14 February 2014
As we pointed out in our Legal Update of 30 January 2014 ("New Companies Ordinance – Old Winding Up and Insolvency Regime"), the new Companies Ordinance for Hong Kong (Chapter 622) is scheduled to take effect from 3 March 2014 but it will not cover the winding-up and insolvency regime. Provisions on these aspects will remain in the existing Companies Ordinance (Chapter 32) – to be renamed as the Companies (Winding up and Miscellaneous Provisions) Ordinance – and the government is proposing various reforms discussed in a consultation document1 issued in April 2013.
One of the proposed reforms relates to section 228A of the existing Companies Ordinance. As is clear from the heading to that section, it sets out a "special procedure" for companies to be wound up voluntarily. In short, if the directors, or a majority of them, have formed the opinion that the company cannot by reason of its liabilities continue its business, they may put the company into liquidation by the passage of a board resolution covering certain matters set out in section 228A(1) and the delivery of a statement in a prescribed form to the Registrar of Companies.
The peculiarity of this procedure lies in the fact that it effectively allows the directors, who are agents of the company, to put it into liquidation in the absence of a members' resolution. Given the potential for abuse, the court has always taken a strict view of section 228A. The observation of Deputy High Court Judge To, as his Lordship then was, in SEG Investment Ltd v. SEG International Securities (HK) Ltd2 is typical:
"… the special procedure for winding-up under section 228A is not an alternative procedure to winding-up. It is not to be invoked at will or arbitrarily. It is not a choice of convenience. It is an escape when any other modes of winding-up under the Companies Ordinance is impracticable if not impossible."3
By a Judgment dated 8 November 2013 in the case Ho Man Kit John v. Fung Chu Kwong4, the Honourable Mr. Justice Harris has demonstrated that the court will not hesitate to stay a winding-up wrongly commenced under section 228A, where a members' meeting could have been convened to decide whether to wind up the company, even if the evidence suggests the members would have resolved to commence liquidation in any event.
The Judgment is a salutary reminder that companies and insolvency practitioners should not invoke section 228A lightly if another way to commence a liquidation is viable. The stance taken by his Lordship is in line with earlier authorities on this section; the court's attitude is firm and clear. Insolvency practitioners may wish to note the uncertainty with regard to their entitlement to receive remuneration for the work carried out before a winding-up is held to be improperly commenced and is stayed in circumstances similar to those in the Ho v. Fung case.
Question 2 in the government's consultation document is whether the special procedure under section 228A should be maintained at all (with amendments to prevent abuse) or repealed altogether. We believe "watch this space" is the best concluding remark for this Legal Update.
1 Improvement of Corporate Insolvency Law Legislative Proposal 2 HCMP 4211 of 2003, 14 October 2005
3 At paragraph 19 of the Judgment; cited in footnote 17 of the Government's Consultation Document 4 HCCW 107 of 2012