Winding up a company in Hong Kong is an important legal step that needs to be done properly. Businesses need to understand that there is no single process that is suitable for all situations. The Companies Ordinance has two distinct procedures for closing a company. These methods include Company Deregistration Hong Kong and Company Liquidation Hong Kong. Although both procedures serve the same purpose of removing a company from the official register, they are quite different in requirements and implications.
If, for any reason, you plan to wind up your Hong Kong company, this article is perfect for you. This article will help you understand the apparent differences between liquidation and deregistration in HK. If you are wondering how to deregister a company in HK, how to liquidate a solvent company in Hong Kong, or the legal requirements for company closure in Hong Kong, then this is the place for you. In that case, this article is a panacea for you. The key objective of this article is to explain methods, procedures, prerequisites, and fitness of HK entities. Knowing the differences enables the business owners to select the approach that suits the case and position of a business. By the time you finish this article, you will be prepared to choose the closure process that is most suitable for your business.
Understanding Company Deregistration in Hong Kong
This section focuses on defining deregistration, the conditions necessary for it, and the complete process of deregistration.
What is the Deregistration of a company?
Company deregistration is a less rigorous exercise undertaken by business owners to remove solvent companies from the Companies Register. This method of business exit applies only to companies that have a clear state of affairs. This means that the companies that have no outstanding liabilities and no remaining assets are eligible for company deregistration. The main characteristic of this method is that it is more straightforward, less formal, and more cost-effective than liquidation. Eligible solvent companies can adopt the deregistration process to dissolve the entity and achieve legal closure formally.
When to Choose Deregistration of your company?
Deregistration should only be chosen when the company meets all the legal eligibility requirements. For a company to be eligible for deregistration, it must fulfil the following conditions:
- All the members are required to agree to deregister the company unanimously.
- The company should not have commenced business, or the business operations should have ceased for at least three consecutive months.
- The company should have no outstanding liabilities.
- The company should have no remaining assets.
Deregistration is a highly advantageous process for business owners. It attracts businesses as it is faster, more cost-effective, and less hectic than liquidation.
The Deregistration Process in a few steps
The process of deregistering a company is pretty simple. Here are the key steps that a company needs to follow to complete the deregistration process accurately:
- The deregistration process starts with a special resolution from the shareholders.
- The company required to obtain a Notice of No Objection from the Inland Revenue Department.
- An application needs to be submitted to the Registrar of Companies to remove the company from the register.
- Then the government publishes a notice in the Gazette and provides time for objections.
- Lastly, if no objections arise, the company is formally removed from the register.
Understanding Company Liquidation in Hong Kong
This section outlines the definitions of liquidation and Members’ Voluntary Liquidation (MVL). It also specifies the necessary conditions and steps for company liquidation.
What is the Liquidation of a company?
Company liquidation is a formal process of legally winding up the affairs of a company. It is carried out by selling the assets, paying off the debts, and distributing any remaining surplus to the company’s shareholders. Liquidation can be applied to both solvent and insolvent companies.
However, the primary focus here will be specifically on Members’ Voluntary Liquidation in Hong Kong. A significant distinction between liquidation and deregistration is that there must be a liquidator in the case of liquidation of a company. In doing this, the liquidator gains complete control of the company and causes the legal closure of the business.
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation (MVL) is initiated by the shareholders of a solvent company. MVL differs from deregistration as it requires the appointment of a liquidator who can carry out the liquidation process. The liquidator will wind up solvent companies by paying the debts, transferring the assets that are not distributed, and allocating the balance funds among the shareholders. This gives a legal end to the activities of a company.
MVL helps in orderly asset distribution and director or shareholder protection. A large number of solvent companies choose this path over deregistration, as it provides full legal certainty that there are no outstanding liabilities to be paid after the liquidation is completed.
When to Choose Liquidation (MVL)
MVL is generally effective for solvent companies that have sustainable assets or need a transparent closure process. The conditions necessary for the liquidation of a company are given below:
- The company should be able to pay all the debts within 12 months.
- A Directors’ Declaration of Solvency is also required for MVL.
- Shareholders need to pass a special resolution that approves the liquidation of the company.
Companies choose MVL when they want to restructure the business, the owner(s) retire, or they want a formal and robust closure. Cessation of a business with significant assets is another scenario where the company may opt for MVL.
The Liquidation Process (MVL)
The steps involved in the liquidation of a company are as follows:
- The process begins with the signing of a Directors’ Declaration of Solvency.
- A special resolution from the shareholders needs to be passed.
- The next step is to appoint a liquidator who handles assets, pays creditors, and distributes surplus to the shareholders. The liquidator manages all aspects, ensures compliance, and is impartial.
- A final meeting of the shareholders is conducted after all the affairs of the company are completed.
- Then the liquidator files final accounts with the Companies Registry.
- Finally, the company will be formally dissolved.
Key Differences: Deregistration vs. Liquidation
Let’s have a look at the main differences between these two concepts.
| Deregistration | Liquidation | |
|---|---|---|
| Purpose and Scope | It is a simple removal process in which only dormant or inactive companies, having no assets or liabilities, are eligible. | It is more formal, which requires asset realization and debt settlement. |
| Solvency Requirement | The company strictly needs to be solvent with no outstanding liabilities. | The company is required to be solvent and should be able to pay all debts within 12 months. |
| Role of a Liquidator | No liquidator is appointed. | A liquidator is appointed to manage the complete process. |
| Complexity and Cost | It is simpler, faster, and less expensive than liquidation. | It is more complex, time-consuming, and costly as it requires professional fees. |
| Legal Implications and Protection | It is less formal and has potential for residual liabilities. | It is legally definitive and provides greater protection for directors and shareholders. |
Important Considerations for Company Closure in Hong Kong
Compliance with Hong Kong Laws
The company should adhere to the Cap. 622 of the Companies Ordinance and the Inland Revenue Ordinance. It is essential to keep proper records to complete the process accurately.
Tax Implications
The companies are required to file the final tax returns and obtain tax clearance from the Inland Revenue Department (IRD).
Professional Guidance
Companies can take professional advice to streamline the process when you are thinking about Liquidation vs. Deregistration Company. Professional guidance provides assistance with navigating complexities, meeting statutory obligations, and avoiding penalties.
Your Path to a Compliant Company Closure in Hong Kong
Companies can select between liquidation and deregistration based on financial status, complexity, and desired legal finality. While deregistration is for simple and solvent companies, MVL is for solvent companies with assets or complex affairs. Both methods have distinct legal requirements, which makes professional advice very crucial for choosing the right path.
Startupr’s professional services can help you in the process. Startupr is a reliable partner for navigating closure in Hong Kong. It ensures compliance and peace of mind for business owners. Contact Startupr today to provide a closure to your company.
