M4 - Winding up

Statutory Demand and Its Legal Implications

  • A statutory demand is a formal written request from a creditor for payment of a debt.

  • It is a precursor to winding up proceedings

  • Under s177(1)(d) of the CWMPO, a company can be wound up if it cannot pay its debts.

  • Legal Threshold:

    • Section 178 of the CWMPO states that a company is deemed unable to pay its debts if it fails to pay a sum exceeding HK\$10,000 within three weeks of being served with a statutory demand.

    • If a debt exceeds this threshold, the demand is actionable.

  • Consequences of Ignoring a Statutory Demand:

    • If a company does not pay or respond within three weeks, the creditor can petition the court for compulsory winding up, alleging insolvency.

    • This can lead to liquidation and the involuntary end of the company's operations.

  • Disputing the Debt:

    • The court may dismiss the petition if there are reasonable grounds to dispute the debt (e.g., non-delivery of goods).

    • Example: Re Globalink Technology Development Ltd [2008] HKEC 277.

  • Recommendations:

    1. Pay the debt within the three-week period if funds are available.

    2. Negotiate with the creditor for an extension or settlement.

    3. Failure to act risks a winding up order, which would be detrimental to the company.

Role and Duties of the Liquidator

  • Who is the Liquidator?

    • In a compulsory winding up, the liquidator is an independent professional (often an accountant or lawyer) appointed to manage the process

    • Initially, the Official Receiver (a government official) acts as the provisional liquidator upon the petition’s presentation (s192 and s194(1)(a) of the CWMPO).

    • Subsequently, the court, creditors, or contributories (shareholders) may appoint a permanent liquidator (s194(1)(c)-(d)).

  • Replacement of Directors:

    • Upon appointment, the liquidator assumes control of the company’s assets and affairs, and the directors’ powers cease.

    • This shift ensures an impartial winding up process.

  • Duties of the Liquidator:

    • Realizing Assets: Selling the company’s assets to convert them into cash.

    • Distributing Proceeds: Paying creditors in the statutory order of priority and, if a surplus remains, distributing it to shareholders.

    • Acting Impartially: Managing the process in the best interests of all creditors and shareholders, not to rescue the company but to facilitate its dissolution (s158).

  • The liquidator is an external expert tasked with winding up the company fairly.

  • Cooperation with the liquidator is essential for a smooth process.

Supervision of the Liquidator in Compulsory Winding Up

  • In a compulsory winding up, the liquidator is subject to multiple layers of supervision to ensure fairness and transparency.

  • Supervisory Bodies:

    • The Court:

      • Has ultimate authority, issuing the winding up order (s180(1)) and overseeing the process.

      • Can give directions or resolve disputes (s158).

    • Official Receiver:

      • A government official who supervises the initial stages and may remain involved if no other liquidator is appointed (s194(1)(a)).

      • Ensures compliance with legal requirements.

    • Committee of Inspection:

      • Comprises creditors and contributories (3-7 members, s206(3)).

      • Represents stakeholders’ interests and supervises the liquidator’s actions (s11.2.2, Part 5 Division 2 Subdivision 7 of the CWMPO).

      • Facilitates the liquidator’s work and may approve certain decisions (e.g., asset sales, s246).

  • These mechanisms ensure the winding up is conducted equitably, protecting all stakeholders’ interests.

Procedure for Distributing Assets in Liquidation

  • The distribution of assets in a compulsory winding up follows a strict statutory procedure.

  • Steps:

    • Realization of Assets: The liquidator collects and sells the company’s assets to generate funds.

    • Proof of Debts: Creditors submit affidavits verifying their debts, supported by documentation. The liquidator admits or rejects these claims (ss263-265).

  • Order of Priority :

    1. Costs and Expenses:

      • Winding up costs, including the liquidator’s remuneration, are paid first (r179 Companies (Winding Up) Rules).

    2. Preferential Creditors:

      • Employees: Wages, severance, etc. (s265, Category A).

      • Government: Taxes owed in the prior 12 months (s265, Category B).

      • Bank Depositors: Up to HK\$100,000 if applicable (s265, Category C).

      • Insurance Claims: If relevant (s265, Category D).

    3. Floating Charge Holders: Creditors with floating charges over assets.

    4. Unsecured Creditors: General creditors (e.g., suppliers).

    5. Shareholders: Any surplus after all debts are paid is distributed per the company’s articles.

  • Dissolution:

    • Once assets are distributed, the liquidator applies for release (s205), and the company is dissolved, either by court order (s227) or automatically after two years (s226A).

  • The liquidator follows a legally mandated order to distribute assets, prioritizing costs, preferential creditors, and then others.

  • Shareholders only receive funds if a surplus remains, which is unlikely in insolvency. The process ensures that all stakeholders are considered and that the winding-up is handled in an open and responsible way.