Following months of acute disruption to business from the protests, compounded by the COVID-19 pandemic, corporate failure is on the rise in Hong Kong. Anecdotal evidence suggests that many companies operating in vulnerable sectors, for example retail and hospitality, have been on the brink of insolvency for months, with many international brands relying on funding from headquarters overseas to carry on. The constant requirement to fund losses cannot be sustainable, as multinationals grapple with crippling declines in revenue and cash drains in their operations globally. Management at headquarters, and directors at the Hong Kong entity level should be prepared to respond should a decision be made to pull the plug on funding. 

Control Risks’ experts have collective experience of over 40 years advising companies in Hong Kong, their shareholders, directors or creditors - on technical, strategic and practical issues in the restructuring and/or winding-up of financially distressed companies. Often, this draws on deep expertise across different disciplines, from insolvency, forensic accounting and digital forensics to asset investigation and recovery, and spanning multiple jurisdictions given many companies have assets, operations or counterparties overseas.

This article discusses some actions that we recommend be taken proactively to ensure companies do the right thing by their employees and creditors, and at the same time minimise damage to brand reputation when faced with extreme cash-flow pressure and the prospect of insolvency in Hong Kong.

1. Perform a solvency assessment and monitor cash

When a company starts to experience financial difficulty, cash flow becomes of paramount importance. A solvency assessment and weekly cash monitoring will assist timely and informed decision-making on when and how much additional funding is required. It may also guide directors in deciding whether it is appropriate to incur further credit whilst the company is insolvent (which can result in personal liability). 

There is no definition of “insolvency” in Hong Kong statutes or under Hong Kong accounting standards. The Hong Kong Companies (Winding-Up and Miscellaneous Provisions) Ordinance provides guidance with respect to determining the solvency of a Hong Kong company.  

In practice, insolvency practitioners use the “balance sheet” and “cash flow” tests in determining a company’s solvency. The “balance sheet test” requires consideration of a company’s financial statements to determine whether the company’s assets exceed its liabilities. The “cash flow test” requires consideration of a company’s ability to pay its debts as they fall due. Control Risks’ forensic accountants and insolvency practitioners have been called upon to assist with solvency assessments due to complexities with this exercise. For example, in a dispute as to whether the directors of a company incurred liabilities at a time when the company was insolvent, we provided expert testimony to the court (which was accepted), that in assessing when debts fell due for the company in question, invoice payment terms should not be the only consideration, rather, the assessment should reflect terms as negotiated and/or otherwise agreed between the company and its creditors. Our evidence that cash flow solvency should be determined by considering a company’s broader financial position, including access to additional funding from its parent company, was also accepted by the court. This ultimately resulted in the company’s directors successfully defending a claim brought by the liquidator.

2. Assess viability of restructuring 

Although the Hong Kong government has plans to include a corporate rescue procedure in the draft bill that will be put to Legco later this year, there is currently no formal rescue procedure in Hong Kong . This legislation has been on the cards for over 20 years but was previously opposed primarily on grounds of protecting employee rights. However, the civil unrest since last summer and the COVID-19 pandemic have brought many companies to their knees, acting as a catalyst for the government to resurrect this legislation, which would also help bring Hong Kong more in line with other jurisdictions. One key proposal being considered is giving companies a six-month moratorium from hostile acts such as winding-up proceedings, while they seek a financial restructuring.  

Typically, balance sheet restructuring seeks to achieve a solvent and viable business at the conclusion of the restructuring. Currently, this has to be accomplished in a consensual manner. For example, lenders swap some of their debt for equity in the debtor, or the debtor persuades its major creditors to take a ‘haircut’ on their debt, usually as part of a deal with a ‘white knight’ who would inject new funds into the debtor to meet the reduced debt. For one client in the toy trading business, we led presentations to six of its key suppliers on a liquidation analysis vs. debt restructuring involving a proposed acquisition by a listed ‘white knight’, and subsequent negotiations with these creditors, which resulted in a 60% ‘haircut’ on their debt in return for immediate payment of the balance with new funds held in escrow and guaranteed orders for the next two quarters. This is one example of a viable and profitable business once excess legacy debt was stripped out of its balance sheet.   

3. Consider putting the company into liquidation

When it is determined that there is no reasonable prospect of avoiding an insolvent winding-up or the business is simply no longer viable, directors should stop incurring further debt and take steps to voluntarily wind-up the company. There are two types of voluntary liquidations in Hong Kong, a creditors’ voluntary liquidation, for insolvent companies, and a members’ voluntary liquidation, for companies that are able to pay their debts in full within 12 months of liquidation. Both can be achieved in an orderly manner and are initiated by a special resolution of shareholders to wind-up the company. In the case of a creditors’ voluntary liquidation, there are also provisions for directors to place the company in liquidation, but it is in practice not often that the requirements for this are met. 

In Hong Kong, Control Risks are often retained to advise on steps to be taken in an orderly winding-up of a company’s affairs, and subsequently act as liquidators so that asset recoveries can be maximized for the general body of creditors (or shareholders in the case of a solvent liquidation) and directors do not enter into transactions that would subsequently be subject to challenge by the liquidator, some potentially resulting in personal consequences for the directors. 

There are also many practical matters that need to be considered in the lead up to formal liquidation, from maximising asset recoveries, preservation of assets and records that may be subject to third party claims, understanding statutory provisions for employees (and simple questions like can we continue to pay them?), dealing with disgruntled creditors and landlords threatening legal action, to convening statutory meetings and adhering to advertising, notice and other filing requirements. These require proper advice from experienced insolvency practitioners and adequate planning to minimise reputational damage and maximise asset recoveries during liquidation.

4. Avoid transactions that may be attacked by a liquidator

Liquidators have a statutory duty to investigate the affairs of the company in the lead-up to liquidation. This typically entails a forensic review of the company’s transactions in the 2 years or more prior to its liquidation. For example, in a recent liquidation where a director had misappropriated substantial company funds and subsequently absconded, we undertook forensic tracing of funds to identify recipients of the stolen funds, review of emails and other electronic data from company servers, accounting systems and employee devices to gather evidence on the purpose of payments and map relationships between relevant parties, and asset traces in three jurisdictions where the director was believed to hold assets. The results of our investigations were used to seek recovery from third party recipients of the misappropriated sums and reports to authorities of the theft, which may ultimately lead to the criminal prosecution and/ or disqualification of the director in question in Hong Kong.

There are myriad claims that can be brought by a liquidator to attack antecedent transactions and recover assets for the benefit of the liquidation. These include proceeds of asset misappropriation (as in the example discussed above), unsecured creditors who have received payment ahead of others (also known as unfair preference payments), property fraudulently conveyed to defeat the claims of other creditors, assets sold at an undervalue and/or losses suffered as a result of fraudulent trading by the directors. These liquidator claims are typically funded by assets in the liquidation. However, it does not mean that just because a company is left with no funds its liquidator’s hands are tied. It is not uncommon for major creditors or in certain cases, for third party litigation funders to fund liquidator investigations and claims.


Corporate failure in certain markets is unavoidable in the current climate as multinationals face tough decisions when prioritising the allocation of limited funds to absorb losses in strategic markets around the globe. However, with proper advice and planning, companies and their directors can act responsibly towards their employees and creditors, avoid pitfalls associated with insolvency and minimize damage to broader brand and corporate reputation.

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