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Hong Kong Law Reform Commission |
11.1 This section makes provision for the preparation and submission
to the Official Receiver of a statement of affairs once the court has made a
winding-up order or appointed a provisional liquidator. The court may order
that no statement of affairs is required. The statement of affairs is in
prescribed form[85] and it must
contain details of all assets, liabilities, and securities and details of the
company’s creditors. The Official Receiver may require other
information.[86]
11.2 The
statement must be verified by affidavit by at least one of the directors or the
secretary of the company at the time the company is wound-up or by, among
others, former directors or officers or employees of the
company.[87]
11.3 The
statement should be submitted within 28 days of the relevant
date,[88] but the time may be
extended by the Official Receiver or the court. The reasonable costs of those
who prepare the statement shall be paid out of the assets of the
company.[89]
11.4 The
statement of affairs may be used in evidence against any person making or
concurring in the making of the statement. Any creditor or contributory may, on
paying a fee, inspect and copy the statement of
affairs.[90]
11.5 We received a submission which questioned whether any real
benefit was to be obtained from that part of the statement which required
directors to estimate asset values. The point made is reasonable but we favour
the retention of the obligation even though experience suggests that directors
tend to produce diverse valuations of assets. The requirement should be
retained because it provides a good reference point for the statement of affairs
and it has the effect of making directors think about the situation they and
their company are in.
11.6 Another submission questioned whether the provisions of the
Companies (Winding-up) Rules, rule 43, and section 190(4) were consistent.
Section 190(4) provides that any person who makes the statement of affairs shall
be allowed out of the assets of the company such costs and expenses incurred in
preparing and making the statement of affairs as the Official Receiver may
consider reasonable, subject to an appeal to the court.
11.7 The oddly
worded rule 43 provides that no person shall be allowed out of the assets of the
company any costs or expenses which have not, before being incurred, been
sanctioned by the Official Receiver, subject to any order of the
court.
11.8 Whatever the differences are we consider that there is no
need for two provisions to cover the same situation and we recommend that
they should be combined.
11.9 We recommend that the costs of
the preparation of the statement of affairs should not be paid by the company as
a matter of course. The onus should be placed on those obliged to prepare a
statement of affairs to demonstrate to the Official Receiver or the provisional
liquidator that any costs to be incurred in the preparation of the statement of
affairs relate to work that would not have been done by the company as a matter
of course in bringing the books of the company up to date.
11.10 By
this we mean that if the books and affairs of a company have been neglected to
such an extent that it would require a greater outlay than would have resulted
from the preparation of a statement of affairs by a company that kept its
affairs and books in order, the extra costs of preparation of the statement of
affairs should be borne by those obliged to prepare the statement of affairs.
On the assumption that the books were correct, these costs would be limited to
the costs of extracting relevant information from the books. In any event, the
costs of preparation should not be a burden on the company as a matter of
course.
11.11 A submission was made that a private sector liquidator should
have the power to extend the date for submission of the statement of affairs as
well as the Official Receiver when a private sector liquidator had been
appointed provisional liquidator. We do not support the submission as the
Official Receiver is the person who prosecutes offences where no statement of
affairs is produced and, as a consequence, should have control of the
process.
11.12 In the Report on Bankruptcy, the Commission recommended that
the time for the submission of the statement of affairs should be increased from
seven to 21 days on creditors‘ petitions. This recommendation was adopted
in the Bankruptcy (Amendment) Ordinance 1996, section 12. The question arises
whether the Companies Ordinance provision should be amended to reflect the
bankruptcy position.
11.13 We consider that there is a considerable
difference between the statement of affairs of a bankrupt and of a company. In
general, companies‘ statements are more complicated and therefore we are
content that the current provision should remain at 28 days for submission,
subject to the power of the Official Receiver or the court to extend the time in
appropriate cases.
11.14 We would add that where the liquidation of a
company involves the unwinding of complex financial contracts, the usual rules
regarding the preparation of a statement of affairs within the stipulated period
may be frustrated and it may be appropriate to make provision for such an event
in the winding-up provisions.
11.15 Section 190(1) provides that the court may dispense with the
statement of affairs and rule 44 provides that any application to dispense with
a statement of affairs must be supported by a report of the Official Receiver.
It is necessary to have a provision to facilitate dispensing with the statement
in a winding-up by the court, because, unlike voluntary winding-up, situations
are likely to arise in winding-up by the court, such as the unavailability of
the directors or of the books of account, which would prevent the preparation of
a statement.
11.16 Although the preparation of a statement of affairs
is just as important in a receivership as it is in a liquidation, there is no
statutory requirement that the directors produce a statement to a receiver. We
suggest that the position can be relaxed in the case of winding-up by the
court.
11.17 We consider that the Official Receiver would not report
that the statement of affairs should be dispensed with in cases where there
clearly should be a statement of affairs prepared. We recommend that the
Official Receiver should have the discretion to dispense with the statement of
affairs without having to apply to the court and without having to show specific
grounds. This follows a provision under the Insolvency Act, section
131(5)(a).
11.18 In cases where a private sector liquidator has been
appointed, we recommend that the Official Receiver should have the same
discretion to dispense with the statement of affairs without the need to apply
to the court.
11.19 The adoption of these recommendations would have the
benefit of reducing costs in some liquidations.
11.20 Under the Insolvency Act, section 288(4), which provides for a
statement of affairs to be submitted in cases of personal bankruptcy, a bankrupt
may be guilty of a contempt of court if he fails, without reasonable excuse, to
submit a properly completed statement of affairs to the Official Receiver.
Adoption of this provision was recommended by the Commission in the Report on
Bankruptcy and is now contained in section 12 of the Bankruptcy (Amendment)
Ordinance 1996. This provision has not been applied to the Insolvency Act
provisions for statements of affairs in cases of companies.
11.21 The
preparation of the statement of affairs is one of the most important aspects of
the winding-up of a company as it enables the liquidator not only to establish
the assets, liabilities and creditors of the company, it also provides the basis
for the liquidator or the Official Receiver to investigate any wrong-doing on
the part of the company or its directors.
11.22 To that end,
directors, in particular, should be encouraged to prepare a statement of affairs
as quickly as is reasonable in a particular case. This, however, does not
always happen, and, in practice, directors often seek to delay the preparation
of the statement. It is common for it to take months of encouragement before
directors produce a statement and the practitioners on the Insolvency
Sub-committee are convinced that in numerous cases directors are not intimidated
by the prospect of a fine. The figures show that, although fines are imposed,
they are usually
small.[91]
11.23 We
recommend that, in addition to the provisions for fines, it should be a
contempt of court for a director to fail, without reasonable excuse, to produce
a statement of affairs to the Official Receiver within 28 days of the relevant
date or such extended period as the Official Receiver may allow. There was a
submission that provisions should be made to permit an application to the court
for time if it was refused by the Official Receiver. We consider that this
would be unnecessary as the court would take account of all the circumstances of
a case in any contempt proceedings.
11.24 We received a submission that non-executive directors might
find it impossible to produce a statement of affairs which they believed to be
true and fair, in the absence of the assistance of executive directors and that,
therefore, it would seem fair to confine the charge of contempt of court to
executive directors only.
11.25 In the Report on Corporate Rescue and
Insolvent Trading, the Commission made recommendations that directors and
senior management should be open to liability for insolvent trading. It was
recommended that any provision on insolvent trading should define directors in
sufficiently broad terms to include those who hold themselves out as directors.
The Report also commented on the position of non-executive directors and
stated that anyone who accepts a directorship of a company has an obligation to
ensure that that he is kept informed of the financial position of the company.
The Report added, however, that if directors and others had been
deliberately misled as to the financial position of the company by other
directors or senior management, they should not be held responsible for
insolvent
trading.[92]
11.26 We
recommend that the same provision should apply to the winding-up
provisions. This should serve to satisfy the concerns expressed in the
submissions but we would caution that the recommendations on connected person
and associates should indicate that we have little time for those non-executive
directors who are prepared to lend their names as directors and take the money
but who are not prepared to keep themselves informed of the financial position
of the company.
11.27 If a person who is required to produce a statement of affairs
makes default without reasonable excuse in complying with the requirement, he
may be subject to a fine on summary conviction of up to $50,000 and a daily
default fine of $300.
11.28 There is no provision under the Companies
Ordinance for the imprisonment of such persons for failure to produce a
statement, though there is precedent for this under the Singapore Companies Act,
section 271(5), which provides for a fine and imprisonment for up to 12 months.
The adoption of the recommendation that directors may be in contempt of court
for not producing a statement of affairs would mean that directors could be
imprisoned as a consequence of such a contempt.
11.29 The Official
Receiver’s Office Annual Departmental Report for 1996/97 records that,
during that period, 40 cases were brought to hearing before the court and that
25 of the cases resulted in
convictions.[94]
11.30 The Insolvency Act, rule 4.33, provides that the Official
Receiver may require any person who may be required to submit a statement of
affairs to submit an affidavit of concurrence stating that he concurs in the
statement of affairs. The affidavit of concurrence may be qualified in respect
of matters dealt with in the statement where the maker of the affidavit is not
in agreement with the deponents, or he considers the statement to be erroneous
or misleading, or he is without the direct knowledge necessary for concurring in
the statement.
11.31 We recommend the adoption of such a
provision as it is unfair to expect a person who disagrees with a statement of
affairs, in whole or in part, to be obliged to swear as to its accuracy and
truthfulness when he cannot honestly do so. The adoption of this provision
might also encourage those who disagree with a statement to say so, as this
could assist the liquidator in his investigations.
11.32 The section provides that as soon as practical after a
statement of affairs has been submitted, or where the court orders that no
statement should be submitted, the Official Receiver shall report to the court
on the amount of the company’s capital issued, subscribed and paid up, the
estimated amount of the assets and liabilities, the causes of failure of the
company, and whether the Official Receiver considers any further inquiry is
desirable.
11.33 If the Official Receiver considers that any fraud has
been committed in relation to the company he should report to that effect, in
which case the court has available the powers provided under section 222.
11.34 The Official Receiver’s Office submitted that, in
practical terms, the section as it was established served no useful purpose.
The submission stated that the original expectation of the section was that a
statement of affairs would be produced at an early stage in a liquidation and
the Official Receiver could then make a preliminary report setting out the
details mentioned above. In practice, however, the report was made at a much
later stage of the liquidation, when its value was questionable.
11.35 The Official Receiver’s Office referred with approval to
section 132 of the Insolvency Act, which replaced an original provision similar
to the current provision in the Companies Ordinance with one which provided that
the Official Receiver had a discretion to report on the reasons for the failure
of a company and as to generally, the promotion, formation, business, dealings
and affairs of the company. The Official Receiver was under a duty, however, to
investigate these matters even though he might not make a report.
11.36 We recommend that the Official Receiver’s
Office‘s submission should be adopted. We see no sense in continuing with
a provision that the Official Receiver’s Office points out is of little
use in practice and which amounts to an unnecessary expense in many
liquidations
11.37 The Consultation Paper noted comment on the Insolvency
Act provision which found it surprising that the Official Receiver in England
and Wales should be under a duty to investigate the general features of
promotion, formation, business, dealings and affairs of the company as there
were circumstances under section 122(1) of the Insolvency Act where the company
had not failed, and was being wound-up for other reasons, and, in any event,
there would not necessarily be any connection with
irregularity.[95]
11.38 We
can see no reason why the Official Receiver should be obliged to investigate
these general matters if the company has not failed but has been wound-up on
other grounds and we recommend that any new provision should reflect
this.
11.39 We note that section 132(2) of the Insolvency Act provides
that the report is, in any proceedings, prima facie evidence of the facts
stated in it. We recommend that this approach should be adopted in any
new provision in the Companies Ordinance. We note that the report, if made,
could have significance if it points to any wrong-doing by directors and others
in cases brought under the provisions on disqualification of directors under
Part IVA of the Companies Ordinance or under, for example, the recommendation
for personal liability of directors and senior management for insolvent trading
in the Report on Corporate Rescue and Insolvent
Trading.[96]
11.40 The
liquidator‘s report could also have significance in other matters such as
proceedings in which application is made for setting aside transactions at an
undervalue, extortionate credit transactions and the prosecution of criminal
offences under the Companies Ordinance.
11.41 A submission of the Hong Kong Association of Banks suggested
that there was, in appropriate cases, a need to conduct an investigation to
expose malpractice with a view to eventual prosecution and that such
investigations had to be a matter for the Government whereas private sector
liquidators should focus on the realization and distribution of assets. The
submission added that such investigations should not be funded from an insolvent
company’s assets on the basis that it had never been accepted that the
victim paid for the investigation of the crime. The submission concluded that
the creditors of the insolvent company, who stood to suffer a loss, should not
be made to see their dividends further diminished by the cost of an
investigation and that it was desirable for these principles to be applied to
the other relevant provisions.
11.42 We support this submission and
recommend that while the Official Receiver should not be obliged to
report on inconsequential matters, there is a public interest in the Official
Receiver investigating matters where there might have been malpractice by
directors or others. This recommendation should be read in conjunction with the
comments on the role of the Official Receiver’s
Office.[97]
[84] Note also the Companies (Winding-up) Rules, rules 39 to 44.
[85] See form 23 of the Companies (Winding-up) Rules.
[86] Sub-section (1).
[87] Sub-section (2).
[88] “Relevant date” for the purposes of this section means, in a case where a provisional liquidator has been appointed, the date of his appointment, and where no provisional liquidator has been appointed, the date of the winding-up order, per sub-section (8).
[89] Sub-sections (3) and (4).
[90] Sub-sections (5A) and (6).
[91] See Fines and imprisonment , at paragraphs 11.28 to 11.30.
[92] Report on Corporate Rescue and Insolvent Trading, paragraphs 19.15 to 19.26.
[93] Sub-section (5) and see the Twelfth Schedule of the Companies Ordinance. Note also L. N. 306 of 1996 which increased the levels of fines under the Companies Ordinance.
[94] Annex 15 of the Official Receiver’s Office Annual Departmental Report 1996/97. Note that there were 11 disqualifications from acting as a company director in 1996/97 according to Annex 16 of the Official Receiver’s Office Annual Departmental Report.
[95] Under section 122(1) of the Insolvency Act or its equivalent under the Companies Ordinance, section 177(1). See The Annotated Guide to the Insolvency Legislation, L. S. Sealy and David Milman, 4th Edition, page 177.
[96] Report on Corporate Rescue and Insolvent Trading, Chapter 19.
[97] See, generally, Chapter 5.