Ada Chung, Registrar of Companies, and Karen Ho, Deputy Principal Solicitor, Companies Ordinance Rewrite Team, Companies Registry, continue their series of articles looking at the major changes introduced by the new Companies Ordinance (Cap 622).
In last month’s CSj, we highlighted the major changes introduced by the new Companies Ordinance (NCO) to enhance corporate governance and modernise the law. This month we take a look at the major changes introduced to facilitate business and ensure better regulation.
With the aim of facilitating business certain procedures have been streamlined.
An alternative court-free procedure based on the solvency test has been introduced for reduction of capital. This is faster and cheaper than the procedure under the old Companies Ordinance (Cap 32), which involved filing an application to the court. Under the NCO, all companies, not just private companies, are allowed to fund share buy-backs out of capital subject to the solvency test, and the restrictions on a company or any of its subsidiaries providing financial assistance for the purchase of shares in the company are streamlined and relaxed. All types of companies may provide financial assistance, provided that the solvency test and one of the three procedures set out in the NCO are complied with.
A uniform solvency test has been introduced. A company can satisfy the solvency test in relation to a transaction if, immediately after the transaction there will be no ground upon which the company would default on debts; and either:
i. if it is intended to commence winding up within 12 months, the company will be able to pay its debts in full within 12 months of the winding up, or
ii. in any other case, the company will be able to pay its debts as they fall due during the 12 months after the transaction.
Every company was required to hold AGMs under the old Companies Ordinance. However, a company is not required to hold an AGM if everything required to be done at the meeting is done by written resolutions and a copy of the documents which would be required to be laid before the meeting is provided to each member. To simplify the decision-making process, under the NCO, apart from retaining the written resolution procedure, a single member company is not required to hold AGMs and a company may dispense with the requirement to hold AGMs by passing a resolution of all members. In such a case, the financial statements and reports which would otherwise be required to be laid before an AGM will need to be sent to members. To safeguard the interests of members, any member may request the company to convene an AGM. Members may also revoke the resolution to dispense with AGMs by passing an ordinary resolution to that effect.
Under the old Companies Ordinance, companies could only amalgamate with court sanction. A new court-free regime for amalgamations is introduced in the NCO. The new regime is confined to amalgamations of wholly-owned intra-group companies where minority shareholders’ interests would normally not be an issue. Under the new regime, an amalgamation may either be vertical (that is, between the holding company and one or more of its wholly-owned subsidiaries), or horizontal (that is, between two or more subsidiaries of the same holding company).
Where specified conditions are met, the NCO introduces a new administrative restoration procedure for a company which has been struck off by the Registrar of Companies without the need for recourse to the court.
Facilitating simplified reporting
Previously, a private company (not being a member of a corporate group) could, with the written agreement of all its shareholders, prepare simplified accounts and directors’ reports. Under the NCO, simplified reporting is extended to more companies. The types of companies that are qualified for simplified reporting, or fall within the reporting exemption, are:
- a small private company/ holding company of a group of small private companies which meets two of the following conditions in a financial year:
- total revenue/ aggregate total revenue not exceeding HK$100 million
- total assets/ aggregate total assets not exceeding HK$100 million
- employees/ aggregate employees not exceeding 100
- an eligible private company/ holding company of a group of eligible private companies which meets a higher size criteria (that is two of the following conditions) in a financial year:
- total revenue/ aggregate total revenue not exceeding HK$200 million
- total assets/ aggregate total assets not exceeding HK$200 million
- employees/ aggregate employees not more than 100
provided that there is 75 percent approval from members and no objection from the remaining members.
- A small guarantee company/ holding company of a group of small guarantee companies with total revenue/ aggregate total revenue not exceeding HK$25 million in a financial year.
- The exemption under the old Companies Ordinance is also retained, namely, a private company (not being a member of a corporate group) with unanimous members’ written agreement may opt for simplified reporting.
Facilitating business operations
The old Companies Ordinance stipulated that every company shall have a common seal with the company name engraved in legible characters. Further, having an official seal for use outside Hong Kong was subject to restrictive requirements. Under the NCO, the mode of execution of documents is simplified by making the use of a common seal optional and relaxing the requirements to have an official seal for use abroad.
To keep up with technological developments, the NCO permits a general meeting to be held at more than one location using electronic technology. A company may set out rules and procedures for holding such a meeting in its articles.
The NCO sets out the rules governing communications that are authorised or required under the NCO to be made to or by companies. For instance, such communication in electronic form to or by a company can be made only with the recipient’s consent or deemed consent. Existing companies may wish to amend their articles, instruments creating debentures or any other agreements, as appropriate, to specify the period for the deemed receipt of documents or information in electronic form or communicated by means of the company’s website. If the period is not so specified, the period is 48 hours pursuant to the NCO except where the contrary is proved.
Ensuring better regulation
To ensure that the NCO enhances regulation, measures have been introduced on various fronts.
Improving the enforcement regime
To improve enforcement, a new power of enquiry is given to the Registrar of Companies to obtain documents or information where there is reason to believe any conduct relating to an offence of providing false or misleading statements has taken place. The investigatory powers of inspectors appointed to investigate the affairs of companies are also enhanced.
The threshold for breach of any provision of the NCO by an officer of the company has been lowered through the introduction of a new definition of ‘responsible person’, which targets intentional and reckless conduct other than willful conduct as under the old Companies Ordinance.
To encourage compliance and to optimise the use of judicial resources, the NCO introduces a new power for the Registrar of Companies to compound specified offences as set out in Schedule 7 to the NCO. Compoundable offences are generally confined to straightforward and minor regulatory offences committed by companies. In compounding an offence, the Registrar will give a notice in writing to a company in breach to offer it an opportunity to rectify the default. If the company pays the compounding fee and complies with the terms of the notice, no prosecution will be initiated by the Registrar for that offence.
Companies limited by guarantee
Under the NCO, companies limited by guarantee come under a specified category of companies and they are required to comply with the following requirements:
- at least two directors are required
- no corporate director is allowed, and
- the annual returns must be delivered together with certified copies of the financial statements, directors’ reports and auditor’s reports.
An escalating scale of annual registration fee is introduced for the filing of annual returns by companies limited by guarantee to encourage compliance with statutory filing requirements. In the case of late filing, substantially higher registration fees are payable. The escalating fee scale is set out in the Companies (Fees) Regulation (Cap 622K) and is the same as the one applicable to private companies.
Clarifying the rules on disclosure of company names and liability status
The opportunity has also been taken to clarify the rules on disclosure of company names. The types of company documents on which the registered name and liability status are to be stated remain the same as those set out in the old Companies Ordinance. Unofficial publications of a company will not be covered. The NCO clarifies that the disclosure rules apply to electronic communications and any website of the company. The requirement under the old Companies Ordinance to paint or affix the company name on the outside of every office or place in which the company’s business is carried on has been relaxed. Under the NCO, a company would have complied with the requirement if it displays its registered name and liability status at the registered office and every business venue, and the company’s name is so positioned that it can be easily seen by any visitor to the premises. The new requirement provides flexibility and allows a company to display its registered name either inside or outside the registered office and business venue. In addition, the requirement only applies to business venues which are open to the public.
Improving the registration of charges
To improve transparency, the period for submitting charges for registration has been shortened from five weeks to one month. Further, a certified copy of the instrument documenting the charge will have to be filed and registered for public search. Third parties will be deemed to have constructive notice of the terms of the charge as registered.
Ensuring the accuracy of information on the Companies Register
To enhance the accuracy of information on the Companies Register, the NCO clarifies the powers of the Registrar of Companies in relation to the following:
- registration of documents – the Registrar is expressly empowered to specify the requirements for the authentication of documents to be delivered to the Companies Registry and the manner of delivery, and to withhold the registration of unsatisfactory documents pending further particulars, and
- keeping of the register – the Registrar may rectify typographical or clerical errors, make annotations, and require a company to resolve any inconsistency or provide updated information.
The NCO provides a statutory basis for applications to court for removing information from the register that is inaccurate, forged or derived from anything invalid, ineffective or done without the authorisation of the company.
A statement of capital is required to be delivered for registration whenever there is a change in a company’s share capital, including an allotment of shares or a permitted alteration of share capital, to ensure the disclosure of up-to-date share capital information.
Refining the scheme for deregistration of companies
The old Companies Ordinance provided that the Registrar may, on the application of a defunct company or its director or member, and subject to certain conditions, deregister the company to the effect that the company be dissolved upon deregistration without going through the windingup process. To minimise any potential abuse, the NCO enhances the regulation of voluntary deregistration by imposing additional conditions to be met, that is, the applicant must confirm that the company is not a party to any legal proceedings and that neither the company nor its subsidiary has any immovable property in Hong Kong.
Ada Chung, Registrar of Companies, and Karen Ho, Deputy Principal Solicitor, Companies Ordinance Rewrite Team, Companies Registry
Ada Chung is a Fellow of the ICSA/ HKICS. This series concludes in next month’s CSj when the Registrar of Companies will further elaborate on the abolition of the memorandum of association and the abolition of the par value of shares.
For enquiries, email: email@example.com, or call the new Companies Ordinance hotline at the Companies Registry: 3142 2822 (available from Monday to Saturday 9:00 a.m. to 8:00 p.m. excluding public holidays).
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