Capital restructuring has become increasingly common due to changing market conditions. Companies in Hong Kong can take advantage of the New Company Ordinance by reviewing their capital structure to grow their businesses.
In Hong Kong, a company limited by shares must have share capital, which is represented by shares in the company. Share capital paid by shareholders is maintained to meet the company's liabilities and to protect creditors; capital cannot be paid back unless prescribed procedures have been completed.
The New Companies Ordinance (Cap 622) came into effect on 3 March 2014. Since then, the court-free procedures for reducing share capital and amalgamating wholly-owned companies within the same group have been well- received by the market.
According to the Companies Registry (CR), the number of cases handled for these two court-free options in 2014 and 2015 are detailed below.
Court-free capital reduction
The alternative court-free procedure for the reduction of capital, which is based on the solvency test, applies to all Hong Kong companies as well as to those cases where capital is used to offset against accumulated losses. In comparison, this option is a faster and cheaper to the court-sanctioned process.
Members' voluntary liquidation
Members' voluntary liquidation is an alternative option to going through the capital reduction process. If the relevant Hong Kong company will ultimately not be needed, disposing the company through members' voluntary liquidation may allow a return of surplus assets to the company's shareholders in a more tax efficient and cost effective manner.
The introduction of the court-free amalgamation makes it easier for a group of companies to restructure and streamline business. The amalgamation can be in a vertical or a horizontal form subject to a solvency test. There are other conditions to be satisfied before this option can be used.
Once the amalgamation has been approved and takes effect, each amalgamating company will cease to exist as an entity separating from the amalgamated company; the amalgamated company succeeds to all the property, rights and privileges, as well as all liabilities and obligations of each amalgamating company.
The New Companies Ordinance also allows other forms of alteration to an existing capital structure of a Hong Kong company, such as:
- an increase in its share capital
- capitalisation of profits and issue of bonus shares, with or without allotment of new shares
- conversion of all, or any of its shares, into a larger or smaller number of shares
- cancellation of shares which have not been taken, or agreed to be taken by, any person, or have been forfeited.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.