The Background

In a recent commercial transaction case that we handled, the purchaser (the “Purchaser”) intended to purchase certain properties in Hong Kong by acquiring shares in the companies holding the properties (the “Transaction”). However, the Purchaser ran short of money to complete the Transaction and needed to seek loan financing (the “Loan”) from third party lenders (the “Lenders”). One of the Lenders is a company with limited liability incorporated under the laws of Hong Kong. The Purchaser borrowed money from the Lender through its parent company, which is a company limited by shares incorporated in 2017 under the laws of British Virgin Islands (“BVI”) (the “Borrower”)

The Lender was required to consider whether they need to obtain a money lender licence in Hong Kong before they can offer the loan to the Borrower. Under the Money Lenders Ordinance (Cap. 163) (the “MLO”), a lender must obtain a money lender’s licence to lend monies in Hong Kong unless certain exemptions apply. The Lender needed to consider, in particular, whether they can rely on the exemptions to the money lender licence requirements stated in the MLO.

Pursuant to Schedule 1 of the MLO, the exemptions to the money lender licence requirement include: (i) the loan is provided by an exempted person; or (ii) the lender makes an exempted loan. These exemptions are listed in Part 1 and Part 2 of Schedule 1 of the MLO, respectively.

The first category of exemption is not applicable in our case as the Lender is not one of the exempted persons. For the latter category of exemption, among all types of the exempted loans stated in the MLO, the only type which may be applicable to our case is, “loans made to a company that has a paid up share capital of not less than HK$1,000,000 or an equivalent amount in any other approved currencies (which are freely convertible into Hong Kong dollars, or any currencies approved in writing by the Registrar of Money Lenders)” (Clause 12 of Part 2 of Schedule 1 of the MLO).

The Lender could argue that the Borrower in our case “has a paid up share capital of not less than HK$1,000,000 or an equivalent amount”. However, after conducting legal research and consulting with BVI lawyers, we realised that BVI companies do not have the concept of “share capital” and it is not possible for the Borrower (as a BVI company) to have a “paid up share capital of not less than HK$1,000,000 or an equivalent amount”.

BVI Business Companies Act 2004

To solve the abovementioned issue, we conducted legal research and sought a BVI legal opinion (the “BVI Legal Opinion”) to clarify the concept of “authorised share capital” or “share capital” under the BVI law. We found the following:-

• The BVI Business Companies Act 2004 (the “BVI Companies Act”) came into effect on 1 January 2005. The BVI Companies Act replaced both the International Business Companies Ordinance and the Companies Act (Cap. 285). The BVI Companies Act abolishes the concept of “authorised share capital”, or indeed of “share capital”, to be in line with modern companies’ legislation in a number of other jurisdictions including Australia, New Zealand and Canada. Those concepts were regarded as redundant and do not represent the true capital in the company.
  
• However, the concept continues to apply for some former BVI International Business Corporations that were automatically re-registered on 1 January 2007 pursuant to the BVI Companies Act.
  
• Under the BVI Companies Act, only the maximum number of shares that a company is authorised to issue or that the company is authorised to issue an unlimited number of shares needs to be stated in the memorandum (section 9(1)(e)(i) of the BVI Companies Act). However, according to the BVI Legal Opinion, in the event that the company is authorised to issue more than 500,000 shares (or an unlimited number of shares) then the annual licence fee will increase rather significantly (currently from USD 350 to USD 1,100 per annum).
  
• Subject to the memorandum and articles of a company, a share may be issued with or without a par value; and a share with a par value may be issued in any currency (section 37(1) of the BVI Companies Act).
• Shares may be issued fully paid, partly paid or unpaid. The consideration for shares may be money, services rendered, personal property, real property, a promissory note or other binding obligation to contribute money or property to the company or any combination thereof.
  
• A company may issue its shares for such amount as may be determined from time to time by its directors, save that where the shares have a par value, the consideration payable for such shares may not be less than the par value.
  
• Save as otherwise stated in its memorandum or articles, a company may increase or reduce its authorised capital, though the company must inform the Registrar in writing of any such change to its authorised capital and file an amendment to its memorandum.
  
• A company may purchase, redeem or otherwise acquire its own shares, provided that, immediately after doing so, the company is solvent (which means the value of the company’s assets exceeds its liabilities, and the company is able to pay its debts as they fall due), and the directors believe on reasonable grounds that the company will be solvent after the purchase, redemption or other acquisition

HK Companies Ordinance

Upon commencement of the Companies Ordinance (Cap. 622) (“CO”), the provisions in the memorandum of association of a company incorporated under the old Companies Ordinance (which were deemed to be provisions in the articles of association after commencement of the CO) relating to authorised share capital of the shares are for all purposes to be regarded as deleted (section 98(4) of the CO).

The par value does not serve the original purpose of protecting creditors and shareholders, and in fact may even be misleading because the par value does not necessarily give an indication of the real value of the shares. The CO adopts the mandatory system of no-par and abolishes also the relevant concepts such as nominal value, share premium.

Deeming provisions are introduced to ensure that contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par value.

Section 85(2) of the CO allows a company to state in its articles the maximum number of shares it may issue. The maximum number of shares to be issued specified in the capital clause may be altered by an ordinary resolution.

The share capital of a company would be its issued share capital. The issued shares can be fully paid or partly paid. It is noted that the Model Articles do not allow for shares to be issued unless fully paid up.

The consideration for shares can be in cash or kind. However, if non-cash consideration (for example, immovable property, plant and machinery, service, etc.) is given, particulars must be set out in the return of allotment (Form NSC1) (section 142(1)(d)(iii) of the CO).

Section 257 to section 266 of the CO sets out the procedure for a private company to purchase or redeem its own shares out of capital, including:-

• a solvency statement from all of the directors that the company satisfies the solvency test that the company is able to pay its debts within the 12 months following the transaction;
  
• a special resolution passed within 15 days of the solvency statement; and
  
• a notice to the public of the proposed reduction in share capital stating, inter alia, that any member who has not consented or voted in favour of the special resolution or any creditor may apply to the court within 5 weeks to cancel the special resolution.

The Conclusion of the Case

Relying on the BVI Legal Opinion, the Borrower’s shareholder subscribed sufficient shares in the Borrower with consideration not less than the par value of the shares, to the effect that the Borrower has paid up capital of an equivalent amount of US dollars more than HK$1,000,000.

There is no circular or guidance note issued by the relevant authorities explaining how to interpret the requirement of “paid up share capital” under the MLO, when a borrower is an overseas company whose jurisdiction does not have the concept of “share capital”. In our case, the Lender, relying on the BVI Legal Opinion, considered that the Loan is an exempted loan.

The Implications

In practice, when we encounter similar cases, we may need to obtain a legal opinion from that jurisdiction to prove that there is no concept of “share capital” in their jurisdiction. We may consider expressly setting out in the loan agreement, as one of the condition precedents, the borrower shall produce evidence to show that it has paid up capital (equivalent to the concept of share capital) of not less than HK$1,000,000 or an equivalent amount in any other approved currencies.

However, we are yet to know whether the relevant authorities will challenge and take a strictly literal interpretation of the “share capital” requirement for the said exempted loan exemption.

For enquiries, please contact our Corporate & Commercial Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.