Section 209A Conversion Of A Compulsory Liquidation To A Voluntary Liquidation
S.209A of the Companies (Winding-up and Miscellaneous Provisions) Ordinance is quite unique to Hong Kong in that it allows the conversion of a court supervised liquidation to a voluntary process, subject to the scrutiny of creditors.
However, the conversion can only take place in limited circumstances. It is still within the power of the Court to stop conversion taking place, even though the creditors have approved it and even when the cost savings arising will be passed on to creditors in the form of an increased dividend.
Firstly, let's look at the circumstances where a conversion can take place and where it is appropriate, then move on to the conversion process and finally look at the Court's approach based on the relatively few occasions that this issue has come before it.
Why Convert
The insolvency provisions of the Companies (Winding-up and Miscellaneous Provisions) Ordinance are, to put it mildly, getting on in years. It is after all based on the 1948 Companies Act from the UK. One of the results is that the court-supervised compulsory liquidation process, designed for a time when quill pens were still in use, has not caught up with the 20th century, let alone the 21st century. Its requirements result in a process which has built-in inefficiencies, which do not operate in the interests of creditors and which because of the high level of Court and Official Receiver's Office involvement, is costly to operate. The end result is that dividends in compulsory liquidations are likely to be lower than in a voluntary liquidation and are likely to take longer to be paid.
The cost savings which can be achieved in a voluntary liquidation can sometimes be sufficient to have a material effect on the level of the distribution.
In particular, in a compulsory liquidation all realisations are subject to Ad Val, or what has been referred to as a tax on creditors. It is a sliding scale set out in the Fees and Percentages Order (just rolls of the tongue, doesn't it??) and is applicable to all asset realisations in every compulsory liquidation.
Let's be clear about this, the creditors gain no benefit for this payment to the HKSAR, it simply goes into the government's coffers. However, in a voluntary liquidation, Ad Valorum Duty, as it is known, is not payable and so all the realisations are available to the creditors
When Is Conversion Appropriate
From the point of view of the creditors, a conversion would seem to be a good idea provided it results in an increased dividend, which hopefully will be paid sooner than would be the case in a compulsory liquidation.
The liquidator's perspective is likely to be that the voluntary liquidation process is more user friendly. Whilst on the face of it, the liquidator's fees are likely to be lower if the compulsory liquidation is converted to voluntary, the lower level of bureaucracy associated with the voluntary process is likely, in most circumstances to make it the favoured option for most insolvency practitioners.
The Court's View
In reaching its decision on an application for conversion, the court will bear in mind a number of factors. These will include:-
What are the benefits to creditors - The usual benefit would be that there would be a bigger dividend than would be the case if the liquidation continued as a compulsory liquidation. It would also be expected that the dividend would be declared sooner than it would in a compulsory liquidation. These benefits arise as a result of fthe reduced formalities associated with the voluntary liquidation process and the reduced level of costs that results.
Is it a "clean" liquidation - There's no definition of what is a clean liquidation. However, before agreeing to a conversion, the Court will expect to hear from the liquidator on whether:-
there are any antecedent transactions (s.182 and s.266 in particular) that could be set aside;
the directors have cooperated with the liquidators and assisted them with their investigations;
the conduct of the directors has been such that the liquidators would not be submitting an adverse diqualification report to the Official Receiver; and
there are any matters of public interest which would mean that the liquidation should continue to be conducted under the suprevision of the Court.
The Official Receiver must be notified of the application for conversion and has the opportunity to make representations to the Court.