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THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2010-2011 (SEMESTER 2) EXAMINATION

School of Business : BUSIOOlOB Company Law

Instructor:

Mr. David Woods

May 4, 2011

2:30 p.m. - 4:30 p.m.

This paper has 6 pages (including this front page).

Answer any THREE questions only. All questions carry equal marks.

1. Apple and Banana have worked together, trading in partnership for a number of
years. They run a successful dress making business. Banana has just adopted 2
children and is now very concerned that his business and personal life should be
divorced from one another. He therefore wishes to ensure that any business
decisions he takes would not threaten the home he provides for his children.
Having explained his concerns to Apple, they both agree to incorporate their
business, becoming the only two directors and both subscribing for 50,000
ordinary shares of $10 each in Apple and Banana's Big Adventure Limited
(ABBAL).
Additionally, they both enter into debentures with the company, lending $300,000
each.
The company runs successfully for the next couple of years. However,
unfortunately for Apple and Banana, Lucrative Ltd has been monitoring their
success and has decided to expand its own competing business in the area,
employing young, inexperienced workers on short-term contracts, operating from
premises in a low-rent part of Hong Kong.
Because of Lucrative Ltd's low operating costs, it has been able to force ABBAL
out of business, which now faces liquidation, its debts far outweighing its assets.
Understandably, Banana is very concerned and seeks your advice as to his liability.
Advise him.
How would your answer differ if you discover, during the course of taking
instructions from your clients, that prior to incorporation they had, in fact, been
employees of Lucrative Ltd, whose employment contracts contained valid
restrictive covenants preventing them from soliciting clients and competing in
business on their own behalf?
When you meet Apple, he informs you that 6 months ago, as sales began to drop,
he ordered a vast amount of fabric from a supplier on credit. How would this
information alter your advice, if at all?

'

2. "The Articles of Association are a statutory form of contract, though an usual


one". Using case authority, explain this statement.
(b) Goldies Ltd., a Hong Kong registered company, has the following provisions
within its Articles of Association:
(i)

"James Wong shall be appointed as the company's solicitor for life and
shall receive annual remuneration of$1 million."

(ii)

"On a motion to remove any director, that director, if a shareholder, shall


have three times the normal voting rights."

(iii)

"A person must hold at least 1000 ordinary shares in the company to
qualify as a director of the company."

(iv)

"Directors may be removed from office by a special resolution of


general meeting."

Advise on the legality of these articles.


(c) Can the Articles of Association always be altered?

3. (a) "The floating charge has considerable advantages for the company, but many
potential drawbacks from the viewpoint of the creditors." Discuss.
(b) On the 1st February 2010 Dragon Ltd. created a floating charge over all its
assets in favour of Tiger Ltd. The charge was given in respect of credit of $5
million provided by Tiger Ltd. Within the document, Dragon Ltd. promised
not to create any further charges, fixed or floating, over some or all of the
same property. This charge was registered on the 2nd March 2010. On the 5th
March 2010, Dragon Ltd. created a fixed charge over its factory in favour of
Rabbit Ltd. On the 26th April 2010, a petition to wind up Dragon Ltd. was
submitted to the court.
Explain the rules relating to priority of these charges and examine the factors
which may be relevant as to whether Tiger Ltd. and Rabbit Ltd. receive
satisfaction in this matter.

4. (a) Discuss the meaning of 'unfair prejudice' within s168A of the Companies
Ordinance.
(b) Tin incorporated Booze Company Ltd in 1980 as a private company to import
and sell beer in Hong Kong. Tin held 90% of the shares, with the remaining
shares being held by Jim, Tin's accountant. The articles named Tin and Jim as
the directors and Jim as company secretary for life. When Tin died in 1992,
his shares were inherited equally by his two sons, Mike and Ike. After
inheriting the shares and becoming directors, the sons proposed changes to
various clauses in the Memorandum and Articles of Association which would
allow the company to begin manufacturing beer and liquor in China. When
Jim objected to the proposal, Mike and lke announced that he would be
removed as director and company secretary. They also announced that they
were going to propose that the Articles be changed so that directors would
have the power to force shareholders to transfer their shares back to the
company, where, in the opinion of the directors, their conduct is detrimental to
company interests. Advise Jim.

5. (a)

Outline the functions and duties of a liquidator.

(b)

"The Bankruptcy (Amendment) Ordinance 1996 amends the law relating to


personal insolvency (bankruptcy) but also makes a significant modification
to the Companies Ordinance. A new S266B deems any reference to a
fraudulent preference to mean unfair preference which is defined by 850 of
the B(A)O. This new provision makes it potentially easier to establish a
preference." Explain this statement.

(c)

In relation to liquidation of a company, explain the notion of


"commencement".

6. Wong is the Managing Director of Melon Ltd, a large fashion retail company
which has been very successful in recent years owing to Wong's well known
industry expertise and management skills.
The Articles of Association of Melon Ltd provide:
Remuneration of directors
Article 17

The board shall fix the annual remuneration of the directors provided that,
without the consent of the company in general meeting, such remuneration
shall not exceed the sum of $3 million per annum.
Article 18

The board may, in addition to the remuneration authorised in article 17, grant
special remuneration to any director who serves on any committee of the
company.
In the past 12 months, the following events have occurred:
(i)

Wong is paid $2 million consultation fee for successfully guiding Melon


Ltd through its takeover of Nectarine Ltd., a competing business. This
payment was agreed by a special committee of the Melon Ltd. board
constituted to advise the main board on mergers and acquisitions.

(ii) Wong forms a private company, Orange Ltd., which manufactures


garments similar to those seen worn by celebrities attending award
ceremonies (but without infringing any patent or design laws). Wong
places large orders with Orange Ltd without informing Melon Ltd. of his
interest in the company.
(iii) Wong is approached by Papaya Corporation, a large US company, with
the offer to enter into a joint venture with them in order to develop a
revolutionary new fabric. Wong resigns his post with Melon Ltd. and
accepts the offer. He makes a handsome profit. Melon Ltd. has recently
been taken over by Quesadilla Ltd. The details of the events outlined
above have now come to the notice of the board of Quesadilla Ltd. and
the directors wish to pursue any claims they may have against Wong.
Discuss the legal issues raised by the above events.

7. (a) Examine the relevance of Partnership Law to Companies.


(b) The articles of Dalhousie Ltd. include a provision that "all transactions of $1
million or more must be approved at a board meeting of the company."
Clive is appointed as the Financial Controller of Dalhousie but he is not
made a director. However the directors of Dalhousie tell him that he will
have overall responsibility for the financial affairs of Dalhousie.
Dalhousie needs to raise fmance of $2 million to develop its business and
Clive approaches Lutyens Bank and Fairlawn Finance Co to arrange this.
The negotiator for Lutyens Bank queries Clive's authority. Clive says that he
does have authority because he is the Financial Controller. Clive signs loan
agreements with Lutyens Bank and Fairlawn Finance for $1 ~ million and
$1;2 million respectively.
The board of directors of Dalhousie have decided that they do not want to
proceed with the two loans. They claim that Clive acted without authority
and that neither loan is therefore binding on Dalhousie.
Advise Lutyens Bank and Fairlawn Finance.

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