INTRODUCTION

FORMS OF BUSINESS ORGANIZATIONS- DEFINE COMPANY: incorporated entity for profit making under companies ordinance. Artificial

person exists by process of law. - Sole trader

o The sole trader has the right to make all decisions affecting the business, owns all businesses; Even if she has an employee, she can overwrite any decision made by the employee.

o He owns all the assets of the business;o The sole trader is responsible for paying tax on the profits of the business;

All profits will belong to the ownero Also if she breached the contract, she would be liable for the breach.

If things goes badly, owner could go into bankruptcy.o The proprietor is responsible for the debts and obligations of the business without any limit;o Raising finance – self; bank loan – security?

The business could give fixed charge, over property or machinery and equipment – fixed charge.

Stock and trades cannot give fixed charge on. Company can grant a charge, such as debt owned or stocks – floating charge, doesn’t

fixed onto assets.o No continuity

Owner cannot pass on the business to other people. Each asset would be transferred under the estate, if the owner passes away.

o No specific requirements for formation;o Simple to runo Little, if any, publicity

- Partnership o General partnershipo Limited partnership

Private equity fund structured around a limited partnership. UK: LLP, limited liability partnership

o Consists of two or more persons Both of the partners are sought to make decisions together.

o Partners share the right to take part in making decisions which affect the business or the business assets, although they may have agreed that this right should be limited in relation to one or more of their number (eg a sleeping partner)

Jointly owned assets, both are employers are employees.o Partners share the ownership of the assets of the businesso Partners share the net profits of the business – not necessarily equallyo Partners share responsibility for the debts and obligations of the business without any limit, and

if one does not pay the others must pay his share. Jointly and severablly liable: one of them amount to all the liability, or both of them

liable. o Raising finance – new partners; bank loan – security?o Continuity – in theory partnership terminates on death/retirement of one partner

Two partners partnership is tricky because when one partners leave, the partnership would dissolve. Normally the one party would buy out the other one. The partnership cease to exist when one leaves.

Bigger partnership, can provide that the partnership would continue and the leaving partner would carry on.

o Formation - contract between them (which need not be in writing) or Partnership Ordinance; Business registration certificate: accountants, would want to know what the yare entitled

to. No ongoing reporting requirement in strict formalities.

o Simple to runo Little, if any publicity

- Company o One or more memberso Decisions made by the Boardo Separate legal person – capable to owns its own assets

Separate and legal entity. So the company enters into the contract with o Limited liability of members

Company is liable for the debt and obligation and not of the directors or shareholders.o Raising finance – issue of shares; borrowings – floating chargeo Continuity

The company carries on, shares can be transmitted to next generation but the company carries on.

o Registration required before it existso Compliance with Companies Ordinance

Increased formality, in terms of the operation Act in accordance with the companies ordinance Account, meetings must be prepared in certain way Documents need to be filed every year. Public documents

o Publicity – filings with Companies Registryo Shareholders (members) of the company. Own shares of the company. Company will be

run by the directors.o Directors can be the same as the shareholders. But they are of separate function, capacity.o Profits belong to the company, so the company is the taxable person, but would payout

dividends to shareholders. - “The big idea of company law is the separate personality of the company as an artificial person. The

separate artificial person is capable of owning property, being a party to contracts and being a claimant or defendant in legal proceedings.” Mayson, French and Ryan on Company Law

FORMATION OF COMPANY- Classification of companies - Based on liability S. 4(2)

Most companies are created as limited liability. The liability of the shareholders is limited, but not the company itself. If insufficient assets, the company is wound up.

Separate entities, companies enter into the contract but not the directors. Members are not responsible for the company’s debts unless the statute or constitution

stipulate so. To assist the carrying out of business. Looking at member’s liability as members, but not as directors. A director might incur

personal liability than shareholders. When does statute intervene?

Fraud? Solvency? Important that the members do not benefit at the expense of the creditors, but it is

a limited obligation to contribute.

Contribute to the company, not the third party Members only liable for the company. Limited to a fixed amount, shares or guarantee when they become members. It is a natural consequence of the principle that a company is a separate entity distinct

from its shareholders that its members are not responsible for the company’s debts (unless they are made responsible by statute or by the company’s constitution).

o Limited by shares S. 170: In the case of a company limited by shares no contribution shall be required from

any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a present or past member.

Vast majority are companies by shares Each share is assigned a par value, money must paid to the company when the

company winds up. It is common to pay premium when purchase the company. Shares can be partly paid, or fully paid.

o By guarantee S. 4(2)(b): a company having the liability of its members limited by its memorandum to

such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up.

o Unlimited liability If a company is registered as unlimited, its members will have to contribute to the assets

of the co on a winding up without any cap when the company winds up

- Classification by number o Private Company CO. S.29

restrict the right to transfer its shares limit the number of its members to 50, not including employees of the company and

former employees who were members of the company whilst employed and have continued to be members: and

prohibit any invitation to the public to subscribe for any shares or debentures in the company.

Majority of companies in Hong Kong are private company.o Public company

If a company fails to satisfy these requirements it is a public company. Unlisted Listed – the securities of these companies may be traded on the Stock Exchange. They

are subject to the regulation of the Hong Kong Stock Exchange and the Securities and Futures Commission.

S. 30—ceases to be a private company, need delivery within 14 days of registrar for registration of prospectus or a statement…

- Classification based on place of incorporation o This course focuses on companies registered in Hong Kong. However note that the Companies

Ordinance in Part XI contains provisions which apply to companies incorporated outside Hong Kong but which have a place of business in Hong Kong.

- Classification based on ownership of/by other companies o Subsidiary CO S. 2 (4)

“For the purposes of this Ordinance, a company shall, subject to the provisions of subsection (6) be deemed to be a subsidiary of another company if:

that other company- controls the composition of the board of directors of the first-mentioned company;

or controls more than half of the voting power of the first mentioned company; or holds more than half of the issued share capital of the first-mentioned company

(excluding any part of it which carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

the first mentioned company is a subsidiary of any company which is that other company’s subsidiary.”

o Holding Company S. 2 (7): “A reference in this Ordinance to the holding company of a company shall be read as a

reference to a company of which that lst-mentioned company is a subsidiary.” Often they hold more than 50% of the shares of a subsidiary

o Related Companies” / “Associated Companies Defined differently in different ordinances

- The Company’s constitution o The company’s constitution comprises the Memorandum and Articles of Association, which

must be filed with Form NC1 when applying to incorporate a company. - Memorandum of Association

o The name of the companyo The location of the company’s registered officeo The company’s objects (optional for companies incorporated after 10 Feb 1997)o A statement of the liability of the memberso The company’s authorized (or nominal) share capital.

- Articles of Association o These are a set of regulations in respect of the internal operation of a company, such as the

calling and holding of meetings.o The Companies Ordinance contains a set of default Articles of Association for a co limited by

shares – Table Ao Table A applies unless a set of Articles is adopted by the company, which expressly excludes

Table A. o There are also forms in the CO for companies limited by guarantee and unlimited liability

companies- The company’s name

o A company may be registered with its name expressed either in English or Chinese or with names in both languages.

o A limited co must have the word “Limited” as the last word of its name if its name is in English; if its name is in Chinese the Chinese characters for limited ( ) must be the last characters of its name.

o S. 20 CO contains restrictions on the choice of name Cannot have the same name as companies registered, statutory companies, Chamber of

Commerce without CE’s consent, names that gives the impression that connects to the government without CE’s consent or constitute Criminal’s offence or contrary to public interests.

o S. 21 CO Ability to dispense with “Limited”

o A company may change its name by special resolution (S. 22) o S. 22 CO

Registrar can also direct a company to change its name if within 12 months of registering he forms the opinion that at the time of registration the name was the same or too like another name on the index, a name which should have been on the index or the name of a statutory company.

o S. 93 CO Requirements re displaying company name, etc.

o Display of names at the front of companies…standard and formats.o Or there could be a fine or the officers may be personally liable.

- The registered office o A company registered in HK is required to have a registered office in HK to which all

communications and notices may be sent. Legal documents, notices, etc are properly served on a company if left at or sent by post to its registered office.

Must notify company registry when it is changed.o The address of the company’s first registered office must be set out in the co’s memorandum of

associationo Notice of any change of address must be sent to the Registrar of Companieso Various registers and documents must also be kept at the co’s registered office

Register of shareholders, charges, shareholders’ meetings.

PROMOTER’S LIABILITY AND PRE-INCORPORATION CONTRACTS- Definition of promoter

o Promotion of a company is concerned with taking steps necessary for incorporation. Whether someone is acting as a promoter is a question of fact rather than of law

o Duties of promoter: concerned with promoters who sell their own property to a newly formed company at an inflated price

EG: if a promoter sells his own property (which he purchased before acting as promoter) to the company at an inflated price

o There is no general definition of “promoter” in CO S. 40 contains a definition which applies in the case of misstatements in a prospectus.

o One who undertakes to form a company with reference to a given project , and to set it going, and who takes the necessary steps to accomplish that purpose (Twycross v Grant)

o The term promoter is a term not of law, but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence (Whaley Bridge Printing Co v Green)

o Lawyers or accountants not generally regarded as promoters (Re Great Wheal Polgooth)- Issues arising from promotion activities

o Promoters stand a Duty of care, trust and confidence to the company even before the company does not exists.

o Disclosure of profits (Gluckstein v Barnes) Must disclose all profits made by the promoters in clear terms. The

promoter may have to account to the company for any profit he has made. Where promoters are in breach of their duties as promoters, the Company is entitled to recover the profit from them. The Company can recover the secret profit even though they chose not to rescind the contract. The liability of promoters is joint or several.

(Erlanger v Sombrero) To independent board or otherwise shareholders. Where promoters has sold his own property without disclosing this – the company can rescind the contract and recover the purchase price.

- Remedieso Property purchased by the promoter before he began to act as promoter and sells to Company

(Re Cape Breton) Rescission only (Re Leeds and Hanley Theatres of Varieties) Possible remedy against the promoter in tort

at common law for negligence if damage has been suffered, misrepresentation, breach of fiduciary duty, fraud.

o Property was purchased by the promoter after he began to act as promoter Rescission available but if the company does not wish to rescind it is possible to recover

the promoter’s profit from the promoter. - Pre-incorporation contracts

o Until a company is incorporated and exist, promoters cannot enter into any contracts on behalf of company.

o Since a company cannot make a valid contract before it is incorporated, a promoter cannot legally claim any remuneration for her services or an indemnity for the expenses incurred in setting up the company (Re National Motor Mail Coach)

o If a promoter, or some other person purporting to act as its agent, makes a contract for the company before its incorporation then:

The company when formed is not bound by it even if it has taken some benefit under it (Re National Mail Coach, Kelner v Baxter)

The company is unable to sue the third party on the agreement: S. 32A (Braymist Ltd v Wise Finance)

At common law the company could not ratify the contract after its incorporation (Kelner v Baxter). S. 32A permits ratification.

Unless the agreement has been made specifically to the contrary, it will take effect as one made personally by the promoter and the third party: S. 32A (Phonogram Ltd v Lane)

CORPORATE RESPONSIBILITY AND LIFTING THE VEIL

CORPORATE PERSONALITY- S. 16

o Managed by corporate - Common Law

o MacNaughten: The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act (Salomon v Salomon)

o Halsbury: …it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part on the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are” (Salomon v Salomon)

Salomon v Salomon : P set up a company – lent money to his company as a secured creditor – then borrowed more money and got into financial trouble. Question was whether P as a secured creditor should be paid first or whether the company’s unsecured creditors should be paid first.

HELD: The company is a distinct and separate person from P. There was no fraud here and he can exercise his rights as a secured creditor

o Gramophone and Typewriter Co Ltd v Stanley (1908) 2KB 89

Company and a subsidiary situation. British company was taxed on profit sent back to the UK from the German company; profits hadn’t be remitted and kept in Germany. Again, it was held that the corporation and the shareholders were not engaged in carrying the business in Germany.

- Consequences of separate legal personality:o Company holds assets in own name, enters into contracts in own name, can sue and be sued in

own name Lee v Lee’s Air Farming Ltd

Lee set up a company in crop spraying business. He was both the director and shareholder. He died while spraying crop on a plane. His wife was able to claim on the basis that the deceased was the employee of the company. Held a company was a legal person and the deceased was another legal person – contractual relationship existed as employer/employee.

o Company has perpetual succession – doesn’t die because all shareholders dieo Ownership of the company can be transferred without affecting the company itselfo Shareholders, directors not liable for criminal or tortious acts of the company itself, though they

may incur personal liability; no personal liability on contracts Exception possible.

o As assets are owned by company, shareholders can’t treat them as their own personal assets Macaura v Northern Assurance Co Ltd

Shareholder wanted to insure by his own name the property of the Company. HELD: He had no insurable interests in that property because it belongs to the

company. No shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein

Tunstall v Steigman D was a landlord of two adjoining shops – rented one out to P – P wanted to apply

for new tenancy – D meanwhile wanted to start a company and rejected P’s renewal – Held that since D wanted to start a company, D had failed to establish intention to occupy both shops due to separate legal entity

LIFTING THE CORPORATE VEIL- The court can in some circumstances look beyond the corporation and assign the liability to the main

controller of the company. There are no set principles when the courts lift the veil, but there are some circumstances that the courts do.

- Agency

o Veil not pierced: Principal is responsible for what the agent does within the scope of agency. It is one of

fact and can be inferred from the circumstances. Consent is often necessary. Salomon v Salomon

The circumstance that a person is a member of a company does not in itself make the company an agent of that person.

While it is held that a company does not necessarily act as agent for its majority shareholder, it does not follow that a company cannot act as an agent for its shareholders and directors. Since a company is a separate legal person, it could agree to act as agent. Hence it is necessary to consider each case individually to establish agency.

The company was created here to avoid a potential legal obligation. Gramophone & Typewriter Co Ltd v Stanley JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry (1989) Ch 72.

Yukong Line Ltd v Rendsburg Investments Corporation (No 2) (1998)1WLR 294 p304. o Veil pierced:

Smith, Stone and Knight v Birmingham Parent company (P) acquired a business and registered it as its subsidiary

company. D compulsorily acquired the subsidiary’s land and the parent company claimed compensation. Subsidiary had no staff or accounts all kept and provided by the parent company.

HELD: subsidiary operated the business as the agent of the parent company and the parent company is entitled to compensation for the land purchase.

o Differentiate from Salomon: the business was never transferred to the subsidiary but rather a nominee and shell arrangement of the parent company

However, note that the status of this case as an authority is somewhat suspect. Most of the commentators rejected the case. Some cases applied whereas the court held that the case was decided at the fact.

Adams v Cape Industries Addressed the issue of agency and dismissed the claim that one company acted as

an agent of another. So unlikely that the court would follow agency field. CA said that it is appropriate to pierce the corporate veil only where special

circumstances exist indicating that it is a mere façade concealing the true facts.

Arguably, the existence of an agency does not violate the separate entity principle – it actually supports the principle of there being two separate persons.

- Trust o Veil not pierced:

Good Profit Development v Leung Hoi D claimed that he made and oral agreement with the directors and shareholders of

the Company to buy out all the shares of the Company where it owns a house – it was accepted that the Company was not a party to their contract. D alleged that the Company was either a trustee or agent of the directors and shareholders or it was the alter ego of the directors and shareholders.

Held that the company does not hold property as an agent or trustee of its members or directors. Company has a separate entity and is not the alter ego of its directors and shareholders. The agreement between D and the directors and shareholders had nothing to do with the company – the fact that they had absolute control of the company did not justify lifting the veil.

o Veil pierced: Trebanog Working Mens Club v MacDonald

Club charged with selling liquor to its members without a license Held that the club was holding the liquor in trust for its members so there was no

offence. “I think the true construction of the rules is that the members were the joint

owners of the general property in all the goods of the club, and that the trustees were their agents with respect to the general property in the goods.”

The Abbey Malvern Wells v Ministry of Local Government and Planning Directors were directly liable to beneficiaries of trusts in question where the

trustee was the actual company Held that shares in a company were held on trusts and that directing the affairs of

the company were trustees so that the court could life the veil and impose the terms of the trust on the company’s property.

The court was trying to investigate the true character of the relationships.

- Sham or Pretence/ Evading enforcement of existing rights o Veil not pierced:

Companies usually set up to evade potential liability. Whereas if they are set up to avoid existing liability, the courts are more reluctant to treat the shareholders responsible.

Adams v Cape Industries English company with 2 subsidiaries, a UK and a US company. The subsidiaries

mined asbestos, judgment obtained against one of the subsidiary, but it was held that it could not be claimed against the parent company.

HELD: the right to use a corporate structure in this manner is inherent in our corporate law... In our judgment, Cape was in law entitled to organize the group’s affairs in that manner and … to expect that the court would apply the principle of Salomon v Salomon in the ordinary way

Yukong Line Ltd v Rendsburg Investment FACTS: company entered into ship charter agreement. On the date of the breach,

before proceedings were commenced and before legal rights existed, the company transferred the assets to another company.

HELD: It was allowed. Bakri Bunker Trading Ltd v The Neptune China Ocean Shipping Co v Mitrans Shipping

o Veil pierced: Gilford Motor Home Co Ltd v Horne

Employee had entered into an agreement not to compete with his former employer after ceasing employment. In order to avoid this restriction he set up a company to do just that.

Held that this is not tolerated – veil lifted and an injunction would be issued against his company

Jones v Lipman A vendor had agreed to sell a piece of land but he later changed his mind. In an

effort to defeat a move to obtain specific performance the vendor transferred the land to a company which he controlled.

Held – court refused to countenance this – veil lifted and specific performance was ordered against the vendor and company

Lee Sow Keng v Kelly McKenzie P as employed by a company – she quit but the company failed to pay her – she

successfully petitioned for the company to wind up to pay her – company still failed to pay her and she realized the same directors had another successful private company to avoid paying her

Held that the veil would be lifted as the profitable company was a mere façade to escape existing legal duties

o “Shenanigans” Toptrans Ltd v Delta Resources

Applied Adams v Cape explained that piercing the corporate veil require there to be some element of “shenanigans”

o Bring the requirement to a higher threshold Re H and others HKSAR v Leung Yat Ming

Clear conduct of the shareholders of the company that was clearly wrong. Chinese university professor trying to claim rent for family member. It was eventually traced back.

- Group Structures o Large businesses often have a group structures. The most obvious company law consideration

favouring the use of subsidiaries is the scope to readjust the level of limited liability afforded to the group as a whole. However, there is a much wider variety of reasons why businesses choose a group structure, e.g. tax, ability to buy and sell businesses, managerial organization of segmented or geographically dispersed businesses, a balance of power in collaborative enterprises, or local regulatory or cultural considerations.”

o Single economic unit argument DHN Food Distributors v Tower Hamlets

Parent company and 2 subsidiaries, one of which held land and the other carried on business. There was a compulsory purchase and grounds of compensation were loss of land and loss of business. Because the company operating the business was separate from the company holding land, only the compensation was paid.

HELD: the veil should be pierced and seen as a single economic unit – the business operated on the land. Basis was that the company legislation requires group account and to that extend recognize group entity.

DENNING: Although there was no business operation, and the concept was to do justice to the fact.

Woolfson v Strathclyde Regional Council Didn’t follow DHN. Subsidiary was a trading company, and the lordship

observed that they had doubts whether the DHN case properly applied, pierced only in special circumstances, indicating that the company is a pure façade.

There is a threshold for the company to be a façade. Adams v Cape Industries

Economically, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged

o Agency argument Adams v Cape Industries

“ However, there is no presumption of any such agency…If a company chooses to arrange the affairs of its group in such a way that the business carried on in a particular foreign country is the business of its subsidiary and not its own, it is, in our judgment, entitled to do so.”

Yukong Line Ltd v Rendsburg Investments o “Façade” argument

Adams v Cape Industries Approved that the veil could be lifted when there the subsidiary is acting as a

mere façade, citing Jones v Lipman case. The motive is relevant. Yukong Line Ltd v Rendsburg Investments Ord v Bellhaven Pubs China Ocean Shipping v Mitrans Shipping Toptrans Ltd v Delta Resources Trustor AB v Smallbone

- Miscellaneous o Daimler Co Ltd v Continental Tyre & Rubber

The corporate veil of a UK registered company (Daimler) was pierced to determine its nationality in time of war

o Ebrahimi v Westbourne Galleries Ebrahimi and Nazar were partners and incorporated their business for tax reasons. Nasar

put his son as a director and fired Ebrahimi.

Held that Company was wound up because the operation of it was much more similar to partnership than a company very exceptional situation

- Lifting the Corporate veil by statute o S. 93 (5)

Misuse of company seal, failure to show co’s name on letterhead, cheque, etc o S. 275 (1)

Fraudulent tradingo S. 344A(6)

Dormant companies : co enters into a relevant accounting transaction o S. 168

Acting as director whilst disqualified

- The One Member Company o One member companies allowed post 2003 Amendmentso S. 4 (1)

A company may have just one member (only a shareholder is a member)o S. 153A (1)

a private company may have just one directoro SS 95A 116BC

One member companies present difficulties in distinguishing between the owner and the company. Special rules apply to one member companies to ensure corporate formalities are observed – see

o S 95A if the number of members of a company falls to one the company must enter this fact into

its register of memberso S 116BC

written records of decisions of the member (which would normally need to be made in GM) must be provided to the company

PARTNERSHIP

SOURCES OF LAW- Partnership Ordinance (Cap 38) of Hong Kong

o Numbered 2 sections ahead, eg section 1 in the UK Act would be section 3 in the HK Ordinance- Partnership Ordinance S 3

o Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

S. 3(2) Shareholders of an incorporated company are excluded from the definition.o Carrying on business

Section 2: “business” as including every trade, occupation, or profession. Miah v Khan

Agreeing to set up a business itself is insufficient to be a partnership – actually have to do something to start the business EG: find a store for rent, hire employees, etc

o In common In order for a partnership to exist two or more people must be involved in the business. Strathearn Gordon Associates Ltd v Commissioners of Customs & Excise

Just because there was reference to a share of profit does not convert their agreement to a partnership

Marshall v Marshall Two people carrying on parallel business. They were each carrying business on

their own account but tried to say that they were a partnership Held not partnership – Must be carrying on business in common

o With a view of profit Cannot set up for charity purpose. Davies v Newman

Although there was a common endeavor, only one of them retains the profit. The test is one of intention – so if partners plan to make a profit but actually make a los, that does not stop the arrangement being a partnership. But if the purpose of the common endeavor is actually to gain business experience, there is no partnership.

S 4(C) The receipt by a person of a share of the profits of a business is prima facie

evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business

Strathearn Gordon Associates v Commissioners of Customs & Excise The mere fact that this consideration was measured by reference to a share of the

net profit does not in our judgment convert the agreement into a partnership.- Miah v Khan

o Business hasn’t properly started. The partners were in a relationship to set up a restaurant and before it was opened, the partnership fell out.

o HELD: Taken steps to open the business. There was a partnership.- Bridge v Deacons

o Force restrictive covenants – salary partners went off and joined another partnership – the law firms they left sought to enforce their restrictive covenants – a partner cannot be sued or sue his firm

- Kao, Lee & Yip v Koo Hoi Yan Donald o Similar to aboveo Partners carry on business, both as principals and as agents for each other, within the scope of

the partnership business; the firm name is a mere expression, not a legal entityo Because English law does not recognize the existence of a "firm" as distinct from the members

of it, a partner cannot sue or be sued by his "firm", either before or after he ceases to be a partner

SETTING UP A PARTNERSHIP- A partnership can be created:

o For a specific purpose or for a pre-determined period of time; oro Carry on continuously: a partnership “at will”

Normally partnerships will carry on indefinitely Companies can also form partnerships to carry out a business.

- Typical rights and responsibilities of partners which are fundamental to the relationship include:o The right to be involved in making decisions which affect the business;o The right to share in the profits of the businesso The right to examine the accounts of the businesso The right to insist on openness and honesty from fellow partnerso The right to veto the introduction of any new partnero The responsibility for sharing any losses made by the business

Any of the characteristics can be varied by agreement.

Business of partnership is determined by fact, not always necessary to written agreements.

WRITTEN AGREEMENT- S. 26: a number of provisions concerning the running of the partnership that will be implied into a

partnership arrangement in the absence of express provision. - The following are some of the main provisions you would expect to see in a written partnership

agreement:o Commencement Dateo Partieso Name o Financial input or Capital contribution o Shares in income profits/losses

Priority over other partners for salaryo Drawings

Take out certain amounts every yearo Place and nature of business o Ownership of the outfito Work input o Roles o Decision-making o Duration (S. 34).

Can dissolve partnership any time with noticeo Retirement o Expulsion o Payment for outgoing partner’s share

Buyout the leaving partner, sometimes necessary by installmentso Restraint of trade following departure (S. 32: Duty on partners not to compete with the firm

during the term of the partnership) Non-compete agreement, but must be reasonable with regards to geographic and time

limitation.o Cannot be varied if entered into agreement for.

- Bridge v Deacons o Leading case on restraint of trade clauseso Force restrictive covenants – salary partners went off and joined another partnership – the law

firms they left sought to enforce their restrictive covenants – a partner cannot be sued or sue his firm

- Kao, Lee & Yip v Koo Hoi Yan Donald o Similar to aboveo Partners carry on business, both as principals and as agents for each other, within the scope of

the partnership business; the firm name is a mere expression, not a legal entityo Because English law does not recognize the existence of a "firm" as distinct from the members

of it, a partner cannot sue or be sued by his "firm", either before or after he ceases to be a partner

SALARIED PARTNER- Someone given the title of partner but does not fully have share of profit yet.- Whether a person is indeed a partner of merely a senior employee is ultimately a question of fact. We

look at salaried partners in the context of whether or not someone has authority to enter into a contract on behalf of the partnership, and holding out.

- Stekel v Ellice o It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily

a partner in the true sense. He may or may not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is partnership depends on what the true relationship is, and not on any mere label attached to that relationship.

- Kao, Lee & Yip v Edwards s

THE OUTSIDER’S QUESTIONSContract- S. 7

o Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership;

o The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

In some cases, partners can deny liability to contract.Authority- Actual Authority

o The partners have all signed the contract – they cannot then change their minds- Express actual authority

o When a partner’s authority is express or written- Implied actual authority

o When the contracting party acquiescenced through course of dealingo When a partner regularly deals with a certain aspect of a business and other partners have never

disagreed to it- Apparent (Ostensible) Authority

o The firm will be liable for actions which were not actually authorized but which may have appeared to an outsider to be authorized. Even where there is some express or implied limitation on a partner’s authority his acts will bind the firm where:

The transaction is one which relates to the type of business in which the firm is engaged (objective issue)

The transaction is one for which a partner in such a firm would usually be expected to have the authority to act (S. 7) (objective issue)

The other party to the transaction did not know (or have reason to suspect) that the partner did not have authority to act; and (subjective issue of 3rd party – whether 3rd party perceived the partner to have authority)

The other party deals with a person whom he knows or believes to be a partner (subjective issue of the 3rd party – whether 3rd party perceived the partner to have authority)

o “business of the kind carried on by the firm” Hirst v Etherington

D controlled a law firm – one of its solicitors, representing D, borrowed money from P and assured that the firm will pay it back – P asked D whether it as within the normal business undertakings of the firm and P said yes

Held that P was not justified in accepting D’s assurances as it was not a normal undertaking of a law firm – she should have inquired further

Mercantile Credit Co v Garrod D was a partnership and leased out garages – partnership agreement stipulated

that it cannot sell cars – D sold car a car to P which D did not own, and P had bought cars from D in the past.

Held P can recover as in P’s perspective it appeared that the sale of cars was in the usual course of business

Chan Pat t/a Hop Kwan Garment Factory v Lin Wan Garment Factory If a partnership is set up to trade garments and one partner orders a large quantity

of dresses without informing the other, disappears without paying, the other partner is liable as principal – the act of the partner is within the usual business of the firm.

If a partner of a law firm orders a large quantity of garments he would be personally liable because it is not in the usual business of a law firm.

o “in the usual way” Goldberg v Jenkins

The person lending money on those terms knows that the person borrowing (60% v 10% normally) is not conducting an ordinary business transaction, and therefore the partner borrowing would have no power to bind his co-partners.

Even if the action by the partner is within the scope of the business carried on by the firm, if it is carried on in an unusual manner the other partners may not be bound.

o Knowledge of lack of authority Where a partner accepts a bill of exchange in the firm name for his own personal debts

(Leverson v Lane ) 3rd party should be put on notice here

Where a partner pledges partnership goods for such debts (Snaith v Burridge); and 3rd party should be put on notice here

Where a partner uses partnership funds to pay such debts (Kendal v Wood ) 3rd party should be put on notice here

S.10 If it has been agreed between the partners that any restriction shall be placed on

the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement

Gallway v Mathew and Smithson 3rd party knew that M had no authority by way of notice but still lent money to M

– Held that partnership was not bound because of the noticeo “knows or believes to be a partner”/ “Holding out”

Section 7 particularly relevant in the case of a salaried partner Stekel v Ellice

The term “salaried partner” is not a term of art and to some extent it may be said to be a contradiction in terms. However it is a convenient expression which is widely used to denote a person who is held out to the world as being a partner, with his name appearing as a partner on the notepaper on the firm and so on. At the same time he receives a salary as remuneration, rather than a share of the profits, though he may, in addition to his salary, receive some bonus or other sum of money dependent upon the profits. Quod the outside world it often will matter little whether a man is a full partner or a salaried partner; for a salaried partner is held out as being a partner, and the partners will be liable for his acts accordingly.

S. 16

Everyone who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner to anyone who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to that person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made

If you are a partner and are held out as a salary partner, still cannot deny the liability of the partnership as 3rd parties don’t know about the holding out.

Still liable if a retired partner binds the partnership (because the letterhead, etc, will not be changed automatically once a partner retires). Provisions in a retirement agreement to dispose of liability for the retired partner possible?

Section 16 is derived from the principle of estoppel and so there must have been a reliance on the holding out.

Nationwide Building Society v Lewis William’s letterhead is displayed even though he was the principal, not partner.

There was no evidence that William was held out to be the partner so partnership was not liable.

Lon Eagle Industrial Ltd v Realy Tading The mere fact that a person’s name is still remained in the business registration

records per se did not amount to ‘holding out’ especially where there is no evidence that any such ‘holding out’ was made or suffered to be made before credit was given by the plaintiff.

Chung Chih-yien v Tailor King (1967) HKLR 51 WATCH OUT FOR THOSE RETIRED PARTNERS, could be liable to notify all the

authorities, business registration.Personal Liability- In any of the above instances the partner who has acted will be personally liable to the other party to

the contract irrespective of whether or not the firm is liable. o If someone left before or join the firm after the event, then they are normally not liable. Person

leaving could be liable through holding out or failing to comply with notice requirement S. 38.

Tortious liability- S. 12

o Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act.”

- S. 14 o Every partner is liable jointly with his co-partners and also severally for everything for which

the firm while he is a partner therein becomes liable under S 12 or 13.”- Dubai Aluminium Co Ltd v Salaam

o HL held that a firm of solicitors could be held vicariously liable for the dishonest acts of one of its partners

Against whom can the firm’s liabilities be enforced?- The partner who signed any relevant contract can be sued individually because there will be privity of

contract between him and the other party to the contract- The firm can be sued as a group of persons. All those who were partners at the time when the debt or

obligation was incurred are jointly liable to satisfy the judgment (SS 11 and 19 PO)

- Any person who was a partner at the time when the debt or obligations was incurred can be sued individually.

- Position of someone who left the firm before the debt or obligation was incurred or who has joined the firm? S19 PO bur NB:

o Holding –out o Failure to give appropriate notice of retiremento Novation agreement makes an incoming partner liable for all existing debts/ specific debts of

the partnership

Failure to give notice under S 38- Where a partner leaves the partnership (either by retirement or expulsion) he must give notice of his

leaving since otherwise he may become liable under s 38 for the acts of his former partner or partners done after he leaves the firm, if the creditor is unaware of the fact that he has left. The notices he should give are prescribed in S 38 and consist of:

o Actual notice (eg by sending out standard letters announcing his departure) to all those who have dealt with the firm prior to his leaving (satisfies S. 38 (1))

o An advertisement in the Gazette as notice to any person who had not had dealings with the firm before his date of departure (s 38 (2)).

Novation- An incoming partner may become liable for existing debts of the partnership if he enters into a novation

contract with the creditor and the other partners agreeing to this.

THE INSIDER QUESTION- Common law, the main obligation that partners owe to each other is the duty of utmost good faith.

Utmost good faith- The utmost good faith is due from every member of a partnership towards every other member; and if

any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour

- S. 30 – 32 o Partners must divulge to one another all relevant information connected with the business and

their relationship;o They must be prepared to share with their fellow partners any profit or benefit they receive that

is connected with or derived from the partnership, the business or its property without the consent of the other partners; and

o S30 – duty not to compete – They must be prepared to share with their fellow partners any profits they make from carrying on a competing business without the consent of the other partners.

- Exampleso Sale by or to the firm:

Bentley v Craven Partners were in sugar business – D bought sugar personally on low market price

– sold it back to the partnership at high market price. Held that partnership was entitled an account of profits – partners must work for

the greatest common good and no particular partner is entitled to personally profit from transactions of the partnership.

o Use of partnership property Gardner v McCutcheon

Use of ship for personal purposes without notifying the partners.

If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or firm name, he shall account for the profit and pay it to the firm

o Renewal of leases Featherstonhaugh v Fenwick

Where a partnership trade was carried on, renewed by one partner in his own name clandestinely, a trust for the partnership; to be accounted for as joint property

o Post-dissolution profits Don King Promotions Inc. v Warren

Promotion management contracts. After partnerships dissolved, the benefits of the contracts during partnership still belong to the partners even though the contract was renewed.

Featherstonhaugh v Fenwick After dissolution of the partnership continuing to trade with the joint property,

must account for profits Where there are no articles prescribing the terms of dissolution, and there is a sale

of joint property, a partner cannot insist on taking the share of another at a valuation

o Competing business Glassington v Thwaites

Duty no to compete – must account for the profit a partner makes when engaging in competing business

- Kao, Lee & Yip v Koo Hoi Yan o The distinguishing or core obligations of a fiduciary are that of loyalty (or fidelity) and good

faith: The duty not to place himself in a position where his or anyone else's interests would or

may conflict with duties owed to the beneficiary ("the Non-Conflict Duty"). The duty not to make a profit from his position ("the Not to Profit Duty").

o These duties are critical in any fiduciary relationship.”

Further Responsibilities implied by the Act- Section 26 (a)

o the responsibility for bearing a share of any loss made by the business- Section 26 (b)

o the obligation as a firm to indemnify fellow partners against bearing more than their share of any liability or expense connected with the business.

Contractual- The partners will also have contractual obligations to each other derived from the terms of the

partnership agreement – express or implied.

DISSOLUTIONWhen does dissolution occur?- Dissolution of a partnership means that the contractual relationship joining all of the current partners

comes to an end. Even if some of the partners continue in business together, strictly, one partnership is dissolve and a new one formed.

- Under S. 34 – 37, a partnership is expressed to be dissolved, most of these provisions can be excluded by agreement:

o Notice (ss 28, 34) Any partner to another, doesn’t have to be in writing.

o Expiry of fixed term (ss29, 34) o Charging order over partner’s assets (s 35)o Death or bankruptcy (s 35)o Illegality (s 36)

The provisions of s 36 cannot be excluded by agreement.o Court order for dissolution (s 37) usually not relevant because a partner can dissolve just by

notice. But in situations where agreement is needed to dissolve, it becomes relevant.

Other forms of partnership – Limited Partnerships and LLP’s(a) Limited Partnerships – Limited Partnership Ordinance (Cap 37)

A partnership structure where there is a general partner and limited partners. The general partner “manages” the business and has unlimited liability; the limited partners , so long as they do not take part in the management of the business, have no liability other than to the extent of any committed but not yet paid capital contributions. A common structure in private equity transactions.

(b) Limited Liability Partnerships Limited Liability Partnership Act 2000 UK. Not currently permitted in HK but likely introduced for law firms.

COMPANY’S CONSTITUTION

CONSTITUTION- Memorandum of Association- Article of Association

MEMORANDUM OF ASSOCIATION- Needs to include:

o Company nameo Registered officeo Objects (Optional for companies incorporated after 10 Feb 1997)

Limit the capacity to transact in business Can only do what it is permitted to do in the memorandum, or else ultra vires and

transaction void Couldn’t be ratified if it is outside of the authority S8 CO – mode and extent to which objects may be altered – special resolution (75% of

members/shareholders) Power to borrow? Each clause is separate and independent and thus, equally important Carry on any business as in the opinion of the board as carrying business

Withered away, LegCo altered the object clauseo Statement of the Liability of the memberso Authorized Share Capital

- Ultra Vires Doctrineo If a company acted outside its objects as stated in its memorandum, the company was said to be

acting ultra vires or beyond its capacity and any such transaction was void A member may seek injunction to prevent the company from entering into what would

have been an ultra vires transaction.o Bell House Ltd. v City Wall Properties Ltd (1966)

Objects clause stated that its object is to carry on the business of developers and builders as well as to carry any other trade and business – D introduced P to a bank in an agreement – P alleged it was not within its objects clause

HELD: the introduction was intra vires and not ultra vires- Reform of HK Law, Abolished:

o S. 5 (1A) (b): an objects clause is optional for a companyo S. 5A (1): A company has the capacity and the rights, powers and privileges of a natural persono S. 5B: If a company does still have its objects… should not do anything not authorized by its

memorandum, but if it does do so, such act is not invalid. This service to protect innocent parties dealing with the company who may otherwise suffer where a company acts beyond its powers.

o S. 5C: A person shall not be taken to have notice of any matter merely because of its being disclosed in the memorandum or articles kept by the Registrar or a return or resolution lodged with him.

- After abolition:o A company no longer need to state its objectives in the memorandumo Has the capacity of a natural persono If object is stated, a transaction beyond the scope that object clause is no longer voido Internally, a shareholder may bring proceedings to prevent the company acting in breach of its

memorandum Challenge a transaction through an injunction

o If the transaction has been carried out, the shareholders may only seek damages from the wrong-doer directors for the company.

- Other reasons to challenge a transactiono Procedural irregularitieso Agency Principleso Breach of director’s duties

S. 24 of the Money Lender’s Ordinance: The contract isn’t enforceable if the interest rate is exorbitant

o Statute for a particular type of business

CASES ON ULTRA VIRES- Distinction to be made between a transaction undertaken by the directors which is beyond the capacity

of the company and one which is within the capacity of the company but an abuse of power by the directors.

o Ashbury Railway carriage and Iron Co. Ltd. v Riche (1875) The case is no longer good law because company can change the articles by special

resolution. A company have all the powers of a natural person, or presumed to have such power to

the extent that they were taken away by the law or the company’s constitution.o Rolled Steel Products (Holdings) Ltd. v British Steel Corporation (1986)

RSP had the power to make a guarantee under its object clause – one of RSP’s directors owed money to BS and the company guaranteed that debt

HELD: Not all activities stated are considered objects, some merely are ancillary powers provided to achieve the objects. The power to give guarantee is an ancillary power, and which was not ultra vires. But there was an abuse of agency power because the director shouldn’t have given guarantee because it wasn’t in the best interest of the company.

QUESTION: Whether the corporate power being examined could have been exercised in pursuit of the company’s objects.

Where a transaction is within the capacity of the company, though if it were done in breach of fiduciary duty and to the knowledge of the third party, the transaction is void.

If the transaction is not ultra vires, it was voidable and the company could ratify it.

o Cotman v Brougham [1918] HELD: Each part of the object clause is to be construed as a substantive clause and not

deemed auxiliary or subsidiary to the object primarily specified effective to prevent a restrictive construction of the object clause.

o Re Introduction [1970] HELD: There is an implied additional power to borrow, whether express or implied, for

the purpose of the company. Borrowing is not the end of matter, and the purpose for the borrowing must be

intra virus to hold the transaction valid. Suggested in Rolled Steel: This is a case which a third party has entered into a

transaction with a company with actual notice that the transaction was an abuse of power and accordingly could not enforce the transaction against the company.

o Re Horsley & Weight Ltd [1982] Company had power in its memorandum to grant pensions to past and present employees

– directors of the company owned all the shares – went into liquidation and made pension payment to directors – liquidator bought a suit against them

HELD: Gratuitous payment to the director can be capable of subsisting as substantive object of the company.

o Charterbridge Corp Ltd. V Lloyds Bank [1970] Director failed to consider whether an action would be in the interest of the company. Held that in such a situation the court has to ask whether the director could have

reasonably believed that the transaction was for the benefit of the company.

ALTERATION OF THE MEMORANDUM- Change of Name

o S. 22 Special Resolution Needed (75%)- S. 8 Alteration of objects

o Special resolution (75%)o Notice of resolution must be sent to all members, including any not entitled to notice under the

Article.o Application to cancel the alteration may be made by:

Holder of 5% in nominal value of the company’s issued share capital; Holder of 5% of any class of shareholders; or 5% of members of a guarantee company; or Holder of 5% of the company’s debentures entitling holders to object

o Court may make an order cancelling or confirming the alteration wholly or in part and on such terms and conditions as it thinks fit

- Capital Clause o May increase its authorized capital by ordinary resolutiono Reducing capital is a problem, because it would put obligation on the current shareholders.

- S. 25: No member of a company will be bound by an alteration to the memorandum or articles made after the date on which he became a member if the alteration requires him to take or subscribe for additional shares or increase his liability to contribute to the share capital or otherwise to pay money to the company.

ARTICLES OF ASSOCIATION

- Contractual Effect of the Articleso CO S. 23

Bind the company and the members as if they were respectively signed and sealed by each member, and contained convenient on the part of each member to observe all the provisions of the memorandum and the articles.

*Acting like a contract between members and members and against the company. No right given by the article other than the member can enforce against the

companyo Estates might not be able to enforce the contract

o Wood v Odessa Waterworks Co. (1889) FACTS: The company declared a dividend and passed a resolution to pay shareholders

debenture bonds – the articles provided that dividends must be paid in cash HELD: The article constituted a contract among the shareholders, and shareholders and

company. The distribution of dividends has to be followed – restrain the company from acting ultra vires

o Hickman v Kent or Romney Marsh (1915)*** LEADING CASE The articles provided that disputes between members and the association be resolved by

arbitration. Hickman brought an action against the company in the courts HELD: the association were entitled to have the action stayed as the articles constituted

as it constituted a contract between Hickman and the company and other members. ASTBURY: An outsider to whom rights purport to be given by the articles in his

capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles, treating them as contracts between himself and the company, to enforce those rights.

The article does not constitute as a contract between the company or member and a third party.

DISTINGUISH: Where all the members have interests in.o Eley v Positive Government Security Life Assurance (1876)

FACTS: The articles appointed Eley as solicitor of the company – he later bought shares of the company. The company got a new solicitor and Eley sued the company for breach of contract

HELD: The article is not a contract between the company and someone who is not a member. Eley is an outsider even though he was then became a member, he couldn’t enforce the article (he sued in his capacity as a solicitor, not a member) – the case did not mention what would have happened if he sued in capacity as a member.

o Beattie v E&F Beattie (1938) Articles of association contained an arbitration clause. B, a member and director of the

company, was in dispute with the company concerning his rights as a director. He brought proceedings against the company.

HELD: He was not bound by the arbitration clause since he was acting in his capacity as director, not a member.

GREENE: Litigated is a dispute between the company and the appellant in his capacity as a director, and when the appellant, relying on this clause, seeks to have that dispute referred to arbitration, it is that dispute and none other which he is seeking to have referred, and b y seeking to have it referred he is not, in my judgment, seeking to enforce a right which is common to himself and all other members.

DISTINGUISH: None of the shareholders would have been affected by this because it is an individual dispute

o Rayfield v Hands (1960)

FACTS: The articles required the directors to be members, ie to hold qualification shares and to purchase shares from any members who wished to sell

Held that this was enforceable against the directors in their capacity as memberso Quinn & Axtens Ltd. v Salmon (1909)

Articles provided that resolutions passed by members must be approved by director – Salmon was a director and shareholder and dissented from the resolution but they still passed it

HELD: Hickman can be sidestepped by identifying some membership rights. The director can sue in the capacity of a member to seek injunction to restrain the company from departing from its articles, even if the end result is the indirect enforcement of an outsider right.

Earlier case than others so is uncertain whether this is being followed

RESTRICTIONS ON ALTERATION OF THE ARTICLES- Introduction

o CO S. 13 provides that the articles of association may be mended by special resolution of the shareholders

o The power to amend the articles by SR is a statutory right and may not be altered or fettered by the articles of association or otherwise

o Amendment of the articles must be made “bona fide for the benefit of the company as a whole”

o Even if the requisite number of votes is reached, there are restrictions on the power to amend the articles:

S. 25 – No member of a company will be bound by an alteration to the memorandum or articles made after the date on which he became a member if the alteration requires him to take or subscribe for additional shares or increases his liability to contribute to the share capital or otherwise to pay money to the company

Protect the minority shareholders Envisage the company is a state where the voting power is equal amongst all

members and determine whether the alteration of article is reasonable Not always fair individual shareholders From the viewpoint of a hypothetical shareholder**

- BONA FIDE FOR THE BENEFIT OF THE COMPANY AS A WHOLEo Allen v Gold Reefs of west Africa Ltd. (1990)***

LEADING CASE Company’s articles gave it a first and paramount lien (the right to retain possession) on

all partly paid shares held by any member for any debt owed to the company – Deceased has some fully and partly paid shares but he died insolvent – Company altered articles to have a lien on fully paid shares as well

HELD: Alteration is valid even though he was the only person affected. Even though he was the only person so far, in due course, it will affect anyone in the future and thus, it is bona fide for the benefit of the company as a whole.

o Greenhalgh v Arderne Cinemas Ltd (1951) P was a minority shareholder of AC, which changed its articles by special resolution in a

general meeting to remove the right of existing shareholders to be offered any shares transferred from the company – P sued

HELD: So long as the alterations to articles were done properly, that it did not unfairly discriminate, and was bona fide to the company, the alterations are valid –

OBITER a special resolution of this kind would be impeached if the effect was to discriminate between the majority and minority shareholders

o There’s a notion that most of all alteration are allowed.

- Power to expel members:o Brown v British Abrasive Wheel Co. (1919)

FACTS: BAW needed to raise capital – the 98% majority would provide capital if they could buyout the 2% minority – the 98% changed the articles by special resolutions giving them power to compulsorily purchase from the 2% - majority prepared to insert a fair price buyout provision

HELD: oppressive to minority shareholders – such a provision was not for the benefit of the company as a whole but just the majority. Injunction was granted to stop the resolution.

o Sidebottom v Kershaw, Leese & Co. (1920) Private Company’s articles were changed to give directors power to require any member

who had a competing business to sell shares at fair value to nominees of directors – Sidebottom had a competing business and claimed alterations were invalid

HELD: it was valid and for the benefit of the company as a whole for company not to have members who were competitors

o Dafen Tinplate Co. Ltd. v Llanelly Steeel Co. Ltd. (1920) FACTS: Company sought to alter its articles to enable the shares of the existing

shareholders to be bought out at fair price whenever the board think it is appropriate to do so

HELD: The alteration is too wide than what was necessary to protect company’s interests PETERSON: If it can be shown that the power is for the benefit for the company

as a whole, I am of the opinion that such a power cannot be supported if it is not established that the power is bona fide or genuinely for the company’s benefit.

o Shuttleworth v Cox Brothers & Co. (1927) In cases of compulsory transfers, courts will scrutinize the majority’s decision more

rigorously than other cases of alterations of articles.o Gambotto v WCP Ltd. (1995)

Higher threshold in Shuttleworth formulated in this case whereas the shareholders are being expropriated.

Rejected Allen v Gold Reefs HELD: Mandatory buyout of minority shareholders may be justified if: (i) there is a

proper purpose; (ii) it is not oppressive to the minority. Expropriation may be justified if continued shareholding of the minority is

detrimental to the interest of existing shareholders and expropriation is a reasonable way to mitigate that detriment

- Shareholder’s Agreements and the Articleso In situations such as:

Joint Ventures, agreement between the shareholders Minority shareholders investment to protect the investments

Cannot fetter the statutory powers!!o Various Benefits of a shareholders’ agreement:

Private documents, as opposed to the articles of the company They are not limited to membership rights and can cover other matters Their terms can only be altered if all parties consent; whereas articles can be changed

with 75% majority (subject to acting bona fide in the interests of the company)o A typical shareholders’ agreement may include:

Undertakings and agreements from prospective shareholders before the company is formed

Director’s appointment for a threshold of shares Matters that it would be inappropriate to put on public record Protection of minority shareholders if required

Internal management issue which the members wish to keep off the public record Policy of the company on borrowing, i.e.

Company can be party to a shareholders agreement, but if it is a statutory power that a company has, then the shareholders agreement cannot limit those powers cannot fetter the statutory powers

But if the company is required to do something under the shareholders agreement (eg to distribute income to members) it is obliged provided it does not conflict with statutory powers

o Russell v Northern Bank Development Corp. Ltd. (1992) Company agreed in a shareholders agreement not to increase share capital of company

without the agreement of all parties to the agreement. Company wanted to increase share capital without the agreement of all parties.

Held that the company was allowed to do so – the agreement cannot fetter with the Company’s rights under its Articles and CO to increase share capital.

o Muir v Lampl The agreement not to remove a particular person as a director is an unlawful fetter on the

statutory power conferred by S157B

COMPANY AND OUTSIDERS

INTRODUCTION- A company acts

o Through its primary organs – the board of directors or the shareholders in general meeting. Both bodies act by adopting resolutions

o Through its officers, agents or employees Through contractual obligations, Or criminal liability What knowledge can be attributed / identified to the agent?

- Vicarious liability and agency:o A principal is bound by the acts of its agent if the agent

Had actual authority to bind the principal Acted within the scope of its apparent (or ostensible) authority

o A principal may be vicarious liable in tort for the acts of it s agents (employees)- Focus on the dispute resolution, where party tries to escape from the contract.

o Whether the company has the right to enter into the contract? Ultra vires principle

o Authority of the person who represented the company. Binding if the director has actual authority to transact the deal or the director has

ostensible or apparent authority. If there is a problem with internal company procedure, i.e. board meeting or

resolution not properly passed, there is the Turquand rule that comes into effect. S. 5C notion of constructive notice (abolished)

AGENCY- Actual Authority

o Authority conferred by contract governing by agency Board resolution maybe referred to for designation of power

o Freeman Lockyer v Buckhurst Park Properties (1964) DIPLOCK: An actual authority is a legal relationship between principal and agent

created by a consensual agreement in which they alone are parties. Nevertheless, if the

agent does enter into a contract pursuant to the actual authority, it does create contractual rights and liabilities between the principal and the contractor.

The director in question managed the company’s property and acted on its behalf of hiring P to do work – deal collapsed and P sued D – D alleged that the director had no authority

Representation + made by someone with actual authority + reliance = binding on 3rd

partyo Hely – Hutchison v Brayhead Ltd (1968)

DENNING: Actual authority can be expressed or implied…when it is inferred from the conduct of the party and the circumstances of the case.

HELD: Implied actual authority from the conduct of the parties. From the circumstance that the board by conduct over many months acquiesced in acting as their CE and committing Brayhead to contracts without the necessity of sanction.

Such authority exists in a legal relationship between the principal and the contractor created by the fact of representation by the principal to the contractor that the agent has the authority to enter into the contract on behalf of the principal within the scope of the apparent authority

- Implied Actual Authorityo Delegation of authority can be implied by appointing a person to a particular role in the

company, then the assumption is that the individual has implied actual authority to do all the things necessary to fulfill that role.

- Ostensible Authorityo i.e. laptop builder authorize Helen to act for the company in purchase of no more than 5 million

dollars. What if Helen enters into the contract for 10 million dollars? Obvious outside of her scope of the company. If the third party entered into the

contract in good faith, then it would be damaging if the contract is void. If it was void then it would slow the commercial transactions down.

If every time a board resolution is required to pass a transaction, then it would drastically impact the commercial world.

The Lord strikes the balance to protect third party so long as it is reasonable to do so and third party places reliance. (Ostensible authority)

o Freeman Lockyer v Buckhurst Park Properties (1964) Apparent or ostensible authority is a legal relationship created by representation intended

to be and in fact acted upon that the agent has the authority to enter into the contract. Held that although the director was not appointed managing director (therefore had no

actual authority, express or implied) D acquiesced his actions and so the director had ostensible authority

Officer or agent cannot confer authority on himselfo (Freeman Lockyer v Buckhurst) – Criteria to establish apparent authority:

A representation to the third party that agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced by that third party;

Such representation was made by a person or persons who had actual authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

The third party relied on that representation in entering into the contract, Under its memorandum and articles of association the company was not deprived of the

capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent

o Holding out to a third party that one has authority to enter into a contract Should be judged on a case by case basis, but two broad categories existed:

Appointing someone with a specific position

o Sales director for examples Company acquiescing someone, by conduct

o Freeman case: the other party knew that the person entering into the contract took on the conduct to arrange the matters.

o Beware! Representation must be relied upon, and must be reasonable. FREEMAN CASE: Officer or agent cannot confer ostensible authority on himself Articles may not allow the director to enter into a contract above certain sum

When that occurs, the contract would not be binding even if the person normally has the authority to enter into.

o Kreditbank Cassel v Schenkers Ltd. (1927) Branch manager of a company drew and endorsed bills of exchange on behalf of the

company for himself – he had no authority from the company to do so. Held that the company was not bound. But if an officer of a company acts fraudulently

under his ostensible authority on behalf of the company, the company is liable for the fraudulent act

o Maybe changing somewhat when a manager has authority to act within day-to-day parameter of his job

o First Energy (UK) Ltd. v Hungarian International Bank Ltd. Senior manager of the bank had no authority to sign credit facilities – he did so

nonetheless HELD: that he had apparent authority because of the usual authority associated with his

position has the ostensible authority- Where ostensible authority cannot be relied on

o Suspicious Circumstances Normally assumed there is authority unless suspicion arises that would alert to third

parties Substantial sum of money or unusual contract

Hely – Hutchison v Brayhead Ltd (1968) When its authority that’s tied up with a certain position, its described “usual

authority”, even if there is no formal appointment. Someone acting as managing director would be held out as managing director.

Panorama v Fidelis Company secretary has ostensible authority for the hiring of cars or general

administration work. Probably have no authority with trading contract

People below the level? More problematic Houghton and Co. v Nothard, Lowe and Wills ltd. (1928)

FACTS: Third party to sell on commission all the fruits imported by the company and retain the proceeds as security for a loan to another company. Board of directors are allowed to designate the power. The power of designation could not be treated as a matter of internal management rule.

HELD: wasn’t bound because the transaction was unusual in nature. Underwood Ltd. v Bank of Liverpool & Martins (1924)

A sole director and principal shareholder of a company paid into his own account cheques payable to the company – this was unusual so as to put the bank on inquiry – bank was precluded from saying that he was acting within the scope of his apparent authority

o Knowledge of lack of actual authority Criterion Properties plc v. Stratford UK Properties LLC (2004)

Knowledge of lack of authority

SCOTT: Apparent authority can only be relied on by someone who does not know that the agent has no actual authority. If a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent’s principal, it is likely to be very difficult for the person to assert with any credibility that he believed the agent did have actual authority.

- Ratificationo The company can ratify the transaction by board, even with someone making a transaction

without the authority to do so. Implied ratification is sufficient if the board affirm by action.- Limitation on Authority

o Good purpose to limit the liabilityo Put such restrictions on the Articles of Association

Limiting sum, for example.o Consequences:

If third party knows of the restriction, then the third party can’t rely on ostensible authority

Restriction on the board’s ability to enter into contract then the board cannot make such representation for an agent to enter into a contract.

If third party is unaware, in order to protect the agency, the court developed a rule that the third party are deemed to have notice of public document: CONSTRUCTIVE KNOWLEDGE

- Constructive Knowledgeo Abolished that knowledge could be constructive by S. 5C of the CO

A person shall not have notice any matter merely because it was disclosed in the memorandum or the article

o Can simply ignore the memorandum if the person is of a position with usual authorityo Not clear if S. 5C applies to person with actual authorityo Reasonable Enquiries? Unsureo i.e. company with restriction on the article that the board of directors cannot enter into

transaction of more than 5 million. MD borrowed 6 million, and he does not have actual authority. Normally he would have usual authority, however, because of this restriction; the board doesn’t have the authority to make the necessary representation because of Freeman.

The contract wasn’t binding due to the issue of representation. If the bank hasn’t checked the article, then S. 5C would protect it and would be made binding if the bank isn’t aware of the situation.

If they have checked the memorandum, then it would have been binding Would indoor management rule save the contract?

Absolute prohibition but not an internal matter. Nothing that allows the resolution to be passed. Turquand rule would not save third party under such circumstances.

INDOOR MANAGEMENT RULE- Developed to:

o Soften the restriction on the agent of authorityo Soften the doctrine of constructive notice

- Usually when the board may not enter into a contract above certain amount without approval of the shareholders, or when a board enter into the contract without approval from the board

- Allow third party dealing with a company to assume, in the absence of circumstances putting him/her on inquiry, that all matters of internal management and procedure have been complied with.

o Doesn’t require to check if such consent was given to protect people of actual knowledge of constitution as well as the knowledge of constructive notice

o Applies when a director hasn’t properly appointed where a board or general meeting hasn’t been properly called, voting hasn’t been carried out, or when necessary resolution hasn’t been passed

Deals mostly with the internal matters, operating of the management, ratified because of the rule

- Royal British Bank v Turquand o LEADING CASEo FACTS: Company gave security for a loan, article provided that the director can only borrow

such sum as authorized by the shareholders to borrow. There was no resolution passedo HELD: Security was binding because third party was entitled to assume that the resolution has

been passedo People transacting with companies are entitled to assume that internal company rules have

been complied with, even if they are not- If there’s nothing suspicious, third party can assume that the internal management has been complied

witho Mahony v East Holyford Mining Co. (1875)

FACTS: Company’s bank received check, signed by 2 directors and countersigned by secretary. Turned out the directors and secretary hasn’t been properly appointed, and the resolution was never passed to sign the check.

HELD: the checks were valid – bank entitled to assume that the company’s rules have been complied with

o Re Hampshire Land Co. (1896) FACTS: articles provided that the directors can borrow to Table A, larger amount need

resolution. Borrowed excessive, notice was invalid after meeting was called. HELD: Although the lender was aware of the requirement of resolution, it was allowed

to presume that resolution has been passed.- S. 157 of CO:

o The acts of a director or manager is valid notwithstanding any defects on the appointment or qualification

Section would only apply if the third party was aware of the irregularity or there was no appointment (Actual knowledge) at all.

o Morris v Kanssen (1946) Regarding rule of S. 157 IMR cannot operate to benefit insiders of companies – it is used to protect outsiders who

have no idea of the company’s internal workings – internal people have a duty to know of the company’s internal workings

- Limitations on the indoor management ruleo Not available to insiders

Because they would have assumed that the internal regulation has been complied with Howard v Patent Ivory Manufacturing Co. (1888)

BEWARE: In Hely - Hutchison, the exclusive was defined more narrowly. Was only an insider when the transaction was so intimately related to his position as director as it make it impossible for him not to be treated as knowing of the limitations.

o Where third party put on notice or enquiry as to the lack of authority Rolled Steel Products (holdings) Ltd. British Steel Corpn (1986)

IMR only available to those dealing with the company in good faith – those who have notice of the relevant irregularity cannot rely on the rule

o Forgery Hua Rong Finance Ltd. v Mega Capital Enterprises Ltd. (1998)

FACTS: Made 2 loans to capital securing loan from Megal Capital. There was resolution to be signed by all 3 directors from Mega, and authorize one of the

directors to sign the document. When HRF tried to enforce, the other 2 directors denied that they have signed the resolution of any loans.

HELD: The director forged the document and the Terquand rule would not apply.

Tort- Companies will be liable if either the organs of the company or its agents and employees acting within

the course of agency or employment commit the tort.- Company may produce products or provides services or make warranties of such product/services. They

may result in personal injuries, or economic injury or loss to third party.o Organs of the company , employees or agents commit a tort, with relations to the idea of

attribution- Meridian Global Funds management Asia Ltd. v Securities Commission (1995)

o Distinguished primary attribution and general attribution. o Primary attribution is the act of the organs generally, i.e. provision on the article that the decision

of the board should be the decision of the company. o General attribution is set forth in Vicarious Liability

Vicarious liability- If the corporate organ acting on behalf of the company, the company would be liable. Act of the board,

act of the agent is the act of the company. - Quite unusual for a corporate organ have itself committed the act in tort. So the company is the general

rule of liability- First identify the person committing the tort, and identify why the company should be liable for such act- Company is liable when an employee injures someone in the course of employment

o So look at whether it is during the course of employmento Both the employee and the employment are liable in such a case

- Courts tend to impose vicarious liability when there is sufficient connection between the liability and the course of employment. Described as a loss distribution instrument.

- Dubai Alumnimum Company ltd. v Salaam (2002) o Liability attached to the company not because the company committed the tort, but it created the

risk to commit the tort by employee- Company can still be liable even the employee committed an unlawful act. It has to protect individual

rights in tort, whereas in contract it provides remedies for the breach of contract.

One Man Companies- Unusual when a company is primarily liable for tort. When there’s one man who’s managing the

company, the person- Williams v Natural Life Health Foods (1998)

o For there to be an assumption of responsibility (by the employee/director), there must be some direct or indirect conveyance that a director had done so, and that the claimant had relied on the information. Otherwise only a company itself would be liable for negligent information.

- Stone & Rolls Ltd. v Moore Stephens (2009) o HELD: Since he was the sole actor of the company, the company was liable but the director

wasn’t liable. o Principle: where the director and sole shareholder of a company deceived auditors with fraud

carried out on creditors, the creditors would be barred from suing the auditors for negligence. Where the company is identifiable to only one person, the fraud of that person is attributable to the company. The company could not then rely on its own illegal fraud when bringing a claim for negligence against auditors.

Offences Committed by a Company- Company itself can’t have mens rea in a criminal act. So whose state of mind would be attributed?

o Company can’t be liable when it was of nature can be made by a natural person, and the company cannot go to prison.

- Strict liabilityo No mental element. Regulatory in nature usually.o Alphacell Ltd. v Woodward (1972)

FACTS: Polluted matter entered into river, and it was an offence to put polluted matter into the water.

HELD: Company was liable- Vicarious liability

o Sometimes hard to identify strict and vicarious liability.o Mousell Bros v London and North Western Railway company (1917)

Up to the court to work out whether the statute allow the company to be vicariously liable.

- Identification principleo Narrower than vicarious liability, provided that company is only liable when a criminal act is

endorsed by organ of the company. Look at whose actions would be attributed to the company.o Lennard’s Carrying Co. Ltd v Asiatic Petroleum Co, Ltd (1915)

Principle: Identify the directing mind and will of the company – the fault or privity is the fault not merely of someone who is a servant but the company is liable upon the footing respondeat superior, that his actions are the actions of the company itself

o DPP v Kent & Sussex Contractors (1944) FACTS: The charge was with intent to deceive. Company furnish false document. HELD: Company could be liable for an offence where a criminal state of mind is needed. HELD: Circumstance may be such that the knowledge or the intention of the organ

may be imputed on the organization.o R v ICR Haulage Ltd (1944)

HELD: Convicted of conspiracy Criteria: State of mind, intention, knowledge or belief is the act of the company.

o Most obvious problem is to identify who.o Tesco Supermarkets Ltd. v Nattrass (1972)

FACTS: Company was found guilty under trade description act. The defense was due to the defect of another person, and the company exercised reasonable precaution and exercise reasonable due diligence

HELD: Store manager was not identified with the company but another person. The identification is the managing director, organ of the company who carries mind or will. Therefore the company was not liable.

DPP v KENT: the intention of the transport manager, a lower ranked position was taken into consideration.

o Meridian Global Funds management Asia Ltd. v Securities Commission (1995) HOFFMAN: The court should consider the purpose intended to count as the company. FACTS: Company failed to comply with statutory disclosure of interest of security. HELD: Knowledge attributed was the individual with the authority to purchase the

security, regardless whether he was the company’s directing mind or will.- Corporate manslaughter

o R v Stanley Company fined 60K pounds in a canoeing trip. Managing director himself was found

manslaughter and his mens rea could be attributed to the company since the company was very small. In bigger company, it is difficult to convict the company of manslaughter.

o Narrow circumstances that companies convicted of manslaughtero UK: Corporate manslaughter was introduced as a result. If the activity by the company causes

death and such activity amounts to gross negligence.

MANAGEMENT OF THE COMPANY

POST INCORPORATION REQUIREMENT- REGISTERS

o Register of directors and secretaries (S.158 CO)o Register of members (S. 95 CO)o Register of charges (S. 89 CO)o Register of holder of debentures (optional)o Company must keep minutes of general meetings (S. 119 CO)o Company must keep accounting recordso Company must file annual return each year (below)

- ANNUAL RETURNo Once every calendar year (S. 107(1))o Submit within 42 days of anniversary of date of incorporationo If late, company, directors and secretary – fine and daily default fineo Containing

Company name, registered number, business name Registered office address Type of company Date of the return Particulars of the directors and secretary Address where register of members and register of debenture holders kept (if not

registered office) Particulars of members and share capital Amount of indebtedness of the company in respect of all mortgages and charges which

are required to be registered with the Registrar

OFFICER OF THE COMPANY- COMPANY SECRETARY

o S 154 (1) CO : Every company must have a secretary. A sole director shall not also be a secretary.

o Usually appointed by Board (Table A Art 112). 1st secretary in Form NC1o Resident in HKo Register of directors and secretaries.o Officer of the companyo Duties:

Admininistrative duties Present at board meetings, make minutes, issue notices, filings

Deeds – two directors or director and secretary Fiduciary duties and duty of skill and care to company Secretary does have power to make contracts on behalf of company, if fall within

“usual authority”, eg Panorama Developments (Guildford) Ltd. v Fidelis Furnishing Fabrics Ltd. 1971 3 All

ER 16 Company secretary hired cars for his own use without the knowledge of managing

director – a company secretary routinely enters into contracts in the company’s name and has administrative responsibility to hire cars – hence company is liable

- MANAGER

o Recent introductiono “A person who, under the immediate authority of the board, exercises managerial functions.”

- DIRECTORSo Person who runs the companyo General:

Minimum number - S 153 A: One generally; Public company must have at least 2, but the articles may provide more

If company has fewer than statutory minimum for more than two months every officer liable to a fine

Company can only be a director of private company in non-listed groupo Circumstances in which barred from being a director:

Under 18 Undischarged bankruptcy Sole secretary and director Disqualification order

o Qualification as director Section 155

If Articles require, director must hold qualification shares o Table A no requirement, unless it is amended

o Appointment Form NC1. Art 77

The names of the first directors shall be determined in writing by the subscribers of the memorandum of association or a majority of them.

Members – Art 99 Ordinary resolution (but if Table A articles, appointment only until next AGM)

Directors – Art 97 Director appointed by directors only holds office until next AGM and is then

eligible for re-election Defective Appointments – s 157 :

The acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification. This provision doesn’t operate where there has been no appointment – Morris v Kanssen (1946) AC 459

o Rotation of Directors Table A provides that at the first AGM of the company all the directors must retire from

office, and at every subsequent AGM one third of the directors must retire. The retiring directors are eligible for re-election. This process supports the notion that directors are appointed by the members and that the members acting in GM ultimately control the company.

It is very unusual these days for a company to adopt these provisions (Art 91 – 95).o Type of Directors

Managing Director Table A, Art. 109

o The directors may appoint one or more of the board to the office of MD for such period and on such terms as they think fit.

Table A , Art. 110 o MD will receive such remuneration as directors determine

Powers and Duties: Art 111

o The directors may entrust any of the powers exercisable by them to the MD upon such terms and conditions and subject to such restrictions as they may think fit. Already looked at ostensible authority of MD last week

Executive /Non-Executive Directors: Executive:

o Employee essentially, with a service contracto Wiki: CEO/ MD

Non-Executive Directors:o Won’t be involved in day to day operation

Alternate directors Typically the articles (though not Table A) provide for the appointment of

alternate directors for the purposes of attending and voting at board meetings if the principal director is absent. Has same power to vote speak and attend as the principal director.

S 153B:o Alternate director is agent of person appointing him and director

appointing an alternate is vicariously liable for any tort committed by the alternate while acting as alternate.

Proxy directors shareholders/ members appoint proxy directors if the real director is absent. He can do things within the scope of what he was allowed to do

Nominee Directors Acts as a non executive director on a board on behalf of another person or firm

such as creditors, bank, investor, or lender.o Shareholders may appoint directors in a Joint Ventureo Banks or creditors may appoint a director to the board

All the directors owe the duty to the company when conflict arise Reserve Directors

S 153A: o One member-one director companies may appoint a “reserve” director to

act in place of the sole director in the event of his death. Shadow Directors

S 2: o A person in accordance with whose directions or instructions the directors

or a majority of the directors are accustomed to act, but excluding professional advisers such as lawyers and accountants.

Must be a matter of regular practice over a period of time – Re Unisoft Group Ltd (No 3) 1994

Definition in Secretary of State for Trade and Industry v Deverell 2001:a. It is not necessary to show that the person gives directions or instructions

on every matter on which the directors act, but it must be shown that the person has a real influence in the company’s corporate affairs;

b. Whether any particular communication should be classed as a direction or instruction is for the court to determine objectively;

c. Advice (provided it is not professional advice) may be a direction or instruction;

d. It is not necessary to show that the directors adopted a subservient role or surrendered their discretion;

e. Despite the use of the term “shadow director”, it is not necessary to characterize the person as “lurking in the shadows”; it is possible for a person to be a shadow director quite openly.

o Role of the Board

Table A: Art 82 The business and affairs of the company shall be managed by the directors

(subject to the Memorandum and Articles and any special resolution)o Because it is effectively amending the article.

o Termination Deemed by Articles : Table A , Art 90: If director:

Becomes of unsound mind Becomes bankrupt or makes any arrangement with creditors Is disqualified under Part IVA of the Ordinance Resigns Has been absent, without permission, for more than 6 months from meetings of

the directors. The Articles may include other grounds,

i.e. Lee Tak, Samuel v Chou Wen-hsien o Office of director to be vacated “if he is requested in writing by all co-

directors to resign.’ Retirement by rotation (as above) S 157D (and articles) - formalities

o Resignation Dismissal from office

o S 157B Company may, by ordinary resolution, remove a director from

office before the expiration of the director’s period of office, notwithstanding anything in its articles or in any agreement between the company and the director

o Special notice (28 days) by member wishing to introduce resolution Company must give members 21 days’ notice of GM

o Director has right to be heard at meeting; issue a statement to memberso “Notwithstanding anything in its articles or in any agreement between the

company and the director”o S 157B (5)

On a resolution to remove a director before the expiration of his period of office no share shall, on a poll, carry a greater number of votes than it would carry in relation to the generality of matters to be voted on at a GM

o Bushell v Faith 1970 - Termed: Bushell v Faith Clauses Does not work in Hong Kong Articles which stipulate that there shall be weighted votes in the

removal of directors are valid – decision is not applicable to listed companies

NOT VALID IN HK because of S157B(5) Articles

Doesn’t matter if articles stipulate a director remain director for life can still rid him eg: disqualification order?

Shareholders’ agreement i.e. no directors may be remove without the consent of all the directors

o Enforceable unless the company is a party. Muir v Lampl (2004) –

o A company cannot agree with a director and shareholder not to exercise the statutory power under S 157B to remove a director by ordinary resolution before the expiration of his office

o Following Russell v Northern Bank Development Corp Ltd (1992) Company cannot limit the power of the company in the

shareholder’s agreement Director’s service contract

Removal under s 157B does not deprive a director of compensation or damages in respect of termination of an employment contract

o Disclosure of Directors’ Interests Where a director is in any way directly or indirectly interested in a contract or proposed

contract with the company, he must declare the nature of his interest (if it is material) at the earliest meeting of the directors at which it is practicable for him to do so (s 162 (1)).

For the purposes of this section, ‘contract’ means a contract which is of significance in relation to the company’s business.

Director can make “general” notice that he is to be deemed to be interested in all contracts with a particular party – must be given before the company first considers a contract with the third party.

Articles will state whether director who is interested in a transaction can count in quorum and vote in respect of a decision on that contract.

Table A – director can’t vote (art 86 (1)); some exceptions Duty to disclose does not ‘prejudice the operation of any rule of law restricting directors

of a company from having any interest in contracts with the company’ (s 162 (5)). It’s up to the members to challenge the disclosure due to fiduciary duty

o Financial Arrangements with Directors Directors’ emoluments

Re George Newman & Co (1895) Lindley LJ: “ Directors have no right to be paid for their services and cannot pay themselves or each other, to make presents to themselves out of the company’s assets unless authorized to do so by the instrument which regulates the company or by the shareholders at a properly convened meeting.”

o Authority in Articles. Art 78, table A Directors’ emoluments must be disclosed in the company’s accounts

Compensation for loss of office A bona fide payment to a director by way of damages for breach of contract or by

way of pension for past services, including superannuation allowance, gratuity, or other similar payment, does not require the sanction of the company in general meeting (s 163D(3)(b)).

Members’ approval will be required in the following circumstances:o Payment as compensation for loss of office or as consideration for

retirement from office (s 163)o Payment as compensation for loss of office or as consideration for

retirement from office in connection with the transfer of the whole or part of the company’s undertaking (s 163A)

o Payment as compensation for loss of office or as consideration for retirement from office in connection with the transfer of shares in the company pursuant to an offer for the shares (s 163B)

Loans to directors (s 157 H) *NOT AS IMPORTANT, JUST READ THROUGH* General prohibition on:

o Loans to directorso Giving guarantees or security in connection with a loan made by a lender

to a director

o Loans to a company controlled by a director or security /guarantee in connection with loan to such a company.

Further restrictions on “relevant companies” - public company or private company which is a member of a listed group; and provisions extended to family members

To protect capital of company from being used improperly by directors for their own purposes

Excepted transactions (S 157HA)o If the ordinary business of the company includes loans, etc.. Such

transactions must be entered into in the ordinary course of business and the amount of the transaction must not be greater and the terms not more favourable, than what is reasonable to expect the co to have offered to an unconnected party of same financial standing.

o Intra-groupo Approval in GM (for non-listed group private companieso Funds to meet expenditure incurred by director for purpose of co or

enabling him properly to perform his duties(subject to conditions re approval in GM)

o Provision of residential premises – transaction to facilitate the purchase of only or main residence of director or to improve such premises (again subject to conditions)

o Lease or hire of goods or land on arms’ length terms Exceptions subject to being below “relevant amount” limits Civil and criminal consequences for breach

MEETINGS & RESOLUTIONS- DIRECTORS

o Notice Art 100, Table A

A director may summon a meeting of the directors, that the secretary must do so on the requisition of a director, and that it is not necessary to give notice to any director who is absent from HK.

No period of notice specified Notice should with sufficient time allowing to attend Broadview Commodities Pte Ltd v Broadview Finance Ltd (1983) Browne v. La Trinidad [1887]

o 4 minute notice, doesn’t automatically render the notice void. Might require to look at indoor management rule.

o If a board meeting were found to be irregular, the person affected could raise objection and require another meeting to be summoned. The failure to call for such other meeting may result in the proceedings of the first meeting being upheld.

Yick Hok Wing v Chan Yook Ming (1997) o Deputy Judge Pang: I think in cases where there is prima facie evidence

to suggest that the notice of meeting were highly irregular, the Court is entitled to examine the intention of those convening the meeting.

o Quorum Art 101 of Table A

Quorum may be fixed by directors but is otherwise two. Ar. 55 of Table A

o Chairman The directors present may elect a chairman and decide the period for which he is to hold

office (Art 103) If chairman not present within 5 minutes of start of meeting, directors may choose

another person to act as chairman of that meeting.o Voting

Majority Chairman to have casting vote (art 100) Resolution in writing signed by all directors as valid as if passed by duly convened

meeting (art 108) - SHAREHOLDERS

o The general powers of running a company are vested in the directors, but certain decisions must be made by the shareholders on general meeting. The shareholders also have the right to call extraordinary general meetings of the company and to propose resolutions for the agenda of the company’s annual general meeting. Thus, members of a company are able to exercise a limited amount of control over the running of a company.

o MEETINGS Annual General Meeting of shareholders:

First AGM should be held within 18 months after incorporation Otherwise, AGM must be held each calendar year at intervals of no more than

15 months In practice most companies hold AGM same time each year, eg first Monday in

March Table A, art 49: At a location decided by the director Opportunity for shareholders to question directors on any matter but in

particular on accounts which are usually presented at the meeting. In pursuant of court order: hold in the year the company defaults, or there the

company must pass resolution for it (s. 111(3)); and the resolution must be forwarded to the Registrar within 15 days (s. 111 (4))

Business of the meeting will o Declaring a dividend, electing directors in place of those retiring (if any)

and appointing auditors. Meeting can be replaced by written resolution of shareholders

EXTRAORDINARY GENERAL MEETING(all other general meetings) – at the request of directors, members, auditors, the court, the official receiver and the company’s liquidator (Table A, art 50)

Convened by directors where need approval to do Quorum

o A director may convene such a meeting if there are insufficient directors in Hong Kong to form a quorum at a meeting of the board of directors (table A, art. 51)

Requisition by members (s 113(1))o Member(s) representing 5% or more of the paid-up capital (or voting

rights) of the company which carries the right to vote at general meetings may requisition a meeting. Previously required 10% of shareholders

S 113 (2) – State the object of the meeting, sign by the requisitionists and deposit at the registered office of the company

Directors are entitled to refuse if the object is incapable to be effectively achieved

Isle of Wight Rly Co. Tahourdin (1993)

o The resolution which it was proposed to submit in the meeting was one which could be carried out by simple majority. Decided that the Court would not interfere to prevent a meeting of shareholders being held.

Convened by shareholderso Two or more members holding not less than 1/10 of the issued share

capital may call a meeting (if articles do not provide otherwise) – used where no directors

Requisition by auditor (s 140 B(1))o When auditor resigns and gives notice to the company that there are

circumstances connected with his resignation which he considers should be brought to the notice of the members

Convened by court order (s 114B) o If for any reason it is impracticable to call a meeting of a company , or to

conduct the meeting as set down in the articles or statute , the court can order a meeting to be convened and held and conducted as the court sees fit

Usually in a quorum (one person) Standard Chartered Equitor Trustee v George Zee & Co. (1995)

The court usually are reluctant to interfere with the removal of a directors

Ng Wing Hon v Choi Tak Lan (2007) Proper to use 114B to overcome the difficulty of achieving

a quorum Not proper to use 114B to remove director when a s168A

petition is pending In liquidation

o TYPES OF RESOLUTION Special resolutions

Majority of at least ¾ of members entitled to and who do vote in person or by proxy at a GM of which not less than 21days’ notice has been given.

“Major” issues, eg change of Articles, alteration of objects clause, name, etc. Must be filed with Companies Registry

Ordinary resolutions Simple majority of the members who attend and vote (in person or by proxy) :

50% +1o One vote over the 50%

EG: removal of directors/ electing directors Written resolutions

Resolutions in writing signed by ALL shareholders entitled to attend and vote at general meetings are regarded as resolutions duly passed.

Exceptions: resolution to remove auditor or director before expiration of term of office

Members holding 2.5% of voting rights may requisition a resolution to be considered at the next AGM

Board resolutions: passed by the boardo NOTICE

AGM or meeting where SR to be passed: 21 days from the requisition to notice Convene a meeting within 28 days, or Requisitionists representing half of the voting rights may convene a meeting

themselves and within 3 months following the 28 days period (s. 113(3))

o Conducted in a manner similar as if the directors have convened the meeting (113(4))

o Reasonable expenses incurred will be paid by the company out of fees due to the defaulting directors (s. 113(5))

Other meetings: 14 days Must be ‘clear days’, excluding day of posting, day of deemed receipt and day of meeting

itself: The Securities and Futures Commission v The Stock Exchange of Hong Kong Ltd

(1992) Shorter notice can be agreed:

With consent In case of AGM, all members entitled to attend and vote at meeting: less than 21

days notice In case of other meetings, if a majority in number of members having the right

to attend and vote at the meeting and holding 95% of the shares agree (s 114(3)) Notice to all members, every person entitled to a share by transmission, and the auditors

(Art 135, table A) S 114A(2)(a):

o If a company is listed, notice must be served on member who is not entitled to vote and also those who are entitled to.

o QUORUM Two unless articles state otherwise (s 114 (1) (c)). One member in a one member

company! Must be present when the meeting proceeds until the conclusion (art. 55)

o CHAIRMAN If the articles do not provide otherwise, any member may be elected chairman of the

meeting (s114A(1)(d)) Usually chairman of the board will act as chairman. If he’s not present, or unwilling to

act, directors choose director to be chair (art 57), or, failing that, one of members(Art 58) Powers of chairman usually set out in Articles.

o PROXY Member has a right to appoint a proxy to attend and vote in his place. (s 114C) Member may appoint a permanent proxy

Or even 2 proxies if necessary Proxy cannot normally vote on a show of hands unless articles allow (Table A does not)

o VOTING Normal position: show of hands – one vote per member (not proxy), irrespective of

number of shares held Poll - one vote per share Right to demand to poll: Art 60

Chairman At least 2 members present in person or proxy Any member or members representing at least 1/10 of total voting rights at

meeting Member or members holding shares conferring a right to vote at the meeting

being shares on which an aggregate sum has been paid up equal to not less than 1/10 of total sum paid up on all shares conferring that right.

Chairman has second or casting voteo MINUTES

Minutes of all GM’s and board meetings must be kept (or record of all written resolutions)

Minutes must be signed by chairman and are evidence of the proceedings. One Member Company: must provide company with written record of decision within 7

days. Similar requirement re single director. Minute book kept at registered office or notice to Registrar of where book kept. Open to inspection to any member free of charge for at least 2 hours a day.

o UNANIMOUS CONSENT When all the shareholders of a company assent to a matter that could be brought into

effect by a resolution in GM the unanimous consent of the shareholders without a formal meeting is enough. This is called the ‘Duomatic principle’ from Re Duomatic (1969)

Buckley LJ: “…I proceed upon the basis that where it can be shown that all the shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

PROPOSED REFORM- Resolutions and meetings

a. Introducing a comprehensive set of rules for proposing and passing a written resolution; b. Enhancing members’ powers to require directors to circulate members’ resolutions; c. Requiring a company to bear the expenses of circulating members’ statements relating to

business of, and proposed resolutions for, AGMs, if they are received in time for sending with the notice of the meeting;

d. Permitting a general meeting to be held at more than one location by using audio-visual technology;

e. Reducing the threshold requirement for members to demand a poll from 10% to 5% of the total voting rights;

f. Giving members a right to inspect voting documents (including proxies and voting papers); g. Clarifying the rights and obligations of a proxy; h. Allowing companies to dispense with AGMs by unanimous shareholders’ consent;

- Registers i. Clarifying that the court may refuse to compel compliance with a request for inspection or a copy

of the register of members, directors or secretaries if the right is being abused; - Registered office and publication of company names

j. Empowering the Financial Secretary to make regulations to require a company to display its name and related information in certain locations and state prescribed information in documents or communications.

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE- Series of corporate failure prompting the reform of the corporate governance- “Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the

way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.” (Wikipedia)

o Good corporate governance, complemented by a sound business environment, can strengthen private investment, corporate performance, and economic growth.

- The role of corporate governance:

o To improve internal and external checks and supervisiono To deter and punish abuse and wrongdoingo To restore investors’ confidenceo To maintain market integrityo To help develop a competitive edge

- Aspects of Corporate Governance (OECD Principles of Corporate Governance (2004))1. Rights of shareholders and key ownership functions2. Equitable treatment of shareholders3. Role of stakeholders4. Disclosure and transparency of company management 5. Responsibilities of the board

With the objective to achieve a sound financial systems Legal and regulatory balance Hong Kong historically relied on the market mechanism. Free trade, port; since legal

regulations has been introduced

CORPORATE GOVERNANCE IN HONG KONG- Highly concentrated ownership in family-controlled companies and weak internal oversight on

controlling shareholderso Even in the listed companies

- Oppression of minority shareholders- Lack of independence of the board from controlling shareholders- Inadequate transparency and managerial accountability- Passive minority shareholders and lack of shareholder activism- Under-utilized legal remedies for shareholders

o Clumsy, cumbersome and tend not to be usedo Most of the incorporated companies were registered from Camen Island and Bermuda

- Difficulties in regulating listed companies incorporated overseas- Box-ticking attitude towards formalities of corporate governance rather than concern with genuine

substance and culture-building

FRAMEWORK FOR CORPORATE GOVERNANCE IN HONG KONG- Hong Kong is keened to maintain the status as a financial leader in the regions and thus saw the need for

corporate governance in the regulation- Listing Rules (not law) – listed companies:

o No fine with the violation of listing rules- Statute:

o Companies Ordinanceo The Securities (Disclosure of Interests) Ordinanceo Insider Dealing

Must not use information generally not available to the public- Company Law: Directors’ duties; Minority Protection

o Generally non-statutory- Accounting and Auditing Standards

o Encourage to form an audit committee

CORPORATE GOVERNANCE REFORM- Mainly targeting listed companies- FSTB (Financial Services and the Treasury Bureau) – Corporate Governance Action Plan (2002)- Standing Committee on Company law Reform (SCCLR) (2003) -

o Explain why they haven’t complied with the law

- Revised Listing Rules (2004)o Poll voting (instead of by show of hands)o Independent Non-executive directorso Audit committee

- Code on Corporate Governance Practices and Corporate Governance Report for listed companies (2005)o Code

Approach: comply or explain Structure: 5 sections

Directors Remuneration of directors and senior management Accountability and audit Delegation by the board Communication with shareholders

o Corporate Governance Report - to be included in summary financial reports and annual reports of listed companies

- Financial Reporting Council Ordinance (2006) - to establish a statutory financial reporting council to investigate sub-standard audits and financial reports

- Statutory backing to major listing rules (2010?)o Primarily focusing on statutory backing to disclosure requirementso Setting out serious penalties for corporate governance failures (at present: public censure) to give

rise to better enforcement and sanctioning

DIRECTOR’S DUTIES- Delegation of powers to the directors:

o Article 82, table A: “Subject to the provisions of the Ordinance, the memorandum and articles and to any directions given by special resolution, the business and affairs of the company shall be managed by the directors, who may exercise all the powers of the company.”

It’s the directors who run the company and make decisions about company’s business Also creates the risk that the directors are not using the power properly to favor their

own interests Large part of Company Law is to limit the power to exercise yet strike a balance between

managing the company Shareholders can remove directors, call meetings, requisition at a general meeting so that

you can raise it for discussion Minorities can take action to enforce director’s duties Common law in Hong Kong, Statutes in UK

Words in UK is different yet refer to the same case- To whom are the duties owed?

o A director owes his duties to the company, not to individual shareholders or employees, or even creditors (except in a winding-up)

It’s the company itself that could enforce the duty. Causes problems for minority shareholders

- By whom are the duties owed?o Directors, ‘de facto’ directors (persons who act as such even though they have not been properly

appointed) o Secretary of State Trade and Industry v Tjolle (1998) 1 BCLC 333

Being a de facto director is a question of degree: whether the individual used the title of director; and whether he had to make major decisions

o What about shadow directors? In Ultraframe (UK) Ltd v Fielding (2005) EWHC 1638

Lewison J took the view that fiduciary duties did not apply to a shadow director on the grounds that a shadow director unlike a properly appointed or de facto director had not undertaken to act on behalf of the company and so put himself in a fiduciary position vis-à-vis the company.

Whereas shadow directors could be liable for controlling all its subsidiaries’ misfeasance, the definition of shadow director is not wide enough to cover the fiduciary duties as owed by the company’s de facto and de jure directors.

Held that a shadow director may still be subject to specific fiduciary duties where his acts go beyond indirect influence.

Davies in Gower and Davies submits that: The duties should apply to shadow directors as well as to de facto directors to the

extent that a shadow director exercises real influence over the company. o This also seems to have been the view of the Law Commission in the

UK.

Duty of Care and Skill ( Principle 4 of the Non-statutory guidelines on Directors’ duties) o A director owes a duty of care to the company not to act negligently in managing its affairs.

The standard is that of a reasonable man in looking after his own affairs. The duty of care arises from the circumstances that the director assumes responsibility for the property or affairs of the company.

o Breach of duty of skill and care entitles the company to damages.- Re City Equitable Fire Insurance Co (1925) Ch 407 Test laid down by Romer J:

o FACTS: Fraud committed by the chairman, director left the affairs to the chairman and the issue was whether the directors were liable.

Objective standard of reasonable care such as might be expected of a reasonable man (Re Horsley & Weight)

1. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

Purely subjective test2. A director is not bound to give continuous attention to the affairs of the company. His

duties are of an intermittent nature to be performed at periodical board meetings…He is not, however, bound to attend all such meetings though he ought to attend whenever, in the circumstances, he is reasonably able to do so.

3. In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”

Low threshold - Re D’Jan of London Ltd (1994) 1 BLCL 561

o FACTS: Director failed to read and signed an erroneously filled insurance proposal. When they claimed money the insurance company refused to pay. Liquidators sued the director for damages. The duty of care owed by directors is a common law duty also:

Whether the director owed a duty of care Whether the duty exercised was reasonable according to a reasonable person carrying the

same function of the directoro Executive and non-executive directors are not differentiated

The Non-statutory Guidelines on Directors Duties, published by the Companies Registry and the Rules of the HKSE require the standard set out in D’Jan’s case.

- Note that at least with regard to attendance at meetings there does not seem to be any differentiation between executive and non-executive directors:

- Dorchester Finance Co Ltd v Stebbing (1977) o FACTS: negligent in signing of check requested by executive director.

o A director carrying out his duties was required to exhibit such a skill as reasonably expected from a person of his knowledge and experience. No distinction was drawn between executive and non-executive directors.

- Re Westmid Packing Services Ltd (1998) o Director disqualification guidelineso Collective responsibility of the board is fundamental to corporate governance. Collective

responsibility must be based on individual responsibility – each director has responsibility to inform himself about the affairs and join with co directors in supervising them.

o A proper degree of delegation is acceptable but total abrogation of responsibility is not.- Lexi Holdings v Luqman

o Directors’ duties are inescapable duties and courts will not accept attempts by directors to excuse non compliance by alleging that responsibility had been delegated – directors must execute their functions vigilantly and responsibly.

FIDUCIARY DUTY- “A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in

circumstances which give rise to a relationship of trust and confidence.” Bristol & West BS v Mothew (1997) 2 WLR 436

o A duty of trust and confidence, not as high of a threshold as trustees

1. To act bona fide in the interests of the company as a whole and not for some collateral purpose (Principle 1)

Duty to act as good faith and bona fide for the benefit of the companyo This duty requires a director to act honestly and in good faith in the interests of both present

and future members, not in the interests of the directors or only a section of shareholders.- Re Smith and Fawcett Ltd (1942) Ch 304

o Meaning of ‘the interests of the company’ – directors must exercise discretion bona fide in what they consider – not what the court considers – is in the best interest of the company and not for any collateral purpose.

2. To exercise powers for their proper purpose (Principle 2)o Directors must use their powers for their proper purpose and not to further their own interests.o Howard Smith v Ampol (1974) AC 821

FACTS: Board was facing takeover position. They issued shares to the bidder to enable that the bidder to win the takeover.

HELD: The allotment was not valid. The dominant purpose of issuing the shares was to alter the balance of power, and this was not the purpose for which the director’s power to allot shares had been given.

Lord Wilberforce: “…it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority or creating a new majority which did not previously exist.”

o Criterion Properties plc v Stratford Properties llc (2002) 2 BCLC 151 FACTS: Directors were acting in good faith in a takeover situation which they wanted to

avoid. There was no question of bad faith but it wasn’t a proper exercise of the director’s power.

Principle: The mere conferring of contractual rights does not constitute ‘receipt’ of assets for this purpose. The creation of contractual rights does not constitute a receipt of assets for the purposes of ‘knowing receipt’

3. Not to allow a conflict of interest and duty/ not to profit from their position (Principles 5 – 9)o As fiduciaries, directors must not place themselves in a position in which there is a conflict

between their duties to the company and their personal interests or duties to others.

o Good faith must be done and seen to be done. If there are any suggestions of bias or conflict of interest, the directors must avoid the conflict.

o In Plus Group v Pyke Director has a duty not to make a secret profit and the duty not to have a conflict of

interest – it does not mater whether he was using company’s information or property when doing so – may well find that their service contract may have a provision to not work for competitors

CONFLICT OF INTEREST – SELF DEALING- Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 (HL) .

o FACTS: Contract between the company and a partnership in which one of the directors is the partner. He has not made a secret profit, but the mere existence of conflict of interest meant that the company could have voided the contract.

o Lord Cranworth LC: “ A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect…So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into…”

The court would look at fairness of the contract and can hold the contract voidable.- S. 162

o Allow the directors to disclose this interest. It is still open for the shareholders to challenge the interest.

PROFITS DETAINED FROM THE POSITION OF A DIRECTOR- Directors may not profit from their position and will hold any profit on trust for the company. The profit

would be hold as trust of the company in the case if the director made a profit. - There would be an account of profits in these situations whether the company can account for profits

depends on whether it was a maturing business opportunity when the director left the company - Regal (Hastings) v Gulliver (1942) 1 All ER 378

o FACTS: Regal owned a cinema, and the director took over 2 of the cinemas and sold them on a going concern (def: where business doesn’t have the threat of liquidation in foreseeable future). Directors took up the balance of the shares when it was sold . The directors made a profit when the shares were sold. The directors were accountable for the profit even though they were doing the company a favor.

o Porter LJ: “Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form. Their liability in this respect does not depend upon a breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is a director. It matters not that he could not have acquired the contract for the company itself… the profit which he makes is the company’s even though the property by means of which he made it was not and could not have been acquired on its behalf.”

- Cook v Deeks (1916) 1 AC 554 (Privy Council) o FACTS: 4 directors of a company. The company has built up good rail with the Canadian

railway company through business. The recent contract, 3 of the directors negotiated as if the company was going into the contract, they undertook the contract on their own. Cook, the 4th director, took action in the name of the company.

o HELD: The directors had to account for the benefit of the company.MATURING BUSINESS OPPORTUNITY

- IDC v Cooley (1972) 2 All ER 162. o FACTS: Cooley was the MD of the IDC. He was negotiating a contract and was told that the

company wouldn’t employ a consultant to enter the contract, therefore the negotiation broke down. He resigned the company and took the contract for himself.

o HELD: he acted in breach of contract and must be accountable for the contract. Whether the company was not given the contract was irrelevant.

- Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371*** o FACTS: Defendant diverted the contract to construct an airfield in Guyana, formed own

company to undertake.o Identified 4 factors which led to the finding that the director should account for profits:

1. The defendants had diverted for their own benefit a ‘maturing business opportunity” which their co was actively pursuing;

2. They were participants in the negotiations on behalf of the company; 3. Their resignation had been “prompted or influenced” by a wish to acquire the opportunity for

themselves; and 4. It was their position with the company, rather than a “fresh initiative” which led them to the

opportunity which they later acquired. - Island Export Finance Ltd v Umunna (1986) BCLC 460

o FACTS: Accepted evidence that the company was not seeking further order that Umunna entered. Sometime after he got the benefit of the contract and the judge was satisfied that the resignation had nothing to do with the contract.

- Balston Ltd v Headline Filters Ltd (1990) FSR 385 o FACTS: Ex-director knew that he was entering into business but hasn’t decided which kind of

business. One of the former clients offered an opportunity and the company decided to enter into the same industry with the former company.

o HELD: Was not a breach of fiduciary duty. So long as there was no maturing business opportunity, then he could decide what to set up.

- Peso Silver Mines v Cropper (1966) 58 DLR (2d) 1 o FACTS: If the company rejected the contract then the director could take up the contract. The

board rejected an offer for claim and Cropper took up the opportunity himself.o HELD: He was not in breach of his fiduciary duties – directors had acted in good faith in

rejecting the deal – the information D received was public information as well – offer was made to D as a private individual and was entirely separate from his role as director

- HK case: Kishimoto Sangyo Co Ltd v Akio Oba o Mere prospect of a business opportunity cannot come within the concept of a maturing

business opportunity.- Bhullar v Bhullar

o Directors must avoid any possibility of conflict of interest, particularly relating to corporate opportunities

REMEDIES FOR BREACH Injunction Rescission

o Failed to disclose interest, then the company could rescind the contract or ratify the contract.o If it is something that’s ultra vires, then the contract is void

Damages or compensation o The appropriate remedy for breach of fiduciary duty is damageso Or loss has been suffered as a result of the breach of fiduciary duty

Restoration of property JJ Harrison (Properties) Ltd v Harrison (2001) EWCA Civ 1467 o Sometimes the court would treat the directors as if they were trustees.

o Gives rise to remedy to trace proceeds of sale. Account for profits

o Director of the company and a director of third party, the profits must be accounted for. o Doesn’t have to be any loss, just when the director made any profit.

Summary dismissal of directoro Can remove a director under statute

AUTHORIZATION / RATIFICATION- Shareholders can approve or ratify a transaction so that the director can be considered not breach the

contract.- Bamford v Bamford (1970) Ch 212.

o FACTS: A takeover case, even though it was for improper purpose, it was ratified in the general meeting.

o Russell LJ: “…impropriety by the directors in the exercise of their undoubted powers is a proper matter for waiver or disapproval by ordinary resolution.”

- Northwest Transportation Co Ltd v Beatty (1887) 12 App Cas 589 . o HELD: Common law allows the director to vote in a decision to ratify his action so long as it is

not an action of fraud- Cook v Deeks

o HELD: Cannot ratify a fraud.

POWER OF THE COURT TO GRANT RELIEF- Section 358 provides that

o if in any proceedings for negligence, default, breach of duty, or breach of trust against an office of the company or its auditors, it appears to the court that he has acted honestly and reasonably, and that having regard to all the circumstances of the case he ought to be excused, the court may relieve him, wholly or in part, from liability on such terms as it thinks fit.

- Ching Tung Futures Ltd (in liq) v Lai Cheuk Kwan (1994) 1 HKLR 95 o FACTS: Lai was held liable for negligence. Acted honestly but failed to act reasonably

PROHIBITION ON EXCLUSION AND INDEMNITY CLAUSES- Any provision contained in the company’s articles, or in any contract with the company or otherwise, for

exempting any officer of the company or its auditors from, or indemnifying him or them against, any liability for negligence, default, breach of duty, or breach of trust, in relation to the company or a related company is void (s 165)

- A company is not, however, prohibited from indemnifying its officers or auditors against the costs incurred by them in defending any proceedings, civil or criminal, in which judgment is given in their favour or in which they are acquitted, or where relief is granted under s 358.

- A company may purchase insurance for any of its officers or persons employed as its auditor against any liability to the company, a related company, or any other party in respect of any negligence, default, breach of duty, or breach of trust (except fraud) and against liability incurred by him in respect of defending any such proceedings. (s 165 (3)).

CODIFIED DIRECTOR’S DUTIES- FOR:

o Complex caseso Not accessible to find through caseso Codification clarify the positiono UK introduced to correct the defect in conflict of interestso Makes the law more predictable

- AGAINST:

o Lose flexibilityo Enlighten Shareholder idea refused

MINORITY PROTECTION

METHODS OF CONTROL BY SHAREHODLERS Appointment and dismissal of directors Directors’ duties General meetings Information rights - accounts (profit and loss account and balance sheet) laid before the AGM each year

and sent to all members before AGM; right to inspect registers Minority shareholder protection

MAJORITY RULE- General rule: corporate action by majority rule.

o Essentially, minorities enter into contract that they cannot amend

MINORITY SHAREHODLER PROTECTION Special resolutions Right to object to amendment of objects clause Right to requisition meeting/resolution at AGM Right to apply to court to inspect records of the company – S 152FA – FE (2.5% total voting rights or

those who hold at least $100,000 or no fewer than five members can apply to court) Shareholder agreements Petition for winding-up the company on ‘just and equitable’ grounds Section 168A – the affairs of the company are being or have been conducted in a manner which is

unfairly prejudicial to the interests of the members generally or of some part of the members (including himself)

Common law COMMON LAW to bring a DERIVATIVE ACTION- Exercise of voting rights by Shareholders

Right to property and maybe exercised on the member’s own interest as they think fit. Do not owe a fiduciary duty to the members

o Northern Counties Securities Ltd v Jackson & Steeple Ltd (1974) 1 WLR 1133 Shareholder’s vote is a property right, which may be exercised in the member’s own

interest and as he or she thinks fit. Member has no fiduciary duty to the company.o North West Transportation Co v Beatty (1887) 12 App Cases 589

FACTS: The directors sold his steamboat to the company and pushed through the resolution in the shareholder’s level.

HELD: A company could ratify the transaction even with the votes of the director in question in his capacity as shareholder.

Walton LJ: When a shareholder is voting for or against a particular resolution he is voting as a person owing no fiduciary duty to the company and who is exercising his own right of property, to vote as he thinks fit.

Problem: Would this allow directors to breach fiduciary duty and cause fraud to minorities?

o Puddephatt v Leith (1916) 1 Ch 200

FACTS: C mortgaged shares in the company to D and transferred them into his name. By a contemporaneous letter, D had undertaken to vote the shares as directed by C. The court ordered him to comply with the undertaking.

HELD: Shareholders may enter into agreements to exercise their votes in a particular way and these have been enforced by the courts

Courts will grant orders to enforce shareholders’ agreements. The court in this case compelled a shareholder to vote as was agreed in a shareholders’ agreement.

o Standard Chartered Bank v Walker (1992) 1 WLR 561 FACTS: Minority shareholders, was ordered not to vote against the reconstruction.

Failure to do so would result in the company’s collapse and his shares would become worthless.

HELD: In exceptional circumstances the courts have been prepared to order that a member’s votes should be cast, or at least not cast, in a particular way.

Bona fide in the best interest of the company as a whole.o Controlling shareholders may not be required to exercise their votes in best interests of the

non-controlling shareholders, but there are some circumstances when the courts have been prepared to intervene to protect a minority shareholder.

- Amendment of Articleso Test in Allen v Gold Reefs of West Africa Ltd (1900) 1 Ch 656, CA

Power to alter the articles must be exercised “bona fide for the benefit of the company as a whole”

To expropriate shares Other situations

Alterations could not be interfered with by the court unless a change was made that was not bona fide to the benefit of the company as a whole

- Majority members may not use their votes to appropriate to themselves property which belongs to the company or to condone their own fraud

o Cook v Deeks (looked at last week) ; FACTS: 4th director didn’t benefit whereas the other 3 did, they were held accountable

for it.’ HELD: Even supposing it be not ultra vires of a company to make a present to its

directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This is outside of North-West Transportation v Beatty and Burland v Earle.

Directors were shareholders as well and cannot ratify their own fraudo Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350 :

FACTS: D has substantial shares in C’s company. C, a minority, claimed that D used its votes to procure the division of business to a third company, causing abandonment of proceedings brought by C’s company to assert its right to concession and wound up the company. The company was going to wind up, and would have ended up with nothing.

Mellish LJ: I am of the opinion that although it may be quite true that the shareholders of a company may vote as they please, and for the purpose of their own interests, yet that the majority of shareholders cannot sell the assets of the company and keep the consideration.

Held: By the majority shareholders selling off assets to the company without informing the general meeting of members they have committed fraud on the minority by expropriating the company’s property

- Other caseso Clemens v Clemens Bros Ltd (1976) 2 All ER 268

There were equitable considerations that should be taken into account which in circumstances that might make it unjust to exercise votes in certain ways

Didn’t want to layout any certain rules **Not strong guidance against the majority

One shareholder had 55% of shares – used voting rights to issue new shares which were not proportional – became 75% shareholder and allowed himself to pass special resolutions

Held that this issue of new shares was not needed and revered the resolution

RULE OF FOSS V HARBOTTLE- The rule in Foss v Harbottle,

o Proper claimant in an action for a wrong alleged to have been done to the company is the company itself;

o If the alleged wrong is one which can be ratified/approved with a simple majority of members, no individual member can bring an action

- Group of directors running a company as they see fit, since they are the majority, the minority has no locus to bring an action against the company. There are exceptions.

- Foss v Harbottle (1843) 2 Hare 461 o FACTS: Two minority shareholders initiated legal proceedings against, among others, the

directors of the company. The claimants asked the court to order the defendants to compensate for losses to the company as a result of wasteful use of mortgages.

o Wigram VC: held that since the company’s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character and thus the action by the claimants could not be sustained: "The corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative."

o Rule in Foss v Harbottle : In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself

o Where the alleged wrong can be approved by simple majority of members in favor of the transaction, then the individual member can’t bring an action.

- Edwards v Halliwell (1950 )2 All ER 1064: o Jenkins LJ: "The rule in Foss v Harbottle, as I understand it, comes to no more than this. First,

the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio.".

- MacDougall v Gardiner (1875) 1 Ch D 13 o Mellish LJ: “…if the thing complained of is a thing which in substance the majority of the

company are entitled to do…there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.”

EXCEPTIONS to the rule in Foss v Harbottle – where litigation will be allowed - Acts which are ultra vires or unlawful

o Member may bring action under S 5B CO to restrain action contrary to Memorandum and Articles

Since a majority of members cannot ratify the contact, then the minority can bring an action

- The requirement of a special majority

o Foss v Harbottle is based on the principle that the majority, i.e., those who can obtain an ordinary resolution, should decide whether or not a complaint relating to the company should be brought to the court. Clearly therefore a simple majority of the members cannot be allowed to confirm a transaction requiring a greater majority.

o If a special majority is required, and an ordinary resolution is insufficient and the minority can bring injunction against the majority.

o Edwards v Halliwell (1950 )2 All ER 1064 FACTS: 2/3 majority to increase contribution. The meeting resulted in simple majority. HELD: the resolution was invalid.

- Acts infringing the personal rights of shareholderso Shareholders may pursue their own claim when their rights as individual members have been

invaded.o Pender v Lushington (1877) 6 Ch D 70

FACTS: Chairman of a general meeting refused to take the votes of certain shareholders into account. The members were able to bring an action to have their votes counted.

HELD: The rights to vote should not be interfered with because it is a right to property. - Fraud on the minority and the wrongdoers themselves are in control of the company

To combat injustice and oppose deceitful actso APPROPRIATION OF COMPANY PROPERTY

Burland v Earle [1902] AC 83 Earle sued the directors for injunction to declare a dividend and obtain an account

of profits from Burland, a director, made by him out of dealing with company properties.

HELD: The claim is refused following Foss v Harbottle, the action is only permitted if brought in the name of the company.

Cook v Deeks [1916] 1 AC 554 HELD: Contract in question was entered into such circumstances that the

directors could not retain the benefit for it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. Burland v Earle does not apply.

Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350: FACTS: where majority votes itself the right to divide the assets among

themselves. Took contracts away for their own benefit and the minority shareholders were left with nothing.

James LJ: “I think it would be a shocking thing if that could be done, because if so the majority might divide the whole assets of the company, and pass a resolution that everything must be given to them, and that the minority shall have nothing to do with it.”

o Abuse of power Based on bad faith Hogg v Cramphorn [1967] Ch 254

FACTS: Directors believed the takeover was bad for the company, issued new shares to a trust so that they could outvote majority control.

HELD: The Company would still be the proper plaintiff. The issuance of shares created fiduciary duty and must only be exercised to raise capital. The improper issuance of shares can be made valid through ratification. But because it is issued against the majority shareholder, there was element of bad faith.

Individual shareholder can bring the action as opposed to the company. Estmanco v GLC [1982] 1 All ER

Council formed Estmanco to regulate the selling of apartments owed by the company. When the apartments were sold, shares were transferred but the right to

vote is retained. New council broke the terms of agreement and adopted new housing policy. Shareholders sued the new council as the sole voting shareholderto enforce performance.

Megarry V-C : “…I feel little doubt that the council has used its voting power not in order to promote the best interests of the company but in order to bring advantage to itself and disadvantage to the minority. …It seems to me that the sum total represents a fraud on the minority in the sense in which “fraud” is used in such phrase, or alternatively represents such an abuse of power as to have the same effect.”

The majority was acting in bad faith against the minorityo Negligence

Must include some element of bad faith Pavlides v Jensen [1956] Ch 565

FACTS: Selling asbestos mine to an associated company at gross undervalue. There was no bad faith, fraud or personal benefit.

HELD: Was just incompetent, no bad faith element. Daniels v Daniels [1978] Ch 406,

Director 1 sold company’s land to director 2 – director 2 sold the land for 28 times the price paid for it and kept the profits

Held Though the case did not have bad faith, the directors and majority shareholders were guilty of breach of duty which not only harmed the company but benefitted themselves only

HELD: The minorities could sue Templeman J : “If minority shareholders can sue if there is fraud, I see no

reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves … To put up with foolish directors is one thing; to put up with directors who are so foolish that they make a profit of £115,000 odd at the expense of the company is something entirely different.”

o In the interests of justice? No general in the interests of justice exception Prudential Assurance v Newman Industries (No.2) [1982] 1 All ER 354

Rejected comment by Vinelott J’s at First Instance exception to the rule in Foss v Harbottle whenever the justifies of the case requires.

Also rejected in Estmanco v GLC.o CONDITION: MUST SHOW THAT WRONGDOER CONTROLS THE COMPANY

In that case the minority are prevented to bring the case for the company The individual shareholder seeking to bring a claim must show that the wrongdoers

control the company. Prudential Assurance v Newman Industries (No.2)

HELD: It applies wherever the persons against whom the action is sought to be brought on behalf of the company are shown to be able to by any means of manipulation of their position in the company’s to ensure that the action is not brought by the company.

Smith v Croft In allowing a derivative claim to continue the court will have to regard to the

majority of the minority’s views. If the claimants were a minority even after the wrongdoers were taken out of the equation, there is no right to sue even with a Foss v Harbottle exception.

Shareholders cannot have a bigger right to sue than the company with its procedural and substantive limitations.

PROCEDURAL ASPECT/TERMINOLOGY- Where a shareholder is suing to restrain the majority from acting illegally or continuing to commit a

personal wrong upon him he can sue in his own name or in the representative form on behalf of himself and other shareholders with whom he enjoys the right he is seeking to enforce.

o Lushington : Own name, or in the representative form - Where the individual member is seeking a claim against third parties for the company’s benefit so that

he is trying to enforce a claim which belongs to the company, his claim is called derivative.

- In a personal or representative claim the company is a real and genuine defendant. In a derivative action the company is joined as a nominal defendant because the directors and the majority of members will not bring the company to court as a claimant(plaintiff). The company is made a party to the action so that the judge may grant it a remedy by being brought in as a nominal defendant.

- Usually it’s a company who sues directors for misfeasance. But if a number of directors are all acting in misfeasance, then the shareholder can bring a derivative action against them. The proper plaintiff is the company (Foss v Harbottle)

- WIKI a shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often the third party is an insider of the company such as an officer or director. Permits a shareholder to initiate a suit when management has failed to do so.

STATUTORY DERIVATIVE ACTION (INTRODUCED 2005)- Under ss 168BA – BK a member of a Hong Kong company may:

o bring proceedings in respect of misfeasance committed against a company;o bring proceedings for any matter where a company does not bring those proceedings because of

misfeasance; ando Intervene in proceedings for any matter where a company, by reason of misfeasance, fails to

diligently continue, discontinue, or defend those proceedings. Misfeasance is defined as meaning fraud, negligence, default in compliance with any

enactment or rule of law or breach of duty. These provisions are wider than the situations where a member could bring an action for ‘fraud on the minority”.

- Leave of the court is requiredo The court must be satisfied that it appears to be prima facie in the interest of the company to

grant leave and that there is a serious question to be tried. CONTRAVERSIAL: would be reviewed in future cases

STATUTE- Statutory derivative action easier to bring and lower threshold than common law- Section 168A & 177(1)(f) CO

o Any member of the company can apply to the court for an order under s 168A on the ground that the affairs of the company are being or have been conducted in a manner which is unfairly prejudicial to the interests of the members generally or of some part of the members (including himself).

o In many cases a petitioner will apply for an order under s 168A and, in the alternative, that the company be wound up under s 177(1) (f) on just and equitable ground.

- Can be brought when the shareholders have equal shares.- There is no statutory definition of the term “unfair & prejudice”. It is; however, clear that both

elements must be present.o Re Taiwa Land Investment Co Ltd (1981) HKLR 297

Fuad J para 27: However difficult it may be to imagine circumstances where it would make any practical difference, it seems clear that elements of both unfairness and

prejudice must co-exist for the section to come into play. Conduct which is intrinsically prejudicial to the interests of a shareholder, without also being unfair, will not be enough, conversely the section cannot be relied upon if the conduct of which complaint is made is merely unfair.

o Bovey Hotel Ventures Ltd , 31 July 1981 (unreported but set out and approved (1983) BCLC 290):

Slade J’s comments in RE A member of a company will be able to bring himself within the section of he can show

that the value of his shareholding in the company has been seriously diminished or at least seriously jeopardized by reason of a course of conduct on the part of those persons who have de facto control of the company, which has been unfair to the member concerned.

The test of unfairness must, I think, be an objective: whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner’s interests.

o It is not necessary to show bad faith- Interests as a member

o Ebrahimi v Westbourne Galleries Ltd (1973) AC 360(HL) FACTS: Equal shares private company. D2 brought in his son as director, along with C

transferred 100 shares each to the son, making the family majority. Father and son passed ordinary resolution to remove C as director

HELD: The conduct must be unfairly prejudicial to the ‘interests’ of all or some part of the members. A petitioner must show unfair prejudice in his character as a member.

The Court looked at S. 168 A. Court was more flexible in the interpretation, generally accepted that an interests of member might be affected.

The company was wound up and C received his capital interest. o Re a Company (no. 00477 of 1986 ) 1986 BCLC 376

HOFFMAN: Managing director of a PLC who has share probably wouldn’t be able to bring an action.

- Section 168A protects interests of members, not just rights. The cases have looked at the “legitimate expectations” of a member that the board would manage the company in accordance with their fiduciary obligations and the terms of the articles of association.

o Re Saul Harrison & Sons plc 1994 BCC 475 FACTS: petitioner held nonvoting shares and the company was running losses. Instead

of distributing the assets to the shareholders, the petitioner claimed unreasonably continued to run the business.

In deciding what is fair or unfair, it is important to bear in mind that fairness was being used in the context of a commercial relationship. The relationship of shareholders is primarily governed by the constitution of the company, and commercial fairness can be seen as a question of complying with them. A member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of terms on which he agreed that the affairs of the company would be conducted

HELD: there was no legitimate expectation. Company has complied with the constitution.

o Taiwo Land ARGUED: Relationship was based on basic understanding of the parties, with mutual

trust and confidence in a small comp. HELD: Failed to satisfy the burden of unfairly prejudice conduct. It was bona fide in the

best interests of company as a whole.o O’Neill v Phillips 1999 1 WLR 1092

HOFFMAN: Protects the interests of members, not just the rights. Legitimate expectation is a broader concept of reference to interests.

ALSO: Referred to equitable consideration in replace to legitimate expectation. It does not extend to situations where applicants lost of trust and confidence, provided the right to dismissal has not be surrendered. Must be some breach of terms in which how the company should be run.

Compliance with the rules of company law cannot be unfairly prejudicial unless the company was using the rules in a manner which equity would regard as contrary to good faith

EXAMPLES OF CONDUCTS UNFAIR AND PREJUDICIAL:- exclusion from management in a company formed as a quasi-partnership - RA Noble & Sons (Clothing)

Ltd (1983) BCLC 273 - making or proposing a rights issue which the minority cannot afford to take up - Re Cumana Ltd (1986)

BCLC 430- taking excessive remuneration - Re Cumana Ltd - significant and serious mismanagement (improprieties, failure to supervise) - Re Macro (Ipswich) Ltd

(1994) 2 BCLC 354o But, as a general rule, managerial decisions are unlikely to amount to unfairly prejudicial

conduct – Re Elgindata Ltd (1991) BCLC 959 - not paying dividends from growing profits, and bought family home without disclose-Re Sam Weller &

Sons Ltd (1990) Ch 682

COURT ORDERS- Set out in S 168A (2)

o Provide broad power to court, issue injunctions, appointment of receiver “Such other order as it thinks fit, whether for regulating the conduct of the specified

corporation’s affairs in future, or for the purchase of the shares of any members of the specified corporation …”.

o Very often, the court will order that the majority buy out the minority (or even that the majority sell to the minority),

- Section 177 (1) (f) CO:o A company may be wound up by the court if the court is of the opinion that it is just and

equitable that the company should be wound up.

LOSS OF SUBSTRATUMo Where the actual basis (purpose) of the company disappeared, then it is just and equitable to

wound up the company.- Re German Date Coffee Co (1882) 20 ChD 169.

o Object of a company was to obtain a German patent to make coffee from dates. It was held that the object was to work on the patent but not making coffee from dates. As a result the company was ordered to wind up.

- Re Mediavision Ltd (1993) 2 HKC 629 o FACTS: Film and Video production. There was a warehouse, and business was not in operation. o HELD: the substratum exists. The substratum was not gone simply because the management was

unwilling to undertake a line of business.

COMPANY CARRYING OUT FRAUD OR ILLEGAL PURPOSE- Re TE Brimsmead and Sons (1897) 1 Ch 406

o Set up a similar name from the company they left intended to pass on the company to carry out promotion fraud.

QUASI-PARTNERSHIPo Partnerships can be dissolved on just and equitable grounds. Or even in a company set up with

few directors, then these types of companies are called quasi-partnership.- Ebrahimi v Westbourne Galleries Ltd (1973) AC 360(HL)

o Took equal shares, personal responsibility was going to remain. Ebrahimi son became involved, and Ebrahimi was removed as a result.

o Case sets down typical criteria for determining existence of a quasi-partnership company:1. an association formed or continued on the basis of a personal relationship (possibly small

comp);2. an agreement or understanding that all or some of the members shall participate in the

conduct of the business; and3. restrictions on the transfer of shares lock the shareholders in.

- Re Yenidje Tobacco Co Ltd (1916) 2 Ch 426 o Company was wound up despite having profit and continuous transaction. The directors were in

dispute.

JUSTICE OR EQUITYo Other than a quasi partnership.

- Re San Imperial Corporation Ltd (no 2) (1980) HKLR 469 o FACTS: X and his partner acquired control, and they fraudulently transferred the asset of the

company to themselves the detriment of the company and shareholderso HELD: Wounding up was ordered when there is a lack of confidence in the conduct and

management of the company’s affairs. (Similar to unfairly prejudicial)- Failure to comply with the directions of the regulatory authority (Mandatory winding up, later

chapters)- Where conduct of management calls for investigation

o Re Comtowell Ltd (1998) 2 HKLRD 463 FACTS: Whether the conduct of the management calls for investigation. Company failed

to submit annual return. HELD: prima facie case to investigate. Wounding up ordered so that once a liquidator is

appointed the court has power to investigate the company.- S 180 (2)

o court shall not refuse to make a winding-up order on ground only that some other remedy is available to the petitioners unless it is also of the opinion that he is acting unreasonably in seeking to have the company wound up instead of pursuing that remedy.

However, courts are generally unwilling to order winding-up of a company that is not insolvent.

- S 177(1) (f) often linked with S 168A, with relief being claimed in the alternative. Even if relief only sought under s 177(1)(f), court has wide power under s 180 (1) to make any order it thinks fit, including e.g. buy-out orders.

RAISING CAPITAL

Private company cannot raise capital through capital market, though can raise shares from arrangements. It can also offer private placements to the public or the existing shareholders.

Authorized capital the capital that a company is authorized by its constitutional documents to issue to shareholders. Part of the authorized capital can remain unissued.

Nominal Capital the par value of stock a company can issue. Alternative name for authorized capital. Issued Capital the nominal value of the shares which have been issued to shareholders and which

remain outstanding

Paid up Capital amount of share capital paid up by the shareholders Unpaid capital amount of share capital unpaid by shareholders Uncalled capital share capital not yet issued or subscribed to

OWNERSHIP OF SHARES- Members of a company own shares in the company and will be given a share certificate as evidence of

title. A person becomes a member of a company by (the value of shares depends on the company’s performance, may or may not produce an income as well):

o Signing the memorandumo Allotment of shares from the companyo Purchase of shares from an existing member; oro Transmission (when someone passes away)

MAINTENANCE OF CAPITAL- The maintenance of share capital is one of the principles of company law.

o Aveling Arford v Perion Ltd (1989) HOFFMAN LJ: A company cannot, without the leave of the court or the adoption of a

special procedure, return its capital to its shareholders. It follows that a transaction which amounts to an unauthorized return of capital is ultra vires and cannot be validated by shareholder ratification or approval.

o Various Reasons Liability of shareholder is to contribute to a company’s assets on winding up. If a

shareholder could contribute assets, then have them repaid, before a winding-up, this principle is evaded.

The rules have developed in recognition of the fact that the share capital is the “creditors’ buffer”.

- Re exchange Banking Co, Flitcroft’s case (1882) o A limited company by its memorandum of association declares that its capital is to be applied for

the purposes of the business… The creditor has no debtor but that impalpable thing the corporation, which has no property except the assets of the business. The Creditor, therefore…gives credit to that capital, gives credit to the company on the faith of the representation that the capital shall be applied only for the purpose of the business, and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders, though it might be a right which he cannot enforce otherwise than by a winding-up order.”

- The historical principle has the following consequences:o A company may not issue shares at a discount;o A company must not generally purchase its own shares;o A company may not generally give financial assistance to anyone for the purposes of buying

the company’s shares;o Dividends must not be paid out of capital;o A company may not reduce its issued share capital except as provided by statute.

ISSUE/ALLOTMENT OF SHARES- Shares can be issued by the directors provided

o The company has sufficient unissued nominal capital, and Nominal capital is permitted to issue shares only up to the amount of its nominal

or authorized capital as stated in the memorandum, or to increase.o Can only issue up to the allotted unissued capital. o Ordinary resolution required to issue shares

o The directors have authority to do so.

The directors can issue shares in the company only if they have authority to do so. Unless they are allotting shares to the founder members or to all members pro rata to their existing holdings, the directors will need the authority of the company in general meeting to allot shares.

Can be given a particular batch of share, or on going, before the next AGM. The directors can then authorize in the next AGM.

o For the proper purpose.- Procedure

o The procedure which must be followed in order to allot shares in the company is as follows: A board meeting must be called (by any director on reasonable notice) Directors must check

Whether there is sufficient unissued nominal capital; Whether shares are to be offered to current members pro rata to their holdings of

share; If not, do they have authority to allot the shares?

If there is a problem with any of these issues the directors will need to call a general meeting, on 14 days’ notice.

If there is no problem or, after the GM has been held, the directors can issue the shares at a board meeting. They will resolve to affix the seal of the company to the share certificates in respect of the shares and enter the new members’ names in the Register of members.

There are also certain filing requirements – informing Companies registry of an increase in capital and the allotment of shares.

Notice must be given to the registrar.- Payment of shares

o Cash/non-cash consideration NORMALLY SO, but also non cash, for example trader incorporate business, when the

assets are transferred. Joint Venture, an important contract could be so.

o Fully/partly paid Normally fully paid. Can also be partly paid when issued.

o Premium Section 48B CO When the shares are issued greater than the nominal value, then the incoming

shareholders would pay a premium to the share premium account and subject to the same rule to the capital firm. Limited circumstances when it could be used.

o Issue at a discount Section 50(1) CO As a general rule, prohibited.

- Types of Shareso Ordinary Shares

Also possible A&B ordinary shares. Joint venture for example. Could also give different right to the shareholders, e.g. voting rights, provided by articles Otherwise, all share are ranked equally.

o Preference Shares The holders have preference over the ordinary shares, in relation to dividends, or

capital. Not normally voting shares. Buyout firms likes to take preference shares

Cumulative: Dividend roll over to the next year Non-cumulative: Shares that does not accumulate dividend in arrears Participating: Special rights attached to the shares

Convertible: investor can choose to turn it into a certain number of shares of the common stock after a predetermined time – ability to convert gives investor opportunity to gain in raise of share price

o Redeemable Shares If authorized by its Articles, a company may issue both ordinary and preference shares as

redeemable shares. This means that the shares will be redeemed (bought back) by the company at some specified time. Or they may be redeemed at the company’s or the shareholder’s option. In order to prevent a company being left with no share capital as a result of redemptions, s. 49(2) forbids the issue of redeemable shares when the company has not issued non-redeemable shares.

o Table A, Article 3 provides for the issue of redeemable shares.- Section 49 A provides that the redemption must be financed:

o Out of distributable profits;o Out of the proceeds of a new issue of shares made for the purposes of the redemption.

- A private company may redeem its shares out of capital but this situation subject to many restrictions including the passing of a special resolution, a directors’ statement of solvency and protection for dissenting members and the company’s creditors.

o Requires Special resolution, directors give statement of solvency- The shares redeemed are cancelled and the amount of the company’s issued capital reduced

accordingly, although the nominal capital ceiling is unaffected and those shares which have been redeemed can be re-issued.

TRANSFER OF SHARES- In the case of a private company, the articles must restrict the right to transfer (s. 29) but the shares of

a public company are freely transferable, indeed they must be if the company wishes the list on SEHKo Private company must restrict the shares transfer, by refusing to register the transfero There maybe shareholder agreements to further restrict the transfer

- Procedure (on sale)o Contract sales – signed by Seller and Buyer, equitable contract passes by signing (only in legal

ownership). Before the transfer of title, the seller holds the shares on trust, including dividends. International Credit v Adham (1994)

Title on entering the share register. o Instrument of transfer

Required by S. 66CO Signed by both parties. Stamp duty is required to be paid – instrument of transfer and contract note must be

submitted to the Stamp Office (S. 19 Stamp Duty Ordinance)o Registration

Buyer will usually lodge the instrument of transfer and Seller’s share certificate with the company for registration. The transfer will generally require approval of the Board. When this is received, the board will authorize the issue of a new share certificate and instruct the updating of the Register of Members.

- Restriction on Transfero A private company must restrict the right to transfer shares in order to meet the definition of a

private company. Directors right to refuse to register

Table A: Any discretion to directors to decline the register without any reason. Pre-emption cause does not prevent shareholder from transferring interest

o Section 69 (1) (B) CO The court may order the company to register the transfer when the company refuses.

o Re Smith and Fawcett Ltd (1943)

FACTS: Company articles provided directors have absolute and uncontrolled discretion to refuse register.

Lord Greene MR:…a fiduciary power of this kind must be exercised bona fide in the interests of the company. Subject to that qualification, an article in this form appears to me to give the directors what it says, namely, an absolute and uncontrolled discretion…”

o Choy Bing Wing v Max Share Ltd. (1993) FACTS: Charging order against X’s shares in defendant and sell by public auction. D

diluted shares, refused to register shares bought by C. Increase in share capital was a device to discourage outsider from being a registered shareholder (S. 69 (1B)).

HELD: It is discretion to refuse to register. The court will not interfere unless transferee shows the board has acted from some improper motive or capriciously.

TRANSMISSION OF SHARES- Transmission is the automatic process whereby, when a shareholder dies, his shares immediately pass to

his personal representatives, or if a member is declared bankrupt, his shares automatically vest in his trustee in bankruptcy.

MAINTENANCE OF CAPITALPurchase by a Company of its own shares – buy backs- Generally forbidden to do so, maintain in the interest of creditors. Over the years, statute has bitten away

at this rule. Company may buyback shares from dissenting shareholders, shareholder dies, and

shareholders wish to transfer the shares to company, or more capital than necessary.o S. 168A

Court may order to buyback shares. May go with the reduction of capitalo SS. 49B – S

Main provision of the CO on the buyback of shares Following rules apply:

Shares being bought must be fully paid The buyback must generally be financed out of distributable profits or the

proceeds of a new issue of shares The shares bought must be treated as cancelled The company’s issued share capital will be reduced by the nominal value of the

shares which are bought The buyback does not reduce the company’s authorized capital

o The company has power to issue shares up to the nominal value of the shares to be bought

o S 49B Allows a company, if authorized by its articles to fund a buyback out of capital in order

to do certain specified things. Although as a general rule the buyback must be financed out of distributable profits or the proceeds of a new issue.

To settle or compromise a debt or claim To eliminate a fractional share or fractional entitlement To fulfill an agreement under an employee share scheme To comply with a court order under S. 168A (unfair prejudice) or where a

member objects to the alteration of the objects or where a member disagrees with the provision of financial assistance by the company

o S. 49D of 49E In the case of non-listed companies, they can only buyback shares pursuant to a contract

approved in advance under 49D or 49E by special resolution and a company of the contract or memorandum of its terms must be available for inspection by the members for

at least 15 days prior to the meeting to pass the special resolution at the meeting itself. The resolution will not be valid if it relies on any member whose shares are being bought back.

- PROCEDURES FOR BUYBACKo Directors must make a statement that having fully inquired into the affairs and prospects of the

company, they have formed the opinion that immediately following the buyback there will be no grounds on which the company would be insolvent and in the year following the buyback the company will be able to pay its debts as they fall due.

o The directors’ statement must be accompanied by an auditor’s report stating that they have enquired into the company’s state of affairs, that the amount of capital intended to be used (a permissible capital payment) is in their view properly determined and that they are not aware of anything to indicate that the opinion of the directors in their statement is unreasonable.

o Special resolution passed within one week of the directors’ statement. The resolution is invalid if it relies on any member whose shares are being bought back (within one week assed of the directors’ statement

o Notice of buyback must be advertised within one week of the resolution – in the Gazette, one English and one Chinese language newspaper and notice in writing to all creditors. In addition the directors’ statement and auditors’ report must be available for inspection

o Any creditor or dissenting member has the right to apply to court within 5 weeks of the resolution for an order prohibiting the payment. In these circumstances the court may order the buy out of a dissenting member or that the creditor be protected.

o Notification to Companies registryo Capital redemption Reserve

If shares are redeemed or bought back out of profits, the amount by which the company’s issued capital is reduced is transferred to a reserve – the capital redemption reserve.

Reduction of Capitalo When the company is trading at a loss, it would reduce the capital if shares aren’t trading at fair

value- The CO provides a company with a limited right to reduce its capital.

o S. 58 (1) Extinguish or reduce the liability on any of its shares in respect of share capital not

paid up Cancel any paid-up share capital which is lost or unrepresented by available assets; or Pay off any paid-up share capital which is in excess of the wants of the company

- Procedureo Company must be authorized by its Article – Table A, Art 47, provides such a powero Special Resolution of memberso Application to the court (unless the reduction consists of a redesignation of the nominal value

of shares to a new amount and the conditions in s 58 (3) are met)o Court will decide whether or not to confirm the reduction. (See Re Ratner)o A copy of the court order and minute approving the reduction must be filed with Companies

registry. The court decides if it should proceeds.

- TESTS CONSIDERED BY COURTo Interests of the Creditorso Interests of members

Show that sufficient information to the members and it is equitable. Re Ratner Group plc (1988)

HARMAN J: the court has over the years established three principles upon which the court will require to be satisfied.

o All shareholders are treated equitably in any reduction. That usually means that they are treated equitable in any reduction.

o Shareholders at the general meeting had the proposals properly explained to them so that they could exercise an informed judgment upon them.

o Creditors of the company are safeguarded so that money cannot be applied in any way which would be detrimental to the creditors.

o The court will also consider the purpose of the reduction and will confirm a reduction only if it is made for a discernible purpose.

o Re South China Strategic Ltd (1997) FACTS: Reduction of capital part of a scheme to create an overseas holding company.

The company was taking losses. Reduce capital from 189 million to 1,000. HELD: Refused to sanctioned it because there was no explanation given respect to

losses. Hidden purpose. o Re Lippo China resources ltd (1998)

FACTS: Purchase to reduce capital by cancelling share premium and goodwill. HELD: Accounting policy wants to eliminate goodwill, so they reduce the capital.

o Reduction of capital must satisfy: The shareholders are treated equitably; The reasons for the reduction is properly explained; The interests of the creditors are safeguarded; The reduction is for a discernible purpose

Financial Assistanceo Loan guaranteed by the company, or loan given by the company to purchase shares of the

company.- Section 47A

o Subject to sections 47B to 48, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.

o Subject to section 47B to 48, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

- S. 47B: Financial assistance is definedo Gift; oro A guarantee, security, indemnity, release, or waiver; oro A loan, novation or assignment of a loan, or any other similar agreement; oro Any other financial assistance given by a company which results in a material reduction of its net

assets or which has no net assets. Chaston v SWP group plc (2003)

Facts: SWP wanted to acquire shares by means of a placing – they commissioned reports on the target company from its accountants – the fees for these reports were paid by a subsidiary of the target company

Held: although the assistance had not been directly given to the purchaser – it was just a payment to the accountants – it helped smooth the transition of purchasing the shares by saving the bidder company from paying essential fees

Harlow v Loveday (2004) HELD: Loan given was financial assistance – a transaction that amounts to

financial assistance is illegal and unenforceable Selangor United Rubber estates Ltd. v Cradock (No. 3) 1968

FACTS: D acquired C’s shares using C’s fund. Cheques were issued in a circular movement to disguise the transaction. (Possible breach of directors’ duties). Bank failed to realize that it was financing a company in an indirect way for acquisition of its own shares

HELD: bank liable as constructive trustee or what in fact was an act of negligence

China Everbright – IHD Pacific ltd. v Ch’ng Poh (2003) FACTS: Controlling shareholder agreed to sell shares – he and his associates

owed the company money as well - it was a term of sale of the shares that the vendor would give the buyer money to discharge his debts – purchaser failed to raise the money to buy the shares and made use of the debt money to purchase the shares instead

HELD: Pre-arranged and circular character of the scheme deprived C of the opportunity of applying the payment for legitimate purpose in effect using the company’s funds to pay for its own shares

- Section 47C (1) and (2): No breach of the ordinance where:o The company’s principal purpose in giving the assistance is not to give it for the purpose of any

such acquisition, or the giving of the assistance for that purpose is but an incidental part of some larger purpose of the company; and

o The assistance is given in good faith in the interests of the company. Brady v Brady (1989)

FACTS: Group of companies run by two brothers, father and uncle, but unable to work together. Arranged to reorganize the group so they undertook separate business, and to reflect equality, they purchased each others’ business.

HL: It was not incidental and incidental part of some larger purpose because it was for the purpose of purchase of shares (Difficult to achieve).

MT Realization ltd (in liquidation) v Digital Equipment Co (2003) FACTS: Loan swap arrangement for a sale of shares payable in installments as

buyers cant afford lump sum purchase HELD: Did not constitute financial assistance for the purpose of the sale of the

shares. HELD: Obligation undertaken in connection with acquiring shares does not itself

constitute giving financial assistance. Must regard commercial realities of transaction.

Chaston v SWP Group ARDEN LJ: Financial assistance may be given even though:

o Acquired company cannot show detriment;o Assistance was given in advance of the transaction, rather in the course;o Assistance merely have acted as an inducement to the transaction;o Assistance has no impact on the share price;o Assistance was done in circumstances where its directors had acted bona

fide in the best interests of the company;o In the transaction rather than to the target company itself; and only one of

the purposes for which the transaction was carried out was to assist the acquisition of shares.

WHITEWASH PROCEDURE (47E of CO)*****o Unlisted Companies are not prohibited from giving financial assistance where

The assistance does not reduce the company’s net assets, or , if it does, the assistance is provided out of distributable profits; and

The majority of the directors make a statement stating

The form the assistance is to take; The names and addresses of the person to whom the assistance is to be given; The purpose for which the company intends these persons to use such assistance; The directors, having made enquiries into the financial affairs of the company, have formed

the opinion that the company will be able to pay its debts as they fall due within the following year (or within 12 months of the commencement of winding-up if it is intended to wind-up the company within 12 months of giving the assistance. (Directors are liable to a fine or imprisonment if they don’t have reasonable grounds for the opinion expressed);

A special resolution of the members is passed approving the giving of the financial assistance (within 30 days of the directors’ statement).

REFORM IN FINANCIAL ASSISTANCE- Under new bill all companies, listed and unlisted, will be allowed to give financial assistance regardless

of source of funds, subject to satisfaction of the solvency test aboveo Approval by the board where the aggregate amount of financial assistance does not exceed 5% of

shareholders’ funds; approval by the board with unanimous approval of the shareholders; approval by the board with ordinary resolution of shareholders provided that in this scenario a member may object to the court.

Dividends- Directors decide whether or not to pay a dividend to members. They are only permitted to recommend

the payment of a dividend (an income payment on shares) if there are profits available for the purpose- Section 79B

o A company’s profits available for distribution are its accumulated realized profits (not previously used by distribution or capitalization) less its accumulated realized losses (not previously written off in a reduction or re-organization of capital). This information is shown in the company’s latest audited accounts

- If funds are available and the directors decide that a dividend should be paid, they suggest the amount of dividend which they think is appropriate and propose this to the members in a general meeting. It is the members who actually declare the dividend. They can vote to pay themselves the same amount as the directors have recommended or less, but they cannot decide to declare a larger dividend than the directors have suggested (art. 115 Table A). The form of the dividend is usually that shareholders receive, for example, 5 cents in the dollar, which means that for every $10 share they own they receive 50 cents.

- If a distribution is made by a company in breach of the restrictions on the payment of dividends and the member receiving the dividend knows or has reasonable grounds for believing that it is in breach, he is liable to repay it. The Ordinance is silent as to any other consequences of the company making an unlawful distribution. However a proposed payment contrary to the provisions of the CO may be restrained by injunction and the directors who cause such a distribution knowing that payment is made out of capital may be personally liable to repay the dividends

o Bairstow v Queens (2000) The obligation to repay dividends is imposed on directors who authorized excessive

payment regardless of whether the company is solvent.o Re Flitcrofts Case

FACTS: Company appeared to have a profit, when in fact they do not. The shareholders passed resolution declaring dividends. In winding up company liquidator applied to have directors responsible for wrongly paid dividends.

HELD: Directors are liable to replace the dividends in breach of trust.

DEBT FINANCING

TYPES OF DEBT FINANCING- Direct

o Shareholders’ loan Can be indefinite at some point, can be redeemed by the company. In a small company, they are taking a shareholders’ loan.

Exist in most companies without being restricted by the company’s ordinance Interest free and long term When it comes to sell the company, loan would be assign to the purchaser

o Debenture More formal loan agreement

Documentation of a loan to shareholders, refer to company ordinance. Security document in favour of bank. Holder gives the loan

Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260 , CHITTY J: a debenture means a document which either creates a debt or

acknowledges it, and any document which fulfils either of these conditions is a “debenture”.

o Individual debentures/ bonds vs debenture stock Individual: separate and distinct debt – bonds Debenture stock: several lenders, issued so that a class of lender would lend money to the

company and issued May or may not be secured or divided in several classes.

o A debenture is defined by s 2 CO as including debenture stock, bonds and other securities of a company whether constituting a charge on the company’s assets or not.

o Private company can’t issue debenture to public because of regulationso Title not recorded, bearer securities.

- Indirect Financingo Bank borrowing

Trade credit: no need to pay for certain period Debt factoring: where a company sells to collateral agency

o 'Debenture' is also used in the context of secured lending from a bank or other institution (ie indirect financing), i.e. where a lender has taken a charge over some or all of the company's property, thereby becoming a secured creditor.

o Another type of debt finance is where a company utilises short-term trade credit. o Debt factoring

- Issue of shares v debt:o Little legislation directed towards debt, a matter of contract. o More fluid medium than equityo If a company relies too heavily on debt, the profit then goes to the lender than the shareholderso CONTRACT LAW BETWEEN THE LENDER AND BORROWER

No requirement to give security, but if it exists, more likely to recover the debt. The company would pay higher interest rate for unsecured loan, because it is more risky. There are more types of loan security, can drawn on time to time: overdraft Borrow principal in installment

Commission fee, negotiation fee in installment even if the full amount was not borrowed

Principal sum borrowed, can be payable on demand. Depends on the term of the contract Borrower’s point of view it is better to have fixed term loan.

THE LEGAL NATURE OF DEBT FINANCE: CONTRACT TERMS- Overdrafts

o Current account financing when a company draws on current account to negative balance. Informal agreement, agreed before hand. Have to pay commitment fee. Revolving credit, after pay have to redo again. Small businesses rely heavily on overdraft If there is no agreement, bank can refuse to pay if lack of funding. Payable by bank on demand (cheque) and also the bank would demand repayment.

o Agreed/feeo usually payable on demand

'On demand' loan means that the borrower has enough time to effect the mechanics of payment, not enough time to go and raise the money: see Bank of Baroda v Panessar [1986] 3 All ER 751.

Normally within 24 hours.- Term loans

o Loan made for specified period. Short term: 1 year Medium: 5-10 years Long: 10+ years

o The primary clauses of the loan agreement determine: 1. Amount of the loan;2. Currency; 3. If it is to be paid out by the bank as a lump sum or in installments; 4. The availability period of the loan facility;5. Conditions precedent

Shareholder’s resolution, board resolution Actions must be taken before the contract

6. Repayment – bullet/instalments Amortized repayment Bullet repayment: interest only

7. Early repayment? Option granted to repay early, but not clear whether there is a basic right to do so

if it was not specified. Give notice, and normally timing issues Banks don’t always like early repayment

8. Interest rates Always be a expressed term Extortion credit transaction

9. Express covenants – commonly including: Gives the bank control to deliver payments May even able to attend board meetings Information that the borrower must provide to comply

o Express restrictionso Positive and negative covenants

Limitation of dividends Minimum capital requirements

No disposal of assets, or change of business No further security over the assets Information on the borrower's business

10. Events of default, eg failure to pay, breach of obligation Terminate the contract and demand repayment; breach of obligation into the loan

agreement; cross default clause (Bank can deny loan with one default from borrower)

- The lender as monitor of corporate governanceo Lenders is in a strong position with regards to a corporate borrower and able to control the

management of the companyo Can ask for express covenant in the companyo As part of the covenant to comply with the listing rule and corporate governance, and lender can

monitor the company operation

SECURITY IN GENERAL TERMS- Secured debt

o A lender with security can claim the secured assets if the borrower fails to meet its obligations. Secured credit is in a stronger position if the company goes into insolvency

o Unsecured debts are governed by the equality ('pari passu') principle which means that the unsecured debts are all reduced pro rata if there are insufficient funds to pay all the company's debts.

o Security may also allow the lender to follow secured assets into the hands of a third party, subject to certain constraints.

o A secured creditor will usually have the right under the charge to appoint a receiver (and where the security is land this is implied under the Conveyancing and Property Ordinance). A receiver ‘receives’ or collects the income of the mortgaged property to apply it to the creditors’ debt. In practice receivers are given much wider powers, including the power of sale. If a more active role is required, eg in the case of running a business, the security documentation should include the right to appoint a manager.

Implied right into any charge to appoint receiver Receiver receives the income from the property charged and applies it to the

chargeholder’s debt. Can have receiver appointed without going into insolvency If appoint a receiver and manager, they have the right to manage the company. May receive better rates for good assets

o The creation of security is a matter of contract law between the parties and so the law will not interfere, in general. The exceptions are the provisions of the CO, especially s 266 (avoidance of fraudulent preferences) and s 267 (invalidity of certain floating charges) (TOPIC WINDING UP)

- Nature of security o Borrower receives money (or other credit) and gives the lender rights over the borrower's

property. o These rights will not come into play unless the borrower defaults.

At that point, the secured property will be sold to repay the debt.o This is an interest granted by the borrower. Security interests are registrable (s 80 CO), and

indeed must be registered for the lender to maintain its position in the queue of creditors. If not register, might risk losing the property

- Forms of property that can be charged o Land, freehold or leasehold, fixtures and fittings. (BEST)o Tangible property – eg stock in trade.o Intangible property – eg debts, intellectual property.

Advantages and disadvantages of debt V SHARESFor the investors- The relative risk of the investment

o From the investor, shares are more risky than loans. If the company in a financial difficulty, dividend might not be distributed.

- Income

o Loans, it is a contractual liability of the company. If the loans do not meet, the company breaches a contract. There may be securities or personal guarantees from director, the lender is in a stronger position

- Involvement in the company o Involved in the company, better off to be a shareholder to exert control over the company.

Lender is merely a creditor of the company- Repayment of capital

o Harder to have private company shares, whereas for loans you can simply agree on a date repayment.

- Restrictions on sale o Directors may deny the register of shares

- Capital value of the investment o Shares may go up or down, whereas there is no capital appreciation on a loan

For the company- More fluid - equity is tightly controlled by statute, mainly the CO.

o No tight restriction on the CO- Payment of income

o Company has to pay interest, doesn’t have to pay dividends on shares- Tax treatment of income payments

o Paying of interest is tax deductible, not dividends (After tax)- Involvement of investor

o Question whether the company wish to have investors involved, for some of the expertiseo Giving shares may secure the involvement, or might prefer a loan

- Repayment of capital o Must pay back the loan

- Cost – debt o Interest Rate low, debt finance is cheaper

- Cost - equity o Higher than interest rate,

- Existing capital structure o If the company has a lot of debt, then it would be more difficult to obtain borrowing, or make it

expensiveo Sometimes the bank would require the shareholders to invest in more money before the lending

- Existing restrictions o Limit on borrowing

- Availability and cost of debt - How is the company rated in the market-place (By rating agencies)- Impact on earnings

o Depends on the cost of borrowing

SHARE AND LOAN CAPITAL – FROM WHOM?o Directors and shareholders

Sometimes requires the founder shareholder to match the investmento Clearing banks o Venture capital

SECURITY FOR LOANS: DEBUNTURE AND CHARGESPre-contract considerations - Directors of Company

o Power to borrow?

Trading company has an implied power to borrow Banks would like to have expressed power to borrow, so company may need to change

the memorandumo Directors’ power to borrow? (Table A, art 81).

Must check if they have the power to do so Restrictions in excess of the issued share capital

o Declaration of interest? (s 162, Table A, art 86) Personal guarantee from the directors

Then they have personal interests, and must declare so (S. 162) Must look at the article to see if they could invoke these transactions Directors must satisfy themselves before the transaction

- Lenderso Company’s power to borrow?

Company registry for existing charges, so may not get the security they wants Crystallized? Charged Already? Land Registry over a charge on property

o Directors’ authority?o Any existing charges? If so →letter of non-crystallisation (if floating)

Security for Loan- Fixed v. floating charges.

o Own meritso Registering charges and what happens when you do not register

- Certain features in common: (a) most charges need to be registered with the Companies Registry (s 80 CO) and are void against

a liquidator or creditor with an interest in the secured assets if not so registered (s 80), though the contract between the lender and the company is still valid;

(b) the charge holder's rights prevail over other creditors on insolvency; and (c) the charge holder can take possession and sell the assets which are the subject of the charge.

- Priorities of chargeso A fixed charge will take priority over a floating charge on the same assets. It is possible for

creditors to enter an agreement between themselves to alter the order of priority of their charges.

o This could happen, for example, if the holder of a fixed charge allowed a bank to have priority for its floating charge, without which priority the bank would not advance new funds to allow the borrower to continue to trade.

Multiple charges, then the first charge holder has total control Can have among the security holders to change the lending

- Fixed charges o Usually over land, including buildings and major items of machinery. o A company can create a number of fixed charges over such assets.o The company cannot deal the asset, for example sell it, without the charge holders' consent. o The purchaser from the company of the charged property can only take it subject to the charge,

as long as the charge has been registered.o If the company goes into receivership or liquidation, then the fixed charge holders are paid out of

the proceeds of the sale of the relevant asset before any other claimants. If the company is being wound up, then the receiver deals without any other parties

o As a general rule, a fixed charge will take priority over a floating charge over the same assets. - Charge over book debt: Fixed charge

o Cannot charge a fixed charge on book debt unless it meets SPECTRIUM PLUSo National Westminster Bank plc v Spectrum Plus Limited and Others [2005] UKHL 41 o Certain criteria must be met:

a restriction against disposals of the charged debts before and after receipt; an obligation to pay monies received in respect of the debts into an account with the

bank on receipt; and an agreement not to withdraw money from this account without the bank’s consent

(which is implemented in practice). Unattractive to a company because book debts is needed to pay the supplier Most debts in the book debt is a floating charge

- Floating charges o If a company has no scope for granting any new fixed charges, how can a lender be offered o In re Panama, New Zealand and Australian Royal Mail Company (1870) LR 5 Ch App 318 .

Types of assets usually subject to floating charge are stock in trade, raw materials and finished articles, and it is possible for a floating charge to comprise a company’s entire undertaking

o Nature The three basic features of a floating charge were analysed in Re Yorkshire Woolcombers

Association Ltd; Houldsworth v Yorkshire Woolcombers Association Ltd:a) it is an equitable charge over the whole or a class of the company's assets, for

example over the book debts; b) the assets subject to the charge are constantly changing; and c) the company retains the freedom to deal with the assets in the ordinary course of

business until the charge 'crystallises'. o Crystallisation

A floating charge will crystallise on the company:a) going into receivership; b) going into liquidation; c) ceasing to trade; or d) any other event specified in the charge document.

When a company winds up; when it defaults on creditor’s debts; the company can’t use the floating charge anymore (after they receive all the book debts) creditor takes the floating charges. Even if company hasn’t received all the monies owed in their book debts, if the company defaults its payment to its creditor with a floating charge, then the creditor can choose to crystallize the book debt and take the floating charge.

o Advantages and Disadvantages of Floating Charges More flexibility for company Extends company’s ability to borrow Disadvantage to borrower:

The company is allowed to deal with the assets → negative pledge clause. o This prohibits the company from creating later charges with priority to

the floating charge. However, this only works if the subsequent charge holder has actual knowledge of the earlier charge.

o Wilson v Kelland (1910). HELD: Constructive knowledge, due to filing the charge at

Companies House, is not enough Registration is not held to be a notice Must have seen the physical negative pledge clause

Preferential creditors take priority over the holder of a floating charge (but not over the holder of a fixed charge). These include various categories of payments including

o eg overdue wages, outstanding severance/long-service payments to employees and statutory debts (tax and rates), as well as specific provisions relating to debts by banks and insurance companies.

Goods subject to retention of title clause (a 'Romalpa' clause) may deprive the holder of a floating charge of rights they might otherwise have over those goods, because the supplier of the goods still owns them.

o The charge holder therefore has no rights to sell those goods to pay the debt owed to them.

Under s 267 CO, a liquidator can apply to have a floating charge set asideo If it was created within 12 months of the company’s winding up and the

company was insolvent immediately after the floating charge was created then a floating charge will be invalidated except to the extent that ‘new monies’ were advanced to the company at the time the charge was created.

- Priority of chargeso Charges created first has priority (amongst charges of the same nature)

Even if second charge is registered first, priority on creation and not on registrationo Fixed charge take priority over floating charge on same assets, even if the floating charge created

earlier over fixed charge Sometimes creditors will enter into agreement amongst themselves to order the priority of

their charges Holder of a floating charge might agree to give a new lender priority over his own fixed

charge

PERSONAL GUARANTEES- Directors may guarantee with creditors to guarantee priority? - Typical terms of a debenture

o Repayment date o Interest o Security o Power to appoint a receiver/manager o Power of sale

- Procedure for issue of debenture o Board resolutiono EGM necessary?o Loan agreement and debenture executed

Sealed!- Registration

o Section 80 CO lists those types of charges which are registerable.o Once the company has formally entered into the loan, it is the company's responsibility to

register prescribed particulars of any charge contained in the debenture at Companies Registry on Form M1, together with the original charging document, within 5 weeks of creation of that charge.

Although it is primarily the responsibility of the company to register prescribed particulars of any charge, it is the debenture holder who suffers if the charge is not registered or is registered late. The debenture holder would therefore usually undertake the registration of the charge himself.

- If a fixed charge is taken over land then this must also be registered at the Land Registry.o Details of any charge created by the company should also be kept in the company's own register

of charges at its registered office, but failure to do this does not affect the validity of the charge in any way.

- Failure of registration at company registryo Failure to register renders the charge void against the company's liquidator, and also against

the company's other secured creditors. It is not void as such against purchasers of the

company's property but they may take free of it under the rule on a bona fide purchaser without notice for value. The security remains valid against the company itself although the money secured by the charge becomes payable immediately (s 80 (1)).

- Late or inaccurate registrationo If the 5 week registration period is missed or the details supplied on Form M1 are inaccurate,

then the court has the power under s 86 CO to order an extension of time or allow rectification of the register.

o An example of registration being granted out of time is Re Chantry House Developments plc [1990] BCC 646.

- Repayment of Loano When the loan is repaid to the lender, Companies Registry is notified that the debt has been paid

and the security released. o If any entries were made against land at the Land Registry, these will also be removed.

WINDING UP

INTRODUCTIONCOMPULSORY LIQUIDATION- Petitioners:

o Companyo Creditor (s)

This is the most usual method by which a petition is presented to a court.o Contributory – see below. NB limits on contributory’s right to petition – qualification period for

holding shares. The court may in its discretion refuse to make a winding-up order and will normally do

so when a majority of creditors oppose the petition- Petition to the court. Compulsory liquidation is normally not instigated by the company- One of the conditions must satisfy for compulsory liquidation to proceed:

o A compulsory liquidation begins with the presentation of a petition to the court on one the following grounds (S 177 (1)):

The company has by special resolution resolved that the company be wound up by the court;

The company does not commence its business within a year from its incorporation, or suspends its business for a whole year

The company has no members; Essentially no real existence

The company cannot pay its debts. (QUALIFICATION BELOW) The event, if any, occurs , the occurrence of which will lead to the dissolution of the

company under its M&A; The court is of the opinion it is just and equitable to wind up the company

o Section 177(2) also gives the court power to wind up a company upon petition by the Registrar, e.g. where the company is being carried on for an unlawful purpose or certain breaches of the Companies Ordinance. Based on just and equitable ground.

- Company unable to pay its debto Whether a company is unable to pay its debts is a matter of fact.o Section 178 sets out three circumstances in which a company will be deemed unable to pay its

debts: A statutory demand in a special form for more than $10,000 has been left at the

registered office of the company and this has not been complied with to the satisfaction of the creditor(s) for a period of at least 3 weeks (unpaid);

If there is a bona fide dispute (because goods are not satisfactory), then you shouldn’t use a statutory demand in the process to demand such from a court.

The court refuse to use the process as a threat to collect debt The company has failed to satisfy a judgment debt where the creditor has obtained a court

judgment and there has been an unsuccessful attempt to levy execution, ie take property from the company for sale to pay the debt;

Extreme situation. Unsatisfied execution. If it is proved to the satisfaction of the court that the company is unable to pay its debts,

taking into account the contingent and prospective liabilities of the company Cashflow test – how much cash generated Balance Sheet test – asset v liability

o Difficult to proveo Trade creditor unlikely to access for the information

- Where a winding-up order is made: o PROCEDURES

The Official Receiver (government appointed) will be the provisional liquidator until the creditors appoint a liquidator.

This is the case unless a provisional liquidator has previously been appointed under S 193.

A provisional liquidator may sometimes be appointed before the winding-up order is made in order to preserve the company’s assets in the interval between the presentation of the petition and the making of the winding-up order.

o Freezes the assets, before the hearing of the winding up order. The provisional liquidator and then the liquidator will take control of the company’s

assets (s 197) and the liquidator may apply to court for an order that company’s property vests in the liquidator (s 198)

Once a provisional liquidator has been appointed or a winding-up order made, no action or proceedings can be continued or commenced against the company except with the leave of the court (s 186)

Liquidator takes over the company, employment ceased. The provisional liquidator must summon separate meetings of the creditors and

contributories to determine whether an application is to be made to the court to appoint a liquidator in his place (s 194 (1)(b).

If there is a difference between the decisions of the meetings or if they fail to make a decision, the court will decide and make such order as it thinks fit.

The creditors and contributories in the meetings referred to above also decide whether or not to ask the court to appoint a committee of inspection and who are to be the members of such committee.

o Oversees what the liquidator does The duty of the committee of inspection is to act in the best interests of the

general body of creditors. The directors must prepare and submit to the provisional liquidator/liquidator a

statement of the company’s affairs, including particulars of the company’s assets, debt and liabilities and details of the company’s creditors and any security they hold.

The statement must be submitted within 28 days of appointment of the provisional liquidator or the winding-up order being made.

When a winding-up order is made the liquidator will submit a preliminary report to the court as soon as possible after receipt of the statement of affairs

- Upon Appointment of Liquidatoro The company may not carry on business except for the purpose of winding up and there shall

be no transfer of shares (s 182)

o All documents issued on the company’s behalf shall have the words ‘in liquidation’ set out after its name (s 280)

o The powers of the directors to manage the company’s affairs will ceaseo The service of the winding-up order will operate as a dismissal of the company’s employees

except as otherwise agreed with the liquidatorLIQUIDATOR- Powers and duties of a liquidator (S 199)

o With the sanction of the court/committee of inspection To bring or defend any action or other legal proceedings in the name and on behalf of the

company To carry on the business of the company for the beneficial winding up of the company To appoint a solicitor to assist him in the performance of his duties To pay any classes of creditors in full To make any compromise or arrangement with creditors To compromise all calls and liabilities to call, debts and liabilities capable of resulting in

debts between the company and the contributoryo Without sanction from the court/committee of inspection

To sell the real and personal property and things in action of the company by public auction or private contract with the power to transfer the whole to one person or sell the same in parcels

To do all acts and to execute, in the name and on behalf of the company, all deed, receipts and documents

To prove, rank and claim in the bankruptcy insolvency or sequestration of any contributory

To draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company

To raise on the security of the company’s assets any requisite money To take out in his official name letters of administration of any deceased contributory and

to obtain money due from a contributory To appoint an agent to do business which the liquidator is unable to do himself To do all such other things as may be necessary for the winding up of the affairs of the

company and distributing its assetso Delegated powers of the court (s 226)

The holding and conducting of meetings to ascertain the wishes of creditors and contributors

The settling of lists of contributories and the rectifying of the register of members, where required, and the collection and applying of assets

The collection of the assets of the company and the application of the same in discharge of the company’s liabilities

The paying, delivery, conveyance, surrender or transfer of money, property, books or papers to the liquidator

The making of calls The fixing of a date on or before which creditors are to prove their debts or claims

o Duties The liquidator must have regard to any directions given by meetings of the creditors

and contributories The liquidator must act in a fair and impartial manner in good faith (Re Silver Valley

Mines) and must not put himself in a position of conflict of interest.: The liquidator has to keep proper accounts, etc and has to submit to certain audit

requirements and reporting obligations to the committee of inspection and the Official Receiver

RECEIVER- Receivership differs from liquidation in various respects:

A person who has fixed charge on a piece of land may appoint a receiver. Proceeds on a separate process, partially derived power from statute (conveyancing

ordinance)o A receiver is appointed by the security holder, the general creditors will have no say in the

matter Discrete piece of property Often the first step towards liquidation but not intrinsically link

o A receiver’s primary responsibility is to serve those who appoint him, whereas the major duty of the liquidator is to look after the interests of unsecured creditors

o The receiver’s powers vis-à-vis the company are determined by the relevant charging document under which he is appointed, whereas the powers and duties of the liquidator are set out in statute and prescribed by the court

o Very often, a receiver will be appointed only in respect of specific assets of the company and will not participate in managing the company. A liquidator is responsible for taking control of the management

o A receiver can be appointed even if the company has gone into liquidation. The appointment of a receiver is appointed does not automatically cause the company to go into liquidation but the liquidation of the company will be an event of default under a charge provided the company allows the a receiver be appointed

o At the end of the receivership the company may still exist and continue to trade. At the end of liquidation, the company will be dissolved and cease to exist.

VOLUNTARY LIQUIDATION- Commencement:

o S 228 : A company may be wound up voluntarily in any of the following circumstances: When the period, if any, fixed for the duration of the company by its articles expires or

upon the happening of any event specified in the M&A as leading to the company’s dissolution, and the company passes an ordinary resolution to wind up;

Special resolution of the members; Special resolution that the company cannot by reason of its liabilities continue its

business and that it is advisable to wind-up; If the directors (or where the company has more than 2) the majority of the directors

deliver to the Registrar a winding-up statement under s 228A.o The fact of the winding-up must be advertised in the Gazette within 14 days of being passed.

- Members’ voluntary winding-up: o The winding-up will proceed as a members’ voluntary if the directors are able and willing to

issue a certificate within 5 weeks before the resolution is passed stating that they have made full enquiry into the affairs of the company and have formed the opinion that the company will be able to pay its debts in full within a stated period, not exceeding 12 months.

o If this can be done, the members appoint the liquidator.o The winding-up commences at the time of passing the necessary resolution.o From the time of commencement of the winding-up the company must cease to carry on its

business, except so far as may be required for the beneficial winding-up thereof.o Upon the appointment of a liquidator, all the powers of the directors shall cease.o If at any time the liquidator is of the opinion that the company will not be able to pay its debts in

full as stated in the certificate of solvency, ie that the company is insolvent, he must summon a meeting of creditors and lay before the meeting a statement of the assets and liabilities of the company.

The creditors may then appoint another liquidator and the winding-up will continue as a creditors’ voluntary winding-up.

- Creditors’ voluntary winding-up: Special resolution of the members Meeting of the creditors have to be called

o Where the directors cannot or are not prepared to issue the certificate that the company will be able to pay its debts within 12 months then the liquidation is a creditors’ voluntary.

o The creditors must be called to a meeting to be held on the same day or the next day after the day on which the resolution for winding-up is to be proposed.

o Notice of the meeting must be sent to creditors and advertised in the Gazette and an English language and Chinese language newspaper.

o The directors must lay before the meeting a full statement of the company’s affairs and a full list of creditors.

o The creditors can either let the liquidator appointed by the members be liquidator or appoint their own choice of liquidator.

o A committee of inspectors may be appointed, with up to 5 representatives of the creditors, to assist and supervise the liquidator (members may also appoint up to 5 persons to the committee).

o From the time of commencement of the winding-up the company must cease to carry on its business, except so far as may be required for the beneficial winding-up thereof.

o Upon the appointment of a liquidator, all the powers of the directors shall ceaseCONSEQUENCES- Consequences of Appointment of Liquidator:

o The liquidator takes possession of the co’s property in order to realise it and use the proceeds to pay the debts and liabilities in a prescribed order. Any surplus is distributable among the members.

o Liquidator has most of the powers of a liquidator appointed in a compulsory winding-up. Certain powers need the sanction of the members/creditors before exercise.

- Procedure under s 228Ao Directors can resolve to wind-up the company where they believe the company cannot because

of its liabilities continue its business and it is necessary to wind up the company and it is not reasonably practicable for the winding-up to be commenced under any other provision of the Ordinance.

Directors can apply to wind up the company o Meetings of members and creditors must be summoned for a date within 28 days after delivery

of the winding-up statement to the Registrar. Rationale for the section appears to have been to speed up the appointment of a

liquidator in emergency cases. Winding-up commences when the directors file the requisite statement and a provisional liquidator is appointed immediately. No delay for member’s meeting.

o The directors must also appoint a provisional liquidator – the appointment will last until the meeting of creditors referred to above.

THE ASSETS OF THE COMPANY AVAILABLE FOR DISTRIBUTION- Contributories

o S 171 “The term “contributory” every person liable to contribute to the assets of the company in the event of its being wound up…”. (INCLUDING ALL MEMBERS)

o S 170 “In the event of the company being wound up, every present and past member shall be liable to contribute to the assets of the company to any amount sufficient for payment of its debts and liabilities…subject to (d) in the case of a company limited by shares no contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a present or past member).”

o The court or liquidator will settle a list of contributories as soon as possible after the winding-up order is made. Section 172 states that the liability of a contributory shall create a debt accruing from the time when his liability commenced but payable only when a call is made.

- Collection of the company’s assetso The court or, more often, the liquidator, causes the assets of the company to be collected and any

debtor of the company may be directed to pay the amount due into a specified bank account. o There are a number of provisions in the CO which enable the liquidator to add to the

company’s assets and so increase the funds available to pay creditors.- Fraudulent trading (s 275) – (RARELY USED)

o Subsection (1) states that if in the course of a winding-up it appears that the business of the company has been carried on with an intent to defraud its creditor, any person who knows that the business has been carried on in that manner may be personally liable for the debts or other liabilities of the company, as the court may direct.

o Note that subsection (3) of the section creates criminal liability, whether or not the company is being wound up.

o There are only two reported cases in HK – Re Patrick & Lyon [1933]

“Actual dishonesty involving real moral blame.” Re Parvinos Lines Ltd (1985) CWU No 37 of 1977,

where a declaration of fraudulent trading and orders of Clough J under s 275 (2) and (3) were set aside; and

borrowing money never intending to pay it back Aktieselkabet Dansk Skibsfinansierung v Wheelock Marden & Co (1989) 2 HKC 273

FACTS: obtained two loans, managers knew there were no reasonable prospects of being paid. Company denied that that Wheelock would continue to support it.

HELD: No fraudulent trade. Actual intend to defraud. CA: Upheld the decision. Had not been fraudulent, not a unanimous decision.

ADS v Brothers (2000) 1 HKC 511 HOFFMAN in CFA: “It is well established that s 275 requires proof that

someone carried on the business of the company with fraudulent intent and that the other directors sought to be held liable were knowingly party to the fraud… the question whether the person carrying on the business was fraudulent was subjective in the sense that he personally must have been dishonest’.

o So long the belief is honestly held, however far fetch it is.- Misfeasance (s 276)

o If in the course of a winding-up it appears that any person who has taken part in the formation or promotion of the company, or that any past or present officer, liquidator or receiver has misapplied, retained, or become accountable for the money or property of the company or been guilty of any misfeasance or breach of duty which is actionable by the company, he may be compelled to repay or restore the money or property or otherwise contribute to the assets of the company, as the court thinks fit.

o This is a purely procedural provision, which creates no new liabilities but provides a simpler mechanism for the recovery of property or compensation in a winding-up.

West Mercia Safetywear Ltd (in liquidation) v Dodd (1988) BCLC 250 o The section would also appear to apply to negligence –

Re D’Jan of London 91994) 1 BCLC 561 was a case under the UK equivalent of this section.

Fraudulent preference (s 266)o S 266(1) provides that where the company has made or done any conveyance, mortgage, delivery

of goods, payment, execution or other act relating to the property of the company within the

relevant time (as set out below) which would constitute an unfair preference under the Bankruptcy Ordinance the liquidator of the company may apply to the court for an such order as the court thinks fit for restoring the position to what it would have been if there had been no unfair preference.

- Elements of an fraudulent preference (S 50 Bankruptcy Ordinance):o A debtor gives an fraudulent preference to a person if:

That person is one of the debtor’s creditors or a surety or guarantor of any of the debtor’s debts; and

The debtor does anything, or permits anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor’s insolvency, will be better that the position he would have been in if that thing had not been done; and

The debtor giving the unfair preference was influenced in deciding to give it by a desire to prefer the person put into the better position; and (QUALIFIED, Re MC BACON)

The preference is given at the ‘relevant time’.o The desire to prefer will be presumed in the case of an unfair preference to an ‘associate’ (other

than by reason of his being an employee). An ‘associate’ is defined in s 51B Bankruptcy Ordinance (DOESN’T INCLUDE A COMPANY). In terms of a company, an associate of the company will be:

A partner of the company An employee of the company and for this purpose any director or officer of a

company shall be treated as being employed by that company (NOT INCLUDED IF JUST A EMPLOYEE)

A company controlled by the debtor (insolvent) company or which controls the debtor company.

LIQUIDATOR USUALLY PROVES THERE IS A REASON TO PREFER Desire to prefer: if a creditor has a floating charge on a book debt, and before winding up

of the company the company defaults on the creditor, the creditor can choose to take back the debt. This is not unfair preference. But if company is winding up, and the floating charge creditor takes debt first before the fixed charge creditor, then this is unfair preference.

o Re MC Bacon Ltd (No 1) Re a Company (No 005009 of 1987) The debtor (company) must be influenced by a desire to prefer (unless it is presumed).

Previously the test was of ‘dominant intention’. The courts have said that desire to prefer is stronger than intention and that a desire means that the company should ‘positively wish’ to put somebody in a better position. A person can choose the lesser of two evils without desiring either

Desire to prefer: motivated by a wish. Higher standard.o ‘Relevant time’ is:

In the case of an associate, 2 years; In other cases, 6 months before commencement of the winding-up (presentation of the

petition). In addition the company must have been insolvent at the time of the preference or must

have become insolvent as a result of the preference. Insolvency for these purposes means the company was unable to pay its debts as they fell due or the value of its assets was less than the amount of its liabilities.

Before winding up (be the company solvent or insolvent), if the company pays money to a creditor (be it associate or non associate), then following the relevant time period (for the creditors), this determines whether there had been unfair preference in these situations. It keeps a check and balance to see that within the time immediately prior to declaring winding up, the company had not been acting

unfairly to the benefit of certain creditors, thereby unfairly letting ‘unfairly preferred’ creditors jump the normal queue for creditor (fixed and floating charge) payouts.

o Orders which the court may make include: Vesting in the liquidator any property transferred as part of the transaction constituting an

unfair preference; Releasing or discharging security given by the company Directing any person to pay to the liquidator any benefits received from the company Reviving the obligation of any surety or guarantor which has been released or discharged Providing security for the discharge of any obligation imposed by or arising under the

order; and Allowing proof of debts from persons who are affected by such orders.

Can be two preferences – debt repaid, or released of a surety or guarantor Maybe circumstances that one transaction is a preference and the other one isn’t

- Floating charges (s 267)o A floating charge created as such on the undertaking or property of the company created within

12 months from the commencement of winding-up of the company is invalid except: If the company was solvent immediately after the creation of the charge; or

EG: the company is in a situation where it is almost going into insolvency, and the directors are contemplating how to get someone in a better position

To the extent of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge.

EG: if a creditor lends money but didn’t impose a security at the time, but decided to impose a security at a later time, that security may be set aside upon the company’s insolvency

o Re Matthew Ellis Ltd (1933) Ch 458 CA The purpose of the section is to prevent last minute floating charges in favour of

themselves by directors or controllers of companies. Cash has been interpreted to include a cheque or the equivalent of cash, which may include goods or services:

o Although the charge is avoided, the debt due to the creditor remains.- Extortionate credit bargains (s 264B)

o Where a company being wound up has been a party to a transaction involving the provision of credit to the company within 3 years ending on commencement of the company’s winding-up, which is extortionate, the liquidator may apply to the court for an order

o A transaction is ‘extortionate’ if: The terms of it are or were such as to require grossly exorbitant payments to be made

(whether unconditionally or in certain contingencies) in respect of the provision of credit; or

It otherwise grossly contravenes ordinary principles of fair dealing And a transaction is presumed to be extortionate unless the contrary is proved.

o The court may make an order providing for: Setting aside the whole or any part of any obligation created by the transaction; Varying the terms of the transaction; Requiring any person who is or was a party to the transaction to pay the liquidator any

sums he received from the company by virtue of the transaction; Requiring any person to surrender to the liquidator any property held by him as security

for the purposes of the transaction; or Directing accounts to be taken between any persons.

- Onerous property (s 268)o Where a company is being wound up and part of the property consists of:

Land burdened by onerous covenants;

Shares or stock in companies Unprofitable contracts; or Any other property which is unsaleable or not readily saleable by reason of some

onerous act or payment being required, The liquidator may, with the leave of the court, disclaim his interest in that

property. o S 268 (2) goes on to state the effect of disclaimer: “The disclaimer shall operate to determine, as

from the date of disclaimer, the rights, interest, and liabilities of the company, and the property of the company, in or in respect of the property disclaimed, but shall not, except so far as is necessary for the purpose of releasing the company and the property of the company from liability, affect the rights or liabilities of any other person.”

DISTRIBUTION OF ASSETSo Funds realised by the liquidator must be distributed in a given order.o Creditors must submit a claim or ‘proof’ of the debt owed to them by the company by affidavit.

They must also state if the debt is secured or unsecured.o The liquidator will set a date by which creditors must submit their claims – advertised and sent to

known creditors.o NB holders of a fixed charge over specific property will usually enforce their security by selling

that property. They are not subject to the order below. If the sale proceeds are not sufficient to pay off the debt the secured creditor can try to recover the balance in the liquidation process but will rank as an unsecured creditor.

Holders of fixed charge must appoint receiver If the sale proceeds produce a surplus, that must be paid to the liquidator for distribution.

- Order in which funds will be distributed:o Divide the company’s assets into three funds:

fixed charge assets; floating charge assets; and unsecured assetso Fixed charge holders will rank first in respect of the fixed charge assetso Unsecured assets will be applied:

In paying preferential creditors (unpaid wages, etc. to employees; statutory debts to the Government (tax, duties, etc.); small depositors of banks/ claimants under insurance contracts)

o Floating charge assets will be applied: If an entire undertaking of a company, won’t have an unsecured assets If a specific floating charge, then may have unsecured assets.

To the extent not satisfied by uncharged assets, in paying preferential creditors Unsecured creditors Contributories In paying the floating charge holder

o Unsecured creditors In meeting the expenses of the winding-up, including the remuneration of the liquidator

o Contributories- Re Leyland Daf Ltd; Buchler v Talbot (2004) UKHL 9

o HELD: that liquidation expenses cannot be paid from the floating charge assets as it is unfair for floating charge holders to bear the costs of a liquidation which are totally unconnected with the charge holder.

o Followed in HK in Re Good Success Catering Group Ltd 542/2002 (24 September 2004). In HK, remuneration of the liquidator comes AFTER paying out floating charge

holders

COMPLETION OF THE LIQUIDATION

- Compulsory Winding-upo If, after deduction of all fees and expenses there are funds remaining in the estate of the

company, the liquidator will distribute this sum to creditors whose claims have been admitted. o Once all the assets of the company have been realized, investigation completed and a final

dividend, if any, has been paid, the liquidator will send notices, together with a summary of his receipts and payments in the liquidation, to the creditors and contributories of the company of his intention to apply to the court for his release as liquidator. 

Any creditor or contributory may raise objection to the intended release within 21 days from the date of the notice.

o If there is no objection to the intended release, the liquidator will proceed to apply to the court for his release as liquidator of the company.

o After obtaining the order for release, the liquidator will file with the Registrar of Companies the "Certificate of Release of Liquidator". On the expiration of two years from the filing of the “Certificate of Release of Liquidator", the company shall be dissolved.

- Voluntary Winding-upo Once all the assets of the company have been realized and a final dividend, if any, has been paid,

the liquidator will make up an account of the winding-up, showing how the winding-up has been conducted and how the property of the company has been disposed of.

o The liquidator summons a general meeting of the company and, in the case of a creditors’ voluntary winding-up, a meeting of creditors. Notice must be given in the Gazette at least one month before the meeting.

o Within one week after the meeting, the liquidator must send a copy of his account to the Registrar of Companies accompanied by a return in respect of the meetings.

o The company is dissolved within three months from registering the account and the return.