3/7/2024

LW4657/LW5657 Company Law II

Liquidation II

Professor Virginia Harper Ho &

Professor Alexander Loke
School of Law
City University of Hong Kong

February 2024

The Role of the Liquidator

1. Inquire into reasons for failure of
company
2. Get in/ protect/ realize assets
3. Distribute the assets

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The liquidator takes custody of the company’s

property. Cap. 32 s. 197
197. Where a winding-up order has been
made or where a provisional liquidator has
been appointed, the liquidator, or the
provisional liquidator, as the case may be,
shall take into his custody, or under his
control, all the property and things in action
to which the company is or appears to be
entitled.

The scramble for priority

Asset value

Secured debt V1
$20m $30m

Unsecured debt
Debt
$60m
Senior debt $40m
Secured debt = $20m
------------------------------------------------
Subordinated debt (100c to the dollar)
Unsecured debt = $10m/$40m
(25c to the dollar)
Preferred shares Equity = $0

Equity
Common shares
100 shares

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The pari passu principle

 Voluntary winding up: Cap. 32 s 250
 Compulsory winding up: Cap 32 s. 264 +
Bankruptcy Ordinance s. 38(8)

Pari passu principle for insolvent companies

Cap 32 s. 264 “In the winding up of an insolvent company the

same rules shall prevail and be observed with regard to the
respective rights of secured and unsecured creditors and to
debts provable and to the valuation of annuities and future
and contingent liabilities as are in force for the time being
under the law of bankruptcy with respect to the estates of
persons adjudged bankrupt, and all persons who in any such
case would be entitled to prove for and receive dividends out
of the assets of the company may come in under the winding
up, and make such claims against the company as they
respectively are entitled to by virtue of this section.”

BO s. 38(8)
(8) Subject to the provisions of this Ordinance, all debts
proved in the bankruptcy shall be paid pari passu.

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In re Lines Bros (1982)

Voluntary w/u £ Payment

28/9/1971 depreciates 1972
against SFr

Company
SFr 18.5 million

In re Lines Bros (1982)

 Liquidators converted the SFr debt into £ at
the rate prevailing at the date of resolution
to wind up the company (i.e.
commencement of winding up)
 Surplus (£2m) after paying all provable
debts
Issue: whether bank entitled to recover
currency conversion loss?
Held: No.

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In re Lines Bros (1982)

Counsel for bank sought to develop on
Miliangos v George Frank (1976)
 Judgment may be given in foreign currency
 Conversion date should date of actual
payment of debt
How relevant is Miliangos to liquidation?

Another Reason Why Commencement of Windup Matters

In re Lines Bros (1982)
Distinct policy concerns in liquidation
 Liquidation (compulsory /voluntary) is a form of collective
enforcement under the law
 Statutory scheme must be followed
 Liquidator needs to compare like with like.
• Compare £ with SFR debt
• Certain total assets – total debts
• Pay creditor pari passu

Proper date: Date when winding up starts

Learning Points:
(a) significance of the commencement of winding up;
(b) the underlying operation of pari passu principle

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Commencement of winding up
Winding up by the court
If a petition for winding-up is presented and a winding-up order is
made, the winding up is deemed to have commenced from the time
when the petition for winding-up is presented.

CO Cap. 32 s. 184(2):
(1) Where before the presentation of a petition for the winding up
of a company by the court a resolution has been passed by the
company for voluntary winding up, the winding up of the company
shall be deemed to have commenced at the time of the passing of
the resolution, and unless the court, on proof of fraud or mistake,
thinks fit otherwise to direct, all proceedings taken in the voluntary
winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the court shall
be deemed to commence at the time of the presentation of the
petition for the winding up.

Commencement of winding up
Voluntary Winding up
Commencement of winding up dates from the time the resolution
for winding up is passed.

CO Cap. 32 s. 230
Commencement of Voluntary Winding Up
“Except as provided in section 228A(5)(a), a voluntary
winding up shall be deemed to commence at the time of
the passing of the resolution for voluntary winding up.”

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Gathering in the Assets

CO Cap. 32 s. 199 Powers of liquidator

***
199-(2) A liquidator may exercise any of the powers specified in
Part 1 or 2 of Schedule 25 only with the sanction of the court or
the committee of inspection.

Schedule 25 Part 2
1. Bring or defend any action or other legal proceedings in the name and
on behalf of the company. * * *

Schedule 25 Part 1
2. Make a compromise or arrangement with—[creditors]
***

Ord. 14/2016 wef 13/2/2017

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CO Cap. 32 s. 199 Powers of liquidator

Schedule 25 Part 3
8. Employ a solicitor to assist the liquidator in performing the liquidator’s duties

(3) Except as provided in subsection (4), a liquidator may exercise any of the
powers specified in Part 3 of Schedule 25.
(4) A liquidator (other than the Official Receiver) may only exercise the power
specified in item 8 of Part 3 of Schedule 25—
(a) with the sanction of the court or the committee of inspection; or
(b) without the sanction if the liquidator has, before exercising the power,
given at least 7 days’ notice of the intention to exercise the power—
(i) (if there is a committee of inspection) to the members of the
committee; or
(ii) (if there is no committee of inspection) to the creditors.

Ord. 14/2016 wef 13/2/2017

Augmenting the assets available for

distribution
For example:
s. 182 Void property dispositions
s. 265D Transactions at an undervalue
S 266 Unfair preferences
s. 267 Invalidate vulnerable floating charges
s. 268 Disclaim onerous contracts etc
s. 275 Directors’ liability for fraudulent trading

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Cap. 32 s. 267
Vulnerable floating charges
* * *(2) If the company creates a floating charge on
its undertaking or property at a relevant time
(within the meaning of section 267A), the charge is
invalid except to the extent of the amount specified
in subsection (3).
(3) The amount is the aggregate of—
(a) the value of so much of the consideration for the creation of the charge that
consists of—
(i) money paid to the company at the same time as, or after, the creation of
the charge;
(ii) money paid at the direction of the company at the same time as, or after,
the creation of the charge; or
(iii) property or services supplied to the company at the same time as, or
after, the creation of the charge; and * * *

Ord. 14/2016 wef 13/2/2017

s. 267A

Relevant time
Connected person Non-connected person

Created within 2 years Created within 12 months

immediately preceding the day immediately preceding the day
on which the winding up of the on which the winding up of the
company commences; company commences;

Company is unable to pay its debts

(within meaning of s. 178) or

Company becomes unable to pay

its debts (within the meaning of s.
178) in consequence of the
transaction under which the charge
is created

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Cap. 32 s. 267
Key Points: Vulnerable floating charges
1. A floating charge created within the relevant
time is presumptively invalid
2. The presumption of invalidity is rebutted if
the chargee is able demonstrate that he gave
new value for the charge
Note the extent of the claim on the collateral

Cap. 32 s. 267 Vulnerable floating charges

Relevant Time (s. 267A)

Connected person Non-connected person

2 years 12 months

s 267A(1) (i) is unable to pay its

connected person: s 265A(3)
associate: s 265A(1), s 265B and 265C
debts … at that time; or
(ii) becomes unable to
pay its debts … in
consequence of the
transaction under which
the charge is created.
s 267A(2)

Ord. 14/2016 wef 13/2/2017

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Cap. 32 s. 267 Vulnerable floating charges

Re Dream Asia (2003)

Loan agreement
including FLC
Co Lenders

$p

$ PPP

Creditors

Cap. 32 s. 267 Vulnerable floating charges

Re Dream Asia (2003)

Loan
agreement + Resolution for
FLC voluntary w/u

2 months

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Cap. 32 s. 267 Vulnerable floating charges

Re Dream Asia (2003)

Issue: Whether the loans which were
disbursed directly to creditors amounted to
“cash paid to the company”?
(Wording prior to Ord. 14/2016)

Section 267: “… except to the amount of any cash

paid to the company at the time of or subsequently
to the creation of, and in consideration for, the
charge, together with interest on that amount at the
rate specified in the charge or at the rate 12 per cent
per annum whichever is the less.

Cap. 32 s. 267 Vulnerable floating charges

Analysis: Re Dream Asia (2003)

Two limbs: (a) substance Two limbs: (a) substance

and (b) form. and (b) form.
As to $P (direct payment): As to $PPP (paid to
(a) Benefit to company - creditors):
Kept company afloat (a) Benefit to company?
(b) Form  Bona fide agreement for
benefit of Co
 Not a subterfuge to
prefer Ls
(b) Form?

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Cap. 32 s. 268
Disclaimer of onerous property
268(1) - Where any part of the property of a company which is
being wound up consists of land of any tenure burdened with
onerous covenants, of shares or stock in companies, of
unprofitable contracts, or of any other property that is
unsaleable, or not readily saleable, by reason of its binding
the possessor thereof to the performance of any onerous act,
or to the payment of any sum of money,
the liquidator of the company, notwithstanding that he has
endeavoured to sell or has taken possession of the property,
or exercised any act of ownership in relation thereto, may,
with the leave of the court and subject to the provisions of
this section, by writing signed by him, at any time within 12
months after the commencement of the winding up or such
extended period as may be allowed by the court, disclaim the
property…”

Unfair Preference
Cap. 32 s. 266, 266A, 266B

Cap. 32 s. 266
(2) If a company has at a relevant time given an unfair
preference to a person , the liquidator may apply to the
court for an order under subsection (3)
(3) … the court may make an order that it thinks fit for
restoring the position to what it would have been if the
company had not given that unfair preference.
(4) The court must not make the [subsec(3) order] unless
the company was influenced, in deciding to give that unfair
preference, by a desire to produce [the s 266A(1)(b) effect]

Ord. 14/2016 wef 13/2/2017

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Unfair Preference
Cap. 32 s. 266, 266A, 266B

Unfair preference
s. 266A

Covered counterparty: s 266A(1)(a)

+
Effect: s 266A(1)(b)
… of putting that person into a position which,
in the event of the company going into
insolvent liquidation, will be better than the
position that person would have been in if
that thing had not been done

Ord. 14/2016 wef 13/2/2017

Unfair Preference
Cap. 32 s. 266, 266A, 266B
Elements:
1. Creditor (or guarantor)
2. In the event of liquidation, the creditor is placed in
a better position than if the thing had not been
done.
3. Desire to prefer
4. Relevant Time
5. Company is insolvent.
• Re Vigers Hong Kong Ltd [2022] HKCFI 261 at [131], Linda Chan J;
• Re Auragem Co Ltd [2019] HKCFI 2914 at [73], citing Re Phantom
Records Ltd HCMP 2770/2003 (unreported, 7 December 2006) 2006)
at [82] – [88].

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Unfair Preference under Cap. 32 s. 266

Re M C Bacon [1990] BCLC 324

O/D facility

Co

O/D facility granted by bank

20/5/1987 Debenture granting collateral to bank
24/8/1987 Creditors’ voluntary liquidation
4/9/1987 Bank demanded payment
7/9/1987 Liquidator appointed

Re M C Bacon (1990)
Unfair Preference under Cap. 32 s. 266
Bankruptcy Ordinance s. 50, imported by Cap. 32 s. 266B(1) (Statutory text prior to
Ord. 14/2016)

Bankruptcy Ordinance s50 (imported by Cap. 32 s.

266B(1)
(3) For the purposes of this section and sections 51 and
51A, a debtor gives an unfair preference to a person if-
(a) that person is one of the debtor's creditors or a
surety or guarantor for any of his debts or other
liabilities; and
(b) the debtor does anything or suffers anything to be
done which (in either case) has the effect of putting
that person into a position which, in the event of the
debtor's bankruptcy, will be better than the position
he would have been in if that thing had not been
done.

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Re M C Bacon (1990)
Unfair Preference under Cap. 32 s. 266
Bankruptcy Ordinance s. 50, imported by Cap. 32 s. 266B(1)
(Statutory text prior to Ord. 14/2016)

50---…
(4) The court shall not make an order under this
section in respect of an unfair preference given to
any person unless the debtor who gave the unfair
preference was influenced in deciding to give it by a
desire to produce in relation to that person the
effect mentioned in subsection (3)(b).

Re M C Bacon (1990)
Unfair Preference under Cap. 32 s. 266

O/D facility

Co

Issues:
(1) Whether the granting of the debenture amounted to
an unfair preference?
(2) Whether the transaction amounted to a transaction
at an undervalue?

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Re M C Bacon (1990)
Unfair Preference under Cap. 32 s. 266

O/D facility

Co
Held: No.
(1) Positive wish?
(2) Desire to prefer?
 Note the subjective nature
 How does one establish this?
 See also Re Hau Po Man [2005] 2 HKLRD 262 (CA)
(3) Influence the transaction? (Causation)

Unfair Preference under Cap. 32 s. 266

Re M C Bacon [1990] BCLC 324

Desire to produce an effect

There must have been a desire to produce the effect mentioned in the
subsection, that is to say, to improve the creditor's position in the event of an
insolvent liquidation. A man is not to be taken as desiring all the necessary
consequences of his actions. *** It will still be possible to provide assistance to a
company in financial difficulties provided that the company is actuated only by
proper commercial considerations.
Under the new regime a transaction will not be set aside as a voidable preference
unless the company positively wished to improve the creditor’s position in the
event of its own insolvent liquidation

Subjective
Intend to produce an effect
“A man is taken to intend the necessary consequences of his actions, so that
an intention to grant a security to a creditor necessarily involves an
intention to prefer that creditor in the event of insolvency.”

Objective Re Phantom Records Ltd HCMP 2770/2003 (unreported, 7

December2006) 2006), Kwan J. (cited in Re Almond Ltd
[2019] HKCFI 634 at [26])

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Unfair Preference under Cap. 32 s. 266

Re M C Bacon [1990] BCLC 324

Influence on the transaction?

As for influence, this requirement is satisfied if it was one of the factors which
operated on the minds of those made the decision. It need not have been the
only factor or even the decisive one. It is not necessary to prove that if the
requisite desire had not been present, the company would not have entered into
the transaction (Re MC Bacon Ltd., at 336c to d).

Re Phantom Records Ltd HCMP 2770/2003 (unreported, 7 December2006) 2006), Kwan J. (cited in Re Almond Ltd [2019]
HKCFI 634 at [26])

Successful proof of desire to prefer

Re Auragem Co Ltd [2019] HKCFI 2914

Formal act:
Resolution to wind up
Decision to wind up

Fund transfer

Held: A desire to prefer the transferee-creditor found.

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Unfair Preference – Creditor OR Guarantor

Cap. 32 s. 266A, 266B

266A. Meaning of unfair preference

(1) A company gives an unfair preference to a person if—
(a) that person is—
(i) one of the company’s creditors; or
(ii) a surety or guarantor for any of the company’s debts or other
liabilities; and
(b) the company does anything or suffers anything to be done which has
the effect of putting that person into a position which, in the event of
the company going into insolvent liquidation, will be better than the
position that person would have been in if that thing had not been
done.
(2) For the purposes of subsection (1)(b), a company goes into insolvent
liquidation if it goes into liquidation at a time when its assets are
insufficient for the payment of its debts and other liabilities and the
expenses of the winding up.
(3) The fact that something has been done pursuant to the order of any court
does not, without more, prevent the doing or suffering of that thing from
constituting the giving of an unfair preference.
(Replaced 14 of 2016 s. 89)

Successful proof of desire to prefer

Re Almond Ltd [2019] HKCFI 634

Borrower Repay loan Bank

Co

I will pay if Borrower does not pay.

Guarantor
(director)

Held: A desire to prefer the Guarantor found.

Note: A desire to prefer the guarantor does not necessarily mean a

desire to prefer the creditor: Re KCK Garment Factory Co Ltd
[2019] HKCFI 585 at [12].

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Unfair Preference
Presumption of the desire to prefer (connected persons): s. 266(5).
Rebuttal of presumption.

Re Fairway Magazines Ltd [1993] 1 BCLC 643

Company Director

Floating charge

Bank

Held:
(1) FLC granted was to enable company to carry on trading
(2) No desire to prefer director

Transactions at an undervalue
Cap 32 s 265D
(2) If the company has at a relevant time …
entered into a transaction with a person at an
undervalue, the liquidator may apply to the
court for an order under subsection (3).
(3) Subject to section 266C, on an application
under subsection (2), the court may make an
order that it thinks fit for restoring the position
to what it would have been if the company had
not entered into that transaction

Ord. 14/2016 wef 13/2/2017

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Transactions at an undervalue
Cap 32 s 265E

Meaning of
transaction at an undervalue

Gift Consideration – the value of which …

No consideration is significantly less than the value …
of the consideration provided by the
s 265E(a) company
s 265E(b)
There must be an intention to provide
a gift, not just a transfer of monies
without consideration: Re Auragem Co
Ltd [2019] HKCFI 2914 at [33]-[67]

Ord. 14/2016 wef 13/2/2017

s 265E(b)
“A company enters into a transaction with a person at an undervalue if – ***
(b) the company enters into a transaction with that person for a consideration
the value of which … is significantly less than the consideration provided by the
company.”

Deposit moneys into E’s account

Elite
H Ltd Performance
Cars

[42]*** I cannot accept that the mere transmission of money, the mere
making of a payment, without any form of dealing between the paying
company and the payee, can constitute the entering into of a transaction
by the company with the payee
***
Without straining the language of the section, this must require some
engagement, or at least communication, between the two parties and not
merely a disposition of money which results in one party's money landing
up in the bank account of the other without anything said or done by that
other.
Re Hampton Capital Ltd [2016] 1 BCLC 372 per Bombas QC
(sitting as Dy Judge of the High Court)

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Cap. 32 s. 275
Fraudulent Trading
If in the course of the winding up of a company it
appears that any business of the company has been
carried on with intent to defraud creditors of the
company or creditors of any other person or for any
fraudulent purpose,
the court, on the application of the Official Receiver, or
the liquidator or any creditor or contributory of the
company, may, if it thinks proper so to do,
declare that any persons who were knowingly parties to
the carrying on of the business in manner aforesaid shall
be personally responsible, without any limitation of
liability, for all or any of the debts or other liabilities of
the company as the court may direct.

Fraudulent Trading Cap. 32 s. 275

Aktieselskabet Dansk v Brothers (2000)

R2 (Company)
Bank
Small collateral
Liquidity crisis Loan substantially unsecured

R1
Director

Bank sued R1 (Director):

(a) Fraudulent Trading (Cap. 32 s. 275)
(b) Fraudulent misrepresentation

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Fraudulent Trading Cap. 32 s. 275

Aktieselskabet Dansk v Brothers (2000)
Fraud – subjective
• i.e. he personally must have been dishonest.

“ … even if the chances of payment of all creditors in full were

so remote that it belonged to the realm of hope rather than
belief, it seem to me that fault, grievous though it may be, falls
short of fraud unless it is coupled with something else, such as
misrepresentation of the position or an intention to use goods
purchased on credit for the purposes of dishonest gain, which
gives it a fraudulent character”
Hardie v Hanson (1960), per Menzies J

Misfeasance suits etc

Cap. 32 s. 276 Power of court to assess damages against delinquent
officer, etc.
276(1) - If in the course of winding up a company it appears that
any of the persons specified in ss (1A), has misapplied or retained
or become liable or accountable for any money or property of the
company, or been guilty of any misfeasance, breach of duty or
breach of trust in relation to the company which is actionable at
the suit of the company,
the court may, on the application of the … liquidator… examine into
the conduct of the person and compel the person to repay or restore
the money or property or any part thereof respectively with interest
at such rate as the court thinks just, or to contribute such sum to the
assets of the company by way of compensation in respect of the
misapplication, retainer, misfeasance, or breach of trust as the court
thinks just.

Ord. 14/2016 wef 13/2/2017

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