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Important Changes under the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 – Part 3: Strengthening Regulation under the Winding Up Regime

This is the third in a series of articles highlighting the changes to be brought in by the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (Amendment Ordinance). Since our last article, 13 February 2017 has been announced as the date when the Amendment Ordinance will come into effect. The Amendment Ordinance makes amendments to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) and the Companies (Winding Up) Rules (CWUR). Our first article looked at the changes aimed at increasing creditor protection and our second article looked at the changes aimed at streamlining the winding up process. This article looks at the changes aimed at strengthening regulation under the winding up regime.

Regulatory Measures for Liquidators and Provisional Liquidators

The Amendment Ordinance introduces new or revised regulatory measures for liquidators and provisional liquidators, with the aim of enhancing the integrity of the winding up process. These include the following.

Duties, basis for determining remuneration and tenure of office of a provisional liquidator in a winding up by the court

Sections 193, 194 and 196 of the CWUMPO are amended to set out more clearly the duties, basis for determining remuneration and tenure of office of a provisional liquidator in a winding up by the court.

Powers of provisional liquidators and liquidators in a winding up by the court

Revised section 199 and new sections 199A and 199B and Schedule 25 set out the powers of different kinds of provisional liquidators and liquidators in a winding up by the court and the restrictions and exceptions in the exercise of such powers. Of note under section 199 is that in a winding up by the court, the liquidator will have power to directly appoint a solicitor to assist him in the performance of his duties by giving 7 days’ advance notice to the Committee of Inspection (COI) or, where there is no COI, to the creditors. Currently, the liquidator has to obtain the sanction of the court or COI before exercising such power.

Prohibition of touting for appointment as provisional liquidator, liquidator, receiver or manager

The offence under section 278A is extended to prohibit the giving, agreeing or offering to give to any person (instead of only to a member or creditor of the company under the existing section 278A) valuable consideration with a view to securing his own appointment or securing or preventing the nomination of some other person as provisional liquidator or liquidator of a company (instead of only as liquidator under the existing section 278A). A new section 297B creates a like offence in respect of the appointment or nomination of a person as a receiver or manager of the property of a company.

Liquidators’ liabilities for misfeasance, breach of duty or trust despite release. 

Section 276 is revised to provide that a liquidator will not be absolved from liabilities arising from his misfeasance, breach of duty or breach of trust notwithstanding that he has obtained a court order under section 205 releasing him from the position of liquidator after completion of the winding up or when he resigns or is removed as liquidator. Creditors or other interested parties will be able to apply to court for leave to take legal action against the liquidator after his release. To protect liquidators from unreasonable or frivolous litigation against them, a new provision states that such legal action can only be taken with leave of the court.

Private and Public Examination Procedures

New sections of the CWUMPO and new rules in the CWUR will be introduced, with the aim of improving public examination procedures.

Power to order public examination of promoters, directors etc.

Currently, under section 222 of the CWUMPO, when the court has made an order for the winding up of a company and the Official receiver or liquidator reports that in his opinion a fraud has been committed by any person in the promotion or formation of the company or by any officer in relation to the company since its formation, the court may direct a person (examinee) to attend a public examination by the court. The examinee is provided with a copy of the report prior to the examination. Under a new section 286A and Rule 51A, there will be no requirement to provide the examinee with the report before he attends the examination.

Currently, under section 168IA(1) of the CWUMPO, the Official Receiver can apply to court for a public examination by a report stating that in his opinion a prima facie case exists against any person that would render that person liable to a disqualification order under Part IVA of the CWUMPO. Section 168IA(7) currently provides that the examinee has a right to be provided with a copy of the report before attending the examination, but under the Amendment Ordinance, section 168IA(7) is amended to remove that right.

The rationale for not providing the examinee with a copy of the report prior to the examination is that it may contain information which, if disclosed to the examinee, may adversely affect the effectiveness of the order being sought or even frustrate its purpose, as the examinee may be minded to conceal, dissipate or destroy relevant information or materials which may tend to incriminate him.

A new Rule 51A(2) of the CWUR provides that the examinee may apply to court to see the report if he satisfies the court that it would be unfair for him not to be allowed to see it. In addition, protection given to the examinee under the existing Rule 54 of the CWUR will remain: the Official Receiver or liquidator is required to give the examinee a “Notice to Attend Public Examination”, which sets out the matters to be examined during the examination, for example, their conduct or dealings in relation to the company, thereby giving the examinee an opportunity to seek legal advice on those matters prior to the examination.

New sections 168IB and 286D will also safeguard the examinee’s interests, in that any answers or affidavits given by him during the public examination which might tend to incriminate him will not be admissible in evidence against him in criminal proceedings.

Removal of Liquidator

A new Section 244A in the Amendment Ordinance and new CWURs 154A and 154B set out the procedures for resignation and removal of a liquidator or former liquidator in a voluntary winding up (in addition to the procedures for removal of a liquidator in a winding up by the court currently provided in the CWUMPO).

Transitional and saving Provisions

Reference should be made to Schedule 26 of the Amendment Ordinance for details of the applicability of the Amendment Ordinance to certain events which take place before the 13 February 2017 commencement date. For example, if a statutory demand was served under the former s.178 (1)(a) before 13 February 2017, the demand continues to have effect.

Key Contacts

Richard Hudson

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9680

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