How private companies after Hong Kong corporation registration can adopt the method of simplified reporting and status of dormant companies?


Predecessor Companies Ordinance for company formation services in Hong Kong allowed private companies to adopt the method of simplified reporting where private companies need not to obey the strict rules and regulations defined in the ordinance for the preparation of company’s accounts and other reporting documents, but public companies are not supposed to enjoy this immunity. This exception to private companies may be due to the fact that public companies usually has the stake and investment of general public and that of state too so there need to be strict scrutiny of corporate affairs of public companies so that public money could be protected from any fraud or misappropriation, whereas this is not in the case of public companies. As the private companies can take the advantage of repealed provision of Section 141D of Cap. 32 to enjoy exemption from certain strictness pertaining to financial reporting, Cap. 622 extended this scope to private companies and the companies limited by guarantee. In light of this extended scope of simplified reporting, private companies and the companies limited by guarantee can adopt the simplified method for the preparation of their annual financial statements. In company formation services in Hong Kong it must be remembered that only those companies are eligible to enjoy this immunity or exception of simplified reporting, who are eligible as being fallen in the “jurisdiction of reporting exemption”, in lieu of Cap. 622. Not only this but all those companies who fall within the jurisdiction of “small private companies” are found automatically eligible for this simplified reporting or the reporting exemption. Now you may reckon that, how one can differentiate whether it is a small private company, medium or large private companies. Legal commentators and legislation took care of this and answers this reckoning question as:

Those private companies which satisfy any two of following conditions or criterion, shall legitimately be called as small private companies and shall enjoy all the immunities and exceptions, bestowed by the legislation and any governing rules and regulations. Following are the criterion or the conditions which private companies are supposed to obey in order to enjoy the immunity and perks of being the small private companies:

  • Total annual revenue of the subjected company shall not exceed the amount of $100 million.
  • Total assets of the subjected companies do not exceed the threshold of $100 million.
  • Total employees and so does the annual employee’s toll of the subjected company shall not cross the threshold of 100 employees, during the financial year.

Hence, any company which satisfies any two of above-mentioned criteria, shall be known as small private companies. If companies showed up to comply with this requirement in its very first financial year then the subjected company shall continue to operate with the status of being a small private company, until company fails to comply with these requirements for the period of two financial years, consecutively. If company fails to demonstrate compliance with these requirements in first financial year but showed up to comply with these eligibility criteria for the consecutive two financial years then such company would continue to be regarded as small private company, until and unless such company demonstrates failure to comply for the consecutive two financial years.

Only above mentioned route is not the only route to be eligible for the simplified reporting or any reporting exemption. Instead apart from this automatic eligibility, private companies can still opt and be held eligible for the simplified reporting if board of directors and members of subjected private company, approves of such simplified reporting. To do so, there are basically two routes which would ultimately leads to the company’s destination of simplified reporting. The first way is to adopt the mechanism of Section 141D of Cap. 32, for which approval of all members of the company is required in writing. The second route emphasis on the approval of at least 75 percent of total votes of members and also that, no vote is in opposition of simplified reporting. This seems quite tricky and this is the reason that story does not stops here and for the companies who adopt second route to get eligible for the simplified reporting there is the condition which requires company to demonstrate compliance with any two of following conditions:

  • The total annual revenue of the company does not exceed the amount of $200 million.
  • The total assets in possession of company does not cross the limit of $200 million.
  • The average number of employees of the company does not exceed the threshold of 100 employees, during the financial year.

The corporate world is full of surprises and exceptions and thus this applies here too. There are certain types of private companies and the companies limited by guarantee who are excluded from being eligible to enjoy reporting exemption and thus on the basis of this such companies would not be able to adopt the method of simplified reporting. Now you may think that why would this happen? Even when Cap. 622 allowed private companies and the companies limited by guarantee to enjoy this reporting exception. The answer lies in the technical point which says that; companies which are excluded from enjoying the perks and immunity of simplified reporting, are basically the companies which:

  • Holds the valid banking license to carry on the banking business.
  • Accepts the loans of money other than any banking business, through their trade or business such as any deposit taking company other than a bank.
  • Operates and carry on the business in lieu of some insurance business.
  • Holds the license as per Pt.V of Securities and Future ordinance (Cap. 571), which basically allows them to carry on any business through the mode of “regulated activity”.

This exclusion is basically on the basis of principle which says that; those companies who take away the public money and transact this public money should be held liable for the general and basic disclosure obligation. This principle makes sense because where there is involvement of public money there should be disclosure and legitimate documents which clearly showcase that how this money is being utilized and what fate does this public money enjoy. Hence, there is no doubt on the fact that such companies should be let to enjoy the simplified reporting and let to take the veil of Section 141D of Cap. 32. Predecessor Companies ordinance carves out this obligation to those companies who own and operate the ships or aircrafts for the purpose of cargo within Hong Kong and out of Hong Kong. However, Cap. 622 does not reproduce this legal obligation/provision.

For the case of companies limited by guarantee, Section 359(1)(a) and 369 and Schedule 3 of Cap. 622 allows them to adopt the method of simplified reporting, provided they fall within the jurisdiction of reporting exemption.

Now here comes the issue of corporate companies and better be called as Corporate Giants which enables Hong Kong holding company formation. For group of private companies and the group of companies limited by guarantee there is an immunity which says that; if they comply with the statutory requirements then they can also enjoy the reporting exemption and thus can legitimately adopt the method of simplified reporting. Not only this, but after Hong Kong holding company formation group of private companies and the group of companies limited by guarantee can adopt simplified reporting mechanism, while preparing the consolidated financial statements of the corporate group.

It may sound weird to you but those companies which stand eligible for the reporting exemption, need not to comply with the requirement which says that reporting documents and more specifically the annual financial statements of the company must give “true and fair view”. Instead they need to comply with the rules and regulations of SME-FRF and FRS on account of statutory requirement to have compliance with the accounting standards, after start up company Hong Kong. Predecessor Companies ordinance required accounts of the exempt private companies to give true and fair view however this was not neither appreciated nor endorsed by the Cap. 622 but the enacted requirement of company’s accounts to give true and correct view, stands intact and valid.

Status and Liabilities for the Dormant Companies

Before going further, we first need to establish the definition of dormant companies. Those private companies which do not take active participation nor indulged in any significant corporate activity tends to seek the status of a dormant company, because by getting the status of dormant companies, these companies can escape the certain provisions of companies ordinance, eminent of which is the permission, not to prepare annual financial statements of the company. Generally, following are some of companies which tends to seek the status of dormant companies:

  • Shelf companies.
  • Companies which are incorporated merely to hold certain assets.

Now let’s come towards the procedure of dormant companies. Section 5 of Cap. 622 says that any company can become a dormant company by passing a special resolution which declares company to be a dormant company and notifying Registrar about passing of such resolution. The basic attraction behind the status of dormant company is the escape from certain legal obligations such as:

  • No need to prepare annual financial statements of the company.
  • No preparation and furnishing of directors report.
  • Escape from the obligation to appoint auditor and furnishing of auditors report.

If any dormant company enters into any accounting transaction then that automatically ceases it to be a dormant company. Now you may reckon that what on earth is called an accounting transaction? Basically, any transaction which company went in and requires by the Section 373 of Cap. 622 to be entered into company’s accounting records, shall be called an accounting transaction. It must be noted that any transaction that company needs to pay to comply with the obligations of company’s ordinance, shall not be called as an accounting transaction. Legal commentators say that if company enters into some accounting transaction then every member and director of the company who ought to have knowledge about this transaction even being a dormant company shall be held personally liable for any debt or any other liability arising out of this accounting transaction. Generally, dormant companies are not exempted from entering or engaging in any activity. For instance, any restriction to bar company from entering into accounting transaction would not hold company not to pass the resolution pertaining to alteration of class shares and neither it prevents members of the company to transfer his/her shares to another member or to the company.

But what if you changed your mind after start up company Hong Kong? Don’t worry just change your mind and think of corporate strategy and rest would be history. For instance, consider the situation where company was made a dormant company because its sole incorporation purpose was to hold certain assets. After some time, controller of the company thought to enter corporate world and deems to transact business with this company. For this situation of changing dormant company to an operational company, a special resolution needs to be passed. This special resolution should clearly declare that company cease to be dormant and deems to enter into accounting transactions. After getting this approved by members of the company, this resolution should formally be delivered to the Registrar office for the formal commencement of ceasing status of dormant company.

We know very well that public companies cannot be a dormant company and not only public but there are certain private companies who also cannot get the status of a dormant company. These private companies are:

  • Those authorized companies which are defined by Cap. 155.
  • Those insuring companies as specified by Cap. 41.
  • Company’s incorporated under the Pt. V of Cap. 571, to carry out business through regulated activities.
  • Approved trustees as defined by the Cap. 485.
  • Any company who has a subsidiary which fall within the jurisdiction of any above-mentioned clauses.
  • Those companies which fall within the jurisdiction of any preceding clauses in the period of previous five years.