All companies can be divided into two general categories: dormant and active companies. In Hong Kong, all companies are governed by the Companies Ordinance; this fact is true of both dormant and active companies alike.
The Companies Ordinance is the law which serves as the primary piece of corporate legislation in Hong Kong. It states that all companies, including companies limited by guarantees, share- limited public and private companies, and public and private unlimited companies must submit accounting records accordingly.
The accounting records of a company reveal all accounting transactions that have taken place every day for a year, including all money spent and received by the company. This information is used to give those in the company a clear insight into the company’s financial standing, its performance, and its assets at any given point in time.
Those who have already registered a company in Hong Kong but believe that the most suitable course of action to be taken is that of halting all operations for a given period can choose to declare dormant status for their company.
Definition of a Dormant Company
A dormant company is a company that neither records nor generates any accounting transactions over the course of one fiscal year. During this period, the company does not carry out any significant financial transactions.
This does not mean that the company is unable to carry out any financial transaction of any form, however. A significant financial transaction is defined as a transaction considered to warrant a mention in the company’s accounting records.
Not every company in Hong Kong is allowed to become dormant; only private companies may do so. Companies which are not private do not have the option of pursuing dormancy. Hong Kong companies which engage in foreign trade are also prohibited from dormancy.
How Companies Become Dormant
In Hong Kong, a declaration of dormancy is not automatically made when a company is unable to make significant financial transactions over the course of one fiscal year. Companies in Hong Kong must explicitly declare dormancy before they may be catalogued as dormant. There is a process of declaring dormancy in Hong Kong; this process will be detailed in the following paragraphs.
The first step a company must take towards applying for dormancy is to have a majority of its members sign a special resolution. This majority must be 75% of the members of the company or more. This special resolution document would then be submitted to the directors of the company. With this document, the directors can then make an official statutory declaration of dormancy. After declaring the state of dormancy, the directors will then submit proof of dormancy in the form of a confirmation statement of the declaration to the Registrar.
From the moment that the document is submitted to the Registrar, the company is immediately considered to be a dormant company unless the document specifies a later date from which it is to become dormant.
Exemptions for Dormant Companies
When a company is declared dormant, there are several exemptions which they may receive. A dormant company is exempted from filing annual returns because without accounting transactions being made, there are no annual returns to be filed. Dormant companies also do not have to make audited financial statements. This also means that all parts of the Companies Ordinance which are related to auditors and auditing processes do not apply to dormant companies. Dormant companies are also exempted from having to hold annual meetings because all the issues which would normally have to be discussed do not apply to dormant companies.