Student UID: ______________________

THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2014 2015 (SEMESTER 1) FINAL EXAMINATION
School of Business: BUSI0010/3803 ABCD

Company Law

Instructors:

Mr. David Woods and Mr. David Bishop

Date & Time:

December 9, 2014, 2:30 p.m. 4:30pm

INSTRUCTIONS

This is a CLOSED BOOK exam. The exam has ONE (1) section and consists of SEVEN (7)
pages (including this instruction page). Students are required to answer FOUR question groups
in total. Each is worth twenty-five points.
Please read the questions carefully and budget your time accordingly.
Please remember the Universitys policy on cheating. Anyone caught cheating on the
examination will face discipline based on the Universitys stated policy.

<<<THIS PAPER IS NOT TO BE TAKEN AWAY>>>

QUESTIONS
Please select FOUR of the seven question groups below to answer inside your examination
booklet. (Each question is worth 25 points.) Please include any relevant statutory provisions
and cases in your answer. If you answer more than FOUR question groups, the instructor will
only grade the first four answers.

QUESTION GROUP 1:
(a) Company meetings must be properly called, convened, and conducted. Discuss.
(b) Brian is the founder and director of Big Shot Cannon Supply Company Limited (Big Shot).
Big Shot is five years old, growing rapidly, and needs additional funding in order to expand.
Brian explains the situation to you, and asks your advice about possible financing options or
limitations that Big Shot might have. After reviewing Big Shots Articles of Association and
other relevant corporate documents you note that Big Shot:
(i) is a private company limited by shares;
(ii) has ten investor shareholders and 39 shareholders who gained their shares as part of
an employee stock option plan;
(iii)has a market capitalization of HK$1,000,000, all of which is currently issued to the
existing shareholders;
(iv) has significant inventory and cash receivables; and
(v) Brian owns 51% of the issued and outstanding shares of Big Shot.
Please advise Brian about the financing options and limitations that Big Shot might have.

QUESTION GROUP 2:
(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.
(b) In 2011, Clive was appointed as the Financial Controller of Dalhousie Ltd., but was not made
a director. The directors of Dalhousie told Clive that he would have overall responsibility for
the financial affairs of Dalhousie, and he operated in that capacity with little oversight from
the board for some time.
In 2012, Dalhousie needed to raise HK$2,000,000 to develop its business, and therefore
Clive approached Lutyens Bank and Fairlawn Finance Co. to discuss possible financing
options. During the process, the negotiator for Lutyens Bank queried about Clives authority
to act on behalf of Dalhousie. Clive said that he had authority because he is the Financial
Controller. Satisfied with his answer, Lutyens Bank signed a loan agreement with Clive for
HK$1,500,000. That same week Clive entered into a similar loan agreement with Fairlawn
Finance, though their negotiator did not ask about Clives authority.
Upon learning of the loan agreements, the Dalhousie board of directors decided that they did
not want to proceed with the two loans. They claimed that Clive acted without authority and
therefore neither loan was binding on Dalhousie.
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.
Advise Lutyens Bank and Fairlawn Finance.

QUESTION GROUP 3:
(a) Given its considerable disadvantages, why should anyone wish to use partnership as a
mode of business organization?
(b) In October 2011, DTZ an Australian company was hit by a liquidity crisis. As a result,
directors of DTZ and the companys bank, the Royal Bank of Scotland, decided to run a fasttracked sales process. On 8 November 2011, the DTZ directors, which included CY Leung,
voted to enter into a deal with UGL as a preferred bidder, though at least one other even
more lucrative offer from another company was still under consideration. On 24 November
2011, CY Leung announced his intention to resign from the DTZ board. On 28 November
2011, CY Leung announced he was running for Hong Kong Chief Executive. On 2
December 2011, Mr. Leung signed a letter of offer from UGL to receive payments in return
for supporting the sale of DTZ and promoting it. On 4 December 2011, DTZ entered
administration and DTZ was sold to UGL for 76 million (the same day Mr. Leungs
resignation went into effect). The unsecured creditors received nothing from the sale.
On 25 March 2012, CY Leung won the Hong Kong election, and in December 2012 Mr.
Leung received his first payment from UGL. Among other things, in the agreement Mr.
Leung agreed to ensure that members of DTZs management team remain in place, and to
"provide such assistance in the promotion of the UGL Group and the DTZ group as UGL
may reasonably require." DTZ's administrators Ernst & Young and its chairman said they
were not aware of CY Leungs agreement with UGL.
Assuming Hong Kong Company Law applied to the case, please advise the shareholders
and creditors of DTZ concerning possible legal action.

QUESTION GROUP 4:
(a) Please consider the following statements from the one of the justices in the SALOMON v
SALOMON & CO LTD [1879] case:
it seems to me impossible to dispute that once the company is legally incorporated it
must be treated like any other independent person with its rights and liabilities
appropriate to itself, and that the motives of those who took part in the promotion of the
company are absolutely irrelevant in discussion what those rights and liabilities are
Either the limited company was a legal entity or it was not. If it was, the business
belonged to it and not to Mr. Saloman. If it was not, there was no person and nothing to
be an agent at all; and it is impossible to say at the same time there is a company and
there is not.
Under what circumstances may the separate legal personality of a registered company be
disregarded?
(b)The Articles of Association for Bouncy Castles Limited (Bouncy) state that any loan
exceeding HK$5,000,000 must be approved and executed by two of its three directors. Big
Bank lent money to Bouncy several times over a five year period. Over that time, a Big Bank
loan officer and Bouncys chairwoman, Hazel, became good friends. In 2008, when Bouncy
was on the brink of bankruptcy, Hazel negotiated and signed on her own the documents for a
loan with Big Bank for HK$5,000,000. She did not notify anyone else at Bouncy about the
loan. Moments after the money arrived in Bouncys account, Hazel forged a request to
transfer the money to her personal account. She then flew to the Cayman Islands and was
never heard of again.
Would Big Bank be able to enforce the loan agreement against Bouncy? Why?

QUESTION GROUP 5:
(a) Outline the main legal differences between shares and debentures.
(b) Caxton Ltd. is an old established printing company with four shareholders, Ian, Tony, Peter
and David. Ian, Tony and Peter, who are brothers, are the directors and each holds 30% of
the issued share capital. David owns the remaining 10%. Recently David has become
concerned about a number of events relating to the affairs of the company.
(i) The board of directors refused to declare any dividends even though Caxton Ltd. has
made substantial profits. David believes that the reason for this is that Ian and Tony wish
to limit their personal tax liability.
(ii) The company has recently sold a plot of land to Tonys sister for HK$5,000,000. David
believes that the market value of the plot was approximately HK$6,000,000.
(iii)The business activity of Caxton Ltd., as stated in the objects clause of the articles of
association, is printing. However, the directors decided to begin providing
photocopying and photographic developing services.
Advise David as to his rights and remedies, if any.

QUESTION GROUP 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. Discuss.
(b) Weng Sang Bank provided a substantial loan to Joy Ltd. to help Joy Ltd. expand its
operations. As collateral on the loan, Joy Ltd. created a floating charge over all its assets in
favour of Weng Sang Bank. This charge was duly registered.
Four months later, needing another loan for operational expansion, Joy Ltd. created a fixed
charge over its factory in favour of Daz Ltd. Before entering into the charge agreement, Daz
Ltd. made a search at the Companies Registry and discovered the existence of the floating
charge in favour of Weng Sang Bank.
More than twelve months after the charge in favour of Daz Ltd. was created, Joy Ltd. went
into liquidation.
Explain the rules relating to priority of charges and state which charge described above is
likely to have priority.

QUESTION GROUP 7:
(a) Please describe the principal duties of an auditor, the powers auditors have been granted
to discharge such duties, and the statutory immunity provided to auditors under the
Securities and Futures Ordinance.
(b) Doday Ltd., a Hong Kong registered company, has the following provisions within its
Articles of Association:
(i) James Wong shall be appointed as the companys solicitor for life and shall receive
annual remuneration of HK$1 million.
(ii) On a motion to remove any director, that director, if a shareholder, shall have three
times the normal voting rights.
(iii) A person must hold at least 1,000 ordinary shares in the company to qualify as a
director of the company.
(iv) Directors may be removed from office by a special resolution of general meeting.
Advise on the legality of these articles.