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Court of Final Appeal rules on dispositions after the commencement of winding-up

Posted on 17 September 2021

Key takeaways

  • The Court of Final Appeal recently provided guidance on the operation of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”), which renders void dispositions of a company’s property after the commencement of winding up unless the court otherwise orders: Hsin Chong Construction Company Limited (In liquidation) v Build King Construction Limited [2021] HKCFA 14.
  • The Court emphasised that a “disposition” of a company’s property occurs where, as a matter of substance, the effect of a dealing is to deprive the company of property, while conferring a corresponding benefit on another.
  • In this case, a company, after the commencement of winding-up proceedings, agreed to sell certain rights at a fair price. This disposition by itself could have been validated. However, the agreement obliged the purchaser to pay the sale price not to the company, but to another entity in the company’s group. The Court held that this payment was void because the effect was to deprive the company of the sale proceeds.


Hsin Chong and Build King were joint venture partners. Build King had exercised a contractual right to exclude Hsin Chong from the joint venture. Despite this, Hsin Chong remained entitled to certain residual rights. Hsin Chong then sold those residual rights to Build King under a Supplemental Agreement.

The Supplemental Agreement was entered into after the winding-up proceedings had commenced against Hsin Chong. As such, section 182 CWUMPO was relevant. This section provides that any disposition of a company’s property after the commencement of winding up shall be void unless the court otherwise orders. The purpose of this section is to preserve a company’s assets as at the commencement of winding up for distribution to the company’s unsecured creditors, and so protect the interests of those creditors.

Build King sought validation of the Supplemental Agreement under section 182 CWUMPO. This was opposed by Hsin Chong’s provisional liquidators.

While the sale of Hsin Chong’s residual rights was a disposition, it was common ground that the sale price was fair. Had the Supplemental Agreement provided that the sale price to be paid directly to Hsin Chong, a validation of this agreement would likely have been uncontroversial – the sale of an asset at fair price does not reduce the assets available for distribution to creditors.

However, the Supplemental Agreement required Build King to pay the sale price not to Hsin Chong, but rather to Cogent Spring, another entity in Hsin Chong’s group. Build King had made a first instalment of the sale price to Cogent Spring under this obligation. The question was whether this prevented validation.

The Court of First Instance validated the Supplemental Agreement and the payment to Cogent Spring, holding that Build King’s payment to Cogent Spring was merely the performance of its payment obligation under the Supplemental Agreement, being an obligation owed to Hsin Chong. The Court of Appeal upheld this decision.

Court of Final Appeal’s decision

The Court of Final Appeal, overturning the decisions of the courts below, set aside the validation orders, and declared that the Supplemental Agreement and Build King’s payment of the first instalment to be void.

Substance over form

The Court emphasised that whether a disposition had taken place must be assessed as a matter of substance. In other words, the focus should be on whether the effect of a dealing is: (a) to deprive the company of property that would otherwise be available for distribution to its creditors; and (b) to confer on another person something of equivalent value (at [36]-[37]).

The relevant disposition

The relevant disposition in this case was Build King’s payment to Cogent Spring of the sale proceeds in respect of Hsin Chong’s residual rights. The effect in substance of this payment was to deprive Hsin Chong of those sale proceeds and to confer on Cogent Spring a corresponding benefit (at [34], [38]).

The Court held that the courts below had erred in focusing in isolation on the Build King’s payment, and in characterising this payment as merely Build King’s performance of its obligation owed to Hsin Chong. This approach failed to have regard to the substantive effect of the dealing as a whole (at [34]-[35], [38]).

Validation not available

It followed that Build King’s payment to Cogent Spring, and the Supplemental Agreement obliging Build King to make this payment, being dispositions, were void unless the court validated those dispositions. The Court held that these dispositions should not be validated as they prejudiced Hsin Chong’s unsecured creditors by reducing the pool of Hsin Chong’s assets available for distribution by the amount of the payments made to Cogent Spring (at [35]).

The Court further held that the courts below had erred in emphasising Build King’s lack of ulterior purpose or breach of duty as a relevant factor favouring validation. These were not relevant factors as the predominating consideration was whether the dispositions prejudiced the interests of Hsin Chong’s unsecured creditors (at [40]).


The Court of Final Appeal’s decision underscores the importance, when contemplating a dealing with a company after commencement of its winding-up, of considering whether the effect of that dealing is to reduce the pool of assets that would otherwise be available for distribution to the company’s creditors. Dealings that have this effect risk being characterised as involving a disposition of the company’s property and rendered void under section 182. Where there is a risk of a contemplated dealing having this effect, it will often be prudent to seek a validation order in advance of the dealing.

Acknowledgements to Jessica Lee for assistance in preparing this post.