A company can close by voluntary winding up (if initiated by shareholders) or compulsory winding up (by court order).
Once bankruptcy is declared, the Official Receiver or Trustee takes control of assets to repay creditors.
Individual Voluntary Arrangements (IVAs) offer an alternative for individuals or sole proprietors to repay debts without liquidation.
Bankruptcy leads to asset seizure, public disclosure, and long-term financial restrictions.
Declaring company bankruptcy means that a court officially determines the business cannot meet its financial obligations.
While the process can help address unmanageable debt, it also involves strict rules and oversight.
Once a bankruptcy order is issued, an Official Receiver is appointed as a provisional Trustee to manage asset distribution.
Whether bankruptcy is voluntary or court-ordered, it’s important to understand the full process, and here’s what you need to know.
When Can a Company File for Bankruptcy in Hong Kong?
In Hong Kong, a company can file for bankruptcy in two main ways: voluntarily or by court order.
Voluntary Bankruptcy (Winding Up)
The company itself decides to close down by passing a special resolution and appointing a provisional liquidator to manage its debts.
- If the company is solvent and can pay its debts, it is called a members' voluntary winding up.
- If the company is insolvent and cannot pay its debts, it enters creditors’ voluntary winding up, where creditors decide how assets are distributed.
Court-Ordered Bankruptcy (Compulsory Winding Up)
A court may order a company to be wound up for various reasons, such as:
- Shareholders pass a resolution to wind up the company.
- The company does not commence operations within one year of incorporation, or ceases operations for over one year.
- The company has no shareholders.
- It cannot pay debts when they are due.
- The company’s Articles of Association trigger dissolution under specified conditions.
- The court considers it just and equitable to close the company (e.g., in cases of fraud, internal deadlock, or loss of business purpose).
The most common reasons for court-ordered bankruptcy in Hong Kong are insolvency and just-and-equitable grounds.
Who Can File for a Company’s Bankruptcy?
A bankruptcy petition can be submitted to the court by:
- The company itself
- Creditors (individuals or businesses owed money)
- Shareholders (also known as contributories)
- Trustees managing bankruptcy cases
- Personal representatives of a deceased shareholder
Filing for bankruptcy is a serious legal decision that affects a company’s future, its employees, and its creditors. Companies should seek professional advice before taking this step.
Is There an Alternative to Bankruptcy in Hong Kong?
Yes. Instead of declaring bankruptcy, a debtor may consider an Individual Voluntary Arrangement (IVA)—a formal repayment agreement among the debtor, creditors, and the High Court.
Although IVAs are primarily used by individuals, they may be applicable to sole proprietors or unincorporated businesses.
Under Section 20H of the Bankruptcy Ordinance, an IVA provides a court-approved mechanism to repay debts over time, avoiding liquidation.
Why Choose an IVA Over Bankruptcy?
An IVA has several advantages over filing for bankruptcy, including:
Avoiding the Stigma of Bankruptcy
The debtor does not face the same legal restrictions that come with bankruptcy, meaning they can keep their job, run their business, and continue daily life as usual.
Better Repayment Terms for Creditors
Creditors may receive a higher repayment amount than they would if the debtor declared bankruptcy, making them more likely to agree to the arrangement.
Faster and Less Expensive Process
Bankruptcy involves court proceedings, legal fees, and time-consuming procedures. An IVA can be a quicker and more affordable way to resolve financial issues.
Easier Access to Credit After Completion
Once the repayment plan under the IVA is fulfilled, the debtor has a better chance of getting credit in the future compared to someone who has gone through bankruptcy.
For many debtors, an IVA is a more flexible and less damaging solution than bankruptcy. It allows them to repay their debts in a structured way while keeping control over their finances and future.
How Does the Bankruptcy Process Work in Hong Kong?
When a debtor cannot repay outstanding debts, the court may issue a bankruptcy order. A neutral party, typically the Official Receiver or a private Trustee, takes control of the debtor’s estate.
The Trustee will collect and liquidate the assets, with the proceeds distributed to creditors. A portion of future income may also be allocated for repayment. The court may investigate for signs of fraud or asset concealment under the Bankruptcy Ordinance.
Note: While individuals and sole proprietors can be declared bankrupt, limited companies follow the winding up procedure.
Steps in the Bankruptcy Process
A standard bankruptcy case in Hong Kong includes the following steps:
- Issuing a statutory demand – A formal notice demanding payment (if required).
- Filing a bankruptcy petition – Submitted to the court, the Official Receiver, and the debtor.
- Court hearing – The judge decides whether to grant the bankruptcy order.
- Bankruptcy order issued – The court officially declares the debtor bankrupt.
- Asset seizure – The trustee collects and sells the debtor’s assets.
- Funds distributed – Creditors are repaid based on asset value and income contributions.
- Discharge of bankruptcy – After a set period, the debtor is released from legal responsibility for the remaining debts.
What Happens After Bankruptcy?
Once a bankruptcy order is issued, no legal proceedings can be initiated or continued against the debtor without court approval. A notice is published in the Government Gazette and in one Chinese and one English newspaper.
The Trustee will control and liquidate the debtor’s assets, using the proceeds to repay creditors. If necessary, the Trustee can inspect the debtor’s residence to identify or evaluate assets. A portion of the debtor’s future income may also be subject to contribution.
Retirement funds and bankruptcy
Retirement savings, such as provident funds, may be included in the bankrupt’s estate depending on the fund’s rules.
If the bankrupt is a retired civil servant, pension payments may be withheld.
A High Court ruling confirms that the Government holds a security interest in civil servants’ pensions tied to the Home Purchase Scheme loan.
Family members and bankruptcy
Family members are not personally liable for the bankrupt’s debts. However:
- Jointly owned assets (e.g., property held with a spouse) may be partially liquidated.
- Joint bank accounts may be accessed in proportion to the debtor’s share.
- Income contributions may be required from the debtor, after deducting reasonable living expenses for the household
Conclusion
Declaring bankruptcy in Hong Kong is a significant legal action that can impact businesses, employees, and creditors. Companies should assess the financial and legal implications carefully and explore whether restructuring or alternative solutions like an IVA are viable.
Need help navigating company bankruptcy or exploring alternatives in Hong Kong? At Air Corporate, our team of legal and corporate experts can guide you through voluntary winding up, creditor negotiations, or Individual Voluntary Arrangements (IVAs).
