Introduction to Company Law

Q1.

1. There are the difference between a private company limited by portions and a public company, as followers:

Thymineransfer portions

A private company limited by portions is restricted to reassign portion harmonizing to its articles but a public company is non restricted.

Nitrogenumber of members

For a private company limited by portions, the figure of member is limited to 50. However, the figure of member of a public company is no restriction.

Secondubscription

Any invitation to the populace to subscribe for any portions or unsecured bonds of the company is prohibited in a private company limited by portions. However, it does non curtail a public company.

Degrees of regulative governments

The demands of a private company limited by portions in the Companies Ordinance are lower than those of a public company. Its one-year returns registering with the Companies Registry are less information than 1s of a public company. In add-on, it does non hold to register its histories with the Companies Registry so that its fiscal information is non in the public sphere. Therefore, the cost of conformity of a private company limited by portions is lower than a public company.

Functions

A private company limited by portions can non go a listed company since going a listed company requires first going a public company. Therefore, a public company may go a listed company.

Hazard

A private company limited by portions is the deficiency of freedom to interchange portions and the low transparence degree of their histories. It leads to a higher hazard investing. Consequently, it is lower degree of capital investing. To opposite, a public company is lower hazard investing.

( Unit 1 P.32-33 )

2. In this instance, it is about the corporate head covering between the company and its members. That is to state, it considers whether the rights and liabilities of the company are treated as separate from the rights and liabilities of its members in company jurisprudence.

Raising the corporate head covering is no guidelines in jurisprudence but there are many jurisprudence instances in old old ages. By and large, a company is a separate legal entity which its members are lawfully permitted to conceal behind the corporate head covering harmonizing to Salomon v. A Salomon & A ; Co Ltd [ 1897 ] AC 22. However, the tribunals may raise the head covering because of obtaining improper advantages, perpetrate fraud or conceal illegal activities. The corporate head covering seems a fake or facade so that the tribunals would raise the head covering. For illustration, the tribunals determine the condemnable duty of a company ‘s staff or a manager acts venally with the company ‘s belongings.

In Re H and others ( Restraint Order: Realisable Property ) [ 1996 ] 2 All ER 391, a batch of persons failed fraudulently to pay more than ?100 million in excise responsibility. Two household companies had the sum of owned 100 % portions. The authorities applied a tribunal order to keep them for covering with the companies’ belongings and their ain belongings. The Court of Appeal held that it was a leading facie instance that the companies had been used for the deceitful equivocation of excise responsibility. Furthermore, it lifted the corporate head covering because it treated the companies’ belongings as the individuals’ ain belongings.

John suggests that Kelvin sell his portions to Leo who is John ‘s brother. However, Leo is a fresh alumnus so that he has no money to pay in Genius Limited. John wants to pay Kelvin HK $ 700,000 from the company. After that, John as a stockholder of Genius Limited should have dividends and so he will utilize the dividends to put off the amount of HK $ 700,000. Therefore, he will reassign the 30 % portions to Leo Free of charge. It is improper method because it treats the companies’ belongings as his ain belongings in conformity with the instance. He does non hold right to utilize the company ‘s belongings to put off Leo ‘s liability. At the same, his behaviour is unjust for others and David is deprived of his right to purchase the portions. Hence, it is an improper advantage.

In decision, the belongings of the company is used to put off Leo ‘s liability and the behaviour is illegal. The sum of HK $ 700,000 is the company ‘s belongings, non the members.

( Unit 1 P.26 )

3. In a private company, its stockholders ‘ right is restricted to reassign portions in conformity with its articles. By and large, there is a ‘pre-emptive right ‘ which is a stockholder must foremost supply his portions to other stockholders if he wants to sell and reassign them. After the other stockholders reject, he offers to a 3rd party and can non supply a price reduction on the portions. That is to state, the merchandising monetary value can non be lower than the sum of selling to other stockholders.

The ground is that a private company is really little graduated table and there is trust among stockholders. When a stockholder withdraws in the company, hence, the other stockholders have an chance to find whether they accept a new stockholder.

In this instance, John should hold a anterior right over David due to the above ground. Genius Limited is a private company which the articles restrict to reassign portions. In add-on, John is the bulk stockholder in the company. As a consequence, Kelvin should follow with its articles and he should foremost offer his portion to John who has a preemptive right. If John refuses Kelvin ‘s portions, Kelvin has a opportunity to sell David which is the 3rd party. However, the merchandising monetary value can non be lower than the monetary value of selling to John.

4. Model articles should be read to find whether managers refuse any transportation of portions. By and large, it allows managers refuse the transportation. The ground is that they can first offer their portions to bing stockholders and the behaviour is a preemptive right. That is to state, Kelvin should foremost offer his portions to John.

Except that, managers provide portion buy-back that is to offer portions back to the company. In other words, Genius Limited may buy back Kelvin ‘s portions.

Furthermore, stockholders ‘ understandings restrict the transportation of portions but it is merely suited for bing stockholders of the company.

To reason, John can object that Kelvin sell his portions to David because he can take purchase Kelvin ‘s portions or portion buy-back.

Q2.

1. George wants to cognize whether F & A ; G Limited purchase back its ain portions. In the yesteryear, it was non allowed because of the regulation in Trevor v. Whitworth instance. However, it is allowed under the new Companies Ordinance, as followers:

Harmonizing to the House of Lords in Trevor v. Whitworth ( 1887 ) 12 App Cas 409, it was non permitted that a company could purchase back its ain portions even if the Memorandum of Association allowed. That is to state, its paid-up capital should be maintained and kept unless:

• it was lost due to ordinary concern hazards, or
• there has been a decrease of the portion capital authorized harmonizing to the statute law.

The ground of prohibition of buy backing a company ‘s ain portions is that it would do the harm of creditors and other maltreatments. For case, an entity may pay higher than the market value when there is portion buy-back. It leads to thin the value of the balance. But the entity pay lower and the value of the staying portions would increase. At the same clip, managers may utilize this method to heighten the value of their ain retentions or to spread out their vote power.

In recent old ages, the regulation about capital care is abolished. In other words, portion buy-back for all companies is allowed and it subjects to a solvency demand ( CR 2008 ) .

The undermentioned portion salvation or buy-back may be funded in conformity with the new Companies Regulation:

• Payment is paid out of a company’s distributable net incomes. ( subdivision 257 ( 2 ) ( a ) ) ;
• There is out of the returns of a new issue of portions which is for the intent of portion salvation or buy-back ( subdivision 237 ( 2 ) ( B ) ) ; or
• There is out of capital if a solvency trial is passed. ( subdivision 248-266 ) .

It is improper for a company or its subordinates to give indirectly or straight fiscal aid for the intent of acquisition of its portions in conformity with subdivision 275. Interrupting the prohibition leads to the managers in a all right and imprisonment. Under subdivision 274, fiscal aid refers to gifts, warrants, security, insurances, loans and any other fiscal aid. Acquisition means portions transportation and portions subscription.

However, there are the undermentioned exclusions:

• the payment of dividends, allocation of fillip portions, distribution of assets in winding-up, decrease of capital confirmed by the tribunal ( subdivision 277 ) ;
• the ordinary concern of the company is imparting money ( subdivision 279 ) ;
• a company in good religion in the involvements of the company provides fiscal aid for the employee portion strategy ( subdivision 280 ) ; or
• the company provides loans to its eligible employees for the intent of enabling them to buy to the full paid portions in its keeping company or the company ( subdivision 281 ) .

Under subdivision 283 to 285, it subjects to solvency trial and one of the three processs, as followers:

1. Under subdivision 283, it provides fiscal aid if:

• managers pass a declaration to give the aid ;
• those managers make a solvency statement ;
• the aggregative sum of the aid and other fiscal aid given under this subdivision non repaid ( such as warrant or security ) is less than 5 % of the paid-up portion capital and militias of the company ; and
• the aid is given non more than 12 months of the solvency statement.

Harmonizing to subdivision 283 ( 4 ) , the company has to direct a notice and the solvency statement to all members within 15 yearss after giving the aid.

2. Under subdivision 284, the aid is approved by written declaration of all members.

3. Under subdivision 285, the aid is approved by an ordinary declaration. Directors must demo the benefit of the aid to the company.

To reason, portion buy-back in Franklin Limited is allowed in recent old ages but there is some above restricted conditions.

( Unit 2 P.34-38 )

2. If F & A ; G wants to cut down its capital, there are two methods for decrease of portion capital.

One method is that a company passes a particular declaration and applies by request to the tribunal for an order corroborating to cut downing portion capital under the new Companies Ordinance under subdivisions 226 to 232. On the request, the tribunal makes the order on any footings and conditions it thinks tantrum.

In fact, every creditor of the company has a right to reject the decrease of portion capital. The tribunal confirms the decrease of portion capital when it is satisfied that:

• the creditors ‘ consent is obtained ; or
• the creditor’s debt or claim is discharged, determines or is secured ( subdivision 229 ) .

Another method is a court-free process and there are some undermentioned standards:

• All managers make a solvency statement in conformity with subdivision 216.
• Members approves in a particular declaration passed within 15 yearss of the solvency statement in subdivision 216.
• A public notice of the decrease of portion capital is published in Gazette declaring the content under subdivision 218.
• A notice is published in one specified Chinese and one specified English newspaper and a written notice to be given to its creditor before the terminal of the hebdomad after the hebdomad in which the particular declaration is passed harmonizing to subdivision 218 ( 3 ) .
• A transcript of the solvency statement is filed to the Registrar for enrollment.
• The members or creditors of the company have a right to analyze the solvency statement and particular declaration within five weeks’ clip.
• If no application of expostulation is raised by recusant members or creditors to call off the declaration, the company can present a transcript between five and seven hebdomads after the declaration to the Registrar for enrollment in conformity with subdivision 224 ( 1 ) .
• The decrease of portion capital and the particular declaration should take consequence when the return is registered.

If a creditor or member objects to the particular declaration, the tribunal may call off or corroborate the particular declaration and on any footings as it thinks fit under subdivision 222. In order to find whether the decrease is blessing, the tribunal may see assorted elements, such as whether the decrease is just among stockholders and whether the involvements of the creditors in the company are protected ( CR 2013a ) .

The above states the solvency statement which each of managers makes to organize the sentiment that the company needs to fulfill the solvency trial in conformity with subdivision 206 ( 1 ) . The statement should be applied to decrease of portion capital, portion salvation and buy-back and fiscal aid under subdivision 204. In subdivision 205, it states the solvency trial is satisfied if:

• instantly after the dealing, the company will be capable of paying its debts ; and
• the company will be able to pay its debts within 12 months after the dealing or beginning of weaving up.

Given an sentiment, a manager must inquire the company’s province of personal businesss and chances and take into history all the liabilities of the company in subdivision 206 ( 2 ) , for illustration, contingent and prospective liabilities.

Besides, a solvency statement is in the specified signifier, states the day of the month on which it is made and the name of each manager doing it, and is signed by each manager who makes it harmonizing to subdivision 206 ( 3 ) .

In decision, George can take either one of the above two processs to cut down the capital of F & A ; G Limited.

( Unit 2 P.30-33 )

Mention:

Law B333 Company Law I, Unit 1-2: OUHK

Assignment 1