26 September 2016 by Frances Chan
Failure to comply with company law in Hong Kong can be very expensive for businesses
In a highly dynamic business and regulatory environment such as Hong Kong, it is challenging for business owners to remain fully aware of the latest legal requirements. Maintaining a skilled, high-quality compliance team in-house is costly and ignorance of the law is no defense under our legal system. It is therefore common for business owners in this jurisdiction to elect to outsource their company secretarial compliance function with the aim of mitigating the risk of non-compliance.
To lower the threshold for prosecuting contravention by officers, Hong Kong’s Companies Ordinance (Cap 622) (New CO), implemented on 3 March 2014, introduced a new definition of ‘responsible person’. A responsible person is an officer of a company − which includes directors, persons performing managerial functions and the company secretary − who authorises, permits or participates in the contravention or failure. The defaulting company and its responsible person is exposed to prosecution and, if convicted, fines.
To ensure timely compliance by companies and their officers with their obligations under the Companies Ordinance, the Companies Registry (CR) issues reminders and instigates prosecution actions as and when appropriate.
According to the CR, the majority of the summonses issued in the past six years are for failing to deliver, or being late to deliver, statutory returns within the prescribed time periods. The total fines imposed for the first seven months of 2016 amount to HK$7,382,780.
If a person upon whom a summons is served fails to appear in court without a good reason, they may be in contempt of court and punished accordingly. If the defendant company is absent from the hearing, the prosecutor may take appropriate steps to continue with the proceedings if the situation warrants it.
Instead of instituting prosecution proceedings against defaulting companies, the Registrar of Companies is empowered under the New CO to exercise their discretion in compounding certain simple and straightforward filing offences − such as prosecution for failure to display a company’s registered name, provision of false information, failure to hold annual general meetings or failure to lay accounts before members. A new inspection unit in the enforcement section of the CR has been set up to step up the enforcement efforts.
Set out below are certain corporate secretarial compliance issues applicable to private limited companies in Hong Kong which may help you better understand the relevant legal requirements:
Every company is required to keep the following statutory registers (these can be in hard copy or electronic form) at its registered office or at another place within the Hong Kong territory:
The CR should be notified of any change in location of keeping these registers in their prescribed form within 15 days of each change.
A local private company must, in respect of every year, deliver its annual return to the Registrar of Companies for registration. This must be done within 42 days of the anniversary of the date of the company’s incorporation and incurs an annual registration fee of HK$105. A substantially higher registration fee, ranging from HK$870 to HK$3,480, is payable for late delivery.
In addition to the payment of the higher registration fee, the company and each of its responsible persons are also liable to prosecution and, if convicted, default fines. The maximum penalty is HK$50,000 for each breach and, in the case of a continuing offence, a daily default fine of HK$1,000.
For persistent non-compliance, the Registrar of Companies may consider taking strike-off action in appropriate cases.
Under the New CO, a local private limited company that is not a subsidiary of a public company must hold an annual general meeting (AGM) within nine months (or such longer period directed by the court) after the end of its financial year end date.This is except for in the following circumstances:
A time interval between each AGM of not more than 15 months (which is a requirement under the predecessor Companies Ordinance) is no longer applicable under the New CO.
Generally speaking, a company’s directors must at the AGM, in respect of each financial year (consisting of a period of 12 months), lay before the company a copy of its audited financial statements (AFS). In this connection and except for a dormant company, all companies are required to prepare AFS (either company level or consolidated financial statements) even if they do not have any transactions during a financial year or have never commenced business or operations since the date of incorporation.
Only certified public accountants holding a valid practicing certificate issued by the Hong Kong Institute of Certified Public Accountants are lawfully qualified to provide auditing services to Hong Kong incorporated companies.
To increase transparency, the New CO requires every private company to have at least one director who is a natural person (i.e. an individual). The CR already issued reminders to those Hong Kong companies which remain non-compliant with this requirement. For continued non-compliance, the Registrar may issue direction to the relevant company. Failure to comply with the direction may result in the company and all of its responsible persons each being liable for a fine of HK$100,000 and for a continuing offence, a further fine of HK$2,000 per day.
In Hong Kong, directors are not subject to any nationality or residency requirement.
There is a deeming provision in the New CO requiring any amount standing to the credit of the company’s share premium account and capital redemption reserve as of 3 March 2014 to become part of the company’s share capital. Capital reserves or other reserves not of the above nature are not covered under the deeming provision and should not be amalgamated into paid up share capital.
There is no name reservation mechanism in Hong Kong and the registration of company names is subject to certain restrictions. Generally speaking, a company name will not be registered if:
The Registrar may direct a company to change its name under the provisions of the Companies Ordinance. If the company fails to comply with the direction, the company and all its responsible persons commit an offence. Each is liable to a fine and, for continuing offence, a further daily default fine.
The Registrar may also replace a company name by the company’s registration number if the company fails to comply with the Registrar’s direction to change its name.
Compliance may be seen as expensive but non-compliance in Hong Kong can cost businesses even more − and sometimes cannot be rectified without leave of the court. Engagement of experienced and qualified professionals to manage company secretarial matters and advise on best practice is therefore recommended.