No good can come of new company director rule

Gordon Jones says the reasons for withholding information on company directors are weak to begin with, and the consequences of such action will be worse than expected for Hong Kong's international reputation

PUBLISHED : Wednesday, 13 February, 2013, 12:00am
UPDATED : Wednesday, 13 February, 2013, 3:33am

The proposals to restrict disclosure of directors' residential addresses and identity card numbers will compromise the principle of limited liability, which has been a central principle of modern company law since 1855.

Statutory limitation of an individual's personal liability for corporate debt gives directors the assurance that they would not be personally bankrupt in the event of a business failure. In return for this protection, however, directors have to disclose key information about themselves, in particular their identity and how they can be contacted. This protects the interests of creditors, investors and all others who have dealings with the company. The consequence of having the protection of limited liability is that directors have to surrender some personal privacy.

For many years, the Companies Ordinance has required the directors of Hong Kong companies to make publicly available their residential addresses and identity card numbers. This requirement was reviewed during a consultation exercise that began in late 2009, as part of the government's efforts to update the law.

In the survey of opinion, 46 of the 68 respondents, including some commercial organisations and professional bodies, said that directors' residential addresses should not be disclosed, mainly for reasons of privacy and risk of abuse. But 20 respondents, including several major professional organisations, favoured maintaining the status quo.

On the question of whether identification numbers should be made public, 43 of the 46 respondents said some of the digits should be masked to better protect personal privacy. But 10 respondents, including trade unions, major professional and business bodies, and some accountancy and law firms, objected. They argued that such information provided a unique identifier of individuals, and noted that disclosure so far has not created a major problem of abuse.

The consultation paper did not consider the fundamental issue of being able to adequately identify and contact directors as part of the limited liability deal. In this respect, residential addresses are a faster and more precise way of contacting directors than service addresses. Furthermore, identity card numbers provide the only unique identifiers for directors. This information is not confidential.

It's worth noting that among the majority that favoured "restricting" this information were corporate members that were clearly not disinterested parties. Conversely, the dissenting voices were heavily involved in policing companies and dealing with corporate fraud.

In conclusion, the government acknowledged there was little evidence that the disclosure of directors' addresses had caused personal safety problems, but said access to this information should be restricted "due to rising concerns over the protection of personal privacy".

The consultation provided the "justification" for the enabling provisions in the new Companies Ordinance, which was passed by the Legislative Council last July and is expected to take effect in 2014. Subsequently, the draft Companies (Residential Addresses and Identification Numbers) Regulation was issued for public consultation. These proposals are misconceived for the following reasons.

Firstly, directors in Hong Kong by and large do not draw threats of physical violence. A confidential register of directors' residential addresses had to be introduced in Britain because the directors of certain companies and their families, particularly those involved in biological and medical research involving animals, were subject to very serious threats of harassment and intimidation by animal rights activists. These included physical violence and arson attacks. No such risk exists in Hong Kong and will, hopefully, never exist.

Secondly, even if a confidential register were established, numerous directors' residential addresses and identity card numbers on the Companies Registry's database will remain open to access. Under section 49 of the new Companies Ordinance, it will be possible to apply for information on the database to be "sanitised", but not all will do so. So even if newly appointed directors are not required to give their personal details, a huge amount of existing data will still be available for public search.

Conversely, if there are numerous applications to sanitise the public record, the value of the existing data will be significantly reduced.

Lastly and very importantly, Hong Kong still permits corporate directors, under which a company can be a director of another private company which is not part of a listed company group. These entities are non-transparent and unaccountable.

Section 457 of the new Companies Ordinance goes some way to mitigating this by requiring every private company to have at least one director who is a natural person (following equivalent provisions in Britain's Companies Act of 2006). However, unlike Hong Kong, the UK requires all companies (including private companies) to file audited accounts.

There is no such provision in Hong Kong. By permitting corporate directors for private companies and not requiring them to file audited accounts, the Hong Kong government is allowing their operation to be obscured by a double layer of opaqueness. If the single natural director of a private company is also permitted to withhold his or her residential address and identity card number, an already unacceptable situation will be further worsened.

This is a very important issue as the overwhelming majority of registered companies in Hong Kong are private companies (over a million as of last December) and, of these, a significant number have corporate directors. They provide perfect vehicles for fraud, money-laundering and the financing of terrorist arms, among other crime.

If enacted, the new provisions will undermine the principles of accountability and transparency that lie at the heart of Hong Kong's company law, undermine our corporate governance standards and adversely affect Hong Kong's image as a major international business and financial centre.

Gordon Jones was the registrar of companies from 1993 to 2007, during which time he modernised and computerised the Companies Registry's operations and was heavily involved in company law and corporate governance reform, including initiating the rewrite of the Companies Ordinance