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 2012 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 9:15a.m.- 9:30a.m. 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 Brown v British Abrasive Wheel Company [1919] 1 Ch Caparo Industries plc v Dickman [1990] 2 AC Donaldson Investment v Anglo Transvaal [1979] 3 SA Greenhalgh v Arderne Cinemas Ltd [1950] Ch Guang Xin Enterprises Ltd. (In liquidation) v Kwan Wong Tan & Fong (A firm) [2002] 2 HKC Hedley Byrne and Co Ltd v Heller and Partners Ltd [1963] 3 WLR Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D Regal Hastings v Gulliver [1942] 1 All ER Re Taiwa Land Investment Co. Ltd. [1981] HKLR Re Tai Lap Investments [1999] 3 HKC Royal British Bank v Turquand (1856) 6 E & B Salomon v Salomon and Co. Ltd. [1897) AC Sidebottom v Kershaw Leese and Co Ltd [1920] 1 Ch Smith (Administrator of Cosslett (Contractors) Ltd.) v Bridgend Courty Borough Council [2002] 1 All ER Yue Xiu Finance Co. v Dermot Agnew [1996] HKC 122. Page 2 of 10

3 SUBJECT NO 12M HONG KONG CORPORATE LAW DECEMBER 2012 The examination paper is divided into TWO sections. Section A is a case study with compulsory questions which 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 5 December 2012 Time allowed: 3 hours SECTION A (Compulsory answer ALL questions in this section. All questions are related.) Hong Kong Natural Rubber Ltd. (HKNRL) is a private company incorporated in Hong Kong trading under the name Woolala Rubber. HKNRL adopted Table A as its articles of association and had an objects clause to import natural rubber from Brazil and resell it in Hong Kong. The articles of HKNRL also provided that the managing director of HKNRL was only authorised to borrow up to $1 million on behalf of the company. Any loan exceeding $1 million had to be approved by an ordinary resolution in a general meeting. Peter owned 25% of the issued share capital of HKNRL and Jody owned the remaining issued shares. Peter and Jody were the only two directors of HKNRL while Jody was also the managing director of HKNRL. In an attempt to protect HKNRL from the rising exchange rate of the Brazilian real (R$, the official Brazilian currency), Jody, without discussing the matter with Peter, entered into some derivative transactions under which Hong Kong Investment Bank (HKIB) would make payments to HKNRL when the R$ exchange rate was high and HKNRL would make payments to HKIB when the R$ exchange rate fell below an agreed level. From , the R$ exchange rate rose and HKNRL received a huge amount of payments from HKIB. Most of these payments were paid to Jody as his bonus for his good performance according to his employment contract with HKNRL. However, in August 2012 the R$ exchange rate began to fall and eventually collapsed, meaning that HKNRL was required to make payments to HKIB. As HKNRL was in financial difficulty, Jody decided, on behalf of HKNRL, to borrow $5 million from Kowloon Bank (KB) which was subsequently paid to HKIB, without passing any ordinary resolution. HKNRL made the requisite payments up the November 2012 but failed to make any further payments. HKIB then brought legal proceedings against HKNRL to recover the sum due, but HKNRL alleged that the derivative transactions were not binding as it had not had the capacity to enter into these derivative transactions according to its objects clause, which stated that the main business of HKNRL is to import and resell natural rubber. Page 3 of 10

4 As HKNRL s financial position did not improve, Jody decided to wind the company up. When HKNRL entered into creditors voluntary liquidation, Peter found that Jody had permitted Jody Rubber Ltd. (JRL) to trade as Woolala Rubber at a time when HKNRL had also been trading under that name without requiring any payment from JRL for its use. It was found that Jody was the majority shareholder of JRL. Peter also found that Jody had caused HKNRL to pay him an excessive bonus for his good performance as the managing director of HKNRL since As a result, no dividend had been declared since When Peter found out about the loan agreement between HKNRL and KB, he wanted to challenge the agreement on the ground that Jody was not authorised to sign any loan agreement exceeding $1 million without an ordinary resolution. It was also found that just before HKNRL was wound up, Jody had caused HKNRL to transfer its business and its goodwill in the name Woolala Rubber to JRL for only $50,000, which was only enough to pay the liquidation fee. (a) Advise HKIB as to whether the derivative transactions between HKIB and HKNRL were valid. (b) Advise HKNRL as to whether it may successfully sue Jody for any breach of his duty as a director of HKNRL by transferring HKNRL s business and goodwill in the name Woolala Rubber to JRL. (c) Advise KB as to the validity of the loan agreement between KB and HKNRL. (d) Advise Peter as to whether he may take any legal action under section 168A of the Companies Ordinance if HKNRL has not been wound up. (Total: 40 marks) Page 4 of 10

5 SECTION B (Answer THREE questions from this section) 2. Danny was an executive director of Fastest Internet Ltd. (FIL), a private company incorporated in Hong Kong which provided IT services. Andy had been engaged as FIL s auditor for many years. Recently, Danny found that Andy had failed to report alleged accounting irregularities to him and failed to advise him of any financial uncertainty at the company. Danny also suspected that Andy had removed some adverse comments from his final audit report without giving reasons. As a result of these omissions, FIL got into serious financial difficulty and Danny lost his job as an executive director of the company. (a) Advice Danny as to whether he may take any legal action against Andy for his breach of duty as an auditor of FIL. (13 marks) (b) Advice FIL as to the proper procedures to remove Andy as the auditor of the company. (7 marks) (Total: 20 marks) Page 5 of 10

6 3. Catherine has recently been appointed as a company secretary of High Tech Computers Ltd. which adopted Table A as its articles of association. She was told that there were three classes of shares in the company: Class A, Class B & Class C. Class A shares and Class B shares are ordinary shares while Class C shares are 10% cumulative preference shares. Catherine was also told that Class A shares have five votes per share while Class B shares have only one vote per share. Class C shares have no voting rights. One of the Class B shareholders felt that this was unfair to all Class B shareholders and proposed reducing the voting power of Class A shareholders. However, Catherine does not understand the distinctions between the three classes of shares and the procedures to reduce the voting right of Class A shareholders. (a) Advise Catherine as to the distinctions between ordinary shares and preference shares. (b) Advise Catherine as to the proper procedures to reduce the voting right of Class A shareholders from five votes per share to one vote per share. (Total: 20 marks) Page 6 of 10

7 4. Daisy and Edwin are the two directors of Wonderful Life Ltd. On incorporation of the company in March 2012, Daisy, on behalf of the company, borrowed $2 million from Kowloon Bank. Clause 10 of the debenture provided that the company created a fixed charge over all existing and future book debts owed to the company and all monies paid to the company in respect of those debts. In October 2012, the company was in serious financial difficulty and had to pay its suppliers immediately. The company s accountant advised that the company should cease trading. However, Daisy and Edwin ignored the accountant s advice and borrowed a further $2 million from Hung Hom Bank at an extremely high interest rate, creating a floating charge over the company s book debts in favour of Hung Hom Bank. By December 2012, the company was unable to continue business and a petition was presented to wind up the company. (a) (b) Advise Daisy and Edwin as to whether they may be liable for the debts of the company. Advise the liquidator of the company as to the validity of the charges created. (Total: 20 marks) Page 7 of 10

8 5. Mandy is the secretary to the managing director of Sino Golf Ltd. (SGL), a company listed on the Hong Kong and Shanghai Stock Exchanges. In October 2012, when Mandy read one of her boss s s, she found that a major debtor of SGL, Pluto Corporation (PC), had filed for Chapter 11 bankruptcy protection in the United States. The also revealed PC s inability to pay its debt ($50 million) to SGL and that this would affect SGL s financial position and share price. Mandy immediately called her boy friend, Michael, and asked him to sell all his shares in SGL. Mandy also sold all her shares in SGL on the Hong Kong Stock Exchange and Shanghai Stock Exchange, before the market was made aware of the impact of PC s bankruptcy on SGL s financial position. In November 2012, SGL announced to the market a decline in net profit of 55%, attributing it partly to the bad debt provision of $50 million as a result of PC s bankruptcy. (a) (b) Advise Mandy and Michael as to whether they may be liable for insider dealing under the Securities and Futures Ordinance. (No need to discuss Chinese securities laws.) (12 marks) Explain to them, if they are liable for market misconduct under the Securities and Futures Ordinance, the penalties/ orders that may be imposed on them under the criminal and civil provisions of the Securities and Futures Ordinance. (8 marks) (Total: 20 marks) Page 8 of 10

9 6. Nancy had been the company secretary of King Development Ltd. (KDL), a private company incorporated in Hong Kong, for many years. Alex, the chairman of the board of directors of KDL, wanted Nancy to become a director and shareholder of the company. Alex told Nancy that the company could offer a loan to help her subscribe for shares in the company, but the company would only offer that loan if Nancy were successfully appointed as a director of the company. However, the articles of association of the company provide that all directors of the company have to be Hong Kong permanent residents: Nancy is currently not a Hong Kong permanent resident. (a) Advise Nancy as to how she may be appointed as a director of the company. (b) Assuming that Nancy is successfully appointed as a director of the company, advise KDL as to the proper procedures which should be followed in providing the loan to Nancy. (Total: 20 marks) End of Examination Paper Page 9 of 10

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