NOTES ON COMPANY LAW

SPRING 2011

Table of Contents

A. B. C. D. E. F. G. H. I. J. K. L.

General Meetings ........................................................................................................................ 1 Company Secretary ..................................................................................................................... 3 Directors ...................................................................................................................................... 4 Majority Rule and Protection of Minority Shareholders .............................................................. 10 Protection of Outsiders .............................................................................................................. 10 Dividends ................................................................................................................................... 11 Auditors ..................................................................................................................................... 13 Reconstruction and Amalgamation ............................................................................................ 16 Fixed and Floating Charges....................................................................................................... 18 Winding-up by the Court ............................................................................................................ 19 Voluntary Winding Up ................................................................................................................ 20 .................................................................................................................................................. 22

NOTES ON COMPANY LAW

SPRING 2011

A. General Meetings
A company is compelled by law to conduct an annual general meeting of shareholders. Other general meetings, extraordinary general meetings, may be held at the request or by the direction of the directors, members, auditors, the court, the Official Receiver 1 (or other person acting as provisional liquidator2), and the companys liquidator. 1. Annual General Meeting A companys first AGM should be held within 18 months after its incorporation, but otherwise no more than 15 months may elapse between the date of one AGM and the next (unless the Registrar authorizes a longer period) (s 111 (1)). Thus, a company incorporated between July and December 2007 need not hold its first AGM until 2009, but thereafter an AGM must be held each calendar year at intervals of no more than 15 months. Table A, article 49, provides that the AGM will be held at the time and place decided by the directors. The AGM provides the shareholders with the opportunity of questioning the directors on any matter but in particular on the accounts and reports, which are usually presented at the meeting. The business of the AGM will include declaring a dividend, electing directors in place of those retiring, and appointing auditors. 2. Extraordinary General Meetings All general meetings other than the AGM are called extraordinary general meetings (EGMs) (Table A, article 50). An EGM may be convened3 at the request of directors, shareholders, auditors, liquidators, the Official Receiver, or by the court. Meetings Convened by the Directors The directors may convene an EGM whenever they think fit, and an individual 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, article 51). Meetings Requisitioned by the Shareholders On the requisition of members holding 5 per cent or more of the paid-up capital of the company which carries the right to vote at general meetings, the directors must convene an EGM (s 113 (1)). The requisition must state the objects of the meeting, be signed by the requisitionists, and be deposited at the registered office of the company (s 113 (2)). If the directors do not proceed to convene a meeting within 21 days from the deposit of the requisition, the requisitionists representing half of their total voting rights may convene a meeting themselves (s 113 (3)).

3.

4.

1 2

NOTES ON COMPANY LAW

SPRING 2011

5.

Proceedings at Company Meetings a. Quorum4 A quorum is the minimum number of persons whose presence is necessary for the transaction of business. No business can be transacted (conducted) at a general meeting unless a quorum of members is present when the meeting proceeds to business and continues to be present until the conclusion of the meeting (article 55). Two members present in person 5 or by proxy shall be a quorum unless the articles otherwise provide (s 114A (1) (c)). In the case of one-member companies, one member present in person or by proxy will be a quorum (s 114AA). b. Proxy (Proxies)6 Any member of a company entitled to attend and vote at a meeting is entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of him. The proxy also has the same right to speak at the meeting as the member who appoints him (s 114C (1)). c. Voting No member is entitled to vote at any general meeting of the company if any call or other sum presently payable by him has not been paid (article 67). d. Voting on a Show of Hands7 On a show of hands, every member present in person has one vote (article 64). A proxy cannot usually vote on a show of hands. e. Voting on a Poll8 On a poll, every member shall have one vote for each share that he holds (article 64). The votes on a poll may be given personally or by proxy (article 69). f. Chairmans Casting Vote In the case of an equality of votes9, whether on a show of hands or on a poll, the chairman of the meeting is entitled to a second or casting vote (article 62).

4 5

6 7 8 9

NOTES ON COMPANY LAW

SPRING 2011

B. Company Secretary
1. Introduction The company secretary is an officer of the company (s 2). Every company must have a company secretary who, except in the case of a private company having one director, may be one of the directors (s 154 (1)). As in the case of directors, the Companies Ordinance does not specify qualifications for holding the office of company secretary. However, in the case of a listed company, the Stock Exchange requires him to be qualified as an accountant, lawyer, chartered secretary (HKICS), or to have some other equivalent qualification or experience indicating that he is capable of discharging the functions of a company secretary. 2. Duties of the Company Secretary He will be present at all meetings of the company and the directors, and will make proper minutes of the proceedings. Under the direction of the board, he will issue all notices to members and other persons who are entitled. He will countersign every document to which the seal of the company is affixed. His department will deal with share and debenture transfers, will keep the books of the company including the registers of the members, debenture holders, charges, and directors and secretaries, and will deliver documents and make necessary returns to the Registrar including the annual return, return of allotments 10, and return of directors and company secretaries.

3.

Power of the Company Secretary The position of the company secretary has changed a great deal in the last 100 years. Once regarded as a mere servant, a company secretary has become the chief administrative officer of the company, with extensive duties and liabilities. In Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971), a secretary, purportedly11 on behalf of the company, fraudulently hired cars, apparently for the purpose of meeting customers, and used the cars for his own private purpose. It was held that the secretary had apparent authority to enter into contracts for the hire of cars on behalf of the company and the company was liable to pay the hire charges.

4.

Appointment of the Company Secretary Table A, article 112, provides that the company secretary will be appointed by the directors for such term, at such remuneration, and upon such conditions as they may think fit. He may also be removed by the directors.

10 11

NOTES ON COMPANY LAW

SPRING 2011

5.

Register of Directors and Company Secretaries Section 158 requires every company to keep a register of its directors and company secretaries.

C. Directors
1. Definition of a Director Section 2 (1) defines a director as including any person occupying the position of director by whatever name called12. This is a definition based purely on function: a person is a director if he does whatever a director normally does. The articles of a company may use the term governor or manager. A director is an officer of the company, for s 2 states that the term officer includes a director, manager or secretary. 2. Shadow Directors If a person gives instructions or directions and the directors, or a majority of directors, of a company customarily act accordingly, that person is a shadow director. The Number of Directors Required Every public company must have at least two directors, but a private company may have just one director (s 153). The companys articles will often specify the minimum number of directors, but they do not usually specify a maximum. The minimum age for a director is 18 years. A corporate body may not, as a general rule, be a director, but a private company which is not a member of a group of companies of which a listed company is a member may be a director (s 154A)13. Every company must have a secretary but a sole director may not be the secretary of the company. Of course, if there are two or more directors, one of them may be the secretary. 4. Duties of Directors a. Generally Directors owe their duties qua (in the capacity of) directors and not qua shareholders. Their duties are owed to the company, not to the individual shareholders.

3.

12 13

NOTES ON COMPANY LAW

SPRING 2011

b. Fiduciary Duties These are like those of any other person in a fiduciary position. The fiduciary duties of directors are: i. to act bona fide (i.e. in good faith) in the interests of the company

ii. not to allow any conflict between their duties as directors and their personal interests; and iii. to exercise their powers for their proper purpose.

i. The duty to act bona fide in the interests of the company Directors of a company must act bona fide in what they consider, and not what the court may consider, is in the interests of the company. To act in the interests of the company means acting in the interests of the shareholders as a whole, such as balancing the interests of current members with those of future shareholders. ii. The duty not to allow any conflict between their duties as directors and their personal interests the no-conflict rule Because a director owes a fiduciary duty to his company, he must not allow his interest and duty to conflict. Thus, he must not make a secret profit out of his position. If he does, he is liable to account for it to the company (Regal (Hastings), Ltd v Gulliver). In Regal (Hastings), Ltd v Gulliver, a company owned a cinema in Hastings and wished to acquire two other cinemas there so that it could sell all three of them to a third party. So it formed a subsidiary company to purchase them. The company originally intended to hold all the shares in the subsidiary company, but had not enough money to do so and only took up 2 000 shares, and a number of the other shares were taken up by the directors of the company. The directors later sold their own shares at a profit. It was held by the House of Lords that the directors must account to the company for the profit which they had made, for they had acquired the shares by reason of their directorships in the company. iii. The duty to exercise their powers for their proper purpose (Piercy v S Mills & Co Ltd) In Piercy v S Mills & Co Ltd, a company was in no further need of capital, but the directors used their power to issue shares to themselves and their friends purely for the purpose of strengthening and maintaining control of the company. It was held that the issue of the shares was an improper exercise of the directors power to issue shares. The allotment was invalid and void. 5

NOTES ON COMPANY LAW

SPRING 2011

c. Duties of Care and Skill A directors duties of care and skill towards the company are not as onerous as the fiduciary duties. In Re City Equitable Fire Insurance Co Ltd, Romer J said: A director need not, in the performance of his duties, exhibit a greater degree of skill than may reasonably be expected from a person of his knowledge and experience does not guarantee that he has the skill of an actuary or of a physician. A director is not bound to give continuous attention to the affairs of his 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. This duty may need to be reconsidered in the case of directors who are employed by the company. In respect of all duties that may properly be left to some other official, having regard to the needs of the business and the articles of the company, a director, in the absence of grounds for suspicion, is justified in trusting that official to perform such duties honestly.

5.

Disqualification of Directors14 The Companies Ordinance lays down certain restrictions on the persons who may be appointed as directors of a company. These restrictions are: a. Minimum Age Requirement The minimum age for a director is eighteen years. b. Undischarged Bankrupts15 A person who is an undischarged bankrupt may only act as director of a company or take part in or be concerned directly or indirectly in the management of any company with the leave 16 of the court by which he was adjudged bankrupt, except where the bankruptcy order was made before 31 August 1984 and he has continuously acted as a director of a particular company since then (s 156 (1)). The court will only grant leave if notice of intention to apply17 has been served18 on the Official Receiver, who will oppose the grant of leave if he is of the opinion that it is contrary to the public interest (s 156 (2)).

14 15

16 17 18

NOTES ON COMPANY LAW

SPRING 2011

c. Persons Disqualified under a Court Order Where a person has been convicted of an indictable offence in connection with the promotion, formation or management of a company or has been guilty of fraudulent trading or of any fraud in relation to the company, the court may make an order that such person shall not, without leave of the court, be a director. d. Qualification Shares (Share Qualification) A director need not be a member of the company unless the articles otherwise provide. If a specified share qualification is imposed, a director not already qualified must obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the articles (s 155 (1)). It should be noted that the bearer of a share warrant 19 shall not be deemed to be the holder of the shares specified in the warrant (s 155 (2)). If the director fails to obtain his qualification within the proper time, he vacates his office and is incapable of being re-appointed director of the company until he has obtained his qualification. In addition, he is liable to a fine. NB: A share qualification is a specified number of shares which a person must hold in the company to qualify him for appointment as a director of it. e. Table A, Article 90 The office of director shall be vacated if the director: i. becomes of unsound mind20

ii. becomes bankrupt iii. resigns his office by notice in writing to the company; or iv. has been absent for more than six months from meetings of the directors held during that period without permission of the directors. 6. Removal of Directors21 By section 157B (1), a company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in the memorandum, articles, or in any agreement between the company and the director. Members are required to give the company special notice of a proposed resolution to remove a director or to appoint somebody in place of a director so removed at the same meeting.

19 20

21

NOTES ON COMPANY LAW

SPRING 2011

On receipt of the special notice of an intended resolution to remove a director, the company must send a copy to the director concerned. He is entitled to be heard on the resolution at the meeting and to have his written representations22 sent to the members. Section 157B does not deprive23 a director of any compensation or damages payable to him in respect of termination. 7. Powers of Directors The general powers of managing a company are usually vested in the directors. Previously, Table A, article 82, provided that the directors could exercise all powers of the company not required by the ordinance or the articles to be exercised by the company in general meeting. If the directors acted within the general powers given to them by article 82 (or by some similar articles), they were not bound to obey resolutions passed by shareholders in general meeting. But, with effect from 13 February 2004, article 82 provides that the directors are bound to follow any directions given by special resolution. Companies are not bound to adopt Table A as their articles and it remains to be seen if the revised article 82 will be adopted24. The directors may meet together to dispatch business25, adjourn, and otherwise regulate their meetings26 as they think fit. A director may at any time summon a meeting of the directors (Table A, article 100). At common law, directors can only exercise their powers collectively by passing resolutions at a properly convened meeting of the board of directors; they have no power to act individually as agents for the company. However, a companys articles will usually empower the board of directors to delegate its powers to individual directors or to committees of directors (Table A, article 104), and to a managing director (article 111). A board meeting may be held informally, but it cannot be constituted on a casual encounter between the directors if one of them objects (Barron v Potter (1914)). In Barron v Potter (1914), B and P, who were both directors of the company, disliked each other and refused to meet at board meetings. One day they met by chance at Paddington station, whereupon P insisted on holding a board meeting on the spot, claiming that he had proposed a motion and carried it with his chairmans casting vote. Bs only response was to object to Ps proposal and to saying anything at all to P. It was held that B had not consented to the holding of the meeting and that the informal encounter between B and P could not be treated as a valid meeting.

22 23

24 82 25 26

NOTES ON COMPANY LAW

SPRING 2011
27

8.

Managing Director

a. Appointment Table A, article 109, provides that the directors may appoint one or more (but usually one) of the board of directors to the office of managing director for such period and on such terms as they think fit and, subject to the terms of any particular agreement, they may revoke such an appointment. While holding the office of managing director, the director is not subject to retirement by rotation 28 , but his appointment will automatically end if he ceases to be a director. b. Remuneration The articles usually provide for the remuneration of managing director. Table A, article 110, provides that a managing director will receive such remuneration (whether by way of salary, commission, participation in profits, or a partly one way and partly another) as the directors may determine. If the appointment of a managing director is void but he has performed services which are accepted by the company, he is entitled to claim reasonable remuneration. c. Powers and Duties The powers and duties of a managing director are determined by the articles and his contract of service. Table A, article 111, provides that the board of directors may entrust29 any of the powers exercisable by them to the managing director upon such terms and conditions and subject to such restrictions as they may think fit. They may revoke 30, withdraw31, vary32 or alter33 all or any of such powers. Holdsworth and Co (Wakefield) Ltd v Caddies (1955) In Holdsworth and Co (Wakefield) Ltd v Caddies (1955), C was appointed managing director of H Co. His service agreement provided that he should perform the duties and exercise the powers in relation to the business of H Co and the businesses of its existing subsidiary companies which might from time to time be assigned to him by the board of directors. Later the board resolved that he should confine his attention to one of the subsidiary companies. C sued for damages for breach of contract. The House of Lords held that the action failed. The board of directors was entitled to do what it had done.
27 28

29 30 31 32 33

NOTES ON COMPANY LAW

SPRING 2011

D. Majority Rule and Protection of Minority Shareholders

Directors owe their duties to the company, not to individual shareholders. Thus, only the company can sue the directors for breach of their duties. No individual shareholder can sue (Foss v Harbottle). However, there are a number of cases in which the court will allow an individual shareholder to sue; e.g., where the alleged wrongdoers are in control of the company, so that it is impossible for the company to bring an action in its own name. The situation is described as a fraud on the minority. Section 168A of the Companies Ordinance entitles any member of the company to seek relief if the companys affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members. In Foss v Harbottle (1843), the minority shareholders in a company brought an action against the directors, alleging that they were responsible for losses which had been incurred. It was held that the action could not be brought by the minority shareholders. The wrong done to the company was one which could be ratified by the majority of the members. The company was the proper plaintiff. The majority of the members should be left to decide whether to commence proceedings against the directors.

E. Protection of Outsiders
1. The Rule in Royal British Bank v Turguand (1856) In the case, the companys constitution provided that the board of directors could borrow money on the companys behalf on bond, as authorized by an ordinary resolution of the company in general meeting. The board borrowed money from the bank on bond bearing the companys seal. No such resolution was passed. It was held that the bond was binding on the company. The lenders were entitled to assume that a resolution authorizing the borrowing had been passed, even if it had not been passed. It should be noticed that the rule in Turguands case protects a person dealing with a company bona fide and without notice of the fact that the companys internal management requirements have not been followed. He is not required to investigate to ensure that all internal regulations have been complied with. In the absence of facts putting him on inquiry, he is entitled to assume that all matters of internal management and procedure required by the articles have been complied with. Hence, the rule is sometimes called the indoor management rule.

10

NOTES ON COMPANY LAW

SPRING 2011

2.

Exceptions to the Rule in Turguands Case There are a number of exceptional cases in which the rule in Royal British Bank v Turguand does not apply. a. The document on which the person seeking to rely is a forgery. b. The person seeking to rely on the rule knows that the transaction is irregular because he is not an outsider. c. Where the person seeking to rely on the rule was put on inquiry and the irregularity would have been discovered if he had made inquiries. d. Where the transaction requires the authority of a special resolution, for in that case the person dealing with the directors could ascertain, by inspecting the file at the Companies Registry, whether any such resolution had been passed.

F. Dividends
1. Definition Dividends are the profits of trading divided among the members in proportion to their shares, and in accordance with their rights as shareholders. Dividend and Interest Dividend must be distinguished from interest. Interest is a debt which, like all debts, is payable out of the companys assets generally. A dividend, however, is not a debt until it has been declared by the company, and dividends cannot be declared out of the assets generally; they can only be paid out of the assets legally available for the purpose. Rules as to Payment of Dividends The important rules as to payment of dividends are: a. Dividends must be paid only out of profits. The rule ensures that the capital of the company is not returned to members but is maintained for the benefit of both creditors and members. In Re Exchange Banking Co: Flitcrofts case, the directors had allowed debts which they knew to be bad to be credited in the accounts, thus creating a fictitious profit. It was held that the directors were liable to refund dividends paid on their recommendation, since these amounted to an unauthorized reduction of capital.

2.

3.

11

NOTES ON COMPANY LAW

SPRING 2011

b. Dividend cannot be paid out of capital. Capital is the fund that creditors of the company ultimately look to payment of debts and it is a fundamental principle of company law that a company must maintain its capital for the protection of creditors, both existing and future. c. The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors (article 115). Under the articles of most companies, it is the company in general meeting which declares the dividend, but the directors who recommend its amount. The articles usually provide that the dividend shall not exceed the amount recommended by the directors and Table A, article 115, does this, so that while the shareholders can reduce the amount of the dividend, they cannot increase it. It should be noticed that the shareholders cannot insist on the company declaring a dividend, even though the profits are amply sufficient, for this is a matter which is at the discretion of the directors. It is the directors who control the management and financial policy of the company, and it is they who recommend the amount of dividend to be paid. d. Dividends will be declared and paid according to the amount paid on the shares, but if any share is issued on specific terms as to payment those terms must be followed. e. Directors may deduct all sums presently payable on account of calls 34 or otherwise35 from the dividend (article 120). f. Dividends may be paid wholly or in part by the distribution36 of paid-up shares, debentures, or debenture stock37 of another company (article 121). g. No dividend shall bear interest against the company38 (article 123). 4. Special Rules for Interim Dividends When the directors can see39 that the company is going to make a sufficient profit by the end of the financial year, they may declare a dividend part of the way through the year (article 116). Such a declaration does not require the sanction (approval) of the general meeting. Even if an interim dividend is declared, the directors may subsequently vary or rescind the dividend. The declaration of such a dividend does not give rise to a debt binding on the company. Thus, in Lagunas Nitrate Co v Schroeder, it was held that shareholders were not entitled to claim payment of the interim dividend which had been declared.
34 35

36 37 38 39

12

NOTES ON COMPANY LAW

SPRING 2011
40

5.

Consequences of Unlawful Distribution (s 79M) Dividends may be paid only out of profits available for distribution. If a distribution is made by a company in breach of the statutory provisions and the member receiving the distribution knows or has reasonable grounds for believing that it is in breach, he is liable to repay it to the company. The Creation of Reserves Even though the company has made a sufficient profit, the directors are not bound to recommend a dividend. Profits may be carried forward 41 and set aside42 as a reserve to be invested, employed in the business of the company, or applied for43 any purpose to which profits may be applied (Table A, article 118).

6.

G. Auditors
1. Introduction An audit is carried out primarily for the shareholders of a company as a check on the directors stewardship 44. The companys accounts are an internal check on the companys financial position and the audit is the external, independent check. Appointment of the First Auditors The first auditors of a company may be appointed by the directors at any time before the first annual general meeting, and they will hold office until the conclusion of that meeting (s 131 (3)). If the directors do not exercise their power of appointment, the general meeting may appoint the first auditors (s 131 (4)). Appointment of Subsequent Auditors Subsequent auditors will be appointed at the companys annual general meeting. Such auditors will hold office from the conclusion of that meeting until the conclusion of the next annual general meeting. If the meeting fails to appoint auditors, any member of the company may apply to the court for an appointment (ss 131 (1) and (2)). Appointment of Auditors to Fill Casual Vacancies Where a casual vacancy arises on the disqualification, removal, or resignation of the auditors before the end of their period of office, the directors or the company in general meeting may make an appointment to fill the vacancy (s 131 (5)).

2.

3.

4.

40 41

42 43 44

13

NOTES ON COMPANY LAW

SPRING 2011

5.

Remuneration of Auditors If the directors appoint an auditor, they may fix his remuneration, and if the court makes an appointment, it may fix the remuneration. Otherwise, the remuneration will be fixed by the company in general meeting or in such manner as the company in general meeting may determine (s 131 (8)). The amount of remuneration must be shown under a separate heading in the companys profit and loss account and it must include all sums paid by way of expenses (Sch 10, para 15). Resignation of Auditors An auditor may resign his office at any time by depositing notice in writing at the registered office of the company. The notice is effective on the date of deposit or a later date as specified in the notice (s 140A (1)). The notice must contain either: a. a statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of members or creditors of the company45; or b. a statement of any such circumstances46 (s 140A (2)).

6.

7.

Powers (Rights) of Auditors a. Every auditor has a right of access47 at all times to the books, accounts and vouchers48 of the company and is entitled to require from officers of the company such information and explanations as he thinks necessary for the performance of his duties (s 141 (5)). b. If the auditors fail to obtain all the information and explanations which are necessary for the purpose of their audit, they must state that fact in their report (s 141 (6)). c. The auditors are entitled to attend any general meeting of the company and to receive all notices and other communications which any member of the company is entitled to receive. They are entitled to be heard49 at any meeting on any part of the business which concerns them as auditors50 (s 141 (7)).

45 46

47 48 49 50

14

NOTES ON COMPANY LAW

SPRING 2011

8.

Duties of Auditors a. An auditor is liable to the company for any loss occasioned to it by his fraud or negligence in the performance of his duties. He must be honest and exercise reasonable care and skill in making enquiries and investigations, but he does not guarantee that the books do show the companys true position. In Re London and General Bank (No 2), the auditors made a confidential report to the directors stating that the companys security for loans was insufficient and that there were difficulties in realizing certain securities, and also stating that in their opinion no dividend should be paid for the year. In their report to the shareholders, the companys chairman persuaded them not to express the view that no dividend should be declared and they merely said that the value of assets was dependent upon realization. A dividend of 7 per cent was declared and paid out of capital. It was held that the auditors were liable to make good the dividend paid out of capital. b. He must show the true financial position as shown by the books. If proper accounting records have not been kept or they do not show a true and fair view of the companys affairs, he must state that fact in his report and even refuse to certify the accounts and resign. c. A watchdog but not a bloodhound Lopes L J said that An auditor is not bound to be a detective. He is a watchdog, but not a bloodhound. d. He is not concerned with policy or management.

9.

Auditors Liability for Misstatement51 in Report The auditors will be liable to their client in both contract and tort if they act in breach of duty of care. They may also be liable in tort to other persons who rely upon their report. The person who alleges a breach of duty of care must establish: a. the existence of a duty b. breach of the duty; and c. that the loss arises as a result of the breach.

51

15

NOTES ON COMPANY LAW

SPRING 2011
52

10.

Relief from Liability Section 165 applies not only to officers of the company but also to auditors. The section states that any provision in the articles or in any contract exempting them from, or indemnifying them against, liability for negligence, default 53, breach of duty54, or breach of trust 55 towards the company is void. Thus, it is impossible for an auditor to limit or exclude liability for negligence by the terms of his contract. If, however, the court thinks that, though liable, the auditor has acted honestly and reasonably, it may relieve him from liability on such terms as it thinks fit (s 358).

H. Reconstruction and Amalgamation

The terms reconstruction and amalgamation do not have a precise legal meaning. Reconstruction occurs when a company transfers the whole of its undertaking and property to a new company under an arrangement56 by which the shareholders of the old company are entitled to receive shares or other similar interests in the new company. Amalgamation implies the combination of two or more companies or the businesses of two or more companies into one company or into the control of one company. A reconstruction or amalgamation, as the case may be 57 , can be effected by a scheme of arrangement under section 166 of the Companies Ordinance. 1. Scheme of Arrangement under Section 166 By the term arrangement is meant a scheme whereby the rights of a companys members or creditors (or of a class of members or creditors) are altered. Under section 166, a company can enter into a compromise58 or arrangement with its creditors or any class of them59, or with its members or any of them without going into liquidation. Section 166 provides that the compromise or arrangement will be binding on the company and the creditors or members, as the case may be, if a. The court, on the application of the company or of any creditor or member of the company (or, if the company is being wound up, of the liquidator), orders a meeting of the creditors or class of creditors, or of the members or class of members, to be summoned60.

52 53

54 55 56 57 58 59 60

16

NOTES ON COMPANY LAW

SPRING 2011

b. The compromise or arrangement is agreed to by a majority in number representing threefourths in value61 of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting. It should be noticed that the compromise or arrangement is sanctioned by the court. 2. UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin FACV In this case, the Court of Final Appeal laid down the following principles which are relevant to scheme of arrangement meetings: a. It is the responsibility of the company putting forward the scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed. b. Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. c. The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights62 against the company is not a ground for calling separate meetings. d. The question is whether the rights which are to be released63 or varied under the scheme or the new rights which the scheme gives in their place are so different that that scheme must be treated as a compromise or arrangement with more than one class. e. The court has no jurisdiction to sanction a scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Even if it has jurisdiction to sanction a scheme, however, the court is not bound to do so. f. The court will decline to sanction a scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but also that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.

61 62

63

17

NOTES ON COMPANY LAW

SPRING 2011

3.

The Hong Kong Codes on Takeovers and Mergers and Share Repurchases 64 require the making of a mandatory offer to all shareholders of the company in the following cases: a. any person acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights b. two or more persons who act in concert65 hold less than 30% of the voting rights any one or more of them acquire voting rights and have the effect of increasing their holding of voting rights to 30% or more of the voting rights c. any person who holds 30% to 50% of the voting rights and acquires additional shares66 carrying more than 2% of the voting rights in the 12 month period; or d. two or more persons who act in concert hold 30% to 50% of the voting rights and acquire additional shares carrying more than 2% of the voting rights in the 12 month period.

I. Fixed and Floating Charges

Charges given as security to debenture holders may be either fixed (or specific) or floating charges. A fixed charge is a charge on some ascertained67 and definite68 property, e.g. land (land includes buildings and houses) or heavy machinery, and prevents the company from realizing that property without the consent of the holders of the charge. In the case of winding-up, a fixed charge need not prove the debt and wait for payment with other unsecured creditors and it has priority over preferential creditors. A fixed charge may be either legal or equitable. Until crystallization, a floating charge does not attach69 any definite property but is an equitable charge on property which is constantly charging, e.g., the companys undertaking or its stock-intrade, and which can be realized by the company in the ordinary course of its business without the consent of the holders of the charge. A floating crystallizes and becomes fixed when the company ceases to carry on business or when it is wound up.

64 65

66 67 68 69

18

NOTES ON COMPANY LAW

SPRING 2011

J. Winding-up by the Court

1. Introduction The process of winding-up brings the life of a company to an end. The winding-up of a company may be by the court or voluntary. When the court orders a winding-up, it is said to be compulsory: the liquidator, who is appointed by the court, can only act under its direction and control. In a voluntary winding-up, the liquidator is appointed by the shareholders if the directors are able to certify that the company is solvent; otherwise, the companys creditors have the power of appointment and will exercise general control over the liquidation. 2. Grounds on which a Company may be Wound Up by the Court S 177 (1) of the Companies Ordinance specifies six grounds on which a company may be wound up by the court: a. The company has by special resolution resolved that the company be wound up by the court. b. The company does not commence its business within a year from its incorporation, or suspends its business for a whole year70. c. The company has no members. d. The company is unable to pay its debts. A company is deemed to be unable to pay its debts if: i. ii. iii. a creditor for $10 000 or more has served on the company, at its registered office, a written demand for payment and the debt is not paid within three weeks execution is unsatisfied71; it is proved to the courts satisfaction that the company is unable to pay its debts, taking into account its contingent72 and prospective73 liabilities.

e. The memorandum or articles provide that it is to be dissolved74 on the occurrence of an event and the event occurs.

70 71

72 73 74

19

NOTES ON COMPANY LAW

75

SPRING 2011

f. The court is of the opinion that it is just and equitable that it should be wound up. This is a wide ground and might be used in a number of cases, e.g., Where the whole object of the company is fraudulent (Re T E Brinsmead & Sons). Where the main object of the company has failed (Re German Date Coffee Co). Where the members have formed a company on the basis of a relationship involving mutual trust, understanding, and confidence which no longer exists (Re Yenidje Tobacco Co Ltd). Where the company is a mere bubble (Re London and County Coal Co). It never has any business and property. Where a director has voting control and refuses to hold meetings, produce accounts or pay dividends (Loch v John Blackwood Ltd). 3. Disqualification for Appointment as Liquidator76 (s 278) There is no statutory requirement as to his qualification. No person being an undischarged bankrupt and no body corporate shall be qualified for appointment as liquidator of a company. Any appointment made in contravention of this section shall be void.

K. Voluntary Winding Up
1. Introduction A voluntary winding up has many advantages over a compulsory winding up, the main one being that there are not as many formalities to be complied with. The vast majority of liquidations are voluntary liquidations. Circumstances in which a Company may be Wound Up Voluntarily Section 228 (1) provides that a company may be wound up voluntarily: a. when the period (if any) fixed by the articles for the duration of the company expires, or an event which determines its existence occurs, and the company resolves (by ordinary resolution) to be wound up voluntarily b. if the company resolves by special resolution to be wound up voluntarily c. if the company resolves by special resolution that it cannot by reason of its liabilities continue its business and that it is advisable to wind up77; and d. if the directors of the company or, in the case of a company having more than two directors, the majority of the directors, make and deliver to the Registrar a winding-up statement under s 228A.

2.

75 76

77

20

NOTES ON COMPANY LAW

SPRING 2011

3.

The Importance of the Certificate of Solvency When a voluntary liquidation in proposed, the directors (or a majority of them if there are more than two) may, at a board meeting, issue a certificate of solvency stating that they have made a full inquiry into the companys affairs and have formed the opinion that it will be able to pay its debts in full within twelve months from the passing of a resolution for voluntary winding-up (s 233 (1)). The certificate of solvency must be delivered to the Registrar for registration. It must contain a statement of the companys assets and liabilities. The certificate of solvency is extremely important, for it determines the nature of the winding up. Section 233 (4) provides that when such a certificate is issued and delivered, the winding up is a members voluntary winding up. When it is not issued and delivered, the winding up in a creditors voluntary winding up.

4. 5.

Appointment of Liquidator in Members Voluntary Winding Up The liquidator is appointed by the company in general meeting (s 235 (1)). Appointment of Liquidator in Creditors Voluntary Winding Up Both the creditors and the company at their respective meetings may nominate a liquidator. If they nominate different persons, the person nominated by the creditors is the liquidator subject to any order made by the court. If the creditors do not make a nomination, then the companys nominee becomes the liquidator (s 242).

21

NOTES ON COMPANY LAW

SPRING 2011

L.
1. The Office of the Commissioner of Insurance The Office of the Commissioner of Insurance78 was established in 1992. It is the regulatory authority of the insurance industry in Hong Kong. Duties of the OCI: a. authorization of insurers to carry on insurance business in or from Hong Kong b. regulation of insurers to ensure the financial soundness and integrity of the insurance market c. regulation of insurance intermediaries to ensure an insurance agent79 is properly appointed by an insurer and registered with the Insurance Registration Board in accordance with the Code of Practice80 for the Administration of Insurance Agents d. liaison with the insurance industry in promoting self-regulation by the industry with the aim of enhancing the protection of policy holders. A contract of insurance can be in any form but in practice it is embodied in a written document called a policy; and e. reviewing regularly the guidelines and regulations developed within the system to ensure that they are in keeping with market development and provide adequate protection to the insuring public. 2. The Hong Kong Exchanges and Clearing Limited The Hong Kong Exchanges and Clearing Limited focuses on trading operations and risk management in the following ways: a. enforcement of trading and clearing rules and detection of trading malpractices81 by users b. maintenance of market transparency by monitoring price and turnover movements on a real basis and requiring prompt disclosure of price sensitive information c. assisting in the risk management process by monitoring exceptional concentrations in positions and unusual price fluctuation d. interaction with market participants, including the handling of disputes in relation to trading matters; and e. cross-market surveillance of the users of the Hong Kong Exchanges and Clearing Limited.

78 79

80 81

22

NOTES ON COMPANY LAW

SPRING 2011

3.

The Securities and Futures Commission The Securities and Futures Commission maintains market order and protects investors in the following ways: a. setting and enforcing market regulations b. licensing and supervising participant such as brokers, investment advisors and fund managers c. supervising market operators including exchanges, automated trading services and clearing houses d. authorizing offering documents of investment products to be offered to the public e. overseeing82 corporate activities of listed companies under the Codes on Takeovers and Mergers and Share Repurchases; and f. educating investors on markets, investment products and their risks.

The Securities and Futures Commission acts as the oversight regulators to detect market malpractices in the following ways: a. scrutinizing83 market activities to detect potential breaches of laws relating to the securities and futures market b. conducting investigations of possible statutory offences 84 that fall within its jurisdiction, including those commenced on referral from the Hong Kong Exchanges and Clearing Limited, other agencies and complaints from the public; and c. overseeing the surveilling actions undertaken by the Hong Kong Exchanges and Clearing Limited and performing cross-market surveillance of activities between HKEx and nonHKEx markets.

82 83

84

23