During the current economic times, many companies are reassessing their corporate structures, the entities that they maintain, where they should have operations, headcount, book sales etc., in fact, the whole business model, revenue generation and maintenance costs of structures.
Hong Kong has always been high in the ease of doing business surveys, where setting up a company is very quick, albeit banking can take longer. Closing down a company though takes longer because various hoops need to be gone through, and Inland Revenue Department always wants to check that proper taxes have been paid.
In this article we outline the three ways of closing down a company, starting with relatively simple deregistration, then a more complex but also common member voluntary liquidation, and finally a creditors voluntary liquidation for insolvent companies.
Comparison between deregistration, members’ voluntary liquidation (MVL) and creditors’ voluntary liquidation (CVL)
Under Section 750 of the Hong Kong Companies Ordinance (Cap.622).
Deregistration is a relatively simple way to dissolve a company Liquidator is not required to appoint. Deregistration is only available for a company that is still solvent.
- All the members of the company agree to the deregistration
- The company has not commenced business or has not been in operation or carried on business during the three months immediately before the application for deregistration
- The company has no outstanding liabilities (i.e., tax payable, government fees, and accounts payable to creditors)
- The company is not a party to any legal proceedings
- It has no immovable property situated in Hong Kong
- The company has obtained all shareholders’ approval
- If the company is a holding company, none of its subsidiary’s assets consists of any immovable property situated in Hong Kong
- The application is accompanied by a written notice from the Commissioner of IRD that he has no objection to the company being deregistered (the “Notice of No Objection”)
Starting from the shareholders’ approval date, it usually takes 4 – 6 months to complete the deregistration.
Post- deregistration compliance obligation
Under Hong Kong laws, if the company is still in existence, it has to comply with the statutory requirements, including the filing of the following:
- Annual Return with the Companies Registry every year
- Profits Tax Return
- Employer’s Return from IRD
The directors of the company immediately before the dissolution are only obliged to keep the books and papers of the company for not less than five years after the dissolution.
- Convene and hold a general meeting and obtain all members of the company’s approval for deregistration
- Prepare the Notice of No Objection to a Company Application form (From IR1263) and submit it to IRD
- An audited financial statement (as at the date of cessation) and profits tax return with tax computation must be prepared and submitted to IRD for final assessment before the Notice of No Objection issue
- Prepare application for Deregistration of Private Company (From NDR1)
- Upon receiving “Notice of No Objection to a Company being Deregistered”, submit NDR1 to the Companies Registry for approval
- The Registrar of Companies will publish a notice of the proposed deregistration in the Gazette
- If no objection to the deregistration is received within three months after publication of the notice, the Registrar of Companies will deregister the company by publishing another notice in the Gazette declaring it to be deregistered on the date of publication of that other notice. The company is dissolved on deregistration.
2. Members’ voluntary liquidation (MVL)
Under Section 237A of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32).
MVL is more complicated and involves the appointment of a liquidator. All the company assets would be realised (sold off and converted to cash) through a legal process to repay its debts. MVL is only available for a company that is still solvent.
- Complete set of account records
- A meeting of shareholders to pass the special resolution by the majority (at least 75%) for MVL
- The company’s ability to repay debts in full within 12 months of commencement of MVL
- Shareholders appoint a liquidator to monitor and handle the entire liquidation procedure
- Obtain tax clearance from the Inland Revenue Department (IRD)
Starting from the shareholders’ approval date, the whole process of MVL generally lasts for at least 9-12 months.
Post-MVL compliance obligation
If the MVL winding-up continues for more than one year, s238 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance requires the liquidators to call a general meeting of the company at the end of the 1st year from the commencement of the winding-up and of each succeeding year, to present the liquidator’s statement of accounts and to give the contributors an update of the liquidation.
The directors of the company immediately before the dissolution are only obliged to keep the books and papers of the company for not less than five years after the dissolution; or
The company’s books and papers should be destroyed as appropriate if a special resolution concerning the disposal of the company’s books and records is passed by the members.
- Convene and hold a board meeting to authorise the following:
- The execution of a Certificate of Solvency (Form NW1 published by the Companies Registry)
- The convening of a general meeting to consider the passing of a resolution to put the company into members’ voluntary liquidation
- Dispatch a notice to those who are entitled to attend the general meeting
- File with the Companies Registry the Form NW1 within five weeks immediately preceding the date of passing of the special resolution for winding-up of the company or on that date but not later than the filling of the resolution for the winding-up of the company
- Hold the general meeting to authorise the passing of the following within five weeks of the date of filing of the Form NW1:
- An ordinary/special resolution to put the company into members’ voluntary winding-up, to appoint liquidator(s), and to grant liquidator(s) the power to distribute the assets of the company in cash or in “specie”
- An ordinary resolution to dispense with the requirement to audit the liquidators’ statement of receipts and payments, if thought fit (s255A of the Companies [Winding Up and Miscellaneous Provisions] Ordinance).
- Submit to the Companies Registry a copy of the resolutions and the Notice of Appointment of Liquidator or Provisional Liquidator (Form NW3 published by the Companies Registry) within 15 days after the passing of resolutions
- Inform both IRD and the Business Registration Office within one month of the cessation of business. A Notification of the Cessation of Business (Form IRC3113 of IRD) should be submitted.
- Publish the following in the Gazette within the prescribed period after the passing of the resolution:
- The resolution to wind up the company (within 14 days)
- The appointment of liquidators (within 14 days)
- A notice to creditors (no prescribed period)
- Arrange for the liquidators to wind up the company and distribute the company’s assets (if any). The liquidators should realise the assets, adjudicate and settle the company’s liabilities, and, if possible, return to each member the capital he had contributed and distribute any surplus assets to those members entitled to such a distribution as prescribed by the company’s articles of association.
- On completing the winding-up, the liquidators should convene a final general meeting by giving at least one month’s notice in the Gazette
- Dispatch a notice (together with a proxy form) to the members
- Hold the final meeting to:
- Consider the accounts of the winding-up presented by the liquidators
- Pass a special resolution to authorise the disposal of the company’s books, accounts, and documents after the expiration of a fixed period from the dissolution of the company (such a special resolution may be passed at a general meeting held earlier)
- File with the Companies Registry a copy of the special resolution within 15 days after the passing of the resolution
- Within the prescribed period after the holding of the final meeting, file the following documents with the Companies Registry:
- The final statement of account of the winding-up (within one week)
- The return of the final meeting (if the quorum of the final meeting is NOT present, state the fact That the meeting has been called and that no quorum was present) (within one week)
- The List of Dividends or Composition (Form 95), if applicable (within 30 days)
- Form 92 (Statement of Receipts and Payments and General Direction as to Statements) and Form 93 (Affidavit Verifying Statement of Liquidator’s Account under Section 284) if the winding-up continues for more than one year (within 30 days)
- Within 21 days after ceasing to act, the liquidator must arrange for a Form NW5 Notice of Cessation to Act as Liquidator or Provisional Liquidator published by the Companies Registry to be filed with the Companies Registry and advertised in the Gazette
- On the expiration of three months from the date of filing the final statement of account and the return of the final meeting, the company is dissolved
3. Creditors’ voluntary liquidation (CVL)
S241 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32).
CVL is more expensive and requires a more complicated procedure than an MVL. It occurs when the shareholders, usually at the directors’ request, decide to liquidate a company because it is insolvent. Either the company cannot pay its debts as they fall due or has more liabilities than assets.
- A meeting of shareholders to pass the special resolution by the majority (at least 75%) for CVL
- A meeting of creditors must be held within 14 days of the shareholders’ meeting (it is usually held on the same day)
- One or more of the directors will prepare a Statement of Affairs (SOA) of the company, which summarises the assets and liabilities (including details of creditors’ claims) and present in the meeting of creditors
- The creditors then vote for the appointment of a liquidator. The vote is based on the value of creditors’ claims (If creditors’ choice of the liquidator is different from that of the shareholders, the creditors’ choice prevails.)
- Obtain tax clearance from the Inland Revenue Department (“IRD”)
Starting from the shareholders’ and creditors’ approval date, the whole process of CVL generally lasts for 9-12 months at least.
Post-CVL compliance obligation
If the MVL winding-up continues for more than one year, s238 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance requires the liquidators to call a general meeting of the company at the end of the 1st year from the commencement of the winding-up and each subsequent year, to present the liquidator’s statement of accounts and to give the contributors an update pf the liquidation.
The company’s books and papers should be destroyed as directed.
- Prepare a Statement of Affairs (SoA) (From 23), a list of creditors, and an estimate of their claims
- Convene and hold a board meeting to authorise:
- The convening of a general meeting of the company to pass a special resolution for the winding-up and to appoint a liquidator
- The convening of a creditors’ meeting to be held on the same day as the general meeting or the following day
- The appointment of a director to preside over the creditors’ meeting
- The execution of the Statement of Affairs
- Dispatch notices of the general meeting and the creditors’ meeting
- To pass a special resolution, at least 14 clear days’ notice is required unless it is passed in an annual general meeting (at least 31 clear days’ notice must be given). If the shareholders consent to a shorter notice period, only seven days’ notice is required
- Publish a notice of the creditors’ meeting in the Gazette and at least one English and one Chinese newspaper, giving at least seven days’ notice
- Hold the general meeting to pass the winding-up resolution and appoint the liquidator(s)
- Hold the creditors’ meeting to:
- Consider the Statement of Affairs, the list of creditors, and their estimated claims
- Appoint liquidator(s)
- Appoint a committee of inspection (consisting of not less than three creditors but not more than seven creditors)
- Pass a resolution to waive an audit of the liquidator’s account, where thought fits
- Where different liquidators have been appointed by the creditors and the members, then the creditors’ choice shall be taken. If the creditors fail to appoint a liquidator, then the member’s choice of the liquidator shall be taken.
- The Inland Revenue Department and Business Registration office should be informed of the commencement of the liquidation
- Submit to the Companies Registry a copy of the resolution for the winding-up and the Notice of Appointment of Liquidator or Provisional Liquidator (form NW3) within 15 days and 21 days respectively after the passing of the resolution
- Publish the resolution to wind up the company and appointment of the liquidators in the Gazette within 14 days and 21 days respectively after the passing of the resolution
- Arrange for the liquidators to wind up the company i.e., realise the assets and settle the liabilities of the company
- On completion of the winding-up, the liquidators should convene a final meeting of the members and creditors by giving at least one month’s notice in the Gazette
- Dispatch notices of the final meeting to members and creditors
- Hold the final meetings of the members and creditors to consider the accounts of the liquidation. A resolution regarding the disposal of the company’s books and papers may be considered at a meeting of the committee of inspection. If no committee of inspection has been formed, the resolution can be considered by the creditors in the creditors’ meeting.
- File a copy of the resolution passed in the creditor’s meeting with the Companies Registry within 15 days after the passing of the resolution
- Within one week after the holding of the final meetings (or after the date of the later meeting if the two meetings were not held on the same day), file with Companies Registry returns of the final meetings and the final accounts of the winding-up. If the liquidation continues for more than one year, the Liquidator’s Statement of Account (Form 92) and Statement of Accuracy (Form 93) must be submitted to Companies Registry within the next 30 days from the expiration of the first 12-months period and in every six-month interval.
- On the expiration of three months from the date of filing of the returns, the company is dissolved
For all of the above ways of closing, accounts must be up to date, audits are performed up to date, and tax filing is completed. Where a company has not received a tax return for a while, and therefore it might not have completed its audits, it can have all outstanding years completed at the same time in one report and all years filed together.
Acclime Hong Kong has many years of experience managing all types of closures, including helping companies prepare for closure. This includes laying off staff and handling their severance and proper procedures in accordance with Hong Kong Labour Law, helping wind down the balance sheet and clearing on balance, taking over accounts payable and accounts receivable management during this process, and handling all accounting, tax and banking matters etc.
Whether closing a business as part of the strategy or being in the unfortunate position of being insolvent and needing to do a CVL to closure because of its financial position, Acclime can help understand the situation and help with the planning and closure.
For more insights, questions and support, please feel free to reach out to us.
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