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Transfer of Business (Protection of Creditors) Ordinance - an overview
- Stefan Schmierer
- 2 days ago
- 4 min read
This article provides an overview of the Transfer of Business (Protection of Creditors) Ordinance (Chapter 49) in Hong Kong, which was created to help manage the transfer of businesses. It was enacted on June 27, 1980. Its main goal is to protect creditors, regulate liability issues, and explain how these responsibilities can be managed.
Author: Stefan Schmierer, Managing Partner. Co-author: Sandra Niehr, intern.
Before this ordinance, the new owner could limit responsibility for the business' debts by only acquiring the assets. Also, acquisitions could be made without formally notifying creditors or the public, potentially leaving creditors with empty hands. Now, the ordinance makes sure the new owner is basically liable even if they only buy part of the business. It also requires the publication of a transfer notice to the public, adding transparency and limiting disputes and misunderstandings between the parties involved and creditors.
Applicability: The Transfer of Business Ordinance applies when a business or part of a business in Hong Kong is sold or transferred to a new owner. "Transfer" is defined as the transfer or sale of a business, excluding:
the sale of the stock-in-trade of a business in the ordinary course of its trade,
the creation of a charge (a legal claim or lien on property),
the transfer of land or any share or interest therein,
or the transfer of a vessel (a ship or large boat) (or the transfer of any interest or share therein).
Furthermore, "business" refers to any trade or occupation (except a profession), whether or not it aims to make a profit.
Liability of the new owner: The new owner is initially responsible for all debts and obligations, including taxes, at the time of the transfer. However, there are ways to limit this responsibility if certain conditions are met.
Conditions to limit responsibility: If only part of a business is transferred (excluding goodwill), the new owner is generally liable for the debts and obligations of the previous owner. However, if the new owner can prove to the court that they bought the part of the business in good faith, for a fair price, and without knowing about the debts and obligations, they will not be liable for them. Also, the new owner will not be liable if a transfer notice is given 1-4 months before the transfer and is completed by the transfer date.
Transfer Notice: As is typical in this context, a transfer notice must be made public. This notice should include details about the seller and the new owner, the nature of the business, the name or style under which it was operated during the last six months before the transfer, the business address, and the date of the transfer.
The notice must be signed by both the seller and the new owner and then publicly announced in the Gazette and in two Chinese-language newspapers and one English-language newspaper circulated in Hong Kong. As mentioned in the previous paragraph, the new owner's liability can be extinguished if the transfer notice is made 1-4 months before the transfer. If the notice is made less than one month before the transfer or after the transfer, the liability can be extinguished at the earliest one month after the last public announcement.
The rules of responsibility: Both the seller and the new owner are responsible to third parties for any damages caused by false statements, missing documents, or unauthorized transfers. The seller must make sure all assets, contracts, and licenses are properly transferred to the new owner. The new owner needs to check all documents and follow legal requirements after the transfer. As mentioned earlier, if the new owner only buys part of the business (especially in asset deals), they can avoid liability if they can prove they did not know about any debts or obligations at the time of the transfer.
What happens if responsibilities are not followed: If the new owner is made liable for any amounts, they are entitled to compensation from the seller. This compensation can be claimed in civil proceedings or as a bankruptcy order. Any actions need to be started within one year upon the successful transfer, to be considered.
Implications and Best Practices for Acquirers: The Transfer of Business Ordinance in Hong Kong regulates the sale and transfer of businesses and parts of businesses, as well as related liability issues.
Before the ordinance, there were no specific laws regulating the liability of the new owner when only part of a business was purchased. This could lead to situations where creditors were unable to claim their debts from the new owner.
The ordinance now ensures that the new owner is liable for all debts and obligations, even if they only acquire part of the business. To avoid or mitigate this liability, it is required to publish a transfer notice. It is advisable to publish it at least one month before the transfer date but no longer than 4 months.
The Transfer of Business (Protection of Creditors) Ordinance framework provides clarity and protection for creditors, ensuring transparency and a smoother transfer process.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
For specific advice about your situation, please contact:
Managing Partner
+852 2388 3899