When a winding-up petition is presented against a company, any transfer or payment of its assets is void unless approved by the Court through a validation order. The Court has wide discretion but will usually ask:
• Does the payment benefit unsecured creditors (if the company is insolvent)?
• Or, if the company is solvent and actively trading, does it fall within the ordinary course of its business?
Where the company is solvent, the Court generally leaves it to the directors to decide what payments are necessary and a validation order for ordinary business expenses is usually granted without difficulty.
In Re Huafang Group Inc [2025] HKCFI 4938, a minority shareholder petitioned against a solvent investment holding company whose subsidiaries conducted the actual business operations. The Court held that the company still had an active and ongoing business, albeit through its operating subsidiaries, and that its ordinary business activities included preparing financial statements, conducting audits, assessing operational performance, ensuring compliance, and handling regulatory inquiries and litigation (in contrast to a dormant company). A validation order was granted for such payments in the ordinary course of its business, subject to monthly reporting to the Petitioner (who could challenge any payments found not to have been made in the ordinary course of business).
However, the Court refused a validation order for professional fees tied to a proposed scheme of arrangement to buy back shares from the minority shareholders. This was not part of its ordinary business and not something the Court would “rubber stamp”. Further, the fees were significant but there was little concrete evidence, or disclosure to the shareholders, on the terms of the scheme.
Takeaway: Even an investment holding company can be treated as having an active and ongoing business for validation purposes — but only genuine business expenses will qualify as being in the ordinary course.
Eugene Kwok of Prince’s Chambers appeared for the Petitioner