Law Relating to Banking in Hong Kong

7.Insolvency

Chapter฀7฀ Insolvency฀ 7.1฀Introductio n฀ Insolvency is the inability to pay debts as they fall due. The reason for tha t inabilit y i s no t importan t i n determinin g whethe r on e i s insolvent. Insolvency may force debtors into compromises an d arrangements with creditors, or may lead to the Uquidation of corporations , or to the bankruptcy of individuals and partnerships. Contrary to common usage and understanding, being insolvent does not mean that one is bankrupt, poverty stricken, or even unable to pay one's debts. Insolvency depends on inability to pay debts as they falldue. Even a debtor with a positive net worth may be found insolvent. Where money is due sooner than income can be earned or property can be sold, insolvency may follow. Insolvency ma y afflic t al l kinds o f individual s an d organiza tions . Unemployed pensioners, salaried workers and owners of small businesses, multi-millionaire tycoons, multinational conglomerates, municipalities, citie s an d state s al l run th e risk of insolvency . A s the BCCHK example shows , even banks may fail an d their insolvency may raise difficult question s of law, 6.5.2 and Chapter 9. 7.1.1 Unable to pay debts Whethe r one is 'unabl e to pay debts as they fall due ' i s not a precise formula tha t can be tested scientifically . Debtors wit h asset s i n exces s o f UabiUtie s may b e insolvent , fo r example wher e a business's asset s ar e largely fixe d an d its debt s are shor t term . Furthermore , insolvenc y i s ofte n deeme d rathe r than proved. Although there is no precise test to determine whether a debtor is insolvent, there are guidelines; the Companies Ordinance (CO) dictates when a corporate debtor will be deemed unable to pay its debts. By CO sl78, a company is deemed insolvent: (1) wher e it does not within three weeks make arrangements fo r the repayment o f a n overdue deb t over $5000 , pursuant t o a creditor's written demand; or 249 250฀Law ฀Relating ฀to ฀Banking฀in ฀Hong฀Kong฀ (2) wher e it fails to satisfy a court direction regarding repayment; or (3) wher e the court is satisfied that it is unable to pay its debts. There are no similar provisions fo r a n individual debtor . The Bankruptcy Ordinanc e (BYO ) require s proo f o f a n ac t o f bank ruptcy rather than insolvency. It is not necessary t o sho w a n inability t o pay debt s to com mence bankruptcy proceedings . What must be shown is an act of bankruptcy. The inabiUty to pay debts is only one of the acts which wiU support a bankruptcy petition. 7.1.2 Consequences of insolvency Insolvenc y has negative and serious consequences. The most serious and common is that the debtor may be forced to surrender property to an appointed administrator for the benefit o f creditors. Insolvency proceeding s ma y also invalidat e transactions which would otherwise be valid. The conduct of debtors may be controlled by court order: they may lose the right to contract , borrow money, manage or form companies. Insolvent debtors who fail to comply with court orders may be sent to prison. 7.1.3 Work out or wind up? Schemes, receivership, bankruptcy and liquidation Insolven t debtors may be forced into schemes of compromise or arrangement with creditors, or the more serious administrative schemes of receivership, bankruptcy or liquidation. Schemes o f compromise , arrangement , an d receivership ma y allow the debtor to work out the debt problems while continuing in business. Bankruptcy and hquidation on the other hand are schemes intended to terminate or wind up the affairs of the debtor. Individuals and unincorporated organizations such as partnerships may be forced to wind up their affairs in bankruptcy proceedings, while the winding up o f companie s take s plac e throug h th e liquidatio n process . Whether the scheme is for working out the debt or winding up the debtors' financia l affairs , debtor s los e contro l o f thei r property . While schemes of compromise, arrangement and receivership may take away the right of control over specific assets , bankruptcy and hquidation proceeding s tak e tota l contro l ove r almos t...