SECTION K - ASSETS AVAILABLE TO CREDITORS

In this Section, we only elaborate on the provisions of the insolvency procedure of winding up, as the nature of the queries appear to be geared towards the availability of assets for distribution among creditors, which would not be the case in the other insolvency procedures described.

K1. Asssets available to creditors generally

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

This answer is restricted to winding up procedures only. All assets are available. However, secured creditors will have an independent right to enforce their security or the assets mortgaged/charged in their favour. Thus in cases of mortgaged/charged assets, only the sale proceeds in excess of the claims of the secured creditors will be available. The secured creditors will have the choice of enforcing their security or to renounce their security and prove for their entire dues. In this case, the mortgaged/charged assets will also be available.

K2. Avoidance of past transaction affecting the assets of a corporate debtor

(a) To what extent and in what circumstances may the administrator of a business organization take steps to recover assets of the organization by overturning past transactions involving property of the organization? (for example preferences given to certain creditors over others, invalid charges granted by the organization, uncommercial transactions entered into by the organization, profits on sales to and from the organization at an undervalue or overvalue.)
Under Section 406 of the Companies Ordinance, except where an order to the contrary is passed by the Court, any transfer of property, movable or immovable (including actionable claims), or any delivery of goods made by a company, which is not a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrances in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by or the passing of a resolution for winding up of the company, is void against the liquidator.
Under Section 408 of the Companies Ordinance, where any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against the company within 6 months before the commencement of its winding up which, had it been made or done by or against an individual within 6 months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed to be a fraudulent preference of its creditors and be invalid accordingly. The Section further provides that, any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.
Under Section 411 of the Companies Ordinance, where a company is being wound up, a floating charge on the undertaking or property of the company created within 12 months of the commencement of the winding up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid except to the amount of any cash paid to the company at the time of or subsequent to the creation of, and in consideration for the charge together with surcharge on the amount at the rate of 1% per month or part thereof as notified by the SEC in the Official Gazette.
Whilst dwelling on the issue of charges mentioned above, the provisions of Section 121 of the Companies Ordinance relating to the registration of mortgages and charges should be noted. This Section provides that every mortgage, charge or other interest, created, shall so far as any security on the company's property or undertaking is thereby conferred, be void against a liquidator and any creditor of the company, unless a copy of the instrument by which the mortgage or charge is cerated or evidenced if filed with the Companys Registrar for registration. Thus, if any mortgage or charge on the property of a company being wound up is not registered, such a mortgage or charge cannot be enforced against the liquidator (or indeed the creditor) of a company being wound up.

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

Under Section 330 of the Companies Ordinance (discussed above), the Official Liquidator in the case of winding up by the Court has the power to take into his custody all assets of the company and has the power to cause any persons formerly involved in the management of the company to hand over such assets and to furnish to the liquidator such information and explanations as he may require. The Official Liquidator may also apply to the Court following his submission of a report(s) under Section 329 of the Companies Ordinance (discussed above) and ask for examination of officer or director of the company where in the opinion of the Liquidator any fraud or other ationable irregularity has been committed in relation to the Company (Sections 351 and 352 of the Companies Ordinance). Similar powers are available to a Liquidator in the case of a voluntary winding up upon application to a Court.

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

In the case of winding up, the Official Liquidator may apply to the Court, and the Court may under Section 340 require any contributory, trustee, receiver, banker, agent, officer or employee or past officer, or employee or auditor of the company to pay, deliver, convey, surrender or transfer forthwith or within a specified time to the Liquidator any money, property or books and papers including documents in his hands to which the company is prima facie entitled.