THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2005-2006 (SEMESTER 2) EXAMINATION

School of Business: BUSI0010B Company Law

Instructor: Mr. David Woods
9:30 a.m.- 11:30 a.m.

May 19,2006

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

1.

"A fundamental difference between partnership and company law is that the
Partnership Ordinance provides an optional, essentially contractual,
framework for conducting business operations through the medium of a
partnership whereas the Companies Ordinance imposes a mandatory
structure." Discuss.

2.

"It is becoming increasingly difficult to predict whether in any particular case

the courts will or will not adhere to the principle of separate corporate
personality as confirmed in Salomon v Salomon & Co Ltd. (1897)." Discuss.

3.

Edward, a director of Fine Coaches Ltd (a coach building company), learned

from George, his accountant, that Happy Travel Ltd., a company to which
George is also the accountant, was to be the subject of a takeover by Jet
Holidays Ltd. Edward immediately purchased $50,000 worth of shares in
Happy Travel Ltd. by means of a temporary loan from Fine Coaches Ltd
which was not formally disclosed in the accounts.
Edward' s shares increased substantially in value as a result of the takeover of
Happy Travel Ltd. by Jet Holidays Ltd. In addition, Edward received various
shareholder benefits, such as holidays and travel at reduced rates and discounts
on the purchase of his new car. He never informed Fine Coaches Ltd. of his
involvement with the other companies.
Advise Edward and George as to their liabilities.

4.

X, Y, and Z incorporate W. Ltd. All three become directors and they hold all
of its shares between themselves. X owns 30o/o of the shares with the
remainder divided equally between Y and Z. After disagreements Y and Z
combine to use their shareholdings to dismiss X from the board. After this
they pursue a policy of distributing profits largely in the form of directors'
fees, thereby reducing the scope for dividends. X has also discovered that Y
and Z are planning to increase the capital of W Ltd by means of a rights issue.
X cannot afford to take up his entitlement and therefore is concerned that his
minority shareholding will be diluted even further.
X therefore wishes to realise his investment in W Ltd but Y and Z have
indicated that they will only purchase his shares at a substantial discount.
Advise X and consider whether your answer would be affected by the fact that
X might have been to blame for the original dispute with Y and Z.

5.

6.

(a)

"The problem of ultra vires has now been solved by the Companies
(Amendment) Ordinance 1997." Discuss.

(b)

"Section 168A Companies Ordinance gives significant protection to

minority shareholders, though it does not supplant the common law."
Discuss.

(a)

"Romalpa clauses in contracts represent a grave danger to creditors

holding floating charges. However, other problems may also occur."
Discuss.

(b)

Hong Ltd. created a floating charge over all its assets in favour of
Heng Seng Bank, which had provided a substantial loan to the
company. This charge was duly registered. Four months later Hong
Ltd. created a fixed charge over its factory in favour of Tung Ltd.
Before taking this charge, Tung Ltd. had made a search at the
Companies Registry and discovered the existence of the floating
charge in favour of Heng Seng Bank.
More than twelve months after the charge in favour of Tung Ltd. was
created, Hong Ltd. went into liquidation.
Explain the rules relating to priority of charges and state which charge
is likely to have priority.

7.

(a)

Activon Ltd. is a manufacturer of washing machines. In 2003, Activon

Ltd. made a contract with Staleglow Ltd., a manufacturer of washing
powder, in which Activon, in return for a substantial payment,
undertook that for the next five years its directors would appear in
Staleglow's television commercials and recommend Staleglow's
products for use with their machines.
In 2005, Activon's directors decided that Staleglow's washing power
was an inferior product and that by recommending it they were in fact
seriously damaging Activon's own profitability.
Advise Activon's directors.

(b)

8.

Explain the "proper purposes" doctrine governing the exercise of

discretionary powers by the board of directors of a company. What is
the rationale of this doctrine?

Churchgate Ltd. is a building company whose directors are Leopold, Rex and
Victoria. Church gate's Articles of Association include a provision that "any
transaction involving expenditure of $500,000 or more must first be approved
at a board meeting". In 2003, Churchgate acquired a site for development in
W anchai and the board appointed Marina to be the manager of the W anchai
project.
Marina asked Edward, an office junior, to order $300,000 worth of bricks for
the Wanchai project from Apollo Ltd. Edward telephoned the order and
Apollo Ltd. delivered the bricks.
Bunder & Co. were anxious to be appointed architects for the Wanchai project
and their senior partner telephoned Leopold to discuss the matter. Leopold
said that they should speak to Marina since she was "in charge of the project".
Marina appointed Bunder & Co. architects for the Wanchai project on terms
which included the payment of an "up-front" fee of$600,000.
Edward also ordered carpets and interior fittings worth $800,000 from Shelley
Ltd.
Shelley Ltd's Sales Manager telephoned Marina who confirmed
Edward's authority and Shelley Ltd. have now delivered the carpets and
fittings.
Rex and Victoria, who are dissatisfied with Marina's handling of the Wanchai
project, have summoned a board meeting claiming that Churchgate is not
liable to pay anything to Apollo Ltd., Bunder & Co. or Shelley Ltd.
Advise Apollo Ltd., Bunder & Co. and Shelley Ltd.

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