Understanding The Difference Between Company Deregistration (Dissolution) vs. Company Liquidation

Understanding The Difference Between Company Deregistration (Dissolution) vs. Company Liquidation

In different places around the world, including jurisdiction, company laws are worded using different terms to mean the process of winding up a company. Terms such as deregistration, dissolving, liquidating, or simply closing down a business are increasingly used by entities all over the world.

There are two main ways to close down a solvent private company limited by shares in Hong Kong which are deregistration and voluntary dissolution procedures of a company.

Company Deregistration vs Company Liquidation

While there are a variety of words, phrases, or terms to describe the cessation or winding down of a business, it is worth noting that the processes and legal implications are greatly different.

In case if the company goes into liquidation, it is shut down permanently. On the other side, the dissolution, deregistration, or striking off opens the chance of revival by the creditors at their request.

In both cases, the period of time required to complete the procedures ranges from 6 to 12 months, and the audited financial statements as well as reliable accounting records of the company should be available.

In the course of closure of a company, it is obligatory to inform the Registrar of Companies, the Inland Revenue Department, and the relevant licensing authorities.

Next we shall explore the procedures of deregistration and liquidation in detail.

Common Reasons For Closing Down A Company

The closing of a company can be effected through means of diverse factors which are in turn unique and challenging for the business. Some common reasons include:

Failure to Carry on Business

This situation occurs when a company is hard to run and its business faces some difficulties that severely prevent it from continuing its activities successfully.

Lack of Profitability

When a company continuously does not meet its revenue targets for expense coverage and profitability objective, its shareholders may choose to end the business operations so that no further financial losses can occur.

Inability to Pay Debts

The financial dilemmas, like a lot of debts or the company cash flow issues, can be the first signs to close the company to prevent bankruptcy or legal action to the creditors.

Disputes Among Shareholders 

Quarrels and conflicts that may arise among the company’s shareholders can make the whole process of working together a lot more difficult. In more instances, such problems may get to the extent where the liquidation of the company is the only right decision.

Non-Compliance with Statutory Requirements

The private sector’s responsibility to meet the legal obligations and statutory requirements, such as improper conduct of company activities, can often lead to regulatory penalties or even to legal consequences. The closure might be the only solution to take these matters into the required legal level.

Corporate Restructuring

As part of a long-term corporate plan, a group may run reorganization process within the company that the attribute. It could be done through the more integrating operations, gathering resources, or the moving of assets, which may end up to some subsidiaries or entities closing.
Whether the end of a business is a result of one or another concerns, it is always a serious step that requires a thoughtful consideration and a tactful decision making process. Laying off a company is typically complex and, thus, needs a well-thought approach to financial, legal, and strategic considerations in order to strike the desired balance for all the relevant parties.

Deregistration Of A Company

Deregistration is a quite simple process if the company that you want to dissolve is already inactive. The process tends to be cost-saving and very fast for companies who satisfy certain conditions. 

Every shareholder of the corporation must vote in favor of deregistration while initiating the process. It involves a situation where the company has closed its business and ceased operations for more than three months or it didn’t operate at all.

If the company had been already conducting business, then the deregistration option would have been open only if all assets had been gathered and all liabilities had been settled. In any case, if a creditor is not paying in full, the creditors will still have the right to present to the court for the reinstatement of the company within a period not exceeding twenty years.

The deregistration process involves an application for a Notice of no objection from the Commissioner of Inland Revenue and the filing of the application with the Companies Registry (form NDR1).

The Companies Registry (CR) can also request additional information or documents in the review of the application. With all of the paperwork in place, the CR will issue a Letter of Approval for the deregistration application within 5 working days of receiving it, followed by a notice in the Gazette.

The notice will be published and there will be three months following its publication during which anyone may file an objection. What remains is a final notice in the Gazette and a publication that lists the company as being a deregistered party.

As long as the company is deregistered, the company still must be ready with its reports, such as filing annual returns, etc.

After the company’s dissolution, all its property (including the credit balance in the bank account) will be deemed by the Hong Kong Government. It is highly recommended to seek a legal or professional counsel service to ensure the accurate disposal of company assets before a company deregistration application.

The registration office at the Inland Revenue Department must be notified to make an order of cancellation of the Business Registration within one (1) month before the published deregistration date.

Liquidation Of A Company

There are two types of company liquidation in Hong Kong which include : 

  • Voluntary Liquidation of Shareholders or Creditors.
  • Statutory Liquidation through the Court

Voluntary Liquidation

Voluntary suspension is done through approving a special resolution within 14 days of its publication in the Gazette. The implementation of the liquidation process is on the date of passing of the resolution.

Liquidation operations start with a company ceasing its business as well as ceasing the power of directors – these may resume if there is a need or an advantage as per the liquidator’s observation. The transfer of shares is void, except if the court sanctions or authorizes such transfers by the liquidator.

The conditions for voluntary liquidation are stipulated below.

Voluntary Liquidation by Shareholders

  • The account book of the company is complete. 
  • Through an extraordinary resolution adopted at the shareholders’ meeting, a majority of the shareholders have provided consent.
  • The business is solvent. 
  • There should be a liquidator who will manage the entire liquidation process.

Voluntary Liquidation by Creditors 

  • The account book of the company is complete. 
  • The company is insolvent and not able to continue the business operation 
  • A company liquidator to oversee the entire liquidation process has to be appointed by the creditors.
  • The appointed liquidator has to be a Certified Public Accountant or a solicitor.

Statutory Liquidation

The Hong Kong court is the competent authority to order the statutory liquidation of the Hong Kong company. The common reasons are : 

  • The company missed the debt of HKD10,000 and above.
  • The court rules that the company’s distribution should be both just and fair.
  • The company by special resolution has resolved that the court should liquidate the company.

The liquidation of the company is classified as a process in action once a liquidation application is filed at the court. The company, the creditors, the Company Registrar, or the Official Receiver can file for compulsory liquidation of the company. 

The court will appoint a Liquidator and it could be the Official Receiver who acts as the temporary liquidator.

The disposal of the company’s property, transfer of shares, or status changes into company shareholders will happen from the moment of commencement of the insolvency – as far as the court does not explicitly state differently.

How FastLane Group Can Help?

In reality, most Hong Kong limited companies are deregistered, instead of being liquidated, through a deregistration process. 

The liquidating process of a company in Hong Kong involves seeking professional assistance for compliance with the necessary statutory terms. Being professionally advised is strongly recommended to get proper guidance for the closing of a Hong Kong company.

FastLane can give the necessary support in the perspective of closing the company down within a short time starting with the following steps.

  • Ensuring the entry of audited financial statements reflects the business activity up to the cessation date and submitting the returns to the IRD.
  • Applying and seeking the approval of the IRD with a ‘Notice of No Objection to a Company being Struck off’
  • Dealing with the tax inquiries the tax authority has generated (if any) 
  • Preparing and submitting related resolutions and required forms to the Hong Kong Companies Registry regarding the winding-up of the company
  • Keeping a close follow-up with IRD and the Hong Kong Companies Registry to speed up the process. Additionally, we proactively check with our customers to ensure their compliance and offer assistance if they require it.

Our expert team at FastLane can take care of the entire deregistration process for you. Contact us now for more details!

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