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School of Business : BUSIOOlOB Company Law


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

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?



"The Articles of Association are a statutory form of contract, though an usual one". Using case authority, explain this statement.



Goldies Ltd., a Hong Kong registered company, has the following provisions within its Articles of Association:



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


"On a motion to remove any director, that director, if a shareholder, shall have three times the normal voting rights."


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


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

Advise on the legality of these articles.



Can the Articles of Association always be altered?



"The floating charge has considerable advantages for the company, but many potential drawbacks from the viewpoint of the creditors." Discuss.


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.




Discuss the meaning of 'unfair prejudice' within s168A of the Companies Ordinance.



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.



Outline the functions and duties of a liquidator.



"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.
















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:


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.


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.


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.




Examine the relevance of Partnership Law to Companies.


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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