Offshore Jurisdictions Updates

The New Honk Kong Companies Ordinance

The new Honk Kong Companies Ordinance has come into effect on the 3^rd of March 2014, the New Ordinance provides a modernised legal frame work in relation with the operation and incorporation of Honk Kong companies, it is now divided into 21 parts, contains over 900 sections and 11 schedules.

Objectives of the New Ordinance:

Enhance corporate governance.
Adopt better regulations.
Facilitate business.
Modernise the law.

Individual Directors

Before the new ordinance was brought into force the position of the sole director of a company could have been held by a corporate director, the new ordinance now provides that private companies must have one natural person as director; this in turn shall enhanced the transparency and accountability of the directors in companies.

Taking into consideration the above mentioned it has to be noted that there is a 6-month grace period from the date of which the new ordinance has been in effect. This means that by the 3^rd of September 2014, all companies which have been registered in Hong Kong must have at least one individual director; such a director may be a resident anywhere in the world.

It has to be further noted that when an individual is appointed in the position of the nominee director this may effect the application for the Hong Kong Profits Tax regime which is not based on a worldwide income tax basis but on the territorial tax system. For example if a director is a resident of a jurisdiction with high taxes, this may result to the change the tax residency of the Hong Kong Company due to the fact that management and control is considered to be exercised where the director of the company is a resident. Having this in mind the tax authorities of the country at which the director is a resident, may consider that the company is an actual tax resident in such country by applying local tax law and for double tax treaty purposes. As a result one should evaluate the possible tax implications that may arise by appointing a foreign director based outside of Honk Kong in a company.

Responsibility of Officers

As in the original Companies Ordinance the new one may impose liabilities which may be subject to penalties in situations where an officer of a company shall be in breach, thus not in compliance with administrative requirements set out within the company ordinance, in addition responsibility of persons which may be held liable has been widened and the threshold of committing offences has been lowered.

The New Ordinance provides that a “responsible person” may be held liable in the event where he “authorises or permits, or participates in, the contravention of failure”. The lowered threshold does not catch negligence but actual knowledge, “wilful blindness” and a reckless act of a responsible person.

A “responsible person” includes a shadow director or an officer of a company and any other shadow director or officer of a corporate officer of the company.

As a result, any person which controls a Honk Kong company or which may give instructions related to such company may be considered a “responsible person”, taking into consideration that the threshold liability has been lowered and now covers situations where such a person ignores any such information will be held liable for any violation of the Companies Ordinance.

Abolition of the Memorandum

The New Ordinance provides that companies shall now have a single constitutional document that being the “Articles”, for already existing companies the provisions within the Memorandum shall be deemed as part of their Articles.

Companies may adopt new articles by taking under consideration the movement to a no-par regime. It is not required to take any actions in regard as there are transitional, saving provisions under the New Ordinance which certain provisions within the Memorandum shall be deemed as part of the Articles.

Such transitional provision further provide that reference to par or nominal value of shares in all contracts, deeds, resolutions and any documents executed prior to the date at which the New Ordinance has been brought into effect shall be deemed as reference to nominal value.

Financial Reporting has been simplified

Restrictions at which non-public companies are permitted to prepare simplified financial statements under the Small and Medium Sized Entities Reporting Standards have been significantly relaxed.

Non-public companies eligible for simplified financial reporting include:

1) Small private companies and groups of small private companies where they satisfy 2 out of 3 of the following conditions:

Total annual revenue of not more than HK$100M;
Total assets of no more than HK$100M net;
No more than 100 employees.

2) Subject always to sufficient shareholder approval, larger “eligible” private companies and groups of larger “eligible” private companies if they satisfy 2 out of 3 of the following conditions:

Total annual revenue of not more than HK$200M;
Total assets of no more than HK$200M net;
No more than 200 employees.

It has to be stated that companies which fall under the simplified financial reporting requirements are still required to prepare directors report and audited annual financial statements.

Directors review must include “business review”

A new requirement has been now introduced for public companies or privates companies which do not qualify for simplified financial reporting which requires them to prepare analytical business review of the company. Such a review shall include information related to risk the company faces, how the company aims to develop its business, environmental, employee, customers and suppliers issues which have a major impact to the company and a breakdown by using a financial performance indicators. Such a review does not apply for companies which are entitled for simplified financial reporting.

Par Value Shares have been abolished

As Honk Kong company law introduces a new regime of no-par value shares thus any provisions in the Memorandum related to authorised share capital, share premium and par-value have been abolished. Any amount of authorised share capital set out in already existing company’s (incorporated prior to when the new law has came into effect) are considered to be deleted.

In practice, par-value of shares along with any amounts standing in credit of the share premium account and capital redemption reserve shall form the share capital of a company. Upon their discretion shareholders may pass a special resolution in order to amend the Articles of a company in order to specify the maximum number of shares which can be issued, if not , no restriction will be imposed on the number of shares which can be issued after the authorised share capital has been abolished.

Transitional provisions subject to reference for par value or nominal value in contracts, resolutions, trust deeds and any other documents which have been executed prior to the date at which the New Ordinance has been in force shall be considered as reference to nominal value, before the law has come into force. Such provisions have been introduced in order to avoid existing companies prior to the enforcement of the law to have their constitutional documents or contractual documents amended.

Classification of rules in relation with Company Administration

New provisions have been added in order to modernise and simplify the day to day company administration, such as:

Clarification of rules related to written resolutions;
Provision of meetings to be held in two or more venues when using electronic technology to link up the venues;
Dispensing the need for annual general meetings in the case of single member companies or companies which members have passed unanimous resolutions for such effect; and
Provision for deeds to be signed under common seal, the adoption and use of a common seal in such an event has became optional.

Conduct and Duties of Directors

A number of changes have been adopted in the New Ordinance; one of the main changes as stated in the beginning of our report is the requirement that all companies must now have one individual director.

Further changes include:

A) Directors Duties have now been codified.

Common law duties of directors have now been codified within the New Ordinance. The standard of care, skill and diligence which a director has towards the company is expected to have the skills and experience that a director actually has and general knowledge, skill and experience he could have reasonably expected to have, same applies to shadow directors.

B) Directors Conduct Ratification.

The new Companies Ordinance codifies the above general common law rule of ratification of director’s conduct. It further provides that ratification of negligence, default or breach of duty or trust of a director requires the approval of disinterested members or unanimous consent of members. The common law rule as to certain acts that are incapable of being ratified still applies; these include illegal acts, acts contravening the articles of association, fraud on minority and act of dishonesty of director.

C) Fair dealings with Directors:

In depth clarification to the extent at which a director may be identified by the Company.
Restrictions on loans provided to directors have been tightened by increasing the categories of persons closely associated with directors.
The prohibitions of payment of loss of office have been expanded.
Widening of the Disclosure under the new Companies Ordinance. Directors will now have to disclose (i) transactions and arrangements, in addition to contracts and (ii) the extent of the interest, in addition to the nature in such transactions, arrangements and contracts. Directors of public companies will now also need to disclose the interests of their connected entities. These requirements similarly apply to shadow directors.

New Companies Ordinance Briefing Notes on Companies (Model Articles) as provided by the Honk Kong Companies Registry

Standard articles of association are contained in Schedule 1 to the Companies Ordinance (Cap. 32) (“Cap. 32”). Specifically, Table A provides the standard articles for companies limited by shares. Part I contains provisions applicable to a company limited by shares not being a private company whereas Part II is applicable to a private company limited by shares (with provisions in Part I incorporated into Part II by reference).They apply to companies that do not have their own articles excluding or modifying the statutory standard articles. Companies limited by guarantee may rely upon the form of articles set out in Table C to Schedule 1, but these, unlike Table A, do not apply by default and must be formally adopted by a company.
Section 78 of the new Companies Ordinance (“new CO”) empowers the Financial Secretary to prescribe model articles for companies. Section 80 thereof provides that on the incorporation of a limited company, the model articles prescribed for the type of company to which the company belongs and that are for the time being in force, so far as are applicable, form part of the company’s articles if the company’s articles do not exclude or modify the model articles.

The subsidiary legislation

Companies (Model Articles) Notice (“the Notice”)

The Notice prescribes the model articles of association which a company to be incorporated under the new CO may adopt in part or in its entirety at its volition, and which will apply by default if not excluded or modified by specific articles registered by the company. The model articles will have no impact on existing companies, including those which have adopted the standard articles provided in Schedule 1 to Cap. 32(An existing company may, however, amend its articles to follow the model articles at its volition).
To make the model articles more user-friendly, the Notice prescribes three distinctive sets of model articles as follows:

(a) Schedule 1 consists of 105 articles for public companies limited by shares;

(b) Schedule 2 consists of 84 articles for private companies limited by shares; and

Compared with the standard articles under Cap. 32, the model articles have been substantially re-organised to enhance clarity, coherence and ease of reference. Articles concerning similar matters are grouped together under different broad headings. The topics are covered in the following sequence:

(a) directors and company secretary, and in particular how directors are to make decisions;

(b) members’ rights and the proceedings at general meetings;

(d) miscellaneous matters, including communications to and by the company.

Major Changes

In terms of contents, the major changes introduced in the model articles include, for example:

(a) in respect of decision-making by directors, new articles have been added for public companies limited by shares in Schedule 1 to provide the detailed procedures for written resolutions. For private companies limited by shares and companies limited by guarantee, a new article dealing with unanimous decisions of directors is added. Articles dealing with the appointment and removal of alternate directors are also added. The articles on voting at directors’ meetings where there is a conflict of interests have been updated to take into account the changes in Part 11 of the new CO and other changes. Articles on directors’ meetings have also been revised to cater for dispersed meetings, i.e. where directors meet via telecommunication or video conferences, or with the aid of other communication technology;

(b) in respect of the proceedings at general meetings, an article is added on the rights of directors and anyone who is not a member of the company to attend and speak at general meetings. The articles relating to the effect, validity and the delivery of relevant notices for proxies have been set out in greater details. The articles on the contents and time frame for notices of meetings have also been revised to align with those provided for in the new CO; and

(c) in respect of share capital, the articles relating to forfeiture of partly-paid shares are set out in greater details and an article has been added to deal with surrender of shares in lieu of enforcement of a call for payment. Amendments have also been made to reflect provisions in the new CO, providing for greater flexibility resulting from migration to no-par regime.

The model articles set out in the Notice are in addition to the mandatory articles that companies are required to have under the new CO. Sections 81 to 85 of the new CO set out these mandatory articles which include:

(a) the name of the company (section 81);

(b) the objects of the company, if the company has been granted a licence to dispense with the use of the word “limited” in its name under section 103 of the new CO (section 82);

(d) details of liabilities or contribution of members (section 84); and

(e) details of initial capital and initial shareholding (section 85).

Seychelles updates

On the 16th of December 2013 the International Business Company Act (IBC Act) Amendment Bill 2013 has come into force and several amendments have been introduced, this may be found below:

The Bearer Shares have been abolished

The Amendments introduced are prohibiting and abolish the issuance of bearer shares by International Business Companies (IBC).

As such any companies which have any issued and outstanding bearer shares are required by 31st June 2014 to recall and cancel such bearer shares within a tine frame of 6 months after Amendments have came into force. Such companies shall proceed with issuance of registered shares in order to substitute the bearer shares that have been cancelled. The IBC share register shall be updated by entering any such particulars of the cancelled bearer shares and replaced registered shares.

As a result after the 16th of December 2013, an IBC and its director shall not proceed with any issuance of any bearer shares. Bearer shares which have failed or have not been recalled in order to be cancelled by 31^st of June 2014 shall be considered of no value, invalid and will have no legal effect. Any provisions stated within the companies memorandum and articles of association which give reference to bearer shares have no effect, thus considered as void. In the event where a company wants remove such a provision about bearer shares from its memorandum and articles of association, it will have to proceed before June 2014, with filling a new amended version with the Registrar of Companies.

Annual Return provided to the registered agent

By providing the Annual Return, a company will confirm to the Registered Agent:

that the company has in accordance with the provisions and requirements of the Act kept at its registered office a complete and updated Share Register;
that the company keeps accounting records in accordance with Act and that such records are available by the registered agent. This shall in turn allow accounting records to be provided upon request where required by law, including any such request from the Seychelles Revenue Commission in order to meet a request for information under a tax treaty or by the Financial Intelligence Authority which may be required under the Anti-Money Laundering Act.

Accounting records may be kept outside of Seychelles, but upon request they have to be available for inspections through the Registered Agent. It has to further be pointed out that IBC’s shall still not have the obligation to prepare or file annual accounts. The Annual Returns are not to be filed with the Seychelles International Business Authority (SIBA), in general it shall be a simple one page standard declaration to be signed on behalf of the IBC and provided to the Registered Agent every year. Such an Annual Return is expected to be provided by 31 December 2014.

It has to further be pointed out that where an IBC does not comply that penalties may be imposed, but up until today it has been noted that SIBA’s approach in relation with non-compliance with record keeping requirements, is keeping a reasonable approach by imposing penalties only in rare cases.

Location of IBC Share Register

IBCs are to keep either the original or a copy of its Register of Members at is registered office in Seychelles. In the event where the original Share Register is not kept at its registered office, IBCs must inform its Registered Agent of the actual physical address at which the Share Register is kept and further inform where such address may change.

D) Accounting Records:

Although the Amendments do not require IBCs to prepare and file annual accounts the Amendments do not change the position with respect to IBC’s obligations for keeping accounting records under the IBC Act. The Amendments introduced have increased the penalties imposed on an IBC and its directors where they do not comply with the relevant requirements.

Following the Amendments which have been introduced, the penalties payable by an IBC for breach of the account record-keeping requirements is $100 and an additional penalty of $25 for each day which no compliance occurs. A director of an IBC may also be held liable where he/she has in his/hers knowledge allowed such a breach to take place, by being liable to penalty of $100 and an additional penalty of $25 for each day at which the breach continues.

The IBC Act position under is as follows:

IBCs must keep proper accounting records that:

clearly show and correctly explain the company’s transactions;
enable at any time to determine the financial position of the company ; and
allow for accounts of the company to be prepared (notwithstanding that an IBC is not required under the IBC Act to prepare accounts).

“Accounting records” – are the documents relating to the company’s assets and liabilities, company receipts and expenditure and sales, purchases and other transactions to which the company is a party.

Such records may be kept at the company’s registered office or such place inside or outside of Seychelles. Where a company does not keep its accounting records at its registered office, it shall notify the Registered Agent of the physical address of the place at which its accounting records are kept. Where the place at which accounting records are kept has changed the company must inform its Registered Agent, about the physical address where records are kept within 14 days at which the location has changed.

BVI updates

The BVI enacted legislation at the end of 2012, which introduced new record keeping rules for companies and partnerships.

The New Rules include that:

records are to maintained for a minimum of five years upon commencement of a transaction;
records and important documentation may be kept in the BVI or in any other jurisdiction;
where documentation shall be kept outside the BVI, such a company must inform in writing its BVI registered agent the physical address where the records are kept.

Accounting record keeping

BVI companies are not obliged to prepare any accounts; neither should accounts be filed with the Agent or the BVI Registry. The recent amendment to the BVI BC Act, states that BVI companies should keep records which will allow determining their financial position.

The term “financial position of the company” in the BVI BC Act is in other words “the assets and liabilities of the company”.

There is no prescribed form for the “accounting records” but it is clear that there is no requirement of producing any financial statements.

Belize updates

The Accounting Records (Maintenance) Act (No. 18 of 2013) provides that Belize companies are required to keep their accounting records at any of the following locations:

Registered Office; or
Registered Agent in Belize; or
Within or outside Belize as may be determined by its directors;

Where the accounting records of a company are kept outside Belize, the company shall provide its Registered Agent with a written record of the physical address of the location where the accounting records are kept and within 14 days notify its Registered Agent of any changes of the location.

Accounting record keeping

The recent amendment to the Belize Act (Amendment Act attached), states that Belize companies should keep records which will allow to determine their financial position. The term “financial position of the company” is in other words “the assets and liabilities of the company”.

The nature of the records and documents to be kept depends on the business undertaken by the company; i.e. a holding company may only have some contracts and invoices which they will allow to determine the financial position of the company. There is no prescribed form for the “accounting records” but it is clear that there is no requirement of producing any financial statements.

Conversion of bearer shares to nominative or immobilisation of bearer shares, which came into force in January 2013.

The amended Regulations state that it is now mandatory for all Belize Registered Agents to retain at all times physical possession of bearer share certificates issued by Belize Companies.

Bearer shares can no longer be in possession of a professional intermediary and must be forward to the registered agent as soon as possible. The shares may also be converted to registered and a copy of the Register of Members duly updated must be sent to the Registered Agent.

The legislation establishes that if a company fails to comply with the amendment, the registered agent should resign of such company.