Government launches consultation on enhancing transparency of beneficial ownership of Hong Kong companies

The Government has launched a two month consultation exercise on proposals to enhance the transparency of beneficial ownership of Hong Kong incorporated companies. This is part of a number of reform proposals aimed at bringing Hong Kong in line with international standards to combat money laundering and terrorist financing. With a mutual evaluation of Hong Kong’s regime with other members of the Financial Action Task Force (FATF) looming in 2018, the Government is keen to enhance Hong Kong’s regime to require transparency of beneficial ownership in line with FATF’s standards.

The consultation paper proposes amending the Companies Ordinance (Cap 622). Under the proposals, all Hong Kong incorporated companies (other than listed companies who will be exempt) will be required to obtain and hold beneficial ownership information which will be available for public inspection. The regime will be backed by criminal sanctions for non-compliance.

Summary of the key features of the proposals to enhance transparency of beneficial ownership

  • Applies to Hong Kong incorporated companies – The proposals apply to all companies incorporated in Hong Kong including companies limited by shares, companies limited by guarantee and unlimited companies. Listed companies, however, will be exempt given the existing regime imposed on them under the Securities and Futures Ordinance (Cap 571) for the disclosure of interests and related registers and record keeping.

  • Company to identify and keep a register of people with significant control – Under the proposals, companies would be required to identify and keep a register (PSC register) of persons with significant control over the company. Persons with significant control means any individual who falls within the definition of beneficial owner detailed below (registrable individual). To capture indirect holdings through corporate structures, the PSC register should also include details of any entity meeting the beneficial ownership definition (registrable legal entity). To ease the administrative burden, only an entity which is immediately above the company in the company’s ownership chain needs to be included.

  • Definition of beneficial owner – The beneficial owner definition proposed is similar to FATF’s definition. It catches any individual who meets one or more of the following conditions:

    • directly or indirectly holds more than 25% of the shares in the company;

    • directly or indirectly holds more than 25% of the voting rights in the company;

    • directly or indirectly holds the right to appoint or remove a majority of directors;

    • otherwise has the right to exercise or actually exercises significant influence or control; or

    • has the right to exercise or actually exercises significant influence or control over the activities of a trust or firm that is not a legal person but whose trustees or members satisfy any of the above conditions in relation to the company, or would do if they were individuals.

  • Details required in the PSC register – The company will need to establish and record in the PSC register information about the registrable individuals and registrable legal entities including name; identity card or passport details or company registration number; correspondence or registered address; date of becoming registrable and the nature of the control. Where there is no registrable individual or legal entity, that fact must be stated in the PSC register. The PSC register must be kept in English or Chinese.

  • Company to verify beneficial ownership information – Information must only be included in the PSC register once provided by the registered individual or ascertained by the company. The company will be required to take reasonable steps to identify and ascertain its registrable individuals and registrable legal entities. The consultation paper cites examples of possible steps a company could take including reviewing a company’s register of members, articles of association, statement of capital and relevant agreements or by sending a notice to persons seeking confirmations of ownership.

  • Notice to persons to confirm beneficial ownership – A company will be able to serve a notice on any person or entity that the company knows or has reasonable grounds to believe either is registrable or knows of a person or entity that is registrable. The consultation proposes that non-compliance by a recipient or the provision of misleading, false or deceptive information in response will attract criminal penalties as a means of ensuring the regime is effective.

  • PSC register to be open for public inspection – The consultation paper proposes that the PSC register is available for public inspection on payment of a fee (or for free for members of the company or any person on the PSC register). As with the existing register of members, the location of the PSC register would need to be notified to the Registrar of Companies. However, the information in the PSC register does not need to be filed with the Registrar of Companies.

  • Criminal sanctions for non-compliance – The Government is proposing criminal sanctions for breaches of the regime similar to those that currently apply to maintenance of the existing statutory registers. Sanctions would include penalties for non-compliance which will apply to the company, its responsible officers and any person who knowingly or recklessly makes a misleading, false or deceptive material particular in the PSC register.

Timeframe for the reforms

The consultation is open for comments until 5 March 2017 and the Government seems set to move quickly towards introducing a bill into the Legislative Council in the second quarter of 2017. With the mutual evaluation of Hong Kong’s regime with other FATF members fast approaching in 2018, the Government is under time pressure to push through these changes.

Other reform proposals

To ensure consistency in the regulatory regimes, the current definition of beneficial owner in the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap 615) (AMLO) may be increased from 10% to 25% consistent with the proposed level for beneficial ownership under the Company Ordinance.

Further, the Government has also simultaneously launched a consultation setting out proposals to enhance the anti-money laundering regulatory regime under the AMLO. The AMLO currently only applies to financial institutions and the Government proposes to extend aspects of this to certain non-financial businesses and professions. This would provide a statutory obligation on solicitors, accountants, real estate agents and trust or company service providers to carry out due diligence on their clients before they engage in certain types of transactions. The Government is also proposing that trust or company service providers become subject to a licencing regime. We will discuss these proposals in more detail in an upcoming e-bulletin.

How should trustees react to foreign divorce proceedings?

In the matter of the Representation of HSBC Trustee International Limited [2011] JRC 167 and [2014] JRC 254A

Facts

The case concerned a divorcing couple.  The Husband was a successful businessman in Hong Kong operating his business through a large group of companies. A conventional discretionary trust governed by the law of Jersey was established in 1995 (the “Trust“). The Trust’s sole asset was a holding of 84.63% of the shares in the Bermuda holding company (the “Company”) which in turn owned 100% of a number of companies which formed the corporate group assembled by the Husband over many years. Approximately 70% of the underlying assets of the holding company and its subsidiaries were held in Hong Kong or the People’s Republic of China.

The Trustee was a BVI company with a branch in Jersey, and had delegated the administration of the Trust to a trust company which carried out the administration from Hong Kong. The Husband was the protector of the Trust and retained the power to appoint and remove trustees. The beneficiaries of the Trust were the Husband, his Wife, their surviving daughter and any other living descendants of the Husband (of which there were none at the date of the hearing).

The marriage between the Husband and the Wife broke down and divorce proceedings were commenced in 2009, resulting in the High Court of Hong Kong granting a decree absolute in 2010. The High Court of Hong Kong made an order joining the Trustee as a party to the divorce proceedings. The Wife sought orders from the Hong Kong Courts to the effect that the whole of the assets of the Trust should be regarded as being part of the matrimonial estate available for distribution between the Husband and the Wife, or alternatively, that the Hong Kong Court should attribute all of the Trust assets to the Husband as a financial resource of the Husband. Continue reading

Hong Kong High Court finds trust on basis of co-habitants’ enforceable oral agreement

The High Court of Hong Kong in Ching Chi Sau v. Yip Woon Yin Judy And Another has found in favour of a non-registered owner claiming beneficial interests in properties against its legal owner. The Defendant, the legal owner of the properties and former co-habitant of the Plaintiff, was held to hold the Plaintiff’s beneficial interest in the properties on trust due to the existence of an enforceable oral investment agreement between the parties.  The case is a helpful demonstration of how fact specific these types of cases are and how Courts grapple with those facts.

Background

The Plaintiff and Defendant were co-habitants for fifteen years until their relationship ended in 2008. During this period, several properties were purchased in the Defendant’s name. The Plaintiff claimed that the Defendant purchased several properties in her name or in the name of a company in which she was the sole shareholder using his funds. He claimed that, despite having no legal title, he had beneficial interests in the properties due to an oral investment agreement (the “Agreement”) made between the Plaintiff and the Defendant. He alleged that the Agreement contained the following terms.

  1. The Defendant and Plaintiff were to invest jointly in the property market as a means of financially supporting them both in retirement;
  2. The funds for these investments would come from refinancing the parties’ home (the “FG House”), the Plaintiff’s salary and, if necessary, the Defendant’s money;
  3. The Plaintiff and Defendant would jointly decide on the property to be acquired, the time to sell the acquired property and how the proceeds of sale would be utilized for further investment;
  4. The proceeds of sale should be reserved for further investment;
  5. The legal title would be in the Defendant’s name as the Plaintiff was reaching retirement age and would find it difficult to obtain a mortgage from the banks. The Defendant would hold the properties on trust for herself and the Plaintiff;
  6. The Defendant would receive an income from the Plaintiff as a nurse assistant to provide proof of income for mortgage purposes; and
  7. Both parties would be beneficially entitled to the properties acquired for investment, the rental income and the proceeds of sale from such properties in equal shares.

This Agreement was supplemented by several written memos, the most significant of which (“Memo 3”) is summarised below.

  1. Both parties agreed that they should continue to stay together for a few years before confirming the legal status of the relationship;
  2. The Defendant proposed the transfer of the beneficial interest in two flats to the Plaintiff in exchange for the beneficial interest in the FG House. The legal title would be held in the sole name of the Defendant. The period for considering this proposal would be three months;
  3. Within six months of the exchange transaction, if there was any economic loss suffered by the Defendant, the Plaintiff would make the mortgage repayments for 1 year in respect of the FG House only;
  4. To demonstrate his sincerity and the fact that the relationship in their advanced age was treasured, the Plaintiff would give certain “personal treasures” to the Defendant for safekeeping.

The Defendant contested the authenticity of the above memo and claimed that her signature had been forged.

The Issues

1.   Beneficial interest in the FG House

This property was registered in the joint names of the Plaintiff and the Defendant. The Defendant claimed to have sole beneficial ownership of the property. In addition, the Defendant claimed that she gave the Plaintiff loans to help purchase the house with some of the Plaintiff’s personal chattels being offered as security.

The Decision

Both parties had made contributions to the down payment on the property and it was clearly intended to be their family home. In addition, the Court found against the existence of the loans as there was no written record of these alleged loans and the Defendant never made any attempts to recover them. Both parties bore legal obligations to repay all charges and mortgages on the property. Furthermore, it was clear from both parties’ intentions and written records that this property should be held in equal shares. The Court therefore held that monies from the sale of the property should be split in equal shares.

2.   Beneficial interest in properties purchased as part of the Agreement

There were three properties in relation to which the Defendant was the sole registered owner. The Plaintiff pleaded that he held beneficial interests in these due to the existence of the Agreement.

The Decision

In reaching his decision, Kent Yee J referred to Luo Xing Juan v Estate of Hui Shui Shee (2009) 12 HKCFAR 1, which concerned equitable rights arising in the course of a relationship between a married couple. In this judgment Riberio PJ cited Lord Diplock in Gissing v Gissing

Where a constructive trust is alleged to arise on the basis of the parties’ common intention, it is the intention commonly held by the property owner and the claimant regarding their shared beneficial interests in the property that matters. The trust is constituted by the claimant’s detrimental reliance on their common intention and the unconscionability of the property owner departing therefrom.”

The Court held that, given the close nature of the relationship between the parties, it was likely that they had had a discussion about joint investment. The Court further acknowledged that it would be difficult for the Plaintiff to have obtained a mortgage due to his age. The Court therefore held that the terms of the Agreement were fair and reasonable in all the circumstances. It was further held that the parties by their conduct acted in accordance with the Agreement. The investments were funded by re-mortgaging the FG House in which both parties had legal title. One additional written memo highlighted that the Plaintiff set the asking price for one of the properties, indicating that he had a significant role in the investment portfolio. As a consequence, all proceeds from the properties purchased as part of the Agreement held in the Defendant’s name were held on constructive trust to be distributed between the two beneficiaries in equal shares. Under this arrangement, it would have been unconscionable for the Defendant to have departed from the Agreement and to claim sole beneficial ownership of the properties.

3.   The property held in the Company’s name

The Plaintiff further pleaded that he had a beneficial in a property (the “CL Flat”) of which Bestview, a company solely owned by the Defendant, was the sole registered owner. The Plaintiff alleged that the property was purchased using the proceeds of loans secured by the FG House. The Plaintiff argued that he had been misled by the Defendant into believing that he had become a 70% shareholder in Bestview.

The Decision

The Court found the Plaintiff’s account implausible. He had been a shareholder in the past and would have been aware of the need to sign certain legal documents to become a shareholder. In addition, at the time of the purchase the relationship between the Plaintiff and Defendant had deteriorated. Therefore, the basis of the investment fund (i.e. a life-long relationship) had already fallen away. The Court believed that the Defendant had no intention to purchase the flat as a joint investment. More significantly, there was no cogent evidence that funds from the FG House were used to purchase the property and there was no evidence that the Plaintiff made any financial contributions to the purchase of the property. The Plaintiff therefore had no beneficial interest in the property.

Authenticity of Handwritten Evidence

The authenticity of the memos was key to the Plaintiff’s claims. The Defendant contested the authenticity of the documents and argued that her signature had been forged on Memo 3. The Court held, citing Nina Kung v Wang Din Shin [2005] 8 HKCFAR 387, that if forgery is asserted then the burden is on the party asserting forgery. This burden is high. The Defendant was seen as an unreliable witness and her claims of forgery were found to be false. These claims were viewed to be an abuse of process and as a result the Defendant was ordered to pay the Plaintiff’s costs on an indemnity basis.

 

Misplaced Trust

At our last private wealth seminar, we took an in-depth look at charities.  A recent UK case has highlighted some of the curiosities which can arise in this context.

Back in 1927, the UK national debt reached 160% of GDP (it is currently around 85%).  it appears that this state of affairs inspired one public-spirited donor to set up a charity known as “The National Fund” which he endowed with the princely sum of GBP 500,000.  Papers lodged with the UK Charities Commission state that: “The aim of the charity is to create a fund, that either on its own or combined with other funds, is sufficient to discharge the National Debt.”

Although the fund has performed rather well and is now worth around GBP 350 million (a 700-fold increase), the growth in the UK national debt has somewhat outstripped the expectations of the donor.  The UK national debt currently stands at over GBP 1 trillion and grew by around GBP 12 billion in 2011/12 alone.  Therefore, the chances of the charity ever being in a position to pay out its trust fund is in serious doubt because the trust fund is very unlikely to ever be large enough to extinguish the entire national debt.

Faced with this position, it is doubtful whether the trust will ever be able to fulfil its charitable purpose (being “other purposes beneficial to the community”).  The trustee is therefore consulting with the UK Charity Commission and Attorney General to see what can be done to change its objects to allow it to distribute some or all of its fund.  Although undoubtedly an unusual case, it does show how issues with charities can be explored with a dedicated regulator, being the Charity Commission (although any change would ultimately have to be blessed by the Court).  Hong Kong does not yet have such a regulator, but a recent consultation has suggested that one be introduced.

If you wish to discuss please contact Gareth Thomas or Richard Norridge.

New Hong Kong Trust Law to come into effect on 1 December 2013

On 17 July 2013, the Hong Kong Legislative Council passed the Trust Law (Amendment) Bill 2013, which will come into operation on 1 December 2013. The purpose of the amendments is to modernise Hong Kong trust law, which is considered to be outdated and out of step with more modern trust laws in comparable jurisdictions (eg, Singapore and England) and as a result has put off settlors from creating trusts in Hong Kong. The amendments cover three major areas, namely the clarifying and enhancing of trustees’ duties and powers, the enhancing of beneficiaries’ protection and the creation of greater flexibility and protection of trusts. The amendments that bring Hong Kong trust law at least partly in line with modern international standards are likely to be welcomed by settlors and to enhance Hong Kong’s status as an international asset management centre. The key amendments include the following new provisions: Continue reading

Hong Kong trusts law reform takes a step forward

After a number of years in gestation, the Trust Law (Amendment) Bill was gazetted on 8 February 2013. The Bill is widely regarded as a necessary modernisation of Hong Kong’s trusts laws, which have remained largely unchanged for decades. This was seen as all the more necessary given the changes made to Singapore’s trusts regime in 2006.

The key proposed changes include:

  • The provisions which limit the length of the life of a trust (known as the “perpetuity period”) are to be abolished such that a Hong Kong trust can now last forever (the existing rules which meant that charities can last indefinitely will continue unaffected).
  • The rules against excessive accumulations are also to be abolished.
  • Trustees of Hong Kong trusts will be subject to a new statutory duty of care.
  • Hong Kong will have its own “firewall” legislation which seeks to limit the impact of forced heirship rules (i.e. rules in certain jurisdictions which limit someone’s freedom to dispose of their estate by providing that prescribed portions of their estate must be given to specific heirs).
  • Professional trustees will have statutory limits on the exculpation clauses (clauses which seek to limit a trustee’s liability) which can be included in trust documentation.
  • Statutory provisions will make clear that those setting up trusts (settlors) can reserve powers of investment or asset management to themselves without making the trust invalid.  The reservation of powers to settlors is particularly attractive to settlors in this part of the world and this provision will bring welcome certainty.

Please contact Gareth Thomas or Richard Norridge if you wish to discuss.