THE UNIVERSITY OF HONG KONG LIBRARIES Hong Kong Collection gift from Appointments Service The University of Hong Kong
A GUIDE ON "EMPLOYEE'S RIGHTS IN BANKRUPTCY, RECEIVERSHIP AND COMPULSORY WINDING-UP' LABOUR DEPARTMENT HONG KONG 1977 PRINTED BY THi GOVERNMENT PRINTER HONG KONG
PATE'io ; 66521 200L 6/77
Introduction A Guide on "Employee's Rights in Bankruptcy, Receivership and Compulsory Winding-up" 1. An employer may become insolvent. If this happens employees who are owed wages, commission, severance pay or wages in lieu of notice of termination of employment will wish to know their rights under the law, what they can do to protect them and how to recover, if possible, whatever their insolvent employer may owe them. 2. The object of this booklet is to explain as simply as possible what the employees of an insolvent employer may and should lawfully do to recover from their employer or his assets what may be owing to them. 3. While every care has been taken in the preparation of this booklet, it is a guide only and therefore should not be regarded as an exhaustive, authoritative legal commentary on the numerous complex aspects of the law that it deals with. 4. Enquiries relating to this guide may be made at any office of the Labour Relations Service of the Labour Department. These are listed in the appendix. Symptoms of Insolvency 5. The common symptoms of insolvency are as follows (a) employer fails to pay his debts including wages as and when they fall due for payment or with reasonable promtitude. (b) plant and machinery or raw materials are removed from the employer's place of work without apparent warning or good reason. (c) place of work is, for no apparent reason, shut down without prior notice. (d) employer suddenly disappears and cannot be located either at his usual place of residence or of business. (e) employer's assets or goods are suddenly seized by court bailiffs. 6. If these or any other symptoms appear which indicate an employer is insolvent, employees should seek early advice and assistance from the Labour Relations Service of the Labour Department. After investigation the Labour Department will, if it considers necessary or advisable, refer 1
employees of an apparently insolvent employer to the Legal Aid Department so that prompt action may be taken to preserve the rights of employees. If necessary, steps may even be taken to obtain, through the court, a warrant for the arrest of an employer owing wages who is about to abscond from Hong Kong so as to avoid paying his employees and other creditors. Failure to Pay Wages 7. Failure to pay wages within seven days after they are due is a contravention of the provisions of the Employment Ordinance. Under such circumstances, employees are entitled to treat this as a serious breach of the conditions of their employment. If by overt acts they accept this breach as a repudiation of their contracts of employment on the part of their employer, they are entitled to regard their contracts as being wrongfully terminated. Bankruptcy and Winding-up 8. If the insolvent employer is a limited liability company, then winding-up proceedings may be taken in the Supreme Court by any creditor (and that includes employees who are owed wages, severance pay and, in certain circumstances, wages in lieu of notice). A limited liability company, in general terms, is identifiable by the word "Limited" which appears after its trading name. This means that normally only the assets of the limited liability company are available to pay off creditors. Generally speaking, shareholders and directors of such a company will not be personally liable for payment of the debts of the company although in certain circumstances (e.g. fraud or misfeasance by officers of the company) they may be required to reimburse creditors of the company out of their personal assets. 9. Where the insolvent employer is a partnership or a "one-man" firm, if any of the partners, or in the case of a "one-man" firm the sole proprietor of the business, commits any of a number of acts of bankruptcy that are specified in the Bankruptcy Ordinance (Cap. 6) any creditor (including employees who are owed money by the employer) may petition to the Supreme Court for a receiving order seeking the appointment of the Official Receiver as receiver of the estate and assets of the employer. Thereafter, at a meeting of creditors at which those employees who are owed money by the employer are entitled, indeed should, if possible, be present, a resolution may be passed by the creditors that the employer be adjudicated bankrupt. 10. Upon the making of a winding-up order in the case of a company, or a receiving order where the employer is not a limited company, the Official Receiver (who is normally the person appointed as liquidator or receiver of the ass'ets of the employer in such cases) will take immediate steps to recover and preserve for the creditors of the employer such of the employer's assets as can be discovered. In certain circumstances, if these assets have come into the hands of a third party (e.g. they have been transferred to a relative
of the employer in an attempt to avoid payment to creditors) the Official Receiver will take prompt appropriate action to recover these assets. 11. One important distinction that must be borne in mind between the effect of a winding-up order in respect of a company and a receiving order in respect of a partnership or "one-man" firm is that while in the case of the limited liability company, generally only the assets of the company may be recovered by the Official Receiver and used to pay the debts of the company, in the latter case, not only the business assets of the firm may be seized by the Official Receiver and utilized to pay the creditors but also the personal assets of all partners or reputed partners of the business. 12. All assets recovered by the Official Receiver which are of any value will normally be sold either by auction or by private treaty or tender and the proceeds of sale, after deduction of the expenses of the sale and of the court proceedings, will be used to pay the employer's creditors what is owing to them. Preferential Rights of Employees in respect of Arrears of Wages and Severance Pay 13. Employees of a limited company in respect of which a winding-up order.has been made are entitled to payment out of the assets of the company in preference to most other creditors (subject to the deduction of the expenses of the winding-up) in respect of (a) wages or salary (including ascertainable commission that may be due) up to a maximum of $8,000* per employee in respect of services rendered to the employer during the four months immediately preceding the date of the (i) making of a winding-up order by the court; or (ii) appointment of the Official Receiver as provisional liquidator of the company where this has been done before the hearing of the winding-up petition in order to preserve the company's assets, and (b) wages in lieu of notice not exceeding one month's wages or $2,000 whichever is the lesser in respect of each employee (with effect from 4th February 1977). (<:) severance pay not exceeding $8,000* in respect of each employee. 14. Any salary, wages, commission, wages in lieu of notice or severance pay exceeding the amounts specified above are non-preferential debts and employees can only be treated with regard to any excess balance as ordinary creditors ranking equally with the other ordinary creditors of the employer, when it comes to the distribution of the balance of the proceeds of the employer's assets.. * Prior to 1st April 1977, the amount was $6,000.
15. Employees of a firm or of a sole proprietorship business are likewise entitled to be treated as preferential creditors in respect of arrears of salaries and wages up to a maximum of $8,000* each and additionally in respect of severance pay up to $8,000* each. In these bankruptcy cases, in order to qualify for preferential payment the wages, salaries or commission must be owed in respect of services rendered to the bankrupt employer during the four months immediately preceding the date of the appointment of the Official Receiver as interim receiver, or the date of the receiving order made by the court, whichever is the sooner. 16. After filing in court of a bankruptcy or winding-up petition it usually takes not less than one month before the court can hear the case and make an order on the petition. Preservation of Assets 17. If employees have reason to believe that their apparently insolvent employer's assets are being disposed of, e.g. his assets are being moved out of his place of business, they should without delay inform the Labour Relations Service of the Labour Department, or if they have already been referred to the Legal Aid Department, the Legal Aid Department staff of their belief. Immediate appropriate action may then be taken on behalf of the employees to preserve the assets for their benefit. As a practical measure, if employees see goods and machinery being removed from the business premises of the employer, they should note down the registration number of any vehicle used to transport the goods from the employer's premises and try to ascertain from the driver of the vehicle or any other available source the address to which the goods are being removed. This information should then be passed to the Labour Relations Service of the Labour Department or to the Legal Aid Department, as may be appropriate, so that the Official Receiver when appointed by the Court may take immediate steps to recover the goods removed from the business premises. Seizure of Employer's Goods on behalf of Judgment Creditor 18. Sometimes an employer's goods are seized by court bailiffs because other creditors of the employer have obtained a judgment against the employer for payment of money and the judgment debt has not been paid. If this happens, the bailiffs, after seizing the goods under the court's warrant will sell the goods by auction and the proceeds of sale will be paid into the court where they will be retained for 14 days and thereafter paid to the judgment creditor unless a bankruptcy or winding-up petition has been brought before the expiration of this 14-day period. Immediately upon filing in court of such a petition, any proceeds of sale held in court under the 14-day rule just mentioned will be "frozen" in court and in all probability * Prior to 1st April 1977, the amount was $6,000.
will eventually become available to pay arrears of wages, wages in lieu of notice and/or severance pay of the employees. This emphasizes the importance of early and immediate action by employees in approaching the Labour Department or the Legal Aid Department where the court bailiffs seize goods pursuant to a court warrant obtained by a judgment creditor. Seizure of Employer's Goods by way of "distraint" for non-payment of Rent 19. If an insolvent employer has not paid his rent, his landlord may obtain from the court a Distress Warrant directing the court bailiff to seize and, if necessary, sell the moveable assets of the employer in payment of the arrears of rent. When this happens the proceeds of sale are not frozen in court. In the case of a bankruptcy, however, where the distraint for arrears of rent has occurred within the three months next before the making of a receiving order against the employer, the employees' preferential claims (i.e. for arrears of wages, wages in lieu of notice and/or severance pay) are a first charge on goods seized under the distraint or on the proceeds of sale. This means that in certain circumstances, the Official Receiver may, after the receiving order has been made, recover from the landlord the employees' preferential claims to the extent that the landlord has benefited from or received money under the distraint. The situation is much the same in the case of a distraint against property of a company in respect of which windingup proceedings are brought. Appointment of Receiver under Debenture 20. A limited liability company will usually mortgage to a bank or lending institution all its assets, including machinery, plant, equipment, raw materials and any goods that it may from time to time produce or manufacture. This is usually done in order to obtain cash to finance the business of the company. These mortgages, known as "debentures" are required to be registered at the Company's Registry. They invariably confer on the lender (known as the debenture holder) the right to appoint without a court order a receiver to take charge of the assets of the company. Such a receiver is not to be confused with the Official Receiver for the former is not appointed by the court but by the debenture holder and in law acts as agent for the employer company. His primary duty is to recover what is owing to the debenture holder either out of the existing assets of the company covered by the debenture or out of future earnings of the company if the receiver decides to manage the company and carry on its business. 21. It is important that employees remember that such a receiver is only an agent for their employer's company and so is not normally personally responsible for payment of arrears of wages or wages that the company may become liable to pay if the receiver acting as a manager continues its
business. His functions and duties are therefore, quite distinct from those of the Official Receiver. It should be borne in mind, however, that if a receiver appointed under a power contained in a debenture seized what are known as "floating" assets he must pay out of these floating assets the preferential claims of the employees. These floating assets are goods not specifically listed in the debenture or mortgage and include such things as raw materials in the employer's factory, stock in trade, assets acquired by the employer's company after the debenture was signed and cash receivable by the company from its debtors. The receiver under the debenture is not liable to pay employees their preferential claims out of fixed assets specifically listed and identified in the debenture as being in existence when the debenture was signed by the employer company. So, items of machinery that have been clearly identified in the debenture by their serial numbers may be sold by the receiver appointed under the debenture and he may lawfully use the proceeds of sale to pay off the debenture holder, that is to say, the lender. 22. Very occasionally, in special circumstances, however, a debenture may be invalid against creditors including employees who are owed arrears of wages, severance pay etc. and may be set aside on the application of the Official Receiver after the making of a winding-up order. 23. If a receiver has been appointed under a debenture and there is no winding-up order subsequently made, employees should co-operate with the receiver by remaining at work unless specifically requested not to by him. They should approach the receiver for the payment of their wages and any statutory benefits to which they may be entitled. If payment is not made promptly by the receiver, they should immediately approach the Labour Department or the Legal Aid Department (if they have already been referred there for legal aid). Proof of Claim 24. Once a receiving order (in the case of a bankruptcy) or a winding-up order (in the case of a limited company) is made, the employees, to whom wages or salaries are owed, should as soon as possible go to the Official Receiver's Office to complete a proof of debt form. They can each file their own proof, or they can appoint one or more representatives to represent them all by completing a single proof of debt. The proof has to be sworn before a Commissioner for Oaths or before an Assistant Registrar of the Official Receiver's Office. All proof of debts will be checked and adjudged by the Official Receiver who may admit or reject part or the whole of any claim. Employees are well advised for their own benefit, to preserve all available evidence of employment, such as employment contracts or employment letters, pay sheets or pay envelopes, salaries and wages books, etc., and to produce the same to the Official Receiver to support their claims.
25. Soon after the making of the receiving or winding-up order, the Official Receiver will call a meeting of all creditors, including the ex-employees to whom salaries or wages are owed. In the meeting the creditors will decide whom to be appointed trustee or liquidator to administer the insolvent estate. They may also ask the Official Receiver any questions in connection with the insolvency proceedings. 26. Employees should not approach the Official Receiver regarding payment of their claims or filing of proof of debt before the receiving or winding-up order has been made by the Court. The Practical Effect of Bankruptcy and Winding-up Proceedings 27. An employer may allege that he is unable to pay wages and severance pay but once proceedings for winding-up or bankruptcy have been commenced against him, experience shows that often he is more prepared to take urgent steps to raise the necessary money to pay his employees what he owes them. 28. Where an employer is ready to pay, the employees should, if they have already approached the Legal Aid Department, ask the employers to pay them through the Legal Aid Department, so as to ensure that all employees receive everything to which they are entitled and that they do not themselves become personally liable for payment of legal costs. If the employees have approached the Labour Department but not the Legal Aid Department they should immediately notify the Labour Relations Service of the Labour Department which will assist them in obtaining the correct amount of payment directly from the employer. 29. If employees are paid through the Director of Legal Aid then application will be made to the Court for any proceedings for bankruptcy or winding-up that may have been commenced to be withdrawn or dismissed. 30. In view of the four months' time limit in respect of wages qualifying for preferential payment (see paragraphs 13-15) employees are strongly advised not to delay taking legal action and relying on mere promises by the employer or by some third party to pay arrears of wages at some future date. If they do so delay this may result in employees' loss of entitlement to payment as preferential creditors in the event that the promises to pay are not kept. 31. Employees should not assume that in every case where an insolvent employer is adjudicated bankrupt or, a winding-up order is made, that this will necessarily guarantee payment of their arrears of wages, severance pay and wages in lieu of notice. Everything depends on what money and assets the employer may have or which the Official Receiver may be able to recover and sell.
The Role of an Official Receiver 32. As has already been indicated, the Official Receiver must not be confused with a commercial receiver appointed under powers contained in a debenture. The Official Receiver is a Government Officer and he is appointed by the court in winding-up or bankruptcy proceedings. Once appointed it is his duty to take custody of the assets of the bankrupt or the company in liquidation. He is then responsible for converting those assets into cash and distributing the proceeds as dividends to the creditors according to the order of priority for payment prescribed by law. 33. The investigation, stock taking and realization of the employer's assets, as well as compliance by the Official Receiver with the requirements of the law relating to bankruptcy and companies winding-up will necessarily be time-consuming. Claimants are advised therefore, that after filing their proof of debt they should exercise reasonable patience and at all times co-operate fully with the staff of the Official Receiver's Office. Assistance rendered by the Labour Department 34. In cases of employer insolvency, employees are advised to approach the Labour Relations Service of the Labour Department as soon as possible for necessary assistance and guidance. They must come forward quickly so as to ensure that their arrears of wages do not fall outside the four months' period already mentioned, thus losing their valuable right to payment in preference to most other classes of creditors. Employees should remember that sufficient time must be allowed for their cases to be processed and any necessary legal proceedings instituted. It is best, if they appoint from amongst their members representatives who are acquainted with all the relevant facts and who are competent and effective to act as spokesmen for all fellow-employees in dealings with the Labour and Legal Aid Departments. These representatives should be able to provide in detail personal particulars of each claimant including his name, aliases, if any, address and telephone number. In addition, they should furnish full particulars of each employee's claim on the forms which are obtainable from any branch office of the Labour Relations Service. It is only when full and accurate information regarding claims have been supplied by employees or their representatives that their cases can be effectively dealt with by the officers of the departments concerned. The Role of the Legal Aid Department 35. The Legal Aid Department plays a particularly important role in bankruptcy and winding-up cases. It will also assist employees who are eligible to receive legal aid to enforce judgments obtained in the Labour Tribunal against employers. Employees who are granted legal aid are given
full legal advice as to their rights and the Legal Aid Department's Litigation Unit will initiate bankruptcy and winding-up proceedings in the Supreme Court wherever appropriate on behalf of employees. Employees should not hesitate to take advantage of this valuable service whenever circumstances warrant. All applications for legal aid for wage claim cases are given top priority and are processed promptly. 36. If employees want to approach the Legal Aid Department direct they may do so, in which case they should go to the Litigation Unit of the Legal Aid Department at Sincere Company Building, 19th floor, 173 Des Voeux Road, Central, Hong Kong. (Tel. 5-457036)
APPENDIX Branch Offices of the Labour Relations Service On the island: Hong Kong Regional Office New Rodney Block 99 Queensway Hong Kong Tel 5-282523 Ext. 62 In Kowloon and New Kowloon: San Po Kong Government Offices 692 Prince Edward Road San Po Kong Kowloon Tel. 3-240909 Kwun Tong District Branch Office Building Tung Yan Street Second Floor Kwun Tong Kowloon Tel. 3-429904 In the New Territories: Chartered Bank Building Third Floor Sha Tsui Road Tsuen Wan New Territories Tel. 12-427003 Yuen Long District Branch Office First Floor Yuen Long Main Road Yuen Long New Territories Tel. 12-760261 Ext. 82 10
KKP 331.255 H7 g Hong Kong. Labour Dept. A guide on "employee's rights in bankruptcy, receivership Date Due