THE LAW REFORM COMMISSION

Chapter 5 Petition for winding-up and effects thereof and Consequences Of Winding-Up Order

Section 182 Avoidance of dispositions of property, &c. after commencement of winding-up

Right of third parties to appear at the hearing of an application for appointment of a provisional liquidator

Section 195 Provisions where person other than Official Receiver is appointed liquidator

Section 206 Meetings of creditors and contributories to determine whether committee of inspection shall be appointed

Section 209A Power of court to order winding-up to be conducted as creditors’ voluntary winding-up

Section 212 Payment of debts due by contributory to company and extent to which set-off allowed

Section 228A Special procedure for voluntary winding-up in case of inability to continue business

Section 233 Statutory declaration of solvency in case of proposal to wind-up voluntarily

Section 237 Power of liquidator to accept shares, &c. as consideration for sale of property of company

Section 237A Duty of liquidator to call creditors’ meeting in case of insolvency

Section 247 Duty of liquidator to call meetings of company and of creditors at end of each year

Section 264 Application of bankruptcy rules in winding-up of insolvent companies

Exceptions to principle only where considerations of maintenance of public order and the prevention of systemic failure are involved

Court orders in respect of unfair preferences and transactions at an undervalue

Chapter 18 Supplement Provisions as to Winding-up and Supplementary Powers of Court

Section 290A Registrar may strike off company for failure to forward annual returns

Combining Part III (Registration of Charges) and Part VI (Receivers and Managers)

Information to be provided by receivers to creditors and other interested parties

Chapter 22 Conversion of a Creditors' Voluntary Winding-Up into a Compulsory Winding-Up

Rule 23A Copies of documents filed in proceedings to be served on Official Receiver

Rule 183 Payment of undistributed and unclaimed money into companies liquidation account

Obligation on directors to sign an annual statement as to the company's affairs

Chapter 25 Hong Kong Government Gazette Advertising of insolvency related issues

“Official Liquidators” to act in all forms of liquidation, receivership, provisional supervision and bankruptcy

“Registered Liquidators” to act in members’ voluntary winding-up, creditors’ voluntary winding-up and individual voluntary arrangements in bankruptcy

Chapter 31 A separate Insolvency Ordinance to include all forms of Winding-Up, Receivership, Provisional Supervision and Bankruptcy

Annex 2 Liquidation - Comparison of the payment percentage and amount under the present provisions and if all creditors were treated equally

1. The Law Reform Commission of Hong Kong was established by the Governor-in-Council in January 1980. The Commission reports on such matters as the Secretary for Justice or the Chief Justice refers to it.

2. On 14th September 1990, the then Attorney General and the Chief Justice referred the following topic to the Commission:

“(1) To review the law and practice relating to the insolvency of both individuals and bodies corporate in Hong Kong, and in particular:

(a) the provisions of the Bankruptcy Ordinance, Chapter 6, in their application both to business and non-business debtors; and

taking into account existing and proposed legislation in other jurisdictions, in particular the UK Insolvency Act 1986 and Chapter 11 of the US Bankruptcy Code, and to consider what reforms are necessary or desirable.

(a) such changes in the Bankruptcy Ordinance as are considered to be required for simplifying bankruptcy procedures, and

(b) any other aspects of insolvency law or practice which the Commission considers should be introduced in advance of the Commission’s final report.”

3. A sub-committee was appointed by the then Attorney General to consider the reference and report to the Commission. The sub-committee on insolvency is chaired by Professor Edward L G. Tyler, formerly a Judge of the District Court and Professor and Head of the Department of Professional Legal Education at the University of Hong Kong, and now Acting Dean of the Law Faculty and Acting Head of the Department of Law at the City University of Hong Kong. Professor Tyler was a member of the Law Reform Commission from 4th July 1987 to 11th August 1993. The other members of the sub-committee are:

4. The terms of reference provided that the Commission could make an interim report on such other aspects of insolvency law or practice which the Commission considered should be introduced in advance of the final report on insolvency. The sub-committee’s intention had been to make a single interim report on bankruptcy to the Commission followed by a final report on all other aspects of personal and corporate insolvency. The Commission’s Report on Bankruptcy was published in May 1995.

5. Following completion of its report on bankruptcy to the Commission, the sub-committee considered that, as provided for under paragraph 2(b) of the terms of reference, it would be appropriate to make a second interim report to the Commission on the issue of making provision for a procedure to facilitate the rescue of ailing companies and to impose liability on directors and senior management for trading while a company was insolvent. The sub-committee’s report to the Commission formed the basis of the Commission’s Report on Corporate Rescue and Insolvent Trading which was published in October 1996.

The consultation process

6. The winding-up provisions of the Companies Ordinance, when taken in conjunction with the provisions on receivership and the winding-up of unregistered companies under Part X of the Companies Ordinance, account for about 165 of the 365 sections in the Ordinance. These sections are supported by subsidiary legislation in the form of the Companies (Winding-up) Rules.

7. We considered that in order for the Consultation Paper to be as comprehensive as possible it would be necessary to seek preliminary submissions from interested bodies on the provisions before we published the Paper. The responses that we received have all been considered and have been reflected in the Consultation Paper.

8. The primary purpose of the Consultation Paper is to solicit views on our, that is, the sub-committee’s, proposals. We would welcome submissions on aspects of the winding-up provisions that we have not referred to. In this context, we note that we have not referred to every section in the Ordinance which relates to winding-up. Where a section is not mentioned it is because we have no comment to make on it.

9. The Consultation Paper will be sent to about 330 consultees and will also be made available free of charge to other interested parties. There will be a consultation period of three months after which all submissions made will be considered by the sub-committee.

10. The sub-committee will then submit its final report to the Law Reform Commission. The Commission will consider the sub-committee’s report before issuing its report.

11. The Consultation Paper follows the Commission’s policy of naming those who make submissions unless confidentiality is requested. None of those who made submissions requested confidentiality. A list of submissions is annexed.^¹ We would like to express our gratitude to all those who made submissions.

Abbreviations

12. For the sake of brevity, references to “he” mean “he or she” unless the context implies otherwise. Abbreviated forms of the following reports and legislation have been used:

“The Cork Report” : The Report of the United Kingdom Committee on Insolvency Law and Practice under the Chairmanship of Sir Kenneth Cork.^¹

“The Harmer Report” : General Insolvency Inquiry: a Report of the Law Reform Commission of Australia under the Chairmanship of Mr Ron Harmer.^²

“The Insolvency Act” : This refers to the United Kingdom Insolvency Act 1986.

“The Insolvency Rules” : This refers to the United Kingdom Insolvency Rules 1986.

13. One of the most important matters under consideration in the Consultation Paper is our proposals on cross-border insolvency, an area of great complexity.^³ We must express our gratitude to Mr Charles Booth, Associate Professor in the Department of Professional Legal Education in the University of Hong Kong and Mr Philip Smart, Associate Professor in the Department of Law in the University of Hong Kong, who addressed us on cross-border insolvency issues and who were of great assistance to us in this regard.

14. The Consultation Paper is effectively set out in two parts. The first part of the Consultation Paper addresses specific sections and rules and the second part addresses general issues.

CHAPTER 1

OVERVIEW

1.1 The function of the insolvency provisions of the Companies Ordinance is to provide a means by which companies which fail can be effectively disposed of or restructured. At its crudest, the insolvency provisions might be considered to be the waste disposal system for companies which have failed and while this is undoubtedly the case with the majority of companies which become involved in insolvency processes, it is not the full story.

1.2 There is a need for the insolvency provisions because although the vast majority of companies do not become insolvent those that do leave behind a trail that needs to be tidied up. This is an important function, as it oversees the fair distribution of the remaining assets of the insolvent company among its creditors. This is not to say that the administration of an insolvent company is simple matter. It can be difficult to recover assets, particularly in situations where companies do not have the cash to fund recovery actions, and there are often difficulties in getting the former owners to co-operate with each other and with the liquidator.

1.3 The insolvency provisions are only necessary because the nature of doing business requires that companies operate on credit: companies borrow money in order to trade and develop. This process is not limited to companies; private individuals and countries also go into debt. The types of debt that are now being developed in the financial markets are tending to increase the complexity of some insolvencies, usually those where the insolvent company was a finance company or bank or where a company was dealing in complex debt market contracts. The more usual forms of debt used by companies involve the obtaining of loans from financial institutions or the obtaining of credit terms from companies with which a company is doing business.

1.4 The impact of the failure of a company that was carrying out a genuine business is difficult to understand at first glance. The obvious victims are the employees and the shareholders of the company but the failure also affects unpaid creditors and the holder of loans that might have been made to the company. When, as happens periodically, significant numbers of companies fail at about the same time, the impact on an economy becomes plain and can be seen in the form of increased unempl