There are many ways to handle an inactive or defunct company that require no further action. Shareholders may simply wish to close down a solvent business because it is no longer viable, changes in group structure have made it redundant, or the company was established for a specific project and this has subsequently been completed or cancelled.
However, in cases where the company is insolvent, creditors are often the ones initiating the liquidation procedure.
In Hong Kong, shareholders have three main options, each of which has its own requirements, considerations and procedures, for handling an inactive/defunct/non-operating solvent business.
The three choices available to Hong Kong entity owners are:
- Members' Voluntary Liquidation (“MVL”)
Dormancy – Switching Off
When a business entity is declared dormant, it is not technically wound up. The entity’s name is retained and can be reactivated in the future. Although annual business registration renewal fees apply and a registered office must be maintained, a dormant company is not required to prepare audited accounts, file an annual return, and hold an annual general meeting. This makes it a low-cost option.
There are, however, exceptions. Certain types of company, such as banks, insurers, trustees, investment advisors, and broker-dealers cannot be made dormant.
The prerequisites for dormancy are:
- Cessation of all business activities, including no "accounting transactions"
- Settlement of all liabilities and closure of all bank accounts
- Preparation of audited accounts up to the cessation of business
If these requirements are met, the enterprise has to pass a special resolution (75% of votes required) and file a special resolution with the Companies Registry. This declares that the company will become dormant from the date of delivery of that special resolution to the Registrar or any later date specified in that special resolution.
Deregistration – The Straightforward Route
A popular option that is available to a defunct and solvent private company. The same exceptions as dormancy apply to certain types of company that may wish to choose this option.
To deregister an enterprise in Hong Kong, the company must:
- Not have commenced operations or business, or has not been in operation or carried out business for at least three months immediately before applying for deregistration
- Not have any outstanding liabilities
- Dispose of all immovable properties situate in Hong Kong (including all its subsidiaries)
- Not be a party to any ongoing legal proceedings
- Have the deregistration agreed by all members
The procedures for deregistering a company are summarized as follows:
- Hold a Board Meeting and a General Meeting to obtain its members' unanimous agreement
- Obtain a 'Notice of No Objection' from the Inland Revenue Department (file a Form IR1263)
- File the deregistration application (Form NDR1), together with the Notice of No Objection, with the Companies Registry
The entire process can take about five months. Once the deregistration application procedures have been completed, the Companies Registry will publish the first notice of the proposed deregistration of the company in the Hong Kong Gazette. Three months after the initial publication, provided there are no objections, the second notice of official dissolution of the company by deregistration will be published in the Gazette.
There are five important considerations to understand when using this option:
- Any assets not disposed of will be considered as bona vacantia – meaning these will be vested to the government
- The company must uphold its compliance requirements through the application period, up till the second official notice
- The liability of the directors will continue as if the company had not been dissolved
- Company records must be kept for at least six years after the date of dissolution
- The company can be restored by way of a court order
MVL – No Going Back
A final method for dissolving a solvent company is by MVL. This is the most permanent and formal option and thus carries more complicated procedural requirements. All limited companies, with no exception, can be wound up by utilizing MVL.
There are two main prerequisites – (i) at least 75% of votes by the shareholders agree to the liquidation, and (ii) the company is solvent and can settle all its debts in full.
Compared to deregistration, under MVL:
- The capital can be returned to the shareholders
- Company directors will no longer be responsible for the liabilities of the dissolved company
- A liquidator will be appointed
- The company cannot be reinstated
- Company records need to be kept for at least five years after the dissolution date
The procedures for MVL are summarized as follows:
- Hold a Board Meeting to issue a solvency certificate (certifying the company can settle all its debts within 12 months from commencement of MVL) and convene a General Meeting
- File the solvency certificate with the Companies Registry
- Hold a General Meeting to obtain shareholder approval and pass a special resolution authorizing the MVL of the company and appointment of a liquidator (the powers of its directors cease upon the appointment of the liquidator)
- File the special resolution and statutory form for the appointment of the liquidator with the Companies Registry
- Publish in the Hong Kong Gazette: a special resolution, a notice of the appointment of the liquidator, and a notice to creditors
- During this period, the liquidator will begin realizing assets and discharging liabilities. The liquidator will also apply for tax clearance from the Inland Revenue Department
- Once tax clearance is obtained, a notice of the Final General Meeting will be published in the Gazette. The liquidator will also make any capital distributions back to the shareholders
- Hold the Final General Meeting
- File the liquidator's statement of accounts and the Return of Final General Meeting with the Companies Registry
- The company will be officially dissolved on the expiration of three months from the date of filing the liquidator's statement of accounts and the Return of Final General Meeting
- File notice of cessation of liquidator with the Companies Registry and publish a relevant notice in the Gazette
To complete the MVL process can take about 9 to 12 months. There will be additional formalities if the MVL fails to be concluded within 12 months. Complexities in the company's structure can also lengthen the liquidation process.
Winding up a solvent company is often just a stepping stone to greater business success. The key here is knowing your options and preparing accordingly, especially when it comes to more complex methods, such as MVL, so business owners can quickly transition to the next business opportunity.