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 2015 Time allowed 3 hours Section A Compulsory case study 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 10:00a.m. Page 1 of 10

2 Case list for candidates reference 1) Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 2) Anns v Merton London Borough Council [1978] AC 728 3) Beattie v E & F Beattie Ltd [1938] Ch 708 4) Caparo Industries plc v Dickman [1990] 2 AC 605 5) Choy Bing Wing v Max Share Ltd [1993] HKLY 154 6) Eley v Positive Government Life Assurance Co Ltd (1876) 1 Ex D 88 7) Guang Xin Enterprises Ltd. (In liquidation) v Kwan Wong Tan & Fong (A firm) [2002] 2 HKC 613 8) Hedley Byrne and Co Ltd v Heller and Partners Ltd [1963] 3 WLR 101 9) Hickman v Kent [1915] 1 Ch ) Re City Equitable Fire Insurance Co Ltd [1925] Ch ) Re Elgindata Ltd [1991] BCLC ) Re Macro (Ipswich) Ltd [1994] 2 BCLC ) Re New British Iron Co, ex parte Beckwith [1898] 1 Ch ) Re Smith & Fawcett [1942] Ch ) Re Taiwa Land Investment Ltd [1981] HKLR ) Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC ) Schindler v Northern Raincoat Co Ltd [1960] 1 WLR ) Simon Fireman v Gold Rice Bowl Ltd [1987] HKLR ) Wood v Odessa Water Works (1889) 42 Ch D ) Young v Ladies Imperial Club [1920] 2 KB ) Yue Xiu Finance Co v Dermot Agnew [1996] 2 HKC 122 Page 2 of 10

3 SUBJECT NO 12M HONG KONG CORPORATE LAW June 2015 The examination paper is divided into TWO Sections. Section A is a case study with compulsory questions and carries 40 marks. Candidates should attempt THREE questions from Section B, all of which carry 20 marks each. Candidates should refer to the Companies Ordinance (Cap. 622) (Winding Up & Miscellaneous Provisions) Ordinance (Cap. 32). and the Companies 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. Wednesday morning, 3 June 2015 Time allowed: 3 hours SECTION A (Compulsory answer ALL questions in this section. All questions are related.) 1 Central Hotel Ltd (CHL) is a private company incorporated in Hong Kong with its articles of association substantially based on the Model Articles for private companies limited by shares. The additional clauses in CHL s articles are: i) the quorum for general meeting of the company is four shareholders or proxies who physically attend the meeting; and ii) all directors of the company must be aged between 18 and 60 years of age. CHL also has an object clause in its articles of association which provides that the main business of the company is to operate hotels in Hong Kong. Alan, Becky, Catherine, Davy and Elaine are the five shareholders in CHL. Each of them own 20% of CHL s issued shares. Alan, Becky and Francis are CHL s three executive directors, while Alan is also the chairman of CHL s board of directors and its managing director. Due to different views on many management issues, Alan and Becky have not been on speaking terms for months. In a recent board meeting, Alan proposed expanding the company s business to operate hotels in China; he reported in the meeting that some preliminary agreements have been signed with some hotels in China to form a strategic alliance. However, Becky believed that it was too risky for the company to expand its hotel business to China and was very worried about this prospect. Page 3 of 10

4 After this dispute on the proposed expansion of the company s business, Becky decided to sell her shares to Catherine and to resign as a director of the company. However, she found that, according to the company s articles of association, the transfer of shares must be approved by the board of directors. Alan and Francis have refused to approve the transfer without giving any reasons. Alan will be 61 years old next month and would like to delete the age restriction for the company s directors. He called a general meeting to achieve this and sent a notice of the general meeting to all five shareholders on 1 September The notice proposed the meeting be held at 7:00p.m. on 22 September 2014 at Alan s apartment at Discovery Bay. However, due to an error in the company s records, Davy s letter was sent to the wrong address so that Davy did not receive notice of the meeting. Only Alan, Becky and Elaine attended the meeting and an ordinary resolution was passed to approve the deletion of the age restriction. Although Becky voted against the resolution, she was out-voted by Alan and Elaine. (a) Advise Becky as to whether she may successfully challenge the meeting and the resolution to delete the age restriction for CHL directors. (15 marks) (b) Advise Becky as to the proper procedures and her rights/ liabilities if she resigns as a director of the company. (5 marks) (c) Advise Becky as to whether she may successfully challenge the board of directors refusal to register her transfer of shares. (d) Advise Alan as to the proper procedures to expand the company s business to operate hotels in China and the validity of the preliminary agreements signed between CHL and some hotels in China under the Companies Ordinance. (Total: 40 marks) Page 4 of 10

5 SECTION B (Answer THREE questions from this section) 2. Percy holds a master of finance degree from a prestigious university and is a very experienced finance professional. He is the managing director of Hong Kong Manufacturing Ltd (HKML). Recently, HKML was due to renew an insurance policy covering all its premises against fire. Without reading any terms of the new insurance policy, Percy simply relied on Nancy, his insurance broker, who completed the insurance policy forms, and he then signed them. Two weeks later, some of HKML s premises were destroyed by fire and it was found that there were mistakes in the forms which allowed the insurance company to repudiate liability for any compensation under the insurance policy. HKML subsequently went into liquidation and Leslie was appointed as HKML s liquidator. (a) Advise Leslie as to whether Percy was in breach of his director s duties. (14 marks) (b) Advise Leslie as to whether there is any ground to disqualify Percy as a director of a company under the Companies (Winding Up & Miscellaneous Provisions) Ordinance (Cap. 32) (6 marks) (Total: 20 marks) Page 5 of 10

6 3. In 2010 The First Group Ltd ( TFG) set up a new company, The First Textile Ltd (TFTL), to manufacture rayon cloth. This process required a licence from the government. In order to obtain the licence, TFTL was required to appoint two experienced directors with special qualifications. Frankie and Ginna were invited to join TFTL. TFG owns 80% of TFTL s issued shares while Frankie and Ginna each own 10% of TFTL s issued shares. There are five directors in TFTL, including Frankie and Ginna, who are the joint managing directors. The other three directors, who are appointed by TFG, are also TFG s directors. Early this year, the government cancelled the licencing system. As a result, TFG used its majority of votes to transfer all TFTL s business into one of TFG s subsidiaries. TFG also cut off the supplies of raw materials to TFTL. As a result, TFTL could not continue its business as no profits was made and its share value crashed. (a) Advise Frankie and Ginna as to whether they may successfully launch an unfair prejudice application under the Companies Ordinance. (14 marks) (b) Assuming that their application is successful, what remedies may the court grant under the Companies Ordinance? (6 marks) (Total: 20 marks) Page 6 of 10

7 4. The Second Rubbers Ltd ( TSRL) is a public but unlisted Hong Kong company. Michael is the company s auditor and this year he has prepared an unqualified audit report. Without reading all the documents carefully, Michael failed to discover that TSRL s directors had falsified entries to overstate the company s accounts receivable. Michael knew that the accounts when certified would be used to raise money and for that purpose supplied 10 certified and serially numbered copies to the company. Mainland Bank relied on one of these copies, given to it on its demand, and lent $5 million to TSRL. TSRL went into liquidation two months later. Mainland Bank sued Michael for the amount of the debt, declaring that a careful audit would have shown TSRL to be insolvent. (a) Advice Michael as to whether he may be liable for any loss suffered by Mainland Bank. (b) Advice Michael as to his potential liability, and possible defences, under the Companies Ordinance if his audit report is included in a prospectus when TSRL is applying for its listing on the Stock Exchange Hong Kong. (Total: 20 marks) Page 7 of 10

8 5. Carmen has been the company secretary of Sunny Day Ltd (SDL) since its incorporation in The company s articles of association provide that Carmen was to be appointed as SDL s company secretary for life and she should not be removed from office except for misconduct. However, early this week, Carmen had a serious quarrel with Pamela, the CEO of the company, who then proposed removing Carmen as SDL s company secretary in the forthcoming board of directors meeting. (a) Explain to Carmen as to the contractual effect of a company s articles of association under the Companies Ordinance. (b) Advise Carmen as to whether Pamela is entitled to remove her as SDL s company secretary. (Total: 20 marks) Page 8 of 10

9 6. The new Companies Ordinance (Cap. 622), which consists of 921 sections and 11 schedules, provides a modernised legal framework for the incorporation and operation of companies in Hong Kong. Part 4 of the Ordinance substantially changes some out-dated rules governing share capital of companies in Hong Kong. (a) Explain THREE major changes introduced by Part 4 (Share Capital) of the new Companies Ordinance (Cap. 622), e.g. the new mandatory no-par system, concepts that were abolished as a result of this new no-par system, etc. (12 marks) (b) Explain the information which a company is required to include in a statement of capital under the new Companies Ordinance (Cap. 622). (8 marks) (Total: 20 marks) End of Examination Paper Page 9 of 10

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