Company Law Assignment

Q1. At the beginning, in this case, we may identify two issues needed to be discussed. The first one is whether Kwan or Lau&Kwan Co. would be liable for the debt incurred by Lau.

The second issue is whether Lau&Kwan Co. has established a place of business in Hong Kong.In the light of s.7 of the Partnership Ordinance, “acts of every partner, who does any act for carrying on in the usual way business of the kind carried on by the firm, bind the firm and his partners, unless the partner so acting has no authority to act for the firm in the particular matter”.

That is, Lau and Kwan are both liable for the debt owing to Cheung & Co., Kwan has not been informed though.Thus, for Cheung & Co. to be able to hold the partnership liable for the debt incurred by Lau, she may need to prove that the followings are being satisfied: (1) The purchase of silk by Lau had been done in relation to the business (sale of antique) of Lau & Kwan Co. (2) The purchase of silk must be such as would be usual for carrying on that business in the usual way; and (3) The act must be done by Lau as a partner, and so understood by Cheung & Co.If the above requirements are all satisfied, the firm (and Kwan) “will be bound even though the activities of the individual partner constitute a fraud on his co-partners, unless the third party is privy to the fraud.

”, as clearly stated in sections 8 and 17 to 18 of the partnership Ordinance. First and foremost, in Polkinghorne v Holland , the plaintiffs and the defendant are partners in a business. Their business had finally incurred a huge loss as the defendant has made a one-side investment decision. It was held that the all the partners were liable for the debt.

"His partners are responsible, notwithstanding that it is done fraudulently and for his own benefit, as the investment advice was within the 'usual course of business' of that firm" The Lord explained.Therefore, for Lau and the creditors to hold the partnership liable for the debt, they had better to give evidence that the purchase of the silk is related to the business, say, the silk is a New Year gift send to its major clients. Conversely, Kwan may claim that the purchase of the silk is not related to the business, and the silk is only for Lau’s own enjoyment instead.On the other hand, in Goldberg v Jenkins, the court held that the borrowing of money by a partner at an extortionate rate of interest (60% per annum) was “an unusual transaction” and the lender “ought to have been put on inquiry that the partner would not have authority.”Thus, for Lau (and the creditors), they may claim that purchasing silk is “an usual transaction”, say, sending silk as gifts to clients is their usual business practice. In the contrary, Kwan has to prove that this is not a usual transaction to send silk for business socializing.

Furthermore, to hold the partnership liable, Lau and the creditors have to prove that the purchase of the silk is an act done by Lau on behalf of the partnership or as a partner, and this is understood by Cheung & Co.Last but not least, the possible remedy available to Kwan is the dissolution of the partnership and suing Lau for breach of the partnership agreement and his duties (fiduciary) as a partner.In accordance to the section 332 of the Company Ordinance, a non-Hong Kong company is “a company incorporated outside Hong Kong which established a place of business in Hong Kong.” ,whereas section 341 defines a “place of business” to “include a share of transfer or share registration office and provides that any office stated in Sch 24 is excluded.” Whether a company has “established a place of business” is always a question considered by court.In the leading case The Artemis v Artemis Transportation Corp (1983), the court has suggested 3 matters to be considered in proving the existence of a “place of business”: (1) The acts relied on to show that an agent is carrying on business must have continued for a sufficiently substantial period of time ; (2) The acts should have been done at some fixed place of business; and (3) The agent must be “here’ in the form of a person carrying on business in Hong Kong; it is not enough to show simply that the company has an agent here.

Despite the fact that Lau and Kwan Co. has set up a “sale office” in Hong Kong, it does not necessarily mean that it is a fixed “place for business”. Besides, as the office has established only for six months, it should not be considered as “sufficiently substantial period of time”.In Elsinct Ltd v Commercial Bank of Korea Ltd (1994), it was held that a broad common sense approach should be adopted to the interpretation of “the place of business”, and “promotions, interviews or persuasion by the Hong Kong representative office did not create legal obligations between the potential customer and the Hong Kong representative office.” It would be difficult to justify that Lau and Kwan is actually carrying business in Hong Kong. That is, giving free drawings, catalogues and free professional advices on interior design do not constitute a “business”.

Furthermore, as the firm has not yet received any return, Lau and Kwan may argue that the setting up of Hong Kong office aims to promote their business in Beijing, instead of carrying business in Hong Kong.Q2. There is no denying that a company becomes a body corporate and assumes a legal personality of its own, distinct from its members, upon incorporation under the Companies Ordinance (Cap32). It is a separate and artificial legal person entity, which enjoys separate legal status. The separate legal entity concept has established in the celebrated case of Salomon v Salomon & Co Ltd., in which the Lord Macnaughten explained: “The company is at law a different person altogether from the subscribers to the memorandum…The company is not in law the agent of its subscribers… and the members are thus not liable.

”Nevertheless, exceptionally, the courts have lifted the “corporate veil” in cases of fraud; attempts to avoid a legal duty, setting up “sham” companies, amongst others; and carrying on criminal activities. The corporate veil may be pierced by the courts, under (i) Common Law, (ii) Statute and (iii) Illegality.Under common law, the court is most prepared to look behind the corporate veil where the company is formed principally as a sham to evade existing liability or to defeat the law.In Gilford Motor Co. Ltd v.

Horne, the defendant solicits the plaintiff’s customers and to avoid contractual obligation by setting up a new company. It was held that Horne and the company, as his “agent” and under his direction, had committed breaches of the covenant. The court lifted the corporate veil and an injunction was granted against both of them. The lord MR further explained: “I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Horne.

” Likewise, the court refused to apply the general principle and lifted the corporate veil in Salomon in Jones v Lipman, in which the defendant set up a company with the sole purpose to escape the consequences of the sale contract.Nevertheless, the court is not entitled to lift the corporate veil merely because the corporate structure has been used to ensure that certain liabilities fall on another company within the group. In China Ocean Shipping Co. case, the court held that the plaintiff’s claim against the defendant (a Hong Kong company associated with MMP, who failed to pay the fine) should be struck out. The defendant had not evade the legal obligation, but simply resort to the corporate structure to avoid incurring obligations in the first placeUnder Section 275 of the Companies Ordinance, if in the course of the winding up of a company, a person is knowingly engaged in the company’s business, carried on with intent to defraud creditors or for any fraudulent purpose, the court may find such person personally liable. The following would use a UK case to illustrate.

In Re WC Leitch Ltd (1932) UK, the liquidator sought declarations that the director of the company had been knowingly a party to carrying on the business of the company with intent to defraud its creditors. The court lifted the veil and held the director personally liable for all the company’s debts. Conversely, in ADS v.Brothers (2000), the court of final appeal upheld the decision that the persons responsible for managing the subsidiary had not been fraudulent since “they personally must honestly believe there was a reasonable prospect that the company would be able to pay the debt”, as explained by the Lord Hoffman.Under Section 276 of the Company Ordinance, if, in the course of a winding up, any person (including officer, liquidator or receiver of the company) misapplies, retains or becomes accountable for the money or property of the company, he/she may be compelled to repay or restore them by way of compensation, as the court thinks just.

The following would use a UK case to illustrate:In West Mercia Safetywear Ltd v Dodd, in which a director of Dodd & Co. arranged for the transfer of £4000 from its wholly owned subsidiary (WMS) to Dodd & Co., to relieve his liability under his guarantee. It was held that the director was guilty of misfeasance and commit breach of trust, and Dodd was ordered to repay the £4000.

So, in this case, the court lifted the veil and held the director personally liable.Last but not least, the courts will lift the corporate veil if the corporate structure is used as a device to conceal criminal activities. In Re H and others, three defendants controlled the two companies, which had been used for the fraudulent evasion of excise duty on a large scale, and the defendants regarded the companies as carrying on a family business. It was held that there was a prima facie case that a corporate structure had been used as a device or facade to conceal criminal activity. It was therefore appropriate for the court to lift the corporate veil and treated the assets of the company as the realizable property held by the defendant.

This case was applied to Secretary for Justice v Lee Chau-ping (2000), in which the convicted defendant used her company to traffic in drugs. It was held that the defendant is personally liable and it is appropriate to confiscate the property of the defendant’s one-man company as “the company was prima facie controlled by her for her personal benefit”. The court lifted the veil of incorporation to include the company’s assets in determining the defendant’s realizable assets.In conclusion, the legal concept of separate personality distinguishes the legal status of a company from its member(s) upon incorporation of the company, under the Company Ordinance (Cap 32). This concept allows the members to use a corporate “veil” to limit or reduce their personal exposure to the company liabilities, and this legal avoidance act should be considered as the sole purpose of incorporation.

Nevertheless, when a corporation is used as a sham, engages in fraud or other wrongful acts, or is used solely for the personal benefit of its owners, courts may pierce the "veil" and look beyond the form to the substance of the corporation's actions, and impose personal liability on the members.Q3. The followings are the essential differences between a partnership and a limited company: To begin with, for the status in law, a limited company is considered to be an artificial legal person with perpetual succession and an entity distinct from its members. On the other hand, a partnership is not a legal person and it does not have continual existence.

As partners and the firm are not separate entities, partners are personally liable to the debts incurred by the firm.In addition, the liability of a member of a limited company may be limited by shares or by guarantee, whereas liabilities of a partner are assumed to be unlimited on a joint and several basis. Besides, a member of a company is not an agent of the company and that of other members, and he cannot bind a company by his acts. On the contrary, in partnership, each partner is an agent of the firm and his partners, and his act is bound to the company and other members. Last but not least, Furthermore, a limited company need to disclose its “books” to the public, while a partnership may keep its business affairs private.“Partnership” is defined by section 3 of the Partnership Ordinance as “the relationship which subsists between persons carrying on a business in common with a view of profit.

” In determining whether there is a relation of partnership in any given circumstances, the courts look to the substance of the relationship and examine the nature of the transaction, instead of merely looking at the form. This can be illustrated by the following case which is similar to the situation which Bobby is facing.In Chan Sau-kut and Another, the plaintiff advanced HK$ 3’900’000 to the defendants’ business and the written agreement stated: “this agreement shall not constitute a partnership agreement between the parties hereto.” It was held that a partnership existed notwithstanding the agreement stating otherwise. The judge claimed that the written agreement provided not only that the parties would share profits generated from the defendants’ business, but also that the plaintiff would have power to control the use of the advance and the operation of the defendant’s business.

Therefore, Bobby might consider arguing that he is not liable to repay Amy because the relationship between them is one of the partners, not creditors and debtors.When proving the existence of the partnership relationship, Bobby had better to give evidence that they were carrying on business with a view to profit , for instance, Amy has made an implied statement that she is actually “investing” instead of “financing”, to the business; and that she will get a return from the business. Furthermore, it would be advantageous to Bobby if he can prove that Amy has discretion to control the use of the fund (i.e.

whether she has given any “advice” to Bobby on the usage of the advance of $800000) and the operation of the business.