Starting from March 2014, Hong Kong companies are entitled to adopt Court-free approach for capital reduction, the company in question is required to fulfil the following requirements in order to reduce its capital:-
Passing of solvency test together with the issuance of solvency statement confirmed by all directors of the company
Obtaining a special resolution in relation to the capital reduction within 15 days after the solvency statement
Arranging public notices on newspapers and government Gazette
Filing of statutory forms to the Companies Registry within the specified time throughout the capital reduction process
Solvency Test
If the company fulfils the following elements, it could pass the solvency test in general:-
The company is able to pay its debts immediately after the transaction; and
The company will be able to pay all its debts as they become due during a period of 12 months immediately following the date of capital reduction. - Or when there is an intention to commence winding up of the company within 12 months after the date of capital reduction, the company will be able to pay its debt in full within the 12 months period after such commencement date.
It is the obligation for all directors to sign and confirm on a solvency statement that the solvency test requirements have been satisfied.
Reserves
The reserves arising from the capital reduction may be regarded as realized profits and be distributed to the shareholders as dividend or to set off against the future losses.
Time Frame
The whole process normally could complete in 6-8 weeks.
LibraryStone Insights
Reason for capital reduction includes (i) returning excess capital to the members of the company; (ii) cancelling paid up capital when there is a material losses in the business; (iii) to create reserves arising from the capital reduction; and (iv) where there are unpaid capital, to reduce the liability on such unpaid share(s)
Considerations to be taken into account - Before conducting the capital reduction, the company need to consider the following factors:-
Any business licensing requirements restricting the company to attend to the capital reduction / licensing requirements on keeping a minimum capital level
Any agreement between the shareholders / business partners on the minimum capital level
Any restriction in the company’s Articles (and shareholder agreement, if any) on capital reduction
Creditors of the company will have 5 weeks window to express objection against the capital reduction, after the date of special resolution. In the case of objection received, the Court may pass an order to cancel the special resolution (i.e. cancellation of capital reduction). Therefore, it is important that the motivation of capital reduction is reasonable without the intention to harm any interests of shareholders and creditors.
Financial Position of the company - Audited financial statements are not mandated in conducting the capital reduction, however, we encourage the directors to check with the accountant to fully understand the company’s current financial position coupled with the projected financial health of the company, before signing off the solvency statement.