Restructuring and insolvency law in Hong Kong

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

Statutory processes available to insolvent companies in Hong Kong are set out in:

  • Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“Cap.32”);
  • Companies (Winding Up) Rules (Cap. 32H);
  • Companies Ordinance (Cap. 622).

Statutory processes for bankruptcy of individuals in Hong Kong are set out in the Bankruptcy Ordinance (Cap. 6). Some provisions of the Bankruptcy Ordinance are incorporated by reference to apply to insolvency of companies.

2. How are insolvency proceedings or restructuring proceedings initiated?

With respect to insolvent companies, insolvency and restructuring proceedings may be initiated voluntarily by the company, or compulsorily by the court. Below is a summary of the various insolvency processes available in Hong Kong:

Formal Insolvency Processes:

  • Creditor’s voluntary liquidation (CVL):
    CVL is a voluntary out-of-court process available to insolvent companies where directors are not able or willing to make the solvency declaration. Usually, a CVL is initiated by the directors, who will call a shareholders meeting. At the shareholders meeting, the shareholders will pass a special resolution to wind up the company and nominate liquidators. Within two weeks of the shareholders meeting, the company must call a creditors’ meeting, which can nominate its own liquidators and establish a committee of inspection to supervise the liquidation. There is no statutory moratorium in a CVL, but the liquidator or any contributory or creditor may apply to the court for directions or other orders. The liquidator will realise all of the company’s assets and distribute the proceeds to creditors in accordance with the provisions of the Cap.32. 
  • Compulsory liquidation:
    Unlike CVL, compulsory liquidation is a court process. It is commenced by issuing a petition against the company. The Court will hear the petition and consider whether to make an order for compulsory winding up of the company. Typically, the grounds of the petition will be on the basis of the company’s inability to pay its debts under s.177 of Cap 32. However, there are other non-insolvency grounds, such as ‘just and equitable’ winding up. 

Restructuring:

  • Consensual workout: This is an out-of-court process consensual process, involving contractual arrangements between a debtor company and its creditors. Workout plans may include amendments and extension of the company’s debts, or restructuring its capital structure.  The creditors’ objective in a consensual workout would be to secure a better recovery than if the company were to be wound up.
  • Scheme of Arrangement: This is a court-sanctioned compromise arrangement between a company and its creditors (whether all or a class of them). A successful scheme will effecively bind such creditors, even if they do not all consent to the arrangement. Briefly, the scheme procedure involves three steps: 
    • Initial court hearing: Court decides whether to grant permission for the scheme proponent to convene meeting(s) of creditors. 
    • Creditors meeting: Meeting(s) of the company’s creditors (or classes of its creditors) are convened for a vote on the proposed scheme. Under Hong Kong law, over 50% in number, representing at least 75% in value, of creditors present and voting at a creditors’ meeting must vote in favour of the proposed scheme for it to be approved. If there are multiple classes of creditors whose debts are to be compromised under the scheme, all classes must approve the scheme. 
    • Final court hearing: Following the creditors’ approval of the scheme, the scheme is submitted to Court for final approval. The focus of this second hearing will be on procedural compliance and fairness. 

Provisional Liquidation:

  • Consensual workouts and Schemes do not create any moratorium on creditors’ actions. In the past, in order to take advantage of statutory moratorium, creditors’ schemes were sometimes coupled with provisional liquidation. The appointment of a provisional liquidator triggers an automatic stay on legal proceedings against the company (however this does not affect secured creditors enforcing their security).
  • However, in Re Legend International Resorts Ltd [2006] 2 HKLRD 192, the Court held that provisional liquidators cannot be appointed for the sole purpose of restructuring (although it is worth noting that foreign soft-touch provisional liquidation may be recognised in Hong Kong).
  • The court may appoint a provisional liquidator if it is satisfied that there is a good prima facie case for the winding-up order and that the company’s assets are in jeopardy. The provisional liquidator’s main responsibility is to protect the company’s assets pending a winding-up order. 

Other processes:

  • Appointment of receiver: Secured creditors usually appoint receivers under the contractual terms of a debenture (usually following an event of default) without involving the Court. The main responsibility of receivers appointed under a debenture is to take over control of the company’s assets over which security is held. Their duties are owed to the appointing secured creditor (not the company’s general creditors). Receivers may also be appointed by the Court, pursuant to the Rules of the High Court of Hong Kong (Cap. 4A). 

A company is deemed insolvent if it is unable to pay its debts. 

Under section 178(1) of Cap.32, a company is deemed to be unable to pay its debts if: 

  • it fails to pay or secure a sum equal to or exceeding HKD 10,000 for a period of three weeks after receiving a statutory demand; 
  • it fails to satisfy an execution issued on a court judgment or order in favour of a creditor; or 
  • it is proved to the satisfaction of the court that the company is unable to pay its debts, taking into account the prospective and contingent liabilities of the company.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

See Q2 above. 

5. Are there several types of creditors and what is the effect of a difference?

The principal categories of creditors are: secured, preferential unsecured, floating charge holders, ordinary unsecured. 

Where distributions are made in a liquidation, creditors are paid out in the following order of priority:

  1. Secured creditors: Secured creditors are generally entitled to be paid out of the proceeds of their security. If the security is insufficient to cover the entire secured debt, the balance that remains unpaid after realisation of the security will be treated as ordinary unsecured debt. 
  2. Preferential creditors: Statutory claims under s.265 of Cap.32 (e.g. preferential debts to employees within statutory limits, government and statutory debts, such as rates and taxes, etc.) are paid after secured creditors. 
  3. Floating charge holders: Ranking among different floating changes over the same assets will rank in order of date of creation. 
  4. Ordinary unsecured creditors: Ranked the lowest among all creditors. 
  5. Shareholders: The remaining balance (if any) will be distributed to shareholders, subject to the articles of associations of the company. 

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

Directors owe duties to the company, which include the duty to act honestly and in good faith in the interests of the company as a whole. When a company is insolvent, directors also owe duty to the company’s creditors. Directors of insolvent companies who allow the company to continue trading while insolvent may be guilty of fraudulent trading (s.275 of Cap.32).

In addition, if the company has Hong Kong employees and fails to pay wages owed to its Hong Kong employees for over seven days after the payment due date, this could constitute a criminal offence for the directors under the Hong Kong Employment Ordinance. The maximum penalty on conviction is a fine of HKD 350,000 and imprisonment for three years.

In these circumstances, entry into a formal insolvency process is often the only way for directors to avoid exposure to risks of fraudulent trading and other directors‘ breaches of duty. Simply resigning from the board of a distressed company will not absolve directors of possible liability. 

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

Generally, Hong Kong law does not require action by representative bodies specific to restructurings and insolvency.

Not in a formal sense. In practical terms, in circumstances where, for example, employee engagement is essential to the prospects of a restructuring proposal, communication or consultation with employee representatives (if appointed) may be desirable. 

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders may also face claw-back risks for shares redeemed or bought back within a year before the commencement of a winding-up (s.170A Cap.32), any unlawful dividends received while the company was insolvent, and any other benefits or property received from the company as part of a transaction at an undervalue or a fraudulent conveyance. Under s.182 of Cap.32, once a winding-up petition is filed, any subsequent transfer of shares in the company or alteration in the status of its members is void, unless the court otherwise orders.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

See Q2 and Q11. Shareholders rank at the bottom of the distribution waterfall in a liquidation, and have very limited influence in an insolvency.   

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

There are two processes in Hong Kong for solvent dissolution of companies, as set out below. In both processes, the company’s directors must make a solvency declaration. As such, an insolvent company cannot use any of the following solvent dissolution processes.

  • Deregistration: Under s.750 of Cap.622, if certain conditions are satisfied, a dormant solvent company may apply to be dissolved by deregistration. No liquidators are appointed in this process. 
  • Member’s voluntary liquidation (MVL): This applies for solvent companies where the directors are willing to make a solvency declaration that the company will be able to pay its debts in full within 12 months after commencement of the winding-up. A director who signs the solvency certificate without reasonable grounds is liable for a fine and/or imprisonment The liquidation commences on the date of passing of the winding-up resolution by the shareholders. 

See Q2 re Scheme of Arrangement. A successful Scheme of Arrangement can be useful when there are dissenting classes of creditors.

13. What is the average success rate after completed restructuring / insolvency proceedings?

Statistics published by the Hong Kong Official Receiver Office are available at the below hyperlinks:

  1. Compulsory Winding-up Petitions presented and Winding-up Orders made for the period January 2002 to March 2022: Statistics on Compulsory Winding-up and Bankruptcy Statistics Search - Official Receiver's Office (oro.gov.hk)
  2. Number of Insolvency Cases Released from 1998 to March 2022: Number of Insolvency Cases Released - Official Receiver's Office (oro.gov.hk)
  3. Compulsory Winding-up of Hong Kong and Non-Hong Kong Companies in 2020 and 2021: Compulsory Winding-up of Hong Kong and Non-Hong Kong Companies - Official Receiver's Office (oro.gov.hk)
Portrait ofKingsley Ong
Kingsley Ong
Partner
Hong Kong (CMS CMNO - Lau, Horton & Wise LLP)
Portrait ofTony Lau
Tony Lau
Associate
Hong Kong (CMS CMNO - Lau, Horton & Wise LLP)