BUSINESS ASSOCIATIONS

CORPORATE DISSOLUTION & INSOLVENCY

(PART 2)
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DEBT FINANCING & SECURITY
2
CORPORATE BORROWINGS/DEBT FINANCING

 Loan funds can be obtained from:

 External financing –
• Banks, other financial institutions, or non-shareholders
• Can take the form of ordinary loans or issue of debt instruments (e.g.
bonds)
 Internal financing –
• Shareholders
• Usually takes the form of shareholders’ loans
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EXTERNAL VS INTERNAL DEBT FINANCING

Bank Loans Shareholders’ Loans

Repayment Fixed date(s) of repayment: No fixed date of repayment

date Lump sum (i.e. repayable on demand)
instalments

Interest Interest accruing Non-interest accruing

Security Secured Unsecured

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SECURITY FOR BANK LOANS
 Mortgage
 Legal or equitable
 A transfer of ownership/title to a creditor by way of security subject to equity of
redemption
 Fixed charge
 Equitable
 Attached to the assets charged
 Floating charge
 Equitable
 Charge hovering over a class of assets which may change from time to time until 5

crystallisation
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ENFORCEMENT OF CHARGES – RECEIVERSHIP
 As provided in the instrument creating the charge (self-help remedy)
triggered by event of default
 Receiver gets in and sells the charged assets to settle the sum secured
 Receiver has no power to carry on chargor company’s business unless
also a manager
 Board still functions unless receiver is also manager
 Chargor company needs not go into winding-up
 Receiver owes duty to chargee only, not to the chargor company
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 RECEIVERS VS LIQUIDATORS
Receivers Liquidators
- Appointed by creditor under the relevant security - Appointed by court/members/creditors under
document CWUMPO

- Appointment does not terminate Board’s management - Appointment terminates Board’s management powers,
powers; trading may continue after appointment and trading power of the company

- Company may not need to go into liquidation after - Liquidator only appointed where company going to be
appointment liquidated/wound up

- Duty to secured creditor to protect the creditor’s interest - Duty to company to protect the interests of unsecured
creditors

- Security document normally provides that the receiver - Acts at agent of the company in exercising his powers
acts as agent of the debtor company to minimise potential subject to court’s control and/or directions of
liability of the creditor creditors/contributories in general meeting 7

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AVOIDANCE PROVISIONS
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AVOIDANCE OF DISPOSITIONS

 Applicable to dispositions made after commencement of winding-

up
 For compulsory winding-up: Any disposition of property of the
company (including transfer of shares or alterations in the status of
the member) will be void, unless otherwise ordered by court (s.182)
 For voluntary winding-up: Any transfer of shares or alterations in
the status of the members will be void, unless consented to by the
liquidator (s.232)
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RECOVERY OF ASSETS – AVOIDANCE PROVISIONS RE
ANTECEDENT TRANSACTIONS
1. Transactions at an undervalue (ss.265D, 265E & 266B)
Prior to 13 February 2017, only apply to individuals under
the Bankruptcy Ordinance (Cap.6) (not to companies)
2. Unfair preference (ss.266 – 266B)
Prior to 13 February 2017, by reference to the Bankruptcy
Ordinance (not self-contained provisions)
3. Invalidation of floating charges (ss.267 & 267A) 10

EVA TAM 2023

AVOIDANCE PROVISIONS –
“COMPANY GOES INTO LIQUIDATION”
 Avoidance provisions re antecedent transactions only apply when
“the company goes into liquidation” (s.265A(4), s.265D(1),
s.266(1), s.267(1))
 Voluntary winding up (s.265A(4)(a))
The passing of the special resolution for voluntary winding up
 Compulsory winding up (s.265A(4)(c))
The making of court order for winding up
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AVOIDANCE PROVISIONS –
“PERSONS CONNECTED WITH THE COMPANY”

 A person is connected with a company if that person is:

 An associate of the company which means a director, shadow director
or other officer (ss.265A(3)(b) & 265C(2))
 An associate of a director or shadow director of the company
(s.265A(3)(a))
 “associates” include spouses, relatives, partners, trustees and
connected companies (ss.265B & 265C)
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TRANSACTIONS AT AN UNDERVALUE

Meaning (s.265E):
Gifts or company receiving no consideration
Consideration received by the company significantly less
than the value provided by the company

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TRANSACTIONS AT AN UNDERVALUE (2)

 ‘Relevant Time’ (ss.266B(1)(a), (2) & (3)):

Commencement of
5 years winding up

1) The company is unable to pay its debts at the time of transaction; or

2) The company becomes unable to pay its debts as a result of the transaction.
 Presumption that both of the above are satisfied if transaction entered into with
persons connected with the company (otherwise than by reason only of being an
employee).
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TRANSACTIONS AT AN UNDERVALUE (3)

Exception for court making a restoration order

(s.265D(4)):
Company entering into the transaction in good faith and
for the purpose of carrying on its business; and
At the time, there were reasonable grounds for believing
that the transactions would benefit the company
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UNFAIR PREFERENCE

- An existing creditor/guarantor
- The creditor/guarantor is preferred at the
relevant time
- The debtor company is influenced by a
desire to prefer the creditor/guarantor
- The debtor company is insolvent at the
‘relevant time’
(s.266)
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UNFAIR PREFERENCE (2)
 ‘Unfair Preference’:
 Placing the creditor/guarantor in a position better than he would have been in
(in an insolvent liquidation) if the preference had not been made (s.266A(1)(b)
& (2))
 Examples: Repayment of the debt over other like debts; Release of the
guarantee earlier than others; Giving security over a previously unsecured debt
 Debtor company influenced by a desire to prefer (s.266(4))
 Note presumption in the case of persons connected with company (otherwise
than by reason only of being an employee) (s.266(5))
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UNFAIR PREFERENCE (3)

 ‘Influenced by a desire to prefer’

 must be voluntary (i.e. not under pressure, no threat of litigation)
 Ho Man Kit v Sure Lead Ltd [2019] HKCFI 2914 at [73]:
 ‘Desire’ different from ‘intention’
 A debtor who gave a preference to a creditor had the intention to do so, but
did not necessarily desire that creditor be preferred
 Sufficient if the desire was one of the factors influencing the debtor’s mind

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UNFAIR PREFERENCE (4)

‘Relevant Time’ (s.266B):

Commencement of
2 years 6 months winding up
Other persons

For persons connected with the company

(otherwise than by reason only of being an employee)

1)The company is unable to pay its debts at the time of preference; or 19

2)The company becomes unable to pay its debts as a result of the preference
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 COURT ORDERS

Where a transaction is a transaction at an undervalue

and/or where unfair preference has been given, court may
make restoration order (s.265D(3) & s.266(3)) as well as
other related orders (s.266C)

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INVALIDATION OF FLOATING CHARGES

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INVALIDATION OF FLOATING CHARGES (2)

 The concepts of “new” vs “old” monies (s.267)

 “Old” monies means monies advanced to the company before
creation of the charge
 “New” monies means monies advanced to the company at the
same time as or after creation of the charge

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INVALIDATION OF FLOATING CHARGES (3)

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INVALIDATION OF FLOATING CHARGES (4)

 For chargees not connected with the company: (ss267 & 267A(2))
 floating charge could be set aside if winding up commences within 12
months
 “new” monies and interest are secured
 “old” monies are unsecured if company was insolvent at the time of
the creation of the floating charge or as a consequence of the
transaction under which the floating charge is created
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INVALIDATION OF FLOATING CHARGES (5)

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INVALIDATION OF FLOATING CHARGES (6)

 For chargees connected with the company (ss267 & 267A(1))

 ‘relevant time’ is extended to 2 years, i.e., cover charges created
within 2 years ending on the day on which the winding up of the
company commences
 ‘new’ monies and interest are secured
 ‘old’ monies are unsecured regardless of whether the company is able
to pay its debts or not
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INVALIDATION OF FLOATING CHARGES (7)

 Mace Builders (Glasgow) Ltd v Lunn [1987] Ch 191

 ss267 and 267A only apply “if the company goes into liquidation”
(s267(1))
 only avoids the charge so covenant to pay remains (i.e. did not
invalidate the repayment of debt secured which had been made by the
company prior to the company going into liquidation) – but see also
s.79 below for payment
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FRAUDULENT TRADING (S.275)

 Business of the company being carried on with intent to defraud creditors

or for fraudulent purpose
 Any persons who were knowingly parties to the carrying on of the
business will
 (on winding-up) be personally responsible for all debts and liabilities of
the company; and
 (whether or not there is a winding-up) be criminally liable
 No ‘wrongful trading’ or ‘insolvent trading’ in HK 28

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 DISTRIBUTION OF COMPANY’S
PROPERTY

Distribution of company’s property to

members only after payments to
preferential creditors and discharge of
liabilities on a pari passu basis (s.250)

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ORDER OF PAYMENT

Winding Up Costs (s.265(4))

Preferential Debts (s.265(1)(b) to (f))

Debts Subject to Floating Charge (s.265(3B), s.79)

Other Unsecured Debts

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PREFERENTIAL DEBTS

 Wages and salary owing to employees during the 4 months prior to the
commencement of the winding-up subject to monetary limit
 Statutory debts are debts owed to the Government during the 12 months
prior to the commencement of the winding-up
 Wages and salary have priority over statutory debts (s.265(3))

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DISSOLUTION

After final affairs are wound up, the company is dissolved

(s.227 (compulsory winding up) & s.248 (voluntary winding
up))

Upon dissolution, any property left in the company is vested

in the Government -- bona vacantia (s.752 CO)
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