In this legal update, we will discuss changes relating to reduction of capital, share buy-back and financial assistance under the new Companies Ordinance.
新《公司条例》系列(4) – 股本减少、股份回购及财政资助
The Uniform Solvency Test
A uniform solvency test is introduced in the new Companies Ordinance. The survival of this solvency test is a pre-requisite for a company that intends to reduce its share capital through the court-free procedures, buy-back its own shares and provide finance assistance to acquire its own shares.
The solvency test will be satisfied if:
immediately after the transaction there will be no ground on which the company could be found to be unable to pay its debts; and
the company will be able to pay its debts as they become due during the period of 12 months immediately following the transaction, or if the company is intended to commence winding up within 12 months after the date of the transaction, to pay its debts in full within 12 months after the commencement of its winding up.
A solvency statement is to be made and signed by directors having formed the opinion that the company satisfies the solvency test. A director must inquire into the company's state of affairs and prospects and take into account all liabilities (including contingent and prospective) of the company in forming his opinion.
A director who makes a solvency statement without having reasonable grounds for the opinion expressed in it will be a criminal offence.
There is and will be no requirement for an auditors' report. The Government takes the view that auditors would not be in a better position than the directors to ascertain the company's solvency.
Reduction of Capital - An Alternative Court-free Procedure
We will have a new and alternative court-free procedure for reduction of capital. This new procedure, which is based on the solvency test (as outlined above) applies to all companies. It is therefore a faster and cheaper way for companies to achieve capital reduction.
To reduce capital through the court-free process, a company would require :-
a special resolution to be passed by disinterested members;
a solvency statement made by all directors;
the Company giving public notice of the reduction of capital in the Government Gazette and newspapers in Hong Kong; and
registration with the Companies Registry.
Any creditor and non-approving member may apply to the Court for cancellation of the resolution.
Under the existing law, companies are allowed to buy back its own shares using distributable profits or using the proceeds of a fresh issue of shares. For private companies, share buy-back out of capital is also permissible based on a solvency test. The new Companies Ordinance will extend this solvency-based buy-back out of capital to all companies.
The requirements and procedures for companies to buy back its shares out of capital are similar to those in the court-free procedure for reduction of capital as discussed above. These requirements will be applicable to all listed and unlisted companies except that listed companies are not allowed to make any on-market purchase of its own shares out of capital.
Under the existing law, it is an offence for a Hong Kong company and its subsidiaries to give financial assistance for the purpose of acquiring shares in the company. There are certain exceptions. This regime will largely be maintained, pending the introduction of insolvent trading provisions.
Notably, the new Companies Ordinance will provide that contravention will not in itself affect the validity of the financial assistance given or any connected contract. This does not, however, mean that one can proceed with a transaction which may involve financial assistance, regardless of any consideration that it may be a prohibited transaction.
The new Companies Ordinance will also permit both unlisted and listed companies to provide financial assistance, subject to compliance with any one of three "whitewash" procedures. A listed company is subject to the additional restriction that it may only provide financial assistance, if it has net assets which are not reduced by the giving of the assistance, or if its net assets are reduced, the assistance is provided out of distributable profits.
In all cases, the directors who vote in favour of giving assistance are required to make a solvency statement. This says essentially that the directors have formed the opinion that the company will be able to pay its debts as they become due during the period of 12 months immediately following the date of the transaction. This is a cash flow test. A director who makes a solvency statement without having reasonable grounds for the opinion commits an offence.
The first "whitewash" procedure permits assistance if the assistance, and all other financial assistance previously given and not repaid, do not exceed 5% of the paid up share capital and reserves of the company.
The above "whitewash" procedure does not require shareholders' approval. The other two procedures require approval either by all shareholders or by an ordinary resolution (which may be passed by a simple majority) of the shareholders. In the latter case, the company must send to each shareholder 14 days before the resolution a notice which contains information about the nature of the assistance and the implications of giving the assistance for the company and the shareholders. The assistance can only be given after 28 days after the resolution is passed. Dissenting shareholders holding 5% of the total voting rights may, within the 28-day period, apply to the Court to restrain the giving of the assistance.