Hong Kong’s Amended Winding-Up Legislation Enhances Protection for Creditors
The Secretary for Financial Services and the Treasury recently announced that the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance (the Amendment Ordinance) will come into operation on 13 February 2017. The Amendment Ordinance introduces a more efficient administration of the winding-up process and streamlines the procedures in line with international developments. The new legislation also aims to further protect creditors against asset depletion of insolvent companies. Our alert discusses these developments.
Implications for creditors and other stakeholders
A significant feature of the Amendment Ordinance is greater protection for creditors by extending the avoidance provisions to include transactions at an undervalue. A "transaction at an undervalue" takes place when the company makes a gift or enters into a transaction on terms providing for no consideration to the company; or enters into a transaction for a consideration the value of which is significantly less than the value of the consideration provided by the company.
We have extracted some of the key features of the Amendment Ordinance in the following table and have highlighted our comments in relation to these developments.
Actions to consider
Businesses should seek advice when negotiating transactions especially in volatile times to ensure that the transactions are not eventually found to be at an undervalue. This may include conducting professional valuations.
Creditors receiving payments or security from companies that may be under financial distress should be wary of the risk of the payment or security being an unfair preference. Advice should be sought early on as the surrounding circumstances of the payment or granting of the security (e.g. reasons for providing the credit/security, how demands were made, etc.) can have a substantial impact on whether a Court finds that there has been an unfair preference.
As the Hong Kong corporate insolvency landscape continues to evolve, we hope to see legislation introduced in the area of cross-border insolvency in the near future. We are monitoring developments on reform in relation to a statutory corporate rescue procedure which will provide further remedies for creditors and investors seeking to restructure a troubled company. We will provide further updates in due course.