent out at the same
time as the notice of general meeting and be published in the
Gazette and in both an English language and Chinese language
newspaper
- Directors must compile a statement of the company's affairs
and a list of creditors and the estimated amount of their claims
ahead of the creditors' meeting
- Shareholders and creditors may nominate a liquidator. In case
of conflict, the creditors' choice prevails
- Publish notice of resolution approving liquidation in the
Gazette within 14 days
- From passing of the special resolution, liquidation commences
and company will cease to carry on business except so far as
necessary for winding-up. Powers of directors cease immediately
upon appointment of liquidator
- Liquidator must notify the Companies Registry of appointment
and publish appointment in the Gazette within 21 days
- Creditors may appoint a committee of inspection to act with the
liquidator for the purpose of acting in the best interests of
creditors as a whole
- Liquidator settles company's debts, collects in funds,
liquidates assets and settles list of contributories etc. as per
the prescribed order (see below), then makes up an account for how
things have been wound up and lays it before a general meeting and
a creditors' meeting, notice of which has been advertised in
the Gazette at least one month before the meetings
- Once approved by the general meeting and creditors' meeting, the liquidator files the account with the Companies Registry within 1 week of the meetings, and 3 months after registration the company is dissolved
Special procedure under s228A Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)
- Often used – quicker and simpler than alternatives and,
due to earlier commencement of liquidation, safeguards
company's assets earlier in the process than under other
routes
- Used where, in the directors' opinion, a company should be
wound up with immediate effect
- Directors resolve (and deliver to the Companies Registry a written winding-up statement to this effect within 7 days), that:
- The Company cannot, by reason of its liabilities, continue its
business
- It is necessary for the company to be wound up, and it is not practicable to do so under other routes
- Directors immediately upon registration appoint a solicitor or
certified public accountant as provisional liquidator, and
appointment must be notified to the Companies Registry and be
published in the Gazette within 14 days
- Liquidation commences as soon as the winding-up statement is
delivered to the Companies Registry
- Meetings of shareholders and creditors will be held within 28
days of filing the statement
- Directors must compile a statement of the company's affairs
and a list of creditors and the estimated amount of their claims
ahead of the creditors' meeting
- Process then proceeds as per a creditors' voluntary liquidation
Deregistration
- Applicable to private companies only. Can be a simple,
inexpensive and relatively quick solution
- Involves an application in the specified form to the Companies Registry by a company, director or member confirming that:
- All members agree to the deregistration
- The company has no outstanding liabilities
- Either the company has ceased operations for at least 3 months prior to the application or the company has never commenced business
- Application must be accompanied by a written statement from the
IRD confirming it has no objection to deregistration (ie. that no
tax remains outstanding)
- If satisfied, the Companies Registry advertises the
deregistration in the Gazette
- Unless an objection is raised within 3 months of publication,
the company is deregistered and dissolved and the Companies
Registry publishes a notice in the Gazette to this effect
- Despite deregistration and dissolution, the liabilities of
officers and members survive
- Reinstatement may be effected by the Companies Registry or by court order (on application) in limited circumstances
Compulsory liquidation by the court
- Compulsory winding–up commences when a petition for
winding-up is presented to the court
- Petition may be presented by the company, any of its creditors,
its contributories, the Financial Secretary, the Companies
Registry, the Official Receiver, and in some cases the SFC,
Insurance Authority and the HKMA
- Company may be wound up by the court where, for example:
- Members pass a special resolution to be wound up by the
court
- The company is unable to pay its debts, including where a
creditor's written demand of HK$10,000 or more remains unpaid
for at least 3 weeks
- The court thinks it is just and equitable to do so (eg. reason for existence no longer exists)
- Following presentation of a petition, where the court is
satisfied that the property of the company is unlikely to exceed
HK$200,000, the court may order the company to be wound up
summarily on an expedited basis
- Court may appoint a provisional liquidator to take charge of
the company's affairs between the date of the petition and the
date of the winding-up order if the court fears wastage or
dissipation of the company's assets. Otherwise the provisional
liquidator (Official Receiver is the default option) is appointed
on the making of the winding-up order. Upon appointment of the
liquidator, the directors cease to have power to manage the
company
- Winding-up hearing is a summary procedure. Evidence is
generally confined to affidavits
- A copy of the winding-up order must be filed with the Companies
Registry and Official Receiver and a notice of winding-up must be
advertised in the Gazette
- Within 28 days of appointment of the provisional liquidator, a
statement of the affairs of the company (including details of its
assets and liabilities), verified by the company's directors,
must be prepared in the prescribed form and submitted to the
provisional liquidator
- Separate meetings of creditors and contributories are
held
- Court has a wide range of powers in relation to the management
of the winding-up. For example, a committee of inspection may be
appointed by creditors and contributories with approval of the
court to work with the liquidator for the purpose of acting in the
best interests of creditors as a whole
- Following distribution of the final dividend and the making of the final return to the contributories, the liquidator applies to the court for release. Typically, the company is dissolved 2 years later
Order of application of assets on a liquidation
- In each winding-up scenario, the assets of the company are applied in the following order:
- Expenses relating to the winding-up
- Preferential creditors
– In particular:
Category A - Employee-related payments (subject to limits)
Category B - Government debts
Category A takes precedence over Category B (and so on) and debts within each category rank equally (and, if assets are insufficient to pay everything, abate equally) among themselves
– Preferential creditors rank ahead of floating charge holders where the assets of the company are insufficient to satisfy all preferential creditors
- Ordinary (unsecured) creditors
- Members
-
– Share pari passu, subject to rights attaching to different classes of share in the constitution
– If proceeds are insufficient, they all receive the same percentage of what they would otherwise be entitled to
- Secured creditors are generally entitled to pay themselves out of their security. If there is a surplus, they must pay this to the company. If there is a shortfall, they rank as unsecured creditors for the balance
April 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.