Legislature Considers Streamlining Company Law

Proposed Changes

The bill proposes many changes to the Companies Ordinance, and some of the more important of these are as follows.

Amended articles of association
When a company amends its articles of association it will be required to send to the Registrar of Companies within 15 days after the alteration a printed copy of the amended articles. An officer of the company must certify that the amended articles are correct. The company and every officer of the company who is in default will be liable to a fine. A daily default fine will be applicable to continued default.

Merger relief
A company that issues shares at a premium (whether for cash or otherwise) is required by Section 48B of the Companies Ordinance to transfer to a share premium account a sum equal to the total value of those premiums. The share premium account may be used only for the purposes set out in the ordinance. This effectively excludes companies in Hong Kong from the benefits of merger relief that arise in acquisitions, mergers and reconstructions.

The bill will introduce merger relief provisions to encourage the private sector to conduct mergers and reconstructions in Hong Kong. Merger relief will be allowed in two cases: (i) when an arrangement results in the issuing company securing at least a 90% holding in the equity shares of the other company through share transfers; and (ii) when there is a reconstruction between parent and wholly-owned subsidiaries but no material change in the shareholder structure of the group or no assets leave the group.

Group accounts
Section 126(2) of the Companies Ordinance requires that where the financial year of a subsidiary does not coincide with that of a holding company, the group accounts normally must deal with the subsidiary's state of affairs (including its profit and loss account) as at the end of its financial year ending with, or last before, that of its holding company . The Financial Secretary, on the application or with the consent of the holding company's directors, may direct otherwise.

The bill proposes to remove the Financial Secretary's discretion. It will also require the group accounts to include the reasons why the financial year of the subsidiary did not coincide with that of the holding company.

Officer and auditor information
Under the bill, both private and public companies will be required to send a copy of its auditor's notice of resignation to the Registrar of Companies.

Also, a company's register will no longer be required to contain the nationality of directors and secretaries and, in the case of listed companies, particulars of the directors' directorships in other companies.

Liquidator's duties
Under the bill, Section 202 will be amended to provide that where a liquidator (other than the Official Receiver) receives money in such capacity, he shall, (i) in the case of a sum not exceeding HK$50,000, deposit the money (without deductions) into the Companies Liquidation Account not later than 14 days after receiving it; and (ii) in the case of any other sum, deposit the money (without deductions) into the Companies Liquidation Account straight away.

A liquidator who retains money in contravention of the amended Section 202 will be required to pay 20% interest on the amount retained, unless he can satisfactorily explain such retention to the court. The court may also disallow all or part of his remuneration and may remove him from office.

The Official Receiver may authorize the liquidator to make this payment into and out of any other bank account that the liquidator specifies. Therefore, the liqidator will no longer have to file an application with the Committee of Inspection to deposit the money into an account other than the Liquidation Account.

Solvency declaration
Directors of a company will be allowed to make a statutory declaration of solvency of the company other than at a meeting of directors if they pass a resolution authorizing this action beforehand.

Company de-registration
The bill includes a new Section 291AA that sets out the following with regard to de-registration of private defunct companies:

• the parties who may apply to the Registrar of Companies to de-register a private company;
  
  
• the circumstances in which the application can be made;
  
  
• the power and the procedure for the registrar to de-register a company; and
  
  
• the effect of de-registration.

Companies that cannot be de-registered are listed in the new Sixteenth Schedule and the Financial Secretary may amend this list.

New Section 291AB provides for the circumstances in which a de-registered company may be reinstated and the effect of reinstatement.

Company books
New provisions under Section 292 will require a person who is a director of a company just before its dissolution to ensure that company books and records are kept for not less than five years after that dissolution. A person who fails to comply with this requirement is liable to a fine.

Registrar of Companies
The bill will repeal Section 290A of the Companies Ordinance and thereby remove the registrar's power to strike off a company for failing to file annual returns.

Also, a new Section 303B provides protection for the government, the registrar and certain other persons from any loss or damage suffered by a user of the information they provide (eg, computerized information) by reason of an error or omission in that information. However, the error or omission must have been made in good faith and in the ordinary course of the discharge of the duties of the relevant person.

Dormant companies
An amendment to Section 344A will add two more categories of companies to the list of companies to which the dormant company exemptions do not apply. These include licensed leveraged foreign exchange traders and approved trustees (as defined in the Mandatory Provident Fund Ordinance).

Status of the Bill

Most of the proposals made in the bill have been discussed and supported by the Standing Committee on Company Law Reform. The bill was introduced into the Legislative Council on March 10 1999 for its first reading, had its second reading in June 1999 and is expected to be introduced next year.

For further information on this topic please contact Noeleen Farrell at Deacons Graham & James by telephone (+852 2825 9211) or by fax (+852 2810 0431) or by e-mail ([email protected]).
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