When a company is in financial difficulties (insolvent or nearly insolvent), the director must take into account the interests of the general creditors as a class. There is a fiduciary duty on the part of the director to the creditors as a class.
The fiduciary duty also arises in any situation where a proposed transaction is likely to lead to the insolvency of the company. Section 275 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32) states that directors must not knowingly defraud creditors by allowing the company to incur debts with no reasonable prospect of avoiding insolvency.
Under section 276 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32), a director can be held personally liable and contribute to the assets of the company for any misfeasance or breach of their directors’ duties.
Further, it could also be a criminal offence for a knowing party to carrying on business in a fraudulent manner and the director can be subject to disqualification as a director for up to 15 years.
Receiver
The Court may appoint a receiver or manager upon the application by the secured creditor of the company to take over some or all of the assets of the company when the amount owing to a secured creditor is overdue.
Liquidation and distribution
A company may be wound up by the Court (compulsory liquidation), or voluntarily by way of creditor’s meeting and the passing of special resolutions by shareholders of the company.
In both cases, a liquidator will be appointed to realize the assets of the company to administer the liquidation of the company.
Some of the functions of the liquidators are:
(a) To investigate into the affairs of the company
(b) To collect and realize the assets of the company
(c) To determine debts owed by the company and pay the company’s creditors
(d) To distribute to shareholders any assets of the company left over after paying creditors (any distribution to shareholders is made according to the rights attaching to their shares); and
(e) To have the company deregistered from the Companies Registry. Once the company is deregistered, it is no longer in existence.
For legal advice or services on corporate and commercial matters, please contact CHOW & CHEUNG, Hong Kong Solicitors & Notary Public. [Tel: +852 2856 3799 Email: cac@ccsn.hk]
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