What’s the Difference Between Deregistration vs Liquidation for Hong Kong Companies?

Business owners in Hong Kong face immense pressures to survive the market every day, and winding is a sobering reality most have to face at one point or another. While deregistration and liquidation are terms often mentioned when a company dissolves, the two methods are quite distinct, as this article aims to illustrate.

Why Do Companies Choose Deregistration or Liquidation?

Businesses will often decide to deregister or liquidate for similar reasons, particularly because:

Business is Unsustainable

Whether due to rising costs or shifting market demands, businesses that fail to stay afloat even while staying compliant may have to consider winding up to cut their losses. 

Other times, business owners may no longer wish to continue or cannot find a successor, thus deciding to wind up the business on a good note.

Falling Behind Compliance Obligations

Businesses that are unable to stay compliant with their administrative obligations, such as submitting annual filings and holding annual general meetings, risk getting removed from the companies registry. Companies that put off administrative duties for too long may consider deregistering or voluntarily liquidating over playing catch up.

Restructuring or Mergers

Parent companies will often restructure their subsidiaries to meet updated goals or streamline costs, leading to subsidiaries winding up in the process. The subsidiary’s assets would then usually be redistributed among the other existing companies or absorbed by the parent company.

How is Deregistration or Liquidation Triggered?

Deregistration is a proactive, voluntary action triggered by unanimous shareholder agreement when the company has stopped all business activities for at least three months, paid all their debts, including tax obligations and outstanding external loans, and is not embroiled in any legal disputes at that time.

Liquidation can be either voluntary or compulsory, where the difference is in who pulls the trigger. A voluntary liquidation can be triggered by unanimous shareholder agreement or a creditor if the company is solvent, whereas a compulsory liquidation can often be triggered by a court order if the company is insolvent, forcing the company’s closure following a creditor’s petition.

What is the Process of Liquidation vs Deregistration?

While the reasons a company might deregister or liquidate might be similar, the processes, and triggering parties are what really separates liquidation and deregistration. 

Deregistration

The deregistration process is designed to be a straightforward and cost-effective way to internally close a defunct, solvent company:

1. Obtain unanimous shareholder approval to deregister the company.
2. Settle all outstanding obligations including taxes, employee wages, and supplier invoices. Businesses will have to prove this to the IRD by completing an audit up to the date of cessation.
3. Obtain tax clearance by applying to the Inland Revenue Department (IRD) for a “Notice of No Objection”.
4. File Form NDR1 with the Companies Registry along with the IRD notice and application fees
5. Undergo the objection period of three-months in which any interested party can raise objections to deregistration.
6. Officially dissolve the company after undergoing the objection period without challenges.

Voluntary Liquidation

Voluntary liquidation is initiated by the company itself and can proceed in two ways, depending on the company’s solvency. A solvent company can undergo the members’ voluntary liquidation, where:

1. Directors declare solvency, affirming the company can pay all their debts within 12 months.
2. Shareholders pass a special resolution with 75% majority to wind up the company.
3. A licensed liquidator is appointed by shareholders to take charge of liquidating the company by selling off company assets, where any remaining surplus is redistributed to the shareholders.
4. The liquidator submits its accounts to the Companies Registry, dissolving the company in three months.

If the company is insolvent, it can undergo the creditors’ voluntary liquidation where:

1. Directors call a shareholders’ meeting acknowledging the insolvency and that the company must be liquidated.
2. The directors present full financial disclosure to a meeting of creditors convened within one day of the shareholder meeting with at least seven days’ notice.
3. The creditors nominate a liquidator, overriding the shareholders’ preference, who then sells off the company assets and distributes the proceeds to creditors according to legal priority. The creditors may form a liquidation committee to oversee the liquidator’s work.
4. Once the assets have been sold off, the liquidator will hold a final meeting and the company is dissolved within three months.

Compulsory Liquidation

An insolvent company that refuses to voluntarily liquidate may be forced to by compulsory liquidation, which is a court-driven process often initiated by an owed creditor, where:

1. 1. An owed creditor files a Winding-Up petition with the Court of First Instance following the company’s failure to meet a statutory demand within 21 days
   2. The court reviews the petition and confirms the company’s insolvency and the debt’s validity, after which,
   3. The court issues a winding-up order to the company.
   4. An Official Receiver is automatically appointed as provisional liquidator to oversee the winding-up.
   5. The Official Receiver holds the first creditors’ meeting within three months of the order, where creditors can nominate a new liquidator or form a liquidation committee.
   6. The liquidator realises funds by selling off company assets and distributing them to the creditors according to legal priorities.
   7. The company is dissolved once the liquidation process is over, concluded with one last meeting where a final account is submitted. 

What are the Effects of Liquidation vs Deregistration?

Directors that choose to liquidate over deregistration give up all powers over the company, which remains in effect even after the process is over. To illustrate, when a company deregisters:

• The company legally ceases to exist and is struck off the Companies Registry, meaning the company can no longer conduct business, hold assets, or be a party to legal actions.
• Any ownerless assets are transferred to the Hong Kong government (Bona vacantia) after the company is deregistered.
• Directors, officers, and members remain personally liable for company obligations.
• Company books and records must be retained for at least six years after deregistration.
• A deregistered company can be restored by court order if an application is made within 20 years.

When a company is liquidated however:

• Directors hand all power and control over to the liquidator.
• In addition, directors, officers, and members are no longer personally liable for company obligations.
• As in deregistration, company books and records must be retained for at least six years after liquidation, and can be restored by court order if an application is made within 20 years.

Conclusion

Ultimately, the differences between deregistration and liquidation depends largely upon the company’s solvency, though deregistration is by far the simpler and more cost-effective path to concluding a company. You could also go dormant and wait for better market conditions to restart your business. If you’re not sure which path your company should take, drop us a message and we’d be happy to help!