Introductions of Hong Kong company law


The Hong Kong Companies Ordinance Cap 32) was enacted in 1932 and is one of the territory's lengthiest and most complicated pieces of legislation. Despite some partial amendments, there has been no substantive review of the law since 1984. In this regard, the Hong Kong Financial Services and the Treasury Bureau (FSTB) launched a comprehensive revision of the hong kong company law. The objectives are to streamline and modernize the provisions, making it more accessible to the public, to strengthen Hong Kong's position as an international and financial centre, and to bring Hong Kong in line with the recent legal developments in other common law jurisdictions.


Hong Kong company names


Shadow companies have been registering in Hong Kong under identical or similar trademarks or trade names to improperly benefit from the goodwill of other companies. A growing number of shadow companies are using Hong Kong trade names to engage in such activities in mainland China.

Under the existing regime, the Registrar of Companies can only direct a hong kong company to change its name if it is very similar to a registered trademark or trade name within one year of its incorporation. In other circumstances, the company registrar has no power to take enforcement action against an infringer, such as directing a name change or striking off an infringing name from the register, even if the trademark owner has successfully obtained a court order against the infringer in a passing off action.

The new proposal is to empower the company registrar to act upon a court order to direct the infringer to change its name within the prescribed time. If the infringer fails to comply with the court order, the Registrar may replace the infringing name with the registration number. A similar approach has been adopted by other common law jurisdictions, such as Australia, Canada and New Zealand.



Company law - Corporate directorship


SCorporate directorships are becoming less popular among common law jurisdictions. Many countries have abolished corporate directorships for the reason that it is difficult to determine the true identity of the delegate of a corporate director and to impose sanctions against any underlying wrongdoer. To improve corporate governance and transparency, the Standing Committee on Company Law Reform (the SCCLR) recommended the abolition of corporate directorships in Hong Kong, subject to a reasonable grace period for phrasing out.

Presently, only private companies may appoint a corporate director. Given that, concerns have been expressed that the abolition of corporate directorships may affect those private companies that rely upon corporate directorships for genuine business purposes, such as asset management and corporate structuring.

In the UK, the Companies Act 2006 has adopted the middle ground in addressing this issue. Instead of an outright ban on corporate directorships, the law requires every company to have at least one natural person as a company's director, who can be held responsible for the company's business conduct.

The SCCLR said there is strong support from the professional bodies and business community for the abolition of corporate directorships. That is because the impact on businesses would likely be minimal and the increased transparency would greatly reduce money laundering and terrorist financing activities.


Company law - Registration of charges


At present, any charges that fall within the list of registrable charges under s80(2) hong kong company law must be registered with the Companies Registry. The SCCLR proposed to reserve the current listing with some updates, such as making aircrafts and interests in aircrafts registrable, replacing the registration of charges securing the issue of debentures as it replicates other registrable charges on the list and deleting references to bills of sale on the basis of its broad and unclear coverage.

Under the existing regime, the company creating the charge must lodge the original instrument of charge with the prescribed particulars with the company registry for verification. A certificate of due registration will be issued upon satisfaction of the registration process. However, only registered particulars are open to the public for inspection. There is no obligation to disclose the full contents of the instrument of charge. The registration constitutes a constructive notice of the existence of a charge, rather than the actual contents of the instrument.

Under the new proposal, the instrument of charge will also be registered in the public register in a prescribed form, containing the information about the company, particulars of the chargee and the date of creation of the charge. Once this approach is adopted, the company creating the charge is required to exercise due care when drafting the charge to ensure the correctness of the particulars of the charge.

There is also a proposal to shorten the time limit for the registration of charges. The recommended option is to follow the UK approach where the current five week-registration period is shortened to 21 days to reduce the time in which the charge is 'invisible' to the public. At present, a charge must be submitted to the relevant authority for registration within five weeks of its creation.



Company law director duties


In Hong Kong, codification of directors' duties has been discussed on numerous occasions in the past. In the process of rewriting the hong kong company law, the SCCLR is reconsidering whether Hong Kong should codify the general director duties. Currently, directors' duties are mainly established under common law principles.

Supporters believe that codification of directors' duties in a statutory form would bring clarity and predictability to the law, which would assist directors to better understand their statutory duties. Concerns have been expressed, however, that the development of codified duties in addition to common law principles might lead to even more ambiguities and uncertainty.

Common law jurisdictions such as the UK, Australia and Singapore have codified the general duties of directors. In the UK, the Companies Act 2006 introduces a statutory statement on directors' duties. It includes the duties to act within power, avoid conflict of interests and exercise reasonable care, skill and diligence. When interpreting the statutory duties, the court must interpret them in the same way as the common law rules and equitable principles. The Australian and Singaporean courts will interpret the statutory duties together with the common law rules and equitable principles. The UK approach intends to achieve certainty of the statutory statement and to facilitate the continued development of the common law.

A major feature of the UK's codification is the introduction of a duty to promote the success of the company. It requires a director of a company to act in good faith and to promote not only the commercial interests of its shareholders, but also the well-being of other stakeholders, such as its employees, suppliers and customers and be responsible for the impact of their business operation on the surrounding community and the environment. This is tantamount to being a broad obligation promoting corporate social responsibility. It will be interesting to see how it is applied by the courts in practice.

Presently in Hong Kong, the company registry has issued the Non-Statutory Guidelines on Directors' Duties setting out the directors' functions and powers. In view of the recent developments, the SCCLR invites public submissions, especially from the business community, on whether Hong Kong should codify the general directors' duties and whether the duty of success of the company should be adopted to promote the interests of other stakeholders.



Company law - Insolvent trading laws


IIn the UK and Australia, insolvent trading provisions or similar legislation have been introduced to improve corporate governance. The common feature of this legislation is to impose personal liability on directors who allow the company to continue to incur debts where the director knows, or ought to know, that the company is insolvent or would become insolvent.

Following the UK and Australian experiences, the Hong Kong Law Reform Commission of the Hong Kong sub-committee on Insolvency proposed to introduce an insolvent trading law. The proposed legislation contains certain elements of the existing UK's wrongful trading provisions and Australia's insolvency trading provisions. The draft legislation was introduced to the Legislative Council in 2000. However, concerns have been expressed about the broad coverage of the legislation. It remains uncertain whether the proposed legislation will be reviewed in the rewriting process of the hong kong company law.



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