FINANCIAL LAW AND

REGULATIONS
WEEK 4
Principles of relevant Hong Kong
Law & the Companies Ordinance
What is Law?
 The study of law is called Jurisprudence

 The word is derived from the Latin language and is

commonly accepted to mean the philosophy of law

 In turn the word Philosophy originated from the

Greek word for “Love of Wisdom”

 It incorporates a critical and systematic approach to

obtaining a deep understanding of a body of
knowledge using logical argument and reasoning
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Sources of Law

 Natural law theory: asserts that human rights derive from

and are a part of nature itself

 Consequently the role of government is to create / enact

laws which correspond as closely as possible to these
hidden laws using the power of reason

 An unjust law, therefore, is no law at all because one

cannot ignore important considerations such as moral
philosophy, religion, human reasoning and conscience

 Aristotle, Plato, Socrates…

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Sources of Law

 Legal Positivism theory: means that the law is something that is

“Posited” or, in other words, validly made in accordance with
socially accepted rules

 There is no connection between law and morality

 Therefore, the source of law is entirely contained in the rules made

by government bodies and the law courts

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Major Legal Systems

 Common Law derived in England and is based on ancient customs and

practice

 It is created and refined by the interpretation of judges each time a case is

heard

 Court decisions become a part of the law through the creation of precedent

 Prevalent in Anglo Saxon jurisdictions, UK, USA, Canada, Australia, New

Zealand, Malaysia, Brunei, Singapore, Hong Kong

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 Major Legal Systems
 Code (Civil) Law attempts to exhaustively cover a complete system of laws
through a process of codification of rules: 1,2,3,4,5,6,…..

 Judges establish rules derived from those codes

 Concept dates back to ancient Babylon, the Roman Empire and Tang Dynasty
(624 AD) with modern origins in France, Germany and Switzerland

 Japanese (German) code introduced by Qing Dynasty and later Republic of

China. Still used in Taiwan

 Used in Continental Europe, Japan, South Korea and Macau. Also Quebec in
Canada and Louisiana in the USA

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Major Legal Systems

 The Mainland uses a mixture of civil law and socialist law

 Little development between 1954 and 1978 in the Mainland

 Change of policy in 1979 after the end of Cultural Revolution led

to significant developments albeit rather slowly and incrementally

 Sometimes criticised for being incoherent with poor enforcement

and weak courts and lack of judicial independence

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Major Legal Systems

 Islamic Law (Sharia) is the world’s most widely used

body of religious law

 Sharia means the way or path to the water source. It is

more a system rather than a set of laws

 Current attempts to make London and Hong Kong global

Islamic finance centres

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Hong Kong Legal System

 Original sources prior to 1997:

 Common Law based on its long usage and precedent

 Law of Equity developed in England in the 14th century as

subjects petitioned the King for justice unavailable at common
law.

 King delegated the petitions to the Chancellor (Church Official)

who dispensed fair and just (equitable) remedies.

 Examples are trusts, injunctions, specific performance, equitable

rescission of contracts and rectification

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Hong Kong Legal System

 Mercantile and Commercial Law which developed in

Europe during the Middle Ages to support and promote
trade between merchants

 Evolved as a system of custom and best practice

 It was very successful and was incorporated into various national

laws including England

 Examples include the Sales of Goods Ordinance, the Bills of

Exchange Ordinance, Bills of Lading, Airway Bills, Letters of
Credit

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Hong Kong Legal System

 Primary legislation refers to the laws passed by the HKSAR Chief

Executive (formerly Governor) with the advice of the Legislative
Council (Legco)

 Subsidiary (delegated) legislation is made by a process of

delegation by Legco to another body

 The delegation takes places under an existing ordinance

 Example – The Securities and Futures Commission (SFC) has extensive

powers to make rules under the Securities and Futures Ordinance (SFO)

 The Hong Kong judiciary is independent

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The Basic Law - HKSAR

 1 July 1997 replaced the Letters Patent and the Royal

Instructions

 Acts as a form of mini-constitution. Domestic Mainland

legislation based on the international Sino-British Joint
Declaration of 1984

 Mainland socialism would not be extended to Hong Kong

 All existing laws (including clan law) would be maintained

except any that would contravene the Basic Law

 The right to private property ownership was confirmed

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System Divisions

 Generally speaking law divides into two main branches:

 Criminal law deals with serious offences which are deemed to offend
against the public at large and which are punishable by fines and or
imprisonment: i.e. murder, assault, theft, as defined by law,…

 Civil law (not to be confused with code law systems) provides remedies
for individuals or businesses that have suffered some wrong by the
actions of another person or persons

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Criminal Law

 Defines offences against the community at large

 Defines how persons committing crimes may be investigated,

charged, brought to trial (at a criminal court) and punished

 Cases are brought by the State on behalf of the people

 Because offenders are subject to punishment charges must be

proven “beyond all reasonable doubt”. Innocent until proven
guilty

 Certain actions may also result in civil law claims

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Civil Law divides into several
divisions
 Civil law is not primarily designed to punish

 Rather it is designed to provide a party with the opportunity to address a wrong

against him or her at a Court of Law (civil division)

 Actions are brought by individuals typically for damages, compensation or an

equitable remedy

 The standard of proof is much less stringent “on the balance of probabilities”.
How would a reasonable man interpret the issue and decide? No question of
guilt

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Contract Law

 Agreement between two or more persons creating obligations which are

recognised by and enforceable under the law

 There must be an offer, an acceptance, consideration and the intention

to create a legal relationship

 An act or forbearance or the promise thereof is the price for which the
promise of the other is bought and a promise thus given is legally
enforceable

 The sale and purchase of financial product creates contracts between

the parties

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Law of Agency

 Agency is a fiduciary relationship created by express or implied contract or by

law

 In which one party may act on behalf of another (the principal) and bind that
principal as long the authority to act is not exceeded

 The agent is said to be a fiduciary - a person who owes another person duties of
good faith, trust, confidence, honesty and care

 A principal is liable for the acts of his or her agent

 An employee may act as agent for an employer

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Law of Tort
 A tort is a civil wrong of which there are many types

 Trespass against the person – assault and battery

 Trespass against property – unlawful entry – interference

 Nuisance

 Deception

 Negligence

 Misrepresentation

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Employment Law
 Employment Ordinance

 Factories and Industrial Undertakings Ordinance

 Employees’ Compensation Ordinance

 Occupational Safety and Health Ordinance

 Under common law, employers must provide an employee with

remuneration, indemnity for expenses, losses and liabilities incurred while
performing duties and a safe working environment

 Under common law, employees must demonstrate skills and competence,

faithful service, obedience and confidentiality

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Other Divisions of Law
 Law of Property

 Inheritance Law

 Family Law

 Administrative Law

 Constitutional Law

 Law of Evidence

 Immigration Law

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Hong Kong Court System
 The Court of Final Appeal (Privy Council before 1997)

 The High Court – Court of Appeal – hears appeals in all civil and criminal
cases arising from proceedings of the Court of First Instance

 The High Court – Court of First Instance – unlimited jurisdiction in respect

of all civil and criminal cases

 The District Courts – hear more serious cases criminal cases (excluding
murder, manslaughter and rape) and civil cases up to HKD1M

 The Magistrates’ Courts – deal with the least serious criminal cases

 Decisions of higher Courts bind the lower Courts

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Hong Kong Forums
 Administrative tribunals are sometimes created by Government to speed up
the legal process which can be slow through the Courts

 Tribunals require less strict levels of proof, are less formal and faster

 The SFO contains provisions to set up Market Misconduct Tribunals and

Securities and Futures Appeals Tribunals

 Arbitration is a private forum for resolving disputes in which a neutral third

party is tasked with making a decision which becomes binding on the parties

 Generally efficient but the element of privacy can lead to the public interest
not been served

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Company Ordinance
Companies Ordinance
(CO)
 A company is an artificial legal person created by an act of law. It has
the power to contract, sue and be sued and own property

 It can commit crimes and torts

 It exists separately from its members (owners - shareholders)

 A limited company’s liability is unlimited but that of the members is

limited

 It has perpetual succession. It can live forever

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Company Types

 A private company is one which:

 Restricts the right to transfer shares

 May not have more than 50 members

 May not offer shares or debentures (loan stock) to the public

 A public company is one that is not a private company

 A listed company is one whose stocks and or debentures are

admitted to listing on a stock exchange. Public company

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Constitution

 As a company does not possess the human ability to think

and act for itself it requires a remedy:

 The Memorandum indicates the purpose for which a

company was formed (objects clause) and regulates its
relationship with external third parties

 The Articles of Association regulate the internal

relationships of the company. Table A model articles are
often adopted

 The constitution forms a contract between the company and

members and between the members themselves

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Share Capital

 Share capital represents the funds invested by the members

(shareholders) and by consequence their ownership

 Ordinary shares are entitled to participate in distributable

profits – receive ordinary dividends

 But only after payment of any preference dividends and loan

interest

 In a winding-up holders of ordinary shares are the last to receive

any payout

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Share Capital

 Preference shares entitle the holder to receive

dividends at a specified rate in priority to ordinary
shareholders

 In a winding-up situation they have priority over ordinary

shareholders on return of capital

 Less risk than ordinary shares but participation in profits

is lower

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Debentures

 A debenture is a document issued by a company as evidence of a

loan

 Holder is entitled to receive a fixed rate of interest – creditor

 May be issued for a fixed term or for perpetuity

 The holders ranks before shareholders in receiving interest

 Debentures may be secured on a fixed or floating charge or;

 They may be unsecured

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Corporate Governance

 Is a set of processes, customs, policies, laws and institutions

affecting the way a company is directed, administered or
controlled

 It includes the relationships among the many stakeholders

involved such as:

 Shareholders, bondholders, directors, management,

employees, customers, suppliers, regulatory authorities, public

 How can accountability be achieved ?

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Meetings

 Opportunity for members (shareholders) to participate in the affairs

of the company

 A company is required to hold an Annual General Meeting (AGM)

 Business includes presentation and approval of annual account,

declaration of dividends, election of directors and appointment of
auditors

 Members can question directors and auditors

 Other meetings are called Extraordinary General Meetings (EGMs)

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Resolutions

 A resolution is a formal way of making and recording decisions

at meetings

 In many cases they can be passed by circular without the need

for the members to actually join a meeting

 An ordinary resolution refers to one passed by a simple majority of

votes (> 50%)

 A special resolution is one passed by at least 75% of members

and is used for more important matters

 21 days notice must be given to members. Copy must be lodged

with Company Registrar within 15 days of it being passed

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Powers of Shareholders

 Shareholder powers are generally exercisable at meetings by the

casting of votes. They can cover a number of issues such as:

 Changes to the company’s articles and name

 Changes to the company’s share capital and major assets

 Variation of share class rights

 Appointment and removal of directors and auditors

 Company restructurings and winding-up (petitions and voluntary)

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Shareholder Protection

 Sometimes shareholders need protection

 Provisions exist in the CO

 Variation of class rights – holders of at least 10% of

class may petition (request) the court to have the
action cancelled if it is against their interests

 An individual member may also petition the court if the

affairs of the company are being conducted in a
manner prejudicial to the members generally

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Minority Protection
 Court will generally not interfere in internal matters. The is the principle of majority power but it cannot be
abused. The CO provides additionally certain safeguards for minorities:

 Certain issues require a special resolution

 Court sanction is required if a decision directly affects creditors

 Members with 5% paid up (voting) capital may requisition a meeting if directors fail to do so

 100 members or 10% of ordinary shareholders may ask the Financial Secretary to appoint an investigator
into company’s affairs

 A member my petition a court to wind up the company

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Further Protection

 In addition a court may intervene to allow an individual member or members to bring an

action:

 To enforce some personal rights (a personal action)

 To enforce the rights of a group (a class action)

 To bring a derivative action when the wrongdoers are in control and it is not possible to
bring an action in the company’s name

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Directors and Officers

 The CO defines a director as including a person who occupies the position

of director, by whatever name her or she is called

 Every public company must have at least two directors

 Every private company must have at least one director

 The directors must be appointed by the members acting in general meeting

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Directors and Officers

 A shadow director is a person in accordance with whose directions or

instructions the directors or a majority of them are accustomed to act

 This provision prevents persons from escaping responsibility / liability for

acting as a director

 Professional advisors are excluded

 A company officer includes a director, manager or company secretary

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Qualifications of Directors

 They must be at least 18 years of age

 They must have any shareholdings as required by the articles of

association (qualification shares)

 They must not be undischarged bankrupts

 They must not be disqualified by courts order: conviction for

indictable (serious) offence, persistent default under the CO,
fraud or fraudulent trading or found to be unfit during insolvency

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Powers of Directors

 The general powers to manage the business are vested in the directors

 Directors are not bound by member resolutions. They may override shareholders

 Members can only intervene in the company management if:

 Directors are unwilling to act, or seek approval to act beyond their powers or act in
breach of their fiduciary duties

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Duties of Directors

 Directors owe a fiduciary duty to the company. They must:

 Act bona fide (in good faith) for the benefit of the company

 Exercise their powers for their proper purpose

 Not allow any conflict of interest between their duties as directors and their personal
interests

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Duties of Directors

 They must also act with skill and care (reasonable man test):

 Must exercise the skill that can be reasonably expected from a person of their
knowledge and experience

 Are not required to give continuous attention to the affairs of the company

 Are justified in relying on a company officer to whom proper delegation of some

duties has been made

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Liabilities of Directors

 In general directors may incur liabilities due to:

 Breaches of fiduciary duties

 Failure to act with due care and skill

 Breaches of statutory duties (law)

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Company Remedies

 In the event of a breach of duty by a director a company may:

 Obtain a injunction to stop such action

 Avoid a contract entered into on behalf of the company if the

directors failed to disclose a personal interest

 All directors in breach will be jointly and severally (separately)

liable to the company for damages

 They must account for any wrongful profit made by dealing

with the company’s property

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Relief for Directors

 The majority of members in general meeting may,

after full disclosure of the material facts, ratify a
breach of duty by directors

 A court may give relief to directors if they have, in

causing the breach, been shown to have acted
honestly and reasonably

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Financial Arrangements

 If a director has a significant (material) interest in a contract or

proposed contract with the company he must disclose it at the
earliest board meeting as is practical

 Remuneration of directors is determined by the company at

general meeting

 Executive directors can have a service contract

 A company cannot directly or indirectly make loans to

directors

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Audits and Investigations

 Investigations may be ordered by the Financial Secretary or

the company may itself carry out a private investigation

 The FS is required to appoint inspectors if a court declares

that an investigation should be carried out and for other
reasons

 All present and past officers and agents of the company –

bankers, solicitors and auditors have a duty to assist the
inspector

 A court can enforce the duty to assist

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Liquidations of Companies

 A liquidation terminates the life of a company

 Assets are sold off and the proceeds are distributed in

accordance with law

 Shareholders are only entitled to receive whatever remains

once all other parties have been paid

 A Liquidation may be compulsory or voluntary

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