Vol 6 (2009) - Issue 5

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The Toothless Tiger: Hong Kong’s Antecedent Transaction Provisions Exposed

A fundamental principle of insolvency law is that all ordinary unsecured creditors of an insolvent company should rank pari passu (subject to certain statutory priorities) and be treated equally in sharing any distributions to be made by an insolvent company. Insolvency laws seek to balance the interests of various stakeholders of a company such that when a winding-up order is made, the collective unsecured creditor pool of the insolvent company is required to stand in line with one another, generally desist from their individual actions against the company and submit to the equalising process as administered by insolvency practitioners. Individual creditor claims against specific assets (unless secured) are substituted for a right to prove in the liquidation for a distribution from the company’s general pool of funds in proportion to the individual creditor’s pre-liquidation debt exposure. The pari passu principle therefore ensures that an individual ordinary unsecured creditor does not receive any preference, priority or any advantage over another ordinary unsecured creditor in the same class.

The assets of an insolvent company must be dealt with in a manner that is most beneficial to that company’s creditors and this will typically involve the realisation of the company’s assets. One other common manner in which the general pool of assets of an insolvent company can be maximised is by the unwinding of certain transactions entered into by a company preliquidation. Antecedent transaction provisions were introduced in the UK and Hong Kong to provide a mechanism by which ‘certain transactions between a [company] and other parties [could] be set aside in appropriate circumstances, so that assets disposed of by the [company] may be recovered and made available to meet the claims of [its] creditors’1. The aim of antecedent transaction provisions is to ensure that ‘“ill-gotten gains” of a recipient can be ordered to be repaid to the company’ to increase the pool of realisations available for the benefit of an insolvent company’s general creditor pool. The practical ability of liquidators to call-in, recover and realise a company’s assets for the benefit of its creditors very much depends upon the legislative arsenal at their disposal and how receptive the courts are to liquidators’ application of such provisions.

Insolvency law’s overarching object of treating creditors equitably within the same class can only be achieved by a robust application of voidable transaction provisions by the courts to ensure that a company’s assets are not diminished for the benefit of one creditor to the detriment of all creditors. This article examines the similarities and differences between the UK and Hong Kong claw-back provisions.

Unfair preferences

The UK and Hong Kong provisions governing the recovery of unfair preference payments made by a company approaching insolvency are identical in form. This comes as no surprise given that the Hong Kong unfair preference provisions, in both a bankruptcy and corporate context as discussed below, are derived from their UK counterpart. What is surprising, and more than a little disappointing from a practitioner’s view, is the limited application of the unfair preference provisions by liquidators to insolvent liquidations in Hong Kong.