Chapter 4 exception to corporate personality

1. The separate legal entity and limited liability doctrines

corporate veil- personality

1. Meaning: a co is a separate legal entity from its
members/shareholders.
2. members will enjoy limited liability and the liability and the
liability of the co itself is unlimited. Note: The concept of limited
liability only applies to the shareholders. The liability of the
company itself is unlimited.

3. the co can sue and be sued in its own name, can enter into
contracts in its own name, purchases property etc. It gives legal
status to an artificial 人造 entity (legal person).
4. 不涉及的 bad intention 和 fraudulent，不用 lift veil

不用 lift veil 的 case：The separate legal entity and limited

liability doctrines
1.1. Salomon v Salomon [1897] AC 22

From the juristic point of view, a company is a legal person distinct from
its members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22].
Salomon was able to contract with and be a secured creditor of the company.
there was no evidence that Mr Salomon had behaved fraudulently. Absent
fraud S was not liable. Not liable

1.2 Lee v Lee’s Air Farming Ltd [1961] AC 12
 （公司可以跟成员签合

同）

The court held that a company could make a valid and effective contract
with its members. It was possible for a person to be at the same time in
total control of a company (as its principal shareholder and sole director)
and a servant雇工 employed by that company.
1.3 Macaura v Northern Assurance Ltd [1925] AC 619 HL （木材烧毁
不赔）

In Macaura v Northern Assurance Ltd [1925] AC 619 HL, it was held that M
had no insurable interest in the timber, as he and the company were
separate legal entities. His claim was disallowed because the timber was
owned by the company.

2. Veil-lifting

2.1 Under the Common law. Common Law Rules on Lift Veil
(1) Fraudulent or improper purpose
Ct is prepared to lift the veil where the co is formed as a sham to evade
existing liability or defeat the law.
To lift or pierce the corporate veil, there must be clear evidence of fraud or
cheating. It is legitimate to use a limited liability company as a vehicle手段 of
business in order to minimize the risk of the business.
•Court is not prepared to assume that there is a relationship of agency
between the co & the person who controls the co (Bakri case)

This two case both evading existing legal obligations.

2.1.1Gilford Motor Co v Horne [1933] 1 Ch 935; 
 （私自招揽客户）

It was held that H and the company, as his agent and under his
direction, had committed承诺 breaches of the covenant. The court
lifted the corporate veil, and granted an injunction禁令 against both
H, the former employee, and his company, even though the company
was not a party to the covenant. Lifted

2.1.1 Jones v Lipman [1962] 1 All ER 442 
 （卖地，毁约卖给自己）

The court made an order for specific performance against both L

and his company, holding that specific performance cannot be
resisted by a vendor who has absolute ownership and control of the
company in which the land is vested授予. Veil lifted. Lifted

2.1.2 Fraud: HKSAR v Leung Yat Ming [1999] 2 HKLRD 402 
 （用

补贴以公司名义买房）

2
 The Court of Appeal held that where the justice of the case
required, it was permissible to go behind the corporate veil,
particularly where it was a cloak遮盖 for deception欺诈. Leung and
her husband had a financial interest in the property concerned and
were not merely仅仅 innocently无罪地 ordering their affairs. Lifted

2.1.3 (2) Using the corp structure to evade legal obligations is

objectionable (after obligations arise). Using a corp structure to
avoid the incurring of any legal obligations in the 1st place is
not objectionable. It’s legal to use corporate structure to avoid
future obligation. （legal用公司结构来avoid future obligation）

题外话 :the group has 3 cos to own 1 ship by each co. that can divide liability.
(better than a co has 3 ships.)

2.1.3 Bakri Bunker 
 Trading Co Ltd v Neptune [1986] HKLR 345


 （三只船，一家公司一只）

Court refused to lift the veil as there was no improper use of the separate
corporate entity principle. No lift

2.1.3 China
Ocean Shipping Co v Mitrans Shipping Co Ltd [1995]
HKLY 1058 

The Court of Appeal held that it was MMP who had chartered the ship
and that the claim against MS should fail. MS had not evaded their
legal obligations: they had simply used a corporate structure to avoid
incurring obligations. The corporate veil could not be lifted merely
because the corporate structure was used to ensure that certain
liabilities fall on another company within the group. Separate legal
entity No

2.1.3 Adams v Cape Industries plc [1990] 1 Ch 433 
 （公司法保护

group company structure）

The court is not entitled to lift the corporate veil as against a defendant
company which is the member of a corporate group merely because the
corporate structure has been used so as to ensure that the legal liability (if
any) in respect of particular future activities of the group (and correspondingly
the risk of enforcement of that liability) will fall on another member of the

3
 group rather than the defendant company. Whether or not this is desirable,
the right to use a corporate structure in this manner is inherent in our
corporate law. No lift

2.2 Statutory veil-lifting 


（1）Criminal acts： when a co commits 犯了a statutory offence法定

犯罪, and it is proved that the offence was committed with the consent同意 or
connivance纵容 of an officer concerned in the management of the co, then
he will be guilty有罪的 of the same offence. . (s 101E of the Criminal
Procedure Ordinance (Cap 221)) 纵容公司犯罪的管理者同罪

2.2.1 R v Mirchandani [1977] HKLR 523

It was held that the words ‘consented’ or ‘connived’ covered a situation

where the officers had deliberately故意地 shut their eyes to an obvious
means of knowledge. Both co and officers were liable. Liable

(2) Cap 32 s 275 Fraudulent trading 
 (Winding up and Miscellaneous

Provisions) Ordinance)

If in the course of the winding up of a company it appears that any

business of the company has been carried on with intent to defraud
creditors or for any fraudulent purpose, the court, on the application
of the Official Receiver, or the liquidator or any creditor or
contributory of the company, may, if it thinks proper to do so, declare
that any person who were knowingly parties to the carrying on of
the business with such fraudulent intent are personally liable,
without any limitation of liability, for all or any of the debts or other
liabilities of the company as the court may direct. Cap 32 S 275 （1）
有

2.2.2 Aktieselskabet Dansk Skibsfinansiering v 
 Brothers (2000) 3

HKCFAR 70 


4
 CFA（Court of Final Appeal） upheld the decision that the directors of WMI
had not been fraudulent. They honestly believed that the co would return to
prosperity. （子公司借钱还不起，以往都有母公司帮助） No lifted

Lord Hoffman explained that ‘It is well established that s 275 requires proof that
someone carried on the business of the company with fraudulent intent and that the
other directors sought to be held liable were knowingly party to the fraud … the
question whether the person carrying on the business was fraudulent was subjective主
观的 in the sense that he personally must have been dishonest.’

Chapter 5 corporate constitution

1. The current form of corporate constitution in HK: Articles of
Association – Model Articles (CO s80 default rules) Cap 622

2. The legal nature of the articles: CO s 86 Cap 622 (contractual

effect of articles)
-statutory contract between:
- company and each member
- a member and each other member.
Contractual rights as members qua members

2.1 Member enforcing articles against company Wood v Odessa Water Works
(1889) 42 Ch D 636 (只能用现金支付，不能用其他支付，董事会违反article)

It was argued by the claimant that the proposal of the directors was inconsistent with the
company's articles of association and therefore ultra vires.

Held: general meeting resolution inconsistent不符 with articles and injunction granted.
Action Ultra vires.

2.2 Company enforcing against member -- Hickman v Kent or Romney Marsh

Sheep-Breeders’ Assoc [1915] 1 Ch 881（article规定只能用仲裁）
Facts: Hickman was a member of the association but it proposed to expel him. He brought an
action for an injunction to prevent the expulsion, but the articles provided for

5
disputes between the association and its members to be referred to arbitration. Association
got stay of Court proceedings

Held: The court stayed the action so that the matter could be referred to arbitration - the
article was binding between the company and its members.

2.3 Rayfield v Hands [1960] 1 Ch 1 （article规定member必须要买shares）

Held: under article that director as members had to buy the shares when some members
want to exit. "directors cannot divest放弃 themselves of their character of members of the
company”

2.4 Ng Kin Kenneth v HK Football Association Ltd [1994] 1 HKC 734

(article 规定arbitrate范围，只在HKFA和members，不是members and association)

› Held: s.23 means AA constituted a valid written agreement to arbitrate between HKFA and
members within the Arbitration Ordinance. However, HKFA articles did not cover disputes
between members and association. The whole purpose of s 23(1) was to create a binding
agreement between the company and its members.

2.5 Limits on enforcement (Outsider’s Rights) article cannot protect outsider’s right:

Eley v Positive Government Security Life Assurance Co [1875] 1 Ex

D 20
The company articles bind only on the company and the members. However, in Eley's case,
the contract is only between an employee (not as a member) and a company and thus it is not
binding on the company.

Held : articles did NOT create contract between company and Eley in capacity as solicitor
even though Eley was shareholder at time of action (though not when article made)

members can enforce articles only in capacity as members: Eley; Hickman v Kent or Romney
Marsh.

Remedies for breach will not be damages but a declaration or injunction .

6
3 Alteration of constitution 章程的变更

3.1Mechanics (level of majority required): CO ss 88(2), (3) 


3.2Statutory protection of members against the change of their rights or liability


 through constitutional amendments: CO s 92. 


3.3 Limitation on majority shareholders’ power to alter

constitution in equity 
 限制大股东权力变更的权力。

3.3.1 Where company’s interest is engaged - Bona fide in the interest

of the company: Allen v Gold Reefs West Africa Ltd [1900] 1 Ch
656 


Lord Lindley said: power to alter subject to general principles of law and equity
applicable to majorities who bind minorities. Must be lawful AND bona fide for
benefit of company as a whole. Majority: No mala fides (bad faith) in present case. uk
and hk 一般会以这个case去判

When alteration only involves adjustment of interests among

3.3.2
shareholders: if what the majority benefited is what the minority has
been deprived of剥夺, then the alteration is not valid.
3.3.2 Greenhalgh v Ardene Cinemas Ltd [1951] Ch 286
(Stock split and new article: removal of pre-emption rights is allowed by special resolution
approved)

3.3.2 Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR

457 (不公平)

[Australian authority] Where the alternation修改 involves

3.3.3
appropriation挪用 of shares (where the company’s articles is silent on

7
the majority’s power to amend修改 the articles to grant themselves
the power to appropriate) - proper purpose and fairness:
Gambotto v WCP (1995) 182 CLR 432
Articles altered to allow 90% holder to expropriate minority shareholdings. when the
majority shareholder have 90% shares, he can force the minority to sell share to him.

Held:

- Where alteration involves expropriation of shares or proprietary rights: valid only if (i)
alteration was for a proper purpose, and (ii) the alteration is not oppressive (ie, must be fair in
procedure and price).
- Where alteration involves other conflicts between shareholders: valid unless beyond any
purpose contemplated by the articles or is oppressive.
On the facts, the alteration was invalid.
Importance placed on proprietary nature of shares.

Chapter 6 Director’s duty

1. To whom are the duties owed


1.1. Percival v Wright [1902] 2 Ch 421

关于董事职责的一个案例，认为董事只对公司承担忠诚义务，而不是
对个人股东负责。 这现在编入英国2006年公司法第170条。

事实：

尼克松导航公司的股东想出售他们的股票，并要求公司的秘书找到买
家。 公司的一些董事以每股12.10美元的价格购买了该股票，该价格是基
于独立估值的。 出售之后，股东们发现，在这次出售谈判之前和期间，
董事会已经参与了其他谈判，出售整个公司，如果这些股票已经实现，
这些股份就会大大增加。 原告起诉，声称违反诚信义务，应该告诉股东
这些谈判。
（理解：其实就是directors对董事会有诚意义务，但是对股东是没有诚
信义务的）。

8
 Held: There is no question of unfair dealing in this case. The directors did not
approach the shareholders with the view of obtaining their shares. The shareholders
approached the directors, and named the price at which they were desirous of selling.
The plaintiffs' case wholly fails, and must be dismissed with costs

2. Duty of care（the ability to avoid negligence）

2.1 Provision: CO s 465 (minimum objective standard) old law
think the decision made by directors that may stupid, but not have
duty.


Duty to exercise reasonable care, skill and diligence

2.2 Earlier case: subjective standard. (low standard)

Re City Equitable Fire Ins Co (1925) Ch 407 

§Diectors must exercise reasonable care that an ordinary man would exercise
on his own behalf . §.(what court think reasonable care: low Objective test)
§Director need not exhibit a greater degree of skill than may be expected from
a person of his knowledge and experience.(low subjective text, we do not have
a high expectation to you )
§Director not bound to give continuous attention to co.(diligence duty to
other people)
§For duties that can be left to another official, a director is usually justified in
trusting that official to act honestly (unless something suspicious is going on) .
§Duties will depend on circumstances of director's position and nature of
company.

is a UK company law case concerning directors' duties, and in particular the duty of care.
It is no longer good law, as it stipulated that a "subjective" standard of competence
applied. Now under Companies Act 2006 section 174, and given the development of the
common law in Re D'Jan of London Ltd, directors owe an objective standard of care
based on what should reasonably be expected from someone in their position.

Higher standard: changed commercial conditions and roles of directors.

9
 2.3 Cases on minimum objective standard: NCO s465 minimum objective
standard.

2.3.1 Re D’Jan of London Limited [1993] BCC 646

The duty of care that a director owed to a company at common law was
equivalent to that in s 214(4) of the Insolvency Act 1986. In not reading the proposal
before signing it, D had been negligent. Although all the shareholders could be taken
to have known of the proposal, or if they had known they would have done nothing
about it, they could not be taken to have in some way authorised the negligent act of
D since they did not give any thought to the manner in which the proposal was
completed. This was an appropriate case for the court to exercise its discretion under s
727 of the Companies Act 1985 in that the negligence of D was not gross and at the
time the proposal was completed the only persons whose interests were foreseeably
being put at risk were those of D and his wife. D should accordingly be only obliged
to compensate the company to the amount of any sum that he would receive by way
of dividend in the liquidation of the company.

2.3.1 Dorchester Finance v Stebbing (Foster J)

s, p, h 三个 directors, S 把公司钱借出去，导致公司损失。虽然 p, h 并没有
管理公司
Held: All 3 were negligent and responsible to make good co's losses
(executive or non-executive) because P and H are accountants. They
are professional in this area. The court absolute thinks they know,
even they did not manage the co.

2.3.1 AWA v Daniels (1992) 9 ACSR 383


AWA managers造成公司损失, 告auditor, auditor说manager contributory
negligence

Held: Board allowed negligent management that caused part of loss.

The board of directors were negligent. If use Re city equitable, it ok.
Because of low standard.
•Duty arises both in equity and in tort .
•Modern standard of care higher than in Re City Equitable .
•Minimum objective standards .
•Subjective aspects of test - standard can vary depending on:

10
 - Whether director has held himself out as having special skills or
experience
- Size and business of company.

2.4. HK authority before codification(编撰):

Law Wai Duen v Boldwin [2002] 4 HKC 403
非执行董事inspect公司账户,necessary to carry out their duty, 公平责任？

•Executive directors and non-executive directors have the same responsibility in law
as to the management of the company’s business .
•Including responsibilities with regard to the finances of the company and as regards
accounting to the shareholders for the company's finances .
•Limits on ability of directors to divest responsibility through delegation.

Summary: standard of care

•Standard of care in HK: unclear in the past. Now follows NCO s465 minimum
objective standard.
•One view: Law Wai Duen v Boldwin Construction as supporting
•subjective test in Re City Equitable.
•Alternative view: a higher standard today in equity and/or tort.
- Dual objective/subjective test.
•Equitable duty:
- Re City Equitable imposes minimum objective standards
- Modern approach under English and Australian cases, and see comments
of Rogers VP in Law Wai Duen v Baldwin Construction [2001] 4 HKC 403
•Negligence:
- Base Metal Trading Ltd v Shamurin [2005] 2 BCLC 171
- AWA v Daniels; Re HIH Insurance Ltd (2002) 41 ACSR 72 at 166-8; ASIC
v Rich.
•Contract.
Summary: director's position in the company

•Can a higher or lower standard be imposed depending on the director's position in the
company? •All directors (inc . non-executive directors) are subject to the same duties: Law
Wai Duen; Dorchester Finance; AWA v Daniels .

•A higher standard might be imposed due to the special skills or experience of the director:
Re City Equitable Fire Ins Co; AWA case .

•Also it may be that the position held by the director in the company (such as chairman of
board) could raise the standard: ASIC v Rich; Re City Equitable Fire Ins Co.

•Ratification Chingtung Futures Ltd (in liquidation) v Lai Cheuk Kwan [1002] 2 HKC 637

11
3. Fiduciary Duty
3.1 Definition: Hospital Products Ltd v United States Surgical
Corporation (1984) 55 ALR 417

Held : “Inherent in the nature of the fiduciary relationship itself is a position of
disadvantage or vulnerability on the part of one of the parties which causes him to
place reliance upon the other and requires the protection of equity acting upon the
conscience of that other.”

Fiduciary duty:
1.Duty to act bona fide in the best interests of the company (subjective In mind to
have good faith
2.Duty to exercise powers for proper purposes (objective test, you can truly
believe that dilute the shares is important to the company, but it is not a proper
purpose, it is breach the fiduciary duty)
3.Duty to avoid conflict of interests e.g you must not make secret profit

3.2 Duty to act bona fide in the best interest of the company:

Re Smith & Fawcett Ltd [1942] Ch 304


拒绝将股份转让给遗嘱指明的儿子
Held: no evidence to show that director did not act bona fide.

Lord Greene: “They [the directors] must exercise their discretion bona fide in what they
consider – not what the court may consider – tobe the interests of the company, and not for
any collateral purposes
是原告人的訴訟有其他附帶的目的（collateral purpose）亦因而是濫用司法程序
Bishopgate Investment Management Ltd (in Iiq) v Maxwell (No 2)
[1994] 1 All ER 261 .

3.3 Duty to exercise power for proper purpose:

3.3.1 Howard Smith v Ampol Petroleum Ltd [1974] AC 821;
两个大股东并不希望公司被收购，准备联合对抗。而董事局发放新股给有意收
购者去against 两个大股东的55%的shares（尽管当时公司是需要钱的）。 法院
裁定这个是董事局以不正确的目的去运用权力。发型股票无效。

12
 Held: that the issue of shares was within power but that it was
exercised for an improper purpose

3.3.1 Hogg v Cramphorn [1966] 3 All ER 420

Held: Buckley J, writing for the Court, held that the new shares issued by the
directors are invalid. The directors violated their duties as directors by issuing shares
for the purpose of preventing the takeover. The power to issue shares creates a
fiduciary duty and must only be exercised in order to raise capital and not for any
other purposes such as to prevent a takeover. The act could not be justified on the
basis that the directors honestly believed that it would be in the best interest of the
company. The improper issuance of shares can only be made valid if the decision
is ratified by the shareholders at a general meeting, with no votes allowed to the
newly issued shares.

3.4 Duty to avoid conflict of interests

3.4.1. Conflict rule: (if you have conflict of interest, you should
disclosure)
Transvaal Lands Co v New Belgium (Transvaal) Land and
Development Co [1914] 2 Ch 488 .
Case Decision:
Samuel, the director of Transvaal breached their fiduciary duty by putting first their personal
gain in acquiring shares from New Belgium rather than promoting the interest of Transvaal.
Even though Harvey was only a shareholder in New Belgium, it was still necessary for them
to give the directors of Transvaal a notice by disclosing their position and interest in New
Belgium.
Importance of the Case:
The importance of citing the case is that the fiduciary
duty of avoiding conflict of interest blankets direct and
indirect interests.
Disclosure of interests – ss 536 to 538, 542 NCO
383 Companies (Disclosure of Information about Benefits of Directors) Regulation
ss 383, 407(4), 451, 452(2), Companies (Disclosure of Information about Benefits of
Directors) Regulation

13
ss 383, 388 to 391, 452(3), Companies (Directors’ Report) Regulation, Companies
(Disclosure of Information about Benefits of Directors) Regulation (remuneration of
directors & Loans to directors)

3.4.2. Profit rule: .(you cannot make a secret profit)

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
diverting business opportunity away from company,董事想成立子公司买电影院，然
后卖给公司
尽管公司也赚了钱，但是董事不应该从中赚钱
Held: that the defendants had made their profits “by reason of the fact that they were
directors of Regal and in the course of the execution of that office”. They therefore had to
account for their profits to the company.
If directors acted honestly, doesn’t matter. Or get general meeting approval.
What if the board has first considered the opportunity and rejected it? See Queensland
Mines Ltd v Hudson (1978) 18 ALR 1 (PC); Peso Silver Mines v Cropper (1966) 58 DLR
(2d) 1; but cf Furs Ltd v Tomkies (1936) 54 CLR 583 .
What if the director came across the business opportunity in his private capacity? Does’t
matter, you are still the director of the co See Industrial Development Consultants Ltd v
Cooley [1972] 2 All ER 162
Where the business opportunity is only speculative: : no breach of duty. “If at the time the
business opportunity was nebulous and uncertain, it would be unfair to deprive the
fiduciary of the benefit of
the matured opportunity once this occurred.” Kishimoto Sangyo Co Ltd v Akio Oba (CA)
[1996] 2 HKC 260
 Profit rule: not make secret profit
 Take advantage of company and position to take away the
opportunities of the company
who by use of a fiduciary position make a profit, being liable to account for that profit,
in no way depends on fraud, or absence of bona fide.
3.4.3Misappropriation rule：Not permissible for directors to divert
company assets to themselves:
Re George Newman and Co (1895) 1 Ch 674 at 686

3.4.4 Disclosure
 At general law:

Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch
App 558
提出的佣金没有披露在 GM.

14
 Held: The general equitable considerations of directors' conflict of interest in
transactions may be modified by provisions in company constitutions, or by
circumstances of appointment, or by the informed and effective consent of the
person to whom the duty is owed, allowing directors to have dealings which
would otherwise be in breach of fiduciary duty. He didn't state his interest to the
company or the general meeting, but to some other persons who were in just as
much a fiduciary position as he was himself. Found C was liable for the whole of
the profits which were obtained

Man Luen Corp v Sun King Electronic Printed Circuit Board Factory
Ltd [1981] 1 HKC 407


三个公司董事合伙建立了一个公司，并用公司卖商品给现在的公司。他们只在董事局
上披露了这件事情，并没有在股东大会上讲，所以无效。

Held：Effects of non-disclosure: transaction voidable at election of company Man

Luen Corp.
you need disclosed to general meeting to shareholders. the co. can afford the
transaction. the co. has choice.
under general law you have duty to disclosed.课堂笔记
statutory law--- BOD
general law-----general meeting
Statutory duties: CO ss 536-539.


4. Remedies补救方法:
Breach of equitable duties:
- Account of profits (independent of whether company has suffered any loss)
- Constructive trust (e.g appropriate for property, tracing)
- Rescission, setting aside the transaction, stop contract
- Injunction (stop someone from doing sth)
- Equitable compensation
- Re third parties (may be set aside if shown that the contract was aware [not
actual knowledge] a directors break of duty)- rescission; constructive trust.
Breach of common law duties:
- Damages

5. Ratification:
Bamford v Bamford [1970] Ch 212;

15
It is possible that company not sue director, want to ratify your breach.
General meeting is the only place to ratify the fiduciary duty. GM has the
authority to sign off.
CO s473 only by resolution of general meeting
Ratification of conduct by director involving negligence, etc.

Chapter8 Share capital

1.Transfer of shares
1.1 restriction on transfer of shares in private companies (Co s11)
1.2 Directors can refuse to register shares at its discretion (MA
private co s2(2))
1.3Re Smith and Fawcett Ltd[1949]Ch 304 (fiduciary duty 中的 case)
“Where the articles provide a discretion, the court must be satisfied that the
discretion is exercised bona fide and honestly, but the court is not entitled to
interfere with a decision with which it merely disagrees.” Simon Freemen at
228 (Jones, J.)只要 director 的 refuse bona fide，法院就不会干预

2. Prohibition on financial assistance

Prohibiting purchasing of companies having substantial cash and arranging so the purchase
money is lent to the purchaser.
Resources of target company should not be used directly or indirectly to assists purchase

2.1 Restriction imposed on company under s 275 NCO.

Consequences of breach.
"Financial assistance" that is prohibited: s 274 NCO. See s 303 NCO et seq.
Egs:
- Gifts.
- Loans. If the company give up the loan to the purchaser
- Guarantees.

16
ss 147 & 148 NCO
meaning of financial assistance: Any transaction for the purpose of financing the acquisition
may involve provision of financial assistance

Chaston v SWP [2003] 1 BCLC 675 (CA)

DRCH 的子公司 help 收购者支付费用，在收购者收购它母公司的时候
Held：DRC provide financial assistance for the purpose of SWP's acquisition of shares in
the parent company

MT Realisations v Digital Equipment

CA held: No. Because MTI was already entitled to those amounts owing from digital UK
to MTR as these were book debts subject to a charge in favour of MTI. Accordingly, MTR
did not provide any assistance to MTI at all

2.2 Statutory Exception

2.2.1 pursuant (依据) to solvency test
2.2.2 Principle purpose exceptions
Financial assistance provided incidental to some other larger purpose: s 277-281 NCO

Brady v Brady [1989] AC 755

两兄弟之间的矛盾，打破 deadlock，支持其中一个兄弟购买另一个的股份
Held: No. Provision of financial assistance was essence of scheme and not incidental to some
other larger purpose. Because the purpose of assistance is the break the deadlock , the
company is financing buyout that is not allowed.

2.2.3 Miscellaneous
using Payment of dividends to buyout.
Bonus shares.
Permissible reductions of capital.
Permissible redemptions of shares .
Arrangements under ss. 668 to 670, 673, 674, 677
S. 237 or 254 Cap. 32 (to be retitled Companies (Winding up and Miscellaneous Provisions)
Ordinance

2.3 Pre-emptive rights (优先认股权)

Outsiders may be precluded from joining company, existing shareholders are not free to
sell or otherwise dispose of their shares except in favour of existing shareholders so long as
a member can be found to purchase the shares at a fair price. See ss 151 to 152, 158 NCO

17
Chapter 9 Loan Capital

1．Fixed charge vs floating charge (Cap32 s267 s267a)

When a co goes into liquidation, a floating charge is invalid if it was created within 12
months before the winding up commences and the co is unable to pay its debt at that
time or becomes unable to pay its debt in consequence of the transaction. 



The period is extended to two years for a floating charge created in favour of a
connected person. 


2. Preferential creditors in priority of floating charges（Cap32

s79&265）
In the event of winding up, certain preferential creditors are paid after the fixed
charge holders but before the floating charge holders.
Cap. 32 s. 265 Preferential payments
“(3B) The [preferential] debts specified in subsection (1) shall, so far as the assets of
the company available for payment of general creditors are insufficient to meet those
debts, have priority over the claims of holders of debentures under any charge
created as a floating charge by the company, and shall be paid accordingly out of
any property comprised in or subject to the charge. * * *”

Key element: whether overall control lies with the chargor?

• The essence of the floating charge is that the assets that are the subject matter of
the security remain under the management and control of the chargor.

根据条文确定是什么 charge：
In re Yorkshire Woolcombers Association Limited [1902] 2 Ch. 284
at 295, per Romer LJ: （floating charge）
Defined floating charge with 3 characteristics

Re Brightlife （1986）(cont’d) （floating charge）

Issue: Whether the so-called “specific” charge on book debts constitute fixed charge
or floating charge?
Held: Floating charge, not fixed charge.

Agnew v Comm. Inland Revenue[2001] 2 BCLC 36, PC on appeal

from NZ
（floating charge）

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Freedom to deal without consent
 • i.e. free to use the proceeds of book debts
Held: Floating charge

Re Spectrum [2005] 2 AC 680, HL

Held: （Floating charge）

3．Automatic crystallization clause

1.terms in contract. E.g default in 3 consecutive monthes
(automatic crystallization clause without bank intervention )
2.negative plagdge clause (even no attempts) co cannot make charge with same
asset with other party.
3. winding up
4.co cease business

Chapter10 Liquidation
1. Priority of claims
1.1 fixed charge
As discussed above, one advantage of having a security is that secured creditors
can stand outside the insolvency by enforcing their secured claims against the
company property subject to fixed charges, if its value is sufficient to cover the
debt. 


1.2 preferential payments: sequence(Cap32 s265)

(i) Category A – relating to employees: the wages/salary of employees for a
specified period of amount (4 months; $8,000), severance payment (max. $8,000),
long-service payment (max. $8,000), wages in lieu of notice (max. one month;
$2,000). [s.265(1)(b), (c), (ca) to (cj) & 1B, Cap 32]
(ii)Category B – relating to the Government: all statutory debts (i.e. tax and rates)
due and payable by the company to the Government within the 12 months before
the appointment of a provisional liquidator, or the date of winding up
commencement [s.265(1)(d)].
(iii) Category C – relating to small depositors (max.$100,000) of licen if bank
winding up）sed banks (the companies being wound up) [s.265(1)(db), (5D),
(5E), (5F) & (6)]
 （
(iv) Category D – relating to the claims against the insurers (the companies being
wound up) [s.265(1)(e), (ea) & (f)] （if the insurance company winding up）

Note: The debts in each category rank equally among themselves and must be
paid in full unless the assets are insufficient to meet them, in which case they will
abate in equal proportions [ss.265(3), (3A), (3AAA)].

1.3 Floating charge

Effect of floating charge in winding up

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 Amended s 267 and added s267A （S267 267A, floating charge connected person
and non connected person）
• To prevent the mischief of last minute floating charges being created by directors or
controllers of companies in favour of themselves.
• When a co goes into liquidation, a floating charge is invalid if it was created within 12
months before the winding up commences and the co is unable to pay its debt at that time
or becomes unable to pay its debt in consequence of the transaction. （become insolvent
because the creation of the charge）
• New s267A extends the period to two years for a floating charge created in favour of a
connected person.
• s267(3) provides exceptions to the amount of the consideration for the creation of the
charge in the form of money paid to or property or services supplied to the co at the same
time.
a（exception：within 12 monthes to take a floating charge。我是之前的 creditor，本来
有一个 charge， 现在我想追加一个 floating charge， 但是借给公司的钱不变，那我
要做一个 consideration， 投入新的钱还有设备给这家公司，才能得到这个 floating
charge 的担保。）
总结一下：
connected person : floating charge invaild, if you create the charge within 2 years
non-connected person: floating charge become invalid, if you create charge12 month before
the winding up or company insolvent at the time of creation of floating charge
if you inject fresh money, there is a new value of the floating charge, then we make a
exception for the charge

1.4 Unsecured creditor: pari passu principle

s.250: “Subject to the provisions of this Ordinance as to preferential payments, the
property of a company shall, on its winding up, be applied in satisfaction of its liabilities
pari passu, and, subject to such application, shall, unless the articles otherwise provide, be
distributed among the members according to their rights and interests in the company.”

2. Winding up

Chapter11 Members’ remedies

1.The rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189
Foss v Harbottle (1843) 2 Hare 461, 67 ER 189
两个minority shs 觉得董事管理不当导致公司损失，They sought an order to hold the dirs
personally liable for the co’s loss

Held: Sh/ers could not bring such an action as the misconduct was done to the co. The sole
right to bring such proceedings belonged to the co... （只有公司可以sue）

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The rule in the case:
• Co is a separate legal entity it can sue & be sued
in its own name.
• If a wrong is done to the co, it is up to the co to take legal action to protect its own rights
• Generally members cannot sue on behalf of the co if the co has been wronged

two basic principles

(1) “Proper plaintiff” principle: if a wrong is done to a co then only the company may sue,
and;
(but court should give exception to minority shareholder to sue the director)
(2) “Internal management” principle: the court will not interfere with the internal
management of companies acting within their powers.

The powers of a co may be exercised either by the sh/ers in GM or

by the board of dirs. （只有general meeting和董事会能够代表公司
的名义sue）

Wrongdoers：
• Will dirs sue themselves on behalf of the co?
• Problem: People causing harm to the co
also control it & so dirs can prevent it taking action to remedy the harm.
• Normally action may be taken against the dirs/ majority shareholders when
1. the co is taken over and comes under new management
2．if the co goes into liquidation, the liquidator takes

Protection of Co and Sh/er’s Interests

• Common Law Protection

 Exceptions to the Foss rule.

Personal rights action, Derivative action
• Statutory Protection （offer statutory protection to minority shareholder）
A special resolution is required for important matters. 

Certain votes are to be disregarded in conflict of interests situation. 

Statutory derivative action may be brought by members in the event of misconduct.


Member’s unfair prejudicial claim. 


21
 Member’s petition to winding up.................. 


1.1 Derivative action in common law (individual能以公司名义sue

董事)
–Exceptions to the rule in Foss v Harbottle

1.1.1 Ultra vires or illegal conduct

• Unlawful return of capital, unlawful financial assistance

• Common law derivative action or personal action 

(Ultra vires: beyond the company’s power, the article confine the companyis
power
in a specific extent. sth the company cannot do.)
Common law derivative action or Personal action

1.1.2 The matter could be done only by a prescribed majority of

members (Act uses ordinary resolution when special resolution is
required by the articles)

Edwards v. Halliwell [1950] 2 All ER 1064 at 1067 


Facts：a challenge by a union member on the union’s decision to increase
membership fees – this change (of membership fees) required 2/3 majority vote on
ballot 


Common law derivative action 


1.1.3 Personal claims（member’s personal right is infringed）

Minority can sue the majority & the co itself if a “personal right” (e.g. based upon
legislation, the arts, separate contract) has been infringed. 

Pender v Lushington (1877) 6 ch D 70

Facts: the arts stated that each sh/er was only entitled to cast 1 vote for every 10
shares held, up to a max of 100 votes.
P split his shareholding among nominees to defeat the provision of the arts. The
chairman refused to accept the nominees’ votes. P sought a court order to overturn the
disallowance
Held: P could sue as his “personal right” to vote was infringed.

if there infer the personal right, then individuals allowed to bring the ledigation,
but it is not a real exception.
Personal action 


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 1.1.4 Fraud in the minority
• Equitable fraud: Abuse or misuse of power, including director’s breach of fiduciary
duty
• Wrongdoers are in control of the co 

Cook v Deek [1916] 1 AC 554
Facts:
• 4 dirs held 25% each of shares.
• They negotiated a contract for the co. 3 of the dirs fell out with P.
• They then diverted the contract to a new co which they had formed and used their
voting majority to pass a resolution declaring that the 1st co (of which P was still a dir) had
no interest in the contract.
Held: the dirs had breached their fiduciary duties to act bona fide in the interest of
the co by taking a commercial opportunity belonging to it. They had committed a fraud on
the minority (P) by abusing their power (majority voting rights to pass the resolution)
causing harm to the 1st co. They had to account to the 1st co for the profits they made.
Common law derivative action

2. Derivative action in general law

2.1 Fraud on the minority/company: Cook v Deek [1916]
• Equitable fraud: meaning Abuse or misuse of power by those in control of a co.
• The minority can bring a derivative action (in the name of the co). Member’s right to sue is
derived from the co.

3.Statutory derivative action

3.1 Provisions: CO ss 732, 733
•Member of company or of associated company may sue for misconduct with the leave of
the court. (ss 732) 

“Misconduct”
• Action can be brought for “misconduct” (不當行為), meaning “fraud, negligence,
breach of duty, default in compliance with any Ordinance or rule of law” committed
against a company. (ss 731)

23
 • “Misconduct” is a concept wider than “equitable fraud” (abuse of power) under the
common law derivative action.

3.2 Case authorities

Criteria for granting leave (s733) ??????
1.In the company’s interests
“on the face of the application” “appears to be”: low threshold (it seems to be the interest of
the company)
Re F & S Express Ltd [2005] 4 HKLRD 743
(an arguable case can be shown to subsist)
2.There is a serious question to be tried （to be decide by the court）
Also relatively low threshold (门槛)
The court will not normally enter into the merits of the proposed action to any great degree.
(Re F & S Express)
Only requires the plaintiff to show at least a probability that the company will succeed.
(Charlton v Baber (2003) 47 ACSR 31, 45)
3.Company has not brought proceedings 

4.Member has served a written notice on the co 
(s733(3)) 



Effect of ratification: s 734
• Ratification by the members does not bar derivative action
• Not a ground for the court to refuse to grant leave, but the court may take into account.
• Common law derivative actions still possible (s732 (6)) （most shs bring SDA）

4. “Unfairly prejudicial” remedies

4.1 Provisions: CO s 724, 725
724-(1) The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by
a member of a company, it considers that—
(a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial
to the interests of the members generally or of one or more members (including the member);
or
(b) an actual or proposed act or omission of the company (including one done or made on
behalf of the company) is or would be so prejudicial.
(it’s a personal claims, they can ask the company or the member to do sth, like ask the
member to purchase shares)
725-(1) The Court may—
(a) for the purposes of section 724(1), make any order that it thinks fit for giving relief in
respect of the matter mentioned in section 724(1)(a) or (b);

24
725-(2) Without limiting subsection (1), the Court—
(a) may make any or all of the following orders—
(i) an order—
(A) restraining the continuance of the conduct of the company’s affairs in the manner
mentioned in section 724(1)(a) or (2)(a);
(B) restraining the doing of the act mentioned in section 724(1)(b) or (2)(b); or
(C) requiring the doing of an act that, as mentioned in section 724(1)(b) or (2)(b), the
company has omitted, or has proposed to omit, to do;
(ii) an order that proceedings that the Court thinks fit be brought in the company’s name
against any person, and on any terms, that the Court so orders;
(iii) an order appointing a
receiver or manager of either or both of the following—
(A) The company’s property, or any part of the property
(B) The company’s business, or any part of the business
s 725 2 a
(iv) Any other order other that the Court thinks fit, whether
(A) for regulating the conduct of the company’s affairs in future; (B) for the purchase of the
shares of any member of the company by another member of the company;
(C) for the
purchase of the shares of any member of the company by the company and the reduction
accordingly of the company’s capital; or
(D) for any other purpose; and

4.2 “unfair” “prejudicial”

•Prejudice described as “injury, detriment or damage”.
• Unfair “not fair or equitable; unjust”.
Re Taiwa Land Investment Co Ltd. [1981] HKC 277
• Legitimate expectation: Must be understood in commercial context.
O’Neill v Phillips [1999] UKHL 24

4.3 Objective test

Unfairness is objective test: “...it is not necessary...to show that the persons who had de
facto control of the company have acted as they did in the conscious knowledge what this
was unfair...the test...is whether a reasonable bystander observing the consequences of
their conduct, would regard it as having unfairly prejudiced the petitioner’s interests.”
(Slade, J) Re RA Noble & Sons [1983] BCLC 273 pp.290-1; see also
Re Taiwa Land Investment Co. Ltd.

4.4 Case example on unfairly prejudicial conduct

4.4.1 Lost of trust and confidence in quasi-partnership situation:
Ebrahimi v Westbourne (1972, HL)A.C. 360
Facts: Mr. Ebrahimi and Mr. Nazar were partners. They decided to incorporate a
company. They agreed that Shares not to be transferred 
 without directors’ consent


All profits distributed by Directors’ remuneration rather than dividends for tax reason.
Later, N’s son was appointed as a director and E and N transferred shares to him. 


25
 After a falling out between the directors, N & N’s son removed E by ordinary
resolution under CO 1948 (UK) s 184 (equiv HK CO S 462) 

Mr. E sue in the court: 

– Buy-out order for oppression and misconduct under UK CA 1948 s 210 

– Winding up petition on just and equitable grounds: UK CA 1948 s 222(f) 

Held: Winding up the co.
– E and N had joined in the formation of the company on the basis that the character
of the association, .......,that E was entitled to participate in the management, would, as
a matter of personal relation and good faith, remain the same; and that, N having in
effect repudiated that relationship and E having lost his right to a share in the profits
and being in that respect at the mercy of N and N’s son and, the proper course being
unable to dispose of his interest without their consent was to dissolve the association
by winding up the company.
•Breaches of understanding that equity would uphold: Legitimate expectations based
on an understanding between the parties in “quasi-partnership” situation.
• There must be a personal relationship or a relationship of mutual trust and
confidence. The mere fact that it is a small co would not suffice.
• Mutual rights of parties might not be exhaustively captured in the legal
documentation – background of quasi-partnership. But petitioner must establish the
existence of the agreement or understanding.

4.4.2 Inadequate dividend payment whiles the directors obtain returns

through directorial remunerations and other benefits:
Re Sam Weller and Sons Ltd [1990] Ch 682

4.4.3 Diversion of company funds for own benefit

Sanford v Sanford Courier Pty Ltd (1986) 5 ACLC 394

4.4.4 Misapplication of company funds for own benefit

Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384

(shs can obtain benefit for ask members to purchase, or wind up co.)

5. Just and equitable winding up

Provision:(Cap 32 s 177(1)(f))
Deadlock: Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 


26
 Failure of substratum (basis on which company was 
 formed):
Re Haven Gold Mining Co (1882) 20 Ch D 151 

Loss of confidence: Ebrahimi v Westbourne Galleries 
 Ltd
[1973] AC 360 

Company incorporated to defraud: Re TE Brinsmead & 
 Sons
Ltd [1987] 1 Ch 406 

Public interest: ASC v AS Nominees Ltd (1995) 52 FCR 504 


Chapter 12 Auditor’s Liability

1. Standard of care
1.1 (1)What a reasonably competent practitioner would do;

For professionals, the test is ‘what a reasonably competent practitioner would do

having regard to the standards normally adopted in his profession’. (Keep Point
Development Ltd. v Chan Chi Yim [2000] 3 HKLRD 166) 


1.1 (2) refer to codes of practice and industry standard

In determining the appropriate standard of care, it is necessary to consider the

prevailing standards of professional conduct and practices. (Thomsen v Johnson
Burglar Alarms Co Ltd [2001] 3 HKLRD 571)

• In preparing the financial statements of a co the auditor has to abide by the
Statements of Standard Accounting Practice (SSAPs) issued by the HK Society of
Accountants.

• The ct in Peter PF Chan v HK Society of Accountants [2001] 1 HKLRD 687
emphasized that the SSAPs were required to be followed (though they do not have the
status of law) and any deviation from them should only be made in exceptional cirs
and had to be justified. 


1.2 Tort liability arising from negligent misstatement

To Whom is the Duty of Care Owed?

27
 Negligent work of an accountant/auditor will not only mean a breach of the contractual
duties owed to the client-co, but possibly an actionable wrong in tort if there is a duty of
care owing to any 3/p (whether auditors are responsible. the 3 party do not have
contractual relation to you,they can sue you base on tort)
Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] A.C.
465
they want to sue the bank of the company.
the bank and should foresee that someone will rely on the report,
then you have a duty of care on that person.

• Foreseeability and proximity

• ‘If in a sphere in which a person is so placed that others could reasonably rely upon his
judgment or his skill or upon his ability to make careful inquiry, a person takes it upon
himself to give info or advice to, or allows his info or advice to be passed on to, another
person who, as he knows or should know, will place reliance upon it, then a duty of care will
arise.’

The Rule in Hedley Byrne:

For an action for negligent advice to succeed there must be:
(a) a special relationship between giver and receiver of advice
(b) assumption of a duty to take care (forseeable)
(c) reliance on the advice

(d) recognised damage caused.

2. Cases
2.1 auditors & shareholders
Killick v Price Waterhouse Coopers (a firm) [2001] 1 BCLC 65
Acc/t was appointed by the co to value its shares for the purpose of setting the price at
which shares owned by a sh/er were to be compulsorily acquired pursuant to the arts.
He was found to owe a duty of care to the sh/er in the conduct of the valuation. 

The court had considered the following factors, inter alia, 

(a) Acc/t knew the purpose of his appt, the no of shares involved & 
the consequences of
the valuation; 

(b) The outgoing sh/ers were not involved in the appt of the acc/t who was aware of that;


(c) In the event of the acc/t being negligent in making the valuation, the only persons who
would suffer are the outgoing sh/ers, not the co; 

(d) There was no risk that a finding of liability would involve an indeterminate risk to an
indeterminate number of people for an indeterminate period. 


28
 2.2 Auditors & Takeover Bidders
Caparo Industries plc v Dickman [1990] 2 AC 605
P was a sh/er in F plc. 1984 a/cs were audited by the Ds. After a/cs published, P purchased
further shares in F, ultimately making a takeover bid which was successful. P alleged that
they had relied on the 1984 a/cs which should have shown a profit of £2.2m instead of
£1.3m.
• Issue: Was there a duty of care owed to P?
• Held: NO. The auditors were not liable to P because neither as sh/ers nor as potential
investors were they in the position ‘neighbour’. There was insufficient proximity between
the auditors and the co’s sh/ers or potential investor. （so the auditor is not liable to the
bidder, since takeover is the another purpose.）

‘If the statutory a/cs are prepared & distributed for certain ltd purposes, can there
nevertheless be imposed on auditors an additional common law duty to individual
sh/ers who choose to use them for another purpose without the prior knowledge of the
auditors? The answer must be No.’ (per Lord Jauncey) 


2.3 Auditors & Lenders

Al Saudi Banque v Clark Pixley (a firm) [1990] Ch 313
Auditors were found to have owed no duty of care to a bank which lent money to the co,
regardless of whether the bank was an existing creditor of the co making further advances or
was only a potential creditor of the co. （because the report is not for the purpose that give
advise for the bank to loan，not a sufficiently close or direct relationship

29