Government steps up fight against shadow companies

The Hong Kong government has announced a public consultation on the amendments to the Companies Ordinance. One of the proposed amendments aims to tackle the issue of shadow companies.

Shadow companies adopt names that are identical or similar to well-known trademarks. Usually, they do not carry on business in Hong Kong and pose as representatives of the trademark owners when contracting with manufacturers in mainland China or elsewhere in an attempt to legitimize the production of counterfeit goods bearing the marks.

The current legal regime does not afford much protection to trademark owners in that respect. A trademark owner may obtain a court order directing a company to change its name in an action for trademark infringement or passing off. However, the registrar of companies has no authority to enforce the court order. Under Section 22(2) of the Companies Ordinance, the registrar may order only that a company, within 12 months of its incorporation, change its name if it is too similar to the name of another company on the register.

The government's consultation document presented a "strong case for strengthening the company registration regime to tackle any possible abuse by shadow companies", and considered a number of options for reform.

First, the consultation document considered the suggestion that the registrar of companies should not allow the registration of a company name which is identical or similar to a trademark registered under the Trademarks Ordinance. However, the government rejected this suggestion on the grounds that it would be unfair to grant trademark owners a monopoly over company names for all types of business activity, including those for which the trademarks have not been registered. Moreover, it would be materially impossible for the registrar to check that every proposed company name is not similar to a registered trademark.

Second, the consultation document considered the possible introduction of an adjudication system similar to that in place in the United Kingdom. Under this system, an applicant may object to a company's registered name on the basis that it is identical or similar to a name in which it has acquired goodwill. The adjudicator then considers the applicant's arguments at a hearing. The adjudicator has authority to order the defendant company to change its name. However, the authorities did not recommend the implementation of this system in Hong Kong on the grounds that:

• shadow companies are unlikely to attend the adjudication proceedings;
  
  
• such proceedings would involve considerable administrative costs; and
  
  
• there may be duplication of efforts between the adjudication system and the courts, as some parties might also seek relief from the courts in passing off actions.

However, the consultation document proposed the following amendments:

• The registrar of companies should be empowered to enforce a court order directing a shadow company to change its name. Should the shadow company fail to comply with the court order, the registrar should be able to substitute the infringing company name with the company's registration number.
  
  
• The registrar should have the authority to refuse to register a company name which is identical to an infringing name which a company has previously been ordered to change.

It is hoped that the proposed amendments, if implemented, will provide trademark owners with practical legal remedies against shadow companies, without granting them an unjustified monopoly over company names.

Ai-Leen Lim, Bird & Bird, Hong Kong