THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS

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1 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS International Qualifying Scheme Examination HONG KONG CORPORATE LAW JUNE 2009 Time allowed 3 hours Section A 10 short questions (compulsory) Section B 5 long questions (attempt any 3) DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE INVIGILATOR Important Note: Candidates are allowed 15 minutes reading time to read through the question paper before the commencement of the examination between 9:15am-9:30am. During the reading time, all candidates must be silent and must not write or mark anything on their question papers or answer books. Candidates must close all their reference books, notes or other unauthorised materials and put these under their chairs. If any candidates write or make any marks during the reading time, or if they speak or in any other way communicate with anyone either in or outside the examination hall during this period or read any unauthorised materials, they will be disqualified from continuing this examination paper. Once candidates have opened the question paper, they are not allowed to leave the examination hall until 10:00am. Page 1 of 12

2 Case list for candidates reference 1. Allen v Gold Reefs of West Africa Ltd [1990] 1 Ch 656; 2. Buchler v Talbot; Re Leyland DAF Ltd [2004] 1 All ER 1289; 3. Canadian Aero Service Ltd v O'Malley [1974] SCR 592; 4. Re City Equitable Fire Insurance Co. Ltd. [1925] Ch Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360; 6. Foss v Harbottle (1843) 67 ER 189; 7. Gilford Motor Co Ltd v Horne [1933] Ch.935; 8. HKSAR v. Leung Yat Ming [1999] 2 HKLRD 402; 9. Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; 10. Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1; 11. Re Chime Corp Ltd [2004] 3 HKLRD 922; 12. Re H and others [1996] 2 All ER 391; 13. Re Kingston Cotton Mill Co (No 2) [1896] 2 Ch 279; 14. Re Kitson & Co Ltd [1946] 1 All ER 435; 15. Re TE Brinsmead & Sons [1897] 1 Ch 406; 16. Re Thomas Gerrard and Son Ltd [1968] Ch 455; 17. Re Quality International Ltd. [1964] HKLR 669; 18. Re Yenidje Tobacco Co Ltd. [1916] 2 Ch 426; 19. Salomon v Salomon and Co. Ltd. [1897] AC 22. Page 2 of 12

3 SUBJECT NO 12M HONG KONG CORPORATE LAW JUNE 2009 The examination paper is divided into TWO Sections. Section A is compulsory and carries 40 marks. Candidates should attempt THREE questions from Section B, all of which carry 20 marks each. You should allow yourself approximately 70 minutes in total to answer the questions in Section A, and 35 minutes for each of the questions attempted in Section B. Unless otherwise stated, $ denotes Hong Kong dollars and Table A applies. Wednesday morning 3 June 2009 Time allowed: 3 hours SECTION A (Compulsory answer ALL questions in this section. All questions are related.) 1. (a) Albert would like to set up a limited company in Hong Kong under the Companies Ordinance. He would like to invite his friend, David, to join his business to sell second-hand computers to China. Albert was told that he may set up a private company or a public company. However, he has no idea what they are. Explain to Albert the definition of a private company under the Companies Ordinance. (b) Albert was also told that he may set up a company limited by guarantee. Again, he has no idea what it is. Explain to Albert the meaning of a company limited by guarantee under the Companies Ordinance. Advise Albert whether he should set up a company limited by shares or a company limited by guarantee. (c) Albert finally decides to set up a private company limited by shares to run his secondhand computers business. However, he prefers not to include the word limited in his company s name. Advise Albert whether he may dispense the word limited in his company s name. Page 3 of 12

4 (d) Explain to Albert the legal procedures to set up a private company in Hong Kong under the Companies Ordinance. (e) Albert finally sets up a private company called Hong Kong Second-hand Computers Company Limited. Albert, David and Michael are the initial shareholders of the company. Each of them owns 10,000 shares of the company. The authorized share capital of the company is $500,000 ($10 X 50,000 shares). Albert and David were appointed as the directors of the company. Albert was also appointed as the managing director of the company. The company was set up on 1 st January 2008 and has adopted Table A as its articles of association. Albert recently realized that he had not held any annual general meeting for the company. Advise Albert as to his potential liability if the company fails to hold its first annual general meeting under the Companies Ordinance. (f) In the first annual general meeting of the company, Albert was told that he had to retire under the articles of association of the company. Explain to Albert the meaning of rotation of directors. Advise Albert whether he has to retire in the first annual general meeting of the company. (g) Albert was told that every company is required to keep several statutory books. However, he has no idea what they are. Explain to Albert FOUR examples of statutory books which every company in Hong Kong is required to keep under the Companies Ordinance. (h) Peter is very interested in joining the company and Albert and David would like to allot 10,000 shares to Peter. However, Michael does not like Peter and insists not to allot any shares to Peter. Advise Albert as to whether he may be able to allot 10,000 shares of the company to Peter. (i) Later, Peter was issued 10,000 shares. He was also appointed as a director of the company in a general meeting. Although Michael voted against the resolution to appoint Peter as a director, he was out-voted. Michael was so upset until one day when he found out that Peter had a previous criminal record in stealing corporate assets when he was the managing director of another company which was eventually wound up because of insolvency. Michael decided to apply to the court for a disqualification order to disqualify Peter from being a director in Hong Kong. Advise Michael as to the grounds to disqualify a director in Hong Kong under the Companies Ordinance. (j) Peter was then disqualified as a director in Hong Kong. Since then, Michael felt that he was isolated from Albert, David and Peter. They never discuss any company business with him. The trust and confidence between Michael and other shareholders Page 4 of 12

5 of the company had been broken down. Michael would like to wind up the company. Advise Michael as to the grounds he may wind up the company under the Companies Ordinance. (Total: 40 marks) Page 5 of 12

6 SECTION B (Answer THREE questions from this section) 2. Number One Computer Ltd. ( NOC ) is a private company incorporated in Hong Kong in the business of manufacturing computers. Alan and Louis are shareholders of the company. Each of them owns 50% of the issued share capital of the company. Alan and Louis are also the two directors of the company. One of the suppliers of the company, Kowloon Supplier Ltd. ( KS ), has not been paid for 3 months for the raw materials it provided to NOC. REQUIRED: (a) Advise KS as to the procedures how it may petition to wind up NOC. (6 marks) (b) It was later found that NOC does not own any assets as all its assets had been transferred to another company, Number Two Computer Ltd. ( NTC ). It was claimed that the assets were used to repay a debt owed by NOC to NTC. It was also found that NTC was set up two months ago and the shareholders and directors of NTC are also Alan and Louis. Advise KS as to whether it can claim the assets of NTC for the debts NOC owed KS: (i) if a winding up order of NOC is granted by the court; and (ii) if no winding up order of NOC is granted by the court. (7 marks) (7 marks) (Total: 20 marks) Page 6 of 12

7 3. Frankie is the managing director of Wonderful World Ltd. ( WWL ), a listed company in Hong Kong. Early this week, Frankie discussed with the CEO, Mandy, of Monkey Land Ltd. ( MLL ) in a video-conference about a possible joint project in developing a new theme park in Hong Kong. Ken, an office assistant of WWL, who was in the corridor outside the conference room, overheard the conversation between Frankie and Mandy. On the next day, Ken bought 10,000 shares of WWL on the Hong Kong Stock Exchange. Later that day, Ken also posted a message on a public forum, Buy Wonderful World Ltd. s shares quickly. Big project with Monkey Land Ltd. imminent. REQUIRED: (a) Advise Ken as to whether he committed any offence(s) under the Securities and Futures Ordinance. (10 marks) Peter read Ken s message on the public forum and immediately bought 500,000 shares of WWL on the Hong Kong Stock Exchange. (b) Advise Peter as to whether he committed any offence(s) under the Securities and Futures Ordinance. (5 marks) (c) Advise Ken and Peter as to the potential civil and criminal penalties they might be subject to under the Securities and Futures Ordinance. (5 marks) (Total: 20 marks) Page 7 of 12

8 4. Kowloon Logistics Ltd. ( KLL ) is a private logistics company incorporated in Hong Kong. KLL has an authorised share capital of 100,000 ordinary shares of $10 each and 1,000 cumulative preference shares of $10,000 each. The Articles of Association of KLL are in the form of Table A except that the preference shares carry a right to a 20% preferential dividend, with no voting rights at general meeting. Nancy and Carol were issued with 37,500 ordinary shares and 100 preference shares of KLL each upon its incorporation. They were also appointed as the directors of KLL. Benny joined KLL later and subscribed for 25,000 ordinary shares and 800 redeemable preference shares. The company has recently secured a 20-year exclusive contract to provide supply chain management to a large international company in Singapore. As a result, KLL wishes to buy more trucks. This will cost at least $50 million. REQUIRED: (a) State three methods that KLL could be used to raise the $50 million needed, and state ONE advantage and ONE disadvantage of each method. (9 marks) (b) Nancy and Carol are very unhappy with Benny soon after he joined KLL as Benny is not very dedicated to the business of KLL, and it seems that he does not know much about logistics to make good decisions as a director. Explain to Nancy and Carol whether Benny is in breach of any director s duties. (5 marks) (c) Nancy and Carol would like to issue 30,000 ordinary shares of KLL to their friend, Stephen at $8 per share. Explain to Nancy and Carol as to the procedures required. (6 marks) (Total: 20 marks) Page 8 of 12

9 5. On 1 st November 2008, a winding up petition was presented to wind up Four Seasons Ltd. ( FSL ). A winding up order was made on 15 th November Alex was appointed as the liquidator of the FSL. He found that FSL has total assets, approximately valued at $800,000. He also found that Kowloon Bank ( KB ) granted unsecured overdraft facilities to FSL on 1 st January As at 1 st April 2008, the outstanding overdraft was at $500,000. At the request of KB, FSL agreed to create a floating charge over all its general undertakings in favour of KB to secure the continuing overdraft facilities. From 1 st April to 1 st November,2008 FSL paid a total of $200,000 into the overdraft account and withdrew a total of $300,000 from the account. REQUIRED: (a) Advise Alex as to the validity of the floating charge created in favour of KB. (10 marks) (b) Alex also found that FSL owed its suppliers $600,000 and Inland Revenue Department unpaid tax of $100,000. The liquidator s costs and expenses are estimated to be $100,000. Advise Alex as to how the assets of FSL shall be distributed. (10 marks) (Total: 20 marks) Page 9 of 12

10 6. ABC Ltd. is a company incorporated and listed in Hong Kong in the business of selling milk and related products to European countries. Andy, Benson and Carlos are the three directors of the company. Each of them also owns 29% issued shares of the company. Donald owns the remaining 13% issued shares of the company. Andy is also the managing director of the company. Early this month, Donald overheard a conversation between Andy and Frank, the auditor of the company. It was said that Andy had imported substandard milk from some mainland China suppliers and he had received huge commissions from the suppliers. It was also said that some unknown chemicals had been added to the products of the company in order to pass the quality control test of the local authority. Andy agreed to pay Frank $500,000 in order to persuade him not to reveal the secret. Donald would like to discuss this problem with Benson and Carlos. However, Benson and Carlos refused to discuss with Donald as they are good friends of Andy. REQUIRED: (a) Advise Donald as to what legal action he may take against Andy and Frank. (15 marks) (b) Donald was so upset and decided to sell all his shares of ABC Ltd. to Benson. Advise Benson as to whether there is any implication under the Codes on Takeovers and Mergers if he acquires Donald s shares of the company and his shareholding of the company increases from 29% to 42%. End of Examination Paper (5 marks) (Total: 20 marks) Page 10 of 12

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