Regulations on Disclosure of Financial Statements of a Company Setup in Hong Kong to Members and General Public

Transparency is the key force which drives the corporate world and to ensure transparency. After getting out of the brainstorming zone of how to incorporate a company in Hong Kong, there is the need to disclose financial statement of company to the members of the company and to the general public. Now you may be thinking that why disclosure to public is required as disclosure to members makes some sense but why such document should be disclosed to general public? The answer won’t be as reckoning as the question was. Disclosure to the members is required to make members of company understand the current financial position of the company and to know how company did performed financially in the passed financial year. As main objective of disclosure to the members is to enact their right to information, same rule applies for the disclosure to the public. Disclosure to general public is made so as to enable general public to know about the exact financial standing of the company, in which they deem to invest and by seeing the financial performance of the company in previous financial year, aspiring investors could take the right decision. Now we shall discuss both disclosures of financial statements as they are necessary after company setup in Hong Kong in detail, so that reader shall know the requirements and liabilities for both disclosures.

Disclosure to the Members of the Company

About the disclosure to the members of the company, Div. 6 of Pt. 9 of Cap. 622 lays down the requirement to furnish the publication of company’s financial statements in Hong Kong company incorporation service. Following are some of documents which must be laid before the members of the company in the annual general meeting of the company:

  • Financial statement of the company and in case of holding companies and subsidiaries, consolidated financial statement should be furnished in front of the members of the company in annual general meeting.
  • Directors report should be submitted to the members in the annual general meeting of the company.
  • Auditors report must be submitted in the annual general meeting of the company.

All these three reports are together called as “Reporting documents” and copies of these reporting documents must be sent or despatched to the members 21 days prior to the holding of annual general meeting of the company. If due to any reason, annual general meeting shall not be held even then members should be served with the copies of reporting documents either at their postal address or any address they specified to receive the official correspondence. If these requirements are not met and failure is found on the part of the company while serving copies of reporting documents to the members then such violation may amount to be an offensive.

For the source of communication, Div. 4 of Pt. 18 of Cap. 622 restricts company to send the copies of reporting documents either in hard form via any mailing correspondence or in soft form either via electronic mail or publishing it on the website. Sending via electronic mail shall only be called legitimate if member of the company agrees to receive these reporting documents at the specified email address of the member, states Section 831 of Cap. 622. Section 833 of Cap. 622 gives some relaxation in this regard and states that; it shall also be considered as legitimate and in compliance with the legal requirements if company publishes these reporting documents on its website, provided members agrees to receive reporting documents by accessing website of the company. However, to promote digital culture in the corporate establishment, Section 833 (4) of Cap. 622 facilitates the use of company’s website as the mean of communication and there is a deemed agreement between the company and its member exist. Articles of the company usually has the authoritative effect as the understanding between the member and the company to send copies of reporting documents by publishing it on the website of the company. However, if any member of the company objects this then he/she must raise the objection within 28 days of his/her joining as the member of the company. For the situation where company publishes reporting documents on the website of the company then as per the script of Section 833 (3) (c) and 833 (8) of Cap. 622 of Hong Kong company incorporation service; company must notify its members that reporting documents such as annual financial statement of the company, auditors report and directors report has been published on the company’s website. About this notification, there is the need to send this notification either in hard form or via any electronic mean to the member of the company, as per the requirements of Section 832 and 831 of Cap. 622. Under the Section 837 of Cap. 622 if member has received reporting documents in electronic form or accessed it by visiting company’s website, still this member is entitled to request the hard copy of reporting documents and such request of the member should be entertained formally and legitimately.

Summary of Financial Reports

There is the leverage in the Section 441 of Cap. 622 for company incorporation Hong Kong which states that instead of sending full reporting documents to the members, company can send the summary of financial reports to the members of the company and there won’t be any harm on the legality and legitimacy of this act, on the part of the company. If we take the look on predecessor companies and get into comparison between the provisions of predecessor companies ordinance and Cap. 622 we’ll come to know that; only listed companies were allowed to send summaries of financial reports to the members but Cap. 622 extended its scope to all companies registered and operating in Hong Kong. But there is one exception in this regard and the companies having the reporting exemption under Section 438 of Cap. 622 are exempted from the obligation of this provision.

Now about the content of summary Section 439 of Cap. 622 states that; summary should derive certain, specific and to the point information from the annual financial statement of the company, directors report and auditors report. Exact information which must be included in the summary is explained and mentioned in the Companies Regulations pertaining to Summary of Financial Reporting and referred as Cap. 622E.     

Now the matter seems to be little confusing as how to differentiate the conditions in which summary should be sent and the situations in which full report should be sent. For this, Section 442 of Cap. 622 states that; company can give the options to the members whether to receive full report or the summary of the financial reports and for this formal notification should be sent to the members along with the return form, where member shall tell company about their intention and this notice shall be called as the “notice of the intent”. If company has sent notice of intent but subjected members did not reply nor left any response on the notice of notification then company shall wait till the date, on which copies of reports are supposed to be sent to the member and failure to respond to the notice of intent shall held subjected member to be entitled to receive the summary of financial reports, states Section 430 of Cap. 622. Under the Section 445 of Cap. 622 member who has received the summary of financial reports can still apply for the full reporting documents, to the company.

Corporate world is analogous to the world of law and regulations and as articles of every company are considered as the constitution of the company and shall has same sanctity for the company as there is the sanctity for any country regarding their constitution. So, in presence of this argument Section 446 of Cap. 622 states that; if constitution of the company did not allow to send or issue summary of financial reports to the members of the company then company is barred from sending summary of financial reports of the company. Hence copies of full reporting documents having annual financial statements of the company, directors report and auditors report, should be sent or despatched to the members of the company.

Disclosure to the General Public

The issues discussed above were related to the disclosures to the members of the company, but investment is the key characteristic of corporate world and much needed things after company incorporation Hong Kong. This is the reason that corporate entities try to attract investors through every possible mean. Suppose you have a handsome sum of bucks in your possession and looking for the right place to invest then what is the key characteristics would you look in any corporate entity as the investor? Obviously that would be the actual annual rate of returns, that is, financial performance of the company, how company manages the assets of its investors and of their own that is the financial position of the company and most importantly, how transparent is company in its transactions and how much it values the investors money? All of these are some of questions which annual financial statement of the company answers very well. From the financial position of the company to the financial performance of the company and from the review of business from the directors report to the comments of auditors on the transactions and corporate affairs of the company in auditors report, all aspects what aspiring investor would look for the investment are covered in these financial reports. After getting clear with the need for disclosure to the public let’s get into some academic stuff and learn what legalities and implications does disclosure to general public involves. Generally speaking public is not entitled nor has the eligibility to receive the copy of company’s annual financial statement thus companies are not required to disclose their financial statements to the general public. However, public companies and the companies which are limited by guarantee are supposed to send reporting documents to the Registrar along with company’s annual returns and copies of reporting documents to comply with the requirements and liabilities of Section 664 of Cap. 622 and Section 7 of Schedule 6. So, in this way general public can access the reporting documents of the company. For this, just make your mind up for the investment, select the company where you wish to invest, visit Registrar office and lodge your application for the inspection of companies record or reporting documents on the basis of Section 45 of Cap. 622. After this, just sit back and inspect the company’s records, see if this suits you, if yes then go and sign the investment treaty and welcome to the corporate world!

Comparison is indeed very helpful for the legal aspirants to draw certain conclusions, challenge any discrepancy and prove the narrative, aspirant wish to pose. For this, have a look on the provisions of predecessor companies ordinance. As per the Section 129G (1) of Cap. 32; if person holds debentures of the company or holds the entitlement to receive the notice of general meeting then such person has the right to receive reporting documents of the company such as annual financial statement of the company, auditors report and the directors report. However, this provision was not reproduced in Cap. 622.