The long waited legislative process of the new Companies Ordinance (“New CO”) was completed on 17 July 2013 and the new law is now expected to be implemented from March 2014. The amendments in the New CO are very extensive ranging from requiring at least one natural person to act as director, codification of director’s duty of care and the abolition of par value for shares and Memorandum of Association for all companies. In this eNews, however, we will only highlight the new changes relating to registration of charges which are aimed at improving the registration of charges regime.
Registration of Charges
Part 8 of the New CO deals with registration of charges and sets out the types of charges that require registration, its procedures as well as consequences of non-compliance. Other issues such as keeping and inspection of copies of charge instruments and registers of charges are also addressed here. Some of the main changes are as follows :-
(a) Updating the list of registrable charges
The New CO expressly provides that (i) a charge on instalments due but not paid, on the issue price of shares; and (ii) a charge on an aircraft or any share in an aircraft are registrable. It also clarifies that (i) a charge for the purpose of securing any issue of debentures; (ii) a lien on subfreights; and (iii) a charge over cash deposits do not require registration and stipulates that a lien on subfreights and cash deposits shall not be regarded as a charge on book debts.
(b) Replacing the automatic acceleration of repayment obligation
The existing law mandates that where a charge becomes void for not being registered within the specified time limit, the money secured by it would fall due automatically and the secured amount would become payable immediately. To allow banks and/or lenders to make their own choice, it will be optional under the New CO for them to include an acceleration provision, therefore allowing them to control the repayment obligations in accordance with the terms of the security documents.
(c) Requiring a certified copy of the written evidence of charge instrument and release of a charge to be registered and made available for public inspection
Currently, 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.
Under the New CO, in addition to the prescribed forms, the charge instruments as well as the release documents are required to be registered and be made available for public inspection. The impact is that since the charge instrument is available for public inspection on the public register, persons who may reasonably be expected to search the register e.g. bankers, financiers and relevant professionals, will be deemed to have constructive notice on the terms of the charge instrument.
(d) Shortening the period of registration
The existing law requires that 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 such charge is created outside Hong Kong. The New CO shortens the registration period to one month in order to minimize the invisible period of the charge from the public.
(e) Clarification of the effect of Court order for late registration
Currently, if the Court makes an order to grant relief to extend the time for registration of a charge, the Court can direct that the relief will not relieve the company from liability of failing to register the charge within the pre-extended registration period. However, it is unclear whether in the absence of any court direction, the relief granted would also automatically relieve the company and its officers from the criminal liability incurred for their failure to register. The New CO clarifies that when such a Court order is granted to a company, and that company has duly registered the charge instrument within the extended time period, liability incurred from failing to register the charge within the pre-extended registration period will be extinguished.
To ensure a smooth transition in the registration process, the new CO provides that for a charge created before the implementation of the new CO but presented for registration after the expiry of 8 weeks from the commencement of the new CO, the new specified form together with a certified copy of the charge instrument should be delivered for registration; whereas for those charges created before the commencement of the New CO and registered within 8 weeks thereafter, the existing registration procedures continue to apply.
Under Part 8 of the New CO, companies will be subjected to stricter regime of registration (e.g. additional documents for registration, shortened delivery period) in order to enhance transparency of companies¡¦ information. As a result, companies and interested parties should observe the time limits more strictly and be careful not to divulge sensitive information in the charge instrument or release document which will become available for inspection by the public.
If you have any queries regarding the above eNews or any other questions relating to the New CO, our Corporate & Commercial lawyers will be happy to assist you.