THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2006-2007 (SEMESTER 2) EXAMINATION

School of Business: BUSIOOlOB

Company Law

May 25, 2007

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

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

1. Examine the legal significance of the following unrelated events:

(a)

Magic Supplies Ltd. (Magic) was incorporated in Bermuda as a subsidiary

of MAG International Ltd. (MAG) for the purpose of supplying MAG
with raw materials for manufacturing. MAG was incorporated in Hong
Kong. Magic regularly bought materials from Germany and stored them
in a Hong Kong warehouse until they were needed by MAG. As the
supply of materials to MAG in Hong Kong was the only business of Magic,
the Inland Revenue Department refused to allow MAG treat the cost of
supplies as an expense for tax purposes.

(b)

In order to reduce speculation in the Hong Kong property market, a

government regulation was implemented which prevented flat buyers from
selling their flats within six months of the purchase. Mr. Lo and his wife
subsequently incorporated XYZ Ltd. for the purpose of purchasing a flat as
an investment. Mr. and Mrs. Lo were the only shareholders of XYZ Ltd.
When the market price rose dramatically just weeks after XYZ Ltd. bought
a flat, Mr. Lo and his wife sold the company to Mr. Yuen for cash. The
flat was the company's only asset. It has been alleged that the La's
contravened the regulation.

(c)

On the 1st December 2000 the Mandatory Provident Fund (MPF) came
into effect in Hong Kong. The ordinance which set up the MPF requires
employees and employers respectively to pay 5% of salary into an
approved scheme which is then invested and can be retrieved by the
employee on retirement. Tung is the controller of a company called
Happy Ltd. which in turn owns a restaurant in Wanchai. Tung is
concerned about the MPF scheme as it will considerably increase his staff
salary bill. Consequently Tung decides to change his employees contracts
with their consent. On average Tung pays his staff $15,000 per month as
salary. He now changes the contracts so that each employee receives a
housing allowance which constitutes 90% of the money paid, the
remaining 10% being designated as "Salary". The MPF scheme applies
only to this latter part.

2. (a)

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

unusual one". Using case authority, explain this statement

(b)

The articles of association of Ambrose Ltd. provide, inter alia, that Bertie
is to be the company's sales director until 2010 and the company's French
representatives should be paid ten per cent commission on all business
they introduce to the company. Claude is named in the articles as one of
those representatives. There is an agreement between Claude and the
company that he may appoint the other French representatives. That
agreement also provides that the company shall not deprive Claude of his
appointment or amend the terms of his commission. Claude has appointed
Daniel as a French representative. Eric has just acquired eighty per cent of
the shares of Ambrose Ltd. and intends to alter the company's articles to
delete the clauses relating to Bertie and Claude, and to reduce the
commission payable to the French representatives to five per cent. He also
intends to add an article whereby any member must sell his shares to a
specified person if a majority of the shareholders require him to do so.
Discuss the legal issues here.

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

4. (a)

"A partnership is a flexible though dangerous form of business

organization." Discuss.

(b)

Ming, Ling and Ting are partners in a firm of painters and decorators. The
following events have recently taken place and you are asked to advise the
parties as to their legal rights and duties:
(i)

Whilst painting a ceiling, Ming carelessly dropped his can of paint

which struck the customer's son on the head and caused a severe
cut. Furthermore, the paint ruined an expensive Persian carpet. A
legal action for the tort of negligence is now pending.

(ii)

Ling has started up his own separate business as a decorator,

though he is still officially a partner of the firm. When a customer
approaches him, he takes the work himself and does not share any
profit with Ming or Ting.
Ting wishes to introduce his friend, Wong, as a new partner so that
more capital can be injected into the fimi. Ming and Ling do not
like Wong.

(iii)

(iv)

Ming suggests that the firm should expand its business to include
fitting out bathrooms and kitchens.

(v)

Ling places an order for paint and paint brushes with Hung. When
Ming and Ting discover the price that Ling agreed to, they are very
upset and suggest that the firm should refuse to pay.

5. (a)

"Romalpa clauses in contracts represent a grave danger to creditors

holding floating charges. However, other problems may occur." Discuss.

(b)

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

6. (a)

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

winding up?

(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.

(c)

Dragon Ltd. is in liquidation as insolvent. The following proofs have been

lodged with the liquidator:
(i)

a claim for damages from Terry relating to alleged negligence of

one of the company's employees;

(ii)

a claim for two years unpaid profits tax;

(iii)

a claim for $1 million form Peter who lent the money to the
company two weeks prior to liquidation. The money was used to
pay the company's wage bill at the time;

(iv)

a claim in respect of $500,000 by John who was given a floating

charge as security six months prior to the commencement of the
liquidation.

(v)

Other unsecured debts of $5 million.

Advise the liquidator as to the validity and priority of these proofs.

7. (a)

In what circumstances will an agent bind a company to a contract made

with a third party?

(b)

"Directors owe duties to their company, not to individual shareholders.

The consequence is that shareholders can never sue directors". Discuss.

(c)

In relation to minority protection examine the significance of winding up

on the "just and equitable" ground under section 177 Companies
Ordinance.

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