The Essential Corporate Law in Hong Kong. These are the highlights if you want to know the essential of Corporate Law in Hong Kong. This entry was drafted by Charltons Law Firm for “E-IURE COMPENDIUM” 2018. Link to e-IURE Network.
This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “Charltons Law Firm” is an excellent option if you are looking for legal advice in Hong Kong.
The Companies Ordinance (Cap. 622) (the “Companies Ordinance”) governs companies incorporated in Hong Kong and overseas companies registered in Hong Kong. Hong Kong’s first Companies Ordinance was enacted in 1865 and was based upon the UK Companies Act 1862. It has since been revised to take into account changing practices in the commercial world, in particular in relation to transparency and disclosure of corporate transactions. The revisions are often similar to those introduced in other common law jurisdictions, such as Australia, Canada, Malaysia, New Zealand and Singapore, all of which have adopted the UK corporate model. When interpreting Hong Kong company law, Hong Kong courts may also refer to case law in these jurisdictions. The current Companies Ordinance came into force in March 2014. The previous Companies Ordinance (Cap. 32) was retitled as the “Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)” (the “C(WUMP)O”). The core provisions affecting the operation of companies under the previous Companies Ordinance were repealed, except those provisions relating to the winding-up and insolvency of companies and the prospectus regime governing public offerings of companies’ shares and debentures.
Types of Business Structure
All entities doing business in Hong Kong, regardless of their corporate form, are required to obtain a business registration certificate from the Inland Revenue Department. Some are also required to register with the Companies Registry for incorporation. The application and registration procedures differ depending on whether the business is a sole proprietorship, a partnership (or other unincorporated body), a Hong Kong-incorporated company or an overseas company.
Sole Proprietorship or Partnership
Sole proprietorships or partnerships are required to obtain a business registration certificate from the Inland Revenue Department, but beyond this there are few formalities with which they must comply. Whilst sole proprietorships and partnerships are not required to disclose information to the public, they must nevertheless keep accounts and are liable for profits tax.
Partnerships are governed by the Partnership Ordinance (Cap. 38). Both sole proprietorships and partners are liable for the debts of their business with unlimited liability. Whilst partnerships may be formed under the Limited Partnership Ordinance (Cap. 37), in practice this ordinance is rarely used.
- Limited company incorporated in Hong Kong
To incorporate a limited company in Hong Kong, certain documents must be filed with the Registrar of Companies and a business registration certificate must subsequently be obtained from the Inland Revenue Department. Under the one-stop company and business registration service jointly launched by the Companies Registry and the Inland Revenue Department, if the required incorporation documents and prescribed fees are submitted to the Registrar of Companies, a limited liability company can collect both its business registration certificate (issued by the Inland Revenue Department) and its certificate of incorporation (issued by the Companies Registry can) from the Companies Registry once its incorporation application has been approved. Following incorporation, limited companies are subject to continuing obligations as set out in the Companies Ordinance, which include a requirement to submit various documents to the Registrar of Companies, such as annual returns, notices of change of directors and of alteration of a company’s share capital.
In general, a company incorporated in Hong Kong must comply, inter alia, with the following continuing obligations:
- Maintenance of registers (including registers of members, charges, directors and secretaries);
- Maintenance of proper accounting records;
- Holding an annual general meeting at least once every financial year (but this may be dispensed with in certain circumstances, e.g. if everything that is required to be done at the meeting is done by a written resolution and copies of the documents required to be laid or produced at the meeting are provided to each member on or before the circulation date of the written resolution);
- Delivering to the Registrar of Companies an annual return within 42 days after the company’s return date every year. The company’s return date is the anniversary of its incorporation (for private companies), 6 months after the end of its accounting reference period (for public companies) or 9 months after the end of its accounting reference period (for companies limited by guarantee);
- Preparation of the company’s financial statements and directors’ report by company’s directors;
- Laying before the company in annual general meeting and sending to every member a copy of the reporting documents (i.e. financial statements, directors’ report and auditor’s report);
- Delivery of particulars of certain charges or security created to the Registrar of Companies; and
- Notification to the Registrar of Companies when there are changes in certain details and particulars.
All documents filed with the Registrar of Companies are open to public inspection.
Overseas company registered as a non-Hong Kong company in Hong Kong
Overseas companies that intend to establish an office in Hong Kong that do not wish to create a Hong Kong-incorporated subsidiary may register as non-Hong Kong companies under Part 16 of the Companies Ordinance.
Within one month after establishing a place of business in Hong Kong, an overseas incorporated company must register as a non-Hong Kong company under Part 16 of the Companies Ordinance by registering certain documents with the Registrar of Companies. It is also required to obtain a business registration certificate from the Inland Revenue Department.
A non-Hong Kong company registered under Part 16 of the Companies Ordinance must report to the Registrar of Companies any subsequent changes to its name, directors, secretaries, authorised representatives, memorandum and articles of association, the address of its principal place of business and registered office, in each case within one month of the change by submitting the prescribed forms. The creation of a charge on property situated in Hong Kong and any existing charge on acquired property situated in Hong Kong must be registered with the Registrar of Companies. Every year, a non-Hong Kong company must submit to the Registrar of Companies an annual return and a copy of its annual accounts (if applicable). Such obligations will cease if the company ceases to have a place of business in Hong Kong.
Types of Companies
Under the Companies Ordinance, a private company is a company that, according to its articles of association:
- restricts the right to transfer its shares;
- limits the number of its members to 50; and
- prohibits the company inviting members of the public to subscribe for its shares or debentures.
A private company does not need to file financial statements with its annual return.
Public companies (non-listed)
Any company which does not include in its articles of association the three restrictions required for the establishment of a private company under the Companies Ordinance is a public company. A public company is subject to more disclosure requirements than a private company, e.g. a public company must submit to the Registrar of Companies its reporting documents (financial statement, directors’ report and auditor’s report) which are open to inspection by the public. At the same time, a public company is subject to more stringent restrictions under the Companies Ordinance than a private company.
Listed companies in Hong Kong are companies listed on one of the two boards operated by the Stock Exchange of Hong Kong Limited (the “Exchange”), namely, the Main Board and the Growth Enterprise Market (“GEM”). The Main Board caters for companies with a profitable operating track record or that are able to meet alternative financial standards. It is designed to give these companies an opportunity to raise further funds from the market in order to finance future growth. GEM, on the other hand, caters for small and medium sized companies and has lower admission criteria. The majority of companies listed in Hong Kong are listed on the Main Board.
While a listing offers advantages and opportunities such as providing easier and greater access to new or additional capital, a listed company is subject to more stringent ongoing compliance obligations. In addition to the Companies Ordinance, listed companies are governed by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (or the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited), as well as the Securities and Futures Ordinance (Cap. 571) and the C(WUMP)O.
The Companies Ordinance provides that limited companies can be either limited by shares or limited by guarantee.
Companies limited by shares
The articles of association of a company limited by shares will specify the maximum number of shares that it may issue. Liability of members of a company limited by shares is limited by the articles to any amount unpaid on the shares held by the members. Shares are usually fully paid when they are issued, in which case, even if the company is wound up and is unable to pay its debts, the members would not be liable to pay those debts.
Where shares have only been partly paid for on issue, however, a member is liable to pay the agreed balance according to the terms of issue or, if there are no terms, when called upon to do so. In the event of a company being wound up, members are liable to contribute to the assets of the company to an amount sufficient for payments of its debts and liabilities, and the costs, charges, and expenses of the winding up, and for the adjustment of the rights of the members among themselves, but their maximum contribution will be the amount unpaid on their shares.
Companies limited by guarantee
The liability of the members of a company limited by guarantee is limited by its articles to the amount that they undertake to contribute to its assets in the event of the company being wound up. The articles must specify the amount each member will contribute to the company’s assets for the payment of (a) the company’s debts and liabilities, (b) the costs, charges and expenses of winding up, and (c) the adjustment, among the members, of their rights. A company limited by guarantee must not have a share capital. It is commonly used when there is no intention to distribute the company’s profits to its members and the members therefore do not need to hold shares. Companies limited by guarantee are typically used by charities and quasi-charitable organisations such as schools and hospitals, but is only a suitable corporate form if the company does not need an initial share capital.
Any provision in the articles of a company limited by guarantee, or in any resolution of the company, which purports to give any person a right to participate in its divisible profits, otherwise than as a member, will be void.
Companies without limited liability
A company is an unlimited company if there is no limit on the liability of its members. Unlimited companies must be formed with a share capital. If an unlimited liability company goes into liquidation, the members will be liable to pay whatever price they agreed for their shares; where this amount is inadequate to satisfy the debts and liabilities of the company together with the costs of winding-up, the members must contribute rateably according to their shareholdings.
A private company may pass and deliver to the Registrar of Companies a special resolution declaring that the company will become dormant. Dormancy enables a private company to remain a registered company while at the same time being exempt from the requirements to hold annual general meetings, deliver annual returns, prepare financial statements and directors’ reports, and appoint an auditor. Thus, the cost of maintaining a dormant company can be significantly lower than the cost of maintaining an active company.
A company ceases to be dormant if it delivers a special resolution declaring that the company intends to enter into an accounting transaction to the Registrar for registration, or if there is an accounting transaction in relation to the company. An accounting transaction is a transaction required by the Companies Ordinance to be entered in the company’s accounting records, except the payment of certain fees.
The current Companies Ordinance which came in to force in 2014 adopts a mandatory system of no-par for all Hong Kong companies with a share capital and abolished the concept of par (or nominal) value of shares. The Companies Ordinance does not specify a minimum or maximum amount of authorised or issued share capital for either a public or a private company. The articles of a company with a share capital may state the maximum number of shares that the company may issue. A company may issue shares with preferred, deferred, redemption or other special rights; or with any restrictions (whether in regard to dividends, voting, return of capital or otherwise) that the company may from time to time by ordinary resolution determine. If a company issues only one type of shares, the shares are presumed to be ordinary shares.
Under the Companies Ordinance, Hong Kong companies must have at least one member and that one member may be a nominee of the beneficial owner. The member need not be resident in Hong Kong and can be an individual or a corporation.
In Hong Kong, companies are typically incorporated with a share capital of HK$10,000 divided into 10,000 shares of HK$1 each.
Rights of Shareholders
Although a company’s board of directors has the power to manage a company and make day-to-day decisions, the Companies Ordinance reserves certain matters for the decision of a company’s shareholders. Decisions reserved for shareholders include:
- at the annual general meeting (or a general meeting, where the company is not required to hold an annual general meeting or has dispensed with holding its annual general meeting under the Companies Ordinance), appointing auditors for the forthcoming year;
- alterations to the company’s articles of association;
- changing the name of the company;
- giving financial assistance for the purchase of the shares of the company (shareholders’ approval is not required where the assistance does not exceed 5% of the paid-up share capital and reserves of the company);
- buying back the company’s own shares;
- granting the directors power to allot shares;
- reducing the capital of the company;
- removing the company’s directors from office; and
- petitioning the court to wind up the company.
Minority shareholder protections
The Companies Ordinance provides for certain rights and protections for minority shareholders. Some of these protections include:
- certain decisions of a company requiring a special resolution also require the approval of the court (i.e. reduction in a company’s share capital requires confirmation by the court, unless the special resolution is supported by a solvency statement);
- the court may make an order if, on a petition by a member of a company, it considers that (i) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members, or (ii) an actual or proposed act or omission of the company is or would be so prejudicial;
- directors must call a general meeting if the company has received requests from members representing at least 5% of the total voting rights of all the members having a right to vote at general meetings;
- a company is required to circulate a statement to members in relation to business to be dealt with at a general meeting, where the company has received requests to do so from (i) members representing at least 2.5% of the total voting rights of all the members who have a relevant right to vote, or (ii) at least 50 members who have a relevant right to vote;
- the Financial Secretary may appoint a person to investigate a company’s affairs on application by at least 100 members or members holding at least 10% of the shares issued (where the company has a share capital), or on application by at least 10% of the persons on the company’s register of members (where the company does not have a share capital);
- any member may bring an action in respect of misconduct (fraud, negligence, breach of duty or default in compliance with any Ordinance or rule of law) committed against a company; or
- any member may petition for the company to be wound up by the court.
Public companies must have at least two directors, and private companies must have at least one director. In the case of a private company that is not a member of a group of companies that includes a listed company, a body corporate can be appointed as a director, but it must have at least one director who is a natural person. Under the Companies Ordinance, a director can be of any nationality, must have attained the age of 18 and must not have been disqualified from acting as a director. When a company appoints a director, the company must send a specific form to the Registrar of Companies of such appointment. This must set out the director’s name and usual residential address and the number of his identity card or passport, and must include a statement that the director accepts the appointment and has attained 18 years of age which must signed by the director.
- Duties of directors of a company
Directors of companies owe a number of duties, which are based on the principle of showing the utmost good faith toward the company. Generally, directors’ duties are owed only to the company itself; directors have been held to owe fiduciary duties to individual shareholders only in limited circumstances. Fiduciary duties of directors, which are generally based on equitable principles, mainly include:
- a duty to act in good faith in the interests of the company;
- a duty to exercise powers for a proper purpose for the benefit of members as a whole; and
- a duty to avoid actual or potential conflicts of duty and interest.
Directors also owe a duty of reasonable care, skill and diligence to the company, which is codified in the Companies Ordinance. The Companies Ordinance requires a director to exercise reasonable care, skill and diligence, meaning the care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (an objective test); and
- the general knowledge, skill and experience that the director has (a subjective test).
In addition to the general duties listed above, “A Guide on Directors’ Duties” issued by the Companies Registry also includes the following general directors’ duties:
- a duty not to delegate powers except with proper authorisation and a duty to exercise independent judgement;
- a duty not to enter into transactions in which directors have an interest except in compliance with the requirements of the law;
- a duty not to gain advantage from the use of the position as a director;
- a duty not to make unauthorised use of a company’s property or information;
- a duty not to accept personal benefit from third parties conferred because of a position as a director;
- a duty to observe the company’s constitution and resolutions; and
- a duty to keep accounting records.
Directors of companies listed on the Exchange must also comply with their duties and obligations under the Exchange’s Listing Rules and the Corporate Governance Code in Appendices 14 and 15 of the Main Board and GEM Listing Rules, respectively. Directors who breach their duties and obligations as a director may be liable to civil or criminal proceedings and may be disqualified from acting as a director.
Dissolution of a company
A company may be dissolved by the following methods:
- a court order to facilitate an amalgamation or reconstruction of companies;
- striking off the name of a company from the register of companies by the Registrar of Companies;
- deregistration of defunct private companies; or
- a winding up.
- Deregistration of defunct private companies under the Companies Ordinance
A private company may make application to the Registrar of Companies for deregistration in accordance with Section 750 of the Companies Ordinance if:
- all the members of the company agree to the deregistration;
- the company has not commenced operation or business, or has not been in operation or carried on business during the 3 months immediately before the application;
- the company has no outstanding liabilities;
- the company is not a party to any legal proceedings;
- the company’s assets do not consist of any immovable property situate in Hong Kong;
- if the company is a holding company, none of its subsidiary’s assets consist of any immovable property situate in Hong Kong; and
- the company has obtained a written notice from the Commissioner of Inland Revenue stating that the Commissioner has no objection to the company being deregistered.
- Winding up
A company may be wound up:
- by the court, i.e. a compulsory winding up; or
- voluntarily, either as:
- a members’ voluntary winding up, or
- a creditors’ voluntary winding up.
- Compulsory winding up
A company may be wound up by the court in the following circumstances:
- if a special resolution has been passed by the company that it should be wound up by the court;
- if the company does not commence its business within one year from its incorporation, or suspends its business for a whole year;
- if the company has no members;
- if the company is unable to pay its debts. A company is deemed to be unable to pay its debts if:
- a creditor whose debt exceeds HK$10,000 serves a notice on the company requiring payment and is not paid within three weeks;
- an execution in favour of a creditor of the company is returned unsatisfied in whole or in part; or
- the court is satisfied that the company cannot pay its debts, taking into account its contingent and prospective liabilities;
- if the articles of association of the company provide that on the occurrence of certain events the company is to be dissolved, and such events have occurred;
- if the company is being carried on for an unlawful purpose or any purpose lawful in itself but which cannot be carried out by a company;
- if the court is of the opinion that it is just and equitable that the company should be wound up;
- if throughout a period of not less than six months ending on the date of the winding-up petition, the company has not had:
- in the case of a private company, at least one director, or
- in case of a public company, at least two directors; and
- a secretary;
- if the company has failed to pay the annual registration; or
- if the company has been persistently in breach of its statutory obligations.
- Voluntary winding up
Section 228(1) of the C(WUMP)O provides that a company may by wound up voluntarily:
- when the period, if any, fixed by the articles for the duration of the company expires, or an event which determines its existence occurs, and the company resolves (by ordinary resolution) to be wound up voluntarily;
- if a special resolution has been passed by the company that it should be wound up voluntarily;
- if the directors of the company or, in the case of a company having more than two directors, the majority of the directors, make and deliver to the Registrar of Companies a winding-up statement under Section 228A of the C(WUMP)O.
A company may be dissolved by a members’ voluntary winding-up provided that the company is solvent and is able to pay its debts within 12 months of the commencement of winding-up. During the process of winding-up, the company is required to comply with all statutory obligations before the winding-up is completed, including but not limited to, settling the business registration fee, filing annual returns with the Companies Registry. If a company has been put into a members’ voluntary winding-up and the liquidators are subsequently of the opinion that the company will not be able to pay its debts in full within the period stated in the certificate of solvency, they must summon a meeting of the creditors and lay before the meeting a statement of the assets, debts and liabilities of the company, i.e. the winding-up is converted into a creditors’ voluntary winding up.
- Liability of the members of the company
In the event of a company being wound up, every past and present member is liable to contribute to the assets of the company an amount sufficient to pay:
- the debts and liabilities of the company;
- the costs, charges, and expenses of winding-up; and
- for the adjustment of rights between the members.
This is subject to qualifications in relation to companies incorporated with limited liability:
- in a company limited by shares, no contribution is required from any past or present member which exceeds the amount, if any, that is unpaid on his shares; and
- in a company limited by guarantee, no contribution is required which exceeds the amount which was undertaken to be contributed in the event of the company being wound up.