A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Administration
Similar to the Companies Registry in Hong Kong. Each province has its own AIC where all companies in that province are registered.
AD VALOREM FEE
Ad Val, as it is known, was used to fund the operations of the Official Receiver’s Office, but nowadays it goes into the general revenue of the government of the Hong Kong Special Administrative Region. It has been described as a “tax on creditors” as the effect of Ad Val is to reduce the amount available to pay a dividend to creditors. All realisations of assets of a company in compulsory liquidation have to be paid into the Companies Liquidation Account from which the Ad Val is deducted. The proceeds of realisation of assets of companies in voluntary liquidation must also be paid into Companies Liquidation Account every six months, but they do not attract Ad Val. This is one of the reasons why the CVL procedure is more beneficial for creditors than the compulsory liquidation procedure. Here is a summary of the sliding scale.
Bankruptcy
Bankruptcy is the process of dealing with the financial affairs of an individual who is unable to pay their debts. In Hong Kong this description is limited to natural persons, whereas in some other jurisdictions bankruptcy is used to describe the corporate insolvency process. In the PRC there is no real concept of personal insolvency.
Bankruptcy Ordinance
Primary legislation covering personal insolvency in Hong Kong. Last updated in 1998, but still has the penal approach which it adopted from the UK Bankruptcy Act of 1914 and 1926 and on which it is still closely modelled. It is more up to date than the Companies (Winding-up and Miscellaneous Provisions) Ordinance, but in international terms it is already dated.
Bankruptcy Rules
Subsidiary legislation (known as regulations) dealing with personal insolvency.
Return of Capital
This usually happens in a MVL (a solvent liquidation) when all the creditors and costs have been paid in full and there is sufficient to make a distribution to the Company’s shareholders. However, there have been a number of examples in recent years of a return of capital to shareholders in compulsory liquidations.
Certificate of Solvency
A certificate signed by one or more directors of a solvent company confirming that the company is solvent and will be able to pay its debts in full within 12 months of the start of the liquidation. This is a requirement to start a Members’ Voluntary Liquidation.
Commencement of Liquidation
In a compulsory liquidation the winding-up is deemed to have commenced on the date that the petition is presented to the Court. In a CVL it commences on the date on which the shareholders pass the resolutions to wind-up. The commencement date is important for a number of reasons, including calculating the periods within which certain antecedent transactions such as unfair preferences and void dispositions can be unwound.
Committee of Inspection (“COI”)
The CoI is nominated at the meeting of creditors. It usually comprises between two and five creditors. Its role is to advise and assist the liquidators of the Company and to agree the liquidators’ remuneration. For more details of the role of the CoI go to Briscoe Wong Advisory and see their Committee of Inspection Guide.
Companies Liquidation Account
Effectively a bank account operated by the Official Receiver’s Office into which all the proceeds of realisation of the assets of companies in compulsory liquidation must be paid. These realisations are subject to Ad Val duty which is charged on a sliding scale.(See above for more details) Interestingly, there is no eqivalent in Bankruptcy where the trustee is required to maintain his trustees’ account at HSBC.
Companies Ordinance
This is now the core of the companies legislation in Hong Kong. It deals with live companies and everything associated with them. It used to be Chapter 32 of the Hong Kong legislation but is now Chapter 622.
C (WUMP) O
Companies (Winding-Up And Miscellaneous Provisions) Ordinance. A compulsory winding-up order is made by the High Court, most commonly on the petition of a creditor but it can also be on the petition of a shareholder, the Official Receiver or the company itself. As a result of this order the Official Receiver automatically becomes the provisional liquidator of the Company (unless another provisional liquidator has been appointed prior to the winding-up order being made).
S.60 Conveyancing and Property Ordinance
This allows liquidators to overturn transactions where it can be shown that the purpose of the transaction was to defraud creditors. Because of the element of fraud, there is a high burden of proof, but the case of Tradepower Holdings has shown that this is not insurmountable as transactions are deemed to have been entered into with the intention to defraud creditors where they are for little or no consideration.
Creditors’ Voluntary Liquidation (CVL)
A liquidation process initiated by the directors of the company. It starts with them deciding that the company is insolvent and cannot continue trading and that it should be wound-up. The directors then convene a meeting of shareholders (also known as contributories), at which they pass a resolution to wind-up the company. The meeting of shareholders is immediately followed by a meeting of creditors at which a liquidator is appointed and possibly a Committee of Inspection.
Debenture
Typically, this is a legal charge over all the fixed and floating assets of the Company. It will usually give the holder of the charge the power to appoint a Receiver and Manager in the event of default.
Dividend
The distribution of the proceeds of sale of the assets to creditors by the Insolvency Practitioner. This is defined as a % of the dollar value of their claims, or as “cents in the dollar”. This usually takes place at the end of the administration, although it is not uncommon for an interim dividend to be declared if there are still assets to realise, but all the claims have been adjudicated.
Fees and Percentages Order
Part of the Companies (Winding-up and Miscellaneous Provisions) Ordinance that deals with the fees that are charged by the Official Receiver’s Office and the Court in various aspects of the liquidation process.
Fixed Charge
Most commonly found when a company gives a charge to its bankers or other lenders as security for loans. A fixed charge will usually be secured on land and buildings. It usually contains the power to appoint a receiver.
Floating Charge
Floating charges are less common in Hong Kong. It is a charge over what are usually known as revolving assets, that is those such as stock, work-in-progress, debtors and plant and machinery, which the company is free to dispose of as it sees fit, without any interference from the chargeholder. In an insolvency, the proceeds of realisation of floating charge assets are firstly available to the preferential creditors. Only once they have been paid, can the balance be paid to the floating charge holder. A floating charge will usually contain the power to appoint a receiver and manager.
Fraudulent Trading
Virtually impossible to prove. No decided cases in Hong Kong. Necessary to establish the intention to defraud in the mind of the individual when the actions were committed.
High Court
The Court in Hong Kong which has jurisdiction over all personal and corporate insolvency matters. Any appeal from a decision of the High Court (sometimes known as the Court of First Instance) is to the Court of Appeal and from there to the Court of Final appeal. Respectively, the Courts are often referred to as CFI, CA and CFA. Company matters, including matters relating to the winding-up of companies, are often dealt with by the Companies Judge, currently Harris.J.
Insolvency
Not defined in the legislation, but usually considered to be either:
being unable to pay debts as and when they become due – the cash flow test; or not having sufficient assets to pay debts in full – the balance sheet test
Insolvency Practitioner (IP)
Usually an accountant who specialises in insolvency and corporate recovery assignments. Unlike in many other jurisdictions, the IP in Hong Kong does not need to have a specialist qualification to act as a liquidator or trustee. However, this area of work is becoming more and more complex with the result that most liquidations of any size are dealt with by experienced IP’s.
Insolvent Trading
Similar to the wrongful trading provisions in the UK Insolvency Act of 1986. It will allow personal liability for company debts to be imposed on directors who know their company is insolvent, that it is likely to go into liquidation and yet allow it to continue trading at the risk of its creditors. Insolvent Trading has not yet been enacted in Hong Kong and is only likely to be enacted at the same time as Provisional Supervision.
Individual Voluntary Arrangement (IVA)
A Court supervised alternative to bankruptcy where the debtor usually agrees to repay his creditors either in full over an extended period, or where the return for creditors is better than bankruptcy. It needs to be approved by creditors representing 75% or more in value of the creditors who are entitled to vote at and who attend the meeting of creditors.
IVA Nominee
The IP who assists the debtor in setting up the IVA, Confusingly he is also called the Nominee if he administers the IVA after its approval by creditors.
Liquidator
Appointed either by the Court or creditors. His role is to realise the Company’s assets, distribute them among its creditors in line with their statutory priorities, investigate the causes of failure and report as appropriate to the Court and the Official Receiver. Usually appointed on a joint and several basis.
Liquidator’s Bond
In a compulsory liquidation, the liquidator is required to provide the Official Receiver with an insurance bond. In theory, its purpose is to safeguard the interests of creditors in the event that a liquidator absconds with Company assets. This has never happened in Hong Kong.
Labour Department
The branch of government that deals with the rights of employees and which probably files more winding-up petitions (on behalf of employees who are unpaid by insolvent employers) than any other creditor in Hong Kong.
Legal Representative (Legal Rep)
The Legal Rep is the representative of the PRC company – every PRC company must have one. He does not have to be a legally qualified person. However, he does have signifcant legal responsiblities in respect of many aspects of the operation of a PRC company. He/she can commit the company contractually but the role of the Legal Reps role is often misuderstood by foreign investors. In particular it’s very difficult to get rid of an uncoooperative Legal Rep. [Excellent summary here.]
Litigation Funding
This is usually referred to as the funding by a third party of litigation in connection with a company in liquidation. The third party may be a creditor or it may be someone who funds litigation in return for a share of the proceeds.
Members’ Voluntary Liquidation – (MVL)
Where a company is solvent, i.e. it has sufficient assets to meet its liabilities, it can be wound-up using the MVL process. The principal criteria, along with payment of all creditors, is that they must be paid within 12 months of the start of the liquidation. Go here for a more comprehensive explanation of the MVL process.
Misfeasance
The section of the Companies (Winding-up and Miscellaneous Provisions) Ordinance under which liquidators can bring claims against directors for breach of their fiduciary duties. Generally, this is where a director acts in his own interests or those of someone else as opposed to acting in the interests of the Company. Such a breach can result in personal liability on the part of directors for losses incurred by the Company.
Official Receiver
A civil servant. The Official Receiver’s Office is responsible for the administration of bankruptcies and compulsory liquidations in Hong Kong and acts as a de facto regulator of those professionals who are appointed in Court supervised insolvencies.
Official Receiver’s Scale Rates
This is a scale of charge-out rates produced by the Official Receiver’s Office. It has recently been updated for the first time since 1998. Whilst neither the Court or creditors are bound by this scale of charges it has become the benchmark for charge-out rates for liquidators in Hong Kong.
Panel A
An administrative scheme operated by the Official Receiver’s Office. First established in 1996, its purpose was to ensure that if a liquidator was not nominated at the first meeting of creditors then the next firm from the Panel A can be put forward. Applies only to non-summary liquidations, (ie those with assets in excess of HK$200,000). Admission to the Panel is based on various factors including numbers of staff and experience. However not being a member of the Panel does not prevent a person being appointed liquidator by the Court in a non-summary liquidation.
Panel T
Applies to summary liquidations, that is those with assets of less than HK$200,000. Membership of the Panel is based on a tender process which presently takes place every 2 years. Those firms which submit the lowest tenders appear to be accepted. Originally known as Panel B, but has become generally known as Panel T because of the tender process. The average tender for the two years starting April 2014 is HK$1,600 with tenders ranging from a high of HK$2,200 to a low of HK$688.
Pari-Passu
A Latin phrase used to describe how distributions are made to preferential and unsecured creditors in proportion to the size of their claims in the insolvency process.
Petitioner’s Deposit
This is the amount (currently HK$12,150, plus Court fees of HK$1,045) paid to the Court when the petitioner presents a bankruptcy petition or a winding-up petition. If a debtor self-petitions, the deposit is HK$8,650 plus HK$1,045.
Preferential Creditors
These creditors have a right to be paid in priority to other creditors, but after the costs of the liquidation. However, not all preferential creditors are created equal. Preferential claims are set out in s.265 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance, which is probably the most inpenetrable section of the whole Ordinance. From a practical point of view the highest priority goes to employees. However, as it is often the case that the employees are paid by the Protection of Wages on Insolvency Fund, it often steps into the shoes of the employees when it comes to a dividend being paid. Other preferential creditors include the IRD for unpaid profits tax and the MPF for any unpaid contributions. If you need to know all the categories of preferential creditors and their respective priorities we would invite you to review the relevant section of the Ordinance.
Private Examination (s.221)
An order for a private examination can be obtained pursuant to s.221 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance. An order is likely to be granted where the liquidator believes that a person or organisation has information or documents about the affairs of the company but when they are unwilling to cooperate with the liquidator. The examination takes place in Court and the person being examined is not allowed to refuse to answer any questions even if by doing so he might incriminate himself. There are similar provisions in the Bankruptcy Ordinance to enforce the provision of information to a trustee in bankruptcy.
Processing Agreement
Usually entered into between a foreing company (most often a Hong Kong company) and a PRC entity – sometimes in the private sector and sometimes part of the local government. The PRC entity agrees to provide factory premises and a workforce – the foreign entity provides the raw materials, plant and machinery as necessary and the orders. The foreign entity makes a regular payment to the PRC entity to cover the costs of the fatory and workforce, but has no other obligations.
Post-Liquidation Interest
If there is enough money to pay all the creditors of the company in liquidation and the costs and fees, the creditors are entitled to be paid interest on their debts from the date of the winding-up order to the date on which they are paid. This is calculated at the judgment rate.
Proof of Debt Form
The form by which a creditor registers its claim in a liquidation or bankruptcy. These are statutory forms in bankruptcies and compulsory liquidations. In IVA’s and CVL’s a similar form is used by most insolvency practitioners.
Protection Of Wages On Insolvency Fund (PWIF)
When a Company fails, it is often the employees who are the first to suffer. The PWIF was set up to provide a measure of protection for employees by enabling this body to make payments to employees dismissed as a result of insolvency. The PWIF then stands in the shoes of the employees in respect of their claims against the company. In practice, it often takes several months for employees to be paid by the PWIF. It only applies to court supervised insolvencies. Payments to employees of a company going into Creditors’ Voluntary Liquidation are still only made on an “ex gratia” basis. In practice if a company going into CVL has less than 20 employees then the PWIF make the appropriate payments. If it has more than 20 employees, the PWIF will not “kick-in” until a winding-up petition has been presented and a “Rena Gabriel” order has been made.
Ironically the fund itself became “insolvent” about 20 years ago and had itself to be bailed out by the government.
Provsional Liquidator
In Hong Kong there are a variety of provisional liquidators. It could be the Official Receiver who automatically becomes the provisional liquidator when a winding-up order is made against a company; or it could be a private sector insolvency practitioner appointed by the Official Receiver pursuant to s.194(1A) – what is known as a Panel T appointment; or it could be a private sector insolvency practitioner appointed by the Court under s.193; or he/she could be appointed by the directors through s.228A.
Provisional Supervision
A proposed corporate rescue procedure first formulated in 1997. Submitted to LegCo on two occasions, it has failed to progress on either occasion because of flaws in the way it is proposed that the claims of employees are to be treated. It is likely to come before LegCo again in 2015/16 as part of the update to the winding-up provisions of the Companies (Winding-up and Miscellaneous Provisions) Ordinance. Tied to Insolvent Trading, but unlikely to become legislation until 2018 or 2019.
Proxy Form
In any form of insolvency procedure a creditor is entitled to vote at a meeting of creditors. A creditor can attend and vote in person or can appoint a proxy to attend and vote on its behalf. Many creditors appoint the chairman of the meeting to be their proxy, not realising that at a CVL meeting of creditors the chairman will be one of the directors of the insolvent company.
Receiver
Can be appointed by the Court or by a lender who has a legal charge which gives the power to appoint a Receiver. The Receiver’s powers are governed either by the Court order under which the appointment takes place or by the charge document under which he is appointed. The role of the Receiver is usually to recover money owed to the chargeholder, or in the case of a Court appointed Receiver it is usually to recover and protect assets which may be in jeopardy.
Receivership
This refers to the process where a creditor who has some form of security, often a fixed charge, appoints someone – a Receiver (usually, but not always an insolvency practitioner) – to realise his security on his behalf, sell it and pay him the proceeds.
Regulating Order
When a Regulating Order is made by the Court, it allows a compulsory liquidation to be administered in a simplified fashion. It usually granted when a company in liquidation has a large number of creditors.
Rena Gabriel Order
Named after the case of the same name. If a company goes into creditors’ voluntary liquidation and has more than 20 employees whose claims are unpaid, the employees can make claims to the Labour Department under the PWIF. However, the PWIF cannot make payments out to more than 20 employees if the Company is in voluntary liquidation. In these circumstances, the practice has developed of the Labour Department filing a winding-up petition against the Company. On the date of the hearing it is not opposed, but no winding-up order is made. A Rena Gabriel order is made which means that the petition remains on file until the voluntary liquidation has been completed and the Company dissolved. The Labour Department can then proceed to make payments to the employees under the PWIF process.
Security for Costs
Often encountered by a liquidator when he commences proceedings against someone in relation to the liquidation. This is usually someone who owes money to the company or against whom the company has some other type of claim. The defendant then asks the Court to order the liquidator to put up money to meet any costs order that might be made against the company. The court usually makes this order because the fact that the company is in liquidation often, but not always, means that it doesn’t have the funds to meet any order for adverse costs. Unfortunately, this is often a tactic to frustrate claims by liquidators as most of the time the liquidator doesn’t have the funds to post the security for costs.
Shareholders
Individuals or Companies who hold shares in the company. Also sometimes known as contributories.
Sino-Foreign Equity Joint Venture – JV
For many years, JVs were the preferred investment vehicle for foreing investors going into the PRC, particularly for the first time. Typically the foreign investor would provide capital, raw materials and know how, whilst the local JV partner, often a government enterprise or a branch of local government would provide the land and or premises and sometimes the workforce. Many JVs were run by Hong Kong businessmen who had contacts in the local towns and villages where the JV was operating from. There are numerous examples of local investors falling out with foreign investors. As foreign investors have grown more comfofrtable with operating in the PRC there has been a movement towards using the WFOE as the investment vehicle of choice.
Specialist Designation in Insolvency
Awarded by the Hong Kong Institute of Certified Public Accountants (HKICPA).There are only some 70 or so people in Hong Kong who have received this award. It was instituted in (year) and for the first three years was open to people who could establish, to the satisfaction of an independent panel, that they possessed the necessary skill and experience in the filed of insolvency and corporate recovery, to be given the title. In future, it will be necessary to pass the Hong Kong Professional Diploma in Insolvencey as one of the prerequisites to applying to the Institute for the award. The Specialist Designation is only available to people who are members of the HKICPA.
Stakeholders
Something of a vague phrase which can encompass creditors, shareholders, employees and could be extended to other third parties who may be affected by the insolvency. For example, in a construction insolvency, employers for whom the insolvent company is working and the eventual owner(s) of a building being constructed could all be thought of as stakeholders
Statement of Affairs
This is a summary of the assets and liabilities of the company as at the date of the winding-up order (in a compulsory liquidation) or the meeting of creditors (in a CVL). Directors are under an obligation to provide a Statement of Affairs to the liquidator in a compulsory liquidation. A Statement of Affairs must be presented to the meeting of creditors in a CVL.
Statutory Demand
Often referred to as a “21 day notice”. The serving of the statutory demand can be the starting point for bankruptcy or winding-up proceedings. If the debt shown on the demand is not paid within 21 days of service, the creditor is then able to file a bankruptcy petition or a winding-up petition.
Summary and Non-Summary Cases (Compulsory Liquidations)
A summary liquidation is one where the the assets of the Company are worth less than HK$200,000. In contrast, a non-summary case is one where the assets are worth more than HK$200,000.
Section 228A Liquidation
A process, unique to Hong Kong, where the directors of a company can place it into liquidation without reference to its shareholders. This procedure has often been criticised and it is claimed has been subject to abuse – but no evidence has been put forward to support this allegation. The directors can only commence this type of liquidation where there are no other means of placing the company into liquidation.
Subrogation
The right of subrogation arises when a person makes a payment of a debt owed by a third party and then steps into that person’s shoes.
Taxation Fees
These are fees payable to the Court whenever the fee note of a liquidator, provisional liquidator or one of their agents is taxed by the Court. The taxing fee is based on a scale rate.
Transactions at an Undervalue
Where a bankrupt has disposed of or transferred an asset for less than its fair market value the trustee can go back up to 5 years to overturn the transaction. There is no similar statutory provision in relation to companies, but such provisions are likely to be introduced with the current proposed changes to the winding-up provisions of the Companies (Winding-up and Miscellaneous Provisions) Ordinance.
Trustee In Bankruptcy
The Trustee is either the Official Receiver or a private sector insolvency practitioner whose role is to investigate the affairs of the bankrupt, realise the bankrupt’s assets and distribute them to creditors in accordance with their priorities. A private sector Trustee is usually an accountant or a solicitor and is appointed by the Court.
Unfair Preference
An unfair preference happens when a company enters into a transaction that puts one or more of its creditors in a better position than they would otherwise have been in the event of the company going into liquidation. Examples include giving security to a creditor who previous had no secruity or paying off one creditor whilst not paying others. A liquidator can go back six months to review such transactions and up to two years if the party that benefited from the transaction was connected (was an associate) with the Company. See here for a more detailed discussion of the subject and here for an explanation as to why it is so difficult to successfully pursue an unfair preference claim.
Void Dispositions
Void dispositions are defined in S.182 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance. They are payments made by a Company (or possibly on its behalf) after the commencement of the liquidation which is the date of the presentation of the winding-up petition. All such payments are void, but can be validated by the Court by what is known as a validation order. However, a validation order will only be made in exceptional circumstances and rarely when the Company is insolvent.
Wholly Foreign Owned Enterprise – WFOE
A PRC company all of whose shares are owned by people outside the PRC. Often referred to by the acronym WOFE, in recent years they have become the preferred vehicle of choice for foreign investors wishing to set up operations in the PRC. They do have certain tax advantages, but in many cases their operations are limited to manufacturing in PRC – all production needs to be exported. The limits on the operations are prescribed when the WFOE is registered.
Winding-Up Order
This is the order made by the Court following the hearing of the winding-up petition.
Winding-up Petition
This is filed with the Court by a creditor. If a winding-up order is eventually made, then the start of the winding-up proceedings dates back to the date on which the petition is presented to the Court.