The Companies Ordinance is the document which governs all companies which have been established and operate in Hong Kong. In 2014, the Companies Ordinance received an update to better reflect the realities of the business environment of Hong Kong. The new version of the Companies Ordinance (Cap. 622), also known as the New CO, took effect in 2014.
The primary purposes of the New CO were of increasing the standard of corporate governance in Hong Kong, improving regulation of Hong Kong’s companies, facilitating the conducting of business activities, and modernizing of Hong Kong’s business laws.
Parties Affected by the Implementation of the New CO
The implementation of the New CO has had a significant impact on various areas of Hong Kong businesses such as directors, officers, shareholders, and the companies themselves. Several charitable institutions in Hong Kong were also impacted by the introduction of the New CO because they had been previously incorporated as companies which had been limited by guarantee.
Enforcement and Standard of care for directors
The New CO has changed several corporate governance requirements in Hong Kong. Most of these changes are related to the enforcement regime as well as the standard of care to which directors are to adhere. The new requirements are especially relevant to directors who are in a more passive role or who are less experienced in the world of business.
For example, according to the stipulations specified in the original version of the Companies Ordinance, there were certain offenses which, when committed, exposed companies and their directors as well as other key figures within the companies alike to liability. Only the officers who deliberately authorized the offense committed would be officially charged.
According to the New CO, any omissions, reckless acts, deliberate violations, failures, and deliberate oversights committed by anyone deemed to be responsible may result in liability. The New CO also expands the possibility of experiencing liability to the officers who have participated in the offense; thus, it is no longer limited to officers who authorized the offensive act.
Therefore, it is important that every Hong Kong company be aware of the regulatory obligations according to the New CO because the new requirements also make it easier for errant officers to be reported.
There are several measures mentioned in the New CO which serve to clarify and update certain matters related to Hong Kong’s corporate laws from a CLG’s perspective. Such matters may be divided into two categories: those of compliance obligations and those matters of procedural convenience.
Conflict between New CO and any Articles of Association
The New CO has done much to streamline and modernize the corporate procedures which take place in Hong Kong. If anything in the New CO and the company’s articles of association are in conflict, it will be the articles of association which will be required to be changed.
Should a Hong Kong company plan to make such a change, it will require approval from the Inland Revenue Department (IRD) as well as 75% of its members before proceeding to do so. It is not always easy or even possible for both circumstances to materialize. Therefore, Hong Kong companies must ensure that they are compliant with the New CO in order to avoid having to change their articles of association.
Expansion of Business Interests
There are several other changes in the New CO which have significant impacts on company directors all over Hong Kong. Directors must now disclose to the board any expansion of business interests. Directors’ reports must also include a business review including all pertinent information related to the company’s affairs unless the company is officially permitted to make a simplified report.
Punishments imposed on errant directors are now more severe than they had previously been. Directors now have the right to be indemnified by the company’s assets for any liabilities to third parties unless there happen to be any exceptions or disclosures which are to take precedence. Companies are also now permitted to purchase director’s insurance in order to pay for liabilities which may have been incurred by directors for actions such as default, breach of duty, negligence, and breach of trust (except fraud), among other matters. Due to the fact that the amount of legal protection offered by way of company indemnity has been reduced by other provisions of the New CO, Hong Kong companies have thus been recommended to purchase director’s insurance.
If you are a business owner or director, and are worried about complying with the new CO, please reach out to our specialists on Paul Hype Page. We would be happy to assist you as you navigate your responsibilities in your professional capacity.