The new Companies Ordinance (the “New CO”) comes into effect on 3 March 2014. This issue forms the first of a series of newsletters on the New CO.

Streamlined and Efficient
The New CO introduces a new corporate regime that is in many ways easier to follow for businesses. When it comes to redemption, repurchase and reduction, the major changes are that a single solvency test is applicable to these three processes and companies seeking capital reduction may do so via an alternative court-free regime. In addition, public and not just private companies are given the right to purchase their shares out of capital.

New Solvency Test
The New CO stipulates one single solvency test which will apply to the following situations:

1.          Redemption out of capital
2.          Repurchase out of capital
3.          Reduction of share capital through the court-free procedure

This solvency test is a two-limb test and is embodied in a solvency statement which all directors sign to certify that the solvency test requirements are satisfied.  

Firstly, the directors should be satisfied that there is no ground on which the company is unable to pay its debts immediately after the transaction. Secondly, they confirm that the company will be able to pay debts during the 12 months immediately following the transaction. Where the directors anticipate that the company will be wound up within that 12-month period after the transaction, the directors have to state instead that the company will be able to pay debts during the 12 months following the commencement of the winding up. 

Before signing the solvency statement, the directors have to inquire into the company’s state of affairs and prospects, taking into account contingent and prospective liabilities of the company.

Reduction: The Alternative Court-Free Procedure
The New CO introduces an alternative court-free procedure for the reduction of a company’s share capital. Companies no longer need to obtain court sanction for the reduction; instead, reduction may be done if directors sign the solvency statement and disinterested members of the company (the members who do not have an interest in the contract for reduction) approve the transaction by special resolution. After the necessary publication (through gazette notices and newspapers) and registration at the Registrar of Companies is done, the reduction is effected with the filing of a return to the Registrar if no application in opposition is made by creditors or members.

Implications

Widening the Pool of Eligible Companies
Under the New CO, public companies may effect share redemption, repurchase or reduction, which is a change from the position under the existing Companies Ordinance (the “CO”) under which only private companies may do so.

A More Fuss-Free Regime
The New CO’s amendments eradicate certain inconveniences in the CO. Where a company desires to redeem or repurchase shares out of capital, it may do so by executing the solvency statement under the New CO. This saves time and expense by getting rid of the need for an auditors’ report on the company’s solvency situation, an item currently necessary under the CO.

The New CO also does away with some complex accounting treatments in a share buy-back out of capital scenario. With the abolition of par value under the New CO, there is no longer any need for the company to perform certain calculations to transfer funds to, or decrease funds in, a particular reserve which is currently necessary in the CO. 

By making the solvency test also applicable to the court-free reduction of capital scenario, the New CO introduces a uniform test for all three share capital restructure transactions. In addition, by implementing the court-free procedure, the New CO saves time by doing away with the need to petition for the court’s approval of the proposed reduction. It also eliminates additional hurdles to the reduction such as the court’s exercise of its discretion under the CO to refuse to confirm the proposed reduction or to impose terms or conditions as it thinks fit.

Towards No-Frills

The New CO is a welcome overhaul of the CO, hailing the introduction of a more streamlined and business-friendly regime. In the context of share redemption, repurchase and reduction, it eliminates certain existing procedures and requirements and thus enables more companies to implement these measures effectively and efficiently. For companies currently contemplating a share buy-back out of capital or a share reduction, it may be worthwhile waiting for the launch of the New CO before doing so in order to profit from the streamlined procedures and requirements.

For enquiries, please contact our Corporate & Commercial Department:

E: cc@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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.