Hong Kong plans new Companies Bill

In order to modernise Hong Kong’s company law, a new Companies Bill is planned for consultation in mid-2009.

In order to modernise Hong Kong’s company law and to keep in line with the evolving requirements of local investors, in Mid-2006 the Hong Kong government decided to rewrite the Companies Ordinance.

In March 2007, the Financial Services and the Treasury Bureau published a consultation paper in order to obtain feedback from the public on proposed changes to the accounting and auditing provisions of the Companies Ordinance. This was the first of a series of consultation papers which will follow in the near future on topics such as share capital, distribution of profits and assets, and company charges.

It is planned that the new Companies Bill (i.e. the draft re-written Companies Ordinance) will be issued for consultation in mid-2009.

The existing proposals

In the current consultation paper, the main topics discussed with the public were:

• provision of accounting reference dates and periods, and changes to the rules on the financial years;
• abolishing the rule that holding companies are required to prepare their own financial accounts, provided the holding company’s balance sheet is shown in its group accounts;
• changes to the director’s report which shall then also include a business overview on the risks and uncertainties that the company may face and estimated future developments, while the reporting requirements of directors in smaller private companies shall be simplified;
• in order to ensure that the auditors of a company have received all relevant information, the director’s report shall also include a statement on the director’s awareness of accounting information that the auditors may not be aware of;
• modernising and streamlining the provisions on directors’ remuneration;
• streamlining provisions on summary financial reports in order to save operating costs;
• strengthening auditors’ rights, such as rights of access to information;
• relaxing rules so that more private companies are eligible to make use of simplified accounts and simplified directors’ reports; and
• reviewing accounting disclosure requirements.

The consultation period ended in June 2007, however, the results of the input from the public are not expected until later this year. In the meantime, more consultation papers on the re-writing of the Companies Ordinance are expected shortly.

Pressure for change

The re-writing of the Companies Ordinance is overdue. In the past years, the Companies Ordinance has seen numerous amendments that resulted in a patchwork legislation. The re-writing of the Companies Ordinance will hopefully create a more stringent and structured legislation that facilitates and streamlines the setting-up and operation of companies in Hong Kong.

Investors hope that a number of other issues will also be addressed in the upcoming consultation papers. For example, under the current Companies Ordinance and practice of the Companies Registry it is extremely easy to establish so-called shadow companies, i.e. companies with a name identical to a registered or famous trademark.

Such shadow companies are regularly used by trademark infringers to create an appearance of authorisation and legality when in fact distributing fakes. Obtaining court orders against such companies to change their names is cumbersome and a time consuming effort.

Trademark owners are therefore hopeful that the re-written Companies Ordinance will make it more difficult to register company names that are identical or similar to existing trademarks or prior company names and that trademark owners will be provided with more time efficient legal tools to take action against shadow companies.

The next two to three years will see a number of proposals for a new Companies Ordinance and given the already relatively investor-friendly practice, one can expect that the changes will, over all, further streamline the setting-up and operation of companies in Hong Kong.

Willi Vett is a German attorney-at-law at Beiten Burkhardt