The new CO is divided into 21 parts, more than 900 sections and 11 schedules. For now, the provisions relating to the winding up and insolvency regime and thepublic offer/prospectus regime will remain with the current ordinance (Cap.32), which will be re-titled as the Companies (Winding up and Miscellaneous Provisions) Ordinance. Cap 32 will be subject to a further rewrite at a later stage.
This bulletin highlights some of the key changes under the new CO regime.
All companies will have to have at least one director who is a natural person. Public companies, companies limited by guarantee and private companies that are members of a group of companies of which a listed company is a member are not permitted to have any corporate directors.
Existing companies with no natural persons as directors will have six months to comply with this requirement after the new CO comes into operation.
Codifying director’s duty of care, skill and diligence
The modern common law dual subjective and objective test in relation to directors’ duties of care, skill and diligence has been clarified and codified in the new CO.
Replacing “officer in default” with “responsible person”
The concept of an “officer in default” will be replaced with that of a “responsible person”.
The new definition of responsible person, for a company or a non-Hong Kong company, includes officers or shadow directors of the company who authorise or permit, or participate in, the contravention or failure. This definition also extends in the case of corporate officers, to their own officers and shadow directors.
The new test covers reckless actsand omissions, as well as intentional contraventions, failures and wilful blindness. However, the intention is not to include mere negligence.
This change is intended to make it easier to bring prosecutions against directors for misconduct.
Extending the scope of director’s indemnification and permitted liability insurance
The general prohibition against indemnifying directors for liability will be extended to situations where the indemnity is provided by an associated company, although express permission to take out insurance is provided for and an exception is made in respect of liability to third parties, provided certain conditions are met.
Amending the regime prohibiting loans to directors
The general prohibition on loans to directors has been extended to a wider category of connected persons.
To facilitate business, the following new exemptions and exceptions are introduced:
- small loans – value of which not exceeding 5% of net assets or called-up share capital of the company making the loans; and
- expenditures on defending proceedings or in connection with investigation or regulatory action, subject to requirements as to repayment.
The criminal penalties have been removed for breach of the provisions prohibiting loans to directors and replaced by civil penalties.
Expanding prohibition on payments for loss of office
Under the new CO, the prohibition of making payments to directors or former directors for loss of office or as retirement payments without members’ approval is extended to payments to entities connected with a director or former director and to payment by a company to a director of its holding company.
There is a new exception for small payments, not exceeding HKD 100,000.
Long-term employment contracts to be approved by members
Directors’ employment contracts exceeding three years will require shareholder approval.
Ratification of conduct by directors
Disinterested members’ approval is required to ratify misconduct of directors.
Widening the scope of disclosure of director’s material interests
Under the new CO, the disclosure of director’s interests covers “transaction” and “arrangement”, instead of just “contract”. In addition, the directors are required to disclose the “nature and extent” of the interest, instead of just “nature”.
For a public company, the ambit of disclosure is widened to include disclosure of material interest of entities connected with director, except interest that the director is not aware of.
Such duty to declare an interest also applies to shadow directors.
Company formation and related matters
Types of companies
There will be five types of companies under the new CO in contrast with the current CO which provides for eight types of companies.
Click here to view table.
Abolishing par value of shares and authorised share capital
A mandatory system of no-par value for shares is introduced and relevant concepts such as authorised share capital and share premium will be retired.
Abolition of memorandum of association
A company will have a single constitutional document – the articles of association. The concept of memorandum of association will be retired. An existing company’s memorandum of association will be deemed to form part of its articles of association, except that any such
condition setting out authorised share capital and the par value of shares are to be regarded as deleted due to the abolishment of par value of shares.
Optional use of common seal
It will no longer be compulsory for companies to have a common seal. Companies may seal a document by authorised signatories.
Transactions in relation to share capital
Uniform solvency test
A uniform solvency test is introduced for the statutory provisions under the new CO governing:
- financial assistance on acquisition of a company’s own shares;
- re-purchase/redemption of a company’s own shares; and
- reduction of a company’s share capital via the court-free
The whitewash procedure has been removed and three new provisions authorising financial assistance with a solvency statement made by the directors are introduced.
The contravention of the financial assistance prohibition is expressly stated not to invalidate the financial assistance transaction.
Accounts and audit
Accounting standard and terminology
The new CO requires financial statements of a company to comply with the accounting standards applicable to the financial statements, which means the statements of standard of accounting practice issued by the Hong Kong Institute of Certified Public Accountants.
Terminology for financial statements under the new CO is brought in line with accounting terminology.
The requirements for financial statements are relaxed to enable more private companies to prepare “simplified accounts” based on the Small and Medium-size Entity Financial Reporting Standard.
A company which does not qualify for production of “simplified accounts” must prepare an analytical and forward-looking business review of the company.
The reporting exemption will be extended to small guarantee companies and a guarantee company which is the holding company of a group of small companies. In all seven types of company will be allowed to prepare simplified financial and directors’ reports.
Auditors will have power to compel production of information or explanations reasonably required for the performance of the auditor’s duties.
A new statutory offence is introduced in respect of a person (widely defined) knowingly or recklessly failing to include in an audit report one of the statements (b) or (c) below that are required to be included in the audit report under the new CO. An audit report must state where the auditor is of the opinion that: (a) adequate accounting records have not been kept by the company; or (b) the financial statements of a company are not in agreement with its accounting records in any material respect; or (c) the auditor has failed to obtain all information or explanations that, to the best of the auditor’s knowledge and belief, are necessary and material for the purposes of the audit. Furthermore, where they have not done so an auditor must include in the audit report, so far as the auditor is reasonably able to do so, a statement giving the particulars that are required to be, but have not been, contained in the financial statements.
The new CO revises the list of registrable charges to include aircraft and shares in aircraft and instalments due not yet paid on shares issues price.
The full charge instrument will now be filed and available for public inspection, rather than the M1 particulars.
Furthermore, the period for delivery to the Registrar of the charge instrument is shortened from five weeks to one month.
Another major change is that a certified copy of any instrument evidencing release of a charge is required in lieu of the current requirement for a statement certifying the same.
Shareholder meetings and written resolutions
The new CO sets out statutory rules on procedures for proposing and circulating written resolutions of members. If the procedures are not followed, the written resolution will not be effective.
In addition to the permission of not holding the AGM under the Cap 32, the new CO also provides that a company is not required to hold an AGM if it has only one member or the AGM is dispensed with by unanimous members’ consent.
An AGM may be dispensed with by passing a written resolution or a resolution at a general meeting passed by all members.
The minimum notice period for annual general meetings remains at 21 days while that for all other general meetings is 14 days.
Other important issues
Removal of headcount test
The headcount test for certain types of scheme of arrangement is removed.
Updated procedure to deregister companies
Three new conditions for the deregistration of dormant companies will be imposed, namely confirmation that the company is not a party to any legal proceedings, and that neither the company nor its subsidiaries (if any) own any immovable property in Hong Kong.
Protection of personal data
The new CO intended to make directors’ residential addresses and full ID/passport numbers withheld from public inspection. However, due to controversy over this proposal, its implementation has been postponed.
New amalgamation process
Wholly-owned companies in the same group can benefit from a new court-free amalgamation process.