Companies Ordinance Rewrite: Registration of Charges and its Effect on Lenders - Hong Kong
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In addition to the Companies (Amendment) Bill 2010 which was passed on 7 July 2010, Hong Kong has also taken steps since 2006 to rewrite the Hong Kong Companies Ordinance (“CO”) and the Companies Bill was finally introduced to the Legislative Council on 26 January 2011. The Bill is intended to update and modernize the CO and improve the competitiveness of Hong Kong as an international financial center.
In this article, we will consider the proposed changes to the provisions dealing with the registration of charges in the Companies Bill and their impact on lending transactions in Hong Kong.
Registration of Charges
Part 8 of the Companies Bill sets out the types of charges that require registration with the Companies Registry and provides the registration procedures and consequences of non-compliance. It also contains provisions requiring companies to allow inspection of the instruments of charges. Some of the significant changes are :-
(a) Updating the list of registrable charges
Under the existing CO, only charges that fall within section 80(2) of the CO require registration. This section will be amended to the effect that other than a charge on a ship or any share in a ship, a charge on an aircraft or any share in an aircraft is also registrable but a charge for the purpose of securing any issue of debentures under the existing section 80(2)(a) of the CO will no longer be required to be registered.
Regarding a charge over cash deposits, although it is arguable that this is registrable as a charge on book debts under section 80(2)(e) of the CO, the Companies Bill expressly provides that “if a company maintains a deposit of money with another person, a charge on the company’s right to repayment of the money is not to be regarded as a charge on book debts of the company”. This clearly excludes a charge over cash deposits for registration purpose. The reason being that such charge is normally taken by financial institutions over deposits or credit balances and third party creditors would not be misled by the absence of registration since bank accounts are usually operated confidentially and it is reasonable to expect the depository bank to have a superior claim to such deposits or credit balances. As a result, lenders who wish to take security over bank accounts may need to obtain this information from the accounts holders instead of relying on the company search on the company’s register of charges.
(b) No automatic acceleration of repayment obligation
Section 80(1) of the existing CO states that in the event of failure to register the charge within the prescribed time limit, the charge becomes void against the liquidator and any creditor of the company and the money secured by the charge shall immediately become payable. This automatic acceleration of repayment may create problems for banks and thus the Companies Bill proposes that lenders be given the option and right to demand immediate repayment when a company fails to register the charge timely. Banks and lenders can therefore control the repayment obligations in accordance with the terms of the security documents.
(c) Requirement that the charge instrument and evidence of discharge be registered
Under the existing law, only particulars of the charge that are stated in the specified form M1 and in the case where a charge is released, particulars of the release stated in the specified form M2 are required to be registered with the Companies Registry and made available for public inspection. Pursuant to the Companies Bill, in addition to these forms, the charge as well as the release documents are also required to be registered and thus, be made available for public inspection. As a result, banks, financial institutions and prospective lenders will have constructive notice of all the terms in the charge instrument including negative pledge clauses. However, this may cause concern to companies borrowers in particular as most charge documents contain the companies’ confidential and sensitive information.
(d) Shortening the period of registration
The CO currently requires the particulars of a charge created in Hong Kong to be registered within 5 weeks after the date of creation and a longer period is allowed if the charge is created out of Hong Kong. The Companies Bill now proposes the registration period be shortened to one month.
Conclusion
With the above changes, the new and modernized CO should be more user friendly and should facilitate the conduct of companies' businesses in Hong Kong.
ABOUT THE AUTHOR: Angela Wang & Co
Angela Wang & Co is a focused Greater China corporate commercial practice. Our defined objective is to provide discerning users of law firms with a firm of real legal capabilities at acceptable cost. Our dynamic team of lawyers adopts a creative and practical approach to commercial solutions, with special attention to good transaction management and close client involvement. We constantly put the needs of clients first.
Copyright Angela Wang & Co.
More information about Angela Wang & Co.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Registration of Charges
Part 8 of the Companies Bill sets out the types of charges that require registration with the Companies Registry and provides the registration procedures and consequences of non-compliance. It also contains provisions requiring companies to allow inspection of the instruments of charges. Some of the significant changes are :-
(a) Updating the list of registrable charges
Under the existing CO, only charges that fall within section 80(2) of the CO require registration. This section will be amended to the effect that other than a charge on a ship or any share in a ship, a charge on an aircraft or any share in an aircraft is also registrable but a charge for the purpose of securing any issue of debentures under the existing section 80(2)(a) of the CO will no longer be required to be registered.
Regarding a charge over cash deposits, although it is arguable that this is registrable as a charge on book debts under section 80(2)(e) of the CO, the Companies Bill expressly provides that “if a company maintains a deposit of money with another person, a charge on the company’s right to repayment of the money is not to be regarded as a charge on book debts of the company”. This clearly excludes a charge over cash deposits for registration purpose. The reason being that such charge is normally taken by financial institutions over deposits or credit balances and third party creditors would not be misled by the absence of registration since bank accounts are usually operated confidentially and it is reasonable to expect the depository bank to have a superior claim to such deposits or credit balances. As a result, lenders who wish to take security over bank accounts may need to obtain this information from the accounts holders instead of relying on the company search on the company’s register of charges.
(b) No automatic acceleration of repayment obligation
Section 80(1) of the existing CO states that in the event of failure to register the charge within the prescribed time limit, the charge becomes void against the liquidator and any creditor of the company and the money secured by the charge shall immediately become payable. This automatic acceleration of repayment may create problems for banks and thus the Companies Bill proposes that lenders be given the option and right to demand immediate repayment when a company fails to register the charge timely. Banks and lenders can therefore control the repayment obligations in accordance with the terms of the security documents.
(c) Requirement that the charge instrument and evidence of discharge be registered
Under the existing law, only particulars of the charge that are stated in the specified form M1 and in the case where a charge is released, particulars of the release stated in the specified form M2 are required to be registered with the Companies Registry and made available for public inspection. Pursuant to the Companies Bill, in addition to these forms, the charge as well as the release documents are also required to be registered and thus, be made available for public inspection. As a result, banks, financial institutions and prospective lenders will have constructive notice of all the terms in the charge instrument including negative pledge clauses. However, this may cause concern to companies borrowers in particular as most charge documents contain the companies’ confidential and sensitive information.
(d) Shortening the period of registration
The CO currently requires the particulars of a charge created in Hong Kong to be registered within 5 weeks after the date of creation and a longer period is allowed if the charge is created out of Hong Kong. The Companies Bill now proposes the registration period be shortened to one month.
Conclusion
With the above changes, the new and modernized CO should be more user friendly and should facilitate the conduct of companies' businesses in Hong Kong.
ABOUT THE AUTHOR: Angela Wang & Co
Angela Wang & Co is a focused Greater China corporate commercial practice. Our defined objective is to provide discerning users of law firms with a firm of real legal capabilities at acceptable cost. Our dynamic team of lawyers adopts a creative and practical approach to commercial solutions, with special attention to good transaction management and close client involvement. We constantly put the needs of clients first.
Copyright Angela Wang & Co.
More information about Angela Wang & Co.
View all articles published by Angela Wang & Co.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
