Form NSC17 Solvency Statement for Hong Kong Companies

Form NSC17 Solvency Statement for Hong Kong Companies

A Hong Kong company reducing its share capital must provide a directors' solvency statement. Form NSC17 is the prescribed declaration for the Companies Registry. The form's role, the required declarations, and the legal basis for both solvency-based and court-confirmed capital reductions are explained below.

What Is a Solvency Statement?

A solvency statement is a formal directors' declaration that the company will remain able to pay its debts throughout and immediately after a share capital reduction. The Companies Ordinance (Cap. 622) requires this statement for reductions using the solvency test, which avoids court confirmation.

Directors must make the statement no earlier than 15 days before the special resolution to reduce capital is passed. It is delivered to the Companies Registry with the resolution and the prescribed form.

Form NSC17: The Directors' Declaration

Form NSC17 contains the solvency statement. It is a specified form under Cap. 622 and must be completed by every director. Each director declares the company can pay its debts in full as they fall due:

• During the period beginning on the date of the special resolution and ending 12 months after that date (the "look-forward period")
• Immediately after the reduction takes effect

This is not a simple statement of opinion. Directors must form the view on reasonable grounds, considering the company's assets, liabilities, financial statements, and any other relevant information. Making a solvency statement without reasonable grounds is an offence under section 214 of Cap. 622.

Solvency Statement Hong Kong: The Solvent Test

The solvency statement procedure is governed by sections 212 to 214 of Cap. 622. To use this route, the company must pass a special resolution approving the reduction. All directors must make the solvency statement and file it with the Companies Registry using Form NSC17.

The solvent test has two limbs:

1. The immediate limb: The company must be able to pay its debts immediately after the reduction takes effect.
2. The 12-month limb: The company must be able to pay its debts as they fall due throughout the 12 months following the special resolution.

If the company fails either limb, it cannot use the solvency-based procedure and must seek court confirmation.

NSC17 Form Share Reduction: When It Is Used

Any company limited by shares that meets the solvency test can use the NSC17 form share reduction procedure. It is commonly used to return surplus cash to shareholders, eliminate accumulated losses on the balance sheet, cancel share premium account balances, or facilitate a buy-back or redemption.

This process does not require court approval, making it faster and less costly than the court-confirmed route. Directors must be confident the company meets the solvency test; the consequences of a false declaration are serious.

Directors' Solvency Statement Companies Registry: Filing Requirements

The Companies Registry must receive the following documents within 15 days after the special resolution is passed:

• Form NSC17 (the solvency statement)
• A copy of the special resolution (Form NSC19 is used for this purpose)
• A statement of capital showing the share capital before and after the reduction

Every director must sign the form. If a director cannot sign, the company must appoint an alternate director or wait until all directors can sign. The Companies Registry will not accept a form signed by only some directors.

The form can be filed on paper or through the e-Services portal. A certified true copy of the solvency statement must be kept at the company's registered office for at least 10 years from the date of the reduction.

Court-Confirmed Reductions and Form NSC17

Even when a company uses the court-confirmed procedure under section 215 of Cap. 622, directors must provide a solvency statement. In that case, Form NSC17 is filed with the court as part of the application. The court will consider whether the statement is properly made.

The court-confirmed route is required when the reduction involves a variation of class rights, creditors object to the reduction, or the company cannot satisfy the solvency test.

After the court confirms the reduction, the company files Form NSC20 (Return of Reduction of Share Capital) with the Companies Registry.

Liabilities and Assets: What Directors Must Consider

When completing Form NSC17, directors must assess the company's liabilities and assets as at the date of the statement. This includes all known liabilities, including contingent liabilities; the value of assets, stated at their realisable or fair value, not necessarily book value; and any commitments or obligations that may arise within the 12-month look-forward period.

Directors should prepare or review the company's financial statements before making the declaration. Significant contingent liabilities, such as litigation or guarantees, must be factored into the solvency assessment.

Special Resolution and the Role of Shareholders

A special resolution to reduce share capital must be passed by at least 75% of the votes cast by shareholders. The resolution must specify the amount of the reduction and its terms. The solvency statement on Form NSC17 must be made before the resolution is passed, and directors must be satisfied the company will remain solvent after the reduction.

Shareholders who vote against the reduction have no statutory right to object under the solvency-based procedure. They may apply to the court under section 216 if they believe the solvency statement is false.

Practical Steps for Filing

To file Form NSC17, follow these steps:

1. Prepare the solvency statement. Each director must sign the form.
2. Pass the special resolution at a general meeting or by written resolution.
3. Within 15 days, deliver Form NSC17, the special resolution, and the statement of capital to the Companies Registry.
4. Keep a certified true copy of the solvency statement at the registered office for 10 years.

The Companies Registry e-Services portal allows electronic filing. Paper forms can be delivered to the Registry's office at Queensway, Hong Kong.

Consequences of Non-Compliance

A director who makes a solvency statement without reasonable grounds commits an offence and is liable to a fine of up to HK$150,000 and imprisonment for up to 12 months. The company itself may also be liable.

If the company fails to file Form NSC17 within 15 days, the reduction is void. The company must start the process again. Directors may also be personally liable for any debts incurred during the period when the reduction was purportedly effective.

Summary of Key Points

• Form NSC17 is the solvency statement form for share capital reductions under Cap. 622.
• All directors must sign the form.
• The form must be filed within 15 days of the special resolution.
• The solvency test has two limbs: immediate solvency and 12-month solvency.
• Court confirmation is not required if the solvency test is met.
• A certified true copy must be kept for 10 years.

For the latest version of Form NSC17, visit the Companies Registry specified forms index at cr.gov.hk.