The Dawn of a New Era for Hong Kong Company Law

Article written by Dr Josh Wilson QC and Cam Truong

When business opened on 3 March 2014 in Hong Kong, a new era in company law began with the commencement of the new companies ordinance, (“C 622”). That ordinance was the upshot of several years of deliberation and hard work by a specialist panel of company lawyers and others dedicated to reforming Hong Kong’s company laws. This article addresses some of the more important changes and the reasons for them.

Reforms to share capital laws were among the more important. C 622 introduced the new mandatory system of no-par for all companies with a share capital. Concepts of nominal value and share premium have been abolished. The Hong Kong legislature takes the view that the par value concept no longer serves its original purpose of protecting creditors and shareholders and those concepts might even be misleading for the reason that the par value does not necessarily give an indication of the real value of the shares. Next, C 622 requires a company that refuses to register a transfer of shares or debentures to give written reasons for its refusal and to give those reasons to the transferor and to the transferee. One can readily envisage the use of those reasons in a bad faith argument!

Another key reform in C622 relates to a court-free procedure for reduction of capital based on a solvency test. This reform did away with the procedure stipulating that share capital could be reduced only if shareholders approved any such reduction by special resolution and the court also approved that share capital reduction. The new court-free procedure is expected to be faster and cheaper. The directors need to sign a solvency statement, obtain members approval, publish notices and do various other things. But the procedure is vastly simplified compared to the previous regime.

A new scheme has been introduced by C 622 relating to fair dealings by directors especially in situations in which a director is perceived to have a conflict of interest. The scheme expands the prohibitions on loans involving directors and it requires members’ approval for directors’ employment for longer than three years.

The standard of a director’s duty of care, skill and diligence has been tightened up in the new part 10 of C 622. The briefing notes that accompanied the new C 622 frankly confessed that the old companies legislation contained no provisions on directors’ duties concerning care, skill and diligence and the common law position in Hong Kong was “not entirely clear”. The briefing notes went on to say “the standard in old case law which focuses on the knowledge and experience which the particular director possesses … is considered to be too lenient nowadays … (and) there is a judicial trend in other comparable jurisdictions towards the use of a mixed objective and subjective test in the determination of the standard of care, skill and diligence expected of directors …”. In light of overseas developments in the common law it is likely that Hong Kong courts would also adopt the mixed objective and subjective test. However there remains some uncertainty because of the absence of clear case authority in Hong Kong.” It is all sorted now. In deciding whether a director has breached the duty of care, skill and diligence owed by him to the company, his conduct is compared to the standard that would be exercised by a reasonably diligent person having regard to (a) the general knowledge, skill and experience that may reasonably be expected of persons carrying out functions carried out by the director in relation to the company and (b) the general knowledge, skill and experience that the director has.  This language is similar to that used in s.180 of our Corporations Act 2001.

Common law rules and equitable principles consequent upon breach of those duties are preserved.

Time does not permit a full excurses into the real depth and gravamen of these reforms. They are truly expansive. However, the reforms have a great deal to offer. Our own corporation law reform people should take a close look at them.

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