Maintaining a Private Limited Company

Introduction

Companies in Hong Kong are subject to different regulatory regimes, depending on their status. The law imposes certain legal requirements to maintain transparency to shareholders and facilitate governance by government bodies, such as the Companies Registry (CR) and the Securities and Futures Commission (SFC). This article will focus on compliance matters for private limited companies under the Companies Ordinance (Cap. 622) (CO).

  1. Who is responsible for ensuring compliance with legal requirements? 

The law identifies ‘responsible person’ as being an officer of the company, including

  • a director
  • a manager
  • a company secretary
  • a shadow director (i.e. a person in accordance with whose directions or instructions the directors, or majority of directors, are accustomed to act) of the company and the responsibility to ensure compliance extends to
  • anyone who authorizes or permits, or participates in, the contravention of the CO or failure to comply with the CO.
  • The potential scope of ‘responsible persons’ can be large. Stay alert to proactively and regularly monitor if your start-up has complied with all the necessary steps (see below for a non-exhaustive list) to avoid falling foul of the law.

2. What are the legal requirements and consequences for non-compliance?

This is not an exhaustive list of legal requirements under the CO for private limited company. It highlights the 4 essential aspects that a start-up venture turning into a private limited company (or considering so) must be aware of:

2.1 Annual maintenance

2.1.1 Annual Return

A private limited company must file an annual return with the Companies Registry within 42 days after the anniversary of incorporation with a filing fee of HK$105.

The annual return must be prepared in a prescribed form (click here)

You can refer to a specimen form (click here)

Late delivery will attract the following penalty (HKD)

more than 42 days after but within 3 months870
more than 3 months after but within 6 months1,740
more than 6 months after but within 9 months2,610
more than 9 months3,480

You can use the Annual Return Filing Calculator provided by the Companies Registry to check the due date for filing (click here).

You can also use the Annual Return e-Reminder Service provided by the Companies Registry free-of-charge for notifications when the due date for filing approaches (click here).

Consequences of non-compliance

The company and every responsible person of the company are liable to a fine of HK$50,000, or a daily default fine of HK$1,000 for a continuing offence.

2.1.2 Renewal of business registration fee

The business registration will have to be renewed depending whether you have registered for a 1-year or 3-year certificate. Fees for renewal differ from each type. You may refer to here for the business registration fee and levy table.

2.2 Filing requirements

A company must file a form to notify the Companies Registry within a specified notice period when the following takes place:

  • any change in the directors or secretary (click here for a specimen form).
  • any change in particulars of existing directors or secretary (click here for a specimen form)
  • any change in company name (click here for a specimen form)
  • any alteration in the company’s articles (click here for the form)
  • any change in registered office (click here for a specimen form)
  • any change in share capital (click here for the form)
  • any allotment of shares (click here for the form)

You may consider appointing a professional company secretarial firm to ensure these filing requirements are met.

2.3 Reporting requirements:

A private limited company has certain reporting obligations to its shareholders, including keeping accounting records and preparing a set of reporting documents (i.e. financial statements, directors’ reports and auditors’ reports) unless it qualifies the reporting exemptions. Having prepared the reporting documents, the company must hold an annual general meeting and lay them before the members.

2.3.1 Keeping of accounting records

A company must keep accounting records at its registered office containing

  • daily entries of all transactions of the company 
  • a record of the company’s assets and liabilities

Consequences of non-compliance:

  • A director who fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000
  • A director who willfully fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000 and to imprisonment for 12 months

2.3.2 Preparing financial statements

For each financial year, your company’s director must prepare

  • financial statements that give a true and fair view of the financial position and performance of the company

Consequences of non-compliance:

  • A director who fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000
  • A director who willfully fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000 and to imprisonment for 12 months

2.3.3 Preparing directors’ reports:

For each financial year, your company’s director must prepare a directors’ reports that contain a business review consisting of

  • Fair review of the company’s business
  • Principal risks and uncertainties facing the company
  • Likely future development
  • Analysis of company’s performance with financial key performance indicators

Consequences of non-compliance:

  • A director who fails to take all reasonable steps to secure compliance commits and offence and is liable to a fine of HK$150,000
  • A director who willfully fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$150,000 and to imprisonment for 6 months

Exemptions – your company’s directors need not prepare such a business review if

  1. your company are qualified for simplified reporting (see below)
  2. your company are not qualified for such simplified reporting exemptions but a special resolution is passed by the members to dispense with the requirement.

2.3.4 Auditors’ report

A company’s auditor must prepare a report for the members on any financial statements prepared by the directors (as explained above) stating the financial statements have been properly prepared. The auditor’s report must also cross check and comment on the directors’ reports.

2.3.5 Holding of annual general meetings

A company must hold an annual general meeting with the shareholders in each financial year.

What is a financial year?

A financial year is calculated with reference to accounting reference period (ARP). The first ARP begins on the date of incorporation of your company (i.e. the date on the certificate of incorporation) and ends on its primary accounting reference date (a date falling within 18 months after the date of incorporation as specified by the directors). Every subsequent ARP is by default a 12-month cycle. Therefore, a company’s financial year begins on the first day of its ARP and ends on the last day.

The legal requirements for holding an annual general meeting are:

  • within 9 months after the end of its ARP
  • where the first ARP is more than 12 months, within 9 months after the anniversary of the company’s incorporation or 3 months after the end of the first ARP (whichever is the later).

Your company may be exempted from such requirements if

  • a written resolution is passed to substitute a physical annual general meeting and a copy of the reporting documents to be laid at the meeting has been provided to each member;
  • your company has only one member;
  • all the members of your company have agreed to dispense with the holding of an annual general meeting

2.3.6 Laying and sending reporting documents

A company’s directors must send copies of the reporting documents and lay them before the company’s annual general meeting for the members.

Consequences of non-compliance:

  • A director who fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000
  • A director who willfully fails to take all reasonable steps to secure compliance commits an offence and is liable to a fine of HK$300,000 and to imprisonment for 12 months

Reporting exemptions:

If your company is a small private company which meets two of the following conditions in a financial year:

  • total revenue not exceeding HK$100 million
  • total assets not exceeding HK$100 million
  • total number of employees not exceeding 100

it will qualify for reporting exemptions and enjoy exemptions such as:

  • not required to disclose auditor’s remuneration in financial statements
  • not required to include a business review in directors’ report
  • not required for auditor to express a true and fair view opinion on the financial statements
  • the financial statements may be prepared in accordance with less onerous accounting standards (i.e. the SME-FRS and FRF issued or specified by the HKICPA) instead of the Hong Kong Financial Reporting Standards which is applicable to listed, public or other companies not qualified for simplified reporting.

2.4 Register maintenance

2.4.1 Keeping of registers

A private limited company must keep the following registers at its registered office showing up-to-date information available for inspection:

  • a register of members
  • a register of directors
  • a register of company secretaries
  • a register of Significant Controllers

   What is a Significant Controller?

A Significant Controller is a natural person or a registrable legal entity, who satisfies one or more of the following conditions:

  • holding more than 25% of issued shares (directly or indirectly);
  • holding more than 25% of the voting rights (directly or indirectly);
  • has the right to appoint or remove a majority of the board of directors;
  • has the right to exercise significant influence or control over the company;
  • has the right to exercise significant influence or control over a trust or firm, whose trustees or members meet one or more of the above conditions.

2.4.2 Keeping of minutes

A private limited company must record and keep the following for at least 10 years from the relevant date:

  • minutes of all directors’ meetings
  • minutes all general meetings of members
  • records of copies of all resolutions passed at meetings other than at general meetings

Consequences of non-compliance

  • A company and every responsible person of the company commits an offence and is liable to a fine of HK$50,000 and a further fine of HK$1,000 for each day during which the offence continues.
Checklist –   You should:
– Know who is responsible for ensuring the company’s compliance with the Companies Ordinance
– Have a basic idea of minimum requirements of compliance of a private company limited by shares.
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