Liquidation by Winding up - Understanding the concept
First, let's go through the basic concept of liquidation. The liquidation of a company is referred to as the ceasing of operations to finish the existence of the legal entity carrying out business. Now, there are three ways of getting to the outcome of the dissolution of a legal business entity in Hong Kong, the deregistration, the winding-up process, and the striking off.
The deregistration process is comparatively less complex than the winding-up process since the latter involves appointing a third party to function as the liquidator, which will oversee the process involving all the company’s assets, settling the company’s debts and accounts, and the distribution of any remaining capital to the owners. Additionally, the liquidator will also need to communicate with the Hong Kong authorities, such as the Companies Registry, the Inland Revenue Department, and any other relevant authority or government body needed to finalize or carry out the process of winding up.
In contrast, the deregistration process can be used for companies that have not been active for a considerable period, meaning that since there have been no recent operations, the closing down process can be done relatively faster. Of course, the company has maintained compliance before starting the deregistration process. Please read our dedicated article here for more information about the deregistration process.
As for the Striking off, a company can cease to exist by mandate of the Companies Registry if there is evidence or the authority believes that the company has not been active for a considerable time. This can be triggered if a company has not filed its Annual Return for a considerable time.
Now that we have landed the basics on the winding-up process and the difference with the deregistration process, in the next section, we can move forward with the choices available for a Hong Kong company to start the liquidation by winding-up process. We also have a related article about how to Strike Off and Deregister a Company in Hong Kong that might help provide more clarity.
The winding-up paths for Hong Kong companies
A company and its owners may face two scenarios where the decision to wind up a company can be taken; more details will be discussed below.
The Voluntary Path
To begin the liquidation process by winding up a company, a special resolution must be passed. The company's owners can initiate this process, the company’s shareholders, or by the creditors, which would be called creditors' voluntary liquidation. This resolution must be published in the Hong Kong government's official gazette within 14 days of approval.
Created by the Owners
If the shareholders want to start winding up, they must communicate with the company's directors to confirm that the company can set off all its debts. If the directors can confirm that the company can fulfill its obligations, it can be declared a solvent private company in a statutory declaration of solvency. This means the company can guarantee to pay creditors off all its debts in the next twelve months after starting the winding-up petition process. To simplify the process, we will enlist the steps below:
- Notification of solvency: This declaration of solvency must be submitted to the Companies Registry within seven days from the creation date. Additionally, the declaration must include a report on the company's current assets and outstanding liabilities based on the latest audited financial statement.
- Extraordinary general meeting: Before 28 days have passed, an extraordinary general meeting should be conducted by the directors to:
- Pass a special resolution and appoint the liquidator.
- Pass an ordinary resolution to commence the winding-up process.
- Appointing the liquidator: The next step is to appoint a professional to serve as the liquidator and state his role and remuneration. The individual must also inform the Companies Registry within 14 days of being appointed.
- The liquidator’s role: now, the liquidator should start working to review the company's obligations and comply with all the filing needed according to the Hong Kong Companies Ordinance.
- The final meeting: once all the pending affairs of the company are sorted out by the liquidator, a final report must be presented, and a final meeting should be called to evaluate the process in detail. A copy of the final account statement and proof that the meeting was conducted should be sent to the Companies Registry 7 days after.
- Dissolution of the company: once the documents are received and accepted by the Companies Registry, usually, a company will be considered to be dissolved within three months. Nevertheless, if the Hong Kong authorities decide otherwise, a notice will be issued with the official date of dissolution.
It is important to mention that this process needs to be published in the gazette within the established period. Moreover, suppose the liquidation process takes more than 12 months from the date it started. In that case, the liquidator must inform and provide reports of the process to the shareholders continuously until the process is finished.
Started by the Creditors
If a company cannot face its obligations, therefore, cannot declare solvency, the creditors can convene a voluntary winding-up process. This is normally known as a “creditors voluntary winding up” process. Similar to the process mentioned above, a meeting of the creditors should be advertised in the gazette and two other Hong Kong daily newspapers. Here we will enlist the steps:
- Resolution for a voluntary liquidation by winding up.
- Conveying a meeting with the creditors.
- Report from the directors: a list of all the obligations related to the creditors must be prepared with the alleged amounts to be paid.
- Appointing a liquidator: the creditors will nominate a liquidator. Sometimes, a committee to inspect the winding-up process can be established.
- The final meeting.
- The dissolution of the company.
As mentioned in the previous scenario, the last two steps should be conducted equally.
The Compulsory Path
As stated in the title, this path falls under the mandate of an authority, which makes it mandatory that a company goes through the winding-up process, regardless of the shareholders' wishes. Nevertheless, there are a few reasons for the Hong Kong authority to issue a court mandate to order the compulsory path. These reasons are the following:
- A debt that cannot be paid by the company, amounting to 10,000 Hong Kong dollars or more.
- Due to the company's circumstances, the court may issue an opinion that the company should go through a winding-up process.
- A special resolution by the directors stated that the court should participate in the liquidation by winding up the company process.
The above-mentioned reasons can arise due to a petition from a party related to the company, such as creditors or shareholders, or the company itself, filed by a lawyer to the Hong Kong authorities. In this sense, here are the steps for this winding up scenario:
- Filing a motion to wind up a company: the petition must be prepared according to the Companies Ordinance statutes and be done through an appointed lawyer. The motion for the winding up petition must be published seven days before the court hearing in the gazette and two local newspapers.
- Delivery of a sealed copy: A copy of the motion must be delivered to the company's business address.
- Court hearing: during the court hearing, the motion for the winding-up process will be evaluated, and if accepted, the court will issue a winding-up order.
- Appointment of the liquidator: a liquidator can be appointed either by the court or by having denominated a liquidator previous to the order being issued by the court.
- Investigation phase: after the appointment of the liquidator, an evaluation of the company will be conducted to verify the actual standing of the company and its liabilities.
- Holding meetings and a committee of inspection: the liquidator will hold constant meetings with the creditors and report on the status of the company's assets. The inspection committee will keep checking and evaluating the performance of the liquidator.
- Dissolution of the company: with the company's affairs finally sorted out and the court's approval, the company will be effectively dissolved.
Now that we have analyzed the path for liquidation by winding up a Hong Kong company, let's go briefly into what happens during the process.
Consequences of the liquidation process by winding up
As we have discussed two paths for the winding process, there are immediate effects on the company and its business once the liquidation process is deemed official. Here, we will discuss what happens in both scenarios:
- The company must stop all its business operations. Nevertheless, it should be conducted if the liquidator considers that the business must be carried out to resolve some of the company's obligations.
- The power of the director normally is annulled. However, if the liquidator requires it occasionally, the director can act as instructed.
- Changes in the number of shareholders or transfer of shares cannot be done.
- The winding-up process is considered to be started once the motion has been filed to the court.
- Any transfer of shares or change of the shareholders cannot be carried out unless the court authorizes it during the liquidation process.
- A shareholder or a creditor can file a claim for further action against the company.
- A liquidator can be appointed before the court hearing if the person that files the motion believes that the company's assets are in danger.
As we have seen, in both paths for the liquidation process by winding up, it is a complex procedure requiring experts, third parties, and various Hong Kong authorities, such as the High Court, the Companies Registry, and the Inland Revenue Department. It is always advisable to contact experts on complex matters such as this to offer guidance to increase the chance of a successful outcome.
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