THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS

2008-2009 (SEMESTER 2) EXAMINATION

School of Business: BUSIOOlOB

Company Law

Date: May 4, 2009

Time: 9:30a.m. -11:30 a.m.

Answer Any THREE questions. All questions carry equal marks.

1.

(a)

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 was 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.
AND

(b)

"A floating charge has many disadvantages as a form of security."

Discuss this statement.

2.

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 form a new company, Lemon Limited, each subscribing for an equal
number of shares. The understanding between them is that the new company
will take over and expand the cosmetics 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
debt-servicing 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.

3.

(a)

"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.
AND

(b)

"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.

4.

Churchgate Ltd. is a building company whose directors are Leo, Rex and
Victoria. Churchgate'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 2008, 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 as architects for the Wanchai project
and their senior partner telephoned Leo to discuss the matter. Leo 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. 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.

5.

(a)

"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.
AND

(b)

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, if any.

6.

(a)

What is the difference between a compulsory winding up and a voluntary

winding up?
AND

(b)

"In the process of winding up, the liquidator has considerable powers to
avoid certain transactions made on behalf of the company prior to
commencement." Discuss.
AND

7.

(c)

Examine the duties of a liquidator.

(a)

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

unusual one". Using case authority, explain this statement
AND

(b)

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

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