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Hong Kong Law Reform Commission |
9.1 In general terms, we feel that the provision works reasonably
well. We received no specific submissions to change the circumstances under
which a company may be wound-up.[48]
The provisions are broadly similar to the provisions under the Insolvency Act,
section 122.
9.2 There are several Ordinances which allow regulatory authorities
to wind-up companies. The Securities and Futures Commission, Office of the
Commissioner of Insurance and the Hong Kong Monetary Authority, all have
provisions to facilitate the winding-up of
companies.[49]
9.3 We
recommend that, while it is not necessary to cross-reference the
provisions which provide regulatory authorities with the power to wind-up
companies, it would be useful for a new section 177(1)(g) to be added to record
that regulatory authorities have these powers. Such a provision would have the
effect of giving notice to anyone checking the winding-up provisions that other
relevant provisions exist. Alternatively, one submission suggested that a
schedule to a new Insolvency Ordinance might contain all of the bases under
which all of the regulatory authorities could wind-up a company as, once done,
this would be easy to maintain and this information would be helpful to anyone
looking at the subject. We leave this as a matter for the Law Draftsman as to
which would be the best way of achieving the desired effect.
9.4 Section 177(1)(d) provides that a company may be wound-up by the
court if it is unable to pay its debts. Section 178(1) deems that a company is
unable to pay its debts in three circumstances:
9.6 Section 178(1)(a) provides that a company shall not be able to
pay its debts if the company has failed to comply with a demand in writing
requiring payment. There is no prescribed form of statutory demand under the
Companies Ordinance, although a statutory demand has been recently introduced in
the Bankruptcy Ordinance.[50] We
recommend that a statutory form should be adopted.
9.7 The
Insolvency Rules[51] provides for a
prescribed form of demand which must state or provide for the amount of the debt
and consideration, any other charge, including interest, and the grounds for
inclusion, a warning of intention to wind-up if payment is not made, the time
within which to comply and possible methods of compliance, and how to contact
the creditor. The Australian provisions also have a well laid out prescribed
form of statutory
demand.[52]
9.8 We
understand that a prescribed form of statutory demand has been introduced in the
Bankruptcy Ordinance. It would be appropriate for the form under these
provisions to mirror the bankruptcy form. There should be no need for the form
to be in a prescribed form and it should be capable of variation to suit any
circumstances that may arise.
9.9 One submission on the Consultation
Paper questioned what was meant in proposing a statutory form of statutory
demand and then stating that it needed not be in prescribed form. The
submission said that at the very least, it would seem sensible to prescribe by
statute that certain particulars had to be contained in a valid statutory demand
and perhaps to provide an illustrative form which could be adapted to suit
particular cases. That statement would reflect our intention that the statutory
form should be in prescribed, but not required, form.
9.10 Another
submission suggested that the statutory form should be bilingual and should
state clearly the consequences of ignoring the document. The form of statutory
demand would be set out in the Ordinance in both Chinese and English. It should
be sufficient for a statutory demand to be served in either language. We agree
with this submission that the statutory form should contain a statement of the
consequences of ignoring the demand and recommend its
adoption.
9.11 Recent Australian amendments have shifted the emphasis from a
company being deemed to being unable to pay its debts to circumstances where it
must be presumed by the court that a company is insolvent. A company is solvent
if, and only if, the company is able to pay all its debts as and when they
become due and payable.[53]
Statutory presumptions also apply in relation to whether a company is insolvent.
These include the failure to comply with a statutory demand, and the execution
of a judgement or other process, in addition to cases where a receiver has been
appointed over the property of a
company.[54]
9.12 We find no
fault with the Australian provisions, but consider that the current provisions,
coupled with the recommendations, would be adequate.
9.13 In terms of minimum debt amount, sections 177(1)(d) and 178(1)(a)
combine to provide that a company is deemed to be unable to pay its debts if the
debt claimed in the petition is for a sum exceeding $5,000. Section 178(1)(a)
contemplates a creditor being able to point to a debt of a specified sum that
cannot seriously be questioned, either as to its existence or its
quantum.[55]
9.14 In the
Report on Bankruptcy, the Commission recommended that the amount of the
minimum debt under the Bankruptcy Ordinance, section 6, should be increased from
$5,000 to $10,000, that the minimum debt amount should be reviewed annually and
should be capable of amendment by subsidiary legislation rather than by
amendment of the primary
legislation.[56] This
recommendation was adopted in the Bankruptcy (Amendment) Ordinance
1996.[57]
9.15 We
recommend that the amount of the minimum debt under the Companies
Ordinance should mirror the minimum debt amount in bankruptcy. Our reasons for
the recommendation are the same as the reasons given in the Report on
Bankruptcy, that a person, or company, should not be exposed to bankruptcy,
or winding-up, for an insignificant amount, a point borne out in practice where
few petitions are presented for less than $10,000.
9.16 We received two
submissions which suggested that the minimum debt amount should be higher than
the $10,000 proposed, one submission suggesting a minimum debt of $25,000 and
one submission linked the amount of minimum debt with the amount of the
petitioner’s deposit, stating that it was illogical to set the deposit
higher than the minimum debt. The petitioner’s deposit of $12,150 under
Companies (Winding-up) Rules, rule 22A, is currently higher than the minimum
debt amount.
9.17 The Report on Bankruptcy stated that there was a
correlation between the amount of the statutory petitioner’s deposit and
the minimum debt amount and stated that the statutory deposit should be a
fraction of the minimum debt. The Report added that recourse to
bankruptcy proceedings, and by extension companies’ winding-up
proceedings, should be within the financial reach of as many people as possible.
The Report also noted that the purpose of the statutory deposit was to
finance the initial administration of the estate. It is clear that a balance
needs to be struck between these two
features.[58] We are no longer
convinced that the statutory deposit should necessarily be less than the minimum
debt. We recommend that provisions adopted in the Bankruptcy Ordinance
to allow the Financial Secretary to prescribe a greater amount than the existing
minimum debt should be adopted in the Companies
Ordinance.[59] We would note that
the minimum debt amount should not be increased to such an extent as to put it
out of the reach of employees.
9.18 Section 178(1) provides that “A company shall be deemed
to be unable to pay its debts” and lists the three circumstances set
out in paragraph 9.4 above under which a company shall be so
deemed.
9.19 Sub-section (1)(c) allows the court to make a judicial
assessment of whether a company is unable to pay its debts. In doing so, the
court shall take into account the prospective and contingent liabilities of a
company. The Consultation Paper questioned whether this provision should
be in the deeming provisions under sub-section (1) as the sub-section still
requires that an inability to pay debts has to have been proved, and it seemed
strange to have something that has to be proved as a deeming provision. The
Consultation Paper noted that the reference to contingent and prospective
debts had been dropped from the test in the corresponding provision of the
Insolvency Act, section 123(2), and now formed a separate test from the other
deeming provisions in the Insolvency Act.
9.20 It appears that the
present wording of sub-section (1)(c) is contradictory, as it runs together two
issues; (i) the question whether current debts can be met as they fall due, and
(ii) the question whether the company can ultimately prove solvent if its future
as well as its present liabilities are taken into account.
9.21 We
received a submission which pointed out that prospective and contingent
liabilities had no place in a “cash-flow” test like
sub-section (1)(c), and that section 123(2) of the Insolvency Act 1986 uses a
“balance sheet” test where such liabilities could be taken
into account. We take this point and recommend that a cash-flow test
should be adopted in sub-section (1)(c) by replacing the current provision with
the following wording, to the effect that a company shall be deemed to be unable
to pay its debts “if the company is unable to pay its debts as they
fall due”. This wording would, we consider, apply a deemed inability
to pay debts measured on a cash-flow basis.
9.22 We also recommend
the adoption of a balance sheet test by the introduction of a new sub-section
(1)(d) to the effect that a company should be deemed to be unable to pay its
debts “if the value of the company’s assets is less than the
amount of its liabilities, taking into account the contingent and prospective
liabilities of the company.”
9.23 We considered the possibility of proposing that certain matters
might be capable of being served by fax or other electronic forms of
communication. We recognise, however, that though there may be merit in the use
of new forms of technology for the purposes of service of documents, it is not
appropriate to make recommendations for insolvency as service relates to many
other processes and the court will undoubtedly deal with these issues in due
course.
9.24 One submission noted that it appeared to be the law that an
assignee of a part of a debt could not serve a statutory demand but could
present a petition if he could prove that the company was
insolvent.[60] The submission
stated that the reason was that such an assignee could not enforce his claim to
be paid that part of the debt without, as a matter of procedural law, joining in
the assignor, who retained rights to the balance of the debt, so that the matter
could be finally dealt with and in order to avoid conflicting decisions
concerning the same debt. The submission stated that this was not satisfactory
as assignment of only part of a debt met a commercial need where the assignment
was required to secure or satisfy only a lesser sum, so that it was not possible
to assign the whole debt, where such liabilities could be taken into
account.
9.25 We note the submission but we are not inclined to support
the idea of changing the law in this respect.
[48] Note, however, the Review of the Hong Kong Companies Ordinance, paragraph 7.11, which recommends that in an application for just and equitable winding-up under sub-section (1)(f), the court should be given the option of making any other order it sees fit and that the remedy should be dissociated from the more undesirable consequences of winding-up procedures in insolvency (such as freezing of bank accounts).
[49] See the Securities and Futures Commission Ordinance (Cap. 420), section 45, the Insurance Companies Ordinance (Cap. 41), Part VI, and the Banking Ordinance (Cap. 155), section 122.
[50] Bankruptcy (Amendment) Ordinance 1996 (Ord. No. 76 of 1996), section 6A.
[51] Insolvency Act, rules 4.4 to 4.6 and Form 4.1.
[52] Australian Corporations Law, section 459E(2)(e), and Form 509H.
[53] Australian Corporations Law, section 95A(1).
[54] Australian Corporations Law, section 459C.
[55] See Hong Kong Company Law, Legislation and Commentary, Roman Tomasic and ELG Tyler, Issue 1, I [9279].
[56] Law Reform Commission of Hong Kong, Report on Bankruptcy, May 1995, Chapter 3.
[57] Ordinance No. 76 of 1996, section 6(2)(a) and (5). The Financial Secretary may prescribe a greater amount. The Bankruptcy (Amendment) Ordinance 1996 came into effect on 1 April 1998.
[58] Report on Bankruptcy, Chapter 4, paragraphs 4.9 to 4.14.
[59] Bankruptcy Ordinance, section 6(2)(a) and (5).
[60] Re Steel Wing Co. Ltd. [1921] 1 Ch 349.