It is an established fact that accounts play a vital role in the operations and prospects of any corporate entity thus maintenance of accounting records is like a first step towards financial transparency in the company. As per the instructions and regulations of Companies Ordinance, all companies are required to maintain proper accounting books which should have all records of receipts, expenses, details of company’s assets, any sale and purchase done by the company and record all those liabilities which falls within the definition of relevant accounting transaction which is in turn very important to determine whether a company is a dormant or what? These accounting books are need to be maintained in the Hong Kong and must be made available at the registered office of the company in the Hong Kong and directors shall have access to these accounting records all the time. If company is a Non-Hong Kong company or setup offshore company in Hong Kong and that its accounting books are maintained outside Hong Kong, then these accounting books should be sent to the registered or any operational office of company in Hong Kong where all the work of setup offshore company in Hong Kong is being carried on. It will let directors of the company ascertain financial position of the company after every six months. Cap. 112 refers to the Inland Revenue Ordinance and this ordinance imposes certain requirements to keep certain records of company to be maintained to enable revenue authorities ascertain true financial position of the company and to assess profitability of the company.

What are proper accounting books?

We discussed above about the need of proper accounting books so let’s define what does the term “proper accounting books” usually implies. As per the classic definition, proper accounting books are those:

  • Which gives clear and fairer view of the company’s state of affairs.
  • Which fairly shows transactions, company went in.

Although directors of the company are supposed to take all responsible steps in company secretarial services Hong Kong to ensure maintenance of proper accounting books and records, but it is an accepted fact that not all directors of the companies are expert in accounting skills and there is the statutory defence of this argument in Section 121(4)(a) which states that:

If the director assumes that he/she does not hold the competence nor relevance to perform duties he/she has been entrusted with then director can entrust these duties to any competent and reliable person to discharge these duties. In this situation obviously, director is entitled to invoke statutory defence, provided it not has been proved that he/she failed to take all relevant steps to fulfil his/her entitled duties.

In case of failure to discharge his/her entitled duties properly shall create criminal offence, states in Section 121 (4) which would further lead to the disqualification order. But such responsibilities cannot be properly fulfilled unless director is given access to the company’s record as per the requirements of Section 121(3). There is no explanation of justification needs to be given by the director in exercising his/her right to access company’s record as this right is conferred by the common law and thus no justification is required. It is the misconception that director’s exercise of inspection of company’s records shall jeopardise the work of provisional liquidator and thus director’s right shall not be lost upon the appointment of company’s liquidator. But this does not mean that director use this as the abuse of power and this abuse can be catching the situations where directors intends to abuse the conferred confidence and injuring this as for any material gain, shall result in denial of statutory defence and thus director’s access to company’s records shall be refused. For the situation where director is involved in litigation against the company then his/her application shall not be smudged with being mala fide, provided director excludes the privileged documents and is successful in showing that this inspection is in consistence with his/her duties as the director of the company.

What must a proper accounting records include?

As per the definition of accounting records in Cap. 622, book of accounts is basically now has replaced the term accounting records. Generally, there is not any major drastic change in present companies ordinance as compared to predecessor companies ordinance but there are some minor changes in the wording and scope of accounting records in Cap. 622. As per the Section 373 (2) of Cap. 622 following records are sufficient for the company to keep so that condition of maintenance of proper accounting records shall be made:

  • Record should show and explain the transactions, company went in.
  • Reasonably disclose the financial position and financial performance of the company.
  • Directors must be instructed to adhere to the script of ordinance regarding compliance of financial statements of the company, to be complied with provisions of the companies ordinance.
  • Record must contain the daily record of the money received by the company and the sum of money expended by the company.
  • Record of all those matters in respect of which receipt and expenditure took place.
  • Record must have the details and recording of company’s assets and all the liabilities of the company.

It must be noted that accounting records can contain ledgers, journals, any vouchers or any statement of this type but accounting should never contain minutes of meetings nor any contracts or agreements whether membership agreements, trust deeds or agreement of any type, even if they give rise to the situation where they should be included in the accounting records of the company. Primary entry books such as cashbooks, journals and ledgers must be kept and recorded reasonably, and it would be insufficient if only these entry books are kept but not the sources from where they have been written because transparency is what corporate operations requires the most and to ensure transparency sources from which journals, ledgers or cashbooks are prepared must also be recorded and be presented, when asked or requested.

Consider the situation where the company in question has the subsidiary undertaking which means that it is not even a company then in this situation subjected company shall not be made subject to the provisions of Section 373 of Cap. 622. It must not be perceived that as company has the subsidiary undertaking and on this basis it does not comes in the net of liabilities of Cap. 622 instead company is supposed to take all reasonable and required steps to secure the liabilities of subsidiary undertaking and thus company should keep its accounting records. This is also necessary because it would let directors to determine the financial status of the company and will help directors in making financial statements of the company in compliance with the companies ordinance.

What form does accounting records be maintain?

Section 376 (2) of Cap. 622 solves this problem and leaves this upon the discretion of the company and says that record can either be kept in hard form or electronic form, whatever company decides would be appropriate for them. Now companies ordinance moves one step ahead and underlines the further requirement to ensure transparency and not to leave any wrong doers with any argument. If record is to be kept in electronic form then Section 376 (3) of Cap. 622 emphasis on any such setting as per which company would be able to reproduce this electronic record in hard copy, whenever asked or required. For the situation where company decides to keep their accounting record in the hard form, then Section 376 (4) of Cap. 622 entails and emphasis on the security feature and says that if record is being maintained by making entries in the bound book then company must ensure that no falsification shall be made and take necessary precautionary measures to prevent any sort of falsification. Ordinance does not stays here and emphasis on the development of any mechanism through which it would be possible to discovery any falsification in the records.

Now the next prominent question is about the location where accounting records of the company should be kept. As per Section 374 of Cap. 622 accounting records can be kept at registered office of the company or at any other place, where the director deems appropriate. There is the allowance that accounting records can be kept outside Hong Kong for the purpose of setting up a business in Hong Kong as a foreign provided following conditions are satisfied under Section 374 (3) of Cap. 622:

  • All the matters related to accounts and returns of the company and record of all transactions company went in, should be sent and kept at the place in Hong Kong, where director deems appropriate for setting up a business in Hong Kong as a foreign.
  • Accounting records of the company must be held open and accessible to the directors for the sake of inspection, free of cost.
  • These accounting records must be disclosed with sufficient and reliable accuracy, so that financial condition of the company could be ascertain, at the intervals not more than six months.
  • Accounting records must be sufficient so as to enable the preparation of financial statements of the company in compliance with the Cap. 622.

Section 377 of Cap. 622 underline the duration up to which record must be kept in office. Accounting records of the company should be retained for the period of seven years, starting from the end of that financial year to which the last entry was made in records.

Liability if Accounting Records are not Maintain

Accounting records are maintained for the sake of transparency after starting a company in Hong Kong and failure to do so shall amount to some sort of penalty or may be as an offence. As per the script of Section 373 (1) of Cap. 622, if company is found to be failed in maintaining and keeping accounting records of the company in compliance with the ordinance then it would legitimately be held that directors has committed an offence. Offence shall even be held if director is found not taking reasonable steps to ensure the company’s compliance with the ordinance then Section 373 (5) of Cap. 622 calls it an offence. If director is charged for offence in compliance with these sections then Section 373 (7) of Cap. 622 comes to the rescue and provides director with the defence. But this defence shall only be available if director is successful in establishing that he had the reasonable grounds to charge any reliable person to oversee the requirements and implication of Section 373 (1) of Cap. 622 and that by this, he/she has discharged his/her duties and that appointee was responsible for any compliance with the ordinance and accused director is innocent in this situation. However, a strong penalty shall be imposed under Section 373 (6) if director is found to be wilfully failing to comply with the requirements of Section 373 (1) of Cap. 622.

There is another way through which director can be accused of offence, i.e., the proceedings of winding up of company. If during the winding up of company it established that director didn’t kept the accounting records of the company for two years, immediately preceding the commencement of the proceedings then as per the Section 373 (2) – 373 (3) of Cap. 622 directors would held to have committed the offence. Section 274 (1) states that by default every officer shall consider having committed an offence. However, there is the defence available which says that offence would not be committed where it is an established fact that director was honest in his/her transactions with the company and his/her default act was excusable.

Objective Test

There is an objective test to determine if director has either taken reasonable steps to secure compliance with the instructions of ordinance or not? And for this all circumstances of the case needs to be made part of the proceedings and examined from every angle. Thus, it would be held insufficient and illegitimate if director subjectively assumes that he/she has acted reasonable and took all reasonable steps.