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THE HONG KONG INSTITUTE OF CHARTERED SECRETARIESTHE INSTITUTE OF CHARTERED SECRETARIES AND

ADMINISTRATORS

International Qualifying Scheme Examination

CORPORATE SECRETARYSHIPDECEMBER 2016

Suggested Answer

The suggested answers are published for the purpose of assisting students in theirunderstanding of the possible principles, analysis or arguments that may be identifiedin each question

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SECTION A

1.

Leo and Paul are Taiwanese. They started a business in Hong Kong by setting upLeopaul Manufacturing Limited (LML), a private limited company incorporated inHong Kong, on 1 September 2015. Leo and Paul hold 7,000 shares and 3,000shares of LML respectively.

Paul has been working in Hong Kong for more than 20 years and he is familiarwith Hong Kong’s business environment. In contrast, Leo spends more thantwo-thirds of his time in Taiwan, where he has his own business. Leo thereforerelies entirely on Paul running LML’s business in Hong Kong.

At the first board meeting of LML held on 1 September 2015, board resolutionswere passed approving, inter alia, the following agenda items:

a) Appointment of Leo and Paul as the first directors.

b) Appointment of Paul as the company secretary.

c) Appointment of Chung & Chee, C.P.A. Limited (Chung & Chee) as theauditor to hold office until the conclusion of the next annual general meetingat a fee to be agreed with the directors.

However, the board missed an agenda item to discuss and approve theaccounting reference date at this first board meeting. Since then, the accountingreference date has never been discussed and determined by Leo and Paul.

Ms Chee is Paul’s best friend and a director of Chung & Chee. Ivy Tong is thefinance manager of LML. Recently, Ivy had a dispute with Ms Chee about theaudit fee. Ivy asked Chung & Chee to resign as auditor of LML by tendering aresignation letter. However, Ms Chee has not taken any action and she wants tohave a meeting to discuss the audit fee with Paul.

Meanwhile, Ivy has proposed to Leo that Chung & Chee be removed and KooKao& Co., Certified Public Accounts (KooKao & Co) be engaged as auditor of LML tofill the causal vacancy after the removal. KooKao & Co is a well-established auditfirm. Ivy is under consideration to be admitted as a partner of KooKao & Co.

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In a recent conversation between Leo and Paul, Leo informed Paul about Ivy’sproposal regarding the removal of Chung & Chee as auditor of LML. Paul told Leothat there was no provision in LML’s articles of association for removal of auditorand thus, Chung & Chee could not be removed.

Paul also told Leo that, due to personal reasons, he planned to quit his Hong Kongbusiness in early 2017. Paul proposed selling all his shares in LML to Leo at aconsideration to be determined in accordance with the net asset value of LML inits first financial statements (which should be laid at LML’s first annual generalmeeting) and to resign as a director of LML.

Paul also planned to resign as the company secretary of LML by filing a Form ND4reporting his resignation as director and secretary of LML with the CompaniesRegistry after the completion of the transfer of shares to Leo before leaving HongKong.

REQUIRED:

1. (a) State concisely the following dates/periods for LML and how they aredetermined, despite the fact that they have not been determined by anydirectors’ resolution:

(i) Primary accounting reference date.

(3 marks)

(ii) First accounting reference period.

(2 marks)

(iii) Last date of holding the first annual general meeting.

(3 marks)

Ans (a) Primary accounting reference date

Pursuant to sections 369(5) to (7) of Companies Ordinance (Cap. 622) (CO), for acompany formed under the CO, the primary accounting reference date is either:

(i) a date specified by the directors that falls within 18 months after its

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incorporation date; or

(ii) if no date is specified by the directors, the last day of the month in which thefirst anniversary of the company’s incorporation falls.

As the primary accounting reference date has not been determined by directors,LML’s primary accounting reference date should be 30 September 2016 (i.e., thelast day of the month in which the first anniversary of the company’s incorporation(LML’s date of incorporation is 1 September 2015)).

First accounting reference period

Pursuant to section 368(2) of the CO, for a company formed under the CO, thefirst accounting reference period begins on its incorporation date and ends on itsprimary accounting reference date.

The first accounting reference period of LML should be from 1 September 2015 to30 September 2016.

First annual general meeting

Pursuant to section 610(2)(b) of the CO, for a private company that is not asubsidiary of a public company and when its first accounting reference period islonger than 12 months, the company must hold its AGM within the followingperiods, whichever is the later:

(i) nine months after the first anniversary of the company’s incorporation(i.e. 1 June 2017); or

(ii) three months after the end of that accounting reference period(i.e. 31 December 2016).

As LML is not a subsidiary of a public company, its first annual general meetingmust be held on or before 1 June 2017.

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1. (b) Advise Leo of the following matters:

(i) Auditor’s duties on preparing the auditor’s report.

(9 marks)

(ii) Whether Chung & Chee may be removed and the rights/duties of Chung& Chee in relation to the removal.

(9 marks)

(iii) Whether KooKao & Co should be appointed as LML’s auditor.

(3 marks)

Ans (b) (i) Auditor’s duties on preparing the auditor’s report

1. During the auditor’s term of office, the auditor must prepare an auditor’s reportstating their opinion on the company’s annual financial statements prepared bydirectors. A copy of the financial statements is laid before the company at itsgeneral meeting or is sent to the members.

2. In preparing an auditor’s report, the auditor must carry out investigations thatwill enable the auditor to form an opinion as to whether:

(i) the financial statements have been properly prepared in compliance withthe CO;

(ii) the financial statements give a true and fair view of the financial positionand finance performance of the company;

(iii) adequate accounting records have been kept by the company;

(iv) the financial statements are in agreement with the accounting records;and

(v) directors’ emoluments, retirement benefits, loans, material interests intransactions, etc., as specified in section 383(1) of the CO have been

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contained in the financial statements.

If the above-mentioned items are not satisfied, the auditor must state that fact inthe auditor’s report.

3. Further, if auditor is of the opinion that the information in a directors’ report isnot consistent with the financial statements/accounting records, the auditormay bring that opinion to the members’ attention at a general meetingaccording to section 406(2)(b) of CO.

4. If the auditor fails to obtain all the information or explanations that arenecessary and material for the purpose of audit, the auditor must state thatfact in the auditor’s report.

(9 marks)

(ii) Whether Chung & Chee may be removed

Although Chung & Chee is appointed on an annual basis and holds office until theconclusion of the next annual general meeting and LML’s articles of association donot have any provision for removal of auditor, Leo may make use of section 419 ofthe CO to remove Chung & Chee.

LML may by an ordinary resolution passed at a general meeting remove Chung &Chee as auditor of LML (section 419(1)).

Special notice is required for an ordinary resolution proposed for the purpose ofremoval of auditor (section 419(2)).

On receipt of a special notice, LML must send a copy of the special notice toChung & Chee (section 419(3)).

If an ordinary resolution for the removal is passed, LML is required to deliver theNotice of Removal of Auditor (Form NA1) to the Registrar for registration within 15days beginning on the date when the resolution is passed if an ordinary resolution

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for the removal is passed (section 419(4)).

Rights/duties of Chung & Chee in relation to the removal

Chung & Chee has the right to be heard and make a written response in relation tothe resolution and to attend the general meeting.

Pursuant to section 425(1)(a) of the CO, Chung & Chee has the duty to make astatement of the circumstances connected with the removal of auditor if itconsiders that such circumstances should be brought to the attention of LML’smembers or creditors.

A copy of the statement of circumstances is required to be delivered to theRegistrar for registration within the period mentioned in sections 426(5) and427(5).

When Chung & Chee gives a statement to LML and there are no circumstancesconnected with removal of auditor that should be brought to the attention of thecompany’s members or creditors, there is no requirement to deliver such astatement to the Registrar of Companies for registration.

(iii) Whether KooKao & Co should be appointed as LML’s auditor

To ensure the independence of an auditor, any officer or employee of a companyis disqualified from being appointed as auditor of the company according tosection 393(2) of the CO.

In addition, if an audit firm is appointed, by the firm name, as auditor of a company,the appointment is to be regarded as an appointment of those persons who arethe partners in that firm from time to time according to section 399(a) of the CO.

Ivy is the financial manager of LML. If she is admitted as a partner of KooKao &Co, Leo should not engage KooKao & Co as the auditor of LML.

1. (c) Upon the completion of the share transfer to Leo, discuss whether:

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(i) It is sufficient and appropriate for Paul just to file a Form ND4 with theCompanies Registry reporting his resignation as company secretary ofLML.

(7 marks)

(ii) Leo can be appointed as LML’s company secretary.

(4 marks)

Ans (c) (i) Whether it is sufficient and appropriate for Paul just to file a Form ND4 with theCompanies Registry reporting his resignation as company secretary of LML

General speaking, the company secretary is an officer and employee of acompany. There should be an employment contract between the company and thecompany secretary. The company secretary may resign at any time in accordancewith the procedure/requirement set out in the company’s articles of associationand/or employment contract. The requisite procedure/requirement normallyincludes:

1. Serve notice of resignation to the company; and

2. Sign a letter of resignation and send it to the company.

Upon receipt of the notice of resignation tendered by the company secretary, theboard of directors should consider whether to accept it or not. If the resignation isaccepted, the directors should:

1. Approve it at a board meeting or by way of directors’ resolutions in writing.Such minutes/resolutions must be properly recorded and, together with thesigned resignation letter, be inserted in the minute book;

2. Update the register of secretaries; and

3. Deliver the Notice of Change of Company Secretary and Director (FormND2A) to the Companies Registry within 15 days after the resignation.

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Discussion and conclusion

Section 477(5) of CO specifies that if notice of resignation of a company secretaryis required under the articles of association and/or the employment contract, theresignation does not have effect unless the company secretary gives notice inwriting of the resignation in one of the following ways:

1. In accordance with the requisite requirement

2. By leaving it at the registered office of the company

3. By sending it to the company in hard copy or in electronic form

Paul should check LML’s articles of association and/or employment contract tosee whether there is any provision governing the resignation of the companysecretary. If there is a requirement to serve notice of resignation and send thesigned letter of resignation to LML, failure to do so means the resignation will nothave legal effect.

Moreover, Paul may file Form ND4 with the Companies Registry only when he hasreasonable grounds for believing that LML will not deliver Form ND2A for thechange of company secretary (pursuant to 477(3) of CO).

Thus, simply filing Form ND4 with the Companies Registry does not mean thatPaul has duly resigned as the company secretary of LML.

(ii) Whether it is valid to appoint Leo as LML’s company secretary

Pursuant to section 474(4) of CO, a private limited company must appoint thefollowing person/entity as its company secretary:

(i) an individual who ordinarily resides in Hong Kong; or

(ii) a corporation which has its registered office or place of business in HongKong.

As Leo does not ordinarily reside in Hong Kong, he may not be appointed as the

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company secretary of LML.

Moreover, after the completion of Paul’s proposal, Leo will become the soleshareholder and sole director of LML.

Pursuant to section 475(2) of CO, the sole director of a private company must notalso be the company secretary.

Thus, Leo may not be appointed as the company secretary of LML.

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SECTION B

2. Goodfood Manufacturing Limited is a limited company incorporated in the CaymanIslands and its shares are listed on the Main Board of Hong Kong StockExchange. The company mainly engages in food manufacturing and processing.

Steven Sun, an executive director of the company, plans to diversify thecompany’s business by opening a chain of coffee shops in Hong Kong. The boardof directors discussed Mr Sun’s plan at their latest meeting and unanimouslyagreed to implement the plan. In addition, the board of directors proposedchanging the company’s name to Goodfood Holdings Limited.

REQUIRED:

2. (a) Discuss whether the proposed company name is acceptable to the Registrarof Companies (Registrar) with reference to the name requirements as statedin the Companies Ordinance (Cap. 622). Discuss the consequences if theproposed name is unacceptable to the Registrar.

(6 marks)

Ans (a) Whether the proposed company name is acceptable by the Registrar ofCompanies and the consequences if the proposed name is unacceptable

1. Part 16 of the Companies Ordinance contains provisions on the regulation ofuse of corporate names by registered non-Hong Kong companies. Normally,the Registrar of Companies (the Registrar) will approve the new companyname (i.e. Goodfood Holdings Limited) unless the Registrar is satisfied thatthe new company name:

(i) is ‘the same as’ or is ‘too like’ a name that appears, or should haveappeared, in the Registrar's index of company names; or

(ii) gives so misleading an indication of the nature of its activities in HongKong as to be likely to cause harm to the public.

2. If the new company name is not approved by the Registrar for any of theabove reasons, the Registrar may, within six months of the date on which

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new company name is registered, serve a notice to that effect on thecompany.

3. If the company is served with such a notice, it must not, after the end of twomonths after the date of serving such notice, carry on business in Hong Kongunder the new company name (i.e. Goodfood Holdings Limited).

4. The company may either cause its company name (i.e. Goodfood HoldingsLimited) to be changed in the Cayman Islands, the place of its incorporation,or apply, in writing, to the Registrar for approval of another name insubstitution of Goodfood Holdings Limited under which it is to carry onbusiness in Hong Kong.

5. If the Registrar approves another name, the company may deliver to theRegistrar for registration a Form NN12, specifying the name so approved.The Registrar will enter the approved name in the Companies Register andissue a fresh Certificate of Registration of Alteration of Name of RegisteredNon-Hong Kong Company.

2. (b) Advise Mr Sun of the formalities that must take place to change thecompany’s name and what follow-up actions the company should take afterthe change of name.

(14 marks)

(Total: 20 marks)

Ans (b) Formalities to change of company name

1. Conduct a company search to ensure no identical or similar names are alreadyregistered with the Cayman Companies Registry and the Hong KongCompanies Registry.

2. Obtain confirmation from the board of directors that there is nothing unusualabout the proposed change of company name and obtain the board’s approvalfor the issue of an announcement, circular and notice of extraordinary meeting(EGM).

3. Inform the Stock Exchange of the change of name and the proposed effectivedate of change. Meanwhile, submit a specimen of the new share certificatebearing the company’s new name to the Stock Exchange for approval.

4. The company must publish an announcement in regard to the proposed

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change of company name as soon as practicable, and despatch the circularand notice of the EGM to shareholders and upload the same at least 10 clearbusiness days prior to the date of the EGM on the company’s and StockExchange’s websites.

5. Upon obtaining at least 75% of the shareholders’ approval at the EGM, post anannouncement of the poll results of the EGM at least 30 minutes before thecommencement of the morning session on the following business day on thecompany’s and Stock Exchange’s websites.

6. File the special resolution sanctioning the change of company name with theCayman Companies Registry.

7. Upon obtaining the Cayman Companies Registry’s approval, publish anannouncement of the new company name when it becomes effective on thecompany’s and Stock Exchange’s websites.

8. File with the Hong Kong Companies Registry a Form NN10 within one monthafter the date of change.

Follow-up actions the company should take after the change of name

1. Obtain the board’s approval for the adoption of the new common seal.

2. Liaise with the branch share registrar in Hong Kong and the principal shareregistrar in Cayman Islands to print new share certificates, engrave the newcommon seal and issue the share certificates.

3. Within one month after the change to the company’s name, inform both theInland Revenue Department and the Business Registration Office of thechange so that a new business registration certificate can be issued bearingthe new company name.

4. Insert the new company name in the memorandum and articles of associationand arrange for these to be published on the company’s and Stock Exchange’swebsites.

5. Arrange for a new name plate to be placed at the registered place of businessin Hong Kong.

6. Amend all statutory documents, such as the company’s letterhead and anyother corporate communication documents, and the company’s website, tobear the new company name as required by the Companies Ordinance.

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3. Carrie and Jessie are directors of Cassie Jewellery Limited, a private companyincorporated in Hong Kong. Jessie is a famous jewellery designer and needs totravel frequently. Due to her busy work schedule, Jessie is always unable toschedule her time to attend the company’s board meetings. Even though thecompany’s articles of association allow her to participate in board meetings byvideo/telephone conference, Jessie still finds it difficult to schedule these meetingsin.

One of Jessie’s friends has advised Jessie that she may appoint her husbandeither as a reserve director or an alternate director to represent her at all boardmeetings.

REQUIRED:

3. (a) Distinguish between a reserve director and an alternate director.

(15 marks)

Ans (a) Differences between a reserve director and an alternate director are as follows;

Type of company

Reservedirector:

Pursuant to section 455 of the Companies Ordinance (CO), aprivate company limited by shares incorporated in Hong Kong, ofwhich the sole director is also the sole member, may appoint areserve director.

Alternatedirector:

All following types of companies provide in their articles ofassociation to allow for the appointment of an alternate director:

1. A private company limited by shares and listed company

2. A public company limited by shares

3. A company limited by guarantee

Governing laws/constitution documents

Reservedirector:

The CO specifies that if a private company has only one memberand that member is the sole director of the company, the companymay, despite anything in its articles, nominate a reserve director.

Alternatedirector:

The right to appoint an alternate director would have to be providedfor in the articles of association of a company. In the absence ofsuch an express right in the articles, the directors may not be able

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to appoint an alternate director.

Purpose of appointment

Reservedirector:

If a sole director/member unexpectedly dies, then the company willnot have any director to exercise its powers and manage thecompany’s affairs. A reserve director will act in place of the soledirector in the event of his/her death.

Alternatedirector:

An alternate director is deemed to be an agent of the director herepresents (appointer). An alternate director may exercise thepowers and carry out the responsibilities of his appointer in theabsence of his appointer.

Rights and responsibilities

Reservedirector:

In the event of the death of the director, the reserve director is to beregarded as a director of the company for all purposes.

Alternatedirector:

An alternate director has the same rights as his appointer in relationto any decision taken by the directors. Unless the articles specifyotherwise, an alternate director is deemed to be a director for allpurposes.

Nomination/appointment

Reservedirector:

A company which satisfies the criteria set out in section 455 of theCO may, by a resolution passed at a general meeting, nominate areserve director at any time.

Alternatedirector:

The procedure for appointment an alternate director is set out in thearticles of association. Normally, a director (appointer) may appointany other director / person as his alternate by a resolution passedby the directors.

Circumstances in which the nomination / appointment become lapse

Reservedirector:

The nomination of the reserve director ceases to have effect if:

a. Before the death of the sole director:

i. The reserve director tenders his resignation; or

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ii. The company at a general meeting revokes thenomination; or

b. The director ceases to be the sole member and sole director ofthe company for any reason other than the death of thatdirector.

Alternatedirector:

The appointment of the alternate director terminates:

a. If the appointer revokes / terminates his alternate’sappointment by giving a notice to the company; or

b. The alternate’s appointer ceases to be a director of thecompany.

Notification to Registrar of Companies (Registrar)

Reservedirector:

The company must submit a Notice of Change of Reserve Director(Nomination/Cessation) (Form ND5) to notify the Registrar within 15days after the nomination/cessation of the appointment of thereserve director.

Alternatedirector:

The company must submit a Notice of Change of CompanySecretary and Director (Appointment/Cessation) (Form ND2A) tonotify the Registrar within 15 days after the appointment/cessationof appointment of the alternate director.

3. (b) Discuss to what extent the following advice is correct and evaluate whichtype of director (i.e. reserve director or alternate director) Jessie shouldappoint:

“Jessie may appoint her husband either as a reserve directoror an alternate director to represent her at all board meetings”

(5 marks)

(Total: 20 marks)

Ans (b) As long as Cassie Jewellery Limited has more than one director, section 455 of theCO does not apply to this company.

Thus, the advice to appoint Jessie’s husband as reserve director is incorrect.

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The right to appoint an alternate director is governed by each company’s articlesof association.

Thus, the advice to appoint Jessie’s husband as alternate director is correctprovided that such an appointment is allowed in the company’s articles ofassociation.

As Cassie Jewellery Limited does not satisfy the criteria set out in section 455 ofthe CO and the main purpose is to find someone to replace Jessie attending andvoting at the board meeting, Jessie should appoint an alternate director.

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4. Willy and Faddy are directors and shareholders of Wafad Investment Limited, alimited company incorporated in Hong Kong. In order to implement the company’sthree-year business plan, Willy plans to borrow HK$200 million from a local bankor potential lender by creating charges on the following assets of the company.

Assets to be pledged under the charges Book value

$ (million)

Office premises situated in Hong Kong (the office is currentlyused by the company as its registered office and place ofbusiness)

100

A piece of land situated in the Philippines (the land has not beenused by the company since the company bought it in 2014)

30

An aircraft (the company owns a 50% interest in the aircraft) 50

An amount/instalment due from Faddy, but not yet paid, on theissue price of shares (Faddy subscribed for 5,000 shares in June2014)

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An amount/deposit of money maintained with Faddy (thecompany has a right to call for repayment from Faddy at any time)

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REQUIRED:

4. (a) Advise Willy whether the company can create charges on any of the aboveassets and whether the charges must be registered with the CompaniesRegistry under the Companies Ordinance (Cap. 622).

(5 marks)

Ans (a) Not all charges need to be registered with the Companies Registry. Only thosecharges which are required to be registered under section 334 of the CompaniesOrdinance (Cap. 622) need to be registered with the Companies Registry.

1. A charge on an office premises situated in Hong Kong is a registrable charge(section 334(1)(c)).

2. A charge on land situated in Philippines is a registrable charge (section334(1)(c)).

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3. A charge on an aircraft or any share in an aircraft is a registrable charge(section 334(1)(h)).

4. A charge on installments due, but not paid, on the issue price of shares is aregistrable charge (section 334(1)(f)).

5. A charge on the company’s right to repayment of money maintained withanother person is not regarded as a charge on the book debts of a company.Thus, it is not a registrable charge (section 334(3)(b)).

4. (b) State precisely the following matters:

(i) The procedure for registration of a charge.

(6 marks)

(ii) The feasibility of an extension of time for the registration and the effectof non-registration of a registrable charge.

(4 marks)

(iii) The procedure for release of a charge.

(5 marks)

(Total: 20 marks)

Ans (b) (i) Procedure for registration of a charge

Both the company and the chargee / mortgagee can deliver the following to theRegistrar of Companies (the Registrar) for registration:

i. A certified copy of the instrument creating or evidencing the charge (sections335, 336 and 338 to 340);

ii. A duly completed Statement of Particulars of Charge (Form NM1); and

iii. A filing fee of HK$340.

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The original charge instrument should not be delivered for registration. If it iserroneously delivered, the Registrar will not be responsible for any damage to theoriginal document or for the safe return of the original charge instrument.

The certified copy of the charge instrument and Form NM1 must be delivered forregistration within one month after the date of creation of the charge or, where thecharge is created outside Hong Kong and is over property situated outside HongKong, one month after the date on which a certified copy of the said instrumentcould have been received in Hong Kong in due course of post.

If the Registrar is satisfied that the particulars entered on the Form NM1 arecorrect and fit for registration, a certificate of registration will be issued.

(ii) Feasibility of extension of time for registration and the effect of non-registrationof a registrable charge

The Registrar has no power to grant an extension of time for late delivery of acharge under the Companies Ordinance.

If the company is unable to deliver the charge to the Registrar for registration bythe prescribed time period, a court order extending the time for registration of thecharge is required under section 346 of the Companies Ordinance.

In case of non-registration of a registrable charge, the registrable charge willbecome void against the liquidator and any creditor because they cease to bepreferential creditors.

However, the obligation to repay the loan is not prejudiced, and the money lent andsecured by the charge becomes immediately repayable.

(iii) Procedure for release of a charge

The company or the chargee / mortgagee may deliver the following to the Registrarfor the release of a charge:

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i. A certified copy of any instrument for the purpose of evidencing the payment,satisfaction, release or cessation;

ii. A duly completed Notification of Payment／Satisfaction of Debt, Release from

Charge, etc. (Form NM2); and

iii. A filing fee of HK$190.

There is no statutory time limit for the delivery of a Form NM2. The company or thechargee / mortgagee can deliver a Form NM2 any time after the charge has beendischarged.

Entries should be made in the company’s register of charges to record the detailsof the charge (i.e. when it is registered and discharged).

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5. Xandra Jewellery Holdings Limited (XJHL) is incorporated in the Cayman Islandsand its shares are listed on the main board of Hong Kong Stock Exchange. Thefollowing diagram illustrates the group structure of XJHL:

Mr Au and Mr Bai are shareholders of JVA Limited and JVB Limited respectivelyand they do not have any relationship with XJHL and its subsidiaries (XJHL Group)or with any connected persons of XJHL Group.

Xandra Limited and each of Mr Au and Mr Bai reach the following agreementsseparately:

1. JVA Limited will open three jewellery shops in Malaysia and borrow $180million (JVA Loan) from GGK Bank; XJHL / Xandra Limited and Mr Au will actas the guarantors in proportion to their shareholding interests in JVA Limited;and

2. JVB Limited will open two jewellery shops in Singapore and borrow $120million (JVB Loan) from GGK Bank; XJHL / Xandra Limited and Mr Bai will actas the guarantors in proportion to their shareholding interests in JVB Limited.

The following information is extracted from XJHL’s latest financial statements:

$ million

Non-current assets 580

Current assets 530

Total assets 1,110

REQUIRED:

JVB Limited

XJHL

Mr Au

40% 70%

Mr BaiXandra Limited

JVA Limited

100%

70% 30%30%

JVC Limited

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5. (a) (i) Briefly explain what an affiliated company is and identify the affiliatedcompanies of XJHL in the above diagram.

(4 marks)

(ii) Critically analyse whether XJHL will trigger any disclosure obligation ifXJHL acts as a guarantor for the JVA Loan and/or the JVB Loan.

(10 marks)

Ans (a) (i)

Chapter 13

Rule 13.11(2)(a) stipulates that an affiliated company refers to an associatedcompany and a jointly controlled entity in accordance with Hong Kong ReportingStandards.

Thus, the following companies are affiliated companies of XJHL:

i. JVA Limited;

ii. JVB Limited; and

iii. JVC Limited.

(ii)

Rule 13.12 stipulates that a guarantee to an affiliated company should be viewedon a group basis. Xandra Limited is a wholly-owned subsidiary of XJHL. Thus, anyguarantee from Xandra Limited to its affiliated companies is deemed to be aguarantee from XJHL to its affiliated companies.

According to rule 13.16 of the Listing Rules, if guarantees given for facilitiesgranted to affiliated companies of a listed company together in aggregate exceed8% under the assets ratio as defined under rule 14.07(1), the listed company mustas soon as reasonably practicable publish an announcement.

JVA Loan

Amount guaranteed by XJHL

= $180 million x 30%

= $54 million

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Assets ratio:

Amount guaranteed by XJHL $54 million

XJHL total assets $1,110 million

= 4.86%

Because the assets ratio does not exceed 8%, XJHL acting as a guarantor for theJVA Loan will not trigger any disclosure obligation under Chapter 13 of the ListingRules.

JVB Loan

Amount guaranteed by XJHL

= $120 million x 30%

= $36 million

Assets ratio:

Amount guaranteed by XJHL $36 million

XJHL total assets $1,110 million

= 3.24%

Because the assets ratio does not exceed 8%, XJHL acting as a guarantor for JVBLoan will not trigger any disclosure obligation under Chapter 13 of the ListingRules.

JVA Loan and JVB Loan

Assets ratios for JVA Loan + JVB Loan = 4.86% + 3.24% = 8.1%

When XJHL acts as a guarantor for the JVA Loan and JVB Loan simultaneously,this will trigger the disclosure obligation according to rule 13.16 of the Listing

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Rules because the assets ratio together in aggregate exceeds 8%.

5. (b) State concisely what disclosure obligation will be triggered based on youranalysis in part (a) above.

(6 marks)

(Total: 20 marks)

Ans (b) If the guarantees granted to the affiliated companies together in aggregate exceed8% under the assets ratio, XJHL must publish an announcement containing thefollowing information as soon as reasonably practicable upon signing theguarantee agreements:

(1) XJHL’s analysis on the amount of guarantees for bank loans granted to theaffiliated companies;

(2) the terms of the guarantees, including the interest rates, methods ofrepayment, maturity dates, and the security therefor;

(3) the source of funding to repay the committed amount of guarantees if suchguarantees become payable by XJHL; and

(4) bank loans utilised by the affiliated companies which are guaranteed by XJHL.

According to rule 13.22 of the Listing Rules, if the above guarantees continue toexist at XJHL’s interim period-end or annual financial year-end, XJHL’s interim orannual report must include a combined balance sheet of JVA Limited and JVBLimited as at the latest practicable date.

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6. Flora Mo is / was a director of the following companies:

Name Type of company Nature of business

AlbineInvestmentLimited (AIL)

A private limited companyincorporated in Hong Kong

Owner of the officepremises in Hong Kongwhich is used by BTLunder a lease

Benoit TradingLimited (BTL)

A private limited companyincorporated in the BritishVirgin Islands and registeredas anon-Hong Kong companyunder Part 16 of theCompanies Ordinance

Carry out trading businessin Hong Kong

Catalan Limited(CL)

A private limited companyincorporated in Hong Kong

Dissolved by members’voluntary winding up

Dado Limited(DL)

A private limited companyincorporated in Hong Kong

Dissolved byderegistration

Flora recently found that both AIL and BTL had been dissolved by the Registrarof Companies for failing to file their annual returns. The companies’ names havebeen struck off the Companies Register.

Flora is aware that the ‘administrative restoration’ procedure under Part 15 of theCompanies Ordinance (Cap. 622) is in force. She is wondering whether theabove companies may be restored by application for administrative restoration.

REQUIRED:

6. (a) State precisely what administrative restoration is and discuss whether AIL,BTL, CL and DL are eligible to apply for administrative restoration.

(12 marks)

Ans (a) The Companies Ordinance (Cap. 622) (CO) introduces the administrativerestoration procedure, which is a process to administratively restore a dissolvedcompany to the Companies Register by the Registrar of Companies (theRegistrar) without the need for recourse to the Court of First Instance.

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Administrative restoration of AIL

A local company dissolved pursuant to striking off action by the Registrar mayapply for administrative restoration if the following conditions set out undersection 761 of the CO are met:

a. The company was in operation or carrying on business at the time its namewas struck off the Companies Register;

b. The company has any immovable property situated in Hong Kong which hasbecome vested in the Government as bona vacantia and the Governmenthas confirmed that it has no objection to the restoration; and

c. The applicant must bring the company’s records kept by the Registrar up todate.

If AIL meets the above conditions, any director or member of the company maymake an application to the Registrar for the restoration of the company within 20years after the date of dissolution.

Administrative restoration of BTL

A non-Hong Kong company whose name has been struck off the CompaniesRegister may also apply for administrative restoration. Section 800 sets out theconditions for administrative restoration:

a. The company had a place of business in Hong Kong at the time of theapplication and at any time within the period of six months before its namewas struck off the Companies Register; and

b. The applicant must bring the company’s records kept by the Registrar up todate.

If BTL meets the above conditions, any director or member of the company may

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make an application to Registrar for the restoration of the company within sixyears after the date of dissolution.

Administrative restoration of CL

The procedure for administrative restoration does not apply to a local companywhich was dissolved by way of winding up.

Administrative restoration of DL

The procedure for administrative restoration does not apply to a local companywhich was dissolved by way of deregistration.

6. (b) Advise Flora on the formalities for application for administrative restorationof a local company.

(8 marks)

(Total: 20 marks)

Ans (b) Formalities of application for administrative restoration of a local company

1. Submit a written application, which confirms that the company holdsimmovable property, to the Registrar.

2. Provide the Registrar with the land search record issued by the LandRegistry showing the title to or ownership of the property.

3. Provide the Registrar with documents that are necessary to bring thecompany’s records kept by the Registrar up-to-date. These include alloutstanding annual returns and the payment of the annual return registrationfee.

4. Provide the Registrar with copies of the written authorisations of allmembers, duly certified by the applicant or a solicitor practising in HongKong.

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5. If the applicant is unable to obtain the written authorisation of all members,provide the Registrar with a statement giving the circumstances leading toand the reasons for making the application, together with certified writtenauthorisations of those members who have authorised the application.

6. The application must include a HK$2,700 administration fee. The fee paidwill not be refunded if the application is not granted.

7. The Registrar must notify the applicant of the decision on the application foradministrative restoration. If the Registrar grants the application, thecompany is restored to the Companies Register on the date on whichnotification is given.

8. The Registrar will register the notification and publish a notice of therestoration in the Gazette.

END