The minutes of the meeting on 16 July 1996 were confirmed. The Chairman informed members that the Chinese Manufacturers Association had declined the invitation to attend this meeting and that the Hong Kong Institute of Company Secretaries had indicated that they would send in a submission on the Bill.

II.Meeting with Hong Kong Association of Banks (HKAB)

Ultra vires doctrine

2. Mr Josiah KWOK briefed members on the salient points of HKABs submission on the Bill. HKAB strongly supported the abolition of the ultra vires doctrine. However, the doctrine was not abolished in its entirety under the proposed legislative amendments and was re-introduced to some extent under the proposed section 5B(1). In practice, third parties dealing with a company would still need to look at the Memorandum and Articles of Association (M & A) and ought to have actual knowledge of the M & A and the objects clause, as transactions could still be challenged on the ground of the directors or officers representing the company exceeding the powers or not properly conducting the business. The protection provided under section 5C for third parties was insufficient as it did not cover the situation where the person had actual knowledge of the M & A. A third party dealing with a company would, under many circumstances, have come into possession of a copy of the M & A. For instance, banks often required a copy from a company to check whether the proper procedures had been implemented to authorise the execution of documents or restrictions on borrowings etc. Third parties dealing with companies would be forced, as a matter of prudence, to review the objects clause in order to avoid litigation. Furthmore, if the objects clause was not clear enough, the company would be requested to amend the M & A or pass a resolution of the shareholders to authorise transactions, so the concern about problems arising from the objects clause in the ultra vires doctrine would still be there.

Balance between the rights of minority shareholders and those of third parties

3. Members expressed concern about whether the rights of minority shareholders would be adequately protected once the ultra vires doctrine was abolished. As minority shareholders could not appoint company directors, it appeared that the provisions were too lenient on directors although shareholders would retain the rights to bring action against officers of the company under section 5B.

4. Mr Alan Collins responded that the HKABs suggestion to add to section 5B(2) (where it states, An act of a company (including a transfer of property to or by the company) is not invalid by reason only that it contravenes subsection (1).) the provision that acts of a company were not voidable was to protect the interest of third parties such as banks without affecting the rights of minority shareholders.

Retrospective effect

5. Mr KWOK said that if the proposed legislative amendment in respect of ultra vires only applied to future transactions, the ultra vires doctrine would still be relevant to all transactions entered into before the passage of this Bill. This would cause confusion and uncertainties as it would be necessary to determine whether the transactions under consideration were subject to the ultra vires provision or not.

De-regulation of forms

6. Mr Collins elaborated on the concern of HKAB regarding the provision of the Bill to empower the Company Registrar (CR) to specify not only the forms but the content of the forms. He said that information to be provided on forms by companies to the CR should be properly specified in the law and not at the discretion of the CR. He referred to the Administrations argument that aggrieved companies could seek a judicial review and reckoned that this would make Hong Kong a less desirable place to do business.

7. Regarding the Administrations advice that the CRs power to specify forms was circumscribed by the provisions and limitations of the principal Ordinance, HKAB was of the view that there were a number of areas where there were no such limitations. Mr Collins believed that in order to give the CR the flexibility to cope with technology changes in information gathering, it would suffice to empower the CR to specify the format of information to be collected and not necessarily the substance.

Discussion with the Administration on HKABs views

8. In response to the Chairmans question on the effect of a third party having "actual notice" of a companys objects on business transacted, Mr J T Allen explained that under the provision of the Bill, if a third party entered into a transaction "with notice" that the directors were exceeding their powers, then the transaction could be challenged and voidable. HKABs suggested amendments to Clause 6 (Section 5B(2)), which would render the transaction not voidable, posed the question of whether it should be considered appropriate (and hence the transaction voidable) for a third party to enter into a transaction which it might benefit from, with the knowledge that the particular transaction was unlawful.

9.Dr HUANG Chen-ya suggested that while the Administration might consider altering the proposed section 5B(1) or 5B(2), it would be desirable to state clearly the rights of minority shareholders, should directors act unlawfully or against the interest of the minority shareholders, in other sections of the Ordinance, say section 40B. At the request of the Chairman, the Administration agreed to consider the way to address the concerns expressed by members and HKAB in relation to clause 6 of the Bill and provide a written paper in this regard.

Admin

III.Meeting with the Hong Kong Society of Accountants (HKSA)

Ultra vires doctrine

Section 5A

10. Mr Andrew Wingfield outlined the HKSAs submission in regard to the amendments to abolish the doctrine of ultra vires. He commented that section 5A, in conferring companies the capacity, rights, powers and privileges of a natural person, might create anomalies, as there were conceptual difficulties in equating a legal entity with a living individual. For instance, it was not clear whether a company, like a natural person, could be prosecuted for certain offences like murder or had the right to remain silent when being questioned. There might also be contradictions between the power of a natural person and that of a company as set out in its M & A.

Section 5B

11. Mr Wingfield made the following points regarding the drafting of section 5B:

There was a discrepancy between the Chinese and English versions of the proposed subsection 5B(1)(a). The English version said, companies shall not carry on any business or exercise any power that it is not authorised by its memorandum to carry on or exercise. The Chinese version of the subsection, when translated into English, meant that a company should not conduct transactions prohibited by its memorandum.
As the proposed subsection 5(1A)(b) allowed a non-section 21(2) company to opt not to have an objects clause to specify the activities which the company could enter into, sub-section 5B(1)(a) would render those companies unable to carry on any activities at all. It should be stated clearly in the subsection that this should only be applied to companies which have an objects clause in its memorandum.

12. Section 5B(1)(b) provided that a company shall not exercise its power in a manner contrary to its memorandum or contrary to any shareholder resolutions. However, companies without an objects clause might later have a shareholder resolution which would authorise/prohibit a certain type of activity. It would still be necessary for third parties to check appointments and restrictions of directors. Mr Wingfield expressed the view that there should be a provision in section 5B that third parties were specifically not required to check the memorandum or any limitation on the powers of the directors.

Section 5C

13. Mr Wingfield questioned the Administrations policy justification for the provision under section 5C (which states that a person shall not be taken to have notice of any matter merely because of its being disclosed in the memorandum or articles kept by the Registrar). He opined that the provision should not be restricted to matters disclosed in the memorandum or articles but should include all documents filed with the CR. In the case of a company without an objects clause in its memorandum, there might be resolutions of shareholders filed with the CR prohibiting certain activities.

Interest on debts

14. Mr John Lees said that the use of a contractual rate of interest on debts involved working out the interest over a period of three to five years when the rate might have changed many times, which made it very cumbersome and costly for the administration of a liquidation. To use an fixed rate would simplify the matter and enable equitable arrangements for creditors.

15. As regards the provision that the rate of interest payable under section 264A was the greater of the rate specified under the Supreme Court Ordinance and the contractual rate, Mr Jan Blaauw said that there would be confusion if the contractual rate was lower than the court rate. It was not clear whether a creditor, who was paid a contractual interest on his debt, could choose either the contractual or the court rate for the post- liquidation interest. He pointed out that circumstances where post-liquidation interest would apply to debt had occurred on many occasions.

Definition of commencement of winding up

Sections 264A & 264B

16. Mr Blaauw pointed out that there was a separate definition of the commencement date of winding up for the purposes of only sections 264A and 264B. In all other cases, the date should be the date of the winding up order. He questioned the desirabiltiy of having two different definitions as this might be dangerous and cause confusion if taken out of context and enquired if there were any other definitions elsewhere in the Ordinance.

Actual notice

17. As regards HKSAs view on the issue that once a third party had a copy of the M & A, it was deemed to have actual notice of the companys objects and thus would not be protected if a transaction was conducted outside the companys powers, Mr Wingfield responded that in that case, the intention of saving the trouble of minimising investigation and inquiry of powers of company directors would not be achieved and third parties would still need to make substantial enquiries in this respect.

18.The Chairman requested the HKSA to submit further responses to the Administrations written response of 22 August 1996 and to the proposed CSA to section 5B(1) which would be provided to the HKSA.

HKSA

Discussion with the Administration on HKSAs views

Interest on debts

19. Regarding interest on debts, Mr Michael Brown responded that the provision for interest being contractual interest was the recommendation of the Law Reform Commission. The Administration maintained that, in practice, the number of windings-up in which interest was payable for a surplus after the payment of all debts was very low.

Definition of commencement of winding up

20. Mr Brown advised that the definition was purely for the restricted purpose of section 264A and 264B for conversion of foreign debts and would not affect the definition of the commencement date of winding up for other purposes of the Ordinance. At the request of the Chairman, he agreed to provide a written response with respect to the policy justifications for having a separate definition of commencement date in 264A and 264B.

Admin

IV.Meeting with P & L Associates

De-regulation of forms

21. Mr Harry TSUI informed members that P & L Associates was a computer software company which provided services to certified public accountants and law firms and listed companies on filing of forms to the CR. He was concerned about the empowering of the CR to specify forms as he was of the view that the specification of forms should be approved by an independent body like the LegCo. He recounted the difficulty in obtaining samples of forms which were under review from the CR and was concerned that CR would only consult a selected group of bodies on the forms to be used.

22. Miss Charis SETO drew members attention to the results of an opinion survey on the regulation of forms and the abolition of the ultra vires doctrine. She advised that 350 questionnaires were sent to P & L Associates clients, out of which 15 corporations and 22 professional firms (mainly accounting and law firms) had responded.

(Post-meeting note: A summary of the survey results was tabled and the Chinese translation was circulated to members vide LegCo Paper No. CB(1) 2064/95-96 dated 13 September 1996)

23. Members commented that as both the sample size and the response rate of the survey seemed to be rather small, they would welcome further submission from the deputation if more representative information could be available.

Discussion with the Adminstration on P & L Associates views

24. In response to the Chairman, Mr G W E Jones said that, upon the enactment of the proposals, a number of the most commonly used forms in the Companies Ordinance would be replaced by forms which were bilingual and much more user-friendly. All the major professional bodies concerned, namely the Hong Kong Society of Accountants, the Hong Kong Institute of Company Secretaries, the Law Society of Hong Kong and the Hong Kong Association of Secretaries, the Law Society of Hong Kong and the Hong Kong Association of Banks, had been consulted on these forms, and their views had been accommodated as far as possible. Mr Jones confirmed that, prior to the introduction of further new forms, the professional bodies concerned would also be consulted on their format and content. All the new forms would go through the gazetting procedure before implementation.

25. Regarding P & L Associates concern about the difficulty in obtaining forms which were being reviewed, Mr Jones explained that it would not be appropriate to release the preliminary forms as the preliminary views of the CRs proposals had been significantly altered based on the comments received and it was likely that the design could change again. Furthermore, early release of these forms would also be inappropriate as it would pre-empt the decision by LegCo that the statutory forms could be de-regulated and amended by the CR. He stressed that the CR had consulted and would consult the professional bodies concerned and the members of the Companies Registry Customer Liaison Group on the current and any proposed changes to the forms. The Department would also ensure that sufficient publicity would be given to any such changes.

26.Regarding the rationale for the proposed amendment to enable a change of the forms without having to amend the subsidiary legislation, Mr Jones explained that if the existing procedure were to be retained, it would be very time consuming and cumbersome even to change a very minor detail of the forms since the amendment to the concerned subsidiary legislation would need to go through ExCo and LegCo. It was due to this rationale that the legislature had already agreed to the de-regulation of forms for over 20 other Ordinances including the Banking Ordinance and the Rating and Valuation Ordinance. He also advised that the substance of the forms was spelt out in the principal Ordinance. As for the practices in other jurisdictions, the Administration advised that many countries like Canada, UK and Australia were moving towards the direction of de-regulating forms.

27. The Chairman said that the de-regulation of forms would be further debated during subsequent discussion of the relevant clauses.

V.Meeting with the Law Society of Hong Kong (LSHK)

Ultra vires doctrine

Drafting issues

28. Ms Ruth Markland said that the Law Society agreed that the ultra vires doctrine in the Ordinance need to be revised and with the principle that third parties dealing with a company should not be affected by a lack of capacity of the company. She pointed out the following drafting issues of the Bill:

It was not clear that a third party dealing with a company was allowed to ignore the question of capacity if he had "actual notice" of it. The Bill did not make it clear that a third party with "actual notice" of a breach of the memorandum of the company was protected;
It did not cover the consequences of a breach of the memorandum by a company; and
There were inconsistencies in drafting in relation to the capacities given to a company in section 5 and section 5B(1) which appeared to be contradictory.

29.

Mr Simon LAI opined that the expressions "by reason only" (5B(2)) and "merely because" (5C) could render the provisions very difficult to apply and it was unclear whether they were equivalent. In the Canadian legislation, it seemed that they had used "by reason only" in the same way as this Bill, but consistency was maintained. He also pointed out the incongruence in the expressions "carry on any business or exercise any power" in section 5B(1)(a) and "exercise any of its powers" in section 5B(1)(b). At the request of the Chairman, he agreed to provide a copy of the Canadian legislation for members reference.

LSHK

30. Mr LAI further said that the inclusion of privileges in the drafting of section 5A(1) seemed to go beyond the issue of ultra vires which dealt with the rights and powers and capacity of a company, not the privileges. It would be useful to state in the legislation as to whether the provision relating to personal privileges was intended to apply to companies.

Abolition of ultra vires

31. Mr LAI opined that from the drafting, it could not be established that the doctrine of ultra vires was abolished completely. The net result of section 5A and 5B was that third parties dealing with the company would still need to look at the objects of the company and it would still be desirable for the company to specify its objects, thus returning to the position before the proposed amendment.

32.

As for the LSHKs stand regarding the necessity to protect third parties who would be deemed to have "actual notice" of the objects of a company, Miss Markland said that they would need to consider the issue and come back with further comments. She also mentioned that since she did not have the chance to study the CSA proposed by the Administration regarding section 5B(1), the Society would also submit further comments on this.

LSHK

Bills Committee on Companies (Amendment) Bill 1996

Minutes of Meeting held on Wednesday, 4 September 1996 at 8:30 a.m.in Conference Room B of the Legislative Council Building

I. Confirmation of minutes of previous meeting and matters arising

II.Meeting with Hong Kong Association of Banks (HKAB)

Ultra vires doctrine

Balance between the rights of minority shareholders and those of third parties

Retrospective effect

De-regulation of forms

Discussion with the Administration on HKABs views

III.Meeting with the Hong Kong Society of Accountants (HKSA)

Ultra vires doctrine

Section 5A

Section 5B

Section 5C

Interest on debts

Definition of commencement of winding up

Sections 264A & 264B

Actual notice

Discussion with the Administration on HKSAs views

Interest on debts

Definition of commencement of winding up

IV.Meeting with P & L Associates

De-regulation of forms

Discussion with the Adminstration on P & L Associates views

V.Meeting with the Law Society of Hong Kong (LSHK)

Ultra vires doctrine

Drafting issues

Abolition of ultra vires

Discussion with the Administration on LSHKs views

VI.Date of next meeting

Discussion with the Administration on HKABs views

Discussion with the Administration on HKSAs views

Discussion with the Adminstration on P & L Associates views

Discussion with the Administration on LSHKs views