Liquidation
Learn what liquidation means for a Hong Kong company, the three types of winding up, and how the process works.
December 2023 | Published by Xero
Published Thursday 6 August 2026
Table of contents
Key takeaways
- Liquidation, also called winding up, is the legal process of closing a company, selling its assets and settling its debts before it is dissolved.
- In Hong Kong, companies are wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). Bankruptcy applies to individuals, not companies.
- There are three types of liquidation in Hong Kong: members' voluntary, creditors' voluntary, and compulsory (ordered by the court).
- A licensed liquidator takes control from the directors, sells the assets and pays creditors in the order set by law, with any surplus returned to shareholders.
What is liquidation?
Liquidation is the process of selling a company's assets to turn them into cash, and it commonly refers to the winding up of a company that is being closed down. When a business is liquidated, its assets are sold and the cash is used to pay what it owes.
In Hong Kong, the winding up of a company is governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The terms "liquidation" and "winding up" mean much the same thing; "winding up" is the wording used in the legislation, while "liquidation" is the term most people use day to day.
What does liquidation mean in business?
In business, liquidation carries two related meanings. Both come back to the same idea of turning something into cash.
- Selling assets for cash: money that was locked up in a thing becomes freely available. Inventory is a common example, where a retailer holds a liquidation sale to clear out old-season stock and free up cash for new products.
- Winding up a company: the business stops trading, sells its assets, pays its creditors and is then dissolved so it no longer exists as a legal entity.
The rest of this page focuses on the second meaning, the formal process of closing a Hong Kong company.
Types of liquidation in Hong Kong
A Hong Kong company can be wound up voluntarily by its own members or creditors, or compulsorily by order of the court. That gives three types of liquidation in practice.
- Members' voluntary liquidation (MVL): for a solvent company, where the directors can declare that it will pay all its debts in full within 12 months. This is the usual route for closing a healthy company that still holds assets.
- Creditors' voluntary liquidation (CVL): for an insolvent company that cannot pay its debts. The directors start the process, but the creditors have the main say in appointing the liquidator.
- Compulsory liquidation: the court orders the company to be wound up, usually after a creditor petitions over an unpaid debt. The Official Receiver or a court-appointed liquidator takes control.
What happens when a company is liquidated?
Once liquidation begins, a liquidator takes over and the company stops trading, apart from work needed to complete the winding up. The steps below outline what happens next.
- A liquidator, who must be a licensed insolvency practitioner (or the Official Receiver in a compulsory case), is appointed and the directors' powers cease.
- The liquidator collects and sells the company's assets and turns them into cash.
- Creditors are paid in the order set by law, and any surplus is returned to shareholders.
- The liquidator reports on the winding up and files the final documents, and the company is then dissolved.
A business might owe money to suppliers, employees, subcontractors, the government or its own shareholders. If there is not enough cash to pay everyone, some creditors may receive only part of what they are owed, or nothing at all. Keeping accurate records and a clear balance sheet helps this process run faster and at lower cost.
How assets are distributed in a liquidation
The cash raised from selling the company's assets is paid out in a set order of priority. Secured creditors are generally entitled to enforce their security first, then the remaining funds are distributed roughly as follows.
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- The costs and expenses of the winding up, including the liquidator's fees
- Preferential debts, which include certain employee entitlements and outstanding Mandatory Provident Fund (MPF) contributions
- Creditors holding a floating charge over the company's assets
- Unsecured creditors, such as suppliers and lenders without security
- Shareholders, who share any surplus only after all debts are paid
Because unsecured creditors sit near the end of the queue, they often recover less than the full amount owed when a company is insolvent. Watching your cash flow and the money you owe through your liabilities is the best way to avoid reaching this point.
Liquidation vs deregistration
Liquidation is not the only way to close a Hong Kong company. Deregistration (also called striking off) is a simpler and cheaper route, but it only suits companies that meet strict conditions.
- Deregistration suits a private company that has not traded for at least three months, has no outstanding liabilities, holds no immovable property in Hong Kong, has no pending legal proceedings, and has the agreement of all members.
- Liquidation suits a company that still holds assets, has liabilities or employees, or has any obligations that need to be formally settled before it closes.
A company eligible for deregistration can still choose voluntary liquidation, but not every company that needs liquidation qualifies for the simpler deregistration route. Comparing the two against your working capital and remaining obligations helps you pick the right one.
A director's duties during liquidation
When a liquidator is appointed, a director's powers end, but the responsibilities do not disappear. The main duty shifts to cooperating fully with the liquidator.
- Hand over the company's books, records and assets to the liquidator
- Prepare a statement of affairs setting out the company's financial position
- Give the liquidator the information needed to complete the winding up
In a compulsory winding up, directors who fail to keep proper records or prepare a statement of affairs can face prosecution or disqualification. Taking early advice from a licensed insolvency practitioner or solicitor helps directors meet these duties.
What is liquidation in accounting?
In accounting, liquidation is the process of closing down a business, selling off its assets, paying creditors and distributing any remaining funds to shareholders. It marks the final stage in the life of a company, once trading has stopped and the books are being settled.
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Whether you are growing a company or preparing to close one, up-to-date records make every financial decision clearer and every process smoother. Xero brings your bank transactions, invoices and reports into one place, so your assets, liabilities and cash position are easy to see at any time.
Clean, current books also make a winding up faster and less costly, because a liquidator spends less time reconstructing accounts. See how Xero can help you stay on top of it all, and get one month free when you are ready to start.
FAQs on liquidation
Here are answers to common questions about liquidating a company in Hong Kong.
What is the difference between liquidation and winding up?
They mean much the same thing. "Winding up" is the term used in Hong Kong legislation, while "liquidation" is the everyday word for the same process of closing a company and settling its affairs.
What is the difference between liquidation and deregistration?
Liquidation is a formal process run by a licensed liquidator that suits companies with assets or debts to settle. Deregistration is a simpler, cheaper strike-off for a dormant company with no assets, liabilities or ongoing obligations.
How long does liquidation take in Hong Kong?
There is no fixed timeline, and tax clearance from the Inland Revenue Department often drives the pace. A straightforward voluntary case can take many months, while a compulsory winding up may run for a few years.
Can a director be held personally liable during liquidation?
Directors who act in good faith are generally protected by limited liability. Personal liability can arise where a director declared the company solvent knowing it was not, moved assets to avoid creditors, or kept trading while knowingly insolvent.
What happens to employees when a company is liquidated?
Employment contracts usually end when the liquidator is appointed. Employees become creditors for unpaid wages and other entitlements, which rank as preferential debts in the order of priority.
Related terms
Learn more about liquidation
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.