In July 2012, the Companies Ordinance (Cap. 622) (CO) was passed by the Legislative Council and became effective on 3 March 2014. The ordinance provides a modernized legal framework for the incorporation and operation of companies in Hong Kong. It aims to achieve four main objectives, namely, to enhance corporate governance, ensure better regulation, facilitate business, and modernize the law. Since it is a re-write, the legal concepts remain unchanged. Many had welcomed this modernized piece of legislation, but were unaware that there are conflicts and inconsistencies therein. These include the following:
With regards to the sections on striking off, or the de-registration of a limited company, the last letter to be sent by the Registrar of Companies before taking formal legal action for striking-off is to write to the founder member(s). A founder member is one who agrees to become a member on incorporation. But, shares that are registered in the name of a member can be transferred to another individual or body corporate, and it would not make sense to send a letter to a person who may or may not still be a member. Furthermore, if a member is not involved in the management of the company, he or she should not be in a position to reply whether the company is still in operation. It is, therefore, necessary to delete the relevant section to relieve the “founder member” of the burden of answering queries from the Registrar of Companies.
Another serious pitfall is the vote counting system. Before the introduction of the new CO, market practitioners had the perception that a written resolution is equivalent to a show of hands i.e. one vote for one signature. However, in the sections on the repurchase of shares, a written resolution can be passed in lieu of holding a general meeting. The sections overlook the fact that shares subject to a repurchase would not have voting rights. A member selling part of his or her shares to the company would face the dilemma of determining whether his or her signature could be counted as a “yes” to the written resolution or treated as “invalid,” as part of his or her shares should not vote in the resolution. The simplest way to avoid falling into this trap is to hold a general meeting to approve share repurchases and conduct a poll vote.
Representatives, or proxies, can now speak and vote at general meetings. But if a person is serving as a proxy to more than two members, there is a question of how votes could be counted via a show of hands. Thus, it is imperative that a mechanism for vote counting be devised via a show of hands for all market practitioners to follow.
Section 588(5) on the General Rules on Votes also contains a serious fault. It states that if any share in a company is held in trust for the company, those shares do not, for so long as they are so held, confer any right to vote at a general meeting. This leads to two issues. Firstly, the CO does not recognize trust arrangements. Trust details should not enter into the register of members. Secondly, if a company can hold its own shares, it is impossible to present the correct share capital in the financial statements. The actual amount of share capital received by the company would be different from the amount stated in the return(s) of allotments and annual returns filed with the Companies Registry. This might be construed as misrepresentation.
With all these material issues and many more in the CO, it is time for a complete review of the CO to mitigate its inherent legal pitfalls.
To help professionals understand the issues in the CO, I have conducted an e-Series course “Issues in the Companies Ordinance (Cap. 622) – from a company secretary’s perspective,” highlights some of these conflicts and inconsistencies, including those discussed above, and offers measures to help professionals avoid falling into legal traps.
Belinda Wong is the author of Hong Kong Company Secretary’s Practice Manual and Hong Kong Company Secretary Checklist, and Director of Leader Corporate Services Limited. She is a mentor of United College and an advisor to the alumni association of the Faculty of Education of the Chinese University of Hong Kong. She is also a member of the Hong Kong General Chamber of Commerce and the Chinese Manufacturers Association of Hong Kong.