Senior Partner Nick Gall and Associate Anjelica Tang contribute the Hong Kong section of The International Comparative Legal Guide to Corporate Recovery & Insolvency 2015 Edition.

This article appeared in the 2015 edition of The International Comparative Legal Guide to: Corporate Recovery & Insolvency; published by Global Legal Group Ltd, London (

Hong Kong – Corporate Recovery & Insolvency 2015

Issues Arising When a Company is in Financial Difficulties

1.1        How does a creditor take security over assets in Hong Kong?

A creditor may take security over a Hong Kong company’s assets in one of the following ways:


A mortgage arises when title (as opposed to possession) to an asset is transferred into the name of the creditor as security for the debt with an agreement for re-transfer on repayment of the debt.  Certain types of mortgages are required to be registered (e.g. mortgages over land shall be registered with the Land Registry and Companies Registry in Hong Kong).


A charge is a form of security consisting of a right of payment out of the asset or out of the proceeds of the realisation of the asset.  A charge does not involve transfer of title or possession of the asset and cannot be enforced if such asset is possessed by a good faith purchaser for value and without notice of the charge.

There are two types of charges:

(1)           A fixed charge is a security created over assets that are ascertained and definite such as land, plants and machinery.  The company is no longer free to dispose of, or deal with, the charged asset and will need to seek authorisation of the fixed charge holder.

(2)           A floating charge is a security created over a class of assets of a company which may be changing and the value of which is not fixed.  The company is free to dispose of the charged asset without the authorisation of the floating charge holder until ‘crystallisation’ (e.g. on liquidation of the company or on a receiver being appointed under the charge).


A pledge involves the asset being physically delivered to the creditor until the loan is repaid.  If the loan is not repaid when due, the asset may be forfeited and sold by the creditor to satisfy the default obligation.


A lien is a right to retain possession of another’s property until the debtor settles the outstanding debt, but such right disappears when possession is lost.  Further, there is no right of sale by the creditor.

1.2        In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack and what remedies are available from the court?

Unfair Preferences

An unfair preference occurs where a payment has been made by the company to a creditor when it is insolvent, but before the commencement of its winding-up, with the effect of putting the creditor in a better position than it would otherwise have been in the liquidation of the company.  The liquidator may challenge the validity of any such transactions which took place two years prior to the commencement of the winding-up if the creditors are ‘associates’ (e.g. director or employee) or six months for any other creditor.  If the challenge is successful, the court may restore the position to what it would have been if the company had not entered into the relevant transaction.

Extortionate Credit Transaction

The court may set aside any extortionate credit transactions entered into three years before the commencement of a voluntary winding-up, the date on which a special resolution was passed to wind-up the company or on the date of the winding-up order made by the court.  A transaction will be considered extortionate if, having regard to the risk accepted by the person providing the credit, the terms require grossly exorbitant payments in respect of the provision of credit or grossly contravene ordinary principles of fair dealing.

Fraudulent Conveyance

Every disposition of the company’s property made with intent to defraud the creditors is voidable and may be set aside by the court.  The exceptions are those made in good faith for valuable consideration and without notice of the intent to defraud creditors.  The transfer of property must have been made with the deliberate intention of trying to put the company’s assets beyond the reach of the creditors.  The court may infer an intention to defraud in circumstances where the transaction was for little or no consideration.

Floating Charges

A floating charge created 12 months prior to the commencement of a winding-up will be invalid unless the company was solvent immediately after the charge was created or new consideration was provided for the charge.

Disposition of Property after Presentation of Petition and Transfers after commencement of Voluntary Winding-Up

In a compulsory liquidation, any disposition of the company’s property (including transfer of shares) after a winding-up petition is presented, will be void, unless otherwise approved by the court.  The court may make a validating order where a proposed sale of a company’s assets would be beneficial not only for the company but also for its secured creditors.  However, if the transaction involves an arrangement between a number of classes of creditors and the company, it will be wrong for the court to grant the order.

In a voluntary liquidation, any transfer of shares (other than transfer made to or with the sanction of the liquidators) and any alteration in the status of the members of the company after the commencement of a voluntary winding-up, will be void, unless it was made with the sanction of the liquidator.

1.3        What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Hong Kong?

General/Common Law Duties

As a general rule, the director of a company has certain fiduciary duties towards the company and its members.  However, as a company approaches insolvency, a director has a duty to take into account the interests of the company’s creditors.  If he/she breaches those duties, he/she may be ordered to compensate the company for any loss or damage that has been suffered as a result of those breaches or repay, restore or account for the money or property appropriated or acquired.


Where a director has breached his duties to the company by misapplying or retaining any money or property, the court can compel repayment of money or restoration of property or contribution by way of compensation by that director.

Fraudulent Trading

A director may be personally liable if he/she was knowingly involved in carrying on any business of the company with the intent to defraud its creditors.  The court may make an order that the director be personally liable for all or any of the debts and liabilities of the company.  He is also exposed to criminal liability and potentially liable to a fine and imprisonment.


A director may be disqualified for a period of up to 15 years if he/she: engages in fraudulent trading; is unfit to be concerned in the management of a company; is convicted of an indictable offence in connection with the promotion, formation, management, or liquidation of any company such as falsifying company’s books; or is found guilty of any other misconduct in relation to the company.

Formal Procedures

2.1        What are the main types of formal procedures available for companies in financial difficulties in Hong Kong and can any of these procedures be used in a restructuring?

The main types of formal procedures available for companies in financial difficulties are as follows:

(1)           A members’ voluntary liquidation (it should be noted that this is a solvent liquidation);

(2)           a creditor’s voluntary liquidation;

(3)           a compulsory liquidation;

(4)           appointment of a receiver; or

(5)           a scheme of arrangement.

A scheme of arrangement and members’ voluntary liquidation can be used to restructure a group or some business.

2.2        What are the tests for insolvency in Hong Kong?

‘Insolvency’ is not defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the “Ordinance”) or under Hong Kong law.  However, a company is insolvent if it is “unable to pay its debts”.  There are three ways in which this can be proved:

(1)           failure to satisfy a statutory demand for a debt of not less than HK$10,000 within 21 days of service of the statutory demand on the company;

(2)           if a judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part; or

(3)           if it is proved to the satisfaction of the court that the company is unable to pay its debts (including any contingent liabilities) as they fall due.

With respect to (3) above, the court will presume that a company is unable to pay its debts where it cannot pay its debts as they fall due (the ‘cash flow’ test).  Alternatively, the court can consider whether the value of the company’s assets is less than the amount of its liabilities, including both contingent and prospective liabilities (the ‘balance sheet’ test).

2.3        On what grounds can the company be placed into each procedure?


A members’ voluntary liquidation is only available where the company is solvent.  Having made a full inquiry into the company’s affairs, the directors must have also formed an opinion that the company will be able to pay all its debts within 12 months of the commencement of the winding-up and sign a certificate of solvency to that effect.  The shareholders must also pass a special resolution to wind-up in a General Meeting.

A creditors’ voluntary liquidation will occur where the company decides to place itself into voluntary liquidation but the directors are unable to certify the solvency of the company (i.e. the company is insolvent), or the liquidator is at any time of the opinion that the company will not be able to pay its debts in full within the specified period.

A compulsory winding-up order may be made by the court where:

(1)           the company has passed a special resolution for winding-up by the court;

(2)           the company has failed to commence its business within one year from its incorporation, or suspends its business for a whole year;

(3)           the company has no members;

(4)           the company is unable to pay its debts as, and when, they fall due;

(5)           the event, if any, occurs on the occurrence of which the memorandum and articles provide that the company is to be dissolved; or

(6)           the court is of the opinion that it is just and equitable that the company be wound up.


A receiver may be appointed: (a) by the court where it is just and equitable to do so; or (b) by a secured creditor pursuant to the terms of a charge or debenture; or (c) by virtue of a statute, which applies only to land.

Scheme of Arrangement

At any time, a company can enter into a binding compromise with its shareholders and/or creditors in respect of its debts.  The schemes are not limited to insolvent companies and may involve solvent companies that wish to re-organise their capital structure.

2.4        Please describe briefly how the company is placed into each procedure.


A members’ voluntary liquidation requires: (a) the directors to certify the solvency of the company; (b) the shareholders to pass a special resolution for winding-up; and (c) an ordinary resolution appointing a liquidator.  The members’ voluntary liquidation commences on the date on which the special resolution is passed.

A creditors’ voluntary liquidation requires a shareholders’ meeting to be held so that a special resolution to wind up the company can be considered and passed.  A creditors’ meeting must also be held on the day of the members’ meeting or the next day.  Notice of the creditors’ meeting must be sent to all creditors at the same time as the notice of shareholders’ meeting and must be advertised in the Hong Kong Gazette and newspapers.  At the meeting, the directors must produce to the creditors a full statement of the company’s affairs together with a list of creditors and the estimated amount of their claims.  The creditors may also nominate and vote for the appointment of a liquidator, and a committee of inspection to supervise the liquidator in the conduct of the liquidation.  The committee will meet at least once a month.  In the event of any conflict regarding the liquidators appointed by the shareholders and creditors, the liquidator nominated by the creditors will normally prevail.  The creditors’ voluntary liquidation commences on the date on which the special resolution is passed.

A compulsory winding-up is commenced by issuing a petition against the company.  The petition must then be: (a) served on the company at its registered office or principal place of business; and (b) advertised in the Hong Kong Gazette and newspapers at least seven clear days before the hearing of the petition; and (c) verified by an affidavit.  The court will hear the petition and make an order for compulsory winding-up if it is satisfied that one of the grounds for winding-up is established (see answer to question 2.3 above).


An application for the appointment of a receiver is made to the Hong Kong High Court by way of summons or, if such appointment is contractual, in the manner set out in the relevant security document.  In the latter case, the receiver must accept his appointment.

Scheme of Arrangement

Once a proposal has been devised and presented to the shareholders and creditors, an application is made to the court to convene meetings of the respective classes of shareholders and creditors.

2.5        What notifications, meetings and publications are required after the company has been placed into each procedure?


Members Voluntary Liquidation

The special resolution and notice of appointment of liquidators must be filed with the Companies Registry in Hong Kong.

The notice of the passing of the resolution for winding-up and notice of appointment of the liquidator must also be advertised in the Hong Kong Gazette.

If the winding-up continues for more than one year, the liquidator must convene a General Meeting within 15 months after the commencement of the winding-up and on each succeeding year.  Before these meetings, the liquidator must account for his acts and dealings and the conduct of the winding-up during the preceding year.

Once the company’s affairs are fully wound up, the liquidator must:

(1)           prepare an account of the winding-up;

(2)           convene a General Meeting in order to lay and explain the account to the shareholders;

(3)           advertise the General Meeting in the Hong Kong Gazette at least one month before holding it; and

(4)           within 8 days of the General Meeting, send the Companies Registry in Hong Kong a copy of the account and a return recording the meeting and its date.

Creditors’ Voluntary Liquidation

The notice of the meeting of creditors must be sent by post to all creditors at the same time of sending the notice of the General Meeting.  The notice of the meeting of creditors must also be advertised in the Hong Kong Gazette and at least one English and one Chinese language newspaper circulating in Hong Kong.

The method of passing the shareholders’ resolution for winding-up, and the liquidator’s appointment is the same as that for a members’ voluntary liquidation.

A liquidator’s duties on notification, filing and calling of meetings follows the same requirements and procedures as that for a members’ voluntary liquidation except that a creditors’ meeting must be called whenever a meeting for shareholders is called.

Compulsory Liquidation

Once a winding-up order is made, the Official Receiver will: (a) serve sealed copies of the order on the company at its registered office and the Companies Registry in Hong Kong; (b) advertise the order in the Gazette and newspapers; and (c) notify other parties including the company’s banks and other known creditors.

Unless the court orders otherwise, a statement of affairs of the company must be delivered to the liquidator or provisional liquidator within 28 days of the winding-up order or the date of the appointment of the provisional liquidator.  The liquidators may require a statement of affairs from: (a) past/present directors or other officers of the company; (b) promoters of the company (i.e. persons who have taken part in the formation of the company); and/or (c) past/present employees (within one year).  The liquidator must then investigate the causes of failure of the company (if any) as well as the affairs of the company and make a report to the court.


If a receiver is appointed by a secured creditor, notice must be given to the Companies Registry in Hong Kong within seven days.  The company must also be informed of any appointment of a receiver by a holder of a floating charge over all or substantially all of the company’s property.  Within 14 days of receiving such notice, the company must provide a statement of affairs to the receiver who will then forward a copy of such statement together with his comments on the statement to the Companies Registry in Hong Kong, the Official Receiver of Hong Kong, or the court.

Scheme of Arrangement

After the court makes an order that the meetings of the respective classes of creditors and shareholders can be convened, notice of the date and time of these meetings will be advertised.  At these meetings: (a) a majority of 75 per cent in value; and (b) 50 per cent in number is required to approve the proposed scheme.  After approval, a petition for sanction must be issued and, at the hearing of such petition, the court will consider whether or not to sanction the scheme.  If final approval of the scheme is given by the court, a copy of the relevant court order must be filed with the Companies Registry in Hong Kong.

2.6        Are “pre-packaged” sales possible?

Unlike many jurisdictions, there are no statutory provisions on pre-packaged insolvencies in Hong Kong, or any arrangement whereby the business of the company is carried on under a new and separate special corporate vehicle.  That said, it is nevertheless not uncommon for companies to be restructured under a pre-packaged arrangement.


3.1        Are unsecured creditors free to enforce their rights in each procedure?


Unsecured creditors have limited rights in any liquidation as they are ranked the lowest amongst all creditors.  When a winding-up order has been made or a provisional liquidator has been appointed, creditors must seek leave from the court to continue with, or commence proceedings against the company.  An unsecured creditor would not be ranked higher than other creditors even if leave was granted in his favour to proceed or commence an action against the company in compulsory liquidation and the action is successful.


Unsecured creditors are free to take any legal proceedings against the company including petitioning for its liquidation during the appointment of a receiver.

Scheme of Arrangement

If a scheme of arrangement is sanctioned by the court, it becomes binding on all creditors and, as a result, the rights of creditors may change.  Until that point, however, unsecured creditors may take any enforcement actions available to them against the company.

3.2        Can secured creditors enforce their security in each procedure?


Secured creditors stand outside the liquidation as they are entitled to be paid out of the proceeds of their security ahead of all other claims.  That said, if the security created is a floating charge, the preferential debts (e.g. sums owing to employees and the government) must be paid before the floating charge holder.


Any secured creditor who did not appoint a receiver may take enforcement proceedings in respect of their security.

Scheme of Arrangement

See the answer to question 3.1 above.

3.3          Can creditors set off sums owed by them to the company against amounts owed by the company to them in each procedure?

The insolvency regime in Hong Kong does not provide for set off in schemes of arrangements or receiverships.  However, in a liquidation, set off applies where there have been mutual credits or mutual debts or other mutual dealings between the company and the creditor before a winding-up order is made.

Continuing the Business

4.1        Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders.


On the appointment of a liquidator in a members’ voluntary liquidation, all the powers of the directors cease, although a liquidator or the shareholders in a General Meeting can sanction their continuance.  Similarly, in a creditors’ voluntary liquidation, the powers of the directors will also cease.  However, the committee of inspection or, if there is no committee, the creditors, can sanction their continuance.  In contrast, appointments of directors, agents and employees are automatically terminated when the court makes a winding-up order under a compulsory winding-up.

The rights of the shareholders will also lapse, although it is worth noting that the shareholders may still vote in a General Meeting for the continuance of the directors’ powers in a members’ voluntary liquidation.


Given that a receiver is appointed to manage the company’s assets, the directors’ managing powers and the shareholders’ decision-making powers are generally suspended.

Scheme of Arrangement

Scheme administrators (usually insolvency practitioners) will implement the provisions of the scheme.  There is no prohibition on the former management of a company to be appointed as scheme administrators, although this is rare.  Most schemes promulgated will contain provisions relating to directors and shareholders including any change in control of the company that may occur as a result of the acceptance of the scheme.

4.2        How does the company finance these procedures?

This area is complex and is beyond the scope of a general introduction.

4.3        What is the effect of each procedure on employees?


On a compulsory winding-up, all employment contracts will be automatically terminated, unless the court orders otherwise.  On the other hand, the commencement of a voluntary liquidation does not automatically terminate the service contracts of employees.

In the event an employee’s contract is terminated, that employee becomes a preferential creditor of the company in respect of their unpaid wages, severance payments, etc.  They could expect to receive ex gratia payments out of the Hong Kong Protection of Wages on Insolvency Fund if the company which employed them was put into liquidation.


The appointment of a receiver does not automatically terminate any contracts of the employees.

Scheme of Arrangement

A scheme of arrangement has no effect on employees.

4.4        What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure?


See the answer to question 1.2 above in respect of avoidance of disposition of property after presentation of petition and avoidance of transfers after commencement of a voluntary winding-up.  As explained in question 1.2 above, the liquidator also has the power to avoid or set aside certain transactions to “claw back” assets of the company in order to increase the funds available to distribute to creditors.


The appointment of a receiver does not automatically terminate any of the company’s contracts.

Scheme of Arrangement

A scheme of arrangement has no effect on the contracts of a company.


5.1        Broadly, how do creditors claim amounts owed to them in each procedure?


In a compulsory winding-up, every creditor must prove his debt, unless the court directs that any creditor or class of creditor shall be admitted without proof.  This involves submitting a standard proof of debt (i.e. a document by which a creditor seeks to establish his claim against a company in liquidation).  Whilst a formal proof of debt is not required in a creditors’ voluntary liquidation, the liquidator will usually invite the creditors to submit their claims in writing before dividends are declared.

The liquidator must then adjudicate the creditor’s claims and consider whether they are valid.  If the liquidator is not satisfied that a creditor’s debt has been proved, he may reject the claim.  Creditors whose claims are rejected have the right to appeal to the court.


When a receiver is appointed by a secured creditor under a charge document, he/she must first distribute the sale proceeds to the secured creditors in accordance with the order of payment in a liquidation, even if they rank ahead of the secured creditor who appointed him.  However, a receiver does not owe any duties to subsequent charge holders or unsecured creditors, except preferential creditors (who rank ahead of floating charge holders).  The only realistic option available to the unsecured creditor for payment of the amounts due to them is to make application to the court for a liquidator to be appointed.

Scheme of Arrangement

After the scheme of arrangement is sanctioned by the court, it will become binding on all classes of creditors.  The procedure by which creditors could claim for the amounts owed to them will be covered in the scheme.

5.2        What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status?


The order of payment in a liquidation is generally as follows:

(1)           Expenses of the winding-up, including the liquidator’s remuneration.  The order of priority of the costs in a winding-up is set out in rule 179 of the Companies (Winding-Up) Rules (Cap. 32H).

(2)           Preferential debts as defined by section 265 of the Ordinance.

(3)           Any preferential charge on distrained goods.

(4)           The company’s general creditors.

(5)           Shareholders.


See answer to question 5.1 above.

Scheme of Arrangement

The ranking of claims will be as agreed and set out in the scheme.

5.3        Are tax liabilities incurred during each procedure?

If the company continues to trade or sells its assets, it would be subject to tax on its profits.

Ending the Formal Procedure

6.1        What happens at the end of each procedure?


In a voluntary liquidation, the company will be permanently dissolved three months after the liquidator files the final account, and return with the Companies Registry in Hong Kong following the final meeting of creditors.

In a compulsory winding-up, the liquidator can apply to the court for an order to permanently dissolve the company once the affairs of the company have been completely wound up.


Once all the applicable secured creditors and preferential creditors (who rank ahead of the floating charge holders) are paid from the realisation of the secured assets, the receivers will be discharged and any surplus funds referred to the company.  The company may be referred to the company directors or, if liquidators have been appointed, it will be wound up by the liquidators.

Scheme of Arrangement

Once a scheme has been sanctioned by the court, the company will continue to operate in accordance with the terms of such scheme.


7.1        Is a formal statutory procedure available to achieve a restructuring of the company’s debts in Hong Kong and, if so, to what extent is it supervised by the court?

There are no formal procedures available to achieve a restructuring of the company’s debts in Hong Kong.  The only exception is a scheme of arrangement.  Most restructurings take place by way of informal workouts, compositions and arrangements essentially made by agreement of the parties concerned.

7.2        If such a procedure is available, is a debt for equity swap possible and how are existing shareholders dealt with?

Despite there being no statutory corporate rescue regimes in Hong Kong, a debt for equity swap arrangement may form part of a restructuring of a company.  This will generally involve the dilution or elimination of existing shareholders’ equity in the company.

7.3        Is a moratorium available as part of the restructuring process?

The fact that a company is in the process of putting in place a scheme of arrangement does not prevent an individual creditor from suing the company, seizing the company’s property or presenting a winding-up petition.  Some (often smaller) creditors will deliberately take such actions once they know: (a) they are not getting a better deal from the proposed scheme of arrangement or even paid off in full; and (b) that major creditors are in favour of the scheme of arrangement.

7.4        Can dissenting creditors be crammed down?

The only way of cramming down dissenting creditors is in a scheme of arrangement.  Therefore, if creditors are unable to reach an agreement on any of the informal methods, a scheme of arrangement may be necessary to reorganise a debtor.

7.5        Is consent needed from other stakeholders for a restructuring?

Restructuring arrangements often have to be agreed by, and made binding on, all creditors, otherwise a dissenting creditor may frustrate the rescue plan and petition for a winding-up.


8.1        What would be the approach in Hong Kong to recognising a procedure started in another jurisdiction?

Whilst the United Nations Commission on International Trade Law (UNCITRAL) has adopted the Model Law on Cross-Border Insolvency, there are no statutory provisions in Hong Kong to implement the UNCITRAL Model Law.

Notwithstanding this, a foreign liquidator may be able to protect assets of a foreign debtor in Hong Kong where the foreign winding-up order is extraterritorial (i.e. extends to assets situated in Hong Kong) and is fair (i.e. does not depart from the paripassu rule for treating all creditors equally).  In order to achieve this, the foreign liquidator may commence proceedings in Hong Kong seeking a declaration regarding the effect of the foreign insolvency proceedings and to recover debts.

Alternatively, a foreign liquidator may initiate a new liquidation in Hong Kong against the foreign company.  However, the court will only exercise its discretion to make a winding-up order against a foreign company if, amongst other requirements, there is sufficient connection within the jurisdiction of Hong Kong.

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