LegCo Paper No.

LegCo Panel on Financial Affairs
Verification of Directors' list with regard to property fraud

Introduction

At a meeting of the Housing Panel on 7 May 1996, it was noted that, in a fraud case, the culprit succeeded in adding a false name to the list of directors of a company, and subsequently obtained a re-mortgage loan from a financial institution. Members felt that the Companies Registry (CR) did not have sufficient control over the changing of the directorships of a company and considered that there was a need to refer the subject to the Financial Affairs Panel.

Functions of the Companies Registry

2. At the outset, it should be stressed that the CR has neither the jurisdiction nor the necessary expertise and resources to exercise the type of control which members of the Housing Panel appear to envisage. In this respect, the functions of the CR are outlined in the department’s Annual Report 1995/96 and include the following -

  1. To provide facilities to allow the promoters of companies, limited partnerships and trust companies to incorporate their enterprises easily, and to register all documentation required by various ordinances governing these enterprises;
  2. To provide the public with facilities to search for information held by the Registry;
  3. To ensure compliance by enterprises and their officers with their obligations under the relevant ordinances.

Processing of Directors’ Appointments

3. Within the framework of the Companies Ordinance (CO), a company is free to appoint its directors in accordance with the provisions of its registered memorandum and articles of association. On receipt of the statutory notifications of appointment, the CR is not in a position to ascertain the authenticity of the purported appointment(s) short of -

  1. physically examining the identity papers of the appointees; and
  2. verifying the authority for such appointments by examining the minutes of the relevant meetings at which the appointments were made and the associated resolutions.

On average, over 5,000 documents are submitted to the CR for filing every working day. If the Registry’s staff were to examine these with a view to establishing the authenticity of each document, the entire registration process would be subject to unacceptable delays with very adverse consequences for Hong Kong’s business and commercial life. The resource implications would also be very significant. Hence there is no existing statutory provision requiring the production of supporting documents upon filing of returns at the CR.

4. It should also be noted that documents bearing the signatures of serving directors are public records open to public search (please see paragraph 2(b) above. Given this, criminals who are determined to cheat can inspect the public records and forge such signatures. The Registry’s staff are not graphology experts and, therefore, are not in a position to detect forgeries. Understandably, the CO does not provide for the CR to exercise the type of control envisaged by members of the Housing Panel. On the contrary, section 348A of the CO makes it clear that the Registrar of Companies is not responsible for verifying the truth of any statement made in any document delivered to him for registration. In this respect, it is a fairly fundamental principle that any party entering into a commercial transaction should do so with caution and undertake their own enquiries as to, for example, the bona fides of the other contracting party.

5. The fraud case in question involved Chung King Investment Ltd (Co. No.: 487180), and the offending document was a Form X(ii) (notice of change of directors or secretary, or in their particulars) purporting to notify a change of directors. We consider that this document itself was not the real effective cause of the damage and loss sustained by the parties concerned. If the mortgagee (the financial institution) had bothered to verify the authority for seeking the mortgage, the misrepresentation could well have been discovered. In this regard, the views of the Law Society expressed at the meeting of the Housing Panel on 7 May 1996 represent the an effective means of tackling the problem. If financial institutions release the original title deeds of a property only upon the production of valid identification documents and obtain authorization from the serving directors of a company in the event that an application for a re-mortgage loan is received from a new director, fraud cases similar to the above should not recur in future.

Financial Services Branch
21 January 1997

Last Updated on 18 August 1998