The fourth in a series of guidance notes produced by the Institute’s Public Governance Interest Group gives guidance on the continuing compliance obligations of not-for-profits under the Companies Ordinance.
The Institute’s Interest Group guidance note project got underway in June 2016. The seven Interest Groups formed under the Institute’s Technical Consultation Panel have subsequently published 17 guidance notes, available on the Institute’s website. This article reviews the latest addition to this series.
Previous guidance notes published by the Institute’s Public Governance Interest Group (PGIG) looked at the different legal structures available to organisations dedicated to the public good, as well as the compliance considerations relevant to the setting up of a Hong Kong limited liability company – the most flexible form for incorporating a charity and/or to carry out a social enterprise. The latest PGIG guidance highlights the continuing compliance obligations of such enterprises under the Hong Kong Companies Ordinance (Cap 622) (CO).
The guidance starts with a compliance overview. A company is run by its directors, with oversight by members/shareholders (as members are commonly called for a company limited by shares) at member/shareholder meetings. There is a need to present the financial and director reports to member/shareholders before the annual member/shareholder meeting (known as the annual general meeting).
A key point to bear in mind is that the due diligence required of directors and officers to ensure compliance with the CO applies to all companies, irrespective of whether they are for, or not for, profit. The guidance will be particularly useful in situations where a not-for-profit (NPO) is run by volunteer directors, who may work pro bono in their free time and who may be less familiar with their compliance obligations under the CO.
In fact directors and officers of NPOs are not subject to lesser liabilities than their counterparts in commercial organisations and the guidance emphasises that the compliance function needs to be adequately understood and resourced. ‘You need to seek to understand and commit resources to compliance-related matters in your company,’ the guidance states.
After giving an overview of CO compliance, the guidance focuses on key issues of particular relevance to companies’ ongoing compliance obligations.
A company’s constitutional documents are a contract between the company and its members/shareholders, and among themselves, and they are very relevant to ongoing compliance issues. The CO requires a company to have a set of Articles of Association (the Articles), a standard form of which can be found on the Companies Registry website (www.cr.gov.hk). The Articles set out the rules and regulations applicable to the company, including relating to member/shareholder meetings, director appointments and authorisations to deal with day-to-day business of the company. The guidance makes it clear that directors and officers need to be familiar with their organisation’s constitutional documents and the technical requirements thereunder. For example, the Articles may have specific rules as to how to deal with a director who is interested in a transaction with the company.
Compliance with directors’ duties has been subject to increasing regulatory scrutiny in Hong Kong and the obligations relevant under the CO should be made very clear to anyone taking up this role. Directors have to exercise reasonable care, skill and diligence to the standard that would be exercised by a reasonably diligent person having the general knowledge, skill and experience of a director, or a higher standard where he or she has a higher skill set. These are in addition to common law fiduciary obligations of a director to act in good faith in carrying out the business of the company.
A key area of directors’ duties to address is how to handle potential conflicts of interest. ‘Directors must not allow their own personal interests to conflict with those of the company in resolving and/or carrying out the business of the company without appropriate disclosures,’ the guidance states.
Subject to additional requirements under the Articles, where a director is directly or indirectly interested in a transaction, arrangement or contract, or a proposed transaction, arrangement or contract, that is significant in relation to the company’s business, and the director’s interest is material, the director must declare the nature and extent of the director’s interest to the other directors in accordance with certain requisite procedures (Sections 536-542).
There are additional compliance requirements for ‘fair dealing’ by directors. They relate to loans, quasi loans, credit transactions, payment for loss of office and lengthy directors’ service contracts. Some of these extend to the company conferring a benefit to a child, cohabitee or shadow directors of the director (Sections 484-535).
The guidance also points out that there are very limited indemnities and ratification rights under the CO for director’s wrongdoings (Sections 465-473). Directors therefore need to consider procuring directors and officers (D&O) insurance to cover certain exposures to liabilities.
The guidance also addresses the assistance company secretaries provide to directors. All companies in Hong Kong must have a company secretary. This can be a natural person or a company (but not held only by a sole director). The guidance adds that the company secretary can be liable for the company not complying with the CO compliance obligations (Sections 3(2) and 474-475).
Annual general meetings
A company must, in respect of each financial year of the company, hold a general meeting as its annual general meeting (AGM) within nine months after the end of its accounting reference period, but in any event not more than 18 months from incorporation or 15 months from the last meeting (Sections 369 and 431).
A company’s directors must, in respect of each financial year, lay before the company in the AGM, or in any other general meeting directed by the court, a copy of certain reporting documents, and the director’s failure to comply with this obligation could lead to a HK$300,000 fine and 12 months’ imprisonment (Section 429).
The reporting documents, which should be sent 21 days before the AGM, are: the financial statements for the financial year, the directors’ report for the financial year and the auditor’s report on those financial statements. Alternatively, companies can comply with the statutory requirements via a written resolution with all the reporting documents circulated on or before the date of the written resolutions to all members. The guidance points out that it is important to remember to notify every member and the auditor within 15 days of the written resolution (Sections 559, 610-612). ‘We have seen many companies failing to meet this compliance requirement,’ the guidance states.
In fact, a company could dispense with the requirement for holding AGMs altogether by passing a written resolution or a resolution at a general meeting by all members. The company is required to deliver a copy of the resolution to the Companies Registry for registration within 15 days after the resolution is passed (Section 613 and 622).
To protect shareholders, the financial statements and reports originally required to be laid before an AGM would still need to be sent to members. Any member may request the company to convene an annual general meeting for a particular year (Section 613(5)).
Record keeping requirements
The guidance also addresses the record keeping requirements under the CO – an issue particularly relevant to company secretaries. A company must keep its records of resolutions and meetings of members and directors available for inspection at the company’s registered office or a prescribed place (Sections 618-620, and 641-648). Information as to trusts are not to be entered in the members register, but companies are now required to keep a significant controllers register identifying beneficial owners holding more than 25% interest in the company, which is subject to narrow exceptions. This applies to all companies within the chain of title from the company to its beneficial owners (Sections 634 and 653A).
The members of the Institute’s Public Governance Interest Group are April Chan FCIS FCS (Chairman), Lau Ka-shi BBS, Rachel Ng ACIS ACS, Samantha Suen FCIS FCS(PE), Stella Ho and Stella Lo FCIS FCS(PE).
Mohan Datwani FCIS FCS(PE) serves as Secretary. Please contact Mohan Datwani, Senior Director and Head of Technical & Research, HKICS, if you have
any suggestions about topics relevant to this interest group at: email@example.com.