How do I close a company that is unable to pay its debts?

If your company, unfortunately, goes insolvent, the relevant stakeholders, including the creditors, shareholders, liquidators, etc. can wind up the company. Alternatively, directors are given power by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) to wind up the company under special circumstances.

Creditors’ voluntary winding up

Creditors’ voluntary winding up is similar in procedure to members’ voluntary winding up. The main difference is that the creditors have a major role to play in this process since the company might not be able to pay off the debts owed to the creditors, so creditors are given a more active role to better secure their interests.

The general procedures of creditors’ voluntary winding up are as follow:

• The company has to call a meeting of shareholders. The notice for the meeting has to be advertised in the Government Gazette and in Chinese and English newspapers. Click on the link to see the template of a notice of Extraordinary General Meeting.
• The shareholders have to pass a special resolution for voluntary winding-up. See the template of a special resolution to put the company into voluntary liquidation by clicking on the link.
• A notice of the resolution has to be posted in the Government Gazette within 14 days of the passing of the resolution.
• During the meeting, a liquidator may be nominated and appointed. The liquidator might be supervised by an inspection committee. The liquidator will deal with the affairs of the company. To see the template of a special resolution to appoint a liquidator, click on the link.
• The company has to call a meeting of creditors within 14 days of the shareholders’ meeting. The creditors may appoint their own liquidator if they are not happy with the shareholders’ choice and/or form a committee to monitor the winding-up procedure, etc.
• While a liquidator is appointed, the powers of directors will be suspended. The liquidator then can liquidate all assets of the company and distribute the proceeds according to the statutory priority.
• The liquidator can call further meetings regularly to update the company and its creditor(s) of the wind-up.
• When the affairs of the company have been fully wound up, the liquidator will produce an account of the winding-up, and call a final meeting of the company and of the company’s creditors.

Compulsory winding up on the ground of insolvency

Compulsory winding up is initiated by presenting a winding up petition to the court. A company can be compulsorily wound up on several grounds as set out in the Companies (Winding Up and Miscellaneous Provisions) as one of the grounds is insolvency.

A creditor, shareholder or the company itself can be a petitioner filing for a winding up order from the High Court. Though given the complexity of the filing procedures, the petitioner is recommended to instruct a solicitor to complete the required formalities on their behalf.

If the court is satisfied with the petition, it may make an order to wind up the company. In that phase, all creditors’ actions against the company will be on stay automatically (i.e., creditors cannot claim their debts from the company temporarily). The liquidator would be under the supervision of the court while performing his duty.

Special procedure: winding up commenced by directors

The directors may initiate the winding up of the company without calling a meeting of the shareholders. This is permitted only if the company is insolvent and it is not reasonably practicable to commence winding up by the two procedures above or any other possible ways under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, where the directors can deliver a winding up statement to the Registrar of Companies without first calling a shareholder meeting. In practice, this procedure is rarely invoked.

Key takeaway

• When a company is insolvent, the members can no longer wind it up voluntarily. The possible ways of winding up are creditors’ voluntary winding up, compulsory winding up and the special procedure of winding up commenced by directors.
• The winding up procedure under insolvency involves a liquidator who will take over the directors’ powers in order to liquidate the company’s assets and distribute them before dissolving the company.

Bibliography

1. Official Receiver’s Office, Simple Guide on Compulsory Winding-up of Companies: https://www.oro.gov.hk/eng/publications/guidwu.htm
2. Companies Registry, FAQ on Deregistration, Striking Off and Winding Up: https://www.cr.gov.hk/en/faq/local-company/dereg-striking-off-winding-up.htm

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