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TOP TIPS: Revised Hong Kong Companies Ordinance explained

Aug 26, 2013 | By |

With the amended company act to be enforced in Hong Kong in 2014, CT asks Joshua Cole, partner of law firm King and Wood Mallesons, to elaborate on the key changes that affect corporate executives.

Key changes

Gazetted on 10 August 2012, the amended Hong Kong Companies Ordinance is expected to be effective in 2014.

Major changes relevant to CFOs and treasurers include the abolition of par value, restricting corporate directorship in private companies, replacing the headcount test, clarification of directors’ duties of care, skill and diligence, strengthening the enforcement regime, facilitating simplified reporting and strengthening auditors’ rights.

New solvency test

Under the new ordinance, directors will be required to issue a solvency opinion to undertake capital reduction, buy-back by a private company or for an unlisted company to provide financial assistance. The same solvency test will apply uniformly across all these scenarios.

The solvency opinion will need to specify that the directors are satisfied that immediately after the transaction there will be no ground on which the company could be found unable to pay its debts, and either (i) if the company intends to commence a winding-up within 12 months of the transaction, the company will be able to pay its debts in full within those 12 months; or (ii) in any other case, the company will be able to pay its debts as they become due during the period of 12 months following the date of the transaction.

Process for reduction of capital

Under the new rule, a company will be able to reduce its share capital either by a special resolution supported by a solvency statement from the directors, or by a special resolution confirmed by the court. We expect companies to favour the special-resolution approach.

Share buy-backs

Under the existing regime, only private companies may undertake share buy-backs, and the old ordinance has fairly complex and restrictive rules on the requirements for buy-backs that vary depending on whether the purchase will be funded from distributable profits, issuance of shares or capital.

A new procedure will be introduced allowing all companies except listed firms to fund buy-backs out of capital if they satisfy the solvency test. This option will co-exist with the current procedure. The new procedure will be impractical for listed firms as they will not be able to practically meet all of the requirements for payment out of capital before the company purchases its own shares in the market.         

Financial assistance                       

Corporations were largely prevented under the old ordinance from giving financial assistance to a third-party aiming to acquire shares in a company, since complex rules and redemptions apply.

Typically, companies found themselves spending a disproportionate amount of time and money on constructing financial assistance transactions to comply with the old rule.

The financial assistance provisions will be streamlined: all types of public companies (listed or unlisted) will be permitted to provide financial assistance, subject to satisfying the solvency test and obtaining any relevant approvals.

Different levels of requirement will be set out based on whether the assistance given is less than 5% of the shareholder funds, the assistance is approved by a written resolution by all members, or the assistance is approved by an ordinary (majority) resolution with notice given to all members, which will also require the board’s approval, supported by solvency statement and the members’ ordinary resolution.

New and simplified financial reporting

Previously a profit and loss, balance sheet and a directors’ report needed to be provided at the AGM. This was a complicated process and many provisions of the old ordinance overlapped.

In future, a clearer rule will require all “reporting documents” to be provided at the AGM or sent to members. In addition to the directors’ report, an analytical and forward-looking business review will need to be submitted.

The business review should include information regarding principal risks and uncertainties facing the company, new developments, analysis of key performance indicators and information related to other significant matters such as environmental, employment and supplier issues.

The new ordinance will simplify reporting obligations for smaller and lower-risk companies; they will only be required to prepare simplified account and simplified directors’ reports based on the SME-Financial reporting standard (SME-FRS) issued by the Hong Kong Institute of Certified Public Accountants.

Companies eligible for the reporting exemption:

• are not required to disclose auditor’s remuneration in financial statements;

• are not required to comply with the requirement that financial statements give a “true and fair view”;

• may exclude subsidiary undertakings from consolidated financial statements;

• are not required to include a business review in the directors’ report; and

• are not required to have an auditors’ report which includes a “true and fair view” opinion.

Eligibility for simplified reporting

A private company (other than banks or deposit-taking companies, insurance companies, or stockbroking firms) will automatically qualify for simplified reporting if it is a “small private company”. To qualify, a private company must satisfy at least two of the following tests:

(a) its total revenue is less than HK$100 million;

(b) the company’s total assets are less than HK$100 million; or

(c) the average number of the company’s employees during the relevant financial year does not exceed 100

Holding companies of a group of small private corporations will generally qualify for simplified reporting.

A private company that is not a member of corporate group (irrespective of whether it meets these small private company requirements) may also adopt the simplified reporting requirements if all its shareholders agree.

Small guarantee companies and groups of small guarantee companies with total annual revenue of less than HK$25 million can also qualify for simplified reporting.

Private companies that fail to meet the small private company test (or cannot obtain approval from all shareholders) may qualify for simplified reporting if they meet a number of other criteria and the simplified reporting approach is approved by 75% of shareholders, with no objection from a singler shareholder.

© Haymarket Media Limited. All rights reserved.
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