Hong Kong Corporate Law November 2004 Suggested Answers

Hong Kong Corporate Law November 2004 Suggested Answers Section A a. All registered companies are bound to compile accounts (s 121) to have their accounts audited (s 141) and to file an annual return at Companies Registry (s 107). The additional requirement applying to a public company is that its accounts must be filed along with its annual return (s 109(3)). For these purposes accounts include the balance sheet which was laid before the company at its AGM, and documents required to be attached to the balance sheet the profit ad loss account, a copies of the auditors report and the directors report. b. The Securities and Futures Ordinance Part XV requires directors and chief executives of listed companies to disclose their interests and dealings in shares, short positions and in debentures. There is no notifiable percentage before disclosure is required and all interests and dealings must be notified to the listed company concerned and to the SEHK. This duty of disclosure extends beyond their own interests to the interests of their families. Directors are taken to be interested in the shares, short positions and debentures in which their spouse or child under 18 years of age is interested (except if the spouse or child is a director is their own right). c. Every registered company is required to have a company secretary and, except in the case of a private company having one director, the company secretary may also be one of the directors (s 154). Thus, Bob s appointment as both director and company secretary is valid. The Companies Ordinance does however impose one limitation on this dual role; if the company s own articles, or any other provision, authorizes or requires a thing to be done by or to a company secretary and a director, it is not satisfied by the same person acting in both capacities (s 154B). d. 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, or to have some other equivalent qualification or experience indicating that he is capable of discharging the functions of a company secretary. Whether Bob will be able to continue therefore depends on the qualifications and experience. e. The Companies Ordinance (s 40) provides that a person who is a director of the company at the time it issues a prospectus is liable to compensate a person who subscribes for any shares on the faith of the prospectus and suffers loss by reason of that statement. Thus directors may be personally liable to pay compensation to a subscriber. But the CO also provides a number of defences; for example if a person having consented to become a director withdraws his consent before the prospectus is issued and it is issued without his authority or consent, or he had reasonable grounds to believe, and did up to the time of allotment believe that the statement was true. 1

f. Where a prospectus includes a statement which purports to be made by an expert, it cannot be issued unless he had given his written consent to the statement s issue in the form and content in which it appears in the prospectus (s 38C). A person who has given his consent in accordance with this provision is only liable in respect of any untrue statement purporting to be made by him as an expert. He is not otherwise regarded as a person who authorised the issue of the prospectus. g. There are no specific requirements in either the Companies, or Table A for calling a meeting of a company s board of directors. Table A, reg 100 provides that a director may summon a meeting of the directors, that the company secretary must do so on the requisition of a director, and that it is not necessary to give notice to any director who is absent from Hong Kong. In deciding whether notice of such a meeting is sufficient the court will have regard to all the relevant circumstances, including whether notice has been given sufficiently early to enable a director to attend: Broadview Commodities Pte Ltd v Broadview Finance Ltd (1983). If short notice is given with the intention of excluding certain person from attending it will be invalid: Yick Hok Wing v Chan Yook Ming (1997). h. If a provision in a company s articles provides for calling an AGM by less than 21 days notice, such a provision is void (s 114). Thus a minimum of 21 days notice is required for calling an AGM. In calculating the 21 day period the day of posting, the day of deemed receipt and the day of the meeting itself are excluded: SFC v Stock Exchange of Hong Kong Ltd (1992). Where a notice is sent by post it is deemed to be effected by property addressing prepaying and posting a letter containing the notice, and to come into effect 48 hours after posting, Table A, reg 135. An AGM may be called by less than 21 days notice if agreed by all members entitled to attend and vote at the meeting (s 114(3)). i. In respect of sending out notice of its AGM, besides the agenda, explanation of the purpose of the resolutions proposed to be passed at the meeting and of relevant material interest of directors in so far as the resolution affect those interests differently from the interest of other members (s 155B), the company is required to send the accounts balance sheet, profit and loss account, director s report ad auditors report to all person entitled to receive the notice. Consideration of the accounts is part of the ordinary business of the AGM (s 129G). In the case of a listed company, the person who are entitled under to receive copies of the accounts under s 129G now have the option of receiving a summary financial report (s 141CA). The notice should also include a statement that a member entitled to attend and vote is entitled to appoint a proxy and include a form / instrument for so doing. j. If WAX Ltd AGM is not quorate, Table A, reg 55 provides that no business can be conducted. A quorum of members must be present when the meeting proceeds to business and continue to be present until the conclusion of the meeting. If within half an hour of the time appointed for the meeting a quorum is not present the meeting will stand adjourned to the same day, time and place in the next week (or otherwise as the directors may determine). If at the adjourned meeting a quorum is also not present within half an hour of the time appointed for the meeting, the members present will be a quorum, Table A reg 56. 2

Section B Question 2 (a) Presently Paul is carrying on business as a sole trader. Given the size of his business and the fact that he wants to expand he should register as a company limited by shares as a means to separate his personal wealth from the business. As a sole trader, if the business is sued for a sum which is greater than the value of the business assets then the party suing may look to Paul s personal assets to recover his entitlement. Paul could face bankruptcy if these combined assets are insufficient. If Paul forms a company limited by shares, then even if the company is would up and is unable to pay its debts, He and any other members will not be liable for those debts. Their liability is limited to the nominal value of their shares; if they have paid for their shares there will no further liability. The Companies (Amendment) Ordinance 2003, which came into effect in February 2004, permits the formation of a one person company. Prior to this date, if Paul had incorporated he would have needed to allot at least one share to some other person. Given that a company may now be formed by one or more persons, for any lawful purpose, Paul s desire to have total ownership and the advantages of limited liability Paul should be advised to register his business as a company limited by shares and to be the company s sole member. The Companies (Amendment) Ordinance 2003 also permits a private company having one director. Paul s desire to have total control can thus be realized but the Companies Ordinance does require a sole director to provide the company with a written record of the decisions that he makes which would otherwise have been made in a meeting of directors, within 7 days. The record must be kept in a book for that purpose in the same way as minutes of proceedings of directors meetings (s 153C). (b) The issue of shares, whether they are voting or non voting, will serve to grant membership / a shareholding of the company. But, the issue of non voting shares will ensure that Paul retains total control. The issue of shares to employees will not affect the status of the company, it will be a private company whatever the number of employees or former employees who are shareholders they are excluded for the purposes of the restrictions applying to private companies imposed by s 29. (c) A registered company is required to have a common seal that is a metallic seal on which its name is engraved in legible characters (s 93). Table A, reg 114 provides that every instrument to which the seal shall be affixed shall be signed by a director and by the secretary or by a second director or by some other person appointed by the directors for that purpose. The extent to which a company uses its common seal, and the procedures to be followed in so doing are, for the most part, matter for each company to determine. The Companies Ordinance provides only that if the law requires a contract between individuals to be in writing and under seal (ie a deed) it may be made on a company s behalf in writing under the common seal of the company (s 32). The Conveyancing and Property Ordinance, s 20, provides that in respect of conveyancing documents, a 3

deed which purports to bear the company s seal, affixed in the presence and attested either by the company secretary and a member of its board of directors, or by two members of the board of directors, is deemed to have been duly sealed. A company may also have a seal dedicated for sealing share certificates and other securities (s 73). In practice such seals are used by private companies but in the case of a public company which is listed, sealing securities would be unworkable. Question 3 (a) The content and effect of the capital clause: this clause of the memorandum must specify the total amount of capital that the company may raise by the issue of shares, ie its authorized capita, the division of that capital and the nominal value of each share. There is no provision requiring the amount to be in Hong Kong dollars. The memorandum does not usually include details as to the rights of different classes of shares class rights are usually set out in the articles or the terms of issuing the shares as determined by the directors or the shareholders. If they are stated in the memorandum this will affect the power to vary such rights (see part (b)). (b) Variation of the nominal value of the shares will certainly vary depending on whether or not the shares have been issued. Unissued share capital can be altered in accordance with s 53-55: if authorised by its articles the company may by ordinary resolution increase its authorised share capital, consolidate or divide all or any of its shares into shares of a larger nominal value, convert its fully paid shares into stock, subdivide its shares into shares of a smaller nominal value or cancel shares which have not been taken or agreed to be taken. Thus, if the company states a certain nominal value in its original memorandum it would subsequently be possible to vary that amount by consolidating or subdividing the nominal value but this provision does not apply to shares which have already been issued and does not facilitate the creation of a new class of share capital. Issued share capital can only be varied in accordance with ss 63A-64. If the terms of issuing the shares specify how their rights may be varied, such a provision must be complied with. Where there is no such provision, the method of variation depends on where the class rights are laid down. If the terms of issue are specified in the memorandum, the rights may be varied if all members of the company agree. If the terms of issue are specified in the articles or in a contract, the articles are deemed to contain a provision that the rights may be varies with the written consent of the holders of 75 per cent in nominal value of the issued shares of the class, or with the sanction of a special resolution passed at a separate class meeting. Where a variation is approved by a proportion of shareholders or the passing of a resolution, the holders of not less than 10 per cent in nominal value of the issued share of the class may apply to the court to have the variation cancelled. The variation can then have effect only if confirmed by the court. 4

Question 4 The Companies Ordinance lays down certain restrictions on the person who may be appointed as directors of companies. There is a minimum age requirement 18 years of age (s 157C), and a person who is an undischarged bankrupt may only act as a director with the leave of the court by which he was adjudicated bankrupt (s 156). If the company s articles require a director to hold a specified share qualification, it is his duty if not already qualified to qualify within 2 months after his appointment or a shorter time if specified by the articles (s 155). If the director does not obtain the qualification in accordance with the articles or s 155, the office of director is vacated and the person concerned may only be reappointed if he has obtained the share qualification. He is also liable to be fined for each day on which it is proved that he acted as a director and was unqualified. The company s own articles may also restrict the persons who can be appointed as a director. The grounds for disqualification contained in Table A, reg 90 which are additional to those described above are: Becomes of unsound mind Becomes bankrupt or makes any arrangement with his creditors Resigns from office in accordance s 157D, or Has been absent for more than 6 months from meetings of the directors held during that period without the permission of the directors. The company s articles may include other or different grounds for disqualification. The company may also alter its articles and thus change or vary the grounds. The court may disqualify a person from acting as a director. Part IVA of the Companies Ordinance provides four principle grounds on which the court may make such an order: Conviction of an indictable offence in connection with the promotion, formation, management, receivership or liquidation of a company or any other indictable offence which involves a finding that he acted fraudulently or dishonestly (s 168E) Persistent default in relation to provision of the Companies Ordinance requiring any return, account or other document to be delivered to the Registrar (s 168F). three or more convictions for such default in the previous 5 years will be deemed persistent default Fraud if in the course of winding up it appears that any officer of the company, the liquidator or a receiver has been guilty of fraud in relation to the company, or if it appears that he has been guilty of fraudulent trading under s 275 even if he has not been convicted (s 168G) Unfitness the court is required to consider the conduct of any person who has been or is a director of a company which at any time has become insolvent, to determine whether his conduct makes him unfit to be concerned in the management of a company. The court may consider his conduct in relation to that company alone or together with his conduct of as a director of any other company (s 168H). A company is insolvent for the purposes of this provision if it goes into liquidation when its assets are insufficient for the payment of its debts or a receiver is appointed. 5

Schedule 15 provides matters for determining the unfitness of directors; they include breach of fiduciary duty or other duty in relation to the company, misapplication or retention of the company s money or other property, failure to account for the company s money or property, failure to comply with the requirements of the Companies Ordinance with regard to keeping registers and making and filing an annual return. Question 5 As a general rule a company may not purchase or subscribe for its own shares: Trevor v Whitworth (1887). Section 58(1A) reinforces this principle a company may however purchase its own shares in accordance with ss 49B-S. Section 49B provides that, if authorised by its articles, a company may buy back its own shares provided it does not result in the company s capital comprising only redeemeable shares. The following rules must also be followed: - the shares must be fully paid, - the buyback must generally be financed out of distributable profits or the proceeds of a new issue of shares - the shares bought back must be cancelled - the company s issued share capital will be reduced by the nominal value of the shares which are bought, and - the buy back does not reduce the company s authorised capital; the company has power to issue shares up to the nominal value of the shares bought back. There are however specific requirements for listed companies. A listed company may purchase its own shares under a general offer, on the SEHK or otherwise. A general offer is an offer to all members to a company or all members holding shares of a certain class on terms which are the same for all those members. It appears from that question that such an offer is not being proposed the buying back of shares as a means to stimulate interest in the shares is a buy back of a limited number of shares on the stock market. A market purchase requires the approval of the company in general meeting and notice of the terms of the proposed purchase must be sent to members with notice of the relevant meeting. Such authorisation will remain valid until the company s next AGM, when it may be extended until the date of the next AGM. If the company proposes to buyback by any other means, for example to buy back from a particular shareholder, then a special resolution is required. If the company buys back the shares out of profits there will be a reduction of the company s issued share capital. To make good the reduction an amount by which the company s issued share capital is reduced must be transferred to the capital redemption reserve. This reserve maintains the company s share capital and is treated as paid up share capital. A public placing is an invitation made to the general public through placing agents / brokers of the SEHK. The placing agents will sell the shares to clients at the issue price plus brokerage commission of x per cent. The shares are not allotted to the placing agent; he acts purely as an agent for the company and is not committed to taking up all the shares. 6

As a general rule the company will need to prepare a prospectus whenever it offers its shares to the public. Thus a public placing, as distinct from a direct offer from the company to the public, will not avoid the prospectus requirements of the Companies Ordinance (s 38 and Schedule 3). However, certain exemptions apply, for example, if the prospectus offers shares to professional investors the 3 rd Schedule requirements and the requirement to produce the prospectus in both English and Chinese do not apply the prospectus must still be registered in accordance with s 38D but this exemption substantially reduces the costs of the placing. Question 6 (a) Receivership occurs when a company has failed to repay a secured loan in accordance with the terms of the loan agreement. The secured creditor may then exercise his rights under the security and appoint a receiver. His function is essentially, to sell (realise) the assets which comprise the security, to distribute the proceeds of sale to the creditor in satisfaction of the balance of the loan. Any surplus or unrealised assets will be returned to the company. The company may then continue with its business. Thus when the receiver appointed by the Bank has realized the Bank s security and paid the Bank the amount it is owed the company will then be able to proceed with its business and it will no longer be in receivership. (b) XZi Ltd may petition for a winding up order on the grounds that AB Co Ltd is unable to pay its debts (s 177). The amount owed must be $10,000 or more and the section requires that a demand is made to the company for payment. If the demand is not met within the following 3 weeks the company is deemed to be unable to pay its debts (s 178). There have been several attempts to introduce legislation which would allow a company which has financial difficulties some time to re-organise its debts free from the threat of creditors petitioning to wind up. But presently there is no means to protect a company which is already in receivership from a winding up petition. (c) Under s 228A the directors of a company, or a majority if there are more than two, form the opinion that the company cannot, by reason of its liabilities, continue its business, they may resolve at a meeting of directors that: - the company cannot by reason of its liabilities continue its business - they consider it is necessary that the company be wound up and that it is not reasonably practicable for the winding up to be commenced under another provision of the Ordinance - that meetings of the company s shareholders and creditors will be summoned to be held not later than 28 days from filing the winding up statement. One of the directors must sign the winding up statement certifying their resolution and deliver it to the Registrar. To be effective it must be delivered to the Registrar within 7 days of being made. The directors must also appoint a person to be the provisional liquidator. (d) The essential differences between a members voluntary liquidation and creditors voluntary liquidation are: 7

- a members voluntary liquidation requires a Certificate of Solvency; the directors or a majority of the if there are more than two, may, at a meeting of directors, issue a certificate of solvency to the effect that they have made a full enquiry into the affairs of the company and they have formed the opinion that the company will be able to pay its debts in full within a maximum of 12 months from the passing of the special resolution. - in a members voluntary liquidation the members will appoint the liquidator whereas in a creditors voluntary liquidation the creditors choice will prevail. 8