Regulations on Director Right of Inspection of Company Records after HK Company Registration and Removal of Company Auditor


As per Section 374 (1) (b) of Cap. 622 the record of the company must be kept open for the directors, to inspect any time they want to. This provision is so strong that it does not deems to displace the common law right of director to access company’s record and documents thus the right to inspection conferred by Section 374 (1) (b) of Cap. 622 is of statutory nature. So, after HK company registration instead of displacing common law, it in fact reinforces common law by imposing certain strict criminal liabilities. But there is the general perception which says that; generally common law has wider scope than Section 374 (1) (b) of Cap. 622 because it is not restricted to accounting records, only. Case of Asia Television Ltd presents of the situation where Court of Appeal accepted and held that; inspection of records under Common Law is wider and extended to the:

  • Corporate material of the company.
  • Corporate records and accounts of the company.
  • Inspection of corporate information.
  • Inspection of accounting records and information.
  • Inspection of any such material, document or record which belongs to the company.

In lieu of these remarks by the Hon’ble court, Court of final appeal accepted that; after company HK business registration director is entitled to inspect any such document which he/she considers necessary to inspect in order to carry his/her duties reasonably.

Scope of Right of Inspection

Right of inspection is not something which can be conferred indefinitely because probability of abuse always exists in corporate sector. Hence, to eradicate the chances for abuse, there is the need to undertake scope of right of inspection. One may object that why right of inspection is conferred to the directors? Right of inspection to the members makes sense but why this right is conferred to the directors of the company. The answer is simple that, as right of inspection is granted to the members to ensure transparency and to stop discrimination of majority members by the minority members, same goes for the right of inspection to the directors. Hence, right of inspection is conferred to the directors so that, director may carry out their duties for the benefit of company. It must be noted that this right of inspection is of individual nature and thus board of director(s) cannot exercise this right in the capacity of board, however each director, individually, can inspect any document he/she deems to inspect. There is no such discrimination between mode of exercise by executive or non-executive directors thus whether the exerciser is executive or non-executive director, he/she may inspect any document or record, alike.

The scope is although wider, but this does not mean that director may abuse their right of inspection and use this right as a matter of abuse or in some offensive manner. Possibility exist that court may restrict director to exercise its right of inspection if it sees that director’s intention in inspection are not fair and intends to misuse the confidential information to the extent, where it would cause damage to the company. Court may also disallow the right to inspect if court notices that there exists the probability of collateral damage to the company and that director’s intention to inspection does not comply with his/her duties as the director of the company and if due to any reason, inspection is allowed then it would be of no benefit to the company. But, it is generally assumed that director inspects company’s records or documents as the obligation of his/her duties as the director of the company and this is the reason that director need not to provide any reason before being allowed to exercise his/her right of inspection and legal commentators thus calls this right as the strong right, on account of this immunity. Now you may be thinking that if director is supposed not to give evidence or proof before allowing for the inspection then how court would reject the right to inspect? Basically, the onus of establishing that sough inspection is for some improper purpose, and is upon the party who is resisting exercise of right of inspection. On account of this, resisting party needs to give substantial evidences and proof trail that there exist some improper behind directors right of inspection and if for some reason director may be allowed to inspect then company may suffer loss on account of improper intention of director.

To apply these underlined principles, courts have awarded robust protection to the director’s right of inspection. To clear this out, lets refer to the case of Re Boldwin Construction Limited where Court of Appeal communicated that there is nothing improper in the exercise of director’s right of inspection to investigate misfeasance on the part of another director, even if desire to inspect company’s records was the result of some vindictiveness. Court of final appeal held that; argument of plaintiff that, director should be restricted from inspection if director had refused to sign company’s cheques in the past, when he/she was supposed to sign them and Court of final appeal held this argument of plaintiff as irrelevant in this case and overruled plaintiff’s argument regarding abuse of right of inspection by the director.

Some people think that, constitution of the company can supersede the general public policy and any provision of common law. But, in fact director’s right to inspect company’s records is the important and vital right in the corporate culture of Hong Kong company establishment and if for any reason company ceases to abrogate this important right via any provision of company’s article which intends to violate this right then court may intervene in this situation because such abrogation may amount to the contravention of public policy and thus where abrogated, shall held to be enforceable. But there can be loophole in the companies ordinance and if company wants to rectify such issues of Cap. 622 then Court of Final Appeal suggested that; if company deems to modify this important right then the maximum what company’s constitution can do is that it may lay down some procedural formalities regarding manners through which director can exercise his/her right of inspection. One example can be the procedure where director is made liable to submit purpose of inspection and undertaking that he/she shall maintain the confidentiality of the company’s corporate business records or documents.

There is the general misconception in the Hong Kong company establishment that appointment of provisional liquidator may harm the director’s right of inspection. But, in reality; appointment of provisional liquidator does not restrain director to exercise his/her right of inspection. This shall continue till the time director neither impedes the provisional liquidator nor tends to cause harm to the company or any prejudice to the company. Under Section 375 of Cap. 622 director is entitled to make copies of the accounting records or of any record or document, which he/she inspects, and company is supposed to provide copies to the director, if director requested for the copies of records or documents, he inspected. If director for any reason cannot inspect company’s record or documents then director may apply to the court to authorise any other person to carry out inspection of records, on behalf of the director.

Removal of Auditor

There are basically four ways through which auditor may cease to act as an auditor of the company. An auditor may cease to function as an auditor of company either through resignation or retirement or removal or through disqualification.

Resignation

Auditor can resign from the position of auditor by depositing a written resignation under Section 417 of Cap. 622, to the company’s registered office in Hong Kong incorporation services. Legislation does not stop here and there are certain requirements through which auditor is supposed to resign and there is the need to be transparency in the resignation of director. For instance, there can be the situation where company creates hurdle for the auditors which resulted in ineffective functioning of auditor. Transparency is ensured in the way that; the auditor who is resigning is supposed to write or give the statement of circumstance where the resigning auditor will state the circumstances which company should consider and was causal for the resignation of director, if there were no such circumstances even then resigning director is supposed to write the statement of circumstances. The company, in turn is supposed to send this statement of circumstances to its members. As per the Section 421 of Cap. 622 in Hong Kong incorporation services, if auditor thinks that there is something in the statement of circumstances which should be taken in the notice of members or creditors then director is entitled to send another notice to the company along with notice of resignation that; director should convene the general meeting of the company so that he/she can give the explanation on notified matter and thus the reason of resignation may put forward before general meeting.

Retirement

An auditor is appointed for the term ending at the annual general meeting of the company thus auditor shall be considered as retired if his/her term ends or expires and that, the auditor has not been reappointed. As per the provisions of Cap. 622 retired auditor has the entitlement to send cessation statement on the same grounds as this right has been conferred to the resigning auditor. Just as resigning auditor has the entitlement to send notice to the company to convene the general meeting and has the entitlement to be heard at the meeting and to attend the meeting, same are the entitlements conferred to the retiring or outgoing director thus he/she is entitled to send notices of the meeting in which he/she is to be replaced and be allowed to attend the meeting and to be allowed to say and thus members should hear him or her.

Like a resigning auditor, retiring auditor needs to write the statement of circumstances to the company and this statement shall be taken in the notice of the company’s members and directors so that if he/she been made retired forcefully then this prejudice act can be taken in the notice of company’s members and creditors and if this is just a normal retirement even then statement of circumstances should be written by the retiring auditor.

Removal

 As per the Section 419 of Cap. 622 members of the company have the right to remove any auditor from his/her office at the general meeting of the company. Under the Section 419 (1) of Cap. 622 this power of member can neither be abrogated by any provision of company’s constitution nor through any agreement between the company and the auditor. But, this does not mean that any such removal shall deprive auditor from any compensation or payable damages. Instead as per the Section 420 of Cap. 622 removed auditor has the entitlement to receive compensation or payable damages on account of termination of his/her appointment.

Special notice must be furnished to the members of the company and also to the auditor who is being removed. Moreover, like retiring and resigning auditors, removed auditor, under the Section 422 (3) of Cap. 622 is entitled to send notices to the company to convene general meeting and let him or her be given the chance to explain his/her position. As per the Section 411 of Cap. 622 removed auditor should be allowed to attend and to be heard at the general meeting of the company. Same as retiring or resigning auditors write statement of circumstances, removed auditor is also supposed to write the statement of circumstances and is allowed to state any matter he/she thinks that must be taken in the notice of the members or creditors.

Disqualification

As per the Section 418 of Cap. 622 if the auditor of the company becomes ineligible or held to be disqualified to be appointed or function as an auditor then concerned auditor shall immediately ceases to be the auditor of the company.