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29TH LEGCO REPORT TO HKSA COUNCIL By Hon. Eric K.C. Li


I. Highlights

To present orally.

II. Committees and Panels

1. Public Accounts Committee (PAC):

The Committee held a total of 14 meetings and 9 public hearings before I tabled the PAC Report No. 39 at LegCo on 19 February 2003 (full copy of my website).  During the public hearings, the Committee heard evidence from a total of 39 witnesses, including 5 Director of Bureau and 9 Heads of Department.

The Report also contains the Public Accounts Committee's Supplemental reports on a chapter "Residential services for the elderly" in Report No. 38 of the Director of Audit on the results of value for money audits which was tabled in the Legislative Council on 24 April 2002.

We have held a public hearing on 5 December 2002 to receive evidence on the subject PAC Report 39 No. 10 "Primary education °V The Administration of primary schools".  The hearing highlighted the cumbersome management structure of the service concerned.  To allow the witnesses more time to consider the various issues involved and the additional information provided by themselves, the Committee has decided to defer a full report on this subject.

2. Financial Affairs Panel:

The Panel held 8 meetings including: one special meeting to discuss the business environment of the Hong Kong insurance industry and difficulties encountered by some sectors in obtaining insurance coverage as well as the business environment of the securities brokerage industry in Hong Kong; one special meeting to study the business environment of the securities brokerage industry in Hong Kong; two special meeting to meet with deputations to hear their views on issues related to insurance coverage for various business sectors; one working meeting to discuss the draft research report on "the Governance of the Hong Kong Monetary Authority" and "Operation of Trading Funds" prepared by the Research and Library Services Division of the Secretariat to date and the relevant agenda are attached as Appendix I.

On 19 February 2003, the Chief Executive of the Hong Kong Monetary Authority (HKMA) has provided the Panel with a report on Hong Kong's latest economic situation. He reiterated the Hong Kong Government needed to implement policies to tackle its growing fiscal deficit, which stood at about 6% of gross domestic product, if it was to maintain to confidence in the SAR°¶s currency peg to the US dollar.  He also said that an appreciation in the value of the yuan would benefit Hong Kong by narrowing price differences between the city and the mainland, thus helping to solve the deflation problem.  It was the first time the authority chief had commented on how any change in yuan policy would affect Hong Kong.

On 7 April 2002, the Hong Kong Society of Accountants (HKSA) was invited to attend a meeting on the initiatives to enhance the regulation of listed companies and corporate governance of companies.  In my opinion, the meeting went smoothly with little surprises.

A proposed list of future agenda items is attached as Appendix II for reference. 

3. Economic Services Panel:

The Panel held 3 meetings since the last report.  The Panel studied Subsidiary Legislation under Merchant Shipping (Local Vessels) Ordinance, Cap. 548 and Shipping and Port Control Ordinance, Cap. 313, Miscellaneous Amendment (Local Vessels) Bill 2003, Subsidiary Legislation under Merchant Shipping (Local Vessels) Ordinance, Cap. 548: Merchant Shipping (Local Vessels) (Compulsory Third Party Risks Insurance) Regulation as well as Merchant Shipping (Liability and Compensation for Oil Pollution) (Amendment) Bill 2003.

It also discussed the update on Hong Kong Disneyland, the extension of the Information and Consultation Agreement with the Hong Kong and China Gas Co. Ltd as well as the adjustments in oil prices.

4. Information Technology and Broadcasting Panel:

The Panel held 3 meetings to date.

The Panel discussed the progress of the Cyberport, the issues related to external telecommunications service, the telephone traffic congestion on 11 September 2002 and 2002 Survey on IT Usage and Penetration in the Household and Business Sectors, the E-Government Programme, promotion of IT adoption in the business sector.

It also studied the encouraging software development in Hong Kong, the Administration°¶s response on issues of concern to the development of film and industry as well as the IT Manpower. 

5. Education Panel:

The Panel held 5 meetings to date.  The Panel focused on the Accreditation Grant for providers of post-secondary programmes, Language Education Review, the reservation of school sites, the progress on the harmonization of pre-primary services, Education (Miscellaneous Amendments) Bill, the deregulation of university salaries as well as to review the adult education courses operated by the Education and Manpower Bureau.

It also studied the education expenditure in the draft Estimates for 2003-04, the proposed amendments to the Hong Kong Examinations and Assessment Authority Ordinance as well as the allocation of the Capacity Enhancement Grant.

There were two special meetings held firstly to discuss the progress on the harmonization of pre-primary services as well as the deregulation of university salaries and secondly discuss the review of the adult education courses operated by the Education and Manpower Bureau as well as the funding cuts for University Grants Committee-funded institutions.

6. Finance Committee and House Committee:

There were 3 meetings of Finance Committee (including a special meeting to consider the Administration°¶s proposal for funding to deal with the outbreak of Atypical Pneumonia) and 9 meetings of House Committee (including a special meeting to discuss the issue of sustainable development as well as cooperation between Guangdong and Hong Kong with Mr. Donald TSANG, JP, Chief Secretary for Administration).  There were also several special FC meetings consisting of 19 sessions from 24 to 27 March 2003 to examine the draft Estimates of Expenditure 2003-04.

TD of HKSA were kept informed of progress on all Bills on a weekly basis.  The updated list of Government Bills in the current legislative session dated 15 March 2003 is attached as Appendix III.

III.   Bill Committees Joined

1. Inland Revenue (Amendment) Bill 2000

The Bills Committee which I chair is now waiting to recommence on the Administration's request and subject to the availability of a Bills Committee slot at the time.

2. Companies (Corporate Rescue) Bill

At the House Committee meeting on 7 December 2001, the Bills Committee recommended that the scrutiny of the Bill should be held in abeyance to allow time for the Administration to conduct consultation on, and work out the details of, a new proposal based on ideas initiated by myself and refined by HKSA.  The House Committee agreed to the Bills Committee's recommendation.

In the PAC Report No. 39 delivered of LegCo on 19 February 2003, I made a passing remark to urge the Administration to expedite this task.  An official reply is expected by May 2003.

3. Bills Committee on Prevention of Child Pornography Bill

There were 3 meetings held since the last report.  The objectives of the Bill are to:

(a)create offences of making, producing, publishing, importing, exporting, distributing, advertising and possessing pornography that depicts children under the age of 16;

(b)create an offence for any person who uses, procures or offers another person who is under the age of 18 for making pornography, or for a live pornographic performance, in which that other person is pornographically depicted;

(c)extend the application of certain sexual offence provisions to acts committed against children outside Hong Kong and prohibiting the making of any arrangement relating to commission of those acts and advertisements for such arrangement; and

(d)make consequential amendments to various Ordinances.

The Bill has now reached a clause-by-clause examination stage.

4. Bills Committee on Land (Miscellaneous Provisions) (Amendment) Bill 2002

There were 6 meetings held since the last report.  The Bill seeks to improve the regulation of excavation in unleased land by -

(a)   Prescribing a fee (including the economic cost in some cases) for excavation permits;

(b)   Widening the scope of enforcement of excavation permit conditions.

The maximum fine for making or maintaining an excavation without a permit or in breach of a permit condition will also be increased from $5,000 to $50,000 to reflect the inflation over the past 30 years.  Liability to 6 months imprisonment will remain the same.

It is also proposed that the control regime be extended so as to bind the Government in so far as it relates to excavations in unleased land which is a street maintained by the Highways Department (HyD).  Government departments which carry out such excavations will therefore have to apply for a permit, pay the prescribed fees and bound by its conditions. 

The Bill has now entered a clause-by-clause examination stage.

5. Bills Committee on Telecommunications (Amendment) Bill 2002

There were 2 meetings held since the last report.  The Bill seeks to amend the Telecommunications Ordinance (Cap. 106) to provide a clear and comprehensive regulatory framework to regulate mergers and acquisitions in the telecommunications market with a view to promoting fair and effective competition in the market.

The Bill proposes to confer on the Telecommunications Authority (TA) a specific regulatory power to regular any change or proposed change in the ownership or control over a carrier licensee which, in the opinion of TA, has, or is likely to have, anti-competitive effect.  A number of procedural safeguards are proposed to ensure the fair exercise of the proposed statutory power.  Non-compliance with the provisions of the Bill will render a carrier licensee liable to sanctions including financial penalties, suspension or cancellation of licence.

I had strong reservations about the over-concentration of power in the TA in regulating the industry, enforcing legislation, conducting investigation and prosecution, and making determinations all at the same time. 

6. Bills Committee on Inland Revenue (Amendment) (No.2) Bill 2001

I was elected as the Chairman of this Bills Committee.  The Bills Committee has held five meetings with the Administration, including one meeting to listen to views of the professional bodies (such as HKSA) and information technology (IT) sector.

The Bill seeks to provide a legal basis for the use of password for authentication and fulfillment of signature requirement for tax returns filed under the Electronic Service Delivery (ESD) Scheme and the filing of tax returns by telephone.

The professional bodies and IT sector which had given views to the Bills Committee had expressed much concern about the security and the risks involved in the use of password as a signing device for filing tax returns electronically.  There were of the view that the proposed use of a Personal Identification Number (PIN) or password for filing tax returns under the ESD Scheme and the telefiling system could not satisfy the signature requirements in the same way as digital signature, particularly when a taxpayer had to shoulder the legal consequences of filing any incorrect return which was criminal responsibility.

To better understand the operation of the proposed systems, the Bills Committee had requested the Administration to demonstrate how the proposed systems operated.  As this was the first legislative proposal in Hong Kong providing a legal basis for the use of password for the purposes of authentication and fulfillment of signature requirement in electronic transactions, the Bills Committee had also considered the experience of other tax jurisdictions which had also accepted the use of passwords to sign tax returns for filing electronically.  The Bills Committee noted that no major security problem associated with the use of password in filing tax returns electronically in other tax jurisdiction, apart from an incident in the United Kingdom (UK), had come to the Administration°¶s attention.  According to the Administration, however, Hong Kong°¶s system was of a different design from that of the UK.

The Administration, having regard to member°¶s concern, had undertaken to highlight in its publicity and information pamphlets on the new service that there was a difference in security between using password and using digital signature for filing tax returns under the ESD Scheme.

The Bills Committee was of the view that the Bill aimed to provide a legal basis for providing an option for the use of password and the use of telephone for filing tax returns, and that the design of the systems and the security issues were outside the scope of the Bill.  The Bills Committee considered that it was the Administration°¶s responsibility to provide sufficient security safeguards in the proposed systems, and suggestions made by members in this respect were only for the Administration°¶s consideration.

The Administration has taken on board certain suggestions of the Bills Committee and the deputations, and agreed to take necessary measures to address the concern raised.  The Administration moved Committee Stage amendments to the Bill, including an amendment to remove the reference to "any other signing device" from clause 2 and clause 8 of the Bill.  In this connection, HKSA and some other deputations have pointed out that the reference to "any other device" in the Bill will create uncertainty as to what other signing device will be accepted under the Inland Revenue Ordinance in future.

Some other amendments are proposed by the deputations and the Bills Committee to achieve greater clarity and consistency of the terms used to the Bill.  These include replacing "adopting" in the proposed section 2(5) by "affixing of a digital signature to a return" and "inclusion of a password with a return"; and replacing "for the purposes of this Ordinance" by "for the purposes of this section" in the proposed new section 51AA(7).

The Bill was passed on 26 February 2003.

7. Bills Committee on Companies (Amendment) Bill 2002

There were 6 meetings held since the last report.  The objective of the Bill is to amend the Companies Ordinance (Cap. 32) (the Ordinance) so as to implement 17 of the recommendations made in the Report of the Standing Committee for Company Law Review (SCCLR) on the Recommendations of a Consultancy Report of the Review of the Hong Kong Companies Ordinance and to provide for other miscellaneous and consequential amendment.  The implementation of 17 recommendations includes:

(a) Abolishing corporate directors which will result in individuals being held responsible for corporate acts;

(b) Making a director vicariously liable for acts and omissions of his alternates;

(c) Reducing the threshold for circulating shareholders' proposals from the present 5% to 2.5% of the voting rights; and

(d) Giving every shareholder a personal right to sue to enforce the terms of a company's Memorandum and Articles of Association.

I am seriously concerned with the Government policy over shadow directors that might scare away foreign investors and hurt Hong Kong's competitiveness. 

I also express serious concern about the new section 161B, which held auditors liable for failure to include in their report loans to shadow directors whom they had no knowledge of.  I said that this would amount to asking auditors to a °•ghost chase°¶.  To address my request, the Administration agree to review the new section 161B in conjunction with the practicality of section 158, which required companies to keep a register of their shadow directors.

HKSA made another written submission to the Bills Committee.  HKSA also expresses concern about section 158(10)(a) and section 161B.  According to HKSA, it could be interpreted that there will no longer be any requirement for the company to include the details of "shadow directors" in its register of directors and secretaries under s158.

While the company is not required to maintain a record of "shadow director" in its register of directors and secretaries, an important source of evidence of existence of "shadow directors" and their identities will be lost.  It would be very difficult, if not impossible, for the auditors to come to a conclusion by themselves as to whether the company has any "shadow directors" and who are the "shadow directors", and as a result, whether any loans have been granted by the company to the "shadow directors".  In the absence of any obligation for the company to maintain such information in its books and records, it will make s161B(6) an extremely onerous duty.

It is also not up to the auditors to determine as to under whose instructions or directions the directors of the company are accustomed to act, and therefore who shall fall to be regarded as "shadow directors" are legally defined.  Accordingly, the auditors could be put into a hopeless situation with their judgment being open to challenge by the company and its directors.  Practically, the auditors simply would not have sufficient objective evidence to count on when challenged by the company and its directors.  Therefore, it will be quite impossible for the auditors to perform the duty under s161B(6).

Regardless of the practical considerations moreover, it is extremely unfair and unreasonable to let the onus of judging whether there is or there is not the presence of shadow directors to rest with the auditors rather than the directors.  Such practice is certainly not one that should be endorsed, as an important principle of good corporate governance is that it should begin with the company and its internal management rather than externally provided. 

HKSA requests the Bills Committee take into consideration its concern when considering s158(10)(a) and amend s161B regarding "shadow directors".  It should also consider the potential implications of these proposed amendments to other sections of the Ordinance as well.

The Bill has now entered a clause-by-clause examination stage.

8. Bills Committee on Stamp Duty (Amendment) Bill 2002

There was 1 meeting held since the last report.  The objectives of the Bill are to provide for an alternative method of stamping under which:

(a)  an application may be made in paper or electronic form for stamping of a specified document without presenting the original instrument; and

(b)  a stamp certificate, in paper form or in the form of an electronic record, may be issued as evidence of payment of stamp duty.

The Panel on Financial Affairs was consulted of the legislative proposal at its meeting on 19 July 2002.  During the meeting, issues such as an earlier implementation date and the false information in an application were discussed.  Members were generally in support of the proposal.

9. Bills Committee on National Security (Legislative Provisions) Bill

There were 4 meetings held since the last report.  The objectives of the Bill are to amend the Crimes Ordinance, the Official Secrets Ordinance and the Societies Ordinance pursuant to the obligation imposed by Article 23 of the Basic Law and to provide for related, incidental and consequential amendments.

The Bill proposes to provide for:

(a) the offences of treason, subversion, secession and sedition;

(b) the prohibition of unauthorized disclosure of certain official information;

(c) the proscription of certain organizations if it is necessary in the interests of national security and is proportionate for such purpose;

(d) the power of entry, search, seizure, detention and removal by the police without warrant for the investigation of treason, subversion, secession, sedition and handling seditious publication;

(e) the election of trial by jury in respect of sedition by inciting violent public disorder, handling seditious publication and any of the offences of unlawful disclosure;

(f) the removal of existing time limit for prosecution of offences; and

(g) related, incidental and consequential amendments.

The Bill also raises issues relating to human right, court procedures and formulation of offences.

The Panel on Security and the Panel on Administration of Justice and Legal Services held 5 meetings to discuss the Consultation Document with the Administration, 7  meetings to listen to views of deputations on the Consultation Document and 2 meetings to receive the Administration°¶s briefing on the outcome of the consultation exercise, the Compendium of Submission of the Bill.

The Administration issued a Consultation Document on the Proposals to implement Article 23 of the Basic Law on 24 September 2002 and conducted public consultation for a period of three months.

This Bill is making very slow progress as the result of the deliberate tactics employed by some LegCo Members.

V.     Motion Debate

List attached as Appendix IV.  In addition, I have written two °•Letters to Hong Kong°¶ on 23 February 2003 and 6 April 2003 for the RTHK as well as one article for "China Daily" on 5 March 2003.  Speeches on my Web Page and highlights will be published in my circulars to members.

VI.   Questions

I have asked 9 questions: outsourcing winding-up cases by the Official Receiver°¶s Office; handling reports of unknown gases; cases of obtaining CSSA payments by deception; income and expenditure of foreign domestic helpers; nutrient composition and hygiene standard of school lunchboxes; access to Mainland aviation market; accreditation charges for overseas academic qualifications; new tender requirements for gas filling stations; strategic supply of oil since the last report which are attached as Appendix V.  The relevant HKSA Committees may wish to be advised and to consider the replies further.

VII. General Political Background

To present orally.

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