THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2006-2007 (SEMESTER 1) EXAMINATION

School of Business: BUSI0010A Company Law

Instructor: Mr. David Woods
December 15, 2006

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

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

1. On 1 March Friend Ltd created a floating charge over its assets in favour of

Granny Bank as security for a loan of $7 million. The charge was not registered.
On 1 April Friend Ltd created a second floating charge in favour of Happy Bank
as security for an existing overdraft facility of $1 million. The charge contained a
term prohibiting Friend Ltd from creating subsequent charges which would rank
in priority to Happy Bank.
Happy Bank's charge is duly registered. On 1 May Friend Ltd purchased
computer equipment from Eager Ltd at a price of $8 million. Friend Ltd paid $1
million in cash and created a fixed charge over its book debts in favour of Eager
Ltd to secure the balance of the purchase price. This charge was duly registered.
Discuss the legal implications of the above.

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2. 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 $1 0 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?

3. 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.
Advise the board of Quesadilla Ltd.

4. Ho and Lo run a partnership trading in cosmetics. They have been very successful
over recent years and are looking to expand. They therefore invite Ko to invest $3
million in a joint venture with them.
They all three form a new company, Lemon Limited, each subscribing for an
equal mumber of shares. The understanding between them is that the new
company will take over and expand the cosmetic business; that Ho and Lo will
work full time in the business; that all three will be directors and that the
company's profits will be distributed in three equal shares as directors'
remuneration.
Lemon Limited runs smoothly for five years. The company is profitable but not
as profitable as Ho and Lo had initially hoped. Without consulting Ko, they
decide that the company should acquire a number of retail outlets in prime site
shopping malls, which involves large capital outlay fitting out the new premises.
Ko is informed that for an indefinite period the company, because of the debtservicing burden that the expansion scheme involves, will only be able to pay a
fixed salary to Ho and Lo in return for their full time services and that Ko must
forego profit in favour of capital growth of her investment.
Ko is unhappy about this proposition and asks to be bought out. Ho and Lo refuse,
informing her that all company resources are needed for the expansion.
Advise Ko.

5. (a) In what circumstances will an agent bind a company to a contract made with a
third party? What effect do the Memorandum and Articles of Association
have on the power of agents to bind companies to such contracts?
(b) "Directors are in a fiduciary position in relation to their company. The effect
is that they cannot make any profit from the exercise of their powers,
irrespective of fault or loss to the company." Discuss.

6. (a) "The articles of association form a contract between a company and its
members. This contract is, however, an unusual one, limited in both its scope
and permanence." What does this statement mean?
(b) "The problem of ultra vires has now been solved by the Companies
(Amendment) Ordinance 1997." Discuss.

7. (a) "The Partnership Ordinance provides a largely voluntary framework for the
creation of business organizations. However, the merits of partnership may
also reflect its weaknesses". Discuss.
(b) "It is said that the two advantages for a small business of forming a company
are the concepts of legal personality and limited liability. In practice, however,
for small companies these concepts may prove to be as much of a handicap as
a blessing and in some respects may prove to be irrelevant."
Discuss.

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