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:
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:
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:
The procedures for deregistering a company are summarized as follows:
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:
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 procedures for MVL are summarized as follows:
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.