LAW OF COMPANIES

IN HONG KONG
THIRD EDITION
 LAW OF COMPANIES
IN HONG KONG
THIRD EDITION

Stefan HC Lo
BA/LLB (Hons 1), LLM, PhD (Sydney)
Deputy Principal Government Counsel (Ag), Civil Division
Department of Justice

Charles Z Qu
LLB LLM (NSW), PhD (ANU)
Associate Professor
School of Law, City University of Hong Kong

SWEET & MAXWELL

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 FOREWORD FROM THE FIRST EDITION

This is a major new work on Hong Kong company law whose appearance is highly
opportune and most welcome. Last year, the Companies Ordinance (Cap.622) was
enacted as the result of a reform process initiated by the Government's Companies
Ordinance Re-Write project. The new Ordinance has not yet entered into force but
is expected to do so on 3 March 2014. It will have an impact on many of the core
rules of company law, including rules on company formation, share capital, financial
statements and audits, schemes of arrangements and the regulatory and listing
regimes. The changes will also bear upon well-established doctrines including indoor
management, financial assistance and directors' duties, to name but a few.
With such a major reform in prospect, everyone concerned needs to know which rules
are to be abolished, which are new and which are unaffected. We need to know how the
new sections fit in with the old Ordinance and the existing case law. We will also wish
to know if any of the new rules are modeled on foreign statutory provisions and what
guidance can be gained from judicial decisions and legal literature in the jurisdiction
concerned.
This book is a valuable resource for addressing all of those questions. It is an ambitious
work taking the fom1 of a general textbook which integrates the new provisions into
the overall framework of company law. It is written with commendable clarity and
conciseness, well supported by citation and references, providing more detailed
exposition and analysis where appropriate. The chapters on directors' duties, members'
remedies and minority protection, corporate contracting and liability, which marshal
and discuss the case law of our Courts as well as relevant overseas authority, are good
examples.
The authors are to be congratulated on an admirable work which will be welcomed
by judges, legal practitioners, accountants, regulators, financial advisers, company
administrators and scholars alike.

Mr. Justice Ribeiro

Permanent Judge
Hong Kong Court of Final Appeal
November 2013
 FOREWORD FROM THE FIRST EDITION

I write this with my Academic Law teacher's hat on (as a former University Law
Professor and a current university external examiner for Law programmes). Most of
us of that ilk would say that there is not at the moment a satisfactory text on Company
Law for University Law students. Vanessa Stott's Hong Kong Company Law, now in
its 13'11edition (which is a testament to its success) is a useful introduction, but, as the
comments on the back cover of the book indicate, it is primarily aimed at students
for non-specialist and professional exams. So, naturally, it does not cover, or not in
any depth, the sorts of issues on which LL.B. teachers like to set exam questions. The
book by Philip Smart and colleagues at the University of Hong Kong, Hong Kong
Company Law: Cases, Materials and Commentary, 1997, gave an in-depth analysis of
such issues and was much valued by university teachers of Company Law, but with the
sad death of Philip Smart in 2008, it seems unlikely that there will be another edition
of the book. Paul Kwan's Hong Kong Corporate Law, 2006, a book of some 1,300
pages, sought to fill the gap between introductory materials and specialized books,
such as Buckley, Gore-Brown and Palmer. It is a magnum opus, which covers many of
the LL.B. issues and has a plethora of citation, but it has now morphed into a 4-volume
loose leaf text and, as such, it is even more a Practitioner's text.
This new book Law of Companies in Hong Kong by Mr. Stefan HC Lo and Prof.
Charles Z Qu does fill the gap - and more. It is, in my view, an excellent book and ideal
for ll.B. and JD. swdents. It covers in appropriate depth all the issues and precedents
one would expect in the syllabuses of these programmes from - Chapter 1: Company
Law and Regulation in Hong Kong, via Chapter 16: Fund-Raising by Public Issue and
Chapter 19: Corporate Rescue to the very last topic on the winding-up of a company,
Chapter 20: Liquidation.
Law of Companies in Hong Kong accomplishes this task with sufficient background
material, clear explanation and analysis, and with sufficient citation of cases, other
texts and learned articles to satisfy the needs of university students and, indeed, of
most practitioners. It is an impressive work, without being weighed down by too much
detail and citation of authorities. The separate chapters on: Corporate Personality
(Chapter 3), Pre-Incorporation Contracts (Chapter 4), Corporate Constitution and
Shareholder Agreements (Chapter 5) and the discussion in Chapter 6 (Corporate
Organs and Division of Powers) on the interpretation ofreg.82 of Part I of Table A in
the soon to be preceding Companies Ordinance (Cap.32) and in Chapter 12 (Corporate
Contracting and Liabilities of Companies) on the Common Law Indoor Management
Rule and the Statutory Indoor Management rule introduced by the new Companies
Ordinance (Cap.622), all illustrate the high standard of the book.
Subsequent chapters on, amongst other topics, Board of Directors (Chapter 7),
Directors' Duties (Chapter 8) and Members' Remedies and Minority Protection
(Chapter I 0) are equally interesting and helpful.
"ui FOREWORD FROM THE FIRST EDITION

This is not an easy time to launch a new book on Hong Kong Company Law with the
new Companies Ordinance (Cap.622) to be brought into operation in the first quarter
of 2014 (3 March 2014). The authors are to be congratulated on the skill with whlch
they have weaved the new provisions of the new Companies Ordinance (Cap.622) into
the text, in appropriate cases giving the legislative background to the changes.
Thus, this publication will remain current even when the new law (Cap.622) comes
into operation in 2014.

Ted Tyler
Honorary Professor, Faculty of Law,
University of Hong Kong
November 2013
 TABLE OF CONTENTS

Forewordji-om the First Edition ............................................................................................................ v

Table of Cases ................................................................................................................................ xxxix

Table of Legislation .......................................................................................................................... cxxi

Index................................................................................................................................................ 1043

CHAPTER 1 COMPANY LAW AND REGULATION

IN HONGKONG
I. Jntroduction ............................................................................................................................... 1.00 I

2. Companies and the Scope of Company Law ............................................................................ 1.002

2.1 Companies in society ........................................................................................................ 1.002
2.2 Companies and corporations ............................................................................................ 1.003
2.2.1 Anglo-Hong Kong law............................................................................................ 1.004
2.2.2 Foreign jurisdictions ............................................................................................... 1.0I 0
2.3 \\'hat company law covers ................................................................................................ 1.011
2.3.1 "Core" company law............................................................................................... 1.012
2.4 Facilitative or mandatory rules? ........................................................................................ 1.016
2.5 Sourcesoflaw ................................................................................................................... 1.020

3. Companies and Other Forms of Business Association ............................................................. 1.024

3.1 lntroduction ....................................................................................................................... 1.024
3.2 Sole proprietorships ......................................................................................................... 1.026
3.3 Partnerships ....................................................................................................................... 1.030
3.3.1 General .................................................................................................................... 1.030
3.3.2 Formation and identification ofpa1tnerships ......................................................... 1.032
3.3.3 Registration ............................................................................................................. 1.041
3.3.4 Nature of a partnership ........................................................................................... 1.042
3.3.5 Partnership property ............................................................................................... 1.043
3.3.6 Financing ................................................................................................................ 1.049
3.3.7 Relationship between paitners ................................................................................ 1.05I
3.3.8 Liability to third parties - contract ........................................................................ 1.057
3.3.9 Liability to third parties-tort ................................................................................ 1.06 I
3.3.10 Limited partnerships ............................................................................................... 1.062
3.3.11 Termination of partnerships .................................................................................... 1.063
3.4 Companies: Comparison with partnerships ...................................................................... 1.064
3.4.1 General .................................................................................................................. 1.064
3.4.2 fom1ation .............................................................................................................. 1.067
3.4.3 Legal status ........................................................................................................... 1.069
X TABLEOF CONTENTS

3.4.4 Formalities ............................................................................................................ 1.07l

3.4.5 Transfer of ownership ........................................................................................... 1.073
3.4.6 Management .......................................................................................................... 1.075

3.4.7 Agency··················•········•·······•········•········•·······•········•·······•········•·······••·······•·········I .076

3.4.8 Liability ................................................................................................................. 1.077
3.4.9 Borrowing powers/financing ................................................................................. 1.079
3.4.10 Taxation ................................................................................................................. 1.08 I

4. Historical Development of Company Law ·········•········•·······•········•·······•········•·······••·······•·········'·083

4.1 English origins .................................................................................................................. 1.083
4.1.1 Historical development of the corporation ............................................................. 1.084
4.1.2 Joint stock companies ............................................................................................. 1.089
4.1.3 Early English Companies Acts ............................................................................... 1.096
4.2 The early Companies Ordinances in Hong Kong: 1865 and 1911 ................................... 1.102
4.3 Companies Ordinance I 932 .............................................................................................. I. I 08

5. Company Law Reform: the Companies Ordinance Rewrite ..................................................... 1.114

5.1 Introduction and background to the Rewrite .................................................................... 1.1I 4
5.2 Objectives of the Rewrite .................................................................................................. 1.1I 9
5.3 The Rewrite process .......................................................................................................... 1.123
5.4 Companies Ordinance (28 of2012) (Cap.622) ................................................................. I .128
5.4.1 Pt. I - Preliminary ................................................................................................. 1.13I
5.4.2 Pt.2 - Registrar of Companies and Companies Register ...................................... 1.132
5.4.3 Pt.3 - Company formation and related matters, and
re-registration of company ...................................................................................... 1.134
5.4.4 Pt.4 - Share capital ............................................................................................... 1.136
5.4.5 Pt.5 -Transactions in relation to share capital ..................................................... 1.138
5.4.6 Pt.6- Distribution of profits and assets ............................................................... 1.141
5.4.7 Pt.7-Debentures ................................................................................................. 1.142
5.4.8 Pt.8 - Registration of charges ............................................................................... 1.143
5.4.9 Pt.9 -Accounts and audit ..................................................................................... 1.144
5.4. 10 Pt. I 0 - Directors and company secretaries ........................................................... 1.146
5.4.11 Pt. I I - Fair dealing by directors ........................................................................... 1.148
5.4.12 Pt.12 -Company administration and procedure ................................................... 1.150
5.4. I 3 Pt.13 -Arrangements, amalgamation and
compulsory acquisition in takeover and share buy-back ........................................ 1.152
5.4.14 Pt.14 - Remedies for protection of companies' or members' interests ................ 1.154
5.4.15 Pt.15 - Dissolution by striking off or deregistration ............................................. 1.156
5.4.16 Pt.16 - Non-Hong Kong companies ..................................................................... 1.157
5.4.17 Pt.17 - Companies not forme<~but registrable, under this Ordinance ................. 1.158
5.4.18 Pt.18 - Communications to and by companies ..................................................... 1.159
5.4.19 Pt.19 - Investigations and enquiries ..................................................................... 1.160
5.4.20 Pt.20 - Miscellaneous ........................................................................................... 1.162
 TABLEOF CONTENTS xi

5.4.21 Pt.21 - Consequential amendments and transitional

and savings provisions ............................................................................................ 1.163
5.4.22 Schedules I to 11 .................................................................................................. 1.164
5.5 Subsidiary legislation ........................................................................................................ 1.165
5.6 What happened to the predecessor Companies Ordinance (Cap.32)? .............................. 1.166
5. 7 Further Reforms ................................................................................................................ I . 167
5.7.1. Securities and Futures and Companies Legislation
(Uncertificated Securities Market Amendment) Ordinance 2015 .......................... 1.167
5.7.2. Companies (Winding Up and Miscellaneous Provisions)
(Amendment) Ordinance 2016 ............................................................................... 1.168
5.7.3. Companies (Amendment) Ordinance 2018 ............................................................ 1.169
5.7.4 Companies (Amendment) Bill 2018 ..................................................................... 1.170

6. Regulatory Regime ................................................................................................................... 1.17 I

6.1 Statutory and non-statutory regulation ............................................................................. 1.17I
6.1.1 Companies Ordinance (Cap.622) ............................................................................ I. I 7 I
6.1.2 Securities and Futures Ordinance ........................................................................... 1.176
6.1.3 Non-statutory regulation ......................................................................................... 1.177
6.2 Regulatory bodies ............................................................................................................. 1.178
6.3 Registrar of Companies and the Companies Registry ...................................................... 1.179
6.4 Securities and Futures Commission .................................................................................. 1.183
6.5 Hong Kong Exchanges and Clearing Ltd ......................................................................... 1.187
6.6 Inspections under Companies Ordinance ......................................................................... 1.19 I
6.6.1 General. ................................................................................................................... 1.19 I
6.6.2 Inspections .............................................................................................................. 1.193
6.6.3 Financial Secretary's power to require production of documents ........................... 1.198
6.6.4 Main changes under Cap.622 .................................................................................. I .202
6.7 Official Receiver's Office ................................................................................................. 1.204
6.8 Regulation of financial reporting and auditing ................................................................. 1.206

7. Theories and Perspectives on Company Law·······•········•········•·······•········•·······•········•·······••·······'·210

7.1 General .............................................................................................................................. 1.210
7.2 Theories on particular areas of company law ................................................................... 1.213
7.3 Economic analysis of law ................................................................................................. 1.216
7.4 Critical legal theories ........................................................................................................ 1.218

CHAPTER 2 ESTABLISHMENT OF COMPANIES

I. Incorporation by Registration ·············•········•·······•········•········•·······•········•·······•········•·······••·······2.00I
1.1 Jntroduction ....................................................................................................................... 2.00 I
1.2 Procedure .......................................................................................................................... 2.002
1.2.1 Articles of association ........................................................................................... 2.003
1.2.2 Incorporation form ................................................................................................. 2.0 I 0
xii TABLEOF CONTENTS

1.2.3 Electronic applications for registration .................................................................. 2.012

1.2.4 Shelf companies ..................................................................................................... 2.013
1.3 Incorporation upon registration ........................................................................................ 2.015
1.4 Other requirements and formalities in connection
with the establishment of the company ............................................................................. 2.017
1.4.1 Members of the company ...................................................................................... 2.017
1.4.2 Directors of the company ....................................................................................... 2.021
1.4.3 Company secretary··················•········•········•·······•········•·······•········•·······••·······•······· 2.023
1.4.4 Registered office .................................................................................................... 2.027
1.4.5 Registers to be maintained by company following incorporation ......................... 2.030
1.4.6 Common seal ......................................................................................................... 2.035
1.4.7 Business registration .............................................................................................. 2.039

2. Types of Companies ................................................................................................................. 2.040

2.1 Limited and unlimited companies .................................................................................... 2.042
2.1.1 Companies limited by shares ................................................................................. 2.044
2.1.2 Companies limited by guarantee ............................................................................ 2.045
2.1.3 Unlimited companies ............................................................................................. 2.047
2.2 Private and public companies ........................................................................................... 2.049
2.3 Change of company type ................................................................................................. 2.054
2.4 Listed and unlisted companies ......................................................................................... 2.058
2.5 Local and foreign companies ........................................................................................... 2.060
2.5.1 Distinction between local and foreign companies ................................................ 2.060
2.5.2 Ordinance applies to Hong Kong companies ........................................................ 2.061
2.5.3 Scope of application of Ordinance to Non-Hong Kong companies ...................... 2.062
2.5.4 Other provisions applicable to foreign companies ................................................ 2.070
2.6 Companies not formed but registrable under Companies Ordinance ............................... 2.076
2.6. J General ................................................................................................................... 2.076
2.6.2 Companies eligible for registration ........................................................................ 2.077
2.6.3 Registration as which type of company? ............................................................... 2.082
2.6.4 Effect of registration .............................................................................................. 2.083

3. Company Names ..................................................................................................................... 2.084

3.1 Requirements .................................................................................................................... 2.084
3.2 Restrictions on the use of particular names or words ....................................................... 2.087
3.3 Publication ofname .......................................................................................................... 2.092
3.4 Change ofname ................................................................................................................ 2.095

4. Promoters··························•·······•········•·······•········•········•·······•········•·······•········•·······••·······•········2.097
4.1 Introduction ....................................................................................................................... 2.097
4.2 Who is a "promoter"? ....................................................................................................... 2.098
4.3 Duties of promoters .......................................................................................................... 2.099
4.4 Remedies for breach of duty ............................................................................................. 2.100
 TABLEOF CONTENTS xiii

CHAPTER 3 CORPORATE PERSONALITY

I. Doctrine of Separate Legal Entity ............................................................................................ 3.00 I
1.1 General .............................................................................................................................. 3.001
1.2 Company's rights and powers............................................................................................ 3.004
1.3 Company's obligations and liabilities ............................................................................. .3.008
2. Liability of Members ................................................................................................................ 3.009
3. Liability of Officers and Employees ......................................................................................... 3.013
4. Rationales for the Separate Entity and Limited Liability Ooctrines ......................................... 3.016
5. Theories on the Nature of Corporate Personality ..................................................................... 3.022
6. Piercing the Corporate Veil ....................................................................................................... 3.023
6.1 General .............................................................................................................................. 3.023
6.2 Conunon law ..................................................................................................................... 3.025
6.2.1 Company as a "merefa9ade" - abuse of the corporate form .............................. 3.026
6.2.2 Evasion of existing legal obligations ..................................................................... 3.041
6.2.3 Fraud or other illegality ......................................................................................... 3.056
6.2.4 Agency ................................................................................................................... 3.062
6.2.5 Concealment scenarios .......................................................................................... 3 .067
6.2.6 Corporate groups .................................................................................................... 3.077
6.3 Statute ............................................................................................................................... 3.083

CHAPTER 4 PRE-INCORPORATION CONTRACTS

I. Introduction .............................................................................................................................. 4.00 l
2. The Common Law Position ...................................................................................................... 4.004
2. I Intention and knowledge ................................................................................................... 4.005
2.2 Liability where the contract is a nullity: breach of warranty of authority ........................ 4.010
2.3 Liability of the promoter's principal ................................................................................. 4.015
2.4 Adoption of the pre-incorporation contract by the company ............................................ 4.016
2.5 Trusts ............................................................................................................................... 4.017

3. Companies Ordinance (Cap.622) Section 122 ........................................................................ 4.019

4. Scope of Application of Section 122 ....................................................................................... 4.026

4.1 Purpo1is ........................................................................................................................... 4.026
4.1.1 Sufficient identification of the company ............................................................... 4.027
4.1.2 Shelf companies .................................................................................................... 4.028
4.1.3 Change of name situation ...................................................................................... 4.029
4.1.4 Mistakes as to the name of the company .............................................................. 4.031
4.2 "In the name or on behalf of a company" ........................................................................ 4.032

S. Ratification .............................................................................................................................. 4 .034

5.1 Who can ratify ................................................................................................................. 4.034
xiv TABLEOF CONTENTS

5.2 How to ratify .................................................................................................................... 4.035

5.3 Whether ratification operates retrospectively .................................................................. 4.041
5.4 Communication ............................................................................................................... 4.047

6. Liability of the Person who Purported to Act for the Company ............................................. .4.048
6. J Where the company does not ratify the contract ............................................................. 4.048
6.2 Where the company has ratified the contract .................................................................. 4.052

CHAPTER 5 CORPORATE CONSTITUTION AND

SHAREHOLDER AGREEMENTS

1. Introduction .............................................................................................................................. 5.001

2. Provisions on Information Required by Company Outsiders .................................................. 5.003

2. J lntroduction ....................................................................................................................... 5.003
2.2 Objects clause ................................................................................................................... 5.006
2.2.1 The purpose of the objects clause and the ultra vires doctrine .............................. 5.006
2.3 Reform of the ultra vires doctrine in Hong Kong ............................................................. 5.0 I0
2.3.1 The need forreform ............................................................................................... 5.010
2.3.2 The 1997 reforms in Hong Kong ........................................................................... 5.014
2.3.3 The significance of the reform: full corporate capacity ........................................ 5.017

3. Rules on Internal Governance: Articles of Association ........................................................... 5.025

3.1 The legal nature of articles of association ........................................................................ 5.025
3.2 The enforcement of articles of association ....................................................................... 5.028
3.2.1 Who can enforce the constitution? ........................................................................ 5.028
3.3 Alteration of articles ......................................................................................................... 5.042

3.3.1 The mechanics·················•·······•········•········•·······•········•·······•········•·······••·······•········5.045

3.3.2 Statutory limitations ............................................................................................. 5.047
3.3.3 Common law limitation on the power to alter the company's constitution ........... 5.052
3.4 Remedies ........................................................................................................................... 5.072

4. Shareholders' Agreements ....................................................................................................... 5.076

4.1 The necessity and advantages of shareholders' agreements ............................................. 5.077
4.2 Disadvantages ................................................................................................................... 5.083
4.3 The relationship with articles ........................................................................................... 5.084
4.4 Circumstances in which provisions in the shareholders' agreement would be invalid .....5.085

CHAPTER6 CORPORATEORGANSAND
DIVISION OF POWERS
I. Introduction ............................................................................................................................. 6.00 I

2. Early Conceptions on the Location of Power of Control ........................................................ 6.005

 TABLEOF CONTENTS xv

3. Modern Methods of Distributing Corporate Control Powers .................................................. 6.007

3. I The general power-allocation mechanism ........................................................................ 6.008
3.2 Powers given to directors or the general meeting specifically .......................................... 6.01 I
3.3 Concurrent powers ............................................................................................................ 6.013

4. The General Power of Management .......................................................................................... 6.017

4.1 Confusion in interpretation: pre-2003 Table A Reg.82 ..................................................... 6.020
4.2 The problems with the mainstream authorities ................................................................. 6.02 l
4.2.1 Questionable authorities ........................................................................................ 6.022
4.2.2 Alternative doctrinal bases .................................................................................... 6.023
4.2.3 An assessment of the second line of authorities .................................................... 6.029

5. The Effect of the Post-2003 Table A Reg.82 and the Model Articles ..................................... 6.031

6. The General Meeting's Residual Power under Common Law ................................................. 6.035
6.1 Where the directors cannot function effectively ............................................................... 6.036
6.2 Where it is necessary for the general meeting to
exercise the company's inherent powers ........................................................................... 6.042
6.2.1 The power to ratify directors' acts in excess of authority ..................................... 6.043
6.2.2 The power to ratify an abuse of power .................................................................. 6.044

7. The Shareholders' Power to Make Decisions Through Unanimous Consent... ........................ 6.045

CHAPTER 7 BOARD OF DIRECTORS

I. Introduction .............................................................................................................................. 7 .00 I

2. Classification of Directors ....................................................................................................... 7.002

2. I Dejure, de facto and shadow directors ............................................................................. 7.003
2.1.1 Defacto directors .................................................................................................. 7.006
2. I .2 Shadow directors ................................................................................................... 7.013
2.2 Types of directors according to functions ......................................................................... 7.016
2.2.1 Managing director or chief executive officer.. ...................................................... 7.016
2.2.2 Executive directors and non-executive directors ................................................... 7.018
2.2.3 Alternate directors ................................................................................................. 7.020
2.2.4 Nominee directors ................................................................................................. 7.023
2.2.5 Reserve directors ................................................................................................... 7.024

3. Qualifications ........................................................................................................................... 7.025

4. Appointment ............................................................................................................................. 7.030

4.1 Minimum number of directors ......................................................................................... 7 .030
4.2 Initial directors .................................................................................................................. 7.032
4.3 Subsequent directors ........................................................................................................ 7.033
4.4 Appointment by outsiders ................................................................................................ 7.038
4.5 Liabilities of under-age directors ········•·······•········•········•·······•········•·······•········•·······..······· 7.039
4.6 Corporate directors ........................................................................................................... 7.040
xvi TABLEOF CONTENTS

5. Vacation of Office ····················•········•·······•········•········•·······•········•·······•········•·······..·······•·········7.042

5.1 Retirement by rotation ...................................................................................................... 7.042
5.2 Vacation of office .............................................................................................................. 7.043
5.3 Removal ............................................................................................................................ 7.045
5.3.1 Removal by directors ............................................................................................ 7.045
5.3.2 Removal by members ............................................................................................ 7.046
5.4 Resignation ....................................................................................................................... 7.056
5.5 Notification to Registrar ................................................................................................... 7.057

6. Board Meetings ......................................................................................................................... 7.058

6.1 Calling board meetings ..................................................................................................... 7.059
6.2 Notice ................................................................................................................................ 7.060
6.3 Quorum ............................................................................................................................ 7.071
6.4 Chairperson ....................................................................................................................... 7 .072
6.5 Voting and minutes of meetings ....................................................................................... 7.073
6.6 Effect of irregularities ...................................................................................................... 7.075
6.6. I Meeting invalid ..................................................................................................... 7.076
6.6.2 Articles waiving the irregularity ........................................................................... 7.08 I
6.6. 3 Irregularity principle ............................................................................................ 7. 083
6.6.4 The Australian position ......................................................................................... 7.088
6.6.5 Effect of irregularity on third parties .................................................................... 7.092
6. 7 Informal decision-making ................................................................................................. 7. 093
6. 7. I Written resolutions ................................................................................................ 7.093
6. 7 .2 Informal meetings ................................................................................................. 7. 095
6.7.3 Decision-making by unanimous consent .............................................................. 7.097
6.8 Technology ........................................................................................................................ 7. I 02
6.9 Sole director companies .................................................................................................... 7. I 04

7. Disqualification ......................................................................................................................... 7. I 06
7.1 Introduction ....................................................................................................................... 7.106
7.2 Conviction of certain indictable offences: s. I 68E of the retitled Cap.32 ......................... 7.110
7.3 Persistent breaches of Ordinance: s. I 68F of the retitled Cap.32 ...................................... 7.113
7.4 Fraud or breach of duty in respect of company in winding-up:
ss.1680, 168L of the retitled Cap.32 ................................................................................ 7.l 17
7.5 Unfit directors of insolvent companies: s. I 68H of the retitled Cap.32 ............................ 7.121
7.6 Disqualification of directors after investigation of a company:
s. I 68J of the retitled Cap.32 ............................................................................................. 7 .127
7.7 Miscellaneous matters ...................................................................................................... 7.129
7. 7. I Scope of disqualification order ............................................................................. 7. 129
7. 7.2 Leave to manage companies ................................................................................. 7.131
7.7.3 Contravention of disqualification order ................................................................ 7.133
 TABLEOF CONTENTS xvii

7.7.4 Foreign companies··········•········•·······•········•········•·······•········•·······•········•·······..······· 7.135

7.7.5 Procedural matters ................................................................................................ 7.136
7.7.6 Public examinations .............................................................................................. 7.139
7.7.7 Listed corporations: Securities and Futures Ordinance (Cap.571) .......................7.140

CHAPTER 8 DIRECTORS' DUTIES

I. Jntroduction ............................................................................................................................... 8.001
1.1 Nature of and rationales for duties .................................................................................... 8.00 I
1.1.l Corporate governance ............................................................................................. 8.002
1.1.2 Directors as fiduciaries ........................................................................................... 8.007
1.2 Sources of law and categories of duties ............................................................................ 8.008
1.3 Persons subject to directors' duties ................................................................................... 8.015
J .3.1 Dejure directors ..................................................................................................... 8.015
1.3.2 Defacto directors .................................................................................................... 8.017
1.3.3 Shadow directors ..................................................................................................... 8.018
1.3.4 Corporate directors ................................................................................................. 8.020
1.3.5 Executive officers ................................................................................................... 8.02 I
1.4 To whom are the duties owed? ......................................................................................... 8.023

2. Acting in Good Faith in the Interests of the Company ............................................................. 8.026

2.1 General .............................................................................................................................. 8.026
2.2 Meaning of"interests of the company" ............................................................................ 8.030
2.2.1 General .................................................................................................................... 8.030
2.2.2 Corporate groups .................................................................................................... 8.035
2.2.3 Nominee directors ................................................................................................... 8.037
2.2.4 Companies in insolvency and interests of creditors ................................................ 8.038
2.3 Subjective or objective test? ............................................................................................. 8.044

3. Exercise of Powers for Proper Purposes ................................................................................... 8.047

3.1 General .............................................................................................................................. 8.047
3.2 The proper purposes of a power ....................................................................................... 8.048
3.2. l Power to deal with company's assets ...................................................................... 8.049
3.2.2 Power to allot shares ............................................................................................... 8.050
3.2.3 Other powers affecting control ............................................................................... 8.054
3.3 The purpose for which a power was exercised ................................................................. 8.061
3.4 Good faith of directors ..................................................................................................... 8.069

4. Conflict of Jnterests ................................................................................................................... 8.070

4.1 General .............................................................................................................................. 8.070
4.2 No-conflict rule ................................................................................................................. 8.07 I
4.2.1 Equitable duty ......................................................................................................... 8.07 l
4.2.2 Examples of a conflict of interest ........................................................................... 8.072
xviii TABLEOF CONTENTS

4.2.3 Disclosure and approval by the general meeting .................................................... 8.078

4.2.4 Modification of duty under the articles .................................................................. 8.08 I
4.3 Disclosure of interests-Companies Ordinance ............................................................... 8.088
4.4 Remuneration .................................................................................................................... 8.093
4.5 Loans to directors and similar transactions ...................................................................... 8.097
4.5.1 Loans ....................................................................................................................... 8.097
4.5.2 Quasi-loans and credit transactions ........................................................................ 8. I 00
4.5.3 Transactions with connected persons ..................................................................... 8. I 04
4.5.4 Exceptions ............................................................................................................... 8.106
4.5.5 Anti-avoidance ........................................................................................................ 8. 108
4.5.6 Consequences of contravention .............................................................................. 8. I 10
4.5.7 Disclosure in financial statements .......................................................................... 8.111
4.6 Connected transactions-listed companies ...................................................................... 8.112

5. Misuse of Assets and Information, and Secret Profits .............................................................. 8. I 13

5.1 Profit rule .......................................................................................................................... 8.113
5.2 Misappropriation of company assets ................................................................................ 8.1 I 8

6. Diversion of Corporate Opportunities ·······•········•········•·······•········•·······•········•·······••·······•·········8·120

6.1 General .............................................................................................................................. 8.120
6.2 Former directors ................................................................................................................ 8.126
6.3 Authorisation by company ·················•········•········•·······•········•·······•········•·······••·······•·········8·129

7. Duty of Care, Skill and Diligence ............................................................................................. 8.132

7.1 General .............................................................................................................................. 8. 132
7.2 Sources of duty ................................................................................................................. 8.133
7.3 Standard of care ................................................................................................................ 8. I 35
7.3. I Standard under the general law ............................................................................... 8. 137
7.3.2 Statutory duty of care ............................................................................................. 8.143
7.4 Oversight or monitoring duty ........................................................................................... 8.149
7.5 Examples ........................................................................................................................... 8. I 53
7.6 Exercise of independent judgment .................................................................................... 8.159

8. Remedies ................................................................................................................................... 8.162

8.1 General .............................................................................................................................. 8. I 62
8.2 Avoidance of acts or transactions ..................................................................................... 8.163
8.3 Restitution of company's property ··············•········•·······•········•·······•········•·······••·······•·········8·166
8.4 Disgorgement of profits or benefits ................................................................................ 8.167
8.5 Equitable compensation .................................................................................................... 8.171
8.6 Remedies against third parties .......................................................................................... 8.175
8.6. I Avoidance oftransaction ......................................................................................... 8.175
 TABLEOF CONTENTS xix

8.6.2 Knowing receipt. ..................................................................................................... 8.177

8.6.3 Dishonest assistance .............................................................................................. 8.179
8.7 Breach of duty ofcare ....................................................................................................... 8.182
8.7.1 Compensation for losses ......................................................................................... 8.183
8.7.2 Causation ................................................................................................................ 8.184

9. Relief from Liability ................................................................................................................. 8.186

9.1 Ratification by company ................................................................................................... 8.186
9.2 Indemnities and provisions exempting liability ................................................................ 8.192
9.2.1 The basic restriction ................................................................................................ 8.192
9.2.2 lnsurance ................................................................................................................. 8.196
9 .2.3 Permitted indemnity provisions .............................................................................. 8.197
9.2.4 Effect of articles which modify duty to avoid conflicts of interests ....................... 8.198
9.3 Court's power to grant relief ............................................................................................. 8.199
9.3.1 Proceedings within ss.902-904 .............................................................................. 8.200
9.3.2 Honesty ................................................................................................................... 8.201
9 .3.3 Reasonableness ....................................................................................................... 8.203
9.3.4 Ought fairly to be excused ...................................................................................... 8.207

CHAPTER 9 GENERAL MEETINGS

I. Introduction ............................................................................................................................... 9.00 I
2. The Nature and Types of Meetings ........................................................................................... 9.005
2.1 The nature of a meeting .................................................................................................... 9.005
2.2 Annual general meetings ................................................................................................... 9.008
2.3 Extraordinary general meetings ........................................................................................ 9.012
2.4 Class meetings .................................................................................................................. 9.013
2.5 Court-ordered meetings .................................................................................................... 9.0l4
3. Calling General Meetings ......................................................................................................... 9.015
3.1 By directors ....................................................................................................................... 9.016
3.2 By members ...................................................................................................................... 9.019
3.3 By the court. ...................................................................................................................... 9.022
3.3.1 Impracticable to call or convene meetings ............................................................. 9.023
3.3.2 Court discretion ...................................................................................................... 9 .031

4. Notice ........................................................................................................................................ 9.039

4.1 Amount of notice .............................................................................................................. 9.040
4.2 Manner in which notice is to be given .............................................................................. 9.043
4.3 Persons entitled to receive notice ...................................................................................... 9.046
4.4 Special notice .................................................................................................................... 9.049
xx TABLE OF CONTENTS

4.5 Content ofnotice ............................................................................................................... 9.050

4.5.1 Date, time and place ............................................................................................... 9.05 I
4.5.2 The business to be transacted ................................................................................. 9.053
4.6 Accidental failure to give notice of meeting or resolution ................................................ 9.062
4.7 Circulation of member-proposed resolutions and members' statements .......................... 9.064
5. Proceedings ............................................................................................................................... 9.066
5.1 Quorum ............................................................................................................................. 9.066
5.1.1 The meaning of quorum ......................................................................................... 9.066
5.1.2 The requirement ..................................................................................................... 9.067
5.1.3 Lossofquorum ...................................................................................................... 9.069
5.1.4 Courts' power of calling meetings and deemed quorum ........................................ 9.070
5.1.5 Joint shareholders ................................................................................................... 9.07 I
5.1.6 Persons attending in different capacities ................................................................ 9.073
5.1.7 Effect of inquorate meetings on validity of meeting .............................................. 9.075
5.1.8 Effect of inquorate meetings on third parties ......................................................... 9.079
5.2 Chairperson ....................................................................................................................... 9.080
5.3 Voting ................................................................................................................................ 9.083
5.4 Proxies and corporate representatives ............................................................................... 9.088
5.4.1 The meaning and significance of proxies .............................................................. 9.088
5.4.2 Appointment of proxies ......................................................................................... 9.090
5.4.3 Proxy's right to vote and to chair a meeting ........................................................... 9.094
5.4.4 Proxy's duty with regard to voting ......................................................................... 9.096
5.4.5 Company-sponsored invitations to appoint proxies ............................................... 9.098
5.4.6 Revocation ofproxy ............................................................................................... 9.101

5.4.7 Corporate representative ·········•········•········•·······•········•·······•········•·······••·······•·········9·104

5.5 Resolutions at meetings .................................................................................................... 9.109

6. Decision Making without Meeting ........................................................................................... 9.1 l l

6.1 Written resolutions ............................................................................................................ 9.1 l l
6.2 Unanimous consent ........................................................................................................... 9.117
6.2.1 Introduction ............................................................................................................ 9.1 l 7
6.2.2 Whose consent is required? ................................................................................... 9.122
6.2.3 Informed consent ................................................................................................... 9.123
6.3 The relationship between the doctrine and the statutory
requirements on written resolutions .................................................................................. 9.125
6.4 Statutory formalitie.s that cannot be waived by members ................................................. 9.129

7. Minutes and Record Keeping .................................................................................................... 9.130

8. Electronic Communications ...................................................................................................... 9.135

9. Procedural lrregularities ............................................................................................................ 9.139

 TABLEOF CONTENTS xxi

CHAPTER 10 MEMBERS' REMEDIES AND

MINORITY PROTECTION
I. lntroduction ............................................................................................................................. 10.00 I

2. The Rule in Foss v Harbottle .................................................................................................. 10.009

2. I Proper plaintiff principle ................................................................................................ 10.0 I 0
2.2 Irregularity principle ...................................................................................................... 10.014
2.3 Rationales for the rule in Foss v Harbottle ..................................................................... 10.0l5

3. Common Law Derivative Action ............................................................................................. I0.016

3.1 Introduction ..................................................................................................................... I0.016
3.2 Ultra vires or illegal conduct .......................................................................................... 10.018
3.3 Fraud on the company ..................................................................................................... I0.019
3.3. I Fraud ..................................................................................................................... I 0.021
3.3.2 Control .................................................................................................................. I 0.025
3.4 Interests of justice ........................................................................................................... 10.029
3.5 Effect of ratification ........................................................................................................ I 0.031
3.6 Double or multiple derivative actions ............................................................................. 10.036
3.7 Procedural and other matters .......................................................................................... 10.039
3.7. I Standing ................................................................................................................ I 0.039
3.7.2 Inequitable conduct ofapplicant... ........................................................................ 10.040
3.7.3 Companies in liquidation ...................................................................................... I 0.041
3.7.4 Pleadings ............................................................................................................... 10.043
3.7 .5 Prima fl,cie case .................................................................................................... I 0.045
3.7 .6 Costs ..................................................................................................................... I 0.046

4. Statuto1y Derivative Action ..................................................................................................... I 0.048

4. I Introduction ..................................................................................................................... I 0.048
4.2 Proceedings to which statutory action apply .................................................................. 10.050
4.2. I Companies within statutory provisions ................................................................. ! 0.05 l
4.2.2 Misconduct ........................................................................................................... 10.052
4.3 Criteria for granting leave - commencing derivative actions ......................................... 10.054
4.3. I Interests of the company ....................................................................................... 10.056
4.3.2 Serious question to be tried ................................................................................... I 0.059
4.3.3 Examples where leave granted .............................................................................. 10.065
4.4 Criteria for granting leave - intervening on behalf of the company ............................... 10.066
4.5 Effect of ratification ........................................................................................................ I 0.069
4.6 Double or multiple derivative actions ............................................................................. 10.072

4. 7 Procedural and other matters·······················•········•········•·······•········•·······•········•·······••····· I 0.073

4.7. I Standing ................................................................................................................ I 0.073
4.7.2 Good faith; conflict of interests ofapplicant.. ...................................................... 10.075
4.7.3 Companies in liquidation ...................................................................................... 10.077
xxii TABLEOF CONTENTS

4.7.4 Form of proceedings and standing to file submissions ....................................... I 0.078

4.7.5 Granting of leave nunc pro tune .......................................................................... 10.080
4.7.6 Evidence .............................................................................................................. 10.081
4.7.7 General powers of the court ................................................................................ 10.082
4.7.8 Independent investigator ..................................................................................... 10.083
4.7.9 Costs .................................................................................................................... 10.086
4.7.10 Indemnification for member's costs - leave application .................................. 10.088
4.7.11 Indemnification for member's costs - proceedings on behalf
of the company .................................................................................................. 10.090
4.7.12 Discontinuation or settlement ........................................................................... 10.093
4.8 Relationship between the statutory and common law derivative actions ....................... 10.094
4.9 Relationship between statutory derivative action and
other alternative remedies ............................................................................................... I 0.097

5. Members' Personal Actions ..................................................................................................... 10.099

5.1 Introduction .................................................................................................................... 10.099
5.2 Conduct involving wrongs to both the company and the members ................................ 10.102
5.2.1 Introduction ....................................................................................................... 10.102
5.2.2 Rule against reflective loss - where member has no cause of action ............... 10.103
5.2.3 Rule against reflective loss - where member has separate cause of action ...... 10.105
5.2.4 Where rule against reflective loss does not apply ............................................. I 0.110
5.3 Personal Rights under the Corporate Constitution ......................................................... 10.I 14
5.3.1 Constitution as a statutory contract .................................................................. 10.114
5.3.2 Restrictions under irregularity principle ........................................................... 10.l I 7
5.3.3 Rights conferred on members otherwise than as members .............................. 10.125
5.4 Personal rights under the general law ............................................................................. 10.127
5.4.1 General .............................................................................................................. 10.127
5.4.2 Fraud on the minority ....................................................................................... 10.128
5.5 Personal rights under statute ........................................................................................... I 0.131

6. Unfair Prejudice Remedy ........................................................................................................ I 0.134

6.1 Introduction .................................................................................................................... 10.134
6.2 Companies to which Pt.14 Div.2 applies ........................................................................ 10.139
6.3 Standing .......................................................................................................................... I 0.140
6.3.1 General .............................................................................................................. 10.l40
6.3.2 Petitioners who are not minority members ....................................................... 10.142
6.3.3 Conduct of the petitioner .................................................................................. 10.143
6.4 Affairs of the company ................................................................................................... 10.145
6.5 Conduct affecting interests of the members ................................................................... I 0.148
6.5.1 Meaning of"interests" ...................................................................................... 10.149
6.5.2 Member qua member ........................................................................................ 10.150
6.5.3 Conduct affecting the petitioner's own interests ............................................... 10.151
 TABLEOF CONTENTS xxiii

6.6 Unfairly prejudicial············•·······•········•·······•········•········•·······•········•·······•········•······· ..····· '0.154

6.6.1 Prejudice ............................................................................................................. 10.155
6.6.2 Unfairness ........................................................................................................... 10.156
6.6.3 Legitimate expectations ...................................................................................... I 0.161
6.6.4 Universal and personal expectations ................................................................... 10.162
6.6.5 Objective test; lack of probity not necessary ...................................................... 10.165
6.6.6 Isolated acts ......................................................................................................... I 0.167
6.6.7 Conduct occurring in the past ............................................................................. 10.168
6.6.8 Threatened or proposed conduct... ...................................................................... I 0.169
6.6.9 Series of minor acts ............................................................................................. 10. l 70
6.6.l 0 Conduct that applies to all members ................................................................. 10.l 7 l
6.6.11 Petitioner's ability to end the impugned conduct... ........................................... I 0.172
6.6.12 Where no parties are at fault ............................................................................. I 0.173
6.6.13 Relevance of the charncter of the company ...................................................... 10.l 74
6.6.14 Public companies .............................................................................................. 10. l 75
6.6.15 Family companies ............................................................................................. 10.177
6.7 Examples of unfairly prejudicial conduct... .................................................................... I 0.178
6. 7. I Breaches of ordinance or non-statutory regulations ......................................... I 0.178
6.7 .2 Breaches of the constitution or shareholder agreements .................................. 10.182
6. 7.3 Breaches of fiduciary duties of directors .......................................................... I 0.184
6.7.4 Excessive remuneration .................................................................................... 10.187
6.7.5 Negligence or mismanagement of company's business .................................... 10.189
6. 7 .6 Breaches of understandings or promises that equity would uphold ................. I 0.191
6.7.7 Exclusion from management ............................................................................ 10.197
6.7.8 Inadequate dividends and non-participation in company's profits ................... I 0.198
6.7.9 Alterations to the articles .................................................................................. 10.200
6.8 Remedies that court may order ....................................................................................... I 0.203
6.8.1 Orders regulating the affairs of the company ................................................... 10.207
6.8.2 Board composition and appointment of a receiver or manager ........................ 10.208
6.8.3 Purchase of shares: buy-out orders ................................................................... 10.2 l l
6.8.4 Damages ........................................................................................................... I 0.216
6.9 Alternative relief. ............................................................................................................ I 0.218
6.9.1 Offer of buy-out of petitioner's shares by respondent... .................................... 10.2 l 9
6.9.2 Relationship with the derivative action ............................................................. I 0.221
6.9.3 Relationship with the winding-up remedy ........................................................ 10.224
6.10 Procedural matters .......................................................................................................... I 0.225
6.10.1 General .............................................................................................................. 10.225
6.10.2 Respondents ...................................................................................................... I 0.229
6.10.3 Costs ................................................................................................................. I 0.230
xxiv TABLEOF CONTENTS

7. Winding-Up on the "Just and Equitable" Grounds ................................................................. 10.231

7.1 Meaning of "just and equitable" ..................................................................................... I 0.232
7.2 Examples ........................................................................................................................ 10.234
7 .2.1 Quasi-partnerships and breakdown of trust and confidence ............................. I 0.234
7 .2.2 Failure of substratum or frustration of company's objects ................................ I 0.236
7.2.3 Other examples ................................................................................................. 10.238
7 .2.4 Conduct of the petitioner .................................................................................. I 0.239
7.3 Relationship with other remedies ................................................................................... 10.240

8. Statutory Injunction ................................................................................................................ I 0.245

8.J General ............................................................................................................................ 10.245
8.2 Persons who may apply ................................................................................................... I 0.248
8.3 Scope of orders and the court's powers........................................................................... 10.249

CHAPTER 11 ACCOUNTS AND AUDIT

I . Introduction ............................................................................................................................. 11.00 I

2. Accounting Records ................................................................................................................ 11.003

2.1 Records to be kept .......................................................................................................... 11.003
2.2 Liability for failure to keep records ................................................................................ 1J.010

3. Annual Financial Statements .................................................................................................. 11.017

3.1 Terminology .................................................................................................................. 11.017
3.2 Obligation to prepare financial statements ................................................................... 11.018
3.3 Financial year ................................................................................................................ 11.019
3.4 Contents of financial statements ................................................................................... 11.02 I
3.4.1 General. ................................................................................................................. 11.02 l
3.4.2 Statement of comprehensive income (profit and loss account) ............................ 1J .023
3.4.3 Statement of financial position (balance sheet) .................................................... 11.025
3.4.4 True and fair view ................................................................................................. 11.029
3.4.5 Other requirements ............................................................................................... 11.03 l
3.4.6 Financial reporting and accounting standards ...................................................... 11.033
3.4. 7 Revision of financial statements ........................................................................... 11.037
3.5 Corporate groups: consolidated financial statements ................................................... 11.040
3.6 Directors' report ............................................................................................................ 11.043
3.7 Disclosure to members .................................................................................................. 11.049
3.7.1 Right to receive reporting documents ................................................................... 11.049
3.7.2 Summary financial reports ................................................................................... 11.052
3.8 Disclosure to the public ................................................................................................. 11.056
3.9 Simplified reporting ...................................................................................................... 11.058
3.10 Dormant companies ...................................................................................................... 1J .066
3.11 Transitional provisions under Cap.622 ......................................................................... 11.07 I
 TABLEOF CONTENTS xxv

4. Directors' Rights of Inspection···········•········•·······•········•········•·······•········•·······•········•·······..····· 11.074

4. I General ............................................................................................................................ 11.074
4.2 Scope of right. ................................................................................................................. I I .075

5. Members' Rights oflnspection ............................................................................................... II .081

5.1 General ............................................................................................................................ 11.08 l
5.2 Criteria for grant of order authorising inspection ........................................................... 11.083
5.3 Documents that can be inspected .................................................................................... 11.092

5.4 Ancillary mailers·································•·······•········•········•·······•········•·······•········•······· ..••••·11.095

6. Auditors ................................................................................................................................... 11.097

6.1 General ............................................................................................................................ 1 I .097
6.2 Qualifications and appointment ...................................................................................... 11.099

6.2.1 Qualifications····························•·······•········•········•·······•········•·······•········•·············· l l .099

6.2.2 Appointment ......................................................................................................... 1 I. I 02
6.3 Auditors' functions, rights and duties ............................................................................. I I. I 06
6.3.1 The auditors' report .............................................................................................. 1I. I 06
6.3.2 Auditors' rights .................................................................................................... 11.118
6.3.3 Common law duty of care ..................................................................................... 11.124
6.3.4 Duty to report impropriety or fraud ..................................................................... 11.I 35
6.3.5 Duties owed to shareholders or third parties ......................................................... 11.I 37
6.3.6 Indemnities by the company ................................................................................ 11.143
6.4 Ceasing to hold office ..................................................................................................... I 1.144
6.4. I Resignation ........................................................................................................... I 1.144
6.4.2 Retirement ............................................................................................................. I 1.149
6.4.3 Removal ................................................................................................................ 1 I. I 51

6.4.4 Disqualification········•·······•········•·······•········•········•·······•········•·······•········•······· ..·····' l.154

CHAPTER 12 CORPORATE CONTRACTING AND

LIABILITIES OF COMPANIES

I. Corporate Contracting ............................................................................................................ 12.00 I

1.1 lntroduction ..................................................................................................................... 12.00 I
I .2 Company contracting through agent. .............................................................................. 12.007
1.2.I General ................................................................................................................. 12.007
1.2.2 Actual authority ................................................................................................... 12.010
1.2.3 Apparent authority (or ostensible authority) ........................................................ 12.024
1.3 Company contracting directly ......................................................................................... 12.04 I
1.3.1 Commonseal ....................................................................................................... 12.041
1.3.2 Execution of documents as if under seal ............................................................. 12.045
1.3.3 Execution of deeds ............................................................................................... I 2.046
1.3.4 Official seals and company chops ....................................................................... 12.050
xxvi TABLEOF CONTENTS

1.4 Protection of persons dealing with a company ............................................................... 12.055

1.4.1 Common law indoor management rule ................................................................ 12.056
1.4.2 Exceptions to the indoor management rule ......................................................... 12.069
1.4.3 Statutory indoor management rule ...................................................................... 12.082
1.4.4 Validity of acts of directors ................................................................................. 12.091
1.4.5 Conveyancing and Property Ordinance .............................................................. 12.093
1.4.6 Validity of documents executed as if under seal .................................................. 12.096
1.5 Ratification ..................................................................................................................... 12.100

2. Liabilities for Civil and Criminal Wrongs ............................................................................. 12.I0I

2.1 Tort and other civil liabilities .......................................................................................... 12.10 I
2.1.1 Corporate liability ................................................................................................ 12.101
2.1.2 Liabilities of individuals ...................................................................................... 12.115
2.2 Criminal liabilities·····························•········•········•·······•········•·······•········•·······••·······•·······' 2.117
2.2.1 Corporate liability ................................................................................................ 12.117
2.2.2 Liabilities of individuals ...................................................................................... 12.129

CHAPTER 13 EQUITY AND DEBT FINANCING

I. lntroduction ............................................................................................................................ 13.001

2. Methods of Corporate Financing ........................................................................................... 13.003

2.1 Obtaining finance for start.-up companies ...................................................................... 13.003
2.1.1 Bank loans and overdrafts .................................................................................... 13.004

2.1.2 Trade credit······························•········•········•·······•········•·······•········•·······••·······•······ 13.005

2.1.3 Business angels .................................................................................................... 13.006
2.1.4 Venture capital ..................................................................................................... 13.007
2.1.5 Equity crowdfunding .......................................................................................... 13.008
2.2 Continuing finance for established firms ...................................................................... 13.009
2.2.1 Retained profits ................................................................................................... 13.009
2.2.2 Short-term finance ............................................................................................... 13.010
2.2.3 Long-term finance ............................................................................................... 13.016

3. The Distinction between Equity Finance and Debt Finance .................................................. 13.028

4. Nature and Types of Equity .................................................................................................... 13.037

4. I General ............................................................................................................................ 13.037
4.2 Nature ofa share ............................................................................................................. 13.039
4.3 Types of shares ................................................................................................................ 13.042
4.3.1 Introduction .......................................................................................................... 13.042
4.3.2 Ordinary shares .................................................................................................... 13.044
4.3.3 Preference shares············•········•·······••·······•········•·······•········•·······•········•········•······ 13.045
4.3.4 Redeemable shares ............................................................................................... 13.052
4.3.5 Bearer shares ........................................................................................................ 13.055

4.4 Stock·································•········•·······•········•········•·······•········•·······•········•·······••·······•······· 13.061

 TABLEOF CONTENTS xxvii

5. Nature and Types of Debt... .................................................................................................... 13.063

5. I Unsecured and secured loans .......................................................................................... I3.064
5.2 Debt subordination .......................................................................................................... 13.066
5.3 Debentures and debenture trusts ..................................................................................... 13.067
5.4 Syndicated loans ............................................................................................................. 13.070
5.5 Club loans ....................................................................................................................... 13.071
5.6 Junk (high-yield) bonds .................................................................................................. 13.072
5.7 Redeemable bonds .......................................................................................................... 13.073
5.8 Foreign bonds .................................................................................................................. I 3.074
5.9 Eurobonds ....................................................................................................................... 13.075

6. Factors Affecting the Choice bel\veen Equity and Debt ........................................................ 13.076
6.1 The size of the company ................................................................................................. 13.076
6.2 Nature of the c-0mpany'sbusiness ................................................................................... 13.077
6.3 Tax deduction .................................................................................................................. I3.078
6.4 Costs of financial distress and insolvency ...................................................................... 13.079
6.5 Restrictions in debentures ............................................................................................... I 3.080
6.6 Cost of disclosure ........................................................................................................... I3.081
6.7 Fluctuation of interest rates in the financial market ....................................................... 13.082
6.8 Gearing ratio ................................................................................................................... I3.083

CHAPTER 14 SHARE CAPITAL

I. Introduction ............................................................................................................................ 14.00 I
I. I Abolition of authorised capital, par value and share premium ....................................... 14.003
I .2 Categorisation of share capital... ..................................................................................... 14.011
1.2.1 Issued or subscribed capital ................................................................................ 14.012
1.2.2 Paid-up capital and unpaid capital. ...................................................................... 14.0I 3
1.2.3 Called up and uncalled capital... .......................................................................... 14.016
1.3 Issue ofshares ................................................................................................................. 14.0l9
1.4 Issue of shares upon incorporation: first shareholders ................................................... 14.020
1.5 Issue of shares after incorporation: subsequent shareholders ......................................... 14.02 l
1.5.1 General. ................................................................................................................ I4.02 I
1.5.2 Pro rata offers (rights issues) and non-pro rata offers.......................................... 14.025
1.5.3 Directors' fiduciary duties ................................................................................... 14.029
1.6 Procedure for issue ........................................................................................................ 14.030
1.7 Consideration for Issue ................................................................................................... 14.036
1.7.1 Issue price ............................................................................................................ 14.036
1.7.2 Fully paid and partly paid shares ......................................................................... 14.038
1.7.3 Non-cash consideration ....................................................................................... 14.044
1.8 Validation of shares improperly issued ........................................................................... 14.045
xxviii TABLEOF CONTENTS

2. Transfer of Shares·····················•········•·······•········•········•·······•········•·······•········•·······..·······•······ 14.047

2.1 Nature of a transfer ......................................................................................................... 14.047
2.1.1 Transfer of legal title ............................................................................................ 14.048
2.1.2 Novation or assignment? ...................................................................................... 14.050
2.2 Procedure for transfer and rights of pa1ties .................................................................... 14.05 I
2.2.1 Unlisted companies: sale of shares ...................................................................... 14.052
2.2.2 Rights of parties after contracting ....................................................................... 14.059
2.2.3 Listed companies ................................................................................................. 14.061
2.2.4 Gifts of shares ...................................................................................................... 14.067
2.3 Restrictions on transfer ................................................................................................... 14.069
2.3.1 Private companies ................................................................................................ 14.069
2.3.2 Public companies ................................................................................................. 14.077
2.4 Fraudulent transfers ........................................................................................................ 14.078

3. Transmission ofShares .......................................................................................................... 14.081

3.1 General ............................................................................................................................ 14.081
3.2 Transmission upon death of a shareholder ..................................................................... I 4.083
3.2.1 Registration as a member ..................................................................................... 14.084
3.2.2 Restrictions on registration .................................................................................. 14.086
3.2.3 Rights and liabilities in the absence of registration ............................................. 14.089
3.2.4 Joint shareholders ................................................................................................ 14.091
3.3 Transmission upon bankruptcy ....................................................................................... 14.092

4. Registers of Members and Significant Controllers ................................................................. 14.095

4.1 Register of members ....................................................................................................... 14.095
4.1.1 Requirement for a register ................................................................................... 14.095
4.1.2 Registered members and status of the register. .................................................... 14.10 I
4.1.3 Rectification of the register ................................................................................. 14.104
4.1.4 Inspection of the register ..................................................................................... 14.105
4.1.5 Branch registers ................................................................................................... 14.111
4.2 Register of Significant Controllers ................................................................................. 14.l I 5
4.2.1 Requirement for a register .................................................................................... 14.l l 5
4.2.2 Significant controllers .......................................................................................... 14.117
4.2.3 Keeping ofregister. ............................................................................................... 14.124
4.2.4 Companies' obligations to ascertain their significant controllers ......................... 14.130
4.2.5 Rectification of the register .................................................................................. 14.131
4.2.6 Inspection of the register ...................................................................................... 14.132

5. Share Ceitificates ................................................................................................................... 14.133

5.1 Requirement for share certificates .................................................................................. 14.l 33
5.2 Status ofa share certificate ............................................................................................. 14.138
5.3 Replacement of lost certificates ..................................................................................... 14.142
 TABLEOF CONTENTS xxix

6. Alterations to Share Capital········•·······•········•·······•········•········•·······•········•·······•········•·······•·····14.149

6.1 Jncreaseofcapital ........................................................................................................... 14.150
6.2 Reduction of capital ........................................................................................................ 14.l 53
6.3 Consolidation ofshares ................................................................................................... 14.155
6.4 Subdivision of shares ...................................................................................................... 14.l 59
6.5 Members' schemes of arrangement ................................................................................ 14.l 62
6.5.1 General ................................................................................................................. 14.162
6.5.2 Procedure ............................................................................................................. 14.167
6.5.3 Class meetings ..................................................................................................... 14.169
6.5.4 Requisite approval at meetings ............................................................................ 14.173
6.5.5 Court sanction ...................................................................................................... 14.178
6.5.6 Intra-group amalgamations .................................................................................. 14.183

7. Variation of Class Rights ....................................................................................................... 14.190

7. I Introduction ..................................................................................................................... 14.190
7.2 Concept of class rights .................................................................................................... 14.192
7.2.1 Classesofshares .................................................................................................. 14.193
7.2.2 Class rights ........................................................................................................... 14.195
7.3 Variation ofrights ........................................................................................................... 14.200
7.4 Procedure for variation ................................................................................................... 14.203
7.5 Minority protection ......................................................................................................... 14.207

CHAPTER 15 MAINTENANCE OF CAPITAL

I. Capital Maintenance Doctrine ............................................................................................... 15.001
1.1 Introduction .................................................................................................................... 15.001
1.2 Transactions amounting to a return of capital. ................................................................ J 5.004
1.2.1 General ................................................................................................................. 15.004
1.2.2 Disguised returns of capital ................................................................................. 15.007
1.3 Overseas developments .................................................................................................. 15.011

2. Reduction of Capital .............................................................................................................. 15.012

2.1 General ........................................................................................................................... 15.012
2.1.1 The basic prohibition ........................................................................................... 15.012
2.1.2 Consequences of contravention ........................................................................... 15.016
2.2 Permitted reductions of capital ....................................................................................... I5.018
2.3 Court confim1ation procedure ........................................................................................ 15.02 I
2.3.1 Court confirmation of reduction .......................................................................... I 5.023
2.3.2 Other matters following court confirmation ........................................................ I 5.040
2.4 Solvency statement procedure ....................................................................................... 15.045
2.4. I Introduction .......................................................................................................... I 5.045
2.4.2 Procedure and requirements ................................................................................ 15.046
xxx TABLE OF CONTENTS

3. Self-Acquisition of Shares, Redemption of Shares and Share Buy-Backs ............................ 15.059

3.1 General ........................................................................................................................... 15.059
3.2 Redemption of shares ..................................................................................................... 15.064
3.2.1 Power to issue redeemable shares ........................................................................ 15.064
3.2.2 Redemption of redeemable shares ....................................................................... 15.067
3.3 Share buy-backs ............................................................................................................. 15.078
3.3.1 General ................................................................................................................. 15.078
3.3.2 Power to buy back shares ..................................................................................... 15.080
3.3.3 Procedure for buy-back: listed companies ........................................................... 15.084
3.3.4 Procedure for buy-back: unlisted companies ....................................................... I 5.092
3.3.5 Financing of buy-back ......................................................................................... 15.094
3.3.6 Disclosure of buy-back ........................................................................................ 15.095

4. Financial Assistance for Acquisition of Shares ...................................................................... 15.097

4.1 Prohibition on financial assistance ................................................................................ 15.097
4.1.1 General ................................................................................................................. 15.097
4.1.2 Meaning of "financial assistance" ....................................................................... 15.I 03
4.1.3 Consequences of contravention ........................................................................... 15.112
4.2 Exceptions ...................................................................................................................... 15.l 14
4.2.1 Exceptions pursuant to solvency test.. ................................................................. 15.115
4.2.2 Principal or larger purpose exception .................................................................. 15.130
4.2.3 Miscellaneous exceptions .................................................................................... 15.135

5. Dividends and Distributions ................................................................................................... 15.137

5.1 Dividends···································•·······•········•········•·······•········•·······•········•·······••·······•······ 15.137

5.1.1 General. ................................................................................................................ 15.137
5.1.2 Types of dividends ............................................................................................... 15.142
5.2 Dividends and distributions out of profits only ............................................................. 15.148
5.2.1 General ................................................................................................................. 15.148
5.2.2 Basic prohibition .................................................................................................. 15.150
5.2.3 Profits available for distribution .......................................................................... 15.153
5.2.4 Company's financial statements for determining amount of distributions .......... 15.159
5.2.5 Relevance of company's solvency ........................................................................ 15.163
5.2.6 Consequences of unlawful distributions .............................................................. 15.164

CHAPTER 16 FUND-RAISING BY PUBLIC ISSUE

I. lntroduction ............................................................................................................................ 16.001
1.1 Historical development of regulation of prospectuses .................................................... 16.004
1.2 Recent developments ...................................................................................................... 16.005
1.3 Disclosure philosophy ..................................................................................................... 16.006
 TABLEOF CONTENTS xxxi

2. Prospectuses ........................................................................................................................... J6.0 I0

2. I Requirement for prospectus ............................................................................................ I6.0 I0
2.1.1 Genernl. ................................................................................................................ 16.010
2.1.2 Offer to the public ................................................................................................ 16.013
2.2 Exemptions ..................................................................................................................... 16.015
2.2.J Genernl exemptions ............................................................................................. 16.015
2.2.2 Exemptions granted by SFC ................................................................................ 16.020
2.3 Contents of prospectuses ................................................................................................ 16.022
2.3.1 Genernl contents requirements ............................................................................ 16.022
2.3.2 Reports ................................................................................................................. 16.025
2.3.3 Expe1is' statements .............................................................................................. 16.026
2.3.4 Amendments to prospectuses .............................................................................. 16.027
2.3.5 Programme offers ................................................................................................ 16.028
2.4 Authorisation and registration of prospectuses ............................................................... 16.030
2.5 Electronic prospectuses .................................................................................................. 16.033
2.6 Applications and allotments .......................................................................................... 16.035
2.6.1 Minimum subscription ......................................................................................... 16.036
2.6.2 Time period for allotments .................................................................................. 16.039
2.6.3 Allotments of shares or debentures to be listed ................................................... 16.040
2.7 Misstatements in prospectuses ........................................................................................ 16.041
2.7.1 Civil liabilities...................................................................................................... 16.041
2.7.2 Criminal liabilities ............................................................................................... 16.083
2.8 Sales of shares ................................................................................................................. 16.09 I
2.9 Territorial scope of regulation ......................................................................................... 16.096
2.9 .1 Offers outside Hong Kong ................................................................................... 16.096
2.9.2 Offers in Hong Kong by foreign companies ........................................................ 16.098

3. Advertising Restrictions ......................................................................................................... 16.102

3. I Introduction ..................................................................................................................... I6.102
3.2 Advertisements concerning prospectuses: Cap.32, s.388 .............................................. 16.l 04
3.3 Advertisements constituting an offer or invitation:
Cap.32 definition of"prospectus" .................................................................................. 16.106
3.4 Restrictions under Securities and Futures Ordinance (Cap.571), s. l 03 ........................ .16.109

4. Listing on the Stock Exchange .............................................................................................. 16.112

4. I Introduction ..................................................................................................................... I6.112
4.2 The stock exchange ......................................................................................................... I6.115
4.3 Listing rules of the stock exchange ................................................................................ 16. I I6
4.3.1 Function and purpose of the listing rules ............................................................ 16.116
4.3.2 Status of the listing rules ..................................................................................... 16.119
4.3.3 Enforcement of the listing rules ........................................................................... 16.120
xxxii TABLE OF CONTENTS

4.4 Methods of listing ........................................................................................................... 16. I22

4.5 Qualifications for listing ................................................................................................. 16.123
4.6 Application procedures and listing documents ............................................................... 16.125
4.7 Continuing disclosure obligations .................................................................................. 16.129
4.7.1 Introduction .......................................................................................................... 16.129
4.7.2 Mandatory disclosure of inside i.nfomrntion........................................................ 16.130
4.7.3 Listing rules ......................................................................................................... 16.147

5. Reform············•········•········•·······•········•·······•········•········•·······•········•·······•········•·······••·······•······16.149

CHAPTER 17 DEBENTURES AND CHARGES

I. Introduction ............................................................................................................................ 17.001

2. Debentures ............................................................................................................................. 17.002

2.1 lntroduction ..................................................................................................................... 17.002
2.2 Meaning and nature of debentures .................................................................................. 17.004
2.3 Types of debentures ........................................................................................................ 17.008
2.3.1 Redeemable and irredeemable debentures .......................................................... 17.009
2.3.2 Convertible debentures ........................................................................................ 17.012

2.3.3 Unsecured notes······················•········•········•·······•········•·······•········•·······••·······•······ 17.014

2.3.4 Debenture series .................................................................................................. 17.015
2.3.5 Debenture stock .................................................................................................. 17.016

2.3.6 Bearer debentures············•·······•········•········•·······•········•·······•········•·······••·······•······ 17.017

2.4 Issue of debentures ......................................................................................................... 17.018
2.4.1 Investor protection ............................................................................................... 17.018
2.4.2 Registration of allotments with the Registrar of Companies ............................... 17.022
2.4.3 The company's register of debenture holders ...................................................... 17.023
2.4.4 Issue of debentures or certificates following allotment ....................................... 17.028
2.4.5 Trustee for debenture holders .............................................................................. 17.029
2.4.6 Specific performance of contracts for debentures ............................................... 17.035
2.5 Transfer of debentures .................................................................................................... 17.036
2.5.1 Instrument of transfer .......................................................................................... 17.036
2.5.2 Registration of transfer ........................................................................................ 17.038
2.5.3 Issue of debentures or certificates following transfer .......................................... 17.039
2.5.4 Legal title ............................................................................................................. 17.040
2.5.5 Bearer debentures············•·······•········•········•·······•········•·······•········•·······••·······•······ 17.041
2.6 Transmission of debentures ............................................................................................ 17.042
2. 7 Meetings of debenture holders ........................................................................................ 17.044

3. Charges ................................................................................................................................... 17.047

3. J Introduction and types of security··············•········•·······•········•·······•········•·······••·······•······· J7.047

3.1.1 General. ................................................................................................................ 17.047
 TABLEOF CONTENTS xxxiii

3.1.2 Mortgages ............................................................................................................ 17.05 I

3.1.3 Charges ................................................................................................................ 17.056
3.1.4 Creation of security and type of security created ................................................ 17.062
3.2 Fixed and floating charges .............................................................................................. 17.064
3.2.1 Distinction between fixed and floating charges ................................................... 17.064
3.2.2 Charges over book debts ...................................................................................... 17.077
3.2.3 Disposition of assets subject to a floating charge ................................................ 17.086
3.2.4 Crystallisation of a floating charge ...................................................................... 17.090
3.2.5 Nature of floating charges ................................................................................... 17.103
3.3 Registration of charges ................................................................................................... 17.I 06
3.3.1 Introduction .......................................................................................................... 17.106
3.3.2 Charges which need to be registered ................................................................... 17.113
3.3.3 Procedure for registration .................................................................................... 17.135
3.3.4 Registration and issue of certificate ................................................................... 17.140
3.3.5 Consequences of failure to register ...................................................................... 17.148
3.3.6 Debentures in a series .......................................................................................... 17.155
3.3.7 Extension of time for registration ........................................................................ 17.158
3.3.8 Existing charges on property acquired by the company ...................................... 17.166
3.3.9 Rectification of registered particulars ................................................................. 17.168
3.3.10 Release of property from charge .......................................................................... 17.172
3.3.11 Company's own register of charges ..................................................................... 17.174
3.3.12 Non-Hong Kong companies ................................................................................ 17.179
3.4 Priority between holders of competing charges .............................................................. 17.I 85
3.4.1 General ................................................................................................................. 17.185
3.4.2 Priorities in relation to charges over real property ............................................... 17.188
3.4.3 Priority in relation to charges over personal property ......................................... 17.191
3.4.4 Priority in relation to charges over debts and choses in action ............................ 17.199
3.4.5 Negative pledge and automatic crystallisation clauses ........................................ 17.205
3.4.6 Subordination agreements .................................................................................. 17.215

CHAPTER 18 RECEIVERSHIP
I. Introduction ········································•········•·······•········•········•·······•········•·······•········•·······..····· 18.00 I

2. The Functions of Receivership ............................................................................................... 18.006

3. Privately Appointed Receivers or Receiver and Managers ..................................................... 18.012

3.1 The legal nature of privately created receivership .......................................................... 18.012
3.2 Qualifications for appointment ....................................................................................... 18.015
3.3 Effect of appointment on different stakeholders ............................................................. 18.016
3.3.1 Effect on the company .......................................................................................... 18.016
3.3.2 On company directors ........................................................................................... 18.019
xxxiv TABLE OF CONTENTS

3.3.3 On employees ........................................................................................................ 18.022

3.3.4 Effect on the company's assets .............................................................................. 18.023
3.3.5 Effect on creditors ................................................................................................. 18.024
3.4 The rights and powers of receivers appointed out of court... .......................................... 18.025
3.5 The duties of receivers .................................................................................................... 18.039
3.6 Liabilities of receivers .................................................................................................... 18.067
3.7 Termination of receivership ............................................................................................ 18.070

4. Court-Appointed Receivers or Managers ............................................................................... 18.076

4.1 Court's jurisdiction .......................................................................................................... 18.076
4.2 Circumstances where appointment is sought .................................................................. 18.079
4.3 Principles for exercise of court's discretion .................................................................... 18.082
4.4 Who may apply? ............................................................................................................. 18.096
4.5 Qualifications for appointment ...................................................................................... 18.097
4.6 Effect of appointment ..................................................................................................... 18.098
4.7 Rights, powers, duties and liabilities ............................................................................. 18.IOI
4.8 Discharge ........................................................................................................................ 18.I I0

CHAPTER 19 CORPORATE RESCUE

I. Introduction ............................................................................................................................ 19.00I

2. Corporate Rescue: The Landscape in Hong Kong ................................................................. 19.007

2. J Workouts and debt rescheduling .................................................................................... J9.007
2.2 The "Hong Kong Approach" .......................................................................................... 19.012
2.3 Receivership .................................................................................................................... 19.013
2.4 Provisional liquidation .................................................................................................... 19.017
2.5 Scheme of arrangement .................................................................................................. 19.0l9
2.6 Cap.32 s.199(1)(e) power of compromise ...................................................................... 19.02 I
2.7 Provisional supervision ................................................................................................... 19.023

3. The Functions of a Restructuring System in Facilitating Corporate Rescue ......................... I 9.034

4. The Stay Device ..................................................................................................................... 19.038

4.1 Adjournment of winding-up petitions ............................................................................ 19.040
4.1.1 Initial adjournment .............................................................................................. 19.042
4.1.2 The possibility of further adjournments .............................................................. I9.043
4.1.3 Prerequisites for further adjournments ................................................................ 19.044
4.1.4 Duration of further adjournments ........................................................................ 19.05 I
4.2 Provisional liquidator ...................................................................................................... 19.052
4.3 Courts' stay powers under the Rules of the High Court ................................................. 19.064
 TABLEOF CONTENTS XXXV

5. The Decision-Making Device······························•········•········•·······•········•·······•········•·······•····· 19.065

5. I The scheme of arrangement regime ................................................................................ 19.066
5.1.1 The provisions ...................................................................................................... 19.066
5.1.2 Principles governing courts' discretion ................................................................ 19.070
5. I .3 Classification of scheme creditors ....................................................................... 19.076
5.1.4 The duty of disclosure ......................................................................................... 19.084
5.1.5 Procedure ............................................................................................................. 19.096

6. Debtor Overreaching Control Devices ................................................................................... 19.106

6.1 Screening out ineligible firms ........................................................................................ I 9.11 I
6.2 Displacing management of eligible firms ....................................................................... 19.I 14
6.3 Constraining the power of incumbent directors .............................................................. I 9.115

CHAPTER 20 LIQUIDATION
I. Introduction ............................................................................................................................ 20.00 I
1.1 General ............................................................................................................................ 20.00 I
1.2 Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32) .............20.006

2. Liquidators ............................................................................................................................. 20.007

2.1 Role of liquidators and qualifications for appointment... ............................................... 20.007
2.1.1 Who is a liquidator and what his or her role is .................................................... 20.007
2.1.2 Panel schemes ...................................................................................................... 20.009
2.1.3 Qualifications for appointment ............................................................................ 20.013
2.2 The appointment of liquidators ....................................................................................... 20.020
2.2.1 Compulsory winding-up ...................................................................................... 20.020
2.2.2 Voluntary winding-up .......................................................................................... 20.023
2.3 The powers of liquidators ............................................................................................... 20.025
2.4 The duties of liquidators ................................................................................................. 20.033
2.4.1 Specific statutory duties-compulsory winding-up .......................................... 20.034
2.4.2 Specific statutory duties - voluntary winding-up .............................................. 20.039
2.4.3 Fiduciary duties .................................................................................................. 20.041
2.4.4 Duty of care ......................................................................................................... 20.046
2.5 Removal .......................................................................................................................... 20.048
2.5.1 Removal by the court ........................................................................................... 20.049
2.5.2 Removal by the members - members' voluntary winding-up ........................... 20.056
2.5.3 Removal by the creditors - creditors' voluntary winding-up ............................. 20.057

3. Compulsory Winding-Up ....................................................................................................... 20.058

3.1 Grounds for compulsory winding-up ............................................................................. 20.058
3.1.1 Winding-up of company by special resolution: Cap.32 s. l 77(l)(a) .................... 20.060
3.1.2 Failure to commence business or suspending business
for a whole year: Cap.32 s.177( I)(b) .................................................................... 20.06 l
xxxvi TABLE OF CONTENTS

3.1.3 The company has no members: Cap.32 s. I 77(1)(c) ............................................. 20.062

3.1.4 Occurrence of events prescribed in the company's
constitutional documents: Cap.32, s. l 77(l)(e) ..................................................... 20.063
3.1.5 Company unable to pay its debts: Cap.32, s. I 77( I)(d) ........................................ 20.064
3.1.6 Just and equitable: Cap.32, s. I 77(J)(t) ................................................................ 20.07 I
3.2 Application and court order ............................................................................................ 20.072
3.2.1 Application by petition ........................................................................................ 20.072
3.2.2 Persons entitled to petition ................................................................................... 20.073
3.2.3 Company as petitioner·············•········•········•·······•········•·······•········•·······••·······•······20.075
3.2.4 Creditor as petitioner ........................................................................................... 20.076
3.2.5 Contributory as petitioner .................................................................................... 20.077
3.2.6 Appointment of provisional liquidator before hearing of petition ....................... 20.080
3.2. 7 Court's powers on hearing of petition .................................................................. 20.08 I
3.2.8 Publication of winding-up ................................................................................... 20.084
3.2.9 Commencement of winding-up ........................................................................... 20.085
3.3 Effect of winding-up order ............................................................................................. 20.086
3.3.1 Appointment of liquidator and formation of commillee of inspection ................ 20.087
3.3.2 Company's property, and control and management of the company ................... 20.089
3.3.3 Stay of proceedings against the company ............................................................ 20.092
3.4 Company's assets in the liquidation ................................................................................ 20.095
3.4.1 Assets available for distribution ........................................................................... 20.096
3.4.2 Assets not available to liquidator for distribution ................................................ 20.099
3.4.3 Contracts of the company .................................................................................... 20.100
3.4.4 Disclaimer of onerous property ........................................................................... 20. JOI
3.4.5 Acquiring information about the company's assets ............................................. 20.107
3.5 Void dispositions of company property .......................................................................... 20. I I9
3.6 Unfair preferences .......................................................................................................... 20.129
3.6.l Concept of"unfair preference" ............................................................................ 20.132
3.6.2 Time at which preference was given .................................................................... 20.135
3.6.3 Influenced by desire to give preference ............................................................... 20.137
3.6.4 Company was insolvent ....................................................................................... 20.141
3.6.5 Court orders ......................................................................................................... 20.142
3.7 Transactions at an undervalue ......................................................................................... 20.143
3.7.1 Concept of"undervalue transaction" ................................................................... 20.145
3.7.2 Time at which company entered into transaction ................................................ 20.158
3.7.3 Company was insolvent ....................................................................................... 20.159
3.7.4 Defence ................................................................................................................ 20.160
3.7.5 Court orders ......................................................................................................... 20.161
3.7.6 Where undervalue transaction also unfair preference ......................................... 20.162
3.7A Invalid floating charges .................................................................................................. 20. I 63
 TABLEOF CONTENTS xxxvii

3.8 Fraudulent trading ........................................................................................................... 20. I 68

3.8.1 Carrying on of any business of the company ....................................................... 20.172
3.8.2 Fraud .................................................................................................................... 20.173
3.8.3 Persons liable ···········•·······•········•·······•········•········•·······•········•·······•········•·············20.176
3.8.4 Court orders ......................................................................................................... 20.177
3.9 Extortionate credit transactions ...................................................................................... 20.178
3.10 Misfeasance .................................................................................................................... 20. I 8 I
3.11 Liability of contributories ............................................................................................... 20.185
3.12 Creditors entitled to claim in the winding-up ................................................................. 20. I 88
3.12.1 Provable debts ...................................................................................................... 20.188
3.12.2 Procedure for proving .......................................................................................... 20.191
3.12.3 Set-off .................................................................................................................. 20.192
3.13 Realisation and distribution of assets ............................................................................. 20. I 94
3.13.1 Assets subject to fixed charges (or mortgages) ................................................... 20.195
3.13.2 Assets available to unsecured (general) creditors (free assets) ............................ 20.197
3.13.3 Assets subject to a floating charge ....................................................................... 20.199
3.14 Winding-up with a regulating order. ............................................................................... 20.203
3.15 Small liquidations: winding-up by summary procedure ................................................. 20.206
3.16 Companies formed outside of Hong Kong ..................................................................... 20.207

4. Voluntary Winding-Up ........................................................................................................... 20.209

4.1 Introduction ..................................................................................................................... 20.209
4.1.1 Members' voluntary winding-up ........................................................................ 20.213
4.1.2 Creditors' voluntary winding-up ......................................................................... 20.219
4.2 Special procedure for members' winding-up: s.228A .................................................... 20.223
4.2.1 General ................................................................................................................. 20.223
4.3 Stay ofa Cap.32, s.228A winding-up ............................................................................. 20.230
4.4 Provisions applicable to voluntary winding-up .............................................................. 20.233
4.5 Voluntary winding-up after commencement of
compulsory winding-up .................................................................................................. 20.238
4.6 Compulsory winding-up after commencement
of voluntary winding-up ................................................................................................. 20.243

5. Offences Antecedent to or in the Course of Winding-Up ...................................................... 20.245

5.1 Concealing or removing property, or other fraud ........................................................... 20.246
5.2 Concealing information from the liquidator,
and falsification of books ............................................................................................... 20.249
5.3 Failure to keep accounting records ................................................................................. 20.25 I
5.4 Other offences ................................................................................................................. 20.252

6. Dissolution of the Company .................................................................................................. 20.253

6.1 Dissolution after company wound-up ............................................................................. 20.253
6.2 Restoration of a dissolved company ............................................................................... 20.259
xxxviii TABLEOF CONTENTS

PROVIEWEXCLUSIVEMATERIALS
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 TABLE OF CASES

Hong Kong
Abdul Aziz Essa v Capital Global Ltd
(unrep., HCCW 422/2010, 8 July 201 l) .................................................... 20.065
ABN Amro Bank NV v Chiyu Banking Corp Ltd
[2001]2HK.LRD 175 .......................................... l.143, 17.193, 17.202, 17.206
Achieve Goal Holdings Ltd v
Zhong Xin Ore-Material Holding Co Ltd
(unrep., HCA I 987/2005, [2014] HKEC 1454) ........................... 18.115, I 8.117
Acropolis Ltd v W&Q Investment Ltd [2018] HK.CF! 1195
(unrep., HCCW 218/2017, HCMP 1721/2017, [2018] HK.EC 1410) ....... 20.080
Action Industrial (Intl) Ltd, Re (unrep., HCCW 35/2007,
[2009] HKEC 1971) ......................................................... 20.050, 20.051, 20.053
Advanced Wireless Group Ltd, Re (unrep., HCCW 441/2006,
[2007] HKEC 764) ........................................................................ 19.044, 19.048
AGI Logistics (HK) Ltd (in liq), Re [2016] 5 HK.LRD 737 .................................. 20.120
Akai Holdings Ltd (in liq) v Everwin Dynasty Ltd (No.2)
[2016] HKC 307 ........................................................ 3.031, 8.004, 8.007, 8.119,
8.135, 8.171
Akai Holdings Ltd (in liq) v Everwin Dynasty Ltd
[2012] 4 HK.LRD 248 (CA) ......................................................................... 8.007
Akai Holdings Ltd (in liq) v Kasikom Bank pie
[2010] 3 HKC 153 ............................................................ 12.010, 12.012, 12.023
Akai Holdings Ltd (in liq) v
Kasikornbank pie (2010) 13 HKCFAR 479 ......................... 8.165, 8.173, 8.175,
8.177, 8.178, 8.191
Akai Holdings Ltd (in liq) v Thanakharn Kasikorn Thai Chamkat
(Mabachon) (unrep., HCCL 59/2004,
(2008] HK.EC 874) ..................................................... 8.026, 8.035, 8.036, 8.077
Akai Holdings Ltd v Kasikorn Bank pie
[201O]3 HKC 153 .................................................................. 8.026, 8.036, 8.078
Akai Holdings Ltd v Thanakharn Kasikorn Thai Chamkat
(Mabachon) (unrep., HCCL 59/2004,
(2008] HKEC 874) ................................................................. 8.035, 8.036, 8.077
Akai Holdings Ltd, Re [2001] 2 HK.LRD 41 l ....................................................... 20.020
Akai Holdings Ltd, Re [2003] I HK.LRD B7 ........................................................ 19.037
Aktieselskabet Dansk Skibsfinansiering v Brothers
(2000) 3 HKCFAR 70, [2000] 1 HKC 511 ....... 8.202, 19.120, 20.173, 20.174
Aktieselskabet Dansk Skibsfinansiering v
Wheelock Marden & Co Ltd [1994] 2 HKC 264 ............................. 7.006, 7.014
Aktieselskabet Dansk Skibsfinansiering v
Wheelock Marden & Co Ltd
[1998] 3 HKC 153 ........................................................................................ 8.020
xl TABLE OF CASES

Albatronics (Far East) Co Ltd, Re

[2002] HKLRD (Yrbk) 180 .......................................................................19.037
Aloha Coffee Co Ltd, Re [2013] 1 HKLRD 356 .........................20. I 33, 20.140, 20.141
Alvarez & Marsal Asia Ltd [2009] 4 HKLRD 727 .....................11.075, 11.076, 11.077
Amery China Building Co Ltd, Re [ I 982] I HKC I97 .........................................20.081
Amery China Building Co Ltd, Re [1982] HKLR 236..........................................20.068
Anglo-Eastern (1985) Ltd v Knutz [1987] 3 HKC 80 ........................................... 10.028
Anglo-Eastern (1985) Ltd v Knutz [1988] 1 HKLRD 322 ...................... 10.019, l0.021
APP (Hong Kong) Ltd, Re (unrep., HCMP 2420/2004,
[2005] HKEC 158) ..........................................................................19.073, 9.068
APP (Hong Kong) Ltd, Re [2004] 2 HKLRD F7 ..................................................20.123
APP (Hong Kong) Ltd, Re [2005] 1 HKLRD 272 .....................19.043, 19.044, 19.046,
19.047, 19.050, 19.097, 9.093
Artan Investments Ltd v Bank of East Asia Ltd
(unrep., HCMP 125/2015, [2015] HKEC 1055) ....... 8.046, 8.047, 8.050, 8.069
Artshop Design and Construction Ltd, Re
(unrep., HCMP 2508/2006, [2007] HKEC 1859) .......................................8.028
ASEAN Interests Ltd, Re 2004 WL 5826,
[2004] HKEC 184 ........................................................................................9.105
Asher & Co (Hong Kong) Ltd, Re [2004] 2 HKLRD 37 ......................................20. l 14
Asia Television Ltd v Mak Chi Kin [2006] HKC 347 ....... 1.057, 1.061, 10.208, 10.163
Asian Infonnation Technology Inc Ltd, Re
(unrep., HCMP 3035/2004, 24 January 2005, CFI) .................................. 15.038
Asiatic Century Ltd, Re [2014] 2 HKC 502 .......................................................... 11.049
Aspial Investment Ltd v Mayer Corp Development International Ltd
[2013] 3 HKLRD 276 ................................................................................12.013
Astrotec Co Ltd, Re (unrep., HCMP 923/2011, [2012] HKEC 842...................... 10.074
Attlee Investments Ltd v Lee Chuen [1982] HKLR 420 ....................................... 19.037
Attlee Investments Ltd v Lee Chuen t/a
Lee Chuen Furnitme Co [ 1983] I HKC I86 .............................................20.092
Attorney General v Herald Houseware Ltd [1996] 4 HKC 787 .............. 12.007, 12.010,
12.025, 12.027
Attorney General v Shun Shing Construction and
Engineering Co Ltd [ 1986] HKLR 311 .....................................................12.120
Baitian Techonology Ltd, Re [2014] 5 HKC 305................................................... l 1.049
Bakri Bunker Trading Co Ltd v Owners of and
Other Persons Interested in the Ship "Neptune"
[1986] HKLR 345 .............................................................................3.054, 3.058
Bank of East Asia Ltd, Re [2015] 4 HKC 137, [2015] HKEC 1055..................... 11.086
Bank of East Asia Ltd v Labour Buildings Ltd
(unrep., HCMP 769/2002,
[2008] HKEC 134, CFI) .......................... 8.077, 12.058, 12.069, 12.070, 12.074
Bank of East Asia Ltd v Rogerio Sou Fung Lam
[1988] 1 HKLR 181 ...................................................................................20.120
Bay Capital Asia Fund, LP v DBS Bank (Hong Kong) Ltd
(unrep., HCMP 3104/2015, [2016] HKEC 2377) .....................................20.208
Beauty China Holdings Ltd, Re [2009] 6 HKC 351 ......................2.071, 19.111, 20.207
 TABLEOF CASES xii

Belgian Bank v Sino Global Intl Ltd

(unrep., HCMP 4950/2001, [2005) HKEC 1414) .......................... 8.074, 8.077,
8.176, 12.074
Belgravia Properties Ltd, Re [2015) l HKLRD 509 .............................................20.186
BF Construction Co Ltd, Re (unrep., HCCW 691/2004,
[2004] HKEC 1513, CFI) ...........................................................................20.060
Billion Express Industrial Ltd v
Tsang Hung Kong [2012] 5 HKC 51 .....................................7.060, 7.086, 7.096
BJB Career Education Co Ltd, Re [2017) l HKLRD 113.....................................20.208
BNP Paribas v GC Luckmate Trading Ltd
[2002] 2 HKLRD 156 ..................................................................................3.073
BOCIResearchLtd,Re[2000] l HKLRD 194........................................15.039, 15.040
Boken Ltd, Re [1997] 3 HKC 537 .........................................................................10.224
Boldwin Construction Co Ltd, Re
[2003) 2 HKLRD 237 ...................................................................10.238, 20.080
Boldwin Construction Ltd, Re [2001] 3 HKLRD 430 ..............................l 1.075, 11.076
Bondwood Development Ltd, Re [ 1990) 1 HKLR 200 ........................... 10.178, 10.184,
10.190, 10.197, 10.210
Bonfield Intl Ltd, Re (unrep., HCCW 99/2002, [2006) HKEC 1113) ..................20.011
Brave Venture Ltd v Xinhua News Media Holdings Ltd
[2017] 5 HKLRD 153 ................................................................................10.251
Broadview Commodities Pte Ltd v
Broadview Finance Ltd [1983] HKLR 384 ......................................7.062, 7.063
CA Pacific Finance Ltd (in liq) (No. l ), Re
[1999) 2 HKLRD 1 ............................................ 13.040, 13.041, 14.059, 14.063
California Intl (Far East) Ltd, Re [2002] HKEC 652.............................................20.062
Capital Asia Ltd, Re [ 1999) 2 HKC 854 ...................................................15.034, 15.038
Capital Sino Investments Ltd, Re [2015] I HKLRD 818 ...................................... 17.171
Canian Holdings Ltd (in liq) (No.2), Re [1984) l HKC 598 ................................20.103
Carryman Industrial Ltd, Re [2000) 3 HKLRD 295 .............................................. 10.239
Cathay Pacific Airways Ltd v Wong Sau Lai (2006) 9 HKCFAR 371 .................. 12.l Ol
Century Group Ltd, Re [2005) HKEC 781 ............................................................20.123
CG & L Investment Ltd and Wyatt Estates Ltd, Re
[1993) l HKLR 107 ...................................................................................10.230
Chan Sau-kut v Gray and Iron Construction and
Engineering Co (a film) [1986] HKLR 84 .......................................1.040, 1.049
Cheery City Contractors Ltd, Re
(unrep., HCCW 896/2003, [2004] HKEC 504) ........................... 19.085, 19.085,
19.109, 19.110, 19.111
Chen Muhua v Joint and Several Liquidators of Joy Rich Development Ltd
(unrep., HCCW 146N2013, HCCW 146/2013,
[2017) HKEC 1101)...................................................................................10.041
Cheng Yuk Lin v Chan Choi Wah [1991] 1 HKC 52 ...............................................9.038
Cheung Kong (Holdings) Ltd, Re [2015) 2 HKLRD 512 ........... 14.165, 14.176, 15.039
Cheung Pik-wan v Tong Sau-ping [ 1986) HKLR 921 ...........................................I 2.095
Cheung Pui Yuen v Worldcup Investments Inc
(2009) 12 HKCFAR 31 ....................................................13.040, 13.057, 14.138
xiii TABLE OF CASES

Cheung Tse Ming v Cheung Yuk May

(unrep., HCA 9995/1995, [1996) HK.LY199)..................................6.036, 6.037
Cheung Ying Lun v Legal Way Ltd [2014) 1 HKLRD 106...................................20.237
Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction Co Ltd
[ 1990) 2 HKLR 223 (CA) ..........................................................................20.120
Chieng Tsai Wan Judy v Kwok Kam Fung [2018) HKCFI 603,
[2018) HK.EC896 .........................................................................11.075, 11.076
Chim Pui Chung v Lam Siu Yue [2002) I HKLRD 136 ....................................... 18.105
Chime Corp Ltd, Re (2004) 7 HKCFAR 546 ............................ .10.184, 10.217, 10.218,
I 0.221, I 0.222, I 0.223
Chime Corp Ltd, Re [2003) 2 HKLRD 905 ..........................................................10.206
ChinaLight&PowerCoLtd,Re[l998] 1 HKC 170................................. 15.022, 15.37
China Light & Power Co Ltd, Re [ 1998) 1 HKLRD 158 .........................14.172, 14.178
China People (Hong Kong) Ltd, Re [2014) 2 HKLRD 808 .................................. 10.243
China Medical Technologies Inc (Joint Liquidators) v KPMG
[2017) 2HKLRD 1091 (CA) .....................................................................20.112
China Metal Recycling (Holdings) Ltd (No.3), Re
[2015) 2 HKLRD 415 ...................................................................16.057, 20.074
China Metal Recycling (Holdings) Ltd, Re [2015) 2 HKLRD 747 ......................20.109
China Minsheng Banking Corp Ltd v
DiChain Holdings Ltd [2008) 5 HKLRD 373 ...........................................17.l 18
China Motor Vehicle Economic Development Co Ltd, Re
(unrep.,HCCW 933/1999, [2000] HKEC 61) ........................................... 19.111
China NTG Investment Ltd, Re [2012) 2 HKLRD 296 ................................7.052, 9.033
China Ocean Shipping Co v
Mitrans Shipping Co Ltd [1995) 3 HKC 123 ............ 3.025, 3.043, 3.051, 3.068
China Solar Energy Holdings Ltd, Re
[2016) (unrep., HCCW 108/2015,
[2016) I-IKEC487 ......................................................................................19.062
China Solar Energy Holdings Ltd, Re [2017) 2 HKLRD 1074............................. 19.062
China Solar Energy Holdings Ltd, Re (No.2) [2018) HKCFI 555,
[2018) 2 HKLRD 338 ......................................................19.062, 19.063, 20.080
China Star Enterprise Hong Kong Ltd, Re [2013) 5 HKLRD 271 ...............9.006, 9.068
China Talent International Development Ltd, Re
(unrep., HCMP 4189/2002, [2004) HK.EC468) .........................................7.124
Chinese United Establishments Ltd v
Cheung Siu Ki [1997) 2 HKC 212 ............................ 8.007, 8.114, 8.118, 8.121,
8.123, 8.126
Ching Hing Construction Co Ltd, Re
(unrep., HCCW 889/1999, [200 I] HKEC 1402)......................... 10.l 73, 10.187,
10.193, 10.198
Chingtung Futures Ltd (in liq) v Lai Cheuk Kwan Arthur
[1992) 2 HKC 637 ........................................................................................8.042
Chingtung Futures Ltd (in liq) v
Lai Cheuk Kwan Atthm [1994) I HKLR 95 ........................8.038, 8.040, 8.041,
8.153, 8.156, 8.188, 8.206
Chintung Futures Ltd v Arthur Lai Cheuk Kwan [1994) 1 HKLR 95 ....................8.188
 TABLEOF CASES xliii

Chit Lee Holdings Ltd, Re [2000] 2 HKC 481 ......................................................20.092

Choi Chi Wai v Cheng Ka Shing
(unrep., HCMP 729/2012, HCA 1441/2012, 126 and 2147/2013,
[2017] HKEC 850) ........................................................................10.197, 10.198
Chor Lau Heung Restaurant Co Ltd, Re
(unrep., HCCW 63/1999, [2000] HKEC 342) ...........................................10.152
Chow Belle v Glory Manor Co Ltd [1989) 2 HKC 581 ........................................10.215
Christian Emil Toggenburger v Beauforte Investors Corp Ltd
(unrep., HCMP 37/2007, [2007] HKEC 171)...................................7.079, 7.087
Chu Kong v Up Profit Ltd (unrep., HCMP 305/2016,
[2017] HKEC 424) ......................................................................................10.091
Chung Cheung She v Sze Yap S S Co Ltd
(1931-32) 25 HKLR 77 .........................................................9.053, 9.055, 9.056
Chung Sau Ling v Asia Women's League Ltd
[2001) 3 HKC410 ......................................................................................10.047
Chyau Fwu Investment Ltd, Re [1986] HKLR 374 ...............................................20.082
CIL Holdings Ltd, Re (unrep., HCCW 432/2001, [2002) HKEC 97) .........19.044, 19.050
CIL Holdings Ltd, Re (unrep., HCMP 2799/2002,
[2003] HKEC 519) .....................................................................................19.050
Cirtex Co Ltd, Re [ 1987) 3 HKC 13 ......................................................................10.238
Citrend Services Ltd, Re [2008] HKLRD 279 ..................... 7.121, 7.124, 17.127, 7.126
City Top Engineering Ltd, Re [2006] 2 HKLRD,
[2006) 3 HKC 455 ......................................................................................20.066
Common Luck Investment Ltd v Cheung Kam Chuen
[1999) 2 HKLRD 417 ...................................................................17.054, 17.056
Commonwealth Printing Press Ltd, SCt (HK), Re
(unrep., HCCW 15/1974, 31 May 1974) ..........................................6.072, 6.074
Compania Sud Americana De Vapores SA v
Hin-Pro International Logistics Ltd
(unrep., HCMP 1449/2014, [2014) HKEC 1186) ........................ 18.010, 18.091
Comtowell Ltd, Re [1998) 2 HKLRD 463 .............................................................10.238
Comtowell Ltd, Re [1998) 4 HKC 81 ....................................................................20.060
Conso Electronics (Far East) Ltd (in liq), Re
[1995) 2 HKC 327 ......................................................................................20.241
Constella Ltd v Super Eastern Ltd [20 IOJ 1 HKC 321 ..........................................I 0.234
Convenience Container [2007) 3 HKLRD 575......................................................17.151
Copyright Ltd, Re [2004) 2 HKLRD 113 ..........................................8.149, 8.150, 8.155
Credit Lyonnais v SK Global Hong Kong Ltd
[2003) 4 HKC 104......................................................................................19.109
Dalny Estates Ltd, Re [2018] I HKLRD 409 .................. 9.144, 10.014, 10.015, 10.118
Datacom Cable System Co Ltd, Re [2001) 2 HKC 482 ........................................20.069
Days Impex Ltd v Fung Yu & Co (unrep., HCA 1035/2014,
[2017] HKEC2269) ........................................... 11.127, 11.132, 11.134, 11.135
DBS Bank (Hong Kong) Ltd v Yue Li (HK) Engineering Ltd (unrep., HCMP
165/2014, [2014] HKEC 1597)..................................................................12.013
Democratic Party v Secretary for Justice
[2007] 2 HKLRD 804 ............................................ 1.002, 2.034, 14.106, 14.108
xliv TABLE OF CASES

Dickson Group Holdings Ltd, Re

(unrep., HCMP 357/2008, HCCW 333/2006,
[2008] HKEC 899) ........................................................................19.037, 19.112
DJH Consultants Ltd, Re (unrep., Civ App 164/1984) ..........................................20.078
Dolphin Advertising Ltd v Tronken Enterprises Ltd
(unrep., HCA 2409/2006, [2009] HK.EC 1954) ...........................12.033, 12.036
Dream Asia Ltd, Re [2003) 2 HKLRD 287,
[2003] 3 HKC 222 ......................................................................................20.165
East Asia Satellite Television (Holdings) Ltd v
New Cotai LLC [20 I I] 3 HKLRD 734 ........................................10.038, 10.096
Easy Carry Ltd, Re (unrep., HCCW 297,298,299, 300 and 301/2014,
[2016) HK.EC2621) .................................................................................. 19.063
E-Harbour Services Ltd, Re [2014) 5 HKLRD 180 ................................................7.054
Elsinct (Asia-Pacific) Ltd v
Commercial Bank of Korea Ltd [1994) 3 HKC 365 ...................................2.064
Emagist Entertainment Ltd, Re [2012] 5 HKLRD 703 .........................................20.128
Emperor Hotel Management Co Ltd, Re
[2002] 3 HKLRD 805 .......................................................................7.126, 7.138
Enzo Barazettie v Steris-Austar Phannaceutical
Systems Hong Kong Ltd [2014) 5 HKLRD 282 ....................................... 11.049
Enterprises Ltd, Re (2009) 12 HKCFAR 512 ........................................................12.103
Eplaza Ltd, Re [2003) HK.EC940..........................................................................20.066
Esquire (Electronics) Ltd, Re [ 1996) 3 HKC 309 .....................................20.068, 20.081
Esquire (Electronics) Ltd, Re [1996) HKLY 203 ................................................... 19.041
Ever Joint (Holdings) Ltd v Nice Theme Ltd
[2006] 4 HKLRD 516 ................................................................................10.042
Ever Rise Engineering Ltd, Re [2001) HKCFI 216 ...............................................20.124
Excel Noble Development Co Ltd v Wah Nam Group Ltd
(unrep., HCCW 130/2000).........................................................................20.124
Excelling Profit Investments Ltd v Sera Ltd [ 1992) 2 HKC 262 ............. 12.091, 12.092
Excelling Profit Investments Ltd v Sera Ltd [1992] HKLY 606 ............................. 1.008
Express Builders Co Ltd, Re [2004) 4 HKC 532 ...................................................20.242
Extramoney Ltd v Chan, Lai Pang & Co (a firm)
[1994) HKLY 223 ............................................... 11.127, 11.130, 11.133, 15.165
Extramoney Ltd v Chan, Lai, Pang and Co (a firm)
[1990] 2 HKLR 268 .....................................................................................8.038
Extramoney Ltd v Chan, Lai Pang & Co (a fim1)
(unrep., HCA A8437/1987, 15 January 1994)............................. I J.127, 11.130,
11.133, 15.165
Eyecare Trading Ltd (in liq) v Commissioner oflnland Revenue
[2012] 2 HKLRD 911 ................................................................................12.103
F & S Express Ltd, Re [2005) 4 HKLRD 743 .............................10.056, 10.088, 10.090
Falcon Insurance Co, Re (Hong Kong) Ltd, Re
(unrep., HCMP 1700/2007, [2007) HKEC 2154) ..................................... 15.038
Far East Structural Steelwork Engineering Ltd, Re
[201OJ I HKLRD 156 ...................................................................17.062, 17.123
Far East Structural Steelwork Engineering Ltd, Re [2005) HK.EC711 ................20.125
 TABLEOF CASES xiv

Finance Co Ltd v Agnew [1995] 2 HKLR 186......................................................l l.138

Finbo Engineering Co Ltd, Re [1998] 2 HKLRD 695 ...........................................20.193
Fireman v Golden Rice Bowl Ltd [1987] 2 HKC 549 ...........................................14.075
Fireman v Golden Rice Bowl Ltd [I 987] HKLR 981 ...........................................14.076
First Bangkok City Finance Ltd (in liq), Re [ 1994] 2 HKC 735 ...........................20.193
First Bangkok City Finance Ltd v Coro Tejapaibui [1989] 1 HKC 453 .................. 1.204
First Dragon Fashion (Hong Kong) Ltd, Re [201 I] HK.CU278 ...........................20.068
First Dragon Fashion (Hong Kong) Ltd, Re [20 I0) 4 HKLRD 592 ......................20. I23
First GNP Hong Kong Ltd, Re [1995) 2 HKC 380 ................................................20.066
Five Lakes Investment Co Ltd v Multiford Co Ltd [ 1985) HKLR 273 ................20.080
Fiveoceans Supply Service Ltd, Re [2002] 1 HKLRD (Yrbk) 167.......................20.230
Fook Lam Moon Restaurant Ltd, Re [2011] 1 HKLRD 964 ....................11.076, 11.078
Fok Ying Tung Ming Yuan Development Co Ltd, Re
[2016] 2 HKLRD 292 ....................................... .15.020, 15.024, 15.025, 15.034
Forecast Nominee Ltd, Re [1996) 4 HKC 12............................................10.149, 10.184
Freeman FinTech Corp Ltd, Re [2018] I HKLRD 320 ...........................................7.140
Fuji Copian (HK) Ltd, Re
(unrep., CFI, HCMP 1011/2004, 29 October 2004) .....................15.035, 15.038
Fujian Group, Re (unrep., HCMP 4682 & 5166/2003 &
HCCW 68/2003, [2003] HKEC 1481) ......................................................19.054
Fujian Group, Re [2003] 1 HKC 659 .....................................................................19.l 12
Full Billion Shipping Ltd, Re [2003] 2 HKLRD 674 ..................I 8.084, I 8.087, I 8.09 I
Fullbright Co Ltd, Re [2009] 2 HKLRD 584 ............................................20.244, 20.255
Fung Chuen v Sandmartin International Holdings Ltd
(unrep., HCMP 1044/2017, [2017] HK.EC2193) ...........11.087, I 1.089, I 1.090
Fung Pui Yi Irene v Motivics & Co Ltd (unrep., LDPE 819/2017,
[2017] HK.EC2399) .....................................................................................4.038
Fu Shou Yuan Group (Hong Kong) Ltd, Re [2014] 1 HKLRD 415 ...................... 11.049
G Ltd, Re [2016) I HKLRD 167....................................................2.071, 20.207, 20.208
Galaxy Electro-Plating Factory Ltd, Re
[2000] 1 HKLRD 876, [2000] 2 HKC 248 ................................................20.065
Gangford Int'I Ltd, Re (unrep., HCCW 181/2008, [2009) HK.EC 1873).............. 10.239
Geewing Co Ltd, Re (unrep., HCCW 619, 628/2000,
HCA 968, 3874/2001, [2005] HK.EC899) ................................................10.234
Gen2 Partners Inc, Re [2012] 4 HKLRD 511 .................. 2.069, 10.067, I 0.078, I 0.221
General v Herald Houseware Ltd [1996] 4 HKC 787 ... 12.007, 12.010, 12.024, 12.027
Geter Industiial Ltd, Re [2002) 3 HKC 71.............................................................20.239
Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd
[2012] 4 HKLRD 474 ................................................................................10.105
Globalink Technology Development Ltd, Re [2008] HKEC 277 ..........................20.066
Goei Tsusho Co Ltd v Leader Engineering &
Construction Ltd [2010] 2 HKLRD 1084....................................................1.057
Gold Pleasure Industrial Co Ltd, Re [2006] 4 HKC 398 .......................................11.079
Gold Pleasure Industrial Co Ltd, Re
(unrep., CACY 21/2009, [2009] HK.EC 1753)..........................................20.053
Goldbond Group Holdings Ltd, Re
(unrep., HCMP 1891/2003, [2003] HK.EC810) .......................................15.038
xl"i TABLE OF CASES

Goldcone Properties Ltd, Re [2000) 2 HKLRD 16 ...............................................20.244

Golden Bright Ltd, Re (unrep., HCMP 6472/2001,
[2004) HKEC 265) ........................................................................10.212, I0.215
Golden Dragon Land Development Ltd, Re [l 999) 3 HKLRD 14,....................... 19.109
Golden Gate International Kindergarten and Nursery Ltd, Re
[2018) HKCFI 641, (unrep.,HCCW 210/2017,
[2018] HK.EC832) .....................................................................................20.076
Golden Sand Marble Factory Ltd v Easy Success Enterprises Ltd
[1999] 2 HKC 356 ......................................................................................20.099
Goldlion Properties Ltd v Regent National... ......................................................... 12.l 03
Gold-Face Holding Ltd, Re (unrep., HCCW 970/2004,
[2006] HK.EC 1795) ...................................................................................19.111
Goldlory Restaurant Ltd, Re [2006) 3 HKLRD 33 I ..............................................20.008
Goldmen Electronic Co Ltd v Sum Wai Man [2002) 2 HKC 324 ..........................3.033
Good Lion Ltd v Chung Sai Wing
[2008) 6 HKC 443 ......................................................................................12.043
Good Profit Development Ltd v Leung Hoi
[1992] 2 HKC 539 ........................................................................................3.006
Good Success Catering Group Ltd, Re [2007) lHKLRD 453 ..............................20.202
Goodway Ltd v Pirelli Cables Ltd [1997] 3 HKC 265 ..........................................20.076
Gottinghen Trading Ltd, Re [2012) 3 HKLRD 453 ....................................2.071, 20.207
Grand Field Group Holdings Ltd, Re [2009) 3 HKC 81 ......................... 10.056, 10.060,
10.084, 10.088
Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland (No.2)
[2010] 4 HKLRD 487 ..................................................................................7.076
Grand Field Group Holdings Ltd v Chu King Fai
[2016] 1 HKLRD 1316 .............................................. 8.071, 8.118, 8.120, 8.167
Grand Sino International Ltd, Re (unrep., HCMP 4616/200 I,
[2006] HK.EC271) .....................................................................................11.074
Grand Trade Development Ltd v
Bonance International Ltd [2001) 3 HKC 137 ................12.042, 12.064, 12.092
Grande Holdings Ltd, Re [2016] 1 HKLRD 435 (CA) .........................................20.065
Grandtag Financial Consultancy & Insurance Brokers Ltd, Re
(unrep., HCMP 23/2006, [2006] HK.EC710) ..............................................9.043
Great Choice Consultants Ltd, Re [2016) 3 HKLRD 854 (CA).........2.063, 2.071, 20.207
Greater Beijing Expressways Ltd, Re [2000) 2 HKLRD 776 .....................5.086, 20.077
Greater Beijing First Expressways Ltd, Re [2007) 4 HKLRD 463 ....................... 19.111
Green Valley Investments Ltd, Re [2003) 2 HKLRD 915 ............................9.139, 9.142
Greenberg v Rund (unrep., HCA A6953/l 988 ......................................................10.043
Grenville House (IO) v Wong Tak Keung Stanley [2012] I HKLRD 315 ..............7. I 02
Guang Xin Enterprises Ltd (in liq) v
Kwan Wong Tan & Fong [2002) 2 HKC 613 ...................11.124, 11.126, 11.130
Guo Jing Jing v Art Master Investment Ltd
(unrep., HCA 1008/2009, [2009) HK.EC2009) ...........................18.082, 18.089
Raking Enterprises Ltd, Re [2001] HKLRD (Yrbk) 150 ......................................20.128
Hallmark Cards Inc vYun Choy Ltd
[2012] 1 HKLRD 396, [201 l] 5 HKC 453 ......................13.011, 17.130, 20.188
 TABLE OF CASES xl"ii

Hang Fung Jewellery Co Ltd, Re [2010) 2 HKLRD 1 ..........................................17.123

Hang Heung Cake Shop Co Ltd, Re
(unrep., HCMP 527/2012, [2013) HKEC 163) ...............I0.053, 10.090, 10.092
Hansen International Ltd v High Fashion Apparel Ltd
(unrep., HCA 1724/2014, (2014) HKEC 1484) ...............................7.060, 7.086
Hao Xiaoying v Wong Yiu Lam William (2017) 6 HKC 151................................ l 1.092
Harbour Front Ltd v Leung Yuet Keung [2018) HKCFI 358,
(2018] HKEC 334 ...........................................................10.143, 10.190, 10.197
He He International Holdings Development Ltd, Re
(unrep., HCMP 2313/2009, [2010) HKEC 567) ..............................9.028, 9.035
Hiew Fook Siong v Fung Tak Keung [2006) 3 HKLRD 762 ........ 10.001, 10.033, I0.128
High Fashion Garments Co Ltd v Ng Siu Tong
(unrep., HCA 12093/1999, [2005) HKEC 1293) ....................................... 8.177
Highfit Development Co Ltd v Koo Siu Ying [2018) HKCFI 105
(unrep., HCA 494/2015, [2018) HKEC 101) ..............................................3.031
Hin Lin Yee v HKSAR (2010) 13 HKCFAR 142 .......................................1.173, 12.120
Hing Ming Gondola (HK) Co Ltd, Re
(unrep., HCMP 418/2008, HCA 84/2007,
(2009) HKEC 1071).....................................................................10.143, 10.174,
10.197, 10.215
Hitachi Ltd v Hticahi Wei Chu (Hong Kong) Ltd
(2007) 4 HKLRD 431 ..................................................................................2.089
HK Fullson Co Ltd, Re [2006] HKEC 156............................................................20.121
HKSAR v Chan Kar Leung [2006) HKEC I 81.......................................................7.110
HKSAR v Chiang Lily [2013) 3 HKLRD 18 ........................................................16.090
HKSAR v Chun Wo Building Construction Ltd [200 I] 3 HKC 5 ........................12.120
HKSAR v Du Jun (unrep., CACC 334/2009,
[2012) HKEC 1280)......................................................................16.134, 16.136
HKSAR v Ho Hon Chung Dane! [2004) 3 HKC 304................................. l. l 7 l, 12.120
HKSAR v Ho Wing Cheong (unrep., CACC 283/2007,
[2009) HKEC 2048) ...................................................................................16.090
HKSAR v LeungYat Ming [1999) 2 HKLRD 402 .......................................3.058, 3.071
HKSAR v Otis Elevator Co (HK) Ltd
(unrep., HCMA 130/2011, (2011) HKEC 1320)....................................... 12.129
Ho Kwok Keung Tony v Hub Global Freight Solutions (HK) Ltd
(unrep., HCMP 670/2012, [2013) HKEC 901) .........................................11.086
Ho Kwok Wah v Group Jewellery Arts Ltd [2000) 3 HKC 599 ..............................2.029
Ho Pui Tin Terence v Wah Nam Group Ltd [2006] 3 HKC 40 .............................. 11.005
Hoida Industrial Co Ltd, Re (2004] 1 HKLRD 744 ................................................7.124
Hong Trading Co Ltd v Bank of Communications
(unrep., HCMP 3099/1999, 29 February 2000, CFI) ................................ 12.043
Hoida Industrial Co Ltd. Re [2004] 1 HKLRD 744 ...................................7.124, 17.127
Hollmet AG v Meridian Success Metal Supplies Ltd
(1997] 4 HKC 343 ......................................................................................20.067
Hong Kong and China Gas Co Ltd, Re [ 1999] 1 HKC 78 .................................... 14.104
Hong Kong and Shanghai Banking Corp Ltd, Re
(1991] 2 HKLR 111 ...................................................................................14.165
xl"iii TABLE OF CASES

Hong Kong Brewing & Restaurants Ltd, Re

(unrep., HCCW 664/1999, [1999] HKEC 637) ........................... 19.037, 19.044,
Hong Kong Chiu Chow Po Hing Buddhism Association Ltd, Re
[2016] l HKLRD 513 ................................................................................ 14.103
Hong Kong Construction (Works) Ltd, Re
(unrep., HCCW 670/2002, 7 January 2003) ..............................................20.066
Hong Kong Construction Re (Holdings) Ltd, Re
[2007] 1 HKLRD 190 ...................................................... 15.022, 15.036, 15.039
Hong Kong Pham1aceutical Holdings Ltd, Re
(unrep., HCCW 1018/2004, [2005] HKEC 1593)..................................... 19.021
Hong Kong Racing Pigeon Association Ltd v
Lam Koon Nam [2002] 3 HKLRD 133 ............................................9.016, 9.056
Hong Kong Rjfle Association v Hong Kong Shooting Association
[2007] 4 HKLRD 121 ..................................................................................9.077
Hong Kong Sailing Federation, Re
[2010] l HKLRD 801 ............................................ 9.139, 9.142, 10.009, 10.014
Hong Kong Society of Congenital & Strnctural Heart Disease Ltd, Re
[2016] 5 HKLRD 117 ...................................................... 11.020, 11.049, 11.073
Hong Kong Spinning Weaving and
Dyeing Co Ltd, Re (1917) 12 HKLR l ........................................................5.053
Hong Kong Times Investments Ltd, Re [2014] 2 HKLRD 29 .............................. 11.049
Hong Kong Zhongxing Group Ltd, Re
(unrep., HCCW 256/2011, [2012] HKEC 358) .........................................20.063
Honor Engineering Ltd v Hing Fat Machinery &
Electrical Engineering Co Ltd
(unrep., DCCJ 3397/2012, [2015] HKEC 600) ......................................... 12.054
Hop Shing Loong Lighting Ltd, Re [2005] HKEC 1953 ......................................20.065
Hoplik Carton Paper Factory Ltd, Re
(unrep., HCCW 893/2002, [2010] HKEC 1330).......................................20.054
Horizon Group Investments Ltd, Re [2002] HKEC 609 ........................................20.066
Hotung v Hillhead Ltd [2008] 3 HKLRD 200 .......................................... 10.109, 10.113
Hotung v Ho Yuen Ki (No.4) [2011] 2 HKC 149 .................................................. 10.109
Hua Rong Finance Ltd v Mega Capital Enterprises Ltd
[1998] 4 HKC 532, [2001] 3 HKLRD 623 ................................... 12.030, 12.079
Hua Rong Finance Ltd v Mega Capital Enterprises Ltd
[1998] 4 HKC 532 ...................................................................................... 12.066
Hua Rong Finance Ltd v Mega Capital Enterprises Ltd
[200 l] 3 HKLRD 623 ................................................................................ 12.030
Hung Cheung She v Sze Yap S S Co Ltd
(1931-32) 25 HKLR 77 ...............................................................................9.053
Hung Fung Holdings Ltd, Re [2001] 3 HKLRD 692 ...............................20.020, 20.088
I-China Holdings Ltd, Re [2004] 2 HKLRD F9 ....................................... 19.054, 19.073
Igai Co Ltd v Get Nice (Union) Finance Co Ltd
(unrep., MP 2739/2013, [2014] HKEC 1412) ..........................................20.138
Incorporated Owners of Albert House, Re [2004] 3 HKLRD L2 .........................20.127
[ncorporated Owners of Foremost Building, Re
(unrep., HCCW No.47 of 2004, 28 October 2004) ...................................20.127
 TABLEOF CASES xlix

Incorporated Owners of Grenville House v

Wong Tak Keung Stanley [2001] HKEC 151 .............................................. 9.136
Industrial Equity (Pacific) Ltd, Re
[1991] 2 HK.LR 614 ......................................................... 14.171, 14.178, 19.077
Information Security One Ltd, Re
[2007] 3 HK.LRD 780 .....................................................................2.071, 20.207
Interform Ceramics Technologies Ltd, Re
(unrep., HCMP 808/2001, [2001] HKEC 469) ......................................... 19.112
Intertrans Far East Ltd, Re [1994] 2 HKC 704 ...................................................... 20.198
Intelligence Link Ltd, Re [20 I3] 5 HK.LRD 151................................................... 11.049
Jackin Total Fulfilment Services Ltd, Re
[2008] 3 HK.LRD 475, [2008] 3 HKC 566 ......................20.065, 20.066, 20.076
Jade Union Investment Ltd, Re [2004] HKEC 306 ............................................... 20.067
Jessop & Baird (Hong Kong) Ltd, Re (No.2) [2017] 5 HK.LRD 314 .................. .18.084
Jessop & Baird (Hong Kong) Ltd, Re [2017] I HKLRD 78 ................................ .20.128
Jetco Ltd, Re [2008] HKEC 908 .............................................................................. 9.037
Jinro (HK) International Ltd, Re
[2004] 3 HKLRD KS .......................................................19.009, 19.054, 19.083
Johnson Stokes & Master v Jackin Total Fulfilment Services Ltd
[2007] 4 HK.LRD 336 ................................................................................20.092
Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd
[2015] 4 HKC 215 ......................................................................................20.208
Joint and Several Liquidators of Kong Wah Holdings Ltd v
Grande Holdings Ltd (2006) 9 HKCFAR 766 ............................. 20.005, 20.008,
20. 109, 20.112
Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Ltd, Re
(unrep., HCMP 3560, 3561, 3562 and 3563/2016,
[2017] HKEC 146) .....................................................................................20.208
Joint Liquidators of Supreme Tycoon Ltd [2018] 1 HK.LRD l 120....................... 20.208
Joint and Several Trustees of Property of Hau Po Man v
Hau Po Fun [2005] 2 HKC 227 ..................................................................20.138
Joint Official Liquidators of a Company v B & C [2014] 5 HKC 152 ................. 20.208
Joint Official Liquidators of Centaur Litigation SPC, Re
(unrep., HCMP 3389, 3391 and 3393/2015,
[2016] HKEC 576) .....................................................................................20.208
Joint Provisional Liquidators of China Lumena New Materials Corp, Re [2018] HK-
CFI 276 (un-rep., HCMP 494/2017, [2018] HKEC 230) ..........................20.208
Joris (International), Re [2014] 4 HKC 38, [5] (CA) ............................................ 14.07 I
Joseph Ghossoub v Team Y &R Holdings Hong Kong Ltd (unrep., CACY 6/2017,
[2017] HKEC 1532)................................................................................... I0.138
Junestar Investment Corp v Boldwin Construction Co Ltd
[2003] 3 HK.LRD 618 ................................................................... 10.039, 10.041
N Fitness Ltd [2018] 1 HKLRD 553 ....................................................................20.017
Ka Ka Realty Ltd [2004] 1 HK.LRD 832 ..................................... I0.146, 10.147, 10.150
Kabushiki Kaisha Yakult Honsha v Yakudo Group Holdings Ltd
[2004] 2 HKLRD 587 ..................................................................................3.014
Kaisa Group Holdings, Re [2017] 1 HK.LRD 18 .................................................. 14.162
TABLE OF CASES

Kam Fai Electroplating Factory Ltd, Re

(unrep., HCCW 534/2000, [2004] HKEC 556) ......................................... 10.187
Kam Kuen Construction Co Ltd, Re
[2002] 3 HKC 547 ......................................................................................20.082
Kam Lan Koon, Re [20 I 5] 5 HKLRD 79 .............................................................. 12.090
Kam Leung Sui Kwan v Kam Kwan Lai
(2015) 18 HKCFAR 501 ........................................... 2.063, 2.064, 2.065, 2.071,
10.173, 10.196, 10.197, 10.211,
10.232, 10.235, 20.207
KammyTown Ltd, Re (unrep., HCMP 874, [2007] HKEC 1147) ........................ 10.088
Kansa General Intl Insurance Co Ltd, Re
[1999] 2 HKLRD 429 ................................................................... 19.037, 19.090
Kan Sau Lan v Kin Lee Construction Co Ltd [2015] I HKLRD 1015................. 10.084
Kao Lee & Yip v Koo Hoi Yan Donald
[2003] 3 HKLRD 296 .................................... 1.055, 8.007, 8.008, 8.021, 8.070,
8.071, 8.077, 8.114, 8.116, 8.118, 8.126,
8.127, 8.128, 8.129, 8.132, 8.137,
8.167, 8.169, 8.171, 8.173, 8.183
Karaha Bodas Co LLC v
Perusahaan Pertambangan Minyak Dan Gas Bumi Negarn (No.2)
[2005] 1 HKLRD 21 .................................................................................. 18.008
Karla Otto Ltd v Bulent Eren Bayram
[2017] 2 HKLRD 124 .................................... 7.008, 7.009, 7.01 I, 7.013, 7.014,
8.017, 8.177, 10.249
Karupayee Ammal v GMT Industrial Ltd (unrep., HCMP 522/20 I7,
[2017] HKEC 2881) ........................................................ 14.083, 14.084, 14.086
KB (Asia) Ltd, Re (unrep., HCMP 307/2013, [2014] HKEC 1192)........ 19.072, 19.081
KCL Capital Ltd, Re [2013] 3 HKLRD 1....................................20.099, 20.195, 20.196
Kee Wai Investment Co Ltd, Re [2003] 1 HKLRD 669 ........................................ 15.022
Keen Lloyd Resomces Ltd, Re
(unrep., HCCW 1134/2002, 21 May 2004, CFI) .......................................20.094
Kelso Enterp1ises Ltd v Liu Yiu Keung [2007] 3 HKLRD 266 ............................20.255
Kennedy v Cheng [2009] 6 HKC 454 ....................................................................20.114
Kensland Realty Ltd, Re [2001] HKCU 857 .........................................................20.076
Kim Sie Joong v Ng Cheuk Ngon (unrep., CFI, HCA 552/2002 .......................... 10.021
King Fung Construction Work Co, Re [2005] HKEC 17 ......................................20.128
King's Dyeing & Weaving Factory Ltd (No.2), Re [1986] 1 HKC 621 ................20.093
Kishimoto Sangyo Co Ltd v Akio Oba
[1996] 1 HKLR 196................................................... 8.114, 8.118, 8.127, 8.129
Koldtech Development (Intl) Ltd, Re
(unrep., HCCW 381/2005, [2005] HKEC 1190)............. 19.109, 19.110, 19.111
Kong Wah Holdings Ltd (in liq) (No.4), Re [2007] 5 HKC 202 ..............20.101, 20.115
Kosoku Office Supplies Ltd, Re [201 l] 2 HKLRD 281.. ...................................... l 7. l 63
Kosonic Industries Ltd, Re (unrep., HCMP 2172/1999,
[1999] HKEC I 183) ................................................................................... 19.083
Kowloon Container Warehouse Co Ltd, Re [I 981] HKLR 210 ............................ 14.102
Koy Holdings Corp v Spider Knitters Ltd [1998] 1 HKLRD 788 ........... 10.215, 10.223
 TABLEOF CASES Ii

Kwan & Pun Co Ltd v Chan Lai Yee (unrep., CACY 234/2002,
[2002] HKEC 1401)..................................................................................... 9.087
Labour Building Ltd, Re [2010] 2 HKLRD 280 ....................................................20.121
Lai KaHing v Nan Fung Finance Ltd [2008] 5 HKLRD 552 ................................ 18.057
Lai Kan Co Ltd v Re Safe Steel Fmniture Factory Ltd
[1988] 1 HKLR257 ......................................................... 10.171, 10.184, 10.241
Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd
[2017]4HKLRD 192 ....................................................................2.034, 14.107,
14.108, 14.109
Lam Kin Chung v Soka Gakkai lntemational of Hong Kong Ltd (No.2)
[2018]2HKLRD769 .............................. 1.170,8.187, 10.055, 10.063, 10.069
Lam Siu Leung v Koover Woollen Knitting Factory Ltd
(unrep., HCMP 6321/1998, [1999] HKEC 1222) ........................ 10.149, 10.161
Landune Int'I Ltd v Cheung Chung Leung [2006] I HKLRD 39 ............ 10.103, 10.105
Lau Suk Ching v Ma Hing Lam [2006] 4 HKLRD 432 ........................................ 14.054
Lau Yun Lin v Kwan Tseung Co Ltd [2017] 5 HKC 500 ......................................20.256
Lau Yuk Chuen v Gauss Electronics Co Ltd
(unrep., HCCW 145, 146/1999, [1999] HKEC 735) ................................. 10.197
Leco Watch Case Manufactory Ltd, Re [2017] 2 HKLRD 388 ............................20.191
Lee Yuk Shing v Dianoor International Ltd (in liq) [20 I6] 4 HKC 535 ............... 16.060
Law Chou Slung v Chow Wing Kun
[1994] 2 HKC 53 I ............................................................................. 1.045, 1.047
Law Shu FatvNg KwongYui [2006] 3 HKLRD 118 ............................................. 3.073
Law Siu Hong Albert v Cheung Kin Ping
(unrep., CWU 103/1995, [1997] HKEC 7) ................................... 10. 196, 10.197
Law Wai Duen v Boldwin Construction Co Ltd
[2001] 3 HKLRD 430 ................................................ 8.141, 8.150, 8.151, 8.159
LDK Solar Co Ltd, Re [2015] 1 HKLRD 458 ............................................2.073, 14. I62
Lee Chee (or Tse) Ngor v Prudential Enterprise Ltd
[1991] HKLY 124....................................................................................... 14.088
Lee Sow Keng v Kelly McKenzie Ltd [2004] 3 HKLRD 517 .................... 3.044, 3.045,
3.047, 3.049
Lee Sun Lan Tobacco Ltd, Re
(unrep., HCCW 377/2005, [2006] HKEC 732) ......................................... 10.236
Lee Tak Samuel v Lee Tak Yan [1999] 4 HKC 12 .................................................20.121
Lee Thai Lai v Wong Chung Kai [2004] 1 HKLRD D12 ............................ 3.051, 3.054,
3.055, 3.058
Leeds and Hanley Theatres ofYarieties Ltd, Re [ 1902] ..........................................2.104
Legend International Resorts Ltd (No.2), Re
(2006] 3 HKLRD 270 ...................................................................20.066, 20.204
Legend International Resorts Ltd, Re (2005] 3 HKLRD 16 ................................. 19.054
Legend International Resorts Ltd, Re (2006] 2 HKLRD 192 ................. 19.056, 19.058,
19.064,19.065, 20.080
Legend International Resorts Ltd, Re (2007] 3 HKC 456 ..................................... 20.125
Legend International Resorts Ltd, Re
(unrep., HCCW 1139/2004, (20 I I] HKEC 317),
affirmed (unrep., CACY 58/2011, (2012] HKEC 89) ...... 20.053, 20.055, 20.054
Iii TABLE OF CASES

Lehman Brothers Securities Asia Ltd (No.2), Re

(2010J 1 HKLRD 58 .................................................................................. 20.001
LehmanBrown Ltd, Re (unrep., CACY 272/2011,
HCCW 377/2010, [2013] HK.EC 357) ...................................................... 10.216
LehmanBrown Ltd, Re [20 I I] 4 HKLRD 237 ...................................................... I 1.088
LehmanBrown Ltd, Re [2011) 5 HKLRD 668 ........................... 11.084, 11.087, 11.088,
11.089, 11.090
Leric Intl Ltd, Re [2009] 2 HKLRD 238 ............................................................... 20. 138
Leung Alfred Cheuk Wah v Unity Investments Holdings Ltd
(unrep., HCMP 1885/2005, [2005] HKEC 1425) ..................................... 10.25I
Leung Chung Pun v Masterwise International Ltd
[2014] 1 HKLRD 1129 ...................................... 11.086, 11.090, 11.091, 11.092
Leung Chi Keung v Market Misconduct Tribunal
[2012] 2 HKLRD 786 ................................................................................ 16.136
Leung Chi-kai Mintis v China-Tech Engineering Co Ltd
[2002) 3 HKC 605 ...................................................................................... 10.225
Leung Tung Hoi v Lai Yip Dyeing Factory Ltd
(unrep., CACY 54/2015, [2017] HKEC 1775) .......................................... I0.056
Leung Kwai Lin v Wu Wing Kuen (2001) 4 HKCFAR 55 .................................... 12.092
Li Chung Shing Tong (Holdings) Ltd, Re
[2011) 5 HKLRD 274 ...................................................... 10.056, 10.060, 10.064
Li Lai Fun v Centro-Sound Ltd [1986] 1 HKC 541 .................... 18.021, 18.034, 18.035
Li Ngan Kwan v Gao Li Hui [2007] 4 HKLRD 592 ............................................... 2.029
Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 .....................8.007, 8.171,
8.173, 8.174, 8. I9 I
LimJonathanvSheWaiHung[2011] 1 HKLRD305 .................. 9.076, 10.014, 10.028
10.117, 10.124
Lin Ming v Chen Shu Quan (No.2) [2013] 2 HKLRD 292 ..................................... 2.064
Linea Trading Co Ltd, Re (unrep., HCCW 350/2004,
HCCW 350A/2004, [2005) HKEC 2024) ................................................. 10.221
Liote Property Management Ltd, Re [2006) 2 HKLRD 106 ....................20.050, 20.052
Lippo China Resources Ltd, Re [1998] 1 HKC 161 ................................ 10.024, 15.034,
15.035, 15.037
Liquidator of Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert
[2018] l HKC472 .......................................... 7.008, 7.009,8.017,8.035,8.119,
8.171, 8.188, 8.190
Liu Hsiao Cheng v Wong Shu Wai [2015) 4 HKLRD 766 ....................... 10.023, 10.026
Liu Hon Ying v Hua Xin State Enterprise (Hong Kong) Ltd
[2003] 3 HKLRD 347 ............................................................ 3.043, 3.045, 3.047
3.073
Liquidators of China Medical Technologies Inc v Tsang Tak YungSamson
[2018] HK.CA 252, [2018] 2 HKLRD 1202 .............................................. 20.109
Lo Sui Lin v Chan Hung Fook [2017) 3 HKLRD 746 ........ 7.053, 7.054, 9.034, 10.236
Lo Suk Ling Yilly v Methodist Church Hong Kong
[2001] l HKC 182......................................................................... 12.022, 12.040
Luck Continent Ltd v Cheng Chee Tock Theodore
[2013] 4 HKLRD 181 ................................................................... 10.178, 10.191
 TABLE OF CASES liii

Lucky Money Ltd, Re (unrep., HCMP 505, [2006] HK.EC 1379) ........................ 10.060
Lucky Resources (HK) Ltd, Re [2017] 3 HKC l.. .................................................20.067
Luen Chenong Tai Construction Co Ltd, Re
(unrep., HCCW 190/2002 [2002] HK.EC 1544)........................................18.l 18
Luen Fai Piecegoods & Cloths Co Ltd, Re
(unrep., HCCW 541/2009, [2010] HK.EC323) .........................................19.l l l
Luen Fat Paint Co Ltd, Re (unrep., HCMP 1791,
[201O]HKEC 212) ...........................................................10.073, 10.086, 10.088
Luen Yick Water & Drainage Works Ltd, Re [2003] 2HKLRD Fl5 .....................20.020
MW Lee and Sons Enterprises Ltd, Re [1999] 2 HKC 686 .................................20.121
Ma On Shan Whitehead Gold Centre Ltd, Re
[2001] 4 HKC 582 ........................................................................................9.037
Macau First Universal Intl Ltd v Ding Xiaohong
[2012] HK.EC 1088 ......................................................................18.084, 18.112,
18.115, 18.116
Ma Ching Yuk v Ma Ching Nam
(unrep., HCMP 3478/2013, [2015) HK.EC298) ....................................... 10.127
Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248 .................................................20.077
Mak Shing Yue Tong Commemorative Association Ltd, Re
[2005) 4 HKLRD 328 ..................................................................10.241, 10.236,
20.078
Mak Sik Bun v Mak Lei Wun (unrep., HCCW 624/2003, 28 Jui 2005) ............... 10.140
Man Luen Corp v Sun Kfog Electronic Printed Circuit Board Factory Ltd
[1981] HKC 407 ...............................................................................8.071, 8.072,
8.076, 8.078, 8.081,
8.091, 8.170, 8.186
Man Yee (a finn) v Chi Tao Enterprises Co Ltd
[1986] HKLR 171 ........................................................................................3.023
Manda1in Capital Advisory Ltd, Re
[201 I] 2 HKLRD 1003 .............................................. 7.051, 7.054, 9.022, 9.026
Manfield Coatings Co Ltd v Springfield Coatings Co Ltd
[1994) HK.LY168.........................................................................................9.036
Maple Trade Finance Inc v Huge Best Intl Ltd
(unrep., HCCW 389/2010, [2011] HK.EC 833 ..........................................20.065
Ma Sum v Ma Choi Kee [ 1967) HKLR I77 ..........................................................I 2.047
Matilda & War Memo1ial Hospital v
David Henderson [1997) HKLRD 360 ........................................................7.098
Matilda & War Memorial Hospital v Henderson [1997] 1 HKC 509 .....................4.041
Matrix Industries Ltd, Re [2004] 1 HKC 194 ........................................................20.260
Max Sunny Ltd, Re (unrep., HCCW 84 and 85/2014, [2014] HK.EC 1286) ........20.080
Mediavision Ltd, Re [1993] 2 HKC 629 ......................................10. l 71, 10.224, 10.236
Melvin Waxman v Li Fei Yu
(unrep., HCA 1973/2012, [2013] HK.EC 1341) ........................................10.045
Melvin Waxman v Li Fei Yu (unrep., HCA 1973/2012, [2017] HK.EC561) ........ 10.047
Menna Leendert Vos v Global Fair Industrial Ltd
(unrep., HCA 4200/1995, [2009] HKEC 1952) ..............................8.028, 8.043,
8.044, 8.171, 8.179
liv TABLE OF CASES

Mellorv Mellor [1992) 1 WLR 517 ....................................................................... 18.108

Merchants (Hong Kong) Ltd, Re (unrep., HCMP 132/2005,
[2005] HKEC 594) ..................................................................................... 19.015
MF Global Hong Kong Ltd (No.2), Re [2015] 2 HKLRD 325 (CA) ...... 19.060, 20.007
MF Global Hong Kong Ltd, Re [2012] 4 HKC 333 ..............................................20.125
MF Global Hong Kong Ltd, Re (No 2) [2012) 5 HKLRD 486 ............................. 20.007
Mi Fung Beads Co Ltd, Re [2005] HK.EC 218 ......................................................20.128
Miracle Chance Ltd v Ho Yuk Wah David [1999] 3 HKC 811 .........6.036, 6.037, 6.040
Miyama Dyeing Co Ltd, Re
(unrep., HCMP 1021/2004, [2004] HK.EC704) ....................................... 15.038
Moulin Global Eyecare Holdings Ltd, Re
(2009) 12 HKCFAR 621 .................................................12.058, 12.073, 12.086,
17.143, 17.145, 17.169,20.163
Moulin Global Eyecare Holdings Ltd, Re
(unrep., HCCW 470/2005, [2008] HKEC 923) .............................7.071, 12.024,
12.025, 17.145
Moulin Global Eyecare Holdings Ltd, Re
(unrep., HCCW 470/2005, 4 June 2008, CFT)............................. 12.024, 12.025,
12.036
Moulin Global Eyecare Holdings Ltd, Re [2009] 4 HKLRD 203 ......................... 17.145
Moulin Global Eyecare Holdings Ltd v
Lee Sin Mei Olivia [2009] 3 HKLRD 265 ......................................2.075, 7.006,
7.008, 7.014
Moulin Global Eyecare Holdings Ltd v
Lee Sin Mei Olivia [2012] 4 HKLRD 263 ................................... 15.003, 15.166
Moulin Global Eyecare Holdings Ltd, Re [2007) 4 HKLRD 315 ........................ 19.020,
19.021, 19.038
Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue
(2014) 17 HKCFAR 218 ..................................................12.097, 12.102, 12.103
Muir v Lampl [2005] 1 HKLRD 338 .................................................5.085, 7.050, 7.054
Murray-Jones v Hongkong and Shanghai Banking Corp
[1982] HKLR 191 ...................................................................................... 10.229
Music Trading On-Line (HK) Ltd, Re (unrep., HCMP 1541/2008,
[2008] HKEC 2110) ................................................................................... 19.015
MW Lee & Sons Enterprise Ltd, Re [1999] 3 HKLRD 427 .................................20.121
MyTravel Group pie, Re [2005) 1 WLR 2365 ....................................................... 19.034
MyWay Ltd, Re [2008] 3 HKLRD 614 ..................................................... 10.053, 10.060
Nardu Co Ltd, Re [2008] 4 HK.LRD 165...............................................................20.109
National Commercial Bank Ltd v Albert Hwang [2002] 2 HKLRD 408 ............. 12.061
New World Development Co Ltd v
Stock Exchange of Hong Kong Ltd
[2004] 2 HKLRD 1027 .............................................................................. 16.l 19
Newmark Capital Corp Ltd v Coffee Partners Ltd
[2007] 1 HKLRD 718 ................................................................................ 10.125
Niceline Co Ltd, Re [2003] 2 HKLRD 725 ........................................................... 18.09l
Ng Wing Keung Paul v AXA China Region Trustees Ltd
[2001] 2 HKC 410 ...................................................................................... 17.040
 TABLEOF CASES Iv

Ng Yat Chiv Max Share Ltd

(1997-98) 1 HKCFAR 155 .............................................10.140, 10.152, 14.033,
14.048, 14.093, 14.094
Ng Yat Chiv Max Share Ltd (No.2) [2000] 4 HKC 469 .......................................20.078
NgYatChi vMax Share Ltd [1997] HKLRD 663 ................................................10.140
Ng Yat Chiv Max Share Ltd [1998] 1 HKLRD 866 (CFA) ..................................20.077
NgYatChi v Max Share Ltd [2001] 1 HKLRD 561 (CA),
(200 I) 4 HKCFAR 299 ..............................................................................10.233
Ng Yat Chiv Max Share Ltd [2001] 1 HKLRD 561 ...................10.184, 10.194, 10.239
Ngo Tai Hong v Endenne Development Ltd [2005] HK.EC2120 ...........................3.059
Nice & Well Ltd, Re (unrep., HCMP 2148, [2008] HKEC 2134) ............ 10.074, 10.088
Niceline Co Ltd, Re [2003] 2 HKLRD 725 ............................................. 18.084, 18.086,
18.091
Nikkodo (HK)Ltd v Lam Chiu Kau [2000] 1 HKLRD 204 ...................................3.059
Nu-West Natural Products Corp Ltd, Re [20 IOJ4 HKLRD 208 ........................... 15.135
Nu-West Natural Products Corp Ltd, Re [2006] 3 HKLRD 13................20.123, 20.128
Ocean Grand Holdings Ltd, Re (unrep., HCMP 120/2008,
[2008] HKEC 664) .....................................................................................19.054
Ocean Palace Restaurant and Nightclub Ltd, Re
[1999] 3 HKC 665 ............................................................10.140, 10.149, 10.152
Official Administrator v Luk Hoi Tong [2005] 3 HKC 615 .................................. 14.069
Official Receiver v Chan Kin Hang Danvil
(unrep., CACY 202/2011, [2012] HKEC 822 )(CA) ......................7.118, 20.050
Official Receiver v Chan Kwong Hung [2006] HKCU 2009 ..................................7.112
Official Receiver v Cheung Gin Hung [2005] I HKLRD Al .................................7.126
Official Receiver v Chow Huen Chun Crispin
(unrep., 7 December 2004, HCMP 5002/2003, Kwan J, CFI) ....................7.112
Official Receiver v Li Ping Chung Re
(umep., HCMP 511/2003, [2004] HKEC 1516) .........................................7.124
Okachi (Hong Kong) Ltd v Nominee (Holdings) Ltd
[2007] 1 HKLRD 55 .....................................................................14.033, 14.059
Ong Kim Yim v Sheecon Trading Co Ltd
(unrep., MP 780/1995, [1996] HKLY 187)..................................................9.041
On Hong Trading Co Ltd v Bank of Communications
(unrep., HCMP 3099/1999, [2000] HKEC 220) ....................................... 12.043
Opes Asia Development Ltd, Re [2012] 4 HKLRD 12..........................................11.086
OpesAsia Development Ltd, Re (umep., HCMP 447/2012,
[2012] HKEC 836) ........................................................................11.074, 11.086
Orient Power Holdings, Re [2008] 2 HKLRD 494 ................................................18.118
OTC Intl AG v Perfect Recovery Ltd, [2009] 3 HKLRD 13 ...................................3.073
Oxford Properties & Finance Ltd, Re [2004] 3 HKLRD 142 ............................... 15.039
Pacific Electric Wire & Amp Cable Co Ltd v
Texan Management Ltd [2008] 4 HKLRD 349 ...........................................3.006
Pacific Electric Wire & Cable Co Ltd v Hannutty Ltd [2009] 3 HKLRD 94 ............3.006
Pacific Foundation Finance Ltd v Fairyoung Holdings Ltd
[1999] 3 HKC 448 ........................................................................12.055, 12.067,
12.069, 12.071
lvi TABLE OF CASES

Pacific Foundation Finance Ltd v Fairyoung Holdings Ltd

[1999] 3 HKLRD 153 .......................................................................8.081, 8.176
Pal Active Ltd, Re (unrep., HCMP 2001/2008,
[20 l OJ2 HKLRD D3) ................................................................................l 0.249
Pappadis v Chan Shing Sheung Barry [1989] 2 HKLR 511 ................................. 16.139
Passport Special Oppo1tunities Master Fund LP v
eSun Holdings Ltd [2011] 4 HKC 62 ..............................................8.034, 8.046,
8.061, 10.127
PCCW Ltd, Re [2009] 3 HKC 292 .................................. 1.185, 14.173, 14.174, 14.180
Peaktop Technologies (USA) Hong Kong Ltd, Re
[2007] 4 HKLRD 207 ................................................................................11.074
Peconic Industiial Development Ltd v Chio Ho Cheong
(unrep.,CFJ,HCA 16255/1999, [2006] HKEC957) ..................................8.180
Peconic Industiial Development Ltd v Lau Kwok Fai
[2008] 4 HKLRD 473, (2009) 12 HKCFAR 139 ........................................8.180
Pedagogic Innovations Ltd, Re [2014] 1 HKLRD 613 ..........................................20.229
Peregrine Fixed Income Ltd (in liq), Re
[1998] 4 HKC 151......................................................................................20.240
Peregrine Holdings Ltd (Official Receiver) v
Philip Leigh Tose (unrep., 8 October 2004,
HCMP 112 of 2002, Kwan J, CFI) ...............................................................7.124
Peregrine lnvestinents Holdings Ltd v
Asian Infrastructure Fund Management Co Ltd
[2003] l HKLRD 209 ................................................................................20.121
Peregrine Holdings Ltd (Official Receiver) v Philip Leigh Tose
(unrep., HCMP 112/2002, [2004] HKEC 1214) .........................................7.126
Peregrine Holdings Ltd (Official Receiver) v
Philip Leigh Tose [2004] HKCU 1172 ........................................................7.126
Peregrine lnvest111entsHoldings Ltd (No.6), Re
[2008] 3 HKLRD 145 ................................................................................20.190
Peregrine lnvestinents Holdings Ltd, Re
(unrep, 7 April 1978, HCCW 20 of 1980) ................................................. 18.0l 1
Peregrine Investments Holdings Ltd, Re
[1998] 2 HKLRD 670 ......................................................18.109, 20.008, 20.041
Perfect Sense Group Ltd, Re [2007] 2 HKLRD 734 ................................ 19.079, 19.083
Perfect Trade Ltd, Re (unrep., HCCW 1147/1999,
[2001] HKEC 627) .......................................................................10.197, 10.199,
10.234, 10.241,
Peter H Yip v Asian Electronics [ 1998] 2 HKC 96 .......................................7 .08 l, 7 .084
Phantom Records Ltd, Re
(unrep., CFI, HCMP 2770/2003 7 December 2006) ....................20.139, 20.140
Pico North Asia Holdings Ltd v
Cheung Yuk Ting Linda (unrep., HCA 1371/2009,
[2011] HKEC 187) .....................................................................................10.109
Pioneer Industries (Holdings) Ltd, Re [2015] 1 HKLRD 1..........................9.009, 8.040
Playmates Investments Ltd [ 1996] 4 HKC 577 .....................................................I0.184
 TABLE OF CASES l"ii

Plus Holdings Ltd, Re

(unrep., HCMP 859/2008, HCCW 612/2006,
[2008] HKEC 1327)...................................................................... 19.054, 19.058
Plus Holdings Ltd, Re [2007) 2 HKLRD 725 ........................................................ 19.061
Poly Investments Holdings Ltd, Re [2007) 2 HKLRD I0 ..................................... 15.038
Poly Property Group Co Ltd, Re [2016] 4 HKC 169............................................ .14.034
Polyson Jewellery Co Ltd v Liu Song Carlos
[200 I] 3 HKC 323 ...................................................................................... 12.068
Polyworld Intl Ltd, Re (unrep., 2007 WL 2629, CFI),
[2007] HKEC 139 ......................................................................................20.232
Poon Ka Man Jason v Cheng Wai Tao [2015] HKEC 114 (CA) ............................ 8.121
Poon Ka Man Jason v Cheng Wai Tao [2015] 2 I-IKC 143..................................... 8.130,
8.167, 8.169
Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144 ................8.071, 8.077,
8.120, 8.125, 8.129, 8.169
Poon Yee Kam v New Paradigm E-Technology Ltd
(unrep., CACY 325 and 326/2004,
[2006] HKEC 2222) ...............................................................4.034, 4.035, 4.036
Power Dekor (Hong Kong) Ltd v Power Dekor Group Co Ltd
[2014] l HKLRD 845 ..................................................................................2.089
Power Point Engineering Ltd, Re (unrep., HCCW 555/1999,
[2000] HKEC 774) ........................................................................ 10.239, 20.061
Pressure Vessels Manufacturing Co Ltd, Re [2003) I HKLRD B4....................... 20.231
Probus Ltd v Treble & Triple Ltd
(unrep., CFI, HCA 2723/2008, 17 November 2010) ................................. 12.009
P1imlaks (HK) Ltd, Re [2016] 2 HKLRD 31.. ..........................................10.055, 10.058
Prudential Enterprise Ltd, Re [2002] 1 HKLRD 267 .............................. 10.219, 10.220,
I0.223, I0.243
Qiyang Ltd v Mei Li New Energy Ltd [2016] 4 HKLRD 790 ......7.086, 14.092, 14.102
QQ Club Ltd (in liq), Re [2013] 6 HKC 208 ........................................................20.140
Qualihold Investments Ltd v Bylax Investments Ltd
[1991] 2 HKC 589 ......................................................................... 12.013, 12.089
Quality Jnt'l Ltd, Re [1964] HKLR 669 ................................................................. 10.238
Quicksilver Glorious Sun N Ltd, Re [2014) 4 HKLRD 759 ................................ 10.244
R v Cheung Siu-yu [1991] 2 HKLR 142 ............................................................... 12.126
R v Mirchandani [1977] HKLRD 523 ..................................................................... 3.071
R v Szeto Kwok-hei [1991] 2 HKLR 178.............................................................. 12.125
R v Tam Ping Cheong (unrep., CA, No.355 of 1995, 12 June 1996).................... 12.127
R vYung Leonora [1994) 3 HKC 141 ................................................................... 11.014
Rainbow Gate Ltd, Re (unrep., HCCW 593/1998,
[2007] HKEC 2310) ........................................... 18.115, 20.050, 20.051, 20.054
Ranson Motor Manufacturing Co Ltd, Re
[2007] I HKLRD 751 ...................................................... 10.220, 10.240, 10.243
Ratonal Industries Ltd v Wan Kin Chung
[2003] 3 HKLRD 11 ..............................................................6.013, 6.014, 6.015
Redford International Ltd, Re [2016] 2 HKLRD 27 ............................................. .14.073
lviii TABLE OF CASES

Regal Motion Industries Ltd, Re [2005] 1 HKLRD 461 ..............................7.124, 7.126

Revelry Gains Ltd v Joy Rich Development Ltd [2017) 1 HKLRD 769 .............. 10.041
Rhine Holdings Ltd (in liq), Re [2002] 3 HKC 543 ....................19.091, 19.091, 20.045
Ricco (lnt'I) Co Ltd v Uni-Harvest lnt'l Ltd
[2017) 6 HKC 487 ............................................................15.103, 15.114, 15.135
Rich Treasure Enterprises Ltd, Re [2001] 3 HKLRD 769 ..................................... 10.238
Roeders (China) Ltd, Re (unrep., HCCW 68/2016, [2016) HKEC 1337) ..............7.054
Ronald Li-Kai Chu v Deacon Te-Ken Chiu [1986] HKLR 1011 .......................... 10.021
Ronald Li-kai Chu v Deacon Te-Ken Chiu [1991) 2 HKLR 572 .......................... 10.214
Rontex Intl Holdings Ltd, Re
(unrep., HCMP 1869/2008, [2010] HKEC 413) .........................................8.154
Rozell Asia (Holding) Ltd v CAL Intl Ltd [1997] HKLRD l ...............................20.229
S Megga Telecommunications Ltd, Re
(unrep., HCMP 5551/2001, [2002) HKEC 1344) ........... 19.015, 19.071, 19.111
S Megga Telecommunications Ltd, Re [2003] 2 HKLRD 583 .............................. 18.063
Sai Kung PLB (Maxicab) (No.land 2) Co Ltd, Re
[2009) 4 HKLRD 523 ......................................................10.240, 10.243, 20.071
Salt & Light Development Inc v
SJTU Sunway Software Industry Ltd [2006) 2 HKC 440 ...........................3.007
San Imperial Corp Ltd, Re [1980) HKLR 649.............................10.238, 10.240, 20.071
SEC Construction Material Ltd v Tan Kin
(unrep., HCA 423/2001, [2002) HKEC 1551) ............................................ l.049
Secretary for Justice v Lee Chau Ping [2000] 1 HKLRD 49 ............3.056, 3.059, 3.076
Securities and Futures Commission v Chan Pak Hoe Pablo
[2011) 5 HKC 484 ......................................................................................16.133
Securities and Futures Commission v
Chan Pak Hoe Pablo [2012) l HKLRD A5 ...............................................16.136
Securities and Futures Commission v
Cheung Keng Ching [2011) 4 HKC 453 ..........................................7.126, 7.140
Securities and Futures Commission v Fung Chiu [2009) 2 HKC 19 ......................7 .140
Securities and Futures Commission v Fung Chiu
[2009) 6HKC423 ........................................................................................7.140
Securities and Futures Commission v Li Hejun [2017] 4 HKLRD 785 ......7.140, 8.035
Securities and Futures Commission v Manda1in Resources Corp Ltd
(unrep., HCCW 348/1996, [1999) HKEC 688, CFl) ....................7.003, 10.145,
10.148, 10.150, 10.165
Securities and Futures Commission v
Qunxing Paper Holdings Co Ltd (No.2) [2018] HKCFT271,
[2018) 1 HKLRD 1060 ..................................... 16.045, 16.053, 16.054, 16.055,
16.076, 16.077, 16.082, 16.089
Securities and Futures Commission v
Stock Exchange of Hong Kong Ltd [1992) 1 HKLR 135 ...........................9.042
Securities and Futures Commission v
Tiger Asia Management LLC (2013) 16 HKCFAR 324 ................ 1.185, 16.054
Securities and Futures Commission v Wong Yuen Yee [2017) 2 HKC 332 ............7 .140
Securities and Futures Commission v Yin Yingneng Richard
(unrep., HCMP 2502/2012, [2015) HKEC 86) ................................8.141, 8.146
 TABLE OF CASES lix

SEG Investment Ltd v SEG Intl Securities (HK) Ltd

(unrep., HCMP 4211/2003, [2005) HKEC 1633) ................7.063, 7.066, 7.067,
7.068, 7.077, 20.229
Shandong Chemning Paper Holdings Ltd v Arjowiggins HKK 2 Ltd
[2017) 4 HKLRD 84 .......................................................................2.071, 20.207
Shanghai Tai Pan Food Manufacture Co Ltd, Re
(unrep., HCCW 832/1999, [2001) HKEC 842) .........................................10.238
Sharp Brave Co Ltd, Re [1999) 4 HKC 79 ............................................................19.037
She Wai Hung v Juliano Lim
(unrep., HCMP 6472/2001, [2004) HKEC 265) ....................................... 10.197
Shih-Hua Investment Co Ltd v Zhang Aidong [2017) 3 HKC 393 ...................... .10.206
Shin Ho Electric Wire and Cable Co Ltd v Hitachi Cable Ltd
(unrep., HCMP 2979/2004, [2005) HKEC 289) ....................................... 10.172
Shiu Fook Co Ltd, Re [1989) 2 HKC 342 ..............................................................10.239
Shop Clothing Ltd, Re (1999) 2 HKC 191 ............................................................20.081
Shum Wing Ping v Wing Tak Computer Embroidery Development Co Ltd
(unrep., HCMP 1438/2014, [2015) HKEC 111) ....................................... 10.058
Shun Kai Finance Co Ltd, Re
(2015) 2 HKLRD 264, (22) (CA).................................... 10.041, 10.077, 20.047
Shun Tak Holdings Ltd, Re [2009) 5 HKLRD 743 ...................................10.047, 10.221
Silver Bell Uniform Ltd, Re [2012] 1 HKLRD 719 .............................................. 10.194
Silver Stone Development Ltd v Lau Kwong Ching
(2006) 4 HKLRD 308, affirmed
(2007) 2 HKLRD 717 (Court of Appeal) ..................................................14.141
Simpson Devp Investment (HK) Co Ltd, Re [ I 999) I HKLRD 202.....................20.065
SinoAmerican Telecom Inc, Re (unrep., CACY 167/98
(1998) HKEC 1004 ....................................................................................20.047
Smart Win Shipping (HK) Ltd, Re [2005) HKEC 335 ..........................................20.128
Smeloan Hong Kong Ltd v Wong Wing Cheung
(2006) 4 HKLRD 757 ..................................................................................3.073
Solar Touch Ltd, Re [2004] 3 HKLRD 154 ................................................2.071, 20.207
South China Strategic Ltd, Re [1996) 4 HKC 182................................... 15.032, 15.034,
15.038
Southwest Pacific Bauxite (HK) Ltd, Re [2018) HKCFI 426,
(2018) 2 HKLRD 449 ................................................................................20.067
Sparkle Consultants (Hong Kong) Ltd, Re [2002] 3 HKLRD 62 ......................... 10.215
Stable Investment Ltd (in liq) v Chang Shin Chuen [ 1982) HKLR 79 ...................5.012
Standard Bank Offshore Trust Co Jersey Ltd v
Belgravia Properties Ltd [2013) HKEC 1429 .............................................9.008
Stanford House Publications (HK) Ltd v
Win Capital Industries Ltd [2006] 3 HKC 534..........................................12.046
Starbay Intl Ltd, Re (2012) 1 HKC 274 .................................................................20.242
State Bank oflndia v Lisbellaw Ltd [l 989) 2 HKLR 604..................................... 17.072
Stephen Liu Yiu Keung v Registrar of Companies [2018) HKCFI 1220
(unrep., HCMP 2758/2017, [2018) HKEC 1469) .....................................20.259
Stevenson Wong and Co v Goldsense Technology Ltd
(2007) 1 HKLRD217 ..................................................................................2.029
Ix TABLE OF CASES

STX Pan Ocean (Hong Kong) Co Ltd (in liq), Re (2014] 5 HKLRD 581.. ..........20.244
StylandHoldingsLtd,Re(2011] 1 HKLRD96 ..............................7.124, 17.127, 7.126
Success Plan Ltd, Re (2002] 3 HKLRD 560............................................................9.022
Sumore Corp Ltd, Re (unrep, HCCW 518/2009
(2012) HKEC 1620, (2012) HKEC 89) .....................................................20.055
Sun Hung International Ltd, Re (2009] 2 HKLRD 418 ...........................10.145, 10.147
Sun Hung Kai Bank Ltd v Attorney General
(1986] HKLR 587 ......................................................................................17.139
Sun's Group Ltd, Re (2004) 3 HKLRD 65 .............................................................20.066
Sun Light Elastic Ltd, Re (2013) 5 HKLRD l.. ........................................ 10.243, 14.179
Sunlink lnt'l Holdings Ltd v Wong Shu Wing
(2010) 5 HKLRD 653 ................................................................................10.128
Super Speed Ltd (in liq) v Bank of Baroda
(2015) 2 HKLRD 965 (CA) .......................................................................20.120
Superyield Holdings Ltd, Re (2000) 2 HKC 90 ........................................10.152, 10.184
Surplus Trader Ltd, Re (2005] 4 HKLRD 436 .......................................................20.125
Sweetmart Garment Works Ltd (No.2), Re [2009) 5 HKLRD 220 .......................20.0l 1
Sweetmart Garment Works Ltd, Re [2008) 2 HKC 252 ........................................20.138
Tai Kam Construction Engineering Co Ltd, Re
(unrep., HCMP 177/2005, (2005) HKEC 507) ......................................... 19.055
Tai Lap Investment Co Ltd, Re (1999] 1 HKLRD 384,
(appeal dismissed, [1999) 3 HKC 660) ........................................10.165, 10.189,
10.190, 10.215
Tai Shing Diary Ltd v Maersk Hong Kong Ltd [2007) 2 HKC 23 .............3.014, 12.115
TaiLap Investment Co Ltd, Re [1999) 1 HKLRD 384 ........................................... 10.187
Taiwa Land Investment Co Ltd, Re (1981] HKLR 297 ........................... 10.154, 10.156,
10.174, 10.191
Tai Wo Tong Pharmaceutical (Hong Kong) Co Ltd, Re
[2014) 3 HKLRD 218 ................................................................................11.049
Tak Ming Co Ltd, Re (No.2) Re [1960) HKLR 389 .............................................. 10.238
Tam Lai King v Incorporated Owners of Malahon Apartments
[2010) 5 HKLRD 63 ..................................................................................10.025
Tam Po Kei v Tam Bo Kin (No. I) (2011) I HKLRD 537 ........................... 8.027, 8.093,
8.159, 8.190
Tam Wing Yuen v Siberian Mining Group Co Ltd (unrep., HCCW 392/2015, (2017)
HKEC 163) .................................................................................................10.240
Tang Kam-yip v Yau Kung School [ 1986) HKLR 448 ..................... 6.022, 6.030, 6.034,
6.054, 20.075
Team Concepts Manufacturing Ltd, Re [2001] HKLRD (Yrbk) 188 ................... 19.113
Terrian v O1iental Peer Co Ltd (1988) I HKLR 246 ...............................................3.006
Texgar Ltd, Re (2002] 1 HKLRD 687 ................................. 8.119, 8.121,10.156, 10.184
Thanakham KasikomThai Chamkat (Mahachon)v
Akai Holdings Ltd (No.2) (2010) l3 HKCFAR479 .........8.004, 8.026, 8.077, 8.165,
8.174, 8.177, 8.183, 12.017, 12.023,
12.024, 12.025, 12.030, 12.031,
12.036, 12.039, 12.040, 12.061,
12.066, 12.070, 12.083, 12.095, 15.112
 TABLE OF CASES lxi

Tian An China Investments Co Ltd, Re [1998] 2 HKLRD 474 ............................. 15.035

Ting Wai Monastery Ltd, Re [2018] I HKLRD 346 .............................................20.080
Toptrans Ltd v Delta Resources Co Inc [2005] 1 HKLRD 635 .................. 3.026, 3.034,
3.035, 3.064
Topping Chance Development Ltd v CCIF CPA Ltd
[2015] 3 HKC 89 .............................................................10.109, 10.112, 11.125,
11.126, 11.129, 11.130
Tourmaline Ltd, Re [2000] 4 HKC 348 ................................................... I0.227, 10.232,
10.238, 10.242
Tradepower (Holdings) Ltd (in liq) v Tradepower (HK) Ltd
[2010] 1 HKC380 .........................................................................20.098,20.173
Tradepower (Holdings) Ltd (in liq) v Tradepower (HK) Ltd
[2010] I HKLRD 674 ......................................................19.l 14, 19.121, 19.123
Tradepower (Holdings) Ltd v Tradepower (HK) Ltd
(2009) 12 HKCFAR 417 ........................................... 8.038, 8.039, 8.040, 8.042,
8.177, 15.003, 15.164, 15.168
Tradepower (Holdings) Ltd v Tradepower (HK) Ltd
[2009] HKEC 538 .............................................................................9.028, 9.029
Trade power(Holdings) Ltd v Tradepower (HK) Ltd
(2009) 12 HKCFAR 417 ............................................................................15.003
Trustee in Bankruptcy of Lo Siu Fai Louis v Toohey [2005] 4 HKC 51 ..............20.191
TS Office System Ltd v Wing Kee Produce Ltd
[2015] 1 HKLRD 479 ................................................................................12.054
TS Wong (Investment & Finance) Co Ltd, Re
[2008] 5 HKLRD 469 ................................................................................20.099
Tsai Shao Chung v Asia Television Ltd [2012] I HKLRD 64 .............................. 11.074
Tsai Shao Chung v Asia Television Ltd
[2012]4HKLRD52 .......................................... 11.075, 11.076, 11.077, 11.078
Tsang (deceased) and Kloeden v Bancka Ltd [2017] 5 HKLRD 562 .....................9.024
Tsang Wai Lun Wayland v Chu King Fai
[2009] 5 HKLRD 105 ...........................................................6.013, 6.014, 6.016,
6.018, 6.020, 8.058, 8.069, 10.120
Tsang Yue Joyce v Standard Chartered Bank
(Hong Kong) Ltd [201O]5 HKLRD 628 ...................................................10.039
Tsao Shao Chung v Asia Television Ltd
[2012] 1 HKLRD 64 .....................................................................11.074, 11.077
Tse Yu Hong Ltd, Re (unrep., HCCW 184-186/1999,
[1999]HKEC 1048)......................................................................19.099, 19.111
Tseng Yueh Lee Irene v Metrobilt Enterp1ise Ltd
[1994] 2 HKC 684 ............................................................10.171, 10.184, 10.243
Tung Fung Hong Forwarding Agents Ltd, Re [1984] HKC 406 ............................20.065
Tysan Holdings Ltd, Re [2013] 4 HKC 425 ............................................. 10.242, 10.243,
10.248, 10.249, 10.251
UBS AG v Stand Ford Intl Enterprises Ltd [2002] 3 HKC 621 ..............................8.180
UDL Argos Engineering & Heavy Industries Co Ltd v
Li Oi Lin (2001) 4 HKCFAR 358 ...................................14.170, 14.172, 14.178,
19.078, 19.079, 19.081, 19.095
lxii TABLE OF CASES

UDLArgos Engineering & Heavy Industries Co Ltd, Re

(unrep., HCCW 581/1998, [1999] HKEC 1054)....................................... 19.050
UDL Contracting Ltd, Re [2000] I HKC 390........................................................20.092
UDL Holdings Ltd v Leung Yuet Keung
[2008] 6 HKC 127, affirmed on appeal
(unrep., CACY 356/2008, [2009] HKEC 1523)..........................................8.072
UDLHoldings Ltd, Re [1999] 2 HKLRD 817 ............................ 19.042, 19.044 19.045,
19.049, 19.050,
19.051, 19.109
Veron International Ltd v RCG Holdings Ltd
(unrep., HCMP 3210/2013, [2015] HKEC 1432) .......... 10.055, 10.063, 10.065,
11.091
Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657 .................. 11.087
Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 .... 10.105, 10.010, 10.019,
10.045, 10.095
Wah Nam Group Ltd (No.2), Re [2003] 1 HKLRD 282 ..........................14.164, 19.037
Wah Nam Group Ltd, Re (unrep., HCMP 2518/2002, [2002] HKEC 1090) ........ 19.037
Wah Nam Group Ltd, Re [2000] HKEC 875 .........................................................20.070
Wako Giken (HK) Co Ltd, Re [2010] 4 HKLRD 121........................................... 10.210
Wang Mei Na v Tang Mu Lien
(unrep., HCA 421/2010, [2011] HKEC 133) ............................................ 10.109
Wealth Property Agency Co Ltd, Re (unrep., HCMP 5157/2001,
[2003] HKEC 168) ............................................................................7.124, 7.126
Wei Xing v Willwin Development (Asia) Co Ltd
(unrep., HCMP 1922/2016, [2017] HKEC 779) ....................................... 11.090
Weihong Petroleum Co Ltd (No.2), Re [2003] 2 HKLRD 747 .............................20.109
Weihong Petroleum Co Ltd, Re [2002] l HKLRD 541 .........................................20.114
Well Bond Group Ltd, Re [2008] 5 HKLRD 147........................................7.118, 7.120,
Wheelock Properties Ltd, Re [2010] 4 HKLRD 587 .................. 14.165, 14.179, 15.022,
15.036, 15.039
Winland Enterprises Group Inc v Wex Pham1aceuticals Inc
[2012] 2 HKLRD 757 .........................................................3.028, 3.0242, 3.037,
3.053, 3.054, 3.068
Winsway Enterprises Holdings Ltd, Re [2017] 1 HKLRD 1................................. 14.162
Wong Hing Faat v Hong Kong and Yaumati Ferry Co Ltd
[1992] l HKC497 ......................................................................................12.l07
Wong Kam San v Yeung Wing Keung
[2007] 2 HKLRD 267 ...........................................................8.047, 8.049, 8.050,
12.058, 12.072, 14.025, 14.028
Wong Kar Gee Mimi v Hung Kin Sang Raymond
[2011] 5 HKLRD 241 .............. 11.084, 11.086, 11.089, 11.090, 11.091, 11.092
Wong King Fun v Keywah International Ltd
(unrep., CA, CACY 7/2009, 27 August 2009) .............................................2.029
Wong Luen Hang v Chan Yuk Lung (unrep., HVA 1265/2015,
[2016] HKEC 596) .....................................................................................18.084
Wong Man Yin v Law Lam Wai (unrep., HCA 6260/1997,
HCMP 1571/2000, [2001] HKEC 740) .......................................I0.155, I0.198,
 TABLEOF CASES !xiii

Wong Man Yin v Law Lam Wai [2001] 3 HKLRD 720 ........................................ 10.215
Wong Man Yin v Ricacorp Prope11iesLtd
(2003) 6 HKCFAR265 .................................................. 10.155, 10.156, 10.157,
10.158, 10.179, 10.182,
10.183, 10.184, 10.191, 10.204
Wong Ming Bun v Wang Ming Fan
[2014] l HKLRD 1108 .......................................................6.049,10.038, 10.096
Wong Pak Sum v Hong Kong Furniture &
Decoration Trade Association Ltd [2014] l HKLRD 507 ...........................9.l 10
Wong Sau Man Samuel v Wong Kan Po Wilson
[2017] 4 HKLRD 542 ...................................................... 11.074, l 1.083, l 1.086
Wong To Yick Wood Lock Ointment Ltd, Re
[2003] I HKC484 ............................................................10.240, 10.243,20.071
Woo Wai King v Cheung Siu Kam
(unrep., HCMP 1910/2014, [2015] HKEC 265) ....................................... 14.138
World One Investments Ltd v Chow Cheuk Lap
[2013] 3 HKLRD 701 ................................................................................ 10.027
World Wide Stationary Manufacturing Co Ltd v
Fong Chi Leung [1994] 2 HKC 449 ............................................................8.184
Wotta Co Ltd v Thomas Brain Stevenson
(unrep., 1999 WL 33578323, [1999] HK.EC 736, CFI) ............................20.213
Wu Yang v Dayuan International Development Ltd
(unrep., HCMP 2143/2011, [2013] HKEC 872) .......................... 11.086, 11.092
Xl0 Ltd, Re [1989] 2 HKLR 306 ........................................................................... 19.041
X-Dive Centre Ltd, Re (unrep., HCCW 98/2005, [2006] HKEC 324) ................. I 0.234
Yakult Honsha v Yakudo [2004] 1 HKC 630 ......................................................... 12.115
Yan Chim Kee Co Ltd, Re (unrep., HCMP 407/2004,
[2005] HKEC 514) .......................................................................................7.126
Yan Kwok Lin Julian vYan Kwok Kee Gay [1997] HKLRD 1199 ...................... 14.033
Yang Zhenghong v Registrar of Companies [2016] 3 HKC 247 ...........................20.258
Yaohan Hong Kong Corp Ltd, Re
[2002] l HKLRD 363 ...................................................... 19.037, 19.091, 20.045
Yat Chiv Max Share Ltd [1998] I HKLRD 866 ...................................................20.073
Yee Fat Development Ltd v Winline Knitting Factory Ltd
[201 I] 3 HKLRD 511 ........................................................3.073, 12.018, 12.040
Yetyue Ltd, Re (unrep., HCMP 421/2001,
[2001] HK.EC l 156)................................................................................... 19.l 13
Yeung Bun v Brio Technology Jnt'I Ltd, Re
[2000] 2 HKLRD 218 ................................................................................ 10.239
Yick Hok Wing v Chan Yook Ming
[1997] I HKC49 ..........................................................................................7.060
Yicko Ga Network Securities Ltd v Oriental Patron Asia Ltd
(unrep., HCA 9848/2000, [2002] HKEC 1477) ........................................ 16.015
Yifung Developments Ltd v Liu Chi Keung Ricky [2017) 5 HKLRD 16 (CA) ... 12.098
Yifung Properties Ltd v Manchester Securities Corp
(unrep., HCA 1341/2014,
[2014] HKEC 1892).........................................................18.039, 18.042, 18.057
Ixiv TABLE OF CASES

Yip Finance (Hong Kong) Ltd v

Moscow Narodny Bank Ltd [ 1979] HKLR 558 ........................................ 20.065
Yip Kwai Chor v King Fung Construction Work Co Ltd
(unrep., HCMP 375/2005, HCA 2183/2004,
[2006] HKEC 2277) ................................................................................... 10.197
Yip Lai Fong v Sin Tung Hing (2004) 3 HKC 153 ............................................... 12.036,
Yip Peter v Asian Electronics Ltd [ 1998] 2 HKC 96 .................................. 9 .141, 14.l 04
Yiu Cheung Glass Mirror Co Ltd, Re [2007] I HKC 502 ..................................... 20.259
Yiu Wing Construction Co Ltd, Re (unrep., HCCW 202/2002,
[2003] HKLRD (Yrbk) 193) ...................................................................... 18.l 18
YJK Co Ltd v Kazuo Aizawa (unrep., HCA 8 l 77/1998,
[1999] HKEC 700) ....................................................................................... 8.028
YK Engineering & Piling Ltd, Re [2004) 2 HKLRD H6 ...................................... 20.220
Yu Lai Ping Wandy v Chan Kuen (unrep., HCCW 1147/1999,
[2001] HKEC 627) ..................................................................................... 10.197
Yuanta Securities Asia Financial Services Ltd v
Core Pacific Investment Holdings (BVI) Ltd
(unrep., HCCW 804/2003, 17 Oct 2003) ................................................... I0.229
Yu Yuchuan v China Shanshui Investment Co Ltd
(unrep., HCMP 360/2015, [2015) HKEC 437) ............................ 10.055, 10.058
Yue Hing Co Ltd, Re (1916) 11 HKLR 53, affirmed
(1916) 11 HKLR82 ................................................................................... 10.238
Yue Tai Plywood & Timber Co Ltd v
Far East Wagner Construction Ltd
[2001] 2 HKLRD 446 ............................................................ 3.036, 3.063, 3.065
Yue Xiu Finance Co Ltd v Agnew [1995) 2 HKLR 186 .......................... 11.138, 11.140
Yuen Sau Fai v Yun Jip Auto Services Ltd
[I 990) 1 HKC 15, affirmed on appeal [ 1990) I HKC 2 .............. 10.150, I0.197
Yuk Wah Ho v Gao Jiaren [1999) 3 HKLRD 862 .......................................... 6.25, 9.136
Yun Jip Auto Services Ltd v Yuen Sau Fai
[1990) 1 HKC 20 ........................................................................... 10.149, 10.170
Yung Kee Holdings Ltd, Re [2012) 6 HKC 246 ...................................................... 2.065
Yung Kee Holdings Ltd, Re [2014) 2 HKLRD 313 ..................................... 2.063, 2.065,
3.025, 3.068, 10.173, I 0.196
Yung Kee Holdings Ltd, Re [2015) 6 HKC 644) ........................ 10.173, 10.I 97, I0.23 I,
10.232, 10.235
Z-Obee Holdings Ltd, Re [2018) I HKLRD 165 .................................................. 19.056
Zanda Investment Ltd v Bank of America National Trust and
Savings Association [1994) 2 HKC 409 ....................................... 12.012, 12.013
Zhang Heng v Kingstone International Wealth Management Ltd (unrep., CACY
56/2017, [2017) HKEC 2093) .................................................................... 10.056
Zhu Kuan (Hong Kong ) Co Ltd, Re
(unrep., HCMP 1286 and 1287/2007,
HCCW 874 and 875/2003, [2007] HKEC 1947) ...................................... 19.037
Zealot & Co Ltd, Re [2008) I HKLRD 386 .......................................................... 18.09l
~J§~ v tLl~1r1~~;(§f ~~0 ~
(unrep., HCMP 2721/2012, [2014) HKEC 512) ....................................... 18.057
 TABLE OF CASES Lw

Australia
Abe1foyle Ltd v Western Metals Ltd (1998) 156 ALR 68 ..................................... 16.015
Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 ............................... 11.087
Addstead Pty Ltd v Liddan Pty Ltd (1997) 25 ACSR 175 .................................... 19.114
Adler v ASIC (2003) 179 FLR 1 .............................................................................7.019
Advance Housing Pty Ltd (in liq) v
Newcastle Classic Development Pty Ltd
(1994) 14ACSR230 ..................................................................................20.042
Ah Toy v Registrar of Co (1986) 10 FCR 356 .......................................................20.043
Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 23 ACSR 715 ........................... 10.248
Alativ Wai Sheung, Re (2000) 34 ACSR 489 ........................................................20.076
Alessi v The Original Australian Art Company Pty Ltd (1989) 7 ACLC 595 ....... 10.240
Alex Russell, Re [ I968] YR 285 ............................................................................I4.047
Alexander v Cambridge Credit Corp Ltd ( 1987) 9 NSWLR 310 ......................... 11.131
Alexanders Securities Ltd, Re (No.2), Re (1983) 8 ACLR 434 .............................20.076
Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250 .................................... 10.041
Allen v Atalay ( 1993) 11 ACSR 753 ......................................................................10.248
Alpha Resources Ltd v CAC (1987) 5 ACLC 844 .................................................14.046
American Delicacy Co Ltd v Heath ( 1939) 61 CLR 457 ............................ 5.043, 5.052,
5.054, 5.059, 10.128
Ampol Petroleum Ltd v R W Miller (Holdings) Ltd [1972] 2 NSWLR 850 .......... 8.064
Anaray Pty Ltd v Sydney Futures Exchange Ltd
(1988) 6 ACLC 271 ......................................................................................7.021
Andco Nominees Pty Ltd v Lestato Pty Ltd (1995) 17 ACSR 239 ....................... 14.082
Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365 .................................. 19.112
Ansett Butler Air Transport Ltd (No.2), Re (1958) 75 WN (NSW) 306 .................9.103
ANZ Executors & Trustee Co Ltd v
QintexAustralia Ltd (1990) 2 ACSR 676 .........................................3.041, 8.036
ARM Constructions Pty Ltd v FCT (1987) 87 ATC 4790 ....................................... J.036
ASC v Multiple Sclerosis Society of Tasmania ( 1993) 10 ACSR 489 .................. 10.170
ASIC v Adler (2002) 168 FLR 253 ..........................................................................7.019
ASIC v Adler (2002) 41 ACSR 72 ...........................................................................8.136
ASIC v Adler [2002] NSWSC 171 (affirmed on appeal
[2003] NSWCA 131.....................................................................................7.019
ASIC v Healey (2011) 83 ACSR 484.......................................................................8.158
ASIC v Hellicar (2012) 286 ALR 501 (HCA) ..............................................8.139, 8.152
ASIC v MacDonald (No.11) (2009) 256ALR 199 ......................................8.139, 8.152
ASIC v MacDonald (No.12) (2009) 259 ALR 116 .................................................8.202
ASIC v Maxwell (2006) 59 ACSR 373 ....................................................................8.150
ASIC v Rich (2003) 44 ACSR 341 ..........................................................................8.139
ASIC v Rich (2009) 75 ACSR I ........................................................8. I36, 8.142, 8.154
ASIC v Vizard (2005) 145 FCR 57 ..........................................................................7.019
ASIC vVizard [2005] 1037......................................................................................7.019
Augold NL, Re [1987] 2 Qd R 297 ........................................................................11.087
August Investments Pty Ltd v Poseidon Ltd (1971) 2 SASR 60 .............................9.130
Austral Brick Co Pty Ltd v
Falgat Constructions Pty Ltd (1990) 2 ACSR 766 ........................ 19.l 12, 20.091
Ix"i TABLE OF CASES

Australasian Oil Exploration v Lachberg (1958) 101 CLR 119............... 15.003, 15.017
Australasian Agricultural Co v Oatmont Pty Ltd ( 1992) 8 ACSR 255 ...................8.028
Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd
(2013) 282 FLR 351 ................................................................................... 12.086
Australian Careers Institute Pty Ltd v
Australian Institute of Fitness Pty Ltd (2016) 116 ACSR 566 ...........8.077, 8.181
AustralianGrowthResourcesCorp Pty Ltd v VanReesema (1988) 13ACLR 261...........8.083
Australian Institute of Fitness Pty Ltd v
Australian Institute of Fitness (Vic/fas) Pty Ltd (No.3)
(2015) 109 ACSR 369 ......................................................................8.016, 8.037,
8.120, 8.125
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199............ 8.048
Australian Mid-Eastern Club Ltd v Elbakht (1988) 14 ACLR 234 ....................... 20.066
Australian National Industries Ltd v
Greater Pacific Investments Pty Ltd (No.3) (1992) 7 ACSR 176 ............... 8.044
Australian Securities and Investments Commission v
Adler (2002) 41 ACSR 72 ............................................................................8.021
Australian Securities and [nvestments Commission v
Cycclone Magnetic Engines Inc (2009) 71 ACSR 1 .........8.160, 10.250, 10.251
Australian Securities and Investments Commission v
MacDonald (No.11) (2009) 256 ALR 199 ..................................................8.021
Australian Securities and Investments Conm1ission v
Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 ..................... 10.250, I0.25 I
Australian Securities and Investments Conm1ission v Maxwell
(2006) 59 ACSR 373 ....................................................................................8.028
Australian Securities and Investments Commission v
Vines (2005) 55 ACSR 617 ..........................................................................8.146
Australian Securities and Investments Commission v AS Nominees Ltd
(1995) 133 ALR 1 ........................................................................................
7.014
Australian Securities and Investments Commission v
Fairlie [1993] TASSC 69 ............................................................... 11.013, 11.016
AWA Ltd v Daniels (1992) 7 ACSR 759 .................................................. 12.014, 12.018
AWA Ltd v Daniels (No.2) (1992) 9 ACSR 383
(on appeal Daniels v Anderson ( 1995) 37 NSWLR 438) .......................... 11.116
Aztech Science Pty Ltd v Atlanta Aerospeace (Woy Woy) Pty Ltd
(2005) 55 ACSR l .............................................................................4.034, 4.047
Back 2 Bay 6 Pty Ltd, Re (1994) 12 ACSR 614 .................................................... 18.010
Ball v Pearsall (1987) 10 NSWLR 700 ....................................................................9.069
Bancorp Investments Pty Ltd v
Primac Holdings Ltd (1984) 9 ACLR 263 ................................................. 10.122
Barrack Mines Ltd v Grants Patch Mining Ltd [1988] 1 Qd R 606 ...................... 11.087
Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429 ..........................4.049
BCI Finances Pty Ltd v Binetter (No.4) (2016) 117 ACSR 18 ....................8.028, 8.181
Beck vTuckey Pty Ltd (2004) 49 ACSR 555 ...............................................9.015, 9.026
Beckingham v Port Jackson & Manly Steamship Co
(1957) SR (NSW) 403 .................................................................................. 1.036
Belgiomo-Zegra v Exben Pty Ltd (2000) 35 ACSR 305 ....................................... 10.177
 TABLEOF CASES lxvii

Bell Group Ltd v Westpac Banking Corp (No.9)

(2008) 70 ACSR l ..................................................................8.009, 8.038, 8.043
Bell v Burton (1993) 12ACSR 325 ..............................................................7.063, 7.102
BH Apartments Pty Ltd v Sutherland Nominees Pty Ltd
(2015) 108ACSR 110 ..................................................................................9.015
Biala Pty Ltd v Mallina Holdings Ltd (1994)15 ACSR l.. ................................ 62, 8.150
Black v Smallwood [1966] ALR 744 ................................................4.003, 4.007, 4.008,
4.010, 4.019, 4.033
Blacktown City Council v Macarthur Telecommunications Pty Ltd
(2003) 47 ACSR 391 ..................................................................................19.107
Bligh v Brent (1837) 2 Y & C Ex 268....................................................................13.039
Bluebottle UK Ltd v Deputy Commissioner ofTaxation
(2007) 240 ALR 597 ..................................................................................15.143
Bolton v Darling Downs Building Society
[ 1935] SR Qd 237 .....................................................................................18.099
Bond Brewing Holdings Ltd v National Australia Bank Ltd
(1990) l ACSR 445 .........................................................18.08 l, 18.083, 18.084,
18.085, 18.086, 18.088
Bond Corporation Holdings Ltd, Re (1991) 5 ACSR 304 ..................................... 14.167
Botar-Tatham Pty Ltd, Re [2001] NSWSC 272 .....................................................20.075
Boulas v Angelopoulos (1991) 5 BPR l l .....................................................4.013, 4.014
Boz One Pty Ltd v McLennan (2015) 105 ACSR 325 ..........................................18.044
Breen v Williams (1996) 186 CLR 71 ..........................................................8.009, 8.070
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
[1992] 2 YR 279 .......................................................6.044, 6.048, 6.049, 12.033
Bright\vell v RFB Holdings (2003) 44 ACSR 186 ................................................10.077
Broadcasting Station 2GB Pty Ltd, Re
[1964-1965] NSWR 1648 ...................................................7.038, 8.037, 10.169
Broadway Motors Holdings Pty Ltd, Re
(in liq) (1986) 6 NSWLR 45 ........................................................................9.139
Brookton Co-operative Society Ltd v
FCT (1981) 147 CLR 441 ..........................................................................15.143
Brunninghausen v Glavanics (I 999) 46 NSWLR 538.............................................8.024
Brunswick NL, Re (1990) 3 ACSR 625 .................................................................10.250
Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd
(2006) 62 ACSR 502 ..................................................................................14.043
Burry&KnightLtd,Re[2014] l WLR4046 ...........................................14.108, 14.109
Burton v Palmer (1980) 5 ACLR 481 ....................................................................15.1 l l
Buzzle Operations Pty Ltd (in liq) v
Apple Computer Australia Pty Ltd (201 I) 81 NSWLR 47 ..............7.014, 7.015
Byron Motors Ltd v Dolphin House Ltd
[1958] 3 SALR 532 ....................................................................................20.061
Cadwallader v Bajco Pty Ltd (200 I) 189ALR 370............................................... 10.080
Campaign Holdings Pty Ltd, Re (1989) 15 ACLR 762 .........................................15.032
Canny Gabriel Castle Jackson Advertising Pty Ltd v
Volume Sales (Finance) Pty Ltd
(1974) 131 CLR321 ....................................................................................l.044
Ix"iii TABLE OF CASES

Cape v Redarb Pty Ltd (1992) 107 FLR 362 .........................................................18.104

Carpark Industrial Pty Ltd, Re [1967) 1 NSWR 337 ............................................. 19.052
Carpenter v Pioneer Park Pty Ltd (2004) 211 ALR 457 ........................................ I0.060
Cater-King Pty Ltd v Westpac Banking Corp [1990) WAR 225 ........................... 18.069
Centofanti v Eekimitor Pty Ltd (1995) 15 ACSR 629 ..................................8.029, 8.084
Central Piggery Co Ltd v McNicholl & Hurst
(1949) 78 CLR 594 ....................................................................................14.032
Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661 .............................................. 10.077
Chan v Zacha1ia ( 1984) 154 CLR 178................................... 1.056, 8.114, 8.116, 8.118
Chapman v E-Sports Club Worldwide Ltd (2000) 35 ACSR 462 ......................... 10.098
Charlton v Baber (2003) 47 ACSR 31, 44 ...................................10.056, 10.057, 10.061
CIC v Hanna (2001) 19 ACLC l.. ..........................................................................20.060
Circle Petroleum (Qld) P/L v
Greenslade (1998) 16 ACLC 1577 (Qld SC) ...............................................8.207
City & Suburban Pty Ltd (as liquidator of Conpact
(Aust) Pty Ltd (in liq), Re ( 1998) 28 ACSR 328 .......................................20.046
Club Flotilla (Pacific Palms) Ltd v
Isherwood ( 1987) 12 ACLR 387 ................................................................12.019
Coles Myer Ltd v Commissioner of State [1998) 4 VR 728 ................................. 14.165
Colorado Constructions Pty Ltd v Platus
[1966) 2 NSW 598 .......................................................................................9.080
Colorado Products Pty Ltd (in prov liq), Re (2014) 97 ACSR 581 ....................... 10.041
Commission for Corporate Affairs v Harvey [ l 980] VR 669 ..................20.042, 20.043
Conunissioner for Corporate Affairs v Bracht [ 1989) VR 821 ...............................7 .130
Commonwealth Bank of Australia v Australian
Solar Information Pty Ltd (1986) 11 ACLR 380 .........................................4.028
Conunonwealth Homes and Investment Co Ltd v
Smith ( I937) 59 CLR 443 ..........................................................................14.032
Conunonwealth v Introvigne (1982) 41 ALR 577 ................................................. 12.101
Conununity Development Pty Ltd v
Engwirda Construction Co ( 1969) 120 CLR 45 5 ......................................20.076
Conununity of St George, Re (1988) 13 ACLR 691 ...............................................9.053
Comptroller of Stamps v Ashwick (Vic) No.4 Pty Ltd
(1987) 163 CLR 640 ..................................................................................15.074
Comptroller of Stamps v
Associated Broadcasting Services Ltd [1990] VR 335 ............................. 12.047
Cope v Butcher (1996) 20 ACSR 37 ......................................................................10.030
Cordiant Communications (Aust) Pty Ltd v
Communications Group Holdings Pty Ltd
(2005) 55 ACSR 185 .........................................................................7.089, 7.091
Corporate Affairs Commission (SA) v
Australian Central Credit Union (1985) 157 CLR 201 ............................. 16.013
Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 ...............7.007, 8.017
Crabtree-Vickers Pty Ltd v
Australian Direct Mail Advertising Co Pty Ltd
(1975) 133 CLR 72 ......................................................................12.026, 12.033,
12.035, 12.036
 TABLE OF CASES lxix

Crumpton v Morrine Hall Pty Ltd

[1965] NSWR 240, 82 WN (Ptl)
(NSW) 456, (NSWSC, I 965) ........................................................J0.120, 14.072
CSR Ltd v Young 1998) Aust Torts Reports 81-468 ................................................3.062
Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789 .................7.130
Cultus Gold NL Re (1987) 12 ACLR 433 .............................................................14.156
Cumberland Holdings Ltd (1976) 1 ACLR 361 ....................................................10.145
Cummings v Lewis (unrep., Federal Court of
Australia, 2 August 1991) ............................................................................l.036
Dairy Containers Ltd v NZI Bank Ltd (1995) 13 ACLC 3211 ...............................8.018
Dalkeith Investments Pty Ltd, Re (1984) 9 ACLR 247 .........................................10.21l
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371. .....................................8.l 76
Daniels v Anderson (1995) 16 ACSR 607 ............................ 8.133, 8.134, 8.136, 8.137,
8.139, 8.141, 8.142, 8.149, 8.150,
8.151, 8.157, 8.199, 8.200
Daniels v Anderson (1995) 37 NSWLR438 .............................. 11.116, 11.127, 11.128,
11.130, 11.133, 20.046
Darvall v North Sydney Brick & Tile Co Ltd
(1989) 16 NSWLR 260 ....................................................................... 8.055, 8.068
Darvall v North Sydney Brick and Tile Co Ltd
(1987) 16 NSWLR 212 ...............................................................................8.030
Dawson, Re [ 1966] 2 NSWR 211 ............................................................................8.174
DCT v Status Constructions Pty Ltd (1987) 12 ACLR 689 ..................................20.026
Deangrove Pty Ltd v Commonwealth Bank of Australia
(2001) 108 FCR 77 .....................................................................................18.021
Deep Sea Fisheries Pty Ltd, Re (1984) 2 ACLC 326 ............................................. I0.238
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 ............................................ 16.069
Dempsterv Malliner Holdings Ltd (1994) 13 WAR 124 ......................................10.030
Deputy Commissioner of Taxation v
Austin (1998) 28 ACSR 565 ..................................................7.003, 7.009, 7.010
Deputy Commissioner of Taxation v
Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 245 ........................... 18.037
Deputy Commissioner of Taxation v Dick (2007) 64 ACSR 61 (NSWCA) ........... 8.200
Demacourt Investments Pty Ltd and
Baker Davis Supply Co Pty Ltd v
Dernacourt Investments Pty Ltd (1990) 2 ACSR 553 ............................... 10.147
Devereaus Holdings Pty Ltd v
Pelsart Resources NL [No.2] (1985) 9 ACLR 956 ......................................9.057
Diesels & Components Pty Ltd, Re [1985] 3 ACLC 555 ...................................... 18.069
Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424 ........................................5.048
Dowse v Marks (1913) 13 SR (NSW) 332 ...................................................6.020, 6.029
Dudley Buildings Pty Ltd v Rose (1933) 49 CLR 84 ..............................................4.0l 7
Duke Group Ltd v Pilmer (1999) 31 ACSR 213 ......................................................8.029
Dunquil Pty Ltd, Re (1985) 9 ACLR 950 ..............................................................20.020
Eastern Resources of Australia Ltd v
Blass Reinforced Products (GRP) Pty Ltd
(1986) 10 ACLR 496 ....................................................................................7.060
Ixx TABLE OF CASES

Edwards v Attorney General (NSW)

(2004) 50 ACSR 122 (NSWCA) ..................................................................8.200
Ehsman v Nutectime Tnt'l Pty Ltd (2006) 58 ACSR 705 ...................................... 10.076
Engel v National Biodiesel Ltd (2015) I 09 ACSR 173......................................... 11.092
ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626 ..............................9.057
Enterprise Gold Mines NL (1991) 3 ACSR 531 ....................................................10.184
Entsch v Mr Crocodile Pty Ltd (1990) 3 ACSR 720 ...............................................6.013
Entwells Pty Ltd v National and General Insurance Co Ltd
(1991) 5 ACSR 424 .......................................................................12.0l 5, 12.110
Equiticorp Finance Ltd (in liq) v
Bank of New Zealand (1993) 32 NSWLR 50 .............................................8.045
Equiticorp Financial Services Ltd v
Equiticorp Financial Services Ltd
(1992) 9 ACSR 199 ......................................................................................8.036
Equity Nominees Ltd vTucker (1967) 116 CLR 518............................................ 12.042
Equitycorp Industries Ltd v ACI Intl Ltd [1987] VR 485 ..................................... 14.075
Ernst&Young vTynski Pty Ltd (2003) 47 ACSR433 .......................................... 18.021
Eros Cinema Pty Ltd v Nassar(] 996) 14 ACLC 1374.......................................... I0.041
Esperance Cattle Company Pty Ltd v Granite Hill Pty Ltd
(2014) 47 WAR 318 ...................................................................................12.086
Executor Trustee Australia Ltd v
Deloitte Haskins Sells ( 1996) 22 ACSR 270 ............................................. 10.253
Farah Constructions Pty Ltd v Say-Dee Pty Ltd
(2007) 230 CLR 89 ......................................................................................8.179
Farrow v Registrar of Building Societies [ I99 I] 2 YR 589................................... I0.028
Federal Business Development Bank, Re
(1983) 18 ACWS (2d) 518 .........................................................................17.196
Federal Commissioner ofTaxation v
Everett (1980) 54ALJR 196 ........................................................................1.044
Ferrier v Bottomer (1972) 126 CLR 597 ...............................................................17.093
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 ....................... 10.204
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd
(2001) 37 ACSR 672 .......................................................................8.122, 10.162
Fiduciary Ltd v Morningstar Research Pty Ltd
(2005) 53 ACSR 732 .....................................................................10.059, 10.061
Fire Nymph Products Ltd v Heating Centre Pty Ltd (in liq)
(1992) 10 ACLC 629 ..................................................................................17.193
Fire Nymph Products Ltd v Heating Centre Pty Ltd (in liq)
(1992) 7 ACSR 365 .......................................................................17.087, 17.209
Fitzsimmons v R (1997) 23 ACSR 355....................................................................8.029
Flavel v Giorgio (1990) 2 ACSR 568 .....................................................................16.085
Forsyth v Blundell (1973) 129 CLR 477 ...............................................................18.041
Foyster v Foyster Holdings (2003) 44 ACSR 705 .................................................. 10.086
Fulloon v Radley [1992] 2 Qd R 290 ........................................................I0.039, 10.127
Furs Ltd vTomkies (1936) 54 CLR 583 ..................................................................8.132
Gambotto v WCP Ltd (1995) 182 CLR 432 ......................................5.042, 5.066, 5.067
GE Capital Australia v Davis [2002] NSWSC 1146 ............................................. 10.253
 TABLE OF CASES lxxi

Genasys II Pty Ltd, Re (1996) 14 ACLC 729 ........................................................18.021

Geneva Finance Ltd, Re (1992) 7 WAR 469 .............................................18.021, 18.037
George Barker (Transport) Ltd v
Eynon [1973) l WAR 1461 ........................................................................18.016
Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers
(2005) 23 ACLC 1288 ..................................................................................8.185
Gold Ribbon (Accountants) Pty Ltd v Sheers [2005) QSC 198..............................8.149
Golden West Resources Ltd, Re
[2008) FCA 1362 ESF 186 of2008 .............................................................9.l39
Goozee v Graphic Word Group Holdings Pty Ltd
(2002) 42 ACSR 534 ..................................................................................10.059
Grant v John Grant & Sons Pty Ltd [1950) 82 CLR l .................................6.013, 6.014
Grant-Taylor v Babcock & Brown Ltd (2016) 330 ALR 642 ................... 16.132, 16.135
Gray v Bridgestone Aust Ltd; Ewing v Flandri Pty Ltd
(1986) 4ACLC 330 .....................................................................................20.047
Griffiths v Secretary of State of Social Services [1974) QB 468 .......................... 18.022
Grove v Flavel(l986) 43 SASR 410 .............................................................8.040, 8.042
Had id v Australis Media Ltd [1999) NSWSC 32 ....................................................4.013
Hamilton v Hunter (1982) 7 ACLR 295 ......................................17.086, 17.088, 17.091
Hamilton v Whitehead (1988) 166 CLR 121.........................................................12.129
Handevel Pty Ltd v Comptroller of Stamps (Vic)
(1985) 157 CLR 177 ..................................................................................17.006
Hannes v MJH Pty Ltd ( 1992) 7 ACSR 8 ................................................................8.055
Hardie v Hanson (1960) 105 CLR45l ..................................................................20.l73
Harlowe's Nominees Pty Ltd v
Woodside (Lake Entrance) Oil Co NL
(1968) 121 CLR483 ..............................................................8.050, 8.067, 8.068
Hart v Barnes (1982) 7 ACLR 310 ........................................................................17.129
Hassall v Speedy Gantry Hire Pty Ltd [2001) QSC 327 ....................................... 10.098
Hatfield Enterprises Pty Ltd, Re (1982) 6 ACLR 494 ...........................................l 4.046
Herrman v Simon (1990) 4ACSR 81 ...........................................................9.l 19, 9.124
Ho v Akai Pty Ltd (in liq) (2006) 24 ACLC 1526 ...................................................7.015
Hookerlnvestments Pty Ltd v
Email Ltd (1986) 10 ACLR 443 .................................................................10.039
Hopkins Professional Services Pty Ltd v
Foyster Holdings Pty Ltd (2001) 39 ACSR 519 ..........................................6.011
Hospital Products Ltd v United States Surgical Corp
(1984) 156 CLR 41 ......................................... 1.055, 8.007, 8.021, 8.071, 8.073
Hubbard Association of Scientologists International v
Attorney-General (Vic) [ 1976) VR 119.......................................................1.007
Hughes v NM Superannuation Board Pty Ltd
(1993) 29 NSWLR 653 .................................................................12.014, 12.098
Hunt v Numa [2000) VSC 218 ...............................................................................18.088
Hunters Products Group Ltd v Kindly Products Pty Ltd
(1996) 20ACSR 412 ..................................................................................15.l 12
JCTAustralia Operations Pty Ltd v
Trade Practices Conunission ( 1992) 38 FCR 248 ..................................... 10.250
tu.ii TABLE OF CASES

Industrial Equity Ltd v Blackbum ( 1977) 17 ALR 575 .........................................15.144

Ingot Capital Market Investments Pty Ltd v
Macquarie Equity Capital Markets Ltd
(2008) 68 ACSR 595 ..................................................................................16.075
Ingot Capital Market Investments Pty Ltd v
Macquarie Equity Capital Markets Ltd (No.6)
(2007) 63 ACSR 1 ......................................................................................16.078
lnkerman Grazing Pty Ltd, Re (1972) 1 ACLR 102 ..............................................20.075
Insurance Group Ltd v ASC (1992) 110 ALR 301 ................................................ 15.164
Integrated Medical Technologies Ltd v
Macel Nominees Pty Ltd (1988) 13 ACLR 109 ...............................6.014, 6.015
Intl Harvester Export Co v
Intl Harvester Australia Ltd [ 1983] I VR 539 ..............................18.022, 18.100
Inventive Marketing Pty Ltd (in liq), Re (2000) 36 ACSR 206 ...............................7.102
Jeffree v National Companies and
Securities Commission ( 1989) 15 ACLR 217 .............................................8.040
Jenashare Pty Ltd v Lembrib Pty Ltd (1993) 11 ACSR 345 ...................................7.062
Jenashare Pty Ltd v Lemrib Pty Ltd (1993) 11 ACLC 768 .....................................9.053
Jenkins v Enterprise Gold Mines NL
(I 992) 6 ACSR 539 .......................................................................10.184, 10.185
JJ Leonard Properties Pty Ltd v
Leonard (WA) Pty Ltd (No.2) ( 1987) 13 ACLR 77 ................................... 17.171
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd
(1991) 6ACSR63 ..........................................................................9.130, 10.170,
I 0. 183, I 0.204
Johnston v Dunster & Co, Re (1891) 17 VLR 100..................................................9.078
Jones v Money Mining NL (1995) 17 ACSR 531 ...................................................5.040
Kelly v Kelly (1990) 92 ALR 74 ..............................................................................1.045
Kelly v Wolstenholme (1991) 9 ACLC 785 .............................................................9.081
Kevroy Pty Ltd v Keswick Developments Pty Ltd
(2009) 69 ACSR 635 ....................................................................................4.042
Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396 .........................10.098, 10.223
Kjnsela v Russell Kinsela Pty Ltd ( 1986) 4 NSWLR 722 ............... 8.038, 8.042, 8.043,
8.190, 18.014, 19.116
Kirwan v Cresvale Far East Ltd (in liq)
(2002) 44 ACSR 21 ......................................................................................8.053
Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606 ........................ 10.184, 10.211
Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd
(1989) 7 ACLC 536 ....................................................................................ll.087
Kokotovich Constructions Pty Ltd v
Wallington (1995) 17 ACSR 478 ...............................................................14.046
Kornblums Furnishings Ltd, Re [1982] VR 123....................................................10.176
Landmark Corp Ltd, Re [ 1968] 1 NSWR 705 .......................................................20.094
Landmark Corp Ltd, Re (1968] 1 NSWR 759 ..........................................19.072, 19.082
Lang v James Morrison & Co Ltd (1911) 13 CLR 1............................................... 1.036
Lau Chak Chuen v Laredo Pty Ltd [2005] WASC 58 ........................................... 11.087
Lawson Constructions Pty Ltd, Re [1942] SASR 201 ........................................... 17.126
 TABLE OF CASES Ixxiii

Lawson v Mitchell [1975] YR 579...........................................................................8.200

Lee v Irons [1958] VR 436 .......................................................................................4.014
Levin v Clark [l 962] NSWR 686 ...............................................................7.023, 13.032
Lieven v Stewa1t ( 1990) 3 ACSR 118....................................................................12.120
Linton vTelnet Pty Ltd (1999) 30 ACSR 465 ..........................................................8.044
Liquidator v Federal Traders Ltd [1931] SASR 425 .............................................. 17.126
Lomax v Dankel (1981) 29 SASR 68 ......................................................................4.013
Loteka Pty Ltd (in Iiq), Re [ I 990] I Qd R 322 ......................................................20. 120
Lyford v Commonwealth Bank of Australia
(1995) 130ALR267 ..................................................................................17.104
Mackay Sugar Ltd v Wilmar Sugar Australia Ltd (2016) 338 ALR 374............... 10.201
Macquarie Bank Ltd v Sixty-Fou1thThrone Pty Ltd
[1998]3VR 133.........................................................................................12.110
Magnacrete Ltd v Robe1t Douglas-Hill (1988) 15 ACLR 325 ................................7.102
Maher v Honeysett and Maher Electrical Contractors Pty Ltd
[2005] NSWSC 859 ...................................................................................10.080
Mai Bower's Macquarie Electrical Centre Pty Ltd (in liq), Re
[1974] 1 NSWLR 254 ................................................................................20.120
Mamouney v Soliman (1992) 9 ACSR 63 ...............................................................7.091
Margart Pty Ltd, Re (I 985) 9 ACLR 269 ...............................................................20.121
Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd
[1983] 2 Qd R 508 .............................................................................7.022, 8.016
Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd
(2001) 38 ACSR 404 ..............................................................8.035, 8.036, 8.045
Marra Developments Ltd, Re (1976) I ACLR 470 ..................................................9.089
Marra Developments Ltd v B W Rofe Pty Ltd
[1977] 2 NSWLR 616 ................................................................................15.143
Massey v Wales (2003) 57 NSWLR I ......................................................... 6.028, 6.032,
6.039
Massey v Wales (2004) 47 ACSR I ..............................................................6.028, 6.038
6.039
McAusland v Deputy Commissioner of Taxation
(1994) 12ACSR 432 ..................................................................................20.091
McCracken v Phoenix Constructions (Qld) Pty Ltd
(2012) 289 ALR 710 (Qld CA) ..................................................................10.253
McEvoy v Caplan (2010) 78 ACSR 167 ................................................................10.076
McLean v Lake Como Venture Pty Ltd
[2004] 2 Qd R 280 ............................................................10.063, 10.078, 10.079
McMillan v Toledo Enterprises Int'l Pty Ltd
(1995) 18 ACSR 603 ..................................................................................10.241
Metyor Inc v Queensland Electronic Switching Pty Ltd
(2002) 42 ACSR 398 .....................................................................10.060, 10.098
Mills v Mills (1938) 60 CLR 150 .......................................... 8.034, 8.062, 8.063, 8.068
Mineral Securities Australia Ltd (in liq), Re
[1973] 2 NSWLR 207 ................................................................................18.037
Mitropoulos v Greek Orthodox Church (1993) 10 ACSR 134................................7.060
Monitronix Ltd, Re (1987) 12 ACLR 161..............................................................14.046
Ixxiv TABLE OF CASES

Morgan v 45 Fiers Avenue Pty Ltd (1986) 10 ACLR 692, 704 ............................ 10.145
Morley v ASIC (2010) 274 ALR 205 (NSWCA) ....................................................8.139
Morley v Statewide Tobaccco Services Ltd (1992) 8 ACSR 305 ............................8.155
Mulcon Pty Ltd v MYT Engineering Pty Ltd
( I 996) 14 ACLC I054 (NSWSC) ...............................................................7. I 02
Mulcon Pty Ltd v MYT Engineering Pty Ltd
(1996) 20 ACSR 606 ..................................................................................12.042
Myer Queenstown Garden Plaza Pty Ltd v
Port Adelaide City Corp
(1975) 11 SASR 504, 33 LGRA 70 .............................................................9.075
MYT Engineering Pty Ltd v Mulcon Pty Ltd
(1997) 15 ACLC 1057 (NSWCA) ...............................................................7.102
Nankivell v Benjamin ( 1892) 18 VLR 543 ...............................................10.018, 10.127
Nardell Coal Corp v Hunter Valley Coal Processing
(2003) 21 ACLC 1505................................................................................18.069
National Australia Bank Ltd v Bond Brewing Holders Ltd
[1991] 1VR386 ............................................................................18.077, 18.097
National Roads and Motorists' Association v Snodgrass
(2002) 42 ACSR 622 ..................................................................................11.l 47
Natural Extracts Pty Ltd v Stotler ( I 997) 24 ACSR I 10.........................................8.125
Neon Signs (NAsia) Ltd, Re [1965] VR 125 ........................................................18.073
Ngurli Ltd v McCann (1953) 90 CLR 425 ...............................................10.128, 14.037
Nicholas v Nicholas [1984] FLR 285 ......................................................................3.034
Nickel Mines Ltd, Re (1978) 3 ACLR 686 ............................................................18.l 16
Niord Pty Ltd v Adelaide Petroleum NL (I 990) 8 ACLC 684 .............................. I0.140
North City Developments Pty Ltd, ex p Walker, Re
(1990) 20 NSWLR 286 ..............................................................................18.037
North Western Shipping & Towage Co Pty Ltd v
Commonwealth Bank of Australia
(1993) I 18 ALR 453 ..................................................................................17.096
Northside Developments Pty Ltd v
Registrar-General (1990) 170 CLR 146.............. 12.07, 12.041, 12.044, 12.056,
12.057, 12.059, 12.060,12.061,
12.062, 12.063, 12.064,
12.069, 12.070, 12.076
Norvabron Pty Ltd (No.2) Re (1986) 11 ACLR 279 .............................................10.147
Norvabron Pty Ltd, Re (1987) 5 ACLC 18 ............................................................10.168
NRMA v Parker (1986) 6 NSWLR 517...................................................................6.003
NRMR v Parker (1986) 6 NSWLR 516 ...................................................................9.062
Obie Pty Ltd, Re (1983) 8ACLR439 ....................................................................17.091
Opes Prime Stockbroking Ltd, Re (2009) 258 ALR 362 .......................................19.068
Ord Forrest Pty Ltd v Federal Conunissioner ofTaxation
(1974) 130 CLR 124 ..................................................................................14.037
Oskar, Re Conunonwealth of Australia, exp ( 1984) 55 ALR 717 ........................20.076
Ox Operations Pty Ltd v
Land Mark Property Developments (Vic) Pty Ltd
[2007] FCA 1221 ..............................................................................6.003, 6.049
 TABLE OF CASES Ixxv

Pace v Antlers Pty Ltd (1998) 89 FCR 485 ...........................................................20.047

Pacific Acceptance Corp Ltd v Forsyth
(1970) 92 WN (NSW) 29 .............................................................11.l 24, 11.126,
11.127, 11.135
Papaioannoy v Greek Orthodox Community of Melbourne
(1978) 3 ACLR 801 ....................................................................................10.123
Pearl Coast Divers Pty Ltd v
Cossack Pearls Pty Ltd (2008) 249 ALR 591 ............................................ 10.077
Permanent Building Society v Wheeler (1994) 14 ACSR 109.................... 8.010, 8.063,
8.134, 8.137, 8.139,
8.183, 8.184
Perrins v State Bank ofVictoria [1991) 1 VR 749 .................................................17.128
Peter's American Delicacy Co Ltd v Heath
(1939) 61 CLR 457 .................................................. 5.043, 5.054, 5.059, 10.128
Petsch v Kennedy [1971] I NSWLR 494 ................................................................7.060
Phelan v Amb1idge Corp Pty Ltd
(2005) 55 ACSR 136 ..................................................................................20.076
Pine Vale Investments Ltd v
McDonnell and East Ltd (1983) 8 ACLR 199........... 8.055, 8.056, 8.067, 8.068
Playcorp Pty Ltd v Shaw (1993) l0ACSR 212 .......................................................7.022
Pilmer vThe Duke Group Ltd (in liq) (2001) 207 CLR 165...................................8.009
Poliwka v Reven Holdings Pty Ltd (1992) 8 ACSR 747 ............................. 6.049, 7.092,
7.097, 7.099
Polon v Dorian (2014) 102 ACSR 1.......................................................................10.253
Potts v Miller (1940) 64 CLR 282 ..........................................................................16.075
Power v Ekstein (2010) 77 ACSR 302 ...................................................................10.229
Pty Ltd v FCT ( 1986) 84 FLR 278 ...........................................................................9.073
QBE Insurance Group Ltd v ASC ( I992) I I0 ALR 30 I ....................................... 15.I64
Qintex Australia Finance Ltd v
Schroeders Australia Ltd (1991) 9 ACLC I09 .............................................3.065
Qintex Ltd (No.2) Re (1990) 2 ACSR 479 ............................................................12.016
Queensland Mines Ltd v Hudson (1978) 18 ALR 1.....................................8.l 16, 8.131
Quick v Stoland Pty Ltd (1998) 29 ACSR 130......................................................20.070
Quinlan v Fiboze Pty Ltd (1988) 14 ACLR 312 ....................................................10.212
R v Australasian Films Ltd (192 I) 29 CLR I95 ....................................................12.126
R v Judges of the Australian Industrial Court,
ex p CLM Holdings Pty Ltd
(1977) 136CLR235 ..................................................................................12.129
R v R [2014] 2 FLR 699 ...........................................................................................8.018
Ragless v IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700.............................. I 0.056
Rankine v Rankine (1996) 18 ACSR 725 ..............................................................10.215
Raymond v Cook (1998) 29 ACSR 254 .................................................................10.144
Registrar-General v Northside Developments Pty Ltd
(1988) 14 NSWLR 571 ..............................................................................12.064
Reid Murray Holdings Ltd v David Murray Holdings Pty Ltd
(1972) 5 SASR 386 ......................................................................................8.044
Reid v Bagot Well Pastoral Co Pty Ltd ( 1993) 61 SASR 165............................... 10.184
Ixxvi TABLE OF CASES

Relwood Pty Ltd v Manning Holms Pty Ltd (No.2)

[1992] 2 Qd R 197......................................................................................18.023
Residues Treatment and Trading Co Ltd v
Southern Resources Ltd (No.4) (1988) 14 ACLR 569 .............................. 10.127
Reynolds Bros (Motors) Pty Ltd v Esanda Ltd
(1983) 8ACLR422 .......................................................................17.086, 17.088
RM (No.13) Pty Ltd, Re (1995) 17 ACSR 758 ........................................................9.131
Roach v Winnote Pty Ltd (in liq) [200 I] NSWSC 822 ......................................... 10.077
Roden v Intl Gas Applications (1995) 18 ACSR 454 ..............................................7.098
Rossfield Group Operations Pty Ltd v Austral Group Ltd
[1981] Qd R 279 ...........................................................................................8.055
Roy Morgan Research Centre Pty Ltd v
Wilson Market Research Pty Ltd (I 996) 20 ACSR 108............................20.076
RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 ........................................ l 0.080
Rural Chemical Industries Pty Ltd Re (1984) 9 ACLR l 76 ....................................9.025
Ruralcorp Consulting Pty Ltd v Pynery Pty Ltd
(1996) 21 ACSR 161 ..................................................................................10.028
SAW (SW) 2010 Ltd v Wilson [2018) 2 WLR 636 ..................... 17.076, 17.092, 17.210
Scare) Pty Ltd v City Loan & Credit Corp Pty Ltd
(1988) 12 ACLR 730 ..................................................................................10.041
Scottish Properties Pty Ltd, Re (1977) 2 ACLR 264 .............................................18.103
Senodynelntl Ltd, Re (1994) 15ACSR494 .......................................................... 14.158
SGH Ltd v FCT (2002) 210 CLR 51 .......................................................................8.037
Shackell v Howe, Thornton & Palmer
(1909) 8 CLR 170 ......................................................................................17.129
Shafron v ASIC (2012) 286 ALR 612 (HCA) ..............................................8.139, 8.152
Shears v Phosphate Co-operative of Australia Ltd
(1988) 14ACLR 747 ..........................................................5.050, 10.200, 10.201
Shell Co of Australia Ltd v Nat Shipping and
Bagging Services Ltd [ 1988] 2 ....................................................................4.047
SidexAustralia Pty Ltd, Re (1995) 18ACSR436 .................................................14.104
Sipad Holdings ddpo v Popovic (1995) ACSR 108 ............................................... 18.097
Siromath Pty Ltd (No.3), Re (1991) NSWLR 25 .................................................20.022
Skay Fashions Pty Ltd, Re (1986) 10 ACLR 743...................................................20.026
Smart Co Pty Ltd (in liq) v Clipsal Australia Pty Ltd
(2011) 82 ACSR 154 ..................................................................................10.077
Smith v Stallard and French (1919) 21 WAR 19 ................................................... 18.038
SmorgonvFCT(1976) 13ALR481 .....................................................................12.117
Soyfer v Earlmaze Pty Ltd [2000] NSWCA 1068................................................. 12.086
Spargos Mining NL (1990) 3 ACSR I ........................... 10.168, 10.208, 10.209, 10.210
Spargos Mining NL (1990) 3 WAR 166 ................................................................10.184
Spence v Mitchell (1914) 14 SR (NSW) 121 ........................................................ 14.059
Spies v R (2000) 201 CLR 603, .............................................................................19.114
Standard Chartered Bank of Australia Ltd v Antico
(1995) 18 ACSR 1 ......................................................7.003, 7.009, 7.015, 8.020
State Bank of New South Wales Ltd v Chia
(2000) 50 NSWLR 587 ..............................................................................18.012
 TABLE OF CASES lxxvii

State Bank ofVictoria v Parry (1990) 2 ACSR 15 ...................................12.014, 12.017

Stewart v von Lieven ( 1988) 14 ACLR 207 ...........................................................12.120
Stockbridge Ltd, Re ( 1993) 9 ACSR 637 ...............................................................I4.167
Story v Advance Bank of Australia Ltd ( 1993) 31 NSWLR 722 .......................... 12.082
Stuartv Kingston (1924) 34 CLR 394 .....................................................................8.176
Summergreen v Parker (1950) 80 CLR 304 ............................................................4.003
Sutherland (as liq of Sydney Appliances Pty Ltd (in liq)) v
Robert Bosch (Aust) Pty Ltd (2000) 33 ACSR 680 ....................................7.091
Swansson v RA Pratt Properties Pty Ltd
(2002) 42 ACSR 313 .......................................................10.056, 10.060, 10.063,
10.078, 10.081, 10.088,
10.090, 10.098
Swiss Screens (Aust) Pty Ltd v Burgess
(1987) 11 ACLR 756 ............................................................7.095, 7.098, 14.046
Sycotex Pty Ltd v Baseler (I 994) 122 ALR 531 ...................................................19.l 14
Sydlow Pty Ltd v TG Kotselas Pty Ltd (1996) 14 ACLC 846..................20.041, 20.046
Talbot v NRMA Holdings Ltd (1996) 68 FCR 590 .................................................9.139
Telecom Australia v Russell Kumar &
Sons Pty Ltd (Receivers and
Managers appointed) (in liq) (1993) 10 ACSR 24 ..................................... 18.023
Television Broadcasters Ltd v Ashton's Nominees Pty Ltd
(1979) 22 SASR 552 ....................................................................................1.036
THC Holding Pty Ltd v CMA Recycling Pty Ltd
(admins apptd) (2014) 101ACSR 202 .......................................................10.253
Thomas v H W Thomas Ltd (1984) 2 ACLC 610 .....................................10.l 74, 10.177
Thorby v Goldberg (1964) 112 CLR 597 ...............................................................8.161
Tickle v Crest Insurance Co Australia Ltd (1984) 2 ACLC 493 ............................20.080
Timberland Ltd, Re (1979) 4 ACLR 259 ..................................................20.042, 20.044
Tivoli Freeholds Ltd, Re [1972] YR 445 ...................................................10.236, 10.237
Toole v Flexihire Pty Ltd (1991) 6ACSR455 .........................................................7.062
Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 .......................................................2.098
Transcontinental Hotel Ltd, Re [ 1947] SASR 49 ..................................................19.078
Transmetro Corp Ltd v Kol Tov Pty Ltd (2009) 71 ACSR 582 ............................. 10.076
Tricontinental Corp v FCT (1987) 73 ALR 433 ....................................................17.104
Trident General Insurance Co Ltd v
McNiece Bros Pty Ltd (1988) 165 CLR 107...............................................5.036
Trust Co Ltd v Noosa Venture 1 Pty Ltd (2010) 80 ACSR 485 ............................ 10.253
Tummon l nvestments Pty Ltd (in liq), Re ( I993) 11ACSR 637 ........................... 12.015
Turnbull v NRMA Ltd (2004) 50 ACSR 44 ..........................................................10.207
Turner Corp (in liq), Re (1995) 17 ACSR 761 .......................................................17.093
Tweedvale Investments Pty Ltd vThiran Pty Ltd (1996) 14 WAR 109 ..................8.172
United Dominions Corporation Ltd v Brian Pty Ltd ( 1985) 60 ALR 741 .............. 1.036
United Rural Enterprises Pty Ltd v Lopmand Pty Ltd
(2003) 47 ACSR 514 ..................................................................................10.214
Van Reesema v Flavel (1992) 7 ACSR 225 ...........................................................11.005
Vatex Petroleum Industries Pty Ltd, Re
(unrep., Supreme Court of New South Wales, 17 August 1989) .............. 18.037
tu.viii TABLE OF CASES

Vector Capital Ltd, Re ( 1997) 23 ACSR 182 ...........................................................9 .073

Vines v ASIC (2007) 62 ACSR l ............................................................................. 8.136
Vitamins Australia Ltd v Beta-Carotene Industries Pty Ltd
( 1987) 5 ACLC 802 ....................................................................................20.258
Yrisakis v ASC (1993) 11 ACSR 162 ...........................................................8.136, 8.149
Wagner v Intl Health Promotions (admin apptd) (1994) 15 ACSR 419 ..................7.102
Walker v Wimbourne (1976) 137 CLR l .................................................................8.035
Warman International Ltd v Dwyer (1995) 182 CLR 544 .....................................8.167
Waterfront Investments Group Pty Ltd (in liq), Re (20 I 5) 105 ACSR 280 ............8.179
Waters v Widdows [1984] YR 503 .........................................................................17.220
Watson v James [1999] NSWSC 600 ....................................................................10.142
Wayde v New South Wales Rugby League Ltd
(1985) 61 ALR 225 ....................................................................................10.165
Westpac Banking Corp v Dawson
(1990) 19 NSWLR 614 ..............................................................................12.043
Westpac Banking Corporation v Bell Group Ltd (in liq) (No.3)
(2012) 89 ACSR 1 ..................................................... 8.009, 8.038, 8.042, 8.044,
8.050, 8.070, 8.075, 8.134
WF Le Comu Ltd; Liquidator v Federal Traders Ltd
[1931] SASR425 .......................................................................................17.126
White v Huxtable, (2006) 24 ACLC 639 ...............................................................18.037
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ......................... 8.033, 8.050,
8.053, 8.063, 8.064, 8.069, 14.025
Whitehouse v Carlton Hotel Pty Ltd
(1987)70ALR251 ....................................................................................14.031
Whitlam v Australian Securities and
Investment Commission (2003) 57 NSWLR 559 ........................................9.097
Williams v Hursey (1959) I03 CLR 30 .................................................................12.125
Wilmar Sugar Australia Ltd v Mackay Sugar Ltd
(2017) 345 ALR 174 ........................................................10.165, 10.174, 10.201
Wily v St George Partnership Banking Ltd (1997) 150 ALR 329............ 17.070, 17.104
Winthrop Investments Ltd Winns Ltd, Re
[I 975] 2 NSWLR 666 ..................................................................................6.044
Wolfson v Registrar General (NSW) (1934) 51 CLR 300..................................... 14.081
Wood v W & G Dean Pty Ltd (1929) 43 CLR 77 ..................................... 14.086, 14.093
Woolworths Ltd v Kelly (1991) 4 ACSR 431 ....................................8.081, 8.084, 8.092
WWW Dot Wizard Pty Ltd v Globe Valley Pty Ltd
[2006] WASCl28 .........................................................................................4.042
Youyang Pty Ltd v Minter Ellison Morris Fletcher
(2003) 196 ALR 482 ....................................................................................8.183
Zabusky v Virgtel Ltd [2013] 1 Qd R 285 ................................................10.039, 10.073
Zempilas v JN Taylor Holdings Ltd (No.6)
(1991) 5 ACSR 28 ......................................................................................10.041

Canada
Athabasca Holdings Ltd v ENA Databasesystems TNC
(1981) 116 DLR (3rd) 318 ................................................................9.029, 9.030
 TABLE OF CASES lxxix

B Love Ltd and Bulk Steel & Salvage Ltd, Re

(1982) 141 DLR (3d) 621 ............................................................................9.026
Bankruptcy of Associated Colour Laboratories Ltd, Re
(1970) 12 DLR (3d) 338; (1970) 73 WWR 566 ..........................................7.102
Barry Estate v Barry Estate [200 I] OJ No.2991 ...................................................I 0.091
Canadian Aero Services Ltd v O'Malley
(1973) 40 DLR (3d) 371 ...................................................................8.127, 8.128
Canadian Aero Services Ltd v O'Malley
[1974] SCR 592 ............................................................................................8.021
Canadian Pacific Ltd v Telesat Canada
(1982) 133 DLR (3d) 321 ............................................................................1.036
Canadian Permanent Mo11gageCorp v Dalgleish
[1928) I DLR 1113,BCCA .......................................................................18.111
Doe v Bennett (2004) 236 DLR (4th) 577 ...............................................................1.007
Discovery Enterprises Inc v Ebco Industries Ltd .............................................................
(1999) 70 BCLR (3d) 299 .........................................................................10.091
Erie Gas Co Ltd, Re [1938) 4 DLR 776 .................................................................18.l 16
Glass v Atkin (1967) 65 DLR (2d) 501..................................................................10.026
Gray v New Augarita Porcupine Mines
[ 1952) 3 DLR I (PC) ....................................................................................8.079
Hemmerling v IMTC Systems (1993) 109 DLR (4th) 582 ........................2.030, 14.095
Horst Pudwill v Royal Bank of Canada
[200 I] OTC 404 (affirmed [2002] OTC 535) ............................................ 14.187
Household Products Co Ltd (1981) 124 DLR (3d) 325 ........................................17.196
lngre v Maxwell (1964) 44 DLR (2d) 764 .............................................................l 0.026
Intercontinental Precious Metals Inc v Cooke
(1993) 88 BCLR (2d) 101 .........................................................................10.091
Liu v Sung (l 991) 13 CBR (3d) 285 ......................................................................10.077
Lloyd-Owen v Bull (1936) 4 DLR 273 ..................................................................10.041
Motherwell v Schoof [ I949) 4 DLR 812 .................................................................8.161
Northwest Forest Products Ltd, Re
[ 1975) 4 WWR 724 ....................................................................................10.060
Pappas v Acan Windows Inc (199 J) 2 BLR (2d) 180 ...........................................10.063
Peso Silver Mines Ltd v Cropper
(1966) 58 DLR (2d) l ...................................................................................8.131
P1imex Investments Ltd v Northwest Sports Enterprises Ltd
(1995) 13 BCLR (3d) 300 ...............................................10.060, 10.088, 10.091
Teck Corporation Ltd v Millar (1972) 33 DLR (3d) 288 .............................8.053, 8.064
Toronto-Dominion Bank v Alex L Clark Ltd (1993) 22 CBR (3d) 6 .................... 10.077
Turner v Mailhot ( 1985) 50 OR
(2d) 561, 28 DLR 222 ...................................................................10.088, 10.090
Vadeko Int'l Inc v Philosophe (1990) 1 OR (3d) 87 .............................................. 10.080

EuropeanUnion
Teckal Sri v Comune di Viano and
Azienda Gas-Acqua Consorziale (AGAC) di Reggio Emilia,
Case C-107/98 [1999) ECR I-8121.. ........................................................... 6.033
Ixxx TABLE OF CASES

Malaysia
Tai Kwong Goldsmith & Jewellers (under receivership) v
Yap Kooi Hee [1995] MLJ l ......................................................................18.101
Tan Guan Eng v Ng Kweng Hee [ 1992] I MLJ 487 ............................................. I0.028

New Zealand
Anti-Corrosive Treatments Ltd, Re (1980) CLC 40-625 ..................................... 10.169
Automobile Association (Canterbury) Inc v
Australasian Secured Deposits Ltd [1973] I NZLR 417 ........................... 17.116
Bank of New Zealand v New Zealand Guardian Trust Ltd
[I 999] 1 NZLR 664 ......................................................................................8.183
Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 .........................8.037, 8.077
Black White and Grey Cabs Ltd v Fox
[1969] NZLR 824 ...................................................................6.003, 6.011, 6.026
Blastclean Services Ltd, Re (1985) 2 NZCLC 99 .................................................. 18.037
Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403 .................................... 14.189
Coachman Tavern (1985) Ltd, Re [1988] 2 NZLR 635 ...........................................6.026
Coleman v Myers [1977] 2 NZLR 225 ....................................................................8.024
Cross v Aurora Group Ltd (1989) 4 NZCLC 64 ................................4.015, 4.028, 4.029
Curtis v J J Curtis & Co Ltd [1984] 2 NZLR 267 ................................................. 14.072
Dempsey and National Bank ofNew Zealand Ltd v
Traders' Finance Corp Ltd [1933] NZLR 1258 ............................17.086, 17.207
Development Finance Corp of New Zealand v
McSherry Export Kilns Ltd (in liq) (1987) 3 NZCLC 99 ...........................4.039
Dovey Enterprises Ltd v Guardian Assurance Public Ltd
[1993] I NZLR 540, 549 ............................................................................17.097
Elders New Zealand Ltd v PGG Wrightson Ltd
[2009] 1 NZLR 577 ....................................................................................14.189
Elders Pastoral Ltd v Gibbs [ 1988] NZLR 596 .......................................................4.006
Empire Capital Resources Pte Ltd, Re [2018] SGHC 36 ............19.067, 19.068, 19.081
Equiticorp Industries Group Ltd v Crown [ 1998] 2 NZLR 481 ............................ 15.112
Green v Meltzer [1993] NZCLC 68 .......................................................................12.015
Hawkes Bay Milk Corp Ltd v Watson [1974] 1 NZLR 236 ....................................4.007
Hilton Intl Ltd (in liq) v Hilton [1989] I NZLR442 ............................................. 15.164
Johnson v Bucko Enterprises [ 1975] 1 NZLR 311 ..................................................3 .054
Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] NZLR 328 ...................... 10.176
Manurewa Ltd, Re [ 1971] NZLR 909 ....................................................................17.209
Marblestone Industries Ltd v Fairchild [1975] 1 NZLR 529 ........................4.006, 4.009
Millers (Invercargill) Ltd v Maddams [1938] NZLR 490 ..................................... I0.187
National Dairy Association of New Zealand Ltd, Re
[1987] 2 NZLR 607 ....................................................................................19.072
Nicholson v Pennakraft (NZ) Ltd
[1985] 1 NZLR 242 .................................................. 8.038, 8.040, 8.041, 19.114
Nimbus Trawling Co Ltd, Re [1986] 2 NZLR 308 ................................................20.172
Park v Dum1[1916] NZLR 761.. ............................................................................17.193
Plateau Equipment Ltd v Marsden (199 I) 5 NZCLC 67 .........................................8.127
Power v Nathan [1981] 2 NZLR 403 .......................................................................4.006
 TABLE OF CASES lxxxi

Reese Bros Plastics Ltd v Southern Co-operative Fruit Processors

(1989) 4 NZCLC 64 .....................................................................................4.015
Rita Joan Dairies Ltd v Thomson [1974] I NZLR 285 ...........................................4.017
Taylor v Todd [2004] 3 NZLR 76..................................................................4.027, 4.035
Thomas v H W Thomas Ltd [ 1984] I NZLR 686,
(1984) 2ACLC 610 ....................................................................................10.l 77
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 ..................................................3.014
Vrij v Boyle [1995] 3 NZLR 763 ..............................................................10.091, 10.223

Singapore
Agus Irawan v Toh Teck Chye [2002] 2 SLR 198, 202 .........................................10.060
Chan Siew Lee v TYC Investment Pty Ltd [2015] SGCA 40 ......................6.030, 6.041
Credit Development Pte Ltd v IMO Pte Ltd [ 1993] 2 SLR 370 .................. 6.003, 6.020,
6.030, 9.062
Daewoo Singapore Ptd Ltd v CEL Tractors Pte Ltd [2001] 4 SLR 35 .................. 19.068
Econ Corp Ltd, Re [2004] 1 SLR 273 ....................................................................19.088
Kitnasamy v Nagatheran [2000] SLR 598 .............................................................I 0.140
Lew Chee Fai Kevin v Monetary Authority of Singapore
(2012) MSCLC 80-031 ..............................................................................16.135
Lim Wing Kee v PP [2002] 4 SLR 327....................................................................8.140
Madhaven Peter v Public Prosecutor (2012) MSCLC 80-034 ...............................16.135
Ng Huat Foundations Pte Ltd, Re [2005] SGHC l 12............................................19.099
Pang Yong Hock v PKS Contracts Services Pte Ltd [2004] 3 SLR 1.................... 10.063
Quall Poh Hoe Peter v Probo Pacific Leading Pte Ltd
[1993] 1 SLR 14...........................................................................................4.003
Sembcrop Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43 ..........................6.041
The Royal Bank of Scotland NV v TT International Ltd [2012] 2 SLR 213 ........ 19.067
The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) v
TT Intl Ltd [2012] SGCA 9 .........................................................19.072, 19.079,
19.080, 19.081, 19.082
TRC Investment Pte Ltd v Tay Yun Chwan Henry [2014] SGHC 192....................6.041
TYC Investment Pte Ltd v Tay Yun Chwan Henry [2014] 4 SLR 1149..................6.041
Wah Yuen Electrical Engineering Pte Ltd v
Singapore Cables Manufacturers Pte Ltd
[2003] 3 SLR 629 ..........................................................................19.082, 19.086

United Kingdom
A and BC Chewing Gum Ltd, Re [ 1975] 1 WLR 579 ...........................................I 0.182
A Co (No.004475 of 1982), Re [1983] Ch 178 ........................................10.150, 10.169
A Co (No.00596 of 1986), Re 2 BCC 99 ..................................................18.009, 18.082
A Co (No.001761 of 1986), Re [1987] BCLC 141 ................................. 10.142, 10.146,
l 0.147, l 0.155
A Co (No.002015 of 1996), Re [ 1997] 2 BCLC I, 18 ..........................................I 0. 196
A Co (No.003096 of 1987), Re (1988) 4 BCC 80 .................................................10.219
A Co (No.00314 of 1989), Re ex p Estate Acquisition and
Development Ltd [ 1991] BCLC 154 ...........................................10.149, I0.150,
10.163, 10.224
Ixxx.ii TABLE OF CASES

A Co (No.00370 of 1987), Re (exp Glossop)

[1988] 1 WLR 1068 ...........................................................10.14810.150, 10.199
A Co (No.003843 of 1986), Re [1987] BCLC 562 ..................................10.150, I0.219
A Co (No.004377 of 1986), Re [1987] 1 WLR 102 ..............................................10.220
A Co (No.00477 of 1986), Re [1986] BCLC 376 .................................................10.161
A Co (No.005134 of 1986), Re (exp Harries) [1989] BCLC 383 ...........10.178, 10.193
A Co (No.005685 of 1988), Re (exp Schwarz) (No.2)
[1989] BCLC427 ............................................... 10.196, 10.200, 10.201, 10.214
A Co (No.006834 of 1988), Re (exp Kremer)
[1989] BCLC 365 ..........................................................................10.214, 10.219
A Co (No.00709 of 1992), Re; O'Neill v Phillips
[1999] I WLR 1092 ........................................................10.150, 10.155, 10.156,
10.157, 10.158, 10.159, 10.160,
10.161, 10.173, 10.182,
10.184, 10.189, 10.191,
10.192, 10.220,
I 0.224, I 0.234
A Co (No.007281 of 1986), Re [ I 987] BCLC 593 ...............................................I0.229
A Co (No.00789 of 1987), Re (exp Shooter)
[1990] BCLC 384 .............................................. 10.178, 10.179, 10.208, 10.214
A Co (No.00836 of 1995), Re [1996] 2 BCLC 192 ..............................................10.214
A Co (No.003079 of I990), Re [ 199I] BCLC 235 ...............................................20.066
A Co, Re [1974] 1 All ER 256 ...............................................................................20.076
A Co, Re [1987] BCLC 133...................................................................................18.010
A Company exp Schwarz, Re [ 1989] BCLC 427 .....................................5.050, I 0.094,
10.098, 10.099, 10.214
A Company ex parte Glossop, Re [1988] I WLR 1068 ............................8.045, 10.148,
10.150, 10.199
AW Hall Co Ltd, Re (1887) 37 Ch D 712 .............................................................14.140
Aas v Benham [1891] 2 Ch 244 ...............................................................................8.126
Abbey Leisure Ltd, Re [1990] BCLC 342, 350 .....................................................10.220
ABC Coupler and Engineering Co Ltd (No.3), Re [ I 970] I All ER 657..............20.188
Aberdeen Rail Co v Blaikie Brothers
[ I 843-60] All ER Rep 249 .....................................................8.07 l, 8.072, 8.076
Abomaya v Sigmund [2014] EWHC 277 ..............................................................10.023
Abram Steamship Co Ltd v
Westville Shipping Co Ltd [ I 923] AC 773 ................................................I6.058
Abrath v North Eastern Railway Co
(1866) 11 App Cas 247 ..............................................................................12.100
Acatos & Hutchinson pie v Watson
[1995] BCC 446 .........................................................................................15.061
Adams v Cape Industries pie [1990] Ch 433 ....................................3.025, 3.026, 3.028,
3.066, 3.067
Adams v Tluift [1915] 2 Ch 21 ..............................................................................16.049
Adelaide Electric Co v Prndential Assmance [1934] AC 122...............................14.200
A-G v Great Eastern Rly Co (1880) 5 App Cas 473 ................................................5.009
Agip (Africa) Ltd v Jackson [1990] Ch 265 ............................................................8.177
 TABLE OF CASES lxxxiii

Agnew v Commissioner of Inland Revenue [2001] 2AC 710 ................ 17.072, 17.073,
17.128
Agricultural Mortgage Corp pie v Woodward [1994] BCC 688 ...........................20.150
AI Levy (Holdings) Ltd, Re [ 1964] Ch 19.............................................................19.117
AIB Group (UK) pie v Mark Redler & Co Solicitors
[2015] AC 1503 ..........................................................8.171, 8.172, 8.173, 8.174
Akers v Samba Financial Group [2017] AC 424 ...................................................20.120
Al Saudi Banque v Clarke Pixley (A Firm) [1990] Ch 313 ..................................11.141
Alabama, New Orleans, Texas and
Pacific Junction RJwy Co, Re [ 1891] 1 Ch 213 .........................................I4. I78
Albazero, Re [1977] AC 774 ....................................................................................3.067
Albert Life Assurance Co, ex p Western Life Assurance Society, Re
(1870-71) LR 11 Eq 164............................................................................14.060
Alexander v Automatic Telephone Co [1900] 2 Ch 56 ................10.021, 14.038, 14.041
Alexander v Simpson (1889) 43 .............................................................................I 0.122
Alexander Ward & Co v Samyang Navigation Co
[1975] I WLR 673 ................................................................6.003, 6.033, 6.036,
6.037, 7.044
Alexander Ward & Co v Samyang Navigation Co
[1975] 2All ER424 .....................................................................................6.036
Alexander Ward & Co Ltd v Samyang Navigation Co
[1975] SC (H L) 26 ......................................................................................6.033
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 ................. 5.043, 5.052, 5.053,
5.060, 10.126, 10.127
Allen v Hyett(l914) 30TLR 444 (PC) ...................................................................8.024
Alma Spinning Co, Re (Bottomley's case) (1880) 16 Ch D 681.. ...........................9.075
Al-Nakib Investments (Jersey) Ltd v Longcroft
[1990] 1 WLR 1390 ...................................................................................16.078
Aluminium lndustrie Vaassen BV v
Romalpa Aluminium Ltd [1976] 2 All ER 552 .........................................13.005
Ambrose Lake Tin and Copper Mining Co, Re
(1880) 14 Ch D 390 ......................................................................................2.099
American Cyanamid Co v Ethicon Ltd [1975] AC 396 .........................................J8.09 l
Ames v Birkenhead Docks Trustees (1885) 20 Beav 332 .....................................18.101
AMO Global Nominees (Private) Ltd v
SMM Holdings Ltd [2008] 1 BCLC 447 ...................................................15.097
Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266 ......................................15.155
AMP Enterprises Ltd v Hoffman [2003] I BCLC 319 .........................................20.055
Anderson v James Sutherland (Peterhead) Ltd [1941] SC 203 ...............................7.016
Andrews v Gas Meter Company [1897] I Ch 361 ................................................13.042
Andrews v Kommis Freeman [ 1999] 2 BCLC 641................................................11.141
Andrews v Mockford [1896] 1 QB 372 .................................................................16.078
Anglesea Colliery Co, Re (1866) LR I Ch 555 .....................................................20.077
Anglo Petroleum Ltd v TFB (Mortgages) Ltd
[2008] I BCLC 185.......................................................................15.107, 15.109
Anglo-Baltic and Mediterranean Bank v Barber & Co
[1924] 2 KB 410 .........................................................................................20.237
Ixxxiv TABLE OF CASES

Anglo-Continental Produce Co Ltd, Re [1939] 1 All ER 99 .................................20.075

Annangel Glory Compania Naviera SA v M Golodetz Ltd
Overseas Aviation Engineering (GB) Ltd, Re [ 1963] Ch 24 ..................... 17.128
Antonio Gramsci Shipping Corpn v Recoletos Ltd [2013] 4 All ER 157...............3.031
Antonio Gramsci Shipping Corp v Stepanovs
[2012] BCC 182 ...........................................................................................3.048
Apex Global Management Ltd v FI Call Ltd [2014] BCC 286 ................ 10.213, 10.229
Arab Bank pie v Mercantile Holdings Ltd [ 1994] Ch 71 ......................................15.097
Arctic Engineering Ltd (No.2), Re [1986] 2 All ER 346 .........................................7.116
Argentum Reductions (UK) Ltd, Re (1975] WLR 186 ...........................................6.039
Armagas Ltd v Mundogas SA (1986] AC 717 ..........................................12.036, 12.037
Ashbury Railway Carriage and Iron Co Ltd v Riche (1875)LR 7 ...........................5.008
Ashpurton Estate Ltd, Re [ 1983] Ch 110..................................................17.151, 17.160
Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd
(2012] EWHC 2090 (Ch) ...........................................................................17.046
Association of Certified Public Accountants of Britain, Re
[1998] l WLR 164 .......................................................................................2.089
Astec (BSR) pie, Re (1998] 2 BCLC 556 ...................................10.144, 10.159, 10.169,
10.176, 10.180, 10.192, 10.194
Atlas Wright (Europe) Ltd v Wright (1999] BCC 163.................................6.047, 9.128
Attorney General of Belize v
Belize Telecom Ltd [2009] BusLR 1316 ....................................................5.075
Attorney-General (Hong Kong) v Reid
[1994] l AC 324 ...........................................................................................8.168
Atwool v Merryweather ( I 867-68) LR 5 ..............................................................I0.021
Automatic Bottle Makers Ltd [1926] Ch 412 ........................................................17.194
Automatic Self-Cleansing Filter Syndicate Co Ltd v
Cuninghame [1906] 2 Ch 34 .................................................6.003, 6.005, 6.006,
6.020, 6.022, 6.029, 8.007, 12.004
Aveling Baiford Ltd v Perion Ltd
[1989] BCLC 626 ...............................................................8.028, 15.009, 15.010
Ayerst (Inspector ofTaxes) v
C & K (Construction) Ltd [1976] AC 167.................................................20.095
B Liggett (Liverpool) Ltd v
Barclays Bank Ltd [1928] I KB 48 ...........................................................12.070
Badgerhill Properties Ltd v Cottrell [1991] BCC 463 ..................................4.003, 4.031
Bagel v Miller (1903] 2 KB 212 ..............................................................................1.057
Baglan Hall Colliery Co, Re (1869-70) LR 5 Ch App 346 ...................................14.044
Bahia and San Francisco Railway Co Ltd, Re
(1867-68) LR 3 QB 584 ..................................................14.078, 14.103, 14.139
Bailey, Hay & Co Ltd, Re [ 1971] 3 All ER 693 .......................................................6.025
Baillie v Oriental Telephone and Electric Co Ltd
[1915] I Ch 50 ..........................................................9.1439.143, 10.029, 10.122
Bairstow v Queens Moat Houses pie
[200 I] 2 BCLC 531 ..........................................................................8.20 I, 8.202,
15.165, 15.166
Baker, Re; Lupton, exp, Re [ 190l] 2 KB 628 .......................................................20. l 06
 TABLE OF CASES lxxxv

BakuConsolidated Oilfields Ltd, Re [1944] 1 All ER 24 ...................................... 10.236

Balaghat Gold Mining Co, Re [1901] 2 KB 665 ................................................., 14.105
Baldwin v Lawrence (I 824) 2 ................................................................................11.081
Ball v Hughes [2018] l BCLC 58 ............................................................................9.122
Baltic Real Estate Ltd (No.2), Re [ 1993] BCLC 503 ...............................10.142, I 0.172
Bamford v Bamford (1970] Ch 212 ....................................... 6.026, 6.044, 6.078, 8.186
Bangla Television Ltd, Re [2007] l BCLC 609 .....................................................20.148
Bank of Credit and Commerce International SA, Re
(No.8), Re [1996] Ch 245 ..........................................................................17.128
Bank of Credit and Commerce International SA, Re
(No.8), Re [1998] AC 214 ..........................................................................17.128
Bank of Credit and Conm1erce Intl (Overseas) Ltd v
Akindele [2000] Ch 437 ..................................................................8.177, 15.112
Bank of Credit and Conunerce Intl (Overseas) Ltd v
Price Waterhouse [ 1999] BCC 351 ............................................................11.l 3 l
Bank of Credit and Conunerce Intl SA (in liq), Re;
Monis v Bank of India [2004] 2 BCLC 279
(affirmed on appeal [2005] 2 BCLC 328) .................................................20.176
Bank of Scotland v TA Neilson & Co 1990 SCLR 456 ........................................17.152
Bannatyne v Direct Spanish Telegraph Co ( I886) 34 Ch D 287 ........................... 15.027
Barclays Bank Ltd v Quistclose Investments Ltd
[1970] AC 567 ............................................................................................20.099
Barclays Bank pie v O'Brien [1994] I AC 180 .....................................................17.I93
Barclays Bank v British and Conm1onwealth Holdings
[1996] I BCLC l ...........................................................................15.003, 15.017
Barclays Bank pie v Grant Thornton UK LLP
[2015] EWHC 320 (Conun) .......................................................................11.142
Barings v Coopers & Lybrand [1997] I BCLC 427 .............................................. 11.I27
Baiings pie (in liq) v Coopers and Lybrand (No. l)
[2002] 2 BCLC 364 .......................................................................I 0.109, I 0.110
Barings pie v Coopers & Lybrand
[2003] EWHC 1319 (Ch) ............................................................................8.204
Barings pie v Coopers & Lybrand [2003] EWHC 1319........................................11.l 33
Baiings pie, Secretary of State for Trade and Industry v
Baker (No.5), Re [1999] I BCLC 433 ...................................8.140, 8.149, 8.150
Barlow Clowes Intl Ltd v Eurotrust Intl Ltd
[2006] l WLR 1476 .....................................................................................8.202
Barned's Banking Co; exp Contract Corp
(1867) 3 Ch App 105..................................................................................12.042
Barnes v Addy (1873-74) LR 9 ChApp 244 .....................................8.009, 8.177, 8.179
Barton v Hanson (1809) 2 Taunt 49 .........................................................................1.036
Barrett v Duckett [1995] BCC 362 ...........................................................10.026, 10.040
Barrett v Duckett [ 1995] I BCLC 243 ...................................................................10.045
Ban-on v Potter [1914] l Ch 895 ........................................................6.011, 6.036, 7.096
Barrow Borough Transport, Re [ 1990] Ch 227 .....................................................17.l 62
Barry and Staines Linoleoum Ltd, Re [1934] Ch 227 .............................................8.200
Barton Manufacturing Co Ltd, Re [1998] BCC 827 ................................20.148, 20.160
Ixxxvi TABLE OF CASES

Basab Inc v Chen Lihua (unrep., CACY 256/2014, [2016) HKEC 2632) ............ 10.109
Base Metal Trading Ltd v Shamurin [2005) BCC 325 ............................................7.097
Base Metal Trading Ltd v Shamurin [2005) I WLR 1157 ......................................8.134
Bass Jarrington Ltd v The Royal Bank of Scotland pie
(unrep., HC13C02505, 7 November 2014) (Ch D) ...................... 12.083, 12.085
Batooneh v Asombang [2003) EWHC 21 l l.. ........................................................ 20.179
Beam Tube Products Ltd, Re [2006) BCC 615 .........................................17.078, 17.085
Beattie v E & F Beattie Ltd [ 1938) Ch 708 ........................................................... I 0.125
Bechaunaland Exploration Co v
London Trading Bank Ltd [1898) 2 QB 658 ................................ 17.017, 17.041
Bede Steam Shipping Co Ltd, Re [1917) l Ch 123 ...............................................14.075
Bell Bros Ltd, Re (1891) 65 LT 245 .......................................................................14.075
Bell Houses v City Wall Properties [ I 966) 2 QB 656 .............................................5.011
Bell v Lever Brothers Ltd [1932) AC 161.....................................................8.077, 8.126
Bellador Silk Ltd, Re [ I 965) I All ER 667 ............................................................10.144
Belmont Finance Corp v Williams Furniture Ltd (No.2)
[1980) l All ER 393 ...........................................................8.177, 15.112, 15.166
Benjamin Cope & Sons Ltd, Re [I 914) I Ch 800 .................................... 17.194, 17.196
Bennett v Bayes (1860) 5 H & N 391 .........................................................3.014, 12.115
Benson v Heathorn (I 842) I Y & C Ch 326, 62 ER 909 .........................................8.132
Bentley-Stevens v Jones (1974)1 WLR 618 ..........................................................17.086
Berg Sons & Co v Adams [1993) BCLC 1045 ......................................................l l .141
Berkeley Applegate (Investment) Consultations Ltd, Re
[ 1989) Ch 32 ...............................................................................................20.099
Betts &Co Ltd v Macnaghten [1910) I Ch430 ...........................................7.074, 9.134
Bhullar v Bhullar [2003) 2 BCLC 24 l.. ............................................. 8.125, 8.132, 8.168
Biggerstaff v Rowatt's Wharf Ltd [1896) 2 Ch 93 ................................................. 12.0l 5
Bilta (UK) Ltd v Nazir (No.2) [2015) 2 WLR 1168.......... 8.025, 8.038, 11.134, 12.103,
12.108, 20.176
Bilta (UK) Ltd v Nazir (No.2) [2016) AC 1................................. 12.I I l, 12.112, 12.113
Bird Precision Bellows Ltd, Re [1984) Ch 419 ......................................................10.215
Bird Precision Bellows Ltd, Re [1986) Ch 658 ......................................................I0.204
Bisgood v Henderson's Transvaal Estates Ltd [1908) I Ch 743 ............... 10.126, I0.127
Bishop v Balkis Consolidated Co Ltd (1890) 25 QBD 512 .................................. 14.058
Bishopsgate Investment Management Ltd
(in provisional liq) v Maxwell [ 1993) Ch l ...............................................20.118
Bisset v Wilkinson [1927) AC 177.........................................................................16.063
Blackwood Hodge pie, Re [ 1997] 2 BCLC 650 .......................................10.155, I0.184
Blair Open Hearth Furnace Co Ltd v Reigart [1913) 108 LT 665 ...............6.01 l, 6.015
BlomqvistvZavarcople[2017) I BCLC373 ..........................................14.039, 14.140
Bloomenthal v Ford [1897) AC 156.......................................................................14.140
Blue Arrow pie, Re [1987) BCLC 585 ........................................10.150, 10.176, 10.194
Bluebrook Ltd, Re [2010) BCC 209 ......................................................................19.035
Blues Hairshop v Customs and Excise
Commissioners [2000) SC 936 .................................................................... 1.036
Boardman v Phipps [ 1967) 2 AC 46 .................................................8.071, 8.116, 8.118,
8.132, 8.168, 8.169
 TABLE OF CASES Ixxxvii

Bolton Metropolitan Borough Council v

Torkington [2004] Ch 66 ............................................................................12.091
Bolton Partners v Lambert (1888) 41 Ch D 295 ......................................................4.041
Bond v Barrow Haematite Steel Co [1902] l Ch 353 .................10.127, 15.140, 15.143
Bonellis' Telegraph Co, Re (Collie's Claim)
(1871) LR 12 Eq 246 ....................................................................................7.097
Borax Co, Foster v Borax Co, Re [ 190l] l Ch 326 ............................................... 17.089
Boston Deep Sea Fishing and TeeCo v Ansell
(1888) 39 Ch D 339 ......................................................................................8.l 17
Boulter v Peplow (1850) 9 Common Bench Reports 493, 137 ER 984 ..................2.048
Boulting v Association of Cinematograph, Television and
Allied Technicians [1963] 2 QB 606 ............................................................8.161
Bowkett v Fuller's United Electric Works Ltd
[1923] l KB 160.........................................................................................20.092
Bowles, Amedroz v Bowles, Re [ I 902] 2 Ch 650 ...................................................4.017
Bowling and Welby's Contract, Re [1895) l Ch 663 ................................ 13.038, 14.082
Bowwles, Amedroz v Bolwes, Re [1902] 2 Ch 650 ................................................4.017
Brabon, Treharne v Brabon, Re [200] 1 BCLC I] ............................................... .20.149
Brady v Brady [1987] BCC 535 ...............................................................................8.042
Brady v Brady [ 1989] AC 755 ..................................................................15.I 12, 15.132
Braemar Investments Ltd, Re [1989) Ch 54...........................................................17.162
Bratton Seymour Service Co Ltd v Oxborough
[1992) BCC471 ...........................................................................................5.074
Braunstein & Marjolaine, Re [1914] WN 335 .......................................................18.080
Bray v Ford [ 1896] AC 44 ........................................................................................8.071
Brazilian Rubber Plantations & Estates Ltd, Re [1911) 1 Ch 425 ..........................8.138
Breckland Group Holdings Ltd v London &
Suffolk Properties Ltd (1988) 4 BCC 542 ........................................6.020, 6.022
Breech-Loading Armoury Co, Re (1867) LR 4 Eq 453 ........................................20.l 14
Breitenfeld UK Ltd v Harrison [2015] 2 BCLC 275,
[2015) EWHC 399 (Ch) ................................................................... 8.076, 8.181
Brian D Pierson (Contractors) Ltd, Re [2001] l BCLC 275 ...................................8.203
Briess v Woolley [1954] AC 333 ..............................................................................8.024
Brightlife Ltd, Re [1986] 3 All ER 673 ..................................................................17.078
Brightlife Ltd, Re [ I987] Ch 200 ................................... 17.092, 17.128, 20.127, 20.163
Brightlife Ltd, Re [1986) BCLC 418 .....................................................................18.061
Bristol and West Building Society v Mothew
(t/a Stapley & Co) [1998] Ch I ....................................................................8.008
Bristol and West Building Society v Mothew [ I998] Ch l ...............8.077, 8.134, 8.183
British America Nickel Corp Ltd v MJ O'Brien [ 1927] AC 369 .......................... 17.046
British and American Trustee and
Finance Corp Ltd v Couper [1894] AC 399............................................... 15.026
British and Commonwealth Holdings pie v
Barclays Bank pie [ 1996] l All ER 38 l.. ......................................15.103, 15.l 06
British Asbestos Company Ltd v Boyd [ I903] 2 Ch 4391 ..................................... I 2.089
British Aviation Insurance Co Ltd, Re
[2005] EWHC 1621 (Ch) ...........................................................................19.071
Ixxxviii TABLE OF CASES

British Aviation Insurance Co Ltd, Re [2006) 1 BCLC 665 .................................. 19.080

British Equitable Assurance Co Ltd v Baily [1906) AC 35 ................................... 10.128
British Murac Syndicate Ltd v
Alperton Rubber Co Ltd [ 1915] 2 Ch 186...................................................7 .038
Briton Medical and General Life Association, Re ( 1888) 39 Ch D 61 ................. 14.103
Brittan.iaBuilding Society v Crammar [1997) BPIR 596 ......................................18.007
Bronester Ltd v Priddle [1961) 3 All ER 471 ..........................................................1.049
Brown v British Abrasive Wheel Co Ltd [1919) I Ch 290 ...........................5.042, 5.065
Browne v La T1inidad (1887) 37 Ch D l ......................................9.142, 10.009, 10.123,
10.124
Brumder v Motornet Service and Repairs Ltd
[2013] 3 All ER 412 ..........................................................................8.144, 8.152
BSB Holdings, Re (No.2) [1996] I BCLC 155 ..........................................8.034, I 0.160
BTI 2014 LLC v Sequana SA [2017] l BCLC 453 ....................15.049, 15.050, 15.052,
15.058, 15.160, 15.161, 15.164
BTR pie, Re (1988) 4 BCC 45 ...............................................................................14.033
BTRplc, Re [1999] 2 BCLC 675..............................................................19.072, 19.082
BTR pie, Re [2000] 1 BCLC 740 ...........................................................................19.077
Buchler v Talbot, Leyland DAF Ltd, Re [2004) l All ER 1289 ............................ 20.200
Building Estates Brickfields Company
(Parbury's Case), Re [1896] 1 Ch 100 .......................................................14.140
Bulkeley v Schutz (1869-71) LR 3 ..........................................................................2.080
Burgoine v London Borough of Waltham Forest
[1997] 2 BCLC 612 ......................................................................................8.195
Burkinshaw vNicolls (1878) 3 App Cas 1004 ......................................................14.140
Burland v Earle [1902) AC 83 ....................................................................8.170, 10.014,
10.019, 10.121, 15.139
Burnden Holdings (UK) Ltd v Fielding [2018) 2 WLR 885, [2018) UKSC 14....... 8.007
Burton and Deakin Ltd, Re [1977] 1 All ER 63 l.. .................................................20.128
Bushell v Faith [1970] AC 1099....................................................................5.087, 7.047
Butlerv Cumpston (1868-69) LR 7 Eq 16.............................................................14.102
Byng v London Life Association Ltd [1990] Ch 170...................................9.051, 9.052
CL Nye Ltd, Re [1971] Ch 442 .............................................................................17.143
CW Dixon Ltd, Re [1947] Ch 251 ........................................................................20.260
Cadbw-y Schweppes pie v Halifax Share Dealing
[2006] EWHC 1184 (Ch) ..............................................................14.079, 14.139
Cambrian Mining Co, Re (1881) LR 20 Ch D 376 ...............................................20.l 14
Campbell, Re [1984] BCLC 83 ................................................................................7.130
Canadian Land Reclaiming and Colonizing Co
(Coventry and Dixon's Case), Re
(1880) 14 Ch D 660 ......................................................................................8.017
Cane v Jones [ 1981] l All ER 533 ...........................................................................5 .046
Cannon v Trask (1875) 20 Eq 669 ...........................................................................9.051
Caparo Industries pie v Dickman [ 1990) 2 AC 605 ..................................11.131, 16.078
Cape Breton (1885) 29 Ch D 795 ............................................................................2.101
Cape pie, Re [2006] EWHC 1316 (Ch) .................................................................19.073
Capewell v Revenue and Customs Cornrs [2007) l WLR 386 ............................. 18.112
 TABLE OF CASES lxxxix

Capital Fire Insurance Association, Re (1882) 21 Ch D 209 ................................20.061

Capitol Films Ltd, Re [2011] 2 BCLC 359 ............................................................12.023
Caratel (New) Mines Ltd, Re [l 902] 2 Ch 498 ........................................................7.074
Cardiff Savings Bank (Marquis of Bute's Case), Re
[1892] 2 Ch 100............................................................................................8.138
Camey v Herbert [1985] AC 301 ...........................................................................15.103
Carter and Ellis, Re, (Savill Bros, exp) [1905] 1 KB 735 ....................................20.106
Carriage Co-operative Supply Association, Re
(1884) 27 Ch D 322 ......................................................................................8.l 17
CAS (Nominees) Ltd v Nottingham Forest pie [2002] 1 BCLC 613 ......................8.032
Case of Sutton's Hospital
(1612) 10 Coke Reports 23a, 77 ER 960 ...................................................12.l l 7
Cass v McCutcheon ( 1905) 15 Manitoba LR 669 ...................................................4.017
Cassel GmbH v Schenkers Ltd [1927] 1 KB 826 ..................................................12.061
Castiglione Erskine & Co, Re [ 1958] 1 WLR 688 ................................................15.058
Castiglione's Will Trusts, Re [1958] Ch 549 ..........................................................15.060
Castell & Brown Ltd [1898] I Ch 315 ...................................................................17.194
Cavendish Bentick v Fenn (] 887) 12 App Cas 652 ...............................................20.J 81
Cayne v Global Natural Resources pie
(unrep., Chancery Division,
MegarryV-C, 12August 1982)....................................................................8.053
Chandler v Cape pie [2012] I WLR 3 I 11 ..................................................3.070, 12.115
Channel Collieries Trust Ltd v Dover [1914] 2 Ch 506 .........................................10.124
Chapman v Smethurst [ 1909] 1 KB 927 ................................................................I 2.052
Charge Card Services Ltd, Re [1987] Ch 150........................................................17.128
Charitable Corporation v Sir Robert Sutton
(1742) 2Atkyns 400, 26 ER 642 ..................................................................6.005
Charles Forte Investments Ltd v
Amanda [1964] Ch 240 ..............................................................................14.076
Charnley Davies Ltd (No.2), Re [ 1990] BCLC 760 ..............................................I 0.222
Charter pie v City Index Ltd [2008] Ch 313 ..........................................................15.112
Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 ................8.036, 8.042, 8.045
Charterhouse Capital Ltd, Re [2015] BCC 574 ................................5.053, 5.055, 5.063,
5.069, 5.070, 5.083, 10.201
Charterhouse Investment Trust Ltd v
Tempest Diesels Ltd (1985) 1 BCC 99, 544 .....................................7.092, 7.097
Charterhouse v Tempest Diesels [1986] BCLC 1 .....................................15.107, 15.108
Chase Manhattan Asia Ltd v First Bangkok City Finance Ltd
[1990] 1 WLR 1181 ......................................................................17.126, 17.128
Chaston v SWP Group pie [2003] l BCLC 675 ...................................... 15.099, 15.107,
15.108, 15.Il0
Cheah v Equiticorp Finance Group [ 1992] 1 AC 472 ...........................................17.215
Chez Nico (Restaurants) Ltd, Re [I 992] BCLC 192 ...............................................8.024
Choppington Collieries Ltd v Johnson
[1944] 1A11ER762 .....................................................................................9.056
Choudhri v Palta [ 1992] BCC 787 .........................................................................18.031
Cimex Tissues Ltd, Re [1994] BCC 626 ................................................................17.074
xc TABLE OF CASES

Citco Banking Corp NV v Pusser's Ltd

[2007] Bus LR 960 ..................................................... 5.052, 5.063, 5.064, 5.069
Citizens' Life Assurance Co Ltd v Brown [I 904] AC 423 .................................... 12.100
City Equitable Fire Insurance Co Ltd, Re [ 1925] Ch 407 ............................ 8.135, 8.137,
8.138, 8.139, 8.140
City of Glasgow Bank (In Liquidation), Re
(1879) 4 App Cas 547.................................................................................14.085
Citybranch Group Ltd, Gross v Rackind
[2004] 4 All ER 735 ...................................................................................10.147
Citybranch Group Ltd, Gross v Rackind
[2005] 1 WLR 3505 ...................................................................................10.145
Civica Investments, Re [1983] BCLC 456 ...............................................................7.116
CL Nye Ltd, Re [1971] Ch 442 ................................................................ 17.l43, 17.144,
17.145, 17.170
Cladrose Ltd, Re [I 990] BCLC 204 .........................................................................7.124
Claridge's Patent Asphalte Co Ltd, Re
[1921] 1 Ch 543 ............................................................................................8.203
Clark Boyce v Mouat [1994) I AC 428 ...................................................................8.077
Clark v Cutland [2004] 1 WLR 783 .........................................................................8.027
Clark v Urqha1t [ 1930] AC 28 ................................................................................16.077
Clarkson v Davies [1923) AC 100..........................................................................10.039
Clemens v Clemens Bros Ltd [1976) 2 All ER 268 .......................5.061, 10.128, 10.129
Clements v Henry Hadaway Organisation Ltd [2008) I BCLC 223 .........20.146, 20.148,
20.153, 20.154, 20.162
Clenaware Systems Ltd, Harris v Secretary of State for Business, Innovation and
Skills, Re [2015) BCC 283...........................................................................7.132
Cleveland Trust pie, Re [ 1991] BCLC 424 ............................................................15.169
Clinch v Financial Corp (1868) LR 5 Eq 450 ........................................................ 15.032
CMS Dolphin Ltd v Simonet [2001) 2 BCLC 704 ..................................................8.127
CohenvSelby[2001] I BCLC 176 .........................................................................8.204
Coldunell Ltd v Gallon [1986] 1 All ER 429 .........................................................20.l 79
Coleman Taymar Ltd v Oakes [2001) 2 BCLC 749 .......................... 8.200, 8.202, 8.206
Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd
[2003] 2 BCLC 153......................................................................................8.042
Collen v Wright (1857) 120 ER 241 ........................................................................4.010
Colonial Bank v Whinney (1886) 11 App Cas 426 ...............................................13.040
Colonial Trusts Corp, Re (1879) 15 Ch D 465 ......................................................17.086
Colonial Trusts Corp, Re (exp Bradshaw)
(1879) 15ChD465 ....................................................................................17.086
Columbian Fireproofing Co Ltd, Re
[1910) 2 Ch 758; on appeal [1910) 2 Ch 120 ............................................20.167
Conunonwealth Oil and Gas Co Ltd v
Baxter 2010 SC 156 .....................................................................................8.077
Company of Merchants of the Staple of England v
Governor and Co of the Bank of England
(1888) LR 21 QBD I60 ..............................................................................12.042
Company, Re [1985) BCLC 333 ..............................................................................3.024
 TABLE OF CASES xci

Compaq Computer Ltd v Abercom Group Ltd

[1991] BCC484 ............................................................................17.199, 17.204
Consolidated Goldfields of New Zealand Ltd, Re
[1953] Ch 689 .............................................................................................20.077
Constable v Executive Connections Ltd
[2005] EWHC 3 (Ch), [2005] 2 BCLC 638 .....................................5.069, 9.083
Continental Assurance Co pie, Re [1997] BCLC 48 ...............................................7.137
Contract Corp, Re Gooch's case (1872) L R 7 Ch App 207 ..................................20.022
Conway v Ratiu [2006] 1 All ER 571 ......................................................................3.025
Cook v Deeks [1916] I AC 554 ..................................................................8.121, 10.021
Comhill lnsurance pie v Improvement Services Ltd
[1986] 1 WLR 114 .....................................................................................20.068
Cornhill Insurance pie v Improvement Services Ltd
[1986] BCLC 26 .........................................................................................20.068
Corran v Butters [2017] EWHC 2294 (Ch) ...........................................................I 0.197
Costa Rica Railway Co v Forwood [1901] 1 Ch 746 ...............................................8.084
Cotman v Brougham [1918] AC 514 .......................................................................5.012
Cotter v National Union of Seamen [ 1929] 2 Ch 58 ............................................. 10.029
Cottrell v King [2004] BCC 307 ............................................................................14.072
County of Gloucester Bank v
Rudry Merthyr Steam and House Coal Colliery Co
[1895] 1 Ch 629............................................................................................9.079
Cousins v International Brick Co [ 1931] 2 Ch 90 .......................................9.096, 9. IOI,
9.103
Cowan de Groot Properties Ltd v
Eagle Trust Ltd [1992] 4All ER 700 ...........................................................8.073
Cox Moore v Peruvian Corp Ltd [1908] 1 Ch 604 ...................................17.046, 17.086
Cox v Coulson [1916] 2 KB l77 ..............................................................................1.036
Cox v Dublin City Distillery (No.2) [1915] 1 IR 345............................................ 17.205
Cox v Hickman (I 860) 8 HL Cas 268 .....................................................................1.033
Creasey v Breachwood Motors Ltd [1992] BCC 638 ..............................................3.045
Creasy v Breachwood Motors Ltd [1993] BCLC 480 .............................................3.051
Credit Lyonnais Bank Nederland NV v
Export Credit Guarantee Department
[ 1998] l Lloyd's Rep 19; [2000] I AC 486 ................................................12.115
Crichton's Oil Co, Re [1902] 2 Ch 86 ....................................................................15.138
Crigglestone Coal Co Ltd, Re [1906] 2 Ch 327 .....................................................20.082
Criterion Properties pie v Stratford UK Properties LLC
[2003] 1 WLR 2108 ........................................................................8.055, 15.112
Criterion Properties pie v Stratford UK Properties LLC
[2004] 1 WLR 1846 ...................................................................................12.040
Croly v Good [20 I O]2 BCLC 569 .........................................................................I 0.192
Crompton & Co Ltd, Re [1914] I Ch 954 ................................................17.088, 17.091
Crumpton v Morrine Hall Pty Ltd
( 1965) 82 WN (Pt!) (NSW) 456 ................................................................I4.072
Crumpton v Morrine Hall Pty Ltd
[1965] NSWR 240, 82 \VN (Ptl) (NSW) 456 ........................................... 10.120
xcii TABLE OF CASES

Cruz City 1 Mauritius Holdings v Unitech Ltd [2015) 1 BCLC 377 .................... 18.008
Cuckmere Brick Co Ltd v Mutual Finance Ltd
[1971) I Ch 949 ............................................................................18.041, 18.044,
Culleme v London and Suburban General
Permanent Building Society (I 890) 25 QBD 485 ............................5.01 I, 5.024
Cumana Ltd, Re [1986) BCLC 430 ..........................................................10.184, 10.211
Cumbrian Newspapers Group Ltd v
Cumberland and Westmoreland Herald Newspaper
and P1inting Co Ltd [ 1987) Ch 1 ...............................................................14.196
Customs and Excise Commissioners v
Hedon Alpha Ltd [1981) QB 818.................................................................8.200
Cyona Distributors Ltd, Re [1967) Ch 889 ............................................................20.175
D' Arey v Tamar, Kit Hill and Callington Ry Co
(1866-67) L R 2 Ex 158 ...............................................................................9.016
D'Jan of London Ltd, Copp v
D'Jan, Re [1994] 1 BCLC 561.. ................................. 8.140, 8.141, 8.156, 8.204
Dadowian Group Intl Inc v Simms
[2006] EWHC 2973 (Ch) ..................................................................3.028, 3.034
Dafen Tinplate Co v Llanelly Steel Co [1920) 2 Ch 124...................5.042, 5.052, 5.065
Dallas, Re [1904) 2 Ch 385 .......................................................................17.199, 17.203
Darby, Re [1911] 1 KB 95 .............................................................................3.054, 3.055
Davey & Co v Williamson & Sons Ltd [ 1898) 2 QB I 94 ..................................... 17.091
Davey, Russell v Northern Bank Development Corp Ltd
[1992) 1 WLR 588 .......................................................................................5.085
David Lloyd & Co, Re (1877) 6 Ch D 339 ............................................................20.094
David Payne and Co Ltd, Re [1904] 2 Ch 608 .......................................................12.032
Davies v DirectLoans Ltd [1986) 2 All ER 783 .....................................................20. l 79
Davies v Gas Light and Coke Co [1909] 1 Ch 248 ............................................... 14.108
Davis and Co Ltd v Brunswick (Australia) Ltd
[ 1936) 1 All ER 299 (PC) ...........................................................................10.238
Dawson Intl pie v Coats Paton pie
[1989) BCLC 233 .........................................................................................8.030
Day v Cook [2002) I BCLC 1................................................................................I0.110
Day v Sykes, Walker & Co Ltd (1886) 55 LT 763 ................................................. 18.l l l
Dearle v Hall (1828) 3 Russ I ........................................ 17.l 9 l, I7.199, I7.200, I7.201,
17.202, 17.203, 17.204, 17.212
Dee Valley Group pie, Re [2017] 2 BCLC 328 .....................................................14.182
Deering v Bank of Ireland ( 1886) 12 App Cas 30 .................................................20.190
Defra v Feakins [2005) BPIR 292 ..........................................................................20.146
DEG-Deutsche Investitions und
Entwicklungsgesellschaft mbH v Koshy
[2004) 1 BCLC 13l ................................................................8.070, 8.079, 8.081
Delaney's International Incorporated v Celtic Charm Ltd
[2018) HKCFI 521, [2018) HKEC 451 .....................................................10.147
Dellow v Busby [1942) 2 All ER 439 ....................................................................12.129
Deloitte Haskins and Sells v National Mutual
Life Nominees Ltd [1993) AC 774 ............................................................11.l 16
 TABLEOF CASES xciii

Derry v Peek (1889) 14 App Cas 337 ..........................................16.059, 16.060, 16.062

Deutsche Genossenschaftsbank v Bumhope [1995] 1 WLR 1580 ....................... 12.125
Devlin v Slough Estates Ltd [1983] BCLC 497 ....................................................10.018
DHN Food Distributors Ltd v Tower Hamlets London Borough Council
[ 1976] 3 All ER 462 .....................................................................................3.066
Dilato Holdings Pty Ltd v Learning Possibilities Ltd [2015] 2 BCLC 199 .......... 11.076
Dimbula Valley (Ceylon) Tea Co v
Laurie [1961] Ch 353 ....................................................................14.201, 15.155
Dimmock v Hallett ( 1866-67) LR 2 Ch App 21 ...................................................16.069
Dimond v Lovell [2002] I AC 384.........................................................................13.063
Diplock LJ in Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd
[1964] 2 QB 480 .........................................................................................12.027
Director of Corporate Enforcement v McGowan
[2008] IESC 28, [2008] 4 IR 598 ......................................................7. l 14, 7.116
Discoverers Finance Corp Ltd, Re [1910] 1 Ch 312 .................................14.047, 14.073
Dixon v Kennaway & Co [1900] 1 Ch 833 ............................................................14.139
Dollar Land Holdings pie, Re [I 994] I BCLC 404 ...............................................20.076
Doloswella Rubber and Tea Estates Ltd, Re [ 1917] 1 Ch 213 ...............................14.038
Domoney v Godingho [2004] 2 BCLC 15...............................................................9.122
Don King Productions Inc v Warren (No.l) [2000] Ch 291.. ..................................8.116
Dorchester Finance Co Ltd v Stebbing
[1989] BCLC498 .......................................................8.140, 8.141, 8.155, 8.206
Dorman, Long & Co Ltd, Re [1934] Ch 635 .........................................................19.085
Dovey v Cory [1901] AC 477 .................................................................................15.166
Downsview Nominees Ltd v First City Corp Ltd
[1993] AC 295 ....................................................17.051, 18.006, 18.040, 18.043
DR Chemicals Ltd, Re (1989) 5 BCC 39 ...............................................................10.166
Driver v Broad [1893] I QB 744 ............................................................................17.104
Drown v Gaumont-British Picture Corp Ltd [1937] 2 All ER 609 ....................... 10.127
Dry Docks Corporations of London, Re
(1888) 39 Ch D 306 ....................................................................................19.052
Duckwari pie (No.2), Re [1998] 2 BCLC 315 .........................................................8.200
Duke of Sutherland v
British Dominions Land Settlement Corp Ltd [ I 926] Ch 746 .................. 14.076
Dunlop Pneumatic Tyre Co Ltd v Selfiidge & Co Ltd [1915] AC 847 ................ .20.147
Duomatic Ltd, Re [1969] 2 Ch 365 ...................................................6.044, 6.047, 8.203,
9. I 17, 9 .122, 9 .128
Duston v Imperial Gas Light Co (1831) 3 B &Ad 125...........................................8.093
Dyment v Boyden [2005] 1 BCLC 163 .................................................................15.109
Eagle Trust pie v SBC Securities Ltd [ 1993] 1 WLR 484 .......................................8.177
East of England Banking Co, Re (1865) 2 Drew & Sm 452 .................................14.102
EbenezerTimmins & Sons Ltd, Re (1902) 1 Ch 238 ............................................14.020
Ebrahinu v Westboume Galle1ies Ltd [1973] AC 360 ................ 10.159, 10.192, 10.232,
10.233, 10.234, 20.071
Eclairs Group Ltd v JKX Oil & Gas pie [2015] UKSC 71,
[2016] BCC 79 .......................................................................8.048, 8.059, 8.063
xciv TABLE OF CASES

ECM (Europe) Electronics, Re [ 1992] BCLC 814 ..................................................7.124

Eddystone Marine Insurance Co, Re [1893] 3 Ch 9 ..............................................14.038
Edgington v Fitzmaurice (1885) 29 Ch D 459 ..........................................16.064, 16.074
Edwards v Hall (1855) 6 De GM & G 74 ..............................................................13.039
Edwards v Halliwell (1950] 2 All ER 1064 ..................................8.191, I 0.009, I 0.017,
10.019, 10.029, 10.099, 10.127
Egyptian Intl Foreign Trade Co v
Soplex Wholesale Supplies Ltd [1985] 2 Lloyd's Rep 36 ............ 12.029, 12.034
Ehrmann Bros Ltd, Re [ 1906] 2 Ch 697 ................................................................17.150
EiC Services Ltd v Phipps [2004] 2 BCLC 589 ....................................................12.082
Eid v Al-Kazemi [2004] EWHC 2129 ...................................................................14.059
El Ajou v Dollar Land Holdings pie
[1994] 1 BCLC464 .........................................................................8.177, 12.109
EL Sombrero Ltd, Re [1958] Ch 900 ............................................................9.023, 9.026
Elder v Elder & Watson Ltd 1952 SC 49 ..................................................I0. I 36, 10.137
Electra Private Equity Partners v KPMG Peat Marwick
[200 l] 1 BCLC 589 ....................................................................................11.140
Eley v Positive Life Assurance Co Ltd ( 1876) 1 Ex D 88 ........................... 5.031, 5.066,
5.067, 10.125
Elgindata Ltd, Re (No.2) [1992] I WLR 1207 ......................................................10.226
Elgindata Ltd, Re [1991] BCLC 959........................................................10.155, 10.184,
10.186, 10.187, 10.207
Ellis & Co's Trustee v Dixon- Johnson [ 1925] AC 489 .........................................20.193
Ellis v Property Leeds (UK) Ltd (2002] 2 BCLC l 75...........................................10.l 10
Emma Silver Mining Co Ltd v Lewis and Son {1879) 2 CPD 396 .........................2.098
Emmadart Ltd, Re [ 1979] Ch 540 .............................................................18.036, 20.075
English and Scottish Mercantile Investment Co v Brunton
[I 892] 2 QB 700 .........................................................................................17.088
English, Scottish, and Australian Chartered Bank, Re
{1893) 3 Ch 385 ............................................................................................9.088
Enviroco Ltd v Farstad Supply NS [2011] UK.SC 16, [2011] 1 WLR 921 ......... 13.037,
14.l O1
Equitable Life Assurance Society Hyman, Re [2000] 2 WLR 798 .........................8.045
Equitable Life Assurance Society Hyman v Ernst & Young
[2003] 2 BCLC 603 ............................................ 11.124, 11.130, 11.132, 15.I 65
Equitable Life Assurance Society v Bowley (2004] 1 BCLC 180 ..........................8.204
Eric Holmes, Re (Property) Ltd, Re [ I 965] Ch I 052 ............................................17.144
Erlanger v New Sombrero Phosphate Co
(1878) 3 App Cas 1218 .........................................................2.097, 2.099, 2.099,
2.100,2.101
Estate Acquisition and Development Ltd, Re [1995] BCC 338 ............................10.197
Estmanco (Kilner House) Ltd v Greater London Council
[1982] I AllER437,[1982] 1 WLR2 ...........................I0.021, 10.029, 10.032,
I 0.128, I 0.129
Evans v Chapman (I 902) 86 LT 381 .......................................................................5.073
Evans v Rival Granite Quarries Ltd [ 1910] 2 KB 979............................. 17.070, 17.086,
17.091, 17.096
 TABLEOF CASES XCV

Exchange Banking Co, Re (Flitcroft's Case), Re

(1882) LR21 Ch D 519 .......................................8.188, 15.001, 15.149, 15.166
Exeter Trust Ltd v Screenways Ltd [ 1991] BCC 477 ...............................17.144, 17.170
Express Engineering Works Ltd, Re [1920) 1 Ch 466 .......................6.003, 6.044, 6.047
6.049, 6.082, 6.084, 9.128
Extrasure Travel Insurance Ltd v Scattergood
[2003) 1 BCLC 598 ................................................................8.042, 8.044, 8.171
Facia Footwear Ltd v Hinchcliffe [1998) 1 BCLC 218 ...........................................8.043
Fairway Graphics Ltd, Re [1991] BCLC 468 .........................................................l 9.l l 7
Fairway Magazines Ltd, Re [ 1992) BCC 924 ........................................................20.165
Fargro Ltd, v Godfrey [1986) 1 WLR 1134 ...........................................................10.026
Feakins v Department for Environment Food and Rural Affairs
[2007] BCC 54 ..............................................................................20.146, 20.156
Fenton Ltd, Re (Fenton Textile Association Ltd, exp) [1931) 1 Ch 85 .................20.190
Ferguson v Wilson (1866-67) LR 2 Ch App 77 ................................3.013, 6.005, 8.007
FG (Films) Ltd, Re [1953] 1 All ER 615 .................................................................3.061
FHR European Ventures LLP v Cedar Capital Holdings LLC [2015) AC 250 .......8.170
Finch (UK) pie (in liq), Henry v Finch, Re [2016] 1 BCLC 394 .............20.133, 20.140
First Energy (UK) Ltd v Hungarian Intl Bank Ltd
[1993) BCC 533 .........................................................................................12.034
First Independent Factors & Finance Ltd v Mountford
[2008) 2 BCLC 297 ......................................................................................8.200
First Subsea Ltd v Balltec Ltd [2018] Ch 25 ...........................................................8.007
Five Minute Car Wash Service Ltd, Re [ 1966) 1 All ER 242 ................................10.168
Florence Land and Public Works Co, Re (exp Moor)
(1878) 10 Ch D 530 ....................................................................................17.086
Folami v Nigerline (UK) Ltd [1978) ICR 277 .........................................................7.049
Follit v Eddy Stone, Granite Quarries Co [ 1892] 3 Ch 75 ....................................17.046
Fons (FH) (in liquidation) v Corporal Ltd [2015) 1 BCLC 320 ............................17.006
Ford v Newth [1901) 1 KB 683 ................................................................................4.041
Ford v Polymer Vision Ltd [2009) 2 BCLC 160.........................................9.079, 12.080
Formento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd
[1958] I WLR45 .......................................................................................l1.127
Foss v Harbottle (1843) 2 Hare 461, 67 ER 189...............................7.083, 8.023, 9.076,
9.142, 10.001, 10.009,
10.015, 10.019
Foster Clark Ltd's Indenture Trusts, Re [1966) 1 WLR 125..................................18.022
Foster v Foster [ 1916] l Ch 532 ...............................................................................6.003
Fowler v Broad's Patent Night Light Co [1893) 1 Ch 724.....................................17.120
Fraser v Whalley (1864) 2 Hem & M 10, 71 ER 361 ......................8.007, 8.055, 10.127
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd
[1964) 2 QB 480 ..............................................................12.008, 12.010, 12.011,
12.015, 12.021, 12.024,
12.025, 12.027, 12.033, 12.036
Freeman v Pope (1869-70) LR 5 ChApp 538 .............................19.121, 19.122, 19.123
French's (Wine Bar) Ltd, Re [ 1987] BCLC 499 ....................................................20.121
Friend v Young [ 1897) 2 Ch 421 ..............................................................................1.057
xcvi TABLE OF CASES

Frontsouth (Witham) Ltd, Re [2011) BCC 635 ............................................6.003, 6.033

Fulham Football Club Ltd v Cabra Estates Plc [1994] l BCLC 363 ......................8.161
Fulham Football Club Ltd (1987) v Richards (2012) Ch 33 .................... 10.218, 10.138
Gaiman v National Association for Mental Health
(1971] Ch 317 ...................................................................................2.008, 8.048
Galbraith v Merito Shipping Co 1947 SC 446 .......................................................10.236
Galoo Ltd v Bright Grahame Murray
(1994) 1 WLR 1361 ......................................................................11.131, 11.132
Gammon (Hong Kong) Ltd v Attorney-General [ 1985] AC 1.................................1.171
Gardner v Parker (2004] I BCLC 417 .....................................................................8.028
Gardner v Parker [2004) 2 BCLC 554 ........................... 10.104, 10.109, 10.110, 10.113
Gaskell v Gosling [1896] l QB 669 .......................................................................18.001
Gencor ACP Ltd v Dalby (2000] 2 BCLC 734 .............................................3.068, 3.070
General Exchange Bank, Re (1870-71) LR 6 Ch App 818 ...................................14.042
George Barker (Transport) Ltd v Eynon
[1974] l WLR462 ........................................................................18.016, 18.017
George Fischer (Great Britain) Ltd v
Multi Construction Ltd [ 1995] I BCLC 260 .............................................I0.112
George Newman & Co, Re [1895] l Ch 674 ...........................................................8.120
George's Estate, Re ( I 887) I9 LR Ir 566 ...............................................................I 8.115
Gerber Gannent Technology Inc v
Lectra Systems Ltd [1997) RPC 443 .........................................................10.l 12
German Date Coffee Co, Re (I 882) 20 Ch D I69 .................................................l 0.236
Ghyll Beck Driving Range Ltd, Re [1993] BCLC l 126........................................10.21l
Gibson Davies Ltd, Re [ I995] BCC 11.................................................................... 7. I 32
Gibson v Ba11on(1874-75) LR 10 QB 329 ...........................................................16.139
Giles v Rhind [2003] 1 BCLC 1 ............................................................................10.l l 3
Gilford Motor Co v Horne [ 1933) I Ch 935 ......................................3.039, 3.040, 3.041
Global Energy Horizons Corporation v Gray [2015] EWHC 2232 (Ch) ................8.169
Gluckstein v Barnes (1900] AC 240 ..................................................2.099, 2.101, 8.079
Gluckstein v Barnes [ 1898] 2 Ch 153......................................................................2.101
Goldburg (No.2), Re [ 1912] 1 KB 606 .....................................................18.070, 18.107
Gamba Holdings UK Ltd v Homan
[1986] l WLR 1301 ........................................... 18.021, 18.040, 18.065, 18.067
Gooch's Case (1872) 7 Ch App 207 .......................................................................20.005
Governments Stock and Other Securities Investment Co Ltd v
Manila Rly Co Ltd [1897] AC 81..................................................17.088, 17.091
Governments Stock Securities Investment Co Ltd v
Christopher [1956] I WLR 237 .................................................................16.014
Graham v Eve1y [2014) BCC 376..........................................................................10.146
Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 ........................6.020, 6.022
Grant v United Kingdom Switchback Railways Co
(I 888) 40 Ch D 135......................................................................................6.043
Gray's Inn Construction Co Ltd, Re [1980] l All ER 814 .....................................20.120
Gray's Inn Construction Co Ltd, Re [ I980] I WLR 711 .......................................20.122
Great Eastern Electric Co Ltd, Re [I 941] Ch 241 .................................................20.026
Great Wheal Polgooth Co, Re (1883) 53 LJ Ch 42 .................................................2.098
 TABLEOF CASES xcYii

Greene, Re [1949] Ch 333 ......................................................................................14.053

Greenhalgh v Ardene Cinemas Ltd [1946) 1 All ER 512 ......................................14.200
Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120 ....................................8.030
Greenhalgh v Ardene Cinemas Ltd [1951) Ch 286 ......................................5.052, 5.064
Gregson v HAE Trustees Ltd [2009) I All ER (Comm) 457 ..................................8.146
Gresham Life Assurance Society, Re
(1872-73) LR 8 Ch App 446 .........................................................14.075, 14.076
Grey's Brewery Co, Re (I 883) 25 Ch D 400 .........................................................20.118
Griffiths v Secretary of State of Social Services
[1974) QB468 ............................................................................................18.022
Griffiths v Yorkshire Bank pie [1994) I WLR 1427.................................17.195, 18.061
Gross v Rackind [2005) 1 WLR 3505.......................................................l 0.145, 10.147
Grosvenor Press pie, Re [ 1985] I WLR 980.............................................15.035, 15.038
Grundt v Great Boulder Proprietary Mines Ltd [1948) Ch 145 ..............................9.059
GT Whyte & Co Ltd, Re [1983) BCLC 31 I ..........................................................20.165
Guardian Assurance Co, Re [1917] I Ch 43 I ........................................................14.164
Guidezone Ltd, Re [2000) 2 BCLC 321 ................................................................10.232
Guinness pie v Saunders (I 990) 2 AC 663 .......................................7.099, 8.081, 8.092,
8.093, 8.165, 8.166,
8.206, 8.207
Guinness v Land Corp of Ireland (1882) 22 Ch D 349 .........................................15.001
Gunston and Tee Ltd v Ward [1902) 2 KB l.. ........................................................12.126
Gwembe Valley Development Co Ltd (in receivership) v Koshy
[2004) 1 BCLC 131......................................................................................8.172
H & K (Medway) Ltd, Re
[1997) 2 All ER 321 ...................................................................................18.061
H R Harmer Ltd, Re [1959) 1 WLR 62............. 10.136, 10.137, 10.145, 10.167, 10.208
Hailey Group Ltd, Re [1993) BCLC 459 ..................................................10.178, 10.205
Hale & Co v Alexandria Water Co (1905) 21 TLR 572........................... 13.038, 13.057
Halifax Sugar Refining Co v Franklyn
(1890) 59 LJ Ch 591.....................................................................................7.070
Halt Garage (1964) Ltd, Re [1982) 3 All ER 1016.......................8.188, 10.187, 15.003,
15.008, 15.017
Hamilton's Windsor Ironworks Co, Re (exp Pitman and Edwards)
(1879) 12 Ch D 707 ....................................................................................17.09I
Hammersmith Town Hall Co, Re (1877) 6 Ch D l 12............................................19.052
Hampshire Land Co, Re [1896) 2 Ch 743 .............................................................12.113
Harben v Phillips (1883) 23 Ch D 14, 32 ................................................................9.094
Hardoon v Belilios [1901] AC 118 ........................................................................14.059
HarmanvBMLLtd[l994) I WLR893 .......................................................9.035,9.037
Hannony Care Homes Ltd, Re [2010) BCC 358 ...................................................17.082
Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955) 1 WLR 352 .............7.016
Harris v Beauchamp Bros [ 1894) I QB 80 l .............................................18.003, 18.007
Harris v Microfusion 2003-2 LLP [2017) 1 BCLC 305 ........................................10.023
Harrison v Kirk [ 1904) AC I ..................................................................................20.086
Harrisons & Crossfield v LNW Railway [1917) 2 KB 755 ....................................4.047
Harrods, Re (Buenos Aires) Ltd, Re [ 1936) 2 All ER 1651 ..................................15.040
xcviii TABLE OF CASES

Harrogate Estates Ltd, Re [1903] 1 Ch 498 ........................................................... 17.169

Hartley Baird Ltd, Re [1955] Ch 143.......................................................................9.069
Harvard Securities Ltd (in liq), Re [I 997] 2 BCLC 369 .......................... 13.041, 14.059
Hashem v Shayif [2008] EWHC 2380, Fam......................................3.025, 3.026, 3.028
Haven Gold Mining Co, Re (1882) 20 Ch D 151.................................................. 10.236
Hawk Insurance Co Ltd, Re [2001] EWCA Civ 241 .............................................19.053
Hawk Insurance Co Ltd, Re [2002] 2 BCC 300 ....................................................19.094
Hawkes v Cuddy [2009] 2 BCLC 427 .....................................................................8.037
Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd
(1969) 92 WN (NSW) 199............................................................10.018, 10.127
Hawks v McArthur [1951] 1 All ER 22 .................................................................14.059
Haycraft Gold Reduction and Mining Co, Re [1900] 2 Ch 230 ...................7.058, 9.016
Heald v O'Connor [ 1971] I WLR 497 ...................................................... 1.173, 15.103,
15.108, 15.112
Hearts of Oak Assurance Ltdv James Flower & Sons [1936] 1 Ch 76................... 9.13 I
Hector Whaling Ltd, Re [1936] 1 Ch 208 ................................................................9.042
Hedley Byrne & Co Ltd v Heller and Partners Ltd
[1964] AC 465 ............................................................................................16.059
Hellenic&GeneralTrustLtd,Re[l976] 1 WLR 123.................19.072, 19.073, 19.074
Helstan Securities Ltd v Hertfordshire County Council
[1978] 3 All ER 262 ...................................................................................17.040
Rely-Hutchison v Brayhead Ltd [1968] 1 QB 549 ....................... 8.092, 12.010, 12.011,
12.012, 12.014, 12.015, 12.017, 12.020,
12.024, 12.028, 12.035, 12.080
Henderson v Bank of Australasia (1890) 45 .......................................................... 10.122
Henderson v Louttit (1894) 21 R (Ct ofSess) 674 ..................................................9.069
Henderson v Merrett Syndicates Ltd (No. I)
[I 995] 2 AC 145.....................................................................8.007, 8.0 I0, 8.183
Henry Pound, Son and Hutchins, Re (1889) 42 Ch D 402 ....................................20.094
Henry v Great Northern Railway Co
(1857) 1 DeG&J606 ..................................................................15.138, 15.142
Herbert Berry Associates Ltd v IRC [1978] 1 All ER 161....................................20.237
Heyting v Dupont [I 964] 1 WLR 843 ...................................................................I0.029
Hickman v Kent or Romney Marsh
Sheep-Breeders Association [ 1915] I Ch 881 .................................5.028, 5.030,
10.125, 10.126
Highfield Commodties Ltd, Re [1985] 1 \.VLR 149 .............................................. 19.052
Hill and Tyler Ltd, Re [2005] l BCLC 41 ..............................................................15.112
Hill v Spread Trustee Co Ltd[2006] BCC 646 .......................................................20.156
Hillman v Crystal Bowl Amusements Ltd [1973] 1 All ER 379 .............................9.105
Hindcastle Ltd v Barabara Attenborough Association Ltd
[1997] AC 70 ..............................................................................................20.105
Hindle v John Cotton Ltd (1919) 56 Sc LR 625 ......................................................8.061
Hirsche v Sims [1894] AC 654.................................................................................8.062
Hivac Ltd v Park Royal Scientific Instruments Ltd [ I 946] Ch I 69 ........................8.077
HL Bolton Engineering Co Ltd, Re [1956] Ch 577 ............................................... 14.092
HLC Environmental Projects Ltd (in liq), Re [2014] BCC 337 ..............................8.042
 TABLE OF CASES xcix

Ho Tung v Man On Insurance Co Ltd [1902) AC 232 .............................................5.046

Hogg v Cramphom Ltd [1967) Ch 254 .............................................6.044, 6.052, 8.069,
8.186, 10.045
Holders Investment Trust Ltd, Re [1971) 1 WLR 583 ...........................................14.207
Holdings Ltd v London & Suffolk Properties Ltd
(1988) 4 BCC 542 ..................................................................6.020, 6.022, 6.025
Holland & Webb Ltd, Re [1936] 3 All ER 944 ......................................................15.040
Holland v Dickson ( I887) 37 Ch D 669 ................................................................14.108
Holland v Revenue and Customs Commissioners
[2010] 1 WLR 2793, [2010] UKSC 5l.. ................................7.008, 7.009, 7.012
Hollicourt (Contracts) Ltd (in liq) v Bank of Ireland
[2001] 1 All ER 289 ...................................................................................20.120
Holmes v Keyes [1959] Ch 199.............................................................................10.124
Holroyd v Marshall (1862) 10 HL Cas 191 ..............................................17.067, 17.075
Holt Southey Ltd v Catnic Components Ltd [1978] 2 All ER 276 .......................20.076
Homer District Consolidated Gold Mines Ltd ex p Smith Re
(1888) 39 Ch D 546 ...........................................................................7.062, 7.069
Hope v lnt'l Financial Society (I 876) 4 Ch D 327 ................................................10.127
Hopkins v T L Dallas Group Ltd [2005] 1 BCLC 543 ..........................................12.040
Hopkinson v Mortimer, Harley & Co Ltd [ 1917] 1 Ch 646 ..................................14.043
Horsely & Weight Ltd, Re [1982] 1 Ch 442 .......................................6.044, 6.047, 8.041
9.128
Houghton v Nothard, Lowe and Wills Ltd [1927) 1 KB 246 .................................12.061
Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 ...................5.072, 16.061
House of Fraser pie v ACGE Investments Ltd [1987] 1 AC 387 .............. 14.201, 15.028
Howard Smith Ltd v Ampol Petroleum Ltd
[1974] AC 821 .....................................6.049, 8.043, 8.047, 8.048, 8.050, 8.052,
8.053, 8.055, 8.061, 8.063, 8.064,
8.066, 8.069, 8.164, 10.127
Hoyt vThompson's Executor I NY 207 (I 859) .......................................................6.010
HR Harmer Ltd, Re [1959) 1 WLR 62......................................................10.182, 10.183
Hubbuck v Helms (1887) 56 L J Ch 536 .....................................17.086, 17.091, 18.080
Humberstone Jersey Ltd, Re (1977) 74 LS Gaz 711 .............................................20.065
Hunter v Moss [1994] 1 WLR 452 ............................................................13.041, 14.059
Hunter v Senate Support Services Ltd [2005] I BCLC 175 ...................................8.045
Hunting pie, Re [2005] 2 BCLC 21 l ...........................................14.201, 15.027, 15.039
Hutton v West Cork Railway Co (1883) 23 Ch D 654 ..................................8.030, 8.031
Hydrodan (Corby) Ltd, Re
[1994] BCC 161 sub nom Hydrodam (Corby) Ltd, Re
[1994] 2 BCLC 180...............................................................7.003, 7.006, 7.008,
7.012, 7.013, 7.015, 8.020
Hydrosan Ltd, Re [1991] BCLC 418 .....................................................................10.229
!group Ltd v Ocwen [2003] BCC 993 ...................................................................17.170
Illingworth v Houldsworth [1904] AC 355 ...............................................17.069, 17.071
Imperial Loan Co Ltd v Stone [ 1892] I QB 599 ...................................................I 2.009
Imperial Mercantile Credit Association v Coleman
(1871) LR 6 Ch 558 .....................................................................................8.084
c TABLE OF CASES

Imperial Mercantile Credit Association v Coleman

(I 873) LR 6 HL 189..........................................................................8.1 J7, 8.079
In Plus Group Ltd v Pyke [2002] 2 BCLC 201 .......................................................8.077
Independent Automatic Sales Ltd v Knowles & Foster
[1962] I WLR974 ........................................................................17.126, 17.127
Indian Zoedone Co, Re (1884) 26 Ch 70 .................................................................9.134
Indian Zoedone Co, Re ( 1884) 53 LJ Ch 465 ........................................................20.075
Industrial Development Consultants Ltd v Cooley
[1972] I WLR443 ............................................................................8.126, 8.127
ING, Re (UK) Ltd v R&V Versicherung [2007] 1 BCLC 108.............................. 12.034
Inland Revenue Commissioner v Conbeer [1996] BCC 189...................................9.135
Inn Spirit Ltd v Bums [2002] 2 BCLC 780 .............................................................8.207
International Credit and Investment Co (Overseas) Ltd v Adham
[1994] I BCLC 66 ......................................................................................14.048
International Leisure Ltd v First National Trustee Co UK Ltd [2013] Ch 346 ..... 10.109
International Leisure Ltd v
First National Trustee Co UK Ltd [2014] I BCLC 128 ............................ 18.040
Iron Ship Building Co, Re (1865) 34 Beav 597 .....................................................14.104
Irvine v Union Bank of Australia (1877) 2 App Cas 366 ..............6.043, 12.068, 12.098
Island Export Finance Co Ltd v Umunna [1986] BCLC 460 ..................................8.127
Isle of Wight Rly Co vTahourdin (1883) 23 Ch D 320 ...........................................6.005
It's a Wrap (UK) Ltd v Gala [2006] 2 BCLC 634 ................................................. 15.168
ltex Itagrani Exports SA v Care Shipping Corp [ 1993] QB 1...............................17.128
J H Rayner (Mincing Lane) Ltd v Department ofTrade and Industry
[ 1989] Ch 72 .................................................................................................1.006
J J Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 ................................8.166
Jaber v Science and lnfom1ation Technology Ltd
[1992] BCLC764 ..........................................................................10.140, 10.149
James v Buena Ventura Nitrate Grounds Syndicate Ltd
[1896] I Ch 456 ..........................................................................................14.089
James v May (1873) LR 6 ......................................................................................14.102
Javis Motors (Harrow) Ltd v Carabott [1964] 3 All ER 89 .....................................9.024
JE Cade and Son Ltd, Re [I 992] BCLC 213 ............................................ 10.165, I0.166
Jermyn Street Turkish Baths Ltd, Re [1971] I WLR 1042 .......... 10.136, 10.137, 10.168
Jermyn Street Turkish Baths Ltd, Re [1971] 3 All ER 184.................................... 10.167
JN2 Ltd, Re [1977] 3 All ER 1104 .........................................................................20.077
John Shaw and Sons (Salford) Ltd v Peter Shaw and
John Shaw (1935) 2 KB 113 .............................................................6.020, 6.022
Johnson & Co (Builders) Ltd, Re [1955] Ch 634 .................................................. 18.059
Johnson v Gore Wood and Co (No.I) [2002] 2 AC I .... 10.103, 10.104, 10.105, 10.107,
10.109, 10.112, 10.113
Jolmson v Lyttle's Iron Agency (I 878) 5 Ch D 687 ............................................... 10.120
Johnson, Re (1887) 20 QBD 68 .............................................................................18.1OJ
Jolmston v Renton (1869-70) LR 9 Eq 181..............................................14.078, 14.103
Jon Beauforte (London) Ltd, Re [1953] Ch 13I ......................................................5.010
JonesvLipman [1962] I WLR832 ..............................................................3.040,3.041
Joshua Stubbs Ltd, Re [1891] 1 Ch 475 .................................................................18.l 18
 TABLE OF CASES ci

Jowitt, Re [ 1922) 2 Ch 442 .....................................................................................l 5. l 43

JRRT (Investments) Ltd v Haycraft [1993] BCLC 401 .........................................14.060
Jupiter House Investments (Cambridge) Ltd, Re [ 1985] I WLR 975 ................... 15.038
Kaye v Croydon Tramways Co [1898] 1 Ch 358 ........................................9.054, 10.122
Kaypak Homecare Ltd, Re [1987] BCLC 409 .......................................................20.054
Keech v Sandford ( 1726) Sel Cas Ch 61, 25 ER 223 ..............................................8.118
Keith Spicer Ltd v Mansell [1970] 1 All ER 462 ....................................................1.038
Kelner v Baxter (1866) LR 2 CP 174................................................4.003, 4.004, 4.005,
4.006, 4.016, 4.032
Kendall v Hamilton (1879) 4 App Cas 504..............................................................1.057
Kenyon Swansea Ltd, Re [ 1987] BCLC 514 ............................................10.168, 10.169
Kerr v John Motteram Ltd [1940] Ch 657 ....................................................7.074, 9.134
Khan v Miah [2000] I WLR 2123 ...........................................................................1.039
King v Marshall (1864) 33 Beav 565 .....................................................................17.066
Kingston Cotton Mill Co (No.2) Re [ I 896] 2 Ch 279 .................11.I24, 11.I26, 11.127
Kirby v Wilkins [1929) 2 Ch 444 ...........................................................................15.060
Kirkpatrick v Snoozebox Ltd [2014] BCC 477 ........................................20.025, 20.031
Knight v Frost [ 1999] 1 BCLC 364 .......................................................................10.040
Kreditbank Cassel GmbH v Schenkers Ltd [1927] 1 KB 826...............................12.061
Krishna v Chandra [ 1928] AIR 49 .........................................................................18.010
Kumar, Lewis v Kumar, Re [1993) 1 WLR 224 ....................................................20.155
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd
[1991) 1 AC 187 ...........................................................................................8.038
La Compagnie de Mayville v Whitley [1896] 1 Ch 788 ..........................................7.065
Ladenburg & Co v Goodwin, Ferreira & Co Ltd [ 1912] 3 KB 27 5 ...................... 17.126
Ladies Dress Association v Pulbrook [1900) 2 QB 376 ........................................15.043
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 .........................2.098, 2.099
Landhurst Leasing pie, Secretary of State for Trade and
Industry v Ball, Re [ 1999] 1 BCLC 286 ......................................................8.140
Lands Allotment Co, Re [ 1894] I Ch 616 .............................................................15.166
Langen & Wind Ltd v Bell [1972) 1 All ER 296 ...................................................14.060
Larvin v Phoenix Office Supplies [2003] 1 BCLC 76 ..........................................10.150
Lavender v Lavender (1875) lr R 9 Eq 593 ...........................................................18.1I2
Law Car and General Insurance Corporation Ltd, Re
[1911] WN 91 .............................................................................................17.129
Lazarus Estates Ltd v Beasley [1956) 1 QB 702 ...................................................12.053
Lee Panavision Ltd v Lee Lighting Ltd [1991] BCLC 575 .....................................8.092
Lee v Lee's Air Farming Ltd [1961] AC 12 .............................................................3.004
Lee v Sheard [1956] 1 QB 192...............................................................................10.l 12
Lee, Behrens and Co Ltd, Re [1932] 2 Ch 46 .................. 8.049, 15.003, 15.008, 15.017
Leeds and Hanley Theatres ofVarieties Ltd, Re [1902) 2 Ch 809 ...........................2.102
Leeds Estate Building and Investment Co v Shepherd
(1887) 36 Ch D 787 ............................................................8.027, 11.130, 15.165
Legal Costs Negotiators Ltd, Re [ 1999] 2 BCLC 171..............................10.142, 10.172
Legal Costs Negotiators Ltd, Re [1999] BCC 547.................................................I0.168
Lehman Bros International (Europe) (in admin) (No.4), Re
[2017] UKSC 38, [2017] 2 WLR 1497................ 2.048, 20.185, 20.188, 20.197
cii TABLE OF CASES

Lehman Bros International (Europe) (in admin) (No.4), Re [2016] Ch 50 ............ 2.048
Lelm1anBros International (Europe) (in admin) (No.4), Re
[2015] Ch 1, [2015] EWCA Civ 485 ...........................................................2.048
Lennard's Carrying Co v Asiatic Petroleum Co
[1915] AC 705 ............................................................................................12.107
LNOC Ltd v Watford Association Football Club Ltd
[2013] EWHC 3615 (Conm1).....................................................................12.083
Leven and Melville (Earl) Re [1954] 1 WLR 1228 ............................................... 14.165
Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260 ................................... 17.006
Leyland DAF Ltd, Buchler v Talbot, Re [2004] 2 AC 298 ................................... 20.195,
20.196, 20.202
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd
[1994] 1 AC85 ...........................................................................................17.040
Lines Bros Ltd (in liq), Re [1983] Ch l .................................................................20.197
Linsen International Ltd v Humpuss Sea Transport Pte Ltd
[2012] 1 BCLC 651 ................................................................3.046, 3.047, 3.066
Lisa Alford, Neil Money (as Joint Liquidators of
Snelling House Limited) v Sally Ann Barton, Philip Barton,
Sarah Barton, Solipetit SL [2012] EWHC 440 (Ch) ...................................7.003
Lister v Romford Ice and Cold Storage Co Ltd (1957] AC 555...................8.021, 8. 142
Lo-Line Electric Motors Ltd, Re (1988) 4 BCC 415 ...............................................7.007
Lloyd Cheyham & Co Ltd v Littlejohn & Co [ 1987] BCLC 303 ......................... 11.127
Lloyd v Banks (1867-68) LR 3 Ch App 488 .......................................................... 17.199
Lloyds & Scottish Finance v Cyril Lord Carpets Sales
(1992] BCLC 609 .......................................................................................17.130
Loch Blackwood Ltd, Re [1924] AC 783 ...............................................................10.233
Logicrose Ltd v Southend United Football Club Ltd (No.2)
[1988] 1 WLR 1256 .....................................................................................8.176
London and General Bank (No.2), Re [1895] 2 Ch 673 .......................... 11.125, 11.126,
11.127, 11.130, 15.165
London and Mashonaland Exploration Co Ltd v
New Mashonaland Exploration Co Ltd (1891] WN 165..................8.076, 8.077
London and New York Investment Corp Ltd, Re [1895] 2 Ch 860 ....................... 15.027
London and Provincial Starch Co, Re (1869) 20 LT (NS) 390 ...............................8.117
London Financial Association v Kelk [ 1884] 26 Ch D 107 .................................... 1.049
London Flats Ltd, Re [ 1969] 1 WLR 711 ................................................................9 .069
London India Rubber Co, Re (1867-68) LR 5 Eq 519.......................................... 13.046
London School of Electronics Ltd, Re [1985] BCLC 273........................ 10.143, I 0.215
London Steamboat Co Ltd, Re (1883) WN 123 ....................................................15.042
London, Hambmgh and Continental Exchange Bank, Re
(1866-67) LR 2 ChApp 427 ......................................................................14.020
Lonmar Global Risks Ltd v West (2011] IRLR 138................................................8.021
Lonsdale Vale Ironstone Co, Re (1868) 16 WR 601 ..............................................20.082
Looe Fish Ltd, Re [1993] BCLC l 160.....................................................................7.124
Loquitur Ltd, Re [2003] 2 BCLC 442 .........................................................8.206, 15.I 66
Lovett v Carson Country Homes Ltd (2009] 2 BCLC 196 ..................... 12.077, 12.078,
12.095, 12.096, 12.097
 TABLEOF CASES ciii

LucasvHarris(l886) 18QBD 127 .......................................................................18.112

Lundy Granite Co, exp, Heavan, Re (1871) LR 6 Ch App 462 ............................20.188
Lungowe v Vedanta Resources pie [2017] BCC 787 ...............................................3.070
Lyon v Knowles (1864) 5 B & S 751 .......................................................................1.036
MC Bacon Ltd, Re [1990] BCLC 324 ..........................20.137, 20.138, 20.139, 20.153
MC Bacon Ltd, Re [1990] BCC 78 .......................................................................20.156
M Harris Ltd, Re 1956 SC 207 .................................................................................9.073
M Wheeler & Co Ltd v Warren [1928] I Ch 840 .....................................18.019, 18.034
Macaura v Northern Assurance Co Ltd
[ 1925] AC 619 .................................................................................3.005, 13.039
MacDougall v Gardiner (1875) I Ch D 13 .................... I 0.009, I 0.116, I 0.117, I 0.123
Mack Trucks (Britain) Ltd, Re [1967] l WLR 780 ...............................................18.022
Maclaine Watson & Co Ltd v Intl Tin Council [ 1988] Ch I .................................18.008
Macleay v Tait [1906] AC 24..................................................................................16.075
Macmillan Inc v Bishopsgate Investment Trust pie (No.3)
[1995] 3 All ER 747 ...................................................................................12.069
MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683 .................... 15.152
Macro (Ipswich) Ltd, Re [1994] 2 BCLC 354 .............................10.189, 10.190, 10.215
Madrid Bank Ltd v Bayley (1866) LR 2 QB 37 ....................................................20.091
Mahoney v East Holyford Mining Co (1875) LR 7 ..................................12.033, 12.056
Maidstone Buildings Provisions Ltd, Re
[1971] 3AllER363 ...................................................................................20.176
Majestic Recording Studios, Re [ 1989] BCLC l ....................................................7.132
Mama Milla Ltd, Shama v Top Brands Ltd, Re
[2016] BCC I (Eng CA) ...............................................................20.041, 20.046
Manchester Building Society v Grant Thornton UK LLP [2018] EWHC 963 .... .11.129
Mandarin Capital Advisory Ltd, Re (1989) 5 BCC 601 ..........................................9.027
Mann Aviation Group (Engineering) Lt (in administration) v Longmint Aviation Ltd
[2011] EWHC 2238 (Ch) ...........................................................................20.148
Mann v D'Arcy [1968] l WLR 893 .........................................................................1.036
Marini Ltd, Re [2004] BCC 172 ............................................................................15.l 67
Maritime Co SA v Avalon Maiitime Ltd (No. I)
[1991] 4 All ER 769 .....................................................................................3.024
Marseilles Extension Railway Co, Re (1871) LR 7 ChApp 161 ..........................12.013
Marshall's Valve Gear Co Ltd v
Manning Wardle & Co [1909] I Ch 267..........................................6.003, 6.006,
6.020, 10.045
MartinvWalker(1918) 145LT Jo377 ....................................................................9.051
Maskelyne B1itishTypewriter Ltd, Re [1898] l Ch 133 ...........................18.073, 18.074
Mason v Schuppisser (1899) 81 LT 147 ................................................................17.139
Matthew Ellis Ltd, Re [1933] Ch 458 ....................................................................20.166
Mawcon Ltd, Re [1969] l WLR 78 ........................................................................12.098
MCA Records Inc v Charly Records Ltd, [2003] I BCLC 93 ................................3.014
Macconnell v E Prill & Co Ltd [1916] 2 ...............................................................10.122
McConnell v Wright [ 1903] 1 Ch 546 ...................................................................16.077
McDonald v John Twiname Ltd [1953] 2 QB 304 ................................................12.053
McGuinness v Bremner pie [1988] BCLC 673 ...........................10.166, 10.175, 10.207
civ TABLE OF CASES

McKerrell, Re [1912] 2 Ch 648 .............................................................................14.091

McMahon v North Kent Ironworks Co
[1891] 2Ch 148.............................................................................17.089, 18.080
McNaughton (James) Papers Group Ltd v
Hicks Anderson & Co [ I 99 I] 2 QB I I 3 ....................................................11.140
McNicholas Construction Co Ltd v Customs and
Excise Comrs [2000] STC 553 ..................................................................12.l 13
Mears v R Mears and Co (Holdings) Ltd
[2002] 2 BCLC 1........................................................................................10.197
Measmes Brothers Ltd v Measures [ I 9 I OJ2 Ch 248 ............................................20.091
Mechanisations (Eaglescliffe) Ltd, Re [1966] Ch 20 ................................17.144, 17.169
Medforth v Blake [2000] Ch 86 ..................................................18.039, 18.040, 18.042,
18.044, 18.058, 18.059
Mediscoe Equipment Ltd, Re [1983] BCLC 305 ..................................................20.244
Menier v Hooper's Telegraph Works (1873-74) LR 9 ...........................................10.024
Mercantile Credit Co Ltd v Garrod
[ 1962] 3 All ER 1103 ...................................................................................1.060
Mercantile Investment and General Trust Co v
Intl Co of Mexico [1893) 1 Ch 484 ............................................................14.164
Mercantile Investment and General Trust Co v
River Plate Trust, Loan & Agency Co
[1894) 1 Ch 578 ..........................................................................................17.046
Meridian Global Funds Management Asia Ltd v
Securities Commission [1995) 2 AC 500........................12.105, 12.106, 12.107,
12.108, 12.124
Miera Contracts Ltd (in liq), Re [2016] BCC 153...................................................8.042
Midland Bank Trust Co Ltd v Green [ 1981] AC 513 ............................................12.095
Miles v Clarke [1953) I All ER 779 .............................................................1.045, 1.046
Milford Docks Co, Re Lister's Petition (1883) 23 Ch D 292 ................................20.076
Mills v Charlesworth (I 890) 25 Q BD 421 .............................................................17.123
Mills v Mills (1938) 60 CLR 150 ................................................................8.034, 8.063,
8.068
Mills v Sportsdirect.com Retail Ltd [2010) EWHC 1072.....................................14.059
Milroy v Lord (1862) 4 De GF & J 264 .................................................................14.068
Mirror Group Newspapers pie v Maxwell (No.2)
[1998] BCC 324 ............................................................................18.108, 20.041
Mirror Group Newspapers pie v Maxwell (No.2)
[1998) I BCLC 638 ....................................................................................18.104
Mistral Finance (in liq), Re [2001] BCC 27 ..........................................................20.156
Mitchell & Hobbs (UK) Ltd v Mill [1996) 2 BCLC 102 ...........................7.058, 12.013
Moffat v Farquhar (1878) 7 Ch D 591 ...................................................................14.075
Moffatt v Farquhar (1877-1878) LR 7 ...................................................................10.120
Monolithic Building Co, Re [1915) 1 Ch 643 ..........................................17.149, 17.152
Montagu's Settlement Trusts, Re [1987) Ch 264 ...............................8.176, 8.180, 8.177
Montgomerie v UK Mutual SS Assn Ltd [ I89 I] QB 370 .......................................3 .0 I 3
Moodie v Shepherd (Bookbinders) Ltd [1949) 2 All ER 1044 ............................. 14.073
Moor v Anglo-Irish Bank (1879) 10 Ch D 681 .....................................................20.076
 TABLEOF CASES cv

Moreley & Sons Ltd, Re [1939) Ch 719 ..................................................................7.042

Morgan v Gray [1953) Ch 83 .................................................................................14.092
Morice v Bishop of Durham (I 804) 9 Yes 399 ........................................................4.017
Morphitis v Bernasconi [2003) Ch 552 ....................................................20.l 75, 20.177
Morrice v Aylmer (I 874-75) LR 7 ........................................................................13.06 I
Morris v Harris [1927) AC 252 ..............................................................................20.260
Morris v Kansenn [1946) AC 459 ............................................... 12.056, 12.067, 12.068,
12.089, 12.090, 12.098
Mortgage Insurance Corp v Canadian Agricultural
Coal and Colonisation Co [ I 90 I] 2 Ch 377............................................... 17.03 I
Moussell Bros Ltd v London and North-Western Railway Co
[1917) 2KB 836 .........................................................................................12.126
Movitex Ltd v Bulfield [ 1988) BCLC 104 ...................................................8.070, 8.198
Mozeley v Alston (1847) l Ph 790, 41 ER 833 .....................................................10.124
MT Realisations Ltd v Digital Equipment Co Ltd
[2003]2BCLC 117..........................................................15.106, 15.107, 15.111
Muir v City of Glasgow Bank (1879) 4 App Cas 337 ...........................................14.102
Multinational Gas and Petrochemical Co Ltd v
Multinational Gas and Petrochemical Service Ltd
[1983) Ch 258 .......................................................................8.024, 8.190, 19.114
MumtazProperties Ltd, Re [2012) 2 BCLC 109.....................................................7.009
Murad v AI-Saraj [2005) EWCA Civ 959 ...............................................................8.169
Murray's Judicial Factor v Murray and Sons [I 993) BCLC 1437......................... 10.153
Musselwhite v CH Musselwhite & Son Ltd [1962) l All ER 201.. ...................... 14.060
Musselwhite v Musselwhite & Co Ltd [1962) Ch 964 ...............................9.063, 10.122
Nant-Y-Glo and Blaina Ironworks Co v Grave (1878) 12 Ch D 738 ......................8.174
Natal Land and Colonization Co Ltd v
Pauline Colliery & Development Syndicate Ltd
[1904) AC 120 ........................................................................4.004, 4.016, 4.038
National Bank Ltd, Re [ 1966) 1 WLR 819 ............................................................I 9.086
National Bank of Kuwait v Menzies [1994) 2 BCLC 306 ....................................20.156
National Coffee Palace Co, Re (exp Panmure)
(1883) 24 Ch D 367 ...........................................................................4.012, 4.013
National Dwellings Society v Sykes [1894) 3 Ch 159 ............................................9.081
National Farmers Union Development Trusts, Re [ 1972) 1 WLR 1548 ............... I4.164
National Patent Steam Fuel Co, Re (1859) 4 De G & J 46 ................................... 14.043
National Provincial and Union Bank of England v
Charnley[1924) 1 KB431 ............................................................17.143, 17.144
National Rivers Authority v Alfred McAlpine
Homes East Ltd [ I 994) 4 All ER 286 ........................................................12.126
National Westminster Bank pie v IRC [1995) l AC 119.......................... 14.032, 14.033
National Westminster Bank pie v Jones [2002) l BCLC 55 ................................. 17.09 l
Neath Rugby (No.2), Re [2009) 2 BCLC 427 ............................................8.037, 10.145
Neil McLeod & Sons Ltd, Re 1967 SLT 46 .............................................................9.074
Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1996) Ch 274 ...............8.081
New British Iron Co, Re (exp Beckwith) [1898) 1 Ch 324 ....................................5.039
New Bullas Trading Ltd, Re [1994) l BCLC 485 ..................................................17.079
cvi TABLE OF CASES

New Clydach Sheet and Bar Iron Co, Re ( l 868) LR 6 Eq 601 .............................17.066
New Zealand Gold Extraction Co (Newbury-Vautin Process) Ltd v
Peacock [1894] 1 QB 622 ..........................................................................14.089
New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 WLR 96 ....................... 12.100
Newbome v Sensolid (Great Britain) Ltd [1954] I QB 45 .........................4.004, 4.007,
4.008, 4.009, 4.033
Newgate Stud Co v Penfold [2008] 1 BCLC 46 ......................................................8.075
Newhart Developments Ltd v
Co-operative Commercial Bank Ltd [1978] QB 814 .................. 18.020, 18.021,
18.034, 18.035
Newton v Anglo-Australian Investment,
Finance and Land Co [1895] AC 244 ........................................................17.120
New World Resources NV [20 I5] BCC 47 ...........................................................15.136
Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 .......................10.147, 10.155
Norman vTheodore Goddard [1991] BCLC 1028.......................................8.140, 8.150
Nortel GmbH (in admin), Re [2014] AC 209 ................................20.15, 20.188, 20.197
North Pole Ice Co Ltd, Re [1924] WN 131............................................................15.042
Northampton Regional Livestock Centre Co Ltd v Cowling
[2016] 1 BCLC431 ......................................................................................l.061
North Sydney Investment and Tramway Co v Higgins [ 1899] AC 263 ..................4.017
North West Transportation Co Ltd v Beatty
( 1887) 12 App Cas 589 ......................................................8.132, 10.001, 10.033
Northern Assurance Ltd v Farnham United Breweries Ltd
[1912] 2 Ch 125..........................................................................................17.046
Northern Bank Ltd v Ross [ I 990] BCC 883 .........................................................17.126
Northern Counties Insurance Co v Whipp ( 1884) 26 Ch D 482 ...........................17.193
Northern Enginee1ing Industries pie, Re [1994] 2 BCLC 704 .................14.201, 15.027
Northumberland Avenue Hotel Co, Re (I 886) 33 Ch D l 6 .....................................4.017
Nottingham General Cemetery Co, Re [1955] Ch 683 .........................................20.028
Nottingham University v Fishel [2000] IRLR 471 ..................................................8.021
Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 ..................................................8.l 79
Nurcombe v Nurcombe [1985] 1 WLR 370, 376 ..................................................10.040
NV Slavenburg's Bank Intercontinental Natural Resources Ltd, Re
[1980] 1 WLR 1076 ...................................................................................17.181
O'Neill v Phillips [1999] 1 WLR 1092.......................... 10.150, 10.154, 10.157, 10.156,
10.157, 10.159, 10.160, 10.161,
10.162, 10.163, 10.173, 10.181,
10.182, 10.184, 10.188, 10.191,
10.192, 10.197, 10.220, 10.224,
10.215, 10.219, 10.229, 10.234
Oakbank Oil Co v Crum (1882) 8 App Cas 65, 71.. ..............................................15.139
Oasis Merchandising Services Ltd, Re [ 1998] Ch 170.............................20.142, 20.161
Odessa Tramways Co v Mendel (l 878) 8 Ch D 235 .............................................14.041
Officeserve Technologies Ltd (in liq) v Anthony-Mike [2017] BCC 574 .............20.120
Okpabi v Royal Dutch Shell pie [20 I 8] EWCA Civ 191 (Eng CA) .......................3 .070
Ooregum Gold Mining Co of India v Roper [1892] AC 125.................................14.004
Opera Photographic Ltd, Re (1989) 5 BCC 601 ...........................................9.026, 9.027
 TABLEOF CASES CYii

Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 .............................................3.028, 3.045

Oriental Bank Corp, Re Guillemin exp (1884) 28 Ch D 634 ...............................20.091
Oriental Inland Stearn Co, Re ( 1873-74) LR 9 Ch App 557 ................................. 19.112
Orleans Motor Co Ltd, Re [1911] 2 Ch 41 ............................................................20.165
Oshkosh B'Gosh Inc v Dan Marbel Inc Ltd (1998) 4BCC 795,
[1989] BCLC 507 ..............................................................................4.028, 4.030
Ottos Kopje Diamond Mines, Re [1893] 1 Ch 618 ............................................... 14.139
Re Ovenden Colbert Printers Ltd, Hunt v Hosking [2014] 1 BCLC 291 ............. .20.146
Oxford Benefit Building and Investment Society, Re
(1886) 35 Ch D 502 ......................................................................................8.027
P James, exp, Condon, Re (1873-74) LR 9 ChApp 609 .....................................20.022
Pacaya Rubber and Produce Co Ltd, Re [1914] 1 Ch 542 ..................................... 16.070
Pacific Coast Coal Mines Ltd v Arbuthnot [1917] AC 607 .....................................9.055
Paget, Official Receiver, Re (ex p) [ 1927) 2 Ch 85 ...............................................20.118
Panama, New Zealand and Australia Royal Mail Co, Re
(1870) LR 5 ChApp 318 ...............................................................17.067, 17.074
Panorama Developments (Guildford) Ltd v
Fidelis Furnishing Fabrics Ltd [ 1971] 2 QB 711 ....................................... 12.019
Paradise Motor Co Ltd, Re [1968) I WLR 1125 ...................................................14.053
Park Air Services pie, Re Christopher Moran Holdings Ltd v
Bairstow [2000] 2AC 172..........................................................................20.188
Parke v Daily News Ltd (No.2) [ 1962) Ch 927 .......................................................8.030
Parker and Cooper Ltd v Reading [1926] Ch 975 ...................................................6.044
Parker v McKenna ( 1874- 75) 10 Ch App 96 ..........................................................8.117
Parsons v Sovereign Bank of Canada [ 1913] AC 160 ...........................................18.017
Paul & Frank Ltd v Discount Bank (Overseas) Ltd [1967] Ch 348 ...................... 17.129
Paycheck Services 3 Ltd [2010) 1 WLR 2793 ...................................7.008, 7.009, 7.012
Pearce v Bulteel [1916] 2 Ch 544 ..........................................................................17.193
Peek v Gurney (1873) LR 6 ...................................................................................16.078
Peel v London & North Western Rly Co (No. I) ( 1905) 1 Ch 5 ..............................9.098
Pelling v Families Need Fathers Ltd [2002] 2 All ER 440 .................................... 14.108
Pender v Lushington (1877) 6 Ch D 70 ......................................10.033, 10.122, 10.123,
Peninsular and Oriental Stearn Navigation Company v Eller and Co
2006 WL 1078913........................................................................................9.062
Pen-y-Van Colliery Co, Re (1877) 6 Ch D 477 .....................................................20.076
Perak Pioneer Ltd v Petroliam Nasional Bhd
[1986] AC 849, [1987) 1 HKC 12..............................................................20.076
Percival v Wright [1902] 2 Ch 42! ...........................................................................8.024
Pergamon Press Ltd v Maxwell [1970) 1 WLR l 167..............................................8.026
Permanent Houses, Re (Holdings) Ltd, Re [1988] BCLC 563.............................. 17.092
Perry v Day [2005] 2 BCLC 405 ...........................................................................10.110
Persad v Singh [2017) UKPC 32...................................................................3.051, 3.053
Peruvian Guano Co v Dreyfus Bros & Co [ 1892] AC 166.................................... 18.100
Peskin v Anderson [2001) 1 BCLC 372 ...................................................................8.024
Peter Buchanan Ltd v Mc Vey [ 1955) AC 516........................................................l 5. l 64
Peveril Gold Mines Ltd, Re [ 1898] 1 Ch 122 ..........................................................5.047
Pfeiffer v Arbuthnot Factors Ltd [ 1988] 1 WLR l 50............................................. 17.204
cviii TABLE OF CASES

Phillips v Brewing Dolphin Bell Lawrie Ltd

[2001] 1 WLR 143 .......................................................................20.146, 20.147,
20.149, 20.150, 20.151
Phipps v Boardman [1967] 2 AC 46 .............................................................8.073, 8.114
Phonogram Ltd v Lane [ I982] QB 938 ............................................4.008, 4.021, 4.024,
4.048, 4.050
Phosphate of Lime Co v Green (1871-72) LR 7 CP 43 ..........................................8.186
Pinto Silver Mining Co, Re (1878) 8 Ch 273 ........................................................20.256
Plantations Trust Ltd v Bila (Sumatra) Rubber Lands Ltd
(1915) 85 LJ Ch 801 .....................................................................................7.038
Plus Group Ltd v Pyke [2002) 2 BCLC 201 ............................................................8.077
PNC Telecom pie v Thomas (No.2) [2008] 2 BCLC 95 ....................8.203, 8.204, 8.206
PNC Telecom pie v Thomas [2003) BCC 202 ..............................................8.203, 9.135
Polly Peck Intl pie (No.5), Re [1997] 2 BCLC 630 ......................................3.037, 3.067
Polly Peck Intl pie, Re [1996] BCC 486 .......................................................3.038, 3.067
Poole v National Bank of China Ltd [1907) AC 229 ............................................. 15.020
Popat v Schonchhatra [ 1997] 3 All ER 800 .............................................................1.044
Portbase Clothing Ltd, Re [1993) Ch 388 ....................................17.215, 17.216, 17.220
Portuguese Consolidated Copper Mines Ltd, Re
(1889) 42 Ch D 160.........................................................................7.102, 12.098
Portuguese Consolidated Mines Ltd, Re (1890) 45 Ch D 16 .................................. 12.08
Pote! v Inland Revenue Commissioners [1971] 2 All ER 504............................... 15.143
Potters Oils Ltd (in Iiq), Re [I 985] BCLC 203 ......................................................20.102
Potters Oils Ltd (No.2), Re [1986] 1 All ER 890 ................................................... 18.038
POW Services Ltd v Clare [1995] 2 BCLC 435 ....................................................14.103
Power v Sharp Investments Ltd [ 1994] 1 BCLC 111,
[1993] BCC 609 .........................................................................................20.167
Powles v Page (1846) 3 CB 16, 136 ER 7 ..............................................................12.109
Prain & Sons Ltd, Re (1947) SC 325 ............................................................9.006, 9.073
Precision Dippings Ltd v Precision Dippings Marketing Ltd
[1986) Ch447 ...................................................................15.165, 15.169, 15.170
Prest v Petrodel Resources Ltd [2013] 2 AC 415 .................. 3.024, 3.030, 3.031, 3.033,
3.043, 3.044, 3.049,
3.067, 3.068, 3.069, 3.070
Prest v Petrodel [2014] 2 Lloyd's 269 ......................................................................3.03 I
Preston v Grand Collier Dock Co (1840) 11 Sim 327 ........................................... 14.041
Prirnlake Ltd v Matthews Associates [2007] 1 BCLC 666......................................8.049
Prior v Bagster (1887) 57 LT 760 ..........................................................................18.038
Pro4Sport Ltd (in liq), Re [2016] BCC 390 ..................................................8.042, 8.146
Produce Marketing Consortium Ltd, Re ( I 989) 5 BCC 569 ...................................8.144
Produce Marketing Consortium Ltd, Re [1989) 1 WLR 745 .......................8.200, 8.202
Progress Property Co Ltd v Moorgarth Group Ltd
[2011) 2AII ER432 .........................................................15.001, 15.009, 15.010
Prudential Assurance Co Ltd v Chatterly-Whitfield
Collieries Ltd [ I949) AC 512 .....................................................................15.027
Prudential Assurance Co Ltd v
Newman Industries Ltd (No.2) [1981] Ch 257 ................10.021, 10.031, 10.033
 TABLE OF CASES cix

Prudential Assurance Co Ltd v Newman Industries Ltd

[1982] Ch 204 ..................................................................10.009, 10.015, 10.029,
I0.045, I0.103, I0.105,
10.106, 10.110
Punt v Symons and Co Ltd [ 1903] 2 Ch 506 .........................................................10.127
PY Solar Solutions Ltd (in liq), Re [2018) 1 BCLC 58,
[2017] EWHC 3228 (Ch) ........................................... 8.040, 8.042, 8.189, 9.122
Pyle Works Ltd, Re (1890) 44 Ch D 534 ..................................................17.120, 20.099
Quarter Master UK Ltd; Quarter Master UK Ltd v
Pyke, Re [2005] 1 BCLC 245 ......................................................................8.116
Quebrada Railway Land and Copper Co, Re [1889) LR 40 Ch D 363 .... 15.027, 15.032
Queensland Mercantile and Agency Co,
exp Australasian Investment Co, Re [ I891] I Ch 536 ..............................17.120
Queensway Systems Ltd v Walker [2007] 2 BCLC 577 ...............................8.205, 8.207
Quin & Axtens Ltd v Salmon [1909] AC 442 ..............................................6.003, 6.022,
6.029, 6.031
RA Noble & Sons (Clothing) Ltd, Re [1983] BCLC 273 .....................................10.241
R v Arnaud (1846) 115 ER 1485 .............................................................................3.00 I
R v Associated Octel Co Ltd [ 1994] 4 All ER 1051..............................................12.120
R v Birmingham City Council [2007] 1 All ER 73 .................................................3.051
R v Blamires Transport Services Ltd [1964] 1 QB 278 .........................................12.125
R v Boal [1992] QB 591.........................................................................................16.139
R v Board ofTrade; exp St Martin Preserving Co Ltd
[1965] 1 QB 603 ............................................................................I0.145, 10.147
R v Boyle Transport (Northern Ireland) Ltd [2016] 4 WLR 63 ..................3.032, 3.072,
3.073, 3.074, 3.075
R v British Steel pie [l 995] 1 WLR 1356..............................................................12.126
R v Brockley [ 1994] BCC 131.,..................................................................1.l 74, 12.120
R v D'Oyly (1840) 12 Ad & E 139 ..........................................................................9.084
R v Dickson ( 1992) 94 Cr App R 7 ........................................................................20.092
R v Gateway Foodmarkets Ltd [1997] 3 All ER 78 ...............................................12.120
R v Gateway Foodmarkets Ltd [1997] IRLR 189..................................................12.126
R v Goldman [1997] Crim LR 894 ........................................................................20.175
R v Grantham [1984] QB 675 ................................................................................20.l 74
R v HM Coroner for East Kent, exp Spooner (1989) 88 Cr App R 10................. 12.121
R v ICR Haulage Ltd [1944] KB 551 .......................................................12.l l 7, 12.125
R v Kemp [1988] QB 645 ......................................................................................20.175
R v Kylsant [ 1932] I KB 442 ....................................................................16.067, 16.069
R v Lockwood [1986] 1 WLR 125...........................................................................8.202
R v Lockwood [ 1986] Crim LR 243 ......................................................................20. l 73
R v Mccredie [2000] 2 BCLC 438 ........................................................................20.249
R v Ovenell [1968] 1 All ER 933 ...........................................................................12.129
R v P&O European Ferries (Dover) Ltd
(1991) 93 Cr App R 72 ..................................................................12.l l 7, 12.127
R v Philippou (1989) 89 Cr App R 290 .................................................................20. l 75
R v Registrar of Co, ex p Central Bank of India
[1986] QB 1114.............................................................................17.147, 17.151
ex TABLE OF CASES

R v Registrar of Companies, ex p Attorney General

[1991] BCLC 476 .........................................................................................2.002
R v Registrar of Companies, exp Bowen [1914] 3 KB I 161..................................2.002
R v Registrar of Companies, exp More [1931] 2 KB 197......................................2.002
R v Registrar of Joint Stock Companies, ex p Johnston
[1891] 2 QB 598, 610 ...................................................................................2.079
R v St Regis Paper Company Ltd [2012] l Cr App R 14 .........................12.122, 12.124
R v Sale [2014] I WLR 663 ..........................................................................3.032, 3.072
R v Sellion [1982] Crim LR 676 ............................................................................20.175
R v Smith [1996] 2 BCLC 109 ..............................................................................20.175
R vTyler (1838) 8 C & P 616.................................................................................12.125
R v W GThomas (1883) 11 QBD 282 ..........................................................90.86, 9.085
R v Wimbledon Local Board (1882) 8 QBD 459 ....................................................9.084
R v Youell [2007] EWCA Crim 225 ........................................................................7.110
Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd
[1921] 2AC465 ...........................................................................................3.014
Rakusens Ltd v Baser Ambalaj Plastik Sanayi Ticaret AS
[2002] 1 BCLC 104......................................................................................2.066
Ramkissendas Dhanuka v Satya Charan Law (1949) LR 77 IA 128 ......................5.032
Randhawa vTurpin [2017] BCC 406 .......................... 2.018, 9.007, 9.016, 9.067, 9. 122
Ratners Group pie, Re (1988) 4 BCC 293 .............................................................15.024
Rayfield v Hands [1960] Ch l ....................................................... 5.028, 10.127, 14.072
Read v Astoria Garage (Streatham) Ltd [ 1952] I Ch 637 .......................................7.049
Real Meat Co Ltd (In Receivership), Re [1996] BCC 254 .................................... 18.031
Re D'Jan of London Ltd, Copp v D'Jan [1994] l BCLC 561.. ................... 8.140, 8.141,
8.156, 8.204
Red Sea Tankers Ltd v Papachristidis [1997] 2 Lloyd's Rep 547 .......................... 12.109
Reeve v Whitmore (1865) 2 Drew & Sm 446 ........................................................ 17.075
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134............................ 8.007, 8.114, 8.116,
8.1 I 8, 8.121, 8.122, 8.124,
8.130, 8.131, 8.132,
8.167, 8.168, 8.186, 10.035
Regentscrest pie v Cohen [2001] 2 BCLC 80 ..........................................................8.043
Regional Airports Ltd, Re [ 1999] 2 BCLC 30 ....................................................... 10.211
Rehman v Chamberlain [2012] BCC 770 ..............................................................l 7. l 69
Reid v Explosives Co Ltd (1887) 19 QBD 264 .....................................................18.100
Reprographic Exports (Euromat) Ltd, Re (1978) 122 SJ 400 ............................... 18.020
Revenue and Customs Commissioners v Holland
[2010] 1 WLR2793 ...................................................................................15.166
RF & E Stanton Ltd, Re [ I929] I Ch I 89 ..............................................................20. I 67
Rica Gold Washing Co, Re (1879) 11 Ch D 36
(unrep., Civ App No.164 of 1984) .............................................................20.078
Richards & Co, Re (1879) 11 Ch D 676 ................................................................19.073
Richardson v Ward ( 1822) 6 Madd 266 .................................................................18.114
Ridge Securities v IRC [1964] I All ER 275 ........................................... 15.004, 15.009,
Risk Management Partners Ltd v Brent London
Borough Council [2011] 2 AC 34 ..........................................6.032, 6.033, 6.065
 TABLE OF CASES cxi

RJ Falcon Developments Ltd, Re [1987] BCLC 437 .............................................20.244

Robert Stephen Holdings Ltd, Re [ 1968] 1 All ER 195 ........................................15.031
Roberts v Letter 'T' Estates Ltd [ 1961) AC 795 .......................................I4.083, 14.084
Robson v Smith [1895] 2 Ch l 18,.............................................................17.091, 17.096
Rock Nominees Ltd v RCO (Holdings) pie (in liq) [2004] I BCLC 439 ............. 10.184
Rolled Steel Products (Holdings) Ltd v
British Steel Corp [1986] Ch 246 .........................................8.051, 6.049, 8.176,
8.190, 12.022, 12.032,
12.070, 15.169
Rolls Razor Ltd v Cox [1967] 1 QB 552 ...............................................................20.192
Rose, Re [1952] Ch 499 .........................................................................................14.068
Ross River Ltd v Cambridge City Football Club Ltd
[2008] I A)l ER 1004 ...................................................................................8.176
Ross v Telford [ 1997) BCC 945 ...............................................................................9.037
Rowell v Commissioners ofinland Revenue [ 1897) 2 QB 194 ............................17.009
Royal Bank of Scotland pie v Sandstone Properties Ltd
[1998] 2 BCLC 429 ....................................................................................14.079
Royal British Bank vTurquand (1856) 119 ER 886, 5 E & B 327 ............7.092, 12.056
Royal Brunei Airlines Sdn Bhd v Tan [1995) 2 AC 378 (PC) ......................8.179, 8.202
Royal Mail Estates Ltd v Maple Teesdale [2016) 1 WLR 942 (Ch D) ....................4.050
Ruben v Great Fingall Consolidated [1906] AC 439 .............................................12.075
Rudge v Bowman (1867-68) LR 3 QB 689 ...........................................................20.186
Rumball v Metropolitan Bank (I 877) 2 QBD 194 ................................................13.057
Runciman v Walter Runciman pie [ 1992) BCLC 1084...........................................8.081
Runciman v Wiater Runciman pie [ 1993) BCC 223 ...............................................7.097
Rushmer v Mervyn Smith (t/a Mervyn E Smith & Co)
[2009) EWHC 94 (QB) ................................................................................ 11.132
Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588 ....................5.085
Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 .....................10.029, 10.126
Russian Spratts Patent Ltd, Re [ I898) 2 Ch 149....................................................17.120
SA & D Wright Ltd, Re [1992] BCC 503 ................................................20.124, 20.126
Safeway Stores Ltd v Twigger [2011] Bus LR l 629.............................................12.111,
Sabloniere Hotel Co, Re (I 866) LR 3 Eq 74 .........................................................20.237
Salomon v A Salomon and Co Ltd [1897) AC 22 ............................2.118, 2.099, 3.001,
3.002, 6.044
Sam Weller and Sons Ltd, Re [1990] BCLC 80........................................10.l 71, 10.198
Samuel Sherman pie, Re [1991) 1 WLR 1070 ........................................................5.024
Samuel Tak Lee v Chou Wen Hsien [1984) 1 WLR 1202.......................................7.045
Samuel v Jarrah Timber and Wood Paving Corp Ltd
[1904) AC 323 ............................................................................................17.01l
Sanitary Carbon Co, Re [ 1877) WN 233 .................................................................9.005
Sarflax Ltd, Re [ 1979] 1 All ER 529 ......................................................................20.172
Sasea Finance Ltd (in liq) v KPMG [2000] l All ER 676 ........................J 1.130, 11.135
Sass, ex p, National Provincial Bank of England Ltd, Re
[1896) 2 QB 12...........................................................................................20.190
Saul D Harrison and Sons pie, Re [ 1995] I BCLC 14 ............................ I0.160, I0.183,
10.184, 10.185
cxii TABLE OF CASES

SAW (SW) 2010 Ltd v Wilson [2018) 2 WLR 636 ..............................................17.092

Schroder Exempt Property Unit Trust v
Birmingham City Council [2014) BCC 690 ..............................................20.112
Scott v Frank F Scott (London) Ltd [1940) Ch 794 ....................................5.073, 14.084
Scott.v Lord Hastings (1855) 4 Kay & J 633 ......................................................... 17.199
Scott v Scott [1943) 1All ER 582 ............................................................................6.023
Scottish Co-op Wholesale Society Ltd v Meyer
[1959) AC 324 .....................................................................8.037, I 0.13610.137,
10.147, 10.171
Scottish Co-operative Wholesale Soc Ltd v Meyer
[1958) 3 All ER 66 .......................................................................................7.023
Scottish Insurance v Wilsons & Clyde Coal Co
[1949) AC 462 ...............................................................................13.043, 13.050
Seaton v Grant [1866-67) LR 2 .............................................................................10.039
Second Consolidated Trust Ltd v
Ceylon Amalgamated Tea and Rubber Estates Ltd
[1943) 2All ER 567 ...................................................................................10.122
Secretary of State for Business, Innovation and Skills v
Weston [2014) BCC 581 ...................................................................7.112, 7.132
Secretary of State for Trade and Industry v Rayna
[2001) 2 BCLC 48 ........................................................................................7.112
Secretary of State for Trade and Industry v Deverell
[2001] Ch 340 ...............................................................................................7.014
Secretary of State for Trade and Industry v Edwards
[1997) BCC222 ...........................................................................................7.137
Secretary of State for Trade and Industry v Jones
[1999) BCC 336 ...........................................................................................7.009
Secretary of State v Barnett [ 1998) 2 BCLC 64 ......................................................7 .132
Secretary of State v Lubrani [ 1997) 2 BCLC 115 ...................................................7 .124
Secretary of State v Worth [ 1994] 2 BCLC 113 ......................................................7 .131
Selangor United Rubber Estates Ltd v Cradock (No.3)
[1968) 1 WLR 1555 ...................................................................................15.166
Severn and Wye and Severn Bridge Railway Co, Re [ 1896) I Ch 559 ................. 15.140
Shaker v Al-Bedrawi [2003) 1 BCLC 157.............................................................10.109
Shapland Inc, Re [2000) BCC 106.........................................................................20.148
Sharp v Dawes (1876) 2 QBD 26 .............................................................................9.006
Sharpe vTophams Ltd [1939) Ch 373 ...................................................................14.136
Shaw v Holland [ 1900) 2 Ch 305 .............................................................................8.117
Shaw v Port Philip and Colonial Gold Mining Co Ltd
[1884) 34 QB 103.......................................................................................12.077
Shaw v Royce Ltd [1911) 1 Ch 138 .......................................................................17.046
Shaw vTati Concessions Ltd [1913) 1 Ch 292 ......................................................10.122
Sheffield Corp v Barclay [1905) AC 392...............................................................14.079
Shepheard v Broome [ I904) AC 342 ........................................................16.067, 16.085
Sherlock Holmes International Society Ltd, Re (No.2)
[2017) 2BCLC 14...........................................................................5.046, 12.090
Shipley v Marshall (1863) 14 CB NS 566 ................................................17.077, 17.126
 TABLEOF CASES cxiii

Shropshire Union Rly and Canal Co v R (1874-75) LR 7 ..................................... 14.139

Shuttleworth v Cox Brothers & Co (Maidenhead)
[1927] 2 KB 9 ........................................................... 5.042, 5.052, 5.063, 10.015
Sidebottom v Kershaw Leese and Co Ltd
[1920] 1 Ch 154......................................................................5.042, 5.052, 5.065
Siebe Gom1an & Co Ltd v Barclays Bank Ltd
[1979]2Lloyd'sRep 142................................... 17.074, 17.075, 17.085, 17.193
Silven Properties Ltd v Royal Bank of Scotland pie [2003] BCC I 002 ............... 18.057
Simmon Box (Diamonds) Ltd, Re [2000] BCC 275 ................................................8.204
Sinclair Investments (UK) Ltd v
Versailles Trade Finance Ltd [2012] Ch 453 ...............................................8.168
Singla v Brown [2008) Ch 357 ...............................................................................20.147
Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675 ..................20.208
Sirdar Gurdyal Singh v Rajah ofFaridkote [1894] AC 670................................... 16.096
Sisu Capital Fund Ltd v Tucker [2005] EWHC 2170 ............................................ I 8.118
SloggerAutomaticFeederCoLtd,Re(l915] 1 Ch478 ...........................18.073, 18.074
SMC Electronics Ltd v Akhter Computers Ltd, [2001] 1 BCLC 433 ................... 12.018
Smith & Fawcett Ltd, Re (1942] Ch 304 ........................................8.026, 14.075, 14.076
Smith (Administrator of Cosslett (Contractors) Ltd) v
Bridgend County Borough Council
(2002] 1 BCLC 77 ......................................................................................17.062
Smith New Court Securities Ltd v Citibank NA
(1997] AC 254 ............................................................................................16.077
Smith v Anderson (1880) 15 Ch D 247 ....................................................................1.033
Smith v Croft (No.2) [1988] Ch 114.............................. 10.018, 10.027, 10.035, 10.127
Smith v Croft (No.3) (1987) BCC 218 ..................................................................10.045
Smith v Henniker-Major & Co (a finn) (2003) Ch 182 ........................................12.086
Smith v Land and House Property Corp
(1884) 28 Ch D 7 ........................................................................................16.065
Smith v UIC Insurance Co Ltd [2001] BCC l l ........................................19.053, 20.080
Smith, Knight & Co, Re (1868] LR Eq 238 ..........................................................10.120
Smith, Knight & Co, Re (1868-69) LR 4 Ch App 20 ............................................ 14.073
Smith, Stone & Knight Ltd v City of Birmingham
[1939] 4All ER 116 .....................................................................................3.061
Sneath v Valley Gold Co [1893] 1 Ch 477 .............................................................17.046
Snook v London and West Riding Investments Ltd
[1967] 2 QB 786 ...........................................................................................3.026
Societe Generale de Paris v Walker ( 1885) I I App Cas 20 ...................... 14.102, 17.199
Soinco SAC! v Norvokuznetsk Aluminium Plant Base Metal Trading Ltd
[1997] 2 Lloyd's Rep 330 ...........................................................................18.008
South African Supply and Cold Storage Co, Re
[1904] 2 Ch 268 ..........................................................................................14.166
South African Territories Ltd v Wallington [ 1898] AC 309 ................................... 17.035
South Australia Asset Management Corp v York Montague Ltd
[1997] AC 191 ............................................................................................16.077
South India Shipping Corp Ltd v Export-Import Bank of Korea
[1985] 1 WLR 585 .......................................................................................2.066
cxiv TABLE OF CASES

South London Greyhound Racecourse Ltd v Wake [1931] 1 Ch 496 ................... 12.065
South of England Natural Gas and Petroleum Co Ltd, Re [ 1911] 1 Ch 573 ......... 16.013
Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701.. .....................................7.049
Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 .......................................19.077
Sowman v David Samuel Trust Ltd [1978] I All ER 616 ........................20.094, 20.121
Spectrum Plus Ltd, Re [2005] 2 AC 680 ..................................................17.072, 17.079,
17.081, 17.082
Spencer v Clarke (1878) 9 Ch D 137........................................................17.199, 17.201
Spokes v Grosvenor & West End Railway
Terminus Hotel Co Ltd [ 1897] 2 QB 124.....................................10.021, 10.043
Sri Lanka Omnibus Co v Perera [1952] AC 76 ......................................................14.033
SSSL Realisations (2002) Ltd, Re [2006] Ch 610 .................................................20.103
Standard Chartered Bank Ltd v Walker [ 1982] I WLR 1410 ...............................18.040
Standard Chartered Bank Ltd v Ceylon Petroleum Corp
[2011] EWHC 1785 .....................................................................................5.017
Standard Chartered Bank v Pakistan Intl Shipping Corp (No.2)
[2003] IAC959 ..............................................................................3.014, 12.115
Stanhope Pension Trust Ltd v Registrar of Companies
[1994] 1 BCLC 628 ....................................................................................20.259
Stanley, Re [ I906] I Ch 131.....................................................................................1.004
Stanley v TMK Finance Ltd [2010] EWHC 3349 (Ch) ...............20.149, 20.152, 20.154
Staple of England v Governor and Co of the Bank of England
(1888) LR 21 QBD l 60..............................................................................12.042
Staples v Eastman Photographic Materials Co [ I 896] 2 Ch 303 .............10.120, 13.049
Stead, Hazel & Co v Cooper [1933] I KB 840 ......................................................18.I 18
Steel Wing Co Ltd, Re [1921] 1 Ch 349 ................................................................20.076
Steen v Law [1964] AC 287 ......................................................................15.103, 15.112
Sticky Fingers Restaurant Ltd, Re [ 1992] BCLC 84 ...............................................9.031
Stocks v Dobson (1853) 4 De GM & G l l.. ..........................................................17.199
Stocznia Gdanska SA v Latreefers Inc (No.2) [2001] BCC 174................2.071, 20.207
Stone & Rolls Ltd (in liq) v Moore Stephens
[2009] I AC 1391. .............................................. ll.134, 12.108, 12.111, 12.113
Stonegate Securities Ltd v Gregory [ 1980] Ch 576 ...............................................20.076
Stoneleigh Finance Ltd v Phillips [1965] 2 QB 537 ..............................................17.124
Stothers v William Steward (Holdings) Ltd sub nom, Re
William Steward (Holdings) Ltd
[1994] BCC 284, [1994] 2 BCLC 266 .......................................................14.086
Strathearn Gordon Associates Ltd v
Commissioners of Customs & Excise [1985] VAITR 79 ...........................1.036
Streatham and General Estates Co, Re [ I 897] 1 Ch 15.........................................17.120
Stroud Architectural Systems Ltd v
John Laing Construction Ltd [ I994] BCC I 8 ...........................................17.149
Stubbs v Slater [I 91OJ1 Ch 632 ............................................................................17.055
Sukhoruchkin v Van Bekestein [2014] EWCA Civ 399 ..........................................8.018
Sun Tai Cheung Credits Ltd v Attorney General
[1987] I WLR 948 ...........................................................17.139, 17.140, 17.141
Swabey v Port Dawin Gold Mining Co (1889) I Meg 385 .....................................5.039
 TABLEOF CASES CXV

Swift v Jewsbury and Goddard (1874) LR 9 QB 301 ...........................................12.l 15

Swiss Bank Corp v Lloyds Bank Ltd
[1982]AC584 ..................................................................17.054, 17.056, 17.062
TA King (Services) Ltd, Cottrell v King, Re [2004) BCC 307 ............................14.072
T &N Ltd (No.3), Re [2007) All ER 85 I ................................................................19.080
T&N Ltd (No.3), Re [2007) 1 BCLC 563 .............................................................19.068
Tailby v HSBC Bank pie [20 I 5] BPIR 143 ...........................................................20.157
Tailby v Official Receiver (1888) 13 App Cas 523 ...............................................17.075
Tam Wing Chuen v Bank of Credit &
Commerce Hong Kong Ltd [1996] BCC 388 ............................................17.128
Tancred's Settlement, Re [1903) 1 Ch 715 .............................................................14.165
Target Holdings Ltd v Redfems [1996) AC 421 ......................................................8.174
Taylor v Good [ 1974] I WLR 556 ...........................................................................1.035
Taylor v M'Keand (1880) 5 CPD 358 ....................................................................17.086
Taylor Sinclair (Capital) Ltd (in liq), Re; Knights v Seymour Pierce Ellis Ltd
[2001) 2 BCLC 176....................................................................................20.146
TCB Ltd v Gray [1986) 1 All ER 587 ....................................................................12.082
Telomatic Ltd, Re [ 1993] BCC 404 .......................................................................17.150
Tinnevelly Sugar Refining Co Ltd v
Mirrlees Watson and Yaryan Co Ltd
(1894) 2 SLT 149...............................................................................4.004, 4.016
Tesco Stores Ltd v Brent LBC [1997] 1 WLR 1037..............................................12.126
Tesco Supermarkets Ltd v Nattrass [1972] AC I53 ..................................12.122, 12.123
Tett v Phoenix Property and Investment Co Ltd (1986) 2 BCC 99 .......................14.072
The Peninsular and Oriental Steam Navigation Company v
Eller and Co [2006] EWCA Civ 432 ...........................................................9.062
The Tjaskemolen [ 1997] 2 Lloyd's Rep 465 ............................................................3.046
Thoars, Reid v Ramlort Ltd (No 2) [2005) I BCLC 331 ......................................20.154
Thomas Gerrard & Son Ltd, Re [1968] Ch 455 ........................................l l.126, 11.127
Thomas Logan Ltd v Davis (191 I) 104 LT 914.......................................................6.029
Thompson vThe Renwick Group plc [2014] 2 BCLC 97 .......................................3.070
Thorn EMI pie, Re (1988) 4 BCC 698 ..................................................................15.024
Tiessen v Henderson [1899) I Ch 861 .....................................................................9.053
Tillet v Nixon (1883) 25 Ch 238 ...............................................................18.003, 18.007
Tilt Cove Copper Co Ltd, Re [ 1913] 2 Ch 588, Ch D ...........................................18.080
Time Utilising Business Systems Ltd, Re [1990] BCLC 568 .................................7.124
Tito v Waddell (No.2) [1977) Ch 106 ......................................................................8.075
Top Brands Ltd v Sharma [2015] 2 All ER 581.....................................................20.046
Towers v African Tug Co [1904) 1 Ch 558 ............................................................10.040
Trade Auxiliary Co v Wickers (1873) 16 Eq 303 .....................................18.009, 18.079
Transatlantic Life Assurance, Re [1980] 1 WLR 79 ..............................................14.104
Transvaal Lands Co v New Belgium (Transvaal)
Land Development Co [1914] 2 Ch 488 .................... 8.073, 8.076, 8.163, 8.176
Trevor v Whitworth (1887) LR 12 App Cas 409 ......................................15.001, 15.059
Trix Ltd, Re [ 1970] I WLR 1421...........................................................................I 9.020
Trustor AB v Smallbone (No.2) [2001] 1 WLR 1177 ......................3.025, 3.028, 3.046,
3.068, 3.069
cxvi TABLE OF CASES

TseKwong Lam v Wong Chit Sen [1983] 3 All ER 54 ..........................................18.053

TTL Realisations Ltd, Re [2000] BCC 998 .............................................................7.132
Turquand v Marshall (1868-<59)LR 4 Ch App 376 .................................................8.138
Twinsectra Ltd v Yardley [2002] 2 AC 164 ..............................................................8.202
Twycross v Grant (I 876-77) LR 2 CPD, 469 ..........................................................2.098
Tyler, Re [1907] I KB 865 ......................................................................................18.106
UBS AG (L-0ndonBranch) v Kommunale Wasserwerke Leipzig Gmbh
[2017] 2 Lloyd's Rep 621 ...........................................................................12.l 11
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 .................................. 7.014, 8.017
8.018, 8.077, 8.179
Union Accident Insurance Co Ltd, Re [1972] 1 All ER 1105 ..................20.080, 20.091
Union Accident Insurance Co Ltd, Re [1972) 1 WLR 640.................................... 19.l 12
Unisoft Group Ltd (No.3), Re [1994] 1 BCLC 609............................................... 10.146
Uniq pie, Re [2012] 1 BCLC 783 ..........................................................................14.164
Urquhart v Macpherson (1878) 3 App Cas 831 .....................................................16.058
Vandepitte v Preferred Accident Insurance Corp of New York
[1933] AC 70 ..............................................................................................17.031
Vandervell's Trusts, Re [I 974] Ch 269 .....................................................................4.018
Vane v Yiannopoullos [1965) AC 486 ....................................................................12.126
Vatcher v Paull (I 915] AC 372, .................................................................10.021, 10.128
Vehicle Inspectorate v Nuttall [1999] 3 All ER 833 ................................................ 1.173
Vic Spence Associates v Balchin 1990 SLT 10 .......................................................4.030
Victoria Steamboats Ltd, Re [I 897] 1 Ch 158 ..........................................17.091, 18.007
Vimbos Ltd, Re [1900) 1 Ch 470 ...........................................................................18.038
Vincent v Premo Enterprises (Voucher Sales) Ltd
[1969] 2 QB 609 .........................................................................................12.047
Viola v Anglo-American Cold Storage Co (1912] 2 Ch 305 ................................. 18.104
Virdi v Abbey Leisure Ltd (1990] BCLC 342 ....................................................... 10.160
Vivendi SA v Richards (2013] BCC 771 .................................................................8.018
VTB Capital pie v Nutritek Intl Corp (2013] 2 AC 337 ...............................3.024, 3.048
Vujnovich v Vujnovich, Re [1990] BCLC 227 ......................................................10.239
W & M Roith Ltd, Re [1967] 1All ER 427 .................................15.003, 15.008, 15.017
W B Anderson and Sons Ltd v Rhodes (Liverpool) Ltd
[ 1967] 2 All ER 850 ...................................................................................12.110
Walker and Smith Ltd, Re (1903) 72 LJ Ch 572 ....................................................15.043
Walker v Linom [1907] 2 Ch 104 ..........................................................................17.193
Walker v London Tramways (1879) 12 Ch D 705 ...................................................5.047
Wall v London and Northern Assets Corp [ 1898] 2 Ch 469 ................................. 10.127
Wallace v Evershed [1899] 1 Ch 891 .....................................................................17.104
Wallace v Universal Automatic Machines
[1894] 2 Ch 547 ..........................................................................................17.091
Wallersteiner v Moir (No.2) [1975) QB 373.............................................l 0.043, 10.047
Ward v Royal Exchange Shipping Co Ltd, ex p Harrison
( 1887) 6 Asp MLC 239 ..............................................................................17.202
Warehousing & Fotwarding Company of East Africa Ltd v
Jatferali (1964] AC 1 .................................................................................... 4.047
Warner Bros Records Inc v Rollgreen Ltd (1976] QB 430 ................................... 17.199
 TABLEOF CASES cxvii

Watson v Davies [1931] I Ch 455 ............................................................................4.047

Watson v Duff Morgan and Vermont (Holdings) Ltd [1974] I WLR 450 ............ 17.160
Watts v Midland Bank pie [1986] BCLC 15..........................................................18.021
Webb Hale & Co v Alexandra Water Co (1905) 21 TLR 572 .................. 13.038, 14.050
Webb v Earle (1875) LR 20 Eq 556 ..................................................................................
[1988] 1 Lloyd's Rep 45 ...................................................10.127, 17.128, 13.049
Weddell v JA Pearce & Major [1988] Ch 26 ........................................................17.199
Welch v Bank of England [1955] Ch 508 ..............................................................14.078
Welsh Development Agency v Export Finance Co Ltd
[1992] BCC 270 ...............................................................13.0l l, 13.012, 17.130
Welsh Irish Ferries Ltd, Re [ 1986] Ch 471 ............................................................17.128
Welton v Saffery [ I 897] AC 299 ..............................................................................5.085
Weniger's Policy Re [1910] 2 Ch 291 .......................................................17.192, 17.201
West Canadian Collieries Ltd, Re [1962] 1 Ch 370 .................................................9.062
West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250 ................8.042, 19.114
West v Blanchet (2000] 1 BCLC 795 .......................................................................l .213
Westmid Packing Services Ltd, Re (No.2) [1998] 2 BCLC 646 .............................8.150
Westmid Parking Services Ltd, Re (1998] 2 All ER 124.........................................7.126
Wheatley v Silk.stoneand Hagh Moor Coal Co
( 1885) 29 Ch D 715 ....................................................................................17.197
White Star Line Ltd, Re (1938] Ch 458 .................................................................14.044
White v Bristol Aeroplane Co [1953] Ch 65 .........................................................14.200
Wilson Brothers and D G Howatt and Co Ltd, Re 1939 SLT 68 ...........................14.179
Will v United Lankat Plantations Co Ltd [1914] AC l l.. ...................................... 13.050
Wills v Wood (1984) 128 Sol Jo 222 .....................................................................20.l 79
William C Leitch Bros (No.2), Re (1933] Ch 261 .................................................20.l 77
William Hockley Ltd, Re [1962] 2All ER 11l.. .................................................... 20.076
Williams v Redcard Ltd [2011] 4 All ER 444 .......................................................12.045
Wilson v Kelland [ 19I O]2 Ch 306 ........................................................................17.193
Wilson v London Midland & Scottish Rly Co (I 940) I Ch 393 .............................9.098
Wilton-Davies v Kirk [1997] BCC 770 ....................................................18.009, 18.010
Winsor v Schroeder (1979) 129 NLJ 1266 ..............................................................1.035
Winter v Inland Revenue Commissioners [1963] AC 235 ....................................20.076
Wood v Odessa Waterworks Co (1889) 42 Ch D 636....................5.028, 10.120, 15.144
Woodroffes (Musical Instruments) Ltd, Re
[1986] Ch 366 ...................................................................17.089, 17.091, 17.220
Woolfson v Strathclyde Regional Council
1978 38 P & CR 52l ....................................................................................3.026
Woolfson v Strathclyde Regional Council (1978) SC 90 ........................................3.066
Woolwich v Milne [2003] EWHC 414 ..................................................................10.197
Worcester Corsetry Ltd v Witting
[1936] 1 Ch 640..........................................................6.003, 6.013, 6.014, 6.015
Working Project Ltd, Re [1995] 1 BCLC 226 .......................................................20.2l6
Worldhams Park Golf Course Ltd, Re [1998] 1 BLCL 554 ..................................18.010
Wragg Ltd, Re [1897] I Ch 796 .............................................................................14.044
Wrexham Association Football Club Ltd v
Crucialmove Ltd [2008] 1 BCLC 508 .......................................................12.083
cxviii TABLE OF CASES

Wrightv Horton (1887) 12App Cas 371 .................................................. 17.175, 17.178

Wyatt, Re [1892) 1 Ch 188..................................................................................... 17.201
Yeung Kai Yung v Hong Kong and
Shanghai Banking Corp [1981) AC 787 ......................................... 3.013, 14.079
Yokong Line Ltd of Korea v
Rendsburg Investments Corp of Liberia (No.2)
[1998) 4 All ER 82 ..................................................................................... 19.l 14
Yorkshire Bank pie v Hall [ 1999) 1 WLR 1713 .................................................... 18.059
Yorkshire WoolcombersAssn Ltd, Re [1903) 2 Ch 284 ......................................... 17.071
Young v South African and Australian Exploration and
Development Syndicate [1896) 2 Ch 268 ....................................... 8.191, 10.127
Yukong Line Ltd of Korea v
Rendsburg Investments Corp of Liberia (No.2)
[1998) 1 WLR 294 ................................................................ 3.026, 3.045, 3.046,
3.048, 8.018, 8.025, 8.038

United States of America

Basic Inc v Levinson 485 US 224 (1988) .............................................................. 16.135
Bastian v Petren Resources Corp 892 F 2d 680
(7th Cir 1990) ............................................................................................. 16.077
Benedict v Ratner 268 US 354 (1925) ................................................................... 17.068
Federal Deposit Insurance Corp v Bierman 2 F 3d 1424 ........................................ 8.150
Geilfuss v Corrigan 95 Wis 651 (1897) ................................................................. 17.068
James Wilson Associates, Re 965 F 2d 160 (7th Cir, 1992) .................................. 19.l 07
Paramount Communications Inc vTimes Inc 571 A 2d 1140 (1989) ..................... 8.030
Weinberger v UOP Inc (1983) 457 A 2d 701 ........................................................... 5.067
 TABLE OF LEGISLATION

Hong Kong CompaniesOrdinancesand Legislation

Companies Ordinance (Cap.622) ........................................... 1.003, 1.004, 1.013, 1.014,
1.015, 1.021, 1.022, 1.064, 1.167, 10.068,
1.071, 1.113, 1.114, 1.118, 1.119,
1.128, 1.129, 1.130, 1.131, 1.142,
1.171, 1.172, 1.173, 1.179, 1.180,
1.179, 1.182, 1.184, 1.185, 1.186,
1.191, 1.192, 1.193, 1.202, 1.203,
2.002, 2.003, 2.004, 2.006, 2.012,
2.031, 2.033, 2.035, 2.036, 2.039,
2.040, 2.041, 2.046, 2.047, 2.051,
2.059, 2.068, 2.071, 2.072, 2.083,
2.084, 3.022, 3.071, 3.072, 5.001,
5.003, 5.004, 5.025, 5.047, 5.049, 5.051,
7.039, 7.043, 7.102, 7.105, 7.106, 7.113,
8.003, 8.010, 9.009, 10.003, 10.048,
10.134, I 1.001, I 1.018, 14.002, 14.006,
16.003, 17.001, 17.060, 17.ll4, 20.006
Pt. l ............................................................................................................ 1.13 l
Pt.2 ............................................................................................... 1.132, 17.141
Pt.3 ................................................................................................. 1.134, 5.003
Pt.4 ............................................................................................................ 1.136
Pt.4 Div.2................................................................................................. 14.024
Pt.4Div.7 .......................................................... 10.004, 10.101, 10.102, 14.191
Pt.5 ................................................................................................. 1.138, 1.184
Pt.5 Div.2.................................................................................... 15.l 16, 15.117
Pt.5 Div.3....................................................................... 14.179, 15.022, 15.136
Pt.5 Div.4............................................. 15.066, 15.078, 15.082, 15.136, 15.152
Pt.5 Div.5................................................................................................. 15.l 17
Pt.6 .................................................................... 1.141, 15.149, 15.151, 15.153,
15.163, 15.165, 15.168
Pt.7 ..................................................................... 1.142, 17.001, 17.002, 17.021
Pt.8 ....................................................... 1.143, 17.001, 17.106, 17.141, 17.177,
17.178, 17.179, 17.186, 17.188,
17.207, 20.163
Pt.9 .......................................................... 1.144, 2.068, 11.071, 11.072, 11.073
Pt.9 Div.4.................................................................................... 15.161, 15.162
Pt.9 Div.6................................................................................................. 11.049
Pt. I 0 .......................................................................................................... 1.146
Pt.11 .............................................................. 1.148, l.149, 2.053, 8.088, 8.012
Pt.11 Div.................................................................................................... 8.106
Pt. I I Div 2 ................................................................................................. 8.098
Pt.12 .......................................................................................................... 1.150
cxx TABLE OF LEGISLATION

Pt.12 Div.l .................................................................................... 9.125, 11.103

Pt.12 Div.2 .................................................................................... 1.169, 14.115
Pt.13 ........................................................................ l .152, 1.153, 2.073, 2.079,
15.022, 15.031, 19.005
Pt.13 Div.2 ........................................... 14.163, 14.164, 15.136, 19.009, 19.042
Pt.13 Div.3 ................................................................................... 14.183,14.184
Pt.13 Div.4 ............................................................................................... 14.176
Pt.13 Div.5............................................................................................... 15.088
Pt.14 ....................................................................... 1.154, 2.068, 10.003, 10.13
Pt.14 Div.2........................................................ 10.006, JO.IOI, 10.102, 10.133
Pt.14Div.3 .............................. 10.006, 10.101, 10.102, 10.127, 10.133, 10.245
Pt.14 Div.4 ............................................................................................... 10.051
Pt.14Div.5 ..................................................................... 10.101, 10.102, 10.131
Pt.15 .......................................................................................................... 1.156
Pt.16 ...................................................................... 1.157, 2.067, 2.069, 17.137,
16.098, 17.179, 17.181
Pt.17 ............................................................. 1.158, 2.076, 2.077, 2.079, 2.080,
2.08 I, 2.082, 2.083
Pt.18 ............................................................................................... 1.159, 9.045
Pt.18, Div.3 ................................................................................................ 9 .137
Pt.18, Div.4 ................................................................................................ 9.137
Pt.19 ............................................................. 1.160, 1.191, 1.192, 1.203, 7.127,
9 .045, 11.050, 10.140
Pt.20 ............................................................................................... 1.162, 1.170
s.2 ...................................................... 1.004, 1.132, 2.058, 2.06 I, 2.062, 2.067,
2.069, 7.005, 7.007, 7.013, 7.037, 8.018,
8.021, 8.097, 8.193, 10.050, 10.051,
10.073, 10.073, I0.248, 13.037, I 4.020,
14.033, 14.101, 14.123, 14.143, 14.184,
15.066, 15.085, 17.005, 17.037, 17.142
s.2(1) ........................................................................................... 11.068, 14.103
s.2(4)(a) ..................................................................................................... 9.045
s.2(4)(b) ........................................................................................ 9.045, 11.050
s.2(4)(c) ........................................................................................ 9.045, 11.050
s.3 ................................................................. 1.131, 1.173, 3.071, 7.031, 8.018,
12.043, 12.129, 14.105, 15.020, 17.044
s.5 ............................................................................................................ 11.067
s.5(5)(a) ................................................................................................... 11.068
s.5(5)(b) ................................................................................................... l l.068
s.5(7) ........................................................................................................ 11.070
s.7 .............................................................................................................. 3.013
s.8 ........................................................................................ 2.044, 3.010, 3.013
s.9 ........................................................................................ 2.044, 3.011, 3.013
s.10 ...................................................................................... 2.047, 3.012, 3.013
s.l l .......................................................... 2.056, 2.057, 14.069, 14.070, 14.073
s.11(1) ............................................................................................. 2.049, 2.056
s.ll(l)(a) ................................................................................................... 2.050
 TABLE OF LEGISLATION cxxi

s.l l(l)(a)(i) ............................................................................................... 8.058

s.l l(l)(b) ................................................................................................... 2.050
s.12 ...................................................................................... 1.131, 2.041, 2.051
s.12(b) ........................................................................................................ 2.050
s.13 ............................................................................................... 2.019, 15.097
s.13( l ) ........................................................................................................ 2.019
s.13(3) ........................................................................................................ 2.019
s.J3(4) ........................................................................................................ 2.019
s.14 ............................................................................................... 2.019, 15.097
s.15 ............................................................................................... 2.019, 15.097
s.16 .......................................................................................................... 11.006
s.21 ............................................................................................................ 1.179
s.24 .......................................................................................................... 14.l 15
s.24(3) ...................................................................................................... 14.l 15
s.24(5) ...................................................................................................... 14.I 15
s.27 ............................................................................................... 1.132, 17.142
s.30 ............................................................................................................ 2.089
s.31 ............................................................................................... 1.132, 17.141
s.32 ................................................................................................. 1.132, 2.012
s.33 ............................................................................................................ 1.132
s.34 ............................................................................................................ 1.132
s.35 ............................................................................................... 1.132, 17.141
s.36 ............................................................................................................ 1.132
s.37 ............................................................................................................ 1.132
s.38 ............................................................................................................ 1.132
s.45 .................................................................................. 1.180, 11.056, 17.142
s.45(2) ........................................................................................................ 2.072
s.47 ............................................................................................................ 1.133
s.48 ............................................................................................................ 1.133
s.49 ............................................................................................................ 1.133
s.50 ............................................................................................................ 1.133
s.51 ............................................................................................................ 1.133
s.52 ............................................................................................................ 1.133
s.53 ............................................................................................................ 1.133
s.54 ............................................................................................................ 1.133
s.55 ............................................................................................................ 1.133
s.56 ............................................................................................................ 1.133
s.57 ............................................................................................................ 1.133
s.58 ............................................................................................................ 1.133
s.59 ............................................................................................................ 1.133
s.60 ............................................................................................................ 1.I 33
s.66 ...................................................................................... 2.040, 2.042, 3.009
s.67 ................................................................................................. 2.002, 2.018
s.67(l)(a) ................................................................................................... 2.009
s.67(l)(b ......................................................................................... 2.010, 2.015
s.67(2) ........................................................................................................ 2.002
s.68(2) ........................................................................................................ 2.005
cxxii TABLE OF LEGISLATION

s.69 ............................................................................................................2.010
s.70 ............................................................................................................2.01 l
s.71 .................................................................................................1.180, 2.016
s.72 ............................................................................................................2.016
s.73 ............................................................................................................2.016
s.74 .................................................................................................2.010, 7.032
s.75 ..........................................................................................................10.126
s.76 ............................................................................................................2.009
s.77 ............................................................................................................2.009
s.78 .................................................................................................2.008, 8.085
s.79 ............................................................................................................2.008
s.80 ............................................................................................................2.008
s.81 .................................................................................................2.005, 2.008
s.82 .................................................................................................2.008, 5.016
s.82(1).............................................................................................2.006, 2.086
s.82(2)........................................................................................................2.006
s.83 ............................................................................................................2.008
s.83(1) ........................................................................................................2.005
s.84 ............................................................................................................2.008
s.84(1)........................................................................................................2.005
s.85 ...............................................................................................2.008, 14.020
s.85(2).........................................................................................14.009, 14.021
s.86 ........................................................................ 5.026, 5.036, 5.037, 10.114,
10.117, 10.125, 10.126
s.86(2)...........................................................................................5.035, I0.116
s.87 .................................................................................................5.045, 6.012
s.88 .................................................................................................5.045, 6.012
s.88(3)......................................................5.045, 9.110, 14.009, 14.021, 14.030
s.88(5)........................................................................................................5.045
s.89 .................................................................................................5.051, 6.012
s.92 ............................................................................................................5.048
s.94 ............................................................................................................2.056
s.94(2)........................................................................................................2.056
s.95 ............................................................................................................2.057
s.98 ......................................................................................1.134, 2.003, 5.003
s.98(4) ......................................................................................... 14.006, 14.008
s. l 00 ..........................................................................................................2.087
S.100(1)(C).................................................................................................2.089
s. l 00( 1)(d) .................................................................................................2.089
s.100(2) ...........................................................................................2.088, 2.089
s.101 ..........................................................................................................2.088
s.102 ....................................................................................2.084, 2.085, 2.086
s.102(c) ......................................................................................................2.084
s. l 03 ............................................................2.006, 2.085, 2.086, 2.093, 12.088
s.103(2) ......................................................................................................5.016
s.103(3) ......................................................................................................2.086
s. l 03(4) ......................................................................................................2.086
 TABLE OF LEGISLATION cxxiii

s.104A ..................................................................................................... 17.020

s.107 .................................................................................... 2.095, 6.012, 9.110
s.107(2) ...................................................................................................... 2.095
s.107(5) ...................................................................................................... 2.096
s. I 08 .......................................................................................................... 2.089
s. I 08(2) ...................................................................................................... 2.089
s.108(3)(a) ................................................................................................. 2.089
s.108(3)(b) ................................................................................................. 2.089
s.108(3)(c) ................................................................................................. 2.089
s. I 09 .......................................................................................................... 2.089
s. l 09(3) ...................................................................................................... 2.090
s.110 .......................................................................................................... 2.091
s.111 ............................................................................................. 2.087, 11.073
s.l l 1(4)...................................................................................................... 2.087
s.l I 1(6)(c) ................................................................................................. 2.087
s.ll2 .........................................2.083, 10.140, 13.037, 13.038, 14.020, 14.101
s.112(3) .................................................................................................... 14.048
s.113 .................................................................................. 2.019, 2.083, 15.062
s.113(2) .................................................................................................... 15.062
s.l 13(4).................................................................................................... 15.062
s.113(5) .................................................................................................... 15.062
s. l 13(7).................................................................................................... 15.063
s.113(9) .................................................................................................... I 5.063
s. l 13(1l) .................................................................................................. 15.062
s.115 ....................................................................... 3.004, 5.016, 5.018, 10.018
s.115(1) ........................................................................................... 5.017, 5.018
s.115(2) ..................................................................................................... .3.005
s.116 ........................................................................................................ 10.131
s.l 16(1)..................................................................... 5.016, 5.020, 5.021, 5.023
s.II6(2) .................................................................... .5.016, 5.020, 5.021, 5.023
s.116(3) ........................................................................................... 5.016, 5.023
s.116(4) ...................................................................................................... 5.023
s.116(5) ........................................................................................... 5.016, 5.020
s.117 ....................................................... 1.134, 5.021, 12.082, 12.085, 12.086,
12.088, 12.089, 12.100
s.117(1) ......................................................................................... 9.079, 12.082
s. l l 7(l)(b) ............................................................................................... 12.083
s.117(2)(a) ............................................................................................... 12.083
s. l l 7(2)(b) ................................................................................................. 9.079
s.117(2)(c) .................................................................................... 9.079, 12.084
s.117(2)(d) ............................................................................................... 12.084
s.117(6) .................................................................................................... 12.087
s.118 ................................................................................ 1.134, 12.082, 12.088
s.118(3) .................................................................................................... 12.088
s.118(4) ....................................................................................... 12.088, 12.089
s.118(8) .................................................................................................... I2.088
s.118(10) .................................................................................................. 12.088
cxxiv TABLE OF LEGISLATION

s.119 ................................................................... 1.134, 12.082, 12.089, 12.100

s.120 ................................................................................ 5.022, 12.025, 12.070
s.121 ........................................................................................... 12.001, 12.004
s.121(2) ....................................................................................... 12.001, 12.002
s.121(3) ....................................................................................... 12.00I, 12.003
s.121(4) ....................................................................................... 12.001, 12.003
s.122 ........................................................................ 4.002, 4.016, 4.019, 4.022,
4.023, 4.024, 4.025, 4.026,
4.028, 4.033, 4.035,
4.043, 4.047, 4.050
s.122( 1) ..................................................................................................... .4.049
s.122(2) ......................................................... .4.024, 4.037, 4.048, 4.049, 4.050
s. I22(3) .................................................................... .4.024, 4.034, 4.045, 4.046
s.122(4) ..................................................................................................... .4.053
s.124( I) ......................................................................................... 2.035, 12.041
s.124(2) ....................................................................................... 12.041, 12.043
s.124(3) .................................................................................................... 12.043
s.124(4) .................................................................................................... 12.043
s.125 ............................................................................................... 1.134, 2.035
s.125( I) ...................................................................................................... 2.036
s.125(2) ...................................................................................................... 2.037
s.125(3) .................................................................................................... 12.051
s.125(4) .................................................................................................... 12.05I
s.125(5) .................................................................................................... 12.051
s.126 ............................................................................................. 2.038, 12.052
s.127 ................................................................. 12.045, 12.046, 12.047, 12.097
s.127(1) .................................................................................................... 12.045
s. I27(3) ............................................................... I. J34, 12.001, 12.003, 12.045
s.127(3)(a) ............................................................................................... 12.045
s. I27(3)(b) ............................................................................................... 12.045
s.127(3) .................................................................................................... 12.094
s.127(5) .................................................................................................... 12.045
s. I27(6) ............................................................. 12.094, 12.095, 12.096, 12.097
s.127(7) ....................................................................................... 12.094, 12.095
s.128( I) .................................................................................................... 12.046
s.128(2) .................................................................................................... 12.047
s.129 ........................................................................................................ 12.051
s.129(1) .................................................................................................... 12.049
s.129(2) .................................................................................................... 12.049
s.131 .......................................................................................................... 2.054
s.132 .......................................................................................................... 2.054
s.133 .......................................................................................................... 2.054
s.134 ........................................................................................................ 13.040
s.135 .......................................................................................................... 1.137
s.136 ........................................................................................................ 14.137
s.136(2) .................................................................................................... I I .082
s.137 ........................................................................................................ 14.138
 TABLE OF LEGISLATION cxxv

s.138 ............................................................................................. 1.137, 13.062

s.139 ............................................................................................. 1.137, 13.056
s.139(2) .................................................................................................... I 3.059
s.139(5) .................................................................................................... 13.060
s.140 .............................................................................. 14.026, 14.027, 14.028
s.140(l)(b) .................................................................................. 14.027, 17.013
s.140(2)(d) ............................................................................................... 17.013
s.140(4) .................................................................................................... 14.028
s.140(5) .................................................................................................... 14.028
s.140(6) .................................................................................................... 14.028
s.141 ................................................................. 14.026, 14.028, 14.030, 17.013
s.141(3)(a) ............................................................................................... 14.026
s.141(3)(b) ............................................................................................... 14.026
s.141(3)(c) ............................................................................................... 14.026
s.142 ........................................................................................... 14.034, 17.022
s. l 42(2)(b) ............................................................................................... 14.034
s.142(3) .................................................................................................... 14.034
s.142(4) .................................................................................................... 14.034
s.142(5) .................................................................................................... 14.034
s.142(6) .................................................................................................... 14.034
s.143 ........................................................................................... 14.033, 17.024
s.144 ............................................................................................. 2.017, 14.035
s.144(1) .................................................................................................... l4.l33
s.146 ........................................................................................................ 14.045
s.150 ........................................................................................... 14.051, 14.053
s.151 ................................................................................ l.137, 14.051, 14.055
s.151(3) .................................................................................................... 14.076
s.152 ........................................................................................... 14.051, 14.074
s.153 ........................................................................................... 14.05l, 14.085
s.154 ........................................................................................... 14.051, 14.058
s.154(1) .................................................................................................... l4.058
s.154(2) .................................................................................................... 14.058
s.154(4) .................................................................................................... 14.058
s.155 .............................................................................. 14.051, 14.056, 14.134
s.156 ........................................................................................................ 14.051
s.157 ........................................................................................... 14.051, 14.078
s.158 ........................................................................................... 14.087, 14.093
s.158(4) .................................................................................................... 14.087
s.160 ........................................................................................................ 14.088
s.161 ........................................................................................................ 14.084
ss.162-169 ............................................................................................... I 4.I 42
s.162 .............................................................................. 14.144, 14.146, 14.147
s.163(1) .................................................................................................... 14. I44
s.163(2) .................................................................................................... 14.I 45
s.164 ........................................................................................................ 14.145
s.165 ........................................................................................................ 14.145
s.165(3) .................................................................................................... 14.145
cxxvi TABLE OF LEGISLATION

s.167 ........................................................................................................14.146
s.167(1) ....................................................................................................14.147
s.167(2) .......................................................................... 14.146, 14.147, 14.148
s.167(3) ....................................................................................................14.147
ss.168 ....................................................................................................... 14.146
s. l 68(2) ....................................................................................................l 4. l 46
s.168(3) ....................................................................................................14.146
s.168(4) .......................................................................................14.146, 14.148
s.170 ................................................................................6.012, 14.149, 14.151
s.170( I)(t)(i) ............................................................................................14.I 54
s.170( 1)(f)(ii) ...........................................................................................14.154
s. l 70(2)(a) ...............................................................................................14.l 50
s. I70(2)(b) ...............................................................................................14.151
s. l 70(2)(c) ...............................................................................................14.l 5 l
s.170(2)(d) ...............................................................................................14.l 52
s.170(2)(e) ..................................................................................14.155, 14.159
s.170(5) ....................................................................................................14.160
s. I70(8) ....................................................................................................14.149
s.171 ...........................................................................................14.155, 14.159
ss. I 74-l 75 ...............................................................................................13.062
ss.176-184 .....................................................................14.190, 15.030, 15.031
s.177 ...........................................................................................10.231, 14.198
s.177( I)(t) ................................................................................................I0.239
s.178 ........................................................................................................ 14.193
s.178( 1) ....................................................................................................14.193
s. l 78(2) ....................................................................................................14. l 94
s.180 ..................................................................................5.049, 9.013, 15.031
s.180(1) .......................................................................................14.192, 15.031
s.180(l)(a) ...............................................................................................14.203
s.180( 1) ....................................................................................................14.204
s.180(2) ....................................................................................................I4.205
s.180(3) ....................................................................................................15.031
s.180(4) ....................................................................................................14.206
s.180(5) ....................................................................................................14.202
s.181 .............................................................................................5.049, 14.206
s.182 .............................................................................................5.049, 14.208
s.182(1) ....................................................................................................14.208
s.182(2) ....................................................................................................l 4.208
s.182(7) ....................................................................................................14.208
s.183 ..........................................................................................................5.049
s.184 .............................................................................................5.049, 14.206
s.185 ..................................................................................1.137, 5.049, 14.191
s.186 .................................................................................. 1.137, 5.049, 14.191
s.187 ..................................................................................1.137, 5.049, 14.191
s.188 ..................................................................................l.137, 5.049, 14.191
s.189 .................................................................................. 1.137,5.049, 14.191
s.190 ..................................................................................l.137, 5.049, 14.191
 TABLE OF LEGISLATION cxxvii

s.191 .................................................................................. l.137, 5.049, 14.191

s.192 .................................................................................. 1.137, 5.049, 14.191
s.193 ........................................................................................................ 14.201
s.200(a) .................................................................................................... 14.04 l
s.20 I ........................................................................................... 14.034, 14.206
s.205 ................................................................. 15.050, 15.051, 15.052, 20.187
s.206 ........................................................................................... 15.052, 20.187
s.206(1) .................................................................................................... 15.048
s.206(2) .................................................................................................... 15.049
s.207 ........................................................................................... 15.048, 15.052
s.209 .......................................................................................................... 2.048
s.210 .................................................... 15.012, 15.018, 15.019, 15.020, 15.045
s.210(1) .......................................................................... 15.018, 15.019, 15.038
s.210(3) .................................................................................................... 15.021
s.211 ........................................................................................... 15.018, 15.019
s.21 l(a) .................................................................................................... 15.045
s.21 l(b) .................................................................................................... 15.021
s.212 ............................................................................... 2.048, 10.018, 15.012,
15.016, 15.048, 15.052
s.213 ........................................................................................................ 15.044
ss.215-225 ............................................................................................... 15.046
s.215 ........................................................................................... 15.020, 15.046
s.215(2) .................................................................................................... I 5.046
s.216 ........................................................................................... 15.046, 14.186
s.216(1) ....................................................................................... 15.047, 15.052
s.216(2) .................................................................................................... 15.053
s.217(2) .................................................................................................... 15.053
s.217(3) .................................................................................................... I 5.053
s.217(4) .................................................................................................... 15.053
s.217(5) .................................................................................................... 15.053
s.218 ............................................................................................. 9.II0, 15.046
s.218(1) .................................................................................................... 15.054
s.218(2) .................................................................................................... I 5.054
s.218(3) .................................................................................................... 15.053
s.220 ........................................................................................................ 15.046
s.220(1) .................................................................................................... 15.053
s.222(1) .................................................................................................... 15.053
ss.223-225 ............................................................................................... I 5.046
s.223 ........................................................................................................ 15.057
s.224 ........................................................................................... 15.056, 15.058
s.225 ........................................................................................... 15.057, 15.058
s.226 ........................................................................................... 15.020, 15.031
s.226(1) ....................................................................................... 15.021, 15.023
s.226(2) .................................................................................................... 15.033
s.226(3) .................................................................................................... I 5.035
s.226(4) .................................................................................................... I 5.033
s.227 ........................................................................................... 15.033, 15.038
cxxviii TABLE OF LEGISLATION

s.227(2) ....................................................................................................l 5.033

s.229 ...........................................................................................15.020, 15.033
s.230 ........................................................................................................15.040
s.230(4) ....................................................................................................15.041
s.230(5) ....................................................................................................l 5.042
s.231 ........................................................................................................15.043
s.232 ........................................................................................................15.044
s.233 ...........................................................................................15.059, 15.066
s.234 ........................................................................................................13.052
s.234(1) ....................................................................................................l 5.066
s.234(3) .......................................................................................13.054, 15.066
s.235 ........................................................................................................15.067
s.236 ........................................................................................................15.080
s.236(2) ....................................................................................................15.080
s.236(3) .......................................................................................l 5.059, 15.081
s.236(4) ....................................................................................................15.059
s.237 ........................................................................................................15.096
s.238-240 ................................................................................................15.084
s.238(1) ....................................................................................................15.086
s.238(2)(a) ...............................................................................................15.087
s.238(2)(b) ...............................................................................................15.087
s.238(3)(a) ...............................................................................................15.088
s.238(3)(b) ...............................................................................................15.088
s.238(4) ....................................................................................................15.088
s.238(6) ......................................................................................15.085., 15.088
s.239(1) ....................................................................................................15.085
s.239(2) ....................................................................................................15.085
s.239(3) ....................................................................................................I 5.085
s.239(4) ....................................................................................................15.085
s.240(1) ....................................................................................................15.089
s.240(3)(a) ...............................................................................................15.089
s.240(3)(b) ...............................................................................................15.089
ss.240(4)-240(6) .....................................................................................15.089
s.244 ........................................................................................................15.092
s.246 ........................................................................................................15.092
s.247 ........................................................................................................15.093
s.248 ........................................................................................................15.093
s.249 ........................................................................................................15.093
s.250 ........................................................................................................15.093
s.251 ........................................................................................................15.093
s.252 ........................................................................................................15.093
s.253 ........................................................................................................15.093
s.254 ........................................................................................................15.093
s.255 ........................................................................................................15.093
s.256 ........................................................................................................15.093
s.257 ...........................................................................................13.054, 15.093
s.257(2) .......................................................................................15.068, 15.093
 TABLE OF LEGISLATION cxxix

S.257(2)(C)............................................................................................... 20.187
s.257(3) .................................................................................................... 15.097
s.258 .............................................................................. 13.054, 15.069, 20.187
s.258(2) .................................................................................................... 15.097
s.259 ........................................................................................................ 20.187
s.259(1) .................................................................................................... 15.069
s.259(2) .................................................................................................... 15.069
s.260 ........................................................................................... 15.069, 20.187
s.261 .............................................................................. 13,053, 15.072, 20.187
s.262 .............................................................................. 13,053, 15.072, 20.187
s.263 ................................................................. 13,053, 15.071, 15.072, 20.187
s.264 ................................................................. 13,053, 15.071, 15.072, 20.187
s.265 ................................................................. 13,053, 15.071, 15.072, 20.187
s.266 ................................................................. 13,053, 15.071, 15.072, 20.187
s.267 ........................................................................................... 15.059, 15.060
s.267(2) ....................................................................................... 15.059, 20.163
s.267(4) ....................................................................................... 15.059, 15.112
s.267(5) .................................................................................................... 20.I 63
s.268 ........................................................................................... 13.054, 15.081
s.269 ........................................................................................................ 13.052
s.269(1) ............................................................. 15.067, 15.072, 15.077, 15.082
s.269(2) .................................................................................................... 15.072
s.269(2)(b) ............................................................................................... 15.077
s.270 ........................................................................................................ 15.095
s.272 ........................................................................................................ 15.111
s.274 ........................................................................................................ 15.106
s.274(1) .................................................................................................... 15.103
s.275 ...................................................... 1.171, 10.018, 15.097, 15.106, 15.120
s.275(1) .................................................................................................... 15.097
s.275(2) .................................................................................................... 15.098
s.275(4) .................................................................................................... 15.l 12
s.276 ............................................................................................. l.175, 15.112
s.277 ........................................................................................... 15.115, 15.136
s.278 .............................................................................. 15.109, 15.115, 15.131
s.280 ................................................................. 15.115, 15.135, 15.136, 15.137
s.280(1) ............................................................. 15.l 15, 15.135, 15.136, 15.137
s.280(1)(b) ............................................................................................... 15.137
s.280(2) .................................................................................................... I 5. I 37
s.281 ........................................................................................... 15.135, 15.137
s.282 ................................................................... 2.059, 15.115, 15.135, 15.135
ss.283-285 .............................................................................................. 15.153
ss.283-289 .............................................................................................. 15.l 16
s.283 ................................................................. 15.115, 15.117, 15.121, 15.130
s.283(1) .................................................................................................... 15.120
s.283( l)(b) ............................................................................................... 15.l l 7
s.283(1)(d) ............................................................................................... I 5.121
s.283(2) .................................................................................................... 15.120
cxxx TABLE OF LEGISLATION

s.283(3) ....................................................................................................15.l 18
s.283(4) ....................................................................................................15.120
s.284 .................................................................15.l 15, 15.122, 15.125, 15.130
s.284(1) ....................................................................................................15.123
s.284( I)(b) ...............................................................................................15.117
s.284(1)(d) ...............................................................................................15.124
s.284(2) ....................................................................................................15.122
s.285 ..............................................................................15.115, 15.122, 15.125
s.285(1) ....................................................................................................15.126
s.285(1)(c) ..................................................................................15.I 17, 15.127
s.285(1)(e)(i) ...........................................................................................15.129
s.285(1)(e)(ii) ..........................................................................................15.130
s.285(2) ....................................................................................................I 5.127
s.285(4) ....................................................................................................15.126
s.286 ...........................................................................................15.115, 15.126
s.286(4) ....................................................................................................15.126
s.287 ...........................................................................................15.l 15, 15.129
s.288 ...........................................................................................15.l 15, 15.129
s.289 ...........................................................................................15.l 15, 15.129
s.290 ...........................................................................................15.152, 15.154
s.290(1) ...................................15.154, 15.157, 15.158, 15.159, 15.161, 15.162
s.291 ........................................................................................................15.155
s.292 ........................................................................................................15.l 55
s.293 ........................................................................................................15.155
s.294 ........................................................................................................15.I 55
s.296 ........................................................................................................15.150
s.297 ........................................................................................................15.163
s.297(1) ....................................................................................................l5.151
s.297(2) ..........................................................................15.154, 15.156, 15.159
s.298 ..............................................................................15.035, 15.157, 15.159
s.298(1) ....................................................................................................15.157
s.301 ...........................................................................................15.168, 15.169
s.301(4) ....................................................................................................15.l69
s.302 ...................................................................15.56, 15.159, 15.160, 15.161
s.303 ........................................................................................................15.163
s.304 ........................................................................................................15.160
s.304(3) ....................................................................................................15.159
s.305 ........................................................................................................15.l62
s.305(2) ....................................................................................................15.162
s.305(3) ....................................................................................................15.162
s.306 ........................................................................................................15.161
s.306(2) ....................................................................................................15.161
s.306(5) .......................................................................................I 5.161, 15.163
s.306(6) ....................................................................................................15.163
s.308 ........................................................................................................17.023
s.309( I) ....................................................................................................17.025
s.309(2) ....................................................................................................17.025
 TABLE OF LEGISLATION cxxxi

s.309(3) .................................................................................................... 17.025

s.309(4) .................................................................................................... l 7.025
s.310 ........................................................................................................ Jl.081
s.310(3) .................................................................................................... 17.026
s.310(4) .................................................................................................... 17.026
s.312 ........................................................................................................ 17.027
s.313 ........................................................................................................ 17.027
s.316 ............................................................................................. 1.142, 17.022
s.316(2) .................................................................................................... 17.022
s.3 I 6(2A) ................................................................................................. I7.022
s.3 l 6(2)(b)(ii) .......................................................................................... 17.022
s.317 ............................................................................................. 1.142, 17.024
s.318 ........................................................................................................ 17.028
s.320 ........................................................................................................ 17.036
s.320(2) .................................................................................................... I7.042
s.321 ........................................................................................................ 17.038
s.321(2) .................................................................................................... 17.038
s.323(1) .................................................................................................... 17.039
s.323(2)(a) ............................................................................................... 17.039
s.323(2)(b) ............................................................................................... 17.039
s.325 ........................................................................................................ 17.043
s.327 ........................................................................................................ 17.0l l
S.328 ........................................................................................................ 17.010
s.330 ........................................................................................................ 17.035
s.331 ........................................................................................................ 17.045
s.331(1) .................................................................................................... 17.045
s.331(3) .................................................................................................... l 7.045
s.331(4)(b) ............................................................................................... 17.045
s.332 ........................................................................................................ 17.032
s.332(1) .................................................................................................... l 7.033
s.332(2)(a) ............................................................................................... 17.034
s.332(2)(b) ............................................................................................... 17.034
s.333(1) ....................................................................................... 17.060, 17.114
s.333(2) .................................................................................................... l 7. l 8 l
s.333(4) .................................................................................................... 17.136
s.334 ...................................................... 1.143, 17.115, 17.117, 17.153, 17.179
s.334(l)(a) ............................................................................................... 17.120
s.334(1)(c) ............................................................................................... 17.125
s.334(l)(d) ............................................................................................... 17.126
s.334( I)( e) ............................................................................................... 17.121
s.334(1)(t) ................................................................................................ 17.I 22
s.334(1)(g) ............................................................................................... 17.I 3 I
s.334(1)(h) ............................................................................................... 17.132
s.334( 1)(i) ................................................................................................ 17.l 33
s.334(1)U)................................................................................... 17.120, 17.134
s.334(2) .................................................................................................... 17.125
s.334(3)(a) .................................................................................. 17.126, 17.128
cxxxii TABLE OF LEGISLATION

s.334(3)(b) ...............................................................................................17.128
s.334(4) ....................................................................................................17.128
s.335 ..................................................................... l.143, 7.123, 17.113, 17.141
s.335(1) ............................................................................l.143, 17.135, 17.136
s.335(2) .......................................................................................17.153, 17.156
s.335(3) ....................................................................................................17.135
s.335(4)(a) ...............................................................................................17.153
s.335(4)(b) ...............................................................................................17.156
s.335(5) .........................................................................................l.143, 17.137
s.335(5)(a)(i) ...........................................................................................17.137
s.335(5)(b)(i) ...........................................................................................17.156
s.335(6) ....................................................................................................17.136
s.335(7) ....................................................................................................17.135
s.336 .............................................................................................7.123, 17.179
s.337 ........................................................................................................ 17.180
s.337(2) ....................................................................................................l 7.044
s.337(4) .........................................................................................l.175, 17.149
s.337(6) ....................................................................................................17.153
s.338 ...........................................................................................17.l 13, 17.166
s.338(2) ....................................................................................................17.166
s.338(3)(a) ...............................................................................................17.166
s.338(3)(b) ...............................................................................................17.166
s.338(5) ....................................................................................................17.167
s.339 ........................................................................................................ 17.179
s.340 ........................................................................................................ 17.I79
s.341 .............................................................................................7.123, 17.157
s.341 (5)....................................................................................................17.157
s.341(6) ....................................................................................................I7.157
s.341(7) ....................................................................................................17.157
s.341(8) ....................................................................................................17.157
s.342 ..........................................................................................................7.123
s.344 ..................................................................... l.143, l.180, 17.138, 17.183
s.344(2) ....................................................................................................l 7 .142
s.344(4) ....................................................................................................17.142
s.345 ........................................................................................... 17.172, 17.183
s.345(3) ....................................................................................................I7 .172
s.345(4) ....................................................................................................17.172
s.346 ........................................................................................................17.183
s.346( 1) .................................................................................................... 17.157
s.346(2) ....................................................................................................17.160
s.346(3) ....................................................................................................I7 .157
s.346(4) ....................................................................................................17.164
s.347 .................................................................17.167, 17.170, 17.171, 17.183
s.347(3) ....................................................................................................l 7.167
s.347(4) ....................................................................................................I7. I7 I
s.351 ........................................................................................................ 17.177
s.351(2) ....................................................................................................17.184
 TABLE OF LEGISLATION cxxxiii

s.352 ........................................................................................................ 17.173

s.352(1) .................................................................................................... l 7. l 76
s.352(2) .................................................................................................... J7.173
s.352(3) .................................................................................................... 17.173
s.353 ........................................................................................................ 17.184
s.353(1) .................................................................................................... 17.184
s.354 ........................................................................................................ 17.176
s.355 .............................................................................. 11.081, 17.178, 17.184
s.355(3) .................................................................................................... 17.178
s.357 ........................................................................................................ 11.106
s.357( 1) ....................................................................................... 11.033, 11.040
s.357(2) ............................................................................ 9 .008, 11.049, 11.117
s.357(3) .................................................................................................... I 1.042
s.357(4)(a) ............................................................................................... 11.033
s.358 ........................................................................................................ 11.071
s.359 .................................................................................. 1.144, 2.053, 11.064
s.359(1) .................................................................................................... l l.058
s.359(1)(a) ............................................................................................... 11.063
s.359(l)(b) ............................................................................................... l l.061
s.359( I)(b )(ii) .......................................................................................... 11.061
s.359(l)(c) ............................................................................................... 11.061
s.359(3) .................................................................................................... l l .060
s.359(3A) ................................................................................................. I I .064
s.359(4) .................................................................................................... 11.062
s.360 ..................................................................... 1.144, 2.053, J 1.061, 11.064
s.361 .................................................................................. l.144, 2.053, 11.060
s.361(1) .................................................................................................... l l .060
s.361(2) .................................................................................................... 11.060
s.361(4) .................................................................................................... 11.060
s.362 ............................................................................................... 1.144, 2.053
s.363 ..................................................................... 1.144, 2.053, 11.063, 11.064
s.364 .................................................................................. 1.144, 2.053, 11.064
s.365 .................................................................................. 1.144, 2.053, 11.064
s.366 .................................................................................. 1.144, 2.053, 11.064
s.366A ..................................................................................................... 11.064
s.367 ............................................................................................. 1.144, 11.019
s.367(1) .................................................................................................... l l.072
s.368 .......................................................................................................... 1.144
s.368(1) ....................................................................................... l l.020, 11.072
s.368( I A) ................................................................................................. 11.020
s.368(2) .................................................................................................... J I .020
s.368(3) .................................................................................................... l l .020
s.369 .......................................................................................................... 1.144
ss.369(1)-369(4) ........................................................................ 11.020, 11.073
s.369(1)(a) ............................................................................................... l l.073
s.369( I)(a)(i) ........................................................................................... 11.073
s.369(l)(b)(i) ........................................................................................... 11.073
cxxxiv TABLE OF LEGISLATION

s.369( 1)(b)(ii) ..........................................................................................11.073

s.369(1)(b)(iii) .........................................................................................l l.073
s.369(1)(b)(iv) .........................................................................................11.073
s.369(2) ....................................................................................................11.073
s.369(2)(iv) ..............................................................................................11.020
s.369(3) ....................................................................................................l l .073
s.369(4) ....................................................................................................11.073
s.369(5) ....................................................................................................l 1.020
s.369(5)(a) ...............................................................................................11.020
s.369(6) ....................................................................................................I I .020
s.370 .............................................................................................1.144, 11.020
s.371 ..........................................................................................................l.144
s.371(1) ......................................................................................................6.012
s.371(5) ....................................................................................................l l.020
s.371(6) ....................................................................................................11.020
s.371(7) ....................................................................................................l l.020
s.373 .........................................7.123, 11.006, 11.014, 11.015, 11.068,20.251
s.373(1) .......................................................................................I 1.0I0, 11.011
s.373(2) .......................................................................................l l.003, 11.012
s.373(3) .......................................................................................I I .004, 11.012
s.373(4)(c) ...............................................................................................11.006
s.373(5) .........................................................................................l.174, 11.010
s.373(6) ....................................................................................................I I .011
s.373(7) ....................................................................................................l l.010
s.374 ................................................................................7.123, I 1.008, I 1.074
s.374(l)(b) ...............................................................................................11.073
s.374(3) ....................................................................................................l l .008
s.375 ........................................................................................................ 11.080
s.376(2) ....................................................................................................l l .007
s.376(3) ....................................................................................................l l.007
s.376(4) .......................................................................................I I .007, 11.021
s.376(7) ....................................................................................................l l .064
s.376(8) ....................................................................................................l 1.021
s.377 .............................................................................................7.123, 11.009
s.378 ........................................................................................................ 11.080
s.379 ...................................................................8.158, 11.018, 11.039, 11.100
s.379(2) ....................................................................................................I I .040
s.379(3)(a) ...............................................................................................11.042
s.379(3)(b) ...............................................................................................11.042
S.379(3)(C)...............................................................................................11.042
s.380 ............................................... 1.144, 2.053, 2.056, 8.158, 11.021, 11.022
s.380(1) ....................................................................................................l l.029
s.380(1)(a) ...............................................................................................11.025
s.380( 1)(b) ...............................................................................................11.023
s.380(2) ....................................................................................................11.040
s.380(3) .............................................................I 1.021, 11.029, 11.040, I 1.065
s.380(4) .......................................................................................11.029, 11.065
 TABLE OF LEGISLATION CXXXV

s.380(4)(b) .................................................................................. 11.033, 11.034

s.380(5) ....................................................................................... l 1.029, 11.034
s.380(7) .................................................................................................... J 1.065
s.380(8) .................................................................................................... l l .033
s.381 .......................................................................................................... 2.056
s.382 .......................................................................................................... 2.056
s.383 ........................................................................................... 11.031, 11.032
s.383(1)(d) ................................................................................................. 8. I 12
s.387 ............................................................................................. 7.123, 11.028
s.388 .......................................................................................................... 2.056
s.388( I) ....................................................................................... 11.043, 11.047
s.388(2) ....................................................................................... l l .045, 11.047
s.388(3) .................................................................................................... I 1.044
s.388(6) .................................................................................................... l l .047
s.388(7) .................................................................................................... 11.047
s.388(8) .................................................................................................... 11.047
s.389 .......................................................................................................... 2.056
s.390 ........................................................................................................ 11.043
s.390(3) .................................................................................................... l l .045
s.391 ........................................................................................................ 11.046
s.392 .............................................................................. ll.098, 11.103, 11.114
s.393 ........................................................................................................ 11.098
s.393(1) .................................................................................................... I I. I 14
s.393(2) .................................................................................................... 11.10 I
s.393(2)(c) ............................................................................................... l l.l0I
s.394 ........................................................................................................ 11.097
s.395(1) .................................................................................................... l l.102
s.395(2) .................................................................................................... I 1. I02
s.396 ........................................................................................................ 11.102
s.396(3) .................................................................................................... 11.103
s.396(4) .................................................................................................... 1I. I03
s.396(6) .................................................................................................... l l. l 02
s.398 ........................................................................................................ 11.I02
s.399 ........................................................................................................ 11.099
s.400 ............................................................................................. 9.049, 11.102
s.401 ........................................................................................................ 11.103
s.403 ........................................................................................................ 11.103
s.403(2) .................................................................................................... I I. I03
s.403(3) .................................................................................................... 11.103
s.403(4) .................................................................................................... 11.l 03
s.403(8) .................................................................................................... J I. I 03
s.405 ........................................................................................................ 11.106
s.406 ........................................................................................................ J 1.107
s.406(l)(b) ............................................................................................... 11.l 07
s.406(2) .................................................................................................... 11.108
s.407 .......................................................................................................... 1.145
s.407(1) .................................................................................................... l l.109
cxxxvi TABLE OF LEGISLATION

s.407(2) ....................................................................................... 11.110, 11.112

s.407(2)(b) ............................................................................................... l l.l l l
s.407(3) .......................................................................... 11.1J0, 11.111, 11.112
s.408 ................................................................................ l.145, 11.111, 11.112
s.408(1) .................................................................................................... l l.l 13
s.408(2) .................................................................................................... l l. l l 3
s.408(2)(b) ............................................................................................... l l.l 14
s.408(2)(c) ............................................................................................... 11.114
s .409 ........................................................................................................ 11.115
s.410 ........................................................................................................ 11.l 22
s.410(1) .................................................................................................... l l.122
s.410(2) .................................................................................................... 1l .122
s.410(4) .................................................................................................... l l.122
s.41 l ............................................................................................... 9.04, 11.152
s.41 l(l)(a) ............................................................................................... 11.120
s.41 l(l)(b) ............................................................................................... 11.120
s.412 .......................................................................................................... 1.145
s.412(1) .................................................................................................... l l.119
s.412(2) ....................................................................................... l l.l 19, 11.121
s.412(4) .................................................................................................... l l.121
s.412(5) .................................................................................................... l l.121
s.412(5)(c) ............................................................................................... 11.l 19
s.4 l 2(9) .................................................................................................... l l .12 l
s.413(1) .................................................................................................... l l.l 19
s.413(2) .................................................................................................... l I.I 19
s.413(3) .................................................................................................... l l.l 19
s.414 ........................................................................................................ ll.123
s.415 ........................................................................................................ 11.143
s.4 l 6(l)(a) ............................................................................................... 11.149
s.417 ........................................................................................................ 11.144
s.418 ........................................................................................................ 11.154
s.419 ............................................................................................. 9.049, 11.151
s.419(1) .................................................................................................... l l.l51
s.419(2) .................................................................................................... l l.152
s.419(3) .................................................................................................... l l.152
s.420 ........................................................................................................ 11.151
s.421 ........................................................................................................ l l.148
s.422 ................................................................................ 1.145, 11.102, 11.148
s.422( 1)(C)............................................................................................... 11.148
s.422(2) .................................................................................................... 11.l 49
s.422(3) .................................................................................................... l l. J52
s.422(5)(a) ............................................................................................... 11.148
s.422(7) .................................................................................................... 11.J48
s.422(8) .................................................................................................... 11. l 48
s.423 .......................................................................................................... 1.145
s.424 ............................................................................................. l.l45, 11.146
s.425 ................................................................................ 1.145, 11.150, 11.153
 TABLE OF LEGISLATION cxxxvii

s.426(l)(a) ............................................................................................... 11.146

s.426(l)(b) ............................................................................................... 11.147
s.426(3) .................................................................................................... J 1.147
s.427 ........................................................................................................ 11.147
s.429 ................................................................... 7.123, I 1.049, 11.106, I I.I 17
s.429(1) ......................................................................................... 9.008, 15.160
s.429(3) .................................................................................................... 11.049
s.429(4) .................................................................................................... I I .049
s.429(5) .................................................................................................... l 1.049
s.430 ...................................................... 9.008, 10.131, 11.054, 11.106, 11.117
s.430(2) .................................................................................................... 11.049
s.430(3) ............................................................... 9.010, 11.049, 11.103, 15.160
s.431 ........................................................................................................ 11.049
s.433 ........................................................................................................ 11.049
s.434 ........................................................................................................ 11.049
s.438 ........................................................................................................ 11.052
s.439 ............................................................................................. 6.012, 11.053
s.441 ........................................................................................................ 1·1.052
s.442 ........................................................................................................ 11.054
s.442(2) .................................................................................................... 11.054
s.442(8) .................................................................................................... 11.054
s.445 ........................................................................................................ 11.054
s.446 ........................................................................................................ 11.055
s.447 ........................................................................................................ 11.067
s.447(2) .................................................................................................... 11.068
s.448 ........................................................................................................ 11.048
s.448(2)(a) ............................................................................................... 11.048
s.448(2)(b) ............................................................................................... I 1.048
s.448(3)(a) ............................................................................................... 11.048
s.448(3)(b) ............................................................................................... 11.048
s.448(4) .................................................................................................... I I .048
s.448(5) .................................................................................................... l l .048
s.449 ........................................................................................... 11.037, 11.039
s.449(3) .................................................................................................... l l .038
s.450 ........................................................................................................ 11.037
s.453 .......................................................................................................... 2.02 I
s.453(1) ...................................................................................................... 6.034
s.453( I)(a) ................................................................................................. 7.030
s.453(1)(b) ................................................................................................. 7 .030
s.453(2) ........................................................................................... 7 .030, 7 .032
s.453(3) ...................................................................................................... 2.02 I
s.454 ·······•••••••••············..··············••••••••••········· ................................ 2.o21, 7.104
s.454(1) ...................................................................................................... 7.030
s.454(2) ........................................................................................... 2.021, 7.032
s.455 .......................................................................................................... 7.024
s.455(2) ...................................................................................................... 7.024
s.456(l)(a) ................................................................................................. 7.040
cxxxviii TABLE OF LEGISLATION

s.456(1)(b) .................................................................................................7.040
s.456(1)(c) .................................................................................................7.040
s.457 ...............................................................................................7.040, 7.041
s.458 ..........................................................................................................7.031
s.458(6) ......................................................................................................7.031
s.459(1) ...........................................................................................7.026, 7.039
s.459(2) ......................................................................................................7.039
s.459(3) ......................................................................................................7.039
s.460 ..........................................................................................................7.034
s.461 ..............................................................................12.089, 12.090, 20.019
s.46l(l)(c) ...............................................................................................12.089
s.461(1)(d) ...............................................................................................12.089
s.461(2)(a) ...............................................................................................12.089
s.462 ..............................................................6.013, 7.045, 7.052, 7.055, 9.027
s.462(1) .....................................................................7.045, 7.050, 7.051, 7.055
s.462(2) ......................................................................................................7.045
s.462(4) ......................................................................................................7 .048
s.462(7) ................................................................................5.087, 7.047, 9.086
s.462(8) ...........................................................................................5.087, 7.047
s.462(9) ......................................................................................................7 .049
s.463 .........................................................................6.047, 7.048, 7.055, 9.027
s.464 ..........................................................................................................7.043
s.464(1) ......................................................................................................7.056
s.464(3) ......................................................................................................7.057
s.464(5) ......................................................................................................7.056
s.465 ....................................... 1.147, 8.010, 8.012, 8.022, 8.135, 8.141, 8.144,
8.146, 8.148, 8.149, 8.182
s.465(2) ......................................................................................................8.144
s.465(4) ......................................................................................................8.143
s.465(5) ...........................................................................................8.019, 8.147
s.465(6) ......................................................................................................8.147
s.466 ...............................................................................................8.148, 8.182
s.467 ...............................................................................................8.193, 8.194
s.468 ...................................................2.075, 8.193, 8.194, 8.195, 8.198, 8.199
s.468(4)(a) .................................................................................................8.195
s.468(4)(b) .................................................................................................8.195
s.469 ....................................................................................8.193, 8.194, 8.197
s.469(2)(a) .................................................................................................8.197
s.469(2)(b)(i) .............................................................................................8.197
s.469(2)(b)(ii) ............................................................................................8.197
s.469(2)(b)(iii) ........................................................................................... 8.197
s.469(2)(b)(iv) ...........................................................................................8.197
s.473 ..................................................................................8.130, 8.187, 10.034
s.474 ..........................................................................................................2.023
s.474(2) ......................................................................................................2.023
s.474(3) ......................................................................................................2.024
s.474(4)(a) .................................................................................................2.024
 TABLE OF LEGISLATION cxxxix

s.474(4)(b) .................................................................................................2.024
s.475(1)......................................................................................................2.025
s.475(2)......................................................................................................2.025
s.475(3)......................................................................................................2.025
s.476 ..........................................................................................................8.187
s.478 ..........................................................................................................7.021
s.478(1)......................................................................................................7.021
s.478(2)......................................................................................................7.02 I
s.479 ........................................................................................................12.042
s.480 ..........................................................................................................1.174
s.480(2)......................................................................................................7.027
s.481 ..........................................................................................................7 .094
s.481(1)......................................................................................................7.074
s.481(2)......................................................................................................7.074
s.481(3)......................................................................................................7.074
s.482(1)......................................................................................................7.074
s.482(2)......................................................................................................7.074
s.483 ...............................................................................................7.104, 7.105
s.483(2)......................................................................................................7 .104
s.483(3)......................................................................................................7.104
s.484 ..........................................................................................................8.097
s.484(1)......................................................................................................8.105
s.486 .........................................................................8.086, 8.089, 8.143, 8.187
s.486(1)(a) .................................................................................................8.105
s.486( I)(b) .................................................................................................8.105
s.486( 1)(C).................................................................................................8.105
s.486(1)(d) .................................................................................................8.105
s.486( 1)(e) .................................................................................................8.105
s.486(1)(f) ..................................................................................................8.105
s.486(2)(a) .................................................................................................8.105
s.486(2)(b) .................................................................................................8.105
s.486(3)......................................................................................................8.105
s.487 ..........................................................................................................8.105
s.488 ..........................................................................................................8.105
s.491 ....................................................................................8.097, 8.098, 8.100
s.491(I )(a) ......................................................................................8.099, 8.105
s.492 ...............................................................................................8.104, 8.105
s.493 ..........................................................................................................8.10 I
s.494 ..........................................................................................................8.102
s.496 ....................................................................................8.097, 8.098, 8.100
s.496(2)(b)(ii) ............................................................................................8.098
s.496(5)...........................................................................................8.098, 8.099
s.497 ..........................................................................................................8.105
s.497( 1)(b) .................................................................................................8.105
s.498 ..........................................................................................................8.107
s.500 ...............................................................................................8.098, 8.104
s.500(2)......................................................................................................8.099
cxl TABLE OF LEGISLATION

s.500(3)(b) .................................................................................................8.099
s.50 l ...............................................................................................8.098, 8.100
s.50 l (2) ......................................................................................................8.099
s.50 l (3)(b) .................................................................................................8.099
s.502 ....................................................................................8.098, 8.100, 8.103
s.502(2) ......................................................................................................8.099
s.502(3)(b) .................................................................................................8.099
s.503 .....................................................................................8.098 8.100, 8.105
s.503(2) ......................................................................................................8.099
s.503(3)(b) .................................................................................................8.099
s.504 ....................................................................................8.109, 8.110, 8.112
s.504(2) ......................................................................................................8.099
s.504(3)(b) .................................................................................................8.099
s.504(4) ......................................................................................................8.110
s.505 ...............................................................................................8.105, 8.110
s.506 ..........................................................................................................8.107
s.507 ..........................................................................................................8.107
s.508 ............................................................................................................8.06
s.509 ..........................................................................................................8.107
s.510 ..........................................................................................................8.107
s.511 ..........................................................................................................8.107
s.512 ..........................................................................................................8.107
s.513 ..........................................................................................................8.111
s.514 ..........................................................................................................8.1 l l
s.515 ..........................................................................................................8.111
s.530 ..........................................................................................................8.095
s.531 ..........................................................................................................8.095
s.532 ..........................................................................................................8.095
s.533 ..........................................................................................................8.095
s.534 ..........................................................................................................8.095
s.535 ..........................................................................................................8.095
s.536 ...............................................................................................8.088, 8.090
s.536(2) ......................................................................................................8.089
s.536(4) ......................................................................................................8.089
s.536(5) ......................................................................................................8.089
s.536(6) ......................................................................................................8.091
s.538 ..........................................................................................................8.089
s.538('1)......................................................................................................8.088
s.538(4) ......................................................................................................8.088
s.540 ..........................................................................................................8.089
s.542 ..........................................................................................................8.092
s.543(2) ....................................................................................................11.043
s.547(1) ......................................................................................................9.J 14
s.547(2) ..............................................................................19.117, 9.113, 9.114
s.547(3) ......................................................................................................9.126
s.548 ....................................................................................9.003, 9.010, 9.111
s.549 ..........................................................................................................9.128
 TABLE OF LEGISLATION cxli

s.549(a) ......................................................................................................9.111
s.549(b)......................................................................................................9.1 l l
s.550 ..........................................................................................................9.1 l I
s.551 ..........................................................................................................9.l l l
s.551(3)......................................................................................................9. I I I
s.552 ....................................................................................9.1 l l, 9.128, 9.137
s.552(1)......................................................................................................9.l l l
s.553 ..........................................................................................................9.137
s.553(1)....................................................................................................19.l 17
s.553(2)......................................................................................................9. I 37
s.554 ..........................................................................................................9.137
s.555 .............................................................................................19.l 17, 9.137
s.556 ..........................................................................................................9.137
s.556(1)......................................................................................................9. l 13
s.556(2)......................................................................................................9. I 13
s.557 ..........................................................................................................9.137
s.558 ..........................................................................................................9.137
s.558(l)(a) .................................................................................................9.I 14
s.558(l)(b) .................................................................................................9.l 14
s.559 ..........................................................................................................9.114
s.559(2)......................................................................................................9.l 14
s.560 ..........................................................................................................9.137
s.561 ..........................................................................................................9.127
s.561(2)......................................................................................................9.l 15
s.561(3)......................................................................................................9.l 15
s.562(3)......................................................................................................9.109
s.563 ..........................................................................................................9.109
s.564 ...............................................................................................l.151, 9.110
s.564(4)......................................................................................................9.060
s.564(4)(a) .................................................................................................9.110
s.564(4)(b) .................................................................................................9.l 10
s.565 ...............................................................................................9.016, 9.017
s.566 ..........................................................................................................9.029
s.566(2)......................................................................................................9.019
s.566(3)......................................................................................................9.019
s.566(3)(b) .................................................................................................9.064
s.567 ...............................................................................................9.020, 9.062
s.567(3)...........................................................................................9.058, 9.064
s.567(5)......................................................................................................9.060
s.568 ...............................................................................................9.020, 9.062
s.569 ...............................................................................................9.017, 9.022
s.570 ..................................................7.052, 7.053, 9.014, 9.022, 9.024, 9.027,
9.028, 9.028, 9.034, 9.035, 9.036, 9.037
s.570(2)......................................................................................................9.022
s.570(4)......................................................................................................9.005
s.570(6)......................................................................................................9.024
s.571(1)....................................................................................................l l.148
cxlii TABLE OF LEGISLATION

s.57l(l)(a) .................................................................................................9.040
s.571(1)(b) .................................................................................................9 .040
s.571(2) ......................................................................................................9 .040
s.571(3)(a) .................................................................................................9.041
s.571(3)(b) .................................................................................................9.041
s.572 ...............................................................................................9.045, 9.137
s.573 ..........................................................................................................9.045
s.573( I) ......................................................................................................9 .045
s.573(3) ......................................................................................................9.045
s.574(l)(a) .................................................................................................9.046
s.574(1)(b) .................................................................................................9.047
s.574(2) ......................................................................................................9.047
s.574(4) ......................................................................................................9 .047
s.574(5) ......................................................................................................9.047
s.575( l ) ......................................................................................................9 .048
s.575(2) ......................................................................................................9.048
s.576(l)(a) .................................................................................................9.050
s.576(1)(b) .................................................................................................9.050
s.576(l)(c) ......................................................................................9.050, 9.059
s.576(1)(d) .................................................................................................9.050
s.576(1)(e) ...........................................................................9.050, 9.058, 9.058
s.576( I)( e)(ii) ............................................................................................9 .058
s.576(2) ...........................................................................................9.050, 9.059
s.576(3) ......................................................................................................9.058
s.576(4) ......................................................................................................9.058
s.576(5) ......................................................................................................9.058
s.576(6) ......................................................................................................9 .058
s.578 ................................................................................9.049, 11.102, 11.152
s.578(1) ......................................................................................................9.049
s.578(2) ......................................................................................................9 .049
s.578(3) ......................................................................................................9 .050
s.579 ..........................................................................................................9.062
s.579(2) ......................................................................................................9 .062
s.580 ..........................................................................................................9.065
s.582( I) ......................................................................................................9 .065
s.582(2) ...........................................................................................9.058, 9.065
s.583 ..........................................................................................................9.065
s.584 ...............................................................................................'l.l51, 9.052
s.585(1) ...........................................................................................9.007, 9.067
s.585(2) ......................................................................................................9 .067
s.585(3) ...........................................................................................9.026, 9.067
s.586 ........................................................................................................19.087
s.588 ...............................................................................................'l.l51, 9.094
s.588(1) ......................................................................................................9.083
s.588(1), (4) ...............................................................................................9.083
s.588(2) ...........................................................................................9.083, 9.094
s.588(3)(a) .................................................................................................9.086
 TABLE OF LEGISLATION cxliii

s.588(3)(b) .................................................................................................9.086
s.588(4)......................................................................................................9.086
s.588(5)......................................................................................................9.086
s.589 ...............................................................................................9.071, 9.083
s.591 ........................................................................................................ I0.132
s.591(1)......................................................................................................9.084
s.591(2)......................................................................................................9.083
s.592 ..........................................................................................................9.085
s.596(1)...........................................................................................9.090, 9.091
s.596(2)...........................................................................................9.090, 9.091
s.596(3)......................................................................................................9.09 l
s.599 ..........................................................................................................9.137
s.601 ..........................................................................................................9.093
s.600(1)......................................................................................................9.099
s.602 ..........................................................................................................9.095
s.603(2)......................................................................................................9.097
s.603(3)(a) .................................................................................................9.097
s.603(3)(b) .................................................................................................9.097
s.604(3)(a) ...............................................................................................19.l 07
s.604(3)(b) ............................................................................................... 19.107
s.605 ..........................................................................................................9.103
s.606 ....................................................................................9.104, 9.105, 9.107
s.606(2)......................................................................................................9. I 04
s.607 ..........................................................................................................9.106
s.607(3)......................................................................................................9. I08
s.610 ..................................................................................1.179, 9.008, 14.026
s.610(1)...........................................................................................9.008, 9.009
s.610(2)......................................................................................................9.009
s.610(3)......................................................................................................9.009
s.610(4)......................................................................................................9.009
s.610(5)......................................................................................................9.009
s.610(7)...........................................................................................9.008, 9.009
s.610(8)...........................................................................................9.008, 9.009
s.611 .............................................................................................9.01 l, 11.067
s.612 ................................................................................ 1.151, 11.049, 11.103
s.612(1).........................................................................................9.010, 11.049
s.612(l)(b) ...............................................................................................11.l 03
s.612(2)......................................................................................................9.0 I0
s.612(5)......................................................................................................9.010
s.613 ....................................................................................1.151, 6.012, 9.010
s.614(2)......................................................................................................9.0 I0
s.615 ....................................................................................9.058, 9.065, 9.137
s.616(1)......................................................................................................9.064
s.617 ...............................................................................................9.007, 9.131
s.618(l)(a) .................................................................................................9.130
s.618( I)(b) .................................................................................................9.130
s.618(l)(c) .................................................................................................9.131
cxliv TABLE OF LEGISLATION

s.618(2) ......................................................................................................9.132
s.619 ..........................................................................................................7.123
s.619(1) ......................................................................................................9.132
s.619( 1)(b) .................................................................................................9 .132
s.620 .............................................................................................9.133, 11.081
s.621(2) ......................................................................................................9.134
s.621(3) ......................................................................................................9 .134
s.622 ...............................................................................................1.171, 1.180
s.627 ........................................................2.030, 7.123, 14.033, 14.055, 14.095
s.627(2) ....................................................................................................14.095
s.627(3) ....................................................................................................14.095
s.627(4) ....................................................................................................14.055
s.627(5) ....................................................................................................14.100
s.628 ..................................................................................2.033, 7.123, 14.033
s.628( I) ....................................................................................................14.098
s.628(3) ....................................................................................................14.098
s.628(4) ....................................................................................................14.098
s.629 ..................................................................................2.018, 2.030, 14.096
s.630 ..................................................................................2.030, 7.123, 14.099
s.631 ................................................................................2.034, 11.081, 14.106
s.631(1) ....................................................................................................14.105
s.631(2) ....................................................................................................14.105
s.631(3) ....................................................................................................14.l 05
s.632 ........................................................................................................14.l 10
s.633 ..............................................................................14.072, 14.104, 14.146
s.633(3) ....................................................................................................14.104
s.634 ...................................................................9.074, 14.102, 14.115, 17.206
s.635 ........................................................................................................14.103
s.637 ........................................................................................................14.lll
s.637(3) ....................................................................................................14.l 13
s.637(4) ....................................................................................................14.113
s.638 ........................................................................................................14.l 13
s.640(a) ....................................................................................................14.l 14
s.640(b) ....................................................................................................14.l 14
s.641 .........................................................................2.030, 2.033, 7.036, 7.057
s.642 .............................................................................................2.034, 11.081
s.642(1) ......................................................................................................7.123
s.643 .........................................................................2.030, 7.036, 7.057, 7.123
s.645 .........................................................................1.180, 7.036, 7.037, 7.123
s.645(4) ......................................................................................................7 .057
s.647 ..........................................................................................................1.180
s.648 ....................................................................................2.030, 2.033, 7.123
s.649 .............................................................................................2.034, 11.081
s.649(1) ......................................................................................................7.123
s.650 ..........................................................................................................7.123
s.652 ...............................................................................................l.180, 7.123
s.653A ......................................2.031, 14.116, 14.117, 14.118, 14.119, 14.132
 TABLE OF LEGISLATION cxlv

s.653B ...................................................................................................... 14.132

s.653C(l) ................................................................................................. 14.l 18
s.653C(2) .................................................................................... 14.118, 14.123
s.653C(3) .................................................................................... 14.l 18, 14.123
s.653C(3)(b) ............................................................................................ 14.123
s.653D ..................................................................................................... 14.l 19
s.653£ ...................................................................................................... 14.120
s.653F ......................................................................................... 14.126, 14.130
s.653H .......................................................................................... 2.031, 14.116
s.653l ....................................................................................................... 14.124
s.6531(1) .................................................................................................. 14.l 17
s.653l(l)(a) .............................................................................................. 14.125
s.6531(I)(b) .............................................................................................. 14.I26
s.6531(2)(a).............................................................................................. 14.128
s.6531(2)(b)................................................................................. 14.l25, 14.127
s.6531.......................................................................................... 14.125, 14.126
s.653K ........................................................................................ 14.125, 14.126
s.653M .......................................................................................... 2.033, 14.129
s.653M(2) ................................................................................................ 14.129
s.653M(3) ............................................................................................... 14.129
s.653M(4) ............................................................................................... 14.129
s.653M(5) ............................................................................................... 14.129
s.653N ..................................................................................................... 14.129
s.653P ...................................................................................................... 14.130
s.653Q ..................................................................................................... 14.l30
s.653R ...................................................................................................... l 4.130
s.653S ...................................................................................................... 14.130
s.653T ...................................................................................................... 14.I30
s.653U ..................................................................................................... 14.130
s.653V ..................................................................................................... 14.130
s.653W ......................................................................................... 2.034, 14.132
s.653X .......................................................................................... 2.034, 14.132
s.653Y ..................................................................................................... 14.I 32
s.6532 ...................................................................................................... 14.132
s.653ZA ................................................................................................... 14.130
s.653ZC ................................................................................................... 14.I28
s.6532D ................................................................................................... 14.131
s.653ZF .................................................................................................... 14.I I 5
s.654 .......................................................................................................... 2.032
s.655 .................................................................................. 2.032, 9.131, 14.097
s.655(1) ...................................................................................................... 9.131
s.655(3) ...................................................................................................... 9. l 3 l
s.655(7) ...................................................................................................... 9. I3 I
s.656 ............................................................................................... 2.032, 9.131
s.656(1) ...................................................................................................... 9.l31
s.657(5)(b) ............................................................................................... 17.026
s.658 .......................................................................................................... 2.027
cxlvi TABLE OF LEGISLATION

s.658(2) ......................................................................................................2.028
s.658(3) ......................................................................................................2.028
s.661 ..........................................................................................................3.071
s.662 .......................................................................1.180, 2.056, 7 .123, l l.056
s.663 ...........................................................................................11.056, 11.067
s.664 .....................................................................l.180, 7.123, 11.038, 11.056
s.664(4) ......................................................................................................2.056
s.664(5) ......................................................................................................2.056
s.668 ........................................................................................................19.005
s.668(1) .........................................................................................2.073, 14.164
s.669 ........................................................................................................19.005
s.670 ...............................................................................9.129, 14.167, 14.169,
18.063, 19.005,19.066, 19.067,
19.071, 20.026, 20.205
s.670( I) ....................................................................................................19.069
s.670(3) ....................................................................................................14.167
s.670(4) ....................................................................................................14.167
s.671 ..............................................................................19.071, 19.084, 19.083
s.672 ..............................................................................19.071, 19.084, 19.083
s.673 ..................................................................................1.152, 2.073, 19.005
s.673( 1) ....................................................................................................14.l 67
s.673(2) ....................................................................................................14.167
s.673(5) ....................................................................................................14.l 68
s.673(6) .......................................................................................14.167, 19.069
s.674 ..............................................................................14.167, 19.005, 19.071
s.674(1) ....................................................................................................14.l 76
s.674( 1)(a) ...............................................................................................19.069
s.674(l)(b) ...............................................................................................19.069
s.674 (l)(c) ......................................................................1.152, 14.176, 19.069
s.674(1)(c)(ii) ..........................................................................................14.177
s.674(1)(d) ..................................................................................14.176, 19.069
s.674( 1)(d)(ii) ..........................................................................................14.177
s.674(2) ......................................................................................................I. I52
s.674(2)(a) ...............................................................................................14.176
s.674(2)(b) ...............................................................................................14.l 76
s.674(3) ....................................................................................................14.176
s.674(5) ....................................................................................................14.176
s.674(5)(a) ...............................................................................................14. I76
s.674(5)(b) ...............................................................................................14.l 76
s.675 ................................................................................2.073, 14.164, 14.166
s.677 ........................................................................................................19.005
s.678 ........................................................................................................14.183
s.678(1) ....................................................................................................14.184
s.679 ..............................................................................14.183, 14.185, 14.186
s.679( I)(b) ...............................................................................................14.187
s.680 ...........................................................................................l4.l84, 14.184
s.680(1) .......................................................................................14.185, 14.188
 TABLE OF LEGISLATION cxl"ii

s.680(2)(a) ............................................................................................... 14.184

s.680(2)(b) ............................................................................................... 14.l 84
S.680(2)(C)............................................................................................... J4.185
s.680(2)(d) .................................................................................. 14.185, 14.187
s.680(3) .................................................................................................... 14.185
s.680(4) .................................................................................................... 14.l 85
s.681 .............................................................................. 14.183, 14.184, 14.186
s.681(1) ....................................................................................... 14.184, 14.185
s.681(1) .................................................................................................... 14.188
s.681(2)(a) ............................................................................................... 14.184
s.681(2)(b) ............................................................................................... 14.184
s.681(2)(c) ............................................................................................... 14.l 85
s.681(2)(d) ............................................................................................... 14.I 85
s.681(2)(d) ............................................................................................... 14.l 87
s.681(3) .................................................................................................... 14.185
s.682 ........................................................................................... 14.183, 14.185
s.683 ........................................................................................... 14.183, 14.185
s.684 ........................................................................................... 14.183, 14.185
s.684(3) .................................................................................................... 14.185
s.685 ........................................................................................... 14.183, 14.185
s.685( 1) .................................................................................................... 14.l 85
s.685(2) .................................................................................................... 14.185
s.685(3)(b) ............................................................................................... 14.I 89
S.685(3)(C)............................................................................................... 14.189
s.685(4) .................................................................................................... 14.189
s.685(5) .................................................................................................... 14.185
s.686 ........................................................................................... 14.063, 14.188
s.687 ........................................................................................................ 14.183
s.705 ........................................................................................................ 15.088
s.707 .............................................................................. 14.176, 15.085, 15.086
s.722 ........................................................................................................ 11.082
s.722(1) ............................................................... 2.068, 10.051, 10.139, 10.247
s.723 ............................................................................................. 5.050, 10.134
s.723(1) .................................................................................................... 10.140
s.723(2) .................................................................................................... I0.140
s.723(3) .................................................................................................... I0.140
ss.724-725 ......................................................... 8.190, 10.151, 10.162, 10.163,
10.164, 10.167, 10.173, 10.176, 10.184,
10.186, 10.218, 10.224, 10.226, 10.239,
14.208, 15.140, 18.087, 20.071
s.724 ................................... 5.050, 5.070, 7.051, 7.052, 10.134, 10.13610.137,
10.151, 10.174, 10.186, 10.218,
10.225, 10.225, 11.092
s.724(1) .......................................................................... 10.134, 10.140, 10.140
s.724(l)(a) ................................................................................. I0.145, 10.167,
10.168, 10.171
s.724(l)(b) .................................................................................. 10.167, 10.168
cxlviii TABLE OF LEGISLATION

s.724(2) ....................................................................................................l 0.140

s.724(3) ....................................................................................................10.140
s.725(2)(iii)..............................................................................................l8.005
s.725 .................................................. 1.195, 5.050, 5.070, 7.051, 7.052, 9.030,
10.130, 10.134, 10.203, 10.219, 10.224,
10.239, 18.003, 18.010, 18.077,
18.079, 18.084
s.725(1) .......................................................................................l0.203, 10.212
s.725(l)(b) ...............................................................................................10.216
s.725(2) ..........................................................................l 0.203, 10.212, 18.079
s.725(2)(iv) ..............................................................................................10.212
s.725(2)(iv)(B).........................................................................................10.212
s.725(2)(iv)(C).........................................................................................l 0.212
s.725(4) ....................................................................................................10.203
s.725(5) ....................................................................................................l 0.216
s.726 ...........................................................................................10.134, 10.207
s.728 ......................................................8.038, 10.246, 10.245, 10.252, 10.253
s.729 .........................................8.038, I0.246, I0.245, 10.249, I0.252, I0.253
s.729(1) ....................................................................................................10.248
s.729(l)(b) ..................................................................................10.249, 10.253
S.729( 1)(C)...............................................................................................10.249
s.729(2) ..................·····························.........·····························............... 10.248
s.729(3) ....................................................................................................I0.250
s.729(4) ........................................................······························.............. 10.250
s.729(5) ....................................................................................................l 0.249
s.730 ...........................................................................................10.245, 10.253
s.730( l ) ....................................................................................................
10.251
s.731 ...........................................................................................10.050, I0.052
s.732 .......................................10.050, 10.082, 10.084, 10.085, 10.093, 10.094
s.732( 1) .......................................................................................10.050, 10.053
s.732(2) .......................................................................................l 0.050, 10.053
s.732(3) ....................................................................................................10.050
s.732(4) .......................................................................................I0.079, 10.097
s.732(6) ..................·····························.........·····························............... 10.094
s.732(7) ....................................................................................................10.097
s.733 .................................................................10.054, 10.066, 10.073, 10.073
s.733(l)(a) ...............................................................................................10.060
s.733(2) ....................................................................................................l 0.094
s.733(3) .......................................................................................10.054, l 0.066
s.733(4) .......................................................................................10.054, 10.066
s.733(5) .......................................................................................10.054, 10.066
s.734(1) ....................................................................................................10.069
s.734(2) ....................................................................................................10.069
s.734(2)(a) ...............................................................................................10.071
s.734(3) ....................................................................................................10.071
s.735 ........................................................................................................10.093
s.736 ........................................................................................................10.094
 TABLE OF LEGISLATION cxlix

s.737 ........................................................................................................ 10.082

s.737(1)(a) .................................................................................. 10.082, 10.085
s.737(1)(b) ............................................................................................... 10.084
s.737(2)(d) ............................................................................................... 10.082
s.737(3) .................................................................................................... 10.082
s.738 ........................................................................................................ 10.087
s.738(1) .................................................................................................... 10.086
s.738(2) .................................................................................................... I0.087
s.738(3) .......................................................................... 10.086, l 0.090, 10.092
s.739 ........................................................................................................ 11.092
s.740 ...................................................... 7 .074, l 1.083, l 1.084, 11.092, l 1.096
s.740(l)(b) ............................................................................................... l l.095
s.740(2) .................................................................................................... I 1.083
s.740(3) .................................................................................................... l l.095
s.740(4) ........................................................... ......................................... 11.095
s.740(4)(b) .................................................................................. ll.092, 11.093
s.740(6) .................................................................................................... l l.082
s.741 ........................................................................................................ 11.095
s.742 ........................................................................................................ ll.094
s.744 .......................................................................................................... l.180
s.745 .......................................................................................................... 1.180
s.746 .......................................................................................................... 1.180
s.747 .......................................................................................................... 1.180
s.750 ............................................................................................. 1.179, 20.232
s.750(6) ...................................................................................................... I. I 82
s.752 ............................................................................................. 9.122, 20.257
s.752(3) .................................................................................................... 20.258
s.752(4) .................................................................................................... 20.258
s.752(5) .................................................................................................... 20.258
s.774 ............................................................................................. 2.064, I0.150
s.776 .......................................................................................................... 2.067
s.776(4) ...................................................................................................... 2.067
s.778 .......................................................................................................... 2.067
s.786 .......................................................................................................... 2.067
s.789 .......................................................................................................... 2.067
s.791 .......................................................................................................... 2.067
s.793 .......................................................................................................... 2.067
s.794 .......................................................................................................... 2.067
s.794(3) ...................................................................................................... 2.069
s.795 .......................................................................................................... 2.067
s.798(3) ...................................................................................................... 2.069
s.806 .......................................................................................................... 2.077
s.806(1) ...................................................................................................... 2.077
s.807( l ) ...................................................................................................... 2.082
s.807(4) ...................................................................................................... 2.08 I
s.808( I) ........................................................................................... 2.078, 2.079
s.814(1) ...................................................................................................... 2.083
cl TABLE OF LEGISLATION

s.818( 1) ......................................................................................................
2.083
s.821(1) ....................................................................................................l l.050
s.827 ...............................................................................................'1.159,2.027
s.828 ..........................................................................................................9.045
s.831 ................................................................................9.045, 11.050, 11.050
s.831(3)(b)(ii) ..........................................................................................11.050
s.831(3)(b)(iii) .........................................................................................11.050
s.832 ........................................................................................................11.050
s.833 ................................................................................9.045, 11.050, 11.050
s.833(3)(c) ...............................................................................................l l.050
s.833(4) ....................................................................................................l l .050
s.833(8) ....................................................................................................l l .050
s.837 ........................................................................................................11.051
s.838 ........................................................................................................11.092
s.840 ..........................................................................................................1.191
s.840(1) ......................................................................................................l.191
s.840(2) ...........................................................................................l.191, 1.198
s.841 ..........................................................................................................8.003
s.841(1) ......................................................................................................l.191
s.841(2) ......................................................................................................l.191
s.846 ..........................................................................................................1.194
s.846( 1)(b) .................................................................................................1.194
s.846( 1)(c) .................................................................................................1.194
s.846(5) ......................................................................................................1.194
s.847 ..........................................................................................................1.194
s.848 ..........................................................................................................1.194
s.855(5) ......................................................................................................l.196
s.856 ..........................................................................................................1.195
s.865 ...............................................................................................l.199, 1.203
s.868(a) ......................................................................................................l.198
s.868(b) ......................................................................................................1.198
s.869 ...............................................................................................l.198, 1.199
s.869( l)(b) .................................................................................................1.199
s.869(2) ......................................................................................................1.199
s.872 ..........................................................................................................1.203
s.873 ...............................................................................................1.161, 1.182
s.876 ..........................................................................................................1.203
s.877 ...............................................................................................'I.194, 1.199
s.879 .......................................................................1.195, 1.200, 2.072, 20.073
s.879(3) ....................................................................................................10.140
s.879(6) ...........................................................................................2.071, 7.127
s.880 ...............................................................................................l .160, 1.203
s.881 ..........................................................................................................1.160
s.882 ..........................................................................................................1.160
s.883 ..........................................................................................................1.160
 TABLE OF LEGISLATION cli

s.884 ............................................................................................... 1.160, 1.203

s.885 ............................................................................................... 1.160, 1.203
s.887 .......................................................................................................... 1.203
s.892 .......................................................................................................... 1.191
s.893 .......................................................................................................... 1.191
s.894 .......................................................................................................... 1.19l
s.895(1) ...................................................................................................... l.182
s.896 .......................................................................................................... 1.179
s.898 .......................................................................................................... 7.113
s.899 .......................................................................................................... 1.162
s.902 .............................................................. 1.162, 8.078, 8.199, 8.200, 8.204
s.903 ........................................................................ 1.162, 8.078, 8.118, 8.199,
8.200, 8.204
s.904 ........................................................................ 1.162, 8.078, 8.118, 8.199,
8.200, 8.204
s.905 .......................................................................................................... 1.162
Sched.l ............................................................... 11.006, 11.040, 1.164, 11.101
Sched. I Pt. I s.1 ....................................................................................... 17.020
Sched.l Pt.I s.lA .................................................................................... 17.020
Sched.2 ................................................................................ 1.164, 2.005, 2.010
Sched.3 .......................................................................... 11.061, 11.063, 11.064
Sched.4 .......................................................................... 11.029, 11.040, 11.164
Sched.4 Pt. I s.2 ....................................................................................... 11.041
Sched.5 .......................................................................... 11.043, 11.044, 11.164
Sched.5A ........................................................................ 2.030, 14.120, 14.121,
14.122, 14.123
Sched.5B ...................................................................................... 2.030, 14.124
Sched.5C .................................................................................... 14.125, 14.127
Sched.6 ........................................................................................... 1.164, 2.053
Sched.6 s.7 .............................................................................................. 11.056
Sched.7 ...................................................................................................... 1.164
Sched.8 ........................................................................................... 1.164, 1.167
Sched.9 ................................................................................ 1.163, 1.164, 2.083
Sched.9 s. l .............................................................................................. 20.006
Sched.9 s.2 .............................................................................................. 20.006
Sched.10 ......................................................................................... 1.163, 1.164
Sched.10 s.37 .......................................................................................... 14.010
Sched.11 ................................................................... 1.163, I .164, 2.008, 2.031
Sched.11 s.14 .......................................................................................... 13.058
Sched.11 s.37 .......................................................................................... 15.077
Sched.11 s.37(1) ...................................................................................... 15.019
Sched.11 s.78 .......................................................................................... 11.073
Sched.11 s. I07(2) .................................................................................... l l .073
Sched.11 ss.124(2)-124(3) ...................................................................... 10.227
Sched.17 Pt. I s. l ..................................................................................... 16.098
clii TABLE OF LEGISLATION

Companies (Winding-Up and Miscellaneous Provisions)

Ordinance(Cap.32) ........................................1.003, 1.014, 1.015, 1.021, 1.113,
1.114, 1.145, 1.166, 1.168, 1.171,
l.172, l.184, l.185, l.186, l.191,
1.192, 1.191, 1.204,2.071,
2.073, 2,074, 2.081, 2.083, 2.098, 3.071,
6.039, 7.001, 7.039, 7.043, 7.068, 17.137,
8.111,10.231, 11.065, 11.121, 13.027,
14.111, 14.155, 15.112, 16.003, 16.036,
!6.! 11, 16.127, 17.154, 17.172, 17.181,
18.025, 18.032, 19.016,19.027,
19.119, 20.003, 20.006
Pt.II.. ............................. 1.113, 1.184, 13.008, 14.023, 16.002, 16.011, 16.012,
16.020, 16.054, 16.098, 16.091, 17.003
Pt.III .............................................................................. 17.0!9, 17.186, 17.206
Pt.lVA .......................................................... 1.113, 2.071, 7.027, 7.139, 20.014
Pt.IVAA................................................................................................... 17.l 37
Pt.V....................................................................... 1.113, 2.071, 20.007, 20.236
Pt.VI .......................................................................................................... 1.113
Pt. VIII........................................................................................................ 1.1l 3
Pt.X ................................................................................................. 1.113, 2.071
Pt.XI ........................................................................................................ 17.181
Pt.XJI .................................................................... 1.113, 1.184, 16.054, 16.098
Pt.XIII ........................................................................................................ 1.113
Pt.XIIIA ..................................................................................................... 1.113
s.2 ........................................................... 17.117, 7.119, 7.122, 16.011, 16.015,
16.039, 16.040, 16.096, 16.098,
16.106, 17.005, 20.007
s.2(1) .......................... 10.247, 20.136, 20.182, 20.246, 20.247, 20.249, 20.250
s.38 ................................................................... 16.015, 16.092, 16.103, 16.107
s.38(1) .................................................. 16.0ll, 16.020, 16.022, 16.091, 16.099
s.38( IA) ......................................................... .............................16.020, 16.022
s.38(1B) ................................................................................................... 16.022
s.38(3) ............................................................... I 6.0 I 0, I 6.0 I I, I 6.033, 16.099
s.38(3)(a) ................................................................................................. 16.0l 5
s.38(3)(b) ................................................................................................. 16.0!0
s.38(3)(C)................................................................................................. 16.015
s.38(5)(a) ................................................................................................. 16.0l 5
s.38(5)(b) ................................................................................................. 16.015
s.38(7) ......................................................................................... 16.020, 16.029
s.38(8) ...................................................................................................... 16.029
s.38A ....................................................................................................... !6.020
s.38A(J ) ................................................................................................... 16.020
s.38A(2) ................................................................................................... 16.021
s.38A(4) ................................................................................................... 16.020
s.38AA .................................................................................................... 16.015
s.38B ........................................................................................... 16.103, 16.104
 TABLE OF LEGISLATION cliii

s.38B(l) ...................................................................................................16.104
s.38B(2) .........................................................................16.105, 16.106, 16.109
s.388(2)(a) ..............................................................................................16.105
s.38B(2)(b) ..............................................................................................16.105
s.38B(2)(c) ..............................................................................................16.105
s.38B(2)(d) ..............................................................................................16.105
s.38B(2)(e) ..............................................................................................16.105
s.388(2)(f) ...............................................................................................16.I05
s.38B(2A) ................................................................................................16.105
s.38B(2A)(b) ...........................................................................................16.I05
s.38C..............................................................................16.026, 16.049, 16.050
s.38C(3) ...................................................................................................16.026
s.38D ............................................................................16.032, 16.050, 16.092,
16.103, 16.107
s.38D(l) ............................................................16.01l, 16.030, 16.030, 16.091
s.38D(2)......................................................................................16.021, 16.022
s.38D(2)(c) ..............................................................................................16.021
s.38D(3)...................................................................................................J6.020
s.38D(4) ...................................................................................................16.020
s.38D(7)...................................................................................................16.032
s.38D(7A) ................................................................................................16.02l
s.39B..............................................................................16.027, 16.028, 16.028
s.40 .......................................................2.098, 12.115, 16.041, 16.043, 16.044,
16.045, 16.047, 16.048, 16.049, 16.050,
16.05], 16.067, 16.071, 16.075,
16.079, 16.093
s.40(1)......................................................................................................16.045
s.40(1)(a) .................................................................................................16.045
s.40( 1)(b) .................................................................................................16.045
sA0(l)(c) ....................................................................................16.045, 16.048
sA0(l)(d) ..........................................................16.045, 16.047, 16.048, 16.048
s.40(2)............................................................................16.049, 16.050, 16.067
s.40(2)(a) .................................................................................................16.049
s.40(2)(b) .................................................................................................16.049
s.40(2)(c) .................................................................................................16.049
s.40(2)(d)(i) .............................................................................................16.049
s.40(2)(d)(ii) ............................................................................................16.049
s.40(2)(d)(i ii) ...........................................................................................16.049
s.40(3)......................................................................................................16.050
s.40(3)(a) .................................................................................................16.050
s.40(3)(b) .................................................................................................16.050
s.40(3)(c) .................................................................................................16.050
s.40(5)........................................................................................................2.098
s.40(5)(a) .................................................................................................16.046
s.40(7).........................................................................................16.045, 16.079
s.40A ......................................16.055, 16.083, 16.084, 16.085, 16.086, 16.087
s.40A(2)...................................................................................................16.086
cliv TABLE OF LEGISLATION

s.40A(3) ...................................................................................................16.086
s.40B........................................................................................................ 16.06l
s.41 ................................................................................ 16.092, 16.093, 16.10I
s.41(1)...................................................................................................... 16.092
s.41(2) ......................................................................................................16.093
s.41(2)(a) .................................................................................................16.093
s.41(2)(b) .................................................................................................16.093
s.41 A .......................................................................................... 16.044, 16.046
s.41A(l)(a) ..............................................................................................16.069
s.4 IA(I )(b) ..............................................................................................16.07l
s.41A(2) ...................................................................................................16.067
s.42 .............................................................................................16.036, 16.038
s.42(1) ......................................................................................... 16.020, 16.038
s.42(3)...................................................................................................... 16.037
s.42(4)...................................................................................................... 16.020
s.42(6)......................................................................................................16.038
s.44 ..........................................................................................................16.038
s.44A ....................................................................................................... 16.039
s.44A(l ) ......................................................................................16.020, 16.039
s.44A(2) ......................................................................................16.020, 16.039
s.44A(6) ...................................................................................................16.020
s.44B(l) ......................................................................................16.020, 16.040
s.448(2) ......................................................................... 16.020, 16.040, 16.040
s.44B(3) ...................................................................................................16.040
s.48A ....................................................................................................... 16.013
s.48A(l) ...................................................................................................16.013
s.48A(2) ...................................................................................................16.014
s.49(1) ...................................................................................................... 15.066
s.49A(2) ...................................................................................................15.074
ss.49B-49$ ..............................................................................................I 5.078
s.49B........................................................................................................ 15.080
ss.49B(l)-49B(2) .....................................................................................15.079
s.49O(6) ...................................................................................................l 5.093
s.79 ...................................................... 17.077, 17.217, 18.060, 18.061, 18.061
s.79(1)......................................................................................... 18.060, 18.061
s. I68C........................................................................................................2.071
s.168C(l) .................................................................................................17.l 37
s. l 68C(l )(b) ............................................................................................17. I37
s.168D ..................................................................................................... 17.137
s.168D(l) .............................................................................7.129, 7.131, 7.137
s.168E .......................................................................7.108, 7.110, 7.111, 7.112
s.168E(2) ...................................................................................................7.lll
s.168E(3) ...................................................................................................7.J 12
s.168E(4) ...................................................................................................7.112
s.168F ..........................................................7.108, 7.113, 7.114, 17.117, 7.116
s.168F(2) ........................................................................................7 .108, 7 .113
s.168F(3) ...................................................................................................7.113
 TABLE OF LEGISLATION clv

s.168F(4) .................................................................................................17.I I 7
s.168G .........................................................7.112, 7.117, 7.118, 7.119, 17.127
s.168G(J)(b) ..............................................................................................7.l 18
s.168H .........................................................7.108, 7.109, 7.121, 7.122, 17.127
s.168H(l) ...........................................................................7.121, 7.122, 17.127
s.168H(2)...................................................................................................7.121
s.168H(3)...................................................................................................7.121
s.168H(4).................................................................................................I 7. I 27
s.1681.........................................................................................................7.108
s.1681(1).......................................................................................7.122, 17.127
s.1681(2)....................................................................................................7.122
s.1681(3)....................................................................................................7.122
s.168.IA...........................................................................................1.205, 7.139
s.1681B......................................................................................................7.139
s.1681........................................................................l.195, 7.108, 7.127, 7.128
s.1681(1)....................................................................................................7.127
s.1681(2)....................................................................................................7.128
s.168K .......................................................................................................7.127
s.168K(l) ...................................................................................................7.123
s.168L. ......................................................................7.108, 7.117, 7.118, 7.119
s.168O .......................................................................................................7.027
s.168O(l)(a) ...................................................................................7.027, 7.133
s.168O(l)(b) ...................................................................................7.027, 7.134
s.168O(3)(a) ...................................................................................7.027, 7.133
s.168O(3)(b) ...................................................................................7.027, 7.134
s.168P ........................................................................................................1.205
s.168P(l) ........................................................................................7.136, 7.137
s.168P(2)(a) .............................................................................................17.l 17
s.168P(2)(b).......................................................................7.l l l, 17.117, 7.117
s.168P(3) ...................................................................................................7.137
s.168P(4) ...........................................................................7.111, 17.117, 7.117
s.168Q(l) ...................................................................................................7.131
s.168Q(2)...................................................................................................7. I 32
s.168T ........................................................................................................2.071
s.169 ........................................................................................................20.003
s.170 ...................................................................1.101, 14.038, 20.147, 20.187
s.l 70(1)......................................................................................................3.012
s.170( I )(d) .................................................................................................3.0 I 0
s.170(1)(d) ...............................................................................................20.185
s.170(J)(e) .................................................................................................3.0ll
s.170A ........................................................................................20.079, 20.] 87
s.l 71(1)....................................................................................................20.079
s.176 ...........................................................................................20.003, 20.237
s.177 ........................................................................................................20.064
s.177( J)...............................................................7.052, I0.226, 20.058, 20.075
s.177( I)(a) .....................................................................20.058, 20.060, 20.075
s. l 77(l)(b) ..................................................................................20.058, 20.060
clvi TABLE OF LEGISLATION

s.177(l)(c) ..................................................................................20.062, 20.073

S.177(1)(C) ...............................................................................................20.058
s.177(1)(d) ..................................................................................20.060, 20.070
s.177( I)( d) ...............................................................................................20.058
s.177( I)(e) ...............................................................................................20.063
s. l 77(l)(e) ...............................................................................................20.058
s.177(l)(f) ...........................................10.101, 10.102, 10.133, 10.197, 10.211,
10.224, I 0.231, I0.231, 10.234, 10.237,
10.239, 10.235, 20.058, 20.060
s.177(2) ....................................................................................................20.073
s.178 ........................................................................................................20.141
s. l 78(1) ....................................................................................................20.064
s.178(1)(a) ..................................................................................20.065, 20.076
s.178( 1)(b) ...............................................................................................20.069
s.178( I)(c) ...............................................................................................20.070
s.178(2) ....................................................................................................20.065
s. l 78(3) ....................................................................................................20.065
s.179 ..............................................................................10.131, 20.072, 20.073
s. l 79(l)(a) ..................................................................................20.077, 20.079
s. I79(1A) .................................................................................................20.079
s. l 79(5) ....................................................................................................20.243
s.180 ........................................................................................................20.081
s.180(1) .......................................................................................19.037, 20.081
s.180(1A) .................................................................................................10.239
s.181 ..............................................................................19.037, 20.092, 20.237
s.182 ................................6.039, 7.123, 17.104, 19.113, 19.14, 19.117, 19.118
20.031, 20.047, 20.089, 20.090, 20.119,
20.120, 20.121, 20.122, 20.123,
20.147, 20.186, 20.230, 20.241
s.183 ...........................................................................................20.078, 20.241
s.184 ........................................................................................................17.149
s.184(1) ....................................................................................................20.085
s. I84(2) .............................................................I7. I04, 20.085, 20.119, 20.186
s.185 ........................................................................................................20.084
s.186 ...................................................I0.042, 18.024, 19.017, 19.037, 19.051,
20.080, 20.092, 20.093, 20.094, 20.100, 20.241
s.187 ........................................................................................................20.086
s.190 .............................................................................................7 .•123, 20.108
s.191(1) .......................................................................................20.034, 20.116
s.191(2) ....................................................................................................20.l 16
s.192 .......................................19.051, 19.055, 19.059, 19.064, 19.051, 20.080
s.193 ............. 19.037,19.051, 19.052, 20.020, 20.080, 20.087, 20.092, 20.223
s.193(1) ....................................................................................................19.016
s.193(2) ....................................................................................................19.016
s.193(3) ....................................................................................................l 9.016
s.193(6) ....................................................................................................I9.049
s.194 .........................................1.205, 20.007, 20.021, 20.088, 20.206, 20.239
 TABLE OF LEGISLATION cl"ii

s.194(1)(a) ........................................................20.007, 20.019, 20.020, 20.087

s.194(1)(aa) ...................................................... 19.020, 20.007, 20.020, 20.087
s.194(J)(b) ..................................................................................20.010, 20.020
S.194(1)(C)...............................................................................................20.020
s.194( l )(d) ...............................................................................................20.020
s.194(1A) ....................................................................................20.007, 20.011
s.195 ........................................................................................................20.050
s.195(1)....................................................................................................20.021
s.196 ........................................................................................................20.197
s.196( l ) ....................................................................................................20.049
s.196(4)....................................................................................................20.007
s.197 ....................................................20.025, 20.035, 20.089, 20.095, 20.194
s.198 ........................................................................................................20.095
s. l 99(l)(a) ............................................................................................... 10.041
s.199( 1)(b) ...............................................................................................20.026
s.199( l )(d) ...............................................................................................20.028
s.199(l)(e) ..................................................................... 19.020, 19.021, 20.028
s.199(1)(e) ............................................................................................... 19.020
s.199(1)(£)................................................................................................20.029
s. l 99(2)............................................................. 19.020, 20.029, 20.031, 20.088
s.199(2)(a) .......................................................................20.025, 20.09020.194
s.199(2)(b) ..................................................................................20.026, 12.046
s.199(2)(d) ...............................................................................................20.026
s.199(2)(e) ...............................................................................................20.026
s.199(3).......................................................................................20.032, 20.194
s.199(4) ....................................................................................................20.032
s.199(5)....................................................................................................l 9.020
s.1998('1) ................................................................................................. 19.020
s.200(1)....................................................................................................20.036
s.200(2)....................................................................................................20.036
s.200(3)....................................................................................................20.032
s.200(4)....................................................................................................20.038
s.200(5).................................................................................................... l 0.041
s.201 ........................................................................................................ 20.036
s.202 ...........................................................................................20.037, 20.050
s.203(1) .......................................................................................20.037, 20.050
s.203(3)....................................................................................................20.037
s.203(3A) .................................................................................................20.050
s.203(5)....................................................................................................20.037
s.203(6)(b) ...............................................................................................20.037
s.204 ..........................................................................................................1.205
s.205 ........................................................................................... 20. l 82, 20.253
ss.206A-207L ........................................................................................20.088
s.206 ........................................................................................................20.206
s.206( l ) ....................................................................................................20.088
s.206( I)(b) ...............................................................................................20.088
s.206(3)....................................................................................................20.088
clviii TABLE OF LEGISLATION

s.206(5) ....................................................................................................20.088
s.209A ..............................................................20.239, 20.241, 20.242, 20.243
s.209A(1)(a) ............................................................................................20.239
s.209A(l)(b ) ............................................................................................20.239
s.209A(2) .................................................................................................20.240
s.209B(a)(i).............................................................................................20.24 l
s.209B(b) .................................................................................................20.241
s.2098( d) .................................................................................................20.242
s.21 l .............................................................................................7.123, 20.025
s.213 ..............................................................................17.l 18, 20.028, 20.147
s.216........................................................................................................20.027
s.217........................................................................................................20.191
s.218 ...........................................................................................20.197, 20.197
s.221 ...........................................................................................20.112,20. l 12,
20.113, 20.114, 20.118
s.221(1) ....................................................................................................20.109
s.221(3) ....................................................................................................20.109
s.222 ........................................................................................................20.118
s.226 ........................................................................................................20.185
S.226(C)....................................................................................................20.025
s.226(d) ....................................................................................................20.028
s.226(d) ....................................................................................................20.028
s.226A .............................................................................8.094, 20.253, 20.216
s.226A(2) .................................................................................................20.255
s.227 ........................................................................................................20.253
s.227A .....................................................................................................20.203
s.227A(l) .................................................................................................20.203
s.2278 ......................................................................................................20.204
s.227C.........................................................................................20.204, 20.205
s.227D ........................................................................................20.204, 20.205
s.227E .........................................................................................20.204, 20.205
s.227F ............................................................................20.052, 20.206, 20.239
s.228 ................................................................................7.068, 20.219, 20.233
s.228(1) ....................................................................................................20.209
s.228( I)(a) ...............................................................................................20.209
s.228(1)(b) ..................................................................................20.060, 20.209
s.228A .........................................7.068, 7.077, 7.123, 20.018, 20.024, 20.131,
20.144, 20.163, 20.170, 20.223, 20.224,
20.225, 20.226, 20.227, 20.228,
20.229, 20.230, 20.231, 20.232
s.228A(J )(a) ............................................................................................20.223
s.228A(l)(b) ............................................................................................20.223
s.228A(l)(c) ...............................................................................20.223, 20.225
s.228A(l4)(b) ..........................................................................................20.225
s.228A(2).................................................................................................20.223
s.228A(3).................................................................................................20.223
s.228A(5).................................................................................................20.224
 TABLE OF LEGISLATION clix

s.228A(5)(a) ............................................................................................ 20.21 l

s.228A(5)(b) ............................................................................................ 20.024
s.228A(5)(c) ............................................................................................ 20.225
s.228A(8) ................................................................................................. 20.223
s.228A(9) ................................................................................................. 20.224
s.228A( 10)............................................................................................... 20.224
s.228A(l4) ............................................................................................... 20.225
s.228A(l 7) ............................................................................................... 20.225
s.228B ............................................................................ 20.223, 20.224, 20.225
s.229( 1) .................................................................................................... 20.2 l 0
s.230 ........................................................................................................ 20.21 l
s.231 ........................................................................................................ 20.211
s.232 ........................................................................................................ 20.237
s.233 ....................................................20.039, 20.214, 20.218, 20.219, 20.226
s.233( 1) .................................................................................................... 20.215
s.233(2) .................................................................................................... 20.215
s.233(4) .................................................................................................... 20.212
s.233(4) ....................................................................................... 20.215, 20.219
s.234 ........................................................................................................ 20.233
s.235 ........................................................................................................ 20.233
s.235(1) ....................................................................................... 20.023, 20.216
s.235(2) .................................................................................................... 20.217
s.235A('I) ................................................................................................. 20.056
s.235A(2) ................................................................................................. 20.056
s.235A(3) ................................................................................................. 20.056
s.236 ........................................................................................................ 20.233
s.237 ........................................................................................................ 15.136
s.237A ..................................................................................................... 20.039
s.237A(lA)(a) ......................................................................................... 20.218
s.237A(lA)(b) ......................................................................................... 20.2 l 8
s.237A(l A)(c) ......................................................................................... 20.2 I 8
s.237A(lB) .............................................................................................. 20.016
s.237A(l C) .............................................................................................. 20.016
s.237A(lF) .............................................................................................. 20.218
s.237A(l G) .............................................................................................. 20.218
s.237A(2) ................................................................................................. 20.2 I 8
s.238 ....................................................................................................... 20.040
s.238(4) ..................................................................................... 20.254, 20.255
s.239 ........................................................................................... 20.254, 20.255
s.239( 1) .................................................................................................... 20.040
s.239(3) .................................................................................................... 20.040
s.239(4) .................................................................................................... 20.040
s.241 ...................................................... 7.123, 20.217, 20.225, 20.226, 20.233
s.241( 1)(a) ............................................................................................... 20.220
s.241( 1)(b ) ............................................................................................... 20.220
s.241(2) .................................................................................................... 20.220
s.241(3)(a) ............................................................................................... 20.22 l
clx TABLE OF LEGISLATION

s.241(3)(b) ...............................................................................................20.221
s.242 .................................................................20.023, 20.221, 20.225, 20.226
s.243 ..............................................................................20.218, 20.222, 20.226
s.244 ........................................................................................................20.226
s.244( I) ....................................................................................................20.222
s.244A .....................................................................................................20.057
s.244A(2) .................................................................................................20.057
s.244A(2)(b) ............................................................................................20.057
s.244A(3) .................................................................................................20.057
s.244A(4) .................................................................................................20.057
s.244A(5) .................................................................................................20.057
s.244A(6) .................................................................................................20.057
s.245 ........................................................................................................20.226
s.246 ........................................................................................................20.226
s.247 ...........................................................................................20.040, 20.226
s.248 .......................................................................................................20.233,
20.254, 20.255
s.248(1) ....................................................................................................20.040
s.248(3) ....................................................................................................20.040
s.248(4) ..........................................................................20.040, 20.254, 20.255
s.250 ........................................................................................................20.235
s.250A(l) .................................................................................................20.217
s.250A(2) .................................................................................................20.2 I7
s.250A(2)(b) ............................................................................................20.217
s.250A(3)(a) ............................................................................................20.2 l 7
s.250A(3)(b) ............................................................................................20.217
s.251 .................................................................20.025, 20.028, 20.029, 20.234
s.251(I ) ....................................................................................................20.028
s.25 l(l)(a) ...............................................................................................20.028
s.251( I)(a)(i) ...........................................................................................20.029
s.25 l(l)(a)(ii) ..........................................................................................20.029
s.251( 1)(b) ..................................................................................20.026, 20.032
s.251(I)( d) ...............................................................................................20.028
s.252 ..............................................................................20.049, 20.057, 20.234
s.252( I) ....................................................................................................20.216
s.253 ...........................................................................................20.024, 20.234
s.254 ........................................................................................................15.136
s.255 ..............................................................................20.032, 20.234, 20.237
s.255A .....................................................................................................20.234
s.255A(2) ....................................................................................20.222, 20.234
s.256 ........................................................................................................20.235
s.257 ........................................................................................................20.243
s.262A ...........................................................................20.013, 20.015, 20.016
s.262A(3) .................................................................................................20.019
s.262A(4) .................................................................................................20.019
s.262B............................................................................20.013, 20.017, 20.019
s.262B(2)(c) ............................................................................................20.017
 TABLE OF LEGISLATION clxi

s.262B(3) .................................................................................... 20.015, 20.017

s.262C ............................................................................ 20.013, 20.016, 20.018
s.262C(2)(b) ............................................................................................ 20.019
s.262C(2)(b)(i) ....................................................................................... 20.018
s.262C(2)(b)(ii) ...................................................................................... 20.018
s.262C(2)(b)(iii) ..................................................................................... 20.018
s.262D ........................................................................... 20.013, 20.017, 20.019
s.262D(l )(a)(i) ........................................................................................ 20.017
s.262D(l )(a)(ii) ....................................................................................... 20.017
s.262D(I )(b) ............................................................................................ 20.017
s.262D(2) ................................................................................................. 20.017
s.262D(2)(c) ............................................................................................ 20.017
s.262D(2)( d) ............................................................................................ 20.017
s.262£ ...................................................................................................... 20.013
s.262E(3)(a) ............................................................................................. 20.018
s.262E(4) ................................................................................................. 20.018
s.262E(6) ................................................................................................. 20.018
s.262F ......................................................................................... 20.013, 20.017
s.262G ........................................................................................ 20.013, 20.019
s.262O(1)(a) ........................................................................................... 20.019
s.262G(l)(b) ........................................................................................... 20.019
s.263 ........................................................................................... 20.188, 20.236
s.264 ................................................................. 20.188, 20.190, 20.192, 20.236
s.264B ......................................................................................... 20.178, 20.180
s.264B(3) ................................................................................................. 20.179
s.264B(4) ................................................................................................. 20.180
s.265 ................................................... 17.077, 17.217, 18.060, 18.061, 19.026,
19.082, 20.099, 20. I 94, 20.197, 20.235, 20.236
s.265(1) .................................................................................................... 20. l 99
s.265( I)(b) ............................................................................................... 20.197
s.265(1)(d) ............................................................................................... 20.197
s.265(1)( db) ............................................................................................. 20.197
s.265(1)(e) ............................................................................................... 20.197
s.265(l)(ea) ............................................................................................. 20.197
s.265(1)(t) ................................................................................................ 20. I97
s.265(3) .................................................................................................... 20.197
s.265(3A) ................................................................................................. 20. l 97
s.265(3AA) .............................................................................................. 20.197
s.265(3AAAA) ........................................................................................ 20. l 97
s.265(3AB) .............................................................................................. 20. I97
s.265(3B) ....................................................................... 13.064, 20.099, 20.] 99
s.265(4) .................................................................................................... 20. l 97
s.265(5) .................................................................................................... 20.197
s.265(5A) ................................................................................................. 20. l 97
s.265(5B) ................................................................................................. 20. I98
s.265A ....................................20.131, 20.132, 20.143, 20.144, 20.159, 20.163
s.265A(2) ................................................................................................. 20.136
clxii TABLE OF LEGISLATION

s.265A(3) ....................................................................................20.135, 20.140

s.265B............................................................................20.136, 20.143, 20.159
s.2658( 1).................................................................................................20. J36
s.265B(2) .................................................................................................20.136
s.265B(3) .................................................................................................20.136
s.265B(4)(b) ............................................................................................20.136
s.265B(5) .................................................................................................20.136
s.2658(6) .................................................................................................20.136
s.265C............................................................................20.136, 20.143, 20.159
s.265C( 1)....................................................................................20. l 36, 20.140
s.265C(2) ....................................................................................20. l 36, 20.140
s.265C(3)(a) ............................................................................................20. l 36
s.265C(3)(b) ............................................................................................20.136
s.265C(4)(a) ............................................................................................20. l 36
s.265C(4)(b) ............................................................................................20.136
s.265C(5) .................................................................................................20.136
s.265C(6) .................................................................................................20. l 36
s.265D .................................................20.031, 20.143, 20.144, 20.160, 20. 161
s.265D(l) .................................................................................................20.144
s.265D(2) .......................................................................20.144, 20.158, 20.159
s.265D(3) .................................................................................................20. l 6 l
s.265D(4) .................................................................................................20.160
s.265E ...............................................................20. 143, 20.146, 20.147, 20.160
s.265E(b) ....................................................................................20.156, 20.160
s.266 ..................................................................7.123, 20.031, 20.097, 20.129,
20.130, 20.131, 20.142
s.266( l ) .................................................................................................... 20.131
s.266(2) ....................................................................................................20.131
s.266(3) ....................................................................................................20.142
s.266(4) .......................................................................................20.131, 20.137
s.266(5) ....................................................................................................20.140
s.266A ...........................................................................20.097, 20.129, 20.132
s.266A(2) .................................................................................................20.132
s.266A(3) .................................................................................................20. l 32
s.266B ................................................20.130, 20.131, 20.143, 20.144, 20.162
s.2668(1 )(a) ...............................................................................20.144, 20.158
s.266B( l )(b) .....................................................20.115, 20.131, 20.135, 20.136
s.2668(1 )(c) ...............................................................................20.131, 20.135
s.266B(2) ......................................................................20.131, 20.141, 20.144,
20.158, 20.159
s.2668(3) .................................................................................................20.159
s.266C............................................................................20.142, 20.143, 20.161
s.266D ........................................................................................20.097, 20.143
s.266E ......................................................................................................20.097
s.267 ................................................................ 17.169, 17.186, 20.03 I, 20.097,
20.163, 20.165, 20.166, 20.167
s.267(2) .......................................................................................20.163, 20.166
 TABLE OF LEGISLATION clxiii

s.267(3) .................................................................................................... 20.164

s.267(3)(a)(ii) .......................................................................................... 20.165
s.267(4) .................................................................................................... 20. I 66
s.267A .................................................................................................... 20.163
s.267A(2) ................................................................................................ 20.163
s.268 ................................................................. 20.028, 20.100, 20.101, 20.102
s.268(1) ....................................................................................... 20.102, 20.104
s.268(2) .................................................................................................... 20. I05
s.268(4) .................................................................................................... 20.104
s.268(6) .................................................................................................... 20. I06
s.268(7) .................................................................................................... 20.105
s.271 .............................................................................. 20.245, 20.247, 20.249
s.271(I ) .................................................................................................... 20.249
s.271(l)(a) ............................................................................................... 20.249
s.271( I)(b) ............................................................................................... 20.247
s.27l(l)(c) ............................................................................................... 20.249
s.271(1)( d) ............................................................................................... 20.247
s.271(1)(e) ............................................................................................... 20.247
s.271(1)(£)................................................................................................ 20.249
s.271(I)( o) ............................................................................................... 20.247
s.271( I)(p) ............................................................................................... 20.247
s.271(3) ....................................................................................... 20.247, 20.249
s.272 ........................................................................................... 20.245, 20.250
s.273 ........................................................................................... 20.245, 20.246
s.273(b) .................................................................................................... 20.246
S.273(C).................................................................................................... 20.246
s.274 ...................................................... 7.123,11.012, 11.015, 20.245, 20.251
s.274(1) .................................................................................................... l 1.012
s.275 .................................................................... 3.071, 7.117, 19.120, 20.031,
20.097, 20.177, 20.245, 20.248
s.275(1) ...............................................20.168, 20.169, 20.170, 20.171, 20.172,
20.175, 20.176, 20.177, 275.321
s.275(3) ....................................................................................... 20.170, 20.248
s.276 ..................................................... 8.038, 10.041, 20.031, 20.046, 20.098,
20.181, 20.182, 20.183, 20.184
s.276(1B) ................................................................................................. 20. I 82
s.277 ........................................................................................................ 20.245
s.278 ........................................................................................................ 20.013
s.280 ········································································································20.084
s.283( I)(b ) ............................................................................................... 20.222
s.285A ....................................................................................................... 9.104
s.286A ........................................................................... 20.030, 20.116, 20.117
s.286A(J )(a) ............................................................................................ 20. I 16
s.286A(l)(b) ............................................................................................ 20.l 16
s.286A(2) ................................................................................................. 20.117
s.286A(4) ................................................................................................. 20. I 18
s.286A(5) ................................................................................................. 20.118
clxiv TABLE OF LEGISLATION

s.286A(8) .................................................................................................20. l 18
s.286A(l 0) ...............................................................................................20. l l 8
s.2868. ....................................20.030, 20.109, 20.110, 20.111, 20.114, 20.116
s.286B(2) .................................................................................................20.111
s.286B(4) .................................................................................................20. l 10
s.286C...............................................................20.030, 20.109, 20.114, 20.116
s.286C(3) .................................................................................................20.114
s.286D .....................................................................................................20.118
s.287(2) ....................................................................................................20.244
s.290 ........................................................................................................20.259
s.290(1) .......................................................................................20.259, 20.260
s.290(1A) ....................................................................................20.259, 20.259
s.291(7) ....................................................................................................20.260
s.292 ...........................................................................................20.257, 20.260
s.293........................................................................................................20.037
s.296 ........................................................................................................20.242
s.296(3) ....................................................................................................20.242
s.297 ...........................................................................................18.005, 18.015
s.297A ........................................................................................18.005, 18.015
s.298A(l) .................................................................................................18.037
s.298A(2) .................................................................................................18.068
s.299( 1) ....................................................................................................18.018
s.299(2) ....................................................................................................I 8.018
s.300 ...........................................................................................18.005, 18.038
s.300A ..............................................................18.005, 18.021, 18.033, 18.064
s.300A(l)(a) ...............................................................................18.033, 18.064
s.300A(l)(b) ............................................................................................18.033
s.300A(J)(c)(i) ........................................................................................18.064
s.300A(l)(c)(ii) .......................................................................................18.064
s.300A( 1)(c)(iii) ......................................................................................18.064
s.300A(2) .................................................................................................18.064
s.300B( 1).................................................................................................18.033
s.302 ..........................................................................................................7.113
s.306 ..........................................................................................................7.113
s.308 ..........................................................................................................2.083
s.308A .......................................................................................................2.083
s.326 ................................................................................2.071, 17.137, 20.207
s.327 ........................................................................................................20.207
s.327(2) ....................................................................................................20.207
S.327(3)(C)...............................................................................................10.231
s.342 ................................................................................2.074, I0.231, 16.099
s.342(1) ....................................................................................................16.099
s.342(1) ....................................................................................................16.098
s.342(3) ....................................................................................................16.099
s.342A .....................................................................................................16.100
s.342B......................................................................................................J6.100
s.342C......................................................................................................16.100
 TABLE OF LEGISLATION cLw

s.342CA ................................................................................................... 16.100

s.342CB ................................................................................................... 16.100
s.342E ...................................................................................................... J6.100
s.342F ............................................................................ 16.055, 16.087, 16.100
s.343 ........................................................................................................ 16.101
s.343(1) .................................................................................................... 16.101
s.350B ................................................. 10.101, 10.102, 10.127, 10.133, 10.245,
10.246, I0.249, 10.253
s.350B(l) .................................................................................... 10.247, 10.248
s.350B(2) ................................................................................................. 10.250
s.350B(5) ................................................................................................. 10.25l
s.350B(7) ....................................................................... 10.249, 10.252, 10.253
s.350B(8) ................................................................................................. 10.249
s.351 .......................................................................................................... l.171
s.351(2) ...................................................... l.l72, 3.071, 8.018, 11.012, 20.251
Sched.l .................................................................................................... 12.004
Sched.3 ....................................................................................... 16.022, 16.023
Sched.3 Pt.I 3 ............................................................................. 16.149, 16.024
Sched.3 Pt.I? .......................................................................................... 16.038
Sched.3 Pt.11............................................................................................ 16.025
Sched.10 ..................................................................................... 11.002, 11.034
Sched.11 .................................................................................................. 11.002
Sched.12 .................................................................................................... 1.171
Sched.15 ......................................................................................... 7.123, 7.124
Sched.17 .......................................................... 16.0l4, 16.015, 16.017, 16.019,
16.096, 16.099, 16.106, 16.108
Sched.17 Pt.l .............................................................................. 16.016, 16.096
Sched.17 Pt. I s.1 ..................................................................................... 16.016
Sched.17 Pt.l s.2 ..................................................................................... 16.016
Sched.17 Pt.I s.3 ........................................................................ 16.0l6, 16.017
Sched.17 Pt.I s.4 ........................................................................ 16.016, 16.017
Sched.17 Pt.l s.5 ........................................................................ 16.015, 16.016
Sched. l 7 Pt. I s.6 ..................................................................................... 16.016
Sched.17 Pt.l s.8 ..................................................................................... 16.016
Sched.17 Pt.I s.9 ..................................................................................... 16.016
Sched.17 Pt.I s.10 ................................................................................... 16.016
Sched.17 Pt.l s.l l ................................................................................... 16.016
Sched.17 Pt. I s.12(a) ............................................................................... I6.016
Sched.17 Pt.l s.12(b) .............................................................................. 16.016
Sched.17 Pt.4 ........................................................................................... 16.016
Sched.17 Pt.4 s.l(b) ................................................................................ 16.018
Sched.17 Pt.4 s.2 ..................................................................................... 16.017
Sched.17 Pt.4 s.3 ..................................................................................... J6.016
Sched.18 Pt. l ........................................................................................... 16.022
Sched.18 Pt.3 ........................................................................................... 16.016
Sched.18 .................................................................................................. 16.022
Sched.19 .................................................................................................. 16.105
clxvi TABLE OF LEGISLATION

Sched.20 .................................................................................................. 16.028

Sched.20 s.2 ............................................................................................ 16.027
Sched.21 ........................................................................ 16.020, 16.027, 16.028
Sched.21 s.2 ............................................................................................ 16.028
Sched.21 s. l ............................................................................................ 16.028
Sched.21 s.2 ............................................................................................ 16.028
Sched.21 s.7 ............................................................................................ 16.028
Sched.21 s.8 ............................................................................................ 16.029
Sched.22 .................................................................................................. 16.045
Sched.25 ............................................................ 1.168, 19.020, 20.029, 20.031,
20.032, 20.088, 20.194
Sched.26 .................................................................................................. 20.129
(predecessor) Companies Ordinance
(39 of 1932)....................................... l.003, 1.013, 1.021, 1.064, 1.108, 1.110,
1.112, 1.113, 1.114, l.115, l.128, 1.133,
1.141, 1.142, 1.143, 1.145, 1.159, 1.166,
1.174, 1.I 80, l.202, l.203, 2.005, 2.006,
2.007, 2.008, 2.018, 2.030, 2.031, 2.033,
2.034, 2.039, 2.041, 2.047, 2.062, 2.067,
2.068, 2.069, 2.077, 2.081, 2.084, 4.032,
8.082, 8.097, 11.002, 14.003, 15.064
Pt.IIA ............................................................................................ 1.141, 15.149
Pt.III ............................................................................................... 1.143, 2.068
Pt.IVAA ......................................................................... 10.048, 10.051, 10.052
Pt.IVAAA ....................................................................................... 1.159, 9. 136
Pt.IX .......................................................................................................... 2.082
Pt.XIIIA ..................................................................................................... 1.1l l
Pt.XIV .......................................................................................... 'I.108, I0.048
s.2 .............................................................................................................. 2.068
s.4 ........................................................................................ 2.003, 2.018, 2.046
s.5(1A) ....................................................................................................... 5.016
s.5A ........................................................................................................... 5.016
s.5B(l) ....................................................................................................... 5.0l6
s.5B(2) ....................................................................................................... 5.016
s.58(3) ...................................................................................................... .5.016
s.5C ............................................................................................. 12.024, 12.069
s.7 .............................................................................................................. 9.006
s.9 .............................................................................................................. 2.004
s.11(2) ........................................................................................................ 2.004
s.15 ............................................................................................................ 2.004
s.20(3) ........................................................................................................ 2.087
s.23 ............................................................................................. 10.l 17, 10.125
s.23(JA) ........................................................................................ 5.035, 10.114
s.28A ....................................................................................................... 15.062
s.29(1) ........................................................................................................ 2.049
s.30 ............................................................................................................ 2.056
s.32A ............................................................................................. .4.002, 4.022
 TABLE OF LEGISLATION clxvii

s.32A(l)(a) ............................................................................................... .4.037

s.35 ............................................................................................... 2.036, 12.050
s.45 .......................................................................................................... 17.022
s.47A ......................................................................................................... 1.171
s.47C. .......................................................................................... 15.131, 15.136
15.136
s.47D ......................................................................................................... 2.059
s.47E ............................................................................................. 2.059, 15.116
s.47F(l) ................................................................................................... 15.051
s.48B(l) ................................................................................................... 14.005
s.49 .......................................................................................................... 15.066
s.49A ....................................................................................................... 15.066
s.49A(J)(b) .............................................................................................. 15.076
s.49A(4) ................................................................................................... 15.074
s.49B(9) ................................................................................................... 15.088
s.49F(2) ................................................................................................... 15.093
s.49H(l) ................................................................................................... 15.074
s.498(4) ................................................................................................... J 5.074
s.491......................................................................................................... 15.068
s.49L(2) ................................................................................................... 15.069
s.50 .......................................................................................................... 14.004
s.53(l)(a) ................................................................................................. 14.003
S.53(1)( C)................................................................................................. 13.062
s.53(l)(e) ................................................................................................. 14.156
s.57B ........................................................................................................ 14.028
s.58(1) ...................................................................................................... 15.021
s.58(1A) ...................................................................................... 15.015, 15.060
s.62(1) ...................................................................................................... 15.045
s.63A .......................................................................................... 14.190, 14.196
s.71A ....................................................................................................... 14.142
s.71A(l0) ................................................................................................. 14.l 47
s.71A(l2) ................................................................................................. 14.l 47
s.73 .......................................................................................................... 13.055
s.73(3) ...................................................................................................... 13.057
s.73A ....................................................................................................... 12.052
s.74A ....................................................................................................... 17.002
s.74A(2) ................................................................................................... l 7.025
s.74A(3) ................................................................................................... I7.025
s.74B ........................................................................................................ 17.002
s.75 .......................................................................................................... 17.002
s.75A .......................................................................................... 17.002, 17.044
s.75B ........................................................................................... 17.002, 17.032
s.76 ............................................................................................. 17.002, 17.011
s.77 ............................................................................................. 17.002, 17.010
s.78 ............................................................................................. 17.002, 17.035
s.79(1) ......................................................................................... 18.060, 18.061
s.79C(2) ................................................................................................... 15.l 57
clxviii TABLE OF LEGISLATION

s.791.........................................................................................................15.163
s.80 .............................................................................................17.138, 17.210
s.80(1).........................................................................................17.137, 17.153
s.80(2)......................................................................................................17.l 16
s.80(2)(a) .................................................................................................17.l 16
s.81 ..........................................................................................................17.164
s.83 ..........................................................................................................17.138
s.83(1)(b) .................................................................................................17.138
s.85 ..........................................................................................................17.172
s.86 .............................................................................................17.164, 17.171
s.86(2)......................................................................................................17.164
s.88 ..........................................................................................................17.177
s.89(2)......................................................................................................I7 .176
s.90 ..........................................................................................................17.178
s.91 ..................................................................................2.068, 17.179, 17.181
s.93(1)(b) .......................................................................................2.035, 12.041
s.95 ............................................................................................................2.033
s.95(1)(c) .................................................................................................14.100
s.95A .......................................................................................................14.096
s.97(1)......................................................................................................13.058
s.97(5)......................................................................................................13.038
s.98 ...............................................................................................9.133, 14.106
s.107 ..........................................................................................................1.171
s.l l l ........................................................................................................11.073
s. l l l(l) .........................................................................................9.008, 11.073
s.l l 1(6)....................................................................................................1l.073
s.112 ........................................................................................................16.038
s.113 ..........................................................................................................9.029
s.l 13(1)...........................................................................................9.016, 9.017
s.l 14 ........................................................................................................10.179
s. I I4(2) ......................................................................................................9 .043
s. l 14AA ....................................................................................................9.007
s.l 14B.......................................................................7.052, 9.027, 9.033, 9.036
s. l 14C(lA)(b) ...........................................................................................9.091
s. l 14C(2)........................................................................................l.15 l, 9.091
s.l 15(1A)...................................................................................................9.106
s. l l 5A(4)(b) ..............................................................................................9 .065
s.l 16BB(l) ................................................................................................9.l 15
s. l l 6C........................................................................................................9.050
s. l l 8(9)....................................................................................................12.088
s.l 19 ..........................................................................................................7.074
s.120 ..........................................................................................................9.133
s.121 ...........................................................................................ll.014, 11.015
s.121(1) ....................................................................................................l l.003
s.122 ........................................................................................................ll.073
s.122(1) ....................................................................................................l l.023
 TABLE OF LEGISLATION clxix

s.122(1A) ................................................................................................. I l.073

s.122(2) .................................................................................................... I I .025
s.123 ........................................................................................................ J 1.065
s.123(1) .................................................................................................... l l .020
s.123(4) .................................................................................................... 11.034
s.124 ........................................................................................................ 11.041
s.125 ........................................................................................................ 12.050
s.125(6) .................................................................................................... I 2.05 I
s.129 ........................................................................................................ 12.051
s.129O(1) ................................................................................................. l l.057
s.140 ........................................................................................................ 14.024
s.141 ........................................................................................... 11.l 10, 14.024
s.141(2) .................................................................................................... l 1.l 17
s.141D .............................................................. 11.058, 11.061, 11.062, 11.065
s.142 ....................................................................... 1.191, 1.192, 1.202, 14.024
s.143 ....................................................................... 1.191, 1.192, 8.003, 14.024
s.144 .................................................................................. 1.191, 1.192, 14.024
s.145 .................................................................................. l.191, 1.192, 14.024
s.145A ............................................................................................ 1.191, 1.192
s.145B ............................................................................................. 1.191, 1.192
s.146 ................................................................................... 1.191, 1.192,14.024
s.147 ............................................................................................... 1.191, 1.192
s.147(2) ...................................................................................................... I .200
s.147(3) ...................................................................................................... l .200
s.148 ............................................................................................... 1.191, 1.192
s.149 ............................................................................................... 1.191, 1.192
s.149A ............................................................................................ 1.191, 1.192
s.150 ............................................................................................... 1.191, 1.192
s.151 .................................................................................. 1.191, 1.192, 14.074
s.152 ............................................................................................... l.191, 1.192
s. l 52A ............................................................................................ 1.19'I, 'I.192
s.152B ............................................................................................. 1.191, 1.192
s.152C ............................................................................................. 1.191, J.192
s.152D ............................................................................................ 1.191, 1.192
s.152E ............................................................................................. l.191, 1.192
s.152F............................................................................................. I. I 91, 1.192
s.152FA.................................................................................................... l l.081
s.152FA(2)(b) .......................................................................................... 11.082
s.153 .......................................................................................................... 2.021
s. I 53A ....................................................................................................... 2.02 I
s.157 ........................................................................................................ 12.089
s.157B .................................................................................. 7.045, 7 .050, 9 .027
s.157B(l) ................................................................................................... 7.045
s.157B(5) ................................................................................................... 7.047
s. I 57H ....................................................................................................... 8.097
s.157H(2) ........................................................................................ 8.097, 8.100
clxx TABLE OF LEGISLATION

s.157H(3) ................................................................................................... 8.100

s. l 57H(3)(c) .............................................................................................. 8.105
s. I 57H(4)(c) .............................................................................................. 8.105
s.157H(l 0) ................................................................................................. 8.097
s. I 57HA(2) ................................................................................................ 8.098
s.157HA(5) ................................................................................................ 8.107
ss.157HA(9)-l 57HA(l 0) .......................................................................... 8.107
ss.157HA(l 1)-157HA(J4) ........................................................................ 8.107
s.157HA(l3) .............................................................................................. 8. l 07
s. I57HA( 14).............................................................................................. 8.107
s.1571......................................................................................................... 8. l l l
s.158 .......................................................................................................... 2.031
s.158(1) ...................................................................................................... 2.031
s.158(2) ...................................................................................................... 2.031
s. I 58(3) ........................................................................................... 2.030, 2.031
s.158A ....................................................................................................... 2.033
s.161 .......................................................................................................... 8.094
s.162 ............................................................................................... 8.088, 8.089
s.165 ............................................................................................... 2.075, 8.198
s.165(2) .................................................................................................... 11.143
s.166 ................................................................ 10.010, 14.162, 14.173, 14.181,
19.005, 19.009, 19.037, 19.042
s.168 ........................................................................................................ 14.176
s.168A ...................................................... 7.052, 8.190, 10.134, 10.13610.137,
10.168, 10.171, 10.216, 10.227,
11.092, 18.087, 20.071
s.168A(2) .................................................................................... 10.167, 10.167
s. I68B ...................................................................................................... 15.088
s.168BAG .................................................................... 044, 9.044, 9.045, 9.045
s.168BC(2)(a) .......................................................................................... l 0.060
s.168D(l)(c) ............................................................................................ 18.015
s.168H ..................................................................................................... ll.015
s.177( I)(t) ................................................................................................ 20.07 I
s.180(1A) ................................................................................................. 20.071
s.291AA .................................................................................................. 20.232
s.305 .......................................................................................................... 1.133
s.311 .......................................................................................................... 2.082
s.332 .......................................................................................................... 2.069
s.341 .......................................................................................................... 2.064
s.346A ....................................................................................................... 2.012
s.346B ........................................................................................................ 2.012
s.350B(3) ................................................................................................... 1.195
s.351(2) ...................................................................................................... I .131
s.358 .......................................................................................................... 8.078
Sched.l .................................................................................................... 12.086
Sched.10 .................................................................................................. 11.021
Sched.11 .................................................................................................. 11.021
 TABLE OF LEGISLATION clxxi

Sched.10 .................................................................................................... 1.144

Sched. l 1 .................................................................................................... 1.144
Table A reg.1 ............................................................................................. 7.103
Table A reg.5 ........................................................................................... 14.201
Table A reg.7 ............................................................................................. 9.074
Table A reg.29 ......................................................................................... 14.091
Table A reg.51 ........................................................................................... 9.016
Table A reg.52 ..................................................................... 9.043, 9.050, 9.059
Table A reg.54 ........................................................................................... 9.059
Table A reg.SS ........................................................................................... 9.067
Table A reg.56 ................................................................................ 9.006, 9.067
Table A reg.65 ........................................................................................... 9.071
Table A reg.70 ..................................................................... 6.018, 6.031, 6.033
Table A reg.79 .............................................................................. 7.028, 12.091
Table A reg.80 ..................................................................... 6.017, 6.025, 6.026
Table A reg.82 .............................................. 6.002, 6.008, 6.017, 6.018, 6.019,
6.020, 6.028, 6.031, 6.032, 12.004
Table A reg.83 ........................................................................................... 7.038
Table A reg.86 ..................................................................... 7.071, 7.073, 8.084
Table A reg.86(2) ....................................................................................... 8.087
Table A reg.86(2)(a)-( d) ............................................................................ 8.083
Table A reg.86(2)(d) ....................................................................... 8.083, 8.087
Table A reg.90(a) ....................................................................................... 7.028
Table A reg.90(d) ....................................................................................... 7 .027
Table A reg.91 ........................................................................................... 7.033
Table A reg.94 ................................................................................ 6.013, 7.033
Table A reg.97 ........................................................................................... 6.013
Table A reg.98 ........................................................................................... 6.013
Table A reg.99 ................................................................................ 6.013, 7.043
Table A reg. 100 ........................................................7.059, 7.063, 7.070, 7.073
Table A reg.102 ......................................................................................... 7.071
Table A reg.103 ......................................................................................... 7.072
Table A reg.I 06 ......................................................................................... 7.073
Table A reg.108 .............................................................................. 7.093, 7.094
Table A reg.109 ..............................................................................7.016, 7.037
Table A reg.110 ......................................................................................... 8.093
Table A reg.111 ......................................................................................... 7.016
Table A reg.126 ....................................................................................... 1·1.08 I
Table A reg.133 ......................................................................................... 9.071
Table A reg.135(b) ..................................................................................... 9.047
Table A, reg.133 ........................................................................................ 9.046
Companies Ordinance (1 of 1865) (repealed) ...................................1.003, 1.102, 1.103,
2.018, 2.077
s.6 .............................................................................................................. 2.018
Companies Ordinance (58 of 1911) (repealed)............................................1.003, 1.102,
1.106, 1.108, 2.077
s.261 .......................................................................................................... 7 .007
clxxii TABLE OF LEGISLATION

Hong Kong Companies Ordinance Amendments Legislation

Companies (Amendment) Bill 2018 ................. 7.094, 11.006, 11.019, 11.020, 11.033,
11.042, 11.064, 11.073, 17.022
Companies (Amendment) Bill 2012 .......................................................................7.094
Companies (Amendment) Ordinance 2018 ..................................................1.169, 2.030
Companies (Amendment) Ordinance 2010 ...................................... 1.112, 1.159, 2.012,
2.039, 2.091, 14.028
Companies (Amendment) Ordinance 2004 ........................... l. 112, l. 116, 1.157, 2.017,
2.018, 2.064, 10.216, 10.139,
11.081, 16.005, 16.016,
16.024, 16.028, 16.098, 17.18 I
Companies (Amendment) Ordinance 2003 .......................................1.112, 1.116, 7.045
Companies (Amendment) Ordinance 1997 ........................... 1.112, 1.116, 5.016, 5.016
Companies (Amendment) Ordinance 1994 ................................................1.112, I0.171
Companies (Amendment) Ordinance 1993 .............................................................1.112
Companies (Amendment) Ordinance 1991 ...................................1.112, 15.064, 15.065
Companies (Amendment) Ordinance 1984 ...................................... 1.110, 1.111, 1.112,
2.064, 17.032
Companies (Amendment) Ordinance 1978 ...........................................................10.135
Companies (Amendment) Ordinance 1974 ...................................1.109, 11.030, 11.031
Companies (Amendment) Ordinance 1972 ...........................................................16.013
Companies (Amendment) Ordinance 1963 .............................................................1.109

Hong Kong Companies Ordinance Subsidiary Legislation

Companies (Winding-Up) Rules (Cap.32H) ..........................................................10.226
r.5(l)(t) .................................................................................................... 20.l 18
r.22........................................................................................................... 20.072
r.23........................................................................................................... 20.072
r.24........................................................................................................... 20.072
r.25........................................................................................................... 20.072
r.26........................................................................................................... 20.072
r.27........................................................................................................... 20.072
r.27A ........................................................................................... 20.072, 20.206
r.32........................................................................................................... 20.067
rr.34-36 ................................................................................................... 20.084
r.36........................................................................................................... 20.084
r.39(6) ...................................................................................................... 20. l 08
r.47 ........................................................................................................... 20.021
r 48 .......................................................................................................... 20.02 I
r.62( 1)...................................................................................................... 20.114
r.62(2) ...................................................................................................... 20.118
r.67........................................................................................................... 20.025
r.74........................................................................................................... 20. l 85
r.75........................................................................................................... 20. I 85
r.76........................................................................................................... 20.185
r.77........................................................................................................... 20. I 85
 TABLE OF LEGISLATION clxxiii

r.78 ........................................................................................................... 20.191

r.79 ······························· ............................................................................ 20.191
r.80 ........................................................................................................... 20. I9 I
r.81 ........................................................................................................... 20.191
r.82 ........................................................................................................... 20.191
r.83 ........................................................................................................... 20.191
r.84 ........................................................................................................... 20.191
r.85 ........................................................................................................... 20.191
r.86 ........................................................................................................... 20. l 9 l
r.87 ........................................................................................................... 20. I9 l
r.88 ........................................................................................................... 20.191
r.89 ····························· ......... ···························· ......................................... 20.191
r.90 ........................................................................................................... 20. I9 I
r.91 ........................................................................................................... 20.191
r.92 ........................................................................................................... 20.191
r.93 ........................................................................................................... 20.191
r.94 ........................................................................................................... 20. l 9 l
r.95 ........................................................................................................... 20.]91
r. l l 6 ......................................................................................................... 20.22 l
r.149 ......................................................................................................... 20.044
r.148 ......................................................................................................... 20.044
r.179 ......................................................................................................... 20.197
Companies (Words and Expressions in Company Names)
Order (Cap.622A) ...................................................................l. l 65, 2.088, 2.089
Companies (Disclosure of Company Name and Liability Status)
Regulation (Cap.622B) ...................................................... 1.165, 2.092, 2.093,
2.094, 3.071
s.2 .............................................................................................................. 2.092
s.3 .............................................................................................................. 2.092
s.4 .............................................................................................................. 2.092
s.5( 1) .......................................................................................................... 2.093
s.5(2) .......................................................................................................... 2.093
s.6 .............................................................................................................. 2.092
Companies (Accounting Standards (Prescribed Body))
Regulation (Cap.622C) .................................................................................1.165
Companies (Directors' Report) Regulation (Cap.622D) ............................ 1.165, 11.043
Companies (Exemption of Companies and Prospectuses from
Compliance with Provisions) Notice (Cap.32L)
s.9A ......................................................................................................... 16.034
Companies (Summary Financial Reports) Regulation (Cap.622£) .......... 1.I 65, 11.053,
11.054
Companies (Revision of Financial Statements and Reports)
Regulation (Cap.622F) ....................................................................1.165, 11.037
s.10 .......................................................................................................... 11.039
Companies (Disclosure of Benefits about Directors)
Regulation (Cap.622O) ......................................................1.165, 11.031, 11.032
clxxiv TABLE OF LEGISLATION

Companies (Model Articles) Notice (Cap.622H) .................. 1.165, 2.008, 5.025, 6.002,
6.018, 6.031, 6.034, 7.027, 7.033,
7.042, 7.043, 7.061, 7.094, 9.046,
9.047, 12.004, 14.086
Schedule 1 (Public Companies) ...............................................................14.038, 14.041
art.2 ........................................................................................................ 12.004
art.2(1) ...................................................................................................... 6.033
art.3 .......................................................................... 6.002, 6.008, 6.018, 6.03 I
art.3( 1) ...................................................................................................... 6.034
art.3(2) ...................................................................................................... 6.034
art.4 ............................................................................................... 6.03 l, 7 .038
art.5. ......................................................................................................... 8.093
art.6 .......................................................................................................... 7.101
art.6(b) ...................................................................................................... 7 .093
art.7 .......................................................................................................... 7.059
art.7(4) ...................................................................................................... 7.064
art.7(5) ........................................................................................... 7.060, 7.061
art.7(6) ...................................................................................................... 7.082
art.8 .......................................................................................................... 7 .103
art.9 .......................................................................................................... 7.07 l
art.11 ........................................................................................................ 7.072
art.11(5) .................................................................................................... 7.072
art.12 ........................................................................................................ 7.073
art.13 ........................................................................................................ 7 .073
art.15 ............................................................................................. 7.071, 7.073
art.15 ........................................................................................................ 8.085
art.17 ........................................................................................................ 7.093
art.18 ........................................................................................................ 7.093
art.18(2) .................................................................................................... 7 .093
art.19 ............................................................................................. 7.093, 7.094
art.22(l)(a) ............................................................................................... 6.013
art.23 ................................................................................... 6.015, 7.033, 7 .035
art.23(3) .................................................................................................... 6.013
art.23(4) .................................................................................................... 7 .035
art.24 ................................................................................... 6.015, 7.033, 7.042
art.24(6) .................................................................................................... 7.042
art.24(7) .................................................................................................... 6.013
art.24(8) .................................................................................................... 7.033
art.24(9) .................................................................................................... 7 .033
art.25 ........................................................................................................ 7.033
art.27 ........................................................................................................ 7.043
art.27( c) .................................................................................................... 7 .027
art.28 ........................................................................................................ 8.093
art.30 ........................................................................................................ 7 .037
art.31 ........................................................................................................ 7.060
art.33 ................................................................................... 6.012, 7.016, 7.037
art.33(2) .................................................................................................... 7.016
 TABLE OF LEGISLATION clxxv

art.33(4) .................................................................................................... 8.093

art.37 ............................................................................................. 2.026, 6.012
art.38(2) .................................................................................................... 9.016
art.39 ............................................................................................. 9.050, 9.059
art.40(1) .................................................................................................... 9.046
art.40(2) .................................................................................................... 9.047
art.41 ........................................................................................................ 9.062
art.43 ........................................................................................................ 9.069
art.44(1) .................................................................................................. 19.087
art.44(2) .................................................................................................. 19.087
art.44(3) .................................................................................................... 9.082
art.44(4) .................................................................................................... 9.095
art.46(1) .................................................................................................... 9.067
art.46(2) ......................................................................................... 9.006, 9.067
art.47(1) .................................................................................................... 9.083
art.49(2) .................................................................................................... 9.084
art.51 ........................................................................................................ 9.083
art.53 ...................................................................................................... 19.097
art.56 ...................................................................................................... 14.04 l
art.63 ........................................................................................... 9.074, 14.084
art.64 ...................................................................................................... 14.l 36
art.65 ...................................................................................................... 14.135
art.66 ...................................................................................................... 14.I36
art.68 ...................................................................................................... 14.042
art.69 ...................................................................................................... 14.042
art.72(3) .................................................................................................. 14.041
art.73(1) ....................................................................................... 6.041, 14.038
art.73(2) .................................................................................................. 14.038
arts.75-78 ............................................................................................... 14.043
art.77(2)(d) ............................................................................................. 14.043
art.78 ...................................................................................................... 14.043
arts.80-82 ............................................................................................... 14.055
art.82 ...................................................................................................... 11.08I
art.82 ...................................................................................................... 14.l 10
art.83 ...................................................................................................... 14.09!
art.84 ...................................................................................................... 14.086
art.84 .......................................................................................... 14.084, 14.090
art. 91 ......................................................................................... 15.140, I 5. 14I
art.91 (2) .................................................................................................. 15.144
art.97 ...................................................................................................... 15.146
art.99 ...................................................................................................... 15.] 47
Schedule 2 (Private Companies) .......................................................................... 14.040
art.2 ............................................................................................... 6.002, 6.008
art.2( 1) ...................................................................................................... 2.050
art.2(2) ....................................................................................... 14.055, 14.073
art.3 ................................................ 5.025, 6.002, 6.008, 6.031, 12.004, 12.013
art.3(1) ...................................................................................................... 6.033
clxx"i TABLE OF LEGISLATION

art.4 ..................................................................................... 5.025, 6.018, 6.031

art.4(1) ...................................................................................................... 6.034
art.4(2) ...................................................................................................... 6.034
art.5 .......................................................................................................... 7 .038
art. 7( I)(a) ................................................................................................. 7 .073
art. 7(1)(b) ....................................................................................... 7 .093, 7. l 00
art. 7(2) ...................................................................................................... 7 .105
art.7(3) ...................................................................................................... 7.105
art.8 .......................................................................................................... 7 .100
art.8(2) ...................................................................................................... 7.093
art.8(4) ...................................................................................................... 7.093
art.9 .......................................................................................................... 7 .059
art.9(2) ...................................................................................................... 7.064
art.9(3) ........................................................................................... 7 .060, 7 .061
art.JO ........................................................................................................ 7.103
art.11 ........................................................................................................ 7.071
art.13 ........................................................................................................ 7 .072
art.13(4) .................................................................................................... 7.072
art.14 ........................................................................................................ 7.073
art.16 ................................................................................... 7.071, 7.073, 8.085
art.20(4) ......................................................................................... 7.094, 7.105
art.22 ............................................................................................. 7.033, 7.035
art.22(1)(a) ............................................................................................... 6.013
art.22(2) .................................................................................................... 7 .042
art.22(3) .................................................................................................... 6.013
art.25 ........................................................................................................ 7.043
art.25( c) .................................................................................................... 7 .027
art.28 ........................................................................................................ 7.037
art.29 ........................................................................................................ 7 .060
art.33 ............................................................................................. 2.026, 6.012
art.34(2) .................................................................................................... 9.016
art.35 ............................................................................................. 9.050, 9.059
art.36(1) .................................................................................................... 9.046
art.36(2) .................................................................................................... 9 .047
art.37 ........................................................................................................ 9.062
art.39 ........................................................................................................ 9.069
art.40(1) .................................................................................................. 19.087
art.40(2) .................................................................................................. 19.087
art.40(3) .................................................................................................. 19.087
art.40(4) .................................................................................................... 9.095
art.42(1) .................................................................................................... 9.067
art.42(2) ......................................................................................... 9.006, 9.067
art.43(1) .................................................................................................... 9.083
art.45(2) .................................................................................................... 9.084
art.46 ........................................................................................................ 9 .094
art.47 ........................................................................................................ 9.083
art.49 ...................................................................................................... 19.097
 TABLE OF LEGISLATION clxxvii

art.56 ...................................................................................................... 14.040

art.58 ........................................................................................... 9.074, 14.084
art.59 ...................................................................................................... J4.136
art.60 ...................................................................................................... 14.135
art.61 ...................................................................................................... 14.136
art.63. ..................................................................................................... 14.055
art.64 ...................................................................................................... 14.055
art.65 ...................................................................................................... 14.09I
art.66 ............................................................................. 14.084, 14.086, 14.090
arts.68-79 ............................................................................................... 14.041
art.70 ...................................................................................................... 14.041
art.73 ......................................................................................... 15.140, 15.141
art.73(2) .................................................................................................. 15.I 44
art.77 ...................................................................................................... 15.146
art.79 ...................................................................................................... 15.147
art.81 ...................................................................................................... 12.042
Company Records (Inspection and Provision of Copies)
Regulation (Cap.6221)...........................................................l. I65, 2.033, 2.034,
14.098, 17.184
s.3 ............................................. 9.132, 14.129, 17.025, 17.176, 17.177, 17.184
s.4 ............................................................................................................ 14.132
s.5 ............................................................................................... 14.132, 17.178
s.6 .................................................................................. 14.132, 17.026, 17.178
s.7 ....................................................................... 9.133, 14.105, 14.108, 14.132
s.8 .................................................................................... 9.133, 14.105, 14.132
s.9 .................................................................................. 14.105, 14.108, 14.132
s.ll ............................................................................................................ 9.133
s.12 .................................................................................. 9.133, 14.105, 17.026
s.13 .......................................................................................................... 14.105
Companies (Non-Hong Kong Companies) Regulation (Cap.6221) ........................ 1.165
Companies (Fees) Regulation (Cap.622K) .................................................1.165, 17.142
Companies (Unfair Prejudice Petitions) Proceedings Rules (Cap.622L) ................ l.165

ReferencedHong Kong Legislation

Abbot of the Order ofCistercians of the Strict Observance
Jncorporation Ordinance (Cap. I I 07) ...........................................................1.009
Administrative Appeals Board Ordinance (Cap.442) ..............................................2.090
Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap.615)
Sched.l .................................................................................................... 14.132
Arbitration Ordinance (Cap.609)
s.20 .......................................................................................................... 10.244
s.84 ··········································································································20.o67
Banking Ordinance (Cap. I 55)..................................................................................2.064
s.46 ............................................................................................................ 2.064
Bankruptcy Ordinance (Cap.6) ............................................ 1.043, 1.168, 1.204, 20.002
s.34 .......................................................................................................... 20. I 88
s.35 ............................................................................................. 20.190, 20.192
clXX\'iii TABLE OF LEGISLATION

s.34(1) ...................................................................................................... 20. l 88

s.38(7) ........................................................................................................ 1.043
s.51(1)(a) ................................................................................................. 20. l 58
s.51B(2) ...................................................................................... 20.130, 20.140
s.53(3) ...................................................................................................... 14.093
s.58 .......................................................................................................... 14.092
s.59 .......................................................................................................... 14.094
s.75 ............................................................................................................ 1.204
Basic Law .................................................................................................................1.18l
art.27 ....................................................................................................... 14.106
art.30 ....................................................................................................... 14. l 06
art.63 ......................................................................................................... 1.181
Bills of Sale Ordinance (Cap.20) .............................................................................1.079
s.2 ............................................................................................................ 17.124
s.9 ............................................................................................................ 17.123
s.l l ............................................................................................................ 1.080
s.14 (2) ....................................................................................................... 1.081
s.26 ............................................................................................... 1.079, 17.029
s.38(7) ........................................................................................................ 1.043
s.53 .......................................................................................................... 14.093
s.58 .......................................................................................................... 14.092
s.59 .......................................................................................................... 14.094
s.75 ............................................................................................................ 12.02
Building Management Ordinance (Cap.344) .........................................................20.127
Business Registration Ordinance (Cap.310) .......................... 1.027, 1.041, 1.071, 2.039
s.2(1A) ....................................................................................................... 2.039
s.5(2) .......................................................................................................... 2.039
s.5A ........................................................................................................... 2.039
s.6(5C)( c) .................................................................................................. 2.039
Business Registration (Amendment) Ordinance 20 l 0.............................................2.039
Chinese Partnerships Ordinance (53 of 1911) (repealed) ........................................1.105
City University of Hong Kong Ordinance (Cap.1132) ............................................1.009
s.3 .............................................................................................................. 1.009
Conm1oditiesTrading Ordinance (Cap.250) (repealed) ..........................................1.174
Communications Authority Ordinance (Cap.616) ...................................................1.009
s.3 .............................................................................................................. 1.009
Contracts (Rights ofThird Parties) Ordinance (Cap.623)
s.3(2)(g) ..................................................................................................... 5.036
s.4 .............................................................................................................. 5.036
s.6(2) .......................................................................................................... 5.036
Conveyancing and Property Ordinance (Cap.219)
s.20 .......................................................................................................... 12.09l
s.20(1) ......................................................................................... 12.046, 12.091
s.20(2) ...................................................................................................... 12.046
s.44 .......................................................................................................... 17.186
s.44(1) ...................................................................................................... 17.058
s.51 .......................................................................................................... 17.055
 TABLE OF LEGISLATION clxxix

s.51(1) ...................................................................................................... 18.025

s.60(1) ......................................................................................... 20.098, 20.100
s.60(2) ...................................................................................................... 20. I00
Sched.4 .................................................................................................... 18.025
Credit Unions Ordinance (Cap.I 19)
s.3 .............................................................................................................. 1.009
s.6 .............................................................................................................. 1.009
Criminal Procedure Ordinance (Cap.221) ...............................................................3.071
s.20 ................................................................................ 12.091, 12.092, 12.093
s.20(!) ......................................................................................... 12.094, 12.097
s.23 ............................................................................................. 12.092, 12.093
s.49(3) ......................................................................................... 12.108, 12.117
s.60 ................................................................................ 19.120, 19.121, 19.123
s.l0lE .............................................................................. 3.071, 12.120, 12.129
s.l 13A ........................................................................................ 12.!08, 12.117
Deposit Protection Scheme Ordinance (Cap.581) .................................................20.197
s.38 .......................................................................................................... 20.197
Drug Trafficking (Recovery of Proceeds) Ordinance (Cap.405) ............................3.057
Employment Ordinance (Cap.57)
s.63C .......................................................................................................... 3.058
s.64B .......................................................................................................... 3.058
Financial Reporting Council (Amendment) Bill 2018 ..........1.208,11.098, 11.099, 11.100
Financial Reporting Council Ordinance (Cap.588) .......................1.207, 11.097, 11.098
s.3 ...................................................................................... 1.009, 11.09911.100
s.4 .............................................................................................................. 1.208
s.5 .............................................................................................................. 1.208
s.6 .............................................................................................................. 1.208
s.22 ............................................................................................................ 1.208
s.23 ............................................................................................................ 1.208
s.25 ............................................................................................................ 1.208
s.26 ............................................................................................................ 1.208
s.27 ............................................................................................................ 1.208
s.28 ............................................................................................................ 1.208
s.34 ................................................................................................. 1.208, 1.209
s.35 ................................................................................................. 1.208, 1.209
s.39 ............................................................................................................ 1.209
s.40 ............................................................................................................ 1.209
s.43 ............................................................................................................ 1.209
s.47 ............................................................................................................ 1.209
s.49 ............................................................................................... 1.209, 11.039
s.43 ............................................................................................................ 1.209
s.47 ............................................................................................................ 1.209
s.49 ............................................................................................... 1.209, 11.040
s.50 .................................................................................. 1.209, 11.040, 11.039
s.194 ................................................................................ 1.205, 20.206, 20.238
Sched. IA .................................................................................... 11.099, 11.100
Sched.5 ...................................................................................................... 1.209
clxxx TABLE OF LEGISLATION

GEM Listing Rules ...................................................................................................7.019

r.5.09 .......................................................................................................... 7.019
High Court Ordinance (Cap.4)
s.2 ............................................................................................................ 18.003
s.17 ............................................................................................................ 8.171
s.21L. ............................................................................ 10.206, 18.003, 18.077,
18.079, 18.083
Hong Kong Tourism Board Ordinance (Cap.302) ...................................................1.009
s.3 .............................................................................................................. 1.009
Hong Kong Bill of Rights
art. 14 ...................................................................................................... 14.106
art.18 ....................................................................................................... 14.106
Hospital Authority Ordinance (Cap.113) .................................................................1.009
s.3 .............................................................................................................. 1.009
Inland Revenue Ordinance (Cap.112) ...........................................................I .081, 1.082
s.2 .............................................................................................................. 1.082
s.14 ............................................................................................................ 1.082
s.14(]) ........................................................................................................ 1.082
s.14(2) ........................................................................................................ 1.081
s.22 ............................................................................................................ 1.082
s.22(4) ........................................................................................................ l.082
s.22A ......................................................................................................... 1.082
s.40B .......................................................................................................... J.082
s.41 ............................................................................................................ 1.082
s.42 ............................................................................................................ 1.082
s.43 ............................................................................................................ 1.082
s.70A ....................................................................................................... 12.114
s.88 ............................................................................................. 12.088, 16.016
Sched. l ...................................................................................................... 1.082
Sched.2 ...................................................................................................... 1.082
Sched.8 ...................................................................................................... 1.08 l
Insurance Ordinance (Cap.41) ................................................................................11.070
Interpretation and General Clause Ordinance (Cap.1)
s.3 .................................................................................... 9 .043, 10.052, 16.039
s.7 .............................................................................................................. 9.006
s.44A(3) ................................................................................................... l 6.039
s.44A(7) ................................................................................................... 16.039
s.71 .......................................................................................................... 16.039
Landlord and Tenant (Consolidation) Ordinance (Cap.7) .....................................20.197
Land Registration Ordinance (Cap.128) ................................................................17.125
s.2 ............................................................................................................ 17.188
Law Amendment and Refom1 (Consolidation) Ordinance (Cap.23)
s.9 .............................................................................................. 13.057, 17.016,
17.204
s.15A ....................................................................................................... 17.128
s.21 .......................................................................................................... 11.133
Lifts and Escalators (Safety) Ordinance (Cap.327) ...............................................20.127
 TABLE OF LEGISLATION clxxxi

Limited Partnership Ordinance (Cap.37) ...........................................1.062, 1.105, 1.179

s.3(2) .......................................................................................................... 1.062
s.5(1) .......................................................................................................... 1.062
Magistrates Ordinance (Cap.227)
s.12 ............................................................................................................ 1.181
s.13 ............................................................................................................ 1.181
Main Board Listing Rules ..................................................................1.177, 1.189, 7.019
r.3.13 .......................................................................................................... 7.019
Mandatory Provident Fund Schemes Ordinance (Cap.485) ..................................11.068
Matrimonial Proceedings and Property Ordinance (Cap.192) ................................3.033
s.17 ............................................................................................................ 3.033
Manslaughter and Corporate Homicide Act 2007 .................................................12.128
Mental Health Ordinance (Cap.136) ......................................................................20.014
Part IVB .................................................................................................. 20.014
Merchant Shipping (Registration) Ordinance (Cap.4 I5).......................................17.I 3 I
Misrepresentation Ordinance (Cap.284) ................................................................16.04l
s.3(1) ........................................................................................................ 16.059
s.3(2) ........................................................................................................ 16.059
Money Lenders Ordinance (Cap.163) ......................................................................l. l 79
Ocean Park Corporation Ordinance (Cap.388) ........................................................l.009
Offences Against the Person Ordinance (Cap.212)
s.2 ............................................................................................................ 12.117
s.7 ............................................................................................................ 12.l 17
Ombudsman Ordinance (Cap.397) ..........................................................................1.009
s.3 .............................................................................................................. 1.009
Partnership Ordinance (Cap.38) ....................................................................1.031, 1.053
s.3(1) .......................................................................................................... 1.034
s.4 .............................................................................................................. 1.037
s.7 ...····························· ................................................................... 1.058, 1.059
s.11 ............................................................................................................ 1.057
s.12 ............................................................................................................ 1.061
s.14 ............................................................................................................ l. 061
s.22 ............................................................................................................ 1.043
s.26 ............................................................................................................ 1.052
S.26(C)........................................................................................................ 1.049
s.26(d) ........................................................................................................ l.049
s.31 ............................................................................................................ 1.053
s.32 ............................................................................................................ ·1.053
s.34 ............................................................................................................ 1.063
s.35 ............................................................................................................ 1.063
s.36 ............................................................................................................ 1.063
s.37 ............................................................................................................ 1.063
s.46 ............................................................................................................ 1.063
s.46(b) ........................................................................................................ 1.049
Personal Data (Privacy) Ordinance (Cap.486) .........................................................1.009
s.5 .............................................................................................................. 1.009
Prevention of Bribery Ordinance (Cap.20 l) ............................................................3.056
clxxxii TABLE OF LEGISLATION

Professional Accountants Ordinance (Cap.50) ................ 1.207, 11.034, 11.097, 11.098

s.2(1) .............................................................................. 11.098, 11.113, 11.114
s.3 .............................................................................................................. 1.207
s.18A ................................................................ ll.034, 11.098, 11.099, 11.101
s.22 .......................................................................................................... 11.098
s.24 ............................................................................................. 11.098, 11.099
s.28A(2) ...................................................................................... 11.098, 11.099
s.28D .......................................................................................... 11.098, 11.099
s.28E ........................................................................................... 11.098, 11.099
s.29(2) ......................................................................................... l l .098, 11.099
s.30 ............................................................................................. 11.098, 11.099
s.34 ................................................................................. .1.207, 11.099, 11.113
s.35 .................................................................................. 1.207, 11.099, 11.113
Proof of Debts Rules (Cap.6E)...............................................................................20.191
Protection oflnvestors Ordinance (Cap.335) (repealed) .........................................1.174
Protection of Wages on Insolvency Ordinance (Cap.380) ....................................19.026
s.18 .......................................................................................................... 20.197
s.16 .......................................................................................................... 20.197
s.24 .......................................................................................................... 20.197
Registered Trustees Incorporation Ordinance (Cap.306) ........................................1.179
Rules of the High Court (Cap.4A)
O.1B r.1(2)(e) .......................................................................................... 19.064
0.3 .................................................................................................. 1.009, 1.183
O.5 ............................................................................................................. 1.184
O.15 ......................................................................................................... 10.223
0.15 r.4 .................................................................................................... 10.098
0.19 ........................................................................................................... 1.189
0.18 r.19 .................................................................................................. 20.18 l
0.18 r.19(l)(a) ......................................................................................... 10.044
O.22 ........................................................................................................... l.189
O.24 ................................................................................................ 1.184, 1.190
O.28 ........................................................................................................... 1.190
0.29 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 1.190, 10.206
0.30 r.3 ...................................................................................................... 18.10
0.51 ......................................................................................................... 18.008
0.59 ........................................................................................................... 1.189
0.63 ........................................................................................................... 1.189
O.72 ........................................................................................................... 1.190
O.81 ........................................................................................................... l.070
0.102 r.2 .................................................................................................. 10.078
0.179 ......................................................................................................... 1.185
0.182 ......................................................................................................... 1.186
0.183 ......................................................................................................... 1.186
0.191 ......................................................................................................... 1.186
O.212 ......................................................................................................... 1.185
0.213 ......................................................................................................... 1.185
 TABLE OF LEGISLATION clxxxiii

O.214 ......................................................................................................... l.185

O.307A(2) ............................................................................................... 16.144
0.3070(2) ·······························································································J 6.144
O.381 ....................................................................................................... l l.134
O.385 ......................................................................................................... l.185
0.388 ......................................................................................................... 1.186
0.399 ......................................................................................................... 1.177
Securities Ordinance (Cap.333) (repealed) ..............................................................1.174
SecuritiesandFuturesOrdinance(Cap.571) ........................ 1.009, 1.015, 1.167, 1.174,
1.183, 1.189, 2.058, 7.140,
11.062, 16.115, 17.020
Pt.IV ............................................................................................. 1.184, 16.149
Pt.IVA........................................................................................................ 1.002
Pt.V .......................................................................................................... 11.062
Pt.YI ........................................................................................................ 11.070
Pt.XIII.. .............................................................................. 1.174, 1.184, 16.132
Pt.XIV ............................................................................................ 1.174, 1.184
Part XV.................................................................................................... 14.I 16
Pt.XIVA........................................................................................ 1.184, 16.130
s. I .............................................................................................................. 9.106
s.3 ................................................................................................... 1.009, 1.183
s.5 ................................................................................................... 1.183, 1.184
s.19 ............................................................................................................ 1.189
s.22 ............................................................................................................ 1.189
s.23 .......................................................................................................... 16.I 16
s.24 ................................................................................................. 1.184, 1.190
s.28 ............................................................................................................ 1.190
s.29 ............................................................................................................ 1.190
s.59 ............................................................................................................ 1.189
s.63 ............................................................................................................ 1.189
s.72 ............................................................................................................ 1.190
s.92 ............................................................................................................ 1.190
s.93 ............................................................................................................ 1.190
s.102 ........................................................................................... 16.012, 16.111
s.103 ................................................................ 16.012, 16.095, 16.104, 16.109,
16.110, 16.111
s.103(1) .................................................................................................... 16.109
s.103(2) .................................................................................................... 16.l 10
s.103(3) .................................................................................................... 16.012
s. I 03(3)(a) ............................................................................................... 16.I09
s.103(3)(k) ............................................................................................... 16.1I l
s.105 ................................................................ .16.016, 16.105, 16.109, 16.129
s.107 .................................................... 16.066, 16.068, 16.080, 16.083, 16.088
s.107(8) .................................................................................................... 16.066
s.108 ................................................... 16.041, 16.043, 16.051, 16.053, 16.068,
16.072, 16.076, 16.080
clxxxiv TABLE OF LEGISLATION

s.108(2) .................................................................................................... l6.051

s.108(4) .................................................................................................... 16.051
s.108(7) ....................................................................................... 16.051, 16.068
s.179 .......................................................................................................... l.185
s.182 .......................................................................................................... 1.186
s.183 .......................................................................................................... 1.186
s.191 .......................................................................................................... l.186
s.212 ................................................................... 1.185, 16.052, 16.057, 20.074
s.213 .................................................................. 1.185, 16.052, 16.054, 16.055,
16.076, 16.082
s.2 l 3(2) .................................................................................................... 16.082
s.2 l 3(2)(b) ..................................................................... 16.054, 16.055, 16.076
s.213(8) .................................................................................................... I 6.054
s.214 ....................................................................... l.185, 7.140, 8.154, 10.141
s.214(2)(d) ................................................................................................. 7.140
s.245 ........................................................................................... 16.041, 16.052
s.277 ................................................... 16.041, 16.043, 16.052, 16.055, 16.068,
16.068, 16.073, 16.076, 16.076, 16.089
s.277(l)(c) ............................................................................................... 16.068
s.281 .................................................................. 1.174, 16.041, 16.043, 16.052,
16.053, 16.076, 16.076
s.298 ...................................... .16.052, 16.055, 16.056, 16.057, 16.083, 16.089
s.305 .............................................................................. 16.052, 16.053, 16.054
s.307A(l) ................................................................................................. 16.132
s.307A(2) ................................................................................................. I 6.144
s.307B. ........................................................................................ 16.131, 16.144
s.307B( 1)................................................................................................. 16.131
s.307B(2) .................................................................................... 16.138, 16.139
s.307B(2)(a) ............................................................................................ 16.140
s.307B(2)(b) ............................................................................................ 16.I4 l
s.307C ...................................................................................................... 16.131
s.307D ..................................................................................................... 16.143
s.307D(2) ................................................................................................. l 6.142
s.307O(2) ................................................................................................. 16.144
s.307N ........................................................................................ 16.144, 16.145
s.307N(6) ................................................................................................. 16.144
s.307P ...................................................................................................... 16.145
s.307U(1)(a) ............................................................................................ 16.145
s.307U( 1)(b) ............................................................................................ 16.145
s.307U(2) ................................................................................................. 16.l 45
s.3072 ...................................................................................................... 16.146
s.307ZA ................................................................................................... 16.146
s.308(1) .................................................................................................... 16.J44
s.329 .......................................................................................................... 8.059
s.366 .......................................................................................................... 8.059
s.381 ........................................................................................................ 11.136
s.385 .......................................................................................................... 1.185
 TABLE OF LEGISLATION clxxxv

s.388 .......................................................................................................... 1.186

s.390 ........................................................................................................ 16.088
s.399 ..................................................................... 1.184, 8.056, 14.168, 15.090
Sched.l .................................................................................................... 16.015
Sched.l Pt.I s.l ............................................................. 16.015, 16.139, 16.054
Sched.l, Pt.I, s.lA .................................................................................. 16.015
Secmities and Futures (Amendment) Ordinance 2016 ......................................... 1.002
Securities and Futures and Companies Legislation(Uncertificated
Securities Market Amendment) Ordinance 2015 ........................................1.167
Pa113 ......................................................................................................... 1.167
Securities and Futures Commission Ordinance (Cap.24) (repealed) ........... 1.174, 1.183
Securities (Insider Dealing) Ordinance (Cap.395) (repealed) .................................1.174
Securities (Disclosure of Interests) Ordinance (Cap.396) (repealed) ...................... 1.174
Securities and Futures (Stock Market Listing) Rules (Cap.571V)
r.1.01 .................................................................................16.124, 16.125, 16.148
r.2.03 ........................................................................................................ 16.l 17
r.lA.05 ..................................................................................................... 16.126
r.2A.09 ..................................................................................................... 16.] 20
r.3.l0A ..................................................................................................... 16.124
r.3.28 ........................................................................................................ 16.124
r.3A.02 ..................................................................................................... 16.125
r.6.0l ........................................................................................................ 16.120
r.7.02 ........................................................................................................ I6. I22
r.7.06 ........................................................................................................ 16.122
r.7.09 ........................................................................................................ 16.122
r.7.13 ........................................................................................................ 16.122
r.7.18 ........................................................................................................ 16.122
r.7.23 ........................................................................................................ I6. I22
r.7.28 ........................................................................................................ 16.122
r.7.30 ........................................................................................................ 16.122
r.7.32 ........................................................................................................ 16.122
r.7.34 ........................................................................................................ 16.122
r.8.02 ........................................................................................................ I6. I24
r.8.03 ........................................................................................................ 16.124
r.8.05 ........................................................................................................ 16.l 24
r.8.07 ........................................................................................................ 16.124
r.8.08 ................................... ···························· ......................................... 16.124
r.8.09 ........................................................................................................ 16.I24
r.8.ll ........................................................................................................ 16.124
r.8.12 ........................................................................................................ 16.124
r.8.13 ........................................................................................................ 16.124
r.8.17 ........................................................................................................ 16.124
r.8.24 ........................................................................................................ l 6. I24
r.9.02 ........................................................................................................ 16.126
r.9.03 ........................................................................................... 16.126, 16.127
r.9.JJ ........................................................................................................ 16.127
r.9.l 1(18) ................................................................................................. 16.127
clxxxvi TABLE OF LEGISLATION

r.l0.0l ...................................................................................................... 16.128

r.l0.03 ...................................................................................................... 16.128
r.11.02...................................................................................................... 16.127
r.12.0l ...................................................................................................... 16.127
r.13.01 ......................................................................................... 16.119, 16.147
r.13.09 ...................................................................................................... 16.148
r.13.09(1) ................................................................................................. 16.148
r.13.10...................................................................................................... 16.148
r.13.l l ...................................................................................................... 16.148
r.13.12 ...................................................................................................... 16.148
r.13.13 ...................................................................................................... 16.148
r.13.14 ...................................................................................................... 16.148
r.13.l5 ...................................................................................................... 16.148
r.13.16 ...................................................................................................... 16.148
r.13.17 ...................................................................................................... 16.148
r.13.18 ...................................................................................................... 16.148
r.13.19 ...................................................................................................... 16.148
r.14.0l ...................................................................................................... 16.148
r.14.04 ...................................................................................................... 16.148
r.14.06 ...................................................................................................... 16.148
r.14.33 ...................................................................................................... 16.148
r.14A.02 ................................................................................................... 16.148
r.14A.13 ................................................................................................... l6.148
r.14A.l l ................................................................................................... 16.148
Societies Ordinance (Cap.151) ......................................................................1.111, 1.166
Stamp Duty Ordinance (Cap.I 17)............................................................................1.002
s.4 ............................................................................................................ 14.053
s.l9 .......................................................................................................... 17.037
s.19(1) ...................................................................................................... 14.054
s.29CB .......................................................................................... 1.002, 14.047
Sched.l .................................................................................................... 14.054
Stamp Duty (Amendment) Ordinance 2014 ............................................................1.002
Stamp Duty (Amendment) (No.2) Ordinance 2014 ................................................1.002
Stock Exchange Listing Rules
r.3.0S(f) ...................................................................................................... 8.141
r.3.25.......................................................................................................... 8.095
r.8.13 ........................................................................................................ 14.077
r.13.68........................................................................................................ 8.095
r.15A.05 ................................................................................................... 16.015
Sex Discrimination Ordinance (Cap.480)
s.2 ............................................................................................... 14.054, 16.016
s.2(1) ........................................................................................................ 14.054
s.13(2) ...................................................................................................... 14.054
s.19(1) ...................................................................................................... 14.054
s.19(2) ...................................................................................................... 14.054
s.45 .......................................................................................................... 14.054
 TABLE OF LEGISLATION clxxxvii

Theft Ordinance (Cap.210)..........................................................................7.110, 20.252

s.16A ....................................................................................................... 16.090
Transfer of Businesses (Protection of Creditors) Ordinance (Cap.49) .........3.043, 3.073
s.3 ............................................................................................................. .3.073
Tmstee Ordinance (Cap.29) .....................................................................................1.179

Australia
Corporations Act 2001 (Cth) ................................. 1.013, 2.003, 5.004, 7.088,
11.098, 15.150, 18.014
s.9 .................................................................................... 8.021, 18.014, 18.030
s.95A (1) .................................................................................................
20.070
s.128 ·······································································································12.086
s.129 ....................................................................................................... 12.086
s.131 ............................................................................................. .4.042, 4.043
s.131(1) ..................................................................................................... .4.043
s.136 ......................................................................................................... 5.004
s.140(l)(b) ................................................................................................ 5.040
s.168(J)(c) .............................................................................................. 17.023
s.179-190 ................................................................................................. 8.135
s.180-183 ............................................................................................... 18.014
s.181 ....................................................................................................... 18.014
s.198A ................................................................................. 6.002, 6.009, 6.041
s.248D ...................................................................................................... 7.102
s.232 .............................................................................. 10.150, 10.167, 10.202
s.234(a)(ii) .............................................................................................. 10.15l
s.237(2)(a) .............................................................................................. 10.060
s.237(2)(b) .............................................................................................. 10.075
s.237(2)(d) .............................................................................................. 10.056
s.247A .................................................................................................... 11.081
s.254E ..................................................................................................... 14.046
s.254T ..................................................................................................... 15.150
s.260D(l)(b) ........................................................................................... 15.l 12
s.411(4)(a)(ii) ......................................................................................... 14.177
s.420B ...................................................................................................... 18.024
s.420B(2) ................................................................................................ 18.030
s.435B ...................................................................................................... l 9 .007
s.46l(l)(a) .............................................................................................. 20.060
s.490 ....................................................................................................... 20.238
s.588FB .................................................................................................. 20.143
s.588FJ(2)(a) .......................................................................................... 20.165
s.674 ....................................................................................................... 16.]32
s.675 ....................................................................................................... 16.132
s.676 ....................................................................................................... 16.132
s.678 ....................................................................................................... 16.132
s.1322 ........................................................................................... 7.088, 7.089,
7.090, 7.091, 9.140
clxxxviii TABLE OF LEGISLATION

s.1324 ..................................................................................................... 10.245

s.1324( 10)................................................................................................ 10.253
Corporations Act 1989 .............................................................................................4.044
s. J 83(3) .......................................................................................... .4.043, 4.045
Trustee Act 1925 (NSW) ........................................................................................14.082

Canada
Business Corporations Act ....................................................... 10.048, I0.245, 14.187
s. I 02( 1) ...................................................................................................... 6.010
s.239 ....................................................................................................... 10.048
s.239(2)(b) .............................................................................................. 10.075
s.240 ....................................................................................................... 10.048
s.241 ....................................................................................................... 10.048
s.242 ....................................................................................................... 10.048
s.247 ....................................................................................................... 10.245

New Zealand
Companjes Act 1955
s.2 .............................................................................................................. 8.018
Companies Act 1993 ................................................................................................1.013
Pt.5 ............................................................................................................ 5.004
s.32(2) ........................................................................................................ 6.010
ss.76-81 ................................................................................................... I 5. l 02
s.76 ............................................................................................. 15.l 18, 15.122
s.78 .......................................................................................................... 15.125
s.78(7) ...................................................................................................... 15.126
s.80 .......................................................................................................... 15.l 18
s.126 .......................................................................................................... 8.018
s.126(1 )(b)(iii) ........................................................................................... 6.010
s. I26(2) ...................................................................................................... 6.0 I 0
s.126(3) ...................................................................................................... 6.010
s.128 .......................................................................................................... 6.010
s. I28(3) ...................................................................................................... 6.0 I0
s.165 ........................................................................................................ 10.245
s.174 ........................................................................................... I0.136, 10.137
s.222 ........................................................................................................ 14.184
Personal Property Securities Act 1999...................................................................17.110

Singapore
Companies Act
s.76 .......................................................................................................... 15.102
s.157 .......................................................................................................... 6.041
s.157(1) ...................................................................................................... 6.04 l
s.157A(l) ................................................................................................... 6.041
s.215D ..................................................................................................... 14.184
s.2 I 6A ..................................................................................................... 10.048
 TABLE OF LEGISLATION clxxxix

s.216A(3)(b) ............................................................................................ 10.075

s.216B ...................................................................................................... 10.048
s.312 ........................................................................................................ 20.238

United Kingdom
BubbleAct 1720 ....................................................................................................... l.095
Companies Act 2006 (Strategic Report and Directors' Report)
Regulations 2013 ........................................................................................11.044
Companies Act 2006 .........................................................................1.013, 1.133, 1.173,
4.002, 6.032, 7.039
Pt.21A ...................................................................................................... 14.115
s.8 ................................................................................................... 2.003, 5.004
s.17 ................................................................................................. 2.003, 5.004
s.31(1) ........................................................................................................ 5.015
s.39 ............................................................................................................ 5.015
s.40 ............................................................................................. 12.083, 12.086
s.51 ................................................................................................ .4.002, 4.021
s.116 ........................................................................................................ 14.]08
s.118 ........................................................................................................ 14.108
s.155 .......................................................................................................... 7.041
s.157(5) ...................................................................................................... 7.039
s.163 .......................................................................................................... 1.133
s.168 .......................................................................................................... 6.032
s.170(5) ...................................................................................................... 8.018
s.207( 1) ...................................................................................................... 8.107
s.207(2) ..................................................................................................... 8.107
s.240 .......................................................................................................... 1.133
s.241 .......................................................................................................... 1.133
s.242 .......................................................................................................... 1.133
s.243 .......................................................................................................... 1.133
s.244 .......................................................................................................... 1.133
s.245 .......................................................................................................... 1.133
s.246 .......................................................................................................... 1.133
s.390 ........................................................................................................ 11.019
s.414A ..................................................................................................... 11.044
s.414B ...................................................................................................... 11.044
s.414C ...................................................................................................... l l.044
s.414D ..................................................................................................... 1·1.044
s.423 ........................................................................................................ 15.050
s.642 ........................................................................................................ 15.045
s.643 ........................................................................................................ 15.045
s.643(1) .................................................................................................... 15.052
s.643(4) .................................................................................................... 15.052
s.644 ........................................................................................................ 15.045
s.680(1) .................................................................................................... 15.l 12
s.790A-790ZG ........................................................................................ 14.l 15
cxc TABLE OF LEGISLATION

s.793 ........................................................................................................ 8.0568

s.994 ............................................................................................. 5.070, 10.201
s. I 121(3) .................................................................................................... 1.173
Sched. lA ................................................................................................. 14.115
Sched.lB ................................................................................................. 14.l 15
Companies Act 1985 ..............................................................1.013, 4.021, 5.014, 9.035
s.35 ............................................................................................................ 5.014
s.35(1) ........................................................................................................ 5.014
s.36(4)....................................................................................................... .4.021
s.36C .......................................................................................................... 4.050
s.36C( l) .................................................................................................... .4.050
s.371 ............................................................................................... 9.035, 9.037
s.459 ........................................................................................... I0.167, 10.169
s.425 ........................................................................................................ 19.052
s.425( 1) ....................................................................................................19.096
s.425(2) .................................................................................................... 19.096
Con1paniesAct 1984 ................................................................................................ 6.022
CompanjesAct 1981 .......................................................15.064, 15.065,15.068, 15.077
Companies Act 1980 ...........................................10.13610.137, 10.169, 14.190, 15.148
s.75 .......................................................................................................... 10.169
Companies Act 1967 ..........................................................1.109, 11.031, 11.065, 4.021
Companies Act 1948 .................................................1.109, 2.064, 5.087, 6.039, l 1.030,
11.031, 11.065, 14.005, 16.004
s.88 .......................................................................................................... 17.032
s.184( 1) ......................................................................................................5.087
s.206 ........................................................................................................ 19.086
s.210 ........................................................................................... 10.136, 10.137
s.227 .......................................................................................................... 6.039
s.270 ........................................................................................................ 20.118
s.415 .......................................................................................................... 2.064
Companies Act 1929 ............................................................1.108, 1.109, 6.023, 15.099
s.45 .......................................................................................................... 15.099
s.137 .......................................................................................................... 6.023
Con1paniesAct 1928 ..............................................................................................15.063
s.18 .......................................................................................................... 15.064
Companies Act 1908 ..............................................................................................16.004
s.212 ........................................................................................................ 20.167
Companjes Act 1907
s.14 .......................................................................................................... 17.011
s.15 .......................................................................................................... 17.010
s.16 .......................................................................................................... 17.035
s.17 .......................................................................................................... 17.178
Companjes Act 1900 .................................................................................16.004, 17.106
s.2 ............................................................................................................ 16.091
s.30 ............................................................................................................ 7.007
Companies Act 1862 .................................................I. I02, 2.076, 6.029, 6.050, 16.004
Sched.I. ...................................................................................................... 6.029
 TABLE OF LEGISLATION cxci

Companies Act 1856 ..............................................................................................16.004

Companies Clauses Consolidation Act 1845 ...........................................................6.005
s.90 ............................................................................................................ 6.005
Companies (Consolidation) Act 1908......................................................................1.106
Companies (Model Articles) Regulations 2008 .............................. 6.002, 6.005, 6.008,
6.018, 6.031
Sched. l art. 4 ........................................................................................... 6.008
Sched.3 art. 3 ................................................................................ 6.002, 6.008
European Communities Act 1972 .................................................................4.022, 5.014
s.9 ............................................................................................................. .4.022
s.9( 1) .......................................................................................................... 5.014
s.9(2) .............................................................................................. .4.022, 4.030
Financial Services and Markets Act 2000 ................................................................1.013
Insolvency Act 1986 ....................................................................................1.013, 18.031
s.43 .......................................................................................................... 18.024
s.43( 1) ...................................................................................................... 18.03l
s.43(2) ...................................................................................................... 18.031
s.43(3) ...................................................................................................... l 8.03 l
s.43(7) ...................................................................................................... 18.031
s.123(2) .................................................................................................... 20.070
s.127 ........................................................................................................ 20.120
s.133 ........................................................................................................ 20.118
s.178 ........................................................................................................ 20. I 05
s.238 ........................................................................................................ 20.143
s.238(5) .................................................................................................... 20.160
s.240(l)(a) ............................................................................................... 20.158
s.245 ........................................................................................................ 20. 167
s.436 ........................................................................................................ 20.146
Insolvency (England and Wales) Rules 2016
r.18.16 ......................................................................................... 18.108, 18.109
Insolvency Rules 1986 (IR) ....................................................................................18.108
r.2.47 ........................................................................................................ 18.108
r.4.30 ........................................................................................... l 8.108, 18.109
Joint Stock Companies Act 1856 ..................................................................1.100, 2.076
Joint Stock Companies Act 1844 ......................................................1.097, 1.098, 1.099,
2.048, 2.076, 5.027, 16.004
s.2 .............................................................................................................. 1.097
s.7 .............................................................................................................. 5.027
s.10 ............................................................................................................ 5.027
s.25 ............................................................................................................ 1.097
s.66 ............................................................................................................ 1.097
Law of Property Act 1925 s.74 ...............................................................................12.094
Limited Liability Act 1855............................................................................1.101, 2.048
s.7 .............................................................................................................. 1.101
s.8 .............................................................................................................. 1.101
Lord Cairns' Act 1858 (UK).....................................................................................8.171
Proceeds of Crimes Act 2002 ...................................................................................3.072
cxcii TABLE OF LEGISLATION

Small Business, Enterprise and Employment Act 2015 ...............................7.041, 8.018

s.156A ....................................................................................................... 7.041
s. I 568 ........................................................................................................ 7.041
Trading Companies Act 1837...................................................................................1.096
Trading Companies Act l 834 ...................................................................................1.096

United States
Delaware General Corporation Law
s.351(3) ...................................................................................................... 6.010
 CHAPTER 1

COMPANYLAWAND REGULATION
IN HONGKONG

PARA.

I . Introduction ............................................................................................................................... I .00 I

2. Companies and the Scope of Company Law ............................................................................ 1.002
2.1 Companies in society ........................................................................................................ 1.002
2.2 Companies and corporations ............................................................................................. 1.003
2.2.1 Anglo-Hong Kong law .......................................................................................... 1.004
2.2.2 Foreign jurisdictions .............................................................................................. l .OI 0
2.3 What company law covers ................................................................................................. 1.011
2.3.1 "Core" company law··············•········•········•·······•········•·······•········•········•·······•·········I.O12
2.4 Facilitative or mandatory rules? ........................................................................................ 1.016
2.5 Sources oflaw ................................................................................................................... 1.020

3. Companies and Other Forms of Business Association ............................................................. 1.024

3.1 lntroduction ....................................................................................................................... 1.024
3.2 Sole proprietorships ......................................................................................................... 1.026
3.3 Partnerships ....................................................................................................................... 1.030
3.3.1 General .................................................................................................................. 1.030
3.3.2 Formation and identification of partnerships ........................................................ 1.032
3.3.3 Registration ........................................................................................................... l .041
3.3.4 Nature of a partnership ......................................................................................... 1.042
3.3.5 Partnership property .............................................................................................. 1.043
3.3.6 Financing ............................................................................................................... 1.049
3.3.7 Relationship between partners .............................................................................. 1.05 I
3.3.8 Liability to thi.rd parties - contract ...................................................................... 1.057
3.3.9 Liability to third parties-tort ............................................................................... 1.061
3.3.10 Limited partnerships ............................................................................................. 1.062
3.3.11 Termination of partnerships .................................................................................. 1.063
3.4 Companies: Comparison with partnerships ...................................................................... 1.064
3.4.1 General .................................................................................................................. 1.064
3.4.2 Formation .............................................................................................................. 1.067
3.4.3 Legal status ........................................................................................................... 1.069
3.4.4 Formalities·····························•········•········•·······•········•·······•········•········•·······•········· I .071
3.4.5 Transfer of ownership ........................................................................................... 1.073
3.4.6 Management. ......................................................................................................... 1.075
3.4.7 Agency .................................................................................................................. 1.076
3.4.8 Liability ................................................................................................................. 1.077
3.4.9 Borrowing powers/financing ................................................................................. 1.079
3.4.10 Taxation ................................................................................................................. 1.081
2 COMPANYLAWAND REGULATIONIN HONG KONG

4. Historical Development of Company Law ............................................................................... 1.083

4.1 English origins .................................................................................................................. 1.083
4.1.1 Historical development of the corporation ............................................................ 1.084
4.1.2 Joint stock companies ........................................................................................... 1.089
4.1.3 Early English Companies Acts .............................................................................. 1.096
4.2 The early Companies Ordinances in Hong Kong: 1865 and I 911 .................................... I. I 02
4.3 Companies Ordinance 1932.............................................................................................. 1.108

5. Company Law Reform: the Companies Ordinance Rewrite ..................................................... 1.114

5.1 Introduction and background to the Rewrite .................................................................... 1.114
5.2 Objectives of the Rewrite .................................................................................................. I. I 19
5.3 The Rewrite process .......................................................................................................... 1.123
5.4 Companies Ordinance (28of2012) (Cap.622) ................................................................. I. I 28
5.4.1 Pt. I - Preliminary ............................................................................................... 1.131
5.4.2 Pt.2 - Registrar of Companies and Companies Register .................................... 1.132
5.4.3 Pt.3 - Company formation and related matters, and
re-registration of company .................................................................................... 1.134
5.4.4 Pt.4 - Share capital... ........................................................................................... 1.136
5.4.5 Pt.5 - Transactions in relation to share capital... ................................................. 1.138
5.4.6 Pt.6 - Distribution of profits and assets .............................................................. 1.141
5.4.7 Pt.7-Debentures ............................................................................................... 1.142
5.4.8 Pt.8 - Registration of charges ............................................................................. 1.143
5.4.9 Pt.9 -Accounts and audit... ................................................................................. 1.144
5.4.10 Pt.JO- Directors and company secretaries ......................................................... 1.146
5.4.J I Pt.I I - Fair dealing by directors ......................................................................... 1.148
5.4.12 Pt.12 - Company administration and procedure ................................................. 1.150
5.4.13 Pt. 13 -Arrangements, amalgamation and
compulsory acquisition in takeover and share buy-back ...................................... 1.152
5.4.14 Pt.14 - Remedies for protection of companies' or members' interests ............... I. I 54
5.4.1 S Pt.JS - Dissolution by striking off or deregistration ........................................... 1.156
5.4.16 Pt.16 - Non-Hong Kong companies ................................................................... 1.157
5.4.17 Pt.17 - Companies not formed, but registrable, under this Ordinance ............... 1.158
5.4.18 Pt.18 - Communications to and by companies ................................................... 1.159
5.4.19 Pt.19 - Investigations and enquiries .................................................................... 1.160
5.4.20 Pt.20 - Miscellaneous ......................................................................................... 1.162
5.4.21 Pt.21 - Consequential amendments and transitional
and savings provisions ........................................................................................... 1.163
5.4.22 Schedules I to 11 .................................................................................................. 1.164
5.5 Subsidiary legislation ........................................................................................................ 1.165
5.6 What happened to the predecessor Companies Ordinance (Cap.32)? .............................. 1.166
5.7 Further Refom1s................................................................................................................ l.167
5.7.1. Securities and Futures and Companies Legislation
(Uncertificated Securities Market Amendment) Ordinance 20 IS ........................ 1.I 67
5.7.2. Companies (Winding Up and Miscellaneous Provisions)
(Amendment) Ordinance 2016 .............................................................................. I. I 68
5.7 .3. Companies (Amendment) Ordinance 2018 ........................................................... l. l 69
5.7.4. Companies (Amendment) Bill 2018 ..................................................................... 1.170
 COMPANYLAWAND REGULATIONIN HONG KONG 3

6. Regulatory Regime ................................................................................................................... 1.17 I

6.1 Statutory and non-statutory regulation ............................................................................. 1.17 I
6.1.1 Companies Ordinance (Cap.622) .......................................................................... I .17 I
6.1.2 Securities and Futures Ordinance ......................................................................... 1.176
6.1.3 Non-statutory regulation ....................................................................................... 1.177
6.2 Regulatory bodies ............................................................................................................. 1.I 78
6.3 Registrar of Companies and the Companies Regist1y ...................................................... 1.179
6.4 Securities and Futures Commission .................................................................................. 1.183
6.5 Hong Kong Exchanges and Clearing Ltd ......................................................................... 1.187
6.6 Inspections under Companies Ordinance .......................................................................... 1.191
6.6.1 General .................................................................................................................... 1.19I
6.6.2 Inspections .............................................................................................................. 1.193
6.6.3 Financial Secretary's power to require production of documents ........................... 1.198
6.6.4 Main changes under Cap.622 .................................................................................. I .202
6.7 Official Receiver's Office ................................................................................................. 1.204
6.8 Regulation of financial reporting and auditing ................................................................. 1.206

7. Theories and Perspectives on Company Law............................................................................ 1.2I0

7.1 Genernl .............................................................................................................................. 1.210
7 .2 Theories on particular areas of company law ................................................................... 1.213
7.3 Economic analysis oflaw .................................................................................................. 1.216
7.4 Critical legal theories ........................................................................................................ 1.2l 8
 1. INTRODUCTION
This chapter provides an introduction to companies and the regulation of companies 1.001
in Hong Kong. The chapter introduces the concept of a company, distinguishing a
company from other business associations. The chapter also discusses the scope of
company law and its historical development, and outlines the current structure or
framework for the regulation of companies in Hong Kong. Finally, the chapter also
provides an introduction to legal theories on company law.

2. COMPANIES AND THE SCOPE OF COMPANY LAW

2.1 Companies in society

Main uses of company vehicle. The traditional concept of a company is a particular 1.002
type of association of persons, but today it is possible for both a group of persons
and a sole individual to constitute a company. In Hong Kong, as elsewhere in the
industrialised world, companies have become a common and important feature
in commerce and society generally. Some of the main uses of companies are as
follows:

• Vehicle for carrying on trade or business. Companies are commonly used for
the purpose of business. 1 Large businesses are invariably carried on through
a company, while companies are also the dominant business vehicle for small
businesses.
• Holding of property. Purchasers of residential or commercial property in
Hong Kong sometimes do so by way of using a company. When the persons
who own the company later wish to have the property sold, then this can be
done by way of a sale of all the shares in the company to the new purchaser
instead of selling the land itself. Previously, there could be savings on stamp
duty where a company is used to acquire land as the rates of stamp duty for
sale of shares were lower than for sale of land, however, this is no longer the
case for new acquisitions of land.2

As at 2012, about 85% of businesses in Hong Kong are in the form of a company: S H Goo, Study Repon
011History of Company lncorporatio11 in Hong Kong - A Study Commissioned by the Companies Registry
(July 2013) 48. On the use of a company as a business vehicle, see further para.1.024 below.
2 Where a foreign company is used, no stamp duty is payable in Hong Kong at all on the sale of the shares. However,
under proposals made in 2012 and 2013 for amendments to the Stamp Duty Ordinance (Cap.117), there are
disincentives for using companies (whether Hong Kong or foreign) to acquire residential property due to the
additional 15% '"buyer's stamp duty" charged on cop of the existing stamp dury (Scamp Duty Ordinance s.29CB,
introduced by the Stamp Duty (Amendment) Ordinance 2014, with retrospective effect from 27 October 2012),
and the higher ad vtl!orem stamp duty races for acquisitions or residential or non-residential property which apply
where the purchaser is not a Hong Kong permanent resident (Stamp Duty Ordinance First Schedule, Head 1(1)
Scale I, introduced by the Stamp Duty (Amendment) (No.2) Ordinance 2014, with retrospective effect from
23 February 2012).
6 COMPANY LAW AND REGULATION IN HONG KONG

• Acting as trustee. Professional trustees provide services to administer trusts

for the benefit of their clients. The use of a company has the advantage of
avoiding the inconvenience that arises, for example, where a natural person
who acts as trustee dies.3
• Vehicle for collective investment. A company can be used to hold assets
for the purpose of investment by public investors. Collective investment
schemes could be in the form of unit trusts, where investors hold units in
the scheme, with the trustee holding the investment assets (such as shares
or other securities), and a manager appointed to manage the investments.
An alternative is to use the company form, where the investors hold shares
in the company, and the company holds and manages the investment assets.
Such collective investment schemes can be open-ended (where investors
can recoup their investment by having their units or shares redeemed by
the trust or company before the expiry of the term of the investment) or
closed-ended (where the units or shares cannot be redeemed before the
expiry of the investment term, and where investors can only sell their units
or shares to others if they wished for early recoupment of their investment).
Open-ended investment companies (OEICs) are common in various
overseas countries. 4 ln Hong Kong, OEICs have not previously been used
due to restrictions in company law on redemptions of shares. 5 However,
legislation has now been enacted to enable OEICs to be established in Hong
Kong.6
• Non-profit purposes. Companies are also used to engage in non-profit
enterprises as an alternative to using a simple unincorporated association of
persons. For example, companies can be established to operate charities, or
to run clubs or sporting activities. Some political parties in Hong Kong are
also constituted as a company.7
• Carrying on certain government enterprises. The Government sometimes
chooses to incorporate a company to carry out activities which can involve
a public function. For example, the Hong Kong Mortgage Corporation Ltd
is a company wholly owned by the Government and which has functions
related to enhancing stability of the banking sector and promoting wider
home ownership in Hong Kong.8

' This is because the company's existence continues notwithstanding changes in the members who constitute the
company: see para. 1.071 below.
' E.g., for England, see the Open-Ended Investment Companies Regulation 2001 (UK).
5 Now allowed under the Securities and Fun,res (Amendment) Ordinance 2016.
• See Securities and Futures (Amendment) Ordinance 2016, which introduces a new Part IVA in the Securities
and Futures Ordinance (Cap.571). Part TVAcommenced operation on 30 July 2018. Sec further Financial
Services and Treasury Bureau, Ope11-£11dedFund Companies Co11sultatio11Paper (March 2014) and
Consultation Co11clusio11s(January 2016); Securities and Futures Commission, Co11sulu,tio11Paper 011the
Securities and Futures (Open-ended Fund Companies) Rules and Code 011 Open-Ended Fund Companies
(June 2017).
7
See DemocraticParty v Secreta1yfor Justice [2007) 2 HKLRD 804.
8 See the website for the Hong Kong Mortgage Corporation Ltd at <http://www.bkmc.com.hk.>.
 COMPANIESAND THE SCOPE OF COMPANYLAW 7

2.2 Companies and corporations

Registered companies. The subject of this book is the registered company (namely 1.003
companies registered under the Companies Ordinance (Cap.622) or its predecessors 9),
but a little needs to be said on the concepts of "companies" and "corporations"
generally.

2.2.1 Anglo-Ho11gKong law

Meaning of "company". In ordinary everyday usage, the term "company" might be 1.004
used to describe all types of businesses other than sole traders. However, the term
"company" has a narrower meaning under modem Anglo-Hong Kong law. The term
does not have a strict technical meaning under the common law,10 but the tem1 is
defined in s.2 of the Companies Ordinance to be a company formed and registered
under that Ordinance (or a predecessor Companies Ordinance). Accordingly, under the
modern law in England and Hong Kong, the term "company" is ordinarily understood
to refer to an incorporated association (or incorporated body).
Meaning of "corporation". As such, companies form a subset of the wider concept 1.005
of "corporation" (or "body corporate"), a concept recognised under the common
law. In an English treatise on corporations from early last century, a corporation was
described in the following terms:

"That body politic known as a Corporation possesses no physical being, but exists in
the eye of the law.It is a group composed of many individuals named corporators, yet
it has a personality separate and distinct from those individuals. It has a continuous
identity. Although the legal existence of an individual cease with his death, the legal
existence of a corporation is not affected by the death or retirement of an individual
corporator. It may have a corporate name and seal, and may enjoy rights, privileges
and powers according to the scheme of its creation. It may, in certain respects, claim
freedom of action as is allowed to an individual; in other respects it is hampered by
incapacities which arise partly from its natural and 'internal' lin1itations, and partly
from external restrictions imposed by the policy of the law."11

Legal personality. Corporations are said to be artificial legal persons, as opposed to 1.006
the human individual or natural persons. The possession oflegal personality means that
the possessor is the subject of the legal system. 12 The possessor is an entity recognised
by the legal system as being the subject of rights and duties. This means that the
duties and rights are vested in that entity and not in someone else. So for example,
corporations, as a legal person, can own property and can enter into contracts.

• Namely,CompaniesOrdinance(1 of 1865)(repealed);CompaniesOrdinance(58 of 1911)(repealed);Companies

Ordinance (39 of 1932) (renamedas the Companies(Winding-Up and MiscellaneousProvisions) Ordinance
(Cap.32)upon the commencementofCap.622).
,o Re Stcmley [ 1906) 1 Ch 131.
'' Cecil T Carr, The General Principles of the Lmv of Co1port11io11s(Cambridge University Press,Cambridge,
1905) I.
" J H Rayner (,lfincing La11e)Ltd v Department of1i·ade a11dIndustry (1989) Ch 72, 107.
8 COMPANYLAWAND REGULATIONIN HONG KONG

1.007 Types of corporation. English common law recognised two categories of corporations:
the corporation aggregate and corporation sole. Blackstone described these as follows:

"Corporations aggregate consist of many persons united together into one

society, and are kept up by a perpetual succession of members, so as to continue
forever; of which kind are the mayor and commonalty of a city, the head and
fellows of a college, the dean and chapter of a cathedral church. Corporations
sole consist of one person only and his successors, in some particular station,
who are incorporated by law, in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural persons they
could not have had. In this sense the king is a sole corporation; so is a bishop; so
are some deans, and prebendaries, distinct from their separate chapters; and so is
every parson and vicar."13

1.008 Registered company is corporation aggregate. A company registered under the

Companies Ordinance (Cap.622) is an example of a corporation aggregate. 14 Such a
registered company with a single member is also a corporation aggregate rather than
a corporation sole notwithstanding that there is only one member. The concept of
corporation sole is a concept of a corporation that comprises a single person and his
successors occupying some particular office or position. That is different from single
member companies under the Companies Ordinance: such companies might have a
sole member at any particular time, but it is legally possible for others to join the
company as members so that the company has more than one member.
1.009 Creation of corporations. Under English law, corporations can be created by the
Crown by way of letters patent or grant of a charter of incorporation, or by an Act of
Parliament. 15 In Hong Kong today, corporations can be created by an Ordinance passed
by the Legislative Council. There are a number of statutory corporations created with
public functions, such as the Hospital Authority,' 6 the Communications Authority, 17
the Securities and Futures Commission 18 and the Hong Kong Tourism Board. 19 The
various universities in Hong Kong are also corporations. 20 Some statutory corporations
engage in business, such as the Ocean Park Corporation. 21 There are also entities
established under other ordinances which are created as a body corporate (e.g. credit
unions registered under the Credit Unions Ordinance (Cap.119), ss.3 and 6). These
are examples of corporations aggregate. Examples of corporations sole created by
statute in Hong Kong include various public bodies such as the Ombudsman 22 and the

" William Blackstone, Blackstone's Commemaries 011the Laws of£11gla11d(London, 1820) 127. On corporations
sole, see also Hubbard Associatio11of Scientologists Imemational v Attorney-General (Vic) [ 1976) VR 119; Doe
v Bennett (2004) 236 DLR (4'') 577.
" Ercelling Profit Investments Ltd v Sera Ltd (1992) HK.LY606.
" William Blackstone, Blacksto11e's Ccmmell/aries 011tlte Laws of E11gland(London, 1820) 129.
16 Hospital Authority Ordinance (Cap.113) s.3.
17 Communications Authority Ordinance (Cap.616) s.3.
" Securities and Futures Ordinance (Cap.571) s.3.
19 Hong Kong Tourism Board Ordinance (Cap.302) s.3.
20
E.g., City University of Hong Kong Ordinance (Cap.1132) s.3.
" Ocean Park Corporation Ordinance (Cap.388).
" The Ombudsman Ordinance (Cap.397) s.3.
 COMPANIESAND THE SCOPE OF COMPANYLAW 9

Privacy Commissioner, 23 and also religious bodies. 24 Corporations which are created
pursuant to statute have their rights and powers defined by the statute under which the
corporation is created.

2.2.2 Foreign jurisdictions

Companies outside Hong Kong. The terms "company" and "corporation" may mean 1.010
different things in foreign jurisdictions. For example, the business equivalent of Hong
Kong registered companies in the various states of the United States is the business
corporation. 25 The term "company" is used in the looser sense, referring to both
incorporated and unincorporated businesses. There also exists in the United States
a hybrid business entity known as the "limited liability company" (LLCs). 26 LLCs in
the United States are in nature partnerships and are different from the type of limited
liability company recognised under Hong Kong law (which is a body corporate).

2.3 What company law covers

Scope of company law. Broadly speakfog, company law covers the body oflaws dealing 1.011
with the establishment of companies; powers and liabilities of companies; internal
administration or operation of companies; rights and duties of corporate participants
such as shareholders and directors; financing of companies; and external administration
(by receivers or liquidators); and winding-up and dissolution of companies.

2.3.1 "Core" company law

Core and non core elements of company law. A distinction is sometimes drawn 1.012
between "core" company law and other areas of law which affect companies but
which might be classified as separate subject areas in their own right. Core company
law is thus said to cover establishment of companies and regulation of the internal
administration of companies and corporate participants. Rules dealing with a
company's raising of funds from the public through an issue of shares are classed
as falling within the area of securities laws (which cover not only company shares,
but also other types of securities or financial instruments/investments, and which
extend to regulation of the securities markets such as the stock market). The rules
on winding-up of companies which become insolvent might be grouped under the
rubric of insolvency law, to cover not only corporate insolvencies but also personal
bankruptcy laws (which deal with bankruptcy of individuals). Also, laws dealing with
company charges could be categorised together with laws dealing with other security
interests which either a company or individual could create in favour of creditors (the
law here involves rights between a debtor and secured creditor, who has certain rights
over the debtor's assets as security for a loan).

" Personal Data (Privacy) Ordinance (Cap.486) s.5.

24 E.g., Abbot of the Order of Cistercians of the Strict Observance Incorporation Ordinance (Cap. I 107).
25 See the Model Business Corporation Act (MBCA), which has been adopted in a number of states in the US. On
the MBCA, see, e.g., Elliot Goldstein, "Revision of the Model Business Corporation Act" (1985) 63 TexasLaw
Review 1471.
26 See, e.g., Wayne M Gazur and Neil M Goff, "Assessing the Limited Liability Company" (1991) 41 Case Wesrern
Reserve Law Review 387.
10 COMPANYLAWAND REGULATIONIN HONG KONG

1.013 Different approaches to whether or not to have the companies statute confined
to just core company law. P1ior to the reforms made by the Companies Ordinance
(Cap.622) ("Cap.622"), the main Ordinance dealing with company law in Hong Kong
(the predecessor Companies Ordinance) has not been confined to core company law.
This can be contrasted with overseas jurisdictions including the current UK regime.
The Companies Act 2006 (UK) (as was the case of its predecessor, the Companies
Act 1985) deals with core company law, while corporate insolvency together with
personal bankruptcies is dealt with under the Insolvency Act 1986 (UK), and corporate
fundraising is dealt with under the Financial Services and Markets Act 2000 (UK).
New Zealand is another example of a common law jurisdiction where the companies
legislation (Companies Act 1993 (NZ)) deals with core company law only. However,
the Corporations Act 2001 (Cth) in Australia covers not only core company law, but also
corporate securities and other financial services, as well as corporate insolvency.
1.014 Scope of Companies Ordinance (Cap.622). In 1997 in Hong Kong, a recommendation
had been made by consultants appointed by the Government for the Companies
Ordinance to be reformed to be confined to core company law.27 The Standing
Committee on Company Law Reform (SCCLR) did not favour complete segregation
of company law and securities law, although it did see merit in treating insolvency law
as a separate topic and in looking at the possibilities of placing the law of company
charges in a separate regime governing personal property security interests.28 What
has transpired from the more recent review of the Companies Ordinance (under the
Companies Ordinance Rewrite project ("CO Rewrite"), which resulted in a new
Companies Ordinance (Cap.622) being enacted in 2012, 29 is that Cap.622 is confined
to core company law (but still including company charges, as is also the case in the
United Kingdom). Under the amendments made when Cap.622 came into operation,
the core company law provisions in the predecessor Companies Ordinance (Cap.32)
were repealed. Cap.32 was not repealed in its entirety as there are provisions which are
retained in that Ordinance. These provisions are mainly on winding-up, prospectuses
(relating to public offerings of shares and debentures), and disqualification of directors.
The predecessor CO was renamed the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance upon the commencement of Cap.622.
1.015 Only partial separation of core and non-core company law. The separation of
core company law from some of the other areas of company law under the reforms
is only partial and does not entirely follow the segregation adopted in jurisdictions
such as the United Kingdom. The provisions in Cap.32 on prospectuses will in due
course be moved to the Securities and Futures Ordinance (Cap.571). But, although
the winding-up provisions are contained in that Ordinance (Cap.32) separate from
the Ordinance dealing with core company law (namely Cap.622), there is no merging
of corporate insolvency and personal bankruptcy laws in a single Ordinance on
insolvency.

27 Review of the Ho11gKo11gCompa11iesOrdi11a11ce:Co11sultancyReport (March 1997) ("Pascutto Report'') 57-69.

" Report oft/re S1a11di11g
Commillee on Compa11ylaw R~form 011tire Recomme11datio11.,ofa Co11s11ha11cy Report
(February 2000) 28-33.
of the Review oft he Hong Ko11gCompanies Ordi11a11ce
" Cap.622 commenced operation on 3 March 2014.
 COMPANIESAND THE SCOPE OF COMPANY LAW 11

2.4 Facilitative or mandatory rules?

\Vhether company law should be mandatory or facilitative. In corporate regulation, 1.016

there has been a debate whether company law should be mandatory or merely
enabling.30
Mandatory rules. The idea of mandatory rules is that company law should be 1.017
composed of a body of mandatory or directive legal rules, reinforced by state-
backed sanctions. 31 Mandatory rules can take the form of certain procedural
requirements, rules which allocate decision-making power in companies with
respect to particular matters,32 and rules which set standards of behaviour (such
as fiduciary duties). Mandatory rules are argued to be necessary to protect the
interests of shareholders, creditors and others from self-interested actions of
corporate managers. 33
Facilitative rules. The alternative view is that company law should be facilitative or 1.018
enabling, in the sense that corporators should be free to opt-out and to adopt their
own specific rules if they choose. 34 Enabling rules might be composed of default
rules which apply unless modified by corporators, or rules which allow the court to
give effect to the intention of the parties where that intention is otherwise frustrated
by some irregularity. Those who argue that company law should be enabling
emphasise the importance of individual rights and freedoms and private ordering
of relationships.
Balance between rules required. Commentators such as Bottomley have argued 1.019
that company law must involve both mandatory and facilitative rules. 35 Mandatory
standards must be set by the state to uphold public values, for example to avoid
oppressive or unfair conduct and to provide for financial and decision-making
accountability. On the other hand, empowering and facilitative rules are also needed to
enable corporators to add their own constitutional rules, in recognition of the private
internal dimensions of companies. In Hong Kong, the SCCLR has also expressed the
view that it is appropriate for company law to provide for a balanced mix of default
and mandatory rules. 36

30 Sec, e.g., Jeffrey N Gordon, "The Mandatory Structure of Corporate Law" ( 1989) 89 Columbia Law Review 154;
Henry N Butler and L.in-y E Ribstein, "Opting out of fiduciary Duties: A Response to the /\nti-Contractarians"
(1990) 65 Washington Law Review I; John C Coffee Jr, "The Mandatory/Enabling Balance in Corporate Law:
An Essay on the Judicial Role" (1989) 89 Columbia law Review 1618; William Bratton, "Public Values and
Corporate Fiduciary Law" ( 1992) 44 Rutgers Law Review 675.
31 Stephen Bottomley, "The Birds, The Beasts, and the Bat: Developing a Constitutionalist Theory of Corpornte
Regulation" (1999) 27(2) Federal Lt,w Review 243,251.
32 For example, the decision for a lawful reduction must be made by the members in general meeting: see Companies
Ordinance (Cap.622) s.211.
" Stephen Bottomley, "The Birds, The Beasts, and the Bat: Developing a Constitutionalist Theory of Corpornte
Regulation" (1999) 27(2) Federal Lmv Review 243,251.
" Ibid.
" Ibid.
36
SCCLR, Report of the Standing Commillee 011Company Law Reform 0111heRecomme11datio11s~( a Co11s11/ta11cy
Report of the Review of the Hong Kong Companies Ordinance (February 2000) [4.23].
12 COMPANY LAW AND REGULATION IN HONG KONG

2.5 Sources of law

1.020 Statutory and common law. Company law in Hong Kong is composed of both
statutory and common law.
1.021 Companies Ordinance (Cap.622). In 2012, a new Companies Ordinance (Cap.622)
was enacted, with effect from 3 March 2014 (see LN 163 of 2013). 37 Cap.622
replaced many of the provisions in the predecessor Companies Ordinance (Cap.32).
Previously, the predecessor CO was the main source of law on companies in Hong
Kong and contained provisions which regulate the creation, administration and
winding-up of companies. Following the commencement of Cap.622, the provisions
on creation and administration of companies (core company law) are now contained
in Cap.622. The corresponding provisions in the predecessor CO were repealed,
but that predecessor CO still contains the provisions on winding-up, public issues
of shares or debentures and disqualification of directors, and the ordinance was
renamed as the Companies (Winding-Up and Miscellaneous Provisions) Ordinance
(Cap.32). Accordingly, there are presently two Ordinances in Hong Kong covering
company law. Companies are often said to be a "creature of statute", and this is
correct in the sense that companies are today created pursuant to statute, and the
rights and liabilities of companies are set out in statute.
1.022 Common law. The Companies Ordinance is not a code on company law, as major
areas affecting the operation of companies are covered by common law principles.
For example, a great number of equitable doctrines and principles come into play in
regulating rights and duties of corporate participants. General principles of agency
law are important in regulating dealings between a company and outsiders (or third
parties). Apart from these other areas of law which find their way into company
law principles, there are also various company law doctrines (e.g. on the corporate
veil, or the capital maintenance doctrine) which, at their inception, might have been
regarded by the courts as being derivative of, or implicit from, the early company
law statutes, but which have largely been developed and fleshed out in case law by
the courts.
1.023 Influence of the UK and other common law jurisdictions. The Hong Kong
Companies Ordinance has traditionally and, to a large extent, still does follow the
UK company law. As such, much of the jurisprudence in English court decisions
are relevant for Hong Kong. The company law of some other common law
jurisdictions overseas is also derived from the UK model, and so court decisions in
such jurisdictions (such as Australia) - on both the common law and comparable
statutory provisions - might also have persuasive authority in Hong Kong even if
they do not operate as binding precedents. Some of the provisions in the Companies
Ordinance have also been enacted with reference to legislative developments in
jurisdictions other than the United Kingdom (such as in Australia, New Zealand,
Canada and Singapore), and so reference to overseas decisions on the comparable
statutory provisions will often be useful.

" The reforms are discussed further below at para.I. I I4.

 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 13

3. COMPANIES AND OTHER FORMS OF BUSINESS ASSOCIATION

3.1 Introduction

Types of business vehicles. Businesses can be operated through different types of 1.024
business vehicles or business organisations. The three broad types of business vehicles
which are recognised under Hong Kong law are:

1. sole proptietorships;
2. partnerships; and
3. compames.

Legal rights dependent on type of business vehicle. The type of business vehicle 1.025
adopted has implications on the legal relationships between the owners and operators
of the business as well as between the owners/operators and third parties with whom
the business deals. Jn other words, the types of legal rights that arise will depend on
the type of business vehicle used.

3.2 Sole proprietorships

Persons running a business on their own. A person operating the business on his 1.026
own account can do so as a sole trader or sole proprietor.
Few formalities for sole proprietorship. As a matter of formality, sole proprietorships 1.027
are straightforward to establish. The main legal requirement for establishment is
registration of the business under the Business Registration Ordinance (Cap.310).
(This requirement also applies for other business vehicles.)
Benefits and responsibilities of sole trader. The sole trader receives all the profits of 1.028
the business, and is personally liable for all its losses. Contracts are entered into for
the business by the sole trader personally (or by employees or agents acting on behalf
of the sole trader, who, as the principal, is the party to the contract).
Law applicable to sole traders. There are no specific legal rules applied to the 1.029
category of sole proprietors or sole traders. Rights and liabilities simply accrue to
the individual; and the general law (e.g. contract law or agency law) applies to the
sole trader as it applies to any individual.

3.3 Partnerships

3.3.1 Ge11eral
Partnership between two or more persons. A partnership can be formed between 1.030
two or more persons (partners). Partners are regarded as joint owners of the business,
and would share in both the profits and losses of the business.
Partnership law applies. A special body of law is applicable to partnerships - i.e. 1.031
partnership law. This body of law is composed of principles under the Partnership
Ordinance (Cap.38) and principles of the common law.
14 COMPANYLAWAND REGULATIONIN HONG KONG

3.3.2 Formation and ide11tificatio11ofpartnerships

1.032 Partnership rights and liabilities. Whether certain persons are in a partnership
relationship impacts on their rights and liabilities.
1.033 Contractual intention to form partnership required. The formation of a
partnership depends on the contractual intentions of the parties. 38 Thus, there must
be a valid agreement between the parties, as a matter of contract law, to establish a
partnership. The relevant intention is not whether the parties subjectively intended to
form a partnership, but whether, objectively speaking, the parties intended to form an
association that the law regards as a partnership. 39
1.034 Definition of "partnership". Section 3(1) of the Partnership Ordinance defines a
partnership as "the relation which subsists between persons carrying on a business in
common with a view of profit". Thus, it is this relationship which must exist before a
partnership can come into existence.
1.035 Partnership requires carrying on of business. The concept of a partnership requires
that there be the carrying on of a business. The business is usually a continuing one
(e.g. operating some retail business), although it is possible for a partnership to be
formed in relation to a single undertaking. 40 The concept of a business, however, is
distinguished from activities which are not in the nature of a commercial or business
enterprise, e.g. where parties simply pool their resources in a one-off investment
venture to make a gain on resale.41
1.036 Partnership business must be carried on in common. For there to be a partnership,
the business must be carried on in common. This is distinguished from a situation
where an undertaking can be said to be constituted of separate businesses rather
than one business being canied on in common. 42 The following factors, although not
necessarily decisive in themselves, may be relevant in indicating that the venture is not
carried on in common: where the parties are responsible for different aspects of the
undertaking; 43 where the pa11ieshave full control over their areas of responsibility and
no joint control over the management of the entire scheme; where the parties do not
intend to carry on the business as principals, nor as agents of each other;44 where the
parties do not intend to be severally liable for obligations to third parties; 45 and where
the pa11iesdo not share the net profits. 46

" Smith v A11derso11 ( 1880) 15 Ch D 247.

,. Cox v Hickman ( 1860) 8 HL Cas 268.
"' See e.g. /Vinsor v Scl,roeder (1979) 129NLJ 1266.
41 Ct: Taylor v Good [1974) I WLR 556.
2
' Blues Hairshop v Customs and Excise Commissioners 2000 SC 936; Strathearn Gordon Associates Ltd v
Commissioners of Customs & Excise [ 1985]VATTR79.
•J Barton v Hanson ( 1809) 2 Taunt 49; Lyon v Knowles (1864) 5 B & S 75 I; Television Broadcasters Ltd v Ash1011:~
Nominees Pty Ltd (1919) 22 SASR 552.
"' Canaditm Pac/fie Ltd v Telesat Canadt1 (1982) 133 DLR (3d) 321; Mann v D 'Arey [I 968] I WLR 893.
41 Television Broadcasters lid v Ashton,· Nominees Pty Ltd (1979) 22 SASR 552; Beckingham v Port Jackson &
Mtmly Stet1111ship Co ( 1957) SR (NSW) 403; Lang v James Morrison & Co Ltd ( 1911) 13 CLR 1, I I.
-"' Cox v Coulson [1916] 2 KB 177; United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741, 750;
ARM Constructions Pty Ltd v FCT( 1987) 87 ATC 4790; Cummings v Lewis (unrep., Federal Court of Australia,
2 August 1991).
 COMPANIESAND OTHER FORMS OF BUSINESSASSOCIATION 15

Partnership relationship. Section 4 of the Partnership Ordinance also sets out factors 1.037
that are to be taken into account when ascertaining whether a person is in a partnership
relationship with others:

• Joint ownership of property does not of itself create a partnership.

• Sharing of gross returns does not of itself create a partnership.
• Receipt by a person of a share of profits in a business is prima facie evidence
that he is a partner in the business. But the receipt of a payment contingent
on or varying with the profits of a business does not of itself make him a
partner. Accordingly: (i) receipt of a debt out of profits of a business does
not of itself make the creditor a partner; (ii) remuneration of an employee or
agent by a share of the profits does not of itself make the employee or agent
a partner; (iii) a widow or child of a deceased partner who receives a part of
the profits of a business as annuity is not a partner by reason only of such
receipt; (iv) a lender who receives a rate of interest varying with the profits of
a business is not a partner by reason of such receipt alone (provided that the
contract of loan is in writing and signed); and (v) a person receiving a portion
of the profits of a business in consideration of the sale by him of the goodwill
of the business is not a partner by reason only of such receipt.

1'1ansellcase: no partnership as no intention to carry on business as partners. 1.038

For example, in Keith Spicer Ltd v Mansell,47 Bishop and Mansell agreed to form a
company to carry on a restaurant business. While they were still looking for suitable
premises, Bishop ordered goods for the restaurant and had them delivered to Mansell 's
premises. 48 The business was never established. Bishop was bankrupt. The suppliers
sued Mansell for payment for the goods. It was argued that Mansell should be liable
on the basis that there was a partnership between him and Bishop. The court held that
there was no partnership as there had not been any intention on the part of the parties
to carry on business as partners. Their intention was to create a company, and what was
done were simply acts preparato1y to the carrying on of a business.
Partnership can come into existence before trading commences if relevant 1.039
intention present. However, where the parties do intend to operate their business as a
partnership, the partnership can come into existence even before the commencement
of trading. Where the parties contemplate that the business will be run as a partnership,
and they take significant steps to conduct the business, then there will be a partnership
in existence even before the business is opened to customers. 49
Chan case: partnership held to exist in light of agreement. Jn Chan Sau-kut v Gray 1.040
and Iron Constructionand Engineering Co (afirrn),50 the court considered the question
of whether a party who provided funds to another for a project for drainage works under

" [ 1970] I All ER 462.

'8 The letter from the supplier of the goods was addre.ssedto "B T Bishop, Esq, BM Vending Ingredients Sales
(London) Ltd", and the invoices were addressed to "BM Vending Ingredients Sales (London) Ltd".
" Khan II Miah (2000) I WLR 2123.
,o [ 1986) HKLR 84.
16 COMPANY LAW AND REGULATION IN HONG KONG

a construction sub-contract was in a partnership with the other. The court held that it
was a partnership in light of the following circumstances: the recital to the agreement
stating that the parties wished to cooperate in the drainage works (suggesting a
community of interest); a clause in the agreement providing that all the parties were
to observe and perform the terms and conditions of the sub-contract (suggesting joint
obligations under the sub-contract); a clause establishing a joint bank account; a clause
providing that the parties would have joint management and control over how the funds
were to be used and that there were to be fortnightly meetings between the parties
regarding work in progress. In the court's view, the terms of the agreement indicated a
pa11nershiprather than a creditor-debtor relationship between the parties.

3.3.3 Registration
1.041 Registration of partnership required. The carrying on of a business as a partnership
requires registration under the Business Registration Ordinance (Cap.310). The
partnership can carry on business under the names of its partners or under some
business name registered under the Ordinance.

3.3.4 Nature of a partnership

1.042 Partnership not a legal entity separate to its members. A partnership might be
referred to as a "firm", but a pa11nership is not a legal entity that is separate from its
members (the partners). This is illustrated by some of the principles below dealing
with the legal rights and liabilities of partners.

3.3.5 Partnership property

1.043 Partnership property and separate property: different treatment. Property used
for the purposes of the partnership business can be categorised either as partnership
property (belonging to all the partners) or separate prope11ybelonging solely to one or
more individual partners. It is important to ascertain whether property is partnership
property or not - for example, because partnership property must be applied
exclusively for the purposes of the partnership and in accordance with the partnership
agreement;5 1 and treatment of the property on a winding-up of the partnership (or
upon bankruptcy of individual partners) differs depending on whether the property is
partnership property or not.52
1.044 Partnership property jointly owned by partners. \1/here property is partnership
property, the property is not owned by any entity separate from the partners. Rather,
the property is owned jointly by the partners, with each having a form of equitable
proprietary interest in the partnership assets. 53
1.045 Ascertaining whether property belongs to the partnership. Whether property is
partnership property or not is ascertained from either the express agreement of the

" Partnership Ordinance (Cap.38) s.22.

" Sec Bankruptcy Ordinance (Cap.6) s.38(7).
" See Popat II Scho11chhatra[1997) 3 All ER 800; Canny Gabriel Castle Jackson Advertising Pty Ltd v Vol11me
Sales (Finance) Pty Ltd (1974) 131 CLR 321; Federal Commissionerof Taxationv Evere/1(1980) 54 ALJR 196.
 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 17

parties or by reasonable inference from the manner in which the partners have dealt
with the property during the subsistence of the paitnership. 54
Miles case: in absence of express or implied agreement court will only treat 1.046
property as "partnership property" if required to give business efficacy to
arrangements. In Miles v Clarke,55 a fashion photography business was operated
as a partnership between the plaintiff and the defendant. When the business was
wound up, it was necessary to ascertain who was entitled to which assets used in
the business. There was no express agreement between the partners whether the
assets were partnership property or not. The court held that in the absence of express
agreement and any other indications of an implied agreement, the court will treat
property brought by each of the parties into the business as partnership property only
as far as necessary to give business efficacy to the arrangements. In this case, the
comt took the view that for the business to operate, the stock in trade of the business
(such as film) must be the property of the partnership. However, ownership of other
assets could have remained with the original owner. Thus, the defendant, who had
originally operated the business on his own account, and who had originally acquired
a lease of premises for the business, and had provided the equipment and furniture for
the business, was entitled to those assets (not being partnership property). Goodwill
brought by the plaintiff to the partnership remained the property of the plaintiff. It
was not necessary for these assets to be treated as assets of the pa11nershipbusiness
in order for the business to operate. For example, the partnership can be regarded as
being entitled to use of the premises for the business on the basis of a licence granted
by the defendant.
Law case: facts. In Law Chou Shing v Chow Wing Kun, 56 a Mr Law set up a business 1.047
in the timber trade. Mr Lam and Mr Chow became partners in the business. In 1988
Mr Chow purchased residential premises in Tai Po - he intended to live in those
premises with a Miss Poon whom he was to marry. The property was purchased
in the names of Mr Chow and Miss Poon, but was to be in the first instance paid
for by the partnership under the following arrangement: the partnership was to
make the loan repayments to the mortgagee under a mortgage obtained for the
purchase of the property; at the same time, the amount of the loan repayments was
to be debited in an account between Mr Chow and the partnership. Under these
arrangements, ultimately Mr Chow would need to effectively make the payments.
Similar arrangements were already in place with the partnership for certain property
owned by Mr Law.
Law case: in absence of express agreement intentions and actions of parties 1.048
critical to determining what constitutes partnership property. Subsequently,
the partnership broke down, and a dispute arose whether the Tai Po premises were
pa1tnership property or not. There was no express agreement on this matter. The court
examined various factors in ascertaining the implied agreement of the parties, and

" See Miles v Clarke [I 953] I All ER 779; Law Chou Shing &A11or v Chow Wing Kun &Anor [I 994] 2 HKC 531;
Kelly v Kelly (1990) 92 ALR 74.
" (1953) 1 All ER 779.
'6 (1994) 2 HKC 531.
18 COMPANY LAW AND REGULATION IN HONG KONG

concluded that the parties' intentions were that the property would be the separate
property of Mr Chow and Miss Poon (and not partnership property). The court took
into account the following factors:

• The attitude ofMr Chow and Miss Poon as to the decorations in the flat when
they purchased it. The evidence was that they had chosen the flat because
the existing decorations were adequate and it was not necessary for extra
spending to re-decorate the place. This indicated the parties' intentions that
Mr Chow and Miss Poon were to bear the costs in relation to the flat and that
the premises were to be theirs.
• In the partnership accounts, debits were made to Mr Chow's account with the
firm with the effect that Mr Chow would ultimately pay for the cost of the
purchase. This was the same treatment in the accounts as for Mr Law's own
residential property.
• When the partnership had entered into difficulty, the partners had arranged
for the Tai Po property to be mortgaged under an all-monies mortgage with
funds being used for the partnership. Miss Poon had been very reluctant
about this arrangement, and although she finally agreed, the court took her
reaction as an indication that she was the owner of the premises (otherwise
she would not have been so concemed with the property being used for the
purposes of the business).

3.3.6 Financing
1.049 Capital or loan financing. Partners may contribute funds to the partnership
by way of capital or loan. There are different legal consequences depending on
whether amounts are provided by partners as capital or loan. 57 In ascertaining the
form in which money is paid over by one party, it is necessary to look at the terms
of the agreement. 58 For an example of where the court needed to ascertain whether
amounts paid by a partner were in the nature of capital or loan, see Chan Sau-kut
v Gray and Iron Construction and Engineering Co (a firm), discussed above at
para.1.040.
1.050 External loan financing. The partnership can also seek external loan financing, for
example from banks.

3.3.7 Relationship between partners

1.051 Rights and liabilities of partners between themselves. The rights and liabilities
of the partners inter se (between themselves) depend on the partnership agreement
(effective on the basis of contract law principles), the provisions of the Partnership
Ordinance, as well as the general law.

" Sec. e.g., Partnership Ordinance, ss.26(c), 26(d), 46(b).

'8 See Bronester Ltd v Priddle (1961) 3 All ER 471; Lo11do11 FinancialA.ssociatio11
v Kelk (1884) 26 Ch D 107;SEC
Construclio11Material Ltd v Tan Kin (unrep., HCA 423/2001, (2002) HKEC 1551).
 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 19

Rights and duties under Partnership Ordinance (Cap.38). Section 26 of the 1.052
Partnership Ordinance sets out rights and duties; however, s.26 is subject to agreement
between the partners to the contrary (whether expressed or implied). Under s.26:

• partners share equally in the capital and profits of the business, and must
contribute equally to the losses;
• partners are entitled to an indemnity from the partnership in respect of
payments and personal liabilities incurred: (i) in the ordinary and proper
conduct of the business of the firm, or (ii) in or about anything necessarily
done for the preservation of the business or property of the firm;
• a partner making a payment or advance beyond the agreed capital contribution
is entitled to interest of 8 per cent per annum;
• a partner is not entitled, before the ascertainment of profits, to interest on the
capital subscribed by him;
• every partner may take part in the management of the business;
• no partner is entitled to remuneration;
• no person may be introduced as partner without the consent of all partners;
• any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners, but no change may
be made in the nature of the partnership business without the consent of all
partners; and
• partnership books are to be kept at the place of business of the partnership (or
the principal place, if there are more places than one), and every partner may
have access to and inspect and copy any of them.

Fiduciary duties owed by partners to each other. Partners are fiduciaries, and 1.053
owe fiduciary duties to each other. Fiduciary duties are imposed in equity on certain
categories of persons, such as partners. Some of the equitable fiduciary duties are also
reflected in the Partnership Ordinance. 59
Breach of fiduciary duty. Where X owes a fiduciary duty to Y and breaches that 1.054
duty, then Y may have remedies against X (e.g. to recover compensation, to seek an
order for the transfer of property from X to Y, or for X to account to Y for improperly
obtained profits etc.). The nature of fiduciary duties will be explored in more detail
in the context of company directors in Chapter 8, but the following cases illustrate the
application of principles of fiduciary duties to partners.
Do11aldcase: breach of fiduciary duty by setting up rival law firm. In Kao Lee & 1.055
Yip v Koo Hoi Yan Donald, 60 a partner in a law firm was found to be in breach of his

'9 See ss.31 and 32.

'" [2003)2 HKC 113.
20 COMPANY LAW AND REGULATION IN HONG KONG

fiduciary duties by his conduct in advising on and setting up a rival firm of solicitors.
In the course of its judgment, the court set out the following principles:

• "[T)he essence of a fiduciary relationship is one of trust and confidence

between the fiduciary and the [beneficiary)" (at 131).
• "[T]he fiduciary undertakes or agrees to act for or on behalf of or in the
interests of another person [the beneficiary] in the exercise of a power or
discretion which will affect the interests of [the beneficiary] in a legal or
practical way (at 131, quoting Mason J in Hospital Products Ltd v United
States Surgical Corp61).
• The "fiduciary is placed in a position of trust and confidence in relation to
the beneficiary, who is in a position of vulnerability" (at 131).
• The "core obligations of a fiduciary is that of loyalty (or fidelity) and good
faith" (at 133).
• Fiduciary duties include: "(I) the duty not to place himself in a position
where his or anyone else's interests would or may conflict with duties owed
to the beneficiary (the non-conflict duty). (2) The duty not to make a profit
from his position (the not to profit duty)" (at I 33).62
• The scope of the fiduciary duties in any particular situation can be attenuated
or modified by the contract between the parties (at 133).

1.056 Zacharia case: fiduciary relationship continues until partnership fully wound up.
In Chan v Zacharia,63 a medical practice that was operated as a partnership held a lease
of premises for three years with an option for renewal. Prior to the end of the three-
year tenn, the partnership was determined and a receiver was appointed to wind up the
partnership. One of the partners, Dr Chan, sought to exercise the option for his own
benefit. The High Court of Australia held that until the partnership was finally wound
up after the final settlement of accounts, the partners continued to be in a fiduciary
relationship to each other with respect to any assets of the partnership. Thus, although
the partnership was in the course of being wound up, Dr Chan still owed fiduciary duties
to the other partner. He therefore breached his fiduciary duties (breach of the profit rule)
by exercising the option for his own benefit.

3.3.8 Liability to third parties - contract

1.057 Partners agent.s of each other and can make binding agreements. Partners are
jointly liable64 for the contrach1al obligations of the partnership: Partnership Ordinance

61 (1984)156CLR41,96-97.
•
2
See further the discussion of these two rules at [2003] 2 l➔ KC 113, 133-14 3.
63
(1984) 154 CLR 178.
.. Joint liability arises when two or more persons jointly promise to do the same thing: Asia Television Ltd v Mak
Chi Kin [2006) MKC 347, [9]. Joint liability involves only one obligation such that the performance by one joint
obligor discharges the other. Under the common law,judgment against one joint obligor operates to bar an action
against the other (Kendall v Hamilton ( 1879) 4 App Cas 504), but that rule is displaced by statute: Civil Liability
(Contribution) Ordinance (Cap.377) s.5; and see further Asic,TelevisionLtd v Mak Chi Kin [2006] HKC 347, [9];
Goei Tsusho Co Ltd v leader E11gi11eeri11g & Co11struc1io11 Ltd [2010] 2 l➔KLRO I084, [38]-[41).
 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 21

(Cap.38) s.1 l .65 Partners are agents of each other, and can bind each other to contracts
where they have authority from the other partners to enter into the contract. Authority
under agency law is of two broad types:

• actual authority - i.e. where the agent is actually given authority (expressly
or implied) from the principal to enter into the transaction;
• apparent or ostensible authority - i.e. where the principal represents
(expressly or impliedly) to the third party dealing with the agent that the
agent has authority to enter into the transaction (even though in fact no actual
authority had been conferred on the agent). 66

Each partner an agent for the partnership. Section 7 of the Partnership Ordinance 1.058
(Cap.38) states: "Every partner is an agent of the firm and his other partners for the
purpose of the business of the partnership; and the acts of every partner who does
any act for carrying on in the usual way business of the kind carried on by the firm
of which he is a member bind the firm and his partners, unless the partner so acting
has in fact no authority to act for the finn in the particular matter, and the person with
whom he is dealing either knows that he has no authority or does not know or believe
him to be a partner."
Apparent authority to carry on firm's business in usual way. Section 7 of the 1.059
Partnership Ordinance effectively restates the common law p1inciples, outlined at
para. l .057 above, in relation to partners. The reference in the section to the possibility
of a partner binding the partnership in relation to "any act done for carrying on in the
usual way business of the kind carried on by the firm" corresponds to the concept of
apparent autho1ity. The partners are treated as having made an implied representation
to all persons dealing with the partnership that each of the partners has the authority to
carry on the firm's business in the usual way.
Garrod case: apparent authority binds the partnership. In Mercantile Credit Co 1.060
Ltd v Garrod,67 Parkin and Garrod were pa11ners operating a motor garage, in the
business of repairing cars. Parkin sold a car to the plaintiff. The partnership did not
have title to the car though, and the car was not ultimately delivered to the plaintiff.
The plaintiff sued the partners for the return of the money paid for the car. Garrod
argued that he should not be liable for this transaction as it was outside the authority
actually given to Parkin under the partnership agreement. The court accepted that
Parkin did not have actual authority to bind the partnership in relation to the sale of the
car. However, the court held that, on the facts of the case, buying and selling cars is not
something that would be unusual and unexpected of a motor garage - accordingly,
Parkin had apparent authority to sell the car and could bind the partnership to the
contract on that basis.

65 Section 11 also provides that after the death of a partner, his estate is also severally liable in a due course of
administration for the debts and obligations of the partnership. so far as they remain unsatisfied but subject to
the prior payment of his separate debts. See further Friend v Young[ 1897]2 Ch 421; Bagel v Miller [1903) 2 KB
212.
,;, On these principles, see further Chapter 12.
67 (1962)3 All ER 1103.
22 COMPANY LAW AND REGULATION IN HONG KONG

3.3.9 Liability to third parties - tort

1.061 Joint and several liability of partners. The partnership is liable for the loss or
injury arising from any wrongful act or omission of any partner acting in the ordinary
course of the business of the firm or with the authority of his co-partners: Partnership
Ordinance, s.12.68 Such liability of the partners is joint and several: see also s.14. 69

3.3.10 Limited part11erships

1.062 Limited liability of certain partners. Although liability of partners is unlimited
for partnerships generally, it is possible to form a limited partnership under the
Limited Partnerships Ordinance (Cap.37). Limited partnerships must be registered
under this Ordinance. A partner who is to be a limited partner would have his
liability limited to the amount contributed to the firm at the time of entering into
the partnership: s.3(2) of the Limited Partnership Ordinance. There are certain
restrictions imposed on limited partners, for example they are not permitted to take
part in the management of the firm and they do not have power to bind the other
partners: s.5( 1) of the Limited Partnership Ordinance. There must be at least one
partner in a limited partnership whose liability is not limited (such a partner being
referred to as a general partner): s.3(2) of the Limited Partnership Ordinance.

3.3.11 Termbiation of partnerships

1.063 Formalities of dissolving partnership. The grounds for dissolution of a partnership
are set out in the Partnership Ordinance ss.34-37. Te1mination of the partnership also
involves a process of winding-up, during which partnership assets are gathered and
realised for the purpose of paying creditors and settling accounts between the partners.
Section 46 of the Partnership Ordinance sets out the order of distribution to creditors
and partners. The partnership is ended after the final settlement of accounts.

3.4 Companies: Comparison with partnerships

3.4.1 Ge11eral
1.064 Setting up a company. Companies in Hong Kong are created or incorporated
pursuant to the registration procedure set out in the Companies Ordinance (Cap.622). 70
A company may be created so that the owners of the company (the members) have
their personal liability for the debts of the business limited. It is the company which
is the entity liable for those debts. The owners/members can receive the profits of the
business through the payment of dividends out of the company's profits. Companies
are managed by or under the authority of the directors of the company. (A director may
also be a member of the company.)

•8 For example,seeNorrhamplon Regional Livestock Ce111re Co Ltd v Cowling [2016] I BCLC 431.
°' Joint and severalliability ariseswhen two or morepersonsin the sameinstrumentjointly promise10 do the same
thing and also severallymake separatepromisesto do the samething: Asia Televisio11lid v Mak CM Ki11[2006]
HKC 347, [9]. Joint and severalliability gives rise 10 onejoint obligation and to as many severalobligations as
therearcjoint andseveralpromisors.At common law, wherethe liability is joint and several,ajudgment against
one debtor docs not bar a severalaction againstanother.
"" Cap.622commencedopemtionon 3 March 2014.Previously,companieswere incorpomtedunderthe predecessor
CompaniesOrdinance.
 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 23

Separate legal entity. Significantly, a company is different from sole proprietorships 1.065
and partnerships in that the company is a separate legal entity- i.e. an entity that the law
recognises as capable of having certain legal rights and liabilities. Rights and liabilities
arising in the course of the business operated through a company vehicle generally
accrue to the company instead of the members or the directors "behind" the company.
Comparing partnerships and companies. The discussion below provides a brief 1.066
comparison of partnerships and companies.

3.4.2 Formatio11
Companies formed by registration. Companies are formed by registration of a copy 1.067
of the articles of association pursuant to the Companies Ordinance (Cap.622). Fees are
payable on registration.
Partnerships formed by agreement. Partnerships are formed simply pursuant to an 1.068
agreement of the partners. There are no formal requirements for creating a partnership.

3.4.3 Legal status

Companies. A company: 1.069

• is a separate legal entity;

• can own property;
• has perpetual succession (i.e. the company continues to exist notwithstanding
changes in members);

• can sue and be sued.

Partnerships. ln a partnership: 1.070

• the partnership is not a separate legal entity;

• the partners jointly own pa1tnership property; they have a form of equitable
proprietary interest in partnership assets;
• where there is a change in members, there is a dissolution of the existing
partnership and a creation of a new partnership with the new member;
• litigation can be commenced in the firm name, but the partners are the paities
to the litigation. 71

3.4.4 Formalities
Registration and other formalities must be met for companies. For companies: 1.071

• there must be registration under the Business Registration Ordinance (Cap.31 0);

" Rules of the High Court (Cap.4A) 0.8 I.

24 COMPANY LAW AND REGULATION IN HONG KONG

• the Companies Ordinance imposes various obligations in relation to the

operation of a company, such as: requiring notifications to the Registrar
of Companies on details of company directors and secretaries; the filing
of annual returns and filing of certain company resolutions with the
Registrar; audit requirements for financial statements; holding of annual
general meetings of members; and the keeping of various company
registers.

1.072 Only registration required for partnerships. For partnerships:

• there are requirements for registration under the Business Registration

Ordinance;
• there are no specific legislative requirements peculiar to partnerships.

3.4.5 Transferof ownership

1.073 Restrictions on transfer of shares depends on whether company private or public.
Shares of public companies are freely transferable; but there would be restrictions on
transfers of shares of private companies.
1.074 New partners introduced by agreement. New partners can be introduced only with
the agreement of the other partners.

3.4.6 111a11ageme11t
1.075 Companies managed by directors. For companies:

• the members (owners) do not usually have a right to manage the company's
business;
• management powers are usually vested in the directors.

Partners have a right to management unless there is agreement to the contrary.

3.4.7 Agency
1.076 Companies. For companies:

• shareholders (members) are not agents of the company, nor is the company
an agent for the shareholders;
• individual directors can act as the agent of the company, depending on
whether they have been conferred with authority as such;
• the board of directors is not an agent of the company, nor are the directors
agents of the shareholders.

In a partnership, each partner is an agent for the other partners.

 COMPANIESAND OTHER FORMS OF BUSINESS ASSOCIATION 25

3.4.8 Liability
Limited liability for companies limited by shares. For companies limited by shares, 1.077
shareholders (members) can lose the amount they paid for the shares (or the amount
required to be paid for the shares), but are not further liable for the debts of the
company. Directors are not personally liable for the debts of the company.
Partners all liable for debts offirm. ln a partnership, the partners are all liable for the 1.078
debts of the firm (except for limited partners in limited partnerships).

3.4.9 Borrowing powers/.fi,umcing

Companies have power to borrow and raise finance through floating charge. For 1.079
companies:

• The company has power to borrow (although the exercise of the borrowing
powers can be subject to limitations in the articles).
• In addition to the types of financing available to individuals, companies can
raise finance through a floating charge 72 (as companies are exempt from the
Bills of Sale Ordinance (Cap.20) under s.26).

Partnerships able to borrow and raise finance in same way as individuals. For 1.080
partnerships:

• Partners can obtain loans and financing that are available to individuals.
• A partnership cannot raise finance through a floating charge (due to requirements
in the Bills of Sale Ordinance s.11 for the specific listing of all assets charged).

3.4.10 T(IX(lfio11

Companies. For companies: 1.081

• The profits tax rate is 16.5 per cent. 73

• The company is taxed as a separate legal entity. The directors or members are
not personally liable for the tax assessed on the company.

Partnerships. For partnerships: 1.082

• The profits tax rate is 15 per cent. 74

• Partnerships are taxed as a separate entity,75 but partners may be personally
liable for the tax assessed on the pa1tnership firm. 76

" On floating charges, see further Chapter 17.

" Inland Revenue Ordinance (Cap.112), s.14(2) and Sch.8.
" Inland Revenue Ordinance, s.14( I) and s.2 definition of"standard rate", and Sch. I.
15 See Inland Revenue Ordinance, ss.14 and 22, and see also the definition of "person" in s.2 (which includes a
partnership, as well as other unincorporated associations). Ordinarily, a pa1tnership is not a legal person, but the
position is otherwise for tax purposes under the Inland Revenue Ordinance.
16
Inland Revenue Ordinance, s.22(4).
26 COMPANY LAW AND REGULATION IN HONG KONG

• A person who is a partner can also opt for personal assessment, in which
case tax is calculated at progressive tax rates 77 on the aggregated income
from all sources. For example, a partner who is also an employee of some
other business and who is liable for salaries tax in respect of that employment
can opt for personal assessment, 78 in which case his income from the salary
and his share 79 of the profit/loss of the partnership business is aggregated.
Personal assessment can be beneficial, for example, where the partnership
business is incurring a net loss. Here, the partner's share of the loss can
be deducted from his salary income, thereby reducing the net chargeable
income on which tax is assessed on him. This reduces the amount of tax that
he would have to pay.

4. HISTORICAL DEVELOPMENT OF COMPANY LAW

4.1 English origins

1.083 Hong Kong companies derived from corporations and joint stock companies in
England. Hong Kong company law originates from developments in England. Two
streams of legal and commercial developments in England led to the modern company.
The first is the development of the corporation. The second is the joint stock company.

4.1.1 Historical development oftlte corporation

1.084 Roman roots. The concept of the corporation existed as early as Roman times,
where Roman law recognised the existence of fictitious legal entities constituted by
villages, towns and colonies, and brotherhoods of priests and artisans. 80 The practical
advantages of the concept of a corporation are reflected in the following comments of
Blackstone:

" ... as all personal rights die with the person; and, as the necessary forms of
investing a series of individuals, one after another, with the same identical rights,
would be very inconvenient, if not impracticable; it has been found necessary,
when it is for the advantage of the public to have any particular rights kept on
foot and continued, to constitute artificial persons, who may maintain a perpetual
succession, and enjoy a kind of legal immortality."81

1.085 Corporation sole. In England, the corporation sole was recognised under ecclesiastical
and canon law by about the 12th or 13th centuries, to enable church property to be held
in perpetuity in the particular religious office rather than having the property devolve

" Inland RevenueOrdinanceSch.2.

78 Sec Inland RevenueOrdinancePt.7 (ss.408-43).
19 Calculatedin accordancewith Inland RevenueOrdinances.22A.
80 SamuelWilliston, "History of the Law oft he BusinessCorporation Before 1800" ()888) 2 Harvard Law Review
105, 106.
8' s
William Blackstone, Blacksto11e Commentaries 011 the laws of £11glantl(London, 1820) 127.
 HISTORICAL DEVELOPMENT OF COMPANY LAW 27

to the heirs of the person holding the office upon his death.82 Thus, a bishop held
land for his diocese or an abbot for his abbey, and the land would devolve on their
successors in office. But there could be a time gap between the time of death and the
time of appointment of the successor. The notion of the office as a corporation bridged
the gap; it is the corporation that holds the land. Similarly, the king and his successors
came to be thought of as a corporation sole, so that royal estates remained vested in the
corporation between the time of the death of a king and the accession of his successor,
and so as to preserve legal continuity and avoid a vacancy of the throne. 83
Peace guilds, municipal corporations and craft guilds. The earliest corporations 1.086
aggregate in England appear to be peace guilds, whose members pledged to stand
by each other for mutual protection. 84 From these developed municipal corporations,
which supervised the inhabitants of a particular town or locality. There also developed
craft guilds, which were associations of persons in a particular trade which regulated
the trading activities of its members, such as associations of goldsmiths, merchant
tailors and fishmongers. 85
Corporate status conferred by the king. In medieval England, corporate status was 1.087
conferred under the authority of the king- implicitly in the case of corporations sole
and municipal corporations which were recognised under the common law "from time
immemorial"; and expressly in the case of royal charters granting corporate status to
trade or craft guilds.86
Regulated companies. By the 16th century, charters were granted for companies
to carry on trade overseas.87What was referred to as "regulated companies" were
corporations created by charter where the members of the company traded on their
own behalf, subject only to the regulations and bye-laws of the company.88 Early
examples were the Russia Company and the Turkey Company.89 Members of regulated
companies paid fees and duties to the company, which provided infrastructure and
facilities for the members' trading - for example factories or consulates for foreign
trading activities. 90 While the companies regulated the business activities of its
members, the members traded on their own stock (i.e. own assets) and took risks and
liabilities individually.91

" Cecil T Carr, The General Principles of the law of Co,porations (Cambridge University Press, Cambridge,
1905) 16-20.
" Ibid., 22-23.
" Samuel Williston,"History of the Law of the Business Corporation Before 1800" (1888) 2 Han-·ardLaw Review 105,
107-108.
" Ibid., 108-109; Frank Evans, "The Evolution of the English Joint Stock Limited Trading Company" (1908)
8 Columbia Law Review 339, 339-340.
•• William Blackstone, Blacks/One'sCommenraries 011the Laws of England (London, 1820) 128-129; Samuel
Williston, "History of the Law of the Business Corporation Before 1800" (1888) 2 Harvard Law Review 105,
108-109.
87 Samuel Williston, "History of the Law of the Business Corporation Before 1800" ( 1888) 2 Harvard Law Review
105, 109.
88 Ronald R Fonnoy, The Historical Fou11tlatio11s of Modern Company Ltnv (Sweec and Maxwell, London, 1923) 4.
89 Samuel Williston, ''History of the Law of the Busine.ss Corporation Before 1800" ( 1888) 2 Harvard ltnv Review
105, 109.
90 Ron Harris, /11dustrializing£11glishLaw: Entrepreneurshipand Business Organiz(lfi0111720-1844 (Cambridge
University Press, Cambridge, 2000) 32.
9' Ibid.
28 COMPANYLAWAND REGULATIONIN HONG KONG

4.1.2 Joint stock companies

1.089 Stock or funds contributed by members pooled together in _jointstock company.
A second type of trading association which developed was the joint stock company.
The early joint stock companies were, like regulated companies, created by cha11er
but were different from the regulated company in that the stock or funds contributed
by members were pooled together and the company traded on the one account. 92 The
members shared all business activities of the company under a common management
and shared in the profits or losses of the company's activities. An early example was
the East India Company, incorporated originally as a regulated company, but which
began trading as a joint stock company in 1612.93 The Africa Company and Hudson
Bay Company were other examples of joint stock companies in that time.94
1.090 Regulated and joint stock companies facilitated trade and cooperation between
traders. The use of regulated or joint stock companies facilitated the government of
the particular trade and provided mutual cooperation between the traders who joined
in the company. These benefits were important due to the great expense of carrying on
trade with distant countries. 95 Apart from the members' personal objective of making
a profit, these companies also had a public function of regulating and ordering foreign
trade.%The charters of these companies granted sole rights of trading in the country
concerned, appointed the officers of the company, regulated their numbers, and gave
permission to make bye-laws, to have a common seal and to sue and be sued in the
corporate name.97
1.091 Incorporation through special Act of Parliament. Apart from incorporation by
charter, it was also possible for companies to seek incorporation through a special
Act of Parliament. 98 Tnthe 17th and 18th centuries, the use of incorporated joint stock
companies grew.99 Companies were created by charter or by statute for a range of
purposes, including for banks, insurance companies, mining companies, water supply
companies, canal companies, railway companies and manufacturing companies. 100
This growth was brought about due to population growth, and growth in trade and
industry brought about by technological developments and colonial acquisitions. 101
While joint stock companies were not prevalent for sectors where there was gradual
growth and where the family firm could survive on mercantile capital, plowed-back

92 Ibid., 33; Ronald R Fonnoy, TlteHistorical Fo111ulatio11s

of Modem Compan_vlaw (Sweet and Maxwell, London,
1923) 5-11.
93
Ibid.
94
Ibid.
" Samuel Williston, "History of the Law of the Business Corporation Before 1800" (1888) 2 Harvardlaw Review
105, 110.
96
Ibid., 111.
9' Ronald R Formoy, The Historical Foundatio11s of Modem Companylaw (Sweet and Maxwell, London, 1923) 17.
" Frank Evans, "The Evolution of the English Joint Stock Limited Trading Company" (1908) 8 Columbia law
Review 339, 348-349.
99 Ronald R Forrnoy, The Historical Fou11da1io11s of Modem Company Law (Sweet and Maxwell, London, 1923) 4.
100 Frank Evans, "The Evolution of the English Joint Stock Limited Trading Company" (1908) 8 Columbia law

Review 339, 345-348; Samuel Williston, "History of the Law of the Business Corporation Before 1800" (1888)
2 Harvard Law Rwic,.v 105, 11.1-112; Ronald R Formoy, The Historical Fo1111da1io11sof Modem Company law
(Sweet and Maxwell, London, 1923) 17-20.
101
TB Napier, "The History of the Joint Stock and Limited Liability Companies" in Centwy of Law Reform (I 901)
pp.386-387.
 HISTORICAL DEVELOPMENT OF COMPANY LAW 29

profits, country banks and networks of friends and relatives,joint stock was important
for sectors where there was fast growth or requirements for lump-sum investment
outlays such that the capital demands went well beyond the capacity of individuals and
traditional sources of finance. 102
Unincorporated joint stock companies. Before 1844, joint stock companies 1.092
could be incorporated (formed by charter or special Act) or unincorporated.
Unincorporated joint stock companies existed in the form of a partnership. The joint
stock company was therefore not a separate legal form of association but was a
description of a business association that traded on the basis of joint stock of its
members. Unincorporated joint stock companies differed from other partnerships
in that they were larger, had a smaller ratio of active members and had contractual
arrangements via deeds of settlement providing ease of transferability of their shares
in the partnership. 103
Disadvantages of unincorporated joint stock companies. The unincorporated joint 1.093
stock company, being a partnership, had a number of disadvantages compared with
incorporated joint stock companies. For example, under partnership law, each partner
would have power to contract for the company and could effectively dispose of all the
property of the firm without the assent of the other partners. Also, and significantly, there
was an absence of separate entity status for unincorpornted joint stock companies. This
led to practical problems for unincorporated joint stock companies constituted by a large
number of members. 104 First, the lack of continuity in the association's existence meant
that there would be a dissolution of the partnership every time there was a change in its
membership, with the consequent need for reorganisation. Secondly, legal action brought
by or against the company was difficult and cumbersome by reason of the need to join
each partner to the proceedings. As Formay has noted, litigation can become impossible
as a practical matter where there is a large number of members in the company and where
the relevant transaction occurs over a period ohime during which there has been constant
changes in membership. 105 Thirdly, there were problems and difficulties arising from
different outcomes in the application of particular statutory regimes to large unincorporated
associations, lacking in a separate legal personality, compared with corporate entities. 106

102
Ron Harris, I11d11strialLzing
English Law: Entrepreneurship and Business Organization 1720-1844 (Cambridge
University Press, Cambridge, 2000) 174-176, 180-181, 182.
103
Simon P Ville, 'The Salomon Judgment and the Development of British Business in the Nineteenth Century', in
Robert Baxi, Keith Fletcher and Saul Fiidman (eds.), Afierma11and Baxt s Cases and Materials 011Corporations
and Associations (8th edn, I999) p.153; Paddy Ireland, "Capitalism without the Capitalist: the Joint Stock
Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality" (1996)
17.Joumal o/'Legal Histo,y 41, 42--43; Ron Harris, Industrializing English Law: £11treprene11rslrip
and Business
Organization I 720-1844 (Cambridge University Press, Cambridge, 2000) 139.
1
°' Ronald R Fonnoy, The Historical Fo1111datio11s of Modem Company law (Sweet and Maxwell, London, 1923)
32-36; Ron Harris, Industrializing English Law: Entrepreneurship and Business O,gani1ation 1720-1844
(Cambridge University Press, Cambridge, 2000) 141-147; John Saville, "Sleeping Partnership and Limited
Liability 1850-1856" (1856) 8 Economic History Review 418.
1
•s Ronald R Formoy, The 1-JistoricalFi,)Undationsof Modern Company Law (Sweet and Maxwell, London, 1923)
33-36. Sec also Hunt, above fn.3. 82.
°'
1
Ron Harris, fnd11striafizi11gEnglish Law: Entrepreneurship and Business Organization 1720-1844 (Cambridge
University Prc.ss, Cambridge, 2000) 145-147. For example, Harris notes the problem for unincorporated
companies flowing from the rule under patent law that assignments of patents to more than five persons were
unlawful.
30 COMPANYLAWAND REGULATIONIN HONG KONG

1.094 Trusts used to overcome disadvantages of joint stock companies. Some of these
problems were sought to be overcome by use of contract or trust law. For example, the
vesting of assets or rights of the joint stock company in a trustee meant that the trustee
could bring actions as trustee on behalf of the company, thereby overcoming the
difficulty that the company as a fluctuating body had in suing. 107 Nonetheless, there
were still limitations in the extent to which the unincorporated joint stock company
could attain the advantages of incorporated bodies. For example, as Harris has argued,
there were restrictions under trust law at the time in relation to trustee's powers to
deal with particular trust assets which made it difficult for trustees to act wholly as
commercial men could in the operation of the company's business. 108
1.095 Obstacles to incorporation meant businesses had no choice but to operate as
unincorporated joint stock companies. To benefit from the features of a corporation,
entrepreneurs sought incorporation through private Acts or by royal charter. However,
applications were often denied, leaving many businesses with only the option of
operating as unincorporated joint stock companies. 109 Inconvenience and expense in
seeking incorporation by the Parliament or the Crown have often been cited as the
obstacles preventing widespread incorporations. 110 Harris has also argued that the
main factor in preventing incorporations was private vested interests. Harris observes
that in sectors such as the insw-ance industry and in flour milling and brewing, the
incumbent businesses which controlled the particular sectors were able to wield
political influence to thwart incorporation applications made by new proprietors
seeking to gain entry into the particular industry. 111 Nonetheless, with economic
developments (and also with uncertainties on the legality of unincorporated joint
stock companies under the Bubble Act 1720 before its repeal and under the common
law thereafter 112), applications for incorporation grew. In the boom of 1824-1826,
Parliament was "besieged with applications", 113 with there being about 500 private
bills coming before Parliament during that period. 114

,o, Ronald R Formoy, The His1orical Fo1111dations of Modem Company Law (Sweet and Maxwell, London, 1923)
41-42.
108 Ron Harris, Industrializing English law: Entrepreneurship and Business Organization 1720-J 844 (Cambridge

University Press, Cambridge, 2000) 152-159, 165-166.

10~ Bishop C Hunt, The Development <>ftheBusiness Corporation in England 1800-1867 (Harvard University Press,

Cambridge, 1936) 11-12.

110
ibid., 82.
111
Ron Harris, illdustrializing English Law: Entrepreneurship and Business Organization I 720-1844 (Cambridge
University Press, Cambridge, 2000) 102-109, 133-136, 178-182.
"' The Bubble Act outlawed "mischievous undertakings" wherein the undertakers "'presumed to act as if they were
corp<>rntebodies and have pretended to make their shares transferable". There was uncertainty whether the Act
caught all unincorporated joint stock companies, but in any event the Act was not much enforced until the early
1800s. While the Act was repealed in 1825 due to pressures brought by business persons, there were some
court decisions handed down at the time which held that unincorporated joint stock companies were unlawful
under the common law. See T B Napier, "The History of the Joint Stock and Limited Liability Companies"
in Centwy of U/IV Reform ( 1901) 383-387; Frank Evans, "The Evolution of the English Joint Stock Limited
Trading Company" (1908) 8 Columbia Law Review 339, 353-358; Bishop C !font, Tire Developmet!I f!f" the
Business Corporation in England 1800-/867 (Harvard University Press, Cambridge, 1936) 42-44; Ron Harris,
lndus1riali1ing English Law: Entrepreneurs/rip and Business Organization 1720-/844 (Cambridge University
Press, Cambridge, 2000) 236-249.
113
Bishop C !font, The Development (!/"theBusiness Co,poration in England /800-/867 (Harvard University Press,
Cambridge, 1936) 32.
114
Ron Harris, !ndustrittli=ingEnglish Law: Entrepreneurship and Business Organization 1720-1844 (Cambridge
University Press, Cambridge, 2000) 255.
 HISTORICAL DEVELOPMENT OF COMPANY LAW 31

4.1.3 Early English Companies Acts

Some benefits of incorporation passed to unincorporated associations. In the 1.096
early 19th century, the English parliament began conferring some of the benefits of
incorporation on unincorporated joint stock companies. Legislation allowed specific
companies to sue and be sued in the name of a principal officer.115 However, for this right
to be of use where the company was defendant, it was also necessary for the legislation
to require a register of members to be kept so that plaintiffs would be able to obtain
recovery from the members after any successful action. 116 Via Acts in 1834 and 1837,
a general right was conferred on the Crown to grant corporate privileges to unincorporated
associations, in particular the right to sue and be sued in the name of principal officers,' 17
although the privileges were "doled out sparingly". 118
Joint Stock Companies Registration and Regulation Act 1844. In 1844, the 1.097
landmark Joint Stock Companies Registration and Regulation Act was passed. The
Act required all joint stock companies 119 to be registered, and following an application
for registration, the company becomes incorporated upon the issue of a "Certificate
of Complete Registration". 120 As an incorporated body, the company has power, inter
alia, to sue and be sued in the registered name, to hold land and to borrow money. 121
The 1844 Act was therefore significant in allowing general incorporation of joint
stock companies by a simple process of registration. The Act did not, however, provide
for limited liability of the company's members. 122 The immediate factor which led to
the enactment of the 1844 Act was the report of the parliamentary Select Committee
(appointed in 1841) which was submitted in March 1844. The parliamentary
committee had been established to enquire into the state of the laws respecting joint
stock companies in light of the widespread fraud that was concomitant with the boom
in company promotions in the 1830s and the ensuing market crash and collapse of
many companies at the end of the 1830s. As Hunt has observed, while the 1844 Act
made the privileges of incorporation generally available by registration, the major
purpose of the Act was to afford a measure of protection to the public through a policy

1
"Bishop C Hunt, The De11elopme11t of the B11sinessCorporation in England 1800-1867 (Harvard University Press,
Cambridge, 1936) 23.
116 Ronald R Fonnoy, The Historical Fo111ulationsof Modern Company law (Sweet and Maxwell, London, 1923)

36-37.
117
Trading Companies Act 1834 and 1837. See Ron Harris, htdustrializing English law: Entrepreneurship a,ul
Business Organization 1720-/844 (Cambridge University Press, Cambridge, 2000) 271-272; Bishop C Hunt,
Tlte Development of the Business Co,poration in England I 800-1867 (Harvard University Press, Cambridge,
1936) 56--60; Frank Evans, "The Evolution of the English Joint Stock Limited Trading Company" ( 1908) 8
Columbia law Review 339, 358-360; Ronald R Formoy, The Historical Fou11datio11s of Modem Compa,1_vlaw
(Sweet and Maxwell, London, 1923) 55-57.
1
" Bishop C Hunt, The Developme11toftlte Business Corporation i11England 1800-1867 (Harvard University Press,
Cambridge, 1936) 58.
119 Defined to mean "every partnership whereof the capital is divided or agreed to be divided into shares, and so

as to be transferable without the express consent of all the co-partners", "assurance companies" (as defined in
the Act), and "every partnership which at its formation, or by subsequent admission ... shall consist of more than
twenty.five members": s.2 of the 1844 Act.
il<l Section 25ofthe 1844Act.
121
See generally: Frank Evans, "The Evolution of the English Joint Stock limited Trading Company - Part 2"
(1908) 8 Columbit1 law Review 461, 461-463; Ronald R Fonnoy, The Historical Fo1111da1ions of Modem
Company law (Sweet and Maxwell, London, 1923) 67-73.
"' Section 66 of the I844Act. Limited liability is discussed below at para.1.100.
32 COMPANY LAW AND REGULATION IN HONG KONG

of publicity. 123 Hunt stated: "What it could not suppress, Parliament now, in the public
interest, proceeded to subject to general inspection and regulation." 124

1.098 Factors that led to enactment of 1844 Act. Harris has argued that the 1844 Act was the
product of a set of "long- and short-term, structural and contingent, legal and economic,
ideological and personal factors". 125 These factors as listed by Harris include: awareness
that developed after the mid- l 8th century on the part of entrepreneurs that joint stock is a
beneficial feature of finance; recognition by the early 19th century that the only efficient
way to employ joint stock is by combining it with the concept of the corporation to form
the joint stock business corporation; the realisation by the 1820s and 1830s that neither
Parliament nor the law officers of the Crown could deal with incorporation individually;
the legitimisation of investment in shares and the share market in general, due to the spread
of share ownership in the canal era, in other utilities after 1800, and in the railway era of
the 1830s and 1840s; the periodical business boom and bust cycle of the late 1830s which
sparked the formation of the parliamentary committee; and the fonnation of a government
at the time which provided an ideological and political base favourable to the advance of
both free trade and interventionist policies (which were evident in the 1844 Act). 126

1.099 No limited liability for members under .1844 Act. As noted above, the 1844 Act did
not confer limited liability for members of registered companies. Limited liability of
members was objected to 127 on the grounds that it would promote reckless speculation
and "gambling in shares", 128 and would open the doors to widespread fraud. There were
fears that there would be a propagation of unsound business schemes as investors, having
the benefit oflimited liability, would be less vigilant in their scrutiny of prospectuses and
their continued monitoring of enterprises. Moreover, it was thought that a proliferation
of joint stock companies with limited liability would damage "individual" enterprises
and "weaken the motives for personal industry, economy and tluift". 129

1.100 Limited Liability Act 1855. The tide had turned by the 1850s though, with greater
support for limited liability leading to enactment of the Limited Liability Act 1855
(and the Joint Stock Companies Act 1856). Limited liability was thought to be

123 Bishop C Hunt, 11,eDevelopment of the Business Co,poration in England 1800-1867 (Harvard Universily Press,
Cambridge, l 936) 89-97. Thus the Act imposed requiremenls for prospectuses, and publicity of the names of
direc1ors, the deed of settlemen1, 1he amount of capital, and other pertinent informa1ion. The Act also imposed
requirements on books of accow1ts and for auditors to inspect balance sheets.
124 Bishop C Hunt, Tile Developmentof the Business Co,poration i11 England 1800-1867 (Harvard University Press,

Cambridge, 1936) 95.

"' Ron Harris, hldustrializing English law: Entrepreneurshipand Business Organization 1710-1844 (Cambridge
University Press, Cambridge, 2000) 287-288.
126 Ron Harris, Industrializing English law: E111reprene111:fhip and Business Orgo11iza1ian 1720-1844 (Cambridge
University Press, Cambridge, 2000) 277-286, 287.
127 See Bishop C Hunt, The Developme/11 of the Business Co,pof'(l/ionin E11gla11d1800-1867 (Harvard University
Press, Cambridge, 1936) 69, 117-118, 126-127; TB Napier, "The lfatory of the Joint Stock and Limited
Liability Companies" in Cem11ryof law Reform (1901) pp.40~01; John Saville, "Sleeping Partnership
and Limited Liability: 1850-1856" (1956) 8 Economic Histo,y Rwil,.v 418, 425-426; R A Bryer, "The
Mcrcan1ilc Laws Commission of 1854 and the Political Economy of Limi1cd Liabili1y" (1997) 50 Economic
Histo,y Review 37, 45-:18.
128 Circularto Bankers.quoted in Bishop C Hun1,The Developmento,fthe BusinessCo1pora1io11 in England /800-1867
(Harvard University Press, Cambridge, 1936) 86.
119 Circularto Ballkers,quo1edin Bishop C Hunt, TheDevelapmentof the Business Co1poratio11 in England 1800-1867
(Harvard University Press, Cambridge, 1936) 86.
 HISTORICALDEVELOPMENTOF COMPANYLAW 33

advantageous for encouraging undertakings of evident utility but which involved risk
to the investors. 130 The dominance of ideas of laissez-faire and freedom of trade in
the mid-19th century provided an environment that was conducive to the ultimate
acceptance of limited liability by the English Parliament. 131 Limited liability was
argued to be important for wealthy investors whose entire fortunes could be lost if their
liabilities did not stop at the amounts invested. 132 However, social justice concerns also
had a role to play. Influential proponents of limited liability had argued that unlimited
liability was a major obstacle that prevented the working class and those of more
moderate means from investing in joint stock enterprises. 133 Social reformers felt
that the availability of limited liability would provide for greater equality and would
promote savings amongst the working class.
Joint stock companies registered under 1855 Act. Under the Limited Liability 1.101
Act 1855, joint stock companies could be registered with limited liability. For such
companies, the members would not be liable under any judgment against the company
or for any debts of the company unless execution against the company was insufficient
to meet the liability, in which case the execution could be ordered to be issued against
any shareholders but only to the extent of the portions of their shares not then paid
up. 134 The express provisions in modern companies legislation' 35 dealing with the
limited liability of members can be traced back to the provisions introduced by the
Limited Liability Act of 1855.

4.2 The early Companies Ordinances in Hong Kong: 1865 and 1911

1865 Ordinance. The first Hong Kong legislation for registration of companies was 1.102
the Companies Ordinance (1 of 1865), which conunenced operation on 4 March 1865.
The 1865 Ordinance largely followed the Companies Act 1862 in England, which
consolidated the earlier English Companies Acts with some amendments.'36 The 1865
Ordinance was enacted for the incorporation, regulation and winding-up of trading
companies and other associations, and contained provisions dealing with: constitution
and incorporation of companies and associations; distribution of capital and liability of
members; management and administration; winding-up; and the registration office. Like

130 TB Napier, "The History of the Joint Stock and Limited Liability Companies" in Ce111111;voflaw Reform (1901)
400; Bishop C Hunt, The Developmentof the Business Corpomtio11in England 1800-1867 (Harvard University
Press, Cambridge, 1936) 116-117.
'" Bishop C Hunt, The Developmemoftlte Business Corpomtio11ill England l 800-1867 (Harvard University Press,
Cambridge, 1936) 116--118; John Saville, "Sleeping Partnership and Limited Liability: 1850-1856" (1956) 8
Economic History Review418,422,424, 429-431.
"' RA Bryer, "The Mercantile Laws Commission of 1854 and the Political Economy of Limited Liability" ( 1997)
50 Economic History Review 37.
''' Bishop C Hunt, The Developme111 oftlte Business Corporationin England 1800-1867 (Harvard University Press,
Cambridge, 1936) 120-124; John Saville, "Sleeping PartnershiJ>and Limited Liability: 1850-1856" (1956)
8 Eco110111icHislory Review4 I8, 419-423.
'" Sections 7 and 8. Sec further Frank Evans, "The Evolution of the English Joint Stock Limited Trading Company-
Part 2" (1908) 8 Columbia Law Revic,.v461, 464; Ronald R Formoy, The Historical Fow,dations of Modem
Company Law (Sweet and Maxwell, London, 1923) 114-116.
"' Sec Cap.32 s. 170.
"' On the Companies Act 1862 (UK). sec Frank Evans, "The Evolution of the English Joint Stock Limited Trading
Company- Part 2" ( 1908) 8 Columbi.alaw Review461, 469-473; Ronald R Formoy, The HistoricalFoundations
of Modern Company Law (Sweet and Maxwell, London, 1923) 130-134.
34 COMPANY LAW AND REGULATION IN HONG KONG

its English counterpart, the Ordinance was a general statute enabling companies to be
formed by registration, with members having limited liability for the company's debts.

1.103 Motivation for enactment of1865Act primarily to benefit British business interests.
Prior to British colonisation of Hong Kong in 1841, the territory was composed of only
a few thousand inhabitants of mainly villagers and fishem1en. The dominant motive
for British acquisition of Hong Kong was trade. In the ensuing decades following
colonisation, the tenitory expanded significantly as an entrepot, with commerce and
trade engaged in by British and foreign merchants as well as Chinese businesses which
grew as a result of increases in the Chinese population in Hong Kong. 137 When the
first Companies Bill in Hong Kong was proposed, there was opposition from some
established trading houses (Jardine Matheson & Co and Russel & Co), but the bill was
passed in 1865 with support from the General Chamber of Commerce and the merchant
community generally.138 The enactment of the Ordinance was primarily for the benefit
of British business interests rather than the local Chinese, and the Ordinance was
important for English investment in the colony.139 As noted by Endacott, the legislation:

" ...led to the increase in the number of firms trading in the eastern market and
to greater opportunities for smaller import-expott companies to start up in Hong
Kong. The old wealthy merchant houses retained their pre-eminence, but had to
meet much more competition." 140

1.104 Growth in registered companies. By 1888, 45 companies were registered in Hong

Kong for land investment, manufacture, trade in Hong Kong and mining and planting
enterprises in South-East Asia. 141 Many of these companies raised significant capital
from the local population in Hong Kong, with subscriptions by both Chinese and
European investors. At the time, it was noted that the tendency towards "joint-stock
investment" was so strong "that the shares of most of the companies have been
insufficient in number for the demand". 142
1.105 Registered companies not used by Chinese merchants until mid-20th century. It
was largely English or European merchants who founded the local public companies
in the 19th century. 143 It has been said that it was not until the mid-20th century that
Chinese merchants came to adopt the registered company as the preferred form of

131 GB Endacott, An Eastem Entrepot (Her Majesty's Stationery Office, London, 1964) ix-xi.
138 G B Endacott, An Eastem Entrepol (Her Majesty's Stationery Office, London, 1964) ix-xi.
139
S H Goo, ::,iudy Report 011 History of Compa11y!11corporation in Hong Kong -A Study Commissioned by the
Companies Regist1y(July 2013) 12.
140
G B Endacott, An Eastem E11trep01(Her Majesty's Stationery Office, London, 1964) xi. On the 1865 Ordinance
and its amendments, see also S H Goo, Study Report 011History of Compa11ylnco,poration in Ho11gKong -A
S111dyCommissioned by the Compa11iesRegistry (July 2013) 12-14.
'" Report on the Condition and Prospects of Hong Kong by Sir G William Des Voeux, Governor ( 1889), extracted in
GB Endacot1,An £astern £111repot(Her Majesty's Stationery Office, London, 1964) 153. On some of the early
Hong Kong incorporated companies, sec also S H Goo, Study Report 011Histo,y of Company h1co1poratio11in
Hong Kong-A Swdy Co111111issio11ed by the Companies Regisfly (July 2013) 54~ I.
142 Report on the Condition and Prospects of Hong Kong by Sir G William Des Voeux, Governor (1889), extracted

in G B Endacott, An £astern £ntrepot (Her Majesty's Stationery Office, London, 1964) 153.
"' Speech by Sir John Pope Hennessy, Governor (4 June 1881), extmcted in GB Endacott, A11Easten, E11trepot
(Her Majesty's Stationery Office, London, 1964) 150.
 HISTORICALDEVELOPMENTOF COMPANYLAW 35

trading. 144 Historically, private enterprises in China had been in the form of sole
proprietorships or partnerships. 145 Under Chinese pai1nerships, it was usually the
active partners or the managers who were made responsible for the firm's debts. The
silent partners who invested in the partnership but were not known to the public could
be made liable "only with difficulty", although there appeared to be no rigid rule. 146
Chinese merchants had complained about the harshness of English partnership law
(where all partners were liable for the firm's debts), and there were allegations that
this gave rise to a practice of concealing the true names of the partners by means of
fictitious partnership deeds and other devices. 147 The Chinese Partnerships Ordinance
(53 of 1911) was subsequently enacted to provide for the registration of Chinese
partnerships and to enable partners to limit their liability. 148
1911 Companies Ordinance. In 1911, a new Companies Ordinance (58 of 1911) 1.106
was also enacted to replace the 1865 Ordinance. The 1911 Ordinance corresponded
generally with the Companies (Consolidation) Act 1908 (UK) which had consolidated,
with amendments, the various English Companies Acts dating from 1862. In moving
the first reading of the bill in the Hong Kong Legislative Council, the Attorney-General
had stated that the amendments in the Companies Acts in England were:

" ...to establish commercial integrity and to protect the investing public from the
wiles and greed of unscrupulous Company promoters. Experience in England
demonstrated how necessary it was that a pub! ic company, as regards its directorate,
the authenticity of the prospectus and the responsibility of the directors in regard
to the prospectus, the general control of the affairs of a company, and in particular
the system of audit, giving the shareholders the right of access to the auditors'
report and rendering auditors' duties more stringent, should be safeguarded by
express statutory provisions." 149

Uniformity with UK legislation. The Hong Kong legislation was to be assimilated 1.107
with that prevailing in the United Kingdom "as far as local conditions will permit",
in order to "give security to trade and secure confidence with the public" and to
"establish uniformity in the commercial centres of the British Empire in the law
relating to Companies". 150

4.3 Companies Ordinance 1932

1932 Ordinance followed UK Companies Act 1929. The (now predecessor) 1.108
Companies Ordinance was enacted in 1932 (39 of 1932), commencing operation on

'"' Z E Li, A11ln1nxluc1io1110Ho11gKong Company law (2nd edn, Gregarian Publications, Hong Kong, I 986) [I.I OJ.
,,s Ibid.
,.,; G Jamieson, Chinese Family and Commercial law (Vetch and Lee Ltd, Hong Kong, 1970) 121-122.
1 1
" Ibid.. 128-129.
" 8 The Chinese Partnership Ordinance subsequently fell into disuse and was repealed in 1971. The separate Limited
Partnerships Ordinance (Cap.37) (passed in 1912) enabled limited parlnerships to be formed generally, but this
Ordinance only applied to "non-Chinese partnerships" until amcndmcntS made to s.2(2) in 1999.
" 9 Hong Kong Hansard ( 13 October 1910) 110.
,,-0 Ibid. On the 1911 Ordinance and its amendments, see also S H Goo, Study Report on His101y of Company

lnco,poration in Hong Kong-A Study Commissioned by the Compo11iesRegishy (July 2013) 15-17.
36 COMPANY LAW AND REGULATION IN HONG KONG

1 July 1933, replacing the 1911 Ordinance. The 1932 Ordinance followed the Companies
Act 1929 (UK), which was the next major English consolidation after 1908. The object
of the 1932 Ordinance was to follow that of the UK Act "to present the whole body of
the subject in a complete form". 151 Although the 1932 Ordinance contained substantially
the same provisionsas the 1929UK Act, there were also some provisions (contained in the
original Pt.XIV) dealing with Hong Kong companies that canied on business in China.i;z
1.109 Separation from UK company law between 1948 and 1984. Until 1948, the company
law of Hong Kong was almost identical with that of England. 153 Subsequently, the
English law parted ways with the Hong Kong law for a period of time due to reforms
implemented in England which were not picked up in Hong Kong until quite a later
stage. The Companies Act 1948 (UK) consolidated the 1929 Act with amendments
made to implement reforms recommended by the Cohen Committee. i; 4 Further
changes were made by the Companies Act 1967 (UK) which implemented some of
the recommendations made by the Jenkins Committee. 15; Some amendments to the
Companies Ordinance were made implementing some of these changes, 156 but it was
not until the major overhaul of the legislation in 1984 that the Ordinance was brought
up to date to the 1948 English Act.
1.110 1984 Ordinance needed due to changes in business world in Hong Kong. The
amendments introduced in 1984 by the Companies (Amendment) Ordinance 1984
were made following recommendations made in 1973 by the Companies Law Revision
Committee in Hong Kong. 157The need for revision of the 1932 Ordinance was spurred
on by the rapid industrialisation of Hong Kong following the Second World War. The
number of registered companies in Hong Kong increased dramatically from 2,000
in 1948 to 26,000 by the end of I972. 158 The increased number of both registered
companies and local listed companies 159 in that period was the result of both the
post-war industrial and commercial development of Hong Kong and the recognition

"' Hong Kong Hansard (27 October I932) 216.

"' Those provisions (otiginally included in the 191I Ordinance by vatious amendment Ordinances) provided for
registration of Hong Kong companies operating in China with a Registrar of Companies in Shanghai (who was
the Consul-General in Shanghai), as well as other requirements in respect of such companies. In the first half of
the 20th century, many Hong Kong registered companies had their head offices in Shanghai and did not carry on
business in Hong Kong. The provisions in the original Pt.XfV of the 1932 Ordinance, together with the China
Order in Council 1925 (previously China (Companies) Order in Council 1915), enabled better regulation of such
companies. Part XIV was repealed by the Companies Amendment Ordinance 1949 (I of 1949).
'" Secolld Report of the Compa11iesLaw Revision Committee 011C-0mpa,1y Law (12 April 1973) (I. I).
'" Report ofzhe Commirree011Company L(llvAme11dme11t (1945) Cm 6659 (Cohen Report).
'" Report ofzhe Compa11yLaw Committee (June 1962) Cmnd 1749 (Jenkins Report).
156 E.g., Companies (Amendment) Ordinance 1963 (on company objects and inspections); Companies (Amendment)

(No 4) Ordinance 1974 (accounting provisions). Some other important amendments made in Mong Kong in
this period included the revised prospectus provisions introduced by the Companies (Amendment) Ordinance
1972. On the various amendments made to the 1932 Ordinance up until 1984, see further S M Goo, Study
Report 011History ofC-0mpa11y lncorpora1ioni11Hong Kong-A Study Commissionedby 1heCompanies Regi.Wy
(July 20 I3) 18-27.
'5' Second Report of the Companies Law Revision Com111ittee (m Co111pany Law (12 April 1973).
' 58 Ibid.. [1.4). On statistics on number of companies incorporated in Hong Kong from 1865 to 2012, sec S H Goo,
Study Report on Histo,y of Co111pa11y !11corporatio11
in Hong Kong -A S1udyCommissioned by the Co111pt111ies
Registry (July 20 I3) 78-81.
'" As late as 1968, there were only 60 companies listed on the Hong Kong Stock Exchange. By I 972, there
were 260 loca I companies listed in Hong Kong: Second Report of the Companies Low Revision Co111mittee
011
Co111po11ylaw(l2Ap1il1973) (1.4).
 HISTORICALDEVELOPMENTOF COMPANYLAW 37

by Chinese merchants of the benefits of trading through a limited company. Aside

from newly incorporated enterprises, a large number of Chinese partnerships were
converting into private limited companies in that period. iw As noted by the Companies
Law Revision Committee, the relatively simple provisions of the 1932 Ordinance were
no longer adequate by the 1970s due to the changes in the business world in Hong
Kong, "especially in view of the vastly increased participation by members of all
classes of the population in the ownership of public companies". 161
1984 Ordinance introduced a number of changes. The ensuing Companies
(Amendment) Ordinance 1984 amended the Companies Ordinance (Cap.32) in quite
a number of areas, including company names, share capital, lost share ce11ificates,
debentures, charges, meetings and administration, investigations and inspections,
shareholders' remedy for unfairly prejudicial conduct, accounts and audit, directors,
winding-up, and overseas companies. 162 The 1984 amendments also introduced
Pt.XIIIA, containing provisions empowering the Chief Executive in Council to
order the Registrar to refuse registration of a company that is formed with the
purpose of evading the Societies Ordinance (Cap.151) (which requires societies to
be registered). 163
Amendments since 1984. Since 1984, quite a few piecemeal amendments were 1.112
made to the predecessor CO from time to time. Many of these amendments came
about from proposals recommended by the Standing Committee on Company Law
Refom1 (SCCLR), which was established in 1984 tasked with the function of advising
the government on reform of company law as and when necessary.164 Significant
amendments after 1984 include: 165

• revision of the provisions prohibiting financial assistance for the acquisition

of shares; 166
• new provisions allowing share buy-backs; 167
• introduction of Pt.HA to set out on a statutory basis the requirements for
dividends to be paid out of profits; 168

160 Z E Li, An !11troduc1io11 to Hong Kong Company Law (2nd edn, Gregarian Publications, Hong Kong, 1986) [ 1.10].
161
Second Report of the Companies Law Revision Commiuee 011Company law ( 12 April 1973) [ 1.5].
162 See generally C Bates, "The Companies (Amendment) Ordinance 1984 in Perspective" (1985) 15 HKLI 167;
S H Goo, Study Report 011History of Company Incorporation in Hong Kong -A Study Commissioned by the
Companies Regist,y (July 2013) 21-22.
163
The Societies Ordinance imposes offences for the OJ>erationof societies which are not registered. The predecessor
of the current Ordinance (Triad and Unlawful Societies Ordinance) was originally enacted in 1897 to deal with
triad societies. Since 1911, when the present Societies Ordinance was enacted, the registration requirements
extend to all societies. A society may be refused registration on the grounds specified in the Ordinance, including
where it is in the interests of national security, public safety or public order: s.5A. The provisions in Cap.32
Pt.XIIIA, which aim to prevent registration of companies that have been refused registration as a society, were
originally contained in the Companies (Prevention of Evasion of the Societies Ordinance) Ordinance 1959.
1
.. On the SCCLR, see further <http://www.cr.gov.hk/en/standing/index.htm>.
165
See also S H Goo, Study Report 011Histo1J' of Company luco1poratio11in Hong Ko11g-A Study Commissioned
by /he Compa11iesRegistry (July 2013) 30-36.
166 Companies (Amendment) Ordinance 1991 (77 of 1991).
167
Companies (Amendment) Ordinance 1991 (77 of 1991).
16
' Companies (Amendment) Ordinance 1991 (77 of 1991).
38 COMPANY LAW AND REGULATION IN HONG KONG

• introduction of provisions on dormant companies; 169

• new Pt.IVA on disqualification of directors; 170
• abolition of the ultra vires doctrine with respect to corporate capacity; 171
• allowing companies to be formed with one member only; 172
• extension of the unfair prejudice remedy to foreign companies which have
established a place of business in Hong Kong (non-Hong Kong companies); 173
• introduction of the statutory derivative action in Pt.JVAA;174
• removal of the prohibition on partnerships with more than 20 members;m
• revision of the provisions on registration of foreign companies having a place
of business in Hong Kong (non-Hong Kong companies); 176 and
• new provisions allowing companies to send documents to members and
others via electronic means or in electronic format. 177

1.113 Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32).

Much of the Companies Ordinance (Cap.32) was repealed upon the introduction of the
present Companies Ordinance (Cap.622) (see paras.1.114 and 1.167 below). Cap.32
is now renamed as the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance. The main provisions of Cap.32 which remain in force are contained in the
following parts:
• Pt.II - share capital and debentures;
• Pt.IVA- disqualification of directors;
• Pt.V-winding-up;
• Pt.VI - receivers and managers;
• Pt.VIII - application of Ordinance to companies fom1ed or registered under
former Ordinances;
• Pt.X -winding-up of unregistered companies;
• Pt.XII - restrictions on sale of shares and offers of shares for sale;
• Pt.XIIT- miscellaneous;
• Pt.XIIIA - prevention of evasion of the Societies Ordinance;

16• Companies (Amendment) Ordinance 1993 (10 of 1993).

11
° Companies (Amendment) Ordinance 1994 (30 of 1994).
"' Companies (Amendment) Ordinance 1997 (3 of 1997).
"' Companies (Amendment) Ordinance 2003 (28 of2003).
"' Companies (Amendment) Ordinance 2004 (30 of2004).
'" Companies (Amendment) Ordinance 2004 (30 of2004).
"' Companies (Amendment) Ordinance 2004 (30 of2004).
11
• Companies (Amendment) Ordinance 2004 (30 of2004).
"' Companies (Amendment) Ordinance 2010 (12 of2010).
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 39

5. COMPANY LAW REFORM: THE COMPANIES

ORDINANCE REWRITE

5.1 Introduction and background to the Rewrite

Cap.622. In 2012, a (new) Companies Ordinance (28 of 2012) (Cap.622) was 1.114
enacted, 178 implementing what was originally the First Phase of the Companies
Ordinance Rewrite on reforming the core company law provisions of the predecessor
Companies Ordinance. Cap.622 commenced operation on 3 March 2014 (see LN 163
of 2013).
Need for major reform recognised as early as 1990s. The need for a major overhaul 1.115
of the predecessor Companies Ordinance was apparent as early as 1994, when the
Government appointed consultants to undertake a full review of the Ordinance. It was
recognised that the piecemeal amendments made to the Ordinance since 1932 had led
to the Ordinance losing its structure and coherency. Moreover, the practice of simply
following the UK amendments was no longer necessarily appropriate, particularly in
areas where the UK law was modified for European Union requirements. In 1997,
the consultancy report (Pascutto Report) was produced. 179 The report made a number
of recommendations for changes to the existing law, to be effected by replacing
the Companies Ordinance with a streamlined Business Corporations Ordinance
that focuses on core company law, drawing on the North American model of
corporations regulation.
SSCLR declined to endorse radical change to company law. In considering the report, 1.116
the Standing Committee on Company Law Reform (SCCLR) declined to endorse the
consultants' recommendations for the radical change to company regulation in Hong
Kong.180 The SCCLR did not consider that there were fundamental or debilitating
problems with the existing regime that necessitated a replacement of the English model
of regulation. A radical replacement of the existing regime comes with its associated
costs, which the SCCLR considered to be high. Also, the SCCLR expressed doubts
whether the North American model, built on a managerial model for corporations
with dispersed shareholdings, was appropriate for Hong Kong where companies with
majority shareholdings are prevalent.181 The SCCLR did, however, accept some of the
specific recommendations of the consultants, which could be easily taken forward by
amendment Ordinances. Some of these reconm1endationswere implemented by various
amendment Ordinances - e.g. allowing single member/director companies to be
formed; 182 providing for one-step incorporation by filing a single application fonn (now

178 Cap.622 was passed by the legislative Council on 12 July 2012 and promulgated by the Chief Executive on
9 August 2012.
119
Ernanno Pascutto and Cally Jordan, Review <ifthe Hong Kong Companies Ordinance: Consultancy Report
(March 1997).
"'6 SCCLR, Report of the Standing Co111111it1ee
011 Co111pt111y
law Refor111011the Reco111111endaticms
c>.f
a Consulta11cy
Report of the Revic,.vc>.f
the Ho11gKong Companies Ordi11ance(February 2000) Chs 2 and 3.
181
On the structure of shareholdings in Hong Kong companies, sec further Philip Lawton, "Bcrle and Means,
Corporate Governance and the Chinese Family Firm" (1996) 6 Australian Journal of Corporate law 348.
182
Companies (Amendment) Ordinance 2003 (28 of2003).
40 COMPANY LAW AND REGULATION IN HONG KONG

the "incorporation form" in the Ordinance); 183 companies to be given full capacity of a
natural person; 184 and express provision allowing companies to insure its directors. 185

t.J 17 SCCLR accepted need to review parts of company law. The SCCLR also accepted
that certain matters required further study and consideration, including more fundamental
structural changes to the Companies Ordinance. In the early years of the new millennium,
the Government and the SCCLR focused on corporate governance reforms, leading to a
number of recommendations made by the SCCLR, 186 which have since been implemented,
including the statutory derivative action, members' rights to apply for inspection of
company records, and the statutory injunction.187
2006 Companies Ordinance Rewrite. Further study of wider reforms still needed to
be undertaken, and in mid-2006, the Government launched the Companies Ordinance
Rewrite. 188The Rewrite was divided into two phases due to the complexity and length
of the Companies Ordinance. Phase I was to cover the core company law provisions,
while Phase Il was to deal with the remaining provisions in the Ordinance.

5.2 Objectives of the Rewrite

1.119 Objective of rewrite to modernise company law and enhance Hong Kong's appeal
as financial centre. The basic objective of the Rewrite was to modernise Hong Kong's
company law and to further enhance Hong Kong's status as a major international
business and financial centre. 189 The key guiding principles of the Rewrite were: 190

• Catering for small and medium enterprises (SMEs)-"think small first". 191
This principle is to ensure that the needs of private companies, particularly
SMEs, are appropriately catered for. In particular, reduction of compliance
costs was considered important. 192
• Enhancing corporate governance. The Rewrite aimed to strengthen corporate
governance, including enhancing regulation of public companies where
appropriate. 193

183 Companies (Amendment) Ordinance 2004 (30 of2004).

is., Companies (Amendment) Ordinance 1997 (3 of 1997).
18' Companies (Amendment) Ordinance 2003 (28 of2003).
186 See SCCLR, Corporate Govemance Review - Phase I Consultation Paper (July 2001); SCCLR, Co,porate
Govema11ceRe11iew-Pltase JI Co11s11ltatio11 Paper (June 2003); SCCLR, "SCCLR issues final recommendations
from Corporate Governance Review Phase II" (Press release, 20 January 2004).
187 Companies (Amendment) Ordinance 2004 (30 of2004).
1
" See FSTB, CO Rewrite: Rewrite of the Companies Ordinance-Accounting and Auditing Provisians Consultation
Paper (March 2007) [1.4)-[1.6).
1
" FSTB, CO Rewrite: Rewrite of tlte Companies Ordinance - Draft Companies Bill First Phase Co11s11ltation
(December 2009) [ 1.4).
190
Ibid., [ 1.5).
191
Ibid., Chs 3 and 4.
192 There is, however, no intention of introducing the United States' concept of"close corporations" (namely closely-
held companies or small private companies where the shareholders are usually also the managers) and for close
corporations to be regulated differently from other companies. See the earlier discussion of the SCCLR on this
topic: Report of tlte Sta11di11gCommillee 011Company Law Reform 011the Recomme11datio11.tof a Consultancy
Repon of the Review of the Hong Ko11gCampa11iesOrdinance (February 2000) Ch 5.
"3 Sec also FSTB, CO Rewrite: Rewrite of the Compa11ies Ordintmce - Drrift Companies Bill First Phase
Consultation (December 2009) Ch 2.
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 41

• Complementing Hong Kong's role as an international business and financial

centre. The Rewrite aimed to benchmark Hong Kong against other comparable
jurisdictions such as the United Kingdom, Australia and Singapore.
• Encouraging the use of information technology. This principle was aimed
at promoting the use of information technology, particularly in facilitating
communications between companies and their shareholders and others.

Rewrite to improve structure and clarity of the Ordinance. Apart from the above, 1.120
the Rewrite also sought to improve the structure of the Ordinance and enhance the
clarity of the provisions so as to make the law more accessible to users. Antiquated
concepts in the law have also been changed, updated or simplified. 194
Aim of Rewrite to modernise and meet modern social and commercial 1.121
needs. "Modernisation" of company law has also been the mantra for corporate
law reform programmes undertaken in overseas jurisdictions in recent decades,
including in the United Kingdom 195 and Australia. 196 At a basic level, this notion
of modernisation involves reform to the law so that the law meets the needs of the
modern social and commercial environment. For example, as noted above, both the
structure and concepts of company law in the predecessor Companies Ordinance
(Cap.32) date from the Victorian era in England. Some of these concepts (such as
par value of shares) have become outdated and have little practical significance
in the modern commercial environment. Modernisation therefore involves the
updating of the law to remove antiquated concepts. At the level of law drafting,
there is also an element of modernisation in using plain English and adoption of
more modern terminology. 197
Purpose of modernising to cater for modern business enterprise. Fundamentally, 1.122
modernisation aims to ensure that the law caters for and deals with the characteristics
of the modern business enterprise. 198 It must be recognised, though, that the model
corporate form in different countries might be different, and so there is not necessarily
one model of modem company law that is suitable for all countries. 199 Modernisation
can also embrace new theories of the company and corporate regulation. For example,
a stream of corporate theory focuses on the interests of all stakeholders in a company
(e.g. creditors, employees and customers etc., as well as members and directors) 200 and
so in time it might be thought that a modern company law must ensure proper regard

194 Ibid., ( l.6).

195
See Company Law Review Steering Group, Modem Company Law: For a Competitive Economy- The Strategic
Fmmework (February 1999) (1.12].
196
Corporate Law Economic Reform Programme ("CLERP"): see Roman Tomasic, "The Modernisation of
Corporations Law: Corporate Law Reform in Australia and Beyond" (2006) 19 Australian Joumal o/Co,porate
Law 2, 29-31.
191
See FSTB, CO Rewrite: Rewrite of the Companies Ordinance- Dra/i Companies Bill First Phase Con.w/ta,ion
(December 2009) Ch 5.
19
' See M Hansmann and R Kraakman, "The End of History for Corporate Law" (200 I) 89 Georgetown law .Joumal
439, 439-440.
199 In this respect, the social and cultural context of the firm must be taken into account in any law reform initiatives:
see Philip La\\1on, "Berle and Means, Corporate Governance and the Chinese Family Firm" (1996) 6 Australian
.Journalof Corporate law 348.
200 Secpara.1.215 below.
42 COMPANY LAW AND REGULATION IN HONG KONG

for the interests of all stakeholders. In this sense, modernisation is an open-ended

project. 201

5.3 The Rewrite process

1.123 Financial Services and Treasury Bureau led the Rewrite. The Government
department responsible for driving the Rewrite was the Financial Services Branch
("FSB") of the Financial Services and Treasury Bureau. Officers of the FSB, together
with officers of the Companies Registry, formed a Companies Bill Team ("CBT"),
which undertook research and formulated policy proposals, assisted with legal
advice from the Companies Ordinance Rewrite Team of the Department of Justice
("CORT"). 202

1.124 Advisory groups established to consider proposals of CBT. In 2006, FSB established
various advisory groups, composed of law academics, members of regulatory bodies,
practising lawyers, accountants, representatives from the business sector and other
industry stakeholders, to consider policy proposals put forward by the CBT. The
following advisory groups were established:

• Joint Working Group of the Government and the Hong Kong Institute
of Certified Public Accounts (to examine the accounting and auditing
provisions).
• Advisory Group I, dealing with share capital, distribution of profits and
assets, and charges.
• Advisory Group 2, dealing with company fom1ation,registration, re-registration
and company meetings and administration.
• Advisory Group 3, dealing with directors and officers.
• Advisory Group 4, dealing with inspections, investigations, offences and
punishment.

1.125 SCCLR reviewed recommendations of advisory groups for preliminary reform

proposals. The various advisory groups held meetings throughout 2006-2008, and
formulated recommendations for particular reform proposals. These recommendations
were considered by the SCCLR. With the benefit of the advice of the advisory groups
and the SCCLR, preliminary proposals for reform in particular areas were publicised
for public consultation in the following areas:

• accountincr
o and auditincr·
o>
203

1
2<J For a discussion of company law reform in the broader theoretical context of modernisation of law, see Roman
Tomasic, "The Modernisation or Corporations Law: Corporate Law Reform in Australia and Beyond" (2006)
19Australi(m Journal ofCo,por(lte law 2.
2<ll CORT consisted or counsel from the Commercial Unit of the Civil Division ofchc Department of Justice.
,., FSTB, CO Rewrite: Rewrite of the Companies Ordi11a1zce -Accou11ting and Auditing Provisions Co11s11/tatio11
Paper (March 2007) and Consultation Co11c/11sio11s(March 2008).
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 43

• company names, directors' duties, corporate directorship, registration of

charges;204 and
• share capital, capital maintenance regime, statutory amalgamations. 205

Draft legislation produced following public consultation. Following receipt of 1.126

public feedback and further consideration by the SCCLR, the reform proposals were
refined by the CBT, again with legal input from CORT. Draft legislation was then
produced by the Law Drafting Division of the Department of Justice for the purpose of
further public consultation in 2009 and 2010. 206 These consultations enabled the public
to consider the draft provisions of the proposed new Companies Bill. The consultation
papers also highlighted specific issues for consideration by the public, including
the headcount test in schemes of arrangements; disclosure of directors' residential
addresses and ID numbers; regulating of directors' conflicts of interests (fair dealing
rules); the common law derivative action; financial assistance for acquisition of
shares; directors' remuneration report; investigation powers; and directors' refusal to
register share transfers.
Companies Bill passed in 2012. In light of the responses from the public on the 1.127
draft bill, a final Companies Bill was prepared which was gazetted on 14 January
2011 and introduced in the Legislative Council on 26 January 2011. Forty-four
meetings of the Legislative Council's Bills Committee for the Companies Bill
were held from February 2011 to June 2012. Second reading of the bill resumed
on 27 June. The bill was caught up in the "filibustering" occurring at the time, but
the Legislative Council managed to pass the bill (as amended by committee stage
amendments) on 12 July 2012, before the end of the term of the Fourth Legislative
Council in July.

5.4 Companies Ordinance (28 of 2012) (Cap.622)

Cap.622 replaced most of Cap.32. The (new) Companies Ordinance (Cap.622) 1.128
replaced much of the predecessor CO, although the latter is not repealed in its
entirety.207 Cap.622 contains the core company law provisions, many of which are
derived from provisions previously contained in the predecessor CO, but new provisions
are also introduced. Some pre-existing provisions and concepts are repealed without
replacement in Cap.622. The enactment ofCap.622 involved a rewrite and so, in many
areas, even though there is no change in substance to the law, the new provisions are
worded differently so as to improve on the legislative drafting.

"" FSTB, CO Rewrite: Rewrite (!( the Companies Ordinance - Company Names, Directors' D111ies,Co,porate
Directorship, Registration of Charges Consultation Paper (April 2008) and Co11s11/tationCo11c/11sions
(December 2008).
,os FSTB, CO Rewrite: Rewrite of the Companies Ordinance - Slwre Capital, Cc,pital Maintenance Regime,
Stat111oryAmalga111ations Cons11ltationPaper (June 2008) and Consultation Co11c/usions(February 2009).
206 FSTB, CO Rewrite - Dnift Companies Bill First Phase Consultation: Co11sulta1ionPaper (December 2009) and

Co11su/t(lfi011
Conclusions (August 2010); FSTB, CO Rewrite- Drop Companies Bill First Phase Co11sultatio11:
Cons11/tatio11Paper (May 20 I 0) and Co11s11ltatio11
Co11c/11sio11s
(October 20 I 0).
207
See further para.1.167 below.
44 COMPANYLAWAND REGULATIONIN HONG KONG

1.129 Commencement of Cap.622 on 3 March 2014. Cap.622 came into operation on

3 March 2014 (LN 163 of2013). However, there are a few provisions which have not
yet commenced operation. These mainly relate to certain privacy protections restricting
public access to the residential address of directors and full identification numbers
of directors and others contained in the Companies Register: see further para.1.133
below.208 Some provisions dealing with the proposed scripless securities regime (s.908
and Sch.8) are also not in operation: see para.1.165 below.
1.130 Summary of Cap.622 given below. The following sets out a summary of the various
parts ofCap.622. 209

5.4.1 Pt.I - Preliminary

1.131 General definitions. This chapter contains general definitions sections. Many
definitions are the same as the previous law under the predecessor Cap.32, but there
are also new definitions: e.g. new definition of"responsible person",2'0 which replaces
"officer in default''.211 The term "public company" is now used in Cap.622. 212

5.4.2 Pt.2 - Registrar of Companies and Companies Register

1.132 Registrar's functions and registration of documents on Companies Register. This
Part brings together the provisions on the Registrar, with new provisions expressly
setting out the Registrar's functions. The Companies Register is essentially the public
register of documents submitted to the Registrar for registration. 213 There are new
provisions setting out in detail formal requirements in respect of documents delivered
to the Registrar for registration, and the circumstances when the Registrar can refuse to
accept or register documents (which do not comply with the statutory requirements). 214
1.133 Includes new protection for directors' personal details but provisions
controversial and not yet in force. Part 2 also contains new provisions providing
privacy protection for residential addresses of directors and identification numbers of
directors or others. 215 The intention is that the register available for public inspection
will not show residential addresses but only correspondence addresses for directors,
and identification numbers will be partially masked. Under the previous law in the
predecessor CO, this information is available for public inspection, although the
permitted purposes of inspection are restricted under the predecessor CO, fonner
s.305. Under the new regime, only certain persons as specified in regulations (e.g.

208 The following provisions of Cap.622 have not commenced operation: s.27(3), (4), (5) and (6) in so far as it relates to
a director or reserve director; ss.47, 49--52 and subdiv.2 of Div.7; s.643(1)(a)(ii),(2)(b) and (3)(b) in so far as it relates
to a correspondence address; ss.643(5), 644, 645(5), 647(4) and (5), 651 and 657(2)(g); ss.791 (4), 802(4H5); Sch.2
ss.3( I)(a)(iii) and (2); Sch.6 ss.3-4; Sch. I I s. I I5.
209 For a more extensive summary of Cap.622, see Edward LG Tyler, Stefan M C Lo and Natalie N C Wong, ''The
New Companies Ordinance - Major Changes" in Companies Ordinance (Cop.622) (Mong Kong, Sweet and
Maxwell, 2013).
21

211
° Cap.622,s.3.
predecessor CO, s.351 (2).
212
Cap.622, s.12.
213 Sec Cap.622, s.2 definition and s.27.
21
" Cap.622,ss.31-38.
2
" Cap.622,ss.47-60.
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 45

liquidators, regulators, law enforcement agencies etc.) will have a right to obtain access
to that information, but there is also a general right to apply to the court for access for
particular purposes. 216 The new proposals in relation to residential addresses follow
overseas developments to enhance privacy protection. 217 In jurisdictions such as the
United Kingdom and Australia, there is no comparable requirement for identification
or passport numbers to be disclosed by directors in the particulars to be registered. 218
A majority of the responses to the 2009 public consultation 219 were in favour of the
new provisions, and the proposals were reviewed by the Bills Committee and enacted
by the Legislative Council with little controversy. However, public controversy arose
in early 2013 after the draft regulations 220 were made available for public consultation.
Journalists and others expressed concerns that the restrictions on disclosure would
seriously hamper investigative journalism and the uncovering of fraud of directors.
At the time of writing, the provisions on restriction of access to residential addresses
and identification numbers have not commenced operation. The Government will
revisit the issue at a later stage. 221

5.4.3 Pt.3 - Companyformation and relate,/ matters, ,uul

re-registration of company
Incorporation and basic requirements for companies. This Part covers 1.134
incorporation of companies and basic requirements of companies. The memorandum
of association is abolished, 222 and the constitution is simply composed of the articles
of association. Part 3 also contains provisions on company names, corporate capacity
and execution of documents. It is no longer compulsory for companies to have a
company seal,223 and so there are also new provisions for execution of documents
without a seal.224 There are new provisions for a statutory indoor management rule,225
based on the UK provisions, although the common law indoor management rule is
not abolished. 226
Re-registration. The provisions on re-registration of companies in Pt.3 are derived 1.135
from the previous law, dealing with conversion of unlimited companies to a company
limited by shares.

216
Cap.622, ss.52, 59.
217 E.g., see CompaniesAct 2006 (UK) ss.240-246.
"' CompaniesAct 2006 (UK) s.163; CorporationsAct 2001 (Aust) s.205B. However,the date of birth is required in
thosejurisdictions.
219 See para.1.125 above.
m Financial Services and Treasury Bureau and Companies Registry, New Compa11ies Ordi11a11ce:Subsidiary
Legislalio11for lmplemen101io11of the New Compa11ies Ordi11a11ce- Phase Tivo Consultation Document
(November2012).
221 See the paper of the Financial Services and Treasury Bureau tabled before the Legislative Council Panel on
FinancialAffairs,"NewArrangementsfor the Inspectionof PersonalInformationon the CompaniesRegisterunder
the new CompaniesOrdinance"(LegCo paper CB(l)788/12-13(01)) (28 March 2013). for the provisionswhich
arc nocycc in operation,sec para.1.129 above.
222 Sec Cap.622, s.98.
223 Cap.622, s.125.
224
Cap.622, s.127(3).
22~ Cap.622, s.s.117-l 19.
"' See further Chapter 12.
46 COMPANY LAW AND REGULATION IN HONG KONG

5.4.4 Pt.4 - Share capital

1.136 Provisions on shares. Part 4 contains provisions on shares, allotment and transfers/
transmissions of shares, share certificates, certain alterations to share capital and class
rights.
1.)37 Changes to prov1s1ons on shares. Important changes include abolition of par or
nominal value of shares; 227 abolition of the power to issue bearer shares 228 and stock; 229
new provision enabling transferors or transferees to require the company to give
reasons for any refusal by the directors to register a transfer of shares; 230 and extension
of the provisions on class rights to companies without share capital. 231

5.4.5 Pt.5- Transactions in relation to share capital

1.138 Provisions on changes to share capital. This Part sets out the provisions on reduction
of capital; redeemable shares; share buy-backs; and financial assistance for acquisition
of company's shares.
1.139 Capital maintenance doctrine retained but new wider exceptions. The capital
maintenance doctrine is retained under Cap.622, but greater flexibility is provided for
companies by the enactment of new exceptions to the doctrine. The new exceptions
set out in Pt.5 are based on a solvency test. Part 5 retains the previous procedures for
a company to engage in a reduction of capital or redemption or buy-back of shares,
but there are also new provisions enabling: (a) capital reductions to be made without
the need for court approval if the company would remain solvent after the capital
reduction; and (b) redemption or buy-back of shares out of capital if the company
would remain solvent following the share redemption or buy-back.
1.140 Prohibition on financial assistance maintained but new exceptions. The prohibition
on a company giving financial assistance for an acquisition of shares in the company
is retained in Cap.622. New exceptions are provided, based again on the solvency test.

5.4.6 Pt. 6 - Distribution of profits """ assets

1.141 Dividends and distributions to shareholders. Part 6 largely restates the provisions
on dividends and distributions to shareholders under former Pt.HA of the predecessor
CO. As the capital maintenance doctrine is retained, the general principle of dividends
out of profits only is retained.

5.4.7 Pt. 7- Debentures

1.142 No major changes for debentures. There are no major changes to the previous law
on registers of debenture holders. The predecessor Ordinance (Cap.32) contained
some provisions covering both shares and debentures (in relation to transfers etc.).
Cap.622 separates out the provisions so that the provisions for debentures are

227
Cap.622,s.135.
228 Cap.622,s.139.Bearershares.inexistencebefore the commencementofCap.622 can continue to exist.
,,. Cap.622,s.138. Stock already in existencebefore the commencementof Cap.622can continueto exist.
z3o Cap.622, s. l 51.
231 Cap.622,ss.185-192.
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 47

contained in Pt.7. Also, to align with provisions for share allotments, there are some
new provisions imposing a requirement for sending a return of allotment of debentures
to the Registrar 232 and setting out the time period for registration in the company's own
register of debenture holders. 233

5.4.8 Pt.8- Registration of charges

Previous registration system retained but with some significant changes. Part 8 is 1.143
the equivalent of the predecessor CO Pt.III. The previous charges registration system
is largely retained in Cap.622. However, there are some significant changes. For
example, there is some modification to the list of registrable charges. 234 A copy of
the instrument of charge is also to be registered,235 and this would impact on the
matters on which lenders may be imputed with constructive notice. 236 The time period
of registration is reduced from five weeks to one month to reduce the "invisibility
period". 237

5.4.9 Pt.9-Accounts and audit

Changes to provisions on company accounts and auditing requirements. Various 1.144
changes are made to the provisions on company accounts and auditing requirements.
These include new provisions determining the financial year of a company;238 changes
in terminology (e.g. "financial statements" replaces "accounts"); expansion of
the categories of private companies and companies limited by guarantee which are
entitled to simplified reporting; 239 and removal of the detailed contents requirements
for accounts under the former Schs. l Oand 11 of the predecessor CO, and replacement
with a new statutory requirement for financial statements to comply with the
accounting standards. 240
Appointment, rights and obligations of auditors. Part 9 also contains the provisions 1.145
on appointment of auditors, and auditor's rights and obligations. There are some new
provisions enhancing auditors' rights to infoimation, 241 and transparency in relation
to an auditor's cessation of office. 242 The auditor's previous obligations under the
predecessor CO in relation to the auditor's report are largely retained. These obligations
include the requirements for the report to state: (a) the auditor's opinion if the auditor
is of the opinion that the financial statements are not in agreement with the accounting
records; and (b) if the auditor has failed to obtain information from the company
considered necessary by the auditor, a statement of that fact. 243 There is a new offence

ui Cap.622, s.316.
233 Cap.622, s.3 I 7.
234 Cap.622, s.334.
23' Cap.622, ss.335 and 344.

"" Cf. ABN Amro Bank NV v Chiyu Banking Corp Ltd [200 I] 2 HKLRD 175.
231 Cap.622,s.335(I), 335(5).
2.1s Cap.622. ss.367-371.
239 Cap.622,ss.359-366.
24-0 Cap.622,s.380.
241
Cap.622, s.412.
z.u Cap.622,s.s.422-425.
Nl Cap.622.s.407.
48 COMPANY LAW AND REGULATION IN HONG KONG

provision where the auditor fails to make these statements where required.244 This new
provision gave rise to controversy, with the accounting profession objecting to the
provision on the ground that the provision is unduly onerous and is unnecessary in
light of the existing disciplinary regime for accountants. However, the provision was
enacted by the Legislative Council which considered that the provision was important
for ensuring audits are properly carried out.

5.4.JO Pt. 10 - Directors and company secretaries

1.146 Appointment, removal and resignation of directors. Part. I O deals with the
requirements for directors and secretaries, including their appointment, removal
and resignation, and provisions restricting indemnities for directors' liabilities, and
minutes of board meetings.
1.147 New provision for statutory duty of care, skill and diligence. A new provision
is the statutory duty of care, skill and diligence. An ongoing issue of debate has
been whether the general law directors' duties (including fiduciary duties) should
be codified. Views have been divided in Hong Kong. Under the Rewrite, only
the duty of care is codified, to make it clear that the standard of care expected
of directors is not a purely subjective standard. The provision in Cap.622, s.465
applies a dual objective/subjective standard.

5.4.11 Pt.Ji -Fair dealing by directors

1.148 Conflicts of interests. This part contains the provisions relating to directors' conflicts
of interests. The previous prohibitions on loans to directors and on quasi-loans and
credit transactions are restated in Pt. I I with modifications. There is a relaxing of the
prohibitions - for example, there is a general exception for all companies that the
transactions would be pennitted if approved by the company's members.
1.149 Requirement for directors to disclose material interests to board. Part. 11 also
contains the requirement for directors to disclose to the board material interests in
transactions entered into by the company. There are also new provisions requiring
member approval for long-term service contracts entered into between the company
and a director.

5.4.12 Pt. 12 - Company admi11istratio11and procedure

1.150 Meetings, resolutions, records, registered office and annual returns. Part 12 sets
out the provisions on members' meetings, the use of members' written resolutions
without meeting, registers of members, directors and company secretaries, company
records, the registered office and annual returns.
1.151 Amendments made to simplify company administration. Various amendments
are made to the previous law to facilitate company administration. For example,
members of a company can agree to dispense with the need for holding annual general
meetings.w The Ordinance confirms that meetings of persons in physically different

241
Cap.622,s.408.
2 •u Cap.622,ss.612and 613.
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 49

places can be held with the use oftechnology. 246 The notice period for meetings where
special resolutions will be proposed is reduced from 21 to 14 days247 (but notice for
annual general meetings is still 21 days). Also, the restriction on the number of proxies
that a member can appoint is removed.248

5.4.13 Pt.13 -Arra11gements, amalgamation and compulsory acquisition

in takeover and share buy-back
Schemes of arrangement. This part contains the provisions on schemes of 1.152
arrangement. Another area of controversy in the Rewrite has been the question of
the "headcount test" for a company's approval of a scheme. After much debate in
the Legislative Council, the headcount test is retained, subject to two exceptions. The
first is that the headcount test is not applied for members' schemes which involve a
takeover or a buy-back of shares. Here, a different test is applied, namely there must
not be more than IO per cent of disinterested votes objecting to the scheme. 249 The
second exception is that in all cases where a scheme is not approved by the company,
the court has discretion to decide that it is unnecessary for the headcount test to be
satisfied. 250 This aims to prevent share-splitting for the purpose of opposing schemes.
Where a share-splitting is engaged in to push a scheme through, the court still has its
general discretion to decide not to sanction the scheme under s.673 of Cap.622.
Amalgamations of companies without court approval. Part 13 also contains new 1.153
provisions for schemes of arrangement involving amalgamations of companies in a
corporate group without the need for court approval (but a solvency test needs to be
satisfied). The provisions on compulsory acquisitions of minority shares following a
largely successful takeover or general offer for buy-back of shares are also contained
in this part.

5.4.14 Pt.14-Remediesfor protection of companies' or members' interests

Members' remedies. Part 14 brings together the provisions on members' remedies 1.154
and includes the unfair prejudice remedy, statutory derivative action, members'
rights to seek injunctions to restrain breaches of the Ordinance etc. (i.e. what is
sometimes referred to as the statutory injunction) and members' rights to seek
inspection of company records.
No major changes to law on members' remedies. There are no major changes of 1.155
substance to the law on members' remedies, as much of the reforms recommended by
the SCCLR were implemented by earlier amendment Ordinances in the last decade.

5.4.15 Pt.15 - Dissolution by striking off or deregistratio11

Deregistration and restoring company to register. This part contains the provisions 1.156
on the Registrar's power to deregister defunct companies, and on deregistration of

246 Cap.622, s.584.

247
Cap.622,s.564.
248 Cap.622, s.588 (cf. the predecessor CO, s.114C(2)).
249 Cap.622,s.674(2).
,,. Cap.622, s.674(l)(c).
50 COMPANY LAW AND REGULATION IN HONG KONG

private companies without the need for winding-up. There are new provisions allowing
the Registrar to restore a company to the register that has been struck off (instead of
necessarily requiring a court order for restoration).

5.4.16 Pt.16- No11-Ho11g

Ko11gcompa11ies
1.157 Registration of foreign companies mainly unchanged. Part 16 contains the
requirements for registration of foreign companies which establish a place of business
in Hong Kong. There are no major changes of substance to these requirements, as
reforms had already been implemented by the 2004 Companies Amendment Ordinance
which came into effect in 2007.

5.4.17 Pt. I 7- Compa11ies11otformed, but registrable, u11derthis Ordi11an.ce

1.158 Provisions enabling companies formed under other Ordinances to be registered
under Cap.622. Part 17 sets out the provisions enabling companies formed under
other Ordinances to be registered under the Companies Ordinance. These provisions
date back to the first companies legislation in the United Kingdom and Hong Kong in
the 19th century, originally intended to enable pre-existing companies (e.g. companies
formed under private Acts) to be registered as a company under the Companies Acts/
Ordinance. The provisions are still sometimes used today for companies established
under other Ordinances to be registered under the Companies Ordinance in order to
take advantage of the provisions on voluntary winding-up.

5.4.18 Pt.18- Comm1micatio11sto a11dby compa11ies

1.159 Sending of notices and documents by electronic means or websites. This part
reproduces the amendments made to the predecessor Companies Ordinance (Cap.32) 251
by the Companies (Amendment) Ordinance 2010 in relation to sending of notices
and documents by companies to members and others by electronic means or by use
of websites. The new Pt.18 also contains provisions dealing with how members and
others can send notices etc. to companies. Documents can be served on companies
at the registered office, 252 as under the previous law. Other notices can be sent to
companies by electronic means subject to compliance with the requirements as set
out in Pt.18.

5.4.19 Pt.19 - /11vestigatio11sa11de11quiries

1.160 Appointment and powers of Financial Secretary.Part 19 contains the provisions on the
appointment of inspectors by the Financial Secretary to investigate affairs of companies
and on the Financial Secretary's powers to require companies to produce documents and
info1mation. Much of the previous law is retained, but there are a few changes, such as
more detailed provisions on confidentiality and protection ofwhistleblowers. 253
1.161 New power for Registrar to obtain documents if suspected false statements.
There are also new provisions giving the Registrar power to obtain documents from

2" Sec predecessor CO, former PLIVAAA.

zs2 Cap.622, s.827.
zs3 Cap.622,ss.880-885.
 COMPANY LAW REFORM: THE COMPANIES ORDINANCE REWRITE 51

companies where there is reason to believe that there has been contravention of
specified offences relating to the making of false statements to the Registrar.2S4

5.4.20 Pt.20 - 1lfiscel/aneo11s

Miscellaneous provisions. Various miscellaneous provisions are contained in this 1.162
part, including the provisions on court orders granting relief to officers for their
default or breaches of duties,255 security for costs to be given by companies which are
plaintiffs (extended to cover companies incorporated outside of Hong Kong),256 and
new provisions empowering the Registrar to compound offences. 257

5.4.21 Pt.21 - Consequential amendments and transitional

and savings provisions
General matters on consequential amendments and savings provisions. This part 1.163
sets out general matters on consequential amendments and savings provisions. The
specific provisions for consequential amendments are contained in Schs.9 and 10, and
the transitional and savings provisions in Sch. I 1.

5.4.22 Schedules 1 to 11
Schedules contain detail of various requirements set out in Cap.622. Apatt from 1.164
the consequential amendments and transitional provisions contained in Schs.9 to 11,
the va1ious schedules contain the detail of various requirements in the Ordinance,
including information to be contained in the incorporation form (Sch.2), certain
information to be contained in financial statements (Sch.4) and directors' reports
(Sch.5) and annual returns (Sch.7).

5.5 Subsidiary legislation

Subsidiary legislation to facilitate implementation of Cap.622. A number of 1.165

pieces of subsidiary legislation were made to facilitate the implementation of various
provisions of Cap.622:

• Companies (Words and Expressions in Company Names) Order (Cap.622A);

• Companies (Disclosure of Company Name and Liability Status) Regulation
(Cap.622B);
• Companies (Accounting Standards (Prescribed Body)) Regulation
(Cap.622C);
• Companies (Directors' Report) Regulation (Cap.622D);
• Companies (Summary Financial Reports) Regulation (Cap.622E);

254 Cap.622,s.873.
25, Cap.622,ss.902-904.
2~ Cap.622,s.905.
2:n Cap.622.s.899.
52 COMPANY LAW AND REGULATION IN HONG KONG

• Companies (Model Articles) Notice (which contains the standard or model

articles which replace, inter alia, TableA articles for new companies) (Cap.622H);
• Company Records (Inspection and Provision of Copies) Regulation
(Cap.6221);
• Companies (Revision of Financial Statements and Reports) Regulation
(Cap.622F);
• Companies (Disclosure of Benefits about Directors) Regulation (Cap.622G);
• Companies (Fees) Regulation (Cap.622K);
• Companies (Unfair Prejudice Petitions) Proceedings Rules (Cap.622L); and
• Companies (Non-Hong Kong Companies) Regulation (Cap.6221).258

5.6 What happened to the predecessor Companies Ordinance (Cap.32)?

1.166 Most of predecessor CO repealed. Upon the commencement ofCap.622, much of

the predecessor CO was repealed. However, Cap.32 was not repealed in its entirety,
as it still contains the provisions not covered by Phase l of the Rewrite. Cap.32 was
renamed as the Companies (Winding-Up and Miscellaneous Provisions) Ordinance
and contains the provisions on directors' disqualification, prospectuses, prevention
of evasion of the Societies Ordinance (Cap.151) and provisions on winding-up and
receivers.

5.7 Further Reforms

5.7.1 Securities a,u/ Futures and Compa11iesLegislatio11 (Uncertijicated Securities

MllrketAmendment) Ordi11ll11ce2015

1.167 Scripless securities system. The Securities and Futures and Companies Legislation
(Uncertificated Securities Market Amendment) Ordinance 2015 (5 of 2015) was
enacted to introduce a statutory framework for a new scripless or uncertificated
securities system in Hong Kong (for listed shares and debentures) - namely a
system allowing for the holding of securities in paperless form (e.g. without the
need for share certificates) and the transfer of securities without an instrument
of transfer. The main amendments are to be made to the Securities and Futures
Ordinance (Cap.571 ), but there are also ancillary amendments to be made to the
Companies Ordinance (Cap.622) to enable the establishment and functioning of the
new system. 259 At the time of writing, the above Amendment Ordinance has not come

258For the background to the subsidiary legislation, see Financial Services and Treasury Bureau and Companies
Registry, New Compcmies Ortlintmce: Subsidia,y Legislation for Implementation of the nc'>vCompanies
Ordinance - Phase One Consultation Document (September 2012) and Phase 1\vo Consultation Document
(November 2012).
"~ Sec Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance
2015 Pt.3. Schedule 8 in the Companies Ordinance (Cap.622) itself contains some provisions to facilitate the
introduction ofa scripless regime, but these provisions have not commenced operation (see L.N. 103 of2013)
and will be superseded by the 2015 Amendment Ordinance.
 COMPANYLAW REFORM:THE COMPANIESORDINANCEREWRITE 53

into operation. The Securities and Futures Commission and the Stock Exchange of
Hong Kong have been working on the details of the new system, and subsidiary
legislation under Cap.571 will also need to be drafted before the scripless securities
system can be established. 260

5.7.2 Companies (Winding-Up and Miscellaneous Provisions)

(Amendment) Ordinance 2016

Amendments to provisions on winding-up and liquidations. Following Phase l of 1.168

the Companies Ordinance Rewrite, the Government embarked on what was originally
referred to as Phase II of the Rewrite, dealing with the remaining provisions in
the renamed Companies (Winding-Up and Miscellaneous Provisions) Ordinance
(Cap.32). Instead of a full rewrite though, the Government eventually engaged in a
less extensive review of the winding-up provisions in Cap.32 to update and improve
the law on liquidations. 261 The amendments have now been implemented through
the enactment of the Companies (Winding-Up and Miscellaneous Provisions)
(Amendment) Ordinance (14 of2016), which commenced operation on 13 February
2017. The amendments to Cap.32 include: (i) a new prescribed form for the statutory
demand; (ii) new provisions on qualifications for appointment as liquidators;
(iii) a new Sch.25 setting out the powers of liquidators; (iv) provisions on unfair
preferences introduced in Cap.32 instead of reliance on the equivalent provisions
in the Bankruptcy Ordinance (Cap.6); and (v) new provisions on undervalue
transactions. The winding-up provisions, as amended, are discussed more fully in
Ch.20 below.

5.7.3 Companies (Amendment) Ortlinance 2018

Significant controllers register. The Companies (Amendment) Ordinance 2018 1.169
(3 of 2018) came into effect on I March 2018 and amends the Companies Ordinance
(Cap.622) to introduce a new obligation on Hong Kong companies to maintain a
significant controllers register. The register shows certain details of beneficial
owners of shares in a company and other persons who have a level of control over the
company above specified thresholds as set out in the legislation. The amendments
were introduced in response to recommendations of the Financial Action Task
Force262 for ensuring transparency of information relating to beneficial owners and
controllers of companies. Since the identity of the ultimate controllers of companies
can be hidden through complex ownership and control structures, the corporate
form can be misused to hide proceeds of crime, facilitate money laundering or serve
other illicit purposes such as tax evasion, corruption or terrorist financing. The new
obligations on a significant controllers register, contained in new Div.2A in Pt.12

260 Sec further Securities and Futures Commission, Hong Kong Exchanges and Clearing Ltd, Federation of Share
Registrars Ltd, Joint Ccms11ltatio11 Paper 011a Proposed Operational Model for /111pleme11ti11g a Scripless
Securities Market i11llo11g Kong (December 2009) and Co11s11ltatio11
Conc/11sio11s(September 20 I0).
26' See Financial Services and Treasury Bureau, Improvement oJCorport1te !11solve11cy Law Legislc,tive P,vpost,ls:
Co11s11lt(lfi011
Doc11me11t (April 2013); Co11sultatio11
Conc/usio11s(May 2014).
262 The Financial Action Task Force is an inter-governmental body that sets international standards on combating
money laundering and terrorist financing.
54 COMPANY LAW AND REGULATION IN HONG KONG

of the Companies Ordinance, are intended to enable Jaw enforcement officers to

ascertain details of the controllers of companies and to prevent use of the corporate
form for money-laundering or terrorist financing. 263

5.7.4 Compa11ies(Ame11d111e11t)
Bi/l 2018
1.170 Miscellaneous Amendments to Cap.622. At the time of this edition, there is also a
further Companies (Amendment) Bull 2018 that has been tabled on the Legislative
Council.264 The Bill proposes various miscellaneous amendments to Cap.622 to
remove ambiguities or inconsistencies, as well as some amendments to the accounting
provisions in Part 19 and Schedule 1 to expand the situations where simplified
reporting is permitted for corporate groups and t align certain concepts with the latest
accounting standards.

6. REGULATORY REGIME

6.1 Statutory and non-statutory regulation

6.1.1 Compa11iesOrdi11a11ce
(Cap.622)
1.171 Obligations on companies and individuals. Apart from containing provisions
which empower companies and incorporators to do things or which facilitate
their ordering of their private relationships, the Companies Ordinance (Cap.622)
also contains provisions which impose obligations on companies and individuals.
Contraventions of these provisions can give rise to an offence as specified in the
Ordinance. 265 Many of the obligations or prohibitions imposed in the Ordinance
are imposed on the company (e.g. the company has obligations to file annual
returns, 266 or the company is prohibited from providing financial assistance for the
acquisition of its shares 267). There is little authority on the point, but it seems to be
accepted 268 that many of the offences imposed on companies under the Companies
Ordinance (such as filing offences) are within the types of regulatory laws where
strict liability 269 is implied. 270

263 On the backgroum\ see Financial Services and Treasury Bureau, Enhancing1iu11sparency of BeneficialOwnership
of Hong Kong CompaniesConsultationPaper(January 2017) and ConsultationConclusions(April 20 I 7).
"' The Bill was gazetted on 6 April 20 18.
"' Under Cap.622, penalties are set out within the individual offence provision. 111Cap.32, the penalties are set out
in a separate schedule: see Cap.32, s.351 and Sch. I 2.
266 Cap.622, s.622; predecessor CO, s.107.

267 Cap.622, s.275; predecessor CO, s.47A.

"' For example, it has been said that the Companies Registry usually only prosecutes defaulting companies for
failures to file annual returns and other regulatory offences, instead of prosecuting officers in default, due to
difficulties in gathering evidence of officer'.~knowledge or wilfulness: Gordon Jones, Corporo1e Govemonce
and Compliance in Hong Kong (LexisNexis, Hong Kong, 2012) 154. The implication is that mens rea is not
required for the offence committed by the company, although mens reo needs to be established for prosecutions
against individual officers (see Cap.622, s.3; Cap.32, s.351 (2)).
>6• Strict liability offences do not require proof of mensrea, but there is a defence of honest and reasonable mistake:
HKSAR v Ho Ho11Clumg Donel [2004] 3 MKC 304.
210 For general principles on whether statutory offences are strict liability offences, see Gammon (Ho11gKo11g)lid v

A11orney-General [1985] AC I; David Ormerod, Smith c111d Hogans Crimi,ud Law (13th cdn, Oxford University
Press, Oxford, 2011) 155-183; and see also Gcncvra Richardson, "Strict Liability for Regulatory Crime: chc
Empirical Research" ( 1987) Criminal lc,w Review295.
 REGULATORYREGIME 55

Offence for company's contravention under Cap.32 for officers in default. Under 1.172
Cap.32, where there is a provision creating an offence for a company's contravention, the
provision also often creates an offence for any "officer in default". This tenn is defined
in Cap.32, s.351(2) to mean "any officer271 of the company, or any shadow director of
the company, who knowingly and wilfully authorizes or permits the default . . . or
contravention". This concept of "officer in default" still applies for the offence
provisions on winding-up etc in Cap.32, but a new concept of "responsible person"
(see below) is used in Cap.622. At present, there is no proposal to harmonise
the concepts as used in the two Ordinances, but it would be appropriate for the
Government to seek harmonisation in due course.
Cap.622 replaces term "officer" with "responsible person" and removes 1.173
"knowingly and wilfully" wording. Under Cap.622, the term "officer in default"
is replaced by "responsible person". 272 Changes are also made to the concept.
"Responsible person" is defined as an officer or shadow director who "authorises or
permits, or participates in, the contravention". The words "knowingly and wilfully"
are omitted, with the statutory intention of ensuring that recklessness is caught. 273
It is not intended that responsible persons would be liable on a strict liability basis,
as the presumption of mens rea would apply; the mental element required would be
voluntariness or intention or recklessness in performance of an act (where the offence
prohibits an act), or knowledge of or recklessness as to the existence of particular
circumstances (where criminality is dependent upon an act being done in specified
circumstances). 274
Some provisions specifically imposing obligations on individuals such as directors 1.174
which provide for an offence if obligations not met. Apart from officers' liabilities
on the above basis, there are some provisions in the Ordinance specifically imposing
an obligation on individuals such as directors. Here, the provision may directly
provide for an offence committed by the person - e.g. directors' responsibility for

271 "Officer" is defined in Cap.32, s.2 to include a director, manager and secretary.
272 Cap.622,s.3.
273 Cf. Companies Act 2006 (UK) s.1121(3) and Buckley 011 the Companies Acts (Butterworths, London)
at [4058)-(4100). See also "Administration's Paper to the Bills Committee on Companies Bill - Follow
up Actions to be taken by the Administration for the meeting on 18 April 2011" (CB(l)2132/I0-11(02)
(6 May 2011).
"' Hin Lin Yee v HKSAR (2010) 13 HKCFAR 142, (42). The original provision in the Companies Bill also
contained the limb "fails to take all reasonable steps to prevent the contravention" (which is present in the
equivalent UK provision: Companies Act 2006 s.1121(3)). This limb was omitted due to concerns of the
LegCo Bills Committee that mere negligence would be caught: see "Administration's Paper to the Bills
Committee on Companies Bill - Follow up Actions to be taken by the Administration for the meeting on 13
May 2011 in relation to the formulation of 'responsible person' under Part I" (CB(l)2636/I0-l l(0l) (30
June 2011). However, it seems that, strictly speaking, negligence is not a standard for me11.s
rea as negligence
refers to situations where it is unnecessary to prove any particular state of mind: David Ormerod, Smith and
Hogan'.<Criminal Law (13th edn, Oxford University Press, Oxford, 2011) 147. The formulation under the
UK provision would also require mens rea to be shown in relation to "fails to take all reasonable steps",
which would be deliberateness or recklessness but not where the failure is due to an honest mistake or was
accidental: see Vehicle Inspectorate v N1111a/l[ 1999] 3 All ER 833. The omission of that limb in Cap.622 s.3
suggests that the Hong Kong formulation is narrower than the UKone, although it was also held in the Vehicle
"1spec1ort1tecase that the word "permit" could, depending on the context, be interpreted to cover "failure to
take all reasonable steps".
56 COMPANY LAW AND REGULATION IN HONG KONG

ensuring that the company keeps proper accounting records, 275 or the prohibition on
un-discharged bankrupts acting as directors. 276
1.175 Contravention of certain provisions results in civil consequences. Apart from
contraventions of the Ordinance resulting in criminal consequences, there are also
provisions in the Ordinance where contravention leads to certain civil consequences,
as an alternative or in addition to criminal consequences. For example, failure to
comply with the requirements for registration of charges leads to the charge being
void as against certain persons. 277 Some provisions do not expressly state the civil
consequences of a contravention, and here it may be necessary to have regard to the
common law rules on illegality to determine whether contracts or transactions would
be rendered void or unenforceable for breach of statute. 278

6.1.2 Securities a11dFutures Ordi11a11ce

1.176 Securities regulation covered by SFO. The Securities and Futures Ordinance
(Cap.571) (SFO) came into operation in 2003, replacing a number of earlier Ordinances
dealing with the securities and futures markets and protection of investors.279 Primary
offerings of company shares and debentures to the public are regulated under Cap.32,
while the bulk of the law on securities regulation is covered by the SFO - including
insider dealing, other market misconduct (such as false trading in securities or creation
of false markets), disclosure of price-sensitive information by listed companies, and
disclosure by shareholders and others of substantial interests in listed companies. The
SFO provides for a range of different sanctions and remedies for contraventions of the
Ordinance, including criminal provisions (e.g. Pt.XIV for market misconduct), civil
sanctions (e.g. Pt.XIII for market misconduct), and provisions enabling persons who
have suffered loss (e.g. investors) to obtain compensation (e.g. s.281 of the SFO).

6.1.3 No11-statutoryregul"tion
1.177 Companies subject to non-statutory regulations such as Listing Rules for listed
companies. Companies in Hong Kong are also subject to certain non-statutory
regulatory regimes. Listed companies are required to comply with the Listing Rules
of the Stock Exchange of Hong Kong.280 Listed and other public companies in Hong
Kong are also required to comply with the Codes on Takeovers and Mergers and Share
Buy-backs. 281

275 Cap.622, s.373(5).

21• Cap.622, s.480. Generally the offences that can be committed by individuals under the Ordinance are not
offences of strict liability, but the English equivalent of the provision has been held to be an offence where me11s
rea need not be shown: R v Brockley [ I994] BCC 13 I.
271 Cap.622, s.337(4).
278 For example, transactions for financial assistance given in contravention of the statutory prohibition have been

held to be invalid: e.g. Heald v O'Co1111<>r [1971] 1 WLR497. However, chis position is expressly reversed under
Cap.622, s.276.
'" These included the Securities Ordinance (Cap.333), Commodities Trading Ordinance (Cap.250), Securities
and Futures Commission Ordinance (Cap.24), Pr0tection of Investors Ordinance (Cap.335), Securities (Insider
Dealing) Ordinance (Cap.395) and Securities (Disclosure of Interests) Ordinance (Cap.396).
28• See Chapter 16.
28' The Code is made by the SFC pursuant to SFO, s.399.
 REGULATORYREGIME 57

6.2 Regulatory bodies

No single regulator. There is no single regulator of companies in Hong Kong.282 1.178

Regulatory functions are divided across a number of bodies or authorities, discussed
below. Apart from the authorities outlined below, it should also be noted that the
Commercial Crime Bureau of the Hong Kong police also has responsibilities for
investigation of corporate crimes283 and the Independent Commission Against
Corruption has responsibilities for investigation of corruption-related corporate
wrongdoing.284

6.3 Registrar of Companies and the Companies Registry

Companies Registry independent government agency set up in 1993 and 1.179

headed by Registrar. The office of the Registrar of Companies is established
pursuant to the Companies Ordinance (Cap.622). 285 The Registrar heads the
Companies Registry, an independent government agency established in 1993.286
The Registrar's functions in relation to companies are as set out in the Companies
Ordinance (Cap.622), but the Registrar also has certain statutory functions as set
out in other Ordinances. 287 Functions in relation to the registration of companies
were originally exercised by the Registrar of the Supreme Court (when the first
Companies Ordinance was enacted in 1865). These functions were transferred
to the Registrar General's Department in 1949. The Companies Registry was
previously an internal unit in the Registrar General's Department. When the
Registrar General's Department was disbanded in I993, the Companies Registry
was created as an independent agency. 288
Registrar has functions of administration of Cap.622. Under Cap.622, the provisions 1.180
on the Registrar of Companies and the Companies Register that is available for public
inspection are set out in Pt.2. The Registrar has functions for the administration of
the Companies Ordinance, including in relation to registrntion of companies and
registration of company documents. Applications for incorporation are made to
the Registrar. The Registrar maintains the Companies Register289 which is a public
register of companies, containing details of companies and documents that companies
must deliver to the Registrar for registration-such as the articles of association, 290

,., For discussion on the issue of whether it would be desirable for there to be a single corporate regulator, see
Report by the Expert Group to Review the Operationoftlte Securities and Futures Market Regulat01:vStructure
(March 2003), http://www.info.gov.hk/info/expert/repo11e_full.pdf; Gordon Jones, Corpomte Govemance a11d
Compliance in Hong Kong (LexisNexis, Mong Kong, 2012) 171-174.
m See also SCCLR, /31hA1111ual Report /996-97at 16-20.
280 See Prevention of Bribery Ordinance (Cap.20 I).
m Cap.622, s.21.
,s,, For information on the Companies Registry generally, see the Registry's website, http://www.cr.gov.hk.
287 For example, limited partnerships arc registered wi1h the Registrar of Companies pursuant co the Limited

Partnerships Ordinance (Cap.37). The Registrar also has functions, for example, under the Trustee Ordinance
(Cap.29), Registered Trustees Incorporation Ordinance (Cap.306), and the Money Lenders Ordinance (Cap.163).
288 See further S H Goo, Swdy Report 011Histo,yofC0111pany /nco,poration in Hong Kong-A Study Co111missioned
by the Co111paniesRegis11y(July 2013) 38-39.
289 Cap.622, s.45.
2Q() Cap.622. s.7 l.
58 COMPANY LAW AND REGULATION IN HONG KONG

particulars of directors and secretaries, 291 particulars of company charges,292 special

resolutions of companies 293 and annual returns (and annual financial statements in the
case of public companies and companies limited by guarantee). 294 The Registrar also
has powers in relation to the striking off and deregistration of companies which are no
longer carrying on business or no longer in operation. 295
1.181 Registrar's delegated authority for prosecution of offences under Cap.622. The
Department of Justice of the Hong Kong Government has the responsibility for
prosecution of offences under the Companies Ordinance pursuant to the Department's
general authority for undertaking criminal prosecutions. 296 However, the Companies
Registry has been delegated authority 297 to conduct prosecutions for a range of
offences summarily, such as in relation to breaches of statutory filing obligations,
failure to hold annual general meetings, 298 providing false information in applications
for deregistration, 299 and carrying on business in the name of a limited company that
has not been duly incorporated. 300
1.182 Registrar has limited investigative powers under Cap.622. Cap.622 also contains
new provisions conferring some limited investigative powers on the Registrar. Under the
predecessor CO, the Registrar did not have any powers of investigation. Most offences
prosecuted by the Companies Registry are therefore filing offences where breaches can
be more easily detected (such as failure to file annual returns). Prosecutions are also
often confined to offences where mens rea need not be established. Under Cap.622,
the Registrar is given powers to require persons to produce records or documents (and
to provide information and explanations in respect of records or documents) where the
Registrar has reason to believe that certain specified offences have been committed. 301
These powers are exercisable only in respect of two specified offences: namely the
offence for knowingly or recklessly giving false or misleading information in an
application for deregistration (Cap.622, s.750(6)) and the offence of knowingly or
recklessly making a false or misleading statement in any document required by or for
the purpose of any provision of the Ordinance (Cap.622, s.895(1)).302

6.4 Securities and Futures Commission

1.183 SFC independent statutory body formed to ensure the integrity of the market
and protect investors. The Securities and Futures Commission (SFC) was
originally formed under the repealed Securities and Futures Commission Ordinance

291
Cap.622, ss.645, 647: 652.
292
Cap.622, s.344.
293
Cap.622, s.622.
29.i Cap.622, ss.662, 664.
2'.ls Cap.622, ss.744-747.
296 Basic Law art.63; Magistrates Ordinance (Cap.227), s.12.
29' Pursuant 10 Magistrates Ordinance. s. 13.
l'.18 Cap.622, s.610.
29• Cap.622, s.750.
300 Cap.622. s.896.
301 Cap.622,s.873.
.1-0l For the view that the Registrar's investigative powers should be expanded fmther, see Gordon Jones, Co,porate
Govemanceand Compliancein Hong Kong (LexisNexis, Hong Kong.2012) 165-168.
 REGULATORYREGIME 59

(Cap.24) in 1989 and continues to exist pursuant to s.3 of the current Securities and
Futures Ordinance (Cap.571) (SFO). 303 The SFC is an independent statutory body
with functions as conferred by the SFO. Prior to the establishment of the SFC,
there was the Securities Commission, formed in 1974, to administer the Securities
Ordinance, which had been enacted in 1974 pursuant to the recommendations of
the First Report of the Companies Law Revision Committee ( 1971). The Securities
Commission did not play a significant regulatory role. The Commission was
effectively a part-time body only, more in the nahire of an advisory committee,
and "a mere adjunct to the system". 304 The SFC was established to replace the
Securities Commission following recommendations made in the Hay Davison
Report 305 in 1988 (which had reported on the regulation of the securities markets
in Hong Kong after the 1987 stock market crash). lt was recommended in the Hay
Davison Report that an independent statutory body outside the civil service should
be created, headed and staffed by full-time regulators and funded largely by the
market, charged with the function of ensuring the integrity of markets and the
protection of investors. 306
SFC's functions and powers: primarily securities regulator. The SFC's functions 1.184
and powers are set out in SFO, s.5. These include promoting the fairness, efficiency,
competitiveness, transparency and orderliness of the securities and futures industry,
and supervision, monito1ing and regulation of the activities of the stock and futures
exchanges and of securities and futures intermediaries. As such, the SFC is primarily
a securities regulator rather than a corporate regulator.307 However, the SFC has
certain regulatory functions in respect of listed companies pursuant to the SFO and
also the companies legislation in Cap.32 and Cap.622. For example, under the SFO,
the listing rules of the stock exchange must be approved by the SFC,308 and the SFC
has responsibilities for enforcement of the provisions on securities disclosure, market
misconduct and disclosure of p1ice-sensitive information (inside information) in
relation to listed companies,30'Jand administers the takeovers regime pursuant to the
Codes on Takeovers and Mergers and Share Buy-backs.310 The SFC also administers
and enforces the provisions in Cap.32 relating to prospectuses/I' and Cap.622 relating
to the purchase by a company of its own shares and a company giving financial
assistance for the acquisition of its own shares.312

303 For the SFC's website, see http://www.sfc.hk.

°'
3 See Securities Review Committee, '"The Operation and Reg11latio11of the Hong Kong Securities htdust,y.,
(Hong Kong, May, 1988) (Hay Davison Report) (9.14)-(9.15). The office of the Commissioner for Securities
(established in I973) was the execmive arm of the Securities Commission and also had direct responsibilities
for registration of securities dealers and advisers, but that office was understaffed and did little supervision after
registration: Hay Davison Report, [9. 18)-[9.20).
ios Hay Davison Report.
°"
3 On the background of the SFC, see also Robert Owen, "Priorities of the New Securities and Futures Commission"
in Securities Regulation in Hong Kong (Securities and Futures Commission, Hong Kong, 2002) Ch. 3.
30' Gordon Jones. Co,port.11eGovernance and Compliance in Ho11gK<>ng(LexisNcxis, Hong Kong, 2012) J04.
308 SFO,s.24.
3® SFO,Pts.lV,XIII,XIV.XIVA.
316 The Code is made by the SFC pursuant to SFO, s.399.
'" Cap.32, Pts.11 and XII.
312 Cap.622, Pt.5 Divs.4 and 5. See SFO, s.5, and Sch.l definition of"rele,,.1nt provisions".
60 COMPANYLAWAND REGULATIONIN HONG KONG

1.185 SFC has certain powers in relation to listed corporations. As part of its enforcement
functions, the SFC has powers, in relation to listed corporations, to require production
of records or documents where, inter alia, it appears to the SFC that there has been
fraudulent conduct in the business of the corporation, the business has been conducted
in a manner oppressive to its members, management has engaged in misfeasance
or misconduct or members have not been given requisite information about the
corporation's affairs. 313 The SFC has powers to seek injunctions and other orders in
respect of contraventions of the SFO or the relevant provisions of the Companies
Ordinance (as mentioned in the previous paragraph), 314 or in respect of, inter alia,
fraud, misfeasance or other misconduct towards a listed corporation's members,
or unfairly prejudicial conduct towards its members. 315 The SFC also has power to
petition for the winding-up of corporations on the ground that it is just and equitable to
do so. 316 ln addition, the SFC has powers to intervene in civil proceedings in the public
interest in relation to matters arising under the SFO or relevant provisions of Cap.32
and Cap.622 referred to above (at para.1.184). 317
1.186 SFC has functions in relation to enforcement of criminal provisions of the SFO
and certain provisions of Cap.32 and Cap.622. Apart from enforcement and
protection of investors through civil actions, the SFC also has functions in relation
to enforcement of criminal provisions in the legislation. The SFC has power to
investigate, inter alia, where it has reasonable cause to believe that there has been
market misconduct or an offence committed under the SFO or relevant provisions of
Cap.32 or Cap.622 referred to above (at para.1. I84). 318 The SFC has powers to require
production of records and documents and to require persons to answer questions in
investigations.319 Application may also be made for a magistrate to issue warrants to
enter premises to search and seize records or documents. 320 The SFC is empowered
to prosecute, summarily, offences under the SFO and the aforementioned Cap.32 and
Cap.622 provisions within its purview. 321

6.5 Hong Kong Exchanges and Clearing Ltd

1.187 HKEx, SEHK, HKFE and HKSCC: non-statutory bodies that self-regulate
stock and futures markets. Hong Kong Exchanges and Clearing Ltd (HKEx) 322 is
the holding company of the Stock Exchange of Hong Kong Ltd (SEHK), the Hong
Kong Futures Exchange Ltd (HKFE)323 and the Hong Kong Secw-ities and Clearing
Company Ltd (HKSCC). 324 These bodies are non-statutory bodies which undertake

313 SFO, s.179.

314
SFO, s.213. SeeSecuri1ieso11dFutures Commission v TigerAsia Ma11ogeme11t
llC(2013) 16 HKCFAR 324.
315
SFO, s.214.
316
SFO, s.212.
311
SFO, s.385. See, e.g., Re PCCW Ltd [2009] 3 HKC 292.
l 18 SFO, s.182.
w> SFO,s.183.
;-io SFO,s.191..
311SFO,s.388.
m For HKEx's website, see ht1p://www.hkcx.com.hk.
m HKFE opera1csand rcgula1csthe future.smarket.
"' HKSCC operates the clearing and settlement system, and also provides nominee services to act as nominee for
investorsin listed companies.
 REGULATORY REGIME 61

the functions of self-regulation 325 in relation to the operation of the stock and futures
markets in Hong Kong.
History of Hong Kong Stock Exchange. Trading in Hong Kong shares can 1.188
be traced back to about 1860, but it was not until 1891 that an Association of
Stockbrokers in Hong Kong (later renamed the Hong Kong Stock Exchange) was
formed. 326 As indicated by its original name, the Stock Exchange was composed
of brokers and regulated the trading activities of its broker members. Other stock
exchanges also came into existence over the next century. In 1986, the then
existing four exchanges 327 merged to form a unified exchange operated by the
Stock Exchange of Hong Kong Ltd.
SEHK and HKEx: statutory duties. In 2000, SEHK (and HKFE and HKSCC) 1.189
demutualised and merged under the single holding company, HKEx. SEHK
regulates listed companies through its Listing Rules, which listed companies
are required to comply with via contractual obligations. 328 Both SEHK and
HKEx have certain statutory responsibilities as set out in the SFO. SEHK is
a "recognised exchange company" within SFO, s.19 and has obligations under
s.22 of the SFO to operate an orderly, informed and fair market in securities
traded on the stock market. SEHK must act in the interests of the public, having
particular regard to the interests of the investing public. HKEx is a "recognised
exchange controller" under SFO, s.59. As the holding company and controller of
SEHK, HKEx is also under similar statutory duties as outlined above, pursuant
to s.63 of the SFO.
SFC responsible for overseeing SEHK and HKEx. The SFC is responsible for 1.190
oversight of SEHK and HKEx. SEHK can only make rules which are approved
by the SFC. 329 The SFC has powers to withdraw recognition of SEHK and
HKEx as a recognised exchange company and recognised exchange controller
respectively 330 (in which case SEHK will no longer be able to operate a stock
market). The SFC also has powers to order the exchange to cease activity in
emergencies, or where there is an economic or financial crisis likely to prejudice
the orderly transaction of business on the stock market; 331 and to give various
directions in relation to the operation of the exchange companies and exchange
controllers. 332

325 That is, regulation over an industry by a private organisation consisting of those in the relevant industry, as
opposed to regulation by a government or public authority.
326
Robert Fell, "Towards the Unified Exchange" in Securities Regulation in Hong Kong (Securities and Futures
Commission, Hong Kong, 2002) Ch I.
m Apart from the Mong Kong Stock Exchange, there were also the Far East Exchange (formed in 1969), Kam Ngan
Stock Exchange (formed 1971) and Kowloon Stock Exchange (formed 1972). Earlier, there had been another
exchange, the Hong Kong Stockbrokers' Association (formed 1921), which merged with the Mong Kong Stock
Exchange in 1947.
328 The Listing Rules are discussed further in Chapter 16.
329 SFO, s.24.
336 SFO, ss.28 and 72.
331
SFO, s.29.
"' SFO, ss.92 (restriction notices) and 93 (suspension orders).
62 COMPANY LAW AND REGULATION IN HONG KONG

6.6 Inspections under Companies Ordinance

6.6.1 Ge11erlll
1.191 Powers of Financial Secretary under Cap.622: "last resort" powers. The
Companies Ordinance contains provisions empowering the Financial Secretary
(FS) 333 to appoint inspectors to investigate into the affairs of a company or to require
production of documents by a company: see Cap.622, Pt.19 (derived from predecessor
CO, ss.142-152F). These powers of the FS have been little used in practice, but the
provisions are retained (with modifications) in Cap.622 so as to provide for "reserve"
or "last resort" powers as a supplement to the powers of other regulatory bodies. 334
1.192 Division 2 and Division 3 of Pt.19 of Cap.622. Division 2 of Cap.622, Pt.J 9
reorganises and reformulates the provisions in former ss.142-152 of the predecessor
CO, on inspections (investigations by inspectors), while Div.3 of Cap.622, Pt.19
covers the predecessor CO, ss.152A-l 52F on inspections of books and papers (upon
the Financial Secretary's direction).

6.6.2 Inspections
1.193 FS has power to appoint inspector to investigate affairs of company under
Cap.622. The FS has power under the Companies Ordinance to appoint an inspector
to investigate the affairs of a company.335 Applications for appointment can be
made (in the case of a company having share capital) by at least 100 members of
the company or members holding at least 10 percent of the issued shares, or (in the
case of a company not having share capital) by at least 10 percent of the members by
number.336 An application can also be made by the company where it has declared by
special resolution that its affairs ought to be investigated.337 The FS has discretion as
to whether or not to appoint an inspector following such applications. The FS can also
make an appointment on its own initiative on various specified grounds, such as where
there is fraud or unfair prejudice or other misconduct against a company's members. 338
Finally, the court can also order the FS to appoint an inspector, and in such a case, the
FS must make the appointment. 339
1.194 Powers of an inspector. An inspector has the following powers:

• to require officers and agents of the company, and others, to produce records
and documents relevant to the investigation which are in their custody or
power;340

333 For the website of the Financial Services Branch of the Financial Services and Treasury Bureau, see http://www.
fstb.gov.hk/fsb/aboutus/welcome/index.htm.
33' "Administration's Paper to the Bills Committee on Companies Bill on Parts 15 and 19" (CB( 1)2439/10-11(06)),
Annex B, para.4.
J.;s Cap.622,s.840.
336 Cap.622, s.840(2).
"' Cap.622, s.840(1). The company also has a power. by special resolution, to appoint its own inspector: see
Cap.622, ss.892-894 .
••>3 Cap.622, s.841 (2).
>3? Cap.622, s.841 (I).
34
° Cap.622,s.846.
 REGULATORY REGIME 63

• to require such persons to take all reasonable steps to preserve the record or
document before it is produced to the inspector;341
• to require such persons to answer questions (on oath or otherwise) relating
to any matter under investigation, or provide information or explanations in
respect of records and documents which have been produced; 342 and
• to require directors to produce documents in relation to their bank accounts
where the inspector has reasonable grounds for believing, inter alia, that
money has been paid in or out of the account connected with his misconduct
towards the company or its members. 343

An inspector can also apply for a magistrate's warrant to enter premises to obtain
documents. 344
Inspector required to make a report to FS and based on report FS may exercise 1.195
further powers. The inspector is required to make a report to the FS. 345 Based on the
information in the report, the FS may:

• petition for the company to be wound up on the just and equitable ground, if
it appears to the FS that it is expedient in the public interest;
• petition for a remedy 346 on the grounds of unfair prejudice;
• apply to the court for a statutory injunction or related remedies; or
• apply for a disqualification order against a director on the grounds of being
unfit to be concerned in management. 347

Prosecution may follow if report discloses an offence. If the repo11discloses that 1.196
an offence has been committed, it is also possible that criminal prosecutions may
subsequently be brought. 348
Inspection power not often exercised. The inspection power is not often exercised. 1.197
In the past, inspectors have been appointed to investigate listed companies or their
related companies, with the most recent appointment made in 1999 to investigate into
the collapse of the Peregrine group of companies. 349

6.6.3 Fina11cialSecretary's power to require production of docume11ts

FS's power to require production of documents less intrusive than that of 1.198
an inspector. There is a less intrusive power, compared with a full-fledged

'" Cap.622, s.846( l)(b). This is a new power not found in the predecessor CO.
,., Cap.622, ss.846(1 )(c), 846(5), 848. The privilege against self-incrimination is expressly abrogated, but there are
reshictions imposed on the use of the evidence in criminal proceedings: see Cap.622, s.865.
°
3
Cap.622. s.847.
344
Cap.622, s.877.
345 Cap.622, s.856.

"' Under Cap.622, s.725.

3 "7 Cap.622, s.879; Cap.32, ss.168J, 3508(3).

"' See also Cap.622, ss.855(5), 878.

349 Reporl on PeregrineFixed Income lid (in liq) and Peregrinefllvestmen/sHoldings Ltd (in liq) (12 February 2000).
64 COMPANY LAWAND REGULATION IN HONG KONG

investigation by an inspector, conferred on the FS to require a company to produce

records and documents. 350 The power can be exercised where an application has
been made under Cap.622, s.840(2) for the appointment of an inspector. 351 The
FS might exercise the power in such circumstances to determine whether it is
appropriate to appoint an inspector. More generally, the FS has a power in any case
to require production of records and documents if it appears to the FS that there is
good reason to do so.352
1.199 FS's power extends to requiring any person to produce documents. The power
to require production of documents extends to requiring any person to produce
the documents if it appears to the FS that the person is in possession of them.353
The company or person who produces documents, and officers and employees of
the company concerned, may be required by the FS to provide explanations of the
documents. 354 Similar to an inspector, the FS can apply to a magistrate for a warrant
to enter premises to obtain books and papers.m
1.200 Further powers of FS exercisable on basis of documents produced. The powers of
the FS, exercisable following an inspector's report, outlined above (at para. l.195), can
also be exercised on the basis of information acquired by the FS pursuant to its powers
to require production of documents.356
1.201 FS's power to require production of documents never been used. As at the
time of writing, the FS's power to require production of documents has never been
exercised. 357

6.6.4 Main changes under Cap.622

1.202 FS's powers apply to local and certain foreign companies. Under the predecessor
CO, the powers to appoint inspectors and to require production of records and
documents apply to non-Hong Kong companies as well as local companies, except
in relation to the application for appointment of an inspector made by members
under predecessor CO, s.142. The new provisions in Cap.622 extend the coverage
to registered non-Hong Kong companies for such applications. Some of the other
changes include enhancement of the investigatory powers of an inspector, such as
new powers requiring persons to preserve records, and requiring persons to provide
information or explanations on records produced (this power is additional to the pre-
existing power to examine persons).
1.203 Provisions on self-incrimination, confidentiality and protection of informers under
Cap.622. Under Cap.622, there are provisions on self-incrimination, confidentiality

m Cap.622, s.869.
>s1 Cap.622, s.868(a).
»2 Cap.622, s.868(b).
353 Cap.622, s.869( I)(b).

,s, Cap.622, s.869(2). The privilege against self-incrimination is exprc.ssly abrogated, but there arc restrictions
imposed on the use of the evidence in criminal proceedings: sec Cap.622, s.865.
3~5 Cap.622, s.877.

35" Cap.622, s.879.

"' "Administration's Paper to the Bills Committee on Companies Bill on Parts 15 and 19" (CB(l)2439/10-11(06)),
Annex B, para.3.
 REGULATORY REGIME 65

and protection of informers applicable to each of the above types of investigations

and enquiries. As is the case under the predecessor CO, persons cannot claim the
privilege against self-incrimination to refuse to provide information. 358 Section 880
of Cap.622 ensures confidentiality of information provided by persons pursuant to
an investigation or enquiry under Pt.19 (subject to certain exceptions). Persons who
provide information pursuant to requirements made in an investigation or enquiry under
Pt.19 are given immunity from civil liability.359 In addition, there are new provisions
protecting informers who voluntarily provide information. Under ss.884 and 885, such
persons will not be regarded as being in breach of any duty of confidence in relation
to the information, and the identity of the person is not admissible in evidence in any
subsequent legal proceedings involving the information.

6.7 Official Receiver's Office

Official Receiver responsible for administration of Bankruptcy Ordinance. 1.204

The Official Receiver is appointed pursuant to s.75 of the Bankruptcy Ordinance
(Cap.6). 360 The Official Receiver's Office is a government agency (fom1erly part of the
Registrar General's Department prior to the disbanding of that department in 1993361)
with responsibilities for administration of the Bankruptcy Ordinance (dealing with
bankruptcies of individual persons) and parts of Cap.32, relating to winding-up of
companies and disqualification of directors.
Official Receiver can also act as liquidator or supervise liquidator for company 1.205
windings-up. In the case of company windings-up, the Official Receiver has
functions including acting as liquidator where no private liquidator is appointed 362
and supervision of liquidations conducted by private liquidators. 363 In relation to
disqualification of directors, the Official Receiver has powers, inter alia, to apply to
the court for disqualification orders and orders for the public examination of persons
suspected of being liable for disqualification. 364

6.8 Regulation of financial reporting and auditing

Financial reporting and company auditors regulated by HKICPA and FRC. Financial 1.206
reporting of companies and company auditors are regulated by the Hong Kong Institute
of Certified Public Accountants (HKJCPA) and the Financial Reporting Council (FRC).
HKICPA main professional body for accountants. The HKICPA is established 1.207
under s.3 of the Professional Accountants Ordinance (Cap.SO) (PAO)365 and is the main

" 8 Cap.622,ss.865, 872 and 876.

H9 Cap.622,s.887.
360 For ORO'swebsite,see http://www.oro.gov.hlc See also financial ServicesBureauand ArthurAnderson,Review
Paper (June 2002).
of the Role of the OfficialReceivers Office- Co11s11/tatio11
361
See First Bangkok City Finance Ltd v Coro Tejapaib1d(1989) I HKC 453, 456-457; Registrar General
(Establishment) (Transfer of Functions and Repeal) Ordinance (8 of 1993).
362 See Cap.32,s.194.
363
Cap.32,s.204.
,.. Cap.32, ss.1681A, 168P. On directors' disqualification, see Chapter 7.
365 The HKJCPA was, prior to 2004, named as the Hong Kong Society of Accountants. The body was originally

formed in 1973. For HKJCPA's website, see http://www.hkicpa.org.hk.

66 COMPANY LAW AND REGULATION IN HONG KONG

professional body for accountants in Hong Kong. The HKICPA is a self-regulatory

body but has statutory responsibilities under the PAO to regulate the accountancy
profession. The Disciplinary Committee of the HKlCPA has disciplinary powers over
certified public accountants (CPAs), including powers to deregister CPAs or to impose
penalties, in respect of, inter alia, fraud or negligence or breaches of the Financial
Reporting Council Ordinance (Cap.588). 366
1.208 FRC independent statutory body. The Financial Reporting Council (FRC) is
established under s.6 of the Financial Reporting Council Ordinance (Cap.588)
(FRCO). 367 The FRC is an independent statutory body, established in 2006 to enhance
the regulatory regime in respect of accountants and auditors. 368 Where there has
been an auditing irregularity or reporting irregularity in respect of listed companies
(such as where auditors have been negligent or have engaged in fraud), the FRC
(or its Audit Investigation Board) has powers to investigate into the irregularity.369
The investigator has powers to require production of records and documents and to
require persons to give explanations in respect of the documents. 370 Applications can
also be made for a magistrate's warrant to enter premises to seize documents. 371 The
investigator completes a written repo11on the findings of the investigation, which may
be published. 372At the time of writing, the FRC only has the function of investigating
and reporting on irregularities but does not have power to carry out disciplinary action
or prosecutions in respect of such irregularities. This will be changed as a result of
reforms on the regulation of auditors. Under the reform proposals, the FRC will have
a role as a fully fledged independent auditor regulator, with disciplinary powers over
auditors of listed companies. 373
1.209 FRC has powers to enquire into non-compliance of financial statements of listed
companies. \1/here financial statements of a listed company are not in compliance with
relevant requirements (such as requirements of the Companies Ordinance or accounting
standards), the FRC also has powers (which may be exercised through its Financial
Reporting Review Committee374) to make enquiries into the non-compliance.375 In
the course of the enquiry, the enquirer has powers to require production of records or
documents and explanations and information.376 Similar to an investigation, an enquiry

,.. PAO. ss.34 and 35.

"' For the FRC's website, see http://www.frc.org.hk.
"' For the background, see Financial Services and the Treasury Bureau, Co11sultatio11 Paper 011rite Proposals to:
(a) E11ha11cethe Oversight of the Public Interest Activities of Auditors and (b} Establish a Fi11a11cial
Reporri11g
Review Panel (September 2003); Financial Services and the Treasmy Bureau, Co11su/tario11 Paper on legislative
P,·oposals to Establish Fi11a11cial
Reporting Cou11ci/(February 2005); and see also Gordon Jones, Co,porate
Govemancea11dComplia11cei11Hong Kong (LexisNexis, Hong Kong, 2012) 179-209.
J(i'} FRCO,ss.4, 22 and 23 .
.no FRCO, ss.25-28.
.m FRCO, s.34.
J72 FRCO. s.35.

m Sec lhc Financial Rcporling Council (Amendment) Bill 2018. Once cnac1cd, the commencement da1e of the
Amendment Ordinance is intended co be I August 2019: sec clause 1(2) of the Bill. Sec further Financial Services
and Treasury Bureau, Proposals ro lmprove the Regulato,y Regimefor Listed £11ri1yAuditorsConsulrati<mPaper
(June 2014) and Co11sultario11
Conclusions (June 2015).
"' The Committee is composed of members of1he Financial Reporting Review Panel: sec FRCO, ss.39 and 40.
"' FRCO, s.40, see also s.5 and Sch. I of the FRCO on the meaning of"relevant non-compliance" .
.rn, FRCO,s.43.
 THEORIES AND PERSPECTIVES ON COMPANYLAW 67

report is to be produced, which may be published. 377 The FRC has powers to give notice
to the directors of listed companies specifying remedial action that should be taken in
respect of the non-compliance. 378The notice can be enforced by application to the court. 379

7. THEORIES AND PERSPECTIVES ON COMPANY LAW

7.1 General

Theory important to ascertain aims of company law and whether such aims being 1.210
met. Legal theories on company law have been written from different perspectives and
in relation to particular aspects of company law. While corporate law theories can be
found in the literature, commentators have lamented from time to time that company
law scholars in Anglo-common law jurisdictions have not sufficiently engaged in
theory. 380 Ultimately, theory is important for ascertaining the appropriate objectives of
the law and for assessment of whether the law operates satisfactorily in achieving the
desired objectives. It has been suggested that theorising about corporate law involves:

" ... questioning the fundamental ideology of corporate law.This might involve asking
questions like: what are corporations and what role do they have? What is the impact
of the way we define corporations on corporate behaviour? What are the values which
w1derlie corporate law? How and why do we continue to support concepts such as
separate legal entity status, limited liability and management control?" 381

Insight from theories enables deeper questioning about workings of company law. 1.211
With insights gained from theory, it is then possible to ask questions about corporate
law such as questions "which challenge why it is the way it is, whether and how it
works, who it works for and who it works against". 382

Existing theories on company law. The discussion below provides an outline of 1.212
existing theories which have been put forward in relation to company law.

7.2 Theories on particular areas of company law

Theories aboutthenatureofcorporatepersonality. Much corporate lawjurisprudence 1.213

has been directed towards explaining the nature of corporate personality. 383 For

377 FRCO, s.47.

3711
FRCO, s.49.
319
FRCO, s.50.
38<l See, e.g., Paddy Ireland, "Property and Contract in Contemporary Corporate Theory" (2003) 23(3) Legal Studies
453,453; Katherine H Hall, "The Interior Design of Corporate Law: Why Theory is Vital to the Development of
Corporate Law in Australia" ( 1996) 7 AustralianJounwl of Co,porate Law I.
38' Katherine H Hall, "The Interior Design of Corporate Law: Why Theory is Vital to the Development of Corporate
Law in Australia" (1996) 7 A11stralia11Journal 0JC01port1telaw 1, 4.
382 Ibid.
383 On corporate personality generally, see, MA Pickering, "The Company as a Separate Legal Entity" (1968) 31
Modern Law Review48 J; CM Schmitthoff, "Salomon in the Shadow" [ 1976) Journal of Business Law 305; Lord
Cooke, TurningPointsoftlze CommonLaw(Sweet and Maxwell, London, 1997) 1-27; Lord Cooke, "Co1vomte
Identity" (1998) 16 Company and Securities law Journal 160. See also Chapter 3.
68 COMPANY LAW AND REGULATION IN HONG KONG

example, concession theories explain the corporate status of associations of persons

as being something that is a concession or privilege granted by the state. 384 Realist or
natural entity theories see the company as an association of persons that has a real
or natural existence, 385 while organic theories conceive of the association of persons
in a company operating as a living organism through the will of the persons who
are the organs of the body corporate. 386 Contractual theo1ies focus on the contractual
nature of the arrangements between shareholders and others involved in the corporate
enterprise, seeing the company as simply being a nexus of contracts. 387 Jn more
recent times, there have also been developments made towards new conceptions
of the company.388 Theories on corporate personality can be important both for an
understanding of the social phenomenon of companies and also in determining the
appropriate rules that should be applied in regulating companies. 389 However, none of
the existing theories have been without criticism. For example, concession theories
have been critiqued on the basis that, while they may have been apt to describe earlier
eras when the obtaining of corporate status depended on the grant of a royal charter or
special Act of parliament, they are no longer accurate to describe modern conditions
where incorporation is a mere formality - almost a right perhaps - pursuant to
°
general incorporation legislation. 39 Contracts-based theories have also been criticised,
for instance, on the basis that the possibility of actual bargaining between the parties
is overstated,391 or that the emphasis on contracts does not give due regard to property
interests involved.392 Organic models likewise have been criticised, with some
commentators arguing that the reification of the company takes the analogy of natural
persons too far, leading to erroneous legal arguments.393
1.214 Theories about corporate governance. Corporate theories have also been developed
in other areas of company law, including in relation to corporate governance and
corporate social responsibility. Corporate governance looks at the laws and systems
for the managing of companies, in particular management of companies in a way that
serves the interests of the shareholders. Corporate governance theories394 examine

"' See M Stokes, "Company Law and Legal Theory" in W Twining (ed.), legal Tlzeo,y and Common law (Basil
Blackwell, Oxfor<~1986), Ch 9, p.162.
"' See Michael J Phillips, "Reappraising the Real Entity Theory of the Corporation" (1993-1994) 21 Florida State
Universitylaw Review 1061.
" 6 See, e.g., G Mark, "The Personification of the Business Corporation in American Law" ( 1987) 54 U11iversity of
ChicagoLaw Review 1441.
"' See M C Jensen and M Meckling, "Theory of the Finn: Manage,ial Behaviour, Agency Costs and Ownership
Structure" (1976) 3(4) Journal of Fina11cia/Economics 305; F H Easterbrook and D R Fischel, The Eco11omic
Strucll/reofCo,porate Law (Harvard University Press, Cambridge, 1991).
"' See, e.g., the idea of corporate constitutional ism suggested in Stephen Bottomley, "The Birds, The Beasts, and
the Bat: Developing a Constitutionalist Theory of Corporate Regulation" ( I 999) 27(2) FederalLaw Review 243.
38• See t\Jrther Chapter 3.

,,o See, e.g., William Bratton, "The Nexus of Contracts' Corporation: A Critical Appraisal" ( 1989) 74 Cornell Law
Review 407,435.
''' Roman Tomasic, J Jackson, R Wocllner, Co,po1-atio11s Law: Principles,Policyond Process(4thcdn, Buucrworths,
Sydney, 2002) 130.
392 Paddy Irclan4 "Property and Contract in Contemporary Corporate Theory" (2003) 23(3) Legal Studies 453;

Michael J Whincop, "Form, Function and Fiction: A Taxonomy of Corporate Law and the Evolution of Efficient
Rules" (2001) 24 Universityof New Sowl, Waleslaw Review 85.
' 9' M Wolff, "On the Nature of Legal Persons" (1938) 54 Law QuarterlyReview 494.
' 9' See also Chapter 8.
 THEORIES AND PERSPECTIVES ON COMPANYLAW 69

the mechanisms for achieving optimal alignment between the interests of managers
and the owners of companies, including both internal governance structures, such as
board composition395 or shareholder monitoring,396 and external mechanisms, such
as the so-called market for corporate control.397 Much corporate governance literature in
the United Kingdom and United States has traditionally focused on the agency problem
that arises from a separation between management and ownership (arising from a dispersed
ownership structure).398 However, large companies in other cow1tries,including in Asia and
continental Europe, often do not exhibit this feature of separation between management
and ownership (e.g. family-controlled companies),399 and so different concepts of corporate
governance may be needed for differently structured companies.400

Corporate social responsibility. In recent decades, corporate governance theories 1.215

have developed from simply examining the interests of shareholders to examining
the need for the management of companies in the interests of others and the wider
community. This is the idea of corporate social responsibility (CSR). 401 Advocates for
CSR have proceeded on different theoretical foundations of the company. For example,
stakeholder, communitarian or pluralist theories have been proposed, which emphasise
that persons other than shareholders (such as creditors, employees, consumers) should
also be regarded as legitimate stakeholders whose interests need to be protected. 402
Team production theories have been adopted by others to lead to similar conclusions
in relation to corporate social responsibility. 403

7.3 Economic analysis of law

Legal theories based on the "law and economics" perspective. Legal theories from the 1.216
"law and economics" perspective have been influential in corporate Jaw jurisprudence
in the United States. Broadly, the economic analysis oflaw stresses the role of the law in
achieving efficiencies, in reducing costs, and in maximising social wealth.404 Principles
of law are justified or assessed against the criterion of efficiency. One basic question

,., See, e.g., Donald C Langevoort, "The Human Nature of Corporate Boards: Law, Norms and the Unintended
Consequences of Independence and Accountability" (200 I) 89 GeorgetownLaw Joumal 797.
396 See, e.g., Lucian A Bebchuck, "The Case for Increasing Shareholder Power" (2005) 118 HarvardLaw Review833.

397
See, e.g., Henry G Manne, "Mergers and the Market for Corporate Control" (1965) 73 Joumal of Political
Economy 110; Michael C Jensen, "Takeovers: Their Causes and Consequences" ( 1988) 2 Journal of Economic
Perspectives21.
39' Adolf Berle and Gardiner Means, The Modern Corporation and P,·ivare Property (revised edn., Harcourt,
New York 1968); E Herman, Corpomte Co111rol. Co,porate Power(CUP, New York, 1981).
399 See, e.g., L Bebchuk and M Roe, "A Theory of Path Dependence in Corporate Ownership and Governance"

(1999) 52 Stanford Law Review 127.

• 00 See, e.g., Philip Lawton, "Berle and Means, Corporate Governance and the Chinese Family Firm" (1996)

6 Austra/ia11Jo11malofC0111orateLaw 349.
<-01 See generally J E Parkinson, Corporate Powera11dResponsibility(Clarendon Press, Oxford, 1993); LE Mitchell
(ed.), ProgressiveCo,porate Law (Westview Press, Boulder, 1995).
,o, Sec, e.g., WM Evan and R Edward Freeman, "A StakcholdcrThcoryofthe Modem Corporation: Kantian Capitalism"
in T L Beauchamp and NE Bowie (eds.). EthicalTheoryand 811siness(4th cdn. Prentice Hall, Englewood Cliffs,
1993) 75-84; LE Mitchell (ed.). ProgressiveCorpomte low (Westview Press, Boulder, 1995).
''" See MM Blair and LA Stout, "A Team Production Theory of Corporate Law" (1999) 85 VirginiaLaw Review
247; LE Mitchell, "A Critical Look at Corporate Governance" (1992) 45 VanderbiltLaw Review 1263.
'°' See, e.g., Richard Posner, Economic Analysis of law (6th edn, Aspen, New York, 2003); D A Wittman (ed.),
EconomicAnalysis of the law (Blackwell Publishing, Malden, 2003).
70 COMPANYLAWAND REGULATIONIN HONG KONG

(under the hypothetical bargaining model) that is asked in determining efficiency

is whether the law provides the rules that the parties would create for themselves if
they had perfect information.405 For instance, with respect to directors' duties owed
to creditors and wrongful or insolvent trading statutory provisions, the hypothetical
bargaining model has been applied to argue that the legal rules are inefficient.406 In other
areas, existing principles of company law have been explained and rationalised on the
basis that they do provide efficient rules. For example the doctrine of limited liability of
shareholders has been defended on the grounds of efficiency- through the lowering of
monitoring costs, the allowing of a more efficient diversification for investors thereby
lowering costs of raising capital, and through the notion that the creditors are the most
efficient risk-bearers.407 In relation to corporate governance, common law principles
of fiduciary duties imposed on directors have been explained and justified as being
required for the reduction of agency costs to ensure that the interests of management
and shareholders are aligned.408 Other areas where economic analysis has been applied
include aspects of corporate governance such as employee participation, the role of non-
executive directors, and executive remuneration; corporate finance, share buy-backs,
mandatory disclosure obligations, shareholder remedies, shareholder voting rights,
takeovers and securities markets regulation.409
1.217 Economic approach been criticised for being too narrow. Although economic
analysis has been dominant in corporate law theory, there are critics who do not accept
that the economic approach should be the sole or dominant approach in thinking about
company law. For example, some critics point out that while economic analysis can
be useful as an aid in determining, say, whether legal rules lead to greater costs than
benefits, there may be problems in over-simplification in economic analysis, and there
may well be other values that the law should promote apa11from economic values.410

Mll Frank H Easterbrook and Daniel R Fischel, Economic Structure of Corporate Law (Harvard University Press,
Cambridge, 1991) vii; Brian R Cheffins, Company law: Theo,y, Stmcture c111dOperation (Clarendon Press,
Oxford, 1997) Ch 6.
Ml• Brian R Cbeffins, Company law: Theory, Structure and Operation (Clarendon Press, Oxford, 1997) 528-553.
Ml> Frank H Easterbrook and Daniel R Fischel, "Limited Liability and the Corporation" (1985) 52 University of
Chicago law Review 89; and see also S E Woodward, "Limited Liability in the Theory of the Firm" (1985)
141 Joumal of Institutional and Theoretical Economics 60 I.
"°' See. e.g., R Cooter and B J Freedman, "The Fiduciary Relationship: Its Economic Character and Legal
Consequences" (1991) 66 New lork U11iversityLaw Review 1045; Frank H Easterbrook and Daniel R Fischel,
Eco110111ic Struc/tlre ofCo,porate Law (Harvard University Press, Cambridge, 1991) 90-93 .
..,, See generally Frank H Easterbrook and Daniel R Fischel, Economic Struc/tlre of Co,porate law (Harvard
University Press, Cambridge, 1991); Roberta Romano (ed.), Foundations of Corporate law(Oxford University
Press, New York, 1993); Brian R Cheffins, Company Law: Theo1y. Structure a11dOperatia11(Clarendon Press,
Oxford, 1997); William W Bratton (ed.), Co111orateLaw (Ashgate, Aldershot, 2000); Michael J Whincop, An
Eco11omicand .Jurisprudential Genealogy of Co,porate Law (Ashgate, Aldershot, 200 I).
410
See, e.g., R M Buxbaum, "Corporate Legitimacy, Economic Theory, and Legal Doctrine" (1984) 45 Ohio
Swte Law Journal 515; Katherine H Hall, "The Interior Design of Corporate Law: Why Theory is Vital to the
Development of Corporate Law in Australia" ( 1996) 7 Australian .Jounwl of Co,porate Law I; D Campbell,
"The Role of Monitoring and Morality in Company Law: A Criticism of the Direction of Prcsem Regulation"
(1997) 7 A11stralia11 Jo11nwl of Co,porate Law 343. D A Wishart, "Arguing Against the Economics of (Say)
Corporations Law" (2003) 26(3) UNSW law Journal 540. On general critiques of economic approaches to law,
sec, e.g., MC Nussbaum, "Flawed Foundations: The Philosophic.al Critique of(a Particular Type of) Economics"
(1997) 64 University of Chicc,go Law R,>vi,•w1197; M J Radin, "Market-Inalienability" (1987) 100 Harvard
Law Review 1849; .IM Finnis, "Allocating Risks and Suffering: Some Hidden Traps" (1990) 38 Cleveland State
law Review 193; M Horwitz, "Law and Economics: Science or Politics?" (1981) 8 Hofstra Law Review 905; J B
White, "Economics and Law: Two Cultures in Tension" ( 1987) 54 Tennessee law Review 161.
 THEORIES AND PERSPECTIVES ON COMPANYLAW 71

7.4 Critical legal theories

Limited analysis of company law using critical legal theories thus far. It has been 1.218
said that there has been little critical analysis of company law using contemporary
critical legal theories such as critical legal studies (CLS), feminist legal theory or
postmodern legal theory.411 As noted by Ireland et al.:

"Critical legal studies should be primarily concerned with exploring the ways in
which law constitutes and reinforces relations of domination and subordination in
society. It is, therefore, surprising that it has given so little attention to company
law, given that incorporated companies - now the dominant legal organisational
fonn of capital - are a major site of those relations." 412

Example of application of critical legal theory in company law context. The work 1.219
of Ireland et al., however, does provide an example 413 of the application of critical
legal theory in the company law context. In their analysis of the idea of separate legal
entity, they examine the historical and social factors which have led to the concept
of shares as an autonomous form of property and to the complete separation of the
legal personality of a company from its members. 414 According to Ireland et al., the
historical process whereby the share and the company are reified is part of the general
historical process which occurs with the development of capitalism, whereby persons
cease to relate to persons except through the ownership and exchange of things. Thus:

" ... it is the relationshipof the share (and ofloan stock) to thejoint stock company- of
object to object- which defines the basic relationshipbetween finance and production
and which thereby regulates productive activity and with it our means of existence.
People come to be mere adjuncts or agents of these objects, either as their temporary
owners or as directors, employeesor customers of the reified entity,the company."415

Ireland et al's CLS critique shows that notions of capital constructed by human 1.220
beings and capable of being changed. The reification of shares and the company and
the pre-eminence given to the claims of money capital (the company) in our existence
come to be accepted as natural and inevitable features of our everyday Jives, and any
destructive impact in the process (such as failure of a "thing", capital, in yielding
adequate profit which leads to dismissal of masses of workers and exploitation of
others) are seen to be merely part of the necessary working of the system. In adopting
a critique of company law from a CLS perspective, Ireland et al. seek to show that
existing notions of capital and the company are not inevitable and eternal but are
constructed by human beings and are accordingly capable of being changed.

411 Katherine HI Jail, "The Interior Design of Corporate Law: WhyTheory is Vital to the Developmentof Corporate
Law in Australia" (1996) 7 AL1stralic111
Jo11malofCo,porate law 1, 5.
"' Paddy Ireland,Ian Grigg-Spalland Dave Kelly,"The ConceptualFoundationsof Modern Company Law" (1987)
14 Jo11malof law a11dSociety 149, 149.
" 3 For another example, sec Harry Glasbeek, "The James Hardie Directors: A Case of Missing Directors and
Journal ofC01pora1e Law 107.
l'vlisdirectionsby Law" (2013) 28 A11stralic111
"' Paddy Ireland,Ian Grigg-Spalland Dave Kelly,"The ConceptualFoundationsofModern Company Law" (1987)
14Joumal oflawa11d Society 149.
•m Ibid., 162.
......... ••-~- .................. ••••••••- .... •••••••••UU•u••••••••••••••••••••••••••••••••••U•••H-••••••u••••••••••-•• .... ••••••••• .. •-•••••••• .. ••••••••••K-•ou•••••••• .. •••• .. •••••••••••••••••••••••••••••••••••• .. • ............... ,,,.
 CHAPTER 2

ESTABLISHMENT OF COMPANIES

PARA.

I. Incorporation by Registration ................................................................................................... 2.001

1.1 Introduction ...................................................................................................................... 2.00 I
1.2 Procedure .......................................................................................................................... 2.002
1.2.1 Articles of association ........................................................................................... 2.003
1.2.2 Incorporation form ................................................................................................ 2.0 I0
1.2.3 Electronic applications for registration ................................................................. 2.012
1.2.4 Shelf companies .................................................................................................... 2.013
1.3 Incorporation upon registration ........................................................................................ 2.015
1.4 Other requirements and formalities in connection
with the establishment of the company ............................................................................ 2.017
1.4.1 Members of the company ...................................................................................... 2.017
1.4.2 Directors of the company ...................................................................................... 2.021
1.4.3 Company secretary ............................................................................................... 2.023
1.4.4 Registered office .................................................................................................... 2.027
1.4.5 Registers to be maintained by company following incorporation ......................... 2.030
1.4.6 Common seal ......................................................................................................... 2.035
1.4.7 Business registration .............................................................................................. 2.039

2. Types of Companies ................................................................................................................. 2.040

2.1 Limited and unlimited companies .................................................................................... 2.042
2.1.1 Companies limited by shares ................................................................................. 2.044
2.1.2 Companies limited by guarantee ........................................................................... 2.045
2.1.3 Unlimited companies ............................................................................................. 2.047
2.2 Private and public companies ........................................................................................... 2.049
2.3 Change of company type ................................................................................................. 2.054
2.4 Listed and unlisted companies ........................................................................................ 2.058
2.5 Local and foreign companies ........................................................................................... 2.060
2.5.1 Distinction between local and foreign companies ................................................ 2.060
2.5.2 Ordinance applies to Hong Kong companies ........................................................ 2.061
2.5.3 Scope of application of Ordinance to Non-Hong Kong companies ...................... 2.062
2.5.4 Other provisions applicable to foreign companies ............................................... 2.070
2.6 Companies not formed but registrable under Companies Ordinance ............................... 2.076
2.6.1 General .................................................................................................................. 2.076
2.6.2 Companies eligible for registration ....................................................................... 2.077
2.6.3 Registration as which type of company? ............................................................... 2.082
2.6.4 Effect of registration .............................................................................................. 2.083

3. Company Names ..................................................................................................................... 2.084

3.1 Requirements .................................................................................................................... 2.084
3.2 Restrictions on the use of particular names or words ....................................................... 2.087
3.3 Publication ofname .......................................................................................................... 2.092
3.4 Change ofname ................................................................................................................ 2.095
74 ESTABLISHMENTOF COMPANIES

4. Promoters .................................................................................................................................
2.097
4.1 Introduction ...................................................................................................................... 2.097
4.2 Who is a "promoter"'?....................................................................................................... 2.098
4.3 Duties of promoters .......................................................................................................... 2.099
4.4 Remedies for breach of duty.............................................................................................
2.100
 1. INCORPORATION BY REGISTRATION

1.1 Introduction

Incorporation (creation of corporation) by registration. Companies are formed 2.001

under the Companies Ordinance (Cap.622) pursuant to the process ofincorporation and
registration. The term incorporation refers to the creation of a corporation. Registration
under the Ordinance is the process by which companies can be incorporated and come
into existence.

1.2 Procedure

Sign articles and deliver incorporation form and articles to Registrar. Under 2.002
the Companies Ordinance (Cap.622), the provisions on incorporation of companies
are set out in Pt.3. Section 67 of Cap.622 is the primary provision allowing for the
incorporation and registration of companies. The provision enables any one or more
persons to form an incorporated company, for a lawful purpose, 1 by signing on the
articles of association of the company and delivering to the Registrar for registration
an incorporation form and a copy of the articles. 2

1.2.1 Articles of association

Under Cap.622 single constitutional document; memorandum abolished. 2.003
Traditionally, the articles of association of a company set out the regulations governing
the internal management and administration of companies. Under the Companies
Ordinance (Cap.622), the company's constitution consists of only the articles of
association. 3 Under the predecessor Companies Ordinance a company was required
to have both a memorandum of association 4 and articles of association. 5 However,
the memorandum of association is abolished under Cap.622, such that companies no
longer need to have such a document for the company to be incorporated. 6 Abolition
of the memorandum helps simplify the incorporation process and the administration
of companies. The use of a single constitutional document (the articles) follows

Cap.622, s.67(2). Companies cannot be formed for any purpose the carrying out of which necessarily involves
an offence against the general law: R v Regisrrarof Compcmies,Exp More [ 1931) 2 KB I97. If the Registrar
is of the view that a company is not formed for a lawful purpose, the Registrar is entitled to refuse registration:
R v RegisrrarofCompcmies.Exp 8owe11(1914) 3 KB 1161, 1167. If the Registrar has registered a company that
is formed for an unlawful purpose, the court has power to make an order for the cancellation of the registration:
R v Regi.wvr of Companies,Ex pArromey General[ 199I] BCLC 476.
' These must be lodged with the registration fees as required by the Companies (Fees) Regulation.
On the corporate constitution, see further Chapter 5.
4
The memorandum being the written agreement by which the incorporators agree to establish an association in
the form of a company. The form of the memorandum of association for companies limited by shares was set
out in former Table B in Sch. I in the predecessor CO. Former Tables C, D and E previously contained the forms
respectively for companies limited by guarantee without a share capital. companies limited by guarancee and
having a share capital, and unlimited companies having a share capital.
See predecessor CO, ss.4 and 15.
• For existing companies established under the predecessor CO (or its predecessors). which would have a
memorandum of association, the provisions contained in the memorandum are now treated as being provisions
contained in the articles: Cap.622, s.98. See further Chapter 5.
76 ESTABLISHMENTOF COMPANIES

developments made overseas. For example, under the Corporations Act 2001 in
Australia, there is just the one constitutional document referred to as the constitution
of the company. In the United Kingdom, the memorandum is still required for
incorporation but it has only a limited role as being a statement that the subscribers
agree to form a company and to become members of the company.7 The memorandum
is no longer treated as a part of the company's constitution in the United Kingdom,
with the constitution now composed of only the articles of association (and certain
resolutions and agreements of the company).8
2.004 All new companies must register articles; must contain certain basic information.
All new companies being formed under Cap.622 must have registered articles of
association. 9 There is certain basic information about the company which is required
to be stated in the articles.
2.005 Compulsory provisions. The required or compulsory provisions to be included in the
articles differ to some extent depending on the type of company being formed. For the
most common type of company, companies limited by shares, the articles must state
the following:

• The company name: 10 see further para.2.084 below.

• That the liability of members is limited to any amount unpaid on the shares
held by the members: 11 on the nature of limited liability, see para.2.042 below.
• Certain information about the company's initial shareholdings (namely the
total number of shares to be issued and total share capital on the company's
formation; total paid and unpaid amounts on the shares issued on formation;
similar information as to the above for each class of shares if the company
has shares of different classes; and in respect of each founder member, 12 the
number of shares that the member is to hold upon the company's formation and
the total amount of share capital to be subscribed by the founder member.) 13

2.006 Objects clause optional unless charitable company. Before 10 February 1997,
it was compulsory for companies to have a clause in the memorandum setting
out the company's objects. 14 This was altered pursuant to amendments made to
the predecessor CO in 1997. The position now under Cap.622 is the same as the
position in the predecessor CO following the 1997 amendments in respect of
whether an objects clause is needed (although under Cap.622, any objects clause

7
Companies Act 2006 (UK) s.8.
8 Companies Act 2006 (UK) s.17.
• This can be contrasted with the position under predecessor CO where it was essentially optional for companies
limited by shares to have registered articles: predecessor CO, s.9. If the incorporators chose not to have their own
ar1iclcs rcgislcrcd under former s.15, then the regulations in former Table A in Sch. I would have applied as the
company's articles: predecessor CO, s. I I (2).
'" Cap.622, s.81.
11 Cap.622, ss.83(1) and 84(1).
12 Sec para.2.017.
" Cap.622, s.68(2) and Sch.2.
" On the significance of the objects clause, see Chapter 5.
 INCORPORATIONBY REGISTRATION 77

would be stated in the articles). For charitable and other companies which seek
to omit the word "Limited" from the company's name, 15 it is compulsory for the
company to have an objects clause. 16 For all other companies, the objects clause
is optional. 17
Capital clause no longer required. Under the predecessor CO, the memorandum 2.007
was required to contain a capital clause; but with Cap.622 abolishing the concepts
of authoiised share capital and nominal or par value of shares, such a provision is no
longer required in the constitution of new companies. 18
Company can set own regulations or rely on Model Articles. Beyond those 2.008
details which must be included in the articles (as required by Cap.622, ss.81-85), it
is up to the company whether to set out its own regulations in the registered articles
or whether to rely on the default articles, which are referred to under Cap.622 as
the model articles. 19 The model articles which can be adopted by companies are set
out in subsidiary legislation: Companies (Model Articles) Notice (Cap.622H). 20
For new companies, these model articles replace the standard articles contained in
former Sch. I to the predecessor CO (namely Table A articles etc.). The provisions
in Table A which apply to existing companies will continue to apply to such
companies unless and until they are altered by the company.21 Under the Companies
(Model Articles) Notice (Cap.622H), there are three sets of model articles: for
private companies limited by shares, public companies limited by shares and
companies limited by guarantee. The applicable model articles will apply insofar
as the company's registered articles do not exclude or modify the model articles. 22
Whether the incorporators should rely on the model articles or should draft their
own provisions will depend on whether the provisions in the model articles are
appropriate for their particular circumstances and purposes.
Other requirements in respect of articles. Articles must be in English or Chinese, 2.009
must be divided into paragraphs numbered consecutively and must be signed by each
founder member.23

1.2.2 /11corporatio11
form
Must contain name, address, founder members, details of who will become 2.010
directors and company secretary and share capital. The incorporation form is
required under Cap.622, s.67(1)(b), and must contain the infonnation as specified

" Cap.622, s. I 03.

16 Cap.622, s.82( I).
" Cap.622, s.82(2).
18
See Chapter 14.
19 Cap.622, ss.79-80.
20 Made pursuant co Cap.622, s.78.
" Cap.622. Sch. I 1, s.9.
22 Cap.622, s.80. This is similar to the position under che predecessor CO: see former s.11(2) in respecc of the
applicacion of the former Table A to companies limited by shares; and Gaima11v N(ltionalAssocit11io11for Mental
Health [I 971] Ch 317 in respect of the application of former Tables C, D or E to companies limited by guarantee
and unlimited companies.
" Cap.622, ss.67(1)(a), 76-77.
78 ESTABLISHMENT OF COMPANIES

in Sch.2 of Cap.622, including the name24 of the company and type of company,2;
address of the registered office, details of the founder members, 26 details of the
persons who will become directors 27 and the company secretary 28 upon incorporation,
and details of the share capital. The fonn is to be signed by any one of the founder
members: Cap.622, s.69. If the signatory is to be a director upon incorporation, the
signatory must also state in the form that he or she has consented to be director and
has attained the age of 18 years: Cap.622, Sch.2 Pt.3 s.4(a). The other persons who are
to be directors upon incorporation must also make a similar declaration, either in the
incorporation form itself or in a separate form to be delivered to the Registrar within
15 days of incorporation: Cap.622, s.74 and Sch.2 Pt.3, s.4(a).
2.011 Must contain statement of compliance. The incorporation form must also contain
a statement of compliance - namely a statement certifying that all the requirements
of the Ordinance in respect of the registration of the proposed company have been
complied with, and the information, statements and particulars contained in the
incorporation form are accurate and consistent with those in the company's articles:
Cap.622, s.70.

1.2.3 Electronic C1pplicC1tio11s

for registration
2.012 Can be submitted online. Since 2011, it has been possible to submit the incorporation
form and copy of the company's constitution (i.e., simply the articles under Cap.622)
online instead of submitting the documents in paper to the Companies Registry.29 The
Companies Registry has created a 24-hour e-portal on the World Wide Web (called
the "e-Registry"). 30 Submission of documents to the Registrar electronically must
be through the e-Registry. The website contains information on user registration
requirements and the requirements for electronic documents.

1.2.4 Shelf compa11ies

2.013 Can use shelf company instead of incorporating new one. Where a person wishes
to use the corporate form, the person can acquire an existing "shelf company" or
ready-made company from accountants, solicitors or other corporate service providers
instead of incorporating a new company. This scenario involves the use of a company
which the corporate service provider has already incorporated (through the normal
way, discussed above) but which is not used for any activities. Typically, the company
would be established with just a nominal amount of share capital. If a client of the
corporate service provider wishes to have a corporate vehicle to start up a business or
for any other purpose, then the corporate service provider will then simply arrange for
the following:

24
Sec para.2.084.
zs Sec para.2.040.
" Sec para.2.017.
" Sec para.2.021.
' 8 Sec para.2.023.
29 See predecessor CO, ss.346A and 3468 (repealed); and now Cap.622, s.32 .

.l-0 See http://www.eregistry.gov.hk.

 INCORPORATIONBY REGISTRATION 79

• transfer of the shares in the company to the client (or other persons who are
to become members of the company);
• appointment of new directors and a new secretary pmsuant to the client's
requirements to replace the pre-existing nominee director and secretary;
• change of the company name;
• change of registered office.

With electronic applications shelf companies might not be so important. Tnthe past, 2.014
shelf companies were often used since the process of acquiring a shelf company was
generally quicker than registering a new company. However, shelf companies might
no longer be as important in the future, as the incorporation process at the Companies
Registry has been speeded up with the introduction of electronic applications for
incorporation.

1.3 Incorporation upon registration

Registration: 4 days for print; 1 hour for online. After the required docmnents 2.015
are delivered to the Registrar, the Registrar registers the documents under Cap.622,
s.67(l)(b). Where the documents are submitted to the Companies Registry in paper
form, it takes about fom working days for registration of the new company. For
electronic applications, the registration is completed and the electronic form of the
certificate of incorporation is generally sent within one hour after online submission
of the documents required for incorporation. 31
Certificate of incorporation issued. Upon registration of the incorporation form 2.016
and the copies of the articles, the Registrar issues a certificate of incorporation under
Cap.622, s.7 I. From the date of incorporation mentioned in the certificate, the company
is formed and comes into existence: Cap.622, s.73. The certificate of incorporation is
conclusive evidence that all the requirements of the Ordinance in respect ofregistration
have been complied with and that the company is duly registered: Cap.622, s.72.

1.4 Other requirements and formalities in connection

with the establishment of the company

1.4.I Members of the company

Founder members. The first members of the company are referred to as the founder 2.017
members.32 Their details are set out in the articles of association and incorporation form,
and they become members of the company upon incorporation. Following incorporation,
share certificates should be issued to the founder members: Cap.622, s.144.

31 Companies Registry, f11corpora1io11of a local Limited Co111pany-lnforma1io11Pamphlet (February 2017).

" Prior to amendments made to the predecessor CO by the Companies (Amendment) Ordinance 2004 that
came into effe.ct on 11 July 2008, founder members were referred to in that Cap.32 as the subscribers to the
memorandum.
80 ESTABLISHMENTOF COMPANIES

2.018 One-person companies can exist. Before amendments to the predecessor CO

made by the Companies (Amendment) Ordinance 2004 that came into effect on
13 February 2004, all companies were required to have a minimum of two members. In
cases where the reality of the company was that it was a "one-man company" (in the sense
that in reality, there was only one person who contJibuted share capital to the company and
was in full control of the company), it was possible to get around the statutory restriction
by the use of nominee shareholdings. For example, the real owner of the company could
be issued with 99 shares, while one share is issued to a second member who would
hold the share as nominee or trustee for the first member. While the earlier companies
legislation envisaged the incorporated company as being an association of persons,33 the
comts accepted that the statutory requirement for a minimum number of members would
be complied with through such nominee holdings, even though the nominee shareholders
may not in substance contribute share capital to the company and may not be involved
in the company's activities in practice.34 Over time, the statutory minimum was whittled
down, and finally in 2004, the legislature in Hong Kong gave formal recognition to the
existence of one-man companies by amending former s.4 of the predecessor Cap.32 to
allow companies to be incorporated with a single member (see now Cap.622, s.67). Where
a company has only one member, the register of members must contain a statement of that
fact: Cap.622, s.629. Whether a company is a single member company for the purpose of
Cap.622, s.629 depends on the nwnber of registered members on the company's register of
members. Note the recent case of Randhawa v Twpin [2017] BCC 406 (Eng CA), where
a company with more than one registered member is not converted to a single member
company merely because a member dies or a corporate member is dissolved.
2.019 Body corporate can be member of company; but cannot be member of company
which is its holding company. A body corporate can be a member of a company.
However, subject to certain exceptions, a body corporate cannot be a member of a
company of which the body corporate is a subsidiary: Cap.622, s.113. In other words,
a body corporate cannot be a member of a company which is its holding company.
For example, if A Ltd owns I 00 per cent of the shares in B Ltd, then B Ltd cannot
be a member of A Ltd. 35 A company is a "subsidiary" of another company if the
latter is a "holding company" of the former: Cap.622, ss.13-15. A company is a
"holding company" of another company if the first-mentioned company controls the
composition of the board of directors of the latter, 36 controls more than half the voting
power of the latter. or holds more than half the issued share capital of the latter:
Cap.622, s.13(1). 37

" Under the Companies Ordinance 1865, s.6 required a minimum of seven members.
-" Salomon v Salomon & Co Ltd [ 1897) AC 22.
,s If B Ltd (the subsidiary) is also a majority shareholder of A Ltd (holding company), then the directors of A Ltd
can effectively entrench themselves in office through their control of the votes of B Ltd (as shareholder of A Ltd)
at general meetings of A Ltd. The prohibition in Cap.622, s.113 is in part intended to prevent this: Companies Law
Revision Committee, Second Report 011Compa11yU,w (April 1973) [2.45]. The other reason for the prohibition is
to prevent the capital of the holding company being indirectly depicted as the result of the purchase of its shares by
its subsidiary: ibid. The latter issue is related to the doctrine of maintenance of capital: see Chapter 15.
-"' Sec Cap.622, ss.13(3}-13(4) as to when the composition of a company's board is deemed to be controlled by
another company.
" See Cap.622, s.14 as to certain circumstances where the holding of shares or voting power is disregarded for
present purposes.
 INCORPORATIONBY REGISTRATION 81

Membership changes following transfer or transmission of shares or issue of 2.020

new shares. After the company is incorporated, the membership of a company can
change through the issue of new shares to new members or through the registration of
a transfer or transmission of shares from an existing member to someone else. 38

1.4.2 Directors of the company

Private company must have at least 1 director; public ones must have at least 2. 2.021
Private companies must have at least one director (Cap.622, s.454), while public
companies and companies limited by guarantee must have at least two directors:
Cap.622, s.453.39 The persons named as directors in the incorporation form become
the first directors of the company with effect from the date of incorporation: Cap.622,
ss.453(3) and 454(2). Subsequent to incorporation, the company can remove directors
from office or appoint new directors: see Chapter 7. There is no maximum number of
directors unless a maximum is specified in the articles.
Restrictions on who can act as director. As to restrictions on who can act as director, 2.022
see Chapter 7.

1.4.3 Company secretary

Company secretary chief administrative officer. Every company must have a 2.023
company secretary: Cap.622, s.474. The person named as company secretary in the
incorporation fonn becomes the first secretary of the company with effect from the date
of incorporation: Cap.622, s.474(2). The company secretary is the chief administrative
officer of the company and usually has functions including the following: arranging
board and shareholder meetings; maintaining registers required by the Ordinance;
filing returns and other documents with the Registrar; dealing with stock exchange
requirements; and other administrative matters.
Possible to have joint secretaries. It is possible to appoint two or more persons to act 2.024
as joint secretaries. For example, a firm that provides professional company secreta1ial
services could be appointed as secretary. Where a partnership firm is appointed, then all
the partners in the fim1 act as joint secretaries of the company: see Cap.622, ss.474(3),
650. The company secretary must ordinarily reside in Hong Kong: Cap.622, s.474(4)(a).
A body corporate can be appointed as secretary, in which case the registered office or
place of business of the body corporate must be in Hong Kong: Cap.622, s.474(4)(b).
Additional qualifications are required for the company secretary of listed companies. 40
Director can be company secretary. A director can also be appointed as company 2.025
secretary: Cap.622, s.475(1). 41 However, where a private company has only one
director, then the director cannot also be the secretary: Cap.622, s.475(2). Also, if
the private company has only one director, then the secretary cannot be a body corporate
whose sole director is the sole director of the private company: Cap.622, s.475(3).

" See Chapter 14.

39
Under predecessor CO, ss. 153, 153A, the minimum number of directors of a company limited by guarantee
depended on whether it is a private company or a public company.
•• See Chapter I6.
41 However, a provision requiring or authorising a thing to be done by or to a director and the secretary cannot be
satisfied by its being done by or to the same person acting both as director and as the secretary: Cap.622, s.479.
82 ESTABLISHMENTOF COMPANIES

2.026 Removal and appointment of new secretory. The articles will generally contain
provisions for the removal of a secretary from office and appointment of a new
secretary. For example, the model articles give the board of directors the power to
appoint and remove company secretaries. 42

1.4.4 Registered office

2.027 Must have registered office in Hong Kong. Every company must have a registered
office located in Hong Kong: Cap.622, s.658. Most of the company information is
kept at the registered office (such as the company's registers). Also, documents can be
served on a company by leaving it at or sending it by post to the registered office of
the company: Cap.622, s.827.
2.028 Upon incorporation, registered office is as stated in incorporation form. Upon
incorporation, the company's registered office is at the place stated in the incorporation
form as the registered office: Cap.622, s.658(2). If the address of the registered office
is changed, the company must give notice of the change in the specified form to the
Registrar within 15 days after the date of the change: Cap.622, s.658(3).
2.029 Service at registered office effective even if vacant or company does not learn
of it. The courts in Hong Kong have accepted that service of documents at the
registered office (as notified to, and recorded by, the Registrar) in accordance with the
Companies Ordinance will be treated as effective service, even though the registered
office is vacated or the company does not actually learn of the service. 43 Therefore,
generally speaking, a party can serve a document at the registered office as shown on
the public register, even though the company has changed its registered office but has
not notified the Registrar of the change. But where the company has lodged a notice
of change of address with the Registrar, it is not settled whether service at the old
address is effective at a time when the notice of change has already been delivered to
the Registrar but where the new address has not yet been recorded by the Registrar.44

1.4.5 Registers to be mai11tai11ed

by compa11yfo/lowi11gi11corporatio11
2.030 Registers to be maintained. The Companies Ordinance imposes certain requirements
on the company to maintain particular registers. Upon the establishment of a company,
the following registers are required: 45

• Register of members: Cap.622, s.627. This register contains details such as

the name and address 46 of members, and for companies with share capital, a

2
' Model Articles (private companies) (Cap.622H) art.33; Model Articles (public companies) (Cap.622H) art.37.
•l Ho Kwok Wah v Gmup .JewelleryAns lid [2000] 3 HKC 599; Stevenson Wongand Co v Goldfense Technology
Ltd (2007] I HKLRD 217; Wong King Fun v Keywah fnlemational lid (unrep., CA, CACY 7/2009, 27 August
2009). But, cf. Li Ngan Kwan v GM Li Hui [2007) 4 HKLRD 592.
"' Sec chc comments in G11angdo11g Corp Ho11gKong (Hofdi11gs)Ltd v Yuet Wah (Hong
/111/Trust a11df11ves1111en1
Ko11g)WahFat Ltd [1997] 2 HKLR 489.
'' Ocher registers are required in particular circumstances-register of debenture holders (sec Chapter 17); register
of charges (sec Chapter 17).
.,. It appears that the address can be a correspondence address and need not be the residential address of the member:
cf. Hemmerling v JMTC Systems(1993) 109) DLR (4th) 582 (dealing with the register of debenture holders).
 INCORPORATION BY REGISTRATION 83

statement of the shares held by each member. 47 An index of members is also

needed for companies having more than 50 members: Cap.622, s.630.
• Register of directors: Cap.622, s.641. This register contains details of the
directors, including their name, residential address48 and identity card number.
• Register of company secretaries: Cap.622, s.648. Th.is register contains
details of the company secretary (or secretaries, if there is more than one),
including their name, correspondence address 49 and identity card number.
• Register of significant controllers: Cap. 622, s.653H. This register contains
details (such as name, correspondence address and identity card number 50) of
the significant controllers of the company. 'Significant controller' is defined
in Cap.622 and includes, for example, an individual who beneficially owns
more than 25% of the shares in the company.51

Now separate register of directors and secretaries. Under the predecessor CO, there 2.031
is a single register of directors and secretaries 52 instead of separate registers, but this
is altered under Cap.622. 53
Registers can be in any form. The registers can be kept by making entiies in bound 2.032
books or by recording the matters in any other form, such as in electronic form. 54
Kept at registered office or any place in Hong Kong. Under Cap.622, the above 2.033
registers can be kept at the registered office or any place in Hong Kong.ss This marks
a change from the predecessor CO, where the registers could only be kept at the
registered office or at a place (in Hong Kong) where the work of making up the register
is done.s6 The company must notify the Registrar of the place where the registers are
kept, but there is no need to send in a notice if the register is, and has at all times been,
kept at the registered office. 57
Members and public generally have right to inspect registers. Members of 2.034
the company have a right to inspect the above registers of members, directors and

" See also Cap.622, s.629 for requirements where the company has only one member.
48 Cap.622, s.643 states that the register also needs to show details of the c-0rrespondence itddress. However, the
provision referring to correspondence address in s.643 has not commenced operation. This means that, similar to
the position under the predecessor CO, the register of directors will show the residential address of directors. On
this issue, see further Chapter I.
49 Under predecessor CO, s.158(3), the residential address is required, but this is changed to correspondence
address under Cap.622.
so Cap.622, Sch.5B s.2.
51 Cap.622, s.653A and Sch.SA s. I. The significant controllers register is a new requirement introduced by the
Companies (Amendment) Ordinance 2018 (3 of 2018) and is discussed more fully in Chapter 14.
52 Predecessor CO, s.158( I)-(3).

s, Transitional provisions deem the former Cap.32, s. 158 register to be a register of directors and a register of
company secretaries in so far as the register relate to directors and secretaries respectively: Cap.622, Sch. I I
ss.114 and 117.
" Cap.622, ss.654-656.
" Cap.622, ss.628, 641. 648 and 653M; and Company Records (Inspection and Provision of Copies) Regulation
(Cap.6221) P1.3.
6
' Predecessor CO, ss.95 and 158A.
" Cap.622. ss.628. 641, 648 and 653M.
84 ESTABLISHMENTOF COMPANIES

secretaries without charge, while other persons can inspect those registers on payment
of the specified fee.58 If the company does not allow inspection, the person seeking
inspection can apply to the court for an order compelling inspection. 59 The law gives
the public a right of inspection as it is legitimate for persons dealing with the company
to know who are the members and directors behind the corporate form. 60 The right
of inspection is not absolute though, and the court can decline to order inspection if
the purpose of the inspection is so divorced from the purposes contemplated by the
Ordinance as to amount to an abuse of the legal rights conferred under the statutory
provisions for inspection. 61 As for the significant controllers register, a different
regime for inspection applies due to the nature of the register. The rights to inspection
of the significant controllers register are restricted to persons on the register, officers
of the Companies Registry and other law enforcement officers. 62

1.4.6 Common seal

2.035 Under Cap.622 seal no longer compulsory. Under the predecessor CO, every company
must have a conunon seal.63 The seal is used to execute deeds and other documents on
behalf of the company. Under Cap.622, the common seal is no longer compulsory for
companies.64 It is optional whether a company chooses to have a seal. If the company opts
to have a seal, it must be a metallic seal on which its name is engraven in legible characters.65
As to use of the seal and execution of documents without a seal, see Chapter 12.
2.036 Official seal for use outside Hong Kong. If a company carries on business outside
Hong Kong, it would be convenient for the company to have an official branch seal
for use in the particular place instead of having to use the common seal to execute
documents. Under Cap. 622, s.125(1), a company is permitted to have an official seal
for use outside Hong Kong.66
2.037 Must be replica of common seal. Such an official seal must be a replica of the
common seal of the company, but have engraved on it the name of every place where
it is to be used: Cap.622, s.125(2).

" Cap.622, ss.631, 642 and 649.

" Company Records (Inspection and Provision of Copies) Regulation (Cap.6221) s.9.
60 See also DemocraticParty v Secreta,yfor Justice (2007) 2 HKLRD 804, at (31)-(33). Members who wish to
preserve their anonymity can appoint a nominee to be the legal owner of the shares who would hold the shares
on trust for the beneficial owner. Only the legal owner needs to be named in the register of members. However,
if a beneficial owner is a significant controller, then the beneficial owner's details may need to be included in the
significant controllers register.
61 Democmtic Party v Secretaryfor Justice (2007] 2 HKLRD 804; Lam Ki11Chung v Soka Gakkail11ternatia11al af
Hong Ko11gLtd (2017] 4 HKLRD 192. Both these cases dealt with inspection of the register of members. In the
Democmtic Pany case, the court also accepted that where the court concludes that the right of inspection is being
abused and declines to order inspection, no criminal liability will arise under former Cap.32 s.98(3) (see now
Company Records (Inspection and Provision of Copies) Regulations 7(3)) in respect of the company's refusal to
allow inspection.
62 Cap.622, ss.653\V, 653X.
63 predecessor CO, s.93(1)(b).
" Cap.622, s.124(1) .
•, Cap.622, s.125.
66 predecessor CO, s.35 restricted the circumstances where an overseas branch seal can be used (i.e. only where the
objects of the company require or comprise the transaction of business ouisidc Hong Kong; and the company's
articles authorise the use ofan official seal outside of Hong Kong). These restrictions no longer apply under the
new law in Cap.622.
 TYPES OF COMPANIES 85

Official seal for sealing share certificates. For the purposes of sealing securities 2.038
or documents creating or evidencing securities (for example share certificates), a
company may have an official seal which is a facsimile of the common seal of the
company with the addition on its face of the word "securities" or the expression in
Chinese "if'.&.3t'"
(or both): Cap.622, s.126.

1.4.7 Business registration

When company formed also necessary to apply for business registration. Every 2.039
person carrying on business in Hong Kong must be registered under the Business
Registration Ordinance (Cap.310) (BRO): BRO, s.5. A company which is incorporated
under the Companies Ordinance is deemed to be a person carrying on business,67 and this
is the case whether or not the company is in fact carrying on business. Accordingly, when
a company is formed under the Companies Ordinance, it is also necessary to apply for
business registration. Application is to be made within one month of the conunencement
ofbusiness, 68 and so for a newly incorporated company, the application needs to be made
within one month of incorporation. In 2011, amendments to the predecessor CO and
BRO came into force to allow for a "one-stop" company incorporation and business
registration service.69 Under this regime (which also applies under Cap.622), where an
incorporation fom1 is submitted under the Companies Ordinance in an application for
registration of a new company, that application is also deemed to be an application for
registration under the BRO if the requisite business registration fee and levy 70 and a notice
of election for the purposes of BRO, s.6(5C)( c)71 are delivered to the Companies Registry
together with the incorporation application: BRO, s.5A. The application for incorporation
and business registration can be made simultaneously either in paper fonn or in electronic
form. Upon approval of the application for incorporation, the Registrar of Companies
issues both the certificate of incorporation and the business registration certificate to the
company.

2. TYPES OF COMPANIES

Types of companies under Cap.622. Under Cap.622, the following types of 2.040
companies can be formed:

• public company limited by shares;

• private company limited by shares;
• public unlimited company with a share capital;

61 BRO, s.2(1 A).

6$ BRO, s.5(2).
•• Companies (Amendment) Ordinance 2010 Pts.2 and 5, and Business Registration (Amendment) Ordinance
20 I 0, both commencing 21 February 2011.
1
• BRO, Sch. I.
71
The election is for the expiry date on the business registration certificate to be three years from the date of
commencement of business. See the Commissioner of Inland Revenue's fonn IRBN I.
86 ESTABLISHMENT OF COMPANIES

• private unlimited company with a share capital;

• company limited by guarantee without share capital. 72

2.04 l Changes compared with predecessor CO. Under the predecessor CO, it was possible
to form unlimited companies without share capital. However, as there is no demand in
practice for the creation of such companies, this category of companies is abolished
under Cap.622. Companies limited by guarantee were previously catego1ised as private
or non-private companies. Under Cap.622, they are a separate type of company entirely
and are not categorised as private or public companies. The predecessor CO did not
refer to "public companies", with the relevant provisions simply refen-ing to companies
"other than a private company". However, the distinction between private and public
companies is understood in practice, and the use of the term "public company" is
adopted in Cap.622. The term "public companies" is defined in Cap.622 as companies
other than private companies and companies limited by guarantee. 73

2.1 Limited and unlimited companies

2.042 Limited by shares or guarantee, or unlimited. Companies may be formed under the
Companies Ordinance as limited by shares, by guarantee or unlimited. 74
2.043 Members' liabilities for debts limited. If a company is a limited company, the
liabilities of the members for the company's debts are limited.

2.1.1 Compa11ieslimited by shares

2.044 Liability limited to amount unpaid on shares. In the case of companies limited by
shares, the liabilities of the members are limited to the amount, if any, unpaid on the
shares held by them: Cap.622, s.8. For example, if the issue price for a share is $100,
then a shareholder who takes that share is required to contribute $ I 00 to the company
but no more. If the full amount of the $100 had been paid to the company by the
member when the share was issued, then the member is not liable to contribute further
to the company to pay the company's creditors even if the company does not have
sufficient assets to meet all its creditors' claims. If the member had only contributed
a portion of the $100 at the time of issue of the share, and the company subsequently
does not have sufficient assets to pay its creditors during a liquidation 75 of the
company, then the member can be required to pay further the amount of the balance
previously unpaid, but no more. Thus, each shareholder stands to lose a maximum of
$100 per share. Most business or trading companies are companies limited by shares.

2.1.2 Companies limited by guartmtee

2.045 Liability limited to amount members undertake to contribute in event of
winding-up. In the case of companies limited by guarantee, the liability of the
members is limited to the amount which they undertake to contribute to the assets

" Cap.622, s.66.

13 Cap.622, s.12.
" Cap.622, s.66.
" See Chapter 20.
 TYPES OF COMPANIES 87

of the company in the event of its being wound up: Cap.622, s.9. For example, if
the articles of association (or formerly the memorandum) states that the maximum
liability of the members is $500 and, if, during liquidation, the company does not
have sufficient assets to pay its creditors, then each member can be required to
contribute up to $500 each. For companies limited by guarantee, the members do
not have to pay any amount upfront, and will only be required to pay amounts in the
liquidation if the company does not have enough assets. Companies which are set up
for non-profit purposes (such as to operate a non-profit club or a charity) are often
established as companies limited by guarantee since there is no need for the company
to raise significant funds for the company's operations from its members by way of
share capital.
No longer possible to form companies limited by guarantee with share capital. 2.046
Previously, it was possible to form a company limited both by shares and by guarantee.
Former s.4 of the predecessor CO was amended, with effect from 13 February 2004,
to remove the option of forming a company limited by guarantee with share capital.
This was on the basis of the recommendation of the SCCLR, which took the view
that this category of company serves little purpose. 76 Pre-existing companies limited
by both shares and by guarantee can continue to exist though. This is the same under
Cap.622, where such pre-existing companies can continue to exist, but it is no longer
possible to form new companies limited both by shares and by guarantee.

2.1.3 Unlimited companies

No limit on liabilities of members. Jn unlimited companies, there is no limit on the 2.047
liability of members for the company's debts: Cap.622, s. l 0. Under the predecessor
CO, unlimited companies could be formed with or without share capital. As there is
no demand in practice for unlimited companies without share capital, this category of
companies is abolished and can no longer be formed under Cap.622.
Amount of shares not limit on liabilities but can help in setting out respective 2.048
entitlements. In an unlimited company, the amount of the shares would not operate
as a limit on the members' liabilities, but the use of a share capital structure could be
helpful, for example in setting the amounts of the respective entitlements of members
in the company. For obvious reasons, unlimited companies are not common. 77
However, the original companies legislation in England (the Joint Stock Companies
Registration and Regulation Act 1844) provided for the incorporation of unlimited
companies only, with limited liability not introduced until the Limited Liability Act
1855. Since the members of unlimited companies do not enjoy limited liability,
certain restrictions in the Companies Ordinance for the protection of creditors do
not apply to such companies, for example the general prohibition on return of capital
in Cap.622, s.212. 78 As discussed in Chapter 15, the maintenance of capital doctrine

76
Standing Committeeon Company Law Refonn, Report 011the Reco111111endatio11s of a Cons11/ta11cyReport of the
Reviewoftlte Ho11gKo11gCompanies Ordinance (February 2000) (5.80).
77 However,unlimited companies have been used in modern times in corporate planning for United States tax
purposes: see Re Lehman Bros hltemational (Europe) (in admin) (No 4) (2015) Ch I; I (affirmed by the Court of
Appeal in Re Lehman Bros lntematio1wl (Europe) (in admin) (No 4) (2016) Ch 50, but reversed by the Supreme
Court in Re Leitman Bros lnternatio11a/(Europe) (i11admi11)(No 4) [2017) 2 WLR 1497).
,. See Cap.622, s.209.
88 ESTABLISHMENT OF COMPANIES

generally prevents a company from returning any of the share capital to members
while the company is a going concern, in order to avoid the company's capital from
being diminished in a way that is unfair to the creditors. But, since the members of
an unlimited company are fully liable for the company's debts, the return of capital
to the members does not pose as great a problem as may be for limited liability
companies. Although the members of an unlimited company are fully liable for
the company's debts, their liability arises only if the company is wound up and the
company does not have sufficient assets to meet the claims of all the creditors. Every
member is liable for the whole of the company's debts and hence any single member
can be liable to contribute to the full amount needed; but a member who is required
to pay can seek contribution from the other members in equity. 79

2.2 Private and public companies

2.049 Private company. Section I I (I) in Cap.622 defines a "private company" 80 as a

company which by its articles:

(a) restricts the right to transfer its shares;

(b) limits the number of its members to 50 (not counting members who are
employees of the company); and
(c) prohibits any invitation to the public to subscribe for any shares or
debentures of the company.81

2.050 Restriction on right to transfer its shares. An example of the first of the above
restrictions is found in the Model Articles (piivate companies) art.2(1), which gives
the directors the power to decline to register any transfer of shares in the company.
A company might also have a pre-emption clause in the articles which would be
sufficient to satisfy s. I 1(1)(a) of Cap.622. In this context, a pre-emption clause is a
clause that confers a right of pre-emption on existing shareholders by providing that,
where a shareholder wishes to sell his or her shares, the shareholder must first offer
those shares to the other existing shareholders in the company. Under the predecessor
CO, despite the requirement for the articles of a private company to contain a
restriction on the right to transfer shares, a company without share capital can still
be categorised as a private company.82 This is no longer the position under Cap.622

"' The liability of the members of an unlimited company is in this respect similar to the liability of partners in a
partnership: see Boulter v Pep/ow (1850) 9 Common Bench Reports 493, 137 ER 984 (liabilities of partners in
an unincorporated joint stock company); and see also Re Lehman Brothers flltematio11al (Europe) (in admin)
[2015) BCC 431, (182], [232); Ronald R Forrnoy, The Historical Foundations o,(Modern Company Law (Sweet
and Maxwell, London 1923) 41; RP Austin and IM Ramsay, Ford's Principles 0JC01poro1ions law (LcxisNcxis
looselcal) [S.110.6).
80 This dcfini1ion is the same as that under predecessor CO. s.29( I).
81
In relation to invitations to the public to subscribe for shares, sec Chapter 16.
82 G Brian Parker and Martin Buckley, Buckley 011 the Companies Acts: Volume I (14th edn, Butterwor1hs. London
1981)93.
 TYPES OF COMPANIES 89

where companies limited by guarantee are a separate category of company and not
classified as private or public. 83

Public company. In Cap.622, "public company" is defined to mean a company that is 2.051
not a private company and not a company limited by guarantee. 84
Private vs public companies. Private companies are smaller companies, and often 2.052
the shareholders of the company are also the directors who manage the company.
Public companies are larger companies. These may be, but are not necessarily, listed
companies (as to which, see para.2.058 below). The great majority of companies
which are formed are private companies. 85
Certain requirements for private companies less restrictive. Many of the provisions 2.053
of the Ordinance apply to private and public companies in the same way, but sometimes
the provisions for private companies are less restrictive. For example, certain accounting
requirements need not apply to private companies,86 financial statements of a private
company need not be lodged with the Registrar87 and the restrictions on companies
granting loans to its directors are less onerous for private companies. 88 Where appropriate,
the law provides for stricter regulation of public companies as such companies have
larger operations with more funds at stake for creditors and public investors.

2.3 Change of company type

Unlimited to limited. Unlimited companies can be converted into a limited company 2.054
by re-registration pursuant to Cap.622, ss. 131-132. However, despite the conversion,
the unlimited liability of persons who were members before the re-registration is
preserved to some extent under Cap.622, s.133.
Other changes to members liability status not provided for. The Ordinance does 2.055
not have provisions allowing for the conversion of limited companies to unlimited
companies, nor for one type of limited company to be converted to another.
Private to public. A private company can change to a public company by altering 2.056
its articles 89 such that it no longer falls within the definition of "private company" in
Cap.622, s.11 and s.94. In that situation, the company must deliver a notice of change
of the company's status as a private company to the Registrar and also a copy of the
company's annual financial statements prepared for the financial year immediately
before the financial year in which the alteration takes effect: Cap.622, s.94(2). 90

u Cap.622, ss. I l(l)(b), 12(b).

"' Cap.622, s.12. See also para.2.041 above.
85 As at December 2017, 1,369,614 (98.964%) companies were registered as private companies, while 725 (0.053%)
were registered as public companies (and I 3,607 (0.983%) registered as companies limited by guarantee):
Companies Registry, "Statistics: Local Companies that has [sic] Remained Registered in the Companies Register
since 2014", http://www.cr.gov.h.k/cn/statistics/statistics_Ol_b.htm.
8• Sec Cap.622. ss.359-366 and 380 for companies falling within the reporting exemption.
37 Sec Cap.622, Sch.6.
38 See Cap.622, Pt. I I Div.2.
39 On alteration of articles, sec Chapter 5.
9<i The previous requirement in predecessor CO, s.30 for the company to register a prospectus or statement in lieu
of prospectus upon the conversion to a public company no longer applies under Cap.622.
90 ESTABLISHMENTOF COMPANIES

Where a private company still retains the provisions in its articles as required by s.11 ( 1)
of Cap.622 but acts in contravention of those provisions, the company remains a private
company. However, the company will lose some of the benefits of a private company. The
provisions in the Ordinance on financial statements 91 and directors' reports 92 apply to the
company as if it were a public company.93 Also, the annual return which the company is
required to deliver to the Registrar for registration 94 would need to contain the infonnation,
and be accompanied by the documents, that are required for a public company.95
2.057 Public to private. Public companies can convert to private companies by altering
their articles to comply with the requirements in Cap.622, s.11. Under Cap.622,
there is a new provision expressly dealing with public companies that conve11 to
private companies and also imposing an obligation to give notification of the change
to the Registrar. 96

2.4 Listed and unlisted companies

2.058 "Listed company" listed on stock exchange. The term "listed company" generally
refers to companies which are listed on the stock exchange. Section 2 of Cap.622
specifically defines "listed company" to mean a company which has any of its shares
listed on a recognised stock market (as defined in the Securities and Futures Ordinance
(Cap.571 )). At present, this refers to companies listed on the Stock Exchange of Hong
Kong. Companies which are not listed companies are referred to as unlisted companies.
2.059 Only public companies can be listed: more stringently regulated. Where companies
are listed, then any member of the public can invest in the company by acquiring the
company's shares, and the shares can be bought or sold on the stock exchange. Only
public companies can be listed in Hong Kong. 97 There are some provisions in Cap.622
which regulate listed companies more stringently in order to protect public investors. 98
Listed companies must also comply with the listing rules of the stock exchange. 99

2.5 Local and foreign companies

2.5.1 Distinction between local and foreign companies

2.060 Generally local (incorporated in HK) and foreign (established elsewhere).
Generally, local companies refer to companies formed or incorporated in Hong Kong,
while foreign companies are those which are established under a foreign jurisdiction
(for example pursuant to the companies legislation in another country). However these
are not legal tenns used in the Ordinance.

9, Cap.622, ss.380, 381.

92
Cap.622, s.388.
93 See Cap.622, ss.382, 389.

"' Pursuantto Cap.622,s.662.

•s SecCap.622,s.664(4),664(5).
96 Cap.622,s.95.
9
' SecChapter 16.
98 For example, the prohibitions on financial assisIanccare stricter in the caseor listed companies:sec Cap.622,

s.282.
99 SeeChapter 16.
 TYPES OF COMPANIES 91

2.5.2 Ordina11ce applies to Hong Kong companies

"Company" in Ordinance generally covers only local companies. Section 2 of 2.061
Cap.622 defines "company" as a company formed and registered under the present
Hong Kong Companies Ordinance (or under the earlier Companies Ordinances in
Hong Kong), and thus references to "company" in Cap.622 cover local companies
only.

2.5.3 Scope of applicatio11 of Ordina11ce to Non-Hong Kong companies

Specific provisions apply to "Non-Hong Kong companies" (foreign companies 2.062
which have established place of business in HK). Cap.622 does not generally
deal with foreign companies, but a number of specific provisions are concerned
with foreign companies which establish a place of business 100 in Hong Kong. Such
companies, which are incorporated outside Hong Kong, and which have established a
place of business in Hong Kong, are referred to as "non-Hong Kong companies" in the
Ordinance: see definition in Cap.622, s.2. 101
Establishing a place of business. The expression "establishing a place of business" is 2.063
not the same as carrying on business in the jurisdiction. The term points to the company
having a "local habitation of its own" .102 Furthermore, the word "established" connotes
not only the setting up of a place of business at a specific location, but a degree of
permanence or recognisability as being a location of the company's business. The
location must be a more or less pennanent one, not necessarily owned or leased by the
company, but at least associated with the company and from which habitually or with
some degree of regularity business is conducted. 103
"Place of business". "Place of business" is defined in CO, s.774 to include a 2.064
share transfer or share registration office. The definition specifically excludes a
local representative office established or maintained by a bank with the Monetary
Authority's approval under Banking Ordinance (Cap. l 55), s.46.
Before l 984, "place of business" was defined (in predecessor CO, s.341) in tenns which
were the same as the definition under the Companies Act 1948 (UK), s.415, namely that
a place of business "includes a share transfer or share registration office". Following
amendments made by the Companies (Amendment) Ordinance 1984, the definition
of "place of business" provided that it "includes a share transfer or share registration
office and any place used for the manufacture or warehousing of any goods, but does
not include a place not used by the company to transact any business which creates
legal obligations". Under that definition, it was held that where a foreign company
established a representative office in Hong Kong, the representative office did not
amount to a place of business in circumstances where the company carried on purely

100
Sec para.2.063 below.
1 1
• Prior to amendments to the predecessor CO which came into effect on 14 December 2007, such companies were
referred to as"oversea companies".
102
Re Y,mgKee Holdi11gslid [2014) 2 HKLRD 313, (82) (CA}; affirmed on appeal in Kam Leung Sui Kwa1111K(1111
Kwa11Lai(2015) 18 HKCFAR 501.
105
Re YungKee Holdings Ltd (2014) 2 HKLRD313, (83) (CA); affirmed on appeal in Kam Leung Sui Kwan v Ka1u
Kwan Lai (2015) 18 HKCFAR 50 I. See also Re Great Choice Co11sulta11ts
Ltd (2016) 3 HKLRD 854 (CA).
92 ESTABLISHMENT OF COMPANIES

promotional or public relations activities which did not create legal obligations in Hong
Kong: Elsinct (Asia-Pacific) Ltd v Commercial Bank of Korea Ltd. Hl4 It was accepted in
that case, however, that such a representative office can well fall within the meaning of
"place of business" under predecessor CO, s.341 before the 1984 amendments and under
the English case law.
Under the amendments to the definition of"place of business" in the predecessor Cap.32
made by the Companies (Amendment) Ordinance 2004 (effective 14 December 2007),
there is no longer a reference to the exclusion of a "place not used by the company to
transact any business which creates legal obligations". Likewise, that exclusion is also
not in the current definition in Cap.622, s.774. The removal of that exclusion means
that the wider definition similar to the English provisions and the earlier pre-1984 Hong
Kong provision now apply again in Hong Kong. 105 In Karn Leung Sui Kwan v Kam Kwan
Lai, 106 the Cowt of Final Appeal accepted that "business" is not confined to commercial
transactions or transactions which create legal obligations. The term "place of business"
com1otesa place where or from which the company either carries on or possibly intends
to carry on business.
2.065 Foreign holding company of subsidiary that has established a place of business in
Hong Kong. In the above case, the foreign company was an investment holding company
and did not carry on any business in its own right, although its subsidiary carried on
a restaurant business in Hong Kong. The holding company used certain premises in
Hong Kong to hold its board meetings; and the only matters discussed at the board
meetings were for appointments to the board and payments of dividends. The Court of
Final Appeal affirmed the lower courts' decisions 107 that these facts were insufficient
to show that the holding company established a place of business in Hong Kong. The
court held that "business" does not cover purely intemal activities, such as changes to
the composition of the board, which do not affect outsiders. Moreover, the fact that the
directors discuss the company's affairs and hold their board meetings in a particular
place is not sufficient by itself to make that place the company's "place of business". ios
At first instance, Harris J did accept, however, that in other situations involving a foreign
holding company with significant activities in Hong Kong it is possible to regard the
holding company as having established a place of business in Hong Kong: such as
where the board of the holding company regularly meets at a location in Hong Kong
to consider and decide on business matters of the corporate group, for example group
strategy, business of divisions in the group, raising debt financing, accessing capital
markets, etc. '09
2.066 Where foreign company operates only through agent in jurisdiction (as opposed
to office) critical whether agent has power to commit the company to contracts. In
England, it has been held that an import-export bank had established a place of business

,... (1994) 3 HKC 365.

,o, Lin Ming v Chen Sim Quan (No 2) [2013) 2 HKLRD 292.
10• (2015) 18 HKCFAR 501, [13).

,o, Re Yung Kee Holdings lid [2012] 6 HKC 246 (CF!); Re Yrmg Kee Holdings Ltd [2014)2 HKLRD 313 (CA).
103 Kam lermg Sui Kwan v Kam Kwan lai (2015) 18 HKCFAR 501, [13]-[14].
10• Re YrmgKee Holdings Ltd [2012) 6 HKC 246, (42). Neither the Court of Appeal nor the Court of Final Appeal

expressed any corrunents on this point on appea I.

 TYPES OF COMPANIES 93

in the United Kingdom in circumstances where it had premises and staff within the
jurisdiction, carried out preliminary work in relation to granting or obtaining loans, and
gave publicity to the foreign bank; and that this was so notwithstanding that the bank
did not conclude within the jurisdiction any banking transactions. 110 However, where
the foreign company operates only through an agent in the jurisdiction (as opposed
to having its own office), it appears that whether the agent has power to commit the
company to contracts is still critical. 111
Non-Hong Kong companies need to be registered. Non-Hong Kong companies 2.067
need to be registered 112 under Cap.622, Pt.16 (sees. 776), 113 and provisions in this Part
also lay down other requirements, such as the need to appoint an authorised person
to receive service of documents on behalf of the company (ss.776(4)(c) and 786 of
Cap.622), and the need to lodge certain returns and notices with the Registrar: see
ss.778, 789, 791, 793-795 ofCap.622.
Pts.8 and 14 of Cap.622 apply to non-HK companies. Apart from the provisions in 2.068
Pt.16, the following also apply to non-Hong Kong companies:

• Part 8, dealing with the registration of charges - for registered non-Hong

Kong companies. 114
• Part 14, dealing with members' remedies (unfair prejudice; statutory
derivative action; statutory injunction; inspection of records) - these apply
to all non-Hong Kong companies, whether or not registered. 115

Status of non-Hong Kong company after ceasing to have place of business 2.069
in HK. In Re Gen2 Partners Inc, 116 it was held that a foreign company which has
established a place of business in Hong Kong remains a "non-Hong Kong company"
within predecessor CO, s.332 even after it ceases to have a place of business in
Hong Kong. The Cap.622, s.2 definition of "non-Hong Kong company" covers
foreign companies: (a) which have established a place of business in Hong Kong
on or after the commencement of Cap.622, Pt.16 (i.e., 3 March 2014); or (b)
which established a place of business in Hong Kong before that date and continued
to have a place of business in Hong Kong at that date. Accordingly, it seems that
non-Hong Kong companies under the predecessor CO which no longer had a place
of business in Hong Kong as at 3 March 20 I4 are no longer categorised as non-

'" Soll/It flldia Shipping Co,p Ltd v Export-Import Bank of Korea [ 1985] I WLR 585.
'" Rak11se11sLtd v BaserAmbalaj Plastik Sanayi Ticaret AS [2002) I BCLC 104.
"' A non-Hong Kong company which is registered under Pt. I 6 is referred to as a "registered non-Hong Kong
company": see definition in s.2. The latter term is new and was not used in the predecessor Cap.32.
11J For the particulars to be registered, see s.776 and the Companies (Non-Hong Kong Companies) Regulation

ss.~. Previously, under the predecessor CO, non-Hong Kong companies were registered under Pt.Xl of that
Ordinance.
'" Cap.32, Pt.Ill (s.91). See Chapter 17.
"' Cap.622, s.722(1). On members' remedies, sec further Chap1er 10. The equivalent provisions in the predecessor
CO on members' remedies also applied to non-Hong Kong companies (with the provisions being applied to
·'specified corporations", defined in predecessor CO, s.2 to include non-Hong Kong companies; the term
"specified corporation" is, however, not used in Cap.622).
'" [2012) 4 HKLRD 511.
94 ESTABLISHMENT OF COMPANIES

Hong Kong companies (unless they establish a place of business in Hong Kong
again). But, pursuant to the above case, a company which established a place of
business in Hong Kong on or after 3 March 20 J4 remains one even after it ceases
to have a place of business in Hong Kong. However, where the company no longer
has a place of business in Hong Kong and gives the required notification to the
Registrar or is struck off the register, then the company is no longer a "registered
non-Hong Kong company". 117

2.5.4 Other provisions applicable to foreig11 compa11ies

2.070 Applicable whether or not have established place of business in HK. There are some
other provisions in the companies legislation which are capable of being applied to
foreign companies, whether or not they have established a place of business in Hong
Kong.
2.071 Foreign companies as unregistered companies. Certain provisions in the Companies
Ordinance (Cap.622) and the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap.32) refer to "unregistered companies". That term is defined in Cap.32,
s.326 and would cover companies incorporated outside Hong Kong, including (but not
limited to) registered non-Hong Kong companies. Provisions which apply to foreign
companies as "unregistered companies" include:

• the provisions in Cap.32, Pt.V dealing with winding-up by the court: see
Pt.X_11s

• the provisions on disqualification of directors under Cap.32, Pt.IVA

(ss.168C-168T), which apply to registered non-Hong Kong companies and
also foreign companies which have carried on business in Hong Kong: see
s.168C ofCap.32 (and see also Cap.622, s.879(6)).

2.072 Provisions on unregistered companies in Cap.622. Cap.622 also contains a

few provisions dealing with unregistered companies: s.45(2) (public inspection
of the Companies Register), and s.879 (application by Financial Secretary for a
disqualification order: see also para.2.071 above).
2.073 Schemes of arrangement. Most of the provisions on schemes of arrangement
in Cap.622, Pt.13 Div.2 cover foreign companies, by reason of the definition of
"company" in s.668(1). That definition extends to any company "liable to be wound

"' Cap.622, ss.794(3) and 798(3).

118
The court has a discretion whether to exercise its power under the Ordinanceto wind up a foreigncompany: see
generallyStocznia Gda11ska SA v Latree.ferslnc (Na 2) [2001] BCC 174; Re Sofor TouchLtd [2004] 3 HKLRD
154;Re ft!(ormatio11Security One Ltd [2007] 3 HKLRD 780; Re Beauty China Holdings Ltd [2009] 6 HKC 351;
Re Gouinghe11 Tradi11gLtd [2012] 3 HKLRD 453; Kam Leung Sui Kwa11v Kc11n Kwan Lai (2015) 18 HKCFAR
501; Re G Ltd [2016) I HKLRD 167; Re Great Choice Cons11lta11ts Ltd [2016) 3 HKLRD 854; Sha11dong
Chewning Paper Holdings Ltd vA1jowiggi11sHKK 2 Ltd (2017) 4 HKLRD 84.
 TYPES OF COMPANIES 95

up" under Cap.32. Unregistered companies are liable to be wound up under Cap.32 119
and are therefore within the Cap.622, Pt.13 Div.2 provisions. 120
Restrictions on raising funds. Also, Pt.XU of the Companies (Winding-Up and 2.074
Miscellaneous Provisions) Ordinance (Cap.32) sets out restrictions on activities
conducted in Hong Kong to raise funds (by the issue of shares or debentures) for
any company incorporated outside Hong Kong, whether or not the company has
established a place of business in Hong Kong: s.342 of Cap.32.
Foreign company: governing law determined by conflict of law rules. Apart from 2.075
the specific provisions in the legislation which are applied to foreign companies, the
law that will govem a foreign company will be detennined by the rules of private
international law (or conflict of law rules). 121 Many of the matters regulating foreign
companies will be governed by the law of the place of incorporation, even though the
company has business in Hong Kong or has Hong Kong residents as its shareholders or
directors. Hong Kong legislation regulates specific aspects of the operations of foreign
companies where there is a need to protect the interests of Hong Kong investors or
creditors, although it must be accepted that there are gaps in the level of protection
given under Hong Kong law.122 Apart from the particular provisions of the legislation
applying to foreign companies, the Listing Rules of the Hong Kong Stock Exchange
also apply to foreign companies which list in Hong Kong.

2.6 Companies not formed but registrable under Companies Ordinance

2.6.1 General
Registration of companies formed otherwise than under Cap.622 or predecessor. 2.076
Part 17 of Cap.622 allows for the registration under the Companies Ordinance of certain
companies which were formed otherwise than under Cap.622 or its predecessors. These
provisions are derived from English provisions in the Companies Act 1862. The English
provisions were originally intended to enable companies f01med under the earlier
Joint Stock Companies Acts and companies formed by letters patent or some other

'" In Re LDK Solar Co Ltd (2015) I HKLRD 458, Lam J confinned that whether or not the court would exercise its
discretion to wind up a foreign company in Hong Kong is irrelevant to the foreign company's status as a company
"liable to be wound up" under the retitled Cap.32. However, whether the court would exercise its jurisdiction to
sanction a scheme of arrangement in respect of a foreign company under Cap.622, s.6 73 depends on whether the
foreign company has a sufficient connection with Hong Kong.
12• The extended definition of"company" in s.668(1) ofCap.622 does not, however, apply to s.675. This is because
s.675 deals with reconstructions and amalgamations, and it is inappropriate for Hong Kong law to provide for
schemes of arrangement that affect the existence of a foreign company. Such matters should be left to the law
of the place of incorporation. Pt.13 Div.3 of Cap.622, on court-free amalgamations, also does not apply to
companies incorporated outside Hong Kong.
'" See generally Graeme Johnston, The Conflict '!( Laws i11Hong Kong (2nd edn, Sweet and Maxwell Asia,
Mong Kong, 2012); Sir Lawrence Collins, Dicey. Morris and Col/i11son the Co11f!icl{!/Laws ( 15th edn, Sweet and
Maxwell, London, 2012). The provisions in the Companies Ordinance expressly applying to foreign companie.s
would be treated by Hong Kong courts as mandatory or overriding statutory provisions which will apply to a
foreign company even though the applicable law under che ordinary con/lice of law rules might be a foreign law.
122 For example, the protections in Cap.622, s.468, which prohibics the exemption or indemnification of officers
for liabilities to the company, do not apply in the case of companies incorporated outside Hong Kong: sec
Re Moulin Global Eyecare Holdings Ltd v Lee Sin Mei Olivia (2009) 3 HKLRD 265 (dealing with the predecessor
CO, s.165).
96 ESTABLISHMENT OF COMPANIES

Act of Parliament (other than the Companies Act) to register as companies under the
Companies Act 1862.The provisions enabled such other companies to be brought within
the Companies Act regime.' 23

2.6.2 Companies eligible.for registration

2.077 "Eligible companies". Under Cap.622, the companies which can register pursuant
to Pt.17 are referred to as "eligible companies". Section 806(1) defines "eligible
company" to mean a company:

• formed after I May 1865 in pursuance of an Ordinance other than Cap.622

or a former Companies Ordinance; 124 or
• otherwise constituted after that date according to law.125

2.078 If have limited liability cannot be registered. However, if the members of the eligible
company have limited liability, then the company cannot be registered under Pt. l 7. 126
2.079 Part 17 does not apply to partnerships. At the time of the enactment of the original
equivalent English provisions, the term "company" was used to describe both
incorporated and unincorporated associations, 127 and so the reference to "company"
in Cap.622, s.808(1) is not necessa,ily confined to a body corporate. However, in
R v Registrar of Joint Stock Companies, Exp Johnston, 128 the English Court of Appeal
held that the provision cannot be relied upon by private partnerships to convert into
a registered company; partnerships which wish to convert to a registered company
under the Companies Ordinance would need to have a company formed and registered
under Cap.622, Pt.3 and not simply being registered under Pt.17. Such an association
entered into by private contract would not be a company "constituted ... according to
law". That phrase is confined to companies constituted in some manner analogous to
registration under statute or constituted by the intervention of the legislature or other
authority that is competent to constitute companies. Lindley LJ had also stated in the
above case that the provisions were only intended to allow registration of "companies
formed for carrying on business"; however, the other two members of the court did not
specify such a restriction. 129

"' For a situation where Pt.17 might be relied on in practice in the modern context, see para.2.08 I below.
'" "Former Companies Ordinance" refers to the Companies Ordinance 1865, Companies Ordinance I 911 and
Companies Ordinance 1932.
125Cap.622, s.806.
126Cap.622, s.808(1).
'" Sec R v Registrar of Joi111Stock Companies. Exp Jolms1011[J 891) 2 QB 598,610.
128 [1891)2 QB 598,610.
129 Also, Lindley L.Jhad made the point in the context of distinguishing between the situation of companies which
carried on business and companies which were formed purely for the purpose of registration. His Lordship was
or
emphasising that the latter is outside the scope the provisions (equivalent 10 Cap.622, Pt.17). It is not clear that
his Lordship was necessarilyconfining the provisionsonly to companies which had been formed for carrying on
business as opposed to carrying on other activities.
 TYPES OF COMPANIES 97

Part 17 does not apply to foreign companies. The provisions in Pt.17 do not apply to 2.080
foreign companies, as it could not have been the legislative intention to bring foreign
companies wholly within the purview of the local companies legislation. 130
Can register for purposes of winding-up. Registration under Pt.17 is not invalid by 2.081
reason only of it having taken place with a view to the company being wound up. 131
Accordingly, it is possible to rely on the provisions for registration in order to take
advantage of the voluntary winding-up provisions of Cap.32. 132

2.6.3 Registratio11 as which type of compa11y?

Eligible company registered as unlimited company or company limited by 2.082
guarantee.An eligible company may be registered under Pt.17 as an unlimited company
or a company limited by guarantee only.133 Under the predecessor provisions in that
Cap.32, Pt.IX (repealed), it was also possible for joint stock companies 134 established
other.vise than under the Companies Ordinance to register under predecessor CO,
Pt.IX as a company limited by shares. The provisions on registration of joint stock
companies were not reproduced in Cap.622, Pt.17 on the basis that the concept of joint
stock companies is obsolete. m Accordingly, Pt.17 no longer provides for registration
as a company limited by shares.

2.6.4 Effect of registration

Regarded as incorporated under Companies Ordinance (Cap.622); and Ordinance 2.083
applies accordingly. Upon being issued with a ce1tificate of registration, the company
is regarded as having been incorporated under the Companies Ordinance (Cap.622) as
an unlimited company or a company limited by guarantee, whichever is applicable. 136
Accordingly, the Ordinance applies to the company and its officers, members,
contributories and creditors in the same manner as if the company had been fonned
under Cap.622. 137 The Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap.32) also applies to such a company in the same way as if the company
was fom1ed and registered under Cap.622, subject, however, to provisions deeming
persons who were liable for the company's debts before registration to be contributories
for the purpose of Cap.32. 138

'-"' Bulkeley vSchutz (1869-71) LR 3 PC 764.

131 Cap.622, s.807(4).
'" The compulsory winding-up provisions can apply to "unregistered companies" and so a company need not seek
registration under Cap.622 Pt.17 to be wound up by the cowi under Cap.32. However, the voluntary winding-up
provisions only apply to companies registered under Cap.622 (or its predecessors).
113 Cap.622, s.807( I).
'" As defined in predecessor CO, s.311.
,;s See FSTB, CO Rewrite - Draji Companies Bill First Phase Consultation: Consultation Paper (December
2009) 138-139. Companies limited by shares under the Companies Ordinance could be regarded as "joint stock
companies" bUl companies rormcd under the Companies Ordinance arc outside the scope of Cap.622, Pi.17.
It appears that there are no other incorporated joint stock companies in existence in Hong Kong: FSTB, CO
Rewrite - Draft Comptmies Bill First Plwse Co11sultatio11: Co11sulta1io11
Paper (December 2009) 139. Nor doe.s
it appear that there would be any unincorporated joint stock companies now in existence.
136 Cap.622, s.814( I).
u7 Cap.622,s.818(1).
"8 See retitled Cap.32, ss.308 and 308A (as amended by Cap.622, Sch.9 ss.112 and 113).
98 ESTABLISHMENT OF COMPANIES

3. COMPANY NAMES

3.1 Requirements

2.084 Can be English and/or Chinese. It is implicit from Cap.622, s. l 02 that the company
name can be in English or in Chinese. Also, a company may have both an English
and Chinese name (s.102(c) ofCap.622). An example is the name shown in the first
clause in predecessor Cap.32 Table B-"The Kwun Tong Electronics Manufacturing
Company Limited (ll,#l!f'ij-y~~~1H~ 0ii'.l)".139 The Registrar of Companies
takes the view that the name cannot be a combination of English words or letters and
Chinese characters, 140 in a manner different from the type of translation exemplified
in the above example. For example, the Registrar would not accept for registration a
name such as "The ll'Jl!/lll~-=fManufacturing Company Limited".
2.085 Limited companies must have word "Limited". Subject to the exception in Cap.622,
s. 103, all limited companies must have the word "Limited" as the last word of the
company's English name, and "1'::i~ii~ii'.l"as the last four characters in the Chinese
name: Cap.622, s. l 02. This requirement is imposed so that persons dealing with
the company would know that they are dealing with a limited company where the
members' liabilities for the company's debts would be limited.
2.086 When limited company might be allowed not to have "Limited". Under s.103, the
Registrar may allow a limited company not to have "Limited" or "~~i0ii'.l" in its
name if:

• the company is formed for promoting commerce, art, science, religion,

charity or any other useful object;
• the profits or other income of the company are to be applied in promoting
its objects; and
• dividends are not to be paid to the company's members.

Those objects and requirements should be stated in the company's articles of

association. 141

3.2 Restrictions on the use of particular names or words

2.087 Existing names cannot be used. Cap 622, s.100 prohibits the use of certain names,
for example existing names in the Registrar's index of company names. In determining

139 UnderCap.622,thereare no equivalentsof the formsof the memorandumof associationin predecessor Cap.32
Sch. I Tables B to E.
"" Companies Registry, Guideline 011Registratio11 ofCompcmy Namesfor Ho11gKong Companies (2014), para.[3].
These arc sometimes referred to as "hybrid names".
141
Companies dispensing with the word "Limited" in their name must have a clause in its articles setting out the
company's objects: Cap.622, s.82(1). A limited company that was formed with "Limited" in its name can also
subsequently seek to dispense with the word "Limited" in its name: Cap.622, ss.103(3}-103(4). For the mancrs
that the Registrnr will take into account in detennining applications, see Companies Registry, G11ida11ce
Notes:
Applicationfor a Licence to Dispense with the l·flord"limited'' in the Name of a Company (2014).
 COMPANYNAMES 99

whether a proposed name is the same as an existing one, certain variations are to be
disregarded, as set out in Cap.622, s. l l l .142 For example, "The Far East Trading Co
Ltd" will be regarded as the same as "FE Trading Company Limited": see ss.111(4),
l l 1(6)(c) ofCap.622. A company name search should be conducted at the Companies
Registry before seeking registration of the company. 143
Consent required for name giving impression of connection with government. 2.088
Unless the Registrar has given consent, it is not possible to use a name which gives the
impression that the company is connected with the Hong Kong Government or with
the Central People's Government: 144 Cap.622, s. l 00(2). The Registrar's consent is also
required to include, in a name, words specified by order made under Cap.622, s. l Ol.
The Companies (Words and Expressions in Company Names) Order (Cap.622A) has
been made under s.101. The Order specifies both English and Chinese words. The
English words specified are chamber of commerce, kaifong, levy, savings, tourism
board, tourist association, trust and trustee.
Registration docs not mean name acceptable: when can give direction to change 2.089
name. To facilitate a quicker process of incorporation, the Companies Registry allows
registration of a name in the application for incorporation if the name is not identical
with one contained in the Index of Company Names 145 and does not contain the
words restricted under the Companies (Words and Expressions in Company Names)
Order (Cap.622A). However, registration does not mean that the name is necessarily
unobjectionable. The Registrar can give a direction to a company to change its name 146
in any of the following circumstances: 147

• Where the name is the same as or is "too like" 148 an existing name in the Index
of Company Names or an existing name of a body corporate established
under another Ordinance. 149
• Where misleading information had been given for the company's registration
by the name. 150
• Where any undertaking or assurance given for the registration by the name
has not been fulfilled. 151

142 Predecessor CO, s.20(3).

'" Searches can be conducted at the Companies Registry's Public Search Centre at 13th floor, Queensway
Government Offices, 66 Queensway Hong Kong; or alternatively electronic searches can also be undertaken
through the world wide web - Companies Registry's Cyber Search Centre (http://www.icris.cr.gov.hk).
'"' Article 85 of the Constitution of the People's Republic of China provides that the State Council is the the Central
People's Government, being the executive body of the highest organ of state power and the highest organ of state
administration. The State Council is composed of the persons referred to in art.86.
"5 Kept by the Registrar under Cap.622, s.30.
'"' The company will need to effect the change of name pursuant to the ordinary procedure for change of name: see
para.2.095 below.
"' Sec Cap.622, ss. I 08 and I 09.
"8 For the factors taken into accoum by the Registrar when determining whether names arc "too like" each other,
see Companies Registry, Guideline011 RegistrationoJCompcmyNamesfor Hong Kong Companies(2014).
"9 The direction can only be given within 12 months afccr the date of the registration of the name: Cap.622,
s 108(3)(a).
,,-0 The direction can be given within five years after the date of the registration of the name: Cap.622, s. I 08(3)(b).
'" The direction can be given within five years after the dace of the registration of the name: Cap.622, s. I08(3)(b).
100 ESTABLISHMENTOF COMPANIES

• Where the name is one which is not permitted by Cap.622, s.100(2). 152
• Where the court has made an order restraining the company from using
the name. This provision was enacted to deal with the problem of "shadow
companies", that is companies incorporated in Hong Kong with names which
are similar to trademarks or trade names of other established businesses
(often, for the purposes of manufacture of counterfeit goods)Y 3 Jfthe court
has ordered the company not to continue infringement of the trademark
(for example in an action brought by the owner of the trademark), then the
Registrar can require the company to change its name.
• Where the name gives so misleading an indication of the nature of the
company's activities as to be likely to cause harm to the public. A case on
an equivalent provision in the United Kingdom is Re Association of Certified
Public Accountants of Britain. 154 In that case, the applicant company was
called The Association of Certified Public Accountants of Britain. The
company applied to the court to set aside the direction of the Secretary of
State for Trade and Industry to change the company's name. The company
was set up to provide a professional association for accountants engaged in
public practice. The association's membership, however, was mainly drawn
from people offering straightforward services who did not have formal
accountancy qualifications. The court dismissed the application, holding that
the public could be misled into believing that the members of the association
were professionally qualified as was suggested by the name of the company.
Members of the public were therefore likely to be willing to pay more money
to a person with such an appellation. This would result in the misleading
name costing the public money and thereby likely to cause harm.
• Where the name is not permitted under Cap.622, ss. 100(l )( c) or 100( 1)(d)
(that is where the use of the name would constitute a criminal offence or
where the name is offensive or otherwise contrary to the public interest).

2.090 Right of appeal. A company to which the Registrar has given a direction under the
last t\vo of the above categories 155 has a right of appeal to the Administrative Appeals
Board against the direction: Cap.622, s.109(3). 156
2.091 Registrar replacing name when company failed to do so. Where a company has
been directed by the Registrar to change its name but has failed to do so within the
required period, the Registrar can replace the name on the register with the words

''' The direction can only be given within three months after the date of the registration of the name: Cap.622,
s. 108(3)(c).
'' 3 See Cap.622, s.108(2); Financial Services and Treasury Bureau, legislarive Co1111cil Brief - Compa11ies
(Ame11dme111) Bill 2009 (C2/1/72(2009)), para.[4); and sec also Hirachi Ltd v Hricahi H'E,iChu (Ho11gKo11g)Ltd
[2007) 4 HKLRD 431; PowerDekor (Ho11gKo11g)ltdv Power Dekor Group Co Ltd [2014) I HKLRD 845.
IS-, [ 1998) I WLR 164.

"' As set out in Cap.622, s.109.

,,. The Administrative Appeals Board (AAB) is established under the Administrative Appeals Board Ordinance
(Cap.442): see further http://www.admwing.gov.hk/eng/links/aab.htrn.Under the predecessor CO, s.22A(IA),
the right of appeal was to the court instead of the AAS.
 COMPANY NAMES 101

"Company Registration Number" as its prefix, followed by the registration number of

the company as stated in the certificate of incorporation: Cap.622 s.110.

3.3 Publication of name

Outside office, letters, etc. Every company is required to paint or affix its name 2.092
outside the office or place in which its business is carried on. 157 The name must
also be mentioned in all business letters of the company, contracts, cheques,
orders for goods, and other specified documents, as well as on any website of
the company. 158 Where a company is registered with both an English and Chinese
name, it is sufficient for the company to display or state either the English or
Chinese name. 159
State liability status of members. While a company with approval under s. l 03 2.093
of Cap.622 can dispense with the word "Limited" in its name, the company must
state that it is a company incorporated with limited liability in the aforementioned
documents of the company: Companies (Disclosure of Company Name and Liability
Status) Regulation (Cap.622B), s.5( I). Unlimited companies must also state in those
documents that the company is incorporated without limited liability: Companies
(Disclosure of Company Name and Liability Status) Regulation (Cap.622B), s.5(2).
Certain abbreviations. In stating the name of a company for any purpose, it is 2.094
possible to use certain abbreviations for certain words in the name (for example "Co"
instead of"Company", or "Ltd" for "Limited) and vice versa: Companies (Disclosure
of Company Name and Liability Status) Regulation, s.6.

3.4 Change of name

By special resolution. A company can change its name by passing a special resolution 2.095
of its members in general meeting: Cap.622, s. l 07. The company must notify the
Registrar of the change within 15 days of passing the resolution: Cap.622, s.107(2).
The restrictions on the possible names that can be used, discussed above, also apply
where a company proposes to change its name.
Does not affect legal status. The change does not affect the legal status or existence 2.096
of the company. Thus, the change of name does not affect any rights or obligations
of the company or render defective any legal proceedings by or against it; and any
legal proceedings that could have been commenced or continued by or against it by
its former name may be commenced or continued by or against it by its new name. 160

15' Sec Companies (Disclosure of Company Name and Liability Status) Regulation (Cap.6228), s.3.
158 Companies (Disclosure of Company Name and Liability Status) (Cap.6228) Regulation, ss.2 and 4. The
requirement for disclosure on the company's website is a new requirement introduced under the regulations
made under Cap.622.
"9 Companies Registry, External Circular No.1312014: Companies (Disclosure of Company Name and liability
Status) Regulation (Cap.622B)-Disclos11re of Company Name (July 2014).
160 Cap.622.s. l 07(5).
102 ESTABLISHMENT OF COMPANIES

4. PROMOTERS
4.1 Introduction

2.097 Duties imposed on promoters (person responsible for setting up company).

Apart from procedural requirements imposed by the Companies Ordinance in
connection with the incorporation of a company, the common law imposes certain
duties on those persons (referred to as promoters) responsible for setting up the
company and its business. Duties are imposed on promoters in order to protect the
company and its investors. The case of Erlanger v New Sombrero Phosphate Co 161
illustrates the possibility of promoters abusing their position to make a gain for
themselves at the expense of the company. In that case, Erlanger and other members
of a syndicate acquired the lease of a small island in the West Indies for £55,000.
Shortly after the acquisition of the lease, the syndicate established a company for
the purpose of purchasing the lease from the syndicate. Using the name of Evans
(who was an associate of Erlanger) as vendor, the lease was sold to the company
for£ 110,000. Although the lease was approved by the board of directors, most of
the directors were associates of the syndicate, and those who were independent
directors were not given information as to the original price for which the lease
was acquired, nor that the real vendors were the promoters of the company. Quite
a number of outside investors had invested money in the company as shareholders.
After the shareholders' subsequent investigation of the contract, the company
decided to bring proceedings against the syndicate. The House of Lords held that
the members of the syndicate were fiduciaries vis-a-vis the company and that
they had abused their position to benefit themselves. The sale of the lease to the
company at an inflated price was clearly disadvantageous to the company, but the
promoters had effectively procured the company's assent to the transaction through
their appointment of non-independent directors. Using their position of power
vis-a-vis the company, the promoters prevented the company from exercising a fair
and independent judgment upon the subject of the purchase, thereby causing loss
to the company (ultimately to the disadvantage of the shareholders).

4.2 Who is a "promoter"?

2.098 Person who undertakes to form company, to set it going, and who takes necessary
steps. Identification of whether a person is a promoter of a company is important
in determining whether the person is under fiduciary duties owed to the company
in connection with the establishment of a company or the raising of finance for the
company. The Ordinance does not provide a general definition of promoter, 162 and
so it is necessary to ascertain the meaning from the common law. It has been said
that a promoter is a person who "undertakes to form a company with reference to a

161
(1878) 3 App Cas 1218.
"' There is a staltllory definition of promoter in Companie.s (Winding-Up and Miscellaneous Provisions) Ordinance
Cap.32, s.40(5) but that definition is narrower than the common law meaning of promoter and only applies for
the purposes of statutory liability for misstatements in the prospectus under s.40 of Cap.32.
 PROMOTERS 103

given project and to set it going, and who takes the necessary steps to accomplish that
purpose": Twycross v Grant. 163In that case, the persons who framed the scheme for the
company, found the directors for the company, prepared the prospectus, paid for the
printing and advertising of the prospectus, and the expenses incidental for bringing the
undertaking into existence were held to be promoters of the company. In Emma Silver
Mining Co Ltd v Lewis and Son, 164 Lindley J stated that "the term 'promoter' involves
the idea of exertion for the purpose of getting up and starting a company". Promoters
include not only those who take an active part in the formation of the company, but
also those who leave it to others to get up the company upon the understanding that
they also will profit from the operation. 165 Moreover, where a company is already
incorporated, persons who are involved in helping raise the necessary capital to enable
the company to carry on its business could also be regarded as promoters. 166 Persons
such as accountants or lawyers who assist in the incorporation or the fundraising purely
in their professional capacities would not be regarded as promoters, 167 but merchant
banks which act as sponsors in the public flotation of a company would likely be
regarded as promoters. 168 The promoters could themselves become initial directors or
shareholders of the company, although they need not be.

4.3 Duties of promoters

Fiduciary duties: must not profit without disclosure. As fiduciaries, promoters 2.099
must not profit from their position without disclosure of their interests in
transactions with the company. 169 Disclosure could be made to an independent board
of directors who may assent to or ratify the transaction with the promoter. 170 Where
there is no independent board formed, then disclosure to the initial members may be
sufficient. 171 Where it is intended that funds for the company would be raised from
members of the public, then there should also be disclosure to possible investors by
setting out the details in the prospectus. 172 For disclosure to be effective to avoid a
breach of duty, there must be full disclosure of all material facts, as emphasised by
the House of Lords in Gluckstein v Barnes. 113 In that case, a syndicate acquired a
property, owned by a company in liquidation ("National Agricultural") and which
was subject to certain mortgages, for the purpose of re-sale to a new company
which the promoters were to set up. The syndicate acquired the property in two
stages. First, they purchased the mortgages from the mortgagees at a price below

163 ( 1876-77) LR 2 CPD, 469, 541.

1.. ( 1879) 2 CPD 396.
165
Tracy v Mandalay Pty Ltd ( 1953) 88 CLR 215; Emma Silver Mining Co Ltd v lewis and Son (I 879) 2 CPD 396.
166 Tracy v Mandalay Pty Ltd (I 953) 88 CLR 2 I 5; Emma Silver Mining Co Ltd v lewis and Son (1879) 2 CPD 396;

Lagunas Nitrate Co v Lagunas Syndicate [ 1899) 2 Ch 392, 428.

°'
1
Re Great Wheat Polgooth Co (1883) 53 LJ Ch 42.
168 There does not appear to be any authority directly on point, but sponsors are arguably promotersunder the above
general principles. On sponsors sec further para.16.048.
1
" Erlanger v New Sombrero Phosphate Co ( 1878) 3 App Cas 1218; Gluckstein v Bomes [ I 900) AC 240.
1
1'l Erlanger v New Sombrero Phosphate Co ( 1878) 3 App Cas 1218; Gluckstein v Domes [ I 900) AC 240.
171
Re Ambrose lake Tin and Copper Mining Co (I 880) 14 Ch D 390; Salomon vA Salomon and Co Ltd [I 897) AC
22; Lagunas Nitrate Co v Lagunas Syndicate [ 1899) 2 Ch 392.
"' Gluckstein v Sames [ I 900) AC 240.
173 [ 1900) AC 240.
104 ESTABLISHMENT OF COMPANIES

the amount of the loans owed by National Agricultural and which were secured
by the mortgages. 174 Secondly, the syndicate purchased the freehold title to the
property for £140,000. This amount was more than enough to allow the liquidator
to pay the full amounts owed by National Agricultural which were secured by the
mortgages and now payable to the syndicate. As a result of these transactions, the
syndicate obtained a profit of £20,000. Within a couple of months from the time of
purchase of the mortgages, the syndicate established a new company and sold the
property, which was now free of the mortgages, to the company for £180,000. In the
prospectus issued to potential investors in the company, the syndicate disclosed the
two amounts of £140,000 and £180,000, but not the other profit of £20,000. The
House of Lords held that the members of the syndicate breached their fiduciary
duty as promoters by failing to disclose the full profits which they obtained from the
transaction. The purchase of the mortgages was effected by the promoters in order
to sell the unencumbered property to the company and could not be regarded as an
independent or unrelated transaction in circumstances where the syndicate's gain on
the mortgages was, in substance, ultimately paid for by the company.

4.4 Remedies for breach of duty

2.100 Rescission. Rescission is the primary remedy for the company where promoters
have breached their duty by failing to disclose their interests in transactions with the
company - that is, the transaction is voidable at the election of the company. 175
2.101 Account of profits.The remedy ofaccount of profits may also be available to the company,
under which the promoter is required to disgorge the amount of secret profits made in
breach of fiduciary duty. For example, in Gluckstein v Barnes, 176 discussed above, the
promoters were required to pay to the company the £20,000 profit that was not disclosed.
This remedy can be important particularly if the company has affirmed the transaction
or the right to rescind is otherwise lost. Where the promoter had sold the property to the
company for an undisclosed profit, the remedy of account of profits is available only if
it can be said that the promoter had acquired the property as trustee for the company or
that the promoter was in a fiduciary position towards the company at the time when the
promoter originally acquired the property. This issue depends on the question of when
the promotion began. In Re Cape Breton, 177a company was established to acquire some
coal areas in which one of the promoters of the company was beneficially interested. The
English Court of Appeal held that, while the promoter was in breach of fiduciary duty
for non-disclosme of his interests in the transaction, the remedy of account of profits
was not available. This was because, at the time when the promoter originally purchased
the coal areas (over two years before the establishment of the company), the property
was acquired for the promoter's own account and the promoter could not be regarded

'" No doubt the mortgagees considered that the sale of the property would not raise sufficient funds to discharge the
full liabilities secured by the mortgages.
"' Erlanger v New SombreroPhosphateCo ( 1878) 3 App Cas 1218.
"• ( 1900) AC 240.
"' (1885) 29 Ch D 795.
 PROMOTERS 105

as a trustee or fiduciary vis-a-vis the company at the time of purchase. 178 In borderline
cases, it may be difficult to detennine whether the person was already a promoter of
the company at the time of the original purchase of the property. In Erlanger v New
Sombrero Phosphate Co, 119 the House of Lords seemed to accept that, at the time when
the syndicate acquired the lease, it was likely that the members of the syndicate already
had the intention of getting up a company which should buy it from them at an increased
price. But the Law Lords considered that the syndicate did not acquire the lease as
trustees nor were they fiduciaries towards the company at the time of the acquisition of
the lease ( and hence the remedy of account of profits would not have been available).
However, as a matter of p1inciple, if the evidence supports a finding that the persons
acquired property with an intention to resell it to a company which they propose to form,
then the acquisition of the property must be regarded as being part of the promotion of
the company, and the persons would be promoters and hence fiduciaries at that time.
This approach was applied by the House of Lords in the later decision of Gluckstein
v Barnes. 180 Also, where the promoter seeks to use funds of the company to discharge
the payment obligations of the promoter under the original contract for purchase by the
promoter, then it is likely that the property would be regarded as having been acquired
by the promoter as trustee or fiduciary for the company. 181
Other grounds for compensation. There could also be other grounds for obtaining 2.102
compensation from the promoter, depending on the circumstances. 182 For example, if
there has been a negligent or fraudulent misrepresentation by the promoter inducing
the company to contract, then damages may be available under the common law in the
tort of negligence or tort of deceit respectively. '83

"' Where the promoters acquired the property before the commencement of the promotion, the courts refrain from
allowing the remedy of an account of profits on the basis that they would not re-write the contract between the
promoters and the company, and moreover, it is difficult for the court to account for accretions to value in the
asset arising before and after promotion commenced.
'"' (1878)3AppCas 1218.
' 80 (1900] AC 240. See, in particular, thcjudgment of Lord Robercson.
' 8 ' Re Olympia Ltd; Gluckstein v Bomes (1898] 2 Ch 153, Eng CA. This point was not discussed in the judgment of
the House of Lords which affirmed the Courl of Appeal's decision.
' 82 Sec also Mathew D J Conaglen, "Equitable Compensation for Breach of Fiduciary Dealing Rules" (2003) 119
LQR 246 as to the possibility of obtaining equitable compensation instead of an account of profits.
' 8' Re Leeds and Hanley Theatres of VarietiesLtd (1902) 2 Ch 809, Eng CA.
 CHAPTER 3

CORPORATE PERSONALITY

PARA.

I. Doctrine of Separate Legal Entity ............................................................................................ 3.001

1.1 General .............................................................................................................................. 3.00 I
1.2 Company's rights and powers ............................................................................................ 3.004
1.3 Company's obligations and liabilities .............................................................................. 3.008
2. Liability of Members ................................................................................................................ 3.009
3. Liability of Officers and Employees ......................................................................................... 3.013
4. Rationales for the Separate Entity and Limited Liability Doctrines ......................................... 3.016
5. Theories on the Nature of Corporate Personality ..................................................................... 3.022
6. Piercing the Corporate Veil ....................................................................................................... 3.023
6.1 General .............................................................................................................................. 3.023
6.2 Conunon law ..................................................................................................................... 3.025
6.2.1 Company as a "111erefa9ade"-abuse of the corporate form .............................. 3.026
6.2.2 Evasion of existing legal obligations ..................................................................... 3.041
6.2.3 Fraud or other illegality ......................................................................................... 3.056
6.2.4 Agency ................................................................................................................... 3.062
6.2.5 Concealment scenarios .......................................................................................... 3.067
6.2.6 Corporate groups .................................................................................................... 3.077
6.3 Statute ............................................................................................................................... 3.083
 1. DOCTRINE OF SEPARATE LEGAL ENTITY

1.1 General

Company is a legal person different from its members. The doctrine of separate legal 3.001
entity of a company constitutes one of the major conceptual foundations of company
law. The powers and liabilities ofa company and the rights of members, creditors and
others dealing with a company are in fundamental respects determined by the separate
entity doctrine. Under this doctrine, the company is a different person altogether from
the members of the company. 1 The company itself is a legal person. 2 As a legal entity
separate from its members, the company has its own rights and liabilities which are not
regarded as the rights or liabilities of its members (nor of the company's directors). In
earlier times, the company was not viewed in this way, as the company was seen as an
entity identifiable with the members who, together, constitute the company. 3 However,
this conception of the company had altered over time, and by the middle of the 19th
century, there was clear recognition that the company was a separate legal person
independent of the company's members. 4
Salomon v Salomon. The House of Lords' decision in Salomon v Salomon and Co 3.002
Ltd 5 is today regarded as the leading decision affinning the separate entity doctrine.
The significance of the decision at the time, however, was the confirmation of the
possibility for small businesses to take advantage of the benefits of incorporation under
the companies' legislation that was originally created to facilitate fundraising for public
companies. 6 The case concerned a Mr Salomon who originally operated his boot-making
business as a sole proprietor. To extend his business and make provision for his family, he
sold his business to a new company which he incorporated. At the time, the companies'
legislation required a minimum of seven members, and the company was incorporated
with Salomon and his family members as the seven subscribers, each subscribing for
one share of par value 7 of £1. The purchase price received by Salomon for the sale of the
business consisted of £1,000 cash, £20,000 fully paid shares, and £10,000 debentures
secured by a floating charge over the whole of the company's assets.8 Subsequently,
when the company entered into financial difficulties as a result of a depression in the

' St,lomon II A Salomo11and Co Ltd [ 1897) AC 22, 51, per Lord Macnaghten.
See the definition of "person" in Interpretation and General Clauses Ordinance (Cap. I) s.3.
3 See Paddy Ireland, Ian Grigg-Spall and Dave Kelly, 'The Conceptual Foundations of Modern Company
Law" (1987) 14 Jo,mwl of U/\V and Society 149; Paddy Ireland, "Capitalism without the Capitalist: the Joint
Stock Company Share and the Emergence of the Modem Doctrine of Separate Corporate Personality" (1996)
17 Journal a( legal History 41.
' Foranearlycase,seeR vArnaud(l846) I 15 ER 1485.
5 [ 1897] AC 22.
6 Paddy Ireland, "The Rise of the Limited Liability Company" (1984) 12 flltemational .Joumal 41/re Sociology of
law 239, 249-255.
' The concept of par value ornominal value of shares is now abolished in Hong Kong: see Chapter 14.
8 That is, a further 20,000 shares were issued to Salomon, with the assets transferred 10 the company in the sale of
che business being used as consideration paid to the company for the shares. The issue of che debentures meant
chat Salomon effectively provided a £10,000 loan to the company, but again Salomon did not advance cash to the
company in the amount of £10,000. The issue of the debentures as part of the purchase price for the business was
equivalent to a situation where the c-Ompanypaid £10,000 to Salomon as part of the purchase price, with Salomon
immediately lending that sum back to the company in return for the issue of the debentures.
110 CORPORATE PERSONALITY

boot and shoe trade, a Mr Broderip agreed to advance £5,000 to the company in return
for Salomon transferring his secured debentures to Broderip. The company's fortunes
could not be saved though, and the company entered into liquidation. As Broderip had a
charge over the company's assets, he was entitled to payment first before the unsecured
trade creditors. As the company did not have sufficient assets, the unsecured creditors
would receive nothing in the liquidation.
The liquidator sought to set aside the transfer of the business from Salomon to the
company and to have the debentures declared invalid. The liquidator's initial claims
failed because no fraud was shown in relation to the transfer of the business and the
issue of the debentures and so there was no basis for disputing the validity of those
transactions. However, at first instance, the court held that the company was entitled
to an indemnity against Salomon for the company's liabilities. The court held that the
company was simply an agent of Salomon because the other shareholders were mere
nominees ofSalomon. 9 Jn substance, the business was still Salomon's, and the company
was just a mere alias of Salomon. The Court of Appeal upheld Salomon's liabilities, but
on the basis that the company was trustee for the shareholders. The Court of Appeal
took the view that by requiring seven subscribers, the legislation envisaged a number
of investors genuinely coming together to form a company. Thus, where Salomon used
nominees to fill up the required numbers, he was attempting to do what the legislature
intended not to be done. Accordingly, Salomon would be liable for the company's debts.
On further appeal, the House of Lords unanimously held in favour of Salomon. Lord
Macnaghten noted:

"The company is at law a different person altogether from the subscribers to

the memorandum; and, though it may be that after incorporation the business
is precisely the same as it was before, and the same persons are managers,
and the same hands receive the profits, the company is not in law the agent
of the subscribers or trustee for them. Nor are the subscribers as members
liable, in any shape or form, except to the extent and in the manner provided
by the Act." 10

3.003 Company different person even if effectively operated by one person. This is so,
even if there is a controlling shareholder (with the others as nominees) and even if
the company is effectively operated by a single person. The House of Lords rejected
the view that the companies' legislation was not intended for smal1 businesses. The
Law Lords emphasised that there was nothing in the legislation requiring that the
subscribers be independent from each other, and there were no requirements for
subscribers to inject any minimum amount of capital beyond that needed to take up
one share. The view that the company was simply an alias of Salomon or was a myth or
fiction was firmly rejected. Once the formal requirements for incorporation under the
legislation are complied with, then the company is legally incorporated and has a legal

9 A shareholderis regardedas a nominee for another where the shareholderholds the legal title cothe shareson
trust for the other (who is the beneficial owner).
16 (1897) AC 22, 51.
 DOCTRINE OF SEPARATELEGAL ENTITY 111

existence of its own, and with rights and liabilities of its own. Accordingly, Salomon
was held not to have been liable for the debts of the company.

1.2 Company's rights and powers

Company has capacity of natural person. A company has the capacity, rights, powers 3.004
and privileges of a natural person. 11 Being a separate legal entity, the company can
enter into contracts. Moreover, the separate entity doctrine means that the company can
contract with its own members. For example, in the Salomon decision, Mr Salomon
contracted with the company (controlled by him) in the sale of his business to the
company. The principle is also illustrated by Lee v Lee~-Air Farming Ltd. 12 Here, a
Mr Lee was the controlling shareholder of a company he set up and was the company's
governing director. Lee also worked as a chief pilot for the company's business
operations and was paid wages for doing so. While piloting an aircraft for the company,
the aircraft crashed and Lee was killed. Lee's wife sought to recover against the company
on the basis of the company's statutory liability to pay compensation to its workers
who suffered personal injury by accident in the course of employment. The issue was
whether Lee was a "worker" within the meaning of the statute. The Privy Council (on
appeal from the New Zealand Court of Appeal) held that he was. The Privy Council
noted that the company was a separate entity to Lee, and held that it was possible for
Lee to act in one capacity (as governing director) to cause the company to enter into an
employment contract with himself in a different capacity (as a worker or employee).
Can own property including land; members do not have legal or beneficial interest 3.005
in property. As a legal entity, the company can own property, including land. 13 Since
the company is a separate entity to its members, the members do not have any legal
nor equitable interest in the property of the company merely on the basis that they are
members of the company. In Macaura v Northern Assurance Co Ltd, 14 where timber
on land was owned by a company but was insured U11dera policy in the name of
the controlling shareholder of the company, it was held that the shareholder could
not claim on the policy by reason that he did not have any insurable interest 15 in the
property. That is, under the separate entity principle, the shareholder did not have any
proprietary interests in the property being insured. The property was owned by the
company, and not the shareholders. Lord Buckmaster stated: "no shareholder has any
right to any item of property owned by the company, for he has no legal or equitable
interest therein". 16
Company does not hold property on trust for persons merely because they are 3.006
members. The above principles have been expressly applied in Hong Kong in a number
of cases. In Good Profit Development Ltd v Leung Hoi,' 7 the plaintiff brought an action

11
Cap.622, s.115.
2
' [1961] AC 12.
'' Cap.622 s.115(2).
" (1925] AC 619.
" Under insurancelaw, the insured is not entitled to claim under the insurancepolicy ifhe or shedoesnot havean
insurable interest in the property being insured.
'6 Maca11ra v NorthernAssuranceCo Ltd (1925)AC 619. 626.
17 ( 1992)2 HKC 539.
112 CORPORATE PERSONALITY

against the two shareholders (and directors) of a company to enforce an agreement for
the sale of all the shares in the company to the plaintiff. The company's sole substantial
asset consisted of certain real property. The underlying intention of the plaintiff and
the two shareholders was for the plaintiff to acquire the real property. The plaintiff
unsuccessfully sought to join the company as a defendant in the action. The plaintiff's
argument that the company held the real property on trust for the shareholders was
rejected on the basis of the separate entity doctrine. 18 Also, the mere fact that the
shareholders had set up the company to hold property did not mean the company was
an "alter ego" of the shareholders. However, the principle that the members do not
own any legal or equitable interest in the company's property does not mean that the
company can never be regarded as a trustee for its members. The company does not
own its assets as trustee for its members merely because those persons are members,
but it is possible for the specific circumstances of the case to give rise to a trust where
the company holds on trust for one or more particular members. 19
3.007 Company's privilege against self-incrimination not available to directors. The
separate entity doctrine is also illustrated by the case of Salt & light Development
Inc v SJTU Sunway Software Industry Ltd. 20 Here, the Court of First Instance held that
where the company is entitled to claim the privilege against self-incrimination, the
privilege protects the company itself and not its directors. The court observed that the
privilege is "personal to the company", and that "[a]s the company has a separate legal
personality it is that separate personality that is protected". 21

1.3 Company's obligations and liabilities

3.008 Company liable in contract and tort. A company can be subject to legal obligations
and can incur legal liabilities. Thus a company is the entity liable on contracts entered
into for the company. A company can also be liable in tort or under the criminal law.
These principles are discussed in detail in Chapter 12.

2. LIABILITY OF MEMBERS

3.009 Limited liability distinct from notion of separate legal entity. The liability of
members for the debts of the company can be limited, depending on the type of
company formed under Companies Ordinance (Cap.622), s.66. The "limited liability
doctrine" of company law refers to the limited liability of members of companies. The
limited liability doctrine is a doctrine which is distinct from the notion of separate
legal entity of a company. Incorporation does not necessarily mean that there is limited
liability, as companies can be formed with the liabilities of its members either limited
or unlimited.

18 Sec also Terrian,, Oriental Peer Co Ltd (1988] I HKLR 246, 254, where che Macaurtt principle was applied.
19 Sec Pacific Electric Wire & Amp Cable Co Ltd v Texan Management Ltd (2008] 4 HKLRD349 (reversed on
appeal on a differcnc poinc of law: Pacific Electric Wire & Cable Co Ltd v Harmutly Ltd (2009) 3 HKLRO 94).
'" (2006) 2 HKC 440.
21 (2006) 2 HKC 440, (78).
 LIABILITY OF OFFICERSAND EMPLOYEES 113

Limited by shares. For companies limited by shares, the liability of members is 3.010
limited to any unpaid amounts on the shares held by the members. 22 For example,
where the issue price for a share is $2, and a member has paid $2 for the shares
upon subscription (i.e. the shares are fully paid), then the member can lose that $2 if
the company becomes insolvent, but the member would not be required to contribute
further amounts to pay the company's creditors on a winding-up. But if the member had
acquired partly paid shares (e.g. paying $1.50 for the $2 shares), then if the company
does not have sufficient assets to satisfy the claims of creditors in a winding-up, then
the member can be called upon to contribute a further $0.50 to pay off the creditors.
Limited by guarantee. For companies limited by guarantee, the members are liable 3.011
for the company's debts only up to the amount stated in the articles of association as
the maximum amount for which members can be liable.23
Unlimited liability. Where a company is an unlimited company, then the members can 3.012
be personally liable for all of the company's debts. 24

3. LIABILITY OF OFFICERS AND EMPLOYEES

Separate entity doctrine and agency law mean that officers and employees are 3.013
generally not liable on company's contracts. Employees would act as agents of the
company, and as such, would generally not be liable on contracts entered into by them
on behalf of the company.25 Similarly, when directors or other officers contract on
behalf of the company as agents, they will not generally be personally liable pursuant
to the law of agency.26 It is the separate entity doctrine and the principles of agency
law which together mean that officers and employees are generally not liable on the
company's contracts. It should be noted that the doctrine of limited liability is not
relevant in relation to officers or employees, as that doctrine relates to a company's
members. Sections 7-10 of the Companies Ordinance (Cap.622), which provide for
the possibility of "limited liability", are concerned with the liability of members.
Agents still personally liable for their torts and other wrongs. Agents can be 3.014
personally liable to third parties for their torts or other wrongs even if acting under
the authority of their principal. 27 Accordingly, employees can be so liable when acting
for the company. Some cases and academic commentators have treated directors
differently so as to confine the situations when directors would be liable in respect of
their torts conm1itted in the course of acting for the company. 28 However, it seems that
the correct position is that directors are to be treated no differently to other employees

22 Cap.622, s.8. See also Cap.32, s.170(1)(d).

23 Cap.622, s.9. See also Cap.32, s.170(1)(e).
'' See Cap.622, s. I0. See also Cap.32, s.170( I).
,s Montgomeriev UK Mutual SS Assn Ltd (1891] QB 370,371. See also YeungKai Yzmgv Hong Kongand Slumghai
Banking Co,p (1981] AC 787; and sec generally Pcccr Waccsand FM B Reynolds, Bowstead tmd Reynolds on
Agency (19th edn, Sweet and Maxwell, London, 2010) [9·002].
26 Fergusonv Wilson(1866-67) LR 2 Ch App 77.
" Bennett v Bayes ( 1860) 5 H & N 391; and sec generally Peter Watts and FM B Reynolds, Bowsteadand Reynolds
onAgency(l9th edn, Sweet and Maxwell, London, 2010) (9-116).
28 E.g. Trevorlvo1y lid vA11derso11 (1992) 2 NZLR 517.
114 CORPORATE PERSONALITY

or agents and therefore will generally be personally liable for torts or other wrongdoing
committed by them. 29
3.015 Accessorial liabilities. Legislation can also impose either direct or accessorial
liabilities on company officers and others in respect of their conduct in the operation
of companies or in respect of the company's contraventions of the law: see para.3.085
below.

4. RATIONALES FOR THE SEPARATE ENTITY

AND LIMITED LIABILITY DOCTRINES

3.016 Perpetual succession; can be party to litigation. A number of the advantages of

incorporation flow directly from the separate entity doctrine. That the company is
a legal entity itself allows for the possibility of perpetual succession. Also, as a
separate legal entity capable of suing others (and being sued), the company can be
a party to litigation without the need to specifically obtain the consent of all the
members of the association and without the need to join all the members as parties
to the court action.
3.017 Promotion of investment and encouragement of entrepreneurship. The main
advantage of the doctrine of limited liability is generally accepted to be the promotion
of investment in business and the encouragement of entrepreneurship. If persons know
that they would not be fully liable for the debts of a business enterprise, then they
would be more willing to provide capital to fund the business. This is seen as being
important for facilitating large-scale enterprises as well as risk-taking, which may be
important for innovation in developing new products or services for society.
3.018 Justified by economic analysis of law. The limited liability doctrine is also justified
by scholars from a law and economics perspective (economic analysis of law).3 For °
instance, Easterbrook and Fischel have argued that limited liability of shareholders
reduces the agency costs of separation between investment and management in
public companies. 31 In public companies, there may be a greater degree of separation
between ownership and management of companies compared with private companies,
in that many or most of the owners (shareholders) of the company may not be involved
in management of the company.32While separation could be beneficial in enabling
those with capital but without professional expertise to provide capital for the use
of those with the expertise, such separation also has its costs (referred to as agency

" See Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd (1921) 2 AC 465; Standard Charte,r.u/Bank v
Pakistan /nil Shipping Co,y>(No 2) (2003) I AC 659; MCA Recordf Inc v Char(y Reconls lid (2003) I BCLC 93;
Kabushiki Kaisha YakultHonsha v Yakudo Group Holdings Ltd (2004) 2 HKLRD 587; Tai Shing Diary Ltd v Maer~k
Hong Kong Ltd (2007] 2 HKC 23; and see further Stefan H C Lo, "Liability of Directors as JointTortfeasors" (2009)
Joumol cif Business Law 109.
J-O For a general summary, sec Ben Pettet, "Limited Liability-A Principle for the 21st Century?" (I 995) 48 Current
Lego/ Problems 125.
" Such arguments though have less importance for private companies or closely held companies where there is no
real separation between ownership and management.
" Adolf A Berle and Gardiner C Means, Modem Corporation and Private Property (Revised edition, MacMillan
and Co. New York 1967).
 RATIONALES FOR THE SEPARATEENTITY AND LIMITED LIABILITY DOCTRINES 115

costs), which can impede the efficiency of the use of the corporate structure as a form
of business organisation. For example, if the managers are not shareholders of the
company, then they do not obtain the full benefit of their own performance and so may
not have the best incentives to work efficiently. This means that shareholders would
need to monitor management to ensure proper performance of their managerial role,
thereby giving rise to monitoring costs. Limited liability can minimise agency costs in
the following ways:33

• Limited liability decreases the need for shareholders to monitor the company.
Since the risk of losing wealth is limited on the part of the shareholders, there
is a reduced need for close monitoring of management.
• Limited liability reduces the need to monitor other shareholders. If liabilities
of shareholders were unlimited, the probability that any one shareholder's
assets are needed to satisfy the company's debts would be lowered if the
other shareholders are wealthier. Limited liability renders the identity of
other shareholders irrelevant and thus avoids costs of monitoring of other
investors.
• Limited liability promotes the transferability of shares which in turn gives
managers incentives to act efficiently. If the company was poorly run, then
third parties can acquire shares more cheaply and can install new (better)
managers to replace the existing ones. Limited liability reduces the costs
of purchasing shares and therefore promotes their transferability because
it is unnecessary to take into account the wealth of other investors in
the company in pricing the shares. Limited liability allows shares to be
fungibles such that all shares in a company can be traded at one price which
is simply determined by the value of the income stream generated by the
company's assets.34
• As shares in a company are homogeneous commodities with one market
price under a regime of limited liability, the market price reflects available
information about a company's prospects and thus the need for shareholders
to expend greater resources analysing a company's prospects is reduced.
• As shareholders can limit their own investment risk by diversification,
companies can raise capital at lower costs because investors need not bear
the greater risks associated with undiversified holdings.
• As shareholders can hedge their risks by diversifying, optimal investment
decisions can be made by managers who can avoid being overly risk-averse
and can seek to maximise investors' welfare. Under a regime of unlimited
liability, the shareholders would seek to constrain risk-taking of managers.

" Fran.k H Easterbrook and Daniel R Fischel, "Limited Liability and the Corporation" (1985) 52 University of
Chicago Law Review 89, 92-97.
'' For the importance of limited liability in promoting efficient and organised securities markets, see also Paul
Halpern, Michael Trebilcock and Stuart Turnball, "An Economic Analysis of Limited Liability in Corporation
Law" (1980) 30 University ofToro1110 lawJ011mal 117.
116 CORPORATEPERSONALITY

3.019 Limited liability results in increased risk to creditors. The benefits of limited
liability to shareholders and the company result in increased 1isk to creditors, who
have to bear a greater degree of risk of the company failing. The costs for creditors
(such as monitoring costs) are increased to protect against such risk. However,
Easterbrook and Fischel argue that the overall transactional costs are lower under
a limited liability regime, and so the cost of raising capital for companies is lower
compared with a regime of unlimited liability of shareholders. For example, creditors'
monitoring costs may not be as high as it would otherwise be for shareholders because
creditors (especially large banks) may have greater information and can engage in
more efficient monitoring. Also, secured creditors may be content to rely on their
security without the need for extensive monitoring of the company.35
3.020 Shielding of company's assets from creditors of owners (and managers) of company.
Hansmann and Kraakman's ideas relating to asset partitioning 36 can be regarded as
providing a justification for the separate entity and limited liability doctrines from a
different perspective. For Hansmann and Kraakman, the importance of organisational law
(including company law) is that it allows for asset partitioning - that is, the separation
benveen a firm's assets and the personal assets of the firm's owners and managers.
In the company law context, the shielding of the owner's assets from the creditors of
the company is reflected in the doctrine of limited liability. However, Hansmann and
Kraakman argue that what is more important in organisational law is the shielding of the
company's assets from the claims of the creditors of the owners (and managers) of the
company (what they refer to as a "reverse" oflimited liability). Under this aspect of asset
partitioning, creditors of the company can have the benefit of avoiding competition with
the creditors of the company's owners or managers when claiming against the assets
of the company. That is, the creditors of the shareholders or managers of the company
would not be entitled to claim against the company's assets for payment of the debts
owed to them by the shareholders or managers. Hansmann and Kraakman argue that
such partitioning can lead to efficiencies. For example, shielding the company's assets
from the claims of the shareholders' creditors means that the company's creditors need
not monitor the personal creditworthiness of each of the shareholders. Also, where a
person establishes separate companies to engage in different lines of businesses, there is
a reduction of monitoring costs for creditors of each business since they do not need to
monitor the state of the other businesses of the person. If, instead, the different businesses
are conducted by the one entity, a creditor who transacts with the entity in respect of only
one of the businesses would also need to monitor the entity's other businesses. Thus,
pa1titioning provides for risk sharing that gives protection to a company's creditors from
risks not associated with the business of the company with which they are dealing.
3.021 Generally economic arguments apply in case of public companies. It is generally
accepted that most of the economic arguments in favour of limited liability apply only
in the case of public companies and not closely held companies, particularly small

" Frank H Easterbrook and Daniel R Fischel, "Limited Liability and the Corporation" (1985) 52 University of
Chicago l(nv Review 89, 98-101. Sec also Richard Posner, "The Rights or Creditors of Affiliated Corporations"
(1976) 43 University of Chicago law Review 499.
" Henry Hansmann and Reinier Knwkman, "The Essential Role of Organizational Law" (2000) 110 Yale law
Joumal 387.
 THEORIES ON THE NATURE OF CORPORATE PERSONALITY 117

private companies. 37 However, the arguments of Hansmann and Kraakman, above,

could be seen as (indirectly) providing justifications for limited liability even in the
case of small companies. Nonetheless, for both small and large companies, different
considerations arise in the case of involuntary creditors (such as tort creditors) as
compared with voluntary (contractual) creditors, such that limited liability of
shareholders is not economically efficient in respect of liabilities to involuntary
creditors. 38

5. THEORIES ON THE NATURE OF CORPORATE PERSONALITY

Various theories. Various theories have been developed in relation to the nature of 3.022
corporate personality. The following provides an outline of some of the main theories. 39
The issue is not simply an academic or theoretical one, as the particular conception of
the company adopted (or how the company is viewed) can have ramifications on the
type and scope of legal regulation of companies:

• Fiction or concession or entity theories: Fiction or entity theories focus

on the company as being a legal fiction - i.e. an artificial entity which is
simply given particular powers ofa natural person through state sanction (and
through the law). Concession theories state that associations of persons are
given corporate status (as a company or other body corporate) only because
this is a concession or privilege given to them by the state. Such a theory
can be utilised to justify extensive regulation of companies, on the basis that
incorporation is a "privilege".
• Aggregate theories: Aggregate theories focus on the fact that a company is
simply an association of individual persons. Aggregate theorists reject the
notion of the company as an entity distinct from its constituent individuals
and their relationships. A company is regarded as nothing but the sum of its
human parts. 40 Acceptance of the aggregate theory can mean that regulation
of companies ought to involve regulation of the individuals behind the
company rather than focusing on rights or liabilities of the corporate

37 See Judith Freedman, "Limited Liability: Large Company Theory and Small Finns" (2000) 63 Modem Law
Review 317.
" Henry Hansmann and Reinier Kraakman, "Toward Unlimited Shareholder Liability for Corporate Torts"
( 1990-1991) 100 Yale law Joumal 1879; Paul Halpern, Michael Trebilcock and Stuart Turnball, "An Economic
Analysis of Limited Liability in Corporation Law" (1980) 30 U11iversityo/'Toro11toLawJoumal 117, 145-147;
David W Leebron, "Limited Liability, Tort Victims and Creditors" ( 1991) 91 Columbia Law Review 1565.
39 See further, e.g., Arthur W Machen Jr, "Corporate Personality'' (1911) 24 Harvard law Review 253; Harold
J Laski, "The Personality of Associations" (1916) 29 Harvard law Review 404; Sanford A Schane, "The
Corporation is a Person: the Language of a Legal Fiction" (1987) 61 Tulane law Review 563; Gregory A Mark,
"The Personification of the Business Corporation in American Law" (1987) 54 University of Chicc,go Law
Review 1441; GunthcrTeubner, "Enterprise Corporatism: New Industrial Policy and the 'Essence' of the Legal
Person" (1988) 36 AmericanJoumal of Comparative Law 130; Mark M Hager, "Bodies Politic:The Progressive
History of Organizational 'Real Entity' Theory" (1989) 50 University of Pittsburgh Law Review 515.
'° Sec Patricia H Werhane, Persons Rights cmd Corporations (Prentice-Hall, Englewood Cliffs, 1985) 40-42;
Michael J Phillips, "Reappraising the Real Entity Theory of the Corporation" (1993-1994) 21 Florida State
University Law Review 1061, 1065-1067.
118 CORPORATE PERSONALITY

entity as something that exists independently of the persons forming or

constituting the company.
• Realist or natural entity theories: Realist or natural entity theories conceive
of the company as an association of persons that is a real or natural entity
(as opposed to being a purely a11ificial entity created by statute). 41 Such
an association has attributes not found among the humans who are its
components. The company is not simply an artificial entity; the statutory
recognition of companies as legal entities simply reflects the reality of
companies having an independent existence. Some natural entity theorists
equate the corporate entity as being a real person analogous to individuals,
and hence may have moral or legal rights and duties in the same way as
natural persons. Other natural entity theorists focus on the group nature of
companies. One possible implication of such a focus is that it is necessary
to take into account organisational theory in looking at group responsibility.
• Organic theories: A related theory to realist theories is the organic theory.
This theory conceives of a company as an organic entity - i.e. the company
is likened to a living organism, with natural persons acting as parts of the body
corporate. This concept of the company has been used to describe the nature
of the board of directors and the general meeting of shareholders - each
of these is regarded as independent organs of the company with their own
areas of power in relation to decision-making for the company.42 Thus, the
board of directors are not agents of the shareholders, but is a corporate organ
itself. The organic conception of the company also underlies the principles
of attribution which refer to the "directing mind and will" of companies.43
• Contractual theories44 : These theories focus on the contractual arrangements
between the persons behind the company - i.e. the corporate constitution 4;
(which has contractual effect between the company and the shareholders).
On one view of the company, the corporate entity is no more than a "nexus
of contracts" - i.e. contracts between shareholders, directors, employees
and creditors. One conclusion that might follow from this conception of
the company is that there should be minimal government regulation of
companies, as the rights and liabilities of the parties are simply matters of
private bargaining between the persons concerned.

41 See Mo,ion J Ho1witz, "Santa Clara Revisited: The Development of Corporate Theory" (1985-1986) 88 West
Virginia law Review 173; Michael J Phillips, "Reappraising the Real Entity Theory of the Corporation" (1993-
1994) 21 Florida State University law Review 1061; Michael J Phillips, "Corporate Moral Personhood and
Three Conceptions of the Corporation" (1992) 2 Business Ethics Quarterly 435.
2
' See Chapter 6.
•l See Chapter 12.
., See Michael Jensen and William Meckling, "Theory of the Firm: Managerial Behaviour, Agency Costs and
Ownership Structure" (1976) 3 Joumal oJFinancial Economics 305; William W Bratton Jr, "The 'Nexus of
Comracts' Corporation: A Critical Appraisal" (1989) 74 Cornell law Review 407; Frank H Easterbrook and
Daniel R Fischel, The Economic Structure of Co,porate Law (Cambridge, Harvard University Press, 199 I);
Melvin A Eisenberg, "The Conception that the Corporation is a Nexus of Contracts, and the Dual Nature of the
Firm" (1999) 24 Journal of Corporation Law 819; Margaret M Blair and Lynn A Stout, "Team Production in
Business Organizations: An Introduction" (1999) 24 Journal of Corporation Law 743 .
., Under Cap.622, the company's constitution is composed of the articles of association.
 PIERCING THE CORPORATEVEIL 119

6. PIERCING THE CORPORATE VEIL

6.1 General

Separate entity and limited liability can be abused. Although benefits flow from 3.023
the doctrines of separate entity and limited liability, the combination of these doctrines
can undoubtedly be abused. For example, creditors of a company can be prejudiced
where a company is deliberately undercapitalised so that it does not have sufficient
funds to meet the claims of creditors, or where assets are removed from the company
for the purpose of defeating creditors' claims. Trading frauds are not uncommon, both
locally and overseas.46 In Hong Kong, controversies have arisen, for instance, where
owners of restaurants (operated through a company) close down their businesses,
leaving wages and other debts unpaid, only to open up similar businesses through
a new company shortly after.47 Strict application of the separate entity and limited
liability doctrines would mean that the "real" owners48 of the businesses are able to
profit from the enterprises of the company while evading the legal liabilities of the
businesses to the detriment of creditors.
To prevent abuse corporate veil can be lifted: rights or liabilities of company are 3.024
tt·eated as rights or liabilities of persons behind company. To prevent abuse of the
separate entity and limited liability doctrines, the law provides certain mechanisms
via both the common law and statute to look through the corporate form to impose
the company's liabilities on persons behind the company (usually shareholders or
directors of the company). Such mechanisms are referred to as "lifting" or "piercing"
of the corporate veil. The terms "lifting of the corporate veil" and "piercing of the
corporate veil" are often used interchangeably, and no distinction is made between
these terms in this chapter.49 The doctrine of"lifting" or "piercing" of the corporate veil
is used in this chapter to refer to principles where rights or liabilities of the company
are treated as rights or liabilities of persons behind the company (shareholders or
directors), or vice versa, by disregarding the separate personality of the company.50
Whatever term is used (whether "lifting" or "piercing"), it is important to distinguish
such principles from other principles which do not involve the disregarding of the
corporate veil in the above manner. Where, for example, a corporate entity is used to
conceal the real actor or to conceal the real relationship between the parties, but where

" See, e.g., Arie Freiberg, "Abuse of the Corporate Form: Reflections from the Bottom of the Harbour., (1987) 10
U11iversilyofNSWLawJounwl 67.
" See Ma11Yee (a firm) v Chi Tao E111e11>rises Co Ltd [ I986] HKLR 171; Diana Lee, "Restaurant Boss Escapes
Prison Over Unpaid Wages" The Sta11dard(29 August 2008).
48 From the legal perspective, the ultimate controllers of the businesses (shareholders/directors of the companies)
do not own the business, but the economic reality is otherwise.
49 I➔owever, some commentators use the terms to refer to ditlerent aspects of going behind the corporate form: see S
Onolenghi, "From Peeping Behind the Corporate Veil, to Ignoring it Completely" (1990) 53 Modem Law Review
338.
,o Sec Prest v PetrodelResources Ltd [2013] 2 AC 415, [ 16]. Sec also VTB Capital Pie II Nutritek /1111 Co,p [2013]
2 AC 337, [I 18]-[119]. In Maritime Co SA vAva/011Maritime ltd (No I) [1991] 4 All ER 769, 779. Staughton L.J
refers to this as a true "piercing" of the corporate veil. His Lordship's view is that the term "lifling" of the
corporate veil should be confined to circumstances where one merely looks behind the corporate form to have
regard to the shareholding in a company for some legal purpose.
120 CORPORATEPERSONALITY

the court uses principles of agency or trust law to impose liabilities of the company
onto its controllers or to treat property acquired by the company as being acquired
for its controllers beneficiaUy, there is no piercing of the corporate veil.51 In such
situations, similar analyses can be made with similar conclusions even if the company
is a natural person. Cases within the doctrine of piercing of the corporate veil involve
an independent ground for imposing a company's rights or liabilities onto another (or
vice versa) that would not otherwise be possible under the law.

6.2 Common law

3.025 Court not entitled to pierce veil simply to achieve justice in circumstances. The
courts can pierce the corporate veil under the conm1on law in appropriate circumstances.
It has often been said though that the law is confusing in this area, with there being an
absence of clear rules or a principled basis that gives any real guidance as to when
the courts would be prepared to pierce the corporate veil. On occasions, the courts
have stated that the veil of incorporation can be pierced where the justice of the case
requires,52 but it appears that the balance of authority favours the view that while justice
might underpin the principles for piercing the corporate veil, a court is not entitled to
pierce the veil simply to achieve justice in the particular circumstances.53The rejection
of"justice" as the test is based on the view that such a test would be too uncertain.

6.2.1 Company as " "merefarcu/e" - abuse of the corporateform

3.026 Company is "mere fa~ade". One broad test that was previously set out by the House
of Lords (albeit by way of obiter) and which has been applied in Hong Kong is that
the courts can pierce the corporate veil where there are special circumstances which
exist indicating that the company is a mere faGade concealing the true facts.s4 This test
is sometimes also referred to as a situation where the company is a "sham". However,
the strict legal meaning of the word "sham" connotes a situation where the parties do
something which is intended by them to give to third parties the appearance of creating
between the parties legal rights and obligations different from the actual legal rights
and obligations which the parties intend to create.ss So strictly speaking, provided that a
company is formed in accordance with the requirements of the Companies Ordinance,
the company has a genuine legal existence and is not a "sham" in the strict legal sense. 56
3.027 Under "mere fa~ade" principle necessary for there to be illegitimate purpose. In
Winland Enterprises Group Inc v Wex Pharmaceuticals Jnc,51 the Hong Kong Court

" Prest v Petrodel Resources Ltd [2013] 2 AC 415, [28], [31]-[33] per Lord Sumption; and see paras.3.030 and
3.067 below.
52 E.g., Rea Company [1985) BCLC 333, 337-338; Conway v Ratiu [2006) I All ER 571, [75], [78), [188).
5J See, e.g., China Ocea11Shipping Co v Mimms Shippi11gCo Ltd [1995) 3 HKC 123, 128,per Nazareth VP, CA;
Re Ytmg Kee Holdi11gsLtd [2014) 2 HKLRD 313, 333 (CA); Adams v Cape Industries Pie [ 1990) Ch 433, 536,
Eng CA; TrustorAB v Smt1//bo11e (No 2) [2001) I WLR 1177; Hashem v Shayif[2008J EWHC 2380, Fam.
50 Woolfso11v StrathclydeRegional Council 1978 38 P & CR 521, House of Lords; Toptra11s Ltd v Delta Resources
Co J11c[2005]I HKLRD 635, CFI. Sec also Adams v Cape Industries Pie [ I 990) Ch 433, Eng CA.
" Snook v London a11dWestRidi11gl11vestme11ts lid [ 1967) 2 QB 786, 802.
"' Sec YukongLi11eLtd of Korea v Re11dsberglnvestme11tsCo,p of Liberia (No 2) [1998) I WLR 294. 306-308;
Hashem v Shayif(2008] EWHC 2380, Fam.
" [2012) 2 HK.LRD757, (54).
 PIERCING THE CORPORATEVEIL 121

of Appeal accepted that "the court will lift the corporate veil of a company if it is a
far;ade or a puppet of the [controller) used to perpetrate fraud or evade legal obligation
and liability". The court emphasised that under the "mere fac;ade" principle, it is
necessary for there to be an illegitimate purpose in the use of the company as a "mere
far,:ade" before there can be a piercing of the corporate veil. The required element of
an illegitimate purpose appears to be the same as the requirement for there to be some
"impropriety" as stated in other cases. That element and other aspects of the "mere
far;ade" principle are elaborated upon below.
Summary of principles: must be some impropriety. In Hashem v Shayif, 58 Mun by J 3.028
reviewed the English cases on veil piercing and after citing the principle that the veil
can be pierced where the company is a mere fac;ade, summarised the law as follows:

• ownership and control of a company are not of themselves sufficient to

justify piercing the veil; 59

• the court cannot pierce the corporate veil merely because it is thought to be
necessary in the interests of justice;

• the corporate veil can only be pierced if there is some impropriety; 60

• the court cannot, on the other hand, pierce the corporate veil merely because the
company is involved in impropriety- the impropriety must be linked to the use
of the company structure to avoid or conceal liability;6'

• if the court is to pierce the veil, it is necessary to show both control of

the company by the wrongdoers and impropriety - that is, misuse of the
company by them as a device or fac;ade to conceal their wrongdoing; 62 here it
is relevant to look at the motive of the wrongdoer; 63
• a company can be a fac;ade, even though it was not originally incorporated
with any deceptive intent - the question is whether it is being used as a
far,:adeat the time of the relevant transactions; 64 and
• the court will pierce the veil only so far as necessary to provide a remedy for
the particular wrong which those controlling the company have done - the
fact that the court pierces the veil for one purpose does not mean that it will
necessarily be pierced for all purposes. 65

Limited scope of piercing doctrine expressed in Prest v Petrodel. More recently, the 3.029
UK Supreme Court considered the scope of the doctrine of piercing of the corporate

58 [2008] EWMC 2380, Fam.

59
See also Wi11/a11d EnteqJrises Group Inc v Wex Pharmace11ticals Inc [2012] 2 HKLRD 757, [51), [53), Eng CA.
60 Sec also Adams v Cape Industries Pie [ 1990) Ch 433, 544; Ord v Be/haven Pubs Ltd [ 1998)2 BCLC 447, 457;
Winland £111e1prisesGroup Inc v lffa Pfu,nnacewicals Inc [2012) 2 HKLRD 757, [54), Eng CA.
61
Sec also Tmstor AB v Small bone (No 2) [2001] 1 WLR 1177, [22).
•2 Trustor A8 v Smallbone (No 2) [200 I] I WLR 1177, [22).
., Sec also Adams v Ct1pe Industries Pie [1990] Ch 433. 542.
"' See also 1i-t1storABvSmallbone(No2) [2001) I WLR 1177.
•, See also Dado11ria11Group 1111/ Inc v Simms [2006) EWHC 2973 (Ch) (682)-(683).
122 CORPORATE PERSONALITY

veil in the case of Prest v Petrodel Resources ltd. 66 A majority of the Supreme Court
affim1ed the existence of the doctrine under the common law, justifying the doctrine
on the basis of the need to prevent abuse of corporate legal personality, with the
doctrine providing a means to undo such wrongdoing where no other legal principle
is available.67 The doctiine was considered to be an example of the general p1inciple
applied by the courts to prevent persons from obtaining an advantage which he has
obtained by fraud.68 However, Lord Sumption confined the scope of the doctrine,
stating:

"[T]here is a limited p1inciple of English law which applies when a person

is under an existing legal obligation or liability or subject to an existing legal
restriction which he deliberately evades or whose enforcement he deliberately
frustrates by interposing a company under his control. The court may then
pierce the corporate veil for the purpose, and only for the purpose, of depriving
the company or its controller of the advantage that they would otherwise have
obtained by the company's separate legal personality. The principle is properly
described as a limited one, because in almost every case where the test is satisfied,
the facts will in practice disclose a legal relationship between the company and its
controller which will make it unnecessary to pierce the corporate veil. ... But the
recognition of a small residual category of cases where the abuse of the corporate
veil to evade or frustrate the law can be addressed only by disregarding the legal
personality of the company is, I believe, consistent with authority and with long-
standing principles of legal policy."69

3.030 Prest v Petrodel: Lord Sumption and Lord Neuberger's distinction between
evasion and concealment cases. According to Lord Sumption, the earlier cases on
lifting or piercing of the corporate veil can be categorised as involving either the
evasion principle or concealment principle. The evasion principle is as set out in the
preceding paragraph. The concealment principle does not involve any piercing of the
corporate veil; but under this principle, the interposition of a company so as to conceal
the identity of the real actors will not deter the courts from identifying them where
relevant. The court is not disregarding the corporate fa<;ade,but is only looking behind
it to discover the facts which the corporate structure is concealing. Lord Neuberger
expressly agreed with Lord Sumption's evasion/concealment distinction and also with
Lord Sumption's fo1mulation of the evasion principle. 70
3.031 Prest v Petrode/: Views of other members of the court. Lord Mance and Lord Clarke
accepted that circumstances where the corporate veil could be pierced outside Lord
Sumption's fom1t1lationwould likely be rare, but their Lordships expressly refrained

-6 [2013)2 AC 415.
61 Sec especially (2013) 2 AC 415, [34), per L-OrdSumption; and [80], per Lord Neuberger. Lord Mance and Lord
Clarke expressly agreed that the doctrine exists under the common law ((98), [ I03]). Lady Hale (with whom Lord
Wilson agreed) also appeared to accept the existence of the doctrine ([91 ]-{92]), but Lord Walker was sceptical
of the eKistence of an independcnt doctrine of "piercing of the corporate vci I" ([ I05]-[ I06]).
• 8 [2013)2 AC 415, [18), [83].
69 (2013) 2 AC 415, [35).
7'l (2013) 2 AC 415, (60)-(61), (81).
 PIERCING THE CORPORATEVEIL 123

from defining the outer limits of the doctrine, warning that it would be dangerous to
foreclose all possible future situations which may arise. 71 Lord Clarke also noted that
since the evasion/concealment distinction was not discussed in the course of argument
before the court, the distinction should not be definitively adopted unless and until
the court has heard detailed submissions on it.72 Baroness Hale (with whom Lord
Wilson agreed) did not state any conclusive views on the issue, but observed that
it is not clear whether all of the cases in which the courts have been or should be
prepared to disregard the separate legal personality of a company can be classified
neatly into cases of either concealment or evasion. Her Ladyship added that those
cases may simply be examples of the principle that the individuals who operate limited
companies should not be allowed to take unconscionable advantage of the people with
whom they do business.73 Lord Walker considered that "piercing of the corporate veil"
is not a doctrine at all, in the sense of a coherent principle or rule of law.74
Whether confined to situations of "evasion of existing liabilities". The Supreme 3.032
Court decision in Prest v Petrodel is important in affirming the court's power to
pierce the corporate veil under the common law. lt is also important in showing that
the doctrine has a narrow scope of operation. However, the precise confines of the
doctrine are still not clear. The view of Lords Sumption and Neuberger confines the
doctrine to situations of "evasion of existing liabilities", which is perhaps narrower
than the general principles hithe110 accepted by courts in both England and Hong
Kong. Given the caveats expressed by Lords Mance and Clarke and Baroness Hale, it
also does not appear to authoritatively state the English position either, though in the
subsequent decision of Antonio Gramsci Shipping Corpn v Recoletos Ltd, 15 the English
Court of Appeal took the view that while the Prest decision does not foreclose further
development of the law, the present scope of the piercing doctrine is confined to the
circumstances as stated by Lord Sumption. In Hong Kong, the evasion/concealment
distinction and the evasion principle as set out by Lord Sumption have been mentioned
in a few cases76 but there is as yet no decision in Hong Kong which has reviewed Lord
Sumption's principles in the light of existing authorities in Hong Kong.
Veil should only be pierced when other remedies prove to be of no assistance. 3.033
Regardless of the scope of the veil piercing doctrine, it should be clear that the court
ought to exercise its power to pierce the corporate veil only when all other remedies
have proved to be of no assistance. 77

11 [2013]2AC415,[I00),[l03].
12 [2013] 2AC4l5, [103).
" [2013] 2 AC 415, )92). For academic critique of the evasion/concealment distinction, see Brenda Hannigan,
"Wedded to Salomon: Evasion, Concealment and Confusion on Piercing the Veil of the One-Man Company"
[20 I3) Irish Jurist 11.
'' [2013)2 AC 415, [ 106].
15 [2013] 4 All ER 157, [65). Sec also R v Sale [2014] 1 WLR 663; R v Boyle Tra11s,,ort(Northern Ireland) Ltd
[2016] 4 WLR 63; William Day, "Skirting Around the Issue: the Corporate Veil After Prest v Petrodel." [2014)2
Lloyd's Maritime and Co111111ercitd
Law Quarterly 269.
76
Akai Holdings Ltd v £venvi11Dynasty Ltd [2016] 3 HKC 307; Highjit Development C<>Lid v Koo Siu Ying [2018)
HKCFl 105 (unrep., HCA 494/2015, [2018) HKEC 101).
77
See Prest v PetrodelResourcesLtd [2013) 2 AC 415, (35), (62).
124 CORPORATEPERSONALITY

3.034 Prest v Petrodel: in matrimonial case husband's companies established long

before marriage broke up and veil could not be pierced. Regardless of the precise
scope of the doctrine, the court's application of the law on the facts in Prest v Petrodel
should be seen to be correct. The case was concerned with ancillary relief following
a divorce, with the particular issue being whether the court could require companies
which were fully owned and controlled by the husband to transfer their property to
the wife pursuant to the relevant statutory provisions. The statute only empowered
the com1 to transfer property to which a former spouse was entitled pursuant to some
legal right in the property in question. 78 On the facts, the husband's companies were
established and had acquired the relevant assets long before the marriage broke up. In
these circumstances, the court held that it was not possible for the court to pierce the
corporate veil to treat the companies' assets as the husband's. 79
3.035 Control and impropriety must be established before court can pierce veil. In
Hashem v Shayif, above, Munby J had emphasised that both the elements of control
and impropriety must be established before the court can pierce the corporate veil. The
Supreme Comt in Prest v Petrodel did not examine the issue of"control" (as that was
clearly established on the facts), but Munby J's views are consistent with the Supreme
Court decision as Munby J expressed both the elements of control and impropriety as
going to the question of whether there is abuse of the company form. If the alleged
wrongdoer does not have control of a company, then it is difficult to say that that
person is abusing the corporate form. In Hashem v Shayi/, Munby J had also refused
to pierce the corporate veil in matrimonial proceedings. The wife argued that property
owned by a company in which the husband had interests should be regarded as the
husband's property for the purposes of a splitting of matrimonial assets. However,
neither elements of control nor impropriety was established in the case. The husband
owned beneficially only 30 per cent of the shares in the company, and while the rest
were held by his children from previous marriages, the court concluded on the facts
that the children did not hold the shares as nominees for the husband. Moreover,
the company's other directors (apa1t from the husband) were from an independent
management company and were not merely stooges of the husband. Also, there was
no impropriety: the comt took the view that merely using the company form to hold
assets does not amount to impropriety.80
3.036 Control seems to mean beneficial ownership and management. In the Court of
First Instance decision of Toptrans Ltd v Delta Resources Co Inc, 81 Deputy Judge
Carlson had also accepted that the two crucial ingredients that need to be present
for the corporate veil to be pierced are control and improper motive. It seems that
the element of "control" generally requires the wrongdoer to own beneficially all
the shares in the company concerned as well as having managerial control of the

78
Macrimonial CausesAct 1973 (UK) s.24(1)(a).
79 However, on the facts, the court accepted that che companies had acquired assets on trust for the husband, and
thus orders for transfers of property could be made on that basis.
80 Cf. Goldme11 Electronic Co Ltd v Sum '10i Mtm (2002] 2 HKC 324. Sec also Matrimonial Proceedings and
Property Ordinance (Cap.192) s.17.
81
[2005) l HKLRD 635.
 PIERCING THE CORPORATEVEIL 125

company in respect of the relevant transactions. Thus, in Nicholas v Nicholas, 82 in

matrimonial proceedings, the English Court of Appeal declined to treat the property
of a company as the property of the husband, even though the husband owned 71 per
cent of the shares in the company in circumstances where the minority shares were
held by others who were not nominees of the husband. In Dadourian Group Intl Inc
v Simms, 83 it was argued that the two controlling shareholders of a company should
be liable for certain contractual debts of the company on the basis that the company
was a mere fa9ade concealing the true facts. However, the court declined to pierce
the corporate veil. Although the t\vo shareholders concerned owned beneficially all
the shares in the company, the chairman and managing director of the company were
independent persons who were not, on a day-to-day basis, acting as agents of the
shareholders or acting under their direction. The shareholders were not in control of
the company in the relevant sense when the company entered into the transactions
concerned, and the court concluded that the company was used as a genuine company
and not as a mere fa9ade.
Toptrans case. In Toptrans Ltd v Delta Resources Co lnc, 84 the plaintiff contracted 3.037
with a company (Delta), which was controlled by a Daniel Wong. Wong also
controlled another company (Polo), and both companies were used to carry on a
business operated by Wong. Delta was liable to the plaintiff for certain payments, and
the plaintiff sued both Delta and Polo to recover the amounts. Although the contract
was with Delta, both the companies were used interchangeably in communicating
with the plaintiff, and the operation of the contract was performed interchangeably
by both companies through common staff and Wong. On the facts, the parties
accepted that Wong was the common controller of both companies. However, the
court found that there was no improper motive. The court held that "some element
of 'shenanigans' must be demonstrated to justify piercing of 'the veil'", and that
none was present in this case, with there not being any "manipulation". 8; It was
merely out of convenience that Wong used both companies to perform the contract.
Accordingly, the court refused to find that Polo would be liable to the plaintiff in
respect of Delta's debts.
YuiTlliPlywood case. The decision in Toptrans Ltd can be contrasted with that in the 3.038
earlier case of Yue Tai Plywood & Timber Co Ltd v Far East Wagner Construction
Ltd.86 In Yue Tai Plywood, the plaintiff supplied goods under a contract entered into
with a company, D 1. There was a second company, D2, which had common directors
and shareholders with D 1, and which shared the same registered office and same place
of business as D 1. D2 drew cheques in favour of the plaintiff in purported payment
for the goods, but the cheques were dishonoured. Jn an action brought by the plaintiff
against D2 for payment, the court held that D2 was liable. The court accepted the
evidence that both the plaintiff and the staff ofD 1 and D2 treated the t\vo companies as
a combined operation, and held that "there was a deliberate and obvious blurring of the

82 [ 1984]FLR 285.
83 (2006] EWHC2973 (Ch).
8' (2005] I HKLRD635.
SS [2005) I HKLRD635, 641.
s. (200I) 2 HKLRD446.
126 CORPORATE PERSONALITY

edges in the operation of [the] transactions". 87 Regardless of whether the corporate veil
was pierced, D2 would in any event have been liable on the cheques as drawer (as held
by the court), although it appears from the judgment that the court was also prepared
to treat D2 as being liable under the contract for the purchase of goods (independently
ofD2's liability on the cheques).
3.039 Criticism of foe Tai Plywood. However, it is not entirely clear from the judgment in
Yite Tai Plywood what the precise basis for piercing of the corporate veil was. There
is a possibility of the decision being justified on the basis of principles of agency.88
Alternatively, if the decision is to be regarded as an application of the idea of a
"mere fa<;ade",there arises the question of what was the impropriety in the case. As
suggested by the Toptrans decision, the mere fact that two companies are used to
carry out the obligations under a contract does not amount to impropriety. Perhaps
there was an element of intentional deception in Yue Tai Plywood that could justify the
piercing of the veil in that case. The Court of Appeal in the later decision of Winland
Enterprises Group Inc v Wex Pharmaceuticals Inc 89 emphasised that the mere fact that
two companies share common management, common directors and common staff is
insufficient for the court to pierce the corporate veil in respect of the t\vo companies.
In that case, Aero Pharm was a wholly owned subsidiary of another company (WEX).
The plaintiff alleged that Aero Pharm was in breach of contract and also sought to
join WEX to the proceedings on the basis that corporate veil of Aero Phann should be
pierced, with any liability for breach of contract also imposed on WEX. The only basis
for piercing the corporate veil in this case was that Aero Pharm was a wholly owned
subsidiary and was under the control of WEX, and with the companies sharing the
same offices and common staff. The Court of Appeal was emphatic in rejecting this as
being sufficient for the piercing of the corporate veil.
3.040 "Impropriety" covers situations where company is used to evade existing legal
obligations, or where used to perpetrate fraud or some other unlawful conduct.
For the purposes of the test for piercing the corporate veil, "impropriety" covers
situations where the company is used to evade existing legal obligations, or where the
company is used to perpetrate fraud or some other unlawful conduct. 90 However, the
notion of improp1iety may be wider than these particular situations. The concept has
also been described as one where a company is used in an unconscionable attempt to
practise some other deception. 91

6.2.2 Evasio11 of existing legal obligatio11s

3.041 Gilford Motor case: company device to avoid restrictive covenant. Where a company
has been set up or used to evade an existing legal obligation of another person or entity,
then the corporate veil can be pierced. The leading decision cited for this principle
is Gilford Motor Co v Horne. 92 In this case, the defendant, Horne, was previously

s, [2001)2 HKLRD 446,450.

88 Sec para.3.063below.
89 [2012)2 1-lKLRD757, [51].
90 Sec para.3.041below.
9' Re Polly Peck /11// Pie (1996) BCC 486, 497,per Robert Walker J.
92 [1933) I Ch 935.
 PIERCING THE CORPORATEVEIL 127

employed as a managing director of the plaintiff, which was in the business of selling
motor vehicles and spare parts and servicing of vehicles. There was a restrictive
covenant in Home's employment contract which prevented him from engaging in
a similar business (whether personally or through another firm or company) over a
certain geographical area for a particular period of time and which prevented him
from enticing the plaintiff's customers away from the plaintiff. After Horne resigned
from his position, he established his own company to engage in a business of servicing
of motor vehicles and supply of spare parts. The directors and shareholders of the
company were Home's wife and a Mr Howard. Home's wife did not take any part
in the company's business, which was run by Horne himself. Howard worked as an
employee under Home's management. In those circumstances, the English Court of
Appeal was prepared to order an injunction restraining both Horne and the company
from breaching the restrictive covenant. Lord Hanworth MR considered that one of
the reasons for creation of the company to carry on the business was Home's fear that
he might otherwise breach the restrictive covenant ifhe carried on the business on his
own account. His Lordship took the view that the company:

" ... was formed as a device, a stratagem, in order to mask the effective carrying
on of a business of ... Horne. The purpose of it was to try to enable him, under
what is a cloak or a sham, to engage in business which . . . was a business in
respect of which he had a fear that the plaintiffs might intervene and object."93

Home's new company was of comse not a party to the restrictive covenant. Thus, the
ordering of the injunction against the company has been interpreted as amounting to a
piercing of the corporate veil of that company such that Home's personal obligations
were also imposed on the company.94
Jones v Lipman: transfer of house to company to avoid obligation to transfer house 3.042
to purchaser. In Jones v Lipman, 95 the vendor of a house wished to effectively release
himself from obligations to transfer the house to the plaintiff purchaser under their
contract of sale. He purported to do so by transferring the house to a company which
he controlled (with the vendor and a clerk employed by his solicitors being the only
shareholders and directors of the company). Prima facie, specific performance might
have been ordered against the vendor in favour of the plaintiff if the vendor refused to
complete the contract. However, such an order for specific performance might not be
made by the court where there is intervention of third party's rights resulting from a
transfer of the land to the third party. The court, however, applied Gilford Motor Co v
Horne and ordered the company to transfer the property to the plaintiff. Russell J held
that on the evidence: (i) the company was under the complete control of the vendor,
and (ii) the acquisition by the vendor of the company and the transfer to it of the real

;; [ 1933] I Ch 935, 956.

~ As to whetherthe clementof"concrol" was presentin this case,Horne was nol himself a membcrofthe company,
bul it appearsfrom the factsthat his wife and the employee(Howard) held the sharesfor him as nominees.It was
acceptedin the caselhal lhe businessof the companywas wholly carried on by Horne and that the companywas
establishedby him to operatehis business:see[ 1933] I Ch 935, 943, 961. In thesecircumstancesthe elcmcnl of
"control" of the companyby Home can be regardedas being established.
" (1962) I WLR 832.
128 CORPORATE PERSONALITY

property was carried through "solely for the purpose of defeating the plaintiff's rights to
specific perfomrnnce".96 Russell J further stated that the company was "the creature of
the [vendor], a device and a sham, a mask which he holds before his face in an attempt to
avoid recognition by the eye of equity".97
3.043 Other grounds instead of piercing veil. While the above cases are generally regarded
as authority for the principle that the corporate veil can be pierced if a company is
used to evade existing legal obligations, the court in those decisions could well have
made the orders against the companies on other grounds without the need to pierce the
corporate veil. In Gilford A1otor Co v Horne, it may have been possible for the court to
restrain the company from engaging in the business on the basis of the tort of unlawful
interference with contractual relations. 98 In Jones v Lipman, the company could have
been treated as holding the property on constructive trust for the plaintiff purchaser
on the basis that it received the property with notice of the plaintiff's prior equitable
interest in the property. 99
3.044 Principle that company cannot be used to evade existing legal obligation accepted
in HK. The possibility of these leading cases being explained on other grounds has
led to some doubting whether there is a legal principle allowing the corporate veil to
be pierced for evasion of legal liabilities. However, a majority of the UK Supreme
Court has affirmed the existence of the principle for piercing of the corporate veil
where the company form has been used to evade existing legal obligations or liabilities
or existing legal restrictions: Prest v Petrodel Resources Ltd, 100 discussed above. The
principle that a company cannot be used to evade an existing legal obligation has also
been accepted in Hong Kong. 101
3.045 HK courts have taken a wide approach in application of principle. There are
some uncertainties though as to the scope of the principle. Hong Kong courts have
taken a wide approach in the application of the principle. In Liu Hon Ying v Hua
Xin State Enterprise (Hong Kong) Ltd, 102 the plaintiff contracted in 1994 with a
company, Hung Tak, to operate a service for the delivery of certain government forms
between Hong Kong and Shenzhen. Under the agreement, the plaintiff was to receive
38 per cent of the profits of the business. Hung Tak paid the profits only for the first
year. Subsequently, Hung Tak transferred its business to a second company, Hua Xin,
which was controlled by the same person or group of persons as Hung Tak. The Court
of First Instance held that this was a classic case where the corporate veil should be
pierced on the basis of the principle that the corporate structure cannot be used to

•• [1962) I WLR 832,835.

91 [ 1962) I WLR 832, 836.

98 Robert P Austin and Ian M Ramsay, Ford:~Principles of Co1pora1ions Law ( 14th edn, LexisNexis Butterworths,
2010) [4.250]. See also Pres/ v Pe1rodelResources Ltd (2013) 2 AC 415, [69)-[71), per Lord Neuberger; but
Lord Sumption accepted that the Gilford decision is properly to be regarded as a decision to pierce the corporate
veil, even though the decision could have been decided on 01hcr grounds as well ([29]).
9' Sec ANZ Exec111ors & TrusteeCo Ltd v Qi111exAustralit1Ltd (1990) 2 ACSR 676,679; Prest v PelrodelResources
Ltd [2013] 2 AC 415, [73), per Lord Neuberger.
'"° [2013) 2 AC 415. Sec paras.3.029-3.034 above.
'"' Sec WinlandEnterprises Group Inc v Wex Pharmaceuticalsfnc [2012) 2 HKLRD 757. (54). CA.
'"' [2003) 3 HKLRD347. See also China Ocean Shipping Co v Mitrans Shipping Co Ltd [1995) 3 HKC 123, 127,
CA.
 PIERCING THE CORPORATEVEIL 129

evade legal obligations. 103 The court drew the inference from the evidence that the
transfer of the business was made with an intention to evade the pre-existing liabilities
of Hung Tak to the plaintiff. 104Accordingly, the court held that Hua Xin should be held
liable for the debts of Hung Tak that were owed to the plaintiff. '°5
Lee Sow Keng case. In Lee Sow Keng v Kelly McKenzie Ltd, 106 the plaintiff was 3.046
owed a judgment debt by the plaintiff's former employer, Linkwaters Investment
Ltd ("Linkwaters"). The second and third defendants were the only shareholders and
directors ofLinkwaters and of the first defendant (Kelly McKenzie Ltd) at the relevant
times. The first defendant was incorporated shortly after the plaintiff had given notice
ofresignation and before Linkwaters summarily dismissed the plaintiff(before expiry
of the notice period). The first defendant took over the business of Link\vaters, with
Linkwaters allowed to be wound up without sufficient funds to pay the judgment debt.
The Court of Appeal affirmed the trial judge's decision 107that the corporate veil should
be pierced on the basis of the principle that a company cannot be used as a device to
conceal the true facts and evade existing liabilities. The court held all three defendants
to be jointly and severally liable for the debt. 108
Position in England: corporate veil cannot be pierced to recover against 3.047
C2 where common controller of companies has moved assets out of Cl
to C2. The courts in the Hong Kong decisions of Liu Hon Ying v Hua Xin State
Enterprise (Hong Kong) Ltd 109 and Lee Sow Keng v Kelly J\1cKenzieLtd, 110 above,
were prepared to impose the transferor's liabilities on the transferee by piercing
the corporate veil. However, under English case law, the corporate veil cannot be
pierced to enable a creditor of one company to recover against a second company
where the common controller of the two companies has moved assets out of the first
company to the second to defeat the creditor's claims. In Yukong Line Ltd of Korea v
Rendsburg Investments Co,p of Liberia (No 2),' 11 Toulson J did not think that the
principles on veil piercing allow the court "to hold the would-be transferee liable to
the plaintiff in damages for the antecedent wrongs of the would-be transferor". In
an earlier decision of Creasey v Breachwood Motors Ltd, 112 the court was prepared
to impose such liabilities on the transferee company where the entire business of
the transferor company had been transferred to the transferee, but that decision was
subsequently disapproved of by the English Court of Appeal in Ord v Be/haven Pubs
Ltd. 113 In the latter case, the court noted that the facts as set out in the judgment of
Creasey did not actually involve asset stripping.

,o, [2003] 3 HKLRD 347, 366.

'°' [2003] 3 HKLRD 347, 360.
,os An alternative basis for Mua Xin ·s liability was the Transfer of Businesses (Protection of Creditors) Ordinance
(Cap.49): see para.3.085 below.
'°" [2004] 3 MKLRD 5 I7.
,o, Lee Sow Ke11g Janel v Kelly McKenzieUd [2004] 3 HKLRD 5 I 7.
108 Sec also TrusrorAB v Smallbone (No 2) [2001] I WLR I 177.
109 [2003] 3 HKLRD 347.

"" [2004] 3 HKLRD 517.

Ill [1998] I WLR 294,310.
"' ( 1992) BCC 638.
113
(1998) 2 BCLC 447.
130 CORPORATEPERSONALITY

3.048 English position: C2 could be required to return assets to Cl if transfers were to

evade Cl 's liabilities In Lins en International Ltd v Humpuss Sea Transport Pte Ltd, 114
Flaux J accepted that, where the transfer of assets of one company to another company
was a sham or a fac;adeto render enforcement against the first company more difficult
in respect of liabilities owed to claimants, the corporate veil could be pierced to entitle
the claimants to seek orders to set aside the relevant transfers. However, Flaux J
applied the approach in Yukong Line and Ord v Be/haven in holding that the corporate
veil cannot be pierced to make the latter company liable under the underlying contracts
with the claimants.
3.049 English position: analysis under Prest v Petrodel. The above English decisions
which do not allow veil-piercing to impose the transferor's liabilities on the transferee
are consistent with the narrow evasion principle set out by Lord Sumption in Prest
v Petrodel Resources Ltd. II5 Although his Lordship in Prest v Petrodel accepted that
the veil can be pierced to deal with cases involving evasion of legal liabilities, his
statement of the principle is confined to situations where a person evades his own
liabilities or frustrates enforcement "by interposing a company under his control".
ln cases of asset stripping and movement of the assets to a new company, the first
company may be subject to the relevant existing legal liability, but not the controllers
of the company. Thus, there is no interposing of a corporate entity by the first company
to evade the first company's liabilities. The first company only attempts to frustrate
enforcement by disposal of its assets. Moreover, Lord Sumption and Lord Neuberger
both emphasised that the veil-piercing doctrine applies only if there is no other, more
conventional, legal remedy available. In the asset stripping cases, in principle there
are alternative remedies. A liquidator of the first company can seek remedies against
the company's controllers in relation to the asset stripping (for example for breaches
of fiduciary duties or for unlawful return of capital) and appropriate orders can be
made against the second company (which received the assets) on the basis of, for
example, agency, constructive trust or "knowing receipt". 1I6 It seems that the decision
in Linsen International Ltd v Humpuss Sea Transport Pte Ltd, 111 discussed in the
preceding paragraph can be understood in this way rather than involving veil-piercing
in the strict sense.
3.050 Might also be divergence between English and HK position regarding piercing
veil to impose liability on controller where assets moved out of company. There
may also be a divergence between the English position and Hong Kong cases regarding
whether the corporate veil can be pierced so as to impose the company's liabilities
on the controller where the controller has moved assets out of the company to defeat
the claims of a creditor. It seems that traditionally the English courts have considered

114
[2012) I BCLC 651. See also The7Jaske1110/e11
[ 1997) 2 Lloyd's Rep 465.
Ill [2013)2 AC 415.
"6 As 10these remedies, sec Chapter 8. A person in the position of the plaimifT(who is owed money) in casessuch as
Liu Hon Yi11g and lee Sow Ke11g would be disadvantaged iflhc court did nol allow the corporate veil 10be pierced
and required any ac1ion10be taken through the liquidator of the firs1 company. However, ullimatcly that may well
be the fairer rcsull if there arc also other unpaid credi1ors of the first company. Recovery by the liquidator in the
winding-up of1hc firs1 company would ensure that all creditors arc treated fairly in accordance with the statutory
scheme for distribution to creditors.
"' (2012) I BCLC 651.
 PIERCING THE CORPORATEVEIL 131

that it would not be appropriate to impose the company's liabilities on the controller
on that basis. 118 In Antonio Gramsci Shipping Corp v Stepanovs, 119 Burton J held that
there is a good arguable case under English law that a victim can enforce a contract
entered into by a puppet company against both the puppet company and the puppeteer.
However, the UK Supreme Court in VTB Capital Pie v Nutritek Intl Corp 120 doubted
whether the Gramsci decision can be justified on the basis of piercing the corporate
veil. In the VTB Capital case, the claimant brought proceedings against a company
for breach of a contract entered into between the claimant and the company. The
claimant also brought proceedings against the controllers of the company in respect of
misrepresentations inducing the claimant to contract. One of the grounds of liability
was on the basis of piercing of the corporate veil, by treating the controllers as the
persons liable on the contract. The court held that the principle of piercing the veil of
incorporation could not be extended to hold that a person controlling the company
was liable as if he had been a co-contracting party, with the company concerned, to a
contract to which the company was a party but he was not.
Liability has been imposed on controller in HK. However, a different approach was 3.051
adopted by the Hong Kong Court of Appeal in the earlier decision of Lee Sow Keng v Kelly
McKenzie Ltd. 121 It had been argued in this case that even if the corporate veil should be
lifted so as to impose the transferor company's liabilities on the transferee company, the
liabilities should not be imposed on the conunon controllers of the companies. The court
rejected this argument, stating:

"The whole point of the exercise where the facts so warrant is to go behind the
veil or fa9ade to identify the person or persons in control: the real question is
one of control. The Judge found, and there was ample evidence to support it, that
the second and third defendants 'orchestrated' the entire 'show' including the
deliberate decision not to defend [the proceedings brought by the creditor) and
ultimately letting Linkwaters [the transferor company] go into liquidation, the
diversion of the goodwill and business of Linkwaters to the first defendant [the
transferee company] and the depletion of the accumulated profits of Link waters
through dividend payments to ensure that Linkwaters had no funds with which the
judgment debt could be satisfied. Thus the intention to evade liability on the part
of the second and third defendants could not have been clearer."122

Better view is that principles on veil piercing not so wide as to allow imposition 3.052
of company's liabilities directly on controllers. However, with respect, the better
view is that the principles on veil piercing are not so wide as to allow the imposition
of the company's liabilities directly on the controllers in these circumstances.

118
)'r1ko11g
line Ltd of Korea v Rend,burg fllvestme111s
Co,p of Liberia (No 2) [ 1998] I WLR 294; and see Paul L
Davies, Gowerand Davies·Principlesof ModernCompa11y Law (8th edn, Sweet and Maxwell, London, 2008) 208;
Derek French, Stephen Mayson and Christopher Ryan, Mayson, Frenchand Ryan 011 Compa11ylaw (24th edn,
Oxford University Press, Oxrord, 2007) 129.
119 [2012] BCC 182.
lz<) (2013] 2AC337.
121
[2004) 3 HKLRD 517.
122 [2004)3 HKLRD 517, 521-522.
132 CORPORATE PERSONALITY

Certainly, the controllers have the motive of evading liability - but the liability
being evaded is that of the transferor company, and it is the use of the transferee
company to evade the liability which is regarded as wrongful and an abuse of the
corporate form. Even if it is appropriate to treat the transferee company as being
liable for the debts of the transferor company (because the transferee is used to step
into the shoes of the transferor to operate the transferor's business), it is another
thing to then impose the liabilities directly on the controllers. To so hold would be
to say that the controllers are themselves in substance the operators of the business,
and further that they should not be permitted to use any corporate form to engage in
the business activities. This would be in direct conflict with the Salomon decision.
Moreover, to allow a direct action by the creditor against the controllers in these
circumstances would effectively circumvent the principle that creditors do not have
standing to seek recovery against directors where the directors have breached their
duties to take into account the interests of creditors when the company is in the
vicinity of insolvency. 123
3.053 Distinction between evasion of existing liabilities (objectionable) and avoidance
of liabilities which have not yet arisen (not objectionable). Whatever the proper
scope of the "evasion" grounds for piercing the corporate veil, it is clear that, even
under the Hong Kong law, there is a distinction between "evasion" of legal liabilities
(including contingent liabilities 124) and the "avoidance" of liabilities which have
not yet arisen. The corporate veil can be pierced in the former but not the latter. 125
In China Ocean Shipping Co v Mitrans Shipping Co, 126 Bokhary J (with whom the
other members of the Court of Appeal agreed) cited the judgment of Slade LJ in
Adams v Cape Industries Plc. 127 In that case, Slade LJ distinguished between existing
limitations imposed on a person's conduct by law or rights of relief against the person
as third parties already possess on the one hand, and rights of relief that third parties
may in future acquire against the person. The corporate veil cannot be pierced simply
on the basis of avoiding the latter. Slade LJ stated:

" ... we do not accept as a matter of law that the com1 is entitled to lift the
corporate veil as against a defendant company which is the member of a corporate
group merely because the corporate structure has been used so as to ensure that
the legal liability (if any) in respect of particular future activities of the group
(and correspondingly the risk of enforcement of that liability) will fall on another
member of the group rather than the defendant company. Whether or not this is

123 See Chapter 8.

'" China Ocea11Shipping Co v Mitrans Shipping Co Ltd [1995) 3 HKC 123, 127, citing the decision in Creasy v
Breochwood Motors Ltd [ 1993) BCLC 480. For the meaning of "contingent liability", see e.g. R v Birmingham
City Council [2007) 1 All ER 73.
"' The cases (as discussed below) have generally dealt with the distinction in the concext of contracrual liabilities.
For discussion of the distinction in the context of tort liabilities, see Stefan HC Lo, "Piercing of the Corporate
Veil for Evasion ofTort Obligations" (2017) 46 Common Law World Review 42.
126 [1995) 3 HKC 123, 125-126. The principles were also applied in lee Thai Lai v Wong Chung Kai [2004)

I HKLRDOl2.
121 (1990) I Ch 433.
 PIERCING THE CORPORATEVEIL 133

desirable, the right to use a corporate structure in this manner is inherent in our
corporate law."128

After quoting the above in the China Ocean Shipping case, Bokhary J added:

"Using a corporate structure to evade legal obligations is objectionable. The

courts' power to lift the corporate veil may be exercised to overcome such
evasion so as to preserve legal obligations. But using a corporate structure to
avoid the incuning of any legal obligation in the first place is not objectionable.
And the courts' power to lift the corporate veil does not exist for the purpose of
reversing such avoidance so as to create legal obligations." 129

China Ocean Shipping case. In that case, the plaintiff chartered its ship to a company, 3.054
Mitrans Panama. Disputes arose which led to an arbitrator's award requiring Mitrans
Panama to pay a certain sum to the plaintiffs. Mitrans Panama failed to pay, and the
plaintiffs sued Mitrans Panama's parent company. The court refused to pierce the
corporate veil to impose Mitrans Panama's liability on the parent. At the time when
Mitrans Panama was incorporated, there was no contract entered into with the plaintiff
yet. There were therefore no liabilities for the parent company to evade. It was only
after incorporation that Mitrans Panama entered into the charterparties which gave
rise to the legal obligations, which were assumed by Mitrans Panama and not the
parent company.
Other cases. The distinction between evading and avoiding legal liabilities was also 3.055
affirmed in Winland Enterprises Group Inc v Wex Pharmaceuticals lnc 130and applied
in Persad v Singh. 131 In the latter case, the Board of the Privy Council held that where
an individual negotiated to take a lease from an owner of premises, the fact that the
individual subsequently used a company to execute the lease agreement as lessee but
had then used part of the premises himself did not mean that the corporate veil could
be pierced to impose personal liability on the individual for the company's breaches of
obligations under the lease.

6.2.3 Fraud or other illegality

Veil pierced where company established or used for purposes of fraud or illegality. 3.056
The courts have accepted that the corporate veil can be pierced where the corporate
form is established or used for the purpose of fraud 132 or a crime 133 or some other
unlawful conduct.'34

128 [ 1990] I Ch 433, 544.

29
' I990] I Ch 433, 127.See also Persad v Singh [20 I 7] UKPC 32, (20] per Lord Neuberger.
[

'l<l (2012] 2 HKLRD 757, [50]-(51 J On the Wi11/a11d case, sec para. 3.039 above.
''' (2017] UK.PC32.
'" Bakri Bunker Trading Co Ltd v The Owners o,fand Other Persons fnterested in the Ship "Neptune" (1986] HKLR
345,349, citing Re Darby [1911] I KB 95; lee Tlu,i Lai v H0ng Chung Kai (2004] I HKLRD DI 2, [6]; Winlcmd
£nte1prises Group fnc v JJ~xPharmacewicals fnc (2012] 2 HKLRD 757, (43], CA.
"' Secretary for Justice v Lee Chau Ping (2000) I HKLRD49.
,,. SeeJol111sonvBuckoEnterprises (1975) I NZLR311.
134 CORPORATE PERSONALITY

3.057 Darby case: well known frauds concealed identity though Cl perpetuated
fraud on C2 and investors. In Re Darby, I35 Darby and Gyde formed a company
(Company A) in which they were the directors and controlling shareholders.
Company A acquired a licence to work a quarry for a small sum, and proceeded
to sell the licence to a new company (Company B) which it promoted. Public
investors subscribed for debentures in Company 8, and the funds obtained by
Company B were used to pay Company A for the licence. Darby and Gyde
effectively made substantial profits from those transactions. There was disclosure
in the prospectuses that Company A was a promoter and would obtain profits, but
there was no disclosure of Darby and Gyde's interests in Company A. Darby and
Gyde were well known frauds and it was unlikely that persons would have been
willing to deal with them commercially. In those circumstances, the court took
the view that, by concealing their identities, and by representing that the company
(Company A) was of good standing and position, they were perpetrating a fraud
on Company B and its investors. Accordingly, the court was prepared to pierce
the corporate veil of Company A to effectively impose on Darby and Gyde the
fiduciary duties of a promoter and to therefore hold them liable to Company B for
the profits which they obtained.
3.058 Leung fot Ming case: obtaining rent allowance in respect of company which
husband owned. In HKSAR v Leung Yat Ming, 136 the defendants (a husband and
wife) obtained private rent allowance from their employers under a condition that
neither they nor their relatives owned the accommodation and did not have any
financial interests in the property. The property in respect of which they obtained rent
allowance was owned by a company which the husband owned and controlled through
nominee shareholders and directors. The Court of Appeal upheld the convictions of
the defendants under the Prevention of Bribery Ordinance (Cap.20 I) for fraud arising
from their deceiving of their employers in relation to their interests in the property. The
court held that it was appropriate to lift the corporate veil in the context of the present
criminal proceedings to look at the identity of the controllers of the company. The court
took the view that the defendants held financial interests in the property concerned
(albeit indirectly through the shares they held in the company) and that there was a
deliberate concealment of the truth (namely their ownership of the company and their
indirect interests in the property). 137
3.059 Lee Chau Pi11gcase: company used for crime. In Secretmy for Justice v Lee Chau
Ping, 138 warrants of arrest were issued against the defendants in relation to alleged

135
[19111 I KB 95.
13
• [ 1999]2 HKLRD 402.
,n It has been suggested that the court may have been overly strict on the defendants as it was legitimate for
the defendants to assume that the separate personality of their company would have been respected due to the
common practice of owning flats through a company: Thomas K Cheng, "The lifting of the Corporate Veil
Doctrine in Hong Kong: An Empirical, Comparative and Development Perspective" (2011) 40 Common Law
World Review207, 214-215. However, it seems that the mental state of the individuals is critical (viewed in light
of the elemenrs of the offence in respect of the mensrea). In Leung *11 Ming, the court accepted on the evidence
that there was a deliberate concealment of the truth through the use of nominees designed (in the court's view)
to hide the identitie.s of the defendanrs, and that therefore the requisite intention to deceive the principals was
established (406). Seealso pam.3.070 below.
138 [2000) 1 HK.LRD 49.
 PIERCING THE CORPORATEVEIL 135

drug trafficking. The defendants absconded, and subsequently, confiscation orders

against the defendants were sought pursuant to the Drug Trafficking (Recovery of
Proceeds) Ordinance (Cap.405). The court granted the orders, including orders in
respect of property owned by companies that were controlled by one of the defendants.
One company was principally used for the defendant's drug-trafficking activities as
it was used to purchase equipment and chemicals used to manufacture ICE. Some of
the proceeds from the drug trafficking were used to pay the company's expenses. The
other companies were also financed from the proceeds of the drug trafficking. Jn those
circumstances, the court pierced the corporate veil on the basis that the companies
were used for crime, and held that the property of the companies was the property of
the defendant for the purpose of the confiscation orders. 139
No fraud simply where companies incorporated to limit liabilities. However, 3.060
similar to the distinction between "evading" and "avoiding" legal liabilities,
discussed above, there is no fraud simply where companies are incorporated to
limit contractual liabilities which have not yet arisen at the time of incorporation.
For example, it has been held that the mere fact that a person establishes different
companies to own different ships ("one-ship companies") to confine the liabilities in
respect of each ship to the particular company that owns the ship does not amount to
fraud. 140 Similarly, where a company was used by an owner of a carpark to employ
staff at the carpark, there is no fraud so as to justify imposing the company's liabilities
for wages on the owner simply because the company was formed to conh·act with
the employees. 141
\Vhere directors or agents engage in conduct which is tortious they will be 3.061
personally liable; nothing to do with piercing veil. On occasion, it has been
said that where directors have engaged in fraudulent misrepresentations when
acting for the company, then the directors would be personally liable for the
misrepresentations on the ground of piercing of the corporate veil as a result of
the fraud. 142 However, the better view is that directors' liabilities in this context
have nothing to do with veil piercing. Where directors or agents engage in
conduct which is tortious, then they will be personally liable notwithstanding
that they were acting for the company. 143 This is simply on the basis of application
of ordinary agency law principles. The directors or agents are liable for their own
conduct, and the legal analysis is no different to the analysis in respect of other
agents acting for a principal which is a natural person. The situation is not one
where the company's liabilities are imposed on the directors or agents. To invoke

,, 9 See also paras.3.07I to 3.075 below.

1-1-0 Bakri 81111ker
Trading Co Ltd v The Owne,:~ofa11d01her Pe1:m11s
h11eres1ed
i11 //reShip "Nep11111e"
[ 1986) HKLR 345.
'" Lee Thai Lai v Wong Chung Kai [2004) I HKLRD D 12. But where a body corporate fails to pay wages as an
employer and is guilty under Employment Ordinance (Cap.57) s.63C, then any di.rector, manager, secretary or
other similar officer of the body corporate also commits an offence if the offence by the body corporate was
committed with the consent or connivance of, or is attributable to neglect on the part of such director or other
officer: Employment Ordinance (Cap.57) s.648.
"' Nikkodo {f-lK) Ltd v Lam Chiu Kou [2000) I HKLRD 204; Ngo Tai I-long v £11den11e Oe11elopme11t Ltd [2005)
HKEC2120.
'" See Chapter 12.
136 CORPORATE PERSONALITY

principles of veil piercing in this context invites unnecessary confusion in the

analysis.

6.2.4 Agency
3.062 Agency not true ground for piercing veil. lt is sometimes said that agency is one of
the grounds for lifting or piercing of the corporate veil in that the rights or obligations
of the company are imputed to its controlling shareholder as principal. However, it is
inaccurate to treat agency as a true ground of lifting or piercing of the corporate veil
because if the company is regarded as an agent for another person, there is no denial
of the separate entity of the company. A company, just like any other legal person,
can act as an agent of another. If the company is to be regarded as an agent of its
controlling shareholder, this arises from an application of agency law principles rather
than through a piercing of the corporate veil. It is clear from Salomon v Salomon
that the mere fact that a shareholder owns most or all the shares in a company does
not mean that the company is the shareholder's agent, even if the shareholder also
exercises managerial control over the company. However, additional factors may be
sufficient to give rise to an agency.
3.063 Circumstances where subsidiary company treated as agent of parent. In Smith,
Stone & Knight Ltd v City of Birmingham, 144 a subsidiary company was treated as
the agent of a parent company in the carrying on of a business at premises owned
by the parent. This enabled the parent to obtain compensation for disturbance of the
business following compulsory acquisition of the property by the local government
authority. 145 The court took into account the fact of the parent's complete control
over the day-to-day activities of the subsidiary. But the following factors were also
present: the business carried on by the subsidiary was never formally assigned to
the subsidiary from the parent; the profits from the business were directly treated as
profits of the parent in the companies' accounts; and the subsidiary did not have its
own staff apart from a manager who had no power to bind the company. A similar
approach was taken in Re FG (Film:.) Ltd, 146 where a British company was held
not to be the maker of a film so as to allow the film to qualify as a British film
under the relevant legislation, in circumstances where the company was seriously
under-capitalised and where the company did not employ any staff. The court held
that it was an American company which was the true maker of the film, and that
the British company was simply an agent of the American company and interposed
purely in an attempt to enable the film to qualify as a British film. A view has
been expressed that such cases are better seen as cases where there is a piercing of
the corporate veil on the basis that the company is a mere fac;ade concealing the
true facts - the true facts being that the persons behind the company are the real
proprietors of the business where the company is not given sufficient resources or

,.., (1939) 4 All ER 116.

'" The subsidiary could not have ob1ained compensation as the compensation was not payable to shorl-term tenants
of premises.
,.. (1953) 1AIIER615.
 PIERCING THE CORPORATEVEIL 137

personnel to independently engage in the business. 147 However, for this alternative
analysis to apply under the more recent Anglo-Hong Kong case law, it would be
necessary for there to be some impropriety.
Possible for parent company to act as agent for subsidiary. It is also possible for 3.064
a parent company to be appointed by a subsidiary to act as the latter's agent to carry
on the subsidiary's business. Jn such a situation, the parent company will assume the
duties and liabilities of an agent. This was the case in CSR Ltd v Young,148 where there
was an express agency agreement between the parent and the subsidiary, under which
the parent was conferred with full authority for the management and control of the
business and undertaking of the subsidiary (which involved the operation of asbestos
mines). By reason of the parent's direct role in the operation of the mines, it was held
that the parent company itself owed a duty of care to workers and others in the mining
community who were exposed to the asbestos. On the facts of the case, the parent was
held to be in breach of the duty and hence liable to a victim who suffered asbestos-
related diseases caused by the exposure. 149
foe Tai Plywood case. The case of Yue Tai Plywood & Timber Co Ltd v Far East 3.065
WagnerConstruction ltd 150 has been discussed above as a case where the court pierced
the corporate veil, although it was suggested above that the judgment was not clear as
to the precise ground for piercing of the veil. However, it is possible that the decision
can be justified on the basis that there was an implied agency. If D l and D2 were used
interchangeably by its conm1on controller not only in dealing with the plaintiff but also
in the use of the building material purchased from the plaintiff, then D 1 can be said
to have acted as an agent for D2 in the purchase of the materials. Thus D2 could be
liable on that basis. There is also the possibility of the two companies being regarded
as partners of each other in the engaging of their business, 151 so long as the test for
establishment of a partnership can be satisfied.

Adams v Cape case. In Adams v Cape Industries plc, 152 the English Court of Appeal 3.066
accepted that one of the indirectly held subsidiaries (AMC) of the parent company
(Cape) in the case was a "mere fai,ade", although the issue was not critical for
determining the outcome of the decision. Although the court analysed the situation using
the "mere fa9ade" principle, it seems that agency law might provide a better basis for
explanation of the conclusion. Cape was a UK company with subsidiaries engaged in
the mining of asbestos in South Africa. NAAC was a wholly owned subsidiary of Cape
engaged in the marketing of asbestos for Cape in the United States. After NAAC became
embroiled in litigation in the United States brought by plaintiffs who suffered illnesses
from asbestos products, Cape put NAAC into liquidation. A new company (CPC) was
established as an independent company outside the Cape group of companies to engage
in the marketing functions of NAAC. Cape also promoted the incorporation of a new

"' Jason Harris, "Lilting the Corporate Veil on the Basis ofan lmplied Agency: A Re-evaluation of Smith, Stone and
Knight" (2004) 23 Comptmy and Securities law Journal 7.
" 8 (1998) Aust Torts Reports 81-468.
" 9 On a parent's direct duty of care, see further para.3.082 below.
''° (200 I] 2 HKLRD 446. Sec paras.3.038-3.039 above.
'" PioneerConcreteServicesLtd v Yelnah Pty Ltd ( 1986) 5 NSWLR 254.
"' (1990) I Ch 433.
138 CORPORATE PERSONALITY

company, AMC, which was owned by a nominee on trust for another Cape subsidiary.
The Cape subsidiaries subsequently sold their asbestos to US customers through AMC.
The purpose of these arrangements was to enable Cape asbestos to be sold into the
United States while reducing or eliminating the appearance of any involvement of Cape
or its subsidiaries. The Court of Appeal took the view that the interposition of AMC was
"clearly a fa9ade in the relevant sense" and that the true seller of the asbestos into the
United States was still the Cape subsidiaries. It appears that what were relevant to this
conclusion were both the motive of deliberate concealment (perhaps a motive to mislead)
and also the fact that AMC did not have its own employees or officers such that it only
existed as a "corporate name". As noted above, it seems that it may have been possible
to treat AMC as effectively acting as agent for the Cape subsidiaries instead of invoking
principles for piercing of the corporate veil.

6.2.5 Concealment scenarios

3.067 Concealment cases do not involve piercing. As explained by Lords Sumption and
Neuberger in Prest v Petrodel Ltd; 53 cases coming within the "concealment principle"
do not involve veil piercing. In these situations, the court has regard to the controllers
of a company - and in this sense, looks behind the corporate veil - but the separate
personality of the company is not ignored. The court simply applies conventional legal
principles to an anangement which happens to include a company being interposed to
disguise the true nature of that arrangement. 154
3.068 Lord Sumption's examples of concealment cases. In Prest v Petrodel Ltd; 55 Lord
Sumption took the view that the two earlier UK cases of Gencor ACP Ltd v Dalby' 56
and TrusLor AB v Smallbone (No. 2)' 51 are examples of concealment cases which do
not involve veil-piercing.
3.069 TrustorAB v Smallbone (No. 2) case. In TrusLorAB v Small bone (No. 2), 158 a director
(Mr Smallbone) of the plaintiff company breached his fiduciary duties owed to the
company by misappropriating the company's funds. The funds were transferred to
another company, Introcom, which was owned and controlled by a trust of which Mr
Small bone was a beneficiary. The directors of lntrocom were nominees and acted on
the instructions of Mr Smallbone. The court held that it was entitled to "pierce the
corporate veil" and treat the receipt of the funds by the company as receipt by the
person (Mr Smallbone) in control of the company on the basis that the company was
used as a fa9ade to conceal the true facts. Introcom was held to be jointly and severally
liable with Mr Smallbone for restitution of the funds to the plaintiff. Lord Sumption in
Prest v Petrodel took the view that rather than piercing in the strict sense, the Trustor
case should be understood as reflecting the concealment principle whereby lntrocom

153 [2013) 2 AC 415. Sec para.3.030 above.

,,., [2013) 2 AC 415, [6 I) per Lord Neuberger.
"' [2013)2 AC 415, [3 I )-[33).
"• [2000) 2 BCLC 734.
'" [2001) I WLR 1177.
"8 [2001) I WLR 1177.
 PIERCING THE CORPORATEVEIL 139

had received the funds as agent or nominee for Mr Smallbone and not in its own
right. 159 Thus Introcom was not itself entitled to the funds.

Ge11corACP Ltd v Dalby case. The case of Gencor ACP Ltd v Dalby' 60 also involved 3.070
a director (Mr Dalby) of the claimant companies who misappropriated funds from the
companies, which were transferred to another company (Bumstead). Bumstead was
wholly owned and controlled by Mr Dalby and the administration of Bumstead by a
corporate service provider was ca1Tiedout in accordance with Mr Dalby's instructions. 161
The court held that Bumstead was used by Mr Dalby for receiving the funds and should
be liable to account for the funds to the claimants. 162 The court was prepared to hold
that Mr Dalby's knowledge (of his own breaches of duties owed to the claimants) could
be attributed to Burnstead. 163 Although the court referred to cases on piercing of the
corporate veil, 164 it seems that since Bumstead received the funds in circumstances
where it has knowledge of Mr Dalby's breaches of duties, Bumstead could be regarded
as being liable to the claimant companies simply on the basis of the principles of
"knowing receipt". 165 Thus strictly speaking there is no piercing of the corporate veil.
As stated by Lord Sumption in Prest v Petrodel, the nature of the dealings in the case
gave rise to ordinary equitable claims against both Mr Dalby and Burnstead. 166
HKSAR v Leung Yat Ming case: analysis under concealment principle. The earlier 3.071
Hong Kong case of HKSAR v Leung Yat Ming 161 could also be analysed through the
prism of the concealment principle as opposed to being a true case of veil piercing.
The company in that case could be regarded as holding the property as nominee for the
defendants such that the defendants can be rightly said to have financial interests in the
property. On this analysis, it is unnecessary to pierce the corporate veil.
UK criminal confiscation cases: R v Sale. In the UK, following the Prest v Petrodel 3.072
decision, the concealment principle was expressly applied in R v Sale 168 in confiscation
proceedings under the Proceeds of Crimes Act 2002 (UK), where a confiscation order
extended to assets owned by a company which was wholly owned and controlled by
the defendant.
UK criminal confiscation cases: R v Boyle Transport (Northern Ireland) Ltd. The 3.073
case of R v Boyle Transport (Northern Ireland) Ltd, 169 which also dealt with confiscation
proceedings, can be contrasted with that of R v Sale. The English Court of Appeal in

159 2013) 2 AC 415, [32). But cf Pey Woan Lee, "The Enigma of Veil-Piercing" [2015) lmemalional Company and
Commercial Law Review 28, 31.
160 [2000) 2 BCLC 734.

161
[2000] 2 BCLC 734, (19].
162 [2000] 2 BCLC 734, (25].

1•i [2000] 2 BCLC 734, (25].

104 [2000] 2 BCLC 734, (25].

iQs See para.8. 177.

166 (2013] 2 AC 415. But cf. Pcy \Voan Lee, •vrhe Enigma or VciJ..Picrcing" [2015] lmernationtt! Company and

Commercial Law Review 28, 31.

167
[ 1999] 2 HKLRD 402; see para.3.059 above.
168
[2014] I WLR 663. But for a case where the concealment principle was not applied in allow a confiscation order
to include assets of a company in which the defendants were directors and shareholders, sec R v Boyle Tra11spor1
(Northern lrela11d)Ltd [2016) 4 WLR 63.
169 [20 I6) 4 WLR 63.
140 CORPORATE PERSONALITY

R v Boyle Transport observed that the general principles on veil-piercing in civil cases
also apply to the criminal context of confiscation proceedings. 170 Although there will
be cases where a company owned or controlled by a defendant can be regarded as the
agent of the defendant such that the confiscation order can extend to property of the
company (such as where the purpose of operating the company is to use it as a means
to carry out unlawful activities), the mere fact that a company is mixed up in relevant
wrongdoing does not of itself always necessitate a conclusion in a confiscation case
that it is an agent of the wrongdoing defendant. There is a difference between situations
where some of the transactions of a company, otherwise operated for lawful purposes,
are tainted by illegality and situations where the entire undertaking of the company is
unlawful. 171
3.074 Concealment principle not applied: R v Boyle Transport (Northern /relan.d) Ltd. In
R v Boyle Transport, the second and third defendants (D2 and D3) owned slightly more
than 50% of the shares in a family-owned company and were the only hvo directors in
the company. The company operated a road haulage business and the convictions of
D2 and D3 related to false instruments made by them in the operation of the company's
business. The English Court of Appeal held that the concealment principle could not
be applied in this case to treat the company's assets as those two individuals' assets for
the purpose of confiscation proceedings in circumstances where the family business
operated through the company (road haulage) was a legitimate business and where the
shareholdings in the company of the other members (who were not nominees ofD2 or
D3) could not be ignored. 172
3.075 Mere fact of person being sole director/shareholder not sufficient to apply
concealment principle. It was also noted in R v Boyle Transport that the fact that
a person is the sole director and shareholder of a company is not of itself conclusive
in requiring the concealment principle to be applied. That criminality is somewhere
involved in the company's operations does not of itself necessarily and conclusively
change that. 173
3.076 Piercing of the corporate veil may be required in some confiscation cases where
concealment principle is not applicable. If a company was set up and used solely for
the purpose of carrying out unlawful activities by an individual, then pursuant to the
above cases, it is possible that the company's assets could be regarded as the individual's
assets for the pmpose of confiscation proceedings. Where the individual does not him
or herself hold shares in the company but controls the company through nominees, it is
possible to regard the company as simply an agent of the defendant. This involves the
application of the concealment principle, and there is no veil-piercing. The company
is an agent of the defendant just as much as if the company was a natural person acting
and holding assets as nominee or agent of the defendant. However, if the defendant
is a director and shareholder of the company and simply controls the company in his
capacities as director and shareholder, the company could not ordinarily be treated

170 [2016) 4 WLR 63, [92).

171
[2016) 4 WLR 63, [94)-(96).
172 [2016)4WLR63,[102)-(107).
173 [2016)4WLR63,[115),(119).
 PIERCING THE CORPORATEVEIL 141

as the company's agent. In the absence of special circumstances giving rise to an

agency, 174 the separate entity doct:J;neprevents the company from being regarded as
the shareholder's agent. It seems that the use of the company for unlawful activities
should not change that analysis regarding agency. Thus to regard the company's assets
as the shareholder's assets for the purpose of confiscation proceedings, it would be
necessary to pierce the corporate veil. It seems that such piercing would have to be
on the basis of either a broader principle for piercing where a company is formed
or used for the purpose of crime, 175 or an application of the evasion principle which
recognises that a person can be regarded as being under an existing legal duty not to
act unlawfully (such that the forming of a company to carry out the unlawful activities
can be regarded as evading an existing legal duty).

6.2.6 Corporate groups

Reality that many corporate groups operating as single firm. The existence 3.077
of corporate groups is today a major feature of the commercial world. Many large
businesses are now conducted through a complex structure of holding companies,
sub-holding companies, subsidiaries and affiliates, involving numerous constih1ent
companies. The economic reality may be that the companies in the corporate group
are together, through their common control, operated as a single firm or enterprise. 176
Outsiders dealing with a conglomerate might not necessarily distinguish bet\veen each
of the individual companies in the group and might simply see themselves as dealing
with the group as a single entity.177
Whether principle of piercing veil in context of corporate group. In DHN Food 3.078
Distributors Ltd v Tower Hamlets London Borough Council, 118 the English Court
of Appeal was prepared to pierce the corporate veil and treat the companies in a
corporate group as a single entity for the purpose of allowing compensation to a
company for disturbance to its business as a result of a local authority's resumption
of the land. The circumstances were similar to the case of Smith, Stone & Knight,
above, where the company seeking the compensation did not own the land, which
was owned by a related company. The DHN case has sometimes been cited as being
authority for a principle that the corporate veil can be pierced in corporate groups
where the companies operate as a single economic unit. However, the correctness
of the decision was doubted in Woolfson v Strathclyde Regional Counci/ 179 and the
Court of Appeal in Adams v Cape Industries plc 180 stated that the DHN decision must
be regarded as being based on the particular statutory provisions for compensation

'" See para.3.064 above.

'" See para.3.057 above and the case of Secretary for Justice v Lee Chau Ping [2000] I l➔KLRD 49, discussed at
para.3.060.
176 Phillip I Blumberg, "The Corporate Entity in an Era of Multinational Corporations" (I 990) 15 Delaware .Jountal

ofCo,porate law 283, 32~327.

"' As i11uscratcd in Yue Tai Plywood & Timber Co Ltd v Far East Jfi1g11erCo11stn1clionLtd [2001] 2 HKLRD 446;
Toptrtms Ltd v Delta Resources Co Ltd [2005] I HKLRD 635; and see also Qintex Australia Fi11a11ce Ltd v
Schroeders Australia Ltd ( 1991) 9 ACLC 109.
118 [ 1976] 3 All ER 462.

" 9 1978 SC 90
uio (1990) Ch 433,536. See also Linse11lntemational Ltd v Humpuss Sea 1iw1sporl Pte Ltd (2012) I BCLC 651.
142 CORPORATE PERSONALITY

rather than setting out any broad principle for the piercing of the corporate veil within
a group context.
3.079 Each company in group is separate legal entity even if group operates as single
economic unit. The facts in Adams v Cape Industries were outlined above. 181 The
plaintiffs had sought to enforce default judgments against Cape (and another UK
subsidiary of Cape) which had been obtained in a US court. Whether the English
court would allow such enforcement depended on whether, under English law, the US
court had jurisdiction to give default judgment against the UK companies. The UK
companies did not themselves have any office or operate any businesses in the United
States. However, the plaintiffs argued, inter a/ia, that Cape was present in the United
States on the basis of the presence of its wholly owned subsidiary (NAAC) in the
United States. The Court of Appeal rejected this argument, affirming the position
under English law that each company in a corporate group is a separate legal entity
even if the group operates as a single economic unit. 182 The plaintiffs had also argued
that CPC's presence in the United States should be attiibuted to Cape on the basis that
CPC was a mere fa9ade concealing the true facts. The court also rejected this argument,
taking the view that all Cape was doing when setting up CPC was to avoid future tort
liabilities rather than evading existing legal liabilities. Although Cape's motive was to
minimise publicity of its involvement in the asbestos industry in the United States, this
was not a sufficient reason to pierce the corporate veil in circumstances where CPC
was established as an independent company (its shareholders were not nominees of
Cape) with its own independent operations. 183
3.080 HK affirmed separate legal entities of companies in corporate group. The Hong
Kong Court of Appeal, in following Adams v Cape Industries, has also rejected the
single economic unit argument and affinned the separate legal entities of companies
in a corporate group. 184
3.081 Criticism of this position. The legal position under English and Hong Kong law has,
however, been much criticised. Commentators have argued that the main economic
arguments for limited liability (such as promotion of investment and the promotion
of efficient capital markets) do not apply in the case of a corporate shareholder. 185
Merely piercing the corporate veil of subsidiaries to impose their liabilities on the
parent company would not create unlimited liability for any person. 186 Thus, critics
have argued that, to reflect the economic reality and to avoid problems for creditors
dealing with undercapitalised subsidiaries (particularly involuntary creditors),
principles of enterprise liability should be applied such that liability can be imposed

1
" See para.3.077 above.
112 [ 1990) Ch 433, 532, 536, 538. See also The Albazem [ 1977)AC 774, 807; Re Pol(y Peck lnrl pie (No.5) [ 1997)2
BCLC 630.
1
83 [1990) Ch 433, 543-544.
18' China Ocean Shipping Co v Mimms Shipping Co Ltd [I 995] 3 HJ<C 123; Winland £nrerprises Group Inc v Wex
P/u,mu,ceuticals lnc (2012) 2 HKLRD 757; Re Yimg Kee Holdings Ltd [2014) 2 HKLRD 313.
18' Sec, e.g., Sandra K Miller, "Piercing the Corporate Veil Among Affiliated Companies in the European
Community and the US: A Comparative Analysis of US, German and UK Veil Piercing Approaches" (I 998)
American Business LawJouma/14, 131-132.
18• Frank H Easterbrook and Daniel R Fischel, "Limited Liability and the Corporation" (1985) 52 Universityof
ChicagoLaw Review 89, 99.
 PIERCING THE CORPORATEVEIL 143

on the corporate group as a whole for liabilities incurred by any of its constituent
companies. 187
Direct duty of care of parent company: not veil-piercing. There are some situations 3.082
under the law where a parent company can be liable in respect of the operations of
its subsidiary but which does not involve piercing of the corporate veil. For example,
where a subsidiary's operations have been carried out negligently, leading to harm or
loss suffered by individuals, 188 the parent company could also be liable in negligence
if the parent company itself owes a duty of care to the individuals. 189 Such a duty of
care may arise due to the parent company's control and involvement in the actual
operations of the subsidiary.190 Where the parent is liable on this basis, the liability
depends on an application of the ordinary principles in tort on whether a duty of care
exists and does not involve veil-piercing. 191 The mere fact that a parent company has
majority ownership of shares in the subsidiary is clearly not sufficient to give rise to a
duty of care in respect of the subsidiary's operations. It has also been held that a duty
of care does not arise merely from the fact of the parent's appointment of a nominee
director responsible for health and safety matters for the subsidiary; 192 nor where the
parent company simply issues to its subsidiaries mandatory policies as group-wide
guidelines on health and safety or other compliance standards. 193

6.3 Statute

Statutory provisions which might be regarded as piercing veil. There are some 3.083
statutory provisions which might be regarded as piercing the corporate veil for
particular purposes. For example, there are various statutory provisions which
impose the company's liabilities on other persons, such as the company's directors.
Under s.275 of the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap.32), personal liability for the debts of the company is imposed on
persons who are knowingly party to fraudulent trading by the company. 194 Also,
if any officer or agent of a company signs or authorises to be signed on behalf of
the company, any bill of exchange, promissory note, endorsement, cheque or order
for money or goods in which the company's name is not mentioned, that officer or
agent is personally liable to the holder of the bill of exchange, promissory note,

187 See, e.g., Christopher D Stone, 'The Place of Enterprise Liability in the Control of Corporate Conduct'' (1980) 90
Yalelaw Journal I; Phillip I Blumberg, "The Corporate Entity in an Era of Multinational Corporations" (1990)
15 Delaware Journal ofCorpora/e Law 283.
,., Such as in the manufacture of asbestos products harmful to employees (Chandler v Cope pie v Cape pie [2012)
I WLR 3 11I), or release of harmful effluent into waterways which leads to personal injury and damage to
property: Lu11gowev VedantaResourcespie [2017) BCC 787.
189
See also para.3.065 above for a parent's liabilities as an agent.
190
Chandler v Cape pie v Cope pie [2012) I WLR 3 I 11 (Eng CA); Lungmve v VedantaResourcespie [20 I7] BCC
787 (Eng CA). Sec generally Stefan HC Lo, "A Parent Company's Tort Liability to Employees" (2014) I Joumal
of !111ematio11al and Comparative law 117; Scefan HC Lo, In Search of CorporateAccou111ability: Liabilities of
Co,porate Participants(Cambridge Scholars J>ublishing,Newcastle Upon Tyne, 2015) 291-320.
191
Chandler v Cape pie v Cape pie [2012] I WLR 3111, 3128.
192
Tho111pso11 v The Re11wiekGrouppie [2014] 2 8CLC 97 (Eng CA).
195
Okpabi v Royal Dutch Shell pie [2018] EWCA Civ 191 (Eng CA).
1
" See Chapter 20.
144 CORPORATE PERSONALITY

cheque or order for money or goods for the amount of it (unless it is duly paid by
the company). 19s
3.084 Accessorial criminal liability of directors or others. Legislation can also provide for
a type of accessoria] criminal Iiabil ity of directors or others in relation to the company's
contravention of an Ordinance. Under the Companies Ordinance (Cap.622), responsible
persons (as defined in s.3) 196 can also be criminally liable under particular provisions
of the Ordinance where the company is in default. More generally, under s.l0lE of
the Criminal Procedure Ordinance (Cap.221), where a person who has committed
an offence is a company and it is proved that the offence was committed with the
consent or connivance of a director or other officer concerned in the management of
the company, or any person purporting to act as such director or officer, the director or
other officer is also guilty of the same offence. 197
3.085 Transfer of Businesses (Protection of Creditors) Ordinance (Cap.49). It is also
important to note the Transfer of Businesses (Protection of Creditors) Ordinance
(Cap.49). Under s.3 of this Ordinance, a transferee of a business can be liable for
all the debts and obligations arising out of the carrying on of the business by the
transferor. This Ordinance applies to all transfers of businesses and is relevant not only
where there is a transfer of business between companies but also in other contexts. But
in the context of companies, the Ordinance can be relied upon by creditors to seek
recovery against transferees as an alternative to piercing of the corporate veil under
the common law.198

"' Companies Ordinance (Cap.622), s.661 and Companies (Disclosure of Company Name and Liability Stanis)
Regulation (Cap.622B).
196 Under Cap.622, the concept of"re.sponsible person" replaces the concept of"officer in default" but the latter is

still used in Cap.32 (as defined in s.351 (2)).

197 Sec R v Mirclumdtmi[ 1977) HKLRD 523.
198 Sec Liu 1-/011Yingv HuaXin State Ente,prise (Hong Kong)Ltd (2003) 3 HKLRO 347. On the Ordinance generally,

sec BNP Paribas v GC Luckmate TradingLtd {2002] 2 HKLRD 156; Lau Sim Fat v Ng Kwong Yiti (2006) 34
HKLRD 118; Smeloan Hong Kong Ltd v Wong Wing Cheung (2006) 4 HKLRD 757; OTC Intl AG v Perfect
RecoveryLtd (2009) 3 HKLRD 13; YeeFat DevelopmentLui v Wi11/iJ1e KnittingFacto•J'Ltd (2011] 3 HKLRD 511.
 CHAPTER 4

PRE-INCORPORATION CONTRACTS

PARA.
I. Introduction .............................................................................................................................. 4.00 I
2. The Common Law Position...................................................................................................... 4.004
2. l Intention and knowledge .................................................................................................. 4.005
2.2 Liability where the contract is a nullity: breach of warranty ofauthority ....................... .4.010
2.3 Liability of the promoter's principal ................................................................................. 4.015
2.4 Adoption of the pre-incorporation contract by the company ........................................... 4.016
2.5 Trusts ............................................................................................................................... 4.017
3. Co1npanies Ordinance (Cap.622) Section 122 ........................................................................ 4.019

4. Scope of Application of Section 122 ....................................................................................... 4.026

4.1 Purports ........................................................................................................................... 4.026
4.1.1 Sufficient identification of the company ............................................................... 4.027
4.1.2 Shelf companies .................................................................................................... 4.028
4.1.3 Change of name situation ...................................................................................... 4.029
4.1.4 Mistakes as to the name of the company .............................................................. 4.031
4.2 "In the name or on behalf of a company" ........................................................................ 4.032

5. Ratification .............................................................................................................................. 4.034

5.1 Who can ratify ................................................................................................................. 4.034
5.2 How to ratify .................................................................................................................... 4.035
5.3 Whether ratification operates retrospectively .................................................................. 4.041
5.4 Conuuunication ............................................................................................................... 4.047

6. Liability of the Person who Purported to Act for the Company .............................................. 4.048
6.1 Where the company does not ratify the contract.. ........................................................... 4.048
6.2 Where the company has ratified the contract .................................................................. 4.052
-
 1. INTRODUCTION
Pre-incorporation contracts. Pre-incorporation contracts are contracts 4.001
purportedly entered into in the company's name or on behalf of a company before the
company is incorporated. Pre-incorporation contracts can often be commercially
imperative. To ensure the viability of the proposed company's business, it is often
desirable to acquire rights, assets or capital on behalf of the company before
its incorporation.' Pre-incorporation contracts are entered into, for example, to
enable the proposed company to start business immediately after its incorporation 2
or to take advantage of profitable deal opportunities. 3 Pre-incorporation contract
issues can also arise where the company wishes to manage its tax liability through
a ratification of loss-making contracts made by the company's business before its
incorporation. 4
Pre-incorporation contracts primarily governed by Companies Ordinance 4.002
(Cap.622). In Hong Kong, pre-incorporation contracts are governed by Companies
Ordinance (Cap.622), s.122. This provision is de1ived from predecessor CO, s.32A,
which was enacted in 1984. While the wording in s.122 has been altered from
that of its predecessor CO, s.32A, the basic rules provided under that s.32A have
been retained. Section 122 is substantially similar to s.51 of the United Kingdom's
Companies Act 2006. Before the enactment of the statutory provision, disputes arising
from pre-incorporation transactions were settled according to common law rules.
It is necessary to consider the common law rules before the effect of the statut01y
provision, as the former rules are still relevant.
Common law rules on pre-incorporation contracts still relevant. The statutory 4.003
provision on pre-incorporation contracts is better appreciated with an understanding of
the pre-existing common law rules. The courts may find it necessary to reinforce their
decisions reached through an application of the statutory provision with a conclusion
drawn from an application of the common law rules. 5 Moreover, cases that fall outside
the scope of the statutory provision may need to be decided through an application of
the common law rules. 6

Law Reform Commission Victoria, Report No 8, Pre-lnco1poratio11Comracts ( 1979) 8.

An empirical study on pre-incorporation contracts conducted in Jingning county, Zhejiang province in China
shows that promoters of small hydroelectric companies have all undertaken certain pre-incorporation activities,
such as geological exploration, feasibility studies, acquisition of land use rights, compensation for loss of crops:
Z Tong (ed.), Go11gsifaFa/i fo Shizhe11g(Principles and Practice of Company Law) (People Court Press, Beijing,
2003) 13.
3 K Heinemann, Pre-i11corporatio11 Tit111sactio11s(Carl Heymanns Verlag KG, Koln, 1990) 74.
4
As was in Case No 07/89, IRB ofR Dec 185 (W. Turnbull, D. P.H. Chan and A. Malkyard) [1989] HKLY 1029.
5 An example is Quah Pol, Hoe Peter v Probo Pacific Leading Pte Ltd [ I993] I SLR 14, where the court
sought to cement their decision on the personal liability of the person who purported to enter into the
relevant contract on behalf of a company that had not been incorporated at the time of the action through
an application of s.41 of Singapore's Companies Act (Cap.SO 1990 Ed) with a consideration of the effect
of Ke/ner II Baxter ( 1866) LR 2 CP 174, 8fock v Smallwood [) 966] ALR 744, and S11mmergree11v Parker
(I 950) 80 CLR 304
• Cotronic (UK) Ltd v Dezonie (tla Wendaland B11ildersLtd) [ 199J) BCC 200; Badger/iii/ P,·operties Ltd v Cottrell
(1991) BCC 463.
148 PRE-INCORPORATIONCONTRACTS

2. THE COMMON LAW POSITION

4.004 Company cannot be bound by any pre-incorporation contracts. A company

in formation does not have the capacity to make contracts and therefore is unable
to appoint an agent. It follows that nobody can contract as the agent of a company
before the latter's incorporation. 7 The company, once incorporated, is unable to ratify a
contract purportedly entered into on its behalf, since ratification can only be effected
by a person ascertained at the time of the act.8 For the same reason, the company is
not bound by a pre-incorporation contract purportedly made on its behalf, nor can the
company sue upon the contract. 9

2.1 Intention and knowledge

4.005 Where both parties are aware company not incorporated, and enter into pre-
incorporation contract, such contract may still be binding. The courts have
developed a set of rules based on the parties' intention, which can be imputed on the
basis of the parties' knowledge as to the existence of the company. Thus, where both
parties knew at the time of contract that the company on whose behalf the contract
was entered into had not been incorporated yet, and if the proposed company is
subsequently incorporated but fails to perform the contract, the person who purported
to make the contract on behalf of a proposed company may be held to have contracted
as the principaJ.IOThe reference to the "proposed" company in Ketner v Baxter 11
indicated that the parties were aware of the non-existence of the company. The parties
must have intended, absent evidence to the contrary, that the person acting for the
proposed company was to be liable for the contract, as the parties must be taken to
have the intention to conclude a binding contract. 12
4.006 Rebuttable presumption that person making contract on behalf of company
may be personally bound. There are some New Zealand authorities that suggest
that in a situation similar to that in Ke Iner v Baxter, 13 where one party has executed
his part of the contract, there is a rebuttable presumption that the person who
purportedly made the contract on behalf of the proposed company is personally
bound to the contract. 14

1 Tinnevelly Sugar Refini11g Co Ltd v Mirrlees Watso11a11dll11J>a11

Co Ltd (I 894) 2 SLT 149; Newbome v Se11Solid
(Great Britain) lld[1954) I QB 45.
• Keh1er v Baxter (1866) LR 2 CP 174, 184, per Earl CJ; Natal Ltmd a11dCo/011izalion Co Ltd v Pa11/i11e Colliery
& Development Sy11dicateLtd [ 1904] AC 120, 126, per Lord Davey.
9
Tinnevel(y Sugar Refi11i11g Co Ltd v Mirrlees Watso11a11dll'lrya11 Co Ltd (1894) 2 SLT 149.
•° Kel11erv Baxter ( 1866) LR 2 CP 174.
11 (1866) LR 2 CP 174.
" J P Mambrook, "Pre-Incorporation Contracts and the National Companies code: What does Section 81 Really
Mean" (1982) 8 Adel LR 127.
" (1866) LR 2 CP 174.
" Mt1rbelsto11e lnd11stries Ltd,, Fairchild [1975] I NZLR 529. 542, per Mahon J; Power v Nathan [1981) 2
NZLR 403, 409,perVautier J; Elders Pastof'(II Ltd v Gibbs [1988] NZLR 596, 601--603,per McGechan J. In
Marblestone Industries. Mahon J expressed the view at 542 that the presumption was "irresistible". However, in
Elders Pastoral, McGe<:hanJ observed that while there can be such a presumption of some strength, it would be
wrong to say that the presumption is ''irresistible" or "irrebuttable" (at 603).
 THE COMMON LAW POSITION 149

Harder to impose personal liability where both parties believe company 4.007
in existence. Where both parties mistakenly believed that the company was in
existence when the contract was made, it is harder to impose personal liability
on the person(s) who executed the contract in the name of the company. In both
Newborne v Sensolid (Great Britain) Ltd 15 and Black v Smallwood,' 6 where the
pseudo directors had wrongly believed the company to be in existence and had
therefore subscribed the name of the company on a contract and added their own
signatures underneath, the contract was held to be a nullity. It was held to be a
contract purportedly made by the company itself, rather than one made by the
person executing the contract on behalf of the proposed company. 17 The function
of the signatures of the pseudo directors in Newborne v Sensolid 18 was just to
confirm the signature of the company. 19
Personal liability difficult to impose as company intended to be principal of the 4.008
contract. The basis of the cowts' decisions in both Newborne v Sensolid 20 and Black
v Smallwood 21 appears to be that the real principal of the contract was the company
and the pseudo directors were acting only in their ministerial capacities. The true test
of the liability of the pseudo directors in this situation may still be the real intention
of the parties. It is possible to argue that the third-party contractor and the purported
director made the same mistake on the existence of the company when the contract
was executed, which means that the company, not the purported director, was intended
to be the principal of the contract. In Phonogram Ltd v Lane, 22 Oliver LJ said that his
Lordship was not convinced that the common law position depends on the narrow
distinction between a signature "for and on behalf" and a signature in the name of the
company. The question, his Lordship held, was: "what is the real intent as revealed by
the contract." 23
Intention of parties critical to determining liability. Mahon J's decision in 4.009
Marbelstone Industries Ltd v Fairchild 24 appears to have been based on the
same view. His Lordship suggested that an alternative way of achieving the same
result in a situation similar to that in Newborne v Sensolid 25 would be to impute
a mutual intention to all signatories that the contract was to be made with the
company alone where all signatories mistakenly believed that the company was
existent. 26

15 (1954]1QB45.
1• [ 1966] ALR 744.
17
Newbome v Se11solid(Great Brilai11)Ltd [ 1954) I QB 45, 51, per Lord Goddard CJ; Black v Smallwood [ 1966)
ALR 744, 749,per Barwick CJ, Kotto, Taylor and Owen JJ; 749-750,per Windeyer J. See also Hawkes Bay Milk
Co,y1Ltd v Watson[1974) I NZLR 236.
18
(1954) I QB 45.
19
[1954] I QB 45, 51,per Lord Goddard CJ.
20
[1954) I QB 45.
" [ 1966) ALR 744.
22 [ 1982) QB 938, 945.

" [ 1982) QB 938, 945.

" (1975) I NZLR529.
" (1954) I QB 45.
26 Marbles/one Industries Ltd v Fairchild (1975) I NZLR 529,542.
150 PRE-INCORPORATION CONTRACTS

2.2 Liability where the contract is a nullity: breach of warranty of authority

4.010 Parties may still be held liable for breach of warranty even if not personally
liable under pre-incorporation contract. That an "agent" or pseudo director is not
personally liable on the contract made under the mistaken belief as to the company's
existence does not necessarily mean the agent or pseudo director is liability-free.
A purported agent can be made liable for breach of warranty of authority.27 A person
who induces another to contract with him or her on the basis that he or she, the former,
is acting as an agent of a third-party is liable for damages to the other contracting party
if that person has suffered damage because of the falsehood of the purported agent's
unqualified assertion of his or her authority to act as such agent. 28 The purported agent
will also breach his or her warranty if he or she makes a contract while the alleged
principal does not exist.29
4.011 Measure of damages against agent for breach of warranty is loss parties should
reasonably have contemplated to result from breach. What, however, is the measure
of damages that the contractor may seek for a breach of warranty of authority?
According to Bowstead & Reynolds on Agency:

" ...[t]he measure of damages for breach of warranty of authority is the loss which
the parties should reasonably have contemplated as liable to result from the
breach of warranty". 30

4.012 Measure of damages for breach of warranty is "what would have been gained
by contract which should have been made". In Re National Coffee Palace Co Exp
Panmure,31 Brett MR observed that the measure of damages in actions for breach of
warranty was:

" ...what the plaintiff actually lost by losing the particular contract which was to
have been made by the alleged principal if the defendant had had the authority
he professed to have; in other words, what the plaintiff would have gained by the
contract which the defendant warranted should be made". 32

4.013 No damages can be obtained if plaintiff would have gained nothing from contract.
Thus, the plaintiff may not be able to obtain any damages if he or she would have
gained nothing from the contract that would have come into existence but for the lack
of authority on the part of the purported agent because, for example, that contract
would not have been enforceable (such as where the contract is one for the sale of
land but there is no memorandum in writing as required by the relevant conveyancing
legislation). 33 Where the principal that the purported agent has held out was insolvent,

27 Black v Smallwood [1966] ALR 744, 747,per Barwick CJ, Kitto, Taylor and Owen JJ.
" Collen II Wright (1857) 120 ER 241, 245,per Willes J.
" Black v Smallwood [ 1966) ALR 744, 747-749, per Barwick CJ, Kitto, Taylor and Owen JJ.
30 FM B Reynolds, Bowsread& Rey11olds011Agency (Sweet & Maxwell, London, 200 I) 504-505.
" ( 1883) 24 Ch D 367.
" (1883) 24 Ch D 367, 371-372.
" Bort!as vAngelopoulo.t (1991) 5 BPR 11,477, 11,490--11,491, per Kirby J; Hadid vAustralis Media Ltd [1999)
NSWSC 32 (11 February 1999) [l4]-[16).
 THE COMMON LAW POSITION 151

the plaintiff will not be entitled to any damages. 34 On the other hand, if the principal
was solvent, the plaintiff would recover the whole loss. 35
Unlikely to obtain even nominal damages where principal insolvent. Some jurists 4.014
and critics hold the view that even where the principal is insolvent, the plaintiff may
recover nominal damages as well as the costs for the legal proceedings. 36 Whether this
is the case is, however, uncertain. As Kirby J pointed out in Bou/as vAngelopoulos, 37
there does not appear to be any English authorities in which an award of nominal
damages has been made in this situation; and the position in Canada is that where the
primary contract is unenforceable, no damages will be awarded.

2.3 Liability of the promoter's principal

Promoter's principal may be held jointly liable with promoter. Where a pre- 4.015
incorporation contract is made on behalf of a company in formation by a promoter, it
is possible to hold, apart from the promoter, another person jointly liable, if that other
person can be regarded as the promoter's principal who has authorised the making of
the contract. In Reese Bros Plastics Ltd v Southern Co-operative Fruit Processors, 38
the pre-incorporation contract was approved by the "provisional directors" of the
company in promotion. The court held Sutherland, the promoter and a provisional
director, and Speight, who was also a provisional director, jointly liable for the goods
supplied pursuant to the pre-incorporation contract. Sutherland contracted as both the
principal and the agent of the provisional directors. Speight was liable as Sutherland's
p1incipal.

2.4 Adoption of the pre-incorporation contract by the company

After incorporation company can only become party to contract through novation. 4.016
Where the company is duly incorporated and is able and willing to pe1form the contract,
the only way for it to become a party to the contract is through novation: "Novation
takes place where the two contracting parties agree that a third, who also agrees,
shall stand in the relation of either of them to the other". 39 Where a pre-incorporation
contract is regarded as being entered into bet\veen the promoter and the third-party
contractor, the parties, as well as the company, can agree that the company will replace
the promoter as a party to the contract. Where there is a novation, there is a new
contract between the company and the third-party contractor on the same terms as the
original contract, and the original contract is regarded as being discharged.

For the novation to be effective, the company must either have expressly agreed to, or
have done acts that are necessarily referable to, the new agreement. 40 There will not

" (1883) 24 ChD 367, 372,per Brett MR.

Re Natio11al Coffee Palace Co Exp Pa1111111re
35
Re Natio11al Coffee Palace Co. Exp Pa11mure(1883) 24 ChD 367, 372; Lomax v Da11kel(1981) 29 SASR 68.
36 For example, lee v lro11s[I 958) VR 436, 447-448, per Pafe J (obiler dicta).
37
(1991)5BPR 11,477.
" ( 1989) 4 NZCLC 64,890.
39
Chilly 011 Co11rracts,Vo/ I: General Principles (30th edn, Sweet & Maxwell, London, 2010) 1367.
•• Natal la11d and Coloni;atio11 Co v Pa11/i11e [ 1904] AC 120.
Colliery and Developmenl -~y11dica1e
152 PRE-INCORPORATION CONTRACTS

be a novation where the company simply assumes (mistakenly) that it is a party to

the existing pre-incorporation contract. 41 It should be noted, however, that the avenue
of novation is only available where it is possible to regard the promoter as a party to
the contract entered into before the incorporation of the company.42 It follows that
novation has no application where the pre-incorporation contract in dispute is held to
be a nullity. One way for the third-party contractor to overcome this limitation is to
insist on contracting with the promoter as a principal and incorporating a provision in
the contract ending the promoter's liability upon the incorporation of the company.43

2.5 Trusts

4.017 View that pre-incorporation contracts can be regulated by trusts by comparing

proposed company with unborn baby. As can be seen from the discussion above,
the difficulties in settling disputes arising from pre-incorporation contracts lie in the
impossibility of determining parties' rights, obligations, and liabilities through agency
rules. Some commentators are of the view that pre-incorporation contracts can be
regulated through the notion of trusts, as it is possible to compare a proposed company
with an unborn baby.44 Courts have also encountered situations where the promoters
purported to enter into a pre-incorporation contract on behalf of the proposed company
as trnstees. 45 It does not appear to be realistic, however, to settle pre-incorporation
contract disputes by conceptualising the relationship between a promoter and the
proposed company as one of trust. In none of the reported cases have the courts based
their decisions on the basis that it is doctrinally possible for a promoter to enter into
a pre-incorporation contract as a trustee. The apparently insum1ountable doctrinal
barrier for treating a promoter as a trustee is the "beneficiary principle", which is a
fundamental trust law principle. 46 This principle says that there must be somebody in a
trust, "in whose favour the court can decree perfoimance". 47 In other words, there must
be beneficiaries who can apply to the court to enforce the trust.48 lt is therefore hardly
possible to create a trust with an unborn baby, hence a proposed company, as the sole
beneficiary. McKenzie argues that the beneficiary principle has not been applied to
the trust for the benefit of an infant or unborn child,49 citing Re Bowles, Amedroz v
Bowles 50 as an example. In that case, Farwell J did say that:51

" Ti11nevellySugar Refi11i11gCo Ltd v Mirrlees Wa1so11{mdYarva11Co Ltd (1894) 2 SLT 149.
42 For example, in a Ketner v Baxter (1866) LR 2 CP 174 situation or where the person who purported to make
the contract in the name or on behalf of the company is deemed as the principal of the contract under a pre-
incorporation provision, such as Companies Ordinance (Cap.622) s.122.
43
See RP Austin and I M Ramsay, Ford'., Pri11ciples of Co,porations Law (15th edn, LexisNexis Butte,worths,
Sydney, 2013) (15.390].
" For example, PD McKenzie, "The Legal Status of the Unborn Company" 5 (1973) NZULR 211.
'1 For example, Re Nonhumberla11d Avenue Hotel Co (1886) 33 Ch D 16; North Syd11eyInvestment and Tramway
Co v Higgins [ 1899) AC 263; Cass v McCutcheon ( 1905) 15 Manitoba LR 669; Dudley Buildings Pty Ltd v Rose
(1933) 49 CLR 84; Rita Joan Dairies Ltd v Thomson (1974] I NZLR 285.
"' Morice v Bishop of Durham (1804) 9 Yes 399.
47
Ibid., per Sir William Grant MR, 404-405.
48 J Mowbray, et al., Lewin 011T111s1s(Sweet & Maxwell, London, 2000) 86-87.
49 PD McKenzie, "The Legal Status of the Unborn Company" (1973) 5 NZULR 211.
'° (1902]2Ch650.
" Re Bolwes, Amedroz v Bolwes {190]}] Ch 650. 653.
 COMPANIES ORDINANCE (CAP.622) SECTION 122 153

" ...[s]o long as you make it clear that the limits of perpetuity are not transgressed,
you may appoint personal estate to an unborn child for life, with remainder to
unborn children."

Beneficiary principle can still be applied to unborn child. The above quotation of 4.018
Farwell J, which was quoted by McKenzie, 52 however, cannot be taken to mean that
the beneficiary principle is inapplicable for a trust with an unborn child as the sole
beneficiary. Re Bowlesn is a future interest case. There, by a marriage settlement,
personal estate was settled in trust, after life interests given to the husband and wife,
for the children of the marriage, or any issue born in the lifetime of the survivor of the
husband or the wife in a certain share and manner. The issue there was whether the old
rule against "a possibility on a possibility", which was applicable to real estate, had
application to personal estate. The beneficiary principle was surely complied with in
that case, as there were beneficiaries in that marriage settlement trust, i.e. the couple.
In other words, there were beneficiaries who could enforce the trust where such a need
arose. If no children were born when the couple's respective life interests lapsed, the
trust would fail and the trust property would be held under a resulting trnst in favour of
the settlor,54 who, in a marriage settlement, is normally the husband himself. 55

3. COMPANIES ORDINANCE (CAP.622)SECTION 122

Common law rules unable to resolve pre-incorporation disputes satisfactorily. 4.019
The conceptual tools available at common law are unable to resolve pre-incorporation
disputes satisfactorily. An application of rules of agency law can render a pre-
incorporation contract unenforceable. A distinction made between a contract
purportedly made on behalf of a non-existent company and one made by the
company itself can lead to the conclusion that the contract is a nullity. Holding a pre-
incorporation contract a nullity or otherwise unenforceable does not accord with a
belief that bargains should be kept.56
Problematic to base decision on parties' supposed intention or knowledge under 4.020
common law. A decision made on the basis of the parties' intention or knowledge, or the
above-mentioned distinction, can be so highly technical that an average businessman is
unlikely to appreciate it. Promoting a company under the traditional common law rules
therefore would require the service of experienced corporate lawyers with "scrupulous
attention to detail", something that small private companies cannot afford. 57
Legislation required to resolve pre-incorporation contract disputes. The inability 4.021
of traditional approaches to resolve pre-incorporation contract disputes called for

52 PD McKenzie, "The Legal Status of the Unborn Company'' (1973) 5 NZULR 211,211.
SS [ 1902] 2 Ch 650.
5' s
Re Va,ulerve/1Trusts [ 1974] Ch 269, 289 per Mcgarry J; R P Meagher & WM Gummow, Jacobs law o/Trusts
in Australia (6th cdn, Buttcrworths, Sydney, 1997) 285ff.
s, For a specimen marriage settlement, sec The Rt. Hon. Lord Millett, PC (ed.), The Encyclopaedic, of Forms cmd
Precedents (5th edn, 2001 Reissue, Buttcrworths, London. 2001) Form 7 (1136].
'6 Black v Smallwood [ 1966) ALR 744, 749, per Windeyer J.
" L Geiz, "Pre-incorporation Contracts: Some Proposals" (1967) UBC L Rev 381, 399.
154 PRE-INCORPORATION CONTRACTS

legislative intervention. This was noted in the report submitted by the Company
Law Committee (UK) headed by Lord Jenkins in 1962, in which a pre-incorporation
contract provision was recommended. lt was proposed to give a company the ability
to adopt pre-incorporation contracts unilaterally and to impose personal liability on
the person who purported to act for the company where the company did not adopt
such contracts. 58 No action was taken on this recommendation in the Companies Act
(UK) 1967.
4.022 Relevant provision first enacted in Hong Kong in 1984. Hong Kong's first
pre-incorporation regime was put in place as a conseqeuence of the enactment of
s.9 of the European Communities Act 197259 in the United Kingdom. Under s.9, the
pre-incorporation contract shall take effect as a contract entered into by the person
purporting to act for the company or as an agent for it, and that he or she shall be
personally liable on the contract. The Companies Law Revision Committee of Hong
Kong took note of this and recommended in its second report the introduction of a
pre-incorporation contract provision similar to s.9(2) of the European Communities
Act 1972.60 The Companies Law Revision Committee did not appear to be supportive
of the Jenkins Committee's recommendation on a company's ability to unilaterally
adopt contracts. 61 Nonetheless, a provision was enacted in 1984 in Hong Kong
(predecessor CO, s.32A (repealed)) which did allow the company to adopt pre-
incorporation contracts. The provision also provided for the liability of the person
purporting to act for or on behalf of the company. As mentioned earlier, predecessor
CO, s.32A has now been re-enacted as Companies Ordinance (Cap.622), s.122.
4.023 Companies Ordinance (Cap.622) section 122 deals with pre-incorporation
disputes. Section 122 provides:

"( 1) this section applies if a contract purports to have been made in the name or
on behalf of a company before the company was incorporated.

(2) Subject to any express agreement to the contrary -

(a) the contract has effect as a contract entered into by the person
purporting to act for the company or as an agent for the company; and
(b) the person is personally liable on the contract and is entitled to enforce
the contract.

(3) After incorporation, the company may ratify the contract to the same extent
as if-
(a) the company had already been incorporated when the contract was
entered into; and

58 Jenkins Report, para.54(b).

'9 Subsequently contained in Companies Act 1985 (UK) s.36(4) (renumbered as s.36C in 1990), and now in
Companies Act 2006 (UK) s.51. As to interpretation of that provision, see the English Court of Appeal decision
in PhonogramLtd v Lane [1982) QB 938.
60 The Companies Law Re,•ision Committee, Second Report ( 12 April 1973) 75.
6' Ibid.
 SCOPE OF APPLICATION OF SECTION 122 155

(b) the contract had been entered into on the company's behalf by an agent
acting without the company's autho1ity.

(4) Despite subsection (2)(b), if the contract is ratified by the company, then on
and after the ratification, the liability of the person mentioned in that subsection
is not greater than the Iiabil ity that the person would have incurred if the person
had entered into the contract after the company's incorporation as an agent acting
without the company's authority."

Person who purported to contract for company liable on contract and can enforce 4.024
it. Where s.122 of Cap.622 applies, prima facie, the person who purported to contract
for the company is liable on the contract and can enforce it: s.122(2). This is the case
even if the company was never in fact incorporated. 62 If the company is incorporated,
then under s.122(3), the company can choose to ratify the contract and become entitled
to enforce it and be liable on it. This alters the common law position.
Issues court look to clarify when applying s.122. The concepts that the courts need 4.025
to clarify when s. I22 is invoked relate mostly to: (i) the scope of the application of
that provision; (ii) issues relating to ratification of the pre-incorporation contract, as
well as; (iii) the position of the person who has purportedly entered into the contract
in the name or on behalf of the company when the company has ratified but failed to
pe1form the contract.

4. SCOPE OF APPLICATION OF SECTION 122

4.1 Purports

Contract must pwport to have been made on behalf of company to fall under 4.026
s.122. An agreement does not fall within the ambit of Cap.622, s.122 if it is not a
contract that purports to have been made in the name or on behalf of a company yet
to be incorporated. The following issues might arise: (i) whether the future registered
company is sufficiently identifiable as the one named in the contract; (ii) whether the
contract falls within the ambit of s.122 in various "change of name situations"; and
(iii) the position of the parties where the name of an existing company is mistakenly
represented in the contractual document.

4.1 J Sufficient ide11tificatio11

of the company
Adequate description of company necessary at time of transaction. In order to 4.027
establish that the contract was purportedly entered into on behalf or in the name
of the company, adequate description of that company must appear at the time of
the transaction "in order to enable a future registered company to be reasonably

62 Phonogram Ltd v lane (1982) QB 938.

156 PRE-INCORPORATION CONTRACTS

identifiable as the company". 63 Thus, a statement such as "I'm forming a new shelf
company for this project so that I can sell the company if necessary" would fall short
of establishing that the maker of the statement was entering into a contract on behalf
of a company before it was registered.64 In Taylor v Todd,65 the first defendant entered
into a prope11ycontract with the plaintiff"as agent for a company/ies and/or trust(s) to
be fonned". The court held that a company registered after the transaction was unable
to ratify the contract under the statutory provision, as:

" ...[t]he desc1iption in the agreement itself indicated that it was not made on
behalf of a company whose incorporation was in contemplation and which would
ratify the contract in a timely fashion but that no decision had been made whether
the purchaser would be a company or a trust". 66

4.1.2 Shelf comptmies

4.028 Shelf companies do not fall under s.122 if company exists before contract
entered into. A shelf company is a ready-made "paper company" that has already
been incorporated by an accounting or law firm. Acquiring a shelf company has
traditionally been a faster way of obtaining a corporate vehicle than incorporating a
new company through the incorporation and registration process. The purchaser of
a shelf company may need to change the name, constitution, the identity of officers
and shareholders to suit. It is possible for a promoter to enter into a contract and then
to acquire a shelf company to ratify the contract. Such a contract does not fall within
the scope of s.122 if the company was incorporated before the formation of the
contract. The company in this situation is not one that "has not been incorporated"
at the time of the contract.67

4.1.3 Change of name situation

4.029 Registration of company's change of name not equivalent to re-incorporation
so contract not pre-incorporation contract. The issue of whether a contract was
purportedly entered into on behalf of a company when it has not been incorporated
can crop up in a number of "change of name" situations. The issue can arise where a
promoter enters into a contract in the name of a non-existent company and subsequently
changes the name of a pre-existing shelf company to one identical or similar to that
of the non-existent company named in the contract. This was the situation in Cross
v Aurora Group lld. 68 The court held that the contract was not made for the then
existing shelf company, there being no evidence that the promoter intended to make

6l RP Austin and IM Ramsay, Ford:~Principles o(Corporaiions Law(l5th edn, LexisNexis Butterworths, Sydney
2013) [ I 9.030].
64 Oaktwig Pty Ltd v Glenlwve11Property Holdings Pty Ltd (2007] NSWSC 1533, (97].
6S [2004] 3 NZLR 76.
"' [2004] 3 NZLR 76, 77.
6' Commo11wea/1t,8011k of Australia v Australia11 Solar Jnformatio11 Pty Ltd ( 1986) 11 ACLR 380; Oshkosh
8 'Gosh Inc v Da11Marbel !11cLtd [ 1989] BCLC 507. See also Cross v Aurora Group Ltd ( 1989) 4 NZCLC
64,909.
•8 (1989) 4 NZCLC 64,909.
 SCOPE OFAPPLICATIONOF SECTION 122 157

the contract on behalf of that company.69 Nor was it a contract entered into on behalf
of a company that came into being when the certificate of incorporation of a company
was issued upon the registration of the shelf company's change of name. The certificate
simply stated that the company's name had been changed, and the operative pa1i of the
certificate was a ce11ificationthat the company was incorporated on the original day of
its incorporation. The registration of the company's change of name was not equivalent
to a re-incorporation of the company.7° The contract in this situation was therefore not
one that was purportedly made for a company when it was not incorporated.
Contracts made under company's new name before change of name process 4.030
finalised not pre-incorporation contracts. The same issue can also crop up where
the company has decided to change its name but a contract has been entered into
under the new name before the change of name process is finalised. In Oshkosh B'
Gosh Incorporated v Dan Marbel Incorporated Ltd, 71 a number of sale of goods
contracts were entered into and perfonned after the company's change of name
had been made but before a certificate of incorporation in the new name had been
issued. The contracts were made in the company's new name. The plaintiff supplier
sued a director who authorised the transactions. The court held that the change of
name took place only when the ce11ificate of incorporation on change of name was
issued. It follows that the contracts were made with the company, which was then
existent, although the company was trading under an incorrect name. The reason why
the contracts did not fall within the ambit of the pre-incorporation contract provision
(s.9(2) of the European Communities Act 1972) was that the effect of the issue of the
certificate of incorporation on change of name was not to re-incorporate the company.
In other words, the contracts were not purportedly made for a company before it was
incorporated. 72

4.1.4 Mistakes as to the name oftlte company

Wrong company name on contract does not make contract pre-incorporation 4.031
contract. The issue of whether the contract in dispute is one purportedly entered into
in the name or on behalf of the company can also arise where the name of an existing
company is mistakenly represented in the contractual document. In Badgerhil/
Properties Ltd v Cottrell,13 the contracts were made on the company's letterhead where
the company's name (Badgerhill Properties Ltd) was incorrectly set out (as Badgerhill
Prope1iy Ltd) due to an error of the p1inter. The contract document stated that the
company had traded as "The Plumbing Centre". One of the issues there was whether
the director who signed the contract was personally liable under the agreement. The
issue turned on whether the contract fell within the ambit of s.36( 4) of the Companies
Act 1985 (equivalent to Companies Ordinance (Cap.622), s.122(2)). Woolf LJ held

69 (1989) 4 NZCLC 64,909, 64,912. The outcome in Cmss might be different ifthere was evidence that the existing
shelf company was intended to be the principal of the concract, but the contract would not be considered as a
pre-incorporation contract ratifiablc by a company not existent when the concract was entered into.
1
• (1989) 4 NZCLC 64,909.
11
c1989) 4 ace795.
72 Sec also the Scottish case of Vic Spe11ceAssociates s
v B"tchi111990 SLT I 0, where OshkoshB GoshIncorporated
Ltd was followed.
v Dan M"rbel !11co1poroted
" (1991) BCC 463.
158 PRE-INCORPORATION CONTRACTS

that the contract was entered into by the legal entity that traded under the trading name
indicated in the contract and that entity was an existing company although its name
was incorrectly printed on its letterhead. As the company was not one that had not
been fom1ed, s.36(4) did not apply.

4.2 "In the name or on behalf of a company"

4.032 Difference between "on behalf of" and "in the name of". "In the name of" is
different from "on behalf of". A situation like that in Baxter v Kelner 14 (where both
the promoter and the third-party contractor knew that the contract was being made for
a company in formation) is clearly one where the signatory executes the contract on
behalf of the (proposed) company.
4.033 Section 122 covers situations where both parties believe company already
in existence and sign "in the name of" company: departure from common
law position. The phrase "on behalf of", prima facie, does not cover a "company
signature" situation, where the parties would be taken to intend that the company
itself is the party to the contract: see para.4.007 above. The phrase "in the name of"
is therefore included in Cap.622, s.122 to cover a Newborne v Sensolid 15 and Black v
Smallwood 16 situation. The majority of the Australian High Court pointed out in the
latter case that the persons who signed the contract "did not contract, or purport to
contract, on behalf of the non-existent company. They simply subscribed the name
of the non-existent company and added their own signatures as directors in the belief
that the company had been formed and they were directors". 77 The person who has
signed as a company officer would not have purported to contract "on behalf of" the
company. Instead, he would be purporting to sign as the company or in the name of
the company.78 Accordingly, s.122 alters the common law as set out in cases such as
Newborne v Sensolid. 19 As discussed above (see para.4.007), under the common law,
where persons sign in the name of the company, the contract would not be regarded as
being entered into by that person. This is altered under s.122 such that the person could
be treated as a party to the contract and be liable on the contract.

5. RATIFICATION
5.1 Who can ratify

4.034 Company can ratify contract. As discussed earlier in this chapter, a company is
unable to ratify a pre-incorporation contract under the common law.80 This is altered
under Cap.622, s.122(3), which allows the company to ratify the pre-incorporation

" (1866) LR 2 CP 174.

75 [1954) I QB 45.
76
[1966) ALR 744.
77
[1966) ALR 744, 749.
78
J P Mambrook, "Promoters and Pre-registration Contracts" in A11srralia11
Co111orario11s
Law - Principles a11d
Pracrice (looseleaJ;LexisNexis) [2. 5.0085].
.,., [1954) 1 QB 45.
so Sec para.4.004.
 RATIFICATION 159

contract. A company enters into a transaction through the person who has the authority
to enter into transactions on behalf of the company. As the board of directors usually
has power to authorise the company to enter into contracts, 81 ratification can be made
by a resolution of the board or by any person acting under the authority of the board
(such as the managing director of the company 82 ). If the promoter who entered into the
contract in the name or on behalf of the company subsequently became the controller
of the company having authority to act on behalf of the company, it is possible for the
promoter himself to ratify for the company.83

5.2 How to ratify

Ratification usually effected impliedly by words or conduct. Section 122 does not 4.035
provide for the ways in which a transaction falling within the scope of this provision
may be adopted. Textbooks and case law authorities appear to take the view that what
constitutes ratification for the pmpose of a pre-incorporation regime is governed
by the law of agency.84 Ratification need not be express. It may be, and normally
is, done impliedly by way of words or conduct. 85 There will be ratification if there
is conduct which plainly indicates that the newly formed company intends to adopt
and perform the pre-incorporation contract. 86 For example, conduct that amounts to
implied ratification can be actual performance of the contract in dispute. In Aztech
Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd, 87 the payment made pursuant
to a pre-incorporation contract by a director (who was also the sole shareholder and
who was described as the directing mind of the company), with authority, was held to
amount to an effective ratification of that contract on the part of the company.88
Poo11case. In Poon Yee Kan v New Paradigm £-Technology Ltd,89 the plaintiff 4.036
entered into an employment contract with the promoters of a company to be formed
(NP Co), the defendant company. The promoters were shareholders of IVRS Co, the
company which was to become the majority shareholder in NP Co after the latter's
incorporation. When the contract was entered into, NP Co was not incorporated yet.
Under the contract, the plaintiff, who was to be engaged as a senior staff member of
NP Co, was granted an oral option with regard to 8 percent of the issued shares in NP
Co, exercisable before any future takeover took place. The plaintiff duly exercised her
option after the incorporation of NP Co but the latter failed to perform its obligations
under the option agreement.

81 See Chapter 12.

12
Auech Science Pty lid vAtlanta Aerospace (Woy Woy) Pry Ltd(2005) 55 ACSR I; Poon YeeKam v New Paradigm
£-Technology Ltd (unrep., CACY 325 and 326/2004, [2006] HKEC 2222).
u Aziech Science Pry lid vAtlanta Aerospace (Woy Woy) Pry ltd(2005) 55 ACSR I; Poon YeeKam v New Paradigm
E-Teclmology Ltd (unrep., CACY 325 and 326/2004, [2006] HKEC 2222).
8' RP Austin and I M Ramsay, Ford:f Principles of Cotporations law (15th edn, LexisNexis Butterworths,
Sydney, 2013) 971; Poon YeeKam v New Pamdigm £-Technology Ltd (unrep., CACY 325 and 326/2004, [2006)
HKEC 2222).
8' FM B Reynolds, Bowstead & Reynolds 011Agency (17th edn, Sweet & Maxwell, London, 200 I) 2-073.
'"' 'Tttylor v Todd [2004] 3 NZLR 76, para.[56).
87 (2005) 55 ACSR I.
88 (2005) 55 ACSR I, (86), (89).
89 (unrep., CACV 325 and 326/2004, (2006) HKEC 2222).
160 PRE-INCORPORATIONCONTRACTS

4.037 Poon case: contract impliedly ratified by correspondence between parties. The
court had no difficulties in holding the contract to be one between the plaintiff and the
promoters on the basis of the predecessor CO, s.32A(l)(a) (repealed). 90 On the issue
of whether NP Co had ratified the contract, Cheung JA held that NP Co did impliedly
ratify the option contract. This was because among other things, both Mr Lai, the
managing director of NP Co, and Dr Wong, a shareholder in lYRS Co, wrote a letter to
the plaintiff after the incorporation of NP Co to confirm the pre-incorporation option
contract.
4.038 Fung case. Where the contract is a commercial lease, moving into the premises and
starting the operation of the business may be taken as acts of ratification. In Fung
Pui Yi Irene v Motivics & Co Ltd,9' a promoter of a company signed a three-year
Tenancy Agreement on behalf of a company one day before the incorporation of
the company. The promoter had also signed in his own name a Sale and Purchase
Agreement for a restaurant business operated at the premises. After the company's
incorporation, Mr. Tan, a director of the company, continued operation of the
restaurant business at the premises. The applicants, who were the owners of the
commercial property, commenced proceedings in the Lands Tribunal for recovery
of the premises when the company stopped its rental payments. Mr. Tan denied the
company's involvement in the restaurant business, pointing out that the company
was not a party to the contracts.
The Lands Tribunal pointed out that in Natal Land & Colonization Co Ltd v Pauline
Colliery & Development Syndicate Ltd,92 where the situation was similar, the Privy
Council had held that, inter alia, occupation of the premises and starting the company's
business amounted to a ratification of the pre-incorporation lease agreement. The
Tribunal held that the company had ratified the Tenancy Agreement, pointing to
the fact that the restaurant business was conducted at the premises (which fact was
not in dispute) and to WhatsApp messages that Mr. Tan had sent to the applicants
acknowledging the company's responsibility for the rental payments.
4.039 Conduct of company does not always amount to implied ratification. That
ratification can be done impliedly, however, does not mean that any act done by the
company that is apparently consistent with a decision to ratify the contract amounts
to ratification. In Development Finance Corp of New Zealand v McSherry Export
Kilns Ltd (in liq)93 ( "McSherry"), a pre-incorporation debenture contract was made on
behalf of a kiln company. Quilliam J held that a "mechanic act" of registration of the
debenture by the servants of the company who believed the debenture to be valid did
not effect a ratification of the contract. His Honour said:

"It is, I think, fundamental that there can be no ratification unless there is a
conscious intention to ratify. It is implicit in s.42A [which is the pre-incorporation
contract provision under New Zealand's Companies Act] that some deliberate act

90 Which is equivalent to Companies Ordinance (Cap.622), s.122(2).

1
• (unrep., LOPE 819/2017, [2017) HKEC 2399).
92 [1904) AC 120 (PC) .
•, (1987)3 NZCLC99,998.
 RATIFICATION 161

shall have been done for the purpose of confirming something which would be
imperfect without that confirmation."

Ratification can only be implied from company's conduct if that was purpose 4.040
of such conduct. In McSherry,94 the servants of the company who completed the
registration of the debenture did not do so "for the purpose of confirming something
which would be imperfect without that confirmation". They did it for the purpose of
meeting the statutory requirement with regard to registration of a debenture, which
they thought was valid, not for the purpose of "confirming", or ratifying the pre-
incorporation debenture contract.

5.3 Whether ratification operates retrospectively

Ratification usually operates retrospectively under agency law. Ordinarily, where a 4.041
principal ratifies a contr<1ct
entered into by an agent without authority,the ratification takes
effect retrospectively,as the contract is treated as having been entered with the authority
of the principal.95 The retrospective effect is subject to certain qualifications; for example,
ratification cannot divest proprietary rights which had been vested before ratification.96

Australian case: ratification not retrospective for pre-incorporation contracts. 4.042

The issue arises as to whether the same principles apply in relation to the statutory
provision for ratification of pre-incorporation contracts. This was considered in
the Australian decision of Kevroy Pty lid v Keswick Developments Pty ltd9 7 in the
context of s.131 of the Corporations Act 200 l (Aust). According to Lyon J, the pre-
incorporation contract would only be regarded as a contract entered into and binding
on the company from the time of ratification and not from the time when the contract
was purportedly entered into for the company before incorporation, nor from the time
of incorporation of the company. In reaching this decision, His Honour accepted that,
in the absence of a clear legislative statement, "there could hardly be retrospective
formation of a contract from the time the agent or trustee purported to make it".98
Lyons J pointed out that the predecessors of s.131 did explicitly provide for the
ratification to operate retrospectively. This fact, and taking into consideration the fact
that the current provision does not contain such express words, must mean that there
was no legislative intention for the ratification to operate retrospectively.99

Wording of Australian legislation different to wording of Companies Ordinance 4.043

(Cap.622) s.122. The current s.131 in Australia which was considered in the above
case is worded differently from the Hong Kong provision of Companies Ordinance
(Cap.622), s.122. The Australian s.131(1) states:

., ( I987) 3 NZCLC 99,998 .

.; 80/1011Partnersv Lambert(1888)41Ch 0295;Motilda and WarMemorial Hospitalv Henderson(1997]1HKC 509.
"" 8olto11Partners v Lambert (1888)41 Ch O 295,307; Ford v Newt/, [1901) 1 KB 683.
9' (2009) 69 ACSR 635.
98 WWW Dot WizardPty Ltd v Globe ValleyPty Ltd[2006)WASC128,(25];Kevroy Pty Ltd v Keswick Developments
Pty Ltd (2009) 69 ACSR 635, 642-643; RP Austin and I M Ramsay,Ford's Principles of Co1pon1tio11s
Law
(14th edn, LexisNexisButterworths.Sydney,2010) 890, 888-889.
99 Kevroy Pty Ltd v Keswick Des·elopmenlsPty Ltd (2009) 69 ACSR 635, 643.
162 PRE-INCORPORATION CONTRACTS

"( 1) If a person enters into, or purports to enter into, a contract on behalf of, or
for the benefit of, a company before it is registered, the company becomes bound
by the contract and entitled to its benefit if the company, or a company that is
reasonably identifiable with it, is registered and ratifies the contract:
(a) within the time agreed to by the parties to the contract; or
(b) if there is no agreed time - within a reasonable time after the
contract is entered into."

4.044 Previous Australian provision suggests ratification does take place retrospectively.
One of the earlier Australian provisions referred to in the judgment (s.183(3) of the
Corporations Act 1989) contained the following:

"(3) Where a company ratifies a contract as provided by subsection (2),

the company is bound by, and entitled to the benefit of, that contract as if the
company had been fonned before the contract was entered into and had been a
party to that contract."

4.045 Hong Kong legislation similar to previous Australian provision. It seems that the
Hong Kong s.122(3) is close to the former s.183(3) in Australia, as s.122(3) provides
that:

"(3) After incorporation, the company may ratify the contract to the same
extent as if -
(a) the company had already been incorporated when the contract was
entered into; and
(b) the contract had been entered into on the company's behalf by an
agent acting without the company's authority."

4.046 Ratification is retrospective under s.122. Section 122(3) expressly equates the
position with that which would arise in the ordinary case of an unauthorised agent
(where the principal was in existence at the time of the purported transaction).
Accordingly, it seems that in Hong Kong the ratification should have retrospective
effect similar to the ordinary position under agency law (and consistent with the
Australian court's views on the earlier Australian provision).

5.4 Communication

4.047 Common law position that there is no requirement that ratification be

communicated to third-party for it to be effective. Given that the company
is only liable upon ratification of the contract under s.122, it is important for the
third-party contractor to be informed about the ratification in a timely manner. Where
the ratification is effected through the conduct of a person directed to the third-party
contractor, the third-party would be aware of the ratification by the conduct of the
person acting on behalf of the company. However, an express act of ratification can
be an internal act such as signing a board minute stating that the company ratifies
 LIABILITY OF THE PERSON WHO PURPORTED TO ACT FOR THE COMPANY 163

the contract, and other parties to the contract, without more, will not be aware of the
ratification. To determine the rights and obligations of the parties at a certain point in
time, it may be necessary to determine whether the ratification takes place immediately
after the internal ratification act is done or when the company's decision to ratify is
communicated to other parties to the contract. 100 None of the case authorities appear
to have provided a definite answer to this question in the context of the statutory
provisions. The position under the conm1on law appears to be that there is no legal
requirement for the ratification to be communicated to the third-party before it is
effective. 101

6. LIABILITY OF THE PERSON \.VHOPURPORTED

TO ACT FOR THE COMPANY

6.1 Where the company does not ratify the contract

Where contract not ratified by company, person who made contract on behalf of 4.048
company personally liable for contract. If the company does not ratify the contract,
then the person who purported to act for the company or as an agent for the company
is treated as a party to the contract, and the person is personally liable for the contract
and is entitled to enforce the contract: s.122(2). 102
Section 122 triggered as long as person purported to act for company. As long as 4.049
the person purported to act for the company or as an agent for the company in respect
of a contract purportedly entered into in the name or on behalf of the company, then
the provisions in ss.122(1)-122(2) are triggered and the person will be personally
liable. The issue does not turn on whether that person is regarded as a "promoter" of
the company. For example, in Bay v Illawarra Stationery Supplies Pty Ltd, 103 the agent
of the promoters who executed the contract was regarded as the person who purported
to act for the proposed company and who would therefore be liable on the contract. 104
There are some uncertainties on the liabilities of the promoters in a Bay situation.
The trial court in that case held all of the four promoters liable on the contract. On
appeal, Grove J expressed a provisional view that:

"Section 81 [of New South Wales's Companies Code, the pre-incorporation

provision under that Code] does not declare liability beyond the person or
persons who execute on behalf of the non-existent company but nothing in its

100 Auech Scie11cePry Ltd v A1/a111a Aerospace (Woy Woy) Pry Ltd (2005) 55 ACSR I, [82], per Basten JA.
,o, Harrisons & Crossfield v LNW Railway [1917] 2 KB 755, 758; Shell Co of A1wralia lid v Nat Shipping a11d
Bagging Services Lid [1988] 2 Lloyd's Rep I, 11, 14. Where the contract was one that was made subject to
ratification, the third-party must be informed about the ratification (Watson v Davies [1931] I Ch 455); but this
is because in such a situation the issue is one ofeontract formation ra1her than simply ratification: Warehousing
& Forwarding Compa11yof£as1 Africa Ltd vJafferali [1964] AC 1, 9-10.
'°' Sec Phonogrt,m Ltd v lt111e[ 1982] QB 938.
,o, ( 1986) 4 ACLC 429.
'°' "In paraphrase, one aspect of this scatutory provision facilicatcs making personally liable one who exccutc.s
a contract on behalf of a non-existent company. In this case that person was Mr Dyke (the agent)": (1986) 4
ACLC 429,431.
164 PRE-INCORPORATION CONTRACTS

tenns purports to exclude any rights or obligations flowing between that person
or those persons and any principal nor does it otherwise impugn the doctrine of
agency .... The law to be applied can be no different if the plaintiff seeks a remedy
directly against the principal." 105

4.050 Personal liability of person acting for company can be excluded by express
agreement. The liability of the person acting for the company under s.122(2) of
Cap.622 is subject to "any express agreement to the contrary". 106 This means that
it is possible for the person and the third-party contractor to agree that the person
would not be liable on the contract. However, for the person to avoid liability under
that s.122(2), there must be a clear exclusion of personal liability, and thus where the
person simply signed "for and on behalf of" the proposed company, this would not
be sufficient to constitute an express agreement that he or she is not to incur personal
liability. 107 A clear exclusion of personal liability can only be proven, it would seem,
where an intention to exclude the operation of the s.122 is established.
In Royal Mail Estates Ltd v Maple Teesdale,' 08 the claimant sued the defendants for a
repudiatory breach of a property purchase contract, which the latter purportedly entered
into for and on behalf of a company. The contract provided that the benefit of the
contract was "personal to the company". The company was incorporated two months
after the execution of the contract. The claimant argued that the defendants were liable
under s.36C( 1), the pre-incorporation provision under Companies Act 1985 (UK). The
defendants applied for summary judgment on the basis that the contractual provision
that the contract was "personal to the company" was an "agreement to the contrary"
so as to exclude their personal liability. The court disagreed, holding that although
that contractual provision was inconsistent with the contract taking effect as one made
with the defendants, it was not possible to derive from the words used an intention to
exclude the operation of s.36C. This was because, inter alia, at the time of contracting,
neither the claimant nor the defendants had known that the company had not been
incorporated. Accordingly, there was no agreement to the contrary for the purposes of
s.36C which would prevent the defendants being parties to the contract.
Where a release was given to the person and the company incorporated failed to
ratify after incorporation, a third-party contractor who has supplied goods or provided
services to the company purportedly pursuant to the contract should have a quasi
contractual remedy (namely, in restitution) against the company. 10'J
4.051 Personal liability of person acting for company can be avoided by obtaining
assignable option from other party that will lapse if not exercised. An altemative
technique for the person entering into the contract for the company to avoid personal
liability is to obtain an option from the third-party contractor in respect of the subject
matter of the proposed contract (for example an option to purchase goods from the

105 (1986) 4 ACLC 429,431.

10• Companies Ordinance (Cap.622), s.122(2).
,o, Pho11ogram Ltd v Lane [J 982] QB 938,944.
103 [2016] I WLR 942 (Ch 0).
10• See J P Hambrook, "Promoters and Pre-registration Contr;1cts" in Australian Co,poration Law - P,·inciples and

Practice (looseleaf, LexisNexis, Sydney), (2.5.0110).

 LIABILITY OF THE PERSON WHO PURPORTED TO ACT FOR THE COMPANY 165

third-party) on terms that the option is assignable but will lapse if it is not exercised
by a certain date. Where the company is incorporated, the person can assign the option
to the company. If the company fails to incorporate or where it is incorporated but
is unwilling or unable to acquire the benefit of the option, the person acting for the
proposed company will not be personally liable if the option is allowed to lapse. 110

6.2 Where the company has ratified the contract

Enforcement action can be taken against company after ratification. As the 4.052
company ratifies the contract and thus becomes a party to the contract, the third-party
contractor is able to take enforcement action against the company if the latter fails to
pe1form its obligations under the contract. The issue of the liability of the person who
purported to contract for the company will arise where the company fails to perform
for any reason.
After ratification person who acted for company can only be held liable to extent 4.053
that they would have been for breach of warranty of authority. Section 122(4) of
Cap.622 provides that where the company has ratified the contract, the liability of
the person who has purportedly entered into the contract in the name of or on behalf
of the company "is not greater than the liability that the person would have incurred
if the person had entered into the contract after the company's incorporation as an
agent acting without the company's authority". The effect of this provision is that
the person can be liable to the extent that he or she would have been on the basis
of breach of warranty of authority. However, if the company's failure to perform
was due to the company's insolvency, it seems that the third-party would also be
unable to obtain substantive damages from the person for the breach of warranty of
authority. 111

"" CM SchmittholT, Palmer's Company Law (24th cdn, Vol 1, Stevens& Sons, London, 1987) 20-04. Sec also RP
Austin and IM Ramsay,Ford':;Principles 0JC01pora1io11sLaw (15th cdn, LexisNexis Butterworths, Sydney,
2013), 973.
111
See para.4.013 above.
................................. •••••••••••• .. ••••••••••••••••••••••••••••••••••••••••••••••••••••U••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••'''''''''••••••••••••
 CHAPTER 5

CORPORATE CONSTITUTION AND

SHAREHOLDER AGREEMENTS

PARA.

I. Introduction .............................................................................................................................. 5.00 I

2. Provisions on Information Required by Company Outsiders .................................................. 5.003

2.1 Introduction ...................................................................................................................... 5.003
2.2 Objects clause ................................................................................................................... 5.006
2.2.1 The purpose of the objects clause and the ultra vires doctrine ............................. 5.006
2.3 Reform of the ultra vires doctrine in Hong Kong ............................................................ 5.010
2.3.1 The need for reform ............................................................................................... 5.010
2.3.2 The 1997 reforms in Hong Kong........................................................................... 5.014
2.3.3 The significance of the reform: full corporate capacity ........................................ 5.017

3. Rules on Internal Governance: Articles of Association ........................................................... 5.025

3.1 The legal nature of articles of association ........................................................................ 5.025
3.2 The enforcement of articles of association ....................................................................... 5.028
3.2.1 Who can enforce the constitution? ........................................................................ 5.028
3.3 Alteration ofarticles ......................................................................................................... 5.042
3.3.1 The mechanics ....................................................................................................... 5.045
3.3.2 Statutory limitations ............................................................................................. 5.047
3.3.3 Common law limitation on the power to alter the company's constitution ........... 5.052
3.4 Remedies .......................................................................................................................... 5.072

4. Shareholders' Agreements ....................................................................................................... 5.076

4.1 The necessity and advantages of shareholders' agreements ............................................. 5.077
4.2 Oisadvantages ................................................................................................................... 5.083
4.3 The relationship with articles ........................................................................................... 5.084
4.4 Circumstances in which provisions in the shareholders' agreement would be invalid .....5.085
................................. •••••••••••• .. ••••••••••••••••••••••••••••••••••••••••••••••••••••U••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••'''''''''••••••••••••
 1. INTRODUCTION
Need for information about company and way company managed. Parties seeking 5.001
to deal with a company need information about the company to determine their rights
and obligations resulting from such dealings. Incorporators and subsequent members
need to have certainty on the fashion in which the company is to be managed and the
manner in which the relationship between the company and its internal stakeholders
is to be regulated. Information required by company insiders and outsiders, before the
commencement of the Companies Ordinance (Cap.622) on 3 March 2014, had been
provided in the company's memorandum of association and articles of association
respectively. Under Cap.622, the company's constitution is contained in a single
document, namely the company's articles of association, and the memorandum of
association is abolished.
Private company: constitution can be supplemented with shareholders' agreement. 5.002
Where the company is a private company, there can be a need to supplement the
company's constitution with a shareholders' agreement. The reasons why such an
agreement might be necessary will be considered later in this chapter.

2. PROVISIONS ON INFORMATION REQUIRED

BY COMPANY OUTSIDERS

2.1 Introduction

Memorandum of association abolished under Cap.622; and information to be 5.003

included in articles. Before the enactment of Cap. 622, the information required by
outsiders was provided in the old style memorandum of association. This document
contained information on, depending on the type of the company concerned, the name
and objects of the company, the way in which members' liabilities were limited, the
liability of members to contribute to the assets of the company, capital, and initial
shareholders. Under Cap.622, these matters are included in the company's articles of
association.' Details of these provisions are discussed in Chapter 2. The conditions
previously contained in the memorandum of existing companies are, under Cap 622,
deemed as provisions in the articles. 2

Memorandum abolished as diminished need with streamlined incorporation 5.004

procedures. The decision to abolish the memorandum of association was made on
the basis of the diminution of the need for such a document. The importance of a
memorandum of association is reduced because of the streamlined incorporation
procedures that the Companies Registry introduced in 2008. Under these incorporation
procedures, a person wishing to incorporate a company is required to deliver to the
Registrar a duly completed incorporation form together with the memorandum of

1
Cap.622,Pt.3, Div.2,Subdiv.3.
2 Cap.622.s.98.
170 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

association and articles of association. The incorporation form includes much of the
information that is required to be stated in the memorandum of association. Also, that
information can be stated in a single constitutional document (now composed of just
the articles of association under Cap.622) without the need for two separate documents.
The abolition of the memorandum of association as a constitutional document
is consistent with the practice in the UK3 and a number of other Commonwealth
jmisdictions, notably Australia and New Zealand, of having a single constitutional
document. 4

5.005 Objects clause and ultra vires doctrine. The discussion below focuses on the objects
clause in the company's constitution, and on the legislative reform and jurisprudence
relating to the objects clause and the ultra vires doctrine. These matters can be
important for resolving disputes between the company and parties dealing with the
company.

2.2 Objects clause

2.2.1 The purpose of the objects clause and the ultra vires doctrine
5.006 Historically aimed at protecting shareholders from uncontemplated business
activities. Under the common law, a company does not enjoy full legal capacity.
The capacity of a company is defined by the objects clause in the company's
constitution. The original requirement for an objects clause in the constitution was
aimed at protecting company investors and creditors against unauthorised use of
funds. A shareholder needs to assess the risks associated with the acquisition of shares
in a particular company. It was assumed that that assessment could be accomplished
through a careful perusal of the company's objects. 5 Inserting objects clauses in a
company's constitution was thought to be an effective way of protecting shareholders
from losses that might result from business activities that were never contemplated
by the shareholders when they acquired their investments. In the 19th century, a
company's assets were conceptualised as a trust fund "dedicated to the defined and
limited objects which would, hopefully, generate fairly stable annual profits for the
benefit of those who supplied the company's capital". 6 The objects clause would
ensure that the company only engages in business activities the 1isks of which the
shareholders could have assessed at the time of their acquisition of the shares.
5.007 Aimed at protecting company's creditors who could ascertain scope of business.
An objects clause can also function to protect the interests of the company's creditors.
It was thought that creditors would rely on the objects clause to ascertain the scope of

3 See Companies Act 2006 (UK) s.17. The memorandum of association is retained in the UK but its nature is
different to the "old-style memorandum". The provisions in the old-style memorandum of existing companies
became part of the articles from I October 2009 (s.28). The memorandum of association now required for
formation of a company in the UK is no longer part of the company's constitution and merely sratc.sthat the
subscribers wish to form a company and agree to become members of the company (and to rake up at least one
share, in the case of companies having share capital): s.8.
• Corporations Act 2001 (Aust.) s.136; Companies Act 1993 (N.Z.), Pt 5.
' Roman Tomasic, Stephen Bottomley and Rob McQueen, Corporations law in Australitt (2nd edn, the Federation
Press, Sydney, 2002) 209.
• Robert Pennington, "Reform of the Uhm Vires Rule" (1987) 8 CompanyLawyer 103, 104.
 PROVISIONS ON INFORMATION REQUIRED BY COMPANY OUTSIDERS 171

business of the company and to use that information for assessing the credit\vorthiness
of the company. Limiting the company's capacity to what was permitted by the objects
clause would therefore help ensure that the company did not depart from the basis on
which creditors provided funds to the company.
Ultra vires doctrine: act not authorised by constitution ultra vires. Under the ulLra 5.008
vires doctrine,7 a company registered under the companies legislation only had the
power to do acts authorised by the company's constitution. The classic version of
the ultra vires doctrine was enunciated by the House of Lords in Ashbury Railway
Carriage and Iron Co Ltd v Riche.8 In that case, a company's contract to provide
finance to another party for the construction of a railway was wholly ineffective, since
provision of finance was not authorised by the company's memorandum of association.
It was held that an act done by the company unauthorised by its constitution was ultra
vires the company and void. The act could not be ratified by the members, even with
unanimous consent, since the act was something that the company was incapable of
doing at all.
Harsh effect of ultra vires doctrine. The House of Lords soon realised the harsh 5.009
effect of a strict application of the ultra vires rule it enunciated in Ashbury. 9 It stated
in a subsequent case, A-G v Great Eastern Rly Co,10 that the ultra vires principle did
not require that each type of transaction that the company was capable of entering into
be particularised in its memorandum and the company had implied power to enter into
transactions incidental or ancillary to the achievement of its stated objects.

2.3 Reform of the ultra vires doctrine in Hong Kong

2.3.1 The 11eetlfor reform

Commercial unreality of doctrine for those dealing with company. The Ashbury 11 5.010
version of the ultra vires doctrine, even after having been relaxed in A-G v Great
Eastern Rly Co, 12 was still too draconian for the business community, especially from
the perspective of those who dealt with the company.13 In Re Jon Beauforte (London)
Ltd, 14 for example, a sale of goods contract was held to be void because the goods
delivered were for the purpose of the company's new line of business, which was
outside the company objects. This can be harsh from the perspective of the party
dealing with the company- the seller in the above case. While the ultra vires doctrine
is premised on third parties having knowledge of the restrictions in the objects clause

1 Some care needs to be taken in the use of the term 11/rravires. For the purposes of this chapter, ultra vires is used
to refer to acts which are outside the "capacity" of a company. In other contexts, it might be said that an act of
a company is 11/rravires if the act is prohibited by statute or the general law. Even more widely, it is sometimes
said that directors act 11/rravires when they act outside the scope of their authority. However, to avoid confusion,
it is preferable in the context of company law not to refer to the latter situation as 11/travires conduct, but only as
conduct which is outside the directors' authority or which is in breach of the directors' duties.
8 (1875) LR 7 HL 653
~ (1875) LR 7 HL 653
10
(1880) 5 App Cas 473.
11
(1875) LR 7 HL 653.
12 (1880) 5 App Cas 473.
" J H Farrar, Farrar'sCompanyLaw (3rd edn, Butterworths, London, 1991) 104.
" (1953) Ch 131.
172 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

when dealing with the company, this is unrealistic in practice. From the commercial
perspective, it is often impractical for traders or others dealing with the company to
inspect the company's constitution before contracting.
5.01 l Prejudicing interests of company. A mechanistic application of the ultra vires rule
may also prejudice the interests of the company itself. This may happen when a third-
party seeks to take advantage of the ultra vires doctrine to retain the benefit of the
company's perfo1n1ance without discharging its own obligation under the contract. 15
In the meantime, a strict application of the ultra vires doctrine may expose company
directors to unwarranted liability, the exposure of which may increase the cost ofrunning
the company and the difficulty for finding suitable candidates for the directorial office.
ln Cullerne v London and Suburban General Permanent Building Society, 16 Mathew J
held that directors who acted beyond the power of the company are personally liable
for the consequential loss, even if they had acted with reasonable care and in good faith
with the approval of the majority of the shareholders. 17 lmposing absolute liability on the
directors on the basis of ultra vires in this situation is arguably unwarranted. 18
5.012 Practice of extending scope of company's objects evolved. To avoid the types of
problems outlined above, the practice grew of extending the scope of the company's
capacity through the use of various techniques. One of these was to include more and
more objects in the objects clause to enable the company to have the capacity to do
whatever the directors considered profitable. 19 Another technique was to state that
each sub-clause shall be treated as a substantive clause and not auxiliary to the primary
object stated in the clause. 20 This technique helped prevent a restrictive interpretation
of each clause, which had the effect of enlarging the scope of the company's capacity.
5.013 Proliferation of objects clauses meant doctrine had ceased to protect anybody.
An effect of the proliferation of objects clauses was that the ultra vires doctrine had
ceased to protect anybody.21 This was because the compendious objects clause did not
delimit the company's business any more: "it seeks to avoid definition by including
everything". 22

2.3.2 The 1997 reforms in Hong Ko11g

5.014 Comparison with reform in UK. The reform of the ultra vires doctrine in Hong
Kong may be compared with the reform that has taken place in the United Kingdom.
The reform in the United Kingdom started in 1972 when the European Communities
Act (ECA) was enacted. Section 9(1) ofECA, which was later consolidated as s.35 of
the Companies Act 1985, provided that in certain circumstances a third-party dealing

15 Bell Houses v City Wall Properties [1966) 2 QB 656 (although in this case the court held the contract in dispute
was intra vires). It seems that it is rare for third parties to invoke the doctrine of 11/rravires against the company
who has contracted with them: Andrew Griffiths, Co111rac1i11g with Companies (Hart, Oxford, 2005) 167.
16 ( 1890) 25 QBD 485.
" (J 890) 25 QBO 485, 490.
18 Sec Robert R Pennington, "Reform of the Ultra Vires Ruic" (1987) 8(3) Company la1Vyer 103, 104-105.
19 LS Scaly, Company lalll and Commercial Reality (Sweet & Maxwell, London, 1984) 43.
'" Cotman v Brouglwm (1918) AC 514; Stable lnvestme111 Ltd (i11liq) v Clu111g
Shin Cl111e11(1982) 1-fKLR79.
" Paul L Oavics, Gower and Davies' Principles of Modem Company l,iw ( 18thcdn, Thomson Sweet & Maxwell,
London. 2008) 153.
22 Robert R Pe,mington, "Reform of the Ultra Vires Rule" ( 1987) 8(3) Company la1Vyer I03.
 PROVISIONS ON INFORMATION REQUIRED BY COMPANY OUTSIDERS 173

with the company would not be adversely affected by any limitation on the company's
capacity stated in the company's constitutional documents. In 1989, s.35(1) of the
Companies Act 1985 was recast to state that:
" ... the validity of an act done by a company shall not be called into question
on the ground of lack of capacity by reason of anything in the company's
memorandum". 23
UK: company's objects now unrestricted unless it chooses otherwise. The ultra 5.015
vires doctrine was further reformed under Companies Act 2006. As it stands now, the
company's objects (and hence capacity) are unrestricted, unless it chooses otherwise
by specifically restricting the company's objects. 24 Even if the company chooses to
adopt restrictions in its objects, those restrictions will not affect the validity of the
company's act.25
HK: reforms in 1997. In Hong Kong, no steps had been taken to reform the ultra vires 5.016
doctrine until amendments were introduced by the Companies (Amendment) Ordinance
1997. The steps taken include: (i) removing the requirement that a limited liability
company must state its objects in its constitution (with the exception of a certain category
of companies, such as charitable companies) (predecessor CO, s.S(lA) (repealed); now
Cap.622, ss.82 and I03(2)); (ii) conferring on a company the same powers as a natw-al
person (predecessor CO, s.SA (repealed); now Cap.622, s.115); (iii) where a company
states its objects in its constitution, its powers to carry on business will be restrained
accordingly (predecessor CO, s.5B( I) (repealed); now Cap.622 ss.116( I) and 116(2));
(iv) where a company has stated its objects in its constitution, no act of the company is
invalid merely because it has acted outside the stated objects (predecessor CO, s.58(3)
(repealed); now Cap.622, s.116(5)); and (v) a member has the power to bring proceedings
to restrain the doing of an act that contravenes the stated objects (predecessor CO,
s.58(2) (repealed); now Cap.622 s. I 16(3)).

2.3.3 The sig11(fica11ceof the reform:full corporate capacity

HK: companies now have full capacity; same capacity as natural person. Following 5.017
the 1997 amendments, the rules in the Companies Ordinance on corporate capacity
help ensure the security of transactions with companies. Importantly, under what is
now Cap.622, s.115(1), a company: "has the capacity, rights, powers and privileges
of a natural person of full age". This provision aims to give companies full capacity.
In this respect, there has been an abolition of the doctrine of ultra vires in Hong Kong
so far as the doctrine relates to a company's capacity under its constitution. 26 However,
notwithstanding the apparent breadth of s.115( 1), certain inherent characteristics of

23 Companies Act 1985, s.35 (I). Note that this provision was recast as s.39 in the Companies Act 2006. The 1989
reform was based on the recommendations made by Professor Dan Prentice, who was commissioned by the
Department of Trade and Industry to review the ultra vires rule: Paul L Davies, Principles of Modem Company
Law (18th cdn, Thomson Sweet & Maxwell, 2008) 154.
'' Companies Act 2006, s.3 1( 1).
" Companies Act 2006, s.39.
26 The abolition or the ultra vires doctrine applies to "companies" only under the Companies Ordinance (namely
companies incorporated under the current Cap.622 or its predecessors). Thus, for example, the ultra vires
doch-inestill applies in relation to statutory corporations which are fonned under their own Ordinances: see, e.g.,
Standard Chartered Bank v Ceylon PehYJleum Co,p (2011) EWHC 1785.
174 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

a company would prevent the company from having capacity to do all things that a
natural person could do. For example, a company could not enter into a contract for
marriage. 27 Leaving aside such exceptions, a company would largely have the same
capacity as a natural person within the sphere of commercial activity.
5.018 Effect of having capacity to do all things natural person can do. The effect of
Cap.622, s.115(1) is illustrated by the different outcomes in the cases of Re Estate of
Leung WaiJing28 and Re Estate of Tang Muk Kwai.29 Both cases deal with the question
of whether a company has capacity to take a grant of probate. In the former case, it
was held that a church (which was not a company to which the Companies Ordinance
applied) did not have capacity to take a grant of probate since the objects clause in its
memorandum of association did not confer on it power to "take a grant". On the other
hand, the latter case dealt with a company under the Companies Ordinance (which did
not have any objects clause in its memorandum). In that case, the com1 held that the
predecessor provision of Cap.622, s.115 had the effect that the company would have
the same capacity as a natural person to take up a grant of probate, and that there could
be no question oflack of power to seek a grant on account of such act being ultra vires.
5.019 Position where company has objects clause. In Re Estate of Tang Muk Kwai,30
the court expressly left open the position where the company has an objects clause.
However, the better view is that the same consequences apply in respect of the question
of the company's capacity and the scope of application of the ultra vires doctrine,
whether or not the company has an objects clause.
5.020 Where objects clause, company must not do act not authorised; but act not
rendered void by ultra vires doctrine. Where the company's articles do contain an
objects clause, the company must not do any act that its articles have not authorised it
to do; and if any power of a company is expressly modified or excluded by its articles,
the company must not exercise the power contrary to that modification or exclusion:
Cap.622, ss.l 16(1) and I 16(2). However, an act by the company (including a transfer
of property to or by the company) is not invalid only because the company does the act
in contravention of ss. l I 6(1) or I I 6(2): see also Cap.622, s. l I 6(5). In other words, in
respect of the external effects of a company's acts, there is no scope for application of
the ultra vires doctrine even if the company's articles restrict the company's objects.
The act is not rendered void by the ultra vires doctrine.
5.021 Might be circumstances where act contravening ob.jects clause is invalid: third-
party has notice that act in contravention of objects clause. That said, there may be
some circumstances where an act that contravenes the objects clause would be invalid.
It seems that where the third-party dealing with the company is aware that the company
is entering into the transaction in contravention of the objects clause, the transaction
can be voidable at the election of the company. This is because the directors of the
company would not have actual authority to enter into the transaction for the company

27 R P Austin and IM Ramsay,Ford'sPrinciples ofC()tporatio11sLaw (15th cdn, LcxisNexisBuncrworths,Sydney,

2013) 886.
,s [20041 I HKLRD 825.
29 (20 I I) I HKLRD858.

.l-0 (2011) I HKLRD858.

 PROVISIONS ON INFORMATION REQUIRED BY COMPANY OUTSIDERS 175

in breach of the objects clause (due to the restriction in the articles and the effect of
ss.116( l )-116(2) of Cap.622). The third-party can enforce the transaction against the
company on the basis of apparent authority of the directors though, so long as the
third-party did not have notice of the contravention of the objects clause.3' However,
if the third-party has notice, the third-party cannot rely on any apparent authority of
the agents. Accordingly, on this basis, the company can rescind the transaction on the
basis of absence of authority of the agents purportedly transacting on behalf of the
company.
Partial abolition of constructive notice doctrine. In the foregoing analysis, it is also 5.022
important to have regard to Cap.622, s.120. That section provides that a person is not
to be regarded as having notice of any matter merely because the matter is disclosed
in the articles of a company kept by the Registrar or a retum or resolution kept by the
Registrar. Section 120 abolishes the common law doctrine of constructive notice with
respect to the articles and returns and resolutions lodged with and kept by the Registrar
in the public Companies Register. This ensures that a third-party would not be treated
as having constructive notice of any restrictions in the objects clause in the company's
constitution merely on the basis of the information being available on the public
register. Accordingly, third parties without actual notice of the restrictions would
generally be entitled to enforce a transaction against the company notwithstanding
that there was a breach of the objects clause. 32
Any restrictions in objects clause remain important to internal governance. 5.023
Although a company now has full capacity despite any restrictions in objects clauses
in the company's constitution, such restrictions remain important in relation to the
internal governance of the company. Under Cap.622, s.116(3), where the company's
constitution does state the objects of the company, the members have power to restrain
the controllers of the company from exercising their powers for a purpose that is
outside the stated objects. However, proceedings must not be brought under s.116(3)
in respect of any act to be done in fulfilment of a legal obligation arising from a
previous act of the company: see also Cap.622, s.116(4). For example, if the company
has already entered into a contract which is outside the scope of the objects clause, it
is too late for a member of the company to restrain performance of the contract.
Director who acts contrary to constitution can breach fiduciary duty. 5.024
The directors can still be liable to the company for the breach of the constitution
though. Generally, a director who acts contrary to the company's constitution can be
in breach of fiduciary duty.33 In particular, it has been held under the common law
that a director will be in breach of his or her duty to the company where he or she
enters into an ultra vires transaction. 34 Such principles should also be applicable to
breaches of the objects clause and breaches of Cap.622, ss.1 16(1)-116(2), such that
the director would be in breach of fiduciary duty and can be liable to compensate

31
On the conceptof apparentauthority,sec Chapter 12.Secalso Cap.622.s.II7.
" Eachcaseneedsto be looked at in the context of its own facts though.The particular circumstancesof the case
could still give rise to constructivenotice, eventhoughtherewould not be constructivenotice merelyon the basis
of the objects clausebeing shownon the public register.
33 Re Samuel Sherman pie [ 1991) I WLR I 070. See further Chapter8.
34 Cullerne v London and Suburban General Permanent Building Society ( 1890)25 QBD 485.
176 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

the company for any losses suffered or to return property to the company received
by the director as a result of the breach.

3. RULES ON INTERNAL GOVERNANCE:

ARTICLES OF ASSOCIATION

3.1 The legal nature of' articles of' association

5.025 Company's regulations on internal governance. Traditionally, the articles ofassociation

have constituted the company's "rule book". As such, the articles set out regulations on
the internal governance of the company. The purpose of the articles is to provide for the
allocation of profit, risk, and control within the company.35 The articles determine the
ways in which the powers of the company are exercised, including allocation of powers
to particular corporate organs.36 The articles may deal with members' rights in relation
to the distribution of the company's profits. Under Cap.622, the articles of association
still perform this role, although in addition the articles now also perform the role of the
former memorandum of association in setting out basic information about the company
for outsiders (as discussed in the previous section).37
5.026 Statutory contract between members i11ter se and member and company.
In Hong Kong, as in the United Kingdom and some other jurisdictions of British
extraction, a company's constitution is a statutory contract between individual
members inter se and between individual members and the company. This is made
clear by Cap.622, s.86:

"(I) Subject to this Ordinance, a company's articles, once registered under this
Ordinance or a former Companies Ordinance -
(a) have effect as a contract under seal -
(i) between the company and each member; and
(ii) between a member and each other member; and
(b) are to be regarded as containing covenants on the part of the company
and of each member to observe all the provisions of the articles.
(2) Without limiting subsection (I), the articles are enforceable -
(a) by the company against each member;
(b) by a member against the company; and
(c) by a member against each other member.
(3) Money payable by a member to the company under the articles -
(a) is a debt due from the member of the company; and
(b) is of the nature of a specialty debt."

" JM Farrar, Farmr'.~Company Law (3rd edn, Butterworths, London, 1991) 95.
;,; E.g., Model Articles arts.3, 4 (private companies): Companies (Model Articles) Notice (Cap.622H) Sch.2.
1
; Sec also Chapter 3 in relation to the contents of articles of association.
 RULES ON INTERNALGOVERNANCE:ARTICLESOF ASSOCIATION 177

Reasons for contractual approach. There are some historical and practical reasons 5.027
for the adoption of the contractual approach to the company constitution. In the 19th
century, the contract was a favourite analytical tool. Also, making a contract had
been the only way of forming or joining any company under the common law.38 The
constitution of the deed of settlement companies in the 19th century was the deed,
which was a contract among members. The Joint Stock Companies Act 1844 (UK)
provided, for the first time, for the registration of deed of settlement companies. The
constitution of a company registered under the 1844 Act was still the deed, which
was an actual contract. 39 The memorandum of association and articles of association
were introduced to replace the deed under ss.7 and IO of the Joint Stock Companies
Act 1856. Sections 7 and I O herein made it clear that both the memorandum and the
articles bound the company and shareholders contractually.

3.2 The enforcement of articles of association

3.2.1 Who ca11e11forcethe co11stitutio11?

The company and its members
Company, members. Section 86 of Cap.622 states in clear tenns that the constitution 5.028
is enforceable between the company and each individual member and among each
member infer se. Thus, the company could enforce a provision of the articles that
required disputes between the company and its members to be referred to arbitration,40
and a shareholder was able to enforce a provision in the articles on dividend payments
against the company.41 An example of enforcement by a member of his rights under the
articles against a fellow member is Rayfield v Hands.42 There, reg. I I [of the articles of
association] provided that a member who intended to transfer shares should inform the
directors, "who will take the shares equally between them at a fair value". The directors
were also members, as the articles required them to hold shares in the company. The
plaintiff wished to transfer his shares and sought a declaration that the three directors
were bound to purchase his shares because of the effect of reg. I 1. Vaisey J granted
the declaration, holding that reg.11 was binding on the directors in their capacity as
members.43
Not all clauses can be enforced by company against members and vice versa, eg 5.029
clause only applies to members i11terse. It should be noted that not all clauses in

" LS Sealy, "The Enforcement of Partnership Agreements, Articles of Association and Shareholder Agreement'' in
PD Finn (ed.), Equity and Commercial Relationships (LBC, Sydney, 1987) 89, 93.
39 Companies Act 1844, ss.7, 26 . .I H Farrar, Farrars Company law (3rd edn, Butterworths, London, 1991) 121.
"' Hickman v Ke111 or Romney Marsh Sheep-Breeders'Association [ 1915] I Ch 881.
41
Wood v Odessa Watenvork~ Co (1889) 42 Ch D 636.
" [ I 960] Ch I.
43
Note that directors are not parties to the statutory contract, but the case of Rayfield v 1-ltmds illustrates that
directors can be bound to the contract in their capacity as members if they also hold shares. However, as
discussed below, the constirution is only binding on members in their capacity as members. This rcs1riction was
not an obstacle in Rt,yjield v Hands, where the court regarded reg. I I in the articles as involving a relationship
between the members and the directors not in their capacity as directors but in their capacity as members of the
company (the directors being referred to as "working members" in that context): see (1960) Ch I, 6. See also
para.5.030 below.
178 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

the articles can be enforced by the company against its members and vice versa.44 For
example, where a provision in the articles only applies to matters between members
inter se, the provision may not be invoked by the company in relation to a matter
between itself and a member. In Ng Kin Kenneth v HK Football Association Ltd,45
reg.49 of the articles of the association of a sports association provided that, inter
alia: (i) all members should refer all differences and questions coming within the
provisions of the Laws of the Game and the Rules of the Association to the Council,
and (ii) the membership of the association: "shall constitute an agreement to refer all
such differences and questions in accordance with the Rules of the Association and
shall be enforceable as an agreement under the Arbitration Ordinance". A member
aggrieved by a decision of the Council of the Association (which was the Association's
governing organ) that he was un-welcome to take part in their activities, etc., sought,
inter alia, a declaration that the decision of the Council was null and void and in
breach of the rules of the Association. The defendant Association sought to stay
the plaintiff's proceeding on the basis that there should be arbitration of the matter
pursuant to reg.49. Kaplan J of the Hong Kong High Court held that judging from
the wording in reg.49, the arbitration clause in that article envisaged disputes between
members concerning the Rules or the Laws of the Game and made no provisions for
arbitration of disputes bet\veen the defendant itself and its members.

External capacity
5.030 Members bound and entitled under constitution in capacity as members. There
appears to be an established rule that members are only bound and entitled under the
corporate constitution in their capacity as members. This rule was set out in Hiclanan v
Kent or Romney Marsh Sheep-Breeders 'Association. 46 Astbury J said in that case that:

"An outsider to whom rights purpoti to be given by the articles in his capacity
as such outsider, whether he is or subsequently becomes a member, cannot sue
on those articles treating them as contracts between himself and the company to
enforce those rights."47

5.031 Eley case. Astbury J formed this view after reviewing a number of case authorities,
including Eley v The Positive Government Security life Assurance Co ltd. 48 In the
Eley49 case, the Court of Appeal held that the plaintiff, one Eley, was not entitled to
enforce a provision of the articles (reg. I 18 of the articles of association) which provided
that he should be the permanent solicitor of the company and should not be removed
unless for misconduct. Eley reached an agreement to this effect with one Baylis, who
was a promoter, before the formation of the company. Eley, who was involved in the
preparation of the articles of association, inserted reg.118 in the articles. Eley became
a member subsequently. Lord Cairns held that the provision was "res inter alios acta

"' For limitations on the ability of minority members to enforce the article.s, see Chapter 10.
41 (1994) I HKC 734.
"' (1915) I Ch881.
47
[ 1915) I Ch 881. 897

•• (1876) I Ex D 88.
•9 (1876) I Ex D 88.
 RULES ON INTERNALGOVERNANCE:ARTICLESOF ASSOCIATION 179

(a thing done benveen others)", to which Eley was not privy. His Lordship explained
that the regulation was either a stipulation binding on members or a mandate to the
directors. His Lordship also said that there appeared to be a grave question "whether
a contract under which a solicitor is not bound to give any particular services, but the
company, on the other hand, are bound to employ him for all their business, and to
continue to do so, however incompetent he may prove to be in point of physical health
or otherwise, until they can convict him of some positive misconduct, is a contract
which the Courts would enforce." 50
Rights given to outsiders enforceable by members. On the other hand, there are 5.032
authorities showing that an article giving rights to an outsider can be enforced by
members. In Ramkissendas Dhanuka v Satya Charan Law, 51 a shareholder successfully
challenged a resolution purporting to terminate the appointment of managing agents
in contravention of an article stipulating the te1m of the managing agents' office. The
basis of the challenge was that under the relevant articles, a decision to terminate the
employment of the managing agents must be made by a special resolution whereas the
decision under challenge was made through an ordinary resolution.
Permissible even though enforcement of member's right incidentally also enforces 5.033
right in capacity other than member. The difference between Elei 2 and Dhanuka, 53
it is submitted, can be reconciled by Goldberg's view that:

"(a] member of a company has under section 20(1) of the (1948) Act [equivalent
to Cap.622 s.86] a contractual right to have any of the affairs of the company
conducted by the particular organ of the company specified in the Act or the
company's memorandum or articles, even though the enforcement of that right
(and the correlative obligation) may incidentally enforce also a right or power
bestowed by the memorandum or articles on a person in a capacity otherwise than
as a member of the company, be that person in fact a member or not". 54

Reconciling Eley and Dhanuka. In Eley, 55 an enforcement of his right enshrined in 5.034
reg.118 would not be incidental but contrary to the conduct of the company's affairs
by the directors, who must have the powers to appoint agents for the company. In
Dhanuka, 56 the enforcement of the right of the managing agents in question was
incidental to the conduct of the relevant affairs by the general meeting. The member's
right enforced in that case was one to have certain affairs of the company, namely
termination of the employment of managing agents, conducted by a particular organ
of the company specified in the company's articles. The general meeting had the power
to conduct the relevant affair by special resolution only.

,o (1876) I Ex D 88, 89.

'' (1949) LR 77 !A 128.
'' (1949) LR 77 IA 128.
" (1949) LR 77 IA 128.
" GD Goldberg, "The Enforcement of Outsider-Rights under Seccion 20 (1) of the Companies Ace 1948" (1972)
35 Mod l Rev 362, 364.
" (1876) I Ex D 88.
' 6 ( 1949) LR 77 IA 128, PC.
180 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

5.035 Enforcing constitution: 2003 amendments. To widen the circumstances where

members can enforce the constitution, s.23(1A) was inserted in the predecessor CO
in 2003. Section 23(1A) has now been re-enacted under Cap.622, s.86(2), which
stipulates that, inter alia, "the articles are enforceable - (a) by the company against
each member; (b) by a member against the company; and (c) by a member against
each other member". While this provision was intended to overcome restrictions on
the proper plaintiff principle in Foss v Harbottle/ 1 it is unlikely that the previous law,
as discussed above, has been altered. 58
5.036 Statutory reform of privity doctrine does not confer right on third-party to enforce
constitutional documents. The privity doctrine in contract law has been reformed so
that it is possible for a third-party on whom the contract confers a benefit to enforce
that contract in stated circumstances. 59 Section 3(2)(g) of the Contracts (Rights of
Third Parties) Ordinance (Cap.623), however, expressly excludes the application of the
Ordinance to company's articles having effect as a contract under seal under Cap.622,
s.86. The exclusion was recommended by the Law Reform Commission of Hong Kong
in its 2005 report on privity of contract, 60 and also follows the position under the
equivalent United Kingdom legislation reforming the law on privity of contract. 61 In
Australia, the doctrine of privity has been somewhat modified under the common law
through cases such as Trident General Insurance Co Ltd v McNiece Bros Pty Ltd. 62
It is, however, unlikely that this type of case would enable an outsider to enforce a
provision of a company's constitution conferring rights on him in that country. Nor is
it likely that the beneficiaries under a trust of shares would have standing to enforce
the statutory contract. 63

Directors
5.037 Directors' lack of standing to enforce constitution. At times, issues can also arise as
to the tights, powers or obligations of a director provided in the constitution. Section
86 of Cap.622 does not say that a company's constitutional documents also constitute
a contract between the company and its directors. The UK Court of Appeal held in
Beattie v E & F Beattie Ltd 64 that a director was unable to enforce the arbitration clause
in the articles as he was suing in his capacity as a director rather than a shareholder.
Regulation 133 of the company's articles provided that:
" ... whenever any doubt, difference, or dispute shall arise between any
members of the company or between the company and any member or
members, . . . the members of the company respectively, shall not take

57 1843) 2 Hare 461.

(

" See further Chapter 10.

59 Contracts (Rights of Third Parties) Ordinance (Cap.623), s.4. The Ordinance came into operation on I January

2016 .
.o The Law Reform Commission of Hong Kong Report: Privity ofC0111rac1, September 2005, para.4.178, available
at http://www.hkrcform.gov.hk.
1
• Sec Contracts (Rights of Third Parties) Act 1999 (UK) s.6(2); and sec further Edwin Peel, The Law of Co11t1t1ct
(12th cdn, Sweet & Maxwell, London, 2007) 691 ff.
62 (1988) 165CLR 107.
63 RP Austin and IM Ramsay, Ford'sPrinciples ofC()lporatio11sLaw (15th cdn, LcxisNexis Buncrworths, Sydney,
2013) 886, 202.
.. ( 1938)Ch 708.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 181

proceedings at law ... but the same shall be referred to two arbitrators or their
umpire ... ".
Directors who are members can enforce constitution in capacity of member. 5.038
Notwithstanding authorities on the lack of standing on the part of directors to enforce
articles, directors who are also members may be able to enforce the company's
constitution in their capacity as member. Jn the Rayfield 65 case considered above (at
para.5.028), the court upheld the directors' obligation to comply with the shareholders'
request for a purchase of their shares in accordance with the articles. Vaisey J did so, as
mentioned above, by ruling that the directors were obliged to take the transfer because
they were also shareholders. His Lordship, however, did not consider a situation where
the directors are not shareholders.
Relevant provision in article treated as incorporated into director's 5.039
employment contract. Where rights are conferred in the constitution on directors
in their capacity as director, one way of enabling them to enforce such rights
is by treating the provision in the relevant article as having been incorporated
into the contract between the director and the employer company. The directors to
whom the companies owed salaries in Re New British Iron Co Exp Beckwith 66 and
Swabey v Port Dawin Gold Mining Co61 were able to recover the amounts owed
on this basis.
Australia: constitution has effect as contract between company and each 5.040
director and company secretary. Under Australia's Corporations Act 2001,
s.140(l)(b), the company constitution has effect as a contract between, inter alia,
"the company and each director and company secretary". Section 140(1)(b) helps
remove the uncertainty on the directors' right to enforce constitutional provisions.
A case example on s.140(l)(b) is Jones v Money Mining NL. 68 In that case, Jones
retired by rotation as a director under the company's articles and offered himself
for re-election. He was not re-elected at the general meeting but no other persons
were elected in his place. Regulation 84 of the company's articles provided that if
at any meeting at which the election of directors "ought to take place" the company
did not fill the position of a director retiring by rotation, the director should remain
in office, unless the company decides to reduce the number of directors. By virtue
of reg.84, Jones was successful in obtaining a declaration that he would remain in
office as a director. 69
No reason not to treat director as party to statutory contract. There is much to 5.041
commend in the Australian provision as regards the directors' power to enforce the
articles. Apart from the historical origin of the memorandum and articles, there does
not appear to be any policy reason not to treat directors as a party to the statutory
contract.

65 (1960] Ch I.
" (1898] I Ch 324.
1
• ( 1889) I Meg 385.
68 (1995) 17 ACSR 531.
"' This decision was made under s.180( I) of the Corporations Law, which was the predecessor of s.140( I )(b),
Corporations Act 200 I.
182 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

3.3 Alteration of articles

5.042 Reasons why articles may need to be altered. The company's ability to adapt in the
business environment depends, to a certain extent, on the alterability of the terms
of the company's constitution. 70 This is especially so where the original tenns of the
constitutional documents restrict the company's freedom in taking action that is, in the
view of the corporators, in the interest of the company. A need for altering the articles
can arise, for example, where there is a need for relaxing stringent restrictions on share
transfers in the existing articles;7' to rid the company of a shareholder who is competing
against it through conferral of a power on the directors or the majority shareholders
to buy out, at a fair price, the shares of the competing member 72 or for the purpose
of maximising the company's profits;73 or to give the company the power to remove
a delinquent director whose term of office is entrenched under the existing articles. 74
5.043 Other examples where alterations required. The issue of alteration of articles may
also arise where there is a need for reconciling inconsistent articles which lead to
different treatment of members, to advance the interests of the company 75 or to ensure
an equitable distribution of profits. 76
5.044 Restrictions on majority to change articles. As the majority members' power to alter
the constitution can be easily misused for self-interested purposes, it is necessary for
the law to chart a limit within which that power may be legitimately exercised. The
following sections consider the mechanics for effecting an alteration of articles and
common law restrictions on the majority's power to alter constitutional rules.

3.3.1 The mecha11ics

Special resolution
5.045 Special resolution. Section 87 of Cap.622 empowers a company to alter its articles.
Subsequent s.88 of Cap.622 provides that articles may be altered or added by special
resolution, subject to that s.88(3) and any other provisions of Cap.622. Section 88(3)
provides that an alteration in articles to the maximum number of shares that the
company may issue may be made by ordinary resolution. Within 15 days after the
date on which an alteration to the articles takes effect, the company must deliver to

,. Paul L Davies and Sarah Worthington, Gower a11dDavies· Pri11ciples of Modern Compa11yLaw ( 19th edn,
Thomson Sweet & Maxwell, London, 2012) 77.
" Greenhalgh vArderne Cinemas Lrd(l951) Cb 286.
" Sidebouom v Ket:fhaw, Leese & Co Lrd [ 1920) I Ch 154. See also Dafe11Ti11plareCo v L/a11ellySreel Co [ 1920)
2 Ch 124 (where the resolution inserting a new article empowering the majority to compulsorily acquire shares
from any shareholder as they thought proper was invalidated on the ground that the terms of the article were too
wide- although it was in the interest of the company to require a defaulting shareholder to sell his shares to the
company, albeit at a fair price).
73 Gomborro v WCP Ltd (I 995) 182 CLR 432. Sec also Brown v British Abr(lsive Wheel Co ltd [1919) I Ch 290,
where the article was inserted by the 98% majority to buy out the minority members as a condition for the
majority shareholders to make the much needed capital injection.
" Sh1111/eworrh v Co.r Brorhers c111d Co (l,,foidenhet,d) Ltd [1927) 2 KB 9. Note, however, that entrenchment of
direct0rs in the articles may be less of a problem nowadays in light of Cap.622 s.462 (sec Chapter 7).
" Allen v Gold Reeft o/Wesr Aji-ica Lrd (1900) I Ch 656.
'' Peters 'American Delicacy Co Lid v Hearh (1939) 61 CLR 457.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 183

the Registrar for registration a notice of the alteration and a certified copy of the
altered articles: see also Cap.622, s.88(5).

Informal alteration
Informal alteration where unanimous consent. It is possible to achieve an 5.046
alteration of the a11icles in the absence of a formal resolution provided that there is
unanimous consent of the members. In Ho Tung v Man On Insurance Co Ltd, 77 the
articles were not signed by members in accordance with the relevant requirement
in the Companies Ordinance, but were registered by the Registrar, who overlooked
the members' failure to sign. The Privy Council held that the articles had been
adopted by the members. In Cane v Jones, 78 Deputy Judge Wheeler QC held that an
amendment of the articles can be effected in the absence of a formal resolution as
long as all of the corporators agreed with the alteration and the proposed amendment
is not otherwise unlawful. Informal agreement can be inferred from conduct, such
as acquiescence in circumstances where the members knew that their assent was
being sought. But where conduct alone is relied upon, that conduct must lead to the
conclusion that on the balance of probabilities the members intended to amend the
articles and, further, intended to make the particular amendment contended for.79

3.3.2 Statutory limitations

Complying with the companies legislation
Must be consistent with mandatory rules in Companies Ordinance. A proposed 5.047
alteration must be consistent with the mandatory rules in the Companies Ordinance.
A company limited by shares is thus unable to alter its constitution to give itself
the power to return share capital to members otherwise than as permitted under the
Ordinance. Nor can a company modify its constitution to deprive members of their
1ight to petition for the winding-up of the company.80 Also, a modification to restrict
the company's power to alter its articles or constitution will likewise be invalid.81

No alterations increasing members' liability to

contribute to share capital
Cap.622 s.92: no alterations increasing members' liability to contribute to share 5.048
capital. A protection afforded to members against an amendment affecting their
rights is Cap.622, s.92. That provision provides that no member shall be bound by
an alteration of the company's constitutional documents after the date on which he
or she became a member, if and so far as the alteration requires him or her to take or
subscribe for more shares than the number held by him or her at the date on which
the alteration is made, or in any way increase his or her liability to contribute to the
share capital or to otherwise pay money to the company, unless the member agrees in

" [ I902] AC 232.

18
(1981] I All ER 533.
19 Society Ltd (No.2) [2017] 2 BCLC 14, (72].
Re the Sherlock Holmes f111erna1io11al
w Re Peveril Gold Mines Ltd [ 1898] I Ch 122; R P Austin and I M Ramsay, fords Principles of Corporaticms Law
(15th edn, LexisNexis Butterworths. Sydney, 2013) 210.
31 Walker v Lo11do11Tramways (1879) 12 Ch D 705.
184 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

writing either before or after the alteration is made. The significance of this protection
is illustrated in Ding v Sylvania Waterways Ltd. 82 In that case, shareholders of the
company consisted of owners of blocks ofland. The original version of the constitution
provided for the charge of a once-only membership fee in exchange for a right to moor
boats in the waterway. The court held, on the basis of a provision equivalent to s.92,
that an amendment giving the company the power to charge a membership fee as an
annual levy for a right to moor was not binding on members.

Class rights
5.049 Cap.622 contains provisions on manner in which change of class rights can be
effected. Where share capital is divided into different classes and special rights are
attached to such classes of shares, an alteration of articles may change members'
class rights. To protect minoiity shareholders from an improper exercise of power
on the part of the majority to alter articles resulting in a change of the former's class
rights, Cap.622 sets out provisions on the manner in which a change of class rights
is to be effected. The procedures under Cap.622, ss.180-184 (for companies with a
share capital) and ss.185-192 (for companies without a share capital) vary depending
on whether the company's constitution provides for procedures on variation of class
rights. These procedures are considered in detail in Chapter 14.

Members' remedies
5.050 Unfairly prejudicial conduct. Cap.622, ss.723-725 give a member the right to apply
for a court order where the company's affairs are being or have been conducted in a
manner unfairly prejudicial to the interests of the members generally or of some part
of the members (including the individual member himself). There is a widely held
view that it is possible for a member aggrieved by an alteration of the company's
articles to seek a court order through these provisions, at least in cases of conflicts
between or among groups of members, where the interest of the company itself is
not engaged and where the modification or repeal is unfairly prejudicial. 83 This view
seems to command some judicial support. 84

Abolition of the entrenchment provisions

5.051 Abolition of entrenchment provisions under Companies Ordinance (Cap.622).
In the United Kingdom and Australia, it is possible to add additional conditions for
altering the company's constitution or particular provisions in the constitution through
inserting an "entrenching provision". 8; Examples of an entrenching provision include

., (1999) 46 NSWLR 424.

83 See, for example, Paul L Davies and Sarah Worthington, Gowerand Davies' Principles ofModern CompanyLaw
(19th edn, Thomson Sweet & Maxwell, London, 2012) 700; RP Austin and I M Ramsay, Ford, Principles of
Corpora1io11s Law (15th edn, LexisNexis Butterworths, Sydney, 2013) 212; Philip Smart, Katherine Lynch and
Anna Tam, Hong Kong CompanyLaw: Cases,Ma1erialsand Co111111en1s(Bu11crworthsAsia, Hong Kong, 1997) 92;
Roman Tomasic, Stephen Bottomley and Rob McQueen, Co,porations law in Australia (2nd end, Federation
Press, Sydney, 2002) 201 (the authors believe that Pt.2F.1 of the Corporations Act 2001 constitutes a statutory
limit on the alteration ofa corporate constitution).
"' Shears v Phosphate(1988) 14 ACLR 747; Re a Company £x p Sclnvtirz(1989] BCLC 427, 450-451. See further
Chapter 10.
8' Companies Act 2006 (UK) s.22; Companies Act 200 I (Aust), s.136(3).
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 185

a majority that is higher than 75 percent or requiring the consent of a particular person.
An entrenching provision can be used to help ensure control by the founders of the
company after its incorporation. 86 Under the predecessor CO, entrenchment could be
achieved by providing additional conditions for altering articles in the memorandum. 87
Under Cap.622, s.89, the power to alter the articles by special resolution is no longer
subject to any conditions in the memorandum as the memorandum is abolished and
the constitution is composed of the articles only. However, s.89 does not make the
power of alteration of the articles subject to any restrictions contained in the articles.
Accordingly, it would not be possible for the company to deprive or restiict the power
of the general meeting to amend the articles by special resolution. 88 The Government's
policy intention was not to provide for the possibility of having entrenchment provisions
in the constitution. Yet, one would have thought that, in a jurisdiction such as Hong
Kong, where family companies play a significant role in the economy, there would be
a need for permitting the company founder to maintain contJ·ol through restrictions
on the ability of other shareholders to alter the company's internal management rules.

3.3.3 Common lwv limittltion on the power to

alter the company's constitution
The traditional common law position
Proposed amendment might affect rights and obligations between company 5.052
and members; or redistribute members' rights. A proposed amendment of the
constitution might aim at or has the consequence of altering the rights and obligations
between the company as a commercial entity and the members. 89 A constitutional
amendment might also alter or redistribute members' rights without affecting the
interest of the company.90 Since the principles in adjudicating different types of
cases involving constitutional amendment may not be identical, the abovementioned
categories of cases are considered separately.

Where the company's interest is engaged

Alle11 v Gold Reef~ test: alteration must be bona fide for benefit of company as 5.053
whole. The seminal case of this type is Allen v Gold Reefs WestAfrica Ltd, 91 wherein
the original common law position on the company's power to alter its articles was
expounded by Lindley MR. In that case, reg.29 of the company's articles of association

86 Philip Lipton, Abe Herzberg and Michelle Welsh, Understanding Compa11yu,w ( 15th edn, Thomson Reuters
LBC, Sydney, 2010) 96.
" Predecessor CO, s.13( I) (repealed).
"' See also Ayre v Skelsey'.fAdama111Cemenl Co ( I 904) 20 TLR 587, affd (1905) 21 TLR 464; and see para.5.047
above.
89 A /fen v Gold Ree/~Wes/Aji-ica lid [ I 900) I Ch 656; Sidebollom v Kershaw Leesea11dCo lrd [ 1920) I Ch I 54;
Dajen Tinplare Co v llanelly Sreel Co [ 1920) 2 Ch 124; S/11111/eworrh v Cox Brorhers & Co (Maidenhead)
(1927)2K.B9.
"' Americtm Delicacy Co Ltd v Hearl, (1939) 6) CLR 457; Greenhalgh vArdene Cinemas lid (1951) Ch 286.
An alteration having the effect of altering the rights of a section of the members may, however, be dictated by
s
the interest of the company: Citco Banking Co,p NV v Pusser lid (2007] Bus LR 960 (where the company's
ability 10 secure, infer tdia, equity and loan finance hinges on the obtaining of a control power by the chairman
of the board).
9' [ I900) I Ch 656.
186 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

gave the company a first lien for debts owing by a member to the company "upon all
shares (not being fully paid) held by such members". The articles were amended to
delete the phrase "not being fully paid". This alteration affected only one (deceased)
shareholder, Zuccani, who held both paid up and partly paid shares. The issue was
whether the company's power to alter its articles was validly exercised. An answer to
this question determines whether Zuccani 's executors could challenge the company's
right to claim a lien on Zuccani's fully paid shares pursuant to the altered articles.
Lindley MR upheld the validity of the alteration. His Lordship held that the power
that the company law statute conferred on the company to alter its articles "must be
exercised not only in the manner required by law, but also bonafide for the benefit of
the company as a whole, and it must not be exceeded". 92 His Lordship was satisfied
that reg.29 was altered bona fide for the benefit of the company, as the alteration
was to affect all members who held fully paid shares, although Zuccani was the only
fully paid shareholder who was in arrears of calls in relation to his other shares.
It is reasonable to see the "interest of the company" in the Allen's case that Lindley
MR was talking about as the interest of the company as a commercial entity, as the
purpose of altering the articles was to enable the company to enforce its claim against
defaulting shareholder borrowers.
In Hong Kong, the Allen v Gold Reefs test was applied in the first instance decision of
the Supreme Court in Re Hongkong Spinning Weaving and Dyeing Co Ltd.93 The test
was also applied in the more recent English decision in Re Charterhouse Capital
Ltd. 94

Where the alteration does not engage the interest

of the company as a commercial entity
5.054 Where alteration adjusts rights between shareholders. There is little room to
question the soundness of the test that Lindley MR formulated in the Allen case
where the alteration would affect the interests of the company as a commercial
entity. However, the test in Allen s case may not be appropriate in cases where the
modification or repeal has no bearing on the company's own interests but involves an
adjustment of the rights and obligations between different (classes of) shareholders.
Peters' American Delicacy Co Ltd v Heath95 is a telling example. In that case, the
company's articles of association contained two inconsistent provisions with regard to
distribution of profits. The regulation on dividends payments provided that dividends
were payable in proportion to the amounts paid up on shares, whereas the provision on
capitalisations by bonus issue said that bonus shares were to be issued in proportion to
the number of shares held by members. The directors considered that the inconsistency
would cause inequity in distributing bonus shares and the articles were altered. Some
partly paid members objected to the modification on the basis that the alteration was
made to benefit the fully paid members at the expense of partly paid shareholders.

92 [1900) I Ch 656, 671.

9, (1917)12HKLRI.
" (2015) BCC 574.
9' (1939)61 CLR457.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 187

Validity of amendment resolving conflicting interests of shareholders 5.055

depends on whether majority's power exercised oppressively or fraudulently.
The High Court of Australia unanimously upheld the amendment. The gist
of their Honour's judgments is that: (i) the test in Allen's case is not helpful when the
purpose of the alteration is to resolve conflicting rights of shareholders rather than to
advance the interests of the company as a whole; (ii) the validity of an amendment
aiming at resolving conflicting interests of shareholders depends on whether the
majority's power to alter articles was exercised oppressively or fraudulently; and
(iii) the majority's power to alter articles in the present case was unchallengeable on the
ground of fraud on a power - "the resolution involved no oppression, no appropriation
of an unjust or reprehensible nature and did not imply any purpose outside the scope
of the power".96 In Re Charterhouse Capital Ltd,91 the English Court of Appeal
followed the approach in Peters' American Delicacy in expressing the principle
that a power to amend the articles will:
" ... be validly exercised, even though the amendment is not for the benefit
of the company because it relates to a matter in which the company as an
entity has no interest but rather is only for the benefit of shareholders as
such or some of them, provided that the amendment does not amount to
oppression of the minority or is otherwise unjust or is outside the scope
of the power". 98
Change of members' pre-emptive rights and Greenhalgh case. Another scenario 5.056
where the alteration of articles involves a change to members' rights but not a
conflict between the interest of the company and that of members is a constitutional
amendment resulting in a change to members' pre-emptive rights. In Greenhalgh v
Arderne Cinemas Ltd,99 the articles originally gave all shareholders rights of pre-
emption under the following clause:
"No shares in the company shall be transferred to a person not a member
of the company so long as a member of the company may be willing to
purchase such shares at a fair value .... "
The second defendant and his family and friends were majority shareholders in the
company. He, the second defendant, wished to sell his shares to a third-party purchaser.
He was able to cause the company to pass a general meeting resolution amending the
a11iclesto include the following provision:
"Notwithstanding the foregoing provisions of this a11icleany member may
with the sanction of an ordinary resolution passed at any general meeting of
the company transfer his shares or any of them to any person named in such
resolution as the proposed transferee, and the directors shall be bound to
register any transfer which has been so sanctioned".

"' (1939) 61 CLR 457,513 per Dixon J.

•1 (20151 ace 574, [90J-[96J.
98 [2015) BCC 574. [90).
99 (1951) Ch 286.
188 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

The effect of the alteration was that any shareholder could sell to a third-party
purchaser without first offering the shares to existing members so long as that course
of action is approved by the members via an ordinary resolution.
5.057 Unfair discrimination test: in Greenhalgh case while majority benefited, minority
not deprived by alteration. A minority shareholder in the company challenged
the alteration, but the court held that the alteration was valid. Prima facie, the
majority shareholders would obtain an advantage since they would always be able
to command a sufficient majority to allow themselves the opportunity to sell to a
third-party purchaser without first offering the shares to existing members. However,
minority shareholders will not be able to do so unless others in the company sufficient
to constitute a majority agree. Evershed MR, however, did not think the proposed
alteration would result in any real unfair discrimination against the minority members.
His Lordship applied an "unfair discrimination" test, namely that: 100

"[A] special resolution of this kind would be liable to be impeached if the effect
of it were to discriminate between the majority shareholders and the minority
shareholders, so as to give the former an advantage of which the latter were
deprived."

Commenting on the particular alteration to the articles under consideration, Evershed

MR stated: 101

" ... But after all, this is merely a relaxation of the very stringent restrictions on
transfer in the existing article, and it is to be borne in mind that the directors, as the
articles stood, could always refuse to register a transfer. A mino1ity shareholder,
therefore, who produced an outsider was always liable to be met by the directors
(who presumably act according to the majority view) saying, 'We are sorry, but
we will not have this man in'."

What his Lordship appears to be saying, by applying an unfair discrimination test, is

that although the alteration makes it easier for the majority to transfer their shares to
third parties, the advantage that the majority is given is not what the minority were
deprived of. The minority has not lost any right because of the alteration.
5.058 Utility of a benefit of a company as a whole" test limited. Evershed MR made
an attempt to provide a meaning to the concept of "the benefit of the company as a
whole": 102

"[T]he phrase 'company as a whole' does not (at any rate in such a case as the
present) mean the company as a commercial entity, distinct from the corporators:
it means the corporators as a general body. That is to say, the case may be taken of

100 (1951) Ch 286,291.

IOI ( 1951) Ch 286, 292.

'°' (1951) Ch 286,291.

 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 189

an individual hypothetical member and it may be asked whether what is proposed

is, in the honest opinion of those voted in its favour, for that person's benefit".

His Lordship, however, did not apply this hypothetical member test to reach his
judgment. In fact, the utility of this test, as will be seen below, is very limited.
Greenhalgh can be justified on basis that members' right to vote can be enjoyed 5.059
for personal advantage unless vitiating element present. Evershed MR's judgment
in Greenhalgh can be justified on the basis that the members' right to vote is an
incident of property to be enjoyed and exercised for the owner's personal advantage,
which right is unimpeachable so far as there is "no vitiating element present". 103 That
the alteration there is not unfairly discriminatory means that no vitiating element was
present.

Assessment of the traditional common law principles

"Company's interest", "company". The resolution of a dispute arising from the 5.060
alteration of articles, especially where the Allen v Gold Reefs test is applied, will entail
a consideration of the concept "company's interest", which will turn on the meaning
of the word "company". As mentioned above, in Greenhalgh vArderne Cinemas Ld/!4
Evershed MR said that interests of the company meant interests of the shareholders
as a whole and to determine whether an action is in the interest of "the company as a
whole", it was necessary to look at what would be in the interest of the hypothetical
shareholder in the company. However, Evershed MR's formulation may not be suitable
for applying the Allen v Gold Reefs test. As has been pointed out, by "the company
as a whole", Lindley MR in Allen v Gold Reefi· 105 clearly means the company as a
commercial entity. 106
Difficulties in hypothetical shareholder test. Difficulties in Evershed MR's 5.061
hypothetical shareholder test is illustrated by the case of Clemens v Clemens Bros
Ltd. 101 In that case, Foster J held that the majority member of a two-member company
had committed fraud on the minority by voting for a capital increase that had the effect
of removing the minority member's present and future negative control. His Lordship
applied the principle that the majority's rights to exercise their votes in any way they
please are subject to equitable considerations which make it unjust to exercise it in a
particular way. However, in the judgment, Foster J had also commented on Evershed
MR's test, and noted that if that test was applied in the present case, then the question
would be whether the majority shareholder, in voting for the resolutions, honestly
believed that those resolutions would be for the benefit of the minority shareholder.
Although Foster J did not in the end rely on Evershed MR's test, his Lordship's
treatment of the minority member as the hypothetical shareholder is problematic, as it
is unclear why the majority member in Clemens cannot be regarded as the hypothetical
shareholder. The truth is, perhaps, that in a close company such as the one in Clemens,

'"' Peters 'America11 Delicttcy Co Ltd v Health (1939) 61 CLR 457, 515per Dixon J.
'°' [1951]Ch286.
,o, [ 1900] I Ch 656.
'"' See para.5.053above.
'°' [1976)2 All ER 268.
190 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

neither members can be aptly described as a hypothetical member, if such a member is

"someone who may be a member at any time, present or future, who has no pa1ticular
number of shares or votes, and who is not affected by any particular distribution of
shares or voting power among his fellow members". 108 The hypothetical shareholder
test is not practical where the company is a large company either. It is, for example,
unrealistic to expect a small shareholder of a large public company to ask himself or
herself the question whether the proposal is beneficial not only to him or her but also
to "a hypothetical shareholder who, presumably, has no personal interest apart from
that of being a member and (if such be the case) a shareholder". 109
5.062 No need to use hypothetical shareholder test in any situation. As "company as a
whole" has been used to indicate, inter alia, the company as a commercial entity, or
corporators as a general body, or "to import a reference to the doctrine of fraud on a
power", 110 it is perhaps safe to use that phrase to mean the company as a commercial
entity when the interest of the company (as an entity) is engaged. There is perhaps no
need to employ the notion of the interest of the company as a whole when an alteration
involves a conflict of rights of members only. In other words, there is no need to use
the hypothetical shareholder test in any situation. The hypothetical shareholder test, it
will be remembered, was not even used by Evershed MR himself in Greenhalgh.
5.063 Primafacie whether alteration for benefit judged by members themselves unless
oppressive. Prima facie, whether an alteration is for the benefit of the company is
to be judged by the members themselves. The amendment can be valid so long as
there are grounds on which reasonable shareholders could have decided that the
amendment would be for the benefit of the company. 111 The court will intervene only
when the alteration is "so oppressive as to cast suspicion on the honesty of the person
responsible for it, or so extravagant that no reasonable man could really consider it for
the benefit of the company". 112
5.064 Where amendment does not engage interest of company as commercial entity,
validity hinges on whether amendment was made oppressively or fraudulently
or unfairly discriminatory. Where the amendment does not engage the interest of
the company as a commercial entity, the validity of the exercise of alteration hinges
on whether the majority's power to alter the articles was exercised oppressively or
fraudulently (American Delicacy) or was unfairly disc1iminatory (Greenhalgh). The
mere fact that shareholders vote in their own interests does not necessarily mean that
the decision will be impugned. Since shareholders are not fiduciaries vis-a-vis each
other or the company, and since the right to vote is a proprietary right of shareholders,
the shareholders can prima facie exercise their rights in their own interests. 113

108 Robert R Pennington, Pe1111i11gto11~ Compa11yLaw (8th edn, OUP, Oxford, 2006) 89.
109 Paul L Davies and Sarah Worthington, Gower a11dDavies' Principles '!( Modem Compa11yLaw ( 19th edn,
Thomson Sweet & Maxwell, London, 2012) 698U:
°
11
F G Rixon, "Competing Tntercsts and Conflicting Principles: an Examination of the Power of Alteration of
Articles of Association" (I 986) 49 Mod L Rev 446,454.
111
Shuuleworth v Cox Brothers mul Co (Maidenhead) Ltd (1927) 2 KB 9; Citco Banking Corp NV v Pusser slid
(2007) Bus LR 960.
"' Shuuleworth v Cox Brothers and Co (Maidenhead) Ltd (1927) 2 KB 9, per Bankes LJ, 18; Re Clwrterhouse
Capital Ltd [2015) BCC 574, (90), (108) (Eng CA).
"' Greenhalgh v Arde11eCinemas Ltd [I 951) Ch 286; Citco Banking Co,p NV v Pusser 's Ltd [2007) Bus LR 960.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 191

The Gambotto case

Compulsory expropriation of shares, courts appear to be more willing to strike 5.065
down alteration. The above discussion illustrates that where the alteration involves
a conflict of interest between the company as a whole and a particular shareholder,
it would often be difficult for a shareholder to challenge an alteration to the articles
under the common law. However, in cases of compulsory expropriation of shares, the
courts appear to have been more willing to strike down the alteration. 114 The problem,
however, is whether the Allen v Gold Reefi· test is actually appropriate for this category
of cases.
Australian Gambotto case: Allen v Gold Reefs test not appropriate for this 5.066
category. The High Court of Australia has answered this question in the negative in
its decision in Gambotto v WCP Ltd. 115 In that case, 99.7 percent ofWCP shares were
held by wholly owned subsidiaries of Industrial Equity Ltd. A general meeting of
WCP proposed to insert a clause in the constitution to empower any member who
was entitled to 90 percent or more of the issued shares to acquire compulsorily, before
a certain date, all the issued shares at the price of $1.80. A valuation conducted for
this purpose showed that the shares were valued at $1.36. Evidence showed that the
proposed appropriation would result in (i) substantial tax savings through a transfer of
tax losses within the group, and (ii) administrative benefits, as it will relieve WCP from
obligations in relation to consolidated accounting and the maintenance of separate
share registry services. The resolution was passed on the unanimous vote of three
minority shareholders. The majority did not vote. Gambotto, who did not attend the
meeting, brought proceedings to enjoin the company from carrying out the resolution.
Australian Gambottocase: alteration invalid. The High Court held unanimously that 5.067
the alteration was invalid. Mason CJ, Brennan, Deane and Dawson JJ delivered a joint
judgment. McHugh J delivered a separate judgment. The majority judges held that
expropriation by majority shareholders for the purpose of aggrandising the majority
is valid if and to the extent that the relevant provisions in the company's constitution
so provide. However, it is one thing to provide for the majority's expropriation powers
in the company's constitution at its incorporation. It is quite another to confer such a
power on the majority through an amendment of the constitution that did not grant
such powers initially.
In considering the majority members' power to amend the constitution in cases where
the alteration gives rise to a conflict of interest and advantages between shareholders,
their Honours rejected the test in the A liens case. The alternative test that their Honours
proposed entailed a distinction between a situation where there was a compulsory
transfer of shares or property rights attached to the shares and one where no such
expropriation was involved. Where no expropriation is involved, a resolution on the
alteration of the constitution will be valid "unless it is ultra vires, beyond any purpose
contemplated by the articles or oppressive as that expression is understood in the

"' Sec e.g. Oafe11Ti11plateCo Ltd v Ua11ellySteel Co [1920] 2 Ch 124; 8row11v British Abrt1siveWheel (1919]
I Ch 290; but cf. Sideboffom v Kershaw Leese and Co Ltd (1920) I Ch 154.
'" (1995) 182 CLR432.
192 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

law relating to corporations". 116 Where an alteration does involve expropriation, the
resolution will be invalid unless two conditions are met. These are: (i) that the power
of expropriation is exercised for a proper purpose; and (ii) the expropriation must be
fair in the circumstances.
On the first condition, the maJonty judges made a distinction between (i) an
expropriation the substantial purpose of which is to protect the company from
detriment or harm and (ii) one that aims at advancing the interests of the company as
a legal or commercial entity or those of the majority. Goal (i) is proper, as long as the
terms of expropriation are not oppressive. An example that their Honours provided is
where there is a need for the company to be rid of a shareholder who competes with
the company, citing Sideboltom v Kershaw, Leese & Co. 117 Their Honours also pointed
out that an expropriation was justifiable where this was necessary to ensure that the
business of the company complies with some regulatory regime.
Goal (ii), according to the majority judges, is improper, as it would:
" ... be tantamount to permitting expropriation by the majority for the purpose
of some personal gain". 118
Their Honours found that the stated purpose of the expropriation through an alteration
in the case at hand was improper, as it was aimed at managing tax liability or
administrative expenses, not protecting the company from a detriment or harm, or
ensuring compliance with a regulatory regime.
On the "fairness" condition, their Honours held that the expropriation must be fair
in both a procedural and substantive sense. The former requires the majority to
disclose all relevant information leading up to the alteration, including an independent
valuation of the shares. The latter refers to fairness of the price offered for the shares,
and a price below the market value is prim a facie unfair.
A further change of law that was brought about by the majority judges' decision on
onus of proof. Their Honours held that, in case of expropriation, the onus lies on those
supporting expropriation to show that the power was validly exercised. The previous
law, which required the minority to prove that the power had been exercised for an
improper purpose, according to their Honours, "tilts the balance too much in favour of
commercial expediency and fails to attach sufficient weight to the proprietary nature
of a share". 119
McHugh J rejected the maJonty judges' distinction between expropnat1on for
the purpose of protecting the company from detriment or harm and of advancing
the company's interest. His Honour held that while administrative cost savings
for the company were not a sufficient justification, the power of amendment for the
purpose of expropriation could be validly exercised for the purpose of managing tax
liability, which helped protect the company's assets. His Honour, however, allowed the

11• Gambollo v WCP Ltd ( 1995) 182 CLR 432, 444.

"' (1920) 1 Ch 154.
118
Gambotto v WCP Ltt/(1995) 182 CLR432, 446.
11
• Gambotto v WCP ltt/(1995) 182 CLR432, 447.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 193

appeal on the ground that the company failed to prove that the expropriation was not
oppressive. To prevent an alteration of articles for the purposes of expropriation being
oppressive, his Honour held, the appropriators will need to act fairly. On the meaning
of fairness, his Honour followed the leading American case, Weinberger v U.0.P
Inc., 120 to hold that the concept of fairness has, in the context of expropriation,
two basic aspects, namely,fair dealing and fair price.
On the meaning of fair price, McHugh J observed that:
" ... (p ]ayment of compensation which accords with the market value of
the expropriated shares will go a long way to preventing the expropriation
from being classified as oppressive." 121
His Honour added though that a price at or above the market price may not
necessarily constitute a fair price for the purposes of expropriation. His Honour
agreed with the Supreme Court of Delaware's view in Weinberger that a fair price
included:
" ... all relevant factors: assets, market value, earnings, future prospects,
and any other elements that affect the intrinsic or inherent value of a
company's stock".
On the concept of fair dealing, McHugh J also adopted the definition from
Weinberger:
"the notion of fair dealing embraces questions of when the transaction
was timed, how it was initiated, structured, negotiated and disclosed and
how approvals to the transactions by directors and other shareholders
were obtained." 122
The company failed to prove that the expropriation was not oppressive because,
according to his Honour, it made no attempt to make a full disclosure that was required.

What will be the position in Hong Kong?

Gambotto untested in Hong Kong. Before 1995, the common law position with 5.068
regard to the majority shareholders' power to alter articles was relatively clear. Where
the purpose of the alteration is to increase the benefit of the company, as is the case
in Allen, the test in Allen's case is applicable. In case an amendment is proposed to
redistribute the rights among shareholders, the negative test of fraud on a power should
be applied, as is shown in the Peters' case. The High Court of Australia's decision in
Garnbotto has certainly changed the landscape in Australia, at least where the aim
of the alteration is to confer powers on majority members to expropriate shares or
property rights attached to shares. Whether the Hong Kong courts will follow the
Garnbotto approach remains uncertain, as the courts do not appear to have had an
opportunity to consider this issue since the Gambotto decision was handed down.

lz<) 457 A. 2d 701 (1983).

'" (1995) 182 CLR432,457.
122 (1995) 182 CLR432.458-459.
194 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

5.069 Position in UK not clear either. The picture in the United Kingdom is not entirely
clear either. In Constable v Executive Connection Ltd, 123 where the facts are somewhat
similar to those in Gambotto, Nugee QC felt that his Lordship was bound not to
follow Gambotto, partly because the United Kingdom Company Law Review Steering
Committee was of the view that Gambotto should not be imported into English Law.124
In Citco Banking Corp NV v Pusswer'.~Ltd,' 25 Lord Hoffmann remarked, in obiter
dicta, that Gambotto had no support in English authority.126 In a more recent decision,
the English Court of Appeal in Re Charterhouse Capital Ltd 127 expressly applied
the traditional "good faith in the interests of the company" test in holding that
an alteration to the articles to facilitate a compulsory buy-out of shares of the
minority was valid in circumstances where the original articles already permitted
the majority to acquire the minority's shares provided that a majority of the
non-purchasing shareholders agreed to the sale and where the alteration to the
articles was merely a "tidying up exercise" to make the articles clearer and more
consistent and to facilitate the transfer and registration of shares compulsorily
acquired. However, there is a view that although the traditional test was applied, the
judgment also noted that the power to amend a company's articles is constrained
by the purpose of the power, 128 which might be taken to support an approach that
"embrace[s] the twin tests of subjective bona fides and objective proper purposes,
as in Gambotto". 129
5.070 Potential use of unfair prejudice. Some commentators believe that the issue can
be side-stepped in Hong Kong by bringing unfair prejudice proceedings (Cap.622,
ss. 724 and 725). 130 As noted, this view has some judicial support, 131 though in
Re Charterhouse Capital Ltd, 132 the English Court of Appeal applied the common
law principles despite the minority shareholder having brought the petition under
the UK unfair prejudice provision. 133
5.071 Potential limits to Gambotto. lt should also be noted that the situation m
Gambotto is one where the amendment involved a conflict between the interest
of majority members and that of the minority. There is at least one Australian
case authority that says that Gambotto does not apply where an amendment is not
redistributive. 134

123
[2005) 2 BCLC 638.
'" [2005) 2 BCLC 638, (26].
"' [2007) Bus LR 960.
12
• [2007] Bus LR 960 (20).

"' [2015) BCC 574.

"' [2015) BCC 574, (90].
12• Paul L Davies and Sarah Worthington, Gower:~Principles of Modem Company law ( I0th edn, Thomson Sweet

& Maxwell, London, 2016) 64 I, 644.

,io Philip Smart, Katherine Lynch and Anna Tam, Hong Kong Company law: Cases, Materials and Comments
(Buttcrworths Asia, Hong Kong, 1997) 92.
"' Sec para.5.050 above.
"' [2015] BCC 574.
"' Companies Act 2006 (UK) s.994.
,,.. Re Arronfield Group Ltd ( 1995) 13 ACLC 1187; Tomasic, Bottomley and McQuecn believe that in this type of
situation the test in the Allen's case is still applicable: Roman Tomasic, Stephen Bottomley and Rob McQueen,
Corporations Law in A11stralia(2nd edn, the Federation Press, Sydney, 2002) 201.
 RULES ON INTERNAL GOVERNANCE: ARTICLES OF ASSOCIATION 195

3.4 Remedies

Not all contractual remedies available; often restricted to injunctive and 5.072
declaratory relief. That a company's constitutional documents constitute a statutory
contract between the company and each member, and among members inter se, does
not mean that all ordinary contractual remedies are available to an innocent party
to the statutory contract. The members' remedies are often restricted to injunctive
and declarative relief. The limitation on an innocent party's ability to seek other
remedies is often based on the need to balance the interests of different stakeholders. 135
An aggrieved member, for example, is generally unable to seek damages or other
monetary remedies against the company, save for damages for dividends declared
but unpaid. The reason for the unavailability of damages as a remedy to members
as against the company is that shareholders should not be permitted to elevate their
claims to the same level of the claim by a creditor. 136 This rule, however, should not
prevent a member from seeking damages against another member for breach of the
statutory contract.
Rectification unavailable to correct error in constitutional documents. Likewise, 5.073
the equitable remedy of rectification is unavailable to correct an error recorded in the
constitutional documents. The court does not have jurisdiction to rectify a company's
constitutional documents, and the correct way to remedy the situation is to amend
the relevant clauses in accordance with the machinery provided in the articles. JJ 7
The general jurisdiction of the court to rectify contractual documents has no application
to a document that only had a statutory effect. That type of document therefore could
only be rectified by statutory authority. 138 Moreover, an order for rectification does not
decree the alteration of the document. It merely directs that the document be made in
accordance with the form it ought to have been executed. This cannot be the case with
regard to a company's constitutional documents, since it is the document in its actual
form that is delivered to the Registrar that constitutes the charter of the company and
becomes binding on the company and its members. 139
Enforcement of constitution through implying terms. ls it possible to seek 5.074
enforcement of the company's constitution through implying terms by the court into
the articles? It would seem this depends on whether it is possible to imply a term
on the basis of the language used in the articles. In Bratton Seymour Service Co Ltd
v Oxborough, 140 the defendant was an owner of property and a shareholder of the
management company of the estate. The court held that the defendant was not obliged
to contribute to the upkeep and maintenance of the amenity areas as this obligation was
not expressly provided in the company's articles. This was because it was impossible to
imply such term from the language used in the articles. Dillon J held that the court will

1ls Sec generally R R Drury, "The Relative Nature of a Shareholder's Right 10 Enforce the Company Contract"
(1986) 45(2) Cc,mbridge LawJounu,I 219.
"' Houldsworth v City of Glasgow Ba11k( 1880) 5 App Cas 317.
'" £va11sv Chapman (1902) 86 LT 381; Sco11v Frtmk F Scott (Londo11)Ltd (1940) Ch 794.
"8 £va11sv Chapman (1902) 86 TLR 381, 382.
"9 Scott v Frank F Seo/I (London) Ltd (1940) Ch 794,802.
,..i (1992) BCC 471.
196 CORPORATE CONSTITUTION AND SHAREHOLDER AGREEMENTS

not imply a term into the articles simply on the basis of surrounding circumstances in
which the property was acquired. His Lordship said that to hold otherwise would place
potential shareholders in an intolerable position as they would not be able to ascertain
precisely their potential obligations to the company.
5.075 Implying term on basis of language used or scheme of articles themselves. It is,
however, possible to imply a term into the articles on the basis of the language used in
the articles or on the basis of the scheme of the articles themselves. Here, the implication
of a term is not on the basis of extrinsic circumstances which may be known only by
some persons and not by all persons who might become members. In Auorney General
of Belize v Belize Telecom Ltd, 141 the company issued three classes of shares, namely B
shares, C shares and one special share. According to the articles, B shareholders were
entitled to appoint two out of eight directors. C shareholders were entitled to appoint
four. The holder of the special share had the power to appoint two directors, but in case
the special shareholder also held 37.5 percent C shares, it would become entitled to
appoint two of the four directors appointable by C shareholders. A provision of the
articles gave the special shareholder the power to require the company to redeem, and
thereby to extinguish, the special share. The articles, however, did not make provision
for the removal of directors appointed by a special shareholder after the special share is
relinquished, nor for the removal of directors appointed by a special shareholder holding
37.5 percent of C shares after that party ceases to hold enough C shares. The Privy
Council held that there was an implied term in the articles that the directors concerned
would vacate office in these circumstances. The Privy Council pointed out that the
fact that the special shareholder was given power to extinguish the special share meant
that the articles could not reasonably mean that the directors appointed by the special
shareholder should remain in office after the special share has ceased to exist. The policy
of giving the special shareholder the power to require redemption was to enable it to
relinquish its influence over the conduct of the company's business. A refusal to imply
the relevant term would mean that the concerned directors would be able to remain in
office indefinitely, although this board arrangement would not reflect the shareholder
interests any more, as there would be no special shareholder who has the power to remove
them, the concerned directors, from the office. Similarly, where the special shareholder
no longer has 37.5 percent C shares, an implied term that the directors appointed by
the special shareholder would vacate office is required to avoid defeating what appears
to have been the overriding purpose of the machinery of appointment and removal of
directors, namely to ensure that the board reflects the appropriate shareholder interests
in accordance with the scheme laid out in the articles. 142

4. SHAREHOLDERS' AGREEMENTS
5.076 Contract entered into by shareholders in relation to operation of company.
A shareholders' agreement is a contract entered into by some or all of the shareholders
in relation to the operation of the company. A shareholders' agreement can be entered

"' (2009) Bus LR 1316.

" 2 (2009) Bus LR 1316, 1324.
 SHAREHOLDERS' AGREEMENTS 197

into at any time, whether before or after the company is incorporated. The company
itself can also become a party to this type of contract. A shareholders' agreement
functions in conjunction with the company's constitution to provide for the rights and
obligations between shareholders. A shareholders' agreement is most often used for
small private companies such as family companies and incorporated joint ventures. The
size of membership in public companies practically precludes the use of shareholders'
agreements by this type of company.143

4.1 The necessity and advantages of shareholders' agreements

Advantages: (a) private not public document. That the company's constitution is 5.077
a statutory contract between the shareholders means that it is possible to include
the whole of the bargain reached between shareholders in the constitution. There
are, however, practical reasons why it is often necessary for shareholders to enter
into a separate agreement outside the constitution. First, the constitution is a public
document. There can be matters between the shareholders that they wish to keep to
themselves. Terms in shareholders' agreements are not accessible by members of
the public.
Advantages: (b) Rights otherwise than qua member; (c) where company party, 5.078
place it under obligations; (d) full range of contractual remedies. Secondly,
shareholders' agreements can be used to confer rights not enforceable if provided
under the articles, for example a right otherwise than qua member, such as the right
to be a lifetime director or to be appointed as a professional adviser to the company. 144
Thirdly, where the company is privy to the shareholders' agreements, it is possible to
place the fom1er under obligations to which it otherwise would not be subject. Examples
include the obligation to exercise a certain level of supervision over subsidiaries, to
recognise beneficial owners' rights over shares, and to bind the directors (who are not
also shareholders) to a particular arrangement. 145 Fourthly, a shareholders' agreement
is an ordinary contract and the full range of ordinary contractual remedies are available
in case of a breach. In contrast, remedies for a breach of the statutory contract is
largely confined to declaratory and injunctive relief, as discussed previously.
Advantages: (e) Minority protection. Fifthly, a shareholders' agreement is an 5.079
effective instrument for minority protection. The articles, for example, can be altered
by three quarters majority. A shareholders' agreement, on the other hand, can only
be altered with unanimous consent. Jn other words, a minority shareholder is given a
veto power. The shareholders' rights provided in such an agreement therefore enjoy a
higher level of protection. Also, it is possible to provide for specific rights in favour
of individual shareholders in a shareholders' agreement such as the right to inspect
the company's books, the right to make decisions on dividend payments 146 and the
right to sell shares to fellow shareholders at a fair market value. The last-mentioned
right ensures the existence of a market for the shares of a member who wishes to

'" See comments by Finn in P D Finn, "Shareholder Agreements" ( 1978) 6 A BlR 91, I02.
'"' Joh.n Cadman, Shareholders 'Agreement (41h cdn, Sweet & Maxwell, London 2004) 2.
14
~ Ibid., 3.

'" It is even possible to provide for the quantity of dividend payment by reference to the size of the profits made.
198 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

terminate his association with the company. Provisions on the conditions upon which
the company can be volunta1ily wound up cater for easy exit by shareholders.
5.080 Advantages: (t) More detailed terms on corporate governance. Also, a shareholders'
agreement can provide more detailed terms on corporate governance (in addition to
minority protection) to suit the nature and particular circumstances of the company. 147
To protect the interests of a certain category of shareholders (e.g. a financial shareholder
who contributes financially to an incorporated joint venture), it is possible to confer
some affirmative control powers to those shareholders in an agreement so that they are
able to replace the company's key executives where circumstances warrant it.
5.081 Advantages: (g) Ratchet clauses. A shareholders' agreement can also be utilised as a
device to align the interest of the management team with that of the company. One way
of achieving this purpose is to include a ratchet clause in the shareholders' agreement
so that the equity stake of the managers will be increased when good performance is
delivered. It is also possible to provide for a negative ratchet arrangement whereby the
management will have their equity stake reduced when the company performs badly,
although this form of ratchets is less common. 148 To supplement the legal regulation of
the managers' disloyal behaviour, it may be a good idea to incorporate rules on related
party deals in a shareholders' agreement.
5.082 Advantages: (h) International transactions. Finally, the shareholders' agreement can
play an important role in facilitating international transactions. As Ronald Charles
Wolf puts:

"When investors from multiple diverse jurisdictions join economic forces there
are often underlying legal concepts which are not known to some of the investors.
Thus in international transactions, the shareholders' agreement is an independent,
private source oflaw, parallel to the local system of justice, ensuring the investors'
understanding finds a basis in contractual rights." 149

4.2 Disadvantages

5.083 Does not bind subsequent members. The most obvious disadvantage of a
shareholders' agreement is that it, without more, does not bind subsequent members,
as it is an agreement between the signatories. It is possible to resolve this problem by
asking new members to execute an accession agreement. The need for new members
to enter into this type of contract renders shareholders' agreements cumbersome and
more costly. This disadvantage, however, may not present a serious problem to the
types of companies that do not envisage accepting new members (e.g. small family
businesses and incorporated joint ventures).

"' Michael J Neyland, "Negotiacing an Effective Shareholders' Agreement'' in Effective Shareholder & Partnersi,ip
Agreements (Legalwise Seminars Pty Ltd, Sydney, 2005).
148
Ibid., 8.
"' Ronald Charles Wolf, Ti,e law and Practice of Shareholders· Agreements in Nt11ionaland lnternt11io11al Joint
Ventures:Common and Civil Law Uses wit/, Multiple Clauses and Formsfor tl,e Practitioner (Wolters Kluwer
Law & Business, Alphen aan den Rijn 2014) 7.
 SHAREHOLDERS' AGREEMENTS 199

4.3 The relationship with articles

\Vhere shareholders' agreement provides that in case of inconsistency it 5.084

prevails this will normally be case. The terms in a shareholders' agreement may be
inconsistent with the provisions in the company's constitutional documents. Where
the shareholders' agreement stipulates that in case of inconsistency the shareholders
agreement shall prevail, this will normally be the case. 150

4.4 Circumstances in which provisions in the shareholders'

agreement would be invalid

Invalid if contradicts mandatory rule in company statutes. As a general rule, a 5.085

provision in either the company's constitution or shareholders' agreement may be
rendered invalid if it contradicts a mandatory rule in company statutes.'5 1 Thus, an
unqualified clause in the shareholders' agreement not to remove a person from the
directorship is invalid as it constitutes an unlawful fetter on the members' statutory
power to remove directors. 152 An agreement that has the appearance of restraining
statutory powers may be enforceable among the signatory members inter se, as
long as the clause does not purport to bind subsequent shareholders. 153 In Russell v
Northern Bank Development Corp Ltd, 154 a number of shareholders, together with the
company, executed a shareholders' agreement whereby they undertook, inter alia,
that:

" ... no further share capital shall be created or issued in the company ...
without the written consent of each of the parties hereto".

Prima facie, this clause fetters the company's statutory power to increase share
capital. The court held that whereas the execution of the agreement by the company
constituted a formal undertaking fettering the statutory power, which was invalid,
the agreement among the signatory shareholders, being a personal agreement not
binding future shareholders, was enforceable.
Agreement invalid where statutory right to petition for winding up fettered. In Re 5.086
Greater Beijing Region Expressways Ltd, 155 art.18(d) of the shareholders' agreement
prohibiting the winding-up of a "relevant" company within a corporate group absent
the approval of both members of the holding company was held to be invalid for
fettering the holding company's right to wind up a subsidiary (the right to petition for a
winding-up). Rogers JA pointed out that the present case was not a case where it could

ll-0 Eg., see Re Charter/rouse Capital Ltd [2015] BCC 574. On the relationship between a shareholders' agreement
and the company's constitution, see further Graham Stedman and Janet Jones, Shareholders Agreements (3rd edn,
Sweet & Maxwell, London, 200 I) 66.
151
Welton v Sa.ffe,y [ 1897] AC 299.
1
" Muir v Uimpl [2005) I HKLRD 338; and sec Cap.622 s.462.
1
" Welton v Sajfery [1897] AC 299, 331, per Davey; .Russell v Northern Dank Development Corp Ltd [1992) I
WLR588.
"' (1992) I WLR 588.
"' ( I999) 4 HKC 807.
200 CORPORATECONSTITUTIONAND SHAREHOLDERAGREEMENTS

be said that the individual members had entered into personal contractual obligations
to exercise their rights in a particular way in that art.28 of the Joint Venture Agreement
was designed to ensure that any subsequent owner of shares in the holding company is
bound by the N agreement. 156
5.087 Weighted voting rights. It should be noted, however, that weighted voting rights
conferred on a member by virtue of the articles of association or shareholders'
agreement can be exercised even if the exercise of that right results in the defeat of
an attempt to exercise a statutory power. In Bushell v Faith, 157 where all of the issued
shares, each of which carried one vote, were held by three members on an equal basis,
reg.9 of the company's articles provided that, in the eventofa resolution being proposed
at a general meeting of the company for the removal of a shareholder or director, any
shares held by that director should carry three votes per share. A motion to remove one
of the two shareholder cum directors pursuant to the statutory power ofremoval under
s.184(1) of the Companies Act 1948 (UK) was defeated by that director's exercise
of his reg.9 voting power. The court held that s.184( l) provided for the removal of
a director by ordinary resolution but it did not say that every share entitled to vote
should be deprived of its special right under the articles. Lord Upjohn added that "[p]
arliament has never sought to fetter the right of the company to issue a share with
such rights or restrictions as it may think fit". i;s However, the use of weighted voting
rights is restricted in Hong Kong in relation to resolutions for the removal of a director
from office before the end of the director's term of office. Under Cap.622, s.462(7),
no share may carry a greater number of votes that it would carry in relation to the
generality of matters to be voted on at a general meeting of the company. 159

156
Re Greater Beijing must be understood on the assumption that the subsidiary in question is a "Relevant''
company for the purpose of the Joint Venture Agreement, although Rogers JA said the ltoldi11gcompany, rather
than the subsidiary, was, "at least for some purposes", a "Relevant'' company. lf"Relevant" company only refers
to the holding company, what the members have agreed pursuant to art. 18(d) would have been that the ltoldi11g
company, not a company under its control, was not to be wound up without the approval of both shareholders.
The problem at issue was, on the other hand, the holding company's right to petition for the winding-up of the
subsidiary. lf the subsidiary company was not a "Relevant" company, the case could have been disposed of on
the basis that art. I S(d), in any case. docs not say that GBR.E (the subsidiary) cannot be wound up without both
shareholders' approval.
'" (1970) AC 1099.
" 8 (1970) AC 1099, 1109.
"' See also Cap.622, s.462(8).
 CHAPTER 6

CORPORATEORGANSAND
DIVISION OF POWERS

PARA.

I. Introduction ............................................................................................................................. 6.001

2. Early Conceptions on the Location of Power of Control ........................................................ 6.005

3. Modem Methods of Distributing Corporate Control Powers .................................................. 6.007

3.1 The general power-allocation mechanism ........................................................................ 6.008
3.2 Powers given to directors or the general meeting specifically ......................................... 6.011
3.3 Concurrent powers ............................................................................................................ 6.013

4. The General Power of Management.. ........................................................................................ 6.017

4.1 Confusion in interpretation: pre-2003 Table A Reg.82 .................................................... 6.020
4.2 The problems with the mainstream authorities ................................................................ 6.02I
4.2.1 Questionable authorities ........................................................................................ 6.022
4.2.2 Alternative doctrinal bases ................................................................................... 6.023
4.2.3 An assessment of the second line of authorities .................................................... 6.029

5. The Effect of the Post-2003 Table A Reg.82 and the Model Articles ..................................... 6.031

6. The General Meeting's Residual Power under Common Law ................................................. 6.035
6.1 Where the directors cannot function effectively ............................................................... 6.036
6.2 Where it is necessary for the general meeting to
exercise the company's inherent powers ........................................................................... 6.042
6.2.1 The power to ratify directors' acts in excess of authority ..................................... 6.043
6.2.2 The power to ratify an abuse of power ................................................................. 6.044
7. The Shareholders' Power to Make Decisions Through Unanimous Consent.. ......................... 6.045
------·----------------------·---------·-------·-·-·---·-------------- ..--,-·-·-- ..-···---~ _
....
 1. INTRODUCTION
Corporate organs: (i) members in general meeting and (ii) board of directors. 6.001
A company is a legal abstraction and must act through human beings. A company
in common law jurisdictions acts through two corporate organs, namely, the board
of directors and members in general meeting. As the law recognises the company as
a person, it is capable of having rights and powers. A company, for example, would
nonnally have the power to raise money, to lend, to make contracts, to appoint,
discipline, or to remove its officers, including directors, to determine remuneration
of its officers and employees, to litigate, to sell corporate assets, to make investments,
to pay dividends to members, or to reach compromises with its creditors. The two
corporate organs generally exercise the company's powers through resolutions reached
at their meetings.
Board of directors: typically have power of management of firm. The reasons 6.002
why the company has a board of directors include the following: (a) it may be
unrealistic for all of the shareholders to be involved in the day to day management
of the firm (at least where the body of shareholders is large); and (b) shareholders
may not have the expertise or motivation to manage the company's business
efficiently.' The division of powers provision in a company's constitution therefore
typically confides the power of managing the company's business and affairs to
the directors, the power of which may or may not be subject to the control of
members in general meeting. 2
Complications as to which corporate organ can exercise given power and 6.003
when. Complications may arise concerning which corporate organ can exercise
a given power; and in what circumstances. For example, issues may arise whether
the general meeting may direct the board to sell the company's assets; 3 whether the
general meeting has the power to ratify an ineffective board decision to acquire and
let premises; 4 whether the majority shareholder holding enough shares to pass an
ordinary resolution may initiate proceedings in the company's name against another
firm for committing a wrong against the former;5 whether the general meeting has
the power to appoint directors where such a power is exclusively vested in the board,
in circumstances where the board cannot function;6 whether the company can be a
competent principal (for the purpose of determining the possibility of ratifying an
unauthorised act), where it does not have a board;7 whether the general meeting has
the power to appoint an insolvency practitioner, where the directors cannot be traced; 8

See Paul Davies, !t11roductio11to Company law (Oxford University Press 2002) 13.
' For example, Model Articles, arts.2, 3 (public companies) and arts.3, 4 (private companies): Companies (Model
Articles) Notice (Cap.622H). See also the predecessor CoO, Table A reg.82 (repealed); Model Articles for Private
Companies limited by Shares (UK), art.3, Model Articles for Public Companies (UK), art.3: Companies (Model
Articles) Regulations 2008 (UK); Corporations Act 2001 (Aust) s.198A.
3 Automatic Seif-Cleansing Filter Syndicate Co Ltd v Cuninghame [ 1906) 2 Ch 34.
' Quin & Axtens, Ltd v Salmon [ I 909) AC 442.
' Marshall's Valve Gear Co Ltd v Manning Wardle & Co [ 1909) I Ch 267.
• Foster v Foster [ 1916) I Ch 532.
' Alexander Ward& Co v Samyang Navigation Co Ltd (1975) I WLR 673.
8 Re Fro11tsouth(Witham) Ltd (2011) BCC 635.
204 CORPORATE ORGANS AND DIVISION OF POWERS

the circumstances in which the general meeting can exercise a power that is vested
concurrently in the general meeting and the directors;9 the validity of shareholders'
requisition for a meeting where the matters proposed to be deliberated in the meeting
fall within the ambit of directors' management powers; 10 whether the general meeting
has the power to make regulations on the operation of the company's business, where
such a power is confided exclusively to the directors; 11 or the effect of members'
unanimous agreement achieved either at or outside of a meeting. 12
6.004 Prima facie solution lies in interpretation of articles. The primafacie solution to a
division of powers issue hinges on the courts' interpretation of the relevant clauses in
the company's articles of association, the way in which the relationship between the
two corporate organs and the sources of their powers is conceived, the level of majority
and formality at which members' consent is obtained, and the existence of an unbiased,
functional board of directors.

2. EARLY CONCEPTIONS ON THE LOCATION OF

POWER OF CONTROL

6.005 Historical view: directors were agents of shareholders. The widely held view
is that prior to the 20th century the board of directors was seen as agents of the
shareholders. Originally, joint stock companies, whether incorporated or not,
were seen as partnerships and the underlying assets belonged to the members in
equity. Accordingly, the directors of those companies, who managed the assets
for the shareholders' assets, could be seen as agents of the shareholders_D The
deeds of settlement companies, which emerged after the passage of the Bubble
Act, were constituted as partnerships or trusts. 14 It is therefore possible to see the
relationship between shareholders and directors in a deed of settlement company
as one between principals and their agents. The provision in s.90 of the Companies
Clauses Consolidation Act 1845, the predecessor of the division of powers
provisions in Table A attached to subsequent company law legislation (now the
Model Articles), was, prima facie, also consistent with an agency conception of
the relationship between the directors and shareholders. Section 90 provided that:

"The directors shall have the management and superintendence of the affairs of
the company except as to such matters as are directed by this or the special Act
to be transacted by a general meeting of the company; but all the power so to be
exercised shall be exercised in accordance with and subject to the provision of
this and the special Act; and the exercise of all such powers shall be subject also

• Worcester Corse11yLtd v Witting [ 1936] I Ch 640.

,o NRMA v Parker ( 1986) 6 NSWLR 517; Credit Oevel<>p111e111 Pte Ltd v !MO Pte Ltd ( 1993) 2 SLR 370.
11
8/ack White (md Grey Cabs Ltd v Fox [ 1969)NZLR 824.
" Re Express £11gi11eeri11g W<>rksLtd [ 1920) 1 Ch 466; Ox Opemtions Pty Ltd v Lo11dMork Property Developments
(Vic) Pty Ltd (2007) FCA 1221.
" Sarah Worthi.ngcon,"Shares and Shareholders:Propcrcy, Powerand Enticlcmcnt: Part 1" (2001) 22(9) Co111po11y
Lawyer 258, 260.
" Paul L Davies, Gowers Principles of Modem Co111panyLaw (16th edn, Sweet & Maxwell 1997)31.
 EARLY CONCEPTIONS ON THE LOCATION OF POWER OF CONTROL 205

to the control and regulation of any general meeting specially convened for this
pwpose . .... " (emphasis added)

Whilst the above agency approach was the accepted historical view, there appears to
be little case authority directly on point. In Isle of Wight Rly Co v Tahourdin,15 a case
where the company was governed by the 1845 Act, Cotton LJ said that:

"[I]f a shareholder complains of the conduct of the directors while they keep
within their powers, the Court says to him: "If you want to alter the management
of the affairs of the company go to a general meeting, and, if they agree with
you, they will pass a resolution obliging the directors to alter their course of
proceeding."

It should be noted though that Cotton LJ's quoted comments were made in a context
where the company was governed by the 1845 Act. 16 As such, it may have been that
the comments reflected an application of the alternative contractual approach that has
been expressly accepted in the 20th century jurisprudence rather than necessarily an
agency approach.
That said, in the context of directors' liabilities, there were some early cases expressly
accepting that directors are agents of the company. In Ferguson v Wilson,17 Cairns LJ
stated:

"What is the position of directors of a public company? They are merely agents of
a company. The company itself cannot act in its own person, for it has no person;
it can only act through directors, and the case is, as regards those directors, merely
the ordinary case of principal and agent."

Modern view: directors not agents of shareholders. In any event, by the early 6.006
20th century, it became clear that the legal nature of the relationship between the
directors and shareholders would no longer be conceived of as one of agency, as
explained through a series of court decisions. 18 In Automatic Self-Cleansing Filter
Syndicate Co Ltd v Cuninghame,19 Cozens-Hardy LJ stated:

"[I]f you once get clear of the view that the directors are mere agents of the
company, I cannot see anything in principle to justify the contention that the
directors are bound to comply with the votes or the resolutions of a simple
majority at an ordinary meeting of the shareholders. I do not think it true to say
that the directors are agents. I think it is more nearly true to say that they are in the

15
(1883) 23 Ch D 320 at 330-331.
1
• Sec Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame (1906) 2 Ch 34, per Collins MR at 43
(although s.90 was noc mentioned in the courc'sdecision in Isle of Wright Rly co v Tahourt!in, as the case turned
on the interpretation of, i111eralia, ss.70 and 91).
17 LR 2 Ch App 77, 89-90. Seealso Clwritable Corporation vSir Robert Sutton (1742) 2 Atkyns400; 26 ER 642,644.
18
Automatic Self-Cleansing Filter Syndic(l(e Co Ltd v Cuninghame [ 1906)2 Ch 34; Marshall':; Jiilve Gear Co Ltd v
Ma1111i11gWardle & Co Ltd (I 909) I Ch 267; Quin &Axte11sv Salmon [1090) AC 442.
19
(1906) 2 Ch 34, 45.
206 CORPORATEORGANSAND DIVISION OF POWERS

position of managing partners appointed to fill that post by a mutual arrangement

between all the shareholders."

As Collins MR noted in that case, the allocation of powers between the general meeting
and the board is a matter of construction of the articles of association. 20

3. MODERN METHODS OF DISTRIBUTING

CORPORATE CONTROL POWERS

6.007 General grant of management powers to directors. In terms of the grant of general
management powers, a common method used within common law jurisdictions is to
grant such powers to the directors, whether by statute or by the company's constitution.
Depending on the wording used in the particular provision, the powers so granted may
or may not be subject to the control of the shareholders via a decision achieved by a
certain level of majority (e.g. by a special resolution). This general power-allocation
structure is typically supplemented by specific powers given to either of the corporate
organs by statutory provisions or regulations in the company's constitution.

3.1 The general power-allocation mechanism

6.008 Model (a): Hong Kong model where general power vested in directors subject
to control by general meeting. The general grant of management powers in various
common law jurisdictions has been achieved through three different models of
management power allocation. The first model vests management power in the
directors, which is subject to the control of the general meeting exercised via a
certain level of majority. This model has been adopted under the Model Articles
(HK) and in the previous Table A (as amended in 2003), and is also the model used
under the Model Articles (UK). 21 These articles allow the shareholders to give
directions to the board via a special resolution but also make it clear that no prior
act of the directors shall be invalidated by a direction given by special resolution. 22
This model of corporate power allocation was first formulated in the UK in 1985
to overcome the confusion caused by the courts' earlier decisions on the division
of corporate powers where the wording of the division of power clauses in the
companies' articles was not clear about the power of the general meeting to control
the directors' exercise of their management powers. 23 The effect of those decisions
will be considered below.

Z<l [ 1906) 2 Ch 34, 42-43.

21
Model Articles (HK), arts.2, 3 (public companies) and arts.3, 4 (private companies): Companies (Model Articles)
Notice; former Table A in the predecessor CO, reg.82 (repealed); Model Articles for Private Companies Limited
by Shares (UK), arc.4; Model Articles for Public Companies (UK), art.3.
22 Model Articles (HK), art.3 (public companies) and art.4 (private companies); former Table A, reg.82 (repealed);
Model Articles for Private Companies Limited by Shares (UK), art.4; Model Articles for Public Companies
(UK), art.4.
23 Paul L Davies and Sarah Worthington, Gowerand Davies 'Principleof Modem CompanyLaw (I 0th edn, Sweet &
Maxwell 2016) (14-7).
 MODERN METHODS OF DISTRIBUTING CORPORATE CONTROL POWERS 207

Model (b): general power vested in directors without general meeting control. The 6.009
second model is a variation of the first, as the directors' management power under this
model is also granted by the company's constitution. Under this model, the power of
management is conferred on the directors, who are given the mandate to exercise all of
the powers of the company except those that the company law legislation and the company
constitution require the company to exercise in general meeting. This is the model adopted
in s.l98A of the Corporations Act 2001 (Australia), which is a "replaceable rule".24
A salient feature of this model is that the directors' management power is not,primafacie,
subject to the direction or control of the general meeting. Section 198A does not give
shareholders power to limit the power of the directors.
Model (c): original and undelegated general powers granted to directors under 6.010
statute. The third model is to grant the general management power to the directors
by the state by virtue of a provision in the company law legislation. This is the model
developed in the United States, 25 which has subsequently been adopted in Canada 26
and New Zealand with minor amendments. 27 Under this model, the power granted to
the directors is said to be original and undelegated, 28 and, primafacie, not subject to
control by the shareholders. 29 Shareholders of a close corporation in the United States,
however, are permitted to exercise management powers, but would be subject to all the
liabilities of directors if they choose to do so. 30
In comparison, in Canada's letters patent jurisdictions, the management powers granted to
the directors are subject to any unanimous shareholder agreement, 31 and the powers given
by virtue of New Zealand Companies Act (CA), s.128 are subject to any modifications,
exceptions, or limitations contained in the Act or in the company's constitution. 32 Under
the New Zealand provision, although primafacie the directors' powers are not subject to
shareholder control, such powers are not necessarily free from the control of the general
meeting. The directors' powers under s.128, as stated above, are subject to, inter alia, any
modifications, etc. contained in the Act or in the company's constitution. In principle, a
company's constitution can contain, or be amended to contain, a provision allowing the
general meeting to control the directors' management powers.33

3.2 Powers given to directors or the general meeting specifically

Powers generally exercisable by corporate organ to exclusion of other corporate 6.011

organ. Powers granted specifically to a corporate organ are, in general terms, exercisable
by the grantee organ to the exclusion of the other corporate organ. Thus, where the

24
The set of replaceable rules in Australia's Corporations Act 2001 constitutes a default company constitution,
which is roughly equivalent to the Model Articles in Hong Kong and the UK and the former Table A articles in
predecessor Companies Ordinances.
25 For example, see Delaware General Corporation Law, s. 141.
2• Bruce Welling, Co,porate Law in Canada: the Govemi11gPrinciples (Scribblers Publishing, 2006) 314 ff.
27 Companies Act 1993 (NZ), s.128.
28 Hoyt v Thompson's Executor J NY 207 ( 1859).
29 Bruce Welling, Corporate Law in Canada: The Goveming Principles (Scribblers Publishing 2006).
30 Delaware General Corporation Law, s.35 I(3). Cf Companies Act 1993 (NZ) ss.126(1 )(b )(iii), 126(2), and 126(3).
31 For example, Canada Business Corporations Act, s. 102(1).
" Companies Act 1993 (NZ) s.128(3).
" Companies Act (NZ), s.32(2).
208 CORPORATE ORGANS AND DIVISION OF POWERS

companies legislation or the company's constitution has granted the power of appointing
company secretaries or the chairperson of the board meeting exclusively to the directors,
the shareholders may not call a general meeting to vote on these matters.34 Likewise,
where the power of making rules for the operation of the company is exclusively conferred
on the directors, the shareholders do not have power to exercise this rule-making power.35
6.012 Examples of exclusive powers in Hong Kong. Specific powers that are granted to
directors under the Companies Ordinance (Cap.622) or the Model Articles in Hong
Kong include: (i) the appointment of a managing director,36 (ii) the appointment of
the company secretary, 37 (iii) the power to specify the company's accounting reference
date for the purpose of detennining the company's financial year,38 and (iv) the power
to prepare summary financial reports. 39 Examples of powers granted exclusively to
the general meeting include: (i) the power to alter articles, 40 including the company's
objects as stated in the articles;41 (ii) the power to change the company's name;42 (iii)
the power to dispense with the requirement for holding annual general meetings; 43 and
(iv) the power to alter share capital. 44

3.3 Concurrent powers

6.013 Typical concurrent power is one to appoint directors. A company's constitution

may grant a certain power to both the directors and the general meeting, in which case,
the power is said to be "concurrent". 45 A typical power granted to the board and the
general meeting concurrently is one to appoint directors. 46 A company's articles might,
for example, give powers to the general meeting to: (i) appoint directors generally; 47
(ii) fill the vacated office when a director retires at an AGM;48 or (iii) remove a director
and appoint his replacement. 49 In addition, the articles might give the directors the

" Hopkins Professional Services Pty Ltd v Foyster Holdings Pty Ltd (200 I) 39 ACSR 5 I9. See also Blair Open
Hearth Furnace Co Ltd v Reigan [ 1913] I08 LT 665. Note, however, that it is possible for the general meeting to
act on a matter within the exclusive province of the directors, where the board is in a state of deadlock: Barron v
Potter [ I914] I Ch 895.
" Black White and Grey Cabs Ltd v Fox [ 1969] NZLR 824.
;,, Model Articles art.33 (public companies): Companies (Model Articles) Notice (Cap.622H) Sch. I.
" Model Articles art.37 (public companies) and art.33 (private companies): Companies (Model Articles) Notice
(Cap.622H) Schs. I and 2.
;s Cap.622, s.371(1).
;, Cap.622, s.439.
'" Cap.622, ss.87 and 88 .
., Cap.622, s.89.
42 Cap.622, s. l 07.
" Cap.622, s.613.
" Cap.622, s.170. Fora more complete list of powers grnnted to the generJI meeting by the company law statute, see
Loh Siew Cheang and William MF Wong, Company law: Powers and Acco1111tability(LexisNexis Butterworths,
Hong Kong, 2003) 166-168.
" Worcester Corse/J:yLtd v Witting (1936) I Ch 640,per Lord Hanworth MR at 645.
46 Worcester Corse11:vLtd II Witting (1936] I Ch 640; Grant v Jo/r11Gram & Sons Pty Ltd (1950) 82 CLR I;
llltegrated Medical Technology Ltd v Mace/ Nominees Pty Ltd (1988) 13 ACSR 110; E111sc/1 v Mr Crocodile Pty
Ltd ( 1990) 3 ACSR 720; Ratonal Industries Ltd v Wa11 Kin Chung (2003] 3 HKLRD 11; Tsang Wai L,111Wayla11dv
C/ru Ki11gFai [2009] 5 HKLRD 105, CF!.
47
Model Articles art.22( I)(a) (private companies), and art.23( I)(a) (public companies).
48 Model Articles art.24(7) (public companies); former Table A, reg.94 (repealed) of the predecessor Cap.32.
•• Cap.622 s.462; Model Articles art.22( I)(a) (private companies), and art.23( I)(a) (public companies); former
Table A, regs.98, 99 (repealed).
 MODERN METHODS OF DISTRIBUTING CORPORATE CONTROL POWERS 209

power to appoint a director to fill a casual vacancy or as an addition to the existing

board.50 Under this version of articles, the powers of appointing additional directors 51
or of filling vacancies52 in the board are granted to both the corporate organs.
Disputes where concurrent powers. Disputes can arise where one of the corporate 6.014
organs challenges the power of the other (nonnally the general meeting) to make such
a decision when the power in question has been exercised. A challenge normally takes
place as a means to assert control where there is a power struggle between a faction
holding the majority of shares and the one that commands the majority on the board.53 A
dispute of this nature may also arise where members with enough shareholdings to pass
a resolution seek to convene a general meeting to have additional directors appointed.54
Resolved by construction of provisions. Such disputes are resolved by a process of 6.015
construction of the power-conferring provisions in the company's articles,55 against
a backdrop that there are certain inherent powers of the company exercisable in
general meeting. 56 For example, members in the general meeting have an inherent
power to direct the control of the company through the appointment of directors. 57
It is possible for the articles to be drafted so as to give the power of appointing
directors solely to the board to the exclusion of the general meeting (in which case
the power would not be concurrent). 58 However, Bryson J held in Integrated Medical
Technology Ltd v Mace! Nominees Pty Ltd 59 that no intention to make an exclusive
prescription of what a general meeting can do (and cannot do) will be implied into
the articles in the absence of "clear language or unmistakable implication". In that
case, the articles expressly conferred on the board powers to appoint additional
directors, and also expressly conferred on the general meeting powers to appoint
directors who retire by rotation. Bryson J held that:

" ...[m]erely to provide that the power to appoint additional directors is given
to the directors ... goes no distance in my view towards such a prescription of
exclusivity".60

In the context of the particular articles, the court was not prepared to accept that the
inherent power of the general meeting to appoint additional directors was impliedly

,o Model Articles. art.22(3) (private companies), and art.23(3) (public companies); former Table A, reg.97
(repealed) of the predecessor Cap.32.
" For example. H'orcesterCorsetry Ltd v Witting [ 1936) I Ch 640.
" Tsang Wai Lun Wayland v Chu King Fai (2009) 5 HKLRD 105.
" See for example, WorcesterCorsetry Lui v Wi11i11g [ 1936] I Ch 640; Gram v John Grant & Sons Pty Ltd ( 1950)
82 CLR I; R<1tonalilldustries Ltd v WanKin Chung (2003] 3 HKLRD 11; Tsang Wai Lrm Wayland v Cltu Ki11g
Fai (2009] 5 HKLRD 105.
" Integrated Medical TechnologiesLtd v Mace/ Nomi11ees Pty Ltd ( 1988) 13 ACLR I09.
55
Blair Open Hearth Furnace Co Ltd v Reigart (1913] 108 LT 665, 669; Worcester Corset•J' Ltd v
Willing [ 1936] I Ch 640, 643 per Lord Hanworth MR.
56 WorcesterCorset,y Ltd v Willing [ 1936] Ch 640; !,11egratedMedical Teclr110/ogies
Ltd v Mace/ Nominees Pty Ltd
(1988) 13 ACLR 110.
51
WorcesterCorsetry Ltd v Willing [ 1936] Ch 640; !,11egratedMedical Teclt110/ogies
Ltd v Mace/ Nominees P(y Ltd
(1988) 13 ACLR I 10.
58 Blair Open Hearth Furnace Co Ltd v Reigart [1913] 108 LT 665.
59 (1988) 13 ACLR 110, 114.

6() (1988) 13 ACLR 110. 114.

210 CORPORATE ORGANS AND DIVISION OF POWERS

excluded. In Worcester Corsetry Ltd v Witting 61 (where the articles were similar to
those in the Model Articles for public companies 62), Lord Hanworth observed that the
directors' power to make an appointment to fill a vacancy in the board or to increase
the size of the board was "temporary", "to be reviewed, and perhaps confirmed at the
general meeting". 63 This was because, under the articles, the directors so appointed
by the board were required to retire at the next annual general meeting (where their
re-appointment could be considered by the shareholders).
6.016 Act of corporate organ not effective if outside scope of power. An act of the corporate
organ is not effective if the organ has, when exercising the relevant power, acted outside
the scope of that power. An instance of ineffective exercise of a concurrent power is
illustrated in nang Wai Lun Wayland v Chu King Fai.64 There, both the board and the
general meeting appointed different persons as directors pursuant to their concurrent
powers conferred by the articles. The court invalidated the prior appointments made
by the board. The purported exercise by the board of its concurrent power was invalid
as, on the facts of the case, the appointments were made in breach of the directors'
fiduciary obligations (where the predominant purpose of the directors' decision to
make the appointments was to entrench their own management control).

4. THE GENERAL POWER OF MANAGEMENT

6.017 Regulation 82 of Table A. Before 2003, reg.82 of Table A (repealed) under the
predecessor CO read:

''The business of the company shall be managed by the directors, who may pay all
expenses incurred in promoting and registering the company, and may exercise all
such powers of the company as are not, by the Ordinance or by these regulations,
required to be exercised by the company in general meeting, subject, nevertheless,
to any of 1hese regulations, to the provisions of the Ordinance and to such
regulations, being not inconsistent with the aforesaid regulations or provisions, as
may be prescribed by the company in general meeting; but no regulation made by
the company in general meeting shall invalidate any prior act of the directors which
would have been valid if that regulation had not been made." (emphasis added)

That version of reg.82 was virtually identical to reg.80 of TableA of the Companies Act 1948
(UK). As will be seen below,the italicised part.ofreg.82 (limiting words) caused considerable
controversy and confusion about the extent to which the directors' general power of
management is subject to control by the general meeting. In 2003, reg.82 was revised to read:

"Subject to the provisions of the Ordinance, the memorandum and articles and to
any directions given by special resolution, the business and affairs o_fthe company

61
[ 1936) I Ch 640 at 648. Applied in Rmo11allnd1wries Ltd v Wa11Kin Clwng [2003) 3 HKLRD 11, [16) per To J
62
Model Articles arts.23, 24 (public companies).
63
Worcester Corse11yLtd v Willing [ 1936) Ch 640, 648, per Lord Hanworth MR; Ratonal lndu.<tries Ltd v Wan Kin
Chung [2003) 3 HKLRD 11, [16],perTo J
-' [2009) 5 HKLRD 105.
 THE GENERAL POWER OF MANAGEMENT 211

shall be managed by the directors, who may exercise all the powers of the company.
No alteration of the memorandum or a1ticles and no such direction shall invalidate
any prior act of the directors which would have been valid if that alteration had not
been made or that direction had not been given .... " (emphasis added)

Model Articles (Cap.6228). The current Model Articles (Cap.622H) in Hong Kong 6.018
are similar, conferring on the members a reserve power exercisable by special
resolution to "direct the directors to take, or refrain from taking, specified action". 65
The purpose of the 2003 amendments to reg. 82 of the fo1merTableA was to make the
position on the extent of the directors' management power clear.66
Interpretation of reg.82. Notwithstanding the wording used in the revised reg.82 6.019
of the former Table A and its equivalents in the current Model Articles (Cap.622H),
it is still necessary to consider and assess the ways in which the earlier version of
reg.82 was interpreted: many companies were incorporated in Hong Kong before
2003 and disputes arising from the previous version of Table A will need to be
settled by considering case authorities on that version of reg.82 (and the previous UK
equivalents). Further, a consideration of the ways in which the courts have interpreted
this earlier version will also be of assistance in predicting the extent to which the
comts will give effect to the wording of the new power-allocation clauses. 67

4.1 Confusion in interpretation: pre-2003 Table A Reg.82

Whether limiting phrase denies general meeting power to exercise control; or 6.020
general meeting's power to intervene determined by power-allocation clause.
At the centre of the controversy with regard to the independence of the directors
in exercising their management power is the effect of the limiting words in the pre-
2003 version of reg.82 of the former Table A (repealed) of the predecessor CO. It
is beyond doubt that under the pre-2003 reg.82 the directors' power of management
was subject to the provisions in the Companies Ordinance and those in the company's
articles of association. The problem has been, and to a certain extent still is, whether
the board's power is also subject to the decisions that shareholders make in the form
of ordinary or special resolutions. The answer to this question hinges on the way in
which the phrase "and to such regulations, being not inconsistent with the aforesaid
regulations orprovisions, as may be prescribed by the company in general meeting"
is interpreted. If the first-mentioned "regulations" in the quoted phrase means
resolutions passed in the members' general meetings, the directors' power would

"' Model Articles art.4 (private companies), and art.3 (public companies): see Companies (Model Articles) Notice
(Cap.622H). The position is the same under the UK Model Articles (Companies (Model Articles) Regulations
2008) and their predecessors in reg.70 ofTable A (Companies (Tables A to F) Regulations 1985 (UK)).
~ This followed the UK clarification of the position: see Paul L Davies and Sarah Worthington, Gower ond Davies'
Principle of Modem Company Law (9th edn, Sweet & Maxwell 2012) [14-7].
67 If, for example, it is legitimate for courts to read down the general meeting's control power notwithstanding the
words limiting the power of the directors in the previous reg.SO under the 1948 Act, it is possible that the court
may do the same in interpreting the new version of the division of power clauses: sec Sarah Worthington, "Shares
and Shareholders: Property, Power and Entitlement: Part I" (2001) 22(9) Comptmy Lawyer 258,262: Stephen W
Mayson, Derek French and Christopher L Ryan, Mayson, French & Ryan 011 Company law (23rd edn, Oxford
University Press, 2006) 546.
212 CORPORATE ORGANS AND DIVISION OF POWERS

be subject to the members' control by way of an ordinary resolution. The absence

of the word "special" in front of the word "regulations" suggest that what would
be needed is an ordinary resolution only.68 If the word "regulations" in this context
denotes regulations as contained in the articles rather than resolutions, the directors'
power under reg.82 would be free of the general meeting's intervention (short of
amendments being made to the articles).
On this issue, two lines of case authorities have developed since the early 20th century.
The basic difference between these two lines of authorities, to put it simply, is whether
the limiting words in reg.82 or a similar worded phrase should be given effect. The
position under the first line of authorities is to read down the limiting words so as to
deny the general meeting the ability to exercise any control, by way of an ordinary
resolution, over the management of the company's business. 69 The second line of
authorities emphasises that the general meeting's power to intervene in management
matters is to be determined by the wording of the power-allocation clause. 70

4.2 The problems with the mainstream authorities

6.02] Mainstream view that limiting phrase denies general meeting power to exercise
control. Although the first line of authorities represents the received view,71 it suffers
from a number of problems which render this view unconvincing. First, cases that are
normally regarded as authorities for the received view either do not support this view
or cannot sustain close analysis. Secondly, the decisions of most of the cases where
the general meeting was not permitted to assert its control by ordinary resolutions
can be rationalised on alternative doctrinal bases. Finally, the received view has been
challenged in a number of more recent decisions.

4.2.1 Questionable authorities

6.022 Criticism of mainstream view authorities. The case of Automatic Self Cleansing
Filter Syndicate Co Ltd v Cuninghame72 is normally regarded as one of the leading
authorities representing the dominant view.73 That case, however, does not say that

•8 "[A]s a general principle, che word 'resolution' means an ordinary resolution unless che context in which it occurs
s
indicates ocherwisc": A D Lang, Horsley Meetings (5th cdn, LcxisNexis Buucrworths 2006) 131.
°' For examples, see The Gramophone and Typewriter Ltd v Stanley [ 1908] 2 KB 89, 105-106, per Buckley LJ;
John Slww and Sons (Salford) Ltd v Peter Shaw and Jo/111Shaw ( 1935) 2 KB 113, 134,per Greer LJ; Breck/and
Gro11pHoldi11gsLtd v London & S11ffo/kProperties Ltd (1988) 4 BCC 542.
"" Amomatic SelfClea11si11gFilter Syndicate Co lid v C1minghame (I 906) 2 Ch 34 (this case is often regarded as a
seminal case for the first line of authorities but, as will be pointed out below, this is inc-0rrectand the ratio of this
case has been misunderstood in a number of well-known decisions); Marsha/ls Valve Gear Co lid v Manning
Wardle & Co Ltd (1909) I Ch 267; Dowse v Marks (1913) 13 SR (NSW) 332; Tam Kam-yip v lau Kung School
[1986) I HKLR 448; Credit Development Pte Ltd v !MO Pre Ltd [1993) 2 SLR 370.
71 Leo Flynn, 'The Power to Direct" ( I99 I) 13 Dublin Universitv Ul\V Journal l OI; Charles Zhen Qu "Some
Reflections on the General Meeting's Power to Control Corporate Proceedings" (2007) 36(3) Common law
WorldReview 23 I.
" [1906) 2 Ch 34.
73
See The Gramophone and Typewriter Ltd v Sw11/ey[1908] 2 KB 89 at l0S-106, per Buckley LJ; John Shaw
a11dSons (Sa/fo,r/) Ltd v Peter Slww and John Shaw ( 1935) 2 KB 113 at 134, per Greer LJ; Breck/and Group
Holdi11gsLtd v London & Suffolk Properties Ltd ( I988) 4 BCC 542. See also R P Austin and I M Ramsay, Fo,rt:f
Principles of Corporations law ( I 5th edn, LexisNexis Butterworths 2013) 234.
 THE GENERAL POWER OF MANAGEMENT 213

the general meeting can never intervene by ordinary resolution even if the division
of power article of the company gives such a power to the general meeting. The ratio
of Coll ins MR 's decision is that where the management powers of the directors are
subject to the general meeting's control by "extraordinary resolution", the powers
of the directors can be altered only by an extraordinary resolution, not an ordinary
resolution. 74 In other words, the Cuninghame case actually supports the view taken by
the second line of authorities.
Furthermore, the case of Quin & Axtens v Salmon 15 is also treated as a leading
authority representing the received view. 76 While a House of Lords case, Lord
Lore burn 's short decision in that case is of limited value as a binding precedent,
as the judgment does not sustain close analysis, 77 and it is difficult to identify a
precise principle underlying the decision. 78
The third case that has often been cited as an authority for the mainstream view is
John Shaw and Sons (Salford) Ltd v Peter Shaw and John Shaw. 79 In that case, certain
directors purported to authorise the company to commence proceedings against the
Shaw brothers (who were also directors in the company). The defendant Shaw brothers
raised various defences, including an argument that the proceedings were unauthorised
because the general meeting had passed a resolution to discontinue the proceedings.
Greer LJ stated:

"[i]f powers of management are vested in the directors, they and they alone can
exercise these powers. The only way in which the general body of the shareholders
can control the exercise of the powers vested by the articles in the directors is by
altering their articles, or, if opportunity arises under the articles, by refusing to
re-elect the directors of whose actions they disapprove."80

Greer LJ's judgment in Shaw, however, should not be taken as a strong authority on
the issue of division of powers. His Lordship's above-quoted observation was obiter
dictum, as the defendant Shaw brothers succeeded in the case on different grounds.
Moreover, Greer LJ's judgment on the general meeting's power of control was not based
on a review of authorities. The only authority his Lordship cited was the 11th edition
of Buckley on Companies. The relevant passage in Buckley states:

" ... And it appears now to be established that under an article in the present
fonn [article 67 of Table A], whatever effect is to be given to the words 'to such
regulations, being not inconsistent with the aforesaid regulations or provisions as
may be prescribed by the company in general meeting', these words do not enable

" At11oma1icSeif-Cleansing Filter Syndicate Co Ltd v C1mi11ghame(1906] 2 Ch 34 at 42.

" [ 1909] AC 442.
16 See RP Austin and IM Ramsay, Ford:~Principles ofCo,pomtions Law; see fn 69.
17
See Charles Zhen Qu "Some Reflections on General Meeting's Power to Control Corporate Proceedings" (2007)
36(3) Common law World Review 23 I.
,. Tam Kam-yip v Yau Kung School [ 1986] I HKLR 448, 455, per Sir Alan Huggins V-P.
19
[l935]2KBl13.
80 [1935] 2 KB 113, 134.
214 CORPORATE ORGANS AND DIVISION OF POWERS

the shareholde,:s, by resolution passed at a general meeting without altering the

articles, to give directions to the directors as to how the company affairs are to s
be managed, nor to overrule any decisions come to by the directors in the conduct
of its business, even as regards matters not expressly delegated to the directors by
the articles." (emphasis added) 81

The learned authors of the 11th edition of Buckley cited Cuninghame and Quin &Axtens
as authorities for their view cited above.82 However, neither of those cases actually
support the proposition contained in the italicised words in the preceding paragraph.
The reason why Cuninghame does not do so was discussed above.83 Why does Quin &
Axtens not support that proposition either? In that case, Lord Lorebmn LC refused to
allow the general meeting to have the final say on a proposed acquisition and letting of
premises. Regulation 75 of the company's articles of association vested the power of
management on the board "subject to such regulations (being not inconsistent with the
provisions of the articles) as may be prescribed by the company in general meeting". 84
Under reg.80, no board resolution on the acquisition or letting of premises would be
valid unless notice had been given to both of the managing directors and both of them
had given their consent. One of the managing directors refused to give consent to
such a board resolution. Lord Loreburn held that the resolutions passed by the general
meeting on the matter were inconsistent with regs.75 and 80.
The general meeting's resolution would be inconsistent with reg.75 if the power
granted to the directors under that article was not subject to the control of the general
meeting. Apparently, Lord Loreburn thought that that was the case: "I should require
great deal of argument to satisfy me that the word 'regulations' in this article does
not mean the same thing as articles". 85 If "regulations" in reg.75 meant articles, the
directors' power of management would be free from any general meeting intervention
short of an amendment to the articles.
However, the reference to "regulations" here cannot mean "articles". If "regulations"
here meant newly made articles, reg.75 would be invalid for contravening the rule
that a company cannot deprive itself of the statut01y power to alter its articles.86
The requirement that the "new articles" be "not inconsistent with the provisions of the
articles" meant that the company is not allowed to alter its articles if inconsistent.The view
that the general meeting's resolution is inconsistent with reg.75 is therefore unconvincing.
Is the general meeting's resolution inconsistent with reg.80? Prima facie, it is not.
Regulation 80 renders a board decision, not the general meeting's resolution, on
the relevant subject matter, invalid if the consent of both managing directors is not

., Buckley, 11 B, Baron Wrenbuy, et al., The Law a11dPractice under tire Compa11iesActs: Co111ai11i11g
the Swtwes
a11dtire Rules, Orders and Forms to Regulate Proceedings (I Ith edn, Stevens 1930) 723.
82
Ibid.
83 Sec para 6.028.
84 Quin & Axtens v Salmon [ I 909] AC 442.
SS [1909] AC 442.
86 MS Blackman, "Articles 59 and the Distribution of Power in a Company" (1975) 92 Soutlr African LawJoumal
286,287.
 THE GENERAL POWER OF MANAGEMENT 215

obtained. 87 If the validity of the company's decisions with regard to the acquisition
or letting of premises hinges on the consent of both managing directors, the general
meeting's resolution would indeed be inconsistent with reg.SO, in which case, Lord
Loreburn 's decision could be rationalised on that basis and his Lordship's decision
would not stand as an authority on the effect of the limiting words in general division
of power clauses.

4.2.2 Alternative doctrinal bases

Breach of a company law provision
Breach of company law provision. One of the issues in the matter of Scott v Scott' 8 6.023
was validity of the general meeting's decision, made by ordinary resolution, to appoint
investigators to enquire into the company's financial affairs. The plaintiff pointed out
that the general meeting was unable to pass the resolution in such a manner in that
s.137 of the Companies Act I 929 provided that the general meeting has the power
to appoint investigators to look into the affairs of the company by special resolution.
Lord Clauson agreed with the plaintiff on the validity of the general meeting's decision
but preferred to base his judgment on this issue on the effect of the division of power
article (reg.7 I). His Lordship's interpretation of the limiting words in reg.71 was
illogical and unconvincing. 89 His Lordship's conclusion on the validity of reg.71,
however, was correct and that conclusion could have been reached by simply agreeing
with the abovementioned view advanced by the plaintiff, i.e. the resolution in question
was passed in breach of s.137.

Breach of specific articles

Breach of specific articles. This was the situation in Shaw. The general meeting's 6.024
resolution to override the directors' decision to sue could rightly be held to be invalid, not
because the general meeting did not have any power to direct the board on management
matters at all, but because the general meeting's decision was in breach of one of the
clauses in the company's articles ofassociation. Regulation 86A of the company's articles
provided that the defendants were not entitled to vote in the general meeting on matters
relating to the debts they owed to the company. The defendants (the Shaw brothers) did
apparently vote on the resolution directing the chairman to discontinue proceedings to
recover debts owed from them.90 The resolution that the extraordinary general meeting
had passed could therefore be impeached on the ground that it had breached reg.86A.

Breach of shareholders' agreement

Breach of shareholders' agreement. This was the situation in Breck/and Group 6.025
Holdings Ltd v London & Suffolk Properties Ltd. 91 The defendant company L Co had
two corporate shareholders, B Co and C Co, which held 49 and 51 percent of the

87
TcmgKam-yip v YauKung School [ 1986] HKLR 448, 453, per Huggins V-P.
88 [ 1943] I All ER 582.
89 See Charles Zhen Qu "Some Reflections on the General Meeting's Power to Control Corporate Proceedings"
(2007) 36(3) Common Law World Review 231.
9<i Paul Redmond, Companiesand Securities Law Co111111e11ta1yand
Materials{5th edn,Thomson Reuters, 2009) 232.
91
( 1988) 4 BCC 542.
216 CORPORATE ORGANS AND DIVISION OF POWERS

shares in L Co, respectively. L Co had adopted reg.SO of Table A of the Companies

Act 1948 (UK), which granted the power of management to the directors subject to,
inter alia:

"such regulations ... as may be prescribed by the company in general meeting".

B Co and C Co had agreed, by a shareholders' agreement, that the institution of

material legal proceedings must have the support of a director appointed by B Co
and a director appointed by C Co. C Co took steps to commence an action in the
name of L Co against, among others, a principal shareholder in B Co, who was also
the managing director of L Co. The action was not authorised by the board of L Co.
B Co, naturally enough, sought an injunction restraining C Co from continuing the
proceedings. Harman J granted the order sought partly on the basis of the terms of
the shareholders' agreement, but largely on the basis that the management power that
reg.80 vested in the directors was not subject to the control of the general meeting by
ordinary resolution.
There was arguably no need for Harman J to base the decision on an interpretation
of reg.80. A decision on the competence of C Co to control corporate proceedings
could have been made squarely on the terms of the shareholders' agreement. An
aggrieved shareholder in a Breck/and situation should be able to prevent the majority
member from acting in contravention of the shareholders' agreement on the basis of
the aggrieved shareholder's cause of action in contract. It is possible for a shareholder
who is party to the agreement to obtain a court order to restrain another shareholder
who is party to the agreement from voting on a resolution that would contravene the
shareholders' agreement. 92

Exclusive specific powers

6.026 Exclusive specific powers to directors. Some of the decisions within the mainstream
line of authorities can be justified on the basis that the specific power that the general
meeting intended to exercise had been conferred on the directors to the exclusion of
members. One such case is Scott v Scott, 93 where Lord Clauson held a resolution passed
by the general meeting on the payment of an interim dividend to be invalid on the basis
that the power to make such a payment was granted to the directors exclusively under
reg.96 of the company's articles. 94 Other cases where the decisions could be regarded
as having been decided on this ground include Black White and Grey Cabs Ltd v
Fox95 and Re Coachman Tavern (1985) Ltd. 96 In the Fox case, reg.87 of the company's

•• Greenwell v Porter [1902] I Ch 530; P11ddepha11

v Leith [1916] I Ch 200. See also Russell v Northern Bank
Development CorpormionLtd [ 1992] I WLR 588 (ML). On validity and enforcement of shareholder agreements,
see Chapter 5.
93 [1943] 1 Ch O 582.
"" [1943] I Ch O 582,584. His Lordship's comments on the effect of the limiting words in the division of power
article, (reg.71) arc, however, illogical. For further comments, sec Charles Zhen Qu, "Some Reflections on the
General Meeting's Power to Control Corporate Proceedings" (2007) 36(3) Common Law World Review 231,
250-251.
9' [ I969) NZLR824.
96 [1988) 2 NZLR635.
 THE GENERAL POWER OF MANAGEMENT 217

articles vested the management power in the directors in the same language as reg.SO
of the English Companies Act 1948. Regulation 87A granted the power to make rules
on certain specific management matters exclusively to the board of directors. The
court held that an ordinary resolution passed to exercise this rule-making power was
a nullity. Although the court referred to the authorities on the effect of reg.SO of the
1948 Act, it was clear that the effect of reg.87 A, which vested rule-making powers
exclusively in the board, was crucial in the court's decision. 97
In Re Coachman Tavern, regs.15 and 21 of the company's articles vested in directors
the power to make calls on members in respect of any money unpaid on their shares.
The general meeting passed a resolution making a call for the full value of all shares
held by the applicants. The issue was the validity of the general meeting resolution.
Gallen J held that:

"[i]n this case, the articles refer 10calls only in lerms of1he powers of directors, and
the call therefore which the shareholders purported to make by ordinary resolution
in general meeting must be regarded as having no validity." (emphasis added)98

In other words, His Honour's decision was made on the basis that the power to make
calls was granted to the directors to the exclusion of the general meeting. An article
vesting a power exclusively in the directors does not, by definition, contain words
limiting the power granted (a "subject to" clause). In other words, a power granted
to the directors exclusively is not subject to the control of shareholders. According to
Gallen J, the general meeting should not be able to "usurp" a power "reserved to the
directors" even by using special resolutions. 99
Exclusive specific powers to directors, general powers clause does not need to be 6.027
considered. Where the power in question is granted exclusively to the directors, a
decision on whether the power can be exercised by the general meeting does not need
to be made through a consideration of the general division of power clause, such as
reg.87 in the Fox case.

Exclusive general management powers

Exclusive general management powers to directors. Under the second model of 6.028
power allocation referred to in section 3. l of this Chapter, the general management
power of the company granted to the directors is not expressed to be subject to the
control of the general meeting. Under such a division of power arrangement, any
power struggle between the two corporate organs can be settled without considering
the effect of the limiting words in the form of the pre-2OO3 reg.82 of Table A of

97 [1969] NZLR 824, 83 1,per North P ("in view of the provisions of arts.87 and 87A, the shareholders in general
meeting were incomJ>etentto deal with the matters which had been confided exc/11sive(yto the directors"), and
836, per Turner J ("I would hold that article 87A docs more; read with article 87, ii seems to me 10 confer
exclusively upon the directors the power to make rules of the kind before us").
"' Re Coachman Tavern (1985) ltt/[1988) 2 NZLR 635,639.
99 Re Coachman Tavem (1985) Ltd [ 1988) 2 NZLR 635,639. A power "reserved to the directors" in this part of His
Honour's judgment should be understood as power confided exclusively to the board. as the powers at issue in
both cases that His Honour referred to in arriving at this conclusion, namely. Bamford v Bamford [1970) Cb 212
(Ch D & CA) and Black White and Grey Cabs Ltd v fox, were exclusively granted to the directors.
218 CORPORATE ORGANS AND DIVISION OF POWERS

the predecessor CO. This is illustrated by Massey v Wales.100 Regulation 58 of the

company's articles of association provided that:

"Subject to the Law and to any other provisions of these Regulations, the business
of the Company shall be managed by the Director(s), who may pay all expenses
incurred in promoting and the forming of the Company, and may exercise all such
powers of the Company as are not, by the Law or by these Regulations, required
to be exercised by the Company in General Meeting."

The majority shareholders purported to instruct the appellants, members of a firm

of solicitors, to institute legal proceedings against one of the directors. The general
meeting subsequently purported to ratify the appoinm1ent of the solicitors in respect
of the proceedings. The issue was whether the general meeting's purported control of
the company's litigational power was valid. Hodgson JA, with whom Meagher and
Beasley JJA agreed, answered this question in the negative.
His Honour held, on the basis of the mainstream view on division of powers, that
where the articles of the company provided that the business of the company was
to be managed by the directors, the general meeting had no power to intervene in
management matters, which included commencement of corporate proceedings. His
Honour, however, added that the general meeting did have a residual power, based
on business efficacy or necessity and the implied intention of members, to exercise
management power where the board is unable to act. His Honour did not regard the
deadlock in the board in the instant case as a situation where the board was unable to
act, holding that it was possible to resolve the deadlock by appointing a new director,
given the members' express power to appoint additional directors.
Hodgson JA's decision on ilie general meeting's power to intervene in management
matters in general was based on a thorough review of case authorities on the effect
of linliting words in power-allocation articles. It is submitted, however, that the same
conclusion can be arrived at without resorting to the mainstream authorities. This is
because the management power that reg.58 granted to the directors was not subject to
the control of the general meeting at all. His Honour could have proceeded on the basis
that, prima .fc1cie, the board's general management powers, which include the power
to conunence legal proceedings, are not subject to the members' control and the only
matter that needs to be considered, which his Honour did consider, is whether, in view of
the circumstances, the general meeting should be permitted to exercise its reserve power.

4.2.3 An assessme11t of the seco11d line of authorities

6.029 Second line: power, or lack thereof, of general meeting determined by wording
of division of power clause. The tenor of this line of authorities is that the power
of the general meeting, or the lack thereof, is simply determined by the wording of
the division of power clause in the articles of ilie company. The seminal case of this
line of authorities is actually not Marshall's Valve, which is generally perceived to
be representing the second line of authorities. As was mentioned previously, it is the

'"°(2004) 47 ACSR l.
 THE GENERAL POWER OF MANAGEMENT 219

Cuninghame case that is generally regarded as the foundational case of the mainstream
authorities. In that case, reg.96 vested the company's management power in the board,
subject to the control of the general meeting "by extraordinary resolution". The general
meeting passed an ordinary resolution to sell the company's assets and to direct the
board to implement the general meeting's decision. Collins MR held that, given the
way in which the directors' power was limited under reg.96:

" ...if it is desired to alter the powers of the directors that must be done, not by
a resolution of which was carried by the majority at an ordinary meeting of the
company, but by an extraordinary resolution". 101

In Marshall's Valve, Marshall, the managing director and a majority shareholder, who
held enough shares to pass an ordinary resolution, commenced proceedings in the
name of the company against the defendant company, which had allegedly infringed a
patent owned by the plaintiff. Marshall's three board colleagues, who held an interest
in the defendant, passed a board resolution that Marshall instituted the proceedings
without the consent of the company. They instructed a solicitor to apply to the court
to have the company's name struck off as the plaintiff. The company had adopted
Table A in Schedule I to the Companies Act 1862 (UK) as its articles of association.
Regulation 55 ofTableA granted the company's management powers to the directors:

"subject ... to such regulations, ... as may be prescribed by the company in

general meeting".

Neville J rejected the board's request to have the company's name struck off, holding
that the power of control that reg.SS gave to the shareholders' meeting enabled the
company in general meeting to make management decisions by way of an ordinary
resolution. Regulation 55 did not say that the "regulations" that may be prescribed
by the general meeting must be made by way of a special resolution. His Lordship
distinguished Cuninghame on the ground that reg.96 of the company in the earlier case
only empowered the general meeting to control the directors by way of extraordinary
resolutions. This notwithstanding, the basis upon which Neville J's decision rests, is
the same as the one on which Collins MR's decision in Cuninghame was made, namely,
the power relationship between the two corporate organs is determined through an
interpretation of the relevant articles.
Neville J's judgment in Marshall's 0:ilve is supported by, or followed in, a number of
subsequent well-reasoned decisions both in the UK and other common lawjurisdictions,
including Hong Kong. The first of these is a 1911 Chancery Division case Thomas
Logan Ltd v Davis. 102 In that case, Warrington J refused to allow the general meeting
to impeach, by an ordinary resolution, the directors' decision on a matter made by
the directors pursuant to a specific power under reg.99 (for appointment of managing
directors), an article separate from the general division of power article, namely reg.113.
Regulation 113 was similarly worded as reg.SS in Marshall's Valve. The ratio of his

101
[1906) 2 Ch 34, 42.
102
(1911) 104 LT914.
220 CORPORATEORGANSAND DIVISION OF POWERS

Lordship's decision was that reg.99 made it clear that the power provided thereunder
was conferred on the directors exclusively. The specific power conferred under reg.99
meant that reg.113 was not relevant and hence that the power under reg.99 was not
subject to the control of the general meeting. Although reg.113 was not relevant to the
issue at hand, Warrington J appeared to have accepted the correctness of the approach
in Marshall's Valve, expressly acknowledging (at 916, 917) that under reg. I 13:

" ...the general management and carrying out of the business and objects of the
company - as to which the company have reserved to themselves the right in
general meeting to direct the directors what to do by what are r(4ferredto in the
articles as regulations made from time to time". ( emphasis added)

Another authority supporting Marshall's 1,tilveis Dowse v Marks.103 In that case, the directors'
general management power under reg. I 03 of the articles was "subject to the provisions of
the statutes and of these presents, and to any regulations from time to time made by the
company in general meeting". Harvey J decided that the effect of reg.103 was that the
directors' management power was subject to the control of the general meeting by ordinary
resolution. His Honour pointed out that the fact that the draftsman had uniformly used the
tenn "article" or the expression "these presents" when referring to the articles meant that the
tenn "regulations" was used in a wider sense than ruticles to include "any other regulations
which may, consistentlywith the express provisions of the articles, be passed by the company
by a simple majority in general meeting".104 Harvey J indicated that his Honour's reading
of the limiting words in reg. I 03 was the same as the interpretation put on reg.113 in by
Warrington Jin Thomas Logan. Harvey J also relied on Marshall~-ffilve,105and distinguished
Quin v Salmon, on the basis that:

"Art. 2, in the present case, is materially different from Art. I in that case upon
which his Lordship's opinion was founded".

6.030 Hong Kong preference for second line: power, or lack thereof, of general meeting
determined by wording of division of power clause. In the past few decades,
Neville J's decision in Marshall s Valve has also found support in decisions of some
other common law jurisdictions including the Hong Kong decision in Tang Kam-yip v
Yau Kung School. 106 The ratio in this case was not based on an interpretation of the
limiting words in the division of power article of the company, as the matter to which
the directors' decision related did not, as the court held, fall within the ambit of the
company's "business". What is significant about the Court of Appeal decision is that
two of the three judges expressly disagreed with the position taken by the mainstream
authorities and preferred the approach exemplified by Marshall's Valve (albeit by way
of obiter). Both Sir Alan Huggins V-P and Fuad J disagreed with Loreborn J's obiter
dicta in Quin & Axtens that the word "regulations" might be synonymous with the
word "articles" in the limiting words in a general division of article similar to the one

163 (1913) 13 SR (NSW) 332.

°' (1913) 13 SR (NSW) 332,341.
1

IOS (1913) 13 SR (NSW) 332. 340-341.

106 [ 1986) HKLR 448.
 THE EFFECT OF THE POST-2003TABLE A REG.82 AND THE MODEL ARTICLES 221

in that case (reg.70). 107 Both their Lordships declined to ignore the limiting words in a
similar division of power clause on the ground that to do so would deprive the limiting
words of their meaning, which would be contrary to a fundamental rule of construction
that words shall not be treated as surplusage if a fair and reasonable meaning can be
ascribed to them. 108 Both of their Lordships also indicated that Neville J's decision in
Marshall's Valve was consistent with and distinguishable from Cuninghame, and that
his Lordship's approach was preferable. 109

A more recent pro-Marshall's valve authority is the Singapore High Court case of
Credit Development Pte Ltd v IMO Pte Ltd. 110 Tn that case, Lim Teong Qwee JC
upheld the right of a shareholder to requisition a meeting to deliberate on the proposed
resolutions to appoint accountants and solicitors. The requisition had been rejected
by the directors on the ground that the proposed resolutions would trespass onto the
domain of the directors, given the effect ofreg.88 of the company's articles, which was
similar to the pre-2003 reg.82 ofTable A in Hong Kong.
Lim Teong Qwee JC's decision was based on a thorough review of most of the then existing
authorities on division of powers. The views that his Honour arrived at on the two lines of
authorities are similar to those of Sir Alan Huggins V-P's and Fuad J's in Tang Kam-yip.
The view expressed earlier in this chapter that the Cuninghame case is consistent with
Marshall's Valve is supported by Teong Qwee JC's decision. His Honour stated:

"Would it also follow that if art.96 had referred to an ordinary resolution instead of an
extraordinary resolution, then the resolution of the company in general meeting for
the sale of the assets would have been valid and binding on the company? Surprisingly
this case has often been cited as authority for the contrary proposition."111

Another recent decision on division of powers which is consistent with Cuninghame and
Marchall's Valve is Chan Siew Lee v TYCinvestment PtyLtd. 112This case will be examined
below, when the shareholders' reserve power is discussed.

5. THE EFFECT OF THE PosT-2003 TABLE A REc.82

AND THE MODEL ARTICLES

Under Model Articles management powers subject to special resolution of 6.031

general meeting. To clarify the confusion caused by the limiting words in the
previous versions of division of power articles, the Model Articles in the UK since
1985 have provided that the management powers of the directors are subject to,
inter alia, the general meeting's directions given by special resolution. 113 In 2003,

,o, [ 1986]HKLR 448,455, per Sir Alan Huggins V-P,462, per Fuad J.
108 [ 1986]HKLR 448,453, per Sir Alan Huggins V-P,462,per Fuad J.
109 [ 1986)HKLR 448,456, per Sir Alan Huggins V-P,464, per Fuad J.
11• [ 1993)2 SLR 370.
Ill (1993) 2 SLR 370,379.
"' [2015) SGCA 40.
"' Table A reg.70: Companies (TablesA to F) Regulations 1985(UK); Model Articles arts.3, 4 (privatecompanies),
arts.3, 4, (public companies): Companies (Model Articles) Regulations 2008 (UK).
222 CORPORATE ORGANS AND DIVISION OF POWERS

as mentioned previously, Hong Kong followed suit and revised the division of
power clause in the previous Table A of the predecessor Companies Ordinance
accordingly. The management powers that Table A reg.82 vests in the board are,
therefore, prima facie, subject to the control of the general meeting by special
resolution. That position is retained under the current Model Articles in Hong
Kong, where the division of power regulation provides for the reserve powers of
the general meeting. 114
6.032 Whether historical reluctance of courts to permit general meeting to make
management decisions mean articles will be read down. There is, however, still a
concern whether, or the extent to which, courts will give effect to the wording of the
limiting phrase in an article such as the post-2003 reg.82 of Table A or even under
the Model Articles. The mainstream line of cases on division of powers demonstrates
the courts' reluctance to permit the general meeting to make management decisions
even where the division of power article does not preclude this. Some commentators
have suggested that courts might read down the literal wording in the new formula. 115
It is therefore of some importance to consider whether the court is indeed likely to read
down the wording of the new formula and if so how.
Some critics question the significance of the new formula, as, according to their
views, the new formula is unlikely to be used contrary to the wishes of the directors:

"[m]embers who have disagreed so seriously with their directors that they have
to adopt a special resolution under art.4 to tell them to do something they do not
want to do, might just as well adopt an ordinary resolution under Companies
Act 2006 (UK), s.168, to dismiss the directors". 116

The relevance of the new fom1ula, however, cannot be dismissed simply on the basis
of the members' power to remove directors by simple majority. For example, early
dismissal of a director from office can still leave the company liable to pay damages
for compensation and the members may simply wish to rein in the directors on a
particular matter instead of replacing them. Issues on the scope of the members' power
of control may also arise in contexts other than one where shareholders actually seek
to assert their powers to direct the board. 117
6.033 Unlikely that power will be read down: recognition that shareholders can
direct board by special resolution. As the significance of the new formula cannot
be neglected, it is necessary to consider whether the courts would read down the
members' control power provided in that formula. The small corpus of available

"' Model Articles art.4 (private companies) and art.3 (public companies): Companies (Model Articles) Notice
(Cap.622H).
115 Sarah Worthington, "Shares and Shareholders: Property, Power and Entitlement: Part I" (2001) 22(9) Compa11y
Lawyer 258, 262.
116
Stephen W Mayson, Derek French and Christopher L Ryan, Compa11yLaw (28th edn, Oxford University Press
2010) 469-470.
111
Massey v Wales(2003) 57 NSWLR I (where the issue was whether the general meeting had power to ratify an
otherwise invalid board decision); Risk Managemelll Par111et:~Ltd v Brem Lo11do11 Borough Co1111cil [2011J 2 AC 34
(UKSC) (where the issue was whether a local govern.men1could be considered as having decisive influence over the
strategic objectives and significant decisions of a company which it incorporated with other local authorities, for the
purpose of determining whether certain principles rela1ing 10 public procurement exemptions applied).
 THE EFFECT OF THE POST-2003TABLE A REG.82ANDTHE MODEL ARTICLES 223

decisions involving the interpretation of reg.70 of the UK Table A of 1985 suggests

that this is not likely to be the case.
In Re Frontsouth (Witham) Ltd, 118 the company in question, BHWL, had only
one shareholder, which was a company called FWL. Both companies were in
administration. To complete the sale of assets owned by BHWL, the terms of the
administrators of both companies needed to be extended. There was no problem in
extending the terms of FWI.:s administrator. It was, however, impossible to extend
the tenme of the administrator for BHWL. The original appointment had lapsed,
and according to para. 77(1)(b) of Schedule B 1 of the Jnsolvency Act 1986 (UK), no
extension of appointment could be made when the original appointment had lapsed.
The lapse of the appointment was caused by the fact that the previous extension of
the appointment was invalid. It was invalid because one of the conditions for the
extension, the written consent by its secured creditors, was not met (one of the two
secured creditors did not respond to the request to provide written consent). The issue
there was whether the company itself may, through a decision of the general meeting,
make a fresh application for appointment of an administrator. It was necessary to
consider the general meeting's ability to do so because of the administrator's lack of
standing to make an application and the absence of an operating board. It would not
be practicable to trace the directors, who had been relieved from their office since the
commencement of administration.
Justice Henderson considered the effect of reg. 70, Table A of the Companies
(Tables A to F) Regulations 1985 (UK) and held that as a matter of general company
law, the decision whether to place the company into administration was to be taken
by the directors, not the general meeting by ordinary resolution. Henderson J took
the view that the decision to make the application could not be taken by an ordinary
resolution of the members, 119 but his Lordship accepted that:

"although by a special resolution they may direct the board to take such a step"
(emphasis added). 120

The judge observed that a fresh application in this situation could be made pursuant
to the statute by one of the company's secured creditors who had already expressed a
willingness to do so. In these circumstances, Henderson J declined to rule on the further
argument raised that a unanimous decision of the members should be sufficient. The
important point for present purposes is that Henderson J rightly recognised that the
general meeting had power under the articles to direct the board by special resolution.
The second case on the effect of reg.70 is RiskManagement Partners Ltd v Brent London
Borough Council. 121 In that case, the claimant, a commercial insurance company,

"' [2011] BCC 635.

119 However, if there is no effective board existing, the general meeting, as the only other corporate organ, is able
to exercise its residual powers under the common law: Alexa11derlford & Co Ltd v Samya11gNaviga1io11Co lid
1975 SC (ML) 26, 41,per Lord I lailsham of St Marylebone. In such a situation, it seems that the general meeting
can simply make the decision by ordinary resolution on the basis of its residual powers.
'"' [20 I I] BCC 635.
IZI [2011] 2 AC 34.
224 CORPORATE ORGANS AND DIVISION OF POWERS

submitted a tender to provide insurance cover for the defendant local authorities. The
tender process was subsequently terminated and the insurance contracts were awarded
to an indemnity mutual insurance company set up by the defendants and other local
authorities. The claimant brought an action for damages for the defendants' alleged
breach of statutory duty in failing to comply with the Public Contracts Regulations
and awarding the contracts to the mutual insurance company. These regulations were
made to give effect to the European Council Directive 2004/18/EC of 31 March 2004.
The broad purpose of the Directive and the regulations is to ensure that, among other
things, public bodies award certain contracts only after fair competition.
The defendants admitted failure to comply with the regulations but argued that they
were exempt from compliance on the basis of the so-called "Teckal exemption". In
the EU Court of Justice case Teckal Sri v Comune di Viano and Azienda Gas-Acqua
Consorziale {AGAC) di Reggio Emilia, 122 the court held (at para.SO) that an exemption
to the abovementioned requirement applied:

" ...where the local authority exercises over the person concerned a control which
is similar to that which it exercises over its own departments and, at the same
time, that person carries out the essential part of its activities with the controlling
local authority or authorities" (emphasis added).

One of the issues was, therefore, whether the relevant local authorities had control over
the mutual insurance company. The Supreme Court of the United Kingdom answered
that question in the affirmative. In so doing, the UK Supreme Court took into account
reg.70 of Table A, which applied to the company, and observed that the article:

" ...meant that the board was subject to direction by the participating members in
general meeting, so long as they achieved a 75% majority". 123

Since the relevant public authorities had I 00 per cent control in the general meeting,
it followed that these authorities had decisive influence over the company's strategic
objectives and significant decisions.
Although the situation in Risk Management was not one where the general meeting was
actually seeking to direct the directors by special resolution, the decision is authority
of the highest level in England that recognises that shareholders with enough voting
rights to pass a special resolution are able to exert decisive influence over the company's
strategic objectives and significant decisions. The chief way, if not the only way, for the
general meeting to influence the company's significant decisions is exercising its voting
powers in general meetings. The shareholders cannot exert such an influence if their
decisions by special resolutions are not binding on the directors. The Risk Management
decision therefore signifies the Supreme Court's tacit recognition that under reg.70, the
shareholders are able to direct the board on management matters by special resolution.

122 Case C-107/98 (1999) ECR I-8121.

123 (201I) 2 AC 34, (57).
 THE GENERAL MEETING'S RESIDUAL POWER UNDER COMMON LAW 225

The provisions in the Model Articles seem to make it even clearer that the members do
have direct control over the board's decision-making. The members' power is set out
as a reserve power in a separate article, and provides: "The members may, by special
resolution, direct the directors to take, or refrain from taking, specified action". 124
The board's power of management as conferred under art.2(1) (public companies) and
art.3(1) (private companies) ofCap.622H is stated to be "subject to ... these articles",
while the article on the members' reserve power is not qualified. Accordingly, the
board's powers must be subject to the control of the members by special resolution.
The only qualification is that the members cannot invalidate anything that the directors
have done before the passing of the special resolution. 125This restriction is the same as
that under the predecessor provisions in Table A.
Practical significance remains to be seen. Admittedly, the practical significance of 6.034
the shareholders' power to direct the board remains to be seen. The general meeting's
power to dismiss directors by ordinary resolution before the end of their term of
office 126 may, in most cases, be a more effective instrument to ensure the board's
adherence to the shareholders' views on management matters 127 and, where necessary,
to end an internal power struggle.

6. THE GENERAL MEETING'S RESIDUAL

POWER UNDER COMMON LAW

Residual powers. Even if the division of power article of the company does not 6.035
leave any room for the general meeting to intervene in management matters by
ordinary or special resolution, the general meeting is able to exercise residual
powers where the board of directors cannot function effectively, or where the
circumstances call for an exercise by the general meeting of the company's
inherent powers.

6.1 ·where the directors cannot function effectively

Circumstances where no board or it cannot act. There is no functioning board if 6.036

there is no board in existence or if the board, although existing, cannot act for various
reasons. One of the reasons why the company is without a board may be the failure
of the company to convene an annual general meeting in the previous year(s) to make
necessary appointments to the board. 128 The board is unable to function where it is
impossible for a board meeting to be quorate. It may be impossible for the board to be
quorate where, for example, one of the two opposing factions on the board does not wish

' 2'Model Articles, art.3(1) (public companies) and art.4( I) (private companies): Companies (Model Articles)
Notice (Cap.622H).
12
s Model Arlicles, art.3(2) (public companies) and arl.4(2) (private companies): Companies (Model Articles)
Notice (Cap.622H).
126
Cap.622, s.462( I).
"' Sarah Worthington. "Shares and Shareholders: Property, Power and Entitlement: Part I" (200 I) 22(9) Company
Lawyer 258.
" 8 Alexander Ward & Co v Samya11gNavigation Co (1975) 2 All ER 424 (HL).
226 CORPORATE ORGANS AND DIVISION OF POWERS

to attend board meetings; 129 or both of the two opposing factions on the board refuse to
meet; 130 or where directors have vacated office and no fresh appointments have been
made to have a sufficient number of directors to meet the quorum requirements. 131
6.037 Where board cannot function effectively general meeting may exercise residual
powers of management. Where the board is not in a position to function effectively,
the general meeting may exercise residual powers of management. In Barron v
Potters, 132 where the board was deadlocked, the court held that the company retained the
power to appoint additional directors, in general meeting, even though the company's
articles vested the power of appointing additional directors exclusively in the board. In
Alexander Ward & Co v Samyang Navigation Co,' 33 a company sued another company,
but the plaintiff company, at the time of the commencement of the action, did not have
a board. This was because all of the directors had automatically retired from office in
accordance with a requirement stipulated in the articles and no replacement directors
were elected as no annual general meeting had been held. The company's action was
commenced by two individuals without authority. The company went into liquidation
and the liquidator purported to ratify the commencement of the proceedings by the two
unauthorised individuals. One of the questions in the case was whether the ratification
was possible. The defendant argued that ratification was impossible as, at the time when
the action was commenced, the company was not a competent principal (who is able to
ratify an unauthorised act), because of the lack of a board. Lord Hailsham rejected this
defence, holding that the company was, at the relevant time, fully competent to, among
other things, commence legal proceedings. His Lordship explained that:

"[t]he company could have done so either by appointing directors, or as 1 think, by

authorising proceedings in general meeting, which in the absence of an effective
board, has a residual authority to use the company spowers." (emphasis added) 134

The House of Lords' decision in Alexander Ward has been followed in Hong Kong in
cases where the board of directors cannot function effectively. 135
6.038 Implied term in company's constitution that it should in no circumstances be left
powerless. The juridical basis on which the general meeting's power to make decisions,
where the company is in want of an effective board, is that there is an implied term
in the company's constitution, on the basis of business efficacy or necessity, that the
company should in no circumstances be left powerless. 136
6.039 When reserve powers can be exercised. However, there is an Australian authority
which has taken a narrow view on the scope of the reserve powers of the general

12• Barron v Pouer [ 1914] I Ch 895; Miracle Chance Ltd v Ho l'r1kWah David [ 1999] 3 HKC 811.
130 Re Commonwealth Printing Press Ltd (unrep., MCCW 15/1974, 31 May 1974).
1 1
! Cheung Tse Ming v Che1111g YukMay(unrep., MCA 9995/1995, [1996] MKLY 199).
132 (1914] I Ch 895.

I)) (1975] I WLR 673.

IH (1975] I WLR 673.
1" Re Commonwealti, Priming Press lid, SCI (HK) (unrcp., MCCW 15/1974, 31 May 1974); Cheung Tse Ming v
Cheung Yz,kMay (unrcp., HCA 9995/1995, [ 1996] HKLY 199); Miracle Chance Ltd v 1-fol'r,k Ifill, David [ I 999)
3 HKC 811 (CA).
"• Massey v Wales (2004) 47 ACSR I, 11-12,per Hodgson J.
 THE GENERAL MEETING'S RESIDUAL POWER UNDER COMMON LAW 227

meeting. In Massey v Wales,137 where the board was deadlocked, Hodgson JA refused
to allow the general meeting to commence proceedings against one of the directors,
holding that it was possible to resolve the deadlock by appointing an extra director,
given the company's constitution had conferred a power of appointment on the general
meeting. By contrast, in Re Argentum Reductions (UK) Ltd, 138 where one of the two
members holding the minority of the shares had presented a petition for winding up
the company on the ground that the board was in a state of deadlock, Megarry J held
that the majority shareholder had the locus standi to apply for a validation order on
behalf of the company under s.227 of the Companies Act 1948 (UK) (equivalent to
Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), s.182).
Megarry J also recognised the possibility of resolving the deadlock through various
means so that the application could be made by the board, but chose to uphold the
majority shareholder's right to apply on the ground, inter alia that:

"[t]hese matters would, however, take a little time, and here I am concerned with
a company which is carrying on a business and has been struck by section 227,
one of the usual consequences of which is that its bank account is frozen." 139

Wide approach in Hong Kong as to general meeting's reserve powers. In the 6.040
Hong Kong case of Miracle Chance Ltd v Ho Yitk Wah David, 140 the Court of Appeal
appears to have taken a broader view on the scope of the general meeting's reserve
powers. The company in that case was a corporate joint venture with one shareholder
(Gao) holding 65 percent of the issued shares and the other (Ho) holding the remainder.
Ho refused to attend both a board meeting and a general meeting called by Gao to
consider proceedings against him, the former. Gao nonetheless sought to institute the
proceedings in the name of the company on the basis of a written resolution consented
to by a majority of the votes of shareholders entitled to vote thereon (namely his 65
percent of the votes), as permitted by the articles. The Court of Appeal accepted that
the general meeting would have power to institute legal proceedings in the name
of the company where the board was unable to act. Rogers JA observed that "if the
board is ineffective, the power which in effect has been delegated by the Articles to
the directors reverts to the person or persons who delegated, namely the company in
general meeting". 141
General meeting's reserve powers in Singapore: Chan Siew Lee case. The scope 6.041
of shareholders' reserve powers was dealt with in the recent Singapore Court of
Appeal case of Chan Siew Lee v TYC Investment Pty Ltd. 142 The dispute in that case
was between two directors cum shareholders, who were ex-spouses. To facilitate an
amicable divorce, Dr Tay (the man) and Ms Chan (Dr. Tay's former wife) entered
into: (i) a deed of settlement (DOS); (ii) an agreement for amendment of the DOS
(SSD); and (iii) a deed of agreement (the TYC deed) to bind the company, TYC, to

1
>1 (2004) 47 ACSR I.
" 8 [ 1975] WLR 186.
" 9 (1975] WLR 186, 189.
1
4-0 [1999]3HKC811(CA).
1
" (1999) 3 HKC 81 I, 815.
1
" (2015) SGCA 40.
228 CORPORATE ORGANS AND DIVISION OF POWERS

the agreements between Dr Tay and Ms Chan. Clause 10 of the SSD (the Payment
Clause) provided, inter a/ia, for a payment voucher system, whereby neither Dr
Chan nor Ms Chan would sign a cheque on TYC's bank accounts unless the other has
signed a voucher approving. By virtue of article 8 of the TYC articles of association:
(i) Dr Tay and Ms Chan cannot be removed by TYC's shareholders; (ii) additional
directors may not be appointed without Dr Tay's and Ms Chan's agreement; and
(iii) any additional director appointed could not have any power outside of those
"define[d], ]imit[ed] and restrict[ed]" by Dr Tay and Ms Chan.
TYC, due to its operations, incurred debts to various service providers and the
tax authority. Ms Chan, however, invoked the Payment Clause to refuse payment.
Eventually, these expenses were paid for by Dr Tay and Amstay Pte Ltd, a company
under his control. Dr Chan called an extraordinary general meeting (EGM) to resolve
the "administrative deadlock". A number ofresolutions were passed by Dr Tay and his
son, who together held 51 percent of the company's issued shares. These resolutions
authorized: (i) reimbursement of the expenses that Dr Tay and Amstay had paid for;
(ii) Dr Tay to unilaterally sign cheques and vouchers to effect such payment; and
(iii) Dr Tay to take all actions, including legal proceedings, to secure reimbursement
of the abovementioned expenses.
As a result of the EGM resolutions, TYC engaged TSMP Law Corporation (TSMP)
and legal fees were charged by TSMP (TSMP fees). TYC also incurred expenses for
advice on accounting and tax issues provided by KPMG arising from the DOS, the
SSD, and the TYC Deed (KPMG fees), and corporate secretarial services provided by
Express Co Registration & Management in connection with the holding of the EGM
(Express Co fees). Disputes over some of the debts were resolved prior to the action.
Ms Chan, however, still refused to approve: (i) the TSP fees; (ii) the KPMG fees; and
(iii) the Express Co fees.
TYC and three of its wholly-owned subsidiaries commenced proceedings against
Ms Chan, joining Dr Tay as a defendant. The plaintiffs sought a declaration that TYC
cheques signed by Dr Tay "are valid, binding and are to be honoured by [TYC's) banks"
notwithstanding that the cheques were not accompanied by payment vouchers signed
by Ms Chan. The plaintiffs also sought alternative relief, namely, specific performance
of an alleged implied term under the abovementioned agreements to sign all necessary
payment vouchers, etc. The plaintiffs' application for this alternative relief was
based on two grounds. The first was that Ms Chan's alleged willful disregard of her
contractual obligations under the DOS, SSD, and TYC Deed. The second was that
Ms Chan had allegedly breached her fiduciary obligations under s.157 of Singapore's
Companies Act in not approving these payments.
The trial judge made his decision through an interpretation of the division of
power provision in the company's articles, pointing out that "it is all a matter of
contract". 143 TYC adopted the model division of power clause provided in s.157A(l)
of Singapore's Companies Act and art.73(1) of the Table A regulations, which are

143
TRC fovestme,11Pte Ltd v Tay YrmChwa11Hemy [2014] SGMC 192, [ 108].
 THE GENERAL MEETING'S RESIDUAL POWER UNDER COMMON LAW 229

identical. The wording in s.157A(l) is identical to that in Australia's s.198A. 144 In

other words, the power vested in the board is, primajacie, not subject to the control
of the shareholders. The issue is thus whether, under the circumstances, the members
have a reserve power to make management decisions. Lee Kim Shin JC held that the
division of powers bet\veen the directors and shareholders was a:

" ... matter of contract .. .subject to any provisions in the Companies Act". 145

As s.157A(l) and art.73(1) confined management powers to the board, the issue is
whether the shareholders' reserve power, under the circumstances, could be implied
into the division of power clause in TYC's articles.
In Singapore, the accepted test for determining whether a tem1 in dispute can be implied
into the contr'<1ct is the three-step framework that the Singapore Court of Appeal f01mulated
in Sembcrop Marine Ltd v PPL Holdings Pte ltd. 146 Central to this framework is the
element of"necessity", which says that a tenn would be implied in fact in an agreement if,
inter alia, "it is necessary to imply in a term, typically in the business or commercial sense,
to give the contract efficacy."147 Applying this test, Lee Kim Shin JC held that:

(i) the resolution on payment made to TSMP was valid, as it was necessary to
imply a limited power (on the part of the shareholders) to appoint solicitors
to commence proceedings to "break the deadlock in management";
(ii) the resolution to authorise Dr Tay to unilaterally sign cheques on TYC's
behalf was invalid, as it was unnecessary to imply this power because,
inter alia, to do so would allow the EGM to rewrite the rights and
obligations of the parties under the SSD; and
(iii) in relation to the alternative prayers, the implied term contended for did not
satisfy the "necessity test".

This was because, inter alia, the gap in the Payment Clause was adequately ameliorated by
the existing directors' duty, under Companies Act s.157( 1), to act honestly and diligently.
On appeal, the Singapore Court of Appeal held that:

(i) the resolution on the payment of the K.PMG fees was valid;
(ii) the resolution on the payment of the Express Co fees was valid, and
(iii) the resolution on the payment of the TSMP fees was invalid.

Like Lee Kim Shin JC, the Court of Appeal also reached its decision through
interpreting the company's division of power clause. The CA agreed with the trial
judge that the analysis of whether there is a reserve power vested in the general
meeting is one that must be situated in the context of implied terms. The court agreed

"' Although s. I98A, under Australia's Corporations Act 2001, is a "replaceable rule" (which, although contained
in the Act, functions as model constitutional provisions) and s.157 A(I) is an ordinary provision in Singapore's
Companies Act.
"s TYC hzvestme111Pte Ltd v Tay YtmClnvan Hemy [2014) 4 SLR 1149 at [88).
'"' SembcropMarine Ltd v PPL HoldingsPte Ltd [20131 SGCA 43.
"' [2015] SGCA 40, [101).
230 CORPORATEORGANSAND DIVISION OF POWERS

that as with implied terms in general, the basis for implying reserve powers in favour
of the shareholders in general meeting is necessary. The CA added that:

''There are two important corollaries of this. First, management powers are
reserved to the shareholders in a general meeting only where the board of
directors is deadlocked or is unable or unwilling to act. Second, their scope is
limited to what is necessary to resolve the deadlock." (at [37))

In the case at hand, there was no doubt a deadlock in the board, and it was impossible
to break the deadlock by appointing an extra director, 148 because of the effect of art.8
ofTYC's articles, mentioned previously. Is the contended reserve power within the
"necessity" scope? The CA observed, at [45), that as a general rule, a reserve power
may be found in two cumulative requirements. The first is that "the dispute must relate
to the performance of a bona fide obligation owed by the company to a third party."
The second is that "there is no material suggesting that it will not be in the company's
best interest to honour these obligations."
The payment to both KPMG and Express Co were held to be valid because both
the cumulative requirements are satisfied. The dispute between Dr Tay and Ms
Chan relates to the performance of bona fide obligations that TYC owed to the two
service providers and there was no evidence that it was not in the company's best
interest to honour these payment obligations. The reason why the payment to TSMP
was improperly incurred is that the general meeting does not have an implied power
to take actions against a director who has allegedly breached his or her contractual
or fiduciary obligations owed to the company. This is because it is possible for the
company to vindicate its rights through a statutory derivative action, which possibility
renders the implication of the reserve power unnecessary.
It should be noted, however,whether the general meeting's reserve power can be implied
into the division of power clause is more likely to be at issue where the management
power confided to the directors is, primafacie, not subject to the control of shareholders,
or, where it prima facie is, the limiting words are open to controversy.Where the division
of power provision expressly grants the shareholders the power to direct the directors,
in whom management powers are confided, shareholders' power to intervene is express.

6.2 Where it is necessary for the general meeting to

exercise the company's inherent powers

6.042 Ratification of exercise of power by directors that is defective. The company has
an inherent power to ratify an exercise of power by directors that is defective (such as
where the directors have exceeded their powers or authority, or although a power is
within the mandate of the directors, the power is exercised for an improper purpose, or
a power is otherwise exercised in breach of the directors' fiduciary obligations). That
inherent power of the company, as can be gauged from case authorities, can, prima
facie, be exercised by the general meeting by ordinary resolution.

"8 As ""1s possible in the Massey case.

 THE GENERAL MEETING'S RESIDUAL POWER UNDER COMMON LAW 231

6.2.J The power to ratify directors' acts in excess of authority

Ratification of unauthorised acts by ordinary resolution. In Irvine v The Union 6.043
Bank of Australia, 149 the directors obtained a loan in excess of the limit of their
borrowing power as prescribed in reg.SO of the company's articles of association. The
limitation in that article was a limitation on the directors' power to borrow on behalf
of the company rather than a limitation on the company's power to borrow. The Privy
Council held that the transaction could be ratified by the general meeting by a majority
of members present at the meeting. In Grant v United Kingdom Switchback Railways
Co, 15°Cotton LJ remarked that to empower the directors to do things in future which
the articles did not authorise them to do would be an alteration of the articles, which
required a special resolution, but to ratify a contract entered into by the directors
without authority is no alteration of the articles and an ordinary resolution sufficed.

6.2.2 The power to ratify tln abuse of power

Ratifying abuse of power by director. The company in general meeting is also 6.044
competent to ratify an exercise of the directors' power where that power was exercised
in breach of the directors' duties. For example, where the directors' power to allot
shares is exercised for an improper purpose in breach of fiduciary duties, it is possible
for the general meeting to ratify the voidable allotment, provided that the improperly
issued shares are not voted. 151
How is the general meeting's power to ratify an abuse of the power of allotment to
be rationalised? Buckley J explained in Hogg v Cramphorn152 that if the directors
have the general meeting's approval prior to the exercise of the power of allotment,
the members would have no cause to complain, as "the criticism that the directors were
by the issue of the shares attempting to deprive the majority of their constitutional rights
would have ceased to have any force". In Bamford v Bamford,153 Plowman J approached
this question from a different angle. In that case, his Lordship accepted a submission made
by the directors and allottees. The gist of that submission was that the reason why the
general meeting had the power to ratify an allotment made in abuse of power was that:

(i) the power to issue capital resided in the company;

(ii) the allotment power that the articles conferred on the directors was subject
to a limitation that applied to all powers of directors, viz, it was to be
exercised bonafide in the best interest of the company;
(iii) the inherent power of the company to issue capital was not subject to this
limitation;
(iv) the company's inherent power is exercisable by the general meeting,
(iv) the only limitation on the general meeting's ability to exercise the
inherent power is that it cannot by ordinary resolution exercise the power in

1•• (1877) 2App Cas 366 (PC).

150
( 1888) 40 Ch D 135.

'" Hogg v Cramphom [1967) Ch 254; Bamford v Bamford [1970) Ch 212; Winthrop fllvestments Ltd Winns Ltd
[1975) 2 NSWLR 666.
'" [ I967) Ch 254,269.
'" [1970) Ch 212.
232 CORPORATEORGANSAND DIVISION OF POWERS

such a way as to conflict with the express power given under the articles to
the board (that is, the general meeting cannot by ordinary resolution usurp
the directors' power and dictate to the board how it shall exercise it); and
(v) where the board exceeded its own power of allotment, the general meeting's
ratification of the allotment was an effective exercise of the inherent power
of the company, which did not conflict with the articles. 154
This analysis is similar to the analysis justifying the general meeting's power of
ratification in the Irvine case, which was relied upon by Plowman J. The above analysis
should be applicable not only to the directors' power to allot shares but also to all powers
of the directors, which are subject to the limitations imposed under fiduciary principles
(although where the company's powers are limited by the Companjes Ordinance or the
general law, the general meeting could not act contrary to such lirrutations).155

7. THE SHAREHOLDERS' POWER TO MAKE DECISIONS

THROUGH UNANIMOUS CONSENT

6.045 Duomatic principle: company bound by shareholders' unanimous consent. The

effect of the shareholders' unanimous consent is succinctly summarised by Buckley
LJ in Re Horsley and Weight Ltd: 156

"[a] company is bound in a matter which is intra vires the company by the
unanimous agreement of its members (per Lord Davey in Salomon v Salomon
and Co Ltd; 157 and see Re Express Engineering Works Ltd 158) even where that
agreement is given informally: Parker and Cooper Ltd v Reading 159".

The rule that his Lordship restated in Horsley is the so-called "Duomatic principle".
The rule acquired its name because it has received perhaps the most detailed exposition
in Buckley LJ's judgment in Re Duomatic Ltd, 160 while, the rule, as can be seen from
the above quote, can be traced back to the Salomon case.
6.046 Rationale for Duomatic principle. There appears to be some uncertainties on the
theoretical basis for the Duomatic principle. Grantham has identified three possible
doctrinal bases: 161

(l) Waiver. This version of the unanimous consent rule says that "if the
shareholders actually meet together they may cme any procedmal

154
For the reason why the general meeting is able to ratify by ordinary resolution as opposed to a special resolution;
see para.6.043.
,;; [1970) Ch 212, 223-224.
156 [ 1982) Ch 442,454.

,;, [ 1897) AC 22, 57.

ISS [ 1920) I Ch 466.
,s• [1926) Ch 975.
''° [1969) 2 Ch 365; Brick tmd Pipe Industries Ltd v Occide11wlLife Nomi11ees Pty Ltd (1992] 2 VR 279,314.
'" Ross Grantham. "The Unanimous Conscnl Ruic in Company Law" (1993) 52(2) Cambridge LmvJoumal 245.
Sec also RP Austin and IM Ramsay, Fords Principles ofCorporatio11s Law (151h edn, LexisNcxis Bu11crworths
2013) (7.590).
THE SHAREHOLDERS' POWER TO MAKE DECISIONS THROUGH UNANIMOUS CONSENT 233

irregularities that occurred at the meeting and proceed validly to transact

the business of the company". 162

(2) Equitable estoppel. Under this view, the Duomatic rule is said to estop an
assenting member from asserting invalidity subsequently. 163
(3) That the unanimous decision of members is the decision by the company
itself. This third theory can be regarded as a "lifting of corporate veil"
theory, as it treats the act of the members as that of the company itself as
opposed to simply an act of a corporate organ.

Estoppel theory. Arguably, the estoppel theory is too narrow. First, it is too narrow in 6.047
that it does not explain all the circumstances where the doctrine has been applied in the
case law. [n many cases where the unanimous consent rule has been applied, the rule
did not function to estop an assenting member from going back on his words. It is used
rather to prevent a party who is not an assenting member (e.g. the company's liquidator,
or the board of directors freshly appointed by the new controlling shareholders) from
asserting the invalidity of the decision arrived at by members' unanimous agreement. 164

Secondly, the estoppel theory is also too narrow in delineating what ought to be
the proper scope of the unanimous assent doctrine. At least where the matter being
decided upon is within the power of the members under the Companies Ordinance and
under the articles, there seems to be no good reason to deny the members the ability to
unanimously decide on the matter such that the decision is also binding on the board
or a liquidator. Except in cases where the law imposes mandatory requirements for
meetings to protect others (such as in the case of a removal of director from office 165),
the requirements for meetings are to protect the rights of the members-to ensure
that they can air their views and exercise their voting rights. Where all the members
are willing to dispense with the requirement for a meeting and where all agree on
the matter in question, it is appropriate for the law to give effect to the members'
unanimous decision rather than to subject the members to formalities which would
serve no useful purpose in the circumstances.
Waiver theory. The waiver theory has been regarded as being one that is concerned only 6.048
with waiver of procedural irregularities at meetings.166 Seen in this way, the waiver theory
is also too narrow because the Duomatic principle has been applied where no actual
meeting has been held. The application of the doctrine to such situations means that there
is not simply a waiver of procedural requirements in the holding of a meeting but there
is a dispensation with the substantive requirement for a meeting altogether.167 However,

161
Ross Gmntham, "The Unanimous Consent Rule in Company Law" (1993) 52(2) Cambridge LawJ011rnal 245,
249.
163
Ibid.
164
Re Express E11gineeri11g WorksLtd (1920) I Ch 466; Parker& Cooper Ltdv Readi11g(1926) Ch 975; Re Duomatic
Ltd [ 1969] 2 Ch 365; Re Horsely & Weight Ltd (1982) I Ch 442 (CA); Atlas Wright (Europe) Ltd v Wright ( 1999)
BCC 163, CA.
165
Cap.622,s.463.
166
See Ross Grantham, "The Unanimous Consent Rule in Company Law" (1993) 52(2) Cambridge LawJ011nu,/
245,249.
161 As in Parker & Cooper Ltd v Readi11g [ 1926] Ch 975 CD; Brick and Pipe Industries Ltd v Occidental life
Nomi11eesPty Ltd [ 1992] 2 VR 279.
234 CORPORATEORGANSAND DIVISION OF POWERS

it is possible to conceive of the waiver theory as one which involves not only a waiver of
procedural irregularities at meetings but also a waiver of the substantive requirement for a
meeting itself. The formal requirements for meetings or written resolutions simply provide
for the fonnal machinery for decision-making-whether of the general meeting or the
board of directors-and both corporate organs are prima.fcicie entitled to dispense with the
need to use that fonnal machinery if the members thereof act unanimously. 168
6.049 Shouldthe doctrinebe extendedto allowmembersto exercisepowersvestedexclusively
in board.The question, then, arises whether it is this wider view of the waiver theory or
it is the lifting of the corporate veil theory that is correct in rationalising the unanimous
assent doctrine. The significance of choosing between these two theories is that the fom1er is
compatible with the rules on division of powers between the general meeting and the board,
while the latter effectively goes beyond or sidesteps those rules in conferring on the members
a wide power of acting for the company even in respect of matters reserved exclusivelyto the
board under the articles. The basic issue is whether the doctrine should be extended to allow
members to exercise powers vested exclusively in the board.

The case law is not entirely certain on this issue. The wider version of the Duomatic
rule pursuant to the third theory has some judicial support. Jn Rolled S1eel Products
(Holdings) Ltd v British Steel Corp, 169 Slade LJ said that:

" ... [h]owever, the clear general principle is that any act that falls within the
corporate capacity of a company will bind it if it is done with unanimous consents
of the shareholders or is subsequently ratified by such consents".

Also, decisions such as Brick and Pipe industries Ltd v Occidental Life Nominees Pty
Ltd 170 are only consistent with the wider view. On the other hand, in Poliwka v Heven
Holdings Pty Ltd, 111 Ipp J stated:

'The power of the members, however, to bind a company is dependent upon

its constitution. In my view, nothing that was said in Re Express Engineering
Works Ltd 172 and the subsequent authorities to which I have referred detracts
from this proposition. In none of those cases were the members precluded by the
articles from binding the company to the contracts in question."

In a recent Hong Kong case, the Court of First instance upheld a shareholders'
unanimous decision to issue new shares to existing members. 173 As a general rule,
the power of issuing shares, which is a management power, is vested in the board of
di rectors. 174

'" In the caseof directors' decision-making without a meeting,seeChapter 7.

169 [1986)Ch 246, 296-7.
110
[1992) 2 VR 279. Seealso Ox Operatio11sPry Ltd v land Mark Pmperty Developme11ts(Vic) Pty Ltd (in liq) [2007)
FCA 1221,wherethe court held that theunanimousdecisionof the membersto commenceproceedingsin thename
of thecompanywaseffective;thejudgmcnt in the casedoesnot show that the court was concernedwith the power-
allocationclausein the company'sconstitution.Sec further Pascoe Ltd (in liq) v Lucas (1998)27 ACSR 737.
171
(1992) 8 ACSR 747, 787.
172 [1920) 1 Ch 466.
173 Wong Ming Bun v Ufo,g Ming Fan (2014) 1 HKLRD 1108(CF!).
'" Howard Smith Ltd vAmpol Petroleum Ltd (1971) /1.C821.
THE SHAREHOLDERS' POWER TO MAKE DECISIONS THROUGH UNANIMOUS CONSENT 235

Lifting of corporate veil theory - there is scope for its acceptance. A major 6.050
difficulty with the third theory is that it can be seen to be inconsistent with the
principles discussed earlier in this chapter that the powers of the directors and members
are dependent on the Companies Ordinance (Cap.622) and the articles, and that each
corporate organ has full autonomy within its constitutional powers. To treat members
(acting unanimously) as the company itself harks back to the earlier conception of the
company being composed of the members as principals who can control the directors
as agents-a conception rejected since the early 20th century. 175

Nonetheless, despite that criticism, there is scope for acceptance of the third theory in
a manner that can still be reconciled with other fundamental tenets of company law.
Notwithstanding the powers conferred on the directors under statute or the articles,
the members as a whole still have ultimate control of the company. The members are
conferred the statutory power to alter the company's constitution. While the board is
not an agent of the members, the powers of the board under the articles are, in a loose
sense, delegated from the members who are the signatories to the articles and who
have the power to alter the articles. Also, fundamentally, the law still treats the interests
of the company as being the interests of the members. Thus, the directors' duty to act
in the interests of the company is a duty to act in the interests of the body of members
as a whole. While this is subject to the qualification that the interests of creditors
are given primacy where the company is near insolvency, the prima facie position is
that there is a unitary of interests between the members and the company. The wide
theory of the unanimous assent doctrine is therefore consistent with the status of the
members as the controllers and owners of the company. Despite calls for a pluralist or
stakeholder approach to company law, Anglo-Hong Kong company law is still based
on the concept of shareholder primacy. The wide application of the unanimous assent
doctrine simply provides an exception to the general rules on division of powers. The
doctrine ensures that the will of the owners of the company can be fulfilled, subject
only to restrictions imposed under the law, which restrict what the company can
lawfully do, or which are intended to protect the interests of third parties.

115
Ross Grantham, "The Unanimous Consent Rule in Company Law" (1993) 52(2) Cambridge Law .Joumal 245.
See also RP Austin and IM Ramsay, Ford~ Principles '!(Co111oratio11sLaw (15th edn, LexisNexis Butterworths
2013) [7.590].
-•--•••--■-••---c-•-• ■-<t-~-•------••••---•••••-~-•••••------u--••••--c-•--,•---••-•••••·•--•-•-•-••u••-•••••-••-•-••••---•-••••••U;t--.MQ••••---•-•
 CHAPTER 7

BOARD OF DIRECTORS

PARA.

I. Introduction .............................................................................................................................. 7.001

2. Classification of Directors ....................................................................................................... 7.002
2. l De jure. de facto and shadow directors ............................................................................. 7 .003
2.1.1 De.facto directors .................................................................................................. 7.006
2.1.2 Shadow directors ................................................................................................... 7.013
2.2 Types of directors according to functions ......................................................................... 7.016
2.2. l Managing director or chief executive officer.. ...................................................... 7.016
2.2.2 Executive directors and non-executive directors ................................................... 7.018
2.2.3 Alternate directors ................................................................................................. 7.020
2.2.4 Nominee directors ................................................................................................. 7.023
2.2.5 Reserve directors ................................................................................................... 7.024

3. Qualifications ........................................................................................................................... 7.025

4. Appointment ............................................................................................................................. 7.030

4.1 Minimum number of directors ........................................................................................ 7.030
4.2 Initial directors ................................................................................................................. 7.032
4.3 Subsequent directors ........................................................................................................ 7.033
4.4 Appointment by outsiders ................................................................................................ 7.038
4.5 Liabilities of wider-age directors ..................................................................................... 7.039
4.6 Corporate directors ........................................................................................................... 7.040

5. Vacation of Office .................................................................................................................... 7.042

5.1 Retirement by rotation ...................................................................................................... 7.042
5.2 Vacation of office ............................................................................................................. 7.043
5.3 Removal ............................................................................................................................ 7.045
5.3. l Removal by directors ............................................................................................ 7.045
5.3.2 Removal by members ............................................................................................ 7.046
5.4 Resignation ....................................................................................................................... 7.056
5.5 Notification to Registrar ................................................................................................... 7.057

6. Board Meetings ......................................................................................................................... 7.058

6.1 Calling board meetings ..................................................................................................... 7.059
6.2 Notice ............................................................................................................................... 7.060
6.3 Quorum ............................................................................................................................ 7.07I
6.4 Chairperson ...................................................................................................................... 7.072
6.5 Voting and minutes ofmeetings ....................................................................................... 7.073
6.6 Effect of irregularities ...................................................................................................... 7.075
6.6. l Meeting invalid ..................................................................................................... 7.076
6.6.2 Articles waiving the irregularity ........................................................................... 7.08 I
6.6.3 Irregularity principle ............................................................................................ 7.083
6.6.4 The Australian position ......................................................................................... 7.088
6.6.5 Effect of irregularity on third parties .................................................................... 7.092
238 BOARD OF DIRECTORS

6.7 Informal decision-making ................................................................................................ 7.093

6.7.1 Written resolutions ................................................................................................ 7.093
6.7.2 Informal meetings ................................................................................................. 7.095
6.7.3 Decision-making by unanimous consent .............................................................. 7.097
6.8 Technology ....................................................................................................................... 7.102
6.9 Sole director companies ................................................................................................... 7.104

7. Disqualification ......................................................................................................................... 7.106

7. I Introduction ...................................................................................................................... 7. I06
7.2 Conviction of certain indictable offences: s. l 68E of Cap.32 ........................................... 7.110
7.3 Persistent breaches of Ordinance: s.J68F ofCap.32 ........................................................ 7. I 13
7.4 Fraud or breach of duty in respect of company in winding-up:
ss.l68G, l68L ofCap.32 .................................................................................................. 7.l 17
7.5 Unfit directors of insolvent companies: s.168H of Cap.32 .............................................. 7.121
7 .6 Disqualification of directors after investigation of a company:
s.1681 of the retitled Cap.32 ............................................................................................. 7.127
7. 7 Miscellaneous matters ...................................................................................................... 7 .129
7.7.1 Scope of disqualification order ............................................................................. 7.129
7.7.2 Leave to manage companies ................................................................................. 7.13 l
7.7.3 Contravention of disqualification order ................................................................ 7.133
7.7.4 Foreign companies ................................................................................................ 7.135
7.7.5 Procedural matters ................................................................................................ 7.136
7.7.6 Public examinations .............................................................................................. 7.139
7.7.7 Listed corporations: Securities and Futures Ordinance (Cap.571) ....................... 7.140
 1. INTRODUCTION
Scope of chapter: types of directors, qualifications, appointment, cessation of office, 7.001
and how directors make decisions. The role of directors and the scope of their powers
are discussed in Chapter 6. This chapter covers the types of directors, qualifications of
directors, and their appointment and cessation of office, as well as on how directors
make decisions. The provisions of the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32) on the disqualification of directors are also discussed
in this chapter. The law on the duties of directors is discussed in Chapter 8.

2. CLASSIFICATION OF DIRECTORS

Concept of director. Black's Law Dictionary defines "director" as "[a] person 7.002
appointed or elected to sit on a board that manages the affairs of a corporation or other
organisation by electing and exercising control over its officers".' For our purposes,
this definition is somewhat too narrow, as under the Companies Ordinance as well as
at common law a person who has not been appointed or elected to sit on the board can
be treated as a director, as will be seen in the discussion below.

2.1 De jure, de facto and shadow directors

Persons who exercise functions of directors should not escape their legal 7.003
responsibilities by not being formally appointed. In terms of the ways in which
a person becomes (to be treated as) a director by law, directors can be classified as
appointed directors (or "de Jure directors"), de facto directors or shadow directors.
The need for treating a person who is not a de Jure director as director lies in the
necessity for ensuring that persons who exercise the functions of directors do not
escape their legal responsibilities by not being formally appointed as director. 2
Dejure director: appointed to sit on board of directors. A person who is appointed 7.004
or elected to sit on a board of directors becomes a de Jure director upon the appointment
or election.
Statutory definition of director. Companies Ordinance (Cap.622), s.2 states that 7.005
"director" includes any person occupying the position of director by whatever name
called. That definition clearly covers de Jure directors but is wider than the one quoted
at para.7.002, as a person can occupy the position of director even if he or she has
never been appointed to sit on the board. Thus the statutory definition in s.2 also
covers de.facto directors, though it does not cover shadow directors.3

' Black'.~Law Dictio11a1y(8th edn, West Publishing, St Paul, Min, 2004)492.

2 Re Hydroda11(Corl~y)Ltd [1994) BCC 161, sub nom Re Hydrodam (Corby) Ltd (1994) 2 BCLC 180; Standard
CharteredBa11kofA11straliaLtd vA111ico(1995) 18ACSR I; Dep111y Commissio11erof Taxation v Austin (1998) 28
ACSR 565; Securities a11dFutures Commissio11v Ma11darinResourcesCo,p Ltd (unrep., MCCW 348/1996, [ 1999)
Hl<EC 688); Re PaycheckServices 3 Ltd [20 I 0] I WLR 2793 (SC(E)); LisaAlford, Neil Money (as Joint Liquidators
of Snelling House Limited) v Sally Am, Barton, Philip Bart<>n,
Sarah Barton, Solipetit SL [2012) EWHC 440 (Ch).
3 However, there arc some specific provisions in Cap.622 on directors which arc expressly extended to cover
shadow directors for chepurpose of those provisions: eg. s.465 in relation to the directors' duty of care.
240 BOARD OF DIRECTORS

2.1.1 De facto directors

7.006 De facto directors: act as directors even though not properly appointed. The term
"de facto directors" refers to persons who act as directors of the company, even though
they have not been properly appointed as directors. 4
7.007 De facto director covered by definition of directors in Ordinance. The concept of
"de facto directors" is covered by the s.2 definition of "director" in the Companies
Ordinance (which defines a director as including any person occupying the position
of director by whatever name called), although the common law concept of de facto
directors predates the current statutory definition. 5
7.008 Paycheck case and common law definition of "de ft1cto director". In Re Paycheck
Services 3 Ltd; Holland v Revenue and Customs Comrnissionen,, 6 Lord Hope endorsed
the definition that Millett J formulated in Re Hydrodan (Corby) Ltd: 7

"A de facto director is a person who assumes to act as a director. He is held out
as a director by the company, and claims and purports to be a director, although
never actually or validly appointed as such. To establish that a person was a de
facto director of a company it is necessary to plead and prove that he undertook
functions in relation to the company which could properly be discharged only by
a director. It is not sufficient to show that he was concerned in the management
of the company's affairs or undertook tasks in relation to its business which can
properly be performed by a manager below board level."

Lord Collins noted that the most relevant tests of whether a person is a de facto director
which have been suggested are: (I) whether the person was the sole person directing
the affairs of the company, or if there were others who were directors, whether he was
acting on an equal footing with the others in directing its affairs; (2) whether there
was a holding out by the company of the individual as a director, and whether the
individual used the title; and (3) taking all the circumstances into account, whether
the individual was part of the corporate governing structure of the company.8 The
principles from the Re Paycheck case were applied by Deputy Judge Hunsworth in the
Hong Kong decision in Karla Otto Ltd v Bulent Eren Bayram. 9

' Aktieselskabet Oa11sk Skib~fi11allsierillg v Wheelock Mardell & C<> ltd (unrcp., Court of Appeal,
17 November 1994); Re Hydroda11( C<>rby)lid (ill liq) [I 994] BCC 161, 163, cited in Moulin Gi<>balEyecare
Ltd v Lee Si11Mei Olivia (2009] 3 HKLRD 265, 293 (CFT) (reversed by the Court of Appeal on other
l-l<>ldi11gs
grounds). Sec also Susan Watson and Chris Noonan, "Defining Directorship" http://ssrn.com/abstract= I695796.
' The definition was first introduced in the Companies Act 1900 (UK) s.30; and in Hong Kong sec Companies
Ordinance (No 58 of 191 I) s.261. On the historical background to the definition, see Corporate Affairs
Co111missio11 11 D,ysdale (1978) 141 CLR 236. However, for some provisions in the Companies Ordinance,

the context may indicate that the reference to "director" does not include de facto directors (for example, the
provisions on the minimum number of directors): Re Lo-Line Electric Motors Ltd ( 1988) 4 BCC 415, 421-2.
6 (2010) I WLR 2793, 2806, [2010) UKSC 51.
' (1994) BCC 161, 163, sub nom Re Hydrodam (Corby) Ltd (1994) 2 BCLC 180; also cited in Mo11li11Glabal
Eyecare Holdings Ltd v lee Si11Mei Olivia (2009] 3 HKLRD 265,293, CFI (reversed by the Court of Appeal on
other grounds).
• (2010) I WLR 2793, 2826, [2010) UKSC 51.
9 (2017] 2 HKLRD 124. See also Uq11idator of Wi11gFai Cmtstruction Co Ltd (i11liq) v Yip Kwong Robert (2018)
I HKC472.
 CLASSIFICATION OF DIRECTORS 241

All relevant factors must be taken into account in determining whether a person 7.009
is a de facto director. Whether a person would be regarded as a de facto director is a
question of fact and degree and all the relevant factors must be taken into account. 10
It is necessary to examine the duties performed by the person in the context of
the operations and circumstances of the particular company. 11 One looks to see if
the person "was one of the nerve centres from which the activities of the company
radiated" .12 Where a person takes on an active role in top-level management
functions, and is reasonably perceived by outsiders dealing with the company as
a director, then the person may well be treated as a de facto director. 13 It is also
relevant to look at whether the person had to make major decisions and whether the
person had proper information (such as management accounts) on which to base
decisions. 14
De facto director where resigned but continued to perform directorial duties. 7.010
In Deputy Commissioner of Taxation v Austin, 15 Madgwick J held the defendant to
be a de facto director of the company for the purpose of determining his liability
for an unfair preference given in favour of Australia's tax authority. In that case, the
defendant had resigned as a director but continued to perform directorial duties such
as conducting negotiations with creditors (including the tax commissioner) on behalf
of the company, countersigning and affixing of the company's seal, as well as signing
company cheques.
Karla Otto case. In Karla Otto Ltd v Bulent Eren Bayram,' 6 the first defendant (DI) 7.01.1
became involved in the affairs of a group of companies (which included the plaintiff
company) after developing a personal relationship with Ms Otto, the founder of the
group. D l was never appointed to positions of authority in either the plaintiff company
or the group but he played an increasingly important role in the affairs of the group and
held himself out (with Ms Otto's permission) as either or both the CEO and CFO of
the group. He also became the sole administrator of the plaintiff company's UK bank
account at HSBC. In these circumstances, the Court of First Instance held that D1 was
clearly acting as a de facto director of the plaintiff.
Whether de jure director of corporate director of company can be regarded 7.012
as de facto director of company. One of the situations where a person's liability
as a de facto director can arise is where a corporate director is interposed between
the defendant, who is a de jure director of that corporate director, and the subject
company. The issue in such a situation is often whether the defendant can be

10 Re Paycheck Services 3 Ltd: Holland v Reve,we and Customs Commissioners [2010) I WLR 2793, 2810, [2010)
UKSC 51; Karla 0110 Ltd v Bulent Eren Bayram [2017) 2 HKLRD 124, [31). See also liquidator of Wing Fai
Co Ltd (in liq) v Yip Kwong Robert [2018) I HKC 472.
Co11structio11
11
Deputy Commissioner ofTaxatio11 v Austin ( 1998) 28 ACSR 565.
12 Re Mumta: Pmperties Ltd [2012) 2 BCLC 109, [47) per Arden LJ, cited in Karla 0110 Ltd v B11le111
Eren Bayram
[2017] 2 HKLRD 124, [33).
1
' Deputy Commissia11ero.(Taxation v Austin ( 1998) 28 ACSR 565.
,. Re Kaytech Intl Pie, Secreuuy ofStatefor Trade a11dI11dust1yv Kaczer [1999) 2 BCLC 351,423. Sec further Re
Red label Fashions lid [ 1999] BCC 308; Secretary of State fi>r Trade and Induslly v Jones I1999) BCC 336;
Sta11dt1rdChartered Bank of Austrolia ltd v Antico ( 1995) 18 ACSR 1.
" (1998) 28 ACSR 565.
1
• [2017) 2 HKLRD 124.
242 BOARD OF DIRECTORS

characterised as a defacto di rector where his or her actions can be attributed entirely
to the position which he or she occupied de Jure as a director of that corporate
director. Lord Hope answered this question in the negative in Re Paycheck Services
3 Ltd; Holland v Revenue and Customs Commissioners, 17 holding that it was
impossible to overcome the distinction between a company (the corporate director
here) and its directors simply by pointing to the quality of the acts done by the
director and asking whether he was the guiding spirit of the subject company. His
Lordship agreed with Millett J in Re Hydrodan (Corby) Ltd 18 that "for a creditor
of the subject company to obtain those remedies (for the defendant's breach of
fiduciary duties) the individual must be shown to have been a director, not just of
the co1pora1e director but of the subject company too (emphasis added)". 19 Jn Re
Paycheck Services, a 3:2 majority of the UK Supreme Court held that as long as the
relevant acts are done by the individual entirely within the ambit of the discharge
of his duties and responsibilities as a director of the corporate director, then the
individual would not be regarded as a de facto or shadow director of the company
in which the corporate director is director. 20

2.1.2 Shadow directors

7.013 Shadow directors: directors act in accordance with this person's directions.
Section 2 of Cap.622 defines shadow director as a person in accordance with whose
direction or instructions the directors or a majority of directors of the company are
accustomed to act.21 In Re Hydrodan (Corby) Ltd,22 Millett J held that to establish that
the defendant is a shadow director, the plaintiff must allege and prove:

"(!) Who are the directors of the company, whether de.facto or dejure; (2) that the
defendant directed those directors how to act in relation to the company or that
he was one of the persons who did so; (3) that those directors acted in accordance
with such directions; and (4) that they were accustomed so to act."

7.014 Shadow director (puppet master) different to de facto director (acting as director)
although can overlap.The concept of a shadow director is different from that of defacto
director, although in some situations there could be an overlap.23 The pmpose of the notion
of shadow director is to identify those with real influence in the corporate affairs of the
company, although it is not necessary that such influence should be exercised over the whole
field of its corporate activities.24 A shadow director has been described as like a "puppet

17 [2010) I WLR 2793, [2010) UKSC 51.

" [1994) BCC 161, sub nom Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180.
19 [2010] I WLR 2793, [2010] UKSC 51, [43].
2<l [2010] I WLR 2793, [2010] UKSC 51, [42], [53]-[54], [96] (sole director ofa corporate director of another
company held not to be de.facto director of the latter company for the purposes of liability for misfeasance).
z, However, a person is not to be considered as a shadow director by reason only that the directors or a majority of
them act on advice given by the person in a professional capacity: Cap.622 s.2 definition of"shadow director".
zi [1994] BCC 161, J63, sub nom Re Hytlrodam (Corby) lid [1994] 2 BCLC 180; cited in Karla 0110 Ltd v Bule11t
Ere11Bayram [20 I 7] 2 HKLRD 124, [35].
" Aktieselskabet Dansk Skibsji11a11sieri11g v WheelockMarden & Co Ltd [1994] 2 HKC 264; Secretc11y of State.for
v Deverefl [2001) Ch 340.
T,r,dea,ul f11tl11st1y
" Secreta1J10.fStateforTi-adea11d!11d11s11y v Devere/I [2001) Ch 340; Karla Otto Ltd v B11/e11t Eren Bayram (2017)
2 HKLRD 124, (35).
 CLASSIFICATIONOF DIRECTORS 243

master who controls the actions of the board". 25 The influence or control exercised by a
shadow director may be strategic in character, defining the context in which, or conditions
upon which, the company operates, or else contriving the transactions of significance to
the company.26 For a person to be a shadow director, his or her influence over the board
must occm over a pe1iod of time and so the mere fact that the directors acted in accordance
with the person's instructions on a single occasion would not be sufficient.27
Parent company can be shadow director. A parent company can be held to be a shadow 7.015
director where its directors give directions to the board of a subsidiary entity and the
directors of that entity were accustomed to act in accordance with such directions. 28 Jn the
case of Standard Chartered Bank a/Australia Ltd v Antico, 29 where a company (P) held a
42% shareholding in another company (G), Hodgson J held P to be G's shadow director
where P imposed reporting requirements on G, exercised controls over the composition
of the board of G and had played a decisive role in relation to a number of significant
transactions entered into by G. The board of G simply accepted the decisions of P in
relation to those significant transactions as something necessary or as afait accomp/i. 30

2.2 Types of directors according to functions

2.2.1 Managing director or chief executive officer

MD: appointed as CEO; both director and employee; typically oversees day-to-day 7.016
running. The managing director is a director who is appointed by the board as the
company's chief executive officer. A managing director is both a director and a company

" Re U11isoftGroup Ltd (No 2j [ 1994)BCC 766, 775, cited in Moulin Global Eyea,re Holdi11gsLtd v Lee Sin Mei
Olivia [2009) 3 HKLRD265,293, CF! (reversedby the Court of Appealon other grounds).In Secretary of State for
li-ade a/Id lndust1y v Devere/I [200 I) Ch 340, Monitt LJ in the EnglishCou11of Appealqualified this by stating that
the requirementthat the directorsare accustomedto act in accordancewith the putativeshadowdirector·sdirections
or instructionsdoes not necessarilymean that the directors must have surrenderedtheir own discretionand were
simply subservientto the putativeshadow director.Morritt LJ consideredthat if the board were accustomedto act
on the directionsor instructionsof the putativeshadow director,it is not necessaryto demonstratethat their action
was mechanicalrather than considered. But for a critique of this approach,see Chris Noonan and Susan Watson,
"The Nature of Shadow Directorship:Ad Hoe Statutory Interventionor Core Company Law Principle?"[2006)
Journal of Business Law 763. Monitt LJ's approachwas acceptedby LewisonJ in Ultrctframe(UK) Ltd v Fielding
[2005) EWMC 1638 but Lewison J also accepted the correctness of earlier case law that held that creditors are
entitled to protect their own interestsby making demand~on the debtor company and that creditors will not be
regardedas shadow directorsmerely because the directorsagree to requirementsimposed by the creditors.On chc
latter point, sec also 8uzzle Ope,wions Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47.
26 Australian Securities Commission vA S Nominees Ltd (1995) 133 ALR 1, 52-53.
27 Re U11isoj/G1011pLtd (No 2) ( 1994) BCC 766, 775, cited in Mo11li11 Global Eyecare Holdings Ltd v Lee Sin Mei
Olivia (2009) 3 HKLRD 265, 293, CF!. In the latter case, a claim that a non-executivedirector and member
of the audit committee of a company was a shadow director of the subsidiary companies was struck out where
there was no evidence that she exercised real influence over the affairs of the subsidiaries which were, on the
evidence,controlledby the majority family ownersof the.companies.The CFI decision was reversedby the Cou11
of Appeal on other grounds: (201OJ2 HKLRD 1096. In Karla 0110 Ltd v B11le11t Ere11Bayram (2017) 2 HKLRD
124 (for the facts, see para.7.011 above), the court held that the first defendant was not a shadow director of the
plaintiffcompany as Ms Otto was not controlled by him as a puppet. Ms Otto ran the business and the companies
together with the first defendant and was not doing so under the control of the first defendant.
28 Re Hydroda11 (Corby) Ltd (1994) BCC 161, sub nom Re Hydrodt1111 (Corby) Ltd (1994) 2 BCLC 180. See also
Ho vAkai Pty Ltd (i11liq) (2006) 24 ACLC 1526;Buzzle Operations Pty Ltd (in liq) vApple Computer Australia
Pty Ltd (2011) 81 NSWLR 47. See further Stefan H C Lo, In Search o_(CorporateAcco1111tability:liabilities of
Co,porate Panicipants (Cambridge Scholars Publishing,Newcastle upon Tyne, 2015), 283-288.
29
(1995) 18 ACSR I.
30
(1995) 18 ACSR I, (63).
244 BOARD OF DIRECTORS

employee31 who is conferred, by the directors, with any of the powers exercisable
by the directors.32 During his tenure, a director so appointed is often not subject to
retirement by rotation or be taken into account in determining the rotation ofretirement
of directors.33 A typical function of the managing director is to oversee the day-to-day
mnning of the company's business and to supervise other senior executives. The precise
role of a managing director is, however, not fixed by law but determined by the tem1s
of his engagement.34
7.017 CEO. The term "chief executive officer" (CEO) is often used nowadays instead of
"managing director". The functions of a director appointed as CEO are usually similar
to those of managing directors.

2.2.2 Executive directors and non-executive directors

7.018 Executive directors full-time employees; Non-executive directors (NED) do not
have full involvement. Executive directors are full-time employees of the company.
Non-executive directors (NEDs) do not have full-time involvement with the company.
They are also known as part-time, outside or independent directors. NEDs are often
able to provide a perspective that is wider than executive directors in corporate
decision-making, and they are likely to be more objective and more balanced in
thinking. 35 NEDs may also be able to protect certain interests within the company
or the interest of stakeholders who do not have a voice on the board, such as small
shareholders and creditors. 36 Another important function ofNEDs is that they serve as
a check on the executive directors' control of company management. 37
7.019 For listed companies at least 1/3 of board should be NEDs. Listed companies, under
the Listing Rules of the Stock Exchange of Hong Kong, must appoint at least three
independent non-executive directors who represent at least one-third of the board.38
Whether a non-executive director is regarded as "independent" is determined with
reference to the factors set out in Listing Rules (Main Board) r.3.13 and Listing Rules
(GEM) r.5.09.
There is little doubt that NEDs are subject to the same fiduciary obligations as
executive directors. 39 NEDs are also subject to the duty of care, skill and diligence. 40

2.2.3 Alternate directors

7.020 Acts in place of director unable to attend or otherwise function. An alternate
director is a person appointed to act in the place of a director when the latter is

" A11de1:rnnv James Sutherland (Peterhead) Ltd [I 941) SC 203.

" Model Articles (public companies) (Cap.622H), art.33; predecessor CO, Table A, reg. I I I (repealed).
33 Model Articles (public companies) (Cap.622H), art.33(2); predecessor CO, Table A, reg.109 (repealed).
30 Harold Holdsworth & Co (Wakefield) lid v Caddies [ 1955) I WLR 352 (HL).
" E J Jacobs, "Non-executive Directors" [ 1987) .Joumal of8usi11ess law 269.
¥> Ibid.; Saleem Sheikh, "Non-cxccucivc Directors: Self-regulation or Codification?" (2002) 23(10) Company
Lawyer 269-270.
" Sec E J Jacobs, "Non-executive Dircccors" [ 1987) Journal of Business Law 269, 270.
38 Listing Rules (Main Board), rr.3.10, 3.1 OA;Listing Rules (Growth Enterprise Markee (GEM)), rr.5.05, 5.05A.
39 ASIC v Adler (2002) 168 FLR 253; affirmed on appeal Adler v ASIC (2003) 179 FLR I; sec also ASIC v Vizard
(2005) 145 FCR 57.
,,i The scope of the duty as imposed on NEDs is discussed in Chapter 8.
 CLASSIFICATIONOF DIRECTORS 245

unable to attend meetings or otherwise function as a director. The appointment of an

alternate director is possible if the articles of the company authorise a director to do so.41

Alternate director as agent of director. Under Cap.622, s.478(1), unless the company's 7.021
articles provide otherwise, whether expressly or impliedly, an alternate director is deemed
to be the agent of the director who appoints him or her and the director who appoints the
alternate director is vicariously liable for any tort. committed by the alternate director
during his or her office. The alternate director, however, remains personally liable for any
act or omission. 42 Section 478 alters the common law position which is illustrated by the
Australian decision of Anaray Pty Ltd v Sydney Futures Exchange Ltd. 43 In that case, the
alternate appointed by a director attended a board meeting and voted for a resolution on a
matter on which the appointor director had a personal interest. A number of the articles of
the company prohibited directors from voting on proposed resolutions on matters where
they had a personal interest. The validity of the resolution that the alternate director voted
for was challenged on the basis that the alternate director was disqualified from voting
as he was his appointor's agent. The Supreme Cou1t of New South Wales rejected the
contention that an alternate director was an agent of his appointor. The basis of the court's
decision on this point was that there were no provisions in the articles making an alternate
director an agent of his appointor, nor was there any suggestion of any collusion between
the alternate and his appointor. Tn Australia, there is no equivalent of Cap.622, s.478,
which deems the alternate the agent of the appointing director.

Generally same position as director and subject to same duties. Generally speaking, 7.022
an alternate director is treated as being in the same position as any other director and is
consequently subject to the nonnal duties that a director owes to his or her company. 44 An
alternate director is, however, not subject to directorial duties unless and until he or she
has assumed directorial authority. Thus, a person who has been appointed as an alternate
director but who has never been called upon to fulfil this role cannot be held liable for
breaching ofa directorial duty, if under the company's articles an alternate does not have
any duty to exercise power until he or she is called upon to fulfil the role.45 Also, an
alternate has no status as a director when his or her appointor is present at the meeting. 46

2.2.4 Nominee directors

Nominee directors appointed to represent interest of particular stakeholders. At 7.023
a general level, the term "nominee director" can be used to refer to "persons who,
independently of the method of their appointment, but in relation to their office, are
expected to act in accordance with some understanding or arrangement which creates
an obligation or mutual expectation ofloyalty to some person or persons other than the
company as a whole". 47 In practice, a nominee director can be appointed to represent

41 See, e.g., Model Articles (private companies) (Cap.622H) art.28; Model Articles (public companies) (Cap.622H)
art.30. The Table A articles in the predecessor CO did not have provisions for alternate directors.
" Cap.622, s.478(2).
' 3 ( 1988) 6 ACLC 271.
" Markwell Bros P~vLtd II CPN Diesels Quee11sla11d Pty Ltd [1983) 2 Qd R 508, 519,perThomas J.
" Playcorp Pty lid v Shaw ( 1993) 10 ACSR 212.
"' Markwell Bros v CPN Diesels (Qld) Pty Ltd [ I983) 2 Qd R 508; Plc,ycorp Pty Ltd v Shaw (1993) 10 ACSR 212.
" Companies and Securities Law Review Committee (Australia), Nominee Directors and Alter11ate Directors
(Report No.8, 1989) 8.
246 BOARD OF DIRECTORS

the interest of a particular stakeholder, such as a party to a corporate joint venture, the
holding company,48 a creditor, 49 or even employees or a government body.50

2.2.5 Reservedirectors
7.024 One-person company can nominate reserve director in event of death. Under Cap.622,
s.455, a private company with one member, who is the sole director, may, in general
meeting, notwithstanding anything in the company's articles of association, nominate a
person (other than the company itself) of 18 years or above to be a reserve director of the
company to act in the place of the sole director in the eventofhis or her death. The nominee
will cease to be the reserve director where: (i) he or she has resigned from this post;
(ii) the company in general meeting has revoked his or her nomination; or (iii) the
director in respect of whom the reserve director was nominated has ceased to be the sole
director.51

3. QUALIFICATIONS
7.025 Generally no professional or educational requirements. Generally speaking,
the law does not prescribe any minimum professional or educational requirements
before persons can act as director. Historically, in the 19th century, directors were not
necessarily appointed for their business acumen. For example, well-known figures
might be appointed to the board in order to attract investors to the company on
the basis of their reputation. Greater managerial abilities are expected of directors
of commercial enterprises today,52 but the law only provides for certain minimal
qualifications for persons to be appointed as directors.
7.026 Natural person 18 years or above. A natural person can be appointed as director only
if the person is of 18 years of age or above.53 There is no maximum age limit unless
provided for in the articles.
7.027 Undischarged bankrupt and disqualified person cannot act as a director. An
undischarged bankrupt is prohibited from acting as a director or taking part in
the management of a company, either directly or indirectly, without the leave of
the court: Cap.622, s.480. A person who contravenes this prohibition commits an
offence 54 and also becomes personally liable for the debts and liabilities of the
company incurred at a time when the person was involved in the management
of the company in contravention of that s.480. 55 A person against whom a

40
Scollish Co-operarive Wholesale Soc Ltd v Meyer [ 1958]3 All ER 66.
'9 Levin v Clark [ 1962]NSWR 686.
$-0 Phillip Lipton, et al., Understanding Company law ( 16thedn, LBC 2012) 384.
s, Cap.622,s.455(2).
52 SecChapter8.
SJ Cap.622,s.459(I). Secalso para.7.039below.
" Cap.622,s.480(2).
" Cap.32,ss.I68O(I)(a) and I68O(3)(a). A personwho is involved in the managementof the companyand actsor
is willing to act on instructionsgiven by a personwho is an undischargedbankrupt will also be personally liable
to the extent set out in ss.168O(1)(b)and 168O(3}(b).Section 1680ofCitp.32 is not repli,ced and continues to
haveeffect after the commencementof Citp.622.
 APPOINTMENT 247

disqualification order has been made is also banned from acting as a company
director. 56 The articles of companies also commonly provide that a director must
not be of unsound mind. 57
Where articles impose share qualification. The predecessor CO, s.155 (repealed) 7.028
provided that where the articles of association of the company impose a share
qualification upon the company's directors, the directors who are not so qualified
are under an obligation to obtain such qualification within two months after their
appointments unless the articles provide a shorter period. 58 This provision is not
reproduced in Cap.622 and was repealed upon the commencement of Cap.622.
Body corporate not permitted for public company but permitted for private 7.029
company. The Companies Ordinance imposes restrictions on the possibility of
appointing a body corporate as director. Appointing a body corporate as a director
is not permitted for public companies and companies limited by guarantee, but is
generally permitted for private companies (although the company must have at least
one director who is a natural person): see further para.7.040 below.

4. APPOINTMENT
4.1 Minimum number of directors

Public company and company limited by guarantee must have at least 2 directors; 7.030
private company at least 1. A public company must have at least two directors. 59
A company limited by guarantee is also required to have at least two directors.60 A
private company, on the other hand, is required to have at least one director.61 As
mentioned previously, where a private company has only one director who is the sole
member, the company may nominate a reserve director who would act in case of the
death of the director.62
Registrar's power to direct company to appoint director where statutory 7.031
minimum not met. The Registrar has power under Cap.622, s.458 to direct a company
to appoint a director or directors to comply with the statutory requirements where the
number of directors of the company has fallen below the statutory minimum. If the
company fails to comply with the direction within the time period specified by the
Registrar (which must be not less than one month or more than three months after
the date on which the direction is given), the company and every responsible person 63
commits an offence. 64

5• Cap.32, Pt.IVA. See paras.7.106 ff below for further discussion on disqualification.

57 E.g. Model Articles (private companies) (Cap.622H), art.25(c); Model Articles (public companies) (Cap.622H),
art.27(c); predecessor CO, Table A reg.90(d) (repealed).
58 Sec also predecessor CO, Table A rcgs.79 and 90(a) (repealed).
59 Cap.622. ss.453(1)(a) and 453(2).
"' Cap.622, ss.453(1 )(b) and 453(2).
61 Cap.622, s.454( I).
62 Sec para.7.024 .

•, See Cap.622, s.3.

"' Cap.622. s.458(6).
248 BOARD OF DIRECTORS

4.2 Initial directors

7.032 First directors are those named in incorporation form. The first directors of a
company are those named in the incorporation form submitted to the Registrar.65 The
appointment of initial directors is subject to the written consent of the appointees. 66

4.3 Subsequent directors

7.033 Rotation, retirement and appointment of directors under Model Articles. Under
the Model Articles for public companies, 67 all of the first directors are required to
retire from office at the first annual general meeting ("AGM"). At the AGM of every
subsequent year, one-third of the directors, or if the number of directors is not three or
a multiple of three, the number nearest one-third, are to retire from office, although a
retiring director is eligible for election. 68 Vacancies created by retirement of directors
are to be filled through an election to be conducted at the same meeting at which a
director retires and in default, a director who has offered himself or herself for election
is regarded as having been reappointed. 69 Directors are elected by ordinary resolution
in accordance with the relevant stipulations in the articles. 70 No provisions are made
for the rotation of directors in the Model Articles for private companies, but the general
meeting has power to appoint new directors by ordinary resolution. 71
7.034 Rejecting appointment of one director without having to reject others. Where
the company is a public company or a company limited by guarantee, no motion for
the appointment of two or more persons as directors by a single resolution can be made,
unless a resolution that such an appointment can be so made has first been passed at
the meeting without any vote against it.72 The rationale behind this prohibition on
composite motions is to preserve the member's ability to refuse the appointment of a
director without having to reject others. 73
7.035 Casual or additional vacancies can be filled by board or general meeting. The
power to appoint directors to fill casual vacancies or as an addition to existing
directors can be vested in the board or the general meeting exclusively or granted
concurrently to both corporate organs. The latter approach is adopted in the Model
Articles. 74 However, any director appointed by the board only holds office until the

65 Cap.622, ss.453(2) and 454(2).

66 Cap.622, s.74.
67 Model Articles art.24 (public companies) (Cap.622H): Companies (Model Articles) Notic-e (Cap.622H), Sch. I.
This provision is similar to those in the predecessor CO, Table A regs.91, 94 (repealed).
•• Model Articles art.25 (public companies) (Cap.622H).
(f) Model Articles art.24(8) (public companies) (Cap.622H). However, the retiring director is not regarded as having
been reappointed if (a) at the meeting at which the director retires, it is expressly resolved not to fill the vacated
office, or (b) a resolution for the reappointment of the director has been put to the meeting and lost: Cap.622H,
arl.24(9).
7<l Sec Model Articles art.23 (public companies).
" Model Articles art.22 (private companies): Companies (Model Articles) Notice (Cap.622H), Sch.2.
'1 Cap.622, s.460.
" Clive M Schmitthoff(cd.), Palmer'sCompany Law (Vol 1, 24th edn, Stevens & Sons 1987) 878.
,. Model Articles (private companies), art.22; Model Articles (public companies), art.23. See also the discussion on
this concurrent power in Chapter 6, section 3.3 (Concurrent powers).
 APPOINTMENT 249

next AGM. 75 If he or she is to continue in office after the AGM, it would be necessary
for reappointment by the general meeting.

Notice to registrar of appointment. Where a new director is appointed, the company 7.036
must send notice to the Registrar of the appointment, with particulars specified in its
register of directors (name, identification number and residential address) together
with a statement signed by the director stating that he or she has accepted the
appointment, and a statement that the appointee has attained the age of 18, if that
person is a natural person, within 15 days from the appointment. 76 The company must
also enter the details of its directors in its own register of directors. 77
Appointment of managing directors and alternate directors. The managing director 7.037
is appointed by the board of directors for such period and on such terms as they think
fit. 78 Where articles so provide, a director may appoint an alternate director to act in
his absence. 79

4.4 Appointment by outsiders

Outsider, eg supplier of capital or debt finance, can acquire right to appoint. It is 7.038
possible for an outsider to acquire a right to appoint a director pursuant to contractual
arrangements. The supplier of either capital or debt finance, for example, may be granted
the right of appointing a director pursuant to a term in the company's articles 80 or of a
contract. 81 Where the 1ight to nominate is conferred under a contract, however, this may
not be specifically enforceable, as the court may be reluctant to compel the company
to appoint the nominee where, for example, the nominee is unsuited for the office. 82
Directors may also delegate 83 their powers to appoint directors to enable the supplier of
debt finance to nominate a director to protect the lender's interest. 84 Where the company
is an incorporated joint venture, joint venturers may appoint nominee directors where
such power is conferred under the terms of the shareholders' agreement. 85

4.5 Liabilities of under-age directors

Appointment void but under-age director can still be liable. A natural person 7.039
director must be at least 18 years ofage at the time ofappointment. 86 An appointment

" Model Articles (private companies), art.22(4); Model Articles (public companies), art.23(4).
16 Cap.622, s.645. The new requirement for notification of a correspondence address under ss.643( I)(a)(ii) and 645
has not yet commenced operation at the time of w1iting: see para.1.133 in Chapter I.
17 Cap.622, ss.641 and 643.
18
Model Articles (public companies), art.33; predecessor CO, Table A reg. I09 (repealed).
19 Model Articles (private companies), art.28; Model Articles (public companies), art.30. Alternate directors would
be within the Cap.622, s.2 definition of "director", and so notification of their appointment to the Registrar is
required pursuant to Cap.622, s.645.
80 British M11racSyndicate Ltd v Alpeno11R11bherCo lid [ 1915] 2 Ch 186.
81 Rubber Ltmds Ltd (1915) 85 U Ch 801.
Pltmtotio11sTi-ustLtd v Bila (S11111tltra)
82 Plantations Ti·ustLtd v Bila (Sumtltra) Rubber Ltlnds Ltd (1915) 85 L.JCh 801,802, per Eve J.
83 Pursuant to the directors' power of delegation as conrerred under the articles: Model Articles (private companies),
art.5; Model Articles (public companies), art.4; predecessor CO, Table A reg.83 (repealed).
8' Robert R Pennington, Company Law (8th edn, OUP 200 I) 651.
8' Re Broadcasting Station 2GB Pty Ltd (1964-1965) NSWR 1648.
86 Cap.622, s.459(1).
250 BOARDOF DIRECTORS

made in contravention of the statutory provision is void, 87 but an under-age person

who purports to act as director or shadow director can still be liable under any
provision of the Companies Ordinance (Cap.622) or the Companies (Winding-
Up and Miscellaneous Provisions) Ordinance (Cap.32) notwithstanding that the
person could not be appointed director: Cap.622, s.459(3). This provision is
modelled on s.157(5) of the Companies Act 2006 (UK). In the United Kingdom,
the provision was introduced to deal with concerns that, notwithstanding the
statutory provision, child directors were sometimes appointed in order to exploit
their immunity from prosecution or the reluctance of enforcement authorities to
pursue young persons. 88

4.6 Corporate directors

7.040 Prohibitions. There is an outright prohibition on public companies appointing a body

corporate as director.89 Corporate directors also cannot be appointed for companies
limited by guarantee. 9° For private companies, there is an absolute prohibition on
corporate directors for such companies which are members of a group of a company
of which a listed company is member.91 Other private companies can appoint corporate
directors, but there is a requirement that the private company must have at least one
director who is a natural person.92
7.041 Issues with corporate directors regarding lack of transparency and
accountability. The issue of corporate directorships had been the subject of public
consultation in 2008, 93 with a suggestion being made that the prohibition on public
companies having body corporate directors be extended to private companies as
well. This was on the basis of ensuring transparency and accountability, as the
interposing of a corporate director between individuals and the subject company
can mean that the individuals escape personal responsibility for compliance with
directors' legal obligations. 94 The lack of transparency also caused concerns on the
possibility of the use (abuse) of corporate directors to facilitate money-laundering
(as control of the company by individuals can be concealed). 95 On the other hand,
there is the argument that corporate directors can serve legitimate purposes:
signing of documents etc. can be facilitated by the use of a corporate director where
individual directors are often out of Hong Kong; and corporate service providers
can provide professional directorial services more conveniently and efficiently
through the use of corporate directors rather than natural persons. In the event,

., Cap.622, s.459(2).
88 Hansard, HL GC Day 2, Vo) 678 col I67 (I February 2006).
89 Cap.622, s.456(1)(a).
90 Cap.622, s.456(1)(c).
91
Cap.622, s.456( I)(b).
•• Cap.622, s.457.
93 FSTB, CO Rewrite • Company Names, Directors Duties, Co1port11e DireCl()rShip, Registrt11io11of Clwrges:
Co11sultatio11Paper (April 2008), [4. l]-[4.7], and Co11sulta1io11 (December 2008), [25)-(30].
Co11c/usio11s
94 Sec para.7.012 above whether the individuals would be defac10 directors oft he subject company.
9' Financial Action Task Force, The Misuse of Corporate Vehicles, lnc/11di11g1h1st and Company Service Providers
( 13 October 2006).
 VACATIONOF OFFICE 251

Cap.622, s.457 aims to strike a balance by requiring at least one director of private
companies to be a natural person. 96

5. VACATION OF OFFICE
5.1 Retirement by rotation

1/3 retire by rotation under Model Articles (public companies). As mentioned in 7.042
section 4.3 above, after the first AGM, under the Model A1ticles for public companies
(Cap.622H), art.24, one-third, or the number nearest to one-third of the directors, are
to retire from office by rotation every year. Those who are to retire shall be those
who have been the longest in office since their last election. As between persons who
became directors on the same day, who to retire, unless they agree among themselves,
is to be determined by lot.97 Where the company has adopted Model Articles (public
companies), art.24, and the number of directors is reduced to two, neither needs
to retire. 98 The Model Articles for private companies do not contain provisions on
rotation, but the resolution of the general meeting appointing a director can specify a
pe1iod of time for the appointment. 99

5.2 Vacation of office

Ceasing to be director. Under the Model Articles, 100 a person ceases to be director 7.043
if the director: (a) ceases to be a director under the Companies Ordinance (Cap.622)
or under the Companies (Winding-Up and Miscellaneous Provisions) Ordinance
(Cap.32); 101 (b) becomes bankrupt or makes any arrangement or composition with
his creditors generally; (c) becomes a mentally incapacitated person; 102 (d) resigns in
accordance with Cap.622, s.464; (e) for more than six months has been absent from
directors' meetings without prior pennission of the directors; or (f) is removed from
office by ordinary resolution.
Whole board vacating automatically when failed to hold AGM. In certain 7.044
circumstances, it might happen that the whole board vacates office automatically
where the company has failed to hold an AGM. This may happen where the company's
articles provide for the retirement of all the directors every certain number of years.
The failure to hold an AGM in the year where all of the directors are required to retire

96
The provision follows the UK approach in the original s. I 55 of the Companies Act 2006 (UK), as enacted.
However, the UK has since proposed a general ban on corporate directors for all companies, with s. I 55 to be
repealed and news. I 56A to be introduced by the Small Business, Enterprise and Employment Act 20 I 5 (UK).
Regulations made under new s.1568 can provide for exceptions. These amendments were previously intended to
come into operation in 20 I 7 but implementation of the provisions has been delayed.
1
• Model Arlicles (public companies), art.24(6).
98 Re Moreley& Sons lid [ I 939) Ch 719.
99 Model Articles (private companies), ari.22(2).
100
Model Articles (private companies), art.25; Model Article.s (public companies), art.27. For the former Table A,
sec reg.99 (repealed).
101
The provisions on disqualification of directors are contained in the retitled Cap.32: see further par.i.7.106 below.
102
As defined: see Model Articles (Cap.622H), art. I.
252 BOARD OF DIRECTORS

will result in a situation where the company is without a board, as no director would
have been elected to replace the directors who have vacated office. 103

5.3 Removal

5.3.1 Removal by directors

7.045 Board compelling director to resign. Where the company's articles provide for the
power of the board to compel a director to resign through a written request of his or her
fellow directors, the director must resign. The validity of a written resignation notice
cannot be impugned merely because one or more of the directors may have exercised
their power to expel one of their number in bad faith. To hold otherwise may introduce
into the management of the company an element of uncertainty which is unlikely
to have been intended by the signatories of the articles and by those who become
shareholders subsequent to the incorporation of the company. Hl4

5.3.2 Removal by members

7.046 Removal by ordinary resolution. By Cap.622, s.462, the company has the power
to remove directors through an ordinary resolution notwithstanding anything in its
articles or any agreement between the company and the di rectors. 105 Section 462 is
derived from the predecessor CO, s.157B (repealed), which was originally introduced
in 1984. To preserve the rights of existing directors at the time, neither predecessor
CO, s.157B nor the current Cap.622, s.462 applies to a private company where a
director held office for life as of 31 August 1984.106 Before amendments made to the
predecessor CO, s.157B under s.60 of the Companies (Amendment) Ordinance (No 28
of 2003) (which came into effect on 13 February 2004), a removal of directors under
the statutory provision required a special resolution.
7.047 CO does not allow for weighted voting rights on removal of directors. Except
for listed companies, '°7 companies can generally issue shares with weighted voting
rights. Previously, this could be used to entrench directors in office, for example
where the shares held by a director are to carry a greater number of votes on a
resolution to remove the director from office. 108 However, this is no longer possible
in Hong Kong. Under Cap.622, s.462(7) 109 on a resolution to remove a director before
the expiration of his or her period of office, no share can carry a greater number of
votes than it would carry in relation to the generality of matters to be voted on at a
general meeting. Where a share carries special voting rights 110 in relation to some
matters but not others, the reference to the "generality of matters" means the matters
in relation to which the share carries no special voting rights} 11

103
Alexander Ward& Co Ltd v Samya11gNavigation Co Ltd [ 1975] I WLR 673.
i().J Samuel Tak Lee v Chou ll~n Hsien [ 19&4) I WLR 1202.
•05 Cap.622, s.462(1).
106 Cap.622, s.462(2); predecessor CO,s.157B(I) (repealed).
101
Sec Chapter 16.
168 Bushell v Paith [1970) AC 1099.
10
• Derived from predecessor CO,s. I 578(5) (repealed).
11
• Namely rights different from those carried by other shares.
111
Cap.622,s.462(8).
 VACATIONOF OFFICE 253

Special notice required of resolution. Special notice is required of a resolution to 7.048

remove a director or to appoint a person in place of the director so removed at the meeting
at which the director is removed. 112 On the meaning of special notice, see Chapter 9. On
receipt of the notice of an intended resolution to remove a director, the company must
forthwith send a copy of this notice to the director concerned and the director is entitled
to be heard on the resolution at the meeting. 113

Director can claim compensation or damages for removal. The statutory provisions 7.049
on the company's power to remove directors do not deprive a person of compensation or
damages payable to that person in respect of the termination of, inter alia, that person's
appointment as director. 114 In fact, the dismissal of a director can be costly where
there is a service contract between the company and the director entitling the director
to hold that position for a fixed period, or giving him the right not to be dismissed
without prescribed or reasonable notice. Where a dismissal entails a breach of the
abovementioned terms in the service contract, the director may be entitled to damages
for breach of contract. 115 Where no service contract subsists between the company and
the director, and the relevant a11icleprovides that the director's appointment is subject
to determination ipso.facto, the company can remove the director without notice and
the director has no ground for suing for wrongful dismissal. 116 Where, however, the
plaintiff is engaged as a managing director without a formal service contract and
no resolution has been passed on his or her remuneration, if he or she has, in fact,
pe1formed his or her duties and received a salary accordingly, he or she may, at least
for some purposes, be treated as an employee of the company and sue for unfair
dismissal. 117
Statutory provision can be relied upon despite anything in articles or agreement 7.050
between company and director. The statutory power of the members to remove
directors by ordinary resolution may be inconsistent with the members' removal power
or a director's 1;ght not to be removed from his or her office provided in the company's
articles or shareholders' agreement, or even a director-cum-member's right to
participate in company management on the basis of quasi-partnership. Section 462( l)
expressly provides that the statutory provision can be relied upon despite anything in
the articles or an agreement between the company and the director. In Muir v Lampl, 118
Lam J also held that the predecessor CO, s.157B (now Cap.622, s.462(1)), being an
important provision governing the power structure of a limited company, could not
be circumvented or abrogated by a contract between the shareholders. His Lordship
held that an unqualified agreement not to remove a particular person as a director
constituted an unlawful fetter on the statutory power conferred under the statutory
provision. It is conm1on for joint venture agreements to confer on the individual joint
venture parties the right to appoint nominee directors to the board. Lam J observed

112
Cap.622, s.462(4).
113
Cap.622.s.463.
114
Cap.622, s.462(9).
'" Southem Foundries (1926) Ltd v Shirlaw [1940] AC 701.
'" ReadvAstoria Garage (Streatlwm) l!d(l952) I Ch 637.
'" Folami v Nigerline {UK) Ltd [ 1978) !CR 277.
118 [2005) I HKLRD 338.
254 BOARD OF DIRECTORS

that this can be legitimate in protecting the interests of a particular shareholder or joint
venture party, but considered that absolute immunity from removal is not justified (as
such immunity would mean that even a majority of shareholders could not remove a
director who acted seriously in breach of his duties).
7.051 Situations where director might be able to contest removal: quasi-partnership
where removal amounting to unfairly prejudicial conduct. However, notwithstanding
1\1/uirv Lampl, there are some cases which suggest that there might be some situations
where a director may be entitled to contest a s.462( l) based removal. In Re Mandarin
Capital Adviso,y Ltd, 119 Harris J stated, by way of obiter dicta, that a director could
be entitled to an injunction to restrain a removal where there is "a written agreement
between shareholders, to which a company is not a party, which contains an express
prohibition against removal of a director all the time he remains a shareholder, which
can be enforced by injunction". 120 It appears that Harris J's comments are directed
towards the situation of quasi-partnership companies where there is an agreement or
understanding between the shareholders that each of them is entitled to participate in
the management of the company. Breach of such an agreement or understanding can
amount to unfairly prejudicial conduct which could entitle the director to remedies
under Cap.622, ss.724-725. 121
7.052 Shareholders' agreement providing for equal participation in management. In Re
China NTG Investment Ltd,' 22 an application was made (under the predecessor CO,
s. l 14B (repealed), now Cap.622, s.570 123) for the court to order the convening of a
general meeting for the purpose of changing the composition of the board of directors.
Deputy Judge Louis Chan ordered a meeting to be convened but refused to authorise
the applicant to propose a resolution for the removal of directors. His Lordship's refusal
was based on the possible existence of an oral shareholders' agreement that allegedly
provided for equal participation in management by all members. The applicant had
denied the existence of the oral agreement and had argued that the leave requested
should be granted and that if the respondents wished to seek a remedy on the basis of
the alleged agreement, they would have to issue proceedings under predecessor CO,
ss. l 68A124 and 177(1). Acceding to this request would, according to the judge, amount
to a decision on the existence of the oral agreement in favour of the applicant and,
because of the doctrine of res judicata, the relevant respondents would be prevented
from relying on that oral agreement in further proceedings.
7.053 Where a proposed removal is one of the grounds for a winding-up petition. A
similar approach was taken in Lo Sui Lin v Chan Hung Fook,'25 where Deputy Judge
Le Pichon declined to grant an order under Cap.622, s.570 for a general meeting to be
convened for the purpose of removing an existing director of a family-run company
from office in circumstances where the ouster of the director was one of the grounds

II? [2011) 2 HKLRD 1003.

120 Re Mtmdarin Capital Adviso,y Ltd (2011) 2 HKLRO I003, I014.
121 Sec further Chapter 10.

122 [2012)2 1-lKLRD296.

123 Sec Chapter 9.

'" That is, the unfair prejudice remedy: see now Cap.622, ss.724-725.
"' [2017) 3 HKLRD 746.
 VACATIONOF OFFICE 255

for a separate petition brought by the minority shareholders (including the director in
question) to wind up the company on just and equitable grounds, where there was an
alleged informal agreement that the majority shareholder (who applied for the order
under Cap.622, s.570) was not intended to be involved in management of the company,
and where that majority shareholder had in fact not been involved in the affairs of the
company for the past 28 years. The court considered that it would be wrong to allow the
status quo to be dramatically changed given the winding-up petition that was pending.
No injunction to prevent removal of director where insufficient evidence to show 7.054
agreement entitling director's participation in management. [n Re £-Harbour
Services Ltd, 126 Peter Ng J allowed an application (under predecessor CO, s.114B)
for an order for a meeting to be held for the purpose of removing a director from
office. In this case, there was also an argument that the order should not be made
because of the existence of an oral agreement between the shareholders that the
company will be operated on the basis of joint control and management. The applicant
disputed the existence of the agreement. The court held that the mere assertion
of a quasi-partnership or an oral agreement or understanding between the only two
shareholders as to joint management of the company is normally not a sufficient
ground for refusing to order a meeting which will enable a majority shareholder to
exercise his statutory right to remove a director. Justice Ng expressed some doubt
as to whether it was indeed possible for an agreement for joint control to ovenide
the statutory power of members 127 to remove a director, citing Muir v Lampl. 128 His
Lordship stated, however, that even assuming that such a contractual restriction is
legally permissible, it will require strong evidence of an unqualified right to participate
in the management of the company. Justice Ng favoured the view of Harris J in
Re 1\1andarinCapital Adviso,y Ltd 129 that ordinarily it would be necessary to show the
existence of a written agreement containing an express prohibition against removal.
Re £-Harbour Services Ltd was distinguished in lo Sui Lin v Chan Hung Fook130
on the basis that the company in the latter case was a small family company that
was only used as an asset-holding vehicle, where it was wholly unrealistic to expect
written agreements; while both Re £-Harbour Services Ltd and Re Mandarin Capital
Advisory Ltd involved shareholders in a commercial setting who had entered into the
business arrangements at arms' length. It was also relevant in lo Sui Lin v Chan Hung
Fook that the proposed ouster of the director was one of the grounds in a pending
petition to wind up the company on just and equitable grounds. 131
Alternative procedures for removal in articles can be relied upon. If the articles 7.055
have set out alternative procedures for removal of a director from office, those

126 [2014] 5 MKLRD 180.

127 i.e. Cap.622, s.462(1).
128 [2005] I HKLRD 338. On Peter NgJ's approach, it appears that, although the court might not prevent the majority

members from exercising their scarutory power to remove a director from office, the director-cum-member may
still seek other remcdie.s under Cap.622, ss.724-725 (such as a compulsory buy-out order) if the removal is
in breach of an agreement or understanding for joint participation in management and amounts to unfairly
prejudicial conduct.
" 9 [2011] 2 HKLRD 1003. Sec also Re Roeders (China) ltd(unrcp., HCCW 68/2016, (2016] HKEC 1337).
1
.1-0 [2017) 3 HKLRD746.
'" See para.7.053 above.
256 BOARD OF DIRECTORS

procedures can be relied upon as an alternative to Cap.622, s.462(1). While the

articles cannot displace the operation of this s.462(1), it is possible for the members
to rely on any alternative procedures for the removal of a director as permitted by the
articles. However, even where the members rely on a separate right under the articles
for removal of the director, the procedural protections in ss.462-463 of Cap.622 are
still applicable-namely the provisions for special notice, the directors' rights to make
representations in relation to the proposed removal and the restrictions on weighted
voting rights. That s.462(3) of Cap.622 expressly states that those provisions are
applicable irrespective of whether the proposed removal by resolution is made under
that s.462( I) or otherwise.

5.4 Resignation

7.056 Can resign at any time unless articles or agreement provides otherwise. A director
may resign from office at any time unless the articles or an agreement between the
company and the director provides otherwise. 132 Where notice of the resignation is
required to be given by the articles or by an agreement with the company, the resignation
does not take effect unless notice is given in accordance with the requirement or by
sending it by post to, or by leaving it at, the registered office of the company.133

5.5 Notification to registrar

7.057 Notify Registrar of change in directors. When there is a change in the directors of
the company, the company must notify the Registrar of the change within 15 days of
the change. 134 The company would also need to update its own register of directors
kept pursuant to Cap.622, s.641. 135

6. BOARD MEETINGS

7.058 Directors must act collectively. The powers conferred on the board of directors
under the Companies Ordinance (Cap.622) or the articles are conferred on the
body of directors as a whole. Directors must act collectively (via a meeting of the
directors or a unanimous decision of the directors), and so an individual director 136
cannot himself or herself exercise the powers conferred on the board. 137 Where the
Ordinance or the articles refers to "the directors", this is generally a reference to the
directors acting as a board, and so for example a provision in the articles conferring
management powers on "the directors" means that the management powers must
be exercised by or under the authority of the board and cannot be exercised by an

H2 Cap.622, s.464(1).
133 Cap.622, s.464(5).
,;, Cap.622, s.645(4). In 1he case of resignation, if there arc reasonable grounds for believing that the company will
not give no1icc, then lhe director resigning mus1 himself give notice co the Regis1rar: Cap.622, s.464(3).
rn Cap.622,s.643.
IS(> .Except
in the case of sole directorcompanies.
'" Re HaycraftGoldReductio11 and MiningCo (1900) 2 Ch 230; Mitchell& Hobbs (UK)LtdvMil/[1996] 2 BCLC 102.
 BOARDMEETINGS 257

individual director acting by himself or herself' 38 (unless delegated with authority

from the board).

6.1 Calling board meetings

By notice. Under the Model Articles, any director may call a directors' meeting by 7.059
giving notice to the directors or by authorising the secretary to give notice. 139

6.2 Notice

Must be given to every director. Neither the company law legislation nor the previous 7.060
Table A contains detailed rules on the notice for board meetings. The Model Articles
do set out some requirements in relation to notice for board meetings, but the legal
rules are largely governed by the common law. Under the Model Articles, notice must
be given to each director. 140 Notice must also be sent to any alternate director who is
acting in place of his or her appointor. 141 The above requirements under the Model
Articles reflect the common law position where the courts have held that notice must
be given to every director. 142
Need not be in writing. Under the Model Articles (Cap.622H), the notice need not 7.061
be given in writing. 143
Notice period as per articles; if articles silent must be reasonable. As to the period of 7.062
notice required, where the company's articles provide for the period, the regulation must
be complied with. A failure to comply may render the meeting ineffective and void. 144
Where the articles are silent on this matter, the period of notice given must be reasonable.145
Test of reasonableness appears to be whether given early enough to enable 7.063
directors to attend. The rationale behind the adequate notice requirement is to ensure
that the directors will be able to make representations of the interest they have in their
hand. The company is entitled to the benefit of the collective wisdom and contribution
of all directors. 146 The reasonableness of the notice depends on the circumstances
in which the notice was given. The test of reasonableness appears to be whether the
notice is given early enough to enable directors to attend. 147 Thus, where the director's

'" Mite/tell & Hobbs (UK) Ltd v Mill [ I996) 2 BCLC I02.
"' Model Articles (private companies), mt.9; Model Articles (public companies), art.7. For the predecessor CO,
Table A, see reg. I00 (repealed).
'"" Model Articles (private companies), aii.9(3); Model A11icles(public companies), art.7(5).
141
See Model Articles (private companies), art.29; Model Articles (public companies), art.31.
142 Billion £<press llld,mrial Ltd v Tsang /i1111gKong [2012) 5 MKC 51; Hansen International Ltd v High Fashion
Apparel Ltd (unrep., MCA 1724/2014, [2014) HKEC 1484). See also Petsch v Ke1111edy (1971) I NSWLR 494;
Eastern Resources oJAustralia Ltd v Blass Reinforced Products (GRP) P~yLtd ( 1986) IOACLR 496; Mitropoulos
v Greek Orthodox Church (1993) 10 ACSR 134; Yick Hok Wing v Chan Yook Ming [ I 997) I HKC 49.
1
"; Model Article.s{privatecompanies), art.9(3);Model Articles(publiccompanies), art.7(5).
"' Je11aslwrePry Ltd v Lembrib Pty Ltd (1993) 11 ACSR 345. But sec para.7.075 below.
,., Re Homer District Consolidated Gold Mines Ltd Exp Smith (1888) 39 Ch D 546; Broadview Commodities Pre
Ltd v Broadview Finance Ltd [ 1983) HKLR 384; Toole v Flexihire Pty Ltd ( 1991) 6 ACSR 455.
" 6 Bell v Burt<m(1993) 12 ACSR 325, 329,perTaclgcll; SEG Investment Ltd v SEG Intl Securities (HK) Ltd(unrcp.,
HCMP 4211/2003, (2005) HKEC 1633), (I I).
'" Broadview Commodities Pre Ltd II Broadview Finance Ltd (1983) HKLR 384,388.
258 BOARD OF DIRECTORS

office is five minutes' walk from the venue of the board meeting, a notice ofless than
ten minutes may be sufficient where the director is available, 148 whereas a few hours'
notice may be insufficient where one of the directors cannot be reached until at least
the next day, as he or she is overseas. 149 Where there is evidence that the purpose of
giving other directors sh011notice is to make a pre-emptive strike on a scheduled board
meeting and to entrench the position of the notice giver as a director, the meeting
called through such short notice will be invalid. 150
7.064 Model Articles: time and place. The Model Articles require the notice to
indicate the proposed date and time of the meeting, and where the meeting is to
take place. 151
7.065 Generally no need to state nature of business to be transacted. As a general
principle, there is no need to state the nature of business to be transacted in the
notice. 152The rationale behind this rule is summarised by Lindley LJ in La Compagnie
de Mayville v Whitley:153

"It is not uncommon for directors conducting a company's business to meet on stated
days without any previous notice being given either of the day or of what they are
going to do. Being paid for their services - as they generally are, ... it is their duty to
go when there is any business to be done, and to attend to that business whatever it is."

7.066 Subject to considerations of reasonableness. This rule, however, is subject to the

overriding consideration of reasonableness in all circumstances. As Deputy Judge A
To points out in SEG Investment Ltd v SEG Intl Securities (HK) Ltd:

"It is not a rule without qualification. If it were, some directors at a meeting may,
upon finding it opportune to do so, pass any resolution which they know would
not be passed had other directors been present at the meeting .... The result would
be a state of anarchy". 154

7.067 Whether some notice required if business important or extraordinary. Deputy

Judge A To was of the view that the rule applied only where the business to be
transacted at the meeting was ordinary business. His Lordship believed that if the
business to be transacted at the meeting was important or extraordinary, some notice
of the nature of the business to be transacted at the board meeting must be given. The
level of the need to state the nature of the business in the notice, His Lordship added,
should be proportional to the level of importance of the business. 155

"8 Browne v L 1H11idad(1887) 37 Ch DI.

"' Re Homer District Co11solidaied Gold Mines Exp Smith [ 1888] 39 Ch D 546. Note, however,that former Table A
reg. I 00 (repealed) provided that it is not necessaryto give notice to any director for the time being absent from
Hong Kong. There is no equivalent of this provision in the Model Articles.
,so YickHokWi11gvClu111YookMi11g[1991] 1 HKC49.
'" Model Articles (private companies) art.9(2); Model Articles (public companies) art. 7(4).
"' La Compagnie de Mayville v Whitley [ 1896] J Ch 788; Kwok Slw11On v Wo11gSai Wing [2001]3 HKLRD 811.
"' ( 1896] 1 Ch 788. 797
,,., SEG Invest111e111 Ltd v SEG bul Securities (HK) Ltd (unrep., HCMP 421 J/2003, [2005) HKEC 1633), [ 13).
"' SEG lnves/111e11t Ltd v SEG /111/Securities (HK) Ltd (umep., HCMP 421 J/2003, (2005) HKEC 1633), ( 13).
 BOARDMEETINGS 259

Voluntary winding-up by board. The facts in SEG Investment Ltd v SEG Intl 7.068
Securities (HK) Ltd involved a purported board resolution for winding-up. A special
feature of the law on voluntary winding-up under Cap.32 is that it is possible for
the board, as distinguished from the shareholders themselves, to initiate a members'
voluntary winding-up. 156 A voluntary winding-up initiated by directors under s.228A
of Cap.32 has the same effect as a members' voluntary winding-up provided under
that previous s.228 of Cap.32. As Deputy Judge A To observed in SEC investment, if a
s.228 winding-up required a notice of 21 days specifying the intention to propose the
resolution as a special resolution, it cannot be the law that the safeguards provided in
the case of a voluntary winding-up be completely dispensed with where the winding-
up is initiated by directors. 157
Failure might suggest avoiding opposition of co-directors. Deputy Judge A To's 7.069
view on the need for stating in the notice the nature of the business to be transacted
at the board meeting is supported by Re Homer District Consolidated Gold Mines,
where North J held that a failure to state in the notice what was to be done at a
board meeting may suggest that the aim of the directors who sent out the notice
was to secure the passing of a resolution that would bind the company through
getting rid of the opposition of their co-directors. 158 The resolution to be deliberated
at the meeting in that case was on the allotment of shares to an external party; the
allotment of which had been ruled out in the previous board meeting attended by
all the directors.
Notice when director absent. If a director is beyond physical reach and has the 7.070
board's permission to be absent from office, it is unnecessary to send notice to the
director, as a notice requiring the director to attend a board meeting would be wholly
inconsistent with the permission given. 159 Under the prior Table A, reg. I 00 (repealed),
it was unnecessary to give notice to a director who was, at the time, absent from
Hong Kong. This provision is not reproduced in the Model A11iclessince the giving
of notice to persons outside Hong Kong is not difficult under modern communication
technologies (and since meetings can be held without the need for every person to be
present at the one location 160).

6.3 Quorum

Quorum generally 2; if director has interest he is not counted under Model 7.071
Articles. For companies adopting the Model Articles or the formerTableA, the quomm
for transacting business at board meetings is two, unless the directors have determined
otherwise. 161 Where a director is interested in a transaction, arrangement or contract
with the company and the interest is material, the director must not be counted in the

156
Cap.32, s.228A. For a more detailed discussion on this topic, see Chapter 19.
15' SEG f11vestme11tLtd v SEG fntl Securities (HK) Ltd (unrcp., HCMP 4211/2003, (2005] HKEC 1633), [14).
"8 Re Homer District C<>nsolidatedGold Mines Exp Smith [ 1888] 39 Ch D 546, 550.
" 9 Hal/fax Sugar R~fi11ingC<>v Frtmkly11( 1890) 59 LJ Ch 591.
160 Sec para.7.102 below.
161
Model Articles (private companies), art. I I; Model Articles (public companies), art.9; predecessor CO, fonner
Table A reg.102 (repealed).
260 BOARD OF DIRECTORS

quorum present at the meeting, subject to certain exceptions. 162 An alternate director
will be counted towards quorum, at least where the company's articles so provide. ' 63

6.4 Chairperson

7.072 Can appoint chairperson for meeting. Under the Model Articles, the directors
may elect one of their number to be the chairperson of their meeting. 164 Where
no such chairperson is elected, or if at any meeting the chairperson (or deputy
chairperson, if any) is not present within 10 minutes after the time appointed for
the meeting, the directors present have the power to choose one of their number to
chair the meeting. 165

6.5 Voting and minutes of meetings

7.073 Majority of votes; chairperson has casting vote in case of equality. Under the Model
Articles, the board of directors passes resolutions by a majority of votes. 166 In case of
equality of votes, the Chairperson of a board meeting has a second or casting vote. 167
Directors interested in a contract being considered by the board may be prohibited
from voting under the articles. 168
7.074 Minutes. The minutes of all proceedings of the directors must be recorded, and the
record of minutes must be kept by the company for at least IO years from the date of
the meeting. 169 A breach of the obligations with regard to the recording and keeping
of minutes of board meetings constitutes an offence. 170 Directors have a common
law right to inspect the board's minutes. 171 Members do not have an absolute right to
inspect the minutes of board proceedings but may apply to the court for inspection
pursuant to Cap.622, s.740. 172 Minutes purporting to be signed by the chairperson
of the meeting, or by the chairperson of the next directors' meeting, are evidence of
the proceedings at the meeting 173 and are prima jacie evidence that the meeting was

162
Model Articles (private companies), art. I6; Model Articles (public companies), art.15; predecessor CO, former Table
A reg.86 (repealed).
163 For an example of this type of article, see reg. 122 of the Bye-Laws of Moulin Global Eyecare Holdings Ltd in Re

Moulin Global Eyecare Holdings Ltd (unrep., HCCW 470/2005, (2008) HKEC 923), (102).
164
Model Articles (private companies), art.13; Model Articles (public companies), art. I I; predecessor CO, former
Table A, reg. I03 (repealed).
165 Model Articles (private companies), art.13(4); Model Articles (public companies), ait.11(5). CJ predecessor CO,

former Table A, reg. I 03 (repealed) (where the period is five minutes).

166 Model Articles (private companies), art.7(l)(a); Model Articles (public companies), art.12; predecessor CO,

former Table A, reg. I 00 (repealed).

161 Model Articles (private companies), art.14; Model Articles (public companies), art.13; predecessor CO, former

Table A regs. I00 and I06 (repealed).

168 Model Articles (private companies), art.16; Model Articles (public companies), art.15; predecessor CO, former

Table A rcg.86 (repealed); and sec further Chapter 8.

1•• Cap.622, ss.481 (I) and 481 (2). The provision in Cap.622, s.48) (2) for retention of the records for IOyears is new.
Under the predece.ssor CO, s.119 (repealed), nothing was said as to how long the records must be kept.
°
17 Cap.622, s.481 (3) (maximum fine at level 5 and daily default fine of $1,000).
171
Sec Chapter I 1.
172 See further Chapter 11.
113
Cap.622,s.482(1).
 BOARD MEETINGS 261

duly held and proceedings thereat duly taken place. 174 However, the minute books
are not conclusive evidence. 175 The articles can provide otherwise though, and in that
situation, the minutes can only be challenged on the basis of bad faith or fraud 176 or
error on the face of the minutes. 177

6.6 Effect of irregularities

Prima facie irregular if not convened or conducted in manner prescribed. 7.075

Company proceedings are primafacie irregular if they are not convened or conducted
in the manner prescribed under the articles or the law. This usually renders the
meeting invalid. However, it may be otherwise depending on relevant provisions in
the company's articles. 178 Also, there may be some situations where the irregularity
principle 179 or the unanimous consent doctrine 180 can apply so as to enable the meeting
to be regarded as valid notwithstanding the irregularity.

6.6.1 Meetillg illvalid

Generally irregularity renders meeting void. The general rule is that an irregularity 7.076
in the convening or holding of a board meeting would render the meeting void, such
that any decisions made at the meeting would be invalid. 181 This is illustrated by the
following cases.
SEG Investment case. In SEG Investment Ltd v SEG Intl Securities ltd, 182 the second 7.077
defendant was a minority member but had control at the level of the board. The
board was divided into t\vo factions. In anticipation that she would lose control in
the upcoming extraordinary general meeting, the second defendant called a directors'
meeting to wind up the company voluntarily under Cap.32, s.228A. The second
defendant gave a director of the other faction oral notice over the phone without
mentioning the real purpose of the meeting two days before the scheduled meeting.
Upon the request of the latter, she, the second defendant, sent a notice in writing the
following day, again without mentioning the purpose of the meeting.
SEG Investment case: inadequate notice in circumstances. Deputy Judge A To held 7.078
the meeting to be irregular and the resolution passed void and ofno effect on the basis
that the notice was inadequate. His Lordship's reasons were that the notice: (i) was too
short in the circumstances (where the business was to wind up the company); and (ii)
did not inform the director to whom the notice was given of the real purpose of the
meeting (the necessity of incorporating such a statement was again determined by the
nature of the proposed resolution). 183

174
Cap.622~s.482(2).
i,s Beus & Co lid v Macnaghte11[ 191OJ I Ch 430.
176 Kerr vJohn Molleram lid [1940] Ch 657.
"' Re Car(J(el (New) Mines Ltd [I 902] 2 Ch 498.
178
Sec para.7.08I below.
119
Sec para.7.083 below.
"'" See para.7.097below.
181
Gn111dField Group Holdings Ltd vTsang Jfoi l1111 Wayland (No 2) [2010] 4 HKLRD 487.
181 (unrep., HCMP 4211/2003,[2005) HKEC 1633).
183
(unrep., HCMP 4211/2003,(2005) HKEC 1633), (71)-{76).
262 BOARDOF DIRECTORS

7.079 Togge11burgercase. In Christian Emil Toggenbwger v Beaiiforte Investors Corp Ltd, 184
the board was divided into two factions: the C faction and the T faction. Cheung, of
C faction, gave four-homs notice on 27 December 2006 for a board meeting. The
resolution proposed was the removal of two T faction directors. It was during the
holiday season. Some directors were overseas. Even some of the directors who were in
Hong Kong could not make it, given the short length of notice. A resolution was passed.
7.080 Toggenburger case; notice too short in circumstances. Reyes J held that the meeting
was invalid because the notice was too short in the circumstances, given that the matter
to be deliberated in the proposed meeting (removal of directors) was not urgent. Also,
it was the holiday season. The company should have given directors allowance for the
fact that some of them were going overseas while others might remain in Hong Kong
to meet year-end deadlines. Any notice for non-urgent matters in or around the end of
December should have given the directors enough opportunity to alter their plans or
to re-arrange their schedules to be able to attend a meeting in person, by telephone or
through an alternate.

6.6.2 Articles waiving the irregularity

7.081 If articles provide irregularity does not affect validity of decision it can be ignored.
If, according to the company's articles, the procedural irregularity would not affect the
validity of the decision, then the irregularity can be ignored and the decision would
be valid. In Peter H Yip v Asian Electronics, 185 the plaintiff challenged the effect of a
board meeting on the ground of inadequacy in the period of notice given. Regulation
88 of the company's articles provided:

"A resolution agreed upon by at least 75% of the directors shall be valid and
effectual whether or not it shall be passed at a meeting of the directors duly
convened and held."

Le Pichon J refused the plaintiff's application, as there was no doubt that the resolutions
in question were agreed upon by over 75 percent of the directors.
7.082 Director waiving entitlement to notice. Another example is art.7(6) of the Model
Articles for public companies (Cap.622H), which provides that if notice of a meeting
has not been given to a director, the director can waive his entitlement to notice by
giving notice to the company not more than seven days after the meeting. If there
is such waiver, then according to art.7(6), the absence of notice does not affect the
validity of the meeting.

6.6.3 Irregularity principle

7.083 Irregularity principle applied to members' meetings; and relevant to board
meetings. The irregularity principle, originating from the rule in Foss v Harbottle, 186
has traditionally been applied in the context of members' meetings, to enable meetings

is-, (unrcp., HCMP 3712007, (2007] HKEC 171).

18
' (1998) 2 HKC 96.
18• (1843)2Hare461,67£R 189.
 BOARD MEETINGS 263

to be regarded as having been held despite there being some procedural irregularity. 187
However, there is some judicial acceptance that the p1inciple can also be relevant for
board meetings.
Lawfulness cannot be questioned if mere informality and irregularity and 7.084
intention clear. In Peter HYip v Asian Electronics,188 Le Pichon J said:

"The irregularity principle really comes to this: the lawfulness ofa decision taken
by a meeting of members or board cannot be questioned if the only facts alleged
to make it unlawful is a mere informality and irregularity and the intention
of the meeting is clear. This is particularly so if there is no evidence that the
decision of the meeting would have been different if the correct procedme had
been observed. In this connection, it is appropriate to refer to what Cotton L.J.
observed in Browne v. Le Trinidad (1888) 37 Ch. D. I at page 10: 'A Court of
Equity refuses to interfere where an irregula1ity has been pe1mitted if it is within
the power of the persons who have permitted it at once to correct it by calling a
fresh meeting and dealing with the matter with all due formalities."'

In the above case (see also the facts outlined at para. 7 .081 above), Le Pichon J accepted
that the irregularity principle could be applied as an alternative basis for the validity
of the directors' resolutions.
Relief refused when irregularity could be cured and result would inevitably be 7.085
same. The irregularity principle was also applied in the context of directors' resolutions
in Bentley-Stevens v Jones. 189 In that case, P, D 1 and D2 were directors of H Co. S Co
was a wholly owned subsidiary of H Co. P, DI, D2 and M were the directors of S Co.
D 1 sent a notice to P, infonning him of a board meeting for H Co scheduled for the
following day. D 1 also tried to phone P on the day the notice was sent, to no avail, as
the latter was away. For the same reason, P did not receive the notice until the evening
of the following day, by which time the board meeting had been held.
A resolution was passed at the board meeting to autho1ise D 1 to give special notice to
S Co for the pmpose of removing P from its board. H Co subsequently requisitioned
an extraordinary general meeting of S Co. D 1 called an EGM of S Co. The notice
convening that meeting was expressed to be given by order of the board. In fact, no
board meeting was held and no notice of the alleged board meeting was given to either
P or M. The EGM resolved to remove P from the S Co board.
P challenged the decision on his removal on the bases of, inter alia, that the initial
board meeting of H Co was invalid due to the lack of notice and that the alleged board
meeting where the decision to call the EGM was also irregular (as that meeting was
never held). Plowman J refused the interlocutory injunction sought by P, holding that
the alleged irregularities could all be cured by going through the proper processes and
the ultimate result would inevitably be the same.

187 Sec Chapter 9.

188 [ 1998)2 HKC 96, [20).
189 (1974)1WLR618.
264 BOARD OF DIRECTORS

7.086 Principle has narrower scope of operation than in context of members' meetings:
directors fiduciaries and act collectively.However, it seems that the irregularity p1inciple
may have a narrower scope of operation in the context of board meetings compared with
members' meetings. [n Billion Express Industrial Ltd v Tsang Hung Kong, 190the issue was
whether a meeting for which no notice was provided to Ming, one of the four directors, was
valid. The comt ruled that no meeting was in fact held, but that even ifthere was a meeting,
the purported resolution passed at the meeting would be invalid. The court declined to
apply the irregularity principle as it was of the view that the deliberate withholding of
notice to a director was more than a mere informality and irregularity. In its judgment,
the court appeared to confine the scope of application of the irregularity principle in the
context of board meetings as compared with members' meetings. The comt emphasised
the difference between directors and members, pointing out that directors are fiduciaries
and have a duty to act in the interest of the company. Also, the power of management is
delegated to the board as a whole and the directors should act collectively. It is therefore
inappropriate for a number of directors to act without meeting or at a meeting of which
notice has not been given to the whole body of directors. 191 The court pointed out that the
company is entitled to have the collective wisdom and contribution of all directors and
a director has a right to paiticipate in the board meeting not merely to vote but also to
express his views on any matters to be discussed in the meetings:

"His contribution as director is not limited to his vote, but extends to his providing
his opinion to the board as part of the collective wisdom that the company is
entitled to obtain from its board." 192

7.087 Irregularity principle cannot be applied if possibility decision would have been
different. In any event, the irregularity principle cannot be applied if there is any
possibility that the decision of the meeting would have been different if the correct
procedure had been observed. In cases where the irregula1ity arose because of a
purpose of denying certain directors the right to attend the meeting in question, the
outcome of the meeting might well be different had they attended and had the correct
procedure been followed. As noted by Reyes J in Christian Emil Toggenburger:

" ... if sufficient notice had been given and more directors had attended, the
advocacy of one or other ... , may have swayed their colleagues to vote against the
resolution"( emphasis added). 193

6.6.4 The Australia11positio11

7.088 Meetings not invalidated unless irregularity causes substantial injustice. In
Australia, the effect of procedural irregularities is provided under s.1322 of the

190 [2012) 5 HKC 51. See also Hansen fntenu,tional Ltd v High Fashion Apparel ltd(unrep., HCA 1724/2014,
[2014) HKEC 1484).
191
[2012) 5 HKC 51, [95). Sec also N Sinclair, et al., Company Directors: ltJw and Liability (Looseleaf, Swecl &
Maxwell 1997).
192 [2012) 5 HKCSI, (97).
193
Christian Emil Togge11burgerv 8eauforte Investors Co1p Lid (unrep., HCMP 37/2007, (2007) HKEC 171), (73).
 BOARDMEETINGS 265

Corporations Act 2001 (Aus). This provision stipulates that company proceedings
(including board meetings, general meetings and creditors' meetings) are not
invalidated by procedural irregularities unless the irregularity causes substantial
injustice. It is helpful to consider the Australian position here as the jurisprudence that
has been developed on s.1322 helps, it is submitted, construct a conceptual framework
on the effects of irregularity.
Procedural vs substantive irregularity. Section I 322 as noted above applies 7.089
only where the alleged irregularity is procedural irregularity as distinguished from
substantive irregularity. 194 How are the t\vo types of irregularities to be distinguished?
In Cordiant Communications (Aust) Pty Ltd v The Communications Group Holdings
Pty Ltd, 195 Palmer J of the New South Wales Supreme Court stated the following:

• "what is a 'procedural irregularity' will be ascertained by first detennining

what is 'the thing to be done' which the procedure is to regulate;
• if there is an irregularity which changes the substance of 'the thing to be
done', the irregularity will be substantive;
• if the irregularity merely departs from the prescribed manner in which
the thing is to be done without changing the substance of the thing, the
irregularity is procedural."

Deliberate withholding of notice to director not mere irregularity. The "substantive 7.090
irregularity" or "procedural irregularity" paradigm seems to be similar to the analysis of
the court in Billion Express Industrial, where it had been considered that the deliberate
withholding of notice to a director was not a mere irregularity. Under the Australian law,
this would amount to a "substantive irregularity". The proceedings cannot be validated
under the Australian s.1322 where there is a substantive irregularity, although Palmer J
had also accepted that in cases where a substantive irregularity could have made no
difference to the result of the meeting, the court may, in the exercise of its discretion
upon equitable principles, make a declaration that the meeting is valid. 196
Substantial injustice shown if different result might have resulted. For the purpose 7.091
of the Australian s. 1322, substantial injustice would be shown if a different result
may have been produced at a company proceeding had a procedural irregularity not
occurred. 197 This is similar to the analysis undertaken for applicability of the common
law irregularity principle, as outlined above.

6.6.S Effect of irregularity 011 third parties

Third party might be entitled to enforce contract despite irregularity. The discussion 7.092
above considers the internal effects on the company in relation to irregularities in

1
" Cordia,11Co1111111111icatio11s GroupHoldi11gsPty Ltd (2005)55 ACSR185,207.
{Aust)Pty Ltd v The Co1111mmica1ions
19
' (2005)55 ACSR 185,206.
196 (2005)55 ACSR 185,206.
197
Mamouney v Soliman (1992) 9 ACSR63, 71; Sutherland (as liq of Sydney Appliances Pty Ltd (in liq)) v Robert
Bosch (Aust) Pty Ltd (2000)33 ACSR680,689; Cordiant Communications (Aust) Pty Ltd v The Commu11icatio11s
Group Holdings Pty Ltd (2005) 55 ACSR 185.207.
266 BOARDOF DIRECTORS

the convening or holding of board meetings. Further considerations arise where the
position of third parties is affected. For example, there may have been an irregularity
at a board meeting where a resolution was passed authorising the company to enter
into a contract with a third party. Notwithstanding the irregularity and the defect in
the company's authorisation of the contract, the third party may be entitled to enforce
the contract as against the company on the basis that the third party dealing with the
company is entitled to assume that the relevant internal governance rules have been
complied with. 198The rules relating to this issue are considered in Chapter 12.199

6.7 Informal decision-making

6.7.1 Written resolutions

7.093 Decisions in absence of meetings: written resolutions require unanimous
approval. The articles of a company commonly contain provisions enabling directors
to make their decisions in the absence of an actual meeting. The Model Articles allow
the directors to make decisions in the form of a written resolution, which is as valid
and effectual as if it had been passed at a directors' meeting duly convened and held.200
The passing of such a written resolution requires unanimous approval by the directors
who are eligible to vote on the matter, and is generally done by each eligible director
signing on one or more copies of the resolution.201
7.094 Requirement to keep record of written resolutions. As noted above,202 a company
is required to retain minutes of its board meetings for at least 10 years from the date
of the meeting. There is no express provision in the Companies Ordinance dealing
with retention of the copies of written resolutions. For private companies adopting the
Model Articles, there is, however, an express requirement in the articles for written
resolutions passed in sole director companies to be retained for at least 10 years.203
For companies which use the predecessor CO, former Table A, reg.108 (repealed)
provides that a written resolution "shall be as valid and effectual as if it had been
passed at a meeting of the directors". On the basis of such a provision, it seems that
the written resolution can be treated as a resolution of a board meeting, and hence the
statutory provision requiring retention of the records ofboard meetings would apply.204
The provision in art.19 of the Model Articles for public companies (Cap.622H) has
wording similar to that quoted above from former Table A reg. I 08 of the predecessor
CO. However, there is no equivalent wording for the provisions in the Model Articles

'" Royal British Bank vTurqua11d(1856) 6 E & B 327, I 19 ER 886; Cltar/erltouseInvestment Tn,sl Ltd v Tempest
Diesels Ltd (I 985) I BCC 99, 544; Poliwka v Heven Holdings Pty Ltd (1992) 8 ACSR 747.
19
• See para.12.056.
200 Model Articles (private companies), arts.7(1)(b) and 8(2); Model Articles (public companies), arts.6(b) and
17-19; fonnerTable A reg.108 (repealed).
1 Model Articles (private companies), art.8(2) (signing or otherwise indicating agreement in writing is sufficient);
2<J
Model Articles (public companies), arts.17 and 18 (signing by each eligible director is necessary). The number
of eligible directors agreeing to the re.solution must satisfy the quorum requirements in order for the resolution
to be effective: Model Articles (private companic.s), arc.8(4); Model Articles (public companies), art.18(2).
202 Sec para.7.074.

2<lJ Model Articles (private companies), art.20(4).

"" See Paper to the Bills Committee on Companies (Amendment) Bill 2002 (May 2003, CB( I)(I 800/02-03(2))
para.7-10.
 BOARD MEETINGS 267

for private companies. Unless it is possible to interpret Cap.622, s.481 as implicitly

covering written resolutions even in the absence of a provision in the articles deeming
the written resolution to take effect as a resolution at a meeting, then it seems that there
may be a gap in the Ordinance dealing with the record-keeping obligation with respect
to written resolutions generally. This gap will be addressed by amendments proposed
under the Companies (Amendment) Bill 2018. Clause 55 of the Bill proposes to amend
Cap.622, s.481 to expressly include a requirement on companies to keep, for I Oyears,
records of all resolutions passed by the directors without a meeting.

6.7.2 /,~formal meetings

Informal meetings valid: business reality. A board meeting can be validly held even 7.095
if it is an informal meeting of the directors. Particularly in cases where the company is
a family business or a closely held private company, directors' meetings are often held
in an informal way and the law recognises this reality.205
Cannot be treated as board meeting if directors do not intend to treat it as such. 7.096
However, a casual meeting of the directors, even if it took place in the boardroom,
cannot be treated as a board meeting if any of the directors do not intend to treat the
meeting as a board meeting. 206The following principles were set out in Billion Express
Industrial Ltd v Tsang Hung Kong. 207 Whether a gathe1ing is a directors' meeting does
not depend on any particular formality. However, a gathering of the directors will be
a directors' meeting only if that was intended to be so on the part of the directors who
attended the gathering. 208 Or to ask the question in another way, do they intend that any
decision made at the meeting would be treated as a decision of the board binding on
the company? The intention of the directors is to be ascertained objectively.

6.7 .3 Decision-making by unanimous consent

Decisions can be made in absence of meetings so long as unanimity. Subject to any 7.097
restrictions in the articles, board decisions can be made in the absence of meetings,
formal or informal, so long as the directors unanimously agree 209 or acquiesce 210
with the decision. The basis of a board decision appears to be what Sir James Bacon
V-C call "combined wisdom" of directors, which "can be most effectively secured
by correspondence, by transmission of messages, or by other means which may be
resorted to". 211
Unanimous and informed concurrence of directors required. The mm1mum 7.098
requirement for the existence of a board decision under the unanimous assent
doctJine appears to be a unanimous and info1med concurrence of the directors

,os Swiss Screens(A11s()Pty Ltd v 811rgess( I987) 11 ACLR 756.

'°" Barron v Poller [1914] I Ch 895.
,o, (2012] 5 HKC 51, [52]-(59].
208 The intentions of directors who did not attend the gathering arc not relevant: [2012] 5 HKC 51, [56]-(59].

'"' 8011ellis"Telegraph Co, Re Collies Claim (1871) LR 12 Eq 246; R1111ci111a11 Pie [1993]
v Walter R1111cima11
BCC 223; Base Metal Trt1di11gLtd v Sha1111,ri11 (2005] BCC 325; Poliwka v 1-fevenHoldings Pty Ltd (1992)
8 ACSR 747.
216 Clumerho11se lnveslmelll 1h1st Ltd v Tempest Diesels Ltd (I 985) I BCC 99, 544.
211
Bonellis"Telegraph Co, Re Collie's Claim (1871) LR 12 Eq 246,258.
268 BOARD OF DIRECTORS

on the matter concerned. 212 The concurrence can be manifested by the directors'
conduct. In Roden v Intl Gas Applications, 213 for example, a secured borrowing
transaction, which was executed by the use of the company's common seal in the
presence of the company's only two directors (one of whom was also the company
secretary) who signed as director and secretary respectively, was held to be valid.
This was notwithstanding the fact that no board meeting was held to consider this
transaction. McLelland CJ held that, on the basis of the relevant provision in the
company's articles, the determining fact of the validity of a transaction of this nature
was the directors' authorisation, the requirement of which was fulfilled. His Honour
added that in any event the presence of the two corporate officers and their actual
concurrence and consensual participation in the sealing process were sufficient to
constitute an effective decision of the directors. In other words, the company's only
two directors' consensual execution of the transaction constituted their concurrence
on the transaction in dispute.
7.099 Limitations as when unanimous consent can be treated as having reached
through board meeting. There are, however, limitations as to the circumstances
in which unanimous consent can be treated as decisions reached through properly
convened board meetings. For example, the fact that every member of the board 214
is aware of a matter does not mean that a disclosure of that matter has been made to
a "meeting of directors" if the duty to disclose to the board is statutorily imposed. 215
Also, an informal agreement between the only two directors who are in the same
time in a trust relationship may not amount to a corporate decision if the agreement
is more appropriately characterised as one between the trustee and the cestui que
trust.216
7.100 Model Articles private companies: provides for possibility of informal decisions.
For private companies adopting the Model Articles (Cap.622H), the possibility of the
directors making decisions informally without a meeting (and without using a written
resolution) is expressly provided for. Under arts.7(l)(b) and 8 ofCap.622H, a decision
of the directors may be made when all directors entitled to vote on the matter indicate
to each other by any means that they share a common view on a matter.217
7.101 Model Articles public companies: decisions must be made at meeting or by written
resolution. For public companies adopting the Model Articles, it is not possible for
the directors to make a decision otherwise than at a meeting or by way of written
resolution. Article 6 of Cap.622H states that those two methods are the only ways
that a decision of the directors may be taken. Accordingly, the common law principles
allowing directors to make a board decision on the basis of unanimous consent are
inapplicable for public companies which adopt the Model Articles.

m Swiss Screens (A11stralia) Pty Ltd v 811rgess(1987) 11 ACLR 756, 758-759; Matilda & /lr,r Memorial
Hospital v David Hentlerso11[ 1997] HKLRD 360.
m (1995) 18 ACSR 454.
2" Poliwka v Heve11f-loldi11gsPty Ltd (1992) 8 ACSR 747.
"' G11i1111ess ( 1990) 2 AC 663 (HL).
Pie v Sa1111ders
216 Poliwka v f-leve11
Holdi11gsPty Ltd (1992) 8 ACSR 747.
"' The number of eligible directors agreeing to the matter must satisfy the quorum requirements in order for the
decision to be effective: Model Articles {private companies), art.8(4).
 BOARD MEETINGS 269

6.8 Technology

Telephonic meetings can be held. There are earlier case authorities that the directors 7.102
must meet in person, unless the company's articles provide otherwise. 218 In the
Australian case Magnacrete Ltd v Robert Douglas-Hill, 219 Perry J held that board
meetings could not lawfully be held by separate phone calls to directors but said that:

" ... [i]t may be that a meeting of directors would be held on a conference
telephone .... " 220

The courts in a number of subsequent Australian cases have expressed their

endorsement of Perry J's view on board meetings by telephone conference. 221 The
uncertainty of the law on the use of technology to call or hold board meetings in
Australia has since been removed by the enactment of s.248D in the Corporations Act
2001 (Aus). Section 248D provides that board meetings may be called and held using
technology consented to by all the directors. There is no equivalent of this provision
for board meetings under Cap.622 in Hong Kong. However, in the Hong Kong case
of Grenville House (JO) v Wong Tak Keung Stanley, 222 Deputy Judge Katherine Lo
upheld the validity of a telephonic conference meeting of the Management Committee
of the plaintiff incorporated owners of building, citing some of the abovementioned
Australian cases as case authorities. 223

Articles can provide for possibility of holding meetings through technology. The 7.103
articles can provide for the possibility of holding meetings through the use of technology
without the need for the directors to meet at the one place. Under the Model Articles
(Cap.622H), a meeting can be held regardless of where a director is, so long as the
directors can communicate with each other any information or opinions on any particular
item of the business of the meeting.224 For companies using the predecessor CO, former
Table A, reg. I (repealed) provides that a requirement in the articles for meetings of the
directors to be held can be satisfied by the meeting being held by such lawful electronic
means and in such manner as may be agreed by the company in general meeting.

6.9 Sole director companies

Sole director: can take decision at any time so long as written record. It is possible 7.104
for a private company to have only one director.225 Where the company has a sole

"' Re Portuguese Consolidated Copper Mines Ltd ( 1889) 42 Ch D I60; Re Bankruptcy of Associated Colour
Laboratories Ltd ( I 970) 12 DLR (3d) 338; ( 1970) 73 WWR 566.
119 (1988) 15 ACLR 325.
'l<l (1988) 15 ACLR 325,333.
'" Bell v 8urto11 (1993) 12 ACSR 325, 328-9; Wag11erv /111/Health Promotio11s(admi11,ipptd) (1994) 15 ACSR
419; Mulco11Pty Ltd v MYT Engineering Pty Ltd ( 1996) 14 ACLC, 1,054, (NSWSC); MYT £11gi11eeri11g Pty Ltd v
Mulco11Pty Ltd (1997) 15 ACLC, 1,057; Re !11ve111ive
Ma1*eti11gPty Ltd (in liq) (2000) 36 ACSR 206.
222 (2012] I HKLRD 315.
"' (2012] I HK.LRD315, (51]-(52].
"' Model Articles (private companies). art.10; M<>del
Articles (public c<>mpanies),
art.8.
22j Cap.622. s.454.
270 BOARD OF DIRECTORS

director, there is no need, nor is it practically possible, for the director to make decisions
through board meetings. The effect of Cap.622, s.483 is that a sole director may make
a decision at any time, which can take effect as a decision of the board, so long as the
director provides the company with a written record of that decision within seven days
after the decision is made. The record is sufficient evidence of the decision having been
taken by the director.226 The record must be retained for at least 10 years from the date
of the decision.227
7.105 Or written resolution. Section 483 expressly excludes the need for a written record
where the decision is made by way of written resolution. The section therefore
contemplates the possibility of a sole director making a decision by way of a written
resolution. This is confirmed in the Model Articles for private companies (Cap.622H),
where arts.7(2)-7(3) allows the sole director to take decisions without regard to any of
the provisions in the articles relating to directors' decision-making. Under art.20(4),
the resolution must be kept for at least IOyears, similar to the requirement for written
records of decisions generally.228

7. DISQUALIFICATION
7.1 Introduction

7.106 Disqualification prov1s1ons. Directors may be disqualified from acting as such

pursuant to Pt.IVA of the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap.32). 229 Unless indicated otherwise, the sections referred to below are
sections in Cap.32.
7.107 Protect public from unfit persons. The purpose of the disqualification provisions is
to protect the general public by prohibiting unfit persons from managing the affairs
of companies. 230
7.108 Grounds. The court may make a disqualification order against a person on any of the
following grounds:

• conviction of certain indictable offences (s.168E ofCap.32);

• certain breaches of Cap.32 or Cap.622 (s. l 68F of Cap.32);
• fraudulent trading or other fraud in winding-up (ss. I 68G and I 68L of
Cap.32);

226 Cap.622, s.483(2).

227 Cap.622, s.483(3).
m However, it seems that this obligation arises only pursuant to the articles rather than pursuant to Cap.622:
sec further para.7.094 above.
"' Part TVAwas outside the scope of the CompaniesOrdinance Rewrite that led to the enactment of Cap.622.
z;o Report of the Review Committee of Insolvency Law anti Practice (Cmnd 8558, 1982) (Cork Report) at [ 1808].
The Hong Kong provisionswere introduced in 1994pursuant to the SCCLR's recommendations:SCCLR, Eighth
A1111ualReport (1991). 96-103; Ninth A1111ualReport (1992), 45-46; Tenth A1111ualReport (1993), 9-12. For
comparableprovisionsin Englan(~see CompanyDirectorsDisqualificationAct I986 (UK) (formerlyCompanies
Act 1948 (UK) s.188 and CompaniesAct 1976 (UK) s.28).
 DISQUALIFICATION 271

• conduct of directors rendering them unfit to manage companies (ss.168H

and 168J ofCap.32).

Disqualification generally discretionary. Generally, the court's power to make 7.109

a disqualification order is discretionary, but in the case of s. l 68H, the court must
disqualify the person if the person is found to be unfit.

7.2 Conviction of certain indictable offences: s.J68E of Cap.32

Types of offences. A disqualification order may be made against a person who has 7.110
been convicted of an indictable offence (whether on indictment or summarily) in
connection with the promotion, formation, management or liquidation of a company; or
in connection with the receivership or management of a company's property; or which
necessarily involves a finding that the person has acted fraudulently or dishonestly:
s.168£ of Cap.32. Common law offences not provided for by way of statute are
indictable offences. Whether a statutory offence is an indictable offence depends
on the particular legislation in question. Persons have been disqualified under this
s. J68E for offences involving false accounting in contravention of Theft Ordinance
(Cap.210), s.18D,231 and under the equivalent English disqualification provision, for
offences involving cheating the Commissioners of the Inland Revenue.232
Applications for order. The Court of First Instance or the court by or before which 7.111
the person is convicted of the offence has jurisdiction to make a disqualification order
under s.168E of Cap.32. 233 Application for a disqualification order against a person
may be made by the Official Receiver, Financial Secretary, or by the liquidator or any
past or present member or creditor of any company in relation to which the person
has committed an offence.234 In the course of a proceeding for the prosecution of an
offence, the court may also make a disqualification order if it thinks fit whether or not
any person applies for such an order.235
Period of disqualification; alternative application under s.168H of Cap.32. 7.112
The maximum period of disqualification that can be made under s.168E of Cap.32
is 15 years (if order made by the Court of First Instance), l O years (District Court)
or 5 years (magistrate). 236 Where a disqualification order is made by a magistrate,
the Official Receiver, or the liquidator or past or present member or creditor of the
company affected can apply to the Court of First Instance for a longer period of
disqualification. 237 Where the court by which the person was convicted has not made
a disqualification order, it is also possible for a separate application to be made to the
Court of First Instance under s. l 68E seeking a disqualification order; however, the

23' liKSAR v Cha11Kar Le1111g

(unrep., CACC 287/2004, [2006] MKEC 181 (disqualification periods of 5 and
10 years for the various defendants).
m R v Youell [2007] EWCA Crim 225 (disqualification for I 0 years under s.2 of the Company Directors
Disqualification Act 1986(UK)).
"' Retitled Cap.32s.168E(2).
234 Cap.32,s.168P(2)(b).
23' Cap.32,s.168P(4).
2.Ki Cap.32,s.168E(3).
237
Cap.32,s.168E(4).
272 BOARD OF DIRECTORS

court will refuse the subsequent application if it amounts to an abuse of process. 238
The court must ask itself whether it would be manifestly unfair to a party or would
otherwise bring the administration of justice into disrepute among right-thinking
people to allow the proceedings to continue. 239 Fairness to the defendant meant that he
should not be exposed to the same claim on multiple occasions by different litigants
unhappy with the outcome of the earlier claim.240
Where a disqualification order has been made under this s.168E as part of the sentence
in criminal proceedings, that in itself does not prevent the institution of Cap.32,
s.168H proceedings for a disqualification order on the grounds of unfitness; and it is
only in rare cases where the s. l 68H proceedings would amount to an abuse of process,
because of the existence of a very substantial overlap between the matters taken into
account in the criminal proceedings and the matters to be taken into account in the civil
proceedings, that it would be appropriate to deny relief under s. 168H.241 Similarly, the
fact that no disqualification order was made in the criminal proceedings does not
mean that proceedings cannot subsequently be brought under s. l 68H.242

7.3 Persistent breaches of Ordinance: s.168F of Cap.32

7.113 Persistent breach of filing obligations. The court may make a disqualification
order against a person who has been persistently in default in relation to provisions
of Cap.32 or Cap.622 requiring any return, account or other document to be filed
with, delivered or sent, or notice of any matter to be given, to the Registrar: s. l 68F
of Cap.32. Under that s. l 68F(2), a person is conclusively proved to be persistently in
default where the person has been adjudged guilty of three or more defaults in relation
to the abovementioned provisions in the five-year pe1iod ending on the date of the
application for the disqualification order. A person is "adjudged guilty" of a default if
the person has been convicted of the relevant offence or the court has made an order
in relation to a default under: (i) Cap.32, s.279 (order requiring liquidator to make
returns, etc.); (ii) Cap.32, s.302 (order requiring receiver to make returns, etc.); or (iii)
Cap.32, s.306/Cap.622, s.898 (order requiring officers to comply with Ordinance). 243
7.114 Persistent. Section 168F(2) of Cap.32 does not provide an exclusive ground for
showing that a person was persistently in default of the relevant provisions, and
so even if a person has not been convicted of the relevant offences, other evidence
can show that the person was persistently in default. 244 In Director of Corporate

238
Secreta,:vof Statefor Busi11ess.
l1111ovatio11 (2014] BCC 581, (38), (39).
a11dSkills v Wesro11
"' Secretary ofSrare_fi>rB11si11ess,
fll11ovario11 [2014] BCC 581, [39).
a11dSkills v Wesro11
2
•• Secrew,y ofSrarefor B11si11ess, a11dSkills v Wesro11[2014]BCC 581, [5 I).
/1111ovario11
24' Official Receiver v Chan Kwong H1111g (unrep., 5 December 2006, HCMP 3294/2004, Barma J, CF!), [ I 9].
Sections 168E and 168Mare different provisions dealing with two different statutory jurisdictions, and hence
in most situations, a subsequent application under s. 168H would not amount to an abuse of process. However,
that is differcm to a situation discussed above (text to rootnotcs 229 to 231) where the two applications arc made
pursuant to the same provision (s. 168H): sec Secrewry of Su,refor 811si11ess, /1111ovc,rio11
a11dSkills v Wesro11
[2014) BCC 581, [21].
2' 2 Secreta,y of St(Jfefor Trade & !11dustryv Rayna [2001] 2 BCLC 48, 57-60; Official Receiver v Chow Hue11 Chu11
Crispi11(unrep., 7 December 2004, HCMP 5002/2003, Kwan J, CF!), [19).
243 Cap.32,s.I 68F(3).

,... Director of Corporate Enforce111e11r v McGowan [2008) IESC 28, (2008) 4 IR 598 (Supreme Court, Ireland).
 DISQUALIFICATION 273

Enforcement v McGowan, 245 the dictionary meaning of "persist" was referred to ("to
continue finnly or obstinately in a state, opinion, purpose, or course of action, esp.
against opposition"), with the cowt adding:

"To persist is to do more than to continue, although repetition is involved. It

implies an element of determination." 246

In that case, the directors were held to have been persistently in default where they had
failed to file annual returns for the company for 13 years.
Applications for order. The Court of First Instance has jurisdiction to make an order 7.115
under Cap.32, s. l 68F.247 It is also possible to apply for an order before the magistrate
in the proceedings for prosecution of the person in respect of the relevant default. 248
Application for an order may be made by the Registrar of Companies, Official Receiver,
Financial Secretary, or by the liquidator or any past or present member or creditor of
any company concemed. 249 In the course of a proceeding for the prosecution of an
offence, the court may also make a disqualification order whether or not any person
applies for such an order.250
Maximum period of disqualification five years. The maximum period of 7.116
disqualification under Cap. 32, s. l 68F is five years. In Director of Corporate
Enforcement v McGowan, above, the court noted that the type of persistent and
flagrant failure by the directors in that case would ordinarily warrant the making of a
disqualification order, but the cowt declined to do so in that case on the basis that a
disqualification order is not punitive but protective and that a disqualification order
in the present circumstances would serve no useful purpose but would disrupt the
ongoing business of the company.251 Jn Re Civica lnvestments, 252 the court held that
longer periods of disqualification should be reserved for cases where the defaults and
conduct of the person have been of a serious nature, for example where defaults have
been made for some dishonest purpose, or wilfully and deliberately, or where they have
been many in number and have not been substantially alleviated by remedial action
and convincing assurances that they will not recur in the future. In that case, there had
been 298 separate defaults in respect of filing of accounts and annual returns. The
court imposed a disqualification order for a period of one year, noting that a longer
period would have been imposed if the defaults had not been substantially remedied.
The court though emphasised that each case must depend on its own facts.253

245 [2008] IESC 28, [2008] 4 IR 598, [37) (dealing with Companies Act 1990 (Ireland) s.160).
246 DirectorofCo,porate E11jorce111e111 v McGowan [2008) IESC 28, [2008) 4 IR 598, [37] (dealing with Companies
Act 1990 (Ireland) s. 160).
''' See s.2 of Cap.32 for the definition of"court".
2"s Cap.32, s.168F(4).
'' 9 Cap.32, ss.168P(2)(a) and 168P(2)(b).
m Cap.32, s.168P(4).
,s, The two directors were husband and wife in a small private company with 12 employees. The following
circumstances were relevant: that the breaches were remedied by the directors filing all outstanding returns; and
an accountant replaced one of the two original directors under a restructuring to avoid repetition of the defaults.
"' [ 1983] BCLC 456 (on the comparable English provision).
"' See also Re Arctic Engineering Ltd (No 2) [ 1986) 2 All ER 346 (accountant had failed to lodge returns as a
liquidator; there was persistent default but cou,t declined to order disqualification in the circumstances).
274 BOARD OF DIRECTORS

7.4 Fraud or breach of duty in respect of company

in winding-up: ss.168G, 168L of Cap.32

7.117 Declared liable for fraudulent trading (s.sl68L) and appears guilty of fraudulent
trading (s.168G). Where the court has declared a person to be liable for the debts or
liabilities of a company under Cap.32, s.275 for fraudulent trading,254 the court may
make a disqualification order against the person: s. l 68L of Cap.32. The court can
make the order on its own initiative. Where, in the course of winding-up, it appears
that a person is guilty of an offence of fraudulent trading under that s.275 (whether
the person has been convicted or not), the com1 can also make a disqualification order
under s. l 68G of Cap.32. Here, the application can be made by the Official Receiver,
the Financial Secretary, or any past or present member or creditor of the company.m
Also, in the course of a proceeding for the prosecution of an offence, the court may
make a disqualification order whether or not any person applies for such an order.256
7.118 Section 168G wider than s.168L. Section 168G of Cap.32 is wider than s.168L in
that under s. l 68G( l )(b ), the court can also make a disqualification order against a
person where, in the course of winding-up, it appears that the person has been guilty,
while an officer, 257 provisional liquidator or liquidator258 of the company, or receiver
or manager of its property, of any fraud in relation to the company or of any breach of
his duty as such officer, liquidator, receiver or manager.
7.119 CFI makes orders. In both ss.168L and 168G ofCap.32, the relevant court for making
the order is the Court of First Instance.259
7.120 Disqualification periods. The maximum period of disqualification under both
provisions is 15 years. The courts divide this into three brackets: the top bracket, over
I O years, is for serious cases; the middle bracket, 6 to I O years, is for serious cases
which did not merit the top bracket; and the minimum bracket, 5 years or less, is for
relatively not very serious cases. 260

7.5 Unfit directors of insolvent companies: s.168H of Cap.32

7.121 Unfit directors of insolvent companies. The court must make a disqualification order
against a person if it is satisfied that:

• the person is or has been a director261 of a company which has at any time
become insolvent262 whether while he or she was a director or subsequently; and

254
See Chapter 20.
255 Cap.32, s.168P(2)(b).
256 Cap.32, s. I68P(4).
2 1
s "Officer" includc.s a shadow director: s. I 68G(3); and sec also s.2 definition of"officer''.
258 For examples involving disqualification of a liquidator, sec Re Well 8011dGroup Ltd (2008] 5 HKLRD 147;

Official Receiver v Chan Kin Hang Danvil [2012] 4 HKLRD J3 (CA).

2
s• Cap.32, s.2 definition of"court".
260 Re Well8011dGroup ltd (2008] 5 HKLRD 147.
261 Director includes shadow director: s.168H(3).
262 Under Cap.32, s. 168H(2), a company becomes insolvent if: (a) the company goes into liquidation at a 1ime when

its assets are insufficient for the paymen1 of its debts and other liabilities and 1he expenses of the winding-up; or
(b) a receiver of the company is appointed.
 DISQUALIFICATION 275

• his or her conduct as a director263 of that company (alone or taken together

with his conduct as a director of other companies 264) makes him or her unfit
to be concerned in the management of a company: Cap.32, s. l 68H(l ).

Applications for order. Applications under s. l 68H are made to the Court of First 7.122
Instance, 265 and may be made by the Financial Secretary or the Official Receiver
if it appears to be in the public interest that a disqualification order should be
made. 266 The liquidator of a company being wound up or a receiver of a company
must report the matter to the Official Receiver (who may then report to the
Financial Secretary) if it appears to the liquidator or receiver that s. l 68H( I) is
applicable to a person. 267
Determining whether unfit: having regard to Sch.15. In determining whether a 7.123
person is unfit to be concerned in the management of a company, the court must
have regard to the matters Iisted in the Sch.15 of Cap.32. 268 These include breaches
of duties by directors, misapplication of company property or money and the extent
of the director's responsibility for the company's failure to comply with specified
provisions of the Ordinance (relating to the company's registers, 269 keeping of
minute books and accounting records, 270 filing of annual returns 271 and preparation
of the company's financial statements 272). For insolvent companies, further matters
are listed, including the extent of the director's responsibility for the insolvency or
for the company's failure to supply goods or services paid for or for the company's
entry into transactions or preferences voidable under Cap.32, ss.182, 265D, or 266;
and failure by the director to comply with specified statutory provisions in the
winding-up. 273
Can take into account factors other than in Sch.15. The courts are entitled to 7.124
take into account factors other than those specified in Sch.15 of Cap.32, whether
or not the conduct involves a breach of directors' duties. 274 A director will be
held to be unfit if the conduct of the director, viewed cumulatively and taking
into account any extenuating circumstances, had fallen below the standards of

263 Conduct as a director of a company that has become insolvent includes the person ·s conduct in relation to any
matter connected with or arising out of the insolvency of the company: s. l 68H(2) of Cap.32.
264 For the scope of relevance of the person's conduct as directors of other companies, see further Re Citre11dServices
Ltd (2008) HKLRD 279 (CA).
265 Section 2 ofCap.32 for definition of"court".
266 Cap.32, s.1681(I). Section 1681(2) sets a time limit of four years from the commencement of winding-up or the
day on which the receiver vacated office (as the case may be), although the coun can grant leave for applications
outside that period.
26' Cap.32, s.1681(3). See also the Companies (Reports on Conduct of Directors) Regulation.
263 Cap.32, s.168K(l).
2~ Cap.622, ss.335, 336, 341, 342,627,628,630,641, 642( I), 643,645,648, 649(1), 650, and 652.
2
7(1 Cap.622,ss.373,374,377, and619.
271
Cap.622.ss.662and664.
272 Cap.622,ss.387and429.
273 These arc Cap.32: ss.190 (statement of affairs); 211 (delivery or property to the liquidator); 228A (special
procedure for winding-up); 241 (meetings of creditors in voluntary winding-up); 274 (proper accounts not kept);
and 300A (infonnation where receiver or manager appointed).
21• Re Copyright Ltd: Official Receiver vCha11C/11111 Yan[2004) 2 HKLRD 113.
276 BOARD OF DIRECTORS

probity and competence appropriate for persons fit to be directors of companies. 275
Directors have been held to be unfit not only for having committed fraudulent
or intentional breaches of fiduciary duties, 276 but also for breaches of duties not
involving dishonesty. 277 If there have been only minor breaches though, then
the court would not conclude that the director is unfit. 278 Simply making a bad
commercial judgment would not render a director unfit to manage companies,
but a director will be held to be unfit if there is incompetence or negligence
in a very marked degree. 279 For example, disqualification orders were made in
Re Peregrine Holdings Ltd; Official Receiver v Philip Leigh Tose,280 where the
directors' serious incompetence in monitoring the company's lending business and
in failing to ensure there were risk management and internal auditing procedures
to assess credit risk had led to the company's collapse in the 1997 Asian financial
crisis. ln line with the duty of care imposed on all directors (whether executive
or non-executive), non-executive directors who do not carry out their monitoring
or supervising role cannot escape a finding of unfitness by having delegated or
relied on others in the company. 281 Isolated failures to comply with statutory filing
obligations might not be sufficient to show that a director is unfit, 282 but persistent
failures can lead the court to conclude that a director is unfit. 283 While previous
cases serve as guidance, they do not operate as precedents and each case depends
on its own facts. 284
7.125 If matters made out court must make disqualificationorder.Where a director is held
to be unfit and the court is satisfied of all the matters in Cap.32, s. l 68H(1), the court must
make a disqualification order. There is no discretion whether to order disqualification.
The minimum period of disqualification is l year, and the maximum period is 15 years.285
The division of the period into three brackets, discussed above for Cap.32, s.168G is also
applicable in relation to s.168H.286 In setting the periods of disqualification, the courts are
to have regard to the purpose of disqualification, namely protection of the public from
persons whose past record as director shows them to be a danger to creditors and others.287
However, deterrence to protect the wider interests of the public is also relevant, but not
punishment.288

"' Re Copyright Ltd; Official Receiver v Chan Chun Yan (2004) 2 HKLRD 113, 123.
276 £.g. Re China Tale111 Ltd (unrep., HCMP 4189/2002, (2004) HKEC 468); Re Hoida
lntlematio11al Develop111e11t
Industrial Co Ltd (2004] I HKLRD 744; Re Regal Motion industries Ltd (2005] I HKLRD 461.
277 E.g. Official Receiver v Li Ping Clumg (unrep., HCMP 511/2003, [2004) HKEC 1516); Re Looe Fish Ltd [ 1993]

BCLC 1160 (allotment of shares for improper purposes though director acted honestly).
"' Re Time Utilising Business Systems Ltd [ 1990) BCLC 568; Re C/adrose Ltd [ 1990] BCLC 204.
279 Re Copyright Ltd: Official Receiver v Chan Chun 1'<111 (2004] 2 HKLRD 113; Re Citrend Services Ltd (2008]
HKLRD 279; Re Stylands Holdings Ltd [2011 J I HKLRD 96; Secreta,y of State v Lubrani [ 1997] 2 BCLC 115.
"" (unrep., 8 October 2004, HCMP 112/2002, Kwan J, CFI).
18' See Re Copyright Ltd, Official Receiver v Chem C/11111 llw [2004] 2 HKLRD I 13, 124.

m Re £CM (Europe) Electronics [ I992] BCLC 814; Re China Talent flltemational Develop111e11t Ltd (unrep.,
HCMP 4189/2002, [2004) HKEC 468), [55].
zu Re Wealth Pr<,pertyAgency Co ltd (unrcp., HCMP 5157/2001, [2003] HKEC 168), [25); Re Hoit/a Industrial Co
Ltd [2004] I HKLRD 744, 75 I.
28' Re Copyright Ltd; Official Receiver v Chan Ch1111 Yan [2004] 2 HKLRD 113.
2s, Cap.321 s.168H(4).
286 E.g., Re Citrend Services Ltd [2008) HKLRD 279, 288 (CA); Re Sty/and l-loldi11gsLtd [2011] 1 HKLRD 96.
281 Re Copyright Ltd. Official Receiver v Chan Clum Yan (2004) 2 HKLRD 113, 123.
288 Re Hoida Industrial Co Ltd (2004) I HKLRD 744, 752.
 DISQUALIFICATION 277

Different brackets of period of disqualification. Examples of cases falling within 7.126

the minimum period (one to five years) include failure to prepare annual accounts, 289
failure to comply with statutory filing obligations 290 and breaches of directors'
duties not involving fraud or intentional wrongdoing. 291 Cases involving intentional
wrongdoing have been considered to fall in the middle bracket (6 to l O years)292 or at
least at the high end of the minimum bracket. 293 Cases involving fraud or deception
fall at least in the middle bracket. 294 Mitigating factors can be taken into account, 295
such as cooperation with the liquidator,296 admission of the allegations before tTial,297
age, 298 health, 299 the length of time that the director has been in jeopardy 300 and the
fact that the person has already served a prison sentence for the same conduct. 301
However, each case depends on its own facts and previous decisions do not operate
as precedents. 302

7 .6 Disqualification of directors after investigation of a company: s. t 68J of Cap.32

Application by Financial Secretary for disqualification order on public interest 7.127

grounds. Inspectors may be appointed by the Financial Secretary to investigate
in a company's affairs, 303 or the Financial Secretary may require the production of
documents or information from a company.304 If it appears to the Financial Secretary
from the inspector's report or from the documents or infonnation obtained that it is
expedient in the public interest that a disqualification order should be made against any
person who is or has been a director or shadow director of any company, the Financial
Secretary may apply to the court for such an order: Cap.622, s.879(6). The court may
make a disqualification order if it is satisfied that his or her conduct in relation to the
company makes him or her unfit to be concerned in the management of a company:
Cap.32, s.1681( I). Section 168K and Sch.15 of Cap.32, and the principles discussed
above, would be relevant in determining the question of unfitness as prescribed in
s.1681.

289 E.g., Re Emperor Hotel Management Co lid [2002) 3 HKLRD 805.

290 E.g., Re WealthPropertyAgency Co lid (unrep., HCMP 5157/2001, [2003) HKEC 168).
291 E.g., Re PeregrineHoldingslid; OfficialReceiver v Philip Leigh lose (unrep., 8 October 2004, HCMl' 112/2002,

Kwan J, CF!) (negligence). But breaches by directors of listed companies could be regarded as being more
serious and can fall within the middle bracket even though there is no fraud: Re Sty/and Holdings Ltd [201 I)
I HKLRD 96; Securities and Futures Commissionv ClteungKeng Citing (2011) 4 HKC 453.
292 E.g., Re WealthPropertyAgency Co lid (unrep., HCMP 5157/2001, (2003) HKEC 168).

293 E.g., Official Receiver v Clteung Gin H1111g

[2005) I HKLRD A I.
294 E.g., Re Hoida Industrial Co Lui [2004) I HKLRD 744; Re Regal Motion Industries Ltd [2005) I HKLRD 461.

295 Re WestmidParkir,gServicesLtd [1998) 2All ER 124.

296 Re PeregrineHoldingsLtd; OfficialReceiver v Philip Leigh Tose(unrep.,HCMP 112/2002, [2004) HKEC 1214).
291 Re PeregrineHoldingsLtd; OfficialReceiver v Philip Leigh Tose(unrep., HCMP 112/2002, [2004) HKEC 1214);

cf Re Yan Chim Kee Co Ltd (unrep., HCMP 407/2004, [2005) HKEC 514).
298 Re fon Chim Kee Co Ltd (unrcp., HCIVIP407/2004, [2005) HKEC 514).

'"' Official Receiver v Cheung Gin Hung (2005) I HKLRD A I.

300 Re Citrend Services Ltd [2008) HKLRD 279.
301 Re Regal Motion Industries Ltd [2005) I HKLRD 461.

302 Re Citre11d Services Ltd [2008) HKLRD 279, 289 (CA).

305 Cap.622,Pt.19Div.2.
304 Cap.622.Pt.19Div.3.
278 BOARD OF DIRECTORS

7.128 Disqualification period. The maximum period of disqualification under s.168J 1s

15 years. 3o;

7.7 Miscellaneous matters

7.7.1 Scope of disqualificatio11 order

7.129 Scope. The order for disqualification that a court can make is an order that the person
must not, without the leave of the court:

• be a director of a company;
• be a provisional liquidator or liquidator of a company;
• be a receiver or manager of a company's property; or
• in any way, whether directly or indirectly, be concerned or take part in the
management, formation or management of a company: Cap.32, s. l 68D(l ).

7.130 Management. "Management" is not confined to actions at the level of the board,
and can cover the making of decisions as to the direction of the company, even
though the decision is subject to approval by a higher officer. However, carrying out
predetermined policies is not regarded as management, even if the person might be
described as a "manager" who is in charge of a branch or division. 306

7.7.2 Leave to ma11agecompanies

7.131 Application can be made during or after disqualification proceedings. A person
who is the subject of a disqualification order may apply for leave of the court to be
involved in management of a company or otherwise participate in a company in one of
the ways prohibited under s.l 68D( I): s.l 68Q( I) of Cap.32. The application for leave
could be made during or immediately after the actual disqualification proceedings. 307
7.132 Parties who must appear; factors to consider. Where the disqualification order had
been made on application by the Financial Secretary, the Registrar, the Official Receiver
or a liquidator, the relevant applicant must appear at the proceedings for leave and call
the attention of the court to any matters which seem to him or her to be relevant, and
may himself or herself give evidence or call witnesses. 308 In deciding whether to grant
leave, the court would take into account factors including on the one hand, the need for
protection of the public, and on the other hand, the need of the disqualified person to
earn a living or the need of a company to have the work done by the disqualified person
for the purposes of its business. 309 The court may grant leave subject to conditions. 3 io

J-Ol Cap.32, s. I 68J(2).

l-06 Cullen v Co,porate Affairs Commission (NSW) (1988) 14 ACLR 789; 0.,111missio11erfi>r Corp<>rate
Affairs v
Bracht [1989)VR 821; Re Campbell[ 1984]BCLC 83.
J-O, SecreU11y [ 1994)2 BCLC I l 3.
ofSt(lle v W<>rth
l-08 Cap.32, s. I 68Q(2).
J-O• Secretc11ycl_/Statev 8ame11[1998) 2 BCLC 64; Re TTL Realisations Ltd [2000) BCC 998.
"" Re Gibson Davies Ltd [I 995) BCC II; Re Majestic RecordingSwdios (I 989) BCLC I; Re ClenawareSystems
and Skills (2015) BCC 283.
Ltd. Harris v Secretaryof Statefor Business,/1111ovatio11
 DISQUALIFICATION 279

7.7.3 Contravention of disqualification order

Liable to imprisonment or fine; personal liability for debts. If a person acts in 7.133
contravention of a disqualification order, the person commits an offence and is liable to
imprisonment for a maximum of two years and to a maximum fine of $150,000. 311 If a
disqualified person is involved in the management 312 of a company in contravention of
a disqualification order, the person would be personally liable for debts and liabilities
of the company incurred at a time when that person was involved in the management
of the company.313
Person acting on instructions of disqualified persons is personally liable for debts. 7.134
Where a person involved in the management of the company acts or is willing to
act on instructions given by a person whom he or she knows to be disqualified, the
firstmentioned person would also be personally liable for the debts or liabilities of the
company incurred at a time when he or she so acts or was willing to act. 314

7.7.4 Foreign comptlnies

Extension to foreign companies. "Company" in Pt.IVA ofCap.32 is defined315 to include 7.135
both Hong Kong companies and registered non-Hong Kong companies,316 and also any
other company (wherever incorporated) which is carrying on or has carried on business
in Hong Kong and which is capable of being wound up under Cap.32.317 The effect of
the extension of the disqualification provisions to foreign companies within the above
descriptions means, for example:

• where a director of a Hong Kong company has been involved in running such
a foreign company, his or her conduct with respect to the foreign company
can be relevant in determining whether the director's conduct comes within
the provisions setting out the grounds for disqualification;
• a person who is director of such a foreign company can also be the subject of
a disqualification order under Cap.32, s.168O; and
• a person who has been disqualified under Cap.32, s.168O will also be
disqualified from acting as a director etc. of such a foreign company.

7.7.5 Procedural matters

COOP Rules. Section 168P(l) of Cap.32 and the Companies (Disqualification of 7.136
Directors) Proceedings Rules (Cap.32K) (COOP Rules) apply to applications for

3 11 Cap.32, s.168M and Sch.12.

312 A person is involved in management if the person is a director of the company or if he is concerned, whether
directly or indirectly, or takes part, in the management of the company: Cap.32, s.1680(4).
3' 3 Cap.32, ss.1680( I)(a) and 1680(3)(a).
3" Cap.32, ss.1680(1)(b) and 1680(3)(b).
"' Sec Cap.32, s. 168C( 1).
316 See Cap.622 1 Pt. I 6.
317 This category of foreign company is caught by reason of s.168C(l)(b) which refers to unregistered companic.s
carrying on or which have canied on business in Hong Kong. For the concept of "unregistered companies",
see Cap.32, s.326.
280 BOARD OF DIRECTORS

disqualification orders other than applications made in the course of a proceeding for
the prosecution of an offence.
7.137 Procedure. The applicant for an order must give at least 10 days' notice of the
intention to seek an order to the person against whom the order is sought. 318
Applications for an order are made by originating summons and the Rules of the
High Court will apply accordingly. 319 The CDDP Rules deal with other matters
relating to the application, service of the summons, the filing of evidence, date of
hearing of the application and time of commencement 320 of any disqualification
order that is made. 321 Under s.168P(I) of Cap.32, the person against whom a
disqualification order is sought may appear and himself or herself give evidence or
call witnesses. On the hearing of any application made by the Registrar, the Official
Receiver, the Financial Secretary or a liquidator, the applicant must appear and call
the attention of the court to any matters which seem to him or her to be relevant,
and he or she may also give evidence or call witnesses. 322 The standard of proof is
on the balance of probabilities as the proceedings for a disqualification order are
civil proceedings. 323
7.138 Carecraft procedure. The courts allow the use of what is referred to as the Carecraft
procedure, which 01iginated from Re Carecraji Construction Co Ltd, 324 to enable the
court to deal with the application summarily in order to reduce the time and cost of
the proceedings. Under this procedure, the parties can provide the court with a set
of agreed facts and an agreed period of disqualification. If the court accepts that a
disqualification order as proposed is appropriate, then the court can make an order
for the agreed period (or a different period if the court determines appropriate). If
the court considers that the agreed facts are insufficient for disqualification, then the
applicant can pursue the application via a full hea1ing, otherwise the court would
dismiss the application.

7.7.6 Public examinations

7.139 Public examination where prima facie case that render him liable to
disqualification. Under s. l 68IA of Cap.32, the Official Receiver may apply for
a public examination of a person if the Official Receiver is of the opinion that a
prima facie case exists against a person that would render him or her liable to a
disqualification order under Pt.IVA of Cap.32. On such an application, the court
may direct the person to attend before the court to be publicly examined as to the

318 Cap.32, s.168P( l ).

31 1} CDDP Rules, r.3.
,io Cap.32, s.168D( I) states that the period of disqualification commences from the date of the order, and CDDP
Rules, r. IOprovides that unless the court orders otherwise, the disqualification order takes effect at the beginning
of the 21 st day after the day on which it is made. The effect is that r. IOsuspends the effect of the order such that
the disqualificacion period commences after the 21 days: Secreta,y oJSu11ejor Tmde ond Industry v Edwards
[ 1997) BCC 222; Re Contine111al AssuranceCo Pie [ 1997) BCLC 48.
'" Sec also the Companies (Disqualification Orders) Regulation for obligations of specified officers of che courc 10
notify the Registrar of che making of disqualification orders or the granc of leave.
-'22 Cap.32.s.168P(3).
"' Re CopyrightLtd; OfficialReceiver v Chan Chun Yan [2004) 2 HKLRD 113, 123-124.
"' (1994) I WLR 172. See Re EmperorHotel ManagementCo Ltd [2002) 3 HKLRD 805.
 DISQUALIFICATION 281

conduct of the business and affairs of a company or as to his or her conduct and
dealings as a director. Section l 68IB of Cap.32 expressly abolishes the privilege
against self-incrimination in relation to an examination under that s. J68IA.

7.7.7 Listed corporations: Securities and Futures Ordinance (Cap.571)

Disqualificationwhere affairsconductedin mannerthat is oppressiveor prejudicial 7.140
to members. In the case of listed corporations, disqualification orders can also be
made under s.214(2)( d) of the Securities and Futures Ordinance (Cap.571) (SFO) upon
the application of the Securities and Futures Commission (SFC). The ground for a
petition under s.214 is that the affairs of the business or affairs of the corporation have
been conducted in a manner that is oppressive or unfairly prejudicial to its members;
involving defalcation, fraud, misfeasance or other misconduct towards its members;
or resulting in its members not having been given all the information with respect to
its business or affairs that they might reasonably expect. The court may order a person
wholly or partly responsible for the business or affairs of the corporation having been
so conducted must not, without leave, be a director or liquidator of a corporation, or
receiver or manager of a corporation's property or business; or in any way, directly or
indirectly, be concerned, or take part, in the management of a corporation. The maximum
period of disqualification under s.214 of the SFO is 15 years. For examples of cases
involving disqualifications under s.214, see Securities and Futures Commission v Fung
Chiu325 and Securities and Futures Commission v Cheung Keng Ching. 326 The Carecraft
procedure can also be adopted for disqualification applications under s.214.327 As to the
SFC's duty of disclosure in disqualification proceedings, see Securities and Futures
Commission v Wong Yuen Yee.328

m (2009] 6 HKC 423 ("misconduct" within s.214 includes breach of directors' duty of care).
'" (2011] 4 HKC 453 (CA). Sec also Securities tmd Fwures Co111111issio11 v Li Hej,111[2017] 4 HKLRD 785;
Re Free111tm Fin TechCo,p Ltd [2018] 1 HKLRD 320.
"' Securities and F,m,res Commission v Ftmg Chiu (2009) 2 HKC 19.
328 (2017) 2 HKC 332.
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 CHAPTER 8

DIRECTORS' DUTIES

PARA.

I. lntroduction ............................................................................................................................... 8.00 l

1.1 Nature of and rationales for duties ................................................................................... 8.00 I
1.1.l Corporate governance ............................................................................................. 8.002
1.1.2 Directors as fiduciaries ........................................................................................... 8.007
1.2 Sources of law and categories of duties ............................................................................ 8.008
1.3 Persons subject to directors' duties ................................................................................... 8.015
1.3.1 DeJure directors ..................................................................................................... 8.015
1.3.2 De.factodirectors ................................................................................................... 8.017
1.3.3 Shadow directors .................................................................................................... 8.018
1.3.4 Corporate directors ................................................................................................. 8.020
1.3.5 Executive officers ................................................................................................... 8.02 l
1.4 To whom are the duties owed? ......................................................................................... 8.023

2. Acting in Good Faith in the Interests of the Company ............................................................. 8.026

2.1 General ............................................................................................................................. 8.026
2.2 Meaning of"interests of the company" ............................................................................ 8.030
2.2.1 General ................................................................................................................... 8.030
2.2.2 Corporate groups .................................................................................................... 8.035
2.2.3 Nominee directors .................................................................................................. 8.037
2.2.4 Companies in insolvency and interests of creditors ............................................... 8.038
2.3 Subjective or objective test? ............................................................................................. 8.044
3. Exercise of Powers for Proper Purposes ................................................................................... 8.047
3.1 General ............................................................................................................................. 8.047
3.2 The proper purposes of a power ....................................................................................... 8.048
3.2.1 Power to deal with company's assets ...................................................................... 8.049
3.2.2 Power to allot shares ............................................................................................... 8.050
3.2.3 Other powers affecting control ............................................................................... 8.054
3.3 The purpose for which a power was exercised ................................................................. 8.06 I
3.4 Good faith of directors .................................................................................................... 8.069

4. Conflict of Interests ................................................................................................................... 8.070

4.1 General ............................................................................................................................. 8.070
4.2 No-connict rule ................................................................................................................ 8.07 I
4.2.1 Equitable duty ......................................................................................................... 8.071
4.2.2 Examples of a conflict of interest.. ......................................................................... 8.072
4.2.3 Disclosure and approval by the general meeting .................................................... 8.078
4.2.4 Modification of duty under the aiticles .................................................................. 8.08 l
4.3 Disclosure of interests-Companies Ordinance ............................................................... 8.088
4.4 Remuneration ................................................................................................................... 8.093
4.5 Loans to directors and similar transactions ...................................................................... 8.097
4.5.1 Loans ...................................................................................................................... 8.097
4.5.2 Quasi-loans and credit transactions ........................................................................ 8.100
284 DIRECTORS' DUTIES

4.5.3 Transactions with connected persons ..................................................................... 8.104

4.5.4 Exceptions .............................................................................................................. 8.106
4.5.5 Anti-avoidance ........................................................................................................ 8.108
4.5.6 Consequences of contravention .............................................................................. 8.110
4.5. 7 Disclosure in financial statements .......................................................................... 8.1 I I
4.6 Connected transactions-listed companies ...................................................................... 8.1 I2

5. Misuse of Assets and Information, and Secret Profits .............................................................. 8.113

5.1 Profit rule ......................................................................................................................... 8.113
5.2 Misappropriation of company assets ................................................................................ 8.1 J 8

6. Diversion of Corporate Opportunities ...................................................................................... 8.120

6.1 General ............................................................................................................................. 8.120
6.2 Former directors ............................................................................................................... 8.126
6.3 Authorisation by company ................................................................................................ 8.129
7. Duty of Care, Skill and Diligence ............................................................................................. 8.132
7.1 General ··············································•·······••·······•········•·······•········•·······•········•········•·········8·132
7.2 Sources of duty ................................................................................................................. 8.133
7.3 Standard ofcare ................................................................................................................ 8.135
7.3.1 Standard under the general law .............................................................................. 8.137
7.3.2 Statutorydutyofcare ............................................................................................. 8.143
7.4 Oversight or monitoring duty ············•·······••·······•········•·······•········•·······•········•········•·········8·149
7.5 Examples .......................................................................................................................... 8.153
7.6 Exercise of independent judgment ................................................................................... 8.159

8. Remedies ................................................................................................................................... 8. I62

8.1 General ··············································•·······••·······•········•·······•········•·······•········•········•·········8·162
8.2 Avoidance of acts or transactions .................................................................................... 8.163
8.3 Restitution of company's property .................................................................................... 8.166
8.4 Disgorgement of profits or benefits ................................................................................ 8.167
8.5 Equitable compensation .................................................................................................... 8.17 I
8.6 Remedies against third parties .......................................................................................... 8.175
8.6.1 Avoidance of transaction ........................................................................................ 8.175
8.6.2 Knowing receipt ..................................................................................................... 8.177
8.6.3 Dishonest assistance .............................................................................................. 8.179
8.7 Breach of duty of care ...................................................................................................... 8.182
8.7.1 Compensation for losses ......................................................................................... 8.183
8.7.2 Causation ................................................................................................................ 8.184

9. Relief from Liability ................................................................................................................. 8.186

9.1 Ratification by company .................................................................................................. 8.186
9.2 Indemnities and provisions exempting liability ................................................................ 8.192
9.2.1 The basic restriction ............................................................................................... 8.192
9.2.2 lnsurance ................................................................................................................. 8.196
9.2.3 Permitted indemnity provisions .............................................................................. 8.197
9.2.4 Effect of articles which modify duty to avoid conflicts of interests ....................... 8.198
9.3 Court's power to grant relief ............................................................................................. 8.199
9.3.1 Proceedings within ss.902-904 .............................................................................. 8.200
9.3.2 Honesty ................................................................................................................... 8.201
9.3.3 Reasonableness ....................................................................................................... 8.203
9.3.4 Ought fairly to be excused ...................................................................................... 8.207
 1. INTRODUCTION
1.1 Nature of and rationales for duties

Duties ensure act properly in interests of company. The law of directors' duties 8.001
regulates certain aspects of the conduct of directors to ensure that they act properly
in the interests of the company when carrying out their functions and exercising their
powers.

1.1.1 Corporate governance

Corporate scandals. The company, its shareholders and others can suffer a loss as 8.002
a result of incompetence of directors in their management of the company or as a
result of directors' abuse of power or fraudulent conduct. In recent decades, the topic
of corporate governance has grown in prominence in corporate law scholarship.'
The issue has also become topical in general public discourse outside the confines
of academic debate. Major corporate collapses sear into the pub Iic consciousness the
problems of corporate wrongdoing, prompting governments to implement legal or
regulatory reforms in an attempt to address the problems. This is illustrated by the
spate of high-profile corporate collapses in the United States in the early years of the
new millennium (Enron,2 Worldcom, Tyco etc.), which led to the enactment of the
Sarbanes-Oxley Act 2002. More recently, the global financial crisis of2007-2008 has
again raised questions of whether existing regulatory schemes are adequate, including
questions of corporate governance and risk management. 3

On corporate governance generally, see, e.g., Robert I Tricker (ed.), Co1port.11e Governance(Ashgate, 2000);
Kenneth A Kim. John R Nofsinger and Derck J Mohr, Corpomte Governance(Prentice Hall, 3rd ed. 2010). On
corporate governance in the Hong Kong context, see Janine Canham and Chris Southorn, "Protecting Shareholders
of Hong Kong Companies" in Nick Ferguson (ed.), Building Valuei11Asia:CorporateGovernancea11dCompliance
for a New Em (Asia Law and Practice, 2000) 29-37; Simon S H Ho, Co,porareGovemance i11Ho11gKong: Key
Problemsand Prospects(Centre for Accounting Disclosure and Corporate Governance School of Accountancy
Chinese University of Hong Kong, 2003); S H Goo and Anne Carver, Co,pomte Go•·erna11ce: the Hong Kong
Debate (Sweet and Maxwell, 2003); Philip Lawton, "Berle and Means, Corporate Governance and the Chinese
Family Firm" (I 996) 6 A11stralia11 Jo11rnalof Corporatelaw 348; Julieanne Doe, "Corporate Governance in
Hong Kong" (1998) 9 J11temational Company and Commerciallaw Review 281; Alex Lau, John Nowland and
Angus Young,"In Search of Good Governance for Asian Family Listed Companies: A Case Study on Hong Kong"
(2007) 28 Companylawyer 306; Simon S H Ho, "The Hong Kong System of Corporate Governance" in A Naciri
(ed.), CorporateGovertumceAroundtlte World(Routledge, 2008) 198-229; Gordon Jones, CorporateGovenumce
a11dComplia11cei11Ho11gKong (2nd edn, LexisNexis, 2015). See also SCCLR, "Corporate Governance Review:
A Consultation Paper on Proposals Made in Phase I of the Review" (July 2001); SCCLR, "Corporate Governance
Review: A Consultation Paper on Proposals Made in Phase II of the Review" (June 2003).
Enron was one of the major energy corporations in the world, and was one of the largest corporations in the
United States (the seventh largest firm by market capitalisation in 2000: William W Bratton, "Enron and the Dark
Side of Shareholder Value" (2002) 76 T11/a11e Law Review 1275, 1276). On the Enron saga and its aftermath, see,
e.g., Jerry W Markham, A Fi11a11cial His101yof Modem US CorporateScandals: From E11ro11 to Reform (M E
Sharpe, 2006); Justin O'Brien (ed.), Goveming the Corporation:Regulation a11dCorpomte Governancein an
Age ofSccmdal and GlobalMarkets (John Wiley and Sons, 2005).
Sec Grant Fitzpatrick, "The Corporate Governance Lessons from the Financial Crisis" (OECD Steering Group
on Corporate Governance, February 2009) <htlp://www.occd.org/dataoccd/32/l/42229620.pdf> [Accessed 24
November 20 I0); Organisation for Economic Co-operation and Development, "Corporate Governance and the
Financial Crisis: Key Findings and Main Messages" (June 2009) <http://www.occd.org/dataoccd/3/I 0/43056196.
pdf> (Accessed 24 November 2010); Robert W Kolb (ed.), lessons fivm the Financial Crisis: Ca11ses,
Conseq11ences and Our Economic Fut11re(\1/iley, 20 I0).
286 DIRECTORS'DUTIES

8.003 Peregrine case. Hong Kong has not been immune to corporate scandals arising
from mismanagement or fraud. 4 Peregrine was one of the major merchant banks
in Hong Kong and its collapse following the 1997 Asian Financial Crisis led to an
investigation under s.143 of the predecessor CO (now s.841 of the current Companies
Ordinance (Cap.622)). 5 Peregrine's failure in January 1998 was triggered by defaults
in loans from Indonesian borrowers. But, while the proximate cause of the collapse
was the crisis in the Asian markets, which few could have predicted, Peregrine was
particularly vulnerable as it had sizeable long-term investments and illiquid trading
assets. The underlying cause of the vulnerability of Peregrine was an inadequate
infrastructure of reporting and accounting procedures, risk management and internal
audit. Underlying these deficiencies were management failures. Peregrine was
directed on a highly informal basis centred on one decision-maker (the chairman).
Management had wide discretion to incur risk, subject only to the personal oversight
of the chairman. The board failed to actively oversee management, and there was
no formal governance structure to put in place a solid system of procedures and
controls.
8.004 Akai case. Another high-profile example is the collapse, in 2000, of Akai Holdings,
a listed company in a corporate group with businesses including the production of
electronic goods and Singer sewing machines. The insolvency of Akai constituted
Hong Kong's largest corporate collapse, with more than US$ l. l billion owed to
creditors when the company entered into liquidation. Subsequent investigations by the
liquidator and the police revealed major fraud by the company chairman in siphoning
assets out of the company.6
8.005 Directors' duties promote good corporate governance. Problems of abuse of power
by directors have been described under economic theories as problems arising from the
separation of ownership and control of companies. 7 If a director is the sole shareholder
and thus I00 per cent owner of the company, then the interests of the director and
the company are aligned. If there are outside shareholders who are not involved in
management, then there could be a divergence in the interests of the directors and
the shareholders. As illustrated by the Akai case, directors can make personal gains
at the expense of the company. Conflicts of interests between the directors and the
shareholders can arise not only in public companies with dispersed shareholdings
but also in companies where the directors are also the dominant or controlling
shareholders - in the latter, the interests of the board-cum-majority owner may differ
from the interests of the minority shareholders. In economic terms, the divergence
in the interests of the managers and the owners of the company and the consequent

' See Alan CW Tang,lnsolvency in China and Hong Kong (Sweet and Maxwell, 2005) paras.4.18-4.72.
5 Richard M Farrant, "Report: Peregrine Fixed Income Ltd (in liq) and Peregrine Investments )foldings Ltd (in liq)"
( 12 February 2000) <http://www.fstb.gov.hk/fsb/ppr/report/doc/report.pdt> [Accessed 24 November 20 IOJ.
• Sec "Akai Case Shows Need for Tighter Oversight" South Chi,u, Morning Post (8 October 2009); Tha11akharn
Kasikom Thai Clwmkat (Mahacho11)v Akai lloldi11gs Ltd (No.2) (20 I0) 13 HKCFAR 4 79; Akai Holdi11gsLtd (i11
liq) v £venvi11 Dynasty Ltd (No.2) [2016) HKC 307.
' Sec, e.g., Michael C Jensen and William H Meek ling, "Theory of the Firm: Managerial Behaviour, Agency Costs
and Ownership Structure" (1976) 3 Jounwl of Fi11a11cial £co11omics 305; and sec also Alex Lau, "The New
Corporate Governance Code for Hong Kong Listed Companies- Part 2: Application of Corporate Governance
Theories" (2005) 26 Company l(ll,yer 345, 345-346.
 INTRODUCTION 287

need for mechanisms to curtail management conduct that is contrary to the owners'
interests is said to give rise to "agency costs". The law of directors' duties provides one
mechanism for reducing such agency costs by deterring directors from acting in their
personal interests at the expense of the company's interests.8
Need for enforcement mechanisms. Directors' duties form part of the legal 8.006
armoury in promoting good corporate governance. While proper corporate
governance cannot be achieved solely through legal regulation, the law imposes
minimum standards that need to be attained in all companies. Yet, notwithstanding
the existence of laws on directors' duties, it is also critical that there be adequate
enforcement mechanisms. In most corporate collapses in Hong Kong, it is up to
the liquidator to attempt to seek recovery against delinquent officers, yet private
liquidators are hampered by insufficient funding and resources. 9 Hong Kong does
not have a full-fledged corporate regulator tasked with investigations of corporate
misconduct generally. 10

1.1.2 Directors as fiduciaries

Fiduciary relationships involve trust and confidence. From the early days in the 8.007
development of company law, the courts already recognised the need to impose duties
on directors similar to the duties imposed on trustees 11 or agents. 12 But while early
case law spoke of directors as trustees or agents of the company, it is clear today
that directors are not trustees of the company or of the shareholders simply by being
directors,' 3 nor are they agents when acting together as the board. 14 By analogy with
trustees and agents, directors are treated as fiduciaries. In equity, persons who are in
a fiduciary position are subject to fiduciary duties. A fiduciary relationship is one of
trust and confidence that usually involves a person (the fiduciary) undertaking to act
for or in the interests of another in the exercise of powers or discretions which affects
the interests of the other person in a way where the latter would be in a position of

8 FrJnk H Easterbrook and Daniel R Fischel, 11,e Economic Structure of Co,porate law (Harvard University
Press, I 99 I) 90-93.
9 Alan CW Tang, Insolvency in China and Hong Kong (Sweet and Maxwell, 2005) para.4.72.
10
The Secu,ities and Futures Commission is primarily a securities regulator rnther than a corporate regulator:
Gordon Jones. Co,porate Govemance and Compliance in Hong Kong (LexisNexis, 20 I2) I04. Compare. e.g.,
the functions of the Australian Securities and Investments Commission in Australia: see Jean J du Plessis,
"Reverberations after the HIH and other Recent Australian Corporate Collapses: The Role of ASIC" (2003) 15
A11stralia11Joumal ofCo,porate law 225.
" fraser v Wltall11y(1864) 2 Hem & M 10, 71 ER 361.
12 Ferguson v Wilso11 ( 1866-67) LR 2 Cb App 77.
" Regal (Hastings) lid v Gulliver [1967) 2 AC 134 (HL); Chinese United Establish111e111s Lui v Cheung Siu Ki
[ 1997] 2 HKC 212, 220. Although directors are not strictly speaking trustees, they are by way of analogy regarded
as trustees in respect of the company's assets for the purpose of their liability to restore misapplied company
assets similar to a trustee:~ liability to restore misapplied trust assets: see Akai Holdings Ltd (in liq) v Evenvi11
Dy11as1y Ltd (No.2) [2016] 3 HKC 307, [53), [57)-(58). They are also regarded as trustees by way of analogy
for the purposes of s.20( 1) of the Limitation Ordinance (Cap.34 7) which provides for no period of Iimitation for
actions by a beneficiary under a trust: (a) in respect of any fraud or fraudulem breach of trust to which the trustee
was a party or privy (sec s.20(1)(a) and Akai Holdings Ltd (in liq) v Eve11vi11 Dynasty Ltd (2012) 4 HKLRD 248
(CA); First Subsea Ltd v Bal/tee Ltd [2018] Ch 25 (Eng CA)), or (b) to recover from the trustee trust property or
the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted 10 his
use (see s.20(1)(b) and Burnden Holdings (UK) Ltd v Fielding (2018) 2 WLR 885, (2018) UKSC 14).
" A11/0111aticSeif-CleansingFilter Syndicate Co Ltd v C1111i11gha111e (1906) 2 Ch 34, 45 (Cozens-Hardy LJ) (Eng CA).
288 DIRECTORS'DUTIES

vulnerability vis-a-vis the fiduciary. 15 There are established categories of fiduciary

relationships under the law, such as director-company,16 trustee-beneficiary, agent-
principal, and solicitor-client. I7 Outside the established categories, a person might be
regarded as a fiduciary vis-a-vis another pursuant to the general tests applied by the
courts in determining whether there is a fiduciary relationship. 18 Fiduciary duties aim
to ensure that the fiduciary exercises his or her powers in the interests of the person
to whom the duties are owed. While different categories of fiduciaries are subject to
similar duties, the precise content and scope of the duties can vary.19

1.2 Sources of law and categories of duties

8.008 Equitable fiduciary duties. Directors' duties in Hong Kong arise mainly from the
general law (mainly equity). Traditionally, the following have been regarded as the
main equitable fiduciary duties of directors:20

• duty to act in good faith in the interests of the company;

• duty to exercise powers for proper purposes;
• duty to avoid conflicts of interests;
• duty not to make secret profits; and
• duty not to misappropriate company assets.

8.009 Proscriptive and non-proscriptive duties. In Australia, a debate has arisen whether
fiduciary duties are confined to proscriptive duties, namely duties which spell out
what a fiduciary cannot do.21 Proscriptive duties are contrasted with prescriptive or
non-proscriptive duties, namely duties which mandate positive action.22 In various
decisions concerning fiduciaries in a different context, it was held by the High Court
of Australia that the only fiduciary duties are the two prosctiptive duties prohibiting
fiduciaries from acting where there is a conflict of interest and from obtaining secret
profits. 23 More recently, in Westpac Banking Corporation v Beil Group Ltd (No.3),24
the Western Australian Court of Appeal affirmed the traditional view in company
law that fiduciary duties of directors also include the duties to act in the interests of

" Kao lee & Yip v Koo Hoi Ya11Donald (2003] 3 HKLRD 296,311; libertarian /1111estme11ts Ltd v Hall (2013)
16 HKCFAR 681, (61)-(68); Aklii Holdings Ltd (i11liq) v Everwi11Dynasty Ltd (No.2) (2016] HKC 307, (468),
(469).
16 Akai Holdings Ltd (i11liq) v Everwin Dynasty Ltd (No.2) (2016) HKC 307, (467).
" Liberrarian InvestmentsLtd v Hall (2013) 16 HKCFAR 681, [53].
" See Kao Lee & Yip v Koo Hoi )vn Donald (2003] 3 HKLRD 296, 311; Hospira/ Products Ltd v United Sta,es
Surgical Co,y, ( I984) 156 CLR 41, 96-97 (Mason J).
" Hendet:Mll v Merrell Syndicates Ltd (No.I) [1995] 2AC 145,206 (HL).
2<l See Bristol a11dWest811ildi11gSocie(y v Mor hew (tla Swpley & Co) [ 1998] Ch I, 16 (Millett LJ); Kao Lee & l'ip v
Koo Hoi YonDonald (2003] 3 HKLRD 296, 312-313; and sec also Julian Svehla, 'Directors' Fiduciary Duties'
(2006) 27 A11strolit111
Bor Review 192.
21 Rosemary Teele Langford, 'The Fiduciary Nature of the Bona Fide and Proper Purposes Duties of Company
Directors: Bell Group Ltd (in liq) v WestpacBanking C<>1p(No.9) (2009) 31 A11stralia11
Bt,r Review 326, 327.
22 Ibid., 327-328.
" Bree11v Williams ( 1996) 186 CLR 71; Pilmer v 11,eDuke Group Ltd (in liq) (200 I) 207 CLR 165.
" (2012) 89 ACSR I, (897)-(933) (Lee AJA), (I 947)-(1978) (Drummond AJA), (2714)-(2733) (Carr AJA).
 INTRODUCTION 289

the company and to exercise powers for proper purposes. The judges noted that the
Australian High Court decisions restricting fiduciary duties to proscriptive duties did
not deal with company directors. As stated by Drummond AJA:

"[i]f the fiduciary obligations of directors to their company are limited to the two
proscriptive ones, not to benefit and not to be in a conflict situation, an extensive
revision of the law governing directors' duties must have taken place without any
examination of that particular issue at the intermediate or final appellate leve1";25
and furthermore ...
"until the High Court declares the law to be otherwise, long established authority
requires the duties of company directors to act bona fide in the interests of the
company and to exercise their powers for proper purposes to be accepted as
fiduciary ones even though they may require the directors to take positive action."

However, in the Hong Kong Court of Final Appeal decision of 1\1/oulinGlobal Eyecare
Holdings Ltd v Olivia Lee Sin Mei, 26 Gumrnow NPJ (with whom the other judges
agreed) spoke of the non-proscriptive duty of directors to act in the interests of the
company as being an "equitable duty" only, contrasting it with proscriptive fiduciary
duties in the "strict sense" of the term "fiduciary". 27 It appears that those comments
were by way of obiter only, but they do suggest the possibility of the proscriptive
model of fiduciary duties being applicable in the context of company directors as
well. In the absence of a decision squarely dealing with the issue at the final appellate
level, it seems that the position is not entirely settled. But in line with the approach
adopted in the Westpac Banking Corporation decision, this Chapter proceeds on the
traditional view that the duties to act in the interests of the company and for proper
purposes are also fiduciary duties. Whether fiduciary duties are confined to the two
proscriptive duties has implications on whether the principles on accessorial liability 28
for a director's breach of fiduciary duties are applicable in respect of breaches of non-
proscriptive duties. 29
Companies Ordinance (Cap.622) s.465: statutory duty of care. Apart from the 8.010
above general law duties, directors are also under a duty to exercise due care, skill
and diligence. This duty originally arose in equity (although it is not regarded as a
fiduciary duty30) and under the common law in the tort of negligence (and where
applicable, pursuant to contract). Under Cap.622, the duty of care of directors operates
as a statutory duty in place of the general law: s.465 of Cap.622.

,s (20 I2) 89 ACSR I, [ I962].

26 (2014) 17 HKCFAR 466, [35)-[36).
27 Gummow NPJ is a former Justice of the High Court of Australia and was a participant in the joint judgment in
Pilmer v The Duke Group Ltd (i11liq) (200 I) 207 CLR 165 which affirmed the proscriptive model or fiduciary
duties.
28 Sec 8ames v Ad((Jl(1873-74) LR 9 Ch App 244 and paras.8.177 to 8.180 below.
2• See Hon T F Bathurst and Sienna Mcrope, "It Tolls for Thee; Accessorial Liability after Bell v Westp(1c"(2013)
87 Ausm1/ia11Law Jour11al831.
30 He11dersonv Merrett Syndicates lid (No.1) (1995) 2 AC 145,205 (HL); Permane11tB11ildi11g Society v Wheeler
(1994) 14ACSR 109, 158.
290 DIRECTORS'DUTIES

8.011 Can be breach of more than one duty. The various duties, above, focus on different
aspects of the responsibilities of directors in the exercise of their functions, but
depending on the circumstances, particular conduct of a director can amount to
breach of more than one of those duties.
8.012 Cap.622: Pt.11. Apart from s.465, the Ordinance also contains other provisions that
supplement the general law duties, in particular in relation to conflicts of interests:
Cap.622, Pt.11. 31
8.013 Listed companies. For listed companies, there are also further restrictions that apply
under the Listing Rules, including Chapter 14A dealing with co1mected transactions.
8.014 Guide on Directors' Duties. The Companies Registry has issued a "Guide on
Directors' Duties", 32 which sets out various duties of directors. The guide is not
itself a law but is the Registry's summary of the legal duties of directors. The guide
is intended to promote awareness among directors of their duties under the law.33

1.3 Persons subject to directors' duties

1.3.1 De jure directors

8.015 De jure directors. De Jure directors 34 are of course subject to the general law duties
and statutory provisions which apply to directors.
8.016 Alternate directors. Alternate directors35 are regarded as de Jure directors during the
period when they act in place of their appointors and would also be subject to the
duties of directors under the law in that period.36

1.3.2 De facto directors

8.017 De facto directors. "De facto directors" are subject to the same duties of de Jure
directors. 37 This was so held from the early days of company,38 for otherwise persons
would be able to escape their legal obligations by avoiding formal appointment to

" The Ordinance also imposes other obligations on directors such as obligations to ensure that proper accounts are
kept or obligations to ensure that requisite documents are filed with the Registrar. These types of obligations are
outside the scope of this Chapter.
" Available at the Companies Registry website: <http://www.cr.gov.hk>.
33 In its review of corporate governance in 2001-2004, the SCCLR declined to recommend the statutory codification
of directors' duties. Instead, the SCCLR recommended the publication of non-statutory guidelines to help
directors better understand their responsibilities: see SCCLR, "Corporate Governance Review: A Consultation
Paper on Proposals Made in Phase II of the Review" (June 2003) paras.7.01-7.12. For an earlier empirical study
on the extent to which Hong Kong directors are aware of their legal duties, see Abdul Majid, Low Chee Keong
and Krishnan Arjunan, "Company Directors' Perceptions of their Responsibilities and Duties: A Hong Kong
Survey" (1998) 28 HKLJ 60.
" Sec Chapter 7.
JS Sec Chapter 7.
36 Mt1rkwellOros Pry Ltd v CPN Diesels (Qld) Pty Ltd (1983] 2 Qd R 508, 519; A11stralit111 l11stit111e
of Fitness Pry
Ltd v AustralianInstitute of Fitness (Vicffas) Pty Ltd (No.3) (2015) 109 ACSR 369, [ 128].
" Karla 0110Ltd v Bulen/ Eren Bayram (2017) 2 HKLRD 124; liquidator of WingFai ConstructionCo Ltd (in liq)
v Yip Kwong Robert (2018) I HKC 472; Ultrafiwne (UK) Ltd v Fielding (2005) EWHC 1638, (1257), and see
also the discussion in CorporateAffairs Commissionv D1ysdale(1978) 141 CLR 236.
'8 Re Canadi.a11 land Reclaimingand Colonizing Co (Coven/Jyand Dixons Case) (1880) 14 Ch D 660.
 INTRODUCTION 291

the board. De facto directors are also covered by the provisions of the Companies
Ordinance (Cap.622) refe1Ting to "directors" due to the s.2 definition of"director". 39

1.3.3 Shadow directors

Shadow directors:better view that general law duties apply to them. The s.2 definition 8.018
of "director" does not refer to "shadow directors" and so references in the Companies
Ordinance to "directors" will not generally cover shadow directors. But there are specific
provisions in the Ordinance that expressly apply to shadow directors, including provisions
which impose liabilities on "responsible persons" (as defined in Cap.622, s.3 40) in
connection with contraventions of the Ordinance. As to the general law duties, in Yukong
Line Ltd of Korea v RendsburgInvestmentsCorp of Liberia (No.2),41 Toulson J considered
that a shadow director who controlled the company's activities "undoubtedly" owed
fiduciary duties to the company. However, in Ultra.frame(UK)Ltd v Fielding,42 Lewison J
declined to follow that approach, taking the view that the facts in the Yukongcase indicated
that the person was more of a defacto director than a shadow director. Lewison J held that
the mere fact that a person is a shadow director of a company does not mean that fiduciary
duties will be imposed on him or her, although his Lordship accepted that where the
shadow director takes on a role beyond indirect influence to assume control of a company
asset, then fiduciary duties will be imposed in respect of the use of the asset.

The issue was raised again in VivendiSA v Richards,43 where Newey J held that shadow
directors would owe fiduciary duties to the company in relation, at least, to the directions or
instructions that they give to the deJure directors. This includes owing a duty of good faith
to act in the interests of the company when giving such directions or instructions. Newey
J took the view that Lewison J in the Ultrafi·arne case had understated the extent to which
shadow directors owe fiduciary duties. In R v R, Munby P agreed with Newey J's analysis.
44

However, as the UK Court of Appeal has subsequently noted, the law is not yet entirely
settled.45 The better view is that, because of the actual control and influence of a shadow
director over the company, the general law duties of directors should apply to shadow
directors to the extent of their control and involvement in the company's activities.46

39 On de facto directors, sec further Chapter 7.

'" The concept of"rcsponsible person" is adopted in Cap.622 instead of the concept of"ofriccr in default" under
Cap.32, s.351 (2).
" (1998) I WLR 294,311.
" (2005) EWHC 1638, [1279)-(1290).
" (2013) BCC 771, (143).
" (2014) 2 FLR 699, [9)-(10).
" Sukhor11chki11 v VanBekestei11(2014) EWCA Civ 399, (40)-(41).
•• This view is supported in Paul L Davies and Sarah Worthington, Gower's P1·i11cip/esof Modern Compa11yLaw
(I0"'edn, Sweet and Maxwell 2016) [16-9); John De Lacy, "The Concept of a Company Director: Time for
a New Expanded and Unified Statutory Concept?" (2006] Journal of Business Law 267, 295. For a critique
of Ultraframe on this question, see also D D Prentice and Jenny Payne, "Directors' Fiduciary Duties" (2006)
122 Law Quarterly Review 558. The codified directors' duties in the UK are now expressly extended to
shadow directors: see Companies /\et 2006 (UK) s.170(5) (as amended by the Small Business, Enterprise and
Employment Act 2015). Sec also Dairy Co111ai11ers ltd v NZI Bank Ltd ( 1995) 13 ACLC 3211. 3238 where
Thomas J of the New Zealand High Court held that a shadow director can owe a common law duty of care to
the company. However, the relevant statuto1y definition of "director" in the New Zealand legislation included
shadow directors (Companies Act 1955 (NZ) s.2, as amended by the Companies Amendment Act 1982; the 1955
Act is now repealed; cf Companies Act 1993 (NZ) s.126) and Thomas J 's view that it would be appropriate to
impose common law duties on shadow directors was made by way of analogy with the treatment of such persons
as directors generally under the Companies Act.
292 DIRECTORS'DUTIES

8.019 Cap.622: duty of care applies to shadow directors. For the statutory duty of care, the
Ordinance expressly applies the duty to shadow directors. 47

l.3.4 Corporate directors

8.020 Body corporate subject to same duties as natural persons. A director which is a
body corporate will also be subject to the same duties as directors who are natural
persons. Bodies corporate can be de facto 48 or shadow directors, 49 and would also be
subject to directors' duties to the extent that such duties apply to de facto or shadow
directors, respectively. In some circumstances, the directors of a corporate director
could also be regarded as de facto or shadow directors of the company in which the
corporate director is a director/ 0 and in this situation the first-mentioned directors
could be subject to duties owed to the last-mentioned company.

1.3.5 Executive officers

8.021 Executive officers owe fiduciary duties. Both executive and non-executive directors
are subject to the duties of directors. Executive officers or senior managers who are not
directors are arguably also subject to the fiduciary and common law duties similar to
that of directors. Under the common law, employees of a company owe a duty of care
to the company in carrying out their functions. 51 Employees might also owe fiduciary
duties to the company, but the scope and nah1re of the duties of employees would not
be coextensive with that of directors. 52 However, the situation is arguably different for
employees who are executive officers. Jn the Canadian decision of Canadian Aero
Services Ltd v O 'Malley/3 it was held that two persons appointed as president and
executive vice-president of the company had responsibilities as senior officers and
were in "top management" rather than "mere employees", and as such owed a more
exacting duty to the company similar to that owed by directors to the company. Persons
within the statutory definition of "manager" 54 could well be regarded as occupying a
fiduciary position similar to directors, but in any particular case the extent to which
a senior manager or officer would be subject to fiduciary duties comparable with

" Cap.622, ss.465(5).

48
See Aktieselskabet Dansk Skibsfi11a11siering v Wheelock Marden & Co Ltd (1998) 3 HKC 153; Standard
Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR I.
.. Re Hydrodan (Corby) Ltd [ 1994] BCC 161, sub nom Re Hydrodam (Corby) Ltd [ 1994] 2 BCLC 180.
"' As for the tests to determine whether this would be the case, see Chapter 7.
51 Lister v Romford Ice and Cold Storage Co Ltd [ 1957) AC 555 (HL).
" It is sometimes said that the employer-employee relationship is one of the established categories involving
fiduciaiy relationships: see Kao lee & Yip v Koo Hoi 1011Donald (2003) 3 HKLRD 296; Hospital Products
Ltd v U11itedStmes Surgical Co,poratio11(1984) 156 CLR 41, 96-97. However, it appears that the employee's
duty of good faith or fidelity (which is an implied duty in the contract of employment) is different to fiduciary
duties which are imposed in equity. The contractual obligations or functions ofan employee may in the particular
circumstances give rise to fiduciary duties as well, but the employment relationship does not of itself lead an
employee to be a fiduciary: Notti11ghamU11iversi1y v Fishel [2000) IRLR 471; lo11111ar Global Risks Ltd v West
(201 I) IRLR 138.
sJ (1974) SCR 592.
" Under Cap.622, s.2, "manager" means a person who, under the immediate au1hority of the board of directors,
exercises managerial functions. Managers, so defined, are "officers" wilhin s.2 of lhe Ordinance. Compare the
definition of "officer" in s.9 ofrhc Corporal ions Act 200 I (Aust) and 1hcpersons held 10 be officers in A11strolia11
Securities a11d/11vest111en1s Commission v Adler (2002) 41 ACSR 72; Australian Securities a11dJnvest111e11ts
Commissionv MacD011ald(No.I I) (2009) 256 ALR 199 (general counsel and chief financial officer of company).
 INTRODUCTION 293

a director will depend on the nature of the position held and the responsibilities
attaching to the position in the company concerned. Imposition of fiduciary duties on
senior executives similar to those of directors can be justified on the basis that such
officers in large public companies may exercise greater management power than the
non-executive directors who might only meet as a board a number of times per year_ss

Duty of care owed by officers. Although the statutory duty of care in Cap.622, s.465 8.022
applies only to directors, executive officers would be under a common law duty of
care, whether pursuant to contract or tort.

1.4 To whom are the duties owed?

Owed to company. Directors' fiduciary duties and the duty of care are owed to the 8.023
company such that the company is the proper plaintiff to bring proceedings against a
director for breach of duty.56
Not owed to members except in special circumstances. Directors' duties are not owed 8.024
to the members individually,57but there may be special circumstances where directors will
owe fiduciary duties to individual members directly pursuant to the general principles on
fiduciary relationships.58 This may be the case where directors act as the shareholders'
agents in selling their shares.s9 It is also arguable that directors can owe fiduciary duties to
individual shareholders when they act on behalf of the company in purchasing the shares of
the shareholders.60 Whether that is the case may depend on factors such as the shareholders'
dependence on the directors for information and advice, the existence of a relationship of
trust and confidence, the significance of the transaction for the parties, and the extent of
any positive action taken by or on behalf of the directors to promote the transaction.61
Take into account interest of creditors when company in vicinity of insolvency. As 8.025
will be discussed below,62 directors have a duty to take into account the interests of
creditors when the company is in the vicinity of insolvency, but it is clear that the duty
is not owed to creditors directly such as to give creditors any direct cause of action
under the general law for breach of the duty.63

" E.g., see Melvin A Eisenberg, "The Duty of Corporate Directors and Officers" ( 1989-1990) 51 University of
Pittsb11rghLaw Review 945, 949-950; John C Coffee, "Beyond the Shut•Eyed Sentry: Toward a Theoretical View
of Corporate Misconduct and an Effective Legal Response" (1977) 63 Virginia UI\V Review 1099, 1110, 1142.
See also Corporations and Markets Advisory Committee, "Corporate Duties Below Board Level" (April 2006),
available at the CAMAC website: <http://www.camac.gov.au>.
56 Foss v Harbollle (1843) 2 Hare 461, 67 ER I 89. See Chapter 10.
57 Percival v Wright ( I902) 2 Cb 421; M11ltinatio1u,I Gas a11d Petrochemical Co v Multi11atio11alGas a11d
Petmchemical Services Ltd [ 1983] Ch 258,288.
" Peskin vAnderson [2001] I BCLC 372,379.
59 Briess v Woolley [1954] AC 333 (HL); Allen v Hyett (I 914)30 TLR 444 (PC).
64 In Percival v Wright [1902) 2 Ch 421, the court declined to find that the directors owed fiduciary duties to
shareholders in connection with the company's purchase of their shares. But the correctness of this approach
has been doubted in later cases: Coleman v Myers [1977] 2 NZLR 225; Re Chez Nico (Resttwra11ts) Ltt/[!992]
BCLC 192, 208; Platt v Plan [1999) 2 BCLC 745; Br111111inglwuse11 v Glavanics (1999) 46 NSWLR 538. Sec
also Peskin vAnderso11 [2001] I BCLC 372.
61 Colemtm v Myers [ 1977) 2 NZLR 225.
62 Sec para.8.038 below.
•, E.g. Yukong Line Ltd of Korea v Re11dsb11rgJ11vestme11tsCorp of Liberia (No.2) (1998) I WLR 294,312; Bi/ta
(UK) Ltd v Nazir (No.2) (2015) 2 WLR I 168, (125).
294 DIRECTORS' DUTIES

2. ACTING IN Gooo FAITH IN THE INTERESTS OF THE COMPANY

2.1 General

8.026 Akai case: breach of duty where company obtained loan to discharge debt of
another. Directors must exercise their powers bonafide (in good faith) in what they
consider is intheinterestsofthecompany. 64 Forexample, inAkaiHoldings Ltd (in liq) v
Thanakharn Kasikorn Thai Chamkat (Mahachon}, 65 Ting, the chairman and chief
executive officer of Akai, 66 caused Akai to obtain a loan from the Thai Farmers
Bank (TFB), with the loan funds used to repay the liabilities of another company
(Singer) that were owed to TFB. Ting also caused Akai to grant a charge in favour
of TFB over certain shares owned by Akai as security for the loan. Akai did
not have any equity interests in Singer but the two companies had a common
controlling shareholder (STC Canada) which owned 43 per cent of Akai and 50
per cent of Singer. Ting owned 45 percent of STC and was the chairman and
CEO of that company, and was also a chairman and director of Singer. When Akai
defaulted on the loan, TFB enforced its security and later claimed as a creditor in
the subsequent liquidation of Akai for the balance owing. The liquidators of Akai
brought proceedings against TFB to set aside the loan and security agreements.
Whether the liquidators could succeed depended in part on whether Ting was in
breach of fiduciary duty owed to Aka i. At first instance, Stone J held that Ting was
in breach of duty by failing to act in the interests of Akai in respect of the loan
and security transactions. Those transactions placed on Akai a considerable debt
burden of another company, in which Akai had no equity interests. This was held to
be plainly to the financial detriment of Akai. Stone J's decision on TFB 's liabilities
was reversed on appeal but his Lordship's conclusions of breach of fiduciary duty
were affirmed by the appeal courts. 67
8.027 Acting contrary to constitution. In the Akai case, Ting had also failed to comply
with the company's constitution by failing to bring the loan and security transactions
to the attention of the board for the board's consideration and approval, and by
failing to disclose his conflicts of interest to the board. Stone J accepted that acting
contrary to the constitution can also amount to a breach of the duty to act in the
company's interests.68

64 Re Smith & Fawce/1 Ltd [ 1942) Ch 304.

65 (unrep., HCCL 59/2004, [2008) HKEC 874).
66 Akai was incorporated in Bermuda, and strictly speaking, the principles applied in the case in respect of directors'
duties would be the principles under the common law of Bermuda (on the basis that the law of the place of
incorporation applies in respect of marters of internal management: see Perga111011 Press Ltd v Maxwell [ 1970]
I WLR 1167; Lord Collins (ed.), Dicey Morris and Collins'The Conj/ict of Laws, Vol 2 (Sweet and Maxwell,
15th ed.2012) para.30-028), but there was no suggestion in the judgmcnt that there is any difference between the
common law of Bermuda and that of Hong Kong in respect of directors' fiduciary duties.
67
Akai Holdings Ltd v Kosikom Bonk pie [2010] 3 HKC 153 (CA); Thonoklwr11 Kosikom Thai Chomka!
(Mahachon) v Akoi Holdings Ltd (No.2) (2010) 13 HKCFAR 479, [146].
68 Sec also Tom Po Kei v Tom 80 Kin {No. I) [2011] 1 HKLR.O 537, [ 18]-[ 19]; Clark v C11tla11d (2004] 1 WLR 783;
Re Oxford Benefit 811ildi11gand investment Society ( 1886) 35 Ch O 502; Leeds Estate B11ildi11g a11dlnvestme11t
Co v Shepherd ( 1887) 36 Ch O 787.
 ACTINGIN GOOD FAITHIN THE INTERESTS OF THE COMPANY 295

Other examples. Other examples where the courts have found that the directors had 8.028
failed to act in good faith in the interests of the company include the following:

• Where the directors dismissed the staff of the company to paralyse the
company's operations after the owner of the company raised suspicions that
the directors were diverting business of the company to themselves. 69
• Where the director caused the company to provide loans to himself for his
personal use in circumstances where the loans were unsecured, interest-free
and did not have any fixed term for repayment. 70
• Where the director caused the company to sell its properties at a gross
undervalue to persons associated with him under what the court regarded as
a sham auction. 71

• Where the directors have used the companies to engage in an unlawful tax
evasion scheme which, once revealed, resulted in detriment to the companies
arising from the imposition of various liabilities, penalties and interest. 72

Where a person is director of more than one company. Where a director of a 8.029
company is also a director of another company 73 which may have a competing interest
with the first company, the director's duty to act in good faith in the interests of the
first company is not reduced by the director's conflicting duties owed to the second
company.74 At a minimum, the director needs to disclose the conflict of interest, 75 but
depending on the circumstances the director may also be required to take positive
action to prevent or limit the damage to the first company in order to comply with
the duties owed to the first company.76 Jn Australia, it has been said that what action,
above and beyond mere disclosure, the director must take will vary from case to case
depending on the subject matter, the state of knowledge of the adverse information, the
degree to which the director has been involved in the transaction, whether the director
has been promoting the cause, the gravity of the possible outcome, and the exigencies
and commercial reality of the situation. 77 Positive action by the director for the benefit
of one company may of course place the director in breach of duties owed to the

69 YJK Co Ltd v Kazuo Aizawa (unrep., HCA 8177/1998, [ 1999) HKEC 700).
1• Re Artshop Design a11dConstruction Ltd (unrep., HCMP 2508/2006, (2007) HKEC 1859).
71 Me,mo Leendert Vosv Global Fair !11d11strial Ltd (unrep., HCA 4200/1995, (2009) HKEC 1952). For other cases
dealing with disposal of the company's assets at an undervalue, see Bisltopgate hives/111e11t Ma11ageme111 Ltd v
Maxwell (No.2) ( 1994) I All ER 261; Ave/i11g8<1,fordLtd v Perio11Ltd (1989] BCLC 626. See also Gard11erv
Parker (2004] I BCLC 417. cf Rege11tcrestPie v Cohen (2001] 2 BCLC 80.
12
BC/ Fi11a11ces P1y Ltd v Bi11etter(No.4) (2016) 117 ACSR 18. The court stated more generally that the interests
of a company do not include activities or ends that would require the company to do any act prohibited by law (at
[262]). See also AustralasianAgric11/t11ral Co v Oat1110111Pty Ltd ( 1992) 8 ACSR 255; but cjA11stralia11
Securities
a11d!11vestme11tsCom111issio11 v Maxwell (2006) 59 ACSR 373.
n As to the possibility of a person acting as director for more than one company see para.8.077 below.
'' Sec Fitzsim11101,sv R (1997) 23 ACSR 355; Duke Group Ltd v Pilmer (1999) 31 ACSR 213.
'5 Sec para.8.070 below.
76
Fi1zsi111111011s
v R (1997) 23 ACSR 355; Duke Group lid v Pi/111er (1999) 31 ACSR 213.
17 Fitzsimmons v R (1997) 23 ACSR 355. Where positive action is required of the director to protect the company,
simply refraining from vO(ing or abseming him or hcrselr from the meeting will be insufficient. But for an
exampleof a case wheredisclosureand refrainingrrom votingwassufficient,see Ce11tofanfiv Eeki111itor Pty Ltd
(1995) 15 ACSR 629.
296 DIRECTORS' DUTIES

second company (including, for example, duties of confidentiality). If the conflicts of

interest are irreconcilable, the proper course for the director is resignation. 78

2.2 Meaning of "interests of the company"

2.2.1 General
8.030 Means interests of members as general body. The "interests of the company" means
the interests of the members as a general body.79 Generally, the interests of shareholders
will be their financial interests flowing from maximisation of the company's profits,
and so, for example, it would not be permissible for directors to make significant gifts
of the company's assets to its employees to the financial detriment of the shareholders. 80
The duty to maximise shareholder value does not mean that the directors must focus
on short-term profits for existing shareholders, as directors would be entitled to act in
the long-term interests of the shareholders as a whole.81
8.031 Can provide benefits to employees and others. The primacy of shareholders' interests
also does not mean that the directors are prevented from providing any benefits to
employees or others at all. As stated by Bowen LJ:

"A railway company ... might send down all the porters at a railway station to
have tea in the country at the expense of the company. Why should they not? It is
for the directors to judge, provided it is a matter which is reasonably incidental
to the carrying on of the business of the company, and a company which always
treated its employees with Draconian severity, and never allowed them a single
inch more than the strict letter of the bond, would soon find itself deserted ...
The law does not say that there are to be no cakes and ale, but there are to be no
cakes and ale except such as are required for the benefit of the company."82

8.032 Attractive remuneration to employees can be consistent with duties; other

examples. Thus, attractive remuneration for employees or promotional offers for
customers can be consistent with the directors' duty to act in the interests of the
members as a whole since such action can contJ.ibute to the commercial success of
the company. Giving to charities can also be a legitimate action on the basis that it
enhances the company's reputation and goodwill.
8.033 Company's constitution and objects can shape duty. The company's constitution
and objects can shape the requirements of the duty.83 For example, directors of non-
profit or charitable companies would be required to act to promote the company's
objects without the need to seek profits to financially benefit the members. 84

78 Fitzsimmons v R (1997) 23 ACSR 355,359.

79 Parke v Daily News Ltd (No.2) [ I962] Ch 927; Greenhalgh vArdeme Cinemas Ltd [ 1950] 2 All ER 1120, 1126.
But for the situation where the company is insolvent or on the verge of insolvency see para.8.038 below.
so Huuon v West Cork Railway Ca ( 1883) 23 Ch D 654; Parke v Daily News Ltd (Na.2) [ 1962] Ch 927.
8' Darva/1 v North Sydney Brick and Tile Ca Ltd ( 1987) 16 NSWLR 212; Dtnvsan Intl Pie v Cac11sP(tfan Pie [ 1989]
BCLC 233. Sec also Ptll'amo,1111 Inc v Times Inc 571 A 2d 1140 (1989).
Commu11ict1tio11s
82 l-/1111011
v West Cork Railway Ca (1883) 23 Ch D 654,673.
83 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285,291.
80 See also CAS (Nominees) Ltd v Nottingham Forest Pie [2002) I BCLC 613,641.
 ACTING IN GOOD FAITH IN THE INTERESTS OF THE COMPANY 297

Duty where different classes of members or groups of members. Where the 8.034
directors' decision does not affect the interests of the corporate entity as a whole but
impacts only on the rights or interests of members as against each other, then the duty
to act in the interests of the company requires the directors to act fairly as between the
different classes and groups of members. 85

2.2.2 Corporate groups

Director's duty to act for benefit of their company rather than other companies 8.035
in group. It is not uncommon for companies within a group to enter into transactions
with each other, such as transfers of assets or provision of loans and guarantees. But
directors are at risk of breach of duty if they act in the interests of other companies
in the group without regard to the interests of the company in which they are director
and for which they are acting in the transaction. As each company is a separate entity,
the directors' duty is to act for the benefit of their company rather than simply for the
benefit of other companies in the group. 86
Where group of companies, derivative benefit might suffice. However, where the 8.036
transaction benefits the related companies or the corporate group as a whole, a director
might not be regarded as being in breach of duty if some benefit could also flow to the
company in question. 87 Such a derivative benefit to a company would be more readily
apparent in the case of a parent company which provides financial or other support for
a subsidiary, as the parent can obtain benefits (e.g. greater dividends) if the subsidiary
is commercially successful. But it may be more difficult to show a derivative benefit
in the case of a subsidiary giving some advantage to a parent company 88 or a company
providing assistance to a sibling company as illustrated by the Akai case, 89 as discussed
above.

2.2.3 Nominee directors

Nominee directors: duty to act in interest of company not appointer. Where a 8.037
particular member or other person has a special power to appoint one or more directors
to the board, the director is commonly referred to as a nominee director. For example,
the shareholders' agreement of a company with three equal shareholders might give
each shareholder the power to appoint one person to the board. Commercially, the
nominee director might be expected to act to protect the interests of the appointer.
However, under the law, the director's fiduciary duty is to act in the interests of the

" Mills v Mills (1938) 60 CLR 150, 164; Re BSB Holdi11gsLtd (No.2) [1996) I BCLC 155; Passport Specu,I
Opportunities Master Fund LP v eSwr Holdings Lui [20 I I] 4 HKC 62, [ 147}-[148].
86
Akai Holdings Ltd v Tha11aklramKasikorn Thai Cltamkat (Mahachon) (unrep., HCCL 59/2004, [2008] HKEC
874) (CFI); Securities a11dFutures Com111issio11v Li Heju11(2017] 4 HKLRD 785; Liquidator ofWi11g Fai
Construction Co Ltd (i11liq) v Yip Kwong Robert (2018] I HKC 472, (235]; Walker v Wimbourne (1976) 137
CLR I, 7 (Mason J); Maronis Holdi11gsLtd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404.
87 Chanerbridge Corp v lloyds Bank [ 1970] Ch 62, 74; £quiticorp Fintmcial Services Ltd v £quiticorp Financial
Services Ltd (1992) 9 ACSR 199,240; Maronis Holdings Ltd v Nippo11Credit Austmlia Pty Ltd (2001) 38 ACSR
404, [ 190)-[ 192].
88 ANZ Executors tmdTrustees Co Ltd v Qintex Australia Ltd (1990) 2 ACSR 676,687.
89 Akai Holdings Ltd (in liq) v T/ranakham Kasikom Thai Chamkat (Malwcho11)(unrcp., HCCL 59/2004, [2008]
HKEC 874), [334); Akai Holdings Ltdv Kasikom Bank Pel (2010) 3 HKC 153(CA). See also Walker v Wimborne
(1976) 137 CLR I.
298 DIRECTORS' DUTIES

company rather than the appointer.90 In Re Neath Rugby Ltd (No.2), Hawkes v Cuddy, 91
the English Court of Appeal noted that nominees may also owe duties to the appointer
if they are employees or officers of the appointer, or by reason of an agreement with the
appointer. However, such duties cannot detract from the director's duty to the company
of which he is a director. The Court of Appeal accepted that nominee directors, without
being in breach of their duties to the company, may take the interests of the appointer
into account, provided that their decisions are in what they genuinely consider to be
the best interests of the company. This approach reflects the general principle that the
scope of fiduciary duties can be moulded to an extent by the agreement of the parties
concerned, but because it cannot be expected that the shareholders would have agreed
that the nominees could act purely in the interests of the appointers without regard to
the interests of the company, the nominee directors are not permitted to act in a manner
detrimental to the interests of the company.92

2.2.4 Companies in insolvency and interests of creditors

8.038 Where a company is near insolvency, directors must take into account interest of
creditors. Where the company is insolvent or is near insolvency, the fiduciary duty
of directors to act bona jide in the interests of the company requires the directors to
take into account the interests of the general body of creditors. 93 If the company is
insolvent, the shareholders have nothing further to lose since the insolvency means
that there are insufficient funds to repay all creditors and so the shareholders will not
recover any of their investment in a winding-up. 94 But the creditors' interests are at
stake since the more funds the company loses, the less the creditors will receive in the
winding up. Accordingly, the "interests of the company" now becomes the interests of
the creditors rather than that of the shareholders. Since the requirement to take into
account the creditors' interests is regarded as part of the duty to act bona fide in the
company's interests, the duty is not owed to creditors directly and creditors do not have
standing under the general law to bring an action against the directors for a breach of
duty.95 The duty is owed to the company, and usually in a winding-up, it will be the
liquidator taking action for the company against the wrongdoing directors.

90 Scoilish Co-operative Wholesale Society Ltd. v Meyer [ 1959) AC 324.

91 (2009) 2 BCLC 427. See also Re Broadcasti11gStatio112GB Pty Ltd (1964-65) NSWR 1648; Berlei Hestia (NZ)
Ltd v Femyho11gh[ 1980] 2 NZLR 150; Australia11Institute of Fitness Pty lid v Australian Institute of Fitness
(Vic/Tas) Pty lid (No.3) (2015) 109 ACSR 369, [106).
92 See also SGH Ltd v FCT(2002) 210 CLR 51, 72. See further Elizabeth Boros, 'The Duties of Nominee and
Multiple Directors: Part I" ( I989) IO Compan_vLawyer 211. But it may be that the articles could expressly
modify a nominee director's duty to the extent that the director is to solely consider the appointer's interests:
Boros, above, 21Cr 17.
93
Tmdepower (Holdi11gs)Ltd v Tmdepower (Hong Kong) lid (2009) 12 HKCFAR 417, [l28]-[131); Chin11111g
Futures lid v Lai C/reuk Kwan Arthur [ 1994] I HKLR 95; Extra111011ey Ltd v Chan, Lai, Pang and Co [ 1990]
2 MKLR 268; Nicholson v Permakraji (NZ) [1985] I NZLR 242; Kinsela v Russell Kinsela P(y Ltd (1986) 4
NSWLR 722; WestpacBanking Co,pomtion v Bell Gmup Ltd (in liq) (No.3) (2012) 89 ACSR I; Bi/ta (UK) Ltd v
Nazir (No.2) [2015] 2 WLR 1168, [123]-[126].
"" Sec Chapter 20.
9' Kuwait Asia Bank EC II National Mutual Life Nominees Ltd [ I 991] 1 AC 187; }'r,kong line lid of Korea v
Rendsburg Investments Corp of liberi(1 (No.2) [1998) 1 WLR 294; Bi/ta (UK) Ltd v Nazir (No.2) [2015]
2 WLR 1168, [ 125]. But creditors have standing to bring an action to restrain a breach of fiduciary duty under
Companies Ordinance (Cap.622) ss.728-729 (see Chapter 10) and also to institute misfeasance proceedings
where the company is in winding up (Cap.32 s.276) (see Chapter 20).
 ACTING IN GOOD FAITH IN THE INTERESTS OF THE COMPANY 299

Taking into account interest of creditors: example of Tradepower case. In 8.039

Tradepower (Holdings) Ltd v Tradepower (Hong Kong) Ltd, 96 the main assets of the
company (Holdings) were the 3,749 of 3,750 paid up "A" shares in another company
(THK). THK's principal assets consisted of various commercial properties. The two
directors of Holdings were the only shareholders of the company and they were also
the beneficial owners of the remaining "A" share held by another entity. The directors
passed a resolution approving of a scheme whereby Holdings' shares in THK would
be converted into "B" shares which for all practical purposes carried no rights at
all. The effect of the scheme was that Holdings' interests in THK were transferred
to the other shareholder of THK for no consideration. The court found that, at the
time of the transaction, Holdings was insolvent as it did not have sufficient assets to
meet a substantial judgment debt. The Court of Final Appeal approved of overseas
cases setting out the duty to take into account the interests of creditors at a time when
the company is insolvent, and held that on the facts it was clear that the directors of
Holdings were in breach of fiduciary duty.
Duty arises near insolvency, doubtful insolvency, or where action would jeopardise 8.040
insolvency. The duty to have regard to the creditors' interests arises not only where
the company is already insolvent (under either the cash flow test or the balance sheet
test of insolvency97), but also where the company is near insolvency or is of doubtful
solvency, or if a contemplated payment or other course of action would jeopardise the
company's solvency.98 For example, in Grove v Flave/, 99 the company was in arrears
by some 120 days payment of its external creditors and had failed in its negotiations
for an increased bank loan. In these circumstances, the court accepted that although
the company was not insolvent, it was in such a poor financial position that there was
a real risk of insolvency, and it was therefore incumbent on the directors not to act in
a way which prejudices the interests of creditors. Even if the company is not presently
in the vicinity of insolvency, the directors can still be in breach of duty by failing
to consider the creditors' interests where the proposed expenditure is so significant
that it threatens the continued existence of the company.100 It is necessary to examine
whether, at the time of (or as a result of) the director's actions, there is a real risk of
the company's creditors being left unpaid; and in this assessment, it may be necessary
to consider the wider context in which the company in question operates and known
significant trading events which, it is reasonably foreseeable, will impact materially in
the near future on the trading viability of the company.101 But in circumstances where
the company is making profits and is "amply solvent", the mere fact that the directors
make commercially unsound decisions which subsequently lead the company to

96 (2009) 12HKCFAR417.
9' Nicholson v Permakraji (NZ) [ 1985] I NZLR 242. On the cash flow and balance sheet tests, see Chapter 20.
98 Nicholson v Permakra/i (NZ) [ 1985] I NZLR 242, cited with approval in Tradepower (Holdings) Ltd v Tradepmver
(Hong Kong) Lid (2009) 12 HKCFAR 417, [ 136].
99 (1986) 43 SASR 410. See also Jejfree v Natio,u,i Companies and Securities Commission (1989) 15 ACLR 217;

BT! 2014 LLC v Sequ(11,aSA [2017] 1 BCLC 453; and sec further Andrew Keay, "The Director's Oury to Take
into Account the Interests of Company Creditors: When is it Triggered?" (2001) 25 Melbourne University Law
Review 315.
Fwures lid v U,i Cheuk Kwan Artlwr [1994] I HKLR 95, 115-116; Re Horsley & Weight Ltd (1982)
,oo Chi1111111g
Ch 442,455.
101
Re PV Solar Solutions Ltd (i11liq) [2018) I BCLC 58, (2017) EWHC 3228 (Ch), [73).
300 DIRECTORS'DUTIES

financial difficulties does not necessarily mean that the directors would be in breach
of duty. The risk of whether the transaction is likely to put the company into insolvency
must be assessed at the time when the decision was made. 102
8.041 Determining whether director breached duty to take into account creditors'
interest: earlier cases suggest objective test. There is some conjecture as to whether
an objective or subjective test is applied to determine whether a director is in breach of
the duty to take into account the interests of creditors. In Nicholson v Permakraft (NZ)
Ltd (in liquidation), I03 Cooke J expressly held that an objective test is applied such
that directors would be found to be in breach of duty where a payment was made to
the prejudice of the creditors at a time when a likelihood of loss to them ought to have
been known by the directors. On this view, a director could not escape liability purely
on the basis that he or she was not aware that the company was insolvent or that the
company's financial position was otherwise precarious, nor solely on the basis that he
or she subjectively felt that the conduct would not lead to prejudice for the creditors. 104
8.042 Recent English decisions suggest subjective test (subject to qualifications). Since
the duty to take into account creditors' interests is usually seen as part of the duty to act
bona fide in the interests of the company,'°5 the English courts now apply a subjective
test (following the general approach that applies to the duty to act in the company's
interests). 106 On this approach, directors would not be in breach of duty if they have in
good faith considered that the transaction or decision in question would not be prejudicial
to the creditors. 107This was the position adopted in Re HLC Environmental Projects Ltd
{in liq)1°8 and in a number of subsequent English decisions. 109 However, the English
courts have also held that the application of the subjective test is subject to the following
qualifications. Firstly, the subjective test only applies where the directors have actually
considered the interests of the company. 110This means that the directors must have had
regard to the interests of the creditors. 111 If they fail to do so, the Charterbridge 1I2 test
applies, namely whether there is a breach of duty depends on whether an honest and
intelligent man in the position of the directors of the company concemed could, in the
circumstances, have reasonably believed that the decision was for the benefit of the

"' See Re Horsley & Weight Ltd [ 1982) Ch 442 where there was no breach of duty in the circumstances of the case.
"' ( 1985) I NZLR 242, 250.
""' See also Re Horsley & Weight Ltd (1982) Ch 442,455; Robert P Austin and Ian M Ramsay, Ford. Austin a11d
Ramsay's Principles of Corporations Law (16th edn, LexisNexis 2015), [8.100].
1
°' See para.8.038 above.
106 See also Westpac Banking Corpora/ion v Bell Group Ltd (i11liq) (No.3) (2012) 89 ACSR I, (923] per Lee AJA,

but c/the views of Drummond AJA at (2031), (2032), (2043), (2073].

101 In applying the subjective test, the court is entitled to examine the objective evidence to determine whether to

believe the directors. For example, the fact that the directors' belief was unreasonable may provide evidence
that it was not in fact honestly held at the time: see Extrasure 7i-avel ln.<11/'(/11ceLtd v Scattergood [2003)
I BCLC 598, [90].
108 [2014] BCC 337, [91], [92].
10• Re Miera Contracts Ud (in liq) (2016) BCC 153; Re Pro4Sport ltd (in liq) (2016] BCC 390; Re PV Solar

Solwions Ltd (in liq) [2018] I BCLC 58, [2017) EWHC 3228 (Ch). See also Andrew Keay, "Directors' Duties
and Credi.tors' Interests" (2014) 130 Law Q11t1rterlyReview 443, 449-451.
11
• Re 1-fLC Environmental Projects Ltd (in liq) (2014] BCC 337, [92); Re PV Solar Solwions Ltd (in liq) (2018] 1

BCLC 58, (2017) EWHC 3228 (Ch).

111
Colin G1".)'er& Associates Ltd v London Wharf (Limehouse) Ltd (2003) 2 BCLC 153, (87).
112
Char/erbridge Corporation Ltd v Lloyds Bank Ltd [ 1970) Ch 62.
 ACTING IN GOOD FAITH IN THE INTERESTS OF THE COMPANY 301

creditors. 113 Where the directors have not put their minds at all to the creditors' interests,
mere honesty is insufficient to prevent a finding of a breach of duty.114 Also, where a
very material interest, such as that of a large creditor (in a company of doubtful solvency,
where creditors' interests must be taken into account), is umeasonably (i.e. without
objective justification) overlooked and not taken into account, the objective test must
equally be applied. Failing to take into account a material factor is something which goes
to the validity of the directors' decision-making process. 115 Even if the test for breach
of the duty to take into account the interests of creditors is primafacie a subjective one,
there will be a breach of the separate duty of care of directors if the directors have acted
negligently.116 That duty has objective aspects in determining whether the directors have
failed to meet the required standard of care. 117
Whether breach depends on size of transaction and company's financial position. 8.043
Whether the directors would be in breach of duty depends on an assessment of both
the size of the transaction concerned and the company's financial position: "[T]he
plainer it is that it is the creditors' money that is at risk, the lower may be the risk
to which the directors ... can justifiably expose the company." 118 The repayment
of intemal creditors' 19 in preference to outside creditors can amount to a breach of
duty.120 Where the directors allow a company in financial difficulties to continue
trading, there may be a breach of duty if the risks are unjustified, having regard to the
need to preserve the assets of the company available for creditors. However, this does
not mean that directors would always be prevented from continuing the business of the
company when the company is near insolvency. For example, in FaciaFootwearLtd v
Hinchcliffe, 121 it was held that the decision of the directors to continue trading did not
amount to a breach of duty in circumstances where the directors were proceeding with
discussions about refinancing arrangements which may have saved the company's
situation and which, if they were to be brought to fruition, required the company to
continue trading in the meantime. Although the continuation of trading might mean
a reduction in the dividend eventually payable to creditors, the creditors' only chance
of full payment was the refinancing that could support a continuation of profitable
trading. As there were reasonable prospects of success in obtaining the refinancing,
the continuing of trading did not mean that creditors' interests were ignored.

113
Brady v Brody [ 1987) BCC 535, 552; Colin Gwyer & Associates Ltd v London Wha,f {Limehouse) Ltd (2003) 2
BCLC 153, (84)-(87); Re HLC Environme11talProjects Ltd (in liq) [2014) BCC 337, [92).
"' See also Kinsela v Russell Kinsela Pty Ltd (i11liq) (1986) 4 NSWLR 722; Tmdepower (Holdings) Ltd v
Tradepower (Ho11gKong) Ltd(2009) 12 HKCFAR 417.
115 Re HLC E11viro11mental Projects Ltd (i11liq) (2014) BCC 337, (92].
116 See Cltingtung Futures lid (i11liq) v Lai Clteuk Kwm, Arlltur [1992) 2 HKC 637.
117
See para.8. I44 below.
"' Ki11selav Russell Kinsela P1y Ltd (1986) 4 NSWLR 722, 733.
119 That is, directors or shareholders of the company who are owed amounts in the capacity as creditor.
IZ<l West Mercier Safetywear Ltd v Dadd [1988) BCLC 250; Grove v Flavel (1986) 43 SASR 410. As for payments to
certain external creditors to the detriment of other creditors, there is English authority that this can also amount to
a breach of duty: Re HLC £11vir(mme11/(II Projects Ltd (i11liq) [2014) BCC 337, [ I06); and sec also Andrew Keay,
"Directors' Duties and Credi1ors' lncerescs" (2014) 130 law Quarterly Revi•"v 443, 466-471. In Moulin Global
£yecare Holdings lid v Olivia Lee Sin Mei (2013) 1 HKLRD 744, [27)-(34), the Hong Kong Court of Appeal held,
in a strike-out application, that there is no breach since the company's net asset position is unaffected; bul on appeal,
the Court of Final Appeal accepted that the opposite view is reasonably arguable and ruled that the liquidator's case
in that regard should not be struck out and should be allowed to go to nial: (2014) 17 HKCFAR 468, (57)-(58).
121
(1998) I BCLC 218.
302 DIRECTORS' DUTIES

2.3 Subjective or objective test?

8.044 Subjective test applies where directors have put their mind to whether transaction is
in interests of company. Where the directors have put their mind to the matter whether
the act or decision is in the interests of the company, and they honestly believe that it is
so in the interests of the company, then generally there will not be a breach of the duty to
act in good faith in the interests of the company even though their belief might have been
unreasonable. 122 The courts apply a form of business judgment rule under the common
law in that the courts have made it clear that they do not act in a supervisory role over the
board's management decisions which have been honestly arrived at, and that the courts do
not review the merits of management decisions. 123 If the conduct is clearly detrimental to
the company, or if the decision was one which no reasonable director could have regarded
as being in the interests of the company, then the court might decline to accept the evidence
of the director that he or she honestly believed that the action was for the benefit of the
company. 124 But this does not detract from the subjective nature of the test. 125
8.045 Objective test applies if directors failed to consider company's interests. Yet,
despite the test being primarily a subjective test, the courts have imported some
objective elements which may be applicable in particular situations. The duty to act
in the interests of the company has objective elements which are applied where the
directors have failed to consider the question of whether the action is in the interests of
the company. Here, mere subjective honesty is not enough to avoid a breach of duty. 126
In Charterbridge CorJJLtd v Lloyds BankLtd, 127 Pennycuick J held that if the directors
have failed to specifically consider the company's interests, then whether there is
a breach of duty depends on whether an intelligent and honest man in the position
of a director of the company concerned could, in the whole of the circumstances,
have reasonably believed that the transactions were for the benefit of the company. In
Australia, this test has been applied in a number of cases, 128 but a doubt has also been
expressed on whether the test is correct. In Equiticorp Finance Ltd (in liq) v Bank
of New Zealand, 129 an alternative test was suggested, namely that there would be a
breach of duty in all cases where the directors failed to consider the interests of the
company, although no consequences would flow from the breach if the transaction was,

122 Regentscrest pie v Colte11[2001) 2 BCLC 80, 105; Extras11reTiuvel lnsura,1ce Ltd v Sca/fergood (2003) I BCLC
598, [90], [97].
123 Howard Smith lid vAmpol Petroleum Ltd (1974) AC 821,832; Menno Lee11dertVos v Global Fair Industrial lid
(unrep., HCA 4200/1995, (2009] HKEC 1952), [205).
124 See Bell Group Ltd v Westpac Banking Corpomtio11 (No.9) (2008) 70 ACSR I, [4608], (4619]. But on appeal,
the West Australian Court of Appeal ap1>earedto take the view that even where the directors honestly believed
they were acting properly, there can be a breach of the duty to act in good faith if the decision was irrational or
manifestly or plainly unreasonable: Wes1pacBa11ki11gCo17Joratio11v Bell Group Ltd (in liq) (No.3) (20 I 2) 89
ACSR I, (923] (Lee AJA), [1980]-[ 1983](Drwnmond AJA), (2772] (Carr AJA).
"' Regentscrest Pie v Cohen (2001] 2 BCLC 80, 105. But c(We.Hpac Ba11ki11g Co1pora1ion v Bell Group Ltd (in liq)
(No.3) (2012) 89 ACSR 1: sec also note 107 above.
126 Me11110 Leenderl 11>sv Global Fair /11d11strialLtd (unrcp., HCA 4200/1995, [2009) HKEC 1952), [205).
121 [1970) Ch 62, 74.
128 Reid Murray Holdings Ltd v David Murray Holdings Pty Lid (1972) 5 SASR 386; Austrtdia11National Industries

Ltd v Greater Pacific Investments Pty Ud (No.3) (1992) 7 ACSR 176; Linto11v Te/net Pty Ud(1999) 30 ACSR 465.
m (1993) 32 NSWLR 50, 148. This approach was followed in Maro11is Holdings Ltd v Nippon Credit Austrolia Pty
Ltd (200 I) 38 ACSR 404.
 EXERCISE OF POWERS FOR PROPER PURPOSES 303

objectively viewed, in the interests of the company. In Akai Holdings Ltd v Kasikorn
Bank pie, 130 the Hong Kong Court of Appeal preferred the Charterbridge approach to
that in Equitico,p, although it was unnecessary to resolve the issue in that case.
Directors must consider relevant factors and exclude from consideration irrelevant 8.046
factors. In addition, there are a few decisions where the courts have held that directors,
when exercising fiduciary powers, must take into account relevant factors and exclude
from consideration inelevant factors. 131 The concept applied here is similar to that
applied in public law,132 although the scope of application of such concepts in the
context of directors is unlikely to be as wide-ranging as in public law.The Court of First
Instance in Hong Kong has indicated a degree of acceptance of the above principle.
In Passport Special Opportunities Master Fund LP v eSun Holdings Ltd, 133 Barma
J observed that "the court should not set itself up as a tribunal to which disgruntled
litigants can appeal against the commercial decisions of the board", but held that if the
board's decision was reached with no consideration at all for a clearly relevant factor,
then the decision is open to challenge. A breach of the duty to consider relevant factors
and exclude from consideration irrelevant factors renders the exercise of the directors'
power voidable. In that case, the directors caused the company (eSun) to enter into a
placement agreement with a broker. eSun indirectly held interests in itself through
cross-holdings with another company (Lai Sun Development). The effect of the share
allotments was to dilute the interests of Lai Sun Development in eSun, which resulted
in a net reduction in the value of the assets of eSun. The court held that the fail me of
the board to consider the adverse financial impact on the company of the placements
amounted to a breach of duty to take into account relevant factors. However, the court
declined to set aside the allotments as innocent third parties (allottees) had already
acquired property rights.

3. EXERCISE OF POWERS FOR PROPER PURPOSES

3.1 General

Consider power, primary purpose for which it was exercised, and then whether 8.047
that was permissible. Directors, as fiduciaries, must exercise their powers for proper
purposes.'3 4 In Howard Smith Ltd v Ampol Petroleum Ltd, 135 the Privy Council held
that, to ascertain whether there is a breach of duty, it is necessary to start with a
consideration of the power in question and to ascertain the natme of the power and the
purposes for which the power was granted. The court must then detennine as a matter

13<l [2010] 3 HKC 153, [64).

,;, /i1mter v Senate Support Services Lid [2005] I BCLC 175; Passport Special Opportunities Master Fund LP v
eSun lioldi11gsLid [2011] 4 HKC 62; and see also Equitable life Assurance Society Hyman [2000] 2 WLR 798,
[ 17)-[21] (Lord Woolf) (Eng CA) (although this approach was not relied upon by the other judges in that case,
nor before the House of Lords: (2002) I AC 408).
'" Sec also Re a Compa11y,ex parte Glossop [ I 988) I WLR I068.
'" [2011] 4 HKC 62, (142)-[156). Sec also Re 8a11kof East Asia Ltd (2015] 4 HKC 137, (22)-(23] where Harris .I
expressed agreement with Barma J's approach.
,,.. HowardSmith Ltd v Ampol Petrole11111
Ltd [ 1974) AC 821; Ui:mgKam San v Ye1111g
WingKe1111g (2007) 2 HKLRD 267.
'" (1974) AC 821. See also Re Bank of East Asia Ltd (2015) 4 HKC 137, (15)-(20).
304 DIRECTORS' DUTIES

of fact the primary purpose for which the power was exercised and whether that is
within what is permissible.

3.2 The proper purposes of a power

8.048 Determining purpose: examination of the power-conferring provision. Directors'

powers are generally conferred by the articles, and it is necessary to look at the
particular provision in question to determine the purposes for which the power was
granted. The particular power-confening provision might not expressly set out the
scope or pmposes of the power, but the provision would be construed in the context
of the articles as a whole, 136 and in light of the nature of the company, and its objects
and activities. 137Ascertaining the purpose of the power where the provision confening
it is silent depends on an inference from the mischief of the provision, which is itself
deduced from its express terms, from an analysis of their effect, and from the court's
understanding of the business context. 138 Some examples of directors' powers are
discussed below.I39

3.2.J Power to deal with compa11y's assets

8.049 Assets of company must be used for corporate purposes. The funds and assets of
the company must be used by directors for corporate purposes. 140 Thus, for example, it
would be an improper exercise of power by directors if they apply company assets for
their own personal benefit rather than for the benefit of the company. I41

3.2.2 Power to allot shares

8.050 Power to allot shares primarily given to raise capital, not to destroy existing
majority. The power to allot shares is primarily given to enable capital to be raised
when required for the purposes of the company,'42 although there may be occasions
when the directors may fairly and properly issue shares for other reasons. I43 But
directors are ordinarily not entitled to allot shares for the purpose of destroying an
existing majority (of shareholders in general meeting) or creating a new majority
which did not exist previously.I44 The reason for this general principle has been said
to lie in the distinction between the indirect proprietorship and ultimate control of the
shareholders on the one hand and the powers of management entrnsted to the directors

136 See Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821, 837.
131 See Austm/ia11 Metropolitan L/feAssuro11ce Co Ltd v Ure (1923) 33 CLR 199,217; and see also Gaima11v
Natio11alAssociatio11of Me11talHealth [ 1971) Ch 3 17.
"' Ee/airs Group Ltd v JKX Oil & Gas pie (2015) UKSC 71, (2016] BCC 79, (30].
"' See also Chapter 14 in relation to the power to refuse registration of share transfers.
"o See the principles set out by Eve J in Re Lee, Nehrens & Co Ltd [ 1932] 2 Ch 46, 51, which, although given in the
context of the former ultm vires doctrine, have been said to be relevant in considering whether or not directors
have abused their powers: Rolled Steel Pmducts (Holdi11gs)Ltd v British Steel Co,p [ 1985] Ch 246, 287-290.
Sec also Westpac B011ki11g Co,poro1io11v Bell Group Ltd (in liq) (No.3) (20 12) 89 ACSR I.
"' E.g. Primloke lid v Mai/hews Associates (2007) I BCLC 666. Such conduct can also amount to breaches of other
duties.
" 2 Re Bcmk of East Asia Ltd [2015] 4 HKC 137, [ I4].
"' Hor/owes Nominees Pty Ltd v Woodside (Lake £11tro11ce)Oil C<>NL (1968) 121 CLR 483, 493; Howard Smith
Ltd v Ampol Petroleum Ltd (1974) AC 821,836.
'" Mowan/ Smith Ltd v Ampol Petroleum Ltd [ 1974)AC 821; WongKam San v )ew1g WingKeung (2007) 2 HKLRD 267.
 EXERCISE OF POWERS FOR PROPER PURPOSES 305

on the other. 145 It is not part of the function of the directors to favour one group of
shareholders over another.
In WongKam San v Yeung Wing Keung, 146 certain directors of the company purported
to allot 9,900 shares to a new shareholder, effectively diluting the I00 percent
beneficial ownership of the existing controller of the shares in the company to 1
percent beneficial ownership. The shares were issued at par value of $1 per share.
The Court of First Instance rejected the directors' argument that the shares were
allotted for the purpose of raising funds and found that there were no commercial
justifications for the share allotment in circumstances where only $9,900 were
raised and where the 99 per cent interest in the company was worth a great deal
more than that value (the company having assets with market value of RMB938
million). The court held that the purpose of the allotment was to replace the existing
majority shareholder with a new majority created out of the allotment and that this
was a breach of fiduciary duty.
Mere fact that company had considerable funds does not mean allotment not for 8.051
proper purpose. In Passport Special Opportunities J\,fasterFund LP v eSun Holdings
Ltd, 147 where directors allotted shares pursuant to private placements, the court held
that the mere fact that the company had considerable cash reserves and that there
was an absence of an urgent need for funds was not fatal to the directors' claim to
have acted for proper purposes. On the evidence, the court rejected the allegation that
the allotments were to protect control of one of the directors, accepting that it was
reasonable for the directors to take advantage of the opportunity to acquire funds (after
a broker had proposed to the company the entering into of the placement agreements)
in circumstances where there was a historical lack of profitability in the company,
where the company had recently used funds for a business acquisition that arose
unexpectedly, and where the company would otherwise likely face difficulties if it
attempted to raise funds commercially.
Howard Smith v Ampol. In Howard Smith Ltd v Ampol Petroleum Ltd, 148 Ampol 8.052
and Bulkships together held 55 percent of the shares in a company, Millers. Ampol
offered to purchase all the shares in Millers pursuant to a takeover at the price of
$2.27 per share. At that time, Millers was in discussion with Howard Smith about the
possible acquisition by Howard Smith of two tankers which were under construction
for Millers. There was concern that the tankers should not pass under the control of
Ampol. Subsequently, Howard Smith proposed to make a competing takeover offer for
the shares in Millers at $2.50 per share, but the difficulty it faced was that Bulkships
was aligned with Ampol, and their majority shareholding meant that Howard Smith
could not succeed in obtaining control of Millers. The directors of Millers then issued
4.5 million shares to Howard Smith at $1.30 per share, which reduced the combined
shareholding of Ampol and Bulkships to 36.6 percent. The Privy Council accepted the
trial judge's finding that the primary purpose of the share allotment was to reduce the

"' Whitehouse v Carlton Hotel Pty Ltd ( 1987) 162CLR 285 (Mason, Deaneand DawsonJJ).
"6 (2007] 2 HK.LRD267.
'" [2011) 4 HKC 62. for the facts, see also parn.8.046above.
" 8 [ 1974)AC 82 l.
306 DIRECTORS'DUTIES

proportionate shareholding of Ampol and Bulkships in order to induce Howard Smith

to proceed with the takeover offer. In these circumstances, the Privy Council held that
the directors breached their duty to act for proper purposes.
8.053 Possible exceptions to principle that improper for directors to allot shares to
affect majority control. It is possible that there could be exceptions to the basic
principle that it is improper for directors to allot shares to affect majority control
in a company. The majority judgment in the Australian High Court decision of
Whitehouse v Carlton Hotel Pty Ltd 149 accepted, in obiter, that it is arguable that
special circumstances may arise in which the dilution of existing voting power of
shareholders or the creation of new voting power may constitute a legitimate purpose
in the exercise of the power to allot shares, such as where statutory provisions make a
particular spread of voting power compulsory or commercially essential. In Kirwan
v Cresvale Far East Ltd (in liq), 150 a majority of the NSW Court of Appeal held that,
where directors allot shares to themselves with the dominant purpose of obtaining
control of the company, there would not be a breach of duty if the company has a
need of capital to avoid liquidation and the only avenue of obtaining that capital is
through the share allotment.
There are also some cases where the courts have stated that the directors should be
allowed to allot shares to defeat a takeover bid if the bidder intended to cause substantial
damage to the company's interest by, for example, running the company down. The
Canadian case of Teck Corporation Ltd v Millar 151 provides a leading example of
this approach. 152 The Privy Council in Howard SmiLh LLd v Ampol Petroleum Ltd 153
accepted that the decision in Teck v Millar was correct, but it appears that this was on
the basis that the directors' primary purpose in that case was not to defeat the bidder's
attempt to obtain control but to cause the company to enter into a more commercially
advantageous agreement with another entity, with the allotment of shares to that
other entity being a by-product of the primary legitimate purpose. 154 Thus, despite the
suggestion in various cases of a more flexible approach that gives greater leeway for
directors to utilise the power to allot shares to affect control of the company, it seems
that the correct position under the English authorities is that the directors would be in
breach of duty even if they honestly and reasonably considered that their altering of
shareholder voting power is to forestall damage to the corporate entity. While the court
in Whitehouse v Carlton Hotel Pty Ltd, above, left open the possibility of exceptions
to the general rule, the court considered that an ultimate objective of ensuring better
management of the company is insufficient to legitimate the improper purpose of
manipulation of voting power. This is consistent with the approach in cases such as
Hogg v Cramphorn Ltd 155 and Howard Smith v Ampol Petroleum.

"' (1987) 162 CLR 285.

,so (2002) 44 ACSR 21, [2], [302).
'" (1972) 33 DLR (3d) 288.
"' Sec also Cayne v GlobalNatural ResourcesPie (unrcp., Chancery Division, McgarryV-C, 12 August 1982).
"' [1974) AC 821, 836-837.
,,., For situations involving mixed purposes, see pam.8.063 below.
"' (1967) Ch 254.
 EXERCISE OF POWERS FOR PROPER PURPOSES 307

3.2.3 Other powers affecting control

Defeating takeover by other means. Directors might also attempt to defeat takeover 8.054
offers via other means apart from an allotment of shares to alter voting power. For
example, directors might cause the company to enter into agreements that are triggered
upon a takeover offer and which might make it prohibitively expensive or otherwise
unattractive for an offeror to proceed - for example a "poison pill" arrangement, 156
or an agreement involving the disposal of the company's major assets ("sale of the
Crown jewels").
\Vhether defeating takeover amounts to breach of duty. It is clear that if the 8.055
directors' purpose in defeating the takeover is simply to preserve their own positions
in the company out of self-interest, then this will amount to a breach of duty.157 There
is also a suggestion that, at least outside the context of share allotments, there could
be circumstances where it would be legitimate for the directors to act with the dual
purpose of advancing the interests of the company and defeating of a takeover offer. 158
In a number of cases, directors have been held to have acted for proper purposes by
causing the company to enter into transactions for the benefit of the company, even
though the transactions also had the effect of defeating particular takeover offers. 159 It
seems that the directors' actions can be regarded as legitimate where their dominant or
substantial purpose was not to defeat the takeover offer,160 or where the actions simply
afforded the shareholders of an alternative, more favourable offer. 161 As a general
principle, the directors of a listed company would not be entitled to take action for
the purpose of depriving the shareholders of the opportunity to consider a particular
takeover offer. As stated by the Privy Council in Howard Smith v Ampol Petroleum:

" ... [t]he right to dispose of shares at a given price is essentially an individual right
to be exercised on individual decision and on which a majority, in the absence of
oppression or impropriety, is entitled to prevail". 162

But merely presenting the shareholders with an alternative takeover offer would not
infringe against the broad principle laid down by the Privy Council.

156 "Poison pill" arrangements can take various forms. One example is an arrangement where existing shareholders
are given a right, triggered upon a takeover, to be issued shares in the company at p1ices significantly below
market.
157 Howard Smith Ltd v Ampol Petroleum Ltd [ 1974) AC 821, 834; Fmser v Whalley ( 1864) 2 Hem & M I0, 71 ER
361; Hannes v MJH Ptv Ltd (1992) 7 ACSR 8.
1
" E.g. Darvall v Non!, Sydney Brick & Tile Co Ltd ( 1989) 16 NSWLR 260, 335 (Clarke JA). See also Criterion
Properties pie v Strat(oni UK Properties LLC [2003) I WLR 2108, where the issue was left open, although on
the facts of that case, the "poison pill" arrangement could not be regarded as a proper exercise of the directors'
powers on any view, in circumstances where the arrangement provided for the gratuitous disposition of the
company's assets which could be triggered by events much wider than a specific takeover threat.
159 Rossjield Group Operotio11sPty lid vAustrtt! Group Ltd [ 1981] Qd R 279; Pine Valel1111es1me11tsLtd II McDonnell
and East Ltd (1983) 8 ACLR 199; Dorval/ v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260.
160 Pine lf,le Investments Ltd v McDonnell 011dEast Ltd (1983) 8 ACLR 199. See para.8.063 below on mixed
purposes.
161
Rossjield Group Operations Ply Ltd v Austral Group Ltd [ 1981] Qd R 279; Dorval/ v North Sydney Brick & Tile
Co Lrd(1989) 16 NSWLR 260.
162 Howard Smith Ltd v Ampol Petroleum Ltd [I 974) AC 821, 837-838.
308 DIRECTORS'DUTIES

8.056 Public companies: Takeovers Code. For public companies though, regard also
needs to be had to the Takeovers Code. Under General Principle 9, directors of a
target company cannot, without general meeting approval, take action in relation to
the affairs of the company which could effectively result in any bonafide offer being
frustrated or in the shareholders being denied an opportunity to decide on its merits. 163
8.057 Private companies, restrictions on transferring shares, may give directors more
latitude. For private companies, the articles must impose restrictions on the right to
transfer shares. 164 Thus, directors of private companies may be justified in looking at
the identities of their shareholders when considering the companies' interests, and
so may be given more latitude in determining whether it is appropriate for particular
persons to be shareholders or controlling shareholders in the company.165
8.058 Appointing additional directors to board for purpose of entrenching control in
board could be breach. Using the power to appoint additional directors to the board
for the purpose of entrenching control in the board may also amount to a breach of
duty. In Tsang Wai Lun Wayland v Chu King Fai, 166 the company had pursuant to its
articles fixed a maximum number of directors that can be appointed. Under the articles,
the directors had power to appoint additional directors subject to the maximum. The
existing directors made appointments up to the maximum to prevent opponents from
seizing control, believing this was in the best interests of the company. The court held
that, even though the directors acted in good faith, there was a breach of the duty to
act for proper purposes. The power of the board to appoint directors was to enable the
board to enhance the range of ability, competence or expertise available to it for the
better execution of the management function and not for the purpose of entrenching
their own control of management by keeping out the appointment of others by the
general meeting. The appointments by the board were accordingly held to be invalid.
8.059 Proper purposes of power to issue restriction notices on shares where information
on beneficial ownership not disclosed: Eclairs Group case. In Eclairs Group Ltd v
JKX Oil & Gas pie, 167 the company's articles contained provisions giving the directors
the power to issue "restriction notices" to a member of the company if a statutory
disclosure notice 168 had been issued requiring information about interests in the
member's shares and the company has not received the required information from
the addressee of the notice. A restriction notice may provide that the member is not
entitled to att.endand vote at members' meetings, that the shares may not be transferred,
and that no dividends shall be paid in respect of the shares. The UK Supreme Court
held that the power of the directors to issue restriction notices under the articles must

163 The Takeovers Code is a non-statutory code made by the Securities and Futures Commission under s.399 of the
Securities and Futures Ordinance (Cap.57 I). The Code is available at <http://www.sfc.hk>. See also Connie
Cheng, "Directors' Duties in Defending Hostile Takeover Bid in Hong Kong" (2005) 18 Australian Journal of
Corporate law I 63.
164
Cap.622, s. I J( I )(a)(i).
'" Sec Chapter 14.
166
[2009) 5 HKLRD 105.
'" [2015) UKSC 71, (2016) BCC 79.
168 Companies Act 2006 (UK), s.793 empowers a public company to issue a disclosure notice to any person whom it

knows or reasonably believes to be interested in its shares. efSecurities and Futures Ordinance (Cap.571 ), ss.329,
366 in the case of a similar power of listed companies in Hong Kong.
 EXERCISE OF POWERS FOR PROPER PURPOSES 309

be exercised for proper purposes. The court held that the relevant provision in the
articles has three related purposes: (1) to induce the shareholder to comply with a
disclosure notice; (2) to protect the company and its shareholders against having to
make decisions about their respective interests in ignorance of relevant information;
and (3) the restriction notices are imposed as sanctions on account of the failme to
provide the information for as long as it persists, on the footing that a person interested
in shares who has not complied with obligations attaching to that status should not be
entitled to the benefits attaching to the shares. 169
Improper purpose where restriction notice issued to affect voting outcome at 8.060
AGM: Eclairs Group case. In Ee/airs Group, the directors issued restriction notices
in respect of shares held by a bloc of shareholders/raiders who, the directors believed,
were seeking to depress the company's shares in order to acquire further interests
in the company to eventually take control of the company's Ukrainian subsidiary.
The directors genuinely believed that the addressees of the notices had given false
information in response to disclosure notices and that accordingly they were entitled to
issue the restriction notices. The notices were, however, issued at a time immediately
before a general meeting where resolutions were proposed, inter alia, for an allotment
of shares, to dis-apply pre-emption rights and to make market pmchases of the
company's shares. The findings of fact on the evidence were that the primary purpose
of a majo1ity of the directors was to disenfranchise the raiders in order to maximize the
chance of the proposed resolutions being passed at the general meeting and to forestall
the raiders' attempt to take control of the company. The Supreme Court unanimously
held that the directors had exercised their power to issue the restriction notices for an
improper purpose, and this was so even though the directors honestly believed that
they were acting in the best interests of the company. 170

3.3 The purpose for which a power was exercised

Purpose of exercise of power is question of fact. What was the purpose of the 8.061
directors in their exercise of the particular power is a question of fact. In detem1ining
the subjective state of mind of directors, the court is to look at evidence of all the
surrounding circumstances. 171For example, in assessing the credibility of the directors'
evidence as to their professed purposes in cases involving an allotment of shares, it
would be relevant to consider matters such as the company's true financial position,
the reality of its need for funds and the effects of the allotment of new shares upon the
shareholders (both in financial terms and in terms of their voting power).172

169 [2015] UKSC 71, [2016] BCC 79, [32] per Lord Sumption. The other judges agreed with this analysis.
l?<l If there were findings of fact that the directors would still have issued the restriction notices for the purpose of
obtaining the required information on interests in the shares (i.e., for a proper purpose) even if the improper
considerations were ignored, then Lord Sumption would have held that the exercise of power was valid on the
basis of application of the "but for" test in dctem,ining the purpose for which the power was exercised by the
directors. However, no conclusive findings on this point could be made by the court as the case was not argued on
the basis of the "but for" test. See (2015] UKSC 71, (2016) BCC 79, [22], (42), (43] and also para.8.063 below.
171
Hindle vJolm Cot1011 Ltd (I 919) 56 Sc LR 625, 630-631: Howmtl Smith ltd v Ampol Petroleum Ltd [1974) AC
821,835.
"' Passport Special Opportunities Master Fund LP v eS1111 Holdings Ltd (2011) 4 HKC 62.
310 DIRECTORS'DUTIES

8.062 If director acted properly fact that personally benefited does not render action
invalid. If the directors acted for proper purposes, the fact that the conduct also
benefited the directors personally does not render the exercise of power invalid. 173
8.063 Where more than one purpose, breach if substantial or dominant purpose was
improper purpose. Where the directors may have more than one purpose in the
exercise of the particular power, there will be a breach of duty if the substantial or
dominant purpose of the directors was an improper purpose. 174 However, there is
also a suggestion in dicta of the Australian High Court that regardless of whether the
impermissible purpose was the dominant one or but one of a number of significantly
contributing causes, the exercise of power would be invalidated if the impermissible
purpose was causative in the sense that, but for its presence, the power would not have
been exercised. 175 In the UK Supreme Court decision of Ee/airs Group Ltd v JKX Oil
& Gasplc, 176 Lord Sumption (with whom Lord Hodge agreed) agreed that such a "but
for" test should be adopted. However, those comments were also by way of obiter and
the three other judges in the case were not prepared to decide the point in the absence
of full argument. m
8.064 Multiple purposes: linearly connected vs separate and independent. Where there
are multiple "purposes", it is necessary to distinguish between the situations where,
on the one hand, the multiple purposes are linearly connected, and on the other, where
they are separate and independent. 178 For example, if the directors intend to alter voting
power as the means to achieving some legitimate purpose, then the two "purposes" are
related in a linear manner in the sense that the illegitimate purpose is desired in order to
achieve the further "purpose". The fact that the latter, ultimate, "purpose" is legitimate
would generally not be sufficient to prevent there being a breach of duty. '79 The ultimate
"purpose" cannot be regarded as the substantial purpose of the exercise of power,
with the impermissible purpose simply being incidental, because the impermissible
purpose crucially needs to be achieved in order to attain the further desired outcome.
The courts have referred to this as a situation where the ultimate objective is just the
reason or motive for the exercise of power for an improper purpose and not a separate
substantial or dominant purpose that validates the exercise of power.180
8.065 Independent purposes, if one legitimate, can potentially validate action. But
where the different purposes can be seen to be independent of each other rather than

173 Hirsche v Sims [1894) AC 654, 660--061; Mills v Mills (1938) 60 CLR 150, 164.
'" Howard Smith Ltd vAmpol Petroleum Ltd (1974) AC 821, 835; Mills v Mills (1938) 60 CLR 150, 186.
175 Whitehouse v Carlton Hotel Pty Ltd ( 1987) 162 CLR 285; accepted to be correct in Perma11entBuilding Socie~y v

Wheeler (1994) 14 ACSR 109, 137 (NSWCA).

176 (2015) UKSC 71, (2016] BCC 79, (19]-(24].

"' (2015] UKSC 71, (2016] BCC 79, (46Jper Lord Clarke, [48]-(55] per Lord Mance (with whom Lord Neuberger
agreed). For discussion of the case, see paras.8.059 and 8.060 above; and see further Robert Boadle, "Improper
Purposes in Company Law" (2016] Lloyd~ Maritime a11dCommercial Law Quarter(y 529; Rosemary Teele
Langford and Ian M Ramsay. "The Proper Purpose Rule as a Constraint on Dircclors' Autonomy - Ee/airs
Group limited vJKX Oil & gas pie" (2017) 80 Modem Law Review 110.
178 On the difference between these two situations, see also David M J Bennett, "The Ascertainment of Purpose

when Bona Fides are in Issue - Some Logical Problems" ( 1989) 12 Sydney Law Revic'lv5.
179
Sec the discussion above on the cases of Teck Corporation Ltd v Millar ( 1972) 33 DLR (3d) 288; Whitehouse v
Carlto11Hotel Pty Ltd (1987) I 62 CLR 285 and Howard Smith Ltd v Ampol Petroleum Ltd [1974) AC 821.
18
• fflhitehouse v Carlton Hotel Pty Ltd ( 1987) I 62 CLR 285.
 EXERCISE OF POWERS FOR PROPER PURPOSES 311

being connected in a linear fashion, then the fact that one of the purposes is legitimate
can potentially validate the action. Here, it is possible to conceive of the legitimate
objective as being the substantial purpose of the exercise of power so that there is no
breach of fiduciary duty. The court's task is simply to determine from the evidence
which of the purposes was the substantial pmpose (or whether the improper purpose
was, as a matter of fact, causative under the "but for" test).
Howard Smith v Ampol. In Howard Smith Ltd v Ampol Petroleum Ltd, 181 the directors 8.066
gave evidence that their purpose in the share allotment was to raise capital. The trial
judge had accepted that the company was in a position of tight liquidity and there was
a need for capital. However, the judge held that the substantial purpose of the directors
was not to raise capital but to reduce the interests of Ampol and Bulkships to procure
the success of Howard Smith's takeover. It was significant that the company had been
in a position of tight liquidity for a number of months and had a policy of dealing with
the problem via loan capital rather than share capital. Yet, at the board meeting for
approval of the share allotment, there was no consideration of loan financing despite
the pre-existing policy and the tax advantages ofloan capital. Moreover, even if a share
issue was appropriate, a general rights issue was rejected on the basis that it would
increase the shareholding of the existing majority. There was also clear evidence that
the directors were concerned at the position of strength of Ampol and Bulkships and
that they wished to procure the success of Howard Smith's takeover offer. The trial
judge's findings were accepted by the Privy Council.
Separate or independent legitimate purpose which was substantial purpose. 8.067
In other cases, the courts have found that there was a separate or independent
legitimate purpose which was the substantial purpose for the exercise of power.
For example, in Harlowe s Nominees Pty Ltd v Woodside (Lake Entrance) Oil
Co NL, 182 the court accepted on the evidence that the substantial purpose of an
allotment of shares by a mining company to a business partner was to improve
the financial position of the company and to give it greater freedom to plan for
mining explorations with the co-venturer even though the allotment had the
effect of frustrating the attempts by an existing shareholder to obtain control of
the company. In Pine Vale Investments Ltd v East Ltd, 183 a bidder made a partial
takeover offer in an attempt to obtain 42 percent control of the company. Shortly
after the announcement of the offer, the directors of the company entered into a
contract to acquire certain businesses, with the funds for the purchase to be raised
via a rights issue. The rights issue affected the assumptions on which the takeover
offer was made and effectively frustrated the bidder's offer. However, there was
no breach of duty by the directors, with the court finding on the evidence that
the substantial object forming the real ground of the board's action was not the
frustration of the takeover offer but the desire to take advantage of a genuine
commercially favourable opportunity.

181
[ 1974] AC 821; and sec para.8.052 above. For the decision of Street .I at first instance, sec Ampol Petroleum Ltd
v R W Miller (Holdings) Ltd (1972] 2 NSWLR 850.
181
(1968) 121 CLR 483.
18
' (1983) 8J\CLR 199.
312 DIRECTORS'DUTIES

8.068 Timing not necessarily determinative of what directors' purpose was. The above
cases also illustrate that, while timing can, coupled with other factors, be decisive in
indicating that the actuating cause was the impermissible purpose, timing on its own
is not necessarily determinative of the question of what was the directors' real purpose
was. If the directors' substantial purpose was a proper purpose, there is no rule of
law that prevents the directors from acting at a particular time that also leads to the
realisation of an improper purpose. 184 This is the case even though the directors were
aware that the exercise of power would have the result of achieving the impermissible
purpose and found it agreeable to their personal wishes. 185

3.4 Good faith of directors

8.069 Objective test applied such that could be breach even if directors acted in good
faith. An objective test is applied such that there could still be a breach of duty even
though the directors acted in good faith or acted honestly.186 The mere fact that the
directors genuinely believed that they were acting for the benefit of the company does
not mean that the conduct cannot be impugned. 187 Thus, despite occasional suggestions
to the contrary, the duty to exercise powers for proper purposes is a duty independent
of the duty to act in good faith in the interests of the company and the former can be
breached even though there is no breach of the latter. 188

4. CONFLICT OF INTERESTS

4.1 General

8.070 Director must avoid conflict of interest. A director must avoid acting where there
is a conflict between his or her own interests and the interests of the company. It has
sometimes been said that the rules on conflicts of interests do not impose a duty on
directors as such, but only impose a disability on directors that prevents them from
acting without proper disclosures to the company. 189 However, the English Court of
Appeal has now disapproved of this distinction. 190 In Hong Kong, the rules on conflicts
of interests have also been stated as giving rise to duties imposed on fiduciaries 191 and
have been described as proscriptive fiduciary duties. 1n

184
Pine ValeInvestments Ltd v Mc001111ell a11dEtist Ltd (1983) 8 ACLR 199, 209-210; Oarva/1 v North Syd11ey
Brick & Tile Co Ltd (1989) 16 NSWLR 260.
1
" Harlowe's Nomi11eesPty Ltd v W0<,dside(Lake £11trtmce)Oil Co NL (I 968) 121 CLR 483,493.
186 HowardSmith Ltd vAmpol PetroleumLtd [1974)AC 821; Whitehousev C(IJ·/to11 Hotel Pty Ltd (1987) 162CLR 285;
Tsa11gWaiL1111 Wayla11d KingFai [2009)5 HKLRD 105;Re Ba11kof EastAsia Ltd [2015)4 HKC 137,(20).
v C/111
181
Hogg v Cra111phor11 Ltd (1967) Ch 254.
188
See also l'flestpacBanking Corporation v Bell Gro11pLtd (in liq) (No.3) (2012) 89 ACSR I, [942), [1979); J R
Birds, "Proper Purposes as a Head of Directors' Duties" (1974) 37 Modern Law Review 580; RP Austin and IM
Ramsay,Ford'sPrinciples of CorporationsLaw (16'hedn,LexisNexis2015) [8.065).
189 Movitex Ltd v Bulfie/d [1988) BCLC I 04; LawCommission(UK), "Company Directors:RegulatingConflictsof
Interests and Formulatinga Statement of Duties" (Consultation Paper, 1998) para.11.13; Len Sealy,"Directors'
Duties Revisited" (200 I) 22 Company Lawyer 79.
190 DEG-Deutschelnvestitio11sund Entwick/ungsgesellschafimbH v Koshy (2004) I BCLC 131, [ I08). This would
also be consistent with the case law on fiduciaiy duties in Australia: see Bree11v Williams ( 1996) 186 CLR 71.
191 Kao Lee & Yip v Koo Hoi 1,111 Donald (2003)3 HKLRD 296, 312-313.
192
MoulinGlobalEyecareHoldingsLid v OliviaLeeSi11Mei (2014) 17 HKCFAR466, [36);and seealso para.8.009above.
 CONFLICT OF INTERESTS 313

4.2 No-conflict rule

4.2.1 Equitable duty

As fiduciaries directors must not put themselves in position of conflict. As 8.071
fiduciaries, directors have a duty not to place themselves in a position where there
would or may be a conflict between their personal or separate interests and the interests
of the company. 193 As to the meaning of "interest":

"An 'interest' has been said to signify the presence of a personal concem of possible
significant pecuniary value in a decision taken, or transaction effected, by a fiduciary,
whether inunediate (a sale of property to the company), indirect (a shareholding in a
supplier to the company) or contingent (where a dealing with an agent proceeds on
the assumption that a success fee is to be paid if a transaction is effected)."194

A conflict of interest does not arise unless there is "real sensible possibility of conflict" 195
or "a real or substantial possibility of conflict:'. 196 The test is objective whether a
reasonable person looking at the relevant facts would think there to be a real sensible
possibility of conflict. 197 The clearest example of where there is a conflict of interest is
where the director enters into a transaction with the company. However, the no-conflict
rule does not mean that the directors can never contract with the company. The rule only
prevents the directors from contracting with the company without the informed consent
of the company or otherwise as permitted by the articles. The duty to avoid a conflict of
interests can be breached even if the transaction is fair to the company. 198

4.2.2 Exllmp/es of a co11flictof interest

Transactions involving conflict of interest. The no-conflict rule can apply not only to 8.072
transactions between the company and its directors, but also to transactions between
the company and a partnership of which the director is a partner, 199 and between
the company and another company in which the director has pecuniary interests (as
shareholder) or in respect of which he has a conflicting duty (because of also being a
director in the other company). 200 There can be a conflict of interest where the director
has a conflicting personal interest or where the director has a duty owed to another that
conflicts with the duty owed to the company.

193
Poon Ka McmJason v Cheng WaiTao (2016) 19 HKCFAR 144, (74]; and see also Bray v Ford (I 896) AC 44,
51-52; Kao lee & Yip v Koo Hoi Yan Do11ald(2003] 3 HKLRD 296; VDL Holdings Ltd v Leung Yr1etKeu11g
[2008] 6 HKC 127, (71)-(73), affirmed on appeal (unrep., CACY 35612008, (2009] HKEC 1523) (CA); Gra11d
Field Group Holdings Ltd v Chu King Fai [2016] I HKLRD 1316, [4.2) (CA).
1
" Andrew Stafford and Stuart Richie, Fiducio,J' Dwies: Directors and Employees (2nd cdn, Jordan J>ublishing
2015)(2.124), cited in Grand Field Group Holdings ltd v Clw King Foi (2016) I HKLRD 1316, (4.8) (CA).
195
PoonKc,Mo11Joso1111 ChengHfa Too(2016) 19 HKCFAR 144, (74), citing Boardmanv Phipps(1967] 2 AC 46, 124.
196
Hospital Products Ltd v UnitedStates S11rgicalCorp (l 984) 156 CLR 41, 103.
197
Grand Field Group Holdings Ltd v Chu King Fai (2016) I HKLRD 13 I6, (4.2] (CA), citing Boardman v Phipps
[1967) 2AC46, 124.
198
Aberdeen Rail Co v Blaikie Brothers ( 1843-60) All ER Rep 249 (HL); Man luen Co,p v Sun King Elecflvnic
Printed Circuit Board Facto1yLtd (1981) HKC 407.
199
Aberdeen Rail Co 11 Blaikie Brothers (1843-60) All ER Rep 249 (HL); Ma11lue11Co,p v Sun King Electronic
Printed Circuit Board Factory Ltd [1981) HKC 407.
200 Transvaallands Co v New Belgium (Tra11svaal) la11dDe11elopme111Co [ 1914) 2 Ch 488.
314 DIRECTORS'DUTIES

8.073 No-conflict rule can apply where director is in another company and be breached
even where adverse interest is small. For example, in Transvaal Lands Co v New Belgium
(Transvaal) Land Development Co,201 Samuel was a director of the plaintiff company and
also a director and shareholder of the defendant company (holding 11,062 shares, being
about 5 percent). Harvey was also a director of both companies, and held 1,000 shares in
the defendant company as a trustee. Two transactions were proposed: the plaintiff company
was to purchase shares in another entity from the defendant company, and the plaintiff
company was to sell certain forfeited shares (in itself) to the defendant company. Samuel
did not vote at the board meeting of the plaintiff company where the transactions were
approved, but he did not disclose the fact of his shareholding in the defendant company.
Harvey voted in favom of the transactions in circumstances where he also failed to disclose
his interests as director and shareholder in the defendant company. The English Court of
Appeal held that the plaintiff company was entitled to set aside the transactions because
of the non-disclosures. Swinfen Eady LJ took the view that the no-conflict rule can be
breached irrespective of the extent of the adverse interest of the fiduciary, and so even a
very small shareholding in the other company would give rise to the need for disclosure.202
However, later cases appear to have relaxed the principle somewhat by suggesting that
there would only be a conflict of interest if there is a significant or substantial possibility of
the director being swayed by some personal interest or loyalty.203
8.074 Non-disclosure of conflict. In Belgian Bank v Sino Global Intl Ltd,204 a director was
given express power by the company to mortgage the company's properties. The
director subsequently mortgaged the properties to a bank to secure loans granted by
the bank in favour of another company in which the director had interests (holding 50
percent of the shares in that company). There was a non-disclosure by the director of the
conflicting interest, and the court held that the director was in breach of fiduciary duty.
The bank was unable to enforce the mortgages against the company in circumstances
where it was held to have had notice of the breach.
8.075 Transaction with close relative of director might amount to conflict. The general
principles on the no-conflict rule would suggest that there could be a conflict of
interest where the company enters into a transaction with a director's spouse or other
close relation. In Newgate Stud Co v Penfold, 205 David Richards J took the view that
there is not necessarily a conflict in all cases where the company transacts with a
close relation of the director, but the question is whether on the facts there is a real
risk of conflict between duty and personal loyalties. This approach correctly takes into
account differences in the actual relationships between the director and the spouse or
other relation. As stated in Tito v Waddeil (No.2):206

20, [1914)2 Ch 488.

202 [1914)2 Ch 488,503.
20l Phipps v Boardman [ 1967) 2 AC 46, 124; Hospital Products Ltd v United States Surgical Co,p (I 984) 156 CLR

41, 103; Westpc,cBcmking Co,porati(m v Bell Group Ltd (in liq) (No.3) (2012) 89 ACSR 1, [2998]. Sec also
Cowan de Groot Properties Ltd v Eagle Trust Ltd [ 1992) 4 All ER 700, 765 where Knox J held that where there
is only an intcre.st in the shares as bare trustee, the shareholding would not lead to a connict of interest as a bare
trusteeship docs not carry with it any duties.
"" (unrcp., HCMP4950/2001, [2005) HK.EC 1414).
,., [2008) I BCLC 46, (23 7)-(242).
~ [ 1977) Ch 106, 240 (Sir Robert Megarry V-C).
 CONFLICT OF INTERESTS 315

"Manifestly there are wives and wives. In one case the trustee may have sold
privately to his wife with whom he was living in perfect amity; in another the
property may have been knocked down at auction to the trustee's wife from whom
he has been living separate and in enmity for a dozen years."

In Breitenfeld UK Ltd v Harrison, 207 the managing director of the claimant company
was held to be in breach of duty where he had assisted his son and daughter-in-law
in the operation of another company which was set up by the latter to operate in the
same line of business as the claimant and which had itself traded with the claimant.
Although the managing director did not hold any office in the other company nor did
he share in the profits of the other company, it was held that he had a personal interest
(in assisting and benefiting his son and daughter-in-law) that conflicted with the duties
he owed to the claimant. ln the circumstances of the case, there was a real sensible
possibility of conflict.
Fairness of transaction not a defence. It is well established that where the company 8.076
enters into a transaction where directors have failed to disclose their conflicting
interests, the validity of the transaction cannot depend on the fairness or unfairness of
the contract. 208 The rule is strict in this respect because the law seeks to uphold high
standards on the part of fiduciaries.
Generally person who is director of two competing companies falls foul of 8.077
no conflict rule in absence of informed consent of companies. Equity does not
prevent a person from being appointed as director of more than one company.209 But
as illustrated by the Transvaal Lands case, there can be a conflict of interest if the
two companies transact with each other.210 There can also be a conflict of interest
where the person is a director of 1ival companies with competing interests. Earlier
case law in England appears to suggest that, unless prohibited by contract or unless

201 (2015] 2 BCLC 275, [2015) EWHC 399 (Ch).

208 Aberdeen Rail Co v Blaikie Brothers (1843 60) All ER Rep 249 (HL); Transvaal Lands Co v New Belgium
(1i-ansvaal) Land Developmellt Co (1914) 2 Ch 488; Man L11e11 Co,p v Sun King Electronic Printed Circuit
Board Facto,y Ltd [ 1981) HKC 407, 413-414. cfNewgate Stud Co II Penfold (2008) I BCLC 46, where the court
took a different approach in the context of a conflict situation involving a close relation of a director. The court
held that where there is a real risk of conflict in a tnmsaction with a close relation, then the onus is on the director
to show that the tninsaction was in the best interests of the company (at (2421).The court cited cases dealing with
mortgagees exercising a power of sale (at [243)). However, the duties owed by mortgagees are not the same as the
fiduciary duties owed by directors under the no-conflict rule. The judgment seems to suggest that a transaction
with a director's close relation should be treated differently compared with self-dealing cases (i.e., transactions
with the director) and should instead be treated similarly with cases on mo11gagees.But if there is a real risk of
conflict of interest in a transaction with a close relation, the situation should come under the no-conflict rule,
and the general principles regarding the irrelevance of the fairness of the transaction ought to apply. This was the
approach adopted in Brei1e11/eldUK Ltd v Harrison [2015) 2 BCLC 275, [2015) EWMC 399 (Ch), [72), where
the court applied Aberdeen Rail Co v Blaikie Bros in holding that the director of the claimant company was in
breach of duty (in assisting a rival company owned and operated by the director's son and daughter-in-law) even
if it could be shown that the rival company traded with the claimant company on fair terms.
"'' London and Mashonakmd Exploration Co Lid v New Maslw11ala1ulExplora1io11Co lid [1891) WN 165; Bell v
Lever Brothers Lid [ 1932) AC 161, 195; 111Plus Group Ltd v Pyke [2002) 2 BCLC 201.
210 But whether there is conflict will depend on the circumstances and the mere fact that the director is also a

director of the other company docs not necessarily mean that there is a conflict of interest: Bank of East Asia Lid
v labour Buildings Lid (unrep., HCMP 769/2002, [2008) HKEC 134), (199)-(200) (no conflict of interest in
circumstances where the other company was a shareholder of the first and where both companies had a common
goal under the transaction).
316 DIRECTORS' DUTIES

there is disclosure of confidential infonnation or misappropnat10n of company

property (including corporate opportunities), there is nothing to prevent a director
from sitting on the board of a rival company.211 However, it is difficult to reconcile this
with the general principle that a fiduciary who acts for two principals with potentially
conflicting interests without the informed consent of both is in breach of the fiduciary
obligation of undivided loyalty.212 There may be special circumstances where a person
is not automatically in breach of the no-conflict rule by acting as director in rival
companies, 213 but generally speaking, a person who is a director of two companies
with conflicting interests should be regarded as falling foul of the rule in the absence
of informed consent of the companies. 2I4 This stricter approach compared to what
earlier English decisions may seem to indicate has been affinned by the Court of Final
Appeal in Poon Ka Man Jason v Cheng Wai Tao.215 While Spigelman NPJ noted in that
case that the earlier English decision of London and Mashonaland ExploraLion Co
Ltd v New Mashonaland Exploration Co Ltd216 is usually cited for the proposition that
there is no rigid rule that a director cannot be involved in the business of a company
in competition with the company of which he is a director, his Lordship stated that
that proposition is either trite or is based on a misconception of the case. His Lordship
considered that Mashonaland stands for no wider proposition than the trite statement
that the law will not interfere in the absence of evidence of a real possibility of breach
of fiduciary duty, including of the conflict rule.217
Moreover, for executive directors under an employment contract with the
company, there would be an implied term in the contract that the director owes
a duty of fidelity to the employer (the company) that prevents the director from
being engaged in other businesses in competition with the employer. 2I8 Where
the director acts for the benefit of one company at the expense of the interests of
another of which he or she is director, there might also be a breach of the duty to
act in good faith in the interests of the latter company in addition to any breaches
of the no-conflict rule. 219

211
lo11do11and Maslumaland Explora1io11Co Ltd v New Masho11alandExploratio11 Co Ltd [ 189I] WN I 65; Bell v
lever Brothers Ltd [1932] AC 161, 195 (obiter); and accepted to be a correct statement of the law by the English
Court of Appeal in In Plus G,vup lid v Pyke [2002] 2 BCLC 20 I. Sec also Berlei Hestia (NZ) v Femyhough
(1980] 2 NZLR 150. But sec now Poo11Ka Ma11Jasc>nv Cheng Wai Tao (2016) 19 HKCFAR 144, [95]-1104],
discussed below.
212 Clark Boyce v Moua/ [ 1994] I AC 428; Bristolcmd WestBuilding Society v Mothew ( 1998] Ch I, 18.
'" See In PILI$G,r:,up Ltd v Pyke (2002] 2 BCLC 201 (director of Company A who established a rival business in
Company B was held not 10 be in breach of duty where the director was excluded from management in Company A).
"' See Co111111011wealth Oil and Gas Co Ltd v Baxter 2010 SC 156; A11strolianCareers fllstitllte Pty Ltd vAustrolia11
lnstilllte of Fitness Pty Ltd (2016) 116ACSR 566; and see also Michael Christie, "The Director's Fiduciary Duty
not to Compete" (1992) 55 Modern law Review 506; Robert Goddar(~ "Competing Directorships" (2004) 25
Compo11ylawyer 23.
'" (2016) 19HKCFAR 144.
216 (1891] WN 165.
"' (2016) 19 HKCFAR 144, [95)-(104). Ribeiro and Fok PJJ agreed with Spigelman NPJ'sjudgment.
"' See Hi11acLtd II Park Royal Scientific Instruments Ltd [1946] Ch 169; Kao lee & Yip v Koo Hoi YanDonald
(2003) 3 HKLRD 296.
219
Bristol and WestBuilding Society v M01hew [1998] Ch 1, 18; Ul11njrame (UK) Ltd v Fieldi11g(2005] EWHC
1638, (1315]-(1316]. See also Akai Holdi11gsLtd v Tha11akhamKasikom Thai Clwmkat (Malwcho11) (unrep.,
HCCL 59/2004, [2008] HKEC 874); on appeal: Akai Holdings Ltd v Kasikom Bank Pel [2010] 3 HKC 153,
(CA); Thanaklwrn Kasikorn Thai Clwmkat (."1alwcho11)vAkai Holdings Ltd (No.2) (2010) 13 HKCFAR 479,
(146]. See also para.8.026 above.
 CONFLICT OF INTERESTS 317

4.2.3 Disclosure and approval by the general meeting

No breach of no-conflict rule if approval by general meeting. There is no breach 8.078
of the no-conflict rule so long as the director discloses the conflicting interest to
the company in general meeting and obtains the approval of the members. In Afan
luen Corp v Sun King Electronic Printed Circuit Board Facto,y Ltd,220 the company
purchased goods from a partnership firm. Three directors of the company were partners
in the firm. At a board meeting of the company, the three directors had disclosed that
they were to form the partnership to sell the goods to the company. However, the
cou11held that it was necessary to disclose to, and obtain the approval of, the general
meeting. As this was not done, the directors were in breach of duty.221
What is adequate disclosure. Where the director is interested in a transaction with the 8.079
company, adequate disclosure requires the nature and extent of his or her conflicting
interests to be disclosed, including any gains that the director would make on the
transaction where such information would be material to the company's decision
whether or not to enter into the h·ansaction.222
At common law director-shareholders not prevented from voting at meeting. 8.080
Under the common law, directors who are also shareholders of the company are not
prevented from voting at the general meeting despite the conflict of interest.223

4.2.4 Modification of duty under the articles

Articles can require that disclosure be made to board only. The articles can modify 8.081
the equitable duty by requiring disclosure to be made to the board only.224 Where the
articles require disclosure at a board meeting, piecemeal disclosure to individual
members of the board outside a meeting or proof of knowledge of all the directors
individually will not be sufficient as the directors must have the opportunity to
consider the issue together as a body.225 However, it seems that where the conflicting

,,. [1981] HKC407.

221 TI1ecourt held that there was a breach of duty even though all the directors were the shareholders, and even though it
was in the interestSof the company to enter into the transaction. There was no discussion of the predecessor Companies
Ordinance, s.358 (repealed) (now ss.903-904 in the current Companies Ordinance (Cap.622)), but it is arguable that
the court could have rcl ieved the directors from liability under the statutory provision in the particular circumstances of
the case: sec further para.8.199 on Cap.622, ss.903-904. The doctrine of unanimous consent did not apply in the case
as not all the directors or shareholders had attended the board meeting to approve the transaction.
222 See Imperial Merca11tileCredit Associatio11v Colema11( 1873) LR 6 HL 189; Gray v New Augaritc, Porcupi11e
Mines (1952) 3 DLR l (PC); DEG-Deutsche J11vestitio11s 111ui E11twickl1111gsgesellschajl 111bHv Koshy (2004) l
BCLC 131, (65) (Eng CA); and see also Gl11ckstei11 v Barnes (1900) AC 240 (promoters); Andrew Griffiths,
"Interlocking Directorships and the Danger of Self-dealing: the Duties of Directors with a Conflict oflnterest"
( 1999) 10 Jnternatio11alCo111pany and Com111ercial Law Review 280.
"' North-West1)-ansportalionCo v Beally (1887) 12 App Cas 589. This is subject to minority shareholder's remedies
(e.g. fraud on the company): see Chapter 10. The statutory requirement (in Cap.622, s.473) for disinterested
voting on a resolution for ratification of a breach of duty does not apply if the resolution is concerned with
authorisation of a proposed transaction rather than ratification of a breach which has already occurred: see
para.8.187 below.
22' Ma11Luer, Co,p vSwt Ki11gElectro11icPri11tedCircuit Board Factory Ltd (1981) HKC 407,413. On the extent
of permissible modification, see also para.8.198 below.
225
DEG-Deutsche lnvestitio11sund Entwicklungsgesellsclw/i mbli v Koshy [2004] I BCLC 131, [59] (Eng CA).
For the justifications for adopting a strict approach requiring formal disclosure at a board meeting, see further
Neptune (VehicleWas/ri11g Equipme11t)Ltd v Fitzgerald [ 1996] Ch 274. See also Guim1essPie v Saunders [ 1988)
I WLR 863 (Eng CA); on appeal Gui11nessPie v Smmders [1990] 2 AC 663.
318 DIRECTORS' DUTIES

interest of a director is evident from the materials before the board at a meeting and is
known to the members of the board, the court may be prepared to uphold the validity
of the transaction despite the absence of a formal declaration of the interest at the
meeting. 226 The absence of a record of a declaration in the minutes of the meeting is
not necessarily conclusive of the question of whether a disclosure was made, as the
court would be entitled to consider the entirety of the evidence to determine the factual
question of whether there had been disclosure. 227
8.082 Table A in predecessor CO. For companies using the predecessor CO's Table A,228
reg.86 provides, inter alia, that, where a director has a material interest in a contract
which is of significance in relation to the company's business, then:

• the director must declare the nature of the interest at a meeting of directors;
• the director must not vote in respect of the contract, and if the director does
so, the vote is to be disregarded; and
• the director is not to be counted in the quorum.

8.083 Certain exceptions to voting restrictions in Table A in predecessor CO. However,

the latter two restrictions do not apply to certain transactions as set out in regs. 86(2)(a)-
86(2)(d). Significantly, the director can vote in respect of a contract with another
company in which the director is interested only as an officer of the other company or
as holder of shares or other securities: reg.86(2)( d). However, the director would still
be subject to the duty to act in the interests of the company.229
8.084 Table A in predecessor CO: disclosure to board may suffice. The prov1s1on in
that former Table A, reg.86 does not expressly provide that disclosure to the general
meeting is not required. However, it may be arguable that reg.86 impliedly dispenses
with the need for such disclosure if there is disclosure to the board in accordance with
the provision. 230
8.085 Model Articles under Cap.622. For companies adopting the Model Articles
under the Companies (Model Articles) Notice (Cap.622H), made under s.78 of
the Companies Ordinance (Cap.622), the requirement for disclosure to the board

226 See Woolworths Ltd v Kelly (1991) 4 ACSR 431 (majo,ity of NSWCA accepted that there would be adequate
disclosure in such circumstances); Runcima11v Walter Runcima11Pie [1992) BCLC 1084 (Simon Brown J held
that at most the absence of a formal declaration would be a technical breach which does not prevent the comi
from upholding the transaction). cf Nep1t111e
(Vehicle Waslti11g
Eq11ipme11t) Ltd v Fitzgerald [ 1996] Ch 274 where
Lightman J held that a sole director must still declare the conflicting interests to himself or herself although
this need not be declared out aloud. The case of Neptune was cited with approval by the English Court of
Appeal in DEG-Deutsche lnvestitio11s1111d mbH v Koshy (see 1h 181 above); but the
E11twick/1111gsgesellschaft
decisions in Woolworths Ltd v Kelly and R11ncima11 v Walter Runciman Pie can 1>erhapsbe reconciled with DEG-
Deutsche /11vesti1ions mbH v Koshy on the basis that there was still an opportunity
und E11twick/1111gsgesellsclwft
for consideration ofche mancr by the board as a body.
"' Sec Pac/fie Fo1111da1io11Finance Ltd v Foi1yo1111gHoldings Ltd [1999] 3 HKLRD 153 (CA).
" 8 The Firsc Schedule in the predcce.ssor CO, which previously contained the Table A articles, is repealed. As to che
continued application of Table A for companies which adopted Table A before its repeal, sec para.2.008.
,,. Australian Growth ResourcesCorp Pty Ltd v VanReesema( 1988) 13 ACLR 261; and sec also para.8.026 above.
230 cflmperial Mercantile Credit Assn v Coleman (1871) LR 6 Ch 558; Costa Rica Railway Co v Forwood (1901) I

Ch 746; WoolworthsLtd v Kelly (1991) 4 ACSR 431; Centofa11tiv Eekimitor P(v Ltd (1995) 15 ACSR 629.
 CONFLICT OF INTERESTS 319

arises where the director has a material interest in any transaction, arrangement
or contract with the company that is significant in relation to the company's
business. Where there is such an interest:

• the director must declare the nature and extent of the interest to the other
directors;
• the director must not vote in respect of the matter; and
• the director must not be counted for quorum purposes in respect of the
matter.231

As to whether disclosure to the general meeting is required, the position under the
Model Articles would be the same as under Table A: see para.8.084 above.
Public companies: disclosure in respect of interests of connected entities. For 8.086
public companies, the disclosure obligation also arises in respect of interests of entities
connected 232 with the director.
Exceptions to voting restrictions in Model Articles. There are exceptions similar to 8.087
Table A reg.86(2), but the exception in reg.86(2)(d) is not reproduced in the Model
Articles.

4.3 Disclosure of interests-Companies Ordinance

Cap.622: statutory requirement to disclose material interest. Part 11 Div.5 of 8.088

Cap.622 replaces the (former) s. I 62 of the predecessor CO (repealed) in setting out
statutory requirements for directors to disclose material interests. Under Cap.622,
s.536, any director who, directly or indirectly, has a material interest in a transaction,
arrangement or contract with the company must declare the nature and extent of the
interest to the directors. 233 Disclosure is required only if the transaction, a1Tangement
or contract is of significance in relation to the company's business. The declaration
must be made at a board meeting or by written notice to the other directors: s.538(1).
A director can also comply with the disclosure obligation by giving a general notice
with respect to a category of contracts in which he or she is interested as specified
in the notice: s.538(4). For example, a general notice could be given stating that
the director has interests in contracts with another company of which he or she is a
shareholder. There would not be a need to make separate disclosures on each occasion
of contracting with that other company.
Disclosure: Cap.622 vs the predecessor CO. The following are the main changes in 8.089
the Cap.622 disclosure requirement compared with the predecessor CO, s.162:

• The disclosure obligation applies to material interests in any "transaction,

arrangement or contract" 234 with the company and not simply "contract".

23' Cap.622M: Model Articles (private companies), art.16 and Model Articles (public companies), art. I5.
1J2 As defined in Cap.622, s.486.
lJ.; c/CompanicsAct 2006 (UK) s.177.
234 Sec,e.g., Re Ouckwari [ 1998)2 BCLC3 15,319.
320 DIRECTORS' DUTIES

• For public companies, the disclosure obligation of a director extends to

material interests of the director's connected entities. 235

• There must be disclosure of both the "nature and extent" of the interest
instead of only "nature".
• There is no need for disclosure if the director is not aware236 of the interest or
the transaction, arrangement or contract in question; nor is there a need for
disclosure if the interest concerns the director's service contract that has been
or is to be considered by the directors or a committee of the directors. 237
• The declaration of interest may be given by written notice to the other
directors as well as at a directors' meeting. 238

• The disclosure obligation also applies to shadow directors (with certain

modifications on the manner of disclosure). 239

8.090 Informal disclosure principles applicable to statutory disclosure. The principles

and cases discussed above (at para.8.081) on informal disclosures to the directors
under the articles are also applicable in the context of the statutory obligation for
disclosure.
8.091 Statutory duty applies in addition to equitable duty. Section 536 of Cap.622
supplements the general law and does not replace the equitable duty requiring disclosure
to the company in general meeting. 240 So compliance with s.536 is insufficient to
prevent there being a breach of fiduciary duty unless the need to disclose to the general
meeting is waived by the articles. In contrast to the equitable duty, the articles cannot
waive the requirements of s.536. 241
8.092 Contravention of statutory duty is an offence. A director who contravenes s.536
is liable to a level 6 fine. 242 It appears that contravention of s.536 does not of itself
affect the validity of the contract, but the equitable remedies will come into play
if compliance with the statutory provision is one of the conditions laid down in a
provision of the articles which relaxes the equitable duty.243

"' Cap.622, s.536(2). "Connected entities" is defined in Cap.622, s.486.

23" A directoris to be regardedas beingawareof mattersof whichthe dire.ctoroughtreasonablyto be aware:
Cap.622, s.536(5).
zn Cap.622,s.536(4).
233 Cap.622,s.538.
239 Cap.622, s.540.
"" Ma11luen Corp v Sun King Electro11ic Primed Circuit Board Factory Ltd (1981) HKC 407; and see s.536(6).
241 Man luen Corp v Sun King Electro11ic Primed Circuit Board Facto1:v Ltd (1981) HKC 407,413.
"' Cap.622, s.542. A level 6 fine is $100,000: Criminal Procedure Ordinance (Cap.221), s.1138 and Sch.8.
"' He/y-Hwchi11son v Bmyltead Ltd [1968) I QB 549 (Eng CA); Guinness Pie v Saullders [1990) 2 AC 663
(Lord Goff); Woolworths Ltd v Kelly (1991) 4 ACSR 431,440; lee Panavision Ltd v lee lighting Ltd [1991)
BCLC 575. But in the latter case, the issue was left open on appeal ([1992) BCLC 22). Some have interpreted
Hely-H111chi11so11v Brayhead Ltd differently, as being authority for the proposition that breach of the statutory
provision will of itself lead to the contract being voidable: G11i1111ess
pie v Saunders [ 1990) 2 AC 663 (Lord
Templeman).
 CONFLICT OF INTERESTS 321

4.4 Remuneration

Directors cannot cause company to pay themselves benefits unless articles provide 8.093
for this. The no-conflict rule means that the directors cannot cause the company to pay
themselves benefits (including remuneration), nor appoint themselves to a salaried
position in the company, unless this is allowed by the articles or by the members in
general meeting. 244 The Model Articles allow a director to hold any other office or
place of profit under the company on such terms (as to remuneration and otherwise)
as the directors may determine. 245 As for remuneration for occupying the office of
director itself (i.e., directors' fees), the Model Articles provide that the remuneration
is to be determined by the company in general meeting. 246 The board has power to set
the remuneration for any managing director appointed. 247
Companies Ordinance largely does not regulate remuneration. Where the articles 8.094
dispense with the need for member approval for directors' remuneration, there can be a
danger of directors setting excessively high levels ofremuneration for themselves. A similar
problem also arises for remuneration of senior executives (where, unless the executive is
also a director, there is no requirement in equity for the remuneration to be approved by the
members). High remuneration is often justified on the basis of the need to attract talent to
a company, but there is sometimes controversy arising from directors being rewarded with
inordinate amounts ofremuneration despite poor financial performance by the company.248
The Companies Ordinance (Cap.622) itself does not regulate to any large extent the question
of directors' remuneration. There is a requirement in s.4 of the Companies (Disclosure
of Information about Benefits of Directors) Regulation (Cap.6220) 249 for disclosure of
directors' emoluments in the notes to the financial statements, although that is limited to
showing the aggregate amount of the emoluments of all directors without the need to show
amounts received by directors individually.

For listed companies some degree of shareholder control over remuneration. For 8.095
listed companies, amendments were made to the Listing Rules in 2004 to enhance
transparency and to retain for shareholders some degree of control over remuneration of

2-" Duston v Imperial Gas light Co ( l 83 I) 3 B & Ad 125; Guinness pie v Sa111ulers( 1990) 2 AC 663; Tam Po Kei v
Tam Bo Kin (No.I) [201 I) I HKLRD 537, [99)-(100).
m Cap.622H: Model Articles (private companies), art.17(1); Model Articles (public companies), art.16(1).
Similarly, under reg.86(3) ofTable. A in the predecessor CO.
246 Model Articles (private companies) art.26; Model Articles (public companies) art.28. Similarly, under reg.78 of

Table A in the predecessor Cap.32.

"' Model Articles (public companies) art.33(4); Table A, reg.110 in the predecessor CO. The Model Articles for
private companies do not contain express provisions on managing directors, but the position would be the same
pursuant to the directors' general powers of delegation in art.5.
2•• See generally Hong Kong Exchanges and Clearing Ltd, "Consultation Paper on Proposed Amendments to the
Listing Rules Relating to Corporate Governance Issues" (Jan 2002), 129-133; Phillip Lawton, "Directors'
Remuneration, Benefits and Extractions, An Analysis of their Uses, Abuses and Controls in the Coq)()rate
Governance Context of Hong Kong" ( 1995) 4 Australian Journal of Coq,orate Law 430; Ian M Ramsay,
"Director's and Officer's Remuneration: the Role of the Law" [1993] Jo11rnalof811si11essLaw 351. For recent
reforms in the UK, sec Department for Business Innovation and Skills (UK), "Directors' Pay: Consultation on
Revised Remuneration Reporting Regulations" (June 2012); Department for Business Innovation and Skills
(UK), "Directors' Pay: Guide to Government Reforms" (2012); Companies Act 2006 (UK) ss.422A, 439A and
new Pt. IOCh.4A (ss.226A-226F), introduced by Enterprise and Regulatory Refonn Act 2013 (UK) ss.79-80.
2' 9 Derived from the predecessor CO. s.161 (repealed).
322 DIRECTORS' DUTIES

directors notwithstanding relaxation of the equitable rules under a company's articles.

Approval of the shareholders in general meeting is required for directors' service
contracts of a duration that may exceed three years (or which require one year's notice
for termination or equivalent compensation in lieu of notice).250 Listed companies must
also disclose the amounts of directors' emoluments on a named basis in the companies'
financial statements. 251 The listing rules require companies to establish a remuneration
committee, a majority of the members of which are to be independent non-executive
directors. 252 The committee should have the responsibilities for setting the specific
remuneration packages of all executive directors and senior management, and for
making recommendations to the board of the remuneration of non-executive directors.
8.096 Non-director executive officers' remuneration.The concern over excessive remuneration
often arises in respect of executive pay, but the focus of the regulation under the Ordinance
and the listing rules is largely confined to the remuneration of directors and not non-
director executives. Under the listing rules, there is no requirement for disclosure of the
remuneration of non-director executive officers on a named basis, but there is a need to
disclose in the financial statements the aggregate amount of the remuneration of the five
highest paid individuals in the company for the financial year.253The Corporate Governance
Code also requires companies to disclose details of remuneration payable to members of
senior management by band in their annual reports.254

4.5 Loans to directors and similar transactions

4.5.1 Loans
8.097 Predecessor CO: prohibition against loans to directors. The equitable fiduciary
duty would prevent companies from providing loans to their directors without approval
of the members or without authorisation under the articles. The predecessor CO had
been amended in 1984255 to introduce provisions imposing stricter regulation of loans
because of the potential for abuse - e.g. loans provided on uncommercial terms or as
disguised gifts, with amounts not repaid to the company. That fom1er s.15 7H(2) of the
predecessor CO (repealed) prohibited a company 256 from directly or indirectly making

250 Stock Exchange Listing Rules, r.13.68.The remunerationcommittee or an independentboard committee of the
listed company must advise the shareholders whether the terms of the contract are fair and reasonable:r.13.68.
See also Listing Rules, Ch.17 in relation to share option schemes. Cap.622, ss.530-535 also require, for all
companies, member approval for long-term service contracts proposed to be entered into with any director, but
the approval required under those provisionsis only in respect of the period of the contract: see s.534.
251
Stock Exchange Listing Rules, App.16, para.24.
252
Stock Exchange Listing Rules, r.3.25. See also The Corporate Governance Code in Stock Exchange Listing
Rules, Ap1>.14.
zsi Stock Exchange Listing Rules, App. I6, para.25.
254 Corporate GovernanceCode para.B.1.5 (Stock Exchange Listing Rules, App.14). This requirement is a "code

provision". Listed companies arc expected to comply with "code provisions"; if they do not do so, they need 10
state their reasons for deviating from code provisions in their annual reports.
255 The prohibitions were introduced into the predecessor CO in 1984pursuant to recommendationsin the Second

Repo,1of the Companies Law Revision Committee on Company Law (April 1973)paras.7.32-7.35.
"' Theprohibitioni.nfonners.157Hof thepredecessorCOappliednotonlyto companiesincorporatedundertheCompanies
Ordinanceor its predecessorsbut also any body corporateincorporatedin Hong Kong and havingits shareslistedon
the Hong Kong Stock Exchange:see formers. I57H(l0) (repealed).The positionunder the currentCap.622is altered
such that the provisionsare only confinedto "companies"withinthe meaningof s.2, as it is thoughtthat additional
requirementsfor listedcompilniesshouldbe dealtwithunderthe listingrules insteadoftl1eComp;uuesOrdinance.
 CONFLICT OF INTERESTS 323

a loan to a director 257 of the company or its holding company. The prohibition also
extended to the giving of guarantees or security by the company in connection with
loans made by third parties to the director.
Cap.622: loan to directors permitted if there is approval by members. The restrictions 8.098
in the predecessor CO were reformulated to some extent under the current Cap.622 in
Pt.11 Div 2. A major change to the law under Cap.622 is that instead of an outright
prohibition, all companies are permitted to provide loans to its directors if there is approval
by the members.258 The requisite approval is referred to as "prescribed approval" in the
provisions,259 and the conditions that need to be satisfied before there is "prescribed
approval" are set out in Cap.622, s.496. Broadly, there are notice requirements, and an
ordinary resolution would be sufficient. For public companies, and also private companies
or companies limited by guarantee which are subsidiaries of public companies,260 there
must be disinterested voting.261 For example, if the loan is given to a director, then any
votes of that director that he may have as member are disregarded. Disinterested voting
does not prevent connected entities (other than nominees) from voting though (unless the
loan etc. is given in favour of that connected entity).

Where loan given to director of holding company approval by members of 8.099

company and holding company required. Where the loan given by a company is in
favour of a director (or connected entity of a director) of the holding company, then
prescribed approval must be given by both the members of the company and of the
holding company.262 The holding company is not prevented from voting in respect
of approval at the subsidiary level.263 If the subsidiary is a "specified company'',264
then disinterested voting is required but the votes of the holding company are to be
disregarded only if the holding company holds the shares on trust for the director.265

4.5.2 Quasi-loans ,md cretlit transactions

Public companies subject to further restrictions. Public companies, and also private 8.100
companies (or companies limited by guarantee) which are subsidiaries of a public
company, are subject to further restrictions. Such companies 266 are prohibited from
making quasi-loans to or entering into credit transactions as creditor for director of the
company or holding company without the "prescribed approval" 267 of the company's

257 The provision also covered shadow directors: see predecessor CO, s. I 57H (repealed). For Cap.622, see ss.484
and 491.
250 The member approval exception only applied to p1ivate companies under predecessor CO, s. I 57HA(2) (repealed).

259 Cap.622, ss.500-504.

'"" These are referred to as "specified companies" in Cap.622, s.496, with the term defined in s.491.
261 Cap.622, ss.496(2)(b) and 496(5).

262 Cap.622, ss.500(2), 50 I(2), 502(2), 503(2), and 504(2). Approval by the members of the holding company is not

required if the holding company is incorporated outside Hong Kong. The intention is to avoid extra-territorial
reach of the legislation in this respect.
263 Approval by the members oft he subsidiary is not required at all if the subsidiary is wholly owned (and the holding
company is incorporated in Hong Kong): Cap.622. ss.500(3)(b), 50 I(3)(b), 502(3)(b), 503(3 )(b), and 504(3)(b).
,.. i.e. a public company. or a private company or company limited by guarantee that is a subsidiary of a public
company: Cap.622, s.491 (a).
26' Cap.622, s.496(2)(b)(ii) and 496(5).
266 These are referred to as "specified companies" in Cap.622, s.496, with the te1111
defined in s.491.
267 See para.8.098 above on the meaning of"presc,ibed approval".
324 DIRECTORS' DUTIES

members. 268 Also, the giving of guarantees or other security by the company in
connection with quasi-loans provided by, or credit transactions entered into with, third
parties for the benefit of a director is prohibited.
8.101 Quasi-loan, e.g. credit card where company pays bank and director under obligation
to repay company. An example of a quasi-loan is where the company allows the director
the use of a credit card issued by a bank where the company makes the payments but with
the director under an obligation to repay to the company. A person makes a quasi-loan to
a director if the person is to pay a sum for the director, or reimburse expenditure incurred
by another for the director, on terms that the director will reimburse the person. 269
8.102 Definition of credit transaction. A person enters into a credit transaction as creditor
for a director if the person:

• supplies goods to the director under a hire-purchase agreement;

• sells goods or land to the director under a conditional sale agreement;

• leases or hires goods or leases land to the director in return for periodicalpayments;or

• othe1wise disposes of land or supplies goods or services to the director on the

understanding that payment is to be deferred. 270

8.103 Credit transactions similar effect to loans. Credit transactions have a similar effect to a
Joan in that the director receives the benefit of the transaction (e.g. possession and use of
the goods) at the outset, while the creditor does not receive full payment until a later time.

4.5.3 Trtlt1SC1Ctio11s
with connectedpersons
8.104 Prohibition on loans also applies to loans given to body corporate controlled by
director. The prohibition on Joans also applies to Joans given to any body corporate
controlled 271 by a director of the company or the holding company. 272
8.105 Specified companies - prohibitions extend to connected entities. For "specified
companies", 273 the prohibitions on loans, quasi-loans and credit transactions also apply
to "connected entities", 274 defined in Cap.622, s.486. The following are defined to be
connected entities of a director:

• Any spouse, child 275 or parent of the director. 276

"8 Cap.622, ss.501-503. The former provisions in che predecessor CO, ss.157H(2) and 157H(3) (repealed) applied
to public companies and any company in a group of companies of which a member is listed.
269 Cap.622,s.493.
21

271
° Cap.622,s.494.
Cap.622, s.492 defines the circumstances when a body corporate is regarded as being c-0mrolledby a director.
212 Cap.622,s.500.
273 i.e. a public company, or a private company or company limited by guarantee that is a subsidiary of a public
company: Cap.622, s.491 (a).
"' Cap.622, ss.502 and 503.
275 Child includes a step-child, an illegitimate child and a child adopted in any manner recognised by the law of
Hong Kong: Cap.622 s.484( I).
276 Cap.622, ss.486( I )(a) and 487.
 CONFLICT OF INTERESTS 325

• A person who is in a cohabitation relationship with the director (i.e., de facto

spouses) (and any minor child of that person who is also living with the director).277
• A body corporate with which the director is "associated", 278 as defined in
s.488. The concept of an "associated" body corporate in s.488 is wider than
the concept of a "controlled" body corporate in s.492. 279
• Trustee of any trust the beneficiaries of which include the director, or spouse
or minor child of the director. 280
• Any partner281 of the director, or of any spouse or minor child of the director,
or of a trustee referred to above.282

4.5.4 Exceptions
Exceptions where member approval not required. Exceptions are set out in 8.106
Cap.622, Pt. I I Div 2 Subdiv 3, such that member approval is not required where
the transaction comes within an exception. A number of the exceptions are derived
from provisions of the predecessor CO, but with some modifications widening the
application of the exceptions. The small loans and expenditure for defending legal
proceedings exceptions (see below) were newly introduced by Cap.622.
Categories of exceptions. The following are the catego1ies of exceptions: 8.107

• Small loans etc.: 283 i.e., where the value 284 of the loan, quasi-loan or
credit transaction does not exceed 5 percent of the company's net assets.
ln determining whether the 5 percent threshold is reached, outstanding
liabilities to the company under previous loans etc. provided to directors etc.
are aggregated and taken into account; 285
• Expenditure on company business-Le., provision of funds to a director to
meet expenditure for the purposes of the company or for enabling the director
to perform his or her duties; 286

277 Cap.622, ss.486(l)(b) and 486(1)(c).

"' Cap.622, s.486(1)(d).
"' The predecessor CO prohibitions also applied to quasi-loans and credit transactions in favour of companies
controlled by a director: ss. I 57H(3)(c), I57H(4)(c) (repealed).
,so Cap.622, ss.486(1)(e) and 486(2)(a). Also included is any trust the terms of which give a power to the trustees that
may be exercised for the benefit of the director or any spouse or minor child of the director: Cap.622, s.486(2)(b).
Any trust for the purpose ofan employee share scheme or a 1>ensionscheme is excluded: Cap.622, s.486(3).
28' That is, a partner in a partnership within the meaning of Partnership Ordinance (Cap.38): see also Cap.622,

s.486(3).
282 Cap.622, s.486( I)(f).
285 Cap.622, s.505; cfCompanics Act 2006 (UK) ss.207(1)-207(2).
"'' To determine the value, sec Cap.622, s.497.
28' Cap.622, ~s.497(l)(b) and 505.
286 Cap.622, s.506. The cap on the amount of expenditure in the predecessor CO, ss.157HA(l l}-157HA(l4)

(repealed) no longer applies under the Cap.622 provisions, nor is there a need to obtain member approval for the
exception to apply.
326 DIRECTORS' DUTIES

• Expenditure for defending civil or criminal proceedings or expenditure in

connection with investigations or regulatory action. 287 However, the director
must repay the funds if the director is convicted or judgment is given against
the director, or the director is found in an investigation or regulatory action
to have committed the misconduct;

• Home loans and leasing of goods/land.288 These exceptions cover: (a) transactions
to facilitate the purchase of residential premises for use as the only or main
residence of director, or for improving such residential premises; and (b) leasing
or hiring goods or leasing land to a director on arm's length terms. There is a cap
to this exception set at 10 percent of the company's net assets;289
• Transactions in the ordinary course ofbusiness-i.e. where the transaction is
within the ordinary course of business o.fthe company and is entered into on
arms length terms (e.g. a loan provided by a bank to its directo,); and290
• Intra-group transactions-i.e., transactions in favour of a company in the
same group. 291

4.5.5 A11ti-llvoida11ce
8.108 Certain arrangements prohibited. Cap.622, s.504 sets out an anti-avoidance
provision. If there is an arrangement entered into by a company whereby a third party
enters into a "questionable transaction" (where the third party obtains a benefit from the
company) or whereby there is an assignment or assumption by the company of rights
or liabilities under a "questionable transaction", then s.504 is triggered. Under s.504,
the company must not enter into the arrangement without the approval of its members.
"Questionable transaction" is essentially a transaction entered into by a person (the
third party) which would have been prohibited under the provisions on loans, quasi-
loans or credit transactions if the company had entered into the transaction instead
of the third party.292 For example, the following transactions would fall foul of s.504:

• where a third party has provided a loan to a director of the company and the
company purchases the loan under an assignment from the third party to the
company; or
• where the company pays an amount to a third party for the third party to
provide a loan to a director of the company.

"' Cap.622, ss.507 and 508; cf Companies Act 2006 (UK), ss.205 and 206.
288
Cap.622, ss.509 and 510.
18• Aggregate of the loan and outstanding liabilities on other loans (or guarantees) given by the company under

Cap.622, s.509 or s.510 are taken into account in determining whether the 10 percent threshold is reached; the
aggregate amount is referred to as the "total exposure amount" (see Cap.622, s.498). The threshold under the
predecessor CO, ss.I57HA(11)-157HA(14) (repealed) was 5 percent. For home loans, the limit of the amount of
the loan to not more than 80 perccm of the value of the premises under predecessor CO, s.157HA(5) (repealed)
no longer applies under Cap.622.
"" Cap.622, s.511. The monetary limits for this exception under predecessor CO, ss.157HA(9)-I57HA(10),
157HA(13), and I57HA(14) (repealed) no longer apply under Cap.622.
291 Cap.622,s.512.
292 Cap.622,s.504.
 CONFLICT OF INTERESTS 327

Questionable transaction: exceptions disregarded. Jn determining whether 8.109

a transaction is a "questionable transaction", the exceptions in Subdiv 3 of
Div 2 of Pt.11 of Cap.622 cannot be taken into account. 293 Those exceptions
cannot be relied upon, as otherwise s.504 would not be triggered if successive
arrangements were entered into where each involved a transaction that (if entered
into by the company) would fall within an exception. Without the carving out
of the exceptions in the definition of "questionable transaction", successive
arrangements could be used to override the monetary limitations that apply
under some of the exceptions. 294

4.5.6 Co11seque11ces
of co11trave11tio11
Contravention: voidable at company's instance. A major change from the 8.110
predecessor CO law is the removal of criminal liability295 for contraventions of the
prohibitions. If there is a contravention under Cap.622, the transaction or arrangement
will be voidable at the company's instance (subject to exceptions), and the director (or
controlled body corporate or connected entity for whom the transaction was entered
into) is liable to account to the company for any gains made and to indemnify the
company for losses.2%

4.5.7 Disclosure i11.fi11a11cial

statements
Disclosure in financial statements. Where a company provides a loan, quasi-loan 8.111
or enters into a credit transaction in favour of a director, controlled body corporate
or a connected entity, there must be disclosure of the particulars of the transaction
in the notes to the financial statements of the company in accordance with Cap.622,
s.383( I)(d) and the Companies (Disclosure oflnformation about Benefits of Directors)
Regulation (Cap.622G).

4.6 Connected transactions-listed companies

Listed companies: further disclosure and approval requirements. Listed 8.112

companies are subject to further restrictions under the Listing Rules in relation
to transactions between the company and its directors or connected persons. For
listed companies, even if the articles relax the equitable requirements for approval
by the general meeting, there may still be a need to comply with disclosure
requirements or requirements for independent shareholder approval under Ch 14A
of the Listing Rules.

293 See Cap.622, s.504(4).

'" Forexample,considerthe situationwherethere is an arrangementinvolvinga third J)<~rtygivinga loanto the director
for an amount under the limit in the small loansexceptionin Cap.622,s.505. If s.504(4)did not contain the words
"wouldhavebeen so prohibitedin cheabsenceof Subdivision3", then that loan is not a questionabletransaction,and
s.504does notapply.So far that seemsa reasonableoutcome.But what if a secondarrangementis enteredintosimilar
cothe above?This again wouldnot be caught,since s.505 wouldapply to chatloan. Each arrangementis not caught,
but the effect of the arrangementstakentogetheris that the loansgiven could exceedthe 5 percentlimit unders.505.
To avoidsuch abuse,the exceptionscannot be takenintoaccoum for the purposesof s.504.
,., PredecessorCO, s.l 57J (repealed) is not reproduced in Cap.622.
2% Cap.622. s.s.513.514, and 515.
328 DIRECTORS' DUTIES

5. MISUSE OF ASSETS AND INFORMATION, AND SECRET PROFITS

5.1 Profit rule

8.113 Director must not profit. Under the profit rule, directors must not, without the
company's approval,297 obtain any benefit or gain by reason of or through their position
as director of the company or by reason of some opportunity or knowledge resulting
from their position as director.298
8.114 Whether profit rule independent of conflict rule. There is some controversy
whether the profit rule is independent of the conflict rule or whether it is a sub-set
of the conflict rule such that the concept of conflict of interest confines the scope of
the profit rule. In most cases, a breach of the profit rule will also involve a breach
of the conflict rule. However, the issue becomes critical in cases where secret gains
are made from the director's position, although there is no real conflict of interest.
Whether the director would be in breach of fiduciary duty here would depend in part
on whether the profit rule has any scope of application where there is no conflict of
interest involved.
8.115 Case law not clear but better view is profit rule has a scope of operation that is
independent of conflict rule. The position under the case law is not entirely clear,
with different judges expressing different views. The leading decision of Regal
(Hastings) Ltd v Gulliver 299 arguably indicates that the profit rule is independent
as a majority of the Law Lords focused on the point that the profits made by the
directors were made by reason of their positions as directors of the company and
there was no real discussion of any conflicts of interests of the directors. However,
the decision has also been interpreted as only dealing with a specific category of
conflict of interest and not setting out any principles over and above the fundamental
principle on conflicting interests-see, for example, the views of Lord Upjohn in
Boardman v Phipps. 300 Yet Lord Cohen in that case appears to have treated the profit
and conflict rules separately as his Lordship appears to have taken the view that the
case could be disposed of by considering the profit rule on its own without the need
to look at the question of conflict of interest (although the fiduciary would also have
been liable under the conflict rule). In Chan v Zacharia,3°1 Deane J of the Australian
High Court expressly stated that the two rules, while overlapping, are distinct. This
view has been endorsed in other cases, including by Ma J in the Court of First

297 Sec further sec para.8.129 below.

293 Regal (Hastings) Ltd v Gulliver [1967) 2 AC 134 (HL); Kishimoto Sa11gyoCo Ltd v Akio Oba (1996) 1 HKLR
196,278 (CA); Chi11eseU11i1edEstablishme111sLtd v Cheung Siu Ki [1997) 2 HKC 212; Grand Field Group
Holdings Ltd v Chu King Fai [20 I6) I HKLRD 1316, (4.3) (CA). See also Kao lee & Yip v Koo Hoi Yan
Do11ald [2003) 3 HKLRD 296; Phipps v Boardman (1967) 2 AC 46; Chan v Zacharia (1984) 154 CLR 178,
198-199.
,.. (1967] 2AC 134 (Hl).
300 (1967) 2 AC 46. Lord Upjohn had dissented in the case, but it is generally thought that there was no dissent on

the law but only on the facts: e.g. see Quee11sla11d

Milles Ltd v Hudson (1978) 18ALR I, 3 (PC).
.IOI (1984) 154CLR 178.
 MISUSE OF ASSETS AND INFORMATION,AND SECRET PROFITS 329

Instance in Kao lee & Yip v Koo Hoi Yan Donald, 302 where it was stated that the two
rules are not always conterminous and each has distinct features. The better view is
that the profit rule has a scope of operation that is independent of the conflict rule.
As noted by Deane Jin Chan v Zacharia 303 and Ma Jin Kao Lee & Yip,304 the profit
rule is directed towards misuse of the director's position for personal advantage. This
can arise even if there is no conflict of interest in a particular case. The director's
position is held for the purposes of the company. Generally speaking, company
assets and information acquired through the directorship are intended to be used for
the company's purposes. Accordingly, the use of the director's position for personal
gain without the company's approval can be regarded as being improper and hence
a breach of fiduciary duty.
Secret commissions or bribes caught by profit rule. The taking of secret 8.116
commissions or bribes by directors from third parties in respect of transactions
for the company's acquisition of goods or services from the third party would be
caught by the profit rule. 305 Profits made by directors from the issue of shares
to themselves at below market value 306 or allotments made under arrangements
with the company's promoters at below market value would also come within
the scope of the equitable rule. 307 The profit rule also covers situations where
directors earn profits from an investment or business opportunity which they
come across through their position as directors of the company: see para.8.120
below.
Profit rule strict: breach even if director acted in good faith. The profit rule is 8.117
strict in that there can be a breach of fiduciary duty even though the director acted
in good faith. 308 Also, it does not matter that the company could not have attained the
profit for itself, nor that the company has not suffered any loss. 309 The rationale for a
strict application of the rule is, similar to the conflict rule, to prevent the possibility

302
(2003] 3 HKLRD 296, 319. In support of this approach, see also Don King Prod11c1ions Inc v Warren
(No. I) (2000] Ch 291, 341; Re Q11arter Mas/er UK Ltd; Q11ar1erMaster UK lid v Pyke (2005] I BCLC
245, (55]; R P Austin, "Fiduciary Accountability for Business Opportunities" in P D Finn (ed.), Eq11ity
and Commercial Relationships (Law Book Company of Australia, 1987) 146-147; Pearlie Koh, "Once a
Director, Always a Fiduciary?" (2003) 62 Cambridge law Jo11mal 403, 406-407. For the opposing view,
sec David Kershaw, "Docs it Mateer How the Law Thinks about Corporate Opportunities?" (2005) 25 Legttf
Studies 533, 538-539.
3o, ( 1984) 154 CLR 178.
'"" (2003)3 HKLRD 296, 315-316.
,o, Boston Deep Sea Fishing and Ice Co II Ansell (1888) 39 Ch D 339; hnperial Mercantile Credit Association v
Coleman (1873) LR 6 HL 189.
'°' Parker v McKe1111a (1874-75) 10 Ch App 96; Shaw v Holla11d (1900) 2 Ch 305.
307
Re London a11dProvincial Starch Co (1869) 20 LT (NS) 390; Re Carriage Co-operative S11pplyAssociation
(1884) 27 Ch D 322.
30' Regal (Hastings) Ltd v Gulliver (1967] 2 AC 134 (HL); Boardman v Phipps [1967) 2 AC 46; Chinese U11i1ed
Establishmenrs Lid v Cheung Si11Ki (1997) 2 HKC 212, 220.
3°' Keech v Sa11dford(1726) Sel Cas Ch 61, 25 ER 223; Regal (Hastings) Lui v G11/liver (1967) 2 AC 134 (HL);

Boardman v Phipps (1967) 2 AC 46; Chinese U11itedEstablishmenrs Ltd v Che1111g Siu Ki [1997) 2 HKC 212,
220; Kao Lee & l'ip v Koo Hoi Yan Do11ald (2003] 3 HKLRD 296, 320; Kishimoto Sangyo Co Ltd II Akio Oba
(1996] I MKLR 196, 20~201 (CA); Grand Field Gro11pHoldings Ltd v Ch11King Fai (2016] I HKLRD 1316,
(4.4]-(4.6] (CA).
330 DIRECTORS'DUTIES

of abuse. In this sense, the rule is said to be prophylactic. 3 io However, as stated by

Lord Cohen in Boardman v Phipps, 311 the mere use of any knowledge or opportunity
which comes to a fiduciary in the course of his or her position as fiduciary does
not necessarily make the fiduciary liable to account for any gains made from the
knowledge or opportunity. Each case depends on its own facts. 3I2 Also, it may be that
the director's liability to account would not arise in circumstances where it would
be unconscientious to assert it, to avoid unreasonable and inequitable applications
of equitable doctrines. 313

5.2 Misappropriation of company assets

8.118 Breach if director misappropriates assets. There is a breach of fiduciary duty where
directors apply company assets for their own benefit or for the benefit of third parties,
as directors do not have power to make presents to themselves or others out of the
company's assets.3I4 Misappropriation of corporate assets constitutes a fundamental
breach of duty and will generally result in a breach of the following fiduciary duties
as well: duty to act bona fide in the interests of the company, duty not to act for any
collateral or improper purpose, and duty not to act in circumstances of conflict.315

8.119 Case examples. In Akai Holdings Ltd (in liq) v Eve,win Dynasty Ltd (No.2),316 the
executive chairman and chief executive officer of Akai, a listed company, was held
to be in flagrant breach of his fiduciary duties by making concealed payments of
hundreds of millions of dollars of Akai's cash assets to offshore companies under
his direct and indirect control and to his business associates and companies they
controlled. In Re Texgar Ltd,3'1 a director was also in breach of duty where he had
misapplied company funds to pay the salaries and rental of an office by another
company owned by the director and had transferred company funds for the benefit
of the latter company purportedly in repayment of a loan which the court found to be

"o E.g., see Regal (Hastings) Ltd v Gulliver (1967) 2 /\C 134 (Lord MacMillan); Pearlie Koh, "Once a Director,
/\!ways a Fiduciary?" (2003) 62 Cambridge Law Journal 403, 408; Bryan Clark, ''UK Company Law Reform
and Directors' Exploitation of 'Corporate Opportunities'" (2006) 17 lnternatio11al Company and Commercial
Law Review 231, 234-235; Michael Ha(tjinestoros, "Exploitation ofBusine.ss Opportunities: How the UK Courts
Ensure that Directors Remain Loyal to their Companies" (2008) 19 /nternatio11alCompa11ya11dCommercial Law
Review 70. But for a critique, see John P Lowry, "Regal (Hastings) Fifty Years On: Breaking the Bonds of the
A11cie11 Regime'!" ( 1994) 45 Northern lre/a11dLegal Quarter(y I; John Lowry and Rod Edmunds, "The Corporate
Opportunity Doctrine: The Shifting Boundaries of the Duty and its Remedies" (1998) 61 Modem Law Review
515. See also David Kershaw, "Lost in Translation: Corporate Opportw1ities in Comparative Perspective" (2005)
25 Oxford Journal of Legal Stttdies 603.
'" [1967) 2 AC 46. The case concerned an acquisition of shares in a private company where the opportunity arose
by reason of the fiduciary's position. Lord Cohen appears to have accepted that if the company was a public
company and the fiduciaries purchased the shares on the market, there would not have been a breach of duty even
if the fiduciaries used knowledge which came to them from their position as fiduciary.
m [1967) 2 AC 46 (Lord Cohen and Lord Hodson).
3' 3 Chan v Zc,charia (1984) 154 CLR 178.
3" Re Ge<>rge Newman & C<>[ 1895) I Ch 674.
'" Akc,i f{()ldings lid (in liq) v Evenvin Dynasty Ltd (N<>.2) (2016] MKC 307, (53], [56], [59)-(61].
"• [2016) MKC 307.
"' [2002) 1 MKLRD 687. Sec also Bishopsgc,te Investment Management ltd (,11liq) v Maxwell (No.2) [ 1994) I All
ER 261; Tam Po Kei II Tam Bo Kin (No.I) (2011) I HKLRD 537; Karla Otto Ltd v B11le11t Ere11Bayram (2017) 2
HKLRD 124; Liqttidator ofl'Ving Fai Construction Co Ltd (in liq) 11 Yip Kwong Robert (2018) I HKC 472.
 DIVERSION OF CORPORATE OPPORTUNITIES 331

bogus. The cases on unauthorised remuneration of directors can also be analysed as

involving misappropriation of corporate assets.

6. DIVERSION OF CORPORATE OPPORTUNITIES

6.1 General

Diverting business opportunity can breach conflict or profit rules or both. 8.120
Directors can be in breach of fiduciary duty by diverting business opportunities away
from the company to themselves or to associates. 318 The conduct can, depending on the
circumstances, be treated as a breach of the conflict or profit rules, or both.319 In Poon
Ka Man Jason v Cheng Wai Tao,320 the sole director of a company which operated a
chain of sushi restaurants was held to have breached his fiduciary duties by diverting
the company's business opportunities to himself when he created new companies
to operate other sushi restaurants both under the brand name (ltamae Sushi) of the
original company and under a new brand name (Itacho Sushi).
Liability to account can arise even if company could not have taken advantage 8.121
of opportunity. In Regal (Hastings) Ltd v Gulliver, 321 the company (Regal) proposed
to establish a subsidiary (Amalgamated) with capital of £2,000 for the purpose of
acquiring leases of two cinemas. It was contemplated that Regal would later assign
the leases together with the sale of another cinema which it already owned. But in the
negotiations for the acquisitions of the leases, the landlord required the directors to
provide guarantees for the payment of the rent until the issued capital of Regal reached
£5,000. The directors were unwilling to do so and instead subscribed for shares in
the subsidiary in order for Regal's issued capital to amount to £5,000. The scheme
for the sale of Regal's cinema and the assigmnent of the leases fell through, but
subsequently the directors sold their shares in Amalgamated for a profit. The shares
in Regal were also sold to the purchasers, and the new board caused Regal to bring
an action against the directors for an account of the profits. The House of Lords held
that the directors were liable to account on the basis that they had obtained the shares
(and the subsequent profits) only by reason of the fact that they were directors of Regal
and in the course of execution of that office. The knowledge and opportunity which
enabled them to make the gain came to the directors solely by reason of their being
directors of Regal. On the evidence, Regal was not in a position to subscribe for the
further shares in Amalgamated, but it was held that the directors' liability to account
can arise notwithstanding that the company could not have taken advantage of the
opportunity and notwithstanding that the directors acted bona fide and the company

m Cook v Deeks [ 1916] 1 AC 554; Regal (Hastings) Ltd v Gulliver [ 1967] 2 AC 134 (HL); Chinese United
Establishments Ltd v Cheung Siu Ki (1997] 2 HKC 212; Re Texgar Ltd (2002] 1 HKLRD 687; Poon Ka Man
Jason II Cheng Wai Tao (2016) 19 HKCFAR 144.
319 Australian !tzstiwte of Fitness Pty Ltd v Ausmdiar, fnstitwe o_/Fitness (Vic/Tas) Pty Ltd (No.3) (2015) 109 ACSR

369, (122).
no (2016) 19 HKCFAR 144.
'" (1967)2 AC 134 (HL).
332 DIRECTORS'DUTIES

itself suffered no loss.322 The House of Lords' decision has sometimes been criticised
as being overly strict, pa1ticularly as the purchasers of the shares seemed to obtain
an undeserved windfall resulting from the disgorgement of the directors' profits in
favour of Regal.323 However, it has been countered that any such "unjust enrichment"
should be regarded as an acceptable price to pay in the need to uphold good corporate
behaviour.324 Arguably, while a strict approach in finding that there is a breach of duty
is justified to ensure the loyalty of directors, it must be open to the courts to consider
issues of fairness in deciding what relief to grant and what allowances may be given.325
8.122 Business opportunity is company's. In Re Texgar Ltd, 326 the director of a company
obtained an exclusive distributorship with a supplier for a new company which he
established in the same business as the former company. The court accepted that
the diversion of the business opportunities to an entity controlled by the director
amounted to a flagrant breach of duty. The director argued that his conduct was
justified on the basis that it was he who developed the business in the first place, that
the company's business was in essence his own, and that he could accordingly do
whatever he thought fit, including setting up a new company to take over the business
after the other director or shareholder in the first company had become uncooperative.
Deputy Judge Poon made it clear that such excuses were unmerito1ious, stating that:
"the business was the company's and the director could not act in total disregard of
the company and the other shareholder; and even if there were genuine grievances in
relation to the uncooperative actions of the other shareholder, he could have brought
the matter to court to deal with any deadlock in the company - what he could not
do was to take over the company's business and corporate opportunities by his own
business vehicles".
8.123 Director can be liable to account even if comes across business opportunity
in personal capacity. Where the director obtains a profit from information or an
opportunity that arises from the position of director of a company, then the director
is liable to account for the gain under the profit rule. However, a director can also be
liable under the conflict rule in cases where the director comes across the business
opportunity in a personal capacity. Jn Chinese United Establishments Ltd v Cheung
Siu Ki, 327 a Mr Cheung came to know of an opportunity to invest in a company
(Wuhan) engaged in a taxi business. Cheung, together with others, formed the
plaintiff company to acquire 50 percent interest in Wuhan. Later, Cheung purchased
the remaining 50 per cent shareholding in Wuhan through another corporate vehicle.
In proceedings brought against Cheung by the plaintiff company for diversion of

322One of the directors (Gulliver) did not acquire any shares in Amalgamated and was held not to be in breach
of duty. Gulliver had procured third parties to subscribe for shares, including two companies in which he had
minority shareholdings. However, on the evidence, it was accepted that the companies acquired the shares
beneficially and so Gulliver was not liable.
m See, e.g., G Jones, "Unjust Enrichment and the Fiduciary's Duty of Loyalty" (I 968) 84 Law Quartedy Review
472; Paul L Davies and Sarah Worthington, Gower's Principles of Modem Company Law (I0''cdn, Sweet and
Maxwcll 2016) [16-91].
"' Loh Siew Chcang and William Wong, Company Law: Powers a11dAcco1111((1bili1y (LcxisNcxis Buucrworths,
2003) 649-650
"' Sec Fe.ml<> Pty Ltd v Bosnjak Holdi11gsPty Ltd (200 I) 37 ACSR 672, 693; and see Cap.622, ss. 903-904.
"• (2002) I HKLRD 687.
"' (1997) 2 HKC 212.
 DIVERSIONOF CORPORATEOPPORTUNITIES 333

a corporate opportunity, Cheung sought to argue that the opportunity to purchase

the remaining 50 percent interest arose not by reason of his directorship in the
plaintiff company but by reason of his prior friendship with the original owners
of Wuhan. Rogers J considered that this argument proceeded on a misconception
of the law, rejecting as too narrow the view that directors are only prohibited from
taking up the business opportunity if the opportunity comes to them by reason of
their directorship. Citing the approach of Viscount Sankey in Regal (Hastings)
Ltd v Gulliver (who had applied the conflict rule), Rogers J took the view that
directors can be liable for diversion of a corporate opportunity where they enter into
engagements in which they have or can have a personal interest conflicting with the
interests of the company.
If existence of opportunity relevant to company directors under duty to 8.124
communicate. This was also the approach adopted in Bhullar v Bhullar.328 In that
case, the company was owned, in equal shares, by two family groups (Mohan 's family
and Sohan's family). The company carried on groceries businesses, but had also
acquired an investment property which it leased to another to run a bowling operation.
The relationship between the two family groups broke down, and at a board meeting,
Mohan's family informed Sohan's family that the former did not wish any further
properties to be acquired by the company. During a period when the two families were
negotiating to divide the company's assets and business between them, the Sohan's
family discovered by chance that the carpark adjacent to the company's investment
property was on the market. Two members of Sohan's family, who were directors in
the company, pmchased the adjacent property through another entity controlled by
themselves. The English Court of Appeal held that the directors were liable on the
basis of the conflict rule. The opportunity to acquire the adjacent property would
have been commercially attractive to the company, given its proximity to the bowling
premises owned by the company. The court took the view that whether the company
could or would have taken the opportunity was not to the point: the existence of the
opportunity was information which it was relevant for the company to know and the
appellants were under a duty as directors to communicate it to the company.
Directors not precluded from taking up business opportunities outside scope of 8.125
company's business. Directors are of course not precluded by their fiduciary duties
from taking up any business opportunity that they come across. Directors can be liable
to account if the opportunity is one which would be of concern or would be relevant
to the company, having regard to the scope of business of the company, including
both the existing business operations of the company and potential businesses that
the company is pursuing or contemplating. 329 The corporate opportunity need not be
identical to the endeavours of the company for the duties to be breached, provided

m [2003]2 BCLC 241.

329 Kao lee & Yip v Koo Hoi Yan Donald [2003) 3 HKLRO 296; Chinese United Establis/11nents Ltd v Cheung

Siu Ki [1997) 2 HKC 212; fndustrit,I Development Consultants Ltd v Cooley (1972) I WLR 443; Bhullar v
8/wllar [2003) 2 BCLC 241; Aus1ralia11/11s1it111e
of Fitness Pty lid v Austmlian fnstitute of Fitness (Vic/Tas) Pty
Ltd (No.3) (2015) 109 ACSR 369, (125]. See further Bryan Clark, "UK Company Law Reform and Directors'
Exploitation or'Corporatc Opportunities'" (2006) 17 fntematio,wl Company tmd Commercial law Review 231,
234-235; Michael H.idjinestoros, "Exploitation of Business Opportunities: How the UK Courts Ensure that
Directors Remain Loyal to their Companies" (2008) 19 InternationalCompanyand Commerciallaw Review 70.
334 DIRECTORS'DUTIES

that the opportunity is "sufficiently in the same ball park". 330 Where the opportunity
is clearly outside the scope of the company's operations, then directors would not
be precluded from taking advantage of the opportunity for themselves. 331 In Poon
Ka Man Jason v Cheng Wai Tao,332 Spigelman NPJ confirmed that the "scope of
business test" is applicable to company directors. His Lordship stated that the facts
and circumstances of a particular case may be such as to modify the subject matter
to which the fiduciary duties of a director apply. However, such modification must
be binding on the company. The modification may be formal, as in a provision in the
company's constitution or a shareholders' resolution, or it may be given informally by
unanimous informed consent of the shareholders.

6.2 Former directors

8.126 Directors cannot obtain for themselves business opportunity by simply resigning.
Directors cannot obtain for themselves a business opportunity that arose while they
were still directors by simply resigning, where the resignation was influenced by a
wish to acquire for themselves the opportunity or where it was their position with the
company rather than a fresh initiative that led them to the opportunity.333
8.127 Where cannot be described as maturing business opportunity at time of
resignation, director not precluded. However, where the business opportunity
was entirely speculative and cannot even be described as a "maturing business
opportunity" at the time of the resignation, then the director would not be precluded
from taking up the opportunity for himself after the resignation: Kishimoto Sangyo Co
Ltd v Akio Oba. 334 In that case, Mr Oba was the managing director of Kishimoto and
was responsible for negotiating contracts on behalf of Kishimoto to supply equipment
to Prime View for the installation of a pilot plant. Prime View's purpose of the pilot
plant was to test the viability of its LCD manufacturing capabilities. Subsequently Mr
Oba resigned from Kishimoto and acquired another company which then obtained
contracts to supply Prime View for Prime View's production project. The Court of
Appeal held that there was no breach of duty by Mr Oba. At the time when he resigned,
the production project was pw-elyspeculative and was not the subject of consideration
by Kishimoto. There was no certainty that Prime View would necessarily proceed
to establish the mass production plant even if the pilot plant proved successful, and
moreover there was no certainty that Prime View would necessarily have selected the
suppliers of the pilot plant. Although a director would be precluded from taking up
tangible or maturing business opportunities contemplated by the company even where
the opportunity had not reached the stage when a specific contract can be identified

m Natural Extracts Pty Ltd v Stoller (1997) 24 ACSR 110, 139; Australian lnstitllle of Fimess Pty Ltd vAus1rolia11
Institute of Fitness (Vicffas) Pty lid (No.3) (2015) 109 ACSR 369, [124).
JJi Sec Aas v 8e11ham[ 1891] 2 Ch 244.
m (2016) 19 HKCFAR 144, (77], [87]-(88). Ribeiro and Fok PJJ agreed with Spigelman NPJ'sjudgment.
"' Canadian Aero Services Ltd II O"Malley (1973) 40 DLR (3d) 371,382; and sec also Industrial Developme111
Consulta111s Ltd v Cooley [ I972] 1 WLR 443; CMS Dolphin Ltd v Simo11et[2001] 2 BCLC 704; Kao Lee & Yip v
Koo Hoi Ya11D011ald[2003] 3 HKLRD 296. It may be otherwise where it was the company which had terminated
the director's position: Plateau Eq1tipmentLtd v Marsde11(1991) 5 NZCLC 67,096.
'" [ 1996) 1 HKLR 196. See also Island &:port Finance Co Ltd II Um111111a [ 1986) BCLC 460.
 DIVERSION OF CORPORATE OPPORTUNITIES 335

at the time of the resignation,33; the mere prospect of future business is insufficient
to come within the notion of a maturing business opportunity. 336 Whether or not a
business opportunity would be regarded as sufficiently mature is a question of degree
by reference to factors such as the stage reached in discussions regarding the business,
the initiative played by the fiduciary, timing and the reasons for the fiduciary to leave
his or her position. 337
Accumulated knowledge, skill and experience can be used for own profit after 8.128
resignation. The courts have also held that the fiduciary duties do not prevent
directors from using their own accumulated knowledge, skill and experience, and
commercial relationships cultivated during their directorship, for their own profit after
resignation. 338

6.3 Authorisation by company

Authorisation by general meeting subject to principles of fraud on company, 8.129

statutory or minority shareholder remedies. If the material facts are disclosed
to the company in general meeting and there is approval by the general meeting,
then a director would not be liable to account for taking advantage of the corporate
opportunity for him or herself. 339 The interested directors are not precluded from
voting at the general meeting if they are also members of the company;340 however,
any authorisation by the general meeting would still be subject to the principles on
fraud on the company or statutory minority shareholder remedies. 341 Authorisation by
all the shareholders outside of a general meeting would also be sufficient to enable the
director to pursue the opportunity for him or herself, on the basis of the unanimous
consent doctiine. 342
If company decides not to take advantage of business opportunity whether directors 8.130
still precluded. There is a suggestion, based on the Commonwealth authorities of
Queensland Mines Ltd v Hudson 343 and Peso Silver Mines Ltd v Cropper,344 that if the
board has bona fide decided that the company would not take advantage of a business
opportunity, then a director would not be precluded by the fiduciary duties from
acquiring the oppo1tunity to make a personal gain. These decisions have been rejected

"' See Ca11adio11Aero Services Ltd v O'Malley (1973) 40 DLR (3d)371.

"' Kishimoto Sangyo Co lid vAkio Oba (1996) I HKLR 196, 210-211.
m Kao lee & Yip v Koo Hoi Yan Do11ald(2003) 3 H KLRD 296
"' KishimotoSangvo Co ltdvAkio Oba (1996) I HKLR 196, 210-211; Kao lee & Yip v Koo Hoi Yan Do11ald(2003)
3 MKLRD 296. The law of breach of confidence can, however, restrain disclosure of confidential information.
Also, contracmal restrictions (if any) can apply so long as they do not infringe the public policy against restraint
of trade.
m Regal (Hastings) Ltd v Gulliver [ 1967] 2 AC 134 (HL).
3,-0 The requirement for disinterested voting for ratification of breaches of duties in Cap.622 s.473 does not apply

where the general meeting gives authorization to the director in advance: sec paras.8.186 and 8.187.
3" Sec Chapter I0.
m Poon Ka Man Jason v Cheng /If,; Tao (2016) 19 HKCFAR 144, (87] (but on the facts of this case, a majority of
the court found that there was no unanimous approval by the shareholders of the company). On the unanimous
consent doctrine generally, sec Section 6.2 in Chapter 9.
J.H ( 1978) 18ALR I (a decision of thePrivy Councilon appealfromtheNSW SupremeCourt).
3" (1966) 58 DLR (2d) I (Supreme Court of Canada).
336 DIRECTORS'DUTIES

by some commentators as being inconsistent with Regal (Hastings) Ltd v Gulliver,34;

but others have accepted that each case depends on its own facts and the decisions
can be reconciled. 346 Both Queensland Mines and Peso Silver Mines involved mining
companies where the directors had rejected a particular mining venture on the grounds
that the company did not have adequate funds, and thereafter one of the directors
took advantage of the business opportunity for himself through another corporate
entity. In Queensland Mines, the Privy Council held that there was no breach of duty
on the basis of either of the following propositions: that the venture was outside the
scope of the fiduciary relationship between the director and the company or that the
company (through the board) had given its fully informed consent for the particular
director to pursue the opportunity.347 In Peso Silver Mines, the director had taken up
the business opportunity only after rejection by the board and after the third party
business interest had pursued the director further in the director's personal capacity.
In those circumstances, the Supreme Court of Canada held that the director's interests
in the venture did not arise by reason of the fact that he was a director of the company
nor in the course of the execution of that office.
8.131 Difficult to accept that board's bona fide rejection of opportunity sufficient to
enable director to acquire it. No doubt each case must depend on its own facts,
as emphasised in Boardman v Phipps. 348 However, in the face of the authority of
Regal (Hastings), it is difficult to accept that there is a general principle that a board's
bona fide rejection of a business opportunity will be sufficient to enable a director
to subsequently acquire the opportunity for himself or herself.349 The directors' bona
fides is not relevant to the question of whether there is a breach of duty; and in Regal
(Hastings) itself, it was accepted on the facts that the directors' decision that the
company could not attain the opportunity because of a lack of finances was a decision
made bonafide. Moreover, the view that board approval is sufficient is contrary to the
general principle that, unless the articles provide othe1wise, general meeting approval
is required to absolve a director from breach of duty.350 Prima facie, a company is
entitled to the disinterested advice of its directors. 351 Even if the majority directors

~; (1967) 2 AC 134 (HL). See, e.g., Stanley M Beck, "The Saga of Peso Mines: Corporate Opporluniry
Reconsidered" ( 1971) 49 Ctmadian Bar Review 80.
~ 6 Sec, e.g., Loh Siew Chcang and William Wong, Comptmy Ltnv: Powers 1111d Accountability (LexisNexis
Buttcrworths, 2003) 648--{)5I; Gore-Brown 011Companies, vol. I, para.15[ 15) (issue 137).
~• (1978) 18 ALR 1, 10. In Quee11sltmdMines Ltd v Hudson (1978) 18 ALR I, it may have been significant that
the company concerned was a small company and the directors were effectively also the shareholders of the
company. As noted by Lord Scannan (at page 11): "The shareholders were Factor and AOE, both of whom were
represented on the board".
-"8 (1967) 2 AC 46.
" 9 See also Bryan Clark, "UK Company Law Refonn and Directors' Exploitation of 'Corporate Opportunities"'
(2006) 17 International Co111panyand Co111mercialLaw Review 231, 240; Michael Hadjinestoros, "Exploitation
of Business Opportunities: How the UK Courts Ensure that Directors Remain Loyal to their Companies" (2008)
19 Internatio11a/ Company and Commercial Law Review 70, 76.
"" See also North West Tra11sporlatio11Co Ltd v Beatty (1887) 12 App Cas 589, 593-594; Fttrs Ltd v Tomkies
(1936) 54 CLR 583; Bhullar v Bhullar (2003) 2 BCLC 241. The outcome on the facts of Quee11sla,ulMines can,
however, be justified on the basis that there was informal unanimous approval of the shareholders where the two
shareholders were joint venture companies which were individually represented on the board. It is more difficult
to reconcile the outcome in Peso Silver Mines Ltd v Cropper with Regal (Hastings) Ltd v Gulliver. The court in
Peso Silver Mines Ltd v Cropper concentrated on the profit rule but did not consider whether there could be a
conflict of interest for the director to have taken up the opportunity: et: Bhullar v 8/wllar.
"' Benson v Heathom (1842) I Y & C Ch 326, 341-342, 62 ER 909.
 DUTY OF CARE, SKILL AND DILIGENCE 337

do not have an actual personal interest in the matter under consideration, there is a
danger of the directors looking out for one of their own rather than acting solely in the
company's interests. 352 However, it can be accepted that in some circumstances, the
board's decision on the company direction can be relevant on the question of whether
there is a diversion of a corporate opportunity. For example, if the directors have
previously set the direction of the business in particular areas, then some business
opportunity that a director now comes across which is outside the scope of those
areas would not give rise to any conflict of interest. Here, the board's decision on
the range of business of the company means that the opportunity is outside the scope
of the director's fiduciary relationship with the company and the director may be
entitled to pursue the opportunity without further approval from the company.353 But
a board's authorisation cannot absolve a director in cases where the opportunity is of
a type within the company's existing operations 354 or is of a type that the company is
contemplating-for here, there is a conflict of interest with respect to which the board
does not have the power to authorise or ratify.

7. DUTY OF CARE, SKILL AND DILIGENCE

7.1 General

Duty of care, skill and diligence: modern corporate environment demands higher 8.132
standards from directors. Directors are under a duty to exercise reasonable care, skill
and diligence in the performance of their functions. In earlier case law, over a century
ago, the courts took a relatively lenient approach in looking at what is expected
of directors. This was so because directors were often figureheads appointed, for
example because they were well known in the public eye so as to attract interest in the
company. As such, they were not expected to take on active roles in the management
or oversight of the company's business. However, the modern corporate environment
demands higher standards from directors. Because of the size and complexity of
modern companies, the major roles that companies play in commerce and society
today, and the significant sums of money invested in companies nowadays, significant
economic and social harms to shareholders, creditors, employees and others could
arise as a result of mismanagement of companies. Directors are seen as having a
responsibility to ensure good corporate governance in companies to minimise such
harms. 355 However, in setting the appropriate standards, the law needs to strike the
right balance, because the imposition of overly-stringent duties on directors can

"' Paul L Davies and Sar;ih Worthington, Gower's Principles of Modem Company law (10 1h edn, Sweet and
Maxwell 2016) (16-103).
"' This would be the case only where the opportunity arises in a personal capacity. If the opportunity arises by reason
of or in the course of the direct0rship, the profit rule applies so as to require general meeting authorisation: see
para.8.125 above.
"' See Bhullar v Bhullar (2003] 2 BCLC 241.
"' See, e.g., Daniels v Anderson (1995) 16 ACSR 607, 656-668; Paul Redmond, "The Reform of Directors' Duties"
(1991) 15 Universityof New South Waleslaw Jounwl 86, 109-11 0; Paul Spink and Stephen Chan, "The Hong
Kong Company Director's Duty of Skill and Care: A Standard for the 21 st Century?" (2003) 33 HKLJ 139;
Report cifCommi11ee011the Fi11r111cial
Aspects of CorporateGoverna11ce (London, 1992) (Cadbury Report).
338 DIRECTORS'DUTIES

potentially stifle entrepreneurship and business innovation by discouraging risk-taking

and increasing business costs. 356 The law must recognise that directors operate in a
commercial environment where some business risk is inevitable.

7.2 Sources of duty

8.133 Equitable duty and duty under tort of negligence. The duty of care originally
arose under both equity and the common law.357 The equitable duty is derived from
the duty of care imposed on trustees. However, the equitable duty is not a fiduciary
duty as such,358 since the duty has nothing to do with the position of disadvantage or
vulnerability on the part of the company and is not specifically concerned with the
fiduciary aspect of the relationship between a director and the company. 359 Under the
°
common law, the duty arose in the tort ofnegligence. 36 For executive directors under a
service or employment contract, the duty can also arise either as an express or implied
term of the contract.
8.134 Cap.622: statutory duty of care of directors. With the enactment of Cap.622, the
duty of care of directors is now set out as a statutory duty. The question of codification
of directors' duties has been topical for some time. 361 Major common law jurisdictions
including the United Kingdom 362 and Australia 363 have set out directors' fiduciary
duties and the duty of care in legislation. In the absence of consensus in Hong Kong on
the need for codification of directors' duties generally, the government has proposed to
leave the duties to be governed by the general law.364 The one exception is in relation
to the duty of care of directors, where a statutory statement of the duty (in Cap.622,
s.465) has been adopted to clarify that the standard of care imposes minimum objective
standards on all directors.

356 See, e.g., Michael J Whincop, "A Theoretical and Policy Critique of the Modern Formulation of Directors'
Duty of Care" ( 1996) 6 A11stralia11.Joumal of Corporate law 72; Douglas M Branson and Low Chee Keong,
"Balancing the Scales: A Statutory Business Judgment Rule for Hong Kong?" (2004) 34 HKLI 303.
"' Perma11e11t811i/di11gSociety v Wheeler (1994) 14 ACSR 109, 155; Daniels vA11derson (1995) 16 ACSR 607,
652-668; Base Metal Tradi11gLtd v Shamurin [2005] I WLR 1157, [19].
m Kao Lee & Yip v Koo Hoi ~m Donald [2003] 3 HKLRD 296, 311-313; Permanent Building Society v Wheeler
(1994) 14 ACSR 109, 157-158; Bristol and West B11ildi11gSociety v Mothew [1998] Ch 1 (Eng CA). Sec also
William M Heath, "The Director's 'Fiduciary' Duty of Care: A Misnomer" (2007) 25 C<>mpanya11dSecurities
LawJoumal 370; but for the comrary view, sec Antony Goldfinch, "Trustee's Duty to Exercise Reasonable Care:
Fiduciary Duty?" (2004) 78 A11stralia11 law Joumal 678; Justice Heydon, "Arc the Duties of Company Directors
to Exercise Care and Skill Fiduciary?" in Simone Degeling and James Edelman (eds.), Equity in Commercial
Law (Lawbook Co, 2005). In Westpac Banking Co1p oration v Bell Group Ltd (No.3) (2012) 89 /\CSR I, Carr
AJA agreed with the approach in Wheeler that the duty of care is not a fiduciary duty ((2715)), but Lee AJ/\
questioned the correctness of that approach ((840), (841)).
"• Permanent Building Society v Wheeler (1994) 14 /\CSR 109, 158.
"" Daniels v Anderson ( 1995) 16 ACSR 607.
,., See SCCLR, "Corporate Governance Review: A Consultation Paper on Proposals Made in Phase I of the
Review" (July 2001) 11-16; Financial Services and Treasury Bureau, "CO Rewrite Consultation Paper on
Company Names, Directors' Duties, Corporate Directorship and Registration of Charges" (April 2008) 16-23.
362 Companies Act 2006 (UK), ss.170-181.
363
Corporations Act 2001 (Aust), ss.179-190.
364
Financial Services and Treasury Bureau, "CO Rewrite Consultation Conclusions on Company Names, Directors'
Duties, Corporate Directorship and Registration of Charges" (April 2008).
 DUTY OF CARE, SKILL AND DILIGENCE 339

7 .3 Standard of care

Directors only liable if negligent. Directors will not be in breach of duty simply 8.135
because there has been some error in their judgment which leads the company to suffer
a loss.365 Directors will only be liable if they have been negligent.
Must take due care when making decisions; and duty also involves oversight of 8.136
company's affairs and can be negligent omission. There are two broad aspects to
the duty of care. First, directors must take due care when making decisions or taking
positive action on behalf of the company. Here, in determining whether directors have
exercised reasonable care, it appears that it would be legitimate for the director to
balance the foreseeable risk of harm against the potential benefits that could reasonably
have been expected to accrue to the company from the conduct in question. 366 Secondly,
the duty of care involves oversight or monitoring of the company's affairs such that
there can be a breach of duty arising from negligent omissions. 367

7.3.1 Sttlndard under the genertll ltlw

Duty is to take reasonable care. The care a director is required to take is "reasonable 8.137
care", which has been described as the degree of care an ordinary man might be
expected to take in the circumstances on his or her own behalf, 368 or the degree of
diligence, care and skill which ordinarily prudent persons would exercise under
similar circumstances. 369
Early English cases: subjective standard. There has been debate as to the precise 8.138
standard of care under the general law.370 In Re City Equitable Fire Insurance Co
Ltd, 371 Romer J considered that a director need not exhibit in the performance of
his or her duties a greater degree of skill than may reasonably be expected from a
person of his or her knowledge and experience. In Re Brazilian Rubber Plantations
& Estates ltd, 372 Neville J stated that a director "may undertake the management of a
rubber company in complete ignorance of everything connected with rubber, without
incurring responsibility for the mistakes which may result from such ignorance". These
and other early English decisions 373 are thus regarded as giving rise to an essentially
subjective standard of care, such that a director is required to "do only as much as one
might fairly expect of someone as stupid and as incompetent as the director happens
to be". 374

36' Re City Equitable Fire Insurance Co Ltd ( 1925) Ch 407.

,.. Vrisakis v ASC ( I993) 11 ACSR 162, 2 I 2; Permanent Building Society v Wheeler (1994) 14 ACSR I09, 159.
367
See para.8.149 below.
368 Re City Equitable Fire flls11ranceCo Ltd ( 1925) Ch 407.

369 Daniels vA11derson(1995) 16ACSR 607,666.

"" See generally Stefan H C Lo, "Courts and Corporate Governance: Development of the Common Law in Light of
Policy Objectives" (2006) 14 Asia Pacific Law Review 75, 84-93.
"' (1925] Ch407.
"' (1911] I Ch 425,437.
m E.g. Turquand v Ma,:rlw/1 (1868-69) LR 4 Ch App 376; Re Cardiff Savings Bank (Marquis of Bute'.r Case)
(1892] 2 Ch 100.
374
Ross W Parsons, "The Director's Duty of Good Faith" ( 1967) 5 Melbourne Universify Law Review 395, 395.
340 DIRECTORS'DUTIES

8.139 Modern Australian cases: duty of care has minimum objective standards. More
modern cases in England and Commonwealth jurisdictions have accepted that the
duty of care of directors has minimum objective standards. The issue was analysed
in detail by the NSW Court of Appeal in Daniels v Anderson, 375 where the court held
that the duty of care is not merely subjective, limited by the director's knowledge
and experience or ignorance or inaction. 376 The court held that there is a minimum
objective standard expected of all directors. But the standard of care also has subjective
elements. The standard expected will vary according to the size and business of the
particular company and the experience or skills that the director held himself or
herself out to have in the appointment to the office. 377 What is required of a particular
director will also depend in part on the manner in which the work of the company is
distributed between the directors and other officers or managers of the company,378
and the actual position held by the director.379 The duty of care of directors is thus
described as involving a dual objective or subjective standard. Whether an action is
brought against the director in equity or in the common law tort of negligence, the
standard of care is the same. 380
8.140 In England judicial acceptance that minimum objective requirements. In
England, there has also been judicial acceptance that there are now minimum objective
requirements expected of all directors. In Re D :Jan of London Ltd, Copp v D 'Jan,381
Hoffmann LJ accepted that the duty of care owed by a director under the common law
is the conduct of a reasonably diligent person having both:

(a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the same functions as are carried out by
that director in relation to the company; and
(b) the general knowledge, skill and experience that that director has.

"' (1995) 16ACSR 607. See also ASIC vAdler (2002) 41 ACSR 72, [372); Vines vASJC (2007) 62ACSR L ASICv
Rich (2009) 75 ACSR I, (7205).
376 Daniels v Anderson (1995) 16ACSR 607, 666.

"' ( 1995) 16 ACSR 607, 668; Re City Equitable Fire insurance Co Ltd [1925) Ch 407.
"' Re City Equitable Fire J11s11ra11ceCo Ltd (1925) Ch 407.
"' See ASIC v Rich (2003) 44 ACSR 341 (company chairman); ASJC v Rich (2009) 75 ACSR I, (7216)-(7221)
(managing director), and [7222)-(7223) (finance director); ASJC v MacDonald (No.J J) (2009) 256 ALR 199,
(549] (CEO's duty to ensure legal compliance by company; this aspect of the decision was not in issue on appeal:
Morley v ASJC (2010) 274 ALR 205 (NSWCA); ASIC v He/licar (2012) 286 ALR 50 I (HCA); Sltafi-on v ASIC
(2012) 286 ALR 612 (HCA)).
"" Permanent Building Society v Wheeler (1994) 14ACSR 109, 159.
"' (1994) I BCLC 561, 563. For other cases importing objective elements in the standard of care, see
Dorchester Fillanee Co v Stebbing [ I989] BCLC 498; Norma11 v Theodore Goddard [ 199 I) BCLC I 028;
Re la11dl111rstleasi11g Pie, Secreta,y of State for Trade and !11dust,y v Ball [ 1999] I BCLC 286; Re Ba rings
Pie, Secreta,y of State for Trade a11dIndustry v Baker (No.5) [ 1999] I BCLC 433, 489 (approved of on
appeal: (2000) I BCLC 523); and see also the Singapore decision in Lim Wing Kee v PP (2002] 4 SLR 327.
However, extra-judicially, Hoffmann LJ seemed co backtrack somewhat by slating 1ha11he standards 10 be
applied today arc the same as 1hose applied in the earlier English decisions such as in Re City Equitable
Fire Insurance Co ltd: Leonard H Hoffmann, "The Fourth Annual Leonard Saincr Leclurc: The Rt Hon
Lord Hoffmann" (1997) 18 Company Lawyer 194. The dual objective and subjective 1es1has since been
codified in statute in England (Companies Act 2006 (UK) s.170) and Hong Kong (Cap.622 s.465): see
further para.8.143 below.
 DUTY OF CARE, SKILL AND DILIGENCE 341

Better view is that Hong Kong would accept that minimum objective standards. 8.141
In Hong Kong, in Law Wai Duen v Boldwin Construction Co Ltd, 382 Rogers VP noted
in obiter that the classic exposition of the duty of care required of a director is that
given in Re City Equitable Fire Insurance. One interpretation of the comments is that
this indicates that the duty of care in Hong Kong was still essentially the subjective
test under the early English law.383 However, Rogers VP had also noted in the judgment
that the standard in Re City Equitable Fire Insurance "is, if anything, open to review
in present day circumstances as, perhaps, being too low".384 The Law Uiti Duen
case was only indirectly concerned with directors' duties, being an application by a
non-executive director to enforce the right to inspect the company's books of account.
The Court of Appeal upheld the right, on the basis that the right was essential to the
proper performance of directors' duties. Rogers VP (with whom the other members
of the court agreed) followed the English decision of Dorchester Finance Co Ltd
v Stebbing385 in holding that executive and non-executive directors have the same
responsibility in law as to the management of the company's business. This implicitly
accepts that there are minimum objective standards expected of all directors. Also,
in Re Copyright Ltd, 386 Kwan J accepted the principles set out in Re Barings pie,
Secretary of State for Trade and Industry v Baker (No.5}387 that directors have a duty
to acquire and maintain a sufficient knowledge and understanding of the company's
business and that, while directors can delegate, they must still supervise the discharge
of the delegated functions. These views are consistent with the trend towards higher
standards adopted by the courts overseas. Moreover, in Securities and Futures
Commission v Yin Yingneng Richard, 388 Anthony Chan J accepted (the point not being
in contention) the principles in Re D 'Jan of London Ltd, Copp v D 'Jan389 and Daniels
v Anderson. 390 Having regard to developments in the law of negligence and to the
greater role expected of directors in corporate governance today,391 the better view
is that the Hong Kong courts would, if faced squarely with the issue, decide that the
standard of care under the common law has minimum objective aspects as expounded
by overseas decisions on the common law.392

382 [200 I] 3 HKLRD 430, 434 (CA).

383 Paul Spink and Stephen Chan, "The Hong Kong Company Director's Duty of Skill and Care: A Standard for the
21" Century?" (2003) 33 HKLJ 139, 141.
384
[2001) 3 HKLRD430, 434.
"' [ 1989) BCLC 498.
'" (2004) 2 HKLRD 113, 124. The case dealt with disqualification under Cap.32 Pt.lVA.
"' [ 1999) I BCLC 433,489 (approved of on appeal: [2000) I BCLC 523).
"' (unrep., HCMP 2502/2012, [2015) HK.EC 86), [45). The case dealt with a company incorporated in the Cayman
Islands, but the court did not note any difference between Hong Kong and Cayman Islands law on directors'
duties.
m [ 1994] I BCLC 561.
l')() (1995) 16ACSR607.
391 See, e.g., Standing Committee on Company Law Reform, "Corporate Governance Review: Consultation Paper

on Proposals in Phase I of the Review" (Hong Kong July 2001) paras.6.0H.07, 6.13; Companies Registry,
A Guide 011 Directors· Duties (Hong Kong March 2014); Stock Exchange Listing Rules r.3.08(1), App.14
(Corporate Governance Code and Corporate Governance Report).
392 For a contrary view, see I Tockley, 'The AWA Decision in Hong Kong' (1995) 5(11) Company Secretary 36.

Although Cap.622, s.465 now applies in relation to directors, the pre-existing common law is still relevant for
events occurring before the commencement of s.465 (3 March 2014). Also, the common l.1wprinciples continue
to apply to officers who are not directors.
342 DIRECTORS' DUTIES

8.142 Under service or employment contract implied term that directors possesses
reasonably competent skills. In any event, for directors appointed under a service
contract or employment contract (i.e., executive directors), there would (in the absence
of any express term in the contract) be an implied term that the director possesses
reasonably competent skills for the executive position appointed and would exercise
reasonable care and skill in the performance of his or her duties.393 The standard would
be what is objectively expected of a person appointed to the designated executive
position. 394 Where the director was appointed on the basis of particular skills,
experience or qualifications, the contract may also expressly or impliedly require the
director to meet the standards reasonably expected of a person having such skills,
experience or qualifications. 395

7.3.2 Statutory duty of care

8.143 Cap.622: new statutory duty replaces general law duty. The statutory duty has
replaced the general law duty.396 Actions in respect of conduct which occurs on or
after the commencement of Cap.622 (3 March 2014) need to be proceeded with via
the statutory provision instead of under the general law. As noted above, the statutory
provision was enacted to clarify that the dual objective or subjective standard of care
is to apply for directors in Hong Kong companies.
8.144 Cap.622: standard of care. Under Cap.622, s.465(2), 397 a director must exercise the
care, skill and diligence that would be exercised by a reasonably diligent person with:
(a) the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the functions carried out by the director in relation to the company;
and (b) the general knowledge, skill and experience that the director has. Paragraph (a)
sets out the minimum objective standards expected of all directors. 398 The standard
is set with reference to the functions of the director in relation to the company, and
so this takes into account the position held by the director and the responsibilities of
the director, as well as the nature and type of the particular company concerned. 399
Where the director has special knowledge, skills or experience, then the standard of
care expected of the director is raised, pursuant to para (b ). The standard expected of
a director cannot be lowered below the minimum objective standard under para (a) for
directors who have poor knowledge, skills or experience, since a director must meet
both the standards in paras (a) and (b).The dual objective and subjective standard in
s.465 sets out in statutory form what is arguably the common law position in relation
to the duty of care of directors.
8.145 Reliance on professional advice. It has been held under the UK statutory equivalent of
Cap.622, s.465 that, although directors must exercise their own independentjudgment,

393 Lister v Romford Ice and Cold Storage Co Ltd [ 1957]AC 555.
"' ASIC v Rich (2009) 75 ACSR I, [7206).
"' See Daniels vAnderso11(1995) 16 ACSR 607,667.
396 Cap.622, s.465(4).

"' The provision is modelled on Companies Act 2006 (UK), s.174.

"' Brumder v Mo1omet Service and Repairs Ltd (2013) 3 All ER 412, [46).
"' See also Re Produce Marketing Consonium Ltd ( 1989) 5 BCC 569; Brumder v Motornet Service and Repairs Ltd
[2013)3All ER412, [55).
 DUTY OF CARE, SKILL AND DILIGENCE 343

the fact that the directors have relied upon professional advice is an important factor
in determining whether they have breached their duty to exercise reasonable care. 400
Cases from general law relevant to statutory duty. The provision in Cap.622 does not 8.146
have an equivalent of s.170( 4) of the Companies Act 2006 (UK), which states that the
statutory duties:

" ...shall be interpreted and applied in the same way as common law rules or
equitable principles and regard shall be had to the corresponding common law
rules and equitable principles in interpreting and applying the [statutory] duties."

The intention of the English provision is for the statutory duties to be interpreted and
developed in an organic manner similar to the common law and consistently with
developments in fiduciary and common law duties in other areas of the general law such as
trusts and agency law.401 Without such a provision in Cap.622, s.465 would be interpreted
pursuant to ordinary principles of statutory construction. The standard of care as set out in
the statutory provisions has been accepted as codifying the existing common law in both
England 402 and Hong Kong.403 Accordingly, since the statutory duty is derived from the
general law, the existing cases under the general law which apply the type of dual objective
and subjective standard set out in s.465 would be relevant to interpretation of the new
provision404 (and hence the case examples and principles discussed in the sections below
should also be relevant in understanding the scope of s.465). As the statutory provision
incorporates the concept of "reasonable care" from the general law, arguably courts in
Hong Kong would also be entitled to have regard to developments in the general law in
interpretation and development of the statutory duty.405

Cap.622: shadow director owes duty of care. A shadow director will also owe a duty 8.147
of care to the company under Cap.622, s.465(5). However, a holding company is not
to be regarded as a shadow director of its subsidiary only because the directors, or a
majority of the directors, of the subsidiary are accustomed to act in accordance with
the directions or instructions of the holding company. 406
Remedies same as general law.Although s.465 replaces the general law, the remedies for 8.148
breach of the duty are the same as the remedies that would apply under the general law.407

7.4 Oversight or monitoring duty

Duty of care requires monitoring company's performance. Directors are not 8.149
necessarily involved in the day to day management of the company's business, but the

4-0<l RePro4spon lid (i11liq) [2016) BCC 390, [46).

44' Explanatory Notes to the Companies Act 2006 (UK), para.305.
,o, Gregson v HAE Trustees Ltd [2009) 1 A.IIER (Comm) 457, [24).
,oi Securities and Futures Commission v Yin Ying11e11g Ric/l(lrd (unrep., HCMP 2502/2012, [2015) HKEC 86), [45).
<-0< Sec Francis Bennion, 8e1111io11on S((1tuto1y lnte11,retatio11 (LcxisNexis, 5th ed. 2008) 563.
'"' See Ausmdia11 Securities and l11vestme111s Commission v Vines (2005) 55 ACSR 617, [1096); Francis Bennion,
Ben11io11on Stawto,y l11terpreu,tio11 (LexisNcxis, 5th ed. 2008) 889-890, 1033, 1459-1460.
406 Cap.622, s.465(6). This provision follows s.251 (3) of the Companies Act 2006 (UK).

-w1 Cap.622.s.466.
344 DIRECTORS'DUTIES

duty of care of directors (under both the general law and under s.465) requires them
to monitor the company's performance and the general affairs of the company. This
requires that:408

• Directors must have a rudimentary understanding of the business of the

company. They should become familiar with the fundamentals of the
company's business;
• Directors must keep informed about the activities of the company. Directors
do not need to be engaged in detailed inspection of day-to-day activities,
but there needs to be a general monitoring of corporate affairs and policies.
Directors would be expected to attend board meetings regularly,409 and board
meetings need to be held as often as required in the circumstances to enable
the board to carry out its functions properly. Directors also need to ensure
that the board has available means to audit the management of the company
so that it can satisfy itself that the company is properly run; and
• While directors are not required to audit corporate books, they should
maintain familiarity with the financial status of the company by a regular
review of financial statements.

8.150 All directors, including non-executive directors, to meet minimum requirements

in monitoring management of company. All directors, including non-executive
directors, are required to meet these minimum requirements in monitoring the
management of the company's business and the finances of the company.410 Directors
are entitled (subject to the articles) to delegate particular functions to those below them
in the management chain, and to trust their competence and integrity to a reasonable
extent, but the exercise of the power of delegation does not absolve a director from the
duty to supervise the discharge of the delegated functions. 411 Directors cannot abrogate
responsibility entirely,412 and can no longer escape liability on the basis that they are
figureheads or sleeping or passive directors.413 If nothing has come to the knowledge
of a director to arouse suspicion that something is going wrong, ordinary attention to
the affairs of the company is sufficient. But if directors know, or by the exercise of
ordinary care should have known, any facts which would awaken suspicion and put

408 Daniels v Anderson ( 1995) 16 ACSR 607, 664, 666-667; and see also Re Bori11gspie. Secrera,y of State for
Trade 011dhidush:Y v Baker (No.5) (1999) I BCLC 433,489 (approved of on appeal: (2000) I BCLC 523);
Re Copyright Ltd (2004) 2 HKLRD 113, 124.
409 See also Vrisakis vASC (1993) 11 ACSR I62, I 70; Gold Ribbon (Accoun1011r.t) P(y lrd v Sheer!! [2005) QSC 198,
[74).
"o low Wai D11e11v Boldwi11Co11str11ctio11 Co Ltd [200 I) 3 HKLRD 430, 434 (CA); Re Copyrighr lid (2004) 2
HKLRD 113, 124-125.
"' Re Bt1ri11gspie. SecreU11yofSrotefor Tmde tmd lnd11s1tyv Boker (No.5) [1999] I BCLC 433,489 (approved of
on appeal: [2000] I BCLC 523); Re Copyrighr Lrd (2004) 2 HKLRD 113, 124-125. On the permissible scope of
delegation, see also ASIC II Mtcnve/1 (2006) 59 ACSR 3 73, [ I00]; Bia/a Pty lid v Ma/Jina Holdings Lid ( I 994)
15 ACSR 1, 62; Norman v Theodore Goddt1rd [ 1991] BCLC I028.
412 Re Wesrmid Packi11gServices Lid (No.2) [1998] 2 BCLC 646,653; Re Copyright lid (2004] 2 HKLRD 113,

124-125.
"' Daniels v Anderson (l 995) 16 ACSR 607, 667-068.
 DUTY OF CARE, SKILL AND DILIGENCE 345

a prudent person on guard, then a degree of care commensurate with the evil to be
avoided is required. 414
Director's duty greater than simply representing particular field of experience. 8.151
Directors may be appointed to be responsible for particular aspects of the company's
business. While it would be unreasonable to expect every director to have equal
knowledge and experience of every aspect of a company's business, particularly in the
case of large companies with diversified activities, every director has a duty greater
than that of simply representing a particular field of experience and cannot absolve
themselves entirely from responsibility in relation to the company's financial affairs or
in relation to the management of the company.415
Can be breach of duty if company does not comply with legal or regulatory 8.152
requirements. Directors can be in breach of the duty of care owed to the company
if they are negligent in failing to ensure that the company complies with legal or
regulatory requirements that apply to the company.416 For example, in ASIC v
A1acDonald (No. 11),417 it was accepted by the tiial judge, inter alia, that the CEO
could be negligent by allowing the company to make false or misleading statements
to the market in breach of legislative prohibitions, and by failing to take steps to deal
with the question of whether certain major transactions would need to be disclosed to
the stock market in compliance with the continuous disclosure rules in the legislation
and listing rules. The trial judge had also held that the non-executive directors were
negligent in approving of the false or misleading statement to the market. 418 Where the
company suffers a loss as a result of the directors' breach, such as where the company
is required to pay a fine or where the company is liable to pay compensation to another
resulting from the directors' acts or omissions, the company would in principle be able
to recover that sum from the defaulting director.419

7.5 Examples

Risk management. In Chintung Futures Ltd (in liq) v Arthur Lai Cheuk-Kwan, 420 the 8.153
company concerned was a private company which operated as a broker on the futures
exchange. As a result of the 1987 stock market crash, a customer of the company
defaulted on a futures trading account held with the company, leading to a loss of about

"' (1995) I6ACSR 607,666, citing Federal Deposit fllsurrmce Corp v Bierma112 F 3d 1424,
Da11iels vA11derso11
1432-1433 and Rankin v Cooper(l907) 149 F 1010, 1013.
"' See Daniels v Anderson (1995) 16 ACSR 607, 664; See also law Wai D11e11 v Baldwin Co11struction Co Ltd
[2001] 3 HKLRD430, 437 (CA).
"' Brwnder v Motornet Service and Repairs Ltd [2013] 3 All ER 412, [47]. See also A,wralia11 Securities a11d
lnve.w11e,11sCom111issio11 v Flugge (2016) I 19 ACSR I (director breached duty of care in respect of certain
transactions with foreign country contrary to United Nations sanctions).
"' (2009) 256 ALR 199.
" 8 The NSW Court or Appeal reversed the trial judge's decision on the factual question of whether the board
approved of the statements which were misleading (Morley vASlC(20I0) 274 ALR 205), but the Court of Appeal
decision on this issue was in turn reversed on further appeal to the Australian High Court: ASlC v Hellicor (2012)
286 ALR 50 I. The case also looked at the duties of a company secretary who was also chief counsel: sec Slwf,011 v
ASlC (2012) 286 ALR 612.
" 9 Brumder v Motornet Service and Repairs Ltd (2013) 3 All ER 412, [49).
"" (1994) I HKLR 95.
346 DIRECTORS' DUTIES

$83.97 million for the company. Because of the risks of loss to the company arising
from customer defaults, Bokhary J considered that each brokerage house needs to have
in place reasonable safeguards against such default. The court held that the ultimate
responsibility for the house's safety rests upon its directors and that the directors must
take reasonable steps to see that such safeguards are in place. The defendant director
was also the account executive in relation to the particular customer concemed, and
the court held that the director breached his duty of care in circumstances where the
account was opened practically without any safeguards-no guarantee was provided
for the account and the account was seriously under-margined.
8.154 Failure to carry out due diligence. The case of Re Rontex Intl Holdings Ltd421
concerned three executive directors of a listed company the principal business of
which was the sourcing, manufacture and sale of garments. The Securities and Futures
Commission brought proceedings under s.214 of the Securities and Futmes Ordinance
(Cap.571) seeking disqualification orders and orders for the company to commence
actions for recovery of compensation against the directors in respect of various
transactions of the company which led to the company suffering loss. The court held
that the directors were in breach of duty and had failed to exercise reasonable care
in, inter alia, causing the company to make investments in particular businesses
without carrying out adequate due diligence or proper appraisal of the worth of the
investments; and making significant prepayments to an agent appointed to expand the
company's business to the PRC without imposing safeguards to ensure the return of
the amounts paid.422
8.155 Lack of supervision. In Dorchester Finance Co Ltd v Stebbing,423 the company was
in the business of money-lending. The executive director was found to have knowingly
misapplied company assets by granting significant loans to himself, connected persons
and others, without proper security and without compliance with the Moneylenders
Act 1900 (UK). The court was of no doubt that the executive director acted negligently.
The court also held the two non-executive directors to be in breach of duty, although
they were unaware of the loans. Both had accounting backgrounds, and were found to
have failed to exercise due care by signing blank cheques and allowing the executive
director to use the company's funds as he pleased, and without otherwise taking any
involvement in the company's affairs.424
8.)56 Signing inaccurate documents. In Re D 'Jan of London Ltd, Copp v D 'Jan,425 the
director of a family private company signed an insurance proposal form without reading
it. He relied on his insurance broker to complete the form, but there were inaccuracies
in the form which subsequently enabled the insurer to repudiate liability for a fire

421
(unrep., HCMP 1869/2008,[2010) HKEC413).
"' See also, e.g., Re HIH,ASIC vAdler (2002)41 ACSR 72 (officers in breach of duty where investmentsand loans were
made without propersafeguards);ASIC v Rich (2009) 75 ACSR I (executivedirectorsnot in breach of duty in respect
of collapseof tclccom.munications company);and sec the followingcases discussedat para.7.124in connectionwith
disqualificationof directors:Re Peregrine/nvestme11ts Holdingsltd(unrcp., HCMP I 1212002,[2004) HKEC 1214);
(unrcp., HCMP 11212002,[2005) HKEC 1673);(unrep.,HCMP I 1212002,(2009) HKEC391).
423
( 1989) BCLC 498.

"' Sec also Morley v Statewide Ti.>baccco Services Ltd (1992) 8 ACSR 305. For an example where a non-executive
director was not considered to be in breach of duty, see Re Copyright Ltd [2004) 2 RKLRD 113.
'" (1994) I BCLC 561.
 DUTY OF CARE, SKILL AND DILIGENCE 347

at the company's premises. On an application by the liquidator, the court found that
the director was negligent. The court accepted that directors may not necessarily be
required to read the detail of all documents they sign-for example, directors might be
excused from reading the whole of a lengthy document containing legal prose on the
assurance of their solicitor that it accurately reflects the board's instructions. However,
the proposal form was an extremely simple document and in the circumstances the
director failed to show reasonable care in signing the form.
Foreign currency dealings: responsibilities of executive and non-executive 8.157
directors. Jn Daniels v Anderson, 426 the company was an importer of goods, and to
protect itself from foreign currency fluctuations, the company entered into foreign
currency dealings. The board had laid down certain basic principles, namely that the
hedging was to be related to the company's exposure to currency movements, and
that no risk was to be taken and stop loss orders were to be in place. But no system
of management or control was put into place by the senior managers, who allowed
one person (Koval) to be responsible for the currency dealings. Koval engaged in
significant speculation but losses were not shown in the company's accounts. The
CEO (Hooke) was held to be negligent. He relied on senior managers to supervise
Koval. However, Hooke was held to have breached his duties as CEO in circumstances
where he had doubts as to the abilities of the two managers originally charged with
the supervision, where he was aware of some deficiencies in internal control but had
failed to seek thorough explanations and where he failed to share what information he
had as to the problems with the non-executive directors. The non-executive directors
were held not to be negligent in circumstances where they did set a general policy for
the currency transactions and there was no reason for them to believe that the policy
was not adhered to by senior management. The non-executive directors were not aware
of the problems of internal control and the books of account, and the auditors had
assured the board that the profits shown in the accounts were genuine. On the facts, the
non-executive directors were entitled to rely on senior management and the external
auditors.
Duty in relation to financial statements. In ASIC v Healey, 421 the Federal Court of 8.158
Australia looked at the scope of directors' duties in relation to the company's financial
statements. In that case, the directors had approved consolidated financial statements
but the financial statements failed to disclose significant matters: there was a failure
to disclose AUS$ l .5 billion of short-term liabilities which were classified as non-
current liabilities, and also a failure to disclose guarantees of short-term liabilities of
an associated company ofUS$1.75 billion that had been given after the balance sheet
date. The information not disclosed was a matter of significance to the assessment of
the risks facing the corporate group and the non-disclosure meant that the financial
statements failed to comply with the relevant accounting standards and did not give
a true and fair view. The court held that both executive and non-executive directors
of the company had breached their duty of care. The court accepted that directors
can delegate the drafting of financial statements to management and that directors

"' (1995) 16ACSR607.

"'(2011)83ACSR484.
348 DIRECTORS' DUTIES

need not become familiar with the complexities of accounting standards. However, the
court held that, in light of the statutory responsibilities of directors for the company's
financial statements, 428 directors must read and understand the financial statements,
consider whether the financial statements are consistent with their knowledge of the
company's financial position, consider the statutory requirements, and make further
enqui1ies if matters revealed in the financial statements call for such enquiries. As
directors are required to understand financial statements, they must understand the
terminology used in financial statements, including the concepts of current and non-
current assets and liabilities (this classification being relevant to the assessment of
solvency and liquidity). The directors cannot substitute reliance upon the advice of
management for their own attention and examination of important matters within the
board's statutory responsibilities. In the present case, the directors were negligent
as they were aware of or should have been aware of the information which was not
disclosed, and were aware of or should have been aware of the relevant accounting
principles requiring disclosure of that information. The directors had failed to take
reasonable steps to consider whether the short-term debts and guarantees should
have been disclosed. They failed to make enqui1ies of management and failed to have
apparent errors corrected.

7.6 Exercise of independent judgment

8.159 Independent judgment; must not fetter discretion. Directors are required to
exercise independent judgment and must not fetter their discretions. The fiduciary
duty to act in good faith in the interests of the company imposes a positive obligation
on directors, such that directors are not permitted to blindly follow the instructions
of another director.429 A company's shareholders are entitled to have its officers
independently consider and decide the company's affairs. 430 Simply following the
instructions of another without putting the director's own mind to the matter could
also amount to a breach of the director's duty of care. In Law Wai Duen v Boldwin
Construction Co Ltd, 431 the four directors of the company were a husband and wife,
their daughter, and a Mr Yip. The husband and Yip denied the wife and daughter access
to the company's books. The wife was successful in an action seeking to enforce her
right of inspection.432 In the proceedings, Yip defended his conduct on the ground
that he was appointed for his technical expertise in building construction and that he
has nothing to do with the company's accounts, hence deferring to the views of the
husband. The court was scathing of this view of his duties as director. Rogers VP (with
whom the other members of the court agreed) stated that Yip cannot absolve himself
entirely from responsibility for the management and financial affairs of the company
and that he was in breach of duty by simply deferring to the husband on the question
of the other directors' access to the books.

' 28Jn the Hong Kong context, sec Cap.622, ss.379-380. (Sec Chapter 11).
419 Tam Po Kei v Tam Bo Kin (No. I) [2011) 1 HKLRD 537, (21 ); Law Wai Duen v Boldwi11Construction Co lid
[2001) 31-lKLRD 430
,;o Tam Po Kei v Tam Bo Kin (No. I) (2011) 1 HKLRD 537, [21).
,;, [200 I) 3 HKLRD 430, 407 (CA).
432 See para.8.I4 I above.
 REMEDIES 349

Can have advice of others and delegate. However, the duty to exercise independent 8.160
judgment does not mean that directors cannot act with the benefit of advice of others
or to delegate particular powers where delegation is permitted by the articles.
Cannot fetter their discretion. As fiduciaries, directors cannot fetter the exercise 8.161
of their powers by binding themselves in a manner that would lead them to disregard
their duties or to act inconsistently with them. 433 Any contract that fetters the directors'
discretion would not be enforced by the courts, 434 and so for example a director would
not be bound by any agreement to vote in a particular way at a board meeting. However,
this does not mean that the directors cannot commit the company to take particular
action at a future time. For example, where the appropriate time for consideration of
the company's interests and for the exercise of the directors' discretion is at the time of
negotiation of a contract rather than the time at which the contract is to be performed,
it can be legitimate for the directors to commit themselves to undertake necessary
action in future for the carrying out of the transaction. 435

8. REMEDIES
8.1 General

Equitable remedies for breach of fiduciary duties; breach of duty of care, company 8.162
can seek common law damages or equitable compensation. Where there is a
breach of fiduciary duty, then equitable remedies can be available, such as rescission,
restitution of property, account of profits and equitable compensation. Where there is
a threatened breach of fiduciary duty, then an injunction could be sought. Where there
is a breach of the duty of care, the company can seek compensation for its losses via
common law damages or equitable compensation.

8.2 Avoidance of acts or transactions

Where breach of fiduciary duties transaction voidable at election of company. 8.163

Where a director breaches his or her fiduciary duties in entering into a transaction with
the company, the transaction is voidable at the election of the company. For example,
the company has the right to rescind a contract entered into where a director has failed
to disclose his or her conflicts of interest. 436
\Vhere improper purpose, act voidable. Where the directors have exercised their 8.164
powers for improper purposes, such as an improper allotment of shares, then the act is
voidable. For example, in Howard Smith Ltd v Ampol Petroleum ltd, 437 the improper

4
J.; Bou/ting vAssocit1tio11ofCi11e11w1ograph, Television and Allied Teclmicians (1963)2 QB 606, 626.
' 34 Motherwell v Schoof[ 1949] 4 DLR 812.
"' Thorby v Goldberg (1964) 112 CLR 597; Fulham Pootbt1/IClub Ltd v Cobra £states Pie (1994] 1 BCLC 363
(Eng CA). Sec further Thomas B Courtney, "Fcctcring Directors' Discretion" (1995) 16 Company Lawyer 221.
"' Tro11svaollcmds Co v New Belgium (Tnwsvaol) Ltmd Development Co (1914] 2 Ch 488. The right to rescind a
voidable contract is subject to the general limitations where the ,ight to rescind can be lost.
"' [ 1974) AC 82 l.
350 DIRECTORS'DUTIES

allotment of shares was set aside by the court and an order was made for rectification
of the register of members.
8.165 Transaction entered into without authority, then act is void. Transactions involving
a breach of fiduciary duty might also have been entered into by persons without any
authority from the company. This was the situation in Thanakharn Kasikorn Thai
Chamkat (Mahachon) v Akai Holdings Ltd (No.2)438 where the Court of Final Appeal
held that the director, who failed to disclose his conflicting interests, did not have any
authority to bind the company to the contracts with a third party lender. Here, the
contracts would be regarded as void.

8.3 Restitution of company's property

8.166 Restitution of company property received in breach of fiduciary duty. Where a

director has received property of the company in breach of fiduciary duty, the company
is entitled to recover the property from the director who is regarded as a constructive
trustee of the property.439 As a constructive trust is imposed, the ordinary principles of
tracing in equity can apply.

8.4 Disgorgement of profits or benefits

8.167 Account of profits for breach of fiduciary duty. The remedy of account of profits
enables the company to obtain any profits a director has made in breach of fiduciary
duty. Thus, for example, where directors have made a gain from usurping a corporate
opportunity in breach of either the conflict rule or profit rule, the director is required
to pay the amount of the gain to the company. 440 The liability to account arises
irrespective of whether the company has suffered any loss.441 Instead of an account of
profits, the company may elect to have a compensatory remedy against the director;
the election will bind the company.442
8.168 Account of profits personal remedy but constructive trust imposed if profited
from misuse of company assets. The remedy of account of profits is a personal
remedy and not a proprietary one, and so, for example, the company would not be
entitled to obtain an asset in specie acquired by the director by misusing corporate
funds but would only be entitled to an equitable account. 443 However, where a director

458 (2010) 13HKCFAR479.For the facts,see para.8.026above.See also Guinness pie v Saunders (1990)2AC 663.
• 39 Guinness pie v Saunders [ 1990) 2 AC 663 (recovery of unlawful remuneration); J J Harrison (Properties) Ltd v
Harriso11(2002) I BCLC 162 (Eng C/\);Akai Holdings Lui (in liq) v Evenvin Dynasty Ltd (No.2) (2016) HKC 307.
0
" Regal (Hastings) Ltd II Gulliver [ 1967) 2 AC 134 (HL); Kao lee & Yip v Koo Hoi YanD011ald[2003) 3 HKLRD
296; FHR European Ventures lLP v Cedar Capital Holdings llC (2015) AC 250; Poon Ka Man Jason v Cheng
Wai Tao (2016) 19 HKCFAR 144.
"' Regal (Hastings) Ltd v Gulliver [ 1967) 2 AC 134 (HL); Kao lee & Yip v Koo Hoi YanDo,wld [2003) 3 HKLRD
296; Grand Field Group Holdings Ltd v Chu King Fai [2016] I HKLRD 1316, [4.4)-[4.6) (CA).
442
Poon Ka Man Jason v Clteng Wai Tao [2015) 2 HKC 143, [6.4) per Cheung JA (with whom the other members of
the Court of Appeal agreed), citing Warman /n1ematio11alLtd v Dwyer (1995) 182 CLR 544, 559. Appeal to the
Court of Final Appeal was dismissed ((2016) 19 HKCFAR 144) though this point was not in issue in the appeal.
The company would wish to seek compensation for losses instead of an account of profits if the company's losses
exceed the profits made by the director. As to compensatory remedies, see para.8.172 below.
443
Sinclair Investments (UK) Ltd v Versailles Tmde Fina11ceLtd [2012] Ch 453.
 REMEDIES 351

has profited from a misuse of company assets or has obtained funds or assets by
misappropriating a corporate opportunity, a constructive trust is imposed on the
property attained by the director in breach of fiduciary duty. For example, in Bhullar
v Bhullar,444 a constructive trust was imposed on the land acquired by the directors in
breach of the conflict mle, and orders were made requiring a transfer of the property to
the company. 445 The imposition of a constructive trust again means that the company's
remedy is a proprietary one and tracing is possible. Where a fiduciary obtains a bribe
in breach of duty, a constructive trust is also imposed on the money obtained. 446
Allowance to director for time, skill and financial contribution. Where a director 8. 169
has obtained assets or made a profit from misappropriating a corporate opportunity,
the court can allow the deduction of expenses incurred by the fiduciary in attaining
the unauthorised assets or profit447 or grant allowances to the director for the time, skill
and financial conhibution he or she made in obtaining the assets or profit. 448 Whether
to grant an allowance is in the discretion of the court, and exercise of the discretion
to award an equitable allowance for skill and effort is limited to "exceptional" or
"unusual" circumstances, where it cannot have the effect of encouraging fiduciaries
in any way to put themselves in a position where their interests conflict with their
duties. 449 In cases where the fiduciary carries on an ongoing business as a result of
the taking advantage of a business opportunity in breach of duty, it may sometimes be
appropriate to put a cap on the duration for which an account of profits is ordered. 450
Limits to account of profits where contract affirmed or right to rescind. Where a 8.170
director has obtained a profit in selling property to the company, it seems that there are
limits to the possibility of the company obtaining an account of profits if the contract is
affi1med by the company or the 1ight to rescind is otherwise lost. If the contract is not
rescinded, then an account of profits is not available unless the director had obtained the
goods as trustee for the company or was already a director and a fiduciary to the company
in respect of his or her acquisition of the goods.451 In Man luen Co,p v Sun King Electronic
Printed CircuitBoardFacto,y Ltd,452 the directors were required to account to the company
for the profits they received for the sale of raw materials to the company, although there was
no rescission of the contract. There was no discussion in the judgment on the limitations
on the availability of an account of profits, but the decision is consistent with the general
principle as the directors had resolved at a board meeting of the company to set up their
own firm for the purpose of supplying goods to the company and the directors can be
regarded as having acquired the goods in a fiduciary capacity vis-a-visthe company.

"' [2003) 2 BCLC 241.

"'' See also Boardman v Phipps [ 1967) 2 AC 46; Regal (Hastings) Ltd v Gulliver (1967) 2 AC 134.
' 46 Afforney-Ge11eral(Hong Kong) v Reid (1994) I AC 324 (PC).

"' Murad v AI-Saraj [2005) EWCA Civ 959; Global Ellergy Horizons Corpomtio11 v Gray [2015) EWHC 2232
(Ch), (130).
"' Boardman v Phipps (1967) 2 AC 46; Kao Lee & Yip v Koo Hoi fon Donald (2003) 3 HKLRD 296.
9
" Global Energy Horizons Corpo1111io11 v Gray (2015) EWHC 2232 (Ch), ( 130).
'"' Kao Lee & Yip v Koo Hoi YanDonald (2003) 3 HKLRD 296; Poon Ka Ma11Jason v Cheng Wai Tao (2015) 2 HKC
143 (CA) (appeal to the Court ofFinal Appeal dismissed ((2016) 19 HKCFAR 144) though this point was not in
issue in the appeal).
"' See Burland v Earle [ I902) AC 83, 99; John McGhee (ed.), S11eln Equity (32""edn., Sweet and Maxwell 2010)
para.7-054; see also the cases on promoters discussed at Chapter 2.
"' [1981] HKC407.
352 DIRECTORS' DUTIES

8.5 Equitable compensation

8.171 Equitable compensation in substitution for misapplied assets (substitutive

compensation). For breach of fiduciary duty by a director, the court has power453
to make an order for monetary payment by the director in the form of equitable
compensation. 454 Where the company's assets have been misapplied, the primary
remedy is for restitution of the assets to the company in specie, but where specific
restitution is not possible, then the director may be ordered to pay sufficient
compensation to the company to put the company back in the position to what it
would have been had the breach not been committed. 455 Equitable compensation in
this context is restitutionary or restorative, 456 and may be referred to as substitutive
compensation since the compensation is intended to provide a pecuniary substitute
for the misapplied asset. 457 For example, in lvfenno Leendert Vos v Global Fair
Industrial Ltd,458 the Court of First Instance ordered equitable compensation where
the directors had wrongfully sold the company's property at a gross undervalue.
It was not possible to seek recovery of the property itself as the property had
subsequently been disposed of to third parties who took in good faith for value. The
amount of compensation ordered was the difference between the open market value
of the property and the sale price. In Akai Holdings Ltd (in liq) v Everwin Dynasty
Ltd (No.2), 459 where the director had misappropriated cash assets of the company,
the equitable compensation payable was the amount of the defalcations less sums
previously paid back to the company by recipients of the funds.

8.172 Equitable compensation for losses suffered by company (reparative

compensation). Apart from providing a monetary substitute to a company for
misapplied assets, equitable compensation may also be ordered to compensate
for other types of losses suffered by a company as a result of a director's

"' The power arises pursuant to the court's inherent cquitablcjurisdic1ion (Nocto11 v Lord AshburtOll {1914}
AC 932) or pursuant to High Court Ordinance (Cap.4), s.17 (derived from the Lord Cairns' Act 1858
(UK)).
'" Where an account needs to be taken for the purpose of ascertaining the position between the fiduciary and the
beneficiary (ie., to identify and quantify any deficit in the funds of the beneficiary), the taking of an account
is a procedure ancillary to the ascertainment of other rights and is not a remedy in itself. In this context,
the taking of an account and equitable compensation are not alternate/inconsistent remedies and there is no
requirement for a plaintiff to elect between them: Libertaria11 lllvestments Ltd v Halt (2013) 16 HKCFAR
681, [99], (166)-(172); Akai Holdi11gs Ltd (i11liq) v Everwi11 Dy11asty Ltd (No.2) (2016) HKC 307, (471).
On accounting of funds, see further John McGhee (ed.), S11elt'sEquity (32"" edn., Sweet and Maxwell 2010)
paras.20-005, 20-012.
455
Libertaria11Investments Ltd v Halt (2013) 16 HKCFAR 681, (75)-[96); Akai Holdings Ltd (in liq) v Everwi11
Dynasty Ltd (No.2) (2016) HKC 307, [470]. (472).
•5• Libertaria11lnvestme11tsLtd v Hall (2013) 16 HKCFAR 681, [ 167);Akai Holdi11gsLtd (ill liq) v Everwill Dynasty
Ltd (No.2) [2016) HKC 307, (465], (472]
'" See AIB Group (UK) pie v Mark Redler & Co Solicitors (2015] AC 1503, (53]; Charles E F Rickett, "Equitable
Compensation: Towards a Blueprint?" (2003) 25 Sydney Law Review 31, 36-38; John McGhee (ed.), S11ell:~
Equity (32""cdn., Sweet and Maxwell 20 I 0) paras.20-020ff, 30-013.
' 58 (un.rcp., HCA 4200/1995, [2009] HKEC 1952), (460]. Sec also £xtrasure Tnivel fl1sura11cesLtd v Scaae,good
[2003] I BCLC 598.
'" [2016] HKC 307, [476]-(478], [499]. Sec also Liquidator of Wing Fai Construction Co ltd (ill liq) v Yip Kwo11g
Robert [2018] I HKC 4 72.
 REMEDIES 353

breach of fiduciary duty.460 Such compensation may be referred to as reparative

compensation. 461 For example, if a company has paid more than the market price
for property under a transaction entered into as a result of a director's breach of
fiduciary duty, apa11 from recovery of the amount of the overpayment, equitable
compensation could be ordered to compensate the company for extra stamp duty
paid due to the higher purchase price. 462
Breach must have caused loss, but rules on remoteness and foreseeability 8.173
inapplicable. Equitable compensation can only be granted for losses caused by
the breach, namely the losses which would not have occurred but for the breach,
or losses which, on a common sense view of causation, were caused by the
breach. 463 The measure of equitable compensation for breach of fiduciary duty
is not assessed on precisely the same basis as damages under the common law.
For example, the compensation (whether substitutive or reparative) recoverable
is not generally constrained by common law principles of foreseeability and
remoteness. 464 This is justified on the basis of the absolute or strict nature of
the fiduciary duties imposed on trustees (and company directors by way of
analogy). 46 ;
Restitutionary nature of remedy (for substitutive compensation) means loss 8.174
of assets generally measured at time of judgment. In the case of substitutive
compensation, another reason why questions of foreseeability and remoteness
are not relevant is because the nature of the relief sought is restitutionary - the
fiduciary is to restore the lost assets by value in lieu of restoration in specie. 466
The director is required to restore the company's funds to put the company in the
position it would have been in if the assets had not been misapplied. 467 Accordingly
the loss is generally assessed at the time of restoration (at the time of judgment)

60
' Gwembe ValleyDevelopment Co Ltd (in receivership) v Koshy (2004) I BCLC 131, [ 142)-( 147].
461 AIB Group (UK) pie v Mark Redler & Co Solicitors [2015) AC 1503, [54); Charles E F Rickett, "Equitable
Compensation: Towards a Blueprint"" (2003) 25 Sydney law Review 31, 38-40; John McGhee (ed.),
Snell's Equity (32"" edn., Sweet and Maxwell 2010) paras.20-0 I7ff, 30-014; and sec also Matthew D J
Conaglen, ;;Equitable Compensation for Breach of Fiduciary Dealing Rules" (2003) 119 Law Quarterly
Review 246.
2
•~ Cf Tweedvale Investments Pty Ltd v Thira11 Pty Ltd (1996) 14 WAR 109; Matchcw D J Conaglcn,
"Equitable Compensation for Breach of Fiduciary Dealing Rules" (2003) 119 Law Qu(lrterly Review 246,
269-270.
"'' Akai Holdings Ltd v Kasikomba11kpie (2010) 13 HKCFAR 479, (151)-(152) (CFA); Kao Lee & Yip v Koo Hoi
Jan Donald(2003) 3 HKLRD 296. See also AIB Group (UK) pie v Mark Redler& Co Solicitors (2015) AC 1503,
[135).
'" See Kao Lee & Yip v Koo Hoi Yan Donald (2003) 3 HKLRD 296, 336; Akai Holdings Ltd v Kasikornbank
Pel (2010) 13 HKCFAR 479, (131); Libertarian illvestments Ltd v Hall (2013) 16 HKCFAR 681, (79),
(82); AIB Group (UK) pie v Mark Redler & Co Solicitors (2015) AC 1503, (135); Akai Holdings Ltd (in
liq) v Everwin Dynasty Ltd (No.2) (2016) 3 HKC 307, (470), (472). The position may be otherwise where
the breach is not a breach of fiduciary duty but a breach of the equitable duty of care: see para.8.183
below.
' 65 See libertarian lnvestmeJl/sLtd v Hall (2013) 16 HKCFAR 681, (79), [80], [82); Charles E F Rickett, "Equitable

Compensation: Towards a Blueprint?" (2003) 25 Sydney law Review 31, 47-48, 52-53.
66
' libertarian lnvestmetlls Ltd v Hall (2013) 16 MKCFAR681, [79).
67
' TargetHoldings Ltd v Redfern., [ 1996)AC 421,437; libenarian lnvestmems Ltd v Hall (20 I3) 16 HKCFAR 681,
(89); AIB Group (UK) pie v Mark Redler & Co Solicitors (2015) AC 1503, (135).
354 DIRECTORS'DUTIES

rather than the time of the deprivation of the property. 468 The court is entitled to take
into account any post-breach changes affecting the value of the lost property such
that the company could recover any increase in market value between the date of
breach and the date of recoupment. 469

8.6 Remedies against third parties

8.6.J Avoidance of transaction

8.175 Setting aside of transaction with third party where breach of fiduciary duties:
void or voidable. The company may have entered into a transaction with a third party
in circumstances where there was a breach of fiduciary duty on the part of a director
of the company. \1/hether the company can obtain an order for the setting aside of
the transaction depends firstly on whether the transaction is void or voidable. For
example, if the director, in purportedly acting for the company, did not have authority
to bind the company to the contract, then the contract is void. This was the situation
in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No.2),470
involving a loan and security transaction with a bank. The bank had, however, already
sold the shares which were the subject of the security for the loan. Since the contracts
were void and the bank was never entitled to the shares, the company was able to
obtain damages against the bank in the tort of conversion.
8.176 Where director had authority transaction voidable unless third party acquired
proprietary rights without notice of breach. Where the issue of lack of authority
does not arise-such as where the board has authorised the company to transact
with a third party but where a director has failed to disclose a conflict of interest, the
transaction is voidable. The company can rescind 471 the contract as against the third
party unless the third party has acquired proprietary rights for value without notice of
the circumstances giving rise to the breach of fiduciary duty. It is not entirely clear
whether constructive notice will be sufficient to enable rescission against the third
party. There is some authority to suggest that constructive notice will not do, as what
must be shown is actual notice or wilful blindness (i.e., where persons deliberately
shut their eyes to the obvious).472 This view was given on the basis that the position

""' Re Dawson [ 1966] 2 NSWR 211, 214-216 per Street J; Libertarian Investments Lui II Hall (2013) 16 HKCFAR
681, [91); Akai Holdings Ltd (in liq) v Everwin Dynasty Ltd (No.2) [2016) 3 HKC 307, [472).
469 Re Dawson [ 1966) 2 NSWR 211; libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, [91 ); Akai

Holdings Ltd (in liq) v Evenvin Dynasty Ltd (No.2) [2016) 3 HKC 307, [472). However, assessment at the time
of the judgment is not an absolute rule and the court may assess the compensation as at the time of the breach if
it is just and equitable to do so: see Me11110
Leemien Vos v Global Fair Industrial Ltd (unrep., HCA 4200/1995,
[2009) HKEC 1952), [3181). For example, where there has been a decrease in the market value of the misapplied
assets, the court may order compensation at the value or the assets at the time of the deprivation: sec Nant-Y.Glo
and Blaina Ironworks Co v Grave (1878) 12 Ch D 738, cited with approval in libertarian Investments Ltd v Hall
(2013) 16 HKCFAR 681, [88).
470 (20 I0) 13 HKCFAR 479. For the facts, sec para.8.026 above.

"' E.g. Transvac,t Lands Co v New Belgium (Transvaal) Umd Dwelopment Co [1914) 2 Ch 488; Belgian Bcmk v
Sino Global /1111 Ltd(unrep., HCMP 4950/2001, [2005] HKEC 1414).
412
Logicrose Ltd v Southend United Football Club Ltd (No.2) (1988) I WLR 1256; Ross River Ltd v Cambridge City
Football Club Ltd [2008) I All ER 1004 (bribes and secret profits).
 REMEDIES 355

should be analogous to cases of knowing assistance (discussed below at para.8.179).

However, since the basis for denying rescission is because the third party is a bona
fide purchaser for value without notice,473 it may be that the approach in cases of
imposition of constructive trusts is inapplicable 474 such that constructive notice should
be regarded as sufficient to allow rescission against the third party.475

8.6.2 Knowing receipt

\Vhere knowing receipt company might be entitled to seek recovery against third 8.177
party; whether constructive knowledge sufficient. Where a third party has received
the company's assets or property traceable from the company's assets with knowledge
that they had been disposed of in breach of fiduciary duty, then the company may be
entitled to seek recovery against the third party.476 The third party will be liable to the
company if the third party has actual knowledge of the facts amounting to a breach of
fiduciary duty. There are statements in a number of cases that constructive knowledge
is also sufficient to ground liability.477 However, in more recent English decisions, the
view has been expressed that constructive knowledge would not be enough at least in
relation to commercial transactions. 478 After a review of the existing authorities, it was
held by the English Court of Appeal in Bank of Credit and Commerce Intl (Overseas)
Ltd v Akindele 419 that for the purposes of the doctrine of knowing receipt, the critical
issue should be whether the recipient's state of knowledge should be such as to make

m The right to rescind the voidable contrnct is a '"mere equity". If the right is not exercised before a bona fide
purchaser acquires a legal or equitable interest for value without notice, the right to rescind is lost and the
purchaser takes its interest free of the equity: see Da(v v Sydney Srock Exchange lrd (1986) 160 CLR 371,
387-389. See also John McGhee (ed.), S11ell'sEquity (32•• edn., Sweet and Maxwell 2010) para.15-020; R P
Austin and IM Ramsay, Ford's Principles of Corporations Law (16th edn., LexisNexis 2015) para.9.360; and
Stuart v Kingston (1924) 34 CLR 394 (PC) (property sold by trustee in breach of trust could not be set aside
where purchaser took for value without notice).
"' In Re Mo11rag11'.f 1l·11sts(1987] Ch 264,278, Megarry V-C noted that there is a fundamental difference
Serrle111e11r
between die doctrine of bo11ajide purchaser for value without notice and the imposition of constructive trust~, as
the former is concerned with the question of whether a person takes property free from an equity while the latter is
concerned with whether a person is to have imposed on him or her the personal burdens and obligations of trusteeship.
"' For acceptance of the view that constructive notice is sutlicient, see Rolled Steel Pmducrs (Holdings) Ltd v
British Steel Corp [ 1986] Ch 246, 306-307; Sarah Worthington, ''Corporate Governance: Remedying and
Ratifying Directors' Breaches" (2000) 116 Ltnv Quarterly Review 638,660. Cases of non-disclosures of connicts
of interests by directors are sometimes also analysed as cases where the director's authority to contract for the
company is defective for non-compliance with the company's article.s. Here, constructive notice of the non-
disclosure can be sufficient to deny the third party the ability to enforce the transaction with the company: see
Pocijic Fou11datio11 Fi,umce Ltd v Fai,young I-foldings Ltd (1999] 3 HKLRD 153 (CA) and Chapter 12. It would
be odd if, on the same facts, a different outcome is reached depending simply on whether the case is analysed as
breach of fiduciary duty or defective authority for non-compliance with the articles.
"' Barnes vAddy(l813-74) LR 9 Ch App 244; Belmolll Finance Co,p Ltd v Williams Furniture Ltd (No.2) (1980] I
All ER 393 (Eng CA); Eagle 1h,sr pie v SBC Securities Ltd ( 1993) I WLR 484, 497-498; £/ Ajou v Dollar land
Holdings pie (1994) I BCLC 464,478; High Fashion Garments Co Ltd v Ng Siu 1011g(unrep., HCA 12093/1999,
[2005] HKEC 1293); Thanakharn Kasikom Thai Cltamkat (Maltaclto11) vAkai Holdings Ltd (No.2) (2010) 13
HKCFAR 479 (CFA); Karla Otto Ltd v Bule11rEren Bayram (2017] 2 HKLRD 124.
477 E.g. Be/1110111Fi11a11ce Co,p Ltd v Williams Furniture Lui (No.2) [ 1980] I All ER 393, 405; Agip (Afi-ica) Ltd v
Jackson (1990] Ch 265, 290-291.
"' E.g. Re Mo11tagu'sSe11leme11/ 7)·usts (1987] Ch 264; Eagle li-ust pie v SBC Securities Ltd [1993] I WLR 484,
502-503.
"' (2000] Ch 43 7.
356 DIRECTORS'DUTIES

it unconscionable for him or her to retain the benefit of the receipt. This test has been
applied by the Court of First Instance in Hong Kong.480 In Thanakharn Kasikorn Thai
Chamkat (Mahachon) v Akai Holdings Ltd (No.2),481 the approach in Akindele was
accepted to be correct by the parties and so the Court of Final Appeal was prepared
to assume, without deciding the point, that the Akindele test was correct. In that case,
apart from its claim for common law damages for conversion, the company also argued
that it was entitled to recover against the lender on the basis of knowing receipt. The
court had found that the belief by the lender that the director had authority to act for
the company was irrational. 482 In these circumstances, the court accepted in obiter that
it would be unconscionable for the lender to retain the benefit of any assets received
from the company under the impugned transaction. 483
8.178 Where knowing receipt, proprietary claim. Where knowing receipt is established,
the company has a proprietary claim for its assets or its proceeds against the third
party. However, even if the third party no longer holds the asset or its traceable
proceeds, the company has a personal claim against the third party for equitable
compensation. 484

8.6.3 Dishonest assistll11ce

8.179 Dishonest assistance. Third parties can also be liable on the basis of being an
accessory to the breach of fiduciary duty, namely dishonestly procuring or assisting
in the breach of fiduciary duty 485 ( or what was previously referred to as "knowing
assistance" 486). For liability to be imposed on this basis, it is unnecessary to establish
that the fiduciary was in breach of trust or that there was any misapplication or
misappropriation of property. 487 In Royal Brunei Airlines Sdn Bhd v Tan,488 the P1ivy
Council also emphasized that it is the state of mind of the third party that is critical
and not the state of mind of the fiduciary. That is, it is not necessary to show that
the fiduciary was dishonest, although this would usually be so where the third party
who is assisting him is acting dishonestly. 489 The liability of a person for dishonest
assistance is to compensate the company for losses resulting from the breach of
fiduciary duty,490 and possibly also to account for profits as a result of his or her
assistance. 491

480 High Fashio11Garme11tsCo Ltd II Ng Siu To11g[2004) I HKLRD 928.

4
"(2010) 13 HKCFAR479, (127)-(128].
4
" For the facts, see para.8.026 above, and see also Chapter 12.
4
" (2010) 13 HKCFAR479, (137).
4
" See John McGhee (ed.), Snell'.~Eq11i1y (32N1edn., Sweet and Maxwell 2010) para.30-070; Tha11aklramKasikom
Thai C/ramkm (Malwclron) vAkai Holdings lid (No.2) (2010) 13 HKCFAR 479.
' 85 Royal Brunei Airli11esSdn Bhd v Tan ( 1995) 2 AC 378 (PC).
' 86 Barnes vAddy (I 873-74) LR 9 Ch App 244.
' 8' Goldtrai/Travel lid (i11liq) vAydin [2015) I BCLC 89, [125)-(129).
488 [1995)2 AC 378.

' 8~ [1995) 2 AC 378, 385, 392. However, the position is different in Australia: Farah Constructions Ply Ltd v Say-
Dee Pty Ltd (2007) 230 CLR 89; Re Wt11erfro111 lnvest111e11ts
Group Pty Ud (in liq) (2015) 105 ACSR 280, [126).
•9• Royal Brunei Airlines Sd11Bhd v Tan (1995) 2 AC 378.
491
Ultra.frame(UK) Ltd v Fielding [2005) EWHC 1638; Novoship (UK) Ltd v Miklu,ylyuk (20 I5] QB 499; and see
further John McGhee (ed.), Snell's Equity (32''edn., Sweet and Maxwell 2010) [30-079)-(30-081]; Hon. William
Oummow, "Dishonest Assistance and Acc-0unt of Profits" (2015) 74 Cambridge Law Jo11rnal405.
 REMEDIES 357

Objective standard of honesty. In Barlow Clowes Intl Ltd v Eurotrust Intl ltd, 492 8.180
Lord Hoffmann, in giving the advice of the Privy Council, accepted as correct the
trial judge's statement of the test of dishonesty that although a dishonest state of
mind is a subjective mental state, the standard by which the law determines whether
it is dishonest is objective; and that if by ordinary standards a defendant's state of
mind would be characterised as dishonest, it is irrelevant that the defendant judges
by different standards. This test is regarded as an objective test of dishonesty and
has been applied in Hong Kong.493 Although the standard of honesty is objective,
whether a person is dishonest also depends on the circumstances actually known to
the person in question, as distinct from what a reasonable person would have known
or appreciated.494
Case example. Jn Breitenfeld UK Ltd v Harrison,49; discussed at para.8.075 above, 8.181
the son and daughter-in-law (who were also employees of the claimant company at the
time when they set up the rival company) were held to have dishonestly assisted the
managing director in the latter's breach of fiduciary duty. There was assistance as
they participated in, and provided the very opportunity for, the managing director's
breach of duty.496 As to dishonesty, the evidence was that all three parties cloaked their
activities (in establishing and operating the rival company) in secrecy and concealed
it from the claimant company. The court held that they did not act as honest people
would act; and their consciences told them that they were engaged in transactions in
which they could not honestly participate, so they acted secretly.497

8.7 Breach of duty of care

Cap.622: statutory duty of care; for remedies general law applies. Although the 8.182
duty of care is now set out under Cap.622, s.465, the principles on the remedies for
breach of duty under the general law apply for breaches of the statutory duty of care.498

8.7.1 Compe11satio11.for
losses
For negligence company can recover compensation: common law principles of 8.183
causation, remoteness and measure of damages likely to apply. Where a director

492 [2006] I WLR 1476 (PC). For an example, see Si11gularis Holdings Ltd v Daiwa Capital Markets Europe Ltd
[2017] I BCLC 625, (2017] EWHC 257 (Ch) (where a director was in breach of fiduciary duty by requesting
the bank to pay the company's funds to entities controlled by the director, the bank was held not to have acted
dishonestly in the circumstances of the case).
493 Peconic Industrial Developme11t Ltd v Chio Ho Cheong (unrep., HCA 16255/1999, [2006] HKEC 957).
The test was not in issue on appeal: Peconic lndu.<trialDevelopment Ltd v Lau Kwok Fai [2008) 4 HKLRD 473
(CA); (2009) 12 HKCFAR 139 (CFA). See also UBS AG v Stand Ford Intl Enterprises Ltd [2002) 3 HKC 621,
627-628; Li Shiu To v Cheung Pik Ng [2018) 2 HKC 381, [47)-[49) Matthew Conaglen and Amy Goymour,
"Dishonesty in the Context of Assistance -Again" (2006) 65 Cambridge law Journal 18.
"' Li Shiu To v Cheung Pik Ng [2018) 2 HKC 381, [50)-[52).
"5 [2015) 2 8CLC 275, [2015) EWHC 399 (Ch).
' 96 [2015) 2 8CLC 275, [2015) EWHC 399 (Ch). [80).
497 [2015) 2 8CLC 275, [2015] EWHC 399 (Ch), [84). The rival company was also liable (at [861). A company's
liability depends on attribution of the acts and dishonest state of mind of persons (eg. its directors) to the
company: e.g., sec BC! Fi11a11cesPty Ltd v Bi11et1er(No.4) (2016) 117 ACSR 18, [308)-(313), [980]-[983);
Pty Ltd v A11stralia11Institute of Fitness Pty Ltd (2016) 116 ACSR 566.
Australian Careers !11stit11te
498 Cap.622.s.466
358 DIRECTORS'DUTIES

is negligent, the company can recover compensation for its losses. Compensation for
losses for breach of an equitable duty is obtained by way of the remedy of equitable
compensation in the court's equitable jurisdiction, while compensation in tort is
obtained via damages under the common law. Generally, common law principles on
damages such as remoteness and measure of damages do not apply to the assessment
of equitable compensation. However, it may be otherwise in the case of the equitable
duty of care. The English Court of Appeal has expressed the view that the aim of
compensation for breach of the duty in equity is the same as under the common
law.499 The remedy is to compensate for loss suffered and is different to equitable
compensation for breach of fiduciary duty which is restitutionary or restorative 500
rather than compensatory. Accordingly, the court took the view that common law
rules of causation, remoteness and measure of damages can be applied by analogy
when assessing the amount of equitable compensation for breach of the duty of care.
There are obiter comments in Hong Kong decisions accepting such an approach,5°1
but doubts have been expressed on its correctness by the Australian High Court. 502

8.7.2 Causation
8.184 Causation: as matter of ordinary common sense whether defendant's act cause
of loss. The company can only recover compensation from a director if the breach of
the duty of care by the director was the cause of the company's loss. Under common
law principles of negligence, it is necessary to examine whether the negligent act or
omission of the defendant was so connected with the plaintiff's loss that as a matter of
ordinary common sense, it should be regarded as a cause of it.503
8.185 "But for" test of causation. In Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers,504
a moneylending company suffered losses after a number of borrowers defaulted under
their loan agreements which led to the company entering into liquidation. Certain of
the directors acted fraudulently in the obtaining of the loans from the company, but
the company also failed to comply with accepted lending practices. The appellant was
a non-executive director who was, together with the other directors, found to be in
breach of duty by failing to ensure such compliance. However, the Queensland Court of
Appeal held that the appellant's breach of duty was not the cause of the company's loss.
The crucial question was whether the appellant's omissions in terms of the collective
governance of the company contributed to the outcome of the decision-making process
of the company that resulted in the improvident loans being made.505 The Court of

499 Bristol and West Building Society v Mothew [ 1998] Ch 1; and see also Permanent Building Society v Wheeler
(1994) 14 ACSR 109; Henderson v Merrell Syndic(lfe ltd [1995] 2 AC 145,205; John Mowbray et al., Lewin 011
Tn,.m ( I 8'"edn., Sweet & Maxwell 2008) para.39-15.
500 In the case of"substitutive compensation": see para.8.174 above.
$()I Kao Lee & l'ip v Koo Hoi Yan Donald [2003] 3 MKLRD 296, 312-313; Tha11akham Kasikom Thai Chamkat
(Mahacho11) v Akai Holdings ltd (No.2) (2010) 13 HKCFAR 479, [155]; Libertarian fllvestments Ltd v Hall
(2013) 16 MKCFAR681, [77]. This approach has been approved of in New Zealand (Banko/New Zealand v New
Zetdand Guardit111Trust Ltd [ 1999] I NZLR 664, 681).
5-0l Youyang Pty Ltd v Mimer Ellison Morris Fletcher (2003) 196 ALR 482. [39].
5-0J Permanent Building Society v Wheeler (1994) 14 ACSR 109, 161. On Hong Kong cases generally which apply
the common-sense te.srof causation in the tort of negligence, see, e.g., ll'c>rldWide St(ltiona,y M(l1111facturi11g
Co
Ltd v Fong Chi Leung [1994] 2 HKC 449,454.
'°' [2006)QCA 335.
5-0, [2006)QCA 335, [273).
 RELIEF FROMLIABILITY 359

Appeal applied the "but for'' test of causation,506 and held that, on the evidence, it was
not possible to conclude that the improvident loans would not have been made but for the
absence of the proper loan assessment procedures that should have been in place.507 If
proper lending procedures were in place, there would have been an increased prospect of
exposing irregular or fraudulent loan applications, but that was not sufficient to establish
that the loans would not have been made but for the appellant's breach of duty.508

9. RELIEF FROM LIABILITY

9.1 Ratification by company

Unless articles provide that board can do so, ratification is by general meeting. 8.186
Prima facie, a company can authorise conduct by a director in advance to avoid the
conduct being regarded as a breach of duty, or the company can ratify a breach of duty
that has already occurred so as to relieve the director from liability to the company.51)<)
Unless the articles provide otherwise, the board does not have the power to ratify
breaches of duties by directors-ratification must be done by the members in general
meeting. 510 An ordinary resolution will suffice, but this is subject to restrictions,
discussed below. Ratification is only effective if there is adequate disclosure of
material facts to the general meeting. 511
Cap.622: interested directors and associated persons not entitled to vote. Under 8.187
Cap.622, s.473, interested directors and associated persons are not entitled to vote
where ratification is sought from the members to relieve directors from breaches of
duties. 512 Votes of the director, entities connected with the director,513 and persons (i.e.,
nominees) holding shares on trust for the director or connected entity are disregarded
in the vote on the motion for ratifying the director's breach of duty. Section 473 was
introduced when Cap.622 was enacted. The provision is an improvement on the
previous law as, under the common law, the director or associated persons are not
prevented from voting to ratify the director's own breach of duty,514 and the resolution
passed on the strength of the director's votes could only be set aside if there is fraud

06
' [2006] QCA 335, [272).
0
' ' [2006] QCA 335, (323).
so, (2006) QCA 335, (282).
509 Hogg v Cramp/tom Ltd [1967) Ch 254; Regal (Hasri11gs)Ltd v Gulliver (1967) 2 AC 134, 150; Bamfo,rl v

Bamford [ 1970] Ch 212. There is a difference between "authorisation" and "ratification" as the former refers
to consent of the company given prior to the conduct occurring, while the latter refers to consent given after a
breach has occurred. However, for simplicity, the term "ratification" will be used in this section to cover both
terms unless the context indicates otherwise. Note also that ratification in the present context involves a release
of the director from liability. It is not sufficient if there is only ratification in the sense of the company adopting
(an being bound by) a transaction entered into by a director without authority and in breach of duty; see Lam Kin
Chung vSoka G(1kkailntenwrional of Hong Kong Ltd (No.2) [2018] 747, [2018) 2 HKLRD 769.
5 ' 6 Regal (Hastings) Ltd v Gulliver [ 1967) 2 AC 134; Man luen Corp v Sun King £/ectronic Printed Circuit Board

Fttcto,y Ltd [ 1981] HKC 407.

"' Phosphate of lime Co v Green (1871-72) LR 7 CP 43, 56-57.
"' cJCompanies Act 2006 (UK) s.239.
' 15 For the definitionof connectedentity,see Cap.622,s.486.
"' Norrh-West Tra11sparratio11
Co v Beatty (1887) 12 App Cas 589.
360 DIRECTORS'DUTIES

on the company. However, s.473 applies only in respect of "ratification" of conduct

and so it may not apply in the case of authorisation of future conduct as opposed to
ratification of conduct that has already occurred.
8.188 Cannot ratify act which is unlawful. There are limits to the circumstances where
the members can effectively ratify director's conduct so as to relieve the director from
liability. Where directors cause the company to do an act which the company cannot
lawfully do (because of a prohibition under either statute Jaw or the general Jaw),
it would not be possible for the company to ratify the conduct. For example, there
cannot be effective ratification of a breach of duty involving disposals of assets to
the company's shareholders in contravention of the maintenance of capital doctrine
under the common law or the Companies Ordinance (Cap.622).m The court may also
hold the ratification (even if given unanimously by the members) to be ineffective
where the transaction is dishonest and illegal, such as opening of letters of credit,
purportedly for payment of goods under non-existent sale and purchase transactions,
which amounted to a fraud on the issuing bank.516
8.189 Cannot ratify breach of duty to take into account creditors' interests. Where the
directors' breach of duty has caused the company to enter into insolvency or has caused
further losses of assets when the company is already insolvent, the members will not
be able to ratify any breaches of duties as the creditors' interests are paramount in
those circumstances. 517
8.190 \Vhether non-ratifiable breaches such as misappropriation of company's assets.
Subject to the above restrictions, the company, through the members as the corporate
organ, can in principle ratify any breach of fiduciary duty or breach of the duty of
care. It is sometin1es said that there are further categories of non-ratifiable breaches,
such as misappropriation of company's assets. However, such statements are apt to
mislead. For example, as long as there is no infringement of the capital maintenance
rules and creditors' interests are not prejudiced, there is nothing to stop the members
from unanimously agreeing to make a gift of the company's assets. 518 This would be
consistent with the general principle that a beneficiary can release a fiduciary from
breach of duties owed to the beneficiary. 519 In Tam Po Kei v Tam Bo Kin,520 Harris J
accepted that the doctrine of unanimous consent of shareholders can be applied to
relieve a director from breaches of duties. The case dealt with a petition under the

5' 5 Sec, e.g., Re Exchange Banking Co, Flitcrofts Ct,se (1882) 21 Ch D 519; Re Holt Garage (1964) Ltd (1982] 3
All ER 1016.
"• Liquidmor of Wing A,i Construction Co Ltd (in liq) v Yip Kwong Robert [2018] I HKC 472, (269)-(271).
'" Chillt1111gF11t11resLtd v Arth11r Lai Cheuk Kwan (1994) I HKLR 95; Kinsela v Russell Kinsela Pty Ltd
(ill liq) ( 1986) 4 NSWLR 722; Re PV Solar Solutions Ltd (ill liq) (2018) I BCLC 58; and see para.8.038
above.
"8 See Re Horsley & Weight Ltd [ 1982) Ch 442,454; Multinational Gas and Petrochemical Co v Multinational Gas
and Petrochemical Services Ltd [ 1983) Ch 258, 289-290; Rolled Steel Products (Holdings) Ltd v British Steel
Corp (1986) Ch 246,296. See also Tom Po Kei vTom Bo Ki11(No.I) (201 I] I HKLRD 537, [67]; cfLiquidator
of Wi11gFoi Co11structionCo Ltd (in liq) v Yip Kwong Robert [2018) I HKC 472, [271).
,,. See further Stefan Lo, "The Continuing Role of Equity in Restraining Majo1ity Shareholder Power" (2004) 16
Australian Journal of Corporate Law 96.
"" [2011) I HKLRD 537, (67], [108). See also Re Stylo11dHoldings Ltd (No.2) (2012) 2 HKLRD 325 where
Burma J. accepted in obiter that misappropriation of company property is capable of ratification.
 RELIEF FROM LIABILITY 361

predecessor CO, s.168A (repealed) (see now Cap.622, ss.724-725), and the director
concerned was found to have made improper distributions of the assets of a family-
owned company. However, the court held that there was no breach of duty in respect
of remuneration paid to an executive director which was agreed to by the permanent
managing director who was the patriarch of the family. At the time, the patriarch had
ultimate authority over the affairs of the company which he had set up, and all the
shareholders (who were family members) had acquiesced to his authority and control.
Jn those circumstances, the court was prepared to infer unanimous approval of the
shareholders for the payment of the remuneration. 521
Ratification might require special resolution and be subject to minority remedies. 8.191
The ability of members to effectively ratify via less than unanimous agreement is
restricted in particular circumstances. First, if the conduct sought to be ratified is
something which the members can only do via a special resolution under the articles or
the Companies Ordinance, then an ordinary resolution will not be effective.522 Secondly,
any ratification by a majority of the members is still subject to minority remedies,
including statutory remedies of members, or remedies under the doctrine of fraud on
the minority under the general law.523

9.2 Indemnities and provisions exempting liability

9.2.1 The basic restriction

Companies ought not give directors blanket exemptions from liability for 8.192
breaches under articles. In the absence of statutory restriction, it may be
possible for the articles to give blanket exemptions from liability for directors
who breach their duties. To avoid giving over-extensive protections to directors,
the Greene Committee in 1925 had recommended a statutory prohibition. 524
While it might be thought that the members should be able to agree amongst
themselves on the scope of directors' liabilities to the company, the Greene
Committee observed that:

"[i]t is ... fallacious to say that the shareholders must be taken to have agreed
that their directors should be placed in this remarkable position. The articles are
drafted on the instructions of those concerned in the formation of the company,
and it is obviously a matter of great difficulty and delicacy for shareholders to
attempt to alter such an article as that under consideration". 525

"' A similar argument could not be made in respect of other distributions in the case which the court had
found to be improper: (a) dividends paid in breach of requirements of the Companies Ordinance cannot
be ratified; (b) certain withdrawals of company funds were not proved to have been approved of by the
family patriarch; and (c) a loan to a director was not approved by all the shareholders but only by a
majority.
m Joung v South Africa11and Australian Exploration and Development Syndicate [ 1896) 2 Ch 268; Edwards v
Halliwell (1950) 2 All ER 1064 (Eng CA).
523
See Chapter I0.
524 "Report of the Company Law Amendment Committee" (Cmd 2657, 1925) (Greene Committee Report),

paras.46-47.
525 Greene Committee Report, para.46.
362 DIRECTORS'DUTIES

8.193 Cap.622: prohibitions against exemption. Sections 467--469 of Cap.622 are the
current Hong Kong provisions equivalent to those enacted in England as a result of
the above recommendations. Section 468 renders void any "provision contained in a
company's articles, or in a contract entered into by a company, or otherwise":

• which "purports to exempt a director of the company from any liability that
would otherwise attach to the director in connection with any negligence,
default, breach of duty or breach of trust in relation to the company"; or
• which "directly or indirectly provides an indemnity for a director of the
company, or a director of an associated company 526 of the company, against
any liability attaching to the director in connection with any negligence,
default, breach of duty or breach of trust in relation to the company or
associated company (as the case may be)".

8.194 Better view that Cap.622, ss.467-469 do not invalidate ratification. Despite
concerns on the possibility of the statutory provisions extending to invalidate a
company's ratification ofbreaches, 527 the better view is that they do not. Resolutions of
a general meeting and infonnal unanimous approval of the members should be outside
the scope of the meaning of "provision", read in the context of the section, which deals
primarily with provisions in the articles or in a contract. Moreover, it has been said
that clear words would be required to interpret the section as oveniding established
principles of the common law on ratification. 528
8.195 Construction of Cap.622, s.468. Section 468 only covers provisions where the company
purports to exempt the director from liability. The words "or otherwise" are to be
construed ejusdem generis with the preceding words, and would cover non-contractual
arrangements with the company under which the company agrees to exempt a director
or to indemnify him.529 The provision does not, for example, prevent a director from
obtaining his or her own insurance from a third party insurance company.

9.2.2 lt1sura11ce
8.196 Company can purchase insurance for director. The company can purchase
insurance for a director for liabilities to the company (or any other person) except
where the liability arises from the director's fraud: Cap.622, s.468(4)(a). The company
can also pm-chase insurance for the director for any liabilities incurred by the officer in
defending proceedings: Cap.622, s.468( 4)(b ). The latter provision covers, for example,
legal costs, and the company can purchase the insurance whether or not the director
is found liable, and whether or not the conduct involves fraud. In practice, however,
insurance companies will often exclude coverage under the policy where there is fraud.

526 "Associated company" is defined in Cap.622, s.2 (i.e. a holding company and all its subsidiaries are associated
companie.swith each other).
"' Sec, e.g., Rani John, "Relieving Directors from the Liabilities of Office: the Case for Reform of Section 241,
Corporations Law" ( 1992) 10 Co111pa11yand Securities law Journal 6, 8.
" 8 Ross Cranston, "Limiting Directors' Liability: Ratification, Exemption and Indemnification" [1992] Journal of
BusinessLaw 197, 206.
"~ Surgoine v London Borough ofWaltlta111Forest (1997) 2 BCLC 612.
 RELIEF FROM LIABILITY 363

9.2.3 Permitted indemnity provisions

Cap.622: company can indemnify director for liability to third party. Cap.622, s.469 8.197
expressly allows a company to indemnify a director for the director's liabilities to third
parties (i.e., the "pennitted indemnity provisions").530 However, there are exceptions. The
company cannot provide indemnities in respect of a director's liability to pay criminal
fines or regulatory penalties, nor can the company pay for the costs of defending cri1ninal
proceedings in which the director is convicted.531 Also, in relation to proceedings brought
by the company against the director,m the company is prohibited from paying the director's
costs in defending the proceedings where the director is unsuccessful.533

9.2.4 Effect of articles which modify duty to avoid conflicts of interests

Modifications of duties under articles not inconsistent with statutory restriction 8.198
on indemnities. There has been debate as to whether the statutory restriction on
indemnities is inconsistent with provisions in the articles which modify or relax
directors' duties in relation to conflicts of interests. 534 It is not uncommon. for articles
to require disclosure of conflicts to the board in place of the general law requirement
for disclosure to the membersY 5 In Movitex Ltd v Bulfield,536 Vinelott J held that
such provisions are not invalidated by the statutory provision on the basis that the
no-conflict rule does not impose a duty on directors but only a disability. On this
analysis, since infringement of the no-conflict rule does not of itself mean that there
is a breach of duty, a provision in the articles modifying the rule does not fall foul of
Cap.622, s.468. However, as discussed above,537 the better view is that breach of the
no-conflict rule ought properly to be regarded as a breach of duty. Even on this latter
approach, it is still possible to reconcile s.468 with particular provisions in the articles
that modify the no-conflict rule. In the Movitex case, Vinelott J rejected the view that
it would be possible to reduce or abrogate the scope of a duty in the articles without
infringement of the statutory provision, essentially on the basis that a reduction or
abrogation of a duty leads, in substance, to exemption of the director from liability
that would otherwise arise and would fly in the face of the purpose of the statutory
provision. This is arguably correct. However, a modification of the scope of a duty
does not necessarily mean that there is a reduction or abrogation of the duty. It should
be open to the courts to characterise particular modifications of duties as altering the
parameters of the duty rather than as reducing the requirements of a duty. For example,
the constitution could, to an extent, legitimately determine what conduct would be in
the interests of a compan.y538 or what would be the legitimate purposes for the exercise

,:,-0 Section 469 was newly introduced in Cap.622 and did not have an equivalent in the predecessor CO.
'" Cap.622, ss.469(2)(a) and 469(2)(b)(i).
"' Including derivative actions: Cap.622, ss.469(2)(b)(iii) and 469(2)(b)(iv).
"' Cap.622, s.469(2)(b)(ii).
'" See, e.g., John Birds, "The Permissible Scope of Articles Excluding the Duties of Company Directors" ( 1976) 39
Modem Law Review 394; and see also Ian M Ramsay, "Liability of Directors for Breach of Duty and the Scope
of Indemnification and Insurance" ( 1987) 5 Company and Securities Ll,w Jow·,u,/ 129, 134-135.
"' See para.8.081 above.
536
[ I988] BCLC I04.
537
See para.8.070.
"' There can, for example, be legitimate differences for a charitable company compared with a commercial
company, with the sco1>eof legitimate activities being determined by the constitution.
364 DIRECTORS'DUTIES

of a power by directorsY 9 It should also be legitimate, for example, for the articles
to require disclosure of conflicts of interests to the board in place of the members.
Despite Vinelott J's reservations in Movitex, such a provision arguably should not be
seen as reducing the scope of the duty but only replaces one corporate organ with
another in relation to the power to authorise the conduct that would otherwise lead
to a breach of duty.540 Granted, the distinction between a modification of a duty and
a reduction of a duty does not provide a bright line test, and there will be borderline
cases which may not be easy to resolve. Nonetheless, s.468 speaks of exemption and
indemnification of liabilities and not of modifications of duties. The t\vo notions are
conceptually distinct. The fact that a duty can potentially be modified to such an extent
that in substance a director is effectively relieved from the duty does not mean that
every modification achieves that result.

9.3 Court's power to grant relief

8.199 Court can relieve director of liability. Under Cap.622, ss.902-904, the court can relieve
a director wholly or partly from liability in any proceedings for negligence, default, breach
of duty or breach of trust, if the officer acted honestly and reasonably, and the court is of
the view that the officer ought fairly to be excused, having regard to all the circumstances
of the case (including those connected with the officer's appointment). These provisions
enable company officers to be excused from liability in situations where it would be unjust
and oppressive not to do so, recognising that such officers are businesspersons who act in
an environment involving risk in commercial decision-making.541

9.3.1 Proceedings within ss. 902-904

8.200 Scope of coverageofCap.622,ss.902-904. In Customsand Excise Commissionersv Hedon
Alpha Ltd,542 the English Court of Appeal held that the English equivalent of ss.902-904
is confined to claims by the company or its liquidator against officers for breaches of
their duties owed to the company and for officer's liabilities under the Companies Act,543
but does not extend to actions brought by third parties nor officers' liabilities under other

m For the latter point in relation to the duty to exercise powers for proper purposes, sec John Birds, "The Permissible
Scope of Arliclcs Excluding che Duties of Company Directors" (1976) 39 Modern Law Review 394,400.
"" Also, any provisions in the former Table A articlc.s which modify the general law requirements (e.g. rcgs.86(3)
and 86(5)) muse be regarded as valid, on the basis of their scarutory footing and the need to interpret che
predecessor CO, s.165 in the context of the whole of the Ordinance, including Table A: sec also John Birds, "The
Pennissible Scope of Articles Excluding the Duties of Company Directors" (1976) 39 Modem law Review 394,
400-40 I. The current Model Articles, which replaced Table A, are contained in subsidiary legislation. Although
subsidiary legislation cannot be inconsistent with the primary legislation, the legislative history of the Model
Articles (being derived from Table A) should indicate that the provisions on conflicts of interest in the Model
Articles are effective despite Cap.622, s.468.
"' Daniels 11Anderson (1995) 16 ACSR 607, 685-686, citing the Report of the UK Company Law Amendment
Committee 1906 (Reid Committee Report) para.24, which recommended the introduction of the provision.
"' [19811 QB 818; applied, for example, in Re Produce Marketing Consortium Ltd [1989) I WLR 745; First
llldepende11tFactors & Finance Ltd v Mountford (2008) 2 BCLC 297.
'" Civil liabilities to the company under the Act would be covered: Re Duclnw,ri pie (No.2) (1998) 2 BCLC 315
(Eng CA). There is acceptance that at least certain criminal provisions for the enforcement of particular duties
imposed on directors under the Act are covered: Re Barry and Staines Linoleoum Ltd [ 1934) Ch 227; Customs
and Excise Commissioners v Hedon Alpha Ltd [ 19811QB 818 (Ackner LJ). I lowever, this view was regarded as
incorrect by the Victorian Supreme Court in Lawson v Mitchell [ 1975] VR 579 after careful consideration of the
legislative history of the English provision (from which the Australian provision is also derived).
 RELIEF FROM LIABILITY 365

legislation. Relief can be granted for liabilities not only in respect of compensation for the
company's losses but also for an account of profits. 544 In Australia, the view that relief is
unavailable where proceedings are brought by third parties has been rejected, although
the relevant decisions were given in respect of liabilities relating to directors' breaches of
duties owed to the company.545 The question of whether an officer can be relieved from
liability under the provision in respect of default under other legislation apart from the
Corporations Act in Australia has not been finally resolved, with differences of opinion
given in Deputy Commissioner of Taxation v Dick.546 Spigelman CJ adopted a narrow
view, consistent with the English authorities. Santow JA was prepared to accept that relief
is available in respect of breaches or defaults under other legislation where the relevant
statutory provision has a sufficient connection with the subject matter of corporations and
directors' duties in the Corporations Act context.547

9.3.2 Honesty
Precondition is that officer acted honestly. A precondition for the grant of 8.201
relief is that the officer acted honestly. For example, in Bairstow v Queens Moat
Houses plc, 548 the directors sought relief from liability to in respect of unlawful
dividends. The English Court of Appeal held that where the trial judge had made
findings that the directors had dishonestly prepared accounts in order to deceive
the market into the belief that the company was much more profitable that it
actually was, then it would not be open for the court to regard the directors as
having acted honestly and reasonably in paying dividends on the strength of
those accounts.
Subjective test. Whether a person has acted honestly or not is assessed under a 8.202
subjective test. 549 A subjective test of dishonesty does not mean that individuals are
free to set their own standards of honesty and are to be assessed with reference to their
personal standard; 550 but a person is not to be regarded as being subjectively dishonest
simply because the person falls below the objective standards of a hypothetical honest
person. 551A person can still be regarded as subjectively dishonest if the person acts in a
way in which he or she knows to be dishonest according to the standards of reasonable

5"" Coleman Taymar Ltd v Oakes [2001) 2 BCLC 749.

5' 5Daniels v Anderson (1995) 16 ACSR 607, 685-686 (NSWCA) (proceedings by third party auditor seeking
contributory negligence against director on basis of director's breach of duty of care owed to the company);
Edwards vAllomey General (NSW) (2004) 50 ACSR 122 (NSWCA) (personal liabilities to tort creditors arising
from directors' decision for company to make payments to existing claimants).
'"" (2007) 64 ACSR 61 (NSWCA).
,., The third judge, Basten JA, did not decide the issue.
548 [200 I] 2 BCLC 531.

" 9 Re Prod11ceMarketing Consortium Ltd (1989) I WLR 745; Coleman Taymar Ltd v Oakes (2001) 2 BCLC

749. Australian courts have stated that a person acts honestly for the purposes of the statutory provision if the
person's conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without
intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the
performance of the duty in question: see, e.g., ASIC v MacDonald (No. I 2j (2009) 259 ALR I 16, (11)-(22).
550 Royal Brt111eiAirlines Sd11Bhd v Tan [ 1995] 2 AC 378, 389; and see Bairstow v Queens Moat Houses pie [2001 J
2 BCLC 531, [58).
551
On the concept of subjective dishonesty generally, see Aktieselskabe1 Dansk Skibsfina11sieri11gv Brothers (2000)
3 HKCFAR 70; Twi11sectraLtd v Yardley [2002) 2 AC 164; Barlow Clowes Intl Ltd v Eumtrust Intl lid [2006) I
WLR 1476 (PC).
366 DIRECTORS' DUTIES

and honest people, even though he or she feels personally that the conduct is not
dishonest (measured against his or her own standards). 552

9.3.3 Reasonableness
8.203 Officer must have acted reasonably. To obtain relief, the officer must also show that
he or she acted reasonably. The test of reasonableness has been described as "acting in
the way in which a man of affairs dealing with his own affairs with reasonable care and
circumspection could reasonably be expected to act in such a case".553 For example,
relief was granted in Re Claridge s Patent Asphalte Co Ltd,554 where the directors had
caused the company to enter into an ultra vires transaction in circumstances where the
directors had acted honestly and had relied, reasonably, on legal advice before entering
into the transaction.
8.204 Even if negligent director might have acted reasonably under Cap.622, ss.902-
904. Sections 902-904 of Cap.622 contemplate that officers who are negligent can
still be regarded as having acted reasonably for the purposes of seeking relief under the
provision. 555 lt has been said that relief can be granted if the negligence was technical
or minor in character, and not "pervasive and compelling". 556 Wider considerations can
be taken into account and not only the nature of the fault of the officer concerned. 557 In
Re Simmon Box (Diamonds) Ltd, 558 the court was prepared to grant a director partial
relief from liability for negligence in failing to properly insure major company assets.
The court took into account the fact that the director was appointed as director in his
father's company in name only as he was still a student with no business experience,
and felt it understandable why he would have been reluctant to question his father's
business acumen in an area where his father had many decades of business experience
with apparently no difficulties at all and where he had no experience. It was also
significant that it was his father who was primarily at fault. 559
8.205 Considerations: each case depends on its own facts. Each case depends on its own
facts though, and the mere fact that a director was a non-executive director or was
not expected to be involved in the running of the business does not mean that relief
would be granted. For example, in Queensway Systems Ltd v Walker,560 relief was
denied where there were breaches of duties in connection with unlawful loans and
misappropriation of company assets in a husband and wife company. The wife was

"' [ 1986)I WLR 125.

cf R v Loc.l.111ood
"' Re Duomatic Ltd (1969) 2 Ch 365, 376-377; applied in Re Brian D Pierson (Contractors) Ltd (2001) I BCLC
275; PNC Telecompie v 17wmas (No.2) (2008) 2 BCLC 95.
'" (1921) I Ch 543. For another example where relief was granted, see Re Duomatic Ltd (1969) 2 Ch 365; and see
also PNC Telecompie II Thomas (No.2) (2008) 2 BCLC 95, (27)-(33).
"' Re D 'Jan of Londo11Ltd ( 1994] I BCLC 561; Re Simmon Box (Diamonds) Ltd [2000] BCC 275; Bc,rings pie v
Coopers & Lybrand (2003] EWHC 1319, (1133)-(1134]; Equitable Life Assurance Society v Bowley (2004] I
BCLC 180, (45]; PNC Telecompie v Thomas (No.2) (2008] 2 BCLC 95, (94].
'" Barings pie v Coopers & Lybrand (2003) EWHC 1319 (Ch)[ 1133].
"' Barings pie v Coopers & Lybra,ul (2003] EWHC 1319 (Ch)[ 1133].
'" (2000] BCC 275. The decision was reversed on appeal on other grounds: Cohen v Selby (200 I] I BCLC 176.
"• See also Re D'.Jan o/Londo11 Ltd (1994] I BCLC 561 where partial relief was granted.
560
(2007] 2 BCLC 577.
 RELIEF FROM LIABILITY 367

not involved in the business and was ignorant of her duties as director, but the court
was not prepared to grant relief in circumstances where she was a recipient of the
significant funds which she knew was paid out of the company.
Examples. Other examples where relief was not given include Chintung Futures Ltd 8.206
(in liq) v Lai Cheuk Kwan Arthur56 ' and Dorchester Finance Co Ltd v Stebbing, 562
discussed earlier.

9.3.4 Ought fairly to be excused

Court has wide discretion in deciding whether officer should be excused. The com1 8.207
has a wide discretion in deciding whether the officer ought to be excused. For example,
even if an officer is regarded as having acted honestly and reasonably in relation to
misapplication of company assets, the comt is likely to refuse to grant relief where the
officer has received company assets or funds to the detriment of creditors. 563 Avoiding
a windfall for a shareholder might be a valid factor to be taken into account. 564

561 (1994] I HKLR 95.

••1 [ I 989) BCLC 498. Relief was also denied in the following cases: Gui11nesspie v Sa1111de,'S
[ I 990) 2 AC 663 (receipt
of unauthorised remuneration and clear conflict of interest); Colema11T<,ymar Lui v Oakes [2001) 2 BCLC 749
(misuse of confidential infonnation and obtaining secret profits); Re loquitur lid [2003) 2 BCLC 442 (unlawful
dividends); PNCTeleeom pie v Thomas (No.2) [2008) 2 BCLC 95 (clear conflict of interest and secret profits).
'"" Gui1111esspie v Sa1111ders[ 1990) 2 AC 663; /1111Spirit lid v Bums [2002) 2 BCLC 780; Q11eenswaySystems lid v
Walker [2007) 2 BCLC 577, [70).
,., See Circle Petrole11m(Qld) Pll v Greens/ode ( 1998) 16 ACLC 1577 (Qld SC).
 CHAPTER 9

GENERAL MEETINGS

PARA.
I. lntroduction ............................................................................................................................... 9.001
2. The Nature and Types of Meetings ........................................................................................... 9.005
2.1 The nature of a meeting .................................................................................................... 9.005
2.2 Annual general meetings ................................................................................................... 9.008
2.3 Extraordinary general meetings ........................................................................................ 9.012
2.4 Class meetings .................................................................................................................. 9.013
2.5 Court-ordered meetings .................................................................................................... 9.014
3. Calling General Meetings ......................................................................................................... 9.0l5
3.1 By directors ....................................................................................................................... 9.0l6
3.2 By members ...................................................................................................................... 9.0l9
3.3 By the court.. ..................................................................................................................... 9.022
3.3.1 Impracticable to call or convene meetings ............................................................. 9.023
3.3.2 Court discretion ...................................................................................................... 9.03 I
4. Notice ........................................................................................................................................ 9.039
4.1 Amount of notice .............................................................................................................. 9.040
4.2 Manner in which notice is to be given .............................................................................. 9.043
4.3 Persons entitled to receive notice ...................................................................................... 9.046
4.4 Special notice .................................................................................................................... 9.049
4.5 Contentofnotice ............................................................................................................... 9.050
4.5.1 Date, time and place ............................................................................................... 9.05I
4.5.2 The business to be transacted ................................................................................. 9.053
4.6 Accidental failure to give notice of meeting or resolution ................................................ 9.062
4.7 Circulation of member-proposed resolutions and members' statements .......................... 9.064
5. Proceedings ............................................................................................................................... 9.066
5.1 Quorum ............................................................................................................................. 9.066
5.1.1 The meaning of quorum ......................................................................................... 9.066
5.1.2 The requirement ..................................................................................................... 9.067
5.1.3 Loss of quorum ...................................................................................................... 9.069
5.1.4 Courts' power of calling meetings and deemed quorwn ........................................ 9.070
5.1.5 Joint shareholders ................................................................................................... 9.071
5.1.6 Persons attending in different capacities ................................................................ 9.073
5.1.7 EITectof inquorate meetings on validity of meeting .............................................. 9.075
5.1.8 Effect of inquorate meetings on third parties ......................................................... 9.079
5.2 Chairperson ....................................................................................................................... 9.080
5.3 Voting ................................................................................................................................ 9.083
5.4 Proxies and corporate representatives ............................................................................... 9.088
5.4.1 The meaning and significance of proxies .............................................................. 9.088
5.4.2 Appointment of proxies ......................................................................................... 9.090
5.4.3 Proxy's right to vote and to chair a meeting ........................................................... 9.094
370 GENERAL MEETINGS

5.4.4 Proxy's duty with regard to voting ......................................................................... 9.096

5.4.5 Company-sponsored invitations to appoint proxies ............................................... 9.098
5.4.6 Revocation ofproxy ............................................................................................... 9.101
5.4.7 Corporate representative ........................................................................................ 9.104
5.5 Resolutions at meetings .................................................................................................... 9.109
6. Decision Making without Meeting ........................................................................................... 9.1 I I
6.1 Written resolutions ............................................................................................................ 9.1 I I
6.2 Unanimous consent ........................................................................................................... 9.1 l 7
6.2.1 Introduction ............................................................................................................ 9.1 I 7
6.2.2 Whose consent is required? ................................................................................... 9.122
6.2.3 Informed consent ................................................................................................... 9.123
6.3 The relationship between the doctrine and the statutory
requirements on written resolutions .................................................................................. 9.125
6.4 Statutory formalities that cannot be waived by members ................................................. 9.129

7. Minutes and Record Keeping .................................................................................................... 9.130

8. Electronic Co1mnunications ...................................................................................................... 9.135

9. Procedural Irregularities ............................................................................................................ 9.139

 1. INTRODUCTION
Company's decisions made under authority of resolutions of board or general 9.001
meetings. As was discussed in Chapter 6, a company acts through two corporate
organs, namely the board of directors and the general meeting. These t\vo corporate
organs make their decisions through board meetings and general meetings respectively.
In other words, the company's decisions are made under the authority of resolutions of
board or general meetings.
Need for set of rules that governs procedures of company meetings. General 9.002
meetings allow members to participate in discussion and decision-making on matters
affecting the affairs of the company. The manner in which the company's meetings
are called, constituted and conducted affects the extent to which members may
participate in corporate decision-making, as well as the rights and interests of various
corporate stakeholders.' There is therefore a need for a set of rules that governs
the procedures of company meetings which help: (i) ensure the members' right to
participate in corporate decision-making and governance; and (ii) protect the right of,
and balance the interests between, members and other corporate stakeholders.
Chapter considers mechanics of general meetings. The remainder of this chapter 9.003
will consider the mechanics of general meetings constituted by, inter alia, statutory
and common law rules. This chapter also discusses alternative ways in which members
can make decisions otherwise than by holding a meeting. For example, it is possible
for the members to make decisions without a general meeting by resolutions in writing
signed by, or on behalf of, all the members of the company, who at the date of the
resolution would be entitled to attend and vote at the meeting.2
Concept of meeting and types of general meetings. It is logical to start the following 9.004
discussion with an examination of the concept of a meeting and types of general
meetings of members.

2. THE NATURE AND TYPES OF MEETINGS

2.1 The nature of a meeting

Meeting requires physical presence of at least two persons at common law but also 9.005
possible to have one person meetings in some cases. At common law, for there to
be a meeting, the physical presence of at least two persons is required. 3 It is, however,
possible to have one person meetings as a matter of law. As will be seen below, the
court, when exercising its powers to order a meeting, may direct that one member of
the company shall be deemed to constitute the meeting. 4

' The exerciseof certain powersor memberscould affect ochers,for examplewhere membersexercisea right to
removedirectors from office: sec Chapter7.
2 Cap.622,s.548.Secpara.9.111below.
3 Re Sa11ita1yCarbonCo [ 1877)W'N 233.
' Cap.622.s.570(4).
372 GENERAL MEETINGS

9.006 Possible for articles to provide for meetings held by one person. Apart from
court-ordered meetings, there may be a question of whether the company's
constitution could provide for meetings to be held by one person. A decision of
the Scottish Court of Session suggests that it is not permissible for the company's
articles to allow a quorum of less than two. 5 However, the English Court of
Appeal had earlier accepted that although the word "meeting" generally means
the coming together of more than one person, the word can have a different
meaning depending on the particular context. 6 The predecessor CO, Table A,
reg.56 (repealed) provided for the holding of an adjourned meeting where the
originally scheduled meeting cannot be held due to an absence of quorum. 7 In
the Hong Kong decision of Re China Star Enterprise Hong Kong Ltd,8 the Court
of Appeal held that reg.56, which stipulated " ... if at the adjourned meeting
a quorum is not present within half an hour from the time appointed for the
meeting, the members present shall be a quorum", enabled the adjourned meeting
to be held with a quorum of one. The court held that reg.56 enabled one person
to constitute a quorum because: (i) the common law principle that a meeting
necessarily involved two persons could be abrogated by legislation; (ii) s. 7 of the
Interpretation and General Clauses Ordinance (Cap. I) provided that the words in
plural included the singular so that the word "members" in reg.56 could be read
as "member"; (iii) in the context of this case, where the company had only two
shareholders, there was no contrary intention in either reg.56 or the predecessor
CO that precluded the operation of s.7; and (iv) reg.56 was clearly intended
to override the two members quorum provision and to prevent deadlocks from
being perpetuated where there was only one member present at the original
meeting and later at the adjourned meeting.
On this view, it is possible for the articles to specify meetings to be held by one person,
at least in a provision dealing with an absence of quorum. The Model Articles provide
that if at an adjourned meeting, "the quorum is not present within half an hour from
the time appointed for holding the meeting, the member or members present in person
or by proxy constitute a quorum."9 The singular form of the word "member" in the
abovementioned regulation confirms that a single member may constitute the quorum,
at least for the purposes of an adjourned meeting.
9.007 One member companies first introduced in 2004 and one member can constitute
quorum for such companies. The earlier overseas cases must also be read subject
to the changes in the Companies Ordinance (Cap.622) allowing private companies to
be formed with a sole member. The change was first implemented in Hong Kong in
2004. 10 With the introduction of single member companies, the Companies Ordinance
now expressly provides that where the company has only one member, one member

5 Re Prai11& Sons (1947) SC 325.

6 Sha,p v Dawes (1876) 2 QBD 26. 29.

' Sec para.9.066 below.

8 [2013)5HKLRD271

• Sec Cap.622H: Model Articles (private companies), art.42(2); Model Articles (public companies), art.46(2)
(Companies (Model Articles) Notice (Cap.622H), Schs. I and 2, respectively).
16 See Chapter 2.
 THE NATUREAND TYPES OF MEETINGS 373

present or by proxy constitutes a quorum of a general meeting. 11 For single member

companies then, meetings of members can be held by one person. 12

2.2 Annual general meetings

AGM must be held at end of each financial year. An annual general meeting 9.008
(AGM) is a meeting of the members that every company is (unless exempted under
the Companies Ordinance) required to hold after the end of each financial year. 13 The
directors are required to lay before the AGM a copy of the reporting documents,' 4
which include the company's financial statements, the directors' report and the
auditor's report. 15 It is a common practice to elect directors at AGMs. 16 An AGM
therefore provides the members with a forum to inspect the company's annual financial
statements, to consider the reports of the directors and auditors, to make decisions on
the composition of the board of directors and also to generally raise questions with the
management over the affairs of the company. 17 The importance of an AGM also lies in
the fact that it is the only members' meeting that many companies may have in a whole
year. Where the company has breached the statutory requirement for holding an AGM,
the court has power to call or direct the calling of an AGM, on application by any
member of the company. 18 The courts have recognised that the statutory requirement
confers on members an important right, and therefore, in the absence of exceptional
circumstances, the court should exercise its discretion to order an AGM once it is
established that there has been default by the company in holding an AGM. 19

Time for holding AGM. Under the Companies Ordinance (Cap.622) different time 9.009
periods for holding the AGM apply to private companies and companies limited by
guarantee on the one hand, and public companies, on the other: Cap.622, ss.610(1)-610(3).
For the purpose of ss.610(l}-610(3), a private company that is the subsidiary of a public
company at any time during the financial year is deemed to be a public company.20 In the
case of private companies and companies limited by guarantee, the AGM must be held
within nine months after the end of the company's accounting reference period, while for
public companies, the pe1iod is six months. The court has the power, on an application
made before the end of the period othe1wise allowed, to extend the period.21 Where a
company has contravened the provisions imposing the obligation to hold anAGM within

11
Cap.622, s.585(1); derived from predecessor CO, s. l 14AA (repealed). Whether a company is regarded as having
one member depends on the number of registered members in the company's register of members: Randhawa v
Turpin (2017] BCC 406, (71] (Eng CA); and see further para.9.067 below.
12 However, the Ordinance also contemplates that a sole member can make decisions as if they were resolutions of
a general meeting without the need to comply with the formalities for holding a meeting: see Cap.622 s.617.
" Cap.622, s.610(1). The requirement in predecessor CO, s.111(1) (repealed) for the AGM to be held every
calendar year no longer applies under Cap.622, s.610.
1
' Cap.622, s.430.
15 Cap.622, ss.357(2) and 429( I).
1
• Sec Paul L Davies and Sarah Worthington, Gower and Davies· Principles of Modern Company law (91h cdn,
Thomson Sweet & Maxwell 2012) [ 15-49].
" Re 8elgravia Properties lid (2013] 5 HKLRO 337, [14].
18
Cap.622, s.6J0(7r610(8).
19
Re 8elgravia P,vperties lid (2013) 5 HKLRO 337, [23).
2° Cap.622, s.610(4).
21 Cap.622. s.610(5).
374 GENERAL MEETINGS

the specified time period, the court has power, on application by any member of the
company, to call, or direct the calling, of a general meeting, which is to be regarded as an
AGM in respect of the financial year in respect of which the company has failed to hold
an AGM.22 An "accounting reference period", for the purposes of Cap.622 is equivalent
to the period of the company's financial year (Cap.622, s.367) and is ascertained in
accordance with those ss.368-371 ofCap.622. 23
9.010 Dispensing with requirement to hold AGM. As many private companies may find
the obligation to hold AGMs redundant and bmdensome, it is possible for a company
to use the written resolution procedure instead of actually holding a meeting, and where
this is done, it is unnecessary for the company to hold an AGM (although the reporting
documents must still be sent to members). 24 Cap.622 also allows a company to dispense
with AGMs indefinitely where a resolution is passed to that effect with the unanimous
consent of all members entitled to vote.25 Again, the reporting documents must still
be sent to members within the periods as specified in the Ordinance. 26 Although the
members have passed a resolution dispensing with the need for AGMs, any member
can give notice requiring the company to hold an AGM for a particular year.27 Also, the
company's decision to dispense with an AGM can be revoked by passing an ordinary
resolution. On the company's obligations to hold an AGM when a decision to dispense
with AGM is revoked: Cap.622, s.614(2). The above provisions for dispensing with the
AGM apply to all types of companies (including public companies), although in practice
it would generally be private companies, which are more likely to dispense with AGMs.
9.011 Dormant companies not required to hold AGM. Under Cap.622, s.611, a dormant
company is not required to hold an AGM.

2.3 Extraordinary general meetings

9.012 EGM: members' meeting that is not AGM. An extraordinary general meeting (EGM)
is a members' meeting that is not an AGM. As long as a meeting is properly convened
and notice is duly sent to all of the members entitled to receive a notice, an EGM may be
held at any time of the year. Under Cap.622, the term "extraordinary general meeting"
no longer appears in the Ordinance, but there is no abolition of the concept ofEGM as
such. The terminology can still be used in practice, and there is nothing in Cap.622 that
prevents companies' own documents (e.g. articles) from referring to EGMs.

2.4 Class meetings

9.013 Class meeting: meeting of holders of class of shares. As is discussed in Chapter 13,
a company may issue, in addition to ordinary shares, other types of shares such as
preference shares or redeemable shares. 28 A class meeting is a meeting of holders of a

22 Cap.622, s.610(7), (8); Re Pioneer li1dustries (Holdings) Ltd [2015) I HKLRD I.

" See Chapter 11.
" See Cap.622, ss.548 and 612( I).
" Cap.622, ss.612(2) and 613.
26 Cap.622, ss.430(3) and 612(2).
27 Cap.622, s.612(5).
" Seepara.13.042.
 CALLING GENERAL MEETINGS 375

class of shares. A class meeting must be held where the consent of a class is required
before the company is capable of making a decision on a matter under consideration.
An example is variation of class rights. 29

2.5 Court-ordered meetings

Court has power to order meeting where impracticable to call meeting under 9.014
Cap.622 or company's articles. Situations may arise where it is impracticable or
even impossible to call a general meeting in the manner prescribed in the company's
constitution or by the companies legislation. 30 To enable the company to transact its
business through members' meetings where it is impracticable to call such a meeting
in accordance with the relevant rules in the articles or Cap.622, the court has the
power under Cap.622, s.570 to order a meeting to be called where for any reason it is
impracticable to call a meeting of the company in the manner prescribed by the articles
or Cap.622. The court's jurisdiction under s.570 will be considered in section 3.3 below.

3. CALLING GENERAL MEETINGS

"Call" signifies whole process of convening meeting. For the purpose of provisions 9.015
governing the power to call general meetings, the word "call" could be taken to cover
the whole process of convening the meeting (in the sense of giving a valid notice of
meeting) and bringing together the members. 31 Depending on the circumstances, a
general meeting can be called by directors at or without the request of members, by
members directly, or by the court.

3.1 By directors

Board of directors has power to call general meeting under Cap.622 and Model 9.016
Articles (MA). The directors' power to call a general meeting is provided for under
Cap.622, 32 as well as under the Model Articles. 33 A question that may arise in the context
of the directors' power to convene meetings is whether a single director has the power to
call general meetings. This is illustrated in Hong KongRacingPigeonAssociationLtd v
Lam Koon Nam.34 One of the issues in that case was whether the power of"directors"
to convene a members' meeting on requisition under the predecessor CO, s.113(1)
(repealed) is capable of being exercised by a single director. Deputy Judge Anthony
To held that a single director could convene a meeting on the basis that, as a matter of

29 Cap.622, s. I80; see also para.14.192 in Chapter 14.

30 For the meaning of"impracticable", see para.9.023 below.
3' Beck v Tuckey Pty Ltd (2004) 49 ACSR 555, [46). per Austin J. Sec also 8H Ap(trtments Pty Ltd v Sutherland
Nominees Pty Ltd (2015) 108 ACSR 110.
" Cap.622 s.565. This is a new provision in Cap.622. Under the predecessor CO regime, the directors' power to
convene EGMs was set out in former Table A reg.SI (repealed).
33 Model Articles (public companies) art.38(2); Model Articles (private companies) art.34(2) (Companies (Model
Articles) Notice (Cap.622H) Schs. I and 2).
34 [2002) 3 HKLRD 133.
376 GENERAL MEETINGS

statutory interpretation, plural includes singular.35 Deputy Judge Anthony To's ruling
on this issue, however, is contestable. In companies statutes, the word "directors" is
usually used to mean the board of directors as a corporate organ.36 In Re Haycraft
Gold Reduction and A1ining Co,37 Cozens-Hardy J questioned the validity of a general
meeting to wind up the company on the basis that the notice summoning the meeting
had been issued by the company secretary without the authority of a resolution of
the directors duly assembled at a board. In reaching his Lordship's decision, Cozens-
Hardy J placed reliance on the rule which the Court of Exchequer laid down in D'Arcy
v Tamar, Kit Hill and Callington Ry Co38 that directors must act together as a board.
Accordingly, it appears that the directors' power to call general meetings is a power
that can be exercised by the board of directors only as a corporate organ.
9.017 Individual directors cannot call general meeting on their own. The position is
made clear in Cap.622. The section providing for the directors' power to call a general
meeting (s.565) simply refers to "directors" (similar to predecessor CO, s.113(1)). If
s.565 leaves any doubt on individual directors' power to call general meetings, that
doubt has been cleared up by s.569 of Cap.622. Section 569 empowers any director,
or any two or more members of the company representing at least I O per cent of the
total voting rights of all members, to call a general meeting where the "company does
not have any director or does not have sufficient directors capable of acting to form
a quorum" (emphasis added). The italicised words in the preceding sentence suggest
that the directors' ordinary power to call general meetings under s.565 is intended to
be exercised by the board as a corporate organ.
9.018 Only possible for individual directors to convene meeting if power conferred by
statute or company's constitution. It is, however, possible for individual directors
to convene a meeting if the power to do so is conferred on individual directors by
statutory provisions or provisions in the company's constitution. 39

3.2 By members

9.019 Members need to request board to call meeting. Where the board of directors is
capable of acting and is willing to call general meetings, members do not have the
power to call a meeting directly. If members wish to have a meeting called, they will
need to request the directors to do so. Members representing at least 5 percent of the
total voting rights of all members having a right to vote at general meetings are entitled
to requisition a meeting. 40 The members' request may include the text of a resolution
that is, inter alia, intended to be moved at the meeting. 41

35
[2002) 3 HKLRD 133, 144.
36
See Chapter 7.
,, [1900)2 Ch 230.
,s (1866-67) L R 2 Ex 158. See also Randhawa v Turpin [2017) BCC 406, [79) (Eng CA).
39 RP Austin and IM Ramsay, Fortis Principles 0JC01pora1io11s Law (14th edn, lexisNexis Buttcrworths 2012)
289
'" Cap.622, s.566(2).
" Cap.622, s.566(3).
 CALLING GENERAL MEETINGS 377

Members may call own meeting if board fails to respond to their request within 9.020
set timeframe. If, however, the directors fail, within 21 days from the date on which
the board receives the requisition, to call a meeting for a date not more than 28 days
after the date on which the notice convening the meeting is given, the requisitionists,
or any of them representing more than 50 percent of the total voting rights of all of
them, may themselves call, at the company's expense, a meeting within three months
of the above-mentioned date.42
Members holding 10% of total voting rights have right to call general meeting 9.021
if board not capable of convening meeting. Where there is no board of directors
capable of convening a meeting (i.e. where the company does not have a board or does
not have sufficient directors to form a quorum at the relevant time), any two or more
members of the company representing at least IO percent of the total voting rights of
all the members having a right to vote at a general meeting may call a general meeting
in the same manner, as nearly as possible, as that in which meetings can be called by
the directors. 43

3.3 By the court

Court has discretionary power to order meeting where impracticable for 9.022
company. The court has a discretionary power to order a meeting where it is
impracticable to: (i) call a meeting in any manner in which a general meeting can be
called; or (ii) conduct the meeting in the manner prescribed by the company's articles
of association. 44 A two-fold test is applied to determine whether the court should order
a meeting: (I) the applicant must first satisfy the court that it is impracticable to call
a meeting; and (2) if it is impracticable, the court must be satisfied that it should
exercise its discretion to convene a meeting. 45

3.3.l Impracticable to call or co11ve11e

meetings
The meaning of "impracticable"
"Impracticable" does not equate to impossible. What, then, does the word 9.023
"impracticable" mean? In Re El SombreroLtd,46 Wynn-Pa1TyJ noted that "impracticable"
is not synonymous with the word "impossible". It may be impracticable to convene
and hold a meeting, even though it is not impossible for the meeting to be held. As
noted by Wym1-Parry J, the test requires the court to "examine the circumstances of
the particular case and answer the question whether, as a practical matter, the desired
meeting of the company can be conducted, there being no doubt, of course, that it can
be convened and held". 47

" Cap.622, ss.567 and 568.

,; Cap.622, s.569. This is a new provision in Cap.622.
" Cap.622, s.570. The court may exercise this power on its own motion or on application by a director of the
company or by a member who would be emit led to vote at the meeting under s.570(2). Sec also note 50 below.
45 Re SuccessPlan Ltd [2002) 3 HKLRD 560, 586; Re Mandarin Capital Adviso,y Ltd [2011) 2 HKLRD 1003.
40 [ 1958) Ch 900.
" [ I 958) Ch 900, 904.
378 GENERAL MEETINGS

9.024 "Impracticable" situations include where impossible to call meeting. If in a

given circumstance, it is impossible to have a meeting called, it will necessarily be
impracticable to call the meeting. Examples of situations where it is impossible to call
a members' meeting include where one of the only two members of the company has
passed away and the quorum of a meeting as provided in the company's constitution
is t\vo,48 or a situation similar to that in Re Noel Tedman Holdings Pty ltd, 49 where all
of the directors and shareholders died in an accident and the articles of the company
required the approval of directors for the transfer of shares by a legal personal
representative to beneficiaries under a will. In the latter situation, it is necessary to
call a general meeting to elect directors.so
9.025 Re Rural case: court ordered meeting where had been impossible to call meeting
as articles adopted had mistakenly omitted regulations relating to appointment
of directors. A further scenario in which it is impossible to call a meeting in the
manner prescribed in the articles or by the company law legislation is demonstrated
in the New South Wales case of Re Rural Chemical Industries Pty Ltd.s 1 In that case,
the articles of association of the company adopted Table A regulations but excluded,
by error, regulations relating to the appointment of directors. The company's affairs
had been conducted on the basis that the above-mentioned regulations were not
excluded. Upon the discovery of the error, doubts arose as to the validity of the
composition of the board and the acts of those who had been acting as directors,
including the allotment and approval of transfers of shares. The status of the members
was accordingly also in question. McLelland J held that the appropriate solution
was for the court to order an EGM to alter the articles, confirm the appointment of
directors, and ratify earlier transactions of the company and previous acts of those
purporting to act as directors.
9.026 "Impracticable" situations include where proposed meeting will not be quorate.
Circumstances where it is impracticable (but not impossible) to call a company
meeting include the situation where the proposed meeting will not be quorate. A typical
situation where such impracticability may a1ise is where the company has only two
members and the quorum of members' meetings is t\vo members. 52 In such a situation,
the absence of just one of the members would render the meeting inquorate. The
difficulty in forming a quorum may be caused intentionally by a member. A member,
for example, may refuse to attend a general meeting because one of the purposes of

•• Javis Motors (Harrow)Ltd v Carabott ( 1964) 3 All ER 89. Here it is possible to convene the meeting by sending
a valid notice of meeting, but it is impossible for the meeting to be called in the wider sense of bringing together
the members: see para.9.026 below.
•9 [1967]QdR56I.
$-0 See also Cap.622, s.570(6) which provides that the legal representative of a deceased member is to be regarded in
all res1>ects,for the purposes of s.570, as a member of the company having the same rights with respect to attending
and voting at a meeting of the company as the deceased member would, if living, have had. Accordingly, the legal
personal repre.scntativc of a deceased member has standing to apply for a court-ordered meeting under s.570. Where
a grant of probate or letters of administration has not yet been obtained, a person will s1ill be regarded as a member
for the purpose of these provisions if the person can demonstrate to the court that it is probable that the person will
obtain the grant: Tsang (deceased)and Kloede11v 8a11ckalid [2017) 5 HKLRD 562.
" (1984) 9 ACLR 176.
" See Cap.622, s.585(3).
 CALLING GENERAL MEETINGS 379

the meeting is to have himself or herself removed as a director.53 The statutory power
of the court to order meetings can be applied in such situations. 54 Although it is not
impracticable to convene the meeting in the sense of giving a valid notice of meeting,
it is impracticable to call the meeting in the sense that it is impracticable to bring the
members together because of the likelihood that one of the members will not attend. 55
It would be impracticable to call a meeting within the statutory provision if it is not
practicable to conduct the meeting of the company in the manner prescribed by the
articles-i.e. where it is not practicable to convene a meeting that could consider and
pass resolutions. 56

The court-ordered meeting as a tool to resolve a deadlock 57

Court may order meeting where minority shareholder refuses to attend and 9.027
is needed for quorum. The refusal of a minority shareholder to attend a proposed
meeting may create a deadlock in the company's affairs, as the members are unable
to make decisions in general meeting in the absence of a quorum. To facilitate
administration of the company's affairs in such a situation, the court is generally
willing to help break the deadlock by ordering a meeting at which the number of
shareholders that falls short of the prescribed quorum would constitute a quorum (e.g.
one member). As Morritt J observed in Re Opera Photographic Ltd,58 the deadlock
existing between the individuals "has to be resolved one way or the other", 59 and the
wrongfulness or otherwise of the conduct of either party would have to be determined
in other proceedings. The quorum provisions, his Lordship held, could not be regarded
as conferring upon the respondent some form ofright to veto.60 Harris J made it clear
in Re Mandarin Capital Advisory Ltd,61 that s. l 14B of Cap.32 (the predecessor of
Cap.622, s.570) was a procedure for addressing problems, for example, in realising
the statutory right of a majority shareholder under Cap.32 s.157B (the predecessor
of Cap.622, ss.462, 463) to remove a director, caused by the impracticability of
conducting a general meeting.

Proof of impracticability
"Impracticable" to call meeting where member who has received notice of meeting 9.028
refuses to attend. Impracticability for the purpose ofCap.622, s.570 can be established
without difficulty where there is evidence that the proposed meeting ca1mot be quorate
because a member, having received the notice of the meeting, refuses to attend, or the
member has otherwise made himself or herself inaccessible. Impracticability can also

" Re El Sombrero lid [ I958] Ch 900; Re B love lid a11dBulk Steel & Salvage Ltd ( 1982) 141 DLR (3d) 621; Re
Opera Photographic Ltd (1989) 5 BCC 60 I; Re Mandarin Capital Adviso,y Ltd [20 I I] 2 HKLRD I 003 (CF!).
5' See also para.9.027 below.
55 Beck v Tuckey P(y Ltd (2004) 49 ACSR 555, [46].

,~ Re Mc111dari11 Capital Advisory lid [2011]2 HKLRD 1003, [9].

51 For the courts' a11irudetowards shareholding deadlock. as distinguished from numerical deadlock, see para.9.037

below.
,s (1989) 5 ace 601.
,. (1989) 5 ace 601. 603
6<l (1989)5 BCC 601,603.
61 [2011)2HKLRD 1003.
380 GENERAL MEETINGS

be established where there is a failure or refusal by the directors to call a meeting when
a requisition is received.62
9.029 Whether "impracticable" to call meeting judged according to matrix of facts.
What about a situation where the members are at loggerheads and one of them,
knowing that it would be a waste of time to requisition or call a meeting, has made
an application requesting the court to order a meeting? The answer is that whether it
is impracticable to call a meeting is to be judged according to the matrix of facts and
the failure to attempt to call a meeting that the applicant knew the respondent would
not attend is not fatal to an application for a court-ordered meeting. 63 For example, it
has been held that, even though the shareholders seeking the meeting did not ask the
directors to call a meeting64before applying for the court order, impracticability was
established where a number of the shareholders (who were also the directors) refused
to sign a set of proposed resolutions under the statutory written resolution procedure,
the resolutions of which were identical to those which would be placed at the meeting
order by the court under the predecessor provision of Cap.622, s.570. 65 This is because
no reasonable person would imagine that the directors would be prepared to accede to
any request to call a meeting to pass exactly the same set of resolutions, which they
had already refused to sign.66
9.030 Can be unnecessary and expensive for shareholders to try to call meetings before
invoking the court's jurisdiction in "impracticable" situations. The reason why the
refusal on the part of directors to call a requisitioned meeting or the failure to attend
when a meeting is called are not the only ways to prove impracticability is succinctly
summarised by Cory J in Athabasca Holdings Ltd v ENA Databasesystems INC:67

"To require a party, which at the moment is at daggers drawn with the other
shareholder of the company, to go through a meaningless, ritualistic routine of
seeking to call a shareholders' meeting, would be to impose an unnecessary, often
expensive step upon such a shareholder".

3.3.2 Court discretion

Where the respondent is seeking remedies under Cap.622, s.725
9.031 Where minority shareholder who refuses to attend for quorum reasons may
also be applying for statutory remedies for unfair prejudice court should
attach conditions if orders meeting. Circumstances may arise where the minority
shareholder who resorts to quorum tactics is applying for statutory members' remedies
obtainable in cases of unfair prejudice. In Re Sticky Fingers Restaurant Ltd, 68 Mervyn
Davies J held that in this situation, if there was a need for the company to have an

62 TJ'(ldepower(Holdings) Ltd v 1}adepmver(Ho11gKo11g)Ltd (unrep., HCA 1796/2005, [2009) HKEC 538); Re He

fie Imemational Holdings DevelopmentLtd (unrcp., HCMP 2313/2009, [2010) HKEC 567).
6l AthabascaHoldings Ltd v ENA DatasystemsInc (1981) 116 DLR (3d) 318 .
., Under the prcdcce.ssor CO, s. 113. See now Cap.622, s.566.
65 TJ'(ldepower(lloldings) Ltd v Tradepower(Hong Kong) Ltd (unrcp., HCA 1796/2005, [2009) HKEC 538).
66 T,r,depower(Holdings) Ltd v Tradepower(Hong Kong) Ltd (unrcp., HCA 1796/2005, [2009) HKEC 538), [8).
67
(1981) 116DLR(3rd)3l8,322.
68 (1992) BCLC 84.
 CALLING GENERAL MEETINGS 381

effective board to deal with its affairs, the court should accede to a request for a court-
ordered meeting. However, to protect the respondent minority shareholder from being
harmed as a result of such a meeting, it was necessary for the court to attach conditions
to the order that it decreed, such as constraints on the board's power to diminish the
respondent's right to participating in the company's management, pending the outcome
of the petition proceedings.
Re Sticky Fi11gerscase: achieves balance between interests of company and parties 9.032
by denying minority shareholder right to use quorum tactics while ensuring
legitimate interest unharmed. His Lordship's decision in Re Sticky Fingers helps
achieve a balance between the interests of the company and the parties. This is because
the approach underlying the decision denies the minority shareholder the right to
deploy quorum tactics as an alternative to the unfair prejudice remedy he is seeking,
while ensuring that his legitimate interest is not harmed, given the unfair prejudice
allegation he has made against the majority shareholder.
Re China case: facts. A similar judicial technique can be used to resolve the tension 9.033
between the need to call a general meeting and the need to safeguard an alleged right
of minority members in a different context. Jn Re China NTG Investment Ltd,69 51
percent of the company's shares were held by X, and the remainder were held by
the second to fifth respondents. The AGM of the company could not be convened
without the cooperation of the minority shareholders due to the quorum requirements.
X sought an order under the predecessor CO, s.114 B for the holding of the AGM to
deliberate, inter alia, upon a proposed resolution to remove the directors nominated by
the third to fifth respondents (R3-5). R3-5 opposed the application on the basis that
an oral shareholders' agreement guaranteed their right to participate in the company's
management. The existence of the oral shareholders' agreement was disputed by X.
Re China case: court ordered AGM where minority shareholders not cooperating 9.034
but would not also authorise proposed resolution to remove directors. The court
acceded to the application for the order sought so that the company's AGM could
be held as soon as possible. The court, however, refused to authorise the proposed
resolution. It ordered an adjournment for trial before a judge to determine the issue of
the existence of the alleged oral agreement. 7° China NTG is one of the case examples
where the court was prepared to give weight to an alleged oral agreement betv;een
the members as to joint management of the company. It has been said, however, that a
mere assertion of a quasi-partnership or an oral agreement or understanding between
the only two shareholders as to joint management of the company is normally not
a sufficient ground for refusing to order a meeting which will enable a majority
shareholder to exercise his statutory right to remove a director 71 On the other hand, at
least in the context of a small family firm (as opposed to one where the shareholders
are in a commercial setting entering into business arrangements at arms' length), the
court may, on the basis of an oral agreement between the shareholders on entitlement

.. (2012] 2 HKLRD 296.

10
The existence of a shareholders' agreement guaranteeingeach party's right to a voice in managementmay be a
legitimatereason for rejectinga s.570 application:see parn.9.035.
11
Re £-HarbourServicesLtd (2014)5 HKLRD 180, (32). See further Chapter 7 paragraph7.052.
382 GENERAL MEETINGS

to participate in management, refuse to order a meeting that will enable the majority to
remove a director.72 In the abovementioned situation, it is "wholly unrealistic to expect
written agreements." 73

No alteration of shareholders' agreement

9.035 Court power to order meeting cannot be used to override shareholders' agreement.
The court's power under Cap.622, s.570 cannot be used to override the shareholders'
agreement on the manner in which the company's affairs are to be managed. The court
will therefore not order a meeting where the shareholders' agreement stipulates that a
shareholders' meeting cannot have a quorum without the attendance of the holder of a
certain class of shares and where that shareholder refuses to attend the meeting. Dillon
LJ observed in Harman v BML ltd 74 that it was not right "to invoke [the equivalent
provision of Cap 622, s.570 under the UK's Companies Act 1985] to override class
rights attached to a class of shares which have been deliberately - in this case by the
shareholders' agreement- imposed for the protection of the holders of those shares,
although they are a minority". His Lordship held that it was not for the court to write a
new shareholders' agreement between the parties and impose it on them. 75
9.036 Court may refuse to order meeting where company formed on basis of agreement
between parties which equity would enforce. For the same reason, where the company
is in the nature of a quasi-partnership formed on the basis of some agreement between
the parties that equity would enforce, the court may refuse to exercise its s.570 power
where no quorum can be constituted because one of the original founders of the company
refuses to attend the meeting, ifto do so would lead to a member acting contrary to the
agreement. In the case of Man.field Coatings Co Ltd v Springfield Coatings Co Ltd,76
Cheung J refused to exercise his Lordship's power under the predecessor of Cap.622,
s.570 (which is s. l l 4B of the predecessor CO) to order a meeting where the company
was incorporated on the basis of a partnership and the two founders had joint control
and management of the company. The two founders of the company in that case had
agreed that, without the prior consent of the other party, there would not be any change
in the directorship and ownership of the shares in the company. An effect of the proposed
meeting would be to install an additional director, which would be inconsistent with the
agreement reached by the two original founders.77

Shareholding deadlock (as distinguished from numerical deadlock)

9.037 Court does not have power to order meeting when shareholding deadlock
arises between two equal shareholders. A deadlock may a1ise between two equal
shareholders. Where one of them refuses to attend meetings, if it has been agreed that
the quorum of meetings is two members, the problem is whether the court has the power

12 Lo Sui Lin v Clum Hung Fook[2017] 3 HKLRD 746.

" Lo Sui Lin v Chan 1-!w,gFook(2017] 3 HKLRD 746, (66].
,. (1994] I WLR 893,898.
" (1994] 1 WLR 893,898. Sec also ReHe He ln1ematio11al
Holdi11gsDevelopme111 Ltd (unrcp., HCMP 2313/2009,
(2010] HKEC 567), [ 1I].
" (unrep., MP 2532/1994, (1994) HKLY 168).
77 But cf Re £-Harbour ServicesLtd (2014) 5 HKLRD 180: see text to note 72 above.
 NOTICE 383

to order a s.570 meeting. The answer to this question is in the negative. The reason
appears to be consistent with that for the decision in Harman v BML Ltd. 78 In refusing
to exercise the power under s.371 of the Companies Act 1985 (UK) (the equivalent to
Cap 622, s.570) in Ross v Telford,19 Nourse LJ endorsed the view of the appellant that
s.371 was a procedural provision not designed to affect substantive voting rights or to
shift the balance of power between shareholders where the shareholders agreed that
power shall be shared equally. The potential deadlock in this situation is something
that must be taken to have been agreed on with the consent and for the protection of
each of the equal shareholders. 80 The courts' disinclination to order a meeting to break
a shareholding, as opposed to numerical, deadlock is also illustrated in the cases of
Re Ma On Shan Whitehead Gold Centre Ltd81 and Re Jetco Ltd. 82

Other examples
Che11gYuk case: court should not exercise discretion to order meeting without 9.038
determining beneficial ownership of shares where appropriate. In Cheng Yuk Lin
v Chan Choi Wah,83 the tiial judge made an order for a meeting to be held with a
quorum of one, on the application by the member holding 75 percent of the shares.
The respondent member contended that she was the beneficial owner of the applicant's
shares. The Court of Appeal held that the trial judge should not have exercised the
discretion to order a meeting without having detennined the issue of the applicant's
beneficial ownership, due to the potential injustice to the respondent. If the respondent
was the beneficial owner of the applicant's shares, then she would be entitled to
mandate the applicant's votes at any general meeting of the company.

4. NOTICE
Notice required to be sent to all members. To enable the members to effectively 9.039
participate in the company's decision-making process, it is crucial to ensure that they
are adequately informed about the date, time, place and the purpose of the meeting.
Sufficient notice of a general meeting helps the members to decide whether to attend
the meeting and if so, how to vote. To ensure the validity of the calling of a company
meeting, notice must be sent to all members who are entitled to receive notice in
accordance with the statutory and common law rules governing the issuance of notice.

4.1 Amount of notice

Company must provide 21 days' notice for AGM and 14 days' notice for all other 9.040
meetings. The company must provide at least 21 days' notice in the case of an AGM.84

' 8 ( 1994] I WLR 893. Sec para.9.035above.

1
• [ 1997]BCC 945.
80 [ 1997]BCC 945, 949-950.
81 (200I] 4 HKC 582.
82 (unrcp., HCMP 592/2008,(2008] HJ<EC908).
8' (1991) I HKC 52.
8' Cap.622.s.57l(l)(a).
384 GENERAL MEETINGS

All meetings that are not an AGM require at least 14 days' notice. Where the company
is an unlimited company, at least 7 days' notice is required instead.85 If the company's
articles provide a longer period of notice, that requirement must be complied with. 86
9.041 Meetingprimajacie void if notice period shorter than that required by statute or
company's articles. Where a general meeting is called by a notice period shorter than
that required by the statute or the company's articles, the meeting is rendered void.87
However, the meeting can be regarded as having been duly called if it is so agreed by
a certain level of majority of members entitled to attend and vote at the meeting. In
the case of an AGM, the shorter notice period must be agreed to by all the members
entitled to attend and vote at the meeting. 88 Where the meeting is not an AGM, short
notice can be agreed to by a majority of members together holding not less than 95 per
cent of the total voting rights.89
9.042 Fraction of a day not counted towards days of notice. In computing the period of
notice, a fraction of a day is generally not counted and the required days of notice
are clear days exclusive of the day of service and exclusive of the day on which the
meeting is to be held.90

4.2 Manner in which notice is to be given

9.043 Requirement for written notice does not preclude use of email. The provision in
predecessor CO, s.114(2) (repealed) required the notice for calling meetings to be
given in writing,91 subject to the articles. The former Table A, reg.52 of the predecessor
CO also required the notice to be in writing while reg.132 allowed notices to be given
personally or by post. In Re Grandtag Financial Consultancy & Insurance Broket~~
Lid,92 Deputy Judge Gill held that the method of giving notice specified in Table A was
permissive and not exhaustive and that service of notice was not irregular just because
it was done by email.
9.044 Consent of recipient required before notices can be sent in electronic form.
However, pursuant to amendments made to the predecessor CO in 2010, consent
of the recipient was needed before notices could be sent by email. A new
Pt.IVAAA was introduced in 2010 to provide for communications in electronic
form. Under the predecessor CO, s. l 68BAG (now repealed), documents or
information could be sent to a person in electronic form, but only if that person
had agreed, generally or specifically, to this mode of communication and had not
revoked the agreement.

81 Cap.622, s.571(1)(b).
86 Cap.622, s.571 (2).
81 011gKim Yim" Sheeco11Trculi11g
Co Ltd (unrcp., MP 780/1995, [1996] HKLY 187).
88 Cap.622, s.57 I (3)(a).
89 Cap.622, s.571(3)(b).
90 Re Hector Whaling Ltd (1936) I Ch 208; The Sec11ritiesand Futures Commission v The Stock Excha11geof
Hong Kong Ltd (1992) I HKLR 135.
91 For the meaning of"writing" see Interpretation and GenerJI Clause Ordinance (Cap.I), s.3.
92 (unrep., HCMP 23/2006, [2006) HK.EC710).
 NOTICE 385

Cap.622 provides that notice of general meeting can be given in hard copy, 9.045
electronic form or by making notice available on website or combination of
methods. The predecessor CO, s. l 68BAG (repealed) was re-enacted in Cap.622 in
Pt.18. 93 There is also a new provision in Cap.622, s.572, which expressly provides
that notice of a general meeting can be given either in hard copy94 or in electronic
form95 or by making the notice available on a website, or by partly one of those
means and partly by another. It seems that a notice sent in electronic form for the
purpose of s.572 must also comply with the requirements in Pt.18 Div.4, including
the requirement that the member receiving the notice must have consented to receipt
of the notice in electronic form: Cap.622, s.831. 96 The requirements in Pt.18 Div.4
on sending documents via a website are also applicable to notices of general meeting
sent via a website under s.572, 97 and this includes the requirement for consent to
have been given by the member for receiving documents via a website before the
company is entitled to send documents in such manner: Cap.622, s.833. Also, s.573
provides that a notice given on a website will be valid only if the notification: (i)
states that it concerns a notice of a company meeting; (ii) specifies the venue, date
and time of the meeting; and (iii) in the case of an AGM, states that it is an AGM.
The notice must be available on the website from the date of the notification until
the date on which the meeting is concluded. 98

4.3 Persons entitled to receive notice

Every member entitled to receive notice of general meetings. Unless the articles 9.046
provide otherwise, every member of the company is entitled to receive notice of
general meetings.99 In the case of joint shareholders, it is common for a company to
provide that the notice of a general meeting is to be sent to the joint holder first named
in the register of members in respect of shares (the senior joint holder). 100
Members not entitled to vote also entitled to notice of general meetings. Members 9.047
who are not entitled to vote are also entitled to notice of general meetings, but this can
be altered by the articles. However, in the case of companies listed on a recognised
stock exchange, members who do not have a right to vote must be given the same
notice as that to which members who have the right to vote are entitled-this cannot
be overridden by the articles. 101 Every director is also entitled to notice of a general

9J Cap.622, s.828.
" See definition in Cap.622, s.2(4)(a).
•s See definition in Cap.622, ss.2(4)(b) and 2(4) (c).
96 It is not expressly stated in s.572 that Pt.18 is also applicable. However, s.573 imposes additional requirements in

relation to notices given by use of a website. and s.573(1) expressly provides that the requirements in s.573 arc
not to limit the applicability of Pt.18. The assumption must be that Pt.18 is applicable to s.572 as a whole. There
is no reason to require Pt.18 to apply to notices given by way of website but not notices given in hard copy or
electronic form.
97 Cap.622, s.573(1).
98 Cap.622. s.573(3).
99 Cap.622, s.574(1)(a); Model Articles (private companies), art.36(1); Model Articles (public companies),

ait.40( I) (Companies (Model /\rticles) Notice (Cap.622H) ,Schs. l and 2).

100
For example, see the predecessor CO, Table A, reg.133 (repealed).
101
Cap.622, ss.574(4) and 574(5).
386 GENERAL MEETINGS

meeting, 102 so is a person who is entitled to a share in consequence of the death or

bankruptcy of a member, as long as the company has been notified of that person's
entitlement. 103
9.048 Auditors entitled to attend and receive notice of general meetings. Auditors are
entitled to attend general meetings of a company 104 and are accordingly entitled to
receive notice of such meetings at the same time as members are given notice. 105
A contravention of the requirement to give notice to auditors amounts to an offence
publishable by a fine at level 3.' 06

4.4 Special notice

9.049 Special notice: notice of intention to move particular resolution not less than
28 days before meeting. Certain matters of the company can be determined by the
general meeting only through a particular type of ordinary resolution, i.e. an ordinary
resolution of which special notice is given. 107 These matters include the removal of
directors 108 and auditors, 109 and appointment of auditors in certain situations. 110 Special
notice, in this context, is a notice of the intention to move the particular resolution
given to the company not less than 28 days before the meeting. 111 The company must
also give notice of the resolution to the members as it gives of the meeting, 112 or if that
is not practicable, by advertisement in a newspaper or in any manner allowed by the
articles not less than 14 days before the meeting. 113

4.5 Content of notice

9.050 Notice of meeting must state place, day, time of meeting and nature of business. A
notice of meeting must state the place, the day and the time of the meeting, as well as
the nature of that business to be dealt with in the meeting. 114 Those requirements are
subject to the articles. 115 If the notice is one that calls anAGM, the notice must state that
the meeting is an AGM. 116 Notice must also be given of any proposed resolutions. 117

102 Cap.622, s.574(l){b).

103 Cap.622, s.574(2). This is equivalent to predecessor CO, Table A reg. l 35(b), and is also provided for in the Model
Articles: see art.36(2) (private companies) and art.40(2) (public companies) (Companies (Model Articles) Notice
(Cap.622H), Schs. I and 2).
uw Cap.622, s.411.
ias Cap.622, s.575(1).
106 Cap.622, s.575(2).

107 Cap.622, s.578.

108
Cap.622, s.4462.
109 Cap.622, s.419.

°
11
Cap.622, s.400.
'" Cap.622, s.578(1).
112 Cap.622, s.578(2).

'' 3 Cap.622, s.578(3). The requirement in the predecessor CO, s. I I 6C (repealed) for the period of2 I days is changed
to 14 days under Cap.622.
'" Cap.622, ss.576(1)(a)-576(1)(c).
"' Cap.622, s.576(2). These requirements arc repeated in Model Articles (private companies), art.35; Model
Articles (public companies), art.39; predecessor CO, Table A reg.52 (repealed).
116
Cap.622, s.576(1)(d).
111
Cap.622, s.576(1)(e).
 NOTICE 387

4.5.1 Date, time and place

Directors have discretion to determine date, time and place of meeting but must 9.051
be in best interests of company. The date, time and place of a general meeting are
normally a matter of the directors' discretion,' 18 which must be exercised in the best
interest of the company as a whole. The court has power to restrain the directors from
proceeding with a planned meeting if the meeting is scheduled with a purpose of
preventing a member from attending or exercising his or her voting rights. 119 Also, the
court may declare a meeting to be invalid where the meeting is adjourned to a time
which is only a number of hours away from the original meeting time such that the
members who are unable to attend the adjourned meeting do not have enough time to
arrange proxies for the meeting. 120
Meetings held by audio-visual link-up. Where the capacity of the venue selected for 9.052
the meeting is not sufficient to accommodate all of the members wishing to attend, the
meeting may be declared invalid.121 It has been held that it is possible to hold a general
meeting in different venues as long as adequate audio-visual links are arranged to
enable members in all venues to see and hear what is going on in the other venues. 122
This position is confirmed under Cap.622, s.584, which provides that a general
meeting can be held at two or more venues using any audio-visual technology that
enables the members to speak and vote at the meeting.

4.5.2 The business to be transacted

Members present at meeting cannot deliberate on any matter not contained in 9.053
notice of meeting to protect absent members. The purpose of the requirement that a
notice must disclose the general nature of the business to be transacted at the meeting
is to protect absent members. A notice of meeting containing in clear language
a full summary of the business to be dealt with at the meeting helps the recipients
of the notice to decide whether it is worth their while to attend. 123 A matter cannot
be deliberated upon at the meeting if it is outside the scope of the business that is
specified in the notice of that meeting. For example, if the business as specified in
the notice is only to pass a resolution that a director who has been charged with an
offence is to stand down and that the position shall remain vacant until the charge is
determined, the company will not have the competence to deliberate on a resolution to
dissolve the whole board. 124
Notice which does not adequately describe nature of business of meeting may 9.054
render meeting invalid. A notice that makes reference to, but fails to state with
sufficient particularity, the general nature of the business to be transacted at the

118
Manin v Walker (I 918) 145 LT Jo 377; Byng v London LijeAssociatio11Ltd [ 1990] Ch 170 (Eng CA).
'" Ca11nonv7l-ask(l875) 20 Eq 669.
'Z<l 8yng v London life Association Ltd [1990] Ch 170 (Eng CA).
'" 8yng v London life Association Ltd [ 1990] Ch 170.
122 8yng v London life Association Ltd [1990] Ch 170.

'" Tiessen v He,ulerson[1899] 1 Ch 861; Chung CheungShe v The Sze Yt,pSS Co Ltd (1931-32) 25 HKLR77:
JenaslwrePty Ltd v lemrib Pty Ltd (1993) 11 ACLC 768.
'" Efstathis v Greek Orthadox Comm1mity of St George (1989) I Qd R 146, sub nom Efstathis v Greek Orthodox
Community of St George (1988) 13 ACLR 691.
388 GENERAL MEETINGS

proposed meeting is inadequate and may render the meeting and hence the resolution
passed thereat invalid. In Kaye v Croydon Tramways Co, 12s a notice that invited
members to consider an agreement on the sale of the company's undertaking was held
invalid, as it failed to inform the members of the fact that the buying company had
agreed to make a substantial payment to the directors to compensate them for their
loss of office.
9.055 Examples of inadequate notices. Other examples of inadequate notice include
situations where the notices have stated that the business to be transacted at the
meeting include, among other things, alteration of articles of association or approval
of an agreement between directors themselves and the company but failed to specify
the effect of the alteration or the agreement. 126 A further situation where the notice has
been held inadequate is one where the resolutions to be passed or confirmed in the
meeting are considerably different from those set out in the requisition. 127
9.056 Notice needs to be adequate to ensure decisions of company on matters relating
to interests of company and members made on informed basis. The practical
importance of the adequacy of notice is that disputes about the validity ofa notice,
hence the resolution, often arise where the impugned resolution confers an interest
or benefit on the company controllers (such as making provisions for retiring
directors, enabling the board to increase the directors' remuneration, enabling the
directors to borrow a sum that is greater than allowed in the company's articles,
relieving directors from liability, 128 as well as the situation in Kaye v Croydon
Tramways Co 129), or a change of membership, hence the control, of the board. 130
Adequacy of notice helps ensure that the decisions of the company in general
meeting on matters relating to the interests of the company and members are made
on an informed basis.
9.057 Notice of meeting stating business to be transacted need not give members every
piece of information but should fully and fairly inform shareholder on voting
matters. On the other hand, that a notice of meeting must state the business to be
transacted at the meeting with sufficient particularity does not mean that the giver of
the notice is obliged to give members every piece of information that might conceivably
affect their rights. 131 It is necessary to look at the effect that the information contained
in the notice will have on an ordinary shareholder who scans or reads the notice
quickly as an ordinary person in commerce or as an ordinary investor: viewed in such
a way, the question is whether the information fully and fairly informs the shareholder
about the matter upon which he or she will have to vote. 132

12l [ 1898) I Ch 358.

126 Normandy v Ind Coope & Co Ltd [ 1908) I Ch 84; Pacific Coast Coal Mi11esLtd v Arbuthnot [ 1917)AC 607.
"' C/wng Cheung She v The Sze YapSS Co Ltd ( 1931-32) 25 HKLR 77.
128 Normtmdy v Ind Coope & Co Ltd [ 1908) 1 Ch 84; Pacific Coast Coal Mi11esLtd v Arbuthn<>t [ 1917) AC 607.
12' [1898) 1 Ch 358. Seepara.9.054 above.

no Chung Cheung She v The S=eYap SS Co Ltd (1931-32) 25 HKLR 77; Choppington O.>llierieslttl v Johnson
[1944) 1 All ER 762; l-/011gKong Racing Pigeon Association Ltd v lam Koon Nam [2002] 3 HKLRD 133.
'" ENT Pty Ltd v S,mmysia Television Ltd (2007) 61 ACSR 626, [19] per Austin .I.
"' Devereaus Holdings Pty Ltd v Pelsar/ Resources NL (No 2} (1985) 9 ACLR 956; ENT Pty Ltd v S1mmysia
Television Ltd (2007) 61 ACSR 626.
 NOTICE 389

Requirement for adequate notice important for passing resolutions which must 9.058
be contained in notice. The requirement for adequate notice is also underscored by
the requirements in Cap.622, s.576(l)(e). That provision states that if a resolution is
intended to be moved at the meeting, notice of the resolution must be given in the notice
of meeting, and the notice must also include a statement 133 containing the info1mation
and explanation, if any, that is reasonably necessary to indicate the purpose of the
resolution. 134 Contravention of s.576(l)(e) amounts to an offence, but does not of itself
affect validity of the resolution if passed. 135 The general law principles can still apply
to invalidate the resolution though. 136
Requirement for notice to specify nature of business of meeting only applies 9.059
to "special business" not ordinary business if articles so provide. Under the
predecessor CO, Table A reg.52 (repealed), the requirement for the notice to specify
the nature of the business of the meeting applied only in respect of what is referred to
as "special business". Special business is distinguished from ordinary business. The
latter is the usual type of business dealt with at AGMs-specified in reg.54 as being
the declaration of dividends, the consideration of the accounts, balance sheets and
the reports of the directors and auditors, the election of directors in the place of those
retiring and the appointment of, and the fixing of the remuneration of, the auditors.
Under such provisions in the articles, notice of ordinary business is not required. 137
Special business is any other business to be transacted at an AGM or any business
transacted at an EGM. Under Cap.622, s.576(l)(c), no distinction is made between
ordinary and special business, and so the default position is that the general nature of
all business to be dealt with at the meeting must be stated in the notice. This is subject
to the company's articles. 138 Unlike Table A, the Model Articles follow the position
under s.576(1)(c). 139
Special resolutions: notice must set out text of resolution and intention to propose 9.060
resolution as special. Where a resolution is to be proposed as a special resolution,
it is necessary for the notice of meeting to set out the text of the resolution and the
intention to propose the resolution as a special resolution. 140
Business specified in notice must be within power of general meeting. The business 9.061
specified in the notice must be one that can be transacted through a general meeting.
It may, for example, be beyond the power of the general meeting to consider a matter
that, according to the terms of the company's articles, is to be dealt with through the
exercise by the directors of their power of management. 141

"' This statement is unnecessary where the company is a wholly owned subsidiary: Cap.622 s.576(1)(e)(ii).
"' Section 576(1)(e) does not apply in relation to a resolution of which notice has been included in the notice of
meeting under ss.567(3) or 582(2) (proposed resolutions accompanying members' requisition for meeting), or
notice has been given under s.615 (resolution proposed by members for AGM): Cap.622, s.576(3).
iJs Cap.622, ss.576(4) and 576(5).
1
.\6 Cap.622, s.576(6).
1
" Sec Grund/ v Great Boulder Proprietary Mines Lrd[l948) Ch 145.
us Cap.622, s.576(2).
" 9 See Model Articles (private companies), art.35; Model Articles (public companies), art.39 (Companies (Model
Articles) Notice (Cap.622H), Schs. 1 and 2).
1
<-0 Cap.622, s.564(4); see also Cap.622, s.567(5).
1
" NRMR v Parker(1986) 6 NSWLR 516; Credit Developme111 Pte Lid v !MO lid [1993) 2 SLR 370.
390 GENERAL MEETINGS

4.6 Accidental failure to give notice of meeting or resolution

9.062 Notice for meeting treated as having been given properly even where accidental
omission in giving notice to one or more members. Notice for a meeting is treated
as having been properly given even if there is an accidental omission in giving
notice to one or more members. 142 This is, however, subject to the provisions in
the company's articles. 143 Under the Model Articles, the accidental omission to give
notice or the non-receipt of notice of a meeting by any person entitled to the notice
does not invalidate the proceedings at that meeting. 144 Thus, in Re West Canadian
Collieries Ltd,' 45 the court considered that an annual general meeting was validly
held, even though the registrar of the company, in sending out to members of the
company notices of a special resolution to be proposed at the AGM, inadvertently
omitted to send notices to a small number of shareholders. Likewise, in The
Peninsular and Oriental Steam Navigation Company v Eller and Co, 146 the validity
of the meeting in question was upheld where the omission to send notices to certain
persons entitled to the notices was caused by the failure to understand the instruction
by the company's solicitors (on the identity of persons who were entitled to receive
the notices in question) on the part of the persons responsible for the implementation
of the sending out of the notices.
9.063 "Accidental" defined as "something which is not deliberate". Note that for the
purpose of this rule under consideration, "accidental" is defined as "something which
is not deliberate". An omission is not accidental if, for example, the company's failure
to give notices to a given shareholder was deliberate, although the decision was based
on the company's solicitor's mistaken opinion on the entitlement of the shareholder in
question to receive notice. 147

4.7 Circulation of member-proposed resolutions and members' statements

9.064 Situations where members have right to propose resolutions to be moved at

general meeting. Members have a right to propose resolutions to be moved at a general
meeting in two situations. The first is where the members themselves requisition the
meeting. Here, the members can include the text of a proposed resolution in their
request for a meeting, and the notice of the meeting sent to members by the company
must include notice of that resolution. 148 The second is where the meeting is an AGM.
Here, the members may request the company to give to members notice of a proposed
resolution where the request is made by members representing at least 2.5 percent of
the total voting rights of the members having a right to vote, or by at least 50 members

142
Cap.622, s.579.
143 Cap.622, s.579(2). However, the articles cannot provide otherwise in respect of, ill/er alia, notices given under
ss.567 or 568 (meetings requisitioned or called by members).
144
Cap.6221➔: Model Articles (public companies) art.41; Model Articles (private companies) art.37.
"; (1962! I Ch 370.
" 6 (2006) EWCA Civ 432, (54).
"' Musselwhite v Musselwhite & Co Ltd [ J962) Ch 964.
" 8 Cap.622, ss.566(3)(b) and 567(3).
 PROCEEDINGS 391

having the right to vote. 149 A resolution proposed by members will be circulated at the
expense of the company. 150
Members representing 2.5% of total voting rights or at least 50 members have 9.065
right to request company to circulate statement prior to general meeting. For
any general meeting, members representing at least 2.5 percent of the total voting
rights or at least 50 members who have a right to vote may request the company to
circulate a statement of not more than 1,000 words relating to a proposed resolution
or other business to be dealt with at the meeting. 151 It is thus possible for members
to express opinions to all of the other members on matters to be deliberated upon at
a general meeting. The expenses of circulating the members' statement in the case
of AGMs are to be borne by the company (similar to the position for circulation of
members' resolutions for AGMs) .152 Where the meeting is not an AGM, the members
requesting circulation are still required to pay for the expenses of circulation unless
the company resolves other.vise. 153 A company is not required to circulate a statement
if the members' rights to circulation are being abused or are being used to secure
needless publicity for defamatory matter. 154 Whether a statement is "defamatory"
depends on the common law meaning of the term, namely whether the meaning of
the statement has a tendency to lower the plaintiff in the estimate of the ordinary
reasonable reader. 155 The word defamatory for present purposes does not mean that the
statement was one which, if it were the subject of a suit in defamation, would result in
a win for the plaintiff. In deciding whether a statement is defamatory, one looks only
to the meaning of the statement, not to the availability of the defences. 156

5. PROCEEDINGS
5.1 Quorum

5.1.1 The meaning of quorum

Quorum minimum number of participants required to constitute valid meeting. 9.066
A quorum is a minimum number of participants who must be present to constitute a
valid meeting.

5.1.2 The requireme11t

Quorum for general meeting two unless articles provide otherwise. Unless the 9.067
articles provide otherwise, the quorum required for a general meeting is two members
present in person or by proxy.157 Where the company has only one member, the quorum

1.19 Cap.622, s.6 l 5.

15-0 Cap.622, s.6 l 6( I).
151
Cap.622,s.580.
' 51 Cap.622. s.582(1). This changes the position compared with predecessor CO, s.115A(4)(b) (repealed).
153
Cap.622, s.582(2).
154
Cap.622,s.583.
'" National Roads and Motorists· Association v Snodgrass (2002) 42 ACSR 622, [ 10].
"' National Roads and Motorists "Association v Snodgrass (2002) 42 ACSR 622, [ 11).
151
Cap.622. s.585(3).
392 GENERAL MEETINGS

is that member in person or by proxy.158 If the only member of the company is itself a
body corporate, that member present by its corporate representative also constitutes a
quorum of a general meeting of the company. 159
9.068 Cap.622 does not specify time after which meeting to be regarded as
inquorate due to insufficient members but MA states half an hour from time
appointed for meeting. Cap.622 does not specify the time after which the meeting
is regarded as inquorate due to insufficient members arriving. Under the Model
Articles, if a quorum is not present within half an hour from the time appointed
for the meeting, then the meeting shall be dissolved where it was called through
a members' requisition, and in all other cases the meeting is adjourned to the
same day in the next week (or to another day that the directors determine).' 60 If
at the adjourned meeting a quorum is not present within half an hour from the
time appointed for the meeting, the member or members present are deemed to
constitute a quorum. 161

5.1.3 Loss of quorum

9.069 Quorate meeting may lose quorum if one or more members leave before
meeting concluded. An otherwise quorate meeting may lose its quorum when one
or more of the members leave before the meeting is concluded. This possibility
raises the question as to the validity of a resolution passed after the meeting has lost
its quorum. The question will need to be answered by reference to the wording of
the quorum regulations in the company's constitution. The common law rule is that
for the meeting to be valid, a quorum must exist from the time when the meeting
proceeds to business to the conclusion of the meeting. 162 This common law rule
has been incorporated in the Model Articles.' 63 Where the company's articles only
state that no business shall be transacted at any general meeting unless a quorum is
present at the time when the meeting proceeds to business, a quorum is only required
at the beginning of the meeting and a quorum is not required when a vote is taken.' 64
Where, however, the loss of quorum results in the presence of only one member
when the vote is taken, no valid decision can be taken at the meeting, even if the
quorum regulation in the articles does not require the quorum to exist at all times
through to the conclusion of the meeting. 165

158 Cap.622, s.585(1). It has been held in the UK that "member", for the purpose of the UK equivalent ofs.585 and
provisions in the articles on quorum, means the registered members, such that a company with two registered
members, one of which is deceased or dissolved, is not a single member company for the purpose of the UK
equivalent of s.585(1): Ra11dlzawav T11tpi11[2017) BCC 406, [71) (Eng CA).
159
Cap.622, s.585(2).
160 Model Articles (private companies), art.42( I); Model Articles (public companies), art.46( I) (Companies

(Model Articles) Notice (Cap.622H), Schs. I and 2); predecessor CO, Table A reg.55 (repealed).
161 Cap.622H: Model Articles (private companies) art.42(2); Model Articles (public companies) art.46(2). The

equivalent provision in former Table A reg.56 of the predecessor CO refers co the "members" present being
a quorum: sec also Re China Swr Ente,prise Hong Kong Ltd (2013) 5 HKLRD 271, discussed above at
para.9.006.
" 2 Henderso11v Lo1111i1 (1894) 21 R (Ct of Scss) 674; Ball v Pearsall (I 987) 10 NSWLR 700.
"' Cap.622H: Model Articles (public companies), art.43; Model Articles (private companies), art.39.
1
"' Re Hartley Baird Ltd (I 955) Ch 143.
°'
1
Re London Flats Ltd [ I969) I WLR 711.
 PROCEEDINGS 393

5.1.4 Courts' power of calling meetings and deemed quorum

Court has power to call meeting in certain situations. As discussed previously, in 9.070
certain situations, the court has the power to call a meeting even if the number of the
members attending the meeting does not constitute a quorum. 166

5.1.5 Joint slu,rehoftlers

Common for company to send notice of general meeting to joint shareholder first 9.071
named in register of members: senior joint holder. It is common for a company's
articles to provide that the notice ofa general meeting is to be sent, in the case of joint
shareholders, to the joint holder first named in the register of members in respect of
shares (the senior joint holder), 167 and the voting power at a general meeting is to be
exercised by the most senior joint holder who votes. 168
Re Transcontinental Hotel case: joint shareholders can be individually counted 9.072
for quorum purposes if articles so provide. Joint shareholders can be individually
counted for voting or quorum purposes if this is required as a result of a proper
interpretation of the company's constitution. In Re Transcontinental Hotel Ltd, 169 the
memorandum, which was subscribed by W and ICF, stipulated that the total capital
of the company was to be issued as fully paid up to FHF, ICF, Wand G. Shares were
duly issued to the four persons as joint shareholders. A regulation in the articles
provided that the presence of two members is required for a meeting to be quorate.
Regulation 55 of the articles stated that:

" .. .in the case of joint holders, the vote of the senior who tenders a vote ... shall
be accepted to the exclusion of the other joint holders, and for this purpose
seniority shall be determined by the order in which the name stand in the register
of members".

The issue there was whether a meeting attended by W and G, who were not senior
members, was quorate. Napier CJ of the South Australian Supreme Com1 held that
the meeting was quorate. His Honour held that the provision that fixed the quorum
could not be given a meaning which makes it impossible for the company to transact
business. All of the four shareholders were proprietors and any one of them, in the
absence of the senior member or members, was entitled to vote. As the members were
joint shareholders, it was impossible to hold a general meeting unless the shareholders
who were not entitled to vote were, nevertheless, regarded as members for the purpose
of forming a quorum.

5.1.6 Persons attending in different capacities

Attending in person or by proxy. If the articles require the quorum to be formed by 9.073
the presence of members "present in person", proxies cannot be countedY 0 Where

166
Sec para.9.022above.
161
E.g., predecessorCO,TableA reg.133(repealed).
168
Cap.622,s.589; predecessorCO,TableA. rcg.65 (repealed).
169 (1947) SASR 49.
1'" M Harris Ltd.. Petitioners, 1956SC 207.
394 GENERAL MEETINGS

the articles provide for quorum "in person or by proxy", proxies can be countedY 1
Thus, a person appointed as proxy by five members can be counted as five different
people for the purpose of satisfying the quorum requirements. 172 This principle
appears to be subject to the common law rule on the minimum number of persons
required for there to be a meeting. 173 Where a quorum requires the presence of two
members and the meeting is attended by one member who also acts as a proxy for
another, no quorum is constituted, notwithstanding the fact that the articles allow
the quorum to be constituted by: "two or more members present in person or by
proxy".114
9.074 Member cannot be counted as two members for the purpose of quorum if attending
in own right and as trustee. It has also been held that, where the quorum required
is three members, and one of the two members present in the meeting attends both in
her own right and as a tmstee holding shares for others, then she can be counted as
two members for the purpose of tallying a quorum. m However, it is not clear whether
this is correct. The basic rule is that, as far as the company is concerned, no holder of
shares is recognised by the company as holding any shares on trust. 176 Accordingly, if
the beneficial holdings of the trustee are ignored, then from the company's perspective
the person who attends in her own right and as a trustee is only a single member
holding just the one lot of shares absolutely. On this analysis, she cannot be counted
as two members.

5.1.7 Effect of inquorate meetings o,i validity of meeting

9.075 Meeting cannot proceed without quorum and inquorate meeting invalid.
A meeting cannot proceed without a quorum and a purported meeting held without a
quorum is invalid.177 The decisions of an inquorate meeting are not capable of being
ratified by a subsequent valid meeting. The decisions can only be made afresh by a
subsequent quorate meeting. 178
9.076 Member's right to challenge validity of decisions made at inquorate meeting
restricted by irregularity principle. However, a member's right to challenge the
validity of decisions made at an inquorate meeting is restricted to some extent by the
irregularity principle under the rule in Foss v Harbottle. 179 That is, notwithstanding the
lack of quorum, the court may decline to make an order that the resolutions passed are
invalid if the view of the majority members is clear and the members would make the
same decision again if the meeting was reconvened with a quorum. 180

171 CM Schmitthoff (ed.), Palmer:~ Company Law (24th edn, Stevens & Sons 1987)Vol I, 843.
112 Re Vector Capital Lid (1997) 23 ACSR 182.
113 See para.9.005.
114 Re Prai11& Sons Ltd 1947 SC 325; lnsom11ia(No 2) Pry Ltd v FCT ( 1986) 84 FLR 278.

115 Re Neil Mcleod & Sons Ltd 1967 SLT 46.

" 6 Cap.622, s.634. Sec also Cap.622H: Model Articles (private companies), art.58; Model Articles (public
companies), art.63; predecessor CO, Table A reg.7 (repealed).
"' Re Alma Spinning Co (8ot1omley '$CttSe) (I 880) 16 Ch D 681.
178 Clam v Fairway lnvestme111sPty Ltd ( 1971-1973) CLC 40-077; Myer Quee11stow11 Garden Plaza Pty Ltd v Port
Adelaide City C<>17,(1975) 11 SASR 504, 33 LGRA 70
"' (1843)2Hare461,67ER 189.
'8" Lim Jonathan v She Wai H1111g (2011) I HKLRD 305. On the irregularity principle, see further Chapter I0.
 PROCEEDINGS 395

Hong Kong Rifle Association case: if validity of meeting to be challenged because 9.077
of quorum action must be taken within reasonable time. Also, in Hong Kong Rifle
Association v Hong Kong ShootingAssociation, 181 Saunders J held that if the validity of
a meeting is to be challenged on the ground that the meeting is inquorate, appropriate
action must be taken within a reasonable time; and that accordingly a decision made
at an inquorate meeting of the company to amend its articles to reduce the quorum of
meetings was not challengeable for lack of quorum where 13 years had lapsed and the
decision had been acted upon and treated as valid.
Resolution passed at inquorate meeting but where members present comprise 9.078
all members of company may be valid: doctrine of unanimous consent. Where a
meeting is inquorate but those present comprise all of the members of the company for
the time being, the resolution passed at the purported meeting may be held valid on the
basis of the doctrine of unanimous consent. 182

5.1.8 Effect of inquorate meetings on third parties

Third party may be entitled to enforce transaction made under authority given 9.079
in inquorate meeting. Where a company enters into a transaction with a third party
on the basis of authority purport.edly granted under a decision made at an inquorate
meeting, the third party may be entitled to enforce the transaction against the company
pursuant to the indoor management rule notwithstanding the irregularity. 183 In County
of Gloucester Bank v Rudty Merthyr Steam and House Coal Colliery Co,184 a decision
to execute a mortgage to a bank made in an inquorate directors' meeting was held
valid in favour of the bank, as, inter alia, the bank did not have any knowledge of the
irregularity, nor was there any reason to put the bank on enquiry. Under the statutory
indoor management rule, the third party's position on a decision made in a board
meeting that suffers from procedural irregularities depends on whether the outsider, in
entering into the transaction, had acted in good faith. 185 The third party is presumed,
unless the contrary is proved, to have acted in good faith; and knowledge of the
irregularity on its own does not amount to bad faith. 186

5.2 Chairperson

Chairperson: person who presides at meeting. The chairperson of a meeting 9.080

is a person who presides at the meeting. The appointment of a chairperson is an
indispensable part of a meeting. The meeting is unable to proceed to business in the
absence of a person "expressly or by acquiescence permitted by those present to put
motions to the meeting so as to enable the wish or decision of the meeting to be
ascertained". 187

181
[2007] 4 HKLRD 121.This aspect of the decision was not in issue on aPJ)eal:[2009) 2 HKLRD 249.
18
' Re Jolmsto11v Dunster & Co ( 1891) 17 VLR 100. Sec also the discussion on unanimous consent in section 6.2
below.
183
The indoor management rule is discussed more fully in Chapter 12.
180 [ 1895) I Ch 629.
18~ Cap.622, s.117( I).
186 Cap.622, ss.I I 7(2)(b) and I 17(2)(c); Ford v PolymerVisionLtd [2009) 2 BCLC 160; see further Chapter 12.
187
ColoradoCo11structio11s Pty Ltd v Pla11ts(1966) 2 NSWR 598,per Street J.
396 GENERAL MEETINGS

9.081 Duties of chairperson. The duty, as well as the function, of the chairperson over a
meeting is:

" ... to preserve order, and to take care that the proceedings are conducted in a
proper manner, and that the sense of the meeting is properly asce11ained with
regard to any question which is properly before the meeting". 188

The procedural role of the chairperson includes:

" ... nominating who is to speak, dealing with the order of business putting
questions to the meeting, declaring resolutions carried or not carried, in due
course asking for any general business, and declaring the meeting closed." 189

9.082 Any member may be elected chairperson. The statutory rule on the qualification of the
chairman of a general meeting, which is a default rule, is that any member may be elected
to be the chairperson. 190Under the Model Articles, the chairperson of the board of directors
is to be the chairperson of a general meeting, if he or she is present and willing to so act. 191
If the chairperson of the board is not present within 15 minutes after the time appointed for
the meeting, or is unwilling to act or has given the company a notice of his or her intention
not to attend the meeting, the directors must elect one of their number to be the chairperson
of the general meeting. 192 If no director is willing to act as the chairperson or if no director
is present within 15 minutes after the time appointed for holding the meeting, the members
must choose one of their number to be the chairperson. 193

5.3 Voting

9.083 Every member has right to vote subject to company's constitution. The general
principle on voting is that every member has a right to vote subject to the provisions in
the company's constitution. 194 The holders of certain classes of shares may have no or
limited voting rights. 195 In the ordinary case, voting is done by way of a show of hands

1" National Dwellings Society vSykes (1894) 3 Ch 159, 162,perChitty J.

189 Kelly v Wolstenholme (l 991) 9 ACLC 785, 787,perYoung J.
190 Cap.622, s.586.
191 Model Articles (public companies), art.44( I); Model Articles (private companies), art.40( I) (Companies (Model
Articles) Notice (Cap.622H), Schs. I and 2).
192 Cap.622H: Model Articles (public companies), aii.44(2); Model Articles (private companies), art.40(2).
193 Cap.622H: Model Articles (public companies), aii.44(3); Model Articles (p1ivate companies), art.40(3).
194 Cap.622, ss.588( I) and 588(4). Where the shares of a registered member are held as nominee for another, it is the
registered member who is entitled to attend the meeting and exercise the right to vote; however, the member would
be required to vote in accordance with the wishes of the beneficial holder of the shares: Qiya11gLtd v Mei Li New
Energy Ltd [2016) 4 HKLRD 790, [38]. If the member votes against the wishes of the beneficial holder in breach
of tmst to the knowledge of the company, the company is regarded as participating in the breach of tmst and the
vote of the member is invalid: Qiyang Ltd v Mei Li Nl'>VEnergy Ltd (2016] 4 HKLRD 790, [42] (vote of registered
member who was an undischarged bankrupt invalid where the shares had vested in the trustee-in-bankruptcy and the
member's exercise of the vote was not authorised by the trustee-in-bankruptcy to the knowledge of the company).
19
' For a case example on a class of shares which do not confer voting rights on the holders, sec Constable v
Exec111iveCo1111ectio11s Ltd [2005] EWHC 3 (Ch), [2005] 2 BCLC 638. The voting rights ofthc holders of certain
classes of shares, for example preference shares, may be curtailed by virtue of the company's constitution: CM
Schmitthoff(ed.), Palmer's Company law (24th edn, Stevens & Sons 1987) Vo! I, 848.
 PROCEEDINGS 397

unless a poll is demanded. 196 Each member or proxy present is entitled to one vote on a
show of hands. 197 Where a member has appointed more than one proxy, the proxies so
appointed are not entitled to vote on a show of hands. 198 In the case of joint holders of
shares, articles commonly provide that the vote of the most senior joint holder voting
is to be accepted to the exclusion of the junior. 199
Every member has right after show of hands to demand poll at common law. 9.084
At common law, every member has a right, after a show of hands, to demand
a poll. 200 This right can be exercised where it is not taken away by statute 201 or
by the company's constitution. Companies' constitutions often make provisions
to qualify the members' right to demand a poll. Under the Model Articles,
for example, a poll can only be demanded by: (a) the chairperson; (b) at least
two members present in person or by proxy; and (c) any member or members
representing at least 5 percent of the total voting rights of all members having
the right to vote at the meeting. 202 Cap.622 restricts the scope of articles in
qualifying the right of members to demand a poll. Section 591(2) of Cap.622
provides that a provision in the articles is void if it seeks to prevent a poll being
demanded by: (a) at least five members having the right to vote at the meeting;
(b) members representing at least 5 percent of the total voting rights; or (c) the
chairperson. Also, the right to demand a poll cannot be excluded by virtue of a
company's articles on any question other than the election of the chairperson of
the meeting or the adjournment of the meeting. 203
Chairperson's statutory duty to demand poll if aware that result on show of 9.085
hands will be different to poll. The chairperson has a statutory duty to demand a poll
if he or she knows from the proxies received by the company that the result on a show
of hands will be different from that on a poll.204 A demand for a poll must be made
immediately after the result of the voting by show of hands is declared and before the
meeting proceeds to other business. 205
Each member has one vote for each share for voting on poll. On a vote on a poll at 9.086
a general meeting, in the case of a company having a share capital, each member has
one vote for each share held by him or her.206 In other cases, every member shall have
one vote.207 The above is subject to any provision of the company's articles.208 Shares

196
Cap.622J: Model Articles (public companies), art.47(1); Model Articles (private companies), art.43(1).
197 Cap.622, s.588( I).
191t Cap.622, s.588(2).

199 E.g., Model Articles (public companies), art.51; Model Articles (private companies) art.47. Seniority is

determined by the order in which the names stand in the register of members. This provision is also placed on a
statutory footing under Cap.622, s.589 (subject to any provision to the contrary in the articles).
,oo RvD'Oyzy(l840) 12Ad&E 139.
2 1
• R v The Wimbledon local Boord ( 1882) 8 QBD 459.
2• 2 Cap.622M: Model Articles (public companies), art.49(2); Model Articles (private companies), art.45(2).

zo; Cap.622 s.591(1).

20,1 Cap.622 s.592.

2•' R v W G Thomas (1883) 11 QBD 282.

206 Cap.622, s.588(3)(a).
201
Cap.622, s.588(3) (b).
208 Cap.622, s.588(4). However, weighted voting rights triggered for resolutions for the removal of a director from

office are not permitted: see Cap.622, s.462(7).

398 GENERAL MEETINGS

in a company held on trust for the company do not confer any right to vote at a general
meeting. 209
9.087 Declaration of voting results by chairperson marks end of voting process.
The declaration of the voting results by the chairperson marks the closure of the voting
process and it is no longer possible for a voter to change or retract his or her vote by
claiming that, inter alia, he or she has made an error.210

5.4 Proxies and corporate representatives

5.4.1 The meaning "ntl sig11i.fica11ce

of proxies
9.088 Proxy: properly appointed agent with authority to vote at general meeting or class
meeting. A proxy, in the context of company meetings, means some agent properly
appointed: 211

" ... with authority to vote at a company general meeting or class meeting in the
interest of the person who appoints the proxy". 212

A proxy paper is a document empowering the proxy to appear and vote for the
appointer.213 The proxy system helps achieve a greater degree of "shareholder
democracy" in that it ensures that the voice of the members who are unable to attend a
meeting can still be heard. In larger, especially listed, companies, the bulk of the shares
may be held by institutional shareholders such as pension funds, insurance companies
or unit trusts. These large shareholders are likely to have strong influence in the
governance of the company through their participation in the company's decision-
making process. A sound proxy and corporate representation system is conducive to
the effective discharge of shareholders' role in corporate governance through their
proxies and corporate representatives.
9.089 Proxies given prior to meeting play important role in determining disputes
between rival shareholder factions. The proxy system also has significant practical
ramifications, as the proxies given prior to a meeting often play a far more important
role in detem1ining disputes between the rival factions of shareholders than anything
that happens at the meeting. 214

5.4.2 Appointment of proxies

9.090 Proxy may but need not be member of company. The proxy may, but need not,
be a member of the company.215 In the case of a company limited by guarantee, the
company's articles may require that a proxy must be a member of the company. If the

Z<l?Cap.622, s.588(5).
z,o R v W G Thomas, Clerk, Vicar of Sr Asaph (1883) 11 QBD 282; Kwan & Pun Co Ltd v Chan Lai Yee (unrep.,
CACY 234/2002, [2002] HKEC 1401).
2 " Re English, Scollish, and ALtstn:,lianChartered Bank (1893) 3 Ch 385. 409,per Lindley L J.
212 PE Nygh and P Butt (eds.), Bu11erwor1hs ALtstn:,lianLegal Dictionary (Buucrworlhs 1997) 948.
'" Re English, Scollish, and ALtSlr(dianChartered Bank (1893) 3 Ch 385, 409,per Lindley L J.
"' Re Marra Developments Ltd (1976) 1 ACLR 470, 472,per Wootten J.
"' Cap.622, s.596(1); A D Lang, Horsley's Meetings: Procedure. Law and Practice (7th edn, LexisNexis
Butterworths 2015) (16.3).
 PROCEEDINGS 399

company's articles do contain such a requirement, no person other than members of

the company can be appointed as a proxy.216
Member of company entitled to attend and vote in general meeting entitled to 9.091
appoint proxy. Any member of a company who is entitled to attend and vote in a
general meeting is entitled to appoint another person to be his or her proxy.217 Under
the predecessor CO, s.l 14C(IA)(b) (repealed), members ofa company not having a
share capital did not have a right to appoint proxies, unless the articles of the company
provide otherwise. This position is altered under Cap.622 such that members of all
companies have a right to appoint proxies.218 Under the predecessor CO, a member of
a company with a share capital may appoint more than one proxy but the number of
proxies he or she appoints, unless the company's articles provide otherwise, shall not
exceed two.219 This restriction has been removed under Cap.622. 220
MA requires proxy notice to be in writing and authenticated. The Model Articles 9.092
require the instrument appointing a proxy (proxy notice) to be in writing and
authenticated or signed on behalf of the member appointing the proxy.221
Possible for member to direct proxy on how to vote. When appointing a proxy, it 9.093
is possible for the member to direct the proxy on how to vote. The instruction can be
given in two different forms. The first is termed as the ordinary proxy, and the second,
the "two-way" proxy. An ordinary proxy is an open proxy which allows the proxy to
vote according to his or her discretion. A two-way proxy is a directed proxy instructing
the proxy to vote for or against the resolution. 222 The directors have a statutory duty
to ensure that any proxy form issued by the company to a member shall be such as
to enable the member to give instructions to his or her proxy on the way in which a
resolution at a general meeting is to be voted on.223

5.4.3 Proxy's right to vote and to chair a meeting

Proxy has a statutory right to vote on resolution both on show of hands and poll. 9.094
Shareholders do not have a right at common law to vote by proxy and the way in which
a member may vote via a proxy is determined by the contract between the shareholders
(i.e. the company's constitution) 224 or pursuant to statute. Under Cap.622, a proxy has
the right to vote on a resolution both on a show of hands and on a poll.225 Where,
however, a member appoints more than one proxy, the proxies are not entitled to vote
on a show of hands.226 These rules are also provided for in the Model Articles. 227

216 Cap.622, s.596(2).

217 Cap.622, s.596( I).
218 Cap.622, s.596( I). This right is no longer subject to the articles, but see also s.596(2), discussed above.
'" Predecessor CO, s. I 14C(2) (re1>ealed).
220 Cap.622, s.596(3).
'" Cap.622H: Model Articles (private companies), art.49; Model Articles (public companies). art.53.
"' CM Schminhoff (ed.), Palmer's Company law (24th edn, Stevens & Sons 1987) Vol I, 85 I.
223 Cap.622, s.601.
"' Harben v Phillips ( 1883) 23 Ch D 14, 32, per Cotton LJ, 35, per Bowen LJ.
22~ Cap.622,s.588.
226 Cap.622,s.588(2).
"' Cap.622H: Model Articles (public companies), art.50; Model Articles (private companies), art.46.
400 GENERAL MEETINGS

9.095 Proxy may be elected as chairperson of general meeting by resolution. Under both
Cap.622 and the Model Articles, a proxy may be elected as the chairperson of a general
meeting by a resolution, subject to the provisions of the company's articles on who may
or who may not be chairperson. 228 As mentioned previously, under the Model Articles,
the chairperson of the board of directors, a member of the board or a member elected
by the shareholders may act as the chairperson of a general meeting, depending on
availability and willingness, etc., of the chairperson of the board or directors. 229

5.4.4 Proxy's duty with regard to voting

9.096 Cousills case: proxy obliged to follow appointer's instructions. In Cousins v
International Brick Co,230 Lawrence LJ held that a proxy: "as between himself and his
principal is not entitled to act contrary to the instructions of the latter". 231 In accordance
with Cousins case, where the proxy is a contractual agent of the appointer, the proxy
is obliged to follow the appointer's instructions. However, the view has been expressed
that where the proxy is gratuitous, the proxy does not have an obligation to vote at the
meeting. 232 On general agency law principles, it has been stated that:

"Where there is no contract between principal and agent, it would seem that the
alleged agent cannot be liable for pure failure to do what he undertook to do
without consideration. However, he can certainly be liable in tort for negligently
failing to complete, or to complete with due care, work which he has undertaken
and upon which he has embarked." 233

9.097 Proxy director of company has fiduciary obligation to follow appointer's instructions
for voting. A proxy who is a director of the company has a fiduciary obligation, owed
to the appointer rather than to the company, to follow the appointer's instructions when
exercising his or her voting rights.234 Also, a proxy nominated by the company has an
obligation under Cap.622 to vote in the way specified by the member in the appointment
of proxy.235 By Cap.622, s.603(3)(a), if such a proxy has been appointed by two or
more members entitled to vote and the members specify different ways to vote in the
proxy document, the proxy must vote on a show of hands in the way specified by the
member(s) representing a simple majority of the total voting 1ights that he or she, the
proxy, is authorised to exercise. If there is no majority, the proxy must not vote.236

5.4.5 Compa11y-spo11sored
i11vitatio11s
to appoi11tproxies
9.098 Directors can invite members to appoint a director to be proxy. One of the methods
that the directors can and have used to secure the general meeting's support is to invite

228 Cap.622, s.602; Model Articles (public companies), art.44(4); Model Articles (private companies), art.40(4).
12~ See para.9.082.
230 [l931]2Ch90.
"' Cousins v lnter11atio1wlBrick Co [1931) 2 Ch 90, J02.
"' AD Lang, 1-forsleysMee1i11gs: Procedure law a11dPractice (7ch edn, LcxisNcxis 2015) [ 16.10).
m Peter Watts and FM Reynolds, Bowsteadtmd Rey11olds 011Age11cy(20th edn, Sweet and Maxwell 2014) [6-028].
254 1-Vhitlamv Aus1ralia11
Securities anti Investment Commission (2003) 57 NSWLR 559.
23
' Cap.622,s.603(2).
23• Cap.622,s.603(3)(b).
 PROCEEDINGS 401

the members to appoint one or more directors to be the proxy or proxies. At common
law, this is permitted even if the invitation is sent out at the company's expense 237 and
even if the invitation is only sent to some of the shareholders (say members holding
not less than a minimum amount of stock). 238 Invitations of this nature may be sent at
the company's expense because the directors have a duty to inform the shareholders of
the policy that they decide to adopt and the reason why the policy should be supported
by members. They are therefore justified in trying to influence and secure votes for
this purpose. 239 Selective invitations can be justified if these are a means to achieve
a legitimate purpose at minimum cost. In Wilson v London Midland & Scottish Rly
Co,240 for example, selective invitations were necessary to ensure the quorum for the
meeting and to minimise the associated cost.
Company sponsored invitations to appoint proxies permitted under Cap.622. 9.099
Under Cap.622, s.600(1), company-sponsored invitations to appoint proxies are also
permitted, so long as the invitations are issued to all members entitled to be sent a
notice of the meeting and to vote at the meeting by proxy. In other words, selective
invitations are not permitted under the Ordinance. While there may be some situations
where it might be thought that selective invitations can be justified (see above),
the pw-pose of s.600(1) is to prevent, for example, selective communications to the
directors' supporters only.241 The statutory requirement in s.600(1) is not contravened
though if: (i) a form of appointment naming the proxy or a list of persons willing to
act as proxy is issued to a member at his or her request, and (ii) the form and list is
available on request to all members entitled to vote.
Two-way proxies required for company-sponsored invitations to appoint proxies. 9.100
Two-way proxies are required for company-sponsored invitations to appoint proxies.242

5.4.6 Revoclltio11of proxy

Appointer may revoke proxy. There are circumstances where the appointer of a proxy 9.101
may change his or her mind and revoke the proxy after an appointment is made. An
issue that may arise from this situation is the point in time at which the proxy can be
effectively revoked, and the way in which votes should be counted if the proxy is not
revoked and the appointing shareholder votes personally at the meeting. 243
Revocation ineffective under Cap.622 unless company receives notice ofrevocation 9.102
before commencement of meeting. Cap.622 contains provisions on the termination
of a proxy's authority. The general principle is that a revocation will be ineffective
unless the company receives notice of the revocation before the commencement of
the meeting at which the vote is given.244 In the case of a poll taken more than 48

"' Peel v London & North Wes/em Rly Co (No I) (1905) I Ch 5; 111lson"London Midland & Scottish Rly Co (1940)
I Ch 393.
"' Peel v London & North U~s/em Rly Co (No I) (1905) I Ch 5; Wilson v London Midland & Scottish Rly Co (1940)
I Ch 393.
m Peel v London & North Wes/em Rly Co (No 1) (1905) I Ch 5.
"" (1940) I Ch 393.
"' Paul Kwan, Ho11gKong Co,pomte Law (LexisNexis 2006) 395.
"' See para.9.093.
"' Cousins v !nternatio11a/Brick Co (1931) 2 Ch 90.
244
Cap.622, s.604(3)(a).
402 GENERAL MEETINGS

hours after it is demanded, a termination notice, to be effective, must be received by

the company before the time appointed for the taking of the poll.245 Similar rules are
provided for in the Model Articles. 246
9.103 Vote of proxy not counted when appointing shareholder attends meeting and
exercises voting power in person. At common law, the vote of a proxy is not counted
when the appointing shareholder attends the meeting and exercises his or her voting
power in person. By voting in person, the member exercises the choice to vote in
person (rather than by proxy).247 What is revoked here is the proxy's authority to
vote with respect to the resolution in question, not his appointment. 248 The common
law rule on the revocation of proxy's authority on the member's voting in person is
codified under Cap.622. 249

5.4.7 Corporate representative

9.104 Body corporate shareholder can authorise any person it thinks fit to act as
representative at meetings: corporate representative. Many companies have
corporate shareholders. A body corporate, although a legal person, is not a natural
person and its voting right will need to be exercised through a human agent.
To facilitate participation in members' meetings by corporate shareholders, s.606 of
Cap.622 empowers a body corporate shareholder to authorise any person it thinks fit
to act as its representative at any meeting of the company.250 The person authorised
is entitled to exercise the same power on behalf of the body corporate as that body
corporate could exercise if it were an individual member. 251
9.105 Authorisation of corporate representative will need to be effected by resolution
of company's directors or other governing body. The authorisation will need to be
effected by resolution of the company's directors or other governing body. A liquidator
of the company has been held to be within the meaning of "governing body" for this
purpose. 252 It is conceivable that where the general meeting is able to exercise the
company's power of management, either because of the effect of the division of power
regulation in the company's articles, or in situations where a board capable of making
unbiased decisions for the company is unavailable,253 the members' meeting, as a
corporate organ, can be regarded as the "governing body" for the purpose of that s.606.
9.106 Corporate representative of recognised clearing house. A recognised clearing house
within the meaning of s. I of Pt. I of Sch. I to the Secmities and Futures Ordinance
(Cap.571) may, if it or its nominee is a member of the company, authorise "such person

245
Cap.622, s.604(J)(b ).
2
•• Model Articles (public companies), art.SS; Model Articles (private companies), art.SI (Companies
(Model Articles) Notice (Cap.62211), Schs. I and 2).
247 Cousins v lnter11atio110/
Brick Co [ 1931) 2 Ch 90.
248 A11sett8111/erAirTransportLtd (No 2) (1958) 75 WN (NSW) 306.
249
Cap.622s.605.
2
so For corporate representatives at meetings of creditors under the predecessor CO, there is a similar provision in
the retitled Cap.32, s.285A.
251
Cap.622,s.606(2).
"' Hillman v C,ystal Bowl Amusements Ltd [1973) I All ER 379; Re ASEAN Interests Ltd (unrep., HCCW
1233/2000, (2004) RKEC 184).
"' See Chapter 6.
 PROCEEDINGS 403

or persons" it thinks fit to act as its representative or representatives at any meeting of

the company. 254

Ordinary corporate shareholder entitled to appoint one corporate representative 9.107

but recognised clearing house entitled to appoint more than one. Given the words
"person" and "person or persons" used in Cap.622, ss.606 and 607 respectively, an
ordinaiy corporate shareholder is entitled to appoint one corporate representative only
but a recognised cleating house is entitled to appoint more than one representative. The
different position for the recognised clearing house is due to the fact that the clearing
house operates as a nominee for investors of shares listed on the Hong Kong stock
exchange.255 For the clearing house, it is possible for multiple corporate representatives
to be appointed to enable the beneficial holders to attend and vote at general meetings.
Thus any beneficial owner holding shares through the clearing house can effectively
apply to act as a "corporate representative" of the clearing house in respect of his or her
shares. Any beneficial holder can thereby exercise rights as members at meetings in this
manner. While the clearing house is the one legal person or shareholder, the statutory
provisions allow attendance and voting in a way that gets around one of the difficulties
for investors who hold shares beneficially through the clearing house.
Distinction between corporate proxies and corporate representative. There is 9.108
a need to be alert as to the distinction between corporate proxies and a corporate
representative. As a company is a legal person, a corporate member can also appoint
proxies instead of a corporate representative. 256 The advantage of appointing a
representative rather than proxies is that the representative is able to exercise the same
power as the appointing company could exercise if it were an individual member. 257
The power of a proxy, in contrast, is more restricted. An example is the restriction of a
proxy's power to vote on a show of hands, considered previously.258

5.5 Resolutions at meetings

Types of resolutions: ordinary and special. A meeting makes decisions through the 9.109
participants' resolutions. The company law legislation in Hong Kong provides for two
types of members' resolutions, namely ordinary resolutions and special resolutions
that can be passed at meetings. An ordinary resolution is one that is passed by a
simple majority of the members present and voting. 259 If a provision in any Ordinance
refers to a resolution of the company or its members but does not specify the type of
resolution required, then an ordinary resolution would suffice unless the company's
articles require a higher majority.260 Similarly, where any other document (such as the
company's articles) refers to a resolution but does not specify what type, the reference
to resolution means an ordinary resolution. 261 Most of the decisions of the general

l$4 Cap.622, s.607.

,ss Sec further para.14.062.
256 Leslie Kosmin and Catherine Roberts. C<>mpany
Meetings: law, Practiceand Procedure(OUP 2008) 155.
2 s1 Cap.622, s.607(3).
" 8 See para.9.094 above.
H9 Cap.622,s.563.
260 Cap.622,s.562(3).
2• 1 AD Lang, Horsleys Meetings:ProcedureLaw and Practice (7th edn, LexisNexis 2015) (11.4).
404 GENERAL MEETINGS

meeting are made by way of ordinary resolution. 262 As noted previously, certain types
of ordinary resolutions cannot be passed unless special notice is provided. 263
9.110 Special resolution: resolution passed by majority of 75% of votes cast. A special
resolution of a general meeting or a class meeting is a resolution passed by a majority
of 75 percent or more of the votes cast.264 A reference to an extraordinary resolution of
a company or a class meeting in any Ordinance enacted or document that existed before
31 August 1984 is deemed to be a special resolution.265 For a resolution to amount to
a special resolution, the text of the proposed resolution must be included in the notice
of the meeting, the notice of which must state the intention to propose that resolution
as a special resolution.266 If the notice is specified this way, according to s.564(4)(b)
of Cap.622, the resolution can only be passed as a special resolution. Certain types of
matters, such as an alteration of the company's constitution,267 a change of the company's
name268 and to authorise a reduction of capital,269 must be decided through a special
resolution. The fact that a certain matter is designated as special business in a company's
articles does not mean that the matter must be decided upon by a special resolution.270

6. DECISION MAKING WITHOUT MEETING

6.1 Written resolutions

9.111 Written resolution: resolution in writing that can be passed without meeting
being held. A written resolution is a resolution in writing that can be passed without
a meeting being held.271 Anything that may be done through an ordinary or a special
resolution passed at a members' meeting, with the exception of removing an auditor
or a director before the end of his or her office, may be done by a written resolution. 272
Under Cap.622, the directors have power to propose written resolutions. 273 Members
holding not less than 5 percent 274 of the total voting rights of all members entitled to
vote on the resolution also have power to require the company to circulate written
resolutions which they propose. 275 Under Cap.622, s.551, members may also request
the company to circulate with the written resolution, a statement of not more than

"' Ibid.
263
See para.9.049.
u,., Cap.622, s.564.
265 Cap.622, s.564(5).

266 Cap.622, s.564(4)(a).

261 Cap.622, s.88(2). Note, however, that an alteration in the articles to the maximum number of shares that a

company may issue may be made by way of an ordinaty resolution: Cap.622, s.88(3).
268
Cap.622, s. l 07.
269 Cap.622, s.218.
210 Wong Pak Sum v Hong Kong Furniture & Decoration Trade Association Ltd [2014] I MKLRD 507. The articles

can potentially provide otherwise, but ordinarily the distinction between ordinary and special business relates to
whether the matter needs 10 be set out in the notice of meeting and is not related to the type of resolution required.
On ordinary and special business see para.9.059 above.
271
Written resolutions are also sometimes referred to as circulating resolutions.
212
Cap.622, s.548.
7
2 J Cap.622, ss.549(a) and 550.

"' The articles mays specify a lower percentage as the threshold: Cap.622, s.552( I).
"' Cap.622, ss.549(b) and 552.
 DECISION MAKING WITHOUT MEETING 405

1,000 words on the subject matter of the resolution. However, each member may only
request the circulation of one such statement with respect to the resolution. 276

Statutory obligation to send copy of proposed resolution and members' statement to 9.112
members. The company has a statutory obligation to send a copy of a proposed resolution
and any members' statement, at the company's expense, to members 277 within 21 days
after it becomes subject to the requirement to send these documents under s.553(1) of
Cap.622.278 Cap.622 does not indicate expressly when the company becomes subject to this
requirement to send copies. It appears, however, that a company becomes subject to this
duty when the directors have proposed the resolution or when the company has received
a request from a sufficient number of members reaching the statutory threshold. The
company also has a statutory duty to notify the auditor of a proposed written resolution.279
Written resolution passed when all members entitled to vote have signified their 9.113
agreement. A written resolution is passed when all of the members entitled to vote
have signified their agreement to it.280 A member signifies agreement to a proposed
written resolution when the company receives from the member or the person acting
on behalf of the member the document containing both: (i) the written resolution; and
(ii) indication of the member's agreement to the resolution. 281
Proposed written resolution will lapse if not passed before end of specified period. 9.114
A proposed w1itten resolution will lapse if it is not passed before the end of the period
specified for this purpose in the company's articles. 282 If no such period is specified
in the articles, the proposed written resolution lapses at the end of 28th day beginning
on the circulation date. 283 When a written resolution is passed, the company must,
according to s.559 of Cap.622, send to the members and the auditor(s) a copy of the
resolution. A failure to do so amounts to an offence on the part of the company and
every responsible person of the company. 284
Company can set out own procedure for passing written resolutions in articles. 9.115
A company can set out in its articles its own procedure for passing written resolutions. 285
Accordingly, it is possible for a company to have simpler provisions or more elaborate
provisions for the passing of a written resolution. However, unanimous approval by all
the members entitled to vote is required in all cases, and so the articles cannot set a
lower threshold in this respect. 286Also, the articles cannot take away the statutory right
to have resolutions passed as written resolutions. 287

276 Cap.622, s.551 (3).

277 Including members who do not have a right to vote on the resolution: sec Cap.622, ss.553(1) and 547(2).
21s Cap.622,ss.552-553.
219 Cap.622. s.555.
280 Cap.622, s.556(1). The persons entitled to vote are referred to as "eligible members", which is defined in
s.547(2).
281 Cap.622,s.556(2).
m Cap.622, s.558(1)(a).
283 Cap.622, s.558(l){b). The circulation date is the date when copies are sent to eligible members (or if the copies

are sent on different days, the first of those days): see also Cap.622, ss.547( I) and 547(2).
284 Cap.622, s.559(2).

285 Cap.622, s.561(2).

286 Cap.622, s.561 (3). This alters the previous law, where no such restriction was imposed under predecessor CO,

s.116B B( I) (repealed).
281 Cap.622, s.561(1).
406 GENERAL MEETINGS

9.116 Decisions made through written resolution save time and money. A decision
made through a written resolution helps save time and money, as there is then no
need for calling a general meeting. A decision on non-contentious issues can be
conveniently made through a written resolution without the members having to meet
and debate in person. The written resolution procedure is a useful tool to facilitate
efficient transaction of business for small private companies. This decision-making
tool is, however, unsuitable, for obvious reasons, for companies with a large number
of shareholders.

6.2 Unanimous consent

6.2.1 Introduction
9.117 Unanimous consent can be equivalent to formally passing resolution in small
private companies. A feature of decision-making in small private companies is that
directors or proprietors often make corporate decisions without observing formalities
necessary for corporate action. In the context of shareholders' meetings, an issue that
often arises is the effect of a course of action agreed to by the members individually
and separately in the absence of a formal meeting. The answer to this question at
common law is provided by the doctrine of unanimous consent (or unanimous assent).
This doctrine says, in the words of Buckley Jin Re Duomatic Ltd:288

" ... where it can be shown that all shareholders who have a right to attend and
vote at a general meeting of the company assent to some matter which a general
meeting of the company could carry into effect that assent is as binding as a
resolution in general meeting would be."

9.118 Unanimous consent doctrine originated in Sa/0111011 v Sa/0111011. The unanimous

consent doctrine was originally set out by Davey LJ in Salomon v Salomon, 289 where
his Lordship said that "the company is bound in a matter intra vires by the unanimous
agreement of the members."
9.119 Issue: whether members' unanimous consent binds company irrespective of
nature of business to be transacted or if it only waives procedural requirements.
An issue relating to the effect of the doctrine of unanimous consent, in the context
of general meetings, is whether members' unanimous consent binds the company
inespective of the nature of the business to be transacted through a decision reached or,
alternatively, unanimous consent only waives procedural requirements for a meeting.
In Herrman v Simon, 290 commenting on the Duomatic principle, Meagher JA said:

" ... it is a doctrine dispensing with the consumptive effect of the formalities.
It is a doctrine that formalities may be disregarded if they have been waived by
all shareholders acting in concert who want the same substantial result. ... the
Duomatic principle, however, formulated, is really only a principle of waiver .... "

283 (1969) 2 Ch 365,373.

m (1897) AC 22, 57.
29• (1990)4ACSR8l,83.
 DECISION MAKINGWITHOUT MEETING 407

Court's position on scope of unanimous consent not clear. On the other hand, there 9.120
are cases where the shareholders' decision, through unanimous consent, on substantive
matters that,primafacie, fall within the province of the directors have been held to be
binding on the company. The courts' position on the scope of the unanimous consent
doctrine is not entirely clear.291 This issue is discussed in more detail in Chapter 6.
The discussion below is concerned with procedural aspects of the doctrine.
Operation of unanimous consent depends on satisfaction of conditions. The 9.121
operation of the unanimous consent doctrine hinges on the satisfaction of a number of
conditions, which are considered below.

6.2.2 Whose consent is required?

First and second conditions: consent of registered shareholders who have right 9.122
to attend and vote at general meeting required. The first thing to note is that
for the purpose of the unanimous consent doctrine, the consent of the registered
shareholders is required. Thus, the shareholders must have applied their minds to the
matter concerned. 292 The consent of a beneficial owner of the shares is not counted. 293
Secondly, only the consent of members who have a right to attend and vote at a general
meeting is required. In Re Duomatic, the holders of all the voting shares indicated
informally their assent to the payment of the directors' salaries. No effort was made to
show that the unanimous consent of non-voting redeemable preference shareholders
had also been obtained. Commenting on the materiality of the failw-e to obtain the
consent of the preference shareholders, Buckley J said:294

"The preference shareholder, having shares which conferred upon him no right to
receive notice of or to attend and vote at a general meeting of the company, could
be in no worse position if the matter were dealt with informally by agreement
between all the shareholders having voting rights than he would be if the
shareholders met together in a duly constituted general meeting."

6.2.3 Informed consent

Third condition: members must have been duly informed of content and effect of 9.123
proposed decision. Unanimous consent to a decision will not be effective unless the
members have been duly informed of the content and effect of the proposed decision.

291 Paul L Davies and Sarah Worthington, Gowers· Principles of Modem Company Law ( I0th edn, Sweet & Maxwell
2016) (14-15)-(14-17); RP Austin and M Ramsay, Ford's Principles of Corporations Law (16th edn, LexisNexis
Butterworths 2015) [7.590).
292
Re PV Solar Solutions Ltd (i11liq), Ball v Hughes [2018) I BCLC 58.
29! Domo11eyv Godi11glto[2004] 2 BCLC 15, [45).
294 Re D110111a1ic Ltd [ 1969) 2 Ch 365, 373. See also Randhawa v Tuq1i11[20 I 7] BCC 406 (Eng CA). In that case, one
member of the company held 75% of the shares and the other member that held the remaining 25% shares was a
company that had been dissolved. It was held that the Ouomatic principle could not be applied where the consent
was orlly given by the first-mentioned member. This was on the basis that consent was not given by all the members
who have a right to at1cnd and vote, and this was so notwithstanding that the other registered member was no longer
in existence. The shares or !he dissolved company had vested in the Crown as bona vacantia (sec, in the case of
the Hong Kong position, Cap.622, s.752) and the Crown would have been entitled to become a registered member.
Presumably there was nothing in the articles of the company that provided that a person entitled to the shares cannot
exercise rights of a member in a general meeting without becoming a registered member.
408 GENERAL MEETINGS

9.124 Herrman case. In Herrman v Simon,295 a special resolution was passed to delete a
provision in the company's articles and substitute a different provision. The old
provision dealt with nominal capital, the rights of preference shareholders and the
powers of directors. The new one provided for nominal capital only. In other words,
the substituted provision had the effect of altering the rights and powers of members or
directors. At least one of the members, the predominant shareholder, did not appreciate
the effect of such an amendment when the meeting was held. The meeting at which
the impugned resolution was passed was procedurally defective, with the consequence
that all of the voting members were not properly informed as to the effect of the new
provision. The issue there was whether the resolution was nonetheless valid on the
basis of unanimous consent of all voting members. In upholding Hodgson J's decision
that the impugned special resolution was invalid, Meagher JA held, inter alia, that the
doctrine of unanimous consent, being a doctrine of waiver, could only operate where
the persons purportedly agreeing on the matter have full knowledge and consent.

6.3 The relationship between the doctrine and the statutory

requirements on written resolutions

9.125 Written resolution procedure gives unanimous consent statutory footing. The
written resolution procedure under Cap.622 puts the unanimous consent doctrine on
a statutory footing. However, the written resolution provisions under Cap.622, Pt.12,
Div.1, Subdiv.2 do not replace the common law. Nothing in Div.l affects the operation
of any rule of law as to: (a) things done otherwise than by passing a resolution;
(b) circumstances in which a resolution is or is not to be regarded as having been passed;
or (c) cases in which a person is precluded from alleging that a resolution has not been
duly passed.2% Accordingly, it is still possible for the members to make decisions without
having a physical meeting pursuant to the common law doctrine of unanimous consent.
9.126 Advantages of statutory written resolution procedure. Despite the existence of
the common law doctrine, there are some advantages of having a statutory written
resolution procedure. First of all, there is a view among some that the common law
doctrine of unanimous consent is only a doctrine of waiver, and a physical meeting is
required before the doctrine can apply. The function of the doctrine would therefore be
restricted to one that cures procedural irregularities at meetings. 297 There are, however,
some uncertainties on the validity of this view. For example, the effect of Duomatic is
that informal consent of members without a meeting binds the company. The statutory
provisions in Cap.622 providing for the written resolution procedure have removed the
uncertainty by confirming that anything that can be done by a resolution may be done
by a written resolution without a meeting.
9.127 Further advantages of statutory written resolution procedure. Secondly, by
stipulating rules on various aspects of written resolution, the statutory regime
provides a higher degree of certainty on the parties' rights and obligations in relation

29' (1990) 4 ACSR 81.

?9(> Cap.622, s.547(3).
291See para.9.119.
 MINUTES AND RECORD KEEPING 409

to their unanimous agreement on the particular matter. Finally, the common law
doctrine of unanimous consent can be circumvented by provisions in the company's
articles of association. In contrast, Cap.622, s.561 guarantees the members' right to
make decisions by written resolutions irrespective of any contrary provisions in the
company's articles.
Common law position: informal assent of members without meeting can bind 9.128
company without need to comply with procedural steps of written resolution. If
the view that the common law doctrine of unanimous consent can apply without the
need for an actual meeting is correct, the common law rules would still have a role in
facilitating infom1al corporate decision making, notwithstanding statutory provisions
on written resolutions. The passing of a written resolution under Pt.12, Div. l, subdiv.2
involves a number of procedural steps, such as proposing of the written resolution, 298
and the circulation by the company of the proposed resolution. 299 At common law,
informal assent of members without a meeting can bind the company without the need
to comply with such procedural steps. 300

6.4 Statutory formalities that cannot be waived by members

Not all statutory formalities can be waived by members. Note that not all statutory 9.129
formalities can be waived by members. An example is the scheme meeting for a
proposed members' scheme of arrangement under Cap.622, s.670. 301 The decision-
making mechanism under this provision is court-driven and a meeting cannot be
convened without a court order. Court control over the meetings is necessary to ensure,
inter alia, the lawfulness of the scheme and the protection of the scheme participants,
other stakeholders, and the public interest. 302

7. MINUTES AND RECORD KEEPING

Recording of minutes keeps stakeholders informed of decisions from previous 9.130

meetings and critical for good governance. The recording of minutes of company
meetings keeps all stakeholders infonned of the decisions that have been made in
previous meetings. The minutes and the law governing the rights and obligations
regarding minutes are therefore critical for the good governance of companies.
The word "minutes", in the context of company law, "means the record of resolution
and matters ancillary thereto". 303 The minutes should include, as Young J summarised
in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A 'Asia) Pty Ltd304 : (i) the

2911
Cap.622, s.549.
299
Cap.622, s.552.
'"' Re ExpressEngineering WorksLtd [ 1920] I Ch 466; Parker v Cooper Ltd v Reading [1926) Ch 975; Re Duomatic
Ltd [ 1969]2 Ch 365; Re Horsely & Weight Ltd [ 1982) 1Ch 442; Atlas Wright (£1m>pe)Ltd v Wright [ 1999)BCC
163(Eng CA). Secalso the discussionin Chapter6.
Jo, For a discussionon the function and operationof schemesof arrangcmcnl,secparas.14.164ff in Chapter 14.
Jo: J Marsdenand G Cheong,"Scheme of Arrangement" in S Kwan, et al. (eds.), Compcmylaw in Hong Kong-
!11solvency(Sweet& Maxwell 2012) 327,340.
305 AugustInvestmentsPty Ltd v Poseidon Ltd ( l 97 l) 2 SASR 60. 62, per ZellingJ.
'°' (199I}6ACSR63,89-90.
410 GENERAL MEETINGS

nature and type of meeting, the time of commencement and like details; (ii) a full
and accurate record of all business done including a list of who was present and all
resolutions passed at the meeting; (iii) at least where disqualification follows non-
attendance, a list of apologies accepted; (iv) a record of all appointments made and
the terms of reference of any committee that is set up, (v) incidents occurring at the
meeting that may be of significance; and (vi) the time of closure of the meeting and,
unless on a regular day, the time and place of the next meeting.
9.131 Company required to keep record of minutes of all proceedings of general
meetings. A company is required to keep a record of minutes of all proceedings of
general meetings. 305 Where the company has passed a resolution otherwise than at
a general meeting, the company must also keep a copy of such a resolution. 300 One-
person companies must also keep written records of all decisions made by the sole
member. 307 Cap.622, s.655 provides for the keeping of company records in either
hard copy form (meaning a paper form or similar form capable of being read 308) or
electronic form (meaning in the form of an electronic record 309). Under that s.655(1),
the company has an obligation to adequately record the information required to be
contained in any company records. Where the records are kept in electronic form,
the company must ensure that they can be reproduced in hard copy form. 310 Under
s.656(1), if the company records are kept otherwise than by making entries in a bound
book, the company has a statutory obligation to take adequate precautions to guard
against falsification and to take adequate steps to facilitate discovery of falsification.
The duty imposed under s.656 is necessary because of the ease in which company
records can be falsified if they are kept, say, in a loose-leaf book 311 or a spring-back
binder holding a large number of unnumbered loose sheets. 312
9.132 Minutes of meetings must be kept at registered address or prescribed place. The
minutes must be kept at the company's registered address 313 or a prescribed place. 314
By Cap.622, s.618(2), the company records mentioned in the preceding paragraph,
including minutes, must be kept for at least 10 years from the date of the resolution,
meeting or decision.
9.133 Books containing minutes must be open for inspection by any member of
company without charge. The books containing minutes of proceedings of any
general meeting kept by a company must be open for inspection by any member of the

"'' Cap.622, s.618( I)(b).

306 Cap.622, s.618(1)(a). This would include w,itten resolutions passed by the members as well as decisions made

by members under the common law unanimous consent doctrine.

301 Cap.622, s.618(1)(c). Where the shareholder of a one-member company has made a decision that may be taken

by the company at a general meeting, that member must provide the company with a written record of that
decision within seven days after the decision is made, unless the decision is made in the form of a written
resolution: Cap.622, s.617.
¥J8 Cap.622, s.655(7).
,., Cap.622, s.655(7).
°
>1 Cap.622,s.655(3).
'" Hearts of Oak Ass11rt.111ceLtd Ltd v James Flower & Sons ( 1936) I Ch 76.
'" Re RM (No 13) Pty Ltd ( 1995) 17 ACSR 7 58.
313 Cap.622, s.619(1).

"' Cap.622, s.619(1)(b). Any place in Hong Kong is a "prescribed place": Company Records (Inspection and
Provision of Copies) Regulation (Cap.622I), s.3.
 ELECTRONIC COMMUNICATIONS 411

company, without charge. 315 Such books should be made available for inspection for
at least two hours in each day.316 The members are entitled, on request and on payment
of a prescribed fee,317 to be provided with a copy of the minutes. The company has a
statutory obligation to provide a copy of the requested minutes to the member within
the prescribed period after it received the request and the prescribed payment.318 The
members are also now given a statutory right to make their own copies of the minutes
(at their own expense) at the time when they inspect the minute books.319
Minutes of proceedings are evidence of proceedings. The minutes of proceedings 9.134
of a general meeting, if purporting to be signed by the chairperson of that meeting
or the chairperson of the next meeting, are evidence of the proceedings. 320 The effect
of the statutory provision is that the minutes, when signed by the chairperson, are
only prima facie, but not conclusive, evidence of the proceedings. 321 The articles of
association can, however, provide that the minutes are to be conclusive evidence. The
issue of whether minutes of proceedings signed by the chairperson of the meeting
constitute conclusive evidence of the proceedings can be crucial in determining the
challengeability ofa decision made at the meeting, such as the appointment or removal
of directors or liquidators. 322 If the articles provide that the minutes are conclusive
evidence, then what is shown in the minutes cannot be challenged by evidence to the
contrary, unless it is established that the minutes were not a bonafide record of what
took place and were written up falsely and fraudulently with a view to setting up a
story which was not in accordance with the facts. 323

8. ELECTRONIC COMMUNICATIONS

Traditional methods of communication post or personal service: fax also permitted 9.135
form of communication. The traditional methods of communication bet\veen the
company and its stakeholders (such as members, creditors and officers) and between
the stakeholders, inter se, have been by use of post or personal service or delivery. The
availability of alternative means of communication under modem technology raises
the question on the validity of communications effected by such alternative methods
of communication in satisfying statutory or contractual obligations for giving notice or
information. One of the forms of technology that has been recognised as a permitted
form of communication in the last three to four decades is fax. 324 Thus, a faxed notice

315
Cap.622,s.620.
316 Cap.622, s.620; Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.7.
"' For the prescribed fee, see Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.12.
"' Cap.622, s.620; Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.11.
319 Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.8. It seems that under the

predecessor CO, s.120 (repealed), the express right to require the company to provide copies impliedly removed
the member's right to make his or her own copies: cf. Re 8alaglta1 Golding Co [ 190I) 2 KB 665, which so
decided in the context of an English cquivalcnl of predecessor CO, s.98 (register of members) (repealed).
3l<l Cap.622. s.621(2).

"' Cap.622, s.621 (3); Re Indian Zoedone Co ( 1884) 26 Ch 70, 77, per Earl of Selborne LC; Beus & Co Lid v
Mac,u,gl11en[ I910] 1 Ch 430.
"' Refndia11Zoedo11eCo(ISS4)26Ch 70; 8e11s&ColidvMac11aghten [1910) 1 Ch430.
m See Kerr vJohn MottramLtd (1940) Ch 657.
"' See the comments by Sir Andrew Mon-itt V-C in PNC Telecompie v Thomas(2003) BCC 202, 206-207.
412 GENERAL MEETINGS

requiring the company to proceed forthwith to convene an EGM was held effective in
PNC Telecom pie v Thomas 325 and a faxed proxy was held as containing the signature
for the purpose of voting at meeting to consider an individual voluntary arrangement
in Inland Revenue Commissioner v Conbeer. 326
9.136 No statutory rules on electronic means of communication before 2010. Before 2010,
no statutory rules were provided specifically on electronic means of communication
in the context of company meetings, 327 although this form of communication had been
adopted in practice in Hong Kong.328
9.137 Cap.622 expressly provides for electronic means of communication. Cap.622
contains a number of provisions expressly providing for electronic means of
communication, 329 which can facilitate the efficient conduct of company meetings.
These include provisions allowing the sending of documents in electronic form in
relation to: (i) circulation by the company of a written resolution; 330 and (ii) the notice
given by the company calling a general meeting. 331 Provisions on communications
to the company include those governing: (i) members' requests to circulate a written
resolution; 332 (ii) signifying agreement to a proposed written resolution; 333 (iii) sending
documents relating to proxies; 334 and (iv) members' requests to circulate resolutions
for an AGM. 335
9.138 Advantages of electronic communications. Electronic communications save the
company costs of printing and of postage or personal delivery. Members are able to
receive information more quickly and members can decide for themselves which part
of a document needs to be printed out. Electronic communications also make it possible
for members to communicate with the company quickly and relatively cheaply.

9. PROCEDURAL IRREGULARITIES

9.139 Procedural irregularities may occur in calling and conducting company meetings.
In the calling and conducting of a company meeting, the directors or other parties may
overlook or otherwise contravene the procedural rules governing general meetings.
Examples include situations where the company failed to send notice of an EGM to
one of its tens of thousands of members; 336 where the company failed to send such a

"' [2003) BCC 202.

"• (1996) BCC 189.
m See further the discussion of predecessor CO, Pt.lVAAA, which was introduced in 2010 (but now repealed), and
the current Cap.622, Pt. I8, para.9.045 above.
m See reg.82 of the company's articles in Yt,k WaltHo v Gao Jiare11[ 1999] 3 HKLRD 862, 873; Malcolm Merry
and Paul Kent, 811i/di11gManage111e111 in Hong Kong (2nd edn, LexisNexis 2008) 346-347.
m For the general provisions on electronic communications, see Cap.622, Pt. 18, Divs.3 and 4.
°
33 Cap.622, s.553(2).
331 Cap.622, s.572.

:.m Cap.622,ss.552and 560.

.m Cap.622,s.556.
·'54 Cap.622,s.599.
:m Cap.622, s.615.
"• Re BroadwayMotors Holdings Pty Ltd (in liq) ( 1986) 6 NSWLR 45.
 PROCEDURAL IRREGULARITIES 413

notice to a shareholder's correct address;337 where the company, in contravention of its

articles, called for voting on a proposed resolution by way of a poll conducted before
the holding of the meeting; 338 where members failed to deposit the proxy form within
time at the registered office of the company in accordance with relevant regulations in
the company's a1iicles;339 and where proxy forms were returned, not to the company but
to the member who sent a letter recommending votes to all members, in contravention
of the statutory rule that such fo,ms must be returned to the company at least 48 hours
10
before the meeting.3"
Effect of procedural regularities on validity of decisions and meetings: common 9.140
law rules apply. The occurrence of procedural irregularities may raise a question on
the validity of the meeting or the decisions that the meeting has purportedly made.
Unlike the company legislation of some other common law jurisdictions, 341 Cap. 622
does not contain a provision on procedural irregularities. Problems raised by such
irregularities will therefore need to be resolved on the basis of common law rules.
Yip Peter case: irregularity principle. The irregularity principle operating in the 9.141
context of company meetings was succinctly summarised by Le Pichon J (as she then
was) in Yip Peter v Asian Electronics ltd: 342

"The irregularity principle really comes to this: the lawfulness of a decision taken
by a meeting of members or board cannot be questioned if the only facts alleged
to make it unlawful is a mere informality and irregularity and the intention of the
meeting is clear. This is particularly so if there is no evidence that the decision
of the meeting would have been different if the correct procedure had been
observed."

Rationale behind irregularity principle. The rationale behind this principle is that a 9.142
court of equity refuses to intervene:

" ... where an irregularity has been permitted if it is within the power of the
persons who have permitted it at once to correct it by calling a fresh meeting and
dealing with the matter with all due fonnalities". 343

The irregularity principle is consistent with Foss v Harbottle 344 in that irregularities
in the company's internal governance are capable of being regularised by the majority
members in a properly convened meeting, as long as the decision of the majority
does not constitute a fraud on the minority.345 Thus, the validity of a decision by the

m Re Green Valley /11ves1me111sLtd [2003) 2 HKLRD 9 I 5.

m Re Hong Kong Saili11g Federal ion [20 JO) I HKLRD 80I.
H 9 Talbot v NRMA Holdings Ltd ( 1996)68 FCR 590.

l"l Re GoldenWestResourcesLtd (2008] FCA 1362.

3" Suchas CorporationsAct 2001 (Aust.) s. 1322.
m [ 1998]2 HKC 96, I 02-103. On the irregularity principle generallysec also para.I 0.0 I 4, and on the principle in
the context of boardmeetings,sec paras.7.083ff.
''' Brow11ev la Trinidad(J881) 37 Ch DI, 10,per Cotton LT.
'" (1834) 2 Hare 461, 67 ER 189.
"' See Re Green Valley fnvestme11tsLtd (2003) 2 HKLRD 915, 924-925, per YuenJ. SeeChapter I 0.
414 GENERAL MEETINGS

general meeting cannot be challenged even if the general meeting is called by the
board of directors and the procedure through which the board meeting at which the
decision to call an EGM is made is defective, the defects of which can be cured by a
properly convened board meeting. 346 On the same principle, a failure to send notice to
a minority shareholder does not necessarily render the resolution passed at the meeting
invalid,347 nor does calling a poll in advance of an EGM (where such a voting method
is not provided for in the company's articles), 348 as long as the miscaniage of the
meeting does not constitute a fraud on the minority. Likewise, where the meeting in
question was not quorate, the effect of the meeting cannot be challenged if the persons
who have permitted it can show that it is within their powers to ensure that a freshly
called meeting will be quorate and would decide in the same way.349
9.143 Irregularity principle does not apply where matter one of substance. Where
the matter in question is not merely an irregularity in the internal management of
the company but one of substance and tinctured with oppression, the irregularity
principle does not apply. For example, it has been held that the matter is not merely an
irregularity where a notice of the meeting and a circular to alter the company's articles
to increase the remuneration of the directors did not disclose the amount of increase. 350
9.144 Re Dabiy Estates case. InReDalny Estates Ltd, 351 the majority shareholders purportedly
passed a resolution to remove the plaintiff as a director and to appoint new directors.
The plaintiff, who claimed to be the beneficial owner of all the issued shares, issued
originating summonses against the new appointees, the company, and the Companies
Registrar. The plaintiff contended that neither him nor another shareholder had been
given notice of the meeting, which had never been held. The trial judge upheld the
defendants' application to strike out the originating summonses on the ground of the
irregulatity principle. The Court of Appeal allowed the appeal of the plaintiff against
the decision of the trial judge. The Court of Appeal noted that it may be argued that
the irregularity principle does not apply: (i) where there was no meeting held at all
and the resolutions were purportedly passed by only a majority of shareholders in
non-compliance with the articles or Cap.622; and (ii) where the resolution in question
was passed by members holding as bare trustees at a procedurally defective meeting
if the resolution is objected to by the beneficial owner, on the basis that the registered
holders as bare trustees might be enjoined from voting against the beneficial owner's
will. The Court of Appeal held that these matters, together with the dispute over the
plaintiff's beneficial ownership, are matters that merit fuller consideration at the trial
of the proceedings rather than being summa1ily dealt with on the defendants' strike
out applications.

~6 Browne v La Trinidad (1888) 37 Ch DI (although Cotton .Idid not even think the board meeting was sufTcring
from procedural irregularity in that case: sec Browne v la Trinidad ( 1888) 37 Ch D I, I0).
,., Re Green Valley Investments Ltd [2003) 2 HKLRD 915.
" 8 Re Hong Kong St,iling Fedemtion [20IOJI HK.LRD 80 I.
J.4? Sec para.9.076.
"" Baillie v Oriemal Telephone and Electric Co Ltd [I 915) I Ch 503.
'" (2018) I HKLRD409, CA.
 CHAPTER 10

MEMBERS'REMEDIESAND
MINORITYPROTECTION

PARA.

I. Introduction ............................................................................................................................. 10.00I

2. The Rule in Foss v Harbottle .................................................................................................. I 0.009

2.1 Proper plaintiff principle ............................................................................................... 10.0I0
2.2 Irregularity principle ...................................................................................................... 10.014
2.3 Rationales for the rule in Foss v Harbottle ..................................................................... 10.015

3. Common Law Derivative Action ............................................................................................. 10.016

3.1 Jntroduction .................................................................................................................... 10.016
3.2 Ultra vires or illegal conduct .......................................................................................... 10.018
3.3 Fraud on the company .................................................................................................... 10.019
3.3.1 Fraud ................................................................................................................... 10.02 I
3.3.2 Control ................................................................................................................ 10.025
3.4 Interests ofjustice ........................................................................................................... 10.029
3.5 Effect of ratification ....................................................................................................... 10.03 I
3.6 Double or multiple derivative actions ............................................................................. 10.036
3.7 Procedural and other matters .......................................................................................... 10.039
3.7.1 Standing .............................................................................................................. 10.039
3.7.2 Inequitable conduct ofapplicant ......................................................................... 10.040
3.7.3 Companies in liquidation .................................................................................... 10.04 I
3.7.4 Pleadings ............................................................................................................. 10.043
3.7.5 Primafacie case .................................................................................................. 10.045
3.7.6 Costs .................................................................................................................... 10.046

4. Statutory Derivative Action ..................................................................................................... 10.048

4.1 Introduction .................................................................................................................... 10.048
4.2 Proceedings to which statutory action apply .................................................................. I 0.050
4.2.1 Companies within statutory provisions ............................................................... 10.051
4.2.2 Misconduct. ......................................................................................................... 10.052
4.3 Criteria for granting leave - commencing derivative actions ......................................... 10.054
4.3.1 Interests of the company ..................................................................................... 10.056
4.3.2 Serious question to be tried ................................................................................. 10.059
4.3.3 Examples where leave granted ............................................................................ 10.065
4.4 Criteria for granting leave- intervening on behalf of the company .............................. 10.066
4.5 Effect of ratification ....................................................................................................... 10.069
4.6 Double or multiple derivative actions ............................................................................. 10.072
4.7 Procedural and other matters .......................................................................................... I0.073
4.7.1 Standing .............................................................................................................. 10.073
4.7.2 Good faith; conflict of interests of applicant ...................................................... 10.075
4.7.3 Companies in liquidation .................................................................................... 10.077
416 MEMBERS' REMEDIES AND MINORITY PROTECTION

4.7.4 Form of proceedings and standing to file submissions ....................................... 10.078

4.7.5 Granting of leave nunc pro tunc .......................................................................... 10.080
4.7.6 Evidence .............................................................................................................. I 0.081
4.7.7 General powers of the court ................................................................................ 10.082
4.7.8 Independent investigator ..................................................................................... 10.083
4.7.9 Costs .................................................................................................................... 10.086
4.7.10 Indenmification for member's costs - leave application .................................. 10.088
4.7.11 Indemnification for member's costs - proceedings on behalf
of the company .................................................................................................. 10.090
4.7.12 Discontinuation or settlement.. ......................................................................... 10.093
4.8 Relationship between the statutory and common law derivative actions ....................... 10.094
4.9 Relationship between statutory derivative action and
other alternative remedies ............................................................................................... I 0.097

5. Members' Personal Actions ..................................................................................................... 10.099

5.1 Introduction .................................................................................................................... 10.099
5.2 Conduct involving wrongs to both the company and the members ................................ 10.102
5.2.1 Introduction ....................................................................................................... I 0.102
5.2.2 Rule against reflective loss - where member has no cause of action ............... 10.103
5.2.3 Rule against reflective loss-where member has separate cause of action ...... I 0. 105
5.2.4 Where rule against reflective loss does not apply ............................................. I 0.110
5.3 Personal Rights under the Corporate Constitution ......................................................... 10.114
5.3.1 Constitution as a statutory contract .................................................................. 10.1 14
5.3.2 Restrictions under irregularity principle ........................................................... I 0.117
5.3.3 Rights conferred on members otherwise than as members .............................. 10.125
5.4 Personal rights under the general law ............................................................................. 10.127
5.4.l General. ............................................................................................................. 10.127
5.4.2 Fraud on the minority ....................................................................................... 10.128
5.5 Personal rights under statute ........................................................................................... I 0.131

6. Unfair Prejudice Remedy ........................................................................................................ I 0.134

6.1 Introduction .................................................................................................................... 10.134
6.2 Companies to which Pt.14 Div.2 applies ........................................................................ 10.139
6.3 Standing .......................................................................................................................... 10.140
6.3.1 General .............................................................................................................. 10.140
6.3.2 Petitioners who are not minority members ....................................................... 10.142
6.3.3 Conduct of the petitioner .................................................................................. 10.143
6.4 Affairs of the company ................................................................................................... 10.145
6.5 Conduct affecting interests of the members ................................................................... 10.148
6.5.1 Meaning of"interests" ...................................................................................... 10.149
6.5.2 Member qua member ........................................................................................ 10.150
6.5.3 Conduct affecting the petitioner's own interests ............................................... 10.I 5 I
6.6 Unfairly prejudicial ........................................................................................................ 10.154
6.6.1 Prejudice ............................................................................................................. 10.155
6.6.2 Unfairness ........................................................................................................... 10.156
6.6.3 Legitimate expectations ...................................................................................... 10.161
6.6.4 Universal and personal expectations ................................................................... 10.162
6.6.5 Objective test; lack of probity not necessary ...................................................... 10.165
 MEMBERS' REMEDIES AND MINORITY PROTECTION 417

6.6.6 Isolated acts ......................................................................................................... 10.167

6.6.7 Conduct occurring in the past.. ........................................................................... 10.168
6.6.8 Threatened or proposed conduct... ...................................................................... 10.I69
6.6.9 Series of minor acts ............................................................................................. 10.I 70
6.6.10 Conduct that applies to all members ................................................................. 10.171
6.6..11 Petitioner's ability to end the impugned conduct... ........................................... 10.I 72
6.6.12 Where no parties are at fault ............................................................................. 10.173
6.6.13 Relevance of the character of the company ...................................................... 10.174
6.6.14 Publiccompanies .............................................................................................. 10.175
6.6.15 Family companies ............................................................................................. 10.l 77
6.7 Examples of unfairly prejudicial conduct... .................................................................... 10.l78
6.7.1 Breaches of ordinance or non-statutory regulations ......................................... 10.I 78
6.7 .2 Breaches of the constitution or shareholder agreements .................................. I0. I82
6.7.3 Breaches of fiduciary duties of directors .......................................................... 10.184
6.7.4 Excessive remuneration .................................................................................... 10.187
6.7.5 Negligence or mismanagement of company's business .................................... 10.189
6.7.6 Breaches of understandings or promises that equity would uphold ................. 10.191
6.7.7 Exclusion from management ............................................................................ 10.197
6.7.8 Inadequate dividends and non-participation in company's profits ................... 10.198
6.7.9 Alterations to the articles .................................................................................. 10.200
6.8 Remedies that court may order. ...................................................................................... 10.203
6.8.1 Orders regulating the affairs of the company ................................................... 10.207
6.8.2 Board composition and appointment of a receiver or manager ........................ I0.208
6.8.3 Purchase of shares: buy-out orders ................................................................... I0.211
6.8.4 Damages ........................................................................................................... 10.216
6.9 Alternative relief ............................................................................................................. 10.2 I8
6.9.1 Offer of buy-out of petitioner's shares by respondent... .................................... 10.219
6.9.2 Relationship with the derivative action ............................................................. 10.221
6.9.3 Relationship with the winding-up remedy ........................................................ 10.224
6.10 Procedural matters .......................................................................................................... 10.225
6.10.1 General .............................................................................................................. 10.225
6.10.2 Respondents ...................................................................................................... 10.229
6.10.3 Costs ................................................................................................................. I0.230
7. Winding-Up on the "Just and Equitable" Grounds ................................................................. 10.23 l
7.1 Meaning of"just and equitable" ..................................................................................... 10.232
7.2 Examples ........................................................................................................................ 10.234
7.2.1 Quasi-partnerships and breakdown of trust and confidence ............................. 10.234
7.2.2 Failure of substratum or frustration of company's objects ................................ 10.236
7.2.3 Other examples ................................................................................................. 10.238
7.2.4 Conduct of the petitioner .................................................................................. 10.239
7.3 Relationship with other remedies ................................................................................... 10.240

8. Statutory Injunction ................................................................................................................ 10.245

8.1 General ........................................................................................................................... 10.245
8.2 Persons who may apply .................................................................................................. 10.248
8.3 Scope of orders and the court's powers .......................................................................... 10.249
.............................. .., ...... ••••••-•--•• .. -•••••••u•••••••·••••• ......-•••-•••• ................................... u ....•••u""•••• .............................. -••••••••••-•• ................... 1••••-••••••••••••••••••••••••••• .. ••••••Utfllll•••••..,. .. ,,,.
 1. INTRODUCTION
Doctrine of majority rule: decisions made by majority of members. The doctrine 10.001
of majority rule applies such that decisions of the members of the company are made
by a majority, with such decisions reflecting the will of the company and being binding
on the minority.' The majority rule doctrine is reflected in the legal rules on decision-
making in general meetings, and in the proper plaintiff and irregularity principles
under the rule in Foss v Harbottle. 2
Minority members can be prejudiced due to abuse of power. Majority members can, 10.002
however, potentially abuse their powers to the detriment of the minority. For example,
where the majority members are also the majority directors, then the board might
cause the company to enter into transactions that benefit the directors to the detriment
of the company, and with the majority members ratifying such conduct. Here, the
minority members are the parties who suffer loss. The law provides certain remedies
for members where directors of the company or where other members abuse their
powers. These remedies are useful in particular for minority members. Where majority
members are aggrieved by actions of the board, they can usually exercise their powers
in general meeting to replace the directors. 3 Minority members are hampered because
of their position as minorities, and so they would be reliant on the specific legal
remedies conferred on members to address wrongdoing by the company's controllers.
Remedies: Pt.14 of the CO contains main statutory remedies. Part 14 of the 10.003
Companies Ordinance (Cap.622) groups together the main statutory remedies:

• statutory derivative action (Div 4);

• unfair prejudice remedy (Div.2);
• injunctions restraining certain conduct (Div.3) (i.e. the statutory injunction);
and
• rights to inspect company records (Div.54).

Other remedies in Cap.622. Other provisions in Cap.622 also provide for certain 10.004
rights or remedies for members. These include provisions on class rights (Pt.4 Div.7),
which are discussed in Chapter 14.
Common law remedies. Aside from statutory provisions, the common law also 10.005
provides for certain remedies for minority members:

• common law derivative action; and

• certain personal rights of action conferred on members.

' North-West Tra11sporta1io11

Co ltd v Beally (1887) 12 App Cas 589,593; Hiew Fook Sio11gv Fu11gTak Ke,mg
(2006] 3 HKLRD 762, 771.
2 (1843) 2 Hare 461, 67 ER 189.
' See Chapter 7.
' See Chapter 11.
420 MEMBERS' REMEDIES AND MINORITY PROTECTION

10.006 Choosing appropriate action depends on whether wrong to company or member

personally. The appropriate action which a member should take depends in the first
instance on whether the wrong is one that is done to the company or to the member
personally. The distinction between the two is not always clear.5 However, where a
corporate right is infringed, then an individual member can generally only seek redress
by a derivative action (or rely on the statutory injunction in Cap.622, Pt.14 Div.3). If
a personal right is infringed, then the member may possibly pursue an action under
Cap.622, Pt.14 Div. 2 (unfair prejudice) or any available common law actions. The
same facts may involve infringement of both the rights of the company and personal
rights of members. 6 The appropriate action that the member should take in such
a situation depends on what type of remedy or order the member wishes to seek.
For example, if the remedy sought is compensation to the company, then it is the
company's right which is to be vindicated, and so a member can only proceed by way
of a derivative action.
10.007 Members' remedies ensure good corporate governance. The law of members'
remedies can be seen as one of the tools for ensuring good corporate governance
in companies. 7 The conferral of legal rights and remedies on members to address
wrongdoing in a company constitutes the members as an external control mechanism. 8
Aside from members' collective powers exercisable in general meeting, the conferral
of remedies for individual members empowers members in their role of monitoring
the company's controllers and of enforcing governance standards and legal duties of
managers.
10.008 Members' remedies can be used to resolve disputes. In the case of closely held
private companies where the members are often also the directors, the law of members'
remedies also serves the function of providing mechanisms to resolve disputes between
the company's proprietors. Thus members' remedies can be utilised for the purpose of
dealing with breakdowns in the relationship between the proprietors by allowing them
to part ways (such as via the remedy for winding up on just and equitable grounds)
or for otherwise enabling proprietors who are locked-in 9 the company to exit the
company on fair terms (such as via the unfair prejudice remedy).

' See para.10.103 below.

• For example, an allotment of shares for the purpose of diluting existing shareholdings amounts to a wrong to the
company (breach of directors' fiduciary duties which are owed to the company) but has also been accepted by the
courts as infringing personal ,ights of the existing shareholders.
7 See generally SCCLR, Co,porate Gove/'/la11ceReview: A Co11sultatio11Paper on Proposals Made i11 Phase I
of tlte Review (July 2001), (12.06)-{12.07); Robert Ian Tricker, Corporate Govema11ce: Principles Policies
a11d Practices (2nd edn, Oxford University Press 2012) 89-95; Stephen Bloomfield, Tlteo,y a11d Practice
of Co,porate Gove/'/la11ce:An il1regrated Approach (Cambridge University Press 2013) 98-99; Christine
Mallin, Co111orateGovernance (4th edn, Oxford University Press 2013) 77-79; Jin Zhu Yang, "The Role of
Shareholders in Enforcing Directors' Duties: A Comparative Study of the United Kingdom and China: Part 2"
[2006) fote/'/lational Compa11yand Commercial ww Review 381; Alex Lau, John Nowland and Angus Young,
"In Search of Good Governance for Asian Family Listed Companies: A Case Study on Hong Kong" [2007)
Company lawyer 306.
8 Simon S H Ho, Corporate Govema11cei11Hong Ko11g: Key Pn>blems a11dProspects (Hong Kong, Centre for
Accounting Disclosure and Corporate Governance School of Accountancy Chinese University of Hong Kong
2003)3,49-53
9 There may not be any market for the shares of a private company, and so it can be difficult for a shareholder to
find a willing buyer to acquire his or her shares.
 THE RULE IN FOSS V HARBOTTLE 421

2. THE RULE IN Foss v HARBOTTLE

Rule in Foss v Harbottle: two limbs. The rule in Foss v Harbott/e 10 imposes certain 10.009
restrictions on the ability of members to seek legal redress for wrongdoing that occurs
in a company. There are two limbs to the rule:

• the proper plaintiff principle; and

• the irregularity principle. 11

2.1 Proper plaintiff principle

Proper plaintiff: where wrong to company then it is proper plaintiff. Under this 10.010
principle, where directors have breached their duties owed to the company or where
any person has infringed any rights of the company, the proper plaintiff to bring an
action against the wrongdoer is the company. 12 In other words, the company is the
person who is entitled under the law to seek legal redress against infringements of
the company's rights. In Foss v Harbottle, two shareholders sought to bring an action
against the directors for breach of directors' duties owed to the company. The court
held that the shareholders did not have standing to institute the proceedings.
Usually power to institute legal proceedings conferred on board of directors. 10.011
Which corporate organ has the authority to institute legal proceedings in the name
of the company will depend on the allocation of powers in the company's articles
of association. 13 Usually, the power is conferred on the board of directors. When the
directors make a decision to commence legal proceedings, then the directors' decision
is regarded as the company's decision. 14
Exceptions to proper plaintiff principle: derivative action. There are, however, 10.012
exceptions to the proper plaintiff principle. Under both the common law and the
Companies Ordinance (Cap.622), an individual member may be entitled to institute
proceedings on behalf of the company in particular circumstances. Such an action is
referred to as a derivative action and is discussed below beginning with para.10.016.
Situations falling outside scope of proper plaintiff principle. There are also 10.013
situations which fall outside of the scope of the proper plaintiff principle in

10 ( 1843) 2 Hare 461, 67 ER 189. For discussion of Foss v Harbottle, see further KW Wedderburn, "Shareholders'
Rights and the Rule in Foss v Harbo11/e" ( 1957) 15 Cambridge Law Joumal 194, ( 1958) 16 Cambridge Law
.Joumal 93; Stanley Beck, "The Shareholders' Derivative Action" (1974) 52 Canadian Bar Review 159; RR
Drury, "The Relative Nature of a Shareholder's Right to Enforce the Company Contract" ( 1986) 45 Cambridge
Law .loumal 219.
11
Some cases proceed on the basis that the two limbs are in substance the same (e.g. MacDouga/1 v Gardiner
(1875) I Ch D 13, 22-23, 24-25, 27; Edwards v Halliwell (1950) 2 All ER 1064, 1066), but the better view is
that the two limbs arc separate (sec Browne v La Trinidad ( 1887) 37 Ch D 1, I0, 17; Prudential Assurance Co
Ltd v Newma11Industries Ltd (1982] Ch 204,210 (Eng CA); Re Hong Kong Sailing Federation [2010] 1 HKLRD
801, [50); Stanley Beck, 'The Shareholders' Derivative Action' (1974) 52 Ccmadian Bar Review 159, 165, 189).
12 Sec Waddi11gto11 lid v Chan Chun Hoo (2008) 11 HKCFAR 370,390.
" See Chapter 6.
" Likewise where the gene,JI meeting has the power to institute legal proceedings in the name of the company.
422 MEMBERS' REMEDIES AND MINORITY PROTECTION

Foss v Harbottle. Where a member has a personal right of action conferred under the
common law or under the Companies Ordinance, the member is entitled to bring an
action (in his own name). Here, the member's personal rights are infringed and the
member has a personal remedy against the wrongdoer. The situation is not one where
the proper plaintiff principle in Foss v Harbottle bites. The proper plaintiff principle
only means that the company is the proper plaintiff to vindicate the company's rights,
as opposed to individual members' personal rights. Members' personal rights of action
are discussed at para. I 0.099 below.

2.2 Irregularity principle

10.014 Irregularity principle: member cannot sue where mere irregularity can be cured
by general meeting. Under the irregularity principle, a member is not entitled to sue
to complain of a mere informality or irregularity 15 where the irregularity is one which
can be cured by a vote of the company in general meeting and where the intention of
the majority members is clear. 16 For example, in Re Hong Kong Sailing Federation, 17 a
general meeting was held where certain motions put to the vote at the general meeting
were defeated by an overwhelming majority. The plaintiff, a member who had supported
the motions, brought an action to seek a declaration that the proceedings at the meeting
were null and void due to breaches of the articles relating to the procedure for calling
of a poll. The court held that the irregularities occurred but declined a remedy on
the basis of the irregularity principle. The wishes of the majority, as reflected in the
votes cast by poll paper, were clear. Although there was an irregularity, the majority
could ratify the irregularity by ordinary resolution (since the motion considered by the
meeting could be passed by ordinary resolution). Accordingly, there was little point in
the court declaring the general meeting to have been invalid.

2.3 Rationales for the rule in Foss v Harbottle

10.015 Rationales for rule in Foss v Harbottle. The proper plaintiff principle follows
logically from the separate entity principle. 18 Both limbs of the rule in Foss v Harbottle
have also been justified on the following policy grounds:

• The rule avoids a multiplicity of actions by a number of members over the

same issue; 19

15 The irregularity principle only applies to "mere" irregularities: see para.9.143. Thus it may be that the irregularity
principle does not apply to validate a purported resolution of members where no meeting had been held at all: see
Re Da/11yEstates ltd[2018) I HKLRD 409, where, in interlocutory proceedings where a strike-out application
was refosed, the Court of Appeal stated that this question merited fuller consideration at trial. The Dalny Estates
case is discussed at para.9.144.
1
" Burland v Earle [ 1902] AC 83, 93-94; Re Hong Kong Saili11gFederation [2010] 1 HKLRO 801; Lim Jo11atha11
v She flfo Hung [2011] 1 HKLRD 305; Re Dalny Estates Ltd [2018] I HKLRD 409, [ 18] (CA). Sec also paras.
[10.117]ffbclow.
" [2010] 1 1-lKLRD801.
18 Foss v Harbo11/e(1843) 2 Hare 461, 490-491, 67 ER 189; Pn1de11tialAssurance Co Ltd v Newman Industries lid
(No.2) [ I982) Ch 204, 224 (Eng CA).
19 Grayvlewis(l873)8ChApp 1035, 1051.
 COMMON LAW DERIVATIVEACTION 423

• The company is in a better position to judge whether to take legal proceedings

than an individual member, 20 particularly in relation to internal disputes
within the company; and 21
• The courts should not intervene where a majority of the members do not
support the legal proceedings (this reflects the majority rule doctrine). 22
Where the complaint is of a procedural irregularity at a general meeting
which the majority can cure, there is little point in invalidating the meeting
where: "the ultimate end ... is only that a meeting has to be called, and then
ultimately the majority gets its wishes". 23

3. COMMON LAW DERIVATIVE ACTION

3.1 Introduction

Derivative action: brought by individual in name of company and for company. 10.016
The term "derivative action" refers to legal proceedings brought by an individual in
the name of the company on behalf of the company. Where the wrong is done to the
company, the proper plaintiff to bring proceedings is the company (with the decision
made by the appropriate corporate organ).24 If the company does not institute the
proceedings, then an individual member may bring a derivative action on behalf of
the company pursuant to the common law exceptions to the rule in Foss v Harbottle.
Circumstances when derivative action can be brought. A common law derivative 10.017
action can be brought in the following circumstances:

• in respect of ultra vires or illegal conduct (see para. I0.018); or

• where there is fraud on the company (see para.10.019).25

Some cases have suggested that there is also a further residual ground for a common
law derivative action on the basis of the interests of justice (see para. I 0.029).

3.2 Ultra vires or illegal conduct

Derivative action for (i) ultrt1vires or illegal conduct. Where the company has engaged 10.018
in conduct which is ultra vires in the sense that it is unlawful for the company to do
the act (such as an unlawful return of capital to shareholders26 or unlawful financial

,o RP Austin and IM Ramsay, Ford:~ Principles ofCoq,oratio11s Law (16111edn, LexisNexis Butterworths 2015),
[ I0.240).
'' Sh1111/eworthv Cox Brothers and Co (Maidenhead) Ltd [1927] 2 KB 9, 22-24; Re Dal11y£states Ltd [2018]
I HKLRD 409, [21) (CA).
22 Sec Re Dalny £states Ltd [2018) I HKLRD 409, [25) (CA).
" MacDouga/1 v Gardiner ( 1875) I Ch D 13, 25; Re Dalny Estates Ltd [2018) I HKLRD 409, [22)-{24)(CA) ..
" Sec para.10.010 above.
" Edwards v Halliwell (1950) 2 All ER 1064, 1067.
2• Cap.622, s.212; Devlin v Slough Estates Ltd (1983) BCLC 497,503.
424 MEMBERS' REMEDIES AND MINORITY PROTECTION

assistance for the acquisition of shares 27), 28 a member has standing to bring a derivative
action on behalf of the company in respect of the conduct. 29 Where the member seeks to
restrain the unlawful conduct, the member has a personal right to bring the action - such
an action is a personal action rather than a derivative action.30 However, the member
would need to proceed by way of a derivative action if the remedy sought is one that is
for the benefit of the company, such as recovery of property or money for the company.31
Such a derivative action can be brought without the need for the member to show that the
wrongdoers are in control of the company and are thereby preventing the company from
suing; however, the court may strike out the action if a majo1ity of independent members
of the company are not in favour of the proceedings. 32

3.3 Fraud on the company

10.019 Derivative action for (ii) fraud on company. Where the wrongdoers commit a
fraud on the company and are in control of the company, a member is entitled to
bring a derivative action on behalf of the company to seek a remedy in favour of the
company. 33 Such an action is permitted by the courts as otherwise no action could be
brought against the wrongdoers because they are able to prevent the company from
suing due to their control of the company. 34
10.020 Term "fraud on minority" should be reserved for infringement of personal right
of minority. The fraud exception to the rule in Foss v Harbottle is sometimes referred
to as "fraud on the minority". However, it is more accurate to refer to this exception as
"fraud on the company" since, in the context of the proper plaintiff principle in Foss
v Harbottle, the wrong is done to the company. 35 To avoid confusion, the term "fraud
on the minority" should be reserved for situations where majority members infiinge
personal rights of the minority. 36

3.3.1 Fraud
10.021 Fraud is equitable fraud; meaning abuse or misuse of power, including director
breaching fiduciary duty. The principles on fraud on the company are derived from
the general equitable doctiine of fraud on a power.37 Accordingly, the notion of fraud

27 Cap.622, s.275; Smith v Croft (No.2) [1988) Ch 114, 165.

" The case law principles in the present context have also been applied to situations where the company acts ultra
vires in the sense of acting outside of capacity. However, the question of lack of capacity no longer arises for
Hong Kong companies as such companies now have full capacity: see Cap.622, s.115 and Chapter 5.
" Smith v Croft (No.2) [ 1988) Ch 114; Nankive/1 v Be11jami11
(1892) 18 VLR 543; Hawkesbury Development Co Ltd
v La11d111ark Fi11a11ce Pty Ltd (1969) 92 WN (NSW) 199.
30 Seepara.l0.128below.
;, Smith v Crofi (,\/o.2) [ 1988] Ch I 14, 177.
ll Smith v CJ'(~/i(,\/o.2) [ 1988] Ch 114.
,i Burland v Earle [ 1902] AC 83, 93; Edwards v Halliwell [ 1950] 2 All ER 1064, 1067; A11glo-Eastem (/985) Ltd
v Knutz [1988] I HKLRD 322; Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370,380.
" Foss v Harbottle (1843) 2 Hare 461,490.67 ER 189; Edwards v !lalliwell (1950] 2 All ER 1064, 1067.
" K W Wedderburn, "Shareholders' Rights and the Ruic in Foss v Harbottle (continued)" (1958) 93 Cambridge
law Jounu,I 93, 93-94.
"' Seepara.10.129below.
" Anglo-Eastem (J985) Ltd v Km,tz [ 1988) I HKLRD 322; On the concept of fraud on a power, see Vatcher v Paull
(1915) AC 372,378.
 COMMON LAW DERIVATIVE ACTION 425

in the present context is equitable fraud and is not confined to cases of dishonest or
deceitful conduct (these being required elements in common law fraud).38The essential
concept of equitable fraud is abuse or misuse of power.39 The concept covers breaches
of fiduciary duties of directors, 40 such as transactions involving misappropriation of
company property,41 or breach of the no profit rule,42 no conflict rule43 or corporate
opportunity doctrine. 44 Where directors have breached their fiduciary duties, there is
equitable fraud even though the directors have acted in good faith.45
Negligence of itself not equitable fraud but derivative action available if 10.022
wrongdoer personally benefited. Negligence by the directors does not of itself
constitute equitable fraud,46 but a derivative action can be brought where the directors
have profited from their wrongdoing. As stated in Daniels v Daniels, 47 a derivative
action is available where "directors use their powers, intentionally or unintentionally,
fraudulently or negligently, in a manner which benefits themselves at the expense of
the company". Jn that case, it was held that a member could bring a derivative action
against the directors where the directors had negligently caused the company to sell
the company's land to one of the directors at a gross undervalue and where the director
profited from a resale of the land.
Whether the requirement for benefit to the wrongdoer applies to breaches of duty 10.023
other than negligence. The English Court of Appeal has held that, except for cases
of actual fraud in the sense of there being deliberate and dishonest breaches of duty,
the fraud exception to the proper plaintiff rule only applies if: (1) the wrongdoing has
caused loss to the company; and (2) the wrongdoer has personally benefitted from the
breaches of duty.48 On this view, the requirement for benefit to the wrongdoer from
Daniels v Daniels applies not only to situations of negligence but is also required for
other breaches of duties (except dishonest breaches). The position under the common
law in Hong Kong is not settled. In Liu Hsiao Cheng v Wong Shu Wai,49 an application
was made to strike out the action on the basis that there was no plea that the wrongdoer
has received some personal benefit by reason of the acts complained of. The Court of
First Instance declined to strike out the claim, accepting that it remained arguable in
Hong Kong that the requirement for personal benefit to the wrongdoer is confined to
cases of negligence such as in Daniels v Daniels, above.

38 A11g/o-Easte/'JI(/985) Ltd v Knutz (1988] I HKLRD 322; Estma11co (Kilner House) Ltd v Greater lolldo11
Council [1982) I WLR 2, 12.
39 A11glo-£astel'II (1985) Ltd v Knutz (1988] I HKLRO 322; £stma,1co (Kilner House) Ltd v Greater lo11do11
Council (1982) I WLR 2.
•• Kim Sie Joo11gv Ng Che11kNgo11(unrep., HCA 552/2002, 18 Nov 2003); Pn,dentia/ Assurance Co Ltd v Newman
!,u/11striesLtd (No.2) [ 1981] Ch 257, 316 per Vinelott J.
41 Spokes v Grosve11or& WestEnd Railway Termim,s Hotel Co Ltd [1897) 2 QB 124.
" A11glo-Eastel'II (1985) Ltd v Knwz [1988] I HKLRD 322; Ro11aldLi-Kai Ch11v Deacon Te-Ken Chi11 (1986)
HKLRD 1011.
'3 Atwool v Menyweather (1867-68) LR 5 Eq 464.
" Cook v Deeks ( 1916) 1 AC 554; Kim Sie Joo11gv Ng Cheuk Ngo11(unrcp., HCA 552/2002, 18 Nov 2003).
45 Pmde11tial Assura11ceCo Ltd v Newma11/11d11striesLtd (No.2) (1981) Ch 257, 316 per Vinelott J; Alexa11der v
Automatic Telepho11eCo [ 1900] 2 Ch 56.
.,. [ 1956) Ch 565.
Pavlides v Je11se11
" [ 1978] Ch 406,413.
'8 Harris v Microfi,sion 2003-2 LLP [2017) I BCLC 305, approvingAbo11royav Sigmund (2014) EWHC 277 (Ch).
" [2015) 4 HKLRD 766.
426 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.024 Conduct by majority members can be equitable fraud. Conduct by the majority
members can also constitute equitable fraud, such as where the members pass a
resolution in general meeting misappropriating company assets. 50

3.3.2 Control
10.025 Fraud exception only applies where wrongdoer has control of company. For the fraud
exception to apply, it is necessary for the member to also plead and prove control of the
company by the wrongdoer.51 Control may be control over the board or control of the general
meeting.52 Since the fraud exception to the proper plaintiff p1incipleis to enable proceedings
to be brought against the wrongdoers who would otherwise prevent any action from being
taken, the element of control would be established if the wrongdoers are in control of either
or both the board and the general meeting in a way that prevents the company from instituting
proceedings. If the corporate organ that has power under the articles to institute legal
proceedings is independent and not subject to the control of the wrongdoer, then a derivative
action on the basis of the fi-dudexception would not be permitted.53
10.026 Control established if deadlock. If the wrongdoer has sufficient control so as to
deadlock the company and prevent the company from taking action, the element of
control will be established even though the wrongdoer is not a majority controller of
the company. Jn Anglo-Eastern (1985) Ltd v Knulz, 54 the company was deadlocked in
that two beneficial shareholders controlled 50 percent of the shares of the company
each. The Court of Appeal held that a derivative action can be brought by a shareholder
holding 50 percent on behalf of the company against the other 50 percent holder ( who
is also a director) in respect of breaches of duties by the latter.
10.027 What is control is practical matter and depends on circumstances. Moreover, it
seems that where the wrongdoer controls the board and also controls sufficient votes
at a general meeting so as to cause a resolution to be passed purportedly ratifying
the wrongful conduct, the element of control would also be established despite
the wrongdoer not being a majority shareholder5 5 (at least where a majority of the
members are not against commencing proceedings 56).

'° Menier v Hooper:~ Telegraph Works (I 873-74) LR 9 Ch App 350.

s, Tam Lai King v !ncoq)orated Ow11e1:~ '!( Malaho11Apartments [20 IOJ5 HKLRD 63, [59J (but where the matter
has been allowed to proceed to completion at trial, it would not be desirable to rule the matter purely on procedural
objection when there is already proofor disproofof the underlying allegation of wrongdoing).
52 Tam Lai King v Incorporated Owners of Malahon Apartments [201 OJ5 HKLRD 63, [59].
SJ Sec Smith v Croft (No.2) [1988J Ch 114, 184-185.
" (1988J I HKLRO 322; Liu HsiM Cheng v Wong Shu Jfoi (2015J 4 HKLRD 766 (no legal requirement for che
aggrieved member to try to procure che company to take action against the wrongdoer before commencing che
derivative accion where to do so would be futile). See also lngre v M(lxwe/1 (1964) 44 DLR (2d) 764: Glass v
Atkin (1967) 65 DLR (2d) 501; Fargro Ltd v Godji-ey (1986) I WLR 1134; Barrett v Duckett (1995) BCC 362.
" Pi-11dentia/Assura11ce lid v Newman l11d11striesLtd (No.2) (1981) I Ch 257, 323-324 per Vinelott J. On appeal,
the Court of Appeal had left open the question of the meaning of "control": see ( 1982) Ch 204, 219-220.
However if the wrongdoer does not control the board so as to be able to prevent the board from instituting action,
the better view is that the board will still be able to take action notwithstanding the purported r-Jtification. The
ratification should be treated as being ineffective, itself being a fraud on the company: see pam.10.028 below.
Here, if the board is capable of taking action, there is no need to confer on a minority member the right to take a
derivative action. See also World One lnvestme/l/s lid v Chow Cheuk Lap [2013 J 3 HKLRD 70 I, where the comi
considered that the element of control in a public company could be established if there is conn·ol of the board
even though there is no control of majority shareholding.
56
Smith v Croft (No.2) [1988J Ch I 14.
 COMMON LAWDERIVATIVEACTION 427

In Waddington Ltd v Chan Chun Hoo,57 the Court of Appeal rejected the view that 10.028
it is always necessary to establish that the wrongdoers themselves hold at least 50
per cent of the voting rights, and stated that control is a practical matter and what
amounts to control would vary with the circumstances of each company. Thus control
via beneficial holdings is sufficient, 58 and it seems that control can also be established
where the wrongdoers are able to exercise effective control by, for example, offering
inducements to controlling shareholders to vote for their benefit, or by use of proxy
votes59 or otherwise by any means of manipulation of their position in the company.w

3.4 Interests of justice

Derivative action (iii) whether can be allowed in interests of justice. In Foss v 10.029
Harbottle itself, it was stated that "claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which corporations
are required to sue". 61 This has been interpreted in some cases as giving rise to a
general exception whereby a derivative action can be allowed in the interests of justice
even if the circumstances are outside the ultra vires or fraud exceptions to the proper
plaintiff principle.62 However, the English Court of Appeal has doubted whether such
an exception exists due to the uncertainties and difficulties in applying a "justice"
test.63 It has been said that the references to the interests of justice in the earlier case
law were given as the justification for the more specific exceptions to the proper
plaintiff principle rather than a separate residual exception. 64
Some Australian cases have accepted that a justice exception exists. In Bia/a Pty 10.030
Ltd v Mallina Holdings Ltd (No.2),65 Ipp J allowed a derivative action on this basis
in circumstances where: there were serious breaches of fiduciary duty; where the
company could recover significant compensation if the action was allowed; where
the wrongdoers had disposed of their shares after the issue of the writ through some
unusual transactions and where the disposal was the only reason that the fraud on
the company exception was inapplicable; where there was no explanation given as to

" [2006) 2 HKLRD 896, 905. See also Farrow v Registrar of Building Societies [ 1991) 2 VR 589; Tan Guan Eng
v Ng Kweng Hee (1992) I MLl 487; Smith v Croft (No.2) [ 1988) Ch 114, 184-185.
" Anglo-Eastern (1985) Ltd v K1111tz(1987) 3 HKC 80; Pavlides v Jensen [1956) Ch 565, 577. See also Lim
Jonatha11v Site Wai Hung [2011) 1 HKLRD.
'9 For example, through the use of company-sponsored proxies where the directors, acting for the company, invite
members to appoint a director as a proxy and to vote in accordance with the director's discretion.
60 Prttde11tialAssura11ceLtd v Newma,1 llld11strieslid (No.2) (I 981) Ch 257, 324-325 per Vinelott J (on appeal, the
question of the meaning of"control" was left open: see [1982) Ch 204, 219.) It is possible, however, to interpret
Vinelott .I's decision as being based on a separate "justice" exception to the proper plaintiff principle (as to which,
see para. I0.029 below) rather than on the basis of the fraud on the company exception. See also Ruralcorp
Co11s11/ti11g Pty Ltd v Pyne,y Pty Ltd ( I996) 21 ACSR 161.
61 (1843) 2 Hare 461,492, 67 ER 189. See also Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474, 48~82;

Baillie v Oriental Telephone & Electric Co Ltd [ 1915) I Ch 503,518; Couer v Natio11alU11io114Seamen [1929)
2 Ch 58, 69; Heyting v Dupont (1964] I WLR 843, 850-851, 854.
62 Sec, e.g., Prndential Assurtmce ltd v Newman Industries Ltd (No.2) (1981) I Ch 257 (Vinclott J).

•, Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [ 1982) Ch 204, 221.
"' Estmanco (Kilner House) Ltd v Greater London Council [1982) I All ER 437,444; Edwards v Halliwell[1950]
2 All ER 1064, 1067.
•s (1993) 11ACSR 785. The point was not discussed in the judgment on appeal: Dempster v Ma/liner Holdings Ltd
(1994) 13 WAR 124.
428 MEMBERS' REMEDIES AND MINORITY PROTECTION

why the new shareholders had acquired the shares knowing that there was pending
litigation; and where the prospect of the company itself commencing proceedings was
remote. 66

3.5 Effect of ratification

10.031 Ratification not effective if infringement of personal right of member. The

company in general meeting can ratify directors' breaches of fiduciary duties so as
to relieve the directors from any liability and to affirm any transaction entered into
in breach of duty, though the power of the company to ratify is subject to restrictions,
as discussed in Chapter 8. Apart from the restrictions on ratification discussed in
Chapter 8, the general meeting cannot ratify infringements of personal rights of
members, 67 nor would ratification be effective if the ratification itself amounts to a
fraud on the company.68
10.032 Ratification can itself amount to fraud. As discussed above,69 fraud on the company
is a ground for enabling a member to bring a derivative action under the common law.
Fraud can be manifested in different ways. The act of ratification itself can amount
to fraud so that a derivative action can be brought notwithstanding the purported
ratification.
10.033 Ratification of breach of fiduciary duties ineffective if passed by wrongdoing
director-shareholders. Members are not fiduciaries and can prim afacie exercise their
proprietary right to vote as they please, including in their own interests.70 Under the
common law, this principle applies equally to directors who are voting in their capacity
as members in relation to some transaction in which they have personal interests, and
so prima facie, ratification of a breach of fiduciary duty could be effective under
the common law even though the ratification is achieved through the wrongdoing
directors' votes.71 However, where directors have engaged in fraud (within the concept
of equitable fraud) in breach of their duties, and the company has suffered loss or
damage as a result of the breach, an act of ratification by a majority of the members
in general meeting would itself be a fraud on the company if the resolution is passed
through the strength of the votes of the wrongdoing directors. 72
10.034 Cap.622, s.473: ability of directors to ratify own wrongdoing restricted.
The ability of directors to ratify their own wrongdoing in their capacity as members

66
See also Cope v Bwcher ( I 996) 20 ACSR 3 7.
1
• Seepara.l0.128below.
•8 Prudential Ass11ra11ceCo Ltd v Newman Industries Ltd (No.2) [1981] Ch 257, 307, 316 per Vinelott J. That
judgment was reversed in part on aP()eal (see [ I9821 Ch 204), but this aspect of Vinelott J's was not discussed
by the appeal court. See also Stefan Lo, "The Continuing Role of Equity in Restraining Majority Shareholder
Power" (2004) 16 Australia11 Journal ofCo,pomte Law 96, 107-112; Stephen W t.ilayson, Derck French and
Christopher L Ryan, Mason, Frenchand Rycmon Company Law (.22ndedn, Blackstone 2005) [ 18.4.5].
"' Sec para. 10.019 above.
,.; Pe11derv lushi11gton(1877) 6 Ch D 70, 75; Hiew Fook Siong v Fung Tak Kew,g [2006] 3 HKLRD 762.
71 North-WestTransportationCo Ud v Beauy (1887] 12 App Cas 589.
72 See PrudentialAssurance Co Ltd v Newman Industries Ltd (No.2) (198 I) Ch 257,307 per Vinelott J; Est111a11co
{KilnerHouse) Ltd v Greater lo11do11 Council (1982) I All ER 437,445.
 COMMON LAW DERIVATIVEACTION 429

has been restricted under s.4 73 of Cap.622 though. 73 So where directors purport to
ratify their own breaches of duties, the ratification may be ineffective under s.473
and there is no longer a need to rely on the concept of fraud on the company to
invalidate the ratification. But notwithstanding s.473, the doctrine of fraud on the
company remains important for invalidating purported ratifications in the context
of the common law derivative action in three situations. Firstly, where the general
meeting authorises the wrongful conduct in advance rather than ratifying the conduct
after the event, it seems that s.473 does not apply.74 Secondly, the majority members
might also be engaging in a fraud on the company where, although they were not
originally themselves party to the directors' breach of duties, they are acting for
a collateral purpose in supporting the wrongdoing directors rather than acting to
secure the benefit of the company (such as where the majority votes in support of the
wrongdoers because of inducements given to them by the wrongdoers). 75 Thirdly, the
doctrine will also continue to be relevant where the wrongdoers are not the directors,
such as where the members misappropriate corporate property and seek to ratify
their own misconduct.
Ratification effective where majority acting independently of wrongdoers. 10.035
There would not be fraud on the company and ratification can be effective to
prevent a derivative action being brought where the majority members are acting
independently of the wrongdoers and not for any collateral purpose, even though
the company has suffered loss. 76 In addition, a derivative action will not be
available whenever a majority of independent members are against the bringing
of the action. 77

3.6 Double or multiple derivative actions

Double or multiple derivative action: member of A Co; A Co is member of B Co; 10.036

member brings derivative action on behalf of B Co. A double derivative action
refers to the situation where a member of Company A, which in turn is a member
of Company B, seeks to b1ing a derivative action on behalf of Company B. Where
for example, Company B is a wholly-owned subsidiary of Company A (the parent
company), and the controllers of the parent company perpetrate a wrong on the
subsidiary, then prirna facie the controllers could prevent the subsidiary from taking
action against themselves, and moreover there would not be any minority member in
the subsidiary to bring a derivative action on its behalf. The term "multiple derivative
action" is used to describe the derivative action brought by a member of a parent
company on behalf of a sub-subsidiary, though the tenn is also used to include double
derivative actions as well.

n Sec Chapter 8.
'' Sec Chapter 8.
" Cf. Prudential Assura11ceLtd v Newnum Industries Ltd (No.2) [ 1981) I Ch 257, 324-325.
16 Cf. Regal (Hasti11gs) Ltd v Gulliver (1967) 2 AC 134, 150;Smith v C,vft (No.2) [1988) Ch 114. It is otherwise
though where the company was insolvent or the wrongful conduct causedthe company to enter insolvency: sec
Chapter20.
17
Smith v Croft (No.2) (1988) Ch 114;Burrows v Becker (1968) 70 DLR (2d) 433.
430 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.037 Multiple derivative action can be brought in Hong Kong. Jn WaddingLon Ltd v
Chan Chun Hoo, 18 the Court of Final Appeal held that multiple de1ivative actions
can be brought under the common law in Hong Kong. Lord Millett NP J noted that
the justification for an ordinary derivative action applies as well to the case where
the wrongdoers, who through their control of the parent company also control its
subsidiaries, defraud a subsidiary or sub-subsidiary as it is to the case where they
defraud the parent company itself. In either case, wrongdoer control precludes action
by the company in which the cause of action is vested. His Lordship emphasised that
the question of whether a derivative action can be brought is simply a question of the
plaintiff's standing to sue, and stated further:

"On a question of standing, the court must ask itself whether the plaintiff has
a legitimate interest in the relief claimed sufficient to justify him in bringing
proceedings to obtain it. The answer in the case of a person wishing to bring a
multiple derivative action is plainly 'yes'. Any depletion of a subsidiary's assets
causes indirect loss to its parent company and its shareholders."79

10.038 Whether derivative action can be brought determined by place of incorporation.

The Court of Appeal has held that whether a derivative action can be brought is a
matter of substantive law, determined by the law of the place of incorporation, and
accordingly a multiple derivative action cannot be brought in Hong Kong on behalf of
a foreign company if the law of the place of incorporation of that company does not
allow multiple derivative actions to be brought.80

3.7 Procedural and other matters

3.7.1 Standing
10.039 Registered members can bring action; former and beneficial owners cannot.
Registered members have standing to b1ing a derivative action,81 even in relation
to conduct that occurred prior to them becoming members.82 Former members are
not entitled to sue or continue a derivative action upon ceasing to be a member.83
Beneficial owners of shares also do not have standing. 84 However, a person not on
the company's register of members may be entitled to bring a derivative action in
exceptional circumstances such as where those controlling the company wrongfully
refuse to register a share transfer and thus the company's register does not list the
transferee as a member.85

'8 (2008) 11 HKCFAR 370. It has also been held in England that multiple derivative actions arc available under the
common law: Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013) 3 WLR 164.
19 (2008) 11 HKCFAR 370, 398.
80 East Asia Satellite Television (Holdings) Ltd v New Colai llC (2011) 3 HKLRD 734; applied in WongMing Bun
v Wang Ming Fan [2014) l HKLRD I 108. However, the provisions on the statutory derivative action apply to
non-Hong Kong companies: see para.10.05 l.
81 Junestar Investment Co,p v B0/dwi,1Constrttction Cc Ltd (2003] 3 HKLRD 618,626.
82 Seaton v Grant (1866-67) LR 2 Ch App 459.
83 Clarkson v Davies [ 1923] AC I00; Fu/loon v Radley ( 1992) 2 Qd R 290.
84 Tsang Yt,eJoyce v Standard Chartered Bank (Hong Kong) Ltd (2010) 5 HKLRD 628; Hooker Investments Pty
ltdv Email ltd(l 986) I0ACLR443; Fu/10011v Radley [ 1992] 2 Qd R 290. See also J Payne, "Derivative Actions
by Beneficial Shareholders" (1997) 18 Compa11ylawyer 212.
85
Zabusky v Virgtel Ltd [2013 J I Qd R 285.
 COMMON LAW DERIVATIVEACTION 431

3.7.2 Inequitable conduct of applicant

Inequitable conduct of applicant may bar claim. The derivative action is an equitable 10.040
remedy and thus where the member seeking to bring a derivative action has him or
herself engaged in conduct which is inequitable or unjust in the eyes of equity, then
the court may bar the claim.86 This will be the case, for example, where the member
does not come to the com1 with "clean hands" or has been guilty of delay;87 where
the member seeks to bring the action for an ulterior motive;88 or where the member
has received the benefits from the wrongdoing with knowledge of the relevant facts. 89

3.7.3 Companies in liquidation

Cannot commence derivative action if company in liquidation. The courts have 10.041
held that a member cannot commence a derivative action pursuant to the exceptions
to Foss v Harbottle where the company has already entered into liquidation, for the
reason that the wrongdoers are no longer in control and the liquidator has the power90
to commence proceedings. 91 If a member is dissatisfied with the liquidator's decision
not to sue, then the member could apply to the court for an order compelling the
liquidator to do so, pursuant to the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32), s.200(5) (which gives the court control over the
liquidator's powers).92 Alternatively a member could seek to rely on the misfeasance
proceedings provision in Cap.32, s.276.93 In overseas cases, it has also been held that
a member could apply to the cow1 for permission to sue on behalf of the company,
pursuant to the inherent powers of the court to order that a contributory (or a creditor)
of a company in liquidation be authorised to use the company's name as a plaintiff.94
If the proceedings would involve a drain on the company's assets, then the court must
be satisfied as to their probability of success before authorising the proceedings, but
where there is no such risk (for example, because the member agrees to provide an
indemnity for the costs and expenses of the litigation) then the court can authorise the
proceedings so long as they are not vexatious or oppressive. 95

86 Nurcombe v Nurcombe [ 1985) I WLR 3 70.

" Nurcombe v Nurcombe (1985) I WLR 370,376,377.
" Barrell v Duckell (1995) BCC 362.
•• Towers v African Tttg Co [1904) I Ch 558; Nurcombe II Nurcombe (1985) I WLR 370; Knight II Frost
[ 1999] I BCLC 364.
90 Cap.32, s.l99(1)(a).
91 Ferguso11v Wal/bridge (1935) 3 DLR 66 (PC); Fargro Ltd II Godfroy (1986) I WLR 1134; Scare/ Pty Ltd v City
loa11 & Credit Co,p Ptv lld(l 988) 12 ACLR 730; Zempilas 11JNTaylor Holdings Ltd (No.6) (1991) 5 ACSR 28;
Co,p v Boldwi11Constructio11Co Ltd [2003] 3 HKLRD 618,622.
.June.starlllvest111e111
92 Fargro Ltd v Godfivy [ 1986] I WLR 1134; Revelry Gai11sLtd v Joy Rich De11elopme11t Ltd [2017] I HKLRD 769;
Chen Mulwa 11.Jointand Several liquidators of.toy Rich Development Ltd (unrep., HCCW l46A/20l3, HCCW
146/2013, [2017] HKEC I 10 I).
~, Re Shun Kai Finance Co Ltd [2015] 2 HKLRD 264, [22] (CA). As to s.276, see Chapter 20.
9' Sec Re Btmk of Gibraltar anti Malta (1865) LR I Ch App 69; Re Imperial Bank of China lndit1 and .lt1pa11
(1866) LR 1 Ch App 339; Cape 8re1011Co v Fenn (1881) 17 Ch D 198; lloytl-Owe11 v 8111/(1936) 4 DLR 273
(PC); Ft,rgrc,Ltd v Gotlji-oy [ 1986] 1 WLR I l 34; Aliprtmdi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250; Eros
Cinema Pty Ltd v Nassar (1996) 14 ACLC 1374; Re Colorado Products Pry Ltd (in pro11liq) (2014) 97 ACSR
581.
., Lloyd-Owen v Bull (1936) 4 DLR 273 (PC); Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250; Eros
Ci11e111aPtyLtdvNassar(l996) 14ACLC 1374.
432 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.042 Derivative action commenced before liquidation not automatically stayed.

Where the derivative action was commenced before liquidation, the action is not
automatically stayed under Cap.32, s.186 upon winding-up, 96 as the action is not
"against" the company within the provision. 97 However, the court can stay or strike out
the proceedings since the right to litigate on the company's behalf now resides with
the liquidator.98

3.7.4 Pleadings
10.043 Form of writ. The form of the writ in a derivative action has traditionally been in the
terms, for example:

"[ name of plaintifl] suing on behalf of himself and all other shareholders in the
Third Defendant other than the First and Second Defendants" (where the third
defendant is the company and the first and second defendants are the wrongdoers).

While the action is in substance an action on behalf of the company, the plaintiff sues
in his or her own name, and the company is joined as a defendant so that the company
would be bound by the judgment and could take the benefit of any remedy ordered in
its favour by the court. 99 Since the plaintiff is suing on behalf of the company, strictly
speaking it is not necessary for the pleadings to state that the plaintiff is suing on
behalf of the other shareholders. 100
10.044 Must plead cause of action and ground for coming within exception to proper
plaintiff rule. The member seeking to bring the derivative action must plead both
the cause of action being pursued on behalf of the company as well as the grounds
for coming within the exceptions to the proper plaintiff principle giving the member
standing to sue, otherwise the claim may be struck out on the basis that the pleadings
disclose no reasonable cause of action. 101

3.7.5 Primafacie case

10.045 Challenge to member's standing resolved as preliminary issue. Where the member's
standing is challenged, it is necessary to resolve the question as a preliminary issue,
and the member is required to prove a prima facie case that the company is entitled
to the relief sought and that the action comes within the proper boundaries of the
exceptions to the proper plaintiff principle. 102 In determining this preliminary issue,

•• See Chapter 20.

91
.Junestar Investment Cmp v Boldwi11Cons1mcrio11Co lrd [2003] 3 HKLRO 618.
" Ever .Joint (Holdi11gs) Ltd v Nice Theme Ltd [2006] 4 HKLRD 516 (stay ordered so that the liquidator could
decide whether to continue with the claim); Mehta v Mehta [2007] 2 HKLRD 520, 526.
•• Spokes v G,YJsvenor& WestE11dRailway Terminus Hotel Co Ltd [ 1897] 2 QB 124, 126, 128; Greenberg v R1111d
(unrep., HCA A6953/l 988, 2 Dec 1988).
•00 Wt,llersreiner v Moir (No.2) [1975] QB 373, 390-391.
161
Rules of the High Court (Cap.4A), 0.18 r. 19(1)(a).
162
Waddington Ltd v Chan C/11111 Hoo (2008) 11 HKCFAR 370, 379-383; Pruden/it,! Assurcmce Co lid v Newman
Industries lid (No.2) [1982] Ch 204, 221-222; Estma11co(Kilner House) Ltd v Greater Lo11do11 Council [ 1982]
I WLR 2, 14-15; Barren v D11cke11 [1995] 1 BCLC 243,250. In the UK, court rules were introduced in 1994
requiring the matter to be dealt with as a preliminary issue, but the requirement had been applied under the
common law even before the introduction of the rules.
 COMMON LAW DERIVATIVEACTION 433

the courts are not to proceed on the basis that the allegations in the plaintiff's pleadings
are facts as they would be on the trial of a preliminary point of law,103 and so it would
be necessary for the plaintiff to provide sufficient evidence for the court to be satisfied
that there is a prima facie case. 104 Also, it has been held that it may be appropriate for
the court to grant a sufficient adjournment for the members to consider in general
meeting whether the proceedings should continue. io;

3.7.6 Costs
Court can order company to pay costs of member bringing action. In 10.046
Wallersteiner v Moir (No.2), 106 the English Court of Appeal made it clear that the
court has a power in equity to order the company to pay the costs of a member
bringing a derivative action both: (1) where the action against the defendant is
successful (in which case, the company would be liable for the costs if they are
not recovered from the defendant, and the company would also be liable for the
additional costs (over and above party and party costs) taxed on a common fund
basis); and (2) where the action against the defendant is unsuccessful (in which
case, the company would be liable to pay both the costs ordered in favour of
the defendant, as well as the minority member's own costs taxed on a common
fund basis).
Court's discretion regarding costs: reasonableness in bringing action; factors 10.047
to consider. The court has a discretion whether to grant an order, and it would be
appropriate to allow an order for a full indemnity of the member's costs down to
judgment if the member had been acting in good faith and had sought recovery
for the company on reasonable grounds. 107 Whether the member can be regarded
as having acted reasonably in bringing the action depends on a test of whether a
hypothetical independent board, exercising the standard of care which a prudent
businessman would exercise in his own affairs, would have decided to bring the
action. 108 Generally, in deciding whether or not to grant an order, the court may take
into account factors including the merits of the case, the wishes of the genuinely
independent shareholders, whether the action is for the benefit of the shareholders,
and the impecuniosity or the financial strength of the plaintiff. 109 For an example
of where the court granted an indemnity as to costs in favour of the minority
shareholder, see Melvin Waxman v Li Fei Yu.110

103
Prudential Assurance Co Ltd v Newman flldustries Ltd (No.]) [ 1982) Ch 204, 221.
"'' As to what is required to show a primafacie case, see Melvin 110xman v Li Fei 111(unrep., HCA 1973/2012,
[2013) HKEC 1341), (20)-(27).
10
' See Hogg v Cramphom Ltd (1967) Ch 254; Bamford v Bamford(l970] Ch 212; and see also Smith v Croft (No.3)
(I 987) BCC 2 I8. It would not be necessary to call a meeting though where the result is a foregone conclusion:
Marshall's Valve Gear Co Ltd v Manning Wardle & Co Ltd (1909) I Ch 267,272.
106
[ 1975) QB 373, 391-392, 403-404.
1 1
• Wallersteiner v Moir (No.2) (1975) QB 373, 403-404.
10• Wallersteiller II Moir (No.2) [ 1975) QB 373,404; Chrmg Sau Ling vAsu, Womens league Ltd (2001) 3 HKC 410,

415; Re Shun Tak Holdi11gsLtd [2009) 5 HKLRD 743, 757.

109 Wallemeiner v Moir (No.2) [ I975] QB 373; Clwng Sau ling vAsia Women:~League ltd[200l] 3MKC410, 415;
Smith v Cn?J'i[ I986] 2 All ER 551; McDonald v Hom ( I995] I All ER 96 I.
110
(unrep., MCA 1973/2012, (2017] HKEC 561).
434 MEMBERS'REMEDIESAND MINORITYPROTECTION

4. STATUTORY DERIVATIVE ACTION

4.1 Introduction

10.048 Statutory derivative action. The difficulties confronting minority members in

bringing a derivative action under the common law, in relation to issues involving
standing, costs, ratification and other disincentives, have led to the enactment
of a statutory derivative action. 111 The provisions were first introduced into
predecessor CO as Pt.IVAA 112 (repealed) and were modelled in part on provisions
in other jurisdictions. 113 Under the current Companies Ordinance (Cap.622),
they are set out in Pt.14 Div.4. There are no substantive changes in Pt.14 Div.4,
compared with the previous provisions in predecessor CO, Pt.JVAA, though there
are some changes in terminology (e.g. "misconduct" replaces "misfeasance": see
para.10.052 below).
10.049 Leave to bring action required. An applicant seeking to bring a derivative
action under the Ordinance must first seek leave from the court. In assessing
whether a statutory derivative action should be allowed to proceed, it is no longer
necessary to examine the common law exceptions to Foss v Harbottle. Instead,
the court is to determine the issue with reference to the specific criteria set out
in the Ordinance.

111
See Standing Committee on Company Law Reform, Co,porate Governa11ceReview: Consultation Paper
011Proposals Made in Phase I of the Review, July 2001, paras.15.14-15.29. See also Daniel T L Lam,
"Statutory Derivative Action in Hong Kong: So Far So Good?" (2009) 23 Australian Joumal of Corporate
Law 26.
112 lnn·oduced by the Companies (Amendment) Ordinance 2004 (No.30 of2004), effective 15 July 2005.

"' Canada: Canada Business Corporations Act I974-1976 ss.239-242, implemented following the Dickerson
Report (R V W Dickerson, J L Howard, L Getz, Proposals for o New Business Corporations Law for
Canada, Information Canada, Ottawa, 1971); New Zealand: Companies Act 1993 ss. I65-168; Australia:
Corporations Act 2001 ss.236--242; Singapore Companies Act ss.216A, 216B; Companies Act 2006 (UK)
ss.260-264 (see Law Commission, Shareholder Remedies, Law Commission Report No 246, Cm 3769,
Oct 1997, paras.6.1-6.114, and the Company Law Review Steering Group, Modern Company Law for a
Competitive Economy: Completing the Stn,cture, 2000, paras.5.82-5.90. On the overseas provisions, see
also, for Australia and New Zealand: P Ficzsimons, "Statutory Derivative Actions in New Zealand" ( 1996)
Company and Securities Law Jour,u,I 184; Matchew Berkhan. "The Derivative Action in Australia and New
Zealand: Will the Statutory Provisions Improve Shareholders' Enforcement Rights?" (1998) JO Bond Law
Review 74; Susan Watson and Owen Morgan, "A Matter of Balance: the Statucory Derivative Action in New
Zealand" ( 1998) 19 Company Lawyer 236; Peter P1ince, "Australia ·s Statutory Derivative Action: Using the
New Zealand Experience" (2000) 18 Company and Sec11ritiesLaw Journal 493; Lang Thai, "How Popular are
Statutory Derivative Actions in Australia? Comparisons with United States, Canada and New Zealand" (2002)
30 Australian Business Law Re11iew I 18; I M Ramsay and B B Saunders, litigation by Shareholders and
Directors: An Empirical S111dyof the Statutory Derivati11eAction (Centre for Corporate Law and Securities
Regulation, University of Melbourne, 2006). Canada: M S Baxter, "The Derivative Action Under the Ontario
Business Corporations Act: A Review of Section 97" ( 1982) 27 McGill Law Joumal 452; B Cheffins and
J Dine, "Shareholder Remedies: Lessons from Canada" (1992) 13 Company Lawyer 89; W Kaplan and B
Elwood, "The Derivative Action: A Shareholder's 'Bleak House"/" (2003) 36 University of British Columbia
Law Review 443. Singapore: Pearlie K M Choo, "The Statutory Derivative Action in Singapore: A Critical
and Comparative Examination" (2001) 13 Bond Law Review 64. United Kingdom: Mahmoud Almadani,
"Derivative Actions: Does the Com1>aniesAct 2006 Offer a Way Forward?" (2009) 30 Company Lawyer 131;
Andrew Keay and Joan Loughrey, "Derivative Proceedings in a Brave New World for Company Management
and Shareholders" [2010) .Joumal of Business Law 151.
 STATUTORYDERIVATIVEACTION 435

4.2 Proceedings to which statutory action apply

Brought for misconduct or to intervenewhere misconduct in proceedings.An applicant 10.050

can seek leave to bring a statutory derivative action on behalf of the company to:

• bring proceedings in respect of misconduct committed against the company;

• bring proceedings in respect of any matter where the company has failed to
bring proceedings in respect of that matter due to misconduct committed
against the company; or
• intervene in proceedings where the company has failed to diligently continue,
discontinue or defend the proceedings by reason of misconduct committed
against the company. 114

The "proceedings" covered are any civil proceedings within the jurisdiction of any
court in Hong Kong. 115

4.2.1 Companies within statutory provisio11s

Can be brought against companies incorporated in Hong Kong and non-Hong Kong 10.051
companies (place of business in Hong Kong). A statutory derivative action can be
brought on behalf of both companies incorporated under the Companies Ordinance
(or its predecessors) and non-Hong Kong companies (namely companies incorporated
outside Hong Kong which have established a place of business in Hong Kong 116). 117

4.2.2 Misco11duct
"Misconduct": means fraud, negligence, breach of duty. Cap.622 uses the term 10.052
"misconduct" in place of "misfeasance" (as used in predecessor CO, Pt IVAA
(repealed)), but the concept remains the same. The term "misconduct" is defined to
mean "fraud, negligence, breach of duty or default in compliance with any Ordinance
or rule of law". 118 This is wider than the concept of "equitable fraud" under the
common law derivative action, and so there is a greater scope for a derivative action
to be brought under the statute compared with the common law in this regard.
Can be brought for any misconduct against company, not just by directors. 10.053
A statutory derivative action can be brought not only where the directors have
committed misconduct, but in relation to any proceeding where any person has

'" Cap.622, s.732(1)-732(3).

"' Cap.622, s.731. However, the application for leave is to be brought in the Cou1t of First Instance: see Cap.622,
s.732 and the definition of"Court" in s.2.
116
Cap.622,s.2.
117
Cap.622, Pt.14 Div.4 refers to "companies", which has an extended definition to cover non-Hong Kong
companies: s.722(1). This is in substance the same as under predecessor CO, Pt.lVAA (repealed), though the
predecessor CO provisions referred to "specified corporations". That term is no longer used in Cap.622, but
there is no change to the scope of application of the provisions in substance. As to whether a foreign company is
a "non-Hong Kong company", see Section 2.5.3 in Chapter 2.
'" Cap.622, s.731. "Ordinance" includes subsidiary legislation: see Interpretation and General Clauses Ordinance
(Cap. I) s.3.
436 MEMBERS'REMEDIESAND MINORITYPROTECTION

committed misconduct against the company. 119 In addition, a statutory derivative

action can be commenced in respect of any matter where a company fails to bring
proceedings in respect of such matter by reason of misconduct committed against the
company. 120 It is clear that the statutory provisions can be relied upon to institute or
defend proceedings against third parties. 121

4.3 Criteria for granting leave - commencing derivative actions

10.054 Requirements for granting leave. The court may grant leave for a member to
commence proceedings on behalf of the company if the court is satisfied that:

• on the face of the application, it appears to be in the company's interests that

leave be granted;
• there is a serious question to be tried;
• the company has not itself brought the proceedings; and
• the member has served a written notice 122 on the company of the member's
intention to apply for leave. 123

10.055 Relationship between "interests of the company" and "serious question to be tried".
The comt usually considers the second requirement (serious question to be tried) first,
on the basis that if that is not satisfied, then it would normally follow that it is not in the
interest of the company to commence the proceedings. 124 Conversely, if the "serious
question to be tried" threshold is satisfied, then usually it will also follow that it is in the
company's interest that proceedings be conm1enced.125 However, this is not necessarily
the case since the two requirements are separate and both need to be established. 126There
will be situations where although there is a serious question to be tried, there may be
reasons why it is not in the interests of the company to commence the proceedings.

4.3.1 Serious question to be tried

10.056 "Serious question to be tried": relatively low threshold. The "serious question to
be tried" criterion is of a relatively low threshold.127 A similar requirement applies in

1
" See Cap.622, s. 732( I).
° Cap.622, s.732(2).
12

'" Re Myway Lld[2008) 3 HKLRD 614, 621-622. See also, e.g., Re Hang He1111g Cake Shop Co Ltd (unrep., HCMP
527/2012, [2013) HKEC 163), where leave was granted for the company to institute proceedings against, inter
alia, the company's former solicitors in respect of the solicitors' undue influence, unconscionable conduct and
breach of fiduciary duties.
"' The notice must comply with Cap.622, s.733(3)-(4), but notice is not required if the court grants leave to
dispense with service of the notice under s.733(5).
123
Cap.622, s. 733.
12
' Re Li Clwng Shing Tang (Holdings) Ltd [2011) 5 HKLRD 274, [3 I; Re Primlaks (HK) Lld[2016) 2 HKLRD 3 I, [6).
125 Yu Yuchuan vChinaShanslwi Investment Co lttl(unrcp., HCMP 360/2015, (2015] HKEC437), [8], [41].
126 Sec Re Li Chu11gShing Tc>11g (Holdi11gs)Ltd [2011) 5 HKLRD 274,283; 1/4?ro11 l11tematio11al
Ltd v RCG Holdi11gs
Ltd (unrcp .. HCMP 3210/2013, [2015) HKEC 1432), [55]. Sec also Lam Ki11Chung vSoka Gakkai l111ema1io1u,I
ofl-/011gKong Ltd (No.2) [2018) 2 HKLRD 769.
'" Re Gra11dField Group Holdi11gsLtd [2009] 3 HKC 81, [21]; Re Li Chu11gShi11gTong (Holdi11gs)Ltd [2011]
5 HK.LRD 274, 285.
 STATUTORYDERIVATIVEACTION 437

Australia, 128 and Kwan Jin Re F & S Express Ltd 129 accepted the principles set out in
the Australian decisions on this criterion, namely that the court will not normally enter
into the merits of the proposed derivative action to any great degree, and the applicant
has the same relatively low threshold to surmount as in the case of an application for
an interlocutory injunction.130 That threshold requires the applicant to show at least a
probability that the company will succeed in establishing its entitlement to the relief
sought at the full trial. 131 This involves the court ascertaining whether the applicant is
able to identify the legal or equitable rights to be determined at trial in respect of which
the final relief is sought.132 The prospects of the plaintiff's success are to be investigated
only to a limited extent, and the court should be slow to find against the plaintiff unless
the prospects are so slim that it cannot be said that there is any expectation of success. 133
There is no need to weigh the prospects of failure against the prospects of success, and
all that has to be seen is that the plaintiff has prospects of success which, in substance and
reality, exist.134
Must nevertheless be information in pleadings and evidence to satisfy low 10.057
threshold. However, there must be information put to the court in the pleadings
(and evidence, where necessary) for the court to be satisfied as to whether there is
a serious question to be tried. For example, in Charlton v Baber, 135 the Australian
court was not satisfied that there was a serious question to be tried in relation to a
claim that the directors were in breach of fiduciary duties by causing the company
to grant uncommercial loans in circumstances where the applicant did not provide
any information as to what the terms of the loans actually were. In the same case,
the court was however satisfied that there was a serious question to be tried in
relation to another claim concerning an improper payment of dividends to one
class of shareholders (to the exclusion of other classes), in circumstances where the
constitution of the company was tendered as evidence and where the constitution did
not on its face indicate that the dividend rights of the different classes of shares were
different.
May be sufficient to produce draft pleadings that set out a case with some 10.058
prospect of success. If the applicant is able to produce a draft statement of claim (for
the proposed derivative action) that sets out a case with some prospect of success when
only the allegations contained in the pleadings are considered, the requirement for a
serious question be tried will be satisfied unless the respondent can demonstrate fairly
readily that there is a serious flaw in the claim and that it has no real substance. 136

"8 Corporations Act 200 I (Aust), s.237(2)(d).

129 [2005] 4 HKLRD 743, 746.
1
.1-0 Swansson v RA Prall Properties Pty Ltd (2002) 42 ACSR 313,318.
'" Clzarltonv Baber (2003) 47ACSR31, 45.
'" Ragless v IPA Holdings Pty Ltd (in liq) (2008) 65 ACSR 700, [40).
"' Re Li Clz1111g Sizing Tong (Holdings) Ltd (2011) 5 HKLRD 274, 285; and see Leung 11mgHoi v Lai Yip Dyeing
Factory Ltd (unrep., CACY 54/2015, [2017] HKEC 1775; Zhang Heng v Kingstone /11tematio11alWealth
Ma11ageme11/ lid (unrep., CACY 56/2017, [2017] HKEC 2093).
'" Re Li CltrmgSizing Tong (Holdings) Ltd (2011) 5 HKLRD 274,285.
'" (2003) 47 ACSR 31.
'" Simm Wing Ping v Wing Tak Computer Embroidery Deve/opme111 Co Ltd (unrep., HCMP 1438/2014, (2015)
HKEC 111), (15); Yi, Yue/wan v China S/zanshui!1111estmentCo Ltd (unrep., HCMP 360/2015, [2015] HKEC
437), [8]; Re Primlaks (HK) Ltd [2016] 2 HKLRD 31.
438 MEMBERS' REMEDIES AND MINORITY PROTECTION

4.3.2 Interests of the company

10.059 Company might have sound business reason for not pursuing action. This criterion
recognises that:

" ...a company might have sound business reasons for not pursuing a cause of
action open to it and that its management might legitimately have decided that
the ... interests of the company would be served by not taking action." 137

10.060 "Appears" to be in interest of company: low threshold. In Re F & S Express Ltd, 138
Kwan J, relying on the decision of Bellman v Western Approaches ltd 139 which dealt
with a similar provision in Canada, accepted that all that is required to establish this
element is that "an arguable case can be shown to subsist" that the proceedings are
in the interests of the company. The Canadian provision and the original Hong Kong
provision in the predecessor CO, s. l 68BC(2)( a) (repealed) referred to "prim a facie"
in the interests of the company, while s.733(1 )(a) of Cap.622 refers to "on the face
of the application". However, the change in wording does not change the provision
in substance. It has been said in Canada that "prima.facie" means "at first sight" or
"on the face of", and the question is whether the applicant has adduced sufficient
evidence which on the face of that evidence discloses that it appears, so far as can
be judged from the first disclosure, to be in the interests of the company. 140 The
threshold under the Hong Kong (and Canadian and Singapore) provisions is "low" 141
and can be contrasted with that under the Australian provisions. In Australia, it is
necessary for the applicant to show on the balance of probabilities that it "is" in
the interests of the company for the proceedings to be brought. 142 The threshold for
the applicant to cross under the Hong Kong provisions is lower, it being sufficient
for the applicant to show that granting leave "appears" to be, on the face of it, in
the interests of the company. 143 That is not a high burden, 144 and it is not necessary
for the applicant to prove a prima facie case as such. 145 Moreover, even under the
Australian provisions, it has been said that the legislation does not require a cost-
benefit analysis of possible outcomes of the prospective litigation, which is an
assessment that would be almost impossible to make with any degree of confidence
or accuracy. 146 This is the case in Hong Kong as well, where there should not be

"' Fiduciary Ltd v Momingstar Research Pty Ltd (2005) 53 ACSR 732, 742.
138 (2005) 4 HKLRD 743, 746. See also Re Grand Field Group Holdings Ltd (2009) 3 HKC 81, (2 I).
139 (1981) 130 DLR(3d) 193.

140 Re Northwest Forest Products Ltd (1975) 4 WWR 724; and see also Primex Investments Ltd v Northwest Sports

E11terprisesLtd ( 1995) 13 BCLR (3d) 300.

141 Yi, l\1chua11v China Shanshui fllvestment Co Ltd (unrep., HCMP 360/2015, (2015) HKEC 437), [8].

"' Corporations Act 2001 (Aust) s.237(2)(a).

143 Bellma11v Western Approaches Ltd ( 1981) 130 DLR (3d) 193; and see Swt111sso11 v RA Prall Properties Pty Ltd
(2002) 42 ACSR 313, 324.
1
" Re My Way Ltd [2008) 3 HKLRD 614, 622-623; Re Grand Field Group Holdings Ltd (2009) 3 HKC 81, (21 ); Re
Li Ch1111g Siring Tong (Holdings) Ltd (20 I I) 5 HKLRD 274, 281-282.
145 In Re Northwest Foresr Products Ltd [ 1975) 4 WWR 724, the Supreme Court of British Columbia noted the use

of the term "prima facie proof" in statutes in relation to proof of issues at trial (where in the absence of further
evidence from the other side, the prima facie proof becomes conclusive proof and the party giving it discharges
his onus). The court held that an applicant in seeking leave to bring a derivative action need not establish a prima
.facie case in this sense. The threshold is lower.
1' 6 Metyor Inc v Queensland Elec1ro11icSwitching Pty Ltd (2002) 42 ACSR 398. 405.
 STATUTORYDERIVATIVEACTION 439

a trial within a trial. 147 Cross-examination should generally not be allowed. 148 The
strength of the company's case in the proposed derivative action is relevant to the
issue of whether the action would be in the interests of the company; 149 and the
court can consider the grounds and points of challenge raised by the respondents. 1so
However the court should not, at the leave stage, be forced to enter into the merits of
the claims where there are serious disputes. 1s1
Meaning of "interests of the company". While the Australian cases are concerned 10.061
with a higher threshold and are inapplicable in Hong Kong in that respect, they may still
be useful as guidance on the meaning of"interests of the company''. It has been held in
Australia that the term refers to "the company's separate and independent welfare". 152
Where company part of group, necessary to examine interests of particular 10.062
company, which can be coloured by wider group interest. Where the company is
in a group of companies, it is necessary to examine the interests of the particular
company rather than the group. The interests of the particular company can however
be coloured or shaped by the wider interests of the group, and it may be that something
which, in isolation, would appear harmful to the interests of the particular company
will be seen in a different light when its interests are viewed in the totality of the group
context. Ultimately though, it is to the particular company's separate interests alone,
whether or not so coloured, shaped or modified, that attention must be directed. 153
Factors relevant to interests of company. The fact that the company has suffered 10.063
significant losses which it could recover in the proposed action is a factor tending to
show that it is in the interests of the company for leave to be granted. 154 On the other
hand, the mere fact that the company has not suffered specific economic loss does
not necessarily show that the proposed action is not in the interests of the company.
For example, if the proceedings relate to breaches of directors' duties, there may
be problems of mismanagement in the company which need to be remedied for
the future. 155 Other factors which might also be relevant in looking at whether the
proceedings would be in the interests of the company include:

• The character of the company. 156 For example if the company is a small family
company, it may be relevant to take into account the effect of the proposed

1" Re Li Clumg Shing Tong (Holdings) Ltd [2011) 5 HKLRD 274, 281.
148
Swansson v RA Pratt P,·operties P~y Ltd (2002) 42 ACSR 313, 318-319; Agus lrawan v Toh Teck Chye [2002) 2
SLR 198, 202.
149 As well as being relevant to the criterion that there is a serious question to be n·ied: Carpe11ter v Pioneer Pm* Pty

Ltd (2004) 211 ALR 457, (1OJ;Re Li Chu11gShing Tong (Holdings) Ltd (2011) 5 HKLRD 274,289.
150
See, e.g., Agus Ira wan v Toh Teck Chye [2002) 2 SLR 198, 202.
151 Re lucky Money Ltd (unrep., IICMP 505/2006, (2006) MKEC 1379) (CFI); and see also Teo Gek l11a11gv Ng

Ai Tio11g[ 1999) I SLR 434, 438.

i;z Chadton v Baber(2003) 47 ACSR 31, 44; Fiduciary Ltd v Morni11gstarResearch Pty Ltd (2005) 53 ACSR 732, 742.
i;J Goozee v Graphic Word Group Holdings Pty Ltd (2002) 42 ACSR 534, 549.
i;, Sec, cg, Veron lntemational lid v RCG Holdings Ltd (unrcp., HCMP 3210/2013, [2015) HK.EC 1432) (leave
granted for proceedings to be brought against former directors of the company for breaches of duties in respect
of major acquisitions made by the company which were subsequently disposed of at considerable loss).
"' Sec, e.g., Y,, Yuclwtm v China Sha11slwi /11vestme11tCo Ltd (unrep., HCMP 360/2015, [2015) HKEC 43 7), (42).
1"' Swtmsso11v RA Prall Properties Pty Ltd (2002) 42 ACSR 313, [57).
440 MEMBERS'REMEDIESAND MINORITYPROTECTION

litigation on the purpose for which the company was established and on the
relationships between the family members who are the shareholders; 157

• The effect of the proposed litigation on the business of the company. I58 ln this
respect, there may be good commercial reasons for the board to decide not
to pursue a claim such as where the directors do not want to damage a good,
long-term profitable relationship between the company and the defendant, or
because they do not wish to generate bad publicity for the company because
of some important negotiations which are underway; 159

• The ability of the defendant to meet at least a substantial part of any judgment
in favour of the company in the proposed derivative action; 160

• The likely costs of the litigation,since it might not be in the interestsof the company
to bring the proceedings where the loss to the company is minin1al and the costs
would outweigh any benefit that the company could attain even if successful in the
proceedings. I6I However the mere fact of the possibility of an adverse costs order
against the company, in the event of the company not succeeding in the derivative
action, would not be relevant as "[t]his consideration begs the question because,
if it is in the best interests of [the company] to bring the action, the risk that a
costs order may be made against it if it is unsuccessful cannot mean it is not in its
best interests to pursue its claim". 162 In addition, the fact that the company is in a
poor financial position and may be tmable to bear the costs of the litigation is not
necessarily relevant, as the court can grant leave on the basis that the applicant is
prepared to bear in the first instance the costs of the litigation; and' 63

• If the board has made a bona fide commercial decision that it is not in the
interests of the company that proceedings are commenced, then the board's
view will be given considerable weight; but in cases in which the prospective
claim is against a director, the board's view may be of less relevance. 164

111
v RA Prall Properties Po, Ltd (2002) 42 ACSR 313, [57].
Swa11sso11
"' Swansso11v RA Prall Properties Po, Ltd (2002) 42 ACSR 313; Re Li Chung Shi11gTo11g(Holdings) Ltd [2011] 5
HKLRD 274, 283.
1
" Pang Yo11gHock v PKS Co11trac1sServices Pte Ltd [2004] 3 SLR I. Sec also Lam Kin Chung v Soka Gakkc,i
illtematio11al 0JH011gKo11gLtd (No.2) [2018) 2 HKLRD 769.
160
Swa11sso11 v RA Pratt Properties Po, Ltd (2002) 42 ACSR 313; Re Li Chung Shing Tong (Holdings) lid (2011) 5
HKLRD 274, 284.
161 cf Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, 742. See also Pappas v Aca11Wi11dows
111c( 1991) 2 BLR (2d) 180; Pa11gYo11g Hock v PIGSCo11tractsServices Pte Ltd (2004) 3 SLR I.
162 Mclean v lake Como Venture Po, Ltd [2004) 2 Qd R 280, 286.
163 Re Li Chu11gSiting Tong (Holdings) Ltd (2011) 5 HKLRD 274, 288.
164
Re Li Ch1111g Shing To11g(Holdings) Ltd [2011] 5 HKLRD 274, 283-284. See also Bellman v WesternApproaches
Ltd (1981) 130 DLR (3d) 193. In Vero11hltemational Ltd v RCG Holdings Ltd (unrep., HCMP 3210/2013,
[2015) HKEC 1432), the present (independent) directors resolved that it was not in the commercial interests of
the company to pursue litigation against its former directors, but Ng J gave little weight to those views given the
lack of reasoning provided in support of the directors' views. In the event, the court granted leave for a derivative
action to be commenced. Ng J'.~approach is to be commended. Although an inde1>endentboard's view could be
taken into accoun1 in looking at whether there might be sound business reasons for the company to decide not
to pursue the act.ion, it is submitted that the court should not simply defer to the decision of 1hc board, but mus1
ultimately be satisfied i1self as 10 whelher the proceedings appear to be in the interests of the company. The
views of the majority (independent) members may also be taken into account; sec Lam Ki11Chung v Soka Gakkai
/11temational of Hong Ko11gLtd (No.2) [2018] 2 HKLRD 769.
 STATUTORYDERIVATIVEACTION 441

Commercial considerations can be outweighed by strong case of breach. In Re Li 10.064

Chung Shing Tong (Holding~)Ltd, 165 leave was granted by Harris J for the plaintiff minority
shareholders to bring an action on behalf of the company against a director and a supervisor in
connection with a recall of the company's products due to contamination. The court accepted
that on the face of it one or more people within the company's senior management failed to
exercise due diligence to ensure the safety and quality of the manufacturing of the products.
The court considered that the commercial considerations against taking proceedings were
outweighed by the strong case of a breach of duty by the putative defendants. The court held
that the fact that the contamination incident was a "one-off" was no answer to the fact that
wrongdoing was perpetrated against the company and was not a reason for concluding that
the action is prima.facie not in the interests of the company.

4.3.3 Exllmples where lellve grll11ted

Example: leave granted in proceedings for breach of directors' duties. In Re F&S 10.065
Express ltd, 166 the Court of First Instance granted leave for the plaintiff shareholder
to bring an action against a director for alleged breaches of duties. The company did
not appear at the hearing to oppose the application, and the court was satisfied on the
basis of the pleadings and the complaints made in a letter to the director (which had
gone unanswered) that there was a serious question to be h·ied.

In Re Grand Field Group Holdings Ltd, 167 leave was granted to commence proceedings
against the company's directors for breaches of fiduciary duties where there was evidence
that significant funds were channelled to entities connected with the directors and where
significant upfront sums were paid to such connected entities under various agreements
which were disadvantageous to the company and not on nom1al commercial tenns. 168

4.4 Criteria for granting leave - intervening on behalf of the company

Intervening: requirements for granting leave. Where the member seeks leave to 10.066
intervene in proceedings, the court may grant leave if the court is satisfied that:

• on the face of the application, it appears to be in the company's interests that

leave be granted;

• the company has not diligently continued, discontinued or defended the

proceedings; and

• the member has served a written notice 169 on the company of the member's
intention to apply for leave. 170

165 (201 I] 5 HKLRD 274.

166 [2005] 4 HKLRD 743.
161
[2009] HIKC 8 I.
1•• For other examples where leave was granted, see l't, l'ilchua11v C/ri11aSha11s/111i
lnvestme11rCo Ltd (unrep.,
HCMP 360/2015, [2015) HKEC 437) (action against directors for failing to act in interests of the company and
for proper purposes in respect of an allotment of shares); ~ro11lnrematio11alLtd v RCG Holdings Ltd (unrep.,
HCMP 3210/2013, [2015) HKEC 1432) (for the facts, see para.10.060 above).
'"' The notice must comply with Cap.622, s.733(3}-(4), but notice is not required if the court grants leave to
dispense with service of the notice under s.733(5).
' 10 Cap.622.s.733.
442 MEMBERS' REMEDIES AND MINORITY PROTECTION

10.067 Interests of company: low threshold. In Re lucty Money Ltd, 171 the court considered
an application to intervene to defend proceedings on behalf of the company. Kwan
J accepted that it would not be in the interest of the company to grant leave if there
is plainly no arguable defence that could be raised on behalf of the company in
defending the proceedings; however her Ladyship emphasised that the threshold to be
surmounted by the applicant is low. On the evidence before the court, her Ladyship was
satisfied that this element was established in that case. The second criterion, namely
that the company had not diligently defended the proceedings, was also established
in circumstances where the applicant's allegations were that those in control of the
company also controlled the plaintiff entity which had instituted the main proceedings
against the company, where those controllers had failed, without plausible explanation,
to file an acknowledgement of service to defend the action on behalf of the company,
and where the controllers had failed to attend an urgent board meeting convened by the
applicant through his nominee directors to consider the litigation. 172
10.068 In Re Myway Ltd, 173 the court also emphasised the relative low threshold to be met
by the plaintiff in granting leave for the plaintiff to continue proceedings brought by
the company against a third party for passing-off and against former employees of the
company for assisting in the passing-off and for breaches of duties owed to the company.

4.5 Effect of ratification

10.069 Ratification not bar to granting leave but can be taken into account. Ratification
or approval of conduct by members of the company would not be a bar to the court
granting leave to allow a member to commence or intervene in proceedings on behalf
of the company. 174 However the court may take into account the approval or ratification
in deciding whether or not to grant leave, having regard to the following matters:

• whether the members were acting for proper purposes having regard to the
company's interests when they approved or ratified the conduct;
• to what extent the members were connected with the conduct when they
approved or ratified the conduct; and

• how well-informed about the conduct the members were when deciding
whether or not to approve or ratify the conduct. 175

10.070 In Re Northwest Forest Products Ltd, 176 the general meeting had approved of the
directors' alleged breaches of duties, however the Supreme Court of British Columbia

171 (unrep., HCMP 505/2006, (2006) HKEC 1379) (CFI).

172 See also Re Gen] Partnet:f Inc [20 I2) 4 MKLRD 5 I I where leave was also granted to a minority member to
defend proceedings brought against the company by the company's controllers.
173 [2008)3HKLRD614.
174 Cap.622, s.734(1). See also SM Beck, "The Shareholders' Derivative Action" (1974) 52 Canadian Bar Review

159, 196-202. In the present context, ratification refers to ratification of the breach. So as to release the director
from liability and not ratification in the sense of the company adopting (an being bound by) a transaction entered
into by a director without authority; sec lam Kin Chung v Soka Gakfoi !111emationalof Hong Kong ltd (No.2)
[2018) 2 HKLRD 769.
m Cap.622, ss.734(2}-734(3).
11
• [1975) 4 WWR 724.
 STATUTORYDERIVATIVEACTION 443

declined to take that into account and granted the applicant leave to commence the
derivative action in circumstances where two of the directors who were to be sued held
approximately 38 percent of the issued shares and there was no evidence presented to
the court as to who voted what at the meeting.
Ratification can be taken into account in determining what order to make. 10.071
Approval or ratification can also be taken into account by the court in deciding
what judgment or order to make in respect of the actual proceedings commenced or
intervened in by a member after leave had been granted. 177

4.6 Double or multiple derivative actions

Statutory double derivative actions can be brought. As members of an associated 10.072

company of a company have standing to apply for leave to bring a statutory derivative
action (see para. I 0.073 below), it is possible for multiple derivative actions 178 to be
brought under the legislation.

4.7 Procedural and other matters

4.7.J Standing
Registered members or members of associated company can bring action. 10.073
Current members of the company have standing to seek leave to bring a statutory
de1ivative action. 179 Members are persons registered as such in the company's register
of members. 180 Leave can also be sought to bring an action on behalf of a company by
a member of an associated company of the first-mentioned company. 181 An associated
company of a company means a subsidiary or holding company of that company,
or a subsidiary of the company's holding company. 182 The extension of standing to
members of other companies in the same group of companies was first introduced in
amendments to the predecessor CO in 2010. 183
No requirement that only minority member can bring action. There is no 10.074
requirement in the legislation that only a minority member would be allowed to bring
a derivative action. Where there is deadlock, a 50 percent holder would be entitled to
b1ing an action under the statutory provisions where the leave criteria are established. 184
However, leave would not be granted where the applicant is a majority shareholder and

177 Cap.622, s.734(2)(a).

'" On the nature of such actions, see para.10.036 above.
119
Cap.622,s.733.
'"' Cap.622, s.2. It is sufficient that the applicant is a member of the company at the time the court makes the
order granting leave without the need for perfection of the title of the applicant as member before allowing an
application for leave to be filed: Re Lue11Fat Pailll Co Ltd (unrep., HCMP 1791/2009, [2010] HKEC 212). In
Australia, it has been held that a person who is entitled to be registered as a member would have standing to bring
a derivative action: Zabus/..yv VirgtelLtd (20 I2) 88 ACSR I88.
181
Cap.622,s.733.
182
Cap.622,s.2.
183
Companies (Amendment)Ordinance2010 (effective10 Dec 2010).
' 84 Sec Re Nice & WellLtd (unrcp .. HCMP 2148/2008, [2008] HKEC 2134); Pang Yong Hock v PKS C<>ntracts
Services Pie ltd [2004] 3 SLR I (Singapore CA).
444 MEMBERS' REMEDIES AND MINORITY PROTECTION

is in a position to procure the company to institute or defend proceedings without the

aid of the court. 185

4.7.2 Good faith; conflict of interests of "PPlica11t

10.075 No requirement that applicant acted in good faith. There is no requirement under
the statutory provisions for the applicant to show that he or she is acting in good faith
in seeking to bring the derivative action. This can be contrasted with the position under
some of the overseas provisions. 186
10.076 Personal interest of applicant not significant. In determining the question of whether
the proceedings are in the interests of the company, Australian courts have held that
the fact that the applicant has a personal interest in the outcome of the proposed action
is not significant or decisive. 187 However, the fact that the applicant would have a
conflict of duties if the action proceeded because of his or her relationship with the
companies involved in the proposed litigation is a relevant factor tending to show that
the action might not be in the interests of the company. 188 Where the characteristics of
the applicants are relevant to an assessment of where the interests of the company lie,
they must be taken into account. 189

4.7.3 Companies in liquidation

10.077 Statutory derivative action probably not available when a company in
liquidation. It is unsettled whether a member can institute a statutory derivative
action where the company has entered liquidation,' 90 but overseas authorities
indicate that a derivative action would not be permitted in such circumstances. The
Canadian position is that the statutory derivative action would be unavailable for the
same reason that the exceptions to the rule in Foss v Harbottle under the common
law are inapplicable when the company is in liquidation, namely that there is now
an independent person in the liquidator who can commence proceedings on behalf
of the company. 191 Earlier decisions of Australian courts had suggested otherwise, 192
however, the view accepted in more recent Australian decisions is that the statutory
derivative action is not available when a company is in liquidation. 193 Even if Div.4 of

'" ReAstrotec Co Ltd (unrep., HCMP 923/2011, [2012) HKEC 842).

186
The good faith requirement was removed in an earlier version of the bill considered by the Bills Committee of
the Legislative Council: see Re Lr,dy Mo11eylid (1mrep., HCMP 505/2006, (2006) HKEC 1379). For overseas
provisions, see Canada Business Corporations Act 1974-1976, s.239(2)(b); Companies Act (Singapore),
s.2 I6A(3 )(b); Corporations Act 200 I (Aust), s.237(2)(b ); Companies Act 2006 (UK), s.263(3 )(a).
"' Ehsma11v Nutectime /111'/Pty Ltd (2006) 58 ACSR 705.
'" Tra11smetroCaq1 Ltd v Kol Tov Pty Ltd (2009) 71 ACSR 582 (aPl)eal dismissed: Mc Evoy v Cap!a11(20 I0) 78
ACSR 167).
18
• Tra11smetroCoq1 Ltd v Kol Tov Pty Ltd (2009) 71 ACSR 582 (apJ>ealdismissed: Mc Evoy v Cap!a11(20 I0) 78
ACSR 167).
190 This issue was left open in Re Slum Kai Finance Co ltd (2015] 2 HKLRD 264 (CA).
191 Liu v Sung (1991) 13 CBR (3d) 285; Toronto-Dominion Bank vAlex L Clark Ltd (1993) 22 CBR (3d) 6. Sec also

the Singapore decision in Pang Yong Hock v PKS Controcts Services Pte Ltd (2004] 3 SLR 1.
192 Rot,ch v Winnote Pty Ltd (in liq) [2001) NSWSC 822; /Jrightwe/1 v RFB Holdings (2003) 44 ACSR 186, 198;

Clwrlto11v Baber (2003) 47 ACSR 31, 39-:10; Carpenter v Pioneer Park Pty ltd (2004) 211 ALR 457.
' 9' Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661; PearlCoast Divers Pty Ltd v CossackPearlsPty Ltd (2008)
249 ALR 591; Smart Co Pty Ltd (in liq) v ClipsalAustraliaPty Ltd (2011) 82 ACSR 154.
 STATUTORYDERIVATIVEACTION 445

Pt.14 ofCap.622 is unavailable to companies in liquidation, there are other potential

avenues for members for obtaining a remedy for the company. 194

4.7.4 Form of proceedi11gslllld Stll11dingto file sub111issio11s

Originating summons. The application for leave is instituted by originating 10.078
summons, 195 and a copy of the originating summons should be served on the company
as the company would be entitled to appear in the leave proceedings and to oppose the
application. The courts have allowed shareholders and directors of the company to file
evidence on their own behalf in opposition to the leave application. 196 Furthermore,
courts have allowed the proposed defendants in the derivative action standing in
the leave proceedings to oppose the application. 197 It is unnecessary for there to be
exceptional circumstances before the court is to grant such permission, as the court
is likely, in general, to be assisted by submissions that bear on questions such as the
jurisdiction to make an order and merits of the proposed claim. 198
Company is plaintiff. Where leave is granted, the proceedings brought on behalf 10.079
of the company should be brought in the name of the company, 199 that is with the
company named as plaintiff.200

4.7.5 Gnmtillg of fellve mmc pro time

Granting oflcavc nuncpro tune. In both Canada201 andAustralia, 202 it has been held that 10.080
although proceedings on behalf of the company have been commenced without leave,
it is possible for the courts to grant leave nunc pro tune so as to rectify the irregularity.

4.7.6 Evide11ce
By way of affidavit. Evidence in the leave application should generally be by way of 10.081
affidavit. Cross-examination on the merits of the proposed derivative action should be
permitted only with leave and such leave should only be granted sparingly.203

4.7.7 Generlll powers of the court

Court can make any order or direction it considers appropriate. Under Cap.622, 10.082
s.737, the court may make any order and give any direction it considers appropriate in
respect of the application for leave, including:

194
See para.10.041above.
195
Rules of the High Court (Cap.4A), 0.102, r.2.
196 Re Lllcky Money Ltd (unrep., HCMP 505/2006, (2006) HKEC 1379); [2007) HKEC 1549).
197
Re Ge112Par/ners file [2012) 4 HKLRD 511, (26). See also Swa11sso11 v RA PMtt P,vperties Pty Ltd (2002) 42
ACSR 313; Mclean v lake Como Venture Pty Ltd (2004] 2 Qd R 280; Fiduciarv Ltd v Morningstar Research Pty
Ltd (2005) 53 ACSR 732.
19
' Re Gen2 Partners hie [2012) 41-LKLRD 511, (27).
199 Cap.622, s.732(4).

200 Mclean v lake Como VenturePry Ltd [2004] 2 Qd R 280. Mowever,where the proceedings involve both an action on
behalf of the company taken by a member as well as a J>ersonalaction of the member against J>ersonsincluding the
company, it may be appropriate to name d1ecompany as a defendant: see Char/1011v Baber(2003) 47 ACSR 31, 34.
2 1
• Vadeko !tzt 'I !11cv Philosophe ( 1990) I OR (3d) 87.
,o, RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170, 174-175; Cadwallader v Bajco P1y Ltd (200 I) 189 ALR
370; Maher v Ho11eysetta11dMaher Electrical Co111ractot:fPry Ltd [2005] NSWSC 859.
zo; Swtms.so11v RA Pratt Properties Ply Ltd (2002) 42 ACSR 313, 318-319; Agus lrtnvtm v Toh Teck Chye [2002) 2
SLR 198,202.
446 MEMBERS' REMEDIES AND MINORITY PROTECTION

• interim orders pending the determination of the application;

• directions concerning the conduct of the application;
• an order directing the company, or an officer of the company, to provide
information or assistance for the purpose of the application or to do, or not to
do, any other act; and
• an order appointing an independent person to investigate and report to the
court. 204

The above powers can also be exercised in relation to any proceedings brought or
intervened in by a member after being granted leave under that s.732. 205

4.7.8 Independe11ti11vestigator
I 0.083 Court can appoint independent investigator. The court has power to appoint an
independent investigator to assist the court in the application for leave and, where
leave has been granted, in any proceedings brought or intervened on behalf of the
company.206 The independent person can be appointed to investigate and report to the
court on the financial position of the company, the facts or circumstances that gave
rise to the proceedings, or the costs incurred by the parties to the proceedings and by
the member who brought or intervened in the proceedings or made the application. 207
10.084 Applications for appointment at the time of the leave application. Where the
court is invited (under s.737(1)(b)) to exercise its power to appoint an independent
investigator at the time when the court is dealing with the application for leave (under
s.732), the court has to consider whether it is necessary at this stage to make the
appointment. At this stage of the proceedings, the court is primarily concerned with
whether the applicant can establish the threshold for leave to be granted (to commence
or intervene in the derivative action). Whether the court would appoint the investigator
would accordingly depend on whether the obtaining of an investigation report is:
(i) reasonably necessary to assist the court in arriving at a correct decision of either
granting or refusing leave; or (ii) reasonably necessary to enable the applicant to
adequately frame at least a prima facie case in the writ to be issued if leave is granted
by the court. 208The case ofRe Ludy. Money LtcP- 09 involved a situation within (i) above.

In that case, Kwan J noted that the court is not required in the leave proceedings to
resolve questions as to the merits of the case advanced by the applicant but found
that it was appropriate to appoint an independent investigator to report to the court
in relation to matters raised in the seriously conflicting evidence filed by the parties.
The report was relied upon by Kwan J in the assessment of whether leave should be

""' See para. 10.083.

Z<Js Cap.622, s.737(1)(a).
m Cap.622, s.737(2)(d) and 737(3).
2'l1 There is no power in the starutory provision for the court to appoint the independent person to have conduct ofthc
proceedings brought or intervened in on behalf of the company: Re lucky Money ltd (unrep., HCMP 505/2006,
[2006) HKEC 1379).
'"' Kan Sau lan v Kin lee Co11structio11 Co Ltd [2015) I HKLRD 1015, (15).
l<i, (unrep., HCMP 505/2006, 18 July 2006 (CF!), (2007) HKEC 1549).
 STATUTORYDERIVATIVEACTION 447

granted. In other cases, the court has declined to appoint an independent investigator,
noting that the appointment in Re Lucf...yMoney Ltd was made on the special facts of
that case, and that it does not mean an appointment is called for whenever there is a
sharp conflict in the evidence filed. 210 In situations coming within (ii) above, where the
court is already satisfied that leave should be granted, the court would only exercise
its discretion to appoint an independent investigator in exceptional circumstances,
where, without such appointment, the plaintiff would be unable to satisfactorily bring
proceedings against the intended defendant. 211
Applications for appointment at the time of the derivative action. Where 10.085
the applicant considers that an independent investigator is required in respect of
the substantive proceedings brought or intervened in under s.732 (i.e. where an
appointment of an investigator is made for the purpose of s.737(l)(a)), the application
for the appointment should only be made after the derivative action has been instituted.
Upon the plaintiff's application made at that later time, the court would have to
consider whether it is just and convenient for the fair disposal of the derivative action
to order an investigation. The court would have to assess the merit of the application
on the basis of the issues as defined in the pleadings, the state of discovery and the
witness statements filed by the parties etc. 212

4.7.9 Costs
Court can make any order it sees fit; but can only make order in favour of 10.086
member if member acting in good faith and had reasonable grounds. Under
Cap.622, s. 738(1 ), the court has power to make any order it considers appropriate
about the costs incurred or to be incurred by the applicant member, the company, and
any other party to the application or proceedings, in relation to both the application
for leave and in any proceedings commenced or intervened in on behalf of the
company. The court may only make an order about costs (including the requirement
as to indemnification) in favour of the member if it is satisfied that the member was
acting in good faith in, and had reasonable grounds for, making the application,
or bringing or intervening in the proceedings. 213 Subject to that restriction, the
court's discretion is at large, with the court entitled to approach the question of costs
unconfined by statutory prescriptions and by reference to the discretions that apply
in the ordinary course in deciding applications for costs. 214 The statutory provision
does not cover the field in any restrictive way, so that the courts could still exercise
their ordinary powers as to costs in addition to the powers conferred under the
statutory provision. 215

216
Re Grand Field Group Holdings Ltd [2009) 3 HKC 81, 90; Re Li Chung Shing To11g(Holdings) Ltd [2011] 5
HKLRD 274, 292.
211
Re Li Cl11111g
Shi11gTong (Holdi11gs)Ltd [2011) S MKLRD274,292; Kan Sau la11 v Kin lee Co11structionCo Ltd
(2015) 1 HKLRD 1015.(17)-[18).
212 Ka11Sau La11v Kin lee Co11struc1io11 Co Lid [2015) 1 HKLRD 1015. [18).
213 Cap.622, s.738(3).
2" Re L11e11Fat Pai11tCo Ltd (unrcp., HCMP 1791, 2009, [2010) HKEC 212), [24), citing Foysler v Foysler Holdings
(2003) 44 ACSR 705.
"' Re lue11Fat Pain! Co Ltd (unrep., HCMP 1791/2009, (2010) HKEC 212); Foysler v Foysler Holdings Ply lid
(prov liq apptd) (2003) 44 ACSR 705, 708; Charlton v Baber (2003) 47 ACSR 31, 49.
448 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.087 Company can be ordered to indemnify member. The power under s.738 extends
to making an order for the company to indemnify out of its assets against the costs
incurred or to be incurred by the member in making the application for leave or in
bringing or intervening in the proceedings. 216 One of the concerns in enacting the
statutory derivative action has been the disincentives for members in bringing a
derivative action as a result of the possibility of them having to bear the costs of
the litigation which, if successful, would lead to a remedy awarded to the company
but not the members. 217 In fact under the common law principles in Wallersteiner v
Moir (No.2),218 there is considerable scope for the courts in allowing the member an
indemnity from the company for the costs of the derivative action, although it may
have been that cowts have not always been liberal in allowing an indemnification for
costs in favour of the member. It would appear then that the legislative intention is to
affim1 the court's powers to order the company to indemnify the member's costs.

4. 7.10 l11de111nificatio11
for member's costs - leave applictltio11
10.088 Indemnity order generally ordered when leave granted. The courts in Hong Kong
have generally been favourable to making an order for the member's costs of the leave
application to be indemnified out of the company's assets after granting leave for the
commencement of the derivative action.219 The applicant member should prima facie
be entitled to an indemnification order if the good faith and reasonable grounds criteria
are established. 220 The element of good faith221 can be satisfied if there is nothing to
suggest that the member was not acting out of a legitimate interest in the welfare of
the company or that some ulterior motive exists for bringing the derivative action
other than for the purpose of recovering loss and damage of the company.222 However,
where there is evidence filed that raises doubts as to whether the member is acting in
good faith and on reasonable grounds, the court may decline to order indemnification
or may defer the question to be considered at a later stage when the matters become
clearer.223

216 Cap.622, s.738(2).

211 See, e.g., Hong Kong Standing Committee on Company Law Reform, Corporate Govema11ce Review:
Con.wltalion Paper 011Proposalf Made i11Phase I of 1he Review, (July 200 I) [ I5 .14]. See also I M Ramsayand
B B Saunders,Litigation by Slzarelzolde1:fand Direc/01:~:A11Empirical Study of 1/zeS1a111101y Derivative Action
(Centre for Corporate Law and Securities Regulation,Universityof Melbourne,2006) 36.
z,s [1975) QB 373; see para.10.046 above.
z,~ Sec, e.g., Re F & S Express Ltd [2005) 4 HKLRD 743; Re Kammy Town Ltd (unrcp., HCMP 874/2007, [2007)
HKEC 1147); Re Li Chung Shi11gTong (Holdings) Ltd [201l) 5 HKLRD 274; Re Hang Heung Cake Shop Ltd
(unrcp., HCMP 527/2012, [2013) HK.EC163).
220 Sec Turner v Mailhot (1985) 50 OR (2d) 561, 28 BLR 222.
22' Some overseasprovisionshave the "good faith" requirementas a criterion for granting leave.In that context, good

faith has been interpretedto involve two interrelatedfactors of (I) whetherthe applicant honestly believesthat a
good cause of action exists and has a reasonableprospect of success, and (2) whetherthe applicant is seeking to
bring the de1ivativesuit for such a collateralpurposeas wouldamount to an abuse of process:Swansso1111RA Pratt
P,operties Pty Ltd (2002) 42 ACSR 313, 320.The mere fact that the applicantis actingout of self-interestwouldnot
necessarilybe evidenceof bad faith where the applicant'spersonal interestcoincideswith the company'sinterests:
P1·imex"1vestme11tsLtd v Northwest Sports Enterprises lid ( 1995) 13 BCLR (3d) 300; Ricltardso11Greenshie/ds of
Ca11adalimited v Ka/macaff(l995) 22 OR (3d) 577; Carpenter v Pioneer Pa,* Pry lid (2004) 211 ALR 457.
"' Re F & S fapress Ltd [2005) 4 HKLRD 743; Re Hang Heung Cake Shop Ltd (unrep., HCMP 527/2012, [2013)
HKEC 163).
"' See, e.g., Re Nice & Well Ltd (unrep., HCMP 2148/2008, [2008) HKEC 2134). See also Re Grand Field Group
Holdings Ltd [2009] 3 HKC 81 where the court defe1Tedthe question of costs, preferring to look at the whole
picture in exercisingthe discretion to award costs in the context of a complex dispute.
 STATUTORYDERIVATIVEACTION 449

Indemnity order can be ordered when leave not granted. The court can order 10.089
indemnification for the costs of the leave application even if leave is not granted, so
long as the applicant had acted in good faith and had reasonable grounds for making
the application. 224

4.7.J I Indemnification for member's costs - proceedings

on behalf of the company
Where indemnification sought for costs of proceedings commenced or intervened 10.090
in on behalf of company, good faith and reasonable grounds applicable. Where
a member seeks an indemnification for the costs of the proceedings commenced or
intervened in on behalf of the company, the good faith and reasonable grounds criteria
under s.738(3) of Cap.622 are also applicable. In addition, the courts require the
applicant member to provide evidence as to the company's ability to pay the costs as at
the time that the order for costs is sought. 225 The court would be unwilling to make the
order if the company does not have the means to fund the litigation and if the member
is better able to bear the costs of the action.226 However, while financial inability of the
member to carry on the action could weigh heavily in favour of a grant of indemnity,227
impecuniosity of the member should not be a necessary precondition for the making
of an indemnification order.228
Cautious approach to indemnification order at leave application. The Hong Kong 10.091
courts have taken a cautious approach in dealing with the question of indemnification
orders at the time of the determination of the leave application. On a number of
occasions, the court has deferred the question of costs to be determined at a later stage
in the proceedings where questions of liability, the quantum of costs, or the company's
ability to pay become clearer. 229 In some overseas decisions, the courts have also taken
the view that the issue of costs should only be dealt with at the conclusion of the
de1ivative action. 230
Submitted that indemnification order should not be left to end of proceedings. 10.092
However, it is arguably inappropriate for the courts to restrict indemnification orders
to situations where the company is successful on the merits or to restrict the time
for consideration of the matter to the conclusion of the derivative action, in light of

224 In Re luen Fat Paillr Co Ltd (unrep., HCMP 1791/2009, [2010) HKEC 212), the leave application was
discontinued after the transaction being challenged by the applicant in the proposed derivative action was
cancelled. The court was prepared to order indemnification of the member's costs in circumstances where
the court would have granted leave had the transaction not been cancelled. The proposed defendants (rather
than the company) were ordered to bear the costs in the particular circumstances of the case.
225
Re F & S Etpress Ltd [2005] 4 HKLRD 743, 747; Re Hang Heung Cake Shop Co Ltd (unrep., HCMP 527/2012,
[2013] HKEC 163), [71]-[75].
226
Swan.~Mn v R. A. Prall Properties Pry Ltd (2002) 42 ACSR 313, 327.
221 Turner v Mailhot ( 1985) 50 OR (2d) 561, 28 BLR 222.
228 Turner v Mailhot ( 1985) 50 OR (2d) 561, 28 BLR 222.
22' Sec, e.g .. Re MyJfoy Ltd [2008] 3 I-IKLRD614; Re Gra11dField Group Holdi11gsLtd [2009] 3 HKC 81; Re li
Clwng Sizing Tong (Holdings) Ltd [20 I I] 5 HKLRD 274; Chu Kong v Up Profit Ltd (unrep., HCMP 305/2016,
[2017] HKEC 424).
2.l-0 !tzrercontinenral Precious Metals Inc v Cooke (1993) 88 BCLR (2d) I01; Vrij v Boyle [ 1995] 3 NZLR 763.
See also Primex investments Ltd v Northwest Sports Eme,prises Ltd (1995) 13 BCLR (3d) 300; Discovery
Eme,prises Inc v Ebco Industries lld(l999) 70 BCLR (3d) 299; Barry Estate v Bany Estate [2001) OJ No 2991.
450 MEMBERS'REMEDIESAND MINORITYPROTECTION

the legislative intention to enact remedial legislation to deal with the disincentives of
bringing derivative actions, including enactment of provisions allowing for the issue
of costs to be determined at an early stage. Imposing greater restrictions than under
the common law principles of Wallersteiner, above, would arguably be contrary to
the legislative intention. In overseas jurisdictions, commentators have observed that
it is difficult to see why the applicant should not be entitled to have the company pay
for the costs of the proceedings if the criteria for leave have been established. 231 The
same can be said for the provisions in Hong Kong, subject to the further requirements
of good faith and reasonable grounds for bringing the proceedings in s.738(3) being
established. Where there is real concern as to the good faith and reasonable grounds of
the applicant, then it may be appropriate to deal with the issue of costs at a later stage
when the evidence can be properly assessed. 232 However, it is submitted that the courts
should not as a matter of course leave to the end of the proceedings the question of
whether an indemnification order should be made. Where there are concerns that the
costs might become substantial, it is always possible for the court to make orders to
allow indemnification in stages. 233

4.7.12 Discontimwtion or settlement

10.093 Leave required to discontinue. Where leave has been granted and proceedings
are brought or intervened in under Cap.622, s.732, the proceedings may only be
discontinued or settled with the leave of the court. 234 This provision protects the
interests of the company, for example by ensuring that a member does not settle the
proceedings on the basis of some advantage that accrues to the member but not to the
company.

4.8 Relationship between the statutory and

common law derivative actions

10.094 Choice between common law or statutory derivative action but not both. The
statutory provisions do not displace the common law derivative action.rn Members
effectively have a choice whether to bring a derivative action under the common law or
pursuant to the statutory provisions. The one person would not be able to bring both a
common law and statutory derivative action in respect of the same matter. If the court
has allowed a statutory derivative action to proceed, then the comi may strike out any
common law action subsequently commenced by the plaintiff. 236 If the plaintiff has

231 See, e.g., PK M Choo, "The Statutory De1ivativeAction in Singapore: A Critical and Comparative Examination"
(200 I) 13 Bond law Review 64, 91; I Ramsay, "Corporate Governance, Shareholder Litigation and the Prospects
for a Statutory Derivative Action" (I 992) I 5 University of New South Wales lawJoumal 149, 164.
2l 2 See, e.g., Nice & Well Ltd v Fu Mee )'rtkShirley (unrep., HCA 2726/2008, (2011 JHKEC 3 I6) where, at the end of
the unsuccessful prnceedings, the member was required to bear the costs instead of the company in circumstances
where the member had made serious and unwarranted allegations of dishonesty, fraud and misappropriation
against the defendant which were held to be wholly unfounded.
2
ll E.g., in Re Hang lleu11g Cake Shop C<>lid (unrep., HCMP 527/2012, [2013) HKEC 163), the court made a
limited order for indemnification for the member to be indemnified as to the costs of bringing the statutory
derivative accion up to and including the close of pleadings; with che matter to be reviewed further ac thac stage.
254 That is, the Court of First Instance. Sec Cap.622, s.735.
23
' Cap.622,s.732(6).
23" Cap.622,s. 736.
 STATUTORYDERIVATIVEACTION 451

commenced the common law action first, then the court may dismiss any subsequent
application brought under the statute. 237 If one person commences a common law
derivative action and another person commences a statutory derivative action, it would
be up to the court to exercise its ordinary powers under court rules to decide whether
and how the parties should or should not proceed with their actions. 238
Where common law or statutory derivative action has been struck out. The 10.095
Ordinance does not expressly deal with the situation where a common law action is
instituted after statutory leave has been refused, nor the converse situation of seeking
leave under s.732 after a common law derivative action has been struck out. However,
the Court of Final Appeal has stated that where a party seeks to take advantage of
the availability of both the statutory and the common law derivative action, the court
should exercise its powers, both express and inherent, to prevent the abuse of the
comt's process and to ensure that the dispute is resolved fairly and expeditiously
without unnecessary procedural comp Iications.239
Reasons for not abolishing common law action. Generally it may be easier for 10.096
plaintiffs to bring a statutory derivative action, but there may be special situations
where only a common law action is available. A major reason that has been put
forward for the retention of the common law derivative action is to preserve the ability
of members bringing derivative actions on behalf of foreign companies in Hong Kong.
Foreign companies which are "non-Hong Kong companies" come within the scope
of the statutory provisions, but not other foreign companies. The apparent concern
is that, if the question of whether a derivative action can be brought is a procedural
question which is a matter governed by the law of the forum (lexfori), then abolishing
the common law action in Hong Kong means that a derivative action ca1111otbe
brought in Hong Kong on behalf of a foreign company (that is not a non-Hong Kong
company) even though such an action would be available in the law of the place of
incorporation of the company.240 However, the Court of Appeal has confirmed that
whether a derivative action can be brought is a matter of substantive Jaw determined by
the law of the place of incorporation. 241 So even if the common law derivative action is
abolished in Hong Kong, it would still be possible for a derivative action to be brought
in Hong Kong for a foreign company if the law of the place of incorporation permits
it.242 Nonetheless, an advantage of retaining the derivative action under Hong Kong
common law in tandem with the statutory action is to provide flexibility and to cover
any situations which might be outside the scope of the statutory provisions but which
may come within the common law action.

231 Cap.622~s.733(2).
238 See Legislative Council Report of the Bills Committee on Companies (Amendment) Bill 2003 (LC Paper
No CB(l)2264/03-04) (June 2004) at [1291; Financial Services and Treasury Bureau, Con.wltaiion Paper on
Statwory Derivative Action in the Companies (Amendment) Bill 2003 (Apr2004) (13).
u, Waddington Ltd v Chon Chun Hoo (2008) J 1 HKCFAR 370,387.
,.w Sec Financial Services and Treasury Bureau, CO Rewrite - Draft Companies Bill First Phase Consultation:
Consultation Poper (Dec 2009) at [9. 7], and Consultation Conclusions (Aug 20 I0), (33}-[36].
"' East Asia Satellite Television (Holdings) Ltd v New Cotai LLC (2011] 3 HKLRD 734; applied in Wong Ming Bun
vffla11gMingFan[2014) I HKLRD 1108.
m See Waddington Ltd v Clta11Chun Hoa (2008) 11 HKCFJ\R 370, (55).
452 MEMBERS' REMEDIES AND MINORITY PROTECTION

4.9 Relationship between statutory derivative action and

other alternative remedies

10.097 Statutory derivative action does not affect members' personal rights. The provisions
on the statutory derivative action are only applicable where an action is sought on
behalf of the company in relation to a cause of action vested in the company. 243 Jt has
no application in relation to personal rights of action vested in members personally,
and thus the distinction between personal and corporate wrongs remains important.
The availability of the statutory derivative action does not affect members' rights to
bring a personal action in respect of their personal rights. 244
10.098 Alternative personal remedy of member does not bar derivative action. It was
suggested in Swansson v R A Prall Properties Pty LtcflA5 that whether there is an
alternative remedy available to the member would be relevant to the question of whether
the action would be in the interests of the company. Palmer J stated that if the substance
of the redress which the applicant seeks to achieve is available by a means which does
not require the company to be brought into litigation against its will, such as where the
applicant can achieve the desired result in proceedings in his or her own name, then it
may not be in the interests of the company to be involved in litigation at all. However
the case 246 cited by Palmer J in support of this approach was subsequently overturned
on appeal in Metyor Inc v Queensland Electronic Switching Pty Ltd.247 In the latter case,
the Queensland Court of Appeal held that the fact that the plaintiffs had personal claims
was not a sound basis for holding that it was not in the interests of the company that the
plaintiffs should have leave to bring proceedings on behalf of the company. The court
noted that "it is not always possible to say at once whether a pa1ticular asset, advantage
or opportunity belongs to the company rather than to one or other of two groups of
warring shareholders" and further that allowing the derivative action can facilitate in
resolving such issues and in ensuring that the company can recover in relation to wrongs
done to it.248 Where the derivative and personal actions are based on the same facts, it
would be possible for the court to join the proceedings. 249

5. MEMBERS' PERSONAL ACTIONS

5.1 Introduction

10.099 Rule in Foss v Htlrbottle does not apply to personal action. The proper plaintiff
principle 250 in Foss v HarbotLle only applies where the wrong is done to the company.

243
Cap.622, s.732(4).
24
.i Cap.622, s.732(7).
245
(2002) 42 ACSR 313, 324. This approach was also adopted in the following cases: Chapman v £-Sports Club
WorldwideLid (2000) 35 ACSR 462; Hassall v SpeedyGa11rryHire Pty Ltd [2001) QSC 327; Pa11gYongHock v
PKS Co11rrac1s Sen,icesPre Ltd (2004) 3 SLR I (Singapore CA).
2' 6 Talisma11 Tech11ologies
Inc v Quee11sla11dElec1ro11ic Swirchi11gPty Ltd [2001) QSC 324.
24' (2002) 42 ACSR 398.
248
(2002) 42 ACSR 398, 405.
2•• Rules of the High Court (Cap.4A), 0.15 r.4; and see, e.g., Meryor Inc v Q11ee11sla11d
Electro11icSwirchi11g
Pry Ltd
(2002) 42 ACSR 398; KeyrarePty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396.
"0 Seepara.10.0l0above.
 MEMBERS'PERSONALACTIONS 453

Where a wrong is done which infringes on the personal rights of a member, then the
member has a personal right of action. 251 The action is in the member's own name for
his or her own behalf, and remedies sought will be for the benefit of the member and
not the company.
Categories of personal actions. Personal rights of members can arise pursuant to: 10.100

• the company's constitution;

• common law;
• contract; or
• statute.

The first three catego1ies are discussed below. The main statutory provisions 10.101
conferring personal remedies on members are the provisions on unfair prejudice, 252
winding up on just and equitable grounds, 253 and the statutory injunction. 254 Those
provisions are discussed in Sections 6 to 8 of this chapter. The Ordinance also provides
certain other statutory protections for members, including protections in respect of
class rights 255 (discussed in Chapter 14) and provisions enabling members to obtain
access to company records 256 ( discussed in Chapter I I).

5.2 Conduct involving wrongs to both the company and members

5.2.1 /11troductio11
Harm to company and to member. Before examining the various personal remedies 10.102
of members, it is necessary to consider certain restrictions on the ability of members
to bring a personal action where the conduct complained of involves a wrong to both
members personally and to the company. The following are situations where the same
conduct involves harms both to the company and to one or more of its members:

• Although members suffer a factual loss resulting from the conduct, the
wrong involves an infringement of the company's rights only, and there is no
personal cause of action for the members. This is the first type of situation
where the members are said to suffer a "reflective loss" only;
• The conduct infringes both the rights of the company and personal rights of
members; however, the loss suffered by members is still reflective of the loss
of the company in that a remedy to the company will also fully compensate
the member. While these situations give rise to separate causes of action

,s, Edwards v Ha/Uwe/1 [1950) 2 All ER 1064, 1067.

2s2 Cap.622, Pt.14 Div.2.
2 s3 Cap.32, s.177(1)(1).

2~ Cap.622, Pt.14 Div.3;sec also Cap.32, s.3508.

2ss Cap.622,Pt.4 Div.7.
2S<i Cap.622. Pt.14 Div.5.
454 MEMBERS'REMEDIESAND MINORITYPROTECTION

for the company and the members, a member might still be prevented from
bringing an action pursuant to the no reflective loss principle;
• The conduct infringes both the rights of the company and personal rights
of members, but the members' loss is separate and distinct and not properly
regarded as being reflective of the company's loss. In such situations, a
member would be entitled to b1ing a personal action in relation to the
member's personal loss; and
• Situations where the member has a cause of action, but no cause of action
vests in the company at all although the company suffers some harm. Here,
members can seek recovery.

5.2.2 Rule against reflective loss - where member has 110 cause of action
10.103 Rule against reflective loss: wrong against company, mere fact of diminution
in value of shares does not give right of action to member. Where a wrong has
been occasioned to the company which infringes the company's rights (such as a
breach of directors' duties owed to the company or where a third party is liable to the
company in contract or tort), the mere fact that shareholders suffer a factual loss by
reason of diminution in the value of their shares does not give the shareholders any
right of action against the wrongdoer. 257 In Prudential Assurance Co Ltd v Newman
Industries Ltd (No.2),m the English Court of Appeal explained this principle on
the basis that the shareholders do not suffer any loss separate and distinct from the
company's loss. The shareholders' rights are only in relation to their shares, and the
shares themselves are not directly affected by the wrongdoing since the shareholders
still hold all the rights attached to their shares. Although the value of the shares
might be reduced by reason of a reduction in the assets of the company caused by
the wrongdoing, the shareholders' loss is merely a reflection of the loss suffered
by the company and is only suffered through the company's loss. The value of the
shareholders' investment is necessarily dependent on the fortunes of the company,
and no separate cause of action vests in the shareholders merely because of the
reflective loss which they suffer.259
10.104 Applies to other categories of reflective loss, e.g. loss of dividends. The principle
applies not only in relation to a diminution in the value of shareholdings, but also to
other categories of reflective loss. This includes losses of a shareholder arising from
a loss of dividends that might otherwise have been declared and paid, or losses of any
other payment which the shareholder might have obtained from the company if it had
not been deprived of its funds.260

'" Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204, 222-224 (Eng CA); Johnson v
Gore Wood and Co (No.I) [2002] 2 AC I, 35 per Lord Bingham, 62 per Lord Milieu (HL); La,ulw,e /111'/ Ltd v
Cheung Chung Leung [2006] I HKLRD 39 (CA).
2~8 (1982) Ch 204, 222-224.
"' For a critique of the court's reasoning, sec M J Sterling, "The Theory and Policy of Shareholder Actions in Torr
(1987) 50 Modern Law Review 468, 470-474.
260 Joh11so11 v Gore Wood a11dCo (No.I) [2002) 2 AC I. 66; Gardner v Parker [2004) 2 BCLC 554, 562.
 MEMBERS' PERSONAL ACTIONS 455

5.2.3 Rule against reflective loss - where member has separate cause of action
Rule against reflective loss: member not allowed to bring personal action. 10.105
Where both the company and a member has a cause of action arising from the same
conduct, but the member's loss is not a separate and distinct loss but is reflective of
the company's loss, the member is not entitled to bring a personal action to recover in
relation to the reflective loss.261
Prudential case. In Prudential Assurance Co Ltd v Newman Industries Ltd (No.2),262 10.106
the plaintiff shareholder alleged that two directors of the company had defrauded the
company and breached their duties to the company by intentionally providing misleading
information to both the board and the general meeting in relation to transactions for
the acquisition of certain assets, causing the company to acquire the assets at an
overvalue. The plaintiff attempted to bring both a derivative action on behalf of the
company and a personal action in relation to the same conduct. As regards the personal
action, the Court of Appeal held that the action was misconceived. The court accepted
that the directors, in advising the general meeting about the transactions, owed the
shareholders a duty to give such advice in good faith and not fraudulently, and that if
directors convene a meeting on the basis of a fraudulent circular, a shareholder will
have a right of action to recover any loss which he or she has personally suffered in
consequence of the fraudulent circular (such as the expense of attending the meeting).
However the shareholder would not be entitled to recover losses which are merely a
reflection of the loss suffered by the company, such as a diminution in the market value
of his or her shares.
Rule prevents double recovery and recovery by members at expense of creditors. 10.107
The approach in the Prudential Assurance case was confirmed in Johnson v Gore
Wood and Co (afirm}, 263 where a majo1ity of the House of Lords rejected the view of
the New Zealand Court of Appeal in Christensen v Scott 264 that the member would be
entitled to commence proceedings pursuant to his or her personal right of action in
relation to the reflective loss. The reason for applying the rule against reflective loss,
even in situations where the member has a personal cause of action, is to ensure that
there is no double recovery against the defendant, and to ensure protection of creditors
of the company (who might othetwise be prejudiced by an award of compensation
directly to the members, leaving the company's Joss uncompensated). 265 Although
the New Zealand court also recognised that double recovery must be avoided, which
could be achieved by the trial judge in making appropriate orders, Lord Hutton in
Johnson v Gore Wood argued that the advantage of the no reflective loss principle

261 Prude111ialAssurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204 (Eng CA); Johnson v Gore
Wood and Co (afirm) [2002] 2 AC I, 35-36 per Lord Bingham, 55 per Lord Hutton, 66-67 per Lord Millett
(HL); La11dune !ntemational Ltd v Chetmg Chung Leung [2006] I HKLRD 39 (CA); Waddington Ltd v
Chan Chun Hoo (2008) 11 MKCFAR 370; Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [2012]
4 HKLRD 474 (CA).
262 [ I 982] Ch 204.
263 (2002] 2 AC I.
260 [ 1996] I NZLR 273.
26' Joh11so11 v Gore )¾)odond C() (No.I) [2002] 2 AC 1, 36, 55, 66; Stein v Blake (No.2) [ 1998] I All ER 724, 730;
Land1111e Cl1101gLeung [2006) I HKLRD39, 47 (CA); Waddi11gto11
1111'/Ltd v Che1111g Ltd v Chan Chun Hoo
(2008) 11 HKCFAR370,400.
456 MEMBERS'REMEDIESAND MINORITYPROTECTION

is that it provides certainty at the outset of the proceedings, which is preferable to

leaving matters involving double recovery to be decided at a subsequent stage by the
trial judge. 266 Lord Millett stated that the dual aims of preventing double recovery
and preventing recovery by members at the expense of creditors apply as a matter
of principle; the matter is not one of discretion, and thus it would be wrong to allow
a member to proceed with the action and to leave issues of double recovery to the
discretion of the trial judge. 267
10.108 Rule applied in Hong Kong. The rule against reflective loss has been applied in Hong
Kong.268 For example, in landune lnt'l Ltd v Cheung Chung leung, 269 a subsidiary
company had purchased shares in another company at an overvalue as a result of
misrepresentations made by the vendor. The parent (Landune) of the subsidiary
company provided a shareholder loan to the subsidiary for the purpose of funding
the purchase from the vendor. Two of the directors of Landune and the subsidiary
company were alleged to have been acting together with the vendor to defraud the
companies. When one of those two directors petitioned as a creditor for the winding
up of Landune on the basis that it was unable to repay a debt owed to the director,
Landune sought to strike out the petition on the grounds of a cross-claim against the
director in relation to the fraud of the director for the recovery of the amount of the
loan given to the subsidiary. The Court of Appeal upheld the first instance decision
of Kwan J that Landune would be barred by the rule against reflective loss from
recovering against the director and thus the cross-claim could not be relied upon as a
defence to the winding up petition. The court reasoned that, even if Landune had an
independent cause of action against the director, the loss suffered by Landune was a
reflective loss. Prima facie it is the subsidiary company which is entitled to recover
for the loss it suffered by purchasing the shares as a result of the misrepresentations.
Landune's loss (the amount of the shareholder loan) was reflective of the subsidiary's
loss in that its loss would be made good if the subsidiary was able to recover against
the directors or the vendor. Accordingly the rule against reflective loss was applicable.
10.109 Rule still applies if nature of cause of action of plaintiff different to company's
or if action arises in some capacity other than member. The rule applies even
though the nature of the cause of action of the plaintiff is different to that of the
company's. For example, where a director holds shares on trust for a beneficiary
and obtains a profit in circumstances amounting to breach of fiduciary duty to the
company and also amounting to a breach of trust, the beneficiary's action against the
trustee/ director will be barred where the claimed profit suffered by the beneficiary
reflects the loss of the company.270 Also it matters not that the plaintiff's action
arises in some capacity other than that of being a member of the company. The rule
is applicable for instance in relation to claims made by a member in the capacity of
an employee (such as for pension payments that the company could have made if the

266 [2002) 2 AC I, 55.

261 [2002) 2 AC I, 66.
26
' Waddington Ltd v C/ra11
C/11111
Hoo (2008) 11 HKCFAR 370.
269
[2006) I l lKLRD 39 (CA).
21• Shaker vAI-Bedrawi [2003) I BCLC I57, 223-224 (Eng CA); Gard11erv Parker [2004) 2 BCLC 554, 563-568
(Eng CA).
 MEMBERS'PERSONALACTIONS 457

company had not suffered the loss), 271 or claims made in the capacity of a creditor
(in relation to the repayments that the company would otherwise have been able to
make if the company had not suffered its own loss). 272 The rule applies regardless
of the form of relief sought, so long as that, as a matter of substance, the claim is
for monies that the company may claim for itself. 273 It has also been held that even
though the company's claim would be met by a defence raised by the wrongdoer,
the plaintiff could still be prevented from pursuing his or her own claim under the
no reflective loss principle despite the problems of double recovery and creditors'
interests not arising. 274 It is not yet settled in Hong Kong whether the rule applies
where the defendant that the plaintiff seeks to sue is different to the defendant that
the company could sue. 275

5.2.4 Where rule against reflective loss does not apply

Where member's loss distinct, member entitled to bring personal action. Where the 10.110
member's loss is separate and distinct from the company's loss, the member is entitled
to bring his or her personal action.276 In determining whether a loss is a reflective
loss277 or is separate and distinct, the Court of Appeal in landune International Ltd v
Cheung Chung Leung278 applied the test of whether the loss is one which would be made
good if the company was able to recover for its own loss. Although the member's loss

271 Johnson v Gore Wood and Co (No.l) (2002) 2 AC I (HL); and see also Gardner v Parker (2004) 2 BCLC 554,
572 (Eng CA).
212 La11d1111e illt'I Ltd v Cheung Chung Leung (2006) I HKLRD 39 (CA); Gardner v Parker (2004) 2 BCLC
554, 571-574 (Eng CA). Dicta in these judgments suggest further that the rule against reflective loss can
be applied whether or not the creditor (or employee, etc) is also a member of the company. However, it is
arguable that the rule has no application in respect of a claim brought by a secured creditor for breaches of
duty owed to him by a receiver, who was appointed by the secured creditor and not by the company, as the
secured creditor is the party primarily entitled to obtain and retain all damages awarded for the breaches
alleged and the party to whom the primary duties were owed: lntenwtio11al Leisure lid v First Natio11a/
T111steeCo UK Ltd [2013) Ch 346; Basab foe v Che11 lihua (unrep., CACY 256/2014, [2016) IIKEC
2632), [29).
m Pico North Asia Holdings Ltd v Cheung Yi,kTing Linda (w1rep.,HCA 1371/2009, [2011) HKEC 187). cfWa11gMei
Na vTang M11 lien (unrep., HCA 421/2010, [201 I) HKEC 133)where the court refused to strike out an application
for the appointment of a receiver to protect against the plaintiff's loss even though that loss was a reflective loss.
21
' Barings pie (in liq) v Coopers and Lybrand (afirm) (No. I) [2002) 2 BCLC 364.
275 In 1-lowng v Hillhead Ltd [2008) 3 HKLRD 200, Reyes J struck our a beneficiary's claim against the trustee

for breach of trust by dishonestly assisting another to misapply a company's assets, which led to diminution in
value of trust assets (comprised of shares in the company). It was argued by the beneficiary that the company's
claim would be against persons other than the trustee, but Reyes J did not consider that this prevented the
no-reflective loss principle from applying. However, the Court of Appeal in a later decision of Hotung v Ho
Yuen Ki (No.4) [20 I I) 2 HKC 149 allowed an appeal against a decision to strike out in similar circumstances,
with the court stating that it is inappropriate to strike out the claim as the law is not settled on the point. In
Topping Chance Development Ltd v CCJF CPA Ltd (2015) 3 HKC 89,(74)-(75), Deputy Judge Leung was
inclined to the view that where the company's only claim would be against a different defendant to the one that
the shareholder was suing, then the company does not have a relevant cause of action that would prevent the
shareholder from pursuing the latter's own cause of action; his Lordship accordingly refused to strike out the
shareholder's claim.
276 Johnson v Gore Wood and Co (a jinn) (2002) 2 AC I, 35-36, 55, 67.

277 For examples of reflective loss, see further Day v Cook[2002) I BCLC I; Ellis v Property Leeds (UK) ltd[2002)

2 BCLC 175; Barings pie (i11liq) v Coopers and Lybrand (a.firm) (No. I) [2002) 2 BCLC 364; Gardner v Parker
[2004) 2 BCLC 554; Perry v Day [2005) 2 BCLC 405.
"' [2006) I HKLRD 39, applying Prudential Assurance Co Ltd v Newman llldustries Ltd (No.2) [1982) Ch 204;
.Johnson v Gore Wood and Co (a.firm) [2002) 2 AC I; Gardner v Parker [2004) 2 BCLC 554.
458 MEMBERS' REMEDIES AND MINORITY PROTECTION

of funds that the company might have paid to the member if the company had not itself
suffered loss is regarded as a reflective loss, a loss which the member has sustained by
reason of his or her inability to have recourse to the company's funds and which the
company would not have sustained itself will be treated as a separate and distinct loss.
For example, in Johnson v Gore Woodand Co (a.firm),219 a plaintiff shareholder brought
a personal action against his solicitors alleging breach of a duty of care owed both to the
company and himself personally a1ising from the same facts. The House of Lords struck
out his claims for compensation for payments that the company would have paid into
the plaintiff's pension fund if the company had not itself suffered the losses caused by
the solicitor's negligence (such losses of the plaintiff being a reflective loss), but did not
strike out the claim for enhancement in value of the pension if the company had been
able to make the pension payments (such being a separate and distinct loss).280

10.111 Rule inapplicable where remedy sought by member is not to compensate for
reflective loss. The rule against reflective loss is also inapplicable where the remedy
which the member is seeking is not to compensate for a loss reflective of the company's
loss. For example, the courts have allowed members to bring a personal action to restrain
an improper issue of shares diluting voting power, even though the wrong is also one
that is suffered by the company (breach of fiduciary duties owed to the company). 281 In
situations where the remedies sought by the member are declarations or injunctions, the
problems of double recovery and damage to the interests of creditors do not a1ise.
10.112 Where company does not have cause of action member can pursue claim even
if would otherwise be regarded as reflective loss. Where a member has a cause of
action but the company does not, then the member would be entitled to pursue his
or her claim for the loss even if the loss would otherwise be regarded as a reflective
loss. 282 This situation could arise for example, where the defendant contracted with the
member for the sale of goods or provision of services to the company and where the
defendant is in breach of contract, causing loss to both the company and the member.
Although the member's loss (diminution in value of the shares held) might well be
reflective of the company's, the member is entitled to recover.283
10.113 Rule still applies nonvithstanding company declines or fails to sue. In a number of
cases, the courts had accepted that there is a limitation to the rule against reflective loss
such that where wrongdoers have, through the wrong done to the company, disabled the
company from pursuing its cause of action against them, then the plaintiff will not be
debarred from bringing the plaintiff's own claim against the wrongdoers. 284 However,

,,. (2002)2AC 1,36-37.

"" The basis appears to be that even if the compan)' is compensated for its loss and could now make the pension
payments, the value of the pension could still be less than what its value would have been had the pension
payments been made at the earlier time.
"' See para. I0.128 below.
"' Johnson v Gore Wood mid Co (No. I) (2002] 2 AC I, 35, 53, 62 (HL); Lee v Shearn [ 1956) I QB 192 (Eng CA);
George Fischer (Great Britain) Ltd v Multi Co11str11ctio11 Ltd (1995) I BCLC 260 (Eng CA); Gerber Garme11t
Technology hie v Lectm Systems Ltd (1997) RPC 443 (Eng CA); Topping Chance Development Ltd v CCIF CPA
Ltd [20 I5] 3 !➔KC 89, (70). As to the position where the company may have a cause of action against a different
defendant, see note 270 above.
"' George Fischer (Grea/ Britain) Ltd v Multi Construction Ltd [ 1995] I BCLC 260 (Eng CA).
28' Giles v Rhind [2003) I BCLC I (Eng CA); Gardner v Parker (2004] 2 BCLC 554, 568-569 (Eng CA); Hot1111g

v Hillhead Ltd (2008] 3 HKLRD 200, 204-205.

 MEMBERS'PERSONALACTIONS 459

the existence of such a limitation was rejected by Lord Millett NPJ in giving the main
judgment of the Court of Final Appeal in Waddington Ltd v Chan Chun Hoo. 285 Lord
Millett emphasised that the principle against reflective loss applies notwithstanding
that the company declines or fails to sue.286 Also, the fact that the company settles with
the wrongdoer on comparatively generous terms does not justify disapplying the rule
against reflective loss.287

5.3 Personal rights under the corporate constitution

5.3.I Co11stitutio11
as a statutory contract
Cap.622, s.86: articles contract between company and each member and 10.114
between members. Under Cap.622, s.86, the articles have effect as a contract
under seal between the company and each member, and between a member and
each other member. Under s.86(2), the articles are enforceable by the company
against each member and by a member against the company and against each
other member. Section 86(2) is equivalent to the predecessor CO, s.23(1A)
(repealed), which was originally introduced in 2003. 288 Prior to the introduction
of this provision, the courts had allowed members to bring proceedings to enforce
the constitution as a statutory contract, but various restrictions were imposed.
Importantly, members were only entitled to enforce rights conferred under the
constitution in the nature of personal rights as opposed to rights conferred on the
corporate entity as a whole.
Basis for distinction between personal rights and corporate rights. The distinction 10.115
between personal 1ights and corporate rights is not always clear in the context of rights
conferred under the corporate constitution. 289 One possible basis for the distinction
between personal rights and corporate rights is that personal rights cover rights of a
prop1ietary nature attached to the shares of a member. 290 Another approach that has
been suggested is to examine whether it is appropriate for the particular dispute to
be determined by an ordinary majority.291 However, such tests do not always provide
certainty. For example, while some rights are clearly of a proprietary nature (such as
the right to transfer shares), the matter is less straightforward for other rights conferred
under the constitution. Also, the second approach mentioned above raises further

285 (2008) 11 HKCFAR 370.

286 (2008) 11 HKCFAR 370, 401. If the company does not sue, the appropriate course of action is to allow the
shareholder to bring a derivative action.
287 In situations where the company's claim has been settled, the plaintiff is prevented from pursuing his or her
own action in order to preclude members from going behind the settlement of the company's claim otherwise
defendants may not be willing to settle with the company, or directors who are also members would be led to a
situation of conflict of interest in deciding whether or not to settle the company's claim: Johnson v Gore Wood
tmd Co (No.I) [2002)2 AC 1, 66; Giles v Rhind [2003) I BCLC 1, 30.
288 Companies (Amendment) Ordinance 2003.
289 Sec generally NA Bastin, "The Enforcement ofa Member's Rights" [1977] Journal of Business law 17; R J
Smith, "Minority Shareholders and Corporate Irregularities" (1978) 41 Modem law Review 147.
290 S C Loh and W M F Wong, Company law: Powersand AccOL111tability (LexisNcxis Buttcrworths 2003) 1309.
29' R R Drury, "The Relative Nature of a Shareholder's Right to .Enforce the Company Contract" (I 986) 45
CambridgelawJoumal 219; Re Hong Kong Sailing Federation(2010) I HKLRD 801.
460 MEMBERS'REMEDIESAND MINORITYPROTECTION

questions as to how one determines whether it is appropriate or not for the matter to be
determined by an ordinary majority.292
10.116 Member have standing to enforce all rights in articles. In view of the
difficulties posed under the case law, the SCCLR recommended that the law
should be clarified so that an individual member can enforce all rights in the
memorandum and articles as a personal right. 293 This recommendation led
to the enactment of what is now Cap.622, s.86(2). On the question of locus
standi, it would appear then that it is no longer necessary to distinguish between
personal and corporate rights in relation to the constitution, as members would
have standing to enforce all provisions in the constitution (including provisions
dealing with purely procedural matters 294).

5.3.2 Restrictio11s u11der irregularity principle

10.117 Irregularity principle still applies, i.e. whe1·e majority could ratify irregularity.
However, although a member may have standing to enforce rights conferred by the
constitution, the courts may decline to grant a remedy on the basis of the irregularity
principle of Foss v Harbottle. 295 The irregularity principle should be seen as a principle
independent of the proper plaintiff principle. While personal rights of members are
outside the scope of the restrictions in the proper plaintiff principle in Foss v Harbottle,
the ability of members to enforce their personal rights is still subject to the irregularity
principle. In other words, although a member has standing to institute a personal action
to enforce the individual right, the court will decline a remedy where the irregula1ity
principle applies - i.e. where the majority could ratify the irregularity by an ordinary
resolution and the majority's views are clear. Restrictions pursuant to the irregulaiity
principle had been applied prior to the 2003 amendments to predecessor CO, s.23, with
the rationale being that there is little point in declaring certain acts to be invalid where:

" ... the ultimate end ... is only that a meeting has to be called, and then ultimately
the majority gets its wishes". 296

This rationale is equally applicable under the amended s.23 of the predecessor CO
(and now under s.86 ofCap.622). 297

"' It is said that a matter should not be decided by an ordinary majority where "the matter is beyond their
competence, as it is in the case of r,/tra vires actions or illegality, or that its solution would require the passing
of a resolution by special majority, or that the interests of justice or practicality preclude the delivery of the
matter into the hands of the majority": R R Drury, 'The Relative Nature of a Shareholder's Right to Enforce
the Company Contract'' ( I986) 45 Cambridge law .!oumal 219, 245; Re Hong Kong Sailing Federmio11
[20 IOJ I HKLRD 80 I, [49]. However, the scope of the last category in those examples (justice/practicality) is
not entirely clear.
:m See SCCLR, Corporate Govemance Review: A Con.wlta,ion Paper 011 Proposals Made i11Phase I ~(the Review
(July 200 I) 68-69.
29
' Sec Legislative Council Bills Committee on Companies (Amendment) Bill 2002, "Summary of Concerns (as at
31 Mar 2003)", (CB(I) 1350/02-03(04), 3 Apr 2003) 6-7.
''" Re Hong Kong Sailing Federation [2010] I HKLRD 801; Lim .!onatlwn v She Wai Hung (2011] I HKLRD 305;
Re Dalny Estates Ltd [2018] I HKLRD 409, (18] (CA).
29• Mac Dougall v Gardiner ( 1875) I Ch D 13, 25 per Mellish LJ; Re Dalny Estates Ltd (2018] I HKLRD 409, (22]

(CA).
29' See Re Hong Kong Sailing Federatio11[2010) I HKLRD 801, (50).
 MEMBERS' PERSONAL ACTIONS 461

Limits to application of irregularity principle. It should be borne in mind that 10.118

the irregula1ity principle does not apply where the matter complained of is one of
substance and not a mere irregularity.298 For example, it may be doubted whether an
ordinary majority of members could, without a meeting held at all, bind the company
to a matter which the articles require to be decided upon in general meeting. 299 It may
be said that in such a situation, the problem is not simply one of a mere irregularity,
but there is non-compliance with the articles of a substantive nature. Allowing the
irregularity principle to be applied in such a situation would be inconsistent with the
unanimous consent doctrine where informal decisions made by members without a
meeting require unanimous approval of the members. 300
If ordinary members can make decision in compliance with articles and their 10.119
view is clear no remedy will be ordered. Much of the pre-existing case law on the
situations where members have or have not been allowed by the courts to enforce
rights conferred under the a1ticles can be explained with reference to the irregularity
principle. The critical questions are whether the matter at issue is one within the
constitutional power of an ordinary majority of the members and whether the view of
the majority is clear. If an ordinary majority of the members can make the decision in
compliance with the articles and the view of the majority is clear, then no remedy will
be ordered in favom of the minority member who is complaining about the conduct.
Examples where ordinary majority does not have power to deal with matter. The 10.120
following are situations where an ordinary majo1ity does not have constitutional power
to deal with the matter, and where, as a consequence, a minority member will be
entitled to enforce the right conferred by the articles:

• right to transfer shares (subject to any restrictions in the articles); 301

• right to have regulations in relation to forfeiture of shares complied with;302
• to uphold rights of pre-emption and other class rights; 303
• right to receive dividends in the form prescribed by the articles; 304 and
• 1ight to appoint directors as permitted by the articles. 305

Where members do not have power to authorise impugned conduct. In the above 10.121
situations, an ordinary majority of the members does not have power to autho1ise
the impugned conduct. Any attempt to side-step the provisions in the articles would

298 Sec para.9.143 in Chapter 9.

299 cf Re Dalny Estates Ltd [2018) I HKLRD 409, where, in interlocutory proceedings where a strike-out application
was refused, the Court of Appeal stated that this question merited fuller consideration at t1ial. See fu1ther note 15
above and para.9.144 in Chapter 9.
,oo On the unanimous consent doctrine, see paras.9.l 17ffin Chapter 9.
,o, Re Smith. Knight and Co (1868) LR Eq 238; Moffa/Iv Farquhar (1877-1878) LR 7 Ch D 591.
302 Johnson v Lyttle's Iron Agency (1878) 5 Ch D 687; Staples v Eastman Photographic Materials Co (I 896) 2

Ch 303.
303 Crumpton v Morrine Hall Pty Ltd [ 1965) NSWR 240, 82 WN (Pt I) (NSW) 456,460.

304 Wood v Odessa WaterworksCo ( 1889) 42 Ch D 636.

305 Tsang WaiL11nlfoyland v Chu King Fai (2009) 5 HKLRD I05.
462 MEMBERS' REMEDIES AND MINORITY PROTECTION

be tantamount to an attempt to alter the articles, which can only be done by special
resolution rather than by a simple majority.306
10.122 Other situations where rights have been enforced. The courts have also permitted
the following rights to be enforced by personal actions:
• right to receive proper notice of general meetings (even if the member does
not have a right to vote307); 308
• right to vote at a general meeting; 309
• right to have improper votes excluded; 310 and
• right to propose amendments to resolutions at general meetings. 311

10.123 Scope for application of irregularity principles in those other situations. In

those situations, an ordinary majority of the members does not have power to alter
the articles to exclude the rights concerned. However, an ordinary majority does
have the power to make the decisions at the meeting concerned by having a new
meeting convened with full compliance with the articles. Prima facie, there is
scope for application of the irregularity principle in these situations. Even in the
case of the right to vote (which is commonly regarded as a proprietary right), the
better view is that while a member who has been denied his right to vote is entitled
to a court declaration for his votes to be recorded, 312 the court should decline to
declare the relevant resolution of the meeting invalid if the vote would not have
affected the outcome of the general meeting's decision. 313 ln the above categories of
situations, the issue ought to turn on whether the view of the majority is clear. For
instance, where inadequate notice had been given of a meeting, it is right to declare
resolutions passed at the meeting to be invalid if the general meeting might have
decided differently if proper notice had been given. 314 On the other hand, if it is
clear that the majority would have decided in the same way, then the court would be
entitled to refrain from declaring the resolutions to be invalid. 315 This is illustrated
by Re Hong Kong Sailing Federation. 316

'"" See also C Baxter, "The Role of the Judge in Enforcing Shareholder Rights" (1983) 42 Cambridge law
Joumal 96. 111-112; and Burland v Earle (1902) AC 83, 93-94.
'°' Re Compaction SystemsPty Ltd (1976) 2 NSWLR 477.
''" Kaye v Croydon 1iw111vaysCo (1898) I Ch 358; Baillie v Orie11/a/Telepho11e & Electric Co Ltd (1915) l Ch 503;
and see also Alexa11der v Simpso11(1889) 43 Ch D 139; MacC011nel/ v E Prill & Co Ltd (1916) 2 Ch 57;
Musselwhite II CH Musselwltite & So11Ltd [ 1962) Ch 964; Banco,p lnvest111e111s Pty Ltd v Primac Holdings Ltd
(1984) 9 ACLR 263; Re Broadway Motor Holdings Pty Ltd (1986) 11 ACLR 495.
"'' Pender v L11slting1011 ( 1877) 6 Ch D 70. See also Tlte Second C-0nsolidatedTrust Ltd v Cey/011A111a/gamated Tea
and Rubber Estates Ltd (1943) 2 All ER 567 .
.11o Shaw v Tali Co11cessio11s Lid [ 19I3] I Ch 292.
'" Hendei:rn11v Bank of Austmlasia ( 1890) 45 Ch D 330.
"' Pender v Luslti11g1011 (1877) 6 Ch D 70.
"' cf MacDouga/1 v Gardi11er( 1875) I Ch D 13 (minority member denied the right to bring an action to complain
of a wrongful decision of the chaiq>erson to refuse to take a poll at a general meeting).
314
Sec Papaioam,oy v Greek Orthodox Community of Melbourne (1978) 3 ACLR 801; Re Compaction Sy$1(:msPty
Ltd (1976] 2 NSWLR 477.
3 ' 5 cf Browne v Lt, Tri11idad( 1887) 3 7 Ch O I.
316 (2010] I HKLRD 801; see para.10.014 above.
 MEMBERS' PERSONAL ACTIONS 463

Importance of view of majority being clear for irregularity principle to apply. As 10.124
long as the view of the majority is clear and there is no doubt as to whether the general
meeting would have decided otherwise if a meeting was held in accordance with all
the requirements in the articles, the irregularity principle can also be applied such that
a minority member would not be entitled to a remedy in the following situations:

• where directors have acted beyond the term stipulated in the articles; 317
• inadequate notice of a board meeting at which resolutions were passed to
convene a general meeting; 318 and
• lack of quorum at a general meeting. 319

5.3.3 Rights co,~ferred 011members otherwise tha11as members

Historically members could only enforce constitution in capacity as members. 10.125
Prior to the 2003 amendments to predecessor CO, s.23 (now Cap.622, s.86), the
courts had held that members could only enforce the constitution in their capacity as
members and not in some other capacity.320 Thus in Eley v Positive Life Assurance Co
ltd, 321 it was held that a member could not bring an action to enforce a provision in
the articles stipulating that the member was to act as the company's legal adviser.322
Whether position now changed. Despite the 2003 amendments, it may be that a 10.126
member still cannot enforce a provision conferring rights on members not in their
capacity as a member. It could be argued that Cap.622, s.86 must be interpreted in
the context of the previous s.75, which states that the articles are for the prescribing
of regulations for the company, and accordingly that the earlier cases such as Eley
continue to apply under the current statutory provisions since the restrictions were
intended to disallow the enforcement of rights in the articles that are "not part of the
general regulations of the company applicable alike to all shareholders." 323

5.4 Personal rights under the general law

5.4.1 Ge11eral
Other personal rights which can be enforced. Apart from situations involving 10.127
contraventions of the articles, the courts have recognised that, under the general law
(common law and equity), members have certain personal rights attached to their

m Mozeley v Alston ( 1847) I Ph 790, 41 ER 833; but c.f Re the Bodega Co Ltd [ 1904] I Ch 276; Channel Collieries
Tt·ust Ltd v Dover [1914) 2 Ch 506; Holmes v Keyes [1959) Ch 199.
318 Browne v La Trinidad (1887) 37 Ch D I.
319 LimJonatha11 vShe Uui Hung [2011) I HKLRD 305.

,,. Eley v Positive life Ass11ranceCo lid ( 1876) I Ex D 88; Re English and Colonial Produce Co [ 1906) 2 Ch 435;
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915) I Ch 881, 897; Beattie v E & F Beallie
Ltd [ 1938) Ch 708; Newmark Capital Co1p lid II Coffee Partners Ltd [2007) I HKLRD 718. But for an opposing
view, see R Gregory, "The Section 20 Contract" ( 1981) 44 Modern law Review 54-0.
"' (1876) I Ex D 88.
m See further Chapter 5.
323 Hicknum v Ke11/or Romney Marslt Sheepbreeders'Association (1915) I Ch 881,897; and see also Bisgood v

He11derso11~ Tra11s11aal
Estates Ltd [1908) I Ch 743, 759 (Eng CA).
464 MEMBERS' REMEDIES AND MINORITY PROTECTION

membership of a company which allow them to bring a personal action in relation to

infringements of those rights. These include the following rights:

• right to have decisions requiring a special resolution (either under the articles
or the statute) to be passed by a special resolution rather than simply an
ordinary resolution; 324
• right to restrain the company from engaging in conduct that contravenes the
Companies Ordinance 325 (this right is also set out in the Ordinance 326);
• cumulative rights to dividends for preference shares (unless provided
otherwise in the articles); 327
• right to receive dividends that have been declared; 328
• right to have a reasonable opportunity to be heard at general meetings; 329
• right to restrain improper dilutions of voting power by the board; 330 and
• right to restrain improper alterations to the articles. 33'

5.4.2 Frau(/ on the minority

10.128 Majority shareholders acting in fraud on minority. In addition to the above specific
examples of personal rights under the common law, it is arguable that generally a
minority member has a personal right to bring an action in any situation where the
majority shareholders have acted in fraud on the minority. Such a doctrine of fraud
on the minority is based on the general equitable concept of fraud on a power that
restricts the ability of majority members from using their majority power for purposes
beyond the scope of or not justified by the instruments creating the power.332 Although
members are not fiduciaries of each other and can primafacie vote in their personal

"' Yo11ngv Sowh African a11dAustralian J::xploratio11 a11dDevelopme111Syndicate [ I896) 2 Ch 268; Edwards v
Halliwell [ 1950) 2 All ER I064 (Eng CA).
"' Hope v fllt'I Financial Society ( 1876) 4 Ch D 327 (shareholder entitled to bring a personal action to restrain
the company from carrying out a resolution purportedly authorising the company to reduce its capital in
contravention of the statutory restrictions on reduction of capital); Ma Ching Yttk v Ma Chi11gNam (unrep.,
HCMP 3478/2013, (2015) HKEC 298), (21) (right to restrain a declaration ofa dividend that is unlawful); and
see also Bisgood v Henderson s Transvaal Esu,tes Ltd [ 1908) I Ch 743; Drown v Gaumonl-Britisl, Picture Co,p
lid (1937) 2All ER 609; Smith v Croft (No.2) (1988) Ch 114; Fu/loon v Radley [ 1992) 2 Qd R 290. If the remedy
sought is recovery of property or compensation to the company (rather than an injunction to restrain the conduct),
then the action by a member must be a derivative action: Russell v Wakefield Wme1111orks Co ( 1875) LR 20 Eq
474,479; Na11kivellv Benjamin (1892) 18 VLR 543; Hawkesbury Development Co Ltd v Landmark Finance Pty
Ltd ( I969) 92 WN (NSW) I99.
316 Cap.622, Pt.14 Div.3;Cap.32, s.350B.
"' Webb v Earle (I 875) LR 20 Eq 556.
m Bond v Barrow Haematite Steel Co lid [ 1902] I Ch 353; RaJifield v Hands (1960) Ch I.
m Wall v London and Northem Assets Corp (1898) 2 Ch 469. General meeting resolutions passed in violation of
this right may be invalidated by the court on the basis that the general meeting may have decided differently had
the member been given the opportunity to be heard.
"" Fraser v Whalley ()864) 2 Hem & M 10; Punt vSymons and Co Ltd(l903J 2 Ch 506; Howard Smith Ltd vAmpol
Petroleum Ltd (1974) AC 821 (l'C); Passport Special Opportunities Master Fund LP v eS11nHoldings Ltd (2011)
4 HKC 62. See also Residues 1i-eatme111 and Trading Co Ltd v Southem Resources Ltd (No.4) (1988) 14 ACLR
569, 574. The general meeting or board resolutions would need to be invalidated by the c.ourt in order to give
effect to the member's rights.
331 Allen v Gold Reefs of WestA/Hca Ltd (1900) I Cb 656.
332 Vatcher v Paull (1915) AC 372,378. See also Sun/ink 1111 '/ Holdings Ltd v Wong Shu Wing (2010) 5 HKLRD 653.
 MEMBERS' PERSONAL ACTIONS 465

interests at general meetings, the general equitable restraints on the exercise of power
apply to prevent majority members from securing some personal gain which does not
fairly arise out of the subjects dealt with by the power and is outside or inconsistent
with the contemplated objects of the power.333 The principle restraining the majority
from altering the articles otherwise than where the alteration is bona .fide for the
benefit of the company should be seen as an example of the wider doctrine of fraud
on the minority that restricts majority power of members generally. Another example
of the application of this doctrine is where the majority shareholders pass a resolution
authorising an issue of shares for the purpose of diluting the minority's holdings. 334
Shareholders not fiduciaries; but power of general meeting subject to equitable 10.129
considerations. In Hiew Fook Siong v Fung Tak Keung, 335 the Court of First Instance
affirmed the basic principles that shareholders are not fiduciaries and that there is no
general requirement for shareholders to vote bona_fide in the interests of the company,
but the court did accept the English authorities of Estmanco (Kilner House) Ltd v
Greater London Counci/ 336 and Clemens v Clemens Bras Ltc/331 as establishing that the
doctrine of fraud on the minority does require that the power of the general meeting
be subject to equitable considerations which make it unjust for the majority power
to be exercised in a particular way. On the facts of the case, the court held that the
doctrine of fraud on the minority did not extend to prevent the general meeting from
removing certain directors from office. The decision is arguably correct on the basis
that directors do not have an entrenched right to remain in office and deciding who are
to be the directors of the company is something well within the objects or scope of the
power of the general meeting.
Majority shareholder cannot vote in way that destroyed value of other shares 10.130
for no rational reason. In Sun link lnt 'l Holdings Ltd v Wong Shu Wing,338 Harris J
held that the equitable constraints on majority shareholder power means that a court
is entitled to intervene to prevent a shareholder voting in a way which will result in
the destruction of the economic value of other shareholders' shares for no rational
reason. In that case, the court granted an injunction restraining a major shareholder
from voting against a capital injection for a company in liquidation in circumstances
where that shareholder's opposition to the scheme would have caused the company
to be de-listed by the stock exchange and to lose the only credible opportunity for
rescuing the company.

m See Al/e11 v Gold Reefs of WesrAfrica Ltd [ 1900) I Ch 656, 671; Brirish £q11irab/eAsswrmce Co Ltd v Baily
[ 1906)AC 35, 42 per Lord Lindley (HL); £srma11co(Kilner House) Ltd v Grearer lo11do11Co1111cil[1982) I All
ER 437; Perer'.f American Delicacy Co Ltd v Heath (1939) 61 CLR 457, SI 1-512 per Dixon J (HC of Aust);
Ngurli Ltd v McCam, ( 1953) 90 CLR 425 (HC of Aust); and see also Hiew Fook Siong v F1111g [2006)
Tak Ke1111g
3 HKLRD 762, 767-771; S1111li11k Wi11g(20 IOJ 5 HKLRD 653. See further Peter
lnr 'I Holdings lrd v Wong S/111
G Xuereb, "The Limitation on the Exercise of Majority Power'' ( 1985) 6 Compa11ylawyer 199, 202-206; G R
Sullivan, "Restating the Scope of the Derivative Action" (1985) 44 Cambridge Law Journal 236, 253-254;
Stefan Lo, "The Continuing Role of Equity in Restraining Majority Shareholder Power" (2004) 16 Ausm,litm
Journal of Corporate Law 96, 96-105.
"" Clemens v Clemens Bros Ltt/[1976) 2 All ER 268.
"' (2006] 3 HKLRD 762, 767-771.
"' (1982) I All ER 437.
"' ( 1976] 2 All ER 268.
m (2010) 5 HKLRD 653.
466 MEMBERS'REMEDIESAND MINORITYPROTECTION

5.5 Personal rights under statute

10.131 Specific personal rights. Various provisions of the companies legislation give
members specific rights, for example:

• right to restrain the company from acting outside its objects or powers as
stipulated in the articles; 339
• right to inspect company registers 340 and to apply to the court for inspection
of company records; 341
• right to receive a copy of the company's financial statements; 342 and
• right to petition as a contributory for the winding up of the company. 343

10.132 Member entitled to enforce such statutory rights regardless of what majority decide.
With rights of the type listed above, a member would be entitled to seek enforcement
of those rights in the com1s regardless of what the majority members decide. However,
with other types of rights which, at first sight, appear to be conferred by the statute, there
might still be questions as to the scope of the ability of a member to bring an action to
enforce those rights. In situations where a general meeting has passed a resolution in
violation of statutory rights such as the right to demand a poll at a general meeting,344
it could be argued that the irregularity principle of Foss v Harbottle prevents a member
from invalidating the resolution if the ultimate outcome is that the majority would still
arrive at the same decision under a new meeting regularly conducted.345
10.133 General remedies to members. Apart from the above rights conferred on members
in relation to specific matters, the companies legislation also provides more general
remedies to members which can be sought by a personal action, including: (i) the
unfair prejudice remedy; 346 (ii) winding-up on the just and equitable grounds; 347 and
(iii) the statutory injunction. 348

6. UNFAIR PREJUDICE REMEDY

6.1 Introduction

10.134 When can unfair prejudice remedy be sought. Part 14 Div.2 (ss.723-727) of
Companies Ordinance (Cap.622) re-states the unfair prejudice remedy formerly

m Cap.622, s.116. See further Chapter 5.

~& Cap.622, ss.310, 350,631,642, and 649.

~' Cap.622, Pt.14 Div.5. See paras.I l.081ffin Chapter 11.

342 Cap.622,s.430.
>43 Cap.32, s.179.
w Cap.622, s.591.
'" cfMttcD011gallvGardi11er(l815) I ChD 13.
340 Cap.622, Pt.14 Div.2.
'" Cap.32, s.177(1)(1).
348 Cap.622,Pt.14 Div.3;Cap.32, s.3508.
 UNFAIR PREJUDICE REMEDY 467

contained in the predecessor CO, s.168A (repealed). Under Cap.622, s.724(1), a

member of a company may apply to the court for a remedy where:

(a) the company's affairs are conducted in a manner unfairly prejudicial to the
interests of the members generally or of one or more members; or
(b) an actual or proposed act or omission of the company (including one done
or made on behalf of the company) is or would be so prejudicial.

Legislative history. The original provision in predecessor CO was introduced 10.135

by the Companies (Amendment) Ordinance 1978, following recommendations
of the Companies Law Revision Committee 349 to adopt the English provision with
amendments as recommended by the Jenkins Committee. 350
Legislation: from restrictive oppressive conduct to broader unfair prejudice. 10.136
The provision in England was originally in section 210 of the Companies Act 1948
(UK), which was enacted pursuant to recommendations of the Cohen Committee. 351
That section allowed the court to grant relief against "oppressive" conduct of a
company's affairs. The concept of oppression was interpreted narrowly by the courts
to mean conduct that is burdensome, harsh and wrongful and involving a lack of
probity.352 This restrictive approach resulted in there being very few instances of
successful actions in England under the provision. The Jenkins Committee was critical
of this restrictive approach and recommended that the provision be amended to make it
clear that a remedy could be available not only when there was conduct amounting to a
lack of probity, but also situations where there is a visible departure from the standards
of fair dealing or a violation of the conditions of fair play on which shareholders who
entrust their money to a company are entitled to rely.353 The Hong Kong provision was
enacted to reflect this approach; and the UK provision was also amended to adopt the
concept of unfair prejudice in the 1980 Companies Act. 354
Section 724 in Cap.622 in substance same as predecessor CO, s.168A. The 10.137
provisions in Cap.622 are in substance largely the same as in s.168A of the predecessor
CO, but there are a few notable changes:

• clarification that the provision covers proposed conduct that is unfairly

prejudicial; 355 and
• clarification of the scope of the remedies that the court can order.356

349
Second Report, 1973, paras.5.95-5.1I0.
350
Report of the Company Law Committee, Cmnd 1749, 1962, paras.199-212.
35' Report of the Committee on Company Law Amendment, Cmnd 6659, 1945.
m See Sco//ish Co-Op Wholesale Society Ltd v Meyer [ 1959] AC 324, 342 (Viscount Simonds); Re H R Harmer Ltd
[ I 959] I WLR 62; Re Jermyn Street Turkish Baths Ltd [ I 971] I WLR I 042.
3s; Report of the Company Law Committee, Cmnd 1749, 1962, para.204, relying on the broader interprctalion of the
provision adopted by lord Cooper in Elder v Elder & WatsonLtd 1952 SC 49, 55.
"' Subsequently Companies Act 1985 s.459; and now Companies Act 2006 ss.994-996. Sec also the equivalent
provisions in Australian and New Zealand: Corporations Act 200 I (Aust) s.232 (fom,crly s.246AA of the
Corporations law, and before that, s.260); Companies Act 1993 (New Zealand) s.174.
'" See para.I0.I69 below.
"' See para.I0.202 below.
468 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.138 Cannot fetter statutory right to petition for unfair prejudice remedy. In Joseph
Ghossoub v Team Y&R Holdings Hong Kong Ltd, 357 the Court of Appeal upheld the
decision of the trial judge to refuse, on the grounds of public policy, to enforce an
exclusive jurisdiction clause in a contract that had the effect of fettering a member's
statutory right to present an unfair prejudice petition in Hong Kong. 358

6.2 Companies to which Pt.14 Div.2 applies

10.139 Remedy available for both Hong Kong companies and non-Hong Kong
companies. The unfair prejudice provisions apply to both Hong Kong companies and
non-Hong Kong companies. 359

6.3 Standing

6.3.1 Ge11eral
10.140 Registered and past members, personal representatives and Financial Secretary
can petition. The following persons have standing to petition under Cap.622, s.724:

• registered members 360 ( even if the member holds the shares on trust for
another); 361
• past members (in respect of conduct that was unfairly prejudicial at the time
the petitioner was a member); 362
• personal representatives, trustees and persons beneficially interested in the
shares of another who was, immediately before the latter's death, a member
of the company; 363
• the Financial Secretary (following investigation by an inspector or following the
exercise of powers to require production of docwnents under Cap.622, Pt.19).364

"' (unrep., CACY 6/2017, (2017) HKEC 1532).

'" However, the court may stay an unfair prejudice petition where the matter in dispute is covered by an arbitration
agreement between the parties: Fulham Football Club (1987) Ltd v Richards (2012) Ch 33.
"' See Cap.622, s.722(1) definition of "company". The provisions were extended to cover non-Hong Kong
companies by the Companies (Amendment) Ordinance 2004 following recommendations by the SCCLR: see
the Co,porate Govemo11ce Review: Consultation Poper on Proposals Mode i11Pltase I of the Review, July 200 I,
paras.16.20-16.27. As to the meaning of"non-Hong Kong company .., see Section 2.5.3 in Chapter 2 and see also
note l 12 above.
"° See Cap.622, ss.112 and 724( I). The right to petition as a member is not affected by the bankruptcy of the
member: Ng Yot Chiv Max Share Ltd (1997-98) I HKCFAR 155 (CFA). Where the person who seeks relief is
not on the register of members but is entitled to be so registered, the person may still be entitled to 1>etitionwhere
the circumstances are such that the company should be estopped from denying that the person is a member: See
Mak Sik Bun v Mok lei W1111 (w1rep., HCCW 624/2003, 28 Jui 2005) (CF!); Kitnosomy v Nagathero11[2000) SLR
598; Re flldepende11tQuarries Pty Ltd ( 1993) 12 ACSR 188; and cfJaber v Science and Information Tech110/ogy
Ltd [ 1992] BCLC 764.
"'' Ng Yat Chi v Max Share Ltd (1997) HKLRD 663 (CA), affirmed on appeal in Ng Yat CM v Max Slu1re Ltd
[1997-1998) I HKCFAR 155; Re Ocea11Palace Restaurtmt a11dNightclub Ltd (1999) 3 HKC 665 (CF!); and see
also Re A Co (No.003160 of 1986) [1986) BCLC 391.
;,(,2 Cap.622, ss.723(2), 723(3), and 724(3).
'" Cap.622, ss.723(1) and 724(1).
,... Cap.622, ss.724(2) and 879(3).
 UNFAIR PREJUDICE REMEDY 469

Equitable owners (including beneficial holders under the Central Clearing and
Settlement System) do not have standing to petition. 365
Securities and Futures Commission can seek order under s.214 of Cap.571. 10.141
The Securities and Futures Commission has a power to seek orders under section 214
of the Secuiities and Futures Ordinance (Cap.571) in relation to unfairly prejudicial
and other conduct within that section with respect to the affairs of listed corporations.

6.3.2 Petitioners who are not minority members

No requirement that petitioner must be minority member. There is no requirement 10.142
that the petitioner must be a minority member,366 and so for example a petitioner
holding 50 percent of the shares could complain of unfairly prejudicial conduct of the
other 50 percent holder that causes deadlock in the company. Also, majority members
can in principle bring a petition, 367 but not where they have the means to end the
impugned conduct by reason of their majority voting power.368

6.3.3 Conduct of the petitioner

No requirement that petitioner must have clean hands but may affect relief. 10.143
There is no independent or overriding requirement under the statutory provision that
a petitioner must come to the court with clean hands; however improper or wrongful
conduct of the petitioner could be material in other ways, such as rendering the conduct
on the other side, even if prejudicial, not unfair, or it may affect the relief which the
court thinks fit to grant. 369 Where the petitioner's action is based on a relationship
of trust and confidence, it seems that inequitable conduct of the petitioner which
has caused a breakdown of confidence may lead to relief being barred. 370 It is not
necessary that there is a direct causative link between the alleged misconduct and
the unfair prejudice in order to deprive a petitioner of relief to which he or she might
otherwise be entitled. 371 The misconduct of the petitioner must be weighed against
the conduct of the respondent's, and where the petitioner's misconduct is, relatively
speaking, not as serious as the respondent's and cannotjustify the respondent's actions,
the court may still afford a remedy to the petitioner.m
Collateral purpose; delay. Where the petitioner has brought the petition for a 10.144
collateral purpose rather than a genuine object of obtaining relief under the provision,

365 See Re A Co {No.007828of /985) (1986) 2 BCC 98; Niord Pry lrd v Adelaide PetroleumNL (1990) 8 ACLC
684; Ng lat Chiv Max Sltare Ltd (1997) HKLRD 663 (CA), affirmed on appeal in Ng Yat Chiv Max Share Ltd
[1997-98) I MKCFAR 155.
366
Re Associated Tool Industries Ltd (1963) 5 FLR 55; Re a Co (No.00/761 of /986) [ 1987] BCLC 141.
3~' Watsonv .fames [ 1999] NSWSC 600.
363 Re Baltic Real Eswte Ltd (No.2) [ l 993) BCLC 503, 507; Re Legal Costs Negotiators Ltd [ 1999) 2 BCLC l 71,

197. See forther Ian Ramsay, "Can a Majority Shareholder Bring an Oppression Action?" ( 1999) 17 Compa11y
tmd Securities Law Joumal 187.
3,;, Re China /111'I Business Developme11t(Ho11gKong) Ltd (unrcp., HCCW 603/2001, (2005) HK.EC 204) [56)

(CF!), citing Re Lo11do11

School of Elec1ro11icsLtd [ 1985) BCLC 273, 279.
,,. cf the cases on winding up on just and equitable grounds.
'" l-lt1rbourFront Ltd v Leung YttetKeung [2018) HKCFT 358, (2018) HKEC 334, [44).
371 E.g., see Re London School of l::tec1ro11ics
Ltd (1985) BCLC 273; Re Hing Ming Go11dola(HK) Co Ltd (unrep.,
HCMP 418/2008, HCA 84/2007, [20 IOJI HKLRD B2).
470 MEMBERS'REMEDIESAND MINORITYPROTECTION

then the petition may be struck out as being an abuse of process.373 Delay in bringing
the petition is not in itself a bar to relief; however it may be relevant to the court's
finding that the respondent's conduct is not unfair by reason of the petitioner having
accepted the position without protest, especially where the petitioner had accepted
benefits arising from the conduct. 374

6.4 Affairs of the company

10.145 "Affairs of the company" given wide interpretation. Section 724(l)(a) of Cap.622
refers to conduct relating to the affairs of the company concerned. The concept of
"affairs of the company" is to be given a wide interpretation, 375 and includes the
company's goodwill, its profits or losses, and its contracts and assets.376 It has been
said that the phrase covers not only business or trade matters of the company, but also
capital structure, dividend policy, voting rights, consideration of takeover offers, and
all matters which may come before the board for consideration; 377 and that relevant
conduct encompasses both external corporate activity and internal management, as
well as use of the company and powers under the articles unfairly to disadvantage a
member.378 The provision applies to conduct of any person who is taking part in the
conduct of the affairs of the company whether de facto or de jure. 379
10.146 Distinction between acts or conduct of company and acts or conduct of
directors or shareholders in personal or private capacity. A distinction is
however made between acts or conduct of the company on the one hand and
acts or conduct of directors or shareholders in a personal or private capacity on
°
the other hand. 38 For example, in Re Ka Ka Realty ltd, 381 concerning petitions
brought in relation to companies run by a family group, Kwan J held that acts
of the respondents to the petitions in evicting the petitioner from the family
home were not acts in their capacity as directors or otherwise on behalf of the
subject companies in each of the petitions and did not constitute conduct of the
affairs of any of the subject companies. Also, a mere breach of a pre-emption
agreement (giving existing shareholders rights of pre-emption when any particular
shareholder wishes to transfer his or her shares) would not in itself constitute the
conduct of the affairs of a company or an act or omission of the company since the

"' Re Bellador Silk Ltd [1965) I All ER 667, 672; ReAstec (BSR) pie [1998) 2 BCLC 556, 592.
"' Re o Co [ I986) BCLC 362, 366.
"' Securities and Futures Commissio11v Mandarin Reso11rcesCotp Ltd (unrep., HCCW 348/1996, [1999) HKEC
688) (CFI); Re Sun H1111g /111'1Ltd [2009] 2 HKLRD 418,424; Morgan v 45 Flet:f Avenue Pty Ltd (1986) 10
ACLR 692, 704; Re Citybranch Gro11pLtd; Gmss v Rackind [2005) I WLR 3505 (Eng CA). See also luck
Conti11e11ILtd v Cheng Chee TockTheodore [2013] 4 HKLRD 181, where the Court at Appeal affinncd that a
general meeting resolution amending the company's aniclcs constitutes affairs of the company.
"6 R v Board oJTrade; exp St Martin Preservi11gCo Ltd [ 1965) I QB 603. 612.
"' Re C11mberla11d Holdings Ltd (1976) J ACLR 361, 374-375. "Affairs of the company" is not restricted to
matters that actually come before the board but includes matters that arc capable of coming berorc the board for
consideration: Re Nec,th Rugby (No.2) [2009) 2 BCLC 427.
" 8 Raymond v Cook (1998) 29 ACSR 252, 263-264.
"' Re H R Harmer Ltd [ J959) I WLR 62.
"" Re a Co (No.001761 of 1986) (1987) BCLC 141, 148; Re U11isoftGroup Ltd (1994) I BCLC 609,622; Re Ka Ka
Realty Ltd (2004] I HKLRD 832.
'" [2004) I HKLRD 832.
 UNFAIR PREJUDICE REMEDY 471

act of purchasing of the shares (in breach of the agreement) is not an act effected
by the company or on its behalf.382
Corporate group: conduct must relate to company in respect of which petition is 10.147
presented. In situations of corporate groups or companies with common shareholders,
it is necessary that the conduct complained of relate to the affairs of the company
in respect of which the petition is presented. 383 The act or omission complained of
must be done or left undone by the subject company or on its behalf. 384 However the
courts must look at the business realities of the situation rather than taking a narrow
or legalistic view, and in some situations, the conduct of one company's affairs may
also be the conduct of another company's affairs. 385 Thus the affairs of a subsidiary
company can also be the affairs of its parent company because of the parent company's
interests in and control of the subsidiary.386 The conduct of the parent company could
also be the conduct of the subsidiary's where the parent company exercised general
control of the financial affairs of the subsidiary and its actions or inactions affected
the subsidiary company.387 Also, where the parent company acts to the detriment of the
subsidiary, the conduct of the board of the subsidiary in allowing that to happen would
be conduct of the affairs of the subsidiary.388

6.5 Conduct affecting interests of the members

Impugned conduct must affect interest of members. To come within the statutory 10.148
provision, the impugned conduct must affect the interests of the members generally
or of some part of the members (including the petitioner). Before amendments to
the section in 1994, the provision only referred to conduct affecting "some part of
the members" and one view was that conduct would not come within the provision
if the conduct affected all the members and not only some of them. 389 The provision
was amended both in Hong Kong and the UK to make it clear that conduct that was
unfairly prejudicial to all the members could also be caught. 390

6.5.1 Meani11gof "interests"

Interests means financial and other interests. The "interests" of members include 10.149
their financial interests in the real value of their shares 391 and in their entitlement to

"' Graham v Eve1y (2014) BCC 376 (Eng CA).

"' Rea Co (No.00/761 of /986) [1987) BCLC 141, 143; Re Ka Ka Realty lld[2004) I HKLRD 832.
"' Re Ka Ka Realty Ltd [2004) I HKLRD 832, 842.
"' Nie/to/as v Sowulcraji Electronics Ltd [ 1993) BCLC 360 (Eng CA); Re Citybranch Group Ltd, Gro.~fv Rackind
(2004) 4 All ER 735 (Eng CA).
386 Re Sun Hu11g/111'/ Ltd [2009) 2 HKLRD 418; Delaney'.~lntematio11al lnco1porated v Celtic Charm Ltd [2018)
HKCFI 521, (2018) HKEC 451; R v Board of Trade; exp St Martin Preserving Co lid [ 1965) I QB 603,
612; Re Citybrtmch Group Ltd, Gross v Racki11d[2005) 1 WLR 3505, 3511 (Eng CA); Re No1w1bronPty Ltd
(No 2) (1986) 11 ACLR 279; Re Dernacourt Investments Pty Ltd, Baker Davis Supply Co Pty Ltd v Dernacourt
lnvestmentS Pty Ltd ( 1990) 2 ACSR 553.
381 Nicholas v Soundcraft Eleclr(mics Ltd [1993) BCLC 360 (Eng CA).
388 Scouish Co-Op Wholesale Society Ltd v Meyer [ 1959) AC 324 (HL).
389 Re a Co (No.003 70 of 1987). exp Glossop [ 1988) I WLR I 068 (Harman J).
390 Companies (Amendment) (No.2) Ordinance 1994.
391
Re a Co (No.00314 of 1989). exp Estate Acquisilion and Development Ltd (1991) BCLC 154, 161-162;
Sec11rilies and Futures Commission v Mandarin Resources Co1p Ltd (unrep., HCCW 348/1996, [ I 999)
HK.EC 688) (CF!).
472 MEMBERS' REMEDIES AND MINORITY PROTECTION

a share in the profits while the company continues to carry on business and a share
in the distribution of the surplus assets when the company is wound up.392 The use of
the word "interests" in the provision means that the section is not limited to conduct
affecting the strict legal rights of members, but extends to wider interests of a member,
with the court entitled to take into account equitable considerations. 393 A member may
have many interests in the company of which he is a shareholder,394 and although
usually the interest will be financial, it appears that it is not necessarily limited to
that.39s

6.5.2 Member qua member

10.150 Must affect interest of members in capacity as members. The courts have interpreted
the statutory provision as requiring that the conduct affect the interests of members in
their capacity as members. 396 Thus primafacie a member would not be able to rely on
Cap.622, s.774 in relation to conduct affecting the member's interests as employee397 or
director,398 as creditor,399 as landlord or tenant400 or licensee of premises,401 as a service
provider4°2 or consultant,403 or otherwise as a person doing business or having dealings
with the company,404 or in relation to the member's personal affairs apart from the
company.405 However the courts have been prepared to take a broad view406 on this issue,
taking into account equitable considerations. Thus, for example, where an investor in
a joint venture company has, in pursuance of the joint venture agreement, invested not
only in subscribing for shares but also in advancing Joan capital, the investor ought not
be precluded from the grant of relief on the ground that the relief would benefit the

m Y,111.lipA1110Services lrd v Y,,en Sau Fai [ I990] I HKC 20, 22 (CA).

3' 3 Re Ringtower floldings pie (1989) 5 BCC 82; Re Forecast Nominee lid [1996] 4 HKC 12; Re Ocean Palace
Restaurtmt and Nightclub Ltd [1999] 3 HKC 665, 670; lam Siu Leung v Koover Woollen Knilling Facrory Ltd
(unrcp., HCMP 6321/1998, [1999] HKEC 1222) (CF!).
' 9' Securiries and Furures Commission v Mandt,rin Resourees Corp Lrd (unrcp., Cfl, HCCW 34811996, [1999]
HKEC 688) (CF!).
' 9' Jaber v Science a11dl11for111atio111echo11ology Lrd [ 1992) BCLC 764.
' 90 Yue11SauFaivYi111JipA11toServicesLtd[I990) I HKC 15,18,ttffinnedonappeal Yi111JipA1110ServicesvYrie11
Sau Fai (1990) I HKC 20, 22 (CA); Re a Co (No.004475) of 1982) (1983) Ch 178. 189. The position in Hong
Kong and England can be contrasted with Australia where s.232 of the Corpor.itionsAct 2001 (Aust) applies to
conduct affecting ".i member or members whether in that capacity or in any other capacity".
m Re Blue Arrow pie ( 1987) BCLC 585; Larvi11v Phoenix Office Supplies (2003) l BCLC 76, [27).
398 Re a Co (No.00314 of /989), exp EstaleAcquisilion and Developme111Ltd (1991) BCLC 154, (1990) BCC 221;

Y,.1e11Sau Fai II Y,.m.lip Awo Services lid (1990) I HKC 15, 18, affirmed on appeal Yim .lip Auto Services v Y,1e11
Sau Fai(l990] I HKC20, 22 (CA).
"' Y,,e11Sau Fai v Y,.mJip Auto Services Lrd [ 1990] I HKC 15, 18, affirmed on appeal Yim .lip Auto Services v Y,1e11
Sau Fai(l990) I HKC20, 22 (CA); Rea Co {No.003843 of 1986) [1987) BCLC 562, 572-573.
400
Re Unisoji Gmup lid (No.3) [ 1994] I BCLC 609, 626 .
.,., Re Ka Ka Realty lrd [2004] I HKLRD 832, 853-854.
«ll Re U11isofiGmup lid (No.3) [1994] I BCLC 609,626.
<-OJ Re a Co (No.003843 of 1986) [ 1987] BCLC 562, 572-573.
"" Yl1e11 Sau Fai v Y,,n .lip Awo Services lid [ 1990] I HKC 15, 18, affirmed on appeal Y,111
.lip Auro Services v l'tte11
Sau Fai(l990] 1 HKC20, 22 (CA).
<-05 Y,.,enSau Fai v Y,.,nJip Auto Services lid [1990] I HKC 15, 18, affirmed on appeal Yun.lip Auto Services v Yi1e11

Sau Fai(l990] 1 HKC20, 22 (CA).

~ R & H £/ecrric Ltd v Haden Bill Electrical LUI,Re Haden Bill £/ectrical Ltd [ 1995] 2 BCLC 280, 293; Re t1 Co
(No.003843 of 1986) [1987] BCLC 562, 572. Sec also Re a Co (No.00709 of 1992), 0 'Neill v Phillips [1999] 1
WLR 1092, 1105, where Lord Hoffmann stated: "the re.quirement that prejudice must be suffered as a member
should not be too narrowly or technically construed."
 UNFAIR PREJUDICE REMEDY 473

investor only as a loan creditor and not as member.407 Also, where persons contribute
capital to a small private company and become members on an understanding that
they would be entitled to participate in management, removal of the member from the
board and exclusion from management can be said to affect the person's interests in the
capacity as member.408The equitable considerations relevant to the statutory provision in
this respect are based upon the terms upon which the petitioner became or continued as
a member of the company, and so the prejudice arising from a departure from the tem1s,
agreement, or understanding on which he or she became associated as a member will be
regarded as being suffered in the capacity of a member.409

6.5.3 Conduct Affecting the petitioner's own interests

Petitioner must have been affected by conduct. The references in Cap.622, s.724 10.151
to the conduct being unfairly prejudicial to members including the member who
presented the petition means that it is necessary for the conduct to affect the interests
of the petitioner him or herself, and it would not be sufficient if the conduct only
prejudices members other than the petitioner.410
Where shares held on trust. Where the petitioner holds the shares on trust for 10.152
another, it appears that the petitioner would have an interest as member in protecting
the value of the shares for the beneficiary in accordance with its duties as a trustee, 411
and thus conduct that prejudices the shareholding would be conduct that prejudices the
interests of the petitioner. However, the petitioner might not be entitled to a remedy if
the petitioner held the shares on trust for the respondent against whom the complaints
are made, since in this situation, the respondent beneficiary's interests are not harmed
and hence there would be no basis for saying that the conduct operated prejudicially
against the petitioner.412
Where petitioner personal representative scope of remedy may be limited. Where 10.153
the petitioner is a personal representative, trustee or person beneficially interested
in the shares following the member's death, the scope of the remedy may be limited
compared with the situation that would have arisen had the deceased member brought a
petition before his or her death. This is because there will be certain conduct that might
have been prejudicial to the deceased member's interests but would not be prejudicial
to the petitioner's interests - such as an expectation on the part of the deceased
member to participate in management that equity would protect. In this situation, the
personal expectation cannot be regarded as being transmitted to the petitioner.413

,o, Gam/estaden Fastigheler AB v Baltic Part11ersLtd (2008) I BCLC 468 (PC).

••• l'rle11
Sau Fai v l'tm Jip Awo Services lid [ 1990] I HKC 15, I 8, affirmed on appeal )'tm .lip Auto Services v Yi,en
Sau Fai [ I 990] I HKC 20, 22 (CA); Re a Co (No.00709 qf /992), O'Neill v Phillips (1999] I WLR 1092, 1105.
409 ReaCo(No00709of/992), O'NeillvPhillips[l999] I WLR 1092, 1105.
"" The Hong Kong and English provisions can be contrasted with the Australian provisions which allow a member
to seek orders even if the conduct only affects other members: Coq)Orations Act 200 I (Aust), s.234(a)(ii).
"' cf Ng YatChiv Mcu: Share Ltd (I 997-98) I HKCFAR 155, 163.
"' Re Supe,yie/d Holdings Ltd (2000] 2 HKC 90; Re Chor Lau Heung ResUwrtmt Co Ltd (unrep., HCCW 63/1999,
(2000] HKEC 342) (CFT). However the legal and beneficial interests of the petitioner need not be coterminous,
and so if a petitioner is a nominee shareholder who has beneficial interests in the company through other entities,
the petilioner would s1ill be entitled to a remedy so long as that other beneficial interest is an interest qua member
of the company: Re Ocean Palace Resta11ra111 a11dNightclub Ltd [ 1999) 3 HKC 665, 670.
"' Murray's Judicial Factor v Murray a11dSons (1993) BCLC 1437.
474 MEMBERS' REMEDIES AND MINORITY PROTECTION

6.6 Unfairly prejudicial

10.154 Requires unfairness and prejudice. A petitioner can obtain a remedy under Cap.622,
ss.724-725 only if the conduct is "unfairly prejudicial". The elements of both
unfairness and prejudice must be established. 414

6.6.1 Prejudice
10.155 Prejudice includes damage to financial or other interests. "Prejudice" was
described in Re Taiwa land Investment Co ltd 415 as meaning "injury, detriment, or
damage". Prejudice includes both damage to the financial interests of the member
such as where the value of the shareholding is diminished or jeopardised, 416 as well
as damage to other interests of members in their capacity as members, such as
infringement of their rights under the Ordinance or constitution or damage to other
interests which would be protected pursuant to equitable considerations. 417 Members
can be prejudiced by a misapplication of the company's assets for the benefit of the
controller of the company even though there is only a limited impact on the value
of the shares. 418 However not all breaches of duties by directors necessarily have a
prejudicial effect on the members. 419 There might not be any prejudice if the conduct
has not altered the company's position nor the position of the members. 420 Trivial
breaches of legal duties might not give rise to prejudice, 421 however certain legal
rights conferred by the Ordinance or the articles may well be regarded as important
by the courts. 422

6.6.2 U11faimess
I 0.156 Unfair means "not fair or equitable; unjust". ln Re Taiwa land Investment Co ltd, 423
Fuad J noted the ordinary meaning of the word "unfair" as being "not fair or equitable;
unjust". The courts have observed that the legislature had adopted the concept of
"fairness" to replace "oppression" to free the court from technical considerations of
legal right and to confer a wide power to do what is just and equitable.424 ln that regard,
the courts have further emphasised that the provision should be applied flexibly to
meet the circumstances of the case425 and be interpreted in a liberal spirit to advance
the remedy since it had been designed to suppress an acknowledged mischief. 426

414
Re Taiwa fond Inves1me111 Co Lid [I 981) HKLR 297.
415
(1981) HKLR 297.
416 Nicholas vSowulcrajl Lld(l993) BCLC360 (Eng CA).
411
See Re a Co (No 00709 of /992), O'Neill v Phillips [1999) I WLR 1092 (HL), approved in Wo11gMan Yi11v
Ricacorp Properties Lid (2003) 6 HKCFAR265 (CFA).
"8 Re Elgindaw Lld[l991) BCLC 959.
.,. Re Blackwood Hodgepie [ I 997) 2 BCLC 650.
,,o Rea Co(No.00/761 of/986) [1987] BCLC 141.
11
' Wo11g Ma11Yi11v Law lam lfoi (unrcp., HCA 6260/1997 and HCMP 1571/2000, [200 I) HKEC 740)(31) (CF().
"' WongMa11Yi11v Ricaco,p Properties Lid (2003) 6 HKCFAR265, 280.
413 [1981) HKLR 297.
' 2' O'Neill v Phillips (1999] I WLR 1092, 1097-1098; Re Texgar Llt/[2002) I HKLRD 687 at 693; WongMan Yin
v Ricacorp PropertiesLtd (2003) 6 HKCFAR265, 87-88 (CFA).
"' Re TexgarLid (2002) I HKLRD 687,693.
''" Re Taiwa fond JiivestmelllCo lid [1981) HKLR 297.
 UNFAIRPREJUDICEREMEDY 475

Court's discretion wide but fairness must be applied judicially in accordance with 10.157
rational principles. However, at the same time the courts have stated that although
their discretion in the unfair prejudice provision is wide, the court cannot do whatever
the individual judge happens to think fair; but rather, the court must apply the concept
of fairness judicially and in accordance with rational principles. 427 These principles on
the notion of fairness are set out authoritatively by Lord Hoffmann in the judgment
of the House of Lords in O'Neill v Phillips.428 Lord Hoffmann emphasised that the
concept of fairness for the purpose of the unfair prejudice remedy must be understood
in its commercial context. This context has two features: ( 1) that a company involves
an association of persons formed for an economic purpose, with the terms of the
association contained in the constitution (and separate shareholders' contracts, if
any); and (2) that company law has developed from the law of partnership, which was
treated by equity as a contract of good faith. Lord Hoffmann stated:

"The first of these two features leads to the conclusion that a member of a
company will not ordinarily be entitled to complain of unfairness unless there has
been some breach of the terms on which he agreed that the affairs of the company
should be conducted. But the second leads to the conclusion that there will be
cases in which equitable considerations make it unfair for those conducting the
affairs of the company to rely upon their strict legal powers. Thus unfairness may
consist in a breach of the rules or in using the rules in a manner which equity
would regard as contrary to good faith."429

Unfair prejudice may arise where legal rights infringed or where equity would 10.158
intervene. Therefore unfair prejudice may arise where the conduct infiinges on legal
rights of members such as in a breach of the Ordinance or the constitution of the
company, but it may also arise in situations where "equity [would intervene] to give
effect to what it considered to have been the true intentions of the pa11iesby preventing
or restraining the exercise of legal rights". 430 The above principles have been accepted
to be applicable in Hong Kong by the Court of Final Appeal. 431
Whether unfair prejudice limited to infringement of legal right or breach of 10.159
understanding/agreement creating inequity. One view of the decision in O'Neill
v Phillips is that the House of Lords narrowed the concept of unfair prejudice to
situations involving either a breach of the statute or constitution or some other
legal duty, or a breach of some actual understanding or agreement which makes
it inequitable to confine the petitioner to his or her strict legal rights. 432 This
interpretation is perhaps based on Lord Hoffmann's reference to the principles in

"' Wong Ma11Yin v Ricaco,p Properties Lid (2003) 6 HKCFAR 265,279.

428 Re a Co (No.00709 of /992), 0 'Neill v Phillips [ 1999] I WLR 1092.
429 [ 1999] I WLR I092, I098-1099.
4
J-O (1999] I WLR 1092, 1101.
431
Wong Man Yin v Ricacorp Properties Ltd (2003) 6 HKCFAR 265; Kam le1111gSui Kwan v Kam Kwan Lai (2015)
18 HKCFAR 501, sub nom Re Yzmg Kee Holdings Ltd [2015] 5 HKC 644, (43].
"' See, e.g., UK Company Law Review Steering Group, Modem Company law for a Competitive Economy:
Completing the Stn,cture, Nov 2000, 96-97; and sec also Robert Goddard "Closing the Categories of Unfair
Prejudice?" (1999) 20 Company Lawyer 333; R Hollington, Shareholders 'Rights (4th edn, Sweet and Maxwell
2004) 157.
476 MEMBERS'REMEDIESAND MINORITYPROTECTION

Ebrahimi v Westbourne Galleries ltd, 433 dealing with legitimate expectations based
on an understanding between the parties in "quasi-partnership" situations which
are relevant both to cases of "just and equitable" winding up and unfair prejudice.
Moreover some of the statements in the judgment appear to support a narrow
interpretation, including where Lord Hoffmann expresses agreement with the view
in Re Astec (BSR) p/~ 34 that "in order to give rise to an equitable constraint based
on 'legitimate expectation' what is required is a personal relationship or personal
dealings of some kind between the party seeking to exercise the legal right and the
party seeking to restrain such exercise, such as will affect the conscience of the
former". 435 Furthermore, Lord Hoffmann went on to say that:

" ... one useful cross-check in a case like this is to ask whether the exercise of the
power in question would be contrary to what the parties, by words or conduct,
have actually agreed. Would it conflict with the promises which they appear to
have exchanged?" 436

10.160 Better view is that unfair prejudice not so limited. However, other parts of
the judgment in O'Neill v Phillips indicate that the decision has not confined the
situations of unfair prejudice in the manner suggested above. This is arguably the
correct interpretation. 437 Lord Hoffmann himself stated in the decision that:

"I do not suggest that exercising rights in breach of some promise or undertaking
is the only form of conduct which will be regarded as unfair for the purposes of
[the statutory remedy for unfair prejudice]". 438

Thus the situations involving a breach of an actual understanding or agreement that

equity would enforce because of the nature of the personal relationship between
the parties (as in quasi-partnership cases) were discussed by Lord Hoffmann as
simply one example, albeit an important example, of situations where equity would
intervene. Lord Hoffmann accepted that other circumstances of unfairness based
upon established equitable principles can also come within the statutory provision.439
This includes situations where equity would restrain the exercise of powers conferred
by the articles where it is outside what can fairly be regarded as having been in the

433 [1973) AC 360.

4
"[1998) 2 BCLC 556,588.
435
[1999) I WLR 1092, 1101.
436
(1999) I WLR 1092, 1101.
431
See also A J Boyle, "Unfair Prejudice' in the House of Lords" (2000) 21 Company Lt11~yer253; Stefan Lo,
"The Continuing Role of Equity in Restraining Majority Shareholder Power" (2004) 16 Australian .Journal of
Corporate law 96, 117-118. The House of Lords did not overrule any earlier decisions, and thus decisions
such as Re BSB Holdings (No.2) [ 1996] I BCLC 155 remain as good law (where Arden .I had held that Lord
Holfmann's earlier decision in Re Saul D Harrison and Sons pie (1995) l BCLC 14 did not confine the unfair
prejudice remedy to siruarions of breach of fiduciary duty, breaches of the statute, breaches of articles or other
relevant agreements; but rather the categories of unfairly prejudicial conduct were not closed and the standards
of corporate behaviour recognised through the statutory provision were, in appropriate circumstances, nor limited
to those standards imposed by enactment or existing case law).
'' 8 (1999) I WLR 1092, 1101.
439 (1999) I WLR 1092, 1102.
 UNFAIRPREJUDICEREMEDY 477

contemplation of the parties when they became members of the company.440 Thus for
instance, as noted in the judgment, where some event puts an end to the basis upon
which the parties entered into association with each other, it may be unfair for one
shareholder to insist upon the continuance of the association because the majority
is using its legal powers to maintain the association in circumstances to which the
minority can reasonably say it did not agree. 441 On this approach then, the categories of
unfair prejudice are not closed 442 and can develop through the elucidation of equitable
principles and considerations, including equitable constraints requiring powers to be
exercised in good faith and not beyond what can fairly be regarded as having been in
the contemplation of the parties when they became members of the company.

6.6.3 Legitimate expectations

Legitimate expectation properly understood. Situations where equitable considerations 10.161
would make it unfair for parties to exercise their legal rights in a patticular way have
been described as giving rise to legitimate expectations of parties which, if denied,
could be unfairly prejudicial conduct.443 For example, it has been said that there could
be legitimate expectations of participation in management such that exclusion from
management could amount to unfair prejudice.444 However, Lord Hoffmann in O'Neill
v Phillips445 observed that it might have been a mistake for him and others to have
introduced the term "legitimate expectations" in the context of unfair prejudice petitions,
as there is a danger of the concept being improperly expanded to cover situations not
o,iginally intended by the use of the term. Lord Hoffmann emphasised that the concept
of legitimate expectations in the present context only arises:

" ... when equitable principles of the kind [set out in the judgment] would make
it unfair for a party to exercise rights under the articles. It is a consequence,
not a cause, of the equitable restraint. The concept of a legitimate expectation
should not be allowed to lead a life of its own, capable of giving rise to equitable
restraints in circumstances to which the traditional equitable principles have no
appl ication."446

6.6.4 Universal and personal expectations

Distinction between universal and personal expectations. As long as the concept of 10.162
"legitimate expectations" is confined within the scope discussed in O'Neill v Phillips,

40
' (1999] I WLR 1092, I 1~1101.
"' [ 1999] I WLR 1092, 110 I. Lord Hoffmann cited the case of Virdi v Abbey leisure Ltd [ 1990] BCLC 342 as an
example. In that case, the understanding between the parties when they acquired the shares in the company was
that the only project that would be undertaken by the company would be the acquisition and management of a
particular nightclub.
"' Re BSB Holdi11gs(No.2) [ 1996] I BCLC 155.
" 3 See, e.g., lam Siu le1111gv Koover Woollen K11i11i11gFac10,y Ltd (unrep., HCMP 6321/1998, [I 999] HKEC 1222)
(CFT), citing Re Ri11g1owerI-foldings pie ( 1989) 5 BCC 82, 90.
'"" Re a Co (No.00477 of 1986) [ 1986] BCLC 376.
"' Rea Co (No.00709of/992), O"NeillvPhillips[l999] I WLR 1092.
"' [ 1999] I WLR 1092, 1102. Sec further Bryan Clark, ''Unfairly Prejudicial Conduce: A Pathway through the Maze"
(2001) 22 Company Lawyer 170; Kevin McGuinncss, "Protecting Shareholder Expectations: A Comparison of
UK and Canadian Approaches to Conduct Unfairly Prejudicial to Shareholders: Patt 2" (2000) 11 International
Company and Commercial law Review 217.
478 MEMBERS' REMEDIES AND MINORITY PROTECTION

above, the tenn may be useful as a shorthand way of referring to circumstances

where protections under ss.724-725 of Cap.622 would be afforded to members. 447
Jn discussion of the concept of legitimate expectations for the purposes of the unfair
prejudice remedy, a distinction has sometimes been made distinguishing between
universal expectations and personal expectations. 448
10.163 Universal expectations held by members of all companies and protected by
Cap.622, ss.724-725. The notion of universal expectations can be used to refer to
the type of expectations that can generally be legitimately held by members of all
companies and which would be protected under ss.724-725. This category would
cover situations involving breaches of provisions of the Ordinance, breaches of legal
or equitable duties under the general law (such as breaches of fiduciary duties449) and
expectations of members to participate in the profits of the company. Such expectations
arise and come within the ambit of the statutory remedy as delineated in O'Neill v
Phillips either on the basis that they form part of the (implied) terms of association
upon which persons become members or that they involve a use of strict legal rights
in a manner which equity would regard as contrary to good faith. Situations involving
universal expectations do not depend on the company being a quasi-partnership or as
involving personal relationships of trust and confidence. 450
10.164 Personal expectations due to personal relationship, only protected by Cap.622,
ss.724-725 where special circumstances. Personal expectations, on the other
hand, arise pursuant to some personal relationship or personal dealings between the
parties involving mutual trust and confidence. Such expectations are protected under
ss.724-725 only where there are special circumstances, such as in quasi-partnerships,
justifying intervention pursuant to established equitable principles.

6.6.5 Objective test; lack of probity not necessary

10.165 Objective text: reasonable bystander. Whether the conduct is unfairly prejudicial is
assessed objectively, with the test expressed as being whether a reasonable bystander,
observing the consequences of the conduct, would regard it as having unfairly
prejudiced the petitioner's interests.451 In Australia, it has been said that the objective
test "assumes ... that reasonable directors weigh the furthering of the corporate object
against the disadvantage, disability or burden which their decision will impose, and
address their minds to the question whether a proposed decision is unfair."452
10.166 Not necessary to show conscious knowledge that conduct unfairly prejudicial.
It is accordingly not necessary for the petitioner to show that the persons engaging
in the impugned conduct acted with a conscious knowledge that this was unfairly
prejudicial to the petitioner or that they were acting in bad faith.453 That is not to say

"' See, e.g., Fex1110

P1ylid v Bos11jakHoldings Ply Ltd (2001) 37 ACSR 672, 745.
" 8Sec E J Boros, Mi11ori1yShareholders· Remedies (Clarendon Press 1995) 137-141.
"~ Sec Re Asi(1 Television Ltd [2015) I HKLRD607, [53).
"" Sec Re a Co (No.003/4 of 1989),exp Estate Acq11isi1io11and Development Ltd [1991) BCLC 154.
'" Re JE CMe a,ul Son Ltd [1992) BCLC 213, 225; Re Tc,i Lop fnves1111e11t
Co Ltd [1999) I HKLRO 384,397.
"' Wi:,ydev New South Wales Rugby league Ltd (1985) 61 ALR 225,234. Sec also Wilmar Sugar Australia Ltd v
Mackay Sugar lid (2017) 345 ALR 174, (13).
'" McGuirmess v Bremner pie [I 988) BCLC 673, 679; Re JE Cade and Son Ltd (I 992) BCLC 213, 225.
 UNFAIR PREJUDICE REMEDY 479

that the subjective state of mind of the persons in control of the company is irrelevant
though, as evidence of bad faith or improper motives can be a relevant consideration
in determining whether the conduct is unfairly prejudicia\. 454

6.6.6 Isolated Acts

Covers series of acts and probably isolated act. Under the fom1er oppression remedy 10.167
in the UK, it had been held that isolated acts did not come within the statutory provision
but that there must be a course of wrongful or improper conduct to amount to conduct
which was oppressive to members. 455The unfair prejudice provision in predecessor CO,
s.168A(2) (repealed) made it clear that a remedy can be available whether or not the
unfairly prejudicial conduct "consists of an isolated act or a series of acts". That wording
is not used in the current Cap.622, ss.724-725, but there does not appear to have been
any legislative intention to alter the law in this respect. Section 724( 1)(b) refers to "an
actual ... act or omission of the company (including one done or made on behalf of
the company)" 456 and would seem to achieve the same effect as the pre-existing law.
However, there may be a question as to whether the concept of an act or omission "of
the company" or "on behalf of the company" is narrower than the concept of an act or
omission "in the company's affairs". Even if there is a difference, the better view is that
s.724(l)(a) is wide enough to cover conduct that consists of an isolated act.

6.6.7 Conduct occurring in the past

Can complain of conduct which occurred in past and was now over. Another 10.168
restriction under the previous oppression provision in the UK was that a remedy would
not be available where the conduct occurred in the past and was over.457 This restriction
does not apply under the unfair prejudice provisions, with s.724(J)(a) referring to
situations both where the affairs of the company "are being" or "have been conducted" in
an unfairly prejudicial manner. Thus conduct which is now over can still come within the
statutory provision, including situations where the unfairness has already been remedied
by the time of the petition. 458 However it appears that the question as to whether the
conduct has already been remedied or is continuing will be relevant to the relief that the
court might grant,459 and if the past conduct has been remedied in a way that it could not
recur, the court may well decline to exercise its discretion to grant any remedy.460

6.6.8 Threatened or proposed conduct

Remedy available for threatened conduct. Under the previous oppression remedies 10.169
overseas, there was some authority to suggest that threatened or proposed conduct

"' Commission v Mandarin Resources Cotp Lid (unrep., HCCW 348/1996, [I 999] HKEC
Sec11ri1iesand F11111res
688) (CF!); Re DR Chemicals Lid ( 1989) 5 BCC 39.
45s Re H R Harmer Ltd [1959] I WLR 62; Re.Jermy11Stree1Turkish Bwhs Lld[l971] 3 All ER 184.

'"' Similar wording is used in Companies Act 2006 (UK) s.994( I)(b)(previously s.459 of Companies Act 1985); and
Corporations Act 200 I (Aust) s.232.
45' Re Five Minute Car Wash Service Ltd [ 1966] I All ER 242; Re Jermyn Street Turkish Ba1hs Lid [ I971] I WLR

1042.
" 8 Securilies tmd Fulures Commission v Mt111dari11Resources Corp Ltd (unrcp., HCCW 348/1996, [1999] HKEC
688) (CF]); citing Re Kenyon Swansea Ltd [1987] BCLC 514.
" 9 See Re Spargos Mi11i11g NL (1990) 3 ACSR I; and see also Re Norvabron Pty Ltd (1987) 5 ACLC 18.
"'" Re Legal Costs Nego1iators Ltd (1999) BCC 547.
480 MEMBERS' REMEDIES AND MINORITY PROTECTION

would not come within the statutory provision, 461 although there was also case law
which supported the view that there was no such restriction in the provisions. 462 The
predecessor CO, s.168A did not expressly deal with this question, but the better view
is that threatened conduct could be caught, at least where a decision has been made
to carry out the conduct and where an intention has been expressed to proceed with
carrying out the act. In line with the current provisions in the UK and Australia,
Cap.622, s.724(l)(b) now makes it clear that a "proposed act or omission of the
company (including one done or made on behalf of the company)" is covered.463

6.6.9 Series of mitzor acts

10.170 Individual acts, not on their own unfairly prejudicial, can cumulatively be so.
Individual acts or omissions which on their own might not be unfairly prejudicial,
could, when taken together, cumulatively amount to conduct which is unfairly
prejudicial. 464

6.6.10 Conduct that applies to llll members

10.171 Can be conduct that applies to all members. In Scottish Co-operative Wholesale
Society Ltd v Meyer, 465 it was held that conduct can potentially come within the
statutory provision even though the conduct applies to all the members and even
though all members have suffered the same prejudice as a result of the conduct. Lord
Denning stated: "Even though the oppressor by his oppression brings down the whole
edifice - destroying the value of his shares with those of everyone else - the injured
shareholders have, I think, a remedy under [the statutory provision].''466 This view was
confirmed in Hong Kong by 1994 amendments to predecessor CO, s. l 68A (see also
Cap.622, s.724(l)(a)), inserting the phrase:

" ... unfairly prejudicial to the interest of the members generally" (emphasis
added). 467

Although there may be some situations where the conduct would not be regarded
as unfair by reason that it applies to all members uniformly, equal treatment can
also be unfair if the actual impact on the members differs by reason of the different
circumstances of the parties. 468

"'' Re Broadcasting Station 2GB Pty Ltd [ 1964] NSWR 1648.

"'' Re Anti-Corrosive Treatments Ltd ( 1980) CLC 40-625.
"'' On the UK decisions under the amended provisions in Companies Act 1980 (UK) s.75 and Companies Act 1985
(UK) s.459 (now Companies Act 2006 (UK) s.994), see Re Ke11yonSwansea Ltd (1987) BCLC 514; Re Asiec
(BSR) pie (1998) 2 BCLC 556; Re a Co (No.004475 4 /982) [1983) Ch 178.
Jip Auto Services Ltd v l'rten Sau Fai (1990) I MKC 20, 23 (CA); John J Starr (Real Eswte) Ply Ltd v
'6< Y,111

Rohen R Andrew (A 'asia) Ply Ltd (1991) 6 ACSR 63; ASC v Multiple Sclerosis Society ofTttsmania (1993) 10
ACSR489.
" 5 (1954) SC 381; on appeal [ 1959] AC 324 (HL); and see also Re Sam Weller and Sons Ltd ( 1990) BCLC 80,
84-85.
,... (1959) AC 324,369.
"'' Companies (Amendment) Ordinance 1994 (72 of 1994).
"' 8 For examples, see Re Lai Kem Co lid and Re Safe Steel Furniture Facto,y lid (1988) I HKLR 257; Tseng Yueh
Lee Irene v Metrobifl Ente1prise Ltd [I 994) 2 HKC 684 (rights issues diluting the petitioner's holdings by reason
that the petitioner is unable to take up the shares); Re Mediavision Ltd (1993) 2 HKC 629.
 UNFAIR PREJUDICE REMEDY 481

6.6.11 Petitioner's ability to end the impugned conduct

If petitioner has ability to end conduct it might not be unfairly prejudicial. Where 10.172
there is available to the petitioner a method of bringing the impugned state of affairs to
an end, then the conduct might not be regarded as unfairly prejudicial. For example this
may be the case where the petitioner has power under the articles or a shareholders'
agreement to appoint sufficient directors to the board who could take action to end the
conduct complained of.469

6.6.12 Where 110 parties are at fault

Irreconcilable differences not sufficient to grant remedy under ss.724-725 of 10.173
Cap.622. The mere fact that there are irreconcilable differences between the parties or
that there is breakdown in the relationship of trust and confidence where neither party
is at fault is not sufficient for the court to grant a remedy under Cap.622, ss.724-725, as
the petitioner must establish that there has been unfairly prejudicial conduct. 470 This is
the case even if a member is effectively locked in the company by reason of difficulties
in disposing of his shares. 471 If there is deadlock in the company, it may be appropriate
however to seek an order for winding up the company on the just and equitable grounds.m

6.6.13 Relevance of the character of the company

Unfairness must be assessed in commercial context. Whether conduct is unfair 10.174
must be assessed in the commercial context, including the nature and character of
the company. 473 Thus for example, particular equitable considerations may be relevant
for quasi-partnership companies but not in the context of other types of companies.
Conduct which might be incapable of being put forward as unfairly prejudicial in the
context of a large corporation might assume a quite different complexion where a
small commercial enterprise is involved. 474 A company's objects (if any) and the fact
that it is a not-for-profit company limited by guarantee are also relevant in considering
the company's particular context. 475

6.6.14 Public companies

Member of public company can bring petition. It is possible for a member of a public 10.175
company, even a listed company, to bring a petition under Cap.622, s.724. Examples
are McGuinness v Bremner plc, 476 where the court held that an unreasonable delay in

' 69See Slti11Ho Electric Wire a11dCable Co Ltd v Hitachi Cable Ltd (unrep., HCMP 2979/2004, [2005] HKEC 289)
(CFJ); Re Baltic Real Estate Ltd (No.2) [ 1993] BCLC 503, 507; Re Legal Costs Negotiators Ltd [ 1999] 2 BCLC
171, 197.
'"' Re Citing Hi11gCons/ruction Co Ltd (unrep., CFI, HCCW 889/1999, 23 Nov 2001), [48); Re a Co (No.00709 of
1992), O'Neill v Phillips [ 1999) 2 All ER 961, 972; Re Ytmg Kee Holdings Ltd [2014) 2 MKLRD 313, [121) (CA)
(and for the Court ofFinal Appeal decision, see Kam Le1111g Sui Kwan v Kam Kwan Lai (20 I 5) 18 MKCFAR 501,
sub nom Re Yung Kee Holdings Ltd [20 I5] 6 HKC 644).
411 Re a 0.>(No.00709 of 1992), 0 'Neill v Phillips [ 1999) I WLR 1092.

"' Sec para.10.231 below.

m Sec, e.g., Thomas v H WThomas Ltd (1984) 2 ACLC 610,620.
"' Re Taiwa Land hzvestme111Co Ltd [1981) HKLR 297,305,307; Re Hing Ming Gondola (HK) Co Ltd (unrcp.,
HCMP 418/2008, HCA 84/2007, [2010) I HKLRD B2).
"' Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174, [65)-(66).
"' [ 1988) BCLC 673.
482 MEMBERS' REMEDIES AND MINORITY PROTECTION

convening a general meeting requisitioned by the petitioners was unfairly prejudicial;

and Luck Continent Ltd v Cheng Chee Tock Theodore,471 involving a failure to amend
the listed company's articles, resulting in a breach of the Stock Exchange Listing
Rules which led to a suspension of trading in the company shares.
10.176 But grounds for public company would be limited. However generally the grounds
of unfairly prejudicial conduct for such companies would be limited to conduct that
is in breach of legal or equitable 1ights or of universal expectations of members, and
not personal expectations arising from personal relationships of mutual trust and
confidence, by reason that such relationships would not be found to exist in public
listed companies conducted under a purely commercial footing.478 Moreover, relief
under Cap.622, ss.724-725 might not be needed if a remedy already exists for the
member in selling his shares on the market.479 However the mere fact that there is a
market for the shares should not necessarily deprive the member of a remedy under
the statutory provisions; for example where a large number of shareholders would seek
to exit from the company as a result of corporate malpractice, the sale of the shares
on-market might not be an adequate remedy for the investors since both the exodus
and news of the corporate wrongdoing could cause a decline in the p1ice of the shares
leading to significant losses for the exiting shareholders. 480

6.6.15 Family comp"nies

10.177 Personal relationships. The personal relationships between family members in small
family companies may be relevant in considering whether the relationships are ones of
mutual trust and confidence 481 so as to import equitable considerations. However the
mere fact that the company is a small family company is not decisive in showing that
the company is a quasi-partnership type of company. Where the court is satisfied that
the family company is not conducted purely on a commercial basis, then the family
nature of the company can be relevant in ascertaining the basic understandings and
personal expectations of the members; for example, there might be an understanding in
the family company that a central objective of the company is to provide employment
for members of the founder's family.482

6.7 Examples of unfairly prejudicial conduct

6.7.1 Breaches of Ordin"nce or non-statutory regul"tions

I 0.178 Breaches of Companies Ordinance. Breaches of the Companies Ordinance (Cap.622)
can potentially amount to unfairly prejudicial conduct. The legal requirements of the
Ordinance can be understood as being part of the rules in accordance with which

m [2013) 4 I IKLRD 181. See paras.10.180 and 10.195 below.

' 18Re Blue Arrow pie [ 1987) BCLC 585, 590; Re Asrec (BSR) pie [ 1998) 2 BCLC 556, 588-589. Cf. Larimer
Holdi11gsLui II SEA Holdi11gsNZ Ltd [2005] NZLR 328, [98}-[ l l 1).
,,. Re Komblums Furnishings Ltd [ 1982) VR 123.
480 S H Goo and R H Weber, "The Expropriacion Game: Minority Shareholders' Protection" (2003) 33 Ho11gKong

law Jounu,I 71, 88.

481 Sec. e.g., Thomas v H W Thomas Ltd (1984) 2 ACLC 610; Belgiorno-Zegra v £xbe11Pry Ud (2000) 35

ACSR305.
482 Thomas v H WThomas lid (1984) I NZLR 686, (1984) 2ACLC 610,620.
 UNFAIR PREJUDICE REMEDY 483

members agree for their association to be conducted. Thus for example, it has been held
that unfairly prejudicial conduct can arise from breaches of provisions prohibiting the
giving of financial assistance for the acquisition of the company's shares;483 breaches
of provisions requiring member approval for non-pro rata allotments of shares; 484
and persistent breaches of requirements to keep proper accounts485 or to lay accounts
before members and to hold annual general meetings. 486
Statutory contravention must result in prejudice. The statutory remedy only applies 10.179
if the contravention results in prejudice to members though. Trivial or technical
breaches of provisions of the Ordinance might be considered as minor matters which
do not lead to any prejudice suffered by members. 487 Nonetheless in Wong Man Yin v
Ricacorp Properties ltd,4 88 the Court of Final Appeal cautioned against taking a
"cavalier approach" to the legal rights of members, observing that provisions such as
predecessor CO, s.114 (repealed),489 regarding the minimum length of notice required
of company meetings, exist to protect the rights of members, and requirements
for proper notice of board meetings under the articles exist to ensure the proper
management of the company. The cowt stated that:

"Failure to serve due notice of a company or board meeting is not ... to be lightly
treated as a mere technicality. There must be circumstances justifying such a
conclusion." 490

Breaches of Listing Rules. In the earlier decision of Re As tee (BSR) pie, 491 Jonathan 10.180
Parker J held that, although members of the public buying shares in a listed company
may expect that all relevant rules and codes of best practice will be complied with,
that expectation cannot give rise to an equitable restraint on the exercise of legal
rights conferred by the company's constitution so as to found an unfair prejudice
petition. In Luck Continent Ltd v Cheng Chee Tock Theodore,492 the Hong Kong
Court of Appeal came to a different conclusion. In that case, the articles of the listed
company breached the Listing Rules by requiring a special resolution for removal of
a director when the Listing Rules provided that an ordinary resolution would suffice.
The court held that the company's failure to amend its articles to comply with the
Listing Rules (due to a controlling shareholder refusing to vote in favour of the
amendment) was unfairly prejudicial in circumstances where the company's failure to
rectify the breach meant that the Stock Exchange would not lift a suspension imposed
by the Exchange on trading of the company's shares. The court placed significance
on a finding that the investors acquired their shares on an understanding with the
company that the company's listing status would be maintained. One of the points

483 Re Hailey Group Ltd [ I993] BCLC 459.

4$4 Re a Co (No.005134 <?[/986), exp Harries [ I989] BCLC 383.
,ss Re B011dwoodDevelopment Ltd [ 1990] I HKLR 200.
<U Re a Co (No.00789 of 1987), exp Shooter [I 990] BCLC 384.
' 8' Re a Co (No.00789 of 1987), exp Shooter [I 990] BCLC 384, 393.
' 88 (2003) 6 HKCFAR 265.
m See now Cap.622, s.571.
' 90 (2003) 6 HKCFAR 265. 280.
"' ( 1998) 2 BCLC 556, 590.
"' (2013) 4 HKLRD 181.
484 MEMBERS' REMEDIES AND MINORITY PROTECTION

in contention before the court was whether there must be a personal relationship
between the shareholders before equity would intervene to uphold the understanding
for the purposes of an unfair prejudice petition. 493 The Court of Appeal held that
this was unnecessary. It is submitted that the Court of Appeal was correct in taking
this view. Just as legal requirements under the Ordinance or the general law can be
understood as being a part of the rules in accordance with which members implicitly
agree for the company to be conducted, the members of a listed company can also be
regarded as implicitly agreeing that the company would abide by the Listing Rules.
Although non-statutory, the Listing Rules are fundamental in the regulatory scheme
governing listed companies. Accordingly members' expectations of compliance
with the Listing Rules can be regarded in a similar manner as members' expectations
of the company's compliance with legal regulatory requirements. For these types of
expectations on the part of the members as to how the company is to be run, there
is no need for there to be any personal relationship between the members to the
agreement or understanding. 494
10.181 Breaches of other regulatory requirements. In Re Asia Television Ltd, 495 the
controllers of ATV (which held a domestic free television programme service licence)
allowed a person who did not satisfy the residency requirements for control of the
company under the Broadcasting Ordinance (Cap.562) to obtain indirect interests
in ATV and to exercise de facto control over ATV, in breach of the terms of the
licence and an undertaking that had been given to the Communications Authority.
This conduct led to the Authority recommending to the Chief Executive that the
licence not be renewed. Without the licence, ATV would have no business and would
be massively insolvent. Jn these circumstances, the conduct of the controllers was
held to be unfairly prejudicial.

6.7.2 Brellches of the co11stitution or shareholder agreements

10.182 Breaches of constitution or shareholder agreements. Lord Hoffmann in O'Neill
v Phillips496 emphasised that breach of the terms, as embodied in the corporate
constitution or in collateral shareholder agreements, on which parties have agreed that
the affairs of the company should be conducted will amount to commercial unfairness
for the purposes of the unfair prejudice remedy. For examples, see Re Mediavision
Ltd,497 Re A and BC Chewing Gum Ltd,498 Re HR Harmer Ltd,499 Re Bondwood
Development Ltd. 500
10.183 Trivial or technical infringmenet might not amount to unfairly prejudicial
conduct. Conduct which is technically unlawful is not necessarily unfair or prejudicial
though, so trivial or technical infringements of the articles might not amount to unfairly

493
On this issue, see further para.10.195 below.
'" Seepara.l0.163above.
••5 [2015) I HKLRD 607.
•'6 Re a Co (No.00709of 1992),O'Neill v Phillips [1999) I WLR 1092(HL); accepted in Wo11g
Ma11Yi11v Ricaco,p
Properties Ltd (2003) 6 HKCFAR265.
••7 [1993) 2 HKC 629.
' 98 [1975) I WLR 579.
' 99 [1959) I WLR 62.
!<H> [ 1990)I HKLR200.
 UNFAIR PREJUDICE REMEDY 485

prejudicial conduct. 501 While that principle is undoubtedly correct, the approach of the
Court of Final Appeal in Wong Man Yin v Ricacorp Properties Ltd, discussed above at
para. I 0.179, indicates that there will be important rights under both the Ordinance and
the articles which courts must be vigilant in protecting. In addition, even if a particular
breach of the articles on its own might not be regarded unfairly prejudicial, persistent
violations of the articles may well come within the statutory provision. 502

6.7.3 Breaches of fiduciary duties of directors

Breach of fiduciary duties. The fiduciary nature of the powers entrusted to the 10.184
directors by the members means that acting in breach of directors' fiduciary duties
would be outside the tem1s of the bargain between the members and the company 503
and could accordingly amount to unfairly prejudicial conduct within the principles
set out in O'Neill v Phillips. 504 For example, unfair prejudice has been found in
cases involving the making of secret profits and diversion of corporate business or
opportunities;5°5 misappropriation of company assets; 506 breach of the duty to act bona
fide in the interests of the company (such as where the directors act in the interests
of one class of members only,5°7 or act in the interests of related companies to the
detriment of the particular company concerned 508) and exercising powers for improper
purposes (such as diluting or altering voting power).509 Not all breaches may result in
prejudice to the interests of members though and so the mere fact that there has been
a breach of fiduciary duty does not necessarily mean that a remedy would be available
under the statutory provision. 510 However, it has been held that misappropriation of the
company's assets is intiinsically prejudicial to the interests of members and will come
within the statutory provision even if there is no quantifiable impact on the value of
members' shareholdings. 511

;o, Re Saul D Harriso11and Sons pie [1995) 1 BCLC 14.

so: See Re HR Harmer Ltd [ 1959) I WLR 62 (Eng CA); Joh11J Starr (Real £state) Pty Ltd v Robert R. Andrew
(A "Asia) Pty Ltd (1991) 6 ACSR 63.
m Re Saul D Harriso11(md Sons plc[1995J 1 BCLC 14, 18.
'°' Re a Co (No 00709of 1992).0 'Neill v Phillips [ 1999) I WLR I092 (HL); accepted in Wo11gMan Yin v Ricacorp
Properties lid (2003) 6 HKCFAR 265 (CFA); see also Re Chime Corp lid (2004) 7 HKCFAR 546, 561 (CFA).
,o, E.g. Re Forecast Nominee lid [ 1996) 4 HKC 12; Re Texgar lid [2002) I HKLRD 687.
"" E.g. Re Bondwood Ltd Developmem Ltd (1990) HKLR 200; Re Playmates Investments Ltd [1996) 4 HKC 577;
Re Tai Lap J11vestme11t Co lid [ 1999) I HKLRD 384.
,o, Kizquari Pty Ltd v Prestoo Pty lid ( 1993) 10 ACSR 606; Reid v Bagot Well Pastom/ Co Pty Ltd ( 1993) 61
SASR 165.
so, Re Spargos Mining NL (1990) 3 WAR 166; Re Ente1prise Gold Mines NL (1991) 3 ACSR 531; Je11ki11sv
E11te1priseGold Mi11esNL (1992) 6 ACSR 539.
'°' E.g. Re Lai Kan Co Ltd a11dRe Safe Steel F11mit11reFac/01:yLtd [1988) I HKLR 257; Re Supe,yield Holdings Ltd
[2000) 2 HKC 90; Re Cunuma (1986) BCLC 430. The issue of shares leading to the dilution of the petitioner's
holdings can be unfairly prejudicial even though the shares are offered pro rata to all existing shareholders
under a rights issue if it is known that the petitioner is unable to subscribe for more shares and the puq)Ose
of the allotment is to dilute the petitioner's holdings: Tseng Yueh lee Irene v Metmbilt E111e111rise Ltd [1994)
2 HKC 684. However the dilution of the 1>etitioner'sshareholding might not be unfair if the rights issue was
motivated by a genuine need to raise capital for the company even if it is known that the petitioner would not be
able to participate in the rights issue: Ng ~,t Chiv Max Share Ltd (2001) I HKLRD 561 (CA), aJTim,ed [2001)
4 HJ<CFAR299 (CFA).
s,o See, e.g., Re Blackwood Hodge pie [ 1997] 2 BCLC 650 (failure by directors to apply their minds properly to a
merger proposal and failure to declare conflicts of interest amounted to breach of their duties, but petitioners
failed to show that they suffered any prejudice). Sec also Rock Nominees Ltd v RCO (Holdings) pie (i11liq) [2004)
I BCLC439.
'" Re Elgi11dataLtd [ 1991) BCLC 959.
486 MEMBERS' REMEDIES AND MINORITY PROTECTION

10.185 Ratification not bar under ss.724-725 of Cap.622. Approval or ratification of the
conduct by the general meeting would not bar an action under ss.724-725,5 12 and
furthermore, ratification could in the circumstances be regarded as exacerbating the
unfairly prejudicial conduct. 513
10.186 Generally petitioner will not be able to sidestep proper plaintiff rule in ss.724-
725 of Cap.622. Although breaches of fiduciary duties involving wrongs to the
company can amount to unfairly prejudicial conduct to members within ss.724-725,
the petitioner would generally not be able to sidestep the proper plaintiff rule in
Foss v Harbottle 514 to obtain a remedy of damages or compensation in favour of the
company under a s.724 petition.m

6.7.4 Excessive remuneration

10.187 Excessive remuneration to directors may be unfairly prejudicial conduct. The
payment of excessive remuneration to directors in essence involves a misappropriation
of company assets 516 or unlawful return of capital (where the director is also a
shareholder),517 and may amount to unfairly prejudicial conduct. The applicable
principles were summarised by Deputy Judge Poon in Re Ching Hing Construction
Co Ltd 518 as follows:

(i) The payment of excessive remuneration to directors, to the detriment of

those members who are not directors, is one of the recognised forms of
unfairly prejudicial conduct;
(ii) If the controlling directors pay themselves remuneration not by reference
to a standard of proper reward for services rendered but as a means to
distribute profits of the company, such conduct would be unfairly
prejudicial to the interests of non-director members; and
(iii) In considering whether the quantum of emoluments is excessive, the court
applies an objective test, with reference to objective commercial criteria.

10.188 Continuing to trade when company making losses and no real prospects might
lead to inferences being drawn. Also, in the above case, Deputy Judge Poon accepted
that if the directors of a company continue to trade when the company is making
losses and when it should have been apparent that there was no real prospect that
the company would return to profitability, the court may draw the inference that the

512 This is because the focus of the unfair prejudice remedy is on mismanagement and not simply unlawful conduct
(see Re Chime Co111Ltd [2004) 7 HKCFAR 546 (CFA)), and conduct can be unfairly prejudicial although not
unlawful: Re Saul D Harrison and Sons pie [ 1995) I BCLC 14.
513 v Enterprise Gold Mines NL ( 1992) 6 ACSR 539.
.Je11ki11s
5" (1843)2Hare461,67ER 189.
515 Sec para. I 0.221 below.
516 Millers (!nvercargill) Ltd v Madtk.Jms[1938) NZLR 490; Re Kam Fai Electropla1i11gFacto,y Ltd (unrcp., HCCW
534/2000, [2004] HKEC 556) (CFJ).
"' Re Halt Garage ( 1964) Ltd [ 1982) 3 A 11ER IO16.
"8 (unrcp., HCCW 889/1999, [2001) HKEC 1402), [44)-[47] (CFI). Sec also Re Kam Pai Elec1roplati11gFactory
Ltd (unrep., HCCW 534/2000, (2004) HKEC 556) (CFI); Wong Man Yi11v Ricacorp Properties Ltd (unrep., HCA
6260/1997 and HCMP 1571/2000, [2001) HKEC 740) [24)-(29) (CFI).
 UNFAIR PREJUDICE REMEDY 487

directors' decision was improperly influenced by their desire to continue in office and
in control of the company and to draw remuneration and other benefits for themselves
and others connected with them.

6.7.5 Neglige11ceor misma11age111e11t

of compa11y~5business
Where mere differences in commercial judgment or merely poor management, 10.189
remedy cannot be invoked. Where the allegations of mismanagement by a petitioner
in essence only amount to differences in commercial judgment between the petitioner
and the controllers of the company, the unfair prejudice remedy cannot be invoked.519
Likewise where management decisions have simply been poor, albeit that the decisions
have led to the company suffering losses. 520 Although such conduct can be prejudicial
to members, it is not unfair since members acquire shares in a company knowing that
their value will depend in some measure on the competence of the management and
they assume a risk that the management may prove not to be of the highest quality.521
Nonetheless, although acts of mismanagement in themselves might not provide a basis
for the exercise of the court's discretion under the statutory provision, such acts could
be relevant on the issue of unfairness when seen in the overall context of the conduct
of the company's affairs. 522
\Vhere serious mismanagement or self-enriching practices courts may well find 10.190
conduct is unfairly prejudicial. Where the conduct involves serious mismanagement 523
or where the acts of mismanagement involve self-enriching practices, 524 the courts
may well find that the conduct is unfairly prejudicial. What amounts to serious
mismanagement should be assessed objectively in line with the general objective test
of unfair prejudice. Conduct that amounts to a breach of the duty to act with due
care, skill and diligence could potentially be unfairly prejudicial within ss.724-725
of Cap.622, 525 for the same reason, it would seem, that breaches of fiduciary duties
of directors are caught. However, isolated breaches of duty are unlikely to constitute
unfair prejudice unless they are particularly serious.526

6.1.6 Breaches of 1111dersta11dings

or promises that equity would uphold
Equitable considerations making it unfair. Aside from breaches of legal duties 10.191
(whether arising under the Ordinance, the constitution or otherwise), the second
broad category of situations of unfair prejudice recognised in O'Neill v Phillips 527

'" Re Tai lap hlvesrme,1/ Co Ltd [ 1999) I HKLRD 384, 397, citing Re Macro (Ipswich) Ltd (1994) 2 BCLC 354.
'"' Re Elgi11data(1991) BCLC 959.
52
' Re Elgi11data[1991) BCLC 959, 993-994.
522 Re Forecast Nominees Ltd [ 1996) 4 HKC 12, 22.

m Re Tai lap Investment Co Ltd [1999) I HKLRD 384, 397-398; Re Elgindata [1991) BCLC 959, 993-994. See
further GP Stapledon, "Mismanagement and the Unfair Prejudice Provision" (1993) 14 Company lawyer 94;
Say Hak Goo, "Unfair Prejudice Remedy" [ 1993).Joumal of Business law 283.
n• Re Forecast Nominees Ltd [ 1996] 4 HKC 12, 22; Re Bo,ulwood Oevelop111e111 Ltd [ 1990) I HKLR 200; Re Tai
lap Investment Co Ltd [1999) 1 HKLRD 384.
"' Re Elgindata [ 1991] BCLC 959, 994; Re Macro (Ipswich) Ltd [ 1994]2 BCLC 354, cited with approval in Re Tai
Co Ltd [1999) I HKLRD 384. Sec also Harbour Front Ltd v Leung Yuet Ke,mg [2018) HKCFl
lap lnvest111e111
358, [2018) HKEC 334.
"' Harbour Front Ltd v Leung Yuet Keung [2018) HKCFI 358, [2018) HKEC 334, (46).
"' Re a Co (No.00709 of 1992). O'Neill v Phillips (1999) I WLR 1092.
488 MEMBERS' REMEDIES AND MINORITY PROTECTION

is where equitable considerations make it unfair for those conducting the affairs
of the company to rely on their strict legal powers. One major example of the
application of equitable considerations within this second category is where the
letter of the articles does not fully reflect the promises made or understandings
reached by the parties at the time when the company was formed and where it would
be unfair for the parties to exercise their legal rights in a way that is contrary to the
understanding of the parties. 528 Equitable considerations can apply to restrain the
parties from breaching their promises or understandings even though such promises
or understandings cannot be independently enforced as a matter of contract. 529
Moreover, apart from understandings reached at the time the company was formed
or the association between the parties entered into, there may also be later promises
made or understandings reached during the life of the company which it would be
unfair to allow a member to ignore. 530
10.192 Necessary for there to be personal relationship or personal dealings. For equitable
considerations (and hence the unfair prejudice remedy) to apply in relation to breaches
of promises or undertakings not embodied in the articles or collateral shareholders'
agreements, it is generally necessary for there to be a personal relationship or personal
dealings of some kind between the party seeking to exercise the legal right and the
party seeking to restrain such exercise, such as will affect the conscience of the
former. 531 The mere fact that a company is a small one, or a private company, is not
sufficient for the importing of equitable considerations in this context, as small private
companies could be formed:

" ... where the association is a purely commercial one, of which it can safely be
said that the basis of association is adequately and exhaustively laid down in the
articles". 532

The association must be formed or continued on the basis of a personal relationship,

involving mutual confidence, such as in a quasi-partnership company 533 where the
relationship between the parties is most closely analogous to that in a partnership (for
example, where a pre-existing partnership had been converted into the company to
operate the same or substantially the same business). 534

"' See Rea Co (No.00709 of /992). 0 'Neill v Phillips [1999) I WLR 1092, 1099-1102; Re Taiwa la11d Investment
Co Ltd [ 1981) HKLR 297; Wong Ma11Yin v Ricaco,p Properties Ltd (2003) 6 HKCFAR 265, 88.
"' ReaCo(No.00709of/992).O"Neil/vPhillips(l999] I WLR 1092.
530 Re a Co (No.00709 of /992). O"Neill v Phillips (1999) I WLR 1092.

531 Rea Co (No.00709 of 1992). 0 'Neill v Phillips [1999) I WLR 1092, 1101, approvingReAstec (BSR) pie (1998) 2

BCLC 556,588. But c/ luck Co11ti11en1 Ltd v Cheng Chee Tock Theodore [2013) 4 HKLRD 181: see para.10.195
below.
532 Ebrahimi v Westboume Galleries Ltd [1973) AC 360, 379-380.

SJl The terms "quasi-partnership" or "quasi-partnership company" are used to refer to small companies where the
proprietors operate the company on the basis of mutual trust and confidence similar to partners in a partnership.
Those terms do not mean that there is a separate category or
legal entity that is a "quasi-partnership" or a "quasi-
parlnership company". ln the present context, such quasi-partnerships arc still "companies".
SJ< Ebrahimi v Wes1boume Galleries Ltd [ 1964) AC 360, 379-380; Re a Company (No.00709 of /992), 0 'Neill v
Phillips (1999) I WLR 1092; Cro(y v Good (2010)2 BCLC 569.
 UNFAIR PREJUDICE REMEDY 489

Mere fact that small family company does not necessarily mean it is quasi- 10.193
partnership or there is relationship of mutual trust and confidence. The mere
fact that the company is a small family company does not necessarily mean that the
company is a quasi-partnership or that there is a relationship of mutual trust and
confidence in the operation of the company's business. 535 It would be necessary to
examine the actual relationships between the parties in the particular case. Moreover,
although a company might have been in the nature of a quasi-partnership at the time
it was established, it is possible for the relationship to subsequently change to a purely
commercial footing so ending the appropriateness of equitable considerations giving
rise to any legitimate expectations. 536
\Vhere the company is not a quasi-partnership: generally personal relationship 10.194
between parties still required. While quasi-partnership companies provide the classic
example of situations where equitable constraints can be applied to restrain breaches of
basic understandings that underpin the parties' association, the fact that a company is
not a quasi-partnership is not necessarily fatal to the petitioner's case. 537 However, it has
been said that there must still be some kind of personal relationship or personal dealings
between the parties sufficient for equity to intervene.538 The Court of Appeal has held
that there could not be a permanent personal relationship of mutual trust and confidence
formed with a state entity that was a party to a joint venture company, as it is impossible
for the state to exhibit those personal qualities, and any personal relationship with the
individuals acting for the state entity could only be transient and could not be relied upon
as the basis of the association since the positions held by those individuals for the state
entity would only be temporary. 539 Also, the element of a personal relationship would be
difficult to establish in the context of a large public company, as the relationship between
the parties would generally be a purely commercial one at arm's length.540
Luck Contitte11tcase: personal relationship not necessary where all shareholders 10.195
privy to understanding.However, in Luck ContinentLtd v Cheng Chee TockTheodore,541
the Court of Appeal held that there was unfair prejudice arising from a breach of an implied
common understanding of the shareholders of a listed company that the company would
maintain its listing status. On the facts, there was no express agreement or understanding
between the shareholders as such, but investors acquired their shares on the premise
and on the implicit agreement of the company that the company's listing status would
be maintained.542 The court took the view that so long as all shareholders are privy to
the agreement or understanding, the lack of a direct personal relationship between the
shareholders does not mean that equity could not hold them to that understanding and

"' Re Clri11gHing Co11s1ruc1ionCo Lld(unrep., HCCW 889/1999, [2001] MKEC 1402).

536
Re a Co (No.005134 qf /986). exp Harries [ 1989] BCLC 383.
m Re Silver Bell U11iformlid [2012] I MKLRD 719, 735-736 (CA).
m ReAsrec (BSR) pie [1998] 2 BCLC 556, 588-589.
n, Ng l'tll Chi v Max Share Ltd [200 IJ I H KLRD 56 I; on appeal the issue was left open by the Court of Final
Appeal: sec (2001) 4 HKCFAR 299, 301-302.
5<-0 Sec Re Blue Arrowpie [ I987] BCLC 585, 590; Re Asree (BSR) pie [ 1998] 2 BCLC 556, 588-589.
5" [2013] 4 HKLRD 181. For discussion of the case, sec also para. I0.180 above.
,., [2013] 4 HKLRD 181, [74]-[75].
490 MEMBERS'REMEDIESAND MINORITYPROTECTION

restrain them from exercising their strict legal rights in breach of it.543 Here, the agreement
or understanding between the company and all its shareholders that the company would
maintain its listing status also operated as an agreement or understanding between, and thus
binding upon, the shareholders interse.544 Leave to appeal to the Court of Final Appeal was
granted on the questions of whether the equitable considerations restricting the exercise
of strict legal rights can only be of a personal character arising between shareholders
inter se and, if so, whether a tripartite agreement for the maintenance of the listing status
of the company between the shareholders inter se as well as the company is capable of
giving rise to considerations of a personal character aiising between shareholders inter se
which may affect the exercise of a shareholder's strict legal rights_s4s But the appeal was
dismissed without the court considering the merits because of changes in shareholdings in
the company that rendered the dispute academic.s46

10.196 Petitioner must establish existence of agreement or undertaking. The petitioner

must establish the existence of the agreement or understanding in order to establish
conduct within the statutory provision on the ground of breach of an understanding. 547
The agreement or understanding need not be express,548 but an expectation held only
by the petitioner would not be sufficient, for the expectation must be one which all the
relevant parties would either assume or take for granted given the background and spirit
with which they were cooperating. 549 Such an understanding outside of the articles or
formal agreements may be more difficult to prove where the parties have already set
out their rights and obligations in detail in formal shareholder agreements. 550 However
it does not follow that the mere existence of complex written agreements necessarily
excludes the possibility of the existence of some other arrangements or understanding
between the parties, express or implied. 551

6.7.7 Exclusion from 111a11ageme11t

10.197 Wrongful exclusion of director can be unfairly prejudicial conduct. Wrongful
exclusion of properly-elected directors from management, contrary to the articles,
could be unfairly prejudicial conduct on the basis that the conduct is unlawful. 552 In
cases where members, who are also directors, have been lawfully removed from office
in accordance with the Ordinance (Cap.622) and the articles, there might not be unfair
prejudice both because the conduct does not affect the petitioner in the capacity as
a member, and because directors do not generally have an entitlement to remain in
office permanently by reason of powers of the general meeting to remove directors
from office under the Ordinance and articles.ss3 However, in the case of companies

'" (2013) 4 HKLRD 181, [70)-(73)

'" (2013) 4 HKLRD 181, [70), [88).
'" (unrep., CACY 107/2012, (2014) HKEC 145).
546 (unrep., FACV 4/2014, 10 December 2014).
'" See Kam leu11gSui Kwan v Kam Kwl/11Lai (2015) 18 HKCFAR 501, sub 110mRe 1\mgKee Holdings Ltd (2015)
6 HKC644.
'" See luck Co11tinentLtd v Cheng Chee TockTlteodore [2013) 4 HKLRD 181.
54
• Law Siu Hong Alben v Chermg Kin Ping (unre1>.,CWU 103/1995, [I 997) HKEC 7)(HC).
550 Re a Co (No.005685 of /988), exp Scltwan [1989) BCLC 427.
55' Re a Co (No.0020/ 5 of /996) [ 1997)2 BCLC I, 18.
$S2 See Re B011dwoodDevelopmentLtd [ 1990) I HKLR 200.
$SJ Sec Re Es/(/teAcquisition t111d Ltd [ 1995] BCC 338, 349-350.
Oevel<>pme111
 UNFAIR PREJUDICE REMEDY 491

formed or continued on the basis of a personal relationship of trust and confidence

(such as quasi-partnerships), where the parties became members or contributed their
capital on an understanding that they would be entitled to participation in management
of the company's business, exclusion from management may well found an unfair
prejudice petition. In a number of cases, exclusion from management has been held to
be unfairly prejudicial in quasi-partnership companies. 554 Exclusion from participation
in management can be unfairly prejudicial not only in circumstances of actual removal
from office, but also other situations of"constructive removal", such as excluding the
director from decision-making and failure to consult the director.555 Exclusion might
not be unfairly prejudicial though in situations where the petitioner had engaged in
wrongful conduct justifying removal from office. 556

6.7.8 Inadequate dividends and non-participation in company's profits

Long-term policy of not paying dividends can be unfairly prejudicial conduct. 10.198
The mere fact that the company has not declared dividends of an amount that can be
justified by the profits of the company is not unfairly prejudicial to members, as prima
facie the decision on the payment of dividends is a commercial one which directors are
entitled to make, having regard to the commercial needs of the company. 557 However
the courts have accepted that a long-term policy of not paying dividends or payment
of unreasonably low dividends in light of the amount of accumulated profits can
be unfairly prejudicial to members where there are no commercial reasons for that
dividend policy.558 Moreover, where the failure to pay adequate dividends occurs at the
same time that the directors are paying themselves excessive remuneration, the courts
would be more willing to make a finding of unfair prejudice as the directors would be
improperly distributing profits to themselves via the remuneration at the expense of
non-director members. 559
Basis of non-payment of dividends amounting to unfairly prejudicial conduct. 10.199
It appears that a dividend or other distribution policy that prejudices the petitioner can
be unfair within the statutory provision either on the basis that: (1) the directors are in
breach of their fiduciary duties to act in the interests of the company; or (2) that there is

'" See Yue11Sau Fai v Ytm Jip A,uo Services lid [ 1990) I HKC 15 (affirmed on appeal: [1990] I HKC 20);
Law Siu Hong Albert v Cheung Kin Pi11g (unrep., CWU 103/1995, (1997] HKEC 7); Lau Yuk Chue11 v
Gauss E/ectro11ics Co Ltd (unrep., HCCW 145 and 146/1999, 8 Dec 1999); Yu Lai Ping Wa11dyv Chan
Kuen (unrep., HCCW 1147/1999, I Jun 2001); She Wai Hung vJulia110 Lim (unrep., HCMP 6472/2001,
27 Feb 2004); Yip Kwai Chor v Killg Fung Co11struction Work Co Ltd (unrep., HCMP 375/2005 and HCA
2183/2004, 12 Dec 2006); Re Hi11g Ming Go11dola (HK) Co Ltd [2010] I HKLRD B2; Kam leu11g Sui
Kwa11v Kam Kwan Lai (2015) 18 HKCFAR 50 I, sub nom Re Yung Kee Holdi11gs Ltd [2015] 6 HKC 644
(though this issue was dealt with in the context of just and equitable winding up under Cap.32 s.177( 1)(1));
Choi Chi Wai v Cheng Ka Shing (unrep., HCMP 729/2012, HCA 1441/2012, 126 and 2147/2013, [2017]
HKEC 850).
m Re Pe,fect Trt,de ltd(unrcp .. HCCW 1147/1999, (2001] HKEC 627) (CF!).
5~ Mears v R Mears and Co (Holdings) Ltd [2002] 2 BCLC I; Woolwiclt v Milne [2003] EWHC 414; Harbour Front

Ltd v Leung Yuet Keung [2018] HKCFI 358, [2018] HKEC 334. Sec also Corron v Bullers [2017] EWHC 2294
(Ch).
'" Sec Re Citing Hing Construction Co Ltd (unrcp., HCCW 889/1999. [2001] HKEC 1402) [44] (CF!).
'" Re Sam Weller and Sons Ltd (1990) BCLC 80; Choi Chi Wai v Cheng Ka Shing (unrep., HCi'vlP729/2012, HCA
1441/2012, 126 and 2147/2013, (2017) HKEC 850).
" 9 Jf011gMan Yin v Law Lam Wai (unrep., HCA 6260/1997 and HCMP 1571/2000, [200 I) HKEC 740), (27) (CFI);
Re Ching Hing Constmction Co Ltd (unrep.. HCCW 889/1999, (2001) HKEC 1402), (44) (CF!).
492 MEMBERS' REMEDIES AND MINORITY PROTECTION

a breach of the (implied) terms on which members agree that the company's affairs be
conducted, since generally for all companies, members contribute capital to the company
on an understanding that they will receive a return on their investments via the payment of
dividends out of profits. 500This can also be seen as an example of the universal expectations
that members can legitimately hold on the basis of equitable intervention.

6.7.9 Alterations to the tlrticles

10.200 Alterations to the articles, albeit legal, may be unfairly prejudicial. Alterations to
the articles, although passed in accordance with the requirements of Cap.622, may be
unfairly prejudicial to the minority. 561 This category of unfairly prejudicial conduct can
be understood as a situation where the conduct would be restrained in equity and could
therefore be regarded as contravening the universal expectations of members protected
under the statutory provision.
10.201 Invalid alteration of articles can be unfairly prejudicial under ss.724-725 of
Cap.622. An alteration of articles which is invalid under the common law562 would
arguably also be unfairly prejudicial under ss.724-725. 563 Furthermore, it was accepted
by Peter Gibson J in Re a Co (No.005686 of 1988), et p Schwarcz (No.2}564 that an
alteration of articles could be unfairly prejudicial to minority members even though
the alteration might not fall foul of the common law test in Allen v Gold Reefs of West
Aft'ica Ltd. 565 That the statutory provision is wider than the test in Allen v Gold Reefs of
West Africa Ltd must be correct. If some genuine benefit to the company results from
the alteration (as opposed to benefits accruing simply to the majority shareholders), then
it may be that the prejudice is not unfair to the minority. However whether that is the
case should depend on the nature and degree of both the benefit to the company and the
prejudice suffered by the minority, and so for instance the courts might be more willing
to intervene under ss.724- 725 to protect valuable proprietary rights of members such as
the right to vote, as in Shears v Phosphate Co-operative of Australia Ltd. 566 Where the
alteration in substance deals with a conflict of interests between shareholders rather than
the interests of the company, although the alteration can be seen to be for the benefit of

"° Sec Rea Co (No.00370 of 1987), exp Glossop [1988) I WLR 1068, 1076-1077.
"'' Sec Shears v Phosphc,te Co-operative of Australia Ltd (1988) 14 ACLR 747; Re a Co (No.005686 of 1988), exp
Schwarcz (No.2) [1989) BCLC 427, 450-451.
"' See Chapter 2.
"'' Shears v Phosphate Co-operative of Australia Ltd (1988) I 4 ACLR 747.
564 [1989) BCLC 427.

'" [1900) I Ch 656. The Allen v Gold Reefs test is whetherthe altera1ion was made bona fide forthe benefit of the
company.
566 (1988) 14 ACLR 747. cf Re Cltarterhouse Capital Ltd (2015) BCC 574, [90)-[ 108), involving alterations to the

articles to facilitate compulsory acquisitions of a minority's shares if a majority of the founders agree to sell to
a purchaser. In that case, the English Court of Appeal essentially focused on whether the common law test of
"bona fide for the benefit of the company" was established even though the application for a remedy was made
under the unfair prejudice provision in Companies Act 2006 (UK) s.994. Although the decision on the facts
that the alteration to the articles was valid is arguably correct (in circumstances where the original articles and
shareholders' agreement already contained compulsory acquisition provisions which could be exercised in the
circumstances that arose and where the alterations in question were largely a "tidying up exercise" in aligning the
articles with the shareholders' agreement and in making the articles clearer and more consistent and facilitating
the transfer and registration of shares compulsorily acquired), it is submitted that the appropriate analysis wider
an unfair prejudice petition should in the main be based on the general principles of unfair prejudice (as in the
Wi/111(1rSugar cases: see para.10.202 below) rather than being tied to the more limited common law principles on
alterations to the arlicles.
 UNFAIR PREJUDICE REMEDY 493

an individual hypothetical member (who is not assumed to be a majority or minority

member) such that the test in Allen v Gold Reefs of West Africa Ltd, as explicated in
Greenhalgh v Arderne Cinemas Ltd, 567 is satisfied, the alteration could still be unfairly
prejudicial to the minority. The prejudice to the minority would arguably be unfair if, via
the alteration, the majority members are seeking to obtain benefits to themselves in a way
that is entirely outside what can fairly be regarded as having been in the contemplation of
the parties when they became members of the company. 568
Wilmllr Sugar cases. Wilmar Sugar was one of 7 members of Queensland Sugar Ltd 10.202
(QSL), a company limited by guarantee which markets and on-sells sugar in the export
market on behalf of the Queensland sugar industry. The 7 members were all sugar mill
owners. In May 2014, Wilmar Sugar issued a notice to terminate its 3-year raw sugar
supply agreement with QSL, effective in June 2017. The constitution of QSL was
amended in December 2015 and again in July 2016, with the effect of giving each of the
3 "original continuing mill owner members" (defined to be the members Bundaberg, Isis
and Mackay- collectively the "BIM Mills") the right to appoint a mill owner director
while confining the rights of other members in the appointment of directors. It was
conunon ground that the amendments were discriminatory against Wilmar Sugar as they
reduced its voting rights for the appointment of the mill owner directors. The Federal Court.
of Australia held, in separate decisions of Mackay Sugar Ltd v Wilmar Sugar Australia
Ltd569 and Wilmar Sugar Australia Ltd v Mackay Sugar Ltd510 dealing with the December
20 I 5 and July 2016 amendments respectively, that the discriminatory treatment under
both sets of amendments were unfair within the Australian statutory equivalent 571 of
the Cap.622 unfair prejudice provisions. ln both decisions, the reasonable hypothetical
bystander test was applied in determining that the amendments were objectively unfair
in the requisite sense. 572 In the second decision, the court stated that this was because the
BIM Mills could now appoint 3 of the 4 mill owner directors. The purported justification
for the different rights on the basis of a mill owner's termination of supply agreements
and competition with QSL was insufficient to show that the amendments were fair in
circumstances where, on the facts:

• 2 of the BIM Mills already competed with QSL 111 vanous significant
respects;
• the entrenched appointment rights of the BIM Mills would remain even
if their agreements to supply raw sugar to QSL in future do not involve
exclusive supply;
• those entrenched rights would also remain even if the other members might
in future enter into agreements with QSL on the same terms as those to which
the BIM Mills might negotiate with QSL; and

m [1951] Ch 286.
m cf Re a Co (No.00709 of 1992). 0 "Neill v Phillips [ 1999) I WLR 1092, 1094-1100.
'" (2016) 338 ALR 374.
l1<l (2017)345 ALR 174.
'" Corporations Act 200 I (Aust) s.232.
"' Sec Wi/11wrSugtlr Australia Ltd v Mackay Sugc,r Ltd (2016) 335 ALR 72, [ 119)-{127](YatesJ), appeal dismissed
in Macktly Sugar Ltd v Wilmar Sugar Australia Ltd (2016) 338 ALR 374; Wi/11wrSugtlr Australitl Ltd v Mackc,y
Sugar Lt.d (2017) 345 ALR 174, (111).
494 MEMBERS' REMEDIES AND MINORITY PROTECTION

• Wilmar Sugar would still have a continuing commercial interest in the efficient
participation ofQSL in the market, whether before or after 30 June 2017, given
the particular statutory requirements whjch affect the operation of the market,
the structure of the market involving growers, mill owners and QSL, and QSL's
bulk sugar terminals used for exporting to overseas customers. 573

6.8 Remedies that court may order

10.203 Scope of courts power under Cap.622, s.725: court can make any order it thinks
fit. Cap.622, s.725( 1) states that the court may "make any order that it thinks fit for
giving relief". Section 725(2) then lists specific orders that the court can make (but
without limiting sub-s.(l)):

• restraining the unfairly prejudicial conduct;

• order proceedings to be brought in the company's name;
• appoint a receiver or manager of the company's property or business;

• regulating the company's affairs in future;

• requiring the purchase of the shares of any member of the company by
another member or by the company;
• any other order that the court thinks fit for any other purpose; or
• order the company or any other person to pay damages to a member.

In the case ofa past member, the only remedy available is damages.m
10.204 Wide jurisdiction: endeavour to put company back on rails, remedy should not
be intrusive and there should be proportionality. Under the statutory provision,
the court has a "very wide discretion to do what is considered fair and equitable in all
the circumstances of the case, in order to put right and cure for the future the unfair
prejudice which the petitioner has suffered at the hands of the other shareholders of the
company". 575 ln deciding on the appropriate remedy, the court should:

" ... endeavour to find a scheme ... which will 'put the company back on the rails'
and avoid the causes of conflict and oppression". 576

The remedy chosen should be the least intrusive and there should be proportionality
between the impugned acts and the remedy.577 The court is to consider the entire
circumstances of the case and have regard to the interests of the company as a whole,

"' Wilmar Sugc,rAusm,lia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174,[ 106]-[111].
~1-1 Cap.622, s.725(4).
"' Wong Man Yin v Ricaco1p Properties Ltd (2003) 6 HKCFAR265, 287 (CFA),ci1ingRe Bird Precision Bellows
[1986] Ch 658,669.
"• John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A 'asia) Pty Ltd (l 991) 6 ACSR 63, 74. See also Re Asia
Television Ltd (2015] I HKLRD 607, (57]-(58].
517 Fex11toPty lid v Bosnjak Holdings (1998) 28 ACSR 688, 741-742.
 UNFAIR PREJUDICE REMEDY 495

as well as the interests of others, including creditors and employees, and also the public
if the nature of the company's activities have a public dimension. 578
Discretionary nature. Relief under the statutory provision is discretionary, and 10.205
although unfairly prejudicial conduct is established, the court has power to decline
relief where appropriate. 579
Interim relief. Apart from orders granting final relief where unfair prejudice is 10.206
established, the court has power to grant interim relief (e.g. interim injunctions). 580

6.8.1 Orders regulating the affairs of the co111pll11y

Can make orders regulating affairs of the company, eg that general meeting 10.207
be held. For example, the court can order that a general meeting be held 581 or not
be held;582 or order alteration of articles. In Roberts v Walter Developments Pty Ltd
(No.2),583 where there was unfair prejudice in a quasi-partnership company arising
from the payment of excessive remuneration, the court ordered an amendment to the
articles to require that directors' remuneration be determined by unanimous agreement
of the members or by an independent accountant in the event of disagreement. In Re
Spargos Mining NL, 584 where the directors' consistent failure to act in the interests of
the company amounted to unfair prejudice, the cowt ordered a deletion of a provision
in the articles allowing decisions of the board to be made by circulating or written
resolutions, for a period of 12 months. That was done as the board had consistently
used that procedure instead of holding actual meetings, and the court was of the view
that in the circumstances it was a haphazard and unsatisfactory way for the board's
affairs to be conducted. Where the court makes an order amending the constitution,
the company must not make any further alteration inconsistent with the court order
without leave of the court. 585

6.8.2 Board composition and appointment of a receiver or manager

Orders restricting powers of director and replacing board. The courts have 10.208
accepted that the statutory provision enables orders to be made to ensure that the
company can be properly nm in the future and that its affairs would be under the
conduct of somebody in whom shareholders generally can have confidence. 586 Thus
for instance, the courts have made orders restricting the powers of a director who
had acted in an authoritarian and overbearing manner in disregard of the legal rights

"' Re Asia TelevisionLtd[2015] I HKLRD 607, (56].

5" See, e.g., Re Hailey Group Ltd [ 1993] BCLC 459 (relief not granted where an administrative receiver had been
appointed after the presentation of the petition, which would be sufficient in remedying the unfairly prejudicial
conduct).
580 High Court Ordinance (Cap.4) s.21 L; Rulc-sof the High Court (Cap.4A) 0.29. Sec Re Chime Corp Ltd [2003]

2 HKLRD 905, [ 13) (CA); Re Wako Gike11(HK) Co Ltd [20 I0] 4 HKLRD 121; Shih-Hua Investment Co
Ltd v Zha11gAidcmg (2017] 3 HKC 393 (interlocutory injunction granted to replace board with independent
professional).
' 8' McG11i1111ess v Bremnerpie [ 1988] BCLC 673.
m fornbu/1 v NRMA Ltd (2004) 50 /\CSR 44.
,s; (1992) I0ACLC804.
'"' ( 1990) 3 ACSR I.
su Cap.622, s.726.
586 Re a Co (No.00789of 1987), exp Shooter [I 990) BCLC 384, 394.
496 MEMBERS'REMEDIESAND MINORITYPROTECTION

of others in the company;587 to restrain an authoritarian director from continuing to

exercise any role over the company's affairs in circumstances where the director had
also acted fraudulently in misappropriating company property and in failing to keep
proper accounts; 588 to replace the existing board with new directors appointed by the
court for a period of 12 months for the purposes of providing independent management
which could make investigations and pursue remedies for the company in relation to
past defaults, and of securing for the company effective management skills for the
immediate future;589 and to appoint a manager to: (i) assume a role on the board to
ensure that the affairs of the company are conducted competently and fairly; and (ii) to
identify an independent third party purchaser to purchase the shares of certain existing
controllers so as to effect a change in control at the board level. 590
10.209 Only interfere with composition of board in very special circumstances. However
the Court of Appeal in Re Chime Corp Ltd591 observed that the com1 would be in
a difficult position to select those who were appropriate to conduct the commercial
affairs of a company, and should only interfere to determine the composition of the
board in very special circumstances and only if it is absolutely essential to do so. It
is clear that the court should not make orders altering the composition of the board
if it would have the effect of forcing highly antagonistic parties to cooperate. 592
Furthermore the court should not assume any active role in management or on-going
supervision of the company.593
10.210 Can appoint receiver and manager for period as alternative. An alternative to the
court altering the board composition is to appoint a receiver and manager for a certain
period. 594 However, appointment of a receiver or manager is also a drastic remedy
and may have an adverse effect on the company's business - for example it could
constitute an act of default of the company under security agreements; and so the court
may decline to make such an appointment where there could be adverse consequences
in connection with the position with customers or creditors. 595

6.8.3 Purchase of shares: buy-out orders

10.211 Buy-out remedy: might be ordered to enable parties to go their own way. This
is a common remedy sought by petitioners and awarded by the court. The court
does not necessarily have to accede to a petitioner's request for a buy-out order
though and might decline to compel the respondents to purchase the petitioner's
shares where a lesser remedy is sufficient to deal with the unfairly prejudicial
conduct and there is no likelihood of the conduct repeating. 596 However where
there are difficulties or impracticalities in framing orders for regulating of the

58' Re H R Harmer lid [ 1959] I WLR 62.

588 Re 8011dwoodDevelopmentLtd [ 1990] I HKLR 200.
589 Re Spargos Mining NL (1990) 3 ACSR I.
590 Re AsiclTelevisionLtd [2015] I HKLRD 607.
591
[2003] 2 HKLRD 905,914.
''" Re ForecastNominee Ltd: KLH Investment Ltd v YeungWeiSung [ 1996] 4 HKC 12, 28.
' 93 Re Spargos Mining NL ( 1990) 3 ACSR I .
' 9' Re 8ondwood DevelopmentLtd [ 1990] I HKLR 200.
' 9' Re Spargos Mining NL (1990) 3 ACSR I.
"• SeeKizq11ari Pty lid v Prestoo Pty lid ( 1993) I OACSR 606.
 UNFAIR PREJUDICE REMEDY 497

company's affairs that would be sufficient to remedy the wrongful conduct, it

may well be appropriate for the court to agree to the petitioner's request to be
bought out. 597 This is especially the case where there has been a breakdown in
the relationship between the parties such that it would be best for the parties to
"go their own way without being in a position further to annoy, interfere with or
injure each other"/ 98 and where the petitioner is otherwise locked in the company
due to difficulties in disposing of the shares. 599 The fact that the respondent is
impecunious may not be sufficient grounds for denying the petitioner a buy-out
remedy where it is otherwise appropriate. 600
Buy-out order can be made against member or company itself. Cap.622, 10.212
ss.725(2)(iv)(B) and 725(2)(iv)(C) expressly provides that the buy-out order may be
made against a member of the company or the company itself. It might not be appropriate
to order a particular respondent who is a member to purchase the petitioner's shares
in circumstances where the respondent's involvement was minimal.601 Buy-out orders
against the company are relatively uncommon,602 and it has been pointed out that
the court should not make such an order (which requires reduction of the company's
capital following the company's purchase) even by consent without taking some steps
to see that creditors are not detrimentally affected.603
Buy-out orders against third parties. Although Cap.622, s.725(2)(iv) does not 10.213
refer to a buy-out order made against a person other than a member or the company,
it has been held under the equivalent provision in England that non-members of
a company who are alleged to have been responsible for the unfairly prejudicial
conduct can be joined as respondents and, in appropriate cases, can be ordered to
be primarily or secondarily liable to buy the petitioner's shares. 604 It seems that this
view can be justified on the basis that the specific types of orders that can be made
under s.725(2) are stated in the provision as "without limiting" the powers of the
court under s.725(1) to make any order that it thinks fit for giving relief.
Respondent can be ordered to sell shares to petitioner. The court has power to order 10.214
the respondent to sell his shares to the petitioner, including where the respondent is
a majority member,605 but such orders are rarely made as the object of the statutory
provision is to give the petitioner relief (which can be done by requiring the petitioner
be bought out by the majority) and not to put the petitioner in a better position by

591 See Re E/gil1data Ltd [ 1991] BCLC 959, 1005.

59
' Re Dalkeilh lnve.w11e111s Pty Lid ( 1984) 9 ACLR 247, 254.
599
ReE/gi11datalld[l991] BCLC959, 1005.
6()() Re Cuma,w Ltd (1986] BCLC430 (Eng CA). See also Re Ghyll Beck Drivi11gRange Ltd[ 1993) BCLC 1126, I 134;

Re Regio11alAi,ports Lid [ 1999) 2 BCLC 30. There is however a possibility that a winding up order may be more
appropriate under Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32), s.177( I)(f).
60' Sec Re Golde11Bright Ltd (unrcp .. HCMP 6472/2001, (2004) HKEC 265).
60' But for an example, see Re Tai lap /11vestme111 Co ltd (1999) 1 HKLRD 384 (order for the company to purchase
the share.sin the event of the respondent shareholders failing to complete the purchase).
''" Qui11/a11v Fiboze Pry Ltd ( 1988) J4 ACLR 312, 313.
'°" Apex Global Management Ltd v FI Call lid (2014] BCC 286.
60' E.g., see Re a Co (No.00789 of 1987). exp Shooter (1990) BCLC 384 (where majority holder unfit to exercise

control of the compan)').

498 MEMBERS' REMEDIES AND MINORITY PROTECTION

expropriating the majority shareholder.6-06In deciding which party should be bought

out where there is a 50-50 shareholding, the court may take into account factors such
as the parties' contribution to the company, their fitness to exercise control over the
company, and any bad faith or impropriety.607
10.215 Valuation of price: court has broad discretion.The court has a broad discretion as to the
basis of valuation of the price to be paid for the shares,608 with the overriding requirement
being that the valuation of shares should be fair on the facts of the particular case.609

6.8.4 Damages
10.216 Damages can be awarded to petitioner but member cannot recover for reflective
loss. The court may order the company or any other person to pay damages that the
court thinks fit to a member of the company whose interests have been unfairly
prejudiced. 610 However, the member is not entitled to recover damages for any loss
that solely reflects the loss suffered by the company that only the company is entitled
to recover under the common law.611 In other words, the member is not entitled to
compensation for reflective losses.612
10.217 Damages can be awarded to company. The court also has jurisdiction to award
damages or restitution in favour of the company, but should only make such an order
in rare and exceptional circumstances. 613

6.9 Alternative relief

10.218 Where more appropriate relief available court may strike out in a Cap.622, s.724
petition. Where there is alternative relief available to the petitioner that would be
more appropriate, then the court may well be prepared to strike out the petition under
s.724. 614 However, the mere fact that there is an alternative remedy does not necessarily

606 Re a Co (No.00836 of 1995) [ 1996) 2 BCLC 192. See also Ronald Li-kai Chu v Deacon Te-ken Chiu [ 1991) 2
HKLR 572,577 (CA); Re a Co (No.005685 of 1988). exp Schwarz (No.2) (1989) BCLC 427; Re Ri11gtower
Holdings pie (1989) 5 BCC 82; Re a Co (No.006834 of 1988). exp Kremer (1989) BCLC 365,367; West 11
Blanche, (2000) I BCLC 795.
601 See, e.g., Ronald Li-kai Chu v Deacon Te-ken Chiu (1991) 2 HKLR 572 (CA).
608 Uniled Rural E111e111rises Pty Ltd v lopmand Pty lid (2003) 47 ACSR 514.
609 Re Golden Bright Ltd (unrep., HCMP 6472/2001, [2004) HKEC 265), [66) (CF!). For the principles relating to
the appropriate basis for valuation, see Wong Man Yin v law lam Wai (2001) 3 HKLRD 720; Koy Holdings Corp
v Spider Kniflers Ltd [ 1998) J HKLRD 788; Re Bird Precision Bellows Ltd [ I984) Ch 419, 43Q-43 I; Re Golden
Bright Ltd (unrep., HCMP 6472/2001, [2004) HKEC 265), [66)-[67) (CF!); Re Tai fop fn11estmen1Co Ltd [I 999)
I HKLRD 384 (appeal dismissed: [1999] 3 HKC 660); Rtmkine v Rankine (1996) 18 ACSR 725; Re Macro
(Ipswich) Ltd [ 1994) 2 BCLC 354, 409-410. As to the date for valuation, sec Chow Belle v Glory Mtmor Co Ltd
(1989) 2 HKC 581; Re Sparkle Consultants (Hong Kong) Ltd [2002) 3 HKLRD 62 (CA): Re Tai lap Investment
Co Ltd (1999) I HKLRD 384, affinned on appeal: (1999) 3 HKC 660 (CA); Re London School of Electronics Ltd
(1985) BCLC 273,282; Re Hing Ming Gondola (HK) Co Ltd (unrep., HCMP 418/2008, HCA 84/2007, (2010)
I HKLRD B2); Re Golden Bright Ltd (unrep., HCMP 647212001, (2004) HKEC 265) (CFI).
61 ° Cap.622, s.725(1)(b). The provision for damages was originally inserted in the predecessor CO, s.168A by the
Companies (Amendment) Ordinance 2004 (30 of2004).
611
Cap.622, s.725(5).
612 See, e.g., Re lelt111anBrow11 Ltd (unrep., CACY 272/2011, HCCW 377, 383/2010, (2013) HKEC 357). As to
reflective losses generally, see para.10.103.
613 Re Chime Corp Ltd (2004) 7 HKCFAR 546. See para.10.221.
614 For example, the court may stay an unfair prejudice petition where the matter in dispute is covered by an
arbitration agreement between the parties: Fulham Football Club (1987) Ltd II Richards (2012) Ch 33.
 UNFAIR PREJUDICE REMEDY 499

bar relief under ss.724-725 of Cap.622, as the totality of unlawful or inequitable

conduct that has occurred may render a remedy under these provisions (such as a buy-
out order) more appropriate.

6.9.1 Offer of buy-out ofpetitio11er~.,shares by respondent

Where buy-out offer or mechanism which provides for all that petitioner can 10.219
expect, petition may be struck out. Where the articles or a shareholders' agreement
contains a mechanism for the purchase of the petitioner's shares or where the respondent
otherwise makes an offer to purchase the petitioner's shares, the court might strike out
the petition on the grounds of abuse of process if the alternative buy-out mechanism
gives all the relief that the petitioner can reasonably expect to obtain pursuant to the
statutory remedy.615 Where the petitioner may be entitled to relief under s.725 apart
from a buy-out order, or where the buy-out mechanism available to the petitioner out
of court is inadequate, then it may not be appropriate to stTike out the petition.
Where obligatory buy-out mechanism court will generally not hear petition. If the 10.220
petitioner is legally bound by the buy-out mechanism, the court will not hear the unfair
prejudice petition and will leave the parties' position to be determined by their strict
legal rights,616 unless equitable considerations would make it inappropriate to leave
the parties to their legal bargain.617 lfthe buy-out mechanism is not mandatory in the
circumstances, or if the respondent has simply made an open offer to the petitioner,
then the court should only strike out the unfair prejudice petition if it is plain and
obvious that the offer is a fair and reasonable one and that the petitioner had acted
unreasonably in rejecting it.618

6.9.2 Relatio11ship with the derivative action

If relief is sought for the company, then derivative action should be brought. It 10.221
has been accepted by the Court of Final Appeal that the unfair prejudice remedy was
not intended to circumvent the rule in Foss v Harbottle to provide compensation or
restitution to the company in relation to wrongs done to the company.6 ' 9 Whether it
is appropriate to allow a petition to be brought under the unfair prejudice provisions
in relation to wrongs done to the company depends on the nature of the member's
complaint and the relief being sought. lf the whole gist of the complaint lies in the
unlawfulness of the conduct constituting a wrong to the company and the petitioner is
seeking relief for the company (or seeking relief in relation to the company's loss, or
for reflective losses), then a derivative action should be brought. 620 While the court has
jurisdiction under s.725 of Cap.622 to award damages or restitution to the company

'" See Re a Co (No.003843of 1986) (1987) BCLC 562; Re a Co (No.003096 of 1987) (1988) 4 BCC 80; Re a
Co (No.006834of 1988), exp Kremer (1989) BCLC 365; Re Pr11de11tial
Enterprise Ltd (2002) l HKLRD 267,
272-273 (CA).
616 Rea Co (No.004377of/986) (1987) I WLR 102.
617
Virdiv Abbey Leisure Lid. Re Abbey Leisure Ltd [ 1990) BCLC 342, 350 (Eng CA).
618 Re P,·uden/ia/ E11te1priseLtd (2002) l HKLRD 267 (CA); Re Ranson Motor Man11facturi11g Co Ltd (2007)
I HKLRD 751. As to what is required for the offer to be fair, see Re a Co (No.00709of 1992). O'Neill v Phillips
[ 1999] I WLR 1092; Re P,·udentialEnterprise Ltd (2002) I HKLRD 267.
"' Re Chime Coq>Ltd (2004) 7 HKCFAR 546.
620
Re Chime Co11> Ltd (2004) 7 HKCFAR 546; Re Shun Tak Holdings Ltd (2009) 5 HKLRD 743; Re Ge112Partners
Inc [2012) 4 HKLRD 511. The unfair prejudice petition is liable to be struck out as an abuse of process.
500 MEMBERS'REMEDIESAND MINORITYPROTECTION

itself, the court would only exercise its discretion to allow such a remedy under
s.725 in rare and exceptional circumstances, and only if: (1) the order for payment
corresponds with the order to which the company would have been entitled had the
action been successfully prosecuted by or on behalf of the company; and (2) it is clear
at the pleading stage that a determination of the amount of the wrongdoer's liability
can conveniently be dealt with in the hearing of the petition. 621
10.222 Unfair prejudice petition can be maintained if petitioner is ra1smg wrongs
to company to show mismanagement. If the petitioner is raising the allegations
involving wrongs to the company to show that there is mismanagement (as
opposed to misconduct or unlawfulness) and the petitioner is seeking relief from
mismanagement (as opposed to restitution to the company), then the petitioner
would be entitled to raise the allegations involving the wrongs to the company in an
unfair prejudice petition. 622
10.223 Possible to bring derivative action and unfair prejudice petition. Where a
member wishes to complain of both misconduct and mismanagement, it is possible
to bring both a derivative action and an unfair prejudice petition in relation to the
same facts,623 and where appropriate, the court may order that both actions be tried
together. 624

6.9.3 Relations/tip with the wi11ding-up remetly

10.224 Overlap with just and equitable grounds for winding up. There is overlap between
the coverage ofss.724-725 ofCap.622 and the just and equitable grounds for winding-
up in the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32),
s. l 77(l)(t), as there is a parallel in the principles upon which the court decides that
the conduct is unfair under the former remedy and unjust or inequitable under the
latter.625 However that is not to say that the conduct within the two provisions are
exactly the same, and there will be situations where the conduct is unfairly prejudicial
within s.724 (of Cap.622) but not within Cap.32, s.177( I)(t). 626 There will also be
situations where it might be just and equitable to wind up the company but where
there is no unfair prejudice. 627 Where the circumstances could justify a remedy under
both provisions, the mere fact that the respondents would consent to a winding up
order does not necessarily prevent the court from ordering a remedy under s.725 of
Cap.622. 628

• 21Re Chime Corp Ud (2004) 7 HKCFAR546,561, 57.S-576;and sec also Re li11et1Tt-adingCo Ltd (unrcp., HCCW
350/2004, HCCW 350.A./2004,[2005] HK.EC2024).
622 Re Chime Corp Ltd (2004) 7 HJ<CFAR 546; Bank of East Asia (Nominees) Ltd v Clum Helen Yr,kChi11g(unrcp.,
HCCW 291/201I, (2014] HKEC 628); Re Chamley Davies Ltd (No.2) (1990) BCLC 760.
623 Sec, e.g., Koy Holdings Co,p v Spider Knitters Ltd [ 1998) I HKLRD 788; Re Prude11tial£11terprisesLtd (2002)

I HKLRD 267; Re Chime Co,p Ltd (2004) 7 HKCFAR546.

624 Sec Rules of the High Court (Cap.4A) 0.15; and see Vrij v Boyle (1995) 3 NZLR 763; Keyrate Pty Ltd v Hamarc

Pty Ltd (2001) 38 ACSR 396.

625 Re a Co (No.00709 of 1992). O'Neill v Phillips [1999) I WLR 1092.

•2• See, e.g., Re Medu,vision lid [1993) 2 HKC 629; Re a Co (No.00314 of 1989), exp Estate Acquisitio11a/Id
Developme11tLtd (1991) BCLC 154.
621 See para. I0.230 below.

628 ReBoke11Ltd(1997]3 HKC537.

 UNFAIR PREJUDICE REMEDY 501

6.10 Procedural matters

6.10.1 Gener"/
Petition. Applications under s.724 are brought by way of petition. 629 Where the 10.225
wrong originating process has been used or where there is some other formal defect,
the action is not necessarily struck out, with the court having a discretion on the
matter.6Jo

Companies (Unfair Prejudice Petitions) Proceedings Rules. The Companies 10.226

(Unfair Prejudice Petitions) Proceedings Rules (Cap.622L) apply where the
petition is solely for seeking relief under ss.724-725 of Cap.622. 631 The rules
and procedures of the High Court for regulating the ordinary civil procedure of
the court also apply, to the extent not inconsistent with the rules in Cap.622L. 632
Where the petition seeks relief under both ss.724-725 and Cap.32, s.177(1) for
winding-up in the alternative, then the Companies (Winding-up) Rules (Cap.32H)
will apply and Cap.622L only applies to the extent not inconsistent with the
winding-up rules in Cap.32H. 633
Transitional: petitions presented before commencement of Cap.622. For petitions 10.227
presented before the commencement of Cap.622, the predecessor CO, s.168A and
the Companies (Winding-up) Rules (Cap.32H) (as in force immediately before that
commencement) continue to apply to the proceedings. 634
Practice Directions 3.3 and 3.4. Reference should also be made to Practice Direction 10.228
3.4, dealing with case management; and Practice Direction 3.3, which sets out
provisions for voluntary mediation.635

6.10.2 Respo11de11ts
Company should be joined; members and other persons may be joined. 10.229
Members 636 and other persons 637 may be joined as respondents to the petition, but
it may be an abuse of process to join a person if it is clear that no possible benefit
could accrue to the petitioner from the joinder of that person. 638The company should
also be joined as a nominal respondent for the purpose of discovery and also because
the company may be affected by the relief sought. 639 However as a nominal party,

Cap.622,s.724.
6 2'9

"" Leung Chi-kai Min/is v China-Tech Engineering Co Ltd [2002)3 HKC 605.
'" Cap.622L, r.3( I)(a).
632
Cap.622L,r.3(5).
633
Cap.622L,r.3(2).
"" Cap.622, Sch. I 1, ss.124(2)-124(3).
"' For practice directions, see the website for the Hong Kong Judiciary: http://www.judiciary.gov.hk.
""' Re a Co (No.00728/ f!f"/986) [1987) BCLC 593.
"" Murray-Jones v Hongkong and Shar,glwi Banking Corp [ 1982) HKLR 191 (CA); Apex Global Management Ltd
v FI Call Ltd [2014) BCC 286.
" 8 Murray-Jones v Hongkong and Shanghai Banking Co,p [ 1982) HKLR 191 (CA).
"' See )'t,anta Securities Asia Financial Services Ltd v Core Pacific illvestme,11Holdings (BVI) Ltd (unrep., HCCW
804/2003, 17 Oct 2003) [43) (CFI); Re Hydrosan Ltd [I 99 I) BCLC 418.
502 MEMBERS' REMEDIES AND MINORITY PROTECTION

the company should not ordinarily participate or expend its funds in a partisan way
in the proceedings. 640

6.10.3 Costs
10.230 Costs generally follow event. Costs follow the event, subject to the discretion of the
court. 641 As unfair prejudice proceedings involve a dispute between the members and
not with the company, costs should not be ordered against the company.642

7. WINDING-UP ON THE "JUST AND EQUITABLE" GROUNDS

10.231 Just and equitable grounds under s.l 77(1)(t) of Cap.32. Section 177(1)(f) of the
Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32) allows
the court to make an order for the winding-up of a company 643 if it is of the opinion
that it is just and equitable to do so.

7 .l Meaning of "just and equitable"

10.232 Just and equitable remedy enables court to sub,ject exercise of legal rights to
equitable considerations. In the leading decision of Ebrahimi v Westbourne Galleries
Ltd,644 Lord Wilberforce stated that the just and equitable remedy enables the court to
subject the exercise oflegal rights to equitable considerations - namely considerations
of a personal character arising between one individual and another, which make it
unjust, or inequitable to insist on legal rights or to exercise them in a particular way.
Such equitable considerations of a personal nature would not arise where a company
was conducted on a purely commercial basis, as the superimposition of equitable
considerations requires "something more"; and the mere fact that the company is a
small company is not sufficient. While equitable considerations commonly arise in
the context of quasi-partnership companies, Lord Wilberforce made it clear that it is
undesirable, if not impossible, to define exhaustively the circumstances in which such
considerations may be relevant. Moreover, the just and equitable remedy is available
not only in situations of quasi-partnerships. The words "just and equitable" have a
wide meaning and do not limit the discretion of the court to the types of situations
accepted in the case law as justifying the making of the order - the jurisdiction may be
invoked whenever justice and equity require.645 Nonetheless, similar to the approach

640 Yua11taSecurities Asia Fina11cia/ Services Ltd v Core Pacific Investment Holdings (BVI) Ltd (unrep., HCCW
804/2003, 17 Oct 2003) [43] (CF!). But where the company has an interest in the proceedings, it may be
appropriate to use company funds in relation to the proceedings: see Power v Ekstein (20 I 0) 77 ACSR 302.
641 Re Elgindaw Ltd (No.2) [ I 992] I WLR 1207.

642
Ltd a11dWyatt Estates Ltd [ 1993] I MKLR I 07 (CA).
Re CG & L lnve.<1111e111
643 While "company" in s.I77 means companies incorporated under the CO (Cap.622) (or its predecessors),

companie.sincorporated outside Hong Kong arc "unregistered companies" within Cap.32, s.326 and can also be
wound up on the just and equitable grounds pursuant to Cap.32, s.327(3)(c). As to the court's discretion whether
or notto wind up a foreign company in Mong Kong on the just and equitable grounds, secKam LeungSui Kwc,11v
Kam Kwan Lai (2015) 18 HKCFAR 50 I, sub nom Re YungKee Holdings lid [2015] 6 HKC 644 at [ 18]-[40].
644 [1973) AC 360 (HL); applied in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, sub nom Re

Yung Kee Holdings lid (2015) 6 HKC 644.

64 ' See Re Tourmaline Ltd (2000) 4 HKC 348, 355.
 WINDING-UP ON THE "JUST AND EQUITABLE"GROUNDS 503

to the concept of "unfair prejudice", the court's discretion needs to be exercised in a

p1incipled manner and a judge cannot simply decide on the basis of the individual
judge's concept of"fairness". 646 The notion of"just and equitable" must be interpreted
in its commercial context. 647 It is clear though that the just and equitable remedy is not
limited to situations involving mala fides. 648
Just and equitable question of fact and all circumstances must be looked at. The 10.233
question of whether it is just and equitable to wind up the company is one of fact
and all the circumstances must be looked at.649 A petitioner is not restricted to rely
on circumstances affecting him in the capacity of a shareholder; rather the petitioner
is entitled to rely on any circumstances of justice or equity which affect him in his
relations with the company or with the other members. 650

7.2 Examples

7.2.1 Quasi-partnerships and breakdown of trust and con.fidence

\Vinding up where breakdown of trust and confidence in quasi-partnerships. In 10.234
Ebrahimi v Westbourne Galleries Ltd, 651 it was held that equitable considerations may
arise in companies where one or more of the following elements exist:(]) an association
formed or continued on the basis of a personal relationship involving mutual confidence
(often, but not necessarily, where a pre-existing paitnership has been converted into
a limited company); (2) an agreement, or understanding, that all, or some (for there
may be "sleeping" members), of the members are to participate in the conduct of the
business; and (3) restriction on the transfer of the members' interest in the company, so
that if confidence is lost, or one member is removed from management, he cannot take
out his stake and go elsewhere.652 The House of Lords accepted that in companies having
such features, it may well be just and equitable to wind up the company where one of
the members have been excluded from management contrary to the understanding of
the parties. Aside from exclusion from management, other situations where there is a
breakdown in the relationship of trust and confidence between the parties in a quasi-
partnership type company could potentially come within s.177(l)(f) ofCap.32, such as
other circumstances involving the exercise of legal rights in a way which departs from
an understanding of the parties,653 or where the breakdown in the relationship is caused
by misconduct on the part of the company's controllers.654

.,.,; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 MKCFAR 501, sub nom Re Yt111g Kee Holdings Ltd [2015) 6
HKC 644, [43), [45).
641 Sec Re Guidezone lid [2000) 2 BCLC 321.
648 Ebrahimi v Westbourne Galleries Ltd [ 1973] AC 360.

"' 9 loch Blackwood Ltd [1924) AC 783, 788.

'°
6 Ebrahimi v Westbourne Galleries Ltd [1973) AC 360. 375.
•" (1973) AC 360. See also Constella Ltd v Super Eastern Ltd [2010) I HKC 321. See also parn.10.232 above.
•,, The existence in the articles of a provision restricting the free transferability of shares in the company would
not in itself be a sufficient basis for winding-up a company on the just and equitable ground if the first two
characteristics outlined above (i.e. personal relationship and basic understanding or agreement) are not present:
Co11stellaLtd v Super Eastern Ltd (2010) I HKC 321, (32).
•" cf Re a Co (No.00709 of 1992). O'Neill v Phillips [1999) I WLR 1092.
654 See, e.g., Re Perfect Trade Ltd (unrep., MCCW I 14711999, [2001] MKEC 627) (CFJ); Re Geewi11gCo Ltd

(unrep., MCCW 619, 628/2000, MCA 968, 3874/200 I, [2005) MKEC 899) (CFI); Re X-Dive Centre Lid (unrep.,
HCCW 98/2005, (2006) HKEC 324) (CFI).
504 MEMBERS'REMEDIESAND MINORITYPROTECTION

10.235 Yung Kee restaurant case. ln Kam Leung Sui Kwan v Kam Kwan Lai, 655 the Company
was the ultimate holding company of a subsidiary which operated the Yung Kee
Restamant. The Court of Final Appeal accepted that: (i) the Company was a family
company operated on the basis of trust and confidence; (ii) there was a common
understanding bet\veen the original controller of the Company (Kam Senior, who
passed away in 2004) and his two sons (Kwan Sing and Kwan Lai) that, while Kam
Senior effectively ran operations during his lifetime, the intention was for his t\1/osons
to run the restaurant business together; and (iii) that this understanding was breached
by Kwan Lai in circumstances where Kwan Lai took conscious steps to obtain control
of the Company and its subsidiaries (e.g. by procming the appointment of his son to the
boards of the companies) and then exercising that control without proper consultation
with, and full participation of, Kwan Sing. In these circumstances, the court held that
it was just and equitable for the Company to be wound up.656 Note that the fact that
the operating company of the restaurant business was an indirectly held subsidiary of
the holding company was not a bar to winding up of the holding company on the just
and equitable grounds. The understanding behveen the shareholders of the holding
company related to operation of the holding company's subsidiaries, which are assets
of the holding company just as much as any business of the holding company itself
and which are capable of being the subject of an agreement or understanding bet\1/een
the shareholders of the holding company that equity would uphold for the purposes of
s.l77(1)(t) ofCap.32.

7.2.2 Failure ofsubstrlltum or frustrlltio11 of comp,my~5 objects

10.236 Just and equitable to wind up company where failure of substratum of company.
It may be just and equitable to wind up a company where there has been a failure
of the substratum of the company, i.e. where the basis on which the company was
formed is lost.657 What the substratum is depends on the general intention and common
understanding of the members when they became members, 658 and thus, for example,
where the company was established with the common understanding that it would only
engage in a particular business, there will be a loss of substratum if there has been a
final and conclusive abandonment of the business 659 or if attainment of that purpose
has become in a practical sense impossible. 660
10.237 Loss of substratum not confined to quasi-partnerships. The "loss of substratum"
grounds for winding-up a company under s.l 77(l)(f) of Cap.32 is not confined to
quasi-partnership companies, although it may be easier to find a general intention and
common understanding in such companies. 661

655
(2015) 18HKCFAR 50 I, sub 110111 Re YungKee Holdi11gsLtd [2015] 6 HKC 644.
" 6 (2015) 18 HKCFAR 501, [48]-[62).
6'' Re Ger111a11Dme Coffee Co (1882) 20 Ch D 169; Re Haven Gold Mining Co (1882) 20 Ch D 151; Re Baku
Consolidated Oilfields Ltd [ I 944] I All ER 24; Re Tivoli Freeholds Ltd [ 1972] VR 445; Re Pei.feet7}-adeLtd
(unrcp., HCCW 1147/1999,[2000] HKEC 627) (CF!); lo Sui Li11v Clum Hung Fook [2017] 3 HKLRD 746.
6' 8 Sec Re German Date C~ffee Co (I 882) 20 Ch D 169; Re Tivoli FreeholdsLtd [ 1972)VR 445. For an exampleof
where the court rejectedthe view chatthere wasa lossof subs1racum, secRe Mak Shing Yt,eTong Commemo,-ative
Association Ltd [2005) 4 HKLRD 328.
6" Re Mediavision Ud [ 1993)2 HKC 629.
660 Galbraith v Merilo Shipping Co 1947 SC 446, 456.
66' Re 1ivoli Freeholds Ltd (1972) VR 445.
 WINDING-UP ON THE "JUST AND EQUITABLE"GROUNDS 505

7.2.3 Other examples

Other examples where just and equitable to wind up. Other examples where it may 10.238
be just and equitable for a company to be wound up include:

• deadlock in management; 662

• where there is a lack of confidence in the conduct and management of a
company's affairs arising from grave misconduct by those in control
of the company, in particular where grave misconduct in the future is
foreshadowed; 663
• sufficiently serious breaches of the members' joint venture agreement;664
• where there is suspected fraud or wrongdoing such that the affairs of the
company require scrutiny by the independent process which follows a
compulsory winding up order; 665 and
• where the company has incuned significant losses such that there is no reasonable
hope that the object of the company of trading at a profit could be attained.666

7.2.4 Conduct of the petitioner

Requirement of clean hands, although not necessarily bar to winding-up. 10.239
Petitioning under s. l 77(l)(f) of Cap.32 involves invoking the court's equitable
jurisdiction and the court may decline an order for winding up on the just and
equitable grounds if the petitioner does not come to the court with clean hands. 667
The requirement of clean hands is not a freestanding or an overriding requirement
though and a lack of clean hands does not necessarily bar a winding up order. 668
However the court will generally exercise its discretion to decline to make the order
if the petitioner's misconduct was causative of the circumstances relied upon as
being unjust and inequitable in seeking the order, 669 or where the making of an order
for winding-up would be against the principle that he who seeks equity must do
equity_610

662 Re Cirtex Co Ltd (1987) 3 HKC 13; Re TakMing Co Ltd (No.2) (1960) HKLR 389; Re Quality Int '/ Ltd (1964)
HKLR 669. See also Re TourmalineLtd [2000] 4 HKC 348 (where on the facts of the case the court held that
there was no true deadlock in the company).
663 Re San Imperial Co,p Ltd (1980) HKLR 649 (this ground for winding up is not limited to quasi-partnership
companies); Re Bo/dwin Construction Co Ltd [2003] 2 HKLRD 237.
664 Re Sha11glwi Tai Pan Food Manufacwre Co Ltd (unrep., HCCW 832/1999, [2001] HKEC 842); Re Rich Treasure
Enteq,rises Ltd (2001) 3 HKLRD 769 (CA).
665 Re YueHing Co Ltd (1916) 11 HKLR 53, affirmed (1916) 11 HKLR 82; Re Comtowe/1Ltd [ 1998]2 HKLRD 463.

""' Davis and Co Ltd v Brunswick (Austl'(J/ia)Ltd (1936) I All ER 299 (PC); Re Deep Sea Fisheries Pty Ltd (1984)
2ACLC326.
6<>' Ng !'tit Chiv Max Share Ltd 12001] I HKLRD 561 (CA), (2001) 4 HKCFAR 299 (CFA); Re Shill Fook Co Ltd
[ 1989] 2 HKC 342.
6<>! V!1j11ovich v Vuj11oviclr
(1990) BCLC 227 (PC}; Yeu11g8u11v Brio Tech110/ogy '/ Ltd (2000) 2 HKLRD 218; Re
/111
Canyma11!11dus1rial Ltd (2000) 3 HKLRD 295.
669 Re Shiu Fook Co Ltd [ 1989] 2 HKC 342; Re Ga11gford/111 '/ Ltd (unrcp., HCCW 181/2008, (2009) HKEC 1873);
Re Power £11gi11eeri11g Ltd (unrcp., HCCW 555/1999, (2000] HK.EC 774) (CFT).
•,. Ng Yat Chiv Max Share Ltd [2001) 1 HKLRD 561 (CA), (2001) 4 HKCFAR 299 (CFA); Re Gangford/,u'/ Ltd
(unrep., HCCW 181/2008, (2009) HK.EC 1873).
506 MEMBERS' REMEDIES AND MINORITY PROTECTION

7.3 Relationship with other remedies

10.240 Winding-up remedy of last resort. Section 180(1A) of Cap.32 provides that where
a petition for winding up is presented by members on the just and equitable grounds,
the court is not to refuse to make a winding up order on the ground only that some
other remedy is available unless the petitioners are acting unreasonably in seeking to
have the company wound up instead of pursuing the other remedy. The approach of
the courts is that winding up is a remedy of last resort and there is a reluctance to grant
winding up where another remedy would be adequate for the petitioner,671 especially in
circumstances where the company is successful and profitable.672 For example, it may be
unreasonable for a petitioner to seek to wind up a listed company if there is an alternative
remedy of selling the petitioner's shares on the stock exchange at a fair value.673
10.241 Unfair prejudice remedy might be more appropriate. Alternative remedies may
be available under Cap.622, ss.724-725 (unfair prejudice), and petitioners often
claim for relief under both the unfair prejudice provision and s.177(1)(t) of Cap.32
in the alternative. As courts are slow to wind up solvent companies if some other
remedy is available, a remedy for unfair prejudice may be more appropriate even
though the circumstances also come within s.177(l)(f). 674 However there would be
some situations where a remedy would not be available under s.725 of Cap.622 but
where it may be just and equitable to wind up the company, such as where there is
a breakdown in a relationship of trust and confidence between the parties due to
irreconcilable differences in circumstances where the breakdown is not the fault
of any party.675 Moreover, courts may be prepared to order winding up despite the
possibility of utilising s.725 where relief under s.725 has not been pressed by the
petitioners and where there is no opposition to the petition for winding up on the
grounds that an alternative remedy is available,676 or where, in circumstances where
the only appropriate alternative relief is a buy-out order, there is no evidence of the
respondents' financial ability to buy out the petitioner's shares. 677
10.242 Winding up can be refused where petitioners acting unreasonably in not
relying on other remedies. A situation where a winding up order may be refused
on the grounds that the petitioners are acting unreasonably in not relying on other
appropriate remedies is where the petitioners are majority shareholders who could
address their grievances through the general meeting or restructuring of the board
of directors. 678

671 Re Sa,1Imperial Corp Ltd [ 1980) HKLR 649; Re Wo11gTo Yick Wood lock Oinrmelll Ltd (2003) I HKC 484 (CA);
Re Ra11sonMotor Ma11ufacwri11gCo Ltd (2007) I HKLRD 751; Re Sai K1111g
PLB (i\1axicab) (No. I & 2) Co Ltd
[2009) 4 HKLRD 523.
612 Re lfong To Yick Wood Lock Ointment Ltd [2003) I HKC 484 (CA).
673 Alessi v The Original Australian Art Company Pry Ltd (1989) 7 ACLC 595, 598; Tam Wi11gl'l,e11v Siberian
Mini11g Group Co Ltd (unrep., HCCW 392/20 I 5, [20 I 7) HKEC 163).
6" Sec, e.g., Re Lai Kan Co Ltd a11dRe Safe Steel Furniture Facto,y Ltd [ 1988) I HKLR 257.
6' 5 McMillan v 'Ti.>ledoE11terprises/nt'/ Pty Ltd (1995) 18 ACSR 603,614; Re RA Noble & Sons (Clothing) Ltd

[1983) BCLC 273.

676
Sec, e.g., Re Mak Shing Yi,eTong Co111111emort11ive Association Ltd [2005) 4 HKLRD 328; Re Lee Sun Lan
Tobacco Ltd (unrcp., HCCW 377/2005, (2006) HKEC 732).
611
Re Pe,fect 1i'(JdeLtd (unrep., HCCW 1147/1999, [2001) HKEC 627)(CFI).
678
Re To11rmalineLtd [2000] 4 HKC 348.
 STATUTORYINJUNCTION 507

Winding up petition will only be struck out where plain and obvious that court 10.243
would not make winding up order. Where an application is made to strike out the
petition for winding up on the basis that an alternative remedy is available, the court
will only accede to the application if it is plain and obvious that the court would not
make a winding up order in light of the alternative remedy.679
Arbitration and stay of winding-up petition. Winding-up proceedings are not within 10.244
s.20 of the Arbitration Ordinance (Cap.609) and hence that provision does not apply
to require the disputing parties in winding-up proceedings to be referred to arbitration
pw-suant to an arbitration agreement to which the parties are subject. However, the
court has a discretionary jurisdiction to stay a winding-up petition. An arbitrator does
not have power to make a winding-up order, but if the substance of the dispute is a
matter covered by the arbitration agreement, it may be appropriate to stay the petition
to enable the arbitrator to make a determination on the relevant facts and matters. If
the arbitrator concludes that the petitioner's claims on those matters are correct, the
petitioner may apply for the stay to be lifted.680

8. STATUTORY INJUNCTION

8.1 General

Statutory injunction provided for in Cap.622 and Cap.32. Cap.622, Pt.14 Div.3 10.245
(ss.728-730) and Cap.32, s.350B set out the provisions on the statutory injunction.681
These provisions were first introduced into the Companies Ordinance by the Companies
(Amendment) Ordinance 2004 to implement the recommendation of the Standing
Committee on Company Law Reforn1 in 200 l that the court should be given a general
power, on application by an affected person or relevant authority, to grant an injunction
against any contravention of the Ordinance or any breach of fiduciary duties.682
Restraint of breaches of Ordinance, fiduciary duties or articles. Cap.622, ss. 728- 10.246
729 allow certain persons, including members of a company, the right to seek an

"' Re Prudential E11te1prise Ltd (2002) I HKLRD 267 (CA); Re flvng To Yick Hvod lock Oint111e11t Ltd (2003) I
HKC 484 (CA); Tse11gYuehLee v MetrobiltE11te1prise Ltd [ 1994) 2 HKC 684. For cases where the petition for
winding-up was struck out, see Re Ra11sonMotor Mamifacturing Co Ltd (2007] I HKLRD 751; Re Sai K1111g
PLB (Maxicab)(No.I & 2) Co Ltd [2009] 4 HKLRD 523. See also Re Sun Light Elastic Ltd [2013) 5 HKLRD I;
Re China People (Hong Kong) ltd[2014) 2 HKLRD 808.
""' Re Quicksi/11er GloriousSun JV Ltd (2014) 4 HKLRD 759 (winding-up petition stayed pending the outcome of
arbitration over dispute concerning the basis upon which the joint venture is to end). In that case, the court also
observed that the 1>0sitionis different where winding up is sought on the grounds of insolvency (rather than the
just and equitable grounds), in which case the petition would not be stayed because the petitioner is invoking a
class right (to wind up the company) available to all creditors.
681 The original provision was enacted as s.350B in Cap.32 in 2004. Upon the enactment ofCap.622 in 2012, the

new provisions ofss.728-730 were introduced to deal with contraventions ofCap.622 while s.350B was retained
in the retitled Cap.32 to deal with contraventions of that Cap.32 Ordinance.
682 Sec Hong Kong Standing Committee on Company Law Reform, Corporate GovernanceReview: Consultation

Pt1peron Proposals Made in Plwse I of the Review (July 2001) [12.02). For comparable overseas provisions,
sec Companies Act 1993 (New Zealand) s.165; Canada Business Corporations Act 1974-1976 s.247, and
Corporations Act 2001 (Australia) s.1324. See also Lang Thai, "Statutory Injunction - Call for Amendment to
s.1324 of the Corporations Acl'' (2006) 24 Companyand Securities LawJoumal 41.
508 MEMBERS' REMEDIES AND MINORITY PROTECTION

injunction to restrain breaches of Cap.622, breaches of fiduciary duties by directors,

or breaches of the company's articles. Cap.32, s.350B contains similar provisions, but
dealing only with breaches of that Cap.32 Ordinance.
10.247 Apply to Hong Kong companies and non-Hong Kong companies. The provisions
apply to both Hong Kong companies and non-Hong Kong companies. 683

8.2 Persons who may apply

10.248 Members, creditors and Financial Secretary can apply. Members684 and creditors 68;
of the company whose interests have been, are or would be affected by the conduct
may seek an injunction under Cap.622, s.729(1 ). The Financial Secretary also has
power to seek an injunction under Cap.622, s.729(2).686

8.3 Scope of orders and the court's powers

10.249 Injunction granted on such terms as court thinks fit. The court's power under
Cap.622, s.729 is to grant an injunction, on such terms as the court thinks fit,
restraining a person from engaging in the impugned conduct 687 or requiring the
person to do any act or thing. 688 This includes a power to order the person to do
a positive act. 689 The court also has powers to order the person to pay damages to
any other person, 690 and to declare any contract to be void or voidable to the extent
specified in the order. 691
10.250 Discretionary nature. In Australia, it has been held that the court's power to grant
an injunction under the comparable section is discretionary.692 The court is given the
widest possible powers under the statutory provision, devoid of traditional restraints
in the exercise of the jurisdiction for granting equitable injunctive relief,693 though the

683 Cap.622, s.722(1 ). For Cap.32, see s.3508(1) and the definition of "specified corporation" in Cap.32, s.2(1 ).
•,... Members are registered members (see Cap.622, s.2), but it is sufficient for an applicant who is a beneficial
holder to become a registered member by the time when the injunction is granted: Re Tysa11 Holdings Ltd (2013)
4 HKC425.
6" See Allen v Atalay (1993) 11 ACSR 753; Ai1peak Pty Ltd v JetstreamAircraft Ltd (1997) 23 ACSR 715.
••• Members, creditors and the Financial Secretary also have standing under Cap.32, s.3508(1 ).
687 See, e.g., Re 1j;sa11 Holdi11gsLtd (2013) 4 HKC 425 (injunction to resn-ain n,msaction for sale of assets at an
undervalue that would amount to breach of fiduciary duty).
6
" See, e.g., Re Pal Active Ltd (unrep., HCMP 2001/2008, (201OJ 2 HKLRD D3) (mandatory injunction for
compliance with fiduciary duty).
6" Karla Otto Ltd v Bulelll Ere11Bayram (2017) 2 HKLRD 124 (where a de facto director of a company wrongfully
used the company's funds to set up a new company in which he was sole director and shareholder and to which
funds of the first-mentioned company were transferred, the court made an order requiring the director to resign
from the board of the second company pursuant to s. 729, together with other declarations and orders for the
recovery of the funds from the second company).
°
69 Cap.622, s.729(1)(b); Cap.32, s.350B(7). The damages that may be ordered does not entitle a person to recover

by way of damages any .loss that is solely rcneetive oft he loss suffered by the company which only the company
is entitled to recover under the common law: Cap.622, s.729(5); Cap.32, s.3508(8). On renective losses, see
para. I 0.103 above. For Cap.32, s.3508(7) state.s that the power to award damages is "either in addition or in
substitution for the grant of the injunction": sec also para.10.253 below.
69' Cap.622, s.729(1)(c). There is no equivalent of this power in Cap.32, s.350B.
692 Re Br1111swick NL (1990) 3 ACSR 625,629.
693 See Cap.622, s.729(3)-729(4); Cap.32, s.3508(2) and 3508(4).
 STATUTORYINJUNCTION 509

power must be exercised judicially and sensibly.694 Under the Australian legislation, it
has been held that, since the court's injunctive powers arise from a statutory jurisdiction
and not the court's traditional equitable jurisdiction, the court is entitled to take into
account wider factors such as the purposes of the companies legislation in the exercise
of the court's discretion.695
Interim and final injunctions. The court has power to grant both interim 696 10.251
and final injunctions. In determining whether an interim injunction should be
granted, it is appropriate for the court to examine the usual questions relevant
to whether interim injunctions should be granted (namely that there is a serious
question to be tried and that the balance of convenience favours the granting of the
order); 697 however, such traditional equitable principles do not circumscribe the
court's statutory jurisdiction. 698 In Re Tysan Holdings Ltd, 699 the court granted an
interim injunction to restrain the directors from engaging in any act to perform an
agreement for the sale of its shareholdings in another company in circumstances
where the directors' authorisation of the transaction may constitute a breach of
fiduciary duties. The applicant had also instituted proceedings to seek leave to
bring a statutory derivative action. The court affirmed that it has jurisdiction to
grant an injunction in the interim of the member's commencement of separate
proceedings in respect of the breach of fiduciary duty or until the trial of the
derivative action.
Statutory exception to Foss v Harbottle in that members can seek injunction 10.252
involving breach of fiduciary duties; but power to award damages not intended
to override Foss v Harbottle. Sections 728- 729 of Cap.622 provide for a statutory
exception to Foss v Harbottle in giving members standing to seek an injunction
restraining any conduct that involves a breach of fiduciary duties owed to the company.
However, despite the court's power to award damages under s.729, it does not appear
that the provisions are intended to override the rule in Foss v Harbottle so as to allow
members a personal right of action to seek compensation or restitution for the company
generally. Moreover, since the cow-t's powers under s.729 are discretionary, the court is
entitled to take into account particular considerations (such as those underpinning the
irregularity principle of Foss v Harbottle) in determining whether it is appropriate to
accede to granting an order under s.729.
Award of damages as a substitute remedy, or supplementary remedy, for an 10.253
injunction. In Australia, it has been held that the power to award damages under
the similar provision of s. I 324( I 0) of the Corporations Act 2001 is only to award

... ~( !Cl Australia Operations Pry Ltd v Trade Proctices Commission ( 1992) 38 FCR 248; and see also Australian
Securities and lnvestme111sCommission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605.
Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; but cf
oi'S Austrolia11 Securities and lnve.<1me111s
Ausrrolia11 Securities and fllvesrments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR I, 63.
696 Cap.622, s.730( 1); Cap.32, s.350B(S). Sec, e.g., Re Tysan Holdings Ltd [20131 4 HKC 425.
69
' Leung Alfred Cheuk fli'.th v Unity lnvesrments Holdings Ltd (unrcp., HCMP 1885/2005, (2005] HKEC 1425); Re

Tysan Holdings Ltd (2013] 4 HKC 425; Re Pioneer Energy Holdings Pry Lrd(2013) 94 ACSR 478; Brove Venwre
Ltd v Xinhua News Media Holdings lid [2017] 5 HKLRO J53.
698 Australi,111Securities and lnvestme111sCommission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; but cf

Australian Securities and lnvesh11e11/s Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR I.
•99 (2013) 4 HKC 425.
510 MEMBERS' REMEDIES AND MINORITY PROTECTION

damages as a substitute remedy, or a supplementary remedy, for an injunction. 700Thus,

according to the more recent authorities in Australia, damages would not be available
when no injunction is sought,7°1 nor where there is no prospect of the court granting an
injunction. 702 In arriving at these views, the Australian courts have taken into account
the structure and context of the statutory provision, including the express reference in
s.1324(10) to damages being awarded "in addition to or in substitution for the grant of
the injunction". 703 It has been said: "Ifthere were to be created in the [statute] a general
power to award damages for contraventions of the [statute], one would expect to see
it disengaged from a section dealing with the jurisdiction to make an injunction."704
In Hong Kong, Cap.32, s.3508(7) also refers to the award of damages "in addition
to or in substitution for the grant of" the injunction. Accordingly, the reasoning of
the Australian courts would appear to be applicable to s.350B. However, the Cap.622
provisions do not contain the above limiting wording, with s.729(1)(b) simply stating
that the cou11may: "order the person to pay damages to any other person". But note
that Cap.622, ss.728-730 were derived from Cap.32, s.350B and, when Cap.622 was
enacted, there did not appear to be any legislative intention to substantively alter the
scope of the statutory remedy in relation to the availability of damages. 705 In light of
the legislative history ofss.728-730 and the reluctance of the courts to attribute to the
legislature an intention to make a radical change to the law by way of a side-wind,706
it is submitted that ss. 728- 730 should be interpreted in a similar manner to Cap.32,
s.3508(7).

m McCracken v Phoenix Constructions (Qld) Pty ltd (2012) 289 ALR 710, [30] (Qld CA). cfTHC Holding Pty
Ltd v CMA Recycling Pty Ltd (admins apptd) (2014) 101 ACSR 202, where che principle from the McCracken
case was accepted to be correct, but where damage.s were ordered on the basis ofa sufficient nexus between che
injunctive relief sought at the outset of the proceedings and the claim for damages.
,.;, Execwor TrusteeAustralia Ltd v Deloi11eHaskins Sells (1996) 22 ACSR 270; Trust Co Ltd v Noosa VentureI Pty
Ltd (2010) 80 ACSR 485; Po/on v Dorian (2014) 102 ACSR I.
,.;, GE Capital Australia v Davis (2002) NSWSC 1146, [58)-[61); THC Holding Pty Lid v CMA Recycling Pty Lid
(ad111i11s
apptd) (2014) IOI ACSR 202, [ 148).
"" Execlllor1h1steeA11stralia Ltd II Deloi/le Haskins Sells (1996) 22 ACSR 270; McCracken v Phoenix Constructions
(Qld) Pty lid (2012) 289 ALR 710, (30) (Qld CA).
"" Erecutor TrusteeAustralia Ltd v Deloille Haskins Sells (1996) 22 ACSR 270,279 per Perry J; and see also Polo11
v Dorian (2014) 102 ACSR I, [783)-(780).
"" See the paper of the Administration tabled before CheLegislative Council Bills Committee: "Comparison Table
for Part 14 - Remedies for Protection of Companies' or Members' Interests" (CB( I)807/11-12(0 I)) (6 January
2012) Annex, clauses 717-719.
,.. Medical Co,mci/ of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144.
 CHAPTER 11

ACCOUNTS AND AUDIT

PARA.

I. lntroduction ............................................................................................................................. 11.00 I

2. Accounting Records ................................................................................................................ 11.003

2. l Records to be kept .......................................................................................................... 11.003
2.2 Liability for failure to keep records ................................................................................ 11.0IO

3. Annual Financial Statements .................................................................................................. 11.017

3.1 Terminology .................................................................................................................. 11.017
3.2 Obligation to prepare financial statements ................................................................... 11.018
3.3 Financial year ................................................................................................................ 11.019
3.4 Contents of financial statements ................................................................................... 11.021
3.4.1 General ................................................................................................................. 11.02 I
3.4.2 Statement of comprehensive income (profit and loss accowit) ............................ l I .023
3.4.3 Statement of financial position (balance sheet) ................................................... 11.025
3.4.4 True and fair view ................................................................................................. 11.029
3.4.5 Other requirements ............................................................................................... 11.03 l
3.4.6 Financial reporting and accounting standards ...................................................... 11.033
3.4.7 Revision of financial statements .......................................................................... 1 I .037
3.5 Corporate groups: consolidated financial statements ................................................... 11.040
3.6 Directors' report ............................................................................................................ 11.043
3.7 Disclosure to members .................................................................................................. 11.049
3.7.1 Right to receive reporting documents ................................................................... 11.049
3.7.2 Summary financial reports ................................................................................... 11.052
3.8 Disclosure to the public ................................................................................................. 11.056
3.9 Simplified reporting ...................................................................................................... 11.058
3.10 Dormant companies ...................................................................................................... 11.066
3.11 Transitional provisions under Cap.622 ......................................................................... 11.07I

4. Directors' Rights of Inspection ............................................................................................... 11.074

4.1 General ........................................................................................................................... 1 I .074
4.2 Scope of right ................................................................................................................. 11.075

5. Members' Rights of Inspection ............................................................................................... 11.08 I

5.1 General ........................................................................................................................... 11.08 I
5.2 Criteria for grant of order authorising inspection ........................................................... 11.083
5.3 Documents that can be inspected ................................................................................... 11.092
5.4 Ancillary matters ............................................................................................................ 11.095

6. Auditors ................................................................................................................................... 11.097

6.1 General ........................................................................................................................... 11.097
6.2 Qualifications and appointment ..................................................................................... 11.099
6.2.1 Qualifications ....................................................................................................... 11.099
6.2.2 Appointment ......................................................................................................... 11.102
512 ACCOUNTS AND AUDIT

6.3 Auditors' functions, rights and duties ............................................................................. I I I 06

6.3.1 The auditors' report ............................................................................................. 11. l 06
6.3.2 Auditors' rights .................................................................................................... 11.l I8
6.3.3 Common law duty of care .................................................................................... 11.124
6.3.4 Duty to report impropriety or fraud ..................................................................... 11. I 35
6.3.S Duties owed to shareholders or third parties ........................................................ 1J .137
6.3.6 Indemnities by the company ................................................................................ 11.143
6.4 Ceasing to hold office .................................................................................................... 11. l 44
6.4. l Resignation ........................................................................................................... 11. l 44
6.4.2 Retirement ............................................................................................................ 11. l 49
6.4.3 Removal ................................................................................................................ 1J. IS I
6.4.4 Disqualification .................................................................................................... 11. l 54
 1. INTRODUCTION
Statutory requirement to keep financial records and prepare annual audited 11.001
financial statements. The Companies Ordinance (Cap.622) contains provisions
requiring companies to keep financial records and to prepare annual audited financial
statements for disclosure to shareholders and, in the case of public companies, to the
public generally.These provisions ensure that investors and creditors can have information
about the financial position of companies. Statutory requirements for audited accounts
date back to the first Companies Acts in England in the middle of the 19th century,
when publicity of financial information of companies was introduced to avoid fraud
perpetrated on investors by joint stock companies. This disclosure philosophy remains
an important part of company law and corporate governance in the modern era. 1
Main changes under Cap.622. Under Cap.622, a number of changes were made to the 1.1.002
law regarding accounts and auditors compared with the provisions in the predecessor
Companies Ordinance. The main changes include: 2

I. some changes in terminology (e.g. "financial statements" replace

"accounts");
2. new provisions for determining the financial year for a company;
3. omission of the detailed statutory contents for financial statements, with
predecessor Cap.32 Schs. l Oand 11 repealed without replacement in Cap.622;
4. extension of the circumstances where simplified reporting can be adopted; and
5. enhancement of rights of auditors.

The changes are discussed in more detail in the relevant parts of this chapter.

2. ACCOUNTING RECORDS

2.1 Records to be kept

What do accounting records include. Under Cap.622, the term "accounting records" 11.003
replaced "books of account" (as used in predecessor CO, s.121(1) (repealed)).

In the Hong Kong context, see, e.g., S H Goo and Anne Carver, Cmporate Govema11ce:the Hong Kong Debate
(Hong Kong: Sweet and Maxwell, 2003); Simon SM Ho, Corporate Govema11ce i11Hong Kong: Key Problemsand
Prospects (Mong Kong: Centre for Accounting Disclosure and Corporate Governance, School of Accountancy,
the Chinese University of Hong Kong, 2003); Alex Lau, John Nowland and Angus Young, "In Search of Good
Corporate Governance for Asian Family Listed Companies: A Case Study on Hong Kong" (2007) 28 Compa11y
/,awyer306. For disclosure philosophy generally, see, e.g., E J Weiss, "Disclosure and Corporate Accountability"
(1979) 34 Business Lt.nvyer 515; Joel Seligman, "The His1orieal Need for a Mandatory Corporate Disclosure
System" (1983) 9 Jounwl of Corporation Law I; John C Coffee Jr, "Market Failure and the Economic Case for
a Mandatory Disclosure System" (1984) 70 Virginia Law Review 717.
2 For background to the major changes on the accounting provisions, see Financial Services and the Treasury
Bureau, Ca11s11/tatio11
Paper: Acco11mi11g a11dA11diti11g Provisio11s(March 2007) and Co11sultatio11 Co11c/11sions
(March 2008); Co11sultationPaper: Draft CompaniesBill Seco11d Phase Co11sultation(May 2010), 96-113, and
Ca11s11/tatio11
Conc/11sio11s(October 20 I0).
514 ACCOUNTS AND AUDIT

The general concept is the same, but there are some changes in wording which set
out more clearly what records are required to be kept. Under Cap.622 s.373(2), the
accounting records that a company must keep are records sufficient to:

1. show and explain the company's transactions;

2. disclose with reasonable accuracy the company's financial position and
financial performance; and
3. enable the directors to ensure that the financial statements comply with the
Ordinance.

11.004 Must include daily records of sums of money receivedand expended; and assets and
liabilities. In particular, the accounting records must contain: (a) daily entries of all sums
of money received and expended by the company, and the matters in respect of which the
receipt and expenditure takes place; and (b) a record of the company's assets and liabilities.3
11.005 Includes cashbooks, ledgers etc but not minutes or contracts. Accounting records
would include ledgers,journals, vouchers, statements and such like records, but do not
include minutes of meetings, nor contracts and agreements, even if they may give rise
to entries in accounting records. 4 Books of prime entry such as cashbooks, journals
and ledgers must be kept and it is insufficient to simply keep the source materials from
which a set of books may be written up. 5
11.006 Company's obligations regarding any subsidiary undertaking which is not
company; must take reasonable steps to ensure it keeps sufficient accounting
records. If a company has a subsidiary undertaking 6 which is not a company and
which is not subject to Cap.622, s.373, the company must take all reasonable steps
to secure that the subsidiary undertaking keeps accounting records that are sufficient
to enable the directors to ensure that any consolidated financial statements required
comply with the Ordinance. 7
11.007 Can be hard copy or electronic.Accounting records may be kept in hard copy form or in
electronic form: Cap.622, s.376(2). Jfthe records are kept in electronic form, the company
must ensure that those records are capable of being reproduced in hard copy forn1:Cap.622,
s.376(3). If accounting records are kept otherwise than by making entries in a bound book,
the company must take adequate precautions to guard against falsification, and must take
adequate steps to facilitate the discovery of a falsification: Cap.622, s.376(4).
11.008 Kept at registered office or other place directors think fit. The accounting records
can be kept at the registered office or at any other place as the directors think fit:
Cap.622, s.374. The records can be kept outside Hong Kong, subject to compliance

l Cap.622 s.373(3).
' Ho Pui Tin Terence v fli'.il, Nam Group Ltd [2006) 3 HKC 40, [25)-[26).
' Van Reesema v FI ave/ ( 1992) 7 ACSR 225.
• For the definition, sec Cap.622, s.16 and Sch. I. Section 16 is to be repealed by the Companies (Amendment) Bill
2018 cl.6 and is to be replaced with new s.357(4)(c) (sec cl.32(4) in the Bill). Schedule I is also to be amended
by the Bill: see cl.85.
' Cap.622, s.373(4).
 ACCOUNTING RECORDS 515

with the following requirements as prescribed under s.374(3). The accounts and
returns with respect to the business dealt with in those records must be sent to, and
kept at, a place in Hong Kong, and must be open to inspection by the directors without
charge. Those accounts and records must disclose with reasonable accuracy the
financial position of the business in question at intervals not exceeding six months,
and must be sufficient to enable financial statements to be prepared in accordance
with the Cap.622.
Must be retained for seven years. Accounting records must be retained for seven 11.009
years from the end of the financial year to which the last entry made or matter recorded
therein relates: Cap.622, s.377.

2.2 Liability for failure to keep records

Director commits offence if fails to ensure compliance. Where the company has .l.l.010
not kept accounting records in accordance with Cap.622, s.373(1), a director commits
an offence if the director failed to take all reasonable steps to secw-e the company's
compliance with the section: Cap.622, s.3 73(5). Where a director is charged under this
provision, a defence is available under s.373(7). The defence applies if the director
proves that he had reasonable ground to believe and did believe that a competent and
reliable person was charged with the duty of seeing that the requirements ofs.373(1)
were complied with and was in a position to discharge that duty.
Separate offence if wilfully fails to take all reasonable steps to secure compliance. .l.l.011
A separate offence, with a higher maximum penalty, is committed if a director wilfully
fails to take all reasonable steps to secure compliance with s.373(1 ): Cap.622, s.373(6).
Keeping proper accounting records in two years immediately preceding winding- 11.012
up. There is also an offence under Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32), s.274 which applies if a company is wound up and the
company had not kept accounting records that comply with Cap.622, ss.373(2)-373(3)
throughout the period of two years immediately preceding the commencement of the
winding-up. Under s.274( I), every officer in default 8 commits an offence. However,
there is a defence which applies if the person acted honestly and, in the circumstances
in which the business of the company was carried on, the default was excusable. 9
Objective test whether director taken reasonable steps. The test of whether a director 11.013
has taken all reasonable steps to secure compliance with the statutory provision is an
objective one, taking into account all the circumstances of the case. 10 It is insufficient
that the director subjectively believed that he had taken all reasonable steps.
After director has left company little they can do to ensure compliance. In R v Yung 11.014
Leonora," the director (and minority shareholder) was responsible for the accounts
of the company up until a time when she was required by the majority shareholder to

8 As defined in Cap.32, s.351(2).

9 Cap.32, s.274(1).
10
Australian Securities Commission v Fairlie (1993) TASSC 69, (44).
11
(1994) 3 HKC 141.
516 ACCOUNTS AND AUDIT

leave the company. The books and records were kept up to date when the accounts were
within the director's control, but books were missing for the period after her departure
for good. The court held that the director did not fail to take all reasonable steps to
secure compliance with predecessor CO, s.121 (now Cap.622, s.373) in circumstances
where, after her departure from the company's offices for good, there was little she
could have done to secure the company's compliance.
11.015 Not strict liability offences. In Re Copyright Ltd, 12 disqualification proceedings
were brought against a non-executive director under Cap.32, s. l 68H, where it was
alleged that the director had committed offences under, inter alia, predecessor CO,
s.121 (now Cap.622, s.373) and Cap.32, s.274. The court confirmed that the offences
are not strict liability offences and held that the offences were not made out against
the director. The director had checked with the company's executive director about
the company's business on a weekly basis and he had been provided a detailed year-
end management report and monthly accounting reports which could only have been
prepared with proper accounting records. In these circumstances, the court held that
the director had taken reasonable steps to comply with the requirements of predecessor
CO, s.121, and in any event, he had reasonable grounds to believe and did believe that
the functions of keeping proper books had been delegated to competent and reliable
persons. Moreover, even if the director was an officer in default under Cap.32, s.274,
he had acted honestly and the default was excusable.
11.016 Employment of competent book-keeper might be sufficient where existing
system functioning properly. For an Australian decision where the director
was held to have contravened the statutory provision, see Australian Securities
Commission v Fairlie. 13 In that case, the director had relied on employees with
accounting qualifications or book-keeping experience. However, the court held
that that was insufficient in circumstances where the director was aware that there
were inadequacies in the accounting records such that no accurate profit and loss
statements had been prepared throughout the period when he held office. The court
took the view that the employment of a competent book-keeper or office manager
may be sufficient where all that is required is to maintain an existing system which
is functioning properly. However, it is insufficient where the records are in chaos
and the mere employment of such a person could not be reasonably expected to be
effective in remedying the situation.

3. ANNUAL FINANCIAL STATEMENTS

3.1 Terminology

1l.017 Terminology aligns with accounting standards. Changes in terminology were made
under Cap.622 (compared with the predecessor CO) to align with the terms used in the
accounting standards. "Annual financial statements" replaced "accounts"; "statement

12 [2004)2HKLRD 113.
" (1993)TASSC69.
 ANNUALFINANCIAL STATEMENTS 517

of financial position" replaced "balance sheet"; and "statement of comprehensive

income" replaced "profit and loss account".

3.2 Obligation to prepare financial statements

Annual financial statements must be audited; must also be directors' report on l.l.018
state of affairs. For each financial year, the company is required to prepare financial
statements.14 The Companies Ordinance (Cap.622) contains a number of provisions setting
out the requirements for these annual financial statements, including a requirement that
the financial statements be audited. 15 A directors' rep01t dealing with the state of affairs
of the company is also required. The financial statements, auditor's report and directors'
report are laid before the company at its annual general meeting. The primary purpose of
the annual financial statements is to present information to the members showing how the
company's funds have been utilised and the profits derived from such use. 16

3.3 Financial year

Calculating when financial year begins and ends. Cap.622 contains prov1s1ons l 1.019
for the calculation of the financial year of a company, based on the UK provisions. 17
The financial year of a company begins on the first date of its "accounting reference
period" and ends on the last date of that period. 18 The accounting reference period is
determined as follows.
Accounting reference period. For companies incorporated under Cap.622, the first 11.020
accounting reference period commences from the date of its incorporation and ends on
the last day of the month in which the anniversary of the company's incorporation falls
(this latter date is referred to as the "primary accounting reference date"). 19 Before
that period ends, it is possible for the directors to specify another day as the p1imary
accounting reference date, but the date specified must fall within 18 months after
the date of the company's incorporation. 20 The accounting reference period for each
subsequent financial year commences on the date immediately following the end of the
previous financial year and ends on the "accounting reference date". 21The accounting

" Cap.622, s.379.

" For the audit requirements, see para. I I. I06 below.
16 Companies Law Revision Committee, Second Report of the Companieslaw Revision Committeeon Company
Ll,w (Hong Kong, 1973), [6.22).
17 Companies Act 2006 (UK), ss.390-392.
18
Cap.622, s.367. Section 367 is proposed to be amended by the Companies (Amendment) Bill 2018 cl.39 to allow
the financial year to end on any date, within 7 days before, or after, the end of the accounting reference period,
as specified by the directors. Cf Companies Act 2006 (UK) s.390. This is to facilitate the practice of companies
which may wish to fix the accounting period as a period of exactly 52 weeks for every year or the accounting
reference date as the same day each year (such as "the last Friday in January").
'9 Sec Cap.622, ss.368(2) and 369(5). For the accoun1ing reference period and primary accounting reference
date for existing companies (i.e., those formed under Cap.32 or any other former Companies Ordinances),
see Cap.622, ss.368(1), 369(1)-369(4); and sec, e.g., Re Hong Kong Society 0JC011ge11iwl & StructuralHeart
Disease Ltd [2016) 5 HKLRD 117, [23]-[27]. For existing dormant companies, sec new ss.368(1 A) and 369(2)
(iv) which are proposed to be introduced by the Companies (Amendment) Bill 2018 cll.40, 41.
°
2 Cap.622, ss.369(5)(a) and 369(6).
21 Cap.622, s.368(3).
518 ACCOUNTS AND AUDIT

reference date is the anniversary of the primary accounting reference date,22 but this
date can also be changed by the directors to some extent. For example, the directors
might wish to change the period of the financial year to align with a holding company.
The financial year can be shortened or lengthened but not so as to render the financial
year longer than 18 months.23 Also, to avoid manipulation of the reporting of financial
results, the financial year cannot be changed more than once every five years.24

3.4 Contents of financial statements

3.4.1 Ge11eral
11.021 Must give a true and fair view; and must comply with accounting standards.
The financial statements must contain the contents as set out in Cap.622, s.380. As
under the predecessor CO,25 there is a basic requirement in Cap.622 for the financial
statements to give a true and fair view.26 However, the detailed contents requirements
of the financial statements are no longer set out in the Ordinance, with greater
reliance made on the accounting standards. This is to provide for greater flexibility
in incorporating developments in financial reporting and in ensuring that the legal
requirements can be more easily kept up to date. Accordingly, the predecessor CO,
Schs. 10 and 11 (repealed) are not reproduced in Cap.622 (with the exception of a few
matters not currently dealt with in the accounting standards 27); and there is an express
provision in Cap.622 requiring the financial statements to comply with applicable
accounting standards. 28
11.022 Consequences of non-compliance. For the consequences of non-compliance with
the contents requirements for financial statements as stipulated in Cap.622, s.380, see
para.11.039 below.

3.4.2 Stateme11tof comprehensive income (pro.fita11dloss llccotmt)

11.023 Requirement for statement. Predecessor CO, s.122( 1) (repealed) previously required
the preparation of a profit and loss account each financial year. There is no express
requirement in Cap.622 for preparation of a statement of comprehensive income
(profit or loss account), although this is effectively required by s.380(l)(b) ofCap.622
which requires the financial statements to give a true and fair view of the "financial
performance of the company for the financial year".
11.024 Statement shows revenue and expenses for period in question. The statement of
comprehensive income shows whether the company has made or lost money during
the period covered by the statement. The statement of comprehensive income shows

22
Cap.622, s.370.
2J Cap.622, s.371 (5).
24
Sec Cap.622,s.371(6). An exception is provided where chechangeis required to coincide with the accounting
referencedaceofa company'sholding company:Cap.622,s.371(7).
" PredecessorCO, s.123(1)(repealed).
26 Cap.622,s.380.
" These are set out in Cap.622, Sch.4 and are required to be contained in che financial staccmcncspursuant to
Cap.622,s.380(3).
28 Cap.622,ss.376(4)and 376(8).
 ANNUAL FINANCIAL STATEMENTS 519

the items ofrevenue and expenses of the company, including for example cash inflows
from the company's trading activities (e.g. sale of goods), operating expenses, gains
made on sale of fixed assets, finance costs (e.g. interest on loans), income tax expenses
and depreciation of fixed assets. The figure (referred to colloquially as the "bottom
line") at the bottom of the statement of comprehensive income shows the net profit
(or loss) of the company after all expense items are deducted from all revenue items.
In showing as profit or loss the difference between the revenue for the period covered
by the statement and the expenditure chargeable in that period, the statement of
comprehensive income is seen as a histo1ical document. The revenue and expenditure
are brought into the account at their recorded monetary amounts, and so this basis of
accounting is referred as the historical cost basis. 29

3.4.3 Statement ojfinancial position (baiflnce sheet)

Annual statement of financial position at. Predecessor CO, s.122(2) (repealed) 11.025
previously required a balance sheet to be prepared each financial year. This is not
expressly stipulated in Cap.622, but that s.380(l)(a) effectively requires a statement
of financial position (balance sheet) as the financial statements must give a tn1e and
fair view of the "financial position of the company as at the end of the financial year".
Snapshot of company's financial position. The statement of financial position 11.026
provides a snapshot of the company's financial position as at the date of the statement.
The statement of financial position is prepared as a histo1ical record and not a statement
of current worth. Its function is to show in monetary terms the capital, reserves and
liabilities of a business at the date at which it is prepared and the manner in which the
total moneys representing them have been distributed over the several types of assets. 30
The statement of financial position shows in tabular form the company's assets,
liabilities and shareholders' equity (or capital), and also contains "notes" explaining
the items in the statement. Assets are composed of current assets (cash or other assets
that would ordinarily be consumed or converted to cash within 12 months after the
end of the last financial year-for example goods to be sold in the company's ordinary
trade) and non-current assets (such as fixed assets used to produce income-for
example land owned by the company, or plant and machinery-as well as intangible
assets such as intellectual property and goodwill). Shareholders' equity refers to the
share capital contributed by shareholders. Liabilities include, for example, amounts of
loans taken out by the company, debt securities issued by the company, tax liabilities
and amounts owed to other persons such as suppliers.
Assets= Liabilities+ Shareholders' equity. The basic equation is: 11.027
Assets= Liabilities+ Shareholders' equity
Shareholders' equity is listed on the liabilities side of the equation as the equity in
a sense represents the funds owing to shareholders. The amounts of liabilities and
shareholders' equity must balance with the total assets because the funds coming in

29 Companies Law Revision Committee, Second Report of the Companies l.aw Revision Co111mi11ee
on Company
Law (Hong Kong, 1973),[6.22).
30 Ibid.
520 ACCOUNTS AND AUDIT

from shareholders and other sources (under "liabilities") (shown on the right hand side
of the above equation) are in the fo1m of cash or other assets of the company (shown
on the left hand side of the equation).
11.028 Approved by board and signed by two directors. The statement of financial position
must be approved by the board and signed on its behalf by two directors ( or the sole
director in a single director company). 31

3.4.4 True a11dfair view

11.029 If compliance not sufficient to give true and fair view additional information
necessary. The financial statements must give a true and fair view: Cap.622, s.380( I ). 32
This is the overriding requirement for financial statements. The financial statements
must also contain information listed in Cap.622, Sch.4 and must also comply with other
requirements set out in Cap.622 as well as applicable accounting standards: Cap.622,
ss.380(3) and 380( 4). However, if compliance with those ss.380(3) and 380( 4) would
not be sufficient to give a true and fair view, then additional information necessary to
give a true and fair view must be given in the financial statements. 33
11.030 "Trueand fair view" vs "Trueand correct view". Before amendments to the predecessor
CO which were introduced in 1974, the basic requirement was for the accounts to give a
"true and correct view", following earlier UK legislation. However, the UK provisions
were amended under the Companies Act 1948 to replace that earlier formulation with
"true and fair view". The reason for the change in the UK provisions was that the word
"co1Tect"was regarded as being too strong because it implies that there is one view which
is "correct". Yet,it was thought that in published accounts, there is no standard of absolute
truth, and so the introduction of "true and fair view" recognised that the presentation of
the figures can only be that which is, in the personal view of the auditor, a fair view.34 This
amendment was introduced in Hong Kong in 1974 as part of the wider reforms amending
the accounting provisions to follow the UK Companies Acts of 1948 and 1967.35

3.4.5 Other requireme11ts

11.031 Particulars of loans to directors must be set out. Particulars of loans, quasi-loans,
credit transactions and other related transactions entered into with directors must be
set out in the notes to the financial statements in accordance with the Companies
(Disclosure oflnformation about Benefits of Directors) Regulation (Cap.622G). 36

" Cap.622, s.387.

" On the "true and fair view" concept generally, see Robert Baxt, "True and Fair Accounts-A Legal Anachronism"
(1970) 44 Australian law .Joumal 541; Edmond Grace and K PE Lasok, "The True and Fair View" (1986) 10
Company lawyer 13; Andrew McGee, "The 'True and Fair View' Debate: A Study in the Legal Regulation of
Accounting'" ( 1991) 54 Modem law Review 874.
JJ Cap.622 s.380(5).
" The introduction of the phrase "true and fair view" was recommended by the Cohen Committee following
a proposal of the lns1itu1cof Chartered Accountants in England and Wales. Sec Andrew Higson. Co1port11e
Fi,w11citdRepor1i11g;Theo1ya11d Pmctice (Sage Publications: London, 2003), 147-147; Report of the Commillee
011Compa11yLaw Reform (Cohen Report) (Cmd 6659, I945).
" Companies (Amendment) Ordinance 1974 (No 80 of 1974), introduced pursuant to the recommendations of
the Companies Law Revision Committee: see Second Report of the Companies law Revision Committee 011
Company law (Hong Kong, 1973), (6.1) [6.94).
" Cap.622, s.383, and see Companies (Disclosure of Information about Benefits of Directors) Regulation
(Cap.622G). As to the statutory provisions restricting the giving of loans, quasi-loans etc, see Chapter 8.
 ANNUAL FINANCIAL STATEMENTS 521

Details on directors' emoluments, etc. Requirements for the notes to the financial 11.032
statements to contain details of directors' emoluments and other benefits, including
loans and quasi-loans etc., are also contained in the subsidiary legislation made under
Cap.622, s.383. 37

3.4.6 Financial reporting and accounting standards

Financial statements need to comply with applicable accounting standards. 11.033
The financial statements need to comply with applicable accounting standards,
namely the statements of standard accounting practice issued or specified by the
Hong Kong Institute of Certified Public Accountants ("HKICPA"). 38 Accordingly,
the financial statements need to comply with the Hong Kong Financial Reporting
Standards ("HKFRS") issued by HKICPA. The HKFRS includes reporting
standards as well as the Hong Kong Accounting Standards, and the Interpretations
issued by HKICPA which give authoritative guidance on interpretation of the
relevant standards. HKICPA was established under the Professional Accountants
Ordinance (Cap.50) ("PAO") to regulate the accountancy profession. The HKFRS
are issued by the Council of the HKICPA pursuant to its statutory powers under
PAO, s.18A. Under that provision, certified public accountants are required to
comply with the HKFRS.
Hong Kong Financial Reporting Standards ("HKFRS"). The HKFRS are intended 11.034
to ensure that financial statements give a true and fair view in accordance with the
Companies Ordinance requirements. Previously, Sch. I Oof predecessor CO had set out
detailed disclosure requirements, but those requirements were originally developed
in an era before accounting standards were promulgated by HKICPA and have not
kept pace with significant developments in financial reporting. The provision under
predecessor CO, s.123(4) (now Cap.622 s.380(5)) allowing departure from the
contents requirements of the Ordinance was introduced in 2005 to ensure that the
HKFRS can be used to supplement or replace provisions of Sch. I O in order for the
accounts to give a true and fair view. The move towards giving the HKFRS greater
legal standing has been taken further under Cap.622, with the omission of Sch. I Oand
an express provision included in Cap.622 requiring the financial statements to comply
with the applicable accounting standards: Cap.622, s.380(4)(b).
International Financial Reporting Standards ("IFRS"). There are also International 11.035
Financial Reporting Standards ("IFRS") which are issued by the International
Accounting Standards Board, the standard-setting body of the International Financial
Reporting Standards Foundation ("IFRS Foundation"). The IFRS Foundation is an
independent, not-for-profit, private sector organisation with the objective of developing
globally accepted financial reporting standards. The IFRS have been accepted in more
and more countries and so Hong Kong companies which wish to be listed in, for
example, the US or European countries would need to comply with the IFRS as well
as the HKFRS. HKICPA has in the last decade undertaken a convergence programme

" See Companies (Disclosure oflnformation about Benefits of Directors) Regulation (Cap.6220).
38 See Cap.622, ss.380(4)(b) and 380(8); and the Companies (Accounting Standards (Presc,ibed Body)) Regulation
(Cap.622C). Cap.622, s.380(8) is to be repealed and moved to the general definition section in ss.357( I), 357(4)
(a): see Companies (Amendment) Bill 2018 cll.32, 43.
522 ACCOUNTS AND AUDIT

so that the HKFRS converge with the IFRS. For most companies, compliance with the
HKFRS now means compliance with the IFRS.39
11.036 Financial Reporting Framework and Financial Reporting Standard for SMEs.
The convergence of the HKFRS with the IFRS means that the requirements imposed
are more exacting than necessary for smaller companies. Accordingly, HKICPA in
2005 issued a Financial Reporting Framework and Financial Reporting Standard for
use by small-sized and medium-sized entities ("SME-FRF & FRS"). Companies to
which the SME-FRF & FRS applies can accordingly opt for less onerous reporting
standards instead of complying with the HKFRS.

3.4.7 Revision ofjimmcial statements

11.037 Revision of financial statements. If the directors discover that the financial statements
do not comply with the Companies Ordinance when the financial statements have
already been sent to members, 40 the directors can seek to revise the financial statements
and make necessary consequential revisions to the directors' report or summary
financial report: Cap.622, s.449. Detailed provisions on the revision of financial
statements and reports are set out in the Companies (Revision of Financial Statements
and Reports) Regulation (Cap.622F), made pursuant to Cap.622, s.450.
11.038 Warning to Registrar of revision if statements already forwarded. If the financial
statements to be revised have already been forwarded to the Registrar under Cap.622,
s.664,41 the company must, within seven days after the directors decided to revise the
financial statements, deliver to the Registrar a warning statement in the specified form
that the financial statements will be so revised: Cap.622, s.449(3).
11.039 Revision voluntary but if defective offence committed; and for listed companies
FRC may effectively compel revision. Revision of the financial statements under
s.449 is voluntary in the sense that the directors are not compelled under the provision
to revise the financial statements. It is the directors' choice. However, the Financial
Reporting Council has power to effectively require directors of listed companies to
exercise their powers under s.449 to revise defective accounts. 42 Also, if the financial
statements do not comply with Cap.622, then an offence can be committed under
s.379 if the defective financial statements are laid before the company in general
meeting. If the financial statements have been revised in accordance with s.449 and
the regulations, then the Companies Ordinance has effect with respect to the revised
statements as if the revised statements were, as from the date of revision,43 financial
statements of the company in place of the original financial statements. 44 The revised
financial statements are regarded as the company's financial statements prospectively

,9 Subject to compliance with IFRS I - First-time Adoption of International Financial Reporting Standards.
<-0 If the financial statcmenis have not been sent to any person, there is nothing 10 prevent the directors from correcting
any errors and to approve the corrected rinancial statcmcnis and have the corrected financial statements be treated
as the e-0mpany's financial statemcnis for sending to members and laying before the company in general meeting
CIC.
" Sec para.11.056 below.
•2 Financial Reporting Council Ordinance (Cap.588), ss.49 and 50 .
., On the meaning of"date of revision", see Companies (Revision ofFinancial Statements and Reports) Regulation
(Cap.622F), s.2(1).
44
Companies (Revision of Financial Statements and Reports) Regulation (Cap.622F), s. 10.
 ANNUAL FINANCIAL STATEMENTS 523

only and not retrospectively, and so persons can still be liable for any contraventions of
the Companies Ordinance which have already taken place before the date of revision
of the financial statements.

3.5 Corporate groups: consolidated financial statements

Must give true and fair view of company and subsidiaries as whole. Holding 11.040
companies are required under Cap.622, s.379(2) to prepare consolidated financial
statements. The consolidated financial statements must give a true and fair view of the
financial position of the company, and all the subsidiary undertakings, 45 as a whole
as at the end of the financial year, and must give a true and fair view of the financial
pe1formance of the company, and all the subsidiary undertakings, as a whole for the
financial year.46 Effectively, the statement of comprehensive income and statement
of financial position must be prepared on a group basis. The consolidated financial
statements must also comply with Sch.4 and other requirements of Cap.622, as well as
applicable accounting standards. 47
Individual and group accounts. Under the predecessor CO, a holding company must 11.041
prepare both individual accounts for itself and group accounts. 48 The requirement for
individual financial statements is not required under Cap.622; however, an individual
statement of financial position for the holding company needs to be included in the
notes to the holding company's consolidated financial statements. 49
Where holding company is subsidiary it need not prepare consolidated financial .l.l.042
statements. Where a holding company is itself a wholly owned subsidiary of another
body corporate, then that holding company need not prepare consolidated financial
statements.so Where a holding company is a partially owned subsidiary of another
body corporate, consolidated financial statements are also not required if the directors
of the partially owned subsidiary have notified its members of this intention and no
members have required the preparation of consolidated financial statements.s 1

3.6 Directors' report

In nature of management report regarding financial year. A directors' report is 1.1.043

required to be prepared for each financial year: Cap.622, s.388(1). The report is in the
nature of a management report dealing with the profit or loss of the company for the

45 For the definition of"subsidiary undertaking", see Cap.622 Sch. I.

•• Cap.622, s.380(2).
" Cap.622, ss.380(3) and 380(4). These subsections refer to "financial statements", which means both annual
financial statements of a company and also the consolidated financial statements: Cap.622, s.357(1).
4$ predecessor CO, s.124 (repealed).
49 Cap.622, Sch.4 Pt. I s.2.
°
5 Cap.622, s.379(3)(a). Sec s.357(3) for the definition or wholly owned subsidiary. Under amendments proposed
to be introduced by the Companies (Amendment) Bill 2018 cl.42, the holding company that is also a wholly
owned subsidiary will have a choice whether to prepare individual financial statemcnrs or consolidated financial
statemcnrs (sec proposed s.379(3A)(a)).
" Sec Cap.622, s.379(3)(b). Sec also new s.379(3)(c), proposed to be introduced by the Companies (Amendment)
Bill 2018 cl.42, under which consolidated statements are also not required for a partially owned subsidiary if all
members agree in writing before the end of the financial year.
524 ACCOUNTS AND AUDIT

financial year and the state of the company's affairs as at the end of the financial year.
The directors' report is intended to supplement the information given in the financial
statements. The specific matters required to be contained in the report are set out in
Cap.622, ss.390 and 543(2), Sch.5, and the Companies (Directors' Report) Regulation
(Cap.622D). This includes details on the principal activities of the company, particulars
material for the members' appreciation of the state of the company's affairs, any
amounts recommended to be paid as dividends, and if shares have been issued during
the year, the reasons for and details of the issue.
1 l.044 Requirement for business review. Cap.622 introduced the requirement for the
directors' report to contain a business review which is intended to provide a review
of the company's business and future developments which is more analytical and
forward-looking than the information previously required in the directors' report
under the predecessor CO.52 The business review need not be included in the directors'
report for companies adopting simplified reporting (see para.11.058 below), wholly
owned subsidiaries and any private company where a special resolution is passed to
the effect that a business review is not required. 53
1 l.045 Consolidated directors' report. The directors of a holding company which prepares
consolidated financial statements must prepare a consolidated directors' report dealing
with the business of the company and its subsidiary undertakings as a whole. 54 There is
no need for a directors' report concerning only the holding company itself. 55
11.046 Approved by board and signed by director or company secretary. A directors'
report must be approved by the board and signed on the board's behalf by a director or
the company secretary: Cap.622, s.391.
I l.047 Director commits offences where fails to take reasonable steps to secure
compliance. Where a directors' report is not prepared in accordance with the
requirements of the Ordinance, any director who failed to take reasonable steps to
secure compliance with those requirements (in ss.388(1) and 388(2)) comm.its an
offence under that s.388(6) ofCap.622. It is a defence for a director to prove that he or
she had reasonable grounds to believe, and did believe, that a competent and reliable
person was charged with the duty of seeing that the above sections were complied
with and was in a position to discharge that duty: Cap.622, s.388(8). 56 A separate
offence with a higher maximum penalty applies where a director wilfully fails to take
reasonable steps to secure compliance with the requirements of ss.388( I) and 388(2)
of Cap.622; also see s.388(7) of Cap.622.
11.048 Directors' civil liability for untrue statements and for omissions. If there is any
untrue or misleading statement in a directors' report,57 a director of the company is

" See Cap.622, Sch.5 for the matters to be included in the business review. The concept of a "business review" was
originally based on the UK provisions: Companies Act 2006 ( UK) s.417 (repealed). The UK regime now uses the
concept ofa "strategic report" in place of the business review: Companies Act 2006 ss.414A-414O (introduced
by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.
" Cap.622, s.388(3).
" Cap.622, ss.388(2) and 390(3).
55 Cap.622, s.388(2).
56 See also para.I 1.010 above.
57 Or in a s1m1maryfinancial report so far as it is derived from a directors' report. As to summary financial reports,
see para. I 1.052 below.
 ANNUALFINANCIALSTATEMENTS 525

liable to compensate the company for any loss suffered by the company as a result
of the statement if the director knew the statement to be untrue or misleading, or
was reckless as to whether it was untrue or misleading: Cap.622, ss.448(2)(a) and
448(3)(a). 58 If there is any omission from the report of anything required to be included
in it, a director is also liable to the company for losses suffered as a result of the
omission if the director knew the omission to be a dishonest concealment of a material
fact: Cap.622, ss.448(2)(b) and 448(3)(b ). Liability is restricted to compensation to the
company. Directors (or anyone else) are not to be liable to any person other than the
company even though that other person has suffered loss in reliance on the defective
directors' repott: Cap.622 ss.448(4) and 448(5).

3.7 Disclosure to members

3.7.1 Rig/rt to receive reporting documents

Laying and publication of financial statements. Cap.622, Pt.9 Div.6 deals with the 11.049
laying and publication of financial statements. 59 The following documents need to be
laid before the company in the annual general meeting: financial statements (including
consolidated financial statements), the directors' report and the auditor's report
(collectively referred to as the "reporting docwnents" 60). 61 Copies of the reporting
documents must also be sent to members at least 21 days before the meeting. 62
If an annual general meeting is not required to be held,63 then copies of the reporting
documents must still be sent to members. 64 There are offence provisions for failures to
comply with the above requirements. 65
Sending copies of reporting documents to members. A company can send copies 11.050
of the reporting documents in hardcopy form or alternatively the company can send
the documents electronically (including via a website) in accordance with Cap.622,
Pt.18 Div.4.66 If the member has agreed with the company, the company can send the
documents via electronic means to an address (such as an email address 67) specified

" Cap.622, s.448 is based on Companies Act 2006 (UK) s.463.

59 Cap.622, s.43 I sets out the time periods within which the financial statements must be laid before the company
in annual general meeting for the financial year concerned. The court has power to extend time under s.43 I.
Applications for extensions are often made where the company had neglected to hold AGMs. For the principles
relating to whether the court would be prepared to extend time, sec Re Intelligence Link Ltd [2013] 5 HKLRD
151; Re Fu Shou Y,1a11 Group (Hong Kong) Ltd [2014] 1 HKLRD 415; Re Hong Kong Times Investments Ltd
[2014] 2 HKLRD 29; Re Asiatic Century Ltd [2014) 2 HKC 502; Re Baitian Techonology Ltd [2014) 5 HKC
305; Re Tai Uv 7i.>ngPhamwceutical (Hong Kong) Co Ltd [2014) 3 HKLRD 218; Enzo Barazelfie v Steris-
Austar Plwrmacewical Systems Hong Kong Ltd [2014) 5 HKLRD 282. As for the relevant stal'Utoryprovisions
under which applications may be made for extension of time in respect of financial years commencing before
the commencement of Cap.622 (3 March 2014 ), see Re Hong Kong Society of Co11ge11ital & Str11ct11ral
Heart
Disease (2016) 5 HKLRD 117, [ IOJ-[ 19].
60 As defined in Cap.622, s.357(2).
61 Cap.622. s.429.
•2 Cap.622, s.430(2); and see also s.434 (rights of members not entitled to vote) ofCap.622 .
•, The AGM can be dispensed with in accordance with Cap.622, s.612.
.. Cap.622, ss.430(3) and 431; and see also Cap.622, s.612(1).
•• Cap.622, ss.429(3)-429(5) and 433.
66 These provisions also apply to other documents (apart from the reporting documents) required to be sent by a
company to its members or other persons.
1
• See the definition of "address" in Cap.622, s.821(1 ).
526 ACCOUNTS AND AUDIT

by the member: Cap.622, s.831. 68 The company can also make its documents available
for access on a website, and this can be regarded as sufficient compliance with the
requirement for sending of the documents to members: Cap.622, s.833. Here, it is also
necessary for the member to have agreed to receive the documents through a website.
However, to facilitate the company's use of websites to communicate with members,
there is deemed agreement in the circumstances set out in s.833(4)-namely where the
articles provide (or the members have passed a resolution) to the effect that documents
or information generally may be sent to members using a website, and the company has
requested consent from a member and the member has not responded within 28 days.
Where a company sends its documents to members via a website, it is also necessary
for the company to notify members of the presence of the document on the website:
Cap.622, ss.833(3)(c) and 833(8). That notification must be given either in hardcopy
form or in electronic form in accordance with either s.832 or 83 I respectively.
11.051 Member can request hardcopy. A member who has received a copy of the reporting
documents in electronic form or via a website can still request a hard copy of the
documents: Cap. 622, s.837.

3.7.2 S1111111uuy
.fi11a11cial
reports
11.052 Summary financial reports to members. Instead of sending the full reporting
documents to its members, the company can send summary financial reports to the
members: Cap.622, s.441. Previously under predecessor CO, only listed companies
could send summary financial reports to its members, but this is extended to all
companies under Cap.622, with the exception of companies which fall within the
reporting exemption (under s.438).69
11.053 Contents of summary financial report. A summary financial report contains certain
information derived from the reporting documents (namely financial statements,
directors' report and auditor's report): Cap.622, s.439. The specific contents
requirements for the report are set out in the Companies (Summary Financial Reports)
Regulation (Cap.622E).
11.054 Choice to members whether to receive full reporting documents or summary
financial reports. A company can give a choice to its members whether to receive the
full reporting documents or summary financial reports:Cap.622, s.442. The company
may send to members a notification asking whether the member wishes to receive
summary reports and providing a return form for the giving of a "notice of intent"
(specifying whether the member agrees to receive the summary reports or not). 70

•• The legislation distinguishes between "electronic form" and "electronic means". A document is sent in electronic
form if it is sent in the form of an electronic record to an information system or is sent by any other means while in
electronic form: Cap.622 ss.2(4)(b), 2(4)(c). For example, a document is sent by electronic means if it is sent by
email. Such a document will also be regarded as being sent in electronic form. However, a document in electronic
form can also be sent via other means, such as by hand or by post: sec also ss.831(3)(b)(ii), 831(3)(b)(iii) of
Cap.622. For example, a document saved electronically on a noppy disc or a detachable hard drive or USB flash
drive could be delivered by hand or by post.
69 Companies falling within the reporting exemption prepare simplified financial statements: sec para.11.058

below.
"" See Cap.622, s.442(2) and Companies (Summary Financial Reports) Regulation (Cap.622£), ss.7-11 as to the
form and contents of the notification.
 ANNUALFINANCIALSTATEMENTS 527

If the company sends a notification but a member does not send any reply in a notice
of intent before the first date on which a copy of the reporting documents is sent to
a member (under Cap.622, s.430), the member will be treated as having agreed to
receive the summary reports in place of the full reporting documents. 71 Members who
have received summary financial reports can still request the company to send to them
the full reporting documents: Cap.622, s.445.
Articles can disallow summary financial reports. If the articles of a company do not 11.055
permit the company to send summary financial reports in place of the full reporting
documents, then the company is not allowed to do so:Cap.622, s.446. 72

3.8 Disclosure to the public

Public inspection of financial statements at Companies Registry. Members of the 11.056

public do not have a right under the Companies Ordinance to obtain a copy of the
financial statements from a company. However, public companies and companies limited
by guarantee are required to deliver to the Registrar, with the company's annual return,73
a copy of the reporting documents: Cap.622, s.664 and Sch.6, s.7. These documents so
lodged would be available for public inspection pursuant to s.45 of Cap.622.
Debenture holders no longer have statutory right to receive accounts. Under 11.057
predecessor CO, s.129O(1) (repealed), holders of debentures of the company and any other
person who is entitled to receive notice of general meetings of the company have a right
to receive copies of the accounts. However, this provision is not reproduced in Cap.622.

3.9 Simplified reporting

Exemptions for private companies. Previously, under predecessor CO, private 11.058
companies could (where all shareholders agree in writing), subject to certain
exceptions, take advantage of predecessor CO, s.141D (repealed) to be exempt
from certain requirements of the Ordinance in respect of the company's accounts.
Cap.622 extends the circumstances where private companies and companies limited
by guarantee can prepare simplified financial statements. 74 Companies eligible for
simplified reporting are referred to in Cap.622 as companies which: "fall within the
reporting exemption".
Small private company automatic exemption. Companies which fall within 11.059
the category of "small private company" automatically fall within the reporting
exemption. 75

" Cap.622, s.442(8).

72
This section also sets out some other circumstances where a company is prohibited from sending the summary
reports in place of the full reporting documents.
n The annual return is required 10 be lodged with the Registrar pursuant to Cap.622, ss.662-664. All companic.s
need to lodge annual returns, but private companies arc not required to lodge copies of its reporting documents
with the Registrar.
" See Financial Services and Treasury Bureau's Co11sultt11io11 Paper 011the Q11alifyi11g Criteria for Privc,te
Companies to Prepare Simplified Fi11a11cial a11d Directors· Reports (December 2011 ). and Consultation
Conc/11sio11s (May 2012).
" Cap.622. s.359(1).
528 ACCOUNTSAND AUDIT

11.060 Small private company: conditions to satisfy. "Small private companies" are private
companies which satisfy any two of the following conditions:

I. total revenue does not exceed $100 million;

2. total assets does not exceed $100 million; and
3. average number of employees during the financial year does not exceed
100.76

A company which satisfies the above in its first financial year continues to be a small
private company until it fails to satisfy the above for two consecutive financial years. 77
Any company which satisfies the above in any two consecutive financial years will
also become a small private company and will continue to be one until it fails to satisfy
the above for two consecutive financial years. 78
11.061 Private companies electing for simplified reporting. Apart from automatic eligibility
for simplified reporting on the basis of the above, private companies can also elect for
simplified reporting by approval of their members. There are two routes. The first
is based on the previous mechanism in predecessor CO, s.141D (repealed) which
requires approval of all members in writing. 79 The second is where there is approval
by at least 75 percent of the votes of members and where there is no vote against
the adoption of simplified reporting. For a company to utilise that second route, the
company must also satisfy any two of the following conditions:

I. total revenue does not exceed $200 million;

2. total assets do not exceed $200 miHion; and
3. average number of employees during the financial year does not exceed I00.80

11.062 Companies which cannot qualify for reporting exemption. Certain types of
private companies or companies limited by guarantee are specificaHy excluded from
the definition of "company falling within the reporting exemption" and so such
companies cannot qualify for simplified reporting. 81 These are companies: which
carry on a banking business holding a valid banking licence; 82 which accept, by way
of trade or business, loans of money otherwise than as a banking business (i.e. deposit-
taking companies other than banks); which carry on an insurance business (otherwise

" Cap.622, s.361 and Sch.3.

77
Cap.622, ss.361(1) and 361(4). See also s.361(2), dealing with existing companies (namely companies
incorporated under the Companies Ordinance of 1865, 1911 or 1932).
78 Cap.622, s.359(3) and 359(4).
79 Cap.622, s.359(1)(b). This provision ensures that private companies which could take advantage of simplified
reporting under the prcdccc.ssor CO can also do so under Cap.622. There arc no size restrictions for a private
company to rely on s.359(1)(b). However. for s.359( l)(b) to apply, the company must not have any subsidiary and
must not be a subsidiary of another company: Cap.622, s.359(1)(b)(ii).
80 Cap.622. ss.359(1)(c), 360, and Sch.3. Companies satisfying these size requirements arc referred to as "eligible
private companic.s" in Cap.622.
81
Cap.622, s.359(4).
81 Granted under the Banking Ordinance (Cap.155).
 ANNUAL FINANCIAL STATEMENTS 529

than solely as agent); or which are licenced under Pt. V of the Securities and Futures
Ordinance (Cap.571) to carry on any business in a "regulated activity" 83 ( e.g. securities
dealers or advisers). There is a carve-out for companies in these specified business
areas as it is thought that such companies, which take in moneys from the public,
should be subject to the general disclosure obligations instead of the less stringent
requirements otherwise applicable for smaller companies. Under the predecessor CO,
that (now repealed) s.141D, the carve-out also applied to companies which own and
operate ships or aircraft for carriage of cargo between Hong Kong and places outside
Hong Kong, but this exclusion is not reproduced in Cap.622.
Companies limited by guarantee. For companies limited by guarantee which fall 11.063
within the reporting exemption and which can adopt simplified reporting, Cap.622,
ss.359(l)(a), 363, and Sch.3.
Groups can fall within exception if satisfy statutory requirements. Groups of 11.064
private companies or companies limited by guarantee can also fall within the reporting
exemption if they satisfy the statutory requirements. 84 Such companies can also adopt
simplified reporting for the consolidated financial statements. 85
Companies failing within exception required to comply with SME-FRF & FRS. 11.065
Companies which fall within the reporting exemption do not need to comply with the
"true and fair view" requirements. 86 Companies falling within the reporting exemption
will effectively be required to comply with the SME-FRF & FRS due to the statutory
obligation to comply with applicable accounting standards. 87 The predecessor CO
requirement for exempt private companies to have accounts which show a "true and
correct view" is also not applied under Cap.622. The requirement for a "true and correct
view" originally applied to all companies. 88 Following amendments made in 1974,
that requirement applied to exempt private companies only. When the amendments
were made to the predecessor CO in 1974 to follow the UK Companies Acts of
1948 and 1967 in imposing more rigorous disclosure requirements, 89 (now repealed)
s.141D of the predecessor CO was also introduced to allow private companies to
continue to apply the pre-existing requirements of predecessor CO with respect to
accounts as it was thought that the more onerous requirements introduced in 1974
were unnecessary for smaller companies. 90 However, the new "true and fair view"
requirement is a less exacting requirement than the former "true and correct view"
requirement. 91 Although it might have been inappropriate for private companies to be

83 As defined in the Securities and Futmes Ordinance (Cap.571 ).

"' See Cap.622, ss.359, 360, 363-366, and Sch.3. Pursuant to amendments proposed by the Companies
(Amendment) Bill 2018 cll.33, 38, groups composed of both private companies and companies limited by
guarantee (referred to as "mixed groups") can also qualify for the reporting exemption (new ss.359(3A), 366A).
The provisions on groups of companies falling within the reporting exemption will also be amended to allow
groups with subsidiaries formed outside of Hong Kong to qualif)• for the reporting exemption so long as the
relevant thresholds in Scll.3 are satisfied: cll.32-38, 86.
8$ Cap.622, s.376(7).
s. Sec Cap.622. s.380(7); and see also s.380(3) for other differences in the contents requirements.
37 Cap.622, s.380(4).
38 Sec para. I I .030 above.
39 Sec para. I I .030 above.

9<i See Explanatory Memorandum to the Companies (Amendment) Bill 1974, C273.
91 See para.11.030 above.
530 ACCOUNTSAND AUDIT

subject to the general reforms introduced in 1974 imposing more onerous disclosure
obligations, the new "true and fair view" requirement in s.123 (now repealed) of
the predecessor CO should also have been adopted for exempt private companies.
Nonetheless, it appears that accounting practice in Hong Kong came to treat "true
and correct" as a less stringent requirement, as compliance with the less onerous
SME-FRF & FRS 92 was regarded as being sufficient for the financial statements to
give a "true and correct view" .93 In any event, the removal of the "true and correct"
requirement in Cap.622 addresses the above anomaly.

3.10 Dormant companies

11.066 Dormant companies need not comply with particular provisions. Private companies
not actively engaged in any trading activities can seek the status as a dormant company
to avoid the need to comply with particular provisions of the Companies Ordinance,
including the provisions on preparation of annual financial statements. 94 Companies
which might wish to seek dormant status include shelf companies or companies which
exist solely to hold certain assets.
11.067 To be dormant company require special resolution. A company becomes a dormant
company by passing a special resolution declaring the company to be dormant 95 and
delivering the special resolution to the Registrar: Cap.622, s.5. Dormant companies
need not prepare financial statements or directors' reports, nor is there a need to
appoint an auditor to the company.%
11.068 If enters into accounting transaction ceases to be dormant company. Any dormant
company which enters into an "accounting h·ansaction" automatically ceases to be a
dormant company.97 An accounting transaction means a transaction that is required
by Cap.622, s.373 to be entered in the company's accounting records, excluding a
transaction arising from the payment of any fee that the company is required by an
Ordinance to pay.98 Also, if a dormant company enters into an accounting transaction,
any member of the company who knew or ought to have known about the accounting
transaction, and every director of the company, are personally liable for any debt
or liability of the company arising out of the accounting transaction. 99 Dormant
companies are not prevented from engaging in any activities entirely. For example,
the restriction in relation to "accounting transactions" would not prevent the company

92 See para.11.036 above.

93 SME-FRF para.16; and see also HKJCPA's Practice Note 900: Audit of Financial Statements Prepared in
Accordance with the Small and Medium-sized Entity Financial Reporting Standard. In the earlier Practice Note
600.2: Audit Approach to Companies Applying s.141 D of the Companies Ordinance (which was applicable for
financial years beginning before I January 2005), it was said that "the fact that balance sheets and accompanying
notes show a true and correct view does not necessarily mean that they also show a true and fair view" (para.5).
"' For the background to the introduction of the provision on dormant companies, see SCCLR, Annual Repor/
1991-1992,13-22.
•s Sec also predecessor CO, ss.344A(I )(b)-344A( I)(c) for other requircmcncs in respect of the special resolution.
96 Sec Cap.622, s.447. There is also no need to hold annual general meetings (Cap.622, s.611) or send annual
returns (Cap.622, s.663).
•1 Cap.622, s.5(5)(b).
98 Cap.622, s.2(1).
99 Cap.622, s.447(2).
 ANNUAL FINANCIAL STATEMENTS 531

from passing a resolution to alter rights of a class of shares, and it does not prevent a
shareholder from transferring his shares to another.
Cease to be dormant company by passing special resolution that intends to enter 11.069
into accounting transaction. A dormant company can also cease to be dormant by
having a special resolution passed declaring that the company intends to enter into
an accounting transaction. 100 The resolution needs to be delivered to the Registrar for
registration.
Public companies and certain private companies cannot be dormant companies. 11.070
Apart from public companies, certain private companies as specified in Cap.622,
s.5(7) also cannot be dormant companies. These are: (i) authorised institutions as
defined in the Banking Ordinance (Cap.155); (ii) insurers as defined in the Insurance
Ordinance (Cap.41); (iii) corporations licensed under Pt. V of the Securities and Futures
Ordinance to carry on a business in any regulated activity (and associated entities of
the corporation 101); (iv) approved trustees as defined in the Mandatory Provident Fund
Schemes Ordinance (Cap.485); (v) companies which have a subsidiary falling within
any of the above catego1ies; and (vi) companies which fall within any of the foregoing
at any time during the preceding five years.

3.11 Transitional provisions under Cap.622

Generally predecessor CO provisions will apply in respect of financial years 11.071

commencing before Cap.622, Pt.9. Cap.622, s.358 sets out the provisions in Pt.9
which apply in respect of financial years commencing on or after the commencement
of Pt.9 on 3 March 2014. Schedule 11, ss.76-87 set out the circumstances where the
provisions of the predecessor CO continue to apply notwithstanding their repeal.
Generally speaking, the predecessor provisions on the accounts etc. apply in respect
of financial years which commenced before the date of commencement of Cap.622,
Pt.9. As the financial years for different companies can differ, the time when Cap.622,
Pt.9 applies to companies can also differ. For most existing companies, 102 there will
be a financial year that "straddles" the commencement of Cap.622, Pt.9, and so
the predecessor CO provisions can apply in respect of that financial year even after
commencement of the new law.The Cap.622, Pt.9 provisions generally apply from the
time of the first financial year of the company that commenced after 3 March 2014,
which is the financial year following the "straddling financial year". 103
Start date of the first financial year of existing company. It is therefore important to 11.072
know when is the start date of the first financial year of an existing company following
the commencement of Cap.622, Pt.9. The first financial year of an existing company
formed and registered before the commencement of Pt.9 begins on the first day of its
first accounting reference period. 104 The first accounting reference period of such a

100 Cap.622. s.S(5)(a).

1 1
• Within the meaning of Pt.VI of the Securities and Futures Ordinance (Cap.571).
102 Namely companies formed under any of the former Companies Ordinances of 1865, 191 I or 1932.

,o, The "straddling financial year" is the financial year that starts before the commencement of Cap.622, Pt.9 and
which ends on a date that is after that commencement. That term is not actually used in the Ordinance though.
104
Cap.622.s.367(1).
532 ACCOUNTSAND AUDIT

company begins on the date immediately following its primary accounting reference
date 105 ("PARO").
11.073 Primary accounting reference date (PARD). The PARD is determined in accordance
with Cap.622, ss.369(1)-369(4) and depends on whether accounts had been prepared
and given to the members as required by the predecessor CO in respect of the
straddling financial year. For the straddling financial year, the accounts need to be laid
before the company in general meeting 106 under s.122 of the predecessor CO (or sent
to members under s.111(6) of predecessor CO where the company does not hold an
AGM in respect of that financial year pursuant to that s.111 (6)). 107 Where the accounts
have been so laid or sent to members, then the PARO is the date 108 up to which those
accounts are made. 109 If the company has failed to hold the AGM in respect of the
straddling financial year by the time required by predecessor CO, s.111 ( 1) but has
prepared accounts on or before that date, then the PARD of that company is also the
date up to which those accounts have been made. 110 If the company has not prepared
accounts for the straddling financial year, 111 but had prepared accounts for the previous
financial year (i.e. the last financial year that ends before the commencement of Pt.9),
then the PARD of the company will be the first anniversary of the date up to which
those accounts were made. 112 Finally, there is a default PARD which will apply if
none of the above situations apply. Here, the PARD is the date by which the company
ought to have held the AGM under predecessor CO, s.111 in respect of the straddling
financial year.113 Accordingly, this default date will apply for companies which have
failed to prepare accounts for two or more years (including the straddling financial
year) before the commencement of Pt.9. 114

105 Cap.622,s.368(1).
106
That AGM is to be held in accordance with predecessor CO, s.111 (I): see also Cap.622, Sch. I I s.107(2).
101
Cap.622,Sch.11 s.78.
103 Predecessor CO, s.122( IA) sets out the date up to which the accounts are to be made.
10• Cap.622, s.369(l)(a). Section 369(l)(a) does not apply if the accounts are made up to a date foiling more than

one day before the commencement of Pt.9: see also Cap.622, s.369(2). This ensures that only the accounts for the
straddling financial year are taken into account for the purposes of s.369( I)(a) (or for companies where there is no
straddling financial year, s.369(1)(a) will still apply where the last accounts prepared before the commencement
of Pt.9 have an end-date falling on the date immediately preceding that commencement, in which case the PARO
is that date and the first financial year of the company under Pt. 9 commences on the date of commencement of
Pt.9). Where the company's accow1ts prepared for the last full financial year that ends before the connnencement
of Pt.9 has an end date falling within a period of only a few months before that commencement, it may be that the
AGM held under existing s.111, where those accounts are laid, occurs after the commencement of Pt.9. However,
the PARO is not the end date of those accounts, for otherwise the straddling financial year will become the first
financial year of the company under Pt.9. That is not the intention and s.369(2) avoids that situation from arising.
Separately, s.369(3) provides a cut-off period that dis-applies s.369(1)(a)(i) if the AGM is not held within the
specified period. This ensures that it would be possible to ascertain the PARO of the company pursuant to s.369
within the time specified in s.369(3).
110 Cap.622, s.369( I)(b)(i).
111
On or before the date by which the company is required to hold the AGM under predecessor CO, s. 111(I).
'" Cap.622. s.369(1)(b)(ii). However, that date must not fall more than one day before the beginning of 12 months
before the commencement date of Pt.9, as otherwise s.369( I)(b)(ii) will not apply: sec also Cap.622, s.369(4).
This cnsurc.s that the PARD will not be a date that is before the commencement of the Pt.9.
113 Cap.622. s.369(1)(b)(iii). For an example. sec Re Hong Kong Society 0JC011ge11ital & Structural Heart Disease
Ltd (2016] 5 HKLRD 117, (24], (26].
'" But in the case of existing donnant companies, see the new s.369(l)(b)(iv), proposed to be intTOducedby the
Companies (Amendment) Bill 2018.
 DIRECTORS' RIGHTS OF INSPECTION 533

4. DIRECTORS' RIGHTS OF INSPECTION

4.1 General

Accounting records must be open to inspection by directors. Under Cap.622, U .074

s.374(l)(b), the accounting records of a company must at all times be open to
inspection by the directors. 115 The statutory right under s.374(1)(b) does not displace
the directors' common law right of access to a company's documents. 116 The statutory
provision reinforces the common law right by imposing certain criminal liabilities.
The common law right is wider than s.374(l)(b) though, in that it is not restricted to
accounting records. In Tsai Shao Chung v Asia Television Ltd, II7 the Court of Appeal
held that the scope of inspection under the common law can cover corporate material,
corporate records and accounts, corporate information and accounting and other
records or documents belonging to the company. The court accepted that a director
is entitled to inspect any documents which could reasonably be thought to be of
assistance to a director seeking to carry out his or her duties.

4.2 Scope of right

Right of inspection exercisable by director individually. The right of inspection 11.075

is conferred on directors to enable them to carry out their duties as a director for the
benefit of the company. II8 Each director as an individual is entitled to exercise the right
on his own; the right is not simply conferred on the board to exercise collectively. 119
The right is exercisable by executive and non-executive directors 120 alike.
Right cannot be abused. Directors are not entitled to abuse their right of inspection. 11.076
The court will not allow a director to exercise the right of inspection if the director
intends to misuse confidential information in a way that would lead to damage to
the company, I21 or if the director seeks inspection for a collateral purpose other than
in pursuit of his or her duties as a director and for the benefit of the company. 122

'" Former directors do not have a right of inspection (whether under Cap.622, s.374 or under the common law): see
Jf011gSau Man Samuel v Wong Kan Po Wilson (2017) 4 HKLRD 542, (23). Even ifan applicant was a director
at the time when the originating summons was issued, the application would still be dismissed if the applicant is
no longer a director by the time of the hearing: Re Opes Asia Deve/opmelll Ltd (unrep., HCMP 447/2012, [2012)
HKEC 836), [2); Wong Sau Man Samuel v Wong Kan Po Wilson (2017) 4 HKLRD 542, [26).
'" Tsai Shao Ch1111g v Asia Televisio11Ltd (2012) I HKLRD 64, (41) (on appeal, see Tsai Slwo Chung v Asia
Television Ltd [2012) 4 HKLRD 52); Re Grand Sino l11tlenuaio1wl lid (unrep., HCMP 4616/2001, [2006)
HKEC 271), (29); Re Peaktop Tec/1110/ogies (USA) Ho11gKong Ltd [2007) 4 HKLRD 207.
117
[2012] I HKLRD 64.
"' Re Boldwin Construction Ltd [2001] 3 MKLRD 430 (CA); Tsai Shao Chung v Asia Television Ltd [2012)
4 MKLRD 52, [26]; Chieng Tsai Wan.Judy v Kwok Kam Fung [2018] HKCFI 603, [2018] HKEC 896, [15].
'' 9 Tsai Shao Chung v Asia Television Ltd [2012] 4 HKLRD 52.
'Z<l Re Boldwin C01wntctio11 Ltd [2001] 3 HKLRD 430 (CA); Re Alvarez & Marso/ Asia lid [2009) 4 MKLRD
727 (CA).
'" Re Boldwi11 Co11strnctio11Ltd [2001) 3 MKLRD 430, [15] (CA); Re Peakt<>pTechr,o/ogies {USA) Ho11gKo11glid
[2007] 4 HKLRD 207.
122 Re Alvare= & Marsal Asi(1 Ltd [2009] 4 HKLRD 727 (CA); Re Fook Lam M<>o11ResU11lf'a11t Ltd [2011)
I HKLRO 964, [30]-[3 I]; Dila10 Holdi11gs Pty Ltd v Leami11g P<>ssibilitiesLtd [2015] 2 BCLC 199. lnspcc1ion
solely for the purpose of harassment would not be permitted: Chieng Tsai Wan Judy v Kwok Kam Fung [2018)
HKCFI 603, (2018) HK.EC 896, (16).
534 ACCOUNTSAND AUDIT

However, the director's right of inspection is a strong right in that a director need
not provide reasons before being allowed to exercise his or her rights of inspection
(it being assumed that he or she does so for the purposes of carrying out his or her
obligations as a director). 123 The onus of establishing that inspection is sought for an
improper purpose rests with the party seeking to resist access and inspection 124 and
clear proof is needed to satisfy the court affirmatively that the director was abusing
the right of inspection. 125
11.077 Robust protection to directors' rights of inspection. In applying the above principles,
the courts have given robust protection to directors' rights of inspection. For example,
in Re Baldwin Construction Ltd, 126 the Court of Appeal held that there was nothing
improper in a director seeking to inspect documents for the purpose of determining if
there was misfeasance on the part of another director, even if the desire to find evidence
of the misdeeds was motivated by vindictiveness. In that case, the court also held that
the fact that the director seeking inspection had refused to sign company cheques
in the past when she should have signed them was irrelevant to any consideration
whether she would abuse her right of inspection of documents. 127 In Re Alvarez &
Marsa!Asia Ltd, 128 a non-executive director was also a creditor of the company and he
was appointed to the board by reason of his position as a major creditor. The director
was concerned as to the company's ability to repay the amounts owing and he had
taken steps to present a winding-up petition against the company. The Com1 of Appeal
held that this was insufficient to deny the director the right to inspect the company's
books of account. In the context where the director was appointed to the board by
reason of his position as creditor, the court did not see that there was any improper
motive on the part of the director even if he was seeking to protect his own position
as regards payment of the debts owed to him. In other cases, the courts have also held
that the fact that there is litigation between the joint venture parties is not by itself
sufficient to justify the inference that the information that might be gleaned from the
documents inspected would likely be abused. 129
11.078 Right cannot be abrogated. The right of a director to inspect documents and obtain
information concerning the company is an important one. The company cannot
by contract seek to take away that right; the courts will regard a provision in the
articles that abrogates the right in substance as being contrary to public policy and
unenforceable. 130 However, the Court of First Instance has suggested, in obiter, that

123 Re Boldwi11Construction lid [2001] 3 HKLRD 430, [20] (CA); Tsai Sltao Chu11gvAsia Television Ltd [2012)
4 HKLRD 52, [26]; ReAlvarez & Marsa/Asia Ltd [2009) 4 HKLRD 727.
'" Re Fook Lam Moon Resta11ra11I Ltd [2011] I HKLRD 964, [30]; Tsai Shao Chung v Asia Televisio11 Ltd [2012]
4 HKLRD 52, [26].
125
Re Alvarez & Mar.<a/Asia Ltd [2009] 4 HKLRD 727CA; Re Pealaop Technologies(USA) Ho11gKo11gLtd [2007]
4 HKLRD 207, [24]; Re Fook Lam Moon Resta11ra11t ltd[201 I] I HKLRD 964, [30].
12
• [200 I] HIKLRD 430.
'" Sec also Re Pet,ktopTechnologies(USA) Hong Kong Ltd [2007] 4 HKLRD 207 where Barma .Istated that the fact
that a director has in the past been guilty of some misconduct in relation to the company docs not necessarily lead
to the conclusion that he is intending to abuse his position in respect of information that is to be obtained ([29]).
128 [2009] 4 JfKLRD 727.

m Re Peaktop Teclmologies(USA) l-lo11gKong Ltd[2007] 4 HKLRD 207. Sec also Tsai ShM C/w11gvAsia Television
Ltd (2012) I HKLRD 64 (affirmed on appeal: Tsai Shao Ch11J1g vAsia Televisio11Ltd [2012) 4 HKLRD 52).
"" Tsai Sltao Chung v Asia Television Ltd [2012) 4 HKLRD 52, (39).
 MEMBERS' RIGHTS OF INSPECTION 535

the company could lay down procedural rules relating to the manner of exercise of
the right of inspection, such as to state the purpose of inspection and to give a written
unde11akingas to confidentiality. 131
Appointment of provisional liquidator does not prevent directors from exercising 11.079
their right of inspection. The appointment of a provisional liquidator does not prevent
the directors from exercising their right of inspection, so long as the directors do not
impede the provisional liquidators in the proper discharge of their duties and would
not cause prejudice or injury to the company. 132
Directors entitled to make copies. Cap.622, s.375 confirms that directors are entitled 11.080
to make copies of the accounting records inspected and that the company must, on
request by a director, provide the director with copies of accounting records. Also, a
director can apply to the court for an order authorising a person to inspect accounting
records on behalf of the director. 133

5. MEMBERS' RIGHTS OF INSPECTION

5.1 General

Members have right to receive copies of annual financial statements and right 11.081
to inspect records. Members have a right to receive copies of the annual financial
statements and other reporting documents (see para.11.050 above), and members also
have statutory rights to inspect certain company records-these include minutes of
general meetings, 134 the register of members, 135 the register of directors and secretary, 136
register of debenture holders 137 and the company's register of charges. 138 The articles
might also give members a right to inspect company documents, such as in the
Model Articles, 139 but the right conferred under that provision is fairly restricted-
dependent on approval by the directors or by the company in general meeting. Until
amendments to the predecessor CO which commenced operation in 2005, there was
no general statutory right for members to inspect a company's books of account or
other company documents. 14°Fo1mer s. I 52FA of the predecessor CO was introduced
in 2005, modelled on Australian provisions, 141 to fill this gap as part of a raft of

"' Re Fook lam J\10011 Restaurant Ltd [2011] I HKLRD 964.

'" Re Gold Pleasure Industrial Co Ltd [2006] 4 HKC 398.
i.n Cap.622,s.378.
13-4 Cap.622,s.620.

i 3s Cap.622, s.631.
1
.\6 Cap.622,ss.642and649.
131
Cap.622.s.310.
138 Cap.622,s.355.

" 9 Model Articles art.82 (private companies), art.103 (public companies): Companies (Model Articles) Notice
(Cap.622H). Similarly under predecessor CO, Table A rcg.126 (repealed).
1
<-0 There is also no general common law right: Baldwin v Lawrence (1824) 2 Sim & St 18.
"' Corporations Act 2001 (Aust) s.247A.
536 ACCOUNTSAND AUDIT

corporate governance refonns to bolster rights of minority members in a company. 142

The equivalent provisions in Cap.622 are contained in Pt.14 Div.5.
11.082 Application to court for inspections. Under Cap.622, s.740(6), members satisfying
any of the following minimum thresholds have standing to apply to the court for an
order allowing inspection of company' 43 records:

l. members holding at least 2.5 percent of voting 1ights; or

2. five or more members. 144

5.2 Criteria for grant of order authorising inspection

11.083 Criteria for grant of order authorising inspection. The court is given a discretion
under Cap.622, s.740 whether or not to allow the applicant to inspect the company
records. Under s.740(2), the court may make an order allowing inspection only if it is
satisfied that:

1. the application is made in good faith; and

2. the inspection applied for is for a proper purpose.

For a recent summary of the relevant principles under s.740, see Wong Sau Man
Samuel v Wong Kan Po Wilson. 145
1l.084 Applicant to establish good faith and proper purpose. The imposition of the above
pre-conditions in s.740 is to avoid the possibility of harassment by members seeking
access to the company's records without proper grounds. The onus is on the applicant
to establish good faith and proper purpose. 146 Both the requirements of "good faith"
and "proper purpose" must be established. The mere fact that there is a proper purpose
does not mean that good faith is also established. 147
11.085 "Good faith" and "proper purpose"; whether composite test or separate tests.
There is some inconsistency in the case law as to whether the requirements of "good

142 Amendments introduced by the Companies (Amendment) Ordinance 2004 upon the recommendation of the
SCCLR: see SCCLR 's Co,porate Govenumce Review: Co11sultatio11 Paper 011Proposals Made in Phase I of rite
Review(July 2001) (18.01)-(18.05].
143 The provisions apply to both Hong Kong companies and non-Hong Kong companies: see Cap.622, s.722.
144
Under predecessor CO, s. l 52FA(2)(b) (repealed), members holding shares paid up to at least $100,000 were also
entitled to apply. Mowever,this limb is omitted in Cap.622 as a result of the abolition of the concept of par value
shares. Under the no-1>arregime, the issue price of shares can be different for shares, even those in the same
class. As fully paid shares in the same class are indistinguishable from each other, conceptually it may no longer
be possible to ascertain the "paid-up" amount on shares held by a particular shareholder where the shares had
been issued at different prices and have been on-sold. (Fully paid shares ranking equally need not be numbered:
Cap.622, s.136(2)).
"' [2017] 4 HKLRD 542, [39], [62], [66].
"• Re Lel1111a1181vwn ltt/[2011) 5 HKLRD 668, [31] (CA).
"' Wo11gKar Gee Mimi v Hung Kin Sang Raymo11d[201 I] 5 HKLRD 241; Re lehma11Brown ltd[201 l} 5 HKLRD
668, [34) (CA).
 MEMBERS' RIGHTS OF INSPECTION 537

faith" and "proper purpose" in s.740(2) constitute a composite test or two separate and
distinct tests and whether the test for "good faith" is subjective or objective.
One view: separate and distinct tests. In Wong Kar Gee Mimi v Hung Kin Sang 11.086
Raymond, 148 Harris J held that the two requirements constitute two separate and
distinct tests; and further that the good faith requirement involves a subjective
test while the proper purpose requirement involves an objective test. "Good faith"
requires that the applicant acts honestly with a purpose that he himself believes to
be proper. The "proper purpose" test requires the court to look at all the surrounding
circumstances to determine what the purpose of the inspection was and whether it was
proper. Harris J restated those propositions in Re Bank of East Asia Ltd, 149 and that
approach was also accepted to be correct by Recorder Anderson Chow SC in Leung
Chung Pun v Masterwise International Ltd 150 and by Deputy Judge William Wong SC
in Wong Sau Man Samuel v Wong Kan Po Wilson.151
Alternative view: composite test. On the other hand, the Court of Appeal in 11.087
Re LehmanBrown Ltd 152 cited Australian cases 153 in accepting that "good faith" and
"proper purpose" express a composite notion and the comt will determine whether
each has been demonstrated by applying an objective test. This principle was reiterated
by the Court of Appeal in Veron International Ltd v RCG Holdings Ltd. 154 The
composite test does not mean that if a proper purpose is proved, a case of good faith
must follow or is to be assumed. 155 In the Australian case of Knightswood Nominees
Pty Ltd v Sherwin Pastoral Company Ltd, 156 Brooking J explained that the reference
to good faith emphasises, firstly, that the proper purpose set up must not be a mere
pretence, and, secondly, that in considering purpose it will be necessary to go beyond
the mere desire to obtain information by the inspection of books and ask what the
applicant wishes to achieve as a result. The statutory provision requires the court to be
satisfied that the applicant is acting, or that the inspection is to be made, "in good faith
for a proper purpose". That expression is a composite one, it being artificial to assign
some consideration to good faith rather than purpose or vice versa. The reference to
good faith colours and so reinforces the requirement of proper purpose. Acting in good
faith and inspecting for a proper purpose means acting and inspecting for a bona fide
proper purpose. 157

1
" [201 I] 5 HKLRD 241. See also Re Opes Asia Developmellt Lid (2012) 4 HKLRD 12; Ho Kwok Keung Tony
v Hub Global Freight Solutions (HK) Ltd (wuep., HCMP 670/2012, [2013) HKEC 901); Wr,ll111gv Dayuan
International Development Ltd (unrep., HCMP 2143/201 I, [2013] HKEC 872); Le1111g Cltrmg Pun v Masterwise
illternatio110I lld[2014] I HKLRD 1129, (16).
1•• [2015] 4 HKC 137, [2015) HKEC 1055, [25).
150 [2014) I IIKLRD 1129, [16). Those principles were not in dispute between the parties in the case.
151 [20 I7) 4 IIKLRD 542, [39].
is: [201 I) 5 HKLRD 668, [31].
153
Barrack Mines Ltd v Grams Patch Mining Ltd [ 1988) I Qd R 606; K11ightswoodNominees Pty Ltd v Sherwin
Postoral Company Ltd (1989) 7 ACLC 536, 540-541; Acehi/1 !11ves1me11ts Pty Ltd v Incitec Ltd [2002] SASC
344, [29); Lau Clwk Clwen v Laredo Pty Ltd [2005] WASC 58, [59). Earlier decisions had earlier suggested
choughthacthe tcscsarc separate: e.g. Re Augold NL [ 1987) 2 Qd R 297.
"' [2013) 3 HKLRD 657, [19].
1" Re Lehma118r(>wnLtd [201 I] 5 HKLRD 668. [34).
"' (I 989) 7 ACLC 536, 540-541; and see also Re Leh111011Brown Ltd [20 I I) 5 HKLRD 668, (34).
"' Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd ( 1989) 7 ACLC 536.
538 ACCOUNTSAND AUDIT

In Fung Chuen v Sandmartin International Holdings Ltd, 158 Deputy Judge Alex Lee
observed that he was bound by the Court of Appeal decisions in Re LehmanBrown and
VeronInternational. His Lordship noted that whichever approach was adopted would
not produce different results in the particular circumstances of the case before the
court, but accepted that in some factual situations the two different approaches may
bear on the results of an application for inspection.
11.088 Proper purpose must be reasonably related to applicant's status as member.
In the Wong Kar Gee Mimi case, 159 Harris J accepted that a proper purpose is one
which is gennane to an applicant's status as a member or is reasonably related to the
interest of such a person as a member of the company. Harris J emphasised that, in
light of the legislative purpose of enhancing the protection of shareholders' rights
in the enactment of these statutory provisions, it is appropriate to adopt a generous
approach to the interpretation of what constitutes an interest "reasonably related" or
"germane" to the applicant's status as a member.160 Where the purpose of inspection
is to protect a shareholder's economic interest in the company or to protect against
a change in value of the member's shares, this should prima facie satisfy the proper
purpose requirement. Harris J disagreed with the more restrictive approach suggested
in an earlier decision that the court would allow inspection only in exceptional and rare
cases and that the proper purpose criterion would normally be satisfied only where
the applicant has a specific or personal right which can be protected only through the
inspection of the company records. 161
11.089 If primary purpose proper, then proper purpose criterion established. The courts
have accepted that if the primary or dominant purpose of inspection is proper, then it is
irrelevant that the applicant has some secondary purpose which might be improper. 162
Applicants do not necessarily lack a proper purpose merely because they are hostile to
the directors or there is hostility between the parties. 163
11.090 Proper purposes. In Re LehmanBrown Ltd, 164 the Court of Appeal noted that the
following purposes have been held to be proper under Australian cases: where a
shareholder reasonably takes the view that a transaction could adversely affect his
investment and he seeks to investigate the transaction for the purpose of determining
what action to take; and where a shareholder seeks to ascertain facts for the purpose
of conside1ing a takeover offer. It is also a proper purpose for a member to seek access

158 (unrep., HCMP 1044/2017, [2017) HKEC 2193), (12).

15• [2011) 5 HKLRD 241, (I 9)-(20). Hanis J reiterated these points again in Re Bank of East Asia Ltd (2015) 4
HKC 137.
160 [2011) 5 HKLRD 241, [25).
161 This view was set out at first instance in Re Lehma11BrownLtd [201 I) 4 HKLRD 237 (CFI). The point was not
discussed on appeal in Re Lelrma11Brow11 Ltd [2011) 5 HKLRD 668 (CA). In 11!ro11 illtemarional Ltd v RCG
Holdings Ltd [2013) 3 HKLRD 657, [20), Yuen JA (with whom the other members of the Court of Appeal
agreed) stated: "I do not find it constructive to enter into an academic discussion as to whether there were two
approaches, and ifso, which one should prevail."
162 Wong Kar Gee Mimi v flung Kin Sang Raymond (2011) 5 HKLRD 241, (21); Re lel1111an8rown Ltd [2011)
5 HKLRD 668, (31] (CA).
163 Wong Kar Gee Mimi v flung Kin Stmg Raymond (2011) 5 HKLRD 241, (22); Re lel1111an8rown Ltd (2011]
5 HKLRD 668, (31) (CA); Fung Chuen v Sandmartin lntemational Holdings lrd (unrcp., HCMP 1044/2017,
[2017) HKEC 2193), [28).
l6' [2011) 5 HKLRD 668, (31).
 MEMBERS' RIGHTS OF INSPECTION 539

to information in respect of possible misconduct 165 or breach of directors' duties 166

in the operation of the company, but bare allegations of wrongful conduct would not
be sufficient to support an order for inspection-there must be proper or sufficient
evidence to support a case for investigation. 167
Limits on the right of inspection. The courts have emphasised that the statutory right 11.091
of inspection is not intended to be a process as wide-ranging as the process of discovery
and is not a substitute for pre-action discovery. 168 An applicant is not entitled to go on a
fishing expedition through vast amounts of the company's records in search of a cause
of action to support his mere suspicion of wrongdoing. 169 Also, the statutory provision
is not intended to enable members to undermine directors' managerial powers (where
such powers are constitutionally vested in the board) by challenging managerial or
commercial decisions of the company's directors. 170 Moreover, the court's discretion
is a wide one, and so even if the applicant satisfies the good faith and proper purpose
tests, the court still has discretion to decline inspection.'7 1 For example, the court

165
Wo11g Kar Gee Mimi v Hung Ki11Sa11gRaymond (2011) 5 HKLRD 241 (order for inspection allowed in respeet
of suspected misapplication of company assets).
166
VeronInternatio11alLtd v RCG Holdi11gsLtd (2013] 3 HKLRD 657 (CA) (order for inspection allowed where
there was a reasonable suspicion that the directors had failed to conduct proper due diligence in respect of certain
substantial acquisitions of shareholdings which the company subsequently disposed of at substantial loss); Re
Bank of East Asia Ltd (2015) 4 HKC 137 (order made for inspection in connection with a board decision for
a private placement of shares where there was at least a respectable argument that the board failed to pro1>erly
scrutinize the reasons for the placement which was proposed by the CEO); Le1111g C/11111g
P1111 v Masterwise
lntema1io11alLtd [2014) I HKLRD 1129, [26]-[33], [44)-[57) (inspection allowed in respect of: claims of
excessive remuneration paid to directors, the non-payment of dividends which were stated to have been paid
to the company in the audited report of a wholly-owned subsidiary, and the failure of the company to prepare
consolidated accounts as required by the Ordinance). Sec also 11,;iXing v Willwin Oevel<>pme111 (Asia) C<>Ltd
(unrcp., HCMP 1922/2016, [2017) HKEC 779); Fung Cl111en v Scmdmc,r/inlntemational Holdings Ltd (unrcp.,
HCMP 1044/2017, [2017) HKEC 2193)
167
Wo11gKar Gee Mimi v Hung Kin Sang Raymond [2011) 5 HKLRD 241, [42); Re Le/11na118row11 Ltd [2011)
5 HKLRD 668, [42]-[44] (CA) (inspection denied where there was insufficient evidence to support allegation
of wrongdoing); Re Bank of East Asia Ltd (2015) 4 HKC 137. However, it is neither possible nor approp,iate for
the court to reach any finn conclusions on the allegations beeause, amongst other things, the evidence would
likely not be complete, it is unlikely that disputes of fact can be resolved on affidavit evidence alone, and the
complaint may well be raised again in subsequent proceedings for adjudication: Leung Chung Pun v Masterwise
International Ltd (2014) I HKLRD 1129, [25). It is sufficient if the applicant can show that there is a proper case
for further investigation: Leung Chung Pun v Masterwise Jntemational Ltd (2014) I HKLRD 1129, (25), (33).
16
' Wo11gKar Gee Mimi v Hu11gKin Sang Raymo11d(201 I) 5 HKLRD 241, [40); Re Lehma11BrownLtd (2011)
5 HKLRD 668, (31) (CA) (applicant's purpose to value company's assets in respect of a (predecessor CO) s.168A
action (now Cap.622, s. 724) was held not to be a proper purpose in circumstances where the s. l 68A petition had
not yet been heard and where the court would be able to make appropriate orders for a valuation exercise if and
when a buy-out remedy is awarded, including orders for discovery of documents relevant to the valuation).
169
WongKar Gee Mimi v Hung Kin Sang Raymond [2011J 5 HKLRD 241, (40); WongSau Ma11Samuel v WongKan
Po Wilson [2017) 4 MKLRD 542.
11<J Wong Kar Gee Mimi v Hung Ki11Sang Raymond [201 I) 5 MKLRD 241, (40], (35]-(36); Re Lehma11Brown
Ltd [20 I I J 5 HKLRD 668, [3 I] (CA); Re Bank of East Asia Ltd [20 I 5) 4 HKC 137. In Arlan lllves1111e111s. the
argument that a board decision to raise funds by way of a private placement of shares was simply a commercial
decision which cannot be the basis for an order of inspection under s. 740 was rejected in circums1anccs where
it appeared that the directors had failed to properly consider the reasons for the placement: sec also note 155
above). In Leung Chung Pun v Mastenvise lnlema1io11alLtd [2014) I HKLRD 1129, [34)-(43), inspection was
not allowed in respect of certain transactions involving the sale of a factory and the relocation of another factory;
the courl regarded these matters as involving purely commercial or managerial decisions of the board.
171
Wo11gKar Gee Mimi v Hung Kin Sang Raymond [2011) 5 HKLRD 241, (39); Re LehmanBrown Ltd (2011)
5 HKLRD 668, (31) (CA).
540 ACCOUNTSAND AUDIT

might decline to allow inspection where it is satisfied that nothing of utility will come
from the inspection or that the company will suffer undue prejudice as a result. 172

5.3 Documents that can be inspected

1l.092 "Records or documents" must be those owned by or belonging to the company;

usually does not include records of subsidiary. Cap.622, s.740 allows inspection of
any "record or document" 173 of the company. The scope of documents available for
inspection is therefore wide. The records or documents within s.740 must, however,
be those which are owned by or belong to the company. 174 Generally the document of
a subsidiary is not owned by and does not belong to the parent company. However, if
for example, a copy of a document of the subsidiary is given to the parent company
for the parent to retain for its own records of the corporate group, then the copy of
the document would be a "record or document" of the parent company on the basis
that it is owned by the parent. 175 Possession of a document not owned or belonging to
a company does not make the document a document of that company. 176 On the other
hand, a document owned by a company is still a document of the company within
s.740 even in the absence of possession of the document for the time being. 177

l 1.093 Court's power to determine which records or documents may be inspected. Even
where the court is inclined to grant inspection, the court may cut down the scope of
documents sought to be inspected by the applicants to those which the court considers
to be appropriate. 178
1l.094 Wong Kar Gee Mimi case. Jn Wong Kar Gee Mimi v Hung Kin Sang Raymond, 179
the company agreed to allow inspection of the following: contracts and agreements,
jomnal entries and vouchers, bank statements, minutes of board meetings and minutes
of general meetings. Of the categories of documents in dispute, the court allowed
inspection of monthly management accounts and ledgers and supporting documents
(in order to allow the applicants access to the complete financial records to properly
investigate the transactions in respect of which there was suspected wrongdoing) and
correspondence and communications between the company and its accountants. The
court also allowed inspection of payroll records and employer tax retums in respect
of a particular employee (to whom it was suspected improper payments were made),
but with certain personal information redacted. 180The following were not allowed for

"' Leung Chu11gP,.mv Masterwise illtenuuianal Ltd [2014) I HKLRD 1129, (18).
173 As defined in Cap.622, ss.739 and 838.

174 Hao Xiaaying v Wang Yiu Lam William[2017) 6 HKC 151, [3. I 8)-[3.19), [3.23) (CA).

175 Hao Xiaoyi11gv Wong Yiu Lam William [2017] 6 HKC 151, [3.21]; and see also Engel v National Biodiesel Ltd

(2015) 109 ACSR 173. cfW011gKar Gee Mimi v H1111g Kin Sang Raymond [2011) 5 HKLRD 241, [46)-[49],
[60]; Wu Ya11g v Dayua11/11ternatio11al
Development Ltd Ltd (unrep., HCMP 2143/2011, [2013] HKEC 872, [23];
Leung Chung Pun v Mastenvise h11emationalLtd [2014] 1 HKLRO 1129, [19]-[21 ].
176 HaoXiaoying v Wong Yiu Lam William[2017) 6 HKC 151. [3.20].

"' Hao Xiaoying v lfong Yiu Lam William [2017] 6 HKC 151, [3.21].
178 Pursuant to an order under Cap.622, s.740(4)(b).
17
' [2011) 5 HKLRD 241.
180 So as to comply with the Personal Data (Privacy) Ordinance (Cap.486), which is not overridden by s.740: see

also, C.ip.622, s.743.

 AUDITORS 541

inspection: correspondence with the company's legal advisers (as legal professional
p1ivilege is preserved under s.742) and co1Tespondence with the Stock Exchange
(these documents were regarded by the court as being irrelevant to the applicant's
purpose of investigating the suspected misapplication of assets).

5.4 Ancillary matters

Applicant's representative can inspect; copies of documents can be made; court 11.095
may impose confidentiality restrictions. The court can authorise a person other than
the applicant members to undertake the inspection (Cap.622, s.740(l)(b)) and so
for example the applicant's legal or accounting experts could inspect the documents
on behalf of the applicant. Persons authorised to inspect documents are entitled to
make copies of the documents: Cap.622, s.740(3). The court also has power to make
various ancillary orders under s.740(4). There are also confidentiality restrictions
which prevent further disclosures of the information obtained from an inspection as
prescribed in subsequent s.741.
Directors can be joined as parties in limited circumstances. Directors can be joined 11.096
in an application under s.740 with a view to obtaining a costs order against them,
but this would only be permitted in the rare case where there is strong evidence of
particular directors of a company dictating the decisions of the board. 181 Where the
dispute is in substance between the company acting through its board on the one
side and a shareholder of the company on the other, and not bet\veen t\vo factions of
shareholders, it would not be appropriate to join the directors as parties. 182

6.AUDITORS

6.1 General

Company required to appoint auditor. Every company 183 is required to have one 11.097
or more persons appointed as auditor of the company pursuant to Cap.622, s.394.
The external auditor of a company plays an important role in corporate governance
in providing one of the mechanisms for external monitoring of a company. While
the financial statements are prepared by the company, the external audit of the
financial statements aims to ensure truth and comprehensiveness in the company's
financial reporting. 184 Apart from the auditor's monitoring function, it is also said that
auditors help ensure transparency in that their scrutiny of publicly reported financial

181 See Re Opes Asia Developme11t Ltd (unrep., HCMP 447/2012, [2012) HKEC 836, [42); Leung Chung Pu11v
Masterwise lntematio11al Ltd [2014) I HKLRD 1129, [64)-{67].
182 Leung Chung Pun v Mastenvise l11ternatio11alLtd [2014) 1 HKLRD 1129, [68).
183 Dormant companies arc. however, exempt: Cap.622. s.447.

"'' SCCLR, Corporate Govema11ce Review: Co11sultatio11Paper 011Proposals Made i11Plwse II cif'the Review
(Jun 2003) [22.01); and sec generally Ross L Watts and Jerold L Zimmerman, "Agency Problems, Auditing and
the Theory of the Firm: Some Evidence" (1983) 26 Journal of Law a11dEc<>11omics613; Michael Sherer and
Stuart Turley, C11rrentIssues i11Auditing (4th edn, Paul Chapman, London, 1997) 3-54; John H Farrar, Corporate
Governance i11Australia and New Zealand (Oxford University Press, Melbourne, 2001) 203-211.
542 ACCOUNTSAND AUDIT

information reduces information asymmetries that impede well-functioning capital

markets, auditors serve a crucial signalling function in sending signals of whether
companies are credible investments or not through their audit opinions and auditors
act as gatekeepers where there are regulatory requirements for clean audit opinions
before certain major corporate transactions can take place. 18s
11.098 Debate over regulatory regime for auditors and auditing. ln recent years, there has
been much debate over the regulatory regime for auditors and auditing. Overseas, some
major corporate collapses have involved deficiencies in audits or auditor involvement
in corporate wrongdoing (such as the use of "creative" accounting treatments that
mask a company's poor financial position). 186 The culpability of Arthur Andersen,
previously one of the "Big Five" accounting firms, in the collapse of Enron in 2001
in the United States led to that firm's demise. Hong Kong has not been without its
problems either, with accounting fraud cases involving a number of PRC companies
listing in Hong Kong 187 and aHegations of negligence against a Big Four accounting
firm in connection with the largest corporate collapse in Hong Kong history (Akai
Holdings). 188 Against a background of worldwide public concern over auditing
practices, moves were made in Hong Kong as elsewhere to strengthen the regulatory
regime for auditing and financial reporting. While the HKICPA retains its disciplinary
powers over the accounting and auditing profession, 189 an independent Financial
Reporting Council ("FRC") was established in 2006 with powers to investigate
irregularities in audits and financial reporting in respect of listed companies. 190It is now
proposed that HKICPA's disciplinary and inspection functions with regard to auditors
of listed companies are to be transferred to the FRC, in order to enhance independence
in the regulation of auditors of listed entities.' 91 Another area of international focus,
particularly following the Enron collapse, has been the question of whether auditors
are sufficiently independent when they may also be providing non-audit services to a

18
' Patricia A McCoy, "Re-aligning Auditors' Incentives" (2003) 35 Connecticut law Review 989, 990-991.
186
Ibid.; Mariam1e M Jennings, "A Primer on Enron: Lessons from a Perfect Stonn of Financial Reporting,
Corporate Governance and Ethical Culture Failures" (2003) 39 California Wes/em law Review 163; Perry E
Wallace, "Accounting, Auditing and Audit Committees After Enron et al: Governing Outside the Box Without
Stepping Off the Edge in the Modem Economy" (2003) 43 Washb11mLawJoumal 91; Jolm Armour and Joseph
A McCahery (eds.), After £11ro11: Improving Co,porate law and Modernising Securities Regulation in Europe
and the US (Hart, Oxford, 2006); Michael Jones (ed.), Creative Accounting. Fraud and lllternatio11alAccou111i11g
Scandals (John Wiley and Sons, Chichester, 2011 ).
181 See Simon S M Ho, Corpomte Govema11ce in Hong Kong: Key Problems and Prospects (Hong Kong: Centre

for Accounting Disclosure and Corporate Governance, School of Accow1tancy, the Chinese University of Hong
Kong, 2003) 39-40.
"' The negligence action by the liquidators against the firm Ernst & Young was settled out of court: see "Akai Case
Shows Need for Tighter Oversight" Sowlt Citino Morning Post (8 October 2009).
18
• Pursuant to the Professional Accountants Ordinance (Cap.SO).
°
19
Financial Reporting Council Ordinance (Cap.588). For the background, see Financial Services and the Treasury
Bureau, Consultation Paper 011 the Proposals 10: (a) En/ranee rite Oversight of"the Public Interest Activities
cif Auditors and (b) Establish" Financilll Reporting Review Panel (September 2003); Financial Services and
the Treasury Bureau, Consultation Paper 011legisllltive Proposals to Establislt Financial Reporting Council
(February 2005); and see also Gordon Jones, Corporate Governance and Complitmce in Hong Kong (LexisNexis,
Hong Kong, 2012) 179-209.
191
Sec Financial Services and the Treasury Bureau, PropOSlllSto Improve the Regult,to,y Regime for Listed Entity
Auditors: Co11s11l1ationPaper (June 2014) and Consultation Conclusions (June 2015); and see the Financial
Reporting Council (Amendment) Bill 2018.
 AUDITORS 543

company which they audit, or where they may have a long association or relationship
with the company concerned. 192

6.2 Qualifications and appointment

6.2.1 Qualifications
Qualifications to be company auditor. To be qualified for appointment as a company 11.099
auditor, the person must meet requirements set out in the Professional Accountants
Ordinance (Cap.50) ("PAO"). 193 Pursuant to PAO s.29(2), an individual who is to be
appointed as auditor must be a certified public accountant 194 holding a practising
certificate. 195 A firm of certified public accountants (practising)' 96 can be appointed
as auditor under the firm name. Jn that situation, all the partners of the firm who
are qualified to be appointed as auditor are deemed to be appointed as auditors of
the company.197 Certified public accountants can also practise through a company
vehicle by registering the company as a "corporate practice" under the PAO.198 Such a
corporate practice can also be appointed as auditor: PAO, s.29(2).
Proposed additional registration requirements for auditors of listed companies. 11.100
Additional registration requirements are proposed to be introduced under the Financial
Reporting Council (Amendment) Bill 2018 for auditors of listed companies. Under
the proposed regime, auditors must be registered as a "PIE auditor" 199 before they may
be permitted to carry out specified audit engagements 200 for a listed company.201
Conflict of interest. To avoid conflicts of interest, the officers or employees of a 11.101
company (or partners or employees of such persons) cannot be appointed as auditor

192
Sec SCCLR, Co,por(JleGovernanceRevi<'>v: Co11sultatio11
Pt,per on Pmposals Mt,de in Phase If of the Review
(June 2003) [22.21 }-[22.29]; Simon SM Ho, Co,porate Govemtmce in Hong Kong:Key Problemsand Prospects
(Hong Kong: Centre for Accounting Disclosure and Corporate Governance, School of Accountancy, the Chinese
University of Hong Kong. 2003) 40-41. Sec also the HK ICPA's Code of Ethics for ProfessionalAcco,1111a111s,
issued under PAO s. I 8A. In the US, legislation was enacted to deal with the problem of independence: Sarbane-
Oxley Act 2002. For Australian reforms, see fan Ramsay, lndepe11de11ce of Australia11Company A11ditors-
Report to the Minister.forFinancial Services and Reg11latio11 (October 2001); James McConvill, An Jntrod11ctio11
to CLERP 9 (LexisNexis, Chatswo0<~2004); and the amendments made to the Corporations Act 2001 (Aust) by
the Corporate Law Economic Reform Program (Audit Refonn and Corporate Disclosure) Act 2004 (Aust).
193 Cap.622, s.393 and definition of"prnctice unit" in s.392 and see PAO, s.2( 1).
194
Certified public accountants are registered under PAO,s.22. For qualifications for registration, see PAO, s.24.
195 Practising certificates are issued under PAO, s.30.
196
Firms are registered under PAO,s.28A(2).
197 See Cap.622, s.399.

1•• See PAO, ss.28D and 28E.

199 As defined in proposed s.3A in the Financial Repo,ting Council Ordinance (Cap.588), s.3 under amendments lo
be made by the Financial Reporting Council (Amendment) Bill 2018 cl.6. "PIE" means "public interest entity",
which includes listed companies: see Cai>.588,s.3 under amendments lo be made by cl.5 of the Bill.
200 The specified engagements are referred to as "PIE engagements" and are set out in proposed Sch. IA of

the Financial Reporting Council Ordinance (Cap.588), to be introduced by the Financial Reporting Council
(Amendment) Bill 2018 cl.77. PIE engagements include preparation of an auditor's report for financial
statemcnrs required to be prepared under Cap.622, s.379.
201
Further registration requirements arc also to be introduced for persons carrying out activities as an engagement
partner or engagement quality control reviewer of registered PIE auditors. Sec Financial Reporting Council
(Amendment) Bill 2018 cl.23 and new Pt.3 to be inserted by the Bill into the Financial Reporting Council
Ordinance (Cap.588). See further Financial Services and the Treasury Bureau, Propostds 10 Improve the
Regulato,y Regime.for Listed E11tityAuditors: Co11sultatio11 Paper (June 2014) and Cons11/tatio11 Co11c/11sio11s
(June 2015 ).
544 ACCOUNTSAND AUDIT

of the company.202 Also, if a person is disqualified for appointment as auditor of any

other undertaking that is a subsidiary undertaking, or a parent undertaking, of the
company or is a subsidiary undertaking of that parent undertaking, then the person is
also disqualified to be appointed as auditor of the company.203 Further restrictions are
imposed under the HKICPA's Code of Ethics for Professional Accountants 204 to deal
with other situations where the independence of the auditor could be compromised or
seen to be compromised.

6.2.2 Appoi11t111e11t
I l.102 First auditors appointed by directors; then appointed at AGM. The first auditors
of a company may be appointed by the directors at any time before the company's first
annual general meeting. 205 Since audited financial statements are to be laid at that
AGM, the directors should exercise their powers of appointment well beforehand-
usually the appointment is made at the first board meeting after the company is
incorporated. 206 At the first AGM, the members reappoint the first auditors or appoint
new auditors pursuant to Cap.622, s.396. The auditors so appointed at the AGM hold
office until the conclusion of the next AGM. At the AGM of each year, the company
must make a fresh appointment 207 -either a reappointment of the existing auditors or
an appointment of new auditors. 208 If no auditor is appointed at an AGM, any member
can apply to the court to make an appoinm1ent.209
11.103 Appointment when no AGM. Cap.622 also contains provisions on appointment or
reappointment of auditors to deal with the situation where a company elects not to hold
°
an annual general meeting. 21 For companies dispensing with the AGM which wish to
have the existing auditor continue in office for the next financial year, there is no need
to make an actual reappointment (unless the articles require), and the existing auditor
will be deemed to be reappointed under Cap.622, s.403. If there is a wish to change
the auditor, then the members can resolve 211 by ordinary resolution that the auditor is
not to be reappointed, or members holding at least 5 percent of the voting rights 212 can
simply give the company a notice that the auditor is not to be reappointed. 213 If that
is done, there is no deemed reappointment, and the members will need to make an

202 Cap.622,s.393(2).
"'' Cap.622, s.393(2)(c). For the concepts of parent and subsidiary undertakings, see Cap.622, Sch. I.
""' The Code is issued under PAO, s. l 8A. The Code does not constitute legislation, but auditors who do not comply
with the Code may be subject to disciplinary action for failure to comply with relevant professional standards:
see generally PAO Pts.IVA and \I on practice reviews and disciplinary proceedings.
,., Cap.622, s.395( I). In cases where the company is not required to hold an AGM, see also s.395(2).
206 If the directors do not make an appointment of the first auditors, the company in general meeting may do so:

Cap.622, s.396(6).
207 Pursuant to Cap.622, s.396.

208 Special notice must be given if a new auditor is to be appointed to replace the outgoing auditor: see Cap.622

s.400; and see also Cap.622, s.578 on the requirements of special notice. The outgoing auditor has a right to make
representations: see Cap.622, s.422 and the discussion of the provision below at para.11.152 below in the context
of removal of auditors.
209 Cap.622, s.398.

°
21 Companies can dispense with the AGM under Cap.622, s.612.

'" Special notice is required: Cap.622, s.403(3). On receipt, chc company must send a copy of the special notice to
the auditor: Cap.622, s.403(4).
212 The articles can specify a lower percentage: Cap.622, s.403(8).
2' 3 Cap.622,s.403(2).
 AUDITORS 545

appointment under Cap.622, s.396(3). 214 Unless there would be unanimous agreement
of the members on a new appointment such that the written resolution procedure
can be invoked,215 the company would have to hold a general meeting to make the
appointment. The appointment must be made before the end of the "appointment
period". 216 The appointment period is the period of 28 days beginning on the date on
which the reporting documents are sent to members (which is required under Cap.622,
ss.430(3) or 612(l)(b) where the company does not hold an AGM).217
Problems when auditors develop close relationship with company over time. 11.104
While the Companies Ordinance does not prevent the same auditors from being
reappointed continuously, a potential problem arises where the auditors develop a close
relationship with the company over time such that they might no longer be sufficiently
independent. 218 The HKICPA's Code of Ethics for Professional Accountants 219
genernlly restricts individuals from acting as the key audit partner in the audit of a
listed company (or other "public interest entity") for more than seven years, although
there is no mandatory requirement for rotation of audit firms (to avoid loss of expertise
of a firm derived from its familiarity with the company's operations).
If casual vacancy in office of auditor either directors or general meeting can fill it. 11.105
If there is a casual vacancy in the office of auditor (for example if the auditor resigns
before the term of office ends), either the directors or the company in general meeting
can fill the casual vacancy.220

6.3 Auditors' functions, rights and duties

6.3.1 The auditors' report

Auditors' report. In respect of the financial statements 221 laid before the company in 11.106
general meeting under s.429 or sent to members under s.430 of Cap.622, the auditors
are required to prepare a report to the members on those financial statements: Cap.622,
s.405. In addition, an auditor's report is also required for any financial statements
circulated, published or issued by the company during the auditor's term of office. 222
Must state whether prepared in compliance with Ordinance; and gives true and 11.107
fair view. Under Cap.622, s.406, the auditors' report must state whether, in the auditors'
opinion, the financial statements have been properly prepared in compliance with the
Ordinance. The report must also state whether, in the auditors' opinion, the financial
statements give a true and fair view of the state of the company's affairs: Cap.622,

214
As the deemed reappointment under Cap.622, s.403 can be forestalled by only 5% of the members, there is still
a possibility that the majority of the members resolve to reappoint the existing auditor under s.396(3).
"' See Cap.622, s.40 I and Pt.12 Div.I for the requirements.
116 Cap.622, s.396(4).
"' Cap.622, s.392 definition of"appointment period". See para.(b) of the definition in the case where the re1>0rting
documents have not been sent on time.
218 SCCLR, Corporate Governance Revil,.v: Consultation Paper 011 Proposals Mt,de in Phase ff of the Review
(June 2003) (22.30)-(22.35).
219 On the status of 1heCode, sec para.11.101 above.
no Cap.622,s.397.
'" This includes consolidated financial statements: see definition of"financial statements" in Cap.622, s.357.
222 Cap.622.s.405.
546 ACCOUNTSAND AUDIT

s.406(1)(b). 223 If the auditors' opinion is that the financial statements comply with
the Companies Ordinance and give a true and fair view, the opinion is said to be
unqualified. If otherwise, the opinion is said to be a qualified opinion.
11.J08 If directors' report not consistent with financial reports must state this. If the auditor
is of the opinion that the information in the directors' report is not consistent with the
financial statements, the auditor must state that opinion in the auditor's report.224
11.109 Investigations to be carried out. In preparing the auditors' report, the auditors are
required by Cap.622, s.407(1) to carry out such investigations as will enable them to
form an opinion:

l. whether adequate accounting records have been kept by the company; and
2. whether the financial statements are in agreement with the accounting
records.

11.110 Must state if adequate accounting records not kept or if financial statements
not in agreement with accounting records. If the auditors' opinion is that adequate
accounting records have not been kept, or that the financial statements are not in
agreement with the accounting records in any material respect, the auditors must
state that fact in their report: Cap.622, s.407(2). If the auditors fail to obtain all the
information and explanations which, to the best of their knowledge and belief, are
necessary for the purposes of their audit, they must also state that fact in their report:
Cap.622, s.407(3). These provisions are similar to the law in predecessor CO, s.141
(repealed), except in relation to the "materiality" requirement.
1l.1 l.1 Criminal liability of auditor. Criminal liability under Cap.622, s.408 is, however,
new. Under that section, certain specified persons (the auditor or specified personnel
within the audit firm or corporate practice) commit an offence if the person knowingly
or recklessly causes a statement required to be contained in an auditor's report under
ss.407(2)(b) or 407(3) to be omitted from the report. There is a comparable provision
in the UK legislation,225 and the provision was introduced in Hong Kong to enhance
the accountability of auditors and integrity of the financial reporting system. 226
11.112 Criminal liability only arises if opinion that adequate accounting records not
being kept is omitted. Despite some concern that the provision may be overly onerous
on auditors, 227 criminal liability arises in respect of s.407(2) only if the auditor is of

2
" This obligation does not apply for companies within the reporting exemption (i.e. companies which adopt
simplified reporting): CaJ>.622,s.406(1)(b). See para. I 1.058 above.
224 Cap.622, s.406(2).
215 Companies Act 2006 (UK) s.507(2).
22
• Legislative Council Report of the Bills Committee on Companies Bill (LC Paper No CB( I)2221/
11-12) (106)-(110). Sec also the rollowing papers of the Adm.inistration presented to the Bills Committee:
Administration's Response to Deputations' Views on cl.399 (LC Paper No CB( I) 1979/ 11-12(02) (24 May 2012);
Administration's Response to Recent Submissions on cl.399 of the Bill (LC Paper No CB(l)2183/I J-12(01)
(15 June 2012).
227 Sec. e.g., Submissions to the Legislative Council Bills Committee on cl.399 of the Bill from Hong Kong Institute
of Certified Public Accountants dated 24 May 2012 and 13 June 2012 (LC Paper Nos CB(l)l991/l l-12(01) and
CB(l}2178/l l-12(01).
 AUDITORS 547

the opinion that adequate accounting records have not been kept etc. (and then only
if the person knowingly or recklessly caused the required statement of that opinion to
be omitted). If the auditor did not hold the opinion, then the obligation to make the
statement is not triggered (and hence there cannot be criminal liability under s.408).
That is so even if the auditor was negligent in arriving at the opinion. Similarly, the
requirement to make the statement under s.407(3) arises only if the auditor is of the
view that not all necessary infom1ation or explanations have been provided. 228 If
the auditor came to the belief that all necessary information and explanations were
provided, then s.407(3) (and hence criminal liability under s.408) is not triggered,
even if the auditor's belief was erroneous and was arrived at negligently. In other
words, criminal liability does not tum on the correctness or otherwise of the auditor's
opinion but potentially arises only if the auditor held the relevant opinion but failed
to include the required statement in the auditor's report. Despite the controversy over
the provision in the passage of the Companies Bill, the criminal provision has only a
narrow area of operation.
Who might be criminally liable. As to the persons who may be criminally liable 11.113
under Cap.622, s.408(1) (as long as the mental elements can be established against
the persons), these are specified in paras.(a) to (c) respectively in s.408(2) as being:

1. if the auditor is a natural person-the auditor, and every employee or agent

of the auditor who is eligible for appointment as auditor;
2. if the auditor is a firm-every partner, employee or agent of the auditor who
is so eligible for appointment; and
3. if the auditor is a body corporate-every officer, member, employee or
agent of the auditor who is so eligible for appointment.

Practice units. Strictly speaking, only "practice units" are eligible for appointment 11.114
as an auditor: Cap.622, s.393( 1). A practice unit is a certified public accountant
(practising) practising on his or her own account, a firm of certified public
accountants (practising) and a corporate practice. 229 Read literally, it might be argued
that ss.408(2)(b) or 408(2)(c) cannot be triggered as, for example, partners of a firm
or officers are not eligible for appointment as an auditor as they would be eligible only
if they practised on their own account and not where they are partner of the firm or
officer of the corporate practice. However, the legislative intention is that the reference
to eligibility to be appointed as an auditor refers to eligibility in the sense of having the
requisite qualifications to act as a ce11ified public accountant (practising) practising
on his own account under the PAO.230
Auditor's report: name and signature. The name and signature of the auditor is 11.115
required in the auditor's report. 231

220 It is the auditor's view which counts because of the wording "to the best of the auditor's knowledge and belief"'.
2-"'9 Cap.622~s.392 and PAO,s.2(1).
2J-O See further Administration's Paper to the Bills Committee on cl.399 of the Bill (LC Paper No CB(l)2287/
11-12(02)) (28 June 2012); Legislative Council Legal Service Division's Note for the Chairman on cl.399 (LC
Paper No LS87/l 1-l 2) (29 June 2012).
231 Cap.622.s.409.
548 ACCOUNTSAND AUDIT

11.116 Common law cause of action for breach of duty. Where the auditors fail to comply
with their statutory duties, the company has a cause of action against the auditors
under the common Jaw for breach of the duty.232 The Companies Ordinance does not
contain any provision for civil liability in respect of auditors' breach of their statutory
duties.
11.117 Auditor's report sent to members and laid before annual general meeting. Copies
of the auditor's report are sent to members before the annual general meeting pursuant
to Cap.622, s.430.233 A copy of the auditor's report also needs to be laid before the
company in annual general meeting. 234 Under predecessor CO, s.141 (2) (repealed),
the auditors' report must be read before the company in general meeting, but this
requirement no longer applies under Cap.622.

6.3.2 Auditors' rights

1l.118 Auditors' rights. The Companies Ordinance confers certain rights on auditors to
enable them to carry out their functions.
11.119 Right of access. Auditors have a right of access at all times to the accounting records
of the company, and are entitled to require from the officers of the company such
information and explanations that the auditor reasonably requires for the performance
of the duties of the auditors: Cap.622, s.412( 1). Apart from officers, Cap.622 also
contains a provision allowing an auditor to require any person holding or accountable
for any of the accounting records of a company to provide information or explanations
to the auditor.235 If the officer or other person fails to provide the information or
explanation as soon as practicable, an offence is committed under Cap.622, s.413( 1).
It is a defence to establish that it was not reasonably practicable for the person to
provide the information or explanation. 236 A person also commits an offence by making
a statement, in the provision of information or explanations, which is misleading, false
or deceptive in a material particular, if the person knows that, or is reckless whether or
not, the statement is misleading, false or deceptive in a material particular. 237
11.120 Attend any general meeting. Auditors are entitled to attend any general meeting of
the company and to receive all notices of, and other communications relating to, any
general meeting which any member of the company is entitled to receive: Cap.622,
s.411( 1)(a). In addition, auditors have a right to be heard at any general meeting which
they attend on any part of the business of the meeting which concerns them as auditors:
Cap.622, s.4ll(l)(b).
11.121 Information on subsidiary undertaking. In the case of a holding company, an
auditor may need information on the company's subsidiary undertakings in light
of the need for the holding company to prepare consolidated financial statements.
Where the subsidiary undertaking is a company incorporated in Hong Kong, that

232
Deloille Haski11s and Sells v National M11111al Ltd [1993) AC 774 (PC(NZ)); AWA Ltd v Daniels
Life No111i11ees
(No 2) (1992) 9 ACSR 383 (on appeal: see Daniels vAnde1:wn (1995) 37 NSWLR 438, 486-487).
>Jl The auditor's report is one of the "reporting documents" (Cap.622, s.357(2)).
2;~ Cap.622, s.429.
2l 5 Cap.622, ss.412(2) and 412(5)(c).
236 Cap.622, s.413(2).

zn Cap.622, s.413(3).
 AUDITORS 549

company and its auditors are under an obligation to give to the auditors of the holding
company such information and explanation as those auditors may reasonably require
for the purposes of their duties as auditors of the holding company: Cap.622, s.412(2).
Cap.622 also contains provisions allowing the auditor to require officers of the
subsidiary undertaking and persons holding or accountable for the financial records
of the subsidiaries to provide information and explanations. 238 Where the subsidiary
undertaking is not a company incorporated in Hong Kong, the auditors may require the
holding company to obtain from the subsidiary undertaking (or from other specified
persons 239) any info1mation and explanation that the auditor reasonably requires for
the performance of duties as auditors of the holding company: Cap.622, s.412( 4).

Defamation: defence of qualified privilege. A defence of qualified privilege is conferred 11.122

under Cap.622, s.410 in respect of an action for defamation against an auditor.240 In the
absence of malice, an auditor is not liable to any action for defamation in respect of any
statement made by the auditor in the course of performing duties241 as auditor.242 In addition,
other persons are conferred a similar privilege in respect of the publication of any document
prepared by an auditor in the course of performing duties as auditor and which is required
to be delivered to the Registrar or another person under the Ordinance. 243 Accordingly,
persons who might otherwise be liable as a publisher of the auditor's defamatory statement,
such as printers, would not be liable for the publication in the absence of malice.

Outgoing auditor providing information to incoming auditor. Where there is a lJ.123

change of auditors, the outgoing auditor is entitled to provide information acquired
in the capacity of auditor to the incoming auditor. The outgoing auditor will not be
regarded as breaching any duty owed by the auditor (such as duties of confidentiality)
in so providing the information so long as the outgoing auditor is acting in good faith
and reasonably believes that the info1mation is relevant to the performance of the
incoming auditor's duties as auditor. 244

6.3.3 Common law duty of care

Duty of care and skill

Duty of care and skill. Auditors owe a duty of care to the company in the performance 11.124
of their auditing functions, with the duty arising both in tort 245 and as an implied term
(at least) in contract. 246 The auditor must take reasonable care and skill in the conduct
of the audit and the making of the auditors' report. 247 What is a reasonable amount of
care depends on the circumstances of the case. 248

238 Cap.622, s.4 l2(2), (9).

239 See Cap.622, s.412(5).
"" The provision is based on s.208 of the Companies Act of Singapore.
241
As defined in Cap.622, s.410(4).
242
Cap.622, s.410( I).
243
Cap.622, s.4 l 0(2).
zu Cap.622,s.414.
,,s See, e.g., Guang Xi11Eme,prises Ltd (in liq) v Kwon WongTan & Fong (2002] 2 HKC 613.
i.-; Equitable life Assurance Society v Ernst 011dl'<>ung
[2003) 2 BCLC 603, [ I 08].
''' PacificAcceptance Corp Ltd v Forsyth ( 1970) 92 WN (NSW) 29, 51.
'' 8 Re Kingston Collon Mill Co (No 2) [ 1896] 2 Ch 279, 284.
550 ACCOUNTSAND AUDIT

11.125 Standard of care. The standard of care expected of auditors has to reflect the
limits of the role of the auditor in the auditing of accounts. While auditors provide
a "reasonable assurance" on the annual accounts, they do not guarantee the financial
wealth of a company and are not in a position to detect all fraud or malpractice in a
company.249 In Topping Chance Development Ltd v CCJF CPA Ltd, 250 the Court of
First Instance accepted that auditors' reports are not warranties as to the state of the
company's accounts or the company's finances, and, moreover, no liability is imposed
on auditors for errors of judgment unless the error was such as no reasonably well-
informed and competent member of the auditing profession could have made. In the
late 19th century decision of Re London and General Bank (No 2), Lindley LJ had
also stated that the auditor is not an insmer and does not guarantee that the accounts
correctly show the true position of the company's affairs. 251 However, in that case the
auditor was found to have been negligent where the auditor certified the correctness
of the balance sheet without presenting to the members material information which
he had obtained indicating that the real value of loans constituting the main asset
of the company might not be properly reflected in the balance sheet owing to likely
difficulties in realisation.
11.126 Making enquiries of staff and management, but auditor watchdog not
bloodhound. Auditors are required to examine the company's books and may need to
make enquiries and seek explanations from the company's staff and management. 252
However, as stated by Lopes LJ in Re Kingston Cotton Mill Co (No 2) (another 19th
century decision):

"An auditor is not bound to be a detective, or ... to approach his work with
suspicion or with a foregone conclusion that there is something wrong" and that
an auditor "is a watch-dog, but not a bloodhound". 253

Accordingly, an auditor may be entitled to rely on assurances and explanations

given by the company without further verification. But if there are circumstances
arousing suspicion or which ought to have aroused suspicion, then more would
be expected of the auditor. 254 In Re Thomas Gerrard & Son Ltd, 255 the court held
that the auditor was not entitled to simply rely on the assurances of the managing
director as to the correctness of invoices when the auditor had come across
invoices which were altered. The court took into account expert accountancy

"' Simon S M Ho, Corporate Govenumce in Hong Kong: Key Problems and Prospecrs (Hong Kong: Centre for
Accounting Disclosure and Corporate Governance, School of Accountancy, the Chinese University of Hong
Kong, 2003) 39; SCCLR, Co,porare Governance Review: Con.wlrarion Paper on Proposals Made in Phase II of
rhe Review (Jun 2003) [22.02).
250 [2015) 3 HKC 71, 83.

ZSI [1895) 2 Ch 673,683.

zs, Re London and General Ba11k(No 2) [1895) 2 Ch 673,683; PacijicAccepta11ce Coq, Ltd v Fo,:~yth (1970) 92 VlN
(NSW)29, 68.
zs3 Re Kingston Corro11Mill Co (No 2) [1896)2 Ch 279,288 (Eng CA): and sec Gua11gXin £11rerprises Ltd (in liq)
v Kwan Jl'c>ngTan & Fong (2002) 2 HKC 613, 622; Topping Cha11ceDevelopmenr Lid v CCIF CPA Ltd [2015) 3
HKC71.83.
'" Re London and General Btmk (No 2) [1895)2 Ch 673. 683; Re Kingsrcm Coll<>nMill Co (No 2) [ 1896]2 Ch 279,
286.
"' [1968) Ch 455.
 AUDITORS 551

evidence that, upon coming across altered invoices, an auditor should undertake a
complete examination of suppliers' statements and where necessary communicate
with the suppliers.
Must act in accordance with prevailing professional standards. The general 11.127
principles from the early decisions of Re London and General Banli256 and
Re Kingston CotLon Mil/257 remain good law today. However, with developments
in financial reporting and auditing practices, the courts have also accepted that the
standard of reasonable care and skill is more exacting today than over a century ago. 258
Sound audit procedures will normally bring to light material irregularities and thus
the auditor's duty may extend to detecting material irregularities in the company's
financial statements. 259 Also, as stated by Lord Denning, while an auditor need not
be suspicious of dishonesty (in the absence of suspicious circumstances), the auditor
must come to his or her task with "an inquiring mind" and be wary that "someone may
have made a mistake somewhere and that a check must be done to ensure that there
has been none". 260 In determining the appropriate standard of care, it is necessary to
consider the prevailing standards of professional conduct and practices, 261 and so for
example it would be relevant for the courts to take into account requirements under
applicable accounting standards. 262
Auditors being held negligent. For a more modern decision where auditors were held 11.128
to be negligent, see the Australian decision of Daniels v Anderson. 263 In that case,
auditors were found to be negligent in failing to advise the company's management or
board of the serious deficiency in internal controls and in the systems of records and
accounts, which led to a failure to detect improper foreign exchange transactions that
had caused the company significant losses. 264

Causation and damages for breach

Causation. To recover substantive damages, the element of causation must be 11.129
established in respect of the breach of duty and the loss suffered. In Topping Chance
Development Ltd v CCIF CPA Ltd, 265 the Court of First Instance stated:

" ... the court will first apply a 'but for' test, and then go on to make a value
judgment. The question is whether the loss falls within the ambit of the defendant's
duty of care."

256
(1895] 2Ch673.
257
[1896] 2Ch279.
258
Re Thomas Gerrant & Son lid [I 968) Ch 455; Daniels vA11derso11
(1995) 37 NSWLR 438,480; £t1ramoney Ltd
v Chan, Lai Pang & Co (a/inn) [1994) HKLY 223; Days lmpex Ltd v Fung l't, & Co (unrep., HCA 1035/2014,
[2017) HKEC 2269), [16).
259 See Barings v Coopers & Lybrand [ 1997) I BCLC 427, 435; Days lmpex Ltd v Fung l't, & Co (unrep., HCA
1035/2014, [2017) MKEC 2269), [ 13).
260 Formento (Sterling Area) LtdvSelsdon Fountain Pen Co Ltd [1958) 1 WLR 45.
26' PacificAcceptance Co,p Ltd v Forsyth ( 1970) 92 WN (NSW) 29.
262 Sec Lloyd Cheyham & Co lid v Lit1/ejolm& Co [ 1987] BCLC 303, 313; Extramoney Ltd v Chan. Lai Pang & Co
(afirm) [1994) HKLY 223.
263 (1995) 37 NSWLR 438.
264 (1995) 37 NSWLR 438, 479-486.
26
' [2015)3 HKC 71, 85.
552 ACCOUNTS AND AUDIT

If the auditors' negligence consists of omission, causation depends not on a question

of historical fact, but on the answer to the hypothetical question, namely, what the
company would have done if the proper advice had been provided by the auditor; the
company must prove that it would have taken action to avoid the risk.266
11.130 Principles on damages. Where an auditor is in breach of duty, the ordinary p1inciples
on the damages recoverable in contract and tort are applicable. It has been held that
the company's payments of dividends and bonuses are the natural and immediate
consequences of an auditors' breach of duty involving an overstatement of profits in
the accounts, and so the company could recover as damages from the negligent auditor
for such payments which would not have been made if the auditors had conducted the
audit properly.267 Likewise, in the case of wrongful payment of taxes for non-existent
tax liability, the company's loss as a result of the payments is in principle recoverable
from the negligent auditor.268 Generally, where the company's decision on the basis
of the defective accounts (which led to the loss being suffered) is a decision which
companies ordinarily take on the basis of the accounts, then the auditor is potentially
liable for the loss.269 Where the auditors are negligent in failing to report inadequacies
in the company's books or systems or in failing to uncover misfeasance by company
personnel, the auditors may be liable for the defalcations or other losses sustained by
the company which the company would have prevented through remedial action had
the auditor alerted the company to the problems. 270
11.131 Limits to damages. There are limits to the damages recoverable from an auditor,
which reflect the limitations in the scope of the auditors' role and the scope of their
duty of care. In Guang Xin Enterprises Ltd (in liq) v Kwan Wong Tan & Fong,271 the
Court of First Instance emphasised that the auditor is not a business adviser; that
the auditor is not qualified to express a view as to how the business should be run,
or what investments to make, or whether the company should continue to carry on
business; and that the auditor is not engaged to steer the management into making
better management decisions. 272 In that case, the company entered into liquidation
and the liquidator argued that by reason of incorrect reporting by the auditors (such
as overvaluation of certain investments), the company continued trading thereby
suffe1ing loss, and that the auditors should be liable for those trading losses. The court,
in striking out the claim, held that the auditors could not be Iiable for the trading losses.

266 [2015) 3 HKC 71, 85. See also Manchester Building Saciety v Grant Thornton UK LLP [2018) EWHC 963
(Comm).
u, Leeds Estate, Building and lnves1111e111 Co v Shepherd (1887) 36 Ch D 787; Re London and General Bank (No
2) [ 1895] 2 Ch 673; Equitable life Assurance Socie1y v Ernst & Young (2003] 2 BCLC 603; Extramoney Ltd v
Chan. Lai Pang & Co (a.firm) [ 1994) HKLY 223; Topping Chance Development Ltd v CC!F CPA Ltd [2015) 3
HKC 71, 87.
268 Topping Chance Development Ltd v CCIF CPA Ltd [2015) 3 HKC 71, 87
26• Sec also Johnson v Gore 1#',od & Co (2003] EWCA Civ 1728, [98) where Arden LJ stated: "The scope of the

dury of care as auditors must in principle encompass anything which the company in general meeting could,
having regard to the statutory scheme for annual accounts and audit, be expected to do on the strength of those
unqualified accounts."
210 See Dcmiels vAnderso11(1995) 37 NSWLR 438, 525-564;Sa.seo Fi11011ce lid (in liq) v KPMG [2000) I All ER 676;
GuangXill E111e1prises Ltd (in liq) v Kwa11Wo'ngTan & Fong [2002) 2 HKC 613, (41). See also para.11.129 above.
"' [2002) 2 HKC 613.
272 [2002) 2 HKC 613, 622-625, citing Caparo !11d11stries Pie v Dickman [1990) 2 AC 605; Ba11kof Credit and
Commerce Intl (Overseas) Ltd v Price Walerhouse ( 1999) BCC 3 51.
 AUDITORS 553

The court held that, in light of the role of the auditor as explained above, trading losses
flowing from a decision to trade based on inaccurate financial information provided
by the auditors are not a kind of damage from which the auditors promise to save the
company harmless. On this basis, the trading losses should not be regarded as having
been caused, in the legal sense, by the incorrect reporting. 273
Whether scope of liability widening. However, in Equitable Life Assurance Socie1y v 11.132
Ernst & Young,274 the English Court of Appeal was not prepared to strike out a claim
for damages in respect of losses which the company could have averted by the directors
selling the company's undertaking at an early stage had the auditors properly reported
on the company's accounts. The approach adopted by the court in this case appears to
widen the scope of auditors' liabilities compared with the more restrictive approach
adopted in the earlier Hong Kong case of Guang Xin Ente,prise and in previous English
cases (including Galoo Ltd v Bright Grahame Murray,275 an earlier decision of the
English Court of Appeal). The decision has been criticised. It has been said that if the
auditors were engaged to provide an audit for the specified purpose of consideration of
a potential sale, then the auditors would rightly be liable for the lost opportunity to sell
resulting from the auditors' negligence. However, that was not the situation in the above
case, and consistently with earlier case law, it is said that the auditors should not have
been regarded as having undertaken to protect the company from losses flowing from
the directors' decision to continue the company's existence.276
On the other hand, Equitable Life Assurance was cited with approval by the Court
of First Instance in refusing a strike-out application in Days fmpex Ltd v Fung Yi, &
Co.277 The court in Days Impex accepted that where the allegation is that the auditors
should have discovered and advised that the company was trading at a loss, and steps
would have been taken accordingly to prevent further trading, the failure to do so is
capable of being an effective cause. 278 The court also took the view that the earlier
English decision of Galoo should not be understood as a case on causation. Rather,
the question is on the scope of the auditor's duty. To the extent that the duty extends
to drawing attention to fraud, the auditor is responsible for the company continuing to
trade fraudulently.279

Company's contributory negligence or culpability

Company's contributory negligence or culpability. Where an auditor is liable to the 11.133
company, the auditor can potentially seek to reduce the amount of damages payable on

273
The court applied Alexander v Cambridge Credit Co111Ltd (1987) 9 NSWLR 3 JO; Galoo Ltd v Bright Gl'(J/wme
Murray [ 1994] I WLR 1361 (Eng CA); Bank of Credit and Commerce Im/ (Overseas) Ltd v Price Waterhouse
[ 1999] BCC 351. The case went on appeal, but there was no appeal on the point concerning the company's trading
losses: see G11a11g
Xi11E111e,prisesLtd v Kwan Wong Tan [2003] 3 HKLRD 527.
2" [2003] 2 BCLC 603.
275 [1994] I WLR 1361.
276 Lee Roach, "Equitable life and Auditor Liability: Part I" (2006) 17 /11tematio11alCompany and Commercial

Law Review 20 I .
277 (unrep., HCA 1035/2014, [2017] HKEC 2269). [32].
278 (unrcp., HCA 1035/2014, [2017) HK.EC 2269). [3 I]; and sec Rushmer v Mervyn Smith (I/a Mervy11£ Smith &

Co) (2009) EWHC 94 (QB).

279 (unrep., HCA 1035/2014. [2017) HK.EC 2269), (30)-(33).
554 ACCOUNTSAND AUDIT

the basis of the company's contributory negligence. 280 Where the company has, through
its directors or senior managers, failed to take reasonable care for its own welfare-
such as where the board or management failed to ensure that proper records were kept
or proper internal controls put in place-then there will be contributory negligence
on the part of the company.281 In Daniels v Andet:rnn,282 the NSW Cow-t of Appeal
held that, generally speaking, contributory negligence of any employee or other person
whose acts for which the company would be vicariously liable would be regarded as the
contributory neg)igence of the company. The general principles of attribution, and their
exceptions, are relevant here.283 For example, where the company's loss resulted from
fraud of an employee, that fraud would not ordinarily be imputed to the company for the
purposes of determining whether there was contributory negligence by the company.284
11.134 Sole director/shareholder source of fraud, whether auditors can rely on illegality
defence in an action by company against auditors. In Stone & Rolls Ltd (in liq)
v Moore Stephens, 285 the liquidators of a company sued the auditors for negligence
in failing to detect that the company had no legitimate business in circumstances
where the sole director/shareholder of the company had used the company solely for
the purpose of defrauding banks. The auditors successfully relied on the illegality
defence (ex turpi causa non oritur actio-the court will not assist a plaintiff to recover
a benefit from his or her own wrongdoing) on the basis that the fraud of the sole
director/shareholder was regarded as the fraud of the company for the purpose of the
illegality defence. The decision of the House of Lords in that case has been much
criticised. 286 Moreover, there is no clear ratio in the case since the reasoning in the
different judgments constituting the majority differed in significant respects. 287 Noting
the uncertainties in the law in this area, the Court of First Instance in Days lmpex Ltd
v Fung Yu & Co288 refused to strike out a claim against the auditors on the basis of
the illegality defence. In that case, the liquidators brought proceedings on behalf of
the plaintiff companies against the auditors alleging breaches of duties in signing off
unqualified "clean" opinions on the status of the companies' accounts and by failing
to detect and report the massive import/export fraud which the controlling shareholder
and director had caused the companies to commit. The court was not satisfied that the
case was a plain and obvious one for striking out.

6.3.4 Duty to report impropriety or/rllud

11.135 Duty to immediately report to company's management or directors any
impropriety or fraud. The auditors' duty to the company includes a duty to

"" Law Amendment and Reform (Consolidation) Ordinance (Cap.23) s.21; and see Daniels v Ande1:Mn(1995)
37 NSWLR 438, 564-578. But cf. Extramoney Ltd v Cha11, Lai Pang & Co (afirm) [ 1994] HKLY 223.
' 8' Daniels vAnde1:w11( I 995) 37 NSWLR 438; Barings Pie v Coopers & ~ybra11d(2003] EWHC 1319.
m (1995) 37 NSWLR 438,570.
zu See Chapter 12.
' 8' Daniels v Anderson ( 1995) 37 NSWLR 438, 568; and see Chapter 12.
z35 [2009] 1 AC 1391. For discussion of the case, sec Bi/ta {UK) Ltd v Nazir (2015) 2 WLR 1168; Peter Watts,
"Stone & Rolls Ltd {In Liquidation) v Moore Stephens (A Firm): Audit Comracts and Turpitude" (2010) 126 low
Quarterly Review 14.
28• See note 239 in Chapter 12.
281 See Bi/ta (UK) Ltd v Nazir (No.2) [2015) 2 WLR 1168, (23)-(24).
288 (unrep., HCA 1035/2014, [2017) HKEC 2269), [39)-(40).
 AUDITORS 555

immediately report to the company's management or directors any impropriety or

fraud uncovered during an audit and not merely at the time ofrendering their report. 289
Moreover, if the auditors suspect that the management might be involved in or was
condoning fraud or other serious irregularities, the auditors may be under a duty to
report to third party regulatory authorities without the management's knowledge or
consent.290 Where the auditors ought to have reported to a third party, it is no answer
to a claim by the company against the auditors for damages to say that reporting to the
company's management would have been ineffective in preventing the fraud. 291
Duty to report to third party may override duty of confidentiality owed to 11.136
company. The auditors' duty to report to a third party may override the duty of
confidentiality owed to the company.292 In the case of listed companies, there is
also statutory protection given to auditors under s.381 of the Securities and Futures
Ordinance (Cap.571) ("SFO"). Broadly, under s.381 of the SFO, an auditor of a listed
company is immune from civil liability in respect of his communicating in good faith
to the Securities and Futures Conm1ission info1111ationacquired in his capacity as
auditor and which suggests that there has been fraud, misfeasance or other misconduct
in the management or conduct of the business of the company. The provision does
not impose any statutory duty on auditors to report wrnngdoing, but the provision
was introduced to facilitate the reporting of fraud or other irregularities by conferring
immunity from civil liability for the "whistle-blowing".

6.3.5 Duties owed to shareholders or third parties

Basic duty owed to company; whether duty owed to shareholders or third parties. 11.137
As the auditors are engaged by the company, the auditors' basic duty of care is owed to
the company. However, oilier persons, such as shareholders or creditors of the company
might rely on the auditors' report for their investment or lending purposes. An issue
arises whether the auditors can be liable to such persons for their negligence in auditing.
Caparo v Dickman. The leading decision is Caparo Industries pie v Dickman. 293 In that 11.138
case, Caparo was a shareholder of a company and had relied on the audited accounts
in subsequent purchases of shares in the company. It turned out that the accounts
were inaccurate and misleading, and Caparo sued the auditors for ilieir negligence. In
setting out the general principles for establishing a duty of care, the House of Lords
held that the fact that it is foreseeable that others may rely on the audited accounts for
particular purposes is not enough; there must be a requisite degree of proximity.294
Accordingly, it was held that auditors do not owe a duty of care to members of the
public at large who might rely on the accounts. Auditors, however, would owe a duty
of care to a third party if: (1) the auditor's advice is required for a purpose, whether

W> Pacific Acceptance Co,11 lid v Fot:~y1h( 1970) 92 \'lN (NSW) 29; Sa.tea Finance lid (in liq) v KPMG [2000]
I All ER 676; Days fmpex Lid v F11nglit & Co (unrcp., HCA 1035/2014, [2017] HKEC 2269), [ 14).
290 Sasea Fi,umce Ltd (in liq) v KPMG (2000] 1 All ER 676,681; Days /mpex Ltd v Fung Y,, & Co (unrcp., HCA

1035/2014, (2017] HKEC 2269), [14]-(18).

2• 1 Sasea Finance Ltd (in liq) v KPMG (2000] 1 All ER 676, 684--685.
292 Sasea Finance Ltd (in liq) v KPMG (2000] 1 All ER 676, 684--685.
295 (1990]2AC605.

'"' (1990) 2 AC 605,624, 631-632.

556 ACCOUNTSAND AUDIT

particularly specified or generally described, which is made known 295 to the auditor
at the time when the advice is given; (2) the auditor knows that his advice will be
communicated for that purpose to the third party, either specifically or as a member of
an ascertainable class; (3) the auditor knows that the advice is likely to be acted upon
by the third party without independent enquiry; and (4) the advice is so acted upon to
the third party's detriment. 296
11.139 Duties usually owed to company not individual shareholders. As to existing
shareholders, the House of Lords in Caparo accepted that the purpose of the auditors'
report is to act as a check on the directors and to protect the shareholders' interests
in the proper management of the company's affairs and to facilitate shareholders'
informed exercise of their rights attached to their shares. 297 However, such interests of
the shareholders would coincide with the interests of the company and so any claim
against the negligent auditors would ordinarily be made by the company rather than
the individual shareholders. 298 Jn any event, any duty of care owed to the shareholders
would only be confined to the purposes for which the auditors' report is prepared and
would not extend to a duty to individual shareholders in respect of the shareholders'
decision to acquire further shares in the company. 299 Thus, in the above decision,
Caparo failed in its claim against the auditors.
11.140 Example of when duty to third party can arise. The above principles were applied
by the Court of Appeal in Yue Xiu Finance Co Ltd v Agnew, 300 where the court
reversed a first instance decision striking out the plaintiff's claim against the auditors
in circumstances where the auditors were appointed specifically to conduct a special
audit before the plaintiff's acquisition of a major shareholding in the company. 301 The
court held that the element of proximity was established on the facts as pleaded. It was
held that the duty of care to a third party can arise where the auditors knew or ought to
have known that the third party would rely on the audit, and it is unnecessary to prove
that the auditors intended the third party to so rely.
I 1.141 Caparo principles apply in respect of whether duty owed to creditors or third
parties. The principles in Caparo also apply in respect of whether a duty is owed to
creditors 302 or other third parties. 303
11.142 Disclaimers. It is possible for auditors to include a disclaimer of liability, for
example in the auditor's report itself, so as to prevent a duty of care arising to third
parties. 304

295 Knowledge includes actual knowledge but also such knowledge as would be attributed to a reasonable person
placed in the position of the auditors concerned: see [1990) 2 AC 605,638, per Lord Oliver; and see also Yi,eXiu
Finance Co Ltd vAg11ew[1995] 2 HKLR 186.
296 [1990) 2 AC 605, 638,per Lord Oliver; and see also 620-624,per Lord Bridge.
297 [ I 990) 2 AC 605, 638, 626, per Lord Bridge, 631, per Lord Oliver, 661-662 per Lord Jauncey.
298 [1990) 2 AC 605,638,626, per Lord Bridge. See also the rule against reflective loss in Chapter 10.
29~ [1990) 2 AC 605,638, 626-621,per Lord Bridge, 650-654,per Lord Oliver, 662, per Lord Jaunccy.

m [1995) 2 HKLR 186.

.l-0, For other cases, sec McNaughton (James) Pt,pers Group Ltd II HicksA11derso11 & Co [ 1991] 2 QB 113; Electra
Private Equity Partners v KPMG Peat Marwick [200 I) I 8CLC 589.
.l-Ol Sec Al Saudi Btmque II Clarke Pixley {A Firm)[l 990] Ch 313; Berg Sons & Co v Adams [ 1993] 8CLC 1045.
.l-OJ See Andrew v Ko111111is Freeman [1999) 2 BCLC 641.
.l-0-l See Barclays Bank pie v Grant 17wmton UK LLP [2015) EWHC 320 (Comm).
 AUDITORS 557

6.3.6 Indemnities by the company

Restrictions on exempting auditors. Cap.622, s.415 restricts provisions exempting 11.143
auditors from liability or indemnifying auditors for liability. Subsections (1)- (4) in
s.415 are worded in the same maimer as the provision on indemnities for directors. 305
The exception in relation to a permitted indemnity provision under sub-s.(5) is more
straightforward than the provisions for directors and simply follows the predecessor
CO, s. I 65(2) (repealed).

6.4 Ceasing to hold office

6.4.1 Resignation
Written notice of resignation. An auditor may resign at any time by depositing a ll.144
written notice of resignation at the registered office of the company: Cap.622, s.417.
Transparency in auditors' resignation. The legislation imposes certain requirements 11.145
and gives auditors certain rights to ensure transparency in the auditor's resignation so
that, for example, any difficulties caused by the company which prevented the auditors
from effectively carrying out their functions can be brought to light.
Statement of any circumstances that should be brought to attention of members 11.146
or creditors. An auditor who resigns from office must, on the resignation, give a
statement to the company of any circumstances that should be brought to the attention
of the members or creditors (referred to as a "statement of circumstances"), or a
statement that there are no such circumstances, as the case may be.306 The company is
required to send the statement of circumstances to the members. 307
Person aggrieved by statement may apply for order that copies need not be 11.147
sent out. To ensure that there is no abuse of the statutory provisions by auditors, the
company or any person who claims to be aggrieved by the auditor's statement may
apply to the court for an order directing that copies of the notice need not be sent out:
Cap.622, ss.426(l)(b) and 426(3). The com1 may grant the order if it is satisfied that
the auditor is abusing the use of the statement of circumstances or is using the notice
to secure needless publicity for defamatory matter: Cap.622, s.427(2). In Australia, it
has been held that the common law meaning of ''defamatory" should be applied in a
provision similar to s.427 of Cap.622, and the fact that there may be a defence in an
action for defamation does not mean that the notice would not be "defamatory" for
the purposes of s.427. 308 Also, if any part of the notice secures needless publicity for
defan1atory matter, then the company is entitled not to send out the whole notice. 309
Convening of general meeting to inform members of circumstances of resignation. 11.148
If the auditor's notice of resignation contains a statement of circumstances which he or
she considers should be brought to the notice of members or creditors, then the auditor

3o, Sec Chapter 8.

366 Cap.622, s.424.
3-07 Cap.622, s.426( I)(a).
308 National Roads and Motorists 'Association v Snodgrass (2002) 42 ACSR 622.
309 National Roads and Motorists'Associotion v Snodgrass (2002) 42 ACSR 622.
558 ACCOUNTSAND AUDIT

may, by another notice given to the company with the notice of resignation, require
the directors to convene a general meeting to receive and consider such explanation of
the circumstances connected with his or her resignation as he or she may wish to place
before the meeting: Cap.622, s.421. The auditor is entitled to require the company
to send to members with the notice of meeting a written statement (referred to as a
"cessation statement") made by the auditor on the circumstances connected with his
or her resignation (or to have the statement read out at the meeting in the event of the
company's failure to send the statement). 310 However, on application by the company
or an aggrieved person, the couit can order that the statement not be sent out if the
auditor is using his or her rights to secure needless publicity for defamatory matter or
is otherwise abusing his or her rights. 311 The auditor has a right to attend the meeting,
to receive all notices and communications which members are entitled to receive in
relation to the meeting and to be heard at the meeting. 312

6.4.2 Retirement
11.149 Auditor terminated if term expires and not reappointed. A person's appointment
as auditor is terminated if his or her term of office expires and he or she is not
reappointed as auditor. 313 Under Cap.622, such an outgoing auditor has a right to
send a cessation statement, 314 similar to the right of a resigning auditor, discussed
above (at para.11.148). The outgoing auditor also has a right to be given notices of
the meeting at which he or she is to be replaced, and to attend, and be heard at, the
meeting. 315
11.150 Outgoing auditor give statement of circumstances to members or creditors where
required. Cap.622 also contains provisions requiring the outgoing auditor to give a
statement to the company of any circumstances that should be brought to the attention
of the members or creditors ("statement of circumstances"), or a statement that there
are no such circumstances, as the case may be.316

6.4.3 Removal
11.151 Removal of auditor by ordinary resolution. The members in general meeting have
power to remove an auditor from office by ordinary resolution: Cap.622, s.419. This
power cannot be excluded by any agreement between the company and the auditor
or by the company's articles: s.419(1). However, the removal from office does not
deprive the auditor of any compensation or damages payable to him or her in respect
of the termination of his or her appointment: Cap.622, s.420.

"" Cap.622, s.422. There may be criminal liability if the company fails to send the statement: Cap.622, s.422(8).
However, the company need not send the statement if the company only receives the statement two days or less
before the last day on which notice may be given (under Cap.622, s.571 (I)) to call the general meeting: Cap.622,
s.422(5)(a).
1
" Cap.622, s.422(7); and see para. I I. 147 above.
"' Cap.622, s.422(1)(c).
113 Cap.622, s.416(1)(a).
114
Cap.622, s.422(2).
115
Cap.622, s.422(2).
316
Cap.622, s.425.
 AUDITORS 559

Special notice of that meeting. Special notice must be given to the company for the 11.152
meeting. 317 On receipt of the notice, the company must send a copy of the notice to
the auditor being removed. 318 The auditor has rights under Cap.622, s.422(3) to make
representations, similar to the rights conferred on auditors in the case ofresignation. 319
The auditor also has a 1;ght under Cap.622, s.411 to attend, and be heard at, the general
meeting.

Statement of circumstances. Similar to the position for resigning or retiring auditors, 11.153
an auditor removed from office before expiry must also give a statement to the
company of any circumstances that should be brought to the attention of the members
or creditors ("statement of circumstances"), or a statement that there are no such
circumstances, as the case may be.320

6.4.4 Disqualification
If disqualified, auditor immediately ceases to be auditor. If an auditor of a company .l.l.154
ceases to be eligible, or becomes disqualified, for appointment as auditor, the auditor
immediately ceases to be auditor of the company: Cap.622, s.418.

317 Cap.622,s.419(2).As cospecialnotice, sec Cap.622,s.578.

318 Cap.622, s.419(3).
319 See para.11.149above.
° Cap.622. s.425.
32
 CHAPTER 12

CORPORATE CONTRACTING AND

LIABILITIES OF COMPANIES

PARA.

I. Corporate Contracting ............................................................................................................ 12.00 I

1.1 Introduction .................................................................................................................... 12.001
1.2 Company contracting through agent .............................................................................. 12.007
1.2.1 General ................................................................................................................ 12.007
1.2.2 Actual authority ................................................................................................... 12.0 I 0
1.2.3 Apparent authority (or ostensible authority) ....................................................... 12.024
1.3 Company contracting directly ........................................................................................ 12.04 l
1.3.l Common seal ....................................................................................................... 12.04 l
1.3.2 Execution of documents as if under seal ............................................................. 12.045
1.3.3 Execution of deeds ............................................................................................... 12.046
1.3.4 Official seals and company chops ....................................................................... 12.050
1.4 Protection of persons dealing with a company ............................................................... 12.055
1.4.1 Common law indoor management rule ............................................................... I 2.056
1.4.2 Exceptions to the indoor management rule ......................................................... 12.069
1.4.3 Statutory indoor management rule ...................................................................... 12.082
1.4.4 Validity of acts of directors ................................................................................. 12.091
1.4.5 Conveyancing and Property Ordinance .............................................................. 12.093
1.4.6 Validity of documents executed as if under seal... ............................................... 12.096
1.5 Ratification ..................................................................................................................... 12. l 00

2. Liabilities for Civil and Criminal Wrongs ............................................................................. 12.101

2.1 Tort and other civil liabilities .......................................................................................... 12.I0I
2.1.1 Corporate liability ............................................................................................... 12.10 I
2.1.2 Liabilities of individuals ...................................................................................... I 2.115
2.2 Criminal liabilities .......................................................................................................... 12. l I 7
2.2.1 Corporate liability ............................................................................................... 12.117
2.2.2 Liabilities of individuals ...................................................................................... 12.129
 1. CORPORATE CONTRACTING

1.1 Introduction

Ways companies can enter into contract. Companies can enter into a contract 12.001
through the methods as set out in s.121 of the Companies Ordinance (Cap.622),
namely as follows:

• Contracts required by law to be in writing and under seal may be made by

the company in writing under the company's common seal or executed in
accordance with s.127(3): Cap.622, s.121(2). 1
• Contracts required by law to be in writing may be made on behalf of the
company in writing signed by any person acting with the company's authority:
Cap.622, s.121(3).
• Oral contracts can be made orally on behalf of a company by any person
acting with the company's authority: Cap.622, s.121 (4).

Deeds required to be under seal. Deeds are required to be under seal and so may 12.002
be executed by companies pursuant to s.121 (2) of Cap.622. The common seal is no
longer compulsory under Cap.622, but companies may still use a seal if they wish. 2 If
a company has a common seal, the seal can also be used for any written contract, even
though the contract is not required by law to be executed as a deed.
For contract under seal, company entering into contract directly; and for other 12.003
contracts, via an agent. Where the contract is executed under seal (or as if it was
executed under seal pursuant to Cap.622, s.127(3)), the company is regarded as
entering into the contract directly. The legal effect of the affixing of the common seal
is similar to the legal effect of a signature of a natural person.3 Where a company enters
into a contract by the methods set out in ss.121 (3) or 121(4) of Cap.622, the company
enters into the contract as a principal, with the agent signing the contract or verbally
contracting for the company, as the case may be. Here, it is necessary to look to the
general principles of agency law to see whether the person purportedly acting as agent
has the requisite authority to bind the company to the contract. But even in the former
scenario where the seal is used, principles of agency law are relevant as it is necessary
to determine whether the persons affixing the seal (or executing the document as if
under seal) are acting under the authority of the company to enter into the transaction
and to affix the seal to the document (or to otherwise execute the document).
Articles determine which corporate organ has power to enter into contracts. The 12.004
articles of a company will detennine which corporate organ has the power to enter into
contracts or other transactions on behalf of the company. Usually, the power to contract
for the company is vested in the board of directors: see, e.g., Model Articles (private

' Sec para.12.041 below.

2 See para.12.041 below.
3 Northside DevelopmentsPty Ltd v Registrar-General(1990) 176CLR 146,156, 160.
564 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

companies) (Cap.622H), art.3.4 Where the board acts pursuant to such authority in the
articles, the board acts as a corporate organ and as the company itself (i.e., the board is not
an agent of the company as such5). Where the board passes a resolution for the company
to enter into a particular transaction, it is still necessary for one or more persons acting
as agent of the company, with authority flowing from the board, to carry out the board
resolution and to enter into the transaction (in one of the ways set out in s.121 ofCap.622)
on behalf of the company. Usually, only major contracts will come before the board. For
day-to-day transactions of a company, the company's agents would be able to contract for
the company within the scope of their authority. Potentially, an agent might be an officer of
the company, an employee or any person appointed as agent for the company.

12.005 Indoor management rule: enables third party to enforce transaction despite
some defect in authority. Where persons purportedly acting for the company do not
have authority to do so, then prima.facie the company is not bound to the transaction.
Where a person has no authority whatsoever to contract, such as where the company
has not even purported to grant any authority to that person, then, generally speaking, 6
the person cannot bind the company to the contract. Where the person acts pursuant
to a power conferred by the articles, circumstances might arise where there is some
defect in the authority because certain requirements of the articles have not been
complied with. AIso, where an agent acts pursuant to a grant of authority purportedly
conferred on him, there might be some defect in the authority arising again from
a lack of compliance with requisite procedures as set out in the articles or under
statute. In these last two categories of situation, the indoor management rule could
be relied on by the third party dealing with the company to enforce the transaction
against the company. The indoor management rule is a rule which enables a third
party to enforce a transaction with the company despite some defect in the authority
of the person purportedly acting for the company: see Section 1.4 below.
12.006 Agency principles and indoor management rule protect third parties and promote
business convenience but cannot facilitate fraud. The application of the agency
law principles and the indoor management rule aims to strike a balance between two
competing interests. Where an agent contracts for a company without proper authority,
either the company or the third party dealing with the company may need to bear the
consequences. Rules enabling the third party to enforce a transaction against the company
despite the defects in authority are intended to protect and promote business convenience
which would be at hazard if persons dealing with companies were under the necessity of
investigating the companies' internal proceedings in order to satisfy themselves about the
authority of agents. On the other hand, protections given to third parties must not go so far
as to facilitate the commission of fraud against a company, with innocent shareholders and
creditors suffering as a result of unscrupulous persons purportedly acting for the company.7

• Companies (Model Articles) Notice (Cap.622H), Sch.2. See also Sch. I for Model Articles (public companies),
art.2; and predecessor CO, First Schedule, Table A reg.82 (repealed).
' Automatic Se!fC/ea11singFilter Sy11dicateCo v Cwwinglwme (1906) 2 Ch 34.
6 There is some suggestion that the position may be different where the written contract is executed under seal:
see para.12.062 below.
' See Northside Deve/opmelllsPty Ltd v Registrar-Ge11eral (1990) 176 CLR 146, 164, per Mason CJ; and see
generally Andrew Griffiths, "The Economic Implications of Validating Unauthorised Contracts Made by
Corporate Agents" [2003) European Business Orga11izaiion law Review 51.
 CORPORATE CONTRACTING 565

1.2 Company contracting through agent

1.2.1 General
General principles of agency law apply. The general principles of agency law apply 12.007
to determine whether a person has authority to enter into a transaction as agent for the
company (the principal). 8 There are two broad categories of authority:

l. actual authority; and

2. apparent authority (or ostensible authority).

Company bound if agent has either actual authority or apparent authority. 12.008
Actual authority and apparent authority can co-exist and may coincide, but either
may exist without the other and their respective scope may be different. 9 A third
party seeking to enforce the transaction against the company need only establish
one or the other. If an agent has actual authority to contract, then the principal will
be bound by the contract and it is unnecessary to consider the question of apparent
authority. If the agent does not have actual authority, it is necessary to see if the
circumstances give rise to apparent authority. If there is apparent authority, then the
principal will also be bound, even though there is a lack of actual authority on the
part of the agent.
Authority not terminated because agent of unsound mind unless third party 12.009
aware of this in which case voidable. The Court of First Instance has held that where
an agent has actual or apparent authority to contract for a company, that authority is
not terminated merely because the agent becomes of unsound mind at the time of the
contract. 10 The court took the view that to ensure commercial efficacy, where a third
party deals with an agent in good faith without knowledge of the agent having gone
insane, the third party should be able to treat the transaction as binding on the principal
(the company). If the third party was aware that the agent was of unsound mind at the
time of the transaction, then it seems that the transaction would be voidable at the
election of the principal. 11

1.2.2 Actual authority

Types of actual authority. An agent has actual authority where the principal has 12.010
consented to the agent having such authority. Actual authority is a legal relationship
between principal and agent created by a consensual agreement to which they alone
are parties. 12 In the context of companies, actual authority can be conferred on an

8 The ensuing discussion focuseson cootraccsand other transactionsentered into by an agent for a company,but
cheprinciplesarc also applicable in respect of any act purportedly made by an agent for the company:see, e.g.,
Attorney General v Herald HousewareLtd [199614 Hl<C 787 (whetheran admission made by an alleged agent
was binding on the company).
9 Freeman & Locl.yer v Bucklwrst Park Properties (Mangat) lid [ 1964)2 QB 480, 502.
10
Probus Ltd v 1i-eble& 1i-ipleLtd (unrep., HCA 2723/2008,(2010) HK.EC1773).(131)-(142).
" Probus Ltd v li-eble& Ti-ipleLtd (unrep., HCA 2723/2008,[20 IOJHK.ECI 773), [ I 37); Imperial Loan Co Ltd v
Stone (1892) I QB 599.
" Freeman & Lockyer v Buckhurst Park Properties (Ma11gal)Ltd (1964) 2 QB 480, 502; and see also Allorney
General v Herald Ho11sewareLtd [ 1996)4 HKC 787, 791.
566 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

agent only by the corporate organ with the power to do the act or thing under the
articles or by persons who themselves have actual authority delegated from the proper
corporate organ. Actual authority is of two types:

1. express actual authority; and

2. imp!ied actual authority. 13

Express actual authority

12.0l.l Express vs implied actual authority. An agent has express actual authority where
the autho1ity has been conferred expressly on the agent. For example, where the
board of directors passes a resolution stating that a particular person is authorised
to enter into a specified transaction on behalf of the company, then that person
will have express actual authority to enter into that transaction on behalf of the
company. Implied actual authority arises where the authority is inferred from
the conduct of the parties and the circumstances of the case,' 4 namely where the
words or conduct of the principal indicate that a particular person is conferred with
authority, even though the grant of authority is not explicitly stated. Whether there is
actual authority is to be ascertained by applying ordinary principles of construction
of contracts, including any proper implications from the express words used, the
usages of the trade or the course of business between the parties. 15 These principles
are applied to determine whether the principal has agreed with the agent to act on its
behalf. To dete1mine whether there is actual authority, it is necessary to focus on the
relationship between the principal and agent and the agreement between these two
parties. It is not necessary for the third party contractor to be aware of the agreement
between the principal and agent. So long as there is actual authority, the agent's acts
on behalf of the principal will create rights and liabilities between the principal and
third party, even though the third party is ignorant of the existence of any authority
on the part of the agent. 16

Implied actual autho1ity

12.012 Can arise where board appoints person, person impliedly authorised to do things
usually falling within scope of position. Implied actual authority can arise where the
board appoints a person to a particular office or position, with the person impliedly
autho1ised to do all such things as fall within the usual scope of that position. 17 For

13
v Brayhead Ltd [ I968] I QB 549, 583; Akai Holdings Ltd (in liq) v Kasikorn Bank Pie [2010]
He(v•H111chi11so11
3 HKC I 53, 177-178, Court of Appeal.
" v Brayhead lld[l968] I QB 549,583.
Hely-H11tchi11so11
'5 Park Properties (Ma11gal) Ltd [1964] 2 QB 480,502.
& Lockyer v B11ckh11t:ft
Free111a11
'6 & Lockyer v Buckhur.H Park Properties (Mangat) Ltd [ I964] 2 QB 480, 502-503. The third party's
Free111a11
ignorance of the actual authority of the agent in the present context docs not necessarily mean that the third
party is ignorant of the fact that the agent is purporting to act on behalf of a principal. However, even where
the third party is unaware that the agent is contracting for a principal, the principal can enforce and be liable on
the contract under the doctrine of undisclosed principal: sec Peter Watts and F M B Reynolds, Bowstead and
Reynolds on Age11cy(20th cdn, Sweet and Maxwell 2014) [8-07 I].
17
Hely-H11tchinso11v Brayhead Ltd [ 1968) I QB 549, 583; Zanda !11vestmentLtd v Bank of America National 1h1st
and Savings Association [1994) 2 HKC 409,419.
 CORPORATE CONTRACTING 567

example, the appointment of a person to the office of managing director would

impliedly confer on that person the usual authority of a managing director. 18 The scope
of such usual or customary authority would be a matter of evidence of what is usual
in the trade.
Directors have powers when acting as board: a director on his own does not have 12.013
implied or usual authority to enter into contracts. Directors have power under
provisions such as Model Articles (private companies) (Cap.622H), art.3 only when
acting together as the board (i.e. via passing board resolutions). It is well established
that the fact that a person holds office as a director does not confer on the director
any implied or usual authority to enter into contracts on behalf of the company. 19 For
example, in Zanda Investment Ltd v Bank of America National Trust and Savings
Association, 20 Rhind J held that an alternate director, exercising the same powers of a
director under the company's articles, did not have implied actual authority to exercise
managerial functions such as endorsing cheques on the company's behalf. The position
is different where the company only has a sole director, as the sole director will him or
herself be able to exercise the authority vested in the board of directors. 21
Position of chairman of board same. The position of the chairman of the board 12.014
appears to be no different to other directors. Although the chairman has particular
responsibilities in presiding over the board,22 such as in selection of matters and
documents to be brought to the board's attention and for fonnulating board policy,
as well as in promoting the position of the company and communicating with the
outside world, the chairman's usual functions do not involve business operations or
contracting for the company.23
Usual authority of MD greater than ordinary individual director. The courts 12.015
have accepted that the scope of the usual authority of persons appointed as managing
director is greater than that of the ordinary individual director. It has been said
that the managing director's usual functions are "to deal with everyday matters, to
supervise the other managers and indeed, generally, be in charge of the business of
the company". 24 The courts have held the following to be within the usual authority of
managing directors:

• borrow money and give security over the company's property in the course of
normal trading activities; 25

18 Akai Holdings Ltd (in liq) v Kasikom Bank Pie (2010)3 HKC 153, 178.
19 Re Marseilles Ertensio11Railway Co (1871) LR 7 Ch App 161, 168; Mitchell and Hobbs (UK) Ltd v Mill (1996]
2 BCLC I02; Qualiltold fllvestments Ltd v Bylax lnvestmems Ltd [ 1991J 2 HKC 589, 593.
20 [ 1994] 2 HKC 409.
" Ltd v Mayer Co,p Developmelll lniemational Ltd [2013] 3 HKLRD 276, (55]; DBS Bank
Cf Aspial fllves1111e111
(Hong Ko11g)Ltd v l'tle Li (HK) Engineeri11gLtd (unrep., HCMP 165/2014, [2014] HKEC 1597), (63).
22 AWA Ltd v Daniels (1992) 7 ACSR 759,867.
" Hely-Hutchinson v Brayhead Ltd [1968] I QB 549,586; State Bank of Victoria" Pany (1990) 2 ACSR 15, 29;
Hughes v NM Superannuation Board Pty lid (1993) 29 NSWLR 653.
" En1wells P1ylid v National anti Gene('(JIfnsurance Co lid (1991) 5 ACSR 424,427.
" 's Wharf Ltd [ I 896] 2 Ch 93. Buecf Re TummonInvestments Pty Ltd (in liq) (I 993) 11 ACSR
Biggerstci!Jv Rowc,11
637 (principal executive officer docs not have usual authoricy to borrow on bchal r of company); and see also
Green v Meltzer (I 993) NZCLC 68,393 (chief executive officer has usual authority to obtain temporary finance
but not m,tjor or significant loans).
568 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

• give guarantees and indemnities on the company's behalf; 26 and

• employ staff or engage third parties to provide services for the company.27

12.016 MD would not have usual authority to sell company's undertaking. The usual
authority of the managing director is to carry on the company's business in the
ordinary way and so a managing director would not have usual authority to sell the
company's undertaking. 28
12.017 Usual authority of CEO comparable to that of MD. The usual authority of the chief
executive officer would be comparable to that of the managing director,29 and this is
likely to be the case even where the chief executive is not a director of the company.
However, the particular circumstances of the company concerned could indicate that
the company treats the office of managing director as being different to that of the
chief executive officer such that the scope of the implied authority of the latter is
lessened. 30 In Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd,31 the Court
of Final Appeal took the view that, in the circumstances of the company in that case
(a listed company), the usual authority of the chief executive officer of the company:
"would no doubt extend to entering into many types of contract, including ... contracts
which might involve [the company] incurring a US$30 million liability".
12.018 Other executive officers or managers may also have usual authority to contract.
Other executive officers or managers of a company may also have usual authority
to contract for the company within the scope of their area of responsibility. For
example, the Court of Appeal has held that usual authority of a business manager
could cover matters such as giving of discounts and settling of accounts. 32 It has
been held in England that an employee with the title of sales director had authority to
bind the company to contracts for the sale of products and to associated commission
arrangements. 33 Jn Australia, it has been held that a person appointed as a money
market manager and foreign exchange dealer had usual authority to enter into foreign
currency contracts for the company.34 Other employees will also have implied actual
authority for entering into ordinary contracts of the company in its day-to-day
business, such as sales staff in a company operating a retail store who would have
usual authority to sell the company's goods to consumers in the store.
12.019 Company secretary has usual authority to enter into contracts which come within day-
to-day running of company's business of administrativenature. The company secretary,
as the company'sadministrativeofficer,will have usual authorityto enter into contracts which
come within the day-to-dayrunning of the company'sbusiness of an administrativenature-

z, Hely-H111chi11sonv Brayhead lid [1968) I QB 549.

21 Park Properties (Ma11gal) Ltd [ 1964) 2 QB 480.
Freeman & Lockyer v B11ckl111t:ft
28 Re Qintex Ltd (No.2) (1990) 2 ACSR479.
29
Sec Hely-ll11tcl1i11so11
v Brayhead Ltd [1968) I QB 549.
,. State Bcmk of Victoria v Pony (1990) 2 ACSR 161.
" (2010) 13 HKCFAR479, [81].
" YeeFat Development Ltd v Winline Knilling Facto,y Ud [2011) 3 HKLRD 511, [21).
" SMC Electronics Ltd vAkhter Co111p11tersLtd (2001) I BCLC 433.
" AWA Ltd v Daniels ( 1992) 7 ACSR759, 861.
 CORPORATE CONTRACTING 569

e.g. employing staff or hiring cars for the company's use.35 However,the usual authority of
the company secretary would not extend to the company'scommercial transactions,36 nor the
power to institutelegal proceedings on the company's behalf.37
Implied authority arising from conduct of company. Apart from implied actual 12.020
authority arising from the position to which the agent is appointed, implied authority
can also arise from particular conduct of the company or those with authority in the
company to delegate that authority, as illustrated inHely-Hutchinson v Brayhead Ltd. 38
In that case, a Mr Richards was the chairman ofBrayhead Ltd. Brayhead was a major
shareholder of Perdio Electronics Ltd. The plaintiff, Viscount Suirdale, guaranteed
a loan provided by merchant bankers to Perdio and also agreed to inject loan funds
himself into Perdio. In return, Brayhead would provide an indemnity to the plaintiff
for his liabilities under the guarantee and also a guarantee for the plaintiff's loan. The
indemnity and guarantee were provided in two letters signed by Richards as chairman
of Brayhead. When Perdio entered into Iiquidation and the plaintiff sought to enforce
the indemnity and guarantee, Brayhead denied liability on the basis that Richards was
not authorised by the board of Brayhead to enter into those transactions.
Implied actual authority when board allowed agent to act as de facto managing 12.021
director. The English Court of Appeal accepted that on the facts Richards did not
have express actual authority, nor was there authority to provide the indemnity and
guarantee arising from his position as chairman. However, the court held that there
was implied actual authority. Richards was never formally appointed as managing
director but he acted as if he was the managing director or chief executive. The other
directors of Brayhead had acquiesced to Richards so acting and in committing the
company to contracts without the board's prior sanction over many months before the
provision of the indemnity and guarantee to the plaintiff. The court held that there
was implied actual authority arising from the board's conduct in allowing the agent
to act as a de facto managing director. The court accepted that a managing director
would have usual authority to provide indemnities and guarantees on behalf of the
company and accordingly Brayhead was bound to the transactions. However, for there
to be implied actual authority in such circumstances, the board members must have
communicated by words or conduct their respective consents to each another and to
the agent. 39
Authority subject to restrictions under company's articles. The actual authority of 12.022
an agent, whether express or implied, would be subject to any restrictions under the
company's articles (including any resh·ictions under an objects clause 40). Moreover,
where the actual authority is said to arise from a general delegation of authority or
from the appointment to a particular position, the grant of autho1ity would be subject
to any limitations in relevant company documentation (such as staff manuals). 41

35 Panorama Developments (Guildford) Ltd v Fidelis Fumishing Fabrics Ltd(l971] 2 QB 711.

3• Northside Developments Pty Ltd v Registrar-General (1990) 176 CLR 146,204.
37 Club Flotilla (Pac/fie Palms) Ltd v Isherwood (1987) 12 ACLR 387.
38 [ 1968] I QB 549.
39 Freeman & Lockyer v Bucklwrst P(lrk Properties (Mangal) Ltd [ 1964] 2 QB 480, 50 I.
'" Rolled Steel Products (Holdings) Ltd v British Steel Corporation (1986) Ch 246,295.
" See lo Suk Ling Vil(v v Methodist Clmrch Hong Kong (2001) I HKC 182.
570 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

12.023 Authority subject to agent's duty to act honestly and in interest of company.
The actual authority of an agent is also subject to the agent's duty to act honestly and
in the interest of the company.42 In Akai Holdings Ltd (in liq) v Kasikorn Bank PCL, 43
the argument that a chief executive officer had actual authority to obtain loans on
behalf of the company for the benefit of another company failed on the grounds that
the director was acting in breach of fiduciary duty in the transactions.

1.2.3 Apparent authority (or ostensible authority)

12.024 Apparent authority is authority of agent as it appears to others; elements of
apparent authority. An agent has apparent authority or ostensible authority where the
third party dealing with the company relies on a representation by the company that the
agent has autho1ity.Apparent authority is the authority of an agent as it appears to others.44
In Freeman & LocA.yerv Buckhurst Park Properties (Mangal) Ltd,45 Diplock LJ set out the
following elements which need to be established to give rise to apparent authority:

l. A representation is made to the third party that the agent had authority to
enter on behalf of the company into a transaction of the kind sought to be
enforced by the third party.
2. Such representation was made by a person who had actual authority to
manage the business of the company either generally or in respect of those
matters to which the h·ansaction relates.
3. The third party was induced by such representation to enter into the
transaction-that is the third party relied upon the representation.
4. Under the company's constitution, the company was not deprived of the
capacity either to enter into a transaction of the kind sought to be enforced
or to delegate authority to enter a transaction of that kind to the agent. 46

12.025 Legal relationship created by representation made by principal to third party.

As explained by Diplock LJ, apparent authority involves a legal relationship between
the principal and the third party created by a representation, made by the principal to
the third party.47 The agent is a stranger to this relationship and need not be aware of the
existence of the representation. This can be contrasted with the situation of actual

., Akai Holdings lid (in liq) v Kasikom Bank PCL (2010) 3 HKC 153, 178 (CA); Re Capitol Films lid (2011)
2BCLC359.
" (2010) 3 HKC 153. The question of actual authority was not in issue on appeal: Thanaklu,rn Kasikom Thai
Cltamkat v Akai Holdings lid (20 I0) 13 HKCFAR 479.
44
Hely-Hutchi1tso11v Brayltead lid (1968) I QB 549, 583; Re Mot1li11Global Eyecare Holdi11gs Ltd (unrep.,
HCCW 470/2005, (2008) HKEC 923), (119).
45
(1964) 2 QB 480, 506; cited/applied in, e.g., Re Moulin Global Eyecare Holdings Ltd (unrep., HCCW 470/2005,
[2008) HKEC 923), [ 120); 17wnakham Kasikom Tlwi Chamkat vAkai f-!oldi11gsLtd (20 I0) 13 HKCFAR479, [43].
46 This fourth element is no longer significant for Hong Kong companies due to the abolition of the ultra vires
doctrine with respect to corporate capacity: see Chapter 5. Also, persons no longer have constructive notice
with res1>ectto restrictions in the company's constitution since the introduction of former s.5C in Cap.32 (see
now Cap.622 s.120). Any restrictions on the exercise of powers under the constin,tion would only affect persons
dealing with the company if they are aware of them.
1
' [1964) 2 QB 480, 503; and sec also Attorney Geneml v Herold Houseware Ltd [1996) 4 HKC 787, 791;
Re Moulin Globed Eyecc,,.eHoldings Ltd (unrcp., HCCW 470/2005, [2008) HK.EC 923), [I 19].
 CORPORATE CONTRACTING 571

authority where the relevant relationship creating the authority is the relationship
between the principal and the agent. The concept of apparent authority is based on an
estoppel, arising from the principal's representation, that prevents the principal from
asserting that he is not bound by the transaction. 48
Agent with apparent authority can authorise another to enter into transaction. 12.026
Where an agent has apparent authority to enter into a transaction, then it is possible
for the agent to actually authorise another to enter into the transaction for the company
so as to bind the company to the transaction, provided that the third party believed that
the authority was being exercised by the former through the latter.49

Representation or holding out

Can be express representation; representation by conduct more common. 12.027
The representation which creates apparent authority may take a variety of forms.
There could be an express representation by the principal to a third party that a
particular person has authority to contract for the principal. However, more common
would be representation by conduct. As stated by Diplock LJ in Freeman & LocA.yerv
Buckhurst Park Properties (Mangat) Ltd, 50 by permitting an agent to act in some way
in the conduct of the principal 's business with other persons, the principal imp Iicitly
represents to anyone who becomes aware that the agent is so acting that the agent has
authority to enter on behalf of the principal into transactions with other persons of the
kind which an agent so acting in the conduct of his principal's business has usually
actual authority to enter into.
Freema11& Lockyer case. In the above case, Kapoor was one of the directors of a 12.028
property development company. He was not formally appointed as managing director
but acted in that capacity to the knowledge and acquiescence of the other directors.
Kapoor purportedly acted for the company in engaging architects to provide services
for the company. When the architects claimed payment against the company, the
company refused payment. There was no express actual authority granted by the board
to Kapoor to contract with the architects. However, the English Court of Appeal held
that there was apparent authority. By allowing Kapoor to manage the affairs of the
company akin to the usual conduct of a managing director, the board holds out to
third parties dealing with the company that Kapoor has the authority within the usual
ambit of a managing director. The usual authority of a managing director in a property
development company would extend to the engaging of the services of architects to
apply for planning permission and to develop the land. Accordingly, the company was
bound to the contract and was liable to the architects. The court had held, however, that
there was no implied actual authority, and so the outcome of this case was different to
Hely-Hutchinson v Brayhead Ltd51 in that regard. The difference between the two cases
is that where there is only silent acquiescence of the agent's conduct by the directors

48
Freeman & Lockyer v Buckhurst Park Pmperties (i\1a11gal)Ltd [1964) 2 QB 480,503; Northside Developments
Pty Ltd v Registrar-Geneml (1990) 176 CLR 146, 172; Tlwnakham Kasikom Thai Cha111ka1 vAkai Holdi11gsLtd
(2010) 13 HKCFAR 479, [52).
49
See Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72, 79-80
(High Court of Australia).
50 [ 1964) 2 QB 480. 503-504;andsecalsoA11omeyGeneral v Herald !louseware Ltd [1996)4 HKC 787,791-792.
5' [ 1968)1 QB 549.
572 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

without communication of their consent to each other and the agent, there could be
apparent authority only rather than implied actual authority.
12.029 Person appointed to position: apparent authority coincides with implied actual
authority (both corresponding to usual authority of that position). In the Freeman
& Lodyer case above, the conduct amounting to a representation of the agent's
authority was conduct in permitting the agent to act in a particular position in the
company notwithstanding the absence of formal appointment. Where there is formal
appointment to a position, it also follows that the company makes a representation that
the person has the usual authority attached to that position. 52 In this situation, the scope
of the apparent authority of the agent would coincide with the implied actual authority
of the agent (both corresponding to the usual authority of a person appointed to that
position) unless the actual authority of the agent is narrowed or widened pursuant to
the articles or pursuant to the company's grant of authority. Where the company allows
a person to act for the company over a wide field of business beyond the ordinary
functions attached to the particular job title held by the person, then the representation
by the company to the outside world is that the person has authority within that wider
field and not the authority usually attached to that job title only.53
12.030 Representation of authority must be clear and unequivocal. In order to give 1ise to
apparent authority, the representation of authority must be clear and unequivocal, and
what is clear and unequivocal would be judged by reference to the practical realities
of the particular case. 54 In Hua Rong Finance Ltd v Mega Capital Enterprises Ltd, 55
the three directors of the company were also the three shareholders, holding equal
shares. Unknown to the others, one of the directors purportedly acted on behalf of
the company to obtain loans from the plaintiff on the security of a flat owned by the
company. At issue was whether the plaintiff could enforce the loans and mortgage
against the company. The plaintiff argued that the director had apparent authority on
the basis that she was a director and one-third shareholder, that the articles permitted
the directors to borrow and to delegate to one director to sign on the seal of the
company, that the director was given custody of the seal and company chop, that
the director could produce the deeds of the flat and that she had used the company's
address. The Court of Appeal rejected the plaintiff's argument, holding that none of
those factors, whether taken alone or in combination, amounted to a representation
by the company that the director had authority to obtain the loans or to enter into the
mortgage on behalf of the company.
12.031 Tha11akhar11 Kasikom Thai Chamkat case. In Thanakharn Kasikorn Thai Chamkat
v Akai Holdings Ltd, 56 the chief executive officer (CEO) of a company (Akai) caused
the company to obtain a loan and to grant security over the company's assets for
the benefit of another company (Singer) having a common controlling shareholder.
The loan funds were used to pay the liabilities of Singer which were owed to the

" Egyptian f111/Foreign Trude Co v Sop/ex Wholesale Supplies Ltd [ 1985] 2 Lloyd's Rep 36, 41.
" Sec Egyptian /111/ Foreign Trade Co v Sop/ex Wholesale Supplies Ltd [ 1985] 2 Lloyd's Rep 36.
" Tha,u,kham Kasikom Thai Chamkat vAkai Holdings Ltd (2010) 13 HKCFAR 479, [71], [ 120].
" (2001)3 HKLRD 623.
" (2010) 13 HKCFAR479.
 CORPORATE CONTRACTING 573

same lender. Before the Court of Final Appeal, it was accepted that the CEO did not
have actual authority, and the issue was whether the CEO had apparent authority to
bind Akai to the transactions. The court accepted that the apparent authority of a
person appointed as chief executive officer would be wide but held that there was
no representation by the company of authority to enter into the transactions in the
circumstances of the case.
Might not be apparent authority if third party aware that transactions not 12.032
for benefit of company. It was significant that Akai received no benefit from the
transactions (not even indirectly, as Akai did not have any equity interests in Singer),
and also that the CEO was in a position of conflict, given his substantial interests in
the common majority shareholder and his management positions in Akai and Singer.
These facts were known to the lender, and in these circumstances, the court held that
the mere fact that the alleged agent was the chief executive officer was insufficient
to amount to a holding out by the company to the lender that he had authority to
commit the company to the transactions. 57 The position might have been otherwise
though if the lender was not aware that the CEO was acting for purposes other than
the company's purposes. It has been held in England that a company holds out its
directors as having apparent authority to bind the company to transactions falling
within the powers conferred on it by its constitution, and that unless he is put on
notice to the contrary, a person dealing in good faith with a company is entitled to
assume that its directors are properly exercising such powers for the purposes of the
company. 58
Representation must be made for company by organ or person with actual 12.033
authority. Under ordinary agency law, the representation giving rise to apparent
authority is made by the principal. In the corporate context, this means that the
representation must be made by the company. It is necessary, then, to identify the
persons who can act for the company in making such a representation, and it is to this
issue that the second element in Diplock LJ's formulation is directed: the representation
must be made for the company by someone with actual authority. Where the board has
power to enter into the transaction under the articles, then a representation from the
board would suffice.59 The members of a company would have the requisite power
to make a binding representation within their areas of authority under the articles.
For example, where there are no properly appointed directors, the members could
represent on behalf of the company that particular persons have authority as the
directors where the members are entitled to make the appointment of directors. 60
Also, under the doctiine of unanimous consent, it seems that a representation by the

51
(2010) 13 MKCFAR 479, [76]-[111).
58 Rolled Steel Products (Holdings) Ltd v British Steel Corp [ 1986] Ch 246, 295-296, per Slade LJ. See, e.g., Re
David Payne and Co Ltd (1904] 2 Ch 608 (lender was not aware that loan was used to pay the 1>ersonaldebts
of the controller and .loan was enforceable against the company; the lender was not bound to enquire as 10 the
purposes of the loan).
'9 Freeman & Lockyer v Bucklwrst Park Properties (Mangal) Ltd (1964] 2 QB 480, 506. It appears that the
representation by the board must be one that is made by each of the directors of the board (or is one to which
each of the directors has consented): see Crabtree-Vickers Pty Ltd v A11stralia11
Direct Mail Advertisi11g Co Pty
Ltd (1975) 133 CLR 72, 80-81 (High Court of Australia).
'" Co (1875) LR 7 HL 869.
Mahony v East Holyford Mi11i11g
574 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

members acting unanimously could be effective to bind the company. 61 Any other
person with actual authority to bind the company to the transaction would also be able
to make a representation binding on the company. 62
I 2.034 Whether representation effective where authority to make representations but not
actual authority to enter into transactions. There is a suggestion in some English
judgments that a person who does not have actual authority to enter into a particular
transaction but who has actual or apparent authority to make representations as to who does
have auth01ity to enter into the transaction can effectively make a representation binding on
the company that a particular person has authority.63 On this view, a company secretary, for
example, might be able to effectively bind the company to a representation that a particular
person is a managing director and has authority to enter into a contract, with the effect being
that the company is bound to the contract entered into by that latter person not\vithstanding
that neither the company secretary nor the other person has actual authority to contrnct.
12.035 Different position whether actual or apparent authority to make representation.
There does not seem to be any difficulty in the above analysis where the person
making the representation has actual authority, e.g. from the board, to make the
particular representation. Here, it can simply be said that the representation is made by
the board through the company secretary and so the entity making the representation
is in fact the entity with actual authority to enter into the contract. However, it is
not clear whether it would be correct to say that apparent authority on the part of
a person to make the representation would be sufficient. Consistent with Diplock
LJ's views in Freeman & Lockyer v Buckhurst Park Properties (Mangat) Ltd, 64 it has
been held by the Australian High Cou1i that there could not be apparent authority
merely on the basis of a representation made by a person who only has apparent
authority to enter into the transaction. 65 If a person having apparent authority to
contract would not be able to make a binding representation as to another's authority
to contract, it is difficult to see how a person, who only has apparent authority
to represent who has authority to contract, can make a representation binding the
company to the contract.
12.036 Where agent does not have authority to contract nor to represent who has
authority, representation by agent not binding. The principles in relation to a person
having authority to represent who has authority to contract were discussed by the Cou1i
of Final Appeal in Thanakharn Kasikorn Thai Chamkat v Akai Holdings ltd, 66 in the
context of whether an agent could clothe himself with apparent authority to enter into
the contract. It is clear that where the agent does not have actual authority to contract

1
• life Nominees Pty Ltd [ 1992) 2 VR 279. On the scope of the doctrine,
Brick & Pipe Industries Ltd v Occide111al
see Chapter 6.
62 Freeman & Lockyer v Buckhw:rt Park Pmperties (,\,fangal) Ltd [1964) 2 QB 480,505; Brick & Pipe /11d11stries
Ltd v Occide111a/Life Nominees Pty Ltd [ 1992) 2 VR 279; Dolphi11Advertising Ltd v Tro11kenEnterprises Ltd
(unrcp., HCA 2409/2006, [2009) HKEC 1954), (20).
6l Egyptian /111/Foreign Trade Ca v Sop/ex Wholesale Supplies Ltd [ 1985) 2 Lloyd's Rep 36, 42-43, per Browne•
Wilkinson LJ; First £11ergy(UK) Ltd v l/1111garian!111/Ba11kLtd [1993) BCC 533; !NG Re (UK) Ltd v R&V
Versichenmg [2007] I BCLC 108.
., [1964) 2 QB 480,505; also approved in Hefy.fl11tchisa11v Brayhead Ltd [ 1968] I QB 549. 593,per Lord Pearson.
6' Crabtree-Vickers Pty Ltd v Austrolian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72.
66 (2010) 13 HKCFAR479.
 CORPORATECONTRACTING 575

nor actual or apparent authority to make any representation as to who has authority to
contract, then the agent's representation to the third pa11ythat he or she has authority
cannot be binding on the company and will not be sufficient to confer on the agent
apparent authority to contract. 67 As noted by Lord Neuberger NPJ in the Akai Holdings
case above:
" ... apparent authority is based on a representation ... as between the alleged
principal and the third party as to the authority of the alleged agent, and if the
third party could rely on some statement by the alleged agent, made without
the authority of the principal, it would seem precious close to pulling up
oneself by one's own bootstraps". 68
Scepticism as to person not having authority to contract having authority to 12.037
represent that person (himself or another) has authority to contract. Lord
Neuberger was also sceptical of the view that a person, not having authority to
contract, could have (apparent) authority to represent that a person (whether himself
or herself or another person) would have autho1ity to contract. Counsel argued why,
if an agent could have given apparent authority to another to sign on behalf of the
company, should he or she not be able to give himself or herself apparent authority
to sign? 69 Lord Neuberger observed that counsel's argument seems to take matters
little further. His Lordship noted that if the agent purports to give another authority,
the question would still arise as to whether he or she had the company's authority to
give the latter authority to bind the company. Similarly, if the agent purports to clothe
himself or herself with authority, the question would still arise as to whether he or
she had the authority to authorise himself or herself to bind the company, which is, at
least normally, the same as asking whether he or she has apparent authority to bind the
company.70 Lord Neuberger approved71 the view expressed by Robert Goff LJ in an
earlier English Court of Appeal decision where his Lordship had stated: 72

" ... the effect of the judge's conclusion was that, although [the alleged agent) did
not have ostensible authority to enter into the contract, he did have ostensible
authority to tell [the third party] that he had obtained actual authority to do so. This
is, on its face, a most surprising conclusion. It results in an extraordinary distinction
between: (1) a case where an agent, having no ostensible authority to enter into the
relevant contract, wrongly asserts that he is invested with actual authority to do so,
in which event the principal is not bound; and (2) a case where an agent, having no
ostensible authority, wrongly asserts after negotiations that he has gone back to his

1
• Freeman& Lockyer v Bucklwrst Park Properties (Mango/) Ltd [ 1964] 2 QB 480, 505; Armagas Ltd v M1111dogas
SA (1986] AC 717; Crabtree-Vicket:~Pty Ltd v Austra/ia11Direct Mail Advertising Co Pty Ltd (1975) 133
CLR 72, 78; l'ip Lai Fong v Sin Tung Hi11g(2004) 3 HKC 153, [25) (CA); Re Moulin Global Eyecare Holdings
Ltd (unrep., CFI, HCCW 470/2005, 4 June 2008), [121); Dolphin Advertising Ltd v 1lrmke11Enterprises Ltd
(unrcp., HCA 2409/2006. [2009) HKEC 1954), [19].
6$ (2010) 13 HKCFAR 479, [64].
•• (2010) 13 HKCFAR479, [66].
,o (2010) 13 HKCFAR479. [66].
71
(2010) 13 HKCFAR 479, [68], [70].
n Armagas Ltd v Mundogas SA (1986) AC 717, 730-731, approved also by Lord Keith on appeal to the House of
Lords: see (1986) AC 717, 777-778.
576 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

principal and obtained actual authority, in which event the principal is bound. As a
matter of common sense, this is most unlikely to be the law."

12.038 But rigid principle oflaw inadvisable. Lord Neuberger observed that it is inadvisable
to lay down any rigid principles of law in this area because of the difficulties in
reconciling principle and predictability with commercial reality and fairness, but
stated: "I find it very hard indeed to conceive of any circumstances in which an
alleged agent, who does not have actual or apparent authority to bind the principal,
can nevertheless acquire apparent authority to do so, simply by representing to the
third party that he has such authority."73

Reliance
12.039 Apparent authority is category of estoppel by representation. The third element
in Diplock LJ's formulation, namely reliance on the representation by the third party,
reflects the point that apparent authority is a category of estoppel by representation. 74
Once it is established that the company has held out the alleged agent as having
authority to bind the principal, and that the third party has entered into the transaction
with the alleged agent, then, in the absence of any evidence or indication to the
contrary, reliance by the third party can generally be preswned. 75
12.040 Where third party knows agent lacks authority cannot rely on representation.
Where the third party dealing with the company knows that the agent does not have
authority, then the third party is not entitled to rely on any representation by the
company of the agent's authority. 76 In Thanakharn Kasikorn Thai Chamkat v Akai
Holdings Ltd,n the Court of Final Appeal held that a third party would also not be
entitled to rely on the representation of authority if the third party's belief that the
agent has authority was dishonest or irrational. If the third party was reckless in its
belief or if it was guilty of turning a blind eye, then that would be within the notion
of irrationality or dishonesty in the present context. However, the mere fact that the
third party might have discovered the truth if it had exercised reasonable care is not
sufficient to prevent the third party from being able to rely on the representation.
In the Akai Holdings case (for the facts, see para.12.031 above), the court held that
any belief by the lender that the CEO had authority was irrational in circumstances
where it was aware that the loan was not being used for the company's own purposes
but for another entity, where it was aware of the conflict of interest of the CEO in

" (2010) 13 HKCFAR 479, [70]. Although the company should not be bound to the contract, query whether the
third party relying on the agent's representation could have remedies against the company for reliance losses: see
Sarah Worthington, "Corporate Attribution and Agency: Back to Basics" (2017) 133 Law Quarterly Review 118,
139-142.
" Tha11akltamKasikom Thai Clwmka1 v Akai Holdings Ltd (2010) 13 HKCFAR 479, [72].
'5 Tha11aklwm Kasikom Thai C/ramkal v Akai Holdings Ltd (2010) 13 HKCFAR 479, [72].
" Criterion Propenies Pie v Stratford UK Properties tic [2004) I WLR 1846, [3 I]; Lo Suk Ling Villy v Methodist
Church Hong Kong [200 I] I HKC 182, 192. See also Re Capitol Films Ltd [2011) 2 BCLC 359 where the court
seated that if the other contracting party knew that a director was acting contrary to the commercial interests
of the director's company, he was unlikely to be able credibly to assert that he believed that the director had
authority.
" (2010) 13 HKCFAR 479, [49)-[62].
 CORPORATECONTRACTING 577

the transactions, and where the lender departed from the normal practice of banks of
obtaining from the company a board resolution authorising the transaction in the case
of such large transactions. 78

1.3 Company contracting directly

1.3.1 Common seal

May have common seal; no longer required. Under s.124(1) of Cap.622, a 12.041
company "may" have a common seal. This provision alters the predecessor law
which required every company to have a common seal. 79 If a company chooses
to have a seal, the seal must-similar to the predecessor law-be a metallic seal
having the company's name engraved on it in legible form. 80 Where the common
seal of a company is affixed to a written contract, the contract is regarded as being
entered into by the company directly. 81 This can be contrasted with the situation
discussed in the preceding section where a company contracts as principal via
an agent.
Articles usually set out who has authority to use seal. The seal is affixed to a 12.042
document by impressing it on the document. The articles of a company would
usually set out who has authority to use the seal. Under Model Articles (private
companies) (Cap.622H), art.81, 82 the seal can be used only by the authority of the
board of directors, and every instrument to which the seal is to be affixed must
(unless otherwise decided by the board) be signed by a director and countersigned
by the secretary or by a second director or by some other person authorised by the
board for the purpose. Such a requirement for two signatures is not satisfied by a
director who is also the secretary signing in the t\vo capacities. 83 The practical reason
for this rule appears to be that the director in whose presence the common seal is
affixed attests to the sealing as pa11of the operation of sealing, not as witness, 84 and
the purpose of requiring a countersignature is to authenticate the signature of the
director. 85 Where the articles do not prescribe the formalities for affixing of the seal,
then the seal can be applied at a meeting of the company in pursuance of a resolution
of the majority; 86 or in the case of a trading company, it appears that the seal can

18 See also Hopkins v T L Dallas Gro11pLtd [2005) I BCLC 543 where the third party could not rely on any
apparent authority of the agent in circumstances where the transactions in question gave rise to unusual onerous
obligations which did not form part of the company's business. For an example where the court rejected the
argument that the third party's reliance on the agent's apparent authority was dishonest or irrational, see YeeFat
DevelopmentLtd v Wi11/ineKnitti11gFacto,y Ltd (2011) 3 HKLRD 511.
19 Predecessor CO, s.93( I)(b) (repealed).
•• Cap.622, s.124(2).
81 NortlrsideDevelopmentsPty Ltd v Registrar-General( I990) 176 CLR 146, 160.
12 The provision is the same for public companies (Model Articles, art.102). For the Model Articles, see Companies
(Model Articles) Notice (Cap.622H).
u See Cap.622, s.479 (which restates s.154B of the predecessor CO) and Mu/con Pty Ltd v MYT E11gi11eeri11g Pty
Ltd ( 1996) 20 ACSR 606.
8' Robert F Norton, Robert JA Morrison & Hugh J Goolden, A Treatise 011Deeds (2nd cdn, W.M.Gaunt 1981) 24.
85 Equity Nominees Ltd v Tucker (1967) 116 CLR 518,523.
86 Gra,u!TradeDevelopment Ltd v Bo11ancef111I Ltd [2001) 3 HKC 137, 148-149 (CA); Company <!fMercho11ts of
the Staple of E11glc111d
v Governora11dCo o,(the Btmk <!fE11gla11d (1888) LR 21 QBD 160.
578 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

also be applied by the persons who are responsible for managing the affairs of the
company. 87 Where a company is in liquidation, the liquidator has the power to use
the company's seal. 88
I 2.043 Effect of use of non-complying seal. Where a common seal is used that does not
comply with the requirements in Cap.622, s.124(2), an offence is committed and the
company, responsible persons 89 and any officer using or authorising the use of the non-
complying seal may be liable to a fine: Cap.622, ss.124(3) andl24(4). If the name on
the seal is incorrect, that does not necessarily mean that the document itself is invalidly
executed. The document will still be regarded as properly executed as long as the non-
complying seal was intended to be the seal of the company.90 But it has been held that
where the seal is not a metallic seal, the document would not be regarded as having
been executed under the seal of the company.91
12.044 Authority to affix seal. For proper execution of a document under seal, the persons
affixing the seal must have authority under the articles or from the company to do
so in respect of the particular document. Having general authority to affix the seal
is not the same thing as having authority to affix the seal to a particular document. 92
There are two aspects to the requisite authority: (i) firstly, authority to enter into the
transaction (substantive authority); and (ii) secondly, authority of a person to formally
execute the document (formal authority). The principles on the granting of such
authority are as discussed above (at para.12.008). If a duly executed document under
seal is required before a contract can be effective, then primafacie there is no contract
if the document is not properly sealed even though the company has authorised the
transaction. However, it may be that the indoor management rule could apply here
to protect a person dealing with the company notwithstanding irregularities in the
affixing of the seal: see para.12.057 below.

1.3.2 Execution of documents as if under seal

12.045 Execution of documents as if under seal. Section 127 of Cap.622 is based on

Companies Act 2006 (UK), s.44 and was introduced since a common seal is no longer
compulsory. The provision sets out how a document can be executed without a seal
but having legal effect as if executed under seal. While companies with a seal can still
use the seal,93 a company may also execute a document by having it signed by two
directors, or by a director and the company secretary.94 For single director companies,
signature by that one director is sufficient. 95 Where a document is signed in accordance
with s.127(3) of Cap.622 and expressed to be executed by the company (in whatever

8' GrandTi-adeDevelopmentLtd v B011a11ce /111/Ltd (2001) 3 HKC 137, 148-149 (CA); Companyof Merchantsof
the Staple of England v Govemorand Co of the Bank of England (1888) LR 21 QBD 160; Barneds Banking Co.
J::xp ContractCorp (1867) 3 Ch App I05, I I 6.
88 Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), s. l 99(2)(b).
89 As defined in Cap.622, s.3.
90 Good Lion Ltd v ChungSai Wing (2008) 6 HKC 443; WestpacBanking Corp v Dawson (1990) 19 NSWLR 614.
9
' 011Hong Tradi11g Co Ltd v Bank ofCommtmicatio11s(unrep., HCMP 3099/1999, [2000) HKEC 220).
92 NorthsideDevelopmentsPty Ltd v Regislrar-Ge11eral (1990) 176 CLR 146,202.
93 Cap.622, s.127(1).
94 Cap.622, s.127(3)(b).
95 Cap.622, s.127(3)(a).
 CORPORATE CONTRACTING 579

words96), then the document takes effect as if it was executed under the company's
common seal. 97

1.3.3 Execution of deeds

Execution of deeds. Cap.622 contains express provisions dealing with execution of 12.046
deeds. 98 Under s.128(1) herein, a company may execute a document as a deed by:

• executing it in accordance with s.127 [ofCap.622];

• having it expressed to be executed by the company as a deed; and
• delivering it as a deed.

Delivering as deed. Delivery means an intention to be bound by the deed which may 12.047
be demonstrated by words or conduct. 99 A document is presumed, unless the contrary
is proved, to be delivered as a deed on its being executed in accordance with s.127. 100
Common practice but no legal requirement for attestation. It is common practice 12.048
for the signatures of the directors or other officers affixing the seal to a deed to be
attested (e.g. by a solicitor), although there is no legal requirement for attestation.
Attorney can be appointed to execute deeds. Under Cap.622, s.129(1 ), the company 12.049
may appoint an attorney to execute deeds (or other documents) for the company.
A document executed by an attorney on behalf of the company binds the company and
has effect as if it were executed by the company. 101

l.3.4 Official seals and company chops

Official seal for executing documents outside Hong Kong. Under s.125 of Cap.622, 12.050
a company may use an "official seal" for executing documents outside Hong Kong.
The section is derived from predecessor CO, s.35 (repealed), but that s.35 allowed the
use of an official seal only if this is authorised under the articles and the company has
objects which require or comprise the transaction of business outside Hong Kong.
Those two requirements no longer apply under s.125 of Cap.622.
Official seal. The official seal is a replica of the common seal, but it also has engraved on 12.051
it the name of every place where it is to be used. A document to which an official seal is

9< An express statement in the document that the signatures arc "by or on behalf of the company" may be sufficient
to show that the document is executed for the company, but this wording is nor necessary if it is otherwise evident
from the document that the document is executed by the company: Willic1111s v Redcard Ltd (2011] 4 All ER 444.
9' Cap.622, s. I 27(5).
98 See also Conveyancing and Property Ordinance (Cap.219), s.20(1 ). Deeds may also be executed by an agent on
behalf of the company pursuant to s.20(2) of that Cap.219. When the company is in liquidation, the liquidator
can execute deeds on behalf of the company either by affixing the common seal (Companies (Winding-Up
and Miscellaneous Provisions) Ordinance (Cap.32), s.l99(2)(b)) or by affixing his own seal: Stanford House
Pub/ic{ttio11s (HK) Ltd v Wi11Capital illd11striesLtd [2006) 3 HKC 534.
99 Vince11tv Premo £11/erprises(VoucherSales) Ltd (1969] 2 QB 609.
100
Cap.622, s.128(2). The requirements under s.128 herein are similar to those under the previous law (except that
there was no equivalent of execution pursuant to that previous s.127(3) as if under seal). See Comptrollerof
Stamps vAssociated Bro{tdcasti11g Services Ltd (1990] VR 335; M{tSum v M{t Choi Kee (1967) HKLR 177.
101
Cap.622,s. 129(2).
580 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

duly affixed 102 is binding on the company as if it had been sealed with the common seal:
Cap.622, s.125(6). Instead of using the official seal, a company can also autho1ise an
attorney for the execution of deeds outside Hong Kong pursuant to s.129 of Cap.622. 103
12.052 Official seal for sealing securities. A company may also have an official seal for
sealing securities: Cap.622, s.126. 104 The securities seal is again a replica of the
common seal, but also has engraved on it the word "securities".
12.053 Rubber chop does not have legal significance under Ordinance but could be relevant
to apparent authority. It is common for Hong Kong companies to have a rubber chop
which is used as the company's chop and is stamped on company documents. The chop
is not equivalent to the common seal 105 and does not have any legal significance under
the Companies Ordinance (Cap.622). The chop is, as a matter of custom, used to show
that the person signing a document has authority to sign on behalf of the company, and
so where a company allows a person to use the company chop, the stamping of the chop
could be relevant to matters relating to the apparent authority of the person. In England,
there is a suggestion in some cases that the imprinting of a rubber-stamped name of the
company by a duly authorised person can be regarded as a signature of the company
(although not with the same effect ofa common seal); 106 however, doubts have also been
expressed whether this view is correct. 107
12.054 Rubber chop: TS Office System case. In TS Office System Ltd v Wing Kee Produce
Ltd, 108 Louis Chan J, after citing the above passage from the Is' edition of this work,
held that the company's permission for the company's receptionist to use the rubber
chop was a representation to third parties that she had authority to act for the company
in situations where the use of the chop would suffice. In this case, the receptionist used
the rubber chop on written orders for the purchase of a year's supply of printer toner
cartridges for the sum of $230,952. The cow-t held that prima facie the receptionist
can be regarded as having apparent autho1ity to place the orders on behalf of the
company. However, the court held that the company was not bound to the contracts of
purchase on the basis that the seller's reliance on the representation was reckless and
inational, 109 noting that the total value of the contracts, which were entered into in one
go, was a factor for consideration on whether the seller acted rationally.' 10

'°' See Cap.622, ss.125(3)-125(5) on persons authorised to affix the official seal.
'°3 Cf. predecessor CO, s.34 (repealed). The Cap.622 provision in s.129 applies to execution of documents both in
or outside of Hong Kong, while predecessor CO, s.34 was confined to execution outside of Hong Kong.
1°' The provision is similar to predecessor CO, s.73A.

105
011Ho11gT111di11g Companv Ltd" Ba11kof Communications (Wlrep., HCMP 3099/1999, (2000) HK.EC 220).
106 Chapman vSmethurst (1909) I KB 927,per Vaughan Williams and Kennedy LJJ; McD011a/dvJoh11Twi11ame Ltd
[1953) 2 QB 304,315.
101 La:arus Estates Ltd v Beasley (1956) I QB 702, 710.

101 [2015) I HKLRD 479.

1
0? See para.12.040 above.
no For another case example, see the District Court decision of Honor Engineering Ltd v Hing Fat Machine,y &
Electrical £11gi11eeri11gCo Ud (unrcp., DCCJ 3397/2012, [2015) HKEC 600), where Deputy Judge Lawrence Ng
upheld the validity of a contract (for the installation of an electrical system and fire service system) between the
plaintiff and the defendant that was printed on the defendant's letterhead and was signed on behalf ofrhe defendant
by a Mr Ng, the defendant's building service engineer, and stamped with the defendant's company chop. It was held
that the permission given to Ng by the controller of the defendant to use the defendant's lenerhead and company
chop constituted a representation to the plaintiff that Mr Ng had the authority to act for the defendant in situations
where the use of the defendant's company chop would suffice, including the entering into of the contrnct in question.
 CORPORATE CONTRACTING 581

1.4 Protection of persons dealing with a company

Apparent authority and other rules to protect outsiders. Outsiders or third parties 12.055
dealing with a company may not always know whether a person purportedly acting
for the company actually has authority to do so. Various legal principles are aimed
at facilitating commerce by enabling outsiders to enforce transactions which they
thought were made with the company notwithstanding the absence of actual authority
on the part of the agent who purported to act for the company. 111 The principles on
apparent authority are an example of such principles protecting outsiders. The section
below discusses other rules and statutory provisions which protect outsiders.

1.4.1 Common law indoor management rule

Indoor management rule: third parties can assume acts properly performed and 12.056
not bound to enquire whether internal management has been regular. Under the
common law, outsiders are protected by the indoor management rule (also referred to
as the internal management rule, or rule in Turquand's case). The rule is derived from
the decision of Royal British Bank v Turquand. 112 Under the rule, persons dealing with
a company in good faith may assume that acts within its constitution and powers have
been properly and duly performed and that the persons are not bound to enquire whether
acts of internal management have been regular.113 In Turquand's case, a loan transaction
could be enforced against the company where the board had approved of the transaction,
even though there was failure to comply with a provision in the articles of the company
which specified that the powers of the board to commit the company to a transaction of
that type were conditional on approval being given by the members in general meeting.
The outsider dealing with the company was entitled to assume that the approval had been
given, and thus the outsider was entitled to enforce the transaction against the company.

Scope of application of rule

Rule applies to irregularities or defects in conferral or exercise authority. The 12.057
indoor management rule applies to irregularities or defects in relation to the conferral
of authority and the exercise of authority. In the Australian High Court decision of
Northside Developments Pty Ltd v Registrar-General, 114 Brennan J stated:

"When the indoor management rule applies, it covers each of the links between
the constitution of the company and the particular act (or omission) done (or
omitted) by a purported officer or agent of the company in the transaction.
It covers the due making of appointments of the original directors, of subsequent
directors, of other officers and of agents; it covers the conferring of authority

11
' See also para.12.006 above.
112
(1856) 119 ER 886, 5 E & B 327; and sec also Mahoney v East flolxfi.>rtlMining Co (1875) LR 7 HL 869,894.
Sec generally K E Lindgren, "History of the Ruic in Royal British Bank v Turquand" (1975) 2 Monash UL
Rev 13; TE Cain, "The Ruic in Royal British Bank v Turquand in 1990" (1990) 2 Bond Law Revic,.v 152; 0 0
Prentice, "The Rule in Turquand's Case" (1991) 107 Law Quarterly Review 14.
"' Morris v Kanssen [ 1946]AC 459. 474; Pacific Foundation Fi1u111ce
Ltd v Fairyo,mg I-foldings Ltd [1999] 3 HKC
448, 452 (CA).
'" (1990) 170 CLR 146, 178.
582 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

on officers and agents; and it covers the satisfaction of conditions governing

their exercise of authority in the instant case .... The cases in which the indoor
management rule has been applied can be placed within one or other of the three
broad catego1ies-appointments, conferring of autho1ity and satisfaction of
conditions-though the categories are not, of course mutually exclusive."

12.058 Rule can apply where board authorises transaction but procedural irregularity
in meeting. For example, Turquand's rule can be relied upon by an outsider where
the board (having management powers under the articles) passes a board resolution
authorising the company to enter into the transaction in circumstances where there was
a procedural irregularity at the meeting (e.g. lack of notice to certain directors 11;) that
would have rendered the board resolution invalid. Other situations where the rule can
apply include failure of a director to declare a conflict of interest at a board meeting
where the board authorised the transaction, 116 borrowing over the specified limit in the
articles (such as in former Table A reg.81) without sanction of the general meeting, 117
and lack of quorum at a general meeting where a resolution was passed authorising
the transaction. 118
12.059 Whether indoor management rule applies where absence of actual or apparent
authority. A question arises whether the indoor management rule applies where there
is an absence of actual or apparent authority on the part of the person purportedly
acting for the company-that is, where there has been no attempt made by the company
to confer authority on the person nor any holding out by the company that the person
has authority. For example, consider a scenario where the office boy who, without
actual or apparent authority, takes it upon himself to negotiate and enter into a contract
purpo1tedly on behalf of the company with an outsider: can the outsider enforce the
contract against the company?
12.060 General principle that Rule has no application where person did not have actual
or apparent authority. The general principle appears to be that the rule has no
application where the person did not have any actual or apparent authority to bind the
company. In Northside Developments Pty Ltd v Registrar-General, 119 Dawson J stated:

"The correct view is that the indoor management rule cannot be used to create
authority where none otherwise exists; it merely entitles an outsider, in the
absence of anything putting him upon inquiry, to presume regularity in the
internal affairs of a company when confronted by a person apparently acting
with the authority of the company. ... In other words, the indoor management
rule only has scope for operation if it can be established independently that the
person purporting to represent the company had actual or ostensible authority
to enter into the transaction. The rule is thus dependent upon the operation of
normal agency principles; it operates only where on ordinary principles the

"' Sec Re Moulin Global Eyecore Holdings Ltd (2009) 12 HKCFAR621.

11• Pacific Fowulation Finance Ltd v Fai,yo,mg Holdings Ltd [ 1999)3 HKC 448.
"' Sec Bank of Etist Asia Ltd v Labour Buildings Ltd (unrep.,HCMP 769/2002,[2008) HKEC 134).
118
See WongKam San v YeungWingKe1111g (2007) 2 HKLRD267.
11
• (1990) 170CLR 146, 198.
 CORPORATE CONTRACTING 583

person purporting to act on behalf of the company is acting within the scope of
his actual or ostensible authority."

Hong Kong support for this general principle. The above comments were cited with 12.061
approval by Lord Neuberger NPJ in the main judgment of the Court of Final Appeal
in Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd. 120 Also, in National
Commercial Bank Ltd v Albert Hwang, 121 it was held that Turquand's case could not
be relied upon by purchasers of certain land where the person purportedly acting on
behalf of the vendor company had falsely represented to the purchasers that he was a
director of the company, and where he did not have actual nor apparent authority to act
for the company. The rationale of the above principles is that to allow Turquand's rule
to apply despite the absence of any actual or apparent authority would unjustifiably
place companies at the mercy of any person who should purport to contract on their
behalf. To pem1it a wide application of the rule:
" ... would be a most alarming doctrine for companies . . . and if some
limitation were not placed upon the [rule], not merely the office boy but any
one might purport to sign on behalf of the company" .122
Where seal affixed Rule might apply despite lack of authority. However, in the 12.062
situation where the company's seal is affixed to a document, there is some suggestion
in the case law that the indoor management rule can apply despite a lack of actual or
apparent autho1ity. In North side Developments Pty Ltd v Registrar-General, 123 Mason
CJ considered that there is a special significance to the use of the company seal (being
a corporate act) that is not adequately explained by agency law principles. 124 His
Honour cited, seemingly with approval, cases to the effect that "if a person dealing
with the company receives a document to which the common seal has been affixed in
the presence of individuals designated in the articles of association, he is entitled to
rely on its formal validity" and cases where:
" ... it is said that it is enough that the third party relies on the affixing of
the seal and the instrument appears to be regularly signed". 125 According
to Mason CJ, "it is the presence of the seal on the document that gives rise
to the presumption that the seal has been affixed with the authority of the
directors". 126
Northside case. In the Northside case, a director (Sturgess) caused a mortgage to be 12.063
executed under the seal of the company. The articles provided that the seal can be used
only under the autho1ity of the directors and required the signature of one director on
the instrument together with the signature of another director or the secretary or some
other person appointed by the directors for the purpose. Sturgess affixed the seal and

'Z<l (20 I0) 13 HKCFAR 479, (59). See also Houghton v Notlwrd. Lowe and Wills Ltd [ 1927] I KB 246; Kredi1ba11k
Cassel GmbH v Schenkers Ltd [ 1927] 1 KB 826.
Ill (2002] 2 HKLRD 408.
122 Kreditbtmk Cassel GmbH v Sche11kersLtd [1927] I KB826, 842-843.
'" (1990) 170CLR 146, 160-164.
'" (1990) 170 CLR 146. 160-164.
'" (1990) 170 CLR 146, 160.
"' ( 1990) 170 CLR 146.162.
584 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

signed as director, and his son countersigned as the secretary. However, the board had
never authorised the mortgage, nor was the son the secretary of the company. The
Australian High Court held that the company was not bound by the mortgage, but not
all of the reasoning of the judges was the same.
Mason CJ was prepared to accept that the indoor management rule could prima
facie be applied, although held that it could not be relied upon by the outsider in the
circumstances due to one of the exceptions to the rule (namely constructive notice 127).
Neither Sturgess nor his son had actual authority to enter into the mortgage, and there
was also no apparent authority arising from their positions in the company. On Mason
CJ's approach, the use of the seal itself is critical in that third parties may be entitled to
place re!iance on the seal notwithstanding the absence of actual or apparent authority.128
I 2.064 Grande Trade Devp case.There are dicta in the Hong Kong Court of Appeal decision
in Grand Trade Development Ltd v Bonance International Ltd 129 which might be taken
to be consistent with Mason CJ's views in the Northside case. The Grand Trade decision
involved an assignment of real property executed under the company's seal, with one of
the directors signing. The articles provided that the seal shall not be used except with
the directors' authority, and further that a document shall be "deemed to be properly
executed if sealed with the seal of the company and signed by the chairman of the board,
or such person or persons as the board may from time to time authorise for such purpose".
The Court of Appeal held that the deeming provision would have been triggered and
Turquand's rule applied (such that the assignment can be regarded as having been duly
executed) if the person appending the signature had been described as a person "duly
authorised by the board". 130 Leaving the matter here, the court's decision can be said to
be based simply on the application of a deeming provision in the company's articles.
However, the court appeared to go further, in the context of the court's discussion
of the Northside case (which did not involve a deeming provision in the articles).
When the Northside case was before the NSW Court of Appeal, 131 McHugh JA had
considered that Sturgess' son was effectively acting as de facto company secretary,
even though not properly appointed. McHugh JA had held that Turquand's rule was
applicable. The Hong Kong Court of Appeal seemingly approved of the approach of
McHugh JA and stated, in relation to the facts of Northside:

"The company's articles permitted the sealing of a document accompanied

by a signature of a director and the countersignature of the secretary. If the
countersignature was that of a person whom the company was bound to
acknowledge was its secretary, the fact that his appointment may have been
invalid was a matter of internal management and not a matter which would affect
an outsider dealing with the company, unless he were put on notice." 132

121 See paras.12.070 and 12.074 below.

"' See also KE Lindgren, "The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in T11rq11and:f
Case" (1973) 9 Melbourne UL Rev 192.
• [200 I l 3 HKC 137.
12
1io [200113 IIKC 137, 152.

13' The NSW Court of Appeal decision (Registrar-Generalv NorthsideDevelopme11/.f Pty Ltd ( 1988) 14NSWLR 571) was
reversedby lhc AustralianHigh Court (Norihside D<,,velopme11ts
Pty Ltd v Registrar-General(1990) 176 CLR 146).
"' [2001) 3 HKC 137, 152.
 CORPORATE CONTRACTING 585

Thus, it may be that the Hong Kong Court of Appeal was prepared to accept that, even
in the absence of a deeming provision in the articles, a company would be bound by a
document executed under seal if it was executed by persons who are empowered under
the articles to use the seal even though such persons have no authority to enter into the
transaction. If this approach is taken to its logical conclusion, then where the articles
enable the board to delegate to any individual person authority to affix the seal, then
any person could bind the company by affixing the seal and signing with the words
"under the authority of the board".
Submitted that where seal affixed without actual or apparent authority Rule 12.065
should not apply. However, it is submitted that situations where the seal is used
should not be treated differently from other situations where there is a lack of
authority, as held by Dawson and Toohey JJ in the Northside case. Dawson J 133
stated that there is no warrant for treating the affixation of the seal of a company
as attracting some special application of the indoor management rule. If the seal is
affixed without authority, actual or apparent, the company is not bound by it. His
Honour stated: "A body corporate can only act through agents, even in the affixation
of a seal, and, if a person who is not authorised, or held out as being authorised,
to enter into a transaction on behalf of a company purports to do so by affixing
the company's seal to a document, the company will not be bound." 134 In Dawson
J's view, the cases where the indoor management rule has applied where persons
without actual authority had used the seal are those where the persons were held out
by the company as acting on its behalf in the transaction in which the seal is used. 135
In the present case, the indoor management rule had no application because the
persons executing the mortgage had neither actual nor apparent authority to enter
into the mortgage for the company. Toohey J agreed with the views of Dawson J.136
The correctness of Dawson J's view may be appreciated through a consideration of
the role of the indoor management rule. The function of the rule in the Turquand
case is to cure irregular transactions. As Dawson J pointed out, absent ratification ex
post, a transaction entered into in the company's name without authority, actual or
apparent, does not bind the company. If no transaction subsists between the company
and the third party, "there would be no transaction to which the indoor management
rule might be applied or order to cure any irregularity." 137

'" See (1990) 170 CLR 146, 201-204.

'" (1990) 170 CLR 146,202.
'" (1990) 170 CLR 146, 202-204.
"' ( 1990) 170 CLR 146, 206-208. There is no clear majority position on this point in the case. Brennan J viewed
that there must be authority (actual or ostensible) before the company can be bound (at 173), but his Honour
appears to take the view that apparent authority (or holding out) can be established as a question of fact on the
basis of the indoor management rule, which is a presumption of regularity and presumption of fact. Brennan J
appears to have accepted in the present case the rule could have applied but for the outsider's constructive notice
(at 175-177, 180-184, 187-189). Gaudron J decided the case on the basis of estoppel, holding that the company
would not be esroppcd from denying the validity of the mortgage where there was no reprcscnrarion of the alleged
agents' authority and where the transaction was nor for the benefit of the company.
'" South London Greyhound Racecourse Ltd v Wake (1931) 1 Ch 496,510 per Clauson .I.Clouson J was commenting
on a situation where forgeries in the narrow sense (i.e. counterfeit of seals of signatures) were involved. His
Lordship's comments, however, should also apply, for the same reason, to circumstances where a trJnsaction was
made without authority, actual or apparent, but no counterfeit is involved.
586 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

12.066 Seems that Rule cannot be used to create authority where none exists. Notwithstanding
the dicta in the Grand Trade case, the approval by the Court of Final Appeal in Akai
Holdings' 38 of Dawson J's views in the Northside case (albeit in a different context) that
the indoor management rule cannot be used to create authority where none otherwise
exists suggests that Dawson J's approach is the correct approach under Hong Kong
law. The earlier decision of Hua Rong Finance Ltd v Mega Capital Entetprises Ltd 139
also reflects this position. In that case, a director affixed the company's seal to the
mo11gage document and signed on the document. Under the articles, the signature of
a person authorised by the board to affix the seal would be sufficient. The Court of
First Instance held that the indoor management rule could not apply as the director had
neither actual nor apparent authority to act. 140
12.067 Indoor management rule protects outsider, not the company. The rule in Turquand's
case protects the outsider, not the company. 141 It cannot be applied to fix the third party
with the consequences of the professing agent. See further para.12.100 below.

Pleadings
12.068 In pleadings identify facts supporting application of Rule. The rule in Turquand's
case is a plea of mixed fact and law.A party relying on the rule must raise a plea based on
the rule in the pleadings and identify the material facts supporting the application of the
rule. Only when this is raised would the company denying the transaction need to rebut
the presumption ofregularity by averring the grounds for non-application of the rule. 142

1.4.2 Exceptio11sto the i11doorma11age111e11t

rule

Actual or constructive notice

12.069 Rule doesn't apply where actual or constructive notice of irregularity. The rule is
a presumption ofregularity designed to protect those who are unable to or who are not
in any reasonably practicable position to ascertain whether all the proper procedures in
the internal management of the company have been complied with. However, a person
"cannot presume in his own favour that things are rightly done if inquiry that he ought
to make would tell him that they were wrongly done". 143 Accordingly, the rule cannot
be relied on by a person who has actual144 or constructive notice of the irregularity. 145
Before the enactment of s.5C in the predecessor CO (now Cap.622, s.120), a person
would be treated under the common law as having constructive notice of the contents
of a company's memorandum and articles and other documents registered with the
Registrar on the basis that such documents are available for public inspection and
persons dealing with the company ought to be aware of the contents of such publicly

1J8 Tha11aklwmKasikom Thai C/ramkal v Akai Holdings Ltd (2010) 13 HKCFAR 479, [59).
ii, 1998] 4 IIKC 532.
[
"o The decision was affirmed on appeal ([2001] 3 MKLRD 623) but the issue before the Court of Appeal was one
of apparent authority and the question of the applicability of Turqutmtl's rule in the absenceof authority was
not argued.
141
Morris v Ka11sse11 (1946] AC 459, 474-475 per Lord Simmonds.
142 YipLai Fong v Sin Tung H11g(2004] 3 MKC 153 (CA).

"' Morris v Kansse11 (1946] AC 459. 475.

1
.., See, e.g., Polyso11Jewellery Co Ltd v Liu Song Carlos (200 I) 3 HKC 323.
1
" Pacific Fo1111datio11 Holdings Ltd (1999) 3 HKC 448,452,455 (CA).
Finance Ltd v Fai1yo1111g
 CORPORATE CONTRACTING 587

available documents. 146 However, that is no longer the case under the present law, as
under s.120 (and under its predecessor CO, s.5C), a person is not to be taken to have
notice of any matter merely because of its being disclosed in the articles or a return or
resolution kept by the Registrar.
Constructive notice: circumstances such that person ought to have investigated 12.070
internal management complied with. Yet, other circumstances can still give rise to
constructive notice. The idea of constructive notice in the present context is that, if the
circumstances are such that the person, if acting reasonably, ought to have investigated
whether the requirements of internal management were comp Iied with, then failure of
the person to take reasonable steps to ascertain the true position will lead the courts to
impute to the person notice of the irregularity. A person may have constructive notice
by failing to make the types of enquiries which are usual for the type of transaction
concerned based on custom and practice. 147
Constructive notice: put on enquiry. Also, if a person is aware of circumstances 12.071
which ought to have led the person to make further enquiries (here, the person is said
to be put on enquiry), if the person is negligent in failing to take reasonable steps to
ascertain the relevant facts, then the person will be treated as having constructive
notice. 148 A person may be put on enquiry where there are unusual circumstances that
ought to arouse suspicion, 149 but whether a person would be put on enquiry depends on
all the particular circumstances. 150 The very nature of a proposed transaction may put
a person on enquiry, 151 and so if a company enters into a transaction such as to excite a
reasonable apprehension that the transaction is entered into for purposes unrelated to
the company's business and from which it appears to gain no benefit, then the person
dealing with the company may be put on enquiry. 152
Creditor put on inquiry. Applying the above principles, Mason CJ and Brennan J in 12.072
Northside Developments Pty Ltd v Registrar-Genera/ 153 took the view that a creditor
will ordinarily be put on enquiry when his debtor offers as security a guarantee given
by a third party company whose business is not ordinarily the giving of guarantees,
because the execution of guarantees and supporting securities for another's liabilities,
not being for the purposes of a company's business nor otherwise for its benefit, is not
ordinarily within the authority of the officers or agents of the company. The facts of
the Northside case were outlined above, at para.12.063. In that case, Mason CJ and
Brennan J held that the outsider was put on enquiry where the mortgage was given not
for the purposes of the company's business nor for its benefit, but was given to secure
the debts of companies controlled by the director.

146 See, e.g., Irvine v Union Bank ofAus1ralia ( 1877) 2 App Cas 366.
"' Macmillan Inc v Bishopsgate lnves1ment Trus/ Pie (No.3) [1995) 3 All ER 747, 769; and see also Bank ofEa.<1
Asia lid v Labour Buildings lld(unrep., HCMP 769/2002, [2008) HKEC 134), [3 I l]-[327).
"8 See B liggeu (Live,pool) Lid v Barclays Bank Lid [ 1928] I KB 48; Tlwnak/,arn Kasikorn Thai CJ,amka/ v Akai
Holdings lld(2010) 13 HKCFAR479, [61).
"' 8a11kof East Asia ltd v labour Buildings lid (unrcp., HCMP 769/2002, [2008) HKEC 134), [310).
i,-0 Rolled Steel Produc1s (I-foldings) Ltd v 8ri1ish Steel Corp [1986) Ch 246,285; Pc,cijicFou11datio11
Finance lid v
Fai1you11gHoldings lid [ 1999) 3 HJ<C448, 452.
1
" Rolled Steel Products (Holdings) ltd v Brilish S1eel Co,p [ 1986) Ch 246, 285.
"' Norlhside Developmenls Pty Lid v Regislrar-General (1990) 176 CLR 146, 160-161,164-165,per Mason CJ.
1
" (1990) 170CLR 146, 182-183,perBrennanJ; MasonCJagreed(l65).
588 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

12.073 Not all transactions benefiting another entity give rise to constructive
notice. Of course not all transactions benefiting another entity would give rise to
constructive notice. For example, as accepted in the Northside case, the circumstances
may show that the giving of security for another is for the company's benefit. 154 In
Pacific Foundation Finance Ltd v Fairyoung Holdings Ltd, 155 the board ofFairyoung
Holdings passed a resolution approving of a borrowing from the lender. Fairyoung
Holdings owed certain amounts to Anklong and, at the direction of Fairyoung
Holding's managing director, the loan funds were used to pay off part of the debt
owing to Anklong. The managing director was the controller of Anklong. When the
lender sought to recover the outstanding amounts under the loan, Fairyoung Holdings
argued that it was not bound on the basis of irregularities at the board meeting whereby
the managing director failed to declare his interests in the transaction. The Court of
Appeal held that there was no such failure on the facts, but considered that even if
there was an irregularity, the lender was protected by Turquand's rule. The company's
further argument that the lender had constructive notice of the irregularities failed in
circumstances where the lender was aware of the company's debts to Anklong, and
where the court took the view that in the circumstances of the company's financial
position, there was nothing improper in the company obtaining a new loan to pay off
an existing loan.
I 2.074 Other examples of constructive notice. For examples where it has been held in
Hong Kong that the outsider had constructive notice of the irregularities such that
they could not rely on the indoor management rule, see Wong Kam San v Yeung Wing
Keung 156 and Re Moulin Global Eyecare Holdings Ltd. 157
12.075 Outsider's agent notice of irregularity can be imputed to outsider. Where the
outsider's agent has actual or constructive notice of the irregularities, that notice can
potentially be imputed to the outsider pursuant to general agency law principles such
that the outsider will thereby be debarred from relying on the indoor management rule. 158

Forgeries
I 2.076 Rule not applicable in cases of forgery. It is often said that the indoor management
rule does not apply in the case of forgeries on the basis of the decision in Ruben
v Great Fingal! Consolidated. 159 In that case, a secretary borrowed amounts from
a lender on the basis of security given over the company's shares. The secretary
fraudulently affixed the seal of the company on the share certificate and forged the
signatures of the directors of the company on the certificate. The lender brought an
action against the company for damages for refusing to register the lender as owners
of the shares (upon their attempt to enforce the security), but the House of Lords

'" (1990) 170 CLR 146, 182-183.

"' (1999)3 HKC 448.
6
" (2007) 2 HKLRD 267.
'" (2009) 12 HKCFAR 621.
'" See, e.g., Bank of East Asia Ltd v Labour Buildings Ltd (unrep., HCMP 769/2002, (2008) HKEC 134),
(311)-(327]; Be/gia11Bank v Sino Global Intl Ltd (unrep., HCMP 4950/200 I, (2005) HK.EC 1414).
,,. ( 1906) AC 439.
 CORPORATE CONTRACTING 589

held that the forged share certificate was a nullity and the lender could not rely on
the indoor management rule.
"Forgery" in this context. However, t\vo points of clarification are required. First, 12.077
the term forgery in the present context has been used both in cases where a seal or
a signature is not genuine (i.e. there is a counterfeit seal or signature) and where the
person affixing a seal or signing a document acts without authority (although the seal
or signatures are genuine). For the purposes of clarity, it is best to confine discussion
of forgery to the former, as the latter is really a question of authority rather than any
forged document.
Mere fact forgery involved does not necessarily mean Rule displaced. Secondly, the 12.078
mere fact that there has been some forgery involved does not necessarily mean that the
indoor management rule must be displaced. If the company represents that the person
signing or sealing the document has authority, then the company may be estopped
from denying the validity of the document not\vithstanding the presence of forgery. 160
In Shaw v Port Philip and Colonial Gold Mining Co Ltd, 161 a secretary had also forged
the signature of a director on a share certificate. The court held that the company
was not entitled to deny the genuineness of the certificate in circumstances where the
company had held out the secretary as having authority to warrant the authenticity of
the certificate. Shaw was distinguished on this ground in the Ruben decision.
Lovett case. In Lovett v Carson Country Homes Ltd, 162a director signed his own signature 12.079
on a debenture issued to a bank but also forged the signature of the company's only
other director. The first-mentioned director had been permitted by the other director to
act for the company in all previous dealings with the bank and also to sign the latter's
name on documentation so long as the latter knew in general terms of the underlying
transaction. The court accordingly held that the company was bound by the debenture
not\Vithstanding the forged signature. In the Lovett case, no doubt the fact that the
director had been permitted to sign the other's name in the past was important, but it
appears that this factor need not always be present for the company to be estopped from
denying the genuineness of the document. The court accepted the broader principle
that: "ifan organ or official of the company with the authority to bind the company held
out the person who committed the forgery as having authority to execute the document
in question, the company may be estopped from denying the validity of the forgery". 163
Hua Rong Fina11ce Ltd. In Hua Rong Finance Ltd v Mega Capital Enterprises 12.080
Ltd, 164 discussed above (at para.12.030), the director had presented to the lender a
forged board resolution purportedly authorising the transactions which were entered
into under seal with a signature of the director. At first instance, the court held that
the lender could not rely on the indoor management rule to enforce the transactions

160 Shaw v Port Philip and Colonial Gold Milling Co Ltd (1884) 34 QB 103; Lovell v Carson Co11nt1yHomes Ltd
[2009) 2 BCLC 196; and see also Northside Developments Pty Ltd v Registrar-General (1990) 176 CLR 146,
200--20I, per Dawson J.
161
[ 1884) 34 QB 103.
162 (2009) 2 BCLC 196.

163 [2009) 2 BCLC 196, (92).

1.. [1998) 4 HKC 532 (CFI); [2001) 3 HKLRD 623 (CA).

590 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

against the company on the basis that the rule does not apply to forgeries and further
that the director did not have any authority from the company to enter into the
transactions. On appeal, the Court of Appeal affirmed that the director did not
have any apparent authority, and accordingly the company was not bound. While
the decision is sometimes cited as an example of the application of Ruben, the
decision is best interpreted as one that is based on the question of authority rather
than forgery. The resolution was a forgery in the narrow sense (as the signatures of
the other directors on the resolution were forged), but the mortgage document was
not forged (in the narrow sense). The resolution was a nullity not only because of
the forged signatures but because there was in fact no resolution passed. The real
issue was whether the mortgage was binding on the company, and the court correctly
held that it was not because the director had neither actual nor apparent authority to
contract. This is a situation where the indoor management rule is not relevant in the
first place because of the absence of authority.

Insiders
12.081 Insiders cannot rely on Rule. A third exception to Turquand's rule is that "insiders"
cannot rely on the rule. In Morris v Kansenn, 165 the board purportedly allotted shares
to a director, but none of the persons acting as directors were duly holding office as
such at the time. The House of Lords held that the director who took the shares could
not rely on Turquand's rule on the basis that it is the duty of the directors (whether de
Jure or de facLo) to see that the company's transactions are regular. To allow directors
the benefit of the presumption of regularity where it was their duty to be aware of
the correct procedures would be to encourage ignorance and condone dereliction of
duty.166 However, the "insiders" exception applies only where the director is purporting
to act on behalf of the company in the transaction with himself or herself. 167

1.4.3 Statutory indoor management rule

12.082 Statutory indoor management rule in Cap.622. Sections I 17 to 119 of Cap.622
set out a new statutory indoor management rule, largely based on ss. 40-42 of the
Companies Act 2006 (UK). Under s.117( l ):
" ... in favour of a person dealing with a company in good faith, the power of
the company's directors to bind the company, or authorise others to do so, is
to be regarded as free of any limitation under any relevant document of the
company".
12.083 Person dealing with a company. Under s. l l 7(2)(a) of Cap.622, a person deals with
a company if the person is a party to any transaction or any other act to which the
company is a party. Under the corresponding English provision, it was held in EiC
Services LLd v Phipps 168 that "the section contemplates a bilateral transaction between
the company and the person dealing with the company or an act to which both are

"' (1946) AC 459.

1•• (1946) AC 459.476.
' 6' See Hely-H11tchi11so11
v BrayheadLtd (1968) I QB 549.
1• 8 (2004) 2 BCLC 589, (35).
 CORPORATE CONTRACTING 591

parties such as will bind the company ... if the section applies" and that the issue
of bonus shares to members does not constitute the members "dealing with" the
company. This is on the basis that there is no bilateral transaction or act where the
company's issue of bonus shares is an internal arrangement of the company with no
action required from the members receiving the shares. 169
The specific wording of s. I 17(2)(a) of Cap.622 has, in the UK in respect of the
equivalent provision in Companies Act 2006 s 40, been said to give rise to circularity:
"In cases where section 40( l) is needed to enforce a transaction there is no
enforceable transaction unless the third party contractor is 'dealing with' the
company, yet dealing with the company depends on a person being a party
to the transaction". 170
To avoid circularity and to give effect to the statutory intention, that s. l l 7(2)(a) must
be read as requiring the person to be a party to any transaction or act to which the
company is "purportedly" a party. 171

Good faith. A person is presumed to have acted in good faith unless the contrary is 12.084
proved.172 Prima facie, a person is not obliged to inspect the company's articles or
otherwise enquire as to the limitations on the directors' powers 173 and so ordinarily,
a failure to make such enquiries will not amount to bad faith. Also, a person is not
to be regarded as acting in bad faith by reason only of the person's knowing that
an act is beyond the directors' powers. 174 For example, where the directors were not
improperly exercising their powers in the transaction, albeit there was some procedural
irregularity at the board meeting, the outsider dealing with the company could still be
regarded as having acted in good faith even ifhe or she was aware of the irregularity. 175
However, knowledge of the irregularities or a failure to make enquiries can in particular
circumstances constitute a lack of good faith. For instance, if a director was in breach
of fiduciary duty in causing the company to enter into the transaction, an outsider
who is aware of the circumstances of the breach of duty (or who is put on enquiry)
could be regarded as acting in bad faith. 176 Even where there is no actual notice of
the irregularities, the statutory provision does not entirely absolve outsiders from
making investigations when the circumstances are such that they ought reasonably to

169
But for the view that a gift or unilateral act is within the statutory provision, see Gore-Browneon Compo11ies,
para 8( 15) (issue 138); Christian Twigg-Flesner, "Sections 35A and 322 Revisited: Who is a 'Person Dealing with
a Company'?" (2005) 26 Compa11yLawyer 195, 199. On this view, a person is still a party to the n·ansaction or
act as the person is a recipient of the gift under the transaction or pursuant to the act.
,,. David Kershaw, Company Law in Co111exr (2nd edn, Oxford University Press 2012) 131.
'" Cf. David Kershaw, Company Law in Co111ex1 (2nd edn, Oxford University Press 2012) 131; TCB Lrd v Gray
(1986] I All ER 587,596; S101y vAdva11ceBankofAusrralia Lrd(l993) 31 NSWLR 722,733.
172 Cap.622, s.l l7(1)(b).
173 Cap.622, s. I l 7(2)(d).

174
Cap.622,s.1 I7(2)(c).
17
s Sec Ford v Polymer Vision Lrd [2009) 2 BCLC 160.
'" Sec Wrexham Associalion Foorball Club Lrd v Crucialmove Ltd (2008) I BCLC 508 (director failed to disclose
connict of interest in the transaction; and outsider held to have acted in bad faith where he acted closely with the
director to procure the relevant transactions and was aware of director's connict of interest and failed to enquire
whether board authorised transaction with full knowledge of the conflict); and see also Ford v Polymer VisionLid
(2009) 2 BCLC 160.
592 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

make investigations. 177 It has been suggested in England that the test of "good faith"
in the present context is the same as the test adopted in Thanakharn Kasikorn Thai
Chamkat v Akai Holdings ltd 178 for preventing an outsider from being able to rely on
the apparent authority of the purported agent; namely that good faith means a belief in
the validity of the transactions which was not irrational or dishonest. 179
12.085 Dealing under the directors' powers. Section 117 of Cap.622 applies only where
the transaction is entered into by the board or through an agent acting under the
authority of the board. 180 The better view is that the irregularities covered by the
provision include a lack of quorum at a board meeting, although the provision would
not apply to decisions made by persons who cannot on substantial grounds claim to
be the board. 181
12.086 Whether s.J 17 applies if agent has neither actual nor apparent authority.
Section 117 of Cap.622 provides that only the directors' powers are to be regarded as
free of constitutional limitations. It seems that the provision does not confer authority
on persons who have no authority (actual or apparent) flowing from the board under
agency law.182 There is an alternative view that the provision should be capable of
applying "if a document is put forward as a decision of the board by someone appearing
to act on behalf of the company, in circumstances where there is no reason to doubt its
authenticity". 183 This suggests that the statutory provision can be relied upon even if
the person purportedly acting for the company does not have any actual nor apparent
authority. However, the difficulty with this view is that s.117 only removes limitations
on the directors' powers in the company's articles and other "relevant documents" that
might otherwise restrict the ability of the directors to bind the company or to authorise
others to do so. An example of such a limitation is a provision in the articles limiting
the power of the directors to borrow over a certain amount without approval of the
members in general meeting. 184 Section 117 can operate to enable the company to be
bound to a loan transaction entered into by the directors or under their authority even

"' See WrexhamAssociation Football C/11bLtd v Cr11cia/111011e lid (2008) I BCLC 508, (46)-(47) (English CA).
173 (2010) 13 HKCFAR479;seepar.i.12.040above.
"' Bass Jarring/on Ltd v 11zeRoyal B011kofScotlond pie (unrep., HCl3C02505, 7 November 2014) (Ch D), (I 17),
citing LNOC Ltd v WaifordAssociatio11 Football C/11bLtd (2013) EWHC 3615 (Comm). As to the latter case, see
para.12.097 below.
"" Palmer's Company law (Vol. I), para.3.329.
"' See Smith v He1111iker-Major & Co (ajinn) (2003) Ch 182, [41), per Robert Walker LJ; Ford v Polymer Vision
Ltd (2009) 2 BCLC 160, (77].
"' See Bass Jarringto11Ltd v Tlte Royal Bank of Scotland pie (unrep., HCl3C02505, 7 November 2014)
(Ch D), [ 117), where it was stated that if the transactions were entered into without authority, then s.40 of the
Companies Act 2006 (UK) could not be relied upon to enable the outsider to enforce the transactions against the
company.
183 Smith v He1111iker-Major & Co (a/inn) [2003] Ch 182, [ I08], per Carnwarth LJ; Derek French, Stephen Mayson
and Christopher Ryan, Mayson. French and Ryan 011 Company law (32"• edn, Oxford University Press 2015)
para.19.5.5.3. Compare also the differently worded Australian provisions (Corporations Act 2001 ss.128 and
129) in respect of which the Auslralian courts have held that it is not necessary that the person representing the
company have authority from 1he company to commit the company to the relevant transactions or execute the
relevant documents, so long as the person has authority to underlake some negotiation or Other steps in relation 10
the contemplated transaction: $()yferv Ear/maze Pty Ltd [2000] NSWCA I068, [82] per Hodgson CJ; A11s1rolia
and New Zealand Banking Group Ltd v FrenmastPty Ud (2013) 282 FLR 351; £spen111ceCallie Company Pty
Ltd II GraniteHill Pty Ltd (2014) 47WAR318.
'"' Predecessor CO, First Schedule, Table A reg.81 (repealed).
 CORPORATECONTRACTING 593

though the general meeting approval was not obtained. In this sense, s.117 operatives
"negatively", but the provision does not confer any power on the directors other than
by removing the specified restrictions. 185 Nor could the provision confer power or
authority on other persons other than removing the limitations on the directors' powers
in the relevant documents.
Limitations under the company's relevant documents. "Relevant documents" 12.087
means the company's articles, and any resolutions of the members (or any class of
members), and any agreements between the members (or members of a class). 186
Accordingly, the provision also applies to limitations on directors' powers under a
shareholders' agreement.
Transaction between company and director. Where the transaction 187 is between the 12.088
company and a director, 188 then Cap.622, s.118 applies. Although s.117 might prima
facie enable the director to enforce the transaction against the company, s.118 operates
to enable the company to rescind the h·ansaction. The right to rescission is lost in the
circumstances set out in s.118(3), such as where the company has already affirmed the
transaction or where there is intervention of third party's rights acquired in good faith
and for value. 189
Restriction in respect of charitable companies. Cap.622, s.119 restricts the application l 2.089
of s.117 in respect of charitable companies. 190 A person dealing with a charitable
company will be entitled to rely on s.117 only if: (a) the person did not know that the
company was a charitable company; or (b) gave full consideration and did not know
that the transaction was beyond the directors' powers. Accordingly, the provision gives
a greater measure of protection for the funds of charities.
Overlap with common law Rule. The statutory indoor management rule overlaps to 12.090
a large extent with the common law rule. The exception to the statutory rule based on
the absence of good faith is narrower than the "notice" exception under the common
law, and so the statutory provision gives greater protection to outsiders in this respect.
However, the common law rule still has an area of operation, such as where the outsider
deals with the company not through the directors but through the members in general
meeting (e.g. decision made by the members) or where the restriction on the directors'
powers is not derived from the articles (or other "relevant document"), although these
circumstances may be rare. Also, the common law rule applies in respect of charitable
companies even if s.117 does not apply by reason of s.119.

185 Palmer'sCompanyLaw (Vol. I), para.3.307.

186
Cap.622~ s.1 l 7(6).
,., "Transaction" includes any act: Cap.622, s.118( 10).
188 Cap.622, s.118 also covers transactions between a company and a director of the company's holding company

or with an entity connected with the director of the company or director of the holding company. Section 486
defines "entity connected with a director": s. I I8(9).
189 However, the provision does not prevent the operation of other rules of law which might invalidate the transaction:

Cap.622. s.118(8). Also, whether or not the transaction is rescinded the director or other persons as specified in
s.118(4) are required to indemnify the company for its losses or to account 10 the company for any gains made:
Cap.622, s.l 18(4).
190 Referred to in the section as "exempt companies". These are companic.s which arc entitled to dispense with the

word "Limited" in their names under Cap.622, s. 103 and which are charitable bodies exempt from tax under s.88
of the. Inland Revenue Ordinance (Cap.112): see also Cap.622, s.l 18(4).
594 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

1.4.4 Validity of acts of directors

12.091 Acts of director valid despite subsequent discovery of defect in appointment
under Cap.622 s.461. Section 461 191 of Cap.622 has replaced predecessor CO,
s.157 (repealed). Under ss.46l(l)(a)-46l(l)(b), the acts of a director are valid
despite the fact that it is discovered afterwards that there was a defect in his or
her appointment or that he or she is not qualified to hold office. 192 In Morris v
Kanssen, 193 it was held that the English equivalent of predecessor CO, s.157 applied
to defective appointments only, and not where there was no appointment made at all
or where a director ceases to hold office but continues to act as a (de facto) director.
Cap.622, s.461 is wider than the predecessor provision in s.157, and also validates
the acts of a person acting as director despite the person having ceased to hold
office as director or despite the person not being entitled to vote on the matter in
question: Cap.622, ss.46l(l)(c)-46l(l)(d). Section 461 overturns Morris v Kanssen
to the extent that the acts of a person who had ceased to hold office can be validated,
but Morris v Kanssen would still be good law in respect of situations where no
attempt had been made to appoint the person as director at all. Section 461(2)(a)
also makes it clear that the acts of a person purporting to act as director can be valid
notwithstanding that the appointment was made in contravention of the restrictions
on bodies corporate or under-age persons acting as director.
12.092 Circumstances where persons not entitled to rely on Cap.622, s.461. A person
who had notice of the defects in the appointment or qualifications etc. before the time
of the relevant act is not entitled to rely on the statutory provision. 194 It has also been
held by the Court of First Instance that s.461 is aimed at providing protection to third
parties, and if, as in the case at hand, the members are challenging the appointment
of the directors, the directors cannot rely on s.461 to justify their appointment
and the lawfulness of their conduct vis-a-vis members. 195 The court observed that
otherwise, the directors can rely on their own wrongdoing to obtain directorship
and to conduct the business of the company to the detriment of its members, which
cannot be right. Similarly, the English court has held that the statutory provision
validates unauthorised actions in favour of those dealing with a company and does
not validate hostile actions which persons dealing with the company do not want
to be validated, such as litigation against them. 196 Furthermore, a director cannot
invoke the statutory provision to validate, in his or her favour, a transaction which
was invalid because of some defect caused by a breach of his duty to see that the
affairs of the company are properly conducted. 197

191
Modelled on Companies Act 2006 (UK) s. 161.
"' For example, directors might be required by their articles to hold shares in the company in order to be eligible or
qualified to be appointed as director: see predecessor CO, Table A reg.79 (repealed); and see, e.g., Brilislr Asbestos
Company Lid v Boyd [1903] 2 Ch 4391; Cha1111el Collieries Trust Ltd v Dove,; St Margaret'.~ and Martin Mill light
Railwt,y Co [ 1914] 2 Ch 506; QuaIihold f11ves1111e11ts
Ltd v Byfa.x fnvestme111sLtd [ 1991) 2 HK C 589, 591.
' 93 [1946] AC 459.
' 9' Morris vKanssen [ I 946]AC459; Re the Sherlock l-folmeslnter11atio11alSociety Ltd (No 2) [2017] 2 BCLC 14,[ 113].
appeal dismissed [2018] I BCLC 188.
' 9' Re Kam la11 Koon [2015] 5 HKLRD 79, [93].
' 90 Re the Sherlock Holmes llltemationaf Society Ltd (No.3) (2017) 2 BCLC 38, [61).
' 9' Re !he Sherlock Holmes Imemational Society Ltd (No.3) (2017) 2 BCLC 38, (59)-(60).
 CORPORATE CONTRACTING 595

1.4.5 Conveyan.cillg an.d Property Ordinance

Section 20 rehuttable presumption that deed duly executed if seal affixed in presence 12.093
of two directors or secretary/director. Section 20( 1) of the Conveyancing and Property
Ordinance (Cap.219) (CPO) deals with the execution of deeds by corporations. The section
provides that in favour of a person dealing with a corporation in good faith, a deed shall
be deemed to have been duly executed by the corporation if the deed purports to bear the
seal of the corporation affixed in the presence of and attested by its secretary or other
pennanent officer of the corporation and a member of the board or other governing body,
or by two members of that board or body. The provision was originally enacted to avoid
the need for persons to enquire as to the formalities for execution under a corporation's
constitution. 198The provision deems due execution in the sense that a person can assume
there to be due execution under s.20 of the CPO notwithstanding different requirements
in the constitution. It is generally accepted that the deeming only operates to give rise to a
rebuttable presumption of due execution, and so for example a person who knows that the
affixing of the seal does not comply with the corporation's constitution will not be entitled
to rely on the provision as the person would not be dealing with the corporation in good
faith within the statutory provision.199 In Re Moulin Global Eyecare Holdings Ltd,200 the
deed on its face complied with CPO, s.20, but the third party was not entitled to enforce
the transaction against the company where the third party had constructive notice of
irregularities in the conferral of authority by the company for entering into the transaction.

Section 23 instrument appearing to be duly executed shall be presumed to have 12.094

been duly executed. Section 23 of the CPO deals with instruments generally and
provides that an instrument appearing to be duly executed shall be presumed, until the
contrary is proved, to have been duly executed. 201 For the presumption to apply, the
document must on its face appear to have been duly executed in accordance with any
requirements in the articles 202 or in accordance with CPO, s.20.

Reliance on ss.20 and 23 in conveyancing. CPO, ss.20 and 23 are often relied upon in l 2.095
the conveyancing context with respect to the question of what would be sufficient for
a vendor to discharge its obligations to show good title to the property to be conveyed
under the agreement for sale and purchase before completion.

1.4.6 Validity of documents exec11ted {IS if under seal

Executed as if under seal. Sections 127(3)-127(5) of Cap.622 provides for the execution 12.096
of a document by signatures of the specified officers in a manner that would be treated
as equivalent to execution under seal: see para.12.045 above. Section 127(6) of Cap.622
then provides that in favour of a purchaser in good faith for value, a document is regarded

198 Bolton Metmpolita11Borough Council v Torkingto11 (2004] Ch 66, [3 I].

199 See, e.g., Michael Wilkinson, "The Continuing Saga of Defective Execution of Conveyancing Documents:
Starutory Tntcrvention" (2003) 33 Hong Kong Low Journ(t/ 347, 354-355; Judith Sihombing and Michael
Wilkinson, Hong Kong Conveyancing (Vol l(A), LcxisNcxis loosclcaf) VT(J57].
200 (2009) 12 HKCFAR 621. See also Excelling Profit Investments Ltd v Sera Ltd [ 1992] 2 HKC 262 (CA).
2• 1 See, e.g., Excelling Prcifitfnvestments Ltd v Ser(1Ltd (1992] 2 HKC 262 (CA); Leung Kw(li Un v Wt, Wing Kuen
(2001)4 HKCFAR55.
202 See Gra1uiTradeDevelopment Ltd v B011anceIntl Ltd [200 I) 3 HKC 137 (CA). But see CPO s.23A(l) in respect
of deeds executed before 9 May 2003.
596 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

as having been executed by a company if the document purports to have been signed in
accordance with s.127(3). Following the equivalent English provisions, s.127(6) appears
to be intended to provide for a presumption of validity, where signatures are used, that
is equivalent to the presumption that applies, where the seal is used, pursuant to the
conveyancing legislation (CPO, s.20(1 ), discussed at para.12.093 above).203
12.097 Presumption of validity. The presumption in Cap.622, s.127(6) applies in favour
ofa purchaser in good faith for valuable consideration: see also Cap.622, s.127(7).
This refers to a person acting in good faith who acquires a proprietary interest
for valuable consideration. 204 The concept of a purchaser in good faith for value
is derived from the equitable concept of a bona fide purchaser for value without
notice. In the latter context, it has been said that questions of the bona fides or
good faith of a person requires enquiry not only as to whether there is a genuine
and honest absence of notice but also enquiry into the whole conscience of the
person. 205 In a decision dealing with the English equivalent of s.127(7) itself, it was
suggested that the requirement of "good faith" should follow the test for negating
apparent authority under the common law, as set out in Thanakharn Kasikorn Thai
Chamkat v Akai Holdings Ltd, 206 namely whether the person was acting dishonestly
or irrationally. 207 The test in Thanakharn was applied on the basis that the statutory
provision provides in effect a statutory presumption of apparent authority and that
therefore a similar test to the common law should be applied to promote clarity and
consistency in the law.
12.098 Meaning of "purports". Section 127(6) of Cap.622 can apply where the document
"purports" to have been signed in accordance with s.127(6). The word "purports" refers
to the impression a document conveys. 208 For example, where there are signatures of
persons stated in the document to be directors, the document would "purport" to be
signed by the directors even if they were not in fact directors. If, for example, those
persons had apparent authority to enter into the transaction, then s.127(6) could be
relied upon to cure the formal invalidity of the document, and the transaction can
be enforced against the company under a document treated as being duly executed.
12.099 Better view is that Cap.622, s.127(6) not applicable to validate transaction if total
absence of authority. In Lovett v Carson Country Homes Ltd, 209 the English court
favoured the view that the provision can also be relied upon by a third party even where
there is a lack of actual or apparent authority on the part of the persons signing and even
in the case of forged signatures, although the court expressly stated that no conclusive
views were being laid down. However, the better view is that s.127(6) would not apply to
validate a transaction if there was a total absence of authority on the part of the persons
signing or if a signature is forged. It seems that the provision provides only a counterpart
to CPO s.20(1), and as the general understanding of the CPO provision is that it only

2'lJFor the English provisions, see Companies Act 2006, s.44(5) and the Law of Property Act 1925, s.74.
"" See loveu v Carson Country Homes Ltd [2009) 2 BCLC 196, (73). "Purchaser" also includes a lessee, mortgagee
or other person who acquires a property interest: see s.127(7).
''" Midland Bank Tn1st Co Ltd v Green (1981) AC 513; Che,mg Pik-wa1111Tong Sau-ping (1986) HKLR 921.
206 (2010) 13 HKCFAR 479; see para.12.040 above.

"'' LNOC Ltd v WatfordAssociation Football Club Ltd (2013) EWHC 3615 (Comm), (91).
"'' Loveu v Carson Co1111/ly Homes Ltd (2009] 2 BCLC 196, (79).
209 [2009) 2 BCLC 196, (80), (98)-( I02), per Davis J (Chancery Division).
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 597

sets out a rebuttable presumption of validity and does not apply to cure forgeries,210
then s.127(6) would also be limited in such manner. Section 127 deals only with formal
validity in the execution of documents and was introduced because the seal is no longer
compulsory under Cap.622. It does not appear that the Hong Kong legislature intended
s.127(6) to effect a radical change by sidewind to the existing law on agents' authority or
the law in respect offorge1ies and the indoor management rule.

1.5 Ratification

Where no authority, for company to enforce transaction against third party it must 12.100
be ratified under agency principles. It has been seen above that where a transaction
is entered into by a person purportedly for the company without actual authority, the
principles of apparent authority and the indoor management rule can enable the third
party dealing with the company to enforce the transaction against the company. However,
those principles do not enable the company to enforce the transaction against the third
party.211 Where, for example, a director has given notice to a third party purportedly
on behalf of the company, although the outsider may presume regularity of the notice
under the indoor management rule, the company cannot rely on that rule to compel
the latter to accept the validity, and hence the consequence, of the notice.212 For an
irregular transaction to be enforceable by the company, the company needs to ratify
or affirm the transaction pursuant to ordinary agency law principles. The transaction
can be ratified by the company through a person or persons having actual authority to
enter into the transaction. Where the board could have authorised the transaction, then
the board can ratify by passing a resolution to that effect.213 Where the matter is within
the authority of the general meeting, then the general meeting can ratify by an ordinary
resolution.214 In any case it seems that ratification can be made by the unanimous assent
of the members. 215 Ratification need not be express but can be implied. 216 Once ratified,
the third party can also enforce the transaction against the company without the need to
rely on the principles of apparent authority or the indoor management rule.

2. LIABILITIES FOR CIVIL AND CRIMINAL WRONGS

2.1 Tort and other civil liabilities

2.1.1 Corporate liability

Company liable in tort. A company can be liable in tort as well as for other civil 12.101
wrongs, whether under the common law or statute. Imposition of liability on the
company reduces the profits of the company available for distribution to shareholders.

"" Sec para.12.093 above and sec also P Smart, ''Conveyancing and Companies: The Single Director and the
Company Seal (Part I)" (2001) 9 Hong Kong lawyer 46.
"' Morris v Kanssen [ 1946) AC 459, 474-475 per Lord Simmonds.
'" Hughes v NM Supera11nuationPty ltd [ 1993) 29 NSWLR 653.
rn Re Portuguese Consolidated Mines Ltd (1890) 45 Ch D 16, 26-27; Yifimg Developments ltd v Liu Chi Keung
Ric4J'[2017) 5 HKLRD 16 (CA).
214
Irvine v U11io11
Bank of Australia (1877) 2 App Cas 366.
"' See Chapter 6.
'" Re Mawco11Ltd [ I 969] I WLR 78.
598 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

Accordingly, the shareholders are ultimately required to bear the burden of the
company's liability. This can be justified on the basis of collective responsibility of the
shareholders, who are the residual bearers of risk in the company and are the persons
for whose benefit the company's activities are undertaken. 217

Vicarious liability
12.102 Company can be principal for acts committed by its employees or agents. Liability
in tort or for other civil wrongs can be imposed on a company through the principles
of vicarious liability. Despite some doubts in earlier times, 218 it is now well established
that a company can be a principal which is liable for the acts of its employees or agents
committed within the scope of their employment or authority, pursuant to ordinary
principles of vicarious liability.219

Primary liability
12.103 Can also be liable directly, e.g. for safety of persons. A company can also be liable
directly rather than vicariously. For example, where a company is under a duty of care
to ensure the safety of persons, the absence of reasonable care taken can be sufficient
for the company to be regarded as being in breach of the duty without the need to
establish negligence on the part of any particular individual within the company.220
Such a situation means there is p1imary or direct liability on the part of the company
rather than vicarious liability.
12.104 Individuals' conduct or mental state attributed to company. There can also be
primary liability on the part of a company where certain individuals' conduct or
states of mind are treated as the company's own through the principles of attribution,
discussed below.

Attribution of conduct and mental states to company

12.105 Rules of attribution. The leading decision on attribution is the Privy Council's
decision (as delivered by Lord Hoffmann) in Meridian Global Funds Management
Asia Ltd v Securities Commission. 221 Pursuant to the principles set out in Lord

"' See John Keeler, "Thinking Through the Unthinkable: Collective Responsibilities in Personal Injury Law"
(200 I) 30 Co111mo11Law World Review 349; Stefan H C Lo, Ill Search of Co,porate Accoull/ability: Liabilities of
Corporate Participa11ts(Cambridge Scholars, 2015) ch.3.
"' It was thought, for example, that the doctrine of ulrra vires restricted the circumstances when a company
would be liable for the conduct of its officers or agents: see Abrath v North Eastern Railway Co (1866) 11App
Cas247,251-252.
m See, e.g., Citize11s'Life Assurance Co Ltd v Brown [ 1904] AC 423; New Zealand Guardian Trusr Co Ltd v Brooks
[1995] I WLR 96. On vicarious liability of principals for agents' torts generally, see Peter Watts and FM B
Reynolds, Bowstead and Reynolds 011Agency (20th edn, Sweet and Maxwell 2014) [8-177].
,:o See Commonwealrh v lntmvigne (1982) 41 ALR 577; Carhay Pacific Airways Ltd v Wong Sau Lai (2006) 9
HKCFAR 371. The position is different in relation to crim.inal liability: sec Artomey-General's Reference
(No. 2 of 1999) (2000] QB 796
221 [1995] 2 AC 500. For the facts of the case, sec para.12.122 below. The rule.s of attribution arc also discussed

at length by Lord Walker in the Court of Final Appeal decision in Moulin Global Eyecare Trading lrd v
Commissioner of !tzland Revenue (2014) 17 HKCFAR 218. For an earlier Hong Kong c.ase which applied the
principles from Meridian, see Gold/ion Properties Ltd v Regelll National Enterprises Ltd (2009) 12 HKCFAR
512. See also Ernest Lim, "Attribution in Company Law" (2014) 77 Modem Law Re11iew794.
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 599

Hoffmann's judgment, there are three categories of rules of attribution to determine

whether certain acts or mental states are to be regarded as the company's:

1. P1imary rules of attiibution. These are set out in the corporate constitution
(such as where articles specify that decisions of the board or of the members
in general meeting on particular matters are decisions of the company) or
implied by principles of company law (such as the doctrine of unanimous
consent of members).
2. General rules of attribution. These are rules which are equally applicable to
natural persons, namely p1inciples of agency law.
3. Special rules of attribution. Where the above principles of attribution are not
appropriate for determining how a particular law applies to companies, it is
necessary for the court to fashion a special rule of attribution to determine
whether the act or mental state of a particular individual should be attributed
to the company for the purposes of that particular law.222 This is a matter of
interpretation of the substantive rule oflaw in question. If the rule is intended
to apply to companies, then one asks the questions: how was it intended to
apply, and whose act ( or knowledge or state of mind) was for this purpose
intended to count as the act etc. of the company? Where the law is contained in
a statute, the issue is determined as a matter of statutory interpretation, taking
into account the language of the statutory provision and its content and policy.

Global case. In the Meridian Global case,223 the company (Meridian) failed to 12.106
1"1eridian
give notice of its substantial secmities holdings in a listed company in breach of securities
legislation.An investment manager of Meridian had knowledge of the company's substantial
holdings. In holding the company to be liable, the Privy Council applied a special rule of
attribution to attribute the knowledge of the investment manager to the company.The policy
of the statutory provision in question was to compel, in fast-moving markets, immediate
disclosure of substantial securities holders so as to ensure market transparency as to the
identity of controllers of listed companies. Accordingly, for the purpose of the statute, it
would be appropriate to treat the knowledge of the employees of the company who have
authority to acquire securities for the company.The policy of the statute would be defeated if
only knowledge of the board or senior managers would be attributed to the company.
Le11nard'sCarrying Co case. In Lennard's Carrying Co v Asiatic Petroleum Co, 224 12.107
the relevant statutory provision provided that an owner of a ship would not be liable
for "any loss or damage happening without his actual fault or privity" where any
goods taken on the ship are lost or damaged by reason of fire. Accordingly, liability
was based on primary liability of the ship-owning company and vicarious liability
would not be covered. A cargo of benzine on board the appellant company's ship was

222 The specialrules of attribution arc not confined coscatucoryrules but can also be applied 10 legal rules under the
common law: Moulin Global £yecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218,
(78); Bi/ta (UK) Ltd v Nazir (No.2) (2015) 2 \VLR 1168,[ 197)per Lords Toulsonand Hodge (UKSC).
225 1\1eridia11Global Funds AtfanagementAsia Ltd v Securities Commission ( 1995)2 AC 500.
2" (1915) AC 705; applied in lfong Hi11gFaat v Hong Kong and YaumatiFerry Co Ltd (1992) I HKC 497.
600 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

lost by a fire caused by the unseaworthiness of the ship in respect of the defective
condition of her boilers. The managing director of another company which managed
the ship on behalf of the appellant company was at fault. That managing director
was also a director of the appellant company. Viscount Haldane LC considered that
for the appellant company to itself be at fault, there must be a person who can be
regarded as a "directing mind and will of the company", such as the board itself or a
person who has authority comparable with that of the board given to him under the
articles. The House of Lords attributed the managing director's fault as the appellant
company's personal fault and the company was held liable, on the basis that the
company failed as a matter of evidence to discharge its burden of showing that the
managing director was only a servant or agent. 225 Lord Hoffmann in the Meridian
case interpreted Viscount Haldane's approach as one involving the application of a
special rule of attribution based on an interpretation of what the statutory provision
required. 226
12.108 "Directingmind and will" can distract from purpose of rules of attribution.Although
the concept of the "directing mind and will" ofa company is still sometimes cited byjudges
and conunentators when dealing with the question of attribution, particularly in c1iminal
cases,227 Lord Hoffinann had observed in the Meridian case that such anthropomorphism
distracts from the purpose of rules of attribution.228 ft is well to heed Lord Hoffinann's
observations. Focus should be on construction or interpretation of the substantive rule
to see how it should be applied to achieve the pw-pose of the rule, rather than dwelling
on the "metaphysics" of a company.229 Conceiving of the company as having human
characteristics and equating directors or others as the company itself can give rise to
confusion in legal reasoning, as happened in the much-criticised decision in the case of
Stone & Rolls Ltd (in liq) v Moore Stephens.230
12.109 Individual director's or board's knowledge. Where the board's knowledge is to be
attributed to the company under the primary rules of attribution, the knowledge of a
single director would not be regarded as the company's knowledge where the other
directors do not possess that knowledge. 231 As the decision of a majority of directors
is a decision of the board, then it seems that the collective knowledge or intentions
of the majority should be sufficient for att,ibution of that state of mind to the board.

225 The memorandum and articles were not put in evidence and the managing director also did not give evidence.
22• Meridian Global Funds Management Asia Ltd v Securities Commission [ 1995) 2 AC 500, 509.
227 See para.12.124 below.
228 Meridian Global Funds Managemelll Asia Ltd v Securities Commission [ 1995) 2 AC 500, 509-510.
22~ See (1995) 2 AC 500, 51 L sec also Moulin Global Eyecare Trading lid v Commissioner of Inland Revenue
(2014) 17 HKCFAR 218, [67), (71), (106) per Lord Walker. cj Bi/ta (UK) Ltd v Nazir (No.2) [2015) 2 WLR
1168, (70), where Lord Sumption expressed the view that the "directing mind and will" concept remains valuable
in describing a person who can be identified with the company for the purpose of imposing direct, as opposed
to vicarious, liability on the company. However, it is submitted that the rules of attribution can adequately deal
with imposition of direct liability (e.g. under the primary rules of attribution) without any need for invoking the
concept of the "directing mind and will".
230 [2009) I AC 1391. See note 239 below; and see further Eilis Ferran, "Corporate Attribution and the Directing
Mind and Will" (201 I) 127 Low Quarterly Review 239.
231 Powles v Page ( 1846) 3 CB 16, 136 ER 7; Red Sea Tankers Ltd v Papachristidis [1997) 2 Lloyd's Rep 547.
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 601

Where attribution is on the basis of a special rule of attribution, it is possible to

treat an individual director's knowledge as the company's for the particular purposes
at hand. 232
Concept of aggregation can be applied. It also seems to be possible to apply the 12.110
concept of aggregation in the civil context, such that acts or knowledge of different
persons can be combined together and attributed to the company.233 Thus, where the
elements of a tort cannot be established against any individual in a company but can
be established against the company by attributing the acts of separate individuals
to the company, then the company will be liable. 234 However, aggregation is not
possible for the purposes of establishing a fraudulent or dishonest intent on the part
of a company.235
Wrongdoing or knowledge of director or agent not necessarily attributed to 12.111
company for all purposes: Bilta case. There are circumstances where a person's
conduct or state of mind would not be attributed to the company by reason of
the person's fraud perpetrated on the company or his or her breach of duty owed
to the company. In Bi/ta (UK) Ltd v Nazir (No.2), 236 the directors of a company
procured the company to engage in transactions to defraud the Revenue in
relation to VAT (valued added tax). The fraudulent scheme involved the company
becoming insolvent, with a VAT liability that it could not discharge by reason of
the insolvency. The liquidators brought proceedings on behalf of the company
against the directors and others to recover compensation for breach of the directors'
fiduciary duties. Two defendants sought to have the proceedings dismissed on the
basis of the illegality defence. Under this defence, the courts would not allow a
claimant to succeed in a cause of action that is founded on an illegal act. It was
argued that the company was itself a party to the fraud and hence cannot rely on its
own illegality in the action against the defendants. The UK Supreme Court rejected
that argument, and held that where a company has been the victim of wrongdoing
by its directors or agents, the wrongdoing or the knowledge of the director or
agent concerned would not be attributed to the company as a defence to a claim
brought against the director or agent by the company for the loss suffered by the
company as a result of the wrongdoing, even though the wrongdoing or knowledge
may be attributed to the company in other types of proceedings and even though
the wrongdoers were the only directors and shareholders of the company. 237 Where
the company is making a claim against the director or agent for their breaches of
duties owed to the company, their wrongdoing or knowledge cannot be attributed
to the company to defeat the company's claim against them because the duty of

"' In the pre-Meridian case law, this was held to be appropriate where the individual director is regarded as the
directing mind and will in the circumstances of the case: El Ajou v Dollar La11dHoldings Pie [1994) I BCLC 464.
m E,mve/1sPty Lui II National and General lmurance Co Ltd (1991) 5 ACSR 424.
'-" W B A11derso11 and Sons Ltd v Rhodes (Liverpool) Ltd [1967) 2 All ER 850.
m Macquarie Ba11kLtd v Sixtv{ourth Tltro11ePryLtd [ 1998) 3 YR 133.
,.,. (2016) AC I.
m [2016] AC I, [7] per Lord Neuberger, [42]-[45) per Lord Mance, [87)-(92) per Lord Sumption, [181),
[204)-[207] per Lords Toulson and Hodge.
602 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

which they are in breach exists for the protection of the company against the
director or agent. 238 As stated by Lord Mance, "it is certainly unjust and absurd to
suggest that the answer to a claim for breach of a director's (or any employee's)
duty could lie in attributing to the company the very misconduct by which the
director or employee has damaged it". 239
12.112 Whether person's fraud or wrongdoing is to be attributed to company
depends on nature of the proceedings being brought. On the other hand,
where a third party is pursuing a claim against the company arising from the
misconduct, the rules of attribution can potentially be applied to attribute to the
company the conduct and state of mind of the director or agent. 24°For example,
the rules of agency may require the company to be vicariously liable to the
third party for any act within the course of the agent's employment. 241 Where
the company is making a claim against a third party, whether or not there is to
be attribution of the act or state of mind of the director or agent again depends
on the nature of the claim. For example, if the company is claiming under an
insurance policy, the knowledge of the director or agent could be attributed to
the company in accordance with the normal rules of agency if there had been a
failure to disclose a material fact. But if the claim of the company, for example
for dishonest assistance or knowing receipt, arose from the involvement of a
third party as an accessory to a breach of fiduciary duty by a director, there is
no good policy reason to attribute to the company the act or state of mind of the
director who was in breach of duty. 242
12.113 Application of rules of attribution depends on context. The principles set out at
para.12.111 above have previously been referred to as the "fraud exception" (or the

2l 8 [2016) AC 1, [44]per L-OrdMance, [89)-{90]per Lord Sumption, [206]per Lords Toulson and Hodge.
2l 9 [2016) AC 1, (38) per Lord Mance, and sec also (89) per Lord Sumption; Moulin Gl<>balEyecare Trading
Ltd v 0.>mmissi<>neroffnlandRevenue (2014) 17 HKCFAR 218, (106]per Lord Walker; UBS AG (London Brtmch)
v Kommunale Wassenverke Leipzig Gmbh (2017) 2 Lloyd's Rep 621 (Eng CA). The suggestion that the company's
claim could be defeated by a defence of illegality gained some trnction following the decision of the House of
Lords in Stone & Rolls Ltd (in liq) v Moore Stephens (2009) I AC 1391, where the auditors successfully raised the
illegality defonce in a claim by the liquidator on behalf of the company against the auditors for their negligence
in foiling to detect the fniud committed by the sole directorfshareholder of the company. In Safeway Stores Ltd
v 7ivigger [20 I I] Bus LR 1629, the English Com1 of Appeal applied Stone & Rolls and denied a company's claims
against its directors on the basis of the illegality defence. Although not expressly overnded by the Supreme Court
in the Bilta case, Lords Toulson and Hodge in the latter case were clitical of the reasoning in Safeway Stores: see
Bi/ta (UK) Ltd v Nazir (No.l) [2016) AC I, [156)-[162).1l1e case of Stone & Rolls itself has been much c1iticized
(see, e.g. Peter Watts, "Audit Contracts and Turpitude" (20 I0) 126 Law Quarterly Review 14; Peter Watts, "Corrupt
Company Conn·ollers, their Companies and their Companies' Creditors: Dealings with Please of Ex Turpi Causa"
[2014) Journal of Business Law 161; Sarah Worthington, "Corporate Atllibution and Agency: Back to Basics"
(2017) 133 law Quartedy Review 118); and since there was no majority ratio in the case, the decision has now been
expressly confined to the facts of its case and does not stand for any wider authority: see Bi/ta (UK) Ltd v Nazir
(Na.2) (2016) AC I, (24), [30) per Lord Mance, (154) per Lords Toulson and Hodge; c/[81) per Lord Sumption.
"" [2016) AC I, (88) per Lord Sumption, [205) per Lords Toulson and Hodge; Moulin Global Eyecare Trading Ltd
v Commissi<>ner<>,(lnland Revenue (2014) 17 HKCFAR 218, (106]per Lord.
"' [2016) AC 1, [88]per L-OrdSumption.
2' 1 [2016) AC 1, [207) per Lords Toulson and Hodge.
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 603

Hampshire Land principle). 243 However, the phrase "fraud exception" is a misnomer
because the above principles for non-attribution are not confined to fraud perpetrated
on the company but also apply to other breaches of duties. 244 Moreover, the principles
should not be seen as an "exception" that is applied to negate a preliminary view
that the conduct or state of mind is attributed to the company.245 Whether to attribute
conduct or states of mind to a company depends on the context and the purpose in and
for which attribution is invoked or disclaimed. 246 It is a fallacy to say that a principal
is prima facie deemed to know at all times and for all purposes that which his agents
know. Before attribution occurs, there must be some purpose for deeming the principal
to know what the agent knows.247 The question in each case is whether attribution is
required to promote the policy of the substantive rule, or (to put it negatively) whether,
if attribution is denied, that policy will be frustrated. 248
Moulin Global case. The case of Moulin Global Eyecare Trading Ltd v Commissioner 12.114
of Inland Revenue249 involved a company whose accounts were falsified (with
profits overstated) by certain directors of the company over a period of 5 years.
The company's tax returns were prepared on the basis of those false accounts.
Subsequently, the company entered into liquidation, and the liquidator applied for
a refund of the overpaid taxes. One of the grounds for a refund was on the basis of
Inland Revenue Ordinance (Cap.112), s.70A, which allows refunds for overpayment
by reason of an error or omission in the tax return. Deliberate misstatements in the
return are not "errors" within s.70A, and hence whether s.70A could be applied in the
present case depended on whether the directors' knowledge of the fraud should be
attributed to the company. By a 4: I majority, the Court of Final Appeal held that the
fraudulent knowledge of the directors must be attributed to the company in the present

'') See Re Hampshire lttnd Co [ 1896] 2 Ch 743; Sto11e& Rolls Ltd (in liq) v Moore Stephens [2009) I AC 1391, [43],
per Lord Phillips, [137]-{168) per Lord Walker; Moulin Global £yecare Tradi11gLtd v Commissionerof /11/c111d
Revenue (2014) 17 HKCFAR 218. In the latter case, Lord Walker also seemed to confine the principles on the
"fraud exception" to the barring of unmeritorious defences in claims by corporate employers against dishonest
directors or employees or their acc-0mplices:[ I34). However, arguably this approach is unduly restrictive (see Ernest
Lim, "Attribution and the Fraud Exception" (2015) Lloyds Maritime and Co111111ercial Law Quarterly 14)and might
not be consistent with the approach approved of by a majority of the UK Supreme Court in the later decision of
Bi/ta. As noted by Lords Toulson and Hodge in Bi/ta, the so-called fraud exception "is simply an instance ofa wider
principle that whether an act or a state of mind is to be attributed to a company depends on the context in which the
question a,ises": Bi/ta (UK) Ltd v Nazir (No.2) [2016) AC I, [181); and see text to notes 225 to 228 below. Although
the Court ofFinal Appeal (CFA) decision in Moulin Global is the present binding authority in Hong Kong, there is
no material difference between Hong Kong and English common law on the attribution rules, and it is submitted
that the insights gained from Bi/ta should also be taken aboard by the CFA in Hong Kong in future.
"' Billa (UK)ltdvNazir(No.2) [2016)AC 1, (9),[71),[181).
245 This was the approach adopted by the majority in Bi/ta (UK) Ltd v Nazir (No.2) [2016) AC I: see [9] per Lord

Neuberger, [3 7) per Lord Mance, [ I9 I] per Lords Toulson and l➔odge. ~([92) per Lord Sumption.
"" [2016] AC I, [9] per Lord Neuberguer, [41] per Lord Mance, [ 181] per Lords Toulson and Hodge.
"' Peter Watts and F M B Reynolds, Bowstead and Reynolds 011Agency (20., edn, Sweet and Maxwell 2014)
[8-123], cited with approval in Bi/ta (UK) Ltd v Nazir (No.2) [2016] AC I, [44] per Lord Mance, and [191]per
Lords Toulson and Hodge.
'' 8 McNicholas Co11s1n1ctio11 C<>Ltd v C11s10111s and Excise C<>mrs [2000] STC 553, [44] per Dyson J. cited with
approval in Bi/ta (UK) Ltd v Ntlzir (No.2) [2015)2 WLR l 168, [ I95]per Lords Toulson and Hodge.
''' (2014) 17 HKCFAR218.
604 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

circumstances, and hence the overstatement of the profits is not an error within s.70A.
In giving the majority judgment, Lord Walker did not consider it to be appropriate to
deny attribution on the basis of the directors' fraud , as this, in his Lordship's view,
would frustrate the statutory purposes of Cap.112. 250 Lord Walker took the view that
an essential part of the statutory scheme is that the Commissioner should be able to
make assessments on the basis of the taxpayer's returns. 251 Yet as pointed out by Tang
PJ in the dissenting judgment, s.70A was enacted precisely to ensure that a refund
could be obtained for errors despite the tax assessment being otherwise final and
conclusive under Cap.112, s.70.252 If a company could be entitled to refunds on the
basis of errors due to negligence of its directors, it is difficult to see why the company
should not be allowed refunds for errors caused by the directors' fraud.253 Tang PJ held
that the directors' fraud should not be attributed to the company since the object and
purpose of Cap. I 12, s.70A was that the taxpayer should pay what is properly chargeable
and no more and that, subject to the 6-year limitation period for applications under
s.70A, the Commissioner has no good policy reason to wish to keep tax paid in excess
of what was properly chargeable. 254

2.1.2 liabilities of individuals

12.115 Where company liable, individuals involved might be liable. Where a company is
liable in tort or for some other wrong, individuals involved in the conduct could also be
liable. In the case of statutory liabilities, the statutory provision might expressly set out
the circumstances when a director or other person would be liable.255 Otherwise, it is a
matter of determining whether the elements giving rise to the plaintiff's cause of action
in respect of the wrong can be established against the individual concerned. Where the
company's liability is vicarious, arising from the wrongful conduct of an agent, the fact
that the company is liable to a plaintiff as principal does not prevent the agent from
being liable. This follows from ordinary agency law principles.256 The same applies in
respect of wrongful conduct of directors.257 However, directors are not personally liable
merely because of the company's liability-the question is whether the elements of
the tort or other wrong can be established against the director (in which case there is
primary liability on the part of the director) or whether the director's involvement in
the wrongdoing comes within the general principles of secondary liability.258 Similarly,

250 (2014) 17 HKCFAR 218, (134). The Court of Appeal (CA) had decided on a different basis, namely that the
"fraud exception" could not be applied as that "exception" only applies under agency law principles and cannot
be invoked where the primary rules of attribution impute conduct or knowledge directly to a company: see (2012)
2 HKLRD 911. Although the Court of Final Appeal (CFA) dismissed the appeal, the CFA held that the CA was
wrong in so confining the "fraud exception": (2014) 17 HKCFAR 218, [ 106), (113).
251
(2014) 17 HKCFAR 218, (134].
252
(2014) 17 HKCFAR 218, (25].
2ll (2014) 17 HKCFAR 218, (29].
25' (20 I 4) 17 HKCFAR 218, [3 I). There is force in Tang PJ's views. For a critique of the majority judgment, see also
Ernest Lim, "Attribution and the Fraud Exception" [2015] Lloyd~ Maritime and Commercial Law Quarterly 14.
2
si E.g., sec retitled Cap.32 s.40 (misscatcmcnts in prospectuses).
25• 8e1111e11 v Bt,yes (I 860) 5 H & N 391; Swift vJewsbwy and Goddard (1874) LR 9 QB 301.
"' Stc111dt1rd Chartered Bank v Pakistan Intl (No 2) (2003] I AC 959; Yakult 1-/onslw v Yakudo [2004] I HKC 630;
Tai Shing Dia,y Ltd v Maersk Pty lid (2007] 2 HKC 23; and sec generally Stefan H C Lo, "Liability of Dircct0rs
as Joint Torrfcasors" [2009] Joumal of Business Law I 09.
"8 In the case of tort, the ordinary principles of joint tortfeasors are applicable: see generally Credit Lyomwis Bonk
Nederland NVv Export Credit Guarantee Department (1998) I Lloyd's Rep 19 (Eng CA); (2000] I AC 486 (HL).
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 605

members are not personally liable simply because the company is liable, but they could
be liable if they have themselves committed the wrongful conduct, such as where a
member breaches a duty of care that the member itself owed to the plaintiff.259
Dis-attribution fallacy. The fact that a director or agent's tortious or other wrongful acts 12.116
can be attributed to the company for certain purposes (such as in imposing liability on
the company) does not mean that there must be a "dis-attribution" of that conduct from
the director or agent. It is a fallacy ("dis-attribution fallacy") to say that attribution of
the conduct to the company must of necessity lead to dis-attribution for the director
or agent so as to relieve him or her from personal liability.260 Accordingly, even if a
person's tortious acts or other wrongdoing is attributed to the company for particular
purposes, the person can still be regarded as having engaged in the wrongdoing and
therefore be personally liable for the wrongdoing.

2.2 Criminal liabilities

2.2.1 Corporate liability

Corporate criminal liability. In earlier times, it was thought that corporations could not 12.117
be criminally liable. The early reticence in accepting that a corporation could be guilty
of a crime was even greater than in respect of torts, for criminal liability depends on
a guilty mind and it was thought that corporations could not be moral agents, having
neither a soul nor a conscience. 261 Moreover, not having a body, a corporation could
not be committed to prison. 262 However, the modern position is that companies and
other corporations can be guilty of criminal offences, with the courts applying rules to
attribute conduct of individuals to the company. 263There are still some offences which
a company cannot commit, such as offences which by their nature cannot be committed
through another person, as in perjury.2c,4 Also a company will not be indictable for
an offence where the only punishment that a court could impose is corporal (e.g.
murder265). 266 However, where a fine is an alternative penalty that can be imposed for
an offence, 267 then a company could be considered to be capable of committing that
offence. Thus, it has been held that a company can be guilty ofmanslaughter 268 (where
a fine can be imposed as an alternative to imprisonment 269).

259 See, e.g., Chandler v Cape Pie (20121 I WLR 3111; and see further Stefan H C Lo, "A Parent Company's Tort
Liability to Employees of a Subsidiary" (2014) I Jo11mal of !11ternatio11ala/Id Comparative Law 117.
260 See further Stefan H C Lo, "Dis-attribution Fallacy and Directors'Tort Liabilities" (2016) 30 A11stralianJo11nu,/

o/Corpomte Ll,w 215.

261
See, e.g., Case o/Sutto11 's Hospital (1612) 10 Coke Reports 23a, 77 ER 960.
262
Blackstone, Commenwrie.< 011the Law o/England (vol I, 1769) 4~65.
263 For an overview of the change in judicial opinion, see R v /CR Haulage Ltd [ 1944] KB 55 I. See also Criminal

Procedure Ordinance (Cap.221) s.49(3) which overcomes the procedural obstacle arising from requirements for
the accused to be physically present at trial on indictment.
,_. R v /CR Ha11/ageLtd [ 1944) KB 55 I, 554; S111orgo11 v FCT( I976) 13 ALR 481, 487-488.
2•s The penalty for murder is life imprisonment: Offences Against the Person Ordinance (Cap.212), s.2.
2(;t(i R v !CR Haulage Ltd (1944) KB 551, 554.
267 Sec generally Criminal Procedure Ordinance (Cap.221), s.1 I3A.

268 R v P&O European Ferries (Dove,) Ltd (1991) 93 Cr App R 72. This case resulted from the 1987 ferry disaster

where the Herald of Free Enterprise ferry capsized off the Belgian port of Zeebrugge, killing 193 passengers
and crew.
269 Offences Against the Person Ordinance (Cap.212), s.7.
606 CORPORATECONTRACTINGAND LIABILITIESOF COMPANIES

12.118 Theories justifying corporate criminal liability. There is a considerable volume

of literature setting out theories justifying corporate criminal liability. One view
is that corporations can be equated with moral agents.21°Others have emphasised
that criminal liability of a corporation is appropriate to reflect the organisational or
collective nature of responsibility of groups. 271 Corporate liability is also justified on
utilitarian or practical grounds, such as more effective deterrence, 272 or more effective
enforcement of the law by avoiding difficulties in identifying specific responsible
individuals in a complex corporate organisation. 273
12.119 Primary or vicarious liability. Doctrinally, a company can be guilty of an offence
either through primary liability or through vicarious liability.

Primary liability
12.120 Can arise for strict or absolute liability. Primary liability can arise under statute
for offences of strict or absolute liability.274 Therefore, where a statutory provision
imposes some duty or obligation on a company, the failure by the company to perform
the duty can lead to primary liability of the company without the need to prove mens
rea where the offence is one of strict or absolute liability.m It is a matter of statutory
interpretation whether a statutory offence requires proof of mens rea.276 While there is
a presumption of a requirement for mens rea, the presumption is often displaced for
regulatory offences. 277 For example, it seems that many offences in the Companies
Ordinance would be offences of strict liability.278

270 See, e.g., Ann Foerschler, "Corporate Criminal Intent: Toward a Better Understanding of Corporate Misconduct''
(1990) 78 California Law Review 1287, 1302-1303; CM V Clarkson, "Kicking Corporate Bodies and Damning
Their Souls" (1996) 59 Modem Law Review 557; Peter French, Collec1ive 011dCoq1orate Responsibility (New
York: Columbia University Press, 1984) 38-45.
271
Sec. e.g., Brent Fisse and John Braithwaite, ''The Allocation of Responsibility for Corporate Crime: Individualism,
Collectivism and Accountability" (1988) 11 Sydney Law Revio'>v468; Brent Fissc and John Braithwaite,
Co,porations, Crime and Accountability (Cambridge University Press 1993); Celia Wells, Co,porations and
Criminal Responsibility (Clarendon Press 2001 ); Eric Colvin, "Corporate Personality and Criminal Liability"
(1995) 6 Criminal Law Fon1111I.
"' Ann Foerschler, "Co11xmite Criminal Intent: Toward a Better Understanding of Corporate Misconduct"
(1990) 78 Califomia Law Review 1287; Brent Fisse and John Braith\\~lite, "The Allocation of Responsibility for
Corporate Crime: Individualism, Collectivism and Accountability" ( 1988) 11 Sydney Law Review 468,496,498.
For example, if there was only individual liability and no co1vorate liability, there may be scapegoating whereby
particular individuals are held out by the company to be responsible, yet there is no change in the corporate
culture or corporate policy that effectively encourages the unlawful conduct.
273 Brent Fisse and John Braithwaite, "The Allocation of Responsibility for Corporate Crime: Individualism,

Collectivism and Accountability" ( 1988) 11 Syd11eyLaw Review 468, 496-498.

"' For strict liability and absolute liability offences, it is unnecessary for the prosecution to prove mens rea.
The defence of honest and reasonable mistake is available for sn-ict liability offences but not for absolute liability
offences: see, e.g., HKSAR v Ho Hon Chung Daniel [200413 IIKC 304.
275 See, e.g., R v Associated Octet Co Ltd [ 1994) 4 All ER I051; R v Gateway Foodmorkets Ltd [ 199713 All ER 78.

276 For factors which the court would take into account to determine if a statute creates strict or absolute liability,

see, e.g., Stewart v vo11Lieven (1988) 14 ACLR 207; on appeal, vo11Lieve11v Stewart (I 990) 3 ACSR 118; Hin
Lin Yee v HKSAR (2010) 13 HKCFAR 142.
2" Sec, e.g., A11orney General v Slum Shing Construction and Engineering Co lid [1986] HKLR 311; HKSAR
v Clum 110Building Constructio11 Ltd [2001] 3 HKC 5; R v Gateway Foodmarkets Ltd [1997] 3 All ER 78.
Regulatory offences (or quasi-criminal offences) are distinguished from offences which arc regarded as "truly
criminal". Generally speaking, the former regulates the conduct of certain activitie.s that are not regarded as
morally reprehensible in nature but which may need to be regulated to avoid harms to others, while the latter
involve activities which are prohibited outright or which are regarded as serious moral wrongdoing.
278 See,e.g.,RvBrocklq[I994)BCC 131.
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 607

Primary liability-attribution of acts and mental state of senior officers

Primary liability on basis of attribution of conduct of individual. Primary liability 12.121
can also arise on the basis of attribution of the conduct and states of mind of individuals
to a company. In establishing primary liability, the traditional common law approach
has been based on the identification or alter ego theory (ie, the notion of the "directing
mind and will"). Under this approach, the company is liable only where both the mens
rea and actus reus can be established against the person or persons who are properly
identified as the company itself.279
Traditional use of identification theory in establishing liability. In R v St Regis 12.122
Paper Company Ltcl,280 the company manufactured coloured paper and board from
waste paper. A technical manager at one of the five mills owned by the company
recorded false readings in environmental reports submitted to the Environment
Agency. He was convicted of relevant statutory offences, and the issue in the case
was whether the company could also be held criminally liable under the statute for
intentionally making false entries in a record required for environmental pollution
control. The English Court of Appeal held that the company could only be liable if
the person who engaged in the criminal conduct could be regarded as a person who
is the directing mind and will of the company, as defined in Tesco Supermarkets
Ltd v Nattrass. 281 The technical manager in question reported to a Mill Operations
Manager, who in turn reported to the mill's Managing Director, who in turn reported to
divisional technical managers and a Divisional Environmental Director, who formed
part of the senior management team of some 8-10 divisional directors. The technical
manager was a person required to follow the company's environmental policy set by
the directors. On the facts, the court held that it was not open to the jury to conclude
that the technical manager was a person who can be categorised as the directing mind
and will of the company.
Traditional use of identification theory in context of establishing defence. In Tesco 12.123
Supermarkets Ltd v Nattrass, 282 the company was the owner of a chain of supermarket
stores and was charged with an offence under the Trade Descriptions Act 1968 (UK).
The company sought to raise a statutory defence on the grounds that the commission
of the offence was due to the default of another person (the manager of the store at
which the offence was committed) and that the company had taken all reasonable
precautions to avoid the commission of the offence. The issue was whether the
manager who was at fault should be regarded as the company itself (in which case
the defence could not apply) or whether the manager could be regarded as "another
person" (in which case the defence would be made out). The House of Lords applied
the "directing mind and will" concept for the purposes of identification. According to
Lord Reid, the directing mind and will of the company would normally be the board
of directors or the managing director, but could also include other superior officers
carrying out the functions of management with full discretion to act independently

279 s
Sec R v HM Coronerfor East Kent, £x p Spooner ( 1989) 88 Cr App R 10, 16; A 1torney-Ge11eral Reference (No.2
of 1999) [2000) QB 796.
280 [2012)1CrAppR14.
281 (1972) AC 153. See par.i.12.123 below.
282 ( 1972) AC 153.
608 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

of instructions from the board. Those persons are distinguished from the company's
employees or agents who are subordinates of senior management. The House of Lords
held that in the present case the shop manager could not be identified as the company.
The board never delegated any part of its functions. The board had set up a chain
of command through regional and district supervisors, but they remained in control.
The shop managers had to obey the directions and orders of their superiors.
12.124 Reformulation of identification theory under the Meridian framework.
As illustrated by cases such as R v St Regis Paper Company Ltd, discussed above at
para.12.122, the identification theory and the "directing mind and will" concept have
still been used by the courts following the 1\1eridian case in the context of criminal
cases. 283 However, as explained by Lord Hoffmann in Meridian, the concept should
simply be seen as an application of a special rule of attribution to detennine whose acts
or state of mind should be treated as the company's for the purpose of the substantive
law in question. 284 As the imagery used in the concept of persons being the "directing
mind and will" can distract from the purposes of attribution, 285 it is preferable to avoid
references to the "directing mind and will". Thus, for criminal offences where it is
necessary to establish mens rea on the pa11of the company under the common law
principles of attribution, the question of whether the wrongdoing individual's conduct
and mental state are to be attributed to the company for the purpose of determining
primary criminal liability of the company should simply be determined on the basis
of whether the individual is a director or a senior officer carrying out the functions of
management with full discretion to act independently of instructions from the board.286
This approach adopts the substance of the rules on the "directing mind and will"
concept but avoids the use of that terminology and the confusion in legal reasoning
that sometimes results from the notion that directors or others are to be regarded as
the company itself.
12.125 Appears not possible to aggregate acts or knowledge of individuals. In
attributing conduct or mental states to the company, it appears that it is not possible
to aggregate acts or knowledge of different individuals within a company to
impose criminal liability on the company where the elements of the offence cannot
all be established with respect to any single individual who is to be regarded as the
company itself. 287 For example, where an offence requires knowledge of facts A, B
and C, and one individual in the company knows of A (but not B or C), and another
knows of Band C (but not A), it is not possible to combine their knowledge to treat

"' See also A11orney-Ge11eral s Refere11ce(No.2 of 1999) [2000) QB 796 in the context of manslaughter.
"' See Lord Hoffmann's explanation of the Tesco decision in Meridia11Global Funds Ma11agemen1 Asia Lid v
Securilies Commission [ 1995) 2 AC 500, 507-508.
zu See para.12.108 above, and see further Eilis Ferran, "Corporate Attribution and the Directing Mind and Will"
(201 I) 127 Law Quarlerly Review 239; Sarah Worthington, "Corporate Attribution and Agency: Back to Basics"
(2017) 133 Law Quarlerly Review 118, 125; Stefan H C lo, "Context and Purpose in Corporate Attribution: Can
the 'Directing Mind' Be Laid to Rest?" (2017) 4 Journal of l111ernario11al
a11dComparaliveLaw 349.
' 16 This is subject to any statutory modification on the requirements relating to che elements of an offence for a
company.
28' Sec Allomey-Generals Reference (No.2 of 1999) (2000) QB 796, 813; and see generally E Colvin, "Corpornte

Personal it)' and Criminal Liability" ( 1995) 6 Criminal Law Forum I.

 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 609

the company as knowing A, Band C. Also, where the actus reus, but not the mens
rea, can be established against one person in the company, it is insufficient that
another person in the company (who did not carry out the actus reus) might have
the requisite mens rea. However, where, for example, the board has the requisite
mens rea and instructs an employee to carry out the acts forming the actus reus,
general principles of criminal law could still lead to the company being criminally
liable. The mens rea of the board would be attributed to the company, and it seems
that the company could be liable as principal offender acting through an innocent
agent 288 or alternatively there may be accessorial liability. 289 A company can be
guilty of conspiracy 290 and so this offence could also be relevant depending on the
circumstances.

Vicarious liability
When vicarious liability has been imposed. Vicarious liability is less commonly 12.126
used in criminal law compared with civil law, but courts may often be prepared
to treat regulatory offences as giving rise to vicarious liability. Vicarious liability
has traditionally been imposed on corporations for statutory offences of strict or
absolute Iiabil ity.291 Tn addition, courts have been prepared to apply vicarious liability
to corporations in relation to statutory offences where there are due diligence or
other similar defences available. 292 However, it is not necessarily the case that a
strict liability regulatory offence entails vicarious liability, nor is it the case that
an offence requiring mens rea for the primary offender cannot lead to vicarious
liability of the offender's principal without the need for mens rea on the part of the
principal. 293 Whether a statutory offence imposes vicarious liability is a matter of
statutory interpretation. 294

Organisational fault

Ineffectiveness of common law approach to criminal liability in case of large 12.127

corporations. The principles of corporate liability under the common law based on
the identification theory (whether as traditionally applied or as reformulated under the
Meridian framework of attribution 295) have been much criticised as being ineffective

288 Deutsche Ge11osse11schaftsba11k v Burnhope (1995) I WLR 1580. On the principles relating to acting through
innocent agents generally, see R v 7J1/er(1838) 8 C & P 616.
,.. See generally Attomey-Ge11eral:tRejere11ce(No.I of/975) [/975] QB 773; R v Szeto Kwok-hei [ 1991)2 MKLR 178.
290 R v /CR Haulage Ltd [1944) KB 551; R v Blamires 1)-ansport Services Ltd [1964) I QB 278 (conspiracy with

officers); Williams v Hursey(l959) 103 CLR 30, 128 (conspiracy with members).
291 See,e.g.,R vCheu11gSiu-yu[l991] 2 MKLR 142.
292 See, e.g., R v Bri1islt Steel Pie [1995) I WLR 1356; Tesco Stores Ltd v Brent LBC (1997) I WLR 1037; R v

Gatc,.vay Foodmarkets Ltd [ 1997) IRLR 189.

29l Sec Mousel/ Bms Ltd v London and North-Western Rc,ilway Co [1917) 2 K.B836, 845-846; R v Australasian

Films Ltd (1921) 29 CLR 195. er. Va11ev Yia1111opoullos[ 1965) AC 486.
2
., Mousel/ Bms Ltd v lo11do11a11dNorth-Western Railway Co (1917) 2 KB 836, 845-846. For further examples, sec
Pearks, G1111sto11and Tee Ltd v Ward [ 1902) 2 KB 1; Natio11alRivers Authority vA/fred McAlpi11eHomes East Ltd
[ 1994) 4 All ER 286.
29
' Seepara.12.124above.
610 CORPORATE CONTRACTING AND LIABILITIES OF COMPANIES

and inappropriate for large companies where functions and responsibilities are spread
diffusively within a complex corporate structure. 296 For example, while a number of
prosecutions have been brought in England against companies for manslaughter arising
from gross negligence causing death (such as the 1987 Herald of Free Enterprise ferry
disaster 297 and the 1997 Southall rail crash 298), few have been successful. 299 In Hong
Kong, there was a successful prosecution against a construction company Ajax Engineers
and Surveyors Ltd for its fault where a site lift had fallen 17 floors, killing 12 building
workers, but there, the company had pleaded guilty, and two individuals who were
originally found guilty had their convictions quashed on appeal. 300 The delegation of
responsibilities via complex and diffuse management structures can mean that no single
individual is culpable, even though it might be thought that the company is responsible
for the ham1 that has occurred and should be held to be criminally liable. A company
might be regarded as being at fault because of corporate policies or a corporate culture
that has facilitated the conduct leading to the ham1, or there are deficiencies and failings
at the organisational level, even though no single individual is fully responsible. 301 Yet
under the common law approach to crin1inal liability, the company cannot itself be
criminally responsible if there is no single individual who is guilty of the offence and
whose conduct and mental state can be attributed to the company.
12.128 Dealing with difficulties of common law. The extension of strict or absolute liability
could avoid some of the above limitations, but this may not be appropriate for offences
where some element of fault ought to be present before there is criminal liability. In some
overseas jurisdictions, different approaches to dete1111iningcorporate fault have been
introduced to deal with the difficulties under the common law. In England, a statutory
corporate manslaughter offence has been enacted which takes into account failures
on the part of senior management without the need to identify a specific individual
who is culpable. 302 In Australia, for federal offences, the common law principles of
corporate liability are replaced with rules which incorporate concepts of organisational
blameworthiness and which expand the scope for corporate liability.303 Under these

"• See generally Brent Fisse and John Braithwaite, Co,porations. Crime and Accountability (Cambridge University
Press 1993); Celia Wells, Corporations and Criminal Responsibility (Clarendon Press 2001); Eric Colvin.
"Corporate Personality and Criminal Liability" (1995) 6 Criminal Law Forum I; GR Sullivan, "The Attribution
of Culpability to Limited Companies" (1996) 55 Cambridge law Journal 515; Meaghan Wilkinson, "Corpor'Jte
Criminal Responsibility - the Move Towards Recognising Genuine Corporate Fault" (2003) 9 Canterbury law
Review 142; Stephanie Earl, "Ascertaining the Criminal Liability of a Corporation" (2007) 13 New Zea/a11d
Business law Quarterly 200.
291 R v P&O European Ferries (Dover) Ltd (1991) 93 Cr App R 72.

'" Attorney-GeneraH Refere11ce(No.2 of 1999) (2000) QB 796.

299 For a summary, see Law Commission (UK), legislati11g the Criminal Code: btvoluflla,y Manslaughter

(Law Com No 237, I996), [l.11]-[ 1.18).

300
R v Tam Ping Cheong (unrep., CA, No 355 of I995, 12 June I996). See Melanie Pritchard, "Corporate
Manslaughter: The Dawning of a New Era?" ( 1997) 27 Hong Kong law .Journal 40.
l<l' See further the references at note 273 above.
l<ll See Corporate Manslaughter and Corporate Homicide Act 2007 (UK); and see, e.g., Sally Ramage, "Corporate
Manslaughter and Corporate Homicide Act 2007 Explained" (2007) 175 Criminal Lawyer 5; Victoria Roper,
''The Corporate Manslaughter and Corporate Homicide Act 2007 - A I 0-ycar Review" (2018) 82 Journal of
Criminal law 48.
J-OJ Criminal Code Act 1995 (Aust) Schedule - The Criminal Code, Pt.2.5; and sec, e.g., Jennifer Hill, "Corporate
Criminal Liability in Australia: An Evolving Corporate Governance Technique?" [2003] Journal of Business law
l; T Woolf, "The Criminal Code Act 1995 {Cth) - Towards a Realist Vision of Corporate Criminal Liability"
( 1997) 21 Criminal Law Journal 257.
 LIABILITIES FOR CIVIL AND CRIMINAL WRONGS 61 I

provisions, a corporation is regarded as having committed the physical elements of an

offence if any employee, agent or officer acting within their actual or apparent authority
has committed those physical elements. As for the mental elements of the offence, this
can be established not only where directors or senior officers have the requisite state
of mind, but also where there is a corporate culture that led to the proscribed conduct
occurnng.

2.2.2 Liabilities of individuals

Individual's own criminal liability. Individuals who have committed a criminal offence 12.129
would be principal offenders and would be criminally liable notwithstanding that the
acts were carried out on behalf of a company. 304 In addition, individuals could also be
criminally liable as accessories where the company is itself the principal offender. 305
Furthennore, statutes might specifically provide for circumstances where directors or
officers are to be liable in relation to offences committed by the company.306

'°' Sec, e.g., Dellow v Busby (1942] 2 All ER 439; R v Ovene/1 (1968] 1 All ER 933; HKSAR v Otis Elevator Co
(HK) Ltd(unrep., HCMA 130/2011, [2011] HKEC 1320).
,o, Sec, e.g., Ha111ilto11
v Whitehead (1988) 166 CLR 121; R vJudges of the Austmlian Industrial Court, Exp CLM
Holdings Pty ltd ( 1977) J 36 CLR 235.
'°' Sec, e.g., the provisions orthe Companies Ordinance (Cap.622) on liabiliry of"responsiblc persons" (defined in
Cap.622, s.3) (cf Cap.32, s.351 and liabilities for "officers in default"). See also Criminal Procedure Ordinance
(Cap.221), s. l0IE.
.... -- .. ---····· ····-·-·· ................... _ ◄•-···-·-· -····- ... -· .. --· ....... ·-·-···· --·-·-··-··
 CHAPTER 13

EQUITY AND DEBT FINANCING

PARA.

I. Introduction ............................................................................................................................ 13.00 I

2. Methods of Corporate Financing ........................................................................................... 13.003

2.1 Obtaining finance for sta1t-up companies ...................................................................... 13.003
2.1.1 Bank loans and overdrafts .................................................................................. 13.004
2.1.2 Trade credit ........................................................................................................ 13.005
2.1.3 Business angels .................................................................................................. 13.006
2.1.4 Venture capital ................................................................................................... 13.007
2.1.5 Equity crowdfunding ......................................................................................... 13.008
2.2 Continuing finance for established firms ...................................................................... 13.009
2.2.1 Retained profits .................................................................................................. 13.009
2.2.2 Short-term finance ............................................................................................. 13.0 I 0
2.2.3 Long-term finance ............................................................................................. 13.016

3. The Distinction between Equity Finance and Debt Finance .................................................. 13.028

4. Nature and Types ofEquity .................................................................................................... 13.037

4.1 General ........................................................................................................................... 13.037
4.2 Nature of a share ............................................................................................................. 13.039
4.3 Types of shares ............................................................................................................... 13.042
4.3.1 Introduction ........................................................................................................ 13.042
4.3.2 Ordinary shares .................................................................................................. 13.044
4.3.3 Preference shares ............................................................................................... 13.045
4.3.4 Redeemable shares ............................................................................................. 13.052
4.3.5 Bearer shares ...................................................................................................... 13.055
4.4 Stock ............................................................................................................................... 13.061

5. Nature and Types ofDebt. ...................................................................................................... 13.063

5.1 Unsecured and secured loans .......................................................................................... 13.064
5.2 Debt subordination ......................................................................................................... 13.066
5.3 Debentures and debenture trusts ..................................................................................... 13.067
5.4 Syndicated loans ............................................................................................................. 13.070
5.5 Club loans ....................................................................................................................... 13.071
5.6 Junk (high-yield) bonds .................................................................................................. 13.072
5.7 Redeemable bonds .......................................................................................................... 13.073
5.8 Foreign bonds ................................................................................................................. 13.074
5.9 Eurobonds ....................................................................................................................... 13.075

6. Factors Affecting the Choice between Equity and Debt ........................................................ 13.076
6.1 The size of the company ................................................................................................. 13.076
6.2 Nature of the company's business .................................................................................. 13.077
6.3 Tax deduction ................................................................................................................. 13.078
614 EQUITY AND DEBT FINANCING

6.4 Costs of financial distress and insolvency ...................................................................... 13.079

6.5 Restrictions in debentures .............................................................................................. 13.080
6.6 Cost of disclosure ........................................................................................................... 13.08I
6.7 Fluctuation of interest rates in the financial market ....................................................... 13.082
6.8 Gearing ratio ................................................................................................................... 13.083
 1. INTRODUCTION
Broadly speaking finance raised through share capital or borrowing. To 13.001
conduct business, a company requires finance. Broadly speaking, finance can either
be contributed by the proprietors (shareholders) of the company or raised through
borrowings (from lenders or creditors). Share capital and loan transactions may raise
issues on the ways in which the interests of different stakeholders in the corporate
enterprise, including the different classes of shareholders and creditors, as well as the
company controllers, are to be balanced. For example, the limited liability privilege
granted to the shareholders of limited companies shifts the risk of borrowing to the
creditors. There is therefore a need for the law to provide creditors with protective
mechanisms. Some of these issues have been addressed in Chapter 8, where the
directors' duty to have regard to creditors' interests was considered. Others will be
discussed in Chapters 14 to 17, where rules associated with the raising and maintenance
of, and transactions with respect to, capital and finance are examined.
Scope of chapter. This chapter serves the twin purposes of providing a bird's-eye 13.002
view on corporate financing and providing an introduction to the four chapters which
follow. The remainder of this chapter will consider: (i) ways in which finance is raised
in practice for start-up companies as well as more established firms, (ii) the distinction
between equity finance and debt finance, (iii) types of equity finance, (iv) types of
debt finance and (v) factors affecting the capital structure of companies.

2. METHODS OF CORPORATE FINANCING

2.1 Obtaining finance for start-up companies

Start-up finance typically provided by entrepreneurs themselves. Start-up 13.003

companies may be incorporated sole-proprietorships or partnerships or an entirely
new business. The initial finance of the firm is typically provided by the entrepreneurs
themselves or their immediate families. If internally raised finance is insufficient for
the needs of the company because of, for example, the nature or anticipated growth
of the business, it is necessary to obtain finance externally. The following sources of
outside capital are available in Hong Kong.

2.1.1 Bank loans and overdrafts

Bank loans. The most obvious source of external finance is loans that can be obtained 13.004
from banks, other financial institutions or other companies (e.g. a sister company or
the holding company if the borrower is a member of a corporate group). Banks are
often willing to provide overdraft facilities. An overdraft facility permits the over-
drawing of funds beyond the credit balance of the account holder. The over-drawing
constitutes a loan provided by the bank to the account holder (borrower).

2.1.2 Trade credit

Trade credit arising in course of business. A very significant source of short-term 13.005
finance for small businesses is trade credit, which arises in the normal course of the
616 EQUITY AND DEBT FINANCING

business without the need for formal arrangements. Trade credit is provided by a
supplier of goods to a purchaser where the terms of sale give the purchaser a certain
period of time for payment after delivery of the goods (for example 30 days or 60
days credit). Trade credit is normally unsecured, although some suppliers incorporate
a Romalpa clause (or reservation of title clause) in the contract.' A Romalpa clause
reserves rights of title in the goods in the seller until a prescribed event occurs, such as
the payment of the purchase price.

2.1.3 Business angels

13.006 Business angels - investors who make capital injections. Start-up companies often
seek their first round of equity financing from the so-called "business angels". These
are investors who make capital injections into small private firms. They are often the
entrepreneur's friends or acquaintances. A business angel is a contributor of share
capital. Given the size of their capital input relative to the existing share capital, angels
often acquire a significant control power in the company.

2.1.4 Venture capital

13.007 Venture capitalist specialise in raising private equity. A firm whose needs ca1mot
be satisfied by the capital injections of business angels may consider investments by
venture capital finns. These firms specialise in raising funds to invest in the private
equity of young firms. The investors in a venture capital firm are typically institutional
investors, such as unit trusts, mutual funds and insurance companies. A venture capital
firm is managed by venture capitalists, who are experienced in investing in start-ups.
Having a venture capital firm as an investor can therefore be beneficial for the growth
of the company. The benefit, however, does not come cheap. A venture capitalist
normally charges a substantial fee based on the positive return he or she generates.
Venture capital is one of the mechanisms for private equity investment. The term
private equity: "refers to an industry encompassing various types of transactions, from
venture capital funding start-ups to going-private buyouts .... " 2 The unifying theme of
such different types of transactions is that the capital involved is privately raised and
is not invested in publicly traded companies. 3

2.1.5. Equity crowdfimding

13.008 Crowdfunding a way of raising finance from a large number of small investors.
"Crowd funding is a way of raising finance by asking a large number of people for a small
amount of money, typically via an internet platform." 4 There are different categories of
crowdfunding: (i) donation crowdfunding; (ii) reward crowdfunding (such as offe1ing
consumers prototypes of products or services, for which the consumer makes payment
prior to production); (iii) peer-to-peer lending; and (iv) equity crowdfunding (which

1 See Aluminium flldustrie Vaasse11 BV v Roma/pa Alt1mi11iumLtd (1976) 2 All ER 552.

2 Tan Chong Huat, et al, law and Practice of Corporate Finance in Singapore (LexisNexis 2016) 247.
' L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2N 1 edn, Hart 2015) 765.
4
L Gull ifer and J Payne, Corporate Finance Law: Principles and Policy (2N 1 edn, Hart 2015) 17.
 METHODS OF CORPORATE FINANCING 617

involves offering of equity shares to a group of investors).5 Equity crowdfunding

has the potential of bridging the gap between equity finance obtained from friends,
families and acquaintances and that raised from the stock markets. Investing through
equity crowdfunding platforms not only helps resolve the shortage of capital supply
for start-ups but also provides ordinary savers with opportunities for high-risk, high-
return investments. Full equity crowdfunding, however, has not been embraced in
Hong Kong, due to regulatory challenges. 6
Given the level of risk involved in investing through crowdfunding, to enable the
market to fully reap the benefit of this form of fund-raising, an appropriate regulatory
regime is necessary. The regulation of equity crowdfunding involves the regulation
of the issuer, the platform, as well as the investors. A number of countries have taken
initiatives in enacting rules on equity crowdfunding. 7 The Hong Kong Financial
Services Development Council has made a proposal to follow suit. 8

2.2 Continuing finance for established firms

2.2.1 Retained pro.fits

Accrued profits can be capitalised. An internal source of finance for an established 13.009
company is the retained profits of the firm. When a need for capital arises, it is possible
for the company to capitalise part or whole of the profits, provided that the company
has accrued profits. It is common for listed companies to meet the need for capital
by paying dividends in the form of bonus shares, rather than a cash-payment, to
shareholders. 9

2.2.2 Short-term .fi11a11ce

Bank loans, commercial papers and promissory notes. In addition to the external 13.010
sources of finance mentioned above (angels, venture capital, etc.), various forms of
private and public sources of debt and equity finance are available. Short-term private
forms of debt finance include bank loans backed up by various forms of security, and
commercial papers or promissory notes. Short-term secured or quasi-secured methods
of finance include receivables financing (debtor finance or invoice finance) and stock
financing.

Receivables.finance
Book debts used as security or assigned outright. Receivables finance is also referred 13.011
to as debtor finance or invoice finance. It involves the raising of finance through the

' Hong Kong Financial Services Development Council, l11trod11ci11g a Regulatory Framework for Equity
i11Ho11gKo11g(FSDC Paper No.21) 17-18, accessed at ht1p://www.fsdc.org.hk/sites/default/files/
Crowdf111uii11g
Final_Report.pdf, 9 May 2018.
• Ibid.. 17. The prospectus regime under Pt.II of the Companies (Winding-Up and Miscellaneous Provisions)
Ordinance (Cap.32) may apply if the offer of shares amounts to an offer to the public: see Chapter 16.
1 Hong Kong Financial Services Development Council, llltrod11ci11g a Regulatory Frameworkfor Equity
i11Hong Kong (FSDC Paper No.21) 20-25, accessed at http://www.fsdc.org.hk/sites/default/files/
Crowclfi11uiing
Final_Report.pdf, 9 May 2018.
' Ibid., 35-44.
' See also Chapter 15.
618 EQUITY AND DEBT FINANCING

use of the firm's receivables-namely debts and other monetary obligations owed to
the firm (e.g. a company's book debts 10). From the legal perspective, this can be done
in one of two ways. First, the debts owing to the firm can be used as secmity for a loan
provided by a lender. Secondly, there can be an outright assignment of the debts by
way of a sale transaction. Whether the transaction involves a secured loan or a sale can
be important, as a company which grants security over its book debts in the form of
a charge or mortgage is under a statutory obligation to register the charge. 11 A sale of
receivables has a commercial function similar to the use ofreceivables as secmity for a
loan. However, the courts accept that if the substance of the transaction involves a sale,
then it will be characterised as a sale rather than as involving the creation of a security. 12
13.012 Factoring: person supplying goods or services to trade customers on short-term
credit assigns resulting receivables to another. Factoring is an example of receivables
financing that is usually effected by way of sale. It has been described as such:

"Factoring is a transaction by which one person (the supplier or 'client')

supplying goods or services to trade customers on short-term credit assigns the
resulting receivables to another, the factor, upon terms that the assignment is to
be notified to the debtors and the factor is to collect in the receivables direct,
assume responsibility for the maintenance of the relevant accounts and, within
agreed limits, bear the risk of default in payment by customers." 13

In the context of raising finance by a company through a factoring agreement, the

"client" is the company concerned. If the factor is not to bear the risks of defaults by
the company's debtors, then the transaction can be on a recourse basis, which means
that the factor has a right to require debts that go into default to be repurchased by the
company. The sale by the company to the factor of the company's receivables would be
at a discount, with the factor making its profits out of the discount. 14
13.013 Invoice discounting. Where the transaction does not involve notification of the
assignment to the company's debtors, the transaction is refe1Ted to as invoice
discounting. Here, the company's debtors are unaware of the involvement of a third
party, and the company maintains full control over its debtor or ledger administration.

Stock.finance
13.014 Stock finance often secured by company stock. Under a stock finance arrangement, a
financier provides funds to a firm for the purchase of stock to "furnish accommodation
to the [firm] which will tide [it] over for the period between acquisition and sale of
stock". 15 For example, a motor vehicle dealer without sufficient capital funds to

10
Seealso Chapter 17.
11
SeeChapter 17.
'' See/-laI/mark Cards Inc v Y,111Choy Ltd [2012) I MKLRD 396; Welsh Development Age11cyv Export Fi11anceCo
Ltd [ 1992)BCC 270.
'3 Roy M Goode,"Some Aspectsof FactoryLaw- I: The Acquisition of Rights in the Receivables"[1982)Joumal
of Business Law 240, 240.
" That is, the amountpaid by the factor for the receivable.sisless than the aggregateface value of the receivables
(sumsdue by thedebtorsto the company).At law, the discountreceivedby the factor is not regardedasan interest
charge:Welsh Development Agency v &port Finance Co Ltd [1992) BCC 270.
" Roy M Goode,Commercial Law (3rd edn, Penguin2004) 739.
 METHODS OF CORPORATE FINANCING 619

acquire a reasonable level of stock (i.e. cars) might obtain stock finance so that it
has funds to make the purchases. Commonly, the borrowing is backed up or secured
by the company's stock. 16 The value of stock as security depends on the quality, age,
perishability and marketability of the inventory.

Commercial paper
Commercial paper: used by relatively large companies. Relatively large companies 13.015
might raise short-tenn loan finance by the issue of commercial paper. Commercial
paper is a fom1 of debt instrument, usually with a maturity date of less than 12
months (hence commercial paper is a form of money market instrument 17). The issuer
borrows on the conunercial paper and the holder of the commercial paper is entitled to
repayment from the issuer. Conunercial paper can be issued at a discount or issued as
interest-bearing. Commercial paper may be in the form of promissory notes payable
to bearer.

2.2.3 Long-term .fi11a11ce

The various sources of long-term finance are discussed below. 13.016

Tenn loans and revolving line of credit

Term loan. A term loan lasts a specific term, namely repayment is made in accordance 13.017
with a fixed period. Where the amount of the loan required is large, that loan can be
provided by a group of banks, in which case the loan is a syndicated bank loan or club
loan. 18
Revolving line of credit. A revolving line of credit or revolving facility involves an 13.018
agreement by a bank to lend a specific amount of funds, and to allow that amount to be
re-borrowed once repayment is made. A company may be able to secure a larger line
of credit with favourable terms if it is willing to pledge an asset as collateral, in which
case the line of credit will be an asset-backed line of credit.

Leasing
Lease and hire-purchase agreements. The lease can be used to finance specific 13.019
assets such as motor vehicles, IT and office equipment, as well as construction and
manufacturing plants. A form of lease often used in commerce is the hire-purchase
agreement. Commonly, a hire-purchase involves a financial institution purchasing
the equipment, with the equipment then leased to the customer (the lessee) for an
agreed period. At the end of the term, the transaction is finalised by the payment of
the outstanding balance, at which time the ownership over the leased assets can be
transferred to the lessee at the option of the lessee. From the practical perspective, a
hire-purchase agreement is similar to a credit sale where the person acquiring the assets
has inunediate use of the assets but can make the payments by way of instalments.
However, in a credit sale, the person acquiring the assets obtains immediate ownership
of the assets, which is not the case for a hire-purchase. A hire-purchase is also

1
• This is usually by way of a floa1ing charge over 1hc stock: sec Chapter 17.
17 Money market ins1rumcnts have less than 12 months to malurity.
18 For a definition of syndicated loan and club loan, sec below paras.13.070 and 13.071.
620 EQUITY AND DEBT FINANCING

distinguished from a conditional sale (where the seller retains ownership of the assets
until all the instalments are paid) in that a hirer under a hire-purchase agreement has
the option to buy the assets at the end of the hire-purchase period.
13.020 ln finance lease equipment must be returned at end. The finance lease is distinguished
from a hire-purchase in that the equipment must be returned to the lessor at the end of
the lease period. However, finance leases are structured such that the minimum period
of the lease corresponds with the expected working life of the equipment.

Project financing
13.021 Project financing is financing of particular economic unit. Project financing is "a
financing of a particular economic unit in which a financier is satisfied to look initially
to the cash flow and earnings of that economic unit as the source of funds from which a
loan will be repaid and to the assets of the economic unit as collateral for a loan". 19 For
example, a project finance deal could be created by an industrial company providing
capital for a subsidiary to be formed to build and operate the project.
13.022 Project financing focuses on single asset for repayment. In contrast to corporate-
style financing, project financing providers do not look at the company's balance sheet
but focus on a single asset (the project) for repayment. Project financing is used to
finance resources (such as an oil pipeline) or infrastructure projects (such as roads,
ports, railways, power stations, hospitals or water and sewage plants).

Private placements
13.023 Private bond issue. A private debt placement is a bond issue made to a small group
of investors as distinguished from one that is made on a public market. Borrowing
through private placement is less costly than publicly issued bonds, as the latter will
incur regulatory costs. 20
13.024 Private placements in respect of raising share capital. Private placements may also be
made in respect of raising share capital. A method for obtaining a more pennanent form
of finance privately is to increase the company's privately procured share capital. A private
placement of shares involves the allotment of a block of shares to a particular investor or
a selected number of investors. These investors may be existing shareholders or persons
outside the company who are to become new shareholders. Private placements can,
for example, be made with institutional investors and corporate investors. Institutional
investors, such as mutual funds, unit trusts, pension funds, charities and insurance
companies, generate incomes through investments, including investments in private or
public companies. Some established corporations invest in private companies, often for,
in addition to investment returns, the achievement of the former's strategic objectives.

Rights issues
13.025 Pro rata offer of shares to existing shareholders. Another typical method of
increasing share capital is a rights issue. A rights issue is an offer of new shares to

'9 Peter K Nevitt, Project Financing(7th edn, Euromoney 2000).

l<l For prospectus requirements for public bond issues, see Chapter 16.
 THE DISTINCTION BETWEEN EQUITY FINANCE AND DEBT FINANCE 621

existing shareholders in proportion to their existing holdings. Tn a renounceable

rights issue, existing shareholders who do not wish to take up the new shares can sell
the rights to subscribe for the shares to others, who may then exercise the rights to
obtain the shares. In a 11011-renounceablerights issue, the existing shareholders are not
permitted to assign their rights, and the rights will lapse if the existing shareholder
decides not to subscribe for the shares.

Publicly issued debt

Debentures, notes and corporate bonds. Publicly issued debt takes the fo1m of 13.026
debentures, notes or corporate bonds. A company can raise finance from an issue of
such debt instruments to the public. The holders of these debt instruments are creditors
of the company and are entitled to periodical interest payments and repayment of the
face value of the instrument at maturity. Notes are medium-tenn debt instruments
(with terms between 1 and 10 years), while bonds are longer-term debt instruments
(e.g. up to 30 years). The term "debentures" can be used interchangeably with notes
or corporate bonds, but there is also a common law meaning given to the term
"debenture" (a document evidencing a debt) which is wider than the usual meaning
of notes or bonds.21

Initial public offerings (!PO)

IPO is first public issue of company's share capital to public. The owners of a private 13.027
firm might wish to take the firm public-i.e. raising share capital from the public. This
might be done where the fim1 requires significant long-term capital to fund expansion
or diversification of the firm's business. Going public can also enhance the prestige
or reputation of a firm. The process for going public is referred to as an initial public
offering (IPO). An IPO is the first public issue of a company's share capital to the public.
The conduct ofan IPO is governed by the prospectus provisions in the: (i) Companies
(Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32); (ii) the Securities
and Futures Ordinance (Cap.571 ); and (iii) the Listing Rules of the Hong Kong Stock
Exchange. The shares to be offered through an IPO can be either new shares through
which new capital is raised, or existing shares sold by existing shareholders. The former
is termed as a primary offering and the latter, a secondary offering.

3. THE DISTINCTION BETWEEN EQUITY

FINANCE AND DEBT FINANCE

Legal categories for sources of corporate finance. The discussion in the previous 13.028
section provides an outline of the different sources of finance for a company in practice.
Sources of corporate finance can be divided into the following two legal categories:

1. equity finance; and

2. debt finance.

21 On debentures, see further Chapter I 7.

622 EQUITY AND DEBT FINANCING

13.029 Most sources of finance can be grouped as equity or debt finance. Most of the
sources of finance discussed in the previous section can be grouped within one or other
of these two categories. For example, equity finance covers share capital contributed
by the subscribers or founder members of the company; and capital raised in return
for the issue of shares to business angels or venture capitalists, or pursuant to private
share placements, rights issues or IPOs. Debt finance covers the various types ofloans
and borrowings discussed above, and the issue of debt instruments or debt securities
by a company. Some of the other types of financing techniques discussed above do not
fit within the debt or equity categorisation-for example, while the sale of receivables
has a commercial function of putting the company into funds similar to a loan, the
legal nature of the transaction is an outright sale.
13.030 Equity finance contributed by owners; debt finance raised through borrowings.
Equity finance is the capital contributed by the company's proprietors. It is constituted
by the share capital contributed by shareholders or persons proposing to be members
of the company. Debt finance is the part of the firm's finance that is raised through
borrowings. The suppliers of debt finance can be either external lenders or creditors,
or the shareholders themselves.
13.031 Share capital is risk capital; while claims of creditor fixed in sense company
obliged to repay debt. From the perspective of the investor or person providing funds
to the company, share capital is risk capital in the sense that if the company's business
is unsuccessful, shareholders are likely to lose part or all of their capital input. When
the company is wound up, members only receive a return of their capital contribution
after all of the creditors are paid in full. Shareholders also do not receive any returns
on their investment dming the life of the company if the company does not earn any
profits. On the other hand, if the company has made profits, the shareholders can share
in the profits, through dividend payments, while the company is a going concern;
and the shareholders are also able to share in surplus assets in a winding-up of the
company if there are assets remaining after paying off the creditors and returning
capital to the shareholders. Shareholders are therefore sometimes called "residual
claimants" of the company. The claims of creditors, 22 in contrast, are fixed in the sense
that irrespective of the success of the company's business endeavour the company is
obliged to discharge its debt obligations when due. Thus lenders are entitled to receive
periodical interest payments (if such is provided for in the loan agreement) regardless
of whether the company is making any profits.
13.032 Shareholders members of company; creditors do not have such internal control
but can exert some control through loan documentation. Shareholders are members
of the company and creditors (who are not also shareholders) are not. Shareholders
are therefore in a position to exercise a certain level of internal control. Under the
company law regime, shareholders have control over the company's constitution, the
company's management as well as the company's economic surplus. Creditors, in
contrast, do not have the same power of internal control. It is however possible for

22
"Creditors" here refer to voluntary creditors, as distinguished from involuntary (e.g. tort) creditors.
 THE DISTINCTION BETWEEN EQUITYFINANCEAND DEBT FINANCE 623

creditors to exert some control through the terms of the loan documentation, such
as terms which restrict further borrowing by the company or which give the creditor
powers to appoint a receiver or receiver and manager.23 Depending on the size and
term of the loan, it is also possible for a lender to obtain a contractual right from
the company to appoint a nominee to the board of the company to protect its loan
investment.24
Debt finance generally cheaper but more risky. From the company's perspective, 13.033
debt finance is generally considered as cheaper but more risky. The creditors do not
participate in the company's profits. The risk of raising finance through debt will
mate1ialise when the company's profits are inadequate for discharging the firm's debt
obligations. An advantage of equity finance is that there is no need for making dividend
payments when the company does not have the means to do so.
Share capital long-term; debt finance can be short term or longer. Share capital 13.034
generally provides the company with long-term or even permanent finance. Debt
finance, on the other hand, helps satisfy the company's need for short-term, medium-
term and long-term finance.
Hybrids of equity and debt finance; preference shares. Some corporate finance 13.035
instruments are hybrids of equity and debt finance. These types of securities have
the characteristics of both debt and equity. Examples include preference shares,
convertible preference shares and convertible bonds. Preference shares have some
feahues of a debt instrument, such as the preference shareholders' right to a fixed
amount 25 of dividends each year (though still subject to the company having
available profits), their right to receive dividends before ordinary shareholders,
their priority over ordinary shareholders in the return of share capital in a winding-
up and their lack of voting rights at company meetings except on matters affecting
their rights. 26 Also, in determining the company's gearing ratio, 27 preference shares
carrying fixed rate dividends are treated as equivalent to money borrowed at a
fixed-rate interest. 28
Convertible preference shares. Convertible preference shares are preference shares 13.036
that offer the holder the option of converting them into ordinary shares on some future
date. Convertible debentures or notes give the holder the option to have their debt
securities redeemed for shares of the issuer. Debt securities may be mandatory or
optional convertible securities. The former are converted by the company regardless of
the wishes of the holder. The latter give the holder the option to convert.29

23 See Chapter I8.

24 Levin v Clark (1962) NSWR 686.
25 By contrast, even where the company has profits, the amount of dividends that ordinary shareholders receive (if
any) is dependent on the company's determination for the year in question.
26
See para. I 3.045 below.
27 For the meaning of gearing ratio, see para.13.083 below.
,s RP Austin and I M Ramsay, Fol'(/:~Principles ofCoq)orations Law ( 14th edn, LexisNexis 2010) 998.
29 Ibid., 1004.
624 EQUITY AND DEBT FINANCING

4. NATURE AND TYPES OF EQUITY

4.1 General

13.037 Shares. For companies having share capital, persons become members of the company
by acquiring one or more shares in the company and by becoming registered in the
company's register of members. 30 A "share" is defined in the Companies Ordinance
(Cap.622), s.2 to mean a share in the share capital of a company. Persons acquire
shares in a company either through an issue of shares by the company to the person,
or by acquiring the shares from an existing shareholder through either a transfer or
transmission of the shares.
13.038 Members generally shareholders but not necessarily so. For corporations generally,
"member" does not necessarily mean "shareholder" and it would be necessary to look
at the constitution of the corporation or the legislation under which the corporation was
established to determine the status of shareholders in the company and to determine
who the members are. 31 Broadly speaking, the shareholders ofa company having share
capital will be the members. A member is defined to be a person registered in the
company's register of members. 32 There is no statutory definition of a shareholder, but
the term refers to a person holding the legal title to shares. Holders of bearer shares
are shareholders, but primajcicie, 33 they are not members in that they are not registered
in the register of members. 34 It should be noted though that it is no longer possible to
issue bearer shares in Hong Kong since the enactment of Cap.622 (see para.13.055
below).

4.2 Nature of a share

13.039 Share property in their own right, independent of assets. The holders of shares in a
company are generally regarded as owners of the company. In earlier times, in relation
to joint stock companies, 35 this notion of ownership was reflected in the law in the
sense that shareholders were seen as beneficially owning the assets of the company.
However, by the mid-19th century, the share came to be regarded by the courts as
an autonomous form of property.36 Shareholders were no longer seen as holding any
proprietary interests in the company's assets. The prope1ty owned by a shareholder
is the share itself and not some portion of the assets of the company. According to
Paddy Ireland, this transformation in the legal nature of the share resulted from the
development and expansion of the stock markets in the 19th century. With such stock
markets in place, shares were transformed into readily marketable commodities

l<l Cap.622, s.2 (definition of"member") and s.112; E11virocoLtd v Fa1:itadSupp(yAIS [2011] UKSC 16, (2011] I
WLR 921, [38]-(40]. Seealsopara.14.101 in Chapter 14.
;, Re Bawli11gand We/bys Contract [ 1895] I Ch 663.
'l Cap.622, s.112.
" As to when holders of bearer shares can be treated as members, sec predecessor Cap.32 s.97(5), discussed below.
" Webb, Hale & Co v Alexandria Water Co ( 1905) 21 TLR 572.
" Sec Chapter I .
" Bligh v Bre111(1837) 2 Y & C Ex 268; Edwards v Hall (1855) 6 De GM & G 74; Maca11rav Northem Assurance
Co Ltd (1925) AC 619.
 NATUREAND TYPES OF EQUITY 625

which could be bought or sold with ease. Shares could be realised as money without
liquidating the assets of the company through a winding-up. Therefore, shares came to
be seen as rights to profit with a value of their own, which could be freely bought and
sold in the marketplace. This qualitative change in the nature of shares then came to be
reflected in the law, with the courts regarding shares as a form of property in their own
right, independent of the assets of the company.37
Share form of intangible property. A share, then, is today regarded as a form of 13.040
intangible property in the nature of a chose in action 38 which is composed of a bundle
of rights and carrying with it obligations as derived from the company's constitution
and under the companies legislation. 39 The rights constituting a share include rights
to vote (in the general meeting), rights to dividends and rights to a return of capital
upon winding-up, and other rights of shareholders as set out in the articles and under
statute. Cap.622, s.134 states that a share is personal property. The question of whether
shares are in the form of real property or personal property gave rise to considerable
difficulties in the early 19th century due to the then prevailing view that shares
conferred on shareholders a beneficial interest in the company's assets. 40 The statutory
provision affirmed that shares were in the nature of personal property, although this
result also followed once the courts accepted that a share is an item of autonomous
property independent of the company's assets.
Shares of same class fungibles. Shares of the same class (having the same rights) are 13.041
indistinguishable from each other and have been regarded by the courts as fungibles.41

4.3 Types of shares

4.3 . .l lntroductio11
Different classes of shares. If permitted by the company's articles, a company's share 13.042
capital can be divided into different classes of shares, for example, ordinary shares
and preference shares. 42 Where the company needs to attract capital contributors
with different rights or obligations, it may issue different classes of shares whereby
holders of shares in one class can have rights or obligations different from those
for shareholders of another class. There could be differences in relation to dividend
rights, voting rights, rights to return of capital etc. The categories below set out some

31 See Paddy Ireland, "Capitalism without the Capitalist: The Joint Stock Company Share and the Emergence of the
Modern Doctrine of Separate Corporate Personality" ( 1996) 17 Journal of legal Histo,y 41.
" Colonial Bank v Whi11ney(l886) 11 App Cas 426.
39 See Borla11d'.tTn,stee v Steel Brothers & Co Ltd [1901] I Ch 279,288; Re CA Pacific Finance Ltd (i11liq)
(No I) [1999] 2 l➔ KLRD I; Che1111g Pui Yt,e11v Worldcup lnve.wne111sInc (2009) 12 HKCFAR 31, [28]; and
see generally Robert R Pennington, "Can Shares in Companies be Defined?" (1989) 10 Company lawyer 140.
44 See Chantal Stebbings, "The Legal Nature of Shares in Landowning Joint Stock Companies in the Nineteenth
Century" (1987) 8 Journal o,flegal History 25.
" Re CA Pacific Finance Ltd (i11liq) (No I) [ I 999] 2 HKLRD I; and sec Hunter v Moss [ I994] I WLR 452; Re
Harvard Securities lid (in liq) (1997] 2 BCLC 369; Eva Michclcr, "Legal Nature of Securities: Inspirations
from Comparative Law" (http://ssrn.com/abstract=l48 l427). Goode regards ownership of share.s as being co-
ownership of a single asset (the issued share capital) rather than ownership of individual fungible assets: Roy
Goode, "Arc Intangible Assets Fungible?" [2003] Lloyd's Maritime and Commercial Law Quarterly 379.
" Andrews v Gas Meter Company [ I 897) I Ch 36 I; Derek French, Stephen Mayson and Christopher Ryan,
Mayson. French and Ryan 011 Company law (31" edn, OUP 2014-15) [6.2.4).
626 EQUITY AND DEBT FINANCING

common classes of shares, but these categories are not exhaustive. A company can
devise a class of shares with whatever 1ights or obligations that it considers desirable,
subject to the articles and to any restrictions under Cap.622. Different classes of shares
can be referred to in any way the company wishes, such as Class A Shares, Class B
Shares, etc.
13.043 Not compulsory that different classes of shares he set out in constitution. Usually, if
there are different classes of shares, this would be set out in the company's constitution.
However, this is not a compulsory requirement under Cap.622. The particular rights
attached to shares would accordingly be set out in the company's constitution or a
separate contract between the company and the members of the particular class. The
rights can be incorporated into a separate contract with the members through the terms
of issue of the shares. Incorporation of the terms at the time when the holder acquires
the shares is simply a matter of contract law. It is also a matter of construction of
the relevant documents as to what the specific rights are.43 If the company wishes to
subsequently alter the rights attached to a particular class of shares, it can do so but
it would need to comply with requirements in Cap.622 and any requirements in the
company's constitution. 44

4.3.2 Ordinary shares

13.044 Ordinary shareholders bear greatest risk but have most to gain. If the company
has only one class of shares, then these would simply be the ordinary shares of the
company. Where the company has preference shares (as to which, see below), then
the ordinary shares will be the shares which do not have preferential rights and which
would have residual 1ights to surplus profits and surplus assets4; in a winding-up. The
holders of ordinary shares are the residual bearers of risk in a company. They bear the
greatest risk of loss of their investment as they are the last group of persons to receive
a return on their investment (after all other claimants on the company have been paid).
Conversely, they have the most to gain from the company's enterprise, as they will be
entitled to all the profits or surplus assets of the company after the fixed amounts of
the claims of creditors and preference shareholders are paid.

4.3.3 Preference shares

13.045 Preference shares: common rights. Companies sometimes issue preference shares,
which commonly carry the following 1ights:

• A fixed right to dividends annually as long as the company has profits

available for distribution in the particular year;
• A right to receive dividends before ordinary shareholders;

43 Scollish l11surtmce v Wilsons & Clyde Coal Co [1949) AC 462.

" Sec Chapter 14.
., In a winding-up, the asscrs oft he company arc used to pay off crcdi.tors first. The members will then receive the
amounrs of capital contributed. If there are any surplus assets left over, then these can be distributed to ordinary
shareholders.
 NATUREAND TYPES OF EQUITY 627

• Priority over ordinary shareholders in the return of share capita] in a winding-

up; and
• Limited voting rights (e.g. having a right to vote at general meetings only
dw-ing periods when dividends are in arrears, or on proposals for a reduction
of capital, or on a proposal for winding-up).

Preference shares: generally necessary for rights to be specified in constitution. 13.046

The particular rights attached to preference shares could differ from company to
company. Again, it is necessary to look at the articles and the terms of issue or other
contract (if any) between the company and the members taking up preference shares.
While the 1ights set out in the above list are usual for preference shares, they are not
necessarily applicable in any particular case. It will generally be necessary for the
rights to be specified in the constitution or other contract. For example, the fact that
preference shareholders are expressly given a right of priority in receiving dividends
does not necessarily mean that the shareholders will also have a priority to the return
of capital in a winding-up. 46
Preference shares exhibit some features of debt. Preference shares provide a form of 13.047
equity financing which exhibits some features of debt. This can be seen, for example,
from the preferred dividend rights which would give preference holders a greater
degree of certainty to an income-stream from the investment compared with ordinary
shareholders (although the income-stream is still less certain compared with a lender
or debenture-holder who may have a fixed right to interest payments regardless of
the company's profitability). Accordingly, preference shares could be attractive to
investors who are slightly risk-averse and who wish to have an investment with a risk
level in between ordinary shares and classic types of debt. An added advantage of
preference shares for investors, as compared to debentures, is that preference shares
are a more liquid form of investment. Preference shares quoted in the stock exchange
may be more marketable than debentures listed for quotation. 47
Benefits of issuing preference shares to existing ordinary shareholders. The issue 13.048
of preference shares instead of ordinary shares could also be desirable from the point
of view of existing ordinary shareholders if they wish to limit a dilution of their control
of the company or in their investment. Equity capital can be raised without diluting
control because of the restricted voting rights of preference shareholders. Also, the
claims of ordinary shareholders on surplus assets in a winding-up are not diluted if
the preference shareholders are not conferred with a right to such surplus. From the
company's point of view, an advantage of raising finance through issuing preference
shares is that the company is not obliged to make dividend payments in a given year.
In contrast, where finance is raised by way of borrowings, the company would have an
obligation to make repayments, regardless of the company's state of financial health
or business needs.

"' Re London India Rubber Co (1867-68) LR 5 Eq 519.

" RP Austin and IM Ramsay, Fords Principles of Corporations Law (15th edn, LexisNexis Butterworths. 2013)
1049.
628 EQUITY AND DEBT FINANCING

13.049 Cumulative preference shares. "Cumulative preference shares" are preference

shares where holders have a cumulative right to dividends. A cumulative right means
that, where the profits for a particular year are insufficient to pay the dividends to
which preference holders are entitled in full, the deficiencies are to be made good
out of profits (if any) in subsequent years. For example, the fixed dividend rights of
the holders might be specified to be some percentage of the paid-up amount of the
shares, say I 0 percent. If the company does not have profits in one year but does have
sufficient profits in the following year, then holders of cumulative preference shares
will be entitled in that second year to receive not only the 10 percent dividends for
that year but also the 10 percent from the previous year which had not been declared.
If the preference shares give the holders preferential dividend rights (i.e. a right to be
paid dividends before the ordinary shareholders), then there is an implication that the
preference shares are cumulative preference shares, 48 unless the constitution or terms
of issue indicate otherwise. 49
13.050 Participating preference shares. "Participating preference shares" are preference
shares which give the holders the right to participate in surplus profits or surplus
capital. For example, a company could confer on preference shareholders priority to
a fixed dividend, and then a further right to dividends after distribution of a fixed
amount to ordinary shareholders. Unless there is indication to the contrary, shares with
preferential dividend rights will not be regarded as conferring rights to participate in
surplus profits. 50 Similarly, shares with preferential rights (i.e. priority) to a return of
capital will not be regarded as conferring a right to participate in surplus assets in a
winding-up unless the constitution or terms of issue provide otherwise. 51
13.051 Convertible preference shares. "Convertible preference shares" are preference shares
which can be converted into ordinary shares at some specified future date, pursuant
to the terms of issue. Usually, the holder of the share is given the option of electing
whether or not to have the shares converted into ordinary shares, although it is also
possible for the shares to be issued with the company having the right of conversion.
An issue of convertible preference shares can allow a company to raise finance at less
cost compared to the issue of ordinary shares-e.g. dividend rates are often lower
than interest rates for the issue of debt securities as the convertible preference share
may have value for the holder who can participate in the company's profits in future
following conversion. Also, for the investor, commonly the conversion rate is such that
the ordinary shares are effectively issued at a discount to market price at the time of
conversion.

4.3.4 Redeemable shares

13.052 Redeemable shares can be bought back by company. Redeemable shares are shares
which can be "redeemed": that is shares which, pursuant to the terms of issue, can be
bought back from the shareholder by the company at the option of the company or

48 Sec Webbv &:,rle(I 875) LR 20 Eq 556.

49 Sec Stt1ples v Eas1ma11Photographic Materials Co [ I896) 2 Ch 303.
'° Will v United Lanka! Pla11tationsCo Ltd (1914) AC 11.
" Scottish insurance Corp Ltd v Wilsons & C(),de Coal Co Ltd [ 1949)AC 462.
 NATUREAND TYPES OF EQUITY 629

the shareholder, after a certain period or on a fixed date. The redemption means that
the company pays back the value of the share to the shareholder. The shares which
are returned to the company are cancelled upon redemption: Cap.622, s.269. The
maintenance of capital doctrine 52 would prevent the possibility of a company issuing
redeemable shares. However, Cap.622, s.234 overrides such restrictions to allow
companies to issue redeemable shares so long as the company's articles do not prohibit
the company from issuing such shares.
For investors redeemable shares can be realised at earlier time. For investors, one 13.053
attraction of redeemable shares is that they can realise their investment at an earlier
time rather than upon the winding-up of the company. This factor may be important if
the shares are thinly traded (that is where there is a lack of a market for the shares such
that it is difficult for a holder of the shares to sell to other investors). The company
might wish to issue redeemable shares where the company seeks only short-term
capital.
Redeemable shares must not be issued when no issued shares. A company must not 13.054
issue redeemable shares at a time when there are no issued shares in the company other
than redeemable shares: Cap.622, s.234(3). Redeemable shares may not be redeemed
unless they are fully paid: Cap.622, s.268. The directors may determine the terms,
conditions and manner of redemption if they are authorised to do so by the company's
articles or by resolution of the company, but such terms and conditions are subject to
the provisions in Cap.622, ss.257 to 266. These provisions also apply in relation to
share buy-backs generally and are discussed in Chapter 15.

4.3.5 Bellrer shllres

Bearer shares: warrant that bearer entitled to shares specified therein. Bearer 13.055
shares are shares which are not registered in the company's register of members. Under
the predecessor CO, s.73 (repealed), it was possible for a company to issue bearer
shares. That section provided that a company limited by shares may, if authorised by
its articles, issue under its common seal a warrant stating that the bearer of the warrant
is entitled to the shares specified therein. The warrant may be issued with coupons for
the payment of future dividends on the shares included in the warrant. Bearer shares
could provide certain advantages, for example, ease of transferability oflegal title (as
transfers are not dependent on registration by the company), and the identity of the
owner is not shown on the public register of members. However, bearer shares were
not common due to problems of theft and fraud.
Under Cap.622 no longer possible to issue bearer shares. Under Cap.622, s.139, 13.056
it is no longer possible for companies to issue bearer shares. It is thought that bearer
shares are undesirable from the perspective of money-laundering due to the lack of
transparency in the recording of share ownership and transfers. 53 Bearer shares which

" Sec Chapter 15.

" Financial Services and Treasury Bureau, CO Rewrite: Draft Companies Bill Second Phase Co11s11/tation
-
Co11s11/tatio11
Paper (May 20 I0) 63.
630 EQUITYAND DEBT FINANCING

are in existence immediately before the commencement of Cap.622 can continue to

exist, until such time as they are surrendered for cancellation.s4
13.057 Share warrant document of title for bearer shares. The share warrant.SSis the
document of title for the bearer shares. This document has been held in England to be
a negotiable instrument,56 with the effect that legal title to the shares can be transferred
by agreement and delivery of the share warrant to the transferee. In Cheung Pui Yuen
v Worldcup Investments Jnc,57 the Court of Final Appeal held that share warrants to
bearer are not negotiable instruments, and that notice of the transfer must be given to
the company before the legal title to bearer shares could be transferred. 58 However,
the earlier English decisions that share warrants are negotiable instruments were not
discussed in the judgment. The court took the view that share warrants could not be
negotiable instruments as negotiable instruments are documents of title to money,
while share warrants do not constitute a promise of payment as such. However, it is
recognised that while share warrants are different from other negotiable instruments
in this regard, the classification of share warrants as negotiable instruments can be
justified on the basis that the ultimate right of a shareholder is to his share of any
surplus moneys in a winding-up. 59
13.058 Must state issue of warrant. Where a share warrant is issued to bearer, the register
of members must state the fact of the issue of the warrant, a statement of the shares
included in the warrant and the date of the issue of the warrant. 60
13.059 Entitled to be registered upon surrender of share warrant. Under Cap.622,
s.139(2), the holder of a bearer share issued before the commencement of Cap.622 is
entitled, on surrendering it for cancellation, to have the bearer's name entered in the
register of members.
13.060 Prima facie not member. As mentioned previously, since the holder of a bearer share
is not registered on the register ofmembers,primafacie the holder is not a member of
the company. However, the articles may deem the holder to be a member either to the
full extent or for any purposes as specified in the articles. 61

4.4 Stock

13.061 Shares same as stock but shares indivisible and stock can be split. A share is
indivisible in that it is not possible for a shareholder to transfer a fraction of a share.

54 See Cap.622, s.139.

" Share warrants to bearer are different from the type of share warrants traded on the stock exchange. The latter are
options to acquire shares in a company.
56 Webb, Hole & Co v Alexandria Water Co ( 1905) 21 TLR 572; Rumbo/Iv Me1ropolira11 Bank ( 1877) 2 QBD 194.
Note also the predecessor CO, s.73(3) which expressly provided that share warrants may be transferred by
delivery of the warrant.
57
(2009) 12 HKCFAR 3 I.
58 As required for 1he assignment of choses in ac1ion generally: Law Amendment and Reform (Consolidation)
Ordinance (Cap.23), s.9.
" Roy Goode, Commercial ltnv (3rd edn, Penguin 2004) 477.
60 Predecessor Cap.32 s.97(1 ), which continues to apply after the commencement of Cap.622 in relation to any
share warrnnts issued by the company before the commencement of Cap.622: Cap.622, Sch. I I, s. 14.
1
• Cap.622, s.139(5).
 NATUREAND TYPES OF DEBT 631

For example, ifa share has a value of$2, it is not possible for the shareholder to seek to
transfer half the share for $1. By contrast, stock can be split up into as many portions
as desired and subdivided into any fraction which can be transferred. 62 For example, a
person holding stock with paid-up value of $100 could sell any amount or fraction of
that stock. Apart from this characte1istic, stock is the same as shares. 63
Under Cap.622 companies no longer have power to issue stock. Under the 13.062
predecessor CO, s.53( l )(c), a company could, if authorised by its articles, convert any
of its paid-up shares into stock (and vice versa). Under the current Cap.622, s.138,
companies no longer have the power to issue stock. Stock had become uncommon in
Hong Kong and there is no perceived need to retain the concept. Any stock on issue
immediately before the commencement of Cap.622 can continue to exist. Such stock
can be converted into shares 64 (but once converted, the shares cannot be reconverted
back to stock).

5. NATURE AND TYPES OF DEBT

Loan credit. Where the company needs funds in addition to its share capital or its 13.063
accumulated profits for the purposes of operating its business, it is necessary for it to
obtain credit. Credit in this context means an agreement under which a person (the
debtor) receives something of value and agrees to repay another (the creditor) on a
future date. Credit therefore involves financial accommodation provided by a creditor
to the debtor.65 The type of credit (and debt) discussed in this section is loan credit,
which involves borrowing. (The other form of credit is sale credit, namely where the
debtor is allowed to obtain goods or services first but with deferred payment.)

5.1 Unsecured and secured loans

Unsecured or secured loan. In terms of the level of security, a loan can be unsecured 13.064
or secured. An unsecured loan normally entails a larger interest payment as compared
to secured loans, as the 1isk of the former is higher. The risk that different types of
secured loans involve may differ too. A loan secured by a fixed charge, for example,
affords the charge-holder a higher level of security than, for example, one based on a
floating charge, as the holder of the latter ranks behind certain classes of unsecured
claimants, in the event of the company's winding-up, under the statutory preferential
creditor provisions. 66
Fixed and floating charges. A fixed charge gives the chargee an immediate proprietary 13.065
interest over a specific asset, which cannot be disposed of by the chargor without the
informed consent of the chargee. A floating charge is said to hover above the whole of

62
Sec Morrice vAylmer(l874-75) LR 7 HL 717, 724-725 .
•, Ibid.
"' Cap.622, ss.174-175 .
., CJ Oi111011dv L<>vell
[2002) 1 AC 384, which dealt with the meaning of"crcdit" in a particular statutory context
(Consumer Credit Act 1974 (UK)).
"' Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), s.265(3B). See Chapter 20.
632 EQUITYAND DEBT FINANCING

the borrowing company's assets, allowing the company to deal with its assets in the
ordinary course of business. The floating charge will "crystalise" upon the occurrence
of a certain event, usually the company's default, in which case the floating charge will
become a fixed charge. 67

5.2 Debt subordination

13.066 Debt subordination: agreeing not to be paid until another creditor is paid. It is
possible for the creditors to determine the risk of unsecured debts consensually by way
of debt subordination:

"Subordination is a transaction whereby one creditor (the subordinated or junior

creditor) agrees not to be paid by a borrower or other debtor until another creditor
of the common debtor (the senior creditor) has been paid."68

The two common ways of creating a debt-subordination are subordination trust or

contractual subordination. Under the former arrangement, the junior creditor agrees
to hold any dividends or distributions received by him or her on trust for the senior
creditor. Under a contractual subordination, the junior creditor agrees with the
debtor that so long as the senior debt is outstanding, the senior debt should be paid
in full before the junior debt becomes payable. As the junior debt is not payable in
the event of a winding-up of the company until the senior debt is paid, it possesses
some characteristics of equity. That is why defe1Ted unsecured notes are termed as
"mezzanine finance". Subordination can be a useful tool for the company to obtain
further unsecured loans, if insiders (e.g. directors of small companies or the holding
company of the borrower) are willing to subordinate their claims to those of the new
lenders (senior creditors). 69

5.3 Debentures and debenture trusts

13.067 Debenture: meaning. At common law,the debenture has various meanings. A debenture
thus means a written acknowledgement of a debt owed by the issuing company, or
document not only acknowledging the debt but also charging the company's assets
with the payment of the debt. Alternatively, it means an instrument acknowledging
the company's debt, charging the company's assets with the payment of the debt, and
restricting the company's freedom of giving any prior charges over the property. 70
Thus, when the word "debentures" is used in the second or third meaning mentioned
above, which is often the case, it means a written acknowledgment of a secured debt.
13.068 Debenture trust. A debenture trust is a trust created to protect the interest of debenture
holders. Under such a trust, the trustee holds the debentures on trust for individual

67
For more on charges, see Chapter 17.
68 PR Wood, The law of Subordinated Debt (Sweet & Maxwell, London, 1990) I.
69 For other purposes and func1ions of subordina1ion, sec P R Wood, The Law of Subordinated Debt (Sweet &
Maxwell, London, 1990) 2-3.
;,i English & Scottish Mercantile Investment Co lid v Brunton [I 892) 2 QB I, 9.
 NATUREAND TYPES OF DEBT 633

debenture holders as beneficiaries. A debenture trust is a useful tool to coordinate the

relationship between the borrower and debenture holders and to protect the interests
of the latter. When the number of debentures issued is large, it is convenient to protect
various lenders through one person, who is in a position to receive interest or otherwise
take enforcement actions on behalf of all debenture holders. It is also possible for the
debenture trustee to be appointed as a nominee director to reinforce the protection of
the lenders.
For further discussion on debentures and debenture trusts, see Chapter 17. 13.069

5.4 Syndicated loans

Syndicated lending when number of financial institutions, through agent, lend 13.070
money or provide other finance facilities to borrower. Syndicated lending can be
described as "a single agreement under which a number of financial institutions, acting
through an agent, lend money or provide other finance facilities to a borrower". 71 The
rights and obligations under a syndicated lending project are several rather than joint and
several. Syndicated lending is often necessary where the amount a borrower is seeking is
large and it is difficult to find a lender that would be willing to bear the lending risk alone.

5.5 Club loans

Club loans: borrower obtains loans from number of financiers acting parallel 13.071
to each other. The club loan is a different mode of multi-lender financing. Under
this mode of lending, the borrower obtains loans from a number of financiers acting
parallel to each other and under materially the same terms. A club loan is different
from a syndicated facility in that the former is not led by an "agent" (e.g. a lead bank)
and also in that there is an absence in the former of typical syndicated lending terms,
such as unified funding mechanics, payment distribution provisions and a syndicate
voting mechanism. In a borrower's market, it is possible for a strong borrower to obtain
more favourable terms (such as pricing and loan covenants) under a club loan facility,
as compared to a syndicated loan project, partly due to the lack of a lead institution.

5.6 Junk (high-yield) bonds

Junk bonds; high risk and high return. Bonds with high-risk and high-retum 13.072
characteristics are called junk bonds or high-yield bonds. They are rated below
investment grade by rating agencies.

5.7 Redeemable bonds

Redeemable bond can be redeemed before maturity date. A redeemable bond is a 13.073
bond that the issuer has the right to redeem before its maturity date. The bond, when

71
J O'Sullivan, "The Roles of Managers and Agents in Syndicated Loans" ( 1992) 3 Journal of Banking cmd
Finance Law and Practice 162, 163; Mallesons Stephen Jaques Solicitors and Attorneys. Australian F-,na11ce
Law (6th edn, LBC, 2008) 295.
634 EQUITYAND DEBT FINANCING

issued, will carry a note on the date on which and the price at which the bond can be
redeemed. The issuer thus has the option to redeem the bond when it is paying a higher
coupon than the market interest rate. In other words, a redemption call gives the issuer
the opportunity to reissue the same bonds at a lower interest rate. The price at which
the bonds are redeemed, however, is typically higher than the original issuing price.

5.8 Foreign bonds

13.074 Foreign bonds. These are bonds denominated in the currency of the country where they
are issued when the issuer is a non-resident company. For example, bonds denominated
in Hong Kong dollars issued by a German company are foreign bonds. Foreign bonds
are regulated by the regulatory authorities where they are issued. Foreign bonds may
have different names depending where they are issued. For example, those issued in
London, New York,Tokyo, Netherland, Spain and China are called Bulldogs, Yankees,
Samw-ai, Rembrandt, Matador and Panda bonds respectively.

5.9 Eurobonds

13.075 Eurobonds. These are bonds which are denominated in a currency that is not the
currency of the country where the bonds are issued. An example is Eurobonds
denominated in Renminbi (RMB) issued in Hong Kong. 72 Eurobonds are not bonds
denominated in Euro.

6. FACTORS AFFECTING THE CHOICE BETWEEN

EQUITY AND DEBT

6.1 The size of the company

13.076 Generally small companies reluctant to involve new equity providers; large
companies raise funds through equity. The size of the company is one of the more
important factors affecting the make-up of the company's capital structure. For
example, a small private company (closely held company) often operates similar to a
partnership as a matter of economic reality. Such a firm, generally speaking, attaches
greater importance to maintaining control and is reluctant to involve new equity
providers. At the other end of the spectrum, a large listed company, by definition,
raises funds through equity issuances. Also, a listed company may issue a sizeable
amount of debt securities to signal to the world of its confidence in its business, often
for the purpose of attracting investments. A closely held company, which is of course
not listed on the market, will not be able to use such leverage as an instrument to send
out signals on the success of the company's business or projects.

'1 Bonds denominated in RMB issued in Hong Kong are also known as dim sum bonds.
 FACTORSAFFECTING THE CHOICE BETWEEN EQUITY AND DEBT 635

6.2 Nature of the company's business

Debt to value ratio in different sectors. The nature of the company's business 13.077
is also one of the most significant determinants of the firm's capital structure. For
example, the debt to value ratio (value= debt+ equity) of banking corporations may
be above 95 percent. At the other end of the spectrum, the ratio for companies in
the pharmaceuticals, biotechnology and life science sectors is typically lower than 10
percent. On the other hand, the debt to value ratio for real estate firms is likely to be
about 50 percent. 73

6.3 Tax deduction

Loan finance is tax deductable. The costs for incurring loan finance are tax deductable. 13.078
A certain portion of debt finance in the overall capital structure may therefore help
increase the returns to shareholders.

6.4 Costs of financial distress and insolvency

Likelihood of financial distress correlated to proportion of company debt. 13.079

The likelihood of financial distress and insolvency of the company is positively
correlated to the proportion of the company's debt capital. Stakeholders will lose
their investments and/or jobs when a company folds. Insolvency is costly, as
hiring, inter a/ia, legal, financial and other types of professionals is costly. A
financially distressed firm, which is likely to lose customers and suppliers, would
find it more difficult to keep its key employees. This is because an eventual
liquidation or even restructuring will have negative ramifications on these
stakeholders.

6.5 Restrictions in debentures

Restrictions on further borrowing. To protect its investment, a secured lender is 13.080

likely to impose conditions in the debenture on further borrowings on the assets
subject to the security.

6.6 Cost of disclosure

Costs of disclosure (preparation of prospectus, etc.). To raise equity or debt finance 13.081
in the financial market incurs costs of disclosure (preparation of prospectus, etc.).
Where it is possible to satisfy the funding need of the company through privately
procured finance, such as rights issues and placements, the company is unlikely to
raise funds from the public.

n J Bert, F1111dame11tals
of Corporate Finance (PearsonAustralia 201 I) 448.
636 EQUITYAND DEBT FINANCING

6.7 Fluctuation of interest rates in the financial market

13.082 Low interest rates encourage debt financing. The respective costs for raising equity
and debt finance are determined by, infer alia, the prevailing interest rates and the
condition of the financial markets. A low-interest rate environment, for example, is
likely to induce the company to increase the size of its debt finance.

6.8 Gearing ratio

13.083 Gearing: relationship between indebtedness and equity capital. A company's

gearing ratio is "the relationship between its indebtedness and its equity capital (capital
gearing) and between the interest charges and available earnings ('income gearing'
or 'interest cover')". 74 Gearing is a measure of indebtness. lt indicates the extent of
borrowing as against the equity held by the company in its assets. Gearing ratio means
the debt-to-equity ratio, i.e. total debt or total equity. Accordingly, the gearing ratio
indicates the company's credit rating, which in tum affects the cost of debt finance.
Lenders tend to determine the borrowing capacity of the company by reference to this
relationship. 75 It is therefore in the interest of the company to adopt a capital structure
with a healthy gearing ratio. The higher the gearing ratio (or "leverage") is, the more
the company is considered risky.

,. R Bergess, Co,porateFi11a1zce
(Sweet & Maxwell 1992)212.
" Ibid.
 CHAPTER 14

SHARE CAPITAL

PARA.

I. Introduction ............................................................................................................................ 14.001

1.1 Abolition of authorised capital, par value and share premium ....................................... 14.003
1.2 Categorisation of share capital ....................................................................................... 14.01 J
1.2.1 Issued or subscribed capital ................................................................................ 14.012
1.2.2 Paid-up capital and unpaid capital ....................................................................... 14.013
1.2.3 Called up and uncalled capital.. ........................................................................... 14.016
1.3 Issue of shares ................................................................................................................. 14.019
1.4 Issue of shares upon incorporation: first shareholders ................................................... 14.020
1.5 Issue of shares after incorporation: subsequent shareholders ........................................ 14.02 l
1.5.1 General ................................................................................................................ 14.021
1.5.2 Pro rata offers (rights issues) and non-pro rata offers ......................................... 14.025
1.5.3 Directors' fiduciary duties ................................................................................... 14.029
1.6 Procedure for issue ........................................................................................................ 14.030
I. 7 Consideration for Issue ................................................................................................... 14.036
1.7.1 lssueprice ............................................................................................................ 14.036
1.7.2 Fully paid and partly paid shares ......................................................................... 14.038
I. 7 .3 Non-cash consideration ....................................................................................... 14.044
1.8 Validation of shares improperly issued ........................................................................... 14.045

2. Transfer of Shares .................................................................................................................... 14.047

2.1 Nature ofa transfer ......................................................................................................... 14.047
2.1.1 Transfer of legal title ........................................................................................... 14.048
2.1.2 Novation or assignment? ..................................................................................... 14.050
2.2 Procedure for transfer and rights of parties .................................................................... 14.05 I
2.2.1 Unlisted companies: sale of shares ...................................................................... 14.052
2.2.2 Rights of parties after contracting ....................................................................... 14.059
2.2.3 Listed companies ................................................................................................. 14.061
2.2.4 Gifts of shares ...................................................................................................... 14.067
2.3 Restrictions on transfer ................................................................................................... 14.069
2.3.1 Private companies ................................................................................................ 14.069
2.3.2 Public companies ................................................................................................. 14.077
2.4 Fraudulent transfers ........................................................................................................ 14.078

3. Transmission of Shares ............................................................................................................ 14.081

3.1 General ........................................................................................................................... 14.081
3.2 Transmission upon death ofa shareholder ..................................................................... 14.083
3.2.1 Registration as a member .................................................................................... 14.084
3.2.2 Restrictions on registration .................................................................................. 14.086
3.2.3 Rights and liabilities in the absence of registration ............................................. 14.089
3.2.4 Joint shareholders ................................................................................................ 14.091
3.3 Transmission upon bankruptcy ....................................................................................... 14.092
638 SHARE CAPITAL

4. Registers of Members and Significant Controllers ................................................................... 14.095

4.1 Register of members ....................................................................................................... 14.095
4.1.1 Requirement for a register ................................................................................... 14.095
4.1.2 Registered members and status of the register .................................................... 14.101
4.1.3 Rectification of the register ................................................................................. 14.104
4.1.4 Inspection of the register ..................................................................................... 14.105
4.1.5 Branch registers ................................................................................................... 14.111
4.2 Register of Significant Controllers ................................................................................. 14.I l 5
4.2. l Requirement for a register .................................................................................... 14. l l 5
4.2.2 Significant controllers .......................................................................................... I 4.117
4.2.3 Keeping of register ............................................................................................... 14.124
4.2.4 Companies' obligations to ascertain their significant controllers ........................ 14.130
4.2.5 Rectification of the register .................................................................................. 14.I 31
4.2.6 Inspection of the register ...................................................................................... 14.132

5. Share Certificates ..................................................................................................................... 14.133

5.1 Requirement for share certificates ................................................................................. 14.l 33
5.2 Status ofa share certificate ............................................................................................ 14.138
5.3 Replacement of lost certificates ..................................................................................... 14.142

6. Alterations to Share Capital········•·······•········•·······••·······•········•·······•········•·······•········•········•······14.149

6.1 Increase of capital ........................................................................................................... 14.l 50
6.2 Reduction of capital ........................................................................................................ 14.I 53
6.3 Consolidation of shares .................................................................................................. 14.l 55
6.4 Subdivision ofshares ...................................................................................................... 14.159
6.5 Members' schemes of arrangement ................................................................................ 14.I 62
6.5.1 General ................................................................................................................ 14.162
6.5.2 Procedure ............................................................................................................. 14.167
6.5.3 Class meetings ..................................................................................................... 14.169
6.5.4 Requisite approval at meetings ............................................................................ 14.173
6.5.5 Court sanction ...................................................................................................... 14.178
6.5.6 Intra-group amalgamations .................................................................................. 14.183

7. Variation of Class Rights .......................................................................................................... 14.190

7.1 Introduction .................................................................................................................... 14.!90
7.2 Concept of class rights·············•········•·······••·······•········•·······•········•·······•········•········•·······l4. I 92
7.2.1 Classes of shares .................................................................................................. 14.193
7.2.2 Class rights·····················•········•·······••·······•········•·······•········•·······•········•········•······ 14.195
7.3 Variation ofrights ........................................................................................................... 14.200
7.4 Procedure for variation ................................................................................................... 14.203
7.5 Minority protection ......................................................................................................... 14.207
 1. INTRODUCTION
Share capital. Broadly speaking, the share capital of a company is the total amount 14.001
of funds provided by shareholders to the company in return for their shares in the
company. Once the funds are paid into the company, the funds become the assets of
the company. The company has a corresponding liability to repay the amounts to the
shareholders when the company is wound up. "Share capital" is a general term and
its specific meaning may depend on the context. Also, there is specific terminology
referring to different aspects of share capital, as discussed below.

Cap.622 provisions in Part 4. Under the Companies Ordinance (Cap.622), the 14.002
primary provisions on shares and share capital are contained in Pt.4. There are also
provisions in other Parts of Cap.622 which relate to shares and share capital, some of
which are also discussed in this chapter.

1.1 Abolition of authorised capital, par value and share premium

Predecessor CO required share capital clause. Under the predecessor Companies 14.003
Ordinance, the memorandum of association of a company limited by shares was required
to contain a capital clause which stated the amount of share capital with which the company
proposes to be registered and the division thereof into shares of a fixed amount. 1 For
example, asswne that the capital clause in the memorandum stated that "The share capital
of the company is $15,000,000 divided into 150,000 shares of$I00 each". The amount
of$ I 5,000,000 was referred to as the authorised capital of the company. The authorised
capital was the maximum amount of share capital that the company can raise (although the
amount could be increased by the company amending the memorandum 2).

Par value of shares; issue of shares at discount In the above example, the shares were 14.004
said to have a nominal or par value of $100 each. The par value of a share was the fixed
amount of each share as set out in the memorandum of association. The par value was more
or less an arbitrary figure determined at the time when the company is incorporated. It had
no necessary correlation with the market value of a share. Under the capital maintenance
doctrine,3 the par value of a share had implications on the issue price. Effectively, shares
could not be issued at a discount-i.e. at a price below par value4 (subject to certain
exceptions5). The rule applied as part of the capital maintenance doctrine to ensure that
funds are paid into the company by shareholders in return for their shares; otherwise the
amount of the issued nominal capital of a company would be misleading to creditors if the
amounts of capital had not actually been paid in by shareholders.

Shares issued above par value issued at premium. Shares could be issued at a price 14.005
above par value-referred to as the issue of shares at a premium. The difference between
the par value and the issue price was the premium. Shares were issued at a premium, for

' predecessor CO, s.5(4) (repealed).

2 predecessor CO, s.53(1)(a) (repealed).
3 Sec Chapter 15.
' Ooreg11111
Gold Mining Co of India v Roper (1892)AC 125.
' predecessorCO, s.50 (repealed).
640 SHARE CAPITAL

example, where the market value of the shares was above the par value. Where shares
were issued at a premium, the company was required to have a share premium account
that shows the aggregate amount of the premiums: predecessor CO, s.48B(l) (repealed).
Generally, for the purposes of the capital maintenance doctrine under the predecessor
CO, the share premium was regarded as part of the share capital and could not be returned
to shareholders before a winding-up similar to the amounts of paid-up nominal capital.
However, the company's accounts would still distinguish between the share premium and
the (paid-up nominal) share capital of a company.
14.006 Cap.622 no longer requires shares to have par value. Under the present Companies
Ordinance (Cap.622), there is no longer a need for shares to have par value or nominal
value. For pre-existing companies, the provision in the memorandum setting out the
par value is regarded as deleted upon the commencement of Cap.622 (namely 3 March
2014). 6 The original purpose of par value was to protect creditors by ensuring that a
certain amount of capital would be injected into the company. However, in reality the
concept of par value gave little protection considering that the par value could be set
at a very low figure and there was nothing to prevent a company from having only
one or a few shares on issue. On the other hand, there were downsides to the use of a
concept of par value:

• It led to unnecessarily complex accounting systems, with the need to

distinguish between share capital and share premium.
• It inhibited the raising of new capital, as shares could not generally be issued
at below par value, even though the market value is below par value.
• It could lead to unnecessary work and costs for share registries-such as the
need for an issue of bonus shares where the company wished to capitalise
profits. 7
• It could be misleading for unsophisticated investors, as the par value did not
necessarily reflect the value of a share. 8

14.007 Par value concept abolished following other regimes. Thus, following other regimes
such as Australia, New Zealand and Singapore, the concept of par value is abolished
under Cap.622.
14.008 Requirement for authorised capital also abolished under Cap.622. With the
abolition of par value, the requirement for authorised capital is also abolished under
the Cap.622 regime. Provisions in the memorandum of pre-existing companies setting
out the authorised capital of the company are regarded as deleted and would not form

• Cap.622, s. 98(4 ).
7
This result follows, again, because shares could not generally be issued for a consideration below par value.
8 Financial Services and Treasury Bureau, CO Rewrite: Shore C(1piwl. Capitol Maintenance Regime and Statutory
Amalgamation Procedure - Consultation Paper (June 2008), 7-8; and sec further Frcshficlds Bruckhaus
Deringer, Consultation Study Concerning the fmplications of Adopting (1No-P(ir Value Share Regime in Hong
Kong: Final Report (29 November 2004). For discussion of policy concerns leading to similar reforms made
earlier in Australia, see Laurie Factor, "Capital Maintenance: Simplification and Creditor Protection" (I 995)
5 Australian Journal of Corporate Law 259, 260-268.
 INTRODUCTION 641

part of the constitution of the existing company upon commencement of Cap.622

(namely 3 March 2014).9
Cap.622 allows companies to state maximum number of shares that can be 14.009
issued to protect existing shareholders from dilution. The concept of authorised
capital did provide some degree of protection for existing shareholders from dilution
of their holdings. Under Cap.622, similar protection can be given by a provision
in the articles stating the maximum number of shares that a company can issue. 10
It is optional for a company whether to have such a provision. Like the amount of
authorised capital under the previous law, any limit in the articles on the maximum
number of shares that a company can issue can be amended by an ordinary resolution
of the company. 11
No longer need to distinguish between share capital and share premium. 14.010
Consequent to the abolition of par value, there is also no need to distinguish between
share capital and share premium. Upon the commencement of Cap.622 (3 March
2014), the amount standing to the credit of a pre-existing company's share premium
account simply became part of the company's share capital. 12

1.2 Categorisation of share capital

Types of share capital. Example: Assume that, upon incorporation, 50,000 shares 14.011
are issued at a price of $100 per share, partly paid to $60 per share. Assume further
that the company has now made a call requiring shareholders to pay a further $10 per
share.
As at the date of the call:

Issued capital = $5,000,000

Paid-up capital= $3,000,000
Unpaid capital = $2,000,000
Called up capital = $3,500,000
Uncalled capital = $1,500,000

The above terms are explained below.

1.2.1 Issued or subscribed capital

Issued capital refers to aggregate issue price of issued shares. The issued capital or 14.012
subscribed capital of a company refers to the total value of shares actually issued to
shareholders with reference to the issue price.

• Cap.622, s.98(4).
°
1
Cap.622, s.85(2).
11
Cap.622,s.88(3).
" Cap.622,Sch.IOs.37.
642 SHARE CAPITAL

1.2.2 Paid-up capital and unpaid capital

14.013 Paid-up capital refers to amount paid by shareholders for shares. Paid-up capital
refers to the amount of issued capital paid up or credited as paid up by shareholders.
That is, the amount actually paid in by shareholders in return for their shares.
The amount also includes amounts treated as paid in by shareholders-such as where
there is an issue of bonus shares, whereby shares are issued to shareholders in lieu of
dividends. Here, the shareholders are not required to pay in amounts as such, but the
amounts on the shares (equal to the amount of dividends in lieu of which the shares are
issued) are credited or treated as paid up by the shareholders.

14.014 Where shares issued partly paid then amount of paid-up capital is less than issued
capital. If shares are issued partly paid instead of fully paid, 13 then the amount of paid-
up capital will be less than the issued capital. If all the shares are issued fully paid, then
the amount of issued capital will be the same as the paid-up capital.
14.015 Unpaid capital amount of issued capital unpaid by shareholders. The unpaid
capital is the amount of the issued capital which has not been paid by shareholders,
whether called or uncalled.

1.2.3 Called up and 1111calledcapital

14.016 Shareholders required to pay unpaid amounts when company makes call. Where
shares are issued partly paid, shareholders are required to pay in unpaid amounts when
the company makes a call. 14
14.017 Called up capital refers to paid up amount plus amount due when company
makes call. The called up capital is the amount of paid-up capital and the amounts
presently due following the making of a call.
14.018 Uncalled capital is capital that is still unpaid but not called. The uncalled capital is
the amount of unpaid capital that has not been called.

1.3 Issue of shares

14.019 Issue of shares to shareholder. Where a company creates new shares in itself which
are acquired from the company by a shareholder, then there is an issue of shares by the
company to the shareholder. This is contrasted with disposals of shares by an existing
shareholder to another (discussed below at para.14.047).

1.4 Issue of shares upon incorporation: first shareholders

14.020 First shareholders are founder members. The first shareholders of a company are
the founder members whose names are stated in the articles of association and who
sign the articles as founder members. 15 The articles would state the number of shares
to be taken by each founder member. 16 Under Cap.622, s.112, the founder members

13 See para.14.038 below.

" See para.14.041 below.
'5 Sec also Cap.622. s.2 definition of"foundcr member".
16 Cap.622, s.85 and Sch.2 s.8(1)(e).
 INTRODUCTION 643

are deemed to have agreed to become members of the company, and on the company's
registration, they must be entered as members in the company's register of members."
Immediately upon incorporation, the founder members are regarded as members of
the company whether their names are entered in the register of members or not. 18
The shares of the founder members are deemed to have been issued at the date of
registration of the company.' 9

1.5 Issue of shares after incorporation: subsequent shareholders

1.5.1 General
Company can issue further shares after incorporation.After incorporation, a company 14.021
can issue further shares either to its existing shareholders or to new investorswho wish to
take up shares in the company. If the articles state a maximum number of shares that the
company can issue,20 then the company cannot issue shares beyond that limit unless it first
alters that provision in the articles by ordinary resolution: Cap.622, s.88(3).
Subscription agreement formed to issue new shares. The process for issuing new 14.022
shares generally involves a contract between the company and the allottee (the person
to be allotted or issued with the shares) for the allottee to take up new shares in the
company. The contract is commonly referred to as a subscription agreement and the
allottees are said to subscribe for the shares. The shares are issued pursuant to the
contract, and the allottee is registered in the register of members.
Shares can be issued by public offer or private issue. Companies can issue shares 14.023
via a public offer or a private issue. Only public companies can offer its shares to the
public and the company must comply with the requirements under the Companies
(Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32) Pt.2.21 A private
issue or private placement involves the company making specific offers or invitations
to particular investors. For example, a public company might place shares with specific
institutional investors or otherwise have shares placed with particular investors with
the assistance of brokers.
Cap.622 Pt.4 Div.2 deals with issue of shares. Cap.622 Pt.4 Div.2 (ss.140-146) sets 14.024
out the provisions on issue of shares, including the provisions requiring a return of
allotment and the issue of share certificates on allotment.

1.5.2 Pro rata offers (rights issues) a11d11011-prorata offers

Pro rata offers or rights issues where offer of shares made to existing 14.025
shareholders in proportion to their shareholdings. Shares can be offered to
existing shareholders under either a pro rata offer or non-pro rata offer. A pro rata
offer involves an offer of shares to existing shareholders in proport.ion to their existing
shareholdings. For example, a one for five offer means that for every five shares

" As to the register of members, see para. 14.095 below.

18 Re London, Hamburg!,and Conti11e111al Exchange Bank ( 1866-67) LR 2 Ch App 427; and see also the definition
of"member" in Cap.622, s.2.
19 Re Ebenezer Timmins& Son.<Ltd ( 1902) I Ch 238.
20
Cap.622, s.85(2). Setting such a limit is permissible, but is not compulsory.
" Sec Chapter 16.
644 SHARE CAPITAL

held by an existing member, the member is entitled to take up one new share in the
company. Pro rata offers are commonly referred to as rights issues. Rights issues
can be renounceable or non-renounceable. Under a non-renounceable offer, only the
shareholder to whom the offer of shares is made is entitled to take up the shares. In a
renounceable rights issue, if the shareholder does not wish to take up the shares, he or
she is able to renounce the shares in favour of a nominee who can then take up those
shares for himself or herself.
14.026 Non-pro rata offers for issuing shares member approval required. Non-pro rata
offers are simply offers (or invitations) to issue shares otherwise than on a pro rata
basis to existing shareholders. Under Cap.622, ss.140-141, the directors must not
without the prior approval of the company in general meeting exercise any power
of the company to allot shares unless the offer is made pro rata to the members of
the company. These provisions give some protection to existing shareholders from a
dilution of their holdings without their consent. However, an ordinary resolution is
sufficient for approval under s.141. The approval can be given to a particular exercise
of the power to allot to shares. Alternatively, standing approval can be given by the
members so that there is a general autho1isation for the company to issue shares.
Where standing approval is given, the approval continues in force until the conclusion
of the annual general meeting that is held next after the date on which the approval
was given (or if no AGM is held within the time limits prescribed by the Ordinance, 22
until the expiration of the period within which the next AGM should have been held). 23
14.027 Member approval also required for non-pro rata grants of rights. The requirement
for member approval for non-pro rata allotments under Cap.622, s. l 40 also applies to
require member approval for non-pro rata grants of rights to subscribe for, or to convert
any security into, shares in the company (e.g. share options): Cap.622, s.140(1)(b).
14.028 Failure to obtain approval does not of itself invalidate allotment. Cap.622, s.140(6)
states that:
"Nothing in this section or s.141 affects the validity of an allotment or other
transaction".
Accordingly, an allotment made in breach of ss.140-141 would not be void by reason
only of such breach. 24 However, if the allottee was aware of the circumstances involving
the directors' breach of the statutory restrictions, it may be that the allotment can be set
aside as against that person pursuant to general common law principles. 25 If there is a

" See Cap.622, s.6 I 0.

" Cap.622, s.141(3)(a). For situations where a company is not required to hold an AGM, see also Cap.622,
ss.141 (3)(b}-14 l (3)(c).
" This reverses this aspect of the decision in WongKam S011v YeungWing Ke1111g [2007) 2 HKLRD 267, decided
under the predecessor CO, s.57B (repealed). Before the commencement of Cap.622, amendments had also been
made to that s.57B to reverse the effect of the above decision on this point: see the Companies (Amendment)
Ordinance 2010.
25 This is because the directors' breach of the statutory restrictions may amount to a breach of directors' duties
(see Chapter 8 on directors' duties generally) and an allotment of shares made in breach of duty is voidable
at the election of the company if the allottee has knowledge of the circumstances constituting the breach: see
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; and see generally para.8.176 in Chapter 8. CJ Wong
Kam Sa11v Yeungl·fli11gKeu11g[2007) 2 HKLRD 267, (86)-[I 14).
 INTRODUCTION 645

breach, there is also criminal liability for any director who knowingly contravened or
permitted or authorised the contravention of the section. 26

1.5.3 Directors'.fiduciary duties

Directors subject to fiduciary duties in exercising power to allot shares. The 14.029
directors' exercise of the power to allot shares is subject to the directors' fiduciary
duties: see Chapter 8.

1.6 Procedure for Issue

Approval required in general meeting before any allotment of shares. Before an 14.030
allotment of shares, any approvals required to be given by the company in general
meeting under Cap.622, s.88(3) 27 or s.14128 will need to be obtained.
Allottee enters into contract with company for issue of shares. Generally speaking, 14.031
the allottee of shares would enter into a contract with the company for the company
to allot and issue the shares to the allottee. 29 As a matter of contract law, usually
the allottee makes the contractual offer and the company accepts the offer after the
board of directors makes the decision for the allotment and the company notifies
the acceptance of the offer to the allottee. For example, in the case of a public offer
pursuant to a prospectus, the company's issue of the prospectus and applications for
subscription is regarded as an invitation to treat. An applicant for subscription who
sends in the application form makes the contractual offer, which the company then
decides whether or not to accept. However, it is possible that the company itself makes
the contractual offer, for example by a provisional allotment letter which provisionally
allocates a number of shares to the offeree, who can then decide whether to accept the
shares. This may be done, for example, for offers to existing members of the company.
Distinction between "allotment" and "issue" of share. The Companies Ordinance 14.032
uses both the terms "allotment" and "issue" of shares. It has been said that these
terms are not technical terms with a precise meaning,3° but generally it seems that
"allotment" refers to the earlier step where a contract or agreement is in existence
for the issue of the shares and the directors have resolved to appropriate the specified
number of shares to the allottee. 31 The shares are regarded as having been issued only
when the shareholder's name is entered in the register of members. 32

2• Cap.622, ss.140(4)-140(5).
27
Increase of limit on maximum number of shares that can be issued: see para.14.021 above.
28 General meeting approval for non-pro rata offers: see para.14.026 above.
29 Although it is common for there to be a contract for the issue of shares, such a contract is not strictly necessary

for a person to be issued shares and to become member of a company. Even in the absence of a contract, if
the company issues shares to a person who agrees to be a member, the issue of shares would be valid and the
person would be a member of the company upon registration in the register of members: sec s.2(1) definition of
"member" in Cap.622: and see Re Nuneaton Borough Association Football Club Ltd [ 1989] BCLC 454.
,o Whitehouse v Carlton Hotel Pry ltd ( 1987) 70 ALR 251, 271.
31 Commomvecdth Homes and lnvest111entCo Ltd vS111ith( 1937) 59 CLR 443,461; National West111insrer Bcmkpie v
IRC [1995] 1AC119, 126.
" Central Pigge,y Co Ltd v McNicho/1 & H11rst(1949) 78 CLR 594, 599; National Westminster Bank pie v JRC
(1995] I AC 119, 126.
646 SHARE CAPITAL

14.033 Allottee to be registered in register of members. Following an allotment of shares,

the allottee needs to be registered in the register of members required to be kept under
Cap.622, ss.627-628. An allottee of shares becomes a member only when the person is
registered in the register ofmembers, 33 and legal title to the shares is conferred only upon
registration. 34 Cap.622 expressly sets out the time frame for registration in the register
of members upon allotment, namely the shares must be registered within two months of
allotment. 35 Also, if a company fails to register an allottee in the register of members in
breach of the contract of allotment, then the allottee can seek specific performance of the
contract, 36 although not where damages would be an adequate remedy- such as where
the company is listed and the company's shares are readily available in the market.37
14.034 Return of allotment must be delivered to Registrar within one month. Under
Cap.622, s.142, a limited company must deliver to the Registrar a return of allotment
in the specified form within one month of the allotment, 38 stating various matters,
including:

• number of the shares allotted;

• the names and addresses of the allottees;
• the amount paid or regarded as paid on each share; and
• a statement of capital39 that sets out details of the total number of issued
shares, total paid-up capital and total issued capital, thereby providing an up-
to-date snapshot of the issued capital of the company.

14.035 Share certificate to be delivered to shareholder after allotment. A share certificate

also needs to be delivered to the shareholder pursuant to Cap.622, s.144. 40

1.7 Consideration for Issue

1.7.1 Issue price

14.036 Issue price is price paid under allotment contract. The issue price for shares refers
to the price or the amount which the allottee is required to pay under the contract for
allotment. The issue price would usually reflect the market value of the shares.
14.037 No par value under Cap.622; but directors subject to fiduciary duties when setting
issue price. Under the no-par regime in Cap.622,41 the concepts of issuing shares at a
premium or at a discount are no longer applicable. The abolition of par value means that

JJ Cap.622, s.2 definition of"member''; Ya11 Kwok li11.!11/ia11

v Ya11Kwak KeeGay [ 1997] HKLRD 1199; Ng YatChiv
Max Slwre Ltd (1997-98) I HKCFAR 155, 164. See further para.14.101.
30 National West111i11sterBankpie v IRC [ 1995] I AC 119, 126.
,s Cap.622. s.143.
"' Sri La11kaOmnibusC<>v Perera[ 1952] AC 76.
" Re BTRpie (1988) 4 BCC 45; and sec also Okaehi(H<>ng K<>ng) Ltd v N<>minee (H<>ldings)Ltd (2007] I HKLRD 55.
'8 Failure to deliver the return of allotmenc within time results in the company committing an offence: Cap.622,
s.142(3). However, the court has power to extend tbe period for delivery of the return: ss.142(4)-142(6); and see
Re Poly Property Group Co ltd[2016] 4 HKC 169.
'9 See Cap.622, ss.142(2)(b) and 201.
"' See para.14.133 below.
" See para.14.006 above.
 INTRODUCTION 647

shares can be issued at any price,42 subject to the directors' fiduciary duties. The power
to issue shares is a fiduciary power to be exercised in good faith for the benefit of the
company.43 When issuing shares which have a value greater than the consideration payable
for them, the directors must give close consideration to the rights of the shareholders
under the articles, including the right of a shareholder to participate in the distribution of
the company's assets on a winding up or on a reduction of capital, for an issue of shares
made otherwise than on the footing that shareholders will participate proportionately
may significantly affect the value of the rights of existing shareholders. 44 The value of
the shares of existing shareholders would be diluted if the consideration received for the
new shares is lower than the value of the shares. Directors may potentially be in breach
of fiduciary duty by acting unfairly towards the existing shareholders. 45

1.7.2 Fully paid and partly paid shares

Shares "fully paid" where full issue price paid. Where the full amount of the issue 14.038
price is paid upon the issue of the shares, then the shares are said to be issued fully
paid. Where the shares are issued on terms that only part of the issue price needs to be
paid at the time the shares are issued, then the shares are issued as partly paid shares. 46
Where the shares are not fully paid up, the shareholder is liable to pay the unpaid
amounts at any time when called for by the company while a going concem,4 7 or by
the liquidator where the company is in liquidation. 48 It is also possible for the terms
of issue of the shares to specify that payments are to be made in fixed instalments on
specified dates. ln such a situation, the liability to make the payments arises without
the need for a call to be made. 49 The instalments are not calls in the strict sense, 50 but
the articles can provide to the effect that failure to pay an instalment when due is to be
treated as failure to comply with a call notice such that the provisions on forfeiture and
other liabilities for non-payment in the articles apply.51
Company may be estopped from denying that shares are fully paid. A company is 14.039
taken to represent that shares are fully paid by issuing a share certificate that says so. 52

" However, shares generally cannot be issued for nil consideration: see Robert P Austin and Ian M Ramsay, Ford.
s
Austin and Ramsay Principles of Co,porations law ( 16"' edn, LexisNexis 2015) [ 17.140). The exception is the
issue of bonus shares for no consideration: see Cap.622, s. I70(2)(d) and para.14.154 below.
" Ngurli Ltd v McCa1111 (1953) 90 CLR 425,455.
" See Ord Forrest Pty Ltd v Federal Commissioner of Taxation ( 1974) 130 CLR 124, 156-158 per Mason J.
" See para.8.034 in Chapter 8 on the duty of directors to act fairly as between shareholders. Even if there is an
ordinary resolution of members authorising or ratifying the issue of shares such that there is no breach of duty
by directors, the various minority shareholder remedies (discussed in Chapter 10) may still potentially be relied
upon by dissenting shareholders.
"' Unless provided otherwise in the articles, there is no requirement for shares to be issued as fully paid shares. See
paras.14.040 and 14.041 for companies adopting the Model Articles. Subject to the articles, wholly unpaid shares
may be issued, with the shareholder liable to pay when calls are made or u1>0nliquidation: see, e.g., Re Eddys1011e
Marine lns111Ymce Com[J(my[1893] 3 Ch 9; Re Doloswella Rubber and Tea Estates Ltd (1917] I Ch 213.
41
Alexander vAutomatic Telephone Company (1900] 2 Ch 56.
4$ Sec Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), s.170; Re £ddys1one Marine
lnsura11ceCompany [ 1893] 3 Ch 9.
" Sec, e.g., Model Articles (public companies) art.73(1); Companies (Model Articles) Notice Sch. I (Cap.622H).
,o Robert P Austin and Ian M Ramsay, Ford, Austin and Ramsay's Principles of Corporations Law (16'" edn.,
LexisNexis 2015) (17.260).
" See, e.g., Model Articles (public companies) art.73(2); Companies (Model Articles) Notice Sch.l (Cap.622H).
On forfeiture, see parJ.14.043 below.
" See para.14.140 below.
648 SHARE CAPITAL

A company that applies to have its shares listed on a stock exchange which requires
that the shares be fully paid, is also to be taken as thereby representing to potential
acquirers of its shares that they are fully paid. 53
14.040 ModelArticles for private companies: shares must be fully paid. for private companies
which have adopted the Model Articles, only fully paid shares may be issued.54
14.041 Model Articles for public companies (Cap.622H): shares need not be issued
as fully paid. For public companies adopting the Model Articles, there is no
requirement for shares to be issued as fully paid shares. Articles 68-79 55 deal with
partly paid shares. Article 70 gives the directors the power to make calls upon the
holders of partly paid shares. The directors must exercise their power to make calls
bona fide in the interest of the company and for proper purposes. 56 Prima facie, the
members must be treated equally so that the directors cannot make different calls on
different shares. 57 However, this can be altered by the articles. 58
14.042 Company can sue shareholder if they fail to make payment pursuant to call.
Where a shareholder fails to make the payment pursuant to a call, the company can
sue for the amount. The articles may also provide for the company to have a lien on
the shares to secure the amounts called: see, e.g., Model Articles (public companies)
(Cap.622H), art.68. Pursuant to a lien, the company may be entitled to sell the shares
if the amounts called are not paid. 59 The lien is in nature an equitable charge. 60
14.043 Company can forfeit shares of member if they fail to pay a call. If the articles
so provide,61 a company can forfeit the shares of a member if the member fails to
pay a call: see Model Articles (public companies) (Cap.622H), arts.75-78. Where
shares are forfeited, the shares are not cancelled but lie in abeyance until they are
sold or disposed of by the company. 62 A forfeiture that eliminates a member's liability
to meet outstanding or future calls would involve an unlawful reduction of capital. 63
This difficulty can be avoided by the articles specifying that the member's liability for
unpaid amounts remains despite the forfeiture. 64

1.7.3 No11-cashco11sideratio11
14.044 Consideration provided by allottee for shares need not be cash. The consideration
provided by the allottee for shares need not be cash.65 For example, where a sole trader

53 BlomqvistvZavarcoplc[20l7] I BCLC373.
" Model Articles (private companies), art.56; see also Companies (Model Articles) Notice (Cap.622H), Sch.2.
" See Companies (Model Articles) Notice (Cap.622H), Sch. I.
56
Odessa Tramways Co v Mendel ( 1878) 8 Ch D 235; Alexa11der v Automatic Telephone Co [ 1900) 2 Ch 56.
57 Preston v Gra11dCollier Dock Co ( 1840) 11 Sim 327.
58 See Cap.622, s.200(a) and Model Articles (public companies), art.72(3).
59 Model Articles (public companies), art.69 .

.o Re Ge11eralExcha11geBank ( I870-71) LR 6 Ch App 8 I 8.

61
A company cannot forfeit shares without such power conferred under the artiele.s: Re National Patent Stec1111
Fuel
Co (1859) 4 De G & J 46.
• 2 Bu11dabergSugar Ltd v Isis Ce111ralSugar Mill Co ltt/(2006) 62 ACSR 502,513. Sec also Model Articles (public
companie.s). art.78 for sale or disposition or forfeited shares.
63 Hopkinson v Morlime,; Harley & Co lid [ 1917] I Ch 646. Sec Chapter 15 on reduction of capital.
.. Model A1ticles (public companies), ait.77(2)(d).
6' Re Bag/an Hall Collie1y Co (1869-70) LR 5 ChA))p 346.
 TRANSFER OF SHARES 649

incorporates his or her business by establishing a company, the sole trader would transfer his
or her business to the company and might treat the transfer of the business as consideration
for the issue of shares to him or her. If the non-cash assets are overvalued, then the allottee
will not have provided sufficient assets to the company for the an1ount of issued capital
recorded. Here, it could be argued that the shares were issued paitly paid instead of fully
paid. However, the cowts will not question the sufficiency of the consideration and will
accept that the shares were properly issued at the price stated by the company so long as the
directors had acted "honestly and not colourably" in the transaction.66

1.8 Validation of shares improperly issued

Court has power to validate invalid issue or allotment of shares. Under Cap.622, 14.045
s.146, the court has power to validate an issue or aHotment of shares which was invalid
by reason of any provision of the Companies Ordinance or other Ordinance or of the
atticles of the company or for any other reason. The court also has power to confirm the
terms of issue of allotment where such terms were inconsistent with or unauthorised
by any such provision. Application to the court may be made by the company or by a
holder or mortgagee of the shares or by a creditor of the company. The court may make
an order if it is satisfied that in all the circumstances it is just and equitable to do so.

Court will make order to validate if just and equitable. The provision appears to 14.046
be derived from an Australian provision. 67 In deciding whether or not to validate the
issue or allotment, Australian courts have taken into account factors such as whether
persons have relied on the purpotted issue,68 interests of innocent parties, 69 prejudice to
any person if the issue was validated, 70 legal or business difficulties if the issue was not
validated 71 and whether there was a blatant disregard of obligations under the Ordinance
or the articles. 72 The public interest may also be relevant, and so for example the court has
declined to validate an issue of shares made as part of a tax avoidance scheme. 73

2. TRANSFER OF SHARES

2.1 Nature of a transfer

Transfer is disposal of shares from existing shareholder to new shareholder. 14.047

A transfer of shares involves a disposal of the shares from an existing shareholder
(transferor) to a person (transferee) who is to become a new shareholder in respect
of the shares being transferred. A transfer is different from an issue of shares by the
company. Shareholders have a right to transfer their shares, subject to any restrictions

~ Re WraggLtd [ 1897] I Ch 796; and see also Re White Star line Ltd [ 1938] Ch 458.
67
Sec Corporations Act 2001 (Aust), s.254E.
6$ Swiss Screens {Aust) Pty Ltd v Burgess (1987) 11 ACLR 756.
•• Kokotovic/1Constructions Pty Ltd v Walli11gto11
(1995) 17 ACSR 478.
1
• Alpha Resources Ltd v CAC (J 987) 5 ACLC 844.
71
Re Swa11Brewery C() Ltd (No.2) ( 1976) 3 ACLR 168.
n Re Mo11itro11ixLtd ( l 987) 12 ACLR I 6 I.
" Re Haifield E11terprisesPty Ltd (I 982) 6 ACLR 494.
650 SHARE CAPITAL

in the company's articles. 74 Although a share is regarded as being composed of a

bundle of rights, each right is not a separate piece of property or separate chose in
action. 75 Accordingly, transfer of a share must involve a transfer of the whole of the
share and it is not permissible to transfer only parts of the rights attached to a share
(such as transferring only the right to dividends). 76

2.1.1 Transfer of leg"/ title

14.048 No transfer of legal title until transfereeregisteredin register of members.A transfer of
the legal title of registeredshares is not effected until the tnmsfereeis registeredas a member
in the register of members.77 The transferee becomes a member only upon registration.78
14.049 Transfer of bearer shares. For bearer shares, the legal title can be transferred by
an agreement to transfer and delivery of the share warrant, as the share warrant is a
negotiable instrument. 79

2.1.2 Novatio11or "ssig11111e11t?

14.050 Transfer of shares amounts to novation not assignment. The language used in
referring to "transfers" of shares connotes that there is an assignment of the shares
from the existing shareholder to the new shareholder. However, it is widely thought
that conceptually, the "transfer" of shares actually involves a novation rather than an
assignment of shares.80 Under the novation, there is an agreement involving three
parties-the transferor, transferee and the company-whereby the company's contract
with the transferor is terminated and is replaced (upon registration of the transferee)
with a new contract bet\veen the company and the transferee on the same terms.
Through this mechanism, the transferee acquires rights (and obligations) represented
by the shares which are the same as those previously vested in the transferor. There is
little case authority on the matter, but it appears that it is correct to view the process
as involving novation rather than assignment. 81 The distinction may be relevant, for
example, to resolution of conflict of Jaw issues.82

2.2 Procedure for transfer and rights of parties

14.051 Cap.622 provisions on transfer of shares. Cap.622, ss.150-157 contain provisions

dealing with transfers of shares. The matters covered include instrument of transfer,

'' Re Discoverei:~ Fi11a11ceCorp Ltd [ 191OJ I Ch 3 12, 3 16.

'5 Re Alex Russell [1968) VR 285, 299-300.
'6 However, a member could create a trust of che share under which the trustee may be required account to one
beneficiary with rc.spect co cerlain rights (e.g. dividend rights only) and to another beneficiary with respect 10
other righrs: Robert P Austin and Ian M Ramsay, Ford, Austin and Ramsay's Principles o_(C.OrporalionsLaw
(16"' edn., LcxisNexis 2015) [ 17.220).
" Co (Overseas) Ltd vAdham (1994) I BCLC 66; and see Cap.622, s. I 12(3).
/11/emational Credit and J11ves/111e11/
78 Cap.622, s.112(3); Ng Yat Chiv Max Share Ltd (1997-98) I HKCFAR 155, 164.
19 Webb Hale & Co vAlexandra Water Co (1905) 21 TLR 572. Bearer shares can no longer be issued underCap.622:
see Chapter 13.
80 See, e.g., Robert R Pennington, Company Law (7"' edn., Butterwo1ths 1995) 423--424.
81 See Eva Micheler, "Farewell Quasi-Negotiability? Legal Title and Transfer of Shares in a Paperless World"
[2002) Joumal of Business Law 358, 360-362.
82 See Stefan Lo, "Application of the /ex creatio11is to Cross-Border Transactions in Shares and Indirectly Held
Securities" (2004) 12 Asia Pacific Law Review 95, 99-102.
 TRANSFER OF SHARES 651

registration of transfer, application to the court for registration, certification of

transfers, issue of share certificates and compensation for forged transfers.

2.2.1 U11/istetlcomp"nies: sale of sh"res

Procedure
Transfer of shares by way of sale would involve contract. A transfer of shares by way 14.052
of sale would involve firstly a contract between the vendor and purchaser of the shares.
Proper instrument of transfer must be executed by parties. A proper instrument of 14.053
transfer needs to be executed by the parties, as such an instrument is required to be
delivered to the company under Cap.622, s.150, before the company can register the
transfer. This requirement was originally introduced for the purposes of stamp duty, and
the courts have held that an instrument is a proper instrument of transfer if it is suitable
for stamping and would attract stamp duty under the stamp duty legislation.83 Stamp duty
of$5 is payable on the instrument of transfer before execution of the transfer (if executed
in Hong Kong).84
Contract notes must be executed for sale and purchase of shares. Under s.19(1) 14.054
of the Stamp Duties Ordinance (Cap.117) (SOO), contract notes need to be executed
in respect of a sale or purchase of Hong Kong stock, which includes shares in a
Hong Kong company.85 Separate contract notes need to be executed by the vendor
(sold note) and the purchaser (bought note), specifying matters required under SOO,
s.19(2), including the quantity and description of the shares and the amount of the
consideration. Ad valorum stamp duty is payable on each of the two contract notes at
a rate of 0.1 percent of the consideration or of the value of the shares, whichever is
the higher.86 The contracts notes need to be stamped within two days after the sale or
purchase (if effected in Hong Kong).87
Company must update register of members within two months of' receiving 14.055
particulars of transfer of shares. After the above documents have been executed and
stamped, they can be delivered (usually by the purchaser) 88 to the company together
with the share certificate. 89 Subject to any further requirements in the articles, 90 the
directors can authorise the registration of the transfer, with the register of members
then updated. 91 Under Cap.622, there is an express requirement for a company to
update its register of members within two months after the company has received

u Re Greene [ 1949) Ch 333, 339; Re Paradise Motor Co ltd [ 1968) 1 WLR 1125.
8' Stamp Duty Ordinance (Cap.117) s.4 and Head 2(4) of Sch.1.
85 Sec definitions of"Hong Kong stock" and "stock" in SOO s.2.
8• SOO. s.19(1) and Head 2(1) ofSch.1 oft he SOO. For the scamp duty payable where the sale is between associated
companies, sec SOO ss.45 and 13(2).
8' SOO, s.19(1) and Head 2(1) ofSch.l of the SOO. The two-day pe1iod is calculated with reference to the time of
completion of the sale or purchase and not from the time when there is an agreement for the sale or purchase: see
Lau Suk Ching II Ma Hing Lam (2006) 4 HKLRD 432 (reversed on other grounds: (2010) 13 HKCFAR 226).
88 The tr.insferor can also lodge the transfer under Citp.622, s.151.

•• To avoid the 1iskoft he parties having paid ad valorum duty despite the directors subsequently refusing to register
the transfer, it is possible for the contract notes to be stamped after the directors give approval for registration
of the transfer.
'° See Model A1ticles (private companies) arts.2(2), 63 and 64; Model Aiticles (public companies) arts.80-82.
" Cap 622, s.627. See para.14.095 below.
652 SHARE CAPITAL

notice of the particulars concerned. 92 This means that transfers need to be registered
within two months.

14.056 Company must deliver new share certificate. The company cancels the old share
certificate, and a new share certificate would need to be delivered to the transferee
under Cap.622 s.155. 93
I 4.057 Procedure where vendor sells only part of shareholdings. The procedure is slightly
different where the vendor sells only a part of his or her shareholdings. lf the vendor
sells all of his or her shares, then he or she would deliver the share certificate to the
pmchaser together with the transfer. However, it would not be prudent for the vendor
to do so if only part of the holdings is to be sold. Instead, the vendor can deliver the
share certificate to the company with the instrument of transfer. The company can then
provide a certification of the instrument of transfer by marking the instrument with the
words "certificate lodged" (or words to like effect) and having an authorised person
signing underneath on behalf of the company. The company retains the share certificate
but the certificated instrument is provided to the purchaser for the completion of the
sale. The purchaser would rely on the certification as evidencing the vendor's title in
lieu of delivery of the share certificate to the purchaser. After there is completion of
the sale and the transfer is delivered to the company for registration, the company
cancels the old share certificate and issues two new certificates: one for the vendor (in
respect of the shares not sold) and one for the purchaser.
14.058 Certification of transfer a representation that company has received documents which
show that transferor has title to shares. The certification of a transfer by the company
is a representation by the company to any person acting on the faith of the certification
that there have been produced to the company documents that evidence title to the shares
in the transferor named in the instrument of transfer: Cap.622, s.154.94 Under s.154(2),
the company can be liable to a person who acts on the faith of a false certification made
negligently by the company.95 Where the company is fraudulent, the company could be
liable in the tort of deceit.96 The certification is only a representation by the company that a
share certificate evidencing the transferor's title has been produced to the company and not
a representation that the transferor actually has title: Cap.622, s.154(1). Accordingly, the
company is not liable merely because the transferor does not have good title. The company
would be liable only if the company negligently or frnudulently certificates the transfer
without the share certificate having been produced to the company.

2.2.2 Rights of parties after co11tracti11g

14.059 Equitable ownership of shares. As noted above,97 the transferee would obtain legal
title only upon registration in the register of members. Pursuant to general equitable

92 Cap.622, s.627(4). Registration of transfers is dealt with in Cap.622, s.151.

93 Sec para.14.133 below.
"" For the background to the imroduction of this provision (originally in predecessor CO, s.69A(I) (repealed)). see
Second Report o_(the Companies Law Revision Commiflee: Company Law (12 April 1973), 97-98 .
., Sec Cap.622, s.154(4) as to when the company is bound by a certification purportedly made on behalf of the
company.
96 See Bishop v Balkis Consolidated Co Ltd (I 890) 25 QBD 512.
9' See para.14.048.
 TRANSFER OF SHARES 653

principles, a contract for the transfer of shares may be specifically enforceable. 98 Where
the contract is specifically enforceable, which will usually be the case for shares in
private companies, the transferee will have equitable interests in the shares after the
contract is entered into.99 Since it is possible for an owner of shares to hold a specified
proportion of the shares on trust for another without satisfying any requirements for
segregation, 100 it would seem that there is no need for identification or ascertainment
of the specific shares out of the bulk before a contract for the sale of only part of the
holdings of the vendor is specifically enforceable. Where a purchaser has equitable
ownership of the shares, the purchaser is entitled as against the vendor to the fruits of
ownership of the shares. 101 The vendor would hold the shares on trust for the pmchaser
who would be entitled to, for example, the dividends or bonus shares arising from
the shareholding, and the vendor would be obliged to vote at general meetings in
accordance with the instructions of the purchaser. 102
Vendor may hold lien over shares until purchase price paid. Until the purchaser 14.060
pays the purchase price for the shares, the vendor is entitled to a lien over the shares
pursuant to the principles of an unpaid vendor's Iien.103 Also, an unpaid vendor would
be entitled to vote on the shares free from any obligation to comply with the directions
of the purchaser. 104

2.2.3 Listed co111pa11ies

Different procedure for selling shares on stock market. The procedure for a sale 14.061
of shares on the stock market is different to that for transfers of shares of unlisted
companies due to the system of holdings of shares listed on the exchange and due to
the specific mechanisms of the exchange.
Stock market investors usually hold shares through nominee. Stock market 14.062
investors often hold shares through a nominee, namely HKSCC Nominees Ltd. For
such investors, HKSCC Nominees Ltd is the registered legal owner of the shares. The
investors may hold their interests in the shares through intermediaries such as brokers,
banks or custodians which hold accounts with HKSCC Nominees Ltd showing the
shares which are held for them by HKSCC Nominees Ltd. The shares traded on the

"' Eid v Al-Kazemi (2004) EWHC 2129; Mills v Sportsdirect.com Retail Ltd (2010) EWHC 1072. But where the
articles make it clear that neither the shares nor any interest in them can be transferred or disposed otherwise
than in accordance with the procedures specified in the articles, the court would not order specific performance
of an agreement to dispose of shares or an interest in them contrary to the terms of the aiticles: Re Coroi11Ltd.
McKitle11v Mis/and (Cyprus) l1111estme11ts Ltd (No.2) (2014) BCC 14, [ 137}-[ 138].
99 Hawks v McArtlwr (I 951) I All ER 22; Mills v Sportsdirect.com Retail Ltd (2010] EWHC 1072; Okachi (Hong
Kong) Ltd v Nominee (Holding) Ltd [2007] I HKLRD 55, 78. However, where the contract is subject to a condition
precedent, the equitable interest in the shares does not pass until the condition is fulfilled: Wood Preserva1ion
Ltd v Prior (1968] 2 All ER 849, 845-856; Re Comi11 Ltd, McKille11 v Mis/and (Cyprus) Investments Ltd (No.2)
[2014] BCC 14, (39], (137).
100 Re CA Pacific Finance Ltd (i11liq) (No.I) (1999) 2 MKLRD I; Hunter v Moss [1994] I WLR 452; Re Harvard

Securities Ltd (in liq) [ 1997] 2 BCLC 369.

1 1
• SpencevMitclzel/(1914) 14SR (NSW) 121.
'°' 1-Jardoonv 8elilios [ 190I] AC 118.
,o, Re Albert Life Assurance Co, Exp Western life Assul'(mce Society (1870-71) LR 11 Eq 164, 178; ltmgen & Wind
Ltd v Be//[1972) I All ER 296.
'°' Musselwhite v CH M11sselwhite & Son Ltd (1962) I All ER 201; JRRT (Investments) Ltd v Haycraft (1993)
BCLC40I.
654 SHARE CAPITAL

exchange are traded through the Central Clearing and Settlement System (CCASS),
operated by Hong Kong Securities Clearing Company Limited (HKSCC). Clearing
and settlement refers to the process whereby, after a transaction is made for the sale of
shares on the exchange, the seller obtains payment and the buyer obtains ownership.
CCASS is a computerised book-entry clearing and settlement system for transactions
in securities listed on the Hong Kong stock exchange.
14.063 Ways in which investor can hold listed shares through broker.An investor can hold
listed shares via a broker in an omnibus client account, where the investor's interests
are held together by the broker with the interests of other clients of the broker-i.e.
there is no segregation. Alternatively, an investor could hold shares via a broker
using a segregated account, where the interests of the investor are identified and held
by the broker separately from the interests of other clients of the broker. Although
the investor might regard himself or herself as owning the shares in the company
as a "shareholder'', the investor has only equitable interests in the shares. As noted
above, the legal title is held by HKSCC Nominees Ltd, and as far as the company is
concerned, the member holding the shares is HKSCC Nominees Ltd. For shares held
for any particular broker as shown in the broker's account in CCASS, the broker would
have equitable interests in those shares. An investor holding an account with a broker
has equitable interests in the interests of the broker. It is in this indirect manner that the
investor holds equitable interests in the shares. Despite the absence of segregation or
specific identification of which shares or interests in shares are held for an investor, it
has been accepted in Hong Kong that the investor does have an equitable proprietary
interest in the shares held in CCASS. 105
14.064 Investor can give instructions to broker to sell shares broker places order in
CCASS computer trading system. An investor who holds shares via a broker
in the manner described above and who wishes to sell his or her shares will give
instructions to his or her broker to sell them at the current market price or at a
specified minimum (or at prices above the minimum where possible). The broker
will then place an order in the CCASS computer trading system. The order will be
executed if there is a buy order (placed by a broker for some other investor who
wishes to buy the shares) at a price that matches the selling order. Settlement takes
place on the second day after the trade day (T+2). HKSCC acts as the settlement
counterparty in being the buyer to the selling broker and the seller to the buying
broker. From the legal perspective, the single market contract between the selling
and buying brokers is novated into two market contracts: one between the selling
broker who sells to HKSCC, and one between HKSCC to the buying broker. The
purpose of HKSCC acting as the counterparty is to reduce the risks to an investor
of the other party to the trade defaulting on their obligations to settle the trade.
Settlement on T +2 involves debits or credits of the shares to the broker's CCASS
account (depending on whether the broker is selling or buying), and payment is
effected electronically in the brokers' designated bank accounts. 106

'"' Re CA PacificFinance Utl (in liq) (No I) [1999]2 HKLR.D1.

106 For further delails, see Leslie S F Youngand RaymondC P Chiang, l'lze Hong Kong Securities lndushy (3rd edn,

StockExchangeofHongKong 1997) 103-117.

 TRANSFER OF SHARES 655

Investor can hold shares in CCASS directly. An investor can also hold interests 14.065
in shares directly in CCASS (in an Investor Participant Account) instead of holding
via an inte1mediary. As there is no intem1ediary between the investor and HKSCC
Nominees Ltd, the investor directly holds the equitable interest in the shares in the
investor's account in CCASS.
Investors may also choose to hold legal title to shares but not on CCASS. Persons 14.066
investing in listed shares can also choose to hold the legal title to the shares. Such
shares are not held in CCASS. The investor will hold the share certificates in the
investor's own name, and the investor will be registered as a member in the company's
register of members. If the investor wishes to sell the shares on the exchange, the shares
must first be deposited into CCASS. That is, the shares will need to be registered in
the name of HKSCC Nominees Ltd and the shares can then be sold in CCASS in the
manner outlined above.

2.2.4 Gifts of shares

Legal title to gift of shares. Where there is a gift of shares, legal title to the transferee 14.067
is obtained through the production of an instrument of transfer and registration of the
transfer by the company, similar to sales of shares.
Transferee can obtain equitable interest in shares before registration of transfer. 14.068
Before registration, the transferee can obtain an equitable interest in the shares
pursuant to the general principles in Milroy v Lord, 107 namely where the transferor
has done everything in his or her power necessary to transfer the ownership of the
property to the transferee. For example, if the transferor has, with an intention to gift
the shares to the transferee, provided an executed transfer and the share certificate to
the transferee, then the transferee will obtain an equitable interest in the shares from
that time. 108

2.3 Restrictions on transfer

2.3.1 Private companies

Private companies have provision in articles restricting right to transfer. Private 14.069
companies must have a provision in the articles restricting the right to transfer shares:
Cap.622, s.11.

Pre-emption rights
Pre-emption rights could confer right of first refusal on existing shareholders. 14.070
A provision conferring on existing members rights of pre-emption would be sufficient
to satisfy the requirement in Cap.622, s.11. Pre-emption rights can be in various forms.
For example, the articles could confer on existing shareholders a right of first refusal if
a shareholder wishes to transfer his or her shares, so that the exiting shareholder must
first offer his or her shares to the existing shareholders who have an option whether or

11
0 (1862) 4 De OF & J 264.
108
Re Rose [ I952) Ch 499; and see also Official Ad111i11istra/or
v Luk Hoi Tong (2005) 3 HKC 615.
656 SHARE CAPITAL

not to take up the shares. Such rights may be important for private companies where
the original proprietors wish to have control over who becomes shareholder in the
company. As small private companies are often operated on the basis of mutual trust
and confidence, the proprietors would wish to effectively have veto 1;ghts over who
can become involved in the business as a shareholder.
14.071 Matter of construction whether pre-emption provisions are engaged. It is a matter
of construction of the relevant articles to see whether the pre-emption provisions are
applicable to the facts of the case in hand. 109 Where the pre-emption clause refers to
a "transfer of a share", then ordinarily the clause is only engaged where there is to be
a transfer of the legal title to the shares. 110 Where the pre-emption clause is drafted
to cover a transfer of the shares or any interest therein, the clause applies if there is
a transfer of any proprietary interest in the shares (either legal or beneficial); but the
conferral of a commercial interest or practical control on another over or in respect of
the shares is not sufficient to trigger the pre-emption rights. 111
14.072 Directors under duty not to register transfer made in breach of articles. Where
shares are transferred in breach of the provision in the articles conferring pre-
emption rights, then the directors are under a duty not to register a transfer which
had, to their knowledge, been made in breach of the articles. 112 A member having a
right of pre-emption under the articles would have standing to apply to the court to
restrain the company from registering a transfer made in breach of the articles. 113 If
the transfer has already been registered, the member could seek rectification of the
register. 114 Generally rectification must be allowed in the absence of some matter
such as acquiescence or waiver. 115 Until rectification is made, the transferee must
be treated as the registered owner and is entitled to enjoy the rights as a member. 116
Accordingly the transferee should be regarded as the legal owner unless and until
the register is rectified. 117

Directors' power to refuse registration

14.073 Directors may have power to refuse registration of transfer. The articles may confer
on the directors a power to refuse registration of a transfer (e.g. Model Articles (private
companies), art.2(2)), with such a provision also being sufficient for compliance with

10• Re Joris (ln1ema1io11al)(2014) 4 HKC 38, (5) (CA).

11• See Re Joris (flltemalional) (2014) 4 HKC 38 (CA) (pre-emption clause, which referred to the transfer of shares,
was held to apply to a transfer by the trustee (of shares held on trust for the deceased beneficiaiy) of the legal
title to the shares to the personal representative of the deceased beneficiary).
111
See Re Coroi11Lid. McKille11 v Misla11d (Cyprus) /11ves1me111s lid (No. I) [2012) BCC 575 (Eng CA).
112
Tell v Phoenix Properzy a11dfllves1111e111 Co Ltd (1986) 2 BCC 99,140; Re Coroi11 lid, McKille11 v Mi.tla11d
(Cyprus) /11vestme111s lid (No.2) [2014) BCC 14, [89), [143), [162).
113
Rayfield v Ha11ds[ 1960) Ch I; Cr11mp1011 v Morri11e Hall Pty Lid ( I965) 82 WN (Ptl) (NSW) 456,460; Curlis v
.I .I Curlis & Co lid [ I984) 2 NZLR 267.
"' Re TA Ki11g (Services) Lid. Coure/1 v King [2004] BCC 307; Re Coroi11 Ltd, McKillen v Mis/and (Cyprus)
Jnves1111ents Lid (No.2) [2014] BCC 14, [90], [143), [165] (Eng CA). The application for rectification would be
made under Cap.622, s 633.
'" Re Con:,in lid. McKillen v Mis/and (Cyprus) /11ves1me111sLtd (No.2) [2014) BCC 14, [90]per Arden L.J.
"' Re Coro in Lid. McKillen v Misla11d (Cyprus) /11ves1me111s Ltd (No.2) [2014) BCC 14, [89] per Ardcn LJ, [ 143]
per Moore-Bick LJ, (165) per Rimer LJ.
111
See Re Coroi11lid. McKille11 v Misla11d (Cyprus) /11vest111e111s lid (No.2) (2014) BCC 14, [89) per Arden LJ.
 TRANSFER OF SHARES 657

Cap.622, s.11. In the absence of a provision in the articles conferring on the company
a power to refuse registration, a shareholder has a right to transfer his or her shares
without the need for the company's consent. 118 Where the provision in the articles is
in a fonn which only gives the directors the power to refuse registration (as opposed
to a provision requiring the directors' approval as a pre-condition for registration),
then unless there is an actual decision of the board refusing registration, the transferee
would be entitled to registration. 119
Notice of refusal to register must be given within two months. If a company refuses 14.074
to register a transfer, the company must give notice of the refusal to both the transferor
and transferee within two months after the date on which the transfer was lodged with
the company: Cap.622, s.151. On an application by the transferor or transferee, the
court may disallow the refusal and order that the transfer be registered if the court is
satisfied that the application is well founded: Cap.622, s.152.
Grounds for refusal to register. Where the articles limit the grounds on which the .14.075
directors can refuse to register a transfer, the directors can refuse registration only on
the specified grounds. 120 Where the articles allow the directors to refuse registration
in their absolute discretion, the directors are still limited by their fiduciary duties
in exercising the power to refuse registration. 121 Accordingly, the court may order
registration if the directors have acted capriciously or unfairly in refusing registration
or are otherwise in breach of their fiduciary duties in refusing to register a transfer. 122
In Fireman v Golden Rice Bowl Ltd, 123 Jones J held that, in the context of a private
company, directors are entitled to refuse registration in favour of a complete stranger
so as to preserve the original character of the company. In this respect, the courts are
slow to impugn the decisions of the directors in recognition of the quasi-partnership
nature of small private companies which are formed on the basis of an element of
mutual trust and confidence between the proprietors. The directors are entitled to
preserve the original nature and character of the company which may otherwise be
altered if a stranger was permitted to obtain equity interests in the company. 124
Right to request company to give reasons for refusal to register under Cap.622. 14.076
The onus of proof is on the persons challenging the directors' decision to show that the
directors breached their duties in refusing to register a transfer. 125 Where the articles
specify the paiticular grounds on which directors are entitled to refuse registration
of a transfer, the directors can be required to state their grounds for refusal in
interrogatories. 126 However, under the common law, directors are not obliged to state

"' Re Smith, Knight & Co ( 1868-69) LR 4 Ch App 20; Re Discoveret:~ Finance Co,p Ltd [ I910) I Ch 312.
119 Moodie v Shepherd (Bookbinders) lid [ I949] 2 All ER 1044; Re Redford lllter11mionalLtd [2016) 2 HKLRD 27.
12<J Moffat v Farq11har( 1878) 7 Ch D 59 I; Re Bell Bros Ltd ( 1891) 65 LT 245; Re Bede Steam Shipping Co lid
[ 1917) I Ch 123; Eq11itycoq>/11d1wriesLtd v AC! /1111Ltd [ 1987) VR 485.
121 Re Smith & Fawceu Ltd [ 1942) Ch 304.

122
Re Greslwm Life Assurance Society (1872-73) LR 8 Ch App 446; Re Smith & Fawcell Ltd [1942) Ch 304;
Fireman v Golden Rice Bowl Ltd [1987] 2 HKC 549.
1" [ 1987) 2 HKC 549.
1" See also Charles Forte !11ves1me11tsLtd v Ama11dc1[ 1964] Ch 240.
1" Duke of Sutherland v British Dominions land Set1leme11tCorp Ltd [1926) Ch 746; Re Smith & Fawcetl Ltd
(1942) Ch 304; Fireman II Golden Rice Bowl Ltd[1987] HKLR 981.
"' Duke ofS11tlterla11dv British Dominions Land Settle111e11t Co,p Ltd (1926) Ch 746.
658 SHARE CAPITAL

the reasons which influenced them in concluding that there were proper grounds to
refuse registration. 127 Cap.622, s.151 (3) alters the common law position by conferring
on the transferor and transferee a right to request the company to give reasons for any
refusal to register the transfer. The company must either provide the reasons or register
the transfer within 28 days after receiving the request. 128

2.3.2 Public companies

14.077 Restrictions on registration not possible for listed companies. There is nothing
in Cap.622 that prevents a public company from imposing restrictions in its articles
on the registration of transfers. However, restrictions are not possible for listed
companies as the listing rules require that securities that are to be listed must be freely
transferable. 129

2.4 Fraudulent transfers

14.078 Fraudulent transfers void. Where a transfer is forged with the signature of the
owner of the shares, the transfer is void and the original owner is entitled to restrain a
transferee from being registered or to seek rectification of the register if the registration
of the transferee has already been done. 130This is so even if the owner was negligent in
allowing the fraud to occur, unless the conduct of the owner is sufficient to amount to
an estoppel. 131The original owner who is entitled to the shares would also be entitled
to obtain compensation from the company for any dividends that should have been
paid to the owner in the period before rectification. 132 Cap.622, s.157 provides that
a company having share capital has power to pay compensation for any loss arising
from a transfer of the company's shares in pursuance of a forged transfer or of a
transfer under a forged power of attorney. The provision enables the company to pay
compensation even if it is not under a legal obligation to do so. 133
14.079 Person who presents fraudulent transfer for registration liable to indemnify
company. A person who presents a fraudulent transfer for registration would be
liable to indemnify the company for any losses suffered by the company as a result
of registration of the transfer. 134 In Yeung Kai Yung v Hong Kong and Shanghai
Banking Corp,135 the share certificates of a member were stolen and a transfer was

121 Re Gresham LifeAss11ra11ce Society (1872-73) LR 8 Ch App 446; Duke ofS111herla11dv British Dominions Land
Seulement Co,p Ltd [ 1926) Ch 746.
"' For background on introduction of the provision, see Financial Services and Treasmy Bureau, CO Rewrite:
Second Phase Consultation of the draft Companies Bill - Co11sultatio11Paper (May 2010), 28-30, and
Con.wltaiion Co11c/11sions(October 2010), 12-14.
129
Stock Exchange Listing Rules, r.8. 13.
iio .Jolms1011 v Re111on( 1869-70) LR 9 Eq 181; Re Bahia and Sa11Francisco Railway Co Lid (1867-68) LR 3 QB
584. See para.14.104 below on rectification.
1! 1 Welch v Bank of England [ 1955) Ch 508.

ii, Re Bahit, and Son Francisco Rt,ilway Company lid (1867-68) LR 3 QB 584.
Ill The provision is derived from the Forged Transfer Acts of 1891 and 1892 in England and was recommended
for inclusion in the Companies Ordinance in the Second Report of the Comptmies Law Revision Commif/ee:
Comptmy law (12 April 1973), 100.
1
,.. Sec Sheffield Co,p v Borclay [ 1905) AC 392; l'<?ung
Kai Yung v Hong Kong and Shanghai Banking Corp [ 1981)
AC 787; CadbwySchweppes Pie v Halifax Share Dealing (2006) EWHC 1184 (Ch).
n, [198l)AC787.
 TRANSMISSION OF SHARES 659

executed with the member's signature forged. A stockbroker, who was not aware of
the forgery, presented the certificates and transfer to the company on behalf of the
transferee. The Privy Council affirmed the Hong Kong Court of Appeal's decision that
the broker 136 impliedly warranted that the documents presented to the company were
genuine and would therefore be liable to indemnify the company for losses suffered by
the company by acting on the request for registration. Liability is inescapable even if
the persons presenting the documents to the company were not aware of the fraud or
could not with reasonable diligence have discovered the fraud. 137
Liability for fraudulent transfers. For example, consider the situation where A is 14.080
the rightful owner of shares but a rogue forges a transfer in favour of B, who is then
registered and to whom a share certificate is issued. B then transfers the shares to C.
Before C is registered, A discovers the fraud and obtains rectification of the register.
The company can be liable to C on the basis of the company's representation in the
share certificate that B was the owner of the shares. 138 However, the company can
seek an indemnity against B in respect of the company's liability to C. B would have
remedies against the rogue, for example in the tort of deceit.

3. TRANSMISSION OF SHARES

3.1 General

Transmission of shares involves automatic change of ownership. A transmission .14.081

of shares involves a divesting of shares from an existing shareholder to another by
the operation of law. A transmission is distinguished from a voluntary transfer in
that the former involves an automatic change of ownership or devolution of property
unconnected with any direct act of the party to whom the property is transmitted. 139
Examples of where transmissions occur include:

• where a shareholder dies;

• where a shareholder (who is a natural person) becomes bankrupt; and
• where a court makes a vesting order which vests ownership of shares 111
another. 140

136 The transferee would also have been liable to the company as principal. The brokers were liable for their own acts
notwithstanding that they were acting as agent for another.
'" [ 1981] AC 787, 797, citing Sheffield Coq> v Barclay [ 1905] AC 392, 399; and see also Royal Ba11kof Scotla11d
Pie v Sandstone Properties Ltd [ 1998] 2 BCLC 429. In the Ye1111g Kai Yimg case, the broker had also argued that
the company was itself negligent as it could have discovered the fraud if it had checked the transfer against the
specimen signature of the true owner in the possession of the company. The Privy Council held that the company
would be deprived of the indemnity only if there was default on its par1 in the nature of dishonesty or lack of
good faith. However, query whether the position may now be altered under the Civil Liability (Comribution)
Ordinance (Cap.377): sec [1981] AC 787, 799-800.
us See para.14.139 below.
" 9 Woifton v Registrar General (NSW) (1934) 51 CLR 300. 311-312.
,<-0 A11dcoNominees Ply Ltd v lestato Pty Ltd (1995) 17 ACSR 239 (vesting order made under legislation having the
effect of vesting ownership through the order itself).
660 SHARE CAPITAL

14.082 Legal title may potentially vest in transmittee upon transmission of shares before
registration. Depending on the nature of the particular transmission of shares, the legal
title of the shares can vest in the transmittee upon operation oflaw such that the transmittee
becomes the legal owner of the shares even before registration as a member. This is the
position in the case of a transmission of shares to the legal personal representative upon
the death of a shareholder. 141 In Australia, where a vesting order in respect of shares was
made by the court under the Trustee Act 1925 (NSW), it was held by Santow J of the NSW
Supreme Court that the vesting order involved a transmission of ownership of the shares
by operation of law.142 His Honour observed that there is much to be said for the view that
absence of registration did not preclude the transmittee from having legal title to the shares
in circumstances where the company was aware of the vesting order and would be obliged
to register the transmittee. At the least, the transmittee would be considered as having "an
inchoate right, fructifying on registration, to full legal ownership of the shares". 143 However,
in the case of a transmission upon bankruptcy, the bankrupt is regarded as remaining as
the legal owner of the shares so long as he or she remains on the register of members as
holder of the shares, while the trustee in bankruptcy is vested with equitable interests in the
shares. 144 In any case, even if the transmittee is regarded as becoming the legal owner of
the shares even prior to registration, the transmittee is not a member of the company w1less
the transmittee is registered in the register of members. 145

3.2 Transmission upon death of a shareholder

14.083 Legal and equitable title of shares vest in deceased's personal representative.
Following the death of a shareholder, the legal and equitable ownership of the shares
of the deceased would vest in the legal personal representative. 146 As noted above,
though, the personal representative would not be a member unless registered as such.

3.2.1 Registration llS " member

14.084 Personal representative entitled to be registered as member. Since legal title
vests in the personal representative, the company would recognise only the personal
representative as the person entitled to the shares. 147 Subject to any restrictions in
the company's articles, the personal representative is entitled to be registered as a
member. 148 For registration, the personal representative would need to produce evidence
to the company oflus or her status as personal representative. 149 Under Cap.622, s.161,
the production to the company of any docmnent which is by law sufficient evidence

141
See para.14.083 below.
142
A11dcoNominees Pry lid v Leswro P~l' Ltd ( 1995) 17 ACSR 239, 257-259.
143
A11dcoNominees Pry Ltd v Lestato Pty Ltd (1995) 17 ACSR 239,259.
''"' See para.14.092 below.
145
Re Bowling and JVelby'sContract [ l895] l Ch 663.
146
Roberts v Lener 'T" Estates Ltd [1961) AC 795; Karupayee Ammal v GMT Industrial Ltd (unrcp., HCMP
522/2017, (2017) HKEC 2881), (15); Gore-Brown 011 Companies (vol.2) para.23(31) (update 134).
'" Roberts v Lener 'T' Estates Ltd (1961) AC 795; and sec also Model Articles (private companies) art.58; Model
Articles (public companies) art.63 (Companies (Model Arlicles) Notice schs.1 and 2).
"' Scoa v Fronk F Sco11(lo11do11)Ltd (1940) Ch 794; Karupayee Ammal v GMT Industrial Ud (un.rcp., HCMP
522/2017, (2017) HK.EC 2881).
"' E.g., see Model A1ticles (private companies) art.66; Model Articles (public companies) art.84.
 TRANSMISSION OF SHARES 661

of probate or letters of administration granted to a person must be accepted by the

company as sufficient evidence of the grant.
Not necessary for personal representative to be registered as member. It is not 14.085
always necessary for a personal representative to be registered as a member and the
personal representative might choose not to do so to avoid personal liabilities on the
shares. 150 The personal representative can dispose of the shares for the purposes of
the administration of the estate or vest the shares in a beneficiary of the deceased 's
estate pursuant to Cap.622, s.153, which enables a personal representative to execute
a transfer of the shares, even though the personal representative is not a registered
member. A personal representative may wish to be registered though, in order to
exercise or enjoy all the rights of a member. 151

3.2.2 Restrictions 011 registratio11

Articles may impose restrictions on registration of persons. Except in the case 14.086
of listed companies, 152 the articles may impose restrictions on the registration of a
person to whom shares are transmitted. However, a provision restricting registration
of a transfer might not, as a matter of construction of the provision, be wide enough
to cover a transmission. 153 The Model Articles (Cap.622H) expressly provide for the
directors' power to decline registration of any person becoming entitled to a share in
consequence of the death of a member. 154 It is also possible for pre-emption rights to
be included in the articles which are triggered upon the death of a shareholder. 155
Right to request reasons for refusal of registration of persons. Where a company 14.087
refuses to register any person as a member in respect of shares which have been
transmitted to him or her by operation of law, the person is entitled to call on the
company to furnish a statement of the reasons for the refusal: Cap.622, s.158. If the
company fails to furnish such statement within 28 days after the request, the company
must register the person as a member: Cap.622, s.158(4).
Registration of persons subject to pre-emption rights. Where the articles contain pre- 14.088
emption rights for existing members that are triggered upon the transmission of shares,
the registration of the transmittee as a member is subject to the pre-emption rights. 156

3.2.3 Rights a11dliabilities in the abse11ce of registration

Estate of deceased entitled to profits of shares and subject to their liabilities. 14.089
Although a personal representative is not a member unless registered, the deceased's

1
"' The personal representative would be personally liable for calls made if registered as a member: see Re City of
Glasgow Ba11k(111Liquidation) (l 879) 4 App Cas 547,593.
1s1 See para.14.090 below.

152 See para. 14.077 above.

153 Wood v W & G Dea11Pty Ltd ( 1929) 43 CLR 77; Stothers v William Steward (Holdings) Ltd sub 110111Re William

Steward {I-foldings)Ltd (1994] BCC 284, [1994) 2 BCLC 266; K(mtp(1yeeA111111al II GMT Industrial Ltd (unrep.,
HCMP 522/2017, (2017) HKEC 2881). [I 7). The use of the word "transfer" can sometimes cover cransmissions;
che question is a matter of conscruction: sec Waters v Wi11111ard1111
Pty Ltd (1990) 3 ACSR 378 (provision rererrcd
co "any transfer (whether voluntary or by operation of law)", which was wide enough to cover transmissions).
"' Model Articles (private companies), art.66; Model Articles (public companies), art.84.
1
" See para.14.088 below.
"' Cap.622, s.160; and see Lee Chee Ngor Moreta v Prudential Enterprise Ltd (1991) 2 HKC 499.
662 SHARE CAPITAL

estate is generally entitled to the profits and advantages attaching to the shares and
subject to the liabilities on the shares. 157 Accordingly, the estate would be entitled to
dividends or the right to receive allotments of shares on a rights issue, 158 and the estate
would be subject to calls made on unpaid shares. 159
14.090 Articles may modify position of what estate is entitled to. The articles can, however,
provide otherwise. For example, the Model Articles provide that a person becoming
entitled to a share by reason of the death of a holder is not entitled to exercise rights
in relation to meetings without being registered as a member. 160 Also, under those
provisions, the directors may give notice to such a person requiring him or her to elect
either to be registered himself or herself or to transfer the share, and if the notice is not
complied with within 90 days, the directors may withhold payment of all dividends,
bonuses or other moneys payable in respect of the share until the requirements of the
notice have been complied with.

3.2.4 Joi11tshareholders
14.091 Surviving shareholder becomes owner of shares. Where a share is owned jointly
by two or more shareholders, the surviving holders would become the owners of the
shares. 161

3.3 Transmission upon bankruptcy

14.092 Equitable interest in shares of bankrupt vest with Official Receiver. Upon a
bankruptcy order being made, the equitable interests in the shares of the bankrupt vest
in the Official Receiver. 162The bankrupt remains a member and the legal owner of the
shares unless the trustee of the bankrupt's estate becomes registered as a member. 163
However, the bankrupt would be required to exercise votes at meetings in accordance
with the instructions of the trustee since the trustee holds the beneficial interests in
the shares. 164
14.093 Trustee in bankruptcy entitled to be registered as member.The trustee in bankruptcy
is entitled to be registered as a member, 165 but if registered would become personally
liable for calls on the shares, as is the case for the personal representative, discussed
above. Cap.622, s.158 and the provisions in the Model Articles on registration of
transmittees also apply in the case of a transmission of shares upon bankruptcy. 166
If the trustee in bankruptcy is not registered, the trustee still has power to transfer the

"' James v Btte11aVe11turoNitmte Grounds Sy11dicateLtd [1896) I Ch 456, 46~67.

158
.James v B11e11a Nitrate Grounds Syndicate Ltd [1896) I Ch 456, 46~67.
Ve11111ra
"• New Zealand Gold Extraction Co (Newhwy-Vautin Process) Ltd v Peacock [1894] I QB 622.
160 Model Articles (private companies), art.66; Model Articles (public companies), art.84.
161 E.g., Model Articles (private companies), art.65; Model Articles (public companies), art.83. Joint ownership of shares
must be by way of a joint tenancy as shares cannot be held in tenancy in common at common law, as is the case for
choses in action generally: Re McKerre/1 (1912) 2 Ch 648. The joint holders can be 1cnantsin common in equity.
162
Pursuant to 1he Bankruptcy Ordinance (Cap.6), s.58.
163 Morgan v Gray (1953) Ch 83; Re 1-fl Bolton Engineering Co Ltd(l956] Ch 577.
1
6-1 Morgan v Gray (1953] Ch 83; Re HL Bolton £11gi11eeringCo Ltd [1956] Ch 577; Qiyang Ltd v Mei Li New
£11ergy Ltd (2016) 4 HKLRD 790.
"' Wood v W & G Dean Pty Ltd (1929) 43 CLR 77.
1
'" See para.14.086 above.
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 663

shares. 167 The trustee in bankruptcy also has a right to petition for winding-up of the
company, even though the trustee is not a registered member. 168
Trustee in bankruptcy can disclaim shares. The trustee in bankruptcy can 14.094
disclaim the shares pursuant to the trustee's general powers of disclaimer of onerous
property. 169 Where the bankrupt remains the registered member, any disclaimer of
the shares does not bring the bankrupt's legal title to the shares or the bankrupt's
rights as a registered member to an end. 170

4. REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS

4.1 Register of members

4.1.1 Requireme11tjor a register

Companies required to keep register of members. Companies Ordinance (Cap.622), 14.095
s.627 requires every company to keep in the English or Chinese language a register of
its members. The register must contain the following particulars:

• the names and addresses 171 of the members;

• a statement of the shares held by each member, distinguishing each share by
its number if the share has a number;
• the amount paid or agreed to be considered as paid on the shares of each
member;
• the date on which each person was entered in the register as a member; and
• the date on which any person ceased to be a member. 172

Single shareholder companies. If the number of members in a company falls to one 14.096
or increases from one to t\vo or more, each of those occurrences must be stated in the
register. 173
Register in hard copy or electronic form. The register may be kept in hard copy form 14.097
or electronic form. 174
Register to be kept at registered office or "prescribed place". The register can 14.098
be kept at the registered office or any "prescribed place" (which is any place in

16' Bankruptcy Ordinance (Cap.6), s.53(3).

168 Com1>anies(Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), s.179(1); Ng !'tit Chiv Max Share
Ltd (1997-98) I HKCFAR 155, 164.
169
Bankruptcy Ordinance (Cap.6), s.59.
1
1<J Ng Yat Chiv Ma.x Slu,re Ltd (1997-98) I HKCFAR 155.
171
The address need not be a residemial address: Hemmerling v IMTC Systems (1993) 109 DLR (4th) 582.
172 Cap.622, ss.627(2) and 627(3).
"' Cap.622, s.629. This requirement was originally introduced in 2003 (in predecessor CO, s.95A (repealed)), for
purposes of transparency,when it became possible for companies to be established with only a single member.
11
~ Cap.622.s.655.
664 SHARE CAPITAL

Hong Kong). 175 Notice needs to be given to the Registrar of the place where the register
of members is kept, unless the register has at all times been kept at the registered office
of the company.'76
14.099 Index of names of members required if more than 50 members. If a company has
more than 50 members, the company must also keep an index of the names of the
members: Cap.622, s.630. Such an index is not required if the register is in such a form
as to constitute in itself an index.
14.100 Entries of former members need to be kept for ten years. Under Cap.622, entries in
a register on former members need only be kept for a period of I Oyears from the date
the person ceased to be a member (instead of30 years under the predecessor CO).'77

4.1.2 Registered members and status of the register

14.10) Register determines who are members of the company. The register determines
who the members of the company are 178 and who the persons holding the legal
ownership of shares in the company are. 179 The founder members become members
upon incorporation of the company, but other persons become members and the legal
holder of shares only upon registration. 180
14.102 No notice of any trust entered on register. No notice of any trust may be entered
in the register: Cap.622, s.634. Accordingly, as far as the company is concerned, the
company needs to recognise only the legal owner of the shares and not the persons
who hold only equitable interests in the shares. 181 Where a trustee holds shares on
behalf of another, it is the trustee who is liable to the company for payments and
liabilities on the shares and not the beneficial owner.182 However, it has been held in
Hong Kong that while the Companies Ordinance precludes registration of equitable
interests on the register, the Ordinance does not prevent a company from recognising
an equitable interest if it chose to do so, such that a beneficial owner of shares who
owed money to the company could be required to pay the outstanding amounts before a
distribution of surplus assets could be made to the legal holder of those shares. 183 Also,
the principle that a company does not take notice of beneficial interests in its shares
only protects the company in the proper conduct of its proceedings. 184 For example,
where the beneficial interests in a bankrupt's shares are vested under the Bankruptcy

175 Cap.622, s.628(1), and Company Records (Inspection and Provision of Copies) Regulation (Cap.6221).
176
Cap.622, ss.628(3) and 628(4).
117
Cap.622, s.627(5). Cf. predecessor CO. s.95(1)(c) (repealed).
178 See Cap.622, s.2 (definition of "member") and s.112; Enviroco Ltd v Fat:ftad Supply AIS [201 I] UKSC 16,
[201 I] I WLR921, [38]-[40].
,,. Re Co1t>i11
Ltd, McKillen v Mis/and (Cyprus) Jnvestmenrsltd [2014] BCC 14, (89].
180 Sec para.14.048 above. However, the legal representative to whom shares arc transmi1tcd upon death of member
holds legal litlc even without registra1ion: see para.14.082 above.
181 Societe Generalede Paris v Walker(I 885) 11 App Cas 20.
182 Re East of £nglcmdBanking Co (I 865) 2 Drew & Sm 452; Muir v City of Glasgow Bank (1879) 4 App Cas 337.
That is the position as between the trustee and the company. As between the trustee and the beneficiary, the latter
is bound to indemnify the trustee and not only out of the trnst property: Hardoon II Belilios [ 190 I) AC 118, 124.
See also 8111/erII Cumpston (1868-69) LR 7 Eq 16; James v May (1873) LR 6 HL 328.
183 Re Kowloon Co11tai11er lfiireho11seCo Ltd (1981) HKLR 210.
1
" Qiya11gLtd v Mei Li New Ene1i:l'Ltd (2016) 4 HKLRD 790, (43].
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 665

Ordinance (Cap.6) in the trustee in bankruptcy, if the company has knowledge of the
bankrupt shareholder's lack of authority (from the trustee in bankruptcy) to vote at a
general meeting, the company participates in the bankrupt's fraud against the trustee in
bankruptcy. In such circumstances, the company may not rely on the protection given
by Cap.622, s.634. 185
Register proof of membership in the absence of evidence to the contrary. In the 14.103
absence of evidence to the contrary, the register is proof of any matters by which
the Companies Ordinance requires or authorises to be inserted therein: Cap.622,
s.635. Although the register is the starting point in determining who the members
of a company are, other evidence may be relied upon to establish membership and
the right to be entered on the register of members. 186 Accordingly, the register is
not necessarily conclusive as to who the members of the company are or who the
rightful owners of shares are. 187 If a person did not agree to be a member, the mere
insertion of that person's name on the register would not be sufficient to constitute
that person as a member of the company. 188 If pre-conditions in the articles for a
person to become member are not satisfied, again such persons will not be valid
members despite registration of their names in the register. 189 Also, where there
is a forged transfer that has led to the transferee becoming the registered owner
of shares, the original owner remains the legal holder of the shares as the forged
transfer is void. 190

4.1.3 Rectification of the register

Court has power to rectify register in certain circumstances. Under Cap.622, 14.104
s.633, the court may order rectification of the register if: (a) the name of any person
is, without sufficient cause, entered in or omitted from the register of members; or
(b) default is made or unnecessary delay takes place in entering in the register the
fact of any person having ceased to be a member. 191 The persons who can apply are
any member of the company, any person aggrieved or the company itself. A "person
aggrieved" is a person whose name ought to be entered in or omitted from the
register. 192 On an application under s.633, the court may decide any question relating
to the title of any person who is a party to the application and also any question
necessary or expedient to be decided for rectification of the register. 193 The section
is wide enough to empower the court to order the deletion of some of a registered
shareholder's shares as recorded in the register. 194

iss The bankrupt shareholder's vote will be regarded as invalid: see Q~yong Lid v Mei Li New E11ergyLtd [20 I6] 4
HKLRD 790, [43], [46].
186 Re Hong Kong Chiu Chow Po fling Buddhism Association Ltd [2016] 1 HKLRD 513, [29].
187 Re Briton Medical and Ge11eralLife Association ( I 888) 39 Ch D 61.
188 Sec the definition of member in Cap.622, s.2( 1).
189 POW Services Ltd v Clare [1995] 2 BCLC 435.
190 Jolmston v Renton (1869-70) LR 9 Eq 181; Re 8ahia and Sa11Fro11ciscoRailway Co ltd (1867-68) LR 3 QB 584.
1 1
• As to how the register should be rectified 10 reflect 1he court order, see Re iron Ship Building Co (I 865)34 Beav
591; Re SidexAustralia Pty Ltd (1995) I 8 ACSR 436.
192
Yip Peter v Asian Electro11icsLtd [ 1998)2 HKC96. Seealso Re Hong Kong and China Gas Co Ltd [ 1999)I HKC78.
193
Cap.622,s.633(3).
194 Re Transatlantic Life Assurance (1980) I WLR79.
666 SHARE CAPITAL

4.1.4 Inspection of the register

14.105 Members and non-members have right to inspect register. Members have a right
to inspect the register without charge, while other persons can inspect the register
upon payment of a fee: Cap.622, ss.631 (1) and 631(2). A member or any person can
also require the company to provide him or her with a copy of the register or any part
thereof upon payment of a fee: Cap.622, s.631 (3). Alternatively, the member or person
is entitled to make his or her own copies in the course of inspection. 195 Where the
company refuses to allow inspection or to provide a copy of the register or to allow
copies to be made, the company and every responsible person 196 commits an offence. 197
The court may also make an order compelling an immediate inspection of the register
or direct that the copies required shall be sent to the persons requiring them. 198
14.106 Inspection not permitted where right to seek inspection is being abused. In
Democratic Party v Secretary for Justice, 199 a decision where Hartmann J upheld the
constitutionality of the predecessor CO, s.98 (repealed) (now Cap.622, s.631), 200 his
Lordship also held that if inspection is sought for a purpose which amounted to an
abuse, the court has the discretion to refuse to compel inspection. 201 Also there is no
criminal liability arising from the company's refusal to allow inspection or to provide
copies in such circwnstances. 202
14.107 Inspection not permitted where inspection sought for improper purposes: Lam
Kin Chung case. In Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd, 203
a member was denied access to the company's register of members. He had requested
access for the purpose of calling an extraordinary general meeting to address and
vote on matters relating to: (1) breach of the articles concerning members' rights to
nominate or be elected as members of the company's management committee; and
(2) excessively high sala1ies and wages of the company's staff. The Court of First
Instance set out the following principles. 204 The court has a narrow discretion to refuse
to order inspection. The burden is on the company seeking to resist inspection to
persuade the court that it is appropriate to exercise that discretion. The court will not
order inspection "if disclosure is impossible, or is sought for an improper purpose,
or would serve no useful purpose, or would amount to an abuse". 205 Also, inspection
may be denied if it is necessary for the protection of privacy and confidentiality of its
members. On the facts of the case, the court held that: (1) it was a proper purpose to

195 Company Records (Inspection and Provision of Copies) Regulation (Cap.6221) s.8. This ovenides Re Balagltat
Gold Mining Co [1901] 2 KB 665, where it had been held that the express right to require the company to provide
copies impliedly excluded the person from making his own copies.
196
See Cap.622, s.3.
191 Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), ss.7, 8 and 11.

198 Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), ss.9 and 13.

,,. [2007] 2 l lKLRD 804.

200 The court held that the public's right of inspection of a company'.~register of members did not infringe the rights

to freedom of association and 10 privacy under articles 27 and 30 of the Basic Law and articles 18 and 14 of the
Hong Kong Bill of Rights.
2'll [2007] 2 HKLR D 804, [78].

2<l2 [2007] 2 1-lKLRD804, [79].

ro3 [2017)4HKLRD192.
2<1-l [20 I7) 4 HKLRD I 92, [8)-[9).
ro, [20 I7) 4 HKLRD I92, (8)
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 667

inspect the register to enable the applicant to discuss at an EGM the denial of members'
rights to nominate or be elected as members of the management committee; 206 but
(2) it was an improper purpose to inspect the register to communicate with other
members regarding the allegedly excessive salaries and wages since there was no
evidence of the type and scale of operation of the company and the nwnber of staff
involved and since:
" ... a member's professed desire to communicate with other members regarding
his allegations of purported wrongdoings of the directors were not proper
purposes ... as these desired communications 'could not confer anything of value
on fellow [members]"'. 207
Scope of applicability of a proper purposes test. It should be borne in mind that 14.108
in the Companies Ordinance Rewrite which led to the enactment of Cap.622, the
Government had declined to adopt the UK reforms on inspection of the register.
Under the Companies Act 2006 (UK), ss.116 and 118, persons seeking access to the
register must state the purposes of the request for access, and, on application by the
company, the court must make an order relieving the company from the obligation to
comply with the request if it is not made for a proper purpose. This regime has been
described by the English Court of Appeal as effecting "a major change in the law".208
On the other hand, the Cap.622 regime still reflects the pre-2006 UK position. Where
the purpose of inspection amounts to an abuse of the right of inspection, then it can
be accepted that the court has power to refuse to order inspection under the Cap.622
regime. 209 However, it appears that the inspection provisions in Cap.622, s.631 and
Cap.6221, ss.7 and 9 do not import a proper purposes test similar to that which
constrains the powers of directors who act as fiduciaries. In the case of members, the
right of inspection is a membership right-and for companies with share capital, the
right is an incident of the members' property right in their shares. 210 As members are
not fiduciaries, they are not subject to proper purpose duties of the type imposed on
directors as fiduciaries. Furthermore, subject to the articles, members would not be
under any duty to disclose their reasons or purposes for inspection. 211
Inspection for purpose of communicating with members about directors' 14.109
wrongdoing. Despite the Lam Kin Chung case,212 it is submitted that generally a
member should not be denied the right of inspection where inspection is sought to
communicate with other members about alleged wrongdoing of the directors. The
court in that case cited the UK decision of Re Burry & Knight Ltc/213 for the principle

206 [2017] 4 HKLRD 192, [l2]-[17].

207
[20 I7] 4 HKLRD I92, [I 8]-[ I9], citing Burry v Knight [2014] I WLR 4046, [19].
208 Re Buny& Knight Lld[2014] I WLR 4046, [I I].

'°' Democratic Party v Secretaryfor Justice [2007] 2 HKLRD 804; Lam Kin Chung v Soka Gakkai lnremational of
Hong Kong Ltd [2017] 4 HKLRD 192. See also Pelling v Families Need Fathers Ltd [2002] 2 All ER 440.
''' Davies v G,is Light and Coke Co [ 1909] I Ch 248, 254; Re 8uny & Knight Ltd [2014) I WLR 4046, [11).
"' For the prc-2006 position in the UK, the English Court of Appeal has observed that the law "did not inquire into
[a member's) motives for wanting access" to the register: Re 8uny& Knight Ltd [2014) I WLR 4046, [I 1), citing
Dt,vies v Gas light and Coke Co [1909) J Ch 248; and sec also Holland v Dickson (I 887) 37 Ch D 669; Gore-
Brown 011 Companies (vol.1) para. l0A[l 2] (issue 136).
211 See para.14.107 above.

rn [2014) I WLR 4046.

668 SHARE CAPITAL

that inspection for this purpose was improper where it would not confer anything of
value on fellow members. The UK court in Re Burry & Knight Ltd had applied the
"proper purposes" test under the Companies Act 2006 provisions. The court disallowed
inspection for the purpose of communicating with members about past misconduct
(occurring about two decades earlier) which the court referred to as now being ''very
stale" in circumstances where the applicant for inspection had already pursued those
allegations before, where professional advice of auditors and solicitors had previously
rejected the allegations of impropriety, where there was Iittle indication of what damage
the company suffered as a result of the alleged defaults, and where it was difficult
to conceive that the applicant could now (in 2014) prove the allegations of events
happening in the 1990s.214 Notwithstanding the decision on the facts, the UK court noted
that the statutory provisions on the right of access to the share register reflects "a strong
presumption in favour of shareholder democracy and a policy of upholding principles
of corporate transparency and good corporate governance"215 (emphasis added).
Moreover, the court accepted that "it is in principle for shareholders to assess whether
a corrununication is of value to them and what action they should take". 216 Accordingly,
even if a proper purposes test applies under Cap.622 (over and above a test based on the
concept of"abuse" of the right of inspection), it is submitted that save for exceptional
circumstances such as those that arose in Re Burry & Knight Ltd, it would generally be
a proper purpose for members to inspect the register to communicate with each other
regarding alleged wrongdoing by the directors. This is important in upholding good
corporate governance, and moreover it should generally be a matter for the members to
determine whether they wish to take any action in respect of the alleged wrongdoing.
14.110 Right of inspection cannot be exercised where register closed. The right of
inspection cannot be exercised where the register is closed under Cap.622, s.632.
The articles might also provide that transfers of shares would not be registered when
the register is closed. 217 Registers are normally closed for the purposes of a general
meeting, so as to facilitate the company's determination of who the members are for
the purpose of sending notices and for attendance and voting at the meeting.

4.1.5 Branch registers

14.111 Branch register of members resident outside Hong Kong may be kept. Under
Cap.622, a branch register of members resident in a place outside Hong Kong may be
kept in that place so long as the articles allow.218
14.112 Branch register may be helpful for overseas members. A branch register may be
useful for the convenience of overseas members, for example, where the company's
shares are listed in an overseas stock exchange.
14.113 Shares registered in branch register. The shares registered in a particular branch
register must not be registered in the principal register of members (which is kept in
Hong Kong), nor in any other branch register of the company: see Cap.622, s.638.

'" [2014) I WLR 4046, [37], [73), [75).

215 [2014) J WLR 4046, [24).
>16 [2014) I WLR 4046, [25).
"' Sec Model Articles (public companies), art.82.
118 Cap.622,s.637.
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 669

However, entries in the branch register must be transmitted to the registered office, and
a duplicate of the branch register must be kept with the principal register in Hong Kong:
Cap.622, s.637(3). The branch register is deemed to be part of the company's principal
register of members: Cap.622, s.637(4).
Companies incorporated outside Hong Kong may have branch register of 14.114
members resident in Hong Kong. A company incorporated outside Hong Kong may
have a branch register of members resident in Hong Kong if the company is permitted
to keep such a branch register under a law in force outside Hong Kong: Cap.622,
s.640(a). The provisions on inspection of the register and rectification of the register
under Cap.622, ss.631 and 633 also apply to the Hong Kong branch register of a
foreign company: Cap.622, s.640(b).

4.2 Register of Significant Controllers

4.2.1 Requirement/or a register

Companies required to keep register of significant controllers. The register of 14.115
members only shows the legal holders of shares. Traditionally, owners of companies
could hide their control of the company through the use of nominee shareholders or
through a structure of interposed entities as the companies legislation did not require
disclosure of beneficial ownership or control of shares. For listed companies, this was
modified by the introduction of the regime on disclosure of substantial shareholdings
in 1991 when the fonner Securities (Disclosure of Interests) Ordinance came into effect
(see now Securities and Futures Ordinance (Cap.571), Pt.XV). For other companies
in Hong Kong, statutory requirements for disclosure of beneficial interests or control
were only introduced recently in Cap.622 via amendments made by the Companies
(Amendment) Ordinance 2018 (3 of 2018), effective I March 2018. Cap.622, Pt. I 2,
new Div.2A now imposes requirements on companies to keep a register of significant
controllers. 219 The new regime seeks to enhance transparency of beneficial ownership
and control of companies for the purpose of deterring the misuse of companies for
money-laundering and te1Torist financing. 220 As the provisions are not intended to
other.vise modify the general principle that the company does not have notice of any
trusts (or equitable interests) in the company's shares, 221 Cap.622, s.653ZF provides
that a company is not, because of anything done under Div.2A, affected with notice of
(or put on enquiry as to) the rights of a person in relation to any shares in the company
or other rights of a person in or with respect to the company.
Obligations imposed on "applicable companies". The requirement to keep a significant 14.116
controllers register is imposed by Cap.622, s.653H on "applicable companies", defined

' 19The provisions are modelled in part on the UK provisions on the register of J>eoplewith significant control:
Companies Act 2006 (UK) Pt.2IA (ss.790A-790ZG) and Schs. IA, 18. For guidance on interpretation of
Cap.622, Pt.12 Div.2A (and the related Schedules), see Companies Registry, G11ide/i11e 011the Keeping cif
Significant Controllers Register by Companies (March 2018). The guidelines arc made under Cap.622, s.24.
They do not have the status of law: sec also Cap.622, ss.24(3) and 24(5).
,,. On the background, see Financial Service.s and Treasury Bureau, £nlu111ci11g Transparency of 8e11ejicial
Ow11ershipof Hong Kong Comptmies-Cons11/tatio11 Paper (January 2017) and Consulation Co11c/11sions
(April
2017).
2" See Cap.622, s.634 and para.14.102.
670 SHARE CAPITAL

to mean companies incorporated under Cap.622 or a former Companies Ordinance. 222

Listed companies are excluded from the definition of "applicable company". 223 This
means that listed companies need only comply with the separate disclosure regime
under the Securities and Futures Ordinance (Cap.571) Pt.XV

4.2.2 Significant controllers

14.117 Significant controllers means registrable persons and registrable legal entities.
The significant controllers register of an applicable company must contain the
required particulars of the significant controllers of the company: Cap.622, s.6531( 1).
There are two broad categories of"significant controller": (1) registrable persons; and
(2) registrable legal entities. 224
14.118 Registrable persons. "Registrable persons" are divided into t\vo further subcategories:
( 1) natural persons; and (2) "specified entities". 225 Natural persons and specified entities
are "registrable persons" of an applicable company if they have significant control
over the company.226 The concept of "significant control" is discussed at para.14.120
below. As seen below, the operation of the provisions means that, for example, a natural
person who has significant control of an applicable company through other companies
interposed between the person and the applicable company can still be a registrable
person of the applicable company. Thus, a natural person may still need to be entered in
an applicable company's significant controllers register even if he or she has ownership
or control of the applicable company through a chain of companies or interposed entities.
14.119 Registrable legal entities. "Registrable legal entity" is defined in Cap.622, s.653D to
mean a legal entity 227that satisfies both the following requirements: (a) it is a member of
the applicable company concerned; and (b) it has significant control over the company.
Thus legal entities that have significant control228 over a company are only regarded
as registrable legal entities if they are also members of the company. This means that
a legal entity that might have significant control over an applicable company through
interposed entities need not be entered in the register of the applicable company. This
is intended to minimise the administrative burden on companies in maintaining the
register. 229 However, natural persons having significant control through that legal
entity might still be "registrable persons" of the applicable company.230

222
Cap.622, s.653A.
2ll Cap.622, s.653A. Regulations may also exempt further categories of companies. At the time of writing, no
regulations have been made on further exemptions.
224
Cap.622, s.653A.
"' "Specified entity" is defined in Cap.622, s.653A. Broadly, the term covers corporations sole, govcmmcnis and
inter-governmental organisations.
21• Cap.622, s.653C( I). This is subject to certain exclusions whereby a natural person or specified entity is not
regarded as a registrable person of the applicable company only because they hold rights or shares in the company
through a registrnble legal entity that is a listed company: see also Cap.622, ss.653C(2}-653C(3 ). This exclusion
appears to be related to the exclusion of listed companies from the definition of "applicable company": see
para.14.116 above. See Examples 3 and 4 in pam.14. 123 below.
221 "Legal entity" is defined to mean a body of persons, corporate or un-incorporate, that is a legal person under the
law that governs it: Cap.622, s.653A. The definition excludes "specified entities" which are within the categories
of "registrable persons" instead: see parn.14.118 above.
"' See para.14.120 below.
"' Financial Services and Treasury Bureau, £11/,ancingTrt111spare11cy of Beneficial Ownership of Hong Ko11g
Compa11ies-Cons11/UJtio11 Paper (January 2017) [3.7).
230 See paras.14.118 above and 14.122 below.
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 671

Concept of "significant control". A person has significant control over an applicable 14.120
company if the person meets one or more of the following conditions:231

(a) the person holds, 232 directly or indirectly, 233 more than 25% of the issued
shares in the company; 234
(b) the person holds, 235 directly or indirectly, 236 more than 25% of the voting
rights 237 in the company;
(c) the person holds, directly or indirectly, the right to appoint or remove a
majority of the board of directors of the company; 238
( d) the person has the right to exercise, or actually exercises, significant
influence or control over the company;

(e) the person has the right to exercise, or actually exercises, significant
influence or control over the activities of a trust or firm-
(i) that, under the law governing the trust or firm, is not a legal person;
and

(ii) whose trustees or members meet one or more of the conditions (in
their capacity as such) specified in paras.(a) to (d) above.

It is possible that a company has more than one significant controller or that there are
no significant controllers.

Examples of significant control through holding of shares. For example, a person who 14.121
legally owns 26% of the shares of a company has significant control under Cap.622, Sch.SA
s. l(a)(i). If a person holds 26% of the shares beneficially through a nominee who holds the
legal title to the shares, then the first-mentioned person is also regarded as holding those
shares239 and will, on that basis, be taken as having significant control.

Indirectly holding shares. Where a person holds shares "indirectly", such shares are taken 14.122
into account in determining whether the "more than 25%" threshold in Cap.622, Sch.SA
s. l(a)(i) is met. Schedule SA s.7 of Cap. 622 determines when shares are held indirectly.A
person holds a share indirectly if the person has a majority stake in a legal entity (entity A)
and entity A holds the share.240 A person also holds a share indirectly if tl1eperson has a

231 See Cap.622, s.653E and Sch.5A s. I. For interpretative provisions on the conditions, see Sch.5A ss.2-16. See
also Companies Registry, G11ideli11e 011the Keeping of Significa111Co111rollers Register by Companies (March
2018) 25-33.
m As to "holding" of shares where there are joint interests, joint arrangements or use of nominees, see Cap.622,
Sch.5A ss.4-6.
" 3 As to "indirectly" holding shares, see Cap.622, Sch.5A s.7 and para.14.122 below.
'" In the case of companies without share capital, this condition is satisfied if the person holds, directly or indirectly,
a right or rights to share in more than 25% of the capital or, as the case requires, profits of the company: Cap.622,
Sch.5A s. l(a)(ii).
"' As to "holding" of rights, including in cases of joint interests and joint arrangements, see Cap.622, Sch.5A
ss.8-10.
"' As to "indirectly" holding ,ights, see Cap.622, Sch.SA s.13.
"' As to "voting rights", see C.ip.622 Sch.5A s.11.
" 8 As to the "right to appoint or remove a majority of the board", see Cap.622 Sch.5A ss.12 .ind 14.
H 9 Cap.622, Sch.5A s.6.
2"<1 Cap.622, Sch.5A s.7(l)(a).
672 SHARE CAPITAL

majority stake in a legal entity (entity A) and entity A is part but not the last of a chain of
legal entities and: (i) each of those legal entities (other than the last one in the chain) has
a majority stake in the entity immediately below it in the chain; and (ii) the last one in
the chain holds the share.241 ''Majority stake" is defined in Sch.5A s.7(2) of Cap.622 and
includes, for example, a situation where the person holds a majority of the voting rights in
the legal entity.
14.123 Examples involving indirect holdings. In the examples below, X is a natural person
and A Ltd is an applicable company
Example I: X holds 51 % of the voting rights in B Ltd, which owns 30% of the shares
in A Ltd. In respect of the significant controllers register of A Ltd:

• X has a majority stake in B Ltd and is regarded as indirectly holding the

30% of shares in A Ltd which are owned by B Ltd. 242 X has significant
control over A Ltd 243 and is a registrable person 244 (and hence significant
controller 245) of A Ltd.
• B Ltd has significant control over A Ltd 246 and is a registrable legal entity 247
(and hence a significant controller) of A Ltd.

The above analysis is the same whether B Ltd is a company incorporated in Hong
Kong or outside Hong Kong.
Example 2: X holds 60% of the voting rights in C Ltd, which holds 51% of the voting
rights in B Ltd, which owns 40% of the shares in A Ltd. In respect of the significant
controllers register of A Ltd:

• X has a majority stake in C Ltd, which has a majority stake in B Ltd. X is

regarded as indirectly holding the 40% of shares in A Ltd which are owned
by B Ltd. 248 X has significant control over A Ltd and is a registrable person
(and hence significant controller) of A Ltd.
• B Ltd has significant control over A Ltd and is a registrable legal entity (and
hence a significant controller) of A Ltd.

• Although C Ltd has significant control over A Ltd due to C Ltd indirectly
holding the 40% shares in A Ltd which are owned by B Ltd, C Ltd is not a
registrable legal entity because C Ltd is not a member of A Ltd. 249 Hence C
Ltd is not a significant controller of A Ltd.

241
Cap.622, Sch.SA s.7(l)(b).
"' Pursuant to Cap.622, Sch.5A s.7( I)(a).
243 Pursuant to Cap.622, Sch.5A s. I (a)(i).
'" See para.14.1 I 8 above.
245 See para.14.117 above.
246 Pursuant to Cap.622, $eh.SA s. I(a)(i).
241
See para.14.119 above.
'" Pursuant to Cap.622 Sch.SA s.7(1)(b).
"' See para.14.119 above.
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 673

Example 3: Take the scenario in Example 2 above, and assume that B Ltd is a listed
company. In respect of the significant controllers register of A Ltd:

• As stated for Example 2 above, X has significant control over A Ltd .

However, X is not a registrable person of A Ltd as X is within the exclusion
from the definition of"registrable person" under Cap.622 s.653C(3)(b). 250
• However, B Ltd is still a registrable legal entity (and hence significant
controller) of A Ltd.

Example 4: Take the scenario in Example 2 above, and assume now that C Ltd is
a listed company, while B Ltd is not a listed company. In respect of the significant
controllers register of A Ltd:

• Again, X has significant control over A Ltd. Here, the exclusion from the
definition of"registrable person" does not apply-since the exclusion only
applies if the registrable legal entity (ie B Ltd) is listed. 251 Accordingly X
is still a registrable person (and hence significant controller) of A Ltd.
Example 5: X holds 100% of the voting rights in t\vo companies, C Ltd and D Ltd.
C Ltd and D Ltd each hold 50% of the voting rights in B Ltd. B Ltd owns 35% of the
shares in A Ltd. In respect of the significant controllers register of A Ltd:

• X has a majority stake in C Ltd. But C Ltd does not have a majority stake
in B Ltd. Accordingly X is not regarded as indirectly holding the 35%
shares in A Ltd which are owned by B Ltd. The above is not altered by
the fact that X also has a majority stake in D Ltd nor the fact that C Ltd
and D Ltd together hold all the voting rights in B Ltd. Accordingly X
does not have significant control over A Ltd within Cap.622 Sch.5A s. l (a).
However, X might still have significant control over A Ltd if, for example,
X actually exercises significant influence or control over A Ltd within
Sch.SA s.l(d). 252
• B Ltd is a registrable legal entity (and hence significant controller) of A Ltd .

2S-O Under Cap.622, ss.653C(2) and 653C(3)(b), a person who has significant control over an applicable company is
not a registrable person of the company if the person has significant control only because the person, inter alia,
holds shares in the company through a chain of legal entities with the last one in the chain: (i) being a registrable
legal entity of the applicable legal entity; and (2) having any of its shares listed on a recognized stock market (as
defined in Cap.622, s.2). See also para.14.118 above.
'" See Cap.622, s.653C(3).
'" As to the residual category of "significant influence or control" in Sch.5A s. I(d) of Cap.622, the following is
stated in the Companies Registry, Guideline on the Keeping of Significant Co111rollers Register by Companies
(March 2018) 27: "Where a person can ensure that a company generally adopts the activities which the person
desires, this would indicate 'significant influence'. Where a person can direct the activities of a company, this
would indicate 'control' .... In considering whether a person actually exercises significant influence or control
over a company, all relationships that the person has with the company or other individuals that are responsible for
the management of the company have to be taken into account to ascertain whether the cumulative effect of those
relationships places the person in a 1><>sition where the person actually exercises significant influence or control
over the company.''
674 SHARE CAPITAL

4.2.3 Keeping of register

14.124 Particulars of significant controllers to be entered in register. The particulars
set out in Cap.622, Sch.5B are required to be entered in the significant controllers
register of an applicable company for each person that the company knows to be a
significant controller. 253 For natural persons, the required particulars are the person's
name, correspondence address, identity card number (or passport details if no identity
card), date on which the person became a registrable person, and the nature of the
person's control over the company: Cap.622, Sch.5B s.2. For the required particulars
of specified entities and legal entities, see Cap.622, Sch.5B ss.3 and 4, respectively.
14.125 Time for entry of particulars. The obligation of an applicable company to enter the
particulars of a significant controller in the register only applies if the company knows
that the person is a significant controller.254 In the case ofregistrable persons, the company
must also confirm the accuracy of the particulars with the person concerned before
the company is to enter the particulars in the register.255 The company must enter the
paiticulars within 7 days after all the particulars for the person have been confirmed. 256
In the case of registrable legal entities, there is no obligation to seek confirmation of
the particulars by the company. The company must enter each required particular for a
registrable legal entity after the paiticular comes to the notice of the company.257
14.126 Updating of particulars. If the applicable company knows of changes to the particulars
of a significant controller or knows that the person ceases to be a significant controller,
then the applicable company must enter the details of the change in the register (though
confirmation of the change is needed first in the case of registrable persons). 258
14.127 Additional matters to be entered in register. If the company knows or has reasonable
cause to believe that it has no significant controllers, then it must note this in its
significant controllers register.259 There are also other circumstances which must be
noted in the company's register where applicable. 260 For example, if the company
knows or has reasonable cause to believe that it has a registrable person but has not
been able to identify that person yet, then this must be noted in the register.261
14.128 Designated representative to be entered in register. The company must also
enter in the significant controllers register the name and contact details of at least
one person designated as the company's representative to provide assistance to law
enforcement officers relating to the register.262 The intention is that there must be
a person designated to be a contact point to facilitate communication between the

253
Cap.622, s.6531. For examples of significant controllers registers, see Companies Registry, Guideline 011 the
Keeping ofSig11ifica11tControllers Register by Companies (March 2018) Annex A.
zs4 Cap.622, s.653I(l)(a).
2ss Before the particulars have been confirmed, the company must however note in its register that it has identified

a registrable person but not all the required particulars have been confirmed: Cap.622, s.6531(2)(b) and Sch.SC
s.4.
256 Cap.622,s.653J.
2~7 Cap.622,s.653K.
"8 Sec Cap.622, s.6531( I )(b) and sec also Cap.622, s.653F on "registrable changes". Also sec Cap.622, ss.653J and
653K for the time of entry of the change.
,,. Cap.622, s.6531(2)(b) and Sch.5C s.2.
''° Cap.622, s.6531(2)(b) and Sch.5C.
"' Cap.622, s.6531(2)(b) and Sch.5C s.3.
262 Cap.622, ss.6531(2)(a), 653ZC. Only the categories of persons in s.653ZC of Cap.622 may be designated.
 REGISTERS OF MEMBERS AND SIGNIFICANT CONTROLLERS 675

company and law enforcement officers investigating beneficial ownership or control

of the company.263
Register to be kept at registered officer or "prescribed place". An applicable 14.129
company must keep its significant controllers register at the registered office or a
"prescribed place", which is any place in Hong Kong.264 The company must give
notice to the Registrar of the place at which the register is kept unless the register has
at all times been kept at the registered office.265

4.2.4 Companies' obligations to ascertain their significant controllers

Company must take reasonable steps to ascertain its significant controllers. 14.130
An applicable company must take reasonable steps 266 to ascertain whether there is
any significant controller of the company, and if so, to identify them. This includes
sending out enquiry notices pursuant to ss.653P to 653S of Cap.622 where required
under those provisions. for example, if the company knows or has reasonable cause
to believe that a person is a significant controller, the company must give notice to
the person requiring the person to confirm whether or not the person is a registrable
person or registrable legal entity, as the case may be. For the purpose of keeping its
register up-to-date, the company must also send out enquiry notices to persons whose
particulars are contained in the register if the company knows or has reasonable
cause to believe that there is a "registrable change" 267 with respect to the person. 268
Addressees of the notices must comply with the notices within 1 month, otherwise an
offence is committed. 269

4.2.5 Rectification of the register

Court has power to rectify register in certain circumstances. The company, 14.131
a significant controller of the company, or any aggrieved person may apply to the
Court of First Instance to rectify the significant controllers register of the company.270
Applications may be made if the name ofa person is, without sufficient cause, entered
in or omitted from the register, or a default is made or an unnecessary delay takes place
in entering in the register the fact that a person has ceased to be a significant controller.

4.2.6 Inspection of tire register

Significant controllers and law enforcement officers have right to inspect. A person 14.132
whose name is entered in the significant controllers register is entitled to inspect the

263
Financial Services and Treasury Bureau, E11ha11ci11g Tra11spare11cy'!( Be11eficialOwnership of Hong Kong
Companies-Consultation Paper (January 2017) [2.17).
264 Cap.622, s.653M and Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.3.
2•s Cap.622, ss.653M(2)-653M(4); see also Cap.622, s.653M(5). For notice of a change to the place at which the

register is kept. see Cap.622, s.653N.

2(;t(j As to "reasonable seeps", sec Companies Registry, Guideline 011the Keeping o/Sig11{fica111
Controllers Register
by Companies (March 2018) 13.
267
See Cap.622~s.653F.
268 Cap.622,ss.653T-653V
269 Cap.622, s.653ZA.
2~ Cap.622.s.6532D.
676 SHARE CAPITAL

register (without charge) and to be provided with a copy of the register (on payment of
a fee).271 Law enforcement officers 272 have power to inspect the register of applicable
companies for the purpose of the officer's performance, under the law of Hong Kong,
of any function of the officer (under Hong Kong law) relating to the prevention,
detection or investigation of money laundering or terrorist financing. 273 Officers of
the Companies Registry also have power to inspect the register for the purpose of
ascertaining whether Div.2A is being complied with.274

5. SHARE CERTIFICATES

5.1 Requirement for share certificates

14.133 Company must complete share certificates within two months of allotment of
shares. Where a company allots shares, the company must complete and have share
certificates ready for delivery within two months of allotment unless the conditions of
issue of the shares provide otherwise: Cap.622, s.144(1).
14.134 New share certificates also required for transfer of shares. Where a transfer of
shares is lodged with the company, the company must also complete and have new
share certificates ready for delivery within the specified period from the date on which
the duly stamped transfer is lodged with the company, unless the conditions of issue of
the shares provide otherwise: Cap.622, s.155. The specified period is 10 business days
for public companies and two months for private companies.
14.135 Details on share certificate. A share certificate would state the shareholder's name
and certify that the shareholder is a registered owner of a specified number of shares
of the particular class. 275
14.136 Share certificates under Model Articles. For companies adopting the Model Articles
(Cap.622H), a member has the choice of having one certificate for all his or her
shares or several certificates each for one or more of his or her shares. 276 Under such
provisions in the articles, it is possible for the shareholder to subsequently request the
company to issue new certificates to represent a different number of shares in his or
her holdings, with the new certificates replacing the previous ones.277
14.137 Shares must be numbered unless fully paid and ranking equally. Shares must be
numbered, unless all the issued shares of the company (or all the issued shares of a
class) are fully paid up and rank equally: Cap.622, s.136. If the shares are numbered,
then the numbering would be indicated in the share certificate.

27' Cap.622, s.653 Wand Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), ss.4-9.
272 Defined in Cap.622, s.653B.
273 Cap.622, ss.653X-653Z. See also the definition of"specified function" in s.653/\ ofCap.622. The terms "money
laundering" and "terrorist financing" are defined in Anti-Money Laundering and Counter-Terrorist Financing
Ordinance (Cap.615), Sell.I Pt. I s. I.
"' Cap.622, ss.653X-653Z.
"' See, e.g., Model Articles (private companies), art.60; Model Articles (public companies), art.65.
276 Model Articles (private companies), art.59; Model Articles (public companies), art.64.
271 See Slta,pe v TophamsLtd [ 1939) Ch 373. See also Model Articles (private companies), art.61; Model Articles
(public companies), art.66.
 SHARE CERTIFICATES 677

5.2 Status of a share certificate

Share certificates documentary evidence of title. Share certificates are documentary 14.138
evidence of title but are not negotiable instruments. 278 ln the absence of evidence to the
contrary, a certificate issued by the company specifying any shares held by a member
in the company is proof of the title of the member to the shares: Cap.622, s.137. Actual
title to shares is determined by the register of members (see para.14.101 above), and
the certificate does not confer legal title on the person named in the certificate as the
holder of the shares. However, unless there is evidence proving to the contrary, the
certificate can be sufficient evidence to show that the person is entitled to be registered
on the register of members. 279
Issuing of share certificate amounts to representation by company that persons 14.139
named in certificate have legal title to shares. The issuing of a share certificate
by a company is also regarded as a representation by the company that the persons
certified as the holders in the certificate have legal title280 to the shares. Accordingly,
the company would be estopped from denying the truth of the certificate as against
a person who has relied on the certificate to his or her detriment, and this is the case
even though the certificate was issued upon a fraudulent transfer and the company
was not aware of the fraud.281 The company would be liable to compensate such a
person for losses sustained as a result of reliance on the certificate. 282 The measure of
damages is the value of the shares as at the date when the company refuses to register
the transfer.283
Where share certificate states shares fully paid where they are not company 14.140
estopped from denying this. Where a share certificate stating that the shares are
fully paid, but in fact the shares are partly paid, the company is also estopped by
the representation in the certificate. 284 Accordingly, a transferee of the shares who
relies on the certificate and who does not have actual or constructive 285 notice of
the true circumstances would be entitled to be treated as holding the shares fully
paid_2s6

Share certificate is chattel capable of being subject of conversion. Although a share 14.141
is a chose in action, the share certificate is a chattel which is capable of being the
subject matter of conversion.287

"' Clte1111g Pui Yuen v Worldcup fllvestmellls btc (2009) 12 HKCFAR 31, ( 13).
"' See Woo Wai King v Che1111g Siu Kam (unrep., HCMP 1910/2014, [2015) HKEC 265).
'"' The representation is to legal and not equitable title: Shropshire U11io11
Rlya11dCa11alCo v R (1874-75) LR 7 HL 496.
181 Re Bahia and San Francisco Railway Co Ltd (1867-68) LR 3 QB 584; Dixon v Ken11away& Co [1900) I Ch

833; Balkis Co11solida1edCo Ltd v Tomki11son[ 1893) AC 396; Cadbury Schweppes Pie v Halifax Share Deali11g
[2006) EWMC 1184 (Ch).
,s, Re Bahia and Sa11Francisco Railway Co Ltd ( 1867--08)LR 3 QB 584; Dixo11v Ke1111away & Co [ 1900) I Ch 833.
2
u Re Ouos Kopje Diamond Aefines[ 1893)1 Ch 618.
284 Burkinslww v Nicolls (1878) 3 App Cas 1004; 111Re Building Estates Briclifields Company (Parbury's Case)

[ 1896) 1 Ch 100; 8loome111lwl v Ford [1897) AC 156. Sec also Blomqvisl v Zavarco pie [2017) 1 BCLC 373.
281 ReAW Hall Co lid (1887) 37 Ch O 712.
286 Burkinshaw v Nicolls (1878) 3 App Cas I 004.
281 Silver Stone Developmenl Ltd v Lau Kwong Ching [2006) 4 HKLRD 308, affirmed [2007) 2 HKLRD 717 (Court

of Appeal).
678 SHARE CAPITAL

5.3 Replacement of lost certificates

14.142 Company allowed to issue new share certificates where original lost. Cap.622,
ss.162-169 allow persons to apply to a listed company to issue a new certificate
where the original was lost. The provisions are derived from the predecessor CO,
s.71A (repealed), which in turn came from s.14 of the Companies (Reconstruction of
Records) Ordinance (repealed) which was originally introduced in 1947 to deal with
problems of lost certificates for pre-war companies. 288
14.143 Provisions on replacement of share certificates only apply to listed companies.
The provisions on replacement of share certificates in the Companies Ordinance apply
to listed companies. 289 Companies other than listed companies may have a provision
in the articles for the issue of replacement share certificates. As will be seen below,
the statutory provisions limit the circumstances of a company's liability arising from
an improper issue of new certificates, thereby facilitating the issuing of replacement
certificates by companies which would otherwise refuse to do so without bank
guarantees indemnifying the company from any liabilities.
14.144 Persons who can apply for replacement certificate. The following persons can apply
for a replacement certificate: the registered holder of the shares, or any person who
claims to be entitled to have his or her name entered in the register.290 Accordingly,
transferees could seek to apply.
14.145 Application for share certificate must be in specified form. The application must
be in the specified form and be accompanied by a statutory declaration by the
applicant as to particular matters including matters concerning entitlement to the
shares: Cap.622, s.163(2). If the company proposes to issue a new certificate to
the applicant, the company must advertise its intention to do so in accordance with
Cap.622, s.164. If the company does not receive notice of any other claim in respect
of the shares, the company may issue a new certificate in accordance with Cap.622,
s.165. If the certificate is issued to a person other than the original registered
member, then the company would be required to update the register of members:
Cap.622, s.165(3).
14.146 Consequences where new share certificate should not have been issued.
Cap.622, ss.167-168 deal with the consequences of the issue of a new certificate in
the event that it is subsequently discovered that the certificate should not have been
issued, for example, because of some fraud which meant that the applicant for the
certificate was not entitled to the shares. Ordinarily, the original owner could seek
rectification of the register under Cap.622, s.633. 291 However, s.167(2) prevents
rectification as against a "genuine purchaser". This term is derived from the
concept of bonafide purchaser for value without notice, but is defined specifically

' 88 For the background, see Second Report of the Companies law Revision Co111111i11ee: Company law ( 12 April
1973), 100-110.
'" Sec Cap.622, s.2 definition of"lisrcd company".
290 Persons who arc entitled to apply are referred to in Cap.622 as "eligible persons": Cap.622, ss.162 and 163(1) for
the definition and application of"eligible person".
29' See para.14.104.
 SHARE CERTIFICATES 679

in s.162 to mean a person who purchases the shares in good faith for value and
without notice of any defect in the title of the seller. Also, the definition is extended
to cover any person deriving title from such a purchaser. The definition, however,
excludes the person to whom the new certificate was issued. Where rectification
is denied because of Cap.622, s.167(2), the original owner entitled to the shares
can claim damages against the person to whom the new certificate was issued (or
subsequent transferees, except "genuine purchasers"): Cap.622, ss.168(3)-168( 4).
The original owner can claim damages against the company only if the company
acted deceitfully: Cap.622, s.168(2). Under these provisions, the liability of the
person to whom the new certificate was issued is similar to that under the common
law292-but instead of being liable to the company, the person would be directly
liable to the original owner of the shares.
Rectfication can be ordered in favour of original owner if there is no "genuine 14.147
purchaser" involved. Where the situation does not involve a "genuine purchaser",
then rectification can be ordered in favour of the original owner who is entitled to the
shares: Cap.622, s.167(1). An order for rectification can be made as against the person
to whom a new certificate was issued whether or not that person obtained a transfer
of the shares for value without notice. 293 Where rectification is ordered, the company
would not be Iiable in damages: Cap.622, s.167(3). The person who obtained the new
ce1tificate (and volunteers deriving title from that person) would effectively bear the
loss, but the position of the person obtaining the new certificate is comparable with
that under the common law, where such a person would be liable to indemnify the
company for losses suffered by the company in compensating innocent third parties
who relied on the certificate. 294
Examples. Consider the following scenarios: 14.148
Example I:

A is the owner of shares. B applies for, and receives, a new certificate on the basis
of a forged transfer. B gifts the shares to C.

A will be entitled to rectification as against C, and neither B nor C could claim

against the company. This is the case whether or not B was innocent of the fraud
or whether or not B had provided value for the transfer. The protection for bona
fide purchasers was only intended to be given to subsequent transferees and not
the person to whom the new certificate was issued.295 This outcome is achieved
under Cap.622 by excluding the person to whom the new certificate was issued
from the definition of "genuine purchaser" in s.162 of Cap.622.

292
A personpresentinga fraudulenttransfer to the companywould be liable to the company,even if that personwas
innocent of the fraud: sec para.14.079.
293 Sec Cap.622, s.167(2) and the definition of ''genuine purchaser" in Cap.622, s.162.

,., Seepara.14.079.
29' Sec Second Report o_fthe Companies Law Revision Commillee: Company Law (12 April 1973). 103, 109.The
statutory provision aimed to protect the company from liability but not to relieve the liability of the person who
(whether im1ocently or otherwise) presents a fr-Judulent transfer to the company.
680 SHARE CAPITAL

Example 2:

A is the owner of shares. B applies for, and receives, a new certificate on the basis
of a forged transfer. B gifts the shares to C. C sells the shares to D, who then gifts
the shares to E (who is now the registered holder). Assume that all the persons B
to E do not have notice of the forgery.

Under Cap.622, s.167(2), A is unable to obtain rectification against E. B and C

would be jointly and severally liable to A pursuant to Cap.622, s.168(4).

6. ALTERATIONS TO SHARECAPITAL

14.149 Power to alter share capital. Cap.622, s.170 enables a company to increase its share
capital, to consolidate or subdivide its shares, and to cancel shares which have not been
taken up. The alterations can be effected without the need for the articles to expressly
authorise the alteration. However, a company's articles can exclude or restrict the
exercise of a power to alter capital under s.170. 296

6.1 Increase of capital

14.150 Company can increase issued capital by issuing more shares. A company can
increase its issued capital by issuing further shares. 297 The process involved in issuing
of shares has been discussed above, at para.14.030.
14.151 Company can also increase share capital by capitalisation of profits. In the
case of increase of capital, apart from the company's power to issue new shares, the
company can increase its share capital by capitalisation of profits. 298 It is optional for
the company whether the capitalisation is to involve an issue of new shares (bonus
shares). 299 Capitalisation without an issue of shares simply increases the value300 of
existing shares. Section 170 also confirms that a company's shareholders can inject
further capital into the company without the company issuing new shares to them.301
Again, the result is that the value attributable to existing shares will be increased.
14.152 Bonus shares can be issued with or without increase in share capital. Under
Cap.622, bonus shares can be issued with or without an increase in share capital. 302
The effect of an issue of bonus shares without an increase of capital is similar to the
effect of a subdivision of shares: the company will have a larger number of shares on
issue, each having a lower value.

?9(> Cap.622,s. l 70(8).

''" Cap.622, s. l 70(2)(a).
298 See also Chapter 15.
"' Cap.622, s. l 70(2)(c).
'°" Valuein the present contextcan be understoodas the market value of shares or the net asset value of the company
attributed to each share.
"'' Cap.622, s. l 70(2)(b ).
''" Cap.622, s. l 70(2)(d).
 ALTERATIONSTO SHARE CAPITAL 681

6.2 Reduction of capital

Ability to reduce share capital restricted by capital maintenance doctrine. 14.153

The ability of a company to reduce its issued share capital is restricted by the capital
maintenance doctrine. That doctrine and permissible reductions of capital are discussed
in Chapter 15.303
Cancellation of shares not involving return of capital. Cap.622, s. I 70(1 )(t)(i) 14.154
allows a company to cancel shares which have not been taken up. 304 The provision is
intended to ensure that where the board has, for example, approved the allocation of
shares via provisional letters of allotment in a rights issue (at which time it might be
said that shares have been allotted, although not yet issued 305), it is possible for the
company to cancel those shares if the proposed allottees do not agree to take up the
shares. Section l 70(l)(f)(ii) of Cap.622 allows a company to cancel shares which
have been forfeited (instead of requiring the company to seek to sell the forfeited
shares).

6.3 Consolidation of shares

Consolidation of shares converts company's shares into smaller number. 14.155

A consolidation of shares involves a conversion of the company's shares into a
smaller number. For example, if the company has 10,000 shares on issue, this can
be consolidated into 5,000 shares. An existing shareholder who held 1,000 shares
would end up holding 500 shares after the consolidation. A company may consolidate
its shares by ordinary resolution. 306 Notice of a consolidation must be given to the
Registrar within one month. 307
No par value affected by consolidation under Cap.622. Under the predecessor CO, 14.156
where shares have par value, a consolidation resulted in the shares having a higher par
value. 308 Par value is abolished under Cap.622. 309 Under the no-par regime, there is
no par value that is affected in a consolidation, but a consolidation of shares will also
result in the shares having an increased value. Earnings per share and dividends per
share would be increased.
Consolidation when shares trading at very low prices: "penny stocks". Where 14.157
a company's shares are trading at very low prices (so-called "penny stocks"), the
company might wish to consolidate its shares to increase the value of the shares. Penny

303 Sec also para.14.164 below where a reduction is carried out as pare of a scheme of arrangement.
"" The equivalent provision under the predecessor CO, s.53(1)(e) (repealed) enabled a reduction of the authorised
capital where there is a cancellation in shares not taken up or agreed to be taken up. This is no longer relevant
under Cap.622 where authorised capital is abolished: see para.14.008 above.
,o, Robert Pennington, Companylaw (7th edn, Butte1worths, London, 1995), 386.
'°' Cap.622, s.170(2)(e).
307
Cap.622,s.171.
,o, For example, assume that the company's authoiised capital was $100, divided into 50 shares of$2 each. The 50
shares could be consolidated into a smaller number, such as 10 shares, with each share having a par value of$10
after the consolidation.
'°' See para.14.006 above.
682 SHARE CAPITAL

stocks can be highly volatile (in that there can be marked fluctuations in price over a
relatively short period oftime), and so can pose a high risk for investors.

14.158 Consolidation as part of corporate reorganisation. A company might also engage

in a consolidation as part of a corporate reorganisation. 310

6.4 Subdivision of shares

14.159 Subdivision involves dividing company's shares. Subdivision (or a share split) is
the opposite of a consolidation, and involves dividing the company's shares (or any of
them) into a larger number. For example, if the company has 5,000 shares on issue, it
could subdivide them by converting the 5,000 shares into 10,000 shares. An existing
shareholder who held 200 shares before the subdivision would hold 400 shares after
the subdivision. A company can engage in a subdivision by ordinary resolution. 311
Notice of a subdivision must be given to the Registrar within one month. 312
14.160 Unpaid amount on partly paid shares to be divided equally. Where partly paid
shares are subdivided, the unpaid amount on a share is to be divided equally among
the replacement shares. 313 For example, if the original share was issued at $10 and was
partly paid to $6 (and so the unpaid amount is $4), then in a two for one (2:1) share
split (as in the example in the preceding paragraph), each of the two replacement
shares would have an unpaid amount of $2.
14.161 Motivation for subdivision could be overly high share price. If the price of shares in a
company is considered to be too expensive, the company might wish to subdivide its shares
to make them more marketable and thereby increase liquidity (as the price per share would
be lower and it would be easier for existing holders to sell to more purchasers).

6.5 Members' schemes of arrangement

6.5.1 General
14.162 Share capital can be altered as part of scheme of arrangement. A company can also
alter its share capital as part of a members' scheme of arrangement under Companies
Ordinance (Cap.622), Pt.13 Div.2 (ss.668-677). 314 These provisions are derived from
the predecessor CO, s.166 (repealed). For the most part, there is no change to the law,
but the Cap.622 provisions are set out in greater detail for the purposes of clarity. Two

"" See, e.g., Re Cultus Gold NL (I 987) 12 ACLR 433; Re Senodyne 1ml Ltd (1994) 15 ACSR 494.
'" Cap.622, s.l 70(2)(e) .
•m Cap.622, s. l 71 .
•m Cap.622, s. l 70(5).
'" The provisions in Pt .13 Oiv.2 apply to both companie.s incorporated under Cap.622 (or a former Companies
Ordinance) and companies incorporated overseas: Cap.622, s.668( I). For examples where a scheme was effected
under these provisions for a foreign company, see Re LDK Solar Co Ltd (2015) I HKLRD 458; Re Winsway
Enterprises Holdings Ltd (2017) I HKLRD I; Re Kaisa Group Holdings Ltd (2017] I HKLRD 18. However, the
provisions on reconstructions and amalgamations under s.675 do not apply to foreign companies: see Cap.622,
s.668( I). This is because matters concerning the existence or otherwise of a foreign company (which could be
affected in a reconstruction or amalgamation) should be detennined under the law of the place of incorporation
rather than under Hong Kong law.
 ALTERATIONSTO SHARE CAPITAL 683

main changes are modifications to the headcount test315 and the introduction of court-
free intra-group amalgamations. 316

Under Cap.622 company can enter into compromise or arrangement with 14.163
creditors or members. Under Cap.622, Pt.13 Div.2, a company can enter into a
compromise or arrangement with its creditors or members. 317 Creditors' schemes are
discussed in Chapter 19. The discussion below looks at the general requirements of the
statutory provisions in the context of members' schemes.
Meaning of "compromise" and "arrangement". A compromise involves a 14.164
settlement of claims between the parties where there is some dispute between the
parties over their rights or where there is difficulty in the enforcement of their rights. 318
Creditors' schemes commonly involve a compromise, although in theory a members'
scheme could also involve a compromise. A scheme between the company and its
members would more commonly involve an arrangement, which is a wider concept
than compromise. An arrangement covers any type of agreement modifying the rights
between the company and its members (or creditors). 319 Both a compromise and
arrangement must however involve some sort of accommodation between the parties
or some "give and take", such that if the shareholders or creditors abandoned their
rights completely without any compensatory advantage in return, then there would not
be a compromise or arrangement within the statutory provisions. 320
Schemes can be entered as part of corporate reorganisation. Members' schemes can 14.165
be entered into to alter the rights of the members as part of a corporate reorganisation.
For example, companies have used schemes of arrangements with members for the
purpose of "re-domiciling" or for privatisations. In the former, the scheme could
involve the establishment of a new company in a foreign jurisdiction that takes over the
business of a Hong Kong company, with the existing shareholders of the Hong Kong
company giving up their shares in the Hong Kong company in return for newly issued
shares in the foreign company.321 In a privatisation, the scheme typically involves a
pub) ic company seeking to cancel the shares held by pub! ic investors, leaving a party 322

m Sec para.14.175 below.

316 See para.14.185 below.
317 The tenn "scheme of arrangement" is used below to cover both compromises and arrangements.
318 Sec Re Guardian Assurance Co (1917] I Ch 431,443.
319 Mercamile Investment and Genera!Tmst Co v Intl Co of Mexico (1893] I Ch 484; Re Wt,hNam Group Ltd (No.2)
(2003) I HKLRD 282.
320 Re National Farmers Union Developmelll 1h,sts (1972) I WLR 1548, 1555; Re Wah Nam Group Ltd (No.2)
[2003) I HKLRD 282. If the scheme forms an integral part of a wider restructuring, it is permissible to
take into account the potential benefits of the restructuring to the members (or creditors) in determining
whether the scheme is a compromise or arrangement within the statutory provisions: Re Uniq Pie (2012)
I BCLC 783.
321 See e.g. Re Hong Kong and Slumghai Banking Co,p Ltd [ 199I) 2 HKLR 111; Re Cheung Kong (Holdings) Ltd
(2015] 2 HKLRD 512. The Hong Kong company is not, strictly speaking, given a new place of domicile. The
term "re-domicile" is used loosely in the present context: all that happens here is that the shareholders become
shareholders of a foreign company instead of being shareholders of the Hong Kong company.
322 The privatisation could also result in more than one party as remaining shareholders in the company-for
example where two or more parties act together to obtain, as between them, I00% control of the company.
684 SHARE CAPITAL

(an existing shareholder) being the sole shareholder who thereby obtains full control
of the company.323
14.166 Schemes could involve reconstruction or amalgamation. Members' schemes could
also involve a reconstruction or amalgamation which affects shareholdings or share
capital of a company. The terms "reconstruction" and "amalgamation" are not legal
terms of art.324 Broadly, a reconstruction involves the transfer of the business of an
existing company to a new company, consisting of substantially the same shareholders
of the previous company.325 An amalgamation involves the combining of two or more
existing businesses of different companies under the control and ownership of one
company.326 Where the scheme involves a reconstruction or amalgamation, the court
has further powers under Cap.622, s.675 to make various orders to facilitate the
scheme.

6.5.2 Procedure
14.167 Procedural steps for scheme of arrangement. The major procedural steps for a
scheme of arrangement are as follows:

1. Apply 327 for a court order for meeting(s) of creditors or members (as
appropriate) to be held.328
2. Obtain approval at the meeting (or at each meeting where there is more than
one) by the requisite majority.329
3. Apply for a court order approving the scheme. 330
4. Register the court order with the Registrar of Companies. 331

14.168 Scheme binding on all members. Once the above requirements have been complied
with in accordance with the Ordinance, the scheme is binding on all the members

"' See, e.g., Re Wheelock P1-openiesLtd [2010) 4 HKLRD 587. A privatisation can also be achieved through a
takeover or a buy-back. It seems that schemes of arrangement are preferred in practice for privatisations on
the basis that no sale of shares is involved and hence no stamp duty is payable for the cancellation of shares.
However, it seems to be arguable that even in the case of a share buy-back (where shares are cancelled upon a
buy-back), there is no sale or purchase of shares for the purposes of the Stamp Duty Ordinance (Cap.117): see
Re Tancred'.< Se11/eme111(1903] I Ch 715, 724; Re Leven and Melville (Earl) [1954) I WLR 1228; Coles Myer
Ltd v Commissioner '!fStote [1998) 4 VR 728; PG Willoughby and A JI lalkyard, Encyclopaedia ofH011gKo11g
Taxa1io11-S1ampDuty Vo/ I (loosclcaf, LcxisNcxis) para.II [3861).
"' Re Sou//, Africtm Supply and Cold Stc>r(lge Co [ 1904) 2 Ch 268.
m Re S<>ull,African Supply and C<>ld Ston:,geCo [1904) 2 Ch 268.
" 6 Re Soulh African Supply and Cold Stcm,ge Co [1904) 2 Ch 268.
"' Application can be made by the company or any creditor or member of the company: Cap.622, s.670(3). Where
the company is being wound up, only the liquidator (or provisional liquidator) may apply: Cap.622, s.670(4).
" 3 Cap.622, s.670. ln Australia, it has been held that the court's role in the initial application also extends to
scrutinising the proposed scheme such that if the court v.cereto fonn a view that, for whatever reason, the scheme
is unlikely to receive court apprOv-dlat the stage of the hearing for sanction of the scheme even if the requisite
majorities at the meetings approve of the scheme, then the court should not give leave to summon meetings: Re
Bond CorporationHoldings Ltd (I 991) 5 ACSR 304; Re Stockbridge Ltd ( 1993) 9 ACSR 637.
"' Cap.622, ss.673(1) and 674 .
•no Cap.622, s.673(2).
331 Cap.622, s.673(6).
 ALTERATIONSTO SHARE CAPITAL 685

(or creditors, as the case may be), including those who did not vote in favour of the
scheme. 332

6.5.3 Class meetings

Approval for scheme required from each class of members. In the first application 14.169
to the court under Cap.622, s.670 for meetings to be held, the company will need to
determine whether class meetings are required. If class meetings are required, then
the requisite approval for the scheme must be obtained at the meeting of each class of
members (or class of creditors). In the case of a members' scheme, a single meeting of
all the company's members would be held if class meetings are not required.
Circumstances in which class meetings required: Argos case. The following 14.170
principles were set out by the Court of Final Appeal in UDL Argos Engineering &
Heavy Industries Co Ltd v Li Oi lin 333 as to when class meetings are required:

• Persons whose rights are so dissimilar that they cannot sensibly consult together
with a view to their common interest must be given separate meetings.
• Persons whose rights are sufficiently similar that they can consult together with
a view to their common interest should be summoned to a single meeting.
• The test is based on similarity or dissimilarity of legal rights against the
company, not on similarity or dissimilarity of interests not derived from such
legal rights.
• The fact that individuals may hold divergent views based on their private
interests not derived from their legal rights against the company is not a
ground for calling separate meetings.
• The question is whether the rights which are to be released or varied under
the scheme or the new rights which the scheme gives in their place are so
different that the scheme must be treated as a compromise or arrangement
with more than one class.

Whether class meetings held determined by shareholders' rights not interests. 14.171
Tn Re Industrial Equity (Pacific) ltd, 334 the scheme involved the privatisation of a
listed company (IEP). Under the scheme, the IEP minority shareholders would receive
shares in another company (BIL) in return for their shares in lEP. A single meeting of
members was held, at which an overwhelming majority approved of the scheme. At
the hearing for court sanction of the scheme, a mino1ity shareholder who objected to
the scheme argued that separate class meetings should have been held for members of
IEP who already held shares in BIL and the members of IEP who did not own shares

m Cap.622,s.673(5). Schemesinvolving a takeover,mergeror sharerepurchase(including privatisations)of public

companiesalso needto comply with requirementsof the Codeson Takeoversand Mergersand ShareBuy-backs.
The.seCodes arc made by the Securitiesand FuturesCommission under s.399 of the Securities and Futures
Ordinance(Cap.571).The Codesdo not operateas laws,but non-compliancewith the Codesmay leadto a denial
of the Hong Kong securitiesmarketsto the company.
"' (2001) 4 HKCFAR 358.
rn (1991) 2 HKLR 614.
686 SHARE CAPITAL

in BIL. His argument was on the basis that the IEP members who held BIL shares
would be affected by their voting by the interests of BIL rather than simply in their
interests as members ofJEP. The court held against the minority shareholder, applying
the principle that whether class meetings need to be held is detem1ined with reference
to the shareholders' rights rather than interests. As all the members at the single
meeting had the same rights in IEP, it was unnecessary for separate class meetings to
be held. (However, if the interests of the minority were overborne by a majority with
extraneous interests, then that can be a factor leading the court to decline to sanction
the scheme on separate grounds, 335 discussed further below at para.14.180.)
14.172 Responsibility of company to determine whether class meetings required. It is
the responsibility of the company putting forward the scheme to decide whether class
meetings are required. 336 If the requisite class meetings were not held, then the court
does not have jurisdiction to sanction the scheme. 337

6.5.4 Requisite "pprov"l "t meetings

14.173 Headcount test and shareholder/ creditor value test. Under the predecessor CO,
s.166 (repealed), there must be approval at each meeting by a majority in number
representing three-fourths in value of those present and voting at the meeting (whether
in person or by proxy). The "majority in number" requirement is referred to as the
"headcount test". The "three-fourths in value" is referred to as the "share value"
or "creditor value" test (as the case may be). The share value test corresponds with
the ordinary way of voting at members' meetings (usually one vote per share). The
share value test ensures that the scheme is implemented only if it has the support of
a substantial majority in value terms; while the headcount test ensures that a small
minority of shareholders who between them control a large stake in the company
could not push through a scheme that does not enjoy broad-based support among the
individual shareholders who are a majority in terms of number of shareholders. 338
14.174 Debate over appropriateness of headcount test. At the time of the Companies
Ordinance Rewrite when the Companies Bill (subsequently enacted as Cap.622) was
being drafted, there was debate in Hong Kong regarding the appropriateness of the
headcount test. The issues were highlighted in the case of Re PCCW Ltd339 (discussed
below) where there were allegations of "share splitting" 340 engaged in by certain
members for the purpose of ensuring that there were sufficient votes in favour of the
scheme to satisfy the headcount test.

335
[1991) 2 HKLR 614, 624-625.
336 UDLArgos Engineering & Heavy l,ufwuries Co Ltd v Li Oi Lin (2001) 4 MKCFAR 358; Re China light and
Power Co Ltd [ 1998) I H KLRD 158.
m UDL Argos Engineering & Heavy /11d11stries Co Ltd v Li Oi Lin (200 I) 4 HKCFAR 358.
m Sec Re PCCW Ltd [2009) 3 HKC 292, [ 177].
m [2009) 3 HKC 292 .
.,.. In the present context, "share splitting" refers to the situation where a shareholder sells his shares 10 a number
of nominees to hold the shares on his behalf. For example, a shareholder with I 00 shares might transfer 99 of
those shares to 99 nominees (who hold on his behalf and vote on his behalf). Before the share split, the original
shareholder has only one vote for the purpose of the headc-Ounttest. After the share split, he can effectively
exercise 100 votes for the purpose of the headcount test (as each nominee is a separateshareholder).
 ALTERATIONSTO SHARE CAPITAL 687

Headcount test criticised for being inconsistent with "one share one vote". As a result 14.175
of the controversies, a significant change was made under Cap.622 in relation to the
headcount test for members' schemes. 341 While the headcount test is intended to protect
minority shareholders, it has been criticised as being contrary to the usual principle of
"one share one vote" and, in the case of listed companies, failing to reflect the reality of
shareholdings where most investors hold only equitable interests in the shares which are
held in CCASS.342 In members' schemes for listed companies, members who wish to be
counted for the purpose of the headcount test would need to have their shares taken out
of CCASS and registered in their own names before the meeting. Otherwise, it is only
HKSCC Nominees Ltd which (as the registered member) can be counted for the purpose
of the headcount test in respect of their shareholdings. 343
Different test applied under Cap.622 for certain schemes: votes cast against 14.176
scheme cannot exceed 10% of total voting rights. For schemes of a1Tangement
generally under Cap.622, the headcount test still applies, together with the share
value test (or creditor value in the case of creditors' schemes). 344 However, for certain
members' schemes, a different test is applied in place of the headcount test (but the
share value test still also applies). 345 Under the new test (referred to as a "negative
10% test" in Re Cheung Kong (Holdings) Ltd346), the scheme can be implemented
only if the votes cast against the scheme do not exceed 10 percent of the total voting
rights attached to all disinterested shares in the company. 347 This test only applies to
schemes involving a takeover offer or general offer for a share buy-back. 348 "Takeover
offer'' is defined in s.674(5) of Cap.622 and is derived from the concept of takeover
offer for the purpose of the provisions on compulsory acquisition of shares following
a takeover.349 However, the definition is also extended to cover schemes involving a
cancellation of shares (otherwise than in a buy-back). 350 The persons who are holders

3" The original proposal in the Companies Bill was to retain the headcount rest, subject 10 the court's discretion
10 dispense with the test for members' schemes: sec FSTB, CO Rewrite: Drofi Compcmies Bill First Phase
Co11su/f(lfi()11
- Co11sulto1io11Paper (December 2009), 36-47; Co11sulta1io11 Co11clusio11s (August 2010). 3-7.
However, amendments were made to the proposal following debate in the Legislative Council Bills Committee
and further public submissions to the Bills Committee: see the Government's paper presented to the Bills
Committee "Administration's Response to Deputations' Views on Clause 664 relating to the Headcount Test and
Proposed Way Forward"( CB(1)2019/l 1-12(02)).
"' See para.14.062 above.
"' As the beneficial holders might instruct HKSCC Nominees Ltd to vote differently on their shares, in practice
HKSCC Nominees Ltd casts one vote in favour and one vote against for the purpose of the headcount test.
344
Cap.622, s.674(1).
345 Cap.622, ss.674(1)(c), 674(1)(d), 674(2)(a), and 674(2)(b).
"' [2015] 2 HKLRD 512.
"' The test is derived from r.2.10(b) of the Code on Takeovers and Mergers which applies in relation to a scheme of
arrangement for privatisation of a public company: see note 236 above on the Code.
"' As defined in Cap.622, s. 707. On general offers for buy-backs, see further Chapter 15.
3'' Cap.622, Pt.13 Div.4, derived from the retitled Cap.32, s.168 and Sch.9.
3;; Cap.622, s.674(5)(b); and see Re Cheung Kong (Holdings) Ltd [2015) 2 MKLRD 512 ("negative 10% test"
applied for a scheme involving a re-domicile, where all the shares of the original Mong Kong holding company
were cancelled). Ordinarily a takeover offer is an offer made by a person co acquire all the sharc.s in the company
not held by that person (offeror): sec Cap.622, s.674(5)(a). In the case of schemes involving a cancellation of
shares, the concept of"takcover offer" in Cap.622, s.674(5)(b) is extended 10 cover an offer for the cancellation
of shares except those held by the "offcror". There is no definition of the term "offcror" but the intention is
co catch the party who is seeking to obtain control of the company and who is usually the party providing the
consideration to the shareholders for the cancellation of their shares (and who is commonly referred to as the
"offeror" in practice in such privatisation scheme documents).
688 SHARE CAPITAL

of disinterested shares (i.e. the independent shareholders) for the purpose of the test
are set out in s.674(3) of Cap.622.
14.177 Court has power to order that headcount test does not apply. For members'
schemes generally, the court is also given a power to order that the headcount test is
not to apply.351 This power can be relied upon where there are concerns that there has
been share-splitting for the purpose of defeating a scheme.

6.5.5 Court sa11ctio11

14.178 Matters court must be satisfied with prior to sanctioning of scheme. Before
the court would sanction a scheme, the court must be satisfied of each of the
following:m

• The meetings were properly constituted (i.e. class meetings were held where
appropriate). 353
• The meetings were duly convened in accordance with the directions given by
the court. 354
• The members or creditors had been given sufficient explanation of the
scheme and its effect and sufficient information to enable them to make a
reasonable judgment as to how to vote at the meeting. 355
• The requisite approvals were given at the meeting(s). 356
• The majority voted bona fide or honestly in what they regard to be the
interests of the class, and not because of their own private interests.357 That
is, the result of each meeting must fairly reflect the views of the members or
creditors concerned-the court may disregard the votes of those who have
such personal or special interests in supporting the schemes that their views
cannot be regarded as fairly representative of the class in question. 358
• The scheme is fair in that it is such that an intelligent and honest man of
business might reasonably approve. 359

14.179 Reduction of capital schemes: other reduction of capital requirements under

Cap.622 must be met as well. Where the scheme involves a reduction of capital, then

"' Cap.622, ss.674( I)(c)(ii) and 674( I)(d)(ii). The provision is derived from Corporations Act 200 I (Aust),
s.411(4)(a)(ii).
m See also Re Wheelock Pmperlies Ltd [2010) 4 HKLRD 587; Re Cheung Ko11g(Holdings) Ltd [2015) 2 HKLRD 512.
m UDLArgos Engineering & Heavy Industries Co Ltd v Li Oi Lin (200 I) 4 HKCFAR 358.
"' Re China light and Power Co Ltd [ 1998) I HKLRD I58.
;s, Re China light and Power Co Ltd [1998] I HKLRD 158.
;s• Re China light and Power Co Ltd [1998) I HKLRD 158.
"' Re Industrial Equity {Pt,cijic) Ltd [I 991] 2 HKLR 614; UDLArgos £11gi11eering & Heavy Industries Co Ltd v Li
Oi Lin (2001) 4 HKCFAR 358.
"8 UDL Argos £11gineeri11g & Heavy Industries Co Ltd v li Oi li11 (200 I) 4 HKCFAR 358.
,,. Re J11dustri.alEquity (Pacific)Ltd (1991) 2 HKLR 614; Re Alabama. New Orleans. Texas and PacificJunction
RlwyCo (1891) I Ch213.
 ALTERATIONSTO SHARE CAPITAL 689

the requirements in Cap.622, Pt.5 Div.3 are also applicable, and the relevant principles
for court sanction of a reduction of capital also apply.360
Re PCCW case: facts. The case of Re PCCW Ltd36 ' involved a scheme for the 14.180
privatisation of the listed company PCCW. Under the scheme, all the shares of
the company except for those of the "Excluded Group" (being those who would
remain as the shareholders in the company following the privatisation) would be
cancelled, with new shares then to be issued to the intended controllers of the
company following the privatisation (referred to as the "Joint Offerors"). The
Joint Offerors were to pay to the holders of the scheme shares $4.50 per share
for the cancellation of those shares but they were to fund that payment out of
dividends to be paid to them by the company after the cancellation of the scheme
shares.
Re PCCW case: allegation of vote manipulation. The requisite approvals for the 14.181
scheme were obtained at the shareholders' meeting. When the company applied for
court sanction, the Secuiities and Futures Commission (with leave to intervene granted)
argued that the court should not sanction the scheme due to share-splitting which was
engaged in for the purpose of satisfying the "headcount test" in the predecessor CO,
s.166 (repealed). Under that (former) s.166, the scheme must be approved by a simple
majority in number of the members (the headcount test) as well as by 75 percent
majority by value of the shares (share value test). 362 It was alleged in the case that
existing shareholders in favour of the scheme had transfe1Tedtheir shares to a number
of nominees for the purpose of ensuring that there would be a sufficient number of
members to satisfy the headcount test. 363
Re PCCW case: scheme would not be sanctioned due to vote manipulation and 14.182
majority not acting bona fide in interests of class. The Court of Appeal held that
the scheme should not be sanctioned. 364 The court accepted that where there was vote
manipulation such as by way of share splitting, then the votes cast would not be a true
reflection of the will of the members. The onus was on the petitioner to satisfy the
court that the majority's decision fairly reflected the class and that the majority was
acting bona .fide and not coercing the minority in order to promote interests adverse
to those of the class. On the evidence, the court was not satisfied that there was no
vote manipulation and that the majority had come to a decision representative of the
class, and so accordingly declined to sanction the scheme. The court also observed that
there were other aspects of the scheme which were troubling. Rogers VP and Lam J

360
See, e.g., Re WilsonBro/hersa11dD G Howa/1a11dCo lid I939 SLT 68; Re Chi11aLig/11a11dPowerCo lld(l998)
I HKLRD 158; Re Wheelock Properrieslid (2010) 4 HKLRD 587; Re Cheung Kong (Holdings) Ltd [2015) 2
HKLRD 512. For the pt.5 requirements, see Chapter 15.
so, [2009) 3 HKC 292.
3•' For the modifications to the headcount test under the present law in Cap.622, see para.14.178 above.
363The circumstances of the company me.ant thal those who had invested in the company earlier at a time when the
share price was much higher would incur losses (as the scheme price ofS4.50 was only a little above the market
price which was at historic lows) while more recent inve.storswould make gains if the scheme was effected.
,., See also Re Dee Valley Group pie (2017) 2 BCLC 328, where the English court held that the chairman of
the meeting considering a scheme is entitled to reject the votes of shareholders whose shares were derived
from share-splitting unde,taken to artificially boost the number of shareholders voting in fovour of or against a
scheme.
690 SHARE CAPITAL

accepted that, apart from the problem of vote manipulation, there seemed to be strong
grounds for refusing to sanction the scheme which would have the effect of forcing
out long-term investors in the company at a depressed price when the share price was
trading at historic lows in circumstances where the reasons for the scheme had not
been adequately articulated, where the substantial drop in asset value of the company
had not been explained, where the long-term investors were treated inequitably, where
the Joint Offerors would receive a dividend upon implementation of the scheme
which should have been payable to all shareholders and where the controllers seeking
privatisation would be maintaining the company's business largely in the same manner
after the scheme.

6.5.6 l11tra-groupamalgamatio11s
14.183 Cap.622 provides for intra-group amalgamations without court sanction.
Another major change in the provisions on schemes of arrangements in Cap.622 is
the new procedure for court-free intra-group amalgamations-namely amalgamations
of companies in the same group without the need for court sanction. Schemes
for amalgamations can proceed under the ordinary procedure, with the need for
court sanction, pursuant to Cap.622, ss.668-677. As an alternative, intra-group
amalgamations can proceed without court approval, so long as there is compliance
with Cap.622, Pt.13 Div.3 (ss.678-687). 365
14.184 Vertical and horizontal amalgamations. There are two categories of amalgamations
within Div.3:

1. Vertical amalgamations: these are amalgamations between a holding company

with one or more of its wholly owned subsidiaries. 366After amalgamation, the
amalgamated company exists with the name of the holding company. All the
shares of the amalgamating subsidiaries are cancelled, and the articles of the
amalgamated company are the articles of the holding company; and367
2. Horizontal amalgamations: these are amalgamations between two or more
wholly owned subsidiaries of the same company.368 Following amalgamation,

'" The provisions are modelled on provisions in Singapore (Companies Act s.215O) and New Zealand (Companies
Act 1993 s.222). The provisions in Pt.13 Div.3 only apply to companies incorporated under Cap.622 (or a former
Companies Ordinance). This is because amalgamations of foreign companies (which affect the existence or
otherwise of the company) should be dealt with under the law of the place of incorporation of the company rather
than under Hong Kong law.
" 6 Cap.622, s.680. For the definition of"wholly owned subsidiary", see Cap.622, s.678(1).

'"' Cap.622, ss.680(2)(a) and 680(2)(b).

"' Cap.622, s.681. Amendments proposed under the Companies Bill 2018 will clarify that a horizontal amalgamation
is permitted under s.681 in res1>ectof Hong Kong wholly-owned subsidiaries of a foreign holding company. This
is done by replacing the phrase "[t]wo or more of the wholly owned subsidiaries of a company may amalgamate''
in Cap.622, s.68 I(I) with the phrase "[t]wo or more of the wholly owned subsidiaries of a body coq1orote may
amalgamate": see cl.70 of the Bill (emphasis added). The definition of "company" in s.2 applies to s.681 of
Cap.622 such that under the currcnc provision, the holding company must also be a company incorporated under
Cap.622 (or a former Companies Ordinance in Hong Kong). With the amcndmcncs under the Bill, the holding
company in Cap.622, s.681(1) can be any "body corporate", including companies formed outside Hong Kong.
The rationale ror nor applying the amalgamation provisions to foreign companies (sec note 365 above) is not
relevant where the amalgamation only involves Hong Kong subsidiaries. In such a case, it is irrelevant that the
holding company is a foreign company.
 ALTERATIONSTO SHARE CAPITAL 691

the shares of all but one of the amalgamating subsidiaries are cancelled. 369
The amalgamated company is the company whose shares are not cancelled
and exists with the name of that company and having the articles of that
company.370

Procedural requirements for amalgamations. The procedural requirements for such 14.185
amalgamations are as follows:

• The directors of each amalgamating company must make a solvency

statement and issue a certificate on the solvency statement.371
• The directors of each amalgamating company must give written notice of the
proposed amalgamation to every secured creditor, and publish the proposal
in an English newspaper and a Chinese newspaper. 372
• The members of each amalgamating company must approve the amalgamation
by a special resolution. 373
• Within 15 days after the approval of the amalgamation, the documents
specified in s.684 must be delivered to the Registrar for registration. 374
• The Registrar issues a certificate of amalgamation after registration of the
above documents, 375 and makes a note of the amalgamation in the Companies
Register in relation to each amalgamating company.376

• The amalgamation takes effect as specified on the certificate of

amalgamation. 377

Solvency statement required from each amalgamating company. The solvency 14.186
statement is required to be made by the board 378 of each amalgamating company, and
is intended to ensure that the creditors of each company would not be prejudiced by
the amalgamation. Under the solvency statement, the directors must be satisfied that:

• as at the date of the solvency statement, there is no ground on which the

directors' amalgamating company could be found to be unable to pay its
debts; and

"' Cap.622,s.68I (2)(a).

J7(1Cap.622~ s.681(2)(b).
371
Cap.622,ss.679,680(2)(c), 680(2)(d), 68 I (2)(c), 68 I (2)(d), and 683.
372 Cap.622~ s.682.

m Cap.622,ss.680(I), 680(3}-680(4), 681( I), 681(3). The amalgamation must be on the terms set out in ss.680or
68 I (as the case may be).
3" The.scinclude the amalgamationproposal and certificate.son the solvency statement.

ns Cap.622. s.684(3).
376
Cap.622, s.685(5).
377 SeeCap.622,s.685(1) and 685(2).
378 Cap.622,ss.679-681 refer 10 "the directors" making the solvency statement,which meansthat a decision of the
board (m,tjority of directors) making the solvency statement is sufficient. This can be contrnsted with the phrase
"all directors", as used in Cap.622, s.216 in the context of solvency statements for a reduction of capital.
692 SHARE CAPITAL

• that the amalgamated company will be able to pay its debts as they fall due
during the period of 12 months immediately after the date on which the
amalgamation is to become effective.

14.187 Solvency statement must declare whether floating charge been granted by
company or security created by company over class of assets. Apart from the
question of the company's solvency, the solvency statement also requires a declaration
in respect of whether there exists a floating charge granted by the company or a security
created by the company over a class of assets, to any of which the security interest has
not attached.379 If such a charge or other security exists for a particular company, each
person entitled to the charge or security (i.e. the secured creditor) must consent to
the amalgamation proposal; otherwise the proposal cannot proceed. The purpose of
this requirement is to avoid, for example, prejudice to the holder of a floating charge
over the entire undertaking of one amalgamating company which was granted later in
time compared with a floating charge granted over the entire undertaking of another
amalgamating company. Upon amalgamation, the holder of the charge which is later
in time may lose priority to the holder of the charge first in time in respect of the entire
undertaking of the amalgamated company.380 Accordingly, all such chargees must
consent to the amalgamation before it can be proceeded with. Apart from floating
charges, the provision also covers other security which might give rise to a similar
problem, such as fixed charges over a class of assets that encompasses both present
and future assets or covering future assets only (in circumstances where not all the
items of property that can potentially come within the class have been acquired, and to
which the security interest has attached).
14.188 Member or creditor of amalgamating company can apply to court to prevent
or alter amalgamation if they would be unfairly prejudiced. A member or
creditor of an amalgamating company or a person to whom an amalgamating
company is under an obligation may apply to the court (before the effective date
of the amalgamation) for an order that the amalgamation not take effect or for the
amalgamation proposal to be modified or reconsidered by the company. 381 The
court may grant such an order (or any other order the court thinks fit) if the court
is satisfied that the amalgamation would unfairly prejudice a member or creditor
or such other aforementioned person.
14.189 Effect of amalgamation is merging of companies into one company. The
effect of an amalgamation under Div.3 is that the amalgamating companies merge
together (amalgamate) and continue to exist as one company (i.e. the amalgamated
company). 382 Each amalgamating company ceases to exist as an entity separate from
the amalgamated company.383The amalgamated company succeeds to all the property,
rights and privileges, and all the liabilities and obligations, of each amalgamating

m Cap.622,ss.679(I )(b), 680(2)(d) and 681(2)(cl).

' 80 SecHorst Put/will v RoyalBankofCa11atla(200I) OTC 404 (affirmed (2002) OTC 535),dealing with provisions
under the CanadianBusinessCorporationsAct.
381
Cap.622,s.686.
"' Cap.622,ss.680(1)and 681(1).
' 83 Cap.622,s.685(3)(b).
 VARIATIONOF CLASS RIGHTS 693

company.384 The process does not involve any "transfer" of property, rights or liabilities
from amalgamating companies to the amalgamated company as such. Rather, the
amalgamating companies continue as one company following the amalgamation.
The amalgamated company simply stands in the shoes of the amalgamating
companies. 385 Legal proceedings commenced against an amalgamating company can
be continued against the amalgamated company, and contracts entered into with an
amalgamating company can be enforced against an amalgamating company (unless
the contract provides otherwise). 386

7. VARIATION OF CLASS RIGHTS

7.1 Introduction

Approval required before company can vary rights attached to shares in .14.190
particular class. Where a company proposes to vary rights attached to shares in a
particular class of shares (referred to in this chapter as "class rights"), there must be
compliance with Cap.622, Pt.4 Div.7 (ss.176-184). These provisions are derived from
predecessor CO, s.63A (repealed), which was first introduced in 1984.387 Prima facie,
a company's articles can be amended by special resolution. 388 Where a company has
issued more than one class of shares, if the rights attached to shares of a particular
class can be amended by a 75 percent majo1ity of the total members of the company,
then it might be possible for members holding one class of shares to strip away class
rights of members of another class of shares against the objections of the latter (where
the members comprised in the first-mentioned class command at least 75 percent
of the total votes). Accordingly, it is necessary for the law to confer protections on
members of each class of shares so that their approval is required before their class
rights can be varied. 389
Cap.622 also protects class rights in companies without share capital. Cap.622 14.191
Pt.4 Div.7 Subdiv. l contains the provisions on va1iation of class rights for companies
with share capital. Subdivision 2 contains similar provisions for companies without
share capital, which would be relevant for such companies which have different
classes of members. 390 The discussion below is confined to class rights in the context
of companies with share capital.

"' Cap.622, s.685(3)(c).

"' Carter Holt Han,ey Ltd v McKema11[ 1998) 3 NZLR 403; Elders New Zealand Ltd v PGG Wrightso11Ltd [2009)
I NZLR 577.
JSn Cap.622, s.685(4).
381 Pursuant to the recommendations in the Seco11dRepon (!{the Companies Law Revision Com111i11ee 011 Company
Law (1973), (3.44)-(3.47]. Predecessor CO, s.63A was based on English provisions first introduced there in the
Companies Act I980 (UK).
388 Sec Chapter 5.
3"" The articles can contain provisions protecting the members of different classe.s. Before the introduction of the
statutory provisions, if the articles contained provisions for variation of class rights, then chose provisions needed
co be complied with. For companies without such provisions in their articles, it was unclear whether class rights
could be altered by special resolution of the members in general meeting or whether the rights could only be
altered by agreement of all members in the class.
JQ() See Cap.622, SS.I 85-192.
694 SHARE CAPITAL

7.2 Concept of class rights

14.192 When the statutory provisions are triggered. The statutory provisions apply where:

• the company's share capital is divided into different classes of shares; and
• there is a variation of rights attached to shares in a class of shares. 391

7.2.1 Classes of shares

14.193 Shares considered to be in class if rights attached to them uniform. Cap.622,
s.178( 1) provides that shares are in one class if the rights attached to them are in all
respects uniform. 392 For example, where a company has on issue ordinary shares and
preference shares which confer different voting and dividend rights to the holders of
each class of shares, then it is clear that the company's share capital is divided into
different classes.
14.194 Different dividend entitlements in first year do not amount to different classes.
Under Cap.622, s.178(2), the rights are not to be regarded as different from those
attached to other shares only because they do not carry the same rights to dividends
in the 12 months immediately following their allotment. Where shares are allotted at
different times during the year, the holders will be entitled to different amounts of
dividends for the first year (as their entitlements will depend on the time when they
were allotted the shares). Section 178(2) of Cap.622 ensures that those shares, which
are otherwise uniform, are not regarded as being shares of different classes merely
because of the different dividend entitlements in the first year.

7.2.2 Class rights

14.195 Not always clear which rights are "class rights". Even where it is clear that the
company has different classes of shares, issues can arise as to which rights within each
class are to be regarded as class rights so as to trigger the application of the statutory
provisions on variation of class rights.
14.196 Position under predecessor CO, s.63A: Rights regarded as class rights if annexed
to particular shares or if rights conferred on person in capacity of shareholder.
In Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Herald
Newspaper and Printing Co Ltd, 393 the articles conferred on the plaintiff certain
rights-e.g. the right to appoint a director as long as he held no less than l O percent
of the company's shares. The company proposed to amend the a1ticles to cancel
the special rights given to the plaintiff. The issue was whether the plaintiff's rights
were special rights attached to shares (class rights) within the statutory provisions.
The court held that rights will be regarded as special rights attached to shares within
the statute if the rights concerned fall into either of the following categories:

'" See Cap.622, s.180( I).

'" Cap.622, s.178 is derived from Companies Act 2006 (UK), s.629.
"' (l987)Cb I.
 VARIATIONOF CLASS RIGHTS 695

• rights annexed to particular shares, such that whoever is the holder of those
particular shares is entitled to the rights;

• 1ights which, although not attached to any particular shares, are conferred on
the person in the capacity of shareholder of the company.

Cumbriu11 Newspapers case: held to be class rights. The plaintiff's rights fell into 14.197
the latter category, above, and were thus class rights within the statute.
Cap.622 partly modifies Cumbria11Newspapers case. The above decision is modified to 14.198
some extent under Cap.622, s.177, which provides that a reference to the rights attached
to a share in a class of shares in a company is a reference to the rights of the holder of that
share as a member of the company. Under that s.177, the first of the above two categories
in the Cumbrian Newspapers case is included in the notion of class rights for companies
with share capital, but not the second. Also, under s.177, rights conferred on members
othe1wise than in their capacity as members would not be regarded as class rights.3')4
Whether class rights encompass unique rights attached to class of shares or all 14.199
rights attached to class of shares. There may also be a question of whether class
rights covers only the unique rights attached to shares in a particular class or whether
all rights in each class of shares are class rights, including rights which are also held by
shareholders of another class of shares. 395 The court in Cumbrian New:,papers appears
to have favoured the former view.

7.3 Variation of rights

Not all changes amount to variation of class rights. Not all changes affecting the 14.200
1ights of members amount to a variation of those rights. For example, an alteration
which affects the enjoyment of a right rather than the right itself might not amount to
a variation of the right: Greenhalgh v Ardene Cinemas Ltd. 396 In that case, it was held
that a subdivision of one class of shares which effectively reduced the voting power of
holders of another class of shares wtyas not a variation of the rights of the latter, since
the holders of the latter still had the same number of votes per share before and after
the subdivision. Also, the creation or issue of further shares ranking pari passu with
existing shares in a class of shares does not involve a variation of the rights attached
to the existing shares. 397
Variation includes "abrogation" of right. Variation includes "abrogation" of the 14.201
right: Cap.622, s.193. However, the cancellation of a particular class of shares and the
return of capital paid up on those shares does not involve a variation or abrogation of

3" This was also the view of the court in the C11mhria11 Newspapers case, above.
39s See further Paul L Davies and Sarah Worthington, Gower and Davies' Principles of Modem Compa11yLaw
(9th cdn, Sweet and Maxwell 2012) [ 19-39).
396 [1946] I All ER 512. See also Adelaide Electric Co v Prudential Assurance [1934) AC 122; White v Bristol
Aeroplane Co [1953) Ch 65.
397 This was expressly provided for in predece.ssor CO,Table A reg.5 (repealed), but that provision is nOlreproduced
in the Model Articles. It appears chat the position is still the same in the absence or such a provision in the articles:
see further Paul L Davies and Sarah Worthington. Gower and Davies· Principles of Modem Company Law
(9th edn, Sweet and Maxwell 2012) para.(19-35).
696 SHARE CAPITAL

class rights where the return of capital is made in accordance with those rights on a
winding-up. 398 For example, the return of surplus capital to preference shareholders
with a priority to return of capital on a winding-up and a cancellation of their
shares does not involve a variation or an abrogation of class rights; rather the return
of capital in these circumstances is simply giving effect to the rights of preference
shareholders. 399 The articles can provide to the contrary though and deem a return of
capital for a particular class of shares to amount to a variation of class rights.400
14.202 Amendment to articles for varying rights attached to class is itself variation of
class rights. Any amendment of a provision in a company's articles for the variation
of the rights attached to shares in a class, or the insertion of any such provision into the
articles, is itself to be regarded as a variation of those rights.401

7.4 Procedure for variation

14.203 Variation procedure. If the company's articles contain provisions for the variation
of class rights, then those rights can be varied only in accordance with the articles. 402
The Model Articles do not contain provisions for variation of class rights, but the
predecessor CO, Table A contained a provision requiring the consent in writing of
holders of three-fourths in nominal value of the issued shares, or with the sanction of
a special resolution passed at a separate general meeting of the holders of the shares
of the class (reg.4).403
14.204 Variation requires written consent of 75% or special resolution if not provided
for by articles. If the company's articles do not contain provisions for the variation of
class rights, then the rights can be varied only if:

• there is written consent of holders representing at least 75 percent of the total

voting rights of holders of shares in the class; or
• a special resolution is passed at a separate general meeting of holders of
shares in the class (i.e. a class meeting) sanctioning the variation.404

14.205 Above restrictions on variation operate without prejudice to any other restrictions
on variation of class rights. The above restrictions are without prejudice to any other
restrictions on the variation of class rights-for example a company could make an
agreement with the holders of shares in a class that imposes other restrictions on the
variation of class rights.405

"' House of Fraser pie v ACGE lnvesunents Ltd [1987] AC 387; Re Nonhern Engineering fllduslries pie [ I 994] 2
BCLC 704. See also Dimbula Valley (Ceylon) Tea Co v Laurie [1961] Ch 353.
J9• Re Hunting pie (2005] 2 BCLC 211.
"'° Re Nor/hem Engineering Industries pie [ 1994) 2 BCLC 704 .
1
.i-0 Cap.622, s.180(5).
Ml2 Cap.622, s.180(1)(a).
-0-0, After the commencement ofCap.622, this provision would still be relevant for pre-existing companies which had
adopted Table A. However, it appears that the first limb in reg.4 (consent in writing) would not have application
after the commencement ofCap.622 due to the abolition of nominal value of shares.
""' Cap.622, s.180( I) and 180(3).
A(jj Cap.622,s.180(2).
 VARIATIONOF CLASS RIGHTS 697

Written notice of variation to be given within 14 days. Where class rights have 14.206
been varied, the company must give written notice of the variation to each holder of
shares in the class within 14 days after the date on which the variation is made.406
The company must also deliver to the Registrar for registration, within one month
after the date on which the variation takes effect: 407 (a) a copy of the resolution or
other docwnent that authorised the variation; and (b) a notice in the specified form
including a statement of capital, as at the date on which the variation takes effect, that
complies with Cap.622, s.201.408

7.5 Minority protection

Minority may be able to challenge variation. Where a majority has approved of 14.207
the variation in a class meeting, it may still be possible for a minority shareholder to
challenge the variation on the grounds that the majority has failed to act bonafide in
the interest of the general body of members in the class. 409
Minority shareholders can apply to court to set aside variation on unfairly 14.208
prejudicial basis. Jn addition, minority shareholders with the requisite shareholding
can apply to the court to set aside the variation on the basis that the variation is unfairly
prejudicial pursuant to Cap.622, s.182. To be able to rely on that statutory provision,
the applicants must hold at least IO percent of the total voting rights of holders of
shares in the class concerned. 410 The application must be made within 28 days after the
date on which the variation is made.411 However, that s.182 is without prejudice to the
main unfair prejudice remedy in Cap.622, ss.724-725, 412 and so even if the minority
shareholders are unable to apply to set aside the variation under s.182, they are still
entitled to apply under s.724 of Cap.622 for a remedy.

406 Cap.622,s.181.
,o, Sec Cap.622. s.180(4) as co when the variation take.s effect.
<-08 Cap.622, s.184.

<-09 See Re Holders /11ves1me11t

Trust Ltd (1971] 1 WLR 583.
•°
11
Cap.622,s.182(I).
11
" Cap.622,s.182(2).
"' Cap.622. s. 182(7). See further Chapter 10.
 CHAPTER 15

MAINTENANCE OF CAPITAL

PARA.

I. Capital Maintenance Doctrine ............................................................................................... 15.00I

1.1 Introduction .................................................................................................................... 15.001
1.2 Transactions amounting to a return of capital.. ............................................................... 15.004
1.2.1 General ................................................................................................................ 15.004
1.2.2 Disguised returns of capital ................................................................................. 15.007
1.3 Overseas developments .................................................................................................. 15.011

2. Reduction of Capital .............................................................................................................. 15.012

2.1 General ........................................................................................................................... 15.012
2.1.1 The basic prohibition ........................................................................................... 15.012
2.1.2 Consequences of contravention ........................................................................... 15.016
2.2 Permitted reductions of capital ....................................................................................... 15.018
2.3 Court confirmation procedure ........................................................................................ 15.02 I
2.3.1 Court confirmation of reduction ......................................................................... 15.023
2.3.2 Other matters following court confirmation ....................................................... 15.040
2.4 Solvency statement procedure ....................................................................................... 15.045
2.4.1 Introduction ......................................................................................................... 15.045
2.4.2 Procedure and requirements ................................................................................ 15.046

3. Self-Acquisition of Shares, Redemption of Shares and Share Buy-Backs ............................ 15.059

3.1 Genernl ........................................................................................................................... 15.059
3.2 Redemption of shares ..................................................................................................... 15.064
3.2.1 Power to issue redeemable shares ........................................................................ 15.064
3.2.2 Redemption of redeemable shares ....................................................................... 15.067
3.3 Share buy-backs ............................................................................................................. 15.078
3.3.1 General ................................................................................................................ 15.078
3.3.2 Power to buy back shares ..................................................................................... 15.080
3.3.3 Procedure for buy-back: listed companies .......................................................... 15.084
3.3.4 Procedure for buy-back: unlisted companies ...................................................... 15.092
3.3.5 Financing of buy-back ......................................................................................... 15.094
3.3.6 Disclosure of buy-back ........................................................................................ 15.095

4. Financial Assistance for Acquisition ofShares ...................................................................... 15.097

4.1 Prohibition on financial assistance ................................................................................ 15.097
4.1.1 General ................................................................................................................ 15.097
4.1.2 Meaning of"financial assistance" ....................................................................... 15.103
4.1.3 Consequences of contravention ........................................................................... 15.112
4.2 Exceptions ...................................................................................................................... 15.l 14
4.2.1 Exceptions pursuant to solvency test.. ................................................................. 15.115
4.2.2 Principal or larger purpose exception .................................................................. 15.130
4.2.3 Miscellaneous exceptions .................................................................................... 15.135
700 MAINTENANCE OF CAPITAL

5. Dividends and Distributions .............. ,........ ,................ ,........ ,....... ,........ ,....... ,........ ,........ ,...... 15.137
5.1 Dividends ....................................................................................................................... 15.137
5.1.1 General ........................... ,........ ,................ ,........ ,....... ,........ ,....... ,........ ,........ ,...... 15.137
5.1.2 Types of dividends ............................................................................................... 15.142
5.2 Dividends and distributions out of profits only ............................................................. 15.148
5.2.1 General .............................................................. ,....... ,........ ,....... ,........ ,........ , ...... 15.148
5.2.2 Basic prohibition ................................................................................................. 15.150
5.2.3 Profits available for distribution .......................................................................... 15.153
5.2.4 Company's financial statements for detem1ining amount of distributions .......... 15.159
5.2.5 Relevance of company's solvency ....................................................................... 15.163
5.2.6 Consequences of unlawful distributions ............ ,....... ,........ ,....... ,........ ,........ ,...... 15.164
 1. CAPITAL MAINTENANCE DOCTRINE

1.1 Introduction

Common law development of capital maintenance doctrine. The maintenance 15.001

of capital doctrine was developed by the courts under the common law. In Trevor v
Whitworth, 1 Lord Watson stated:

"Paid-up capital may be diminished or lost in the course of the company's trading;
that is a result which no legislation can prevent; but persons who deal with, and give
credit to a limited company, naturally rely upon the fact that the company is trading
with a certain amount of capital already paid, as well as upon the responsibility of
its members for the capital remaining at call; and they are entitled to assume that
no part of the capital which has been paid into the coffers of the company has been
subsequently paid out, except in the legitimate course of its business."

Share capital contributed by members cannot be returned except on winding-up 15.002

under capital maintenance doctrine. Under the doctrine, share capital contributed
by members of companies limited by shares 2 cannot be returned to the members except
in a winding-up (or otherwise as allowed under statute). The rationale of the capital
maintenance doctrine is the protection of creditors, who transact with the company
on the basis that the capital contributed to the company by shareholders would be
available to meet the company's liabilities in a winding-up (subject only to the risk
of the capital being lost in the company's business-a risk which the creditors bear). 3
Unlawful return of capital to shareholders void under common law. It appears 15.003
that an unlawful return of capital to shareholders is void under the common law.4
Neither the directors nor the shareholders of the company would have authority to
cause the company to make an unlawful return of capital to shareholders. 5 Directors
are potentially Iiable to the company for breach of their general duties as directors if
they cause the company to engage in an unlawful return of capital. 6

(1887) LR 12 App Cas.409, 423-4. See also Re facha11ge Ba11ki11g Co. Flitcroft s Case (1882) 21 Ch D 519,533;
G11i11nessv la11d Corp of/re/and (1882) 22 Ch D 349, 37S-6; Progress P,·operty Co Ltd v Moorganh Grot1pLtd
[2011] I WLR I, [2011] 2 All ER 432, (1).
The restrictions do not apply for unlimited companies since members of unlimited companies would be required
to contribute to pay the debts of the company in a winding-up in any event.
3 On the capital maintenance doctrine generally, see John Amour, "Share Capital and Creditor Protection; Efficient
Rules for a Modern Company Law" (2000) 63 Modem law Review 354; Eva Micheler, "Disguised Returns of
Capital -An Ann's Length Approach" (20 I0) 69 Cambridge law .Jo11mal151.
' Re Lee, Behrens and Co Ltd [ 1932] 2 Ch 46; Re W & M Roit/r Ltd [1967] I All ER 427; Re Halt Garage (1964)
Ltd [ 1982]3 All ER 1016; Barclays Bank v British and Co111mo11wealtlr Holdings [1996] I BCLC I; A11stralasian
Oil £xplora1io11v laclrberg (1958) 101 CLR 119. Sec also Eva Michcler, "Disguised Returns of Capital -An
Arm's Length Approach" (2010) 69 Combridge lcnv Journal 151, 163-167. But for the position in relation to
unlawful dividends, sec para.15.169 below.
' Re Halt Garage (1964) ltd [1982) 3 All ER 1016; Tradepower (Haldi11gs)ltd v Tradepower (Hong Kong) ltd
(2009) 12 HKCFAR 417, [2010] 1 HKC 380.
• Directors were held liable, for example, in li-adepower (Holdings) Ltd v 1iudepower (Hong Kong) Ltd (2009) 12
HKCFAR 417, (2010) I HKC 380. See also Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2012)
4 HKLRD 263, (48). On directors' duties, genernlly, see Chapter 8.
702 MAINTENANCE OF CAPITAL

1.2 Transactions amounting to a return of capital

1.2.1 Generlll
15.004 Return of capital can take different forms. The clearest example of a return of
capital is the payment of the money contributed by members for their shares back to
the members. However, a return of capital can be effected in different ways, including
a distribution of assets of the company to a shareholder. A gratuitous disposition of
the company's assets to a shareholder when the company does not have distributable
profits will be regarded as an unlawful return of capital. 7
15.005 Particular types of transactions prohibited under doctrine. The common law
doctrine is of broad application, but a number of specific prohibitions as underscored
by the statute are based on the doctrine:

• prohibition on reduction of capital;

• prohibition on self-acquisition of shares;
• prohibition on financial assistance for the acquisition of shares; and
• prohibition on the payment of dividends otherwise than out of profits.

15.006 Prohibitions discussed in chapter. The above prohibitions are discussed in this chapter.

1.2.2 Disguisetl returns of capital

15.007 Disguised returns. Transactions which, on their face, do not purport to return capital
to shareholders might nevertheless potentially involve an unlawful return of capital if
there is a payment or transfer of assets to shareholders for no or insufficient value at a
time when the company does not have distributable profits.
15.008 Re Halt case: unlawful return of capital found where former director continued to
be paid when no longer active in company's business. For example, in Re Halt Garage
(J964) Ltd, 8 a husband and wife were the shareholders and directors of a company.
After the wife became ill, she was no longer active in the company's business, although
she remained a director. Remuneration continued to be paid to the wife despite her
absence in the company. At the time of the payments, the company had no profits and
accordingly the remuneration was paid out of capital. The court accepted that, under
the company's articles, a director was entitled to remuneration for holding office even
though the director was not active in the conduct of the company's business. However,
the com1 held that the company's power to award such remuneration predicated that a
director would receive remuneration for services rendered or to be rendered. Having
regard to the wife's inactivity, the court did not consider that the whole amounts drawn
by the wife during the relevant period were genuine remuneration for holding office as
director. The payment of the excessive amounts was held to be an unlawful return of
capital and void, and so the amounts were repayable to the company.9

1
Ridge Securities v IRC [1964) I All ER 275,288.
• [1982)3AII ER 1016.
9 See also, e.g., Re lee, Behre11sand Co Ltd [ 1932) 2 Ch 46; Re W & M Roith Ltd [ 1967) I All ER 427.
 CAPITAL MAINTENANCE DOCTRINE 703

Whether there is a return of capital depends on substance of transaction, not form. 15.009
Whether a transaction infringes the conunon law rule is a matter of substance and not
form, and so the label attached to the transaction by the parties is not decisive. 10 This is
illustrated in the Halt Garage decision, above. Other examples in the case law include:
Ridge Securities v IRC, 11 where it was held that payments (described as interest) made
by a subsidiary to its parent company were a disguised return of capital where there had
not been any commercial reason for the subsidiary to obtain the loan from the parent
company (Aveling Beu.ford Ltd v Perion Ltd 12), where the sale of a company's assets to
another entity controlled by a shareholder of the company at a gross undervalue was held
to amount to an unlawful return of capital; and Tradepower (Holdings) Ltd v Tradepower
(Hong Kong) Ltd, 13 where a scheme involving the cancellation of Company A's rights as
shareholder in Company B in favour of Company C (the other shareholder in Company
B) was regarded as effectively disposing of Company A's interests 14 to Company C and
an unlawful return of capital by Company A to its own shareholders (in circumstances
where Company C was controlled by the shareholders of Company A).
Not always necessary to show parties acted fraudulently or in bad faith for 15.010
disguised returns. For the court to find that there is a disguised return of capital, it
is not always necessary to establish that the parties intended to return capital to the
shareholder or that the parties acted fraudulently or in bad faith. 15 As stated by Lord
Walker SCJ in Progress Property Co Ltd v Moorgarth Group ltd, 16 the state of mind is
not always relevant. So for example, dividends paid out of capital would be unlawful
however well-meaning the directors who paid it. Similarly, an objective test is used to
determine whether payments to a director or shareholder as remuneration are excessive
so as to amount to a return of capital, subject to a "margin of appreciation". However,
Lord Walker SCJ also noted that, because it is necessary to investigate all the relevant
facts in determining the true purpose and substance of the impugned transaction,
sometimes the parties' subjective intentions can be relevant. 17 His Lordship observed
that if a company sells assets to a shareholder at a value which turns out to be less than
market value, it may be necessary to look at the motives and intentions of the directors,
and to assess factors such as whether the company was under financial pressure
compelling it to sell at an inopportune time, what advice was taken, how the market
was tested and how the terms of the deal were negotiated. His Lordship also stated:

"Pretence is often a badge of a bad conscience. Any attempt to dress up a

transaction as something different from what it is is likely to provoke suspicion." 18

10
Progress Property Co Ltd v Moorgarth Group Ltd [201 I) I WLR I, (2011) 2 All ER 432, (16); 1radepower
(Holdings) Ltd v Tradepower (Hong Ko11g)Ltd (2009) 12 HKCFAR 417, (2010) I HKC 380, (125).
II [1964]1AIIER275.
" [ 1989] BCLC 626.
" (2009) 12 HKCFAR 417, (2010) I HKC 380. For the facts of this case and discussion in the context of directors'
duties, see also Chapter 8.
" Company A's main assets were its shareholdings in Company B. Company B owned a number of commercial
premises.
15 Aveling Ba,ford v Perio11[ I989] BCLC 626, 632; Pmgress Property Co Ltd v Moorgarth Group Ltd [2011]
I WLR I, [20 I I ]2 All ER 432, [28].
16 (2011] I WLR I, [2011] 2 All ER 432, (28].
17 (201 I] I WLR I, [2011]2 All ER 432, (27], (29].
18
(20 I I] I WLR I, [2011 ]2 All ER 432, (30].
704 MAINTENANCEOF CAPITAL

If the transaction is an improper attempt to extract value by the pretence of

an arm's length transaction, it will be unlawful. However, if the transaction is
genuinely made at arm's length, then it will stand even if it appears to be a bad
bargain. 19

1.3 Overseas developments

15.011 Capital maintenance doctrine abolished in New Zealand and United States.
The capital maintenance doctrine has been criticised and has been abolished in
New Zealand, following the US approach. It has been argued that the capital
maintenance doctrine does little to protect creditors in practice, particularly in
the absence of any minimum capital requirements in the Companies Ordinance. 20
It appears that creditors do not generally regard the amount of a company's issued
share capital as a significant matter when deciding whether or not to extend
credit to the company. 21 For one thing, the amount of the issued share capital is
not necessarily reflected in the company's assets since the capital can be used
up in the company's operations. The alternative approach adopted in the United
States and New Zealand is the solvency test approach, which allows a company
to make a distribution to its shareholders as long as the company is solvent. 22
The supporters of the solvency test approach take the view that it is the risk
of a company's insolvency which would be of concern to creditors and thus a
solvency test better achieves the objective of creditor protection. As to shareholder
protection, it is possible to incorporate requirements for shareholder approval for
particular types of distributions that might give rise to shareholder concerns.
Although there had been earlier recommendations in Hong Kong to replace the
capital maintenance doctrine with the solvency test approach, 23 this proposal has
not been taken forward. For the most part, it seems that the business sector is
content with the current regime and it is not thought that there is any real need to
radically alter the existing laws in this area. 24 However, the Companies Ordinance
Rewrite (leading to enactment of the current Companies Ordinance (Cap.622))
made some modifications to the capital maintenance rules to make wider use of a
solvency test to provide for greater flexibility for companies. 25

'9 [2011) I WLR I, [2011] 2 All ER 432, [30]. In 1ha1case, a sale of assc1s was held on the fac1s10 be a genuine
commercial sale and not a dressed-up return of capital. See generally Eva Micheler, "Disguised Returns of
Capital - An Arm's Length Approach" (20 I0) 69 CambridgeLaw Jouma/ 151.
"' See the Review of the Hong Kong Companies Ordinance:ConsultancyReport (1997) (Pascutto Report) 94-96;
Jonathan Rickford, "Reforming Capit;1l:Report of the Interdisciplinary Group on CapirJI Maintenance" (2004)
15 Ewvpean Businesslaw Review 919, 931-933.
21 OT!, Modern Companylaw for a CompetitiveEconomy: StrategicFramework(February 1999), 81-82.
22 Companies Act 1993 (NZ) s.52; Modern Business Corporations Act (US) s.6.40.
" Review of 1heHong Kong Companies Ordinance:Co11sultancy Report ( 1997) (Pascutto Report), 94-96.
" See FSTB, CO Rewrite:Share Capital. CapitalMai111e11a11ce Doctrinea11dStatuto,yAmalgamationPmcedure-
ConsulrationPaper (June 2008), 18-19, Co11s11/tatio11
Conclusions(February 2009), 8-9.
25 FSTB, CO Rewrite: Share Capiwl, Capital Mai111e11a11ce Doctri11eand Swt1110,yAmalgamation Procedure-
Con.wlta1ionPaper (June 2008), 19-29, Co11s11/ration Conclusions(February 2009), 10-14. See paras.15.045,
15.095and 15.116below.
 REDUCTION OF CAPITAL 705

2. REDUCTION OF CAPITAL

2.1 General

2.1 .J The basic prohibition

Reduction of capital only in accordance with legislation. Companies Ordinance 15.012
(Cap.622), s.210 allows a company limited by shares 26 to reduce its capital in accordance
with Div.3 of Pt.5 of the Ordinance. An offence is committed under Cap.622, s.212
if a company reduces its share capital in contravention of Div.3. A reduction of share
capital can take various forms. These include:

(a) Returning paid-up capital to shareholders;

(b) Extinguishing or reducing the liability on unpaid shares. Such a reduction
enables holders of pa11lypaid shares to be relieved of their liability to pay
further calls on their shares to the extent of the amounts extinguished. For
example, if shares with an issue price of $10 are partly paid to $7, then
extinguishing the liability of any amount up to $3 per share involves or
would involve a reduction of the issued capital of the company; and
(c) Cancelling any paid-up share capital. This does not involve any return of
capital to shareholders as such but there is a reduction of the figure ofpaid-
up capital in the company's accounts.

Reduction of capital may be required due to changes in company's business. 15.013

The situations referred to in paras. (a) and (b) above might occur due to changes in the
company's business which result in the company having more issued capital than is
required for its continuing operations. Since the company has more resources than it
needs, it may be appropriate for excess capital to be returned to shareholders.
Company may wish to cancel paid-up capital. A company may wish to cancel 15.014
paid-up capital in the situation referred to in para. (c) above where the company has
sustained significant losses in its business of a pennanent nature. The reduction of the
amount of capital representing the lost assets means that the company's accounts can
reflect the true financial position of the company. The reduction also means that the
losses can be written off and there is a bringing forward of the time when the company
may be in a position to pay dividends to its shareholders. 27 Such a reduction may be
desirable to facilitate new equity investments in the company, for otherwise investors
may be reluctant to inject capital into the company if there is little prospect of receiving
a return on their investment (by way of dividends) due to prior losses of the company.
Amounts in share premium account and capital redemption reserve fund treated as 15.015
paid-up capital. Under the predecessor regime in the predecessor CO, for the purposes
of that s.58(1A) (repealed) of the predecessor CO, the amounts in the share premium

26
Or a company limited by guarantee having share capital.
27 On dividends, see para. I 5. I38 below.
706 MAINTENANCEOF CAPITAL

account28 and capital redemption reserve fund29 of a company were treated as paid-up share
capital. Accordingly, for example, a cancellation of amounts in the share premium account
or a return of amounts of premium to shareholders was prohibited unless complying with
requirements set out in the predecessor CO. Upon the conunencement of the current
Cap.622 (3 March 2014), amounts standing to the credit of the company's share premium
account and capital redemption reserve become part of the company's share capital (due to
the abolition of nominal or par value of shares).30

2.1.2 Co11seque11ces
of co11trave11tio11
15.016 Criminal liability for contravention ofCap.622, s.212. A contravention ofCap.622,
s.212 leads to criminal liability for the company and every responsible person. 31
15.017 Unlawful return of capital also void under common law. A return of capital that
does not comply with the statutory requirements could also breach the common law
maintenance of capital doctrine. An unlawful return of capital to shareholders would
be void under the common law.32

2.2 Permitted reductions of capital

15.018 Situations where company allowed to reduce share capital in ss.210-211. Cap.622,
ss.210( I) and 211 allow a company to reduce its share capital:

• by special resolution supported by a solvency statement in accordance with

Subdiv.2 (of Pt.5 Div.3); or
• by special resolution confirmed by the court 33 in accordance with Subdiv.3
( of Pt.5 Div.3).

15.019 Any form of reduction permitted under ss.210-211 of Cap.622. Any form of
reduction of capital is permitted under Cap.622, ss.210-211 so long as the statutory
requirements are complied with, 34 but s.210(1) lists out some examples of the types of
reduction that can be effected:

• extinguishing or reducing liabilities on unpaid shares;

• cancelling any paid-up share capital which is lost or unrepresented by
available assets;
• pay off any paid-up share capital which is in excess of the wants of the
company. 35

zs Sec Chapter 14.

29
Sec para.15.075.
,. Cap.622, Sch.11 s.37(1).
" As to "responsible person", see Cap.622, s.3.
" Re Lee. Behrens and Co lld(1932) 2 Ch 46; Re W & M Roith Ltd [1967) I All ER 427; Re Halt Garage (1964j
Ltd (1982) 3 All ER 1016; Barclays Bank v British and Commonwealth Holdings [1996) I BCLC I; Australasian
Oil Exploration v Lacliberg ( 1958) IOI CLR 119.
" Court of First Instance.
" Poole II National Bank of China lid [ 1907] AC 229.
" See also para.15.013 and 15.014 above.
 REDUCTION OF CAPITAL 707

Reduced share capital in balance sheet must reflect financial position. lt appears that 15.020
the decision in Re Fok Ying Tung Ming YuanDevelopment Co Ltd36 can be interpreted
to stand for the proposition that a reduction of share capital within Cap.622, s.210
must result in the share capital, as shown on the balance sheet following reduction,
accurately reflecting the company's financial position. This means that where the
company is carrying on its balance sheet an accumulated loss, the reduction of capital
must involve a write-off of the loss. This is so even if the purpose of the reduction
is to return capital to the shareholders. The cowt in the above case held that in such
a situation, the company should structure the reduction in two parts, which can be
implemented in one resolution. The first is a reduction to write off the accumulated loss
and the second a reduction to make available capital for return to shareholders. If the
special resolution for reduction of capital only purports to provide for the latter, with
the result that the company will, after the reduction, continue to carry an accumulated
loss on its balance sheet, the special resolution is defective. 37 Where the court
confirmation procedure is adopted, the court would decline to confirm the reduction
in such circumstances. 38 Although the above decision was made in the context of the
court confirmation procedure under ss.226 and 229 of Cap.622, it should follow that
the same analysis is applicable to a reduction under the solvency statement procedure
in s.215 of Cap.622. It would appear that a special resolution under that s.215 should
also be regarded as being defective if the reduction stated in the resolution does not
write off accumulated losses. In these circumstances, the purported reduction should
be regarded as being unlawful.

2.3 Court confirmation procedure

Court confirmation procedure largely unchanged under Cap.622. The procedure .15.021
under s.21 l(b) and Subdiv.3 (court confirmation procedure) is essentially the same
procedure as under the predecessor law in the predecessor CO, s.58(1) (repealed),
except that there is no longer a need (as previously required under s.58(1)) for the
company's articles to specifically authorise the company to reduce its capital before
the company can engage in a capital reduction. However, a company's articles can
prohibit or restJ.ict the company's power to reduce capital. 39 Under the procedure in
Cap.622, Subdiv.3, the following requirements need to be complied with:

• there must be approval for the reduction given by a special resolution of the
company; and
• confirmation of the reduction by the court must be obtained: Cap.622,
s.226(1).

Both provisions on reduction of capital and schemes of arrangement will need to 15.022
be complied with if capital reduced under an arrangement. Where a reduction of
capital is carried out as part. of a scheme of arrangement, the company will need to

36 [2016) 2 HKLRD 292, (17)-(19), (21)-(22].

37 Re Fok 1711g1img Ming YuanDevelop111e111
Co Ltd (20 I6) 2 HKLRD 292, [ I 7)-( I9).
38 Re Fok Ying TtmgMi11gYuanDeve/opme11t Co Ltd (2016) 2 HKLRD 292, [ I9).
39 Cap.622, s.210(3).
708 MAINTENANCE OF CAPITAL

comply with both the requirements for reduction of capital in Cap.622 Pt.5 Div.3 and
for a scheme of arrangement under Cap.622 Pt.13 .40

2.3.1 Court co11.firmatio11

of reductio11
15.023 Company can apply to court for order confirming reduction. Where a company
has passed a special resolution for reducing share capital, it may apply by petition to
the court for an order confirming the reduction. 41
15.024 Requirements to be satisfied for court approval. The requirement for court approval
ensures that shareholders' and creditors' interests are not prejudiced by the reduction of
capital. The courts have accepted that the following requirements need to be satisfied
before a reduction of capital would be approved:

• the shareholders are treated equitably;

• the reduction proposals are properly explained to shareholders in the circular
summoning the meeting;
• the creditors' interests are safeguarded; and
• there is a discernible purpose for the reduction. 42

15.025 Up-to-date audited financial statements must be provided to the court. In the
application to the court, the company should provide the court with up-to-date audited
financial statements that are either unqualified or contain limited and immaterial
qualifications. If the company fails to do so, the court should decline to confirm the
reduction since the court would not be in a position to satisfy itself that the reduction
is proper.43

Equitable treatment of shareholders

15.026 Reduction must affect all shareholders of equal standing in similar manner. The
reduction must affect all shareholders of equal standing in a similar manner, but where
the reduction treats certain shareholders differently from their equals, the court may
still confirm the reduction if those who are not treated equally have consented to the
reduction. 44 The court will decline to confirm the reduction ifit is unjust or inequitable
to shareholders who do not consent to the proposal. 45
15.027 Treatment of different classes conform to rights of different classes arising on
a winding-up. Equitable treatment of different classes of shareholders generally

Ml Sec, e.g., Re China light & Power Co Ltd (1998] 1 HKC 170; Re Kee Wai Investment Co Ltd (2003] 1 HKLRD
669; Re Hong Kong Constr11ctio11{Holdings) Ltd (2007) 1 HKLRD 190; Re Wheelock Properties Ltd (2010)
4 HKLRD 587. See also para.14.181.
" Cap.622, s.226(1 ).
" Re Rat11ersGro11ppie ( 1988) 4 BCC 293; Re Thom EM/ Pie ( 1988) 4 BCC 698; Re Lippo China Resources lid
(1998) 1 HKC 161; Re CNT Security Group lld[2014) 4 HKLRD 659; Re Cheung Kong (Holdings) Ltd (2015)
2 HKLRD 512; Re Fok Ying Tung Ming Yt1a,1De11e/opme11t Co Ltd (2016) 2 HKLRD 292, ( 14).
" See Re Fok Yi11gTung Ming Yttan De11elopme11tCo Ltd [2016) 2 HKLRD 292, (26)-(33).
" See Re Jupiter House ln11estme11ts(Cambridge) Ltd [ 1985) BCLC 222, 224; British and American li-ustee a11d
Finance Co,p Ltd v Couper [1894) AC 399.
" British and American Trustee and Finance Co,p Ltd v Couper [1894) AC 399,406.
 REDUCTION OF CAPITAL 709

requires that the reduction conform to the rights of the different classes that would
arise in a winding-up. 46 For example, where preference shareholders have priority
as to return of capital in a winding-up (but no right to participate in surplus assets),
then: (i) a return of capital in excess of the company's wants should involve paying
off the preference holders first;47 but (ii) where the reduction involves a cancellation
of shares to reflect the company's losses, then the ordinary shares should be cancelled
first. 48
Reduction not unfair if consistent with reasonable expectations of shareholder in 15.028
particular class. A reduction will not be unfair if it is consistent with the reasonable
expectations of a shareholder of the class in question, having regard to the risks which
the shareholder must be taken to have assumed when he or she acquired the shares of
that class.49 There is no unfairness if the scheme involves no more than the realisation
of such a risk. It has been held that it has always been a characteristic of preference
shares that the holders are at risk of their hopes of participating in future profits being
frustrated by a liquidation or a reduction of capital, and so there is nothing unfair in a
company reducing its capital by cancelling preference shares and returning the capital
paid up on those shares to the holders.so Moreover, in a situation where the preference
shareholders have a priority to return of capital in winding-up, an earlier return in a
reduction of capital simply gives effect to the preference shareholders' rights to return
of capital before ordinary shareholders.s 1
Re Holders case: proposed reduction unfair to preference shareholders as fell 15.029
short of compensating them for disadvantages of share cancellation. In Re Holders
Investment Trust ltd, 52 the proposed reduction involved a cancellation of 5 percent
cumulative redeemable preference shares of £1 each, redeemable at par on 31 July
I 971, and allotting to the holders the same nominal amount of 6 percent unsecured
loan stock repayable in 1985-1990. The court held that the proposed scheme was
unfair to the preference shareholders. Although there was an increase in the interest
rate from 5 percent to 6 percent, that advantage fell substantially short of compensating
the preference shareholders for the disadvantages, in particular the postponement of
the date of repayment.
Where reduction involves variation of class rights then ss.176-184 ofCap.622 must 15.030
be complied with. Where the reduction of capital involves a variation of class rights,
then the requirements in Cap.622, ss.176-184 should be complied with. However even
if the requisite approvals of the members of the class have been obtained, the court still
has discretion not to confi1111the reduction.

'6 Bannatynev Direct Spanish TelegraphCo ( 1886) 34 Ch D 287.

" PrudentialAssurance Co Ltd v Chatterly-WhiifieldCollieriesLtd [ 1949) AC 512.
' 8 Re London and New YorkInvestment Co1pLtd [ I 895) 2 Ch 860; and see also Re Quebrada Railway land and
Copper Co ( 1889) LR 40 Ch D 363.
" Re Huntingpie (2005) 2 BCLC 211, (23).
so Re Northern Engi11eeri11gIndustriespie (1994) 2 BCLC 704; House of Fraserpie vACGE illves1111e11/s
lld(l987)
I AC 387, 392-393; Re Hu111i11gple (2005) 2 BCLC 211.
" House of Fraserpie v ACGE Investments Ltd (1987) I AC 387, 392-393; Re Hunting pie (2005) 2 BCLC
211, (27).
" (1971) 2AII ER 289.
710 MAINTENANCEOF CAPITAL

15.031 Reasons why provisions must be complied with. Jn Re Holders investment Trust Ltd, 53
the parties were in agreement as to the following p1inciple: that if the reduction has
been approved in a class meeting, then the burden of proof is on the opponents to the
reduction to show that the reduction is unfair, but if the reduction has not been approved
in a class meeting, then the burden is on the company to prove that the reduction is fair.
The first limb of that proposition can be accepted. However, it is not clear that the second
limb is correct under the current law.The second limb indicates that notwithstanding the
absence of approval at a class meeting, the court can still confirm a reduction of capital
that varies class rights. At the time of the above decision, procedures for alteration of class
rights were only contained in the a1ticles (the original English equivalent of Cap.622,
ss.176-184, not being enacted until 1980), and it can be accepted that, in that context,
the statutory power to reduce capital can override requirements in the articles for class
meetings. However, under Cap.622, s.180( I), requirements in the articles for variation
of class rights are given statutory footing, such that the Ordinance mandates variations
to conform with requirements in the articles or, in the absence of such requirements,
in accordance with the requirements in Cap.622, s.180(3). Although Cap.622, s.226
does not itself require class meetings to be held, there is no reason to read s.226 as
overriding that s.180. The better view is that both ss.180 and 226 need to be complied
with in the case of reductions of capital which vary class 1ights. In any event, it has been
said that where there will be different treatment of different classes, the reduction of
capital should proceed by way of a scheme of arrangement (Cap.622 Pt.13) where the
statutory provision gives greater protection to minority shareholders; the court should
not encourage the weakening of those protections by confirming reductions of capital
where class approvals have not been obtained. 54

Proper explanation
15.032 Must be full and frank disclosure to shareholders about reasons for reduction.
There must be full and frank disclosure of information to shareholders so that they can
make an informed choice. There must be proper explanation of the reduction and the
reasons for the reduction. 55 Particular disadvantages of the scheme should be pointed
out to the shareholders, and also any interests of the directors in the scheme should
be disclosed. 56 The information must be given to shareholders in the circular sent with
the notice of meeting, and not simply presented to shareholders at the time of the
meeting. 57

Creditor protection
15.033 Grounds on which creditors can object to reduction. Under Cap.622, ss.226(2) and
227, if the reduction of capital involves either a diminution of liability in respect of
unpaid share capital or the payment to any shareholder of any paid-up share capital,58

53 (1971) 2 All ER 289.

;, Sec Re Robert Stephen Holdings lid (1968) I All ER 195, 196.
" Re South China Strategic Ltd [ 1996) 4 HKC 182.
"' Re Campt1ig11 Holdings Pty lid ( 1989) 15 ACLR 762; Re Quebrada Railway land tmd Copper Co ( 1889) LR
40 Ch D 363
" Clinch v Financial Corp (1868) LR 5 Eq 450.
" ln other reductions, the court also has power t-0direct that creditors be entitled t-0object: Cap.622, s.226(4).
 REDUCTION OF CAPITAL 711

then creditors of the company are entitled to object to the reduction. For this purpose,
the court is to settle a list of creditors entitled to object.59 Under Cap.622, s.229,
the court can make an order confirming the reduction of capital only if the court is
satisfied that with respect to each creditor entitled to object:

• the creditor has consented to the reduction; or

• the creditor's debt or claim has been discharged or has determined or has
been secured.

Reduction should not be detrimental to creditors. The safeguarding of creditors 15.034

means that the reduction of capital must not be detrimental to them. 60 Where the
reduction involves a return of capital to shareholders or a cancellation of liabilities
for unpaid capital, the court will need to look at whether there are sufficient assets
of an immediate nature which would cover both the capital to be reduced and the
liabilities of the company with an ample margin of security. 61 Where only some
creditors have consented, and only the non-consenting creditors' debts have being
discharged or secured, it would also be necessary for the consenting creditors to
agree to postpone their claims to those of the non-consenting creditors before
the court would confirm the reduction. 62 Where consent of the creditors has not
been obtained, it is acceptable for a bank guarantee to be provided to cover all the
liabilities of the company. 63
Court has power to dispense with need for settling list of creditors. The court 15.035
has power to dispense with the need for settling the list of creditors and to direct that
the creditors are not entitled to object if the court thinks it is proper to do so having
regard to any special circumstances: Cap.622, s.226(3). The courts have exercised that
power where the company provides an appropriate undertaking that would safeguard
the interests of creditors. 64 The usual form of the undertaking provides that for so long
as there remains outstanding any debt of or claim against the company which, if the
date on which the proposed reduction of the capital of the company becomes effective
was the date of the commencement of the winding-up of the company, would be
admissible to proof in such winding-up, and the persons entitled to the benefit of such
debts and claims have not agreed otherwise, then the credit arising from the reduction
will be credited to a special reserve account and as such: (i) will not be available for
distribution as realised profits; and (ii) must be treated as an undistributable reserve of
the company for the purposes of Cap.622, s.298.65 Apart from the usual undertaking,
there could be other circumstances where the com1 is prepared to dispense with the

59 Cap.622, s.227(2).
64 Re lippo China Resourceslid (1998] I HKC 161, 164. See also Re Fok Ying Tt111g Ming Yt1a11
Developme111
Co
Ltd [2016] 2 HKLRD 292, (20)-(22].
6' Re So111hChina Strategic Ltd [1996] 4 HKC 182, J86; Re Capital Asia Ltd [ 1999] 2 HKC 854, 862-864.
62
Re South China Strategic Ltd [1996] 4 HKC 182, 186.
•, Re South China Strategic Ltd [ 1996] 4 HKC 182, 186.
"' See Re GrosvenorPressPie (1985] 1 WLR 980, 982-983 .
., Re Titm A11China InvestmentsCo Ltd [1998] 2 HKLRD 474, 477-478; Re lippo CM11aResourcesLtd (1998]
I HKC 161, 165-166;ReCNTSec11rityGro11pltd[2014)4 HKLRD659;Re GrosvenorP,·essPie [1985) I WLR
980,982.
712 MAINTENANCE OF CAPITAL

need to settle the list of creditors, although in every case the court must be satisfied
that the creditors will not be prejudiced. 66
15.036 No prejudice to creditors' interests where reduction does not alter amounts of
issued and paid-up capital. Where a reduction of capital is carried out as part of a
restructuring of the company involving a cancellation and then a re-issue of shares of
the same number and value, there would not be any prejudice to creditors' interests
where the issued and paid-up capital of the company following implementation of the
scheme is maintained at the same level as before. 67

Discernible purpose
15.037 Must be purpose for reduction that is demonstrated by evidence to court. This
requirement means that there must be some purpose or justification for the reduction
which is demonstrated by evidence to the court. 68
15.038 Examples of purposes. Examples of purposes satisfying this requirement include
those specified in Cap.622, s.210( 1): paid-up capital lost or unrepresented by available
assets; 69 and paid-up capital in excess of the wants of the company.7 For the purposes °
of the former, capital is not lost unless it is permanently lost so far as is presently
foreseeable, and so a temporary fall in the value of a capital asset is not sufficient. 71
But where the court is not satisfied that the loss of capital is permanent, the court
may still confirm the reduction of capital if the company gives an undertaking in the
usual form (see para.15.035 above) which ensured that if the lost capital was in fact
recovered it would not be distributed as dividends. 72 If the purpose of the reduction
is a loss of assets, full description of the loss and the circumstances of it must be
provided. 73 Where paid-up share capital is cancelled by reason of a permanent loss,
then there is no return of capital to shareholders and so the right of creditors to object
under Cap.622, s.227 does not apply.
15.039 Other examples of purposes accepted by the court. Other examples where the
courts have accepted that there is a discernible purpose include:

• Replacing capital provided by preference shareholders with surplus cash or

with funds obtainable commercially on the market at a cheaper rate (e.g.
because of a fall in interest rates).74

-6 See, e.g. Re Fuji Copia11(HK) Ltd (unrep., CFI, HCMP JO11/2004, 29 October 2004).
6' Re Hong Kong Co11S1ruc1ion (Holdings) Lid [2007] I HKLRD 190; Re Wheelock Propenies Ltd [2010]
4 HKLRD587.
68 Re Lippa China Resources lld[l998] 1 HKC 161, 167.
69 Sec, e.g., Re Miyamc, Dyeing Co Ltd (unrcp., HCMP 1021/2004, [2004] HKEC 704); Re Asian fnfor111t1lion

TechnologyInc lid (unrep., HCMP 3035/2004, [2005] HKEC 133); Re Falcon Insurance Co (Hong Kong) lid
(unrcp., HCMP 1700/2007, [2007] HK.EC2154).
,.; See, e.g. Re F11jiCopian (HK) Ltd (unrep., CFI, HCMP IOI 1/2004, 29 October 2004).
" ReJ11piterHo11seInvestments (Cambridge)Ltd (1985) I WLR 975; Re GrosvenorPress P/c(J985] I WLR 980.
12 Re Jupiter Ho11seInvestments(Cambridge)Ltd (1985) I WLR 975; Re GrosvenorPress Pie (1985) I WLR 980;
Re CapitalAsia Ltd (1999) 2 HKC 854; Re Poly InvestmentsHoldings Ltd (2007) 2 HKLRD 10; Re CNT Security
Gro11pLtd (2014) 4 HKLRD 659. The undertaking need only be confined to any recoveries from the particular
investments or businesses giving rise to the loss that is the subject of the reduction of capital: Re Capiwl Asia Ltd
[1999) 2 HKC 854; and see also Re Go/dbondGroupHoldingsLtd (unrep., HCMP 1891/2003, [2003) HKEC 810).
73 Re Sou/ii China Strategic Ltd (1996) 4 HKC 182.
" Re Hunting Pie (2005]2 BCLC 211.
 REDUCTION OF CAPITAL 713

• Cancellation (and then re-issue) of shares as part of a scheme of arrangement

for a p1ivatisation of a company, 75 for superimposing a new holding company
between the shareholders and their original company, 76 or for a re-domiciling
of the company. 77

• Cancellation of shares and re-issue in foreign currency, for the

re-denomination of the currency of shares. 78

2.3.2 Other matters following court confirmation

Registration requirements
Company required to deliver documentation to Registrar where court confirms 15.040
reduction of capital. Where a court has confirmed a reduction of capital, the company
is required to deliver to the Registrar a copy of the order and a minute 79 of the reduction
approved by the court setting out the amount of share capital, number of shares, amount of
each share and amount paid up on each share, together with a return in the specified form:
Cap.622, s.230. The court may require other infonnation to be included in the minute.80

Special resolution for reduction of capital takes effect upon registration. The 15.041
special resolution for the reduction of capital takes effect upon the registration of the
order, minute and return: Cap.622, s.230(4).
Notice of registration must be published in manner court directs. Notice of 15.042
the registration must be published in such manner as the court may direct: Cap.622,
s.230(5). 81
Registrar issues certificate following registration. Following registration, the Registrar 15.043
issues a certificate certifying the registration of the order and minute. The ce1tificate is
conclusive evidence that all the requirements of the Companies Ordinance (Cap.622) with
respect to the reduction have been complied with, and that the share capital of the company
is as stated in the minute: Cap.622, s.231. Jn other words, the reduction is treated as being
lawful even though pa1ticular statutory requirements were not in fact complied with.82

Liability of members in respect of reduced shares

Where reduction involving cancellation of unpaid amounts members no 15.044
longer liable for amounts cancelled under Cap.622. Where there is a reduction
of capital involving cancellation of unpaid amounts, the members would prima
/acie no longer be liable for the amounts cancelled: Cap.622, s.2 I 3. However,

15
Re Oxford Pmperties & Fina11ceLtd [2004] 3 IIKLRD 142; Re Wheelock Properties Ltd [20 IOJ4 HKLRD 587.
'- Re Chi11alight & Power Co Ltd [ I 998] I HKC 170.
n Re Hong Kong Co11struction (Holdi11gs) Ltd [2007] I HKLRD I90; Re Che1111gKong (Holdings) Ltd [20 I 5] 2
HKLRD 512.
18 Re BOC! Research Ltd [2000] I HKLRD 194.
1
• For the form of the minute, sec, e.g. Re Harrods (8ue11osAires) ltd [I 936] 2 All ER 1651; Re Holla11d & Webb
Ltd [1936] 3 All ER 944.
80 Re lfolfond & Webb Ltd [ 1936] 3 All ER 944; Re BOC! Research ltd [2000] I HKLRD 194.
81 The court has no discretion to dispense with the notice: Re L<>ndo11Steamboat C<>Ltd (I 883) WN 123. For the
form of notice, see Re North Pole lee Co Ltd [ I 924) WN 131.
82 See Re Walker and Smith Lid (1903) 72 LJ Ch 572; ladies Dress Association v P11/brook[ 1900) 2 QB 376.
714 MAINTENANCEOF CAPITAL

there is an exception in Cap.622, s.232. If there is a creditor who was not entered
in the list of creditors by reason of his or her ignorance of the proceedings for
reduction or of their nature and effect with respect to his or her claim, and the
company subsequently is unable to pay the amount of the debt or claim, then the
members who would have been liable for the unpaid amounts immediately before
the reduction will be treated as being liable to contribute to the payment of that
debt or claim as if the reduction had not taken place.

2.4 Solvency statement procedure

2.4.1 Introtluction
15.045 Alternative to court confirmation procedure is solvency test. As an alternative to the
court confomation procedure for a reduction of capital, it is possible for companies to
use an alternative cowt-free procedure (that adopts a solvency test) introduced under
Cap.622, ss.210 and 211(a). This alternative has the advantages of being quicker and
cheaper, and would be an attractive option to take where the company is clearly solvent.
On the other hand, companies might choose to use the traditional court-confirmation
procedure to attain certainty on the legality of the scheme for reduction. 83

2.4.2 Procedure am/ requirements

I 5.046 Procedure. The provisions for the alternative court-free procedure for reduction of
capital are contained in Cap.622 Pt.5 Div.3 Subdiv.2 (ss.215-225). In broad outline,
the procedure involves the following:

84
• The directors must make a solvency statement;
85
• A special resolution must be passed;
• Company must publish a notice of the company's approval of the reduction; 86
• Members or creditors have a five-week period to apply to the court to object
to the reduction; 87
• If there is no application to the court, or if the court confirms the reduction,
then returns must be registered with the Registrar; and 88
• The reduction takes effect upon registration. 89

83
See FSTB, CO Rewrite: Share Capital, Capital Mai11te11a11ce
Doctrine and Stat111oryA111algamation Procedure-
Con.w/ta,ion Paper (June 2008), 21-22, Co11s11/tatio11 (February 2009), 10-11. In practice, the
Concl11sio11s
court-free procedure has been widely used since the commencement ofCap.622. In the period from March 2014
to January 20 I 5, 92 out of I02 companies which reduced their capital made use of the court-free procedure:
Companies Registry Press Release ( 11 January 2015). Court-free procedures have also been adopted in
Singapore (Companies Act ss.78B-78F) and for private companies in the UK (Companies Act 2006 ss.642-644).
80 Cap.622, s.216.
81 Cap.622, s.215.
86 Cap.622, s.218.
8' Cap.622, s.220.
88 Cap.622, ss.223 and 225.
89 Cap.622, s.215(2).
 REDUCTION OF CAPITAL 715

Solvency statement
All directors must make solvency statement. All the directors must make the 15.047
solvency statement which is to comply with Cap.622 Div.2 of Pt.5.90
Directors making solvency statement confirm that company satisfies solvency 15.048
test. A solvency statement is a statement that each of the directors making it has
formed the opinion that the company satisfies the solvency test.91 A company satisfies
the solvency test if:

• immediately after the transaction in question (i.e. the reduction of capital)

there will be no ground on which the company could be found to be unable
to pay its debts; and
• either:
if it is intended to commence winding-up of the company within
12 months after the date of the transaction, the company will be able to
pay its debts in full within 12 months after the commencement of the
winding-up; or
in any other case, the company will be able to pay its debts as they
become due du1ing the period of 12 months immediately following the
date of the transaction. 92
Inquire into company's affairs and take into account contingent and 15.049
prospective liabilities. In forming an opinion for the purpose of making a
solvency statement, the directors must: (a) inquire into the company's state of
affairs and prospects; and (b) take into account all the liabilities of the company,
including contingent and prospective liabilities. 93 The requirement to take into
account the contingent and prospective liabilities of the company does not mean
that such liabilities are to be aggregated at their face value with debts presently
due. On the other hand, such liabilities cannot be ignored. The directors must
consider the nature of the contingent and prospective liabilities, what assets will
be available to meet them and what provision (in a non-technical sense) has been
made for that purpose. 94
Directors must apply the correct test of solvency. In BT! 2014 LLC v Sequana SA,95 15.050
which dealt with similar provisions in the Companies Act 2006 (UK) on the solvency
statement for a reduction of capital, it was stated that:

" ... the directors must actually have formed the opinions set out in the solvency
statement. lt is not enough that they make a solvency statement that says that they

90 Cap.622, s.216( I).

9' Cap.622. s.206( I).
92 Cap.622, s.205.
9' Cap.622, s.206(2). As co contingent and prospective liabilities. see para.20.076.
~ BT! 2014 llC v Seq11anaSA (2017] I BCLC 453, (329}-[330] (note chat the decision is on appeal at the time of
writing).
9' [2017) I BCLC 453. But note that the decision is on appeal at the time of writing.
716 MAINTENANCE OF CAPITAL

have formed those opinions if in fact they have not-for example because they
misunderstood what the correct test was."96

The court held that it must be satisfied that the directors applied the correct test of
solvency under s.423 in the UK Act (equivalent to Cap.622, s.205). However, the
directors are not required to contemplate the possibility of a worst case scenario or
whether, if calamity were to strike, the company might be unable to pay its debts.97
Every one of the directors must have the right state of mind (as required by the statute)
in signing the solvency statement in order for the capital reduction to be valid.98
15.051 Solvency test derived from predecessor CO. The solvency test is de1ived from the
test used in predecessor CO, s.47F(I) (repealed) for the whitewash procedure (i.e.
approval by members) for financial assistance by unlisted companies for an acquisition
of shares in the company.
15.052 Consequences if company did not in fact satisfy solvency test. If the company
did not in fact satisfy the solvency test at the time when it was made, that does
not necessarily mean that the ensuing reduction of capital carried out on the basis
of the solvency statement contravenes Cap.622 s.212 and becomes unlawful. In
respect of the solvency statement, all that Cap.622, ss.205, 206 and 216(1) require
is that the directors make a statement that they have formed the opinion that the
company satisfies the solvency test. If those requirements have been complied
with (as to which, see para.15.050 above), then the reduction does not contravene
s.212, even if the company was insolvent or even if the directors did not have
reasonable grounds for making the solvency statement. As held in BT! 2014 LLC
v Sequana SA, 99 the lack of reasonable grounds does not render the insolvency
statement invalid. "Reasonable grounds" is not an element in Companies Act 2006
(UK) s.643(1) (equivalent to Cap.622, s.205) but only in the definition of the
criminal offence in s.643(4) of the UK Act (equivalent to Cap.622, s.207). If a
director makes a solvency statement without having reasonable grounds for the
opinion expressed in it, the director is subject to criminal liability. 100 There is also
a possibility of the directors being in breach of their duties owed to the company,
and so the company may have remedies against the directors and others (such as
shareholders receiving a return of capital) on the grounds of knowing assistance
or knowing receipt. 101

Approval by members
15.053 Special resolution approving reduction must be passed within 15 days of solvency
statement. The special resolution approving the reduction must be passed within 15
days after the date of the solvency statement. 102 There are restrictions on voting, so

"" [2017) 1 BCLC 453, [322).

•1 [2017) 1 BCLC 453, [322)-(327).
98 [20 I 7) 1 BCLC 453, [316).
99 [2017) 1 BCLC453, [332)-(333). But note that the decision is on appeal at the time orwriting.
100 Cap.622,s.207.
101
See Chapter 8.
102 Cap.622,s.216(2).
 REDUCTION OF CAPITAL 717

that members holding shares to which the resolution relates ought not to vote on
a show of hands (in favour of the resolution) or, in the case of a poll, ought not to
exercise the votes carried by any of those shares (in favour of the resolution). 103 The
resolution is not effective if those members so vote and the resolution would not have
been passed if the members had not done so. 104 However, the above voting restrictions
do not apply in the case of a reduction of capital that applies equally to all issued
shares in the company. ios

Publication of notice
Company must publish notice of reduction in Gazette and newspapers after 15.054
resolution passed. After the resolution for reduction of capital is passed, the company
must publish, within the time specified in Cap.622, s.218(2), a notice in the Gazette
stating that the company has approved a reduction of capital and setting out other
details as required by s.218( 1). The company must also publish a notice to the same
effect in the newspapers or alternatively, give written notice to the same effect to each
of the company's creditors. 106

Court power to cancel reduction

Members and creditors can apply to court within five weeks if object to 15.055
resolution. Members and creditors may apply to the court for cancellation of the
resolution for reduction of capital within five weeks after the date of the resolution. 107
The court has power to confirm or cancel the resolution on any terms and conditions
it thinks fit. 108

Registration requirements
Company can deliver return setting out reduction to Registrar after five weeks 15.056
if there is no objection. Where no application has been made to the court objecting
to the reduction within the five-week period after the passing of the resolution, the
company can deliver to the Registrar a return setting out particulars of the reduction
and containing a statement of capital: Cap.622, s.224. There is a time limit in that the
return can be delivered only to the Registrar no later than seven weeks after the date
of the resolution.
Company must deliver office copy of court order to Registrar within 15 days of .15.057
court order. Where an application has been made to the court and the court has made
an order, the company must deliver an office copy of the order to the Registrar within
15 days. 109 If the court has confirmed the reduction, the company must also deliver
a return to the Registrar setting out the particulars of the reduction and containing a
statement of capital: Cap.622, s.225.

103 Cap.622, ss.217(2) and 217(3).

'°' Cap.622. ss.217(2) and 217(4).
10
~ Cap.622, s.217(5).
106 Cap.622, s.218(3).
101
Cap.622, s.220( I).
108 Cap.622,s.222(1).
109 Cap.622.s.223.
718 MAINTENANCE OF CAPITAL

I 5.058 Reduction of capital takes effect when registered. The reduction of capital takes
effect when the retum delivered under s.224 or s.225 of Cap.622 is registered by
the Registrar. 110 A reduction is not rendered invalid merely because there is some
inadvertent error in the documents registered (including inadvertent errors in the
statement of capital). 111

3. SELF-ACQUISITION OF SHARES, REDEMPTION

OF SHARES AND SHARE BUY-BACKS

3.1 General

15.059 Company not permitted to acquire shares in itself. Under the common Jaw, a
company is not permitted to purchase its own shares. 112 The rule was laid down as
part of the capital maintenance doctrine since the effect of a company acquiring its
own shares means that there is no injection of capital into the company for the shares
that are issued. The common law restiiction is reinforced by Cap.622, s.267 which
prohibits a company limited by shares 113 from acquiring its own shares, whether by
redemption, buy-back, subscription or otherwise. Contravention of the statutory
prohibition results in criminal liability. 114 A purchase of shares made in breach of
the capital maintenance doctrine is void under the common law.115 However, if the
purchase is made under the provisions of the Companies Ordinance which provide
for exceptions to the basic prohibition (namely, Cap.622 Div.4), no such purchase is
void by reason only ofa failure to comply with those provisions: Cap.622, s.267(4). 116
Thus, the common law position is altered where companies purport to purchase their
own shares in accordance with the statutory provisions. Yet, it seems that s.267(4) of
Cap.622 does not prevent the purchase from being set aside where, for example, the
directors are in breach of duty and the shares were repurchased from the directors,
or where the shares were repurchased from third parties and principles of knowing
receipt or knowing assistance are applicable. 117
15.060 Permissible for shares to be gifted to company whe1·e company holds beneficial
interest only. It has been held in England that the common law restriction on a
company purchasing its own shares does not prevent a company from holding the
beneficial interest in its own shares by having a registered member holding the shares
on trust for the company, where no consideration passed from the company.118 Thus,

11
° Cap.622, s.215(2); Re Ca.t1iglio11eErskine & Co [ 1958) I WLR 688.
111 BT/ 20/4 LLC v Sequana SA [2017) I BCLC 453, [343]-{344) (but note that the decision is on appeal at the time
of writing).
112 Trevor v Whitworth ( 1887) LR 12 App Cas 409.
"3 Or a company limited by guarantee having share capital: sec Cap.622 s.233.
114
Cap.622,s.267(2).
"' Trevor v Whitworth (1887) LR 12 App Cas409.
11• However, a purchase made in contravention or Cap.622, s.236(3) is void; sec also Cap.622, s.236(4), and
para. 15.083 below.
"' See Chapter 8.
118
Kirby v Wilkins (1929) 2 Ch 444.
SELF-ACQUISITION OF SHARES, REDEMPTION OF SHARES AND SHARE BUY-BACKS 719

for example, where shares were bequeathed to a company under a will, it was possible
for the company to direct that the shares be transfe1Tedto nominees to hold the shares
on trust for the company. 119 The prohibition in the predecessor CO, s.58(1 A) (repealed)
referred only to the "purchase" or "subscription" by the company for shares in itself,
and it would appear that the above case law principles were applicable under the
former s.58(lA). The current Cap.622, s.267 prohibits a company from "acquiring"
its own shares. There is no definition of "acquire". However, arguably the provision
covers acquisition of the legal interest in the shares only and the above principles from
the English cases are still applicable under that s.267.
No contravention on self-acquisition when subsidiary holds shares in holding 15.061
company. Where a subsidiary holds shares in its holding company, there is no
contravention of the general prohibition on self-acquisitions, even though the
subsidiary indirectly holds interests in itself. 120 However, it may be otherwise if an
interposed corporate entity was intentionally used purely to evade the statutory and
common law restrictions. In such a situation, it would arguably be possible for the
court to pierce the corporate veil. 121
Specific provision prohibiting subsidiary from being member of holding 15.062
company but subject to exceptions. Also, there is a specific provision in Cap.622,
s.113 which prohibits a subsidiary from being a member of its holding company
(whether directly or through a norninee 122). However, s.113 is subject to the following
exceptions: 123

• Where the subsidiary holds the shares as a personal representative, or as a

trustee for persons other than the holding company (or another subsidiary of
the holding company): Cap.622, s.113(2). 124
• Where the subsidiary was already a member of the holding company before
the time when the former became a subsidiary: Cap.622, s.113(5). In this
situation, the subsidiary can continue to be a member of the holding company.

Subsidiary member of holding company can acquire further shares in holding 15.063
company. Where a subsidiary is a member of its holding company (i.e. where the
exceptions apply), the subsidiary can acquire further shares in the holding company
where the shares are allotted to it as fully paid up in consequence of a capitalisation of
reserves or profits by the holding company: Cap.622, s.113(7). However, the subsidiary

119
Re Castiglione~ Will Trusts [ 1958] Ch 549.
'"' See Acatos & H111ehinso11 pie v Watson [ 1995] BCC 446.
' 2 ' Acatos & H111ehi11so11 pie v Watson [ 1995] BCC 446,450. On piercing the coq>0rate veil, see Chapter 3.
122 Cap.622, s.l l3(1 I).

' 23 There are also exceptions for the benefit of subsidiaries which were already members of the holding company
before the time of commencement of the earlier equivalent ofCap.622. s. I 13 in predecessor CO, s.28A (repealed)
(namely 31 August 1984): sec also Cap.622, s.113(4).
' 24 The exception docs not apply if the holding company or ocher subsidiary is beneficially .interested in the shares,
unless it is so interested only by way of security for che purposes of a transaction entered into by ic in che ordinary
course of a business which includes che lending of money. This cnsure.s that banks, for example, would not be
caught by the prohibition merely because the bank is beneficially interested in the shares through enforcement
against a person ofa security granted by the person over the person's assets which include the shares.
720 MAINTENANCE OF CAPITAL

is not entitled to exercise voting rights as a member of the holding company: Cap.622,
s.113(9).

3.2 Redemption of shares

3.2.1 Power to issue redeemable shares

15.064 Capital maintenance doctrine would prevent redeemable shares but altered by
statute. Prima facie, the capital maintenance doctrine would prevent the possibility of
a company issuing redeemable shares since the redemption of a share means that there
is a return of capital before winding-up. However, there may be legitimate commercial
reasons for having redeemable shares,125 and when the predecessor Companies Ordinance
1932 was enacted, provisions were made allowing a company to issue redeemable shares
based on UK provisions introduced in s.18 of the Companies Act 1928.
15.065 Only preference shares could be issued as redeemable shares before 1991. Before
amendments to the predecessor CO were made in 1991, only preference shares could
be issued as redeemable shares. However, amendments in 1991126 followed changes
made in the United Kingdom in Companies Act 1981 to enable any shares to be issued
as redeemable shares.
15.066 Provisions on redeemable shares in Cap.622. The provisions on redeemable shares
in predecessor CO, ss.49 and 49A (repealed) are restated in Cap.622 Pt.5 Div.4 (with
some modifications). Under Cap.622, s.234(1), a company limited by shares 127 may
issue redeemable shares (defined in s.2 to mean shares which are to be redeemed or
liable to be redeemed at the option of the company or the shareholder). 128 However,
no redeemable shares may be issued at a time when there are no issued shares of the
company which are not redeemable. 129 The previous requirement in predecessor CO,
s.49(1) for the articles to authorise the issue of redeemable shares before such shares
can be issued is not contained in Cap.622, but Cap.622, s.234(1) allows for the articles
to prohibit or restrict the issue of redeemable shares.

3.2.2 Redemption of redeemtlble shares

15.067 Redeemable shares can only be redeemed if fully paid. Redeemable shares may be
redeemed only if they are fully paid: Cap.622, s.269(1 ). The directors may determine
the terms, conditions and manner of redemption if authorised to do so by the articles or
by an ordinary resolution. 130
15.068 Restrictions relating to financing of redemptions to protect creditors. Importantly,
there are restrictions relating to the financing of redemptions to ensure that creditors
would not be prejudiced by a redemption of shares. Redeemable shares can only be
redeemed out of: (a) distributable profits of the company; (b) out of the proceeds ofa fresh

"' SecChapter 13.

12• Companies(Amendment)Ordinance 1991(77 of 1991).
121 Or a companylimited by guaranteehaving sharecapital: sec Cap.622.s.233.
128 On redeemableshares,seealso Chapter 13.
12~ Cap.622, s.234(3 ).

no Cap.622, s.235.
SELF-ACQUISITION OF SHARES, REDEMPTION OF SHARES AND SHARE BUY-BACKS 721

issue of shares made for the purposes of the redemption; or (c) out of capital (subject to
satisfaction of a solvency test). 131 These restJictions are intended to avoid the possibility
of companies evading the capital maintenance doctrine by simply issuing most of their
shares as redeemable shares and then having the shares redeemed out of capital. Under
the predecessor CO, only private companies were permitted to redeem shares out of
capital (subject to satisfaction of a solvency test). 132 As part of the reforms for allowing
greater use of the solvency test in attenuating the capital maintenance restrictions, the
exemption for private companies to fund a redemption of shares out of capital was
extended to all companies under Cap.622. 133
Conditions to be satisfied if paying for redemption out of capital. Where companies 15.069
propose to fund a redemption out of capital, the following must be satisfied:

• All the directors must make a solvency statement that complies with Div.2 of
Pt.5. 134 The solvency test and the requirements for the solvency statement are
the same as for a reduction of capital based on a solvency statement; and 135
• The company must pass a special resolution approving the payment out of
capital within 15 days after the date of the solvency statement. 136 Members
holding shares to which the resolution relates cannot exercise voting rights
carried by any of those shares in favour of the resolution.'3 7

Publication requirements for proposed payment out of capital to redeem shares. 15.070
As is the case for reductions of capital based on a solvency statement, there are
publication requirements for a proposed payment out of capital to redeem shares. 138
Creditors' and members' may apply to court to cancel resolution for payment out 15.071
of capital. Creditors and dissenting members have a right to apply to the court for the
cancellation of a special resolution for payment out of capital. 139The application must
be made within 5 weeks after the date of the special resolution.
Shares treated as cancelled on redemption. Upon redemption, the shares are treated 15.072
as cancelled: Cap.622, s.269(1). On redemption, a company must:

• reduce the amount of its share capital if the shares were redeemed out of
capital;
• reduce the amount of its profits if the shares were redeemed out of profits; or

u, Cap.622~s.257(2).
'" predecessor CO, s.491 (repealed), originally introduced in 1991 when the provisions on share redemptions were
reformulated largely on the basis of amendments made in the Companies Act 1981 (UK).
,;i See FSTB, CO Rewrite: Share Capital, Capital Maintenance Doctrine and Sta111t01yAmalgamatio11 Procedure-
Co11s11/tmio11
Paper (June 2008), 23-25, Cons11/tatio11
Conc/11sio11s
(February 2009), 12.
1
.w Cap.622, s.259( I).
,,s Sec para.15.048 above.
i.x, Cap.622, ss.258 and 259(2).
'" Cap.622, s.260. The resolution is ineffective if the member votes and the resolution would not have passed if the
member had not clone so. This is to avoid connicts of interests.
u8 Cap.622,s.s.261-262.
139 Cap.622.s.s.263-266.
722 MAINTENANCE OF CAPITAL

• reduce the amount of its share capital and profits proportionately if the shares
were redeemed out of both capital and profits,
by the total amount of the price paid by the company for the shares. 140

15.073 Accounting treatment of redemptions streamlined under Cap.622. Under Cap.622,

the accounting treatment of redemptions is streamlined as a result of the abolition of
par value of shares as discussed below.
I 5.074 Way in which company's issued share capital reduced following redemption
under predecessor CO. Under the predecessor CO, the amount of the company's
issued share capital was reduced following a redemption pursuant to predecessor CO,
s.49A(4) (repealed). Where redemption was out of profits, the nominal amount by
which the issued capital is diminished had to be transferred to a capital redemption
reserve: predecessor CO, s.49H(l) (repealed). The capital redemption reserve was
treated as paid-up share capital of the company so that the amounts could not be
returned to shareholders except under an authorised reduction of capital as pennitted
by the Companies Ordinance: predecessor CO, s.49H(4) (repealed). 141 While there was,
strictly speaking, a reduction of share capital, 142 the requirements for redemption out
of profits and the creation of a capital redemption reserve meant that the "capital
yardstick" was unchanged following the redemption.
15.075 Fresh issue of shares would mean capital effectively replaced. The alternative
of financing out of the proceeds of a fresh issue of shares also means that there is
effectively a replacement of the capital (pursuant to the new issue of shares) and so
there is no net reduction in the company's capital in this situation.
15.076 Any premium payable on redemption must be paid out of distributable profits.
Under the predecessor CO, if the redemption involved paying to the shareholder more
than the nominal value of the share (namely there is premium payable), prima facie
the premium had to be paid out of distributable profits: predecessor CO, s.49A(l)(b)
(repealed). If the company did not have distributable profits, and proceeds of a fresh
issue of shares were used to fund a premium (where the shares were issued at par), then
there was effectively a payment out of capital. To avoid this, the proceeds of a fresh
issue of shares could be used to pay for a premium on redemption only if the shares
were originally issued at a premium; and the amount of the proceeds so used must not
be more than the aggregate of the premiums received by the company on the issue of
the shares redeemed, or the cuITent amount of the company's share premium account
(whichever is the less): predecessor CO, s.49A(2) (repealed). Here, the amounts in the
share premium account could effectively be used to fund the payment of premium,
without the need to use share capital to fund the premium.
I 5.077 Changes under Cap.622. The following changes apply under Cap.622:

° Cap.622,s.269(2).
14

"' However, the reserve could be applied by the company in paying up unissued shares to be allotted to members as
fullypaid bonus shares: predecessorCO, s.49H(4) (repealed).
"2 Comptroller of Stamps vAshwick (Vic) No 4 Pty Ltd (1987) 163CLR 640.
SELF-ACQUISITION OF SHARES, REDEMPTION OF SHARES AND SHARE BUY-BACKS 723

• Firstly, the capital redemption reserve is abolished. For existing companies, any
amount standing to the credit of the capital redemption reserve becomes part of
the share capital. 143 There is no longer a need for a capital redemption reserve
to which amounts are transferred following a payment out of profits. This is
because, while the shares redeemed are cancelled,144 there is no reduction of the
issued share capital of the company. There is only a reduction in the amount of
the profits used. 14; Accordingly, there is no need for the creation of a reserve to
maintain the company's capital yardstick.
• Secondly, the matters relating to premium and the share premium account
also do not arise. There is no longer a distinction between share capital and
premium, 146 and any amount from the proceeds of a fresh issue can be used
to pay for a redemption regardless of whether the redemption price is higher
than the issue price of the share. Again, the capital yardstick of the company
is maintained because there is no diminution in the issued capital of the
company following the redemption. Effectively, the share capital injected
into the company from the fresh issue simply replaces the share capital that
is returned to shareholders through the redemption.

3.3 Share buy-backs

3.3.1 Ge11eral
Share buy-backs permitted. The basic prohibition on a company acqu1rmg its 15.078
own shares is relaxed under the Companies Ordinance such that companies can
buy back or repurchase shares from their members so long as there is compliance
with the requirements of the Companies Ordinance. The provisions on buy-backs in
Cap.622 are contained in Pt.5 Div.4. Cap.622 refers to share buy-backs instead of
share repurchases (as referred to in the predecessor CO), but this is only a change
of terminology with no substantive change in the concept. The Cap.622 provisions
are derived from the predecessor CO, ss.49B-49S (repealed), which were originally
introduced in 1991. Those provisions in the predecessor CO were based in part on
provisions in the United Kingdom first introduced in the Companies Act 1981 (UK).
The SCCLR has observed that:

" ... prior to I981, any suggestion that a company should be allowed to purchase
its own shares would have been regarded as rank heresy". 147

However, it is now generally accepted that there may be legitimate commercial

reasons for buy-backs, and that buy-backs would not be problematical if there
are legislative safeguards in place protecting the interests of members and
creditors. For example, for private companies, buy-backs can facilitate the

13
~ Cap.622,Sch.11s.37.
1
~ Cap.622,s.269( I).
14
~ Cap.622,s.269(2)(b).
"' See Chapter 14.
'" SCCLR,ThirdAmwal Report 1986/1987, 5.
724 MAINTENANCE OF CAPITAL

exiting of a shareholder from the company (which may be appropriate if there

is a falling out between the shareholders, or if a proprietor wishes to retire from
the company), and enable control to be retained by the existing proprietors (this
may be important where shares are transmitted to others upon the death of a
member). The company's ability to buy back shares in such circumstances is
useful if the other existing shareholders are unable or unwilling to purchase the
shares. For companies generally, including listed companies, buy-backs may be
advantageous for facilitating employee share schemes (so that companies can
buy back shares when an employee leaves), providing an alternative means for a
company with excess cash to return cash to shareholders, enhancing shareholder
value by increasing earnings per share and providing a company with an
alternative method of achieving an optimal capital structure. 148 Accordingly,
in 1990, the SCCLR recommended the introduction of buy-back provisions in
Hong Kong.
15.079 Difference between share buy-backs and share redemptions. The difference
between share buy-backs and share redemptions is that the latter occurs in accordance
with the terms of issue of the shares. Where the shares issued are not redeemable
shares, then the buy-back provisions can be used. However, the buy-back provisions
can also be used to buy back redeemable shares before the time for redemption has
arrived. 149

3.3.2 Power to buy back shares

15.080 Buy-back of shares possible without express authorisation under articles.
Cap.622, s.236 allows companies to buy back their own shares in accordance with
the statutory provisions. Under Cap.622, there is no longer a need for the articles
to authorise a company to engage in a buy-back (as previously required under the
predecessor CO, s.49B (repealed)), but the articles can prohibit or restrict buy-
backs. 150
15.081 Company can only buy back shares if has issued non-redeemable shares.
A company may buy back shares only if the company has issued shares which are not
redeemable. 151 The shares to be bought back must also be fully paid shares. 152
15.082 Shares cancelled upon buy-back. Shares bought back under Cap.622 Pt.5 Div.4 are
regarded as cancelled upon the buy-back. 153
15.083 General procedures discussed below. The general procedures available for buy-
backs for listed and unlisted companies are discussed below.

" 8 See further SCCLR, Third A1111ual Report 1986/1987, 5-10; SCCLR, Sixth A1111ual Report 1989/1990, 26-33;
Bernard McCabe, "Desirability of a Share Buy-Back Power" (1991) 3 Bond law Review 115.
1
•~ This was expressly provided in the predecessor CO, ss.49B(l) and 498(2) (repealed) but not in Cap.622.

However, the position is still the same even in the absence of these express provisions.
,so Cap.622, s.236(2).
'" Cap.622, s.236(3).
12
s Cap.622, s.268.
u 3 Cap.622, s.269( 1).
SELF-ACQUISITION OF SHARES, REDEMPTION OF SHARES AND SHARE BUY-BACKS 725

3.3.3 Procedure for buy-back: listed companies

Types of buy-backs for listed companies. There are three types of permitted 15.084
buy-backs for listed companies:

I. On-market buy-back.
2. Off-market buy-back by way of a general offer.
3. Off-market buy-back otherwise than by general offer.'54

On-market buy-back
On-market buy-back: buy-back of shares on stock market. An on-market buy- 15.085
back involves a buy-back of the shares on the stock market. 155Before the company
can engage in such a buy-back, there must be authorisation by an ordinary resolution
of the members. 156The notice for the general meeting must contain a memorandum
of the terms of the proposed buy-back. 157The authorisation given by the members
is valid for the period expiring on the date of the next annual general meeting of
the company, but the period can be extended by the company at the annual general
meeting until the date of the next annual general meeting. 158 \1/here the company
has obtained the authorisation from the members, it means that the company can
buy back its own shares on the stock market at any time during the period of the
validity of the authorisation. Buy-backs would be subject to the terms set out in the
memorandum given to members before they gave the authorisation, but otherwise
the buy-backs would be made in accordance with the ordinary requirements of the
stock exchange.

Off-market buy-back by general offer

General offer: offer to all members of company on same terms. A general offer 15.086
means an offer to all the members of the company on terms which are the same in
relation to all the shares. 159An offer to all the members of any class of shares in a
company on the same terms is also a general offer. If there are members residing
outside Hong Kong in a jurisdiction where it would be unlawful to make the offer
to them, it is unnecessary for the company to include these persons in the general
offer.160

Authorisation by ordinary resolution required before general offer. Before a general 15.087
offer can be made, the members must give authorisation by an ordinary resolution. 161
The notice for the general meeting must contain a copy of the document containing

154 Cap.622, ss.238-240.

' 55This can be either a recognised stock market (see Cap.622, s.2 defini1ion; the Stock Exchange of Mong Kong
comes within this definition) or anapproved stock exchange (Cap.622, s.239(4)).
1
$6 Cap.622. s.239( I).
1 7
s Cap.622, s.239(2).
1$8 Cap.622, s.239(3).

is9 Cap.622, ss.238(6) and 707.

160 Cap.622, s.707 definition of"general offer".
161
Cap.622. s.238(1).
726 MAINTENANCE OF CAPITAL

the proposed general offer.162 The notice must also contain a statement signed by the
directors containing such particulars as would enable a reasonable person to form a
valid and justifiable opinion as to the merits of the proposed general offer.163
15.088 General offer can be used for obtaining control by having company buy back
shares of all other shareholders. As an alternative to a takeover or a scheme of
arrangement, the general offer procedure can be used to confer control on one or
more shareholders by having the company buy back the shares of all the other
shareholders. The shareholders who are intended to obtain control of the company
would hold on to their own shares and will not accept the general offer. If all the
other shareholders accept the offer, their shares are cancelled upon the buy-back,
leaving the shareholders who did not accept with full control of the company.
Where this objective is sought, the company can potentially utilise the compulsory
acquisition powers in Cap.622 Pt.13 Div.5 164 to buy out minorities who do not
accept the general offer. If it is contemplated that the compulsory acquisition
powers may need to be used, the shareholders who are seeking control cannot
vote on the resolution for authorisation of the general offer. 165 Also, the company
must appoint an independent investment adviser 166 to advise the members who
may be affected by the compulsory acquisition of their shares on the merits of the
proposed general offer. 167

Off-market buy-back otherwise than by general offer

I 5.089 Off-market offer to some members of company only or offer not on same terms.
Such a buy-back is one where the offer is made off-market to only some of the
members of the company or where the terms of the buy-back are not the same for all
the members to whom the offer will be made. In other words, there can be differential
treatment of the shareholders. This can obviously give rise to abuse. Accordingly, a
special resolution of the members is required before a company can buy back shares
under such an otfer. 168 The notice of the general meeting must be accompanied by a
copy of the proposed buy-back contract (or a memorandum of the terms if the proposed
contract is not in writing). 169 Also, the notice must include a statement signed by the
directors containing such particulars as would enable a reasonable person to form a
valid and justifiable opinion as to the merits of the proposed purchase agreement. 170
There are restrictions on voting on the resolution such that the members to whom the
offer will be made should not exercise (in favour of the resolution) the voting rights
attached to the shares to which the buy-back offer relates. 171

162
Cap.622, s.238(2)(a).
163
Cap.622, s.238(2)(b).
!6-1 Derived from the predecessor CO, s.1688 (repealed).
' 65 Cap 622.s 238(3)(b). The shareholder(s) seeking control is referred to as a "non-tendering member'' (see ss.238(6)
and 705 of Cap.622). That term replaces "relevant shareholder" which was used in predecessor CO, s. 498(9)
(repealed).
166 Cap.622, s.238(4).
161
Cap.622, s.238(3)(a).
168 Cap.622, s.240(1).
16? Cap.622, s.240(3)(a).

no Cap.622, s.240(3 )(b).

"' See Cap.622, ss.240(4)-240(6).
SELF-ACQUISITION OF SHARES, REDEMPTION OF SHARES AND SHARE BUY-BACKS 727

Codes on Takeovers and Mergers and Share Repurchases

Listed company would need to comply with requirements in Codes on Takeovers 15.090
and Mergers and Share Buy-backs. The listed company would also need to comply
with requirements set out in the Codes on Takeovers and Mergers and Share Buy-
backs. The Codes are issued by the Securities and Futures Commission pursuant to
s.399 of the Securities and Futures Ordinance (Cap.571 ). The Codes are non-statutory
and do not have the force of law. However, breach of the Codes can lead to the listed
company being denied the facilities of the Hong Kong securities markets. 172
Share Buy-back Code contains additional requirements to Companies Ordinance. 15.091
The Share Buy-back Code contains requirements additional to those set out in the
Companies Ordinance, relating to matters such as requirements on shareholder
approval and the contents to be included in the offer document for a share buy-
back. Various provisions of the Takeovers Code also apply to a buy-back. Also, if
the buy-back increases any shareholder's proportionate interest in voting rights in the
company, 173 there could be a trigger of the general provisions of the Takeovers Code
requiring the shareholder to make mandatory takeover offers to the other shareholders
in the company.

3.3.4 Procedure for buy-back: unlisted companies

Unlisted company can buy back shares under contract approved by special 15.092
resolution. An unlisted company may buy back its own shares under a contract
approved in advance by a special resolution of the company's members. 174 Restricted
voting rights apply and so any member holding shares to which the resolution relates
should not exercise the voting rights carried by any of those shares in favow- of the
resolution. 175
Variations of authorised buy-back contracts and releases. The prov1s10ns in 15.093
Cap.622, ss.247-256 on variations of authorised buy-back contracts and releases set
out the requirements for shareholder approvals in a more explicit manner compared
with the predecessor CO, 176 but there are no major changes of substance.

3.3.5 Fina11cingof buy-back

Ways of financing share buy-backs. As is the case for redemptions of shares, buy- 15.094
backs under Cap.622 can be financed out of:

• distributable profits;
• proceeds of a fresh issue of shares; or
• capital via the solvency statement procedure. 177

"' Sec para.1.4 of the Introductionto the Codes.

in Sec para.15.089above.
174
Cap.622, s.244.
,n Cap.622, s.246.
'" predecessor CO, ss.49D(6) and 49f(2) (repealed).
' 17 Cap.622. s.257(2).
728 MAINTENANCE OF CAPITAL

The provisions discussed above for redemptions also apply in the case of buy-backs:
see paras.15.071-15.078 above. However, for listed companies engaging in on-market
buy-backs, it is not possible for the buy-backs to be funded out of capital. 178 The reason
is because the requirements for shareholder approval, with the time restrictions for
the making of the payment out of capital, 179 would create complexities and practical
difficulties if applied to stock market transactions.

3.3.6 Disclosure of buy-back

I 5.095 Return regarding share buy-back to be delivered to Registrar within 15 days.
Within the period of 15 days after the date on which any shares are bought back by
a company, the company must deliver to the Registrar for registration a return in the
specified form containing the details required by Cap.622, s.270.
15.096 Copies of documentation must be kept and available for inspection. Copies of
contracts for buy-backs by unlisted companies and contracts for off-market buy-backs
(otherwise than by general offer) by listed companies must be kept by the company
and be made available for inspection in accordance with Cap.622, s.237.

4. FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES

4.1 Prohibition on financial assistance

4.1.1 Ge11eral
15.097 Prohibition on financial assistance for acquiring shares under Cap.622. Companies
Ordinance (Cap.622), s.275(1) prohibits:

• a company from giving financial assistance directly or indirectly to any

person for the purpose of acquiring shares in the company before or at the
same time of the acquisition;
• a subsidiary 180 from giving financial assistance directly or indirectly to
any person for the purpose of acquiring shares in the subsidiary's holding
company before or at the same time of the acquisition.

15.098 Financial assistance also prohibited after acquiring shares. Cap.622, s.275(2) also
prohibits financial assistance given after the acquisition. Where a person has acquired
shares in a company and any person has incurred a liability for the purpose of that

118 Cap.622, s.257(3).

"' The payment out of capital can be made no earlier than five weeks after the date of the special resolution (to
give time for members or creditors to object), and no later than seven weeks after that date (so that the risk of
the company subsequently making a payment out of capital when the solvency statement is no longer accurate is
reduced): Cap.622, s.258(2).
180 As defined in Cap.622, ss.13-15. The statutory provision docs not have extraterritorial effect and so a subsidiary

incorporated outside Hong Kong would not be prohibited by s.275 ofCap.622 from giving financial assistance
for the acquisition of shares in the Hong Kong holding company: see Arab Bank pie v Mercantile Holdings lid
( 1994) Ch 71; AMG Global Nominees (Private) Ltd v SMM Holdings lid (2008) I BCLC 447.
 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES 729

acquisition, the company or any of its subsidiaries are prohibited from giving financial
assistance directly or indirectly for the purpose of reducing or discharging that liability.

Prohibition originates from UK Companies Act 1929. The prohibition originates 15.099
from s.45 of the Companies Act 1929 (UK), which was introduced following
reco1mnendations of the Greene Committee. 181 The provision was intended to prevent
asset stripping, whereby a person purchases shares in a company and then uses the
company's assets to fund the purchase. It was thought that this could violate the capital
maintenance doctrine if effectively the company's share capital is paid to the seller of the
shares as the price for the sale to the purchaser. In essence, there is a return of capital to
the shareholder. However, the statutory prohibition seems to be wider in that it covers
different types of financial assistance that might not involve any return of capital. For
example, the prohibition includes financial assistance where the company grants a loan
to the person acquiring the shares. The Jenkins Committee pointed out that in the case
of a loan, there is no return of capital as the company simply substitutes one asset for
another. 182 Nonetheless, the company bears the risk of losing its funds, even in the case
of a loan, as the borrower might not end up repaying. Although the view of the Jenkins
Committee was that the capital maintenance doctrine does not provide justification for
the prohibition on financial assistance, the Jenkins Committee recommended retention
of the provision in the United Kingdom to prevent abuses and the risk of a loss of
the company's funds which would prejudice shareholders and creditors. 183 Seen more
broadly, the prohibition can be justified on the basis that it prevents the company's
resources from being used simply to benefit an acquirer of shares where there is no
benefit (but possible detriment) to the company or its creditors or other shareholders. 184
Prohibition on financial assistance long been criticised resulting in its abolition in 15.100
the UK for private companies. Nonetheless, the prohibition on financial assistance
has long been criticised. 185 The question of whether a transaction is caught by the
prohibition is often a complex one to answer, leading to uncertainties and difficulties in
the application of the law. The prohibition is also seen as being too wide, and capable of
penalising beneficial or innocuous transactions. In the United Kingdom, the prohibition
on financial assistance has been abolished for private companies on the basis that the
provisions are complex and burdensome and impose compliance costs which are
disproportionate to the benefits of the prohibition. 186 It is thought that there are other

,., Board ofTrade (UK), Repon of/he Compan_vlaw Amendment Committee /925-26. [30)-(31].
,., See Board ofTrade (UK), Reportoftlte Compan_vlawCon11nittee /962 (Cmnd 1749) (173].
183 See also Chaston v SWP Group Pie (2003] I BCLC 675, [31].

184 See also John Amour, "Share Capital and Creditor Protection; Efficient Rules for a Modern Company Law"

(2000) 63 Modern law Review 354, 368-370. For discussion of the prohibition generally, see Eilis Ferran,
"Corporate Transactions and Financial Assistance: Shifting Policy Perceptions but Static Law" (2004) 63
Cambridge law Jo11r11al 225.
,ss As can been seen from submissions to the Jenkins Committee: see Board of Trade (UK), Report of the Company
Law Commi11ee1962 (Cmnd 1749) [ 171]. Sec also John Amour. "Share Capilal and Creditor Protection; Efficient
Rule.s for a Modern Company Law" (2000) 63 Modem Law Revic»v 354, 374-378; Eilis Ferran, "Corporate
Transactions and Financial Assistance: Shifting Policy Perceptions but Static Law" (2004) 63 Cambridge Law
Journal 225, 225-226, 239-243.
186 The prohibition on rinancial assistance in the Companies Act 2006 (UK) s.678 applies to public companies only.

For the background to the UK reforms, see DTI, Modem Company law for a Competitive Economy: Developing
tlte Framework (Mar 2000) (7.17)-[7.25].
730 MAINTENANCEOF CAPITAL

remedies which are sufficient to protect against possible abuses-namely provisions

on wrongful trading, directors' duties and minority shareholder remedies. However, the
prohibition was retained for public companies due to European Union requirements. 187
15.101 Hong Kong also moving towards abolishing prohibition on financial assistance
for private companies. Similar concerns have been raised in Hong Kong. 188 The
Government has accepted in principle that the statutory prohibition should be abolished
for private companies on the basis that the prohibition does more harm than good.
However, the prohibition is retained for the time being pending introduction of insolvent
trading provisions in Hong Kong. This is to ensure that there will be adequate alternative
remedies in the law that can deal with the type of abuses that is currently dealt with by
the prohibition on financial assistance. For public companies, the Government takes the
view that different considerations are relevant and that the prohibition should be retained
in any event. It is thought that the rationale for the prohibition may be at its strongest in
the context of public companies with widely held shares, where there may be greater risk
of opportunistic behaviour by the new controllers in a leveraged takeover.18')
15.102 Broad exceptions to prohibition for private and public companies under Cap.622.
Nonetheless, there are broad exceptions under Cap.622 applicable to both private and
public companies. These exceptions are intended to lessen the restrictiveness of the
prohibition and to enable the carrying out of transactions which might be beneficial to
the company. The exceptions are based on Singapore 190 and New Zealand 191 provisions,
although there are some differences.

4.1.2 Meanil1gof ''fi11artcial

assistance"
15.103 Definition of financial assistance under Cap.622. Under the Cap.622, s.274(1)
definition of "financial assistance", the following specific categories are included
within the concept:

(a) financial assistance by way of gift;

(b) financial assistance by way of guarantee, security, 192 or indemnity, 193 or by
way of release or waiver;
(c) financial assistance by way of a loan; 194 and

187 OTT, Modem Company Law for a Competitive Economy: Company Formatio11(md C(tpital Maintenance
(October 1999)[3.41).
188 Sec FSTB, CO Rewrite:Share Capital, CapitalMain1e11ance Doctri11e(111d
Swtwo,y Amalgamation Procedure-
Co11sultationPaper (June 2008) 26-29, Consultation Conclusio11s(February 2009) 13-14; FSTB, CO Rewrite:
Draft Compa11iesBill Second Phase Co11sulta1io11 - Co11su/t(lliOnPaper (May 2010) 12-18, Consul/(/tion
Conclusio11s(October 2010) 4-9.
18• See FSTB, CO Rewrite: Drafl CompaniesBill Second Phase Co11s11llatio11 - ConsultationPaper (May 20 I0) 16-
17;John Amour,"Share Capital and Creditor Protection;Efficient Rules for a Modern CompanyLaw" (2000) 63
Modern law Review 354,370.
°
19 CompaniesAct (Sing) s.76.
191
CompaniesAct 1993(NZ) ss.76-81.
192 See, e.g., Heald v O'Connor (1971) I WLR 497; Camey v Herbert (1985) AC 301.
193 Exceptindenmitiesin respectof the indenmifier'sownneglector default."Indemnity"in lhe statuto1yprovisionis to be
givenits no1mallegalmeaning:seeBritisha11dCom111011wealth Holdingspie v Barck,ysBankpie [ 1996)I All ER381.
194 See, e.g., Steen v llJ\v (1964) AC 287; Ricco (/111'/)Co Ltd v Uni-Harves//nt'I Ltd (2017) 6 HKC 487.
 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES 731

(d) any other financial assistance given by a company the net assets of
which are thereby reduced to a material extent or which has no net
assets. 195

Para.( c) of definition also includes certain types of agreements. Apart from loans, 15.104
para.(c) in the definition of"financial assistance" also includes "any other agreement
under which any of the obligations of the person giving the assistance are to be fulfilled
at a time when in accordance with the agreement any obligation of another party to
the agreement remains unfulfilled". This would cover, for example, a contract where
the company sells goods to the person acquiring the shares, with deferred payment
terms such that the person need only repay the company at a later time (after the time
when the company has already delivered the goods to the person). Paragraph (c) also
includes financial assistance given by way ofnovation or assignment of rights under a
loan or such other agreement as outlined above. For example, if a third party provides
a loan to the person acquiring the shares and the third party's rights under the loan are
assigned to the company such that the acquirer now owes the debt to the company, then
that could be caught by para.(c).
Para.(d) of definition is the catch all category. Paragraph (d) in the definition 15.105
of financial assistance provides for a catch-all category of other types of financial
assistance.
Case law relied on as definition does not explain term "financial assistance" 15.106
itself. While Cap.622, s.274 lists the categories of financial assistance which are
within the prohibition, the definition does not explain what "financial assistance"
itself means. To understand this concept, it is necessary to examine the case law.
It has been stated that assistance involves something in the nature of aid or help
given by the company. 196 The assistance must be of a financial nature. 197 In Belmont
Finance Cotp v Williams Furniture Ltd (No.2), 198 the English Court of Appeal held
that where the company enters into a transaction for the purpose of putting a person
in funds to acquire shares in the company, then that would amount to financial
assistance. Accordingly, if the company purchases an asset at an overvalue from
a person for the purpose of putting that person into funds to acquire shares in the
company, then the transaction can constitute financial assistance within para.(d) of
the definition in Cap.622, s.274. 199
Necessary to look at commercial substance and reality of transaction to judge 15.107
whether financial assistance given. To see whether financial assistance is given,
it is necessary to look at the commercial substance and the commercial reality of

19
' "Net assets" is defined in Cap.622,s.274(1).
196
MT Realisations Ltd v Digital Eq11ip111ent Co lid [2003) 2 BCLC 117, 124.
197
British and Com111011wealth Holdings pie v Barclays Bank pie [1996) I All ER 381.
1•• [ 1980) I All ER 393.
199
The court also held that even if the purchase was made at a fair price, there would still be financial assistance.
However, that aspect of the decision no longer reflects the law as the statuto,y definition of"financial assistance"
has been amended since that case such that in the case of a purchase of an asset, it could only be financial
assistance if there is a material reduction in the company·s net assets following the transaction (or if the company
has no net assets).
732 MAINTENANCEOF CAPITAL

the transaction. 200 It has been emphasised that in cases where it is doubtful whether
the transactions are caught, it is important to remember the central purpose of the
prohibition, to examine the commercial realities of the transaction and to bear in mind
that the prohibition involves c1iminal liability.201
15.108 Financial assistance also includes any transfer of value from company which
results in reduction of price. Financial assistance includes not only the actual
provision of cash to the person acqui1ing the shares, but also any assistance composed
of a net transfer of value from the company which effectively reduces the price the
person would have otherwise had to pay for the shares. 202 Financial assistance within
the statutory provision covers not only assistance given directly to the person acquiring
the shares, but also a financial benefit given to the vendor 203 or any other person which
smooths the path to the acquisition of shares. 204
15.109 Financial assistance only prohibited if purpose of assistance acquisition of shares.
Financial assistance is only prohibited if the assistance was given for the purpose
of the acquisition of shares. 205 The relevant purpose is the purpose of the company
or the subsidiary which is giving the financial assistance. 206 The mere fact that a
person does an act knowing that it would result in a particular consequence does not
necessarily mean that the purpose for doing the act was to achieve the consequence. 207
The statutory provision can be contravened even though the assisting of the acquisition
of shares was only one of the purposes for the transaction. 208
15.110 Chastott case: payment of accountants' fees by subsidiary company unlawful
financial assistance for acquisition of shares in holding company. In Chaston v
SWP Group plc, 209 DRC was the subsidiary ofDRCH. SWP was to acquire shares in
DRCH and was to fund this acquisition through an offer of its own shares. SWP carried
out a due diligence exercise for the purposes of stock exchange listing requirements,
and in doing so, obtained an accountants' report. DRC paid the fees for the report.
The English Court of Appeal held tlrnt the payment of the fees by DRC (subsidiary)
was unlawful financial assistance for the acquisition of shares in DRCH (the holding
company). The payment was financial assistance for the purpose of the acquisition
as the payment of the fees facilitated or smoothed the way for the acquisition to take
place. It was irrelevant that the assistance had no impact on the price at which the
shares are actually acquired. It was also irrelevant whether the company providing the

200 Charter/rouse v Tempes1 Diesels [I 986] BCLC I, IO; C/,aston v SWP Group Pie (2003) I BCLC 675. See also
MT Realisations Ltd v Digital Equipment Co Ltd (2003] 2 BCLC 117 (no financial assistance after taking into
account the net effect of the arrangements).
"'' Anglo Pe1mleum Ltd v TFB (Mortgoges) Ltd [2008] I BCLC 185, [26).
2<12 Clwnerhouse v Tempes1Diesels [ 1986] BCLC I, I0--1 I.

2<1J HealdvO'Con11or[l971] I WLR497.

"" C/ra.<1on v SWP Gmup pie [2003] I BCLC 675.
2<15 Sec Cap.622, s.275 and Dyment v Boyden [2005) 1 BCLC 163; Anglo Petroleum Ltd v TFB (Mor1gc1ges)Ltd

[2008) 1 BCLC 185 (no unlawful financial assistance where there were bonajide commercial reasons for lhe
transactions rather than a purpose of assisting the acquisition of lhe shares).
'"" Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2008) I BCLC 185, [35).
2<11 Anglo Petroleum Ltd v TF8 (Mortgages) Ltd [2008] I BCLC 185, [35).
'" 8 As to the exception in Cap.622, s.278 where there are a number of purposes. see para.15.130 below.
2<1, [2003] I BCLC 675.
 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES 733

assistance suffered any detriment,210 or whether the directors were acting in good faith
in the interests of the company.
Not financial assistance where company pays own indebtedness. Payment by the 15.111
company of its own indebtedness in accordance with its existing legal obligations
would not amount to financial assistance.211 More generally, there is also no assistance
given where the company does not give to the party alleged to be assisted anything to
which the latter party was not already legally entitled.212

4.1.3 Consequences of co11traventio11

Cap.622: validity of any contract or transaction connected with financial 15.112
assistance not affected by financial assistance. There is criminal liability for
a contravention of the prohibitions on the part of the company and responsible
persons. 213 Jn terms of civil consequences, the statutory provision expressly provides
that the validity of the financial assistance and of any contract or transaction connected
with it is not affected only because of the contravention: Cap.622, s.276. This alters
the predecessor law under the predecessor CO, where the transaction for the provision
of the financial assistance would be void and unenforceable. 214 The position under
s.276 is similar to that in Australia 215 and also aligns with the position in respect
of a buy-back of shares that does not comply with the Ordinance. 216 However, the
wording of s.276 leaves open the possibility that the transaction for the provision
of the assistance could be set aside on other grounds. For example, if directors have
breached their general duties owed to the company and have themselves received
company assets resulting from the assistance, then the company's transactions with
the directors can potentially be set aside pursuant to the company's general remedies
against directors for breach of duty. It has been held that directors who cause the
company to provide unlawful financial assistance would be in breach of their duties
owed to the company and would be liable to the company for any assets misapplied
as a result thereof, and that this is the case whether or not the directors knew that the
transactions were unlawful. 217 If the company has already transferred assets pursuant
to the transaction, there may be possibilities for the company to recover the assets

210 It was argued that the assistance was beneficial to the company as the change in control of DRCH would bring
commercial advantages to the corporate group. However, the court held that this factor was irrelevant. The
question of benefit will be relevant though if the issue tmns on whether the financial assistance comes within
para.(d) of the definition.
211 Burton v Palmer ( 1980) 5 ACLR 481.
"' MT Realisations Ltd v Digital Equipme11tCo Ltd (2003) 2 BCLC 117 (obtaining an entitlement through the
enforcement of existing security rights against the company did not mean that the company was providing
financial assistance to the security holder).
213
Cap.622 s.275(4). From the policy pers1>ectivethough, it may be that it is inappropriate to impose a penalty on
the company to pay a fine for contravention since the statutory prohibition is intended to protect the company
(and its creditors and shareholders generally). In Australia, the company is not subject to any criminal liability:
Coq>0rations Act 2001 (Aust) s.260D(l)(b). In the UK the company is liable: Companies Act 2006 (UK)
s.680( 1).
'" Sec Heald v O'Connor [1971) 1 WLR 497; Bmdy v Brady [1989] AC 755; Re Hill tmd Tyler Ltd [2005] 1
BCLC41.
"' Corporations Act 200 I (Aust) s.260O( 1)(a).
2Hi Cap.622, s.267(4).
217 Steen v Law (1964) /\C 287. See also Hunters P1vd11ctsGroup Ltd v Kindly P,vducts Pty Ltd (1996) 20
ACSR412.
734 MAINTENANCEOF CAPITAL

against the persons who received the assistance or from third parties 218 pursuant to
general principles of restitution, 219 constructive trusts 220 and the tort of conspiracy. 221
15.113 Delay not necessarily a bar to relief. Delay in bringing an action, absent any
prejudice, does not per se operate as a bar to the relief claimed for contravention of the
statutory prohibition. 222

4.2 Exceptions

15.114 Exceptions to prohibition on financial assistance. Exceptions to the prohibition are

set out in Cap.622, ss.277-289. Exceptions are included in the legislation because of the
potential width of the prohibition which may catch transactions which are not objectionable
or which are otherwise subject to other adequate controls under the legislation.

4.2.1 Exceptio11spursua11tto solvency test

General
15.115 General exceptions where companies authorised to provide financial assistance
if satisfy solvency test. Cap.622 Pt.5 Div.5 Subdiv.4 (ss.283-289) contains general
exceptions such that companies are authorised to provide financial assistance
generally on the basis that the company satisfies the solvency test set out in Pt.5 Div.2.
There must also be compliance with the specific requirements contained in Pt.5 Div.5
Subdiv.4. While the predecessor CO, s.47E (repealed) allowed unlisted companies to
provide financial assistance where the company is solvent and there is approval by the
general meeting, the provisions in Cap.622, ss.283-289 apply to all companies.
15.116 Authorisation for financial assistance. Before the company can provide financial
assistance under Pt.5 Div.5 Subdiv.4, the directors of the company must make a
solvency statement pursuant to Pt.5 Div.2.223 There are then three alternative routes for
the company to be authorised to provide the financial assistance:

• assistance not exceeding 5 percent of paid-up capital;

"' The remedies available against third parties illustrated in cases such as Belmont Finance Corp v fflilliams
Furniture Ltd (No.]) (1980) I All ER 393; Eq11itico1p Industries Group Ltd v 11,e Crown (1998) 2 NZLR
481 and HuJ!lers Products Group Ltd v Kindly P1-oductsPty Ltd (1996) 20 ACSR 412 arguably still apply
notwithstanding Cap.622, s.272. The transactions are not void only because of the contravention of the statutory
provision but there is something more, namely the dishonest or unconscionable assistance or receipt of company
property. These latter factors can lead to the transactions being set aside. As to the general principles on knowing
assistance and knowing receipt, which may be relevant in situations involving third parties, see Bank of Credit
and Commerce /111/(Overseas) Ltd v Akindele [200 I) Ch 437; Criterion Properties pie v Stratford UK Properties
LLC [2003] I WLR 2108; Chaner pie v City Index Ltd [2008] Ch 3 13; Tlwnaklram Kasikorn Thai Chomka! v
Akai Holdings Ltd (2010) 13 HKCFAR 479.
,,. Eq11iticorp Industries Group Ltd v Tire Crown [ 1998] 2 NZLR 481.
zio Be/moll/ Finance Corp v Williams Fumiture Lui (No.2) [ 1980) I All ER 393; Equitico,11 Industries Group Ltd v

The C1t>w11 [1998) 2 NZLR 481; l-/11111ers Products Gro11pLtd v Kindly Products Pty Ltd (1996) 20 ACSR 412.
w Be/1110111 Co1p v Williams Fumit11re Ltd (No.]) [ 1980] I All ER 393.
Fi11a11ce
"' Ricco (1111'1) Co Ltd v Uni-Harvest In/'/ Ltd [2017) 6 I-IKC487 (delay of 10 years did not prcvenl the court from
granting rcliel).
223 Cap.622, ss.283(1)(b), 284(1)(b), and 285(1)(c). For discussion or the solvency statcmen1, see para.15.048.

Unlike the reduction of capital or buy-back provisions, it is sufficient if a majority of the directors make the
solvency statement for the purpose of the financial assistance provisions.
 FINANCIALASSISTANCEFOR ACQUISITIONOF SHARES 735

• assistance with unanimous shareholder approval; or

• assistance by ordinary resolution.

Financial assistance not exceeding 5 percent of paid-up capital

Directors can approve small amounts of financial assistance (not more than 5% 15.117
of paid-up capital) without shareholder approval. For relatively small amounts of
financial assistance, the directors can approve the giving of the assistance without
the need for shareholder approval under Cap.622, s.283. 224 For this section to apply,
the aggregate amount of the assistance and any other financial assistance given under
this section that has not been repaid must not exceed 5 percent of the paid-up capital
and reserves of the company. For example, unpaid amounts on Joans previously
given pursuant to this section need to be taken into account in determining whether
the 5 per cent value is reached. Where the financial assistance is given by way of a
guarantee or security, the amount for which the company remains liable is taken into
account. 225 For example, if a charge secures a loan with $x amount not yet repaid, then
that $x amount is to be included in the calculation.
Requirements to be satisfied before financial assistance given. The following 15.118
requirements also need to be satisfied:

• the board must, before the assistance is given, pass a resolution resolving
that:
the company should give the assistance;
giving the assistance is in the best interests of the company; and
the terms and conditions under which the assistance is to be given are
fair and reasonable to the company; 226 and
• a solvency statement must be made by the directors on the same day as the
abovementioned board resolution. 227

Company must give notice within 15 days of giving assistance. Within 15 days after 15.119
the assistance is given, the company must give notice to the company's members. 228
Financial assistance must be given within 12 months of solvency statement 15.120
and directors' resolution. The solvency statement and directors' resolution under
Cap.622, s.283 have a life of only 12 months in that the financial assistance can be
given only within the 12-month period after the day on which the solvency statement
is made. 229 If the financial assistance is given within that 12-month period but at a
time when the company is no longer solvent, the giving of the financial assistance

22' This provision is basedon CompaniesAct 1993(NZ), ss.76and 80.

22~ Cap.622, s.283(3).
'" The grounds for theseconclusionsmust be set out in the resolution: Cap.622,s.283(2).
211
Cap.622, s.283( I).
228 Cap.622, s.283(4).
229 Cap.622,s.283(l)(d}.
736 MAINTENANCEOF CAPITAL

will not contravene Cap.622, s.275. However, it seems that the directors must still
act in accordance with their general duties as directors and so there could still be
a possibility of the directors being in breach of their duties owed to the company
if they allow the company to provide the financial assistance when the company is
insolvent.

Financial assistance with unanimous shareholder approval

15.121 Financial assistance can be given with solvency statement and unanimous
shareholder approval. Under Cap.622, s.284, financial assistance can be given where
the directors have made a solvency statement and all members approve the giving of
the assistance by written resolution. 230 The requirement for a written resolution means
that this provision will be more useful for smaller companies than larger companies.
For larger companies, where it may be difficult to obtain approval of all the members,
Cap.622, s.285 would be more relevant as that provision requires only an ordinary
resolution. While s.284 sets a higher threshold in terms of member approval, the
procedural requirements are simpler compared with s.285.
15.122 Requirements to be satisfied for giving financial assistance. The requirements
that need to be met under Cap.622, s.284(1) for the assistance to be given are as
follows:

• the board must, before the assistance is given, pass a resolution resolving
that:
the company should give the assistance;
giving the assistance is in the best interest of the company; and
the terms and conditions under which the assistance is to be given are
fair and reasonable to the company;231
• a solvency statement must be made by the directors on the same day as the
abovementioned board resolution; and
• all the members approve of the assistance by written resolution. 232

15.123 Financial assistance to be given within 12 months of date of solvency statement.

The financial assistance can be given only within the 12-month period after the day on
which the solvency statement is made.233

Financial assistance by ordinary resolution

15.124 Financial assistance can be given with solvency statement and ordinary resolution
of members. Under Cap.622, s.285, financial assistance can be given where the
directors have made a solvency statement and the giving of the assistance is approved

230 This provision is based on Companies Act 1993 (NZ), s. 76.

231
The directors need to provide the grounds for their conclusions on these matters in the board resolution: Cap.622,
s.284(2).
132 For requirements on written resolutions generally, see Cap.622 Pt.12 Div. I Subdiv.2 and Chapter 9.
233 Cap.622, s.284( l)(d), and see para. I 5.121 above.
 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES 737

by the members by an ordinary resolution. 2 , 4 The threshold for member approval in

s.285 is less stringent than that required under previous s.284, but s.285 contains
further requirements for the protection of members.
Requirements to be satisfied before giving financial assistance. The following 15.125
requirements need to be met under s.285(1):

• the board must, before the assistance is given, pass a resolution resolving that:
the company should give the assistance;
giving the assistance is in the best interest of the company and is of
benefit to the members not receiving the assistance; and
the terms and conditions under which the assistance is to be given are
fair and reasonable to the company and to the members not receiving
the assistance; 235
• a solvency statement must be made by the directors on the same day as the
above board resolution; and
• the members approve of the assistance by ordinary resolution.

Company must send members financial assistance proposal before holding general 15.126
meeting. Before the company holds a general meeting to seek member approval,
the company must send to members details of the proposed financial assistance in
accordance with Cap.622, ss.285(1)(c) and 285(2).
Dissenting members can apply to court to restrain giving of financial assistance. 15.127
If an ordinary resolution is passed, dissenting members holding at least 5 percent of
the voting rights may be entitled to apply to the court for an order restraining the
giving of the assistance. 236 An application can be made only if:

• the giving of the assistance is neither in the best interest of the company, nor
of benefit to the members not receiving the assistance; or
• the terms and conditions under which the assistance is given are not fair and
reasonable to the company, or to the members not receiving the assistance.2 , 7

2" The 01iginal proposal for the third exception was to provide along the lines ofs.78 of the Companies Act 1993
(NZ), which allows financial assistance by approval of directors with notice given to members (and with members
having a right to object). However, there was feedback in the public consultations on the dmft Companies Bill
provisions supporting a mid-way approach in terms of member approval: see cl.5.81 in the draft bill contained
in FSTB's Companies Bill: Co11sulta1io11 Draft-Parts 1. 3-9, 12 & 19-20 (May 2010) and FSTB, CO Rewrite:
Draft Compa11iesBill Second Phase Consultation -Consultalion Co11c/11sions(October 2010) 4-9. A view was
expressed that unanimous approval under the second exception may be too difficult to obtain, especially for
larger companies, while the exception based on New Zealand's s.78 did not give sufficient protection to the
shareholders. The third exception (now in Cap.622, s.285) was re-formulated in light of these views.
m 1l1edirectorsneed to providethe grounds fortheir conclusionson these matters in the board resolution:Cap.622,s.285(4).
236
Cap.622~s.286.
m Cap.622, s.286(4). The grounds are derived from Companies Act 1993 (NZ), s.78(7). It seems that there is
an anomaly in that while prima facie the company should provide the assistance only if the assistance is both
in the interest of the company and in the interest of the members not receiving the assistance, a dissenting
shareholder cannot apply to the court if only one of these requirements is unsatisfied. Similarly, in the case of the
requirements for the terms and conditions to be both fair to the company and to the members.
738 MAINTENANCE OF CAPITAL

I 5.128 Dissenting members must make application to court within 28 days of resolution.
The application must be made within 28 days after the date of the resolution. 238 The
court may confirm or restrain the giving of the financial assistance on any terms and
conditions it thinks fit. 239
15.129 Financial assistance can only be given within 12 months of date of solvency
statement. Similar to ss.283 and 284, any financial assistance to be given under
Cap.622, s.285 can be given only within the 12-month period after the date of the
solvency statement.240

4.2.2 Principal or larger purpose exception

15.130 Financial assistance not prohibited if assistance for acquisition of shares is not
principal purpose. If the company's principal purpose in giving the assistance is not
to give it for the purpose of the acquisition of shares, or the giving of that assistance for
that purpose was only an incidental part of some larger purpose of the company, then
the financial assistance is not prohibited so long as the assistance was given in good
faith in the interest of the company: Cap.622, s.278. 241
15.131 Brady case: facts. This exception only has a narrow scope of operation in light of the
decision in Brady v Brady. 242 In that case, there was dispute and deadlock between two
groups of family members who owned and operated the Brady group of companies. To
resolve their disputes, there was an agreement to reorganise the companies so that each
family branch would take a separate part of the group's business. This reorganisation
involved a buy-out of shares in the parent company which was effectively funded by
that company through a cancellation of debt liabilities owed to that company. Prima
facie, this contravened the prohibition on financial assistance, but it was argued that
the principal or larger purpose exception applied. It was argued that the giving of the
assistance was only incidental to a larger purpose of the corporate reorganisation and
the breaking of the deadlock between the parties.
15.132 Brady case: distinction between motive and purpose of financial assistance critical.
However, the House of Lords rejected that argument. Lord Oliver distinguished
between the purpose of giving the assistance and the motive for giving the assistance.
The motive cannot amount to the "larger" purpose so as to trigger the exception. Here,
the reorganisation and the breaking of the management deadlock only provided the
motive or the reasons for the giving of the financial assistance. There was no larger
purpose. The only purpose of the discharging of the debt liabilities was to assist the
acquisition of the shares. Lord Oliver emphasised that the larger purpose cannot simply
be constituted by the benefits considered to be likely to flow or the disadvantages
considered to be likely to be avoided by the acquisition.
15.133 Brady case: motive cannot amount to larger purpose to trigger principal purpose
exception. In making the distinction between purpose and motive, Lord Oliver also

2; 8 To give memberstime to make an application, the companyc.annotprovide the financial assistancewithin that
28-day period: Cap.622, s.285(1)(c)(i).
239 Sec Cap.622,ss.287-289.
24° Cap.622, s.285(1)(c)(ii), and sec para.15.121 above.
"' This exception is derived from predecessor CO, s.47C (repealed).
2 2
' (1989)AC755.
 FINANCIALASSISTANCEFOR ACQUISITIONOF SHARES 739

gave an example of a bidder seeking control of a company who finances the bid
from the company's own funds. It may be that the change in control of the company
is thought to be desirable from a commercial perspective. But the reasons for the
giving of the assistance cannot constitute a larger purpose within the exception. The
pw-pose and the only purpose of the assistance is that of enabling the shares to be
acquired. The financial or commercial advantages flowing from the acquisition, whilst
they may constitute the reason for forming the purpose of providing assistance, are
a by-product of it rather than an independent purpose of which the assistance can
properly be considered to be an incident. The House of Lords took this st1ict approach
in interpreting the exception for the reason that any wider interpretation means that the
statutory prohibition would be deprived of any useful application.
Re Nu-West case followed approach in Brady case: motive behind giving financial 15.134
assistance could not form a larger purpose. The above approach was applied by
Barma J in Re Nu-West Natural Products Corp Ltd. 243 The company granted security
to enable one of the two shareholders in the company to buy out the other's shares.
The buy-out was proposed as part of an agreement to settle disputes between the
parties and to have winding-up proceedings in respect of the company stayed. The
court held that the facts were indistinguishable from Brady v Brady and that the
settlement of the dispute and the avoidance of liquidation of the company were only
reasons or the motive for the giving of the financial assistance but could not form a
larger purpose so as to come within the principal purpose exception.

4.2.3 Miscella11eous exceptions

Other exceptions. Other exceptions are set out in Cap.622, ss.277-281 :244 15.135

• distributions by way of a lawful dividend; 245

• distribution made in the course of the company's winding-up;
• allotment of bonus shares;
• reduction of capital in accordance with Cap.622 Pt.5 Div.3;
• redemption or purchase of shares made in accordance with Cap.622 Pt.5 Div.4;
• anything done pursuant to a court order under Cap.622 Pt.13 Div.2
(i.e. schemes of arrangement); 246
• anything done under an arrangement binding on creditors under the
(Companies Winding-Up and Miscellaneous Provisions) Ordinance
(Cap.32), ss.237 or 254;
• the lending of money in the ordinary course of business by a company where
the lending of money is part of the ordinary business of the company;247 and

2' 3 (2010] 4 HKLRD 208. See also Ricco (!111'/)Co Ltd v U11i-flarves11111'/ Ltd (2017] 6 HKC 487.

'"' These exceptions arc derived from predecessor CO, s.47C (repealed).
,,; Sec para.15.149 below.
246 Sec New World Resources NV [20 15] 8CC 4 7.

m This exception is effectively limited to banks and money-lending companies: see Steen v Law [ 1963)AC 287. See
also Cap.622, s.282 in the case of listed companies.
740 MAINTENANCE OF CAPITAL

• provision of money by the company for acquisition of shares pursuant to

certain employee share schemes (discussed below). 248

15.136 Exception in relation to employee share schemes. Cap.622, s.280(1) allows

assistance given by a company:

• in good faith in the interest of the company for the purposes of a scheme
facilitating the holding of shares in a company for the benefit of current or
former employees249 of the company or another company in the same group; or
• for the purposes of, or in connection with, anything done by the company (or
another company in the same group) for the purposes of facilitating transactions
in shares in the company (or its holding company) between, and involving
the acquisition of beneficial ownership of those shares by, current or fonner
employees250 of the company or another company in the same group.251

See also Cap.622, s.281, which specifically covers loans to employees for the
acquisition. 252

5. DIVIDENDS AND DISTRIBUTIONS

5.1 Dividends

5.1.1 Ge11eral
Nature of dividends
15.137 Return shareholders receive is given via dividends. The return that shareholders
receive for their equity investment is given in the form of dividends while the company
is a going concern. In the broad or strict sense, dividends means the fund to be divided,
but the narrower and more common usage of the term means each shareholder's
portion of the fund (the company's profits) that is divided and paid to the shareholders
while the company is a going concern.m

Entitlement to dividends
I 5.138 Dividends only paid in accordance with company's articles and out of
company's profits. Shareholders can be paid dividends without the need for express
authorisation in the articles. However, dividends must be paid in accordance with any

2' 8
See Cap.622, ss.28~281. See also further restrictions in Cap.622, s.282 for listed companies.
"' 9
There is a requirement that the employee must be employed in good faith. The exception also applies to schemes for
the holding of shares forthc benefit of certain family members of the employee: sec Cap.622, s.280(2). The section
docs nor expressly refer 10 directors, but directors who are employees will also be covered by Cap.622, s.280.
"" Or, certain family members as specified in Cap.622, s.280(1)(b).
'" This exception is derived from Companies Act 2006 (UK) s.682(2)(b)-(c).
"' Directors are excluded from this exception.
"' Hemy II GreatNorthern Railway Co (1857) I De G & J 606, 44 ER 858, 870-871, 873; Re Crichto11sOil Co
(1902) 2 Ch 86, 95.
 DIVIDENDS AND DISTRIBUTIONS 741

requirements specified in the company's articles. 254 Under both the common law and
statute, dividends can only be paid out of a company's profits pursuant to the capital
maintenance doctrine. 255
No legal entitlement to dividends unless provided for in articles or terms of issue. 15.139
Unless the articles or the terms of issue provide otherwise, shareholders do not have
a legal entitlement to have dividends paid whenever the company has profits. 256 lf,
as is commonly the case, the articles confer on the directors discretion whether to
recommend a declaration of dividends before dividends can be paid,257 it is a matter
for the directors to decide whether, and to what extent, dividends should be paid each
year. The directors can decide to plough the company's profits back into the company's
business instead of distributing profits to shareholders. The members will only have
a legal entitlement to receive dividends once they have been declared, in which case
the dividends become recoverable as a debt owed by the company to the members. 258
However, directors would need to act in accordance with their general fiduciary
duties.259 Also, there will be circumstances where members can petition under either
Cap.622, ss.724 or 725 on the grounds that a policy of paying no or insufficient
dividends amounts to unfairly prejudicial conduct. 260

Procedure for payment of dividends

Procedure for paying dividends determined by articles. The procedw-e is as 15.140
determined by the articles. Commonly, the directors recommend an amount of
dividends to be paid, and the company in general meeting (usually at the AGM) makes
the declaration of dividends.261

Treatment of different shareholder classes

Directors under duty to act in general interest of all classes of shareholders when 15.141
recommending dividends. When recommending dividends, the directors are under a
duty to act in the general interest of all classes of shareholders and must not favour any
one class at the expense of another.262

5.1.2 Types of dividends

Interim and final
Distinction between interim and final dividends. Company law distinguishes 15.142
between interim and final dividends. 263 Final dividends are declared at the annual

"' Oakbank Oil Co v Crum (I 882) 8 App Cas 65, 71.

m See para.15.149 below.
256 Burland II Earle ( 1902) AC 83; Bond II Barrow Haematite Steel Co [ 1902) I Ch 353, 362.
257 See, e.g., Model Articles (private companies) art.73, Model Articles (public companies) art.91 (Companies

(Model Articles) Notice schs. l and 2).

"' Re Seven, and lfye cmd Severn Bridge Railway Co [ 1896) I Ch 559; Bond v Barrow Haema1iteSteel Co [ 1902)
I Ch 353. Entitlements to dividends for preference shareholders are usually also conditional on a declaration:
RP Austin and IM Ramsay, Fords Principles ofC01poratio11sLaw (15th edn, LexisNexis 2013) (18.030).
259
See Chapter 8.
'"" See Chapter I0.
261
See Model A11icles(private companies) art.73; Model Articles (public companies) art.91.
262 Hemy v Great Non hem Railway Co ( 1857) I De G & J 606, 44 ER 858, 871.

2ol See Bluebottle UK Ltd v Depuly Commissioner ofTaxotio11(2007) 240 ALR 597, [ 18)-(20).
742 MAINTENANCE OF CAPITAL

general meeting (AGM) after the end of the financial year on the basis of the
annual financial statements prepared for the financial year. A final dividend thus
reflects the results of a completed year of trading. Apart from the payment of
final dividends, the articles may confer on the directors a power to pay interim
dividends before the end of the financial year. For example, the Model Articles
allow the directors from time to time to pay to the members such interim dividends
as appear to the directors to be justified by the profits of the company. 264
Accordingly, where the company has sufficient profits at any time before the AGM
(when the annual financial statements for the financial year are laid before the
company), the directors could resolve to pay interim dividends to the shareholders
in advance of the declaration of the final dividend at the AGM. 265 The declaration
of a final dividend gives rise to a debt owed to the shareholder as at the time of
the declaration,26{;but that is not the case with interim dividends which can be
revoked at any time before the dividend is paid. 267 If it is discovered between the
time of the directors' decision and the time of payment that the company no longer
has sufficient profits, then the directors are entitled to, and ought to, revoke the
decision to pay interim dividends.

Non-cash dividends
15.143 Dividends can only be paid in non-cash assets if provided for by articles. Dividends
can be paid in the form of non-cash assets only if such payment is permitted by the
articles. 268 The Model Articles allow the general meeting to declare dividends to be
paid wholly or partly by the distribution of specific assets.269 Unless the articles provide
othe1wise, the company cannot discriminate between shareholders and resolve to pay
some shareholders in cash and others in specific assets.270 In relation to an article
dealing with non-cash dividends in the form as set out in the Model Articles, it has
been held that the provision does not authorise discrimination between shareholders
except, as stated in the provision, for settling difficulties arising in the distribution of
specific assets. 271

Bonus shares in lieu of cash dividends

15.144 Bonus shares may be issued instead of dividends if provided for by articles. If
the articles allow, then the company may issue bonus shares to shareholders instead
of paying cash dividends. Such bonus shares are also referred to as scrip dividends.
Companies' dividend reinvestment schemes or share investment schemes are schemes
or policies which allow shareholders to take up further shares in the company in lieu
of receiving cash dividends.

'"' Model Articles (private companies), art.73(2); Model Articles (public companies), art.91 (2) (Cap.622H).
>65 See Re Jo,vilt [ 1922] 2 Ch 442.
' 66 Bond v Bc,rrowHaemt,tite Steel Co [ I 902] I Ch 353.
26' Pote/ v111lt111d
Revenue Commissioners [1971] 2 All ER 504, 511-512; Brookton Co-operativeSociety Ltd v FCT
(198 I) 147 CLR 441,455; Marl'fJDevelopments Ltd v B W Rofe Pry lid [ 1977] 2 NSWLR 616,622.
268 Wood v Odessa WaterworksCo ( 1889) 42 Ch D 636.

,.. Model Articles (private companies), art.77; Model Articles (public companies), art.97 (Cap.622H).
"" illd11strialEquity Ltd v Blackb11m(1977) 17 ALR 575.
"' Industrial Equity Ltd v Blackb11m(1977) 17 ALR 575, 580-581.
 DIVIDENDS AND DISTRIBUTIONS 743

Bonus shares issued through declaring dividends and having them paid for by 15.145
issue of paid-up shares. There are two ways of issuing bonus shares in lieu of cash
dividends. The first is to declare dividends and to have the dividends paid for by way of
an issue of paid-up shares. This is permitted under the Model Articles. 272 The amount
of dividends to which each shareholder is entitled is credited towards the payment for
the shares issued to the shareholder. There is accordingly a transfer of the amounts
from the company's profits to the issued share capital.
Bonus shares issued through direct capitalisation of profits. The second method 15.146
is through a direct capitalisation of profits, as permitted for example by the Model
Articles. 273 Here, there is no need to declare a dividend first. Under the Model Articles,
the company in general meeting may upon the recommendation of the directors pass an
ordinary resolution to capitalise any profits of the company. Where the capitalisation
is accompanied by the issue of shares, the directors may apply the sum capitalised in
the proportions in which the members would be entitled if the sum was distributed by
way of dividend. The shares can be issued fully paid or partly paid, and will be credited
as paid up to the amounts capitalised for each share. The profit and loss account is
debited and the issued share capital is credited with the same amount.
Practical difficulty if rateable distribution ends up in fractional entitlement to 15.147
shares: usually dealt with by company's articles. A practical difficulty that can
arise following a rateable distribution of shares in lieu of cash dividends is that some
shareholders may end up being entitled to a fraction of a share. A company cannot
issue a fraction of a share. However, the articles may have provisions for dealing
with fractional entitlements by giving the company the power to issue fractional
certificates or to pay for the fraction by way of cash. 274 Typically, a fractional
certificate confers on the holder financial entitlements (but no membership rights)
in proportion to the fraction held, and the holder may be entitled to receive full
shares once the holder holds a number of fractional certificates which correspond
to a whole number of shares.

5.2 Dividends and distributions out of profits only

5.2.1 Gener"/
Dividends can only be paid out of profits and not capital. As part of the common 15.148
law capital maintenance doctrine, dividends can be paid only out of profits and not
out of capital.275 This is reinforced by statutory provisions in Cap.622 Pt.6 (derived
from predecessor CO, Pt.HA (repealed)). These provisions are based on provisions
first introduced in the United Kingdom in the Companies Act 1980,276 and were
recommended to be introduced in Hong Kong by the Companies Law Revision

"' Model Articles (private companies), art.77; Model Articles (public companies), art.97 (Cap.622H).
m Model Articles (private companies), art.79; Model Articles (public companies), art.99 (Cap.622H).
"' See Model Articles (private companies), art.79(3); Model Articles (public companies), art.99(3) (Cap.622H).
"' Re ExchangeBankingCo (Flitcroft'sCase) (1882) LR 21 Ch D 519.
'" Following recommendations of the Jenkins Committee: see Board of Trade (UK), Report of the CompanyLaw
Committee1962(Crnnd 1749).
744 MAINTENANCE OF CAPITAL

Committee 277 and the SCLLR. 278 The statutory provisions provide greater certainty to
the law compared with the common law by setting out specific rules for detennining
whether a company has profits for distribution. The provisions were seen as embedding
into the law what was regarded as good accounting practice,279 and in some important
respects impose greater restrictions than under the common law. Cap.622 Pt.6 operates
in addition to the common law (or other restrictions imposed by other Ordinances or
under the company's articles), 280 and so there could still be a breach of other legal
requirements, even though there is compliance with Pt.6 of this Cap.622.
15.149 Cap.622 maintains principle. Despite criticisms of the rules on distributions based
on the capital maintenance regime,281 the basic rule of dividends to be paid from
distributable profits is maintained in Hong Kong under Cap.622 as practitioners and
businesspersons in Hong Kong generally do not see the existing law as giving rise
to any problems in practice. 282 This is similar to the position in the United Kingdom,
but can be contrasted with some other jurisdictions. As mentioned earlier, 283 New
Zealand has replaced the capital maintenance rule so that an insolvency test is used to
determine whether dividends can be paid. In Australia, the capital maintenance regime
has not been entirely replaced but a solvency test has now been adopted to replace the
rule of dividends out of profits. 284

5.2.2 Basic prohibition

15.150 Company must not make distribution except out of profits under Cap.622. Under
Cap.622, s.297( 1), a company must not make a distribution except out of profits
available for the purpose.
15.151 Meaning of "distribution". "Distribution" is defined widely in Cap.622, s.290 to
mean every description of distribution of a company's assets to its members, 285 whether
in cash or otheiwise. However, the following are excluded from the definition:

• Issue of shares as bonus shares.

• Redemption or buy-back of shares in accordance with Cap.622 Pt.5 Div.4.

277 Companies Law Revision Committee, Second Report of the Companies law Revision Commillee 011Company
Law(l2 April 1973) (6.54)-(6.57].
"' SCCLR, ThirdAmwal Report 1986/1987, 2-3.
279 Ibid. For a comparison between the statutory provisions and the common law, see Kris Aljunan and Chee Keong

Low, "Dividends: A Comparative Alrnlysis of the Provisions in Hong Kong and Australia,. ( 1995) 5 Australian
Joumal ofCo,porate Law 455.
2110
See Cap.622, s.296.
"' See, e.g., Jonathan Rickford, "Legal Approaches to Restricting Distributions to Shareholders: Balance Sheet
Tests and Solvency Tests" (2006) 7 European Business Orga11izatio11 Law Review 137.
282 FSTB, CO Rewrite: Share Capital, the Capiwl Main1ena11ce Regime, Stawto,y Amalgamation Procedure -
Con.wlta1ionPaper (June 2008) [3.12]; Co11s11ltatio11
Conclusions[31].
283 Sec para.15.01 I above.

' 8' Sec Corporations Ace 200 I (Aust) s.254T, as amended by the Corporations Amendment (Corporate Reporcing
Reform) Act 2010. For background to the Auslralian reforms, sec Australian Accouming Research Foundation,
Paymentof Dividends under the CorporationsAct 2001 (2002).
' 8' Genuine paymcncs to members not in their capacity as members (e.g. genuine paymencs of remuneration for
services provided to the company) would not be caught as a "distribution": see MacPherso11v E111vpea11
Strategic
Bureau Ltd (2000) 2 BCLC 683, [52).
 DIVIDENDS AND DISTRIBUTIONS 745

• Reduction of capital.
• Distributions in a winding-up.
• Financial assistance given by the company to a member under Cap.622,
ss.283, 284 or 285.

Reasons for above exclusions. Issues of bonus shares would still involve a 15.152
capitalisation ofprofits, 286 and so there is no infringement of the capital maintenance
doctrine. The main significance of the exclusion of bonus shares from the definition
of "distribution" is that unrealised profits can be applied for the issue of bonus
shares. 287 As for redemption or purchase of shares and reductions of capital, the
statutory protections are set out in other Companies Ordinance provisions. The
exclusion for financial assistance for acquisition of shares (lawfully given on the
basis of a solvency statement) is intended to ensure that the solvency test under
ss.283-285 of Cap.622 is applied in respect of such payments rather than the profits
test in Pt.6.

5.2.3 Profits available for distribution

Profits available for distribution are company's accumulated realised profits 15.153
less accumulated realised losses. The profits available for distribution are the
company's accumulated, realised profits, so far as not previously utilised by
distribution or capitalisation, 288 less its accumulated, realised losses, so far as
not previously written off in a reduction or reorganisation of capital duly made:
Cap.622, s.297(2).
Losses from previous years must be made good before distribution to 15.154
members. The requirement for accumulated profits means that losses sustained
in previous years must be made good before profits of a particular year can be
distributed to members. In other words, it is necessary to look at the aggregate
profits of the company since the time of its incorporation and compare with
the aggregate losses of the company since that time. 289 This alters the common
law position. 290 The requirement for realised profits also alters the common law
rule. 291 The distinction between realised and unrealised profits is determined
by accounting practice. 292 For example, where an asset owned by the company

286 See para.15.146 above and see also the definition of "capitalisation" in Cap.622, s.290.
m There is no prejudice to creditors because the company does not part with assets. On unrealised profits, see
para.15.155 below.
2811
See Cap.622, s.290( l ).
"" However, losses written off in a reduction of capital need not be taken into account. On reductions of capital, see
para.15.012.
290 Ammonia Soda Co Ltd v Chamberlain [ 1918] I Ch 266. The term "nimble dividends" is used to refer to dividends

paid out of current profits without the need to account for losses of previous years.
29' Oimbula Valley (Ceylon) Teti Co Ltd v Laurie [I 961) Ch 353.
292 Sec Cap.622. s.291. Special rules apply to determine realised profits and losses for insurance companies,

as recognition of the need to take into account future liabilities and other considerations stretching away in
the future arising from the long-term nature of the business: sec Cap.622, s.293. As to the treatment (for all
companies) where there has been a revaluation of fixed assets, sec Cap.622, s.292. Where there is a distribution
of a non-cash asset, any unrealised profit shown in the financial statements for that asset is treated as a realised
profit for the purposes of determining the lawfulness of the distribution: Cap.622, s.294.
746 MAINTENANCE OF CAPITAL

has increased in value, a revaluation of the asset in the company's accounts will
show an unrealised profit. If the company sells the asset for a gain, then the
profit becomes a realised profit.
15.155 Profits and losses of revenue and capital taken into account under Cap.622.
Profits and losses of both a revenue and capital nature are taken into account under
Cap.622, s.297(2). 293
15.156 Further restrictions for listed companies. For listed companies, there is a further
restriction in Cap.622, s.298. Under that s.298(1), a listed company may make a
distribution only if:

(a) the amount of its net assets 294 is not less than the aggregate of its called up
share capital295 and undistributable reserves; and
(b) the distribution does not reduce the amount of those assets to less than that
aggregate.

15.157 Meaning of undistributable reserves. "Undistributable reserves" is defined in

Cap.622, s.290(1) to mean: (a) the amount by which the company's accumulated,
unrealised profits exceeds its accumulated, unrealised losses; and (b) any other reserve
which the company is prohibited from distributing by any other ordinance or by its
articles. 296
15.158 Balance sheet or net assets test to determine whether distributable profits
available for listed companies. Cap.622, s.298 sets out a balance sheet or net assets
test to determine whether there are distributable profits. The provision requires that
any distribution made must not reduce the net assets below the amount of the share
capital and reserves. This provides the "capital cushion" intended for protection of
creditors under the capital maintenance doctrine.297 The amount of the cushion is
determined from the balance sheet (statement of financial position). Despite initial
appearances, the balance sheet test in s.298 is substantially similar to the net profits
test in s.297(2) because the latter looks at accumulated profits and losses over the
life of the company, and the balance sheet effectively records the cumulative profits
and losses across successive profit and loss statements. So even in the case of
application of s.297(2), profits can be distributed only if net assets exceed the capital
and reserves. Where s.298 differs from s.297(2) is that, effectively, a listed company's

293 The profit or loss arising from the sale of a fixed asset (such as office premises no longer required by che
company) is an example of a capital profit or loss. Profit or loss made in the sale of the company's stock-in-trade
is an example of a revenue profit or loss.
29
~ Cap.622, s.290(1).
295 Cap.622, s.290(1).
29• predecessor CO, s.79C(2) (repealed) included the share premium account and the capital redemption reserve in

the definition. However, this is no longer necessary under Cap.622 due to the abolition of these concepts: see
para.15.078.
29' See Jonathan Rickford, '"Legal Approaches to Restricting Distributions to Shareholders: Balance Sheet Tests and

Solvency Tests" (2006) 7 £11ropea11 Business Orga11izatio11 law Review 137, 140.
 DIVIDENDS AND DISTRIBUTIONS 747

net accumulated realised profits must be sufficient to cover unrealised losses as well
before a distribution can be made.298

5.2.4 Comp"ny 'sfi.11(l11Ci"I

st"tements for determining amou11tof distributio11s
Distributable profits determined by company's last annual financial 15.159
statements. Whether a company has distributable profits is prima facie
determined with reference to the company's last annual financial statements,
namely those prepared for the preceding financial year and which have been laid
before the company in the annual general meeting under Cap.622, s.429( 1) ( or
sent to members under Cap.622, s.430(3)): Cap.622, ss.302 and 304. The amount
of distribution which may be made is determined by reference to the following
items as stated in the company's financial statements: profits, losses, assets,
liabilities, provisions, share capital and reserves. 299 The financial statements
must have been properly prepared in accordance with the Companies Ordinance,
subject only to matters which are not material for determining, by reference to
aforementioned items, whether the distribution would contravene the Companies
Ordinance. 300
Possible to make distribution based on initial financial statements for newly 15.160
incorporated companies. If the company proposes to make a distribution before
any financial statements have been laid, such as where the company has been
incorporated only within the past year and the company has not yet held its first
AGM, it is possible for the company to do so on the basis of initial financial
statements. The general requirement as to initial financial statements is that they
must be sufficient to enable a reasonable judgment to be made as to the amounts of
the "financial items" (as defined in Cap.622, s.290(1 )). 301 For listed companies, there
are additional requirements. The initial financial statements of a listed company
must be prepared in accordance with the ordinary requirements for financial
statements under Cap.622 Pt.9 Div.4 (subject only to matters which are not material
for determining whether the distribution would be lawful and to modifications as
are necessary because the financial statements are not prepared for a full financial
year), and an auditor's report is required. 302
Possible to make distribution based on interim financial statements. If the 15.161
company does not have distributable profits under the company's last annual
financial statements, a company may still be able to make a distribution on the
basis of distributable profits shown in interim financial statements. Interim

198 Sec SCCLR, Third Annual Report 198611987, 3; Kris A,junan and Chee Keong Low, "Dividends: A
Comparative Analysis or the Provisions in Hong Kong and Australia" (1995) 5 Australian Journal o_(Corporate
Law 455, 467.
'"' Cap.622, s.302; sec also Cap.622, s.290( I) definition of"financial items".
300 See Cap.622, s.304(3). See, e.g. BT! 2014 LLC v Sequa11aSA (2017] I BCLC 453, where it was held that

financial statements gave a true and fair view and were properly prepared in accordance with the statutory
requirements for the purpose of detennining whether the payment of dividends was lawful. Note that the decision
is on appeal at the time of writing.
301 See Cap.622, ss.302 and 306.

302 See Cap.622, ss.306(2) and 306(5).

748 MAINTENANCE OF CAPITAL

financial statements are financial statements prepared since the time of the last
annual financial statements (but before the company's next annual financial
statements are laid before the company in the next annual general meeting). 303 For
unlisted companies, the only requirement in respect of interim financial statements
is that the financial statements must be necessary to enable a reasonable judgment
to be made as to the amounts of the financial items (as defined in Cap.622,
s.290(1)). 304 This is the same requirement as for initial financial statements for
unlisted companies. Reliable management accounts which deal with the financial
items would generally be sufficient for unlisted companies. In the case of
listed companies, there are again further requirements for the interim financial
statements to be properly prepared in accordance with Cap.622, Pt.9 Div.4 (subject
only to matters which are not material for determining whether the distribution
would be lawful and to modifications as are necessary because the accounts are
not prepared for a full financial year). 305 There is no need though for the interim
financial statements to be audited.
I 5.162 Not strictly necessary to prepare interim financial statements for interim
dividends if last annual financial statements justify payment of dividends. The
statutory requirement for interim financial statements does not necessarily apply
simply because a company wishes to pay interim dividends.306 If the last annual
financial statements justify the payment of inte1im dividends, then it is not strictly
necessary to prepare interim financial statements and the payment of the dividends
will be in compliance with Cap.622 Pt.6. 307 However, if the company's financial
position has deteriorated since the time of the last annual financial statements such
that the company no longer has sufficient distributable profits, then any distribution
made to shareholders could breach the common law capital maintenance rules, even
though it is not unlawful under Cap.622 Pt.6. 308

5.2.5 Relevllnce of compa11y~~

solvency
15.163 Company's directors must also ensure distributions not made where company
insolvent. Although the primary rule for dividends and distributions is the rule,
based on the capital maintenance doctrine, that payments can only be made out of
distributable profits, the company's directors must also ensure that distributions
should not be made where the company is insolvent. Directors have a duty to
take into account the interests of creditors when the company is insolvent or
near insolvency. 309 Accordingly, even if the company has distributable profits,
the directors should not recommend the payment of dividends if the company is

303 Cap.622, ss.302 and 305.

'°" Cap.622, s.305(2). For an example where this requirement was satisfied in respect of interim financial statements,
see BT! /4 LLC vSequa11a SA [20 I7] I BCLC 453 (but note that the decision is on appeal at the time of writing).
J-OsCap.622, s.305(3).
306 As to interim dividends, see para.15.143 above.

301 Where distributions had already been made on the basis of the last annual accounts, those distributions must be

taken into account when considering whether further distributions are to be made pursuant to the same accounts:
see Cap.622, s.303; see also predecessor CO, s. 791.
JO! Sec also para.15.149 above.
~ Sec Chapter 8.
 DIVIDENDSAND DISTRIBUTIONS 749

already insolvent or if the payment of the dividends would put the company into
insolvency. 310 The directors may be in breach of their fiduciary duties or duty of
care if they cause the company to pay dividends or make a distribution to members
in such a situation. 311

5.2.6 Consequences of unlawful distributions

General
Distribution unlawful if contravenes capital maintenance doctrine or 15.164
Cap.622. A distribution will be unlawful if it contravenes the common law capital
maintenance rule or if the distribution is in breach of Cap.622 Pt.6. A breach
of Pt.6 can occur not only where the distribution is made otherwise than out of
distributable profits in breach of s.297, but also where there is non-compliance
with other requirements of Pt.6. Thus, it has been held that the requirement for a
distribution to be made in accordance with financial statements which are drawn
up in the proper format and laid before the annual general meeting is not merely
a procedural technicality, and so breach of the requirements as to the financial
statements can render the distribution unlawful. 312 Similarly, failure to comply
with the requirement for the auditor's statement in Cap.622, ss.306(5) and 306(6)
means that the distribution is unlawful.3 13

Directors
Directors liable if caused company to make an unlawful distribution. Where 15.165
the directors have caused the company to make a distribution which is unlawful,
the directors will be in breach of their duties owed to the company (and may
be liable to compensate the company) if they were aware that the company did
not have distributable profits or were aware of irregularities in the financial
statements. 314 If the directors were negligent (that is where they ought reasonably
to have known that the distribution was unlawful), then they will also be in
breach of duty and can be liable to the company. 315 However, there are also
cases where the courts have stated without qualification that directors are under
a duty not to cause any unlawful payment of dividends, 316 and so it may be
that liability of the directors to compensate the company is effectively a strict

316 Ltd (in liq) v Hilton (1989) I NZLR442; Peter B11cha11a11

Hilton /111/ Ltd v Mcl'ey (1955) AC 516; QBE /11suro11ce
Group Ltd v ASC ( 1992) 110 ALR 30 I; Trodepower (Holdings) Ltd v Tradepower (Ho11gKong) Ltd (2009)
12 HKCFAR 417, (2010) I HKC 380, (125).
311 Hilton Intl Lid (i11liq) v Hilton [ 1989) I NZLR 442. See also BT/ 2014 LLC v Sequa11a
SA (2017) I BCLC 453
(but note that the decision is on appeal at the time of writing).
312 Moat Housespie (2001] 2 BCLC 531, (35).
Bairstow v Q11ee11s
m Precision Dippings Ltd v Precision Dippings Marketing lid [ 1986) Ch 447.
314
Re fachange Banking Co, Flitcroji:, Case (1882) 21 Ch D 519; Bairstow v QueensMoat Houses Pie (2001) 2
BCLC531.
315
Dovey v Cory [ 190I) AC 477.
316 Re Lands Allotme111Co [ 1894) I Ch 616, 638; Selangor United Rubber Estate., Ltd v Cradock (No 3) [ 1968) I
WLR 1555, 1575; Belmont Finance Co,p v Williams Furniture Ltd (11/o.2)[ 1980) I All ER 393,404; Re loquitur
Ltd (2003) 2 BCLC 442, 471-472; Moulin Global Eyecare I-foldings Ltd v Olivia Lee Sin Mei (2012] 4 HKLRD
263, (48).
750 MAINTENANCEOF CAPITAL

liability without the need to show fault on the part of the director. The law on
this question is not yet settled. 317
15.166 Directors only liable to compensate for excess un_justifiedamounts not entire
amount of distribution. Where there is an unlawful distribution, it seems that the
directors are only liable to compensate the company for the excess amounts paid out
which are not justified by the company's available profits rather than the entire amount
of the distribution made. 318

Members
15.167 Members liable to repay distribution if aware or reasonably believe
distribution unlawful under Cap.622. Where a distribution (or part thereof) has
been made to a member in contravention of Cap.622 Pt.6, and at the time of the
distribution the member knows or has reasonable grounds for believing that the
distribution contravened Pt.6, then the member is liable to repay to the company
the amount of the distribution (or that part of it that is unlawful): Cap.622, s.30 I.
A member will be liable under this provision where the member knows of the facts
giving rise to the contravention and it is unnecessary to show that the member
knew that the distribution was unlawful; and so there will be liability where the
member was aware of the receipt of the distributions from the company and knew
that the company had made only losses. 319 It is not entirely clear whether the
wording "reasonable grounds for believing" means "ought to have known" (such
that constructive knowledge can be imputed) or whether it only means knowledge
which the member "must be taken to have" or "may reasonably be taken to have"
possessed. 320
15.168 Members can also be liable to repay unlawful distributions under common law.
Cap.622, s.30 I is without prejudice to any other obligations under the law to repay a
distribution unlawfully made,321 and so a member can also be liable to repay unlawful
distributions under the common law.The general mle for an unlawful return of capital
under the common law is that the transaction is void.322 However, it seems that in
the case of unlawful dividends, members who received the dividends would only be
liable to repay the amounts to the company if they knew or ought to have known
that the company did not have sufficient profits for the payment of the dividend.323

"' See Reve1111eand Customs Commissioners v Ho/la11d (2010] I WLR 2793, (46)-(47); and see fmiher Eilis
Ferran, "Directors' Liability for Unlawful Dividends" (2011) 70 Cambridge LawJottma/321.
'" Re Mari11iLtd [2004) BCC 172.
"' It:~ a Wrap (UK) Ltd v Gala [2006) 2 BCLC 634. See, e.g., Tradepower (Holdi11gs)Ltd v Tradepower (Ho11g
Kong) Ltd (2009) 12 HKCFAR 417, [2010] I HKC 380.
llO In It:~ a Wrap (UK) Ltd v Gala [2006] 2 BCLC 634, Arden LJ favoured the former view while Chadwick LJ
favoured the latter.
J21 Cap.622, s.30 I(4).

ll2 Sec para.15.003 above.

m Sec Rolled Steel Products (Holdings) Ltd v British Steel Corp ( 1986) Ch 246, 303-304; Precision Oippings Ltd v
Precision Dippings Marketing Ltd [1986] Ch 447; Re Clevela11dTrnstPie [1991] 8CLC424. As to the possibility
of members being liable on the basis of unjust enrichment even though they did not have knowledge of the facts
rendering the distribution unlawful, sec Jennifer Payne, "Unjust Enrichment, TrustS and Recipient Liability for
Unlawful Dividends" (2003) 119 Law Quarterly Review 583; Chee Ho Tham, "Unjust Enrichment and Unlawful
Dividends: A Step Too Far?" (2005) 64 Cambridge Law Journal 177.
 DIVIDENDS AND DISTRIBUTIONS 751

Constructive knowledge would be sufficient for a claim against a member under the
common law.324

If distribution unlawful due to breach of Cap.622 entire distribution rendered 15.169

unlawful. It appears that if the distribution is unlawful by reason of contravention of
requirements of the Ordinance (such as the requirement for proper financial statements
or auditor's statement), the entire distribution is rendered unlawful and a member can
be required to repay the full amount even if the company had sufficient profits to make
the distribution. 325

Auditors
Auditors liable to compensate company for improperly paid dividends when 15.170
negligent. Where auditors negligently certify the company's financial statements,
which leads to the company paying dividends despite not having sufficient profits, the
auditors can be liable to compensate the company for dividends improperly paid out.326

32' Rolled Steel P,oducls (Holdings) Ltd v Bri1ish Steel Co,p [ 1986) Ch 246, 303-304; Precision Oippings Ltd v
Precision Oippings Markeling Ltd (1986] Ch 447.
"' See Precision Oippings Lid v Precision Oippings Markeling Ltd [ 1986) Ch 44 7.
'" Leeds £slate, Building and Investment Co v Shepherd (1887) LR 36 Ch O 787; Re london and General Bank
(No.2) (1895) I Ch 673; Eq11i1able
LlfeAss11ranceSociety v Ems/ & Yormg(2003) 2 BCLC 603; &1ra111011ey Ltd v
Chan, Lai Pang & Co (afim() (unrep .. HCA J\8437/1987, (1994) HK.LY223).
 CHAPTER 16

FUND-RAISING BY PUBLIC ISSUE

PARA.

I. Introduction ............................................................................................................................ 16.001

1.1 Historical development of regulation of prospectuses .................................................... 16.004
1.2 Recent developments ...................................................................................................... 16.005
1.3 Disclosure philosophy .................................................................................................... 16.006

2. Prospectuses ........................................................................................................................... 16.010

2.1 Requirement for prospectus ............................................................................................ 16.0 I0
2.1.1 General ................................................................................................................ 16.010
2.1.2 Offer to the public ................................................................................................ 16.013
2.2 Exemptions ..................................................................................................................... 16.015
2.2.1 General exemptions ............................................................................................. 16.015
2.2.2 Exemptions granted by SFC ................................................................................ 16.020
2.3 Contents of prospectuses ................................................................................................ 16.022
2.3.1 General contents requirements ............................................................................ 16.022
2.3.2 Reports ................................................................................................................. 16.025
2.3.3 Experts' statements .............................................................................................. 16.026
2.3.4 Amendments to prospectuses .............................................................................. 16.027
2.3.5 Programme offers ................................................................................................ I 6.028
2.4 Authorisation and registration of prospectuses .............................................................. I6.030
2.5 Electronic prospectuses .................................................................................................. 16.033
2.6 Applications and allotments .......................................................................................... 16.035
2.6.1 Minimum subscription ........................................................................................ 16.036
2.6.2 Time period for allotments .................................................................................. 16.039
2.6.3 Allotments of shares or debentures to be listed ................................................... 16.040
2. 7 Misstatements in prospectuses ....................................................................................... 16.04 l
2.7.1 Civil liabilities ..................................................................................................... 16.041
2.7.2 Criminal liabilities ............................................................................................... 16.083
2.8 Sales of shares ................................................................................................................ 16.09 I
2.9 Territorial scope of regulation ........................................................................................ 16.096
2.9.1 Offers outside Hong Kong ................................................................................... 16.096
2.9.2 Offers in Hong Kong by foreign companies ........................................................ 16.098

3. Advertising Restrictions ......................................................................................................... 16.102

3.1 Introduction .................................................................................................................... 16.102
3.2 Advertisements concerning prospectuses: Cap.32, s.388 .............................................. 16. I04
3.3 Advertisements constituting an offer or invitation:
Cap.32 definition of "prospectus" .................................................................................. 16.l 06
3.4 Restrictions under Securities and Futures Ordinance (Cap.571 ), s. I03 ......................... 16.109

4. Listing on the Stock Exchange .............................................................................................. 16.112

4.1 Introduction .................................................................................................................... 16.l l 2
4.2 The stock exchange ........................................................................................................ 16.l l 5
754 FUND-RAISING BY PUBLIC ISSUE

4.3 Listing rules of the stock exchange ................................................................................ 16. l I 6

4.3.1 Function and purpose of the listing rules ............................................................ 16.116
4.3.2 Status of the listing rules ..................................................................................... 16.119
4.3.3 Enforcement of the listing rules .......................................................................... 16.120
4.4 Methods of listing ........................................................................................................... 16.122
4.5 Qualifications for listing ................................................................................................ 16. I23
4.6 Application procedures and listing documents ............................................................... 16.125
4.7 Continuing disclosure obligations .................................................................................. 16.129
4.7.l Introduction ......................................................................................................... 16.129
4.7.2 Mandatory disclosure of inside information ....................................................... 16.130
4.7.3 Listing rules ......................................................................................................... 16.147

5. Reform ................................................................................................................................... 16.149

 1. INTRODUCTION
Initial public offerings. As outlined in Chapter 13, public companies can raise funds 16.001
through an offer of shares or debentures to the public. Although it is usual for the
companies to be listed so that the shares or debentures can be publicly traded on the
exchange, it is possible to offer shares or debentures to the public without listing on
the stock exchange. When a company offers its shares to the public for the first time,
the process is refe1Tedto as an initial public offering (IPO). The company is said to "go
public". The procedure generally involves:

• appointment of a sponsor (such as an investment bank) to assist the company

in the IPO (the sponsor also usually acts as lead underwriter');
• appointment of professionals (legal advisers, reporting accountants);
• conducting of due diligence (to investigate the company's business, financial
position, future prospects etc. to ensure that all necessary information about
the company is ascertained for inclusion in the prospectus);
• drafting of the prospectus;
• application to the stock exchange for listing;2
• preparation of pre-deal research reports by analysts appointed by the sponsor
or underwriters and engaging in marketing to institutional and professional
investors (through various means, including provision of pre-deal research
reports, conducting of management roadshows via promotion meetings or one-
on-one meetings and distribution of the draft or "red-herring" prospectus 3);

• book-building process, whereby the underwriters approach institutional investors

to explore market interest and build a book of the demand of their clients (obtaining
expressions of interest to acquire the securities in the offering at various p1ices)-
this normally occurs a few weeks before the start of the public offering period and
the issue price is fixed on the basis of the book-building;

• authorisation and registration of the prospectus;

• issue of the prospectus and application forms to the public and commencement
of the offer period (the offer period usually only lasts three and a half days in
Hong Kong);
• following the close of the offer (closing of subscription lists), shares are
allocated and allotted to the subscribers;
• final approval for listing and commencement of trading on the stock
exchange.

' On underwriters, see also para.16.015 below.

2 Sec para.16.112 below.
3 "Red hen-ing" prospectuses refer to a near-final draft of the prospectus with infonnation such as pricing and
related financial information omitted.
756 FUND-RAISING BY PUBLIC ISSUE

16.002 Public offerings regulated by Companies (Winding-Up and Miscellaneous

Provisions) Ordinance (Cap 32). Part II of the Companies (Winding-Up and
Miscellaneous Provisions) Ordinance (Cap.32) contains provisions regulating public
offerings. The main provisions deal with the circumstances as to when a prospectus
must be registered and issued, information that must be included in the prospectus, civil
and criminal liabilities for misstatements contained in prospectuses, and restrictions
on advertising activities of the company in the public fund-raising process. While
the provisions in Pt.II of Cap.32 set out a statutory scheme regulating prospectuses
and public offerings of shares or debentures, there are also some provisions of the
Securities and Futures Ordinance (Cap.571) and principles of the common law that
could be relevant (for example in relation to mis-statements in prospectuses).
16.003 Prospectus regime unchanged by CO Rewrite. The reforms made under the
Companies Ordinance (Cap.622) do not touch on the prospectus provisions. For
the time being, the prospectus regime remains in Cap.32 (which was renamed as
the Companies (Winding-Up and Miscellaneous Provisions) Ordinance upon the
commencement of Cap.622 (on 3 March 2014)). For potential reforms in the future,
see paras.16.005 and 16.149 below.

I.I Historical development of regulation of prospectuses

16.004 Regulation of prospectuses historically modelled on English law. When

promoters of joint stock companies in 19th century England sought to raise
funds from public investors, they usually did so through the issue of a prospectus
inviting persons to become shareholders in the company. 4 The prospectus contains
information about the company and was used to attract potential investors.
When the Joint Stock Companies Act 1844 was enacted in England, there was a
requirement for registration of prospectuses as part of the scheme for provisional
registration of companies, although the provision was not reproduced in the
Companies Act 1856 when provisional registration was abolished, nor was it
reproduced in the Companies Act 1862. Accordingly, in Hong Kong under the
Companies Ordinance 1865, which was based on the UK 1862 Act, there were
no requirements for registration of prospectuses. The provisions on registration,
detailed contents requirements and civil liability for untrue statements in
prospectuses were first introduced in Hong Kong in the Companies Ordinance
1911, modelled on provisions in the Companies Act 1900 (UK) and Directors'
Liability Act 1890 (UK), which were consolidated in the Companies Act 1908
(UK). The provisions in the subsequent Companies Ordinance (of 1932) were
substantially amended in 1972 to implement reforms proposed in the First Report
of the Companies Law Revision Committee on the Protection of Investors to bring
the Hong Kong provisions up to date with the prospectus provisions contained in
the Companies Act 1948 (UK).

' Sec J Ashton Cross, limited Uc,bility Companies: The lmvand Practice (Simpkin Marshall Hamilton Kent & Co
1912) 3 7-41; Henry Hurrell and Clarendon G Hyde, 11,e Lawof Directors and Officers of Joint Stock Companies
(Waterlow and Sons 1884) 34-44.
 INTRODUCTION 757

1.2 Recent developments

Securities and Futures Commission conducting review of prospectus regime. 16.005

From the early 2000s, the Securities and Futures Commission (SFC) has been engaged
in a three-part review of the prospectus regime.5 Phase I of the review was completed
in 2003, with the introduction of certain facilitative measures via guidelines and class
exemptions within the existing framework. Phase 2 was completed in 2004 when
a number of amendments were made to Cap.32 by the Companies (Amendment)
Ordinance 2004. These amendments involved a number of "quick-fixes", providing
for relatively straightforward and less controversial amendments in response to market
demand. Phase 3 involves a comprehensive review of the entire prospectus regime.
Public consultation was carried out in 2005, with the SFC proposing some major
reforms to modernise the public offering regime for shares and debentures in Hong
Kong.6 Although some of the measures have been introduced in advance of the other
Phase 3 initiatives, the bulk of the reforms are still to be implemented. 7

1.3 Disclosure philosophy

Prospectus regime based on disclosure philosophy. The prospectus regime under 16.006
Cap.32, as is the case under Anglo-American models of securities regulation, is
largely based on a disclosure philosophy. The core feature ofa disclosure regime is that
companies are required to disclose to the investing public material infonnation about
the company's operations and securities, and it is for investors to make up their own
mind whether to invest in the company. Disclosure regulation can be contrasted with
merit regulation and other substantive regulation. Merit regulation imposes controls
on what investments can be offered to the public.8 Substantive regulation sets out rules
regulating corporate behaviour and enforcing required standards of conduct. 9 In the
United States, federal regulation of securities laws is based on a disclosure philosophy,
although some States in the United States provide for merit regulation through a
requirement for registration of securities. 10 In Hong Kong, although the regulation of

See SFC, Co11s11ltatio11 Paper 011Possible Reforms lo the Prospectus Regime in the Compa11iesOrdinance
(August 2005) 4-5.
• SFC, Co11s11lwtio11Paper 011Possible Reforms to the Prospectus Regime i11the Comp<miesOrdi11a11ce (August
2005), and Consultatio11Co11clusio11s(September 2006).
1 The carving out of structured products from the Cap.32 regime was implemented by the Securities and Futures
and Companies Legislation (Sn·uctured Products Amendment) Ordinance (8of2011 ); and see SFC, Consultation
Paper 011PossibleReforms to the Prospectus Regime in the Companies Ordina11ceand the Offers of /tlvestments
(October 2009), and Consultation Conclusions (April 2010).
Regime in the Securities and Futures Onii11a11ce
The SFC had also proposed to introduce amendments relating to regulation of sponsors: SFC, Con.rnlta1ion
Paper on the Regulatio11of Span.Mt:~(May 20 I2), and Co11sultatio11
Conclusio11s(December 20 I2). The SFC
subsequently decided not to take forward the legislative amendments originally proposed regarding sponsor
liability under Cap.32: see SFC, Supplemental Co11sultario11 Conclusio11sonrhe Regulation of/PO Spo11sors-
Prospectus Liability (August 2014); and see para.16.048 below.
Sec, e.g., Con.rad G Goodkind, "Blue Sky Laws: ls there Merit in the Merit Requirements?" [ 1976] Wisco11sin
law Review 19.
• Susanna K Ripken, ''The Dangers and Drawbacks of the Disclosure Antidote: Toward a More Substantive
Approach co Securities Regulation" (2006] 8t1ylor Law Review 139.
10
Referred to as ''blue sky law": see Rick A Fleming, "I 00 Years of Securities Law: Examining a Foundation Laid
in the Kansas Blue Sky" (2011) 50 lfi,shb11mlawJoumal 583.
758 FUND-RAISING BY PUBLIC ISSUE

public offerings of shares and debentures is mainly based on disclosure, there is also
some degree of merit regulation, for example in the minimum qualifications for listing
on the stock exchange. For investment products other than shares and debentures,
there is also a certain degree of merit regulation under the Securities and Futures
Ordinance (Cap.571) (for example authorisation requirements in relation to collective
investments and structured products 11).
16.007 Aims of disclosure regime. There is much academic debate over the merits of
a system of mandatory disclosure. At one end of the debate, there is the question
of whether mandatory disclosure is necessary. At the other end, the question arises
whether mandatory disclosure is sufficient or whether merit regulation is also required.
A disclosure regime aims to achieve objectives including the following:

• Preventing fraud (as the threat of public disclosme can deter corporate
wrongdoing).
• Enabling investors to make fully infonned investment decisions.
• Increasing public confidence in the markets (investors will be more willing
to invest if there is equal access to information). 12

16.008 Arguments for and against mandatory disclosure. Some have argued from a
law and economics perspective that legal rules requiring mandatory disclosure are
unnecessary as it would be in firms' own interests in any event to disclose information
to the market. 13 However, others have countered that only mandatory rules can ensme
that an optimal amount of (accurate) information is released to the market. 14 There
is also an argument that a mandatory disclosure regime is costly and outweighs the
benefits of such a regime, although it has been said that there is no conclusive evidence
establishing this. 15
16.009 Arguments for and against merit regulation. At the other end of the debate, critics
have argued that a disclosure regime on its own is insufficient to protect investors. Rules
emphasing disclosure are based on an assumption of rational decision-making, but
behavioural economics indicate that human decision-making is not always grounded
by reason. For instance, an average investor who is overloaded with information may
not be able to process all the information rationally and may end up making decisions

11 See para.16.019 below.

12
Susanna K Ripken, "The Dangers and Drawbacks of the Disclosure Antidote: Toward a More Substantive
Approach to Securities Regulation" [2006] Baylor law Review 139, 149-156; and see also Betty M Ho, Public
Companies and their Equity Securities: Principles of Regulotio11under Hong Kong law (Kluwer 1998)64-75.
13 George J Benston,"Required Disclosureand the Stock Market:An Evaluationof the Securities ExchangeAct of
1934" (1973) 63 American Eco110111ic Review 132.
" John C Coffee, Jr, "Market Failure and the Economic Case for a Mandatory Disclosure System" (1984)
70 Virginia law Review 717; Joel Seligman. "The Historical Need for a Mandatory Corporate Disclosure
System" ( 1983) 9 Journal of Corporation law 1; Betty M Ho, Public Companies and their Equity Securities:
Principles of Regufotion under Hong Kong law (Kluwer 1998) 75-77. Sec also Frank H Easterbrookand Daniel
R Fischel,"Mandatory Disclosureand the Protectionoflnvestors" (1984) 70 Virginia Law Review 669.
" See Betty M Ho, Public Companies and their Equity Securities: Principles of Regulation under Hong Kang Law
(Kluwer 1998)79.
 PROSPECTUSES 759

on the basis of biases or less relevant infonnation. 16 Merit regulation and substantive
regulation aim to reduce risks of investment by prohibiting offe1ing of particular
investments or by prohibiting objectionable conduct. However, opponents of merit
regulation argue that the increased costs of capital for entrepreneurs under a system of
merit regulation unduly hamper new enterprises. 17

2. PROSPECTUSES
2.1 Requirement for prospectus

2.1.1 General
Company must issue prospectus for shares and debentures. A company must not 16.010
issue any form of application for shares in or debentures of the company unless the
form is issued with a prospectus: Cap.32, s.38(3). The requirement is imposed for
offers made to the public only.18
Prospectus required for all forms of written documents used to offer shares 16.011
or debentures. Although s.38(3) of Cap.32 imposes the prospectus requirement
only where the company issues an application form, the prospectus regime in
Cap.32 Pt.II would still apply where the company does not issue application forms
as such but uses some written document to offer shares or debentures or invite
persons to apply for shares or debentures. This is because s. 38( 1) requires that
a prospectus issued by a company complies with the contents requirements set
out in the provision, and s.38D(l) prohibits a company from issuing a prospectus
which does not comply with the Ordinance and which has not been registered with
the Companies Registrar. "Prospectus" is defined in s.2 to mean any prospectus,
notice, circular, brochure, adve1iisement or other document offering shares in or
debentures of the company to the public or calculated to invite offers by the public
to acquire shares. Thus, effectively, any written document containing an offer or
invitation to take up shares or debentures would need to comply with ss.38(1) and
38D(l).
Regulation of public offerings document based not transaction based. Regulation 16.012
of public offerings under Cap.32 is document-based rather than transaction-based.
Purely oral offers or invitations are not caught by Cap.32 Pt.II, but would be regulated
pursuant to Secmities and Futures Ordinance (Cap.571) s. l 03. That provision restricts

16 Susanna K Ripken, "The Dangers and Drawbacks of the Disclosure Antidote: Toward a More Substantive
Approach to Securities Regulation" [2006) Baylor Law Review 139, 156-184.
17 See, e.g., Rutheford B Campbell, Jr, "The Insidious Remnants of State Rules Respecting Capital Formation"
(2000) 78 Washington University Law Quarterly 407; Stuart R Cohn, "The Impact of Securities Laws on
Developing Companies: Would the Wright Brothers Have Gotten olT the Ground?" ( 1999) 3 Journal of Small
mul Emerging Business Law 315; Charles H B Braisted, "State Registration of Securities: An Anachronism
No Longer Viable" (2000) 78 Washington University law Quarterly 401. For an overview of the debate, sec
Betty M Ho, Public Companies and their Equity Securities: Principles of Regulorion under Hong Kong Low
(Kluwer 1998) 131-134.
18
See Cap.32, s.38(3)(b).
760 FUND-RAISING BY PUBLIC ISSUE

public offerings of securities (including shares or debentures) and is not restricted to

written offers or invitations. 19

2.1.2 Offer to the public

16.013 Question of whether offer private or for section of public. Cap.32, s.48A provides
a partial definition of the meaning of offering shares or debentures to the public.
Under s.48A(J ), an offer to the public includes an offer to any section of the public,
whether selected as members or debenture holders of the company concerned or as
clients of the person issuing the prospectus or in any other manner. This definition,
first introduced in England in the Companies Act 1948 and introduced in Hong Kong
by the Companies (Amendment) Ordinance 1972, makes it clear that an offer can
be one made to the pub! ic, even though it is not made to the pub] ic generally. Thus,
for example prospectuses issued by the company to the members of the company
only can, under s.48A, still be regarded as an offer to the public. In Corporate Affaif:s
Commission (SA) v Australian Central Credit Union,20 a similar provision in Australia
was considered. It was held that the question of whether the offer is a private one or
is one made to a section of the public so as to come within the statutory provision
firstly requires an examination of whether there is any rational co1mection between
the characteristic which sets the members of a group apart and nature of the offer
made to them. Where there is no rational connection, then the group would ordinarily
be treated as a section of the public for the purposes of the offer. If, however, there
is a rational connection or there is some subsisting relationship between the offeror
and the members of a group, then it would be necessary to consider the significance
of the subsisting relationship or the particular characteristic identifying the group
and any connection between that relationship or characteristic and the offer, and also
other factors such as the number of persons comprising the group, and the nature and
content of the offer.21 In the case at hand, three existing credit unions (together having
23,000 members) were merged to form a new credit union. The court considered that
an offer made by a stranger to the 23,000 members of the merged credit union would
likely be an offer to the public, 22 but held that the offer in the present case was not a
public offer. Although the high number of offerees would point to the conclusion that
there is an offer to the public, the court held that the offer by the credit union to its own
members would be an offer to them in their domestic or private capacity as members
of the union. The offer arose from their membership and relates to property in which
they would be already indirectly interested as members and would accordingly have a
perceptible and rational connection with that membership.
16.014 Corporate affairs decision consistent with Cap. 32. The approach in the above
decision is consistent with Cap.32, s.48A(2) (although there was no equivalent of this

19
See s. I 03 and the definitions of "advertisement" and "invitation" in s. I 02. If the offer or invitation is made by
a prospectus which complies with Cap.32 Pt.II, then Securities and Futures Ordinance (Cap.571), s.103 is not
con1ravencd: sec also, Cap.571, s.103(3).
,. (1985) 157 CLR 201.
" It has been said though that the test set out in the decision would be difficult to apply in practice: SFC, O/Jersof
Securities and other Investments - Report of a H0rking Group (December 1991) [3.22).
22 For an earlier English decision to similar effect, see Re South of England Natural Gas and Petroleum Co Ltd
(1911) I Ch573.
 PROSPECTUSES 761

s.48A(2) in the Australian provision). Section 48A(2) provides that an offer is not to
be treated as made to the public if it can properly be regarded, in all the circumstances,
as not being calculated to result, directly or indirectly, in the shares or debentures
becoming available for subscription or purchase by persons other than those receiving
the offer, or otherwise as being a domestic concern of the persons making and
receiving it: Cap.32, s.48A(2). For the purposes of this s.48A(2), the test is not who
receives the prospectus but who can accept the offer put forward. 23 Non-renounceable
rights issues24 or offers to employees under employee share schemes would ordinarily
come within s.48A(2), although there are also specific exemptions for these under
Sch.17, discussed below.

2.2 Exemptions

2.2.1 General exemptions

Circumstances in which prospectus not required. Apart from private offers,25 a 16.015
prospectus is also not required for offers in relation to the following.

I. Underwriters. Offers in connection with a bona .fide invitation to a person

to enter into an underwriting agreement are exempt.26 When a company
wishes to raise capital through a public offering, there may be a risk of the
fund-raising being unsuccessful if there are insufficient investors willing to
take up the shares of the company. To offset this risk, one or more underwriters
are usually engaged to bear the risk of under-subscriptions in return for a fee
or commission. There are different types of undetwriting arrangements. 27 In
the strict or "old-fashioned" form of underwriting, the underwriter agrees to
take up the unsubscribed shares in the event that investors do not take up all
the shares on offer. In "firm commitment" underwriting, the company allots
all the shares to the underwriters who then act as wholesalers in offering the
shares to the public.
2. Rights issues. Cap.32, s.38 does not apply to the issue to existing members or
debenture holders of a company of a prospectus or application form relating
to shares or debentures of the company, whether an applicant for shares
or debentures will or will not have the right to renounce in favour of other
persons: Cap.32, s.38(5)(a). 28

23 GovernmentsStock Securities !11vestme11t

Co Ltd v Christopher (1956] I WLR 237.
24
Govern111e111s
Stock Securities !11vestme11t
Co Ltd v Christopher (1956] I WLR 237.
25 Seepara.16.0IOand 16.013 above.
2• Cap.32, ss.38(3)(a), 38(3)(c) and Sch.17 s.5.
27
See Abe,joyle Ltd v Westem Metals Ltd (1998) 156 ALR 68; Yicko Ga Ne/WorkSecurities Ltd v Oriental Palron
Asia Ltd (unre1>.,HCA 9848/2000, (2002] HKEC 1477).
28
As to the meaning of renounccable or non-renounccable rights issues, sec para.14.025. The exemption appears
to be premised on the basis that existing shareholders or debenture holders of the company already have
information necessary for making an informed decision without the need for a prospectus. However, this has
been criticised on the basis that while the information required might be less than for an offer to the wider public,
some regulatory control is still appropriate to ensure adequate disclosure: SFC, Offers of Securities and other
fll11est111e11ts
- Report of a l'l'orki11g
Group (December 1991) (3.73]; Betty M Ho, Public Compcmiesand their
Eq11itySecurities(Kluwer 1998) 106-107.
762 FUND-RAISING BY PUBLIC ISSUE

3. Existing listed shares or debentures. Cap.32, s.38 does not apply to

prospectuses or application forms relating to shares or debentures which are
uniform with shares or debentures previously issued and for the time being
listed on the Stock Exchange of Hong Kong: Cap.32, s.38(5)(b). 29
4. Structured products. The prospectus requirements do not apply for offers of
any shares or debentures which are structured products. 30

16.016 Safe harbours providing for exemptions to prospectus regime. A list of safe
harbours providing for exemptions is also set out in the Sch.17 of Cap.32: 31

I. Offers to professional investors.32 "Professional investor" is defined in

Sch. I of the Securities and Futures Ordinance (Cap.571 )33 and includes, for
example, financial institutions or banks, insurance companies, registered
MPF schemes, securities and futures intermediaries (brokers), trust
corporations and persons of high net worth (individuals having a portfolio of
not less than $8 million).
2. Large investments. An offer in respect of which the minimum consideration
payable by any person for the shares (or in the case of debentures the
minimum principal amount) is not less than $500,000 is exempt.34
3. Small-scale offerings. Offers to not more than 50 persons or offers in respect
of which the total consideration payable for the shares or debentures does not
exceed $5,000,000 are exempt.35 However, the offer document for such offers
needs to contain a warning statement that the contents of the document have
not been reviewed by any regulatory authority in Hong Kong and that the
offerees must exercise caution and obtain independent professional advice
as appropriate. 36 To avoid abuse of this exemption through division of a
large offe1ing into smaller offerings, offers for the same class of shares or
debentures made by the company without a prospectus within any 12-month

29 More precisely, listed on a recognised stock market as defined in Securities and Futures Ordinance (Cap.571 ),
Sch.!, Pt.I, s.l: see also, Cap.32, s.2. On the question of whether it is appropriate for such offers to be wholly
exempt, see the comments at note 28 above, which are also relevant in the context of existing listed securities.
30 Cap.32, s.38AA. There is a statutory definition for "sn-uctured product" in Cap.32, s.2 and Securities and
Futures Ordinance (Cap.571) Sch. I, Pt. I, s. lA. That definition covers, inter alia, investments where the return
is determined by reference to changes in the price, value or level of some specified securities or commodities or
an index. An equity-linked note is an example of a structured product. Equity-linked notes are debt instruments
where the amount that the investor can recoup from the investment is based on the return of the underlying equity,
such as a basket of shares or a share index. More generally, the concept of a structured product is an investment
product whose value is determined with reference to the price or value of some underlying asset: see Stock
Exchange of Mong Kong Listing Rules r. I 5A.05.
" Cap.32, s.38(3)(c) and Sch. I7. The s.2 definition of "prospectus" also excludes prospectuses for offers within
Sch. I 7. Sch.17 was introduced by the Companies (Amendment) Ordinance 2004. For the background, see FSTB
and SFC, Co11sulta1io11 Paper 011Proposed Ame11dme11ts to the Companies Ordinance 10 Facilitate Offers of
Slwres and Oebenwres (March 2003); Co11sulta1io11 Co11c/usio11s(November 2003).
;, Cap.32, Seh.17 Pt. I, s.1.
;; Sec also Securities and Futures (Professional Investor) Rules (Cap.571D).
;, Cap.32, Seh.17 Pt. I, s.4.
" Cap.32, Sch.17 Pt. I, ss.2, 3.
"' For the precise contents of the warning statement, see Cap.32. Seh.18 Pt.3.
 PROSPECTUSES 763

period are to be counted together to determine whether the 50-person or $5

million thresholds are reached. 37
4. Offen; to underwriters.38

5. Takeovers and share buy-backs. Offers in connection with a takeover

or merger or a share buy-back which is in compliance with the Codes on
Takeovers and Mergers and Share Buy-backs are exempt.39
6. O.ffet~sfor no consideration. Offers to existing shareholders for no
consideration are exempt. That is, capitalisations of shares or bonus issues 40
do not require prospectuses. However, the offer document must also contain
the warning statement required for the small-scale offerings exemption.41
7. Offers to qualifying persons. "Qualifying persons" is defined in Sch.17 Pt.4,
and includes directors, employees, officers, consultants of a company and
their dependents. Non-renounceable offers to such persons by the company
or by a company in the same group are exempt.42 The offer document must
also contain a warning statement. 43
8. O.ffet~sby charitable institutions or educational establishments. Offers by a
charitable institution or trust of a public character44and offers by educational
establishments 45 are exempt,46 provided that the proceeds of the offer will
be applied towards the objectives of the charitable institution or trust or
educational establishment, as the case may be. Again, the offer document
must also contain a warning statement. 47
9. Offers by clubs or associations. Offers to members, or applicants for
membership, of a club or association are exempt, so long as the proceeds of
the offer are to be applied for purposes concerning the affairs of the club or
association. 48 The offer document must also contain a warning statement. 49
10. Share exchanges. Offers in respect of an exchange of shares in the same
company which does not result in an increase in the issued share capital of
the company are exempt. 50 Similarly, in respect of an exchange of debentures
of the same company which does not result in an increase in the aggregate

3' Cap.32, Sch.17 Pt.4, s.3.

38 Cap.32, Sch.17 Pt.I, s.5. See also para.16.015 above.
39 Cap.32, Sch.17 Pi.I, s.6.
'° Cap.32, Sch.17 Pt.I s.7. See also paras.14.151 and 14.152.
" Cap.32, Sch.18 Pt.3; see above.
" Cap.32, Sch.17 Pt. I s.8.
43 Cap.32, Sch.18 Pt.3; see above.
" As mentioned in s.88 of the Inland Revenue Ordinance (Cap.112). Such institutions and trusts are tax-exempt
under s.88.
" As defined in s.2(1) of the Sex Discrimination Ordinance (Cap.480).
46
Cap.32, Sch.17 Pt.I s.9.
" Cap.32, Sch.18 Pt.3; see above.
48
Cap.32, Sch.17 Pt.I s. I0.
" Cap.32, Sch.18 Pi.3; sec above.
5° Cap.32, Sch.17 Pi.I s.11.
764 FUND-RAISING BY PUBLIC ISSUE

principal amount outstanding under the debentures. The offer document must
also contain a warning statement. 51
11. Collective investments and SFC authorised documents. Offers in connection
with authorised collective investment schemes are exempt. 52 Offers in
advertisements, invitations or documents autho1ised by the Securities and
Futures Commission are also exempt.53

16.017 Public offerings falling into two or more exemptions exempt from prospectus
requirements. Except for small scale offerings, 54 the exemptions which are contained
in Sch.17 can be relied upon in combination so that public offerings falling wholly
within two or more categories of the exemptions would still be exempt from the
prospectus requirements. 55
16.018 Offers to persons outside Hong Kong disregarded for safe harbour purposes.
Offers to persons outside Hong Kong are disregarded in determining whether an offer
comes within a safe harbour. 56
16.019 Purpose of exemptions to clarify law and reduce compliance costs. The exemptions
introduced in Sch.17 in 2004 were intended to clarify the law and to facilitate
fund-raising by reducing compliance costs where full application of the prospectus
regime is thought to be unnecessary. For example, a number of the exemptions
addressed some of the uncertainties of the "offer to the public" test by specifically
exempting certain categories of what should be regarded as private offers (e.g. offers
to members of clubs, or offers to the company's officers and employees). Offers
to 50 or less persons are also exempted on the basis that they are in the nature of
private offe1ings;57 and offers seeking to raise $5 million or less are exempted as the
costs of imposing rigorous disclosure requirements are thought to be outweighed
by the benefits, considering the small impact of the offering on the investing public
generally. Exemptions are also provided where the offerees targeted are capable of
protecting their own interests without the need for a prospectus. This is most evident
in the case of offerees which are underwriters or institutional investors (banks, MPF
providers, etc.). More controversial is the inclusion of individual investors of high net
worth or who are subscribing for large amounts. However, exclusion of the need for
prospectuses for such investors has been justified on the basis that such persons have
the resources to obtain their own professional advice to protect their interests. Other
offers are exempted from the prospectus requirements because they are regulated
under the Securities and Futures Ordinance. This last category includes offers of
interests in collective investment schemes and also the exemption in relation to offers

51 Cap.32, Sch.18 Pt.3; see above.

52 Cap.32, Sch.17 Pt. I s. I2(a). Collective investment schemes are authorised under s. I04 of the Securities and
Futures Ordinance (Cap.571).
SJ Cap.32, Sch.17 PI.I s.l2(b).The SFC has power co authorise advertisements, invitations or documcms under
s.105 of the Securities and Futures Ordinance (Cap.571 ).
" That is, offers within ss.3 or4 of Pt. I ofCap.32, Sch.17.
" Cap.32, Sch.17 Pt.4 s.2.
" Cap.32, Sch.17 Pt.4 s. I(b).
" See also SFC, Offers of Securities and other fllves/mellls - Report of a Working Group (December 1991) (3.34).
 PROSPECTUSES 765

of structured products (introduced in 201158), both of which are regulated under the
Securities and Futures Ordinance.

2.2.2 Exemptions gnmtetl by SFC

SFC power to grant exemptions from compliance if not prejudicial to investing 16.020
public and compliance would be unnecessarily burdensome. Under Cap.32,
s.38A, the Securities and Futures Commission (SFC) has power to grant exemptions
from compliance with certain provisions of Pt.II. These are provisions on the
requirements for a prospectus to accompany application forms (s.38(3)): (i) contents
of prospectuses (ss.38(1 ), 38( IA), 38(7)); (ii) the application for registration of the
prospectus (s.38D(3), 38D(4)); (iii) minimum subscription (ss.42(1), 42(4)); (iv) time
for allotment of shares or debentures (ss.44A(1), 44A(2), 44A(6), 448(1), 448(2));
and (v) programme offers (Cap.32, Pt.I of Sch.21).59 Companies proposing to offer
shares or debentures may apply to the SFC for an exemption. The SFC may grant
an exemption (which can be subject to conditions) if the SFC considers that the
exemption will not prejudice the interest of the investing public and compliance with
the requirements of the relevant provisions would be irrelevant or unduly burdensome
or is otherwise unnecessary or inappropriate.60
SFC may also grant exemptions on own initiative. The SFC may also on its own 16.021
initiative, and on the same grounds, grant exemptions from compliance with the
above provisions for any class of companies or any class of prospectuses issued by
companies.61 Pursuant to this power, the SFC has published the Companies (Exemption
of Companies and Prospectuses from Compliance with Provisions) Notice (Cap.32L).
The Notice contains exemptions relating to bilingual prospectus requirements (s.4),
certain contents requirements of prospectus for GEM companies62 (s.5), valuation
reports (s.6), certain contents requirements with respect to debentures (ss.8, 9) and
requirements for hardcopy prospectus to accompany application forms (s.9A).

2.3 Contents of prospectuses

2.3.1 General co11te11ts

requirements
Information that needs to be included in prospectus. Cap.32 provides a detailed 16.022
checklist of information that needs to be included in the prospectus: Cap.32, ss.38( l ),
38(1A), 38D(2),63 Sch.3, and PU of Sch.18. If any prospectus is issued without
complying with ss.38(1) or 38(1A) (including Sch.3 and Sch.18), then the company

" See Securities and Futures and Companies Legislation (Structured Products Amendment) Ordinance (8 of
2011). For the background, see SFC, Co11sultatio11 Paper 011Possible Reforms to the Pmspect11sRegime i11the
Co111pa11iesOrdi11a11ce Regime i11the Sec11ritiesa11dF11wresOrdina11ce(October
a11dthe Offers of fove.'1111e111s
2009), and Cons11/tatio11 (April 20 I0).
Conc/11sio11s
59 Cap.32, s.38A(4).
6<l Cap.32, s.38A( I).
61
Cap.32, s.38A(2).
•2 These arc companies approved for listing on the Growth Enterprise Market (GEM) of the stock exchange: sec
para.16.112 .
•, Cap.32, s.38O{2) sels oul cer1ain fonnal requirements for a prospectus. For example, there are formatting
requirements for documents as imposed under ~s.38D(2)(c), 38D(7A).
766 FUND-RAISING BY PUBLIC ISSUE

and every person who is knowingly a party to the issue of the prospectus is liable to a
fine: Cap.32, s.38(1B).
16.023 Information about company and offering to be included in prospectus.
Schedule 3 requires the prospectus to contain information about the company's
business, the share capital of the company, directors and proposed directors, amount
payable for the shares, statement as to the gross trading income or sales turnover of the
company for the previous three financial years, as well as a host of other information
about the company and the offering.
16.024 General disclosure obligation for prospectus. Apart from the specific matters listed,
there is a general disclosure obligation contained in Cap.32, Sch.3, Pt.I, para.3. This
provision requires that "Sufficient particulars and information to enable a reasonable
person to form as a result thereof a valid and justifiable opinion of the shares or
debentures and the financial condition and profitability of the company at the time of
the issue of the prospectus, taking into account the nature of the shares or debentures
being offered and the nature of the company, and the nature of the persons likely to
consider acquiring them." The wording in the second part of the provision ("taking
into account ... ") was inserted by amendments made in 2004 64 to make it clear that
what information is required would depend on the nature of the particular securities
offered and the particular circumstances of the offer.

2.3.2 Reports
16.025 Reports to be included in prospectus include auditors' report. Part II of Sch.3
in Cap.32 sets out the reports that need to be included with the prospectus. Auditors
are required to provide a report on certain specified matters, including the profits
and losses and assets and liabilities of the company.65 If any of the proceeds of the
fund-raising will be used for the purchase of a business or an acquisition of another
undertaking, then a report by accountants is required in relation to the business or
undertaking. Where the company holds land or buildings with a value of not less
than $3 million, or where the value of the land exceeds 10 percent of the value of
the company's assets, then a valuation report is required with respect to the land and
buildings.

2.3.3 Experts' statements

16.026 Expert statement only to be included in prospectus with written consent of
expert. Where the prospectus contains a statement made by an expert, it is necessary
for the company to obtain written consent of the expert for the inclusion of the
statement in the prospectus: Cap.32, s.38C. An expert includes an engineer, valuer,
accountant and any other person whose profession gives authority to a statement
made by him or her.66

., Companies (Amendment) Ordinance 2004.

65 For the role or auditors and reporting accountants in a public offering involving a new listing on the stock
exchange, sec Jack Chow, "Role of Auditors/Reporting Accountants in New listings" in The Practitioner's
Guide to the Listing Rules of the Hong Kong Stock Exchange (1S12011) Ch.4.
66 Cap.32, s.38C(3).
 PROSPECTUSES 767

2.3.4 Amendments to prospectuses

Amending prospectuses. Prospectuses may be amended by an addendum to the 16.027
prospectus or by replacing the prospectus with a new prospectus. 67 The addendum or
new prospectus is to be regarded as a "prospectus" and so all the Cap.32 requirements
for prospectuses will apply accordingly.68

2.3.5 Programme offers

"Dual prospectus" structure possible for repeat or continuous offers starting with 16.028
primary "programme prospectus". Cap.32, s.398 and Sch.20 apply to facilitate
programme offers, namely offers made on a repeat or continuous basis or through
successive tranches. 69 In the absence of these provisions, a full prospectus is required
each time an offer is made in the series. The provisions in Sch.20 allow for a "dual
prospectus" structure. There must firstly be a programme prospectus, which is a
document containing such relevant information as the issuer thinks fit (but excluding
price, or any formula for calculation of price, of the shares or debentures). 70 When each
offer in the series is made, instead of requiring a full prospectus, the company may
issue an issue prospectus, which is a document containing such relevant information
as is not already contained in the programme prospectus. 71 The programme prospectus
and each issue prospectus together form the prospectus for the purpose of the Cap.32
provisions. 72 The programme prospectus and the issue prospectus concerned must
be made available to investors throughout the period during which the shares or
debentures are offered.73
Expiry of programme prospectus. The programme prospectus must expire before 16.029
the following dates: (1) first anniversary of the date of publication of the programme
prospectus; or (2) the date of publication of the next annual report and financial
statements of the company.74 Upon expiry, the shares or debentures can no longer be
offered or sold to the public.

2.4 Authorisation and registration of prospectuses

Formalities for prospectuses. Under Cap.32, s.38D( 1), a prospectus must not be issued 16.030
by or on behalf of a company unless the prospectus complies with the requirements
ofCap.32. Section 38D(l) ofCap.32 also requires authorisation of registration of the
prospectus, and registration of the prospectus, before a prospectus can be issued.

67 Cap.32, s.39A and Sch.20 s. I. For amendments to issue or programme prospectuses, see also Cap.32, s.398 and
the Sch.21.
"' See Cap.32, Sch.20 s.2.
69 The provisions were introduced in Cap.32 by the Companies (Amendment) Ordinance 2004: see FSTB and SFC,
Co11s11/tatio11
Paper on Proposed Amendments to the Companies Ordinance to Facilitate OJ]er!iof Shares and
Debenwres (March 2003) [5].
7
o Cap.32, Sch.21 ss. 1 and 2.
" Cap.32, Sch.2J ss.1 and 2.
72 Sec Cap.32. s.398 which allows the prospectus to consist of more than one document in accordance with Sch.21.
n Cap.32, Sch.21 s.7.
" Cap.32, Sch.21 s.8. If the offer is an offer of debentures and there is a guarantor corporation (see ss.38(7)-38(8)),
then the date of expiry of the prospectus is the earlier of any of the aforementioned dates or the date of the
publication of the next amrnal report and financial statements of the guarantor corporation.
768 FUND-RAISING BY PUBLIC ISSUE

16.031 Prospectus to be sent to Stock Exchange where company seeking listing. Prima
facie, the prospectus is required to be sent to the Securities and Futures Commission
(SFC) for authorisation by the SFC: Cap.32, ss.38D(3)-38D(5) 75 . However, where the
company is seeking listing of its shares on the Stock Exchange of Hong Kong, the
company should send the prospectus (listing document) to the Exchange. For such
companies, the Stock Exchange is responsible for pre-vetting and authorisation of
the prospectus, 76 although the Exchange would also pass on copies of the listing
documents to the SFC for the SFC's review.77
16.032 Prospectus to be registered once authorised. Once the prospectus has been authorised
and other requirements in Cap.32, s.38D are complied with, then the prospectus would
need to be registered by the Registrar: Cap.32, s.38D(7).

2.5 Electronic prospectuses

16.033 Prospectuses may be issued in electronic form. It is possible for companies to

issue prospectuses to potential investors in electronic form. For example, where
application forms are issued electronically (such as by downloading from a website),
the requirement in Cap.32, s.38(3) for the issue of a prospectus can be complied with
if the application form is attached to or accompanied by an electronic prospectus. 78
16.034 SFC provided exemptions from requirement of paper prospectus. To facilitate use
of technology, the SFC has provided for exemptions from the requirement for the issue
of a paper prospectus with a paper application form where an electronic prospectus
is available from the company's designated website and on the website of the stock
exchange. 79 Other conditions need to be met before the exemption is applicable,
including requirements for copies of the printed form prospectus to be made available
for collection at specified locations free of charge, and for the application fonn to state
how the electronic or printed form prospectuses can be obtained.

2.6 Applications and allotments

16.035 Cap.32 contains specific provisions for applications and allotments of shares
and debentures made following prospectus. General provisions and procedures on
allotments of shares are discussed in Chapter 14. Some specific provisions of Cap.32

" See also SFC, Guidelines 011 Applyi11gfor a Rela.mtio11 fi-om the Procedural Formalities to be Fu(filled upo11
Registratio11ofa Prospectus under tlte Companies Ordi11a11ce (Cap.32) (21 February 2003).
" Securities and Futures (Transfer of Functions - Stock Exchange Company) Order (Cap.571 AE).
77 Securities and Futures (Stock Market Listing) Rules (Cap.571 V) r.5; and see also the SFC and Stock Exchange's
Memorandum of Understanding Governing Listing Matters (MOU), 28 January 2003. Although the Exchange
has responsibility for authorisation of the prospectus and deciding whether or not to accept the application for
listing, the SFC has powers to object to the listing: see Securities and Futures (Stock Market Listing) Rules
r.6 and MOU, para.7.8. On recent developments regarding che roles of the SFC and Stock Exchange in listing
matters, sec SFC and HKEx, Joi11tCo11sultatio11 Paper: Proposed £nha11cementsto the Stock £xchcmge of
Hong Ko11glimited":,Decisio11-Maki11g a11dGovema11ceStrucwrefilr listing Regulation (Ju11e2016) cmd the
Joi11tConsultation Co11c/usions(September 2017).
'8 Sec generally SFC, Guideli11es filr £lectro11icPublic Offeri11gs(April 2003).
79 Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Cap.32L)
s.9A.
 PROSPECTUSES 769

in relation to applications for, and allotments of, shares or debentures made pursuant
to a prospectus are discussed below.

2.6.1 Minimum subscriptio11

Minimum capitalisation requirements for companies listing on stock exchange. 16.036
There are minimum capitalisation requirements for companies listing on the stock
exchange pursuant to the Listing Rules of the exchange, 80 but there are no general
minimum capitalisation requirements imposed under Cap.32. However, certain
requirements are imposed under Cap.32, s.42 in respect of an allotment of shares
offered to the public for subscription.
Amount payable for each share cannot be less than 5% of issue price. First, the 16.037
amount payable on application on each share must not be less than 5 percent of the
issue price of the share: Cap.32, s.42(3).
No allotment of share capital unless minimum amount of share capital 16.038
subscribed and paid for. Secondly, where there is an amount stated in the prospectus
as the minimum subscription amount for the purposes of para.7 in Pt.I of Cap.32
Sch.3, then unless that minimum amount of share capital has been subscribed, and
the sum payable on application for the amount has been paid to and received by the
company, no allotment of the share capital can be made by the company: Cap.32,
s.42(1). Paragraph 7 in Pt.I of Sch.3 allows, but does not compel, the directors to
set out a minimum amount to be raised for the purposes specified in the provision,
such as for the purchase of property or the repayment of loans out of the proceeds of
the issue of the shares. Section 42( I) of Cap. 32 applies only to the company's first
allotment of shares offered to the public for subscription: Cap. 32, s.42(6). Where an
allotment is made in contravention of s.42, the allotment is voidable at the instance
of the applicant for the shares within one month after the date of the allotment:
Cap. 32, s.44. 81

2.6.2 Time period for allotme11ts

Allotments can only be made from third day after issue of prospectus. Under 16.039
Cap.32, s.44A, allotments of shares or debentures in pursuance of a prospectus issued
generally 82 can only be made from the third day83 after the date of the first issue84 of the

•0 See para.16.124 below.

" Cap.32, s.44 sets out an alternative time period for the applicant's election to set aside the allotment, namely,
the period within one month after the holding of a statutory meeting if the company is required to hold such a
meeting. Before its repeal in 1984, s.112 of Cap.32 required public companies to hold a "statutory meeting"
within not less than one month but not more than three months after the company was entitled to commence
business. It appears that there was an oversight in not amending s.44 when s.112 was repealed. The reference to
statutory meeting in s.44 is now redundant.
82 "Issued generally" means an issue to persons who are not existing members or debenture holders of the company:
Cap.32, s.2.
8l In calculating this period, Saturdays, Sundays and general holidays (sec s.3 of the Interpretation and General
Clauses Ordinance (Cap. I)) arc disregarded: Cap. 32 , s.44A(7). On computing time generally, sec also s. 71 of
Cap. I.
8' A prospectus is first issued when it is issued as a newspaper advertisement; but if the newspaper advertisement is
not issued before the third day after the day on which it is first issued in any other manner, the day of first issue
is that day when the prospectus was first issued in any manner: Cap. 32, s.44A(3).
770 FUND-RAISING BY PUBLIC ISSUE

prospectus (or such later time as specified in the prospectus) and not later than 30 days
after the date of first issue.85The time when allotments can first be made is referred to
as the time of the opening of the subscription lists.86 Subscription lists are said to be
closed when allotments can no longer be made.

2.6.3 Allotments of shares or debentures to be listed

16.040 Allotments void if permission for listing on stock exchange not applied for before
third day after issue of prospectus. Where a prospectus issued generally 87 states that
application has been or will be made for permission for listing on the stock exchange,
an allotment of the shares or debentures is void if the pennission has not been applied
for before the third day after the first issue of the prospectus: Cap.32, s.44B(l). 88 If
permission is refused before the expiration of three weeks89 from the date of the closing
of the subscription lists, the allotments are also void: Cap. 32, s.44B(l). Subscription
monies need to be returned to the applicants for the shares or debentures in accordance
with s.44B(2) of Cap. 32.90

2.7 Misstatements in prospectuses

2.7.1 Civil liabilities

Introduction
16.041 Civil liability for misstatement in prospectus. Where the prospectus contains a
misstatement, civil liability can arise under:

• Cap.32, s.40;
• Securities and Futures Ordinance (Cap.571), ss.108, 213,245,277,281,305;
or
• common law principles on misrepresentation (supplemented by the
Misrepresentation Ordinance (Cap.284)).

16.042 Only general law remedies for innocent misstatements. For innocent
misstatements, it seems that only the general law remedies for misrepresentation
would be applicable.
16.043 General law and statutory liability for negligent or fraudulent misstatements.
For negligent or fraudulent misstatements, civil liability can potentially arise under
Cap.32, s.40; Securities and Futures Ordinance (Cap.571), ss.108, 277 and 281; as
well as under the general law on misrepresentations.

85 Cap.32, ss.44A( I), 44A(2).

s,; Cap.32, s.44A(I).
8' "Issued generally" means an issue to persons who arc not existing members or debenture holders of the company:
Cap.32, s.2.
88 For requirements on listing applications generally, sec para.16.112 below.
89 Or such longer period as notified by the stock exchange, not exceeding six weeks.
90 The money received from the applicants for the shares must be kept in a separate bank account so long as the
company may become liable to repay it under Cap. 32, s.448(2); see also Cap.32, s.448(3).
 PROSPECTUSES 771

Civil liabilities under Cap.32, s.40

Section 40 of Cap.32 applies when prospectus contains untrue statements. 16.044
Section 40 applies where a prospectus contains any untrue statement. Untrue statement
would include false statements, and under subsequent s.41 A of Cap. 32, also includes
statements which are misleading in the form and context in which they are included in
the prospectus, as well as material omissions.
Persons can recover compensation if subscribed for shares or debentures and 16.045
suffered resultant loss by reason of untrue statement. The persons who can
recover compensation under s.40(1) of Cap.32 are those who subscribed for shares
or debentures on the faith of the prospectus and who suffered loss by reason of the
untrue statement. 91 Section 40(7) and Sch.22 of Cap. 32 make it clear that persons
who acquire the shares or debentures by way of purchase or through an agent are
regarded as subscribers, as are persons who acquire the shares or debentures pursuant
to arrangements made between the company and intermediaries appointed for the
pmposes of the offer. A person can only claim compensation if there is causation-
that is the person had relied on the prospectus and the untrue statement caused the loss.
Persons who purchase shares on the secondary market are not subscribers and would
not be able to claim under that s.40.
Persons liable to pay compensation. The persons who are liable to pay compensation 16.046
under s.40( 1) of Cap.32 are any of the following:

• Directors of the company: Cap.32, ss.40(l)(a) and 40(l)(b). The directors

included are those who are directors at the time of the issue of the prospectus,
and those named in the prospectus (with their authorisation) as having agreed
to become a director of the company.
• Promoters of the company: Cap. 32, s.40(l)(c). "Promoter" is defined to
mean a promoter who was a party to the preparation of the prospectus, or of
the portion containing the untrue statement, but does not include any person
by reason of his acting in a professional capacity for persons engaged in
procuring the formation of the company.92
• Any person who has authorised the issue of the prospectus: Cap. 32,
s.40(l)(d). 93

Company considered to be "person authorising issue of prospectus" under 16.047

Cap.32, s.40. Section 40 does not expressly refer to the company that is raising funds
in the public offering; however, it would seem that the company would come within
s.40( I)( d) as a person authorising the issue of the prospectus.

9' Application under Cap.32, s.40 is made by the person entitled to receive compensation under that s.40: sec
Securities and Futures Commission v Qw1xi11gPaper Holdings Co Ltd (No.2) (2018] HKCFI 271, [2018] 1
HKLRD 1060, [44]-(45].
n Cap.32, s.40(5)(a). On prom0tcrs generally, sec Chapter 2.
9' The SFC and the stock exchange have regulatory functions in approving prospectuses (sec para.16.031 above),
but they are not regarded as persons authorising the issue of the prospectus for the purposes of the liability
provision: see s.40(1A).
772 FUND-RAISING BY PUBLIC ISSUE

16.048 Sponsors under Cap.32, s.40. Sponsors 94 are not expressly referred to either, although
they would likely come within the category of promoter in s.40(l)(c). Alternatively,
they might be regarded as persons who authorise the issue of the prospectus under
s.40(1)(d) on the basis of their role and duties in the preparation of the prospectus
under the listing rules. 95
16.049 Defences under Cap.32, s.40. Defences are set out in Cap.32, s.40(2):

1. No consent given to prospectus: Where the prospectus was issued without a

person's knowledge or consent, it is a defence if the person forthwith gives
public notice of that fact on becoming aware of the issue of the prospectus. 96
2. Withdrawal of consent:
a. For persons who have consented to be directors, it is a defence if the
person withdrew the consent before the issue of the prospectus and the
prospectus was issued without the person's authority or consent. 97
b. If, after the prospectuswas issued but before any allotmentsare made, a person
becomes aware of an untrue statement in the prospectus, it is a defence if the
person withdrew his consent to the prospectus and gave reasonable public
notice of the withdrawaland of the reason for the withdrawal.98
3. "Reasonable belief" defence: It is a defence if the person had reasonable
grounds to believe and did believe up to the time of the allotment that the
untrue statement was true.99 Directors are not expected to personally verify
the truth of all statements in the prospectus, but they are expected to make
enquiries and to obtain the opinion or report of competent people as to
the material facts in the prospectus. 100 There would not be any reasonable
grounds for belief in the truth of statements contained in the prospectus if
the director did not read the prospectus and simply relied on uncorroborated
information provided by a promoter selling to the company and on the fact
that the other directors had signed the prospectus. 101

" Sponsors are usually investment banks which are appointed by the company to assist with initial public offerings
by advising the company on the entire transaction and driving it forward to completion: see SFC, Co11s11ltario11
Paper on Possible Reforms 10 rite Prospectus Regime in tlte Companies Ordina11ce(August 2005) (15.3). It is
compulsory to appoint a sponsor for initial applications for listing: SEHK Listing Rules r.3A.02.
" See SEHK Listing Rules Ch 3A. The SFC takes the view that sponsors are within Cap.32, s.40( I)(d). It had
originally proposed amendments to Cap.32, s.40 to expressly confirm this (SFC, Co11s11/tatio11 Paper 011rite
Regularion of Spo11sors(May 2012)) but subsequently concluded that such legislative amendments were
unnecessary as sponsors should already be covered under the existing s.40 without any express reference to
sponsors: SFC, Supplememal Co11s11lratio11 Co11c/11sio11s011rite Reg11lario11of !PO Sponsors - Prospecrus
liabiliry (August 2014).
96 Cap.32, s.40(2)(b).
97 Cap.32, s.40(2)(a).

• 8 Cap.32, s.40(2)(c).
99 Cap.32, s.40(2)(d)(i).This defence docs not apply where the untrue statement was purportedly made on the authority

of an expert or of a public official document or st1tement (in which case, sec Cap.32, ss.40(2){d)(ii)-40(20(d){iii)).
As to how the defence applies in the case of material omissions, sec para.16.067 below.
100
Adams v11zrijl (1915) 2 Ch 21, 24.
161
Adams v11irij/ (1915) 2 Ch 21.
 PROSPECTUSES 773

4. "Reasonable reliance" defences:

a. For experts' statements which are untrue: It is a defence if the person had
reasonable grounds to believe and did believe up to the time of the issue
of the prospectus that the expert making the statement was competent to
make it and that the expert had given the consent required by Cap. 32, s.38C
(and had not withdrawn that consent before delivery of the prospectus for
registration, or to the person's knowledge, before allotrnent).'°2
b. For untrue statements made by an official person or contained in a copy
or extract from a public official document: It is a defence if the untrue
statement was a correct and fair representation of the statement, copy or
extract. 103
Experts may be liable for untrue statements. Experts who have consented to the 16.050
inclusion of statements made by them (Cap. 32, s.38C) may be liable as a person who
authorised the issue of the prospectus, but only in respect of any untrue statements
purporting to be made by them as expert and not in respect of other unh·ue statements
contained in the prospectus: Cap.32 s.40. The following defences under s.40(3) apply
for such an expert: 104

l. Withdrawal of consent:
a. The expert is not liable if the expert withdrew his or her consent in
writing before delivery of a copy of the prospectus for registration. 105
b. If, after the prospectus has already been delivered for registration but
alloh11entshave not been made, the expert becomes aware of the untrue
statement, it is a defence for the expert to withdraw his or her consent in
writing and give reasonable public notice of the withdrawal and of the
reason for the withdrawai. 106
2. "Reasonable belief" defence: It is a defence if the expert.proves that he or she
was competent to make the statement and had reasonable grounds to believe,
and did believe up to the time of alloh11entthat the statement was true. 107

Civil liabilities under securities and futures ordinance

SFO imposes civil liability for misrepresentation which has induced another 16.051
to subscribe for securities. Section 108 of the Securities and Futures Ordinance
(Cap.571) (SFO) imposes civil liability on any person who makes a fraudulent,

,o, Cap.32, s.40(2)(d)(ii). The defence applies to any untrue statement purporting to be a statement by an expert or
contained in what purports to be a copy of or extract from a report or valuation of an expert; but for the defence
10 be applicable, it is necessary for the untrue statement 10 be a correct and fair copy of or extract from the report
or valuation.
103 Cap.32, s.40(2)(d)(iii). The terms "official person" and "public official documcm" are not defined. The provision

would cover, for example, statements extracted from official Government documents.
"'' The defences under Cap.32, s.40(2) are inapplicable to such an expert.
,o, Cap.32, s.40(3)(a). Prospectuses are registered under Cap.32, s.38D: see parJ.16.032 above.
106 Cap.32,s.40(3)(b).
101
Cap.32,s.40(3)(c).
774 FUND-RAISING BY PUBLIC ISSUE

reckless or negligent misrepresentation 108 which has induced another to, inter alia,
enter into or offer to enter into an agreement to subsc1ibe for securities. 109 Section 108
does not apply, however, in any case to which Cap.32, s.40 applies. 110 If a company is
liable under s. l 08, then directors of the company will also be liable unless they prove
that they did not autho1ise the making of the misrepresentation. 111
16.052 Disclosure of false or misleading information may constitute market misconduct
under SFO. Section 277 of the SFO applies where a person discloses false or
misleading information as to a material fact that is likely to, inter alia, induce another
to subscribe for securities, where the firstmentioned person knows or is reckless
or negligent whether the information is false or misleading. Conduct within s.277
constitutes market misconduct under s.245 of the SFO, which can lead to civil liability
under s.281 to compensate persons who have suffered loss as a result of the conduct.
Section 298 of the SFO is the criminal counterpart of s.277 (confined to knowing or
reckless disclosures). Contravention of s.298 also gives rise to a similar liability to pay
compensation under later s.305 of the SFO.
16.053 Applications for compensation by persons who sustained loss. The civil remedies
for compensation under SFO, ss. I 08, 281, and 305 may only be invoked by the persons
who suffered the loss in question. 112
I 6.054 SFC's right of action to obtain compensation for investors. Section 213 of the SFO
gives the Securities and Futures Commission (SFC) a right of action to seek various orders
where there is contravention of the "relevant provisions" (defined in SFO Sch. I Pt. I s. l
to mean, inter alia, the provisions of the SFO and the Cap.32, Pt.II and Pt.XII prospectus
provisions). Section 213 confers on the SFC, as regulator, a substantive statutory cause of
action to obtain civil remedies for the benefit of investors, who may otherwise be deterred
by cost and other considerations from instituting legal proceedings. 113 Proceedings under
s.213 are the pub! ic law analogue of actions for damages by individuals under s.305 of
the SFO. 114 It is um1ecessary for there to be a declaration of contravention of the relevant
provisions made in separate market misconduct or criminal proceedings before remedies
may be obtained under that s.213. Where the SFC brings proceedings under s.213, the
court is entitled to make a declaration that ce1tain acts have been done which found
jurisdiction under s.213 even though the acts may constitute criminal offences. 115 The
remedies available under s.213 include orders to restore parties to a transaction to the

'°' See Securities and Futures Ordinance (Cap.571 ), s. I08(7) for definitions of the terms "fraudulent
misrepresentation", "reckless misrepresentation" and "negligent misrepresentation".
109 "Securities" includes shares: Securities and Futures Ordinance (Cap.571) Sch. I, Pt. I. As to s. I08, see DBS Bank
(Hong Kong) Ltd vSit PanJit [2016] 5 HKC 104 (CA).
110 Securities and Futures Ordinance (Cap.571), s. I08(4).
111
Securities and Futures Ordinance (Cap.571 ), s. I08(2).
112 Securities and F11t11res Commission v Q1111xingPaper Holdings Co Ltd (No.2) [2018] HKCFI 271, [2018] I
HKLRD I060, [44)-(45].
113 Securities and Futures Commission v Q,mxing Pt,per Holdings Co Ltd (No.2) [2018] HKCFI 271, [2018] 1
HKLRD I060, [45)-(50].
'" Securities and Fuwres Commission v Tiger Asia Management LLC (2013) 16 HKCFAR 324, [16].
"' Securities and Futures Commission v Tiger Asia Management LLC (2013) 16 HKCFAR 324, [ 17]. In proceedings
under s.213, the civil court is not making an actual declaration that a criminal offence has been committed though;
that is a matter for the criminal court should criminal proceedings be instituted in respect of the same c-0nduct.
 PROSPECTUSES 775

position in which they were in before the transaction was entered into (s.213(2)(b)) and
orders for damages (s.213(8)).

SFC v Q1mxi11gPaper Holdi11gscase. In Securities and Futures Commission v 16.055

Qunxing Paper Holdings Co Ltd (No.2),116 a listed company published materially false
or misleading infonnation concerning its financial results in its IPO prospectus and in
subsequent annual reports and results announcements. The misstatements were in respect
of overstated turnover and overstated sales, resulting in overstated profits; and failures
to disclose bank borrowings. The court held that the company engaged in disclosme of
false or misleading information inducing transactions within SFO, ss.277 and 298 and
also that the IPO prospectus contained untrue statements in contravention of Cap.32,
s.342F (the equivalent of Cap.32, s.40A for foreign companies issuing prospectuses in
Hong Kong). Hence the company had contravened "relevant provisions" for the purpose
of s.213 of the SFO. The court granted orders under s.2 l 3(2)(b) requiring the defendants
(i.e. the company, the company's subsidiary and two executive directors of the company)
to make payments to shareholders, with a view to restoring them to the positions in which
they were before their subscription or purchase of the company's shares or warrants.
Honte.xcase: In a case brought against Hontex International Holdings Company Ltd 16.056
(Hontex) by the SFC, the court made orders requiring Hontex to make a repurchase
offer to investors who subscribed for Hontex shares in the initial public offering or
who purchased the shares on the secondary market. 117 The orders were made following
the parties' signing of a statement of agreed facts where Hontex acknowledged it had
contravened s.298 of the SFO. Hontex acknowledged that it was reckless in allowing
materially false or misleading statements to be made in the prospectus which materially
overstated its turnover, profits before tax, and the values of its cash and cash equivalents.
SFC has standing to seek winding up of company. In Re China Metal Recycling 16.057
(Holdings) Ltd (No.3),118 the company concerned engaged in an IPO and was listed
on the Stock Exchange. In proceedings brought by the SFC against the company, the
court found that the company had entered into a series of fictitious transactions which
led to a significant overstatement of its revenue and profits. The court considered that
this was done in order to advance the IPO and induce investors to subscribe for shares;
with those in charge of the company perpetrating a massive fraud on investors. The
com1 accepted that there would appear to have been serious contraventions of SFO,
s.298 and granted the SFC's application to wind up the company on public interest
grounds pursuant to SFO, s.212.

Liabilities under general law of misrepresentation

Right to rescind contract for misrepresentation under common law. Under the 16.058
common law, a person who was induced into a contract by a misrepresentation has a
right to rescind the contract. 119

116 [2018) HKCFI 271, (2018) I HK.LRD 1060.

117
SFC, "Hontex Ordered to Make $ 1.03 Billion Buy-back Offer Over Untrue lPO Prospectus" (Press Statement
20 June 2012).
'" (2015) 2 HKLRD 415.
119 Urquhart v Macpherson ( 1878) 3 App Cas 831; Abram Steams/tip Co Ltd v Westvi/le Shippi11g Co Ltd [ 1923)

AC 773.
776 FUND-RAISING BY PUBLIC ISSUE

16.059 Damages available for misrepresentation. Damages are also available pursuant to
the following actions: 120

121
• in the tort of deceit in relation to fraudulent misrepresentation;
• in the tort of negligence 122 or under the Misrepresentation Ordinance
(Cap.284), s.3(1) in relation to negligent misrepresentations; and
• pursuant to Misrepresentation Ordinance (Cap.284), s.3(2) in relation to
innocent misrepresentations.

16.060 Necessary to prove actual fraud to establish civil liability in deceit; easier to establish
liability under Misrepresentation Ordinance. To establish civil liability in deceit, it is
necessary to prove actual fraud, namely that the person made the false representation:
(1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be
true or false. 123 However, where damages are sought, the plaintiff can simply rely on
Misrepresentation Ordinance (Cap.284), s.3(1). Instead of the plaintiff being required
to establish the element of fraud, the burden is placed on the defendant to show that he
had reasonable grounds to believe and did believe that the facts represented were true. 124
16.061 Company primary party to be held liable under common law misrepresentation for
misstatements in prospectus. Under the common law principles of misrepresentation,
the company is the primary party who may be liable. Previously, it had been held that
a shareholder's right to damages against the company is lost if the right to rescission
has been lost, 12; but this principle is now overridden by Cap.32, s.40B. Section 40B
provides that a person is not debarred from obtaining damages or other compensation
from a company by reason only of: (a) his holding (or having held) shares in the
company, or (b) his having any right to apply or subscribe for shares, or to be included
in the register of the company in respect of shares.
16.062 Directors may also be personally liable for common law fraudulent
misrepresentation. Where the element of deceit can be established against the
directors, then they will also be personally liable w1der the common law for fraudulent
misrepresentations made in the prospectus. 126 However, ordinarily it seems that
directors would not be liable for negligent misstatements contained in the prospectus
under the common law.127

Statements of opinion/intention
16.063 Only incorrect statements of fact amount to misstatement or misrepresentation.
There is no misstatement or misrepresentation purely where an opinion tw-ns out to

120 See generally, e.g., HG Beale (ed.), C/riuy 011Co111rac1s(31st edn, Sweet and Maxwell, London, 2012).
121 Deny v Peek ( I889) 14 App Cas 33 7.
'" 1/edley Byme & Co lid v Heller a11dPar111ers Ltd [ 1964) AC 465.
l2l Deny v Peek (1889) 14 App Cas 337, 374; Lee YukShing v Dianoor International lid (in liq) (2016) 4 HKC535
(CA).
11' See 1,eeYr,kShi11gv Dianoor lntematio,u,t Ltd (in liq) [2016) 4 1-TKC535 (CA).
"' Houldswor1h v City of Glasgow Bank (1880) 5 App Cas 317.
11• Deny v Peek (1889) 14 App Cas 337.
121 Cf. Williams v Natural Life Health Foods Ltd (1998) I WLR 830.
 PROSPECTUSES 777

be false or where a stated intention is not carried out. In other words, only incorrect
statements of fact can amount to a misstatement or misrepresentation. 128
Still misstatement of fact where statement of intention made without belief that 16.064
intention will be carried out. However, where a person makes a statement of his
or her intention, there is a statement of fact which is impliedly made by the person,
namely that the person intends to cany out the stated intention at the time of making
the statement. Thus, where a person makes the statement of intention without belief
that the intention will be carried out, there is a misstatement of fact: Edgington v
Fitzmaurice.'29 Tn that case, the prospectus stated that the object of the issue of
debentures was to finance the extension of the company's buildings, to purchase
horses and vans and to develop the trade of the company. The real purpose of the issue
though was to raise funds to enable the company to pay off certain debts. The court
held that there could be liability in the tort of deceit in those circumstances.
Statement of opinion could also amount to misstatement of fact. Similarly, if a 16.065
statement of opinion is made, then the person impliedly makes a statement of fact,
namely that the person does in fact hold the opinion, and that the person has reasonable
grounds for the opinion. If either of those two implied facts is false, then there could
be an actionable misrepresentation. 130
Similar liability under SFO s.107. For liabilities under Securities and Futures 16.066
Ordinance s.107, the above approach is confirmed by that s.107(8).

Omissions
Liability for material omissions under Cap.32. Under the general law of 16.067
misrepresentations, mere silence or the failure to disclose facts does not amount to a
misrepresentation. 131 However, material omissions can lead to liability under Cap.32,
s.40: see also s.41A(2) of Cap.32. While it is appropriate to impose liability for
material omissions, there is difficulty in applying the reasonable belief defence in
Cap.32, s.40(2). In Shepheard v Broome, 132 the directors honestly believed that certain
contracts were not material and need not be disclosed in the prospectus. However, it
was held that the defence of reasonable belief as to the truth of the statement did not
apply; the directors knew of the contracts and knew that they were not disclosed-this
was sufficient for there to be liability. 133
SFO also applies to material omissions. Securities and Futures Ordinance (Cap.571), 16.068
s. l 08 also applies where there is an omission of a material fact that results in a
statement being false or misleading, 134 and that SFO, s.277 also covers information
that is false or misleading through the omission of a material fact. 135

128 Bisset v Wilki11son[1927] AC 177.

129 (1885) 29 Ch 0459.
1
J<J Smith v Land tmd House Property Co,7, (1884) 28 Ch D 7.
1
" Sec e.g. Rvl<)dsa111[1932] I KB442,447.
"' [ I904] AC 342.
"' Shepheard v Broome [ 1904] AC 342, 347.
1
-" Securities and Futures Ordinance (Cap.571 ), s.108(7).
1
" Securities and Futures Ordinance (Cap.571 ), s.277( I )(c).
778 FUND-RAISING BY PUBLIC ISSUE

16.069 Liability for partial truths or misleading statements. In the case of partial truths
or statements literally true but which give rise to a misleading impression, it seems
that there could be a misrepresentation under the general law as well as liability
under statute. In R v Kylsant, 136 the prospectus stated that the company had paid
dividends every year between 191 1 and 1927. This was true, but the prospectus did
not disclose that the company suffered substantial trading losses for a number of
those years and that the company was only able to pay dividends because of income
of a non-recurring nature earned during the special circumstances of the war period.
Taken as a whole, the prospectus gave a false impression of the financial position
of the company. The court accepted that the prospectus contravened a statutory
provision prohibiting the making of statements which are "false in any material
particular". This approach is confirmed under Cap.32, as that s.41A(l)(a) provides
that a statement included in a prospectus is deemed to be untrue if it is misleading
in the form and context in which it is included. The concept of "misleading or
deceptive" statements in the SFO, ss. l 07 and 277 would also cover statements
literally true but which give rise to a misleading impression. 137

Liability for reports by third parties

16.070 Company can still be held liable when prospectus based on expert's report.
Under the common law, it has been held that where the company issues a prospectus
containing extracts from a report made by a third party expert or containing statements
based on the expe11's report, an action in misrepresentation can still lie against the
company arising from misrepresentations in the report as the share allotment is made
pursuant to a contract that is formed on the basis of representations set out in the
prospectus: Re Pacaya Rubber and Produce Co Ltd. 138The court in that case accepted,
however, that the company would not be liable for the misrepresentations where the
company makes it clear in the prospectus that it is not vouching for the accuracy of the
report quoted or referred to in the prospectus.
16.071 Any statement in report or memorandum on face of, incorporated into or issued with
prospectus considered part of prospectus under Cap. 32. Under Cap.32, s.41A(l)(b),
a statement is deemed to be included in a prospectus if it is contained in any report or
memorandum appearing on the face of the prospectus or by reference incorporated in
the prospectus or issued with the prospectus. Accordingly, there could be liability w1der
s.40 for untrue statements included in reports of third parties which are included in or
accompanying the prospectus or incorporated in the prospectus by reference.
16.072 SFO s.108 applies where misrepresentation made by person. Section 108 of
the SFO applies where a "misrepresentation" has been made by a person. It may
be that the analysis in Re Pacaya Rubber is also relevant under s. l 08. That is, unless
the company has warned in the prospectus that it does not vouch for the accuracy of
the contents of the report, the company would be treated as holding out the truth of the
contents. In this way, the company can properly be regarded as also being a party who

136 [ 1932] I KB 442. See also Dimmock v Ha lieu ( I 866-67) LR 2 Ch App 21.
131
See Demagogue Pry Ltd v Roment~y (I 992) 39 FCR 31.
138
(1914] I Ch542.
 PROSPECTUSES 779

makes the representation. If the representation is false, then the company has made a
misrepresentation within that s. l 08.

SFO s.277 liability for persons who disclose, circulate, disseminate or concerned 16.073
in disclosure of false or misleading information. Securities and Futures Ordinance,
s.277 can apply to impose liability on a person who, inter alia, discloses, circulates,
disseminates or is concerned in the disclosure, circulation or dissemination of the false
or misleading infonnation. It is arguable that by including extracts from or statements
based on a false rep01t the company has circulated or disseminated the false information.

Reliance, causation and damages

Common law remedy available only if plaintiff relied on misrepresentation. 16.074
Under common law principles of misrepresentation, a remedy would be available to
the plaintiff only if the plaintiff relied on the misrepresentation in entering into the
contract; however, it is not necessary for the misrepresentation to be the sole factor
influencing the plaintiff to contract. 139
Person who acquires shares on faith of misleading prospectus can recover 16.075
compensation under Cap. 32 s.40. Under Cap.32, s.40, a person who acquired
shares on the faith of the prospectus can recover compensation for the loss sustained
by reason of the untrue statement contained therein. This requirement also indicates
that there must be a causative connection between the loss and the untrue statement
before compensation is available. 140
Person can recover damages if induced by misrepresentation to acquire shares 16.076
under SFO s.108. Similarly, under Securities and Futures Ordinance s.108, a person
can recover damages only if the person was induced by the misrepresentation into
entering into the agreement to acquire the shares. The causative connection bet\veen
the misrepresentation and the loss also needs to be satisfied for a person to seek
compensation under SFO, ss.277 and 281. However, where the SFC is seeking
a remedy under s.213(2)(b) of the SFO in favour of the relevant class of investors
generally, it may not be necessary to investigate the circumstances of every individual
investor and investment to establish reliance and inducement, as to do so would render
the statutory remedy of s.213 ineffective. 141
Damages available difference between price paid and true value of shares. The 16.077
amount of damages recoverable would generally be the difference between the price
paid for the shares and the true value of the shares at the time of the acquisition. 142
Liability would not ordinarily extend to cover losses caused by a fall in the market, 143
although it may be otherwise in the case of fraudulent misstatements. 144

"9 Edgi11gto11v Fitzmaurice (1885) 29 Ch D 459.

1
<-0 See fur1herMacleay II Tait (1906] AC 24; !11go1Capital Market Investments Pty Ltd v Macquarie Equity Capital
Markets Ltd (2008) 68 ACSR 595.
1
" Securities and Futures C-0mmissio11v Qunxi11g Paper Holdings Co Ltd (No.2) [2018] HKCFI 271, [2018]
I HKLRD 1060, [60]. On the Qu1cti11gcase, see further para.16.055 above.
142
McC01111el/11 Wright (1903] I Ch 546; Clark v Urqhart [ 1930]AC 28; Polls II Miller (1940) 64 CLR 282.
1
" Bastian v Petren Resources Co,p 892 F 2d 680 (7th Cir 1990), 685; South Australia Asset Ma11ageme11tCo,p v
l'<>rkMontague Ltd [ I997] AC I9 I.
144
Smith New Court Securities Ltd v Ci1iba11kNA [1997) AC 254; Securities and F11111res Commission v Q1111xi11g
Paper Holdings Co Ltd (No.2) [2018) MKCFI 271, [2018) I MKLRD 1060, [65).
780 FUND-RAISING BY PUBLIC ISSUE

Third parties relying on prospectus

16.078 Investor who purchases shares on secondary market in reliance on prospectus
could not make claim for misrepresentation historically under common law.
Traditionally, the function of the prospectus is to invite persons to subscribe for shares
in the company pursuant to the public offer and so the prospectus is only intended
to be relied upon by the subscribers who are allotted shares by the company. 145 On
this traditional view under the common law, generally an investor who purchases
the shares on the secondary market in reliance on the prospectus would not be able
to claim against the company in respect of any misrepresentations contained in the
prospectus. 146 However, the company could be liable to a third party pursuant to the
general test for liability to third parties for negligent misstatements. 147 It has also been
suggested that if there is evidence to show that a prospectus or prospectuses generally,
in light of changed market practice, was issued with a purpose to inform and encourage
purchases following an IPO (namely after-market purchases), then it is arguable that a
duty of care is assumed by the company owed to those investors who, as intended, rely
on the contents of the prospectus in making such purchases. 148
16.079 Purchasers in secondary market who rely on misleading prospectus cannot seek
compensation under Cap. 32. Under Cap.32, s.40, only persons who subscribe for
shares on the faith of the prospectus can seek compensation under the section. Similar
to the common law, purchasers in the secondary market who relied on the prospectus
cannot seek compensation under s.40 for any misstatements contained therein. 149
16.080 SFO s.108 may cover secondary market purchasers of shares. Under s.108 of the
SFO, a person can seek damages if the person was induced by the misrepresentation
into, inter alia, acquiring or subscribing for shares. Section 108 therefore covers
situations where a person purchased shares in reliance on the misrepresentation.
However, it is not entirely clear whether the section would cover purchasers in the
secondary market who relied on a prospectus provided for the primary market. The
requirement that the plaintiff seeking recovery be "induced" by the misrepresentation
might indicate that the representor must have intended the plaintiff (or a class of
persons including the plaintiff) to rely on the representation before there is liability.
If that is the case, then it could be argued that the company only intends persons
subsc1ibing for shares to rely on the prospectus. On the other hand, s. l 07 of the SFO
refers to (criminal) liability where a misrepresentation is made "for the purpose of
inducing another person" to acquire shares, while s.108 simply refers to a person being
"induced" by the misrepresentation. It might be argued then that s. l 08 is applicable

145 PeekvGumey(1873)LR6ML377.
146
Peek v Gumey (1873) LR 6 ML 311,AI-Nakib lnvest111e111s (.let:fey) Ltd v lo11gcroji [1990) I WLR 1390.
147
AI-Nakib /11vestme11ts (.let:fey) Ltd v lo11gcmji [ 1990) I WLR 1390; Caparo Industries Pie v Dickman [1990) 2
AC 605 (discussed in Chapter 11 in the context of auditors' reports).
148
Andrews v Mock.ford (1896) I QB 372; Ingot Capital Mtirket /11vestme11tsPty Ltd v Macquarie Equity Capiu,I
Markets Ltd (No.6) (2007) 63 ACSR 1, [1118)-(1122).
"' Cap.32, s.40(7) and Sch.23 clarify that persons subscribing for shares or debentures include persons who
purchase shares or debentures pursuant to an offer in a prospectus-for example where the public offering is
made by the company through an intermediary (where the company sold the shares 10 the intermediary which
offers the shares for sale to the public). However, the expanded definition of"persons who subscribe" for shares
or debentures is not intended to cover persons who purchase the shares in the secondary market.
 PROSPECTUSES 781

so long as the plaintiff relied on the misrepresentation into acquiring the shares, even
though the company did not have the purpose of inducing him or her to acquire the
shares on the basis of the misrepresentations.
SFO s.277 may also cover secondary market purchasers of shares where 16.081
purchase is close in time to the issue of prospectus. Section 277 of the SFO applies
where the disclosure of the false or misleading information "is likely to induce
another person to subscribe for securities" or "likely to induce the sale or purchase
of securities". It is arguable that information contained in a prospectus is likely to
induce sales or purchases as well as a subscription for shares. Section 277 does not
appear to require there to be any intention to induce a sale or purchase and so even
though the prospectus might only be intended to be relied upon by subscribers, it is
arguable that purchasers on the secondary market who relied on the prospectus can
recover compensation under ss.277 and 281. However, the prospectus would only
be likely to induce sales or purchases within a period close to the time of the public
offering. The greater the lapse in time between the transaction and the time when
the subscription period in the public offering closed, the less likely would there be
liability under s.277 in respect of secondary trading.
SFO s.213 and secondary purchases on market: Qunxi11gcase. In Securities and 16.082
Futures Commission v Qunxing Paper Holdings Co Ltd (No.2), 150 the investors who
were entitled to compensation under the SFO as s.213(2) covered both subscribers in
the IPO and purchasers on the secondary market. It appears that this was on the basis
both that:

( 1) apart from misstatements in the prospectus, the company had disclosed

false or misleadinig statements in annual returns and announcements after
the IPO; and
(2) the court considered that for the purpose of s.213, in the circumstances of
the case, it was unnecessary (and indeed inappropriate) to establish reliance
and inducement on an individual basis in the case of each investor.151

The court noted that even if an investor did not him or herself read the IPO prospectus,
a1mual reports and results announcement, the relevant information would have found
its way into market commentaries and would have been reflected in market sentiments
about the company's shares and ultimately in the prevailing share price. 152

2.7.2 Criminal liabilities

Introduction
Criminal liability for misstatements. There can be criminal liability for misstatements 16.083
contained in prospectuses under:

• Cap.32, s.40A;

150 (2018) HKCFI 271, (2018) I HKLRD 1060. See paras.16.054 and 16.055 above.
151 See para.16.076 above.
'" (2018) HKCFI 271, (2018) I HKLRD 1060, (60].
782 FUND-RAISING BY PUBLIC ISSUE

• Securities and Futures Ordinance (Cap.571), ss.107 and 298; or

• general offences under the criminal law.

Criminal liabilities under Cap.32, s.40A

16.084 Any person who authorises issue of prospectus that contains untrue statements
commits offence. Where a prospectus includes any untrue statements, any person
who authorised the issue of the prospectus commits an offence unless he or she proves
either that:

• the statement was immaterial; or

• that he or she had reasonable grounds to believe and did up to the time of
the issue of the prospectus believe that the statement was trne: Cap.32,
s.40A_1s3

16.085 Cap. 32, s.40A covers negligent and fraudulent misstatements. Criminal liability
under Cap.32, s.40A covers both negligent and fraudulent misstatements. 154 In the case
of material omissions, it seems that there could be liability where the defendant knew
that the information was omitted, even though there was a reasonable and honest belief
that the information was not material. 155
16.086 Unclear which persons would be categorised as having "authorised the issue"
of prospectus. As is the case under s.40, the scope of the persons who "authorised
the issue" of the prospectus is not entirely clear. 156 It seems that the directors of the
company whose shares or debentures are offered would be covered by the provision
and arguably also the company itself. Experts who have consented to the inclusion of
statements made by them under s.38C of Cap.32 are not by that reason alone to be
regarded as persons who have authorised the issue of the prospectus. 157 While experts
may be civilly liable for untrue statements made by them, they would not be criminally
liable for their untrue statements.
16.087 Liability under Cap.32, s.40A for false representations of director's interest in
company where shareholdings were being held beneficially for him. In HKSAR v
Chiang Lily, 158 the prospectus stated, amongst other things, the shareholdings of
an executive director (Chiang) and of a personal assistant to Chiang. The court
accepted that the personal assistant's shares were held beneficially for Chiang,
and that accordingly the prospectus contained false representations about Chiang's

'' 3At the time of writing, the SFC is considering amending s.40A to place the burden of proof on the prosecution
in resI>ectof materiality and lack of reasonable grounds: see SFC, Co11sultatio11 Paper 011Jlte Regulatio11of
Sponsors(May 2012).
''' For an example of an Australian case where there was criminal liability for false or misleading statements in the
prospectus, see Flavel v Giorgio ( 1990) 2 ACSR 568.
"' Sec Shepheardv Broome [ 1904) AC 342, discussed at para.16.067 above.
"• The SFC is also considering expressly including sponsors within s.40A of Cap.32: SFC, Co11sulta1io11 Paper 011
the Regulation ofSpo11sors(May 2012).
"' Cap.32, s.40A(2}. The SFC and the stock exchange are also excluded; see also Cap.32, s.40A(3).
" 8 [2013) 3 HKLRD 18.
 PROSPECTUSES 783

interests in the company. (The apparent purpose was to avoid the application of
the moratorium period in the Listing Rules on the disposal of the director's shares
after listing.) Chiang and the other executive director of the company were held to
have contravened Cap.32, s.342F (the equivalent of Cap.32, s.40A for companies
incorporated outside Hong Kong) for having authorised the issue of a prospectus
containing untrue statements.

Criminal liabilities under Securities and Futures Ordinance

SFO, s.107 liability for fraudulent or reckless misrepresentation. Section I 07 of 16.088
the SFO imposes criminal liability on a person who makes a fraudulent or reckless
misrepresentation for the purpose of inducing a person, inter alia, to enter into an
agreement for acquisition or subscription for securities. Where a company is liable
under s. l 07, then officers of the company might also be liable under principles of
accessorial liability set out in s.390 of the SFO.
SFO, s.298 criminal counterpart to civil provision under s.277. Section 298 of 16.089
the SFO is a criminal provision equivalent to the civil liability provision in s.277.
However, s.298 does not cover negligent misstatements. On ss.277 and 298 of the
SFO, see para. J 6.052 above.159

Other criminal liabilities

General criminal offences relating to fraud could be relevant. Apart from the 16.090
above provisions specifically dealing with fraudulent misstatements in prospectuses or
disclosed in connection with acquisitions of securities, other general criminal offences
relating to fraud could also be applicable, such as Theft Ordinance (Cap.210), s. J6A
or the common law offence of conspiracy to defraud. 160

2.8 Sales of shares

Cap. 32 prospectus regime limited to offers or invitations made by company 16.091

whose shares or debentures being offered. The prospectus regime in Cap.32 Pt.II
generally applies only to offers or invitations made by the company whose shares
or debentures are being offered, as the basic requirements in Cap.32, s.38(1) as to
contents of prospectuses and in that later s.38D( 1) for the registration of prospectuses
only apply to prospectuses "issued by or on behalf of a company". 161 The definition
of prospectus in s.2 does include prospectuses containing offers to the public for both
subscription and purchase. When this definition was first introduced in the United
Kingdom in the Companies Act 1900, it was said that the prospectus provisions would
apply to prospectuses offering shares or debentures for sale, such as where they are

159
See also Sec11rities and F11tures Commission v Q1111xi11g Paper Holdings Co Ltd (No.2) [2018] HKCFI 271,
(2018] I HKLRD 1060
1
.0 Sec, e.g., IIKSAR v Ho Wing Cheong (unrcp., CACC 283/2007, (2009] HKEC 2048) (leave to appeal refused:
(unrcp., FAMC 10/2010, (2010] HKEC 1045); HKSA R v Chiang Lily (2013] 3 HKLRD 18.
161
Also, the liability provision in s.40 for misstatements imposes liabililics on the directors and promoters of the
company, indicating that the provisions apply for prospectusesissuedby the company whose sharesor debenrure.s
are offered.See also Betty Ho, Public Companies and their Equity Securities: Principles of Regulation under
Hong Kong law (Kluwer Law International 1998) I 05-106.
784 FUND-RAISING BY PUBLIC ISSUE

taken by financiers and then offered for sale. 162 However, the prospectus regime would
not generally catch secondary sales as offers for sales in the secondary market would
not be made by shareholders on behalf of the company.
16.092 Anti-avoidance: deemed prospectuses for certain offers for sale under s.41 of
Cap.32. There is an express provision in s.41 explicitly dealing with sales of shares.
Section 41 is an anti-avoidance provision which is intended to confirm the application
of the prospectus regime where companies first place the shares with another entity
who would then make an offer to the public for the sale of shares to investors. Under
s.41(1), where a company allots (or agrees to allot) shares or debentures with a view
to the shares or debentures being offered for sale to the public, any document by which
the offer for sale to the public is made is deemed to be a prospectus issued by the
company. Thus, where the document (the deemed prospectus) does not comply with
previous ss.38 and 38D of Cap.32, there is contravention by the company of those
provisions.
I 6.093 Company deemed to have intention to sell shares to public if offer for sale to public
made within six months of company allotting shares under Cap.32, s.41. It may be
difficult to prove the intention of the company, and thus (rebuttable) presumptions of
the proscribed intention are set out in s.41(2) of Cap.32. Under s.41(2)(a), where an
offer for sale of the shares or debentures is made to the public within six months after
the allotment of the shares or debentures by the company (or within six months after
the agreement to allot), then the company will be treated as having made the allotment
(or agreement to allot) with the intention of the shares or debentures being offered
for sale to the public, unless the contrary can be proven. The rebuttable presumption
also arises if at the date when the offer for sale was made, the whole consideration to
be received by the company in respect of the shares has not been received: Cap.32,
s.41 (2)(b ).
16.094 Scope of Cap.32, s.41 may be too wide. While this Cap.32, s.41 is important as
an anti-avoidance provision, the provision might be wide in hindering transactions
that might not be objectionable from a regulatory standpoint. 163 For example,
s.41 might catch a sale in the secondary market of listed shares acquired by
an underwriter pursuant to an underwriting commitment in a public offer by
the company even where the original public offer was made with a registered
prospectus. From a policy perspective, there is no need for the secondary sales to
be deemed to be made pursuant to a prospectus as the position is no different to
any sale in the secondary market of listed shares that had originally been issued
on the basis of a prospectus.
16.095 Offers to public may be prohibited under SFO, s.103. Offers or invitations to
the public to acquire (including purchase) shares may also be prohibited under
s. l 03 of the SFO, although the prohibition is subject to exceptions as listed in the
section.

"' Francis Bcauforl Palmer, CompaniesAcr 1900 (2nd cdn, Stevens and Sons Ltd 190 I) 24-25.
"' SFC, ConsultarionPaper on PossibleReforms lo rhe ProspecrusRegime in the CompaniesOrdinance(August
2005) ( I 3.2).
 PROSPECTUSES 785

2.9 Territorial scope of regulation

2.9.1 Offers outside Hong Kong

"Offer" refers to offers made within Hong Kong. Under s.l(b) of Pt.4 ofCap.32, 16.096
Sch.17, a reference to an "offer" in Pt.I of Sch.17 does not include an offer to the
extent that it is made to persons who are outside Hong Kong. Part 1 sets out offers
which are exempt from the prospectus requirements. 164 The effect of s. l (b) of Pt.4 of
Cap.32, Sch.17 is that an offer that is made only to persons outside Hong Kong will be
exempt from the Cap.32 prospectus requirements. 165
Companies should comply with overseas laws and regulations for overseas offers. 16.097
For overseas offers, Hong Kong companies will need to ensure that they comply with
the overseas laws and regulations on the offering.

2.9.2 Offers in Hong Kong by foreign companies

Provisions regulating prospectus of foreign companies in Hong Kong similar 16.098
to local companies. Part XII of Cap.32 contains provisions regulating prospectuses
of foreign companies in Hong Kong. The provisions are similar to those in Pt.II for
local companies, although not precisely the same. They apply to prospectuses issued,
circulated or distributed in Hong Kong offe1ing166 to the public for subscription or
purchase 167 shares or debentures of any company incorporated outside Hong Kong,
whether the company has or has not established a place of business in Hong Kong. 168
Accordingly, the provisions apply whether or not the company is a non-Hong Kong
company within Cap.622 Pt.16.
Contents requirements of prospectuses also similar to local companies. The 16.099
contents requirements of prospectuses are contained in Cap.32, s.342. Section 342(1)
is similar to that previous s.38( 1) but with some additional information requirements.
Section 342(3) is the equivalent of s.38(3) in imposing the requirement for a
prospectus to accompany application forms. As is the case for Hong Kong companies,
the prospectus requirements only apply to offers to the public, and there are similar
exceptions (including those in Cap.32, Sch.17).

164
See para.16.016 above.
165 If an offer is wholly targeted at persons outside Hong Kong, then the offer will be an offer to less than 50 persons
within the exemption ins. l of Pt. I of the Sch. I7. Offers made outside Hong Kong to persons outside Hong Kong
would not be regulated by Cap.32 in any event as Cap.32 would not have extraterritorial effect to cover such offers
(pursuant to the general presumption against extraterritorial operation of legislation: Sirdar G1111lyal Singh v
Rajah ofFaridkote [ 1894] AC 670,683). However, without the express exemption, offers made in Hong Kong to
persons outside Hong Kong could still be caught by Cap.32.
l()(i The intention is that invitations are also covered: see s.2 definition of''prospectus".

,., A number of provisions in Pt.XII were amended by the Companies (Amendment) Ordinance 2004 (30 of 2004)
to include reference ro purchase of shares as well as subscriptions. On the face of it, the amended provisions
may seem to apply to secondary sales generally, but the intention of the amendments was merely to align the
Pt.XU provisions with Pt.II: sec FSTB and SFC, Co11s11!1atio11 Paper011ProposedAmendments to the Companies
Ordi,umce 10 Facilitate Offers of Shares and Debe11wres(March 2003) para.3J(c). The context of the provisions
should indicate that only offers for subscription or for sale made by or on behalf of the company arc caught rather
than offers made by any existing holders: see further para.16.091 above.
168
Cap.32, s.342(1).
786 FUND-RAISING BY PUBLIC ISSUE

16.100 Requirements for experts' consents and registration of prospectus for foreign
companies; liabilities for misstatements under Cap.32. Similar to the position
for Hong Kong companies, there are requirements for experts' consents (s.342B)
and registration of the prospectus (s.342C). There is also civil liability (s.342E) and
c1iminal liability (s.342F) in respect of misstatements in prospectuses,' 69 and there are
also provisions on SFC exemptions (s.342A), amendment of prospectuses (s.342CA)
and programme prospectuses (s.342CB).
16.101 Section 41 anti avoidance provision also applies to foreign companies under s.343.
The anti-avoidance provision in respect of sales of shares or debentures under s.41
also takes effect for foreign companies: Cap.32, s.343(1).

3. ADVERTISING RESTRICTIONS
3.1 Introduction

16.102 Necessary to regulate advertising to prevent release of inaccurate information.

The regulation of disclosure in prospectuses would not be effective from preventing
the company from releasing inaccurate information to entice investors if there were
not also restrictions on the scope of advertising that a company can engage in with
respect to a public offer.
16.103 Ways in which advertising regulated. Advertising is restricted on the following
bases:

• Cap.32, s.38B-advertisements concerning prospectuses;

• the requirements under Cap.32, ss.38 and 380 by reason of the definition of
"prospectus"; and
• Securities and Futures Ordinance (Cap.571), s.103.

3.2 Advertisements concerning prospectuses: Cap.32, s.38B

16.104 Prohibition on publishing or advertising part or all of prospectus. Cap.32,

s.388(1) prohibits any person from publishing extracts from or abridged versions ofa
prospectus or any advertisement in relation to a prospectus or a proposed prospectus.
16.105 Exceptions to prohibition. The prohibition is subject to exceptions as set out in
Cap.32, s.38B(2):
• Advertisements within Sch.19 of Cap.32. 170 Schedule 19 sets out the
information that can be contained in such an advertisement. Only bare

'" The provisions in the Securities and Futures Ordinance on remedies or liabilities for false or misleading
statements (SFO, ss.107, 108,213,277, and 298) can also apply 10 foreign companies: sec, e.g, Securitiesand
Futures Commissionv Q1111xing Paper Holdings Co Ltd (No.2) [2018) HKCFI 271, [2018) I HKLRD 1060.
11
• Cap.32, s.38B(2)(e).
 ADVERTISING RESTRICTIONS 787

information on certain specified matters is permitted, such as information

on the name of the company, the shares or debentures offered and the
dates on which and places at which the prospectus will be available. Such
advertisements are in the nature of offer awareness statements or "tombstone
advertising" which are intended to ale11 the public to the existence of the
public offer.
• Advertisements authorised by the SFC (under Securities and Futures
Ordinance (Cap.571), s. l 05). 171
• Publication of an extract from or abridged version of a prospectus m
accordance with requirements specified by the SFC. 172
• Publication of the English version only of a prospectus in an English language
newspaper or the Chinese version only in a Chinese language newspaper.173

3.3 Advertisements constituting an offer or invitation:

Cap.32 definition of "prospectus"

Definition of prospectus under Cap. 32. "Prospectus" is defined in Cap.32, s.2 to 16.106
mean any prospectus, notice, circular, brochure, advertisement or other document
offering shares or debentures of the company for subscription or purchase (or
calculated to invite offers by the public to subscribe for or purchase such shares or
debentures). Documents in respect of offers exempt under Sch.17 are excluded from
the definition, and so are advertisements exempted from the advertising restrictions
under s.38B(2).
Written advertisements forming part of prospectus may contravene ss.38 or 38D of 16.107
Cap.32. The wide definition of prospectus means that written advertisements coming
within the definition would contravene Cap.32, ss.38 or 38D if the advertisement does
not contain the information required by s.38 or is not registered as a prospectus under
s.38D.
Advertisements or documents issued by third parties could be caught under 16.108
wide "prospectus" definition. The restrictions apply not only to the company
that is issuing the shares or debentures but can also cover advertisements or
documents issued by third parties. For example, pre-IPO or pre-deal research
reports by connected analysts could potentially be caught by the restrictions.
Pre-IPO research reports are produced by analysts to provide information to
potential investors. The reports often contain more background on the industry
sector and macro environment (such as analysis of competitors) than contained
in the company's prospectus, and provides the analyst's expert assessment of

'" Cap.32, s.38B(2)(c), 388(2)(1).

172 Cap.32, s.38B(2)(a), 38B(2)(d), 38B(2A). For ofTcrs of shares or debentures to be listed, the Stock Exchange has
been given the function of specifying rcquiremems under s.38B(2A)(b): sec Securities and Futures (Transfer of
Functions-Stock Exchange Company) Order (Cap.571AE), s.3.
17' Cap.32, s.38B(2)(b).
788 FUND-RAISING BY PUBLIC ISSUE

the company's strengths and weaknesses. 174 Where the reports are produced by
analysts employed by the sponsor or an underwriter to the offering, then there is a
risk that the reports could be regarded as being calculated to invite offers for the
shares or debentures within the definition of "prospectus".' 75

3.4 Restrictions under Securities and Futures Ordinance (Cap.571), s.103

16.109 SFO s.103 prohibits advertisement, invitation or document inviting offers from
public without authorisation. Securities and Futures Ordinance (Cap.571) (SFO),
s. l 03( 1) prohibits the issue of an advertisement, invitation or document inviting, inter
alia, offers from the public to acquire or subscribe for shares or other securities unless
there is authorisation by the SFC under that later s. l 05. A number of exceptions to this
basic prohibition are set out in s.103. For example, there is no contravention of s. l 03 if
the document is a prospectus complying with Cap.32 or is an adve11isementpermitted
under that Cap.32, s.38B(2). 176
16.110 Pre-lPO reports could be caught by s.103. Pre-lPO reports 177 could prima .facie
be caught by SFO, s.l 03, but there is no contravention if the report is issued by
licensed intermediaries (such as licensed securities advisers) within the exemption for
advertisements by licensed intermediaries in s.103(2).
16.1.1.l Roadshow, oral or visual presentations may also be caught by s.103. Roadshow
presentations or information provided orally or through visual presentations would
not come within the Cap.32 provisions but may be caught by SFO, s.103, which
covers oral as well as written advertisements or invitations. 178 Again, presentations
given by licensed intermediaries would be exempt, as would be presentations given to
professional investors. 179

4. LISTING ON THE STOCK EXCHANGE

4.1 Introduction

16.112 Shares can only be traded on stock exchange if securities listed. Companies can
only have their shares or securities traded on the stock exchange in Hong Kong if
the shares are listed on the Stock Exchange of Hong Kong. Applications for listing
are made pursuant to the Listing Rules of the Stock Exchange. Securities can be
listed either on the Main Board or the Growth Enterprises Market (GEM). The GEM

114
SFC, Co11sulta1io11
Paper on Possible Reforms to the Prospectus Regime in the Companies Ordinance (August
2005), [29.1).
11
s SFC, Ca11s11/tation
Paper 011PossibleReforms10the Prospecll<fRegimei11the CompaniesOrdi11a11ce
(August 2005),
[29.2). Pre-dealrcporrsgiven to, for example,professionalinvc.storswouldnot be caught due to the exemptionsin
Sch.17. For the SFC's proposalson regulationof pre-dealresearchgenerally,sec SFC, Cons11/t(l(io11 Poper on the
Reguloto,y From1M<>rkfi>r Pre-DealResearch(September20 I0). and Cons11/totio11 (June2011).
Co11c/11sio11s
11• Securities and Futures Ordinance,s.103(3)(a).
177
Sec para.16.108 above.
178 See the definitions of "advertisement" and "invitation" in Securitiesand Fulures Ordinance, s. I02.

m Securities and Futures Ordinance(Cap.571). s.103(3)(k).

 LISTING ON THE STOCK EXCHANGE 789

was established to facilitate public fund-raising by new enterprises which have good
business ideas and growth potential but which do not fulfil all the requirements for
listing on the Main Board. The listing requirements for the GEM are accordingly
relatively less stringent, compared with the requirements for the Main Board.
Local and foreign companies can have securities listed. Both local companies and 16.113
foreign companies 180 can have their securities listed on the Hong Kong Stock Exchange.
Most companies listed on the Stock Exchange are incorporated outside Hong Kong. 181
This is partly due to historical reasons, with many local companies re-domiciling
overseas before the handover in 1997. Hong Kong has also become the primary venue
for mainland enterprises for raising funds outside their domestic markets.
Equity and debt securities can listed. Both equity and debt securities can be listed 16.114
on the stock exchange. The discussion below focuses on the listing requirements for
equity securities (which includes shares), where listing is sought on the Main Board. 182

4.2 The stock exchange

History of Stock Exchange of Hong Kong. The Stock Exchange of Hong Kong 16.115
Ltd and the Hong Kong Futures Exchange Ltd 183 demutualised in 2000 and merged
together, along with the Hong Kong Securities Clearing Company Ltd, 184 under the
single holding company, Hong Kong Exchanges and Clearing Ltd (HKEx). Before
2000, the Stock Exchange was operated essentially as a private industry association
of brokers. Concerns whether the exchange was being operated in the public interest
and the need to modernise both the regulatory structure and securities laws in
Hong Kong led to reforms which included the demutualisation. Both HKEx and the
Stock Exchange of Hong Kong Ltd have statutory responsibilities under the SFO as
a "recognised exchange controller" and "recognised exchange company" respectively
under that Ordinance.

4.3 Listing rules of the stock exchange

4.3.1 Function and purpose of the listing rules

Companies seeking to have securities listed must comply with Listing Rules to 16.116
ensure proper regulation and efficient operation of market. Companies (issuers)
which seek to have their securities listed on the Stock Exchange must comply with
the Listing Rules of the Stock Exchange. The Listing Rules (LR) are made under s.23
of the SFO, which authorises the recognised exchange company to make rules, inter

180
For additional obligations that may be imposed on foreign issuers, see Chapters 19 and 19A of the Listing Rules.
181
1246 out of 1448 listed companies were incorporated outside Hong Kong as at June 201 I: FSTB, "Bills
Committee on Companies Bill Follow-up Actions to be Taken by the Administration for the Meeting held on
28 June 2011" (CB(1)2756/10-11(01), 7 July201 I) I.
18
' Refcrcnce.s 10 the Listing Rules hereafter arc references to the Listing Rules for listing on the Main Board of
the Stock Exchange. There are separate listing rules for the GEM. The Listing Rulc.s can be accessed from the
website ofHKEx: http://www.hkex.com.hk/cng/rulcsreg/listrules/mbrulcs/listrulcs.htm.
183
Responsible for the futures exchange.
184
Responsible for the central clearing and settlement system (CCASS), which provides for the electronic system
for the holding and trJnsfer of securities tnided on the exchange.
790 FUND-RAISING BY PUBLIC ISSUE

alia, for the proper regulation and efficient operation of the market which it operates.
In particular, a recognised exchange company operating a stock market may make
rules for matters including applications for listing of securities and the requirements
to be met before securities may be listed. The Listing Rules contain both requirements
imposed before admission to listing as well as continuing obligations with which an
issuer must comply once listing has been granted.
16.117 Purpose of Listing Rules: for investors to have and maintain confidence in market.
The Listing Rules aim to ensure that investors have and can maintain confidence in the
market and in particular that:

• applicants are suitable for listing;

• the issue and marketing of securities is conducted in a fair and orderly manner
and that potential investors are given sufficient information to enable them to
make a properly informed assessment of an issuer;

• investors and the public are kept fully informed by listed issuers of all factors
which might affect their interests;
• all holders of listed securities are treated fairly and equally;
• directors of a listed issuer act in the interest of its shareholders as a whole; and
• all new issues of equity securities by a listed issuer are first offered to existing
shareholders unless they have agreed otherwise. 185

16.118 Listing Rules provide some merit regulation for protection of investors. The
conditions for Iisting imposed by the Listing Rules provide a degree of merit regulation
for the protection of investors in Hong Kong.

4.3.2 Status of the listing rules

16.119 Listed issuer bound to rules as matter of contract. Under LR 13.01, an issuer whose
securities have been admitted to listing is required to comply with the Listing Rules. Issuers
undertake to comply with the rules pursuant to the issuer's application for listing.The effect
of these provisions is that a listed issuer is botmd to the rules as a matter of contract.186

4.3.3 Enforcement of the listing rules

16.120 Sanctions for failing to comply with Listing Rules. The Stock Exchange has power
to suspend dealings in any securities or cancel the listing of any securities, including
where an issuer fails, in a manner which the Exchange considers mate1ial, to comply
with the listing rules. 187 The Listing Committee of the Exchange can also exercise
disciplinary powers under LR 2A.09 in relation to breaches of the rules. The sanctions
that can be imposed under this rule include:

• issue a private rep1imand;

18
' LR 2.03.
186 See New WorldDe11e/op111e111
Co Ltd v Stock Exchangeof Hong Kong lid [2004)2 HKLRD I027, [ IOJ.
187 LR6.0l.
 LISTING ON THE STOCK EXCHANGE 791

• issue a public statement which involves criticism;

• issue a public censure; and
• require breaches to be rectified.

Proposals to give statutory backing to some provisions of Listing Rules. Many 16.121
have argued that the sanctions under the Listing Rules are insufficient and "lack
teeth". 188 To address such concerns, the government has proposed to give statutory
backing to the more important provisions of the Listing Rules by incorporating the
provisions in the Securities and Futures Ordinance. 189 Civil or possibly criminal
sanctions can then be imposed pursuant to the Securities and Futures Ordinance.
The earlier proposals of the government were to provide statutory backing to a range of
disclosure obligations, including disclosure of price-sensitive information, disclosure
or publication of annual and periodic reports, and disclosure and shareholder approval
requirements for notifiable transactions and connected transactions. 190 However, there
has been considerable resistance in the market and to date, the government has only
implemented the reforms in respect of price-sensitive infonnation. 191

4.4 Methods of listing

Ways in which equity securities can be listed. Chapter 7 of the Listing Rules sets out the 16.122
different ways in which equity securities can be listed on the stock exchange. These are:

• Offers for subscription: i.e. offers to the public by or on behalf of an issuer of

its own securities for subscription. 192

• Offers for sale: i.e. offers to the public by or on behalf of the holders or
allottees of securities already in issue or agreed to be subscribed. 193
• Placings: i.e. the obtaining of subscriptions for or the sale of securities by an
issuer or intermediary primarily from or to persons selected or approved by
the issuer or intermediary. 194
• Introductions: i.e. applications for listing of securities already in issue
where no marketing arrangements are required because the securities for
which listing is sought are already of such an amount and so widely held
that their adequate marketability when listed can be assumed (e.g. where
the securities have already been listed on another stock exchange). 195

188 See, e.g., Betty Ho, Public Companies 011dtheir Equity Securities: Principles of Regulation under Hong Kong
Law (Kluwer 1998) 743-747, 799-812.
189 Sec FSTB, Co11sultation Paper 011Pn>posals to E11htmce the Regult11io11<!flisting (2004) and Consultation
Co11c/usio11s(2004); FSTB, Co11sulwtio11 Pt,per 011 Proposed Ame11d111e111s to the Securities a11d Futures
Ortlintmce 10 Give Statut<>ty Backing 10 Major lis1i11g Requirements (2005).
190 Sec SFC, Consultation Paper on Proposed Amendments to the Securities a11dFutures (Stock Market Listing)
Rules (2005) and Co11sultatio11Conclusions (2007).
1 1
• See para.16.129 below.
192 LR 7.02.
95
' LR 7.06.
194
LR 7.09.
195 LR7.13.
792 FUND-RAISING BY PUBLIC ISSUE

• Rights issues: i.e. offers by way of rights to existing holders of securities

which enable those holders to subscribe for secu1ities in proportion to their
existing holdings. 196
• Open offers: i.e. offers to existing holders of securities to subscribe for
securities, whether or not in proportion to their existing holdings, which are
not allotted to them on renounceable documents. 197

• Capitalisation issues: i.e. allotments of further secur1t1es to ex1stmg

shareholders, credited as fully paid up out of the issuer's reserves or profits, in
proportion to their existing holdings, or otherwise not involving any monetary
payments (e.g. the issue of scrip dividends via a capitalisation ofprofits). 198
• Consideration issues: i.e. issues of securities as consideration in a transaction
or in connection with a takeover or merger or the division of an issuer. 199
• Exchanges: i.e. the listing of securities by an exchange or a substitution of
securities for or a conversion of securities into other classes of securities. 200
• Other methods: securities may also be brought to listing by the exercise of
options or warrants or similar right; or any other method as approved of by
the Exchange. 201

4.5 Qualifications for listing

16.123 Conditions to be met to seek listing of securities under Chapter 8 of Listing Rules.
Chapter 8 of the Listing Rules sets out the basic conditions which have to be met in
order for the company to be qualified to seek the listing of the particular securities.
16.124 Examples of conditions to be met under Chapter 8 of Listing Rules. Examples of
the requirements include the following:

l. The issuer must be incorporated 202 and must be a public company.203

2. The issuer must satisfy the profit test or either of the two market capitalisation
tests. 204 Under the profit test, the issuer must have attained profits of at least

196
LR 7. l8.
197
LR 7.23.
198
LR 7.28.
199
LR 7.30.
m LR 7.32
20' LR 7.34.
202 LR 8.02.
3
2<1 LR8.03.
2<J.l LR 8.05. Biotcchcompanieswhicharc unable to satisfy thesetes1smays1illbe listedif they satisfy the requirements
in LR Ch.18A(introducedwith effect from30 April2018). In 2017, the Stock Exchangehad consideredwhethcrto
introducea new board to facilitatelistingof companiesfrom emergingand innovativesectors. Subsequently,it was
decided that insteadof a new boar<~a new Ch.I SA wouldbe introducedto allow the listing of biotech companies
that do not meet the financialeligibilitytests.The requirementsin Ch.I8A are intendedto ensure adequate investor
protectionfrom the risks associatedwithsuch companies:see HK.Ex,ConceptPaper:New Board(June 2017), and
Co11sultatio11Conclusions(December2017); HKEx. Co11s11/tation Paper:A Listing Regimefor Companiesf,om
Emergingand hmow,tiveSectors (February2018), and Cons11lt.ation Conc/11sio11s(April 2018).
 LISTING ON THE STOCK EXCHANGE 793

$20 million in the most recent year and an aggregate of at least $30 million
for the preceding two years. The first market capitalisation test205 requires the
issuer to have a market capitalisation 206 of at least $2,000 million, revenue of
at least $500 million for the most recent audited financial year and positive
cash flow from operating activities of at least $100 million in aggregate for
the preceding three financial years. The alternative market capitalisation
test207 requires the issuer to have a market capitalisation of at least $4,000
million and revenue of at least $500 million for the most recent audited
financial year. For each of these tests, there are also requirements for the
issuer to have a trading record of at least three financial years, and there
must also have been management continuity for at least the three preceding
financial years and ownership continuity for at least the most recent audited
financial year.
3. There must be an adequate market in the securities. 208 This means that there
must be sufficient public interest in the business of the issuer and in the
securities for which listing is sought.
4. There must be an open market in the securities. 209 This normally requires at
least 25 percent of the issued share capital to be held by the public.210 There
must also be an adequate spread of holders of the securities to be listed-the
number will depend on the size and nature of the issue, but in all cases there
must be at least 300 shareholders.
5. The expected market capitalisation at the time of listing of the securities of
a new applicant which are held by the public must be at least $50 million,
while expected total market capitalisation at the time of listing must be at
least $200 million. 211
6. The share capital of a new applicant must not include shares of which the
proposed voting power does not bear a reasonable relationship to the equity
interest of such shares when fully paid.212 This is subject to certain exceptions,
including new exceptions taking effect from 30 April 2018 which allow
certain companies to be listed with a WVR (weighted voting right) structure.
"Weighted voting right" refers to "the voting power attached to a share of a
particular class that is greater or superior to the voting power attached to an
ordinary share, or other governance right or arrangement disproportionate to
the beneficiary's economic interest in the equity securities of the issuer".213

,o, Market capitalisation/revenue/cash flow test.

'°" Market capitalisation means the market value of the entire size of an issuer, including all classes of securities
of the issuer irrespective of whether the securities are listed or unlisted: LR 1.0 I. Market capitalisation is an
estimation of the value of the business by multiplying the number of shares by the current price of a share.
'°' Market capitalisation/revenue test.
208 LR 8.07.
209 LR 8.08.
"" As to meaning of the public, see LR 8.24.
211
LR 8.09.
212 LR8.11.
Zll LR8A.02.
794 FUND-RAISING BY PUBLIC ISSUE

The relaxation of the Listing Rules to allow companies with WVR structures is
intended to facilitate listing of high growth and innovative companies in Hong
Kong. Such companies seek to have a WVR structure as they rely heavily upon
the technical expertise, market knowledge and foresight of their founders. The
existence of a WVR structure ensures that the founders can maintain control
of their company despite their smaller shareholdings which may result after
seeking outside investors.214 Companies seeking to list with a WVR structure
must satisfy the requirements in Listing Rules Ch.8A.
7. The securities for which listing is sought must be freely transferable. 215
8. There are a number of requirements imposed in respect of management. A
new applicant must have at least two executive directors ordinarily resident in
Hong Kong. 216 The Stock Exchange must be satisfied that the directors have
the character, experience, integrity and competence commensurate with their
position as director of a listed company.217 There must also be at least three
non-executive directors 218 who represent at least one-third of the board. 219
9. The issuer must have a company secretary who is an individual and who is
capable of discharging the functions of company secretary by virtue of his
academic or professional qualifications 220 or relevant experience. 221

4.6 Application procedures and listing documents

16.125 New applicant must have sponsor for initial listing application. A new applicant
must have a sponsor to assist it with its initial application for listing.222 A sponsor must
be a corporation or authorised financial institution which is licensed 223 or registered 224
for Type 6 regulated activities (namely advising on corporate finance) and permitted
under its licence or certificate of registration to undertake work as a sponsor.225
16.126 Application procedure. Details on the application procedure and requirements are
set out in LR Ch 9. A listing application form must be completed by the sponsor and

"' HKEx, Consultation Paper:A listing Regimefor Companiesf,vm Emergingand Innovative Sectors (February
2018) para.97. See also the Consultation Conc/11sio11s (April 2018). On the background to the new regime
allowing WVR structures, see also HKEx, ConceptPaper:New Board (June 2017). and Cons11/tation Conclusions
(December 2017). See further Shen Junzheng, "The Anatomy of Dual Class Share Structures: A Comparative
Perspective" (2016) 46 Hong Kong Law Jo11rnal4 77; FlorJ Huang, "Dual Class Shares Around the Top Global
Financial Centres (2017) Jo11rnalof Business Law 137.
215
LR 8.l3.
216
LR 8.l2.
211 LR 8.15 and 3.09, and see further LR Ch 3.
218
LR 3.l0.
219 LR 3. lOA.
22• The following academic or professional qualifications are acceptable: member of the Hong Kong Institute of
Chartered Secretaries, a solicitor or barrister (as defined in the Legal Practitioners Ordinance), or a certified
public accountant (as defined in the Professional Accountants Ordinance): LR 3.28 Note I.
221 LRs 8.17~3.28.
222 LR 3A.02.
223 Under Securities and Fun,res Ordinance (Cap.571), s. l I6.
2" Under Securities and Futures Ordinance (Cap.571), s.120.
225 LR 1.01. For other provisions in respect of requirements and role oft he sponsor, sec LR Ch 3A.
 LISTING ON THE STOCK EXCHANGE 795

which is to be lodged by the sponsor on behalf of the issuer.226 Applications for listing
are made to the Listing Division of the Stock Exchange pursuant to LR 2A.05. The
applications are then considered by the Listing Committee.
Listing document may also be prospectus and must comply with all prospectus 16.127
requirements. The listing application form must be accompanied with a number of
specified documents, including a draft of the listing document that is substantially
complete. 227 The requirements for the listing document are set out in LR Ch 11 and
Appendix I. Where the issuer is required to comply with Cap.32, the listing document
will be the prospectus which must comply with the prospectus requirements under
Cap.32. 228 The final proof of the listing document must be lodged with the Stock
Exchange at least four clear business days before the date of the hearing of the
application for listing. 229 No listing document may be issued until the Stock Exchange
has confirmed to the issuer that it has no further comments thereon. 230 On the date
of the issue of the listing document, a formal notice must be published notifying the
public of the proposed listing. 231
Restrictions on preferential treatment of employees or directors of issuer under 16.128
Listing Rules. Chapter 10 of the Listing Rules imposes certain restrictions regarding
preferential treatment of employees or directors of the issuer in the allocation of shares
pmsuant to the public offering. For example, no preferential h·eatment is to be given to
directors, 232 and no more than 10 percent of the securities can be offered to employees
on a preferential basis.233

4.7 Continuing disclosure obligations

4.7.1 Introductio11
Listed companies required to disclose price-sensitive information to market. As part 16.129
of the disclosure philosophy, listed companies in Hong Kong are required to disclose
material price-sensitive information to the market in order to ensme that the market
is fully informed. Timely disclosure of price-sensitive information (information which
would affect the price of the securities of a company) ensures that there is a fair and
open market, thereby promoting confidence of investors that there is a level-playing
field. Before 1 January 2013, the listing rules contained the main obligations in relation
to continuing disclosme. With effect from I January 2013, the general disclosure
obligation in relation to price-sensitive information (referred to as "inside information"
in the legislation) is contained in the SFO. The general disclosure obligation previously
contained in LR 13.09 of the Listing Rules was repealed with effect from the same date.
The moving of the disclosure obligation from the Listing Rules to the SFO was done as

226
LRs 9.02 and 9.03.
221
LRs 9.03 and 9.11.The draft listing documentsubmittedwith the application is referred 10 as to che"Application
Proof".
" 8 Secalso LR Ch 11A in relation 10 cheStock Exchange'srole in vetting and authorisacionof the prospectus.
229 LRs 11.02and9.11(18).
230 LR 12.01.

2JI LR 12.02.
232 LR 10.03.
233 LR 10.01.
796 FUND-RAISING BY PUBLIC ISSUE

the first step in the government's proposal to give statutory backing to a number of the
more important continuing obligations under the Listing Rules.234

4.7.2 M,mdato,y disclosure of inside i11formatio11

General
16.130 Only civil sanctions and remedies for non-disclosure of price-sensitive
information ("inside information"). Price-sensitive information (referred to as
"inside information" in the SFO) is regulated under Pt XIYA of the SFO.235 The
original proposals for regulating price-sensitive information provided for both civil
and criminal consequences for contravention of the disclosure obligation.236 However,
the present provisions provide only for civil sanctions and remedies for breach due to
market concerns on the severity of the law in light of perceived uncertainties as to what
would amount to price-sensitive information. 237

Disclosure obligation
16.131 Disclosure obligation under SFO s.307B. Under SFO, s.307B( 1), a listed corporation
must, as soon as reasonably practicable after any inside information has come to its
knowledge, disclose the information to the public. 238

Inside information
16.132 Definition of "inside information". "Inside information" is defined in SFO,
s.307 A(l) and is in substance the same as the concept used for the purposes of the
provisions on insider dealing in the SFO.239 "Inside information" means specific
information that:

• is about:
o the corporation;
o - a shareholder or officer of the corporation; or
o - the listed securities 240 of the corporation or their derivatives;241 and

234 Seepara.16.12l above.

zi, Introduced by the Securities and Futures (Amendment) Ordinance (9 of 2012). For background, sec FSTB,
Consultation Paper 011the ProposedStatutcny Cod/ficationof Certain Requirementsto Disclose Price Sensitive
Information by Listed Corporations(20 I0) and Consultation Co11c/usio11s
(2011 ). Sec also the SFC's Guidelines
011Disclosureof Inside lnji.,,·11w1io11
(June 2012).
zS6 See FSTB, Consultation Paper 011 Proposals 10 Enhance the Regulation of Listing (2004) and Consu!U1tio11
Co11cl11sions(2004); FSTB, Cons11ltatio11
Paper011ProposedAmendmell/sto the Securitiesand FuturesOrdinanceto
GiveStatuto,y Backinglo Major listing Requirements(2005); SFC, Co11sultatio11
Paper011ProposedAmendmentslo
the Securitiesand Futures(StockMa1*etListing)Rules (2005) and ConsultationCo11c/11sio11s
(2007).
m Enoch Yiu, "Tribunal Proposed to Handle Non-Disclosure by Listed Firms", South China Momi11gPost
(24 August 2009); Enoch Yiu, "Government Waters Down Stock Market Reform", South China Moming Post
(30 March 20 I0).
"' The manner of disclosure is set out in Securities and Futures Ordinance, s.307C.
m The insider dealing provisions in SFO Pt XJII previously used the term "relevant information", but this has now
been replaced with the term "inside information".
240 "Listed securities" is defined in SFO, s.307 A( I).

241 "Derivatives" is defined in FO, s.307 A( I).

 LISTING ON THE STOCK EXCHANGE 797

• is not generally known to the persons who are accustomed or would be likely
to deal in242 the listed securities of the corporation but would if generally
known to them be likely to materially affect the price of the listed securities.

"Specific information" information capable of being identified, defined and 16.133

unequivocally expressed. The concept of "specific information" was considered in
Securities and Futures Commission v Chan Pak Hoe Pab/0243 in the context of the
insider dealing offence. The com1 accepted that specific information is information
which possesses sufficient particularity to be capable of being identified, defined and
unequivocally expressed. The requirement for the information to be "specific" does not
mean that the information must be "precise", in that the lack of precision of information
does not prevent it from being specific. A mere rumour is not specific information.
However, information about a proposed transaction can be specific information
where the proposal is beyond the stage of being a vague exchange of ideas. Where
negotiations or contacts have occurred, there must be a substantial commercial reality
to the negotiations which goes beyond a merely exploratory testing of the waters and
which is at a more concrete stage where the parties have an intent to negotiate with a
realistic view to achieving an identifiable goal before information about the proposed
transaction would be regarded as specific information. However, there is no need to
establish that there be any foresight that the transaction will "probably" or "likely"
come to fruition before information concerning the contemplated transaction becomes
sufficiently specific. The fact that further negotiations are required and that the
transaction would ultimately have to be approved by the board or by the shareholders
does not mean that the information about the proposed transaction cannot be specific
information.
Du Jun case test of materiality: information must be kind that would not only 16.134
interest investor but lead to investment decision that would affect price. On the
test of materiality in para.(b) of the definition, the Court of Appeal in HKSAR v Du
.Jun.244 has commented that the question is the likely impact of the information on
the ordinary reasonable investor-whether the information is important information
likely to be of interest to such an investor, not being of passing interest only, but
interest of a kind that would be likely to lead to an investment decision such as
would effect a material change in the price of the security. Information can be
material within the statutory definition whether the impact on the price is positive
or negative.
United States test of materiality: substantial likelihood reasonable investor would 16.135
consider information important to investment decision. In a different context, it
has been held in the United States that information is material if there is a substantial

''' The Australian provisions on disclosure of price-sensitive information (Corporations Act 200 I (Cth of Aust)
ss.674~78) refer to "persons who commonly invest" in the securities.In that context. it has been held that the
expression is a class description, such that the inquiry is to determine what information would or would not
be likely to innucnce a hypotheticalclass of personswho commonly invest in securities.The cfossdescription
avoids the need to distinguish between large or small, frequent or infrequent, sophisticatedor unsophisticated
individual investors:sec also Grant-Taylor v Babcock & Brown Ltd (2016) 330 ALR 642, (115)-( 116).
w [2011)5HKC484.
2" (unrep., CACC334/2009,(2012)HKEC 1280),(107).
798 FUND-RAISING BY PUBLIC ISSUE

likelihood that a reasonable investor would consider the information important in

making an investment decision. 245 The standard of materiality does not require proof
of a substantial Iikelihood that knowledge of the information would have caused the
reasonable investor to change his or her decision, but contemplates a showing of a
substantial likelihood that, under all the circumstances, the information would have
assumed actual significance in the reasonable investor's deliberations. Information
is not material if it is only information which a reasonable investor "might" consider
important.
16.136 Evidence that may be relevant, and examples of information which may
satisfy test of materiality. Evidence which might be relevant in showing whether
information satisfies the test of materiality includes the impact on the share price
once the infonnation was known to the public246 and expert opinions of financial or
investment analysts. 247 Examples of information which, on the particular facts, have
been held to be inside information for the purposes of the insider dealing provisions
include information about a proposed sale of shares in the company248 or a proposed
placement of shares in the company 249 and information about a proposed acquisition
of oilfield assets by the company.250
16.137 For information to be "inside information", it must not be generally known to
general i11vesti11gpublic. The further requirement in para.(b) of the definition that
the information not be generally known to the public means that the information
must not be generally known to the general investing public. Accordingly,
information can be non-public information within para.(b), even though the
information is known to market professionals. 251 The fact that there is rumour or
speculation in the public about a matter does not mean that the matter is known
by the public. 252

Information known to the corporation

16.138 Point at which "inside information" regarded as having come to knowledge of
corporation. A corporation can only disclose the information if it has knowledge of
the information. Inside information is regarded as having come to the knowledge of
the corporation if: (a) the information has, or ought reasonably to have, come to the
knowledge of an officer of the corporation in the course of performing functions as

245 '/'SC Industries hie v Northway 426 US 438, 96 S Ct 2126 (1976). See also Basic Ille v Levinson 485 US 224
(1988). The '/'SC /11d11striestest has been applied in the context of the Australian provisions on disclosure of
price-sensitive information: Grant-Taylor v Babcock & Brown Ltd (2016) 330 ALR 642, [96). For discussion of
the applicability of the '/'SC flldustries test in the context of the Singapore provisions on insider trading in the
Securities and Futures Act (Chapter 289), see Lew Chee Fai Kevin v Monetary A11thority <?(Singapore (2012)
MSCLC 80-031; Madlwven Peter v Public Prosecutor (2012) MSCLC 80-034.
2' 6 See, e.g., Sec11ri1iesand Futures Commission v Chan Pak Hoe Pablo [2011J 5 HKC 484.

"' See, e.g., Leung Chi Keung v Market Misconduct Tribunal [2012] 2 HKLRD 786 (CA); HKSAR v Du ./1111(unrep.,
CACC 334/2009, [2012) HKEC 1280).
2' 8 Securities and Futures Commission v Clum Pak floe Pablo (unrcp., Mag. App. 754/20 I0, [2012] I HKLRD AS).

"' Leung Chi Keung v Market Misc<>nductTribunal [2012] 2 HKLRD 786.

"" 1/KSAR v Du Jun (unrcp., CACC 334/2009, [2012] HKEC 1280).
2" Sec Rcpon of the Insider Dealing Tribunal on Public lntcmational Investments Ltd (1995), 236.
"' See Report of the Insider Dealing Tribunal on Public International Investments Ltd (1995), 257; Report of the
Insider Dealing Tribunal on Lafe Holdings Ltd ( I990), 57-58.
 LISTING ON THE STOCK EXCHANGE 799

an officer of the corporation; and (b) a reasonable person, acting as an officer of the
corporation, would consider that the infonnation is inside information in relation to
the corporation: SFO, s.3078(2).
Only information known by high level personnel regarded as requmng 16.139
disclosure. The effect of SFO, s.307B(2) is that only information possessed by high-
level personnel in the corporation would be regarded as information known by the
corporation requiring disclosure. "Officer" means a director,253 manager or secretary
of, or any other person involved in the management of, the corporation. 254 The term
"manager" is not defined, but in other legislative contexts it has been held to refer to
"those who are in a position of real authority, the decision-makers within the company
who have both the power and responsibility to decide corporate policy and strategy" 255
or "a person who has the management of the whole affairs of the company". 256 Such a
concept of manager, narrowed down to high-level executives, would appear to accord
with the legislative intention for s.3078(2). 257
"Inside information" which company ought to have known. The reference in SFO, 16.140
s.307B(2)(a) to infom1ation that ought reasonably to have come to the knowledge of an
officer means that it is not possible for corporations to avoid the disclosure obligation
by avoiding inside information being passed to the corporation's officers. Appropriate
reporting systems should therefore be in place to ensure that the corporation will be
able to comply with the statutory disclosure obligations.
Objective test to determine whether information regarded as "inside 16.141
information". An objective test is used to determine whether information is regarded
as inside information, as SFO, s.307B(2)(b) looks at whether a reasonable person
would consider the information to be inside information.

Exceptions to disclosure requirement

Exceptions for confidential negotiations/proposals. The concept of inside information 16.142
is wide enough to cover, for example, negotiations for major transactions (where the
information is sufficiently "specific": see para.16.133 above), even though there
may be commercial justifications for the negotiating parties to keep the negotiations
confidential before the transaction is finalised. Accordingly, SFO, s.307D(2) exempts
a corporation from the disclosure obligation in respect of incomplete proposals or
negotiations if the information is kept confidential. Once confidentiality is Jost though,
the corporation must comply with the disclosure obligation.
Other exceptions. There are also some other exceptions set out in s.307D of the SFO, 16.143
including information about trade secrets (but again, the information must be kept

w Under the SFO, "director" includes de facto and shadow directors: see SFO, Sch I Pt. I s. l.
,;, SFO, Sch. I Pt.I s. I.
,ss R v Boat [1992] QB 591, 597-598.
"• Gibson v 8ar1011(1874-75) LR 10 QB 329, 336. Sec also Pappadis v Chan Shi11g Sheung Bany (1989] 2
HKLR511.
'" Sec FSTB and SFC's paper on "Proposed Scope or Persons Covered and Liability of 'Officers' under the
PSI Regulatory Regime" (Nov 2011) (Bills Committee on Securities and Futures (Amendment) Bill 2011,
CB(l)433/11-12(02)), 1-2.
800 FUND-RAISING BY PUBLIC ISSUE

confidential), and information which must not be disclosed under some enactment or
court order.

Consequences of breach
16.144 SFC may institute proceedings in Market Misconduct Tribunal for suspected
breach of disclosure obligation which has power to make orders to remedy
breach. Where there is a suspected breach of the disclosure obligation, the SFC may
institute (civil) proceedings in the Market Misconduct Tribunal. 258 If the Tribunal
finds that there has been a breach, the Tribunal may make orders as set out in SFO,
s.307N, including an order for payment of a regulatory fine not exceeding $8 million
against the corporation or a director or chief executive259 of the corporation. An order
can only be made against a person under s.307N if the person is in breach of the
disclosure obligation. 260 The disclosure obligation is imposed on the corporation under
s.307B and so orders can be made against the corporation under s.307N. Also, any
officer of the corporation will be regarded as breaching the disclosure obligation if:
(a) intentional, reckless or negligent conduct of the officer resulted in the corporation's
breach; or (b) the officer has not taken all reasonable measures from time to time to
ensure that proper safeguards exist to prevent the breach. 261
16.145 Appeals of decisions of Market Misconduct Tribunal. Decisions of the Tribunal on
whether a person has breached a disclosure obligation can be appealed to the Court
of Appeal on a point of law.262 Questions of fact can only be appealed if the Court of
Appeal grants leave.263 Appeals can also be made to the Court of Appeal against the
order of a Tribunal made under SFO, s.307N (or s.307P in respect of costs). 264
16.146 Any person suffering pecuniary loss resulting from breach of disclosure obligation
entitled to bring action to recover compensation under SFO. A person who has
suffered pecuniary loss as a result of a breach of the disclosure obligation is entitled to
bring an action in the courts to recover compensation from a person who has breached
the disclosure obligation: SFO, s.3072. Any findings by the Tribunal on whether there
has been a breach will be sufficient evidence for a conclusion by the court that there
was a breach unless the contrary is proved: SFO, s.307ZA.

4.7.3 Listing rules

16.147 Company must comply with continuing obligations under Listing Rules. Once a
company is listed on the exchange, the company must at all times, while listed, comply
with obligations imposed under the listing rules. 265

258 SFO s.3071. The first proceedings instituted under this section were commenced by the SFC in July 2015 against
AcrossAsia Ltd: see SFC's Press Release "SFC Commences MMT Proceedings against AcrossAsia Limited, its
Chairman and CEO for Late Disclosure oflnside Information" (27 July 2015); and the SFC's Notice commencing
the proceedings, available on the Market Misconduct Tribunal's website <http://www.mmt.gov.hk/eng/rulings/
AcrossAsia_Ltd%20_22072015_e.pdf>.
25~ As defined in SFO, s.308(1); see also SFO, s.307N(6).
260 See SFO, s.307A(2) for the meaning of"breach ofa disclosure requirement".
261 SFO, s.307G(2).
262 SFO, s.307U( I)(a).
2' 3 SFO, s.307U( I)(b).
2
t;.i SFO, s.307U(2).
2
'' LR 13.01.
 REFORM 801

Continuing disclosure obligations imposed by Listing Rules. The general disclosure 16.148
requirement in former LR 13.09(1) was repealed upon the commencement of the
insider information provisions in the SFO. However, the Listing Rules impose a range
of other continuing obligations on listed companies. These include:

• Specific disclosure obligations under LRs 13.09-13.19 which, for example,

require disclosure where the company enters into particular types of
transactions as specified in the provisions (such as certain financial assistance
given to affiliated companies 266) or upon the occurrence of specific events
(such as a breach of significant loan agreements 267).
• Obligations in respect of "notifiable transactions". The concept of
"notifiable transactions" is defined in LRs Ch 14 and broadly refers to major
acquisitions and disposals of assets of the company.268 LR 14.33 summarises
the requirements for different categories of notifiable transactions in respect
of disclosure and publication, as well as shareholder approval.
• Obligations in respect of "connected transactions". The term "connected
transaction" is defined in LR l 4A. l 3 and includes, for example, a transaction
between the listed company and a connected person. "Connected person" is
defined in LR l 4A. l l and includes directors, the chief executive, substantial
shareholders 269 and associates 270 of the listed company. Connected
transactions within Ch 14A must be disclosed to the market and there must
also be approval sought from independent shareholders for the transactions:
LR 14A.02.

5. REFORM

Review of prospectus regime to modernise regulation of public offers underway. 16.149

As noted at para.16.005 above, the SFC has been engaged in a review of the prospectus
regime to modernise the regulation of public offers of shares and debentures. Major
initiatives which the SFC has indicated it will pursue include the following: 271

• To transfer the prospectus provisions from Cap.32 to the Securities and Futures
Ordinance. However, the prospectus regime (for shares and debentures) will
still be a separate regime from the provisions in Pt.IV of the Securities and
Futures Ordinance which deal with public offers of investments generally.
• The prospectus regime will change from "document-based" to "transaction-
based" regulation so that the provisions will apply to public offers of

266 LR13.l6.
267
LR 13.l9.
268 See in particular LRs 14.01, 14.04 and 14.06.
269 As defined in LR I.OJ.
270
Ibid.
271 SFC, Co11s11ltationPaper 011 Possible Reforms to the P,-ospectus Regime in the Companies Ordina11ce
(August 2005), and Co11s11/tationCo11c/11sions
(September 2006).
802 FUND-RAISING BY PUBLIC ISSUE

shares or debentures generally and not only in relation to written offers or

invitations.
• The liability provisions for mis-statements will be revised, for example to
expressly include the issuer company as a party who would be liable.
• The general disclosure standard now found in para.3 of Pt.I ofCap.32, Sch.3
will be set out in the main body of the Securities and Futures Ordinance, with
other prescribed contents requirements to be set out in subsidiary legislation.
• To impose a requirement for supplemental prospectuses in the event of new
circumstances arising since the prospectus date.
 CHAPTER 17

DEBENTURES AND CHARGES

PARA.

1. Introduction ............................................................................................................................ 17.001

2. Debentures ............................................................................................................................. 17.002

2.1 lntroduction ..................................................................................................................... 17.002
2.2 Meaning and nature of debentures .................................................................................. 17.004
2.3 Types of debentures ......................................................................................................... 17.008
2.3.1 Redeemable and irredeemable debentures ......................................................... 17.009
2.3.2 Convertible debentures ........................................................................................ 17.012
2.3.3 Unsecured notes .................................................................................................. 17.014
2.3.4 Debenture series ................................................................................................. 17.015
2.3.5 Debenture stock .................................................................................................. 17.016
2.3.6 Bearer debentures ................................................................................................ 17.017
2.4 Issue of debentures .......................................................................................................... 17.018
2.4.1 Investor protection ............................................................................................... 17.018
2.4.2 Registration of allotments with the Registrar of Companies ............................... 17.022
2.4.3 The company's register of debenture holders ...................................................... 17.023
2.4.4 Issue of debentures or certificates following allotment ...................................... 17.028
2.4.5 Trustee for debenture holders .............................................................................. 17.029
2.4.6 Specific performance of contracts for debentures ............................................... 17.035
2.5 Transfer of debentures .................................................................................................... 17.036
2.5.1 Instrument of transfer .......................................................................................... 17.036
2.5.2 Registration of transfer ........................................................................................ 17.038
2.5.3 Issue of debentures or certificates following transfer ......................................... 17.039
2.5.4 Legal title ............................................................................................................. 17.040
2.5.5 Bearer debentures ................................................................................................ 17.041
2.6 Transmission of debentures ............................................................................................ 17.042
2.7 Meetings of debenture holders ........................................................................................ 17.044

3. Charges................................................................................................................................... 17.047
3.1 Introduction and types of securiry................................................................................... 17.047
3.1.1 General ................................................................................................................ 17.047
3.1.2 Mortgages ............................................................................................................ 17.051
3.1.3 Charges ................................................................................................................ 17.056
3.1.4 Creation of security and type of security created ................................................ I7 .062
3.2 Fixed and floating charges .............................................................................................. 17.064
3.2.1 Distinction between fixed and floating charges .................................................. 17.064
3.2.2 Charges over book debts ...................................................................................... 17.077
3.2.3 Disposition of assets subject to a lloating charge ................................................ 17.086
3.2.4 Crystallisation ofa floating charge ..................................................................... 17.090
3.2.5 Nature of floating charges ................................................................................... 17.103
804 DEBENTURES AND CHARGES

3.3 Registration of charges .................................................................................................... 17.I06

3.3.1 Introduction ......................................................................................................... 17.106
3.3.2 Charges which need to be registered ................................................................... 17.113
3.3.3 Procedure for registration .................................................................................... 17.135
3.3.4 Registration and issue of certificate ................................................................... 17.140
3.3.5 Consequences of failure to register ..................................................................... 17.148
3.3.6 Debentures in a series .......................................................................................... 17.155
3.3. 7 Extension of time for registration ........................................................................ 17.158
3.3.8 Existing charges on property acquired by the company ...................................... 17.166
3.3.9 Rectification of registered particulars ................................................................. 17.168
3.3.10 Release of property rrom charge ......................................................................... 17.172
3.3.11 Company's own register of charges ..................................................................... 17.174
3.3.12 Non-Hong Kong companies ................................................................................ 17.179
3.4 Priority between holders of competing charges .............................................................. 17.185
3.4.1 General ................................................................................................................ 17.l85
3.4.2 Priorities in relation to charges over real property .............................................. 17.188
3.4.3 Priority in relation to charges over personal property ......................................... 17.191
3.4.4 Priority in relation to charges over debts and choses in action ............................ 17.199
3.4.5 Negative pledge and automatic crystallisation clauses ........................................ 17.205
3.4.6 Subordination agreements .................................................................................. 17.215
 1. INTRODUCTION
Loan financing under the Companies Ordinance (Cap.622): debentures and 17.001
registration of company charges. As discussed in Chapter I 3, Joan financing is
contrasted with equity financing as one of the ways in which a company can raise
funds. While the Companies Ordinance (Cap.622) contains detailed provisions
dealing with various aspects of equity financing, including provisions on the issue and
transfers of shares, the Ordinance does not in general regulate the provision of finance
to a company through loans. There are, however, two main areas where the Ordinance
deals with loan financing, namely the provisions on debentures (Cap.622 Pt.7) and on
registration of company charges (Cap.622 Pt.8). These are discussed in this chapter.

2. DEBENTURES
2.1 Introduction

Law on debentures largely unchanged by Cap.622. The main provisions dealing 17.002
with debentures in Cap.622 are contained in Pt.7. This Patt groups together the
provisions on debentures contained in the predecessor CO, ss.74A-78 (repealed)
and other provisions in the retitled Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32) which applied to both shares and debentures. For the
latter, there are now stand-alone provisions in Cap.622, although the substance of the
law is largely retained. A few of the provisions in Cap.622 Pt.7 were newly introduced,
but for the most part, the law on debentures is not altered by Cap.622.
Provisions of Cap.32 dealing with prospectuses unchanged. The provisions in Pt.JI 17.003
of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32)
on prospectuses were not dealt with by the Companies Ordinance Rewrite in any
substantive manner and continue to apply in this Cap. 32 in relation to public offerings
of debentures (and shares): see Chapter I 6.

2.2 Meaning and nature of debentures

Company can borrow by issuing debentures. A company can borrow via the issue 17.004
of a debenture 1 or a series of debentures.
Definition of debenture. There is an inclusive definition of "debenture" in the 17.005
Ordinance. Section 2 ofCap.622 defines debenture to include "debenture stock, bonds
and any other debt securities of the company, whether or not constituting a charge on
the assets of the company". 2

1
The word comes from the Latin term "debentur mihi" ("They are due to me"), the opening words used in old loan
documents.
' This definition is the same as that in Cap.32, s.2, as amended by the Securitie.s and Futures and Companies
Legislation (Structured Products Amendment) Ordinance (8 of 2011). Before the amendment, the definition
referred to "any other securities" instead of "any other debt securities". The actual wording in the earlier
definition was wider than the actual concept of a debenture, as "securities" can mean either equity or debt
securities. The definition was amended to confirm that "debenture" covers only debt securities.
806 DEBENTURES AND CHARGES

17.006 Common law definition of debenture. Since the statutory definition is not exhaustive,
the common law definition remains significant even in the context of the Companies
Ordinance. At its broadest, a debenture is defined under the common law to mean a
document creating or evidencing a debt owed by the company to a person.3 This definition,
however, is subject to some exceptions, for example a cheque or other negotiable
instrument is not regarded as a debenture even though it is a document evidencing a debt.4
Sometimes the tenn "debenture" is used more narrowly to cover only debts which are
secured over the assets of the company;5but generally speaking, under the broad meaning
of the term "debenture" under the common law,security is not an essential characteristic of
a debenture.6 Accordingly, a debenture can be either secured or w1secured.
17.007 Company is "debtor" and debenture holder is "creditor". As a matter of
terminology, the company is said to issue a debenture, while the person who holds
the debenture is referred to as a debenture holder. The legal relationship between the
parties is one of debtor-creditor, where the company is the debtor and the debenture
holder the creditor. As a loan, the debenture commonly gives the debenture holder an
entitlement to receive interest under the specified rate.

2.3 Types of debentures

17.008 Categorisation of debentures. Debentures can be categorised m different ways,

depending on the terms of the debenture.

2.3.1 Redeemable and irredeemable debentures

17.009 Redeemable debentures: can be transferred back to company. Redeemable
debentures are debentures which can be transfeITed back to or redeemed by the
company, for example, on a fixed date or at the election of the lender (debenture
holder). Redemption involves repayment of the principal (amount borrowed) to the
debenture holder, although the debenture can also provide for redemption with the
repayment ofa premium over and above the principal sum. 7
17.010 Company has power to reissue redeemed debentures. Section 328 ofCap.622 provides
that a company has the power to reissue redeemed debentures, either by reissuing
the same debentures or by issuing new debentures in their place (unless the articles
or a contract entered into by the company, or a resolution of the company, provides
otherwise). Primafcicie, a company, like any other individual, cannot owe a debt to itself,
and so the redemption of a debenture by the company extinguishes the debt such that it
would not be possible for the company to reissue the debenture to another.8 Section 328
and its predecessor provisions9 were enacted to overcome this problem.

3 levy v Abercorris Slate and Slab Co ( 1887) 37 Ch D 260; Fons (Ff-I) (i11liquidation) v Corporal Ltd [20 I5] I
BCLC 320 (written shareholder loan agreements were debentures within the common law meaning).
' Handevel Pty Ltd v Comptroller ofStc,mps (Vic) (1985) 157 CLR 177, 196.
5 Sec Chapter 13.
• llandevel Pty Ltd v Comptrollero_(Stamps {Vic) (1985) I 57 CLR 177, 196; Fons (PH) (in liquidation) v Co,pcm,I
Ltd [2015] I BCLC 320.
7
Rowell v Commissioners o.f Inland Revenue [ 1897) 2 QB 194.
8 Re Ge<>1ge Routledge & Sons Ltd [1904] 2 Ch 474; Re Tasker & Sons [1905]2 Ch 587.
9 predecessor CO, s.77 (repealed). The original English provision \\'.IS s. I 5 of the Companies Act 1907 (UK).
 DEBENTURES 807

Irredeemable debentures: no date specified for repayment of principal. 17.011

Irredeemable debentures (or perpetual debentures) are debentures where no date is
specified for the repayment of the principal. If the debenture specifies a contingent
event that can trigger redemption, then the debenture can be redeemed upon the
happening of the event. In all cases, an irredeemable debenture can still be redeemed
in the winding-up of the company. Where an irredeemable debenture is secured
against property, prima facie, the equitable principles on "clogs on the equity of
redemption" would render irredeemable debentures invalid. Courts of equity apply the
maxim "once a mortgage, always a mortgage", to ensure that a borrower will be able
to get back his property on paying off what is due on the security. 10 It is thought that
the restriction should not apply to corporate borrowers; accordingly the Companies
Ordinance (Cap.622) expressly allows companies to issue irredeemable debentures. 11

2.3.2 Convertible debe11tures

Convertible debentures: redeemed by issue of shares to debenture holder. 17.012
Convertible debentures (or convertible notes) are debentures which can be redeemed
by an issue of shares to the debenture holder. The conversion might be compulsory
or it may be at the election of the debenture holder, depending on the terms of the
debenture.
No granting of rights to convert security into shares without approval of 17.013
members. Under s.140(1 )(b) of Cap.622, the directors must not grant rights to
convert any security into shares without first obtaining the approval of the members
in general meeting in accordance with s.141. This provision extends the requirement
for member approval for non-pro rata allotments of shares to, inter alia, the issue of
convertible debentures. 12 Where approval for the issue has been given by the members
in accordance with s.141 of Cap.622, no further approval is required for the subsequent
allotment of shares made pursuant to the conversion rights. 13

2.3.3 Unsecured notes

Unsecured notes: debentures not secured over assets of company. Unsecured notes 17.014
are debentures which are not secured over any assets of the company. These are also
referred to as simple or naked debentures.

2.3.4 Debe11ture series

Debentures in series can be issued to different persons ranking equally at different 17.015
times. Where a company issues debentures which are secured against assets of the
company, those who are issued with the debentures first in time will usually have
priority over those issued later, in claiming against the assets. 14 However, a company
can issue a number of debentures to different persons all ranking equally, even though

10
Samuel vJc,rrah Timber and Wood Pc1vi11g Corp Ltd [1904) AC 323.
11
Cap.622. s.327, derived from predecessor CO, s.76 (repealed). The original provision in England was s.14 of the
Companies Act 1907 (UK).
12 er.Companies Ace 2006 (UK) s.549.
" Cap.622, s. I 40(2)(d).
" On priorities, see para.17 .185 below.
808 DEBENTURES AND CHARGES

not all issued at the same time. Where this is done, the debentures are said to be in
a series. It is necessary for each debenture to state that it ranks equally with other
debentures in the series.

2.3.5 Debenture stock

17.016 Company can create fund of debenture stock from which debenture holder
becomes a creditor for definite sum of money from that stock. A company can
create a single fund of debenture stock from which the company can issue a certificate
to each subscriber declaring that the holder is entitled to be a creditor for a definite
sum of money, being part of the stock. Where a debenture (as opposed to debenture
stock) is issued with, say, a face value of $100 (i.e. the company borrows $ 100), the
debenture holder cannot make a legal transfer of any part of the $100. 15 However,
where debenture stock is issued of whatever amount, the holder of the stock can
transfer any fraction of the amount (subject to any limitations in the terms of issue).
Holders of debenh1re stock would rank equally with each other without the need for
the certificates to expressly provide to that effect.

2.3.6 Bearer debentures

17.017 Bearer debentures transferable by delivery of debenture document. Bearer
debentures are debentures which are transferable by delivery of the debenture
document. 16

2.4 Issue of debentures

2.4.1 Investor protection

17.018 Companies and securities legislation only regulates fundraising by issue of bonds or
debt securities. While the common law concept of a debenture is wide and can cover
borrowings ranging from a single bank loan to fundraising by an issue of bonds or debt
securities, the companies and securities legislation regulates only the latter. Regulation of
offerings of debentures to investors or to the public is done as part of the legal regime for
investor protection. Although debenture holders are lenders to the company, the acquisition
of debentures or bonds is seen by the debenture or bond holder as a form of investment.

17.019 Prospectus regime also applies to offer of debentures. The prospectus regime in
Cap.32 Pt.III for offers of shares to the public also applies to the offer of debentures
to the public: see Chapter 16.
17.020 Debentures within definition of"securities" under SFO. Debentures are also within
the definition of"securities" in the Securities and Futures Ordinance (Cap.571) 17 and
are subject to regulation under that Ordinance. Debentures which are "structured
products" are also regulated as such under that Ordinance. 18

15 Since it is not possible to effect a legal assignment of part of a debt: see Law Amendment and Reform
(Consolidation) Ordinance (Cap.23), s.9.
16 BeclunmalandExplorationCo v lo11do11 TJ-adi11gBa11kLtd [ 1898) 2 QB 658.
" Cap.571 Schedule I Pt. I s. I. Note, however, the exclusions of particular types of debentures from the definition
of "securities": e.g. non-transferable debentures and debentures in a private company are excluded.
" See Cap.571, s.104A; and see the definition of"structured product" in Sch.! Pt.I s.lA.
 DEBENTURES 809

Cap.622 imposes registration requirements for issues of debentures. Part 7 of 17.021

Cap.622 contains provisions, inter alia, ensuring a level of publicity or transparency
in respect of debentures issued by the company by imposing certain requirements for
registration and the keeping of a register of debenture holders.

2.4.2 Registration of a/lotme11ts with the Registrar of Compa11ies

Cap.622 requires companies to register debentures. Section 316 of Cap.622 17.022
imposes an obligation on companies to register an allotment of debentures or
debenture stock within one month after the allotment. The provision is modelled on
the pre-existing requirement for the return of allotment for shares. 19 The return, to be
delivered to the Registrar for registration, is to be in the specified form and contain the
particulars set out in s.316(2). The reference in s.316 to an "allotment" of debentures
or debenture stock indicates that the provision is not intended to cover, for example,
single debentures in the form of an ordinary bank loan. Section 316 would cover
allotments of debentures in a series and also debenture stock.20

2.4.3 The company's register of debe11ture holders

Every company must keep register of debenture holders. The Companies Ordinance 17.023
imposes an obligation on every company to keep a register of debenture holders if the
company issues a series of debentures, or any debenture stock, that are not transferable
by delivery.21 This obligation was first introduced in Hong Kong in 1984 to enable
debenture holders with identical rights to organise joint action to protect their interests.22
Company must register allotments of debentures within two months. The company 17.024
must register an allotment of debentures or debenture stock in the company's register
of debenture holders within two months from the date of allotment. 23 This requirement
in Cap.622 did not have an equivalent in the predecessor CO and was introduced
to align with the corresponding obligation for registration of members following an
allotment of shares. 24
Register to be kept at company's registered office or elsewhere in Hong Kong. 17.025
Under Cap.622, the register may be kept at the company's registered office or at any
other place in Hong Kong.2; If the register is not kept at the registered office, the
company must notify the Registrar of the place at which the register is kept.26

1
• predecessor Cap.32, s.45 (repealed) and Cap.622, s.142. The Companies Act 2006 (UK) also contains a
requirement for a return of allotment for debentures: s. 74 l.
20 ln the case of debentures transferable by delivery (i.e. bearer debentures), a new s.3 l 6(2A) is proposed to be
introduced by the Companies (Amendment) Bill 2018 such that the requirement in s.3 l 6(2)(b)(ii) for the return
to state the name and address of the allottee will not apply.
21 Cap.622, s.308. The position in the UK is different as a register is not mandatory as such: see Companies Act
2006 (UK) s.743. In Australia, a register of debenture holders is mandatory if the company has issued debentures:
Corporations Act 2001 (Aust) s.168( I)(c).
22 Companies (Amendment) Ordinance 1984; Seco!ldReporrof rite CompaniesLaw RevisionCommirree(1973)
para.[3 .82).
23 Cap.622, s.317.
24
Cap.622, s.143.
25 Cap.622, s.309(1); Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.3. This is
more liberal than the former provisions in the predecessor CO under which the register could only be kept at the
registered office or at a place where the register is made up: predecessor CO, s.74A(2) (repealed).
2• Cap.622, ss.309(2)-309(4). Cfpredecessor CO, s.74A(3).
810 DEBENTURES AND CHARGES

17.026 Right to inspect the register. Members of the company and registered debenture
holders have a right to inspect the register free of charge. Other persons have a
right to inspect the register upon payment of the fee prescribed in the regulations
(namely $50).27 The company may charge a lesser fee or no fees at all.28 Persons may
also request the company to provide them with a copy of the register upon payment of
the prescribed fee (or any lesser amount set by the company).29
17.027 Companies able to maintain branch registers where debentures issued
outside Hong Kong. Cap.622 also introduced provisions expressly allowing
companies to maintain branch registers where debentures are issued outside
Hong Kong. 30

2.4.4 Jsst1e of debentures or certificates following allotment

17.028 Debentures must be ready for delivery within two months of allotment. Within
two months after an allotment of debentures or debenture stock, the company must
complete the debentures, or certificates for debenture stock, and have them ready for
delivery (unless the conditions of allotment provide othe,wise). 31

2.4.5 Trustee for debenture holders

17.029 Trustee usually appointed for debenture series or debenture stock. The Companies
Ordinance (Cap.622) does not impose any compulsory requirement for a trustee to
be appointed for debenture holders. However, the appointment of a trustee is useful
where a company issues debentures in a series or debenture stock. From the company's
perspective, it needs to deal only with the trustee instead of a large number of debenture
holders. There are also advantages for the debenture holders as the trustee will be able
to take co-ordinated action on behalf of all debenture holders and to act to protect the
interests of the debenture holders.
17.030 Trust deed between company and trustee. Where a trustee is to be appointed, a
debenture trust deed is entered into between the company and the trustee. The tmst is
constituted under the trust deed, and the deed will also contain matters such as powers
and duties of the trustee, rights of debenture holders, events constituting default on the
part of the borrowing company and creation of a charge (if the debentures are secured).
17.031 Legal ownership of debentures vested in trustee. The legal ownership of the
debentures (i.e. ownership of the legal chose in action constituted by the debt owing
from the company for principal and interest) is vested in the trustee. Where the
debentures are secured, the rights over the security are also vested in the trustee. As
beneficiaries under the trust, the debenture holders have beneficial interests in the
trust property (composed of the debentures and any security). 32

27
Cap.622,s.310(3); Company Records(Inspectionand Provisionof Copies) Regulation(Cap.6221),s.6.
2
s Cap.622,s.657(5)(b).
29 Cap.622,s.3I0(4); CompanyRecords(Inspectionand Provisionof Copies) Regulation(Cap.6221),s.I2; seealso
Cap.622,s.657(5)(b).
J-O Cap.622,ss.312-3I3. Thesearc modelled on the equivalentprovisions for share.s:sec Chapter 14.
;, Cap.622,s.3l 8.
" As to the debenture holders' rights of action 10 enforce the trust, see M<>rtgage Insurance C()Jp v Canadian
Agricultural Coal and Co/011isation Co (1901) 2 Ch 377: Va11depittev Preferred Accident I11s11ra11ce Co1p of
New York[1933)AC 70, 79.
 DEBENTURES 811

Provision to limit scope of clauses exempting trustees from liability. It became 17.032
common for clauses to be inserted into trust deeds exempting trustees from liability
to the debenture holders. Predecessor CO, s.75B (repealed) was introduced in 1984 to
limit the scope of such exemption clauses. 33 The provision is now contained in s.332
ofCap.622.
Clauses exempting trustee from exercising due care and diligence void. Under 17.033
Cap.622, s.332(1), a provision in the trust deed (or contract with the debenture
holders) is void to the extent that it would exempt the trustee from, or indemnify the
trustee against, liability for breach of trust for the trustee's failure to show the degree
of care and diligence required of the trustee, having regard to the provisions of the trust
conferring on the trustee any powers, authorities or discretions.
Trustee may still be granted release from liability for specific acts or omissions. J7 .034
However, that does not prevent the debenture holders from granting the trustee a
release from liability with respect to specific acts or omissions. 34 In other words,
a blanket exemption from liability contained in a provision in the trust deed (or a
contract) is not permissible, but the debenture holders can consider each situation as
it arises to see whether the trustee should be released from liability. It is possible for
the trust deed (or contract) to contain a provision enabling a release to be given by the
debenture holders through agreement by a majority of at least 75 percent in value of
the debenture holders present and voting. 35

2.4.6 Specific performance of co11tractsfor debentures

Contracts for debentures can be enforced by specific performance. Under the 17.035
general law, a contract for a loan cannot be specifically enforced and thus it has been
held that a company cannot enforce a contract to subscribe for debentures by suing for
the unpaid amounts as a debt. The company's remedy for the breach of contract would
only be damages for loss suffered. 36 This was thought to be problematic for companies,
and so the Companies Ordinance contains a provision overriding the general law
principle such that a contract with a company to take up and pay for any debentures of
the company may be enforced by an order for specific performance. 37

2.5 Transfer of debentures

2.5.1 Instrument of trams/er

No registration of debentures without instrument of transfer. A company must 17.036
not register a transfer of debentures or debenture stock unless a proper instrument of
transfer has been delivered to the company.38 This requirement is the same as that for
transfers of shares. 39

n Companies(Amendment)Ordinance 1984.The provision is derived from CompaniesAct 1948(UK), s.88.

3' Cap.622,s.332(2)(a).
35 Cap.622,s.332(2)(b).
36 South African Territories Ltd v Wallingto11[ 1898]AC 309.
37 Cap.622,s.330,derived from predecessorCO, s.78 (repealed).The English predecessorprovision is Companies
Act 1907(UK), s.16.
38 Cap.622,s.320.
39 On the instrumentof transfer for shares, see further Chapter 14.
812 DEBENTURES AND CHARGES

17.037 Stamp duty not payable on debenture transfers. Stamp duty is not payable on
transfers of debentures or debenture stock.40

2.5.2 Registration of tr{lf1sfer

17.038 Obligation to register transfer within two months. Similar to the position for
registration of transfers of shares, Cap.622 also introduced a provision imposing
an express obligation on the company to register a transfer of debentures or
debenture stock within two months after the instrument of transfer is lodged with
the company. 41 As under the pre-existing law, if the company refuses to register
the transfer, the company must give notice to the transferor and transferee notice
of the refusal. 42

2.5.3 Issue of debe11tures or certificates following tra11sjer

17.039 Certificates must be ready within two months for private companies. Where there
is a transfer of debentures or debenture stock of a private company, the private company
must complete the debentures, or certificates for debenture stock, and have them ready
for delivery within two months after the day on which the transfer is lodged with the
company (unless the terms of issue provide otherwise). 43 For other companies, the
period is 10 business days.44

2.5.4 Leg"/ title

17.040 Time at which legal transfer effective. Unlike the position in respect of members and
the register of members, there are no provisions in the Companies Ordinance defining
"debenture holder" or providing that the register of debenture holders is to be evidence
of title. Nonetheless, since the Ordinance requires companies to keep a register of
debenture holders, it is arguable that legal title is only transferred upon registration. 45
In any event, since a provision in a loan agreement prohibiting assignment of the loan
can be effective to invalidate an assignment made in contravention of the loan,46 the
terms of issue of debentures can provide that a legal transfer is effective only upon
registration.

2.5.5 Bearer debentures

17.041 Bearer debentures transferable by delivery. Bearer debentures or bearer bonds are
negotiable instruments and, as such, are transferable by delivery.47

"" Under Stamp Duty Ordinance (Cap.117), s.19, stamp duty is payable on contract notes for the sale or purchase
of Hong Kong stock. However, loan capital, debentures, loan stocks and bonds are excluded from the definition
of"stock": s.2.
" Cap.622, s.32 I .
'1 Cap.622, s.321 (2).
'3 Cap.622, ss.323(1), 323(2)(a).
" Cap.622, ss.323(1), 323(2)(b).
'' Sec Paul L Davies and SarahWorthington, Gowers Principles of Modern Company Law ( I o•• cdn, Swcccand
Maxwell, 2016) (31-22).
"' Helstan Securities Ltd v Hertfordshire County Council [ 1978) 3 All ER 262; Linden Gardens frust Ltd v Lenesta
Sludge Disposals Ltd (1994) I AC 85; Ng Wing Keung Paul vAXA China Region Trustees Ltd (2001) 2 HKC410.
" Becha11nala11d faploration Co v London Trading Bank Ltd [ 1898) 2 QB 658.
 DEBENTURES 813

2.6 Transmission of debentures

No need for instrument of transfer when debentures transferred by operation 17.042

of law. Where debentures are transmitted by operation of law, it is unnecessary for
there to be an instrument of transfer for the purpose of the registration of the person to
whom the debentures are transmitted. 48
Evidence of grant of probate or letters of administration. Where a person produces 17.043
a document to the company that is by Jaw sufficient evidence of the grant of probate
of the will or lett.ers of administration of a deceased person, the company must accept
that document as sufficient evidence of the grant. 49

2.7 Meetings of debenture holders

No detailed provisions for meetings of debenture-holders under Cap.622. There 17.044

will be occasions where the debenture holders need to meet together to make decisions.
Predecessor CO, s.75A (repealed) previously applied the statutory provisions on
general meetings of the company's members to the debenture holders (subject to any
provisions in the trust deed or other document securing the debentures or debenture
stock). This provision is not reproduced in Cap.622. Under the current law, it is left to
the trust deed (or other document) to set out provisions on the convening and holding
of meetings of debenture holders.
Certain debenture holders may apply to court to request meeting. However, s.331 17.045
of Cap.622 provides a right for debenture holders 50 with 10 per cent51 or more of the
value of the debentures to apply to the court for a meeting of debenture holders to be
held to give directions to the trustee for debenture holders. This right can be excluded
under the trust deed or other document securing the issue of the debentures. 52
Any modification to rights of debenture holders agreed by majority must be in 17.046
interests of debenture holders as a whole. Trust deeds might contain a provision
specifying that the rights of the debenture holders can be modified with agreement of
a specified majority of the debenture holders. Such provisions can enable minorities
to be bound to the decision of a majority. However, the equitable doctrine of fraud on
the minority would apply. Therefore, for example, the decision of the majority must be
made bonafide in the interests of the debenture holders as a whole. 53

48
Cap.622, s.320(2).
" Cap.622, s.325.
50 Section 331 of Cap.622 applies in res1>ectof debentures issued in a series ranking equally and in respect of
debenture stock; sec Cap.622, s.33 I(1).
5' The trust deed or other document securing the issue of the debentures can set out a higher percentage: Cap.622,
s.331(4)(b).
n Cap.622, s.33 I (3).
n British AmeriC(INickel Corp Ltd v MJ O'Brien [ 1927] AC 369. Sec further Fol/it v Eddy stone, Granite Quarries
Co [ 1892) 3 Ch 75; Mercantile investment (Ille/Ge11era/1h1stCo v River Plate Trnsl, Loan & Agency Co ( 1894)
I Ch 578; S11eath" Valley Gold Co [ 1893) I Ch 477; Cox Moore v Peruvian Co,p Ltd [ 1908) I Ch 604; Shaw v
Royce Ltd (1911) I Ch 138; Northem Assurance Ltd v Farnham United Breweries Ltd (1912) 2 Ch 125;
Asse11agonAsset i\1(11,age111e11t
SA v Irish Bank Resolution Corp Ltd [2012) EWHC 2090 (Ch).
814 DEBENTURES AND CHARGES

3. CHARGES
3.1 Introduction and types of security

3.1.1 General
17.047 Security. Security can be granted to a lender to secure a loan provided by the lender
to the company. The advantage to the lender of obtaining security for the loan is that
the lender can have recourse against the security if the company is unable to repay
the loan. The security can be enforced both before and after a company enters into
liquidation. Where the company is in liquidation, the secured lender can rely on its
security instead of claiming as an ordinary creditor in the winding-up.
17.048 Personal security and real security. There are two broad types of security that can
be provided for a loan:

1. Personal security-i.e. a guarantee, under which a person (the guarantor) is

contractually bound to discharge the liability of the debtor owed to the creditor
if the debtor defaults. For example, a lender might require the directors of the
company to guarantee a loan given by the lender to the company.
2. Real security-i.e. security over assets, where the creditor (secured creditor)
has a proprietary claim over the assets of either the debtor or a third party to
secure payment of the debt. The company can grant security over its assets in
favour of the lender under a secured loan.

17.049 Categories of real security. The categories of real secmity are:54

• pledges;
• liens;
• charges; and
• mortgages.

17.050 Charges and mortgages. The discussion m this chapter deals with charges and
mortgages.

3.1.2 Mortgages
17.051 Mortgage. Where a loan is secured by a mortgage over property, legal title of the
property is transferred from the mortgagor55 to the m01tgagee (creditor), with the
mortgagor possessing the right56 to have the property transferred back upon discharge
of the liabilities secured by the mortgage. 57

" See generally Roy Goode and Louise GuIiifer, Goodeand Gullifer011Legal Problemsof Creditand Security (6th
edn, Sweet and Maxwell 2017); ELG Tyler, Hon PW Young, Hon C E Croft, Fishera11dliglttwood~ Law of
Mortgage (3"' Australian edn, LexisNexis Butterwotihs 2014) 12-81.
" The mortgagor can either be the debtor or a third party.
" That is, the equity of redemption. This right is proprietary in nature.
57 See, e.g., Dow11sviewNomi11eesLid v First City Co,p Ltd (l 993) AC 295 (HL); Commo11Luck Investment Ltd v
Cheung Kam Cl111e11 (1999) 2 HKCFAR 229, [1999) 2HKLRD417, 422-423.
 CHARGES 815

Mortgage non-possessory security. A mortgage is a non-possessory security-i.e. 17.052

the existence of the secuiity does not depend on the security holder having possession
of the assets mortgaged.
Legal mortgage created upon effective transfer of legal title. A legal m011gageis 17.053
created where there is an effective transfer of the legal title to the mortgagee.
Equitable mortgage. An equitable mortgage is created where: 17.054

• there is a binding agreement to grant a legal mortgage (supported by

consideration); 58 or
• the mortgage is over equitable property.

Rights of mortgagee. Where the debtor defaults, the mortgagee has the following 17.055
rights:

• Power of sale-i.e. the power to take possession of the assets and to sell the
assets and to use the proceeds to discharge the debtor's liabilities owed to
the mortgagee. The power of sale may arise from express agreement under
the mortgage, or it may arise pursuant to the common law.59 There is some
doubt whether a common law power of sale exists for mortgages over tangible
property.60 A statutory power of sale can be exercised in respect of mortgages
over land.61
• Right of foreclosure-i.e. the right to have the mortgaged property vest
absolutely in the mortgagee. 62 Foreclosure extinguishes the equity of
redemption as well as the outstanding liabilities of the debtor.

3.1.3 Charges
Chargee has equitable proprietary interest. Where a loan is secured by a charge 17.056
over assets, the creditor (i.e. the chargee) has an equitable proprietary interest in
the assets constituted by a right to be paid out of the assets charged in the event of
the debtor defaulting. 63 Although the security holder has an equitable interest in the
assets, the ownership of the assets remains with the charger (the party granting the
charge).
Charge: non-possessory security. Like a mortgage, a charge is also a non-possessory 17.057
security.

58 For the equitable interest to arise, the agreement must be specifically enforceable. A contract to mortgage
property, whether real or J>ersonal,will normally be specifically enforceable: Swiss Bank Corp v Lloyds Bank Ltd
[ 1982] AC 584, 595.
59 Stubbs v Sloter [1910) 1 Ch 632 (common law power of sale in respect of a mor1gagc over shares).
6'l Sec LS Scaly and R JA Hooley, Commercial Law: Text Cases and Materials (3rd cdn, Oxford University Press
2003) 1076.
61 See Conveyancing and Property Ordinance (Cap.219), s.S 1 and Sch.4.
62 A court order is required for foreclosure. Sec further Common luck fnves1me111 Ltd v Cheung Kam Clwen (1999)
2 HKCFAR 229, [1999) 2 HKLRD 417, 422-423.
" See Swiss Bank Co,p v Lloyds Bank Ltd [ 1982) AC 584.
816 DEBENTURES AND CHARGES

17.058 Charges equitable under common law. Charges under the common law are equitable
in nature. Statute may however provide for the creation of legal charges, for example
legal charges over land under the Conveyancing and Property Ordinance (Cap.219),
s.44(1).64
17.059 Remedies for chargee following default. Where the debtor defaults, the chargee can
apply to the court to exercise a power of sale under the conunon law. The charge
agreement however can expressly grant the chargee remedies (e.g. the power of sale or
power to appoint a receiver) without the need for a court order.
17.060 Charges include mortgages under Cap.622. Under the conunon law, mortgages are
different to charges. However, under the Companies Ordinance (Cap.622), charges
include mortgages for the purposes of the provisions in the Ordinance dealing with
registration of charges. 65
17.061 Fixed charges and floating charges. Charges are of two types: fixed charges and
floating charges. The distinction is discussed below.

3.1.4 Creation of security and type of security created

I 7.062 Parties' intentions determine creation and type of security. The question of whether
a security is created over assets, as well as the question as to the type of security
created, both depend on the parties' objective intentions. 66
17.063 Tangible, intangible, real and personal property. Mortgages and charges can be
created over both intangible and tangible property, and over real or personal property.

3.2 Fixed and floating charges

3.2.1 Distinction between fixed and floating charges

17.064 Fixed charge over specific asset. Under a fixed charge (or specific charge), a specific
asset is given as security for the loan. Generally, the chargor cannot dispose of the
property free of the charge without the chargee's consent.
17.065 Floating charge. Apart from a fixed charge, a company can also grant a floating
charge as security for a loan.67
17.066 Historical development of the floating charge: restrictions under early case law.
The concept of a floating charge was developed by the English courts in the late 19th
century. Where a company does not have any substantial fixed assets (such as land),
but has only circulating assets (such as stock in trade or receivables), a lender can

., This provision provides that a legal mortgage of an interest in land is to be created as a charge by way of deed.
The legal charge does not vest the legal estate in the mortgagee but gives the mortgagee a legal interest comprised
of the rights the mortgagee would have as if it was a legal mortgage.
6s Cap.622, s.333(1).

"' Sec e.g. Smith (Adminism,tor ofCossle11 (Contractors) Ltd) v Bridgend County Borough Co1111cil [2002) I BCLC
77; Swiss Bank Co,p v Lloyds Bank Ltd [1982) AC 584; Re Far Etist Stmcwral Steelwork Engineering Ltd [2010]
I HKLRD 156.
67
Because of restrictions under the bills of sale legislation, individuals are unable to grnnt floating charges: see
Chapter I.
 CHARGES 817

obtain worthwhile security only if the circulating assets can be made the subject of a
security. Commercial documents purported to grant charges in favour of lenders over
the "undertaking", "property", "estate" or "assets" of the company. However, earlier
decisions of the courts indicated that such charges could not cover property which
might be turned over in the course of trade, as otherwise there would be business
paralysis (since charged assets cannot be disposed of without the lender's consent). 68
Later cases: floating charges can be created. Judicial opinion altered in subsequent 17.067
cases. The first conceptual breakthrough came in the decision of Holroyd v Marshall, 69
where it was held that equity would recognise the possibility of an assignment of
future property (where, for example, a present agreement to assign future property
will automatically lead to equitable title to the property being transferred upon the
property coming into existence in the hands of the assignor). This development in the
law meant that property acquired after the creation of a charge can also be subject to
the charge. The second important conceptual development was the court's recognition
that acquisition of future property under a charge need not be treated as an irrevocable
appropriation of the property to the charge but that the chargor can remain free to
dispose of the property for purposes other than as security for the chargee. 70
Floating charge facilitates commerce. Thus, the notion of a floating charge came 17.068
into existence in England for the facilitation of commerce. Floating charges can be
granted, for example, over circulating assets such as the company's stock in trade.
Under such a charge, any stock acquired by the company and in the meantime held
by the company would be subject to the charge. Until the charge is enforced (more
precisely, until crystallisation: see para.17 .090 below), the chargor company can still
sell the stock in the ordinary course of the company's business without the need to
continuously obtain the assent of the chargee for each disposition. 71
Distinction between fixed and floating charge. In Illingworth v Houldsworth, 72 Lord 17.069
Macnaghten distinguished between a fixed (specific) charge and a floating charge in
the following manner: 73

"A specific charge ... is one that without more fastens on ascertained and definite
property or property capable of being ascertained and defined; a floating charge,
on the other hand, is ambulatory and shifting in its nature, hovering over and so
to speak floating with the property which it is intended to affect until some event

"' Ki11gv Marshall ( 1864)33 Beav 565, 569; Re New Clydach Sheet and Bar lro11Co ( 1868)LR 6 Eq 60 I; and see
William J Gough, Company Cha,ges(2nd edn, Butterworths 1996) 102-103.
69 (1862)10MLCasl91.
1
• Re Panama. New Zealand a11dAustralian Royal Mail Co ( 1870) 5 Ch App 3 I 8. See further William J Gough,
Company Charges (2nd edn, Butterworths 1996) I06-108.
71
Courts in the United States,however,did not go down this route. with the courtstaking the view that arrangements
conferring such poweron the chargordid not createa genuine security interestand could not vestany proprietary
interestsin the lender: Geilfuss v Corrigan 95 Wis 651, 70 NW 306 (1897); 8e11edictv Ratner 268 US 354. 45 S
Ct 566 (1925). An alternative Forniof security wassubsequentlydevelopedin the United Statesto achievesimilar
ends:Uniform Commercial Code,art.9: sec further para.I7.110 below.
n [ 1904)AC 355.
" ( 1904)AC 355, 358.
818 DEBENTURES AND CHARGES

occurs or some act is done which causes it to settle and fasten on the subject of
the charge within its reach and grasp."

17.070 Crystallisation converts floating to fixed charge. The "event" or "act" mentioned
towards the end of the above passage is a reference to the process of crystallisation
of a floating charge. Upon crystallisation, the floating charge converts into a fixed
charge.74 Although the floating charge becomes "fixed" onto the specific assets only
upon crystallisation, a floating charge is a present security in that it presently affects
all the assets of the company expressed to be included in it75 and is available to the
chargee as and from the time it is given, although crystallisation may occur in the
future. 76
17.071 Characteristics of floating charge. In Illingworth v Houldsworth, 77 the House
of Lords had affirmed, on appeal, the decision of the English Court of Appeal in
Re Yorkshire Woo/combers Assn Ltd, 78 where Romer LJ had described a floating charge
as having the following characteristics: 79

(i) being a charge over a class of assets of a company;

(ii) that class is one where the specific assets within the class, in the ordinary
course of business, change from time to time; and
(iii) until some future step is taken by or on behalf of the chargee, the company
may dispose of the assets charged and give good unencumbered title so
long as that is done in the ordinary course of the company's business.

17.072 Floating charge where chargor free to dispose of charged assets without consent
of chargee. The above description was not intended by Romer LJ to be an exacting
definition of a floating charge. The first and second characteristics of Romer LJ's
formulation are usually present in a floating charge, but they are not essential for the
existence of a floating charge. It is the third characteristic that is the critical factor
for distinguishing between a fixed or floating charge. That is, if the chargor is free to
deal with the charged assets and withdraw them from the security without the consent
of the holder of the charge, then the charge would be a floating charge rather than a
fixed charge. 80
17.073 Whether charges designated as fixed or floating not determinative of their legal
status: courts must look to agreement between parties. Whether a charge is a fixed
or floating charge does not necessarily depend on the parties' designation, as the court
must determine as a matter of law whether the charge created is fixed or floating in

7
' Crystallisation is discussed further below at paras.17.090-17.102.
75 £vans v Rival Granite Quarries Ltd [1910) 2 KB 979, 999.
76 Wily v SI George Partnership Banking Ltd ( 1997) 150 ALR 329, 334.
77 (1904) AC 355.
78 (1903)2Ch284
"' [1903)2 Ch 284,295.
80 See Agnew v Commissioner of Inland Revenue [2001) 2 AC 710, [32) per Lord Millett; Re Spectrum Plus lid
(2005) 2 AC 680, [III) per Lord Scott. See also State Bank of India v Lisbellaw Ltd [ 1989) 2 HKLR 604.
 CHARGES 819

light of the parties' agreement as to the rights and obligations that are created. 81 In
other words, the court must have regard to the substance of the parties' agreement.
Whether charge fixed or floating does not depend on type of assets charged. 17.074
Whether a charge is fixed or floating also does not depend on the type of assets
charged. 82 It is usual for fixed charges to be granted over fixed assets, and floating
charges granted over circulating assets, but this is not inherent in the nature of a
fixed or floating charge, respectively. However, in the absence of any indication to
the contrary in the parties' agreement, a charge over circulating assets is presumed
to be a floating charge while a charge over fixed assets is presumed to be intended
as a fixed charge. 83 A charge over the company's entire undertaking is a charge
over the entire business of the company as a going concern, including all the
present and future property of the company; and as such, it is presumed to be a
floating charge. 84
Whether charge fixed or floating does not depend on whether property is existing .17.075
or future. The distinction bet\veen fixed and floating charges also does not depend on
whether the property charged is existing property or future property. A floating charge
is usually intended to cover both present and future property (i.e. the present and
future assets coming within the class of assets charged). However, it is also possible
to create a fixed charge over future property where the future assets coming within
the description in the charge agreement will be treated (in equity) as being subject to
the charge inm1ediately when they come into existence or into the ownership of the
chargor.85
Validity of floating charge depends on construction of instrument and not on 17.076
whether uncharged assets exist at time of creation. A floating charge can be validly
created even if, at the time of creation, there were no uncharged assets and even if the
company did not then have a power to acquire assets in the future free from a fixed
charge arising from the crystallisation of a prior floating charge.86 Such a situation
might arise, for example, where a first floating charge over the entire undertaking of
the company is automatically crystallised immediately prior to the time when a second
floating charge is created. The first charge is converted into a fixed charge over all
of the company's assets and there are no uncharged assets capable of coming within
the second charge. However, that does not mean that the second charge is not validly
created.87 Whether a floating charge has been created depends on the construction of
the instrument creating the charge.88

" See e.g. Agnew v Con11nissio11erofl11/a11dRevenue [200 I] 2 AC 710, [16], [32].

82 See Siebe Gorman a11dCo Ltd v Barclays Bank Ltd [ 1979] 2 Lloyd's Rep 142. The decision was overruled by the
House of Lords in Re Spectrum Plus Ltd [2005] 2 AC 680 on a different point.
u See Re Cimex Tissues Ltd [1994) BCC 626.
8' Re Pa,wma, New Zealtmd and Australia Royal Mail Co (1870) LR 5 Ch App 318.
85 Sec Holroyd v Marshall (1862) 10 I-CLCas 191; Rewe v Whitmore (1865) 2 Drew & Sm 446; Tai/by v Official
Receiver (1888) 13 App Cas 523; Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142, 159.
86 SAW (SW) 2010 Ltd v Wilson [2018) 2 WLR 636, [24) per Briggs LJ.
8' While the second charge is regarded as having been validly created, the second chargec will lose out to the rirst
chargee on the question of prio,ities: see pam.17.185.
88 SAW (Sff? 2010 Ltd v Wilson (2018) 2 WLR 636, [24) per Briggs U.
820 DEBENTURESAND CHARGES

3.2.2 Charges over book debts

17.077 Book debts can be subject to either fixed or floating depending on level of
restrictions placed on chargor. The term "book debts" refers to debts arising in the
course of trade of the company and which would in the ordinary course of business
be entered into books of account of the company.89 There have been a number of
English cases dealing with the question of whether a charge over book debts created
a fixed or floating charge. The issue arises as the parties attempt to create a fixed
charge (which is beneficial for the chargee) while at the same time reserving as much
flexibility as possible for the chargor company in the use of the proceeds of the book
debts (which is desirable for the company so that it can use the cash in the operation of
its business). However, if there are insufficient restrictions imposed on the company's
power in dealing with the book debts or its proceeds, the charge will be treated by the
courts as giving rise to a floating charge only. The issue can be critical for the chargee
where there is competition with other secured creditors or with statutory preferential
creditors (who are given priority over holders of floating charges 90).
17.078 Mere restriction on chargor selling or assigning book debts not sufficient to
create fixed charge. A charge over book debts which merely restricts the right of the
chargor to sell or assign the book debts without the consent of the chargee will not be
sufficient to create a fixed charge over the book debts: Re Brightlife Ltd.91 In that case,
the chargor was not prevented, under the charge, from collecting in the book debts and
paying the proceeds into its bank accounts.n Hoffmann J (as he then was) noted that
once the proceeds were paid into the company's own accounts, they would be outside
the charge over the company's book debts and would be at the free disposal of the
company. Where the company had a right to deal with the assets in such a way for
its own account, the charge is inconsistent with the nature of a fixed charge and thus
could only be a floating charge.
17.079 Not possible to treat book debts and its proceeds separately and create separate
fixed and floating charges. In Agnew v Commissioner of Inland Revenue,93 the
debenture purported to treat the book debts and its proceeds as separate assets under
two separate charges-a fixed charge over book debts while they remain uncollected,
and a floating charge on their proceeds. The Privy Council noted94 that while a debt
and its proceeds are separate assets, the latter are merely the traceable proceeds of
the former and represent its entire value. The debt cannot be enjoyed in specie, and
thus an assignment of or charge over a debt without giving the assignee/chargee the
right to receive and enjoy the proceeds of the debt has no value. Any attempt then to

89
Shipley v Marshall (I 863) 14 CB NS 566. See further para.17.126 below on book debts.
90 See Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32), ss.79 and 265; and see further
Chapter 20.
91
( 1986) 3 All ER 673, 676-677. See also Re Beam Tube Products lid (2006) BCC 615.
92 The debenture stated chat it created a ''first specific charge" over che company's pre.sentand future book debts.
The clause stated that the company "shall noc without prior consent in writing of [the chargce] ... deal with its
book or other debts or securities for money otherwise than in the ordinary course of getting in and realizing the
same which expression shall not authorize the selling, factoring or discounting by (the company) of its book
debts."
93 (2001)2AC710 .
., (2001)2AC710,[46).
 CHARGES 821

separate the ownership of the debts from the ownership of the proceeds would not
make any commercial sense. Accordingly, it was not possible for a debenture to treat
the book debts and its proceeds separately to create a fixed charge over book debts and
a floating charge over the proceeds. 95
Agnew case: floating charge as assets freely disposable by chargor. In the Agnew 17.080
case, since the company was al1owed to collect in the book debts and to use the
proceeds for its own account without the consent of the chargee, the company was
in substance left in control of the process by which the assets were extinguished and
replaced by different assets which were not the subject of a fixed charge and were at
the free disposal of the company. In these circumstances, the charge over the book
debts could be a floating charge only.%
Charge over book debts could be fixed if company prohibited from realising debts. 17.081
In the Agnew decision, the Privy Council noted that a charge over book debts could
be created as a fixed charge if the company was prohibited from realising the debts -
i.e. prohibited from both assignment and collection of the debts.97 However, the mere
fact that the company is allowed under the debenture to collect in the book debts does
not mean that the charge cannot be a fixed charge. For example, the debenture will
create a fixed charge98 where there is an assignment of the debts to the chargee and
the company is simply given a power to collect the proceeds (on trust) on behalf of
the chargee.99 Also, a debenture which allows the company to collect in the book debts
but which requires the company to pay the proceeds into a blocked account (such that
the company is not entitled to withdraw the amounts from the account for its own use)
can be regarded as a fixed charge over the book debts. 100 Although the company is
required to deposit the proceeds into an account with the chargee bank, the debenture
will not create a fixed charge if the company is not prevented from withdrawing from
the account for its own purposes. 101
Other restrictions sufficient to create fixed charge over book debts. Other 17.082
restrictions which would be sufficient to create a fixed charge over book debts include:

• preventing all dealings with the book debts; and

• preventing all dealings with the book debts other than their collection, and to
require the proceeds when collected to be paid to the chargee in reduction of
the chargor's outstanding debt. 102

Such restrictions not attractive to chargor company. In practice, the above 17.083
restrictions required to create a fixed charge over book debts would not be attractive

~5 The Privy Council considered Re New Bui/as Trading Ltd [ 1994] I BCLC 485 to be wrongly decided. The New
Bui/as decision was subsequently overruled by the Mouse of Lords in Re Spectrum Plus Ltd [2005] 2 AC 680.
,,.; [2001]2 AC 710, (49].
97 [2001]2 AC 710, (48].

"' Strictly speaking a mortgage.

99 [2001]2AC 710, (17], [48].
100
[2001] 2 AC 710, (48].
101
Re Spectrum Plus Ltd [2005]2 AC 680, [58)-(64], [112)-[ 120), (143)-(154).
102
See Re Spectrum Plus Ltd [2005) 2 AC 680, [54); Re Harmony Care Homes Ltd [2010) BCC 358.
822 DEBENTURES AND CHARGES

for a chargor company if the company depends on the proceeds of its book debts to
ensure sufficient cash flow for carrying on of the company's business.
17.084 Spectrum case: charge designated as fixed charge by parties and proceeds had to
be paid into designated account. In Re Spectrum Plus Ltd, 103 a charge was created
which covered the book debts of the company. The charge was stated to be a fixed
charge. The clause dealing with the restrictions on the company's use of the book debts
provided:

"With reference to the book debts and other debts hereby specifically charged
[Spectrum] shall pay into [Spectrum's] account with the Bank all moneys which
it may receive in respect of such debts and shall not without the prior consent in
writing of the Bank sell factor discount or otherwise charge or assign the same in
favour of any other person or purport to do so and [Spectrum] shall if called upon
to do so by the Bank from time to time execute legal assignments of such book
debts and other debts to the Bank."

17.085 Spectrum case: floating charge created as insufficient restrictions placed on

chargor. Pursuant to that clause, the company could collect in the book debts but
was required to pay the proceeds into the designated account. The company could not
charge or assign the chose in action represented by the account, but could withdraw
money from the account for its own use. The House of Lords affirmed the principles
in the Agnew decision. It was held that, on the terms of the charge in the present
case, there were insufficient restrictions placed on what the chargor could do with the
proceeds of the book debts. Since the chargor could freely withdraw money from the
account, then it was considered to be a floating charge. 104

3.2.3 Dispositio11 of assets subject to l1jloati11g charge

17.086 Company has implied licence or power to dispose of assets in ordinary course
of business. The core feature of a floating charge is the ability of the company to
dispose of the charged assets free of the charge. The company is treated as having an
implied licence or an implied power to dispose of the property while carrying on its
business in the ordinary course. 105 For example, transactions for sale 106 or lease 107 of
assets can be within the scope of the implied licence. Also, unless the floating charge
instrument provides otherwise, the company would be entitled to grant a later charge

'°' [2005) 2 AC 680.

°'
1
The House of Lords overruled the decision of Siebe Gorman & Co Lrd v Barclays Bank Lid [ I979] 2 Lloyd's
Rep, where a similar charge had been held to be a fixed charge. For a subsequent decision applying the principles
in Re Specrrum Plus, see Re Beam Tube Prod11crslrd [2006] BCC 615. On Spee/mm Pl11sgenerally, see Alan
Berg, "The Cuckoo in the Nest of Corporate Insolvency: Some Aspects of the Specrrum Case" [2006] Joumal
of B11si11esslaw 22; Duncan Henderson, "Problems in the Law of Property after Spectr11m Plus" (2006)
17 /11tenwrio11alCompa11yand Commercic,1 law Review 30; David Capper, "Specrrum Plus in the House of
Lords: the Victory of Substance over Form in Personal Property Security Law?" (2006) 6 Journal of Co,pomte
Law Srudies 447.
'°' Re Flore11ceLa11da11dPublic Works Co, £x p Moor ( 1878) I0 Ch D 530, 540-541; £va11s II Rival Granite
Quarries Ud(l910] 2 KB 979,993.
106 Re Florence Land a11dPublic Works Co. Exp Moor (I 878) I0 Ch D 530, 54 I.
161
Dempsey and National Bank of New Zeala11dLid 111i·aders'Fina11ceCo,p Ltd (1933) NZLR 1258.
 CHARGES 823

(e.g. a mortgage or fixed charge) having greater priority than the floating charge. 108
Transactions can be valid even though they are not usually entered into as part of
the company's business, so long as the transaction was undertaken in the course of
maintaining the company's business as a going concern. 109 Transactions would be
outside the implied licence if, for example, the h·ansaction amounts to a disposal of
the substantial undertaking of the company with a view to ceasing operation as a going
concern; 110 the transaction is designed to defeat the chargee 's secm;ty to benefit other
creditors; 111 or the transaction involves a fraudulent dealing. 112
Transaction outside company's implied licence docs not necessarily crystallise 17.087
floating charge. A transaction outside the implied licence does not necessarily
crystallise a floating charge: see further below on "crystallisation". However, if the
circumstances also give rise to crystallisation (such as where the transaction also
involves a cessation of the company's business), then the assets would pass to the
disponee subject to the crystallised charge. 113
Where no crystallisation notice of breach of implied licence determines whether 17.088
disponee takes property subject to chargee's interest. If there is no crystallisation,
whether the disponee takes the property subject to the chargee's interests depends
on whether the disponee has actual or constructive notice of the breach of the
implied licence. 114 Notice of the existence of the floating charge without notice that
the disposition is inconsistent with the charge is not enough to defeat the claims of
a disponee who takes the legal interest in the assets. 115 It is possible for a charge
instrument to expressly delineate the types of dispositions that would be valid 116 such
that the scope of the company's licence to deal with the assets is narrower than the
implied licence. 117 However, a disponee who takes the legal interest in the assets will
only take subject to the chargee's interests if the disponee has notice of the restrictions
in the charge. 118
Chargee can obtain injunction or appoint receiver if there is potential breach 17.089
of company's implied licence to deal with assets. ln all cases where there is a
proposed transaction that would breach the company's licence to deal with the assets,

10
• Re Colonial Th,sls Co,p. Exp Bradshaw (1879) 15 Ch D 465,472; Cox Moore v Peruvian Co,p Ltd (1908)
I Ch 604.
1°' Rey110/dsBros (Motors) Pty Ltd v Esanda Ltd ( 1983) 8 ACLR 422 (company which dealt in agricultural equipment

disposed of some of its second-hand tractors to a financier in exchange for a reduction in an outstanding debt; it
was held that the disposal was valid).
110 Hubbuck v Helms ( 1887) 56 LJ Ch 536. As the company ceases business, the charge would actually crystallise:

see para.17.091 below.

111 Hamilton v Hwuer(l982) 7 ACLR 295.
"' Taylor v M"Keand(l880) 5 CPD 358.
11i Fire Nymph Prod11c1sLtd v The HeGling Centre P(y Ltd (in liq) ( 1992) 7 ACSR 365, 379.
1
" See, e.g., Hamilton v Hunter (1982) 7 ACLR 295.
11s English and Scouish Mercaniile lnves1me11tCo v Brunton [1892) 2 QB 700; Reynolds Bras (Motors) Pty Ltd v

Estmda Ltd (1983) 8 ACLR 422, 427.

116
Sec, e.g., Governments Stock and Other Securities Investment Co Ltd v Manila Rly Co Ltd [1897) AC 81;
Re Crompton & Co Ltd [ 1914) I Ch 954.
117
If the restrictions go so far as to deprive the charge oft he incidents or features of a noating charge. then the court
may characterise chc charge as a fixed charge rather than a noating charge.
118
English and Scottish Mercantile lnvestmelll Co v Brunton (1892) 2 QB 700; Reynolds Bros (Motors) Pty Ltd v
Esanda Ltd (1983) 8 ACLR 422,427. See further para.17.205 below.
824 DEBENTURES AND CHARGES

the chargee can obtain an injunction to restrain the transaction' 19 or can appoint a
receiver to protect the assets. 120 Such action by the chargee would also have the effect
of crystallising the charge: see below.

3.2.4 Crystallisation of a floati11g charge

Meaning and events of crystallisation
17.090 Process of crystallisation converts floating charge to fixed charge. When a floating
charge crystallises, the charge attaches specifically to, and becomes a fixed charge
over, all the items of assets within the class of assets charged which the company
owns at the time of crystallisation. The process of crystallisation converts the floating
charge into a fixed charge as at the time of crystallisation.
17.091 When crystallisation occurs. The existence of a floating charge is premised on the
company continuing to operate as a going concern and to carry on business in the
ordinary way.121 Accordingly, crystallisation occurs in the following situations:

• Upon the court making an order for the compulsory winding-up of the
company. 122The mere fact that a petition is presented for compulsory winding-
up does not crystallise the charge. 123 Also, the charge is not crystallised
simply because a provisional liquidator is appointed before a court order for
winding-up. 124
• Upon the company passing a resolution for voluntary winding-up. 12;
• Upon the company ceasing to carry on business. 126 The mere fact that a
company is in financial difficulties is not sufficient to show that the business
of the company has ceased. 127 There would be crystallisation where the
company sells its entire undertaking with a view to ceasing operations as a
going concern. 128
• Upon the appointment of a receiver by the chargee 129 ( or other enforcement
steps by the chargee such as taking possession as mortgagee 130). However, the
appointment of a receiver by one chargee does not of itself crystallise charges
held by other chargees. 131

119 See Re Borax Co. Foster v Borax Co [ 1901] I Ch 326; Re Waodroffes (Musical !11strttmenls)Ltd (1986] Ch 366,
377-378.
"" McMahon v North Kent Ironworks Co [ 1891] 2 Ch 148. On receivers, see further Chapter 18.
'" Govemments Stock and 01lter Securities lnvestmem Co Ltd v Manila Rly Co Ltd [ 1897]AC 81, 86.
"' Wallace v U11iversalAutomatic Machi11es[I 894] 2 Ch 547.
123 Re Vicloria Steamboats Ltd [ 1897] I Ch I 58.
'" Re Obie Pty Ltd ( I983) 8 ACLR 439.
"' Re Colonial Trusls Corp ( 1879) 15 Ch D 465, 472; Re Crompton & Co Ltd [ 1914) I Ch 954.
126 Re Woodroffes (Musical /11struments)Ltd [1986] Ch 366; Natio,u,I 111,,stminster
Bank Pie vJones (2002) I 8CLC
55. Sec also Hubbuck v Helms ( 1887) 56 LJ Ch 536; Davey & Co v Williamson & Sons Ltd [ 1898] 2 Q8 194.
121 Robson v Smith [ 1895) 2 Ch 118.
128 Hamilto11v Hunter (1982) 7 ACLR 295.
,,. Evans v Rival Gra11iteQut1rries Ltd [1910) 2 KB 979.
130 Re Hamilton s fVindsor ho11works Co. Exp Pitman and Edwards (1879) 12 Ch D 707, 710.
13' Ltd (1986) Ch 366.
Re Woodroffes (Musical illstru111e11ts)
 CHARGES 825

Parties can agree on events to give rise to crystallisation. In addition, the parties can 17.092
agree on any event to give rise to crystallisation (e.g. via an automatic crystallisation
clause in the charge agreement), including the following events:

• default in payment (or upon the happening of any event of default by the
debtor under the loan 132);
• if, without the consent of the chargee, the company grants security to another
person over the property subject to the floating charge; 133
• whenever any creditor of the chargor appoints a receiver;
• whenever any other floating charge crystallises; and
• where the chargee gives notice to convert the floating charge into a fixed
charge. 134

Effect of crystallisation
Chargor no longer has right to dispose of charged assets upon crystallisation. 17.093
Where crystallisation has occurred, the floating charge becomes a fixed charge, and
the chargor company no longer has a right to dispose of the charged assets free of the
charge. The assets which are within the fixed charge are those within the description
of the floating charge which are owned by the company at the time of crystallisation.
However, it is also possible for the charge instrument to be drafted so as to cover assets
within the class covered by the floating charge which are acquired by the company
after crystallisation. 135 This is consistent with the principle that a fixed charge can be
granted covering future assets (which would be subject to the charge upon the assets
coming into the hands of the company).
Rules on priorities. Where the company purports to dispose of charged assets to a 17.094
third party following crystallisation, the rights as between the chargee and the third
party depend on the rules on priorities, discussed below at section 3.4.

Partial crystallisation
Crystallisation can occur even where chargor company financially stable. Where 17.095
an automatic crystallisation clause is drawn widely, it is possible for the floating
charge to be crystallised in circumstances where the chargor company's financial
position is still sound and where there is no risk to the chargee's secmity. For example,
if any event of default is covered by the automatic crystallisation clause, then minor
or technical breaches of the loan agreement by the chargor company could trigger
crystallisation.

'" Re Permanent Houses (Holdi11gs)Ltd [ I 988) BCLC 563.

'" SAW {SW) 2010 Ltd v Wilson [2018] 2 WLR 636.
'-" Re 8rightlife lid [ 1987) Ch 200.
'" Ferrier v 80110111er ( I 972) 126 CLR 597 (where the company charged "all its real and personal property and
assets and rights whatsoever and wheresoever situate both present and future", it was held that the charge applied
to money received by the company after crystallisation); Re 1luner Corp (in liq) (1995) 17 ACSR 761.
826 DEBENTURES AND CHARGES

17.096 Not possible to selectively crystallise charge, unless charge instrument provides
otherwise. Where the chargee takes steps to crystallise a charge (for example
pursuant to a clause which allows the chargee to crystallise charge by giving notice to
the company), prima facie it is not possible for the chargee to selectively crystallise
the charge over certain assets only but not others. 136 However, the charge instrument
can provide otherwise. For example, if the charge instrument contained a clause that
provides that the chargee may by notice crystallise only the assets specified in the
notice, it seems that the clause would be effective. 137 Also, it seems that the charge
instrument could itself specify which assets would be crystallised on the happening of
certain specified events.

Decrystallisation
17.097 Decrystallisation: some dicta suggesting chargee can waive rights after
crystallisation. It has been suggested that it is possible for a crystallised floating
charge to be decrystallised or re-floated, such that the charge reverts back to the status
of a floating charge. 138 There is little case authority directly on point, but there is some
dicta noting that a chargee can waive its rights following crystallisation. 139
17.098 Decrystallisation conceptually possible. Conceptually, it seems to be possible to
treat a crystallised charge as reverting back to being a floating charge. In respect of
the period after the decrystallisation, the chargor company is entitled again to dispose
of its assets free of the charge within the ordinary course of its business. In respect
of the period before decrystallisation, there may be some conceptual difficulties in
retrospectively treating the floating charge as never having crystallised. However,
decrystallisation is conceptually possible without the need for treating the floating
charge as never having crystallised.
17.099 Clause on decrystallisation binding on chargor and chargee. If the chargee
instrument contains a clause on decrysta]\isation (for example by the chargee giving
notice to the chargor), then any decrystallisation is made pursuant to the 01iginal
contract and should therefore be binding on the chargor and chargee. There is
effectively a binding waiver by the chargee of its rights that it could have enforced
against the chargor. Where the charge instrument does not contain a provision for
decrystallisation, any waiver by the chargee can amount to an estoppel.
17.100 Waiver by chargee gives authority to chargor to dispose of assets free of charge. A
waiver by the chargee also means that the chargee gives authority (whether expressly
or impliedly) to the chargor to dispose of the assets free of the charge notwithstanding
the crystallisation. Such conduct by the chargee means that, even if the chargee might
otherwise have had priority over a disponee, the chargee's conduct amounts to conduct
that would lead the chargee's priority being postponed. 140

' 36 Robson v Smith [1895) 2 Ch 118, 126; Evans v Rival Granite Quarries Ltd [ 1910) 2 KB 979.
n, North H'<,stemShipping & Towage C() Pty Ltd v Commonwealth Bank of Australia (1993) I 18 ALR 453.
ns William J Gough, C()mpanyC/u,rges (2ndcdn, Butterworths I996)404-407;ArchanaAcharya, "De-crystallisation
of Floating Charges by Operation of Contract" (2003) 21 Company and Securities law Joumal 214.
13' See Dovey Enterprises Ltd v Guardian Assurance Public Ltd (1993) 1 NZLR 540,549.

"" See para.17 .193 below.

 CHARGES 827

After decrystallisation chargee cannot enforce rights that arose when charge 17.101
became fixed during period between crystallisation and decrystallisation. On
the above analysis, even if the crystallised charge must still be regarded as a fixed
charge during the period between crystallisation and decrystallisation, the chargee is,
following decrystallisation, not entitled to enforce any of its security rights that arose
under the fixed charge before the decrystallisation.
Decrystallisation does not create a new floating charge. An issue has been raised 17.102
whether decrystallisation means that there is a new floating charge created. The better
view is that decrystallisation of itself does not result in a new floating charge being
created. Just as there is no new charge when a floating charge crystallises into a fixed
charge, so there is only the one continuous charge where there is a decrystallisation. 141

3.2.5 Nature of floating charges

Juridical nature: charge of future assets theory and present interest theory. There 17.103
are different theories as to the juridical nature of floating charges. Two main theories
are:

1. Charge of future assets theory. 142 Under this theory, the chargee does not
obtain any proprietary interest over the assets subject to the charge until
the charge crystallises. However, the chargee has, before crystallisation,
equitable rights in the form of a mere equity. This theory conceives of the
floating charge as an incomplete assignment which becomes complete upon
crystallisation.
2. Present interest theory. 143 Under this theory, the chargee has a present
equitable proprietary interest over the assets presently owned by the company
within the charge. The chargor is able to dispose of the assets free of the
charge on the basis of a licence granted by the chargee conferring such a
power on the chargor.

Practical implications of following either theory. Which theory of the floating charge 17.104
is correct can have practical implications. For example, a disposition of a company's
property after the commencement of winding-up is void. 144 Where a court orders a
company to be wound up, the earlier date of the petition is the date of commencement
of winding-up. 145 If a floating charge crystallises on the date of the winding-up order
(which is after the time of commencement of winding-up), then under the "charge of

141
William J Gough, Compa11yCharges (2nd edn, Butterworths 1996) 407; Archana Acharya, "De-crystallisation of
Floating Charges by Operation of Contract'" (2003) 21 Company and Securities Law Journal 214. For a different
view, see Tan Cheng Han, "Automatic Crystallisation, De-crystallisation and Convertibility of Charges" ( 1998)
2 Company Fi11ancialand Insolvency Law Reporter 565.
" 1 William J Gough, Company Cha,ges (2nd edn, Butterworths 1996) 97, 100.
" 3 John H Farrar, "World Economic Stagnation puts the Floating Charge on Trial" (1980) 1 Company Lawyer 83;
Eilis Ferran, "Floating Chargc.s - The Nature of the Security" ( 1988) 47 Cambridge Law Journal 213. See
also Sarah Worthington. "Floating Charges - An Alternative Theory" (1994) 53 Cambridge Law Jo11mal 81;
K J Naser, "The Juridical Basis of the Floating Charge" [ 1994) Company Lawyer 11.
1
., Cap.32, s.182. See further Chapter 20.
,.u Cap.32, s.184(2).
828 DEBENTURES AND CHARGES

future assets" theory, there will be a disposition to the chargee that would be rendered
void. On the other hand, if the "present interest" theory is correct, then there is no
disposition after the commencement of winding-up, and the chargee would be entitled
to rely on its security. The court in Re Margart 146 adopted the latter approach in holding
that the crystallised charge was not void. While there are also some other decisions
favouring the "present interest" theory, 147 there are also cases supporting the "charge
of future assets" theory. 148
17.105 Present interest theory preferred for commercial efficacy. The basic function of a
floating charge is to confer on the chargee security over the company's assets while at
the same time allowing the company to carry on its business without being hampered
by the fact of the existence of the security. The "present interest" theory gives full
effect to the purpose of granting to the chargee security, while the "charge of future
assets" theory can in some cases limit the effectiveness of the security (as shown
in the above example). Conceptually, there does not seem to be any impediment to
treating the chargee as having, even before crystallisation, a proprietary interest in the
assets which are in the class of charged assets and which come into the hands of the
company for the time being. It seems, then, that the "present interest" theory is to be
preferred so as to give effect to the commercial function of floating charges. Moreover,
it seems that the "present interest" theory is more consistent with the principles under
which the chargee has 1ights before crystallisation which are not merely contractual
in nature. 149

3.3 Registration of charges

3.3.1 l11trotluctio11
17.106 Part 8 ofCap.622 covers registration of charges. Part 8 of the Companies Ordinance
(Cap.622) contains the provisions on registration of charges derived from Pt.III of
the predecessor CO. The original provisions in Hong Kong were enacted in the 1911
Ordinance and were derived from the Companies Act 1900 (UK). 150 The statutory
provisions require companies to register with the Registrar details of particular
categories of charges granted over the assets of the company. Failure to register
renders the charge void as against the liquidator and other (secured) creditors. 151
The Ordinance does not, however, set out a system for determining priority between
persons with competing interests over the same assets.

146
1985) 9 ACLR 269.
(
141See, e.g., Driver v Broad [ 1893] I QB 744; Wallace v Evershed [ 1899] I Ch 891.
'" Triconti11e11ralCorp v FCT(l987) 73 ALR 433; Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267;
Wi(y vSt George Partnership Banking ltd(l997) 150ALR 329.
"' For example, the ability to seek court ap1)()intmentof a receiver where the charged assets are in jeopardy, and
the possibility of attaining priority over later fixed charges if the later chargee has notice of any negative pledge
clauses under the noating charge (discussed below at para.17.205): sec Eilis Ferran, "Floating Charge.s - The
Nature of the Security" (1988)47 Cambridge lawJoumal213, 214-217; Sarah Worthington, "Floating Charges-
An Alternative Theory" (1994) 53 Cambridge law Joumal 81.
"" As for the current UK provisions in Companies Act 2006 Pt.25 (UK), as amended by the Companies Act 2006
(Amendment of Part 25) Regulations SI 2013/600, see Peter Graham, "Registration of Company Charges"
(2014) Joumal of Business law 175.
'" See para.17.149 below.
 CHARGES 829

Purpose of register of charges to allow public to check whether company has 17.107
granted security over assets. The register of charges maintained by the Registrar,
containing the details of registered charges, is available for public inspection. The
basic purpose of the charges registration system was to "meet the complaint which
has been made, that those who deal with a company are unable to discover what its
position is as regards mortgages and charges". 152 Prospective creditors of the company
can ascertain the creditworthiness of a company by seeing whether assets of the
company are encumbered under earlier Joans granted by other lenders. 153 Generally
speaking, earlier secured creditors have priority over subsequent secured creditors, and
so a prospective creditor seeking to take security over particular assets can determine
whether there would be any prior claimants by searching the public register.
Cap.622 largely retains previous regime with some changes. The charge registration 17.108
regime under the predecessor CO is largely retained under Cap.622. However, there
are some notable charges, including:

• some changes to the list of registrable charges; 154

• requirement for a copy of the instrument of charge to be registered; 155 and
• the time for registration is changed from five weeks to one month. 156

Other changes considered but not adopted. Some other changes were also 17.109
considered in the course of the Companies Ordinance Rewrite but not adopted in the
end, such as providing for a statutory system of priorities. By and large, there does not
appear to have been much pressure from the business sector for a major overhaul of
the pre-existing law on company charges in Hong Kong. The Government considered
that the pre-existing regime has been working satisfactorily in Hong Kong and so only
modest reforms have been implemented in Cap.622. 157
System for registration of charges different to United States' PPSA regime. The 17.110
system for registration of charges under Hong Kong and English Jaw can be contrasted
with that under art.9 of the Uniform Commercial Code of the United States. The
regime under art.9 provides for a statutory code on personal property security, 158 and
has been adopted (with variations) in most Canadian provinces, 159 in New Zealand 160

152 Francis B Palmer, The Companies Act /900 (2nd edn, Stevens and Sons 1901) vi.
153 Creditors can also ascertain the general financial position of a company by inspecting the company's financial
statements. On financial statements, see Chapter 11.
"' See para.17 .116 below.
155 See para.17.138 below.

156 See para.17.137 below.

15' See Financial Services and Treasury Bureau, CO Rewrite - Company Names, Directors' Duties, Co,porate

Directorship, Registration of Charges: Co11s11/tatio11

Paper (April 2008), [5.5]-[5.6].
158 The term "personal property security" refers to security taken over personal property as opposed 10 real property

(land).
" 9 E.g., Personal Property Security Act 1967 (Ontario); Personal Property Securities Act I993 (Saskatchewan).
See Gerard McCormack, "Personal Property Security Law Reform in England and Canada" [2002] Jo11rnalof
Business law I 13.
160 Personal Property Securities Act 1999 (NZ). See Gernrd McCormack, "Personal Property Security Law Reform

in Comparative Perspective -Antipodean Insights?" (2004) 33 Common Law World Review 3.

830 DEBENTURESAND CHARGES

and in Australia. 161 The main features of the various Personal Property Securities Acts
(PPSA) overseas include:

• a unifonn system for registration of personal property security interests

created by individuals and companies;
• registration obligations based on a "notice filing system" (notice can be filed
by creditor either before or after execution of secu1ity agreement); and
• priority is on the basis of "first to file or perfect". 162

17.111 Other common law jurisdictions adopted PPSA regime as existing laws outdated.
The various English-based common law jw-isdictions which have adopted the United
States PPSA regime have done so as their pre-existing laws on company charges and
other personal property security (such as bills of sale legislation 163) are perceived to be
outdated and inadequate in meeting the needs of the modern commercial environment.
The problems of the existing regimes are said to include complexity, difficulties in
detem1ining priorities and differing registration requirements depending on the
identity or nature of the property used as security. 164
17.112 No proposals in Hong Kong to move towards PPSA regime. It was beyond the remit
of the Companies Ordinance Rewrite project to review personal property security
law generally in Hong Kong, as the Rewrite was confined to company law. There are
currently no proposals in Hong Kong to move towards a PPSA regime. In England,
there had been some earlier recommendations to adopt a PPSA regime, 165 but the
proposed reforms have not yet seen the light of day.166

3.3.2 Chllrges which 11eedto be registered

17.113 Obligation to register charges created by company. Cap.622, s.335 imposes the
obligation on companies to register every "specified charge" created by the company.
There is also a separate obligation on companies to register charges which exist over
property acquired by the company: see also Cap.622, s.338 and para 17.148 below.

161 Personal Property Securities Act 2009 (Cth of Aust). See Rasiah Gengatharen, "The New Legal Framework for
Personal Property Securities in Australia" (2012) Journal of Intematio11a/Ba11ki11g Law a/Id Regulation 94;
E LG Tyler, Hon PW Young, Hon C E Croft, Fisher a11dLiglttwood's Law of Mortgage (3"' Australian edn,
LexisNexis Butterworths 2014) 140-243.
162 The security is said to be pe1fected by registration or, in the case of possessory security (where the security
interest arises under the law by the creditor taking possession of the property), the security is perfected by the
taking of possession.
163 As to bills of sale, see para.17. 123 below.
i,s., Gerard McCormack, "Personal Property Security Law Reform in Comparative Perspective - Antipodean
Insights?" (2004) 33 CommollLaw WorldReview 3, 5.
165 Report of the Committee 011 Consumer Credit (1971, Cmnd 5427) (Crowther Report); A Review of Security
Interests in Property(HMSO, London, 1989) (Diamond Report).
166 A less radical overhaul was proposed by the UK Law Commission: Company Security Interests(Report No 296)
(2005, Cmnd 6654). Sec further Gerard McCormack, "Rewriting the English Law of Personal Property Securities
and Article 9 of the US Unifom, Commercial Code" (2003] Company Lawyer 69; Gerard McCormack, "The
Law Commission Consultative Rcporl on Company Security Interests: An Irreverent Riposte" (2005) 68 Modern
Law Review 286; Andrew McNight, "Reforming the English Law of Secured Transactions in Personal Property"
(20 I0) 4 Law and Fi11aJ1cial Markets Review 553. For the present law in the UK, see also note 147 above.
 CHARGES 831

Only charges and mortgages need to be registered under Cap.622. Not all 17.114
security granted by a company needs to be registered under the Companies Ordinance
(Cap.622). The provisions only cover charges and mortgages. 167 Other types of security,
such as pledges or liens, need not be registered.
Only those charges specified as registrable need to be registered. Even where 17.115
the security is a charge (or mortgage), registration is required under Cap.622 only
if the charge is of a type that is listed as being registrable. Under Cap.622, the term
"specified charge" is used to refer to charges which need to be registered. The list of
"specified charges" is set out in Cap.622, s.334.
Heads of registrable charges. The heads of registrable charges (specified charges) 17.116
are largely the same as those in predecessor CO, s.80(2) (repealed), but there are
some modifications. Notably the head of charge under the predecessor CO, s.80(2)(a)
(repealed) (a charge for the purpose of securing any issue of debentures) was omitted in
Cap.622. The provision clearly covered any charge granted for an issue of debentures
in a series or debenture stock. There had been some uncertainty whether the provision
covered charges granted under a single debenture, but the better view was that the use
of the word "issue" connoted a charge created for the purpose of securing a number
of debentures in a group, and hence single debentures were not caught 168 (unless they
fell within another head of charge). Under earlier Australian legislation, this head of
charge had been removed to avoid the uncertainty and also to remove the anomaly in
that all the other heads of charge dealt with charges over specific kinds of property
rather than with charges over the kind of debt for which security is given. 169 Likewise,
this head of charge was removed in Hong Kong under Cap.622 as it was thought to be
unnecessary. 110
Specified charges under Cap.622. The specified charges within Cap.622, s.334 are 17.117
discussed below.

Share capital
No requirement to register charge where company grants charge over shares that 17.118
it owns over another company. Where a company owns shares of another company,
the first-mentioned company can grant a charge over those shares. 171 There is no
specific head of charge requiring registration of such charges.
Heads of charge covering company's own share capital. In respect of the company's 17.119
own share capital, there are a number of heads of charge covering charges over the
company's rights to receive unpaid amounts due on shares (e.g. the company's rights
to receive further amounts from holders of partly paid shares).

,., The term "charge" is defined to include a mortgage for the purpose of the provisions on registration of charges:
Cap.622, s.333( I).
' 68 Automobile Association (Canterbwy) Inc v Australasian Secured Deposits lid [ 1973] 1 NZLR 417.
,., Company Law Advisory Cornmittce(Australia),Sevent/, Interim Report: Company Charges (1972, Parliamentary
Paper No 230) (Eggleston Committee Report), [43].
,,. Financial Services and Treasury Bureau, CO Rewrite - Company Names, Directors· Duties, Co,porate
Directorship, Registration ofClwrges: Consultt1tion Paper (April 2008), (5.9].
'" For a discussion on taking security over shares, see China Minsheng Banking Co,p Ltd v DiChai11Holdings Ltd
[2008) 5 HKLRD 373.
832 DEBENTURESAND CHARGES

17.120 Charge on uncalled share capital needs to be registered. A charge on uncalled share
capital of the company needs to be registered: Cap.622, s.334(l)(a). 172 It is possible
for a company to grant a charge over its uncalled share capital such that in the event of
calls being made on the shareholders (whether before or during a winding-up 173), the
chargee is entitled to the amounts paid in by the shareholder or contributory. 174 Where
such a charge is intended, the charge should expressly refer to uncalled share capital.
It has been held that a charge on the company's undertaking and all its "property
whatsoever and wheresoever both present and future" only covers property of the
company, as it exists at the time of commencement of winding-up, and so would not
include capital uncalled as at that time. 175
17.121 Charge on calls on shares made but unpaid registrable. A charge on calls on shares
made but not paid is also registrable. 176
17.122 Charges on instalments due but not paid registrable. Cap.622 also introduced a
head of registrable charge for charges on instalments due, but not paid, on the issue
price of shares. 177 This provision was introduced to cater for the situation where,
instead of shares being issued partly paid, they are to be issued as fully paid, with the
payments to be made by way of instalments. The instalments are not strictly calls and
so would not come within the head of charge for unpaid calls on shares.

Bill of sale
17.123 Any charge that would require registration as bill of sale registrable by company.
A charge created or evidenced by an instrument that, if executed by a natural person,
would require registration as a bill of sale is registrable under s.334(1)(b) of Cap.622. 178
It has been said that a bill of sale, in its ordinary meaning, is a document which is
given where the legal property in the goods passes to the person who lends money
on them, but the possession does not pass. 179 For example, a document creating a
mortgage over goods is a bill of sale. The Bills of Sale Ordinance (Cap.20) (BOSO)

"' As to the meaning of uncalled share capital, see Chapter 14.

173
ln a winding-up. the liquidator has the power to make calls (see Cap.32, s.213 and Companies (Winding-up)
Rules (Cap.32H) r.74). The receiver for the chargee can only realise the secmity through the liquidator, although
the court can order the liquidator to make the call or the receiver may be empowered to use the liquidator's name
for getting in the call: Fowler v Broads Pate/II Night Light Co [1893) I Ch 724.
'" Re Pyle Works ( 1890) 44 Ch D 534; Newton v Anglo-Australian btvestmenl. Finance and Land Co [ 1895) AC 244.
"' Re Streat/tom and General Estates Co [1897) I Ch 15; Re Russian Spratts Patent Ltd [1898) 2 Ch 149. The
company's 1ight to uncalled capital is a chose in action and so the charge over uncalled capital is a charge over a
chose in action (Re Queensland Mercantile and Agency Co. Exp A11stralasia,1Investment Co [I 891] I Ch 536).
However, in Re Russian Spratts Pate11/Ltd, Lindley MR stated: "although in a sense, uncalled capital may be
called property, it is property of a very peculiar description. After all, it is not a debt. It is a right to make a call
and create a debt; and it is rather stretching the meaning of the word 'property' to make it include such a right
as that". Mercantile practice at the time never considered "property·• of a company to include uncalled capital
and the English Court of Appeal was not prepared to depart from that interpretation. Although a charge over the
entire undertaking and property of the company does not cover uncalled capital, the charge would still need to be
registered under an alcema(ive head of charge (Cap.622 s.334(1 )(j)): sec para.17.134 below.
176
Cap.622, s.334(1)(c). For the concept of partly paid shares and the making of calls, sec Chapter 14.
117
Cap.622, s.334(1)(f).
178 For bills of sale generally, sec Wayne Clark et al., Fisher tmd Lightwo0tls Law oJMortgage ( 12th edn, LcxisNcxis

2006) Ch.16; Re Far East Structurtd Steelwork £11gineeri11g Ltd [2010] I HJ<LRD 156; Re Hang Fung kwellery
Co Ltd (20 l OJ2 HKLRD I.
m See Mills v Charlesworth (1890) 25 QBD 421,424.
 CHARGES 833

requires registration of bills of sale, 180 but companies are exempted from the obligation
to register under that Ordinance. 181 However, if the bill of sale would otherwise be
registrable under the BOSO if executed by a natural person, then any charge created or
evidenced by the bill of sale needs to be registered under Cap.622.
Meaning of "bill of sale". There is a detailed definition of "bill of sale" in BOSO, 17.124
s.2, which extends the common law meaning of the term. The definition broadly
covers: (i) instruments transferring legal or beneficial ownership of personal
chattels; (ii) instnunents conferring a right of possession of personal chattels; and
(iii) agreements by which a right in equity to any personal chattels, or to any charge
or security thereon, is to be conferred. 182 A bill of sale can be one given as security for
payment of money (security bills) or for other purposes (absolute bills). Even though
a document may be a bill of sale under BOSO, it would only be registrable under
Cap.622 where a charge is created (i.e. security bills). 183

Land
Charge over land or interest in land registrable. This head applies to charges on 17.125
land (wherever situate) or any interest in land, except a charge for any rent or other
periodical sum issuing out ofland: Cap.622, s.334( l)( c). 184 Where a judgment creditor
obtains a charging order from the court whereby the company's interest in land stands
charged with payment of the judgment debt, the charging order is a form of execution
and is not an equitable charge that needs to be registered. 185 The holding of debentures
entitling the holder to a charge on land is not to be regarded as an interest in the land. 186

Book debts
Charge on book debts registrable. A charge on book debts of the company 1s 17.126
registrable: Cap.622, s.334(l)(d). Book debts have been described as:

" ... such debts accruing in the ordinary course of trade as are usually entered in
the trade books". 187

Well-kept books of the company would show what moneys are to become payable,
when they should be paid and to what extent they are paid. 188 For example, the debts
payable to a company arising from the company's sale of goods or supply of services
in the ordinary course of its business would be book debts. 189 This includes amounts

ISO BOSO, s.9.

181
BOSO, s.26.
18
' LS Sealy and R JA Hooley, CommercialLaw: Text Cases a11dMarerials(3rd edn, Oxford University Press2003)
1090. There are also expressexclusions under the definition in BOSO, s.2.
183
Sto11e/eighFinance Lid v Phillips [1965] 2 QB 537.
184
There arc also separatercgistracionrequirementspursuant to chc Land Registration Ordinance (Cap.128): sec
generally S H Goo andAlice Lee, Land Law in Hong Kong (3rd cdn, LcxisNexis 2009).
18
' Re OverseasAvia1io11 Engineeri11g(GB) ltd [ 1963] Ch 24.
186
Cap.622, s.334(2).
187
Shipley v Marshall (1863) 14 CB NS 566.
188
Re WF Le Comu Ltd; Liquidator v FederalTradersLtd [ 1931) SASR 425,440.
189
Ladenb11rg& Co v Goodwi11,Ferreira& Co Ltd (1912) 3 KB 275.
834 DEBENTURES AND CHARGES

that would be due as instalment payments. 190 Where the company is a bank in the
business of providing loans, a loan owed by a bank customer/borrower is a book debt
of the lending bank. 191 The debt arising under a cheque or credit card transaction
for payment for the sale of a company's stock in the ordinary course of business is
itself a book debt. 192 Similarly, a charge over a promissory note is a charge over the
right to payment under the promissory note, and where the monies payable under the
promissory note are a book debt, the charge over the promissory note would also be
regarded as a charge over a book debt. 193
17.127 Existing and future book debts registrable. If the debt is in the nature of a book
debt, it will be treated as a book debt whether or not it is in fact entered in the books
of the business. 194 A charge can be granted over both existing and future book debts,
and a charge over future books is registrable just as much as a charge over a book debt
which is in existence at the date of creation of the charge. 195
17.128 Statutory exclusions where charge not regarded as charge over book debt. There
are a number of statutory exclusions where the charge is not regarded as a charge over
a book debt:

• A deposit by way of security of a negotiable instrument given to secure the

payment of book debts is not to be regarded as a charge on those book debts. 196
This exemption is granted in order that the benefits of, and consequences
of, negotiability should not be prejudiced by the insolvency of the company
which deposits the negotiable instrument. 197
• A charge over bank deposits 198 is excluded under Cap.622, s.334(3)(b). That
provision states that if a company maintains a deposit of money with another

190 Re Lawson Co11structio1,sPty lid [1942) SASR 201 (ins1alment payments for work in progress under a
construction contract); Independent Automatic Stdes lid v Knowles & Foster (1962) I WLR 974.
191
Chase Manlwuan ASill Ltd v First Bangkok City Fina11ceLtd [1990) I WLR 1181, (1990) 2 HKLR 215 (PC).
192 Northem Bank Ltd v Ross (1990) BCC 883.
193
Chase A,fllnhattllnAsiaLtd v First Bangkok Ciry Finance Ltd [1990) I WLR 1181, (1990) 2 HKLR 215 (PC). But
note the exception in s.334(3)(a) ofCap.622: see para.17.128 below.
194 illdependem Autonl(ltic Sales Ltd v Knowles & Foster [ 1962) I WLR 974.

195 llldependemAutonl(ltic Sales lid v Knowles & Fosler (1962) I WLR 974.

19• Cap.622, s.334(3)(a).

"' Chase Ma11hat1a11 Asia lid v First Bangkok Ciry Finance lid (1990] I WLR 1181, [1990) 2 HKLR 215,218
(PC). In this case, the promissory note had not been deposited and so the exemption did not apply.
198 In Re Charge Card Services Lui [1987) Ch 150, it had been held that it is not possible for the holder of a

bank deposit account to grant a charge in favour of the bank over the money in the account ("charge-back
arrangements"). The account constitutes a debt owed by the bank to the account holder. The court considered
that conceptually it is not possible for a charge to be granted in favour of a debtor of his own indebtedness. If
the debtor enforces the charge, the debtor would have to sue himself, which is not possible. It was thought that
the charge would not be possible because a person cannot have a proprietary interest in a debt which he owes to
another: Re Ba11kofCredi1a11dCommerce !n1emalio11alSA (No.8) [ 1996] Ch 245,258. However, this reasoning
was disapproved of by the House of Lords in Re Ba11kof Credi, and Commerce lnternalional SA (No.8) [1998)
or
AC 214 where it was considered that the charge back arrangemelll satisfies the elemcnrs for creation a charge,
and that where the charge over a debt is in favour of the debtor rather than a tltird party, the only difference
is that the method of enforccmelll of the charge and realisation of the property is different (by way of a book
entry rather than claiming payment from the debtor). In any event, the position is clarified in Hong Kong under
Law Amendment and Reform (Consolidation) Ordinance (Cap.23) s. I 5A, which confirms that charge-back
arrangemenlS are valid: see also Tam Wing Cillle11v Bank of Credit & Commerce Hong Kong Ltd (1996) BCC
3 88, [ I 996) I HKC 692 (PC).
 CHARGES 835

person, a charge on the company's right to repayment of the money is not to

be regarded as a charge on book debts of the company. There had been some
uncertainty whether a charge granted by the company over its bank deposits
is a charge over a book debt (as the credit amount in the company's deposit
account is a debt owed by the bank to the company), although the better view
is that it is not. 199 Cap.622 puts the matter beyond doubt.
• If a company charters a ship from a shipowner, the shipower's lien on
subfreights for amounts due under the charter is not to be regarded as a charge
on book debts.200 A lien on subfreights is a provision in the charterparty of
a vessel stating that the shipowners shall have a claim upon all amounts
due under sub-charterparties for payments in respect of the head-charter. 201
A number of first instance decisions in England had held that such a lien
would be a registrable charge either as a charge on book debts202 or as a
floating charge.203 However, the correctness of this view has been doubted;
it being observed that the lien gives the shipowner only the personal right
to intercept sub-charter payments before they reach the charterer and not a
prop1ietary right, and so the lien is not in the nature of a charge. 204 Moreover,
from the commercial perspective, it is thought that it is inappropriate to
characterise such liens as registrable charges as such liens are of relatively
short duration.205 Cap.622 overturns the effect of the English case law in
providing that such liens are not registrable charges.

Debts not amounting to book debts. The following also do not amount to book debts: 17.129

• a debt due from an agent to a principal or money held on trust for the
principal; 206
• realisation of a company's assets which are not made in the course of normal
trading activity of the company;207
• contingent debts under contracts of insurance, or guarantee or indemnity
contracts. 208

199 Re Brightlife Ltd (1987) Ch 200, 208-209; Perrins v Suite Ba11kof Victoria (1991) I VR 749, 754. Book debts
reflect the proceeds of normal trading activity, and it is inappropriate to regard a company's credit bank balances
as book debts since bank balances are more appropriately viewed as investments of the company's surplus
moneys: William J Gough, Company Charges (2nd edn, Butterworths 1996) 685.
200 Cap.622, s.334(4).

201 Financial Services and Treasury Bureau, CO Rewrite - Company Names, Directors' Duties, C0tporate

Directorship,Registra1io11 of Charges: Co11s11ltatio11 Paper (April 2008), (5.17).

,o, Re WelshIrish Ferries Ltd [ 1986] Ch 471; flex ltagrani Exports SA v Care Shippi11gC0tp [ 1993] QB 1.
203 A11na11gel Glory Compa11iaNaviera SA v M Golodetz Ltd [1988] I Lloyd's Rep 45. See para.17.134 below on
registration of floating charges.
'°' Agnew v Commissionerof !11ltmdRevenue (2001) 2 AC 710. [41).
,os Financial Services and Treasury Bureau, CO Rewri1e - Company Names, Directors· Duties, Co,por(lte
Directorship,RegistrationofClwrges: Consultation Paper (April 2008), [5.17).
2°' Shacke/1v Howe, Thornton & Palmer (1909) 8 CLR 170; Re Law Ct,r and General Insurance Corporation Ltd

[1911) WN 91.
2• 1 Harl v Sames (1982)7 ACLR 310, 316-317.

208 Paul & Frank Ltd v Discount Bank (Overseas) Ltd (1967) Ch 348.
836 DEBENTURES AND CHARGES

17.130 Factoring agreement under which there is sale of book debts not a charge over
book debts. A factoring agreement under which there is a sale of book debts does
not amount to a charge over book debts, even though the purchaser of the debts is
given recourse against the seller in the event of default in payment of the debt by the
debtor.209

Ships and aircraft

17.131 Charge on ship or share in ship registrable. A charge on a ship or any share in a ship
needs to be registered. 210
17.132 Charge on aircraft or share in aircraft registrable. Cap.622 introduced a head of
registrable charge for charges on an aircraft or any share in an aircraft. 211Under the
predecessor CO, s.80(2)(c) (repealed), there was a possibility that such charges would
be registrable as a bill of sale. The position is clarified under Cap.622 so that all
charges over aircraft need to be registered, to align with the position for charges on
ships.212

Goodwill and intellectual property

17.133 Charge on goodwill and intellectual property registrable. This head of charge
covers charges on:

(i) goodwill;
(ii) a patent or a licence under a patent;
(iii) a trademark; or
(iv) a copyright or a licence under a copyright. 213

Floating charge
17.134 Floating charge on company's undertaking or property must be registered.
A floating charge on the company's undertaking or property is registrable. 214

3.3.3 Procedure for registration.

17.135 Obligation to register imposed on company but chargee may also register charge.
The obligation to register is imposed on the company. 215However, it is in the interests
of the chargee to ensure that the charge is registered. Accordingly, the chargee (or any

m Hallma,*Cards Inc v )',,n Choy lld[2012] I HKLRD 396; WelshDevelopmemAgency v Expon Finance Co Ltd
(1992] BCC 270; Lloyds & Scouish Finance v Cyril Lord Ca,pets Sales (1992] BCLC 609.
z,o Cap.622, s.334(1)(g). There are also registration requirements under the Merchant Shipping (Registration)
Ordinance (Cap.415).
211
Cap.622, s.334(1)(h).
212 Financial Services and Treasury Bureau. CO Rewrite - Company Names, Directors· Owies, Co,porate
Oirec1orship,Registrationa/Charges: Consultation Co11clusio11s (December 2008), [37].
213 Cap.622, s.334(1)(i).
"' Cap.622, s.334(1 )(i). On floating charges, see parn.17.071 above.
2
" Cap.622, s.335(1).
 CHARGES 837

person interested in the charge) may effect registration. 216Where a person other than
the chargor company registers the charge, the person can recover from the company
the fees paid to the Registrar for registration.217
Formalities for registration. To effect registration, it is necessary to de)iver a statement 17.136
of the particulars of the charge, together with a certified copy 218of the instrument (if
any) creating or evidencing the charge, to the Registrar for registration. 219A statement
of particulars must be in the specified form220 and be accompanied by the prescribed
fee.221

Cap.622: registration must be within one month of creation of charge. Under 17.137
Cap.622, the time period for registration is one month after the date on which the
charge is created. 222This period is shortened from the period of five weeks as set
out in the predecessor CO, s.80(1) (repealed). A person inspecting the register of
charges at any particular time will not necessarily find details of any registrable charge
recently created by the company (in the last month under Cap.622, or in the last five
weeks under predecessor CO). As such, this period for registration has been referred
to as the "invisibility period". While a longer period of time may be advantageous
from the perspective of giving enough time for preparation of the materials for
registration, a long "invisibility period" is disadvantageous to prospective creditors
since, at the time when they take a charge from the company, they cannot be certain
that the company has not granted any other charge (that might have priority) during
the invisibility period. To reduce the latter problem, the period is shortened under
Cap.622 to I month. The original proposal in the draft Companies Bill had been to
shorten the pe1iod to 21 days,223but this was subsequently changed to one month
due to concerns by creditors that 21 days might be insufficient for preparation of the
registration documents.
Cap.622: statement of particulars of charge and copy of instrument creating 17.138
charge must be registered. Under the predecessor CO, s.83 (repealed), the Registrar
was required to register only the particulars of charge set out in (former) s.83( I)(b) of
predecessor CO. The charge instrument was sent to the Registrar simply for the purpose
of comparing the part.iculars in the specified form with the instrument of charge before
the Registrar registers the particulars. Under Cap.622, s.344, both the statement of the

216 Cap.622, s.335(3).

217 Cap.622, s.335(7).
"' The copy must be certified as a true copy by a director or company secretary of the chargor company (or a
person authorised by the company); or by any other person interested in the charge (or a person authorised by
the first-mentioned person, or in the case of a company that is an interested person, a director or secretary of that
company): Cap.622, s.333(4).
219 Cap.622, s.335( I).

,,. Form NM I. See further para. 17.14 I below.

22' Cap.622, s.335(6). For the amount of the fees, see the Companies (Fees) Regulation (Cap.622K).
222 Cap.622, s.335(5)(a)(i). lfthe charge is created outside Hong Kong and comprises property situated outside Hong

Kong, the time period for registration is one month after the date on which a cerlified copy of the instrument of
charge could, if dispatched with due diligence, have been received in Hong Kong in.due course of post: Cap.622,
s.335(5).
"' This is the period under Companies Act 2006 (UK) s.859A. Sec furlher Financial Services and Treasury
Bureau, CO Rewrite - Company Names. Directors·D11ties.Corporate Directorship.Registrationof Charges:
Paper (April 2008). [5.27), and ConsultationCo11c/11sio11s
Co11s11/tatio11 (December 2008), [55).
838 DEBENTURES AND CHARGES

particulars of the charge and a copy of the instrument creating or evidencing the charge
(if any) are to be registered. 224 This was proposed to provide greater transparency so
that more information on the charge is available for public inspection. 225 A significant
legal effect is the impact on the rules on constructive notice of matters relating to
the charge. 226 In the public consultation responses on this proposal, there had been
some concerns about confidential or commercially sensitive information in the charge
instrument being made available for public inspection. However, the Government
noted that such information can always be set out in an ancillary document instead of
the charge instrument itself, in which case the information would not be on the register
and cannot be inspected by the public. 227
17.139 Instrument refers to any written document where rights and liabilities are
confirmed. For present purposes, "instrument" means any ''\vritten document or
documents, formal or informal, whereby rights or liabilities legal or equitable exist or
are confirmed". 228 An example of an instrument evidencing the charge is a document
such as a memorandum of deposit which evidences the creation of a charge created by
way of deposit of title deeds. The reference to an instrument evidencing a charge does
not cover documents which, coincidentally to their main purpose, merely indicate that
a charge must at sometime or somehow have been created (such as a letter that refers
to the charge); more direct association is necessary.229

3.3.4 Registration a11dissue of certificate

17.140 Su11case: applicant failed to include requisite particulars on registration form,
registration refused. ln Sun Tai Cheung Credits Ltd v Attorney GeneraP.30 (a decision
on an earlier version of predecessor CO, s.80 (repealed)), the Privy Council, on appeal
from Hong Kong, had held that the applicant for registration must prove his right to be
registered by giving the date of the charge and thus demonstrating that the time period
for registration had not expired. Accordingly, where the applicant failed to include
such requisite particulars in the form for registration, the Registrar is entitled to refuse
registration. In that case, there was no instrument creating or evidencing the charge,
and the Privy Council held that it was incumbent on the applicant to give particulars
to show how the charge was created, when it was created and how it came about that
a charge was created without an instrument. The applicant had also lodged copies of
letters referring to the charge, but the Privy Council held that this was insufficient; the
Registrar was not bound to analyse and understand all the letters and then draft the
necessary particulars for the applicant.

2" This is now also the position in the UK: see Companies Act 2006 (UK) s.859A (introduced by the Companies Act
2006 (Amendment of Part 25) Regulations SI 2013/600).
225 Financial Services and Treasury Bureau, CO Rewri1e - Compa11y Names, Directors· Duties, Co111orote

Directorship, Registration of Charges: Consult01ion Poper (April 2008), [5.22).

22• See para. 17.206 below.
227 Financial Services and Treasury Bureau, CO Rewrite. Second Phase Consulu,tion 011the Draft Companies Bill:

Consultation Conclusions (October 2010), Appendix III (p.29).

" 8 Mt1so1111Sclwppisser (1899) 81 LT 147, 148; Sun Tai Cheung Credits lid 11Alfomey Ge11eral[ 1987) I WLR 948,
[1987) HKLR 1010, 1016 (PC).
,,. Sun Hung Kai Bank Ltd vA11orney Genert,I (1986) HKLR 587,594, CA, affirmed on appeal: S1111 Tai Che1111g
Credits Ltd vAllorney General (1987) I WLR 948, (1987) HKLR 1010, 1016 (PC).
"" (1987) I WLR 948, (1987) HKLR 1010.
 CHARGES 839

Cap.622: application for registration must comply with specified form. Under 17.141
Cap.622, Pt.8 does not list out the required particulars, but the application for registration
would need to comply with the specified form (Form NMl), 231 which would list out
the requisite particulars. If the application for registration does not comply with the
form and contents requirements of the specified fom1, then the Registrar would be
entitled to refuse to register the charge pursuant to the Registrar's powers in Pt.2 of
Cap.622. 232 ln all cases, the applicant would need to show its entitlement to registration
pursuant to the principles in Sun Tai Cheung Credits Ltd v Attorney General, above.
Charge appears on Registrar's register of charges after registration. Once 17.142
accepted for registration, the statement of particulars of the registered charge and the
copy of the instrument creating or evidencing the charge (if any) are registered on the
Registrar's register of charges. The register of charges maintained by the Registrar is
part of the Companies Register233 to which the public can access upon payment of the
specified fee.234 The extent to which persons would be treated as having constructive
notice of matters registered in the register of charges is discussed below at para.17 .206.
After registration Registrar issues certificate of registration: conclusive evidence 17.143
that requirements for registration been satisfied. Following registration, the
Registrar issues a certificate of registration. 235 The certificate is conclusive evidence
that the requirements for registration have been satisfied, 236 notwithstanding any
errors or omissions made by the applicant for registration or by ilie Registrar in
the particulars registered. 237 The certificate is conclusive for all the purposes of the
Companies Ordinance (and also the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32)) and not merely conclusive for the purposes of the
Part dealing with registration of charges. 238
English case law: certificate of registration conclusive as to due registration but not 17.144
that particulars themselves are accurate. There is some uncertainty in the case law
as to the precise matters on which the certificate is conclusive. The statutory provision
states that the certificate is conclusive evidence that "the requirements of this Part. as
to registration have been satisfied". In England, it has been held that this means that
the certificate is conclusive evidence that the Registrar has entered the particulars of
the charge on the register of charges and that the steps preliminary thereto have been
cariied out (namely the presc1ibed particulars have been presented to the Registrar for
registration). 239 In other words, the certificate is conclusive evidence that the charge
is properly registered and cannot be subsequently treated as void.2A-O This is the case
even though the actual date of the creation of the charge was earlier than as stated in

231 Cap.622, s.335.

m See in particular Cap.622, ss.31 and 35.
2.;.; Cap.622, ss.2, 27.

"' Cap.622, s.45; see also the Companies (Fees) Regulation (Cap.622K).
235 Cap.622, s.344(2).

m Cap.622. s.344(4).
"' National Provincial and Union Bank of England v Chamley [ 1924] I KB 431, 447-448; Re CL Nye ltd ( 197I]
Ch 442; Re Moulin Global £yecare Holdings lid (2009) 12 HKCFAR621.
" 8 Re Moulin Global £yecare Holdings Ltd (2009) 12 HKCFAR621. Sec further Chapter 20.
" 9 Re Mechanisations (Eaglescliffe) Ltd [ l 966) Ch 20, 35.
2<-0 National Provincial and Union Ba11kofE11gla11d v Chamley (1924) I KB 431,451 (Eng CA).
840 DEBENTURES AND CHARGES

the certificate and the charge would have been registered out of time if the actual date
of creation was treated as the date of creation for the purpose of determining whether
the charge was registered within time. 241 However, in order to discover the terms and
effect of the charge, one must look at the document creating the charge and not the
register.242 Accordingly, the English courts have held that even though the certificate
wrongly states the amount secured by the charge, the charge is not rendered void to
the extent of the understated amount. 243 The charge is valid as to the actual amount
secured as stated in the charge instrument and is not limited to the amount stated on
the certificate. Under the English case law then, the certificate is conclusive as to due
registration but not that the particulars registered are themselves accurate. 244
17.145 Hong Kong: obiter that certificate conclusive evidence of matters stated in
certificate including date of creation of charge. In Hong Kong, the Court of Final
Appeal in Re Moulin Global Eyecare Holdings Ltd, 245 suggested, by way of obiter,
that the certificate is conclusive evidence of the matters stated in the certificate such
that the date named in the certificate is to be regarded as the date of creation of the
charge notwithstanding that the actual date of creation of the charge might have been
another date.246 This appears to go beyond the English autho1ities. The first instance
decision in Re Moulin Global Eyecare is consistent with the English cases in that
the trial judge considered that the date of creation of charge would be a date within
the five-week period before its registration rather than necessarily the date stated on
the certificate (on the basis that the certificate is only conclusive evidence that the
requirements for registration have been complied with).247 Both the Court of Appeal248
and Court of Final Appeal disagreed with this view, holding that the certificate is
conclusive evidence that the date stipulated on the certificate is the date of creation of
the charge. However, there is no discussion of the English cases in the Court of Final
Appeal judgment. The Court of Appeal decision referred to Re Cl Nye ltd, 249 where it
was stated that "[t]he certificate is no less conclusive as to date than as to amount". 250
However, as discussed above, that and the other English cases on the issue appear to
only support the principle that the certificate is conclusive of due registration rather
than being conclusive that the particulars stated on the certificate are accurate.
17.146 Cap.622: copy of instrument of charge registrable. Under Cap.622, a copy of the
instrument of charge is itself registrable. Notwithstanding the obiLer comments of
the Court of Final Appeal in Re Moulin Global Eyecare, above, it would be prudent

241 Re Eric Holmes (P,-operty) Ltd [ 1965) Ch I 052; Re Cl Nye Ltd [ 1971) Ch 442; Exeter 1i11stLtd v Screemvavs
Ltd [1991J sec 477.
242
National Provincial and Union Ba11kofEngla11d v Chamley [ 1924] I KB 431; Re Mechanisations (Eaglescliffe)
Ltd [ I966] Ch 20.
243 Re Mecha11isa1io11s (Eaglescliffe) Ltd [ 1966] Ch 20. Similarly, a charge is valid as to all the assets secured by
the charge even though the registered particulars only listed some assets and not all those listed in the charge
instrument: Natio11alProvincial and Union Bank of E11gla1ulv Chamley [ 1924] I KB 43 I.
..., William .I Gough, Company Charges (2nd edn, Buttcrwor1hs 1996), 720.
245 (2009) 12 HKCFAR 621.
246 (2009) 12 HKCFAR 62.l, (49].
2" Re Moulin Global Eyectire Holdings Ltd (unrcp., HCCW 470/2005, (2008] HKEC 923), [133].
248 Re Moulin Globt,I Eyecare Holdings Ltd [2009] 4 HKLRD 203.
249 (1971)Ch442.

"" Re Moulin Global Eyecare Holdings Ltd (2009) 4 HKLRD 203, (37).
 CHARGES 841

for prospective creditors searching the register of charges to ascertain the particulars
of charge from the charge instrument itself rather than relying on the certificate of
registration or the details set out in the statement of particulars that is registered.
Certificates obtained by fraud. Where the certificate has been obtained by fraud, it 17.147
seems that a direct attack on the certificate would not be possible, but it may be that
the court could act in personam against the fraudulent party so as to prevent him or
her from taking advantage of the fraudulently obtained certificate; and also a creditor
personally damaged by the fraud might be able to take proceedings for damages. 251

3.3.5 Consequences of failure to register

Offence committed by company if charge not registered in time. If the charge 17.148
is not registered in time, then an offence is committed by the company (and by the
responsible persons252 of the company). 253
Failure to register renders charge void against liquidator or creditor of company. 17.149
Failure to register also has an impact on the chargee, since the charge is rendered
void against any liquidator and creditor of the company so far as any security on
the company's undertaking or property is conferred by the charge.254 The charge is
only void as against those persons, but remains valid as between the company and
the chargee.255 For example, if there are no competing creditors and if the company
is not in winding-up, the chargee would still be entitled to enforce the charge against
the company even though it is not registered. Also, the charge would be valid against
persons other than the liquidator or creditors, such as persons who purchase the
absolute title to the property charged.256
Unregistered charge not void against unsecured creditors who have no interest in 17.150
charged property. In the present context of the statutory provision for invalidity of
unregistered charges, "creditor" only covers creditors who have acquired a property
right to or an interest in the subject matter of the unregistered charge.257 Accordingly,
the unregistered charge is not void as against unsecured creditors who do not have
any interests in the property charged. This is justified on the basis that treating the
charge void as against an unsecured creditor without a proprietary interest in the
charged assets is meaningless. Such an unsecured creditor cannot intervene to prevent
the company from repaying the chargee in full or from granting a new charge to the
chargee over the same charged assets. Indeed, even if the original unregistered charge
was void, it does not prevent the company from simply selling off the asset and using
the proceeds to repay the chargee.258 Here, the chargee is not enforcing the original
charge; the company is simply choosing to sell off the asset in which the unsecured
creditor has no proprietary interests.

zs, R v Registrar of Co, Exp Central Ba11k<?(fodia [ 1986) QB 1114, I 177.

is2 Cap.622,s.3.
253 Cap.622. s.337(2).
2~ Cap.622, s.337(4).

"' Re Monolithic B11ildi11gCo (1915) 1 Ch 643,667.

"' Stroud Architecrurt,I Systems Ltd v Joh11lai11g Co11structio11Ltd [ 1994)BCC 18,24.
'" Re Ehrmann B1vsLtd (1906)2 Ch 697; Re Telomatic Ltd (1993) BCC 404,407.
2'8 See further Re Ehr111am1 Broslid [ l 906) 2 Ch 697. 708.
842 DEBENTURES AND CHARGES

17.151 Unregistered charge void against unsecured creditors who have interest in
charged property or where petition for winding-up been presented. However, the
position would be otherwise if the unsecured creditor has obtained some interest in
the charged assets, such as where enforcement action has been taken that gives the
creditor a property right or interest in the charged asset. 259 Also, upon the presentation
of a petition for winding-up, the unsecured creditors are treated as having a sufficient
interest in the charged assets such that the unregistered charge would then be void as
against the unsecured creditors even though a winding-up order has not been made. 260
Upon commencement ofliquidation (which dates back to the time of the petition 261),
there is a "statutory trust" over the company's assets for the benefit of all the company's
creditors such that the assets must only be distributed in accordance with the statutory
scheme in a winding-up, and this interest of the unsecured creditors in the assets is
regarded as sufficient to render the unregistered charge void as against them upon
presentation of the petition for winding-up (at least where the company is insolvent
and a winding-up order likely).262
17.152 Unregistered charge void against competing secured creditor who holds security
over same assets. An unregistered charge would be void as against a competing
secured creditor who holds security over the assets subject to the unregistered
charge. 263 This is the case even though the competing creditor has knowledge of the
existence of the earlier unregistered charge,264 although it may be otherwise if there
was fraudulent conduct. 265 Where the later charge is expressed to be subject to a prior
ranking charge (which turns out to be unregistered), that does not necessarily mean
that the unregistered charge would not be void as against the later chargee. It is a
matter of interpretation of the charge, but unless the parties have clearly indicated
otherwise, the court will interpret the express ranking clause as being made on the
assumption that the earlier charge is valid and not void.266
17.153 Unregistered charge not void against secured creditor holding security over
different assets. For the same reasons why an unregistered charge is not void as against
an unsecured creditor who does not have any proprietary interest in the charged assets,
the unregistered charge would also not be void as against a secured creditor who holds
security over different assets and not the assets under the unregistered charge.
17.154 Cap.622 gives lender choice of whether to require money secured under
unregistered charge to become immediately payable. Under the predecessor CO,
non-registration of a registrable charge led to an automatic acceleration of the time for
repayment of the debt secured by the charge, as (fom1er) s.80(1) of the predecessor
CO provided that the money secured by the charge shall immediately become payable.

25~ ReAshp11no11 £stores lld[l983) Ch I 10, 123.

z,;o R v Registrar OfCo, Exp Cemral Ba11kof India [ I 986) QB I I 14.
261
Cap.32. s.184.
"' R v Registrar of Co, Exp Ce111tt1I 8a11kof !11dia(1986) QB 1.114.The ''statutory trust" docs not, however,mean
that chereis a trust such thacthe company no longer holds the equitableestate(in the scrictgeneral law sense)for
all purposes:The Co11ve11ie11ce Conrai11er[2007) 3 HKLRD 575.
263 Re Monolithic Building Co, Taco11 Co (1915) I Ch 643.
v Mo110/ithic811ildi11g
,.,. Re Monolithic Building Co, Taco11v Mo110/ithic811ildi11g Co [ 1915) I Ch 643.
"' Re Monolithic B11ildi11g Co (1915) I Ch 643,663.
Co, Taco11v Mo110/irhicB11ildi11g
''" Bank of Scotland v TA Neilso11& Co 1990SCLR456.
 CHARGES 843

This is changed under Cap.622, so as to provide flexibility for lenders. Under Cap.622,
s.337(6), the lender has a choice whether to require the money secured to become
immediately payable.

3.3.6 Debentures i11a series

Registration of debentures in series. The procedure for registration is slightly 17.155
different where the charge is granted in respect of debentures forming part of a series
and where the debenture holders are entitled equally (i.e. pari passu) to the benefit
of the charge. 267 Where there is an insh·ument containing the charge other than the
debenture (e.g. where the charge is contained in the trust deed), then it is sufficient
to register a copy of that instrument, together with the statement of particulars of the
charge, without the need to register each of the debentures in the series. 268 Where
there is no such instrument, then it is sufficient to register a copy of any one of the
debentures in the series, together with the statement of particulars of the charge,
without the need to register each of the debentures in the series.269
Time period for registration is one month. The time period for registration is one 17.156
month after the execution of the instrument by reference to which the charge is given
(e.g. the trust deed), or if there is no such instrument, one month after the execution of
the first debenture of the series. 270
Company required to deliver statement of particulars for each issue of debentures 17.157
in the same series. For each issue of debentures in the same series, the company is
also required to deliver a statement of the particulars of the issue.271 The statement
of particulars must contain the date and the amount of the issue, as well as other
particulars required in the specified form. 272 Accordingly, where some debentures in
the series are issued at one time, and further debentures in the same series are issued
at a later time, there is an obligation to register each subsequent issue of debentures.
This is an additional requirement to the initial registration of the charge. This ensures
that full details are shown on the register in relation to the amounts secured. However,
while a failure to register the particulars of each issue of debentures pursuant to s.341
of Cap.622 leads to an offence being committed,273 such failure does not affect the
validity of the debentures issued.274

3.3.7 Exte11sio11
of time.for registration
Court may extend time for registration. Where a charge has not been registered 17.158
within time, the court may, on an application by the company or any person interested

'•' Under Cap.622, although there is no longer a specific head of registrable charge for charges securing an issue of
debentures (see para.17.116 above), it is still possible for a charge securing an issue of debentures in a series to
be registrable pursuant to any of the heads of registrable or specified charge in Cap.622, s.334.
268 Cap.622, ss.335(2), 335(4)(a).
'°' Cap.622. ss.335(2), 335(4)(b).
27(1 Cap.622, s.335(5)(b){i).
271
Cap.622, s.341.
272 Cap.622, s.341 (5}-341 (6).
275 Cap.622,s.341(7).
27'4 Cap.622. s.341(8).
844 DEBENTURES AND CHARGES

in the charge (such as the chargee ), by order extend the period of time for registration. 275
The court may make such an order only if the court is satisfied that:

• the failure to register was accidental, was due to inadvertence or to some other
sufficient cause or is not of a nature to prejudice the position of creditors or
members of the company; or
• it is just and equitable to grant the relief on other grounds. 276

17.159 Court to allow registration out of time where it would be just and equitable. On the
statutory power to allow registration out of time, it has been said that "the Legislature
did intend by those very wide terms not to give a restricted opportunity to repair an
omission but to give the widest possible discretion to the Court in circumstances which
need not show that the omission was accidental or due to inadvertence but which
would be sufficient on other grounds to make it just and equitable to grant relief."277
In Re Braemar Investments Ltd, 278 Hoffmann J stated that "the underlying guide to the
exercise of the discretion is whether for any reason, whether specified in the section or
not, it would be just and equitable to grant relief". 279 In that case, the chargee bank had
obtained assurances from the solicitors of the chargor company that the charge would
be registered. The solicitors failed to do so. There was no evidence before the court
on the reason for the failure, but the court held that it was just and equitable to allow
late registration. Whether the solicitors' omission was careless or deliberate, the court
took the view that on the facts the bank had acted entirely reasonably in trusting the
solicitors to carry out its instructions.
17.160 Court has power to impose terms and conditions on the extension of time. The
court has power to make an order extending time for registration on any tenns and
conditions that the court thinks expedient. 280 Where the court grants an order, it is
usually on the basis of a proviso that the order:

" ... be without prejudice to the rights of parties acquired during the period between
the date of creation of the said charge and the date of its actual registration". 281

Since, in applications for extensions of time, the practice is not to advertise for
creditors and to make them a respondent in the proceedings, the proviso is required to
protect persons whose rights would otherwise be overridden in their absence. 282 The
proviso is, however, only intended to protect rights acquired against, or affecting, the
property comprised in the unregistered charge in the intervening period. 283 As stated
in Re Ashpurton Estate Ltd:

275 Cap.622, s.346(1).

216 Cap.622, s.346(3).
2" Re MIG Tnm Ltd [ 1933] Ch 542, 560.
278 [1989) Ch 54.
279 [1989) Ch 54, 61

zso Cap.622, s.346(2).

281 Palmer's Company I.Aw (Swecl and Maxwell looscleal) [13.399.49); and sec also Warson v OujfMorga11 and

Vermont (I-foldings) Lld[l974) I WLR 450; Sun Hung Kai Bank ltdvAllomey General [1986) HKLR 587.
282 ReAshpurton ES/{Jff! Ltd [1983] Ch I JO, 123.
283 ReAshp11rton Estate Lt.d [1983] Ch 110, 123.
 CHARGES 845

"Such persons would include a subsequent chargee of the relevant property; a

creditor who has levied execution against the relevant property; and an unsecured
creditor if, but only if, the company has gone into liquidation before registration
is effected." 284

Court generally refuses to extend time once company gone into liquidation. 17.161
It foHows from the above that the court would invariably refuse to extend time for
registration once the company has gone into liquidation. 285 This is because the order
would be futile. The effect of the proviso is that the late registration would not prevent
the charge from being void as against unsecured creditors since the company has
already entered liquidation. However, this is a matter of discretion, and there might be
cases, for example where fraud is involved, where the court might extend the time for
registration after the commencement of liquidation and omit the proviso which would
render the order futile.286
Court may also refuse to extend time when liquidation imminent. Where the 17.162
company is not yet in liquidation, the imminence of liquidation is a relevant factor
for the court to take into account in determining whether an order extending time
for registration should be made. 287 The overriding question is whether it would be
just and equitable to aHow late registration in the circumstances. 288 In Re Braemar
Investments Ltd,289 discussed above, the court considered it appropriate to extend
time for registration even though liquidation was imminent. In Ali v Top Marques
Car Rental Ltd,290 the decision of Re Braemar Investments was distinguished, and
late registration refused, in circumstances where the company was already in
administration 291 and there was no prospect of a solvent ex it from administration, and
where the chargee was only prompted to apply for registration upon learning of the
making of the administration order. Since the administration procedure bars creditors
from petitioning for winding-up during the currency of the administration order, it
would be unfair on unsecured creditors to aHow late registration when late registration
would be refused if the company was already in liquidation. 2n
Practice for officer of company to file evidence showing that company has not 17.163
been or is not going to be wound up. There is a practice that in applications for
extension of time, evidence is filed by an officer of the chargor company deposing to
the fact that no winding-up order has been made, resolution for winding-up passed, no
winding-up petition is pending, that the company continues to carry on business and
that no judgment has been obtained against the company which remains unsatisfied.
However, this is not necessary in every case; what is required is that the applicant
officer of the company files evidence explaining the circumstances in which the

284
(1983] Ch 110, 123.
m (1983] Ch 110, 124.
,u [1983] Ch 110, 124.
281 Re Braemar Investments Ltd [1989] Ch 54.
288 Re Braemar lnvestmentS Ltd (1989] Ch 54, 62.

w (1989] Ch 54.
29<l (2006] EWHC 109
2• 1 There is no Hong Kong equivalenc of the statutory administration procedure in England under Pt.II of the

Insolvency Act 1986 (UK). On corporate rescue generally, sec Chapter 19.
2• 2 See also Re BarrowBorough1iwisport [ l 990) Ch 227.
846 DEBENTURESAND CHARGES

charge failed to be registered and stating that the applicant has no reason to believe
that there are presently any prospects of the company being put into liquidation. 293
17.164 Cap.622 removes criminal liability in all cases where court allows late registration.
The (former) s.86 of the predecessor CO was amended in 1984 to include a new
s.86(2) dealing with the effect of a court order extending time on the criminal liability
for the 01iginal failure to register within time. 294 Under predecessor CO, s.86(2)
(now repealed), the court was expressly given power to direct that the granting of
the extension does not have the effect of relieving the company or its officers from
any liability already incurred under s.81 (repealed). The position is now altered under
Cap.622. Originally, there had not been any intention to change the law in this respect
when the Companies Bill was introduced into the Legislative Council. However, there
were members of the Legislative Council's Bills Committee who took the view that it
would be appropriate to remove criminal liability in all cases where the court allows
late registration.295 Accordingly, under Cap.622, s.346(4), if the court makes an order
extending time for registration and the charge is registered within the extended period
of time, the criminal liability incurred for the original non-registration is automatically
extinguished. In other words, the court's discretion on this issue is removed.
17.165 Suggestion that it would have been preferable for court to have discretion with
respect to criminal liability for late registration. The change in the law was on
the basis that it would be fair to relieve the company and its responsible officers
from liability if the court extends time for registration. However, it would have been
preferable for the statutory provision to allow the court discretion on the matter. For
example, there could be circumstances where it is just and equitable to allow late
registration in order to protect an innocent chargee yet it is still appropriate to punish
the company for the initial non-registration (e.g. where the company's failure was not
accidental but was deliberate).

3.3.8 Existing charges on property acquired by the company

17.166 Any property acquired that would be registrable if created by company must also
be registered within one month. If the company acquires property that is subject
to a charge that would be registrable if created by the company, the company must
also register the charge pursuant to Cap.622, s.338. Similar to registration of a charge
created by the company, the obligation is to register a statement of the particulars
of the charge together with a certified copy of the instrument (if any) creating or
evidencing the charge.296 The charge must be registered within one month after the
date of the acquisition of the property.297

293 Re Kosoku O.fficeSupplies Ltd [2011] 2 I➔KLRD 281.

29
' The provision was added upon the recommendations in the Second Report of the Companies law Revision
Committee (1973), para.[4.9).
2')$ Sec Minutes of the 9th meeting of the Bills Committee on Companies Bill (3 June 2011), LC Paper No
CB(l)2473/11-12.
29" Cap.622,s.338(2).
'" Cap.622, s.338(3)(a). lfthc charge was created outside Hong Kong and comprises property situated outside Hong
Kong, the time period for registration is one month after the date on which a certified copy of the instrument of
charge could, if dispatched with due diligence, have been received in Hong Kong in due course of post: Cap.622,
s.338(3)(b).
 CHARGES 847

Failure to register is offence but charge not rendered void. Failure to comply with 17.167
the registration requirement results in the commission of an offence. 298 However, the
charge is not rendered void by the non-registration. The chargee would not necessarily
be aware of the disposal of the property from the original chargor to the company and
so would not be in any position to ensure proper registration of the charge following
the company's acquisition. Accordingly, the chargee is not penalised with invalidity of
the charge despite the company's failure to register.

3.3.9 Rectification. of registered particulars

Court has power under Cap.622 to rectify registered particulars. The court is given 17.168
power under Cap.622, s.347 to order rectification of an omission or misstatement
of particulars in the statement of particulars or accompanying instrument delivered
for registration. Application for an order may be made by the company or a person
interested in the charge (e.g. chargee). The grounds for making the order are the same
as the grounds for ordering extension of time for registration, namely:

• the omission or misstatement was accidental, was due to inadvertence or to

some other sufficient cause, or is not of a nature to prejudice the position of
creditors or members of the company; or
• it is just and equitable to grant the relief on other grounds. 299

Court unlikely to allow rectification to show earlier date of creation. The court has 17.169
power to rectify the particulars of charge that need to be registered such as the date of
the resolution authorising the issue of debentures in a series. 300 However, it is unlikely
that the court would allow rectification of the date of the charge to show the earlier
actual date of creation of the charge (compared with the date indicated by the certificate
of registration) for the purpose of enabling the chargee to avoid invalidity (of a floating
charge) under Cap.32, s.267. 301 It would only be in exceptional cases where the court
would make an order for rectification if the company has already gone into liquidation
and the rights of unsecured creditors in the liquidation had crystallised. 302
No inherent jurisdiction to rectify register apart from above power. There is no 17.170
inherent jurisdiction to rectify the register apart from the statutory provisions for
rectification,3°3 nor to delete the whole registration. 304 The power to rectify under s.34 7
would be limited to rectification of the statement of the particulars of a charge and any
accompanying instrument but would not extend to extraneous material lodged with the
above and which have been registered. 305

298 Cap.622~s.338(5).
299 Cap.622, s.347(3).
300 See Re Harrogate Estates Ltd [1903] I Ch 498.
301 Rehman v Clwmberlai11 [2012) BCC 770; and see also Re Moulin Global Eyecare Holdings Ltd (2009)

12 HKCFAR621.
3°' Re Mechanisations (Etiglescliffe) ltd [ I 966) Ch 20, 36.

303 !group Ltd v Ocwen [2003) BCC 993. Apart from Cap.622 s.347, there is also a general power of the court to

order rectification in the circumstances set out in Cap.622, s.42.

"" Re Cl Nye Ltd (1971) Ch 442; faeter frust Ltd v Screenways Ltd (1991) BCC 477.
30' !group Ltd v Ocwen (2003) BCC 993.
848 DEBENTURESAND CHARGES

17.17.1 Cap.622 extends rectification power to instrument of charge as well as particulars of

charge. The predecessor CO, s.86 (repealed) covered only rectification of the registered
particulars of the charge but not rectification of the instrument of charge. Cap.622, s.347
extends to rectification of the instrument of charge. This is to ensure accuracy of the register
and to avoid, for example, inconsistency between the registered particulars and the copy
of the instrument of the charge as shown on the register. However, s.347(4) of Cap.622
states that the court may make an order only to rectify an omission or misstatement of
any particular in the instrument of charge to the extent as pennitted by common law
rules and equitable principles. This provision makes it clear that the court can only rectify
the instrument to the extent allowed under the general law principles of rectification of
documents.306 Section 347 is not intended to give the court a new statutory power to rectify
an instrument of charge beyond the circumstances where rectification of a contractual
document would be pemlitted under the general principles of contract law. Where an
application is made to rectify the charge instrument under this s.347, the parties to the
instrument must ordinarily be joined as parties to the application.307

3.3.10 Release of property from charge

17.172 Notification of satisfaction of debt secured by registered charge may be given to
Registrar to place on register. If the debt secured by a registered charge has been paid
or satisfied in whole or in part, or any propetty subject to a registered charge has been
released from the charge or has ceased to be the company's property, notification may
be given to the Registrar of that fact.308 The notification can be given by the company
or person entitled to the charge. The notification must be in the specified form and
be accompanied by a certified copy of any instrument required by the Registrar for
the purpose of evidencing the payment, satisfaction, release or cessation. 309 Upon the
Registrar being satisfied that the payment, satisfaction, release or cessation did take
place, the notification and accompanying instrument is registered on the register of
charges. 310 These provisions in Cap.622 replace the predecessor CO provisions for
registration of the memorandum of satisfaction,3 11 although they serve the same
purpose and operate in largely similar fashion.
17.173 Notification and subsequent registration not mandatory. The above provisions are
useful for showing on the register that the amounts secured by a charge have been
repaid. However, such registration is not mandatory.

3.3.11 Company's own register of charges

17.174 Company must keep own register of charges. The company is under an obligation
to keep its own register of charges. 312 This obligation pre-dates the provisions on the

m Re Capital Sino Investments Ltd [20151 I HKLRD 818. As to the general principles on rectification, see e.g.
H G Beale et al. (ed~.), Chilly 011 Contracts: General Principles (31st edn, Sweet and Maxwell 2012) [5- l l0]tr
Sec also JJ leonart! Pn>perties Pty Ltd v Leonard (WA) Pty Ltd (No 2) (1987) 13 ACLR 77.
J-07 Re Capiwl Sino !11vestme111s Ltd [2015) 1 HKLRD 818 .
.i-0sCap.622, s.345.
,.~ Cap.622. s.345(3).
•uo Cap.622, s.345(4).
'" predecessorCO, s.85 (repealed).
12
-' Cap.622,s.352.
 CHARGES 849

public register of charges maintained by the Registrar and is derived from s.45 of
the Companies Clauses Consolidation Act 1845 in the United Kingdom. 313 When
the provisions on the public register were introduced in the early 20th century, the
provisions on the company's internal register were retained in the legislation; so there
are dual obligations imposed on the company, to maintain its own register as well as to
have specified charges registered with the Registrar.
Company must register all fixed and floating charges affecting its property. In 17.175
respect of the company's own register, the company is required to register all fixed and
floating charges affecting the company's property. 314Accordingly, all charges created by
the company over its property and all pre-existing charges over any prope11yacquired
by the company must be registered in the company's register. Non-registration results
in criminal liability 315 but does not lead to invalidity of the charge. 316
Register to be kept at registered office or elsewhere in Hong Kong. The register can 17.176
be kept at the company's registered office or any place in Hong Kong.317 If the register
is not kept at the registered office, the company must notify the Registrar of the place
at which the register is kept.318

Company must keep copy of every registrable instrument of charge. The company 17.177
is also required to keep at its registered office or any place in Hong Kong a copy of
every instrument creating a charge required to be registered under Cap.622 Pt.8. 319
Members and creditors entitled to inspect these copies without a fee. Members and 17.178
creditors 320 of the company are entitled to inspect the company's internal register and
the company's copies of instruments of registrable charges without the need to pay a
fee, while other persons can undertake inspection upon payment of the prescribed fee.321

3.3.12 Non-Hong Kong companies

Registered non-Hong Kong companies registration obligations. Registered non- 17.179
Hong Kong companies 322 are required to register with the Registrar: 323

313 See Companies Ordinance 1865 s.42 (repealed).

314
Cap.622, s.352(2).
315 Cap.622, s.352(3).

316 Wright v Horton (1887) 12 App Cas 371.

317 Cap.622, s.352(1); Company Records (Inspection and Provision of Copies) Regulation (Cap.6221) s.3. Under the

predecessor CO, s.89(2) (repealed), the register could only be kept at the registered office or the place where the
register is made up.
111t Cap.622, s.354.

319 Cap.622, s.351; Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), s.3.

"" This refers to existing creditors: Wright v Horton (1887) 12 App Cas 371.
321 Cap.622, s.355; Company Records (Inspection and Provision of Copies) Regulation (Cap.6221), ss.5-6. Under

the predecessor CO, s.90 (repealed), only members and (existing) creditors were entitled to inspect a copy of the
instruments of registrable charges kept by the company, but this is altered under Cap.622, s.355(3) in relation to
copies of charges registered under Cap.622 Pt.8. Under die original provisions in Companies Ordinance 1865, s.42
(repealed), only the members and (existing) creditors could inspect the register as well, but this right was extended
to other persons under the Companies Ordinance 1911, s. 103 (repealed), following Companies Act 1907 (UK) s.17.
322 As to registration of non-Hong Kong companies. sec Chapter I.

323 Cap.622 Pt.8 contains specific sections which cxpre.ssly apply to non-Hong Kong companies rather than

adopting the approach under predecessor CO, s.9 I (repealed) which applied the provisions for local companie.s
to registered non-Hong Kong companies by way of reference. However, for the most part, the substance of the
law was unchanged under Cap.622 Pt.8 compared with the predecessor CO, s.91 (repealed).
850 DEBENTURESAND CHARGES

• specified charges 324 created by the company on any of its property m

Hong Kong (which was in Hong Kong at the time of creation); 325
• charges over property in Hong Kong acquired by the company where the
charge is of a type which would require registration if created by the company
(and where the property was in Hong Kong at the time when it was acquired
by the company); 326 and

• charges which, on the date of its registration as a non-Hong Kong company

under Cap.622 Pt.16, are specified charges created by the company over
prope11y in Hong Kong or which subsist in respect of property in Hong Kong
acquired by the company (where the property was in Hong Kong at the time
when it was created or acquired by the company). 327

17.180 Non registration leads to charge being void against any liquidator and creditor and
criminal liability. As is the case with charges created by local companies, a registrable
charge created by a registered non-Hong Kong company which is not registered leads
to the charge being void against any liquidator and creditor of the company, and there is
also criminal liability imposed on the company and responsible persons. 328
17.181 Provisions on registration only apply to registered non-Hong Kong companies. The
original provisions on registration of charges of non-Hong Kong companies applied to all
foreign companies which had established a place of business in Hong Kong, whether or
not the company had complied with the requirement for registration as a non-Hong Kong
company ( or oversea company, as they were previously termed) under the Companies
Ordinance. 329 This was problematical for chargees as they could not be certain whether a
foreign company had in fact established a place of business in Hong Kong, and so they
could not know with certainty whether their charge required registration. 330 To remedy
this problem, s.91 of the predecessor CO was amended with effect from 2007 331 to limit
the registration obligation to non-Hong Kong companies which are registered (under
predecessor CO PtJQ (repealed), or now under Cap.622 Pt.16). The Cap.622 provisions
follow those amendments and apply only to registered non-Hong Kong companies.
17.182 Charges over ship or aircraft. The 2007 amendments (and now Cap.622 Pt.16) also
clarified, inter alia, that for charges over a ship or aircraft:

• the property is regarded as property in Hong Kong if the ship or aircraft

is registered in Hong Kong, even though it is physically located outside
Hong Kong; and

"' The specified or registrable charges are the same as for local companies: Cap.622, s.334.
m Cap.622, s.336. Registration must be effected within one month of creation of the charge.
J>• Cap.622, s.339. Registration must be effected within one month of acquisition of the property.
317 Cap.622, s.340. Registration must be effected within one month of registration as a non-Hong Kong company
under Pt.16.
328 Cap.622,s.337.
"' Sec NV Slave11burgsBank lnterco111ine11tal
Natural Resources lid [ 1980] I WLR I 076.
·''" Company Law Review (UK), Modern Comptmy law for a Competitive Economy - Registration of Company
Charges: Co11s11/totio11 (Oct 2000), [3.64).
Doc11111e11/
"' Companies (Amendment) Ordinance 2004 (30 of2004) Sch.2.
 CHARGES 851

• the property is regarded as property outside Hong Kong if the ship or aircraft
is registered outside Hong Kong, even though it is physically located in
Hong Kong.332

Registered non-Hong Kong companies follow same registration procedure as local 17.183
companies. The procedure for registration is similar to that for local companies, and
the provisions on certificate of registration, 333 notification of release of property from
charge, 334 extension of time for registration 335 and rectification 336 are also applicable.
Registered non-Hong Kong companies must keep own register of charges. 17.184
Registered non-Hong Kong companies also have to keep their own register of charges
(on every337 charge created by the company over property in Hong Kong or subsisting
in property in Hong Kong acquired by the company, where the property was in
Hong Kong at the time of creation or acquisition), 338 as well as copies of instruments of
their charges registered with the Registrar.339 The register and the copies may be kept
at the principal place of business of the company in Hong Kong or at any other place
in Hong Kong.34-0Any person has a right of inspection of the register or the copies,
similar to local companies. 341

3.4 Priority between holders of competing charges

3.4.1 General
Issues of priority arise where two or more charges. Issues of priority arise where 17.185
two or more charges342 have been created over the same prope11y. It is important to
determine which chargee has priority to claim first out of the asset if the proceeds on
a sale of the asset are insufficient to discharge the liabilities owed to all the competing
chargees.
Registering first in time does not confer priority. Registering first in time under the 17.186
Companies Ordinance does not confer priority on a chargee. The rules on priorities
of company charges are as determined by the common law, as affected by statutory
provisions.343 Non-registration under Cap.622 Pt.8 affects the priorities of chargees
because non-registration invalidates a charge (as against the liquidator and other
chargees). The rules set out below are based on the assumption that there has been
due registration under Cap.622 Pt.8 (or its predecessor in the predecessor CO Pt.III
(repealed)).

ni Cap.622, s.333(2).
333 Cap.622, s.344.
334 Cap.622, s.345.

m Cap.622, s.346.
J'6 Cap.622, s.347.
337 Similar to local companies, the company's own register is not limited to the specified or registrable charges.

m Cap.622,s.353.
n 9 Cap.622. s.351(2).
3-w Cap.622,ss.351(2),353(1); Company Records(Inspectionand Provision of Copies) Regulation(Cap.6221),s.3.

'" Cap.622,s.355; CompanyRecords(Inspectionand Provision of Copies) Regulation(Cap.6221).

,., Referencesto "charges" in the discussionin this section include "mortgages".
J.H On relevant statutory provisions affecting the validity of charges, see also Cap.32, s.267 in relation to floating

charges,discussedin Chapter20.
852 DEBENTURES AND CHARGES

17.187 Factors affecting which charge has priority. The question of which charge has
priority may be dependent on the following variables:

• the type of asset charged (importantly, whether the property is real property,
chattels or choses in action);
• whether the charge is legal or equitable; and
• whether the charge is fixed or floating.

3.4.2 Priorities in relation to charges over real property

17.188 Registration for charges on land and interests in land. Apart from the need for
companies to register charges on land under Cap.622 Pt.8, the Land Registration
Ordinance (Cap.128) (LRO), s.2 requires instruments 344 in relation to interests in land,
including mortgages and charges over land, to be registered with the Land Registry.
17.189 LRO provisions on registration. Relevant provisions of the LRO include:

• Section 2A:
"(1) A document effecting a floating charge, whether or not it specifically
identifies any land charged, is not, for the purposes of section 2, a
deed, conveyance or other instrument in writing by which any parcel of
ground, tenement or premises in Hong Kong may be affected.
(2) A document effecting a floating charge created before, on or after
I November 1984-
(a) becomes a fixed charge on the land intended to be affected; and
(b) for the purposes of section 2, is a deed, conveyance or other
instrument in writing by which any parcel of ground, tenement
or premises in Hong Kong may be affected,
upon crystallisation of that charge after I November 1984 as evidenced by a
certificate signed by or on behalf of the chargee.
(3) For the purposes of section 5, the time of execution of a charge
mentioned in subsection (2) is the time of signature of the certificate
mentioned in that subsection."
• Section 3:
"(I) Subject to this Ordinance, all such deeds, conveyances, and other
instruments in writing, and judgments, made, executed, or obtained,
and registered in pursuance hereof, shall have priority one over the
other according to the priority of their respective dates ofregistration,

.l4< The LRO applies only in relation to instruments in writing, and so if a mortgage or charge is created without
any instrument (e.g. equitable mortgages under the doctrine of part performance, or equitable charges created
orally), then the mortgage/charge is not registrable. Note that a legal mortgage is registrable as it is created by
deed (expressed as a legal charge): Conveyancing and Property Ordinance (Cap.219), s.44.
 CHARGES 853

which dates shall be determined in accordance with regulations made

under this Ordinance.
(2) All such deeds, conveyances, and other instrwnents in writing,
and judgments, as last aforesaid, which are not registered shall, as
against any subsequent bonafide purchaser or mortgagee for valuable
consideration of the same parcels of ground, tenements, or premises,
be absolutely null and void to all intents and purposes:
Provided that nothing herein contained shall extend to bonafide leases
at rack rent for any term not exceeding 3 years."
• Section 5:
"All deeds, conveyances, and other instruments in writing, and judgments,
which are duly registered within the respective times next mentioned, that
is to say, all deeds, conveyances, and other instrwnents in writing which are
registered within one month after the time of execution thereof respectively,
and all judgments which are registered within one month after the entering
up or recording thereof, shall severally be in like manner entitled to priority,
and shall take effect respectively by relation to the date thereof only in the
same manner as if this Ordinance had not been passed."

Application of rules on priority for charges over land which are registrable. 17.190
Consider the following scenarios of two competing charges over land which are
registrable under the LRO.345

• Where both charges are registered within one month of time of execution
of the charge instrument (i.e. generally the time of creation), then the first
created will have priority under s.5.
• Where the first charge is registered within one month within s.5, but the
second is registered outside the one-month period, then the first charge will
have priority from the date of creation.
• Where the second charge is registered within one month within s.5, but
the first charge is registered outside the one-month period, then the second
charge has priority under ss.3(1) and 5.
• Where both charges are registered outside the one-month period, then
priority depends on the date of registration under s.3( 1). However, if the first
instrument is not registered at a time when the second instrument is created
for the benefit of a bonafide purchaser or a mortgagee for value, the effect of
s.3(2) is that the first instrument is void as against the person entitled under
the second instrument. 346

'" For priority rules for other situations, including situations where one or both charges are not registrable under the
LRO, see e.g. S H Goo and A Lee, Land Law i11 Hong Kong (2nd edn, LexisNexis Butterworths 2003) 295-310.
"' Notice of the prior unregistered interest is irrelevant where the subsequent interest has been registered: LRO, s.4;
see also S II Goo and A Lee, Land Law in Hong Kong (2nd edn, LexisNexis Butterworths 2003) 297.
854 DEBENTURES AND CHARGES

• If both charges are not registered, then common law principles on priorities
would apply, subject to situations where the first charge is void as against the
second under s.3(2). 347

3.4.3 Prfority in relation to charges over personal property

17.191 Common law rules on priority apply to charges over personal property. The
common law rules on priority, outlined below, apply in relation to competition
between charges over personal property. There is an exception to these rules in relation
to charges over debts and other choses in action, where the rule in Dearle v Ha/1348
would usually be applicable instead. Accordingly, for the most part, the rules below
are mainly relevant for competing charges over tangible personal property rather than
intangibles.

Fixed versus fixed

17.192 First in time prevails for two fixed charges. Where the two charges are fixed, the
basic rule is that the first 349 in time prevails.350
17.193 Exceptions to first in time rule. Exceptions to the above rule include the following:

• Prior equitable versus subsequent legal: The legal holder prevails if he or

she is a bonafide purchaser for value351 without notice of the prior interest.352
Generally, the subsequent holder will be treated as having notice of the prior
interest if the prior interest was registered on the Registrar's register of charges
pursuant to the Companies Ordinance before the creation of the subsequent
interest. The registration of a charge on the Companies Register gives rise to
constructive notice as to the existence of the charge. 353 Some commentators
suggest that the doctrine operates to confer "notice to all the world", 354 while
others suggest that the register would give rise to constructive notice only
to those who may fairly be expected to examine the register of company
charges. 355 There does not appear to be any case authority on point,356
but the latter view seems to be preferable on the basis that the doctrine is

'" S H Goo and A Lee, Land Law ill Hong Ko11g(2nd edn, LexisNexis Butterworths 2003) 303-303. However,
s.3(2) of the LRO will not protect the second interest where the holder has notice of the prior interest.
'" ( I 828) 3 Russ I. See para.17 .199 below.
'" Date of creation.
"" E.g. Re Wenigers Policy [1910) 2 Cb 291,294 (competition between two equitable chargees).
"' Consideration need not be adequate, but it must be valuable and not nominal: Pa,* v D11nn[ I 916) NZLR 76 I.
"' PearcevB11lreel[1916J2Ch544.
m Wilson v Ke/land [ I9 IOJ2 Ch 306; and see also Siebe Gorma11& Co Lrd v Barclays Bank Lid [ I979) 2 Lloyd's
Rep 142; Fire Nymph Pmducts Lid v Heating Cemre PryLid (i11liq) (I 992) 10 ACLC 629; ABNAmm Bank NV v
C/riy11Banking Coq>Lrd [2001) 2 HKLRD 175. It seems that the provision excluding constructive notice in
Cap.622 s.120 docs not apply co chc register of charges since the provision only covers che articles and returns or
resolutions lodged wich the Registrar.
"' William .I Gough, Company Clwrges (2nd cdn, Burcerworths 1996) 810.
"' Palmer's Company Law (Sweec and Maxwell looseleaf) [13.364); Roy Goode, Commercial law (3rd edn,
Penguin 2004) 666.
"• For general discussion, see John de Lacy, "Constructive Notice and Company Charge Registration" [2001)
Conveyancer and Property Lawyer 122.
 CHARGES 855

intended to impute notice on persons who ought reasonably to have inspected

the register. Under the doctrine generally, a person is treated as having
knowledge of matters that the person would have discovered if the person
had taken proper steps. 357 It might not necessarily be reasonable to expect, for
example, absolute purchasers of chattels of a company in the ordinary course
of business to search the register of company charges, although the position
may be otherwise with respect to land. But in any event, creditors taking
security over the company's assets ought reasonably to inspect the register
and the doctrine of constructive notice should at least generally apply to such
persons.
• Prior legal versus subsequent equitable: The equitable holder prevails where
the prior legal holder failed to obtain the title deeds.358
• Prior equitable versus subsequent equitable: Where the eqmties are not
equal, then the subsequent interest can have priority. The equities will not
be equal if action of the first chargee makes it unjust for him or her to have
priority.359

Floating versus floating

Re Be,,;amin case: first in time usually prevails for floating charges unless company 17.J94
reserves power to create later floating charge with priority. Where the competing
charges are floating charges, it was held in Re Benjamin Cope & Sons Ltd 360 that the
first created in time prevails. The second chargee can have priority though if, under
the tem1s of the first charge, the company reserved the power to create a later floating
charge with priority.361
Some argument that crystallised charge has priority. Where the floating charges 17.195
crystallised at different times, there is an argument that the charge which crystallised
first has priority: Griffiths v Yorkshire Bank plc. 362 This is on the basis that upon
crystallisation, the charge becomes a fixed charge, and a fixed (equitable) charge
will have priority over uncrystallised floating charges, as well as any floating charges
that crystallise subsequently (on the general principle that a first equitable fixed has
priority over subsequent equitable fixed charges).
Principle in Re Benjlllni11case applies irrespective of crystallisation. However, the 17.196
better view is that the principle in Re Benjamin Cope & Sons Ltd 363, above, applies
irrespective of the time of crystallisation. 364 This is because, unless the charge has

35' Barclays Bonk pie v O "Brien [ 1994] I AC 180, 195-196.

358 Walker v Li11om[ 1907]2 Ch 104; and see also Nor/hem Co1111ties Insurance Co v Whipp (1884) 26 Ch D 482.
359 ReCostell&Brow11Ltd[l898] I Ch3I5.
360 [1914] I Ch800.
36' Re Automatic 8011leMakers Ltd [1926) Ch 412.
362 [1994) I WLR 1427.
363 [1914] I Ch800.
364 This view is expressly supported by Canadianauthori1ies:Re Household Products Co Ltd (1981) 124 DLR (3d)
325; Re Federal Business Development Bank (1983) I 8 ACWS (2d) 518. The decision in Re Benjamin Cope &
Sons Ltd does not appear to have beencited before the c-011rtin Griffiths v Yorkshire Bank Pie.
856 DEBENTURES AND CHARGES

provided otherwise, a floating charge only contemplates subsequent purchasers and

takers of fixed charges to have priority over the earlier floating charge, and thus the
company's granting of a later floating charge having priority over (or ranking equally
with) the first would be inconsistent with the earlier floating charge. 365

Fixed charges competing with floating charges

17.197 Fixed charges have priority over floating charges. Fixed charges generally have
priority over floating charges. 366
17.198 If floating charge created before fixed charge, floating charge has priority if
crystallised prior to creation of fixed charge. Where the floating charge was created
before the fixed charge, the floating charge has priority if it crystallised before the
second charge was created. 367 The applicable analysis in this situation is a prior fixed
equitable charge competing with a subsequent fixed.

3.4.4 Priority in rellltio11to charges over debts a11dc/wses in actio11

17.199 Dearle v H"ll rule: first chargee who gives notice to debtor of existence of charge
has priority. The rule in Dearle v Hall, 368 dealing with priorities between assignees of
choses in actions, applies between competing charges over debts369 and other choses
in action (such as a trust fund,370 a cause of action,371 a contractual option372 or an
insurance policy 373). 374 Under the rule as applied to charges, the first chargee who
gives notice 375 to the debtor (or holder of the fund) of the existence of the charge has
priority.376 Where the asset charged is a debt (e.g. a charge over the company's book
debts), the reference to the "debtor" for the purpose of the rule is the debtor owing the
money to the chargor company. The chargee would need to give notice of his charge
to that debtor.
17.200 Dearle v Hall rule enables interested person to protect their position. The rationale
for the rule is that it enables persons who obtain an interest in the chose in action
to protect their position by giving notice to the fund-holder and thereby prevent the

""5 William J Gough, Company Charges (2nd edn, Butterworths 1996) 275-276, 906, 1003; Eilis Ferran, Company
Law and Corporate Finance (Oxford University Press 1999) 535.
"" 6 Wheatley v Silkstone and Hagh Moor Coal Co (I 885) 29 Ch D 715.
""' Wheatley v Silkstone and flagh Moor Coal Co (1885) 29 Ch D 715.
"8 (I 828) 3 Russ I.
"~ Stocks v Dobson (1853) 4 De GM & G 11.
"" Dearle v Hall ( 1828) 3 Russ I.
"' Weddell v JA Pearce & Major ( I988) Ch 26.
"' Warner Bros Records Ille v Rollgreen ltd(l976] QB 430.
"' Spencerv Clarke (1878) 9 Ch D 137.
"' See generally John De Lacy, "Re.flections on the Ambit of the Rule in Dearle v Hall and the Priority of Personal
Property Assignments: Part I" (1999) 28 A11g/o-America11law Review 87, 87-88. The rule does not apply to
certain chases in action, such as shares (since the company only recognises the legal holder pursuant to Cap.622
s.634): Societe Genera le De Paris v Walker (1885) 11 App Cas 20, 30-31.
"' Oral notice is sufficient: Lloyd v Banks (1867-68) LR 3 Ch App 488; Re Dallas (1904) 2 Ch 385,399. Notices
received (within business hours) on the same day are regarded as having been received simultaneously, and
priority would then depend on date of creation/assignment of the interest: see RP Meagher, WM C Gummow, J
R F Lehane, Equity: Doc1ri11eand Remedies (3rd edn, Butterworths 1992) [834).
,,. Swck< v Dobson (1853) 4 De GM & G 11, 17; Compaq Compwer Ltd vAbercom Group Ltd (1991) BCC 484,
497. Persons who acquire their interest as volunteers cannot rely on the rule to obtain priority: Scott v lord
Hastings ( 1855) 4 Kay & J 633,637.
 CHARGES 857

(original) owner of the chose from later granting a competing interest in the chose. 377
With notice having been given to the fund-holder, a later assignee or chargee can,
before obtaining his or her interest, enquire with the fund-holder whether anyone has a
prior interest in the chose. Failure to give notice by the earlier assignee or chargee can
be regarded as negligent conduct such that his or her priority should be postponed to a
later assignee or chargee who gives notice first.
Second chargee cannot rely on Dearle v Hall rule to obtain priority if he or 17.201
she had notice of prior interest. The rule is qualified by the principle (sometimes
referred to as the second limb of the rule in Dearle v Hall 378) that the second assignee
over an earlier interest (that would otherwise have p1iority) ifhe or she had notice 379 of
that earlier interest.380 Since the pmpose of the rule in Dearle v Hall is to prevent the
assignor or (original) owner of the chose from fraudulently granting a later competing
interest to another by concealing from the latter the fact of existence of a prior interest,
it is thought that the rule should not be applied if the later taker was aware of the earlier
interest at the tin1e when he acquired his interest. 381
Whether holder of floating charge entitled to give notice under Dearle v Hall 17.202
rule prior to crystallisation to obtain priority. There are authorities which have
held that the holder of a floating charge is not entitled to give notice for the purpose
of the rule in Dearle v Hal/382 until the charge has crystallised. 383 The rationale given
for this principle is that it is in the nature of a floating charge that the chargor
is entitled to make subsequent assignments of the charged property or grant
subsequent interests having priority over the floating charge. 384 However, this nature
of the floating charge contemplates only subsequent dispositions that are made in
the ordinary course of the company's business; and also the floating charge does not
contemplate the grant of subsequent floating charges taking priority. 385 Accordingly,
it seems that the holder of the floating charge should be entitled to give notice, even
before crystallisation, so as to obtain priority over persons (such as a later floating
chargee) who obtain an interest that is not contemplated by the nature of the floating
charge.
Notice by holder of floating charge under Dearle v Hall rule only effective if asset 17.203
is present property. The ability of the holder of a floating charge to give notice for the

311 Dearle v Hall ( I828) 3 Russ I, 13; John De Lacy, "Reflections on the Ambit of the Rule in Dearle v Hall and the
Priority of Personal Property Assignments: Part I" ( 1999) 28 A nglo-America11Law Review 87, 90; Roy Goode,
Legal Problems of Credit and Security (4th edn, Sweet and Maxwell 2008) 652.
"' ( I828) 3 Russ I.
"' Notice includes constructive notice: Spencer v Clarke ( I 878) 9 Ch D 137.
3
'° Re Weniger~ Policy [1910] 2 Ch 291.
38' But the second assignee can still protect his position vis-tl-vis subsequent assignees by giving notice to the

fundholder. This can give rise to problems of circularity if a third assignee (who has no notice of the first
assignment) then gives notice before the first assignee: see Re Wyau [I 892] I Ch 188, 208-209. For a critique of
the "second limb", sec John De Lacy, "Reflections on the Ambit of the Ruic in Dearle v Hall and the Priority of
Personal Property Assignmcncs: Par! I" (1999) 28 A11glo-America11law Review 87, l2Crl27.
382 (1828)3 Russ I.

383 ABNAmro Bank NVvChiyu Banking Co,p ltd[2001] 2 HKLRD 175; Ward v Royal Excha11geShipping Co Ltd,

exp Harriso11(1887) 6 Asp MLC 239, 58 LT 174.

"'' Ward v Royal Exchange Shipping Co Ltd. exp Harriso11(I 887) 6 Asp MLC 239, 58 LT 174, 178.
38
' See para.17. I96 above.
858 DEBENTURES AND CHARGES

purpose of the rule in Dearle v Hall386 is also qualified by the principle that notice is
only effective where the asset concerned is (or has become) present property and not
while it remains an expectancy.387
17.204 Dearle v Hall rule also applies where there is competition between legal assignees
or charges. It is clear that the rule in Dearle v Hal/ 388 applies in relation to competing
equitable interests. There has been some debate whether the rule also applies where
there is competition between legal assignees or chargees. There are English cases
suggesting that the rule is applicable regardless of whether the assigmnent is legal or
equitable. 389 The issue is not critical where the first assignment is a legal assignment,
since the assignee needs to give notice to the debtor in any event in order for the
assignment to take effect as a legal assignment. 390 The issue can be important though
where there is competition between a prior equitable interest and a subsequent legal
interest. Some commentators have argued that the rule has no application in such a
situation (in which case the test would be whether the subsequent legal assignee is a
bonafide purchaser for value without notice). 391 However, the better view is that the
rule still applies here. The purpose of the rule is to provide a means for a subsequent
taker to ascertain whether there are prior interests, and it should be incumbent on the
subsequent taker to make enquiry with the debtor rather than simply giving notice to
the debtor.392

3.4.5 Negative pledge a11dautomatic crystallisatio11 clauses

17.205 Negative pledge clause only effective if subsequent chargee has notice of clause.
The holder of a floating charge might try to protect itself from losing priority to later
chargees by incorporating a negative pledge clause in the charge agreement which
prohibits the company from granting a later charge having priority or ranking pari
passu (i.e. equally) with the floating charge. Such a clause will preserve the priority of
the first chargee against a subsequent chargee if the subsequent chargee has notice of
the clause,393 but not otherwise.

"• (1828) 3 Russ I.

"' Re Dallas (1904) 2 Ch 385; and see RP Meagher, WM C Gummow, J RF Lehane, Equity: Doctrine and
Remedies (3rd edn, Butterwo1ths 1992) [833).
"' (1828) 3 Russ I.
"• Pfeiffer vArbuth11ot Factors Ltd [1988) I WLR 150, 163; Compaq Computer Ltd vAbercorn Group Ltd [1991)
BCC 484, 502.
''° Law Amendment and Refonn (Consolidation) Ordinance (Cap.23), s.9. Where the prior legal assignment is an
absolute assignment, no question of competition over priority can arise as the original owner of the chose will no
longer be able to create any subsequent legal or equitable interests in the asset. Where the prior legal interest is a
security interest (e.g. legal mortgage), the original owner still has an equity of redemption which can be assigned.
Questions of priority can arise here, but the prior legal interest will have priority whether the ordinary rules on
priorities are applied or whether the rule in Dearle v Hall applies.
"' E.g., Fidel is Oditah, "Priorities: Equitable versus Legal Assignments of Book Debts" ( 1989) 9 Oxford Joumol of
Lego/ Studies 513.
"' Sec Joh.n De Lacy, "Rencctions on the A.mbit of the Ruic in Dearle v Hall and the Priority of Personal Property
Assignments: Parl I" (1999) 28 Anglo-American law Review 87, 88. Alternatively, even if the bona fide
purchaser rule is applied rather than the rule in Oeorle II Hall, it might be arguable that the later legal assignee
should be imputed with constructive notice of the existence of the earlier equitable interest (of which notice had
been given 10 the debtor) if the legal assignee had failed to make inquiries with the debtor.
' 9' E.g., Cox v D11bli11 City Distille,y (No 2) [ 1915) I IR 345. The subsequent interest is subject to the p1ior interest
on the basis of a mere e-quityor personal equity.
 CHARGES 859

Predecessor CO: notice of existence of charge did not give constructive notice 17.206
of contents of charge document such as negative pledge clause. Notice of the
existence of a charge does not give rise to constructive notice of the contents of the
charge instrument, at least in relation to particulars which are not required by the
statutory scheme to be registered on the Registrar's public register of charges.394 Under
the predecessor regime for registration of charges in predecessor CO Pt.III (repealed),
the instrument of charge is not registered on the register of charges maintained by the
Registrar.395 However, a practice developed whereby particulars of clauses such as
negative pledge clauses were included in the form delivered to the Registrar for
registration. Accordingly, persons who search the register would have actual notice of
the existence of such a clause. If a person does not search the register though, it was
held under the former Pt.III regime that the person would not have constructive notice
of the clause.396
Cap.622: subsequent chargees regarded as having constructive notice of contents 17.207
of charge document such as negative pledge clause. The position is arguably altered
under Cap.622 Pt.8, where the charge instrument itself is required to be registered. 397
The New Zealand decision in Dempsey and National Bank of New Zealand Ltd v
Traders' Finance Corp Ltd 398 applied the general principle that the availability of
information about charges on the public register does not give rise to constructive
notice of the contents of the charge instrument even though under the legislation
considered in that case, the registration obligation also extended to registration of a
copy of the charge instrument. However, the reasoning adopted by the court should
also have meant that there would not even be constructive notice of the existence of
a registered charge.399 The better view is that where the registered charge instrument
under Cap.622 Pt.8 contains restrictive clauses such as negative pledge clauses,
subsequent chargees will be regarded as having constructive notice of the clause if
they fail to search the register.400
Cap.622: subsequent chargees also regarded as having constructive notice of 17.208
automatic crystallisation clauses. Automatic crystallisation clauses in charge
agreements can be effective to cause a floating charge to crystallise automatically
upon the occurrence of an event, e.g. upon the company granting or attempting to

394 Wilson v Ke/land [1910] 2 Ch 306; ABN Amro Ba11kNV v Chiyu Ba11ki11g Co,p lid [2001] 2 HKLRD 175.
395 See para.17 .138 above.
396 ABNAmro Ba11k NV v Chiytt Ba11kingCo,p Ltd [2001) 2 HKLRD 175.
391 See para.17 .138 above.

' 9' [ 1933) NZLR 1258.

399
See William J Gough, Compa11yCha,ges (2nd edn, Butterworths 1996) 811.
00
' See Financial Services and Treasury Bureau, CO Rewrite- Second Phase Co11s11/tatio11 of/he Drafi Compa11ies
Bill: Co11sultatio11 Paper (May 20 I0) 90; and see also Ji Lian Yap, "Amending the Statutory Framework for
the Registration of Company Charges" (2014) 35 Sw1111e law Review 261. Cf. Peter Graham, "Registration of
Company Charges" [2014] Journal of Business Law 175, 192, where it is suggested that under the present UK
position under Companies Act 2006 (UK) Pt.25 (as amended by the Companies Act 2006 (Amendment of Part
25) Regulations SI 2013/600) (where a copy of the charge instrument also needs to be registered), there could be
constructive notice of restrictive clauses if thc existence of the clause is disclosed in the statement of particulars
delivered for registration but not Otherwise. Unlike the Cap.622 provisions in Hong Kong, the UK provisions
expressly require the statement of particulars of the charge to stare whether any of the terms of the charge
prohibit or restrict the company from creating further security that will rnnk equally with or ahead of the charge:
Companies Act 2006 s.859O(2)( c ).
860 DEBENTURESAND CHARGES

grant a later charge having priority to or rankingpari passu with the earlier charge. 401
Such clauses take effect irrespective of whether the subsequent chargee has notice of
the clause. However, the application of the rules on priorities will in some instances
depend on whether the subsequent chargee has notice of the earlier interest under the
prior charge. In this situation, notice of the existence of the automatic crystallisation
clause may well be crucial. The principles discussed above on constructive notice of
negative pledge clauses also apply in relation to automatic crystallisation clauses.
17.209 Time of crystallisation may be significant to priorities. The time at which the
floating charge crystallises under an automatic crystallisation clause may also be
significant in terms of priorities and is prima facie a matter of construction of the
clause. Thus, where a floating charge contains an automatic crystallisation clause that
states that the charge would crystallise upon the company "attempting" to grant a
second charge, then the prior floating charge will crystallise before the second charge
is created (and accordingly might have priority on the basis of being first in time). 402
Where the floating charge is stated to crystallise simply upon the creation of the second
charge, then the charge might be treated as crystallising contemporaneously with the
creation of the second charge. The issue of whether the second charge is subject to the
crystallised charge in such a situation was alluded to in the decision of Fire Nymph
Products Ltd v The Heating Centre Pty Ltd (in liq/ 03 but was expressly left open.404
In SAW (SW) 2010 Ltd v Wilson,405 the automatic crystallisation clause provided for
crystallization:

"[i]f ... the Borrower encumbers howsoever the property subject to the floating
charge".

Arden LJ noted that the clause did not refer to "attempt" to encumber and thus did not
apply to the prior act of attempting to encumber or agreeing to enter into such security.
Her Ladyship considered that the word "instantly" can mean either "simultaneously"
(in the same moment) or "fo11hwithor immediately upon" the occurrence of the event

40 ' See 17.205 above.

402 Re Ma11urewaLtd [ 1971) NZLR 909; Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in li.q) ( 1992) 7
ACSR 365, 378,per Sheller JA (with whom Handley JA agreed) (NSWCJ\).
403
( 1992) 7 ACSR 365 .

...., ( 1992) 7 ACSR 365. In that case, the automatic crystallisation clause stated that "if the mortgagor shall deal with .. .
the mortgaged property other than in the ordinaty course of its ordinary business then the floating charge .. .
shall ipso facto become fixed". This clause was construed as giving rise to contemporaneous crystallisation with
a dealing (transfer of the assets) that took place otherwise than in the ordinary course of the chargor's business.
The transferee was held to have taken the assets subject to the crystallised charge either on the basis of the
transferee having notice of the automatic crystallisation clause (374, per Gleeson CJ, 379, per Sheller JA (with
whom Handley JA agreed)), or on the basis that the disposition of the assets otherwise than in the ordinary course
of the chargor's business would have crystallised the floating charge under the general law (i.e. irrespective of
the automatic crystallisation clause), with the effect that the assets would pass to the dis1>0neesubject to the
crystallised charge (379, per Sheller JA). Sheller JA noted that "[t]he rights that a fixed charge confers against
third parties and how it may rank as a matter of priority arc questions which [did] not arise" in that case (at 379),
while Gleeson CJ observed that "[a] difficult question, which it [was] not necessary to resolve in this case, would
arise where the relevant dealing created an equitable interest in a third party, and it became necessary to work
out which of the equitable interests, that of the [holder of the crystallised charge] or that of the third party, was
prior in time" (3 73).
.u;, [2018) 2 WLR 636.
 CHARGES 861

in question, but (contrary to Fire Nymph Products) held that the latter is the obvious
and natural meaning in the present case:

" ... given the deliberate use of the word 'encumbers' m the first operative
event".406

ABN Amro case. A number of the above principles are illustrated by the case 17.210
of ABN Amro Bank NV v Chiyu Banking C01p Ltd. 401 In that case, the company
granted a floating charge in favour of ABN Amro over certain categories of assets
as specified in the charge. The charge contained an automatic crystallisation clause
(to crystallise the charge upon the company creating another charge or attempting
to create another charge over the charged assets without the consent of ABN
Amro). The charge was duly registered and details of the above clauses were also
delivered to the Registrar for registration, although the predecessor provision on
registration in the predecessor CO, s.80 (repealed) did not require registration of
such particulars. The company later opened a fixed deposit account with Chiyu, and
under a charge-back arrangement, the company granted an equitable fixed charge
in favour of Chiyu over the debt constituted by the deposit account. Subsequently,
ABN Amro appointed receivers pursuant to its charge, and the company was also put
into voluntary liquidation.
ABN Amro case: charge did not cover deposit account. The first issue was whether J7 .211
ABN Amro's charge covered the deposit account so as to give rise to competition
between ABN Amro and Chiyu in claiming against that asset pursuant to their
respective charges. As a matter of interpretation of the charge instrument, the court
held that ABN Amro's charge did not cover the deposit account, but the court also
set out obiter comments on a second issue of priority which would have needed to be
resolved if ABN Amro's charge did cover the deposit account.
ABN Amro: Rule in Dearle v Hall applied to competition between first and second 17.212
equitable fixed charges - first chargee to give notice had priority. On that second
issue of priority, the competition would have been between a first equitable fixed charge
(ABN Amro's fixed charge which would have automatically crystallised immediately
before the creation of Chiyu's charge - since the automatic crystallisation clause is
triggered upon the company "attempting" to create the second charge, as provided
for in the clause) and a second equitable fixed charge (Chiyu's charge). The charged
asset was a debt (a chose in action) and hence the rule in Dearle v Ha!/4°8 would be
applicable. The debt arising under the deposit account held with the bank Chiyu was
a debt owed by Chiyu to the chargor company. The first chargee to give notice to the
debtor would accordingly have priority. On the facts, ABN Amro had not given notice
to Chiyu of its charge; and it was unnecessary for Chiyu to expressly give notice to

'"" (2018] 2 WLR 636, [45}-(46). This means that the first charge only crystallises after the time of creation of the
second charge. The other judge, Briggs LJ, decided the case on different grounds and expressly left this issue
open. His Lordship stated that he was prepared to assume, without deciding. that the Fire Nymph case would be
followed in England: (27].
'"' [2001] 2 HKLRD 175.
'"'8 ( 1828) 3 Russ I. See para.17. 199 above.
862 DEBENTURES AND CHARGES

itself. Accordingly, Chiyu would be treated as having given notice for the purpose of
the rule in Dearle v Hall.

17.213 ABN Amro: no constructive notice of automatic crystallisation clause in this case.
But did Chiyu have notice of the existence of the earlier charge so as to prevent it
from relying on the rule in Dearle v Hall to obtain priority? Chiyu alleged that it had
not inspected the register of charges. Despite not having actual notice, Chiyu would
have had constructive notice of the existence of ABN Amro's floating charge. That
would not have prevented Chiyu from relying on the rule in Dearle v Hall since a later
chargee would only be prevented from relying on the rule (under the "second limb" of
the rule 409) if he had notice of an earlier charge that could have priority. Since Chiyu 's
fixed charge would have had priority over the floating charge, merely having notice of
the existence of the earlier floating charge would not have been fatal for Chiyu. IfChiyu
had notice of the existence of the automatic crystallisation clause though, then it would
be taken to have had notice of an earlier fixed charge so as to prevent it from relying on
the rule in Dearle v Hall. However, the court held that there was no constructive notice
of the automatic crystallisation clause. Hence Chiyu would have had priority.
17.214 Under Cap.622 there would have been constructive notice of automatic
crystallisation clause in ABN Amro case. The position may well be different under
Cap.622 Pt.8 though. On the view expressed above (at para.17.207) that there would
be constructive notice of the contents of registered charge instruments under Cap.622,
if the facts oftheABN Amro case arose under Cap.622, Chiyu would have constructive
notice of the automatic crystallisation clause.

3.4.6 S11bordi11atio11
agreements
17.215 Chargees can agree to alter rules on priorities without notice to chargor. Chargees
can enter into an agreement amongst themselves to alter the usual rules of priorities
without notification to the chargor.410 The chargees who are parties to the subordination
agreement can be contractually bound to the agreement.
17.2.16 Subordination agreements problematic. However, such agreements can give rise to
problems of circularity in some cases, e.g. where statutory preferential creditors are
involved. In Re Portbase Clothing Ltd,411 there were three chargees involved:

• first chargee (bank): fixed charge;

• second chargee (directors): floating charge; and
• third chargee (trustee of parent company's pension fund): floating charge.

17.217 Re Portcase case: problem of circularity with subordination agreements. The three
chargees entered into a subordination agreement where the third chargee would have
priority.412 Subsequently, the chargor company entered into liquidation, and the issue

Ml? Sec para.17.201 above.

"" Sec Cheah v £quitico1p Fintmce Group [1992) 1AC 472; Re Portbase Clo1hi11gLtd [ 1993)Ch 388.
"' [1993) Ch 388.
"' The bank had agreed to deferred priority because the third charge was granted for a loan that was used by the
chargor company to reduce its debts owing to the bank.
 CHARGES 863

arose as to priority between the bank's fixed charge, the trustee's floating charge and
statutory preferential creditors. 413 In the absence of the subordination agreement, the
bank would have priority due to its fixed charge. The preferential creditors would
then have next priority, ranking ahead of the trustee's floating charge pursuant to the
statutory provisions. However, the existence of the subordination agreement gave rise
to a problem of circularity:

• the fixed chargee has priority over the preferential creditors (since the rights
of the preferential creditors are not stated in the statute to have priority over
fixed charges);
• the preferential creditors have priority over the floating chargee (due to the
statutory provisions); and
• the floating chargee has priority over the fixed chargee (due to the
subordination agreement).

Re Portcase case: findings on priority. In the above case, the court held as follows: 17.218

• first priority: preferential creditors;

• second priority: floating charge (trustees);
• third priority: fixed charge (bank).

Re Portcase case: intention of parties under subordination agreement used 17.219

to determine priorities. The court held that the intention of the parties under the
subordination agreement was that the bank's charge was to rank after the trustees'
charge. Since the statutory provisions required the preferential creditors to have
priority over the floating charge, and since the intention was for the bank to rank after
the trustees, it was necessary to rank the bank last.
Courts unlikely to allow preferential creditor to be prejudiced by subordination 17.220
agreement. The above case indicates that the courts are unlikely to allow preferential
creditors to be prejudiced by a subordination agreement. 414 Notwithstanding the
outcome of that case though, it may be argued that with appropriate drafting in the
subordination agreement, it is possible for the chargees to effectively exchange their
security rights (via principles of subrogation or trust) such that the floating chargee
would rank before the preferential creditors to the extent of the amount secured under
the fixed charge. 415

413 Cf. Cap.32, ss.79 and 265. Preferential creditors under chcse provisions have prioricy over floating charges but
not fixed charges. Sec further Chapter 20.
"' See Waters v Widdows [ 1984) VR 503, 513-514; Re Portbase Clothing Ltd [ 1993) Ch 388, 399-401.
"' Sec Re Portbase Clothing lid (1993] Ch 388,407; Re Woodroffes (Musical f11stm111e11ts) Ltd [1986] Ch 366;
Roy M Goode, legal Problems of Credit and Security (3rd edn, Sweet and Maxwell 2003) 188-189; William J
Gough, Company Charges (2nd edn, Butlerworchs 1996) 998-1005.
 CHAPTER 18

RECEIVERSHIP

PARA.

I. Introduction ............................................................................................................................ 18.00I

2. The Functions of Receivership ............................................................................................... 18.006

3. Privately Appointed Receivers or Receiver and Managers ..................................................... 18.012

3.1 The legal nature of privately created receiversh.ip.......................................................... 18.012
3.2 Qualifications for appointment ...................................................................................... 18.015
3.3 Effect of appointment on different stakeholders ............................................................ 18.016
3.3.1 Effect on thecompany .......................................................................................... 18.016
3.3.2 On company directors ........................................................................................... 18.019
3.3.3 On employees ....................................................................................................... 18.022
3.3.4 Effect on the company's assets ............................................................................. 18.023
3.3.5 Effect on creditors ................................................................................................ 18.024
3.4 The rights and powers of receivers appointed out ofcourt.. ........................................... 18.025
3.5 The duties of receivers .................................................................................................... 18.039
3.6 Liabilities of receivers .................................................................................................... 18.067
3.7 Termination ofreceivership ............................................................................................ 18.070
4. Court-Appointed Receivers or Managers ............................................................................... 18.076
4.1 Court's jurisdiction ......................................................................................................... 18.076
4.2 Circumstances where appointment is sought ................................................................. 18.079
4.3 Principles for exercise of court's discretion .................................................................... 18.082
4.4 Who may apply? ............................................................................................................. 18.096
4.5 Qualifications for appointment ..................................................................................... 18.097
4.6 Effect of appointment ..................................................................................................... 18.098
4.7 Rights, powers, duties and liabilities ............................................................................. 18.101
4.8 Discharge ........................................................................................................................ 18.I l 0
 1. INTRODUCTION
Receiver appointed to collect property. "A receiver is a person appointed to take 18.001
possession of, get in, or recover, property for the benefit of the persons who are
ultimately determined to be entitled to it." 1 Historically, receivership is a method
by which secured creditors can enforce their security. 2 Corporate receivership is
a form of insolvency administration which entails the appointment of a receiver
(or receiver and manager) by the creditor to the corporate debtor that has defaulted
on the loan contract. A lender who has been given a charge over the borrower's
property usually has a contractual right to appoint a receiver with respect to the
property subject to the charge. The reason why a secured creditor chooses to realise
its interests through a receiver is to avoid the possibility of incurring liabilities to
the borrower. 3
Receiver and manager: not just collecting property but managing business of 18.002
debtor. A receiver and manager is a person who has been given the power not only
to act as a receiver but to manage the business of the debtor. A creditor who has
been given a charge over the whole, or substantially the whole, of the company's
assets would usually have a contractual power to appoint a manager and receiver.
In practical terms, this means that a receiver and manager can often be appointed
in respect of the company's entire business by the holder of a debenture that gives
the holder a global security (fixed charge over fixed assets and floating charge over
the company's entire undertaking). In the modern business environment, lenders
often require a high level of protection due to increasingly larger scales of business
operation. 4
Receivers appointed by court. A receiver can also be appointed by the court pursuant 18.003
to either: (i) Companies Ordinance (Cap.622), s.725; (ii) High Court Ordinance
(Cap.4), s.21L; or (iii) the court's inherent jurisdiction. A company sometimes
needs the help of a court-appointed receiver to address corporate governance issues.
A creditor, in certain circumstances, may also seek to safeguard its interests through
a court-appointed receiver. 5 The functional roles of both privately appointed and
court-appointed receivers will be further considered below in section 2 of this
Chapter.
Sources of law on receivers: common law. Much of the law on receivers is set out 18.004
under the common law (or more precisely, equity).

R P Meagher, et al., Meaghe,; Gummow & Lelwne s Equity: Doctrines and Remedies (4th cdn, LcxisNexis
But1erworths2002) 907.
2 Roy Goode, Principles c?fCorporate Insolvency Law (4th edn, Thomson Sweet & Maxwell 2011) [10-01).
3 Gaskell v Gosling [I 896] I QB 669; Gerard McConnack, "Receivership and Rescue Culture" [2000] Company
Financial and Insolvency low Review 229, 231-32.
' Roy Goode, Principles of Corporate lnsofoe11cylaw (4th edn, Thomson Sweet & Maxwell 2011) [10-02).
' For example, where the debenture does not provide for out of court appointment (Bri/lania Building Society
and Cl'CJmmar(1997) BPIR 596, 602, per Scott J; Ji/let v Nixon (1883) 25 Ch 238); or where the default
events specified in tl1edebenture have not occurred but the debenture holder's position is in jeopardy (Harris v
Beauchamp Bros [ I 894) I QB 80 I).
868 RECEIVERSHIP

18.005 Sources of law: statute. There are some statutory provisions on receivers in the
companies legislation, contained in the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32), ss.297 to 302A. Those provisions on receivers are
supplemented by Cap.622, s.725(2)(iii), which provides for the appointment of a
receiver where unfair prejudice is established.

2. THE F'uNCTIONS OF RECEIVERSHIP

18.006 Receivership primarily debt enforcement device. Receivership is prima1ily used as

a debt enforcement device. Where the right to appoint a receiver is provided for in a
debenture, the debenture holder has the power to appoint a receiver to collect, protect
and receive the charged assets. Where the debenture also provides for the appointment
of a manager, which is common where the security provided is a charge over the
whole, or substantially the whole, of the debtor's assets, the debenture holder also has
the right to, and often does, appoint a manager to carry on the business of the debtor.
The offices of the receiver and manager are often combined, in which case a single
person is appointed as the receiver and manager. The manager's decision-making
powers on whether to carry on or close down the business of the company or whether
to dispose of the company assets is a useful tool for the realisation of the debenture
holder's claim.6
18.007 Receiver can also be appointed by the court to protect secured creditor's interest.
Receivership is also a useful tool for protecting a secured creditor's interest where
no receiver can be appointed out of court. This can happen where the debenture does
not authorise appointment of a receiver in the circumstances 7 or where the debenture
holder's position is in jeopardy but the default events specified in the debenture have
not occurred. 8
18.008 Judgment creditor can enforce rights against company with assistance of receiver.
In particular cases, it is also possible for a judgment creditor of a company to enforce
its rights against the company with the assistance of a receiver appointed by the
court by way of equitable execution.9 This may be the case, for example, where the
satisfaction of the creditor's claim hinges on a successful enforcement of the company's
unliquidated claim against one of the company's own debtors and where the recovery
of a judgment debt by normal means of legal execution is "not practicable". In this

• Dow11sviewNominees Ltd v First City Co1p Ltd (1993) AC 295.

' Tillett II Nixon ( 1883) 25 Ch 238 (where the mortgagee's right to foreclosure has not yet arisen (the action for
foreclosure was still pending) under the Conveyancing Act 1881); Brittania B11ildi11g Society II Grammar [ I 997)
BPIR 596, 602, per Scott J (where His Lordship remarked, by way of an obiter dictum, that where A was the
mortgagee of the debtor's real property and B had a charge over the debtor's chattels, in order that the property
could be sold as a going concern, it would be open to A, by arrangement with B, either to appoint a receiver and
manager himself. or ask the court to do so, in relation to both the real property and the personal property (where
the debenture held by A does not permit him to have a receiver appointed in relation to the chattels).
• Harri.n Beauchamp Bros [ I894] I QB 80 I; Re Victoria Steamboats Ltd [ I897] I Ch I58. See further para.18.079
below.
9
Rules of the High Court (Cap.4A), 0.51.
 THE FUNCTIONS OF RECEIVERSHIP 869

situation, a court-appointed receiver can enforce the company's unliquidated claim on

the creditor's behalf. 10
Corporate governance instrument. Receivership can be used as a corporate 18.009
governance instrument. A court may be willing to appoint a receiver to manage the
affairs of the company where the company is incapable of managing its own affairs
because of the absence of a board 11 or the board is not able to function properly. 12 lt
is possible, for example, to resolve a deadlock in the board that has caused a pause in
management activities by having a receiver appointed by the comt, in which case the
company will be managed by the receiver until the deadlock is resolved. 13 Also, where
the best way of resolving an internal dispute is to order the sale of a member's shares
to another shareholder, the court may be willing to appoint a receiver to preserve the
company's assets before such a sale takes place. 14
Risk of dissipation of corporate assets. A receiver or receiver and manager can be 18.010
appointed to take over the control of a company where the court is convinced that
there is a risk that corporate assets may be misappropriated or otherwise dissipated by
company controllers,15 or that there is a real 1isk that the company will be in breach
of a Mareva injunction ordered against it.16 The appointment of a receiver or receiver
and manager is also a remedy available, both at common law and under Cap.622, to
members where the company's affairs are conducted in a manner unfairly prejudicial
to individual members or members as a whole. 17
Receiver ad litem to control proceedings in liquidation. It is also possible to seek a 18.011
com1 order to have a receiver ad !item appointed to control proceedings of a company
in liquidation. An instance where it is necessary to do so is where the ability of a
liquidator or a provisional liquidator to exercise the company's litigational power is
compromised because they are in a position where their own interest conflicts with that
of the company or because of the leakage of confidential information. 18 Receivership
is also a useful corporate rescue device, as discussed in Chapter 19!9

10
Maclai11e Watson & Co Ltd v Intl Jin Council (1988) Ch I; Soi11coSAC/ v Nor11okuznetskAlu111i11i11111 Plant Base
Metal J)'(Jdi11gLtd ( 1997) 2 Lloyd's Rep 330:Karaha Sodas Co LLC v Pe11,sahaa11 Pertambangan Minyak Dan
Gas Bumi Negara (No.2) (2005) I HKLRD 21 (CFI) (where the impractability arose out of the fact that garnishee
orders over the shares owned by the debtor could not be attached to future dividend payments). See also Cruz City
I Mauritius Holdings v U11itecl1Ltd [2015) I BCLC 377.
11 TradeAuxilia,y Co v Wickers (1873) 16 Eq 303.
12 For example, the court appointed a receiver to manage the business of Shanghai Land Holdings Ltd in June 2003
on the application of the board in circumstances where the chairman and the managing director of that company
have apparently disappeared: S Kwan, et al. (ed.), Compa11ylaw i11Ho11gKong: Insolvency (Thomson Sweet &
Maxwell 20 18) [ 11.006).
1J Re a Co (No.00596 of 1986) (1986) 2 BCC 99,063.
" So that the assets will not be devalued or diminished by either side in the interim: Wilton-Davies v Kirk [1997)
BCC770.
15
Krishna v Chandl'lJ [ 1928) AIR 49; Re Zealot & Co Ltd [2008) 1 HKLRD 386.
1
• Compania Sud Americana De Vapores SA v Hin-Pro /ntenu,tional Logistics Ltd (unrcp., HCMP 1449/2014,
(2014] HKEC 1186) (CFI).
" Cap.622 s.725; Re 8t1ck 2 Bay 6 Pty Ltd (1994) 12 ACSR 614; Rea Co [1987) BCLC 133; Wilton-Davies v Kirk
(1997] BCC 770; Re ffl.>rldhams Park Golf Course Ltd [1998] 1 BCLC 554; Re Asia Telwisi<>n Ltd [2015] 1
HKLRD 607 (appointment of manager).
18
Holdings ltd(unrep., HCCW 20/1980, 7 April 1978, Le Pichon J).
Re Peregrine /11vest111e11ts
19
See para.19.014.
870 RECEIVERSHIP

3. PRIVATELYAPPOINTED RECEIVERS OR RECEIVER

AND MANAGERS

3.1 The legal nature of privately created receivership

18.012 Receiver non-fiduciary agent of company but must act in best interest of debenture
holder. Debentures invariably provide that the receiver or receiver and manager act as
the agent, not of the appointor (the debenture holder) but of the borrower company.
The position under the general law on the duties of receivers, however, is that a receiver
must exercise his or her powers in good faith in the interest of the debenture holder,
rather than the company, his or her professed principal. Vis-a-vis the company, the
receiver is said to be the only non-fiduciary agent. 20 There are histo1ical and practical
reasons for the development of this odd agency relationship. The most succinct account
of the historical reasons is provided by Goode:

"Originally, a mortgagee whose mortgagor defaulted could apply to the court

to appoint a receiver to collect the rents and profits of the mortgaged property
and apply these to payment of the mortgage interest. Subsequently it was found
more convenient for the appointment to be made by the mortgagor himself at the
request of the mortgagee, thus obviating an application to the court. Later still,
mortgagees began reserving the power to make the appointment themselves, at
the same time providing that the receiver was to be the agent of the mortgagor,
not of the mortgagees." 21

18.013 As receiver is agent of company, debenture holder can avoid liability. One of the
practical reasons why a mortgagee or a debenture holder wants the receiver to be treated
as the agent of the company rather than of himself or herself is to avoid the liability that
the receiver, who would othe1wise act as the debenture holder's agent, may incur during
the currency of his appointment. In equity, a secured creditor who has taken possession
of his or her debtor's business is accountable for not only the revenue received, but also
the revenue that he or she would have received but for his or her negligence.22 The second
reason is to shift the cost for the service of the receiver to the company.23
18.014 Corporate rescue-limitations of current agency approach. Whereas the legal
nature of the receiver's agency at common law is not too problematic when receivership
is used as a debt enforcement instrument, this may not be the case when considering
the role of receivership in corporate rescue. As pointed out in Chapter 19, receivers
and managers have made outstanding contributions, at least in the United Kingdom, in
restoring distressed companies to financial health or maximising returns for unsecured

2<l Swte Ba11kofNewS0111/rI/Mes Ltd v Chia (2000) 50 NSWLR 587, [869]; RP Meagher, et al., Meaghet; Gummow
& Lehane 's Equity: Doctrines and Re111edies(4th cdn, LexisNcxis Buttcrworths 2002) 930; John Amour and
Sandra Frisby, "Rethinking Receivership" (2001) 1 04ordJoumal of legal Studies 73, 77.
21 Sec Roy Goode, Principles 0JC01pora1e Insolvency Law (4th edn, Thomson Sweet & Maxwcll 2011) [ 10-01].
22 RP Austin and 1 M Ramsay, Ford's Principles ofCo,porations law (15th edn, LexixNexis Buttcrworths 2013)
[26.010).
" See RP Meagher, et al., Meaghe,; G11m111ow s
& leha11e Equity: Doctri11esand Remedies (4th edn, LexisNexis
Butterworths 2002) 928.
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 871

creditors through, for example, selling the firm's assets as a going concern rather
than piecemeal. 24 A commonly held view, however, is that a receiver and manager is,
generally speaking, not motivated to act in the best interest of unsecured creditors,
given his paramount duty to act in the interest of his or her appointor.25 Assuming this
view reflects reality, it only holds where the regulatory regime is similar to that in the
United Kingdom and Hong Kong. Where the roles and obligations of receivers are
redefined by statute, the legal nature of receivership will transform accordingly. Take
Australia for example: company officers are subject to a range of statutory duties of
loyalty and duty of care.26 The definition of company officers under the Corporations
Act 2001 includes, among other persons, a receiver.27 A receiver therefore has a duty
to act in the best interest of the company,28 the interest of which, when the company is
insolvent, is the aggregate interest of creditors. 29 There is thus a strong argument that
receivership, when used as a corporate rescue device in Australia, does not suffer from
the weakness discussed above, at least not to the same extent as in the United Kingdom
and Hong Kong. One way of reinforcing the utility of receivership as a corporate
rescue instrument in Hong Kong is therefore to modify the role of receivers statutorily.

3.2 Qualifications for appointment

Receiver or manager must be natural person. A receiver or manager must be a 18.015

natural person. A body corporate cannot be appointed as a receiver or manager of
a company's property,30 nor can an undischarged bankrupt 31 or a person subject to a
disqualification order.32

3.3 Effect of appointment on different stakeholders

3.3.1 Effect 011 the comp,my

Effect of receivership. The effect of receivership on the company itself is vividly 18.016
described in George Barker (Transport) Ltd v Eynon: 33

"The appointment of a receiver by the debenture holder does not end the life of
the company. The company is, so to speak, anaesthetised but the receiver may
carry on business on its behalf. The legal persona of the company will continue
to subsist until liquidation, and the company in the case of the most successful
receiverships may be restored in full conscious activity when the anaesthetic is
no longer applied after the debts owing to the debenture holders have been paid."

2' Seepara.19.015.
25 See para.19.017.
2• Coq>0rations Act 200 I, ss.180--183.
27 Corporations Act 200 I, s.9.
28 Corporations Act 200 I, s.181.
29 Kinsela v Russell Kinsela P~vLtd (in liq) (1986) 4 NSWLR 722.
°
3 Cap.32, s.297.
31 Cap.32, s.297 A.
" Cap.32, s.168D(l)(c).
" (1973) I WAR 1461, 1469.
872 RECEIVERSHIP

18.017 Legal persona of contracting company remains intact. As the persona of the
contracting company remains legally intact, the appointment of receivers does not
have the effect of discharging or terminating the company's contracts entered into
before receivership. 34
18.018 Business documents must contain statement that receiver or manager appointed.
Upon the appointment of a receiver or manager of the property of the debtor, all
business documents in which the name of the company appears (such as invoices,
orders for goods or business letters issued by or on behalf of the company), must
contain a statement that the receiver or manager has been appointed. 35 Default
in complying with this requirement will result in liability for a fine on the part of
the company and its officers, including its liquidator or receiver or manager, who
knowingly or willfully authorise or permit the default.36

3.3.2 011 company directors

18.019 Directors not technically displaced by appointment but transfer of management
powers to receiver and manager. A valid appointment of a receiver and manager does
not displace the directors, who technically still retain their office. The appointment,
however, will, in ordinary circumstances, transfer the directors' power of management
to the receiver and manager. The extent to which the directors' powers are superseded
by the appointment of a receiver and manager depends on the width of power conferred
on the appointee. Where wide powers are granted to the receiver and manager, the
directors can be excluded from management altogether.37
18.020 Directors' residual powers of management. Even where the appointment of a receiver
and manager has the effect of suspending the directors' powers of management, the
directors may still retain some residual powers. The directors have residual authority
over the part of the company's assets not subject to the charge, pursuant to which
the receiver and manager has been appointed. 38 The directors also have powers to
challenge the validity of a receiver's appointment, as long as the debenture holder's
rights and interests are not prejudiced. The directors may also oppose any petition
made during the receivership to wind up the company.39
18.021 Other powers of directors. Further, the directors are entitled to inspect the books and
records of the company that are in the receiver and manager's possession, provided
that this does not hinder the discharge by the latter of his or her functions and does not
prejudice the interests of the debenture holder.40 The directors also retain the powers to
use the company seal, where this is necessary for resolving internal matters.41 Finally,

-" Parsons v Sovereign Bonk ofConodo [ 1913) AC 160; George Barker (Tra11spor1) Ltd v Eynon [ 1974] I WLR 462.
,s Cap.32, s.299( I).
;,, Cap.32, s.299(2).
" M Wheeler & Co Ltd v Warren [1928) Ch 840,844, 846.
,s N<,.vhartDwelopments Ud v Co-operative Commercial Bank [1978) QB 814.
" Re Reprographic Exports (Euromat) Ltd ( 1978) 122 SJ 400.
<-0 Re Geneva Fintmce ltd (1992) 7 WAR 469. Beyondthe statutory obligations(see Cap.32 s.300A) or any obligations
under the tenns of the debenture,a receiveris not obligedto provideinfonnationabout the receivershipto the company
or its di.rectorsif the receiver considers in good faith that disclosure of the infonnarion would be contrary to the
interests of the debenture holder in realising the secuiity: GombaHoldiJ1gs(UK) Ltd v Homan (1986) I WLR 1301.
" Re Genasys ll Pty Ltd (1996) 14 ACLC 729.
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 873

the directors retain certain powers to control corporate proceedings. The directors may
sue the receiver in the name of the company for any breach of duty on the part of
the receiver.42 The directors also have the power to institute proceedings against third
parties43 (including the debenture holder44) where the receiver and manager refuses to
do so, as long as the board is willing to provide an indemnity for costs, 45 if requested
to do so by the receiver.46

3.3.3 011 employees

Employment contract not automatically terminated: when are they terminated. 18.022
Employees' employment contracts with the company are not automatically terminated
merely because of the appointment of a receiver, who is an agent of the company.47
However, the employment contracts will be terminated if the receiver sells the
company's business as a going concern (due to the change in employer).48 An
existing employment contract will also terminate where the receiver enters into a new
employment contract with the employee which is inconsistent with the existence of
the previous contract. 49 In addition, the company's contract with an employee will
terminate where the role of the receiver is inconsistent with the continuing service of
the employee. 50

3.3.4 Effect 011 the compa11y's assets

Property not vested in receiver; floating charge will crystallise. The company's 18.023
property is not vested in the receiver upon the advent of receivership. 51 \1/here the
receiver is appointed pursuant to a floating charge, that floating charge will crystallise
upon the appointment of the receiver (if the charge had not yet crystallised before
the appointment). As is the case for fixed charges, upon crystallisation of a floating
charge, the company will lose the power to dispose of the charged property without
the debenture holder's consent. The company is regarded as a trustee holding for the
secured lender.52

3.3.5 Effect 011 creditors

No automatic stay of proceedings. Unlike the position where an order for winding-up 18.024
is made,53 the advent ofreceivership does not t1igger an automatic stay of proceedings
against the company. Creditors are therefore still able to enforce their claims against

" Watrsv Mid/a/Id Bmtkplc (1986] BCLC 15.

" See Li u,i F1111v Ce11rro-Sotmdlid [ 1986] I HKC 541; Ernst & Young v 7ynski Pty Ltd (2003) 47 ACSR 433.
" Newhart Developments Ltd v Co-opemrive Commercial Bank Ltd [1978) QB 814.
" Newhart Developments Ltd v Co-opemtive Commercial Bank Ltd [1978] QB 814, 819; Dea11grovePty Ltd v
Commonwealth Bank ojAusrrolia (200 I) I 08 FCR 77.
40 Ernst & Yo1111g v Tynski Pty Ltd (2003) 47 ACSR 433, [26).
" Re Foster Clark Ltd'.<illdenture Trusts [ 1966) I WLR 125; Re Mack Trucks (Britain) Ltd [ 1967) I WLR 780.
4$ Re Foster Clark lid's illdenture Trusts [1966) I WLR 125; Re Mack Trucks (Britain) Ltd [1967] 1 WLR 780.
49 Griffiths vSecreta,yoJStateofSocfol Services [1974] QB 468.
,o Griffiths v Secretary of St(l/e of Social Services [ 1974] QB 468; Intl Harvester Export Co v Intl Harvester
Australia Ltd [1983] VR 539.
" Telecom Aus1n1liav Russell Ku111ar& Sons Pty Ltd (in liq) ( 1993) 10 ACSR 24.
" Re/wood Pty Ltd v Manning Ho/111sPty Ltd (No 2) (1992) 2 Qd R 197.
" Cap.32, s.186; see also Chapter 20 of this text.
874 RECEIVERSHIP

the company upon the appointment of a receiver. If the same property is subject to
more than one charge, generally speaking, the holder of a debenture can realise his
or her interests subject to prior charges. In some Commonwealth jurisdictions, the
receiver and manager (or equivalent) can, with cou11 leave, dispose of the property
subject to the charge despite prior charges, as long as, among other things, the sale or
disposal of the property does not unreasonably prejudice the interests of the holders
of prior charges. 54 No similar powers are provided for a receiver and manager under
Hong Kong's companies legislation (neither Cap.32 nor Cap.622).

3.4 The rights and powers of receivers appointed out of court

18.025 Sources of power of receiver. A receiver's express rights and powers are provided in
Cap.32 and the debenture deed, as well as the appointment instrument. In the case of
mortgages of land created by deed, a receiver is also given certain powers set out in
Sch.4 to the Conveyancing and Property Ordinance (Cap.219). 55
18.026 Powers normally include power to collect, possess, control, dispose of asset and
manage company. The powers provided in the debenture normally include the powers
to collect, to take possession, to control, use and dispose of the assets comprising the
security, as well as the power to manage the company's business, if the appointee is to
act as the receiver and manager.56
18.027 Scope of powers delineated in debenture deed. The scope of the receiver's power to
manage the company is delineated in the debenture deed or the appointment documents.
As the primary purpose of receivership is to realise the right of the appointor against
the company, the management power of a receiver and manager is normally granted,
and should be exercised, for the achievement of this purpose. As the appointment
of a receiver and manager will normally result in the suspension of the directors'
management powers over the charged assets, a void in this power must be filled to
keep the company's business running during the receivership where the charge is over
the company's entire undertaking. The power of a receiver and manager may also be
exercised to enable the office holder to achieve the purpose of the receivership through
various methods, such as selling the company's undertaking as a going concern to
maximise returns, or to turn the company around to enable it to discharge its debts.
18.028 Charged asset can be sold as agent of company. Before the winding-up of the
company, the charged assets can be sold by the receiver in two different capacities. It
is possible for the receiver to exercise the power of sale in his or her deemed capacity
as the agent of the company, in which case the assets will be sold in the name of the
company. If the purchaser wishes to obtain a clear title, it will be necessary for all of
the encumbrancers, including the debenture holder, to join in the conveyance to concur
in the sale free from their interests. The encumbrancers can also release their interests
through deeds of release.

" Insolvency Act 1986 (UK), s.43; Corporations Act 200 I (Aust), s.420B.
" Conveyancing and Property Ordinance (Cap.219), s.51(1) and Sch.4.
" Roy Goode, Principles ofCo,porate Jnsoh·ency Law (4th edn, Thomson Sweet & Maxwell 2011) (10-43).
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 875

Or sold by mortgagee. Alternatively, assets subject to the security can be sold by 18.029
the receiver in his or her capacity as the debenture holder's agent, in which case, the
decision to sell is made by the debenture holder who sells as the mortgagee. There is
no need to take steps to clear the title for this type of sale, if all other encumbrancers
are junior security holders. A sale of this type overrides junior security interests.
The claims of junior security holders then will be met from the surplus proceeds
remaining after the principal of the receiver, the debenture holder, has been paid. 57
Power to sell assets subject to prior charge in some Commonwealth jurisdictions. 18.030
Under the corporate insolvency law regimes of some Commonwealth jurisdictions,
the court may grant powers to the receiver whose appointor is the holder of a charge
over the whole, or substantially the whole, of the debtor's assets to dispose of assets
subject to prior or equal security interests. Under Australia's Corporations Act 2001,
for example, the power to sell assets which are subject to prior security interests
may be conferred by the court on a "controller", if: (i) the controller has the power
to sell the debtor's assets; (ii) the holder of the prior security interest has refused
to give consent to the proposed sale; (iii) if the proposed sale is in the best interest
of the company's creditors and of the company; and (iv) the proposed sale will not
unreasonably prejudice the holder of the prior security interest.58
Insolvency Act 1986 (UK). Under the Insolvency Act 1986 (UK), if, on application 18.031
by the receiver, the court is satisfied that the disposal (with or without other assets) of
any property of which he or she is receiver and which is subject to a security interest
of prior or equal ranking would be likely to promote a more advantageous realisation
of the company's assets than would otherwise be effected.,the court may authorise the
receiver to dispose of the property as if it were not subject to the security.59 The proceeds
of such a sale, however, must be applied first to discharge prior charges. 60
Power to sell assets subject to prior charges corporate rescue tool. A power to sell 18.032
the assets subject to prior charges where such a sale would promote more advantageous
realisation of the debtor's assets would make receivership a more effective tool of
corporate rescue. Such a power would undoubtedly promote the sale of the debtor's
business as a going concern. As a sale of a firm's going concern normally generates
more proceeds than if the debtor's assets are sold piecemeal, going concern sales can
help achieve the purposes of rescuing the business of the failed firm and maximising
returns to unsecured creditors. No similar powers are provided under Cap.32 for
receivers and managers. Given the lack of a formal corporate rescue procedure in
Hong Kong and the utility of receivership as a rescue device, a statutory provision on
a receiver's power to dispose of assets subject to prior charges should be considered.

'' Roy Goode, Principles o{Corpora/e lnsolve11cy Law (4th edn, Thomson Sweet & Maxwell 2011) [ 10-45).
58 Corporations Act 2001, s.4208(2). A "controller" in relation to property of a corporation, is defined in the
Corporations Act 2001 to mean: (a) a receiver or a receiver and manager, or (b) anyone else who is in possession
of that property or has control of that property for the purpose of enforcing a charge: s.9 of the Corporations
Act 2001.
'9 Insolvency Act 1986, ss.43(1),43(2), and 43(7).
6<J Insolvency Act 1986, s.43(3), Cho11dhriv Pa/ta (1992) BCC 787; Re Real Meat Co lid (Jn Receivership) (1996)
BCC254.
876 RECEIVERSHIP

18.033 Notice of appointment. An important statutory provision that can assist a receiver or
manager in obtaining infonnation from the company is Cap.32, s.300A. Under this
provision, a receiver and manager, upon his or her appointment, must provide a notice
of his or her appointment to the company.61 The company must, within 14 days after
receipt of the notice or such longer period as may be allowed by the court, submit a
statement as to the company's affairs to the receiver and manager.62 The statement
must contain information on the company's assets, debts and liabilities, details of
creditors, details of secu1;ties held by the creditors and such other information as
may be prescribed by subsidiary legislation.63 This provision assists the receiver and
manager in locating the assets subject to the charge and to ascertain the circumstances
that led to his or her appointment, 64 which will help him or her to carry out his or her
functions, such as realising the debenture holder's claim or carrying on the business of
the company. The infom1ation acquired by the receiver and manager may also lead to
legal action to recover assets that the company can rightfully claim against a third party.
18.034 Receiver can make decisions on corporate proceedings if deed so provides. A
receiver is able to make decisions on the conduct of corporate proceedings if the
debenture deed so provides.65 Where the debenture deed confers on the receiver the
power to collect and take possession of the assets subject to the charge, the receiver
has an implied power to initiate proceedings in the company's name for the purpose
of exercising that express power. This implied power can be exercised without leave
of the court. 66 An issue that may arise is the receiver-manager's power to defend
proceedings where such a power is not provided in the debenture deed. In Li Lai Fun v
Centro-Sound Ltd, 67 Deputy Judge Barnett refused to imply such a power and said that
when a need to defend corporate proceedings arises:

" ... [t)he proper course for the receivers to have taken would have been to
persuade the directors of the company to defend the proceedings and, if they were
not prepared to do so, to approach the debenture holder for appropriate authority."

18.035 Whether implied power to defend proceedings. His Lordship's view on this issue,
however, is contestable. The judge in Li Lai Fun relied on the decision of Newhart
Developments Ltd v Co-operative Commercial Bank Ltd, 68 where it was held that the
directors were entitled to exercise the power to commence proceedings on behalf of
the company. However, the court in Newhart had indicated that the directors could
exercise such a power only if there was no prejudice or detriment to the appointing
debenture holders in their capacity as debenture holder. From a policy point of view,
an implied power in favour of the receiver would be justifiable where the directors'

61 Cap.32, s.300A(l)(a).
62
Cap.32, s.300A(l)(b).
6l Cap.32, s.300B(l) .
., Suchas the circumstancesof default by the companywhich led to the receiver'sappointment.
65 Nc..,vhartDevelopments Ltd v Co-operative Commercial Bank ltd (1978] QB 814, 819,per ShawL.J.
66 M Wheeler & Co Ltd v Warren (1928] 1 Ch 840.
67
[I986]HKC541,(18).
68 (I978JQB814.
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 877

decision to defend or not to defend the company's proceedings may lead to a dissipation
of the charged assets. 69
Implied power to petition to wind up company. Where a receiver of the whole of the 18.036
assets of the company has been appointed with express powers to take possession of the
company's assets and to do all such acts as may be considered incidental or conducive
to such powers, it has been held that the receiver can have an implied power to present
a petition, on behalf of the company, to wind up the company. 70 The protection and
preservation of the assets of the company are incidental to the receiver's possession of
such assets, and if the company is unable to pay its debts, and a winding-up order will
have the effect of protecting the assets under the control of the receiver from depletion
(such as where, under statute, a winding-up order would have the effect of preventing
statutory rates from being levied), then the power to petition for winding-up would
also be incidental to the power to take possession of the assets.
Statutory duty to seek court directions in connection with performance of his or 18.037
her functions. A receiver and manager appointed out of court has a statutory power
to seek the court's directions in relation to any particular matter arising in connection
with the performance of his or her functions. 71 The court is disinclined to provide
directions on matters of commercial judgment, 72 as it does not act as an "indemnifier"
of the receiver in relation to commercial matters. 73 The court, however, is willing to
give directions on whether it is lawful to embark on a course of action proposed by
the receiver himself or herself74 or whether the receiver is obliged to act in accordance
with what is required by a third party.75
Right to claim remuneration: generally right against company. A receiver has a right 18.038
to claim remuneration for services provided. 76 The debenture under which the receiver
was appointed may set out the receiver's rights to remuneration, but in the absence
of any provision for remuneration, the receiver would still be entitled to payment on
the basis of quantum rneruit.11 Generally speaking, the claim will need to be made
against the company, as the debenture normally provides that the appointee shall be
the agent of the company, as discussed above.78 Where, however, the appointee acts as
the agent of the debenture holder, the claim should be made against the principal of
the appointee, i.e. that debenture holder.79 One instance where the receiver acts as the
agent of the debenture holder is where the former represents the latter to effect a sale

69 S Lo, "Directors" in S Kwan, et al. (eds.), Company u,w in Hong Kong: fllsolve11cy(Sweet & Maxwell 2018)
(1.013).
1
• Re Emmadarl Ltd [ 1979] Ch 540.
11
Cap.32, s.298A( I).
12
Re Mi11eral Sec11riliesA11s1mlialrd (i11liq) [ 1973) 2 NSWLR 207; Depwy Commissioner ofTaxa1io11v Besr &
less (Wollongong) P(y lrd (1992) 7 ACSR 245.
n Re Bla.,1clea11Services Ltd ( I 985) 2 NZCLC 99,282.
'' Norrlr Ci(y Developments Pry lid; Exp Walker (1990) 20 NSWLR 286; Re Varex Permleum fllduslries Pry lid
cif
(unrcp., Supreme Court of New South Wales, Hodgson J, 17 August 1989); White v l-f11xtable,in the 111a11er
lake Federation Pry Lid (rec & mgr opp!) (2006) 24 ACLC 639.
" Re Geneva Finance Lui; Quigley (rec & mgr oppt) v Cook (1992) 7 WAR 496.
76
Prior v Bogster (1887) 57 LT 760.
n Re Vimbos Ud[l900] 1 Ch 470.
78
See para.18.012.
,. Re Vimbos Ltd (1900) I Ch 470,474; Smith v Stallard and French (1919) 21 WAR I 9.
878 RECEIVERSHIP

of the assets subject to the charge, as distinguished from the sale by the company itself,
as considered above.soThe appointee may, however, lose the right to remuneration if he
or she has breached his or her duty or has otherwise acted negligently or dishonestly.81
The court also has a power to detennine the amount of remuneration for receivers
appointed out of court, upon application by the liquidator, where the company has
entered into winding-up. 82 This power can be exercised as a control over the receiver's
remuneration in order to protect unsecured creditors.

3.5 The duties of receivers

18.039 Sources of duties are appointment instrument and equity. A receiver is the donee
of significant powers and an abuse of that power may cause extensive losses on the part
of the debenture holder, the company, other encumbrancers or sureties. It is therefore
necessary for the law to place certain constraints on the exercise of those powers given
to the receiver. The rules on the scope of a receiver's powers and the manner in which
these powers are to be exercised form the basis of the duties of a receiver. The first
source of these rules is the appointment instrument, which prescribes the duties that
the receiver owes to the debenture holder.83The second source is equity, which requires
a receiver to exercise his or her powers with care and in good faith for the purpose for
which he or she was appointed. 84
18.040 Duty of care owed to company, party having equity of redemption, and to surety.
A basic duty of a receiver is to realise the assets subject to the security for the benefit
of the debenture holder.SSAs a matter of contractual obligation, a receiver is required to
observe the terms of the appointment instrument and act within the scope of authority
confeITed on him or her. Apart from the duties owed to the appointor, a receiver also
owes a duty of care to the company, and any other party having an interest in the equity
of redemption, such as a subsequent encumbrancer. 86 A receiver also owes a duty of
care to a smety.87 The duty of care, in this context, is owed in equity.88
18.041 Equitable duty of good faith and care. When the exercise of power by a receiver
is examined under the lens of the equitable duty of good faith and care, the relevant
power is often exercised against the interest of a party other than the debenture holder.
An Australian example where it was held that the power of sale was exercised in bad
faith is Forsyth v Blundell. 89 In that case, the mortgagee (which was under the same

80 See para.18.029 above.

., O'Donovan, Company Receivers and Administration (LBC online service) [12.490); Michael Murray, Kea.v's
fllsolve11cy:Pe,:rnnal and Corporate Law and Practice (6th edn, Thomson LBC 2008) 463 .
., CaJ>.32,s.300; Re Po1te1:,Oils Ltd (No.2) [1986) I All ER 890.
83 Michael Murray, Keay'., Insolvency: Pe1:wnal a11d Co1pomIe Law ond Practice (6th edn, Thomson LBC

2008), 464.
8' Medfonh v Blake [2000] Ch 86, 102; Yifimg Properties Ltd v Manchester Securities Corp (unrep., HCA
134tn014, [2014) HKEC 1892), [92).
3s Gamba I-foldings (UK) Ltd v 1-fomtm[1986) 1 WLR 1301; /11/emational Leisure Ltd a11danother v First Nario,u,t
TmsleeCoUKLtd[2014] 1 BCLC 128.
86 Downsview Nominees Ltd v First City Co,p Ltd [1993) AC 295.
81 Standard Chartered Bank Ltd v Walker [ 1982) 1 WLR 1410.
88 Downsview Nominees Ltd v First City Co,p Ltd [1993) AC 295 (PC); Medforth v Blake [2000) Ch 86 (CA).
89 (1973) 129 CLR 477.
 PRl\',<\TELY
APPOINTED RECEIVERSOR RECEIVERAND MANAGERS 879

duties as the receiver in the present context) concluded a private sale at the reserve
p1ice before the scheduled auction, even though another party had given an indication
of bidding up to a price higher than the reserve price. The mortgagee was held to have
breached the duty to act in good faith, as he did not attempt to bring two interested
potential purchasers into competition. It was considered that "good faith", in the
present context, means that the receiver should act without fraud and without willfully
or recklessly sacrificing the interests of the mortgagor or chargor.90
Good faith. It has been said that a receiver cannot be in breach of his duty of good 18.042
faith to the mortgagor in the absence of some dishonesty, improper motive or element
of bad faith.91
Good faith: Downsview Nominees case. A subsequent English case on good faith is 18.043
Downsview Nominees Ltd v First City Co,p Ltd.92 Jn that case, the company, whose
assets were subject to two floating charges, defaulted on the second debenture, which
was held by FCC. FCC decided that the business of the debtor should be closed down.
The debtor sought help from R, the second defendant, who used D, a company under
his control, to take an assignment of the first debenture. R subsequently procured D
to appoint himself as a receiver and manager of the company (pursuant to the first
debenture). FCC offered to pay to Dall the moneys owing under the first debenture, to
no avail. R then continued to carry on the debtor's business, causing substantial losses.
The Privy Council held that R accepted appointment as receiver and manager for the
purpose of preventing the holder of the second debenture from enforcing its security
instead of the purpose of enforcing the security under the first debenture. R therefore
had breached his duty to exercise his powers in good faith for a proper purpose.
Taking reasonable care to obtain proper price. The Privy Council, in Downsview, 18.044
endorsed the opinion of the English Court of Appeal expressed in Cuckmere Brick
Co Ltd v Mutual Finance Ltd 93 that if the mortgagee (or receiver) decided to sell,
he must take reasonable care to obtain a proper price. 94 The duty of "reasonable
care", in this context, is owed in equity, not under the common law.95 The mere fact
that a higher price might have been obtained or that the terms might be regarded as
disadvantageous to the mortgagor or chargor does not necessarily mean that there is
a breach of duty.96
Cuckmere Brick case: facts. In Cuckmere Brick, the plaintiffs borrowed £50,000 18.045
from the defendants on the secw-ity of a mortgage of a construction site for which the
plaintiffs had obtained planning permission to build I00 flats. Subsequently, due to
financial embarrassment, the plaintiffs, with the concurrence of the defendants, had

9<J (1973) 129 CLR 477,493; and see also C11ckmere

Brick Co Ltd v M11111al
Finance Ltd (1971) I Ch 949, 966.
9' l'ifimg PropertiesLtd v Manchester Sec11ritiesCotp (unrep., IICA 1341/2014, [2014) HKEC 1892), [94), citing
Medjorth v Blake (2000) Ch 86, I 03.
92 [ 1993]AC 295 (PC).
?, (1971] Ch 949.
"' (1993]AC295,315 .
., (1993] AC 295, 315-316. Sec also Scot! V-C's comments in Medforth v Blake (2000) Ch 86, 98-99. Any
compensation is therefore by way of equitable compensation and not by common law damages.
96 ( 1993)AC 295, 315. See also Boz One Pty Ltd v McLemzan (2015) 105ACSR 325 for an example where it was
held that the receiverswere not in breach oft.he duty of care when exercisingthe powerof sale.
880 RECEIVERSHIP

obtained permission to develop houses on the same site, the development of which
was thought to be commercially more advantageous.

18.046 Cuckmere Brick case: facts. The plaintiffs defaulted and the defendants took possession
of the site to exercise their power of sale. The estate agents of the defendants provided
a relatively pessimistic assessment as to the value of the site and pointed out that
developing flats was not an economic proposition.
18.047 Cuckmere Brick case: facts. The defendants, however, had not passed on to the agents
the valuation done previously by their surveyors, which provided a much more positive
assessment of the prospects of developing flats and a higher valuation of the site.
18.048 Cuckmere Brick case: action alleging defendant breached duty of care when
exercising power of sale. The advertisement of the auction provided detailed
information on the permission obtained for the development of houses but failed
to mention the planning permission for developing flats. Before the auction took
place, the plaintiffs wrote to the defendants requesting a postponement of the sale
to, inter alia, enable particulars of the planning permission for flats be circulated.
No postponement was made and the sale went ahead. The site was sold for £44,000.
The plaintiffs commenced action alleging the defendants had breached their duty of
care when exercising the power of sale.
18.049 Cuckmere Brick case: selling mortgagee under duty of good faith and duty of
care. Before Cuclanere Brick it was not completely clear whether a selling mortgagee,
when exercising his or her power of sale, owed the mortgagor a duty of good faith only
or both a duty of good faith and a duty of care. In Cuckmere Brick, the three judges on
the bench were unanimous that the weight of authority pointed to the conclusion that a
selling mortgagee owed the mortgagee not only a duty of good faith but a duty of care
in exercising his power of sale.
18.050 Cuckmere Brick case: mortgagee must act in good faith and take reasonable
care to obtain market value of mortgaged property. The court recognised that the
mortgagee, when exercising his power of sale, did not act as a trustee of the power of
sale and was entitled to prefer his own interest where there was a conflict of interests,
notably in determining the timing of the sale. The court pointed out, however, that in
exercising the power of sale, the mortgagee must: (i) act in good faith, i.e. honestly and
without reckless disregard for the mortgagor's interest; and (ii) take reasonable care to
obtain whatever was the true market value of the mortgaged property at the moment
he chose to sell it.
18.051 Cuckmere Brick case: breach of duty of care. The court found that the defendants
breached their duty of care for failing to include the planning permission for flats
in the advertisement and for forgoing an opportunity to cure the problem when the
plaintiffs made a request to do so through a postponement of the auction. Had the
plaiming permission for flats been included in the advertisement, the auction might
have attracted more bidders, which might have led to a higher price for the sale.
18.052 Tse Kwong case: duty of care can be breached by failing to seek professional
advice as to methods of sale and amount of reserve. In certain circumstances, the
mortgagee's duty of care can be breached by failing to seek professional advice as
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 881

to the methods of sale and amount of reserve. This was the situation in Tse Kwong
Lam v Wong Chit Sen. 97 In that case, the appellant arranged for the construction of a
residential or commercial building. The project was partly financed by a loan of$ I .4m
from the respondent on the security of a mortgage over part of the building (the other
part of the project was financed by advance sales). The appellant borrower defaulted
and the respondent decided to exercise his power of sale by auction. The auction was
advertised in three local newspapers. The advertisement, however, contained no more
than notice of the bare fact of the auction coupled with minimum description of the
property.
Tse Kwong case: facts. A company whose funds were supplied by the respondent 18.053
and whose directors were the respondent, his wife and his son had decided to bid in
the auction with the reserve price of$ l .2m. The respondent did not seek advice from
the auctioneer or other real estate agents on the reserve price or steps to be taken to
obtain a market price for the sale. The auctioneer was informed of the reserve price
only shortly before the auction. The company was the only bidder and purchased the
property at the reserve price.
Tse Kwong case: action to set aside sale of property on basis that it was improper 18.054
and at undervalue. That price was below the amount still owing to the respondent
under the mortgage, and the respondent claimed for the outstanding amounts due from
the appellant. The appellant disputed the amount claimed and counterclaimed that the
sale should be set aside on the ground that the sale to the company was improper and
at an undervalue.
Tse Kwong case: no inflexible rule that mortgagee cannot sell to company in 18.055
which he or she has interest but mortgagee failed to act in good faith and obtain
best price. Lord Templeman held that there was no inflexible rule that a mortgagee
exercising his or her power of sale cannot sell to a company in which he or she has an
interest. However, his Lordship added, the mortgagee (and also the company in this
case), given the conflict of duty and interest to which the mortgage was subject, had to
show that the sale was made in good faith and that the mortgagee had taken reasonable
precautions to obtain the best price reasonable obtainable at the time by taking expert
advice as to the method of sale and the amount of the reserve. The mortgagee fell
below this standard of care because of his failure to seek professional advice on the
methods of sale and obtaining best price, as well as the reserve price.98
No obligation to take steps to try to increase value of mortgaged property. It should 18.056
be noted, however, that the selling mortgagee owes the mortgagor a duty only to take
reasonable care to obtain a proper price or the true market value for the property at
the date on which he decided to sell it.99 Also, the receiver does not have an obligation
to take any steps to try to increase the value of the mortgaged property before selling.
Even where such steps are taken, the receiver is free to halt these steps and to proceed

9' (1983] 3 All ER 54.

98 The court, however,refused to set aside the sale due to the inexcusabledelay on the part of the appellant.The
appealwas allowed to the extent that the appellant was entitled to the alternative remedy of damages.
!19 Lai Ka Hing v Nan Fung Finance Ltd [2008) 5 HKLRD 552; ~3'§llit v .f1Jl\'Hfflllf'fff~l\!0iei.l (unrep., HCMP
2721/2012, (2014) HK.EC 512).
882 RECEIVERSHIP

with an immediate sale of the mortgaged property. A receiver's primary duty is to

bring about a situation where the secured debt is repaid, and so the receiver is entitled
to sell the property in its existing condition without awaiting or effecting any increase
in value or improvement in the property. 100 There is no fiduciary duty in the sense that
the receiver must act in the best interests of the mortgagor. 101
18.057 Equitable duty of care can be used to regulate behaviour of receiver and manager
in managing business. The rules relating to the equitable duty of care can also be used
as a doctrinal tool to regulate the behaviour of a receiver and manager in managing the
business of the debtor. In Medforth v Blake, 102 the receivers and managers appointed
to the debtor company failed to take steps to claim large discounts from suppliers,
although the original controller of the company had told them repeatedly that they
could do so. Sir Richard Scott V-C held that if the equitable duty of care approach can
be used to establish the receiver's liability for failure to exercise reasonable care in
relation to a sale of the debtor's assets, the same approach can be adopted to police the
receiver's conduct with regard to the management of the business. His Lordship ruled
that a receiver managing the mortgaged property owed a duty to manage the property
with due diligence. This duty does not require the receiver to carry on the debtor's
business. If, however, the receiver decides to do so, "due diligence requires reasonable
steps to be taken in order to try to do so profitably". 103 By failing to take steps to
obtain the large discounts, the receivers in Medjorth breached their duty to manage the
mortgaged property with due diligence.
18.058 But no obligation to decide to carry on debtor's business. The reason why a receiver
managing the mortgaged property does not have a duty to carry on the debtor's business
is that his or her power is, in effect, the power of the mortgagee exercisable against the
debtor. 104 The receiver's primary duty is to realise the secmity on behalf of debenture
holder. He or she is therefore under no obligation to run the debtor's business at the
expense of the debenture holders. 105 Why does the receiver then come under a duty of
due diligence if he or she decides to run the debtor's business? The answer provided
by Sir Richard Scott V-C in Medforth v Blake 106 appears to be that the receiver is
in a similar position with a mortgagee in possession. If a mortgagee has gone into
possession and carried on the business negligently or incompetently, the mortgagee is
accountable to the mortgagor for losses caused to the latter by the former's negligence
or incompetence. 107 Sir Richard Scott V-C rejected the contention of the defendant in
that case that the receiver appointed by a mortgagee should be treated differently. His
Lordship pointed out that if a receiver or manager, under established authorities, 108
owed some specific duties as the mortgagee when selling, there was no reason to

100 Si/ve11Propenies Ltd v Royal Bank of Scotland Pie [2003] BCC 1002.
161 YijimgProperlies Ltd v Ma11chesterSec11ri1iesCo,11(unrep., HCA 1341/2014, [2014] HKEC 1892), [92].
62
' [2000)Ch 86.
163 [2000)Ch 86, I02.per ScouV-C.
& Co (Builders) Ltd (1955) Ch 634.662.
,o-, ReJol111so11
& Co (Builders) lid (1955) Ch 634,662.
,o, ReJol111so11
10• [2000)Ch 86.
16
' [2000)Ch 86, 93, 99.
168 Such as C11ckmereBrick, DownsviewNominees.and YorkshireBank Pie v Hall [ 1999) I WLR 1713.
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 883

hold the receiver's position to be different when it came to the receiver's duty when
conducting the debtor's business. 109
Obligation to deal with claims of preferential creditors if s.79 applies. A receiver 18.059
or manager is under the obligation to deal with the claims of preferential creditors 110 if
Cap.32, s.79 applies. Section 79(1) provides that:

"Where a receiver is appointed on behalf of the holders of any debentures of

a company secured by a charge which, as created, was a floating charge, or
possession is taken by or on behalf of those debenture holders of any property
comprised in or subject to the charge, then, if the company is not at the time in
course of being wound up, the debts [of preferential creditors under s.265] shall
... be paid out of any assets coming to the hands of the receiver or other person
taking possession as aforesaid in priority to any claim for principal or interest in
respect of the debentures."

Claims of preferential creditors have priority over claims of chargee appointing 18.060
receiver where receiver appointed under floating charge. Thus, under Cap.32,
s.79, the claims of preferential creditors have priority over the claims of the chargee
appointing the receiver where the receiver was appointed under a floating charge
(including crystallised floating charges' 11). There is a suggestion in Griffiths v
Yorkshire Bank pie' 12 that s.79 would not give the preferential creditors priority over
other competing chargees who have not appointed a receiver nor taken possession of
the assets, on the basis that the wording of the provision only gives the preferential
creditors priority "to any claim for principal or interest in respect of the debentures"
(emphasis added), with the reference to "the debentures" at the end of s.79(1) being
a reference to the debentures under which the receiver was appointed. However, this
view was not followed in Re H & K (Medway) Ltd, Mackay v Inland Revenue, 113 where
the court held that "the debentures" must mean "any debentures" secured by a floating
charge, and thus preferential creditors would have priority over all holders of floating
charges.
Limitations to protection of preferential creditors in s.79 of Cap.32. There are 18.061
other limitations to s.79 in terms of protection of preferential creditors though. For
example, s.79 does not apply where no receiver is appointed and where the chargee
does not take possession of the assets-e.g. in the situation where, with a floating

109
[2000] Ch 86, 99.
110
I.e. preferential creditors under Cap.32 s.265, such as employees.
111
Section 79 (and s.265) of Cap.32 originally conferred priority on preferential creditors over holders of debentures
"secured by a floating charge". In Re Brightlife Ltd [1986] BCLC 418, the court had held that the equivalent
of Cap.32, s.265 in the Companies Act 1985 (UK) (which applies in the case of winding-up) did not give the
preferential creditors priority over holders ofa floating charge which had already crystallised into a fixed charge
berore the company's winding-up. Cap.32, ss.79 and 265 were amended in 1987 to overcome that decision so
that preferential creditors would have priority over the holders of any "charge which, as created was a floating
charge".
Ill (1994) I WLR 4127.
Ill [ 1997) 2 J\11ER 321.
884 RECEIVERSHIP

charge over book debts, the chargee has a right under the charge instrument to require
the company to assign the book debts to the chargee upon crystallisation. 114
18.062 Cap.32, s.79 can impact on feasibility of rescue plan. In providing for the protection
of the interests of preferential creditors, this s.79 can impact on the feasibility of
any rescue plan put forward by a receiver and manager. Where the rescue plan is
to be carried out through a scheme of arrangement under Cap.622, s.670, it is
necessary for the proposed plan to be approved by different classes of creditors
through class meetings. 115 The obligation to pay preferential creditors under s.79
means that the proposed plan must make provisions to make full payments to the
preferential creditors in priority to ordinary unsecured creditors unless this entitlement
to preferential payment is waived by the relevant class of preferential creditors. In
Re S Afegga TelecommunicationsLtd,116 the court refused to sanction the proposed
rescue scheme organised by the receiver and manager because, as at the time of the
creditors' meetings, there were insufficient assets to satisfy the preferential debts owed
to employees in full and no separate class meeting was held for employees, as a class
of preferential creditors, to consider whether the employees were willing to waive their
treatment as preferential creditors.
18.063 Receiver under duty to provide information. A receiver also owes the company and
other relevant parties a common law and statutory duty to provide information. Under
Cap.32, s.300A, a receiver has an obligation to: (i) notify the company about his or
her appointment forthwith; 117 (ii) send the statement of the company's affairs with his
or her comments, within two months of his or her receipt of the statement, to both the
Registrar and the court; 118 (iii) send the same documents to the company and, if he or
she does not think fit to make any comment, a notice to this effect; 119 (iv) send a copy
of the said summary to any trustee for debenture holders on whose behalf he or she
was appointed, and also to all such debenture holders so far the receiver is aware of
their addresses; 120 and (v) send to the parties mentioned in (i) to (iv) above (except the
court), within two months or a longer period as the court may allow after the expiration
of 12 months of his or her appointment and every subsequent period of 12 months or
a longer period allowed by the court an abstract in the specified form showing his or
her receipts and payments during the relevant period. 121
18.064 Statutory provisions not exhaustive of receiver's obligation to render accounts
and provide information. The statutory provisions are, however, not exhaustive of
a receiver's obligations to render accounts and to provide information. 122 During the
receivership, the receiver's duty to provide, or in other words, the company's right to
obtain, infonnation beyond the statutory accounts: "depend on demonstrating 'a need

114
P Smart, K Lynch and A Tam, Hong Kong Company Law: Cases Materials and Comments (Butterworths
1997) 415.
115 See para.19.073.
116 [2003) 2 HKLRD583.
111
Cap.32, s.300A{l)(a).
118
Cap.32, s.300A{1)(c)(i).
11~ Cap.32, s.300A( l)(c)(ii).

12• Cap.32, s.300A(l)(c)(iii).

"' Cap.32, s.300A(2).

112 GombaHoldings (UKj Ltd v Homan [ 1986) I WLR 130l.
 PRl\',<\TELYAPPOINTED RECEIVERS OR RECEIVER AND MANAGERS 885

to know' for the purpose of enabling the board to exercise its residual rights or perform
its duties". 123 Such "a need to know" may, for example, arise where the board needs
the information to discharge its statutory duty to file annual financial statements. The
directors may also need information from the receiver for the purpose of exercising the
company's right to redeem the mortgage. In Gamba Holdings (UK) Ltd v Homan, 124
Hoffmann J accepted that it is at least arguable that:

" ... a board which demonstrates a bona fide intention and ability to redeem is
entitled not merely to a redemption statement showing how much is still owing
but also to reasonable information about the nature of the assets remaining in the
hands of the receivers."

Gomba Holdings case: receiver's duty to provide information subordinate to 18.065

primary duty to debenture holder. His Lordship added, however, that the receiver's
duty to provide information in this situation must be subordinated to his primary duty
not to do anything which may prejudice the interests of the debenture holder.
Gomba Holdings case: no order for receiver to provide information to enable 18.066
company to redeem as plaintiff failed to show company in position to redeem. On
the facts of the case though, Hoffmann J rejected the request by the sole director of
the company for an order that the receiver provide certain items of information for the
alleged purpose of exercising the company's right to redeem. His Lordship's decision
was based on the ground, inter alia, that the plaintiff failed to make out a prima facie
case that the company was in a position to redeem.

3.6 Liabilities of receivers

Receiver or manager personally liable for contract he or she entered into unless 18.067
it provides othenvise. A receiver or manager of the company's property is personally
liable on any contract entered into by him or her in the performance of the functions,
except insofar as the contract otherwise provides. 125The receiver or manager, however,
is entitled to an indemnity out of the assets in respect of his or her personal liabilities
on the contract. 126
Not liable under existing contracts; but receiver can be liable for wrongful 18.068
possession of third party's property. A receiver is not liable under existing contracts
(including contracts for hire of equipment), even though he or she procures the company
to continue to complete the contracts. 127 Pre-receivership contracts are entered into by
the company itself. Just as the directors are not liable on the company's contracts
entered into before the company is in receivership, a receiver is not personally liable
on these contracts after the commencement of the receivership.

Ill Gomba Holdings(UK) lid v Homan [ 1986) I WLR 130I, J308.

'" [1986] I WLR 1301, 1308.
12~ Cap.32, s.298A(2).
1
26 Cap.32, s.298A(2).
Pty Ltd (1985) 3 ACLC 555; Cater-Ki11gPty Ltd v WestpacBanking Corp (1990) WAR
'" Diesels & Co111po11e11ts
225; Narde/1Coal Co,p v Hunter ValleyCoal Processi11g(2003) 21 ACLC 1505,(66).
886 RECEIVERSHIP

18.069 A receiver can be liable in tort, for trespass or conversion, to a third party whose
property is in the possession of the company. For example, a third party's assets
may be in the possession of the company where it has supplied stock or equipment
under a reservation of title clause. 128 In order to discharge his or her duty to preserve
the company's assets, the receiver is likely to act as quickly as possible to take
control of the company's assets after his or her appointment. He or she may not have
enough time to verify the title of the assets that are in the company's possession.
If the receiver deals with these assets in a manner which is inconsistent with the
third party's right to possession or ownership, the receiver may commit trespass or
conversion. 129

3.7 Termination of receivership

18.070 Terminated where purpose achieved or receiver removed. A receivership will end
when the purposes for the appointment of the receiver or manager have been achieved.
This will be the case where the administration of receivership is completed. 130
A receivership can also terminate where the receiver or manager is removed by his or
her appointor.
18.071 Normally debenture provides receiver can be removed without cause. The
debenture normally confers on the debenture holder a power to remove the receiver
or manager without cause. The debenture holder can thus remove an appointee if the
latter does not discharge his or her roles in the way in which the former would like or
if the report made by the appointee is insufficient. 131
18.072 Removal can be made for misconduct: court has inherent jurisdiction to do so.
Another circumstance in which the debenture holder's power of removal can be
exercised is where the receiver or manager has committed some form of misconduct.
Where the debenture does not provide a removal power, a removal can be made with
court sanction. The court has an inherent jurisdiction to remove privately appointed
receivers or managers. 132 The court, however, may be slow to exercise this jurisdiction
except where the receiver's misconduct is flagrant. 133
18.073 Resignation terminates receivership unless replacement within reasonable time.
A resignation of the receiver or manager also terminates the receivership, unless a
replacement is made within a reasonable time. The possibility of resignation is
normally provided for in the debenture. 134 The appointment of a receiver or manager
by the court discharges an appointment previously made out of court by a party to the
action. 135

128 Roy Goode, Principle.<of Co,porate Insolvency Law (4th edn, Thomson Sweet & Maxwell 2011) [ I0-59].
"~ Re Goldburg (No.2) [ I9 I2] I KB 606.
130 P Blanchard and M Gedye, The Law of Company Receivership in Australia and New Zealand (Buttcrworths

1994) 266.
"' Michael Murray, Keay's/11sol11e11cy:
Personala11d0.>1porateLawa,ul Practice(6th cdn, Thomson LBC 2008) 498.
"' Re Maskelyne British TypewriterLtd (1898] I Ch 133; Re StoggerAutomatic Feeder Co Ltd [1915] I Ch 478.
"' Re Neon Signs (A/Asia) lid [ 1965] VR 125.
"' Michael Murray, Keay 's/11so/11ency:
Personaland Co1porateLaw and Practice(6th edn, Thomson LBC 2008) 498.
"' Re Mask.ely11e
British 1j,pewriterLtd (1898) l Ch 133; Re SloggerAutomatic Feeder Co Ltd (1915) l Ch 478.
 COURT-APPOINTED RECEIVERS OR MANAGERS 887

Management reverts to board on termination. On the termination of receivership, 18.074

the company's management power reverts to the board of directors, unless liquidation
ensues, in which case, the power of control is taken over by the liquidator.
Liquidation does not necessarily discharge receivership. If liquidation is ordered 18.075
subsequent to the advent of receivership, a court-appointed receiver or manager is not
necessarily discharged. I36

4. COURT-APPOINTED RECEIVERS OR MANAGERS

4.1 Court's jurisdiction

Jurisdiction to appoint. The Court of First Instance can appoint a receiver or manager 18.076
pursuant to s.21L of the High Court Ordinance (Cap.4) (or its inherentjurisdiction I37)
or pursuant to Companies Ordinance (Cap.622), s.725.
Power of appointment exercised where just and convenient. The power of 18.077
appointment under s.21L ofCap.4 can be exercised:

" .. .in all cases in which it appears to the Court of First Instance to be just and
convenient to do so". I38

Appointment under Cap.622, s.725 for unfair prejudice. Under Cap.622, s.725(2), 18.078
where unfair prejudice is established, the court can make an order to appoint a receiver
or manager of the whole or a part the company's property or business. The power
provided in the latter provision may be exercised to protect the interests of minority
shareholders. Cap.622, s.725 is discussed in detail in Chapter 10.

4.2 Circumstances where appointment is sought

Inadequacy in debenture provisions or the power to appoint not yet exercisable. 18.079
An appointment can be made to meet the need for protecting the interest of a charge
holder due to either the inadequacy in the debenture provisions or where the charge
holder's interest is in jeopardy but its power to appoint a receiver or manager is not yet
exercisable. The position of the charge holder, for example, can be in jeopardy where
other creditors are commencing or threatening action against the company, 139 where
ajudgment creditor has levied execution against the company, I40 where the company
parts with the whole or substantially the whole of its undertaking and assets otherwise
than in the ordinary course ofbusiness, 141 where the company's business is closed and
its funds and credit are exhausted, I42 or where the company's share capital is exhausted

'" For further discussion on this topic, see para. 18.117 below.
'" Natio,wl Australia Bank Ltd v Bond Brewing Holders Ltd ( 1991) I VR 386.
'" High Court Ordinanc-e (Cap.4), s.21L.
139 McMahon v North Kelli Ironworks Co [ 1891) 2 Ch 148 (Ch D).
'"" Edwards v Standa,r/ Rolling Stock Syndicate [ 1893) I Ch 574 (Ch D).
141 Hubbuck v Helms ( 1887) 56 L J Ch 536.

& Ma,jolaine [ 1914) WN 335.

'" Re Bra1111stei11
888 RECEIVERSHIP

and the company proposes to distribute its only assets among shareholders. 143 If the
default events in the charge holder's debenture are not drafted sufficiently wide to
cover such circumstances, then the charge holder would need to apply to the court if it
wishes to have a receiver appointed to protect its interests.
18.080 Unsecured creditor can apply to court to appoint receiver in principle. In principle,
an unsecured creditor can also apply to the court to appoint a receiver. For example,
it might be possible for an unsecured creditor to seek the appointment of receivers for
the purpose of enforcing a negative pledge given by the company. However, it seems
that the court's jurisdiction would rarely be exercised in favour of unsecured creditors
as other, less drastic, remedies should generally be adequate for the protection of the
rights of unsecured creditors. 144
18.081 Application by member for court to appoint receiver. Apart from applications
made by creditors, those within the company (such as members) might also seek an
appointment of receivers to preserve the company's assets or to preserve the status
quo. For example, this might be done to prevent misappropriation or dissipation of
the company's assets. 145 Or an appointment might be sought where the company's
board is unable to function properly, such as where there is no board available, 146 or
the company's management is paralysed because of deadlock between the corporate
controllers. 147 An appointment in this situation provides the company with temporary
management pending the availability of a functioning board.

4.3 Principles for exercise of court's discretion

18.082 Appointment is equitable remedy. The appointment of a receiver under the High
Court Ordinance (Cap.4), s.21 L (or pursuant to the court's inherent jurisdiction) is an
equitable remedy that can be granted only where the remedies obtainable at law are
inadequate to meet the ends of justice. 148
18.083 Appointment must be for protection of a right and only allowed if no other
remedy adequate. In making an application, the applicant must show that he or she
has some legal or equitable right (although that right does not need to be proprietary
in nature) that will be protected or enforced by the order sought and that no other
remedy is adequate for that purpose. 149 The appointment of a receiver can have a
considerable and adverse effect on an ongoing business. It is expensive and depletes
the company's assets. It is generally damaging to businesses involving manufacturing
and sale of goods, as opposed to a more static business such as letting commercial
or residential property. 150 A receivership order is a serious infringement of rights

143 Re Tilt Cove Copper Co Ltd [ I9 I3] 2 Ch 588 (Ch D).

,.., Bond Brewing Holdings Ltd v National Australia Bank Ltd ( 1990) I ACSR 445 (injunction would be sufficient
to enforce negative pledge clause rather than the appointment of a receiver).
145 Guo Jing Jing v Art Master Investment Ltd (unrcp., HCA 1008/2009, [2009] HKEC 2009). See para. 18.089

below.
146 Tn:,deAuxilia,y Co v Wickers(1873) 16 Eq 303.

'" Re c, Co (No 00596 of 1986) 2 BCC 99.063.

"' Bond Brewing Holdings lid v National Australia Bank Ltd (I 990) 1 ACSR 445.
" 9 Bond Brewing Holdings Ltd v National Australia Bank Ltd (1990) I ACSR 445.
"" Re Jessop & Baird (Hong Kong) Ltd (No. l) [2017) 5 HKLRD 314, (15) per Harris J.
 COURT-APPOINTED RECEIVERS OR MANAGERS 889

and is likely to impact adversely on the reputation of the company. 151 Moreover,
an appointment of a receiver may cause members of the public to hesitate to deal
with the company as it may be difficult for people to differentiate between receivers
appointed on grounds of insolvency and those appointed on other grounds. 152 The
appointment of receivers is therefore a remedy of last resort. 153 So for example,
receivers should not be appointed where damages or injunctions, including Mareva
injuctions, would be an adequate remedy or where an undertaking given by
the defendant would be adequate. 154 Where the applicant is also applying for an
alternative member's remedy under Cap.622, s.725, where that remedy (such as a
buy-out order) would be adequate, the application for the appointment of interim
receivers will be rejected. 155 Also, where the principal remedy sought is a buy-out
order, there is a practical reason why the court may be reluctant to appointment an
interim receiver. This is that 'it will generally be desirable commercially that the
business is operated by the persons likely to take control of it if they are ordered to
purchase the petitioner's shares or a price is agreed voluntarily.' 156
Drastic nature. Given its drastic nature, the comts exercise great circumspection 18.084
where an order entails dispossession of the person entitled to the asset to which the
appointment is made. This is especially so where the order is sought ex parte without
notice to the defendant. 157 Where an interim order is sought pending trial, the plaintiff
should be required to undertake to the court to make good any loss that the defendant
may suffer because of the order. 158 It has been said that:

"The order appointing the receivers operate[s] as an injunction ... [and] [t]he
usual undertakings as to damages is the price that must be paid by almost every
applicant for an interim or interlocutory injunction. An injunction will by its
nature require a person to do or abstain from doing some act as so is by its nature
an order with a tendency to prejudice the person to whom it is directed." 159

Undertaking for interim or interlocutory injunction. Requiring an undertaking by 18.085

the plaintiff helps ensure that the plaintiff will not seek the order in the absence of
solid grounds. An application for appointment of receivers is likely to be rejected
where no such undertaking is given. 160
Unreasonable delay may result in refusal. An unreasonable delay may also result in 18.086
the court's refusal of the application. In Re Full Billion Shipping Ltd, 161 an application

151 Wong Lue11Hang v Chan Yt,kLung (unrep., HVA 1265/2015, (2016] HKEC 596), [74), (90) per Deputy Judge Le
Pichon.
1
" Re Full Billio11 Shippi11gLtd [2003] 2 IIKLRD 674, [48] per Chu J.
isi Macau Firs, Univet:wl Intl Ltd v Di11gXiaoho11g (unrep., CACV 193/2011, (2012] HKEC 1088), (42] (CA).
154
Bond Brewing lioldi11gs Ltd v Natio11al Australia Ba11kLtd ( 1990) I ACSR 445.
155 Re Nice/i11e Co lid (2003] 2 HKLRD 725 (CFI).
156
Re Jessop & Baird (Ho11gKong) Ltd (No. 2) [2017] 5 HKLRD 314, [16] per Harris J.
157
Bond Bn»ving Holdi11gs Ltd v Nc1tio11alAllSlralia Bank lid (1990) I ACSR 445.
" 8 Bond Brewing Holdi11gsLtd v Natio11al A11sm1/iaBank lid (1990) I ACSR 445.
" 9 Bond Bn»ving Holdings Ltd v National Ausm,lia Bank Ltd (1990) I ACSR 445,476.
160
Bond Brewing Holdings Ltd v National AllSlrtdia Bank Ltd (1990) 1 ACSR 445,476; Re Niceline Co Ltd [2003]
2 HKLRD 725 (Cfl).
161
[2003) 2 HKLRD 674.
890 RECEIVERSHIP

for appointing interim receivers was made to preserve the company's assets pending
the resolution of unfair prejudice proceedings brought under predecessor CO, s. l 68A
(now Cap.622, ss.724-725). The applicant was concerned that the new management
team, which had taken over the operation of the company, would not run the company
properly. However, the application for the appointment of a receiver was made only
after five months had lapsed since the new management took over. Chu J accepted
that unreasonable delay is not necessarily fatal nor is at an absolute bar to acceding to
the application, but considered that delay, particularly if unexplained, is relevant when
assessing the claim of risk of imminent irreparable hann. In the present circumstances,
Chu J refused the application, pointing out that the delay, coupled with the lack of
evidence of a risk of dissipation of assets, suggested that there was no present or
urgent need for intervention by receivers. The court also pointed out that the delay
had resulted in a situation where no practical purpose could be served by appointing
receivers.
18.087 Balance of convenience. One of the factors that the courts will take into
account in all cases is where the balance of convenience lies. A receiver will
not be appointed, for example, where the severe consequences following such an
appointment would outweigh the inconvenience of not making the appointment
sought. 162
18.088 Guo Jing Jing case: principles for appointing interim receiver same as
Americll11 Cyll11amid.A Hong Kong case example where an application for the
appointment of interim receivers was granted is Guo Jing Jing v Art Master
Investment Ltd. 163 In that case, the three members of the company were Guo,
Ng and Ng's step mother, Fang. The three members held 20 percent, 51 percent
and 29 percent respectively. The only business of the company was to hold a
hotel in Shanghai. The hotel was initially leased to a hotel-management company
(the lease) owned by Zhang, Fang's uncle, for RMB Im per month. The lessee
sub-leased the hotel and its management to another company for RMBl.Sm per
month, making a profit of RMB 500,000 per month.
18.089 Guo Jing Ji11g case: derivative action brought. Guo brought a derivative action
against the other t\vo members, alleging that the latter: (i) committed various wrongs
against the company, resulting in misappropriation of millions of RMB's worth of
company assets; and (ii) had caused the company to enter into various transactions,
not in the interest of the company but to benefit themselves. Guo also alleged that she
was removed as a director without her knowledge. Guo applied for the appointment of
interim receivers to protect the assets of the company.
18.090 Guo Ji11g Ji11g case: principles for considering whether to appoint interim
receivers same as those in American Cya11amid.Thomas Au J accepted that the
principles for considering whether to appoint interim receivers are the same as those

162 1/1111/vNuma (2000] VSC 218, [20); Bond Brewing Holdings Ltd v Natio,u,t Australia Bank Ltd (I 990)
I ACSR445.
'" (unrep., HCA 1008/2009,(2009) HK.EC2009).
 COURT-APPOINTED RECEIVERS OR MANAGERS 891

applied in the context of interim injunctions as set out in American Cyanamid Co v

Ethicon Ltd,' 64 which entails a consideration of the following questions:

• whether there is a serious question to be tried;

• whether there is a real risk of dissipation of assets;
• whether there is no or no current effective protective regime, and some form
of interim protection should be given to preserve the status quo; and
• the risk of damage to the company if the appointment is made, and whether it
can be adequately compensated by a cross-undertaking in damages.

Guo Jing Jing case: serious question to be tried. The first element, whether there was a 18.091
serious questionto be tried,was established.The defendantsnaturallycontestedthe allegations
made by Guo, but the court accepted that there was a serious question to be tried because,
inter alia, there were inconsistenciesbetween the evidence provided by the defendants and
some of Fang's evidence tended to support.some of the allegationsmade by Guo.
Guo .ling .ling case: risk of dissipation of company's assets in this case. The court 18.092
also held that on the evidence presented, there existed a real risk of dissipation of the
company's assets. The court held that the way in which the defendants responded to
Guo's allegations demonstrated that there was at least a doubt on the integrity and
commercial morality of the defendants in managing the company, and that this was
further underscored by the fact that the defendants were now blaming each other for
the alleged wrongdoing of which neither could explain satisfactorily.
Guo Jing Jing case: court stated protective measure needed to preserve company's 18.093
assets. The cowt also formed the view that some protective measure should be put in
place to preserve the assets of the company and maintain the status quo.
Guo Jing Jing case: court rejected argument that appointment of interim receivers 18.094
would have serious adverse effect on company. As to the balance of convenience,
the court rejected the defendants' argument that the appointment of interim receivers
would cause serious adverse effect on the company. The court pointed out that the
company was merely an asset holding company and its business was managed by
a third party, which suggested that the day-to-day operation of the company would
be minimal and not costly. Also, there was no evidence that customers or suppliers
were even aware of the linkage between the company, which was a BVf company,
and the hotel, which was located in Shanghai. The court was also unimpressed by the
submission that an appointment in the circumstances would be disproportionate or
unjustified, in particular given the substantial amount of assets at stake and given that
the administrative cost to be incurred in the day-to-day management of the company
was unlikely to be substantial.

,.. [ 1975)AC 396. Forother caes applyingthese principlesin detenniningwhethera receivershould be appointed,see e.g.
Re Niceline Co Ltd (2003) 2 HKLRD 725; Re Full Billio11Shipping Ltd [2003) 2 HKLRD 674; Re Zealot & Co Ltd
(2008) I MKLRD386; Macau First Universal lmematio,wl Ltd v Ding Xioohong [201I] 3 HKLRD 27; Compania
SudAmericana De MlporesSA v Hin-Pro !11ternotiono/Logis1icsLtd (unrep.,HCMP 1449/2014,[2014] HKEC 1186).
892 RECEIVERSHIP

18.095 Guo Jing Jing case: court took into account that applicant willing to offer
usual damages undertaking. In reaching its decision, the court also took into
account the fact that the applicant was willing to offer the usual undertaking as to
damages.

4.4 Who may apply?

18.096 Must have legal or equitable right which will be protected. A person would have
standing to apply for the appointment of a receiver under High Court Ordinance
(Cap.4), s.21 L if the person has a legal or equitable right which will be protected or
enforced by the grant of that remedy.165 While often the applicant has some proprietary
interest in the property concerned, it is not necessary as a matter of law for the applicant
to have such an interest before the applicant is entitled to apply for the appointment of
a receiver over the property. 166

4.5 Qualifications for appointment

18.097 Qualifications for appointment same as for privately appointed receivers. This is
the same of that for privately appointed receivers. 167

4.6 Effect of appointment

18.098 Receiver takes control of property but not vested in him. A cowt-appointed receiver
or manager, upon appointment, assumes control of the company's property affected,
although the appointment order does not vest in him or her the title over the property
or any rights of action. 168 Where the court makes an order for a proper person to be
appointed as receiver, the company holds the property affected as the custodian of the
court from the time of the order; and where a receiver is duly appointed in pmsuance
of that order, possession is transferred to the receiver as an officer of the court such
that the property is regarded as being in the possession of the court. 169

18.099 Whether employees dismissed. The traditional view on the effect of a court-
appointment of a receiver on company employees, as was set out in Reid v The
Explosives Co Ltd, 170 is that where a receiver and manager is appointed over the whole
business of the company, the appointment would be equivalent to a dismissal of the
company's servants. This is because "the Court acts on behalf of all, and appoints
a manager in the interest of all, but the effect is the same as in the case of a single
mortgagee who takes possession". 171 A single mortgagee taking possession of the
business of the mortgagor, which would be the same case as where an employer shuts

165 National Ausrrolia Bank Ltd v Bond Brewing Holders Ltd [ 1991] 1VR 386.
166 National A11stralit1Bank Ltd v Bond Brewing Holders Ltd [ 1991] 1VR 386.
161
Sec para.18.015above.
16880/1011v Darling Downs Building Society (1935] SR Qd 237.
"• Peruvian Guano C<> v Dn•xfus 8ros & Co [ 1892]AC 166. 187, 195.
no (1887) 19 QBD 264.
171
Reid v 11,eE.,plosivesCo Ltd (1887) 19 QBD 264, 261,per Lord Esher, MR.
 COURT-APPOINTED RECEIVERS OR MANAGERS 893

up his or her business, would be equivalent to a dismissal of the servants. 172 An action
can lie against the receiver and manager if an immediate dismissal is inconsistent with
the notice entitlement provided in the employment contract of a servant dismissed. 173
However, the position adopted by a subsequent Privy Council case and Australian
authorities is that whether employees are dismissed depends on the particular facts
of the case. For example, there would be no dismissal if the court order intended the
company to continue to carry on the whole of its business undertaking without any
breach in continuity. 174
Officer of court. A court-appointed receiver or manager is an officer of the court. 18.100
Interference with the work of a court officer amounts to contempt of court. 175 As an
officer of the court, a court-appointed receiver or manager does not act as an agent
of the company or any other persons (nor is the receiver an agent of the court). It
follows that a court-appointed receiver or manager, who does not have a principal, is
responsible for his or her own actions.

4.7 Rights, powers, duties and liabilities

Similar to privately appointed receiver: powers defined in appointment order. 18.101

Many of the rights, powers, duties and liabilities of privately appointed receivers or
managers also apply to court receivers and managers. The powers of a court-appointed
receiver or manager are defined in the appointment order.
No right to recover company property in own name. The company's property does 18.102
not vest in the receiver at law or in equity upon appointment (whether privately or
court appointed), and so the receiver has no right of action to recover property of the
company in his own name. 176
Act in best interest of all parties interested in asset. The duty of court-appointed 18.103
receivers or managers is to act in the best interest of all the parties interested in the
assets and not simply in the interests of any particular debenture holder. 177 As court
officers, court-appointed receivers are:

" ... fiduciaries charged with the duty of protecting, getting in, realising and
ultimately passing on to others assets and property which belong not to themselves
but to creditors or beneficiaries of one kind or another .... Their fundamental
obligation is ... a duty to account, both for the way in which they exercise their
powers and for the property which they deal with." 178

"' Reid v The Explosives Co Ltd (I 887) 19 QBD 264,267.

m Reid v The Explosives Co Ltd ( I887) 19 QBD 264.
'" Po,:m11v Sovereig11Bank o/Ca11ada [ 1913]AC 160; Intl Harvester £<port Co v Intl Harvester Australia Ltd [ 1983]
I VR 539; Sipad Holdings ddpo v Popovic (1995) 19 ACSR 108. For further discussion on th.istopic, see S Lo,
"Directors" in S Kwan, et al. (eds.), C<>mpa11y Insolvency (Sweet & Maxwell 2018) [1.014).
Law in Hong K<>ng:
'" Re Johnson (1887) 20 QBD 68, 74.per Bowen LJ; Ames v Birkenhead Docks Trustees (I 885) 20 Beav 332,353,
per Lord Romilly; Tai Kwong Golds111ith& Jewellers (under receivership) v Yap Kooi Hee [ 1995] MU J.
"' Re Sco1tish Pr<>pertiesPty Ltd (1977) 2 ACLR 264, 271, per Needham J.
"' Viola vA11glo-A111erican Cold Storage Co (1912) 2 Ch 305,311; Cape v Redarb Pty lid (1992) 107 FLR 362.
178 Mirror Group Newspapers Pie v Maxwell (No. 2) [ 1998) I BCLC 638, 648.
894 RECEIVERSHIP

18.104 Does not owe duty of care to other stakeholders. As it is clear from the authorities
previously referred to, in relation to the exercise of his or her power of sale or
management a receiver (and manager) does not owe a duty of care to other stakeholders
in tort. Whether a court-appointed receiver or manager owes a stakeholder an equitable
duty of care in a given circumstance depends, among other things, on the term of his
or her appointment. Thus, it has been held that where the court order gives a receiver
the power to manage a particular item of property and requires him or her to pay into
court the net proceeds of the sale, but no power of distribution of the proceeds nor any
power to investigate or determine issues of entitlement or priority in the proceeds, the
receiver did not owe any duty in equity to seek court directions as to a certain person's
alleged interest in the proceeds of the sale. 179
18.105 Must act honourably. A court officer has the duty to act not only lawfully but also
honourably; and an exacting standard of fair conduct and high-mindedness is to be
expected from a receiver as an officer of the court. 180This duty to act high-mindedly
will be relevant in settling a dispute between the court officer (even where the officer
is acting on behalf of some other people-say, creditors) and a third party, where
upholding the claim of the officer is morally wrong, although the third party may
not have a claim either in law or in equity. For example, in Re Tyler,' 81 a bankrupt's
asset (a life insurance policy), which was subject to a mortgage, was preserved by the
financial contribution made by the bankrupt's wife, who had paid the premiums during
the bankruptcy. This was known to the trustee in bankruptcy. The court held that the
trustee (an officer of the court) should not be allowed to retain the net proceeds (after
the discharge of the mortgage) of the realisation of the asset without repaying to the
wife the sums she had paid. The court held that no high-minded person would have
denied making the repayments to the wife in the circumstances.
18.106 Can be personally liable for trespass. A court-appointed receiver or manager can
be personally liable for trespass in the course of perfom1ing his or her functions. For
example, where the property that the receiver or manager has dealt with belongs to a
third party, the former can be liable to that third party for trespass. 182
18.107 Remuneration. A court-appointed receiver is to be allowed such remuneration, if
any, as may be authorised by the court, and the cowt may direct such remuneration
to be fixed by reference to such scales or rates of professional charges as it thinks
fit. 183 A receiver appointed by the court is entitled, in respect of his remuneration, to
an indemnity out of and a lien over the assets that are subject to the receivership. 184
A court-appointed receiver or manager must justify the amount of compensation he
or she claims as part of his or her duty to account. 185The court may disallow claims to
remuneration where they have arisen from the improper or misguided actions by the

"' Chim Pui Ch,mg v lam Siu Yt,e[2002] I HKLRD 136.

18
• Mc,cauFirsr Universal !11renw1ionalLtd v Ding Xiaolro11g(No.2) [2012] HKLRD 494, [47).
181
[ 1907] I KB 865.
182
Re Goldburg [ 1912] I KB 606.
183
Rules of the High Court (Cap.4A), 0.30 r.3.
1
8-1 Compania Sud Americana de VaporesSA v Hi11-Pro lnrernatio11allogistics Ltd (unrcp., HCMP 1449/2014,
(2015) HKEC 798), (13), citing Mellor v Mellor (1992) I WLR 517,526.
18
' Mirror G1v11p Newspaperspie v Maxwell (No.2) [ 1998) BCC 324.
 COURT-APPOINTED RECEIVERS OR MANAGERS 895

receiver and may also moderate such claims where they are judged to be excessive
in amount. 186 In A1irror Group Newspapers pie v Maxwell (No.2), 187 Ferris J noted
that there was no provision in the UK's Insolvency Rules 1986 (IR) dealing with
remuneration for court-appointed receivers, but pointed out that the provisions in
relation to administrators and liquidators could be used as a reference. Under the
IR, matters to be considered in determining an administrator's remuneration include
complexity of the case, any responsibilities falling on the administrators of an
exceptional kind or degree, the effectiveness of the administration and the value and
nature of the property (IR, r.2.47). Time properly spent was also relevant (see IR,
r.4.30 in relation to a provisional liquidator). 188
Peregri11e case: remuneration could he ordered on different bases. In Re 18.108
Peregrine Investments Holdings Ltd, 189 Le Pichon J pointed out that remuneration
(of provisional liquidators in that case) could be ordered on one of several bases,
including a time basis, a realisation basis, or the all-encompassing test under r.4.30 of
the UK Insolvency Rules 1986. 190 To justify his claim, the provisional liquidator will
need to: (a) adduce sufficient evidence to explain the nature of each task undertaken
and the considerations which led them to embark upon that task; (b) link the time
spent to that explanation; (c) satisfy the court that a reasonably prudent man faced
with the same circumstances in relation to his own affairs would have laid out or
hazarded his own money in doing what the provisional liquidators had done; (d)
normally produce contemporaneous records of what they did and why they did it;
(e) normally produce contemporaneous records of all items of expenditure and of
services rendered and how they were calculated and how they were justified; (t)
indicate the fees for any item of work disallowed as being unnecessarily incurred;
(g) indicate the fees for any item of work disallowed as being incurred in breach
of duties. 191 As indicated by the Mirror Group case, it seems that the above factors
would also be relevant for receivers.
Costs and expenses. The order appointing a receiver may also, in line with long- 18.109
established principles, provide that the receiver is entitled to be indemnified out
of the relevant assets for the reasonable costs and expenses properly incurred in
the performance of his or her duties and in the exercise of his or her powers as
receiver. 192

4.8 Discharge

Generally discharge order required. As a court officer, a court-appointed receiver 18.110

or manager can be discharged only by the court. Discharge must be made through a

186
Compania Sud Americana de VaporesSA v Hin-PJ'O !111ema1ionallogi.Hics Ltd (unrep., HCMP 1449/2014,
[2015] HKEC 798), [20].
18
' ace
[ 19981 324
188 The Insolvency Rules 1986 (UK) have now been replaced by the Insolvency (England and Wales) Rules 2016
(UK). On remuneration of administrators and liquidators under the 2016 rules, sec r.I8.I6.
189 [ 1998] 2 HKLRD 670.
190 Sec now Insolvency (England and Wales) Rules 2016 (UK), r.I8.I6.
191
Peregrine ln11estme111s
Holdings Lid [ 1998) 2 HKLRD 670.
192
Capewe/1v Reve1111eand Cusloms Comrs [2007) I WLR 386, [21); Woodv Gorb1mova[2014) I BCLC 487.
896 RECEIVERSHIP

discharge order, unless the appointment is for a limited time 193 or the appointment order
itself provides for the discharge of the appointee. 194 This is so even if the circumstances
have rendered the appointment nugatory. 195
18.111 Discharged where appointment defective. The court must make an order for
discharge of a court-appointed receiver or manager if the appointment is defective
in the first place, or where the original appointment should not have been made. 196
For example, an appointment of a receiver for the purpose of execution over property
not capable of being assigned or otherwise charged (e.g. because of a statutory rule)
is flawed and the appointee must be discharged. 197 Also, a receiver appointed, by
mistake, over property belonging to a person who is not a party to the action must be
discharged. 198
18.112 Discharged where purpose achieved. A court-appointed receiver or manager will be
discharged by the court when the purpose of his or her appointment has been achieved.
For example, where the receiver or manager is appointed to manage the company's
affairs where no competent and unbiased board is available or where the board cannot
function because of the existence of a deadlock, the appointee can be discharged when
a functioning board is available. 199
18.113 Discharge on receiver's own application and showing reasonable cause. A receiver
or manager can be discharged on his or her own application before the completion
of the functions, as long as the appointee can show reasonable cause for his or her
discharge. An example ofreasonable cause is ill health. 200
18.114 Removal for misconduct. As a court officer, a court-appointed receiver or manager
can be removed on the ground of misconduct or other ground for unfitness is shown.201
A receiver may be discharged if his or her conduct has been such as to impede the
impartial course of justice as to amount to a gross dereliction of duty.202 A receiver may
also be discharged for any default or misconduct of such a degree as will forfeit the
confidence of the court or which is liable to prejudice the interests of the parties. 203 For
example, the receiver may be removed ifhe or she has consistently breached his or her
duty to lodge accounts and has failed to comply with the court order in reference to the
same matter.204 Dismissible misconduct also includes misapplication of the assets of
the company for unlawful payments. 205 The court will be slow to condemn or discharge
a receiver who has honestly done his best but failed to discharge his duties by reason

193 Canadian Permanent Mortgage Corp v Dalgleish (1928) I DLR 1113.

'" Day v Sykes. Walker & Co Ltd ( 1886) 55 LT 763.
"' Canadian Permanent Mongage Co,p v Dalgleish [1928) I DLR 1113.
196
Macau First Universal lntematio11al Ltd v Di11gXiaohong (No.2) [2012) 2 HKLRD 494, [52).
"' Lucas v Harris (1886) 18 QBD 127 (Eng CA). The property in question there was the pensions of two officers
of the armed forces, which, according to the Army Act 1881, was inalienable.
198
Lave11derv Lave11der( 1875) IR 9 Eq 593.
"~ Sec para.18.009 above.
200Richardson v Ward ( 1822) 6 Madd 266.
ro, Macau First Univerwl lntemt1tio11al Ltd v Oi11gXit1ohong (No.2) [2012) 2 HKLRD 494, [52).
2'l2 Macau First Universtd lntemt11io11alLtd v Oi11gXit1ohong (No.2) [2012) 2 HKLRD 494, [52).
ro, Macau First Universal lntemt11io11alLtd v Di11gXit,ohong (No.2) [2012) 2 HKLRD 494, [52).
""' Re St George's Estate (1887) 19 LR lr 566.
ro, Re Rai11bowGate Ltd (unrep., HCCW 593/1998, [2007) HKEC 2310) (removal of a liquidator for misconduct).
 COURT-APPOINTEDRECEIVERSOR MANAGERS 897

of their onerous and irksome nature. 206 The court may also be reluctant to discharge a
receiver where the receiver has, overall, acted in the interest of the company, though
the receiver appeared to have acted in favour of one of the factions within the company.
In such a case the court's confidence in the receiver is not forfeited, even if the actions
of the receiver has been less than perfect.207
Conflict of interest. A court officer can be removed where the duty he or she owes 18.115
to one company conflicts with a duty owed to another. Thus, if the same person is
appointed as the receiver or manager, with full management control, of two different
companies that are engaged in litigation against each other, the appointee should be
removed from his or her post as the receiver or manager of one of the companies. 208
Also, a court officer could be removed if he or she has a personal interest in the
outcome of the performance of his or her duties. An example is where the appointee is,
on the one hand, an officer and shareholder of the company and on the other, a creditor
of the same firm. 209
Court does not lightly remove its own officer. The court does not lightly remove 18.116
its own officer and will, amongst other considerations, pay due regard to the impact
of a removal on his professional standing and reputation. The onus of proof on an
applicant will not be easy to discharge where the officer has become well acquainted
with the business and affairs of the company. Even if grounds for removal are made
out, it is also necessary to take into account the disadvantages that would arise from
the removal of the officer in terms of costs and delay.210
Liquidation does not necessarily discharge receiver: general rule is that receiver 18.117
should not be appointed liquidator. If liquidation is ordered subsequent to the
advent of receivership, a court-appointed receiver or manager is not necessarily to be
discharged. In order to save trouble and expense, the court may appoint the receiver to
be the liquidator, if it is appropriate to do so.211 The general rule is that a receiver of the
company should not be appointed as the liquidator. The main reason is that a (privately
appointed) receiver or manager acts in the interest of his or her appointor whereas a
liquidator acts on behalf of all of the unsecured creditors collectively.212 However,
even where the receiver or manager is appointed by the debenture holder, where no
real conflict of interests exists, the court may be willing to appoint the incumbent to
be the liquidator.213 This might not be simply to save trouble and expense, but also to

'°' Macar, First Universal International Ltd v Ding Xiaolwng (No.2) (2012) 2 HKLRD 494, (53), citing Re St
George's Estate (1887) 19 LR lr 566,567.
2• 1 Achieve Goal Holdings Ltd II Zlto11gXin Ore-Material Holdi11gCo Ltd (unrep., HCA 1987/2005, (2014) HKEC

1454), [81) (CFI).

2•• Re Nickel Mines Ltd (1978) 3 ACLR 686 (where the same person was appointed as the provisional liquidator of
two companies engaged in litigation).
'°' Re Erie Gas Co Ltd [ I 938) 4 DLR 776.
216 Macau First U11i11ersal International Ltd v Di11gXiaohong (No.2) [2012) 2 HKLRD 494, [55}-[56). In that case,
the court declined co discharge the receivers. Sec also Achieve Goal Holdings lid v Zhong Xin Ore-Material
Holding Co Ltd (unrep., HCA 1987/2005, [2014) HK.EC 1454).
211 ReJos/1110Stubbs lld[l891) 1 Ch 475 (Eng CA).
212 Stead, Hazel & Co v Cooper [1933) 1 KB 840,843; Re Orient Power Holdings [2008) 2 HKLRD 494.

"' Re Luen Che11011gTai Construction Co Ltd (unrcp., HCCW 190/2002, [2002] HKEC 1544); Re Yiu Wing
Construction Co Ltd (unrep., HCCW 202/2002, (2003) HKLRD (Yrbk) 193); Sis11Capital Fund Ltd v Tucker
[2005) EWHC 2170; Re Orient Power Holdings (2008) 2 HKLRD 494.
898 RECEIVERSHIP

take advantage of the knowledge that the incumbent receivers have acquired about the
company.214 Where the receiver or manager is a court officer, the above-mentioned
conflict of interests does not exist. A court-appointed receiver or manager is appointed
to act on behalf of all the parties interested in the assets, mentioned above.215 The
court should therefore be less wary when appointing the court-appointed receiver or
manager to be the liquidator.

"' Re Orient PowerHoldings (2008)2 HKLRD494.

2
" Seepara.18.103.
 CHAPTER 19

CORPORATE RESCUE

PARA.

I. Introduction ............................................................................................................................ 19.00I

2. Corporate Rescue: The Landscape in Hong Kong ................................................................. 19.007

2.1 Workouts and debt rescheduling .................................................................................... 19.007
2.2 The "Hong Kong Approach" .......................................................................................... 19.012
2.3 Receivership ................................................................................................................... 19.013
2.4 Provisional liquidation .................................................................................................... 19.017
2.5 Scheme ofarrangement .................................................................................................. 19.0l9
2.6 Cap.32 s.199(1 )(e) power of compromise ...................................................................... 19.02 l
2.7 Provisional supervision .................................................................................................. 19.023

3. The Functions ofa Restructuring System in Facilitating Corporate Rescue ......................... 19.034
4. The Stay Device ..................................................................................................................... 19.038
4.1 Adjournment of winding-up petitions ............................................................................ 19.040
4.1.1 Initial adjournment .............................................................................................. 19.042
4.1.2 The possibility of further adjournments .............................................................. 19.043
4.1.3 Prerequisites for further adjournments ................................................................ 19.044
4.1.4 Duration of further adjournments ........................................................................ 19.05 I
4.2 Provisional liquidator ..................................................................................................... 19.052
4.3 Courts' stay powers under the Rules of the High Court ................................................. 19.064

5. The Decision-Making Device ................................................................................................ 19.065

5.1 The scheme of arrangement regime ............................................................................... 19.066
5.1.1 The provisions ..................................................................................................... 19.066
5.1.2 Principles governing courts' discretion ............................................................... 19.070
5.1.3 Classification of scheme creditors ...................................................................... 19.076
5.1.4 The duty of disclosure ......................................................................................... 19.084
5.1.5 Procedure ............................................................................................................. 19.096

6. Debtor Overreaching Control Devices ................................................................................... 19.106

6.1 Screening out ineligible firms ........................................................................................ 19. I I J
6.2 Displacing management of eligible firms ...................................................................... 19.l 14
6.3 Constraining the power of incumbent directors .............................................................. 19.l l 5
 1. INTRODUCTION
Corporate insolvency: debts restructured with view to nurturing company 19.001
back to health or maximising returns for creditors. When a company becomes
insolvent, the managers of a company have two options. The first is to have the
company liquidated inm1ediately.The second, which is termed "corporate rescue" for
the purposes of this chapter, is to have the company's debts restructured with a view
to either nurturing the company back to financial health or, if that is impossible, to
maximising the returns for the creditors. A debt restructuring can maximise returns for
the creditors only if that process is able to result in a larger pool of wealth as compared
to the situation where the company is to be liquidated inm1ediately.Corporate rescue
is generally regarded as a preferred alternative to liquidation. Where it is possible to
resuscitate a financially distressed company through, among other things, rearranging
its debt obligations and a respite given by the creditors, the rescue option is likely to
be more socially desirable. When a company is wound up, company employees and
officers will lose their jobs, shareholders and certain classes of creditors (such as
unsecured creditors) will lose most, if not all, of their investments, the state will lose a
source of revenue, and the demand for social services can increase. 1 The rescue option
is also a socially more desirable outcome, as compared to an insolvent liquidation, if
the former will result in a better return for creditors.
Putting unsalvageable company through rescue process not beneficial. On the 19.002
other hand, putting an unsalvageable company through a rescue process where no
net financial gain can be made is not socially beneficial. Postponing the liquidation
of a company beyond rescue through a restructuring process can injure the interests
of certain classes of creditors. A delay in the realisation of secured creditors' claims,
for example, could impair the interests of claimants of that class. The fact that a
restructuring process will not yield any net gain suggests that no claimholders will
benefit from the process. On the other hand, a rapid deployment of the assets of
uncompetitive firms to higher value users promotes economic development.2
Corporate rescue regime must: (i) make correct decision on deployment of assets; 19.003
and (ii) maximise assets available to claimants. The central tasks of a corporate
insolvency regime are therefore to: (i) make a correct decision on the deployment
of the debtor's assets, and (ii) maximise the pool of assets available to claimants. As
an insolvent debtor's assets, at least in a practical sense, belong to the creditors3, the
question of how the debtor's assets are to be deployed and distributed should naturally
be answered through a decision reached collectively by the creditors.
Claimholdcrs may reach collective decision through contractual means. It is 19.004
possible for the claimholders to reach a decision collectively through consensual

' BG Carruthers and TC Halliday, Rescue Business: The Making of Corporate Bankruptcy law in England cmd
the United States (OUP 1998) 69; Insolvency Law and Practice: Report of the Review Committee, Department of
Trade. Cmnd 8558( 1982), para.203.
2 Kevin E Davis and Michael J Trebilcock, "Legal Reforms and Developments" (200 I) 22(1) Third World
Quarterly 21, 23.
3 Especially unsecured creditors.
902 CORPORATERESCUE

means. Such agreement requires unanimous consent of the claimholders, which

may be hard to obtain.4 Even if a collective agreement has been reached through this
informal means, it is possible for a recalcitrant creditor to petition the winding-up of
the company unilaterally, thereby rendering the informal restructuring effort futile.
19.005 Modes of corporate rescue in Hong Kong. There is therefore a need for a formal
means, which stays claimholders' enforcement actions and allows a restructuring
decision to be reached without unanimous consent of claimholders. A stay of
proceedings is necessary to give the company some "breathing space", during which
a restructuring option may be considered, and, if warranted, rescue actions can be
taken. To accommodate this need, the Hong Kong Govenm1ent made a couple of
attempts to put in place a purpose-built corporate rescue procedure called "Provisional
Supervision" (PS) in the early 2000s, in vain.5 The net result is that Hong Kong still
does not have a self-contained corporate rescue regime. This, however, does not mean
that no mode of corporate rescue exists in Hong Kong. A formal mode of corporate
rescue exists in Hong Kong, with the scheme of arrangement (SOA) procedure
provided under Companies Ordinance (Cap.622) Pt.13, Div.2 as the centre-piece. 6 The
SOA procedure on its own might not provide for all the desirable features of a formal
corporate rescue system, but it, when combined with particular corporate insolvency
rules and doctrinal structures, has worked well as a restructuring device. Apart from
the SOA regime, the other constituent parts of the restructuring system in Hong Kong
include relevant corporate insolvency rules that can be used as a device to put in place
a moratorium and doctrinal structures that are used to control possible overreaching
activities by company controllers where the SOA procedure is used to create a debtor
. . .
111possession regime.

19.006 Corporate rescue in HK. The function, significance, and the rules on the operation
of the above-mentioned corporate rescue devices will be examined in the remainder
of this chapter after a brief introduction to the landscape of corporate rescue in
Hong Kong.

2. CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG

2.J Workouts and debt rescheduling

19.007 Workout and debt rescheduling: alter current obligations. A "workout" is a debt
restructuring via contractual arrangements between the company and its creditors. The
advantage of a workout is that it allows the company's difficulties to be tackled at an
early stage and it may be cheap and quick to organise. The disadvantage of a workout

' E LG Tyler (ed.) Hong Kong CompanyLaw Handbook(I Ith cdn, LcxisNexis 2009) 758; George G Triantis,
"Mitigating the Collective Action Problem of Debt Enforcement Through Bankruptcy Law: Bill C-22 and Its
Shadow" (1992) 20 Can 811sLJ242, 246.
' Sec Section 2.7 below.
6 Predecessor CO, s.166 (repealed) has been re-enacted with revision in Cap.622 Pt. I3, Div.2, ss.668-670,
673-674, 677. In terms of an arrangement or a compromise with creditors, the rules under the former s.166 have
been largely retained.
 CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG 903

is that it requires unanimous consent of the creditors and it can be frustrated by the
holdout of a single creditor. 7
Debt rescheduling, which can be termed as a "bank workout", is "a contractual
a1Tangement entered into by a debtor company or companies with all or some of
their bank creditors". 8 The purpose of a rescheduling is to alter the company's current
obligations. This may take a number of different forms, including (but not limited
to) deferment of time for payment; translation of current debt into equity or long-
term loans; giving security or additional security to creditors;9 consolidating existing
loans to reduce or spread interest payments; or readjusting the balance bet\veen short-
term, medium-term or long-term facilities. Existing lenders may even be willing to
provide new loans, especially if improved security or altered priority status can be
arranged. 10 Debt rescheduling provides the company with a respite to overcome cash-
flow difficulties typically caused by over-gearing.' 1
HK examples of saving distressed companies via debt reschedulings. The 19.008
most notable Hong Kong examples of saving distressed companies through debt
rescheduling are the rescue of a number of large shipping companies in the 1980s.
These companies, including Hutchison Whampoa Ltd, Wah Kwong Shipping and
Investment Company (Hong Kong) Ltd, and Oriental Overseas Holdings Ltd, were on
the verge of a collapse due to the worldwide downturn in the shipping industry in the
early 1980s.12 Apart from a high level of commitment and loyalty on the part of the
financial lenders, a distinct feature of these case examples is the significant financial
contribution the major shareholders made for the survival of the companies. The major
shareholders in all of these companies were members of a single family, who were
willing to make personal sacrifices (such as contributing most or all of their personal
assets to the company) for the rescue effort. 13 The fact that pa11 of the debts were
discharged with the personal assets of major shareholders would have made it easier
to achieve a turnaround compared with using debt rescheduling alone.
Debt rescheduling plays significant role in HK. The role of debt rescheduling in 19.009
corporate rescue in Hong Kong appears to be significant. According to a survey
conducted by Grant Thornton Hong Kong on listed companies which engaged in debt
restructuring in Hong Kong from 1998 to 2004, only 54 per cent of the companies
surveyed attempted to restructure their debts through formal procedures (mainly
schemes of arrangement under predecessor CO, s.166 (repealed) (see now Cap.622
Pt.13 Div.2)).14 This suggests that a significant proportion of the companies surveyed
would have been restructured through workouts, including debt rescheduling. There

1 .I Payne, "Debt Restructuring in English Law: Lessons from the United States and the Need for Reform'' (2014)
LQR 282, 285.
8 A Lickerish, "Debt Rescheduling" (1990) 6 IL & P 38.
9 Ibid., 38.
10
D Brown, Corporate Rescue (John Wiley & Sons 1996) 7.
" Ibid., 7.
12 Sec E L G 1yler, "Proposals for a New Corporate Rescue Procedure in Hong Kong" in G Wang and Z Wei
(eds), legal Developments in Chi11(1M(1rke1Economy and Law (Sweet & Maxwell 1996) 51, 56; AC W Tang,
Insolvency i11Chin(t and Ho11gKong (Thomson Sweet & Maxwell Asia 2005) 63-90.
" AC WTang, Insolvency in China and Hong Kong (Thomson Sweet & Maxwell Asia, Hong Kong, 2005) 63-90.
" lbid.,113.
904 CORPORATE RESCUE

is anecdotal evidence that most restructurings in Hong Kong take place by way of
informal workouts, compositions and arrangements. 15

19.010 Debt rescheduling can be used in conjunction with formal procedure. Debt
rescheduling can be used in conjunction with a formal procedure as a fallback
position. In Re Jinro (HK) International Ltd, 16 for example, the first component of
the restructuring plan was the sale of the entire group to be effected through a scheme
of arrangement. In the event that the first component fails to materialise, the second
component, which involved a debt rescheduling, would come into play.

19.011 Debt rescheduling more relevant where large company. Debt rescheduling is more
relevant where the debtor company is a large, publicly listed company. This is because
lenders are reluctant to grant unsecured Joans to small companies. Lenders often take
security over the borrowing company's assets at an early stage, where the borrower is
a small private company. 17

2.2 The "Hong Kong Approach"

19.012 HKAB/HKMA guidelines. There may be situations where a small number of lenders,
sometimes just one, refuse to sign a restructuring agreement, which is contractual in
nature, and threaten to take enforcement actions, such as realising security, which would
cause the collapse of the proposed workout. 18 To address this problem, the Hong Kong
Association of Banks (HKAB) and the Hong Kong Monetary Authority (HKMA) jointly
issued a formal, non-statutory guideline called "Hong Kong Approach to Corporate
Difficulties" in November 1999. The gist of this document is that the lenders that are
authorised financial institutions (which are subject to the supervision ofHKMA) should
be cooperative with a distressed corporate bo1Towerand other lenders in a bid to rescue
the company and keep it going, if the company is salvageable. The decision whether
to provide continued support to a company is made by the lenders collectively. The
role of the HKMA is that of an "honest broker" or impartial mediator to bring workout
negotiations to a satisfactory solution. 19The role of the Hong Kong Approach, however,
appears to be somewhat limited, as the HKABIHKMA guidelines do not have binding
force and, more importantly, these guidelines only apply to banks and in the Hong Kong
context, companies often have a significant proportion of non-bank creditors.20

2.3 Receivership

19.013 Receiver: role is to collect property. Receivership is a private law remedy "whereby
an invariably secured creditor enforces its security against the charged assets of a

•s Nick Gall and Ashima Sood,"Hong Kong" in The lntemario11alComparativeLegal Guide to Co1pora1eRecove,y
and Insolvency 2017 (1 I'h edn, Global Legal Group 2017) Chapter 16, [3.1),accessed at https://www.gallhk.com/
Public.ations/INS17_Chapterl 6-Hong_Kong.pdf,4 May 20 I8.
16 [2004) 3 HKLRD KS.

" A Lickerish, "Debt Rescheduling"(1990) 6 !L & P 38, 38.

18 D Carse, Speech in the Seminar on Hong Kong Approach to Corporate Difficulties, 29 November 1999, http://

www.info.gov.hk/hkma/cng/spceches/spccchs/david/spccch_291 I99b.htm [Accessed IOJuly 2009 11:55am).

' 9 Ibid., 3.
l<l Charles D Booth, et al. 11ieHong Kong C01porateJ11solve11cy Mo1111al (4"' edn, LexisNexis2018) 309.
 CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG 905

company''.2 1 A receiver can be appointed by the court or by a secured lender.22 The

basic role of a receiver is to collect, protect and receive property and income from the
property charged. The scope of the power given to a receiver may be wide enough so
as to include the power to sell assets comp1ising the security.23 Where the charge is
over the entire business and undertaking, the receiver may be given the power to carry
on the business, in which case the receiver will be called a receiver and manager. The
power of management can also be conferred on a person other than the receiver. (For
a more detailed discussion about receivership, see Chapter 8).
UK: receiver contributed to corporate rescue. The power given to receivers and 19.014
managers is believed to have contributed to corporate rescue in the United Kingdom:

"In some cases, they (receivers and managers) have been able to restore an ailing
enterprise to profitability and return it to its former owners. In others, they have
been able to dispose of the whole or part of the business as a going concern. In
either case, the preservation of the profitable parts of the enterp1ise has been of
advantage to the employees, the commercial community, and the general public."24

Receivers called "corporate doctors" in HK. This view is also held in Hong Kong, 19.015
where receivers are called "corporate doctors". 25 Receivership functions as a rescue
device where the receiver and manager: ( 1) endeavours to organise the sale of the
entire business as a going concern rather than selling assets piece meal; (2) sells off the
unprofitable elements of the business so that the remaining part can be nurtured back
to financial health; and (3) sells the profitable part of the business through a "hive off"
to a new company, leaving the old company to be wound-up. 26
Receivers' use of schemes of arrangement. It is not uncommon in Hong Kong for 19.016
a receiver and manager to organise a rescue plan through a scheme of arrangement, 27
notwithstanding the perception that receivers and managers are not incentivised to
favour rescue over liquidation. 28

2.4 Provisional liquidation

Provisional liquidator safeguards business and assets pending outcome of 19.017

winding-up. A provisional liquidator is a person appointed to safeguard the company's
business and assets pending the outcome of a winding-up petition. A provisional

21 LG Doyle, Administrative Receivership: Law and Practice (IT Law and Tax 1995) I.
22
Campany Law in Hong Kong - fllsolve11cy (Thomson Sweet & Maxwell loose-leaf) Part 11 Receivership,
[11001).
23 See Chapter I8 at [ 18.026]
2' Insolvency Law and Practice: Report of the Review Committee, Cmnd 8558 (the Cork Report), 1982, 117.
is E L G Tyler, "Proposals for a New Corporate Rescue Procedure in Mong Kong" in Guiguo Wang and Zhenying
Wei (eds.), Legal Developmentsin China (Sweet & Maxwell 1996) 51, 54.
2• J Brewer, TheLaw and Practice of Hong Kong Privc,teCompanies(Thomson Sweet & Maxwell Asia 2005) 249;
ELG Tyler (ed.) Hong Kong Companylaw Handbook(11 th edn, LcxisNcxis 2009) 1262.
27 Forexample, ReMerclwnts (Hong Kong) Ltd (unrep., HCMP 132/2005. [2005] HKEC 594); Re Music Trading
On-Line (HK) Ltd (unrcp., MCMP 1541n008. [2008] HKEC 2110); Re S Megga Teleco1111111111ications Ltd
(unrep., HCMP 5551/2001, [2002) HKEC 1344).
28 V Finch and D Milman, Corporate fnso/11e11cy Law: Perspectives and Principles (3'' edn, CUP 2017) 287-288.
906 CORPORATERESCUE

liquidator can be appointed at any time after the presentation of a winding-up

petition and pending the making of a winding-up order by the court. 29 A provisional
liquidator's powers are derived from the Companies (Winding-Up and Miscellaneous
Provisions) Ordinance (Cap.32), the Companies (Winding-Up) Rules (Cap.32H), and
the court order making the appointment. 30 Either the Official Receiver or a private
insolvency practitioner can be appointed as a provisional liquidator. 31
19.018 Appointment of provisional liquidator triggers stay. The appointment of a
provisional liquidator triggers a stay which bars the commencement or continuance
of proceedings against the company. Proceedings against the company can be
commenced or continued after an appointment is made only with the leave of the
court. 32 Since the second half of the l 990s, the courts in Hong Kong, inspired by the
creative use of provisional liquidation to effect moratoriums in the United Kingdom,
started to experiment on the use of provisional liquidation to achieve a stay. Issues
relating to the employment of provisional liquidation as a stay device will be further
considered below (at para.19.039).

2.5 Scheme of arrangement

19.019 SOA statutory collective decision-making procedure. The SOA procedure is a

statuto1ily provided collective decision-making procedure through which the company
and its shareholders or creditors may reach an agreement on the reorganisation of the
rights and liabilities of the shareholders or creditors. The aim of an SOA is to obtain a
binding agreement among stakeholders, through the operation of a majority decision,
on the modification of the legal rights of shareholders or creditors. Such modification
may or may not be detrimental to the rights-holder. An SOA can be organised for
different purposes, such as effecting a capital reduction, redomiciling a company
overseas, or reaching a settlement with the creditors. 33
19.020 Only formal procedure for restructuring. In Hong Kong, the SOA procedure is
the only formal collective decision-making procedure that can be used to arrange a
restructuring. The SOA procedure is perceived to suffer from a number of deficiencies,
notably the lack of a moratorium provision and the difficulties associated with the
organisation of class meetings. 34 Yet in fact, since the mid late 1990s, schemes have

" Cap.32, s. I 93( I).

30 Cap.32, s. I 93(3).
" Cap.32, s.193(2).
" Cap.32, s. I 86.
" ELG Tyler (ed.), Hong Kong Co111pa11y law Ha11dbook( 11th edn, LexisNexis 2009) 758-760.
"' V Finch, Corporate fllsolve11cy law: Perspec1ivesa11dPri11ciples (CUP 2002) 252-253, 327; E L G Tyler,
"Proposals for a New Corporate Rescue Procedure in Hong Kong" in G Wang and Z Wei (eds.) Legal
Developments in China: Market Economy and Law (Sweet & Maxwell I996) 5 I, 55-56; S Smith, "Some
Problems in Reorganising Insolvent Companies" in M Merry (ed.), law lecture.for Prac1i1ioners 1983, 231,
245; P Smart and CD Booth, "Reforming Corporate Rescue Procedures in Hong Kong" (2001) 1 Journal of
Co,porate Lt11vSwdies 485, 487 ("the deficiency or the schemeof arrangement as a corporate rescuemechanism
require no elaboration"); CD Booth, "Hong Kong Insolvency Law Reform: Preparation for the Next Millennium"
[2001) JBl 126, 147-148; CD Booth, S Briscoe and P Smar!, "Corporate Rescuein Hong Kong" in R Olivares-
Caminal (ed.), Expedited Debi Restructuring: An flltemational Comparative Analysis (Kluwer Law International
2007) 297, 300-30 I; J Payne, "Debt Restrucluring in English Law: Lessons from the United Statesand the Need
for Reform" (2014) Q.L.R.282, 291-292.
 CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG 907

been used extensively for restructuring purposes in Hong Kong, the UK, and some
other Commonwealth jurisdictions. 3s The function and operation of the SOA regime
will be further considered below.36

2.6 Cap.32 s.199(1)(e} power of compromise

Liquidator has power to make compromise in special circumstances. Under 19.021

Cap.32, s.199(2) and Sch.25 Pt. I s.2, 37 a liquidator has the power, with the sanction
of the court or the committee of inspection, to reach a compromise or make an
arrangement with the company's creditors and persons who claim to be the company's
creditors. This power may also be exercised by a provisional liquidator holding office
under s.194(l)(aa) after a winding-up order is made with the sanction of the court. 38
The power under Sch.25 Pt.I s.2 of Cap.32, however, should be relied upon only in
special circumstances, as it is usually more appropriate for a corporate reorganisation
to proceed through the SOA procedure (where creditors have a better opportunity to
voice their views). 39
Special circumstances. Factors that the courts have taken into account in allowing 19.022
liquidators to exercise the power under former s.199(1)( e) (now Cap.32, Sch.25 Pt. I
s.2) include:
• whether the compromise involves an alteration of creditors' rights as against
each other or it only affects the size of the ultimate pool available for
distribution; 40
• whether consultations with the creditors, who were fully informed, have been
held;41
• the level of majority of creditors in support of the proposal; 42
• whether a refusal of the liquidator's application would result in separate
schemes for each of the companies in liquidation (which would be costly and
time-consuming); 43
• whether the proposed compromise is with one group of creditors in respect
of a single asset instead of the wholesale disposal of the company's assets; 44
and

35 Charles Zhen Qu and Stefan HC Lo, "Schemes of Arrangement: Economic Analysis of Three Issues Relating to
Classification of Claims" (2017) 40(4) UNSWLJ 1440, 1441.
36
See Section 5 below.
37 This provision replaced former s.199(1)(e) in amendments introduced by the Companies (Winding-Up and
Miscellaneous Provisions) (Amendment) Ordinance 20 I6 ( 14 of 2016).
38 Cap.32, s.199B(I) and Sch.25 Pt.I s.2.
39 Re Trix Ltd [ 1970] I WLR 1421; Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 3 15.

,o Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 315.

" Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 315.
" Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 315; Re Hong Kong Pharmaceutical Holdings Ltd
(unrcp., HCCW IO18/2004, [2005] HK£C 1593).
" Re Moulin Global Eyecare Holdings Ltd [2007] 4 HKLRD 315; Re Hong Kong Pharmacewical Holdings Ltd
(unrep., HCCW 1018/2004, (2005) HKEC 1593).
" Re Hong Kong Pharmaceutical Holdings Ltd (unrep., HCCW 1018/2004, (2005) HKEC 1593).
908 CORPORATE RESCUE

• whether insisting on the use of the SOA procedure would lead to unnecessary
costs, significant delay, and would be Jess advantageous for the unsecured
creditors. 45

2.7 Provisional supervision

19.023 Provisional supervision (PS) not yet enacted. "Provisional supervision" (PS) is the
name given to the restructuring procedure first proposed in 1996 by the Law Reform
Commission and which was included in bills tabled before the Legislative Council in
200046 and 2001 47 (but which were not enacted). The law reform on corporate rescue
was prompted by the publicity of the corporate distress dming the mid-1980s shipping
slump mentioned above and the perceived deficiencies of the SOA regime. 48 Under the
proposal, the PS procedure is triggered by the appointment of a provisional supervisor,
who is an independent insolvency specialist. The appointment is to be made by the
directors. A so-called "major secured creditor", i.e. a creditor holding a fixed charge
or a floating charge over the whole or substantially the whole assets of the company,
has the right to veto a proposed provisional supervision.
19.024 Provisional supervisor takes over management from directors. Once appointed,
the provisional supervisor takes over the management of the company from the
directors. The appointment of a provisional supervisor triggers a 30-day moratorium
automatically, which can be extended to six months by the court. During the
moratorium, the provisional supervisor is to make ajudgment on the viability of having
the company restructured. If the conclusion is in the negative, the company would go
into liquidation. If the provisional supervisor believes that the company is salvageable,
he or she is to prepare a rescue proposal. The proposal must be approved by a vote of a
majority in number and in excess of two-thirds in value of creditors present who vote
in one single class. Once the proposal is approved, it becomes binding on the company
and all of its creditors. The provisional supervisor is, at this point, to hand the power
of management back to the directors.
19.025 Super priority for certain lenders. To facilitate the availability of working capital for
a proposed rescue, the procedure makes provision for the so-called "super priority"
for certain lenders. Under this provision, a lender who provides the funding after the
commencement of the provisional supervision is given priority over all other claims,
with the exception of fixed charges.
19.026 Resistance to PS recommendation. To give effect to the above-mentioned LRC
recommendation, legislation was introduced in January 2000 in the form of the
Companies (Amendment) Bill 2000. This Bill met strong resistance from stakeholders.
The main reason for the staunch opposition was that it contained a requirement that
before the company could go into PS, it must discharge all of its obligations to workers

41 Re Hong Kong Plwn11aceutical Holdings ltd(unrep., HCCW 1018n004,(2005]HKEC 1593).

"' Companies (Amendment) Bill 2000.
47
Companies (Corporate Rescue) Bill 2001.
•• ELG Tyler, "Insolvency Law in Hong Kong" in R Tomasic (ed.), Insolvency Law in East Asia (Ashgate 2006),
219.
 CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG 909

(such as unpaid wages and other entitlements due under the Employment Ordinance
(Cap.57)) or set up a trust with sufficient funds to meet this payment obligation. 49 A
company in need of rescue would be uni ikely to have the means to meet these payment
requirements. The clauses on PS were therefore excised from the Bill in April 2000.
Protection of Wages on Insolvency Ordinance (Cap.380) (PWIO) (issue of 19.027
employee priority treatment problem). The reason why stakeholders were so firm
about the full payment requirement was that the Hong Kong Government offers only
very limited social security benefits and there is no full unemployment benefit in
Hong Kong. 50 The only real protection for workers is derived from the Protection of
Wages on Insolvency Fund (PWIF), which was established under the Protection of
Wages on Insolvency Ordinance (Cap.380) (PWJO). Under the PWIO, the PWJF is to
be provided through a levy payable by every business registered in Hong Kong. The
fund provides for the payment of a specific sum for arrears of wages and certain other
employee entitlements when a corporate employer is liquidated or a non-corporate
employer becomes bankrupt. When the payment is made, the PWJF is subrogated to
the employees' preferential rights under Cap.32, s.265 or the Bankruptcy Ordinance
(Cap.6) (BO), s.38. The payment is to be ex gratia.
Employees whose positions have been terminated when company wound-up can 19.028
receive more favourable treatment than as preferential creditors. The effect of
the PWIO and PWIF is that employees who have been laid off when the company is
wound-up can receive more favourable treatment than under Cap.32 or the BO, under
which they are treated as preferential creditors. 51 To apply for a PWIF payment, a
winding-up petition must have been made against the employer. Where the company
enters into PS, such a petition may not have been made, in which case the employees
are not entitled to PWIF payments. To ensure protection of employees laid off during
PS, the LRC's 1996 proposals recommended that PS should be an additional triggering
event of payment out of the PWIF.52 Th is proposal was, however, strongly resisted by
various stakeholders for various reasons. One of these is that treating PS as a triggering
event of PWIF payments would enable unscrupulous employers to misuse PS and shift
their employee payment obligations to PWIF.53 The full payment requirement under the
2000 Bill was proposed as an alternative to the 1996 LRC PWJF payment proposal. 54

" Ibid., 222; CD Booth and T N Lain, "Rescuing Hong Kong Companies with Provisional Supervision: Proposals
that Workers and Management can Support" (2010) 40 Ho11gKong Ll,wJoumal 271,272.
so E L Tyler and A Young, "Provisional Supervision in Hong Kong: Third Time Lucky'!" (2011) 8 lnternatio1wl
Co,porate Rescue 19; Anonymous, "Proposed Trust Fund Cause for Concern", South Chi11aMorning Post,
12 December 2001, p.7. The govemment provides only able-bodied unemployed persons aged between 15 and
59 with employment assistance and very modest temporary financial assistance. For details, see http://www.swd.
gov.hk/en/index/site_pubsvc/page_socsecu/sub_comprehens/.
'' The amount of PWIF payment that an employee is entitled to is several times larger than their preferential
entitlement: for details, see A C W Tang, Insolvency i11China a11dHong Kong (Thomson Sweet & Maxwell
Asia 2005), 461.
" The Law Reform Commission of Hong Kong, The law Reform Commission of Hong Kong Report: Co,pomte
Rescue tmd /11solventTrading (Oct 1996) 27, (5.40]-[5.43).
" P Smart, "Reforming Corporate Rescue Procedures in Hong Kong" (2001) 1 Journal cif'Corpomte ltiw Swdies
485,495.
" Companies (Amendment) Bill 2000, s.168ZA(c)(iv); P Smarl and C D Booth, "Provisional Supervision and
Workers' Wages: An Alternative Proposal" (2001) 31 Hong Kong Law Journal 188, 189.
910 CORPORATE RESCUE

19.029 Second attempt to introduce PS legislation failed. A second attempt to introduce

the PS legislation to the Legislative Council was made in 2001. The 2001 Bill,
entitled Companies (Corporate Rescue) Bill, differed from the 2000 Bill in relation
to the protection of secured creditors, but the clause on the company's obligations
to employees was substantially unchanged. A subsequent proposal was made by the
Hong Kong Government to the Legislative Council in 2003 (the 2003 proposal). This
proposal recommended a cap on the amount payable to employees when the company
was compulsorily wound up to the equivalent amounts payable to workers by PWIF
(HK$278,500) before it could enter into PS.55 However, there was insufficient time to
resolve outstanding concerns and to introduce amendments to the Bill, and the Bill
was allowed to lapse. Again, the Bill failed to gain support from all stakeholders, many
of whom believed that priority treatment of employees' entitlements would mean that
PS would rarely, if ever, be used. 56
19.030 2009/2010 consultation on PS. In 2009, prompted by the 2008 global financial crisis,
the Task Force on Economic Challenges assembled by the Hong Kong Government
recommended that PS be reintroduced. In October 2009, the Hong Kong Government
commenced a three-month public consultation 57 on the review of the proposed rescue
procedure.
19.031 But employee priority treatment problem unresolved. The Consultation
Conclusions were released in July 2010. 58 Whilst the proposals made in the
Consultation Conclusions contain some improvements on the previous version of
the PS procedure, the bottleneck of PS (i.e. the employee priority treatment problem)
remains unbroken. Under the proposals made in the Consultation Conclusions on
this topic (the final proposals), the company must pay arrears of wages up to the
PWIF limit by the 30th calendar day after the commencement of the procedme.
Outstanding entitlements (pay-in-lieu of notice and severance payment) of the
workers who have been laid off before the commencement of PS must be paid
up to the PWIF limit 45 calendar days after the voluntary arrangement has been
approved. If the initial moratorium period is extended, the payment must be made
within 45 calendar days from the date of extension. Any remaining outstanding
pre-commencement entitlements must be paid in full within 12 months after the
voluntary arrangement has come into effect. If the company fails to make payment
according to the timetable, the employees will be able to present a petition to the
cou11to wind up the company.
19.032 Final PS proposals. When compared to the 2003 proposals, the final proposals
are more acceptable from the company's point of view. It is now at least possible to
commence PS before any obligations to employees are discharged. However, for a

" Sec http://www.lcgco.gov.hk/yrO0·0I/cnglish/bc/bc 12/papers/bc I2cb 1-2463• Ie.pdf.

"' EL Tyler and A Young, "Provisional Supervision in Hong Kong: Third Time Lucky?" (2011) 8 /11ter11atio11al
CorporateRescue 19.
" Financial Services and the Treasure Bureau, Review of CorporateRescue Procedure legislative Proposals:
ConsultationPaper(October 2009).
" Financial Services and the Treasure Bureau, Review of CorporateRescue Procedure legislative Proposals:
ConsultationConclusions(July 2010).
 CORPORATE RESCUE: THE LANDSCAPE IN HONG KONG 91 I

company in a rescue situation, finding money to make salary payments to workers

within 30 calendar days after the commencement of PS and other payments within
45 calendar days after the approval of the voluntary arrangement is still a tall order.
The revised requirement of employee priority treatment, in other words, still makes
the use of PS difficu!t. 59
PS proposals still to be implemented. In May 2014, the Financial Services and 19.033
Treasury Bureau presented a paper to the Legislative Council Panel on Financial
Affairs summarising the proposals for the PS procedure. 60 At the time of writing, a
new PS bill is being prepared, with the Bureau planning to introduce the bill into the
Legislative Council in the 20 I 8/19 legislative year.61

" This appears to be the view of most of the insolvency and restructuring professionals who made a submission
to Hong Kong's Financial Services and Treasury Bureau (FSTB) in response to the FSTB's Consultation Paper.
See for example the submissions by Borrelli Walsh (an experienced specialist insolvency and restructuring
firm) ("The alternatives put forward in the Consultation Paper will (both) unreasonably restrict the use of
provisional supervision where a company in financial distress has difficulty in finding sufficient cash to
settle employees outstanding claims or may divert cash which may best be used to ensure the continuation
of the business as a going concern"), Ferrier Hodgson ("Companies in financial difficulties are unlikely
to have sufficient cash available to pay or meet such entitlements. Given the proposed insolvent trading
amendments, what does a company do if it cannot pay these entitlements before entering into rs• It will have
no alternative than to seek liquidation when it could not possibly be otherwise saved by PS"), K K Yeung
Management (an experienced workout s1>ecialist)("We would not prefer any of the three options namely the
2003 Proposal, Alternative A or Alternative B. We consider all the options to be unduly complicated and
to a large extent, impracticable. Also, we consider that public funds like PWlF should not be used outside
their currently escablished purposes for which the funds were set up"), Deloitte ("[U]ndcr this proposal, the
possibility of rescuing the company will still be subject to the risk that the company may not have sufficient
cash now to scctle the employees' outstanding entitlements"), William M F Wong (a barrister practising
in the area of corporate insolvency) ("[A]lthough one is inclined to support an option that will grant full
payment to employees albeit within 12 months, the reality ... is that if Alternative B (the alternative that has
been recommended in the Consultation Conclusion)) is implemented, investors or white knights will simply
buy 0111all the assets of the co111pa11y at a certain price instead of taking over the company as a whole. They
will then offer new contracts to the existing employees .... To be pnigmatic, one must realise that to insist
on full payment to employees' outstanding claims may not be beneficial both to the underlying objective
of corporate rescue and the interest of employee (emphasis original)."), Rupert Purser (a shareholder and
director of a private equity fund that invests in distressed companies) ("However, if employees are to be paid
...a preferential amount that does not renect a strict liquidation right of payment in accordance to a company's
available assets that would be available to a liquidator, then the Government should provide funding for
these payments."). See also the view of Briscoe Wong Ferrier (one of the most respected insolvency firms
in Hong Kong): "Provisional Supervision And (More Importantly) Insolvent Trading" available at http://
www.briscoewongferrier.com/web/?p=468 ("The problem continues to be, how can a company that is
hopelessly insolvent come up with sufficient cash to meet employee liabilities, particularly those which
have to be paid under (I) and (2) above, within such a tight timeframe. This is likely to limit the use of the
legislation, as many companies will not have the funds available to satisfy these requirements. In those cases,
the outcome is likely to be liquidation and the loss of jobs rather than the company being rescued.") Business
owners appear to share the views of insolvency professionals. For example, Hong Kong Small and Medium
Enterprises Association has also expressed its concerns, in its submission to FSTB, on the need to make full
payments to employees, pointing out that the very reason that some firms choose to be wound up is precisely
its inability to discharge their debts to employee creditors.
"' Financial Services and the Treasury Bureau, Paper for the Legislative Co1111cil Pa11el011Fi11a11cial
Affairs:
Cons11ltatio11
Co11c/11sio11s
011Corporate!11solvencyLaw /111p1oveme11t
Exerciseand Detailedproposals011a 11ew
Stat11101yCo,porate Rescue Procedure(May 2014) (CB(l)l536/l3•14(01)).
•• Financial Services and the Treasury Bureau, Paper for the Legislative Co1111cil
Pa11el011Financial Affairs
(February 2018) (LC Paper No. CB(l)625/17-18(07)) pam.9.
912 CORPORATE RESCUE

3. THE FUNCTIONS OF A RESTRUCTURING SYSTEM IN

FACILITATING CORPORATE RESCUE

19.034 Making accurate collective decision on allocation of debtor company's assets can
be undermined by strategic behaviour of stakeholders. One of the chief tasks of a
restructuring process is to make an accurate collective decision on the allocation of
the debtor company's assets. The correctness of a collective decision, however, can be
undermined by the strategic behaviour of both the debtor and its creditors. Strategic
behaviours of stakeholders lead to wrong allocational and distributional decisions
either because they deny the creditors a chance to deliberate on the deployment of the
debtor's assets or because they result in wrong decisions.
Creditors may be denied an opportunity to deliberate on the deployment of the debtor's
assets because of the creditors' race of debt collection. 62 A race of debt collection
dismembers the debtor. The debtor can be disintegrated by a race of debt collection
even when it is still salvageable.63 Where the debtor is dismembered, creditors will
not have an opportunity to deliberate on the way in which the debtor's assets are to be
allocated. The only option left would be immediate liquidation with the consequence
that creditors who act faster than others are able to make full recovery at the expense
of other creditors.
19.035 Respective interests of stakeholders. Where the company survives to the collective
bargaining stage of the restructuring process, the strategic behaviour of creditors
during that process may lead to suboptimal allocational decisions and a subversion of
the statutory distributional regime. The debtor management and creditors who might
benefit from the continuing existence of the company (e.g. trade creditors who do not
want to lose the company as a customer), for example, may take strategic actions to
force a restructuring on other stakeholders, even if the proposed rescue is not value
maximising. Company officers generally prefer rescue to liquidation, as the former
helps preserve their positions within the company. On the other hand, some creditors
may threaten to vote against an optimal restructuring proposal unless they are given
a share of the return to which they are not entitled under the statutory distribution
scheme. 64
19.036 Debtor management interests. In the meantime, where a restructuring process is under
the control of the debtor, the debtor management may have the scope and incentive to
act in its own interest to the detriment of the debtor company, whose residual owners
are now creditors. Apart from the effect on the accuracy of the allocational decision,
mentioned above, the consequences of the agency problem during the rescue process
also include the reduction of the pool of wealth available to claimants.

62 This is caused by what Jackson describes as the "common pool" problem: Thomas M Jackson, The Logic a11d
Limits <>f
Btmkruptcy Law (BearBooks, Washington DC. 1986) 11.
6l Brian R ChefTins, Compa11yLaw: Theory, Structure and Operc11io11 (Clarondon, Oxford, 1997) 547 .
., For example.son strategic behaviour of those opposing a scheme, sec Re My Travel Group Pie (2005) 1 WLR
2365 (where "out of money" bondholders would have used their hold-out rights co try to bargain for a deal co
which they would not be entitled; though they did not succeedsince they were not treated as parties to the scheme
and were not entitled to vote) and Re Bluebrook Ltd (2010) BCC 209. For the statutory distribution system, see
Cap.32, ss.250 and 265.
 THE STAY DEVICE 913

Key is neutralising stakeholder strategic behaviour. A conclusion that can be 19.037

drawn from the above is that the key to the correct allocational and distributional
decision and a successful rescue attempt is to neutralise the effect of various forms of
stakeholder strategic behaviour. The above-mentioned forms of strategic behaviours
can be regulated typically by three rescue governance devices, namely a stay device to
stop the race of debt collection, a collective decision-making device to bind dissenters
and to police opportunistic behaviours, as well as an agent policing device to constrain
debtor overreaching.

4. THE STAY DEVICE

Stays: winding-up order or appointing provisional liquidator; or through 19.038

winding-up procedure. There are at least two ways of achieving a moratorium through
the use of corporate insolvency procedures provided in the Companies (Winding-Up
and Miscellaneous Provisions) Ordinance (Cap.32). First, Cap.32 provides a stay
of proceedings where a winding-up order has been made or a provisional liquidator
has been appointed. 65 Secondly, a stay can be effected by a court through an exercise
of some of its statutory powers in relation to the winding-up procedure, such as the
powers to adjourn winding-up petitions 66 and to appoint provisional liquidators.67
In fact, in Hong Kong, a restructuring plan is often devised or carried out after a
winding-up order has been made against the company.68 It is common in Hong Kong
for potential investors to approach the liquidators with restructuring proposals after
a winding-up order has been made.69 Alternatively, a liquidator may take initiative to
find potential investors to put forward a rescue proposal. 70 A liquidator, for example,
may prepare and distribute an information package to investors to invite proposals for
restructuring so as to realise the listing status and other core assets of the company or
group. 71 Where a restructuring was initiated before the commencement of liquidation
(by the provisional Iiquidator, for example), the Iiquidators may decide to carry on and
complete the restructuring plan after the winding-up order is made.72

., Cap.32, s.186.
.. Cap.32, s.180(1).
•1 Cap.32, s.193. Cap.32, s.181 also gives the courts the power to stay or restrain pendi11gproceedings against the
company. This provision has been used to prevent a creditor from gaining priority over others where a petition has
been made which might result in a winding-up or scheme of arrangement (Attlee !11vestme11ts Ltd v lee C/u,en
(1982] HKLR 420).
.. The restructuring plans in 7 of the 46 restructuring cases (under the predecessor CO, s.166 (repealed)) decided
from 1989 to 2009 (i.e., about 17% of these cases) were initiated or organised by liquidators of the companies
in liquidation: Re Akai Holdings lid [2003] I HKLRD 87; Re Albatro11ics (Far Easl) Co Ltd [2002] HKLRD
(Yrbk) 180; Re Dick.<011Group Holdings Ltd (unrep., HCMP 357/2008, HCCW 333/2006, [2008] HKEC 899);
Re Ka11.wGe11erallnt!ernational /11.wranceCo Ltd [ 1999] 2 HKLRD 429; Re Moulin Global Eyecare Holdi11gs
Ltd [2007] 4HKLRD315; Re Wah Nam Gmup Ltd (unrep., HCMP 25 I 8/2002, (2002] HKEC 1090); Re l'aohan
Ha11gKong Corp Ltd [2001] I HKLRD 363; Re Zhu Kuan (Hong Kong) Co ltd (unrcp., HCMP 1286 and
1287/2007, HCCW 874 and 875/2003, [2007] HKEC 1947).
•• For example, Re Kcmsa General /nterna1io1wl Insurtmce Ltd [ 1999] 2 HKLRD 429; Re Slu11p 8mve Co ltd
(1999] 4 HKC 79; ReAkai Holdings Ltd [2003] I HKLRD B7.
10 For example, Re Dickson Group Holdings Ltd (unrcp., HCMP 357/2008, HCCW 333/2006, (2008] HKEC 899).
71
For example, Re Wah Nam Group Ltd (No.]) (2003) I HKLRD 282.
72 For example, Re Hong Kong Brewing & Resta11m111s Ltd (unrep., HCCW 664/1999, (1999) HK.EC 637).
914 CORPORATE RESCUE

Recent English experience shows that the court has the potential power to order a stay
of proceedings by exercising its case management powers.73

19.039 Appointment of provisional liquidator activates stay. An adjournment order and the
appointment of a provisional liquidator are made through the exercise of the courts'
discretion, the exercise of which are guided by specific rules. Since the mid-late
1990s, a set of sophisticated rules on the exercise of the comts' powers on adjomnment
and appointment of provisional liquidators has been developed through the courts'
adjudication of a large number of corporate reorganisation cases. The remainder of
this section considers the content and effect of these rules.

4.1 Adjournment of winding-up petitions

19.040 Adjournment gives company respite during which restructuring scheme can be
considered. On most occasions where the court is asked to sanction a restructuring
scheme, a winding-up petition would have already been made against the company. An
order to adjourn a winding-up petition gives the company a respite, during which the
viability of a restructuring scheme can be assessed and (in some cases) a restructuring
plan may be prepared.
19.041 Complex restructuring likely to require more than one adjournment. A complex
restructuring project is likely to require more than one adjournment. In making decisions
on the grant of adjoununents, the courts need to be guided as to: (i) circumstances in
which, (ii) the conditions under which, and (iii) the duration of which, the initial and
subsequent adjournments can be granted for restructuring purposes.

4.1.1 Initial adjournment

19.042 Purpose is to consider viability of restructuring: 4-week rule applies. The purpose
of the initial adjournment is to enable the debtor company to consider the viability ofa
restructuring. Jones J expressed the view in Re Xl OLtd, 14 that a period in the vicinity of
four weeks would be sufficient to enable the company to make this assessment. 75 His
Lordship recognised that there might be circumstances that justify longer adjournments
or more than one adjournment. 76 The four-week rule that Jones J formulated was
endorsed in the subsequent Court of Appeal case Re Esquire (Electronic:.) Ltd. 77

4.1 .2 The possibility ojji,rther atljoumments

19.043 Successful restructuring requires more than one ad_journment.Where a petition
has already been made, a successful restructuring almost always requires more than
one adjournment. Once the restructuring is assessed to be viable, the company often
needs more time to implement the proposed scheme. As Le Pichon J pointed out in Re
UDL Holdings Ltd, 18 the four-week rule mentioned above should not be taken to be

" Sec section 4.3 below.

,. I1989) 2 HKLR 306.
" (1989) 21-lKLR 306. (3]per Jones J.
16 (1989)2 HKLR 306, (3).
77 (unrep., Civ App 31/1996, (1996) HKLY 203).
78 (1999)2HKLRD817.
 THE STAY DEVICE 915

an inflexible rule. If the company considered that an alternative to a winding-up was

possible and the proposed alternative had the support of the creditors or a substantial
majority of them:

" ... it must follow that such adjournments as may be necessary should be granted
until the creditors are able to decide whether or not to accept the alternative
arrangement by voting at any court convened meeting. Otherwise the short
adjournment would not serve any useful purpose given the procedure involved in
a s.166 [now Cap.622 Pt.13 Div.2] application." 79

4.1.3 Prerequisites for further lldjoumme11ts

Pre-requisites: (a) in principle support of majority; and (b) viability support. 19.044
To grant a further adjournment, the court needs to be convinced that two criteria
are satisfied. First, the proposed restructuring scheme must have the "in principle"
support of the majority of creditors (the "in-principle" support criterion). Second, it
must be reasonably arguable that the majority of participants would support and the
court would sanction the proposed scheme (the viability criterion). 80
"In-principle support" criterion. The "in-principle support" criterion entails 19.045
an examination of the size of the creditors' support for the proposed scheme. That
notwithstanding, no specific rules appear to have been formulated on the level of
majority that must be proven in establishing the creditors' "in-principle" support.
What transpires from virtually all of the cases where subsequent adjournments have
been granted is that the companies in question were able to prove that the proposed
scheme had the "in-principle" support of three-fourths (or thereabouts) in value of
the creditors. 81 This suggests that the majority in value rule applied for the sanction of
the proposed scheme has been used as a guide to determine whether the "in principle
support" requirement is met. According to Le Pichon J, an adjournment is justified
only if a restructuring proposal is shown to have the necessary 'in principle' support
within the first few weeks of the first hearing. 82
In-principle support: might be necessary to consider classification of creditors. 19.046
In determining whether the proposed scheme has the creditors' in-principal support,
it may be necessary to consider matters relating to the classification of creditors. As
will be discussed below, the court does not have jurisdiction to sanction a scheme
unless the scheme is approved by each class of creditors. This means that where it is
impossible for all of the creditors to consult in one class, the proposed scheme will not
have the in-principle support if it is opposed by any one of the classes of creditors. This
scenario raises the question on the extent to which the scheme administrator, when

1
• Re UDL Holdings Ltd[l999) 2 HKLRD 817,823.
80 Re APP (Hong Kong) Ltd [2005) 1 HK.LRD 272.
81 Re Advanced Wireless Group Ltd (unrcp., HCCW 441/2006, [2007) HK.EC 764); Re APP (Hong Kong) Ltd
[2005) I HKLRD 272, Re CIL Holdings Ltd (unrcp., HCCW 432/2001, [2002) HK.EC 97); Re UDL Holdings
Ltd [1999) 2 HKLRD 817.
82 Re Hong Kong Brewing & Resta11ran/sLtd (unrep., HCCW 664/1999, (1999) HKEC 637).
916 CORPORATE RESCUE

making an adjournment application, needs to classify the creditors into more than one
group, or to otherwise discount the votes by a certain category of creditors.
19.047 APP case. The question raised in the preceding paragraph was considered in detail
in Re APP (Hong Kong) Ltd.83 In that case, the company had been granted four
adjournments and it needed one more adjournment to enable an application to be made
for sanction of the proposed scheme. One of the issues, in determining the existence
of creditors' in-principle support, was whether creditors who were sister companies
within the same corporate group (special interest creditors) should be excluded in
calculating the size of creditors' support. Kwan J held that provided special interest
creditors had given in-principle support for the proposed scheme, the company was
required to do no more than to show that it was reasonably arguable that the support
of the special interest creditors would not inevitably be discounted at the sanction
hearing.
19.048 APP case. In the circumstances of the case, Kwan J granted the adjournment sought on
the basis of, inter alia, her Ladyship's satisfaction that the support of special interest
creditors would not inevitably be discounted at the sanction hearing. Her Ladyship's
view on the likelihood of a discount of the related creditors' support at the sanction
hearing was based on the fact that: (i) in the absence of evidence to the contrary, it
ought to be assumed that directors, as fiduciaries, would act in the best interest of the
company (the directors who also served on the boards of special interest creditors
had disqualified themselves); (ii) the related entities did not depend on the proposed
scheme for the validity of their own restructuring or survival; (iii) most related parties
were also insolvent themselves, and had duties to their own creditors that require them
to act in their own interest rather than the interest of the group; (iv) a number of
the special interest creditors were, for various reasons, subject to Indonesian capital
market regulations and supervision of the capital markets regulator of that country;
and (v) the Master Restructuring Agreement provided for mechanisms to ensure arms-
length dealing on the part of various special interest creditors.
19.049 Viability criterion. The content of the viability criterion may differ slightly depending
on the nature and purpose of a proposed restructuring scheme. Where the proposed
restructuring scheme entails a sale of assets to an independent investor, the viability
of the scheme is assessed by comparing the position of the creditors in a restructuring
scenario with that in a liquidation situation. A proposed scheme is generally regarded
as being viable if the scheme will result in a better return for scheme creditors when
compared with their position if the company is to be liquidated. 84
19.050 Where liquidation recoveries would be zero, in-principle support of majority
might be sufficient. Where the proposed scheme aims at rehabilitating the company,
at least where the estimated liquidation recoveries for unsecured creditors would be

83 [2005) I HKLRD 272.

80 Re Advanced Wireless Group ltd (unrcp., HCCW 441/2006. (2007) HKEC 764) (liquidation scenario: in chc
range of 1.68% and 3.01 %, restructuring scenario: in che range of9.99% and 16.52%); Re APP (Hong Kong) Ltd
[2005) I HKLRD 272 (liquidation scenario: in the rangeof2.6% to 4%; restructuring scenario: immediate 10%
return or one new share of par value HK$1 for every HK$! of their admitted claims, such shares rankingpari
pass11to the existing shares).
 THE STAY DEVICE 917

practically zero, the in-principle support of the proposed scheme by a large number
of creditors may be a sufficient reason for granting an adjournment. This is especially
so where the creditors in support of a rescue scheme are mostly financial creditors
which have made their commercial decisions on the strength of a liquidation analysis
prepared by a liquidation or corporate recovery specialist.SS

4.1.4 Duration of fi,rther ,u/journme11ts

Varies between one week to three months. The duration of each of the subsequent 19.051
adjournments generally varies bel:\veen one week to three months. 86 A complex
restructuring process can require a stay for a total period of close to two years. 87 The
courts in Hong Kong have shown a willingness to grant multiple adjournments to
accommodate this need.88 Subsequent adjournments have been granted to enable the
company to: (i) conduct negotiations with potential investors, (ii) have a liquidation
analysis prepared by a corporate recovery or liquidation specialist, (iii) put a
restructuring proposal to its creditors and to ascertain the creditors' views, (iv) prepare
scheme documents, and (v) make an application to convene creditors' meetings. 89

4.2 Provisional liquidator

Can be appointed after presentation of winding-up petition and before winding- 19.052
up order made. Cap.32, s.193 gives the court the power to appoint a liquidator
provisionally after the presentation of a winding-up petition and before the making of
a winding-up order. Such an appointment, according to Cap.32, s.192, must be:

" ... for the purpose of conducting the proceedings in winding-up a company and
performing such duties in reference thereto as the court may impose". 90

As mentioned, the appointment of a provisional liquidator triggers an automatic stay

of proceedings against the company.91
Provisional liquidator not limited to protecting company's assets, maintaining 19.053
status quo and prevent creditor from obtaining priority. The traditional common

" Re UDL Holdings Ltd [ 1999) 2 HKLRD 817, 828, per Le Pichon J.
"' In Re Advanced Wireless Group Ltd (unrep., HCCW 441/2006, [2007) HK.EC 764), the company was granted a
number of adjournments between October 2006 and July 2007. The shortest adjournment granted was a week
(see (4)). The longest three months (see [53)).
" For example, in Re Cil Holdings Ltd (unrep., HCMP 2799/2002, [2003) HKEC 519), the winding-up petition
was presented on 11 May 200 I and the proposed scheme was sanctioned on 2 April 2003. The total period of stay
granted through extending adjournments amounted to close to 23 months.
88 See Re Advanced Wireless Group Lid (unrep., HCCW 441/2006, [2007] I IKEC 764); Re UDLArgos Engi11eering&
Heavy Industries Co Ltd (unrep., HCCW 581/1998, [1999] HKEC 1054); Re APP (Hong Kong) Ltd [2005] I
HKLRD 272, and Re C!L Holdi11gsLtd (unrep., HCCW 432/2001, [2002] HKEC 97); Re UDL Holdings Ltd
[1999] 2 HKLRD 817.
89 For example, Re Advanced Wireless Group Ltd (unrcp., HCCW 441/2006, [2007] HKEC 764); Re UDL Argos
£11gi11eering& Heavy Industries Co lid (unrcp., HCCW 581/1998, (1999] HKEC 1054); Re APP (Ho11gKong)
Ltd [2005] I HKLRD 272, and Re CIL Holdi11gsLtd (unrcp., HCCW 432/2001, (2002] HKEC 97); Re VDL
Holdi11gsLtd (1999] 2 HKLRD 817
9<i Cap.32, s.192.
9' Cap.32, s.186.
918 CORPORATE RESCUE

law position on the appointment of a provisional liquidator was that such an

appointment could be made to protect the company's assets pending the outcome of
the winding-up petition, to maintain the status quo and to prevent any creditor from
obtaining priority.92 There are, however, some more recent UK authorities indicating
that the appointment of a provisional liquidator does not have to be restricted to the
above-mentioned purposes. Megarry V-C. observed in Re Highfield Commodities
Ltd 93 that there was no hint in the UK equivalent of s.193 that an appointment of a
provisional liquidator must be restricted to certain categories of cases. 94 Jn the above-
mentioned case, Meggary V-C refused to remove the provisional liquidator appointed
by the Secretary of State to protect members of the public from the alleged fraud of
the company.
19.054 Use of provisional liquidation to obtain moratoria in England. The less restricted
position set out by Meggary Y-C appears to have ushered in an era, which ended in 2003,
during which provisional liquidation was used to achieve moratoria for financially
distressed insurance companies in the United Kingdom. Before the enactment of the
Enterprise Act 2002 (UK), provisions for administration contained in Pt. II of the
Insolvency Act 1986 (UK) did not apply to insurance companies. During that period,
the practice had been developed by the courts of using a winding-up petition as the
basis for the appointment of provisional liquidators to resolve financial difficulties
by a scheme under s.425 of the Companies Act (UK) 1985.95 This practice has been
approved by UK judges in a string of cases.96
19.055 HK courts inspired by that approach. The creative use of provisional liquidation
to obtain morato1ia in England has inspired the Hong Kong courts to do the same
in a wider context in Hong Kong. There is no space to outline in this chapter the
development of the jurisprudence by the Hong Kong courts on provisional liquidation
as a stay device.97 It is, however, necessary to mention a twist on the evolvement of the
law on provisional liquidation as a rescue device in Hong Kong. This twist developed
following the comments of Kwan Jin Re Legend International Resorts Ltd, where her
Ladyship stated that it was within the jurisdiction of the court to appoint provisional
liquidators to explore, formulate and pursue a corporate rescue. 98

92 Palmer's Company law (24th edn, Stevens & Sons 1987) 1394; Lightman & Moss, The law of Receivers of
Companies (Sweet & Maxwell 1994) 19-20; Len Sealy and David Milman, Annolated Guide to the Insolvency
legislation (9th edn, Sweet & Maxwell 2006) 166; Paul Kwan, Hong Kong Corpomre law (LexisNexis 2006)
1283; Mark Philips and Gabriel Moss, "Provisional Liquidators: New Uses for an Old Remedy" (1993) 6(1)
lnsolv lnt 1, I; Re Dry Docks Cotporations of London (1888) 39 Ch D 306, per Kay .I at first instance; Re
Hammewnith Town Hall Company (1877) 6 Ch D 112; Re Ca,park Industrial Pty Ltd [ 1967] I NSWR 337,341.
93
[1985) I WLR 149.
"" ReHighfieldCommodtiesltd[l985) I WLR 149,159.
•s Re English & American Insurance Cot lid [I 994) I BCLC 649, 650 per Mannan J; Smith v U/C Insurance Co
Ltd [200 I) BCC I I, 20-21 per Judge Dean QC.
96 Re English & American Insurance Cot Ud [ 1994) 1 BCLC 649,650 per Harman J; Re Hawk Insurance Co lid

[2001) EWCA Civ 241, [8] per Lord Chadwick; Smir/1v U!C !11wra11ceCo Ltd (2001] BCC 11, 20-21 per Judge
Dean QC.
9' For examples, Re F,yitm Group (unrep., HCMP 4682 & 5166/2003 & HCCW 68n003, [2003] HKEC 1481); Re
I-Chi11t,Holdings Ltd [2004) 2 HKLR.O F9; Re Ji111·0(HK) lnternt1tional Ltd [2004) 3 HKLRD KS; Re Tai Kam
Construction Engineering Co Ltd (unrep., HCMP 177/2005, (2005) HKEC 507); Re Ocean Gra11dHoldings
Ltd (unrep., HCMP 120/2008, [2008) HK.EC 664); Re Plus Holdi11gsLtd (unrep., HCwU' 859/2008. HCCW
612/2006, (2008) HKEC 1327).
•• Re Legend Jntemational Resorts Ltd (2005) 3 HKLRD 16, 49.
 THE STAY DEVICE 919

Re legend Intl Resorts case: provisional liquidator appointed for purpose of 19.056
winding-up, rather than avoiding winding-up. Kwan J's statement was described
by Rogers V-C as "bold" in his Lordship's appeal judgment. In his judgment, his
Lordship stressed the difference between the appointment of a provisional liquidator
on the basis that the company was insolvent and that its assets were in jeopardy on the
one hand, and an appointment solely for the purpose of enabling a corporate rescue
to take place on the other.99 His Lordship held that the power to appoint provisional
liquidators was provided for under Cap.32, s.192, which stated that the appointment
of a provisional liquidator must be for the purpose of winding-up, rather than avoiding
winding-up, of a company. 100

Limitations on use of provisional liquidation for corporate rescue. To some extent, 19.057
Rogers V C's comment in Re Legend appears to have sent out a negative message on
the use of provisional liquidation as a corporate rescue device. 101 The Hong Kong
Government's Consultation Paper on corporate rescue in 2009, for example, justifies
the need for enacting the provisional supervision procedure on the basis, inter alia,
that Rogers V-C's judgment in Re Legend International Resorts has put in place some
limitations on the use of provisional liquidation procedures for rescue purposes. 102 A
recent case example where the impact of the Cou11of Appeal's decision in Re Legend
was felt is Re Z-Obee Holdings Ltd. 103 There, the scheme company was incorporated
in Bermuda. It was listed on the Stock Exchange of Hong Kong and was registered
as a non-Hong Kong company in Hong Kong. The company was in financial distress,
and a winding up petition was presented to wind up the company in Hong Kong.
The petition and a summons for the appointment of provisional liquidators were
adjourned after the company entered into a deed of settlement with the petitioner and
other creditors. However, when the company failed to pay an instalment due under
the deed of settlement, the summons for the appointment of provisional liquidators
were restored and the Hong Kong court made the appointment. Notwithstanding that
appointment, the company's board invoked the jurisdiction of its place of incorporation,
Bermuda, to cause provisional liquidators to be appointed in that jurisdiction as well.
The decision to seek the appointment in Bermuda (where provisional liquidation may
in appropriate circumstances be used to facilitate a restructuring), was made on the
consideration that:

" ... restrictions on the use of provisional liquidators in Hong Kong to restructure
companies in financial distress . . . created a risk that the [Hong Kong] court
might be constrained to wind up Z-Obee [the scheme company]." 104

'J9 Re legend /111emationalResorts Ltd [2006] 2 HKLRD 192, 203.

100
Re legend lmemational Resorts Ltd [2006] 2 HKLRD 192, 203-204.
101
Sec Charles D Booth, Stephen Briscoe and Philip Smart, "Corporate Rescue in Hong Kong" in Rodrigo Olivarcs-
Caminal (ed.), Expedited Debt Restruct11ri11g: A11lntema1io11al0.>mpt,rativeAnalysis(Kluwer Law International
2007) 297, 308-309; Douglas W Arner et al., "Property RighlS, Collateral, Creditor Rights, and Insolvency in
East Asia" (2007) 42 Te.rlnt 'I l J 515, 554; Anil Hargoven, "Shareholders as Creditors in Hong Kong Corporate
Insolvency: Myth or Reality?" (2008) 38 HKL.f 685,703.
102
Financial Services and the Treasure Bureau, Review of Corporate Rescue Proced11re Legislative Proposals:
Paper(October 2009),7.
Co11s1t!tatio11
1• 3 [2018) I HKLRD 165.
104
[20I8) I HKLRD 165, [8) per Harris J.
920 CORPORATE RESCUE

19.058 Re legend Intl Resorts: whether impact overstated. Despite the above, the previous
editions of this book expressed the view that the impact of the Court of Appeal's
decision in Re Legend International Resorts on the use of provisional liquidation as a
restructuring device has perhaps been overstated. This view has now been confirmed
by subsequent development of the jw-isprudence on provisional liquidation. 105 There
are two broad situations where a restructuring role of the provisional liquidator is
consistent with the statutory winding up provisions, as follows.
19.059 Winding-up and restructuring not always mutually exclusive. Firstly, winding up
itself and restructw-ingare not always mutually exclusive. Typical restructuring methods
used in Hong Kong include: (i) the selling of the entire business of the doomed company
as a going concern instead of selling assets piecemeal, and (ii) the selling of the profitable
part of the business through a "hive off" to a new company, leaving the old company to
be wound up. '°6 Both of these types of rescue measures are entirely consistent with the
purpose of Cap.32, s.192 in that they are not aimed at "avoiding winding-up", nor are
they alternatives to winding-up. The old company in both scenarios is to be wound up.
Most of the restructw-ing schemes do not aim at rehabilitating the company.107
19.060 Restructuring can often be consistent with preservation of assets. Secondly, even
if the company is eventually not wound up because of a restructuring, the restructuring
can, depending on the circumstances, still be consistent with the provisional liquidator's
function of preserving the company's assets. The fact that a winding up petition has
been presented does not necessarily mean that the company will be wound up. As
stated by the Court of Appeal, in a 2015 case:

" ... there may be circumstances in which it will be necessary for ... a provisional
liquidator to realise some of the assets of the company-for example, where
that is required in order to secure or preserve them. If ... assets are realised by
such a provisional liquidator, he will simply hold them pending the resolution
of the winding up petition, and will, pending the outcome of the petition either
return them to the control of the company and its management (if the petition
is dismissed) or pass them on to the ... liquidator ... (if a winding-up order is
made )." 108 ( emphasis added)

Although the above statements were made in a different context to the issue of
appointment of provisional liquidators for rescue purposes, they acknowledge
that provisional liquidation can legitimately involve realisation of assets and that
provisional liquidation does not inexorably entail winding up. '°9

19.061 Preservation of the company's assets can itself necessitate a restructuring plan.
In Re Plus Holdings Ltd, 110 a decision made almost immediately after the Cow-t of

105 Sec the cases discussed below at paras.19.060and 19.062.

1
"6 J Brewer. The Law a11dPractice of l·lo11gKong Private Companies (Thomson Sweet & Maxwell 2005) 249; EL
G Tyler (ed.) /long Kong Company law Handbook (11ehcdn, LcxisNcxis2009) 1262.
'"' V Finch, Corporate Insolvency: Perspectives and Principles (2nd cdn, CUP 2009) 243.
103 Re MF Global Hong Ltd [2015]2 HKLRD 325, (13) per Barma JA.
10• See also para.19.062below.
11
• [2007) 2 HKLRD 725.
 THE STAY DEVICE 921

Appeal handed down its decision in Re Legend, Kwan J granted the application for
the appointment of provisional liquidators where the company was put into the third
stage of the delisting procedmes. The company's most valuable asset was its listing
status, and in the absence of a viable resumption proposal submitted to the Stock
Exchange, the company would be delisted and the asset lost. Kwan J held that it was
appropriate to appoint provisional liquidators to take charge of the responsibility of
submitting a viable restructuring proposal to the Stock Exchange for the protection of
the asset (listing status) which was in jeopardy. In that case, the provisional liquidators
eventually succeeded in devising a restructuring through the use of a scheme. 111
China Solar E11ergy Holdings cases. In a number of subsequent Court of First 19.062
Instance decisions relating to China Solar Energy Holdings Ltd, the CFI has further
affirmed, in clear terms, the legitimacy of appointing provisional liquidators to, inter
alia, restructure the company, as long as the appointment was made on the basis that
the company was insolvent and the assets were in jeopardy. The China Solar litigation
also involved the appointment of provisional liquidators with restructuring powers to
preserve the company's listing status (the asset in jeopardy). 112 The first of the string of
China Solar decisions involved a question of costs following consent summonses for
the withdrawal of an application by certain shareholders to discharge the provisional
liquidators. 113 The applicants had relied on the Comt of Appeal's decision in Re
Legend in an argument that the provisional liquidators were originally appointed at
the instance of another faction of shareholders to wind up the company in order to
frustrate any corporate rescue. Deputy Judge Le Pichon (who was also the only other
judge on the bench in Re Legend) rejected that view. Her Ladyship noted that the
provisional liquidators were appointed with powers to facilitate a rescue, and further
observed that:

"Properly read, the distinction being made there [in Re Legend] was between
the appointment of provisional liquidators on the basis that the company was
insolvent and assets were in jeopardy ... and the appointment ... solely for
the purposes of enabling corporate rescue to take place. It does not follow that
where it is appropriate to appoint provisional liquidators who are then given the
requisite extra powers, they may not exercise those powers and explore where the
corporate restructuring proposals are viable and in the interests of the creditors
and the company."' 14

In a subsequent China Solar decision, 11s which dealt with an application by the
provisional liquidators for approval of various contractual documents related to the
restructuring that was being implemented, one of the major creditors objected to
the application on the ground that approval should not be granted as the provisional
liquidators are: "acting outside the power and beyond what is permitted in

"' Re Plus Holdings Ltd (unrcp., HCMP 859/2008, HCCW 612/2006, [2008) HKEC 1327).
112
See Re China Solar Energy Holdings Ltd (No.2) [2018) HKCFI 555, [2018) 2 HKLRD 338, (9)-(10), [36)-(39).
"' Re China Solar Energy Holdings Ltd (2016) (unrcp., HCCW 108/2015. (2016] HKEC 487.
"' (unrep., HCCW 108/2015, (2016) HKEC 487) (25).
'" Re China Solar E11ergyHoldi11gs
Llt/[2017) 2 HKLRD 1074.
922 CORPORATE RESCUE

liquidation". Again, Re legend was relied upon by the opposing creditor. Anthony
Chan J rejected that argument. His Lordship endorsed DHCJ Le Pichon's view
referred to above, adding that Re Legend stands for the narrower proposition that
provisional liquidators should not be appointed solely for enabling corporate
rescue. 116
Subsequently, the objecting creditor applied for a discharge of the provisional
liquidators. 117 The issue was whether the provisional liquidators ought to be discharged
where their current sole remaining function is to complete the company's restructming.
The creditor argued that, infer alia, "[r]estructuring means avoiding winding-up and
is contrary to Legend which holds that provisional liquidation must be for the purpose
of a winding-up, and not for the purpose of avoiding a winding-up." 118 In rejecting the
application, Harris J held: 119

• "The meaning of 'purpose' is a protean concept and its meaning must depend
on the context."
• "When the Court of Appeal [in Re Legend] said that provisional liquidation
'must be for the purposes of winding-up', it could not have meant to
say the intended result of provisional liquidation must be a winding-up.
Otherwise this would contradict the Court of Appeal's own endorsement
of the practice that when provisional liquidators were appointed on asset
preservation grounds, they could be granted restructuring powers. The
intended result of the restructuring exercise would be the avoidance of
winding-up."
• "The law has never been that provisional liquidation is meant to lead to
a winding-up. The law has always been that the provisional liquidation is
meant to ensure that the operation of a winding-up would not be frustrated,
if there is a winding up."
• "The conventional grounds for appomtmg provisional liquidators are
essentially to protect the interests of all creditors as a whole. Permitting the
provisional liquidators to conclude the restructuring would further protect
creditors' interests."

Harris J noted it would be "counter-intuitive" to grant provisional liquidators with

restructuring powers but not allow them to complete their restructuring efforts, 120 and
concluded that the case authorities: " ... [do] not prescribe such a perverse result". 121
19.063 Recent jurisprudence cleared up doubt on use of provisional liquidation for
corporate rescue; but still limits. The recent developments in the jurisprudence
on provisional liquidation, discussed above, have cleared up the doubt on the

116 [2017) 2 HKLRD 1074, [27).

111
Re China Solar Energy Holdings Ltd (No.2) [2018) HKCFI 555, [2018) 2 HKLRD 338.
118 [2018) HKCFI 555, [2018) 2 HKLRD 338, [JS].
"' [2018) HKCFI 555, [2018) 2 HKLRD 338, (31).
120 [2018) HKCFI 555, [2018) 2 HKLRD 338, (31).
12' [2018) HKCFI 555, [2018) 2 HKLRD 338, (45).
 THE STAY DEVICE 923

function of provisional liquidation in obtaining a moratorium, and in corporate

rescue generally. It should be noted though that the court will not allow provisional
liquidation to be used merely as a means to postpone a winding up, where the
possibility of a successful restructuring is not in sight. In Re Easy Carry Ltd, 122
for example, Harris J ordered the companies to be wound up when, two years after
the first petition was made, during which a number of adjournments had been
granted, the contributories failed to produce a concrete restructuring proposal. In
making the ruling his Lordship commented that the case was "an unsatisfactory
example of the misuse of the provisional liquidation jurisdiction." 123 Also,
whether powers to facilitate a restructuring should be granted and the scope of
the powers would depend on the particular circumstances such as the existence
of creditor suppoii. 124

4.3 Courts' stay powers under the Rules of the High Court

Court rules give court power to stay execution ofjudgment to allow court-ordered 19.064
meetings for SOA. There are some earlier case autho1ities to the effect that the court
has no power under the companies statute to grant a stay of execution of a judgment
to allow court-ordered meetings for the purposes of a scheme of arrangement. 125
These authorities would constitute a limitation on the courts' power to order a stay
of proceedings only if the relevant legislative environment today remains the same as
when those cases were decided. This, however, is not the case.
In a recent case, Bluecrest Mercantile BV v Vietnam Shipbuilding Industry Group,' 26
the English High Court granted a stay where the debtor company was at an advanced
stage of developing a corporate rescue scheme. The court held that the earlier cases,
mentioned above, were only authorities that the court did not have a power to grant
stays under the relevant Companies Acts considered under those cases. It added that
the OK's Civil Procedure Rules (CPR) r.3.1(2)(f) enabled the court to grant either a
stay of proceedings or a stay of judgment using its case management powers. l n an
earlier UK case, 127 Thomas J held that Order 4 7 of the Rules of the Supreme Court
(power to stay execution by writ of fieri facias) gave the court the power to stay
execution of judgment where, inter alia, the scheme had a reasonable prospect of
succeeding.
The Rules of the High Court (Cap.4A) (RHC) in Hong Kong contains a rule similar
to CPR r.3.1(2)(f) (namely RHC Order 1B r.1(2)(e)). Given the above-mentioned
UK cases, there is clearly a potential for the Hong Kong courts to order a stay of
proceedings on the basis of their case management powers.

' 22
(unrcp., HCCW 297,298,299,300 and 301/2014, (2016] HKEC 262!).
Ill(unrcp., HCCW 297,298.299, 300 and 301/2014, (2016] HKEC 2621) [7].
'" Re China Solar Energy Holdings Ltd (No.2) (2018] HKCFI 555, (2018] 2 HKLRD 338, (26].
"' Booth v WalkdenSpinning and Manufacturing Comptmy Ltd [ 1909]2 KB 368. Sec also Bowke11v Fullers United
£JectridJ0rks [ 1923] 1 KB 160.
'" (2013] EWHC I 146 (Comm).
'" Sea Assets ltd v PT Gar11daIndonesia (No.2) (unrep., 27 June 2001, 2001 WL 1251844).
924 CORPORATE RESCUE

5. THE DECISION-MAKING DEVICE

19.065 Scheme of arrangement provisions. The main statutory decision-making machinery

provided is the scheme of arrangement provisions. These provisions protect creditors
through the voting rules they provide and the control power they confer on the courts
over the procedure. The rules that the courts have developed on the application of
these provisions help fill the gaps left in the statutory provision. The remainder of
this section will start with a brief outline of the decision-making mechanism provided
under the scheme of arrangement provisions in Cap 622. 128 It then proceeds to
consider issues determining the success of a proposed scheme, such as classification
of scheme creditors and disclosure of information. The creditor protection effect of
the above-mentioned statutory mechanisms will be considered in the light of the need
for protecting creditors against: (i) inter-creditor rent-seeking behaviours, (ii) intra-
creditor strategic behaviours, and (iii) debtor opportunism.

5.1 The scheme of arrangement regime

5.1.1 The provisions

19.066 Members and/or creditors arrangement or compromise with company. Cap.622,
s.670 provides a procedure by which members and/or company creditors are able to
reach an agreement to bind themselves inter se, and the company, by a prescribed
level of majority, to accept the terms of the proposed arrangement or compromise
plan. A "compromise" involves a settlement in respect of the company's debts. An
"arrangement" modifies the rights of the parties but the modification need not be
det1imental to the interest of a rights-holder. More often than not, a restructming
scheme is a compromise scheme, as it necessarily involves a settlement in respect of
the company's debts.
19.067 Scheme where company is guarantor. Section 670 of Cap.622 can be relied upon
by a company to compromise its contingent liabilities as guarantor of notes issued
by third parties. 129 The note-holders are contingent creditors of the company and a
scheme between the company and contingent creditors is permissible. 130
19.068 Schemes releasing rights of third parties. A scheme may propose to obtain a release
of the creditors' claims against not only the scheme company but also third parties,
such as a release of the liabilities of the third pa11yissuers of notes where the scheme
is between the note-holders and the guarantor company 131 (or where the scheme
company is the primary debtor and the third parties are guarantors 132 or insurers 133).
This is permissible as long as there is a sufficient nexus between the release and the

128 For a discussion of the statutory and court-imposed requirements that need to be met in the context of members'
schemes,sec Chapter 14.
"' Re Empire Capital ResourcesPte Ltd [2018) SGHC 36, [72).
no The Royt1!Bank oJScotla,ulNV v TT f11terna1io11alLtd [2012] 2 SLR 213; Re Empire Ct1pifalResources
Pte Ltd
[2018) SGHC 36, [46).
'" Re Empire Capital ResourcesPte Ltd [2018) SGHC 36.
"' DaewooSingaporePtd Ltd v GEL Ji-actorsPte Ltd [200 I) 4 SLR 35;
"' Re T & N Ltd (No.3) (2007) I BCLC563.
 THE DECISION-MAKING DEVICE 925

relationship between the creditors and the scheme company,134 such as a nexus or
connection between the scheme company's debt and the third party's debt. 135 That
connection would generally be made out where one is a guarantee for the other, and it
does not matter which one is primary and which is secondary. 136
Under Cap.622 court can order meeting of members or creditors; court has power 19.069
to sanction scheme upon approval of creditors or members. Cap.622, s.670(1)
confers on the court the power to order meetings of the members or creditors (or
classes thereof) upon the application in a summary way of the company, any creditor,
member or, in the case of a company being wound up, the liquidator. The level of
majority prescribed for approval, for the purposes of a creditor scheme, is a majo1ity
in number representing three-fourths in value of the creditors or class of creditors. 137
Upon the approval of the creditors and members (where relevant), 138 application
needs to be made to the court again to obtain the court's sanction of the scheme. On
court sanction, the scheme becomes binding on all parties, including any dissenting
minority.139 The court order needs to be delivered to the Registrar for registration and
takes effect when it is registered. 140

5.1.2 Principles gover11i11g

courts' discretion
Principles. The court will sanction a proposed scheme of arrangement only where: 19.070

(1) "the provisions of the statute have been complied with"; 141
(2) "the class was fairly represented by those who attended the meeting and that
the statutory majority are acting bona fide and are not coercing the minority
in order to promote interests adverse to those of the class whom they purport
to represent"; 142 and
(3) "the scheme is such that an intelligent and honest man, a member of the
class concerned and acting in respect of his interest, might reasonably
approve" .143

(1) Provisions of statute complied with. Requirement (1) above refers to compliance 19.071
with the requirements under Cap.622, ss.670, 671, and 672. These include: (i) the
stipulation as to the level of majority required for reaching a binding compromise or
arrangement provided in Cap.622, s.674; (ii) requirements with regard to the notice
summoning meetings stipulated under Cap.622, ss.671 and 672, including requirements
in relation to the explanatory statement that must be included in the notice; and (iii)

"' Re Opes Prime S1ockbroki11glid (2009) 258 ALR 362.

'" Re Empire Capiwl Resources Pte lld[2018) SGHC 36, [61).
,i,, Re Empire Capital Resources Pte Ltd [2018) SGHC 36, [61 ).
1J1 Cap.622, ss.674(1)(a) and 674(1)(b).
,;s Note that under Cap.622, ss.674(1)(c) and 674(1)(d), the court has the power to waive the headcount requirement
for an arrangement or compromise with members.
" 9 Cap.622, ss.674(1)(a) and 674(1)(b).
1
4-0 Cap.622, s.673(6).
'" Buckley 0111heCompanies Ac1 (14th cdn. Buttcrworths 1981) 473-474.
11
" Ibid.
'" Ibid.
926 CORPORATE RESCUE

proper constitution of class meetings, since the statutory provision refers to schemes
with classes of creditors or members. 144 The requirements for both proper disclosure
through, infer alia, the explanatory statement and the convening of correctly classified
meetings are aimed at protecting scheme members. Creditors' interests are hanned
where they are divested of all or part of their legal claim against the company without
their consent. A prima facie agreement obtained from a creditor is no consent unless it
is obtained when the creditor is in possession of all information necessary to make the
decision. Incorrectly classed scheme meeting(s) may deprive dissenters of a vital means
of vetoing an oppressive and unfair scheme. Issues relating to the duty of disclosure and
scheme meeting classification are considered below at para.19.084.
19.072 (2) Fair representation at meeting. Requirement (2) (fair representation at meetings)
is imposed by the court in the exercise of its discretion whether to sanction a scheme,
to ensure that the majority does not force a scheme onto the minority for extraneous
purposes. An issue of fair representation arises typically where claimants of the same
class: (i) have divergent interests because they hold different types of securities or
claims; 145 or (ii) are related to the scheme company and the votes of those who hold
more than one type of securities I46 or of related parties may affect the outcome of
the class meeting. I47 A typical judicial method of dealing with circumstances where
the class is not fairly represented is to discount, often to the extent of completely
disregarding, the votes by claimants who the court believe have voted in a self-centred,
rather than class-promoting, manner. I48
19.073 (3) Scheme is such that intelligent and honest man might reasonably approve. To
determine whether this requirement (3) is met, at least for the purposes of a rescue
scheme, the court may compare the returns to creditors in insolvent liquidation and
restructuring situations respectively. An intelligent and honest man acting in respect of
his interest might reasonably approve the scheme where the return under the scheme
is greater than that in a winding-up scenario. 149 The satisfaction of this requirement,
especially where a scheme is proposed in other contexts, may also hinge on whether
the scheme is fair between various interests. 150 In Re Richards & Co,151 for example,

'" Co Ltd (2005) EWHC 1621 (Ch); Re S Megga Teleco111m1111icatio11s

Re British Aviation flls11ra11ce Ltd (unrep.,
HCMl' 5551/2001, (2002) HKEC 1344).
'" Re KB (Asia) Ltd (unrep., HCMP 307/2013, (2014) HKEC 1192).
146
Re National DairyAssociatio11 of New Zeala11dLtd (1987) 2 NZLR 607.
"' Re Landmark Corp Ltd (1968] I NSWR 759; Re Hellenic & Ge11eml7i-ust Ltd (1976) I WLR 123; The Royal
Bank of Scotland NV (formerly kllown as ABN Amro Bank NV) v TT Intl Ltd [2012) SGCA 9; Re KB (Asia) Ltd
(unrep., HCMP 307/2013, (2014) HKEC 1192).
'" Re National Dairy Association of New Zealand Ltd [ 1987) 2 NZLR 607 (where the co1111did not expressly use the
words "discounf' or "disregard" but the fact that the pro1)()sedscheme was rejected where the situation was one
where the scheme favoured claimants who held more type A securities than type B securities at the expense of
those who held less type A securities than Type B securities had the effect of disregarding the votes of the former);
Re La11dma1*Co,p Ltd [ I 968) I NSWR 759; Re Hellenic & Ge11eml7h1sr Ltd [ I 976) I WLR 123; Re KB (Asia)
Ltd (unrep., HCMP 307/2013, (2014) HKEC 1192). See Parker J'.~comments in Re BTR Pie [ I999) 2 BCLC 675,
682, er The Roy(,/ Ba11kofScotlcmd NV (formerly known as ABN Amro Bank NV) v TT Intl Ltd [2012) SGCA 9.
''~ Re f-Chi11a Holdings Ltd [2004) 2 1-TKLRDF9; Re APP (Hong Ko11g)Ltd (unrcp., HCMP 2420/2004, [2005)
HKEC 158) 3; Re 3D-Gold Jewelle,y Holdings Ltd (unrcp., HCMP 1196, 1205, 1206 and 1207/2009, HCCW
503/2008, [2009) HKEC 1104).
"" Re Richards & Co (1879) 11 Ch D 676; Re Hellenic & Ge11eralTmst Ltd [ 1976) 1 WLR 123; Re Cape Pie [2006)
EWHC 1316 (Ch).
'" (1879) 11 Ch D 676.
 THE DECISION-MAKING DEVICE 927

a creditor obtained a judgment against the company but delayed issuing execution
on the representation of the latter that they would pay and did not intend to present a
winding-up petition. Subsequently, the company presented a winding-up petition and
made an arrangement with the statutory majority of creditors for a composition under
the Joint Stock Companies Arrangement Act 1870. The judgment creditor opposed
the arrangement and moved for liberty to issue execution. Fry J gave judgment in
favour of the creditor and refused to sanction the arrangement, holding that, when
commenting on authorities on the issue, "it would be an evil day for both creditors and
companies if it were decided that creditors who granted such an indulgence thereby
lost the benefit of their judgment". 152 In other words, the scheme in question was, in
the circumstance, not one where an intelligent and honest man, a member of the class
concerned and acting in respect of his interest, might reasonably approve.
Re Hel/e11ic& Ge11eralTrust case. Another case example on requirement (3) is Re 19.074
Hellenic & General Trust ltd, 153 where the court refused to confirm the scheme with
shareholders on the ground, inter alia, that a dissentient's personal tax liability would
other.vise have been increased.
Courts rarely refuse on (3) where (1) and (2) met. It should be noted, however, that 19.075
courts have rarely ever refused to sanction a scheme on the ground of requirement (3)
where requirements (I) and (2) are satisfied. 154

5.1.3 Classification of scheme creditors

Each class must approve in their own class meeting. A scheme proposal cannot be 19.076
sanctioned unless it is approved by each class through decisions made in their own
class meetings.'55 The rationale behind the requirement is to prevent the collective
decision-making procedure from being exploited by strategic actors to benefit
themselves at the expense of other scheme participants. 156 A thorny issue that courts
in various jurisdictions have experienced in exercising their discretion on whether to
sanction the scheme is how a class should be constituted. 157

'" ( 1879) 11 Ch 676,679.

'" (1976) I WLR 123.
"' L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (Hart 2011) 651.
'" ELG Tyler (ed.), Ho11gKong Company law Handbook ( I Ith edn, LexisNexis 2009) 761.
'" Sovereign Life Asswrmce Co v Dodd [ 1892] 2 QB 573, 583, per Bowen LJ; Lynn M Lopucki and George G
Tliantis, "A System Approach to Comparing US and Canadian Reorganization of Financially Distressed
Companies" in Jacob S Ziegel (ed.), Currell/ Developments in illternatio110Iand Comparative Co,porate
illso/vency Lmv(Clarendon 1994) 109, 171.
157 V Finch and D Milman, Cotporate Insolvency law: Perspectives and Principles (3rd edn, CUP 2017), 326-328.

See also ELG Tyler, "Proposals for a New Corporate Rescue Procedure in Hong Kong" in G Wang and Z Wei
(eds.), legal Developments i11China: Market Economy and law (Sweet & Maxwell 1996) 51, 55-56; S Smith,
"Some Problems in Reorganising Insolvent Companies" in M Merry (ed.), law lecturefi>r Practi1ioners (1983)
231,245; P Smart and CD Booth, "Reforming Corporate Rescue Procedures in Hong Kong" (2001) I .Joumal
ofCo,porate law Studies 485,487; CD Booth, "Hong Kong Insolvency Law Reform: Preparation for the Next
Millennium" [2001] JBL 126, 147-148; CD Booth, S Bliscoe and P Smart, "Corporate Rescue in Hong Kong"
in R Olivares-Caminal (ed.), Expedited Debt Restructuring: An !tztematio,u,t Comparative Analysis (Kluwer
Law International 2007) 297, 30~301; Douglas G Baird, Ele111e11ts of Bankruptcy (5th cdn, The Foundation
Press 2010) 237; Lynn M Lopucki and George G Tliantis, "A Sys1cm Approach to Comparing US and Canadian
Reorganization of Financially Distressed Companies" in Jac-0b S Ziegel (ed.), Current De11elop111e111s in
International and Comparative Corporate Insolvency Law (Clarendon 1994) 109, 163, 171.
928 CORPORATE RESCUE

19.077 Classification rules: classification by dissimilarity of rights, not individual

interests. To tackle this issue, the courts have developed a set of classification
rules. The seminal case on classification of claims is Sovereign Life Assurance Co v
Dodd, 158 where Bowen LJ laid out the guiding principles on classification of scheme
participants:

"It seems plain that we must give such a meaning to the tenn 'class' as will
prevent the scheme being so worked as to result in confiscation and injustice,
and that it must be confined to those persons whose rights are not so dissimilar as
to make it impossible for them to consult together with a view to their common
interest." (the Dodd test)

As has been clarified by subsequent cases, the Dodd test is constituted by two
principles. First, any decision on the classification of scheme participants is to be
made according to the similarity or dissimilarity of their rights against the company,
rather than the similarity of their individual interests not derived from such legal
rights 159 (the dissimilarity principle). Secondly, scheme participants will be divided
into separate classes only if their rights are so dissimilar as to make it impossible for
them to consult in the same class (the impossible to consult principle).
19.078 Dissimilarity of rights: if terms of scheme mean creditor's positions are different,
when compared against absence of scheme, then different class. How, then, is
the similarity or dissimilarity of rights determined? In The Royal Bank of Scotland
NV (formerly known as ABN Amro Bank NV) v TT Intl Ltd, 160 V K Rajah JA of the
Singapore Court of Appeal said: 161

"[T]he dissimilarity principle ... means that if a creditor's (or a group of creditors')
position will improve or decline to such a different extent vis-a-vis other creditors
simply because of the terms of the scheme (and not because of its own unique
circumstances, i.e., its 'private interests' assessed against the most likely scenario
in the absence of scheme approval ('the appropriate comparator')), then it should
be placed in a different voting class from the other creditors."

19.079 Appropriate comparator, for the purposes of a rescue scheme, is generally insolvent
liquidation. For the purpose of a corporate rescue scheme, the so-called appropriate
comparator is generally the insolvent liquidation scenario. For example, where the
company is insolvent, contingent creditors would assess the scheme prima1ily based
on its effectiveness in preserving the company's economic value (so as to satisfy their

IS8 (1892) 2 QB 573,583.

15
• Re Industrial Eq11i(y(Pacific) ltd[l 991) 2 HKLR 614; Re BTR Pie [2000] I BCLC 740; UDLA1gos Engineering &
Heavy Industries Co Ltd v Li Oi Lin (2004) 4 HKCFAR 358; Re TelewestCom,mmications Pie (2004) BCC 342;
Re KJ3(Asia) Ltd (unrep., HCMP 307/2013, (2014) HKEC I 192); Re Apcot, Parking I-foldings Gmbl-f (2015)
BCC 142.
160
[2012) SGCA 9.
'" [2012) SGCA 9, (140). Sec also UDl Argos Engineering & Heavy lnd11stries Co Ltd v U Oi Lin (2001) 4
HKCFAR358.
 THE DECISION-MAKING DEVICE 929

claims), as the rest of the creditors would. Thus, where the rights that the scheme has
granted to contingent creditors are the same as these creditors' rights in the comparator
scenario, there is no need to classify these creditors separate)y.162
Comparator does not have to be liquidation. The comparator, however, does not 19.080
have to be the insolvent liquidation scenario. It can be a continuing solvent run-off,
if the company proposing the scheme is solvent, 163 or, in the case where the proposed
scheme arises from settlement discussions in the context of a disputed claim, the
appropriate comparator would be continuing litigation regarding the disputed claims
and the uncertainty accompanying it.164
Examples. An example of a situation where certain categories of creditors need to be 19.081
classified separately from ordinary unsecured creditors is where shareholders have
claims for unpaid dividends, which claims are statutorily treated as subordinated
claims for the purposes of an insolvent liquidation. Where this category of claims is
not treated as subordinated claims under the scheme, the scheme will have altered
the template of creditors' rights under the comparator scenario. In the above-
described situation, the position of the subordinated creditors would improve (under
the scheme) vis-a-vis other creditors simply because of the term of the scheme.
They therefore should be classified separately. 165 Another example where separate
classification may be necessary is where one of the creditors is the holder of a
floating charge that has not been effectively waived or released. In this situation, the
chargee, being a secured creditor, may need to vote separately from the unsecured
creditors. 166
The need for putting claimants into different meetings may also arise where the scheme
involves the release of the claims of more than one set of creditors where the obligors
of each set of creditors are different. This situation may arise, for example, where the
scheme company is a guarantor of notes issued by different third party entities, where
the scheme proposes to release both the company's liabilities and the third parties'
liabilities to the note-holders (the creditors). In this situation, it has been observed by
the Singapore High Court that:

"While the creditors may have a common element in the fonn of the guarantee by
the applicant [scheme] company, as well as other commonalities, the fact that the
creditors have other rights exercisable against different entities, would seem on

162 Royal Bank of Scotland NV (former/v k11ownas ABN Amro Ba11kNV) v TT /nil Ltd (2012] SGCA 9, (143]. See
also Re Pei.feet Sense Gm11pLtd [2007] 2 HKLRD 734, [33] ("Notwithstanding that some of the bank creditors
may have a contingent claim against the Parent Company under the guarantees, the Company considered that all
scheme creditors have the same rights in a winding-up of the Company and all scheme creditors have a common
interest that would make it possible for them to consult together with a view as to how that common interested
was best pursued.").
' 63 Re the BritishAviation _Insurance Co Ltd (2006) I BCLC 665, [88); Royal Bank ofScotlcmd NV (formerlyknown
as ABN Amro Bank NV) v TT Intl Ltd [2012] SGCA 9, [ 140].
,.. Re T&N lid (No.3) [2007] 1 All ER 851, (88], [99]; Royal Bank cif Scotland NV (/i.lrmerlyknown as A BN Amro
Bank NV) v TT 11111 Ltd [2012] SGCA 9, (140].
' 6' Roy<dBankofScotl<md NV (formerly known as ABNAmro Bank NV) v TT 11111 ltd[2012] SGCA 9.
' 66 Re KB (Asia) Ltd (unrep., HCMP 307/2013, [2014] HKEC 1192).
930 CORPORATERESCUE

its own to call for separation into different classes. The considerations that may
come into play in weighing whether any release is to be given, and what should
be the price of such release, would seem to be the sort that could attract different
results, which would mean that there would be little common interest." 167

19.082 Creditors who stand to recover 100% might be different group. Creditors who stand
to recover 100 per cent may also need to be classified as a different group. 168 However,
where a scheme pays to preferential creditors the amount of their preferential claims
in full (see Cap.32. s.265), there might not be a need for the preferential creditors to be
placed in a separate class if the scheme is merely preserving their preferential status
as conferred by s.265.' 69
19.083 The "impossible to consult" principle. The rationale behind the "impossible to
consult" principle 170 appears to be that "any overzealous subdivision may give a small
group a right of veto that would defeat the basic object of the provisions dealing with
schemes of arrangement which is to enable large groups to achieve a compromise or
effect an arrangement". 171 The crux of the test, according to Barret J, is whether the
differentiation in terms of the claimants' rights destroys the ability of the rights-holders
to consult together with a view of their common interest. 172 Thus, the claimants' ability
to consult can be established where the proposed scheme had unanimous support of
all claimants; 173 where the submission by objecting creditors contains an implied
concession to the effect that it would be possible for all the relevant creditors to consult
together on the issue on dispute; 174 or where the differential treatment of creditors has
been agreed upon by all creditors by way of a pre-filing inter-creditor agreement. 175
In the above-mentioned circumstances, the creditors' ability to consult is established
on the basis of factors indicating the creditors' actual ability to consult. In a recent
UK case,' 76 however, Hildyard J held that the rights-holders' ability to consult can
be determined by considering whether a reasonable and rational participant in the
dissentient's position would be able to, under the circumstances, consult with the rest
of creditors. Where, for example, a rescue scheme is wealth-maximising, a reasonable
and rational creditor would not prefer the prospect of having a larger slice in a smaller
cake (which is the case if the company is to be liquidated) at the expense of doing
considerably less well in terms of that creditor's overall recoveries. In other words, the
creditor in this situation should prefer the restructuring option and ought to be able to

161Re Empire Capital ResourcesPre Ltd [2018] SGHC36, [81 ].

'" WaltYuenElectrical E11gi11eering
Pte Ltd II SingaporeCablesMamifacturersPte Ltd [2003) 3 SLR 629 (the case,
however, was decided on the basis of lack of disclosure).
"' See UDLArgos Engineering& Heovy lndm1ries Co Ltd v Li Oi Lin (200 I) 4 I➔KCFAR 358.
110 See para.19.078 above.
171
In theAppln of United MedicalProtectionLtd [2007) FCA 631, [15Jper Finkelstein J. See also Nordic Bank Pie v
InternationalHarvesterA,mralia Ltd [ I983] 2 VR 298,301 per Lush Jon behalfofthe court ("To break creditors
up into classes ... will give each class an opportunity 10 veto the scheme, a process which undermines the basic
approach of decision by a large majority").
172 Re Hills Motonvay lid (No 4500102)(2002) 43 ACSR I0 1, [ 12].

"' Re Hawk InsuranceCo Ltd [2002) BCC 300.

'" Re Nine EntertainmentGroup lid (N() I) (2012] FCA 1464.
"' Re Pe,fect Sense Group Ltd [2007) 2 HKLRD 734.
"• Re Apcoa ParkingHoldings GmbH [2015) BCC 142.
 THE DECISION-MAKING DEVICE 931

consult with other creditors with a view of their common interest, which would be an
enhanced overall recovery. This "reasonable and rational" person approach allows the
court to sanction the scheme where the scheme is objected to on the basis of the lack
of ability to consult on the part of the dissentients. m

5.1.4 The duty of disclosure

Cap.622 requires disclosure of material interests of directors or debenture 19.084
trustees. The scheme members will not be able to make a decision on the proposed
scheme without complete and accmate information on the effect of the scheme. To
meet this informational requirement, Cap.622, ss.671 and 672 provide that where a
scheme meeting is summoned, the notice summoning the meeting must contain an
explanatory statement informing the scheme members of any material interests of
the directors of the company or the debenture trustees (where the compromise or
arrangement affects the rights of debenture holders) and the effect thereon of the
proposed scheme.
Must give all information reasonably necessary. Although the duty of disclosure 19.085
under Cap.622, ss.671 and 672 is, prima facie, one to disclose the material interests of
directors or debenture trustees, the scope of the company's duty of disclosure is wider.
In Re Dorman, Long & Co Ltd 118, Maugham J said: 179

" ... it is essential to see that the explanatory circulars sent out by the board of
the company are perfectly fair and, as far as possible, give all the info1mation
reasonably necessary to enable the recipients to determine how to vote."

Relevant to court's discretion to approve arrangement. In Re National Bank Ltd, 180 19.086
Plowman J observed: 181

"Section 206 [of the Companies Act 1948 (UK)] ... say[s] nothing about
disclosure either of valuations or of profits or of assets or of liabilities. By s.206
the court is given the widest possible discretion to approve any sort arrangement
between a company and its shareholders."

Cheery City Contractors case: creditors not given sufficient explanation of 19.087
scheme; no prospect of it being sanctioned. A Hong Kong case example on this
point is Re Cheery City Contractors Ltd. 182 In that case, at the time of the creditors'
meeting, the outcome of two arbitration proceedings arising out of disputes with one
of the unsecured creditors was pending. The fact that any recovery in favour of the
company would not form part of the scheme assets was not presented with sufficient
clarity in the scheme documents. Instead, reference to the possible recovery in the

"' Sec Charlc.s Zhen Qu and Stefan HC Lo, "Schemes of Arrangement: Economic Analysis ofThree Issues Relating
10 Classification of Claims" (2017) 40(4) UNSWLJ 1440, 1461ff.
178 [ 1934] Ch 635.
1
"' [1934] Ch 635,657.
180 (1966] I WLR 819
181
(1966) I WLR 819,829.
182
(unrep., HCCW 896/2003, (2004) HK.EC 504).
932 CORPORATERESCUE

scheme documents was apparently used to entice unsecured creditors. Most of these
creditors were not financial creditors and had not undertaken close analysis of the
scheme documents. The court refused to grant the company a further adjournment of
the winding-up petition to obtain court sanction. The court held that the fact that the
creditors had not been given sufficient explanation of the scheme and its effect means
that there was no prospect for the court to sanction the scheme.
19.088 Importance of proper disclosure shown in Singaporean cases. The importance of
proper disclosure is also demonstrated in a number of Singapore cases. One of these
is Wah Yiten Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte
Ltd. 183 In that case, the claims of three related party creditors dramatically increased
in the period leading up to the commencement of the SOA rescue process but other
creditors were not provided with infonnation on the reasons for the increases. Two
of these related party creditors were the directors of the company. The third was a
company controlled by one of the related party creditors-cum-directors.
19.089 Failure to provide sufficient information. Moreover, infonnation on the estimated
realisable value vis-a-vis each creditor in a liquidation scenario provided by the
company was unreliable as it was based on unaudited information. The Court of
Appeal upheld the decision of the court below to refuse to sanction the scheme. The
ground of the court's decision was the failure on the part of the company to provide
sufficient infonnation: (i) on the circumstances in which the related parties' debts
were incurred, and (ii) to enable the creditors to assess whether the returns under the
proposed scheme were in fact greater than what they could expect in a liquidation.
19.090 Econ Corp Ltd case. Jn Re Econ Corp ltd, 184 one of the reasons leading the Singapore
High Court to reject the sanction application was the lack of transparency. The
company was a wholly owned subsidiary of Econ International Ltd (EIL). Both the
company and EIL were in bad financial shape and were unable to meet the demands
of their creditors. The proposed scheme was approved by the creditors. The creditors,
however, were not provided information on the losses incurred by EIL. The state
of EI8s finances was material in that creditors would need infom1ation about the
financial state of both the company itself and its holding company to determine the
desirability of the scheme as opposed to liquidation. The court also accepted the
opposing creditors' argument that there was a lack of information about the rationale
for a number of apparently uncommercial transactions that the company had entered
into with various parties.
19.091 Court still retains discretion to sanction scheme despite lack of disclosure, e.g.
does not negative consent. The lack of disclosure in relation to any one matter,
however, does not necessarily lead to a court's rejection of the sanction application.
In other words, the lack of disclosure does not deprive the court of its discretion to
sanction the scheme. The court, for example, may be willing to sanction a proposed
scheme notwithstanding a Jack of disclosure if the inadequacy of information does not
negative the consent of scheme creditors.

' 8'(2003)2 SLR629.

'"' [2004) 1 SLR273.
 THE DECISION-MAKING DEVICE 933

Kansa case: deficiencies did not negative consent. In Re Kansa General Intl 19.092
Insurance Co Ltd,' 85 the liquidator of an insurance company proposed a scheme to
enable scheme creditors to be paid as soon as possible. The financial information
provided to creditors was inadequate. For example, the scheme documents did not
disclose the fact that the cost of the scheme was to be footed exclusively by creditors
of a certain class, i.e. reinsurance preference creditors (RP). Also, no estimates were
given as to the costs of the scheme, nor were estimates of the net assets available
for distribution. To make matters worse, there were inconsistencies in the scheme
documents on the balance of the scheme assets, the value of claims of RP creditors
and the payment that that class of creditors may expect to receive. Le Pichon J held,
however:

" ... whilst there are considerable deficiencies in the financial information, they
are not so fundamental as to negative the consent of the scheme creditors" .'86

This is because, her Ladyship said, the acceleration of receipts is:

" ... plainly an important if not the decisive factor from the perspective of any
scheme creditor". 187

Yaohan case: might be sanctioned, despite lack of disclosure, if rejection 19.093

would make position worse. The court may also be inclined to sanction a scheme
if, although the lack of disclosure would vitiate the consent of scheme creditors, a
rejection of the scheme would make the position of each scheme participant worse.
In Re Yaohan Hong Kong Corp Ltd, 188 the rescue plan entailed a sale of the company's
listing status. At the time of the scheme meeting, the shares of the company had lost
all of their intrinsic value (in the context of liquidation) and the shareholders could
not have realised any value on their own. However, as the sale transaction required the
cooperation of the shareholders, it was appropriate to give them some "sweetener",
out of the consideration received for the sale of the company's listing status. There
had, however, been little judicial guidance on how the proceeds for the sale should be
split between the creditors and shareholders until shortly before the creditors' meeting
was held. In the local case of Re Rhine Holdings Ltd (in liquidation), '89 the j udgment
of which had been handed down before the creditors' meeting was held, the judge
was highly critical of the 6:4 split in the consideration between the creditors and the
shareholders, holding that the shareholders were only entitled to token consideration
in the fonn of a "sweetener".
Yao/ran case. Under the scheme proposed by the liquidators, the consideration for the 19.094
sale would be split betv.,eencreditors and shareholders in the proportion of 67 percent
and 33 percent. The proposal was approved by the creditors. Before the proposal

1
" (1999] 2 HKLRD429.
186 [ 1999] 2 HKLRD 429, 443.
181 [ 1999] 2 HKLRD 429, 443.
188 [2002) I HKLRD363.
189 [2002)3 HKC 543.
934 CORPORATERESCUE

was voted, the liquidators failed to explain to the creditors the legal position on the
appropriate split as expounded in Re Rhine Holdings. 190That was notwithstanding that
the liquidators were aware and understood the effect of Re Rhine Holdings on this
point oflaw. The trial judge in Re Yaohan was highly critical of the split under the plan,
holding that the appropriate sweetener was in the order of 5 percent. The judge held
that the liquidators' failure to provide information on the legal position on the split of
consideration meant that any consent given by the creditors would have been vitiated.
19.095 Yao/um case. The judge, however, did not reject the scheme because to do so would
result in a liquidation of the company, in which case neither shareholders nor creditors
would get anything. Given that the liquidators had put themselves in a conflict of
interests' position and had profited from this conflict, the trial judge was willing to
sanction the scheme on the undertaking by the liquidators to pay to the creditors one-
half of their profits and one-half of legal disbursements incurred in relation to the
restructuring agreement. The Court of Appeal rejected the liquidators' appeal to have
the undertaking discharged.

5.1.5 Procedure
19.096 SOA process. In Re Hawk Insurance Co ltd, 191 Chadwick LJ provided an outline on
the process of SOA under s.425 of the Companies Act 1985 (UK): 192

"First, there must be an application to the court under s 425(1) of[the 1985 UK
Act] for an order that a meeting or meetings be summoned. It is at that stage
that a decision needs to be taken as to whether or not to summon more than one
meeting; and, if so, who should be summoned to which meeting. Second, the
scheme proposals are put to the meeting or meetings held in accordance with the
order that has been made; and are approved (or not) by the requisite majority in
number and value of those present and voting in person or by proxy. Thirdly, if
approved at the meeting or meetings, there must be a further application to the
court under s 425(2) of [the 1985 UK Act] to obtain the court's sanction to the
compromise or arrangement. ..
It can be seen that each of those stages serves a distinct purpose. At the first
stage the court directs how the meeting or meetings are to be summoned. It
is concerned, at that stage, to ensure that those who are to be affected by the
compromise or arrangement proposed have a proper opportunity of being present
(in person or by proxy) at the meeting or meetings at which the proposals are to
be considered and voted upon. The second stage ensures that the proposals are
acceptable to at least a majority in number, representing three-fourths in value,
of those who take the opportunity of being present (in person or by proxy) at
the meeting or meetings. At the third stage the court is concerned: (i) to ensure
that the meeting or meetings have been summoned and held in accordance with
its previous order; (ii) to ensure that the proposals have been approved by the

190 [2002) 3 HKC 543.

191 [2002) 2 BCC 300.
192 [2002) 2 BCC 300, (11)-(12).
 THE DECISION-MAKING DEVICE 935

requisite majority of those present at the meeting or meetings; and (iii) to ensure
that the views and interests of those who have not approved the proposals at the
meeting or meetings (either because they were not present or, being present, did
not vote in favour of the proposals) receive impartial consideration."

When should classification of creditors be considered. An issue that must be 19.097

considered in following the process outlined by Chadwick LJ is the stage at which
classification of creditors should be considered. There appears to be two schools of
thoughts on this question. According to the Practice Statement (Companies: Schemes
of Arrangements) (UK), 193 the need for classification should be considered at the
first stage. On the other hand, Lord Millet NPJ expressed the view in UDL Argos
Engineering & Heavy Industries Co Ltd v Li Oi Lin 194 that the classification issue
should be left to stage three. 195 This was because seeking to address those issues
earlier may prematurely attract contentious proceedings that might otherwise have
been avoidable.
View that classification should be considered at first stage. The view of the Court 19.098
of Appeal of Singapore, as was expressed by V K Rajah JA in the recent case of Royal
Bank of Scotland NV (fonnerly known as ABN Amro Bank NV) v TT Intl Ltd 196 is that
the position stated in the Practice Statement is preferable. This is because without a
preliminary determination on classification, it is impossible to determine whether the
scheme is likely to attract sufficient support. A lack of support may render creditors'
meetings futile. Lord Millet's concern may have been overstated, as the court has
complete carriage over timelines and conduct of proceedings.
That is broadly consistent with practice in Hong Kong. The view in the Practice 19.099
Statement is broadly consistent with the practice in Hong Kong. The court may start to
consider issues relating to classification even before the first stage, where, for example,
it is necessary for the applicant to obtain a stay of proceedings through adjournments
of a winding-up petition. In that case, issues on classification of creditors are likely to
be deliberated when the company's application for an adjournment is considered by
the court. 197

The first stage: formal steps towards the scheme creditors' meeting(s)
Application to court for creditors' meeting(s). This stage stai1s when the subject 19.100
company makes an application ex parte for a meeting of all creditors or meetings of
different classes of creditors. At this stage, the applicant should make a determination
whether more than one class meeting is required. When the application is made, issues
on the possible need for separate meetings should be unambiguously brought to the
attention of the court.

19' [2002] I WLR 1345.

1., (2001) 4 HKCFAR358.
19
' (2001)4 HKCFAR358,[14].
1
% (2012) 2 SLR 213.
19
' Re APP (Hong Kong) Ltd (2005) 1 HKLRD 272.
936 CORPORATE RESCUE

19.J0.1 Court give directions for creditors' meeting or meetings; notice of meeting sent.
Following a consideration of the issues raised by the applicant and the creditors in
relation to creditors' meetings, the court will give directions for a creditors' meeting or
meetings. The function of this stage is for the applicant to apply for leave to convene
the creditors' meetings. The court will not consider the merits and fairness of the
proposed scheme at this stage. The cow-t will not order creditors' meetings if there
is no prospect that the proposed scheme will be sanctioned eventually.198 Once the
directions for meeting(s) are given, the scheme administrator should make sure that
a notice of the meeting, including an explanatory statement, is duly sent to creditors,
together with proxy forms.
19.102 Scheme creditors submit proof of debt. After this step, the prospective scheme
creditors will submit their proofs of debt together with supporting documents, if any, to
the chairperson of the meeting, who is normally the scheme administrator, by the cut-
off date prescribed in the explanatory statement. If the scheme administrator wishes
to extend the cut-off date, prior court sanction must be obtained and all the creditors
should be informed. The task of adjudicating on disputes as to the voting 1ights of any
person claiming to be a creditor is performed by the scheme administrator, who must
determine the issue objectively.

The second stage: The conduct of scheme creditors' meetings

19.103 Meeting itself; material information must not be withheld. The process
of proof, admission, and rejection is ordinarily completed before the scheme
creditors' meetings are held. The chairperson of the meeting may post a list of
the creditors and the corresponding amounts of their admitted claims (for the
purposes of voting) at the meeting venue prior to the meeting. Disclosure of
material information must not be deliberately withheld until the meeting so as to
influence its results.
19.104 Results. After creditors cast their votes, the chairperson may immediately thereafter
tabulate the results and announce them by the end of the meeting. The proposed
scheme can proceed to the third stage if the requisite majority is obtained.

The third stage: seeking the court's approval

19.105 Court's sanction. The third stage serves as an additional check to ensure the integrity
of voting outcome and the objective fairness of the proposed scheme. The court will
not sanction the proposed scheme unless the three conditions for the sanction of the
scheme referred to at paras.19.070-19.071 are satisfied. The court may issue an order
to sanction the scheme if it is satisfied as to, inter a Lia, the merits and fairness of the
scheme. When the order is registered with the Registrar, the scheme becomes binding
on a)] parties, including dissentients.

' 98 Re Tse Yi,Hong Ud (unrcp., HCCW 184-18611999. [1999] HKEC 1048) (where the court rejected the company's
request for an adjourrunent for a winding-up petition on the basis of a proposed restructuring scheme); Re Ng
H11atFo1111datio11sPte Ltd (2005) SGHC 112, [9].
 DEBTOR OVERREACHING CONTROL DEVICES 937

6. DEBTOR OVERREACHING CONTROL DEVICES

Wealth transfers by management and shareholders at expense of creditors. When a 19.106

company is on the verge of insolvency or is in a restructuring process, the management
and shareholders may have a stronger incentive to transfer assets to themselves at
the expense of creditors. Wealth transfer can be achieved through excessive asset
distribution to shareholders or managers; asset substitution, whereby the management
takes excessive investment risk; and management entrenchment through suboptimal
investments. 199
Wealth transfers and forms of asset distribution. Asset distributions can take the 19.107
form of excessive salaries, interest-free loans or excessive dividends.200 Wealth transfer
can also be effectuated through the use of the managers' discretion over investment
decisions "to wrest concessions from the firm's creditors by threatening to sap firm
value through suboptimal investment policies" .201 Management shirking can also have
the effect of wealth transfer. A finn with outstanding debt may have an incentive to
forgo future investment opportunities if the benefits accrue to bondholders rather than
shareholders. 202 The benefits of future investments should accrue to creditors when
the company is in a rescue situation, where managers are really hired at the cost of
creditors. By forgoing investments for the benefit of creditors whilst being paid by
creditors, the managers transfer wealth to themselves at the expense of creditors.
Incentive to shareholders of asset substitution. The incentive of engaging in asset 19.108
substitution lies in the fact that: (i) an increase in the level of risk-taking lowers the
price at which the credit was obtained, if the price reflects both the cost of capital and
the risk of default (assuming the price of credit is determined by, inter alia, the level
of risk that the management of the company is to take);203 and (ii) any upside gains
from the risky investments favour the shareholders and downside losses are shared by
the creditors. 204 \1/hilst the need for future capital may discourage the company from
adopting this strategy, such conduct is rational where the company faces insolvency.205
Preserving management's position and tactics used. The purpose of preserving 19.109
management's own positions can be achieved through resisting an efficient liquidation
or making value decreasing investments in which they have expertise to make
themselves indispensable to the finn. 206 The managers may also achieve their self-
preservation through misusing the formal restructuring system itself. For example,

199 F H Buckley, "The American Stay" (1993-1994) 3 S Cal lnterdisc L J 733, 745; Michael Trebilcock and Jodi
Katz, "The Law and Economics of Corporate Insolvency: A North American Perspective" in Charles Rickett
(ed.), Essays on Corporate Restn1ct11ri11g and fllsolve11cy (Brooker's 1996) I, 8.
2
°" FM Buckley, "The American Stay" (1993-1994) 3 S Cal lnterdisc L.! 733, 745.
201 Yaacov Z Bergman and Jeffrey L Callen, "Opportunistic Underinvestment in Debt Renegotiation and Capital

Structure" (I 991) 29 Journal o_fFi11ancial Economics I 37, 138.

202 Ibid.. l37.
203 Ross Grantham, "Commentary on Goddard" in Ross Grantham and Charles Rickett (eds.), Co,porate Personality

;,, the W' Ce11twy (Hart 1998) 65, 65--66.

"" FM Buckley, "The American Stay" (1993-1994) 3 S Cal l11terdisc l .! 733, 745; Michael Trebilcock and Jodi
Katz. "The Law and Economics of Corporate Insolvency: A North American Perspective" in Charles Rickell
(ed.), Essays 011 Corporate Restructuri11g a11dInsolvency (Brooker's 1996) I, 8.
'°' Ross Grantham, "Commentary on Goddard" in Ross Grantham and Charles Rickett (eds.). Corporate Perso11ality
in the 2(!" Century (Hart 1998) 65, 66.
2°' F H Buckley, "The American Stay" (1993-1994) 3 S Cal J111erdisc L J733, 745-746.
938 CORPORATERESCUE

managers may use the restructuring regime as a stalling tactic or a means to obtain
a "debt holiday". 207 Formal restructuring systems have even been used as a litigation
tactic to stay winding-up proceedings and legal actions against the company.208
19.110 Creditors protected by keeping ineligible firms out of restructuring process;
control over management; and limiting board's power. The three principal forms
of wealth transfer considered above are possible only where the managers are able to
exercise unbridled decision-making powers during the restructuring process. Wealth
transfer will not take place during corporate restructuring if the financially distressed
firm is kept out of that process. Keeping firms that do not have a prospect to be
successfully restructured at the restructuring process is therefore an important way
of protecting creditors from debtor opportunism. Where a firm has been let through
the gate of the restructuring process, creditors' interests can be protected only through
control over the decision-making powers of company management. The decision-
making power of a debtor's board can be limited by either removing, or constraining
the powers of, the directors. Hong Kong's scheme-based restructuring system, in
its current form, contains effective mechanisms to protect creditors from debtor
opportunism through all of the three means of control stated above.

6.1 Screening out ineligible firms

19.111 Methods for screening out ineligible firms: disclosure and court appearances.
The two chief methods of screening out ineligible firms under the Hong Kong
scheme-based restructuring system are the mandatory disclosure and the mandatory
court appearance requirements. Under this system, the debtor is required to make
disclosures on various matters for the purposes of both achieving a moratorium through
adjournments of winding-up petitions and obtaining court sanction of a proposed
plan. To obtain an adjournment, the applicant will need to prove, among other things,
that there are reasonable prospects of the scheme obtaining the approval of both the
majority scheme participants and the court. 209 To show the prospects of obtaining the
required approval, the applicant will need to provide the court with information on,
among other things, the financial position of the company. A failure to place before
the court the company's financial statements, such as the balance sheet or a cash-flow
statement, will result in a rejection of the adjournment application. 210

,., Entry into a formal restructuring process prevents the appointment of a provisional liquidator or the winding-up
of the company, hence the prevention of the investigation of the conduct of the company officers and the delay
of debt collection on behalf of creditors. See Re .JamesWilson Associates, 965 F 2d 160, 170 (Posner J) (7th
Cir, 1992); Michael Rose and Larelle J Law, "Voluntary Administration: Will They Work?" (1995) 3 Insolvency
Law .Journal 11, 21; lntan Eow, "The Door to Reorganization: Strategic Behaviour or Abuse of Voluntary
Administration?'' (2006) 30 Melbourne U11ive1:tityLaw Review 300, 311.
"' 8 Blackrown Ciry Council v Macarthur Telecom1111111icario11s Pty Ltd (2003) 47 ACSR 391,392 per Barrett J (an
action on negligent advice); lntan Eow, "The Door to Reorganization: Strategic Behaviour or Abuse ofVoluntary
Administration?" (2006) 30 Melbourne University law Review 300, 311.
,.. UDL Holdi11gsLtd [ 1999)2 HK.LRD 817; Credir lyo11nais v SK Global Hong Kong Lrd (2003] 4 HKC 104, 113
per Rogers VP; Re Cheery City Co11tractorsLl(I (unrep., HCCW 896/2003, [2004] HK.EC 504) (28] per Kwan J.
"" Re Golden Dragon la11d Development Ltd [1999) 3 HKLRD J4; Re Koldtech Development (!nrl) Ltd (unrep.,
HCCW 381/2005, (2005) HKEC I 190); Re Lllen Fai Piecegoods & Cloths Co Ltd (unrep., HCCW 541/2009,
[20 IOJHKEC 323).
 DEBTOR OVERREACHING CONTROL DEVICES 939

Disclosure for scheme. As mentioned earlier, to satisfy the conditions for obtaining a court 19.112
sanction of the proposed scheme, the company is required to attach an explanatory statement
to the notice to be sent to the participants in the proposed scheme.211 To demonstrate the
effect of the proposed scheme, an explanatory statement typically contains, among other
things, infom1ation about the company's assets, as well as a comparison between the
creditors' position in a liquidation and that under the proposed scheme.212
Mandatory court appearances. The enforcement of disclosure requirements is carried 19.113
out through mandatory court appearances by the adjournment or scheme sanction
applicant. As mentioned previously, the initial adjournment (of a winding-up petition)
is, generally speaking, granted only for up to four weeks and the duration of each
subsequent adjournments varies between one week and three months. This means that
typically an applicant would make a number of court appearances before the proposed
scheme can be sanctioned. 213 To obtain each of the subsequent adjournments, the
applicant must prove the continuing satisfaction of the "in-principal support" and
the "viability" criteria through satisfying the relevant disclosure requirements (see
para.19.044). Companies that fail to do so 214 are, in normal circumstances, eliminated
from the restructuring process and would enter the liquidation process immediately.215

6.2 Displacing management of eligible firms

External administrators. Under Hong Kong's insolvency system, a company's 19.114

insolvency often triggers the appointment of external administrators such as a
liquidator, provisional liquidator or a receiver and manager. The appointment of a
liquidator or provisional liquidator results in a displacement of the directors. 216 Where
a receiver has been appointed with a wide management power, the directors, although
officially remaining in their positions, effectively relinquish their powers to the
receiver.217 While the company is under the management of an external administrator,
a scheme is normally proposed by such a person on behalf of the company.218 The

211
See paras.19.084-19.085
above.
212 Where the proposer of a scheme foils to disclose the required infonnation in the statement, the proposed scheme
cannot proceed: Re Cheery City Comroctors Ltd (unrep., HCCW 896/2003, (2004) HKEC 504); Re Koldtech
Development(Jntlematio11al) Ltd(unrep., HCCW 381/2005, (2005) HKEC I 190).
213 Para.19.044 above.
214 Paras.19.045 and 19.046 above.
215 The rigour at which the reorganisation cases are screened at the pre-confirmation phase means that when a
case reaches the sanctioning stage, most of the ineligible firms would have been sifted out of the reorganisation
process. That notwithstanding, court appearance at the confirmation stage still plays a valuable gate-keeping
role. An example is Re S MeggaTelecommunicationsLtd (unrep., I ICMP 5551/200 I, (2002] HKEC 1344), where
the court refused to sanction the proposed scheme on the ground that a certain class of creditors was classified
with the general unsecured creditors where they should have been allowed to vote as a separate class. Admittedly,
however, Re S Megga is on the fair treatment of different classes of creditors, rather than protecting the scheme
participants from the overreaching conduct of company controllers.
216 Re OrientalInlandSteam Co (1873-74) LR 9 Ch App 557,560; Re U11ionAccide111 lnsura11ceCo ltd[l972) I WLR
640; AustralBrick Co Pty Ltd v FalgatCo11sm,c1io11s Pty Ltd (1990) 2 ACSR 766, 767: A1!fiw1kNomineesPty Ltd v
s
Connell(1989) I ACSR 365; Andrew R Keay, McPherson ltzw of Co Liquidation(Sweet & MaxwclJ2001) 303.
217 s
Michael Murray, Keay Insolvency: Personaland Co,porate Law and Proctice (6th cdn, LBC 2008) 460.
218 For example, Re Dickson Group Holdings Ltd (unrcp., HCMP 357/2008, HCCW 333/2006, [2008] HKEC 899);
Re Fujian Group (2003) I HKC 659; Re lnterform CeramicsTeclmologiesLtd (unrep., HCMP 808/2001, (2001)
HKEC469).
940 CORPORATE RESCUE

possibility of company managers, who are not m office, to act opportunistically

against the creditors' interests hardly exists.

6.3 Constraining the power of incumbent directors

19.115 Where restructuring under control of company, then laws constraining

management powers. A restructuring process under Hong Kong's system on scheme
of arrangements may be under the control of the debtor company for two reasons.
First, directors may be able to obtain a moratorium through adjournments of winding-
up petitions, mentioned above. They may remain in control until the court has made
its decision on the company's petition on adjournments or sanction of the proposed
scheme. Secondly, the company itself may initiate a restructuring process before
a winding-up petition is made.219 In either situation, the task of limiting company
controllers' management power can be achieved through the operation of existing
statutory and common law rules designed to constrain company directors' decision-
making powers.
19.116 Fiduciary obligation to act in best interest of company. Under the general law,
the court of equity imposes a fiduciary obligation on company directors to act in
the best interest of the company. The "interest of the company" means, when the
company is insolvent or is approaching insolvency, the aggregate interests of the
creditors. 220 Acting in the interest of the company, in this context, therefore means
avoiding acting contrary to the interests of company creditors. This understanding on
the directors' creditor-regarding obligation is shared by cowts of all jurisdictions of
British extraction, including Hong Kong.221
19.117 Creditor can petition for winding-up. Whereas a restructuring can be carried out
under the management of the directors in the absence of any winding-up petition, a
creditor may make a petition any time where the company is insolvent. The prospect
that a director being sued by the liquidator for breach of fiduciary duties is real.
This possibility should constitute a strong deterrence against directors' overreaching
activities.
19.118 Statutory rules controlling debtor optimism. Statutory rules that have been
enacted to control debtor opportunism include: (i) provisions designed to deprive
the management of the power of disposition during the winding-up process; and (ii)

,,. For examples, see Re Yetvue Ltd (unrep., HCMP 421/2001, [2001) HK.EC 1156) and Re Team Co11cepts
Ma1111facturi11g
Ltd[2001) HKLRD (Yrbk) 188.
22• Ki11selav Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 730 per Street J, endorsed by Dillon L J in West
Mercia Safetywear Ltd (i11liq) v Dodd [1988) BCLC 250, 253; RP Austin and IM Ramsay, Ford'.,Pri11ciples
of Corporationslaw ( 15th edn, LexisNexis Butterworths 2013) (8.090); .I E Parkinson, Corporate Power a11d
Responsibility: Issues i11the Theo,y of Company law (Clarendon I993) 87. See also L S Sealy, "Directors
'Wider' Responsibilities - Problems Conceptual, Practical and Procedural" ( 1987) 13 Mo11ashUniversity Law
Review 164, 166.
221 M11ltint1tio11al
Gas and Petn>chemicalCo Ltd,, M11lti11atio11al Gas mul PetrochemicalService Ltd (1983) Ch 258;
Nicholson v Permakrafi(NZ) Ltd [1985) 1 NZLR 242; Kinsela II Russell Kinsela Pty Ltd (1986) 4 NSWLR 722;
Sycotex Pty Ltd v Baseler (1994) 122 ALR 531; Addstead Pty Ltd v liddan Pty Ltd (1997) 25 ACSR 175; Yuk<>11g
Line Ltd of Korea v Re11dsb11rgl11vest111e11ts
Corp of Liberia (No.2) (I 998) 4 All ER 82; Spies II R (2000) 201 CLR
603; Tradepower(Holdings) Ltd II Tradepower(HK) Ltd (2009) 12 HKCFAR 417. See further Chapter 8.
 DEBTOR OVERREACHING CONTROL DEVICES 941

those enacted to protect creditors against dissipation of corporate assets by company

controllers while the company is outside the winding-up process.
Section 182 of Cap.32 freezes directors' power of disposition after commencement 19.119
of winding-up unless validation order. Cap.32, s.182 is a provision enacted to freeze
the directors' power of disposition in the course of liquidation. That provision renders
void any disposition of company property after the commencement of winding-up,
unless the disposition is permitted by a court order (a "validation order"). 222 For
the purpose of this provision, presentation of the winding-up petition marks the
commencement of the winding-up process. 223 A court will not make a validation order
while the company is insolvent unless it is satisfied that the transactions are likely to
be profitable and therefore would increase the company's assets, so as to benefit the
creditors.224
Cap.32, s.182 effective instrument for protecting creditors. Wealth transfer is 19.120
virtually impossible where the court has taken control of the power of dealing with
corporate assets. Section 182 should therefore be an effective instrument for protecting
creditors from debtor opportunism where the company has entered into the winding-
up process. From the creditors' point of view, the protective effect of s. 182 is highly
significant, as most of the restructurings in Hong Kong are effected after the winding-
up petition is made.225
Fraudulent trading and voidable disposition prov1S1on.Where a restructuring 19.121
scheme is being organised while the company is outside the winding-up process, it
is hard to control debtor opportunism through removing directors' decision-making
powers. It is, however, possible to constrain the board powers through statutorily
provided power controlling devices. The most notable devices of this nature that
are available include the fraudulent trading provision under Cap.32, and the rules
on voidable dispositions under the Conveyancing and Property Ordinance (CPO)
(Cap.219).
Section 275 fraudulent trading: requirement of dishonest intent has rendered 19.122
provision obsolescent. The fraudulent trading provision, Cap.32, s.275, authorises
the court, on the application of the liquidator, to declare that any persons who were
knowing parties to the carrying on of the company's business with intent to defraud
creditors of the company or creditors of any other person, or for any fraudulent
purposes, are liable to make such conh·ibutions to the company assets as the court
thinks proper. This provision, however, is of doubtful efficacy. The requirement of
dishonest intent, as well as the courts' insistence on the strict standards of pleading and
proof, has virtually rendered the fraudulent provision "obsolescent". 226

212
Cap.32, s.182.
m The court has jurisdiction to make a validation order after the presentation of the winding-up petition
notwithstanding that a winding order has not been made: Re Al levy (Holdings) Ltd [1964) Ch 19.
22' Re Fairway Gf'(/phics Ltd [ 1991) BCLC 468. Sec Chapter 20.

m On the discussion of Cap.32, s.182 jurisprudence, sec Chapter 20.

'" V Finch, "Directors' Duties: Insolvency and the Unsecured Creditor" in A Clarke (ed.), Current Issues in
Insolvency law (Stevens & Sons, London, 1991) 96. Sec Aktieselskaber Dansk Skibsjinansiering v 8ro1he,1·
(2000) 3 HKCFAR 70, where Lord Hoffmann affinned that the test of honesty for the purpose ofCap.32, s.275,
was subjective.
942 CORPORATE RESCUE

19.123 Section 60 of the Conveyancing and Property Ordinance (Cap.219) (CPO):

voidable disposition. Whilst s.275 of Cap.32 is of little assistance, the voidable
disposition provision under the CPO has proven to be much more effective in
combating debtor opportunism. That s.60 of the CPO provides that every disposition
of property made with intent to defraud creditors shall be voidable at the instance of
the person thereby prejudiced. 227 ln the Court of Final Appeal decision in Tradepower
(Holdings) Ltd v Tradepower (HK) Ltd, 228 the Court upheld the Court of Appeal's
decision to set aside a transaction on the ground of s.60. On the need for proving
fraudulent intent, Ribeiro PJ applied the rule in Freeman v Pope,229 namely that if a
disposition of property unsupported by consideration was made by the disponor when
or so as to become insolvent, resulting in current or future creditors being subjected to
a significant risk of being unable to recover their debt in full:

" ... such facts ought in virtually every case to be sufficient to justify the inference
of an intent to defraud creditors on the disponor's part (emphasis added)". 230

19.124 Section 60 of the CPO: inference of intent to defraud creditor pursuant to rule
in Freeman v Pope. The basis of Ribeiro PJ's decision on the above-mentioned issue
appears to be that establishing a contravention ofCPO, s.60 involves a different enquiry
from that required for proving a cause of action based on Cap.32, s.275. Whilst that
s.275 requires courts to grapple with the question of when the carrying on of the
business by the defendant ceases to involve merely misguided optimism and becomes
cheating one's creditors, provisions like CPO, s.60:

" ... focus on the quality and impact upon creditors of specific dispositions
of property in the light of the disponor's financial condition at the time each
disposition was made". 231

As CPO, s.60 involves a far more limited and well-defined enquiry, it can be appropriate
to apply a rule based on inescapable inferences. 232
19.125 Rule in Freeman v Pope helpful to claw back corporate assets. That there is no need
to prove the defendant's actual intent to defraud creditors in cases falling within the
rule in Freeman v Pope means that CPO, s.60 can be invoked with relative ease to claw
back corporate assets disposed of, for no consideration, at the expense of creditors.
As the utility of s.60 had not really been tested before Tradepower, the Court of Final
Appeal's decision is likely to usher in an era during which company creditors are better
protected against debtor opportunism.

227
Conveyancingand Property Ordinance(Cap.219), s.60.
228
(2009) 12 HKCFAR4I7, [2010] I HKLRD 674.
m (1869-70) LR 5 Ch App 538.
230 (2009) 12 HKCFAR 417, (2010] 1 HKLRD 674, 711. However, in cases falling outside the scope of the rule in

Freemanv Pope, i.e. cases where the disposition is made for valuable consideration, or where the disponor is not
insolvent or where the disposition docs not deplete the fund potentially available to the creditors, an actual intent
to defraud creditors must be shown as an inrerencc properly to be drawn on the available evidence before s.60 of
the CPO is engaged: (2009) 12 HKCFAR 417, [2010] I HJ<LRD 674, 711.
"' (2009) 12 HKCFAR417, [2010) I HKLRD 674, 709-710perRibeiro PJ.
"' (2009) 12 HKCFAR417, [2010) I HKLRD 674.
 CHAPTER 20

LIQUIDATION

PARA.

I. Introduction ............................................................................................................................ 20.00 I

1.1 General ............................................................................................................................ 20.00 I
1.2 Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32) .............20.006

2. Liquidators ............................................................................................................................. 20.007

2.1 Role ofliquidators and qualifications for appointment .................................................. 20.007
2.1.1 Who is a liquidator and what his or her role is .................................................... 20.007
2.1.2 Panel schemes ...................................................................................................... 20.009
2.1.3 Qualifications for appointment ........................................................................... 20.013
2.2 The appointment of liquidators ....................................................................................... 20.020
2.2.1 Compulsory winding-up ...................................................................................... 20.020
2.2.2 Voluntary winding-up .......................................................................................... 20.023
2.3 The powers ofliquidators ................................................................................................ 20.025
2.4 The duties of liquidators ................................................................................................. 20.033
2.4.1 Specific statutory duties - compulsory winding-up .......................................... 20.034
2.4.2 Specific statutory duties - voluntary winding-up ............................................. 20.039
2.4.3 Fiduciary duties .................................................................................................. 20.041
2.4.4 Duty of care ......................................................................................................... 20.046
2.5 Removal .......................................................................................................................... 20.048
2.5.1 Removal by the court.. ......................................................................................... 20.049
2.5.2 Removal by the members - members' voluntary winding-up ........................... 20.056
2.5.3 Removal by the creditors - creditors' voluntary winding-up ............................ 20.057
3. Compulsory Winding-Up ....................................................................................................... 20.058
3. J Grounds for compulsory winding-up .............................................................................. 20.058
3.1.1 Winding-up of company by special resolution: Cap.32 s.177(l)(a) .................... 20.060
3.1.2 Failure to commence business or suspending business
for a whole year: Cap.32 s.177(1)(b) .................................................................... 20.06 I
3.1.3 The company has no members: Cap.32 s. l 77(l)(c) ............................................. 20.062
3.1.4 Occurrence of events prescribed in the company's
constitutional documents: Cap.32, s. l 77(l)(e) ..................................................... 20.063
3.1.5 Company unable to pay its debts: Cap.32, s.177(1)(d) ........................................ 20.064
3.1.6 Just and equitable: Cap.32, s.177( I)(1)................................................................ 20.071
3.2 Application and court order ............................................................................................ 20.072
3.2.1 Application by petition ........................................................................................ 20.072
3.2.2 Persons entitled to petition .................................................................................. 20.073
3.2.3 Company as petitioner ......................................................................................... 20.075
3.2.4 Creditor as petitioner ........................................................................................... 20.076
3.2.5 Contributory as petitioner. ................................................................................... 20.077
3.2.6 Appointment of provisional liquidator before hearing of petition ...................... 20.080
944 LIQUIDATION

3.2.7 Court's powers on hearing of petition .................................................................. 20.081

3.2.8 Publication of winding-up ................................................................................... 20.084
3.2.9 Commencement of winding-up ........................................................................... 20.085
3.3 Effect of winding-up order .............................................................................................. 20.086
3.3.1 Appointment of liquidator and formation of committee of inspection ............... 20.087
3.3.2 Company's properly, and control and management of the company ................... 20.089
3.3.3 Stay of proceedings against the company ............................................................ 20.092
3.4 Company's assets in the liquidation ................................................................................ 20.095
3.4. l Assets available for distribution .......................................................................... 20.096
3.4.2 Assets not available to liquidator for distribution ................................................ 20.099
3.4.3 Contracts of the company .................................................................................... 20.100
3.4.4 Disclaimer of onerous property ........................................................................... 20.101
3.4.5 Acquiring information about the company's assets ............................................. 20. 107
3.5 Void dispositions of company property .......................................................................... 20. l l 9
3.6 Unfair preferences ........................................................................................................... 20. l 29
3.6. I Concept of"unfair preference" ........................................................................... 20.132
3.6.2 Time at which preference was given ................................................................... 20.135
3.6.3 Influenced by desire to give preference ............................................................... 20.137
3.6.4 Company was insolvent ....................................................................................... 20.141
3.6.5 Court orders ......................................................................................................... 20.142
3.7 Transactions at an undervalue ......................................................................................... 20.143
3.7.1 Concept of"undervalue transaction" ................................................................... 20.145
3.7.2 Time at which company entered into transaction ................................................ 20.158
3.7.3 Company was insolvent. ...................................................................................... 20.159
3.7.4 Defence ................................................................................................................ 20.160
3.7.5 Court orders ......................................................................................................... 20.161
3.7.6 Where undervalue transaction also unfair preference ......................................... 20.162
3.7A Invalid floating charges .................................................................................................. 20.163
3.8 Fraudulent trading ........................................................................................................... 20. I 68
3.8.1 Carrying on of any business of the company ...................................................... 20.172
3.8.2 Fraud .................................................................................................................... 20.173
3.8.3 Persons liable ...................................................................................................... 20.176
3.8.4 Court orders ......................................................................................................... 20.177
3.9 Extortionate credit transactions ·········•·······••·······•········•·······•········•·······•········•········•·······20.I78
3.10 Misfeasance ..................................................................................................................... 20. l 8 I
3.11 Liability of contributories ............................................................................................... 20. I 85
3.12 Creditors entitled to claim in the winding-up ................................................................. 20.188
3.12.1 Provable debts ...................................................................................................... 20.188
3.12.2 Procedure for proving .......................................................................................... 20.191
3.12.3 Set-off .................................................................................................................. 20.192
3.13 Realisation and distribution of assets .............................................................................. 20. l 94
3.13.1 Assets subject to fixed charges (or mortgages) ................................................... 20.195
3.13.2 Assets available to Lmsecured(general) creditors (free assets) ............................ 20.197
3.13.3 Assets subject to a floating charge ...................................................................... 20.199
 LIQUIDATION 945

3.14 Winding-up with a regulating order ................................................................................ 20.203

3.15 Small liquidations: winding-up by summary procedure ................................................. 20.206
3.16 Companies formed outside of Hong Kong ..................................................................... 20.207

4. Voluntary Winding-Up ........................................................................................................... 20.209

4.1 lntroduction ..................................................................................................................... 20.209
4.1.1 Members' voluntary winding-up ........................................................................ 20.213
4.1.2 Creditors' voluntary winding-up ........................................................................ 20.219
4.2 Special procedure for members' winding-up: s.228A .................................................... 20.223
4.2.1 General ................................................................................................................ 20.223
4.3 Stay of a Cap.32, s.228A winding-up ............................................................................. 20.230
4.4 Provisions applicable to voluntary winding-up ............................................................... 20.233
4.5 Voluntary winding-up after commencement of
compulsory winding-up .................................................................................................. 20.238
4.6 Compulsory winding-up after commencement
of voluntary winding-up ................................................................................................. 20.243

5. Offences Antecedent to or in the Course of Winding-Up ...................................................... 20.245

5.1 Concealing or removing property, or other fraud ............................................................ 20.246
5.2 Concealing information from the liquidator,
and falsification of books ............................................................................................... 20.249
5.3 Failure to keep accounting records .................................................................................. 20.25 l
5.4 Other offences ................................................................................................................. 20.252

6. Dissolution of the Company .................................................................................................. 20.253

6.1 Dissolution after company wound-up ............................................................................. 20.253
6.2 Restoration of a dissolved company ............................................................................... 20.259
 1. INTRODUCTION
1.1 General

Liquidation occurs where liquidator takes control of company, realises assets for 20.001
distribution and dissolves company. Liquidation or winding-up of a company is a
process whereby a liquidator is appointed to take control of the company to collect
in and realise the company's assets for dist1ibution, in an orderly and fair manner, to
creditors and shareholders, with the company dissolved at the end of the process. The
basic purpose of a liquidation is to bring the company's affairs and existence to an
end. The company's affairs are wound-up, and the company's property is distributed to
those who are entitled to claim against the company.
Companies can be wound-up whether solvent or insolvent. Companies can be 20.002
wound-up upon becoming insolvent.' This is referred to as an insolvent liquidation.
Companies which are not insolvent can also be wound-up.
Two modes of winding-up. The Companies (Winding-Up and Miscellaneous 20.003
Provisions) Ordinance (Cap.32) prescribes two modes of winding-up: 2

l. compulsory winding-up (winding-up by the court 3); and

2. voluntary winding-up.

Compulsory and voluntary winding-up. Compulsory winding-up takes place 20.004

following a cou11 order for the company to be wound-up. Often a compulsory
winding-up is initiated by creditors, but the company or its members may also petition
for compulsory winding-up. Voluntary winding-up usually occurs via a decision
of the company in general meeting. Both insolvent and non-insolvent liquidations
can proceed as either a compulsory or a voluntary winding-up. The main difference
between compulsory and voluntary liquidations is that there is a greater degree of
court supervision and control in the former.
Main characteristics of insolvency law. In a non-insolvent liquidation, creditors of 20.005
the company will be able to have their debts fully paid out of the company's assets.
By contrast, creditors will be faced with difficulties in an insolvent liquidation. If
the company's assets are few compared with the size of the claims of creditors, then
the creditors might have only a small proportion of their claims satisfied. Corporate
insolvency law regulates both the process of winding-up and the rights and entitlements
of parties with a claim against the company. Important characteristics of Hong Kong
insolvency law include the following:

' In common law sys1cms which follow the English cradition, insolvency is distinguished from bankruptcy. Both
companies and natural persons are said to become insolvent when they are unable to pay their dcbcs. Natural
persons who arc insolvent may enter into bankruptcy pursuant to the Bankruptcy Ordinance (Cap.6). A different
insolvency law regime exists for companies, which arc put inco liquidation or winding-up under Cap.32.
2 Cap.32, s.169.
3 Cap.32, s.176 confers jurisdiction on the Court of First Instance to wind-up companies under Cap.32.
948 LIQUIDATION

• Collectivity principle. Upon a company entering into winding-up, unsecured

creditors are no longer entitled to pursue individual action against the
company. Collective action is taken through the liquidator for the recovery
and realisation of the company's assets for the benefit of the class of
unsecw-ed creditors as a whole. This facilitates a fair and orderly process for
dealing with the financial affairs of the insolvent company, which is regarded
as a fundamental purpose of insolvency law.4
• Paripassu principle. The company's assets are distributed to the unsecured
creditors on a paripassu basis-i.e. in proportion to the amount of their
debts. This idea of equal sharing has long been a fundamental principle of
insolvency law, although there are some statutory exceptions which aim to
give protections to particular classes of creditors.
• External control. The insolvency regime requires an external person-the
liquidator-to step in to take control of the company's affairs and property in
place of the directors. The liquidator may be the Official Receiver5or a private
insolvency practitioner (who generally has an accounting or legal background).
In a compulsory winding-up, the liquidator is an officer of the court6 and is
subject to supervision by the court. In insolvent liquidations, apart from the
functions of collecting in the company's assets and making distributions to
the creditors, the liquidator also has the function of investigating the causes
of the company's failure and the conduct of those concerned in the company's
dealings and affairs.7 The latter function of the liquidator serves a wider public
interest in enabling the authorities to take appropriate action against those who
have engaged in misconduct in relation to the company.8

• Rights accrued before liquidation are preserved. For the most part,
distributions to creditors in a liquidation are made on the basis of the creditors'
rights as created before the liquidation. The recognition of existing rights also
includes proprietary rights over assets of the company, such as the proprietary
rights of secured creditors who are generally entitled to rely on their security
and who can therefore claim outside the winding-up. There are exceptions to
the general principle of preservation of existing entitlements-e.g. statutory
avoidance provisions which are intended to uphold the paripassu principle,
and statutory provisions which provide a redistributional effect (such as the
provisions giving priority to certain claims of employees). 9

' See Law Reform Commission of Hong Kong, Report 011the Winding-Up Provisions of the Companies Ordinance
(1999), [l.5), citing Law Reform Commission (Australia), General Insolvency lnquity (Report No 45, 1988)
(Harmer Report), [33).
5 I.e., the Official Receiver appointed under the Bankruptcy Ordinance (Cap.6): Cap.32, s.2(1). On the Official
Receiver generally, sec the website of the Official Receiver's Office http://www.oro.gov.hk.
• Gooch 's Case (1872) 7 Ch App 207, 21 l.
1 Joinu111dSeveral Liquidators of Ko11gJfol, Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766. [23).
8 Joint and Several liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, [23).
9 For discussion of the underlying principles and objectives of corporate insolvency law, see, e.g., Roy Goode.
Pi-i11ciplesof Corporate J11solve11cyLaw (4th edn Sweet and Maxwell 2011), Chs.2, 3. See also RizwaanMokal,
Corporate Insolvency Law: Theo,y and Applicatio11 (Oxford University Press 2005); Vanessa Finch, Co,porate
Insolvency Law: Perspectives and Pri11ciples(2nd edn, Cambridge University Press 2009) Ch.2.
 LIQUIDATORS 949

1.2 Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32)

Review of winding-up provisions under Cap.32. The reforms introduced by the 20.006
Companies Ordinance (Cap.622) did not touch on the winding-up provisions ofCap.32.
The winding-up provisions remain in Cap.32, which was renamed as the Companies
(Winding-Up and Miscellaneous Provisions) Ordinance upon the commencement of
Cap.622 on 3 March 2014. 10 Subsequent to the enactment of Cap.622, the Government
reviewed the winding-up provisions of Cap.32. 11 The reforms have now been
implemented by amendments to Cap.32, pursuant to the Companies (Winding Up and
Miscellaneous Provisions) (Amendment) Ordinance 2016 (14 of2016), effective 13
February 2017. The reforms made to Cap.32 include:

• providing for a prescribed form for the statutory demand under s. l 78(l)(a);
• introducing new provisions disqualifying certain persons with potential
conflicts of interest from acting as liquidator (ss.262A-262B);
• setting out the powers of liquidators in a new Schedule (ss.199-1998 and
Sch.25);
• setting out the unfair preference provisions in Cap.32 (ss.266, 266A) instead
of by reference to the Bankruptcy Ordinance (Cap.6);
• introducing provisions to invalidate undervalue transactions (ss.265D, 265E);
• expanding the exemptions from invalidity of floating charges under s.267;
• certain amendments to the special procedure for members' winding-up under
s.228A to reduce risk of abuse of the procedure;
• expressly abrogating the privilege against self-incrimination in private and
public examinations under ss.286A-286D (replacing predecessor CO, ss.221
and 222 (repealed));
• allowing the liquidator to send documents to others by electronic means
(ss.296A-296E); and
• allowing the committee of inspection to hold meetings remotely and to make
decisions via a written resolution procedure (ss.205A-207K).

2. LIQUIDATORS

2.1 Role of liquidators and qualifications for appointment

2.1.J Who is a liquidator an.d what his or her role is

Liquidator appointed to carry out winding-up of company. A liquidator is a person 20.007

appointed either by the court, the members or the creditors, to carry out the winding-up

10 See Cap.622,Sch.9 ss.l and 2.

11
See FSTB,lmpro11e111e11/ Law legislative Proposals - Co11s11/tatio11
of Co,porate l11solve11cy (Ap1il
Doc11me11/
2013)and Co11s11/tation (May2014).
Co11c/11sions
950 LIQUIDATION

of a company.12The appointment in any type of winding-up may be of a single liquidator

or it may be of two or more persons acting as joint liquidators.13 There is no liquidator
licensing system in Hong Kong and there are no formal requirements on the sort of
qualifications that a liquidator must possess. The Official Receiver's Office (ORO),
however, indirectly controls the involvement of private insolvency practitioners in
corporate insolvency matters through the panel scheme system, referred to below. Cap.32
also contains provisions on qualifications of persons acting as liquidator, though these
are mainly directed at avoiding appointments which may result in a conflict of interest.14

20.008 Role of liquidator. The liquidators' roles include investigation as to the reasons
why a company has failed; to get in, protect, and realise the company's assets; and
to distribute the proceeds of realisation in accordance with the statutory distribution
rules in Cap.32. 15

2.1.2 Panel schemes

20.009 ORO's establishment of panels of private insolvency practitioners. Traditionally,
most of the corporate insolvency matters in Hong Kong were handled by the ORO.
With the growth in the number of liquidations from the 1990s, the ORO established
the Panel A and Panel B schemes in 1996 and 1998 respectively to brief out corporate
insolvency cases to the private sector in order to reduce the ORO's administrative
burden. 16 In 2001, the Panel B scheme was replaced with the Panel T scheme.
20.010 Panel A scheme. The Panel A scheme deals with larger liquidations (referred to
as "non-summary cases"), where the property of the company is likely to exceed
$200,000. Accounting firms with experienced insolvency practitioners who satisfy
the requirements stipulated by the ORO may be admitted to the Administrative Panel
of Insolvency Practitioners for Court Winding-Up (i.e. Panel A). 17 If the creditors or
contributories at the first meetings 18 of creditors and contributories do not have their
own choice of person to be nominated as liquidator, the Official Receiver may, under
a rotation system, recommend practitioners from the firms admitted to Panel A to
the first meetings of creditors and contributories for nomination as liquidator in non-
summary cases.

" Cap.32, s.2 has a definition for "liquidator", namely liquidator "includes a provisional liquidator holding such
office by virtue of ss. I 94( I )(a), 194( I)(aa), or I94( IA)". The issue of whether a liquidator includes a provisional
liquidator arises in the context of provisions of Cap.32 which simply refer to "liquidator". See Re MF Global
Hong Kong lid [2015] 2 HKLRD 325 (CA), overruling Re Lehman BrothersSecuritiesAsia Ltd (No 2) [201 OJI
HKLRD 58 on this point. Whether liquidator includes other provisional liquidators depends on the context of the
particular section concerned: Re MF GlobalHong Kong Ltd (No 2) [2012] 5 HKLRD 486.
'3 Sec Cap.32, s.196(4) in relation to joint liquidators in a compulsory winding-up.
'' Cap.32, Pt.5 Div.4A.
" Re Peregrine InvestmentsHoldings Ltd[ 1998] 2 HKLRD 670,679 per Le Pichon J; Charles D Booth ct al., Hong
Kong Co,porate InsolvencyMc111ual (4th edn, LexisNcxis2018) 4. Sec also Joint and Several liquidators of Kong
WahHoldings Ltd v GrandeHoldings Ltd (2006) 9 HKCFAR 766, (23) and text to note 7 above.
'' See Xianchu Zhang, "Developing a Regulatory Framework for Outsourcing of Insolvency Work in Hong Kong,
China" in OECD,Asian lnsolve11cySyste111s: Closing the Jmplememation Gap (OECD 2007) 193-196.
17 See ORO, Rules for Admission of Firms and Personsfor Taking-upAppointment of Liquidators or Special
Ma11agersin Non-S111n111a1y Co11rtWi11ding-11p Cases <https://www.oro.gov.hk/eng/publications/pdf/Panel%
20A%20Scheme%20Rules.pdl'>, accessed 27 June 2018.
" Cap.32, s. I 94(1)(b). See para.20.020 below.
 LIQUIDATORS 951

Panel B and Panel T schemes. The Panel B scheme dealt with summary corporate 20.011
insolvency cases (where the assets are less than HK.$200,000)and had lower qualification
requirements for admission of insolvency practitioners to the panel. Under this scheme,
which also adopted a rotation system, private insolvency practitioners were appointed
as agents of the Official Receiver for sunm1ary cases. In late 1999, Rogers JA pointed
out that the Panel B scheme was impermissible under the Ordinance, as it entailed a
delegation of the whole of the Official Receiver's function as liquidator and provisional
liquidator to an agent. As a consequence, the Panel B scheme was discontinued. In
order to enable the Official Receiver to legitimately brief out summary cases, Cap.32,
s.194(1A) was enacted,19 and the Panel T scheme was set up to replace the Panel B
system.20 The Panel T scheme adopted a tender system whereby the list of insolvency
practitioners included in the panel is established at regular intervals through a tender
system conducted by the ORO. Legal and company secretarial firms, in addition to
accounting firms, are eligible to tender as long as they meet the relevant requirements.
Generally corporate insolvency cases managed by private insolvency practitioners. 20.012
As a result of the development of the panel scheme system, a substantial portion of
the corporate insolvency cases in Hong Kong are now managed by private insolvency
practitioners. Increasingly, creditors are also taking a pro-active step in making their own
choice of insolvencypractitioner to be nominated as liquidator at the meeting of creditors.2'

2.1.3 Qutllijicationsfor tlppoi11tme11t

Cap.32 restrictions on appointments as liquidator. Although there are no specific 20.013
qualifications required for a person to be appointed liquidator, 22 Cap.32 does impose
certain restrictions on who can act as liquidator. The relevant provisions are contained
in ss.262A to 262G, which were inserted into Cap.32 by the Companies (Winding-
Up and Miscellaneous Provisions) (Amendment) Ordinance (14 of 2016), effective
13 February 2017. These provisions reproduce the prohibitions on undischarged
bankrupts and bodies corporate acting as liquidator (previously contained in s.278
(repealed)) but also add new prohibitions, including restrictions to avoid appointment
of persons as liquidator where the person's relation with the company could constitute
a conflict of interest. 23

Prohibitions which are applicable to all categories of winding-up. For both 20.014
compulsory winding-up and voluntary winding-up, the following persons are
disqualified from being appointed as liquidator (or provisional liquidator):

• bodies corporate;

• undischarged bankrupts;

'9 Re Sweetmart Garment !forks Ltd (No 2) [2009] 5 HKLRD 220, 222-223.
20 Re Bonfield Intl Ltd (unrep., HCCW 99/2002, (2006) HKEC 1113), (15); Re Goldlory Restaura111Ltd (2006) 3
HKLRD331, 338.
21 Stephen Briscoe, "Panel T Appointments - the Dilernrna" (13 October 2013) <http://www.briscoewong.com/
panel-appointments-dilemma>, accessed 27 June 2018.
" See para.20.007 above.
" See Financial Services and Treasury Bureau, !111p1vve111e11t
ofCo,pomte !11solve11cyLaw Legislative Proposals:
Co11s11/tatio11
Document (April 2013) 23-29.
952 LIQUIDATION

• persons disqualified under Cap.32 Pt.IVA (unless the court has granted leave
for the person to be appointed as liquidator or provisional liquidator, as the
case may be);
• persons found under the Mental Health Ordinance (Cap.136) to be incapable,
by reason of mental incapacity, of managing and administering the person's
property and affairs; and
• persons subject to a guardianship order under Mental Health Ordinance
(Cap.136) Pt.IVB. 24

20.015 Prohibitions applicable to compulsory winding-up and creditors' voluntary

winding-up. For compulsory winding-up and creditors' voluntary winding-up, the
following persons are disqualified from being appointed as liquidator (or provisional
liquidator) of the company in question (unless leave of the court is obtained):

• any creditor or debtor of the company;

• any director (or former director) of the company;
• any company secretary (or former company secretary) of the company;
• any auditor of the company or a person who was auditor of the company
within the 2 year period before commencement of winding up; and
• any receiver or manager of the property of the company.25

20.016 Proposed liquidators must make disclosure statements in compulsory winding-

up and creditors' voluntary winding-up. Apart from the above restrictions,
Cap.32, ss.262A and 262C require a proposed liquidator (or provisional liquidator)
to make a disclosure statement to disclose whether the person has any other relevant
connections or relationships with the company.26 These further connections do
not render the person disqualified from appointment as liquidator (or provisional
liquidator). However, they may potentially give rise to a conflict of interest, and
it would be up to those nominating or appointing the person as liquidator (or
provisional liquidator) to consider whether it is appropriate to make the nomination
or appointment. 27
20.017 Relationships and other matters to be disclosed in disclosure statement.
The relationships to be disclosed in the disclosure statement are set out in Cap.32,
s.262D(2). The proposed liquidator (or provisional liquidator) must disclose whether

24 Cap.32, ss.262A and 2628(2).

21 Cap.32, ss.262A and 2628(3).
26 The obligation to make a disclosure statement also applies to the incumbent liquidator in a members' voluntary
winding-up where the winding-up is co be converted to a creditors' voluntary winding-up: Cap.32, s.237 A(I B).If
the incumbent liquidator is to be replaced by another person (Cap.32, s.237 A( IC)), then s.262C of Cap.32 would
apply to the proposed Iiquidator.
" The Government considered that it might not be appropriate to extend the disqualification provisions to cover
these further connections/relationships clue to the limited pool of insolvency practitioners in Hong Kong: sec
Financial Services and Treasury Bureau, lmpro11e111e11t of Co,porate lnso/ve11cylaw legislative Proposals:
Consultation Docu111e11t (April 2013) 26.
 LIQUIDATORS 953

he or she is (or was within the 2 years before the making of the statement):an
auditor, receiver or manager, provisional liquidator or liquidator of the company;
or a member, creditor, debtor, director, company secretary, employee, legal advisor
or financial advisor of the company, its holding company or its subsidiary; or an
immediate family member of such a director, company secretary, auditor, receiver
or manager, provisional liquidator or liquidator as referred to above. 28 If any such
relationship exists, there must be disclosure of the details of the relationship and
the reasons for believing that the existence of the relationship would not result in a
conflict of interest. 29 The disclosure statement must also contain a confirmation by
the proposed liquidator (or provisional liquidator) that he or she is not disqualified
under Cap.32, s.262B. 30
Delivery of disclosure statements and tabling at meeting. The convenor31 of a 20.018
meeting for the nomination or appointment of a liquidator (or provisional liquidator)
must ensure that copies of the disclosure statements made under Cap. 32, s.262C are
sent32 with the notices of meeting and are tabled at the meeting. 33 Where appointment
is to be made by the court, then the disclosure statement must be delivered to the court
before the appointment. 34 Where the directors are commencing voluntary winding-up
under Cap.32, s.228A and the directors' appointment of a provisional liquidator is to
be made without a board meeting, then the disclosure statement must be delivered to
the directors before the appointment. 35
Consequences of acting while disqualified, and validity of acts of purported 20.019
liquidator. If a person is disqualified from acting as a liquidator (or provisional
liquidator) by reason of Cap.32, s.262B 36 or if a person has failed to make a
disclosure statement that is delivered or tabled at the relevant meeting in
accordance with Cap.32, ss.262C(2)(b) and 262D, 37 then any purported
appointment of the person as liquidator (or provisional liquidator) is void. 38
The person who purports to act as liquidator (or provisional liquidator) in such
circumstances commits an offence. 39 However, the acts of the person as liquidator
(or provisional liquidator) are valid even if it is anerwards discovered that there

28 If the proposed liquidator or provisional liquidator is a paitner in a firm or a director of a body corporate, see also
Cap.32, ss.262D(2)(c) and 262(2)(d) on further disclosures regarding the finn and body corpornte respectively.
See also Cap.32, s.262F on duties regarding updating of the disclosure statement. In Re JV FitnessLtd (2018) I
HKLRD 553, it was accepted that a previous finding by the court that a proposed liquidator had been in contempt
of court is not a matter required to be disclosed under Cap.32, s.262D. However, it was held that such a matter
should be disclosed to the court in an ex parte application for appointment of the person as liquidator on the basis
of the general duty to make full and frank disclosure in ex parle applications.
29 Cap.32, s.262D(l)(b).
3
° Cap.32, s.262D(l)(a)(i). If the person would be disqualified under s.262B(2)(c) or 262B(3) (because of a
disqualification order) but for leave of the court, then the person must confirm that leave has been obtained:
Cap.32, s.262O( I)(a)(ii).
31 The "convenor" is the person who summons the relevant meeting: Cap.32, s.262E(6).
32 Cap.32, s.262E(3)(a).
33 Cap.32, ss.262C(2)(b)(ii)-262C(2)(b)(iii), 262E(4).
3' Cap.32, s.262C(2)(b)(i).
" Cap.32, s.262C(2)(b)(iii).
36 See paras.20.014 and 20.015 above.
37 Sec paras.20.017 and 20.018 above.
38 Cap.32, s.262A(3).
" Cap.32, s.262A(4).
954 LIQUIDATION

was a defect in the appointment or the person was not qualified to hold office as
a liquidator (or provisional liquidator). 40

2.2 The appointment of liquidators

2.2.1 Compulso,y winding-up

20.020 Provisional liquidator and appointment of liquidator after winding-up order
made. Upon a winding-up order being made, the Official Receiver automatically
becomes the provisional liquidator,41 unless a different person has already been
appointed as the provisional liquidator before the winding-up order,42 in which case,
that person is to continue to act as provisional liquidator.43 The Official Receiver or
other provisional liquidator acts until he or another person becomes the liquidator.44
The provisional liquidator is statutorily obliged to summon separate meetings of
creditors and contributories to consider whether to make an application to the court
for the appointment of a liquidator.45 Where the contributories and creditors cannot
agree on this matter, the court has the power to decide the difference and make an
order as it thinks fit. 46 Where the views of the creditors and contributories diverge on
the appointment of liquidators, the court will give greater weight to the decision of
majority creditors in an insolvent liquidation, as theirs is the primary interest in the
outcome of the liquidation, not the contributories. 47 The court also has the power to
make any appointment and order as it thinks fit where the contributories or creditors
do not meet, or fail to pass a resolution.48
20.021 Notice must be given to Registrar of appointment of provisional liquidator or
liquidator. Where a person other than the Official Receiver is appointed as provisional
liquidator or liquidator under Cap.32, s.194, that person must give notice of his
appointment to the Registrar in the specified form and give security in the prescribed
manner49 to the satisfaction of the Official Receiver.50
20.022 Court-appointed liquidator officer of court and must act fairly and impartially.
A court-appointed liquidator is an officer of the court.5' As an officer of the court, a
liquidator must act fairly and impartially.52 The status of the court-appointed liquidator
as court officer may have a bearing on the propriety of the contracts he or she enters

"' Cap.32, s.2620( I)(a), (b).The wording used in s.2620 is similar to that for the provision on directors in Cap.622,
s.461 (see Chapter 12).
41 Cap.32, s.194( I)(a).
42 A provisional liquidator may be appointed under Cap.32, s.193 at any time after the presentation of a winding-up
petition: see para.20.080 below and also paras.19.052 in Chapter 19.
43
CaJ>.32,s.194( I)(aa).
"' Cap.32, s.194( I)(a), I94( I)(aa).
,i Cap.32, s. I94( I)(b).
'6 Cap.32, s. I 94( l)(c); Re Akai Holdings lrd [2001) 2 HKLRD 411.
1
' Re O,mquil Po, Ltd (1985) 9 ACLR 950; Re Akt,i Holdings Ltd [200 I) 2 HKLRD 411; Re Hu11gF1111g Holdings
Ltd [2001) 3 HKLRD 692; Re luen Yick Hf1ter & Drainage Works Ltd [2003) 2 HKLRD FI 5.
,s Cap.32, s. 194( 1)( d).
•• Sec Companies (Winding-Up Rules) (Cap.32H), rr.47 and 48.
,-0 Cap.32, s.195( 1).
" Re Contract Corp, Gooch'scase (1872) LR 7 ChApp 207.
" Re Conrract Corp, Gooch 's case (1872) LR 7 Ch App 207; Ex P James re Co1Ldo11 (1873-74) LR 9 Ch App 609.
 LIQUIDATORS 955

into.53It also means that any interference of the liquidator may constitute contempt of
coui1. The courts are willing to protect its officers from vexatious litigation.s4

2.2.2 Volu11f(lrywinding-up
Liquidator appointed by ordinary resolution of shareholders for members' 20.023
winding-up and usually by creditors in creditors' winding-up. Where the
shareholders have decided to wind up the company voluntarily, the liquidator
is appointed by the shareholders by way of an ordinary resolution in the case of a
members' voluntary winding-up.ss The remuneration of the appointee will also be
fixed by the shareholders. 56 In a creditors' voluntary winding-up, the creditors have
power to nominate their own liquidator. Where the members and creditors have
nominated different persons to be the liquidator, the person nominated by the creditors
would be the liquidator.57 If the creditors have not nominated any liquidator, the person
nominated by the shareholders would be the company's liquidator.S8

Liquidator must publish notice of appointment in Gazette within 15 days of 20.024

appointment and give Registrar notice. Within 15 days after appointment, the
liquidator must publish in the Gazette a notice of his or her appointment, and deliver
to the Registrar a notice of his or her appointment in the specified form. 59

2.3 The powers of liquidators60

Wide range of powers conferred on liquidators to enable them to discharge role 20.025
properly. Liquidators are creatures of statute, and as such they can only do what they
are empowered to do by statute and cannot do something that they are not empowered
to do by statute: Kirkpatrick v Snoozebox Ltd.61 Given the roles of the liquidation
officeholders stated above, liquidators are conferred a wide range of powers necessary
for the discharge of those roles. For example, to enable liquidators to discharge their
roles of getting in and realising the company's assets for the benefit of the creditors
and contributories, liquidators have the power to take into their custody, or under their
control, all the assets that the company appears to be entitled to,62 as well as the power

" Re Oasis Merchandising Ltd [I 998) Ch 170.

" Re Siramath Pty Ltd (No. 3j (199 I) NSWLR 25.
" Cap.32, s.235( I). As to members' voluntary winding-up, see para.20.209 below.
6
' Cap.32, s.235( I).
57 Cap.32, s.242.
" Cap.32, s.242.
59 Cap.32, s.253. This provision does not apply to a provisional liquidator appointed under s.228A(l)(c), in which
case notice must be given pursuant to that section instead: see para.20.223 in relation to s.228A.
"' Unless indicated otherwise or the context otherwise requires, the discussion below applies to liquidators in both
a compulsory winding-up and voluntary winding-up. For the powers of liquidators generally in a voluntary
winding-up, see Cap.32, s.25 I. In the case of the liquidator nominated by members in a voluntary winding-up
who acts as liquidator before the creditors' meeting, there are restrictions on his or her 1>0wersunder s.243A,
as in1roduced by 1he Companies (Winding-Up and Miscellaneous Provisions) (Amendment) Ordinance (14 of
2016), effective 13 February 2017 (and sec Financial Services and Treasury Bureau, Improvement of Co,pof'(lte
Insolvency Law legislative Proposals: Consultation Document (April 2013) 17-18; Consultation Conclusions
7-8). As for the powers of provisional liquidators in a compulsory winding-up who hold office by virtue of s. I 94
after a winding-up order is made bu1 before a liquidator is appointed, sec ss.199A. I998.
" [2014) BCC 477.
62 Cap.32, s.197.
956 LIQUIDATION

to sell corporate assets.63 To reinforce this power of getting in property, the court may
require a range of people, namely any "contributory, trustee, receiver, bank, agent or
officer of the company", to deliver or transfer to the liquidator, "any money, property,
or books and papers in his hands to which the company is primafacie entitled". 64
20.026 Liquidators given power to carry on company's business as far as necessary for
beneficial winding-up. To discharge his or her role ofreal ising the company's property
for the benefit of company creditors and contributoiies, the liquidator may also need
powers to maximise the assets available to claimants. Accordingly, liquidators are
given the power to carry on the company's business, so far as may be necessary for
the beneficial winding-up of the company 65 (e.g. so that the business may be sold
as a going concern 66 or honoming existing contractual commitments which would
increase the amount available for distribution 67) and an array of powers incidental to
the carrying on of the company's business. These include the power to raise money
on the security of the company's assets,68 the power to execute and seal documents
in the name of the company 69 and the power to draw or make bills of exchange and
promissory notes. 70
20.027 Official Receiver acting as liquidator can apply to court for appointment of
special manager to carry on company's business. Where the Official Receiver is
the liquidator of a company, he or she may apply to the court for the appointment of a
special manager.71 Such an appointment could be made to facilitate carrying on of the
company's business.
20.028 Liquidators can exercise power to compromise with company's creditors and
disclaim onerous assets. Liquidators can exercise a host of powers in relation to
the company's claims and liabilities. These include the power to compromise with
the company's creditors or persons claiming to be creditors, etc. and the power to
disclaim onerous company assets.72 Generally speaking, a compromise with creditors
must be reached through the Cap.622, s.670 scheme of arrangement (SOA) procedure.
A compromise through Cap.622, s.670 requires the sanction of the court. Where
certain conditions are satisfied, the liquidator may, with the sanction of the court or
the committee of inspection, reach a compromise directly with the creditors without

63 Cap.32, s I 99(3), Sch.25 Pt.3. Item I.

., Cap.32,s.211.This power is delegatedto the liquidator:Cap.32,s.226(c); Companies(Winding-Up)Rules (Cap.32H),r.67.
65 Cap.32, s.199(2), Sch.25 Pt.2 Item 2. In a compulsory winding-up, sanction of either the court or the committee
of inspection is required for the liquidator to exercise this power. "Necessary" means that it must not be merely
beneficial for the winding-up but something more (Re Wreck Recove,:y and Salvage Co (I 880) 15 Ch D 353,
360) but it is sufficient that the liquidator bo11a.fideand reasonably forms the opinion that the carrying on of the
business is necessary for the beneficial winding-up of the company: Re Great Eastern Electric Co Ltd [ 1941)
Ch 241, 246. Such sanction is not required in the case of voluntary winding-up: see Cap.32, s.25 I( l)(b).
«> Re Skay Fashions Pty Ltd (1986) 10 ACLR 743.
6' DCT v Status Cons1n,c1ionsPty Ltd ( 1987) 12 ACLR 689.
68 Cap.32, s.199(3), Sch.25 Pt.3 Item 5.
69 Cap.32, s.199(3 ), Sch.25 Pt.3 Item 2.

7'l Cap.32, s.199(3), Sch.25 Pt.3 Item 4.

" Cap.32, s.216.
'' Cap.32, s.268. These powers are exercisable by the liquidator in both compulsory and voluntary winding-up.
 LIQUIDATORS 957

having to go through the SOA procedure. 73 The liquidator also has the power, with the
sanction of either the court or the committee of inspection, to pay any class of creditor
in full.74 The liquidator's power to disclaim, with court sanction/; property that is
onerous (e.g. property which is valueless or unrealisable but subject to burdens such
as rates or mortgage), if exercised properly, can help maximise returns to company
creditors. 76 That is because a disclaimer of onerous property helps avoid continuance
of liabilities in respect of the onerous property, which will be payable as expenses
in the liquidation. 77 The liquidator may exercise the court's power to make calls, the
power of which is provided under Cap.32, s.213.78 For the purposes of a compulsory
winding-up, the call-making power cannot be exercised without the court's special
leave or the sanction of the committee of inspection. 79
Liquidators have power to compromise with company's debtors, potential 20.029
debtors and contributories. The liquidator also has the power to compromise with
the company's debtors, potential debtors and contributories. The power is subject to
the sanction of either the court or the committee of inspection. so
Liquidators have power to seek private or public examinations of persons to 20.030
facilitate investigation into company affairs. To assist liquidators to discharge their
duties in relation to investigation of the company's affairs, they are given the power
to seek private or public examinations of persons. 81 The availability of private and
public examinations facilitates liquidator's investigations to: (i) uncover the company's
assets; (ii) assess creditors' claims; and (iii) identify the reasons for the failure of the
company.82 Obviously, a liquidator, having been appointed from outside the company,
would not be familiar with the affairs of the company and would need the cooperation
from the company officers, its lawyers and auditors alike. Such cooperation, however,
may not be forthcoming. It is therefore necessary to equip a liquidator with the ability
to compel these people, and those who are or may be the company's debtors, as well as
people who can provide information on the company's affairs, to provide information
or documents on the affairs of the company.
Liquidators have power to conduct corporate proceedings in name of company. 20.031
It is often necessary for liquidators to commence or defend proceedings on behalf of
the company-for example, proceedings against the company's debtors. A liquidator
may also want to protect and maximise company assets by recovery against defaulting
corporate officers or seeking court declarations that certain transactions amount to

" Cap.32, ss.199(2), 251(1), and Sch.25 Pt.I Item 2. In the case ofa members' voluntary winding-up, sanction is
to be given by a special resolution of members: Cap.32, s.251 ( I)(a)(i).
14 Cap.32, ss.199(2), 251(1)(a)(ii), and Sch.25 Pt.I Item I. In the case of a members' voluntary winding-up,
sanction is to be given by a special resolution of members: Cap.32, s.251( l)(a)(i).
15 Cap.32, s.268.
1
• For an example, see Re No11i11gham General Cemete,y Co [1955) Ch 683. See further para.20.101 below.
11
Roy Goode, Principles of Corpora/elnsolve11cyLaw (4th edn, Thomson Sweet & Maxwell 2011) [6-27).
18 Cap.32, ss.226(d) and 251(1)(d).
1
• Cap.32, s.226(d).
°
8 Cap.32, ss.199(2), 251(l)(a)(ii), and Sch.25 Pt. I Item 3. In the case of a members' voluntary winding-up,
sanction is to be given by a special resolution of members: Cap.32, s.251 (l)(a)(i).
81
Cap.32, s.286A (public examinations) and ss.2868, 286C (private examinations): sec paras.20.109 below.
82 Stephen Briscoe and Charles D Booth, Ho11gKong Corporate lnso/11e11cy Ma1111al (2nd edn, Hong Kong Institute
of Certified Public Accountants 2009) 86.
958 LIQUIDATION

void dispositions. 83 To enable liquidators to perfonn their duties relating to the conduct
of corporate proceedings, they are given powers to conduct corporate proceedings in
the name of the company.84 Where the liquidator seeks to exercise his or her litigational
power on behalf of and in the name of the company in a compulsory winding-up,
the sanction of the court or of the committee of inspection is required.85 Where the
company is in a voluntary winding-up, no such sanction is needed. In the case of
proceedings in respect of undervalue transactions, 86 unfair preferences, 87 invalid
floating charges, 88 fraudulent trading 89 and misfeasance proceedings, 90 no sanction is
required whether the company is in compulsory winding-up or voluntary winding-up,
as these proceedings may be brought in the name of the liquidator.
20.032 Ways in which liquidator assisted with performance of duties. To assist a liquidator
to perform his or her duties, he or she is also given the power to engage solicitors 91
or agents to do any business where the liquidator cannot do it himself or herself, 92
as well as the power to do other things that are necessary for the winding-up of the
company and the distribution of assets. 93 The power relating to the appointment of
solicitors is exercisable with the sanction of the court or the committee of inspection
in the case of a compulsory winding-up; or alternatively, sanction is not required if the
liquidator has, before exercising the power, given at least 7 days' notice of the intention
to exercise the power to the committee of inspection or to the creditors (if there is no
committee). 94 The liquidator also has the power to apply to the court for directions in
relation to any matter arising from the winding-up. 95

2.4 The duties of liquidators

20.033 Liquidator subject to statutory and fiduciary duties. In carrying out his or her
functions, the liquidator is subject to both the duties set out under Cap.32 and fiduciary
duties and the duty of care that are exacted on him or her under the general law.

2.4.J Specific statutory duties - compulsory winding-up

20.034 Liquidator under duty to report to court on company's affairs following winding-
up order. Where a winding-up order is made, the liquidator must, after the receipt of
the statement of the company's affairs prepared by the company, report to the court on
the financial status, the reason of the company's failure (if the company has failed),

" Cap.32, s. I 82.

84 Cap.32, s.199(2), Sch.25 Pt.2 Item I. Unless the statute provides otherwise, proceroings for the company must be
brought in the company's name and not in the liquidator's own name: KirkpatrickvSnoozebox Ltd [2014] BCC 477 .
., Cap.32, s.199(2).
86
CaJ>.32,s.265D.
87
Cap.32, s.266.
88 Cap.32, s.267.
89 Cap.32, s.275.

9<l Cap.32, s.276.

91
Cap.32, s.199(3), Sch.25 Pt.3 lcem 8.
92 Cap.32, s.199(3), Sch.25 Pt.3 Item 7.
95 Cap.32 , s.199(3), Sch.25 Pc.3 Item 9.
~ Cap.32, s.199(3), (4), Sch.25 Pt.3 Teem8. The requirement ror sanction or notice does noc apply for a voluntary
winding-up: Cap.32, s.251(J)(b).
9' Cap.32, s.200(3) (compulsory winding-up) and s.255 (voluntary winding-up).
 LIQUIDATORS 959

and the need for further enquiries on matters relating to the promotion, formation or
failure of the company or the conduct of the company's business.96
Liquidator under duty to take custody of all assets to which company entitled. 20.035
Upon the winding-up of the company or the appointment of a provisional Iiquidator,
the liquidator or the provisional liquidator has a duty to take custody or put under
his or her control all of the assets that the company is prima .facie entitled, including
chosesin action.97
Liquidator under duty to take into account directions of creditors, contributories 20.036
or committee of inspection in relation to distribution of assets. In the course of
the company's winding-up, the liquidator is obliged to take into account directions
given by creditors or contiibutories or the committee of inspection in relation to the
administration and the distribution of the assets.98 In conducting the administration of the
winding-up, the liquidator must summon meetings where this is directed by the creditors
or contributories by resolution or requested in writing by 10 percent in value of the
creditors or contiibutoiies. 99 The liquidator must keep proper books containing entries
or minutes of proceedings at meetings, which must be made available for inspection by
creditors or contributories, subject to the control of the court. 100
Liquidator under duty to keep accounts properly and pay money received 20.037
into Companies Liquidation Account. As the liquidator's tasks entail getting
in and realising assets belonging to the company, he or she will receive money
from various sources on behalf of the creditors or contributories. To safeguard the
interests of the claimants and to ensure the integrity of the liquidator with respect
to his or her dealing with the company's assets, Cap.32 imposes a host of duties in
relation to account keeping by liquidators. Thus, the liquidator has an obligation
to pay money received into the Companies Liquidation Account 101 and to send
an account of his or her receipts to the Official Receiver not less than twice a
year. 102 The liquidator must also furnish the Official Receiver with such vouchers
and information relating to the account as the Official Receiver requires. 103 The
liquidator has an obligation to send a printed copy of the account or summary by
post to every creditor and contributory when the account has been audited or where
he or she has been notified by the Official Receiver that the latter has decided that
the account need not be audited. 104
Liquidator must not let discretion be fettered in making distributions. In making 20.038
distributions, the liquidator must not let his or her discretion be fettered. His or her
discretion must be exercised by himself or herself. 105

"" Cap.32, s.191(1).

97 Cap.32, s.197.

98 Cap.32, s.200( I).

"" Cap.32, s.200(2).
100 Cap.32,s.20I.
1 1
• Cap.32, s.202. The Companies Liquidation Account is kepi by the OITicial Receiver: see Cap.32, s.293.
102 Cap.32, s.203( 1).
103 Cap.32, s.203(3).
'°' Cap.32, ss.203(5), 203(6}(b).
l(lj Cap.32,s.200(4).
960 LIQUIDATION

2.4.2 Specific statutory duties - voluntary winding-up

20.039 Liquidator under duty to summon meeting of creditors if forms opinion that
company will not be able to pay debts. As a members' voluntary winding-up should
only proceed as such where the company is solvent, the position of the creditors must
be protected if it turns out that the company is insolvent. 106 To ensure that the interests
of creditors are safeguarded, Cap.32 in1poses a duty on the liquidator to summon
a meeting of the creditors and lay before the meeting a statement of the assets and
Iiabilities of the company, if he or she, the liquidator, at any time, forms the opinion
that the company will not be able to pay its debts in full within the period stated in the
certificate of solvency required under Cap.32, s.233. 107
20.040 Duties of liquidator in relation to winding-up account and convening of meetings
of members or creditors. To ensure the accow1tability of the liquidator to the members
or creditors, as the case may be, Cap.32 imposes a nwnber of duties on the liquidator
in relation to the winding-up account and the convening of meetings of members or
creditors. As soon as the affairs of the company are fully wound-up, the liquidator has a
duty to prepare an account in respect of the winding-up and call a general meeting 108 and
a creditors' meeting' 09 to explain the account to members and creditors. The liquidator
is required to send a copy, within one week of the date of the meetings of the members
and creditors, or if the meetings are not held on the same date, after the date of the latter
meeting, of the final account to the Registrar, who shall register the accounts, three
months after which the company shall be dissolved. 110 Where a winding-up has lasted
more than one year, the liquidator must call a general meeting (and also a meeting of
creditors in the case of a creditors' voluntary winding-up) at the end of the first year from
the commencement of the winding-up, and of each succeeding year. 111

2.4.3 Fiducia,y duties

20.041 Liquidator owes fiduciary obligations to company. The office of liquidator has
been described as being a cross between a trustee and agent, or a fiduciary agent
(like company directors) of the company. 112 There is therefore no doubt that such an
officeholder is a fiduciary of the company. 113 A Iiquidator therefore owes fiduciary
obligations to the company, the medium through which different stakeholders' interests
are protected. Thus, a liquidator has a duty to exercise his or her power in good faith
for a proper purpose in discharging his or her roles in liquidation.
20.042 Liquidator must not be placed in position where personal interests conflict with
company or duties. As a fiduciary, liquidators must not place themselves in a position
where their personal interest conflicts with: (i) that of the company and (ii) their duties.

106 See para.20.218.

107 Cap.32, s.237 A.
108 Cap.32. s.239( I).

•0:t Cap.32, ss.239(1) and 248( I).

°
11
Cap.32, ss.239(3}-239(4) and 248(3)-248(4).
111
Cap.32, ss.238 and 247.
112 Sydlow Pty Ltd v TG Kotselas Pty ltd (1996) 14 ACLC 846, 850 perTambcrlin J.

" 3 Mirror Group Newspapers Pie v Mtmve/1 (1998) BCC 324; Re Peregrine fnvestments Holdi11gsLtd (1998) 2
HKLRD 670; Top Brands Ltd II Sharma (2015) 2 NI ER 581, appeal dismissed in Re Mama Milla Ltd. Shama v
Top Brands lid (2016) BCC I (Eng CA).
 LIQUIDATORS 961

Nor are they permitted to profit from their office. 114 Thus, liquidators will breach their
core fiduciary obligations if they make unauthorised payments with the company's
funds to an entity controlled by themselves or otherwise use the company's funds for
personal purposes unconnected with the liquidation. 115 Another situation where the
liquidator's interest conflicts with his or her duty is illustrated in Advance Housing Pty
Ltd (in liq) v Newcastle Classic Development Pty Ltd. 116 There, the liquidator was a
partner of a firm which had provided accountancy services to the company when the
latter approached insolvency. One of the payments made by the company to the firm
was for the services rendered. There was a need to investigate whether this payment
had constituted an unfair preference. Santow J held that an "inherent conflict" arose in
this situation, as it was the liquidator's duty to conduct the investigation. 117
Liquidator who employs own firm as agent and delegates duties to firm in breach 20.043
of fiduciary obligations. Liquidators tend to be accounting professionals and thus
have opportunities to exercise their power of delegation in favour of their employer
firm or the firm of which they are partners. However, liquidators who employ their
own firm as the agent and then delegate most, if not the whole, of their duties to the
firm will be in breach of their fiduciary obligations. 118
Liquidator should apply to court for leave to resign where interests conflict with 20.044
company under common law. At common law, a liquidator who is in a position
where his or her own interest conflicts with that of the company should apply to the
court for leave to resign. 119 Under the Companies (Winding-Up) Rules (Cap.32H),
a liquidator cannot purchase the company's assets without leave of the court,' 20 or,
without express court sanction, purchase goods if the transaction would result in the
liquidator obtaining any portion of the profits (ifany). 121
Liquidator has duty to be impartial to different categories of stakeholders. As 20.045
a fiduciary, the liquidator also has a duty to be impartial and to maintain an even
hand bet\veen different categories of stakeholders whose interests are subject to the
protection of the liquidator. A situation where a liquidator's duty of impartiality may
become an issue is where it is necessary to determine the entitlement of contributories
and creditors to the proceeds from a sale of the company's assets in an insolvent
liquidation. Generally speaking, when the company is insolvent, the contributories
do not have any interest in the proceeds from the realisation of the company's assets,
as any disposal of assets would necessarily be for the benefit of creditors. However,
where the asset being sold is the company's listing status,' 22 it may be justifiable to pay
shareholders a token consideration or "sweetener", as such a sale normally requires

'" Re Timberland Ltd ( 1979)4 ACLR 259.

''' Commissioner/or Coq1omte Affairs v Harvey [ 1980]VR 669.
116 (1994) 14ACSR 230.
117
( 1994) 14ACSR230, 232, 237, 238.
118
for Co,porateAJJairs v Harvey (1980] VR 669. A liquidator will breachhis or herduty ifhc or she
Com111issio11er
makesa wholesaledelegationof powersto his or her agent(s):Ah Toy v Registrt,r of Co (1986) 10 FCR 356.
119
Re Timberla11tlLtd ( 1979)4 ACLR 259.
,ro Companies(Winding-Up) Rules(Cap.32H). r.148.
'" Companies(Winding-Up) Rules (Cap.32H),r.I49.
122 SeeChapter 19.
962 LIQUIDATION

the cooperation of shareholders. 123 Where, however, the size of the sweetener given to
shareholders is disproportionately high, the liquidators would be in breach of their duty
to maintain an even hand between contributories and creditors. A breach ofliquidators'
duty was found in Re Yaohan Hong Kong Corp Ltd, 124 where the split of consideration
between creditors and shareholders for sale of the company's listing status was in the
proportion of 67 percent and 33 percent respectively. The shareholders' entitlement in
this situation should normally be 5 percent. 125

2.4.4 Duty of Ctlre

20.046 Liquidator owes company duty of care both in equity and common law. Given the
nature of the liquidator's office, the liquidator owes the company a duty of care both
in equity and at common law.126 The liquidator's duty of care owed under the general
law is analogous to the duty of care owed by company directors. 127 The standard of
care is that expected of a reasonably skilled insolvency practitioner. 128 For example,
a liquidator was held to be negligent and in breach of duty where the liquidator paid
no real attention to the company's documents and where the liquidator demonstrated
a lack of competence and insight in the handling of the insolvency.129 A breach of the
liquidator's duty of care might also arise if a loss has been caused because the liquidator
had determined a legal issue without seeking legal advice where the complexity of the
issue required a liquidator to try to obtain such advice. 130 A liquidator will also be
in breach of the duty of care if, after the liquidator's appointment, because of his or
her failure to take control of corporate property, an item of the company's assets is
transferred to another person, the transaction of which would amount to a voidable
preference. 131
20.047 Situations where liquidator may be held to be in breach of duty of care. Another
example where a liquidator may be held to be in breach of the duty of care is where
the liquidator fails to take steps to terminate the winding-up process by carrying out
court orders when the company becomes solvent (the failure of which would have
increased the cost of the liquidation), or failure to pay corporate tax resulting in an
imposition of penalty tax. 132 A liquidator has a duty to form a careful professional

"' Re Rhine Holdings Ltd (in liq) (2003) 3 HKC 543; Re laohan Hong Kong Corp Ltd [200 I) I HKLRD 363.
124 [2001) I HKLRD 363 (although no reference to the duty of impartiality was made in the judgment of the Court
of Appeal).
125 Re Rhi11eHoldings Ltd (in liq) (2003] 3 HKC 543; Re laohan Hong Kong Corp Ltd [2001) I HKLRD 363.
126 Sydlow Pry Ltd II TG Kotselas Pty Ltd (1996) 14ACLC 846. See also Daniels vA11derson[1995) 37 NSWLR 438.
121 Daniels v Anderson [ 1995) 37 NSWLR 438.
"' Top Brands Ltd II S/u,rma (2015) 2 All ER 581, appeal dismissed in Re Mama Milla Ltd. S/umw v Top Brands Ltd
[2016) BCC I (Eng CA).
12
• Top Brands Ltd v Sharma [2015) 2 All ER 581, appeal dismissed in Re Mama Milla Ltd, Shama v Top Brands
Ltd [2016) BCC I (Eng CA). In that case, the liquidator was liable (in misfeasance proceedings under the UK
equivalent ofCap.32, s.276) for sums which she improperly paid to third parties without properly considering the
company's position or making responsible enquiries. The fact that the liquidator had taken legal advice did not
reduce her blameworthiness, as the advice had been geared to the liquidator's woefully incorrect and inadequate
instructions.
l!O City & Suburban Pty Ltd (as liquidator o.(Conpact {Aust) Pty Ltd (in liq)() 998) 28 ACSR328.
131 Sydlow Pty Ltd v TG Kotseftts Pty Ltd (1996) 14 ACLC 846.
"' Pace v Antlers Pry Ltd ( 1998)89 FCR485.
 LIQUIDATORS 963

judgment, whether a claim of the company, as a matter of common sense, should be

pursued or abandoned. The liquidator may breach the duty of care and skill if he or
she exhibits a want of skill or care, etc. in making that judgment. 133 Jn carrying out a
sale of corporate assets through private treaty, a liquidator may breach the duty of care
and skill ifhe or she does not bother to ascertain the value of the company's assets and
restricts the invitation to submit proposals to, bar one or two outsiders, creditors who
have inside information on the value of the assets on sale. 134

2.5 Removal

Court has power to remove liquidators. The interests of the liquidation might 20.048
require the removal of liquidators or provisional liquidators from office. It is
certainly in the best interest of the liquidation to remove unqualified, unfit or
dishonest liquidators. It is therefore necessary for the court to have the power
to remove liquidators. The court's power to remove liquidators has become
particularly pertinent in Hong Kong in recent years. This is because there has been
a significantly increased demand for insolvency professionals resulting from the
increase in the number of compulsory windings-up in Hong Kong since the early
1990s on the one hand, and the fact that no licensing system has been put in place
to regulate the admission or practice of liquidators, on the other. The panel system
has resulted in a significant portion of insolvency work being undertaken by
people with inadequate experience, 135 and perhaps even awareness of commitment
to the relevant professional standards.

2.5.1 Removal by the court

Court's power to remove liquidator exercisable "on cause shown". The court's 20.049
power to remove a I iquidator is provided in Cap.32, s.196( I) (compulsory winding-
up) and s.252 (voluntary winding-up). For provisional liquidators, the court's power of
removal is in s.193(6). The power is exercisable "on cause shown".
Misconduct or personal unfitness may amount to cause. Misconduct or personal 20.050
unfitness may amount to a "cause" for the removal of a liquidator. Misconduct, for
the purpose of removing a liquidator, can be in the form of a breach of a liquidator's
statutory duties or fiduciary obligations or breach of the appointment contract with the
Official Receiver (OR). In Hong Kong, liquidators have been removed for breaching
the statutory duties to submit accounts to the OR under Cap.32, s.203( 1) and to allow
the OR to exercise his or her power under Cap.32, s.203(3A) to audit the liquidator's
accounts, 136 to pay income of the company into the Companies Liquidation Account

''' Grt,y v Bridgestone Aust Ltd; Ewing v Flandri Pty Ltd ( 1986) 4 ACLC 330. For a case where the liquidator was
not in breach of duty in agreeing to a settlement. sec Re Sh1111
Kai Finance C<>Ltd (2015] 2 HK.LR.D264 (CA).
'"' Re Si110America11
Telecom Inc (unrep., CACV 167/98, [1998) HKEC 1004) (although this case is not on
liquidators' duties, the negligence on the part of the liquidators was taken into consideration in the c-Ourt's
decision to reject a s.182 validation order application).
'" See Stephen Briscoe and Charles D Booth, Hong Kong Co1porateInsolvency Ma11110I (2nd edn, Hong Kong
Institute of Certified Public Accountants 2009) 86.
'" Re liote Property ManagementLtd (2006) 2 HKLRD 106.
964 LIQUIDATION

under Cap.32, s.202, 137 and to lodge security to the satisfaction of the OR within the
timeframe prescribed under Cap.32, s.195. 138
20.05.1 Liquidators can be removed for breach of fiduciary obligations. Liquidators can
also be removed for breach of fiduciary obligations. A liquidator, for example, can be
removed where he or she has made intentional misrepresentations on the occurrence
of the realisation of company assets in the account submitted to the OR, 139 where
the liquidator has misappropriated the company's assets for unlawful payments, 140 or
where the liquidator has provided false evidence on the qualifications or fitness of
another person as a liquidator. 141
20.052 Some duties of liquidator prescribed under terms of contract between OR and
appointee. The contract that the OR enters into with an appointee often prescribes
certain obligations on the part of the liquidator with regard to the performance of his
or her duties in liquidation. A case example is Re Liote PropertyManagementLtd,142
where an order for removal was made because, inter alia, the liquidators had failed
to perform their contractual obligation to apply for a summary procedure order under
s.227F of Cap.32.
20.053 Other examples on removal of liquidators. It has been held that a liquidator can be
removed on the ground of unfitness where he or she was appointed on the strength of
a misleading or fraudulent statement, about his or her experience as a liquidator, made
in the affirmation of fitness in support for his or her application for appointment (even
though the affirmation was made by another person). 143 In another case, provisional
liquidators, who were appointed to preserve the assets of a company following a petition
to wind up the company on just and equitable grounds, were removed from office
where they had acted in a way which caused one faction of shareholders reasonably
to lose confidence in them and to have reasonable grounds for considering them to be
biased in favour of the other faction. 144 Liquidators must not only be independent, but
must be seen to be independent. 145
20.054 No need for misconduct or personal unfitness to show "cause" to remove liquidators.
The "cause" that must be shown for the removal of liquidators, however, does not
require anything amounting to misconduct or personal unfitness. Thus, a liquidator
can be removed where he or she did not show sufficient vigour in performing his or

131 Re Rai11bowGate Ltd (unrep., HCCW 593/1998, [2007] HKEC 23 I 0) (distribution of dividend from the estate
of a debtor of the company); Re Actio11Industrial (/1111)Ltd (unrep., HCCW 35/2007, [2009) HKEC 1971) (the
surplus of proceeds from the realisation ofan item of the company's assets).
"' Re Actio11Industrial (Intl) Ltd (unreJ>.,HCCW 35/2007, [2009] HKEC 1971) (CFI); Re Well Cond Gmup Ltd
[2008] 5 I IKLRD 147 (CFI); Official Receiver v Chan Ki11Ha11gDa11vil(unrep., CACV 202/2011, [2012] HKEC
822) (CA).
139 Ltd (unrep., l lCCW 35/2007, [2009] l➔ KEC I971 ).
Re Actio11lnduslrial (/1111)
"& Re Rai11bow Care lid (unrep., J➔CCW 593/1998, [2007] HKEC 2310) (payment of liquidator's fees and
disbursement without seeking court approval).
"' Re Ac1io11Indusrrial {J11tl)Ltd (unrcp., l➔CCW 35/2007, [2009] HKEC 1971).
"' [2006] 2 HKLR D I06.
143 Re Ac1io11lnduslrial (/111/)lid (unrcp., HCCW 35/2007, [2009] l➔KEC 1971).
1
" Re Gold Pleasure !11dustrial Co lid (unrcp., CACV 21/2009, [2009] HKEC 1753).
"' Re Legend fnlemalional Resorls Ltd (unrep., HCCW 1139/2004, [2011) HKEC 317), affinned (unrep., CACV
58/2011, [2012) HKEC 89).
 LIQUIDATORS 965

her duties, 146 or failed to proceed with the liquidation with reasonable expedition. 147 A
liquidator can also be removed where he or she has left the jurisdiction without having
made any arrangement for the co-liquidators to properly carry out their office, and it
is reasonable to assume that he or she has no intention of returning. 148 The court has
a wide discretion and a liquidator can be removed if could be shown that it is on the
whole desirable that the liquidator be removed. 149
Re Legend case: onus of proof on party making application to remove liquidator 20.055
not easy to discharge. In Re Legend International Resorts Ltd, 150the Court of First
Instance emphasized that the onus of proof on the party making the application
for the order will not be easy to discharge where the liquidator has become well
acquainted with the business and affairs of the company or the process of winding-
up has almost reached conclusion. Even if grounds for removal are made out, it
is also necessary to take into account the disadvantages that would arise from the
removal in terms of costs and delay. The court's decision in that case dismissing
the application for removal was upheld on appeal. 151 The Court of Appeal cited
with approval AMP Enterprises Ltd v Hojfman, 152 where Neuberger J had stated the
following:

"[J]f a liquidator has generally been effective and honest, the court must think
carefully before deciding to remove him. It should not be seen to be easy to
remove a liquidator merely because it can be shown that in one, or possibly
more than one, respect his conduct has fallen short of ideal. Otherwise, it would
encourage applications ... by creditors who have not had their preferred liquidator
appointed, or who are for some other reason disgruntled. Once a liquidation has
been conducted for a time, no doubt there can almost always be criticism of the
conduct, in the sense that one can identify things that could have been done better,
or things that could have been done earlier. It is all too easy for an insolvency
practitioner, who has not been involved in a particular liquidation, to say, with
the benefit of the wisdom of hindsight, how he could have done better. It would
plainly be undesirable to encourage an application to remove a liquidator on such
grounds."

2.5.2 Removal by the members - members' voluntary wirtding-up

Members may remove liquidator by special resolution. In a members' voluntary 20.056
winding-up, the members of the company may by special resolution remove a
liquidator from office. 153 Any contributory may convene the general meeting for

'"' Re Keypak Homecare Ltd [ 19871 BCLC 409.

''' Re Rainbow Gate Ltd (unrep., HCCW 593/1998, [2007] HKEC 2310).
"8 Re Hoplik Carton Paper Factory Ltd (unrep., HCCW 893/2002, [20 IOJ MKEC 1330).
"' Re legend lntematio,wl Resorts Ltd (unrcp., HCCW 1139/2004, [2011] MKEC 317), affirmed (unrcp., CACY
58/2011, [2012] MKEC 89).
,,-0 (unrcp., HCCW 1139/2004, [2011] HKEC 317), [34]-[35]. Sec also Re Sumore Corp Ltd (unrcp, HCCW
518/2009, [2012] HKEC 1620).
'" (unrcp., CACY 5812011, [2012] HKEC 89).
"' [2003) I BCLC 319, [27).
is3 Cap.32,s.235A(l ).
966 LIQUIDATION

the purpose of removal. 154 Notice specifying the intention to remove the liquidator
must be given to the liquidator and the creditors. 155 Any creditor or contributory can
apply to the court for an order that the liquidator not be removed from office by the
company. 156

2.5.3 Removal by the creditors - cretlitors' volu11tarywinding-up

20.057 Creditors may remove liquidator at creditors' meeting. In a creditors' voluntary
winding-up, the liquidator may be removed from office at a meeting of creditors
by a resolution passed by a majority in number and three-fourths in value of the
creditors present. 157 A meeting for removal must be convened by the liquidator if not
Jess than one-tenth in value of the creditors request the liquidator in writing for such
a meeting to be convened. 158 If the liquidator does not convene the meeting within
21 days, any creditor may convene the meeting for the purpose of removal. 159 The
notice of meeting must specify the intention to remove the liquidator. 160 Any creditor
or contributory can apply to the court for an order that the liquidator not be removed
from office. 161

3. COMPULSORY WINDING-UP
3.1 Grounds for compulsory winding-up

20.058 Six grounds for compulsory winding-up. Six grounds for compulsory winding-up
are provided in Cap.32, s.177(1). The first one is that the company has resolved by a
special resolution that the company be wound-up by the court. 162 The second is that
the company does not commence its business within a year from its incorporation,
or suspends its business for a whole year.163 The third is that the company has no
members. 164 The fourth is that the company is unable to pay its debts. 165 The fifth
one is where an event occurs on the occurrence of which the articles provide that the
company is to be dissolved. 166 The last one is that the court is of the opinion that it is
just and equitable that the company should be wound-up. 167

154
Cap.32, s.235A(3).
iss Cap.32, s.235A( I).
156 Cap.32, s.235A(2).

151 Cap.32, s.244A(5). Section 244A was added by the Companies (Winding-Up and Miscellaneous Provisions)

(Amendment) Ordinance (14 of2016), effective 13 February 2017. Prior to enacnnent of this section, there was
no express provision on removal ofa liquidator in a creditors' voluntary winding-up and it was necessary to rely
on the court's power of removal under s.252.
158 Cap.32, s.244A(2).

is~ Cap.32, s.244A(3).

HiO Cap.32, ss.244A(2)(b), 244A(4).
161
Cap.32, s.244A(6).
162 Cap.32, s.177( I)(a).

Hil Cap.32, s.177( I)(b).

1
6-1 Cap.32,s.177(1)(c).
16' Cap.32. s.177(1)(d).

"• Cap.32, s. I 77(1)(e).

167
Cap.32,s. 177(I)(t).
 COMPULSORY WINDING-UP 967

Fourth and sixth grounds most common. The fourth and the last grounds are by far 20.059
the most common grounds, which will be dealt with after a brief consideration of the
other four grounds.

3.1.1 Winding-up of comptlny by specitll resolution: Cap.32 s.177(1)(tl)

Members can opt for voluntary winding-up as alternative, but might prefer 20.060
court-ordered winding-up in some cases. Most companies would prefer voluntary
winding-up by a special resolution under Cap.32, s.228( I)(b) instead of a court-ordered
winding-up under Cap.32, s.l 77(1)(a), as a voluntary winding-up would be cheaper
and shareholders have greater control. However, there can be circwnstances where
shareholders prefer winding-up by the court. One of these is where the shareholders
believe that there is a need to have the conduct of management investigated. This
can happen where, for example, the controller of the holding company wishes to
wind up one of its subsidiary companies and have the conduct of the latter's directors
investigated. 168 The special resolution ground is sometimes pleaded together with
some other grounds, such as the inability of the company to pay its debts under
Cap.32, s. l 77(1)(d) and that it is just and equitable that the company be wound-up
under Cap.32, s. 177(] )(t) or equivalent provisions. 169 The majority shareholders,
however, are not permitted to use Cap.32, s.177( 1)(a) winding-up as a tool to resolve
their disputes with minority shareholders. 170

3.1.2 Ftlilure to commence business or suspending business

for a whole year: Cap.32 s.J77(1)(b)
Must also establish no intention to commence or re-commence business. The 20.061
company will not be automatically wound-up on the establishment of this ground by
the applicant; 171 it is also necessary to show that the company has no intention of
commencing or re-commencing business. 172The court will not countenance a winding-
up application on this basis where the failure to commence business or the company's
suspension of its business is caused by the fault of the applicant. 173

3.1.3 The comp,my has no members: Ctlp.32 s.177(1)(c)

Company wound-up if no members. Before amendments were introduced by the 20.062
Companies (Amendment) Ordinance 2003 allowing single member companies,
Cap.32, s.177(1)( c) provided that a company could be wound-up if the number of
members fell below two. In a decision under that provision, the court was prepared to
wind up a company with less than two members, at the instance of a creditor petitioner,

6
' ' Re Comtowe/1 lid [ I998) 4 HKC 81; CIC v Hanno (2001) I9 ACLC 1,217 (where Barrett J of the Supreme Court
of New South Wales approved an application made on the basis of, i11terolia, s.46J(l)(a), Corporations Act 2001
(which is equivalent to Cap.32, s.177(1)(a))); Re BF Co11.ttmc1ionCo Ltd (unrep., HCCW 691/2004, [2004)
HKEC 1513)(CFI).
' 69 Re Comtowe/1 Ltd [ 1998) 4 HKC 81; CIC v Ha11na(2001) 19 ACLC 1,217; Re BF Construc1io11Co lid (unrep.,
HCCW 691/2004, (2004) HKEC 1513) (CFl).
1
1'l Tt,m Po Kei "Tam Bo Kin (2011) I HKLRD 537 (CF!), reversed on other grounds: (2012)2 HKLRD 1227 (CA}.
'" Byron Mo1<,rsLui" Dolphin House Ltd [ 1958) 3 SALR 532; Palmer s Company law (24th edn, Stevens & Sons
1987) 1361.
"' Re Capital Fire lns11ranceAssociation (1882) 21 Ch D 209.
"' Re Power Point Engineering Ltd (unrep., HCCW 555/1999, [2000) HKEC 774).
968 LIQUIDATION

notwithstanding that the sole director or member had indicated that he or she was
prepared to nominate another person to comply with the statutory requirements as to
number ofmembers. 174 Section 177(J)(c) now applies only if the company does not
have any members.

3.1.4 Occurrence of eve11tsprescribed i,i the company's

co11stitutio11aldocuments: Ctlp.32, s.l 77(l)(e)
20.063 Articles can provide for circumstances where company is dissolved. Cap.32,
s.177(1 )(e) was inserted to enable the personal representative of a deceased shareholder
of "quasi partnership" companies to exit from the company. 175 In a partnership, the
surviving partner or partners are normally obliged to buy out the deceased partner
or the partnership must be wound-up. Section l77(1)(e) of Cap.32 allows a similar
arrangement for companies so long as provision is made in the articles for the
company to be wound-up in the specified circumstances. However, the provision is
wider than the circumstances of a shareholder becoming deceased. lt appears though
that s. l 77(l)(e) has seldom been relied upon in practice in Hong Kong.

3.1.5 Company unable to pay its debts: Cap.32, s.177(l)(d)

20.064 Company unable to pay its debts: most common ground. This is by far the most
common ground for a compulsory winding-up at the instance of creditors. Section 177
of Cap.32 does not provide a definition of inability to pay debts or of insolvency. It
can be hard for a creditor to prove its case, as it may not have the information on the
company's ability to pay its debts. To overcome this problem, Cap.32, s.178(1) deems
a company to be unable to pay its debts in three situations.
20.065 First situation where company deemed unable to pay debts: where creditor served
demand on company and company failed to pay for three weeks. The first is where
a creditor has served 176 on the company a demand under his or her hand 177 requiring
the company to pay the sum due, and the company has for three weeks thereafter
neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction
of the creditor: Cap.32, s.178(1)(a). To utilise the statutory demand procedure in that

'" Re Califomia /111/(Far East) Ltd (unrep., HCCW 108/2002, [2002) HKEC 652).
"' Companies Law Revision Committee, Second Report of the CompaniesLaw Revision Committee 011 Company
Law (1973), (2.63); Board ofTrade (UK), Report of/he C-0mpa11y Law Committee(1962) (Cmnd 1749) (Jenkins
Committee Report), [71)-(75).
11• The demand is to be served at the registered office of the company. This can be by personal service at the

registered office u1>0na person authorised to accept service, or if the door of the registered office is locked
by placing it underneath the door or leaving it at the foot of the door (Re Ttmg Fung Hong ForwardingAge111s
Ltd [ 1984) HKC 406, 408; Re Ha11gko11g Zha11gxingGroup Ltd (unrep., HCCW 256/2011, [2012) HKEC 358)
or by registered or ordinary post sent to the registered office: Re Galaxy Electra-Plati11g Facto,y Ltd [2000) I
HKLRD 876, [2000] 2 HKC 248 (in the absence of an admission of receipt by the company, the petitioner must
prove that the statutory demand was lcfl at the company's registered office; for a demand sent by registered post,
confirmation by the post office of delivery would be sufficient evidence of receipt of the demand; but evidence
that the demand was posted by ordinary post is on its own insufficient).
111 Pursuant to amendments made by the Companies (Winding-Up and Miscellaneous Provisions) (Amendment)

Ordinance (14 of 2016), effective 13 February 2017, the demand must be in the prescribed form as set out
in new Form IA in the Companies (Winding-Up) Rules (Cap.32H). The personal signature of the creditor is
unnecessary. and signature of a duly authorised agent such as the creditor's solicitor is sufficient.
 COMPULSORY WINDING-UP 969

s.178(l)(a), the sum due 178 to the creditor must be at least $10,000. 179 A company is
liable to be wound-up if it fails to meet a statutory demand. 180

Court will reject winding-up application if reasonable grounds for disputing 20.066
company's liability for the debt. The court will reject a winding-up application if there
is a genuine dispute on substantial grounds about the petitioning debt-namely where
there are reasonable grounds for disputing the company's liability for the debt. 181 This
would be the case, for example, where there is a dispute between the parties whether
the goods supplied have been received. 182 Another example is a dispute whether a
precondition for payment for goods supplied or service rendered has been met. 183 Also,
the court will not sanction a petition where the company has a valid cross-claim or set-
off against the petitioner in excess of the petitioning debt. 184 A dispute over the precise
amount of the debt due is not sufficient for the court to refuse winding-up. 185 Where
the company disputes the debt, the company may oppose the petition at the hearing, or
the company may seek to restrain the creditor from filing or advertising the petition. 186
The burden is on the company to show that there is a genuine dispute on substantial
grounds. 187 Where the cowt is satisfied that there is such a genuine dispute, the usual
situation is that the petition will be dismissed, with the parties to resolve the dispute
outside the petition. 188 However, in some cases the court may be prepared to resolve
the dispute on the petition instead of leaving the matter to be decided in separate
proceedings (such as where the matter is very easy to decide). 189
Arbitration clauses and arbitral awards. The court is not obliged to strike out or 20.067
dismiss a petition merely because the contract between the petitioner and the debtor
contains an arbitration clause that provides that any disputes that cannot be resolved

178 The debt must be a liquidated sum (Re HumberstoneJersey Ltd ( 1977) 74 LS Gaz 71 J) and must be a debt which
is presently due: Re Jacki11Total F11/filme111
Services Ltd [2008) 3 HKLRO 475, (2008) 3 HKC 566. A liquidated
debt is a pre-ascertained liability under the agreement of the parties and includes a contractual liability where
the amount due is to be ascertained in accordance with a contractual formula or contractual machinery: see Re
Grande Holdings Ltd (2016) I HKLRD 435 (CA).
' 79 Cap.32, s.178(3). However, where the creditors are employees, the amounts owing to the employees for unpaid
wages, wages in lieu of notice, severance payments, pay for untaken statutory holidays and pay for untaken
statutory leave can be aggregated as if those creditors were a single creditor: Cap.32, s.178(2). A statutory
demand cannot be used if the size of the debt is not known; but a demand overstating the amount due is valid so
long as the undisputed amount which is due meets the statutory minimum: Re Jacki11Total Fulfilment Services
Ltd (2008] 3 HKLRD 475, (2008] 3 HKC 566; Maple Trade Fina11ceIlle v Huge Best lilt/ Ltd (unrep., HCCW
389/2010, (201 I] HKEC 833, (48); Abdul Aziz Essa v Capital Global Ltd (unrep., HCCW 422/2010, 8 July
2011), (22).
180 For an example, see Re Hop Siring loo11glighti11gLtd (unrep., HCCW 195/2005, (2005) HKEC 1953) (CFJ).

181
See, e.g., Re First GNP Hong Ko11gLtd [1995)2 HKC 380; Re the Sun '.t Group Ltd (2004) 3 MKLRD 65.
,., Re Globalink TecltnologyDeve!opme111 Ltd (unrep., HCCW 670/2.006, (2008] HKEC 277).
183 Re eP!aw Ltd (umep., HCCW 1122/2002, (2003] HKEC 940).

' 84 Re Horizon Gmup fovestme111s Ltd (unrep., HCCW 109/2002, (2002] MKEC 609); Re City Top Engineering Ltd
(2006] 2 HKLRD, (2006] 3 HKC 455.
,ss Re Jacki11Total F11/fi/111e111
Services Ltd [2008) 3 HKLRD 475, (2008) 3 HKC 566. This is the case so long as the
undisputed amount is equal to or above the statutory minimum for serving a statutory demand: sec para.20.065
above.
186 See A11stra!ia11 Mid-Eastern Club ltd v Elbt1kht(1988) 14 ACLR 234.
' 8' Re Hong Kong Constmctio11(Works)Ltd (unrcp., HCCW 670/2002, 7 January 2003).
188
Re a Company (No 003079 of 1990) [1991) BCLC 235.
' 89 Re legend J111emational Resorts Ltd (No ]) (2006) 3 HKLRD 270.
970 LIQUIDATION

by negotiations shall be referred to arbitration. 190 This is so even if the company has
commenced arbitration, as this alone does not demonstrate that the debt is in fact
disputed on substantial grounds. It remains necessary for the company to discharge
its burden of establishing this. 191 If the company establishes that the debt is disputed,
then the winding-up petition will generally be dismissed if the company has taken the
steps required under the arbitration clause to commence the contractually mandated
dispute resolution process (which might include preliminary stages such as mediation)
and filed an affirmation in accordance with r.32 of the Companies (Winding-up) Rules
(Cap.32H) demonstrating this. 192 Where a petition to wind up a company is based on
non-payment of an arbitration award that has already been made against the company,
the petition is not regarded as enforcement of the arbitration award as such and does
not require leave under Arbitration Ordinance (Cap 609), s.84. 193
20.068 Creditor whose debt not disputed has right against company to winding-up
order. A creditor whose debt is not disputed to be due and payable has a right ex
debitojustitiae as against the company to a winding-up order.194 However, the court
retains a discretion whether or not to make a winding-up order, and so for example
the views of other creditors might be taken into account. 19; The persistent failure to
pay an undisputed debt gives the creditor the right to petition the winding-up of the
debtor company on the basis that the debtor is presumably insolvent. In this situation,
the creditor is entitled to say, in the words of Hannan J in Cornhi/l lnsurance pie v
Improvement Services Ltd: 196

"[i]fyou don't pay me I must suspect you can't. Therefore I can properly swear
that you are insolvent and I can properly present a winding-up petition to the
Companies Court."

20.069 Second situation where company deemed unable to pay debts: if execution,
judgment, decree or order of court in favour of creditor returned unsatisfied.
The second situation where a company is deemed to be unable to pay its debts is
if execution or other process issued on a judgment, decree or order of any court in
favour of a creditor of the company is returned unsatisfied in whole or in part: Cap.32,
s.178(l)(b). 197
20.070 Third situation where company deemed unable to pay debts: where proved that
company unable to pay debts. The third is where it is proved to the satisfaction of the
court that the company is unable to pay its debts: Cap.32, s.178( 1)( c). In substance,

190 Ho/Imel AG v Meridian Success Metal Supplies Ltd [ I997] 4 HKC 343.
191 Re .lade Union Investment Ltd (unrep., JJCCW 400/2003, [2004] MKEC 306).
"' See Re Southwest Pacific Bauxite (HK) Ltd [2018] MKCFl 426, [2018] 2 MKLRD 449.
" 3 Re Lucky Resources (HK) Ltd [2017] 3 MKC I.
'" Re Esquire (Electronics) Ltd [ 1996] 3 MKC 309, 312 per Godfrey JA.
195 Sec furtherRe Amery China Building Co Ltd [ 1982]HKLR 236; Re £squire (Elec1ro11ics)Ltd [ 1996)3 HKC 309
' 96 [1986] I WLR 114, 118. Sec also Comhill Insurance Pie v lmproveme111 Services Ltd [ 1986] BCLC 26 (company
may be wound-up where there is failure to repay undisputed debt even if it appears that company is solvent). Cf.
Re First Dragon Fashion (Hong Kong) Ltd (unrcp., MCCW 41/2010, [2011] HKEC 211), [15]-[16], where the
court took the view that while non-payment of undisputed debt is very strong evidence of insolvency, winding-up
would not be ordered unless the company is in foct insolvent.
' 9' See, e.g., Re Datacom Cable System Co Ltd [2001) 2 HKC 482.
 COMPULSORY WINDING-UP 971

this is not really a deeming provision as the creditor has to prove the existence of the
actual ground for winding-up (namely that the company is unable to pay its debts). The
wording in ss.177(1 )( d) and 178(1)( c) of Cap.32 appears to suggest that the cash-flow
test, rather than the balance sheet test, is more relevant in detem1ining a company's
ability to pay its debts. The wording in that s.177(1 )(d) is similar to that in s.95A( I) of
Australia's Corporations Act 2001. The test adopted in the latter provision is commonly
regarded as being the "cash-flow test" or "commercial test" of solvency. 198 Under the
cash-flow test, it is necessary to consider the company's expected net cash flow, its
available assets which could be realised to meet the payment of debts as and when
they are payable, and arrangements between the company and prospective lenders to
determine whether any shortfall in liquid and realisable assets and cash flow could
be made up by borrowings. 199 In determining whether a company is unable to pay its
debts, the court is also to take into account the contingent and prospective liabilities of
the company. 200 Hong Kong courts have applied both the cash-flow and balance sheet
tests to establish whether the company is insolvent. 201 It is submitted that there is no
need for applying the balance sheet test for the purpose of s.177( 1)( d), as the ground
provided in this provision is plainly that "the company is unable to pay its debts" rather
than when "the value of the company's assets is less than the amount of its liabilities",
as provided in the Insolvency Act 1986 (UK) s.123(2), in which case the balance sheet
test is relevant.

3.1.6 Just am/ equitable: Ct1p.32, s.177(1)(/)

Ground relied upon by members to address maladministration. Before the 20.071
introduction of the unfair prejudice remedy in the predecessor CO, s. l 68A (as restated
in Cap.622, ss.724- 725), the just and equitable ground for winding-up in s.177( 1)(t)
ofCap.32 was relied upon by members to address maladministration in the company's
affairs. 202 This ground for winding-up is still often relied upon by minority members
together with the unfair prejudice remedy. Where a petition is presented on the just
and equitable grounds, the court is not to refuse to make a winding-up order only
on the ground that some other remedy is available unless the petitioner is acting
unreasonably in seeking to have the company wound-up instead of pursuing the other
remedy: Cap.32, s.180(1 A). However, the remedy of winding-up is one of last resort
and the court may be reluctant to wind up a company if there is some other adequate
remedy for the petitioner,2°3 especially if the company is profitable. 204 There will be
some situations where alternative remedies would not be available but where it would
be just and equitable to wind up the company, such as the existence of a deadlock in
the company or there is a loss of the company's substratum. 205

198 RP Austin and I M Ramsay, Ford:f Principles ofCo,porations law ( 16th edn, LexisNexis 2015) [25.050].
199
Quick v S10/andPry Ltd ( 1998) 29 ACSR 130, 138; and see also Bell Gmup Ltd v WestpacBanking Group Corp
(No 9) (2008) 70 ACSR I, [ I090].
,oo As to contingent and prospective liabilities, sec para.20.076 below.
201 For an example, sec Re WahNam Group Ltd (unrep., HCCW 166/2000, [2000] HKEC 875) (CFT).

202 Ebmhimi v Wesrboume Galleries Ltd [ 1973] AC 360.

'"' Re Stm Imperial Corp Ltd (1980] HKLR 649; Re l/'c:,11g To Yick ll'c>od
lock Oi11t111e111
Ltd (2003) I HKC 484; Re
Sai Kung PLB (Maxicab) (No I and 2) Co Ltd [2009] 4 HK.LRD 523.
"" Re WongTo Yick /food lock Oi111111e11t Ltd (2003) I HKC 484.
'°' See Chapter 10.
972 LIQUIDATION

3.2 Application and court order

3.2.1 Applictltion by petition

20.072 Application for compulsory winding-up made by petition. Application for
compulsory winding-up is made by way of petition: Cap.32, s.179. The procedure is
set out in Companies (Winding-Up) Rules (Cap.32H), rr.22-27A.

3.2.2 Persons entitle,/ to petition

20.073 Persons who have standing to petition. Under Cap.32, s.179, the following persons
have standing (locus standi) to petition:

• the company;
• any creditor;
• any contributory;
• the trustee in bankruptcy 206 or personal representative of a contributory;
• Official Receiver (where the company is already in voluntary winding-up);
• Financial Secretary (on the just and equitable grounds where it is in the
public interest, following an investigation of the affairs of the company by an
inspector or production of information: see Cap.622 s.879); and
• Registrar of Companies (under the grounds in s.177( 1)( c) or s.177(2)).

20.074 Securities and Futures Commission can also present petition. The Securities and
Futures Commission can also present a petition on the just and equitable grounds
where it is in the public interest for the company to be wound-up: Secmities and
Futures Ordinance (Cap.571 ), s.212. 207

3.2.3 Company as petitioner

20.075 Decision of company to petition needs to be made by members unless provided
for in articles. Unless the articles give powers to the directors to petition for winding-
up, the decision of the company to petition needs to be made by the members in
general meeting. 208 A special resolution is required where the petition is made on
the basis of Cap.32, s. l 77(1)(a), but it appears an ordinary resolution would be
sufficient where the company is relying on any of the other grounds in Cap.32,
s.177(1). 209

6
2<l SeeNgYatChivMaxS/wreltd(J997-98) I HKCFAR 155,(1998] I HKLRD866.
2<l' Sec Re China Mewl Recycling (Holdings) Ltd (No 3) [2015) 2 HKLRD 415.
2<li Re Emnuulart Ltd (1979) Ch 540; and sec also Tang Kam-yip v Yau Kung School [1986) HKLR 448 (CA). Bue
cf. Re lnkerman Grazing P~v Ltd (1972) I ACLR 102; Re Botar-Tatlwm Pty Ltd [2001) NSWSC 272. Where a
receiver has been appointed, there may be some circumstances where the receiver will have power to present a
petition on behalf of the company: Re Emmadart Ltd [ 1979) Ch 540. Where the company is already in voluntary
liquidation, the liquidator can petition: Re Indian Zoedone Co ( 1884) 53 LJ Ch 465.
l<i? See ReAnglo-Conti11emal Produce Co Ltd (1939) I All ER 99.
 COMPULSORY WINDING-UP 973

3.2.4 Creditor as petitioner

Creditors entitled to petition. The term "creditor" generally refers to a person who is 20.076
entitled to enforce a claim against the company as a debt. 210 This will include persons
who have a claim against the company for a liquidated sum (such as a seller of goods
who is presently entitled to payment for the price under the sale of goods contract, or
a lender who is owed a specified sum of money that is presently payable under a loan
contract), as well those who have obtained judgment against the company requiring
the company to pay damages or some other sum of money to the person (i.e. judgment
creditors). 211 There is no statutory minimum as to the size of a debt before a creditor
can petition; however, the courts require that the debt be at least the minimum amount
required for service of a statutory demand under Cap.32, s.178(l)(a) (i.e. $10,000). 212
Contingent or prospective creditors are entitled to petition. 213 A contingent creditor
is a person to whom the company, pursuant to an existing obligation, will become
subject to a liability to pay a sum of money if and when some future event occurs 214-
e.g. a guarantor. A prospective creditor is a person to whom the company, pursuant
to an existing obligation, is subject to a liability to pay a sum of money which is
not yet due but which will certainly become due in the future, either on some date
which has already been determined or some date determinable by reference to future
events.215 For example, a person who has sold and delivered goods on credit terms is
a prospective creditor in relation to the amounts that are not yet due for payment. 216
Assignees of debts217 and secured creditors 218 also have standing to petition. A person
with an untried claim against the company for unliquidated damages is not a creditor
and cannot petition before obtaining judgment; 219 however, where the person's claim
for unliquidated damages is undisputed, it may be that the person can be treated as
a contingent or prospective creditor on the basis that there is a present undisputed
obligation to pay an amount. 220 Where the debt is genuinely disputed by the company
on substantial grounds, then the creditor does not have standing to petition. 221

216 See, e.g., Re Oskar; Exp Co111111011wealth of Australia (1984) 55 ALR 717.
211
See, e.g., GoodwayLtd v Pirelli CablesLtd ( 1997) 3 HKC 265.
212 Re Milford Docks Co; Lister's Petition (1883) 23 Ch D 292.
"' Cap.32 s.179(1), but subject to the proviso in s.179(l)(c).
"' Re WilliamHockley Ltd [ 1962) 2 All ER 111, 113; Winterv Inland Revenue Commissioners[ I963) AC 235,249;
Co1111111111ity
Dewlopmellt Pty Ltd v Engwirda Constr11ctio11 Co (I 969) 120 CLR 455,459; and see also Re Jackin
TouilFu/filme11tServices Ltd (2008) 3 HKC 566, (22]. If the contingency cannot aiise in the event of winding up,
then the debt is not a contingent debt within s.179: Re Golde11Gate lntemMio11alKi11dergarte11 and N11rse1J>
Ltd
(2018) HKCFI 641, (unrep., HCCW 210/2017, (2018) HKEC 832).
215 Sto11egateSecurities Ltd v Grego,y [ 1980) Ch 576, 579; Tlte Roy Morga11Research Centre Pty Ltd v Wilson
Market Research Pty Ltd ( 1996) 20 ACSR I08; Phela11v Ambridge Co,p Pty Ltd (2005) 55 ACSR 136, (30).
216
Holt Southey Lui v Catnic Compo11e111s Ltd [ 1978) 2 All ER 276.
217 Perak Pioneer Ltd v Petroliam Nasional Bhd [1986] AC 849, (1987) I HKC 12 (PC). This includes equitable
assignees: Re Steel Wi11gCo Ltd [1921] I Ch 349.
118 Re Ke11slandRealty Ltd [2001) HKCU 857; Moor v Anglo-Irish Bank (1879) 10 Ch D 681; Re Alexanders
Securities Ltd (No 2) (1983) 8 ACLR 434.
2' 9 The Roy Morgan Research Centre Pty Ltd v WilsonMarker ResearchPty Ltd (1996) 20 ACSR 108; Re Pen•y-lim
Collie,y Co (1877) 6 Ch D 477.
220 Re Dollar land Holdings Pie (1994) I BCLC 404; Alati II WaiSheung (2000) 34 ACSR 489. See also Re a Co
[ 1974) I All ER 256, 260. Generally, where liability is nOLin dispute, but it is not known with certainty how much
is owed, a creditor still has standing to present a petition: Re Jackin Total FulfilmentServices Ud [2008) 3 HKC
566, (9].
'" Re Jacki11TotalFul.filmelllServices Ltd (2008) 3 HKC 566, (4]; Re Gold Hill Mines (1883) 23ChD210.
974 LIQUIDATION

3.2.5 Contributory as petitioner

20.077 Former and existing members of company may petition as contributories.
Former222 and existing members of the company may petition as contributories. 223 The
members who can petition include registered members (even if they only hold the
shares as nominee 224), as well as allottees who are not registered but who have a right
to be registered. 225 Holders of fully paid shares are still regarded as contributories
who can petition.226 However, the right of a contributory to petition is subject to the
qualification in Cap.32, s. l 79(1)(a), which provides that a contributory is not entitled
to petition unless:

• the company has no members; or

• at least some of the contributory's shares: (1) were originally allotted to the
contributory; or (2) were held by the contributory, and registered in his or her
name, for at least 6 months during the 18 months before the commencement
of the winding-up; or (3) devolved on him or her through the death of a
former holder.

20.078 English courts: contributories not entitled to petition unless tangible interest
in winding-up established. English courts have further held that a contributory
is not entitled to petition unless the contributory can establish that he or she has
a tangible interest in the winding-up, such as where there would be a surplus of
assets after payment to creditors. 227 There is some doubt as to the position in Hong
Kong, with the Court of Appeal in Re DJH Consultants Ltd 228 expressing the view
(in obiter) that the English cases do not reflect the law in Hong Kong, while a
differently constituted Court of Appeal in Ng Yat Chi v Max Share Ltd (No 2)229
(in obiter) doubted the correctness of the views in Re DJH Consultants Ltd and
accepted that the English approach applied in Hong Kong. The Com1 of First
Instance in Re A1akShing Yue Tong Commemorative Association Ltd 230 considered
that the rule requiring a tangible interest is helpful in preventing petitions being
presented by contributories where they could serve no useful purpose and in
thereby preventing petitions from being presented for some illegitimate purpose.
The court noted, in any event, that the existence of a tangible interest is not limited
to the situation where there are surplus assets, and that some other useful purpose
for the contributory in having the company wound-up can also be sufficient to
amount to a tangible interest.

222
Re Consolidated Goldjieldsa/New Zealand Ltd [ 1953] Ch 689.
223 For the meaning of"contributory", see Cap.32, ss. I 70A, 171 and 170.
224 Ng licitChiv Max Shore Ltd ( 1997-98) I HKCFAR 155, [ 1998] I HKLRD 866; Mai Gou v MokChiklun [200 I]
3 HKLRD 248 (CA).
225 Re JN2 Ltd [ 1977] 3 All ER 1.!04.
216 Ng Yat Chi v Max Share Ltd ( 1997-98) 1 HKCFA.R 155, [ 1998] 1 HKLRD 866, 870; Re Greater Beijing
Expressways Ltd [2000] 2 HKLRD 776 (CA); Re Anglesea Collie1y Co (1866) LR I Ch 555.
221 Re Rica Gold WashingCo ( 1879) 11 Ch D 36.
228 (Unrcp., Civ App No 164 of 1984.)
22~ [2000) 4 HKC 469.
"" [2005)4 HKLRD328.
 COMPULSORY WINDING-UP 975

Petition by directors or members who are contributories under Cap.32, s.170A. 20.079
The directors and members who are liable to contribute to the company's assets
under Cap.32, s. l 70A (where the company had redeemed or bought back shares out
of capital) 231 are entitled to petition for winding-up as contributories. 232 The above
limitations in Cap.32, s. l 79(l)(a) (referred to in para.20.077 above) do not apply if the
director or member presents a winding-up petition on either the insolvency or just and
equitable ground. 233 The requirements in the case law for there to be a surplus of assets
(referred to in para.20.078 above) also should not apply. The directors and members
are conferred with the right to petition for winding up in order that they can prevent
the company's assets from being depleted further and making them potentially liable
under s. l 70A for greater sums. 234

3.2.6 Appoi11tme11tof provisional liquidator before hearing of petition

Court has power to appoint provisional liquidator before winding-up order. The 20.080
court may appoint a provisional liquidator under Cap.32, s. 193 at any time after the
presentation of a winding-up petition and before the making of a winding-up order.235
A two-step analysis is involved in dete1mining whether an appointment should be
made:(!) the applicant must show at least a goodprimafacie case for a winding up at
the hearing of the petition; and (2) the court would determine whether overall it is just
and convenient to appoint the provisional liquidator.236 In Re Club Mediterranean Pty
Ltd, 237 Bright J of the South Australian Supreme Court stated that:

"Where the petitioning creditor makes the application and the company opposes
it the court must come to a conclusion as to the degree of urgency and of need [to
appoint a provisional liquidator] established by the petitioning creditor and the
balance of convenience."

Hong Kong courts have followed Bright J's approach and have held that those factors
must be assessed in considering the second element, above, of whether it is just and
convenient to make the appointment. 238The primary object of appointing a provisional
liquidator is the need to maintain the status quo and to prevent anybody from obtaining

rn See para.20. I87 below.

m The directors and members who are liable are "contributories" within Cap.32, s.171(1).
m See Cap.32, s. 179(1A).
'"' Financial Services and Treasury Bureau, lmprovemelll of Corporate Insolvency Law Legislative Proposals:
Co11sultatio11 Document (April 2013) 66.
235 See also Cap.32, s.192.

,.,. Five Lakes illvestme11tCo Ltd v Multiford Co Ltd [ 1985) HKLR 273, 283-284; Re Boldwi11Const111ctio11 Co Ltd
[2003) 2 HKLRD 237, 246-247; Re Max Sunny Ltd (unre1>.,HCCW 84 and 8512014, [2014) HKEC 1286), [ 10);
Acropolis Lid v W&Q illvestme111Ltd [2018) HKCFI 1195 (unrep., HCCW 218/2017, HCMP 1721/2017, [2018)
HKEC 1410).
'" ( 1975) II SASR 481.
m Five Lakes lnves1me111 Co Ltd v Multiford Co Ltd [ 1985) HKLR 273, 283-284; Re Bok/win Construction Co Ltd
[2003) 2 HKLRD 237, 246-247; Re Max S111111y Ltd (unrcp., HCCW 84 and 85/2014, [2014) HKEC 1286), [10);
Acropolis Ltd II W&Q Investment Ltd [2018) HKCFI 1195 (unrcp., HCCW 218/2017, HCMP 1721/2017, [2018)
HKEC 1410). The Hong Kong courrs have also referred to the need to take into account the "commercial realities"
of the case. "Commercial rcalitie.s" was not referred 10 in the passage from Bright Jin Re Club Mediterranean Pry
Ltd, quoted above, though earlier in the judgment, Bright J had referred to previous cases, observing that ''The
cases make plain the c-Ommercialrealities which prompt the appointment of a provisional liquidator."
976 LIQUIDATION

priority over other creditors.239 Where the petition is on the basis of the company's
inability to pay its debts, the court will be prepared to make an appointment if it is
shown that the company is insolvent and the company's assets are in jeopardy. 240 Upon
appointment of a provisional liquidator under s.193, actions and proceedings against
the company are stayed unless the court grants leave otherwise. 241 The powers of the
provisional liquidator are conferred by the court and are set out in the order appointing
him or her or in any subsequent court order.

3.2.7 Court's powers 011 hellring of petition

20.081 Court has discretion on whether to make winding-up order. The court has
discretion whether or not to make a winding-up order.242 The court must not refuse to
make a winding-up order only on the ground that the assets of the company have been
mortgaged to an amount equal to or in excess of those assets, or that the company has
no assets. 243 In the case of a creditor petitioning on the ground of insolvency, if the
debt presently due to the creditor is unpaid, then the creditor is prima facie entitled
as against the company to a winding-up order-an entitlement frequently referred to
as a right ex debilojustitiae.244 For example, in Re Esquire (Electronics) ltd, 24; the
insolvent company sought to have the winding-up petition dismissed or adjourned
on the basis that there was a possibility of the company recovering substantial assets
from a third party through litigation and that a possible source of finance for funding
of the litigation would not be available if the company was put into liquidation. The
Court of Appeal affirmed the trial judge's decision to order winding-up, holding that
an adjournment will not generally be granted at the company's request against the
opposition of a petitioning creditor whose presently owed debt is unpaid; it is of no
avail to the company to say that, if only it is given time, it will be able to pay.
20.082 Court will have regard to views of majority creditors by value and contributories.
However, the collective nature of winding-up means that the petitioning creditor's
right is not an individual right but is a representative right as one of a class. 246 The

zs? Re legend lnter11atio11al

ResortsLtd [2006) 2 HKLRD 192, (27) (CA).
0
" Re Legend Imemational Resorts Ltd [2006! 2 HKLRD 192, [27), [35) (CA). The danger to the company's assets
need not result from any malfeasance (at [27)). See also Re 1ing Uui Monaste,y Ltd (2018) I HKLRD 346
(provisional liquidators appointed as independent professional required to take charge of company's affairs given
unsatisfactory state of the company ·s records and uncertainties over company's membership and directors). Cases
in the UK and Australia have held that danger to the assets and the company being insolvent are not the only
situations where an appoinnnent may be made; and other factors, such as the public interest, may be taken into
account: Re U11io11 Accident fllsura11ceCo Ltd [ 1972] I All ER 1105; Tickle v Crest fllsura11ceCo A11st111/iaLtd
1984) 2 ACLC 493; and see also Smith v UICIns11ra11ce Co Ltd (200 I] BCC 11. Cf. Re legend, above, where the
Hong Kong Coun of Appeal emphasised that a provisional liquidator may only be appointed for the purposes of
winding-up (at [35]). In Re China Solar Energy Holdings Ltd (No.2) [2018) HKCFI 555, (2018] 2 HKLRD 338,
[3 I], Harris J held that the "purposes of winding-up" means matters associated with a winding-up, including
asset preservation and asset collection. As to whether it is possible to appoint provisional liquidators for the
purpose of corporate rescue, see Chapter 19.
241
Cap.32, s.186; and sec para.20.092.
2'' Sec Cap.32. s.180, and sec, e.g. Re Shop Clothing Ltd (1999] 2 HKC I91, 196.
"' Cap.32, s.180(1); Re £squire (Electrcmics)Lrd[1996] 3 HKC 309 (CA).
2"' E.g., Re Ame,y Chin" 811ildi11g CoLtd (1982] 1 HKC 197,201; Re £squire (Electrcmics)Ltd [ 1996] 3 HKC 309
(CA).
'" (1996)3 HKC 309.
,.. Re Chya11Fw11 fn11est111e11t
Ltd [ 1986) HKLR 374, 378.
 COMPULSORYWINDING-UP 977

court will have regard to the views of the majority creditors by value and also the
views of the contributories, but the latter will not be taken into account if the company
is insolvent. 247 The views of unsecured creditors will usually carry greater weight
than those of secured creditors, 248 and the court may disregard the views of creditors
who are connected with the company and whose interests do not reflect those of
independent creditors. 249 While the court will accede to the wishes of the majority
independent creditors where possible, the comt is not bound by their views and may
still order winding-up in the face of majority opposition where there is no good reason
for refusing the winding-up order.250
Court's exercise of its discretion in relation to petition on just and equitable 20.083
ground. As to the court's exercise of its discretion in relation to petitions on the just
and equitable ground, see Chapter 10.

3.2.8 Publication of winding-up

Copy of winding-up order must be delivered to Registrar; company documents 20.084
must state company being wound-up. On the making of the winding-up order, a
copy of the order must be delivered to the Registrar for registration: Cap.32, s.185. 251
The Official Receiver will also arrange for a notice of the order to be gazetted and
advertised in a local newspaper.252 Upon entering into winding-up, every invoice,
order for goods or business letter issued by or on behalf of the company or a
liquidator, or a receiver or manager, being a document on or in which the name of
the company appears, must contain a statement that the company is being wound-up:
Cap.32, s.280.

3.2.9 Commencement of winding-up

\Vinding-up deemed to commence from presentation of winding-up petition. 20.085
Upon a winding-up order being made, the winding-up is deemed to have commenced
from the earlier time of the presentation of the petition for winding-up: Cap.32,
s.184(2). However, in cases where a voluntary winding-up is converted to a
compulsory winding-up, the compulsory liquidation is deemed to have commenced
at the time of the passing of the resolution to enter into voluntary liquidation: Cap.32,
s.184(1).

3.3 Effect of winding-up order

Order for winding-up operates in favour of all creditors and contributories. 20.086
Under Cap.32, s.187, an order for winding-up operates in favour of all the creditors
and contributories of the company as if made on the joint petition of a creditor and of
a contributory. This provision confirms the class nature of winding-up proceedings

2' 1 Re LonsdaleValelr,:ms1011e
Co ( 1868) 16 WR 601.
" 8 Re Crigglestone CoedCo Ltd [1906) 2 Ch 327,333.
2' 9 Re Kam Kuen Construction Co Ltd [2002) 3 HKC 547.

,w Re Chyou Fwu InvestmentLtd (1986) HKLR 374; Re Kam Kuen Co11sm,ctionCo Ltd [2002) 3 HKC 547.
2" See also Companies (Winding-Up) Rules (Cap.32H), rr.34-36.
"' Companies (Winding-Up) Rules (Cap.32H), r.36.
978 LIQUIDATION

and the ability of all creditors and contributories to take the benefit of the winding-up
order to claim in the liquidation pursuant to the statutory scheme. 253

3.3.1 Appointment of liquidlltor tlnd formlltion of committee of inspection

20.087 Provisional liquidator continues until liquidator appointed. Where a provisional
liquidator had been appointed pursuant to Cap.32, s.193 before the winding-up order
being made, that provisional liquidator continues to act in such capacity following
the order until a liquidator is appointed: Cap.32, s.194( 1)(aa). Otherwise, the Official
Receiver becomes provisional liquidator upon the winding-up order and will continue
to act as such until a liquidator is appointed: Cap.32, s.194(1 )(a). 254

20.088 Application to the court for appointment of committee of inspection. At the

first meetings of creditors and contributories summoned under Cap.32, s.194 for
consideration of the appointment of a liquidator, the meetings may also determine
whether or not an application should be made to the court for appointment of a
committee of inspection to act with the liquidator.m It is often necessary to have such
a committee appointed where the number of creditors is large, as in this situation it can
be difficult for the liquidators to liaise with every creditor. The committee assists and
supervises the work of the liquidators. Certain powers of the liquidator may only be
exercised with sanction of the committee. 256 A committee of inspection must consist
of not less than 3, and not more than 7 members. 257

3.3.2 Company's property, and control and management of the company

20.089 Liquidator or provisional liquidator to take custody or control of all property of
company. Where a winding-up order has been made or where a provisional liquidator
has been appointed, the liquidator or provisional liquidator (as the case may be) is
to take into his or her custody or control all the property of the company: Cap.32,
s.197. See further para.20.095 below for discussion of the company's assets in the
liquidation.
20.090 Any disposition of company's property made after commencement of winding-up
deemed to be void. Under Cap.32, s.182, any disposition of the company's property
made after the commencement of winding-up (i.e. after the time when the petition
was presented 258) is deemed to be void unless sanctioned by the court; see para.20.119
below. But Cap.32, s. 182 does not invalidate dispositions by provisional liquidators or
liquidators acting pursuant to their statutory powers, 259 such as in the exercise of their

>SJ SeeHorriso11vKi,*[1904)AC I (HL).

25' For appointmentof the liquidator, seealso para.20.020above.
lSS Cap.32. s.206( I).
256
Sec~ e.g., Cap.32, s.199(2) and Sch.25 Pts. I and 2.
21
' Cap.32,s.206(3).The courc haspower to vary the minimum and maximum numbers.As to membershipof the
committee,sees.206(1)(b).(5); ReH,mg Fung Holdings Ltd [200 I] 3 HKLRD 692. Once formed,the commiuee
should not be dissolvedsavewith good reason:ReJoy Rich DevelopmentLrd (2016) 2 HKLRD I 058. As to the
conduct ofprocccdings or meetingsof the committee,sec Cap.32,ss.206A-207L.
"8 As to the commencementof winding-up, seepara.20.072above.
'" SeeRe Fi>·eLakes Investment Co Ltd [ 1985)HKLR 273.
 COMPULSORY WINDING-UP 979

power to sell the company's assets for the purposes of the winding-up: see Cap.32,
s.199(3) and Sch.25 Pt.3 Item 1, and also para.20.025 above.
Directors' powers cease upon appointment of provisional liquidator or 20.091
liquidator. Upon appointment of a provisional liquidator or liquidator, the
directors' powers cease, 260 although they would still have certain residuary powers
such as appealing the winding-up order. 261 Employees are dismissed from their
employment from the date of the publication of the winding-up order. 262 While the
directors lose their powers, there is some uncertainty whether they cease to hold
office as directors. There are some obiter views in the English Court of Appeal
decision in Measures Brothers Ltd v Measures 263 suggesting that the directors are
displaced from their office, but the earlier decision of Madrid Bank Ltd v Bayley264
had held to the contrary, and Australian courts have also held that directors are not
automatically removed from office but only have their powers suspended upon a
winding-up. 265

3.3.3 Stay o.fproceedings agllinst the company

No action or proceedings can commence against company without leave of the 20.092
court after winding-up order made: s.186. When a winding-up order has been made,
no action or proceeding can be proceeded with or commenced against the company
except by leave of the court: Cap.32, s.186. 266 The provision includes arbitration 267
proceedings and criminal268 proceedings brought against the company. The rationale
of the provision is to protect the company's assets from being diminished in litigation
and to ensure that claims against the company are dealt with under the statutory
scheme for winding-up. If a provisional liquidator had been appointed before the
order for winding-up, the automatic stay of proceedings applies from the time of
appointment of the provisional liquidator: Cap.32, s.186. The mere presentation of
the petition for winding-up does not lead to a stay of proceedings. However, upon
presentation of the petition, the company or any creditor or contributory may apply
to the court to stay any action or proceeding against the company: Cap.32, s.181.
In order to maintain the status quo and to prevent creditors from gaining priority
over others of their class, a stay would be granted unless there are very exceptional
circumstances. 269

260 Re Oriental Ba11kCorp, Erp Guillemin (1884) 28 Ch D 634.

261 Re U11io11Accidentlnswrmce Co Ltd [1972] I All ER 1105.
262 Re Gen em I Rolli11gStock Co ( 1866) LR I Eq 346.

263
[1910] 2 Ch 248.
264
( 1866) LR 2 QB 37.
26
' Austral Brick Co Pry Ltd v Fa/got Co11structio11sP(y Ltd ( 1990)2 ACSR 766; McA11sla11d
v Depwy Commissioner
a/'Taxatio11(1994) l2ACSR432.
'"' See also Cap.32, s.I83, which provides that any attachment, sequestration, distress or execution put in force
against the company's property after the commencement of winding-up is void. However, leave to proceed with
any such processcan be obtained from the court: Re Chit Lee Holdings Ltd [2000] 2 HKC 481.
261 Re UDL Co111rac1ing Ltd (2000) I HKC 390.
268 R v Dickson ( 1992) 94 Cr App R 7.
269 Au/ee Investments Ltd v lee C/111e11 tla Lee Chue11Furniture C<>[1983] I HKC 186 (CA); Bowkell v Fuller's
United Electric Works Ltd [ 1923) I KB 160. For an example where a stay was refused, see Joh11sonStokes &
Master II Jackin Total Fulfilment Services Ltd [2007) 4 HKLRD 336.
980 LIQUIDATION

20.093 Court has broad discretion under s.186. Where an application is made under s.186
to seek leave of the court, the court has a broad discretion to do what is right and fair
in the circumstances. 270 If the issues can be appropriately dealt with in the liquidation,
then leave will be refused; but if there are substantial issues of fact that are in dispute
or matters of law of complexity, then leave will be granted to allow the issues to be
dealt with properly by way of separate proceedings. 271
20.094 Secured creditor entitled to deal with secured assets; appoint receiver or to
make application to court if liquidator does not give possession of assets.
Section 186 of Cap.32 does not prevent a secured creditor or the receiver from
dealing with the assets covered by the security that had been taken into possession
before the order for winding-up, 272 nor does it prevent a secured creditor from
appointing a receiver pursuant to a contractual right for appointment after a
winding-up order has been made. 273 However, if the liquidator declines to give
up possession of assets to the secured creditor or receiver, then leave of the court
needs to be sought to obtain possession, as it would otherwise be contempt of
court to interfere with the exercise of powers of the liquidator as an officer of the
court. 274 Jn addition, any proceedings that need to be brought against the company
for enforcement of the security require leave pursuant to s.186, such as an action
by a mortgagee seeking an order for possession. 275 Leave would invariably be
given as secured creditors are entitled to their property that is not administered
within the liquidation. 276

3.4 Company's assets in the liquidation

20.095 Title to assets does not vest in liquidator. Although the liquidator takes control of
the company's assets after a winding-up order pursuant to Cap.32, s.197, title to the
assets does not vest in the liquidator unless a vesting order is made under Cap.32,
s.198. The company's assets are said to be subject to a statutory trust for the benefit
of the creditors. 277 However, the Comi of Appeal in The Convenience Container 118has
explained that this does not mean that there is a trust (in the strict general law sense)
over the company's assets upon liquidation. Both the legal and equitable ownership of
the assets still remain with the company in the winding-up, and the "statutory trust"

270 Re King's Dyeing & WeavingFac101yLtd (Nol) [1986) 1 HKC 621.

'" Re King's Dyeing & WeavingFacto,:yLtd (Nol) (1986) 1 HKC 621.
"' Sowma11vDavidSa11111e/1J·11stltd(l978] I All ER6l6.
273
Re Henry Pound, Son and Hutchins (1889) 42 Ch D 402.
"' Re Henry Pound, Son and Hutchins ( 1889) 42 Ch D 402; see also Re Landmark Corp Ltd [ 1968] I
NSWR 705.
2' 5 Re Keen Lloyd Resources Ltd (unrep., HCCW 1134/2002, 21 May 2004) (CFI).
276
See Re David Lloyd & Co ( 1877) 6 Ch D 339, Eng CA; Re Henry Pound, Son and Hutchins ( 1889) 42 Ch D 402;
Re Keen Lloyd Resourcesltd(unrep., HCCW 1134/2002, 21 May 2004) (CFI).
2" Ayers/ (l11spec10roJTaxes) v C & K (Co11struc1io11) Ltd [ 1976] AC 167 (HL).
278 (2007) 3 HKLRD 575. In terms of the general law concepts of legal and equitable owncrsh.ip under a trust, there

is no separation of equitable ownership of the company's assets upon liquidation; however, in specific statutory
conrcxis, such as the revenue legislation considered in Ayers/ {Inspector<>]Taxes) v C & K (Co11struc1io11) ltd
(1976) AC 167, the company might no longer be regarded as having a "beneficial interest" in its assets upon
liquidation.
 COMPULSORY WINDING-UP 981

simply means that the assets must be dealt with in accordance with the statutory
provisions on winding-up.

3.4.1 Assets available for distribution

Assets available for distribution include assets held at time of liquidation and 20.096
assets acquired during course of liquidation. In general, the assets or property
available for distribution to creditors (and members) in the liquidation are the assets
of the company held at the time of entry into liquidation as well as assets acquired by
the liquidator on behalf of the company in the course of the liquidation. A company's
property can include interests in land, goods, intellectual property rights, insurance
policies, contractual rights, other choses in action and other intangible property such
as transferable quotas and licences. 279
Ways in which liquidator able to augment available assets for distribution. A 20.097
number of provisions of Cap.32 allow the liquidator to augment the available assets
for distribution by recovering property for the benefit of the creditors. These Cap.32
provisions include:

• s.182, which renders void any dispositions of the company's property made
from the commencement of winding-up (see section 3.5 below);
• ss.265D and 265E, which gives the court the power to set aside undervalue
transactions entered into by the company within a certain period before the
commencement of winding-up (see section 3.7 below)
• ss.266 and 266A, which give the court power to invalidate unfair preferences
given by the company to any creditor within a certain period before the
commencement of winding-up (see section 3.6 below);
• s.267, which invalidates certain floating charges granted by the company in the
12-monthperiod before the commencementof winding-up (see section 3.8 below);
and
• s.275, which imposes personal liability on directors and others for fraudulent
trading (see section 3.9 below).

Liquidator may institute court proceedings to recover compensation or damages 20.098

where company has cause of action against third party. The liquidator may also be
able to commence court proceedings on behalf of the company against third parties
to recover compensation or damages etc. where the company has a cause of action
against the third party (e.g. for breach of contract): see para.20.031. In addition, where
directors or other officers of the company are liable to the company (e.g. for breach of
fiduciary duty), then the liquidator can take action through ordinary court proceedings
on behalf of the company against the officer or, alternatively, the liquidator can
commence misfeasance proceedings via the summary procedure in Cap.32, s.276: see

279 See fu1ther Roy Goode, Principles of Corporatelnsolve11cylaw (4th edn, Thomson Sweet & Maxwell 2011)
[2-02)-(2-26).
982 LIQUIDATION

para.20.181. Liquidators can also rely on the general provision in Conveyancing and
Prope11y Ordinance (Cap.219), s.60(1), which renders voidable every disposition of
property made with intent to defraud creditors. 280

3.4.2 Assets 1101 available to liquidator for distribution

20.099 Liquidator not entitled to distribute property where valid security held by creditor.
Where a creditor has a valid security over the company's property, the liquidator would
not be entitled to that property for distribution to the general (i.e. unsecured) creditors. 281
However, where the assets available for the general creditors are not sufficient to satisfy
the claims of preferential creditors under Cap.32, s.265, then the assets subject to a
floating charge would be available to meet those claims of preferential creditors in
priority to the chargee: see Cap. 32, s.265(3 8) and para.20.199 below.
Assets held by the company on trust are not available to the liquidator.282

3.4.3 Contracts of the company

20.100 Liquidator can take action on behalf of company to enforce contractual rights.
Where a company has fully performed its obligations under a contract and the other
party has not fully performed before the company's liquidation, the liquidator can
take action on behalf of the company to enforce its contractual rights against the other
party. Where the other party has fully pe1formed but not the company, the other party
can claim as a creditor against the company in the winding-up for sums owed or for
a sum representing the amount of damages for breach of contract. 283 In the case of
executory contracts (where both parties to the contract have not fully performed), if
the liquidator is willing to procure the company to perform, then the liquidator can
enforce, on behalf of the company, the company's contractual rights against the other
party. If the liquidator does not procure the company's performance, then the other
party can terminate the contract (pursuant to its ordinary rights under contract law or
pursuant to Cap.32, s.268(5)) and can claim against the company as a creditor in the
winding-up in respect of any losses suffered. If the other party does not exercise its
rights to terminate or rescind the contract, the liquidator may be able to disclaim the
contract pursuant to Cap.32, s.268: see para.20. l Ol below. In any case where the other
party to the contract has proprietary claims against the company's assets, that pa11yis
entitled to enforce its real rights over the assets. 284

"" Cap.219, s.60(1) does not extend to any estate or interest in property disposed of for valuable consideration
and in good faith or upon good consideration and in good faith to any person not having, at the time of the
disposition, notice of intent to defraud creditors: Cap.219, s.60(2). See generally Tradepower(Holdi11gs)lid (in
liq) v Tradepower (Hong Kong) Ltd (2009) 12 HKCFAR 417.
"' See e.g. Re Pyle WorksLtd (1890) 44 Ch D 534, 577-578.
m Barclays Bank Ltd v Quistclose Investments Ltd [ I970] AC 567 (HL); Golden Sand Marble Facto,y Ltd v Easy
Success E11te1prises Ltd [1999] 2 HKC 356. However, where a liquidator has incurred fees in connection with the
adminisn·ation oftrnst property (or pro1>ertyin which another claims equitable interests), the liquidator is entitled to
have such fees and expenses paid out of that property: Re BerkeleyApplegt1te(l1111estme11t) Co11s11ltc1tio11s
Ltd [ 1989]
Ch 32; Re TS flf:,ng(l11vestme11t Co Ltd (2008] 5 HKLRD469; Re KCL CapitolLtd [2013] 3 HKLRDI.
& Fi11t111ce)
"' The other party cannot commence proceedings for breach of contract against the company without leave of the
court: sec para.20.092 above. Howcver, it is not necc.ssary for the other party 10 obtain j udgment in its favour; he
or she can simply lodge a proof of debt in the liquidation and claim as a creditor in the liquidation.
' 8' If proceedings are necessary to enforce the proprietary rights, leave to bring the proceedings can be sought under
s.186: see para.20.090 above.
 COMPULSORY WINDING-UP 983

3.4.4 Disclaimer of onerous property

Liquidator able to bring unprofitable contracts to end and give up company's 20.101
interest in onerous property. In the course of winding-up, the liquidator might find
that the company has continuing obligations under a contract or liabilities arising from
property of the company which could contribute to the depletion of the company's
funds to the detriment of the creditors of the company as a whole, or which might
hold up due administration of the liquidation. For example, the company might be a
tenant under a lease of shop premises with a remaining term of, say, three years. The
company no longer needs to use the shop premises but is under contractual liabilities
pursuant to the lease. The liquidator can repudiate the lease under contract law
principles, but if the landlord does not accept the repudiation and allows the contract to
stand, then the company is subject to the continuing obligations to pay rent etc. under
the lease. Cap.32, s.268 allows the liquidator to bring such unprofitable contracts to
an end and to give up the company's interests in onerous property, in order to release
the company from the continuing obligations or liabilities. The liquidator's power to
disclaim thereby facilitates the administration of the winding-up. Persons who are
injured by the disclaimer (such as the landlord in the above example) can claim as a
creditor in the winding-up.
Section 268(1) enables the liquidator to disclaim, with leave of the court, the following 20.102
categories of property or contracts:

• land of any tenure burdened with onerous covenants;

• shares or stock in companies;
• unprofitable contracts; and
• any other property that is unsaleable, or not readily saleable, by reason of its
binding the possessor thereof to the performance of any onerous act, or to the
payment of any sum of money.285

Re Carrian case: liquidators ordinarily entitled to disclaim unprofitable contracts. 20.103

In Re Carrian Holdings Ltd (in liq) (No 2), 286 the company (CHL) had, before entry
into liquidation, purchased shares in another company (Almatys) and had signed on to
a joint venture agreement with other shareholders of Armatys. Under the agreement,
CHL became liable to contribute about $281 million as a loan to Armatys, which
would be used towards the purchase price of certain land that was being acquired
by a subsidiary of Armatys. By the time of CHL's liquidation, the value of the land
was considerably lower than the purchase price. Moreover, the loans provided by the
shareholders of Armatys-including that to be given by CHL-were unsecured, and
their claims were to be ranked behind third party lenders. In these circumstances,
the liquidators of CHL believed that the company's liability to contribute the $281
million greatly outweighed any long-term benefit that might result from participating
in the joint venture agreement, and that it was unlikely that any profit would accrue

28' On the meaningof this fourthcategory,see Re Potlers Oils Ltd (in liq) (1985) BCLC 203.
286 [ 1984) I HKC 598.
984 LIQUIDATION

to CHL. The liquidators accordingly applied to the court under s.268 to disclaim the
joint venture agreement and also the shares held in Armatys. The court accepted that
the joint venture agreement was an unprofitable contract 287 and the liquidators would
ordinarily be entitled to an order to disclaim such a contract. However, the court
declined to allow the disclaimer in the circumstances of the case where a beneficial
owner of shares in Armatys was prepared to give an indemnity to CHL for any losses
that it might suffer under the joint venture agreement (which in the coUI1'sview, was
adequate protection for CHL) and where the beneficial owner would be seriously
prejudiced if the disclaimer was allowed.
20.104 Liquidator must disclaim onerous property within 12 months. There is a time limit
for the liquidator to disclaim onerous property. Disclaimer must generally be made
within 12 months from the commencement of winding-up: Cap.32, s.268(1). Where
the property has not come to the knowledge of the liquidator within one month after the
commencement of the winding-up, the power of disclaimer may be exercised within
I 2 months after the liquidator has become aware of the property: Cap.32, s.268(1). If a
person has an interest in the property of the company and wishes to avoid uncertainty
whether the liquidator would disclaim, the person can apply in writing to the liquidator
under Cap.32, s.268( 4) requiring the liquidator to decide whether or not to disclaim.
In these circumstances, the liquidator has 28 days after the receipt of the application
to give notice to the applicant that he or she intends to apply to the court for leave to
disclaim, otherwise the power to disclaim is lost. The court has power under Cap.32,
ss.268(1) and 268(4) to extend any of the above periods of time.
20.105 Disclaimer determines rights, liabilities and interests of company in respect
of disclaimed property. The disclaimer operates to determine, as from the date of
disclaimer, the rights, interest, and liabilities of the company, and the property of
the company, in or in respect of the property disclaimed: Cap.32, s.268(2). Thus, the
company is freed from all liabilities in respect of the property, and, conversely, is no
longer to have any rights in respect of the property.288 However, the disclaimer is not
to affect the rights or liabilities of other persons except so far as is necessary for the
purpose of releasing the company from liability: Cap.32, s.268(2). Any person injured
by the operation of a disclaimer is deemed to be a creditor of the company to the
amount of the injury, and may prove the amount as a debt in the winding-up: Cap.32,
s.268(7). The House of Lords in Hindcastle Ltd v Barbara Attenborough Association
Ltd 289 considered the effects of a disclaimer of a lease under the similar provision
in s.178 of the Insolvency Act 1986 (UK). Where the company is an original tenant
(as opposed to an assignee) under a lease in a case where the only persons involved
are the landlord and the company, the liquidator's disclaimer of the lease brings the
lease to an end, and the landlord's rights and liabilities vis-a-vis the company must
necessarily be extinguished in order to reflect the determination of the company's
rights and liabilities. Where there is a guarantor of the company's obligations as tenant,
the company's rights and liabilities under the lease are extinguished and the lease

' 8' Sec also Re SSSl Realisations (2002) Ltd (2006) Ch 610 for the meaning of"unprofitablc contracrs".
288 Hindcastle Ltd v BarabaraAttenboroughAssociation Ltd [ 1997)AC 70, 87 (HL).
28• (1997) AC 70.
 COMPULSORY WINDING-UP 985

comes to an end, but the guarantor's liabilities to the landlord remain as if the lease is
still in existence. If the guarantor discharges its liabilities to the landlord, the guarantor
can prove as a creditor in the company's liquidation. Where there is a sub-tenant, the
disclaimer of the head lease brings that lease to an end and neither the landlord nor the
sub-tenant has any rights or liabilities vis-a-vis the company. However, the sub-tenant
is still entitled to remain in possession of the premises for the term of the sub-lease,
although it appears that the sub-tenant would be obliged to pay the rent and perform
the tenant's obligations under the disclaimed head lease. 290
Vesting orders for property. Jn situations like the last category discussed in the above 20.106
case (i.e. where there is a sub-tenant under a disclaimed lease), it may be preferable
for the parties to seek a vesting order under Cap.32, s.268(6) to avoid the uncertainties
arising from the notional continuance of the disclaimed lease. Under Cap.32, s.268(6),
any person who claims any interest in the disclaimed property or is under any liability
not discharged by the Ordinance in respect of the disclaimed property can apply to the
court for a vesting order. The order can be made for the vesting of the property in or
the delivery of the property to any persons entitled to the disclaimed property, or to
whom it may seem just that the property should be delivered by way of compensation
for the undischarged liability. The court can generally make an order on any terms it
thinks just, but where the property disclaimed is of a leasehold nah1re, the court must
not make a vesting order in favour of any person claiming under the company (whether
as a sub-lessee or a mortgagee or chargee) except on the terms of making that person:
(a) subject to the same liabilities and obligations as those to which the company was
subject under the lease at the commencement of the winding-up; or (b) if the court
thinks fit, subject only to the same liabilities and obligations as if the lease had been
assigned to that person at that date.291 For example, the landlord under a disclaimed
head lease can apply for an order vesting the head lease on a sub-tenant. Jf the sub-
tenant declines to accept the vesting order, then the sub-tenant would lose its interests
in the property: Cap.32, s.268(6).

3.4.5 Acquiring i11for111atio11

about the compa11y'sassets
Statutory provisions assist liquidator in ascertaining company's assets. 20.107
Liquidators can face particular difficulties in ascertaining the assets of the company
where there has been a siphoning off of company property or other fraudulent activity
by the company's controllers before the liquidation, or where the company has failed
to maintain proper books and records. A number of statutory provisions assist the
liquidator in ascertaining the company's assets.
Directors required to submit statement of affairs including details of company's 20.108
assets to liquidator upon winding-up order. Upon a winding-up order being made,
the directors are required to submit a statement of affairs to the liquidator, setting out

290
1-fi11dcas1/eLtd v B"rabara Allenborough Associo1io11Ltd [ 1997] AC 70, 89; and see Trevor Tayleur, "The Effect
of Disclaimer: A Talc of Two Cases" [ 1997] Conveytmcer and Property Lawyer 24; TanDawson, "Disclaimer
Revisited" (2003) 3 lnsolve11q Lawyer 118.
29' The liabilities and obligations can be different depending on whether the terms of para.(a) or (b) are imposed:
see fmther Re Walke,;Exp Mills (1895) 64 LJ 783; Re Bake,;exp Lupton (1901) 2 KB 628; Re Carterand Ellis.
Exp S"vi/181YJs[ 1905) I KB 735.
986 LIQUIDATION

various matters including details of the company's assets: Cap.32 s.190. The liquidator
may also hold personal interviews with directors and others who have been required by
the liquidator to submit and verify the statement of affairs pursuant to Cap.32, s.190. 292

20.109 Specified persons may be required to give information to court: private

examinations. Specified persons may be required to give information to the court in
person or by affidavit, or to produce to the court books and papers, under the private
examination procedure in Cap.32, ss.286B and 286C. 293 Section 286B provides that
the court may, at any time after the appointment of a provisional liquidator or the
making of a winding-up order, require any of the specified persons (see para.20.110
below) to do one or more of the following:

• attend before the court;

• be examined 294 under Cap.32, s.286C on oath as to the promotion, formation,
trade, dealings, affairs or property of the company; 29s

• submit to the court an affidavit containing: (i) an account of the person's

dealings with the company, or (ii) information concerning the promotion,
formation, trade, dealings, affairs or property of the company;

• produce any books and papers in the person's custody or power relating to the
company 296 or the promotion, formation, trade, dealings, affairs or property
of the company.

20.110 Specified persons who may be subject to an order under Cap.32, s.286B. The
specified persons are:

• any officer of the company;

• any person known or suspected to have in his or her possession any property
of the company;

292 Companies (Winding-Up) Rules (Cap.32H), r.39(6).

" 3 Cap.32, ss.286B and 286C replaced the previous provisions of Cap.32, s.221 in amendments made by the
Companies (Winding-Up and Miscellaneous Provisions) (Amendment) Ordinance (14 of 2016), effective 13
February 2017.
"' A body corporate can be examined through its proper officer: Joint and Several liquidators of Kong J/1:,J,
Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766.
"' The term "affairs of the company" has a wide meaning, and information concerning the "dealings" and "affairs"
of a company are wide enough to cover, in an appropriate case, infonmuion concerning the affairs of a subsidiary
of the company concerned: Re Nard11Co Ltd (2008) 4 HKLRD 165, (16); Re China Metal Reqcling (Holdings)
Ltd (2015) 2 HKLRD 747.
29• On the scope of the phmse "relating to the company" in former Cap.32, s.221 (3), the Cou,t of Appeal has stated:
(i) the wording "relating to" is one of considernble width; (ii) the phrnse '"relating to the company" should be
construed as including at least the matters set out in the longer phrase used in fonner s.221(1) ("promotion,
formation, trade, dealings, affairs or property of the company"); and (iii) documents relating to the company
are not restiicted to documents of the company, but can include, for example, auditors' working papers (see
Liquidators ofChi1ta Medical Technologies Inc v Tsang Tak Yu11gSamso11(2018)HKCA 252, [2018) 2 HKLRD
1202, [23), (34), [39)). The Court of Appeal disapproved ofthe relatively restrictive interpretation of the phrase
"relating to the company" that had been adopted in the earlier decision of Re Weihong Petroleum Co Ltd (No.2)
[2003) 2 HKLRD 747.
 COMPULSORY WINDING-UP 987

• any person supposed to be indebted to the company; and

• any person whom the court deems capable of giving information concerning
the promotion, formation, trade, dealings, affairs or property of the
company.297

Application to court for examination usually made by liquidator. Application to 20.111

the court for an order under Cap.32, s.286B may be made by the provisional liquidator
or liquidator. The Official Receiver can also apply where a winding up order has been
made. The court may also make an order on its own motion.298
Ko11gWah case: scope of Cap.32, ss.286B and 286C allows liquidators to 20.112
ascertain assets of company and investigate causes of company's failure. In
Joint and Several liquidators of Kong Wah Holdings Lid v Grande Holdings Ltd,299
the Court of Final Appeal examined the scope of the provisions in fo1mer Cap.32,
s.221 (predecessor CO, ss.286B, 286C). The court noted that the provisions are
designed to enable liquidators to carry out their functions, which are twofold: (1)
to collect the assets of the company, settle its liabilities and distribute its funds
amongst its creditors (and shareholders); and (2) to investigate the causes of the
company's failure and the conduct of those concerned in its dealings and affairs.
The provisions can be relied on by liquidators not only to reconstitute the state of
the company's knowledge so that the liquidator can ascertain the company's assets
for distribution, but also to discover facts and documents relating to potential claims
by liquidators against third parties or to enable liquidators to report to the authorities
for the latter to take appropriate action against those guilty of misconduct in relation
to the company's affairs. Liquidators must satisfy the court that the information
or documents sought are reasonably required to enable them to carry out their
functions, but in considering this question, the court should give great weight to the
views of the liquidator. The court must endeavour to strike a balance between the
liquidator's reasonable requirements and the need to avoid making an order that is
unreasonable, unnecessary or oppressive to the party from whom the documents or
information are sought.
Ko11gWah case: liquidator has right to request documents in general terms 20.113
and inappropriate to require liquidator to establish that particular documents
exist. The Kong Wah Holdings case dealt with an application made under former
Cap.32, s.221 by the liquidators in connection with the insolvency of companies
in the Akai group. The companies were makers of consumer electronics products,
and the collapse of the group produced what the trial judge had described as the
largest corporate insolvency in Hong Kong. The liquidators applied for summonses
against a number of subsidiaries of the companies seeking production of documents

297
Cap.32,s.286B(4).
298
Cap.32,s.286B(2).
299 (2006) 9 HKCFAR 766. See also Schroder Exempl Property Unit Trust v Birmingham City Co1111cil
[2014) BCC
690; China Medical Technologies Inc (Joilll liquidators) v KPMG [2017) 2 HKLRD 1091 (CA) (order for
production of documents from associated firm of former auditors in mainland China).
988 LIQUIDATION

in respect of five specified transactions concerning the companies, and against

three former officers and employees of the companies for oral examination. At first
instance, Kwan J granted the orders. The subsidiaries appealed on various grounds,
including that the orders did not define with sufficient particularity the documents
required to be produced, and that the orders were made without evidence that the
documents existed. The appeals were dismissed by both the Court of Appeal and
Court of Final Appeal. In relation to the above arguments of the subsidiaries, the
Court of Final Appeal held that: (l) the court can order the production of documents
which are described in general terms as the liquidator is normally a stranger to
the company and it would be impossible for the liquidator to specify in detail the
required documents; and (2) it is inappropriate to require the liquidator to establish
that the documents exist-rather, it is for the respondent to satisfy the comi that the
documents do not exist.
20.114 Persons allowed to attend court to examine person under Cap.32, s.286C;
abrogation of privilege against self-incrimination. Section 286C of Cap.32
provides for the court to examine the person summoned, but the Official
Receiver, provisional liquidator or liquidator is entitled to attend the examination
and, if the court allows, may put questions to the person examined. 300 The
legal representative of the examinee can also attend and can put questions to
the examinee for the purpose of explaining the evidence given by the examinee
during the examination. 301 The common law privilege against self-incrimination
is expressly abrogated by Cap.32, s.286D and so a person cannot rely on the
common law privilege to refuse to provide information on the ground that it
would incriminate him or her. 302 In Kennedy v Cheng, 303 the Court of Final
Appeal confirmed the liquidator's power to supply transcripts of examinations
to the police, and observed that the police would be free to make derivative use
of the transcripts in investigating any wrongdoing notwithstanding that self-
incriminating statements were made by the examinee. The court further noted
that if the examinee is subsequently prosecuted, it would be for the criminal court
to rule on whether the prosecution is entitled to make direct use of the transcripts
supplied to the authorities. It would be possible for the court to hold that any
admissions made by the examinee were involuntary and therefore inadmissible,
but even where the admissions were voluntary, the court may exclude the evidence
if that is necessary to secure a fair trial.
20.115 Documents subject to legal professional privilege need not be produced.
Documents that are subject to legal professional privilege need not be produced, but

300 Companies (Winding-Up) Rules (Cap.32H), r.62(1).

JOI Cap.32, s.286C(3); Re Breech-LoadingArmoury Co (1867) LR 4 Eq 453; Re CambrianMining Co (1881) LR 20
Ch D 376.
'"' See also Re WeihongPetroleumCo Ltd (2002] I HKLRD 541; Re Asher& Co (Hong Kong)Ltd[2004) 2 HKLRD
37, where the privilege was held to have been impliedly abrogated under fonner s.221. In both those cases, the
court held that art. I 1(2)(g) of the Hong Kong Bill of Rights is not relevant since that provision applies in the
determination of a criminal charge only. However, the court can disallow questions which are oppressive: Re
WeihongPetroleumCo Lid (2002] I HKLRD 541.
JOl [2009) 6 HKC 454.
 COMPULSORY WINDING-UP 989

the person claiming the privilege can be required to produce a list of the privileged
documents setting out an adequate description of the documents to enable the
propriety of the claim to be assessed. 304 The person cannot be compelled to provide
a description that goes so far as to disclose, directly or indirectly, the contents of the
document. 305
Public examination can also be ordered by court. Apart from a private examination 20.116
under Cap.32, ss.286B and 286C, a public examination before the court can also be
ordered in the circumstances set out in Cap.32, s.286A. 306 Under Cap.32, s.191(2),
the Official Receiver or liquidator may make a "further report" (i.e. additional to the
report required under Cap.32, s.191(1)) stating, in his or her opinion, that a fraud has
been committed by any person in the promotion or formation of the company, or by
any officer of the company in relation to the company since its formation. If such a
further report is made, the court may require that person or officer (or other specified
person) to attend before the court to be pub) icly examined: Cap.32, s.286A(l )(a). If no
further report was made, the Official Receiver or liquidator may still apply to the court
for an order for the public examination of a specified person: Cap.32, s.286A(l)(b). 307
The matters on which the specified person may be examined are: (a) the promotion,
formation or management of the company; (b) the conduct of the business and affairs
of the company; and (c) the conduct or dealings of the person examined in relation to
the company.
Specified persons who may be subject to an order under Cap.32, s.286A. The 20.117
specified persons are:

• any current or former officer of the company;

• any current or former provisional liquidator or liquidator of the company, or
receiver or manager of the property of the company; and
• any person who is or has been concerned, or is taking or has taken part, in the
promotion, formation or management of the company.308

Scope of public examinations. Questions may be put to the examinee by the 20.118
court, the Official Receiver, liquidator, and any creditor or contributory: Cap.32,
ss.286A(4), 286A(5). Section 286A(8) ofCap.32 expressly allows an examinee's legal
representative to put to the examinee such questions as the cowt thinks just for the
purpose of enabling the examinee to explain or qualify any answers given by him or
her. The common law privilege against self-incrimination is expressly abolished under

°'
3
Re Kong WahHoldings Ltd (i11liq) (No 4) (2007) 5 HKC 202.
305 Re Kong Uflh Holdings Ltd (i11liq) (No 4) (2007) 5 HKC 202.
306 Cap.32, 286A replaced former Cap.32, s.222 in amendments made by the Companies (Winding Up and
Miscellaneous Provisions) (Amendment) Ordinance (14 of2016), effective 13 February 2017.
307 Previously this was not possible under former s.222 of Cap.32, which only allowed for a public examination if
the "further report" alleging fraud had been made.
308 Cap.32, s.286A(2).
990 LIQUIDATION

s.286D.309 Public examinations are used less frequently than private examinations.
A major difference in the conduct of the examination under that s.286A is that the
public examination is in open court and creditors and others are entitled to attend. 310
Also, the notes of the examination can be inspected by any creditor or contributory:
Cap.32, s.286A( I0). 311 When reviewing the equivalent public examination provisions in
England before the reforms under the Insolvency Act 1986 (UK), the Cork Committee
had noted that a public examination is important for giving publicity to creditors and
to the wider community in relation to the facts connected with a company's failure and
for exposing se1ious misconduct. 312

3.5 Void dispositions of company property

20.119 Any disposition of company's assets made after commencement of winding-

up void unless court orders otherwise. In many, if not most, circumstances of
compulsory winding-up, the petition is based on the company's inability to pay its
debts, or on the "just and equitable" ground, which is often established by proving
misconduct on the part of shareholders or company controllers. 313 To ensure the
creditors' right to paripassu participation in the liquidation (when the company is
insolvent) and to protect the company's assets from being dissipated by defaulting
officers or controlling members, it is necessary to freeze the company's ability
to dispose of its assets until a decision on the winding-up petition is made by the
court. Cap.32, s.182 therefore provides that any disposition of the company's assets
made after the commencement of a compulsory winding-up is, unless the court
otherwise orders, void. The winding-up, where the company is wound-up by the
court, is deemed to commence at the time of the presentation of the petition for the
winding-up. 314
20.120 Defintion of "disposition" under Cap.32, 182. It has been said that a disposition
within Cap.32, s. I 82 includes "not only any dealing in the company's tangible or
intangible assets by sale, exchange, lease, charge, gift or loan, but also the conferment
of a possessory or other lien on an asset and any other act which, in reducing or
extinguishing the company's rights in an asset, transfers value to another person". 315
For example, a payment out of the company's bank account (which is in credit) to a

30• The privilege was previously regarded as being impliedly abrogated under former s.221: see Re Paget. Exp
Official Receiver (1927) 2 Ch 85; Bishopsgate Investment Ma,wgement Ltd (in provisional liquidatio11) v
Maxwell [ I993) Ch I.
"" Re Grey:~Brewery Co (1883) 25 Ch D 400; and see Companies (Winding-up) Rules (Cap.32H) r.5(1)(!). In
contrast, creditors and the public do not have a general right to attend a private examination, although the court
in its discretion can allow particular persons to be present: Re Grey'.~Brewe,y Co (1883) 25 Ch D 400.
J 11 This is different to a private examination where the notes of de1>0sitionsof a person examined are not 01>ento
inspection unless the court allows: Companies (Winding-up) Rules (Cap.32H), r.62(2).
;,, Kenneth Cork, "Report of the Review Committee on Insolvency Law and Practice" (Cmnd 8558, 1982), (655)
("Cork Report"). Cap.32, s.222 is equivalem to the former provision in s.270 of the Companies Act 1948 (UK)
(repealed). The current English provision is set out in the Insolvency Act 1986 (UK) s.133.
'" Sec Chapter I0.
31
" Cap.32.s.184(2).
'" Roy Goode, Principles of Insolvency Law (4th edn, Sweet and Maxwell 201 I) (13-128), approved by the Court
of Appeal in ReAGJ Logistics (HK) Ltd (in liq) (2016] 5 HKLRD 737, (10).
 COMPULSORY WINDING-UP 991

third party would be void, with the amount recoverable from the third party.316 On
the other hand, a payment out of an overdrawn account is not in itself a disposition
of the company's property since such a payment constitutes a loan by the bank to the
company.317
Section 182 of Cap.32 does not apply to assets to which company is not 20.121
beneficially entitled. Section 182 of Cap.32 however has no application to assets
that are not free assets of the company to which it is beneficially entitled and which
can be realised for the benefit of its creditors. 318 The void disposition provision is
applicable only where the property that has been or is to be disposed of belongs to the
company. Where the beneficial interest in the property had already passed to another
from the company before the presentation of the petition, a subsequent transfer by
the company of the legal title would not be caught by s.182. 319 Thus, s.182 does
not apply to the enforcement of a mortgage or charge, such as a sale of assets by a
receiver pursuant to the relevant debenture, 320 or a transaction in respect of assets over
which the company does not have any beneficial interests (e.g. where the assets in
question are held by the company as trustee). 321 Nor is the provision applicable where
the lender of the defaulting company assigns its mortgage to the guarantor, where
the latter has discharged its obligations qua guarantee. 322 Also, s.182 does not catch
the transfer of the legal title upon completion of a specifically enforceable sale of
land contract which had been entered into before the commencement of winding-up

316 Re Gray~ /1111Ca11str11ctio11 Co Ltd [ 1980) I All ER 814; Ba11kof East Asia Ltd v Rogeri0S011F1111g Lam [ I 988) I
HKLR 181 (CA); Hollico11rt(Contracts) Ltd (in liq) v Bank ~/"fre!a11d(2001) I All ER 289 (Eng CA). The Hong
Kong Court of Appeal has further held that there are two dispositions of the company's property involved-not
only is there a disposition of the company's properly to the third party recipient of the funds, but there is also a
disposition of the company's property in favour of the bank (such that the funds could also be recovered from
the bank): Ba11kcif East Asia Ltd, above; Chc>valier(HK) lid v Joint Liquidators of Right Time Co11structio11 Co
Ltd [1990) 2 HKLR 223 (CA); Re AG! logistics (1-/K)Ltd (in liq) (2016) 5 HKLRO 737. This is on the basis
that when the company's funds in the account are paid to the third party by the bank, there is a corresponding
reduction or extinguishing of the debt owed by the bank to the company (since the account in credit c-0nstitutes
a debt owed by the bank to the company, which is a form of property (chose in action) owned by the company).
Jn Re AG! logistics, above, the Court of Appeal considered that it is clear that the reduction or extinguishing
of the company's property (i.e. the debt owed to the c-Ompany)is a disposition of the company's property. The
court declined to follow UK and Australian authorities which take the view that there is only a disposition in
favour of the third party and no disposition in favour of the bank: Hollicourt, above; Re Mai Bowers Macq1tarie
Electrical Ce11trePty Ltd (in liq) ( 1974) I NSWLR 254; Re loteka Pty Ltd (in liq) ( 1990) I Qd R 322. But if the
payment constitutes a disposition of the company's property in favour of the bank, then it seems that logically the
property received by the third party from the bank must be the bank's property and not the company's (in which
case the payment to the third party could not be a disposition of the e-0mpany'sproperty): see Paul Key, "Banker's
Liability for Post-Petition Dispositions" {2001) Cambridge law Journal 468,470. In the UK, the Supreme
Court has held that normally a disposition involves a disponor and disponee, and not every extinguishing of the
company'.~property is a disposition within the Insolvency Act 1986 (UK) s 127 (equivalent to CaJ>.32,s.182):
Akers v Samba Fi11ancialGroup (2017) AC 424. Cf. Ojficeserve Technologies Ltd (i11liq) vA111hony-Mike[2017)
BCC 574.
311 S11perSpeed Ltd (i11liq) v Bank of Baroda (2015)2 HKLRD 965 (CA).

m Re MW lee and Sons Ente,prises Ltd [1999) 2 HKC 686. 697; affirmed Lee Tak Samuel v Lee Tak ~111[1999) 4
HKC 12.
319 Peregrine !11ves1ments I-foldings Ltd v Asian hifmstructure Fund Management Co lid (2003) I HKLRD 209.
"" Re labour Building Ltd [2010) 2 1-lKLRD280. Sec also Re Margart Pty Ltd (1985) 9 ACLR 269 (enforcement
of noating charge); Sowmt111v David Samuel Trust Ltd [ 1978) I All ER 616.
n, Re MW Lee & Sons E11te1priseLtd (1999) 3 HKLRD 427.
322 Re HK Fu/Ison Co lld(unrep., HCCW 374/2005, (2006) HKEC 156).
992 LIQUIDATION

(as the beneficial interest had passed to the purchaser upon the entering into of the
contract). 323
20.122 Court has power to validate otherwise void transactions under Cap.32, s.182. The
court has power under Cap.32, s.182 to validate a transaction such that it will not be
treated as being void. The reason why the court is given power to validate dispositions
is that a disposition might be beneficial to all parties concerned in the particular
circumstances. This would be the case where the company has an opportunity to act
speedily to sell an item of its assets for an exceptionally good price. It may also be in
the best interest of the company and its creditors to complete a contract or project, or
carry on the business in ordinary course with a view to sell the business as a going
concern. 324
20.123 Transaction will not be validated if it will deplete company's assets. The principles
governing a Cap.32, s.182 order (which is called a "validation order") are well settled.
While the company is insolvent, a transaction or carrying on of the business that has,
or is likely to have, the effect of depleting the company's assets, which will harm the
interest of the creditors, will not be validated. 325 The carrying on of the business, for
example, is likely to deplete the company's assets where the business has been loss-
making for almost the entire life of the company,326 or where the petitioner cannot
prove that the continuing trading of an insolvent company is likely to generate net
income for the benefit of the company or its creditors. 327
20.124 Transaction may be validated if will benefit company and creditors. Where,
however, the petitioner can establish that validating a transaction is likely to benefit the
company and its creditors, validation orders will be made. Situations where validation
orders have been made while the company is insolvent include where payment of
arrears made to suppliers is a pre-condition for the continuation of the supply,328
where a transaction would raise funds for the company,329 where the petitioner has
adduced evidence that: (i) the trading on by the company would enable the company to
complete profitable jobs within a relatively short period of time; and (ii) the majority
shareholder, who is also a creditor, and other associated creditors have given an
undertaking by way of an affidavit not to call in their loans in the interim. 330
20.125 Legal expenses incurred by company. A typical type of transaction that has been
subject to Cap.32, s.182 litigation in Hong Kong concerns legal expenses incurred
by the company, for example for opposing the winding-up petition. The principle to
be applied in making decisions on the validation order in this situation is consistent
with the principle mentioned above, i.e. whether the action sought to be validated is in
the best interest of the company and its creditors. Thus, where the company has no or

m See Re Fre11ch ~ (Wi11e

Ba,) Ltd [ 1987] BCLC 499.
J1' Re Gray:f /1111Con.w·11c1io11
Co Ltd [ 1980] I WLR 711, 717, per Templeman J.
J>s ReAPP (Hong Kong) Ltd (2004] 2 HKLRD F7; Re Ce11t111y Gro11pLtd [2005] HKEC 781; Re NU-WestNt1t11r(I/
Products Co,p Ltd [2006] 3 HKLRD 13; Re First Dragon Fashion (Hong Kong) Ltd [20 I0] 4 HKLRD 592.
"• Re Ce111111y Group Ltd [2005] HKEC 781.
"' Re First Dragon Ft,shion (Hong Kong) Ltd [20 I0] 4 HKLRD 592.
" 8 Re SA & D Wright Ltd[l992] BCC 503.
"~ Excel Noble De11elopme111 Co Ltd II WahNam Group Ltd (unrep., HCCW 130/2000) (CF!).
"" Re Ever Rise Engineering Lid [200 I) HKCFI 2 I 6 (23 October 200 I) (HKLII).
 COMPULSORY WINDING-UP 993

little assets left and there is no strong prospect of resisting winding-up, it is not in the
interest of the creditors to make a validation order.331 Where, however, legal expenses
have been incurred for organising a compromise or debt restructuring, where such
actions can be fairly regarded as ones taken to preserve or bring in the assets of the
company, the court may be willing to make a validation order.332
Granting validation order also depends on whether party who dealt with company 20.126
acted in good faith and whether transaction took place in ordinary course of
business. Whether a validation order should be made can also depend on whether
the party who has dealt with the company has acted in good faith and whether the
transaction took place in the ordinary course of business and is likely to be for the
benefit of the creditors generally. In Re SA & D Wright Ltd, 333 the court validated
transactions relating to the supply of goods to a company against which a winding-up
petition was made, where the supply took place in the ordinary course of business
and the supplier was not aware of the winding-up petition against the company. The
payment transactions were beneficial to the company or its creditors in general, as
timely payment was a condition for the continuing supply of the goods.
Court may also be willing to validate transactions to perform statutory functions. 20.127
The court may also be willing to validate transactions, even though the company
is insolvent, where the transactions are necessary to allow the company to perform
certain statutory functions, and the sanction of the validation application is dictated by
the public interest. Thus, the court will validate transactions necessary for the company
to discharge its duties under the Building Management Ordinance (Cap.344) and the
Lifts and Escalators (Safety) Ordinance (Cap.327) with regard to the management and
maintenance of the building.334
Validation order more likely granted for solvent companies but not where 20.128
disposition injures company. Where the company is solvent (typically where the
winding-up petition is made on the just and equitable ground because of disputes
among shareholders), a validating order will genera]ly be given if the evidence shows
that the directors considered that a particular disposition was necessary or expedient
in the company's interests, and also that the reasons given by the directors for that
opinion were reasons that an intelligent and honest man could reasonably hold,
notwithstanding the opposition of a contributory unless the opposing contributory
can prove that the disposition is likely to injure the company. 335 A case example where

"' Re Swplus TraderLtd [2005) 4 HKLRD 436. See also Re legend !11ternatio11a/ Resorts Ltd [2007) 3 HKC 456.
m Re Far East Strttcwml Steelwork £ngineeri11gLtd [2005) HKEC 711. See also Re MF Global Ho11gKo11gLtd
[2012) 4 HKC 333 (the court will validate costs incurred by the company in instmcting accountants and solicitors
if it is satisfied that they have been incurred in the bo,wjide interests of the creditors of the company as a whole).
m [1992) BCC 503.
3" Re the lnco,porated Owners of Foremost Building (unrep., HCCW No 47/2004, 28 October 2004); Re
lnco,y,omted Ow11ers,>JAibertHouse [2004] 3 HKLRD L2.
ns Re Burton and Deakin Ltd [1977] I All ER 631; Re !Jaking £11te1prisesLtd [2001) HKLRD (Yrbk) 150; Re
King Fung Co11structio11 Work Co [2005) HKEC 17; Re Smart Win Shipping (HK) Ltd [2005) HKEC 335; Re
Mi Fung Beads Co Ltd [2005] HKEC 218. Where the company which is the subject of an unfair prejudice
petition is solvent and has an ongoing business, it is incumbent upon the petitioner to try and agree on the
terms of a validation order with the company, or at least those pares of it which can normally be expected to
be uncontentious, so as to avoid the necessity of an urgent application being made to the court: Re Emagist
Emertain111e11t Ltd [2012) 5 HKLRD 703; Re Jessop & Baird (Hong Kong) Ltd (2017) I HKLRD 78.
994 LIQUIDATION

a shareholder successively opposed an application for an order validating payments

out of the company's bank by a director is Re Nu-West Natural Products Corp Ltd,336
where there was evidence that the director had set up a rival company to compete
with the company with the help of funds advanced by the company and that if he had
continued access to the company's bank accounts, he would continue to deplete the
company's assets to the prejudice of the company's creditors and shareholders.

3.6 Unfair preferences

20.129 Unfair preferences voidable under Cap.32, ss.266 and 266A. Where a company
is insolvent and liquidation is imminent, there is a danger of the company repaying
debts owed to certain creditors (e.g. directors or controlling shareholders who have
lent money to the company) to the disadvantage of other creditors. The statutory
provisions on unfair preferences in Cap.32, ss.266 and 266A aim to deal with this
scenario by rendering such preferences voidable and allowing the liquidator to recover
the company's funds or assets given as an unfair preference upon application to
the court. While the statutory provisions can catch preferences given to connected
persons in fraud of other creditors, the provisions are not based on fraudulent intent.
If a preference is given to any creditor of the company, there is a possibility of the
preference being invalidated, even though the company acted in good faith. The
statutory provisions invalidate unfair preferences to ensure that creditors are treated
equitably pursuant to the pari passu principle, and to avoid any creditors gaining an
unfair advantage over others.
20.130 Previous law on fraudulent preferences replaced with concept of unfair
preferences. Under the old law (which applied to liquidations commencing before
1 April 1998), preferences given to creditors could be set aside if they amounted
to a "fraudulent preference" within Cap.32, s.266 (since repealed this past 2017).
The concept of fraudulent preference was replaced by the new concept of "unfair
preference", introduced by the Bankruptcy (Amendment) Ordinance 1996. The
amending legislation introduced the unfair preference provisions in the Bankruptcy
Ordinance (Cap.6), which applies in the case of personal bankruptcies (i.e.
bankruptcy of natural persons), but the same concept of unfair preference was also
applied to corporate insolvencies through the introduction of the predecessor CO,
s.266B by the Bankruptcy (Amendment) Ordinance, which applied the bankruptcy
provisions by way of reference. The effect of former s.266B, read together with
former s.266, was that, for a winding-up commencing on or after I April l 998,
where there is an unfair preference given by the company within the provisions
of the Bankruptcy Ordinance (Cap.6) dealing with unfair preferences, the unfair
preference would be invalid. However, the operation of the bankruptcy provisions
in corporate liquidations was not entirely satisfactory. For example, the definition
of "associate" 337 in the context of debtors who are natural persons gave rise to
some anomalies for debtor companies-such as where that Cap.6 s.51 B(2) refers

·"" [2006) 3 HKLRD 13.

"' As to the relevanceof the concept of"associate" in the unfair preference provisions,see paras.20.135and 20.140
below.
 COMPULSORY WINDING-UP 995

to the "spouse" of the debtor. 338 These anomalies have now been removed by the
Companies (Winding-Up and Miscellaneous Provisions) (Amendment) Ordinance
(I 4 of 2016), 339 which introduced stand-alone provisions on unfair preferences for
corporate liquidations in Cap.32. 340
Elements which need to be established for setting aside of unfair preference. The 20.131
following elements need to be established before a transaction impugned as an unfair
preference may be set aside by the court under Cap.32, s.266:

• The company has gone into liquidation: s.266(1). 341

• The company has given an unfair preference: s.266(2).
• The unfair preference was given within six months before the commencement
of the winding-up of the company (or two years before commencement of
winding-up in the case of persons connected with the company): ss.266(2),
266B(l)(b) and 266B(l)(c). 342
• The company was influenced by a desire to put the creditor (who received
the preference) into a position which, in the event of the winding-up of the
company, is better than the position he or she would have been in if the
preference was not given: s.266(4).
• The company was unable to pay its debts (i.e. insolvent) at the time the
preference was given or the company became insolvent in consequence of
the preference: ss.266(2) and 2668(2). 343

3.6.1 Concept of "imfair preference"

Meaning of unfair preference. A company gives an unfair preference to a person if: 20.132

• that person is one of the company's creditors or a surety or guarantor for any
of the company's debts or other liabilities; and
• the company does anything 344 or allows anything to be done which has the
effect of putting that person into a position which, in the event of the company

"' See FSTB, lmproveme11/ of Co,porate l11so/11e11cyLl11vlegislative Proposals- Cons11/tatio11 Docume11/(Aptil

2013) 49-55.
"' The amendments commenced operation on 13 February 2017. The new provisions apply to unfair preferences
given on or after that commencement date: Cap.32, Sch.26 s.30.
JMJ See Cap.32, ss.266 and 266A, and see also ss.265A-265C, 266B-266D.
3" A company goes into liquidation if: (a) the company passes a resolution for voluntary winding-up; (b) a winding-
up statement is delivered to the Registrar under s.228A; or (c) the court makes a winding up order (see also
Cap.32 s.265A).
3' 2 Cap.32, s.266 only applies if the preference was given at a "relevant time": sec also Cap.32, s.266(2). Section
2668 ofCap.32 provides for the meaning of''rclcvant time".
343 Cap.32 s.266 only applies if the preference was given at a "relevant time'': sec also Cap.32, s.266(2). Section
2668 ofCap.32, provides for the meaning of"relevant time".
3"" The foct that something has been done pursuant to the order of any court does not, without more, prevent the
doing or suffering of that thing from constituting the giving of an unfair preference: Cap.32, s.266A(3).
996 LIQUIDATION

going into insolvent liquidation, 345 will be better than the position he or she
would have been in if that thing had not been done: s.266A.

20.133 Transactions amounting to unfair preferences. Transactions amounting to an unfair

preference include the following:

• the repayment of an amount owed to an unsecured creditor; 346

• the provision of security to an unsecured creditor in relation to a pre-existing
debt;
• a transaction at an undervalue with an existing creditor.347 For example, if
the company sells an asset to an existing creditor at a price below the value
of the asset, then the creditor obtains more than what the creditor now gives
to the company. The benefit obtained by the creditor puts him or her into a
better position than he or she would have been in had the transaction not been
entered into.

20.134 Transactions which do not amount to unfair preferences. The following transactions
do not amount to a preference if:

• Security given to a new creditor. There is no "improvement" in such a

creditor's position. The creditor does not obtain any advantage since the
creditor obtains no more from the company than what he or she now puts
in. 348 Conversely, other creditors are not disadvantaged.
• Security given to an existing creditor in respect of a new loan provided by
that creditor. Again, the creditor's position in respect of the new loan is not
"improved" since he or she gives the company the same value as what he
or she would be entitled to take out from the security. His or her position
in relation to the existing debt is also not improved if the security does not
extend to cover the existing debt.
• Payment to a secured creditor of an amount not exceeding the value of the
security. Assuming that there are no creditors entitled to priority over that
secured creditor at the time of payment, then that secured creditor's position
in a winding-up is not improved since he or she would have been entitled to
that amount out of the assets in priority to others anyway had the payment
not been made. There is no disadvantage to other creditors as the effect of

345 A company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for
the payment of its debts and other liabilities and the expenses of the winding up: Cap.32, s.266A(2). As to when
a company "goes into liquidation", see Cap.32, s.265A and note 341 above.
346 See, e.g., Re Aloha Coffee Co lid [2013] I MKLRD 356; Re Finch (UK) pie (i11liq), Hemy v Finch [2016] I
BCLC 394 (transfer of property to a director as payment for amount owed by company ro director arising from a
redemption of the director's share.s).
34' Sec also para.20.162 below.
"8 Roy Goode, Principles o/Corport,te Insolvency law (4th edn, Sweet and Maxwell 2011) (13-83)-(13-84].
 COMPULSORY WINDING-UP 997

the payment is to free up the assets under the security (to the amount of the
payment) for the benefit of other creditors. 349

3.6.2 Time at which preference was given

Unfair preference only caught if given in six month period before winding-up or 20.135
two years if given to person connected with company. Generally, an unfair preference
will be caught only if the preference was given in the period of six-months ending
on the day of commencement of winding-up: Cap.32, s.266B(l)(c). However, where
a preference is given to a person connected with the company, then the preference
will be caught if it is given any time in the period of two years ending on the day of
commencement of winding-up: Cap.32, s.266B(l)(b). A person is connected with the
company if the person is:

• an associate of the company; or

• an associate of a director or shadow director of the company.350

Meaning of "associate". "Associate" is defined in Cap.32, ss.265B and 265C. An 20.136

associate of a company includes the following:

• Directors, shadow directors or other officers of the company: s.265C(2). 351

"Officer" includes the company secretary and managers of the company.352
• Any person who has control of the company: s.265C(4)(a). 353 A person has
control of a company if: (i) the person is entitled to exercise or control the
exercise of more than 30% of the voting power at any general meeting of the
company (or of another company which has control of it); or (ii) any or all
of the directors of the company (or of another company which has control
of it) are accustomed to act in accordance with that person's directions or
instructions: s.265C(5). These provisions mean that a holding company is an
associate of its subsidiary companies. Also, s.265A(2) of Cap.32 states that
a provision that a person is an associate of another person means that they
are associates of each other. Thus a subsidiary will also be an associate of its
holding company.
• Another company (or body corporate 354) if the same person has control of
both companies (or bodies corporate): s.265C(3)(a). 355 For the meaning

39
" Ibid., [l3-93).
350 Cap.32, s.265A(3).
351
An employee of the company is also an associate of the company under Cap.32, s.265C( I). However, the two-
year period in s.266B(l)(b) does not apply where a person is connected with the company by reason only of being
its employee: Cap.32, s.266B(l)(b).
352 Cap.32 s.2( I); and see also the definition of "manager" in this s.2( I).
3' 3 A 1>ersonis also an associate of the company if the person and his or her associates together have control of the
company: Cap.32, s.265C(4)(b).
i;, Cap.32, s.265C(6).
m 1\vo companies arc also associates of each other if one person has control of one and that person's associates
(whether alone or together wilh the person) have control of the other company: Cap.32, s.265C(3)(b).
998 LIQUIDATION

of "control of a company", see s.265C(5) as discussed above. Where the

company in liquidation is a subsidiary in a group of companies, the effect of
s.265C(3)(a) is that any other subsidiary in the group will be an associate of
the first-mentioned company.

As noted at para.20.135 above, an associate of a director or shadow director of a

company would also be a person connected with the company. In this regard, an
associate of a person as prescribed in Cap.32 includes:

• A spouse 356 or cohabitant 357 of the person; a relative358 of the person or of the
spouse or cohabitant; or a spouse or cohabitant of the relative: s.265B(l).
• A partner of the person; or a partner of a spouse, cohabitant or relative of the
person: s.265B(2).
• A trustee of a trust where the beneficiaries includes the person or an associate
of the person (or the terms of the trust confer a power that may be exercised
for the benefit of the person or an associate of the person): s.265B(3).
• An employer or employee of the person: s.265C(l).

3.6.3 Influenced by desire to give preference

20.137 "Desire to prefer" must be one of reasons for entering unfair preference
transaction though not dominant one. The requirement in Cap.32, s.266(4) in
relation to the state of mind of the company can be contrasted with that which applied
under the previous concept of fraudulent preference. Under the concept of fraudulent
preference, it was necessary to show that the debtor had a "dominant intention" to give
the preference. For unfair preferences though, it is sufficient if the desire to prefer was
one of the reasons for entering into the transaction; it need not be the dominant reason,
nor even a decisive one, so long as it was one of the factors which operated on the
minds of those who made the decision. 359
20.138 Distinction between "intention" and "desire". Moreover, "intention" and "desire"
are different concepts. While a person is taken to have intended the necessary
consequences of his or her actions, a person does not necessarily desire those
consequences. It is therefore necessary to establish that not only did the company
intend to enter into the transaction (giving the preference), but the company also
desired the consequences of the transaction (namely that the creditor's position would
be improved in the event ofwinding-up). 360 However, direct evidence of the requisite

>56 "Spouse" includes a former spouse and a reputed spouse: Cap.32, s.265B(4)(a).
"' A person is a cohabitant of another if the two persons (whether of the same or opposite sex) live together as a
couple in an intimate relationship: Cap.32, s.265B(S). Former cohabitanrs arc included as associates: Cap.32,
s.265B(4)(b).
"' A person is a relative of another person if that person is a brother, sister, uncle, aunt, nephew, niece, lineal
ancestor or lineal descendantof that other person: Cap.32, s.265B(S);sec also s.2658(6).
'" Re MC 8aco11Ltd (1990) BCLC 324.
"° Re MC Bacon Ltd [ 1990)BCLC 324; see also Joi111and Several 1h,stees of P,vperty of Hau Po Man v Hau Po
Fun [2005) 2 HKC 227, CA; Re Swee/mar/ Garme11tWorks Ltd (2008) 2 HKC 252.
 COMPULSORY WINDING-UP 999

desire is not always necessary, as it may be inferred from the circumstances of the
case. 36' In Re MC Bacon Ltd,362 the company was held not to have been influenced
by a desire to prefer the creditor bank in circumstances where the bank had demanded
security to be given for continued availability of the overdraft facilities after the bank
became aware of the company's financial difficulties. On the evidence, the company
had little choice but to grant the security to enable the company to continue its
operations, and it was a matter of indifference to the company whether the bank was
in a better position or not in a winding-up. 363
"Influenced by desire to prefer" element need only be one of factors operating in 20.139
minds of persons entering into transaction. The element of "influenced by desire"
would be satisfied if the desire was one of the factors which operated on the minds of
those who made the decision. It need not have been the only factor or even the decisive
factor. It is not necessary to prove that if the requisite desire had not been present, the
company would not have entered into the transaction. 364
Presumption of "desire to prefer" where creditor associate of company. Where 20.140
the creditor who was preferred is a person connected with the company,365 then the
requisite desire to put the creditor into a better position would be presumed, unless the
contrary is shown: Cap.32, s.266(5). This presumption does not apply, though, where
the creditor is connected with the company by reason only of being the company's
employee: Cap.32, s.266(5). 366 Under the previous law where it was necessary to rely
on the Bankruptcy Ordinance provisions on unfair preferences, 367 it was doubtful
whether the presumption could be properly applied to a director of the debtor company
in circumstances where a director was only an associate of the company by reason
of the director being regarded as an employee of the debtor (Bankruptcy Ordinance
(Cap.6), s.51 B(4)). 368 Under the current law, the presumption will clearly apply where
the unfair preference is given to a director. This is because a director is an associate

36 'Re M C Bacon Ltd ( 1990) BCLC 324; Re Sweetman Garment Works Ltd (2008) 2 HKC 252. Although the
court can assess the sun-otmding circumstances and the objective effects of a trJnsaction to see if it can infer the
requisite desire without any direct evidence of the decision maker's motivation, the surrounding circumst.inces
will have to be compelling in order to justify the court drnwing the necessary infe.rence: Igai Co Ltd v Get Nice
(Union) Fi11a11ce Co Ltd (unrep., MP2739/2013, (2014) HKEC 1412), (19).
362 (1990) BCLC 324.

363 Where the debtor gives the preference because of moral pressure exerted on the debtor rather than because of a

desire to prefer the creditor, then the preference would not be set aside: Joint a11dSeveral Trustees of Property of
Hau Po Man v Hau Po F1111 (2005) 2 HKC 227, CA. See also Re Sweetmart Garme11/Works Ltd (2008] 2 HKC
252 (the creditor had pressed for repayment but on the facts, the creditor's actions did not constitute pressure
inducing the preference; rather the evidence tended to show that there was a desire to prefer the creditor); Re
Leric Intl Ltd [2009] 2 HKLRD 238 (no evidence to establish the requisite desire).
"' Re MC Bacon Ltd[l 990] BCLC 324,336; Re Phantom Records Ltd(unrep., CFI, HCMP 2770/2003 7 December
2006) [88].
36' See Cap.32~s.265A(3) and para.20. l29 above.
3"' Employees are associates of the company under Cap.32, s.265C( I).
367 Sec para.20.130 above.
308 Sec Re QQ Club Ltd [2013] 6 HKC 208, [46]; buc cf. Re Plum tom Records Ltd (unrcp., CF!. HCMP 2770/2003,

7 December 2006); Re Alolw Coffee Co Ltd [2013] I HKLRD 356 (where the presumption was applied to
a creditor who was a director of the company; the presumption was not rebutted in circumstances where the
director was one of two directors in a small company. where the director had special responsibility over the
finances of the company, and where she was aware of the company's financial difficulties and yet caused the
company to pay her $700,000 within a six-week period).
1000 LIQUIDATION

of the company (and hence connected with the company) under the separate limb in
Cap.32, s.265C(2) and is not an associate by reason only of being an employee of the
company under that previous s.265C(l). 369

3.6.4 Compa11ywas i11solve11t

20.141 Insolvent company: unable to pay debts. Whether the company is unable to pay
its debts (i.e. insolvent) for the purposes of Cap.32, s.266B(2) is determined in
accordance with the test in Cap.32, s.178. That test is the one applied for determining
whether the insolvency ground for compulsory winding-up is established and involves
a cash-flow test of solvency.370 In applying the cash-flow test, the court in Re Aloha
Coffee Co Ltd 311 applied the following principles:

• The essential question is whether the company's financial position is such

that it can continue in business and still pay its way.
• It is necessary to look, with a commercial approach, at the company's
financial position as a whole.
• It would be relevant to consider the following matters: all of the company's
debts at the time in question in order to determine when those debts were
due and payable; all of the assets of the company as at that time in order to
determine the extent to which those assets were liquid or were realisable
within a timeframe that would allow each of the debts to be paid as and
when it became payable; the company's business as at that time in order
to determine its expected net cash flow from the business by deducting
from projected future sales the cash expenses which would be necessary
to generate those sales; and arrangements between the company and
prospective lenders, such as its bankers and shareholders, in order to
determine whether any shortfall in liquid and realisable assets and cash
flow could be made up by borrowings which would be repayable at a time
later than the debts.
• The court is to take into account not only existing debts, but also debts which
will fall due in the near future and the likely availability of funds to meet
those debts.

3.6.S Court orders

20.142 Court may make appropriate order to restore position as if unfair preference
not given. A transaction amounting to an unfair preference is voidable under Cap.32,
s.266. That sub-s.266(3) provides that the court may make such order as it thinks fit for
restoring the position to what it would have been if the unfair preference was not given.
Section 266C sets out the specific orders that the court can make, such as requiring

-"' For a UK example where the director railed to rebut the presumption, sec Re Finch (UK) pie (in liq), Henry v
Finch (2016] I BCLC 394.
"" See paras.20.064 above.
"' (2013) I HKLRD 356, (22)-(23).
 COMPULSORY WINDING-UP 1001

any property transferred in connection with the giving of the unfair preference to be
vested in the company. Where an unfair preference is invalidated under the above
provisions, any money or property recovered is available to the general (unsecured)
creditors. 372

3.7 Transactions at an undervalue

Undervalue transactions voidable under ss.265D and 26SE. The provisions m 20.143
Cap.32 ss.265D and 265E allowing the setting aside of transactions at an undervalue
were newly introduced by the Companies (Winding-Up and Miscellaneous
Provisions) (Amendment) Ordinance (14 of 2016). 373 Similar provisions had existed
in the Bankruptcy Ordinance (Cap.6) since the amendments made by the Bankruptcy
(Amendment) Ordinance 1996, as derived from UK provisions.374 At that time, the
provisions were not applied to corporate liquidations because the Government did
not want to pre-empt the recommendations of the Law Reform Commission which
was conducting its separate review of the winding-up provisions.375 The Commission
did eventually, in its 1999 Report, recommend the introduction of provisions on
undervalue transactions, but this was not implemented until the 2016 Amendment
Ordinance.376 Where a company enters into a transaction at an undervalue (such as a
gift) with another party at a time when the company is insolvent, that party derives a
benefit at the expense of the creditors of the company. To protect the creditors from
being prejudiced, the provisions on undervalue transactions enable the liquidator to
apply to the court for an order to effectively set aside the transaction.

Elements which need to be established for setting aside of undervalue transaction. 20.144
The following need to be established before the court has power to set aside a
transaction at an undervalue under Cap.32, s.265D:

• The company has gone into liquidation: s.265D(l).m

• The company has entered into a transaction with a person at an undervalue:
s.265D(2).
• The undervalue transaction was given within five years before commencement
of winding-up: ss.265D(2), 266B(l)(a). 378

372 Re Oasis Merchandising Services Ltd [ 1998) Ch 170.

373 The provisio11scommenced operation on 13 February 2017. See also Cap.32, ss.265A-265C, 266B-266D.
374
Insolvency Act 1986 (UK) s.238. Cfthe Australian provisions on "uncommercial transactions" in Corporations
Act 2001 (Cth of Aust) s.588FB.
37S Law Reform Commission of Hong Kong, Report 011 the Winding-Up Provisions of the Companies Ordinance
(1999) 158.
316 Ibid.; and see also FSTB, !111proveme11t of Corporate Insolvency Law Legislative Proposals - Consultation
Doc11me111 (April 2013) 46-48; and Consultation Co11c/11sio11s (May 2014) 4-5.
377 A company goes into liquidation if: (a) the company passe.sa resolution for voluntary winding-up; (b) a winding-
up statement is delivered 10 the Registrar under Cap.32, s.228A; or (c) the court makes a winding up order (sec
also Cap.32, s.265A).
378 Cap.32, s.265O only applies if the transaction was entered into at a "relevant time": s.265O(2). Section 266B
provides for the meaning of"relevant time".
1002 LIQUIDATION

• The company was unable to pay its debts (i.e. insolvent) at the time the
transaction was entered into or the company became insolvent in consequence
of the transaction: ss.265D(2), 2668(2). 379

3.7.1 Concept of "undervalue transaction"

20.145 Meaning of undervalue transaction. Under Cap.32, s.265E, a company enters into a
transaction with a person at an undervalue if:

(a) the company makes a gift to that person, or otherwise enters into a
transaction with that person on terms that provide for the company to receive
no consideration; or
(b) the company enters into a transaction with that person for a consideration
the value of which, in money or money's worth, is significantly less than
the value, in money or money's worth, of the consideration provided by the
company.

20.146 There must be a "transaction" entered into by company. Unlike the position in the
UK, 380 "transaction" is not defined in Cap.32 for the undervalue transaction provisions.
But as a matter of ordinary language, the word "transaction" is wide. 381 Similar to the
UK position, "transaction" in Cap.32, s.265E would be intended to cover as wide
a range of mutual dealings as possible. 382 "Transaction" includes a contract but the
existence of a contract is not necessary.383 The relevant "transaction" for the purpose
of s.265E may be constituted by an overall arrangement comp1ising individual linked
transactions. 384 For s.265E to apply, it is necessary that the company be a party to
the transaction. 385 However, so long as the company is a party to one of the linked
transactions in the overall arrangement, it is unnecessary for the company to be a party
to each of the individual linked transactions. 386

20.147 Concept of "consideration" is that under contract law. "Consideration" in

Cap.32, s.265E means consideration in the contractual sense. 387 A promise is
supported by consideration if there is an act or forbearance by the promisee that
is given in return for the promise. 388 The consideration is the quid pro quo for the

m Cap.32, s.265D only applies if the transaction was entered into at a "relevant time": s.265D(2). Section 266B
provides for the meaning of"relevant time".
0
" See InsolvencyAct 1986 (UK) s.436, which defines transaction to include a gift, agreement or arrangement.
"' Re Taylor Si11clair (Capital} Ltd (in liquidatio11); Knights v Seymour Pierce Elli.t Ltd [200 I] 2 BCLC 176, [20].
m C/e111e111s v He111yHadaway Orga11isation Ltd [20081 I BCLC 223, [3 I].
m C/e111e11ts v Hemy Hadaway Organisatio11 Ltd [20081 I BCLC 223, [31). Aside from gifts, "transaction" would
involve some element of dealing between the parties to the transaction: Re Taylor Sinclair (Capital) Ltd (in
liq11idatio11);Knights v Seymour Pierce Ellis Ltd [2001] 2 BCLC 176, [20].
;s, Phillips v Brewing Oofpl,;11Bell Lawrie Ltd [200 I) I WLR 143; Oefra v Feakins [2005] BPIR 292. [45], appeal
dismissed in Feakins v Department for £nviro11111e111Food tmd Rural Ajfai,1· [2007] BCC 54.
' 8' Re Ovenden Colbert Printers lid, 1-/11111 v Hosking [2014) I BCLC 291.
' 86 Feakins v Oept1rt111e11tfi>r£11vir(mme11tFood and Rural Affairs [2007) BCC 54.
387
Sing/a v Brown (2008)Ch357, (25).
' 88 See Dunlop Pneumatic Tyre Co lid v Selfridge & Co Ltd (1915) AC 847, 855.
 COMPULSORY WINDING-UP 1003

promise; namely what is bargained for as the price to be exacted on the promisee in
return for the promise. 389 Consideration may constitute a benefit conferred by the
promisee (to the promisor or another party) or a detriment suffered by the promisee
in return for the promise. Under contract law, the consideration necessary for there
to be a valid contract must move from the promisee; 390 however, in the context of
the undervalue transactions provisions in the UK, the House of Lords has held that
the statutory provision does not stipulate by what person(s) the consideration is to
be provided, and thus it is relevant to take into account any consideration (whether
flowing from the promisee or another person) for which the company has entered
into the transaction. 391

Examples of transactions amounting to undervalue transactions. The following 20.148

are some examples of transactions at an undervalue from the case law where there is
no consideration received by the company:

• Gratuitous payments of monies said to be loans but which were held to be

gifts in circumstances where the payments were made without intent that
they should be repaid and which were not repayable on demand. 392
• An agreement to pay interest retrospectively on an existing interest-free
loan.393 Here, the company receives no consideration for the agreement to
pay interest. 394
• Posting of an entry in an inter-company account between the company and a
related entity (Entity A) showing a debt due (of the amount of £2.5 million)
from the company to Entity A in circumstances where Entity A was an existing
debtor of the company.395 The booking of the £2.5 million as a credit to Entity
A allowed the debt to the company to be set-off, thereby depleting the assets
of the company. The company did not in fact owe any amount to Entity A but
owed the amount to another related entity (Entity B).The £2.5 million should
have been booked as a credit to Entity B and not Entity A.

The following is an example of an undervalue transaction where the value of the

consideration received by the company was significantly less than the value of the
consideration provided by the company:
• Excessive payments made by the company for management services provided
to the company.396 Overpayments by the company for goods or services can
constitute undervalue transactions.

389 Roy Goode, Principles<?( Corporate fllsolvency Law (4th edn, Sweet & Maxwell 20 I I) [ 13-24].
390 Dunlop Pneumatic '(yre Co Ltd v Selji-idge & Co Ltd (1915] AC 847.
391
Phillips v 8rewi11g Dolphin Bell Ltnvrie ltd[2001] I WLR 143, (20].
392 Re Borton Manufacturing Co ltd[l998] BCC 827.
393 Re ShaplandInc (2000]BCC 106.
3~ As is the position under general contract law principles, "past consideration" is no consideration and is
disregarded: sec Re Bang/a Television Ltd (2007] I BCLC 609.
"' Ma1111Aviatio11 G,vup (E11gi11eering)Lt (in ad111i11istration)v Lo11gmilllAviation Ltd [2011) EWHC 2238 (Ch).
'" Clements v Henry Hadaway Organisation Ltd (2008) I BCLC 224.
1004 LIQUIDATION

20.149 Determining the value of consideration. The value of an asset that is being offered
for sale is prima facie not less than the amount that a reasonably well informed
purchaser is prepared, in arms' length negotiations, to pay for it.397 Where property is
sold on the open market, after having been properly advertised and marketed, the sale
price will in general represent the open market value of the property. Where there has
been an actual exchange of that nature, there is no need for estimating the open market
value as the actual price paid will be taken as the open market value.398 Otherwise,
expert evidence will be required to determine market value. The consideration is to be
valued as at the date of the transaction. 399
20.150 Whole of transaction must be looked at. In valuing the consideration, the transaction
as a whole must be looked at. For instance, where the transaction involves a larger
arrangement composed of a number of individual linked transactions, the entirety of
the arrangement must be examined in assessing the consideration rather than looking
at each individual transaction separately.400 Another example is Agricultural Mortgage
Co,p pie v Woodward.401 In that case, the first defendant granted a lease of a farm to a
tenant at full market rent (being the best rent that could reasonably be obtained). The
property was subject to an existing mortgage though, and the tenancy was a protected
agricultural tenancy under the relevant legislation. The effect of the tenancy was to
reduce the value of the freehold interest in the farm by about a half. This effectively
conferred on the tenant substantial benefits, placing the tenant in a "ransom position"
vis-a-vis the morgagee if the mortgagee wished to sell the property free of the tenancy.
It was held that the benefits conferred on the tenant by the first defendant were
significantly greater in value than the rent received by the first defendant.
20.151 Relevance of subsequent events to valuation. In determining the value of
consideration, it may be relevant to take into account subsequent events which may
assist in determining the correct value to be attributed to the consideration at the time
of the transaction. In Phillips v Brewing Dolphin Bell Lawrie Ltd,402 a transaction
involved a sale of a stockbroking business by AJB through the sale of AJB's shares
in the company which owned the business. The transfer of shares was for the stated
consideration of£ 1. However, the purchaser (Brew in Dolphin) also agreed in return to
assumeAJB's obligations to its employees; and also, Brewin Dolphin's parent company
(PCG) agreed to take a sub-lease of computer equipment from AJB, with the total
"rent" payable over four years amounting to £ 1.25 million. This amount was equal
to a valuation of the stockbroking business which the parties had agreed to dming
negotiations for the above transactions. 403 The head-lease of the computer equipment
(under which AJB was head-lessee), however, prohibited any sub-leasing, and the sub-
lease which AJB granted to PCG amounted to a breach of the head-lease. In the event,

m Phillips v Brewing Dolphin Bell Lowrie Ltd [200 I) I WLR 143, [30).
m Re Brabon, 7)·elwme v Bra/>0n[200) I BCLC 11, 38.
m Phillips II Brewing Dolphin Bell Lawrie Ltd [2001) I WLR 143, (26]; Stanley v TMK Finance lid [2010] EWHC
3349 (Ch), (7)
<-00 Sec Phillips v Brewing Dolphin Bell Lawrie Ltd [2001] 1 WLR 143, discussed in para.20.151 below.
<-01 (1994] BCC 688.
2 (2001] 1 WLR 143.
<-0
3 The parties structured the sale in the above manner instead of via a simple payment of£ 1.25 million from the
<-0
purchaser to the seller due to tax and other commercial reasons.
 COMPULSORY WINDING-UP 1005

within a couple of months of the sub-lease, AJB defaulted in paying the rent due under
the head-lease. The head-lessor repossessed the computer equipment. PCG treated
the sub-lease as terminated and accordingly no payments had been made to AJB. AJB
was, at the time of the above agreements, in deep financial trouble, and a winding up
order was made against AJB a few months later (with a subsequent appointment of
an administrative receiver 04). The liquidator successfully argued that the sale of the
shares was at an undervalue. The consideration in return for the sale included the rent
to be paid by PCG. But PCG's covenant to pay the rent was valued at "nil". Jn valuing
the covenant, there was an uncertainty as to whether the sub-lease would survive for
the four year period (and hence whether AJB would ultimately be entitled to receive the
whole of the £1.25 million). Where the event on which the uncertainty depends has
actually happened, then it is relevant for the com1 to take note of what happened in
reality. Thus the House of Lords held that it was relevant to take into account the
subsequent events of the repossession of the equipment and the appointment of an
administrative receiver. Those events underscored the precariousness of the sub-lease
as at the time when the sub-lease was entered into.
But "hindsight principle" is not applied by the courts. Another example where it 20.152
is appropriate to take into account subsequent events for the purpose of valuation is
Stanley v TMK Finance ltd, 40; where the court took into account the subsequent sale
of the prope11y, in October 2006, in determining the value of the property in May
2005. The evidence was that there was no material difference in market conditions
between those dates and thus the price agreed between independent third parties
in 2006 was evidence showing what the open market value was in May 2005. The
above cases, however, do not mean that the courts apply a "hindsight principle", 406
whereby valuation is assessed with reference to changes in the market value caused
by subsequent events. It is permissible to use later events to establish by inference the
market value as at the date of the transaction. 407 But it is not permissible to take into
account later events which alter the value of the asset or other consideration, such as
later events which cause an increase in the market value of the property.408
Value of consideration is determined from point of view of company. The value 20.153
of both the consideration provided to the company and the consideration for which
the company entered into the transaction is assessed from the point of view of the
company.409 For example, additional benefit suffered by the company can be taken
into account, over and above the monetary amount given by a company, as long as the
detriment was a detriment bargained for or given in return (the quid pro quo) for the
promise made to the company.410

"" Under the head-lease, such an appointment was also an event which triggered the head-lessor's right to terminate
the head-lease.
4-0S [20 IOJ EWMC 3349 (Ch).
'°" Stanley v TMK Fi,umce Ltd [2010] EWHC 3349 (Ch). [16].
,o, Stanley v TMK Finance Ltd [2010] EWHC3349 (Ch), [16].
448 Sec Sumley v TMK Fina11ceLtd (2010] EWHC 3349 (Ch), (16}-(17]; Roy Goode, Principles of Corporate

Insolvency law (4th cdn, ThomsonSweet & Maxwell 2011) [12-32].

4-09 Re MC 8aco11Ltd (No 2) [ 1990] BCLC324, 340; Cle111e11tsv Hemy Hadtnvay 01ganisatio11Ud (2008] I BCLC
223, [33).
"" See Roy Goode,Pri11ciplesof Corporate lnsolve11cyLaw (4th edn,ThomsonSweet& Maxwell2011) [I 3-27).
1006 LIQUIDATION

20.154 Preferable, but not necessary, to arrive at precise valuation figures. lt is preferable,
but not essential, that the court arrives at precise valuation figures; and if that is not
possible, the court can decide that the value falls within a range. 411 It is also sufficient
if, in the absence of precise figures, the court is satisfied that the "incoming value" is
on any view significantly less than the "outgoing value" provided by the company.412
20.155 No clear guidance on meaning of "significantly less". The courts have not provided
any clear guidance on what constitutes "significantly less" when measuring the value of
the consideration provided by the company and that for which the company entered into
the transaction. In a bankruptcy case of Re Kumw; Lewis v Kumar, 413 the court regarded
the transaction to be at an undervalue in circumstances where there was "a substantial
element of bounty" on the part of the bankrupt; while in Clements v Henry Hadaway
Organisation Ltd, the court stated that for a transaction to be at an undervalue, "the
court must be satisfied that the incoming value is on any view 'significantly less' than
the outgoing value" (emphasis added); (see also para.20.154 above).
20.156 Giving security over assets. In Re M C Bacon Ltd,414 Millett J held that the mere
creation of a security over a company's assets cannot be a transaction at an undervalue
within the UK equivalent ofCap.32, s.265E(b). His Lordship stated:

"By charging its assets the company appropriates them to meet the liabilities due
to the secured creditor and adversely affects the rights of other creditors in the
event of insolvency. But it does not deplete its assets or diminish their value. It
retains the right to redeem and the right to sell or remortgage the charged assets.
All it loses is the ability to apply the proceeds otherwise than in satisfaction of the
secured debt. That is not something capable of valuation in monetary tem1s and is
not customarily disposed of for value."415

20.157 Giving of guarantees. Where a company gives a guarantee in favour of a lender for
the purpose of a loan granted by the lender to a third party, the situation is not one
where the company provides a gift or receives no consideration. 416 The consideration
is the making of the loan by the lender, as long as that was done in return for the
giving of the guarantee by the company. Whether the guarantee is a transaction at an
undervalue depends on a comparison of (a) the value to the company of the granting
of the loan to the third party, with (b) the value provided by the company in the giving
of the guarantee. As to the former, a guarantee for the purpose of a loan to a subsidiary
could, for example, be of value to the parent company providing the guarantee (since

'" Re Thoars, Reid v Ramlort Ltd (No 2) [2005] I BCLC 33 I, 383; Stanley v TMK Finance Ltd [2010] EWHC 3349
(Ch), [7].
"' Cle111e111s v He111yHadaway Organisation Ltd [2008] I BCLC 223, [34].
" 3 [ 1993] I WLR 224, 241.
"' [ 1990] BCC 78.
" 5 (1990] BCC 78, 92. This analysis has been applied or approved of in various cases (sec Notional Bank of
K11w(1itv Me,i=ies [ 1994] 2 BCLC 306 (Eng CA); Re Mistral Finance (in liquidation) [200 I] BCC 27; Fe(1kins
v Department for Envimnment Food and Rural Affairs [2007] BCC 54 (CA)) but was doubted by Arden LJ in
Hill v Spread Tmstee Co Ltd [2006] BCC 646, 674 (CA)). In any event, it may be that the position is different
in the case ofa security granted for the indebtedness ofa th.ird party: sec Roy Goode, Principles ofC01port11e
illsolve11cyLaw (4th edn, Thomson Sweet & Maxwell 2011) (13-38).
"" Tai/by v HSBC Ba11kplc (2015) BPIR 143.
 COMPULSORYWINDING-UP 1007

an injection of funds to the subsidiary could enhance the business and profitability
of the subsidiary, which is an asset of the parent company). As to the value provided
by the company, it seems that if the financial position of the third party borrower
(the principal debtor) is strong, then the lower the value of the guarantee provided by
the company (since the likelihood of the lender relying on the guarantee, and hence
the likelihood of the company being required to make a payment pursuant to the
guarantee, is lower). Conversely, if the principal debtor is in a poor financial state at
the time of the giving of the guarantee, then the value of the consideration provided by
the company (the giving of the guarantee) is higher.417

3.7.2 Time at which company entered into tnmsaction

A transaction at an undervalue is only voidable if it was given at a "relevant time" 20.158
(Cap.32, s.265D(2)), namely at a time in the period of five years ending with the
day on which the winding up of the company commences: Cap.32, s.266B(l)(a). 418
Unlike the position for unfair preferences, the same period applies whether or not the
transaction was entered into with a person connected with the company. Under the
UK provisions, a two-year period applies;419 however, the five-year period in Cap.32,
s.266B(l)(a) in Hong Kong aligns with that for undervalue transactions under the
Bankruptcy Ordinance (Cap.6).420

3.7.3 Comp"ny JVllS insolvent

Insolvent company: unable to pay debts. A transaction at an undervalue is voidable 20.159

only if the company was unable to pay its debts (i.e. insolvent) at the time when the
company entered into the transaction: see Cap.32 ss.265D(2), 266B(2). The test of
insolvency is the same as that applied for unfair preferences: see para.20.141 above.
However, a (rebuttable) presumption of insolvency applies under s.266B(3) if the
transaction was entered into with a person connected with the company (otherwise
than by reason only of being the company's employee). For the concept of "persons
connected with a company", see ss.265A-265C and paras.20.135 and 20.136 above.

3.7.4 Defence
Defence where transaction in good faith and would benefit company. A transaction at 20.160
an undervalue would not be voidable under Cap.32, s.265D if the court is satisfied that:

(a) the company entered into the transaction in good faith and for the purpose
of carrying on its business; and
(b) at the time the company did so, there were reasonable grounds for believing
that the transaction would benefit the company: s.265D(4).

"' Sec Tai/by v HSBC 8a11kpie [2015) BPIR 143; Roy Goode, Pri11ciplesof Corporate f11solve11cy Lt11v(4th cdn,
Thomson Sweet & Maxwcll 2011) [13-35)-(13-37).
" 8 However, sec also lhe requirement for lhe company to be insolvent in Cap.32, s.2668(2) and para.20.159 below.
" 9 Insolvency Act 1986 (UK) s.240(1)(a).
•2'l Bankruptcy Ordinance (Cap.6), s.Sl(l)(a); and see further FSTB, J111proveme111 of Corporate l11solvencyLaw
Legislative Proposals- Co11su!tatio11 (May 2014) 4-5.
Co11c/11sio11s
1008 LIQUIDATION

Section 265D(4) is derived from Insolvency Act 1986 (UK) s.238(5). The onus is on
the party seeking to rely on s.265D(4) to establish the elements in the defence. 421 For
example, s.2650( 4) may potentially apply where the company has made gratuitous
end-of-year or new year bonuses to employees. If the company was clearly solvent
at the time when the bonuses were paid, the bonuses were given as genuine bonuses
and were not exorbitant, then it is arguable that the elements in s.265D( 4) can
be satisfied. Although the bonuses are gratuitous, the company can benefit from
improved staff morale and improved relationships with staff arising from the
payment of the bonuses.
In the case of undervalue transactions within Cap.32, s.265E(b) (i.e. transaction entered
into with a person for considerntion significantly less in value than consideration
provided by company), the defence in Cap.32, s.265D(4) is also capable of being
applied. Although the consideration that the company receives might be considerably
less than what the company has provided, there is still a possibility of the company
receiving some other benefit from the transaction. Since "consideration" within Cap.32,
s.265E is the "bargained for" benefit, 422 there may be other benefits (not bargained for)
that the company may derive from the transaction in question. For example, where
the company sells goods at a heavily discounted price, the sale transactions could be
transactions at an undervalue under that s.265E(b). However, there can still be benefit
to the company-such as where the discounted sales are to raise cash flow or to dispose
of old stock that might not otherwise be sold at all, or where the discounts offered are a
part of a promotion in the nature of a "loss leader" that is intended to entice customers
to purchase additional goods or services from the company.

3.7.5 Court orders

20.161 Court may make appropriate order to restore position as if transaction not entered
into. An undervalue transaction is voidable under Cap.32, s.2650. Section 2650(3)
provides that the court may make such order as it thinks fit for restoring the position to
what it would have been if the company had not entered into the transaction. Section
266C, which applies to both unfair preferences and undervalue transactions, sets out
the specific orders that the court can make. The funds or assets recovered would be
available to the liquidator for distribution to the general (unsecured) creditors and
would not be covered by any charge over the company's assets since the right to seek
orders under the above provisions is a right belonging to the liquidator and not the
company.423

3.7.6 Where undervalue tra11saction also unfair preference

20.162 Undervalue transaction could also be unfair preference. There is a possibility that
the one transaction can amount to both a transaction at an undervalue and an unfair
preference. 424 In such a case, it is possible to rely on either sets of provisions for setting

421
Re 8arto11Mt11111facturi11g
Co Ltd [1998]BCC 827.
"' Sec para.20.147above.
.,, See Re Oasis MerchandisingServices Ltd [1998)Ch 170.
'" See, e.g., Clements v Henry Hadaway OrganisationLtd [2008] I BCLC223; and see also para.20.133above.
 COMPULSORY WINDING-UP 1009

aside the transaction, but the claw-back period under Cap.32, s.266B for undervalue
transactions is longer (5 years, compared with the period of 6 months (or two years for
preferences given to persons connected with the company)).

3.7A Invalid floating charges

Floating charge created 12 months or less before winding-up invalid if company 20.163
insolvent at the time (or 2 years for connected persons). One of the ways in which
company controllers who are also creditors (or even external lenders) may transfer
wealth to themselves to the detriment of company and other creditors is to elevate
the status of their existing unsecured rights against the company through creating
a floating charge when the company's insolvency is in sight. To protect creditors
against this form of strategic behaviour, Cap.32, s.267 invalidates a floating charge425
created 426 within the period of 12 months ending with the day of commencement of
the winding-up if, at the time of creation of the charge, the company was unable to
pay its debts or became unable to pay its debts in consequence of the transaction
under which the charge was created. 427 There should be no objections to granting a
floating charge over an antecedent unsecured debt if the company is solvent after
the creation of such a charge, as the creation of a floating charge in this situation
would more likely involve a genuine renegotiation of the terms relating to the
antecedent debt rather than an attempt to steal a march on other creditors in a
liquidation. However, in cases where the floating charge is granted in favour of
a person connected with the company,428 the time period for invalidity is 2 years
instead of 12 months before commencement of winding up and there is no need to
prove that the company was unable to pay its debts (insolvent) at the time of creation
of the charge. 429 The provision on invalidity is stricter for connected persons because
of the greater likelihood for such persons to seek to gain an advantage over other
unsecured creditors. 430

Exception to invalidity: where company receives new value for the charge. There 20.164
is an exception in Cap.32, s.267(3) in that a floating charge which is otherwise caught
by the section will be valid to the amount (in aggregate) of: (1) any money paid to, or

425 Following amendments made in 1995, s.267 applies to a charge that was a floating charge at the time it was
created (and see now s.267(5)). The amendment was made to avoid the argument that the provision does not
apply to a floating charge that had already crystallised into a fixed charge by the time of commencement of
winding-up (see Re Briglttlife Ltd [1987] Cb 200).
"' Where the charge is registered under the provisions on registration of charges in the Companies Ordinance
(Cap.622) Pt.8, the date of the creation of the charge shown on the certificate issued by the Registrar is treated as
the time of creation of the charge for the purposes of s.267: Re Moulin Global Eyecare Holdings lid (2009) 12
l➔ KCFAR 621. See further Chapter 17.
"' Cap.32 ss.267(2), 267A(2). For the meaning of"unable to pay its debts", see para.20. 141above. Sections 267 and
267A only apply if the company has gone into liquidation. A company goes into liquidation if: (a) the company
passes a resolution for voluntary winding-up; (b) a winding-up statement is delivered to the Registrar under
s.228A; or (e) the court makes a winding up order (sec Cap.32 s.265A).
" 8 For the meaning of "persons connected with the company", see paras.20. l 35 and 20.136 above.
4
?9 Cap.32,s.267A(I ).
•J-O Sec FSTB, fmproveme11t of Co,porate f11solve11cylaw legislative Proposals - Co11sultatio11Document (April
2013) 56-57. The provision on connected persons was added by the Companies (Winding-Up and Miscellaneous
Provisions) (Amendment) Ordinance (14 of2016), effective 13 February 2017.
1010 LIQUIDATION

at the direction of, the company at the time of, or subsequently to, the creation of, and
in consideration for, the charge; (2) the value of any property or services supplied to
the company at the time of, or subsequently to, the creation of, and in consideration
for, the charge; and (3) interest on the above amounts at the rate specified in the
charge or relevant agreement, or at the rate of 12 percent per annum, whichever is
the less. The reason why payment of money to the company, even where the company
may be insolvent after the creation of the floating charge, can validate the charge (to
the extent of the new value) is that there is fresh money brought into the company
as consideration for the charge. Creditors' interests are not injured to the extent that
the company has received new value for the charge, and so the charge is valid to the
amount of the fresh money received by the company.
20.165 Cap.32, s.267 exception: money paid to or at the direction of the company. The
exception in s.267 for value provided to the company applies only if there is new
value received by the company. Accordingly, where the charge is granted to secure
the company's liability for one of its existing (unsecured) debts, there is no new
value provided to the company within the exception. 431 Prior to amendments made
in 2016, 432 it was held that the exception only applied if money is actually paid to
the company and received in the hands of the company, such that the money must
be paid to the company in both form and substance. 433 Thus, where the person to
whom the charge is granted makes a payment to ce1tain of the company's creditors
instead of the company, the exception did not apply.434 This is now altered pursuant
to the 2016 amendments, where the money is paid to another at the direction of the
company. 435 Also, it was previously held that the case law requirement for the money
to be paid to the company in substance means that the charge can still be invalidated
where the money is paid to another indirectly by routing the money through the
company in circumstances where no value or benefit is received by the company. 436
It is submitted that this principle remains good law under the amended s.267. The
2016 amendments were merely intended to extend the categories of consideration
or value to the company (which were previously restricted to cash only) and to
avoid the rigidity of the requirement for payments to be received in the hands of
the company.437 The exception is still premised on "new value to the company". 438
If in substance the company receives no value, then the exception should not apply.
However, the requirement that value be received by the company in substance does
not mean that the company could not immediately use the funds to pay others; for
example, it would be possible for the company to use the money to pay off creditors
who are threatening to wind up the company so as to keep the company afloat or

•Ji Re GT Whyte & Co Ltd [ 19831BCLC 311.

"' Companies (Winding-Up and Miscellaneous Provisions) (Amendment) Ordinance (14 of 2016), effective 13
February 2017. The amendments are based on Corporations Act 200 I (Cth of Aust) s.588FJ(2)(a) and Insolvency
Act 1986 (UK), s.245(2)(a).
m Re DreamAsia Ltd [2003] 2 HKLRD 287, [2003] 3 HKC 222.
"' Re DreamAsia Ltd [2003] 2 HKLRO 287, [2003] 3 HKC 222.
43
' Cap.32, s.267(3)(a)(ii) .
.,. Sec Re OrleansMotor Co lid [1911] 2 Ch 41; Re Fainvay Maga=inesLtd [1992] BCC 924.
437
Law LegislativeProposals- ConsultationDocumem(April2013) 57.
FSTB, Improvementof Co,porate /11solve11cy
438 ibid., 56-57.
 COMPULSORY WINDING-UP 101 I

the company could pay off creditors to ensure future supplies. 439 The critical factor
is whether the value to the company of the consideration given for the charge is
illusory.440
Cap.32, s.267 exception: property or services supplied to the company. Pursuant 20.166
to the 2016 amendments, value to the company in the form of property or services
supplied to the company was also included within the exception in s.267. This is to
cater for arrangements which involve supply of property or services to the company
on credit.441 The value of the property or services, for the purpose of determining the
amount for which the charge is valid under s.267(2), is the amount in money which, at
the time the property or services were supplied, could reasonably have been expected
to be obtained: (a) for supplying the property or services in the ordinary course of
business; and (b) on the same terms (apart from the consideration) as those on which
they were supplied to the company.442
Time of payment of cash to company: whether before creation of charge. The 20.167
principle that the grant of the charge to secure a pre-existing unsecured debt does not
fall within the exception in s.267 follows from the requirement in the exception that
the consideration must be provided "at the same time as, or after, the creation of" the
charge. However, with regard to the time at which payment is made, the traditional
position of the court appears to be "quite generous". 443 In Re Columbian Fireproofing
Co Ltd, 444 money paid 11 days before the execution of the charge, but in anticipation
of and in reliance upon it being executed, was held to have been paid at the time of,
etc., the creation of the charge. In Re F & E Stanton ltd, 445 the court made a similar
decision where at least 54 days elapsed after the first advance and five days after the
first advance, before the debenture was executed. The modern position appears to be
different. In Power v Sha,p Investments Ltd,,w, the court held that Neville J's decision in
Re Columbian Fireproofing Co Ltd was wrong for two reasons. First, Neville J's decision
was based on the proposition that "a payment made on account of the consideration for
the security, in anticipation of its creation and in reliance on a promise to execute it,
... is made at the time of its creation within the meaning of the section."447 Second, the
court in Re Columbian Fireproofing Co Ltd failed to pay due regard to the distinction

"' Re Dream Asia Ltd (2003] 2 HKLRD 287, (2003] 3 HKC 222, 227; Re MarrltewEllis Lrd [ I933] Ch 458. The
amended s.267(3)(a)(ii) makes it clear that such payments can be made directly to the third party creditor without
the need for payment to the company first.
' 40 There is no express proviso which dis-applies the exception where the funds advanced to the company are used to

discharge an existing debt owed to the chargee, as contained in Corporations Act 2001 (Cth of Aust), s.588FJ(4)
(and as to which, see Lucas v Cllrrie (2013) 2 I 7 FCR 308). However, it is submitted that the exception in Cap.32,
s.267(3) would not apply to such a re-financing by the lender if the circumstances are such that the company
does not in substance receive any value or benefit and the transaction merely results in conversion of the lender's
unsecured debt into a secured debt. See also Roy Goode, Pri11ciplesof Co,porate fllsolve11cyLaw (4th edn,
Thomson Sweet & Maxwell 201 I) [13-117).
"' FSTB, lmproveme111 of Corpott,te Insolvency Law LegislativeProposals- Consulwtion Doc1111um1 (Apri I 2013) 57.
".i
2 Cap.32,s.267(4).

"' EL GTylcr (ed.),Hong Kong Company Law Handbook (LcxisNexis, 11th edn) 1181.
"' (1910) 2 Ch 758 and on appeal [1910) 2 Ch 120.
"' [ 1929) I Ch I 89
,.., (1994) I BCLC 111, (1993] BCC 609.
"' Re Co/11111bian Fireproofing Co Ltd [ 191OJ2 Ch 758, 765, per Neville J.
1012 LIQUIDATION

that Buckley J made in Re Jackson & Bassford 448 between two different categories of
cases. The first of these is where the promise to execute a debenture creates a present
equitable charge (namely where there is a binding agreement for the creation of a
charge), in which case a charge has already been created before the execution of the
formal debenture. The second is where the promise is only a promise that in some
future circumstances a charge shall in the future be created, in which case there is no
present security created. The existence of a promise in the second scenario is irrelevant
to the application of s.212 of Companies Act 1908 and s.245 of Insolvency Act 1986,
which are UK provisions equivalent to Cap.32, s.267. In Re Moulin Global Eyecare
Holdings Ltd,449 Kwan J followed the UK Court of Appeal's judgment in Power v Sharp
Investments Ltd and held that the alleged floating charge was void where payment was
made two months before the creation of the charge.450

3.8 Fraudulent trading

20.168 Person can be held liable for company's debts for fraudulent trading. A person
can be liable for the company's debts where there has been fraudulent trading within
Cap.32, s.275(1 ). The provision is intended to protect creditors from fraudulent
conduct by directors. 451
20.169 Elements which need to be established to impose liability for fraudulent trading.
The following elements need to be established to impose liability on a person for
fraudulent trading under Cap.32, s.275(1 ):

(I) there was a carrying on of any business of the company;

(2) the business was carried on:
(a) with an intent to defraud creditors; or
(b) for any fraudulent purpose; and
(3) the person was knowingly party to the caITying on of the business.

20.170 Civil and criminal liability. Civil liability for the company's debts can only be
imposed under Cap.32, s.275(1) if the company has entered into liquidation. However,
there is also criminal liability under Cap.32, s.275(3) that applies whether or not the
company has entered into liquidation.
20.171 Applications can be made by OR, liquidator, creditor or contributory of company.
Application under Cap.32, s.275(1) can be made by the Official Receiver, liquidator or
any creditor or contributory of the company.

"8 (190612 Ch 467,476 to 477,per Buckley J.

"' (Unrep., 2008 WL 1933176, CF!, [2008] HKEC 923). This point was not in issue on appeal [2009] 4 HKLRD
203, CA; (2009) 12 HKCFAR 621, CFA.
"" However, where the interval between payment and the creation oft he charge is so shorl that it can be regarded as
de minimis (such as a "coffee-break"), the payment will still be regarded as being made at the time of creation of
the charge: Power v Sha,7, lnvest111e11ts
Ltd [1994] 1 BCLC 111, [ 19931BCC 609. 619.
'" The original provisions in the UK were enacted following the recommendations of the Greene Committee Report
(Wilfield Greene, "Report of the Company Law Amendment Committee" (Cmnd 2697, 1926).
 COMPULSORY WINDING-UP 1013

3.8.J Carrying 011 of any business of the company

Interpretation of "any business of the company has been carried on" in Cap.32, 20.172
275(1). The words "any business of the company has been carried on" in Cap.32,
s.275(1) have been interpreted very widely by the courts. A single transaction can
come within the concept of "any business"; 452 and moreover the business need not be
an active trading business of a company.453 For example, the sale of a company's sole
capital asset might not be part of the ordinary trading business of a company, but the
sale would be "any business" of the company within that s.275(1). 454

3.8.2 Fraud
Fraud or subjective dishonesty must be established. Fraud or subjective dishonesty 20.173
must be established for Cap.32, s.275(1) to apply. There would be fraudulent trading,
for example, where the directors incur liabilities on behalf of the company with the
intention that the creditors would not be repaid at all. However, directors are not
deemed to have acted fraudulently merely on the basis that the company continued
to carry on business and to incur debts at a time when there is, to the knowledge of
the directors, no reasonable prospect of the creditors ever receiving payment of those
debts.455 While such knowledge on the part of a director could be evidence of intent to
defraud, what must be shown is that the director was personally dishonest. A person
would be regarded as being dishonest if the person acts in a way that he or she knows
to be dishonest according to the standards of reasonable or honest people, even though
he or she feels personally that the conduct is not dishonest (measured against his or
her own standards). 456 It is also arguable that reckless conduct can amount to dishonest
conduct. 457
Aktieselskabet case: director who secured refinancing of loan prior to liquidation 20.174
did not act fraudulently as honestly believed would have ongoing support from
parent company. In Aktieselskabet Dansk Skibsfinansiering v Brothers,458 the
company was facing a liquidity c1isis as it was having difficulty in finding the cash
to meet its commitments for the purchase of a number of ships. To deal with this
problem, a director of the company was able to obtain the agreement of a lender to
revise the terms of financing for the ships. The company, however, was unable to
trade out of its difficulties and subsequently entered insolvent liquidation. The lender
commenced proceedings, arguing that the directors had engaged in fraudulent trading.

"' Re Gerald Cooper Chemicals Ltd (1978) 2 All ER 49.

453
Re Sarf/lJx Ltd (1979) I All ER 529.
"' Re Nimbus Trawling Co Ltd [ I 986) 2 NZLR 308.
"' Aktieselskabet Dtmsk Skibsfinansieri11g v Brothers [2000) I HKC 511, CFA.
456 See R v Lockwood [ I986) Crim LR 243. This approach is arguably supported by Lord lfoffmann's judgment

in Aktieselskabet Dansk Skibsfi11a11sieringv Bratlte1:f (2000) 3 HKCFAR 70; [2000) I HKC 5 I I: see Stefan
Lo, "Directors" in Justice Susan Kwan et al. (eds.), Company law i11Ho11gKong: fllsolve11cy 2018 (Sweet and
Maxwell, Hong Kong, 2018) [1.035). Sec also Tradepower (Holdings) Ltd (i11liq) v Tradepower (Hong Ko11gj
Ltd [2010) I HKC 380, CFA, [851-[90) as to the reasons why an objective test of dishonesty is not applicable in
a statutory provision such as s.275, although an objective test may be appropriate in determining whether there
was fraud or dishonesty in other contexts.
'" 1-fordie v 1-/(mson(1960) 105 CLR 451; and sec also Stefan Lo, "Directors" in Justice Susan Kwan et al. (eds.),
Company Law in Hong Kong: Insolvency 2018 (Sweet and Maxwell, Hong Kong, 2018) (1.035).
" 8 (2000) 3 HKCFAR 70; [2000) I HKC 511.
1014 LIQUIDATION

The Court of Final Appeal held against the lender, affirming the decisions of the lower
courts that the directors did not act fraudulently in circumstances where they honestly
believed that the parent company would provide the necessary support to enable the
company to trade through the trough in the trade cycle and return to prosperity. The
court emphasised that the fact that the likelihood of smvival of the company was
objectively low is not inconsistent with honesty. Nonetheless, if there is evidence that
the directors failed to properly consider the prejudice to creditors which may flow
from their conduct, as a reasonable and honest person might have considered, or if
there is evidence that the directors have otherwise failed to act as a reasonable and
honest person might have acted, then such evidence could be taken into account by
the court in deciding whether or not to believe the directors when they claim that
they were acting honestly. However, as Lord Hoffmann noted in the decision, in cases
where fraud has been inferred from the evidence, there is almost always "something
else" apart from simply the directors knowing that there was no reasonable prospects
of the creditors ever being paid-such as a misrepresentation to creditors of the
company's position or their prospects of payment, or dishonest intent to gain some
personal advantage. In R v Grantham,459 the English Court of Appeal had held that the
jury was entitled to find that the directors were intending to deceive a supplier where
the company had ordered potatoes from the supplier on 28 days credit for a total of
£88,000 in circumstances where the company had no assets and no credit facilities,
and where the company had sold the potatoes for £68,000 and distributed most of the
proceeds among the directors. Commenting on this case, Lord Hoffmann observed
that there was both an intention to gain a personal advantage as well as deception
of the supplier, who was led to believe that he would be paid in 28 days when the
directors knew perfectly well that there was no hope of that coming about.
20.175 "Intent to defraud creditors" and "fraudulent purpose." Section 275(1) ofCap.32
can apply where there was "intent to defraud creditors of the company or creditors
of any other person". For the purposes of this s.275, "creditor" means any person
to whom money is owed, whether or not the debt can be presently sued for.460 For
example, customers with an unliquidated claim against the company can be a creditor
within s.275. 461 But to come within sub-s.275(1), the fraud need not be directed
towards creditors; there can be fraudulent trading if any business of the company has
been carried on for any "fraudulent purpose". The scope of the words "fraudulent
purpose" is not entirely clear. In R v Kemp,462 the English Court of Appeal considered
that those words are deliberately wide and held that they encompassed fraudulent
misrepresentations made by a person inducing customers to believe that they had
ordered more goods from the company than they had in fact ordered. By contrast,
in Mmphitis v Bernasconi,463 a differently constituted Court of Appeal held that
not every fraud or fraudulent misrepresentation perpetrated by a company amounts
to fraudulent trading, and that, on the facts, a fraudulent misrepresentation made to

' 59 [1984) QB 675.

"'° R v Smith [ 1996) 2 BCLC I 09.
...,, R v Sellio11[1982) Crim LR 676.
"' [ 1988) QB 645. For other cases supporting a wide interpretation of the words "fraudulent purpose", sec Re Cyo11c1
DistributorsLtd [ 1967) Ch 889. 892; R v Philippo11(1989) 89 Cr App R 290; R v Goldman(1997) Crim LR 894 .
...,, [2003) Ch 552. See also Re Gerald Cooper Chemicals Lid [ 1978) Ch 262.
 COMPULSORY WINDING-UP 1015

the company's landlord did not amount to fraudulent trading.464 However, the earlier
decision was not cited in the latter case, and it also appears that the court in the latter
decision did not examine the concept of "fraudulent purpose" separately from the
concept of "intention to defraud creditors", even though they are independent grounds
for determining whether the requisite element of fraud was present.

3.8.3 Persons liable

Persons liable those knowingly party to carrying on business with fraudulent 20.176
intent. The persons liable under Cap.32, s.275 are those who are knowingly party
to the carrying on of the business with fraudulent intent. The person must be a party
to the fraudulent trading in that he or she participates in, takes part in, or concurs
in the conduct. 465 At the time of participating in the conduct, the person must have
knowledge that the business was being carried on to defraud creditors or for a
fraudulent purpose. 466 In Bi/ta (UK) Ltd (in liq) v Nazir,461 the UK Supreme Court
held that an English court winding up an English company had worldwide jurisdiction
over the company's assets and hence Insolvency Act 1986 (UK), s.213 (equivalent of
Cap.32, s.275) has extraterritorial effect so that orders under the section can be made
against persons who are domiciled outside of the jurisdiction. Similarly, Cap.32, s.275
should also have extraterritorial effect.

3.8.4 Court orders

Court can order party to fraudulent trading to be personally responsible for 20.177
debts and liabilities of company. Where a person is knowingly party to fraudulent
trading under Cap. 32, s.275(1), the court can order the person to be personally
responsible, without any lin1itation of liability, for all or any of the debts or other
liabilities of the company. It seems that the appropriate extent of liability of a person
should be an amount representing the loss of the company caused by the fraudulent
trading.468 The com1 should not include any punitive element in the amount of any
contribution ordered under this s.275(1).469 Any sums of money recovered under s.275
will be available to the liquidator for the creditors generally (and not just the defrauded
creditor).470

3.9 Extortionate credit transactions

Court can set aside or vary extortionate credit transactions entered into before 20.178
winding-up. Under Cap.32, s.264B, the court can set aside or vary extortionate credit
transactions that the company had entered into in a certain period before winding-up.

'"" The court stated that situations where "any business of the company has been carried on with intent to defraud
creditors" (as contemplated by the statutory provision) do not extend to all situations where "any creditor of the
company has been defrauded in the course of carrying on the business of the company" ([46]).
40s Re MC1ids1oneBuildings Provisions Ltd [1971) 3 All ER 363.

""" Re Bank of Credit and Commerce Intl SA (in liq); Morris v Bank of India [2004] 2 BCLC 279; affirmed on
appeal: [2005] 2 BCLC 328 .
.,., [2015] 2 WLR 1168.
""8 Morphitis v Bernasconi [2003] Ch 552, [55].
' 69 Morphitis v Ber11asco11i(2003) Ch 552, (55).
"" Re William C Leitch Bros (No 2) (1933) Ch 261.
1016 LIQUIDATION

The insolvency legislation does not in general allow bad bargains entered into by the
company to be set aside for the benefit of creditors, but s.264B provides an exception
in the case of particularly harsh credit transactions.471
20.179 Elements to be established for extortionate credit transactions provision to apply.
The provision applies to a company being wound-up where each of the following
elements is established and prescribed in Cap.32:

(I) The company is, or has been, a party to a transaction for, or involving, the
provision of credit to the company (e.g. a loan agreement).
(2) The transaction is extortionate. A transaction is extortionate if, having regard
to the risk accepted by the person providing the credit: (a) the tem1s of the
transaction require grossly exorbitant payments to be made in respect of
the provision of the credit; or (b) it otherwise grossly contravenes ordinary
principles of fair dealing: s.264B(3).472 Section 264B(3) imposes the burden
of proof on the party arguing that the transaction is not extortionate to
establish that the transaction is not extortionate.
(3) The transaction was entered into in the period of three years ending on
(in the case of winding-up by the court): (i) the date of the resolution for
winding-up, if the company had entered into compulsory winding-up on the
basis of a special resolution for compulsory winding-up; or (ii) the date of
the winding-up order in any other case.

20.180 Liquidator entitled to make application; orders that court can make. The
liquidator is entitled to make the application under Cap.32, s.264B. If the transaction
is extortionate, then the court can make any of the orders set out in sub-s.264B(4).
These include orders setting aside any obligation created by the transaction, varying
the terms of the transaction or requiring any party to the transaction to pay to the
liquidator sums paid to that person by the company.

3.10 Misfeasance

20.18] Summary procedure for misfeasance under Cap.32, s.276. Section 276 sets out
a summary procedure for obtaining compensation for a company which is being
wound-up from the company's officers and others who are liable to the company for
misfeasance or breach of duty. The provision does not create an independent basis
of liability but simply provides for a summary procedure for enforcement of the
company's existing rights 473 that may be quicker and cheaper compared to ordinary
court proceedings against the delinquent officer. An application under s.276 can be
dismissed on the basis that it has no prospects of success if the threshold requirement

'" Sec the recommendations of the Cork Report: Kenneth Cork, "Report of the Review Committee on Insolvency
Law and Practice" (Cmnd 8558, 1982).
" 2 For cases decided under similar provisions in the Consumer Credit Act 1974 (UK) ss.I37-140, sec Wills v U0od
(1984) 128 Sol Jo222; Coldunell ltd v Gallon [1986] 1 All ER 429; Davies v Direct loans Ltd (1986) 2 All ER
783; Batooneh vAsombang [2003] EWHC 2111.
"' Cavendish Bentick v Fenn (1887) 12App Cas 652,669.
 COMPULSORY WINDING-UP 1017

for application of the section is not met. The threshold requires the applicant to
establish a prima facie case, not in the sense of some formal evidential burden of
proof, but it must be shown there is sufficient basis for the relief sought under s.276,
that there is something which warrants an inquiry.474
Applications can be made by the OR, liquidator, creditor or contributory. 20.182
Applications can be made under s.276 by the Official Receiver, liquidator or any
creditor or contributory. The persons liable under the section are any person who has
taken part in the formation or promotion of the company,475 or any past or present
officer,476 or liquidator 477 or receiver of the company.
Situations when misfeasance proceedings can be brought under section 20.183
276. Misfeasance proceedings under s.276 can be brought where the person has
misapplied, or retained or become liable or accountable for any money or property of
the company, or been guilty of any misfeasance or breach of duty in relation to the
company that is actionable at the suit of the company.478 This includes, for example,
breaches of fiduciary duty by directors, breaches of the duty to act with due care, skill
and diligence by directors, and breaches of the restrictions under the maintenance of
capital doctrine.
Court can order liable party to repay, restore money or property to company or 20.184
pay compensation. Where the person is liable under Cap.32, s.276 proceedings, the
court can make orders to compel the person to repay or restore the money or property
to the company, or to pay compensation to the company.

3.11 Liability of contributories

Court may make calls on contributories. Cap.32, s.170 deals with the liability of 20.185
contributories to contribute to the assets of the company in a winding-up to meet the
company's debts and liabilities. Shareholders in a company limited by shares would of
course not be required to contribute any amount exceeding the amount, if any, unpaid
on their shares.479 The court may make calls on contributories pursuant to Cap.32,
s.213.480 This power is delegated to the liquidator but the liquidator must not make
any call without the special leave of the court or the sanction of the committee of
inspection.481 "Debts and liabilities" within s.170 of Cap.32 covers not only provable
debts but also non-provable liabilities, and accordingly the liability of contributories

"' Kai Finance Co Ltd [2015] 2 HKLRD 264, [27] (CA). This threshold is similar to the threshold that a
Re S/11111
member would have to meet to bring a common law derivative action, and is different to the principles for striking
out under Rules of the High Court, Order 18 r.19: [2015]2 HKLRD 264, [24)-(26].
7
" ' I.e., promoters:see Chapter2.
476 See the definition of "officer" in Cap.32, s.2( I).
417 Provisional liquidators arc also included. ln the case of liquidators who have been given a release under Cap.32
s.205. applications under that later s.276 may only be made with leave of the court; sec also Cap.32, s.276(1B).
" 8 Sec, cg., Liquidator of Wing Pai Construction Co lid (in liq) v Yip Kwong Robert [2018] 1 HKC 472.
-119 Cap.32,s.170(1)(d).
<$0 But where the shares in question arc fully-paid shares, any transfer of such shares has no impact on the interests
of creditors in the winding-up and so generally the court should validate such a transfer .
..s, Cap.32, s.226; see also Companies (Winding-Up) Rules (Cap.32H), rr.74-78.
1018 LIQUIDATION

to contribute to the assets of the company extends to contribution for payment of such
amounts. 482
20.186 Transfer of shares after commencement of winding-up void. To ensure that the
liability of contributories is preserved, s.182 of Cap.32 renders void any transfer of
shares or alteration in the status of a member after the time of commencement of
winding-up 483 unless the court makes a validation order. The restriction on the transfer
of shares is aimed at preventing a holder of partly-paid shares transferring the shares
to an insolvent person. 484 The test for determining whether the court should grant an
application for validation of a share transfer is to ask whether or not the creditors might
be better or worse off in the event of a winding-up order being made, and the transfer
not having been sanctioned. 48 ' Generally the cowt should be prepared to validate a
transfer of fully-paid shares as such a transfer would not prejudice the interests of
creditors. 486
20.187 Liabilities of directors and shareholders where shares redeemed or bought back
out of capital. As discussed in Chapter 15, it is possible for a company to finance a
share redemption or buy-back out of capital under Cap.622, ss.257(2)( c) and 258-266
if, inter alia, the directors make a solvency statement in accordance with Cap.622,
ss.205 and 206. If a payment out of capital has been made but the company enters into
insolvent winding up within a year after the payment out of capital, then the directors
and shareholders concerned are potentially liable to contribute to the company's assets
in the winding up under Cap.32, s. l 70A.487 Liability under that provision may arise if:

(i) winding up commenced on, or within I year after, the date on which the
payment out of capital was made; and
(ii) the aggregate amount of the company's assets and the amounts paid by way
of contribution by contributories under Cap.32, s.170 is insufficient for
payment of the company's debts and liabilities, and the costs, charges and
expenses of the winding up.

Each shareholder whose shares were redeemed or bought back out of capital is liable
to contribute to the company's assets to meet the shortfall referred to above, up to the
amount of the payment out of capital received by the shareholder. Each director is also
jointly and severally liable with the shareholders for the full amount of the shortfall
unless the director had reasonable grounds for forming the opinion on the company's
solvency in the solvency statement.

' 32 Re Lehman Bros lnter11atio11al(Europe) (i11admi11istmtio11)(No 4) [2017] UKSC 38, [2017] 2 WLR 1497 (but
stan,tory interest is not within Insolvency Act 1986 (UK) s.74 (equivalent of Cap.32 s.170)).
' 83 The winding-up is deemed to commence from the time of presentation of the petition: Cap.32, s.184(2).
' 8' Rudge 1180111111(111(1867-68) LR 3 QB 689. 696.
' 85 Re 8elgravia Properties Ltd[2015] I HKLRD 509, [6].
' 80 Re 8elgravia Properties Ltd [2015) I HKLRD 509.
481
This provision was introduced by the Companies (Winding-Up and Miscellaneous Provisions) (Amendment)
Ordinance (14 of 2016). effective 13 February 2017; and sec Financial Services and Treasury Bureau,
/111prove111e111
ofCo,porate lnso/11e11cy Law Legislati11eProposals: Co11s11/tatio11 (April 2013) 64-66;
Doc11111e11/
Cons11/tationCo11c/11sions (May 2014) 6-7.
 COMPULSORY WINDING-UP 1019

3.12 Creditors entitled to claim in the winding-up

3.12.1 Provllble debts

Creditors entitled to claim in winding-up those with provable debt. The creditors 20.188
entitled to claim in the winding-up are those with a provable debt within Cap.32,
s.263. For solvent companies being wound-up, provable debts are all debts owed by
the company, whether present or future, whether certain or contingent, and whether
liquidated or unliquidated. For insolvent companies, the provable debts are those set
out in s.34 of the Bankruptcy Ordinance (Cap.6), as applied by Cap.32, s.263. 488 These
include all debts and liabilities, present or futme, certain or contingent, to which the
company is subject at the date of the winding-up order. Unliquidated damages are
provable only if they arise by reason of a contract, tort, promise or breach of trust. 489
The amount provable for contingent claims and unliquidated damages would need to be
estimated. 490 Where the payment under a debt has already been earned by pe1formance
by a creditor (i.e. where the contract is executed on the part of the creditor), but the
debt is not payable until some future time, any dividend paid to the creditor before
the date due for payment is discounted to take into account the early payment. 491
Where the payment has not been earned by performance by the creditor at the time
of winding-up (i.e. where the contract is executory on the part of the creditor), then
the creditor can prove for the amount only if and when it is earned. 492 However, where
the pre-liquidation contract is actively adopted by the liquidator for the benefit of the
winding-up (e.g. adoption of a lease in order to run the company's business), then the
amounts earned by, and due to, the creditor after the commencement of winding-up
are payable to the creditor as expenses of the liquidation rather than being treated as a
provable debt. 493 In all cases where a contract is entered into by the company (or by the
liquidator on behalf of the company) after the commencement of winding-up, debts
due to a third party under the contract are also payable as expenses rather than being
provable. For liabilities to creditors which are not provable debts (nor expenses of the
winding-up 494), they are still dealt with in the winding-up, but would only be payable
after all the provable debts are paid in full. 495

Secured creditors need not prove debts and can rely on security unless security 20.189
insufficient to satisfy claims: required to prove for remaining amounts. Secured
creditors need not prove for their debts and can simply rely on their security. However,

'" Section 264 incorporates fu11her bankruptcy rules in the winding-up of insolvent companies. Under this
provision, the rights of secured and unsecured creditors and to debts provable and to the valuation of annuities
and future and contingent liabilities as are in force for the time being under the law of bankruptcy are applicable
in the winding-up of insolvent companies. On the scope of application of bankruptcy provisions, see Hallmark
Cards Ille v YrmCl,oy Ltd [20 I2) I H KLRD 396, (20 I I) 5 HKC 453.
489 Bankruptcy Ordinance (Cap.6), s.34( I).
49<l Ibid.

49
' See Companies (Winding-Up) Rules (Cap.32H), r.89 and Re ParkAir Services Pie; Chriswpher Moran Holdings

Ud v 8t1irstow [2000) 2 AC 172.

"' Re Park Air Services pie: Christopher Mom11Holdings Ltd v 8airstow (2000] 2 AC 172.
493
Re Lundy Granite Co. exp Heava11(1871) LR 6 Ch App 462; Re ABC Coupler cmd Engineering Co Ltd (No 3)
(1970] I All ER 650.
,.. For the meaning of liquidation expenses, sec Re Nortel Gmbl-1(i11admi11)[2014) AC 209, (97)-( 104).
"' See Re Nortel GmbH (in admin) (2014) AC 209, [39] (UKSC);Re Lehman Brothers (Europe) (in admi11istralion)
(No 4) (2017] UKSC 38, (2017] 2 WLR 1497.
1020 LIQUIDATION

if the security is insufficient to satisfy their claims, then secured creditors can prove
for the remaining amounts.
20.190 Only one proof can be lodged in respect of single debt. The rule against double
proof means that only one proof can be lodged in respect of a single debt, even though
there may be more than one contract in respect of the same debt.4% This is to avoid
the liquidator paying out two dividends for what is essentially the same debt. For
example, consider the case where a guarantor has guaranteed the whole of the debt497
of a company, which subsequently enters into liquidation. The creditor is entitled
to prove for the whole amount of the debt (and this is so even if the creditor has
partly been paid by the guarantor). 498 The guarantor is not entitled to prove for the
debt unless the guarantor pays the debt in full. Once the creditor has received the full
amount owed, then the guarantor becomes subrogated to the rights of the creditor in
the winding-up. 499

3.12.2 Proce,lure for proving

20.191 Proofs lodged by creditors. Proofs are lodged by creditors pursuant to the Companies
(Winding-Up) Rules (Cap.32H).s00The liquidator examines every proof of debt lodged
to determine whether to admit or to reject it.soiThe creditor can appeal decisions of the
liquidator to the court. 502

3.12.3 Set-off
20.192 May be possible to set off amount owed by creditor to company against debt owed
by company to creditor. If the creditor owes an amount to the company, it may be
possible to set off that amount against the debt owed by the company to the creditor,
in order to determine the amount for which the creditor can prove in the winding-up.
In the absence of such a set-off, the creditor would have to pay the full amount owing
to the company and then try to recover the full amount owed by the company to him
or her. This would be disadvantageous to the creditor since he or she would have to
compete with other creditors in claiming the full amount of the debt. The bankruptcy
rule of set-off in Bankruptcy Ordinance (Cap.6), s.35 applies by virtue of Cap.32,
s.264. Pursuant to s.35, where there are mutual credits, mutual debts or other mutual
dealings between the company and the creditor, account must be taken of what is
due from the one party to the other in respect of such mutual dealings and the sum

496 Deering v Ba11kof Ireland (1886) 12 App Cas 30, HL; Re Peregrine l11vestme11ts Holdi11gsLtd (No 6) (2008) 3
HKLRD 145.
491 A guarantee is for the whole of a debt, even though it is subject to a cap or limitation ofliability. That situation is

different to the situation where the guarantee is for a part of the debt: see Re Sass,Exp Narional Provincial Bank
of England Lrd [ 1896] 2 QB 12.
••8 Re Sass,Exp Narional Provi11cialBa11k'!( England Lrd [ 1896] 2 QB 12.This reflects the position before winding-
up where the creditor would be entitled to sue the debtor for the full amount of the debt: [ 1896] 2 QB 12, 14.
••~ Re Fe,,ron Lrd, Exp Fenron Textile Association ltd[1931] 1 Ch 85. 115. See generally Edward Bailey and Hugo
Groves, Corporate lnsolve11cyLaw a11dPractice (4thcdn, LcxisNexis Buttcrworths 2014), Ch 27.
'°° Sec rr.79-93; and sec also Cap.32 s.217. The Proof of Debts Rules (Cap.6E) are also applic.ablc by virtue of
Cap.32 s.264: see, e.g., Re Leco WatchCase Ma1111fac1ory Ltd [2017] 2 HJ<LRD 388.
'°' Companies (Winding-Up) Rules (Cap.32H), r.94.
'°' Companies (Winding-Up) Rules (Cap.32H), r.95; and see Tmstee in Ba11kr11ptcy of lo Siu Fai Louis II Toohey
(2005) 4 HKC 51 (CA); Re Leco WatchCase Ma111ifacto1y Ltd (2015) 2 HKLRD 87.
 COMPULSORY WINDING-UP 1021

due from the one party shall be set off against any sum due from the other party
and the balance of the account, and no more, is to be claimed or paid on either side
respectively. For example, where a company in liquidation owed remuneration due to
an employee salesman in circumstances where the salesman still held money received
for goods sold and to which the company was entitled, the two amounts were required
to be set off.503
Mutual claims must exist at time of winding-up and must be pecuniary for set-off 20.193
to occur. The mutual claims must exist as at the time of the winding-up order,504 and
the claims must be in respect of pecuniary demands. 505 There must also be mutuality
in that, first, the demands must be between the same parties, and secondly, they must
be held in the same capacity or right.506 Mutuality is concerned with the status of
the parties and their relationship to each other such that each of the parties must be
beneficially interested in the claim against the other.507 The requirement of mutuality
is not concerned with the nature of the claims themselves. 508

3.13 Realisation and distribution of assets

Assets realised by liquidator distributed to creditors and contributories. Assets that 20.194
are realised 509 by the liquidator can be distributed to the creditors and contributories.
Creditors are entitled to payment before the contributories. The order of distribution
is outlined below. The order depends on whether the payments are made from secured
assets or from the company's "free assets". Secured assets are not dealt with in the
liquidation itself, but Cap.32, s.265 allows certain creditors (the preferential creditors)
to claim payment out of assets subject to floating charges in priority to the holders of
the floating charges. The intention under s.265 is to give some measure of protection
to certain categories of creditors, such as employees. 510 Priorities between competing
charges are dealt with at Chapter 17.

3.13.1 Assets subject to fixed charges (or mortgages)

Distribution order. The order of distribution is as follows: 20.195

(I) Costs of preserving and realising the assets; and receiver's remuneration and
costs and expenses of the receivership. 511
(2) Chargee.

so, Rolls Razor Ltd v Cox [1967) I QB 552.

'°' Cf. Re First Bangkok City FinanceLtd (i11liq) [ 1994] 2 HKC 735.
sos Ellis & Co:~Trustee v Dixon-Johnson [ 1925] AC 489. For example, a claim for return of goods in specie cannot
give rise to a set-off.
'°" Re Finbo EngineeringCo ltd[l998] 2 HKLRD 695.
so, Re Finbo Engineering Co Ltd [ 1998] 2 HKLRD 695.
sos Re Finbo EngineeringCo Ltt/[1998] 2 HKLRD 695.
'"' On the liquidator's powers 10 realise the company's assets,sec ss.197, 199(3) and Sch.25 Pt.3 Item I.
" 6 Sec generally the Cork Report, Ch 32; Companie.sLaw Revision Commiucc, Second Report of the Companies
law Revision Co111111it1ee 011 Company law (1973) [8.31 }-[8.44].
'" Where there is no receiver appointed, chcn the costs and expensesof a liquidator acting to realise the security for
the chargee c-0uld be rec.overedout of the assetsbefore satisfaction of the claims of the chargee: Re Leyland DAF
Ltd, Buchler v Talbot(2004) 2 J\C 298, (63); Re KCL Capital Ltd (2013) 3 HKLRD I, (7).
1022 LIQUIDATION

20.196 Surplus after payment to chargee forms part of free assets available for general
creditors. If there is a surplus after payment of the amounts due to the chargee,
the surplus forms part of the free assets available for the general creditors. In the
absence of such a surplus, the liquidator is not entitled to claim his or her fees
and expenses out of the charged assets; and accordingly even though the liquidator
disputes the security, the liquidator is not entitled to payment out of the assets for
fees or expenses incurred in resolving the dispute where the security is subsequently
found to be valid. 512

3.13.2 Assets t1vailt1bleto unsecured (general) creditors (free assets)

20.197 Distribution order. The order of distribution is:

(I) Costs and expenses 513 of the liquidation (including the remuneration of the
liquidator as allowed under s.196): Cap.32, s.265(4) and Cap.32H, r.179.
(2) Amounts owing to employees, subject to the statutory limits (under Cap.32,
ss.265( I)(b )-265( I)( cj)): see also Cap.32, s.265(3).514
(3) Statutory debts due to the government (e.g. rates and taxes) (under Cap.32,
s.265(1)(d)): see also Cap.32, s.265(3A).
(4) If the company is a bank, then persons holding deposits (up to a specified
limit per depositor) (under Cap.32, s.265(l)(db); and see also those sub-
ss.265(5D)-265(51)) and s.265(3AAAA) ofCap.32. 515
(5) If the company is an insurer, then an1ountsowing to insured persons claiming
under an insurance contract against the insurer (under Cap.32, s.265(l)(e),
265(ea), 265(t)): see also Cap.32, ss.265(3AA) and 265(3AB).
(6) Landlord who distrained 516 goods within three months before the date of
winding-up order (in respect of the debt due to the landlord under Cap.32,
s.265(5A) for any amounts paid to the preferential creditors referred to in (2)

"' Re KCL Capital Ltd (2013) 3 HKLRD I, applying Re Leyland DAF Ltd. Buchler v 1albot (2004) 2 AC 298.
513 For the meaning of liquidation expenses, see Re Nortel GmbH (in admin) (2014) AC 209, [97)-(104).
"' Employees are separately given some protection pursuant to the Protection of Wages on Insolvency Ordinance
(Cap.380). Under this Ordinance, payments can be made (subject to limits) out of a Protection of Wages
on Insolvency Fund to employees for unpaid wages after a winding-up petition has been presented to wind
up the employer company: s. I6. Where an employee is paid from the fund under s. I 6, then the Wages on
Insolvency Fund Board is subrogated to the rights of the employee (in respect of the compensated amounts),
and so for example the Board can claim in the winding-up of the company and be entitled to the priority
that the employee would have had under Cap.32, s.265: see Protection of Wages on Insolvency Ordinance
(Cap.380), s.24. Cap.32, s.265 also contains express provisions giving priority for repayment of amounts to the
Board which the Board had paid out to employees pursuant to s.18 of the Protection of Wages on Insolvency
Ordinance.
505 This provides some protection to bank customers who have de1>0sitedfunds with a bank (such as in a savings

account) where the bank becomes insolvent. Protection to depositors are also given by the Deposit Protection
Scheme Ordinance (Cap.581), where compensation to depositors can be paid from the Deposit Protection
Scheme Fund. Where such compensation is paid. then the Hong Kong Deposit Protection Board is subrogaccd
to the righrs of the depositor, including the entitlement to priority under Cap.32, s.265: sec Deposit Protection
Scheme Ordinance s.38.
' 16 Distress is a common law right of a landlord to detain goods of a tenant who is in arrears of rent, and to sell the
goods for payment. As to exercise of the right, see Landlord and Tenant (Consolidation) Ordinance (Cap.7) Pt.Ill.
 COMPULSORY WINDING-UP 1023

to (5) above in priority to the landlord pursuant to the first charge over the
goods created under Cap.32, s.265(5)).
(7) Ordinary creditors paripassu (in respect of provable debts). 517
(8) Statutory interest. (This refers to interest payable on provable debts and on
the taxed costs of the petition where there is a surplus after the payment of
all provable debts (i.e. where the company is not insolvent): see Cap.32,
s.264A.5' 8)
(9) Non-provable liabilities. (Certain liabilities to creditors are not provable
in the winding-up (see para.20.188 on provable debts). Also, there may be
liabilities which arise after the cut-off date (by reference to which claims are
admitted to proof) and which also do not count as expenses of the winding-
up.519 Where the liability is neither a provable debt nor an expense of the
liquidation, the company's assets can be used to discharge the liability in
the winding-up only after all provable debts have been paid, but before
contributories/members are repaid. 520)
( 10) Return of capital to contributories entitled thereto (Cap.32, s.218).
Entitlements may be determined by the articles.
(11) Payment of surplus to contributories entitled thereto (Cap.32, s.2 I 8).
Entitlements may be determined by the articles.

Court can make order giving creditor advantage if creditor given indemnity to 20.198
liquidator. Where a creditor had given an indemnity to the liquidator for costs of
successful litigation for the recovery of assets, or for the protection or preservation
of assets, or for other expenses incurred by the liquidator which have been recovered,
then the court can make an order giving that creditor an advantage over other creditors
in relation to the distribution of those assets or the amount of those expenses so
recovered: see Cap.32, s.265(5B). 521

3.13.3 Assets subject to afl.oati11g charge

Floating charge assets not usually available to general creditors. Prima facie, 20.199
assets subject to a floating charge are not available to the general creditors, but if the
free assets available to the general creditors are not enough to satisfy the claims of
the preferential creditors under Cap.32, s.265( I), then the assets subject to a floating
charge would be available to meet those claims of preferential creditors in priority to
the charge; see also Cap.32, s.265(3B).

"' Re lines Bros Ltd (in liq) [ 1983] Ch I.

5'8 Sec further Re Nortel GmbH (in admin) (2014) AC 209, [39); Re Lehman Brothers (Europe) (in administration)
(No 4) [2017] UKSC38, (2017)2 WLR 1497
" 9 Re Lehman Brothers (Eurr.>pe) (in administration) (No 4) [2017) UKSC38, [2017] 2 WLR 1497, [ 193).
,,. See further Re Nortel GmbH (in t1dmi11)(2014) AC 209, (39); Re Lehman Brothers (Europe) (in administration)
(No 4) [2017) UKSC38, (2017)2 WLR 1497
'" E.g., the court may order a dividend of a higher percentageto the creditor: see Re J11terh'CJ11s
Far East Ltd [1994)
2 HKC704.
1024 LIQUIDATION

20.200 Distribution order. The order of distribution is as follows:

(1) Costs of preserving and realising the assets; and receiver's remuneration
and costs and expenses of the receivership, including costs and expenses of
discharging statutory duty to pay the preferential creditors. 522
(2) Claims of preferential creditors referred to under points (2) to (5) above (in
relation to the order for distribution of "free assets" at para.20.197), in the
statutory order noted above.
(3) Floating chargee.

20.201 Surplus after payment to chargee forms part of free assets available for general
creditors. If there is a surplus after payment of the amounts due to the chargee, the
surplus forms part of the free assets available for the general creditors.
20.202 Liquidator not entitled to claim for costs of winding-up in priority to preferential
creditors or floating chargee. The liquidator is not entitled to claim payment out of
the assets under the floating charge for the general costs of the winding-up in priority
to the preferential creditors or the floating chargee. 523

3.14 Winding-up with a regulating order

20.203 Court can make regulating order for compulsory winding-up: special procedures
subject to regulation by court. The court may make a regulating order under Cap.32,
s.227 A, which allows the compulsory winding-up to proceed via some different
procedures pursuant to special regulation by the court. The provision was enacted
to deal with liquidations involving large numbers of small creditors, such as bank
depositors in the liquidation of a bank. However, the provision is not limited to such
situations. Under this sub-s.227 A( 1), the Official Receiver, liquidator or any creditor
can apply to the court for a regulating order "by reason of the large number of creditors
or contributories or for any other reason the interest of the creditors so requires".
20.204 Special procedures can be applied after regulating order made. Once a regulating
order is made, then the special procedures under Cap.32, ss.227B-227E can be applied.
For example, under s.227B, the court can appoint a liquidator without a first meeting
of creditors and contributories. In Re Legend International Resorts Ltd (No 3),524 the
court made a regulating order to allow an urgent appointment of a liquidator under
s.227B so that there would be a liquidator who could challenge in time certain writs of
attachment executed over the company's assets in the Philippines. If the attachment was
not challenged, then the general body of creditors of the company could be prejudiced.

521Where there is no receiver,the liquidator'scosts and expenses in discharging these functions can be paid out of
the assets before payment to the chargec: Re Leyland OAF Ltd, Buclder v Talbot [2004) 2 AC 298, [2004) I All
ER 1289, 1296, 1298.
"' Re Leyland OAF Ltd, Buchler v Talbot (2004) 2 AC 298, HL; Re Good Success C(lfering Group Ltd (2007) I
HKLRD453. Fordiscussionof the Houseof Lords decision, sec RizMokal,"Liquidation Expensesand Floating
Charges - the Separate Funds Fallacy" (2004) Lloyd's Maritime and Commercial Law Quarterly 387; John
Armour and Adrian Walters,"Funding Liquidation:A FunctionalLaw" (2006) 122 Law Quarterly Review 303.
"' [2006) 3 HKLRD 289.
 COMPULSORY WINDING-UP 1025

Court has power to vary procedure in relation to regulating order. Under Cap.32, 20.205
s.227C, the court can vary the procedure for ascertaining the wishes of creditors and
contributories. If there is a proposal for a scheme of arrangement under Cap.622,
s.670, then the court can make orders under Cap.32, s.227D to vary the normal
requirements in s.670 of Cap.622 in relation to meetings and approvals of creditors
or contributories in ascertaining their agreement to or rejection of the scheme. Also,
under Cap.32, s.227E, where the company in liquidation is a bank, the bank depositors
need not lodge a formal proof of debt and can be regarded as having proved their debts
for amounts as shown in the bank's records.

3.15 Small liquidations: winding-up by summary procedure

Court can make order for company to be wound-up in summary manner where 20.206
value of company property less than $200,000. Where the property of the company
is not likely to exceed $200,000, the court can make an order for the company to
be wound-up in a summary manner: Cap.32, s.227F. Certain of the usual procedures
required in a winding-up are dispensed with, which enables the liquidation to be
conducted in a more cost-effective manner. Where an order is made pursuant to s.227F,
the Official Receiver or provisional liquidator is to be appointed as liquidator, and
there is no need for meetings of creditors or contributories to be held under ss.194 or
206 of this Cap.32, nor is there a need for a committee of inspection.525

3.16 Companies formed outside of Hong Kong

Winding-up of foreign companies. Section 327 of Cap.32 confers on the court 20.207
jurisdiction to make an order to wind up "unregistered companies" on three grounds:
(1) if the company is dissolved, or has ceased to carry on business, or is carrying
on business only for the purpose of winding up its affairs; (2) if the company is
unable to pay its debts; or (3) if the court is of opinion that it is just and equitable that
the company should be wound up. The term "unregistered company" is defined in
previous s.326 and includes companies formed outside Hong Kong (namely foreign
companies). 526 Before the court would exercise its jurisdiction to wind up a foreign
company, usually the following three core requirements must be satisfied: (1) there
is a sufficient connection with Hong Kong; (2) there is a reasonable possibility that
the winding-up order would benefit those applying for it; and (3) the court is able to
exercise jw-isdiction over one or more persons in the distribution of the company's
assets. 527

m See also Companies (Winding-Up) Rules (Cap.32H), r.27A.

52~ A foreign company cannot be wound up voluntarily under Cap.32, s.327(2).

m Kam leungSui Kwan v Kam Kwan lai (2015) 18 HKCFAR501; and sccalsoStocz11iaGdanska SA v latreejersfnc
(No 2) [2001) BCC 174; Re Solar Touch lid (2004] 3 HKLRDl 54; Re Information Security One ltd (2007) 3
HKLRD 780; Re Beauty China Holdings Ltd [2009] 6 HKC 351; Re Goninghen Trading Ltd [2012) 3 HKLRD
453; Re G Ltd (2016] I HKLRD 167; Re Great Choice Co11sufU1111S Ltd (2016) 3 HKLRD 854; Shandong
Chenming Paper Holdings Ltd v A,jowiggins HKK 2 lid [2017] 4 HKLRD 84. Sec generally: Simon Powell,
Tony Chow and Ping Kan Kwan. "Cross-Border Issues" in Hon. Madam Justice Kwan et al (eds), Company Law
in Hong Kong: lnso/11ency2018 (Sweet and Maxwell, 2018) Ch.12.
1026 LIQUIDATION

20.208 Assistance to foreign liquidators under the common law. Where a foreign company
is being wound up outside of Hong Kong, but there is a need to invoke Hong Kong's
jurisdiction to facilitate the winding up (for example, because the company has assets
in Hong Kong), it may be possible to do so by seeking a liquidation of the foreign
company in Hong Kong in parallel: see para.20.207 above. Alternatively (and indeed
preferably, where possible), the foreign liquidator may apply to the court in Hong
Kong for the grant of assistance to the foreign liquidation. The court has power
under the common law to grant assistance if: (1) the assistance sought (e.g. a power
to be conferred on the foreign liquidator) is available both under Hong Kong law
and the foreign law under which the liquidator was appointed; (2) the granting of the
assistance is consistent with the substantive law and policy of Hong Kong; and (3) the
assistance is not sought for purposes which are properly the subject of other schemes
for compulsory provision of information and is not sought to obtain material for use in
actual or anticipated litigation. 528 Where the court is prepared to grant assistance to the
foreign liquidator on this basis, the foreign liquidator can effectively exercise certain
of the Cap.32 powers that are conferred on liquidators appointed in a Hong Kong
liquidation without the need for a Hong Kong winding up of the foreign company.
The court may, for example, order that proceedings against the company in Hong
Kong be stayed, and confer powers on the foreign liquidator to take possession and
control of the company's assets in Hong Kong or to apply to the court for examination
of persons. 529

4. VOLUNTARY WINDING-UP
4.1 Introduction

20.209 Situations in which company can be voluntarily wound-up. Cap.32, s.228(1) sets
out the circumstances where a company can be voluntarily wound up:

• The members can resolve for the company to be wound up by passing a

special resolution: s.228( 1)(b ).

"' Singu/aris Holdings Ltd v PricewaterhouseCoopers [2015) AC 1675 (PC), [25); Re BJB Career Edttcatio11
Co Ltd (2017] I HKLRD 113. See also Joint Official Liquidators ofa Company v B & C [2014) 5 HKC
152; Joillt Admi11istrators of African Minerals Ltd v Madison Pacific Trust Ltd (2015) 4 HKC 215; Re G Ltd
(2016) I HKLRD 167; Re Joi11t Official Liqttida1ors of Centa11r Li1igation SPC (unrep., HCMP 3389, 3391
and 3393/2015, (2016) HKEC 576); Re Joint and Several Liquidators of PacificA11des Ente1prises (BVI) Ltd
(unrep., HCMP 3560, 3561, 3562 and 3563/2016, [2017] HKEC 146). The power to grant assistance applies
not only to a compulsory winding-up but also to a voluntary winding-up as well as (Re .Joi111Liquidalor.~
of Supreme T}coon Lid [2018] I HKLRD 1120, where Marris J declined to follow dicta to the contrary in
Singularis Holdings Ltd v PricewalerhouseCoopers [20 I 5] AC 1675 (PC), (25]); but does not apply to a
solvent winding-up (such as a members' voluntary winding-up): Re Joi11tLiquidators of Supreme Tycoon Lid,
above.
529 For standard terms oft he order granting assistance, see Re Joi111O./JicialLiquidators ofCe11taur Litigation SPC
(unrep., HCMP 3389, 3391 and 3393/2015, (2016] HKEC 576). A court order for assistance is not required for
exercise of powers to obtain information that the directors could ordinarily exercise, such as obtaining information
from the company's own banks in Hong Kong about the company's bank accounts: sec Bay Capital Asia Fund, LP
v DBS Bank (Hong Ko11g)Ltd (unrep., HCMP 3104/2015, (2016) HKEC 2377); Re Joint Provisional liquidators
of China L11111enaNew Materials Co,p (2018) HKCFI 276 (unrep., HCMP 494/2017, (2018) HKEC 230).
 VOLUNTARY WINDING-UP 1027

• The members can also pass an ordinary resolution for voluntary winding-up
under s.228(l)(a), but this is only possible where the articles have fixed a
period for the duration of the company which has expired or an event occurs
on the occunence of which the articles provide that the company is to be
dissolved.
• The directors can make the decision for voluntary winding-up by delivering
a winding-up statement under s.228A: s.228(l)(d). 530

Company must give notice of resolution within 15 days. When a company has 20.210
passed a resolution for voluntary winding-up, it must give notice of the resolution by
advertisement in the Gazette within 15 days after the passing of the resolution.531
Voluntary winding-up deemed to commence at time of passing resolution. 20.211
A voluntary winding-up is deemed to commence at the time of the passing of the
resolution for voluntary winding-up: Cap.32, s.230. 532 The company must cease to
carry on its business at the commencement of a voluntary winding-up, except so far as
may be required for the beneficial winding-up of the company.533
Types of voluntary winding-up. The Ordinance sets out the following types of 20.212
voluntary winding-up (Cap.32 s.233(4)):

(I) Members' voluntary winding-up.

(2) Creditors' voluntary winding-up.

4.1.1 Members' voluntary winding-up

Reasons for members' voluntary winding-up. A voluntary winding-up would be 20.213
a members' voluntary winding-up where the company is solvent. The members may
wish to wind up a solvent company voluntarily for various reasons. A corporate group,
for example, may decide to wind up member companies that are no longer required.
A company may cease its operation while it has sufficient assets to pay off its debts.
A company may outlive its purposes. 534 The need to voluntarily wind up a company
can also arise where it is clear that the purpose for which the company was formed has
become frustrated. 535
Members' voluntary winding-up only possible where company solvent. Members' 20.214
voluntary winding-up is possible only where the company is solvent. Where the
company is insolvent, the assets remaining in the company belong to company
creditors, not members. The members have control over the winding-up in a members'
winding-up, while creditors have greater control in a creditors' voluntary winding-up.

SJ<J Thisis discussedfurther at para.20.223below.

ni Cap.32, s.229(1).
"' Exccpcas provided in Cap.32,s.228A(5)(a) where a voluntary winding-upoccurson chcbasis or the direccors'
delivery of a winding-up scacemenc: sec para.20.223below.
n 3 Cap.32, s.231.
"" SeeCharlesD Booth et al., Hong Kong Corporate fllsolvency Ma1111al(4th edn, LexisNexis 2018) 17.
"' See ff0tta Co Ltd v Thomas Brain Stevenson (1999) HKEC 736.
1028 LIQUIDATION

20.215 Winding-up proceeds as members' voluntary winding-up where directors signed

solvency certificate. The winding-up will proceed as a members' voluntary winding-
up where a majority of the directors have signed a certificate of solvency under
Cap.32, s.233 to the effect that they have made full enquiries on the affairs of the
company and have formed the opinion that the company will be able to make full
payments of its debts within 12 months of the commencement of the winding-up. 536
For the certificate of solvency to be effective, the directors must issue the certificate
within the five weeks immediately preceding the date of the members' resolution for
winding-up or on that date but before the passing of the resolution. 537 The certificate
must also be filed with the Registrar not later than the date of delivery to the Registrar
of a copy of the resolution. 538 The resolution must be delivered to the Registrar within
15 days after it is passed. 539
20.216 Members' voluntary winding-up managed by liquidator appointed by ordinary
resolution. A members' voluntary winding-up will be managed by a liquidator
appointed by the members by way of an ordinary resolution. 540 The appointment is
usually made at the meeting where the members resolve for the company to be wound-
up. If from any cause whatever there is no liquidator acting, the court may appoint a
liquidator. 541 On the powers, duties and removal of liquidators, see sections 2.3, 2.4,
and 2.5 above.
20.217 Directors' powers restricted after resolution for winding-up and cease on
appointment of liquidator. After the company has passed a resolution for voluntary
winding-up and before the appointment of a liquidator, the directors may exercise their
powers only with the sanction of the court. 542 This is subject to the following exceptions.
The directors may, without sanction of the court, dispose of perishable goods and
other goods that are likely to diminish in value if not immediately disposed of.543 The
directors may also, without court sanction, do anything that may be necessary to protect
the company's assets. 544 In a creditors' voluntary winding-up, the directors are also
permitted to exercise their powers for the purpose of securing compliance with their
obligations to convene a creditors' meeting under Cap.32, s.241.545 On the appointment
of the liquidator, the powers of the directors cease entirely, except so far as the company
in general meeting or the liquidator sanctions the continuance thereof. 546
20.218 Liquidator must summon meeting of creditors if during course of liquidation
becomes of opinion that company will not be able to pay debts as certified in

536 Cap.32, ss.233(1), 233(4).

537 Cap.32, s.233(2).
5311
Caf>.32, s.233(2).
m Cap.622, s.622.
50& Cap.32, s.235( I).
$4 1 Cap.32, s.252( I).
502 Cap.32, s.250A(l), (2). This section was added by the Companies (Winding-Up and Miscellaneous Provisions)
(Amendment) Ordinance (14 of 2016), effective 13 February 2017; and sec Financial Services and Treasury
Bureau, Improvement <!(Corporate Insolvency ltnv legislative Propostds: Consultatian Document (April 2013) 18.
3 Cap.32, s.250A(3)(a).
s--
~ Cap.32. s.250A(3)(b).
,., Cap.32, s.250A(2)(b).
546 Cap.32, s.235(2).
 VOLUNTARY WINDING-UP 1029

solvency certificate. Tfthe liquidator is, at any time, of the opinion that the company
will not be able to pay its debts in full within the period stated in the certificate
of solvency under Cap.32, s.233, the liquidator must summon a meeting of the
creditors for a date not later than 28 days after the day on which the liquidator formed
that opinion. 547 The liquidator must prepare a full statement of the position of the
company's affairs and must lay that statement before the meeting. 548 At the meeting,
the creditors may appoint a liquidator in place of the original liquidator appointed
by the members, 549 and may also appoint a committee of inspection. 550 On the day
when the meeting of creditors is held, the winding-up becomes a creditors' voluntary
winding-up and the provisions on creditors' voluntary winding-up in Cap.32
accordingly apply.551 The creditors could also seek to petition to have the company
wound-up by the court. 552

4.1.2 Creditors' voltmtary winding-up

Creditors' voluntary winding-up where no certificate of solvency. A voluntary 20.219
winding-up proceeds as a creditors' voluntary winding-up where the members have
resolved for the company to be voluntarily wound-up under Cap.32, s.228 and
the board of directors does not file a certificate of solvency with the Registrar in
accordance with Cap.32, s.233.m
Creditors' meeting must be held within 14 days after meeting of company. 20.220
A creditors' meeting must be summoned for a date not later than 14 days after the
day of the general meeting at which the resolution for voluntary winding-up is
proposed. 554 Notices of the meeting must be sent to the creditors at least 7 days before
the day on which the meeting is to be held.555 The notice of the meeting must also be
advertised once in the Gazette and once at least in, respectively, an English language
newspaper and a Chinese language newspaper circulating in Hong Kong.556 Failure
to give notice to the creditors in accordance with the statutory provision can result
in the court declaring the voluntary liquidation invalid due to material irregularities
in the procedure adopted by the company for the commencement of the voluntary
liquidation, as occu1Tedin Re YK Engineering & Piling Ltd. 557
Formalities of meeting. The meeting must be held at a place most convenient to most 20.221
of the interested parties. 558 The meeting is to be chaired by a director as appointed

"' Cap.32, s.237(1A)(a). See also Cap.32, ss.237(1A)(b) and 237(1A)(c) regarding notices of the meeting.
"' Cap.32, ss.237A(IF), 237A(IG).
w.1 Cap.32, s.237A(2).
550 Cap.32, s.243.

551
Cap.32, ss.237B(l), 237B(2).
m See para.20.243 below.
553 Cap.32, s.233(4).
554 Cap.32, s.241( I)(a). The time for holding of the creditors' meeting was altered under amendments made by the

Companies (Winding-Up and l'vliscellaneousProvisions) (Amendment) Ordinance (14 of 2016), effective 13

February 2017. Sec further Financial Services and Treasury Bureau, ImprovementofCo,porate Insolvency Law
Legislative Proposals: Co11sultatio110ocume111(April 2013) 15-19; O.>11sultation Co11clusions7-8.
,s, Cap.32, s.241(1)(b).
'~ Cap.32, s.241(2).
"' [2004) 2 HKLRD H6.
" 8 Companies (Winding-Up) Rules (Cap.32H), r.116.
1030 LIQUIDATION

by the board.m The directors must lay before the meeting a statement of the affairs
of the company, a list of the creditors and the estimated amount of the creditors'
claims. 560 The creditors may appoint a liquidator in the meeting. In case the liquidator
appointed by the creditors is different from the person nominated by the members,
the liquidator nominated by the creditors shall be the liquidator, although application
to the court can be made by any director, member or creditor of the company within
seven days of the creditors' nomination for the court to determine who should be
appointed ]iquidator.561
20.222 Creditors may appoint committee of inspection. The creditors may, if they think
fit, appoint a committee of inspection of not less than three, and not more than seven,
persons. 562 The committee has the power to fix the liquidators' remuneration, 563 to
dispense with the audit of the liquidators' account,564 and to direct the disposal of the
company's books and papers upon dissolution. 565

4.2 Special procedure for members' winding-up: s.228A

4.2.1 General
20.223 Directors have power to resolve to commence members' voluntary winding-up by
filing statement with Registrar under Cap.32, 228A. Section 228A gives a power to
the directors to commence the process of members' voluntary winding-up by filing a
winding-up statement with the Registrar.566 To utilise the this procedure in s.228A, a
majority of the directors must:

l. Pass a board resolution to the effect that: (a) the company cannot by reason
of its liabilities continue its business; (b) it is necessary that the company be
wound up and that the winding-up should be commenced under s.228A as it
is not reasonably practicable to commence other modes of winding-up under
Cap.32 (with reasons given567); and (c) meetings of the company (i.e. the
members) and creditors will be sununoned within 28 days after the delivery
of the statement to the Registrar.568
2. Cause a meeting of the company to be summoned for a date within the
aforementioned 28-day period. 569

55~ Cap.32, s.241(3)(b).

560 Cap.32, s.241(3)(a).
561
Cap.32. s.242.
562 Cap.32, s.243. On the function of the committee, see para.20.088 above.
56J Cap.32, s.244( I).
56-1 Cap.32, s.255A(2).
565 Cap.32, s.283( I)(b).
566 Cap.32, s.228A was amended (and s.228B added) by the Companies (Winding-Up and Miscellaneous Provisions)
(Amendment) Ordinance (14 of 2016), effective J3 February 2017, to reduce the risk or abuse of the provision.
For example, the powers or the provisional liquidator (who is appointed by the directors) is restricted under
s.228B. See Financial Services and Treasury Bureau, Improvement of Co,porate h,sofvency l,aw legislative
Proposals: Consultation Document (April 2013) 11-14.
7
S6 Cap.32, s.228A(2).
568 Cap.32. s.228A(l)(a).
569 Cap.32, s.228A(l)(b).
 VOLUNTARY WINDING-UP 1031

3. Appoint a person who would act as the provisional liquidator in the winding
up from the time of commencement of the winding up. 570 The provisional
liquidator must be either a solicitor or a certified public accountant under
the Professional Accountants Ordinance (Cap.50). 571
4. Make a winding-up statement in the specified fom1, signed by one director
and containing a statement by the director certifying that the above actions in
(1) to (3) have been taken. The date and time of the meeting of the company
must be stated in the winding-up statement. 572
5. Deliver the winding-up statement to the Registrar within 7 days after the
date on which it is made.m

Winding-up commences at time of delivery of statement. The winding-up 20.224

commences at the time of the delivery of the winding-up statement. 574 The directors
must, within 15 days of the commencement of the winding-up, give notice in the
Gazette of: (a) the commencement of the s.228A winding-up, and (b) the appointment
of the provisional liquidator.575 A notice of the appointment of the provisional
liquidator must also be delivered by the appointee to the Registrar within 15 days of
the comrnencement. 576
Provisional liquidator holds office until meeting of creditors summoned. The 20.225
provisional liquidator, unless a liquidator is appointed earlier, holds office until a
meeting of creditors is summoned under s.228A. 577 The directors must cause a meeting
of the company and of its creditors to be summoned for a date not later than 28 days
after the delivery of the winding-up statement. 578 At those meetings, the members and
creditors would respectively nominate a liquidator to be appointed. 579
Provisions applicable to creditors' voluntary winding-up also apply here. The 20.226
provisions applicable to a creditors' voluntary winding-up (Cap.32, ss.241 to 248)
apply to a winding-up commenced under Cap.32, s.228A. 580 It seems that the winding-
up would be classified as a creditors' voluntary winding-up since no certificate of
solvency is issued under that s.233 of Cap.32.
Rationale behind Cap.32, 228A: speed up appointment of liquidator in emergency 20.227
situation. The rationale behind s.228A appears to have been to speed up appointment of

sro Cap.32, s.228A(l)(c).

571
Cap.32, s.228A(8). By contrast, no such requirement is specified for appointment of provisional liquidators
under Cap.32, s.193.
572 See Cap.32, s.228A(2), 228A(3).
s7, Cap.32,s.228A(3).
574
Cap.32, s.228A(5).
575 Cap.32,s.228A(9).
516 Cap.32,s.228A(l 0).
"' Cap.32, s.228A(l 4). As for the provisional liquidator's powers, sec Cap.32, ss.228A(14)(b) and 2288.
'" Cap.32, ss.228A(l)(e), 228A(5)(e).
' 79 Sec Cap.32, ss.228A( 17), 241 and 242.
' 80 Cap.32, s.228A(l 7)(b). Section 241 of Cap.32 applies with the modifications set out in that previous
s.228A(l7)(a).
1032 LIQUIDATION

a liquidator in an emergency situation. 581 Such a situation might arise, for example, where
a company has assets in the Mainland and there is a danger that they may be seized by
creditors in that jurisdiction. 582 A rapid appointment of provisional liquidators will help
preclude the possibility that the company's assets be dissipated by creditors scrambling
in another jurisdiction. The provisional liquidator may be able to take steps to secure the
company's assets, or at least commence negotiations with a view to avoid their seizure. 583
20.228 Cap.32, s.228A may be useful for construction company with ongoing contracts.
The s.228A procedure may also be useful for a voluntary winding-up by, for example,
a construction company that has ongoing contracts. In this situation, the procedure can
be used to secure assets and to avoid the activation of termination clauses as a tactic to
maximise the realisation for the creditors. 584
20.229 Cap.32, s.228A may only be invoked if other modes of winding-up impracticable or
impossible. Section 228A is a draconian provision in that members are excluded from the
decision-making process and deprived the protection afforded by the ordinary requirement
that voluntary winding-up requires 75 percent majority approval of the members. 585 That
the winding-up process is conm1enced at the instance of the board provides directors
with opportunities to make use of s.228A strategically for the benefit of themselves. An
example of misusing s.228A is illustrated by SEG Investment Ltd v SEG International
Securities (HK) Ltd,586 where To J invalidated the decision of the directors to wind up the
company under s.228A where the shareholder who had control over the board sought to
put an end to the company one day before a shareholders' meeting when she knew she
would be in imminent danger of losing her control over the board. To prevent s.228A from
being misused to the disadvantage of members, the court has made it clear that the special
procedure under that provision can only be invoked where other modes of winding-
up are impracticable if not impossible.587 It is only possible to prove impracticability
or impossibility if the directors are able to show "some urgency" for winding-up the
company through the shorter and simpler route of winding-up under s.228A.

4.3 Stay of a Cap.32, s.228A winding-up

20.230 Can request court to stay Cap.32, 228A procedure after winding-up commenced.
Once a s.228A winding-up has commenced, it is possible to request the court to stay
the process and have the company wound-up compulsorily on various grounds. 588
An obvious ground to do so is that there is evidence that the special procedure is
being abused. Thus, in Re Fiveoceans Supply Service Ltd, 589 the court ordered a stay

'" Companies Law Revision Committee, Second Report of the Companies law Revision Commillee on Company
low ( 1973), [8.22); Board ofTrade (UK), Report of the Company law Commillee (1962) (Cmnd 1749) (Jenkins
Committee Report), (503).
"' See Charles D Booth et al., Hong Kong Co,porate Insolvency Manual (4th edn, LexisNexis 2018) 48.
583 Ibid.
584 Ibid., 49.
585 SEG fllvestme11tlid v SEG lntemotio1u1I Securities (HK) Ltd [2005] HKEC 1633, [ 19),per To J.
586 [2005) HKEC 1633, affin-ned on appeal: [2008) HKEC 222.
58' RozellAsia (Holding) Ltd v CAL Intl Lrd [ 1997) HKLRD l; SEG InvestmentLtd v SEG lntematio11alSecurities (HK)
Ltd (2005) HKEC 1633, affin-ned on appeal: (2008) HK.EC222; Re Pedagogiclm1ovatio11s Ud [2014) I HKLRD 613.
' 88 For the general principles on converting a voluntary winding-up LOcompulsory winding-up, sec para.20.243 below.
58• [2002) I HKLRD (Yrbk) 167.
 VOLUNTARY WINDING-UP 1033

of the s.228A winding-up and that the company be wound-up compulsorily on the
finding that substantial sums of money had been taken out of the company after the
presentation of the s.228A winding-up petition. The conversion into a compulsory
winding-up makes it possible for the court to control the disposition of the company's
assets through Cap.32, s.182 validation orders.
Cap.32, s.228A may also be stayed where substantial creditor's interest 20.231
compromised by appointment of provisional liquidator: Re Pressure Vessels case.
A s.228A winding-up can also be stayed where there is evidence that a substantial
creditor's interest has been compromised because of an error made on the appointment
of the provisional liquidator and the provisional liquidator's apparent lack of
impartiality in managing the winding-up process. This was the case in Re Pressure
Vessels Manufacturing Co ltd, 590 where the creditors' resolution on the appointment
of the liquidator was made following a ruling by the meeting's chairperson (a director),
which was legaHy wrong, that the value of the claims of certain substantial creditors
should be discounted. The resolution would not have been passed had the deductions
not been made. One of those substantial creditors petitioned for compulsory winding-
up. While the liquidator asserted that he took a neutral stance, the evidence indicated
that he strongly favoured continuing with the voluntary liquidation; and in his
affirmations, he had also challenged the validity of the petitioner's debt and continued
to assert that the deductions were valid (on grounds which the court considered to
be legally untenable). The cow-t accepted that the petitioner had a legitimate sense
of grievance in the appointment of the liquidator and in the independence of the
liquidator, and accordingly granted the order for compulsory winding-up.
Permanent stay to Cap.32, s.228A procedure granted when winding-up under 20.232
section 228A not intended. The court has also granted a permanent stay of a s.228A
winding-up where the company controllers intended to deregister the company (under
predecessor CO, s.291AA (repealed); see now Cap.622, s.750) but had completed and
filed the forms for s.228A winding-up by mistake. 591

4.4 Provisions applicable to voluntary winding-up

Voluntary winding-up applicable provisions. A number of provisions of the 20.233

Ordinance apply specifically to a voluntary winding-up: see Cap.32, ss.228-257.
Sections 235 to 239 of Cap.32 apply in a members' voluntary winding-up, 592 while
those later ss.241 to 248 apply in a creditors' voluntary winding-up. These provisions
deal with, inter alia, appointment and removal of liquidators, the duty of liquidators
to call meetings and dissolution after the affairs of the company are fully wound-up.
Provisions which apply to every category of voluntary winding-up. Cap.32, ss.249 20.234
to 257 apply to every category of voluntary winding-up:

• Liquidators must give notice of their appointment in accordance with s.253

within 15 days after appointment.

' 90 [2003] I HKLRD 84.

' 9' Re Polyworld /111/Ltd [2007] HKEC 139.
' 92 Cap.32,s.234.
1034 LIQUIDATION

• The court has power to appoint a liquidator whenever there is no liquidator

acting: s.252.
• The powers and duties of liquidators are set out in s.251.
• The liquidator is required to keep an account of his or her receipts and
payments as liquidator and must have the account audited: s.255A. 593
• The court has power to determine any question arising in the winding-up, on
application by the liquidator or any contributory or creditor: s.255.

20.235 Provisions dealing with order of distribution. There are two sections expressly
dealing with the order of distribution. Section 256 of Cap.32 provides that the costs,
charges and expenses properly incurred in the winding-up, including the remuneration
of the liquidator, are payable out of the assets of the company in priority to all other
claims. Section 250 ofCap.32 provides that, subject to the provisions of the Ordinance
as to preferential payments (i.e. s.265), the property of the company shall be applied
in satisfaction of its liabilities paripassu, and subject to such application shall, unless
the articles otherwise provide, be distributed among the members according to their
rights and interests in the company. In effect, the order of distribution is the same as in
a compulsory winding-up. 594
20.236 Provisions applicable to both voluntary and compulsory windings-up. The provisions
in Cap.32 Pt V (ss.263-296) are applicable to both voluntary and compulsory winding-
up proceedings. These include the provisions dealing with proof of debt, application
of bankrnptcy rules, preferential payments, extortionate credit transactions, undervalue
transactions, unfair preferences, invalid floating charges, fraudulent trading, disclaimer
of onerous property, offences antecedent to or in course of winding-up, va1ious
supplementary provisions as to winding-up and provisions relating to dissolution of the
company.
20.237 Provisions only applicable to compulsory windings-up. Other provisions ofCap.32
(ss. l 76-227F) apply only to compulsory windings-up and not voluntary windings-
up. For example, there is no automatic stay of proceedings against the company from
the time of commencement of winding-up; 595 and also there is no invalidation of
dispositions of prope1ty from the commencement of winding-up. 596

' 9'The committee of inspection or the creditors if there is no committee (in the case of a creditors' voluntary
winding-up), or the company by ordinary resolution (in the case of a members' voluntary winding-up), may
determine that an audit is not required: Cap.32, s.255A(2).
'" See para.20.194 above.
"' The court however bas ju1isdiction to srny any action, proceeding. attachment, distTess or execution iigainst the
company: Re Key11shamCo (1863) 33 Beav 123; Re Sablo11iereHotel Co (1866) LR 3 Eq 74; Herbert Berry
Associates Ltd v !RC (1978) I All ER 161; A11glo-Balticand MediterraneanBa11kv Barber & Co (1924) 2
KB 410. Application may be made under Cap.32 s.255 for the court to exercise its power under s.181 to stay
proceedings: Cheung Ying l1111 v legal WayLtd (2014) I HKLRD 106.
" 6 However, a transfer of shares which has not been sanctioned by the liquidator or an alteration in the status of

members made after the commencement of winding-up is void: Cap.32, s.232.

 VOLUNTARYWINDING-UP 1035

4.5 Voluntary winding-up after commencement of

compulsory winding-up

Possible to initiate voluntary winding-up after commencement of compulsory 20.238

winding-up. One of the features of the law on voluntary winding-up in Hong Kong
is that Cap.32 does not prohibit the company from initiating a voluntary winding-up
after the commencement of the compulsory winding-up process. The position in some
other juiisdictions is different. 597 This makes it possible for the companies to use a
creditors' voluntary winding-up as a tool to shortcut compulsory winding-up, which is
generally more expensive and time-consuming.
Decision to convert to voluntary winding-up must be made at early stage of 20.239
process of compulsory winding-up. The decision to convert must be made at
an early stage of the compulsory winding-up though. At either of the meetings
of the creditors and contributories convened by the provisional liquidator under
Cap.32, s.194 following a winding-up order (for the appointment of a liquidator),
a resolution can be passed to make an application for the compulsory winding-up
to be converted to a creditors' voluntary winding-up. The liquidator or a creditor
can apply to the court under Cap.32, s.209A, within three months from the date of
the resolution, 598 for an order for the winding-up to be conducted as a creditors'
winding-up.
Factors court has regard to in deciding whether to make order for conversion 20.240
from compulsory winding-up to voluntary winding-up. Cap.32, s.209A(2) lists
a range of factors to which the court must have regard in deciding whether or not
to make the order for conversion. These include the wishes of the creditors and
contributories; the progress of the winding-up; whether directors or other officers
have committed offences involving fraud, dishonesty etc. in relation to the affairs of
the company; whether any person concerned in the management of the company was
a director of any other company which has gone into liquidation in the previous three
years; whether the insolvency of the company is a matter of public concern; and any
other matter which the court considers appropriate in the particular circumstances.
The court has discretion, but generally the court should refuse to make an order where
court control of the liquidation is appropriate due to the fact that the liquidation is of
pub Iic concern, where investigations are required, or where impropriety or wrongdoing
cannot be ruled out. 599
Order made under Cap.32, s.209A converts compulsory winding-up to voluntary 20.241
winding-up but some provisions relating to compulsory winding-up continue to
apply. An order made under s.209A operates to convert the compulsory winding-up

97
' See, for example, Corporations Act 200 I (Aust) s.490, Companies Act (Sing) s.312.
,., Cap.32, s.209A(l)(b). The court can permit a later application: s.209A(l)(b) (and see Re Geter Industrial Ltd
[2002] 3 HKC 71 as to when this would be allowed). In the case where there is an order under s.227F for the
company to be wound-up in a summary manner, the liquidator or a creditor can apply to the court within three
months from the date of the order: s.209A(l)(a).
599 Re Peregrine Fixed Income Ltd (in liq) (1998] 4 HKC 151, 159.
1036 LIQUIDATION

into a creditors' voluntary winding-up. 600 The original date of commencement of the
(compulsory) winding-up is treated as the date of the commencement of the creditors'
voluntary winding-up. 601 Although the winding-up is converted into a creditors'
voluntary winding-up, the provisions on avoidance of dispositions of property after
the commencement of compulsory winding-up (under ss.182 and 183) and automatic
stay of proceedings (under s.186) continue to apply.602
20.242 Liquidator's fees and other expenses due immediately after Cap.32, s.209A order
made. After the making of the order under s.209A, the fees of the liquidator 603 and
any charges or expenses due and payable under s.296 or other provision of Cap.32
up to the date of the order must be paid forthwith out of the assets of the company in
priority to all other claims. 604 Accordingly, the liquidator also remains liable for the ad
valorem fees payable under s.296(3) and the Companies (Fees and Percentages) Order
(Cap.32C) in respect of pre-conversion realisations.605

4.6 Compulsory winding-up after commencement

of voluntary winding-up

20.243 Commencement of voluntary winding-up does not prevent petition for

compulsory winding-up. The commencement of voluntary winding-up does not
prevent a petition for compulsory winding-up: Cap.32, s.257. Unlike that Cap.32,
s.209A, there is no statutory list of matters that the court must take into account.
However, Cap.32, s.179(5) provides that the court shall not make a winding-up order
unless it is satisfied that the voluntary winding-up cannot be continued with due
regard to the interests of the creditors or contributories. Also, s.257 provides that
where the application for compulsory winding-up is made by a contributory, the
court must be satisfied that the rights of the contributories will be prejudiced by
a voluntary winding-up before ordering compulsory winding-up. Notwithstanding
the absence of a list of factors comparable with s.209A, the courts have laid down
principles requiring similar factors to be taken into account.
20.244 Re Goldcone Properties case: court has unfettered discretion to determine whether
class remedy ofliquidation better satisfied by voluntary or compulsory liquidation.
In Re Goleicone Properties Ltd, 606 it was held that the court has an unfettered discretion
to be exercised judicially. The key question is whether the class remedy of liquidation

600
Re Co11soElectro11ics(Far East) Ltd (in liq) [1995) 2 HKC 327.
601 Cap.32, s.209B(a)(i).
602 Cap.32, s.209B(b). Those sections do not ordinarily apply in a voluntary winding-up.
603 The court retains its power to assess the fees of the provisional liquidators acting as such before the conversion:
Re 1lte Express Builders Co Ltd [2004] 4 HKC 532.
()()4 Cap.32, s.209B(d) .
.0 5 Re Starbay b11ILtd [2012] I HKC 274 .
.o6 [2000] 2 HKLRD 16. In that case, compulsory winding-up was ordered where there was primt, facie evidence
showing that further investigations may be required, and where the independent majority creditors favoured
the petition. Sec also Re Fullbright Co ltd [2009] 2 HKLRD 584 (compulsory winding-up order made where
petitioner was a major creditor (Commissioner for Inland Revenue) whose debts were wrongfully rejected, where
there was prima facie evidence that the directors had caused the company to ring-fence its asseLSfrom the
Commissioner and that the allegations would re4uire investigation by an independent liquidator; and where the
existing liquidator has not been administering the liquidation in a proper manner).
 OFFENCES ANTECEDENT TO OR IN THE COURSE OF WINDING-UP 1037

is better satisfied by the continuation of the voluntary liquidation or is better served by

being superseded by a compulsory liquidation. All material factors need to be taken
into account, and these include:

• Views of the majority creditors and contributories, 607 which the court would
be inclined to follow in the absence of contrary reasons. 608 In the case of
creditors, regard must be had to the value of each creditor's debt.6-09
However,
the court is not bound to give equal weight to all debts of equal amount.
It must have regard to other interests which may influence the views of a
particular creditor, taking into account general principles of fairness and
morality that underlie insolvency law.6 io That is, a qualitative approach is
adopted, as opposed to a purely quantitative approach. 611
• Whether there is sufficient prima facie evidence to form the basis of a
rational judgment that there may be a need for further investigations. For
example, there may be a need for investigations to be made against directors
by a liquidator under the supervision of the court. 612 Also, if investigations
are needed against persons who appointed the liquidator, then compulsory
winding-up may be appropriate so that there is an oppmtunity for a new
liquidator to be appointed (as officer of the court). It is necessary for the
liquidator to be not merely independent but seen to be independent. 613

• Whether there was a public interest involved. For example, it is in the public
interest that there should be a proper and effective administration of the
liquidation, and that misconduct should be thoroughly investigated. 614 It is
relevant to take into account the failure of the existing liquidator to administer
the liquidation in a proper manner. 615
• Where the voluntary liquidation is almost complete, that may be a factor
indicating that compulsory liquidation is unnecessary. 616

5. OFFENCES ANTECEDENT TO OR IN THE

COURSE OF WINDING-UP

Criminal offences relating to conduct before or during winding-up. Cap.32, 20.245

ss.271-27 5 set out a number of criminal offences relating to particular conduct
occurring before or in the course of the winding-up. The offences are generally aimed

6-0' See also Cap.32, s.287 as to determination of views of creditors and contributories, e.g. by way of meetings.
6-08 Re Fullbright Co Ltd [2009) 2 MKLRD584, [21).
6()<) Cap.32, s.287(2).
610 Re RJ FalconDevelopmentsLtd [ 1987] BCLC 437,445.
6" Re Goldcone ProperliesLtd [2000] 2 HKLRD 16, 54-55.
"' Re STX Pan Ocean (Hong Kong) Co Ltd (in liq) [2014) 5 HK.LRD581.
"' Re STX Pan Ocean (HongKong) Co Ltd (in liq) [2014] 5 HKLRO 581, 4H7.
6" Re Fullbright C() Ltd [2009) 2 MKLRD584, [35).
'" Re Fullbright Co Ltd (2009) 2 HKLRD584, (35).
616 See Re Mediscoe Equipment Ltd (1983] BCLC 305; Re GoldconeProperties Ltd (2000] 2 HKLRD 16, 31-32.
1038 LIQUIDATION

towards ensuring: (a) that the company's officers do not hide or remove the company's
property so as to defeat the claims of creditors; and (b) that the company's officers
provide full and accurate information to the liquidator about the company's assets,
liabilities and affairs, so that the liquidator can carry out his or her functions properly.
The liquidator can be required to refer matters to the Secretary for Justice pursuant to
Cap.32, s.277 where it appears that an offence has been committed.

5.1 Concealing or removing property, or other fraud

20.246 Criminal liability for fraudulent conduct before liquidation under Caap.32, 273.
Cap.32, s.273 imposes criminal liability on officers (as defined in Cap.32, s.2(1)) for
ce11ain fraudulent conduct engaged in before the company entered into liquidation.
Liability can only arise under the provision, though, after the company has been
ordered to be wound-up or a resolution has been passed for voluntary winding-up.
The section covers, for example, situations where the officer, with intent to defraud
creditors, has transferred any property of the company (s.273(b)); or has concealed or
removed any part of the property of the company since, or within three months before,
the date of any unsatisfied judgment or order for payment of money obtained against
the company (s.273(c)).
20.247 Criminal liability for concealing or removing property, failure to deliver up
company's property to liquidator under Cap.32, s.271. There are also a number
of offences contained in Cap.32, s.271 relating to concealing or removing property of
the company, or failure to deliver up to the liquidator the company's property which
is in the custody or control of the officer: Cap.32, ss.271(1)(b), 271(1)(d), 271(1)(e)
and 271(I)( o). Section 271( 1)(p) relates to certain false representations or other fraud
practiced on creditors. The offences in s.271 are imposed on officers (as defined in
s.2( 1), but also including shadow directors 617), and the section extends to conduct
occurring within certain periods of time both before the commencement of winding-
up as well as during the course of the winding-up.
20.248 Criminal liability for fraudulent trading under Cap.32, s.275. There is also the
criminal liability for fraudulent trading under Cap.32, s.275(3), which can arise
whether or not the company has entered into liquidation: see section 3.8 above.

5.2 Concealing information from the liquidator,

and falsification of books

20.249 Offences for concealing information under Cap.32, s.271. Cap.32, s.271 (I) also
contains offences imposed on officers 618 relating to concealing of information about
the company's property, liabilities or affairs, or destruction or falsification of the
company's books and papers: ss.271 (l)(a), 271(1)(c), and 271(1)(f)-271 (I )(1).619

611 Cap.32, s. 271(3).

618
As defined in Cap.32, s.2(1); but for the purposes ofCap.32, s.271, "officer" also includes shadow directors:
s.271(3).
61
• See also R II McCredie(2000) 2 BCLC 438.
 DISSOLUTION OF THE COMPANY 1039

Separate offence for falsification of company's book with intent to defraud under 20.250
Cap.32, s.272. Cap.32, s.272 contains a separate offence for falsification of the
company's books or papers with an intent to defraud or deceive any person. Officers 620
and contributories can be liable under the section, and the section covers conduct
occurring either before or after the commencement of winding-up.

5.3 Failure to keep accounting records

Every officer guilty of offence if accounting records not been kept for two 20.251
years prior to commencement of winding-up. If the accounting records required
by Cap.622, s.373 have not been kept by a company in liquidation throughout the
pe1iod of two years before the commencement of winding-up, every officer of the
company who is in default621 is guilty of an offence: Cap.32, s.274. It is a defence for
the officer to show that he or she acted honestly and that in the circumstances in which
the business of the company was carried on the default was excusable.

5.4 Other offences

General offences. There are other general offences that could be applicable in the 20.252
context of winding-up, such as offences under the Theft Ordinance (Cap.210) or the
common law offence of conspiracy to defraud.

6. DISSOLUTION OF THE COMPANY

6.1 Dissolution after company wound-up

Dissolution can be automatic or following court order after compulsory 20.253

liquidation is completed. Where the affairs of the company have been completely
wound-up in a compulsory liquidation, the court is to make an order for dissolution of
the company upon application by the liquidator: Cap.32, s.227. Alternatively Cap.32,
s.226A can be relied upon for automatic dissolution without the need for application
to the court. Under that section, where the liquidator or the Official Receiver has
delivered a certificate to the Companies Registrar in accordance with the section after
the affairs of the company have been completely wound-up and after the liquidator has
been granted his or her release, 622 the company is dissolved upon the expiration of two
years from the registration of the certificate.
Company dissolved after three months after voluntary liquidation completed. In 20.254
the case of a voluntary liquidation, the company is dissolved three months after the
registration of the return made by the liquidator following the holding of the final
meeting of the company (under Cap.32, s.239) and, in the case ofa creditors' voluntary

62<l As dcrincd in Cap.32, s.2( I).

• 21 See Cap.32,s.351(2) for the meaning of"officer in default".
622 Pursuantto a court order under Cap.32,s.205.
1040 LIQUIDATION

winding-up, of the creditors (under Cap.32, s.248).623 The final meetings are held once
the affairs of the company are fully wound-up.
20.255 Court may make order to defer date of automatic dissolution. In the cases of
automatic dissolution (under Cap.32, s.226A in a compulsory winding-up, or Cap.32,
ss.239 or 248 in voluntary winding-up), the court may make an order deferring the
date of dissolution. 624 For the court to exercise its discretion to defer the dissolution of
a company, it is necessary to show there is still some aspect of the company's business
which has not come to a conclusion, such as assets being found, or disagreement
between the creditors and the liquidator whether the liquidator's work is completed. 62;
Relevant factors in the exercise of the court's discretion include the interests of
creditors, the public interest (including the need for investigations into possible past
misconduct) and whether there is likely to be detriment to any party by deferring the
dissolution. 626
20.256 Company ceases to exist once has been dissolved. Once the company has been
dissolved, it ceases to exist.627
20.257 Any remaining property of company vests in government as bona vaca11tia.
The winding-up should mean that all the company's property has been realised and
distributed before the company is dissolved. However, if there was any property of
the company that was not dealt with in the liquidation (e.g. because the property did
not come to the attention of the liquidator), then the property is deemed to be bona
vacantia pursuant to Cap.622, s.752 upon dissolution of the company and would vest
in the government.
20.258 Debts and liabilities cease to exist unless property sub_jectto such liabilities. Since
the company ceases to exist, its debts and liabilities also cease to exist. 628 However, if
there remains property of the company (vesting in the Government as bona vacantia ),
then the property remains subject to any previous liabilities imposed on the property,
including prior encumbrances. 629

6.2 Restoration of a dissolved company

20.259 Court has power to declare dissolution void and revive dissolved company. The
court has power to declare a dissolution to be void and therefore to revive a dissolved
company: Cap.32, s.290. Application can be made by the liquidator 630 or by any

6" Cap.32, ss.238(4) (members' voluntary winding-up) and 248(4) (creditors' voluntary winding-up).
624
Under Cap.32, s.226A(2), the application can be made by the Official Receiver or liquidator. In the case of
voluntary winding-up, the application can be made by the liquidator or any other person who appears to the court
to be interested (Cap. 32, ss.238(4) and 248(4)).
625 Re Working Project Ltd [1995) I BCLC 226,231; Re F11/lbrigh1Co lid [2009) 2 HKLRD 584, [ 17).
62• Kelso E111e111risesLtd v li11 Yiu Keung [2007) 3 HKLRD 266; Re F11/lbrightCo Ltd [2009) 2 HKLRD 584, [ 18).
6" Re Pinto Silver Mining Co (1878) 8 Ch 273; Lau Yim Lin v Kwan Tseung Co Ltd [2017) 5 HKC 500.
628 H A J Ford, R P Austin, I M Ramsay, Fords Principles of Co1poratio11sLaw (9th cdn, Buttcrworths 1999)

[27 .700).
.,. Sec Cap.622, ss.752(3}-752(5); Yang Zhenghong v Registmr of Companies [2016] 3 HKC 247; and see also
Vitamins Australia Ltd v Beta-Cc,rotene lndusrries Pty Ltd ( 1987) 5 ACLC 802, 808.
630 See Stephen Liu Yiu Ke1mg v Registrar of Companies [2018] HKCFI 1220 (unrep., HCMJ>2758/2017, (2018]

HKEC 1469).
 DISSOLUTION OF THE COMPANY 1041

person who appears to the court to be interested. 631 The court will generally make
an order to enable the liquidator to distribute an overlooked asset or a creditor to
make a claim that was not previously made; 632 however, the court's power to make
an order under the section is not limited to these situations. 633 The court's order must
generally be made within two years of the date of the dissolution (Cap.32, s.290( 1)),
but an order can be made outside this period if there are exceptional circumstances:
Cap.32, s.290(1A).
Company that is restored treated as never having been dissolved. Under Cap.32, 20.260
s.290( 1), the court order is for the dissolution to be void, and the section further
provides that upon the order being made, such proceedings may be taken as might have
been taken if the company had not been dissolved. This provision has been interpreted
to mean that the effect of the order is that the dissolution is treated as being void ab
initio, and so property that became bona vacantia under s.292 of Cap.32 is treated as
never having vested in the government. 634 But although the company is "restored to
life as from the moment of dissolution" so that the company is treated to have existed
in the period between the dissolution and the court order avoiding the dissolution, the
company "remains bmied, unconscious, asleep and powerless until the order is made
which declares the dissolution to have been void" .635 The court order does not validate
intermediate acts purportedly done on behalf of the company between the time of
dissolution and the court order, and so, for example, arbitration proceedings involving
the company that abated upon dissolution of the company would not be automatically
revived upon the court order being made. 636

631
Cap.32, s.290( I).
631 Re Yiu Cheung Glass Mirror Co Ltd [2007) I HKC 502; Stanhope Pe11sio11 Trust Ltd v Registmr of Companies
(1994) I BCLC 628.
633 Re Ma1rix lnd1wries lid (2004) I HKC 194; Stephen Liu Yiu Keung v Registrar of Companies [2018) HKCFI

1220 (unrep., HCMP 2758/2017, [2018) HKEC 1469).

634 Re CW Dixon Ltd (1947) Ch 251. However, if the Government has disposed of or otherwise dealt with the

property prior co restoration, the restoration docs not affect the disposition or dealing (i.e. the disposition or
dealing remains valid notwithstanding the restoration): Cap.622 s.773(3), and sec also Cap.622, ss.773(5)-
773(7).
•" Morris v Harris [1927) AC 252,269, HL.
"' Morris v Harris [ 1927) AC 252. 269.
 INDEX

Accountant apparent authority, 1.058, 12.007,

professional body, 1.207 12.008, 12.024-12.040
regulation, 1.207, 1.208 corporate contracting, 12.006
Accounting records deliberate concealment, 3.066
hard copy, I 1.007 enforcement of transaction against
book-keeper, 11.016 third party, 12.100
compliance, 11.010-11.016 existence as corporate name only, 3.066
composite test, 11.087 express actual authority, 12.0 I 0,
directors' rights of inspection, 12.011, 12.022
I 1.074-1 J.080 general principles applicable, 12.007
electronic, 11.007 holding out, 12.027-12.040
inspection implied, 3.065
authorised person, 11.095 implied actual authority, 12.010,
director, I 1.074-11.080 12.012-12.023
member, 11.081-1 J.095 knowledge that agent lacks authority,
liability for failure to keep, 12.040
I I.0I0-11.016 liability of officers and employees,
limited circumstances, 11.096 3.013-3.014
members' rights of inspection partnerships, 1.057-1.058
application for inspection, 11.082 piercing the corporate veil,
criteria, I 1.083-11.09 I 3.062-3.066
discovery, 11.091 pre-incorporation contract, breach of
documents, scope of, warranty, 4.010-4.014
I 1.092-1 J.094 ratification, enforcement against third
good faith, l 1.083-11.085 party, 12.100
generally, 11.081-11.095 reliance, 12.039-12.040
proper purpose, 11.083-11.090 representation, 12.024-12.040
preceding winding-up, I 1.0 I 2 subsidiary company treated as agent of
provisional liquidator, l 1.079 parent, 3.063
records to be kept, l 1.003-11.008 types of actual authority, 12.0 I 0
retention, 11.009 Agent
statutory requirement, 11.001-11.002 apparent authority, 12.024
subjective and distinct tests, 11.086- contracts without proper authority,
11.087 12.006
where kept, 11.008 de.facto managing director, 12.021
Accounting reference period duty to act honestly and in interest of
meaning, 9.009 company, 12.023
Acting in good faith implied actual authority,
directors' duties, 8.026-8.046 12.012-12.023
profit rule, 8.117 no actual or apparent authority,
Adverse interest rule 12.036-12.038
exception to attribution, 12.I 05 unsound mind, of, 12.009
Agency Alteration of articles of association
see also Indoor management rule and see Articles of association
actual authority, 1.057, 12.007, 12.008, abolition of entrenchment
12.10-12.023 provisions, 5.051
1044 INDEX

adjusts rights between shareholders, Annual financial statement

5.054-5.055 accounting standards
Allen v Gold Reefs test, 5.053 compliance, I 1.033-11.036
'benefit of company as a whole' test, audit, I 1.0 I 8
5.053, 5.058 balance sheet, 11.025-1 l.028
class rights, 5.049, 5.059 business review, l 1.044
common law limitation, 5.052-5.064 consolidated directors' report, I 1.045
company's interest, meaning, 5.060 consolidated statement, I 1.040-11.042
compliance with Companies contents, I 1.021-11.039
Ordinance, 5.047 corporate groups, 11.040-11.042
entrenching provision, 5.05 I debenture holders, 11.057
Gambotto case, 5.065-5.0701 directors' emoluments and
Hong Kong position, 5.068-5.070 loans, 11.032
hypothetical shareholder test, 5.058, directors' civil liability, J 1.048
5.061-5.062 directors' report, 11.043-11.047
inconsistent, 5.043 disclosure to members, l I .049-11.055
informal, 5.046 disclosure to public, 11.056-11.057
invalid, 10.200-10.20 l dormant companies, I 1.066-11.070
liability to contribute to share capital financial position, 11.025-11.028
protection against, 5.048 financial year, I 1.019-11.020
mandatory rules, consistency with member's right to receive reporting
5.047 documents, 11.049-11.05 I
mechanics, 5.045-5.046 non-compliance, I J .022
members' liability, 5.048 obligation to prepare, l 1.018
members' remedies, 5.050 particulars of loans and
need for, 5.042 transactions, 11.031
pre-emptive rights, 5.056-5.057 primary accounting reference
restrictions on majority members, date, l 1.073
5.044 profit and loss account,
special resolution, 5.045 11.023-11.024
statutory limitation, 5.047-5.051 public inspection, 11.056
unfair discrimination test, 5.057 reporting exemption, I J .058-l J .065
unfairly prejudicial, I 0.200-10.20 I reporting standards for SMEs, 11.036
unfairly prejudicial conduct, 5.050 revision, l l .037-11.039
validity, 5.064 simplified reporting, I 1.058-11.065
Alternate director SME reporting standards, 11.036
acts in place of director, 7.020 start date, first financial year, 11.072
agent of director, as, 7 .021 summary financial reports,
de jure director, as, 8.016 11.052-11.055
directors' duties, 7.022, 8.016 terminology, I 1.017
status, 7.022, 8.016 transitional provisions Cap.622,
Amalgamations 11.071-11.073
effect, 14.191 true and fair view, I 1.021,
floating charge, 14.187 I 1.029-11.030, I 1.040
horizontal, 14.184 untrue statements, 11.048
intra-group, 14.183-14.189 Annual general meeting (AGM)
procedural requirements, 14.184 accounting reference period, 9.009
security over class of assets, 14.187 dormant companies, 9.011
solvency statement, 14.186-14.187 frequency, 9.009
unfairly prejudicial, 14.188 importance of, 9.008
vertical, 14.184 meaning, 9.008
 INDEX 1045

reporting documents, 9.008 error in document, 5.073

requirement, 9.008-9.009 implied terms, 5.074-5.075
resolution to dispense with, 9.0 I 0 information for external parties,
written resolution procedure, 9.0 I 0 5.003, 5.025
Apparent authority information required, 2.004
see also Agency internal governance of
agent with no, 12.036-12.038 company, 5.025
estoppel by representation, 12.039 language, 2.009
express representation, 12.027 lay-out, 2.009
indoor management rule legal nature, 5.025-5.027
common law, 12.056-12.068 legislation, 2.003
exceptions, 12.069-12.081 model articles, 2.008
statutory, 12.082-12.090 objects clause, 2.006
legal relationship, 12.024-12.026 remedies, 5.072-5.075
protection for third parties, 12.055 rule book, 5.025
reliance on representation, signature, 2.009
12.039-J 2.040 statutory contract, as, 5.026, 5.027
representation by agent not binding, Asian Financial Crisis (1997)
12.036 corporate scandal, 8.003
representation by conduct, Asset partitioning
12.027-J 2.038 meaning, 3.020
representation clear and unequivocal, Associated body corporate
12.030 concept, 8.105
representation to third party, Association of Stockbrokers in
12.024-12.026 Hong Kong
representation with actual authority, see also Hong Kong Stock Exchange
12.033-12.035 formation, 1.188
Articles of association Audit
alteration see Alteration of articles of regulation, 1.206-1.209
association requirements, Cap.622, I. J44
capital clause, 2.007 Audit Investigation Board
Companies Ordinance Cap.622, Financial Reporting Council, 1.208
1.134 Auditor
company constitution in, 5.001 appointment, I. 145, I I. I 02-11.105
compulsory provisions, 2.005 breach of duty, 11.116,
contract, as, 5.026, 5.027 11.130-11.132
electronic submission, 2.012 Caparo principles, 11.138-11.141
enforceable, 5.026 casual vacancy, 11. I 05
enforcement causation
Australia, 5.040-5.041 breach of duty, 11.129
company and members, 5.028-5.029 company's contributory negligence,
directors, 5.037-5.041 11.133-11.134
external capacity, 5.030-5.036 conflict of interest, I I. I OJ
generally, 5.028-5.041 criminal liability, l 1.111-1 1. 113
lack of standing of directors, 5.037 damages for breach, 11.130-11.132
members, 5.028-5.029 defamation, 11. 122
rights given in capacity as outsider, disclaimers, 11.142
5.030-5.036 disqualification, 11.154
third party, 5.036 duty of care and skill, 11.124-11.134
widening, 5.035 duty owed to shareholders or third
entrenching provision, 5.051 parties, 11.137-11.141
1046 INDEX

duty to report impropriety or fraud, Bearer shares

11.135-11.136 Companies Ordinance Cap.622,
duty to third party, 11.136, 13.056
l l.137-11.141 meaning, I 3.055
enquiries of staff and management, member of company, 13.060
11.126 share warrant, 13.057-13.059
fraud, 11.134, 11.135 title document, 13.057
general meetings, 11.120 transfer, I 4.049
improperly paid dividends, 15.170 transparency, 13.056
impropriety, 11.135-11.136 Beneficiary principle
indemnity, 11.143 pre-incorporation contract, 4.017,
investigations, I I. I 09 4.018
liability, 11.130-11.132 Bill of sale
limits to damages, 11.131 meaning, 17.124
name and signature in report, 11.115 registration of charges, 17.123-17 .124
negligence, 11.128, 11.133 Blackstone, W
outgoing, 11.123, 11.150 corporations, 1.007
permitted indemnity provision, Board meeting
11.143 call by notice, 7.059
practice units, 11.114 chairperson, 7.072
qualifications, I J.099-11.101 conference calls, 7. I 02
qualified privilege defence, 11.122 decisions by unanimous consent,
removal by ordinary resolution, 7.097-7.101
11.151-11.153 directors must act collectively, 7.058
report, 11.106-1 I. 117 informal decision-making
requirement to appoint, 11.097-11.098 informal meeting, 7.095
resignation, 11.144-11.148 Model Articles, 7.100, 7. I 01
retirement, 11.149-11.150 private company, 7 .100
right of access, 11.119 public company, 7.101
rights, J.145, I I. 118-11. 123 unanimous consent, 7.097-7.101
significant changes, 1.143 written resolutions, 7.093-7.094
specified audit engagements, 11.l 00 informal meeting, 7.095-7.096
standard of care, 11.125, 11.127 invalid, 7.076-7.080
statement of circumstances, 11.146, irregularity
11.148, 11.150, 11.153 articles waiving irregularity,
subsidiary undertaking, information 7.084-7.082
on, 11.121 Australian position, 7.088-7.091
whistle-blowing, 11.136 effect of, 7.075-7.092
Australia third parties, 7.092
core company law, 1.013 irregularity principle, 7.083-7.087
Authorised share capital minutes, 7.074
meaning, 14.003 notice
protection for shareholders, 14.009 call by, 7.059
requirement abolished, 14.008 director absent, 7.070
extraordinary or important business,
Bankruptcy Ordinance 7.067, 7.069
Official Receiver failure to give, 7 .069
responsible for administration, 1.204 must be given to every director,
Bearer debentures 7.060
transferable by delivery, 17.0 I 7, nature of business, 7.065-7.070
17.041 period of, 7.062, 7.063
 INDEX 1047

place of meeting, 7 .064 Hong Kong preference, 6.030

reasonableness consideration 7 .066, questionable authorities, 6.022
7.069 second line of authorities,
reasonableness test for period, 7.063 6.029
time of meeting, 7.064 wording of division of power clause,
voluntary winding-up by board, 6.029-t.030
7.068 specific powers, 6.011-6.012
waiving of entitlement, 7 .082 Table A, Regulation 82 (pre-2003),
written, 7.061 6.017, 6.019
quorum, 7.071 interpretation of limiting phrase,
sole director company, 7.104, 7. 105 6.0 l 9-t.020, 6.031
technology, use of, 7.102-7.103 Body corporate
unanimous decision without meeting, associated, 8.105
7.097-7.101 controlled, 8. 105
voluntary winding-up, 7.068 corporate representative, 9 .100-9 .107
voting, 7.071 director, as, 7.029, 7.040-7.041
written record directors' duties, 8.020
sole director company, 7 .104 generally, 1.005
written resolutions, 7.093-7.094, 7.105 member of company, as, 2.019
Board of directors prohibition on loans, 8.104
agents of shareholders, 6.005 receiver, 18.015
corporate organ, as, 6.001, 6.002, transparency and accountability, 7.041
9.016 Bond issue
corporate power allocation, 6.007 generally, 13.023-13.025
exclusive general management powers, Bonus shares
6.028 generally, 14.152, 15.144-15.147, 15.152
exclusive specific powers, Book debts
6.026--6.027 bank deposits. 17.128
general meeting, power to call, charges over, 17.077-17.085
9.016--9.018 debts not amounting to, 17.129
general power-allocation mechanism, existing and future, 17.127
6.008-6.010 factoring agreement, 17.130
general power of management, lien on subfreights, 17.128
6.017-6.030 registration of charges, 17. J 26-17 .130
historical view, 6.005 statutory exclusions where charge not
interpretation of Regulation 82 regarded as, 17.128
(pre-2003), 6.020 Books of account see Accounting
limiting phrase, 6.021-6.028 records
management powers, 6.002, 6.007, Branch registers
6.026--6.028 and see Register of members
new Model Articles, 6.018 generally, 14.111-14.114
power of general meeting over board Bribes, 8.116
alternative doctrinal bases, Brokerage
6.021-6.028 duty of care, example, 8.153
breach of company law provision, Bulldogs
6.023 foreign bond, 13.074
breach of shareholders' agreement, Business angels
6.025-6.040 start-up companies, 13.006
breach of specific articles, 6.024 Business registration,
criticism of mainstream authorities, Ordinance, 2.039
6.022 provisions, 2.039
1048 INDEX

Buy-out offer Carecraft procedure

meeting expectations, 10.219 disqualification of directors, 7 .134
obligatory, 10.220 Causation
unfair prejudice remedy, 10.219, duty of care
10.220 remedy for breach, 8. 184-8. I 85
Buy-out order Central Clearing and Settlement
unfair prejudice remedy, System (CCASS),
10.211-10.215 14.062-14.066
headcount test, 14.175
Capital Certificate of incorporation
paid-up capital, meaning, 15.0 l 5 issue of, 2.016
reduction of see Reduction of capital Chairperson
return of capital see Capital duties, 9.081
maintenance doctrine function, 9.080
transactions amounting to return proxy as, 9.095
of capital see Capital who may be elected, 9.082
maintenance doctrine Charge
Capital maintenance doctrine bank deposits, 17.128
bonus shares issues, 15.152 book debts
common law development, 15.001 fixed or floating, 17.077-17.085
disguised returns of capital, meaning, 17.077
15.007-15.010 competing charges
generally, 1.139, 1.141, 14.153 ABN Amro case, 17.210-17.214
overseas development, 15.011 automatic crystallisation clause,
rationale, 15.002 17.208-17.214
redemption of shares, Dearle v Hall rule, 17.199-17 .204
15.064-15.077 debts and choses in action,
return of capital 17.199-17.204
bad faith, 15.010 factors, 17.187
disguised returns, 15.007 interested person, 17.200
fom1s, 15.004 issues of priority, two or more
fraudulent action, 15.010 charges, 17.185
gratuitous disposal when no land and interests in land,
distributable profits, 15.009 17.188-17.190
prohibitions, 15.005 negative pledge clause,
transactions amounting to, 17.205-17.207
15.004-15.010 notice of prior interest, 17. 199,
unlawful, 15.003, 15.017 17.20 I
winding-up, 15.002 personal property,
self-acquisition of shares, 17.191-17.198
15.059-15.063 personal property, both fixed,
unlawful distribution of dividends 17.192-17.193
15.164 ' personal property, both floating,
unlawful rentrn, 15.003 I 7. 194-1 7. 196
winding-up, 15.002 personal property, fixed versus
Capital redemption reserve floating, 17.197-17.198
abolished, 15.077 priority between holders of
Companies Ordinance Cap.622, competing charges,
15.077 17.185-17.220
fund, 15.015 real property, J7. 188-17. 190
redemption of shares, 15.074 registering first in time, 17.186
 INDEX 1049

subordination agreements, provisions, 14. I 90-14. I 9 I

17.2 I 5-17.220 restrictions, 14.204-14.205
crystallisation of floating charge, special resolution, 14.203, 14.204
17.070 written consent, 14.203, 14.204
equitable proprietary interest by written notice, 14.206
chargee, 17.056 Club loan
equitable under common law, 17.058 meaning, 13.071
fixed Cohen Report (1945)
comparison with floating, 17.069, generally, 1.109
17.073-17.076 Commercial Crime Bureau, Hong
crystallisation converts floating to, Kong police
17.070 corporate crimes investigation, 1.178
security for loan, 17.061 Commercial paper
specific asset, 17.064 short-term finance, 13.010, 13.015
floating see Floating charge Common seal
lien on subfreights, 17.128 see also Official seal
mortgage as, 17.060 authority to affix, 12.044
non-possessory security, 17.057 authority to use, 12.042
registration see Registration of execution of documents, 12.044, 12.045
charges incorporation by registration,
remedies following default, 17.059 2.035-2.038
unregistered legal effect, 12.003
consequences, 17.149-17.154 non- compliance with requirements,
Chinese Partnerships Ordinance 1911 12.043
generally, 1.105 not compulsory, 12.002
Church property official use, 2.036, 2.038, 2.039
corporation sole, 1.085 requirement, 2.035, 12.041
Circulating resolution procedure use outside Hong Kong, 2.036, 2.038,
decision-making tool, as, 9.116 2.039
Class meeting written contract, 12.002
meaning, 9.013 Companies (Amendment) Ordinance
members' scheme of arrangement, 1984
14.169-14.172 generally, I. I J0-1.111
Class rights Companies (Model Articles) Notice
annexed to particular shares, 14.196 three sets of model articles, 2.008
articles of association, alteration, 5.049 Companies (Winding-up and
class meeting, 9.013 Miscellaneous Provisions)
concept, 14. I 92-14.199 Ordinance
conferred on person in capacity of Cap.32 retitled I. 167
shareholder, 14.196 Companies Bill Team
different dividend entitlements, 14.194 Rewrite process, 1.123, 1.124
meaning, 14.190, 14.193 Companies Law Revision Committee
rights regarded as class rights, dividends, 15.148
14.195-14.199 First Report (1971 ), 1.183
statutory provisions triggered, 14.192 recommendations (1973),
variation, 1.110
abrogation, 14.200 Companies not formed under
amendment to articles, 14.202 Companies Ordinance
approval required, 14.190 body corporate, 2.079
changes without variation, 14.200 Companies Ordinance Cap.622,
procedure, 14.203-14.206 2.076-2.081
1050 INDEX

effect ofregistration, 2.083 Part 16, 1.157

eligible companies, 2.077, 2.082 Part 17, 1.158
foreign company, 2.080 Part 17, 2.076-2.08 I
limited liability, 2.078 Part 18, 1.159
registration, 2.076 Part 19, 1.160-1.16 I
registration for winding-up purpose, Part 20, 1.162
2.08 I Part 21, I. 163
Companies Ordinance Schedules I to 11, 1.164
common law and, 1.022 auditing requirements, 1.144
influence of the UK on Hong Kong, auditor, 1.145
1.023 capital maintenance doctrine, 1.139
regulatory regime, 1.171-1.175 communications, I. I 59
Companies Ordinance 1865 Companies Register, 1.129, 1.132
function, 1.102 company accounts, 1.144-1.145
growth in registered companies, 1.104 company administration and
motivation for enactment, 1.103 procedure, I. 150- I. 151
Companies Ordinance 191 l company formation, 1.134
generally, I. I 06 company secretary, 1.146-1.147
Companies Ordinance 1932 consequential amendments, 1.163
1984 Amendment Ordinance, core company law, 1.021
l.110-1.JJI debentures, l.J42
amendments since 1984, I.I 12 definitions, 1.131
followed Companies Act 1929 (UK), deregistration, 1.156
1.108 director, 1.146-1.149
generally, I. 108-1.113 directors, privacy protection, I. 133
revision, need for, 1.1 I 0 disclosure of interests, 8.085,
Second World War, rapid changes 8.088-8.092
after, 1.110 effective, 1.114
Companies Ordinance Cap.32 electronic communications, 9 .136
before 2014, l.021 enactment, I . I 14
controllers register .......... 1.170 financial assistance, shares, 1.140
effect of CO 622 on, 1.167-1.169 foreign companies, 1.157
renamed, 1.167 generally, 1.128-1.130
updated provisions, I. 169 incorporation of companies, 1.134
Companies Ordinance 2012 Cap.622 inspections under, 1.191-1.203
section 122, 4.002, 4.022-4.033 investigations and enquiries,
Part I, 1.131 1.160-1.161
Part 2, I.I 32-1.133 members' remedies, 1.154-1. 155
Part 3, 1.134- 1.135 miscellaneous, 1.162
Part4, 1.136-1.137 non-Hong Kong companies, 1.157
Part 5, 1.138-1.140 pre-incorporation contracts, 4.002,
Part 6, 1.141 4.022-4.033
Part 7, 1.142 prohibitions against exemption of
Part 8, 1.143 director's liability, 8.193-8.195
Part 9, 1.144-1.145 ratification, relief from liability,
Part 10, 1.146-1.147 8.187
Part 11, 1.148-1.149 Registrar, functions, 1.132
Part 12, I. I 50-1.15 I registration of charges, l.J 43
Part 13, 1.152-1.153 registration of companies not formed
Part 14, 1.154-1.155 under Companies Ordinance,
Part 15, 1.156 2.076-2.08 I
 INDEX 1051

registration of pre-existing companies, directing mind and will, 3.022

I. I 58 finance, raising, 1.079
re-registration of companies, I. 134 floating charge, 1.079
restoring company to register, 1.156 and see Floating charge
savings provisions, 1.163 foreignjurisdictions, 1.010
schemes of arrangement, 1.152-1.153 formalities, 1.071
scope, 1.014 formation, 1.067, 1.134
share capital, I. I 36-1.140 gearing ratio, 13.083
shareholders, 1.141 governing body, meaning, 9. l Ol
subsidiary legislation, 1.166 government enterprises, 1.002
transaction in relation to share capital, incorporated association, 1.004
1.138- l.l 40 legal status, 1.069
Companies Ordinance Rewrite project liability, 1.077
accessibility, 1.120 main uses, 1.002
advisory groups, 1.124, 1.125 management, 1.075
background, I. 114-1.118 meaning, 1.004
draft legislation, I. 126 non-profit purposes, 1.002
final Companies Bill, 1.127 partnership, comparison with,
generally, 1.014 1.067-1.082
modernisation, 1.122 property, holding of, 1.002
objectives, I . I 19-1. 122 public register, 1.180
Phase l, 1.114, 1.118 receivership effect on, 18.016-18.0 l 8
Phase II, 1.118, 1.169 registered company, 1.003, 1.008
principles, 1.119 registration, 1.071
process, 1.123-1.127 separate legal entity, 1.065
social and commercial needs, separate legal entity doctrine see
1.121-1.122 Separate legal entity doctrine
Companies Ordinance Rewrite Team setting up, 1.064
Department of Justice, 1.123 shares, 1.073
Companies Register taxation, 1.081
Companies Ordinance Cap.622, 1.132 transfer of ownership, l .073
Companies registry trustee, as, 1.002
creation, 1.179 Company chop
delegated prosecution authority, I .181 use of, 12.053
direction to change company name, Company law
2.089-2.091 core, 1.012, 1.013, 1.015, 1.021
e-Registry, 2.012 critical legal theories, 1.218-1.220
Guide on Directors' Duties, 8.014 early Companies Ordinances, Hong
incorporation procedures, 5.004 Kong, I. I 02- I. I 07
Registrar, 1.179-1.182 economic analysis, 1.216-1.217
regulatory body, 1.179-1.182 faciliative rules, 1.018, 1.019
Company foreign jurisdictions, 1.013
accounts, l.144-1.145 historical development
administration, 1.151 Chinese merchants, l. l 05
agency, 1.076 Companies Ordinance 1865,
amalgamation without court 1.102-1.105
approval, 1.153 Companies Ordinance 1911, 1.106
Anglo-Hong Kong law, 1.004-1.009 corporations, 1.084-1.088
borrowing powers, 1.079 early English Companies Acts,
business vehicle, as, 1.002 1.096-1.101
collective investment, 1.002 English origins, 1.083-1. IOI
1052 INDEX

joint stock companies, 1.089-1.095 Company seal

uniformity with UK legislation, and see Seal
I. 106, l.107 generally, 1.134
'law and economics' perspective, Company secretary
1.216-1.217 appointment, 1.146, 2.026
mandatory rules, 1.016, 1.017, 1.019 chief administrative officer, 2.023
non-core, 1.012, 1.015 director as, 2.025
scope, J.01 l duty of care, skill and diligence, 1.147
separation of core and non-core, 1.015 joint, 2.024
sources, 1.020-1.023 removal, 1.146, 2.026
theories and perspectives resignation, I. I 46
corporate governance, 1.214 Compensation
corporate personality, 1.213 duty of care
corporate social responsibility, remedy for breach, 8.183
1.215 Compulsory winding-up
management of companies, 1.213 application by petition, 20.072
critical legal theoiies, 1.218-1.220 appointment of liquidators,
economic analysis, 1.216-1.217 20.020-20.022
generally, 1.210-1.212 appointment of provisional liquidators,
Company Law Revision Committee 20.080
(Rong Kong, 1973) arbitration clause, 20.067
pre-incorporation contract, 4.022 assets
Company names available for distribution,
company names, 1.134 20.096-20.098
abbreviations, 2.094 contracts, 20.100
change before incorporation, 4.029 fixed charges, 20. I 95
change by special resolution, 2.095 floating charge, 20.199-20.202
change of name, 2.095-2.096 free, 20. I 97
Companies Registry search, 2.087 information, 20.107-20.116
direction to change name by Registrar, onerous property, 20.101-20.92
2.089-2.091 piioiitisation, 20.200
existing, 2.087 realisation and distribution,
impression of connection with 20.194-20.202
government, 2.088 secured, 20.094
in the name of, 4.033 title to, 20.095
'incorporated with limited liability' unsecured creditors, 20.197
statement, 2.093 valid security held by creditor, 20.099
'incorporated without limited liability' void disposition, 20.119-20.128
statement, 2.093 balance sheet test, 20.070
language, 2.084 calls on contributories, 20.185
legal status of change, 2.096 cash-flow test, 20.070
'limited' as requirement, 2.085-2.086 commencement, 20.085
on behalf of, 4.032 company as petitioner, 20.075
pre-incorporation contract, company has no members, 20.062
4.029-4.033 company property, 20.089, 20.090
publication, 2.092-2.094 void dispositions, 20.119-20.128
requirements, 2.084-2.086 contractual rights, enforcement,
restrictions, 2.087-2.091 20.100
right of appeal, 2.092 contributories, liability, 20.185
signatories, 4.032-4.033 contributory as petitioner,
wrong name on contract, 4.031 20.077-20.079
 INDEX 1053

conversion to voluntary, realisation and distribution of assets,

20.237-20.242 20.194-20.202
copy of order to Registrar, 20.084 regulating order, 20.203-20.205
court summons for assets information, rule against double proof, 20.190
20.109-20.114 secured assets, 20.094
court's discretion to make, 20.081 Securities and Futures
court's powers, 20.081-20.083 Commission, 20.074
creditor as petitioner, 20.076 set-off, 20.192-20.193
creditors entitled to claim, shares, transfer of, 20.186
20.188-20.193 small liquidations, 20.206
disclaimer of onerous property, special resolution, by, 20.060-20.071
20.101-20.106 statement of affairs, 20. J08
disposition, definition, 20.120 summary procedure, by, 20.206
dispute about petitioning debt, 20.066, unable to pay debts, 20.064-20.070
20.068 unfair preferences, 20.129-20.142
double proof, 20.190 unfair prejudice remedy, 20.071
effect of order, 20.086-20.094 validation order, 20.123-20.128
events prescribed in constitutional vesting order, 20.106
documents, 20.063 void disposition of assets,
extortionate credit transactions, 20.1 I 9-20.128
20.178-20.180 voluntary winding-up after
failure to commence business, 20.061 commencement of,
fraudulent trading, 20.168-20.177 20.237-20.242
generally, 20.003, 20.004 winding up of foreign companies,
grant of assistance, 20.208 20.207
grounds, 20.058-20.059 Compulsory winding-up order
information about assets commencement, 20.085
court summons, 20.109-20.114 committee of inspection, inspection of,
documents subject to legal 20.088
professional privity, 20.115 copy to Registrar, 20.084
public examination before directors' powers, 20.091
court, 20.116 effect, 20.086-20.094
statement of affairs, 20.108 liquidator, appointment, 20.087
statutory provisions, 20.107 publication, 20.084
invalid floating charge, stay of proceedings, 20.092-20.094
20.163-20.167 Conflict of interests
just and equitable, 20.071, 20.083 auditor, 11.101
liabilities of directors and shareholders, director's duty see Directors' duties
20.187 liquidator, 20.042, 20.034
liability of contributories, 20.185 receiver, 18.117
misfeasance, 20.181-20.184 statutory derivative action, 10.076
onerous property, 20.101-20. I 06 Connected entities
persons entitled to petition, 20.073 category of persons, 8.107
petition after commencement of Company Ordinance Cap.622, 8.102,
voluntary, 20.243-20.244 8.107
proofs lodged by creditors, definition, 8.105
20.190-20.191 loans, 8.098
provable debts, 20.188-20.191 transactions with, 8.104-8.107
provisional liquidator, 20.020, 20.021 Constructive knowledge
publication, 20.084 director
quasi-partnership, 20.063 breach of duty, 8.177
1054 INDEX

Constructive notice Corporate criminal liability

breach of duty, 8.176 aggregation of acts or knowledge,
Contract 12.125
agency law principles, 12.006 attribution principles, 12.122
Companies Ordinance Cap.622 section delegation of responsibilities, 12.127
121, 12.001 directing mind and will, 12.124
common seal, 12.041-12.044 generally, 12.117
company chop, 12.053 identification theory, 12.121-12.123,
deeds under seal, 12.002 12.127-12.128
director, defect in appointment, validity individual criminal liability, 12.129
of acts, 12.091-12.092 limitations of identification theory,
execution of deeds, 12.046 12.127-12.128
execution of documents, 12.045 primary, 12.119-12.125
fraud, 12.006 strict or absolute liability, 12.120
indoor management rule, 12.005 theories justifying, 12.l l 8
methods of entering into vicarious, 12.119, 12.126
contract, 12.001 Corporate doctor see Receiver
official seals, 12.050-12.053 Corporate finance
outsiders, 12.055 bank loans, 13.004, 13.010
power to enter into contract, 12.004 bond issue, 13.023
protection of third parties, 12.006, business angels, 13.006
12.055 commercial paper, 13.0 I 0, 13.015
purports, meaning of, 12.098 company size, 13.076
rubber chop, 12.053 convertible preference shares, 13.036
third parties, 12.055 corporate bond, 13.026
third party enforcing transaction, debenture, 13.026
12.005, 12.006 debenture restrictions, 13.080
third party protections, 12.006 debt and equity finance distinction,
validity of acts of directors, 13.028-13.036
12.091-12.092 debt to value ratio, 13.077
validity of documents executed as if debtor finance, 13.01 I
under seal, 12.096-12.099 disclosure costs, 13.081
Convertible debentures equity
generally, 17.012-17.013 nature and types, 13.037-13.062
Convertible preference shares equity and debt finance distinction,
generally, 13.051, 13.036 13.028-13.036
Conveyancing equity or debt
execution of deeds by corporations, factors affecting choice,
12.093-12.095 13.076-13.083
Corporate bond equity crowdfunding, 13.008
long-term finance, 13.026 established firms, 13.009-13.027
Corporate contracting directly factoring, 13.012
generally, 12.041-12.052 factors affecting choice between equity
Corporate contracting through agent ordebt, 13.076-13.083
actual authority, 12.010-12.023 financial distress costs, 13.079
agency law principles, 12.007 gearing ratio, 13.083
agent of unsound mind, 12.009 hire-purchase agreement, 13.019
apparent authority, 12.024-12.040 initial public offerings, 13.027
generally, 12.007-12.009 insolvency costs, 13.079
ostensible authority, l 2.024-12.040 interest rate fluctuations, 13.082
 INDEX 1055

invoice discounting, 13.013 fraud, 12.110, 12.104

invoice finance, I 3.01 I generally, 12.10 I
leasing, 13.019-13.020 individual liability, 12.115
legal categories for sources, 13.028 knowledge, 12.109
loan documentation, 13.032 Moulin Global case, 12.114
long-term finance, 13.016-13.027 personal liability, 12.1 15
meaning, 13.001 person's fraud or wrongdoing, l 2. l 12
methods, 13.003-13.027 primary liability, 12.103-12.104
nature of company business, 13.077 rules of attribution, 12.105, 12.113
notes, 13.026 secondary liability, 12.115
preference shares, 13.035-13.036 vicarious liability, 12.102
private placements, 13-023-13.025 Corporate organs
project financing, 13.021-13.022 board of directors, 6.001, 6.002
promissory notes, 13.010, 13.015 division of powers, 6.003-6.004
publicly issued debt, 13.026 members at general meeting, 6.00 I
receivables finance, 13.011-13.013 scope, 6.0 I 6
retained profits, 13.009 Corporate personality
revolving line of credit, 13.018 accessorial liability, 3.015
risk capital, 13.031 aggregate theories, 3.022
shares, prorata offer of. 13.025 concession theories, 3.022
short-tern, finance, 13.0 I 0 contractual theories, 3.022
start-up companies, 13.003-13.008 fiction or entity theories, 3.022
stock finance, 13.014 liability of members, 3.009-3.012
tax deduction, 13.078 liability of officers and employees,
term loan, 13.017 3.013-3.015
trade credit, 13.005 obligations and liabilities, 3.008
venture capital, 13.007 organic theories, 3.022
Corporate governance personal liability of agent to third
Akai case, 8.002 parties, 3.014
directors' duties, 8.002-8.006 privilege against self-incrimination,
need for, 8.002-8.005 3.007
Peregrine case, 8.003 realist or natural entity theories, 3.022
theories, 1.214-1.215 rights and powers, 3.004-3.007
topical debate, 8.002 separate legal entity doctrine,
Corporate Governance Code 3.001-3.003
remuneration theories on nature of, 3.022
senior management members, theories, 1.213
8.096 Corporate power allocation see
Corporate insolvency Management powers
see also Corporate rescue Corporate receivership
options, 19.001 meaning, 18.001
private insolvency practitioners, 20.009 Corporate regulator
Corporate liability generally, 8.006
adverse interest exception to Corporate representative
imputation, 12. l 05 authorisation, 9.101-9 .104
aggregation concept, 12.110 generally, 9.101-9 .108
Bi/ta case, 12.111 more than one, 9. 104
direct liability, 12.103 proxy distinct from, 9.105
directing mind and will, 12.108 recognised clearing house, 9.103,
dis-attribution fallacy, 12.116 9.104
1056 INDEX

Securities and Futures employee priority treatment

Ordinance, 9. I 03 problem, 19.027-19.028,
Corporate rescue 19.031, 19.032
asset distribution, 19.106, 19.107 major secured creditor, 19.023
asset substitution, meaning, 19. I 06 procedure, 19.023-19.024
Cap.32 section 199(1)(e) power, proposal, 19.023
19.021-19.022 protection of wages,
collective agreement, I 9.004 19.027-19.028
compromise power, 19.021-19.022 resistance to, 19.026
constraining management powers, revised provisions 2014, 19.033
19.115-19.125 super priority, 19.025
consultation paper (2009), I 9.057 purpose, 19.001-19.003
corporate doctor, Hong Kong, receivership, 18.014, 19.013-19.016
19.015 restructuring system
debt rescheduling, 19.007-19.01 I accurate collective decision on
Hong Kong examples, 19.008 allocation of assets, I 9.034
debtor opportunism debtor management interests,
statutory rules, I 9. I I 8- I 9 .125 19.036
displacing management, 19.114 functions, 19.034-19.037
external administrators, 19. I I 4 neutralising stakeholder strategic
fiduciary duty, best interest of the behaviour, I 9.037
company, 19.116 stakeholders, respective interests,
fraudulent trading, I 9 .121, I 9 .122, 19.035
19.124-19.125 scheme of arrangement, 19.019-
freezing power of disposition, 19.119 19.020
Hong Kong, formal mode, I 9.005 special circumstances for compromise,
Hong Kong Approach to Corporate 19.022
Difficulties guideline, stay of proceedings, 19.018, 19.038
19.012 voidable disposition provision, 19.121,
ineligible films I 9.123
court appearance requirements, wealth transfer
19.111, 19.113 at expense of creditors,
disclosure, 19.111, 19.112 19.106-19. 109
screening out methods, meaning, 19.107
19.111-19.J 13 protection against, 19.1 I 0, I 9 .117,
interest of the company, 19.120
meaning, 19.116 winding-up petition, 19.117
main tasks, 19.003 Corporate Rescue in Hong Kong
management, displacing, 19. I 14 consultation paper (2009), I 9 .057
management powers, constraining, Corporate social responsibility
19.115-19.125 generally, 1.215
meaning, 19.00 I Corporation
over-riding control devices, aggregate. 1.007, J.008, J.009, l.086
19.106-19. 125 craft guilds, 1.086
provisional liquidation, 19.017-19.018, creation, 1.009
19.052-19.064 historical development, 1.084-1.088
provisional supervision, 19.005, legal personality, 1.006
19.023-19.033 meaning, 1.005
2000 Bill, 19.023 municipal, 1.086
2001 Bill, 19.023, 19.029 peace guilds, 1.086
consultation 2010, 19.030 regulated companies, 1.088
 INDEX 1057

Roman roots, 1.084 Damages

royal charters, 1.087 unfair prejudice remedy,
sole, 1.007, 1.008, 1.009, J.085 10.216-10.217
statutory with public De facto director
functions, 1.009 Companies Ordinance, definition,
types, 1.007 7.009
universities, 1.009 de Jure director as, 7.012
Corporation aggregate definitions, 7.006-7.009
examples, 1.009 directors' duties, subject to, 8.017
generally, 1.007, 1.086 Paycheck case, definition, 7 .008
registered company as, 1.008 prevention of damage to
Corporation sole creditors, 7.01 I
examples, 1.009 resigned, performing directorial
generally, J.007, J.008 duties, 7 .0 J I
historical development, 1.085 use of term, 7.003, 7.006
Court-ordered meeting De jure director
power of court, 9.014 alternate director as, 8.016
Credit transaction appointed to sit on board of
extortionate directors, 7. 004
compulsory winding-up, statutory definition, 7.006
20. 178-20.180 Debenture
Creditors' scheme of arrangement, allotment
14.163 delivery after, 17.028
see also Scheme of arrangement registration, 17.022
compromise, 14.164 bearer, 17.017, 17.041
creditor value test, 14. 173, 14,154 borrow by issuing, 17.004
Criminal liability branch register, 17.027
see also Cap.622, 1.142
auditor, 11. 111-11.1 I 3 common law definition, 17.006
misrepresentation on prospectus, convertible, 17.012-17.013
16.083-16.090 debenture document, 17.017
piercing the corporate veil, 3.072 debenture holder, meaning,
reduction of capital, 15.0 I 6 17.007
Critical legal studies debenture stock, 17.016
generally, 1.218-1.220 debtor, meaning, 17.007
Crystallisation definition
agreement on events giving rise to, common law, 17.006
17.092 securities, 17.020
competing charges, priority, statutory, 17.005
17.208-17.214 delivery after allotment, 17.028
converts floating to fixed charge, form of invesh11ent, I 7 .0 I 8
17.090 grant of probate, 17.043
decrystallisation, 17.097-17.102 instrument of transfer, 17.036
effect, 17.093-17 .094 investor protection, 17.018-17 .021
meaning, 17.090 irredeemable, 17.0 I I
occurs in certain situations, issue, 17.018-17.035
17.091 issue period following allotment,
partial, 17.095-17.096 17.028
rules on priorities, 17.094 legislation, 17.002-17.003
Cumulative preference shares letters of administration,
generally, 13.049 17.043
1058 INDEX

meaning, 13.067 Debt

meetings of holders, club loan, 13.07 l
17.044-17 .046 contractual subordination, l 3.066
place register to be kept, 17.025 debenture trust, I 3.068
prospectus regime, 17.019 debenture, 13.067
publicly issued debt, 13.026 debt finance, 13.029-13.036
redeemable, 17.009-17.010 debt subordination, 13.066
register of debenture holders, equity, factors affecting choice,
17.023-17 .027 13.076-13.083
registration requirements, 17.021, fixed charge, 13.065
17.022 floating charge, 13.065
reissue of redeemed, I 7.0 I 0 foreign bond, 13.074
restrictions, 13.080 high-yield bond, 13.072
right to inspect register, 17.026 junk bond, 13.072
specific performance, 17.035 loan credit, 13.063
stamp duty, 17.037 mezzanine finance, 13.066
stock, l 7.016 redeemable bond, 13.073
structured products, 17.020 subordination, I 3.066
terminology, 17.007 subordination trust, 13.066
transfer syndicated loan, 13.070
bearer debentures, 17.041 unsecured or secured loan,
generally, 17.036-17.041 13.064-13.065
instrument of, 17.036 Debtor finance
issue period following transfer, generally, 13.01 l
17.039 Decrystallisation
legal title, 17.040 and see Crystallisation
registration, 17.038 binding clause, 17.099
stamp duty, 17.037 floating charge and, 17.098, 17. l 02
transmission, 17.042-17.043 waiver by chargee, 17. 100
trust, 13.068 Deeds
trust deed, l 7.030 attestation, 12.048
trustee Conveyancing and Property Ordinance,
appointment, 17.029 12.093-12.095
debenture series or debenture stock, delivery, 12.047
17.029-17.034 execution, 12.046
due care and diligence, 17.033 execution by attorney, 12.049
exemption from liability, execution by corporations,
17.032-17.034 12.093-12.095
legal ownership, 17.031 Deregistration
liability, 17.032-17.034 Companies Ordinance Cap.622, 1.156
types, 17.008-17.017 Derivative action
unsecured notes, I 7.014 beneficial owners of shares, 10.039
use of, 17.004 company in liquidation,
Debenture holder 10.041-10.042
meaning, 17.007 costs, l 0.046-10.047
meeting, 17.044-17.046 double or multiple, 10.036-10.038
Debentures in a series form of writ, 10.043
meaning, 17.015 former member, 10.039
persons with equal ranking, 17.015 fraud on minority, I 0.020
registration, 17. I 55-17. I 57 fraud on the company,
statement of particulars, 17.157 10.019-10.028
 INDEX 1059

inequitable conduct of applicant, dejure, 7.003, 7.004

10.040 defect in appointment, 12.091
interests of justice, 10.029-10.030 definition
meaning, I 0.017 Black's Law Dictionary, 7.002
pleadings, 10.043-10.044 Companies Ordinance Cap.622,
primafacie case, 10.045 7.004
pocedural matters, 10.039-10.047 disclosure of material assets, 1.149
ratification, effect of, I 0.031-10.035 disqualification
registered member, 10.039 affairs conducted in oppressive of
standing, I 0.039 prejudicial manner, 7 .140
statutory derivative action, relationship after investigation of company,
with, I 0.094-10.095 7.127-7.128
see also Statutory derivative action Carecraft procedure, 7 .137
ultra vires or illegal conduct, 10.017, CDDP Rules, 7.136
10.018 foreign companies, 7.135
unfair prejudice remedy, relationship indictable offence., maximum
with, 10.221-10.223 period, 7.112
Directing mind and will listed corporations, 7. 140
meaning, 3.022 management, meaning, 7.130
Director person acting on instructions of
age limit, 7.026 disqualified person, 7. 134
alternate, 7.020-7.022 procedural matters, 7 .136-7 .140
appointed, 7.003 provisions, 7 .106
appointment, 1.146, 6.013, public examination, 7 .141
7.030-7.041 purpose, 7 .107
additional, 7.035 Securities and Futures
body corporate, 7.040-7.041 Ordinances.214, 7.140
by outsiders, 7.038 unfit directors of insolvent
casual, 7.035 companies, 7.121-7.126
corporate, 7.040-7.041 unfit persons, 7.107, 7.109
defect in, 12.091-12. 092 disqualification order
delegation of powers, 7 .038 after investigation of company,
initial, 7.032 7.127-7.128
managing director, 7.037 application for leave to manage
minimum, 7.030-7.031 companies, 7.131-7.132
notice to registrar, 7 .036 application, 7. I 11
rejecting, 7.034 contravention, 7.133-7.134
subsequent, 7.033-7.037 discretionary, 7 .109
under-age, 7 .039 fraudulent trading, 7 .117- 7. 120
body corpornte as, 7.029, 7.040-7.041 grounds, 7. I 08
breach of fiduciary duty, 5.024, 10.252 indictable offence, conviction of,
ceasing to be, 7.043 7.110-7.112
change of persistent breaches of Ordinance,
notification to Registrar, 7.057 7.113-7.116
chief executive officer, 7 .017 disqualification procedure, 7.137
classification, 7.002-7.024 duty see Directors' duties
Companies Ordinance Cap.622, executive, 7.018
1.146- l.149 failure to hold AGM, 7.044
company secretary, 2.025 fair dealing, 1.148-1. I 49
corporate organ, 9.016 initial, 7.032
defacto, 7.003, 7.006-7.012 liabilities of under-age, 7 .039
1060 INDEX

managing, 7.016, 7.017, 7.037 unfairly prejudicial conduct,

minimum number, 7.030--7.031 10.187-10.188
natural person as, 7.026 unfit
nominee, 7.023 applications to CFI, 7 .122
non-executive, 7.018-7.019 determination of unfitness, 7 .123
notification of change to Registrar, disqualification order, 7.125
7.057 factors taken into account,
personal details, 1.133 7.123-7.124
power of disposition insolvent companies, 7.121-7.126
freezing, 19.119 matters listed in Schedule 15, 7.123
privacy protection, 1.133 period of disqualification, 7.126
private company, 2.021 unlawful distribution of dividends,
prohibitions, 7.040 15.165-15.166
public company, 2.021 vacation of office, 7.042-7.057
qualifications, 7.025-7.029 validity of acts where defect in
receivership, 18.019-18.02 I appointment, 12.091-12.092
removal, 1.146 whole board automatically
removal by directors, 7.045 vacating, 7.044
removal by members Directors' duties
alternative procedures in Articles, acting contrary to constitution, 8.027
7.055 acting in good faith, 8.026-8.029
compensation, 7.049 agency costs, 8.005
contested, 7.051 Akai Holdings case, 8.026, 8.165,
damages, 7.049 8.175, 8.177
equal participation, shareholders' alternate director, 8.016
agreement, 7.052 benefits, 8.093-8.096
generally, 7.046-7.055 body corporate director, 8.020
ordinary resolution, 7.046 breach, 8.011
quasi-partnership, 7 .05 I bribes, 8.116
special notice ofresolution, 7.048 Companies Ordinance
statutory provision, 7 .050 Cap.622, 8.010, 8.012
unfair prejudicial conduct, 7.051 conflicts of duties, 1.148
weighed voting rights, 7.047 conflict of interests
remuneration, excessive, adequate disclosure, meaning, 8.079
10.187-10.188 approval by general meeting, 8.078
reserve, 7.024 avoidance, 8.070
resignation, 1.146, 7 .056 conflict rule, 8.071-8.087
restrictions, 2.022 credit transactions, 8.100-8.103
retirement by rotation, 7.033, 7.042 director of two companies, 8.077
rotation and retirement, Table A and director-shareholders voting at
Model Articles, 7.033, 7.042 general meeting, 8.080
shadow, 7.003, 7.013-7.015 disclosure, 8.029, 8.076,
share qualification, 7.028 8.081-8.092
shares, refusal to register transfer, disclosure to board, 8.081-8.087
14.073-14.076, 14.086-14.087 equitable duty, 8.071
transparency and accountability, general, 8.012, 8.070
7.041 informed consent if more than one
types according to functions, company, 8.077
7.016-7.024 loans and credit transactions,
under-age, 7.039 8.097-8.112
undischarged bankrupt, 7.027 loans, 8.097-8.099
 INDEX 1061

Model Articles, Cap.622, financial statements, 8.158

8.085-8.086 generally, 8. 132
no-conflict rule, application, 8.072, import company, 8.157
8.073 independent j udgment, 8 .159-8 .161
non-disclosure of conflict, 8.074 listed company, 8.154
quasi-loans, 8.100-8.103 money-lending, 8.155
remuneration, 8.093-8.096 monitoring duty, 8.149-8.152
Table A, Cap.32, 8.082-8.085, 8.087 private company, 8.156
transaction with close relative, 8.075 remedies for breach, 8.182-8.185
transactions with connected persons, sources, 8 .133-8 .134
8.104-8.107 standard, 8.135-8.136
corporate governance, 8.002-8.006 statutory, 8.010, 8.019, 8.134,
corporate groups, 8.035-8.036 8.143-8.151
corporate regulator, 8.006 duty of care, skill and diligence,
creditors' interest, 8.025, 8.038-8.043 1.147
breach of duty, 8.041-8.043 equitable fiduciary duties, 8.008
financial position of company, executive officer, 8.021-8.022
8.041, 8.043 failure to act in good faith, examples,
objective test, 8.041 8.026-8.028
subjective test, 8.042 fiduciary duties, 8.007-8.008
Tradepower case, 8.039 allotment of shares, 14.029
transaction size, 8.043 breach, !0.184-10.186
de facto director, 8.017 unfairly prejudicial conduct,
disclosure 10.184-10.186
breach of duty, 8.091 function, 8.001
Companies Ordinance Cap.622, good faith, 8.069
8.088-8.092 Guide on Directors' Duties, 8.014
generally, 8.029, 8.076 Howard Smith v Ampol, 8.052, 8.054,
informal, 8.090 8.055, 8.066, 8.164
liability after contravention, 8.092 independent judgment
Model Articles, Cap.622, 8.085 delegation, 8.160
public companies, 8.086 exercise of, 8.159-8.161
disclosure to board, 8.081-8.087 must not fetter discretion, 8.159,
diversion of corporate opportunities 8.161
authorisation by company, insolvency, company in or near,
8.129-8.131 8.038-8.043
duty to conununicate, 8.124 interests of the company
existence of opportunity relevant, benefit of own company, 8.035
8.124 benefits to employees, 8.031
former directors, 8.126-8.128 constitution and objects shape
generally, 8. 120-8.125 requirement, 8.033
liability to account, 8.121, 8.123 corporate groups, 8.035-8.036
opportunity outside scope of creditors' interest, 8.038-8.043
company's operations, 8.125 derivative benefit, 8.036
dividends, 15.141 different classes and groups, 8.034
duty of care insolvency, 8.038-8.043
breach, remedies for, 8.182-8.185 meaning, 8.030-8.043
brokerage, 8.153 members as general body, 8.030
Companies Ordinance Cap.622, nominee directors, 8.037
8.134, 8.143-8.151 relevant factors, 8.046
examples, 8.153-8.158 remuneration, 8.032
1062 INDEX

subjective test, 8.044 profit rule, 8.113-8.117

subjective with objective elements, proscriptive and non-proscriptive
8.044 duties
liability fiduciary duties, 8.009
Companies Ordinance Cap.622, traditional view, 8.009
8.193-8.195 purpose of power
conflicts of interest, 8.198 benefit of directors, 8.062
court's power to grant relief, 8.199 dominant purpose improper, 8.063,
exemption and indemnification, 8.064, 8.066
8.198 Howard Smith v Ampol, 8.066
exemptions, 8.192-8.195 independent legitimate purpose as
honesty as precondition for relief, substantial purpose, 8.065,
8.201-8.202 8.067
insurance, 8.196 independent purposes, 8.065
permitted indemnity provisions, more than one, 8.063
8.197 multiple purposes, 8.064
prohibitions against exemption, question of fact, 8.061
8.193 timing, 8.068
ratification by company, relief from liability
8.186-8. I 91 blanket exemptions for breaches,
reasonableness, 8.203 8.192
scope of relief, 8.200 Companies Ordinance Cap.622,
third party, 8.197 8.193-8.195
listed companies, 8.0 I 3 conflicts of interest, 8.198
loans, 8.097-8.112 court's power to grant, 8.207
members, owed to, 8.024 exemption and indemnification,
misappropriation of company 8.198
assets, 8.118 exemptions, 8.192-8.195
monitoring duty, 8.149-8.152 honesty, 8.201-8.202
nature and rationale, 8.001-8.007 insurance, 8.196
nominee director, 8-036 no-conflict rule and indemnity,
owed to company, 8.023 8.198
owed to members, 8.024 permitted indemnity provisions,
persons subject to, 8.017-8.022 8.197
powers prohibitions against exemption,
allotment of shares, 8.050-8.054, 8.193
8.055 ratification by company,
appointment of additional directors, 8.186--8.191
8.058 reasonableness, 8.203-8.206
breach of duty, 8.055, 8.058, 8.063 scope when granted, 8.200
company assets, 8.049 third party, 8. I 97
determining purpose, 8.048 remedies for breach
exercise for proper purpose, account of profits, 8. 167-8.170
8.047-8.058 allowance for time, skill, financial
Howard Smith v Ampol, 8.052, contribution, 8 .169
8.054, 8.055, 8.066 avoidance of acts or transactions,
purpose of power, 8.061-8.068 8.163-8.165
restriction notices, 8.059-8.060 causation, 8.184-8.185
restrictions on transferring shares, compensation, 8.183
8.057 constructive knowledge, 8 .177
takeover bid, 8.054, 8.054-8.055 constructive notice, 8.176
 INDEX 1063

dishonest assistance, 8.179 Companies Ordinance Cap.622, 8.085,

equitable compensation, 8.171 8.088-8.092
fiduciary duties, 8. I 63 informal, 8.090
generally, 8.165, 8. I 88 liability after contravention, 8.092
Howard Smith vAmpol, 8.164 main changes, 8.089
improper purpose, 8.164 statutory requirement, 8.088
knowing assistance, 8.179 Dishonest assistance
knowing receipt, 8.177-8.178 breach of duty, 8. 179
rescission, 8.176 honesty, objective standard of
restitution of company property, ordinary standards, 8.180
8.166 mind, defendant's state of, 8.180
third parties, against, 8.175-8.179 Disqualification
transaction without authority, 8.165 affairs conducted in oppressive of
remuneration prejudicial manner, 7.140
generally, 8.093-8.096 Carecraft procedure, 7 .138
listed companies, 8.095 CDDP Rules, 7.136
non-director executive officers, foreign companies, 7 .135
8.096 legislation, 7. I 06, 7 .140
regulation, 8.094 listed corporations, 7 .140
secret commissions, 8.116 management, meaning, 7. 130
shadow director, 8.018-8.019 procedural matters, 7 .136-7 .140
sources oflaw, 8.008-8.014 procedure, 7 .137
standard of care public examination, 7.139
Companies Ordinance Cap.622, purpose, 7. I 07
8. 134, 8.143-8. 15 I Securities and Futures Ordinance
decision-making, 8.136 s.214, 7.140
general law, 8.137-8.142 Disqualification order
implied term, reasonably competent after investigation of company,
skills, 8.142 7.127-7.128
minimum objective requirements, contravention, 7.133-7.134
8.139-8.141 discretionary, 7. I 09
negligence, 8.135 fraudulent trading, 7.117-7.120
negligent omissions, 8.136 grounds, 7. I 08
oversight of company affairs, 8.136 indictable offence
reasonable care, 8.137 conviction, 7 .110-7.112
skills, experience, qualifications, criminal proceedings overlap,
8.142 7.112
statutory duty of care generally, 7. 111
Companies Ordinance Cap.622, maximum period, 7. l 12
8.010, 8.134, 8.143-8.151 types, 7. I I 0
general law cases relevant, 8.146 leave to manage companies,
remedies, 8 .148, 8.151 7.131-7.132
shadow director, 8.019, 8.147 Official Receiver powers, 1.205
standard of care, 8 .144 persistent breaches of Ordinance
takeovers, 8.054-8.057 adjudged guilty of default, 7.113
to whom owed, 8.023-8.025 documents, 7 .113
Disclosure jurisdiction, 7 .1 I 5
loans to directors, 8.11 l maximum period, 7. l I 6
Disclosure of interests persistent, meaning, 7 .114
board, to, 8.085 person acting on instructions of
breach of duty, 8.091 disqualified person, 7 .134
1064 INDEX

scope, 7.129 unlawful distribution

unfit directors of insolvent companies, auditors, 15.170
7.125 contravention of capital maintenance
Dissolution of company doctrine, 15.164
and see Winding-up directors, 15.165-15.166
automatic, 20.253, 20.255 members, 15.167-15.169
court order, 20.253 Document
court order deferring date, 20.255 common seal, 12.041-12.045
restoration of dissolved, electronic means or websites, 1.159
20.258-20.260 execution as if under seal, 12.045
voluntary liquidation, 20.254 validity, 12.096-12.099
winding-up, after, 20.253-20.257 Financial Secretary, power to require
Dividends production, 1.198-1.20 l
balance sheet or net assets test, 15.158 inspection, I. 192, 1.194
bonus shares, 15.144-15.147 official seal, 12.050-12.052
different shareholder classes, 15. 141 service
distribution registered office, 2.029
accumulated realised profits, 15.153 Dormant company
bonus shares, 15.152 accounting transaction, 11.068, 11.069
capital maintenance doctrine, annual general meeting, 9.011
15.152, 15,163 companies which cannot
determining amount, 15.159-161 be dormant, 11.070
initial financial statement, 15.160 special resolution, 11.067, 11.068,
interim financial statement, I 1.069
15.161-15.162 status, 11.066
last annual financial statement, 15.159 Duomatic principle
losses from previous years, 15.154 equitable estoppel, 6.046, 6.047
meaning, 15.151 lifting of corporate veil, 6.046,
out of profits only, 15. 150 6.049-6.050
profits available for, 15.153-15. I 58 meaning, 6.045
relevance of company's solvency, rationale,6.046
15.163 unanimous consent, 6.045-6.050
restriction for listed companies, waiver, 6.046, 6.048-6.049
I 5.156
undistributable reserves, meaning, Easterbrook, FH
15.157 limited liability doctrine, 3 .018, 3.019
unlawful, 15.164-15.170 Electronic communications
entitlement to, 15.138-15. I 39 advantages, 9.138
final, 15.142 articles of association, 2.012
interim, 15.142 Companies Ordinance Cap.622, 9.137
nature, 15.137 generally, 9.135-9.138
non-cash, 15.143 incorporation form, 2.012
non-payment Eligible company
unfairly prejudicial conduct, company limited by guarantee, 2.082
10.198-10.199 Company Ordinance Cap.622,
paid from distributable profits only, 2.076-2.083
15.148-15.149 definition, 2.077
procedure for payment, 15.140 unlimited company, 2.082
types, 15.142-15.147 Employee share scheme
undistributable reserves, meaning, financial assistance for share
15.157 acquisition, 15.I 36
 INDEX 1065

Entrenching provision Financial assistance for acquisition of

generally, 5.05 I shares
Equitable considerations authorisation, 15.116
unfairly prejudicial conduct, solvency statement and ordinary
10.191-10.196 resolution, 15.124-15.129
Equity unanimous shareholder approval,
debt 15.121-15.123
factors affecting choice, without shareholder approval,
13.076-13.083 15.117-15.120
shares contravention of
bearer, 13.055-13.060 prohibition, 15.112
definition, 13.037 definition, 15.103-15.105
fungibles, 13.041 employee share scheme, 15.136
member, 13.038 exceptions pursuant to solvency test,
nature, 13.039-13.041 15.115-15.129
ordinary, 13.044 exceptions to prohibition, 15.102,
preference, 13.045-13.051 15.114-15.136
property, as, I 3.039- I 3. 040 meaning through case law,
redeemable, 13.052-13.054 15. l 06-15. I I I
shareholder, 13.038 not principal purpose of assistance,
types, 13.042-13.060 15.130-15.134
stock, I 3 .061-13.062 principal or larger purpose exception,
Equity finance 15.130-15.134
generally, 13.029-13.036 prohibition, 15.097-15.102
e-Registry prohibited after acquiring shares,
generally, 2.012 15.098
Estoppel by representation prohibition for acquiring shares,
apparent authority, 12.039 15.097
Eurobond solvency test satisfied, 15.115
meaning, 13.075 Financial reporting
Executive officer regulation, 1.206-1.209
fiduciary duties, 8.021-8.022 Financial Reporting Council (FRC)
Express actual authority documents, 1.208
generally, 12.010, 12.01 I enquiry report, 1.209
restrictions under articles, 12.022 establishment, 1.208
Extortionate credit transaction financial statements, 1.209
compulsory winding-up, FRC Ordinance, 1.207, 1.208
20.178-20.180 investigation and reporting
Extraordinary general meeting powers, 1.208, 1.209
meaning, 9.012 non-compliance, listed
procedural i1Tegularities, companies, I .209
9.139-9.143 powers, 1.208, 1.209
regulation of financial reporting and
auditing, 1.206
Factoring remedial action, 1.209
meaning, 13.01 I Financial secretary
Family company application for inspection, 1.193
unfairly prejudicial conduct, I 0.177, appointment and powers, 1.160
10.193 appointment of inspectors, 1.191, 1.193
Luck Continent case Companies Ordinance (Cap.622)
Shareholders privy, I 0.195 main changes, 1.202-1.203
1066 INDEX

documents assets, compulsory winding-up,

inspection, I. 192 20.199-20.202
power to require production, book debts, 17.077-17.085
LJ 98-1.201 breach of implied licence,
exercise of inspection power, 1.197 17.088-17.089
inspection power, 1.191, 1.197 characteristics, 17.071
last resort powers, I . I 91 charge of future assets theory,
local and foreign companies, 1.202 17.103-17.105
powers, 1.160, 1.191, 1.195, company, 1.079
1.198-1.20 I compulsory winding-up,
report of inspector to, 1.195 20.163-20.167
reserve powers, I . I 91 conversion to fixed, 17.070
Financial Services and Treasury crystallisation, 17.070, 17.087, 17.088,
Bureau 17.090-17.096
corporate rescue, 19.033 decrystallisation, 17.097-17.102
Financial Services Bureau development, 17.066-17.068
generally, l.123, I. 124 disposition of assets, 17.086-17 .089
Financial statements fixed, comparison with, 17.069,
duty of care, example, 8.158 17.073-17.076
listed companies implied licence to dispose, 17.086
non-compliance with requirements, invalid, 20.163-20.167
1.209 juridical nature, theories,
statutory requirement, 1.144 17.103-17.105
Financial year lease of assets, 17.086
accounting records, I 1.019-11.020 meaning, 13.065
Fischel, DR partnership, 1.080
limited liability doctrine, 3.018, 3.019 present interest theory,
Fixed charge 17.103-17.105
and see Charge property existing or future, 17.076
see also Floating charge receiver, preferential creditors, 18.060
agreement between parties, type receivership, I 8.023
determined by, 17.073 security for loan, 17.061, 17.065
assets, compulsory winding-up, transaction outside implied licence,
20.195 17.086, 17.087
book debts, 17.077-17.085 transactions for sale, 17.086
crystallisation converts floating to, type of assets charged, 17.074
17.070 Foreclosure
floating, comparison with, 17.069, meaning, 17.055
17.073-17.076 Foreign bonds
meaning, 13.065 meaning,13.074
property existing or future, 17.076 Foreign company
security for loan, 17.061 see also Non-Hong Kong company
specific asset, J 7 .064 applicable Ordinance provisions,
type of assets charged, 17.074 2.070-2.075
Floating charge Companies Ordinance Cap.622, 1.157,
and see Charge 2.080
see also Fixed charge disqualification, 7.131
agreement between parties, type established elsewhere, 2.060
determined by, 17.073 establishment of place of business,
antecedent unsecured debt, 20.163, 2.065
20.167 governing law, 2.075
 INDEX 1067

holding company, 2.065 court order, 20.177

meaning, 2.060 fraud or subjective dishonesty,
operation through agent in jurisdiction, 20.173-20.175
2.066 intent to defraud, 20.175
registration, 1.157 liability, 20.168-20.171, 20.176
restrictions on raising funds, 2.074 personal liability, 20.168-20. 169,
schemes of compromise and 20.176
arrangements, 2.073 subjective dishonesty or fraud,
unregistered companies, 2.071, 2.072 20.173-20.175
Foreign jurisdictions FRC see Financial Reporting Council
companies outside Hong Kong, 1.010 Fungibles
core company law, 1.013 shares of same class, 13.041
Forgery
indoor management rule, Gearing ratio
12.076-12.080 meaning, 13.083
Formay,RR General meeting
unincorporated joint stock companies, calling
1.093 impractical to call, 9.023-9.030
Foss v Harbottle rule meaning, 9.015
breach of fiduciary duties, I 0 .251 calling by directors, 9.016-9.018
irregulaiity principle, I 0.014 calling by members, 9.019-9.021
limbs, 10.009 calling by the court, 9.022-9.038
personal action, 10.099 chairperson, 9.080-9.082
proper plaintiff principle, common law position, informal assent,
10.010-10.013 9.128
rationales, 10.0 I 5 company-sponsored invitations to
statutory exception, l 0.252 appoint proxies, 9 .098-9. 100
Founder member consent by whom, 9. 122
allotment of shares, 14.028 corporate representative, 9.101-9. I 05
issue of shares, 14.020 court discretion in calling, 9.031-9.038
share certificate, 2.017 electronic communications,
Fraud 9.135-9.138
corporate liability, 12.110, 12. 104 generally, 9.001-9.004
Fraud on the company impracticable
conduct by majority members, court order for quorum, 9.027
10.024 deadlock, 9.027
control, 10.025-10.028 matrix of facts, 9.029
derivative action, 10.019 meaning, 9.023
equitable fraud, I 0.021 proof, 9.028-9.030
fraud on minority, 10.020 proposed meeting not quorate,
negligence, 10.022, 10.023 9.026
Fraud on the minority quorum, 9.026, 9.027, 9.028
see also Foss v Harbottle rule refusal of minority shareholder to
infringement of personal rights, attend, 9.027
10.020, 10.128-10.130 impracticable, situation where
Fraudulent conduct impossible, 9.024-9.025
before or during winding-up, 20.246 informed consent, 9 .122-9. 123
Fraudulent trading invalid meeting, 9.052, 9.054
and see Compulsory winding-up irregularity principle, 9.141-9.143
any business, interpretation, 20.172 meaning, 9.001
before or during winding-up, 20.248 minutes, 9.130-9.134
1068 INDEX

multi-venue meetings, 9.137 unanimous consent, 9 .117-9 .128

notice, 9.039-9.065 voting, 9.083-9.087
accidental failure to give, proxies, 9.088-9.100,
9.062-9.063 9.106-9.108
circulation of member-proposed proxy company director, 9.097
resolutions, 9.064 proxy paper, 9.088
circulation of members' statements, quorum, 9.026, 9.027, 9.028,
9.065 9.066-9.79
content, 9.050-9.060 record keeping, 9 .130-9 .134
entitlement to receive, 9.046-9.048 residual power
failure to give, 9.062-9.063 common law, 6.035-6.044
manner in which given, 9.043-9.045 ratification of abuse of power,
period, 9.040-9.042 6.043--o.044
special business, 9.059 ratification of directors' power, if
special notice, 9.049 defective, 6.042-6.044
special resolution, 9.060 where directors cannot function
notice of revocation, 9.107 effectively, 6.036--o.040
ordinary resolution, 9. I 09 resolutions, 9. I 09-9 .116
power over board of directors revocation of proxy, 9 .106-9. I 08
alternative doctrinal bases, Scheme of Arrangement, 9.129
6.021--o.048 special resolution, 9. I I 0
mainstream authorities, criticism, specific powers granted to members,
6.021--o.028 6.012
questionable authorities, 6.022 statutory formalities that cannot be
second line of authorities, waived, 9.129
6.029--o.030 statutory written resolution procedure,
procedural irregularities, 9.139-9.143 9.125-9.127
procedures, 9.002 unanimous consent, 9.117-9.128
proceedings statutory requirements relationship,
chairperson, 9.080-9.082 9.125-9.128
common law position, 9 .128 without meeting, 9.128
consent by whom, 9.122 unanimous consent doctrine, 9.078
corporate representative, 9.101- void
9. J 05 notice, 9.041
electronic communications, voting, 9.083-9.087
9.135-9.138 written resolution, 9 .111
informed consent, 9 .123-9 .124 General power of management see
irregularity principle, 9.141-9. 143 Board of directors
minutes, 9.130-9.134 Good faith
procedural irregularities, directors' duties, 8.069
9.139-9.143 receiver, 18.039-18.043, 18.069
proxies, 9.088-9.100, 9. 106-9. 108 statutory derivative action,
quorum, 9.066-9.79 10.075
record keeping, 9.130-9.134 Greene Committee Report (1925)
resolutions, 9 .109-9 .116 directors' liabilities, 8.192
revocation of proxy, 9. I 06-9 .108 Grigg-Spall, I
Scheme of Arrangement, 9.129 critical legal theories,
statutory formalities that cannot be 1.218- 1.220
waived, 9 .129
statutory written resolution Hansmann, H
procedure, 9.125-9.127 asset partitioning, 3.020, 3.021
 INDEX 1069

Harris, R Hong Kong Monetary Authority

company law, 1.094, 1.095, (HKMA)
1.098 corporate rescue, 19.012
Hay Davison Report (1988) Hong Kong Securities Clearing
Securities Commission, 1.183 Company Limited (HKSCC)
Headcount test generally, 1.187, 14.062-14.066,
members' scheme of arrangement, 16.115
1.152, 14.173-14.177 Hong Kong Stock Exchange
High-yield bond history, 1.188
meaning, 13.072 Hunt, C
HKEx see Hong Kong Exchanges and company law, 1.097
Clearing Ltd
HKICPA see Hong Kong Institute of Implied actual authority
Certified Public Accountants agent as de facto managing
HKSCC see Hong Kong Securities director, 12.021
Clearing Company Limited chairman of board, 12.014
Holding company chief executive officer, 12.017
generally, 2.065 company secretary, 12.019
Honesty conduct of company, 12.020
precondition director, 12.013
relief from liability, executive officers, 12.0 I 8
8.201-8.202 generally, 12.0 I 0, 12.012-12.023
subjective test, 8.202 managers, 12.018
Hong Kong Approach to Corporate managing director, 12.015-12.016
Difficulties restrictions under articles, 12.022
non-statutory guideline, 19.012 Import company
Hong Kong Association of Banks duty of care, example, 8.157
(HKAB) Incorporated association
corporate rescue, 19.012 use of term, 1.004
Hong Kong Exchanges and Clearing Incorporated body
Ltd (HKEx) use ofte1111,1.004
generally, I 6.1 15 Incorporation
holding company, 1.187 Companies Ordinance Cap.622, 1.134
recognised exchange controller, incorporation by registration
1.189 a1ticles of association, 2.003-2.009
Securities and Futures Commission business registration, 2.039
responsible for oversight, certificate of incorporation, 2.016
1.190 common seal, 2.035-2.039
statutory duties, 1.189 company secretary, 2.023-2.026
Hong Kong Financial Reporting directors, 2.021
Standards (HKFRS) electronic applications, 2.012, 2.015
generally, l 1.034, I 1.036 incorporation form, 2.010-2.011
Hong Kong Futures Exchange Ltd length oftime, 2.015
(HKFE) meaning, 2.001
generally, 1.187, 16.115 members, 2.017-2.020
Hong Kong Institute of Certified Public online applications, 2.012
Accountants (HKICPA) procedure, 2.002-2.014
disciplinary power, 1.207 legislation, 2.002
establishment, 1.207 public companies, 2.041
regulation of financial reporting and private or non-private companies,
auditing, 1.206 2.041
1070 INDEX

register of company secretaries, 2.030 exceptions to disclosure requirement,

register of directors, 2.030 16.142-16.143
register of members, 2.030 high level personnel, 16. 139
registered office, 2.027-2.029 knowledge by corporation,
registers to be maintained, 2.030-2.034 16.138-16.141
shelf companies, 2.013-2.014 mandatory disclosure,
types of companies, 2.040-2.083 16.130-16.146
Incorporation form materiality test, I 6. 128-16.136
information required, 2.010 non-public information, 16.137
statement of compliance, 2.011 objective test, 16.141
Indemnification order pecuniary loss after breach, 16.146
statutory derivative action, sanctions and remedies, 16.130
l 0.087-10.092 specific information, 16.133
Independent Commission Against Insolvent company
Corruption unfit directors, 7.117-7 .122
responsibilities, 1.178 Insolvent liquidation, 20.002
Index of Company Names Inspections under Company Ordinance
generally, 2.089 Financial secretary
Indoor management rule powers to investigate, 1.191-1.203
absence of authority, 12.059-12.061, Inspector
12.065-12.066 appointment by Financial Secretary,
actual notice of irregularity, 12.069 1.191, 1.195
common law, 1.134, 12.056-12.068 powers, 1.191, 1.194
constructive notice of irregularity, production of documents, 1.191, 1.192,
12.069-12.075 l.194
defects in authority, I 2.057 report disclosing offence, 1.196
exceptions, 12.069-12.081 report to Financial Secretary,
forgery, 12.076-12.080 1.195-1. 196
insiders, 12.08 I warrant to enter premises, 1.194
irregularities, 12.057-12.058 Interests of the company
constructive notice, 12.069-12.075 benefit of own company, 8.035
meaning, 12.005, 12.056 benefits to employees, 8.031
pleadings, 12.068 constitution and objects shape
scope of application, 12.057-12.066 requirement, 8.033
seal affixed on document, 12.062- corporate groups, 8.035-8.036
12.066 creditors' interest, 8.038-8.043
statutory, 12.082-12.090 derivative benefit, 8.036
Initial public offering (IPO) different classes and groups, 8.034
meaning, 13.027, 16.001 insolvency, 8.038-8.043
procedure, 16.001 meaning, 8.030-8.043
prospectus provisions, 16.002-16.003 members as general body, 8.030
Inquorate meeting nominee directors, 8.037
third parties, 9.079 remuneration, 8.032
unanimous consent doctrine, 9.078 Internal management rule see Indoor
validity, 9.075-9.078 management rule
Inside information International Financial Reporting
and see Listing Rules Standards (IFRS)
breach of disclosure requirement, general, 11.035, I 1.036
16.144-16.146 Invalid floating charge
definition, 16.132 antecedent unsecured debt, 20.163,
disclosure obligation, 16.131 20.167
 INDEX 1071

cash payment can validate, 20.163, share certificate

20.165, 20.166 delivery after allotment, 14.035
created before winding-up, 20. 163 subscription agreement, 14.022
time period, 20.163 subsequent shareholders,
Invoice discounting 14.021-14.029
meaning, 13.013 upon incorporation, 14.020
Invoice finance validation of invalid issue or allotment,
meaning, 13.011 14.045-14.046
IPO see Initial public offerings
Ireland, P, 1.218-1.220
Irregularity principle .Jenkins Report (UK, 1962)
application if decision would be generally, 1.109,4.021, 10.135
different, 7.087 Joint stock company
board meeting, 7.083 creation, 1.089
generally, 7.083-7.087, 10.014 function, 1.090
inquorate meeting, 9.076 historical development, 1.089-1.095
irregularity cured if decision not incorporation by charter, 1.089
changed, 7.085 incorporation by special Act of
lawfulness, 7.084 Parliament, 1.091
members' meeting, 7.083 Joint Stock Companies Registration
members' personal actions, and Regulation Act 1844,
10.117-10.124 1.097-1.099
not applicable, 9.142 limited liability, 1.100-1. l Ol
rationale behind, 9. 141 obsolete, 2.082
relief, 7.085 obstacles to incorporation, 1.095
scope of operation, 7 .086 registration, J.097, 2.082
summary, 9 .140 trusts, use of, 1.094
Issue of shares unincorporated, 1.092-1.093, 1.095
and see Shares .Junk bond
after incorporation, 14.021-14.029 meaning, 13.072
allotment and issue distinction, Just and equitable winding-up
14.032 and see Winding-up
allotment form to Registrar, 14.034 breakdown of trust and confidence,
allotment to founder 10.234
members, 14.028 Companies Ordinance (Cap.32),
allottee to be registered, 14.033 10.231
approval before allotment, 14.030 conduct of petitioner, 10.239
Company Ordinance provisions, court would not make order, I 0.243
14.024 examples, 10.234-10.239
consideration for issue, 14.036-14.044 failure of substratum of company,
contractual offer, 14.031 10.236-10.237
directors' fiduciary duties, 14.029 generally, 20.071
founder or first shareholders, 14.020 last resort, I 0.240
issue price, 14.036-14.037 meaning, l 0.232-10.233
meaning, 14.019 minority members, 20.071
non-pro rata offers, 14.026-14.027 petitioners acting unreasonably,
private issue, 14.023 10.242
pro rata offers, 14.025 quasi-partnerships, 10.234, 10.237
procedure, 14.030-14.035 relationship with other remedies,
public offer, 14.023 10.240-10.243
rights issues, 14.025 unfair prejudice remedy overlap, 10.224
I072 INDEX

Kelly, D rationales, 3.0 I 6-3.021

critical legal theories, 1.218- 1.220 shielding of assets, 3.020
Knowing assistance Limited partnership
breach of duty, 8.179 meaning, 1.062, 1.078
Knowing receipt Liquidation
breach of duty, 8.177-8. l 78 collectivity principle, 20.005
Kraakman, R court-appointed receiver, 18.117
asset partitioning, 3.020, 3.02 I external control, 20.005
insolvent, 20.002
Law Reform Commjssion meaning, 20.001
provisional supervision, 19.023 non-insolvent, 20.005
Legal personality pari passu principle, 20.005
corporation, 1.006 plaintiff, company, I 0.079
Liability privately appointed receiver,
accessorial, 3.015 18.075
criminal see Corporate criminal rights accrued before liquidation,
liability 20.005
director see Directors' duties statutory derivative action,
employee, 3.013-3.015 I 0.077-10.078
fraudulent trading, 20.168-20.171 summons, originating, I 0.078
joint and several, partnerships, 1.061 Liquidator
limited company, 2.043 appointment
members of company, 3.009-3.012 compulsory winding-up,
officer, 3.013-3.015 20.020-20.022
partnerships, 1.057-1.061, 1.062, compulsory winding-up order,
1.078 20.087, 20.089
pre-incorporation contracts, 4.007- ordinary resolution of shareholders
4.008, 4.015, 4.048-4.053 or creditors, 20.023
Lien on subfreights voluntary winding-up,
meaning, 17.128 20.023-20.024
Lifting the corporate veil see Piercino court-appointed, 20.022
the corporate veil " definition, 20.007
Limited company duties
by guarantee, 2.042, 2-048 duty of care, 20.046-20.047
by guarantee with share fiduciary, 20.041 20.045
capital, 2.046 statutory, 20.034 20.040
by shares, 2.042, 2.044 fiduciary duties
change to unlimited, 2.054 conflict of interests, 20.042, 20.034
liabilities, 2.043 delegation, 20.043
Limited liability company impartiality, 20.045
United States, 1.0 I0 governing body, as part of, 9.1 OI
Limited liability doctrine members' voluntary winding-up,
agency costs minimised, 3.018 20.216-20.217, 20.224, 20.225,
economic arguments favour public 20.227
companies, 3.021 Official Receiver, 20.020, 20.027
entrepreneurship, 3.017 Panel Scheme system, 20.007
increased risk to creditors, 3.019 powers
justified by economic analysis of Jaw, assistance to perform duties,
3.018 20.032
meaning, 3.009 carry on company business,
promotion of investment, 3.017 20.026-20.027
 INDEX 1073

compromise with creditors, 20.028 non-executive directors, 7.018

compromise with debtors, 20.029 public company, 2.059
conduct corporate proceedings, Securities and Futures Commission,
20.031 1.184
examination of persons, 20.030 stock exchange, 2.058
generally, 20.025-20.032 unfairly prejudicial conduct,
p1ivate insolvency practitioners, 10.175
20.009 Listed corporations
provisional liquidator, 20.020, 20.021 Securities and Futures Commission,
removal by court 1.185
breach of fiduciary obligations, Listing Rules of the Stock Exchange of
20.062 Hong Kong
failure to perform contractual application procedure,
obligation, 20.052 16.125-16.126
generally, 20.048-20.055 capitalisation issues, 16.122
misconduct, 20.050 comp Iiance, 16. 116
on cause shown, 20.049, 20.050, compliance with continuing
20.054 obligations, 16.147
onus of proof on party applying for conditions, 16.124
removal, 20.055 connected transactions, 16.148
personal unfitness, 20.050, 20.053 consideration issues, 16. 122
removal by creditors, at creditors' continuing disclosure obligations,
meeting, 20.057 16.129-16.148
removal by members, special disclosure obligation, 16.131
resolution, 20.056 continuing, I 6. 129-16.148
liquidator, role, 20.007-20.008 enforcement, 16. 120-16.121
statutory duties exchanges, 16.122
accounts, 20.037 function, 16.116
compulsory winding-up, Hong Kong Stock Exchange
20.034-20.038 foreign companies, 2.075
custody of all assets, 20.035 inside information
directions regarding distribution of breach of disclosure requirement,
assets, 20.036 16.144-16.146
discretion must not be fettered, definition, I 6. 132
20.038 disclosure obligation, 16.131
meeting of creditors, exceptions to disclosure
20.039-20.040 requirement, 16.142-16.143
report to court, 20.034 high level personnel, 16.139
voluntary winding-up, knowledge by corporation,
20.039-20.040 16.138-16.141
Listed company mandatory disclosure,
connected transactions, 8.013 16.130-16.146
definition, 2.058 materiality test, I 6.134-16.136
directors' duties, 8.013 non-public information, 16.137
duty of care, example, 8.154 objective test, 16.141
Financial Reporting Council, 1.204, pecuniary loss after breach,
1.208-1.209 16.146
financial statements, non-compliance, sanctions and remedies, I 6.130
1.209 specific information, 16.133
investment by members of public, listing document, 16.128
2.059 loans to directors, 8.112
1074 INDEX

merit regulation for protection of incorporated in Hong Kong, 2.060

investors, 16.118 meaning, 2.060
methods of listing, 16. 122
non-execurive directors, 7.018 Majority rule doctrine
non-statutory regulation, I. 177 meaning, I 0.00 I
notifiable transactions, 16.148 Management powers
placings, 16.122 alternative doctrinal bases,
preferential treatment restrictions, 6.021 6.028
16.128 breach of company law provision,
price-sensitive information, 16. 129 6.023
purpose, 16. 117 breach of shareholders' agreement,
qualifications for listing, 6.025 6.040
16.123-16.124 breach of specific articles, 6.024
specific disclosure, 16.148 concurrent powers, 6.013-6.016
sponsor for new applicant, 16.125 construction of power-conferring
status, 16.119 provisions, 6.015
Loan credit criticism of mainstream authorities,
generally, 13.063 6.022
Loans to directors duomatic principle, 6.045-6.048
anti-avoidance, 8.108 general grant to directors, 6.007
approval not required, 8.106-8.106 general meeting
approval or authorisation, 8.097, directors cannot function effectively,
8.098 6.036-6.040
body corporate, 8.104 ratification of abuse of power,
Companies Ordinance (Cap.622), 6.043 6.044
8.098 ratification of directors' power, if
connected entities, 8.098, 8.1 OS defective 6.042-6.044
connected transactions management powers, general
listed companies, 8.112 meeting, residual powers under
contravention of prohibitions, 8. 110 common law, 6.035-6.044
credit transaction, 8.103 general power-allocation mechanism,
creditor for director, 8.102 models, 6.008-6.0 I 0
disclosure in financial statements, 8.111 Hong Kong preference, 6.030
disinterested voting, 8.098 limiting phrase, 6.021-6.028
exceptions where approval not Model Articles, effect of new,
required,8.106 8.107 6.031-6.034
expenditure for defending actions or post-2003 Table A Regulation 82,
proceedings, 8.106 6.031-6.034
generally, 8.097-8.112 pre-2003 Table A Regulation 82, 6.017,
holding company director, 8.099 6.019-6.020, 6.03 I
listed companies, 8.112 questionable authorities, 6.022
prescribed approval, 8.098 reserve powers of general meeting,
prohibition, 8.097 6.031
public companies, 8.100, 8.1OS second line of authorities, 6.029--6.030
quasi-loan, 8.10 I shareholders' power
questionable transaction, 8.109 unanimous consent, 6.045-6.050
small loan, 8. I 08 shareholders, practical significance of,
specified companies, 8.099, 8.100, 6.034
8.105 special resolution of general
Local company meeting, 6.031
definition, 2.061 UK decisions, 6.033
 INDEX 1075

specifically granted powers, fraud on the minority, 10.128-10.130

6.011-6.012 harm to company and member,
wording of division of power clause, 10.102-10.113
6.029-6.030 irregularity principle, restrictions,
Matador bonds l 0.117-10.124
meaning, 13.074 personal rights under corporate
Meeting constitution, I 0.1 I 4-10.116
annual general, 9.008-9.011 personal rights under general law,
class, 9.013 10.127-10.130
court-ordered, 9.014 personal rights under statute,
extraordinary general 10.131-10.133
meeting, 9.012 reflective loss, I 0. I 03-10.113
general see General meeting rule against reflective loss,
meaning, 9.006 10.103-10.113
nature, 9.005-9.007 specific personal rights, I 0. 13 1-10. I 32
numbers of persons at, 9.005 Members' remedies
one person, 9.005, 9.006, 9.007 appropriate action, 10.006
one-member company, 9.007 Companies Ordinance Cap.622,
procedural irregularities, 9.139, 1.154-1.155
9.140-9.143 common law, 10.005
Re Dalny Estates case, 9.144 Foss v Harbottle rule,
Member 10.009-10.015
bearer shareholder, 13.060 good corporate governance, 10.007
definition, 13.038 irregularity principle, 10.014
interests non-Hong Kong companies, 2.068
remedies for protection, proper plaintiff principle,
1.154-1.155 10.010-10.013
personal rights in articles, resolution of disputes, 10.008
10.114-10.116 statutory, 10.003, 10.004
Members of company Members' schemes of arrangement
body corporate, 2.019 agreement modifying rights,
changes, 2.020 14.164
fmmder, 2.017 alteration of share capital, 14.162
issue of new shares, 2.020 amalgamation, I 4. I 66
liability, 3.009-3.012 approval, 14.169, 14.173-14.177
limited by guarantee, 3.01 l binding nature of, 14.168
limited by shares, 3.0 l 0 class meetings, 14.169-14.172
limited liability, 3.009 Companies Ordinance (Cap.622),
majority rule doctrine, I 0.00 I 14.162, 14.163
minority corporate reorganisation, 14.165
abuse of power, l 0.002 court sanction, 14.177-14.182
one-person company, 2.018 generally, 14.162-14.166
transfer of shares, 2.020 headcount test, 14.173-14. I 77
unlawful distribution of dividends, intra-group amalgamations,
15.167-15.169 14.183-14.189
unlimited liability, 3.012 majority in number, requirement,
Members' personal actions 14.173
categories, I 0. l 00 procedure, 14.167
enforce constitution in capacity as reconstruction, 14.166
members only, 10.125-10.126 reduction of capital, 14.178
Foss v Harbottle rule, 10.099 share splitting, 14.174
1076 INDEX

shareholder value test, 14.173, Negligence

14.176 company business
three-fourths in value, 14.173 unfairly prejudicial conduct,
votes against scheme, 14.176 10. 189-10.190
Memorandum of association New Zealand
see also Articles of association core company law, 1.013
abolishment, 5.001, 5.003, 5.004 Nominee director
generally, l.134, 2.003 directors' duties, 8.037
information in, 5.003 stakeholders' interest, 7.023
Mezzanine finance Non-Hong Kong company
meaning, 13.066 see also Foreign company
Minutes of proceedings Companies Ordinance,
evidence, as, 9 .134 2.062-2.068
Minutes definition, 2.062
copy, 9.133 foreign company, 2.069
electronic form, 9. 13I holding company, 2.065
hard copy, 9. 131 members' remedies, 2.068
inspection, 9.133 place of business, 2.064
items to be included, 9.130 establishinment, 2.063
length of time kept, 9 .132 registration, 1. 157
meaning, 9.130 registration of charges, 2.068
one-person company, 9 .131 registration requirement, 2.067
prescribed place, 9.132 requirements, 2.067, 2.068
purpose, 9 .130 Non-insolvent liquidation
registered address, 9. I 32 collectivity principle, 20.005
requirement for general meetings, 9.131 external control, 20.005
where kept, 9.132 meaning, 20.005
Misfeasance pari passu principle, 20.005
and see Compulsory winding-up rights accrued before liquidation,
application, 20.182 20.005
court order, 20.184 Notice of meeting
summary procedure for enforcement, accidental failure to give,
20. I 81 9.062-9.063
when proceedings can be brought, adequate, 9.056-9.058
20.183 amount of notice, 9.040-9.042
Money-lending auditors, 9.048
duty of care, example, 8.155 capacity of venue, 9.052
Mortgage circulation of resolutions and
equitable, 17.054 statements, 9.064-9.065
foreclosure, 17.055 content, 9.050-9.060
legal, creation of, 17.053 date, time and place, 9.050-9.052
non-possessory security, 17.052 disclosure of business, 9.053-9.060
power of sale, 17.055 electronic format, 1.159, 9.044, 9.045
rights of mortgagee, 17.055 email, 9.044
security, as, 17.049 entitlement to receive, 9.046-9.048
use of, 17.051 failure to give, 9.062-9.063
Multiple derivative actions fraction ofa day, 9.043
Hong Kong common law, 10.037 inadequate, 9.054-9.055
meaning, 10.036 manner in which given, 9.043-9.045
place of incorporation, 10.038 nature of business, 9.050, 9.053-9.060
statutory, 10.072 omission to give, 9.062-9.063
 INDEX 1077

period of, 9.040-9.042 Ombudsman

place, 9.050, 9.052 generally, 1.009
requirement, 9.039 One-person company
resolutions, circulation of member- generally, 2.018
proposed, 9.064 minutes, 9.131
special business, 9.059 records of decisions, 9 .131
special notice, 9.049 Onerous property
special resolution, 9.060 and see Compulsory winding-up
statements, circulation of members', disclaimer, 20.101-20.106
9.065 vesting order, 20. I 06
website, 1.159 On-market buy-back
written, 9.043, 9.045 see also Shares
procedure, 15.085
Objects clause
see also Ultra vires doctrine Parent company
act not authorised by articles, 5.020 subsidiary's business, 3.063
constructive notice, 5.022 parent's direct role, 3.063
contravention, third party, 5.021 Paper company
contravention, validity, 5.020 meaning, 4.028
expansion, 5.012-5.013 Par value shares
protection of interests of creditors, generally, 14.004-14.007, 14.037
5.007 Participating preference shares
purpose, 5.006-5.007 meaning, 13.050
reformed ultra vires doctrine, Partnership
5.019-5.020 agency, 1.057-1.058, 1.076
restrictions, 5.022-5.023 apparent authority, 1-059-1.060
third party, 5.021-5.022 binding agreements, 1.057
Ocean Park Corporation borrowing powers, 1.080
generally, 1.009 breach of fiduciary duty, 1.054-1.056
Officer in default business carried on in common,
generally, 1.172, 1.173 l.036
Official branch seal capital or loan financing, 1.049
see also Official seal carrying on of business, 1.035, 1.037,
generally, 2.037-2.039 1.038
Official Receiver Chan case, 1.040
bankruptcy, 1.204, 14.090 company, comparison with,
disqualification order, 1.205 1.067-1.082
liquidation, 20.020, 20.027 contractual intention, 1.033
Official Receiver's Office, 1.204-1.205 definition, 1.034
winding-up, 1.205 dissolution, l.063
Official seal examples, 1.038-1.040
see also Common seal external loan financing, 1.050
execution of documents outside Hong factors taken into account, 1.037
Kong, 12.050 fiduciary duties, I .053-1.056
purpose, 12.051 finance, raising, 1.080
replica of common seal, 2.039 financing, 1.049-1.050
sealing securities, 2.037, 12.052 floating charge, 1.080
Off-market buy-back forn1alities, 1.072
see also Shares fonnation and identification,
by general offer, 15.086--15.088 1.032-1.040, 1.068
otherwise than by general offer, 15.089 intention, 1.036, 1.038, 1.039
1078 INDEX

joint and several liability, 1.06 I avoidance of house transfer obligation,

legal status, 1.070 3.040, 3.04)
liability, 1.078 avoidance of restrictive covenant,
liability to third parties, l.057-1 .06 I 3.039, 3.041
limited liability, 1.062 common law, 3.025-3.069
loan financing, 1.049, 1.050 control, meaning, 3.034
management, 1.075 control and impropriety to be
Mansell case, 1.038 established, 3.028, 3.033,
nature, 1.042 3.035-3.037
new partners, 1.074 corporate groups
partnership law, 1.031 operating as single firm,
partnership property, 1.043-1.048 3.065-3.066
personal assessment, taxation, 1.082 separate legal entities of companies
property jointly owned, 1.043-1.048 in, 3.068-3.070
registration, 1.041, 1.072 evasion and avoidance of liabilities
relationship, 1.037 distinction between, 3.051-3.053
rights and liabilities, 1.032 existing, 3.031
rights and liabilities inter se, 1.05 I evasion of existing legal obligations
rights and liabilities under Partnership China Ocean Shipping case, 3.052
Ordinance, 1.052 generally, 3.039-3.053
taxation, 1.082 Gi(ford Motor case, 3.039, 3.041
termination, 1.063 Hong Kong courts approach,
terms of agreement, 1.040 3.042 -3.053
transfer of ownership, 1.074 Jones v Lipman case, 3.040, 3.041
two or more persons, 1.030 Lee Sow Keng case, 3.044, 3.045
Partnership Ordinance Linsen lnternation Ltd case, 3.045,
definition, 1.034 3.046
dissolution, 1.063 Liu Hon Ying case, 3.043, 3.045
fiduciary duties, 1.053 Winland Enterprises Group
generally, 1.031 case, 3.053
liability to third parties, 1.057-1.061 Yukong Line case, 3.045
property, 1.043 evasion of existing liabilities, 3.031
relationship, 1.037 failure of other remedies, 3.032
rights and duties, 1.052 fraud or other unlawful conduct,
Pascutto Report 1997 3.054-3.059
company law reform, I. I I 5 fraud, 3.054
Penny stocks company used for crime, 3.057
share capital, 14.157 concealment of identity, 3.055
Perpetual succession Darby case, 3.055
generally, 3.016 Lee Chau Ping case, 3.057
Personal property security regimes Leung Yat Ming case, 3.056
see also Registration of charges limitation of liabilities, 3.058
jurisdictions outside Hong Kong, rent allowance, 3.056
17.110-17.113 fntudulent trading, 3.070
Piercing the corporate veil generally, 3.023-3.024
accessorial criminal liability, 3 .072 illegitimate purpose, 3 .027
agency, 3.060-3.064 impropriety, 3.028, 3.033, 3.038
Adams v Cape case, 3.064 liability imposed on controller, HK,
implied, 3.063 3.048-3.050
Yi,e Tai Plywood case, 3.063 limitation of liabilities, 3.058
appropriate circumstances, in, 3.025 mere facade principle
 INDEX 1079

Adams v Cape case, 3.064 assignable option, 4.051

generally, 3.026-3.038 beneficiary principle, 4.017, 4.018
illegitimate purpose, 3 .027 binding effect, 4.004, 4.006
impropriety, 3.028 breach of warranty, 4.010-4.014,
summary, 3.028 4.053
test, 3.026 change of name, 4.0294.030
Toptrans case, 3.035 common law, 4.0034.018
Yui Tai Plywood case, 3.036-3.037 common law, intention and knowledge,
personal liability of officer or agent, 4.0054.016
3.070 common law, trusts, 4.0174.018
Prest v Petrodel case, 3.029-3.032, Companies Ordinance (Cap.32), 4.002
3.048 Companies Ordinance (Cap.622),
scope of doctiine, 3.029-3.031 4.002, 4.0224.033
signature on behalf of company, enforcement action against company,
without company name, 4.0524.053
3.070 intention and knowledge, 4.0054.016
statutory provisions, 3.070-3.072 legislation, 4.002, 4.0194.025
subsidiary company treated as agent of liability, 4.0074.008, 4.048-4.053
parent, 3.061 meaning, 4.001
Toptrans case, 3.035 mistakes as to company name, 4.031
tortuous conduct, 3.059 not ratified, 4.0484.05 I
transfer of assets, 3.043-3.049 personal liability, 4.0074.008,
transfer of business, 3.043-3.049, 4.0484.051
3.072 personally binding, 4.006
transferor's liabilities imposed on promoter's principal, liability, 4.015
transferee, 3.043-3.046 purports to be on behalf of company,
unlawful conduct, 3.054, 3.059 4.026
Yui Tai Plywood case, 3.036-3.037, ratification
3.063 Australian case, 4.0424.044
Place of business authority to ratify, 4.034
non-Hong Kong companies, breach of warranty of authority,
2.064 4.053
Pleadings communication, 4.047
derivative action, 10.043 correspondence, 4.037
Poison pill arrangement enforcement action against company,
use of term, 8.054 4.0524.053
Power of sale Fung case, 4.038
generally, 17.055 intention, 4.039
Preference shareholder personal liability, 4.0484.05 I
unanimous consent and, 9.122 Poon case, 4.036, 4.037
Preference shares purpose of conduct, 4.040
advantages, 13.047 retrospective, 4.041 4.046
benefits, 13.048 third party communication, 4.047
common rights, 13.045-13.046 who can ratify, 4.034
convertible, 13.051 words or conduct, by implication,
cumulative, 13.049 4.0354.040
generally, 13.035-13.036 shelf companies, 4.028
participating, 13.050 signing 'in the name of', 4.033
rights specified in constitution, 13.046 signing 'on behalf of', 4.032
Pre-incorporation contract sufficient identification of company,
adoption by company, 4.016 4.027
1080 INDEX

trusts, 4.017--4.018 Proper plaintiff principle

uses, 4.001 Foss v Harbottle rule, 10.010-10.013
wrong name on contract, 4.031 Prospectus
Primary accounting reference date advertising
(PARO) constituting an offer or invitation,
meaning, 11.073 16.106-16.108
Privacy Commissioner exceptions to prohibition, 16.105
generally, 1.009 necessity for regulation, 16.102
Private company prohibition, 16.104
change to public, 2.056 prospectus definition,
definition, 2.049 16. l 06-16.108
director, 2.021 regulation, 16.103
duty of care, example, 8.156 advertising restrictions, 16.I 02-16. 111
public company comparison, 2.052 allotment
requirements, 2.053 time period, 16.039-16.040
restriction on right to transfer shares, void, 16.040
2.050 amendments, 16.027
shareholders' agreement, 5.002 application provisions, 16.035
Private placements auditor's report, I 6.025
generally, 13.023-13.025 charitable institutions, 16.016
Privilege against self-Incrimination clubs or associations, 16.016
Companies Ordinance (Cap.622), collective investments, 16.016
1.203 contents, l 6.023-16.029
separate legal entity doctrine, 3 .007 corporate affairs, 16.014
Privity of contract definition, 16.091, 16.106-16.108
third party enforcement of disclosure obligations, 16.024
constitutional documents, 5.036 disclosure philosophy, 16.006-16.009
Profit rule dual prospectus structure, 16.028
acting in good faith, 8.117 educational establishments, 16.016
bribes, 8.1 I 6 electronic, 16.033-16.034
conflict rule, whether part of, exemptions to requirement,
8.114-8.115 16.015-16.021
director must not profit, 8.1 I 3 existing listed shares or debentures,
secret commissions, 8. I 16 16.015
strict application, 8.117 expert statement, 16.026
Project financing foreign companies
generally, 13.021-13 .022 offers in Hong Kong, 16.098-16.10 I
Promissory notes historical development of regulation,
generally, 13.0 I 0, 13.015 16.004
Promoter information to be included,
account of profits remedy, 2.10 I I 6.023-16.024
breach of duty, remedies, initial public offering, 16.001
2.100-2. I 02 large investments, 16.016
damages remedy, 2.102 mandatory disclosure, 16.007-16.008
disclosure of interests, 2.101 merit disclosure, I 6.009
duties, 2.097, 2.101 minimum subscription, 16.036-16.038
fiduciary duties, 2.10 I misrepresentation
generally, 2.097 company liability, 16.061
identification, 2.098 deceit, 16.059, 16.060
meaning, 2.097, 2.098 directors' liability, 16.062
rescission, 2.100 innocent, 16.059
 INDEX 1081

liability under general law, compensation, 16.075

16.058-16.062 criminal liability
negligence, 16.059 authorised the issue, category of
right to rescind contract, 16.058 persons, 16.086
Securities and futures Ordinance, fraudulent, 16.085
16.051-16.057 general fraud offences, 16.090
misstatements see Prospectus generally, J6.083-16.090
misstatements negligence, 16.085
offer to the public, 16.013-16.014 provisions, 16.083
offers Securities and Futures Ordinance,
for no consideration, 16.016 under, 16.088-l 6.089
in Hong Kong, 16.096 untrue statements, 16.078
in Hong Kong by foreign companies, damages, 16.077-16.078
l 6.098-16.10 l defences under section 40, 16.049
outside Hong Kong, 16.096-16.097 directors' liability for fraudulent
overseas, 16.096-16.097 misrepresentation for, 16.062
exempt, l 6.0 I 5-l 6.0 I 6 expert report, 16.070
to persons outside Hong Kong, experts liable for untrue statement,
16.018 16.050
overseas offers, 16.096-16.097 fraudulent or negligent, 16.043
paper, 16.034 incorrect statements of fact, 16.063
presentations, oral or visual, 16.l l l innocent, 16.042
professional investor, 16.016 material omissions, 16.067-16.068
programme prospectus, 16.028-16.029 misrepresentation, 16.058-16.062
public offering provisions, negligent or fraudulent, J 6.043
16.002- l 6.003 no consent defence, 16.049
public offerings in two or more official untrue statement defence, 16.049
exemptions, 16.0 I7 omissions, 16.067-16.068
qualifying persons, 16.016 partial truths, 16.069
registration, 16.032 person, by, 16.072, 16.073
reports, l 6.025 provisions, applicable, 16.041,
requirement for, 16.010-16.014 16.043
review of regime, 16. 149 reasonable belief defence, 16.049,
rights issues, I 6.0 l 5 16.050
roadshow presentations, 16.l l l reasonable reliance defence, 16.049
safe harbours, 16.016 reliance on misrepresentation,
sales of shares, 16.091-16.091 16.074-16.078
Securities and Futures Commission, secondary market purchasers,
16.005, 16.016 16.078-16.082
share exchanges, 16.016 Securities and Futures Ordinance,
share repurchases, 16.016 under, 16.051-16.057
share sales, 16.091-16.091 sponsors, 16.048
small-scale offerings, l 6.016 statement of fact, 16.063, 16.066
structured products, 16.015 statement of intention, 16.064, 16.066
takeovers, 16.016 statement of opinion, 16.065, 16.066
underwriters, 16.0 I 5, 16.0 l 6 third parties relying on prospectus,
Prospectus misstatements 16.078-16.082
civil liabilities, 16.04 I- I 6.082 third party reports, liability for,
company liability for 16.070-16.073
misrepresentation, 16.059 untrue statements, 16.044, 16.049,
compensation, 16.045 16.050
1082 INDEX

withdrawal of consent defence, 16.049, election as chairperson, 9.095

16.050 faxed, 9.135
Prospectus regime form, 9.093
disclosure philosophy, I 6.006-16.009 procedural irregularities, 9.139
prospectus regime, review, 16.149 instruction form, 9.093, 9.139
Protection of informers meaning, 9.088
generally, 1.20 I notice in writing and authenticated,
Provable debts 9.092
compulsory winding-up, notice ofrevocation, 9 .107
20.188-20.191 ordinary, 9.093
Provisional liquidation prior to meeting, 9.089
corporate rescue, use in, procedural irregularities, 9.139
19.055-19.056 proxy paper, 9.088
Hong Kong, evolvement of use, revocation after appointment,
19.055 9. 106
moratoria, 19.054 revocation of authority to vote, 9. I 08
reorganisation device, 19.055-19.064 revocation, 9.106-9. l 08
winding-up, 19.052, 19.056, 19.060 right to vote, 9.094
Provisional liquidator significance, 9.089
appointment, 19.052 two-way, 9.093, 9.100
compulsory winding-up, 20.087, Public company
20.089 change to private, 2.057
members' voluntary winding-up, company limited by guarantee, 2.051
20.224, 20.225, 20.227 definition, 2.044, 2.052
purposes, 19.053 director, 2.021
Provisional supervision unfairly prejudicial conduct,
2000 Bill, 19.023 10.175-10.176
2001 Bill, 19.023, 19.029 Public offerings
consultation 2010, 19.030 initial public offering, 13.063,
employee priority treatment problem, 16.001-16.003
19.032 prospectus regime, 16.003
employee priority treatment provisions, 16.002-16.003
problem,19.027-19.028, 19.03 I Public register of companies
major secured creditor, 19.023 generally, 1. 183
procedure, 19.023-19.024
proposal, 19.023 Qualified privilege defence
protection of wages, 19.027-19.028 generally, 11. I 22
resistance to, 19.026 Quasi-loan
revised provisions 2014, I 9.033 generally, 8. l OI
super priority, 19.025 Quoram
Proxy attending in different capacities,
appointment, 9.090-9.093, 9.073-9.074
9.098-9.100 challenge within reasonable time,
company-sponsored invitations to 9.077
appoint, 9.098-9.100 court power to call meeting, 9.070
corporate representative, distinction deemed, 9.070
between, 9. I 0 5 general meeting, 9.066-9.079
direction on how to vote, 9.093 inquorate meeting, 9.068,
director of company, 9.097 9.075-9.079
duty with regard to voting, irregularity principle, 9.076
9.096-9.097 joint shareholders, 9.071-9.072
 INDEX 1083

loss, 9.069 defective, 18.111

meaning, 9.066 effect of, 18.098-18.100
meeting deemed to be inquorate, interim receivers, 18.088,
9.068 18.090-18.094
present in person or by proxy, 9.073 jurisdiction, 18.076
requirement, 9.067-9.068 power where just and convenient,
third parties, 9.079 18.077
unanimous consent doctrine, 9.078 qualifications, 18.097
validity, 9.075 9.078 unfair prejudice, 18.078
balance of convenience, I 8.087
Ratchet clause conflict of interest, 18.I 15
meaning, 5.081 control of property, 18.098
Ratification costs and expenses, 18.109
common law derivative action court's discretion
I 0.031-I0.035 ' principles, 18.082-18.095
Companies Ordinance Cap.622, 8.187 Court officer removal, 18.1 16
general meeting, by, 8.186 damages, undertaking as to, 18.084,
minority remedies, 8.191 18.095
misappropriation of company assets, debenn1reprovisions, inadequate, 18.079
8.190 discharge, 18.110-18.117
non-rati fiable breaches, 8.190 duty of care, 18.104
pre-incorporation contract see duty to act honourably, 18.105
Pre-incorporation contract equitable remedy, 18.082
relief from liability, 8.186-8.19 I GuoJingJingcase, 18.088-18.095
special resolution, 8.191 injunction, 18.084-18.085
statutory derivative action, interim receivers
I0.069-10.071 principles for considering,
unlawful act, 8.188 18.088-18.095
Reasonable bystander test jurisdiction to appoint, 18.076
unfairly prejudicial conduct, legal or equitable right, must have,
10.165-10.166 18.096
Reasonableness liability for trespass, 18.106
reasonableness, negligence, 8.204 liquidation, 18.117
Reasonableness, relief from Iiability, minority interests, protection, 18.078
8.203 misconduct, 18.114
Receivables finance officer of court, 18.100
generally, 13.011-13.013 power of appointment, 18.077
Receiver powers, 18.10 I
ad /item, 18.011 property recovery, 18.102
Companies Ordinance Cap.622, 18.005 protection of a right, 18.083
corporate doctor, Hong Kong, 19.015 purpose achieved, 18.112
court-court appointed, 18.003 qualifications for appointment, 18.097
meaning, 18.001-18.002 reasonable cause for discharge, 18.1 13
purpose, 18.001-18.002 remuneration, 18.l 07 18.0 I 5
sources of law, 18.004 trespass, 18.l 06
Receiver: court appointed undertaking for interim injunction,
act in best interest of all parties, 18.103 18.085
application, 18.08l unreasonable delay, 18.086
appointment unsecured creditor, 18.080
circumstances where sought, Receiver: privately appointed
18.079-18.080 agent of company, 18.012-18.013
1084 INDEX

appointment termination of receivership,

effect on stakeholders, 18.070-18.-73
18.016-18.024 Receivership
notice, 18.033 company, effect on,
qualifications, 18.015 18.016-18.018
appointment instrument, 18.039 company assets, 18.023
avoidance of liability, 18.013 company directors, effect on,
breach of duty of care, I 8.051, I 8.052 18.019-18.021
charged assets, 18.028 corporate governance instrument,
corporate proceedings, decisions on, 18.009
18.034 corporate rescue, 19.013-19.016
corporate rescue, I 8.014 creditors, 18.024
court directions debt enforcement device, 18.006
statutory duty, 18.037 employees, 18.022
debenture deed, 18.027 functions, 18.006-1801 I
debtor's business, 18.058 prevention of dissipation of corporate
duties, I 8.039-J 8.066 assets, I 8.011
duty of care owed to company, secured creditor, protection of interest,
18.040 18.007
duty to provide information, termination, 18.070-18.075
18.063-18.066 Recognised exchange company
equity, 18.039 generally, 1. 189, 16.125
failing to seek professional advice, Recognised exchange controller
18.052 generally, 1.189, 16.125
good faith, 18.041, 18.043 Redeemable bond
implied power, 18.035-18.036 meaning, 13.073
information provision, 18.063-18.066 Redemption of shares
legal nature, 18.012-18.014 See also Capital maintenance
liabilities, 18.067-18.068 doctrine
liquidation, I 8.075 accounting treatment, 15.073
misconduct, 18.072 capital redemption reserve, 15.074,
mortgaged property, 18.056 15.077
natural person, 18.015 Companies Ordinance (Cap.622)
notice of appoinh11ent, 18.033 changes, 15.077
petition to wind up company, exception based on solvency test,
18.036 15.068
powers, 18.025-18.027, fresh issue, 15.075
18.035-18.036 generally, 15.064-15.077
preferential creditors, 18.059-18.062 power to issue redeemable shares,
reasonable care to obtain proper price, 15.064-15.066
18.044-18.051 premium, 15.076, 15.077
regulation of behaviour, 1.8056 premium paid out of distributable
removal, I 8.070-18.071 profits, 15.076
remuneration, right to claim, 18.038 protection of creditors, 15.068
render accounts, 18.064 redemption out of capital,
rescue plan feasibility, 18.062 15.068-15.070
resignation, 18.073 share capital reduced, 15.074
reversion of management on share premium account, 15.076,
termination, 18.074 15.077
rights and powers, 18.025-18.038 shares treated as cancelled, 15.072
selling of assets, 18.028-18.032 solvency test exception, 15.068
 INDEX 1085

Reduction of capital solvency test, 15.045,

balance sheet, 15.020 15.048-15.051
cancellation of paid-up capital, Register of company secretaries
15.014-15.015 generally, 2.030-2.034
court confim1ation procedure Register of directors
application for order, 15.023 generally, 2.030-2.034
cancellation of unpaid amounts, Register of members
15.044 branch registers,
certificate following registration, 14.111-14.114
15.043 changes in numbers, 14.096
creditor protection, 15.033-15.036 equitable interests, 14.102
disclosure to shareholders, 15.032 fonn, 14.097
equitable treatment of difference former members, 14.100
classes, 15.027 generally, 2.030-2.034
equitable treatment of shareholders, index of names, 14.099
15.026--15.031 inspection, 14.103-14.110
liability in respect of reduced shares, legal ownership of shares,
15.044 14. l Ol
notice of registration, 15.042 prescribed place, 14.098
protection of interests, 15.024 prima facie evidence, 14.103
purpose or justification for, rectification, 14.104
15.037-15.039 register of significant controllers,
reasonable expectations, consistent 14.115-14.132
with, 15.028-15.029 registered members and status,
registration requirements, 14.101-14.103
15.040-15.043 registered office, 14.099
restructuring company, 15.036 requirement, 14.095-14. l Ol
settling list of creditors, 15.033, trust, notice of, 14.102
15.035 Registered office
special resolution, 15.041 essential, 2.027
variation of class rights, Hong Kong location, 2.027
I 5.030--15.031 notice of change of address lodged,
change in company business, 15.013 2.029
contravention of legislation, registered address, 2.028
15.016-15.017 service of documents, 2.029
court confirmation procedure, Registers
15.021-15.044 format, 2.032
criminal liability, 15.016 maintenance, 2.030-2.031
forms, 15.012 members right to inspect, 2.034
legislation, 15.012 registered non-Hong Kong company,
paid-up capital, meaning, 15.015 2.067
permitted, 15.0 I 8-15.0 I 9 restoration of company to, 1. 156
solvency statement, 15.047-15.053 where kept, 2.033
solvency statement procedure Registrar of Companies
court power to cancel, 15.055 administration of, 1.180
effective, 15.058 Companies Ordinance (Cap.622), 1.32,
generally, 15.045-15.058 I. 180 -1. 182
publication of notice, 15.054 functions, I.I 32, 1.180
registration requirements, investigative powers, 1.161, l. l 82
I 5.056--15.058 power to obtain documents, 1.161
special resolution, 15.053 regulatory body, 1. 179-1 . 182
1086 INDEX

Registration refusal of extension of time,

pre-existing companies under Cap.622, 17.161-17.162
1.158 registered non-Hong Kong companies,
Registration of charge 17.179-17.184
and see Charge registration time limit, 17.137
aircraft, 17.131-17 .132, 17.182 release of property from charge,
bill of sale, 17 .123-17 .124 17.172-17.173
book debts, 17.126-17.130 share capital, 17.118-17.122
certificate obtained by fraud, 17.147 ships, 17.131, 17.182
certificate ofregistration, statement of particulars of charge,
17.143-17.145 17.136, 17.138
charges which need to be registered, statement of particulars on register,
17.114-17.117 17.142
Companies Ordinance (Cap.622), 1.143 statutory provisions, 17.106, 17.108
company, obligation to keep own time, extension, 17. 158-17. 165
register of charges, unregistered charge
17.174-17.178 consequences, 17. 149-17. 154
compliance with specified form, Regulated companies
17. 140- I 7. 141 generally, 1.088
debentures in a series, 17.155-17 .157 Regulating order
expedient extension of time, 17.160 compulsory winding-up,
extension of time, 17.158-17 .165 20.203-20.205
failure to register, 17. 148-17 .154 Regulatory bodies
floating charge on company's Companies Registry, I. 179-1.182
undertaking or property, 17.134 Hong Kong Exchanges and Clearing
formalities for registration, 17.136 Ltd, 1.187-1.190
goodwill, 17.133 Hong Kong police, Commercial Crime
heads of registrable charges, 17.I 16 Bureau, 1.178
instrument, meaning, 17.139 Independent Commission Against
instrument of charge, 17.138, 17. 139, Corruption, 1.178
17.142, 17.146 Registrar of Companies,
intellectual property, 17.133 1.179-1.182
just and equitable extension of time, regulator, 1.178
17.159 Securities and Futures Commission,
land, 17.125 1.183-1.186
late registration where allowed, Regulatory regime
17.164-17 .165 civil consequences of contravention,
non-Hong Kong companies, 1.175
17.17917.184 Companies Ordinance,
notification of satisfaction of debt, 1.171-1.175
17.172-17.173 non-statutory, 1.177-1.190
obligation to register, 17.135 obligations on companies and
personal property security regimes, individuals, I. I 7 I
17.110-17.113 obligations on individuals,
procedure, 17.135-17.139 1.171, 1.174
property acquisition officer in default, 1.172
registrntion within one month, responsible person, 1.173
17.166-17.167 Securities and Futures Ordinance,
purpose, I 7. I 07 1.176
rectification of particulars, Religious bodies
17 .168-17 .171 generally, 1.009
 INDEX 1087

Rembrandt bonds compromise, meaning, 19.066

meaning, 13.074 consult" principle, impossible to,
Re-registration 19.083
Companies Ordinance (Cap.622), corporate rescue, 19.019-19.020
1.134 court sanction, 19.069, 19.105
Rescission court, discretion to approve, I 9.085,
breach of duty, 8. I 76 19.091-19.095
Reserve director court-ordered meeting, I 9.069
one-man company, in, 7.023 creditors
Resolution creditors who stand to recover 100%,
generally, 9 .109-9 .116 19.082
ordinary, 9 .109 debenture trustees, disclosure of
requirement to keep copy, 9 .13 1 material interests, 19.083
special, 9.110 directors, disclosure of material
statutory obligation to send interests, 19.083
copy, 9.112 disclosure
types, 9 .109 Chee,y City Contractors case,
written, 9.111-9.116 19.087
Responsible person Econ Corp Ltd case, 19.090
definition, 1.173 Kansa case, 19.092
Rubber chop Yaohan case, l 9.093-19.095
meaning, 12.053 disclosure duty, 19.083-19.095
TS Office System case, 12.054 dissimilarity of rights, 19.077,
Rule against reflective loss 19.078
generally, 10.103-10.113 exclusion rule, 19.077
failure to provide sufficient
information,
Samurai bonds
19.19.087-19.092
meaning, 13.074
Sarbanes-Oxley Act 2002 (USA) fair representation at meeting, 19.070,
19.072
generally, 8.002
general meeting, 9.129
SCCLR see Standing Committee on
headcount test, 1.152
Company Law Reform
Scheme of arrangement 'intelligent and honest man might
reasonably approve', 19.070,
see also Share capital alterations
19.073-19.075
agreement to bind, 19.066
level of majority required, 19.069
appropriate comparator,
19.079-19.081 meeting
approval by each class in own class application to court, 19. 100
approval by each class in own
meeting, 19.076
meeting, 19.076
arrangement, meaning, 19.066
conduct, 19.103-19.104
classification of creditors,
19.076-19.077 fair representation,
I 9.070, I 9.072
consideration of, 19.097-19.099
material information disclosure,
classification rules, 19.077
19.103
common right rule, 19.077
company notice, 19. I O1
wide duty of disclosure, 19.084 proof of debt, 19. 102
results, I 9.104
Company Ordinance Cap.622,
material interests, disclosure of,
1.152- l.153
19.084
compliance with statute, 19.070,
19.071 principles, 19.070-19.075
1088 INDEX

procedure takeovers regime, 1.177, 1.184

classification of creditors, unfair prejudicial conduct, I 0.141
consideration of, Securities and Futures Ordinance
]9.097-19.099 corporate representative, 9. l 04
conduct of meeting, 19.103-19 .104 generally, 1.183, I. I 84
court sanction, 19.105 prospectus
formal steps towards meeting, advertising restrictions,
I 9.100-19.102 16.109-16.111
process stages, 19.096 criminal liability for
provisions, 19.064-19.069 misrepresentation,
share-splitting, 1.152 16.088-16.089
wholly-owned subsidiaries, treatment material omissions, 16.068
of, 19.077 regulatory regime, 1.176
Scripless securities system Security
generally, I . 168 categories of real, 17.049
Seal charges, 17.049
common, 2.035, 12.002 generally, 17.047-17.050
official branch seal, 2.038-2.039 lien, 17.049
official seal, 2.036 mortgage, 17.049
requirement, 2.035 personal, 17.048
securities, 2.037 pledge, 17.049
use outside Hong Kong, 2.036, real, 17.048
2.038-2.039 SEHK see Stock Exchange of
Secret commissions Hong Kong
generally, 8.116 Self-acquisition of shares
Secured loan contravention of prohibition, 15.061
generally, 13.064 beneficial interest, 15.060
Securities and Futures Commission prohibition, 15.059
authorisation of prospectus, 16.031 subsidiary member of holding
civil actions, enforcement and company, 15.061-15.063
protection, 1.186 Self-incrimination
criminal provisions, enforcement of, privilege against, 1.203, 3.007
1.186 Separate legal entity doctrine
exemptions granted by, 16.020-16.02 I agency law and, 3.013-3.014
formation, 1.009, 1.183 capacity of natural person, 3.004
functions and powers, 1.184 company different person from
generally, 1.009 members, 3.001, 3.003
Hong Kong Exchanges and Clearing company operated by one person, 3.003
Ltd generally, 3.001
oversight responsibility, 1.190 leading decision, 3.002
listed companies, 1.184 obligations and liabilities,
listed corporations, 1.185 3.008
petition for compulsory winding-up, perpetual succession, 3.0 I 6
20.074 privilege against self-incrimination,
prospectus exemptions, 16.016 3.007
prospectus regime, review, 16.005 property, 3.005-3.006
securities regulator, 1.184 rationales, 3.016-3.021
statutory body, I . 183 rights and powers of company,
Stock Exchange of Hong Kong, 1.190 3.004-3.007
Stock Exchange of Hong Kong Salomon v Salomon case, 3.002
oversight responsibility, 1.190 shielding of assets, 3.020
 INDEX 1089

Set-off meaning, 14.00 I

compulsory winding-up, members' schemes of arrangement see
20.192-20.193 Scheme of arrangement
SFC see Securities and Futures paid-up, 14.013-14.014
Commission par value, 14.156
SFO see Securities and Futures penny stocks, 14.157
Ordinance reduction, 14.153-14.154
Shadow director registration of charges, 17.118-17.122
and see Director share premium, 14.010
definition, 7.013 solvency test, 1.139, 1.140
duty of care, 8.147 subdivision of shares, 14.161-14.163
generally, 8.018-8.019 transactions in relation to,
parent company as, 7.015 1.138-1.140
puppet master, as, 7.014 types, 14.011-14.018
purpose, 7. 0 14 uncalled, 14.018
Share buy-backs unpaid, 14.015
compliance with Codes, unpaid amount on partly paid shares,
I 5.090-15.091 14.160
disclosure, 15.095-15.096 Share capital alterations
financing, 15.094 bonus shares, 14.152
fully paid shares, 15.08 I capital maintenance doctrine, 14.153
listed companies, I 5.084-15.091 capitalisation of profits, 14.151
non-redeemable shares, 15.08 I consolidation of shares,
off-market buy-back by general offer, 14.155-14.158
15.086-15.088 increase of capital, 14.149-14.152
off-market buy-back otherwise than by reduction, 14.153-14.152
general offer, 15.089 subdivision of shares, 14.159-14.161
on-market buy-back, 15.085 unpaid amount on partly paid shares,
power to buy back, 15.080-15.083 14.160
procedure alterations, 14.148
listed companies, 15.084-15.091 Share certificate
unlisted companies, 15.092-15.093 application for replacement,
prohibition, 15.078 14.143-14.144
share redemptions, difference between, chattel, subject of conversion, 14.139
15.079 details, 14.133
unlisted companies, 15.092-15.093 documentary evidence of title, 14.136
Share capital founder members, 2.017
alterations see Share capital legal title, 14.137
alterations Model Articles, 14.134
authorised capital, 14.003, numbered, 14. 135
14.008-14.009 partly paid though stated as fully paid,
bonus shares, 14.152 14. 138
called up, 14.016-14.017 provisions on replacement,
capital maintenance doctrine, 14.153 14.140-14.147
capitalisation of profits, 14. 151 rectification after replacement,
categories, 14.011-14.018 14.146-14.147
Companies Ordinance Cap.622, replacement of lost, 14.139-14.147
1.136--1.140, 14.002 requirements, 14.131-14.135
consolidation of shares, 14. I 55-14. I 58 specified period after transfer, 14.132
increase of capital, 14.149-J 4.152 status, 14.136-14.139
issued or subscribed, 14.012 transfer of shares, 14.132
1090 INDEX

Share purchase definition, I 3.037

unfairly prejudicial conduct, 10.213 financial assistance for acquisition,
unfair prejudice remedy, 1.140
10.211-10.215 fraudulent tnmsfers, 14.078-14.080
Share Repurchase Code fully paid, 14.040
non-statutory regulation, l.177, l.184, fungibles, as, 13.041
15.090, 15.091 gifts, 14.067-14.068
Shareholders intangible property, 13.040
Companies Ordinance Cap.622, issue see Issue of shares
1.141 nature of, 13.039-13.041
dividends and distributions, 1.141 non-cash consideration, 14.042
equity finance, 13.029-13.032, 13.034 offers to public, 16.091-16.091
residual claimant, I 3.031 one class if rights are uniform,
Shareholders' agreement 14.195
advantages, 5.077-5.081 ordinary, 13.044
binding subsequent members, 5.083 par value, 14.004-14.007, 14.037
disadvantage, 5.083 participating preference, 13.050
inconsistency with articles, 5.084 partly paid, 14.040, 14.041-14.043
international transactions, 5.084 penny stocks, 14.157
invalid, 5.085-5.087 preference, 13.045-13.051
meaning, 5.076 premium, 14.010
minority protection, 5.079 premium account, 15.015
private company, 5.002 property, as, 13.039
private document, as, 5.077 provisions, changes, 1.I 36-1. I 37
ratchet clause 5.081 redeemable, 13.052-13.054
restraining statutory powers, 5.086 redemption see Redemption of shares
unfairly prejudicial conduct, self-acquisition, 15.059-15.063
10.182-10.183 share-splitting, 1.152, 14.174
weighted voting rights, 5.087 share warrant, 13.057-13.059
Shares shareholder as member, 13.038
allotment subdivision, 14.159-14.161
affecting majority control, 8.053 transfer see Transfer of shares
company with considerable funds, transmission see Transmission of
8.051 shares
directors, by, 8.050-8.054, 14.029 types, 13.042-13.060
Howard Smith v Ampol, 8.052, unpaid amount on partly paid shares,
8.054, 8.055 14. 160
takeover bid, 8.054 validation of improperly issued,
bearer, 13.055-13 .060 14.045-14.046
bonus, 14.154 variation of class rights,
chose in action, 13.040 14. 190-14.191, 14.200-14.206
class meeting, 9.013 Shelf company
class rights, 14.190 generally, 2.013-2.0 I 4, 4.028
classes, 13.042-13.043 Simplified reporting
Companies Ordinance Cap.622, companies limited by guarantee,
1.136-1.137 11.063
consideration for issue, private companies, 11.058-11.065
14.036-14.044 true and fair view requirements, 11.065
consolidation, 14.155-14.156 Societies
convertible preference, 13.05 I registration requirement, 1.111
cumulative preference, 13.049 Societies Ordinance, 1.111
 INDEX 1091

Sole proprietorship derivative action, time of

formalities, 1.027 plaintiff's application, 10.085
generally, 1.026 discontinuation or settlement, I 0.093
treated as individual, 1.029 stat der act,
Sole trader double or multiple, 10.072
benefits and responsibilities, 1.028 evidence, I 0.082
generally, 1.026 form of proceedings, I 0.079-10.080
treated as individual, 1.029 good faith, I 0.075
Solvency test granting ofleave nunc pro tune, l 0.081
redemption of shares, 15.068 indemnification order, I 0.087-10.092
reduction of capital, 15.045, independent investigator,
15.048-15.051 l 0.084-10.086
Special notice interests of the company,
notice of intention, 9.049 10.059-10.064
Specified companies company's separate and independent
generally, 8.099, 8.100, 8.105 welfare, I 0.061
Standing Committee on Company Law low threshold, 10.067-10.068
Reform (SCCLR) intervening, l 0.066-10.068
corporate governance, I . I 17 leave application
establishment, 1.112 application for appointment, I 0.084
generally, 1.014, 1.019 leave proceedings, l 0.084
members' remedies, 1.155 leave to bring, 10.049, 10.054
radical change declined, I. 116 legislation, 10.048
recommendations, 1.116-1.117 majority member, I 0.074
reform proposals, 1.125, 1.126 member of associated company, l 0.073
Start-up companies members' personal rights, 10.097
bank loans, 13.004 misconduct, l 0.052-10.053
business angels, 13.006 multiple, 10.072
obtaining finance, 13.003-13.007 originating summons, 10.079
overdrafts, 13.004 personal claim of member, I 0.098
trade credit, 13.005 procedural matters, 10.073-10.087
venture capital, 13.007 ratification, effect of, 10.069-10.071
Statement of compliance registered member, I 0.073
generally, 2.011 serious question to be tried,
Statutory derivative action 10.056-10.065
alternative remedies, 10.097-10.098 standing, 10.073-10.074
application, I 0.050-10.053 Statutory indoor management rule
commencing action, 10.059-10.065 charitable company
common law derivative action, restriction, 12.089
relationship between, Company Ordinance (Cap.622), 12.082
I 0.094-10.095 company, Person dealing with, 12.083
companies in liquidation, company's relevant documents,
10.077-10.078 12.087
companies within provisions, common law rule overlap, 12.090
10.051 directors' powers, 12.085
company as plainti If, I 0.080 Good faith, 12.084
conflict of interests, I 0.076 legislation, 12.082
costs, 10.086-10.092 transaction between company and
court powers, 10.083 director, 12.088
criteria for granting leave, Statutory injunction
10.054-10.068 application, 10.247
1092 INDEX

breach of fiduciary duties, 10.252 Securities and Futures Commission

Companies Ordinance Cap.622, oversight responsibility, I. 190
10.244-10.246 statutory duties, l. 189
court's power, I 0.249 Stock finance
discretionary, l 0.250 generally, 13.014
final, 10.251 Subordination
interim, I 0.251 meaning, 13.066
persons who may apply, I 0.246, Subordination agreement
10.248 and see Charge
provisions, 10.244-10.246 intention of parties, 17 .219
purpose, I 0.246 priorities in competing charges,
scope of orders, I 0.249-10.252 17.215-17.220
Statutory written resolution procedure Re Portcase case, 17.217-17 .219
advantages, 9.126-9.127 Syndicated loan
removal of uncertainty, 9 .126, 9 .127 meaning, 13.070
unanimous consent and, 9.125-9.128
Stay Takeover
activation, 19.039 defeating by agreements, 8.054
adjournment of winding-up petition, defeating by alteration of voting power,
19.039-19.051 8.054
compulsory winding-up order, after, defeating to preserve own position,
• 20.092-20.094 8.055
further adjournments poison pill arrangement, 8.054
APPcase, 19.047-19.048 sale of Crown jewels, 8.054
classification of creditors, Takeovers and Mergers Code
19.046-19.048 generally, 1.177, 1.184, 8.056, 15.090
duration, 19.052 Trade credit
in-principle support, start-up companies, 13.005
19.044-19.050 Transfer of business
prerequisites, 19.044-19.050 piercing the corporate veil, 3.073
requirement, 19.041, 19.043 Transfer of shares
viability support, 19.044, 19.049 bearer shares, 14.049
zero recoveries, 19.050 Companies Ordinance (Cap.622)
initial adjournment, 19.042 provisions, 14.051
meaning, 19.038 equitable ownership, 14.059
members' voluntary winding-up, fraudulent transfers, 14.078
20.230-20.232 gifts, 14.067-14.068
provisional liquidation, legal title to gift, 14.067
19.052-19.064 legal title transfer, 14.048-14.049
provisional liquidator, 19.038, lien until purchase price paid,
19.039 14.060
viability of restructuring, 19.042 listed companies, 14.061-14.066
Stock CCASS computer trading system,
generally, 13.061-13. 062 14.062-14.066
Stock exchange HKSCC, 14.062
history, 16.125 procedure, 14.061
listing of securities, 16.111-16. J J4 selling shares, 14.06I, 14.064
Stock Exchange of Hong Kong (SEHK) shares through nominee, 14.062
generally, 1.188, 16.125 ways to hold shares,
non-statutory body, 1.187 14.063-14.066
recognised exchange company, 1.189 nature of transfer, 14.047-14.050
 INDEX 1093

new certificate within specified period, meaning, 14.081

14.112 registration as member,
novation or assignment, 14.050 14.084-14.085
procedure, 14.052-14.068 restrictions on registration,
restrictions 14.086-14.088
generally, 14.069-14.077 rights and liabilities, 14.089-14.090
pre-emption rights, 14.070-14.072, transfer, distinguished from,
14.088 14.08l
pre-emption provisions, 14.071 Triad societies
private companies, 14.069-14.076 generally, 1.111
public companies, 14.077 Trusts
refusal to register registration, pre-incorporation contract,
14.073-14.076, 14.086 4.017-4.018
rights after contracting, 14.059-14.060 Types of company
transmission, distinguished from, change of type, 2.054-2.057
14.081 companies not formed under
unlisted companies Ordinance, 2.076-2.083
by way of sale, 14.052 limited company by guarantee with
contract notes, I4.054 share capital, 2.046
false certification, 14.058 limited, 2.042-2.045
new share certificate, 14.056 listed, 2.058-2.059
proper instrument of transfer, local and foreign, 2.060-2.075
14.053 private and public, 2.049-2.053
register of members to be updated, public, 2.044, 2.049-2.053
14.055 under retitled Companies Ordinance
sale of shares, 14.052-14.058 (Cap.32), 2.040
title to shares, 14.058 unlimited, 2.042, 2.047-2.048
vendor selling part only, 14.057 unlimited without share capital,
unpaid vendor's lien, 14.060 2.043
Transmission of shares unlisted, 2.058
and see Shares
automatic change of ownership, Ultra vires doctrine
14.08 I see also Objects clause
bankruptcy abolition
Official Receiver, 14.092 companies under Companies
trustee in bankruptcy, Ordinance, 5.017
14.093-14.094 act not authorised by constitution,
death of shareholder 5.008-5.009
estate, 14.089-14.090 application modified, 5.009
generally, 14.083-14.094 capacity, 5.017-5.018
joint owned share, 14.091 commercial unreality, 5.010
legal title, 14.083 director
registration as member, breach of fiduciary duty, 5.024
14.084-14.085 external effects of company's acts,
restrictions on registration, 5.020
14.086-14.088 generally, 5.005
rights and liabilities, meaning, 5.008
14.089-14.090 methods of avoidance, 5.012-5.013
estate, 14.089-14.090 objects clause and, 5.019-5.020
joint owned share, 14.091 prejudice of the company interests,
legal title, 14.082, 14.083 5.01 J
1094 INDEX

reform invalidated by statutory provisions,

1997 amendments, 5.016 20.129, 20.142
Hong Kong, in, 5.014-5.016 means of giving, 20.132
need for, 5.010-5.013 time period, 20.135
significance, 5.017-5.024 transactions amounting to,
Unanimous consent 20.133-20.13
binding or waiving procedural transactions at an undervalue, 20.142,
requirements, 9.119, 9.128 20.143
common law, 9 .117 undervalue transaction, 20.145-20.157
conditions, 9.122-9.124, 9.125 Unfair prejudice
court's position, 9.120 affairs of the company,
effect, 9.1 I 9 10.145-10.147
full knowledge requirement, application, 10.139
9.123-9.124 conduct affecting interests of members,
generally, 9.117-9.128 10.148-10.153
informal assent without meeting, affecting petitioner's own interests,
9.128 10.151-10.153
informed consent, 9.123-9.128 conduct must be unfairly prejudicial,
origination of doctrine, 9 .118 10.154-10.177
preference shareholders, 9 .122 conduct of petitioner, I 0.143
registered shareholders, by, 9.122 corporate group, I O.147
satisfaction of conditions, 9 .121 interests, meaning, 10.149
shareholders' power to make decisions legislation, I 0.135-10.139
by, 6.045-6.050 member qua member, I 0. I 50
statutory requirements relationship, petition brought for collateral purpose,
9.125-9. I 28 10.144
statutory written resolution procedure petitioner not minority member,
and, 9.125-9.128 10. 142
Unanimous consent doctrine Securities and Futures Commission,
inquorate meeting, 9.078 10.141
Unanimous consent rule standing to petition, 10.140-10.144
duomatic principle, 6.045-6.048 when sought, 10.134
equitable estoppel theory, 6.046, 6.047 Unfair prejudice remedy
lifting of corporate veil, 6.046, alternative relief, 10.218-10.224
6.049-6.050 appointment of receiver or manager,
waiver theory, 6.046, 6.048 10.210
Unfair preferences board composition, orders regulating,
and see Compulsory winding-up I 0.208-10.209
associate of company, 20.135-20.136, buy-out offer meeting expectations,
20.140 10.219
concept, 20.132-20.134 buy-out offer obligatory, 10.220
court orders, 20.161 buy-out orders, I 0.211-10.2 I 5
court order to restore position, 20. 142 (predecessor) Companies Ordinance
desire to prefer, 20.137-20.140 (Cap.32) s. I 68A, 10.202
elements to be established, 20 .13 I Companies Ordinance (Cap.622) s.725,
history, 20.130 10.203
influenced by desire to prefer, compulsory winding-up, 20.071
20.139 costs, I 0.230
insolvent company, 20.141 court-ordered remedies,
intention and desire, distinction 10.202-10.217
between, 20.138 damages, I 0.2 I 6-10.217
 INDEX 1095

derivative action, relationship with, no party at fault, I 0.173

10.221-10.223 non-statutory regulations breach,
discretionary nature of relief, l 0.205 10.178-10.179
Foss v Harbottle rule, I 0.221 objective test, I 0. I 65-10.166
interim relief, l 0.206 Ordinance breach, 10.178-10.179
jurisdiction, wide, I 0.202-10.204 personal expectations,
mismanagement, relief from, I 0.222 10.162-10.164
orders regulating company affairs, personal relationship or dealings,
10.207 breach of, 10.191-10.196
orders restricting directors' powers, petitioner has ability to end conduct,
10.208-10.209 10.172
petition, I 0.225-10.227 prejudice, meaning, I 0.155
Practice Directions, l 0.228 proposed conduct, 10. 169
procedural matters, 10.225-10.230 public company, 10.175-10.176
respondents, 10.229 reasonable bystander test,
share purchase, I 0.211-10.215 10.165-10.166
winding-up remedy overlap, I 0.224 requirement, l 0. 154
Unfairly prejudicial conduct shareholder agreement, breach of,
and see Unfair prejudice remedy 10.182-10.183
alteration of articles of association, threatened conduct, I 0. I 69
5.050 unfairness, meaning,
alterations to memorandum or articles, 10.156-10.160
10.200-10.201 unfairness assessed in conunercial
character of company relevant, context, I 0.174
I 0.174 universal and personal expectations,
conduct applicable to all members, 10.162-10.164
10.171 Unincorporated joint stock company
conduct occurring in the past, 10.168 generally, 1.092-1.093, 1.095
constitution, breach of, incorporation benefits added, 1.096
10.182-10.183 United Kingdom
cumulative minor acts, 10.170 Companies (Consolidation) Act 1908,
discretion of court, 10. I 57 1.106
dividends, non-payment or inadequate, Companies Act 1929, 1. I 08
I 0.198-J 0. I 99 Companies Act 1948, 1.109
equitable considerations, breach of, Companies Act 1967, 1.109
10.191-10.196 Company Law Committee ( 1962),
examples, 10.178-10.201 4.021
excessive remuneration to directors, core company Jaw, 1.013
10.187-10.188 early Companies Act, 1.096- l. IOI
exclusion from management, 10.197 Hong Kong uniformity with UK
family company, 10. I 77 legislation, 1.106, 1.107
fiduciary duties of director, breach of, United States
I 0.184-J 0.186 adverse interest rule, 12.105
irreconcilable differences, l 0.173 limited liability company, 1.010
isolated acts, 10.167 Yankees, 13.074
legitimate expectation, 10.161 Unlimited company
listed company, 10.175 change to limited, 2.054
mismanagement of company business, liability, 2.047
10.190 share capital structure, use of,
negligence of company business, 2.048
I 0. I 89 without share capital, 2.043, 2.047
1096 INDEX

Unregistered companies Voting

definition, 2.071, 2.072 declaration ofresults, 9.087
foreign companies as, 2.07 I, end of process, 9.087
2.072 generally, 9.083-9.087
Unsecured loan instructions to proxy, 9.093,
meaning, 13.064 9.096-9.097
Unsecured notes one vote per share, 9.086
meaning, 17.014 poll, common law, 9.084
poll, statutory duty, 9.084
Validation order proxy, 9.088-9.100
winding-up, 19.J 19, proxy's duty, 9.096-9.097
20.123-20.128 proxy's right, 9.094
Venture capital right to vote, 9.083
start-up companies, 13.007 show of hands, 9.083, 9.084
Vesting order
disclaimed property, 20.106 Wealth transfer
Voluntary winding-up asset distribution, 19. I 07
see also Compulsory winding up; asset substitution, I 9.108
Winding up forms, 19.106
applicable provisions, management entrenchment, 19.106,
20.233-20.237 I 9.109
commencement, 20.211 protection against, 19.110, l 9. I I 8
compulsory winding-up Whistle-blowing
after commencement of, generally, 11.136
20.237-20.242 Winding-up
petition for, 20.243-20.244 amending bill, 20.222
conversion from compulsory, compulsory see Compulsory
20.237-20.242 winding-up
creditors dissolution after, 20.253-20.260
committee of inspection, 20.222 fraudulent trading, 7 .113- 7 .116
generally, 20.219-20.222 just and equitable
meeting, 20.220-20.221 breakdown of trust and confidence,
no certificate of solvency, 20.219 10.234
dissolution after three months, (retitled) CO Cap.32, I 0.231
20.254 conduct of petitioner, I 0.239
generally, 20.003, 20.004 court would not make order,
members 10.243
generally, 20.213-20.217 examples, 10.234-10.239
liquidator, 20.216-20.217 failure of substratum of company,
meeting of creditors, 20.217 10.236-10.237
reasons, 20.213 last resort, 10.240
special procedure under section meaning, 10.232-10.233
288A, 20.223-20.229 petitioners acting unreasonably,
stay of section 228A procedure, 10.242
20.230-20.232 quasi-partnerships, 10.234, 10.237
notice of resolution, 20.210 relationship with other remedies,
order of distribution, 20.235 10.240-10.243
reasons for, 20.209 just and equitable grounds
resolution, 20.209, 20.210 unfair prejudice remedy overlap,
types, 20.212 10.224
 INDEX 1097

modes, 20.003 Written resolution

offences before or during circulating resolution procedure,
concealing information, 20.248 9.116
concealing or removing property, company can set own procedure,
20.247 9.114
criminal, 20.245 lapse of proposed, 9 .114
falsification of company book, meaning, 9 .111
20.250 statutory written resolution procedure
frnudulent conduct, 20.246 unanimous consent,
fraudulent trading, 20.248 9.125-9.128
general, 20.245, 20.251 time and money saving, 9. l l 6
proper accounts, 2.0211 when passed, 9. l l 3
statutory provisions, 20.006
unfair prejudice remedy overlap
Yankees
just and equitable grounds, 10.224
foreign bond, 13.074
voluntary see Voluntary winding-up