Declaring Company Bankruptcy in Hong Kong
7 minute read
Declaring company bankruptcy is a legal action where the court decides and declares that a company is unable to pay off its debts. In some situations, filing for bankruptcy serves as a great method to get out of a financial breakdown. However, in this case, the chances are that the authorities will place the company under various restrictions.
Declaring bankruptcy in Hong Kong is similar to the practice followed in the Western countries. Once you file for bankruptcy, the official receiver becomes the provisional trustee and has the power to arrange how the property gets distributed to creditors.
But is that all there is to the bankruptcy process? Certainly not.
Take a look below to find out everything you need to know about company bankruptcy in Hong Kong.
Under what circumstances can a company file for bankruptcy?
In Hong Kong, a business may file for bankruptcy either voluntarily or by court order.
To voluntarily enter winding up (i.e., the bankruptcy process), a company passes a special resolution to appoint a provisional liquidator.
If a given company is solvent at the starting phase of the process, it is deemed to be in members’ voluntary winding up. On the other hand, if it is insolvent, it is deemed to be in creditors’ voluntary winding up.
When it comes to why the legal authority (court) starts the process, in general, these are the reasons that instigate the winding up:
- Company has by special resolution decided that the company should be wound up by the court.
- Company does not start its business within a year from its incorporation, or suspends its business for a year.
- It has 0 members.
- It cannot pay off its debts.
- The event happens on the occurrence of which the company’s articles of association stipulate that it should be dissolved.
- The court believes that it is just and equitable that the company should be wound up.
The common practice shows that the key reasons tend to include insolvency and just and equitable winding up. Keep in mind that just and equitable winding up is generally unrelated to the solvency of the company.
A company can present the declaration of bankruptcy before the court. The following entities also have this power:
- Any creditor or creditors
- Contributory or contributories
- Trustees in bankruptcy
- Any personal representative of a contributory
Is there an alternative to bankruptcy?
There is an alternative that the debtor can choose. It is called IVA and refers to the individual voluntary arrangement.
With an IVA, the debtor makes a repayment proposal to the High Court and the creditors. If the Individual Voluntary Arrangement is approved by all parties, the arrangement legally binds all creditors according to section 20H of the Bankruptcy Ordinance.
That is the case if the repayment proposal made by the debtor is accepted by the creditors and the court.
The Individual Voluntary Arrangement is a formal procedure under the Bankruptcy Ordinance and is a legitimate option if you want to avoid bankruptcy.
What are the advantages of the IVA?
There are quite a few reasons why you may want to opt for the IVA.
- Firstly, the debtor can avoid the stigma of bankruptcy. They shall be free of all legal restrictions provided under the Bankruptcy Ordinance. This means that the debtor can retain their job and carry on with their life.
- On the other hand, the creditors can expect better repayment from the debtor since the debtor now has more incentive to make the actual repayment compared to the official bankruptcy.
- On top of that, legal procedures for bankruptcy can involve significant time and cost losses. With an IVA, that is rarely the case.
- Finally, the debtor has a better chance to obtain credit after the repayment (pursuant to an IVA arrangement) has been completed.
As you can see, this option seems like a better solution to your financial problems compared to declaring company bankruptcy in Hong Kong.
What is the process of declaring bankruptcy?
As a debtor (about to bankrupt), failing to repay debts results in the authority’s negative repercussions.
In other words, the court that has granted bankruptcy orders against the debtor seizes the debtor’s assets. Once the assets have been seized, the court proceeds to sell them and convert the valuable assets into money.
The person that implements this process is a neutral party referred to as the Trustee. The Trustee can be the Official Receiver, usually employed by the Official Receiver’s Office. The seized assets that are converted into money are then distributed among the creditors. Just to remind you, the creditors are the ones who are owed the money by the debtors. Hence, this is done with the aim of repaying the relevant debts or portions of the debts.
It is also worth noting that there is a rule regarding the period of the bankruptcy order. Basically, a part of the debtor’s earnings is taken and used for repayment.
The court is also obliged to investigate whether the causes of bankruptcy are valid or not. If the findings show that there was a foul play, the authority will punish the wound-up, as this breaches the Bankruptcy Ordinance law in Hong Kong.
The debtor in bankruptcy proceedings can be an individual or a group (for instance, joint ventures). However, this excludes limited companies.
Once the bankruptcy order is discharged, the debtor is free from the monetary liabilities that were incurred prior to bankruptcy.
Now take a look at the simplified stages of an average bankruptcy case:
- Releasing a statutory demand for debt repayment to the debtor (if applicable)
- Showing a bankruptcy petition before the court, to the Official Receiver’s Office, and the debtor
- Court hearing
- The court grants a bankruptcy order
- The collection of the debtor’s assets is realized by the Trustee (or the Official Receiver)
- The relevant proceeds are distributed and one part of the debtor’s income is transferred to the creditors
- Finally, there comes the discharge of the order of bankruptcy
What happens after the bankruptcy?
Once the court grants a bankruptcy order against a debtor, there are no other legal proceedings that can be taken or continued against the debtor or the debtor’s assets without the permission of the court.
The order of bankruptcy is advertised by the Official Receiver in the Gazette and two newspapers, one in Chinese and one in English. This is a common administrative practice in Hong Kong.
The Trustee takes control of the assets of the bankrupt party. These assets shall be realized by the Trustee for the reimbursement of debts.
The bankrupt party may also be required to give one portion of the current income to the Trustee for repayment. The Trustee can even visit the bankrupt person’s home to inspect assets if necessary.
The bankrupt party’s provident fund is generally considered to be part of the bankrupt’s assets. It is subject to the provisions of the relevant provident fund scheme.
In case a retired civil servant finds themselves bankrupt, then their pensions cease to be payable unless there are discretionary arrangements. Additionally, as mentioned in a High Court judgment, the Government has security rights regarding civil servants’ earnings and retirement funds under the Home Purchase Scheme loan.
Following the realization process of the bankrupt’s assets and deduction of the administrative expenses, the Trustee shall distribute the balance to the creditors through dividends.
Once the deduction of the number of reasonable living expenses of the bankrupt party and the bankrupt’s family is completed, the balance of earnings during the effective period of the bankruptcy order is to be distributed among the creditors.
Finally, bear in mind that family members of the debtor are not required to bear the bankrupt party’s debt. However, if the debtor owns some property under the joint name of their spouse, the bankrupt party’s share of the property may be seized.
If the debtor holds a joint account with their family members, their portion of the total amount can be drawn to pay off the debt.
Naturally, no one wants to end up in a difficult situation such as bankruptcy and legal proceedings.
However, if there is a need to consider filing for bankruptcy, it would be wise to act as fast as you can. In other words, if you do not see a chance for your business to recover quickly enough, bankruptcy is definitely not your worst enemy.
If there is little to no chance of a speedy recovery, you should sign a winding-up petition voluntarily while you still can. This is one of the most common ways to officially declare your company as insolvent.