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 DECEMBER 2010 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 10:00a.m. Page 1 of 10

2 Case list for candidates reference 1. Agnew v Commissioners of Inland Revenue [2001] 2 AC Re Brightlife Ltd [1987] Ch China Ocean Shipping Co v Mitrans Shipping Co Ltd [1995] 3 HKC Ebrahimi v Westbourne Galleries Ltd [1973] AC Finedon International Ltd. v. Profit Chart Industries Ltd [2002] 3 HKLRD Gilford Motor Company Limited v Horne [1933] 1 CH King Pacific International Holdings Ltd v Cheung Yiu Wing [2002] 3 HKLRD Re Opera Photographic Ltd [1989] BCLC Re Piccadilly Radio plc [1989] BCLC Re Taiwa Land Investment Co. Ltd. [1981] 1 HKLR Salomon v Salomon and Company Limited [1897] AC Tett v Phoenix Property and Investments Co Ltd [1984] BCLC Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch Waddington Ltd v Chan Chun Hoo Thomas [2006] 2 HKLRD Woolfson v Strathclyde Regional Council 1978 SC (HL) Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 Page 2 of 10

3 SUBJECT NO 12M HONG KONG CORPORATE LAW DECEMBER 2010 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 1 December 2010 Time allowed: 3 hours SECTION A (Compulsory answer ALL questions in this section.) 1. (a) Under the Companies Ordinance, what information must be covered by the proper books of account? (b) (c) Under what circumstances can a company be deemed insolvent for the purposes of winding up by the court? Danny intends to form a non-profit limited company to promote arts called Visually Danny, without using Limited or Ltd as part of the name. Can Danny use the proposed company name? (d) At a general meeting, does a proxy enjoy the same rights as the member who appoints him? (e) Who is a reserve director? Page 3 of 10

4 (f) Describe the contents of the document that must be prepared by the board of directors in order to enable a company to enter into a members voluntary winding up. (g) (h) What is a double derivative action? Explain the rule in Foss v Harbottle. (i) A Ltd was found to have entered a 15-year contract in 1996, which was beyond its object clauses.. Explain the validity of the contract. (j) Explain what a pre-incorporation contract is and discuss whether it is binding on a company after its incorporation. (Total: 40 marks) Page 4 of 10

5 SECTION B (Answer THREE questions from this section) 2. Close friends Karen and Betty formed a partnership selling health food soon after their graduation. In 2001, they incorporated the partnership to a company, F Ltd. They were equal shareholders and the only directors of the company. John, Karen s husband, invested in the company and became a shareholder last year, with Karen, Betty and John each holding equal shares in F Ltd. Over time Karen and John have become tired of Betty holding the company back with her conservative business approach, and they removed her from the board in accordance with the articles of association of F Ltd and the Companies Ordinance. Betty is very unhappy about her removal, feeling that she has been betrayed by an old friend. REQUIRED: Advise Betty what legal action she can take based on her removal from the board. (Total: 20 marks) Page 5 of 10

6 3. Owen, the largest shareholder and only director of M Ltd, is considering retiring. Ian and Terry hold 11% and 9% of the shares in M Ltd respectively. Ian has convinced Owen that he is the best person to be his successor. As a result, Owen agrees to sell all his shares to Ian, despite knowing that Terry will be unhappy about this. The relevant clause of the articles of association provides that: A share may be transferred by a shareholder to any shareholder or outsider selected by the transferor. No share shall be transferred to an outsider so long as any shareholder is willing to purchase the offered shares at a fair price. Should there be more than one shareholder who is willing to buy, the said shares should be offered to them equally. REQUIRED: (a) What are the legal consequences if Owen transfers ALL his shares to Ian in breach of the articles of association and registers Ian as the shareholders of those shares? (7 marks) (b) Ian is worried that even if he secures voting control over the company (no matter whether he takes up all or half of Owen s shares), a frustrated Terry may cause him trouble by not showing up at subsequent annual general meetings (AGMs) since the quorum is set at two. Advise Ian how he can make sure that subsequent AGMs can be validly conducted. (13 marks) (Total: 20 marks) Page 6 of 10

7 4. Ken was the former head of research and development of P Ltd. His employment contract with P Ltd has a valid restrictive covenant under which Ken could not solicit the clients of P Ltd for his personal business. Ken urged his friend, Rick, to employ him as a personal assistant and to set up a company to compete with P Ltd. As a personal assistant, Ken accompanied Rick to solicit the clients of P Ltd. Rick has relied on Ken so much that he always asks Ken for his advice on important decisions and usually follows this advice. In fact, Rick always introduces Ken to the employees as a director. In order to reward Ken without breaching the restrictive covenant, Rick s company made a substantial interest-free loan to Ken with no repayment schedule. REQUIRED: Advise Ken whether he can avoid the restrictive covenant through this arrangement, and what procedures should be followed under the Companies Ordinance before Rick s company can provide a loan to him. (Note: Candidates are only required to advise on company law matters and NOT on employment law issues.) (Total: 20 marks) Page 7 of 10

8 5. G Ltd was ordered to be wound up by the court on 1 June 2010 because of its inability to repay debts. The court appointed Helen as the liquidator of G Ltd. When Helen reviewed the company s accounts and documents, she found that on 1 December 2008, G Ltd transferred its office premises to H Ltd at an undervalue and then leased them back at rent over the market value. However, the company s records do not reveal the fact that H Ltd is owned by some of the directors of G Ltd. In Helen s opinion, the sale and leaseback arrangement is the key reason leading to the downfall of G Ltd. REQUIRED: Advise Helen of what legal action, if any, she can take against the directors of G Ltd and in respect of the transactions between G Ltd and H Ltd. (Total: 20 marks) Page 8 of 10

9 6. Bank A provided a loan to D Ltd on the condition that the company provides security by way of a fixed charge on all its present and future accounts receivable. The loan contract states that D Ltd must not sell its accounts receivable and it must deposit the moneys which it may receive in respect of the accounts receivable into a designated bank account. D Ltd may withdraw money from the designated account for ordinary business use. It has been revealed that the charge was not registered with the Companies Registry within the required time limit. REQUIRED: Explain whether the charge created is a fixed charge or floating charge in law. Advise Bank A of the legal consequences under the Companies Ordinance of the failure to register a charge, and discuss what can be done to protect the bank s interests under the charge. (Total: 20 marks) End of Examination Paper Page 9 of 10

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