Introduction

Compulsory liquidation is where the court makes an order to wind up a company upon receiving a creditor’s petition. A creditor may initiate or threaten to initiate compulsory winding up proceedings as a pressure tactic to compel the company to repay the outstanding sums immediately. If the company genuinely disputes the debt in question, it should take practical steps to oppose the action on an urgent basis and avoid the dire consequences of a compulsory winding up order.

Common Grounds for Compulsory Winding Up

A company can be wound up by the court on a variety of grounds as prescribed in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (“the Ordinance”). The grounds include: -

1. The company is unable to pay its debts; or
2. The court believes it is just and equitable that the company should be wound up;

In practice, the majority of compulsory winding up petitions are issued on account of the company’s inability to pay its debts.

Under section 178 of the Ordinance, there are three ways a creditor can prove that a company is unable to pay its debts. The most frequently used method is where a creditor, to whom the company is indebted in a sum then due that equals or exceeds HK$10,000, serves on the company at its registered office a written demand in a prescribed form[1] (“the Statutory Demand”), and the company neglects to pay the sum within 3 weeks of service of the Statutory Demand.

The Statutory Demand and Disputed Debts

Great care must be taken when drafting the Statutory Demand. The creditor must ensure that the debt is due and payable at once. Any debt that is merely prospective or contingent in nature will not suffice. The debt must also be for an ascertained amount. In the event that the amount is unascertained, the creditor should obtain a judgment in their favour, and subsequently issue a Statutory Demand followed by a compulsory winding up petition on the basis of the judgment debt. The creditor must carefully particularise the correct basis of liability in the Statutory Demand. Most importantly, the debt, if it is to properly form the basis of a winding up petition, must not be disputed by the company on substantial grounds.

A company can oppose a Statutory Demand if there is a bona fide dispute on substantial grounds. In practice, the company should write to the petitioner upon receipt of the Statutory Demand particularising with sufficient detail the reasons why it disputes the debt.  The dispute must be bona fide in both a subjective and objective sense: it must honestly be believed to exist and must be based on substantial and not frivolous grounds.[2] The onus is on the company to create so much doubt regarding the liability of the company to pay the debt that the court cannot ignore it.

If, however, the dispute only concerns the quantum of the debt and not the liability to pay, the court can still make a winding up order as long as the debt actually owed exceeds HK$10,000. Similarly, if the company does not dispute the debt but has a valid cross-claim or set-off against the petitioner, and the company has had a reasonable opportunity to litigate its claim but failed to do so, the court can still make a winding up order.[3]

Should you have any enquiries related to this article, please contact Jeremy Levy.

 

[1] Form 1A of the Companies (Winding Up) Rules.