Share capital reduction with court-free process for companies in Hong Kong : How to do


Companies can take advantage of the court-free process in Hong Kong to conduct capital reduction to optimize excess capital, and conduct a share reduction. The Companies Ordinance (Cap. 622) (“CO”)  has introduced a court-free process for reduction of capital of companies. The court free process requires directors to give a solvency statement in order to reduce the company’s capital. The procedures for capital reduction have been streamlined to enable all companies to restructure efficiently and in a cost-effective manner.


A company must obtain the approval of its shareholders to the proposed reduction of capital by special resolution. Before a company has obtained its shareholders’ approval to a proposed reduction of capital by special resolution, its directors must make a solvency statement in support of it.  


To pass the solvency test in Hong Kong and make a share reduction in your capital, these procedures have to be followed:

  • Immediately following the transaction, there must be no ground on which the company could be found unable to pay its debts.
  • The company has to be able to pay its debts as they become due during the period of 12 months immediately following the transaction, or if the company is about to  start the process of winding up within 12 months after the date of the transaction, to pay its debts in full within 12 months after the start of its winding up.


Other requirements for a capital share reduction in Hong Kong :

All directors need to sign and certify that the solvency test requirements have been satisfied. Before signing the solvency statement, the directors have to inquire into the company’s state of affairs and prospects, taking into account contingent and prospective liabilities of the company. 

Also, directors pay close attention to fulfilling all requirements before taking the decision. They should be aware that the extended use of the solvency test under the CO will increase directors’ exposure to potential liabilities on civil and criminal. 

Although an auditor’s report is not mandated, it is wise to engage certified accountants to assess the current financial wellbeing of the firm and the impact of capital reduction on the same. The directors should also consider starting the process for reduction when auditor’s report have been made available. This will help ensure the variation in the company’s financial status is minimal from the time of initiating the process and date of approval. 

The company needs to be aware that any creditor or non-approving shareholder may, within five weeks after the special resolution is passed, apply to the court for cancellation of the resolution. 

Shareholders must be provided with adequate information to approve the special resolution in capital reduction process.


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