Measures to combat shadow companies proposed

Hong Kong
On January 22 2010 the Hong Kong government published a bill proposing various amendments to the Companies Ordinance. Among other things, the bill introduces measures to tackle the problem of shadow companies.

Shadow companies adopt names that are identical, or very similar, to established trademarks of other companies, so as to create a false impression of affiliation with the owners of the marks. Typically, the shareholders and directors of shadow companies incorporated in Hong Kong are resident in mainland China, and the companies have no substantive presence or business in Hong Kong. The sole purpose of incorporating the shadow companies in Hong Kong is to make infringing activities carried out in China look legitimate by granting licences to Chinese manufacturers to produce counterfeit goods under the established trademarks.

Currently, even if a brand owner brings a trademark infringement or passing off action against a shadow company and obtains an order from the court requesting that the company change its name, it is very difficult to enforce the order, since changing the name of a company requires the passing of a special resolution by its shareholders. As the shareholders of the shadow company are not resident in Hong Kong and do not fall within the jurisdiction of the Hong Kong courts, brand owners cannot compel the shareholders to comply with the order. Under the existing Companies Ordinance, the registrar of companies has only the power to direct a company to change its name. The registrar can impose a fine on the company for non-compliance, but has no authority to change its name. 

To overcome this practical problem, brand owners must join the shareholders as co-defendants when they bring action against the shadow companies, so that if the shareholders do not comply with the order, the court can appoint a person (eg, the plaintiff’s solicitor) to take all necessary steps on behalf of the defendant company and its shareholders to change the name of the company to one that does not contain the plaintiff’s name or trademark.

However, since the shareholders are not resident in Hong Kong, brand owners must incur extra costs to apply for service of the writ outside of Hong Kong. Moreover, since the shareholders sometimes use fake identities and addresses to incorporate the shadow companies, costs may also be incurred to apply for substituted service of the writ.

The Companies (Amendment) Bill 2010 seeks to improve the situation by introducing the following measures:
  • If the court has issued an order restraining a company from using its existing name (or any part of its name), the registrar shall direct the company to change its name within a prescribed time. If the company fails to do so, the registrar shall substitute the company’s name with its registration number. Therefore, when the amendment to the Companies Ordinance takes effect, brand owners will be able to enforce court orders, and will save the costs of joining non-resident shareholders as co-defendants.
  • If the court has issued a name change order in respect of a company name, no one will be permitted to incorporate a company under that name, except with the consent of the registrar. Currently, nothing prevents another shadow company from being incorporated under the same name.
According to the legislative timetable, the amendments should become law before the end of 2010.

The proposed amendments are certainly good news for brand owners, but many feel that they are not sufficiently far-reaching. The power of the registrar to substitute a company name with its registration number is triggered only by a court order; therefore, brand owners will still have to bring legal proceedings in order to make a shadow company change its name. Further, the authority of the registrar to block the adoption of company names is limited to identical names. Infringers can thus get around this restriction by incorporating shadow companies under a slightly different name (eg, by adding non-distinctive words such as 'international' and 'Asia'). IP practitioners in Hong Kong will thus continue to seek further improvements through administrative measures or legislative changes. 
Rebecca Lo, Rebecca Lo & Co, Hong Kong

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