Hong Kong insolvency law

[4] Under Hong Kong law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals.

[14] The test for insolvency under Hong Kong law is whether a company is unable to pay its debts.

It also means that the directors are expected to discharge their duties in the best interest of the company's creditors rather than its shareholders; that transactions may be potentially vulnerable as voidable transactions, and that the right of creditors to set-off mutual debts may become impaired in relation to debts which are incurred during the period of insolvency.

By statute floating charge holders are subordinated to preferred creditors, although under complex rules still rank ahead of liquidator's claims.

[21] If after the payment of all of the creditors' claims there are any surplus funds left over, they are distributed to the members of the company in accordance with their entitlements.

[25] In order for insolvency set-off to operate there must be strict mutuality between the claims (in that the company and creditor must both be beneficially entitled to the relevant debts, not merely claimants as agents or trustees for another party).

The right to insolvency set-off is not if the creditor was aware that a winding-up petition had been presented at the time credit was extended to the company.

[31] Since the decision in the Legend case[32] in 2005[33] provisional liquidation may not be used as a means of shielding the company from creditor's claims to facilitate a restructuring in Hong Kong,[34] although prior to that date the practice was relatively common.

[24] Separately, although not part of the insolvency regime in Hong Kong, there is a power to set aside transactions which were entered into with intent to defraud creditors under section 60 of the Conveyancing and Property Ordinance (Cap 219).

[38] This does not affect the title to any property obtained by a party in good faith and without notice of the intention to defraud.

[14] In the absence of any specific corporate rehabilitation process, schemes of arrangement have been described as "the only tool currently available to facilitate the rescue of distressed companies".

This proposal will usually seek to compromise and/or extend the company's debts, often with the aim of enabling the business continuing to operate.

[33] Hong Kong has not introduced the UNCITRAL Model Law on Cross-Border Insolvency into domestic legislation.

Accordingly, cross-border insolvency cases are still conducted upon an ad hoc basis using a form of modified universalism.

[44] The courts do have power to wind up a foreign company if it can be shown to have a sufficient connection with Hong Kong.