Policy Statement & Submission

11th July 2008


Prof K C Chan SBS JP
Secretary for Financial Services and the Treasury
8/F, West Wing
Central Government Offices
Hong Kong

by post and fax: 25371736

Dear Prof Chan,

Second Public Consultation on Companies Ordinance Rewrite –
Company Names, Directors' Duties, Corporate Directorship and Registration of Charges

The Hong Kong General Chamber of Commerce is pleased to submit the following views in respect of the proposals made in the captioned consultation document.


1. Shadow Companies (Question 1 & 3)

(a) In view of the increasing abuse of the company name registration system in Hong Kong by "shadow companies" to carry out their counterfeiting activities and the lack of power of the Companies Registrar ("CR") to enforce a court order to change a company's name under the Companies Ordinance, we agree with the proposed amendment to empower the CR, upon receipt of a court order, to direct the company to change its name and to change a company's name to its registration number if the company does not comply with the CR's direction.

(b) However, our view is that the role of the CR will still be very passive in combating the abuses by "shadow companies" even after the above measure is introduced. This is because the owners of a trademark or trade name will still need to take a legal action against a shadow company to obtain a court order. We would suggest that the CR should consider introducing a company names adjudication system similar to that introduced in the UK under the Companies Act 2006 ("CA 2006") which can provide the companies, especially SMEs, a cheaper alternative to enforce their rights. It can also lighten the court's burden by striking out claims in which the infringing companies simply have no reasonable prospect of success.

Section 73 of the CA 2006 provides that the order made by the adjudicator may be enforced in the same way as an order of the High Court and we suggest that Hong Kong should also adopt this approach for efficiency.

Our answer to Question 1 is:
(a) Yes
(b) Yes
(c) We believe that adjudication should also be considered in parallel.

2. Hybrid Names (Question 2)

As noted in the Consultation Paper, the CR is unaware of any strong demand for the registration of hybrid names (58 applications in 2006 and 64 applications in 2007) and the permission for registration of hybrid names may aggravate the problem of "shadow companies". As such, we do not consider it necessary to amend the law to provide the CR with a discretionary power to approve a "hybrid name".

However, for those phrases which have no direct Chinese equivalents and are used in other legislation, we agree that the new CO should permit companies to use those phrases in their company names.
Our answer to Question 2 is:
(a) No
(b) N/A

Our answer to Question 3 is: Please see above.

3. Directors' Duties (Question 4)

We consider that the standard of care, skill and diligence required to be exercised by a director of a company should be codified in the Companies Bill, but not for the other general duties of directors introduced under the CA 2006, including the duty to promote the success of the company and the duty to declare interest and avoid conflicts of interest. We believe that Hong Kong should consider adopting the same wording as that stated in section 174 of the CA 2006 (duty to exercise reasonable care, skill and diligence) and that such duties should be interpreted and applied in the same way as common law rules or equitable principles.

The main reasons for supporting the codification of the standard of care, skill and diligence are to improve the corporate governance in Hong Kong and to provide clarification of the standard against which the directors will be measured under the common law.

It is noted in Law Wai Duen v Boldwin Construction Co Ltd [2001] 4 HKC 403 that the director's duties in Hong Kong remain the same as those laid down in Re City Equitable Fire Insurance Co. Ltd. [1925] Ch 407 which held that "a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected of a person of his knowledge and experience". The above wording is also repeated in Rule 3.08 of the Main Board Listing Rules of the Stock Exchange of Hong Kong . Some case law has argued that the subjective element (the knowledge and experience the director has) in Re City Equitable's ruling overrides the objective element (reasonableness) in measuring the director's standard of care and skill towards the company. As a result, the less the knowledge and experience possessed by the director, the lower the standard of care and skill required, and that more informed directors will be subject to a higher risk of being sued. However, recent case law in UK suggested that a more objective approach in assessing the director's standard of care towards the company (i.e. taking into account the knowledge, skill and experience that may reasonably be expected of a person carrying out his function) should be adopted. We are concerned that the judicial decisions applying or distinguishing the rulings in various circumstances have created uncertainty and sometimes inconsistencies for directors' guidance.

In UK, the above uncertainty on standard of care has now been clarified under section 174 of the CA 2006. It is also noted that the standard of care imposed on the directors is also codified in Australia, Singapore and Malaysia. As noted by Rogers V.P. in Law Wai Duen case, the standard which described as being required of a director under Re City Equitable "is, if anything, open to review in present day circumstances as, perhaps, being too low". In order to bring the legal duties of directors more into line with today's demand of corporate governance and to provide clarity and certainty, we would suggest that the standards of care, skill and diligence required from the directors be codified.

Whereas for the other general director's duties stated in the CA 2006, it is suggested that they replace in several aspects the common law rules on authorization, waiver, ratification and condonation of directors' breach of duty. Given that the Non-Statutory Guidelines on Directors Duties provided by the CR in Hong Kong have to date provided a clear and accessible description of director's duties and can provide more flexibility, we believe that the other general duties of directors need not be codified in the Companies Bill.

Our answer to Question 4 (a) (b) and (c) is: No, but please see above.

4. Corporate Directorship (Question 5)

It is noted that corporate directorship has been abolished in many other common law jurisdictions (e.g. Australia, Singapore, Canada, New Zealand, Malaysia and the US). Those in favour of abolishing corporate directorship are of the view that it is difficult to know who is responsible for the conduct of the business of a company with corporate directors and it is also difficult to attach liability to the delegation of acts prejudicial to the company. However, we acknowledge that corporate directorship does provide flexibility commercially, and to improve accountability and corporate governance at the same time, we would suggest that Hong Kong should adopt the UK's approach to requiring every company to have at least 1 director who is a natural person to be held accountable for the company's actions.

Our answer to Question 5 is:
(a) No
(b) Yes
(c) N/A

5. Registration of Charges

The following comments on the proposed enhancements to Registrations of Charges are made with reference to recommendations in the UK's Law Commission Report on Company Charges (August 2005).

Recommendation 1: The charge will be registered using a simple online system

The Law Commission is of the view that the current system of registration involving paper prescribed particulars is a drain on the resources of the Companies Registry (which is required to incur cost in employing people to vet the correctness of the prescribed particulars) and an unnecessary cost for the Chargor in producing the prescribed particulars. A simple online registration would be more cost effective, since only a limited amount of data would suffice to meet the objective of the registration system (i.e. to alert people that certain assets of a company are affected by security). In practice, it is doubtful whether any person would do a deal on the basis of the prescribed particulars and it is sufficient for them to know that security does exists which should then prompt them to do due diligence on the actual documentation. The details required in the current registration regime do not appear necessary.

Recommendation 2: The criminal sanction requiring companies to send information will be abolished. It will be up to the Chargee to register the charge and ensure the details are correct.

This reflects what happens in practice. It is the lawyer acting for the Chargee who would invariably be the person who prepares the prescribed particulars and submit the same for registration. Since the Chargee is the person deriving the benefit from registration as agent of the Chargor and is indeed able to effect registration without assistance of the Chargor, it would seem sensible for that person to take charge of the registration. The current position is also unfair on the Chargor because it can end up with an accelerated loan for something which the Chargee and its lawyers have done wrong.

Recommendation 3: Companies House will no longer be required to check through the details and send out a certificate of registration

The logic in Recommendation 1 applies.

Recommendation 4: Companies House and Land Registry will share information on registration of charges, so properties will only need to be registered once.

and

Recommendation 5: 21-day time limit for registration will be removed, and it will be possible to register in advance of the transaction.

Under current regime registration outside of the 5 week prescribed period requires a court order. This is an unnecessary drain on court time and resources. In the Law Commission Report, the Law Commission recommends the removal of the registration time limit and the creation of a priority system (note that the current registration system does not affect priority). The Law Commission's view is very clear that it considers the current registration scheme which dates back to 1900 as being inappropriate to modern needs and is inefficient. It is consistent with the objective of the rewrite exercise to look further into the future rather than adopting the current position of the Companies Act 2006 which is clearly in need of updating. The HK Government should therefore consider the Law Commission report and recommendations in more details and if anything follow the approaches there rather than the position in the Companies Act 2006. If in the future, the UK Government does decide to adopt the Recommendations then HK will always be playing the catch up game.

We hope you will find our input to be of use and do apologise for the uneven format in addressing the issues raised, as well as the delay with our submission. We are most grateful to you office for granting us an extension.

Yours sincerely

David O'Rear
Chief Economist
Hong Kong General Chamber of Commerce