Proposals to strengthen the rights of trademark owners

For some time the problem of shadow companies has caused grave concerns to trademark owners. "Shadow companies" are principally incorporated by Chinese individuals who take advantage of the Hong Kong company registration system to register a company name incorporating another party’s famous mark as a vehicle to carry out counterfeit dealings across the border in the People’s Republic of China. Typically, such shadow companies carry out no business activities in Hong Kong.

Currently, the rightful owner of the mark used by the shadow company can: 

• take court action for trademark infringement and/or passing off to obtain an order directing the shadow company to change its name; 
• where the company was incorporated less than 12 months ago, apply to the companies registrar under Section 22(2) of the Companies Ordinance for a direction that the company change its name as it is too like the name of another company on the Companies Register; or 
• apply to the registrar under Section 291 of the Companies Ordinance to strike the company off the register where there are reasonable grounds to believe that the company is defunct.

However, taking court action is often costly and time consuming, while the other two measures are not without their own difficulties. For example, historically the registrar has taken a very narrow interpretation of "too like", and there must be a likelihood of mistaken identity before invoking Section 22(2). Further, the 12-month time limit and the requirement that the application reach the registrar in reasonably good time before the expiry of the 12-month period in order to afford the company an opportunity to be heard mean that it is often too late for the rightful owner to file the application. For a Section 291 application, in considering whether the company carries on business the registrar will take all relevant circumstances into consideration, including whether the company has any activities outside Hong Kong. For recently incorporated companies, this section cannot be relied on by the rightful owners.

In light of the apparent insufficient protection afforded to the rightful owners, who are often forced to initiate legal proceedings against the company, in 2006 the Financial Services and Treasury Bureau launched a comprehensive rewrite of the Companies Ordinance. On 2nd April 2008 it issued a consultation paper seeking public views on proposed amendments to the ordinance to tackle the abuse of the company name registration regime by shadow companies in Hong Kong.

The proposals set out in Chapter 2 of the paper on company names seek to strengthen the registrar’s power in the company registration process as follows:

• Upon receipt of a court order requiring a company to change its name, the registrar will direct the company to change its name within a specified period. If the company fails to comply with the direction, the registrar may substitute the infringing name with its registration number.
• The registrar will reject registration of any company name which is "the same" as an infringing name which the registrar has previously directed a company to change and is the subject of a court order.
• The registrar will also change a company’s name to its registration number if the company has not complied with the registrar’s direction to change its name under Section 22(2) of the Companies Ordinance.

Further, the review considered the alternative of empowering the registrar to strike a company off the register if it fails to comply with a direction to change its name. However, the paper does not recommend this option as it could adversely affect the interests of third parties (eg, creditors), and may result in uncertainties over the liabilities and obligations of the company and its officers.

The possibility of adopting a system of company name adjudication similar to that introduced in the United Kingdom was also considered, but was regarded as inappropriate.

Although the proposals will not adequately tackle the problem of shadow companies, the amendments are a valid interim measure to relieve trademark owners of some of the difficulties posed by the current measures. However, the effectiveness of the registrar’s new powers relies on the registrar adopting appropriate interpretations of:

• the meaning of "the same"; and
• what constitutes non-compliance with the registrar’s direction to change a company name.

The term "the same" should be read to give effect to the terms of the court order and non-compliance should not be construed restrictively.