Introduction

On 12 November 2020, the Official Receiver’s Office (“ORO”) issued Circular No. 2 / 2020 setting out the revised arrangement on submission of Form D1 and Form D2 by provisional liquidators or liquidators to the Official Receiver (“Circular”). Provisional liquidators / liquidators (“Liquidators”) are required to submit a statutory Form D1 to the ORO when they become aware of any unfit conduct of a director. The Circular takes effect from 1 December 2020.

The existing arrangement

Where the Liquidators of an insolvent company are of the view that the conduct of a current or former director, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company, the Liquidators are required to report the matter to the Official Receiver by completing Form D1 which can be found in the Schedule of the Companies (Reports on Conduct of Directors) Regulation (Cap. 32J).

The Official Receiver may, upon receiving such report, apply to the court for a disqualification order against any person who is or has been a director of a company which has become insolvent pursuant to section 168I of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”), if it is satisfied that it is in the public interest to do so.

The reporting requirement is invoked where it appears to the Liquidators that the conduct of the former or current directors is unfit for management of the company. The requirement applies equally to members’ voluntary winding-up.

The new arrangement

Pursuant to the Circular, in the future, the Liquidators will be required to submit a questionnaire (“Questionnaire”) when they file Form D1 to the Official Receiver. The Questionnaire is in the form of a non-exhaustive checklist and the Liquidators are required pursuant to the checklist to provide supporting information and documents to the Official Receiver. The Liquidators are also expected to answer the questions according to information and documents available to them, and are not obliged to undertake investigations which they would not otherwise have considered necessary to make.

Highlights of the Questionnaire

The Questionnaire is divided into 15 parts. Below are some of the major questions asked in the Questionnaire.

1.        Part A and Part B concern general information about the directors and creditors, such as whether the directors have benefited directly or indirectly in an unreasonable or excessive manner from the company’s trading, and whether any creditor or other persons have complained about the conduct of the directors.

2.        Under Part C, the Liquidators are required to provide information about any breaches of the following sections:

a.        Section 274 of CWUMPO: this section imposes liability on every officer of the company who has failed to keep accounting records in accordance with the Companies Ordinance (Cap. 622) (“CO”);

b.        Section 373, 374 and 377 of the CO: section 373 requires a company to keep accounting records in accordance with the CO, whereas section 374 and 377 deal with the location and the duration under which the accounting records should be kept respectively.

3.        Under Part D and E, the Liquidators shall provide information about any suspicious bank transactions with respect to the company’s bank statements and to give particulars of any misuse of the company’s bank account, such as drawing cheques that are subsequently dishonoured. In respect of the dishonoured cheques, the Liquidators should explain, to the best of their knowledge, whether the directors knew or ought to have known that the cheques they had caused to be drawn on the company’s bank account would not be met on presentation.

4.        Part F and G concern the directors’ misfeasance or breach of duty and the misapplication or retention of company money or property. In particular, the Liquidators shall provide information about the following:

a.        Whether the directors have received any gift out of capital (including money or other consideration) from the company rather than for the remuneration of a service, which has caused a material loss to the company;

b.        Whether the directors authorised any payment or other disposition of company property to themselves or connected persons as gift out of capital;

c.         Whether the directors have failed to disclose to the company of any contracts, dealings or other transactions involving the use of company assets or property that had caused material losses to the company;

d.        Whether the directors were responsible for any material loss to the company; and

e.        Whether any proceedings for recovery were instituted against the directors.

The Liquidators should also provide details of the directors’ explanations (if any) for their action.

5.        Under Part H and I, the Liquidators are required to provide information regarding the directors’ failure to submit a signed statement of affairs under section 190 of CWUMPO, as well as any other instances of non-cooperation on the part of the directors in the course of administering the winding-up.

6.        Under Part J, K, and L the Liquidators are asked to provide information about the particulars of insolvent trading, the causes of the company becoming insolvent and the failure by the company to provide goods or services which have been paid for by customers. In essence, these sections seek to enable the Official Receiver to ascertain the responsibility of the directors for the company’s failure. 

7.        Part M concerns the dispositions of company property after the date of commencement of winding-up under section 182, 265D and 266 of the CWUMPO. The general rule laid down under section 182 is that dispositions of property after commencement of winding-up are void unless the court otherwise orders. And transactions at an undervalue and unfair preferences can be set aside by the court under section 265D and 266 respectively.

8.        Part N concerns the transfer of business of the company and the directors’ responsibility for such transfers.

9.        Part O concerns the company’s failure to pay wages, MPF and other termination payments or pension contributions.

10.    Part P deals with the investigations or proceedings brought against the company and/or the directors by law enforcement agencies and regulators, such as the police and the ICAC etc.

Effect of disqualification

Pursuant to section 168D of the CWUMPO, a person under a disqualification order shall not, for a specified period, without leave of the court:

1.        be a director of a company;

2.        be a provisional liquidator or liquidator of a company;

3.        be a receiver or manager of a company’s property; or

4.        in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company.

The maximum period of disqualification is 15 years. Any person who breaches a disqualification order will face both criminal liability and personal financial liability under the CWUMPO. The maximum punishment on summary conviction is a fine of $25,000 and 6 months’ imprisonment.

Conclusion

The revised arrangement will facilitate the discharge of duties by the Liquidators and save considerable time and costs. The said Questionnaire serves as a reminder of the directors’ duties and how failure to comply with the statutory requirements may trigger the disqualification process by the ORO. Existing directors are therefore advised to seek professional advice in discharging their duties and managing the affairs of the company.