Forthcoming Revision of the Companies Ordinance - International Law Office

International Law Office

Company & Commercial - Hong Kong

Forthcoming Revision of the Companies Ordinance

October 06 2003

Formation of Incorporated Companies
Directors
Memorandum and Articles of Association
Reduction of Share Capital
Loans to Directors
Winding-up Provisions
Filing Requirements
Comment


In February 2000 the Standing Committee on Company Law Reform of the Securities and Futures Commission published its proposals to modernize the Companies Ordinance. Due to the breadth of these proposals, the changes will be contained in several amending ordinances. One of these ordinances is the Companies (Amendment) Ordinance 2003, which was enacted on July 2 2003 and which is expected to come into force later this year. This update highlights the significant changes which will be introduced by the amendment ordinance.

Formation of Incorporated Companies

At present, in accordance with the view that a company is an association of a number of persons with common objects, a company must have at least two shareholders. The amendment ordinance will introduce a one-member company, thereby recognizing the fact that many sole traders incorporate, and accordingly it will remove the need to have nominee shareholders. The amendment should make share transfers simpler. However, the concept of a company being distinct from its members will be retained so that liability of the company will remain distinct from that of the sole member.

Subject to observance of the requisite formalities, there seems to be nothing to stop an existing company from converting into a one-member company.

Directors

Sole director and reserve director in private companies
Complementary to the introduction of one-member companies, a company will only be required to have one director and that director can be the sole member. However, Section 153A(6) will enable the company to nominate a person to act as a reserve director in the event of the sole director's incapacity. It would be good practice for this nomination to take place on incorporation.

Resolutions of the one-member company will be recorded in writing and signed by the director.

Alternate directors
At present, an alternate director appointed by a director is personally liable for his own acts, but the director appointing him is not. Under the new Section 153B, a director will be vicariously liable for any tort committed by his alternate director. This will mean that affected parties will be able to claim against both the alternate director and the director appointing him.

Shadow directors
Currently, the term 'shadow director' is only defined in Part IVA of the Companies Ordinance in relation to disqualification of directors (Section 168C). The amendment ordinance will insert a definition of 'shadow director' into Section 2(1) which is somewhat broader than that in Section 168C, and this new definition will apply throughout the ordinance. This will mean that a person acting as a shadow director will be subject to all the liabilities and obligations of a director under the Companies Ordinance even if he is not officially appointed as a director.

No definition is to be inserted for a de facto director (who is a person who acts without lawful authority to bind the company).

Indemnity and insurance of directors and officers
At present, a company is prohibited from purchasing insurance for its directors and officers. In practice, directors and officers often buy the insurance themselves and are reimbursed by the company. The amendment to Section 165 of the Companies Ordinance will permit the company to purchase and maintain insurance for its directors and officers in respect of liability in a variety of specified situations and defending an action.

Memorandum and Articles of Association

Section 23(1) states that the memorandum and articles of association bind the company and its members as if each had signed them. A substituted Section 23(1) will reinforce this concept so that, subject to the terms of the Companies Ordinance, members, present and future, are to be bound to observe the provisions of the memorandum and articles of association for the benefit of the company and all other members. The amendment will in no way alter the existing rule that members are unable to object to the amendment of the memorandum and articles of association, even without their consent, as long as those amendments have been made in accordance with the requirements of the Companies Ordinance.

The amending section will not contain the existing Section 23(2), which treats any debt owed by a member to the company as a 'specialty', thereby extending limitations on action for recovery of the debt to 12 years (as opposed to six years for a non-specialty debt).

Reduction of Share Capital

When the amendment ordinance comes into force it will not be necessary to seek court confirmation of the reduction of the share capital of a company if the purpose of the reduction is to redesignate the nominal value of shares to a lower value and the conditions set out in Section 58(3) are met.

In removing the need to apply to the court, which can be time-consuming and expensive, the amendment streamlines the process of reducing the share capital of a company.

Loans to Directors

The amendment ordinance will extensively amend the provisions, especially Sections 157H and 157I relating to loans to directors. A re-drafted Section 157H will be inserted to reinforce the existing provisions. Changes in the section include a detailing of the types of prohibited transactions. A new section, Section 157HA, deals with excepted transactions. Parts of Section 157I are amended.

Winding-up Provisions

To bring the Companies Ordinance into line with the current bankruptcy law, the amendment ordinance will increase the minimum debt for which a company can be wound up from HK$5,000 to HK$10,000.

Filing Requirements

Filing requirements at the Companies Registry will be simplified by allowing a company to file written statements instead of statutory declarations and affidavits. There will be no change to Section 349, which renders a person liable for making false statements.

The amendment ordinance also promotes the use of the Company Registry's standard forms in order to make the filing process easier and to save time and costs. The company registrar will have the power to prescribe the standard form to be used and to refuse to register any forms other than those specified.

Comment

In order for Hong Kong to be a major international centre, its commercial legal infrastructure must keep up to date. The Companies (Amendment) Ordinance is part of the movement towards the modernization of Hong Kong company law to reflect desirable international practices. The changes should ease the compliance burden on companies and should be generally welcomed in the market.

It is good to see that many (but unfortunately not all) of the new provisions are drafted in plain English, which should make them more readily accessible to readers.


For further information on this topic please contact Nicholas Norris or James Bidlake at Simmons & Simmons by telephone (+852 2868 1131) or by fax (+852 2810 5040) or by email (nicholas.norris@simmons-simmons.com or james.bidlake@simmons-simmons.com).



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