The new Companies Ordinance: second anniversary review
It has been two years since the implementation of the new Companies Ordinance, Chapter 622 of the Laws of Hong Kong, on 3 March 2014. In this article, the Companies Registry reviews what the law has achieved for Hong Kong and highlights some of the more commonly raised implementation issues.
The new Companies Ordinance (NCO) provides a modernised legal framework for the incorporation and operation of companies in Hong Kong. The main objectives of the NCO are to enhance corporate governance, facilitate business, ensure better regulation and modernise Hong Kong’s company law.
The NCO achievements
Since the implementation of the NCO on 3 March 2014, Hong Kong’s position as an international financial and commercial centre has been further reinforced.
A host of initiatives to enhance corporate governance have been introduced under the NCO. These include, among others, requiring every private company to have at least one individual acting as director to enhance corporate transparency and accountability, and introducing more effective rules to deal with directors’ conflicts of interest to foster shareholder protection. According to the World Bank’s Doing Business 2016 report, Hong Kong sustains its top position in ‘protecting minority investors’ among 189 economies. The World Bank commended Hong Kong for introducing requirements for directors to provide more detailed disclosure of conflicts of interest under the NCO.
A number of measures have been introduced to simplify statutory procedures, reduce the compliance costs of companies and cater for the needs of small and medium-sized enterprises. The NCO has simplified the procedures for starting a business in Hong Kong by abolishing the memorandum of association and making the use of a common seal optional. Hong Kong improved its ranking from eighth to fourth globally in the ‘starting a business’ category of the Doing Business 2016 report.
The NCO also provides an alternative court-free procedure for the reduction of a company’s capital and introduces a new administrative procedure for the restoration of companies to the Companies Register. Some statistics from 2015 which demonstrate the popularity of the new initiatives brought in by the NCO to facilitate business and save costs are as follows:
- around 57% of the new companies incorporated electronically adopted the sample articles of association provided at the e-Registry (www.eregistry.gov.hk)
- 173 out of 176 companies which reduced their capital made use of the alternative court-free procedure
- 328 applications for restoration of companies to the Companies Register using the administrative restoration procedures were received in 2015, which represented about 54% of the total number of applications for company restoration, and
- 26 groups of companies have undergone amalgamation through the new court-free procedure.
In recognition of the efforts of the Companies Registry (CR) in implementing and promoting the NCO to foster Hong Kong’s competitiveness as an ideal place to do business, the CR was awarded the Gold Prize of the Departmental Service Enhancement Award in the Civil Service Outstanding Service Award Scheme 2015.
Despite a generally smooth transition to the NCO, we highlight below some of the more commonly raised implementation issues under the new law.
Delivery of annual returns
Under the NCO, an annual return of a public company or a guarantee company is required to be delivered, together with certified true copies of the relevant financial statements, directors’ report and auditor’s report, within 42 days after the company’s return date, that is, six months (for a public company) or nine months (for a guarantee company) after the end of the company’s accounting reference period.
For a public company or a guarantee company registered under a former Companies Ordinance, the new requirements apply to the first financial year of the company that begins on or after the commencement date of the NCO and all subsequent financial years. For example, if a guarantee company prepares its financial statements up to 31 March every year, its first annual return would have to be delivered under the NCO on or before 11 February 2016, within 42 days from 31 December 2015.
The CR issued an external circular – Delivery of Annual Returns under the Companies Ordinance – on 31 July 2015 to remind public and guarantee companies of the relevant requirements. A simple and user-friendly ‘Annual Return e-Reminder’ service is available free of charge at our e-Registry (www.eregistry.gov.hk) to facilitate compliance. Users of the service will receive electronic notifications for delivering annual returns.
To improve the disclosure of company information, public companies and companies not falling within the reporting exemption are required to prepare, as part of the directors’ report, a more analytical and forward-looking business review. The review must contain, inter alia, a description of the principal risks and uncertainties facing the company and information relating to environmental and employee matters that have a significant impact on the company.
A private company that does not fall within the reporting exemption need not prepare a business review if it has members’ approval of a special resolution passed by 75% of its members. The special resolution must be passed at least six months before the end of the financial year to which the directors’ report relates.
Reduction of capital
The NCO introduces an alternative court-free procedure for reducing capital based on a solvency test. Under the procedures, the company is required to satisfy the solvency test, pass a special resolution for reduction of capital and publish notices in the gazette and newspapers. The special resolution and reduction take effect when the return on reduction of share capital is registered. The new procedure is faster and cheaper than the procedure under the old Companies Ordinance which involved filing an application with the court.
A new court-free regime for amalgamation which facilitates corporate activities and reduces compliance costs, is introduced in the NCO. The new procedure can be adopted to achieve amalgamations of wholly-owned intra-group companies, either vertical (between the holding company and one or more of its wholly-owned subsidiaries) or horizontal (between two or more subsidiaries of the same holding company).
To give ample notice to interested parties, the directors of each amalgamating company must give written notice of the proposed amalgamation to every secured creditor and publish notice of the proposed amalgamation in a newspaper at least 21 days before the date of the general meeting at which the resolution is to be approved, or on or before the circulation date of the proposed written resolution if the articles do not specify a period (Section 682).
Administrative restoration of companies
The NCO introduces a new administrative procedure for the restoration of companies to the Companies Register. The new procedure is widely accepted and used by the business community.
In order to facilitate timely receipt of the notification of the decision of the Registrar of Companies (the Registrar) on the application, the applicant is reminded to provide a complete correspondence address in the application form.
Under the NCO, if the name of the company upon restoration is the same as the name of an existing company, the restored company must change its name within 28 days after the restoration. It is an offence under the NCO if the restored company fails to change its name. The Registrar may change the name of the restored company to a name that consists of the words ‘Company Registration Number’ as its prefix, followed by its company registration number if the company fails to comply with the Registrar’s direction to change name.
Deregistration of companies
Before making an application for deregistration, a company is subject to the requirements set out below.
- It must ensure that all its properties (including any credit balance in its bank accounts, motor vehicle, landed property, etc) have been properly disposed of. Once the company is dissolved, every property and right vested in or held on trust for the company immediately before the dissolution will be vested in the government as bona vacantia.
- It should settle all its outstanding liabilities (including various kinds of service fees) before applying for deregistration; otherwise, third parties may raise objection to the deregistration of the company, and the Registrar may reject the application. To give false or misleading information in the application, for example, as regards the indebtedness of the relevant company constitutes a criminal offence.
To facilitate electronic submission of applications at the e-Registry, a copy of the ‘Notice of No Objection to a Company being Deregistered’ (NNO) issued by the Commissioner of Inland Revenue should be certified as true by the applicant, a director or the company secretary of the company. The PDF file of the NNO should be delivered together with the electronic Form NDR1 ‘Application for Deregistration of Private Company or Company Limited by Guarantee’.
Requirements for the certified translation of documents
A non-Hong Kong company registered under Part 16 of the NCO is required under various provisions of the NCO to deliver copies of documents issued in its place of incorporation (for example articles, certificates of incorporation, accounts, etc) for registration. Copies of such documents should be certified pursuant to Section 775 of the NCO. If the documents are not in English
or Chinese, a certified translation in either of these languages has to be delivered. The translation of documents should be certified pursuant to Section 4 of the NCO.
Further to the implementation of a full scale electronic filing service covering 84 specified forms at the e-Registry portal in March 2015, the CR targets to introduce a full range of electronic search services on the mobile platform (www.mobile-cr.gov.hk) by mid-2016.
Other legislative proposals in the pipeline are discussed below.
Open-ended fund companies
Following a public consultation in March 2014, the government has formulated the legal framework to introduce open-ended fund companies (OFC) in Hong Kong to facilitate the setting up of investment funds. The Securities and Futures (Amendment) Bill 2016 was introduced into the Legislative Council in January 2016 to lay down the framework for the new regime. While the Securities and Futures Commission will regulate the operation of OFC, the CR will be responsible for processing the incorporation of OFC and the registration of their corporate filings.
The Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance 2015 was published in the gazette on 27 March 2015 to provide the legal framework for the establishment and implementation of an uncertificated securities market regime in Hong Kong. Detailed provisions on the operation and regulation of the uncertificated securities market will be set out in new subsidiary legislation to be made under the Securities and Futures Ordinance.
More information is available on the Companies Registry’s website: www.cr.gov.hk.
SIDEBAR: Tips on annual return preparation
When preparing the annual return (Form NAR1), the Companies Registry reminds companies to:
- make reference to the company’s up-to-date records before completing the respective entries in the annual return and the schedules/continuation sheets
- sign the annual return and attach all the completed schedules/continuation sheets
- deliver the annual return of a public company or guarantee company together with certified true copies of the related financial statements
- double check that the correct particulars are provided and there are no missing entries/pages/schedules/continuation sheets
- comply with the deadline for delivery of annual return to avoid payment of higher annual registration fees pay the correct annual registration fee, and
- deliver proper forms for reporting changes in the particulars of the company, for example changes in the location of registered office, if any.
SIDEBAR: Enhancing awareness
Examples of the Companies Registry’s efforts to enhance stakeholders’ awareness of the new Companies Ordinance requirements include:
- issuing reminder letters to all guarantee companies in September and October 2015 to remind them of the new requirements on delivery of annual returns under the NCO
- issuing letters to private companies which do not have a natural person acting as director to remind them of the new requirement to have at least one natural person acting as a director
- setting up an Inspection Unit in its Enforcement Section to conduct site visits of the registered office addresses of companies, including checking compliance with the requirements on disclosure of company names and keeping of company registers, and
- updating the ‘frequently asked questions’ on the NCO on the Registry’s website and setting up a new subsection containing copies of Table A in the old Companies Ordinance (Cap 32) for the reference of companies which had adopted the provisions in Table A as their articles of association before the commencement of the NCO.