HONG KONG SAR, CHINA Law and Practice Contributed by: Doos Choi, Pierre Dzakpasu, Ester Chow and Aditya Kurtakoti, Mayer Brown
Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO) Where a debtor is being wound up by the Hong Kong courts and has entered into a transaction with any person within the period of five years before the commencement of the winding-up (which as a matter of Hong Kong law, consti - tutes a transaction at an undervalue), it may be set aside on application to the Hong Kong courts by the liquidator. A debtor company enters into a transaction with a person at an undervalue if: • that debtor company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for that debtor company to receive no consideration; or • that debtor company enters into a transac - tion with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by that debtor company. It is also necessary for the liquidator to estab - lish that at the time the transaction took place, the debtor company was, or became in con - sequence of the transaction, unable to pay its debts (within the meaning of Section 178 of the CWUMPO). Unfair Preferences (Sections 266 to 266B CWUMPO) A liquidator may apply to the Hong Kong courts to set aside a transaction where a company which is being wound up has given an unfair preference to a person within six months before the commencement of its winding-up proceed - ings. The period is extended to a period of two years if the preferred party is a connected per - son. A debtor gives an unfair preference to a person if:
From a procedural perspective, a scheme brings with it the ability to also compromise the debt of the minority/dissenting creditors, provided that the relevant voting thresholds are achieved and the reviewing court is satisfied that the scheme is not unfair and otherwise procedurally compli - ant. 7.5 Risk Areas for Lenders Security granted in favour of a lender over an asset is, assuming perfection, generally “ring fenced” from unsecured creditors in an insol - vency situation. Secured creditors are gener - ally entitled to the proceeds of the sale of their secured assets outside of the order of priority of payment on a company’s insolvency. However, as stated above at 7.2 Waterfall of Payments , a secured creditor may need to petition as an unsecured creditor if the secu - rity enforcement proceeds are not sufficient to repay its secured debt in full. In that eventuality, any recoveries will be subject to the prescribed order of priority of payments on a company’s insolvency. Another risk area for lenders if a borrower, security provider or guarantor were to become insolvent arises from the avoidance of transac - tions. Upon insolvency, it is possible that cer - tain transactions in favour of the lenders may be challenged in court and unwound or modified pursuant to the avoidance provisions discussed further under 7.6 Transactions Voidable Upon Insolvency . This might mean that certain pay - ments or transfers to lenders or grant of security to the lenders may be reversed. 7.6 Transactions Voidable Upon Insolvency Transaction at an Undervalue in Respect of a Company (Sections 265D and 265E of the
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