COMPANY LAW

July 5, 2023

QUESTION ONE

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The move by Tara and Suzie to cast a vote to remove Uma from the position of director was unfair and prejudicial. Consequently, in the spirit of protection of minority shareholders, Uma is entitled to a remedy for the prejudice suffered therefrom. Although the procedure adopted by Tara and Suzie was lawful, being removal of director by a majority vote, the outcome of this procedure was however in breach of Uma’s legitimate expectations (Re RA Noble & Sons Ltd, 1983). The reasons advanced by Tara and Suzie were unreasonable. The fact that majority of the shareholders cannot get along with the minority shareholder and that the aggrieved minority shareholder does not work as hard as the rest of the shareholders cannot reasonably be advanced to justify their ultimate decision for removal. All directors of a company cannot be expected to work as hard as each other, what matters is that he directors are working hard enough faithfully to their fiduciary duty to the company.

An action by a company’s majority shareholders may be lawful but prejudicial and unfair nevertheless. This is particularly so, where the alleged act is in breach of legitimate expectations and results in an outcome that indicates bad faith (Re O’Neill v. Phillips, 1999). In this case, Uma’s removal followed the statutory legal procedure (Companies ordinance 2014, s 462 and s 463), by a majority vote. This notwithstanding, the reasons inspiring the decision were unreasonable in application of an objective test (Re RA Noble & Sons, 1983). As a result of this decision, the minority shareholder, Uma, was prejudiced. To this extent, having established both elements of unfairness and prejudice, Uma is entitled to a remedy.

Besides, Uma, is entitled to a remedy due to the company’s failure to pay reasonable dividends to him, being a shareholder. A company’s shareholders are entitled to a reasonable share of dividends according to the company’s ordinance. Uma can elect to sue the company for remedy in a personal action (Companies ordinance 2014, s 73). In addition to that, Uma can sue in a statutory derivative action, the majority shareholders for paying themselves substantial remuneration and perks without any commercial justification. The two are in breach of the fiduciary duty of making bonafide decisions in the interest of the company. The court in exercise of its wide discretion will award an appropriate remedy (Re Hammer Ltd, 1959). This can range from forcing the company to buy out the shares of Uma or regulating the conduct and management of the corporation.

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An offer by Suzie and Tara to buy out the shares of Uma will avail to Uma a reasonable alternative opportunity to obtain a remedy for the damages suffered as a result of the majority directors’ conduct. This would be a demonstration of good faith on their part hence the claim of damages on the ground of unfair and prejudicial conduct will not arise. However, this is contingent on whether or not Uma will accept the offer to sell the shares. He is not obligated to sell the shares. This conclusion follows from the fact that one of the remedies that a court may issue as a remedy for damage is a court order to force the company to buy out the shares of a minority shareholder where the minority shareholder suffers damage as a result of the company’s decision.

QUESTION TWO

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The issue is what action is available to the company in respect of the breach of duty imposed on directors to avoid a conflict of interest. A director of a company has an obligation to act in good faith for the company’s benefit. He/she should act honestly, exercise their director duties for a proper purpose while avoiding furtherance of personal gain or illegitimate purpose attainment. Also, a director of a company is under obligation while performing his duties to avoid acts or omissions that are in conflict with personal interests. Under section 536 of the Company Ordinance, should a director be faced with conflict of interest: he/she must disclose such to the board of directors, avoid undertaking that transaction or resign as director so as to avoid such conflict of interest. The duty to avoid conflict of interest extends to contracts which the directors enters into (Bell &Anor. v. Lever Brothers Ltd & Ors., 1932).  A contract that a director has personal interest that does not concur with company’s interest, the contract is voidable by the company and any profits acquired by the director may be regained by the company. In Regal (Hastings) v. Gulliver, the court adopted a strict approach stating that directors should not profit out of property acquired by reason of his relationship with the company in which he is a director. Pursuant to s. 537 of the Company Ordinance, if a director fails to disclose his interests, he will commit an offence and be liable for payment of fine (HKSAR v. Liu Kit Man, 2015). In this case, Liam acted in such a way that his personal interests conflicted with those of the company by entering into an agreement with Nelly Limited. According to Regal case and s. 537 of the Company Ordinance, Whirlwind Limited can impose a fine on Liam and obtain the HK $45 million profit that Nelly Limited acquired as a result of its contract with Whirlwind Limited.

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The procedure relating to removal of Liam as a director of Whirlwind Limited. Liam may be disqualified pursuant to s. 168F of Companies (Winding Up and Miscellaneous Provisions) Ordinance. S. 168F (1) states that the court may make a disqualification against a person if she/he is convicted of an offence in connection with acting dishonestly or fraudulently. A magistrate may disqualify a person for 5 years, a judge of the District Court may disqualify a person for 10 years and a judge of the Court of First Instance may disqualify a person for 15 years. In this case, Liam may be removed from position of director through the disqualification procedure.

QUESTION THREE

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Adrian, Celia, Emma and Francis shall bear civil and criminal liability for the offences of inside dealing and the losses suffered as result of their conduct (Securities and Futures Ordinance 2002, s 270). This offence occurs where a person being connected to a listed company, gains access to secret information as a result of the connection, and then trades in reliance of this information with view to make profit or evade incurring losses; or discloses this information to other third parties who ac in reliance of this information for a similar purpose. Celia is a primary insider being an employee of Best Limited, gains privy to secret information about Creative, counsels Adrian to deal in the shares of Creative. She makes the disclosure with full knowledge that the information is relevant and with reasonable believe that the person so counseled with deal with the shares in reliance of the given information. Celia and Emma are secondary insiders fitting within the statutory description [Securities and Futures Ordinance 2002, s270(1)(e) and (f)]. Francis despite not tipping any person to deal in the shares, dealt with the shares in reliance of the information he received knowing the same was coming from a person connected to the Creative.

Besides, Adrian shall be liable for the offence of disclosure of false or misleading information inducing transactions in relation to the second message posted. This offence is provided for in section 277 (Securities and Futures Ordinance 2002).  It occurs when a person discloses or disseminates information that is likely to induce sale of or subscription for securities of the listed company involved. It may also occur where the circulated information is likely to affect either positively or adversely, the market price of the securities of the company. For the conduct to amount to an offence, the disseminated information must be false or misleading as to the material fact, and the fact of falsehood or misleading must be known to the person circulating the information or the person is reckless or negligent as to the authenticity of the information so circulated [Securities and Futures Ordinance 2002, s 277(1)].

In his case, Adrian deliberately and maliciously circulated the second message knowing it to be false. The same was done in bad faith and designed to induce transactions related to Best Limited securities. This could lead to purchase and sale of shares or maintaining, stabilizing, increasing or reducing the prices of the Best shares. This was not done in the ordinary course of business and so Adrian cannot escape liability by dent of section 277 (2)(a) of the Securities and Futures Ordinance 2002.

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The penalties for the offences committed in (a) above are provided for in division 5 of the Securities and Futures Ordinance 2002. They shall upon conviction on indictment be sentenced to an imprisonment for 10 years’ maximum or pay a fine of $10.000.000; or on summary conviction liable to pay a fine of $ 1,000,000. This is for criminal liability. On civil liability, the defendants shall be liable to pay compensation by way of damages to any all persons affected for the pecuniary loss sustained (Securities and Futures Ordinance 2002, s 302). The loss to be compensated for is both where a person entered into a transaction on reliance of the information provided to his/her detriment.

QUESTION FOUR

  1. Nature and validity of the charges in favour of Wealthy Bank and Efficient Bank and their respective priority.

Efficient Bank’s charge over the building block of Victory Limited for HK $ 15 million is a fixed charge. A fixed charge attaches to assets that can be determined i.e. machinery, buildings, specific book debts etc. A fixed charge attaches immediately upon creation and registration of a charge. A fixed charge creates an obligation on the chargor to not deal with or sell the charged asset without the explicit consent of the chargee. The chargee of a fixed charge gets a higher priority. Wealthy Bank’s charge is a floating charge. The debenture states that “Victory Limited hereby charges all its stock and book debts to the bank and will hold all the proceeds on behalf of the bank in account number 050193 at Wealthy Bank and will not withdraw money from the account without first notifying the bank in writing.” A floating charge hovers over a group of assets (future or present) without being specific to a particular asset, it gives the chargor permission to use charged assets freely in the ordinary course of business. Chargee grants lower priority. In this case, Efficient Bank has a fixed charge whereas Wealthy Bank has a floating charge. Efficient Bank’s charge takes priority over Wealthy Bank’s charge.

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The issue is whether Ingress Limited can claim ownership of the parts of the proceeds or components of the sale from the liquidator, regardless of the charges granted by Victory Limited. The debenture agreement stated that “…… Further Victory Limited will not create any additional security over any of its assets in favour of any other creditor acting in priority or in pari passu with this charge without the prior consent of the Bank.” This clause that Wealthy Bank incorporated in the Agreement is a negative pledge clause. The negative pledge clause mitigates loss for Wealthy Bank. The negative pledge clause prevents subsequent creditors from having particular set of assets as security. Therefore, Ingress Limited can demand ownership of parts of the proceeds or of the components of that sale from the liquidator following the charges by Victory Limited have been settled.

REFERENCE LIST

Bell &Anor. v. Lever Brothers Ltd & Ors., 1932

HKSAR v. Liu Kit Man, 2015

Laws of Hong Kong, Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32

Laws of Hong Kong (China) (2002). Securities and Futures Ordinance No. 5 of 2002 Cap 571.

            Government Printer.

Laws of Hong Kong (China) (2014). Companies ordinance 2014 Cap 622. Hong Kong,

Government Printer.

Re O’Neill v. Phillips (1999) UKHL 24, WLR 1092.

Re RA Noble & Sons (clothing) Ltd (1983) BCLC 273.

Regal (Hastings) v. Gulliver [1942] UKHL 1

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