Hong Kong - New Companies Ordinance


New Hong Kong Companies Ordinance

In August 2012 we reported on the passing of the Companies Bill by the Hong Kong Legislative Counsel with the aim of completely overhauling the Territories’ company legislation. The subsidiary legislation has now been enacted and in March this year new Companies Ordinance (Cap. 622) came into effect. The previous Companies Ordinance (Cap. 32) has been repealed with the exception of the sections relating to prospectuses and insolvency are retained and repackaged in the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32).

The objectives of the legislation are to:

a) Enhance corporate governance;
b) Ensure better regulation;
c) Facilitate business; and
d) Modernise Hong Kong company law.

With bold objectives the new Ordinance has introduced sweeping changes to modernise the law. It is immediately noticeable that the law is written and organised in a more accessible and modern style.

The Ordinance abolishes the requirement for all companies to have a Memorandum of Association, from now on companies are only required to have Articles of Association. For existing companies the Memorandum is deemed to have been incorporated into the Articles of Association, save for the provisions relating to the par value of shares and authorised share capital which have been abolished and are thus deemed to have been deleted. The legislators considered that the previous practice of par value was outmoded and the new ‘no-par’ system will be clarity and streamline accounting while at the same time giving companies flexibility with the management of their shares capital. There has been a corresponding change to the law relating to the ability of companies to reduce capital by the purchase of their shares or provide finance for the purchase of their shares, that we consider further below.

Under a separate Companies (Model Articles) Notice (Cap 622H) new model articles of association have been issued, which can be adopted in whole or in part by new companies on incorporation, depending of the type of company.  Under the Ordinance it is no longer possible to incorporate unlimited companies without share capital.

There are now only five types of companies that can be incorporated:

1. Public companies limited by shares;
2. Private companies limited by shares;
3. Unlimited public companies with shares;
4. Unlimited private companies with shares; and
5. Companies limited by guarantee with share capital.

A further change removes the obligation on companies to hold annual general meetings. Under the new Ordinance a company is not required to hold an AGM providing that the AGM business is completed by written resolutions which are provided to each member of the company. The company may dispense entirely with the need to hold AGM if all the members pass a resolution to this effect. In the case of a single member company there is no obligation to hold an AGM at all. The company’s financial statements and reports that previously were required to be placed before the members at the AGM, must now be sent to all the members. It is intended that the new AGM regulations will speed and simplify the decision taking process of companies. The Ordinance also provides protection to member who may request the calling of an AGM. Member can by ordinary resolution, resolve that the decision to discontinue AGM’s is revoked and the AGM’s be restored.

General meetings are now permitted to be held in multiple locations via electronic technology and communications by the company can be electronic if the recipient agrees or with their deemed consent. The requirement and procedure, particularly regarding the holding of electronic meetings can be set out in the company’s articles.

It is now possible for all companies, including public companies, to buy back shares from its capital reserves or through its subsidiaries providing financial assistance to the parent company. The former restrictions on subsidiaries providing assistance have been relaxed and the processes streamlined. Whether the company itself or its subsidiaries fund the buy back the company providing the finance must meet the requirements of a uniform insolvency test. This test allows the reduction in capital to proceed without application to the court, thus considerably speeding the process and reducing the cost. The criteria to be satisfied may, in summary, be stated as follows:

- Following the purchase of the shares there are no ground which would cause the company to default on its debts and either:

(a) If within 12 months the company started the winding up process, it would be able to pay its debts in full within 12 months of that winding up; or
(b) In all other cases it will be able to pay all its debts in full in the 12 months following the share purchase transaction.

In a corresponding provision the Ordinance also permits a court free process for the amalgamation of companies. While this is limited to wholly owned intra-group amalgamations it will facilitate amalgamations between parent and subsidiary (vertical amalgamation) and between the subsidiaries of the same parent (horizontal amalgamation). It is important to note that it applied only to wholly owned companies without minority interests.

Where appropriate and providing the conditions set out in the Ordinance are met companies that have been struck off by the Registrar of Companies, can be restored to the Register without application to court.

The simplification and streamlining of procedures has been extended to a broader range of companies. It was possible for the member of private companies to agree the preparation of simplified accounts and reports and now the simplified procedure has been extended to more companies provided they fall within the various exemptions of the Ordinance. In very brief summary, companies that are:

1. Small private companies that meet two of the following criteria:
(a) Total revenue of not more than  HK$100 million;
(b) Total assets not more than HK$100 million;
(c) No more than 100 employees.

2. Private companies meeting a higher size criteria and 75% of the member approve without the remaining members objecting:

(a) Total revenue of not more than  HK$200 million;
(b) Total assets not more than HK$200 million;
(c) No more than 100 employees.

3. Small guarantee companies with total revenue of not more than HK$35 million

Small companies which had the unanimous approval of the members under the old Ordinance can continue to prepare simplified accounts and reports.

Other changes to companies reporting obligations include:

1. No requirement for the financial statements to provide a ‘true and fair view’ or auditors such an opinion on those financial statements.
2. The requirement to disclose directors material interests in transactions or auditors remuneration.
3. The required information contained in directors’ report has also been reduced.

As well  as simplifying the new Ordinance also aims to clarify areas where there was a lacuna in the  previous Ordinance or where it was unclear. One particular area was the indemnity given by a company to a director against third party liabilities. The new Ordinance now permits a company to provide an indemnity to its directors, subject to conditions, with the exception of personal liabilities such as fines and penalties that have been imposed on them.

To simplify the execution of documents it is no longer a requirement for a company to have a common corporate seal. It is an optional requirement for document to bear the company seal and for the company to have a seal for use abroad.

The new Companies Ordinance represents a major change in Hong Kong company law and practice and will take time to bed in. We would be pleased to provide more information and further details can also be found on the Hong Kong Companies Registry website www.cr.gov.hk where the Ordinance can be accessed.

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