(a) In relation to each type of insolvency procedure available in the legal system of this economy, what types of claims of creditors are properly admissible for payment in the context of that procedure? (for example liquidated debts, future debts, contingent claims, secured claims, unliquidated claims for damages, interest claims, costs of administration or of legal proceedings, periodical payments, debts owed by guarantors of the business organization.)

In all of the formal insolvency proceedings - both compulsory and voluntary winding ups, Section 166 schemes, and in the proposed provisional supervision scheme - a broad range of claims by creditors of the company are properly admissible. In a winding up, Section 263 sets forth the debts that may be proved, which include liquidated and unliquidated claims, certain and contingent debts, existing and future debts, ascertained debts, or debts sounding only in damages, periodic payments and claims for interest.

A secured creditor will normally recover his debt by means of enforcing its security. In practice, it is only where a secured creditor is undersecured that it will be compelled to prove in the liquidation (in relation to the unsecured part of the debt).

The costs of the liquidation, which include the fees of the liquidator (and of his legal advisers) as well as any costs and expenses properly incurred by the liquidator, are not treated as a 'debt' owed by the company: rather, such costs are payable out of the assets of the company in priority to all other claims.

Debts owed by parties under guarantees (in relation to the company's unpaid debts) cannot be claimed in the winding up of the company - a separate claim must be brought against the guarantor. However, at the common law, upon making a payment to the company' creditor upon the company's default, the guarantor would have a right of indemnity against the company. Where the guarantor has discharged all of the company's debt, the guarantor is subrogated to the rights of the creditor; an exception is made to this rule where the guarantor discharges only part of the company's debt. Tomasic & Tyler, supra, paras [11485-11495].

Although the category of provable debts is quite broad there are exceptions, including foreign revenue claims and fines. See Bankruptcy Ordinance, Section 34(3A), pursuant to BAO, Section 25.

Section 264 provides for the application in winding up of the bankruptcy rules with regard to the respective rights of secured and unsecured creditors, to provable debts and to the valuation of annuities and future and contingent liabilities. Section 264A, which does not apply to insolvent companies, deals with interest payable on debts.

(b) At what date are the amounts of admissible debts computed?

The amount of any admissible debt is calculated as at the date the commencement date of the relevant insolvency procedure, eg, the date of the filing of the petition in a compulsory winding up and the date of the passing of the resolution in a creditors' voluntary winding up.

Pursuant to Section 217, the court may fix a date on which creditors are to prove their debts or claims and any creditor who does not comply with the deadline shall be excluded from the benefit of any distribution. The Companies (Winding-up) Rules, r 93 provides that in a compulsory winding up, the liquidators should give notice to creditors to prove their debts.

(c) By what method are claims of creditors proven by those creditors in the context of each type of insolvency procedure?

In a compulsory winding up creditors must submit a formal proof of debt to the liquidator, unless the court directs that any creditor or class of creditors shall be admitted without proof. Companies (Winding-up) Rules, r 79. In a voluntary liquidation the liquidator may require any creditor to submit his claim in writing.

In provisional supervision, it is likely that creditors will be required to give written notice of their claims.

(d) How are disputed claims made by creditors adjudicated upon? (for example by the administrator, or by a Court.)

In a winding up, the liquidator determines whether to accept or reject (in whole or in part) any claim by a creditor; and where he rejects a proof, the liquidator must state in writing to the creditor the grounds for rejection. Companies (Winding-up) Rules, r 94. An aggrieved creditor can thereafter take the matter to the court within 21 days of the service of the notice of the rejection, and the court may reverse or vary the decision. Id, r 95. In a compulsory winding up, within three days of the liquidator receiving notice from a creditor of his intention to appeal against the decision rejecting a proof, the liquidator must file such proof (and a memorandum as to the disallowance) with the Registrar of Companies. Id, r 102.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what principles apply to the division of available assets of the corporate debtor among those of its creditors entitled to payment? Is there a basic principle of equality of payment, or are rights of priority of payment enjoyed by secured creditors, or by certain classes of creditors over others? (for example costs of the administration, claims for taxes owed by the debtor, amounts owed to employees of the organization.)

(1) Compulsory Winding Up - The starting principle, at least in theory, is that all creditors share equally. However, this principle is in practice severely curtailed by three main factors. First, secured creditors (with either fixed or floating security) realise their security outside the liquidation process and thereby have in substance priority over the mass of unsecured creditors. Second, the funds otherwise available to unsecured creditors may be significantly diminished by the costs of the liquidation - which rank ahead of all other claims on the company's assets. Rule 179 of the Companies (Winding-up) Rules sets out the order of priority for these payments (which may be varied by the court pursuant to Section 220 if the company's assets are insufficient to meet the costs, charges, and expenses incurred in the winding up.) Third, Section 265 of the Companies Ordinance gives certain groups of creditors (called 'preferential creditors') priority over unsecured creditors generally. These debts can be roughly organised into four categories of priorities:

(a) for employees' claims;

(b) for statutory debts owed to the SAR government (including tax claims for taxes due and payable within the twelve months preceding the date of the appointment of a provisional liquidator or, if no such appointment has been made, the date of the winding up order);

(c) for small deposits (up to HK$100,000) (where the company being wound up is a bank); and

(d) and for various insurance-related claims (where the company being wound up is an insurer).

In general, employees are entitled to priority for pre-petition wage claims up to HK$8,000 during the four months before the commencement of the winding up; severance payments up to HK$8,000; long leave service payments up to HK$8,000; compensation payments; wages in lieu of notice (up to the lesser of one month's wages or HK$2,000); accrued holiday remuneration; and contributions due under the Occupational Retirement Scheme. These debts rank equally with each other and are payable before the other classes of priority payments. In practice, employees first make a claim upon the Protection of Wages on Insolvency Fund for some of these claims, and the Fund, in turn, is entitled is entitled to the claim the priority payable in the liquidation.

It should be noted that the Sub-Committee on Insolvency has proposed that the only exceptions to pari passu distribution should be 'where considerations of maintenance of public order and the prevention of systemic failure are involved.' Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 15.9 at 100. This proposal would lead to the abolition of the priorities for employees claims and for government taxes. This proposal is quite controversial, and the proposed treatment of employees was opposed by the Labour Unions in Hong Kong, China, the Protection of Wages on Insolvency Fund Board, and the Labour Department.

At present, after payment of the priorities, unsecured creditors are generally lucky to receive 5% of their debts.

The Sub-Committee on Insolvency has proposed that Section 250, which at present is applicable only to voluntary winding-ups (see below), be extended to all forms of winding up and moved to a new Section 265(1). Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 14.4 at 95.

(2) Creditors' Voluntary Winding Up - The situation is generally the same as for compulsory winding ups. Section 250 provides as follows:

Subject to the provisions of this Ordinance as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

Section 265 (preferences) applies to voluntary winding ups; Rule 179 of the Companies (Winding-up) Rules technically does not, although in practice it is applied by analogy. Tomasic & Tyler, supra, para [10479]. The Sub-Committee on Insolvency has recommend that Section 250 be amended to clarify that the preferences in Section 265 are exceptions to the pari passu principle. Consultation Paper on the Winding Up Provisions of the Companies Ordinance, supra, para 14.1 at 95.)

(3) Section 166 Scheme and Proposed Provisional Supervision Procedure - The order of priority would be a matter for the scheme or the proposal of voluntary arrangement, respectively, to determine. In practice, the issues involved in determining the classes for a Section 166 Scheme are very complicated, and are one reason why such schemes are so few in number. To address this problem, the Report on Corporate Rescue and Insolvent Trading has recommended that in provisional supervision all creditors - secured and unsecured alike - will vote in one class (para 16.37 at p 94). The Report does provide that the pre-provisional supervision claims of employees should be treated in the same fashion as the pre-liquidation claims of employees in a liquidation. (Id, paras 5.42-.44 at 42) and that loans made to the company during provisional supervision will receive super-priority (id, ch 12). However, there is an ongoing debate as to how to treat the debts owed to employees. The Consultation Paper on Corporate Rescue and the Protection of Wages on Insolvency Fund (Treatment of Employees in "Provisional Supervision") has recently been opened on the topic and after reviewing the responses the Law Reform Commission will decide whether:

(1) to allow workers who have been laid off as a consequence of provisional supervision to make a claim on the Protection of Wages on Insolvency Fund;

(2) to require that a company satisfy all unpaid wages before commencing provisional supervision;

(3) to exempt employees from the moratorium and allow them to commence winding up as a way of triggering their ability to collect from the Payment of Wages on Insolvency Fund;

(4) to require the Payment of Wages on Insolvency Fund to allow workers to get quick relief but to treat these payments from the Fund as priority debts in a voluntary arrangement plan of the company.

(b) Give a brief account of the order of priorities, if any, of payment of creditors prescribed by the legal system of this economy.

In liquidation, the order of payment would be as follows:

(i) the claims of holders of charges created as fixed charges;

(ii) the costs, charges, and expenses properly incurred in the winding up;

(iii) preferential payments;

(iv) holders of floating charges

(v) unsecured creditors.

Preferential creditors are given statutory priority over the holders of floating charges both in receivership and in liquidation. Companies Ordinance, Sections 79B and 265(3B).