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THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS
2009-2010 (SEMESTER 2) EXAMINATION

School of Business : BUSI0010B,C Company Law

May 7, 2010

Instructors:

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

Mr. David Woods

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

1. (a) "The Articles of Association form a contract between a company and its

members. However, this contract is unusual in several respects." Discuss.

(b) The articles ofM Ltd. provide as follows:
(i)

N, who is not a member of the company, is to be its solicitor for life.

(ii)

Any member wishing to sell his shares must first offer them to existing
members.

(iii)

On a resolution to remove a director the votes attached to any shares

held by that director are to be doubled.

0, a director of M Ltd., transferred some of his shares to N without complying

with the pre-emption clause in the articles. In response to this N has been sacked
as the company's solicitor and 0 was dismissed as a director by an Extraordinary
General Meeting of M Ltd's members. The chairman of the Extraordinary
General Meeting refused to acknowledge the validity of the "weighted votes"
provision in the articles. Furthermore the surviving directors or M Ltd are now
refusing to register the transfer of shares to N.
Advise N and 0 as to their rights, if any.

2. (a) The principle derived from Salomon v Salomon Co. Ltd. [1897] is viewed as
fundamental to company law. Outline the consequences of this principle and
explain the circumstances in which it may be ignored.
(b) Tang, a lecturer at the University ofPokfulam receives a housing allowance of
$20,000 per month as part of his remuneration package. By the terms of his
contract the housing allowance must be used only to rent accommodation, not
to purchase. Furthermore, lecturers receiving such allowance must show their
lease agreement to university authorities. It is also a condition that the
landlord (lessor) should not be "connected" in any way to the tenant (lessee),
the lease agreement excepted. The lecturer must be the tenant.
(i) How might Tang seek to circumvent the housing allowance rules?
(ii) Evaluate the likelihood of success of an attempted circumvention.

3. X, Y, and Z incorporate W. Ltd. All three become directors and they hold all of
its shares between themselves. X owns 30% of the shares with the remainder
divided equally between Y and Z. After disagreements Y and Z combine to use
their shareholdings to dismiss X from the board. After this they pursue a policy of
distributing profits largely in the form of directors' fees, thereby reducing the
scope for dividends. X has also discovered that Y and Z are planning to increase
the capital of W Ltd by means of a rights issue. X cannot afford to take up his
entitlement and therefore is concerned that his minority shareholding will be
diluted even further.
X therefore wishes to realise his investment in W Ltd but Y and Z have indicated
that they will only purchase his shares at a substantial discount.
Advise X and consider whether your answer would be affected by the fact that X
might have been to blame for the original dispute with Y and Z.

4. 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.

5. (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.

(iii) Ting wishes to introduce his friend, Wong, as a new partner so that
more capital can be injected into the firm. Ming and Ling do not like
Wong.
(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.

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 from 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) "Directors owe duties of care and skill to their company.

standard of care required is very low." Discuss.

However, the

(b) Chiu and N g are on the board of Honest Cameras Ltd and between them hold
51% of the shares. They also have another company, Super Cameras Ltd, in
which together they own 100% of the shares.
Best Deal Ltd approaches Honest Cameras Ltd with an offer to supply
cameras at an exceptionally low price. Chiu and Ng negotiate with Best Deal
Ltd and persuade it to offer the contract to Super Cameras Ltd instead. They
hold an EGM of Honest Cameras Ltd at which they pass a resolution stating
that Honest Cameras Ltd is not interested in the contract.
(i)

Discuss the duties owed by Chiu and Ng to Honest Cameras Ltd.

A third shareholder, Szeto, owns 6% of the shares of Honest Cameras Ltd

and has discovered that Chiu and Ng have passed the contract to Super
Cameras Ltd and that they control Super Cameras Ltd.
(ii)

Discuss what Szeto can do.

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