Dissolving a business is never an enjoyable experience. Careful attention to detail is required throughout this procedure, regardless of where your firm is located (Hong Kong or elsewhere). A company dissolves during winding-up or liquidation when it stops doing business entirely. Its primary goal is to sell off assets (such as stock or property) to settle debts and distribute the proceeds to shareholders or partners.
But what makes HK company liquidation different than others? Let’s find out.
Why Would A Company Get Closed? Top Reasons
The following are some of the most common reasons given by business owners to wind up their companies:
- Low or nonexistent profit
- Bad management and operations
- Not being able to pay its debts
- Controversy between shareholders
- Mismanagement of corporate activities and other forms of noncompliance with legislative requirements
- Restructuring of corporations
Requirements For Deregistering a Company
It is necessary to meet the following requirements before applying for HK company deregistration:
A deregistration cannot take place unless all of the company’s members (shareholders) agree;
The company has never started operations or conducted any kind of business, and it has been at least three months since it last did either of those things before the application.
The following statements are true:
- The company is not liable for anything
- It is not involved in any lawsuits
- It does not own any real estate in Hong Kong
- If it is a holding company, neither its assets nor its subsidiaries do.
Methods of Winding Up an HK Company
Voluntary Windup of a Company
When a company in Hong Kong decides to close down on its own accord, it starts with a crucial gathering of its shareholders, provided the company is financially healthy and can cover all its debts. An essential vote in this meeting can set the wheels in motion for the company to officially shut down.
Alternatively, if the shareholders’ vote clearly shows a decision to close the company, there’s no need for a formal closure order from the Court.
The essential steps in this self-directed shutdown process are:
- Shareholders must unanimously agree to shut down the company.
- A formal announcement of this decision must be published in the official government publication within two weeks.
- An important meeting with the company’s creditors needs to be arranged, with notices published in both the official government publication and newspapers in Chinese and English.
- The company’s leaders must prepare a detailed financial report, including a list of all creditors and their expected claims, to discuss in the creditors’ meeting. Decisions regarding the shutdown process are made here.
- In this meeting, a person responsible for managing the company’s closure, known as a liquidator, may be chosen, along with a committee to supervise their work.
- The liquidator takes over the company’s affairs, holding regular meetings with the company and its creditors to update them on the shutdown progress.
- After settling all company affairs, the liquidator prepares a final report on the shutdown and organizes a concluding meeting with the company and its creditors.
If the shareholders can’t agree on shutting down, the HK company’s directors can still decide to dissolve the company. This decision hinges on:
- The company is unable to operate due to its debts.
- The directors believe in the necessity of shutdown.
- The impracticality of using other legal provisions for the shutdown.
- A combined meeting of the company and its creditors is scheduled 28 days after informing the Registrar of Companies.
- A director’s signed declaration of this decision should be submitted to the Registrar of Companies within a week of the decision. Meetings with the company and creditors should follow within 28 days, along with appointing a provisional liquidator.
Given the complexity of these procedures, it’s highly recommended to seek advice from a lawyer or other qualified professionals before starting this process.
Compulsory winding up
In Hong Kong, a company may be forced to close down by a court order under certain circumstances. The reasons for a court to mandate such a shutdown include:
- The company’s inability to clear a debt exceeding HKD 10,000.
- The court judges that it’s just and reasonable for the company to cease operations.
- A decision made by the company itself, through a special vote, to seek court-ordered closure.
- The company’s creditors can initiate this process by hiring a legal professional to file a winding-up petition.
This petition must adhere to specific legal requirements outlined in the Companies Winding Up Rules. Additionally, public notice of the petition must be given. This includes advertising in the Official Gazette at least seven days before the hearing and in a Chinese and an English daily newspaper in Hong Kong.
Following this, an official copy of the petition must be sent to the company’s main office or business location. There’s also a requirement for a legally sworn statement affirming the details of the petition.
When the winding-up petition is in place, the process officially begins. Any changes in the company’s assets, including share transfers or changes in shareholder status, become invalid unless the court decides otherwise. The company, or any of its creditors or shareholders, can request the court to halt or limit any ongoing legal actions or proceedings against the company.
Furthermore, there are concerns about the safety of the company’s assets. In that case, the petitioner can request the court to appoint a provisional liquidator to protect these assets before the petition is heard.
In Hong Kong, there are three categories of provisional liquidators:
- Traditional provisional liquidators are appointed under standard legal procedures.
- Provisional liquidators are selected during a voluntary liquidation initiated by members.
- “Panel T” appointments, in which the Official Receiver is named the provisional liquidator.
Overview of the Procedure of Closing A Company in Hong Kong
The process of legally forcing an HK company to close, also known as a compulsory winding-up, begins with delivering a legal notice to the debtor company. This is the first step in a series of carefully structured legal procedures:
- If three weeks pass after the delivery of this notice and the debt remains unsettled, a formal request to shut down the company is submitted to the High Court.
- From submitting this request to the first court hearing, the creditor must follow specific procedures and meet advertising requirements. It’s important to note that the Court can appoint a temporary manager for the company’s assets at any point during this period.
- Before the first court hearing, the creditor must obtain a confirmation from the Registrar that all necessary legal steps and procedures have been followed.
- During the initial court hearing, the Court reviews whether all conditions for shutting down the company are met. If there’s no opposition, the Court might immediately order the company to shut down and appoint a temporary manager.
- The company’s directors must provide a thorough report of the company’s financial situation, including a detailed account of the company’s assets, to the temporary manager. For companies with assets below HK$200,000, a more streamlined shutdown process can be requested.
- Within three months of the shutdown order, the temporary manager arranges a meeting with the company’s creditors and shareholders to select a liquidator and possibly a supervisory committee. Creditors need to submit proof of their claims before they can vote in this meeting.
- The Court must confirm the selection of the liquidator within three months of this meeting. If there’s no consensus on who should be the liquidator or concerns about the chosen liquidator’s suitability, the Official Receiver may propose another qualified professional from a designated list.
- The final phase involves liquidating the company’s assets. This process, which consists of selling off the company’s assets and paying off creditors, can take two to three years. Once all possible assets have been liquidated, the liquidator seeks the court’s permission to conclude the process. If the liquidator is the Official Receiver, they will file a final report to the Companies Registry.
- Once these steps are completed, the company is formally dissolved.
Legal Implications of Winding Up HK Company
In the context of legally mandating a company’s closure, known as compulsory winding-up, the process is considered to begin on the date the court receives the winding-up petition. This start date has several important legal consequences for the company and its directors:
- Any transfer of the company’s assets or alterations in its membership become invalid unless specifically permitted by the Court.
- The start date is a key factor in determining if a transaction is considered an unfair preference or voidable.
- This data is also crucial in assessing whether transactions involving undervalued exchanges are voidable.
- It affects the legality of seizure, impounding, or legal enforcement actions against the company’s assets.
- The validity of floating charges, which are security interests over a pool of changing assets created by the company, is also tied to this commencement date.
Conclusion
Getting a company in Hong Kong to close a business may be a lengthy, intricate, and difficult process. Reach out to SetupHK for any further help or inquiries you may have about hiring a firm in Hong Kong. At any point in time, our team of knowledgeable experts is here to provide a hand.
