In what represents a significant milestone for the development of company law in Hong Kong, a new Companies Ordinance (the “New Ordinance”) was published in the Government Gazette in August 2012, and will become effective on a day to be appointed (expected to be in 2014). The changes introduced by the New Ordinance are extensive and, in this article, we discuss a couple of significant changes which might be of interest to insurance companies:
Codification of directors’ duty of care, skill and diligence
Certain directors’ duties, namely the duty to exercise reasonable care, skill and diligence, have been codified (whereas previously those duties were found mainly in case law). Directors’ fiduciary duties remain defined by case law and uncodified.
In line with the UK Companies Act 2006, under the New Ordinance, a director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director relating to the company (objective test); and
- the general knowledge, skill and experience that the director has (subjective test).
The civil consequences for breach of these duties under common law and equity are preserved.
Auditor’s rights to information and liabilities
Under the New Ordinance, an auditor may require a wider range of persons (including persons who hold or are accountable for the accounting records of non- Hong Kong subsidiary undertakings of a Hong Kong company) to provide information or explanation reasonably required for the performance of the auditor’s duties, and the company must take all reasonable steps to obtain such information or explanation as soon as practicable. A person commits an offence if he makes a statement to an auditor that conveys or purports to convey any information or explanation that is materially misleading, false or deceptive.
In addition, the auditors will face criminal liabilities (fines only, not imprisonment) if, in the event of accounting fraud, they knowingly or recklessly failed to include in their report a declaration that the financial statements were materially different from the company’s accounting records, or that they could not obtain all the information or explanation needed for the audit.
The New Ordinance introduces a requirement on a public company (listed or unlisted), or larger private companies which do not qualify for simplified reporting, to prepare a more comprehensive directors’ report, which will include an analytical and forward looking business review of the company, containing information regarding the risks and uncertainties the company faces, the future development of the company’s business, and matters relating to employees, customers and suppliers that have a significant impact on the company.