- The issue is whether Lorain is entitled to petition to the court on grounds that the affair of Pichon was conducted in a manner unfairly prejudicial to the interest of the members. Section 724 states that members who have suffered as a result of the affairs of the company being conducted in a manner which is unfairly prejudicial to the interests of the members of the company generally or part of its members( including him/herself) can apply by petition to the court for an order under the section. The scope of unfair prejudice extends to proposed omissions and acts that may happen in the future that are likely to be prejudicial to the interests of the members. As held in Re Ocean Palace Restaurant & Nightclub Ltd, the petitioner presenting for relief must be a member but there is no requirement requiring him or her to have any beneficial and legal interest. Lorain must show that Vienna is using his greater voting power in a manner which does not enable her to enjoy a fair participation in the company’s affairs, Lorain must show that Vienna’s conduct departs from accepted standards of fair play which amounts to discrimination against the minority, and this is as held in Re Taiwa land Investment Co Ltd. In this case, Lorain is entitled to petition on the grounds that the affairs of Pichon are conducted in a manner unfairly prejudicial to the interest of the members because Vienna claimed that all of the Pichon’s commission income of about $ 100m earned in the current year should in the account of Vienna Property Agency Ltd (‘VPAL’) of which Vienna is interested in as the company’s sole shareholder and director on the ground that those commission income was derived by the effort of VPAL and her.
- The issue is whether Lorain can apply to the Financial Secretary or the Court for appointing an inspector to inspect the affairs of Pichon and VPAL. The objects of appointing an inspector to investigate the company’s affairs include: to assist the members in instances where the management has failed to disclose information about the company and in instances where the majority shareholder has abused their power and as a result of abuse of power, he/she has injured the interests of other members. In this instance, Vienna, as the majority shareholder, has abused his power and the result of his actions have injured the interests of Lorain. Therefore, Lorain can apply to the Financial Secretary for appointing an inspector to inspect the affairs of Pichon and VPAL. According to section 840(2) of the Company Ordinance, Lorain must hold shares of at least 10%, in this instance, Lorain hold 40% of the shares and Lorain’s claims must be supported by evidence to show that she has good reasons for requesting the investigation and that she is acting in public interest. In conclusion, Lorain can apply because, Vienna, who is the majority shareholder, conducted himself in a way that his actions affected the interests of Lorain, who is the minority shareholder.
- The issue is to discuss and evaluate the legal issues in respect of director’s duties owed by Vienna to Pichon. A director has the duty to act in good faith in promotion of the success of the company for the benefit of the company and of its members by considering the consequences that his/her actions are likely to cause in the future, by considering the interests of the employees of the company and by acting fairly between the members of the company. In this case, Vienna failed to act in good faith for the success of Pichon Property Company as he claimed that Pichon’s commission income of about $ 100 m earned in the current year should be recorded in the account of Vienna Property Agency Ltd, of which he was interested in as the company’s shareholder and director.
Secondly, a director of a company has a duty to avoid a situation in which she/he has an indirect or direct interest that may conflict or conflicts with the interests of the company. In this case, Vienna’s interests conflicted with the interests of the company. Thirdly, a director has responsibility to prepare and present financial statements this is as per section 379 of the Company Ordinance, he/she has the responsibility to keep the accounting records at its registered office or at any place the directors think fir, and be open to inspection by the directors, directors who fail to take all reasonable steps to secure compliance commit an offence. In this case, Vienna failed to prepare and present financial statements and to keep accounting records at its registered office because Lorain discovered losses in the financial statements of Pichon. Further, Vienna was not accountable and did not carry out business for the benefit of Pichon Company as he claimed that the benefits acquired were as a result of his efforts and those of VPAL. Lorain can demand Vienna and VPAL to account for all the income and benefits conferred on her and/or VPAL because Vienna did not prepare and present financial statements and he carried out the company’s business with regard to his own interests.
QUESTION TWO
- Explain the principle of separate legal entity. The principle of separate legal entity means that if a company is incorporated in Hong Kong be it a private limited company or a public company, it must meet the standard conditions set out in s. 11, that it is a separate entity from its members and director that means that the company is not an agent of its directors or its members; as a natural person: the company can enter into contract and hold properties; the management and business of company is overseen by Board of Directors, if a Director is delegated to act on behalf of the Board, he/she can be considered an agent of the Company. As held in Salomon v Salomon, a company is a separate legal entity from its shareholders, employees, directors and agents and that it can be sued in its name and own assets separately from the shareholders of the company.
- The issue is whether Apple Ltd can recover the outstanding debt of HK $ 20m owed by Orange Ltd, by asking the court to lift up the veil of Orange Ltd and/or Mango Ltd. The answer is yes, Apple Ltd can recover the outstanding debt. In Liu Hon Ying v. Hua Xin State Enterprise, another company D, was formed to take over the business of C so as to avoid the debt owed by C to P. C and D ran the same business, they had the same offices, staff, customers, equipment and telephone number. P claimed that the corporate veil ought to be lifted. The Court held that the veil of incorporation should be lifted in such cases. In this case, Mango Ltd was formed so that Orange ltd. Could avoid the debts, in this case the veil of incorporation ought to be lifted so that Apple Ltd can recover its outstanding debt.
- (1) The question is what unfair preference is. Unfair preference is a situation where a company pays its debts or transfers its assets to a creditor shortly before becoming insolvent. Section 50 of the Bankruptcy Ordinance states that a company gives unfair preference to a person if that person is one of the company’s surety, guarantor, creditor for any of the company’s liabilities and debts and if the company does anything or permits anything to be done which has the effect of putting that person in a position, should the company go into insolvent liquidation, he/ she will be in a worse situation. The test that is applied is a subjective test. In Fairway Magazine Ltd v. Hartigan, it was held that the company was influenced by commercial consideration and not the desire to prefer himself. In this case, Mr. Orange was motivated by the desire to prefer himself therefore, the liquidator shall intervene.
(2) The issue is what type of winding up of Orange Ltd is available and its effect on Apple Ltd. The type of winding up is on just and equitable grounds. In Re TE Brinsmead and Sons, a company was formed to pass off the pianos of well-established firm, it was held that the company can be wound up on just and equitable terms because it was formed for a fraudulent purpose. In this case, the company was formed for fraudulent purposes, it can therefore be wound up equitable and just grounds. The effect of winding up Mango Ltd is that the company will appoint a liquidator to evaluate the assets of the company, Apple Ltd. Will be refunded its debts owned by Orange Ltd.
(3). Apple shall take a voluntary winding up action subject to section 228 of the Company Ordinance, which requires creditors to institute winding up procedures in case the company owes them and it is about to be insolvent.
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