As you may already be aware, the Hong Kong Administration is now moving into the final stages of preparation for the introduction of a new Companies Ordinance (CO). This is an entirely new Ordinance, to be identified as Chapter (Cap.) 622 of the Laws of Hong Kong, and will supersede the majority of the existing Companies Ordinance, Cap. 32.
A key milestone was reached recently, with the announcement that the commencement date of the new CO is set as 3 March 2014. This notice is subject to negative vetting by the Legislative Council but is expected to be cleared without change before the end of this month.
What will happen on 3 March 2014?
Assuming the commencement notice passes without change, on 3 March 2014 the whole of the new CO will come into operation with only two main areas of exception. These exceptions relate to the deferral of the provisions in the new CO for:
· the controversial question of the protection of directors’ usual residential addresses and identity card numbers; and
· the paperless holding and transfer of shares and debentures.
This means that the CO currently in force (i.e. Cap. 32) will automatically become the “predecessor Ordinance” as from 3 March 2014 in accordance with section 2 of the new CO and the provisions of the new law will apply in most cases instead1.
In this respect, it is important to note that the new CO specifically contains provisions aimed at ensuring as smooth a transition as is reasonably possible. These include the following:
· The new CO contains a specific schedule, Schedule 11, which sets out detailed transitional and saving provisions which deal explicitly with how arrangements set up under the existing CO (Cap. 32) will transition through under the new CO. For example, section 44 of Schedule 11 confirms that any redeemable shares issued before the commencement of the new CO may be redeemed after 3 March 2014 in accordance with the requirements of the new CO (which
are less onerous than those under the existing Cap. 32).
· In addition, Schedule 11 contains deeming provisions to assist with the smooth transition of new requirements which apply automatically to all Hong Kong incorporated companies as from 3 March 2014. For example, section 40 of Schedule 11 covers how any references in contracts to par value or nominal value should be interpreted after the commencement date of the new CO when such concepts will be abolished.
· In accordance with section 358 of the new CO, the requirements of
Part 9, which relates to the preparation of audited annual reports by companies, are only effective for the first annual reporting period beginning on or after 3 March 2014.
This means that the first annual reports to be affected by Part 9 of the new CO will be those from companies with a 31 March year end, with Part 9 first impacting on these companies’ financial statements for the year ending 31 March 2015. For those with a calendar year end, the impact will be on annual reports for the year ending 31 December 2015.
In addition, the Administration is taking steps to assist companies in the transition. For example, the Companies Registry will allow a transitional period of three months from 3 March 2014 during which time it will continue to accept most existing forms – this is confirmed in Companies Registry External Circular No. 2/2013 (issued 1 November 2013), which sets out a complete list of the 92 new or updated forms which will apply under the new CO. The Circular identifies just 5 specific forms which will cease to be acceptable immediately from 3 March 2014, and one form which will cease to be acceptable after eight weeks.
What changes will the new CO introduce?
The Administration’s overall objectives for the re-write of the CO are to modernise Hong Kong’s company law and to further enhance Hong Kong’s status as a major international business and financial centre.
In addition to initiatives directed specifically at modernising the law, the Administration focused on specific initiatives intended to:
· enhance corporate governance;
· ensure better regulation; and/or
· facilitate business.
These initiatives cover a range of specific matters relating to directors’ conduct, company administration and interaction with shareholders. For example, from a financial reporting perspective these initiatives include the following:
· Relaxing the eligibility criteria for simplified financial reporting (referred to as the “reporting exemption” in the new CO), such that more non-public entities will be eligible for relief from the requirement to follow Hong Kong Financial Reporting Standards (HKFRSs) as issued by the Hong Kong Institute of Certified Public Accountants (HKICPA)
· Introducing a requirement for companies not eligible for the reporting exemption to include an analytical and forward-looking business review in their annual directors’ report
· Introducing a no-par value share capital regime which is mandatory for all companies in order to retire the out-dated concepts of par (or “nominal”) value and share premium
· Providing greater flexibility over the management of share capital, by simplifying the process by which statutory capital may be reduced by a solvent company, and introducing a new court-free procedure whereby two or more solvent companies within the same group may be amalgamated
· Updating terminology in the new CO to align more closely with terminology used in HKFRSs and otherwise more generally giving statutory backing to HKFRSs and reducing the level of additional disclosure on financial matters set out in the new CO
· Expanding the scope of disclosure of directors’ benefits to capture a greater range of non-monetary or indirect benefits, particularly for public companies and those non-public companies not eligible for the reporting exemption
What information is available to help us prepare?
As mentioned, the new law introduces a wide range of specific changes relating to directors’ conduct, company administration and interaction with shareholders. It is important that you involve experts in these areas to help you through this transition, whether these experts are in-house or your external advisers.
As part of our contribution to that process, KPMG has developed a series of briefing notes, each of which focuses on a specific topic relating to financial reporting and highlights areas of change and potential implementation issues that companies need to be aware of. The topics we have focused on to date relate to:
· full financial statements;
· directors’ reports;
· the changes that affect share capital; and
· the simplified financial reporting regime.
These briefing notes are intended to be a practical reference source for the transition period and beyond, as well as providing an easy way to find the relevant sections and regulations in the new CO. Copies can be obtained from your usual KPMG contact or by following the link in the information column to the right.
If you need any further information you are welcome to contact us. However, we also recommend that you take a look at the specific topic page on the Companies Registry’s website. Here you can find a wide range of useful information introducing the new CO published by the Administration, such as:
· an overview of all the major initiatives introduced in the new CO;
· briefing materials on each of the 21 parts of the new CO and the pieces of subsidiary legislation;
· a table of origin (which sets out section by section where the sections in the new CO have come from);
· a table of destination (which sets out whether the sections in the existing CO (Cap. 32) have been carried forward into the new CO and if so, to where); and
· answers to frequently asked questions.
This thematic section is being updated on a regular basis for new material from the Registry. For example, slide decks of the presentations that the Companies Registrar and her team have been presenting to members of the various professional bodies in Hong Kong are uploaded after each event and, as from 1 February 2014, the site will provide downloadable copies of all of the new forms.
However, it should also be remembered that the new CO is a comprehensive re-write of the language of the law. This means that the devil is very much in the detail when it comes to identifying exactly what impact the new requirements will have on individual companies.
This may be the case even where at first sight it appears that the provisions of existing law are to all intents and purposes carried forward. Therefore, whenever working with the new CO, care needs to be taken in order to avoid misunderstandings or omissions. In particular, if needing to apply the law in practice, we would recommend you to:
· refer directly to source, rather than relying solely on summaries;
· read around the section, schedule or regulation in question and follow any cross-references through, in order to fully understand their implications;
· take care to identify the latest version of the legislation – this applies in particular when referring to subsidiary legislation, which can be relatively easily amended by the Administration; and
· whenever in doubt, seek legal advice.
If you would like further assistance on any of the matters discussed, please feel free to talk with your usual KPMG contact. However, please also note that many of the matters discussed in this update are primarily legal matters and if in doubt, expert legal advice should be sought.
1 The new CO (Cap. 622) supersedes the majority of the existing CO (Cap.32). The exceptions are the provisions in the existing Cap. 32 which relate to corporate insolvency, prospectuses and disqualification of directors, receivers and managers. These parts of Cap. 32 which are not covered by Cap. 622 will continue to remain in force for the time being under the new title of the “Companies (Winding up and Miscellaneous Provisions) Ordinance”. The details of this change can be found in Schedule 9 to Cap. 622.
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