Hong Kong: Should you deregister or liquidate that subsidiary?

When a private company wishes to cease its operation in Hong Kong, this is the most common question we are asked: should we deregister the entity or liquidate the entity?

Deregistration

The deregistration procedure is applicable to most companies (subject to certain exceptions) which have not been in operation during the preceding three months.

The process is initiated by directors and shareholders passing resolutions to approve the deregistration, followed by submission of the prescribed form to the Inland Revenue Department (IRD). Upon receiving a written notice of no objection from the IRD, the Companies Registry should be approached with the prescribed forms and fees. The notice of proposed deregistration is then published in the Government Gazette. Once a three months’ notice period has passed with no objection raised, the company will be deemed dissolved. Any remaining property of the company would be vested in the Government of Hong Kong.

In order to qualify for deregistration, a company needs to satisfy the following requirements:

• all the members of the company agree to the deregistration
• the company has not commenced operation or business, or has not been in operation or carried on business during the three months immediately before the application
• the company has no outstanding liabilities and
• the company is not a party to any legal proceedings.

Note that liabilities of every director, manager and member of the company shall continue and may be enforced as if the company had not been deregistered. In addition, within 20 years from the date of deregistration, if any director, member, or creditor of the company feels aggrieved by the deregistration, he/she can still make an application to the court to reinstate the company.

Compared with liquidation, deregistration is faster and more cost-efficient, provided that the directors and members are comfortable with the possibility of reinstatement and any residual liabilities.

The general timeframe for deregistration to complete is approximately six to nine months. Compared with liquidation, it is a faster and more cost-efficient option, provided that the directors and members are comfortable with the possibility of reinstatement and any residual liabilities as mentioned above. 

Liquidation

For a company to dissolve via liquidation, the directors of the company must first investigate the company’s affairs and issue a certificate of solvency indicating that the company will be able to pay its debts in full within the next 12 months.

Shareholders will then pass a special resolution approving the liquidation, and immediately thereafter the company will cease its business insofar as necessary for the liquidation procedure to proceed. Shareholders will also appoint a liquidator, who will realize all assets of the company, paying out to creditors in satisfaction of its liabilities pari passu.

Powers of directors cease immediately upon the appointment of the liquidator. Costs and expenses of the liquidation will usually be paid out of the company’s assets, including the liquidator’s renumeration (which is usually fixed by the shareholders).

Unlike deregistration, liquidation is permanent, and there are no reinstatement procedures available. All the liabilities of the company will also be settled at the completion of the process. However, liquidation is a lengthier procedure, taking up to 12 months, depending on when the company can obtain tax clearance from the IRD (which may take from 3 to 6 months).

In summary, liquidation provides finality to the company's affairs and more certainty regarding residual liabilities. However, it is generally more complicated (with the involvement of a liquidator) and therefore lengthier and more expensive (compared to deregistration). If there are no assets or liabilities remaining within the company, deregistration is therefore more suitable and appropriate.

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Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.