What it means and what to do if a creditor files a winding-up petition against your company
Circumstances in which a winding-up petition can be issued
Generally, creditors will turn to a winding-up petition only when all other debt collection efforts have failed - after all, the amount realised in a liquidation scenario is often highly uncertain. Indeed, experience shows that in many cases, ordinary creditors receive just a fraction of the sums they are owed. However, before a creditor will hire a lawyer to issue and serve a winding-up petition it will usually first do its homework and make sure it has the grounds to do so. Why? Because if it does not, it will be on the hook both for its own legal costs and the costs incurred by the debtor in its defence of the petition. What are these grounds? Simply put, a creditor must have (i) an undisputed debt (ii) that is due and payable (iii) that the debtor is unable to pay. A debt is deemed to be 'due and payable' on a specific date, e.g. under a contract, upon the expiry of a formal or statutory demand (after three weeks in Hong Kong), or at the court's discretion.
The implications of a winding-up petition for your business
Once the petition has been issued and served, the petitioning creditor is required to advertise it in the government Gazette and at least two Hong Kong newspapers - one English and one Chinese. Your problems will now become public, and this will undoubtedly serve to increase the pressure from your other creditors and demoralise your staff. Making the petition public may also cause another problem: your banks may 'freeze' your accounts under Section 182 of the Companies Ordinance to ensure they are not accused of dissipating the company's assets (although in practice many banks in Hong Kong do not take this drastic step as it impacts significantly the company's ability to conduct business). If your company is listed in Hong Kong, once a petition is lodged you would immediately need to make a public announcement.
How should you respond?
Once a winding-up petition has been issued and served against your company, you must take it very seriously. Ignore it and your company will most certainly be placed into liquidation by the court. Hiring experienced financial and legal advisors is a must. The key is to decide upon and then implement a correct response.
Getting out of trouble
So, a winding-up petition has been issued and you have successfully secured an adjournment of its hearing. The pressure is off, but only for a short while. Now what should you do? In our experience there is only one thing to do if you want to save your company and your employees' jobs: work as hard as you can to come to terms with your creditors before the next hearing, as the court may not allow you a second chance.
If a winding-up petition has been issued against your company, all is not lost. However, as indicated above, you will have to work extremely hard and make many compromises in order to successfully challenge the petition, keep your company afloat and return it to prosperity. Of course the best course of action you can follow when facing increasing demands from your creditors is to work with your creditors and arrive at a consensual repayment plan with them thus avoiding the prospect of ever having a winding-up petition being filed against your company. As demonstrated above, the negatives from such a filing - from increased pressure from your other creditors, bad publicity, low employee morale, just to name a few, clearly outweigh any positives.