(a) In relation to each type of insolvency procedure available in the legal system of this economy, what assets of the corporate debtor are available to its administrator to satisfy the claims of its creditors?

(1) Compulsory Winding Up and Creditors' Voluntary Winding Up - The claims of creditors are satisfied out of the assets of the company. (See Section 250 in the case of voluntary winding up.) These assets would also include amounts recovered from contributories for amounts remaining due on partly paid shares, amounts recovered through the exercise of the liquidator's avoiding powers, and amounts recovered from directors for fraudulent trading (Section 275) or for delinquent behavior (Section 276). However, it should be noted that the commencement of avoidance actions, as well as actions under Section 275 or 276, would be more likely in a compulsory winding up than in a creditors' voluntary winding up.

The liquidator gathers and converts to cash the company's assets, which, in turn, will be distributed to creditors (and to contributories, if there is a surplus) by way of dividend.

(2) Section 166 Scheme - There are no set requirements as to which assets should be used for distribution in a Section 166 Scheme. Although it would be possible to use some of the assets available as of the commencement of the procedure, it would be more usual to pay creditors (and contributories, if need be) out of future earnings. A scheme might well include those elements that are noted in the discussion of provisional supervision immediately below.

(3) Proposed Provisional Supervision Procedure - A successful provisional supervision will lead to a plan of voluntary arrangement that is approved by the creditors. By enabling a company to continue in business, a successful plan will enable creditors to benefit from the company as a going concern. The plan requirements have deliberately been left-open ended, 'entirely at the discretion of the provisional supervisor.' Report on Corporate Rescue and Insolvent Trading, para 14.3, at 80. A draft plan might include a variety of solutions including the following:

(a) an extension of the time for payment of debts.

(b) a composition in satisfaction of debts,

(c) the compromise of any claims against the company,

(d) the variation or the reordering of the rating for payment of its debts or any class of its debts,

(e) the conversion of its debts in whole or in part into shares or other securities to be issued by the company or ¡­

(f) any other scheme or arrangement in relation to the affairs of the company.

Id, para 3.6, at pp 26-7. However, it is clear that most successful plans will be premised on paying the claims of creditors out of the future profits of the restructured company.

(a) To what extent and in what circumstances may the administrator of a corporate debtor take steps to recover assets of the debtor by overturning past transactions involving property of the debtor? (for example preferences given to certain creditors over others, invalid charges granted by the debtor, uncommercial transactions entered into by the debtor, profits on sales to and from the debtor at an undervalue or overvalue.)

(1) Compulsory and Creditors' Voluntary Winding Ups - The Companies Ordinance provides a liquidator with a variety of avoidance powers, including the following:

(a) Preferential transfers - Section 266 of the Companies Ordinance provides for the avoidance of fraudulent preferences in corporate insolvencies and, in so doing, incorporates Section 49 of the Bankruptcy Ordinance. The situation is somewhat complicated by the recent consequential amendment to the preferential avoidance powers in Section 266 of the Companies Ordinance made through Section 76 of the BAO. The result of this amendment is that the old fraudulent preference avoidance power continues to apply to all cases commenced prior to 1 April 1998. As for cases commenced on or after 1 April 1998, the new preference avoidance power is applicable in all cases commenced on or after 1 April 1998 to all transactions occurring on or after that date. However, the old law continues to apply in cases commenced on or after 1 April 1998 to transactions occurring prior to that date. For further discussion of this issue, see Charles D. Booth & Philip St. J. Smart, Retrospective or Prospective?: Determining the Scope of Hong Kong's New Insolvency Law, forthcoming in 8 International Insolvency Review (February 1999); Charles D. Booth & Philip St. J. Smart, New Insolvency Law: Traps and Gaps, Hong Kong, China Lawyer 62 (January 1999).

Old fraudulent preference law - Pursuant to old Section 49 of the Bankruptcy Ordinance, a liquidator may avoid as a fraudulent preference, inter alia, any payment or transfer of property by a company to its creditor that was made:

(1) with the 'dominant intention' to prefer the creditor;

(2) within six months of the filing of the bankruptcy petition;

(3) at a time when the debtor was unable to pay his debts as they became due.

There is an important exception to this test: a payment or transfer made by debtor under the fear of legal process or as the consequence of the pressure of a creditor was not considered voluntarily made, and therefore, is not a fraudulent preference. See Sharp v Jackson [1899] AC 419. Given the need to prove a 'dominant intention' to prefer, this section is rarely used in practice. One of the few areas in which the section has successful is in situations where company directors have ensured that their company pay back corporate debts that have been personally guaranteed by the directors.

New preference law - Section 76 of the BAO amended the Companies Ordinance by adding new Section 266B, which is entitled 'Fraudulent preference deemed to be an unfair preference.' This section provides:

(1) On and after the day section 36 of the Bankruptcy (Amendment) Ordinance 1996 (76 of 1996) (the 'amending Ordinance') comes into operation, where the winding up of a company commences on or after that date -

(a) a reference in section 266 or 266A of this Ordinance to a fraudulent preference shall be deemed to be a reference to an unfair preference as provided for in section 50; and

(b) a reference in section 266 of this Ordinance to a period of 6 months shall be deemed to be a reference to a period of -

(i) 6 months or

(ii) 2 years in the case of a person who is an associate as provided for in section 51B, of the Bankruptcy Ordinance (Cap. 6) (the 'principal Ordinance').

Thus, pursuant to Section 266B(1), where the winding up of a company commences on or after 1 April 1998, the new unfair preference terminology in new Sections 50 to 51B of the Bankruptcy Ordinance will be applicable (pursuant to BAO, Section 36). These new sections replace old Section 49 of the Bankruptcy Ordinance and, in the corporate context, will enable a liquidator to attack unfair preferences to 'associates' of the debtor that occur within two years of the filing of the petition and unfair preferences to non-associates that occur within six months of the filing of the petition. However, a weakness arises when applying the unfair preference provisions to associates of a corporate debtor. Because of drafting errors, directors, their spouses, and their relatives are exempt from the stricter requirements applicable to associates. See Philip Smart, Unfair Preferences, Hong Kong, China Lawyer 15 (June 1997); Philip Smart, 'Associate' Misdefined, Hong Kong Lawyer 10 (Aug. 1997). The recent amendment to Section 266 was intended to be a 'temporary measure,' and in its recent Report the Sub-Committee proposes to adopt a series of definitions from the UK Insolvency Act (eg, 'connected persons' and 'associates') to address this problem, as well as to ensure that the new definitions will capture transactions involving associated companies, shadow directors, or associates of shadow directors. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras16.16-16.23 at 123-25.

New Section 50(4) of the Bankruptcy Ordinance replaces the 'dominant intention to prefer' test with a requirement that the debtor be influenced by a 'desire' to put a creditor into an improved position in the event of the debtor's bankruptcy. New Section 50(5), in turn, makes it easier for a liquidator to attack unfair preferences involving associates: the section provides that an unfair preference by a debtor to an associate (other than by reason only of being the debtor's employee) is presumed, unless the contrary is shown, to have been influenced by the debtor's desire to put the associate in an improved position. New Section 51(2) provides that for an unfair preference to be avoided, the company must be insolvent at the time of transfer or become insolvent as a consequence of the preference. However, this section also relaxes the test for preferences to associates by providing that in a transaction involving an associate (again, other than by reason only of being the debtor's employee), the company will be deemed to have been insolvent at the time of, or as a result of, the preference, unless the contrary is shown.

Pressure by creditors will likely continue to be held sufficient to overcome the voluntary nature of the company's actions. In addition, payments to creditors may well be found not to have been influenced by a 'desire to prefer' but rather by a desire to achieve another purpose. See the English case, Re Ledingham-Smith [1993] BCLC 635 (holding that in making a payment to a firm of accountants, the debtor was influenced by a desire to retain the services of the accountants during his financial difficulties) (cited in LS Sealy & David Milman, Annotated Guide to the Insolvency Legislation, Section 340, comment, at 404 (4th ed, 1994). Thus, the new section will most likely have the greatest impact in attacking transactions involving associates. Non-associates will still frequently benefit from 'last minute grabs.'

(b) Uncompleted executions and attachments - Unlike the preference powers that may be used to recover property transferred by the company in the period preceding the commencement of the winding up, Section 269 prevents a creditor from retaining the benefit of his attachment or execution unless the attachment or execution was completed before the commencement of the winding up.

Under Hong Kong, China law, an execution against goods is completed by seizure and sale or by the making of a charging order; an attachment of a debt, by receipt of the debt; and an execution against land, by seizure, by the appointment of a receiver, or by the making of a charging order. Section 269(2). Thus, a creditor in Hong Kong, China who pursues attachment or execution is treated as an ordinary unsecured creditor until the execution or attachment is completed. However, if the creditor does not complete the attachment or execution before the commencement of the winding up, the creditor is nevertheless entitled to retain moneys received prepetition by the creditor, and thus will lose only the 'benefit' of the attachment or execution for the remainder of the debt, subject to the discretion of the court pursuant to Section 269(1)(c). See Re Andrew [1937] Ch 122, 127, 136.

(c) Avoidance of floating charges - Section 267 provides that a charge created as floating charge by an insolvent company within twelve months of the commencement of the winding up shall be invalid, except to the amount of any cash advanced to the company at the time of (or after the creation of), and in consideration for, the charge, together with interest. The Sub-Committee on Insolvency proposed that the provision should be extended from 12 months to 2 years in the case of persons who are connected to the company. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 16.16-.23 at 123-25.

(d) Extortionate credit transactions - In February 1997, an amendment to the Companies Ordinance took effect that enables a liquidator to seek the avoidance of extortionate credit transactions entered into not more than three years before the commencement of the liquidation. Companies Ordinance, Section 264B (enacted pursuant to Hong Kong, China Companies (Amendment) Ordinance 1997 (Ordinance No. 3 of 1997) (16 Jan. 1997), Section 43.

(e) Transactions at an undervalue - A provision providing for the avoidance of transactions at an undervalue was enacted in the Bankruptcy Ordinance pursuant to Section 36 of the BAO. This provision, however, is not at present applicable in corporate insolvencies, although the Sub-Committee on Insolvency recently recommended that such a provision be enacted in the Companies Ordinance. Consultation Paper on the Winding-Up Provisions of the Companies Ordinance, supra, para 16.26 at 125. At present, such transactions may instead be attacked by the liquidator under Section 60 of the CPO, which is described below.

Fraudulent conveyances - In addition to the avoidance powers in the Companies Ordinance, Section 60 of the Conveyancing and Property Ordinance provides for the avoidance of fraudulent conveyances. Section 60(1) provides for the avoidance of dispositions of property made 'with intent to defraud creditors.' However, Section 60(3) exempts from the operation of Section 60(1) 'any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.' Recoveries under this section are rare; for example, the exception for transactions involving 'valuable' or 'good' consideration has great potential for leading to litigation.

(2)Section 166 Scheme - The avoidance powers in the Companies Ordinance described above would not be exercisable in a non-insolvency scheme. Theoretically, Section 60 of the Conveyancing and Property Ordinance would be applicable, but in practice that would rarely occur. In a liquidation scheme, see above discussion.

(3) Proposed Provisional Supervision Procedure - The Sub-Committee recommends that the unfair preference provisions and the transactions at an undervalue proposals should not be exercisable in a provisional supervision. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 16.30 at 126. The Sub-Committee also proposed that Section 267 should not be applicable to super priority borrowing in a provisional supervision. Id, para 16.37 at 128. The same result is likely for the application of Section 267 in provisional supervision generally and for the provision regarding extortionate credit transactions. If the provisional supervision fails and the company is ultimately wound up, the liquidator will be able to apply the avoidance powers at that time. Id.

However, provisional supervision will enable the provisional supervisor to prevent a creditor from retaining the benefit of an attachment or execution that was not completed before the commencement of the provisional supervision.

(b) What powers or mechanisms are available to each type of administrator for investigation of the affairs of the corporate debtor, for examination of persons formerly involved in the management or control of the debtor, and for the discovery of assets of the debtor?

(1) Compulsory Winding Up - Pursuant to Section 190, the following persons may be required to submit a statement of affairs to the Official Receiver within 28 days of the making of the winding up order or the appointment of a provisional liquidator (the 'relevant date'), whichever is earlier:

(a) who are or have been the company's directors or officers;

(b) who have taken part in the formation of the company at any time within one year before the relevant date;

(c) who are in the employment of the company, or who have been in the employment of the company within such one year period and are on the opinion of the Official Receiver capable of giving the information required;

(d) who are or have been within the said year officers of or in the employment of a company, which is, or within the said year was, an officer of the company to which the statement relates.

The statement must be in the prescribed form and verified by affidavit and include the particular of the company's assets, debts, and liabilities; the names, addresses, and occupations of the company's creditors; the securities held by the creditors respectively and the dates when the securities were respectively given; and such further information as the Official Receiver may require. The Sub-Committee on Insolvency has proposed (1) that the Official Receiver should have the discretion to dispense with the statement of affairs without having to apply to court and (2) in addition to the current practice of imposing a fine, the failure to submit the form as prescribed without reasonable excuse should be a contempt of court. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 6.10 at 25 & 6.15, at 26.

Section 211 provides that that court may require any contributory, trustee, receiver banker, agent or officer of the company to pay, deliver, convey, surrender, or transfer to the liquidator any money, property, books and papers in his hands to which the company is prima facie entitled. The Sub-Committee has recommended that this provision be extended to include 'any other party' and that it also be applicable to provisional liquidators. Id, paras 9.31-.33 at 54-55.

The Companies Ordinance provides for both private and public examinations of certain persons. Section 221(2) (private examination) provides the court with the power to summon certain persons known or suspected of having property of a company or suspected to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company. Section 221(2) provides for examination under oath and subsection (3) for the production of any books and papers in his custody or power relating to the company. Failure by a person to appear may lead to his apprehension and being brought before the court for examination. Section 222(1) provides for the public examination of promotors, directors, and officers of the company in cases in which the Official Receiver believes that a fraud has been committed or that a case exists that would render a director liable to disqualification under Part IVA of the Companies Ordinance. Subsection (5) provides that the person examined shall be examined under oath.

The Sub-Committee has recommended that the winding-up provisions on private and public examinations should be amended to mirror the provisions recently enacted in the Bankruptcy (Amendment) Ordinance 1996, which include, inter alia, guidelines regarding self-incrimination, perjury, the use of interrogatories, the attendance of legal representation, the inspection of the liquidator's report, and the production of documents by the Commissioner of Inland Revenue. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, paras 9.55-.77 at 59-65. In addition, the Sub-Committee recommended that the court should be empowered to order a respondent being examined in a private examination to satisfy his debt owed to the company or to deliver company property that is in his possession. Id, para 9.69 at 63.

(2) Creditors' Voluntary Winding Up - The directors of the company, pursuant to Section 241, are obligated to present creditors at the first meeting of creditors with 'a full statement of the position of the company's affairs together with a list of the creditors of the company and the estimated amount of their claims.' If a liquidator wished to hold examinations of the type provided by Sections 221 and 222, he would have to apply to the court under Section 255. The Sub-Committee has recommended that the private examination of persons should be permitted in a voluntary winding up without requiring an application under Section 255. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 9.60 at 62.

The Sub-Committee has recommended that amended Section 211 be extended to cases of voluntary winding up. Id, para 9.31 at 54.

(3) Section 166 Scheme - Not applicable in a non-insolvency scheme. In a liquidation scheme, see above discussion.

(4) Proposed Provisional Supervision Procedure - The provisional supervisor will be able to require the submission of a statement of affairs by the same persons who would be required to submit a statement under Section 190 in a compulsory winding up. The provisional supervisor will be under time pressure to decide within 30 days whether the purposes of a voluntary arrangement are likely to be achieved. Therefore, the statement will be due within seven days of the request by the provisional supervisor. Individuals requested to submit a statement of affairs may also be required to deliver immediately to the provisional supervisor all documents and records relating to the company that are in his possession or control; to inform the provisional supervisor of the whereabouts of any documents or records of which he is aware; and to provide the provisional supervisor with any information relating to the business, property, affairs or financial circumstances of the company that is within his knowledge.

The Sub-Committee has recommended that amended Section 211 be extended to cases of provisional supervision. Id, para 9.33 at 54. However, the Sub-Committee has recommended that the private examination of persons should not be permitted in provisional supervision. Id, para 9.60 at 62.

(c) What procedures may be employed by each type of administrator for the recovery of assets of the corporate debtor which are available for distribution to creditors? (for example initiation of legal proceedings, compensation from directors.)

(1) Compulsory and Creditors' Voluntary Winding Ups - The liquidator is empowered to commence legal proceedings in the name of the company, which may prove necessary to recover assets of the company that have been dissipated. In regard to the directors, in the appropriate cases, the liquidator might decide to commence a fraudulent trading action against the directors of the company under Section 275 or actions against delinquent directors under Section 276.

(2) Section 166 Scheme - Not applicable in a non-insolvency scheme. In a liquidation scheme, see discussion above.

(3) Proposed Provisional Supervision Procedure - Although not specifically included in the list of a provisional supervisor's powers, the power to initiate legal proceedings would be included on the power to do all other things incidental to his functions. Report on Corporate Rescue and Insolvent Trading, para 8.25(l), at 58. The Law Reform Commission has recommended that a provisional supervisor not be able to commence fraudulent or insolvent trading actions against directors. Id, Chapter 19.