For directors, the winding up of a company could be judgment day when their past misdeeds come back to haunt them. If insolvency is on the horizon, there are various matters directors should bear in mind lest incurring personal liability if insolvency becomes inevitable.

Unfair Preference

The rules governing unfair preference are found under sections 266, 266A, and 266B of the Companies (Winding-Up and Miscellaneous Provisions Ordinance (Cap. 32) (the “Ordinance”). A company would be deemed to have given unfair preference to a person if:-

Introduction

Background

Another Hong Kong court decision has questioned whether the judgment in the leading case of Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426, may have gone too far when it suggested that an arbitration clause in an agreement should generally take precedence over a creditor's right to present a winding-up petition.

Land and buildings Ships and aircraft Other tangible assets Liens Retention of title Intangible assets Personal security Debentures Form of debentures Assets covered by debentures Trust receipts or letters of hypothecation

Receivership

Appointment of a receiver Receivers' powers Receivers' obligations Termination of the receivership

Deacons contacts

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Types of security

While every effort has been made to ensure the accuracy of the information contained in this booklet, it is only a summary and should not be relied upon as a substitute for detailed advice in individual cases.

Deacons 2020

Contents

Introduction Corporate insolvency

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Available procedures

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Liquidation

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Members' voluntary liquidation

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Creditors' voluntary liquidation

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Compulsory liquidation

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Which procedure?

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Receivership

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Scheme of arrangement3

During the COVID-19 crisis, many companies are facing unexpected financial distress, and taking steps to stabilise their business and bolster their finances.

Many directors will not have experienced these issues before, and should be aware of how their duties are impacted when the company is in financial distress.

This guide has been prepared on the basis of Hong Kong law principles. Many of the principles will also be applicable to other common law jurisdictions.

How are companies responding to the current crisis?

Directors of Hong Kong companies under cashflow pressure or financial distress should be aware that as their companies approach insolvency, their duties are increasingly owed to the creditors of their companies rather than to the shareholders of their companies. Pressure from suppliers and other creditors to make payments can place directors in a difficult position of incurring personal liability.

The tragically unforeseen current novel coronavirus (COVID-19) global pandemic has brought unprecedented challenges to all aspects of Hong Kong society including the health of its citizens, the economy and the business community.

This is the twenty-ninth in our series of General Counsel Updates which aim to summarise major developments in key areas.