COMPANY LAWCOMPANY LAW

Law 330Law 330 Hong Kong Shue Yan CollegeHong Kong Shue Yan College

TextbooksTextbooks

Vanessa Stott: An Introduction to Vanessa Stott: An Introduction to Hong Kong Business Law, Longman, Hong Kong Business Law, Longman, Third Edition, 2001Third Edition, 2001

Vanessa Stott: Hong Kong Company Vanessa Stott: Hong Kong Company Law, Longman, Tenth Edition, 2003Law, Longman, Tenth Edition, 2003

INTRODUCTION TO INTRODUCTION TO INCORPORATIONINCORPORATION

1. Definition of a "Company" 1. Definition of a "Company" A company is a "corporation" - an A company is a "corporation" - an

artificial person created by law. artificial person created by law. A human being is a "natural" person. A human being is a "natural" person. A company is a "legal" person. A company is a "legal" person. A company thus has legal rights and A company thus has legal rights and

obligations in the same way that a obligations in the same way that a natural person does. natural person does.

Salomon v Salomon and Co Salomon v Salomon and Co Ltd (1897)Ltd (1897)

Sole proprietor incorporated business Sole proprietor incorporated business into a companyinto a company

Whether loan to company by Salomon Whether loan to company by Salomon secured by a charge over assets of secured by a charge over assets of company has priority over other company has priority over other unsecured loansunsecured loans

Held: Salomon was entitled to be paid Held: Salomon was entitled to be paid before unsecured creditor. The before unsecured creditor. The company was not an agent of or trustee company was not an agent of or trustee for Salomon but a separate legal entity.for Salomon but a separate legal entity.

Lord Macnughten:Lord Macnughten:““The company is at law a different person altThe company is at law a different person altogether from the subscribers to the memoranogether from the subscribers to the memorandum; and although it may be that after incorpdum; and although it may be that after incorporation the business is precisely the same as ioration the business is precisely the same as it was before and the same persons are managt was before and the same persons are managers and the same hands receive the profits, thers and the same hands receive the profits, the company is not in law the agent of the subsce company is not in law the agent of the subscribers or trustee for them. Nor are the subscrribers or trustee for them. Nor are the subscribers as members liable, in any shape or form,ibers as members liable, in any shape or form, except to the extent and in the manner provi except to the extent and in the manner provided by the Ordinance.”ded by the Ordinance.”

Other cases (pages 2 and 3 of CL)Other cases (pages 2 and 3 of CL)

Macaura v Northern Assurance Co Ltd (19Macaura v Northern Assurance Co Ltd (1925)25)

Good Profit Development Ltd v Leung Hoi Good Profit Development Ltd v Leung Hoi (1993)(1993)

Lee v Lee’s Air Farming Ltd (1961)Lee v Lee’s Air Farming Ltd (1961)

Companies and Companies and Partnerships Compared Partnerships Compared

DefinitionsDefinitions

Section 2 of Companies Ordinance (Cap. 3Section 2 of Companies Ordinance (Cap. 32)2) "company" ("company" (公司公司 ) means a company formed a) means a company formed a

nd registered under this Ordinance or an existnd registered under this Ordinance or an existing company;ing company;

Section 3 of Partnership Ordinance (Cap. Section 3 of Partnership Ordinance (Cap. 38)38) (1) Partnership is the relation which subsists (1) Partnership is the relation which subsists

between persons carrying on a business in between persons carrying on a business in common with a view of profit.common with a view of profit.(2) But the relation between members of any (2) But the relation between members of any company or association which is- company or association which is-

(a) registered as a company under any Ordinance (a) registered as a company under any Ordinance relating to the registration of joint-stock companies; relating to the registration of joint-stock companies; or (Amended 50 of 1911; 1 of 1912 Schedule)or (Amended 50 of 1911; 1 of 1912 Schedule)(b) formed or incorporated by or in pursuance of any (b) formed or incorporated by or in pursuance of any other Ordinance, or any enactment or instrument, other Ordinance, or any enactment or instrument, (Amended 25 of 1998 s. 2)(Amended 25 of 1998 s. 2)

is not a partnership within the meaning of this is not a partnership within the meaning of this Ordinance.Ordinance.

A company can be created only by A company can be created only by certain prescribed methods - most certain prescribed methods - most commonly by registration under the commonly by registration under the Companies Ordinance (Cap. 32). A Companies Ordinance (Cap. 32). A partnership is created by the partnership is created by the express or implied agreement of the express or implied agreement of the parties, and requires no formalities, parties, and requires no formalities, though it is common to have a though it is common to have a written agreement. written agreement.

A company incurs greater expenses A company incurs greater expenses at formation, throughout its life and at formation, throughout its life and on dissolution, though these need on dissolution, though these need not be excessive. not be excessive.

A company is an artificial legal A company is an artificial legal person distinct from its members. person distinct from its members.

A company can have as little as one A company can have as little as one member and there is no upper limit member and there is no upper limit on membership. A partnership must on membership. A partnership must have at least two members and has have at least two members and has an upper limit of 20. Exceptions are an upper limit of 20. Exceptions are a partnership of solicitors or a partnership of solicitors or members of the Stock Exchange. members of the Stock Exchange.

Shares in a company are normally Shares in a company are normally transferable (must be so in a public transferable (must be so in a public company). A partner cannot transfer company). A partner cannot transfer his share of the partnership without his share of the partnership without the consent of all the other partners. the consent of all the other partners.

Members of a company are not Members of a company are not entitled to take part in the entitled to take part in the management of the company unless management of the company unless they are also directors of it. Every they are also directors of it. Every partner is entitled to take part in the partner is entitled to take part in the management of the partnership management of the partnership business unless the partnership business unless the partnership agreement provides otherwise. agreement provides otherwise.

A member of a company who is not A member of a company who is not also a director is not regarded as an also a director is not regarded as an agent of the company, and cannot agent of the company, and cannot bind the company by his actions. A bind the company by his actions. A partner in a firm is an agent of the partner in a firm is an agent of the firm, which will be bound by his firm, which will be bound by his acts. acts.

The liability of a member of a The liability of a member of a company for the debts and company for the debts and obligations of the company may be obligations of the company may be limited. A partner in an ordinary limited. A partner in an ordinary partnership can be made liable partnership can be made liable without limit for the debts and without limit for the debts and obligations of the firm. obligations of the firm.

The powers and duties of a company, The powers and duties of a company, and those who run it, are closely and those who run it, are closely regulated by the Companies Ordinance regulated by the Companies Ordinance and by its own constitution as contained and by its own constitution as contained in the Memorandum and Articles of in the Memorandum and Articles of Association. Partners have more Association. Partners have more freedom to alter the nature of their freedom to alter the nature of their business by agreement and without business by agreement and without formality, and to make their own formality, and to make their own arrangements as to the manner in which arrangements as to the manner in which the firm will be run. the firm will be run.

A company must comply with A company must comply with formalities regarding the keeping of formalities regarding the keeping of registers and the auditing of registers and the auditing of accounts which do not apply to accounts which do not apply to partnerships. partnerships.

The affairs of a company are subject The affairs of a company are subject to more publicity than those of a to more publicity than those of a partnership - e.g. companies must partnership - e.g. companies must file accounts which are available for file accounts which are available for public inspection. public inspection.

A company can create a security A company can create a security over its assets called a floating over its assets called a floating charge, which permits it to raise charge, which permits it to raise funds without impeding its ability to funds without impeding its ability to deal with its assets. A partnership deal with its assets. A partnership cannot create a floating charge. cannot create a floating charge.

If a company owes a debt to any of its sIf a company owes a debt to any of its shareholders they can claim payment frhareholders they can claim payment from its assets rateably with its other creom its assets rateably with its other creditors. A partner who is owed money bditors. A partner who is owed money by the partnership cannot claim paymey the partnership cannot claim payment in competition with other creditors. nt in competition with other creditors.

A partnership (unless entered into for a A partnership (unless entered into for a fixed period) can be dissolved by any fixed period) can be dissolved by any partner, and is automatically dissolved partner, and is automatically dissolved by the death or bankruptcy of a partner, by the death or bankruptcy of a partner, unless the agreement provides unless the agreement provides otherwise. A company cannot normally otherwise. A company cannot normally be wound up on the will of a single be wound up on the will of a single member, and the death, bankruptcy or member, and the death, bankruptcy or insanity of a member will not result in insanity of a member will not result in its being wound up. its being wound up.

Types of CompaniesTypes of Companies

Statutory CorporationsStatutory Corporations Formed by an Ordinance.Formed by an Ordinance. Introduction by a LegCo Member a private Introduction by a LegCo Member a private

bill as defined in the Private Bills Ordinanbill as defined in the Private Bills Ordinance. Examples are found in Ordinances, chce. Examples are found in Ordinances, chapter numbers from 1000 onwards: Hong apter numbers from 1000 onwards: Hong Kong Council of Social Service CorporatioKong Council of Social Service Corporation (Cap. 1057) enacted on 9 March 1951. n (Cap. 1057) enacted on 9 March 1951.

Introduction by the Government a public Introduction by the Government a public bill. Examples are Kowloon-Canton Railwbill. Examples are Kowloon-Canton Railway Corporation Ordinance (Cap. 372)ay Corporation Ordinance (Cap. 372)

Section 3 of Chapter:372 KOWLOON-CANTON RAILSection 3 of Chapter:372 KOWLOON-CANTON RAILWAY CORPORATION ORDINANCEWAY CORPORATION ORDINANCE

ESTABLISHMENT OF THE KOWLOON-CANTON RAESTABLISHMENT OF THE KOWLOON-CANTON RAILWAY CORPORATIONILWAY CORPORATION

(1) There shall be established a public authority, to (1) There shall be established a public authority, to be called the Kowloon-Canton Railway Corporation, be called the Kowloon-Canton Railway Corporation, which shall have such powers and duties as are conwhich shall have such powers and duties as are conferred and imposed on it by, or by virtue of this Ordferred and imposed on it by, or by virtue of this Ordinance. (Amended 56 of 1986 s. 4)inance. (Amended 56 of 1986 s. 4)

(2) The Corporation shall consist of the f(2) The Corporation shall consist of the following members- ollowing members-

(a) a Chairman appointed by the Chief Executive;(a) a Chairman appointed by the Chief Executive;(b) a Chief Executive Officer appointed by the Co(b) a Chief Executive Officer appointed by the Corporation, the appointment to be made in the marporation, the appointment to be made in the manner provided in paragraph 4 of the First Schedunner provided in paragraph 4 of the First Schedule; le;

(c) not less than 4 nor more than 8 other member(c) not less than 4 nor more than 8 other members appointed by the Chief Executive,s appointed by the Chief Executive,

and the members of the Corporation shaand the members of the Corporation shall be the governing body thereof and shalll be the governing body thereof and shall comprise its managing board. l comprise its managing board.

(2A) The functions of the Chairman an(2A) The functions of the Chairman and the Chief Executive Officer shall be td the Chief Executive Officer shall be the functions assigned to them by this he functions assigned to them by this Ordinance and any functions that the Ordinance and any functions that the Corporation may assign to them. Corporation may assign to them.

By Registration (Registered By Registration (Registered Companies) Companies) Formed by registration under the Formed by registration under the

Companies Ordinance (Cap. 32). Companies Ordinance (Cap. 32). Registration is the most commonly used Registration is the most commonly used

means of forming a company and means of forming a company and virtually the only method now used to virtually the only method now used to form a trading company. form a trading company.

S. 4 (1): "Any 2 or more persons, S. 4 (1): "Any 2 or more persons, associated for a lawful purpose may, by associated for a lawful purpose may, by subscribing their names to a subscribing their names to a memorandum of association (which must memorandum of association (which must be printed in the English or Chinese be printed in the English or Chinese language) and otherwise complying with language) and otherwise complying with the requirements of this Ordinance in the requirements of this Ordinance in respect of registration, form an respect of registration, form an incorporated company, with or without incorporated company, with or without limited liability." limited liability."

Classification of Registered Classification of Registered Companies Companies

Limited liabilities vs Unlimited liabilitieLimited liabilities vs Unlimited liabilitiess "Limited Liability" refers to the liability of t"Limited Liability" refers to the liability of t

he members, not the liability of the compahe members, not the liability of the company. ny.

The company will always be liable to the fuThe company will always be liable to the full extent of its debts. ll extent of its debts.

The liability of the members, whether limitThe liability of the members, whether limited or unlimited, is to the company, not to ted or unlimited, is to the company, not to the individual creditors of the company. he individual creditors of the company.

Unlimited Companies Unlimited Companies

Members have unlimited liability (If company Members have unlimited liability (If company is being wound up, members can be made to is being wound up, members can be made to contribute to the company’s assets without contribute to the company’s assets without limit to enable it to pay its debts.) limit to enable it to pay its debts.)

Cannot be public companies. Cannot be public companies. Can be set up with or without a share capital. Can be set up with or without a share capital. Not subject to the same restrictions on Not subject to the same restrictions on

alteration of capital as other types of alteration of capital as other types of company, and do not normally have to file company, and do not normally have to file annual accounts.annual accounts.

Companies Limited by Companies Limited by GuaranteeGuarantee

Members agree to contribute a specified Members agree to contribute a specified amount to the company’s assets in the amount to the company’s assets in the event of the company being wound up. event of the company being wound up. (Total amount payable by all members is (Total amount payable by all members is called the "guarantee fund") called the "guarantee fund")

Members do not have to pay anything as Members do not have to pay anything as long as company is a going concern - so long as company is a going concern - so company has no contributed capital. company has no contributed capital.

Companies limited by guarantee are not Companies limited by guarantee are not usually formed for business ventures. usually formed for business ventures.

Companies Limited by Companies Limited by Shares Shares

The most common kind of registered The most common kind of registered company. company.

Members of the company take Members of the company take shares issued by the company. Each shares issued by the company. Each share is assigned a nominal value - share is assigned a nominal value - the amount that must be paid to the the amount that must be paid to the company for the share. Members company for the share. Members may also agree to pay an extra may also agree to pay an extra amount - called a premium. amount - called a premium.

When the company is registered, its memWhen the company is registered, its memorandum must state the total nominal valorandum must state the total nominal value of all the shares it is going to issue (calue of all the shares it is going to issue (called the registered capital, or nominal capiled the registered capital, or nominal capital or authorised share capital). tal or authorised share capital).

The memorandum also states the numbeThe memorandum also states the number of shares to be issued: e.g. 10,000 shares r of shares to be issued: e.g. 10,000 shares of $1 each = registered capital of $10,000. of $1 each = registered capital of $10,000.

Liability of a member (shareholder), when Liability of a member (shareholder), when the company is wound up is limited to the the company is wound up is limited to the amount, if any, of the nominal value of his amount, if any, of the nominal value of his shares which has not been paid. shares which has not been paid.

( A shareholder is also contractually ( A shareholder is also contractually bound to pay any premium which has not bound to pay any premium which has not been paid). been paid).

Shares are normally partly or fully paid Shares are normally partly or fully paid for when issued, so company will have a for when issued, so company will have a contributed capital.contributed capital.

Companies Limited by Companies Limited by Shares may be Public or Shares may be Public or

Private Private Section 29 provides:Section 29 provides: "the expression "private company" ("the expression "private company" (私人公私人公司司 ) means a company which by its articles-) means a company which by its articles-

(a) restricts the right to transfer its shares; and(a) restricts the right to transfer its shares; and(b) limits the number of its members to 50, not including (b) limits the number of its members to 50, not including

persons who are in the employment of the company anpersons who are in the employment of the company and persons who, having been formerly in the employmed persons who, having been formerly in the employment of the company, were while in that employment, and nt of the company, were while in that employment, and have continued after the determination of that employhave continued after the determination of that employment to be, members of the company; andment to be, members of the company; and

(c) prohibits any invitation to the public to subscribe for a(c) prohibits any invitation to the public to subscribe for any shares or debentures of the company.ny shares or debentures of the company.

If a company's articles fail to satisfy thIf a company's articles fail to satisfy the requirements of section 29, it is a pue requirements of section 29, it is a public company.blic company.

Private companies have no authorised Private companies have no authorised minimum share capital. minimum share capital.

Listed CompaniesListed Companies

Apart from satisfying the rules Apart from satisfying the rules setting out the requirements for a setting out the requirements for a company to list its securities company to list its securities (including shares) on the Stock (including shares) on the Stock Exchange of Hong Kong, the Exchange of Hong Kong, the company must not be a private company must not be a private company.company.