Sovereign Hong Kong - Company Deregistration and Liquidation

A company with dormant status is inactive but remains a Hong Kong registered company and need only comply with a minimum of formalities. Dormant company status may be useful if a company wishes to retain the use of its business names or if the company may resume trading at a later date.

Annual business registration fees apply for a dormant company and a registered office must be maintained, but it is not required to prepare audited accounts, file an annual return or hold an annual general meeting.

Deregistration is a relatively simple, inexpensive and quick procedure for dissolving defunct solvent companies but has strict criteria: solvency, no outstanding liabilities, shareholder approval and tax clearance.

A Members’ Voluntary Liquidation (MVL) is a formal process designed for solvent companies that allows all liabilities to be settled in an orderly way and any remaining value to be distributed to shareholders before the company is formally dissolved. It is the shareholders that control the liquidation.

A Creditors’ Voluntary Liquidation (CVL) is a formal process designed for insolvent companies that allows all outstanding debts to be settled in an orderly way, but the creditors have a more significant role. The creditors have the right to appoint a liquidator to replace the liquidator appointed by the company and can also appoint a committee of inspection to supervise the liquidation.

Regardless of the closure method, until a company is formally dissolved it is required to observe its statutory obligations under the Companies Ordinance. These include the keeping of up-to-date accounts and audits, the filing of annual returns and the delivery of notices of change of address of registered office and change(s) of company secretary and director(s) and their particulars for registration.

Directors’ duties apply regardless of the company’s solvency position. These include, amongst others, the duty to act honestly and in good faith in the interests of the company as a whole. It is important to note that if a company is nearing insolvency, the interests of the company as a whole also encompass the interests of the company’s creditors.

Directors and officers must also adhere to fiduciary duties. Should a director or officer commit a breach of any such of duties, a subsequently appointed liquidator may bring actions against them on behalf of the company.

In addition, directors and officers may be subject to civil and criminal penalties and/or disqualification orders if they are found liable for falsification of company books, failure to keep proper books of account, or fraudulent trading.

A company’s business can also be ended by a compulsory winding-up or liquidation, which is a formal court-led procedure, or by striking-off.

Striking off is a statutory power conferred on the Registrar of Companies. A company cannot apply for striking off. Under the Companies Ordinance, the Registrar is empowered to strike the name of a company off the Companies Register where it has reasonable cause to believe that the company is not in operation or carrying on business. The company is dissolved when its name is struck off the Companies Register.

Owners of Hong Kong companies that have ceased operation should seek professional advice. Sovereign can assist with the deregistration and dissolution of entities that are no longer required, whether it be the closure of a single Hong Kong entity or the closure of multiple branch and representative offices and companies across a range of jurisdictions.

Only a private company limited by shares or a private company limited by guarantee, other than those companies specified in section 749(2) of the Companies Ordinance, can apply for deregistration. The company must be a defunct solvent company.

The company must meet the following conditions before making a deregistration application:

• All the members of the company agree to the deregistration.
• The company has not commenced operation or business or has not been in operation or carried on business during the three months immediately before the application.
• The company has no outstanding liabilities.
• The company is not a party to any legal proceedings.
• None of the company’s assets (including its subsidiaries’ assets if it is a holding company), consist of any immovable property situate in Hong Kong.
• The company has obtained a ‘Notice of No Objection to a Company being Deregistered’ from the Commissioner of Inland Revenue.

A deregistration application (Form NDR1) should be delivered to the Registrar of Companies, within three months from the date of issue of the Notice of No Objection, together with the required fee and the Notice of No Objection.

A letter acknowledging receipt of the application for deregistration will be issued by the Companies Registry in four working days. The Registrar will then publish a notice of the proposed deregistration in the Hong Kong Government Gazette.

If no objection to the deregistration is received within three months after the date of publication of the notice, the Registrar will deregister the company by publishing another notice in the Gazette declaring it to be a deregistered company on the date of publication of the second notice. The company is dissolved on deregistration.

The applicant or the person nominated in the application will be notified upon deregistration of the company. The whole process takes about five months.

Despite deregistration and dissolution, the liabilities of officers and members survive, and company records of a deregistered company must be kept for at least six years after the date of dissolution. Reinstatement may be effected by the Companies Registry or by Court order (on application) in limited circumstances.

A members’ voluntary liquidation (MVL) is generally used where a local private company is healthy and has retained profits but is no longer needed, such as where:

• A company was created for a specific project that has now been completed.
• A group simplification involves the closure of surplus companies.
• A shareholder retires with no plans to sell or pass the company on.
• A company that has accumulated profits rather than distributing them annually.

The key legal requirements for the MVL process in Hong Kong, as provided in the C(WUMP)O, are:

• Complete set of accounting records.
• The directors must sign a Certificate of Solvency stating their opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding-up.
• 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.
• The shareholders must convene an extraordinary general meeting (EGM) within five weeks after the issue of the Certificate of Solvency, to pass a special resolution to put the company into MVL (Winding-Up Resolution), which requires a majority of at least 75%, and a special resolution to appoint a liquidator(s).
• The MVL is deemed to commence upon the passing of the Winding Up Resolution and the company then ceases to carry on its business, except as may be required for the winding up.
• To be effective, the Winding Up Resolution and Certificate of Solvency must be filed with the Registrar of Companies within 15 days.
• The company must also submit a copy of the notice of appointment of the liquidator to the Registrar within 21 days of the appointment.
• The Winding Up Resolution and the notice of appointment of the liquidator must be published in the Gazette within 14 days and 15 days respectively.
• The cessation of business must also be notified to the Inland Revenue Department (IRD) and Business Registration Office within one month of the passing of the Winding Up Resolution.
• After appointment, the liquidator will proceed to wind up the company by realising its assets, paying all creditors and adjusting the rights of the contributories.
• A tax clearance must be obtained from the IRD, which can take three to six months depending on the facts of each case,
• Once tax clearance has been obtained, the liquidator can proceed with distribution of the surplus and return of the capital to the shareholders.
• When the company has been fully wound up, the liquidator must prepare an account detailing how the liquidation was conducted and how the assets were disposed and call a general meeting of shareholders to lay the account before it. This must be advertised in the Gazette one month in advance.
• Within one week of the meeting, the liquidator must submit a copy of the account, together with a return of the final meeting, to the Registrar for registration.
• The company will be formally dissolved from the Companies Registry three months after the date of registration.

Starting from the shareholders’ approval date, the whole process of MVL typically lasts for at least nine to 12 months. Upon the appointment of the liquidator, all the powers of the company’s directors cease unless the liquidator or the company in general meeting sanctions their continuance.

A limited company can be wound up by the High Court of the Hong Kong Special Administrative Region in the circumstances set out in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, which include:

• The company is unable to pay its debts, including where a creditor’s written demand of HKD10,000 or more remains unpaid for at least 21 days.
• The Court is of the opinion that it is just and equitable that the company should be wound up.
• The company has resolved by special resolution that it should be wound up by the Court.

Compulsory winding–up commences when a petition for winding-up is presented to the Court by the company, a shareholder, a creditor or a regulatory authority.

If the Court is satisfied that one of the grounds set out in the C(WUMP)O exists, it can make a winding-up order against the company. The court may have regard to the wishes of creditors and what is just and equitable.

Upon the making of the winding-up order, the Court appoints a provisional liquidator, and the directors cease to have power to manage the company. However, the directors are required to:

• Deliver the company’s assets, books, papers and seal to the provisional liquidator.
• Attend the office of the provisional liquidator to provide information of the company’s assets and dealings.
• Submit a sworn statement of affairs of the company within 28 days from the date of the appointment of the provisional liquidator or the date of the winding-up order.
• Attend meetings of creditors and shareholders when notified by the provisional liquidator or liquidator.
• Continue to co-operate with the provisional liquidator or liquidator until the liquidation is concluded.
• Notify the provisional liquidator or liquidator of any change in address.

Unless a provisional liquidator has already been designated before issuing the winding-up order, the Official Receiver will assume the role of provisional liquidator. During a compulsory liquidation, there is an automatic stay on all proceedings and creditors’ actions against the company, unless the Court grants leave for such proceedings to commence or continue.

It is worth noting that if the Court is satisfied that the property of the company is unlikely to exceed HKD200,000, it can order the company to be wound up summarily on an expedited basis. It can also appoint a provisional liquidator to take charge of the company’s affairs between the date of the petition and the date of the winding-up order if it fears dissipation of the company’s assets.

The Compulsory Winding-Up procedure will then be as follows:

• A copy of the winding-up order must be filed with the Companies Registry and Official Receiver and a notice of winding-up must be advertised in the Gazette.
• Within 28 days of appointment of the provisional liquidator, a statement of the affairs of the company (including details of its assets and liabilities), verified by the company’s directors, must be prepared in the prescribed form and submitted to the provisional liquidator.
• Creditors must complete a Proof of Debt Form to prove for any debt contracted by the company and submit it to the provisional liquidator or liquidator together with any documentary evidence.
• Separate meetings of creditors and shareholders are held. Generally, voting rights at these meetings are only available to creditors whose Proof of Debt Forms have been admitted for voting purpose by the chairman of the meeting and to shareholders whose names appear in the latest Annual Returns of the company filed with the Companies Registry as members.
• Both the creditors and the shareholders have a right to nominate a liquidator. If there are different nominations, it will be for the Court to decide who will be appointed as liquidator at a determination hearing, which usually takes place within two or three months of the meetings.
• A committee of inspection may be appointed by creditors and shareholders with approval of the Court to work with the liquidator for the purpose of acting in the best interests of creditors as a whole.
• The chairman of the meetings will report the results of the meetings to the Court and apply for an order of appointment of liquidator and members of the committee of inspection, if any.
• The role of the liquidator is to realise the assets of the company at the best possible price, distribute the proceeds to the creditors in accordance with their statutory priority, and to investigate the circumstances surrounding the failure of the company.
• All funds received by the liquidator from realising the company’s assets are paid into the Companies Liquidation Account. If the liquidator wishes to withdraw funds from the Companies Liquidation Account, it must provide the Official Receiver with documentary evidence to support a withdrawal.
• If, after deduction of all fees and expenses, there are funds remaining in the estate of the company, the liquidator will distribute this sum to creditors whose claims have been admitted.
• Following distribution of the final dividend and the making of the final return to the shareholders, the liquidator applies to the Court for a Certificate of Release of Liquidator, which must be filed with the Registrar of Companies.
• The company will be dissolved two years after the filing of the Certificate of Release of Liquidator.