Capital Reduction in Hong Kong: How to Restructure and Optimise Your Company’s Capital

Profitability but dividend is not available?

Companies may face this scenario due to accumulated accounting losses.

Capital reduction is a key financial restructuring tool available to companies in Hong Kong. It allows them to optimise their capital structure, eliminate accumulated losses, or return surplus funds to shareholders.

This article will explain capital reduction in Hong Kong, the methods available for implementing it, and the reasons involved.

Understanding Capital Reduction in Hong Kong

Under the Hong Kong Companies Ordinance (Cap 622), companies, subject to their Articles of Association, may extinguish the unpaid capital, cancel any paid-up capital that is lost or unrepresented by available assets or repay any excess paid-up capital by two methods: the court-free method and the court-sanctioned method.

Court-Free Capital Reduction Method

The court-free method is often preferred by solvent companies due to its efficiency and cost-effectiveness.

Steps Involved in the Court-Free Method:

1. Directors’ Solvency Statement: Each director must sign a solvency statement confirming that the company is solvent.
2. Shareholders’ Resolution: A special resolution must be passed at a shareholders’ meeting, i.e. requiring at least 75% majority vote.
3. Public Notice: The company must publish a notice in the Government Gazette as well as in one specified English language newspaper and one specified Chinese language newspaper in Hong Kong or give written notice to each creditor of the proposed capital reduction.
4. Filing with Registrar of Companies: The special resolution and solvency statement are required to be filed with the Companies Registry within a specified timeline.  After the five-week objection period from the date of the special resolution, a prescribed form is also required for submission to the Companies Registry for the reduction to take effect.

Court-Sanctioned Capital Reduction Method

When a company is not solvent or if creditors object, the court-sanctioned method is required. This process is more complex and involves oversight from the courts to protect creditors and ensure fairness.

Key Steps in the Court-Sanctioned Method:

1. Petition to the Court: The company files a petition with the court detailing the reasons for the capital reduction.
2. Court Hearing: The court holds a hearing to assess the petition, allowing creditors and shareholders to present objections.
3. Court Approval: If the court is satisfied, it will issue an order approving the reduction.
4. Finalization with Registrar of Companies: Once the court approves, the company must file the court order and other documents with the Companies Registry to finalize the capital reduction.

The court-sanctioned method provides an extra layer of scrutiny and is suitable for companies facing creditor objections or insolvency. Although more time-consuming, it ensures legal protection for all stakeholders involved.

Solvency Statement

A critical component of the capital reduction process is solvency statement. Directors are required to declare that, immediately after the reduction, the company will be able to meet its debts. In forming an opinion for the purpose of making a solvency statement, Directors should inquire into the company’s state of affairs and prospects and take into account all the liabilities of the company (including current, contingent and prospective liabilities).

In this connection, Directors may prepare up-to-date management accounts of the Company as evidence of forming the opinion and as a way to discharge directors’ duties, protecting the company, its directors and creditors from potential risks.

Reasons for Capital Reduction

Companies may carry out a reduction of share capital for several reasons. These include:

1. Return surplus capital:
2. Eliminate accumulated realised losses and/or increase distributable reserves, enable the payment of dividends;
3. Return share capital to shareholders before going through a streamlined process of deregistration.

Where To Next?

Capital reduction is a powerful financial tool. Whether your company is looking to streamline its capital structure, eliminate accumulated losses, or return surplus capital to shareholders, it is essential to navigate the process carefully.

For expert advice tailored to your specific needs, InCorp Hong Kong’s team of professionals is here to guide you through every step of the capital reduction process. Contact us today to ensure that your company’s capital reduction is handled efficiently and in full compliance with Hong Kong regulations.