Reduction of capital – confirmation by court – “share capital” under ss. 226, 229 was amount of share capital carried in company’s balance sheet at time of reduction – audited financial statements in support of application should express true and fair view of company’s financial state
C was a Hong Kong private company limited by shares. In August 2014, a special resolution (the “Resolution”) was passed pursuant to s. 226 of the Companies Ordinance (Cap. 622) (the “CO”) for the reduction of C’s share capital from HK$3.105 million to some HK$1.953 million and that such reduction be effected by repaying to the shareholders HK$371 on each of the issued and paid up shares. In September 2014, C issued a petition for confirmation by the Court of the reduction under s. 226 of the CO. The reason given for the reduction was that C’s total capital was in excess of its needs. The application was opposed by one of C’s shareholders. C’s balance sheet for the year ending 31 December 2013 recorded an accumulated loss of HK$748,547,385 and the total capital as HK$2,356,452,615. At issue, inter alia, was the meaning of “share capital” under ss. 226 and 229 of the CO.
Held, dismissing the petition, that:
The reason why reductions of capital had until recently required the confirmation of the Court, which in turn involved careful scrutiny to ensure that creditors were not prejudiced by it, was because of the assumption that creditors did business with a company relying on its capital as evidencing the amount available to them. The Court would approach any reduction on the basis that what it was sought to change was the amount of share capital carried in a company’s balance sheet at the time of reduction. If a company was carrying on its balance sheet an accumulated loss, which reduced its available capital, this was the amount of share capital for the purposes of a reduction. Thus, the Resolution was defective and the Court should decline to confirm it.
The Court would avoid confirming a reduction, which could in some way prejudice future creditors. It was important that the description of the reduction accurately reflected the balance sheet in order that future creditors were not misled as to the capital of a company. Any knowledgeable person, such as a corporate finance lawyer or accountant, reading the proposed minute recording the reduction of capital, would be likely to assume that as at the date of the Resolution, C did not have any accumulated losses. This would be wrong and misleading.
The Court heavily relied on audited financial statements in assessing the financial state of a company as part of the process of evaluating a petition to confirm a reduction of capital. It needed positive confirmation by auditors that they did express a true and fair view of C’s financial state, but the auditors had declined to do so by way of disclaimers of opinion. The Court was being asked to assess the financial statements (without the benefit of C’s books and financial records) and to satisfy itself that C was solvent and had cash available to distribute if the capital reduction was approved. This was not the correct approach. The Court should be able to rely on up-to-date audited financial statements that were either unqualified or contained limited and immaterial qualifications.
Thomson Reuters – Sweet & Maxwell
Thomson Reuters – Sweet & Maxwell are the publishers of the Authorised Hong Kong Law Reports & Digest ("HKLRD") and the Authorised Hong Kong Court of Final Appeal Reports ("HKCFAR"), and providers of Westlaw HK (www.sweetandmaxwell.com.hk / www.westlaw.com.hk).