(a) What is the underlying philosophy of the insolvency law of this economy? (For example is it distributive, rehabilitative or penal?)

The primary philosophy underlying the existing corporate insolvency regime is distributive, although as will be noted below, there are some rehabilitative and penal elements.

(b) Are there elements of more than one philosophy present in the insolvency law of this economy?

See Section I1(a) immediately above.

(c) Briefly describe the relevant elements, and if applicable, any penal sanctions available.

Distributive - The primary philosophy underlying Hong Kong, China corporate insolvency is distributive. Since it is difficult to rehabilitate Hong Kong, China companies under the existing statutory legal regime, the end result for the majority of companies in financial difficulties (that are unable to achieve informal workouts) will be liquidation pursuant to the winding-up provisions in Part V of the Companies Ordinance. These procedures provide for the assets of the company to be distributed to the company's creditors, and in the rare case where there are remaining assets, to the company's shareholders.

Rehabilitative - The primary corporate rescue procedure in the Companies Ordinance is included in Section 166, but this has not proven to be an effective procedure in the insolvency context and is rarely utilized. (Section 166 is more likely to prove effective for amalgamation or reconstruction in the non-insolvency context.) Although Section 166 may be utilised after a winding-up order has been made (see Section 227D), a Section 166 compromise or arrangement would more likely be proposed by either a company or its creditors as a means of avoiding liquidation.

An arrangement is also possible, albeit rarely, in a voluntary winding up pursuant to Section 237A or 254.

Corporate rescue is also possible through receivership, although whether receivership will ultimately save a company depends primarily on the wishes and actions of the secured creditor appointing the receiver. Thus, receivership is more of a creditor's remedy than an insolvency procedure.

To address these problems, in the Report on Corporate Rescue and Insolvent Trading the Law Reform Commission proposed its comprehensive 'provisional supervision' system for restructuring companies in Hong Kong, China, which is based on a rehabilitative philosophy.

Penal - The Companies Ordinance includes the following sections that set out offences that are antecedent to or arise in the course of a winding up:

Section 271 Offences by officers of companies in liquidation

Section 272 Penalty for the falsification of books

Section 273 Frauds by officers of companies which have gone into liquidation

Section 274 Liability where proper accounts not kept

Section 275 Responsibility of directors for fraudulent trading (possibly to be supplemented by a provision that will hold directors responsible for insolvent trading).

Section 276 Power of court to assess damages against delinquent officers, etc. Section 277 Prosecution of delinquent officers and members of company.

(a) In which judicial category is insolvency law classified in the legal system of this economy? (For example civil, commercial or administrative.)

The laws relating to Hong Kong, China corporate insolvency are part of Hong Kong, China companies law and are contained in Parts V and X of the Companies Ordinance.

(b) Which Courts, tribunals or administrative bodies in this economy are competent to exercise jurisdiction in insolvency matters?

Hong Kong, China does not have a separate insolvency court system. Rather, Section 176 provides that the Court of First Instance (formerly the High Court), which is Hong Kong, China's highest trial court and is part of the Hong Kong, China High Court (which, in turn, consists of the Court of First Instance and the Court of Appeal) has jurisdiction to wind up any company. One judge of the Court of First Instance generally hears company law cases and deals with contested winding-up petitions and other liquidation matters. Unopposed winding-up petitions are dealt with by the Registrar of the High Court in open court.

(c) Are any limitations placed on the jurisdiction of any of these bodies?

No, there are not any limitations on the jurisdiction, except as noted in I2(b) immediately above.

(a) What types of insolvency procedure are available in the legal system of this economy for the administration of corporate debtors in financial difficulty? (For example bankruptcy, liquidation (winding up), receivership, restructuring or other forms of administration.)

Under the Companies Ordinance, the following three procedures are available:

1. Winding Up by the Court (Compulsory Winding Up). See Sections 176- 227F; 263-296.

A. Winding Up by the Court with a Regulation or (Regulating) Order. See Sections 227A to 227E (to be used primarily in cases in which there are a large number of creditors or contributories).

B. Winding Up by Court by Way of Summary Procedure. See Section 227F (for use in small winding-ups where the company's property is not likely to exceed HK$200,000).

2. Voluntary Winding Up (Winding Up without a Court Order). See Sections 228-296. This procedure lacks the formalities of the court-initiated compulsory winding up. Since neither the court nor the Official Receiver is directly involved in the process, the procedure is advantageous from the company's perspective.

A. Members' Voluntary Winding Up. See particularly Sections 234-239A. In order to proceed with a Members' Voluntary Winding Up, the directors must be able to make a declaration that the company will be able to pay its debts in full. Thus, a members' voluntary winding up is not a true insolvency procedure and therefore will not be discussed in detail below. If the directors are unable to make this declaration, the winding up shall continue as a Creditors' Voluntary Winding Up.

B. Creditors' Voluntary Winding Up. See particularly Sections 240-248

3. Section 166 Compromise or Arrangement (a Section 166 Scheme). See Sections 166-168. An arrangement is also possible in a Voluntary Winding Up under Section 254, but is rarely used for the reasons noted in Section I3(b) below and will not be discussed in any detail.

The next procedure will be enacted in the near future.

(4) Proposed Provisional Supervision. See the Report on Corporate Rescue and Insolvent Trading, supra.

Outside of the formal company law schemes are the following:

(5) Receivership. Although a receiver is usually appointed out of court pursuant to a debenture, a judicial appointment is also possible. In either case, there are applicable provisions in Part VI of the Companies Ordinance.

(6) Informal out-of-court workout. See the Hong Kong Association of Banks' Guidelines on Corporate Difficulties, supra.

 

(b). Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure.

1. Compulsory Winding Up - The procedure is normally initiated by a creditor (but see Section I4(b) below, for the list of other entities who may initiate the procedure). The procedure takes place under the supervision of both the court and the government - the latter through the Official Receiver, who plays a substantial administrative role. The aim of the procedure is to liquidate and then distribute the company's assets to the creditors (and to the shareholders in the case of a surplus) in an efficient manner.

A. Winding Up by the Court with a Regulation or (Regulating) Order. For use where there are a large number of creditors or contributories. This procedure enables the court (1) to dispense with the summoning of meetings of creditors and contributories for the purpose of appointing a liquidator and committee of inspection and (2) to make the appointments itself - will not be discussed below).

B. Winding Up by Court by Way of Summary Procedure. Where the company's assets are not likely to exceed HK$200,000, this procedure allows for streamlining, including appointing the Official Receiver as liquidator; not holding meetings of creditors and contributories; and not appointing a committee of inspection - will not be discussed below).

2. Creditors' Voluntary Winding Up - Normally, the procedure is initiated by the company passing a special resolution to that effect or by the majority of the company's directors making a statutory declaration under Section 228A(1) that the company should be wound up. The procedure is quicker and less expensive than a compulsory winding up and is most useful in cases where there are few major disputes among the parties and where there is no suspicion of wrongful behavior by the directors. The aims of the procedure are the same as those for a winding up by the court - to liquidate and distribute the assets in an efficient manner. A weakness of the procedure is the lack of a moratorium on creditors' actions.

3. Section 166 Scheme - This is the primary corporate rescue procedure in the Companies Ordinance. Although Section 166 may be utilised after a winding up order has been made, a Section 166 compromise or arrangement is typically proposed by either a company or its creditors as a means of avoiding liquidation:

Under a compromise, a creditor agrees to accept a lesser sum than is due, or agrees to accept repayment by instalments over a period instead of in one lump sum immediately due. It can also cover a situation where a claimant agrees to modify undoubted rights. A compromise presupposes some dispute or difficulty in enforcing rights. Usually in a compromise situation the debtor company retains, or resumes, control of its assets and the creditor/claimant recovers less than he might otherwise be entitled to.

An arrangement covers any other type of agreement modifying rights, including situations where the modification is not detrimental to the right holder.

Tomasic & Tyler, supra, para [8152]. In a typical case, the creditors and the company attempt to agree to a scheme that might include elements of both a compromise and arrangement in an effort to save the company, including the creditors agreeing to the following: extending the time for payment of interest and repayment of principal; accepting less than 100% in satisfaction of their claims; exchanging debt for equity, or agreeing to vary their rights in other ways.

For a proposal to be binding on creditors or classes of creditors, it must be accepted by a majority in number and 3/4 in value of the creditors or classes of creditors (as the case may be) who are present and voting either in person or by proxy. The sanction of the court is also required. Once sanctioned by the court, the scheme is binding on all creditors.

However, there are many weaknesses with Section 166 including the following: (1) secured creditors retain veto power over the restructuring process as there is no mechanism to compel unwilling or uncooperative secured creditors to negotiate; (2) there is no stay to prevent secured creditors from realizing their security or unsecured creditors from bringing actions against the company, or even from winding up the company in those instances when a reorganization is being contemplated outside a liquidation; (3) the matters involving the classification of creditors are very complicated; and (4) the process is time consuming and expensive. Given these deficiencies, it is not surprising that there are few successful Section 166 corporate rehabilitations.

An arrangement is also possible in a voluntary winding up under Section 254 for a company about to be, or in the course of being, wound up. This section does not involve the court and requires sanction by a special resolution and approval by 3/4 in number and value of the creditors. This section is rarely used -- unlike Section 166 which requires majority in number and 3/4 in value of creditors present and voting, Section 254 requires 3/4 in number and value of all creditors. See Report of the Review Committee on Insolvency Law and Practice in the United Kingdom [United Kingdom, Cmnd 8558, June 1982], under the Chairmanship of Sir Kenneth Cork, GBE, para 403 at 97-98. Interestingly, the Sub-Committee recommended that the provision be amended to require a majority in number and 2/3 in value of creditors present at a meeting. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 14.11-.12 at 96-97. In this revised form, the section might prove more useful.

4. Proposed Provisional Supervision Procedure - This scheme is intended to provide a 'flexible framework' for achieving corporate rescue. Court appearances by the provisional supervisor will be limited and the process is intended to be cost effective and fast. The aim will be to present a voluntary arrangement plan to creditors for their approval within six months of the commencement of a provisional supervision. At the heart of the procedure is the moratorium, which is described in greater detail in Sections C5(a) and E4(a) above. The secured creditors will play a crucial role in this procedure.

The creditors will vote on the plan in one class. For any resolution to pass, it will be necessary to gain the assent of a majority in number and in excess of two-thirds in value of all creditors voting on the resolution either in person or by proxy. Report on Corporate Rescue, supra, para 16.37 at 94. For a critique of allowing the creditors to vote in one class, see Charles D. Booth, Hong Kong Corporate Rescue Proposals - Making Secured Creditors More Secure, 14(4) Insolvency Law & Practice 248, 253 (1998).

5. Receivership - As noted in Section C3(c) above, a receiver may be appointed either by the court or out of court pursuant to a debenture. A debenture usually provides that a secured creditor may appoint a receiver (usually defined to include a receiver and manager) upon the occurrence of specified events of default. Generally, the debenture will specify that the receiver and manager is an agent of the company and empower him to assume the powers of management of the company and operate the business of the company, at times to sell the business as a going concern. Of course, the overall scope of the receiver's powers and responsibilities would be spelled out in the debenture or in the court order.

Although a receiver may 'save' a company, it must be kept in mind that the receiver's primary objective is to ensure that the secured creditor is repaid. He has no duty to call meetings of creditors. Whether a receivership will save a company depends on a variety of factors of concern to the secured creditor including the following: whether the charged assets adequately protect the creditor; whether the creditor will benefit if the company continues to trade; and whether the existing client relationship should be preserved. Where it appears that the receiver will be able to save the company, the receiver would likely keep the other creditors informed.

Where a company has gone into receivership there is no inherent reason why, after the secured creditor has been paid off, the company should not resume its business under the old management. However, very often the appointment of a receiver is merely a preamble to a full winding up. If so, if there is a surplus after satisfying the claims of the secured creditor, the receiver must account to the liquidator, if one has been appointed.

Sections 297 and 297A provide, respectively, that a body corporate and an undischarged bankrupt may not serve as a receiver.

The receiver must be cognisant of the claims of preferential creditors because they are entitled to receive priority over the holder of a floating charge. See Section 79B of the Companies Ordinance.

A receiver has certain common law duties (eg, a duty of care to the company and a duty to act in good faith). A receiver also has specific statutory duties set out in the Companies Ordinance, including the following: ensuring that all of the company's documentation states that a receiver has been appointed (Section 299) and delivering his accounts to the Registrar of Companies (Section 301 for receivers appointed by the court and Sections 300A(2) for receivers appointed pursuant to a debenture). In addition, a receiver appointed pursuant to a debenture has additional duties including the following: notifying the company of his appointment; seeking the submission of the statement of affairs; and providing statutorily required information to the Registrar of Companies and to other required parties. See Sections 300A and B. The Sub-Committee proposed that receivers should also provide reports to creditors and contributories of a company in receivership (Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 20.20 at 159) as well as a 'Receiver's report' where a company in receivership is subsequently wound up (id, para 20.22 at 160).

Since receivership is more of an enforcement mechanism by a secured creditor than a formal rescue mechanism, it is primarily discussed in Section C above rather than in response to the questions below.

(6) Informal Workout - The Guidelines on Corporate Difficulties are applicable to multi-bank situations involving corporate borrowers in financial difficulties. The aim of the Guidelines is to 'nurse . . . the company back to health.' (para 1(b)). The banks are to abide by a standstill - and neither withdraw existing credit facilities nor take unilateral steps to collect their debts. A lead bank will be appointed, as well as a steering committee for larger lender groups. Unanimity will ultimately have to be achieved. These Guidelines are described in greater detail in Section G above and will not be discussed below.

(b) Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure.

(c) Identify the relevant legislation governing each type of insolvency procedure available for corporate debtors.

See Section I3(a) above.

(a) Is it usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced?

Yes. Since there is little likelihood that a company will emerge from liquidation proceedings once the court makes a winding-up order, there are substantial incentives for the company to first negotiate with its creditors. Moreover, the fact that corporate debt is often guaranteed by the company's directors serves as an additional incentive in favor of negotiation - for if the company is wound up, the likelihood increases that the creditors will attempt to enforce their personal guarantees, and possibly even resort to filing bankruptcy petitions, against the directors.

(b) In relation to each type of insolvency procedure available in the legal system of this economy, who may commence the procedure? (For example the corporate debtor, secured creditors, unsecured creditors, directors, shareholders, the State.)

1. Compulsory Winding Up - The usual petitioner is an unsecured creditor, but the list of entities who may file a petition is quite broad. In 1997/98, over 85% of petitions (including both bankruptcy and compulsory winding-up cases) were filed by either trade creditors (31.8%), the Director of Legal Aid ('DLA') (30.7%), or banks or other financial institutions (23.4%). Official Receiver’s Office, Annual Departmental Report 1997-98, supra, Annex 8 (1998). Winding-up orders followed in 33.2% of the cases commenced by the DLA and in 66.8% of the non-DLA cases. Id. Section 179(1) provides that a winding up petition may be filed by the following persons and entities: the company; a creditor (secured or unsecured) or creditors (including any contingent or prospective creditor or creditors); a contributory or contributories (including both current members and former members of partly paid shares who transferred their shares within the last year); or the trustee in bankruptcy or the personal representative of a contributory; or by all or any of those parties, together or separately. However, this section includes provisos (a) and (c) that respectively limit the situations in which a contributory or a contingent or prospective creditor may file a petition. Section 179(1)(d) specifies that the Financial Secretary may file a petition in a case falling within Section 147(2)(a), which would involve an investigation of the company. Section 179(1)(e) provides that the Registrar of Companies may file a petition in a case referred to in Section 177(1)(c) or (2), which would involve non-compliance with company law requirements. Lastly, Section 179(2) sets out the conditions that must be satisfied for the Official Receiver or another authorized person to file a petition against a company that is in the midst of a voluntary winding up.

   Most petitions are filed by unsecured creditors on the ground that the company is unable to pay its debts. Section 178 defines the inability of a company to pay its debts. (See Section I4(c) immediately below.)

   Other Hong Kong, China ordinances also provide for the commencement of winding ups. For example, Section 45 of the Securities and Futures Ordinance (cap 24) provides that if it appears to the Securities and Futures Commission (the ‘SFC’) that it is ‘expedient in the public interest’ that a company should be wound up, the SFC may petition for the company to be wound up on the just and equitable ground. See Securities and Futures Commission v MKI [1995] 2 HKC 79. There are similar provisions in other ordinances. See, eg, Section 122 of the Banking Ordinance (cap 155) and Sections 422-49 of the Insurance Companies Ordinance (cap 41). The Sub-Committee on Insolvency recently proposed that a new Section 177(1)(g) be added that explicitly notes that regulatory authorities have these powers. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 4.3 at 13.

   The Sub-Committee on Insolvency has recently recommended several changes to the guidelines for filing a petition. First of all, the Sub-Committee recommended that Section 180(1A) (which applies when a contributory petitions on the just and equitable ground) be amended to reflect the generally accepted position in Hong Kong, China that when a contributory petitions on the just and equitable ground it is not necessary to prove that the company has a surplus. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 5.10 -.13 at 18-19. Second, if a provision based on Section 76 of UK Insolvency Act is enacted in the Companies Ordinance, a related amendment will be to provide that a person who is liable to contribute under this provision may petition for the winding up of the company on the grounds set out in Section 177(1)(d) or (f). Supra, para 3.5 at 11-12. And third, the Sub-Committee has also recommended that directors should be allowed to petition to wind up a company. Supra, paras 5.2-.6 at 17-18.

2. Creditors’ Voluntary Winding Up – Pursuant to Section 228, a voluntary winding up is commenced either by a resolution of the company or by the directors pursuant to Section 228A.

    

3. Section 166 Scheme - Section 166 provides as follows:

   Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

   As can be seen, the class of those who may commence a compromise or arrangement is expansively drawn. In practice, however, the procedure is commenced by either the company or its creditors. Where a creditor makes the application, he must demonstrate that the company consents to the proposed arrangement. Tomasic & Tyler, supra, para [8154]. Where the company applies, it would not be sensible to initiate the process unless the company’s major secured creditors support the effort.

4. Proposed Provisional Supervision Procedure – It is expected that the procedure will normally be initiated by a majority of directors of the company or by the members of the company by ordinary resolution. The procedure will be sought where the directors and/or members realize that their company will be unlikely to survive in the absence of a concerted effort by the company and its creditors to restructure the company. Where a winding-up petition has been filed but a winding-up order has not yet been made, a provisional liquidator may initiate the procedure (except where the directors have made a declaration under Section 228A of the Companies Ordinance). Where a liquidator has been appointed, the liquidator’s consent will be necessary for a provisional supervision to go forward. In addition, a receiver appointed over the whole or substantially the whole of a company's assets would also be permitted to initiate the procedure. But creditors will not be able to initiate the procedure.

(c) On what basis may each type of insolvency procedure be commenced, or what requirements must be satisfied before the procedure may be commenced? (For example non-payment of debts; balance sheet/cash flow insolvency; trading losses; resolution by directors to enter insolvency procedure.)

 

(1) Compulsory Winding Up -- Section 177(1) sets out the grounds upon which a company may be wound up as follows:

A company may be wound up by the court if –

1. the company has by special resolution resolved that the company be wound up by the court;
2. the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
3. the number of members is reduced below 2;
4. the company is unable to pay its debts;
5. the event, if any, occurs on the occurrence of which the memorandum or articles provide that the company is to be dissolved;
6. the court is of opinion that it is just and equitable that the company should be wound up.

As can be seen from this list, the insolvency-related factors are included in (a), (d), (e), and (f). The most frequently relied upon ground is (d) and the usual petitioner is an unsecured creditor. Section 178 defines the three situations in which a company is deemed unable to pay its debts. In short, they are: (a) where the company fails to satisfy within three weeks of the service of notice a debt exceeding HK$5000; (b) where an execution or other process issued on a judgment is returned unsatisfied; or (c) where it appears to the court that the company is unable to pay its debts, taking into account the contingent and prospective liabilities of the company. Thus, the usual test relied upon is the cash flow test in Section 178(a), but the balance sheet test may also be relied upon in Section 178(c). The Sub-Committee on Insolvency has proposed to increase the amount of the minimum debt to HK$10,000, as has recently been done in the Bankruptcy Ordinance. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 4.14 at 15.

The 'just and equitable' ground has been held to include that the substratum of the company has gone or that the company was formed to carry on an illegal purpose or fraud.

Section 177(2) sets forth the grounds upon which the Registrar of Companies may rely when petitioning under Section 179.

Section 147(2)(a) provides for a company to be wound up in a case commenced by the Financial Secretary as a result of an investigation involving a report under Section 146 or the production of documents under

Section 152. In such cases, it must appear to the Financial Secretary that ‘it is expedient in the public interest’ that the company should be wound up. If so, the court may order the winding up on the just and equitable grounds.

(2) Creditors’ Voluntary Winding Up – Section 228(1) provides that a company may be wound up as follows:

1. when the period, if any, fixed for the duration of the company by the articles expires, or the event, if any, occurs on the occurrence of which the memorandum or articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily;
2. if the company resolves by special resolution that the company be wound up voluntarily;
3. if the company resolves by special resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up;
4. if the directors of the company or, in the case of a company having more than 2 directors, the majority of the directors, make and deliver to the Registrar a statutory declaration under section 228A.

Section 228A sets forth a special procedure for voluntary winding up in cases in which the company is unable to continue in business. The Sub-Committee on Insolvency has recommended to abolish Section 228A because it gives unscrupulous directors the opportunity to wind-up a company, in the period between the date of the resolution and the meetings of creditors and contributories, without reference to either the creditors or the shareholders and perhaps to use the provision [to] their own advantage.’ Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 10.6 at 72. The Sub-Committee has also recommended that whether or not Section 228A is abolished, Section 228(1)(d) should be amended to clarify that the declaration needs to be made by only one of the directors. Id, para 10.2 at 71. The Sub-Committee has also proposed that if the provision is not abolished, certain amendments should be made if provisional supervision is introduced into law. Id, paras 10.14-.19 at 74-75.

The voluntary winding up shall proceed as a creditors’ voluntary winding up unless pursuant to Section 233 the directors make a statutory declaration that the they have made a full inquiry into the affairs of the company and that they believe that the company will be able to pay its debts in full within a period not to exceed 12 months from the commencement of the winding up.

(3) Section 166 Scheme - There are no formal requirements specified in Section 166. The procedure will be available to both solvent and insolvent companies. Certainly, the earlier the process is commenced the greater are the chances of success.

1. Proposed Provisional Supervision Procedure – In the typical case in which the procedure will be initiated by the directors of a company, a resolution of the company or the board of directors (or a proposal in a prescribed form) will be required. As with Section 166, the procedure will be available to both solvent and insolvent companies, and the earlier the process is commenced, the greater will be the likelihood of success.

 

(d) How is each type of insolvency procedure commenced? (For example by application to the Court, by administrative act, by written notice to the business organization.)

1. Compulsory Winding Up - The procedure is commenced by the presentation of a winding-up petition to the court. (However, as noted above, in the typical case, a creditor commences the process by first serving on the company a copy of the Section 178 statutory notice. If the company fails to comply within three weeks, then the creditor files the petition.) Proper notice must also be given in the Gazette in accordance with Companies (Winding-up) Rules(cap 32) (Sub leg H), r 24.
   
   In addition, where a petition is filed by a company pursuant to a special resolution to wind up the company, the resolution must be registered with the Registrar of Companies within 15 days.
   
   
2. Creditors - Voluntary Winding Up - With the exception of a voluntary winding up commenced pursuant to Section 228A, a voluntary winding up is commenced through the passing of the resolution for voluntary winding up. The resolution must be registered with the Registrar of Companies within 15 days. In addition, Section 229 provides that within 14 days of passing the resolution, the company must give notice of the resolution by advertisement in the Gazette. The Sub-Committee on Insolvency has recommended that this period be extended to 15 days. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 10.23 at 76. In cases commenced pursuant to Section 228A, the case is commenced at the time a director delivers to the Registrar of Companies a copy of the Section 228A(1) statutory declaration.
   
   
3. Section 166 Scheme - The scheme is commenced on the application in a summary way of the relevant party.
   
   
4. Proposed Provisional Supervision Scheme – The procedure will be commenced by filing the following documents at both the High Court Registry and the Companies Registry:

1. A copy of the of the prescribed resolution of either the company or the board of directors proposing a voluntary arrangement, or of the proposal in the form prescribed of the liquidator in a compulsory winding up; and

2. The consent to act of the provisional supervisor.

 

(e) What is the usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor?

 

The time period in a compulsory winding up between the filing of the petition and the making of the winding up order is roughly six weeks. The average time period has been increasing; a couple of years ago, the norm was closer to four weeks.

It should also be noted that in 1997/98, there were court hearings of contested petitions in 182 cases (out of 921 winding up petitions). Official Receiver’s Office, Annual Departmental Report 1997/98, supra, Annexes 6 & 14.

(f) How effective is the judicial or court system (or administrative system) in relation to the handling of formal insolvency proceedings?

 

The judicial system is very effective in relation to the handling of compulsory winding ups.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what is the effect on the corporate debtor, its constituent parts and its business relationships of initiation of the relevant insolvency procedure?

 

(1) Compulsory Winding Up - Pursuant to Section 184, with the exception of cases originally commenced as voluntary winding ups, a compulsory winding up is deemed to commence at the time of the presentation of the winding up petition. However, in cases in which the company initially passed a resolution for the voluntary winding up of the company, the time of commencement shall be deemed to be the time that such resolution was passed.

(For example How does initiation of the insolvency procedure affect:

• the interests of owners/shareholders of the debtor; Pursuant to Section 182 of the Companies Ordinance, any transfer of shares, or any alteration in the status of the members of the company made after the commencement of the winding up is void, unless the court orders otherwise. In addition, the shareholders will no longer be able to bind the company through the making of resolutions.

2. Creditors Voluntary Winding Up - Pursuant to Section 230, with the exception of cases commenced under Section 228, a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up. A case commenced under Section 228 is deemed to commence at the time of the delivery of the Section 228A statutory declaration.

- the interests of owners/shareholders of the debtor; Section 232 provides that any transfer of shares (except those made with the approval of the liquidator) and any alteration in the status of the members of the company, made after the commencement of the winding up, is void. Although the corporate state and powers of the company shall continue until the company is dissolved, in practice the shareholders will no longer meet once the procedure is commenced.

3. Section 166 Scheme – In answering this question it is assumed that a winding up petition has not been filed against the company.

(4) Proposed Provisional Supervision Procedures

(For example How does initiation of the insolvency procedure affect:

(b) If another insolvency procedure has already been initiated in relation to the corporate debtor, how does the initiation of a second procedure affect the first?

 

1. Compulsory Winding Up - If a winding up order has been made, a liquidator may apply to the court to call a meeting of creditors and/or contributories to discuss whether a compromise or arrangement should be agreed to. The Section 166 scheme would thus occur within the winding up. If agreement on a Section 166 scheme could not be reached, the winding up would continue.

   A scheme may also occur as part of the winding up, as occurred in the winding up of the Bank of Credit and Commerce (Hong Kong) Ltd in 1992 (‘BCC(HK)’). See BCC(HK) Scheme of Arrangement and Attached Explanatory Statement, Aug. 6, 1992. (The scheme was entered into for reasons of economy and efficiency in administration to address the problem that although the claims of unsecured owed less than HK$100,000 apiece amounted to less than 3% of the claims against the bank, such creditors accounted for 30,000 of the bank’s 35,000 creditors.)

   Pursuant to Section 209A, upon the application of the liquidator or any creditor, the court has the power to order that a compulsory winding up be conducted (from the date of the order) as if it were a creditors’ voluntary winding up. This section includes a variety of factors to be considered by the court before making such an order. In 1997/98 there were three applications under Section 209A to convert compulsory winding ups into voluntary winding ups. Official Receiver’s Office, Annual Departmental Report 1997/98, supra, Annex 14. Over the past 5 years, there have been roughly 12 such conversions.

   The Sub-Committee on Insolvency has proposed that where a conversion is made under Section 209A, Sections 182, 183 and 186 will be applied in the voluntary winding up only if such provisions had been used in the compulsory winding up. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, 9.18-.20, at 52-53.

   There is also discussion in the Consultation Paper on the Winding Up Provisions of the Companies Ordinance as to whether Section 209A should be abolished: the majority was in favor of retention and the minority supported abolition. Supra, paras 9.1-.15 at 49-52.

2. Creditors' Voluntary Winding Up - The commencement of a voluntary winding up does not prevent the commencement of a compulsory winding up by any person who is permitted to file a winding up petition. See Section 179(2). Section 179(2) also enables the Official Receiver to file a winding up petition against a company that is in the process of being wound up voluntarily. However, the court shall not order that the company be wound up unless ‘it is satisfied that the voluntary winding up cannot be continued with due regard to the interests of the creditors or contributories.’

   Section 257 provides that the commencement of a creditors' voluntary winding up does not prevent any creditor or contributory from petitioning to have the company wound up by the court, but in the case of an application by a contributory, the court must be satisfied that the rights of the contributory will be prejudiced by the voluntary winding up.

   The Sub-Committee on Insolvency recommended (1) that the power of a liquidator appointed in a creditor’s voluntary winding up should cease on the date of the order converting the case to a winding up by the court and (2) that the liquidator appointed in the voluntary winding up should only be required to swear accounts for which he was liable. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 22.2 at 170.4

3. Section 166 Scheme – A compulsory winding up or a voluntary winding up commenced after the initiation of a Section 166 scheme would take priority over the Section 166 scheme. If the Section 166 negotiations were to continue, they would do so in the context of the winding up.

    

4. Proposed Provisional Supervision Procedures – During the continuance of the moratorium, it will not be possible for any party to commence winding up proceedings against the company.