Voluntary Winding-up of a Company
A limited company, which is formed and registered under the Companies Ordinance, can be liquidated. The term “liquidation” bears a similar meaning of “winding-up” (or “wound-up”). It generally means that all the assets of the company would be realised (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end.
A company may be wound up voluntarily. Voluntary winding-up consists of:
members’ (shareholders’) voluntary winding-up; and
creditors’ voluntary winding-up.
No matter whether the company is in financial difficulty or not, it may hold a general meeting of its shareholders to bring itself to an end by winding-up procedures. A special resolution that the company be wound up voluntarily may be passed. No winding-up order from the Court is necessary.
The voluntary winding-up procedures include:-
A special resolution for voluntary winding-up to be passed by the shareholders.
A notice of the resolution has to be advertised in the Government Gazette within 14 days of the passing of the resolution.
The company has to call a meeting of creditors. The notice for the meeting has to be advertised in the Government Gazette and in Chinese and English newspapers.
The directors of the company have to make a full statement of the position of the company’s affairs, together with a list of creditors and the estimated amount of their claims, to be laid before the meeting. Resolution (concerning the details of the winding-up matter or process) may be passed at the meeting.
During the meeting, a liquidator may be nominated and appointed. Further, an inspection committee may be appointed to supervise the exercise of power by the liquidator.
The liquidator will deal with the affairs of the company. The liquidator will call further meetings of the company or creditors each year to account for his acts concerning the winding-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.
If no special resolution can be passed at a general meeting of shareholders, the board of directors may nevertheless pass a resolution that the company be wound up. The relevant resolution shall include the following contents:
The company cannot because of its liabilities continue its business;
The directors consider it necessary that the company be wound up;
Why it is not reasonably practical to use other provisions of the Companies (Winding Up and Miscellaneous Provisions) Ordinance to wind up the company; and
A meeting of the company and of its creditors will be summoned and held on a date not later than 28 days after the delivery of a declaration to the Registrar of Companies.
A declaration recording such resolution has to be signed by a director and be delivered to the Registrar of Companies within seven days of the date of the resolution. Meetings of the company and of the creditors have to be summoned within 28 days of the delivery of such resolution to the Registrar of Companies. A provisional liquidator also has to be appointed upon the delivery of the declaration.
Effects of Voluntary Winding-up
Upon the commencement of the voluntary winding-up, the company will cease to carry on business except that which may be required for the benefit of winding-up smoothly. The legal status and powers of the company will continue until it is dissolved.
Furthermore, any transfer of shares (except a transfer made by the liquidator or made with his/her approval), and any alteration to the status of the members of the company which is made after the commencement of a voluntary winding-up, will be void.
Recovering Unpaid Wages
As an employee you are considered to be a "preferential" creditor of the company. If a company has just been would-up, the employee is entitled to receive payments (in respect of wages, wages in lieu of notice and severance payments that fall under the statutory limits) out of the employer's assets in preference (with priority) to most other creditors.
For example, an employee (as a preferential creditor) can recover the arrears of wages up to a maximum of $8,000 in respect of services rendered to his/her employer.
Any arrears of wages, wages in lieu of notice, or severance payments in excess of the statutory limits are considered “non-preferential debts”, and the employee will be treated as an ordinary creditor with respect to any amounts claimed in excess of the statutory limits .
However, whether an employee will be paid even the amounts within the statutory limits will depend on the company's assets available. He/She may consider applying to the Labour Department for gratuitous payment from the Protection of Wages on Insolvency Fund .
Creditor Recovering Debt
A creditor has to prove that the company owes him/her the debt by completing a Proof of Debt Form (Form 63A). He/She should submit the form to the provisional liquidator or liquidator, together with documentary evidence, if any, after the company has been would up. A filing fee of $35 is required if the debt exceeds $250 or it is not an employee’s claim. Also, he/she may attend or even summon a general meeting of creditors so that he/she can participate in decisions concerning the distribution of the remaining property of the company.
Unless the debt owed to him/her by the company is secured and the value of the assets covered by the security is sufficient to repay the debt, he/she is not guaranteed that he/she can recover all the money.
Unsecured creditors may recover money only if there are funds remained in the assets of the company after the realizations of all the company’s assets (i.e. all the assets were sold and converted to cash) and the deduction of all fees and expenses incurred in the winding-up process. Usually the unsecured creditors could not recover the full amount and they will be paid in proportion to the size of their debts.
Consequences of Winding-up on Shareholders or Directors of Company
After the granting of winding-up order, the shareholders' liabilities are limited to the value of shares held by them (limited by shares). In this case, there will be no liability further than the value of any shares in the relevant shareholders' names in which they have not yet paid for at the time the company is wound up. Another case, which is not common in the commercial field, is that the liabilities of shareholders are limited to the amount in which they have agreed to contribute to the company's assets if the company is being wound-up (limited by guarantee).
Directors will not be subject to personal liability unless they have obtained advantages from the company unlawfully or in breach of the duties as a director or they have given personal guarantees to the creditors (which is not uncommon in particular for bank loans). The powers of all directors of the company will cease after the making of a winding-up order.
Duties (as a Director of Company) in relation to Winding-up Proceedings
On the appointment of a provisional liquidator, or the making of the winding-up order, the powers of the directors of the company will cease.
The directors are legally required to:-
deliver to the provisional liquidator or liquidator the company’s assets, accounts’ books and records, and seal;
attend the office of the provisional liquidator or liquidator for interviews to provide information about the company’s assets and dealings;
submit a sworn statement of affairs of the company (similar to a balance sheet) within 28 days after the appointment of a provisional liquidator or the making of the winding-up order;
attend meetings of creditors and contributories when notified to do so by the provisional liquidators or liquidators;
continue to co-operate with the provisional liquidator or liquidator until the liquidation is concluded; and
notify the provisional liquidator or liquidator of any change in address.
Company’s Assets Transferred Before Winding-up
Any transfers or dispositions of assets made by a company within 2 years before the commencement of winding up can be set aside (made invalid) if the company does not receive full value for the transfer or disposition. This is called a transaction undervalue. If the transfer or disposition is made more than 2 years and within 5 years of the commencement of winding up, it can still be set aside if the company was insolvent or had become insolvent after the transfer or disposition.
The situation is the same if a company sold the company’s assets (e.g. a piece of land) to a third party undervalue within 2 years before the commencement of winding up.
Generally, in case of a voluntary winding up, the date of commencement of winding up is the date of the resolution passed for winding up the company.
Payment to Creditors Before Winding-up Proceedings
If payment is arranged to one of the creditors immediately before the commencement of winding-up proceedings, even though the person who received payment is your company's creditor, the transaction is still invalid if it is made within 6 months of the commencement of the winding up and with the intention to prefer a particular creditor. It is called a preferential payment. If the person who received the assets is an “associate” of a company (e.g. a director), the relevant period is 2 years prior to the commencement of winding-up.
For example, if your company owes you (as a director or shareholder) or your wife or your relatives money and arrange payment immediately before the commencement of winding up, it would be a preferential payment as there is a clear intention that the company will “prefer” to repay these creditors than the others.
The reason behind is that your company's assets should be realized and all the relevant proceeds should be used to: i) settle all the expenses incurred in the winding-up proceedings; and ii) share with all the creditors but not only the one that you “prefer” to pay for. In this case, the creditor (who received your money) may be ordered by the Court to refund the money back to your company.
Priority of Distribution of Assets
Generally speaking, funds realized during the process of the wind up will be used in the following priority: -
To pay for the costs and expenses of the realization;
To pay for the costs and expenses of the petition for winding up;
To pay for the costs and expenses of the liquidator; and
If there are funds remaining, it will be used for distribution of dividends to the creditors on a pro rata basis with the following priority:
Preferential creditors: For example, tax owed to the government and wages owed to employees of the company; and
Conclusion of Winding-up
The liquidator can apply to the Court for the release of the duties once the followings have been accomplished:
- all the assets of the company have been realized (i.e. all assets have been sold and converted to cash); - investigations related to the winding-up proceedings are completed; and - a final dividend (if any) has been paid to the creditors to settle the debts
The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator.
After obtaining the order for release from the court, the liquidator will file a “Certificate of Release of Liquidator” with the Registrar of Companies. The company shall be dissolved two years after the filing of the “Certificate of Release of Liquidator”.
Due to the complexity of the above procedures, you are advised to consult a qualified professional. Contact us today.