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Key changes under the Companies Ordinance (Cap. 622)

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Key changes under the Companies Ordinance (Cap. 622)

2.5. ALTERNATIVE COURT-FREE PROCEDURE FOR REDUCTION OF CAPITAL BASED ON SOLVENCY TEST

New CO references: sections 215 to 225

Position under the Old CO

The Old CO only allowed a reduction of share capital if approved by way of shareholders’ special resolution and a court approved the reduction (although court approval was not required if the sole purpose of the reduction was to re-designate the nominal value of shares to a lower amount).

Court-free procedure for capital reductions under the New CO

While retaining a court-sanctioned procedure for capital reductions, the New CO introduces an alternative court-free procedure based on a solvency test.

The requirements under the court free procedure are as follows:

Solvency statement

All the directors need to sign the solvency statement in support of the proposed reduction;

Shareholders’ special resolution

The company needs to obtain shareholders’ approval by way of special resolution (75%) within 15 days after the date of the solvency statement.

If the resolution is to be passed as a written special resolution, any shareholder holding shares to which the resolution relates is not eligible to sign the special resolution. If the special resolution is proposed at a meeting, the resolution will not be effective if a shareholder holding shares to which the resolution relates exercises the voting rights carried by those shares and the resolution would not otherwise have been passed.

Public notice of reduction of share capital (s.218)

If a special resolution for reduction of share capital is passed, the company must:

  1. publish a notice in the Gazette:
    1. stating that the company has approved a reduction of share capital;
    2. specifying the amount of share capital to be reduced and the date of the special resolution;
    3. stating where the special resolution and solvency statement are available for inspection; and
    4. stating that a shareholder who did not vote in favour of the special resolution or a creditor of the company may apply to the Court under section 220 within 5 weeks after the date of the special resolution for its cancellation.

      The notice must be published no later than the last working day of the week following the passing of the special resolution (or, if that is less than 4 clear business days after the date of the special resolution, no later than the last working day of the week after that);

  2. before the end of the week following the passing of the special resolution, the company must:
    1. publish a notice to the same effect as the notice under paragraph (i) above in at least one specified English newspaper and one specified Chinese newspaper; or
    2. give written notice to that effect to each of the company’s creditors;

Registration and inspection of solvency statement

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.

The company must deliver a copy of the solvency statement to the Registrar no later than the day on which the company publishes notice in the Gazette, or if earlier, the day on which it publishes notice in specified newspapers or gives notice to the company’s creditors.

It must also ensure that the special resolution and the solvency statement are available for inspection by any shareholder or creditor at its registered office or any place prescribed by regulations made under section 657:

  • from the date of publication of notice in the Gazette or, if earlier, the date of publication of notice in specified newspapers or the date on which written notice was given to the company’s creditors
  • until 5 weeks after the date of the special resolution.

Power of Court to confirm or cancel special resolution

Any creditor or non-approving shareholder may, within five weeks after the special resolution is passed, apply to the court for cancellation of the resolution under section 220. If an application is made, the applicant must serve the application on the company and give notice of the application to the Registrar within 7 days of serving the application on the company.

The Court must make an order either confirming or cancelling the special resolution. The Court order may also:

  1. provide for the company to buy back the shares of any of its members and for the reduction accordingly of the company’s share capital;
  2. provide for the protection of the interests of shareholders or creditors of the company;
  3. make any alteration to the company’s articles that may be required as a consequence;
  4. require the company not to alter its articles.

The company must deliver a copy of the Court order to the Registrar within 15 days.

Registration of return of reduction of share capital

If no application to Court is made for cancellation of the special resolution, the company must deliver a return setting out particulars of the reduction of share capital and the share capital of the company to the Registrar no earlier than 5 weeks and no later than 7 weeks after the date of the special resolution.

If application to Court is made and the Court confirms the special resolution or the proceedings terminate without determination by the Court, the company must deliver the return to the Registrar within 15 days after the making of the Court order or after termination of the proceedings.

The special resolution and the reduction of share capital take effect when the return is registered by the Registrar.

Treatment of reserves

It was unclear under the Old CO whether reserves created arising from a reduction of share capital could be regarded as distributable reserves. Section 214 of the New CO clarifies that reserves arising from a reduction of share capital may be regarded as realised profits.

Practical considerations and recommended steps

The directors are expected to have reasonable grounds in forming their opinion as to the company’s solvency. Directors must therefore make due enquiries as to the company’s state of affairs and prospects before signing the solvency statement. In some cases, directors may decide that professional assistance (for example, from auditors or financial advisers) is needed.

2.6. ALLOWING ALL COMPANIES TO BUY BACK SHARES OUT OF CAPITAL, SUBJECT TO SOLVENCY TEST

New CO references: sections 257 to 266

Position under the Old CO

Under the Old CO, a company could generally only buy back its shares using distributable profits or using the proceeds of a fresh issue of shares. There was an exception for private companies, which could fund a buy-back by payment out of capital based on a solvency test.

Under the New CO, all Hong Kong companies are allowed to fund buy-backs out of capital, subject to a solvency requirement. Listed Hong Kong companies are however prohibited from funding an on-market share buy back out of capital (s. 257(3)).

Sections 258 to 266 retain most of the Old CO requirements and procedures applicable to buy-backs by a private company out of capital, and extend them to all companies.

The requirements and procedures are similar to the new court-free procedure for reduction of capital as set out above and include the following key features:

  1. Solvency statement

    All the directors need to sign a solvency statement in support of the proposed payment out of capital (s.259).

  2. Special resolution of shareholders

    The company needs to obtain shareholders’ approval by a special resolution passed within 15 days after the date of the solvency statement.

    If the resolution is to be passed as a written special resolution, any shareholder holding shares to which the resolution relates is not eligible to sign the special resolution. If the special resolution is proposed at a meeting, the resolution will not be effective if a shareholder holding shares to which the resolution relates exercises the voting rights carried by those shares and the resolution would not otherwise have been passed.

  3. Publication of notices

    The company must publish notices in the Gazette and in a specified English and Chinese newspaper and must register the solvency statement with the Registrar.

  4. Application to Court to cancel special resolution

    Any creditor or non-approving shareholder may, within five weeks after the special resolution is passed, apply to the court for cancellation of the resolution.

  5. Time Limit

    The payment out of capital and the buy-back must be made no earlier than five weeks and no later than seven weeks after the special resolution is passed (subject to any court application by a creditor or dissenting shareholder).

Practical considerations and recommended steps

The New CO removes the requirement for an auditors’ report to be prepared when funding a buy-back out of capital. However, the directors are still expected to have reasonable grounds in forming their opinion as to the company’s solvency. Directors must therefore make due enquiries as to the company’s state of affairs and prospects before signing the solvency statement. In some cases, directors may decide that professional assistance (for example, from auditors or financial advisers) is needed.

2.7. REFUSAL TO REGISTER TRANSFERS OF SHARES OR DEBENTURES

New CO references: Section 151(3) and (4)

Position under the Old CO

The Old CO required a company which refused to register transfer of shares or debentures to send a notice of such refusal to the transferor and transferee within two months after the transfer was lodged with the company. However, there was no requirement for the notice to be accompanied by the reasons for the refusal.

Position and key provisions in the New CO

Sections 151(3) and (4) of the New CO require companies to give reasons explaining their refusal to register a transfer of shares upon request and within 28 days after receiving the request.

Practical considerations and recommended steps

Section 152 of the New CO retains the provisions of the Old CO that allow a transferee, where a company refuses to register a transfer of shares, to apply to the court to have the transfer registered by the company. A court may, if it is satisfied that the application is well founded, disallow the refusal and order that the transfer be registered forthwith by the company. Generally, however, courts have been reluctant to intervene in the exercise of directors’ discretion without clear evidence of bad faith or an improper motive. The requirement to provide reasons for refusing to register a share transfer under the New CO will enhance transparency and help to ensure that directors only exercise their powers for proper purposes.

One area where a refusal to register a transfer of shares may be a significant issue is in the case of an equitable charge over shares, where the charged shares are not registered in the name of the security holder. Following enforcement, the board may refuse to register the transfer of shares into the name of the security holder or a third party purchaser. In such case, the requirement to explain the refusal under the New CO may assist the security holder (if it can be shown the refusal is motivated by bad faith). As an extra precaution, the security holder may insist at the outset that the articles of association are amended so as to remove the directors’ discretion to refuse to register a transfer of shares following enforcement of the charge.
 

Skills

Posted on

2014-06-16