PLC Panel on Financial Affairs
Prosecution of directors for failing to file annual returns
The purpose of this paper is to inform members of the proposed expansion of the Companies Registry's prosecution policy to prosecute directors who fail to file annual returns in accordance with the statutory provisions of the Companies Ordinance with effect from 1 April 1998.
2. The filing of annual returns is a fundamental obligation for all local Hong Kong companies incorporated and registered under the Companies Ordinance. In return for the significant privilege of limited liability, all such companies are required to disclose certain basic information about themselves such as their registered address, directors and share capital structure. Any enterprise is totally free to decide whether or not to form a limited liability company in order to undertake its business but, once having formed such an entity, the company is subject to the statutory disclosure regime enshrined in the Companies Ordinance.
3. Under section 107 of the Companies Ordinance, all companies are obliged to prepare and file with the Companies Registry (CR) annual returns containing the information required in section 107(2). If no changes in information have taken place between the time when the last annual return was filed and the time that the current annual return is due, under the provisions of section 107(5), a company may file a very simple certificate of no change to the information previously filed.
4. The statutory time limits for filing this information are as follows -
- · in the case of public companies, within 42 days of the date of the last Annual General Meeting;
- · in the case of private companies, within 42 days of the date of the last anniversary of the incorporation of the company.
Section 109(4) provides that, if a company fails to comply with section 107, the company and every officer who is in default shall be liable to a fine and, for continued default, to a daily default fine. The current level of fines is set at a maximum of $50,000 for each breach together with a daily default fine of $700.
Importance of compliance
5. At present, the compliance rate in Hong Kong for companies filing annual returns is relatively poor. Last year's compliance rate, if calculated as a simple ratio between the number of companies which have filed annual returns and the total number of companies works out at about 70%. This compares, for example, with a compliance rate of 91% for filing annual returns in the United Kingdom in 1996/97. It is important that the compliance rate in Hong Kong is improved as enforcement of the Companies Ordinance's disclosure requirements ensures the transparency of company affairs which is a very important element in the territory's continued status as a leading international and financial business centre. In addition, enforcement to ensure improved compliance will encourage directors to observe their statutory duties and promote corporate governance.
Striking-off of companies for failing to file annual returns
6. In November 1997, the CR completed a major exercise, under the provisions of section 290A of the Companies Ordinance, to strike-off from the register of companies those companies which have consistently failed to file their annual returns for two consecutive years or more. Since the implementation of this policy in March 1994, the CR has examined the records of 431,507 local companies registered in Hong Kong prior to 1 July 1993 and struck off a total of 76,763 companies which had failed to comply with this fundamental provision. Many of these companies had been commercially inactive for a very long time. In addition, a total of 6,803 companies, threatened with being struck-off, filed all outstanding annual returns together with the relevant fees and penalties in order to remain on the register. The clearing of the data base has made it possible to draw a line under what has happened in the past and focus on the companies currently on the register.
Prosecution of directors for failing to file annual returns
7. In view of the above considerations, the CR is determined to ensure that companies and their directors comply with their statutory duties to file annual returns. Furthermore, the computerization of the CR's data base has enabled the department to considerably enhance its enforcement role. Consequently, with effect from 1 April 1998, the directors of companies which fail to file their annual returns within the statutory time limits are liable to face prosecution under section 109(4). It is, however, hoped that the rate of compliance will be such that prosecutions will be kept to the bare minimum.
8. In connection with the implementation of the new prosecution policy, the CR has arranged an extensive publicity programme as follows -
- Companies Registry External Circulars Nos 6/97 and 1/98 were issued to all the relevant professional bodies and major customers of the CR on 1 December 1997 and 5 January 1998 respectively;
- newspaper advertisements were placed in the Ming Pao, Apple Daily News, Wen Wei Po, Oriental Daily News, Hong Kong Economic Journal (Chinese version), South China Morning Post and Hong Kong Standard (English version) on 19 December 1997;
- notices and fliers have been posted in the CR's premises and issued to customers filing documents with the Registry since early December 1997, and this will continue throughout 1998;
- a new announcement has been included in the "What's New" section of the CR's home page on the Internet since 15 December 1997;
- the Registrar of Companies has prepared articles which will appear in the February editions of 'Company Secretary', 'The Hong Kong Accountant' and the 'Hong Kong Lawyer'; and
- on 24 March 1998, it is proposed to issue new newspaper advertisements, posters and an announcement in the "What's New" section of the CR's home page on the Internet reminding members of the public of the new policy which will take effect on 1 April 1998.
5 February 1998