The new Companies Ordinance

The Government has just announced that the new Companies Ordinance will (except for a few provisions) come into effect on 3 March 2014.

It is a huge Ordinance, consisting of 21 parts (with divisions and sub-divisions), 921 sections and 11 schedules. 12 regulations have been made to implement the new law.

In this series, we will discuss some of the important new provisions affecting banks and financial institutions. We will start with the changes concerning the financial statements that some corporate customers have to produce, a new requirement for directors' "business review", and some provisions concerning auditors.

Simplified financial and directors' reports

As one of the major initiatives intended to facilitate business, the new Companies Ordinance will permit more small and medium-sized companies to issue simplified financial reporting.

Under the existing law, private companies may prepare simplified financial reporting, but only if it is not part of a group, and it requires the written agreement of all its shareholders.

Under the new law, more SMEs will be able to provide simplified financial reporting. They include:

(a) A "small" private company, and a group of small private companies, that satisfies any two of the following conditions –

(b) A "larger" private company, and a group of such private companies, that satisfies any two of the following conditions –

(c) A private company which is not part of a group, if all its shareholders agree with simplified financial reporting.

Certain private companies are excluded from simplified financial reporting, including corporations licensed under the Securities and Futures Ordinance.

This new flexibility will basically apply from the financial year of the company which begins after the new Ordinance comes into effect.

Audit of the financial statements is still required for all companies under the new law, except dormant companies.

The accounting standards for simplified financial reporting will be the Small and Medium-sized Entity-Financial Reporting Framework (SME-FRF) and the Small and Medium-sized Entities Financial Reporting Standard (SME-FRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).

The financial statements of companies adopting simplified financial reporting are not required to give a "true and fair view". The auditor's report of such a company will, instead, state whether the financial statements have been prepared, in all material respects, in compliance with the new Ordinance and the applicable accounting standards.

Subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards, in the case of simplified financial reporting.

There will be no requirement to include a "business review" in the directors' report (for which, see below).

Business review

Public and other large companies (in effect, all companies except those which qualified for simplified reporting) will be required to prepare as part of the directors' report, an analytical and forward-looking business review.

The business review is required to cover:

• a fair review of the company's business;
• a description of the principal risks and uncertainties facing the company;
• important events affecting the company; and
• an indication of likely future development in the company's business.

The business review will include an analysis using financial key performance indicators, a discussion of the company's environmental policies and performance and the company's compliance with the relevant laws and regulations, and an account of the company's key relationships with its employees, customers, suppliers and significant business partners.

Business review will basically be required from the financial year of the company which begins after the new Ordinance comes into effect.

Private companies, which are not qualified for simplified reporting, may opt out of the requirement to prepare a business review if so approved by a special resolution of its shareholders.

It may be noted that a director of the company is only liable to compensate the company for any untrue or misleading statement in a directors' report, if the director knew, or was reckless as to whether, the statement was untrue or misleading. This liability extends to the omission of anything required to be included in the report, but only if the director knew it was a dishonest concealment of a material fact. There is apparently no liability to other parties including creditors who may rely on the directors' report.

Auditors

1. Statement of circumstances

An auditor is required make a statement of relevant circumstances, if:

1. he resigns from office, is removed from office, or retires without being reappointed, and
2. he considers that there are circumstances connected with the resignation or the termination of his appointment that should be brought to the attention of the company's members or creditors.

Within 14 days of receipt of the statement, the company must send a copy of the statement to its members, or apply to Court for an order directing copies of the statement not to be sent to its members.

If the outgoing auditor has not received notice of an application to the Court within 21 days of the company receiving the statement, he must send a copy of the statement to the Companies Registry for registration.

Such statements may well be of interest to the company's creditors.

In the absence of malice, the auditor will not be liable for defamation in respect of such statement.

2. Criminal liability

As an initiative to safeguard the reliability and integrity of auditor's reports, the Government has introduced criminal liability for auditor's reports.

If an auditor:

1. is of the opinion that the company's financial statements are not in agreement with the accounting records in any material respect; or
2. fails to obtain all the information or explanations that, to the best of his knowledge and belief, are necessary and material for the purpose of the audit,

he must state that opinion or fact in the auditor's report.

It will be a criminal offence, if the auditor knowingly or recklessly causes any of the above statements to be omitted. The auditor will be liable to a fine of not exceeding HK$150,000, not to imprisonment.