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Author: Philip B Gilligan
Service Area: Insolvency & Restructuring
Date: November 2012
Country: Hong Kong

 

Closing the operations of a solvent company in Hong Kong

A. Dormancy, deregistration and members' voluntary liquidation

  1. Solvent companies in Hong Kong have three ways to close their operations. They may become dormant, or they may be dissolved by way of deregistration, or members' voluntary liquidation. An overview of each option is provided as follows.

I. The "dormant company" procedure

  1. A company wishing to cease its operations may choose to become 'dormant' under s344A of the Companies Ordinance (Cap. 32) ("CO"). In general terms, a company is considered to be dormant during any period in which no accounting transaction occurs which is, for the company, a 'relevant accounting transaction'. These are transactions required to be entered in the company's books of account under s121 CO, namely, transactions with respect to: (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (b) all sales and purchase of goods by the company; or (c) the assets and liabilities of the company. However, a relevant accounting transaction for this purpose does not include any fee required to be paid by the company under any statute (s344A(9) CO).
  2. The procedure for a company to become dormant under s344A CO is only available to private companies. Furthermore, the following types of companies are excluded from dormancy under the Sixteenth Schedule of the CO (s344A(8) CO):
    1. authorized institutions as defined in the Banking Ordinance (Cap. 155);
    2. insurers as defined in the Insurance Companies Ordinance (Cap. 41);
    3. corporations licensed under Part V of the Securities and Futures Ordinance (Cap. 571) ("SFO") to carry on any regulated activity within the meaning of Schedule 5 of the SFO and an associated entity of the corporation within the meaning of Part VI of the SFO;
    4. approved trustees as defined in the Mandatory Provident Fund Schemes Ordinance (Cap. 485);
    5. companies having a subsidiary falling within (i)-(iv) above; and
    6. companies that have fallen within (i)-(v) above at any time during the preceding 5 years.
  3. In order to become dormant, a private company (not otherwise excluded under the Sixteenth Schedule of the CO) must pass a special resolution to: (a) declare that the company will become dormant either from the date of delivery of the special resolution to the Registrar of Companies ("Registrar"), or from a later specified date; (b) authorize the directors to file the special resolution to the Registrar; and (c) declare that prior to the company ceasing to be dormant, the directors shall deliver to the Registrar a further special resolution declaring that the company intends to enter into a relevant accounting transaction (s344A(1) CO). The company will then be deemed to be dormant either from the date of delivery of the special resolution, or as from a later date specified in such resolution (s344(3) CO).
  4. A company which has attained dormant status is inactive but remains a registered company and need only comply with a minimum of formalities. Thus, under s344A(4) CO, dormant companies are exempted from a number of provisions under the CO (the "Exemptions"), which concern:
    1. the submission and content of annual returns and the holding of an annual general meeting (ss107-111 CO);
    2. compiling profit and loss accounts, balance sheets and directors' reports and the appointment, removal and liability of auditors (ss 122-134 CO);
    3. the resignation of auditors and the auditors report (ss140A-141 CO); and
    4. the documents attached to accounts and the accounts of private companies (ss141C-141D CO).
  5. A company may hold assets and property, and any monies representing the share capital of the company will remain in the company and not be distributed to shareholders during the period that it is deemed dormant. However, if a company enters into a relevant accounting transaction during that period, there are several consequences. Firstly, the Exemptions will cease to apply from the date of the relevant accounting transaction, and secondly, any shareholder of the company who knew or ought to have known about the relevant accounting transaction, and all the directors of the company, shall be personally liable for any debt or liability of the company arising out of the relevant accounting transaction (s344A(6) CO). For this reason, it is important for a company seeking dormancy to first clear and settle any assets or property which may give rise to any relevant accounting transaction. For example, any bank accounts which earn interest or incur bank charges will trigger relevant accounting transactions, and should be dealt with prior to an application for dormancy.
  6. When a company wishes to cease being dormant, it may deliver to the Registrar a further special resolution declaring that the company intends to enter into a relevant accounting transaction (s344A(5) CO). The company will cease to be dormant upon the delivery of such resolution.

II. Deregistration

  1. Under s291AA CO, a private company (including dormant companies), or the director or a member of such a company, may apply to the Registrar for deregistration. Where the applicant is a company, it must nominate a person to whom the notice of deregistration is to be given (s291AA(4) CO). However, the types of companies not eligible for dormancy under the Sixteenth Schedule of the CO are also not eligible for deregistration under s291AA CO (s291AA(16) CO) (see above at para. 3).
  2. A deregistration application may only be made if:
    1. all the members of the company agree to deregistration;
    2. the company has never commenced business or operation, or has ceased to carry on business or ceased operation for more than 3 months immediately before the application;
    3. the company has no outstanding liabilities; and
    4. the application is accompanied by a written notice from the Commissioner of Inland Revenue (the "CIR") that he has no objection to the company being deregistered (the "Notice of No Objection") (s291AA(2), (3) CO).
  3. The CIR is empowered to issue a Notice of No Objection under s88B of the Inland Revenue Ordinance (Cap. 112) ("IRO"). On the application by a director or member authorized to do so, or a person nominated by the company, the CIR will issue a Notice of No Objection if he is satisfied that the company has never commenced operation, or has already ceased business, that it will not start or resume business in the future, and that it has already disposed of all trading stock, landed property and securities, if any. In addition, the CIR must be satisfied that the company's tax liabilities have been cleared, there are no outstanding obligations under the IRO, and there are no unanswered enquiries from the Inland Revenue Department ("IRD") or unsettled objections or appeals in respect of any tax assessments already raised. If any of these conditions are not satisfied, no Notice of No Objection will be issued (see the IRD publication, 'How to Apply for a Notice of No Objection to a Company Being Deregistered'').
  4. Once the Notice of No Objection has been obtained, application for deregistration may be made to the Companies Registry. On receiving a deregistration application, the Registrar is entitled to assume without further inquiry that the information given in connection to it is true, but may request further information from the applicant (s291AA(5), (6) CO). Any person who, in connection with the application, knowingly or recklessly gives any information to the Registrar that is false or misleading in any material particular is liable on summary conviction to a level 6 fine (currently being HK$100,000) and imprisonment for 6 months (ss291AA(14), 351 and Twelfth Schedule of the CO; s113B of the Criminal Procedure Ordinance (Cap. 221) ("CPO") and Schedule 8 of the CPO). If the Registrar is not aware of any failure to comply with the above requirements, he must publish a notice of the proposed deregistration of the company in the Gazette, stating that unless an objection is received within 3 months of the date of publication, the Registrar may deregister and dissolve the company (s291AA(7), (8) CO). If no objection is received at the end of the 3-month period, the company may be deregistered by the publication of another second notice in the Gazette declaring it to have been deregistered on the date of that notice (s291AA(9) CO). Notice must also be given to the applicant, or to the person nominated to receive such notice (s291AA(10) CO).
  5. Upon the publication of the second notice, the company is dissolved (s291AA(11) CO). The cessation of business must be notified to the IRD and the Business Registration Office within 1 month of the dissolution (s8(2) Business Registration Ordinance (Cap. 310) ("BRO")). However, although the company is dissolved, the liability, if any, of the officers and members of the company will continue and may be enforced as if the company had not been dissolved (s291AA(12) CO). All the property and rights vested in or held on trust for the company immediately before its dissolution shall be deemed bona vacantia, and the ownership of such property and rights will be transferred to the Hong Kong Government (s292(1) CO). For this reason, it is necessary to ensure that all the property and rights owned by the company are dealt with and transferred out of the company's ownership prior to the making of the application for deregistration.
  6. However, dissolution of a company by way of deregistration is normally not suitable for companies with considerable share capital, since there may be difficulty securing the return of that capital to its shareholders. This is because there are rules which require that the share capital of a company be maintained whilst the company is still a going concern. Generally, the capital of a company may only be returned to its shareholders in the following circumstances: (a) the company redeems or purchases its own shares out of capital in accordance with ss49-49S CO ("share buy-back"); (b) the company reduces its capital in accordance with ss58-63 CO ("reduction of capital"); or (c) the company is put into liquidation. However, share buy-backs and reductions of capital are exceptional transactions due to their high complexity. They are subject to very stringent requirements, and an attempt at either transaction would necessarily incur more substantial legal costs. Accordingly, if the share capital of a company is considerable and it is ultimately desired that it be returned to its shareholders, dissolution of the company by way of deregistration may not be the most economical solution as compared to dissolution through liquidation proceedings (see below at Section III, Members' voluntary liquidation).
  7. A deregistered company may be reinstated by the Registrar by the publication of a notice in the Gazette declaring its registration to be reinstated if he is satisfied that the company was deregistered as a mistake on his part (s291AB(1) CO). Alternatively, a person who feels aggrieved by the deregistration of a company may apply to the court within 20 years of the deregistration to have the company reinstated. In that case, the court may order that the Registrar reinstate the company's registration if it is satisfied that it is just to do so. Generally, if there is a genuine claim against a deregistered company, and the claimant wishes to bring an action against the company, it would be very unusual for a court to refuse to reinstate the company (Re Active System Trading Ltd (unreported) [2004] HKEC 851). If the court orders the reinstatement of the company, it may also validate anything done between its deregistration and reinstatement, and make any other order it considers appropriate (s291AB(2), (3) CO). If the Registrar has disposed of any company property which was vested in the Government as bona vacantia upon the company's dissolution (see para. 12, above), the Registrar is bound to pay to the company the amount he received or an amount equal to the value of the property as at the date of the disposition when the company is reinstated (s292A CO).

III. Members' voluntary liquidation

  1. A solvent company (i.e. a company which can settle all of its debts in full) may also be dissolved by way of a members' voluntary liquidation ("MVL"). However, before a company commences the liquidation, it should attempt to settle all of its outstanding liabilities and minimise its asset holding in order to expedite the liquidation process.
  2. The first step in an MVL is to convene and hold a meeting of the directors to authorise: (i) the issue of a certificate of solvency ("Certificate of Solvency"); and (ii) the convening of an extraordinary general meeting of the shareholders to consider the passing of a resolution for winding up the company ("EGM").
  3. For companies with only 1 director, that director may issue a Certificate of Solvency by recording it and signing the record of it in the company's minute book. For companies with 2 directors, the Certificate of Solvency must be made by all the directors, or for companies with more than 2 directors, by a majority of the directors (s233(1) CO). A Certificate of Solvency may only be issued by the directors other than at a meeting of the directors if before it is issued, a resolution has been passed by the directors authorising the Certificate of Solvency to be issued (s223(1A) CO) In the Certificate of Solvency, the directors must state that they have made a full inquiry into the affairs of the company, and that having done so, they have formed the opinion that the company will be able to pay its debts in full within 12 months of the start of the liquidation. The certificate of solvency must be accompanied by a statement of the company's assets and liabilities as at the latest practicable date before the issue of the certificate (s233(1), (2)(b) CO).
  4. Within 5 weeks after the issue of the Certificate of Solvency, the EGM is held to pass: (i) a special resolution to put the company into MVL (s233(2)(a) CO) (the "Winding Up Resolution"); (ii) a special resolution to appoint a liquidator(s); and (iii) an ordinary resolution that an audit of the liquidator's account of his receipts and payments shall not be required (if appropriate). The MVL is deemed to commence upon the passing of the Winding Up Resolution (s230 CO). Under s116(1) CO, 21 days' notice must be given of the meeting, unless a 95% majority of the shareholders allows consent to short notice. If the members of the company cannot agree on a liquidator, the court may appoint one. However, if it does so, then only the court may, on cause shown, remove the liquidator and appoint a replacement (s252 CO). Philip Gilligan generally acts as liquidator in all MVLs handled by Deacons.
  5. To be effective, the Certificate of Solvency must be filed with the Registrar no later than the filing of the Winding Up Resolution, i.e. within 15 days of the date the resolution is passed (s233(2)(a); s117(1) CO). The company is also required to submit to the Registrar a copy of the notice of appointment of the liquidator within 21 days of the appointment (s253(1) CO). Furthermore, the Winding Up Resolution and the notice of appointment of the liquidator must be published in the Gazette within 14 days (s229(1) CO) and 21 days (s253(1) CO) respectively. The cessation of business must also be notified to the IRD and Business Registration Office within 1 month of the passing of the Winding Up Resolution (s8(2) BRO).
  6. If the Certificate of Solvency is not filed, the liquidation will automatically become a creditors' voluntary liquidation
    (s233(4) CO) ("CVL"). Alternatively, if the company subsequently becomes insolvent after the commencement of the MVL, the liquidator is under a duty to summon a creditors' meeting to take place as soon as is practicable, and the creditors can resolve that the MVL should thereafter be conducted as a CVL (s237A(1) CO). The main difference between an MVL and a CVL is that in the former, it is the shareholders which control the liquidation, whilst in the latter, the creditors will take a much more significant role. Thus, in a CVL, the creditors have the right to nominate a liquidator, and such nomination will take precedence to any other person nominated by the company. Furthermore, the creditors can also appoint a committee of inspection to supervise the liquidation (s237A(2) CO).
  7. Under s230 CO, the MVL is deemed to commence from the date of the passing of the Winding Up Resolution and the company shall cease to carry on its business, except so far as may be required for the beneficial winding up thereof (s231 CO). Upon the appointment of the liquidator, all the powers of the company's directors cease except so far as the company in general meeting or the liquidator sanctions their continuance (s235(2) CO).
  8. After appointment, the liquidator will proceed to wind up the company by realising all the assets of the company (if any), paying all the company's creditors and adjusting the rights of the contributories among themselves (s251(2) CO). At this stage, the biggest factor which may affect the time required to wind up the company will be the obtaining of tax clearance from the IRD, which may take from 3-6 months. Once tax clearance has been obtained, the liquidator may proceed with distribution of the surplus and return of the capital to the shareholders. In this way, provided there are surplus assets to settle all of the company's liabilities, any remaining surplus funds may be distributable to its shareholders as a return of capital in the course of the liquidation.
  9. At any time during the MVL, the liquidator, or any creditor or contributory may apply to the court to determine any question arising in the MVL, or to exercise all or any of the powers which the court might exercise if the company were being wound up compulsorily by the court, as respects the enforcing of calls, or any other matter (s255(1) CO). Furthermore, the liquidator may exercise the following powers with the sanction of a special resolution of the company (s251(1)(a) CO):
    1. pay any classes of creditors in full;
    2. make any compromise or arrangement with creditors or persons claiming to be creditors;
    3. compromise all calls and liabilities to call, debts, and liabilities, capable of resulting in debts, and all claims between the company and a contributory, or alleged contributory, or other debtor, and all questions in any way relating to or affecting the assets or the winding up of the company, and take any security for the discharge of any such call, debt, liability or claim, and give a complete discharge in respect thereof.
  10. The liquidator may also exercise the following powers without sanction by a special resolution of the company (s251(1)(b) CO):
    1. sell the property of the company;
    2. execute all deeds, receipts and other documents in the name and on behalf of the company;
    3. prove, rank and claim in the bankruptcy, insolvency, or sequestration of any contributory, for any balance against his estate, and to receive dividends in respect of that balance;
    4. draw, accept, make, and endorse any bill of exchange or promissory note in the name and on behalf of the company;
    5. raise money on the security of the company's assets;
    6. take out in his official name letters of administration to any deceased contributory;
    7. appoint an agent;
    8. do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.
  11. Generally, all the company's creditors should be paid in full within 12 months of the commencement of the liquidation. If the MVL continues for more than 12 months, the liquidator must summon a general meeting of the company at the end of the first year from the commencement of the MVL, and of each succeeding year (or within 3 months from the end of the year or such longer period as the Official Receiver may allow), and an account of the liquidator's acts and dealing and the conduct of the MVL during the preceding year must be laid before the meeting (s238(1) CO).
  12. As soon as the affairs of the company are fully wound up, the liquidator must make up an account of the winding up, showing how he has conducted the liquidation and disposed of the assets. The liquidator must then call a general meeting of shareholders, which must be advertised 1 month in advance in the Gazette, to lay before it the account and give an explanation of it (s239(1), (2) CO). Within 1 week of the meeting, the liquidator must send a copy of the account and a return as to the holding of the meeting and its date to the Registrar for registration (s239(3), (4) CO). The company will be formally dissolved on the expiration of 3 months from the date of registration of the account and return of the final meeting (s239(4) CO). Taking into account the above steps, an MVL for a company that does not have any substantial assets or liabilities will generally take at least 8-9 months to complete.
  13. A court has a discretion to order that the dissolution of a company by MVL is void, on the application of the liquidator or by any other person who appears to the court to be interested (s290(1) CO). The application must be made within 2 years from the date of dissolution, although if it is satisfied that there are exceptional circumstances justifying it, the court may extend the time to make the application, subject to such terms and conditions as it thinks just and expedient (s290(1), (1A) CO). If the court orders that a dissolution is void, proceedings may be taken against the company as if it had not been dissolved, and the applicant must deliver a copy of the order to the Registrar within 7 days of the date of the order or be liable to a fine, and for continued default, to a daily default fine (s290(1), (2) CO).

B. Summary

  1. In the case of dormancy, the company will not be permanently dissolved, but merely becomes inactive. Thus, even though a dormant company is exempted from a number of key provisions under the CO, it is still required to observe the other provisions of that ordinance, as well as comply with other applicable laws in Hong Kong. For example, dormant companies are still required to report changes of its directors or secretary to the Registrar (s158(4) CO), and to pay business registration fees under the Business Registration Ordinance (Cap. 310). Nevertheless, dormant company status may be useful if, for example, a company wishes to retain the use of its business names, or if the company may resume trading at a later date.
  2. A company which is deregistered is dissolved. However, such dissolution may not be 'permanent' in the sense that a deregistered company is subject to reinstatement upon the application of any person who feels aggrieved by the deregistration. Furthermore, neither option of dormancy nor deregistration will provide for the return of share capital to the shareholders of the company unless a lengthy and costly share buy-back or reduction in capital is undertaken.
  3. If the company in question has considerable share capital which will need to be returned to the shareholders, an MVL would likely be the best option. This would provide a more final dissolution of the company, and ensure that any surplus proceeds remaining after all the liabilities have been settled are returned to the shareholders.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.