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What New Business Owners Need To Know About Companies Ordinance

If you are planning to incorporate your business in Hong Kong, you should be aware of the Companies Ordinance and what it covers.

The Companies Ordinance is a law made by the Hong Kong government and provides a legal framework for the incorporation and operation of companies in Hong Kong.

Why Is There a Need for the Companies Ordinance?

The Companies Ordinances aims to enhance corporate governance, make sure companies are better regulated, facilitate business environment and modernise the law to make it relatable to today’s context.

It helps Hong Kong to keep pace with the international standing of the latest legal framework development in company law. It also keeps Hong Kong as a hotspot for potential entrepreneurs, thus the need for the region to maintain and enhance its status as a major international business and financial hub in the eyes of business owners.

Who Needs To Follow This Ordinance?

Companies that are incorporated in Hong Kong and foreign companies registered in Hong Kong are required to adhere to the Companies Ordinance. This includes newly incorporated companies as well.

Company incorporation can be a tedious process if you are unsure of what are the steps needed. Our company secretaries in Hong Kong can help you with any incorporation and compliance matters while our accountants are available to provide the help you need.

What Is the Difference Between the Old and New Companies Ordinance?

The new Ordinance came into effect on 3 March 2014. In a nutshell, it gives more flexibility for companies when providing statements.

The new Companies Ordinance allows more types of non-public companies to opt-out of the full reporting regime and prepares simplified financial statements instead.

Major changes include:

  1. Deregistration process
  2. Financial statement reporting
  3. Company restoration process
  4. Capital reduction procedure
  5. General meetings of company members
  6. New rules for proposing, passing and recording of written resolutions
  7. Companies cannot have a body corporate as a sole director

We’ve provided only a few changes that have taken place. For a full list, you can refer here.

What You Need To Know Under the Companies Ordinance

Apart from the usual process of company incorporation in Hong Kong which you can read up on our simple guide here, we have picked out a few important things to note under the Companies Ordinance.

Registered office address

The Companies Ordinance states that a company must have a registered office address in Hong Kong where all its communication is addressed to. This address will be decided by you when you first start the incorporation process.

Corporate director

In the new Ordinance, companies must have at least one natural person as a director. In other words, you cannot appoint a body corporate as a sole director, which was possible in the old Ordinance. Furthermore, the corporate director cannot be a sole director of the company.

Share capital

A company’s share capital is the total amount of share price multiplied by the number of shares it has issued. Since the new Ordinance, each share does not have par value, which gives companies more flexibility in determining the share price each time they are issued. The company is also allowed to change the currency of the shares with discretion.

Meeting of members

In the previous Ordinance, any meeting of members which was not an Annual General Meeting (AGM) was called an Extraordinary General Meeting. An AGM needs a notice period of 21 days, and should not be held at two or more places. This also means that meetings can only be held at one single place at a time

In the new Ordinance, any meeting of members which was not an Annual General Meeting is now referred to as a General Meeting. You can hold a General Meeting at two or more places, which allows company members to use electronic communication means such as video calls to hold meetings. The notice period for a meeting is still 21 days.

The Companies Ordinance gives you the option to not hold an Annual General Meeting under some conditions, for instance, the company is not a sole member company.

Shadow director

A shadow director is someone who acts under the directions or instructions of the directors, or a majority of the directors, of the body corporate.

The Ordinance states that any penalties that are applied to an actual director also applies to the shadow director under some circumstances.

The financial year of a company

Your company’s financial year starts on the date of incorporation and ends on the date specified by the directors. If you do not pick a financial year-end date, it will be automatically set as the last day of the month of your company’s first anniversary of incorporation.

A key change with the new Companies Ordinance is that it allows more private and guarantee companies to opt out of full financial statements and directors’ reports by fulfilling size criteria and or have unanimous members' consent.

Read More: How to Choose a Financial Year End for My New Company

Directors’ reports

Public companies and companies that are not qualified for simplified financial reports should prepare a business review in the directors’ report unless your company is exempt. The directors’ reports is basically a report of the Company’s information that investors may wish to know about but is not included in the financial statements, e.g. principal activities of the company, directors’ service contract, directors’ right to acquire shares in the company.

What are Reporting Exemptions?

The new reporting exemption relaxes the criteria for private or eligible guarantee companies to prepare simplified financial and directors’ reports.

These exemptions can be found in the financial statements, directors’ reports, auditor’s reports.

If your company is eligible for reporting exemptions:

  • You do not need to include any assets or liabilities at fair value or deferred tax.
  • You do not need to include a statement of cash flows
  • You do not need to reveal an auditor’s remuneration in your financial statement.
  • You do not need the auditor to give a ‘true and fair view’ in the financial statement.
  • You can choose to exclude subsidiary undertakings.
  • You do not have to disclose the material interests of directors in the financial statement.
  • You do not have to include a business review, donations made for charitable purposes, reasons for a director resigning or not seeking re-election, material interests of directors in transactions, arrangements, or contracts of significance entered into by a special undertaking of the company is not required to be disclosed.

What Is the Auditor’s Role With the New Companies Ordinance?

The auditor’s role is to audit your company’s financial statements, which is required for all companies, including those within the reporting exemption. It is an important role for the company. Therefore, an auditor must be appointed for each financial year of a company. Should the auditor resign, the company’s members, beneficiaries, and the Company Registry must be informed.

If an auditor decides to resign from your company’s office, they should deposit notice of resignation with a cessation statement/ statement of circumstances to your company’s registered address. This statement should include any circumstances that arise due to the auditor’s resignation. The company that receives such notice of resignation must file a designated form to the Companies Registry within 15 days from the date receiving such notice.

In the new Companies Ordinance, submission of the statement of circumstances will be extended to removal of auditors from office and retirement of auditors, in addition to self resignation.

Conclusion

In all cases of company incorporation, take your time to understand the law in the country that you wish to start your company. The more you understand about the country’s rules, the fewer problems you will have while starting your new company! We help entrepreneurs like you to register your company in Hong Kong and with accounting and bookkeeping tasks for small businesses like yours, no matter if you are based in Hong Kong or overseas.

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