Dissolving a Hong Kong company can be achieved by either deregistration or liquidation. This post will provide you with some insights on which is the better exit approach for you.
Deregistration
The conditions
The company must meet the following conditions:
the company has not commenced business, or has not been in operation or carried on business during the 3 months immediately before the application for deregistration;
the company has no outstanding liabilities;
the company is not a party to any legal proceedings;
the assets of the company (and all subsidiaries) do not consist of any immovable property situate in Hong Kong; and
the company has obtained shareholders approval and a "Notice of No Objection" from the relevant authority in Hong Kong.
Time frame
Starting from the shareholders approval date, it normally takes 4 - 6 months to complete the deregistration.
Post-deregistration
According to the Companies Ordinance, every person who was a director of the company immediately before the dissolution (including both deregistration and liquidation) must keep the company’s books and papers for at least 6 years after the date of the dissolution.
An aggrieved party (e.g. a creditor) may apply to the court for an order to restore the company within 20 years of the deregistration.
Liquidation
The conditions
A solvent company (a company which can settle all of its debts in full) may go for members' voluntary liquidation ("MVL"). This is a process of settling the accounts and liquidating the assets of a company, while the net net assets will be distributed to the shareholders before the company officially dissolved.
The company must meet the following conditions:
obtain the board of directors agreement and approval for conducting MVL - a certificate of solvency will be issued, accompanied by the company's latest financial statements;
obtain shareholder approval on MVL and confirm the appointment of liquidator - the power of the company's directors will be ceased once the liquidator be appointed; and
obtain tax clearance from the Inland Revenue Department
Time frame
It takes more time to complete MVL (and it also depends on how much assets & liabilities the company has before the commencement of MVL), the whole process in general last for 9-12 months at least.
Tax
When receiving the distribution from the liquidator, shareholders of the company may need to fulfill relevant tax obligations if they are resided out of Hong Kong, therefore, a comprehensive tax planning is recommended before the commencement of MVL.
Post-MVL
The liquidator or any other person who appears to the court to be interested, may apply to the court for an order to declare the dissolution by way of MVL as void, such application must be made within 2 years from the dissolution date.
as mentioned above, every person who was a director of the company immediately before the dissolution must keep the company’s books and papers for at least 6 years after the date of the dissolution.
LibraryStone Insights
Which is the better approach for your company?
There are no clear rules setting out when to adopt which approach, the decision is depends on the company's business nature; share capital structure, types of assets owned; and the payable & receivable situation etc. However, we see companies which were dissolved by MVL are usually the companies in finance industry / subsidiaries of a listed company / companies with considerable share capital, assets and liabilities.
Other factors e.g. the cost of dissolution, time frame and the court application period (20 years for deregistration vs 2 years for MVL) should also be taken into account when making the decision.
Costs
Deregistration is a relatively simple and straightforward process when compare with MVL. The cost of engaging a professional firm to conduct deregistration is about 10 times less costly than MVL.
Do we have the "3rd Option"?
An inactive company may register with the Companies Registry to become a dormant company. This approach allows the company in question to maintain its legal identity while in the meantime entitled to the exemption from fulfilling a number of key provisions under the Companies Ordinance e.g. deliver of annual return, which lightens the administration, legal and financial burden of the company.
This "3rd Option" is widely adopted by business owners and conglomerates as a pre-dissolving and pre-restructuring solution.
Before you start deregistration, please make sure...
The company in question should transfer the ownership of or dispose all its assets (including cash out all the funds in the bank accounts) before starting the deregistration process. We have seen a number of deregistered companies applied to the court for company restoration, simply because they found out the companies remain as the legal owner of valuable assets, including cash in the bank.
A company intends to undertake MVL is also recommended to do the same, because this could reduce the MVL process time and cost.