Comment on
Companies (Amendment) Bill 1996
Although the Hong Kong Institute of Company Secretaries is in favour of the Bill in general, and particularly supportive of the de-regulation of forms, the abolition of constructive notice and the limitations on the doctrine of ultra vires, some concerns were raised regarding the scope of the de-regulation provisions and the capacity of the company to contract.
De-regulation of Forms
Members approve of de-regulation of forms in general and look forward to the opportunity to participate in the consultation process regarding the design of appropriate documentation. Although vesting such powers in the Registrar of Companies will undoubtedly be advantageous, eg :
legislative process could not possibly be as flexible or responsive
greater participation from business and professional community in form design
consistency with the way in which such matters are dealt with at the listed level
deep concerns were expressed regarding the extent of power which will be vested in the Registrar of Companies, ie :
power to specify particulars (being particulars required for the purpose to which the form relates) to be contained in the form.
Members wondered whether the Bill inadvertently conferred more power on the Registrar than intended, and although Members have nothing but respect for the integrity of the Registrar of Companies, concern was also voiced over the apparent ease by which the power could be put to unintended purposes.
The main concern is that power essentially intended to facilitate compliance in a more effective manner, by making the forms more user friendly and computer compatible1, may be used to completely alter the obligation of companies, eg. the statutory relief from full disclosure previously enjoyed by private companies (s109(3)) may be inadvertently lost2.
With regard to the matters which may be required in the annual return by the Registrar, Members also questioned how s2A provisions would apply to annual returns, as the annual return requirements are found in a schedule rather than a form as such. Perhaps some clarification of the application of the provision is required here.
A final concern regarding the alteration of existing forms was that they be gradually introduced should the Bill be passed. Members foresee serious adjustment problems if the grace period for adoption is not sufficient. Companies will need time to reorient their thinking in order to retool systems and retrain employees for such fundamental changes.
Ultra Vires
Members are in favour of giving companies the option to limit the capacity to contract by way of stated objects, but concerned about the application of the proposed sections.
s5A - Powers of a Company
Members voiced some concern over general references to the abolition of ultra vires in news releases and discussions related to the Bill, and in the Explanatory Memorandum to the Bill itself3, for the Bill provides for the limitation of the effects of the doctrine rather than its abolition.
Although the Explanatory Memorandum does qualify the statement regarding abolition, ie. to provide for the abolition of the doctrine of ultra vires in its application to companies4, the Bill expressly provides for restriction by way of stated objects clauses (s5B) and so the doctrine survives.
With regard to s5A(1), given the conceptual difficulty and legal impossibility of treating a legal person, which has no body to be kicked or soul to be damned, as a natural person, Members wondered whether there was a more appropriate way to articulate the intention.
.
s5B - Power Limited by Memorandum, etc.
Although the intended effect of proposed section 5B appears to be clearly articulated in the Explanatory Memorandum to the Bill5, the intent is not so apparent in proposed section 5B(1) as originally drafted, ie.
A company shall not -
(a) carry on any business or exercise any power that is not authorised by its memorandum to carry on or exercise; or
(b) exercise any of its power in a manner contrary to its memorandum.
or as amended, ie. Where the memorandum of a company states its objects, it shall not carry on any business or do any other act that it is -
restricted by the memorandum from carrying out or doing, or
not authorised by the memorandum to carry out or do (emphasis added).
The section appears to be open to mis-interpretation and otherwise too restrictive - in that it appears to confuse objects and powers, and may otherwise be interpreted as requiring that powers be stated in the memorandum.
Although the inclusion of express powers in broadly drafted objects clauses is a common practice among draftsmen6, inclusion is not required, and not necessary, as the power of a company to achieve its stated objects or otherwise enter into contracts reasonably incidental to the achievement of those objects arises by implication at common law7 and statute8.
With regard to the specific amendments to the section as originally drafted, Members questioned the value and effect of substituting "do any other act for exercise any power, "as, inter alia, the improper exercise of power amounts to an act.
The reference to memorandum restrictions and authorisation, rather than memorandum and articles of association, was also seen as curious, given the fact that much of the Bill is based on the Canadian position, where the relevant provision is as follows :
A corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to the articles9.
With regard to the contravention of s5B, Members wondered what remedies would be available to :
the company and its members
third parties with actual notice
third parties put on inquiry notice
A final comment concerns alterations of memorandum objects clauses. Members thought this might be an appropriate time to consider amendments to the Companies Ordinance provisions regarding such alterations (s8). In light of the Bill provisions, the existing provisions would appear to be inappropriate and out of date.
Meaning of Unregistered Companies
Although the proposed section clears up the relationship between oversea and unregistered companies, an ambiguity still exists regarding companies incorporated outside Hong Kong.
As an oversea company is one that was incorporated outside Hong Kong but establishes a place of business in Hong Kong (s332), the reference to oversea company in section 333 should be replaced by overseas or foreign company.
Conclusion
With regard to the de-regulation provisions, Members questioned whether the increase in the powers of the Registrar was more than necessary to provide an appropriate degree of flexibility. With regard to the proposed amendments affecting the capacity of the company to contract, Members were primarily concerned with the application of the provisions, expressing a general feeling that the provisions required further clarification.
1 -- SCCLR Twelfth Annual Report p59
2 -- See Companies Ordinance s109(3) and proposed sections 2A, 107, 107(8)
3 -- para3
4 -- Thereby eliminating a possible reference to agents of the company acting ultra vires.
5 -- 'The effect of s5B is that where a company's memorandum states its objects, its business activities will be restricted accordingly'.
6 -- Whether a clause is an object or express power is a question of construction for the courts Re Horsely & Weight Ltd [1882] 3 WLR 431; Re Introductions [1970] 2 WLR 791
7 -- Rolled Steel Products (Holding) Ltd v. British Steel Corporation 3 All ER 52 [1984]
8 -- 'The powers of a company .... shall include, unless otherwise expressly excluded or modified by its memorandum or articles, the powers set forth in the Seventh Schedule.' Companies Ordinance s5(5).
9 -- Canada Business Corporation Act s16(2)
Last Updated on 10 December 1998
