The new Companies Ordinance (Part 3)

In this third update on the provisions of the new Companies Ordinance affecting banks and financial institutions, we will discuss some of the changes relating to transfer of shares, financial assistance, registration of charges and debentures.

Reasons for refusing to register a transfer of shares

When a shareholder sells his shares, the purchaser needs to be registered on the company's register of members as the new shareholder, in place of the old shareholder, and to obtain a new share certificate. The purchaser will not acquire legal title to the shares, unless he has been so registered. This is also the case where the seller is a creditor which has taken a mortgage over the shares.

In a private company, a shareholder's right to transfer shares is required by law to be restricted. A usual restriction is that the directors may in their discretion refuse to register a share transfer.

The new Ordinance will require a company to provide a statement of the reasons for refusing to register a transfer, when requested by the existing shareholder or his purchaser.

Hong Kong has not adopted the helpful UK requirement that the company must provide the purchaser with such further information about the reasons for the refusal as the purchaser may reasonably request.

The new Ordinance goes on to provide that the existing shareholder or his purchaser may apply to the Court, which may order the company to register the transfer, if the Court is satisfied that the application is “well-founded”.

Financial assistance

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 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 Ordinance will also permit both unlisted and listed companies to provide financial assistance, subject to compliance with any one of 3 “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.

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. Requiring an auditors' report in every case would merely add expense and cause delay.

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 2 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.

Registration of charges

The new Ordinance maintains the current regime of only requiring registration of particular categories of charges (and mortgages).

The existing practice is to register a charge over cash deposits, on the ground that it is a charge on book debts. The new Ordinance will provide that a charge over cash deposits is not to be regarded as a charge on book debts. This seems to facilitate the taking of security over money in a bank account, but may well create difficulties in practice.
The new Ordinance will make clear that a mortgage over an aircraft is registrable.

The new Ordinance will shorten the period for delivery of the charge document to the Companies Registry for registration from 5 weeks to 1 month.
A certified copy of the charge document will be registered and become available for public inspection. Thus any information contained in the charge document will be available to the public.

Further, third parties, including banks and financial institutions, will be deemed to know the existence of registered charge documents (even if they have not searched the Companies Registry and did not know about the charge document).

Under the existing law, if a charge becomes void for not being registered with the Companies Registry within the specified time limit, the money secured by it automatically becomes immediately payable. The new Ordinance will remove this “automatic” acceleration and give the lender a choice whether to accelerate repayment.

It may be noted that the new Ordinance will give the Registrar power, on an application by the company, to rectify a typographical or clerical error contained in any information on the Companies Register.

Debentures

The definition of what constitutes a “debenture” remains essentially the same under the new Ordinance, and includes, e.g., bonds and any other debt securities.

Under the existing law, a company is required to keep a register of the holders of its debentures or debenture stock. This applies when the company issues a series of debentures or any debenture stock that are not transferable by delivery. The register is open to inspection by any person.

The new Ordinance will provide for the keeping of branch registers of debenture holders. This is intended to facilitate the issue of debt securities outside Hong Kong.

A new provision requires the company to deliver to the Companies Registry a return of allotment, within 1 month after an allotment of debentures or debenture stock. Failure to file the return is an offence on the part of the company and its responsible persons. This is intended to protect investors in debentures.

Not much thought seems to have been given to the meaning of the term “debenture”. This is however important, because, e.g., the obligation to make a return of allotment of debentures depends on what is a “debenture”. It has been said that the term “has no precise meaning”. In the latest case, the Judge was prepared to hold that a general credit agreement to provide credit facilities by means of a current account, and a general assignment to the bank of all present and future debts, were all “debentures”. Earlier, the highest court has held that an ordinary mortgage of land is a “debenture”. Nevertheless, the intention is probably not to require a return every time a company signs a loan agreement or a mortgage.

The new Ordinance will empower holders of 10% of the value of the debentures to apply to the Court for a meeting of the debenture holders to be held to give directions to the trustee for the debenture holders. This right may be excluded by the debentures, the trust deeds or other documents securing the issue of the debentures.