New Hong Kong Companies Ordinance: Financial assistance

01 Nov 2013 | Newsletter/briefing

WHEN IN FORCE: 3 March 2014

COMPANIES AFFECTED: All Hong Kong incorporated companies

NEW PROVISIONS: Part 5, Division 5 of new CO: ss274–289

THE PROHIBITION ON FINANCIAL ASSISTANCE

  • the basic prohibition that a company and its subsidiaries cannot give financial assistance directly or indirectly for the purpose of an acquisition of shares in the company remains unchanged

SUMMARY OF CHANGES

  • the meaning of "financial assistance" is broadly unchanged
  • the new CO clarifies that a company is not prohibited from giving financial assistance for the purpose of an acquisition of shares in its holding company if the holding company is incorporated outside Hong Kong
  • unlike the recent revisions to the UK companies legislation, there is no confirmation in the new CO that the financial assistance provisions do not prohibit a non-Hong Kong subsidiary from giving financial assistance for the purpose of an acquisition of shares in its Hong Kong incorporated holding company. Case law suggests a non-Hong Kong company should not be so prohibited as long as no Hong Kong parent company takes any steps assisting in the financial assistance
  • where financial assistance is given in contravention of the new CO, the financial assistance and contracts connected to that financial assistance remain valid. The concern under the existing legislation of the financial assistance and connected contracts being void for illegality has been removed
  • contravention of the financial assistance prohibition remains a criminal offence. The maximum penalty fine increases from HK$125,000 to HK$150,000. The maximum imprisonment term remains unchanged at twelve months. A company and its responsible officers may be held liable for a contravention
  • the new CO abolishes the rather cumbersome whitewash exemption under the existing legislation (s47E), which is replaced by three streamlined authorization procedures applicable to both listed and non-listed companies. The new authorization procedures are subject to satisfaction of a solvency test and allow:
    • financial assistance (including previous financial assistance granted under this procedure that has not been repaid) not exceeding 5% of shareholder funds as disclosed in the most recent audited financial statements of the company
    • financial assistance approved by all shareholders via written resolution
    • financial assistance with the approval of shareholders by ordinary resolution
  • each of the three new authorization procedures requires a board resolution and a solvency statement. The board resolution must set out in full the basis for the decision to approve the provision of financial assistance
  • there is no specified form of solvency statement that must be used. Only those directors voting in favour of the resolution need sign the solvency statement (in contrast to certain other new CO solvency statements, which must be signed by all of the directors)
  • other exemptions to financial assistance under the existing legislation have generally been retained under the new CO. As is the case under the existing legislation, some of these exemptions are more restrictive in relation to listed companies

IMPLICATIONS FOR PRACTICE

Directors’ Duties

  • under the three new authorization procedures and other exemptions, directors must continue to ensure that the proposed financial assistance is in the best interests of the company and does not constitute an unlawful distribution of assets

Transaction timetable

  • the introduction of the three new authorization procedures will help shorten timetables for companies seeking to give financial assistance. If the financial assistance does not exceed 5% of shareholder funds, then the steps taken to authorize the financial assistance may be carried out on the same day. Same day authorization may also be possible where the financial assistance is approved by all shareholders via written resolution

Accounts

  • it is not necessary to rely on audited accounts when making the solvency statements under the new authorization procedures. Directors, however, should consider what assistance they would require to determine the company’s solvency for this purpose. In certain circumstances, a company may seek the assistance of its external accountants. Directors should at the very least minute a review of up-to-date management accounts


For related publications, see also: New Hong Kong Companies Ordinance Tool Kit.

Contacts

Peter Brien (partner), Lisa Chung (partner), Peter Lake (partner)


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