Get ready for the new Hong Kong Companies Ordinance

A company's powers will be limited by any limitation in its Articles of Association (the Memorandum of Association will be abolished). A shareholder may sue to restrain the company from acting in contravention of the limitation.

However, in favour of a person dealing with a company in good faith, the power of the directors to bind the company will be deemed to be free of the limitation.

The new Ordinance provides that mere knowledge that an act is beyond the directors' powers under the Articles of Association is not bad faith. Further, a third party is not obliged to inquire as to the limitations on the power of the company's directors to bind the company.

These may seem wide, but the protection actually afforded to a third party dealing with a company may be quite limited. Furthermore, even if the transaction is saved under the new Ordinance, the third party may incur liability at common law by reason of the directors exceeding their powers.

The protection will not apply if the parties to the transaction include an insider, like a director of the company or of its holding company, or an entity or a person connected with the director. The new Ordinance suggests that the rights of a third party to the transaction are not affected, but at the same time it gives the court a wide power, on application by the company or the third party, to affirm, sever or set aside the transaction on any terms the court thinks just. Presumably, the rights of third parties are not intended to be adversely affected, but how this new power to sever or set aside will be exercised remains to be seen.

The protection will also not apply where the company is registered without “Limited” as the last word of its name, such as a charitable organisation.

Seal

Under the existing law, a deed needs to be executed by a company by affixing its seal. There was an argument that formalities, such as affixing a seal, served a cautionary, and thus useful, function. In practice, this formality seems to be merely cumbersome.

The new Ordinance provides that a company may have a common seal.

It will no longer be necessary to affix the seal onto a deed. Instead a company may execute a deed by having the document signed by the director (if it has only one director), or by two directors (or a director and the company secretary) (if it has two or more directors). This method of signing will suffice, if the document states that it is executed by the company as a deed.

Auditors

Statement of circumstances

An auditor is required make a statement of relevant circumstances, if:

(a) he resigns from office, is removed from office, or retires without being reappointed, and

(b) he considers that there are circumstances connected with the resignation or the termination of his appointment that should be brought to the attention of the company's members or creditors.

Within 14 days of receipt of the statement, the company must send a copy of the statement to its members, or apply to the court for an order directing copies of the statement not to be sent to its members.

If the outgoing auditor has not received notice of an application to the court within 21 days of the company receiving the statement, he must send a copy of the statement to the Companies Registry for registration.

Such statements would be of interest to creditors. In the absence of malice, the auditor will not be liable for defamation in respect of such a statement.

Criminal liability

As an initiative to safeguard the reliability and integrity of auditor's reports, the government has introduced criminal liability for auditor's reports (but not enabled, for example, investors and creditors who, as everyone knows, would rely on the reports to sue).

If an auditor is of the opinion that the company's financial statements are not in agreement with the accounting records in any material respect or fails to obtain all the information or explanations that, to the best of his knowledge and belief, are necessary and material for the purpose of the audit, then he must state that opinion or fact in the auditor's report.

It will be a criminal offence, if the auditor knowingly or recklessly causes any of the above statements to be omitted. The auditor will be liable to a fine not exceeding HK$150,000 ($19,350) and will not be subject to imprisonment.