Summary of Key Steps for a Reduction of Share Capital for a Hong Kong Company

Introduction

• A reduction of share capital by a company is the process whereby a company reduces the amount of its share capital to, for example, create distributable reserves from which to pay a dividend, or to return surplus capital to shareholders
• Capital reductions are permitted under Hong Kong law so long as the relevant conditions are met and the relevant steps are carried out

Two methods of carrying out a capital reduction

1. Court-free capital reduction process under sections 215 to 225 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong)
   
   1. Generally cheaper and faster; requires directors to give a solvency statement 
2. Court process under sections 226 to 232 of the Companies Ordinance

Steps required to effect court-free capital reduction process under sections 215 to 225 of the Companies Ordinance

1. Review articles of association of the company for any prohibition against the capital reduction or to identify any specific approvals that may be required
2. Check if the capital reduction will result in members holding only redeemable shares – in this case, the capital reduction is not allowed
3. Review contracts entered into by the company (eg. bank facilities) to check for any counterparty consent required to effect a capital reduction
4. Pass board resolutions of the company to approve the capital reduction
5. All directors of the company to make a solvency statement in the Hong Kong Companies Registry NSC17 Form (which must be sent to the members of the company with or before the special resolution – see Step 7). The solvency statement is a statement that each director has formed the opinion that (i) immediately after the capital reduction there will be no grounds on which the company could be found unable to pay its debts; and (ii) either: (a) if there is commencement of winding-up of the company within 12 months from the date of capital reduction, the company will be able to pay its debts in full within 12 months from the commencement of the winding-up, or (b) in any other case, the company will be able to pay its debts during the 12 months following the capital reduction. In order for the directors to make this solvency statement, the financial position and outlook of the company will need to be considered carefully
6. Company to issue a notice to the auditors to notify them of the special resolution to approve the capital reduction
7. Members of the company to pass a special resolution to approve the capital reduction (within 15 days of the directors’ solvency statement – see Step 5). A member of the company whose shares the capital reduction relates to is not eligible to vote on this special resolution, and if it does so and the resolution would not have been passed if this member had not voted, then the resolution is not effective (but this restriction on voting does not apply to a reduction of share capital applying to all shares equally)
8. Form of the special resolution to be filed with the Companies Registry within 15 days of it being passed 
9. Solvency statement to be registered with the Companies Registry by the date of publication of the notice in the Government Gazette (see Step 11) or the date of newspaper publications / issue of notice to creditors (see Step 12) (whichever is earlier) 
10. Issue notice to auditors to inform them that the special resolution to approve the capital reduction has been passed
11. Publication of notice of capital reduction in the Government Gazette (within the week after the week in which the special resolution is passed)
12. Publication of notice of capital reduction in newspaper advertisements (one in an English language newspaper and one in a Chinese language newspaper) or issue notice to individual creditors to inform them of the capital reduction (in each case, within the week after the week in which the special resolution is passed)
13. The solvency statement and special resolution must be made available for inspection by creditors and members at the company’s registered office from the date the notice of the capital reduction is published in the Government Gazette (see Step 11) or published in the newspapers / the notice to the creditors is issued (see Step 12) (whichever is earlier) to the date falling 5 weeks after the date of the special resolution
14. A member who did not vote in favour of the special resolution or a creditor of the company may apply to court within 5 weeks after the date of the special resolution. The court may adjourn proceedings on such application to make an arrangement to protect the interests of these members or creditors and will make an order confirming or cancelling the special resolution, subject potentially to certain terms and conditions
15. Assuming no creditor or member applies to the court objecting to the capital reduction, file the Return of Reduction of Share Capital NSC19 Form with the Hong Kong Companies Registry not earlier than 5 weeks and not later than 7 weeks after the special resolution is passed (the special resolution and capital reduction take effect when the return is registered with the Hong Kong Companies Registry)

Steps required to effect court-confirmed capital reduction process under sections 226 to 232 of the Companies Ordinance

1. Review articles of association of the company for any prohibition against the capital reduction or to identify any specific approvals that may be required
2. Check if the capital reduction will result in members holding only redeemable shares – in this case, the capital reduction is not allowed
3. Review contracts to which the company is a party (eg. bank facilities) to check for any counterparty consent that may be required to effect a capital reduction
4. Pass board resolutions to approve the capital reduction
5. Company to issue a notice to the auditors to notify them of the special resolution to approve the capital reduction
6. Members of the company to pass a special resolution to approve the capital reduction 
7. Form of special resolution to be filed with the Companies Registry within 15 days of it being passed 
8. Issue notice to auditors to inform that the special resolution to approve the capital reduction has been passed
9. Apply by petition to court for an order confirming the capital reduction
10. Court will settle a list of creditors entitled to object to the capital reduction by ascertaining, with the help of the company, the names of these creditors and the nature and amount of their debts or claims, and may publish a notice to fix a date by which creditors not on the list are to claim to be on the list, or are excluded from objecting
11. Court to make an order confirming the capital reduction on terms and conditions it deems fit, provided that it is satisfied that, with respect to every creditor who is eligible to object to the capital reduction, their consent has been obtained or their debt has been discharged, secured (for example, by the company ring-fencing funds to repay it) or otherwise determined
12. Company to prepare a minute containing the prescribed information and obtain approval by the court to the minute stating details of the capital reduction
13. File the Return of Reduction of Share Capital NSC20 Form with the Hong Kong Companies Registry 
14. Register the court order (see Step 11), minute (see Step 12) and return (see Step 13) with the Hong Kong Companies Registrar within 15 days of the court order (special resolution takes effect on this registration). The capital reduction take effect when the order, minute and return are registered with the Hong Kong Companies Registry
15. Company to publish of the notice of the registration of the court order (see Step 11), minute (see Step 12) and return (see Step 13) as directed by the court
16. Certification by the Registrar of the registration of the court order (see Step 11), minute (see Step 12) and return (see Step 13)

Timing

1. Court-free process: typically about 2 months and always at least 5 weeks from the date of the special resolution is passed
2. Court process: As determined by the Court, but typically longer than the court-free process

If you wish to know more, please contact James Parker or Kiew Su Yun.