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COMPANY LAW

COMPANY LAW. Law 330 Hong Kong Shue Yan College. Textbooks. Vanessa Stott: An Introduction to Hong Kong Business Law, Longman, Third Edition, 2001 Vanessa Stott: Hong Kong Company Law, Longman, Tenth Edition, 2003. INTRODUCTION TO INCORPORATION. 1. Definition of a "Company"

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COMPANY LAW

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  1. COMPANY LAW Law 330 Hong Kong Shue Yan College

  2. Textbooks • Vanessa Stott: An Introduction to Hong Kong Business Law, Longman, Third Edition, 2001 • Vanessa Stott: Hong Kong Company Law, Longman, Tenth Edition, 2003

  3. INTRODUCTION TO INCORPORATION • 1. Definition of a "Company" • A company is a "corporation" - an artificial person created by law. • A human being is a "natural" person. • A company is a "legal" person. • A company thus has legal rights and obligations in the same way that a natural person does.

  4. Salomon v Salomon and Co Ltd (1897) • Sole proprietor incorporated business into a company • Whether loan to company by Salomon secured by a charge over assets of company has priority over other unsecured loans • Held: Salomon was entitled to be paid before unsecured creditor. The company was not an agent of or trustee for Salomon but a separate legal entity.

  5. Lord Macnughten: “The company is at law a different person altogether from the subscribers to the memorandum; and although it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Ordinance.”

  6. Other cases (pages 2 and 3 of CL) • Macaura v Northern Assurance Co Ltd (1925) • Good Profit Development Ltd v Leung Hoi (1993) • Lee v Lee’s Air Farming Ltd (1961)

  7. Companies and Partnerships Compared • Definitions • Section 2 of Companies Ordinance (Cap. 32) • "company" (公司) means a company formed and registered under this Ordinance or an existing company;

  8. Section 3 of Partnership Ordinance (Cap. 38) • (1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.(2) But the relation between members of any company or association which is- (a) registered as a company under any Ordinance relating to the registration of joint-stock companies; or (Amended 50 of 1911; 1 of 1912 Schedule)(b) formed or incorporated by or in pursuance of any other Ordinance, or any enactment or instrument, (Amended 25 of 1998 s. 2) is not a partnership within the meaning of this Ordinance.

  9. A company can be created only by certain prescribed methods - most commonly by registration under the Companies Ordinance (Cap. 32). A partnership is created by the express or implied agreement of the parties, and requires no formalities, though it is common to have a written agreement.

  10. A company incurs greater expenses at formation, throughout its life and on dissolution, though these need not be excessive.

  11. A company is an artificial legal person distinct from its members.

  12. A company can have as little as one member and there is no upper limit on membership. A partnership must have at least two members and has an upper limit of 20. Exceptions are a partnership of solicitors or members of the Stock Exchange.

  13. Shares in a company are normally transferable (must be so in a public company). A partner cannot transfer his share of the partnership without the consent of all the other partners.

  14. Members of a company are not entitled to take part in the management of the company unless they are also directors of it. Every partner is entitled to take part in the management of the partnership business unless the partnership agreement provides otherwise.

  15. A member of a company who is not also a director is not regarded as an agent of the company, and cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be bound by his acts.

  16. The liability of a member of a company for the debts and obligations of the company may be limited. A partner in an ordinary partnership can be made liable without limit for the debts and obligations of the firm.

  17. The powers and duties of a company, and those who run it, are closely regulated by the Companies Ordinance and by its own constitution as contained in the Memorandum and Articles of Association. Partners have more freedom to alter the nature of their business by agreement and without formality, and to make their own arrangements as to the manner in which the firm will be run.

  18. A company must comply with formalities regarding the keeping of registers and the auditing of accounts which do not apply to partnerships.

  19. The affairs of a company are subject to more publicity than those of a partnership - e.g. companies must file accounts which are available for public inspection.

  20. A company can create a security over its assets called a floating charge, which permits it to raise funds without impeding its ability to deal with its assets. A partnership cannot create a floating charge.

  21. If a company owes a debt to any of its shareholders they can claim payment from its assets rateably with its other creditors. A partner who is owed money by the partnership cannot claim payment in competition with other creditors.

  22. A partnership (unless entered into for a fixed period) can be dissolved by any partner, and is automatically dissolved by the death or bankruptcy of a partner, unless the agreement provides otherwise. A company cannot normally be wound up on the will of a single member, and the death, bankruptcy or insanity of a member will not result in its being wound up.

  23. Types of Companies • Statutory Corporations • Formed by an Ordinance. • Introduction by a LegCo Member a private bill as defined in the Private Bills Ordinance. Examples are found in Ordinances, chapter numbers from 1000 onwards: Hong Kong Council of Social Service Corporation (Cap. 1057) enacted on 9 March 1951. • Introduction by the Government a public bill. Examples are Kowloon-Canton Railway Corporation Ordinance (Cap. 372)

  24. Section 3 of Chapter:372 KOWLOON-CANTON RAILWAY CORPORATION ORDINANCEESTABLISHMENT OF THE KOWLOON-CANTON RAILWAY CORPORATION • (1) There shall be established a public authority, to be called the Kowloon-Canton Railway Corporation, which shall have such powers and duties as are conferred and imposed on it by, or by virtue of this Ordinance. (Amended 56 of 1986 s. 4)

  25. (2) The Corporation shall consist of the following members- • (a) a Chairman appointed by the Chief Executive;(b) a Chief Executive Officer appointed by the Corporation, the appointment to be made in the manner provided in paragraph 4 of the First Schedule; • (c) not less than 4 nor more than 8 other members appointed by the Chief Executive, and the members of the Corporation shall be the governing body thereof and shall comprise its managing board.

  26. (2A) The functions of the Chairman and the Chief Executive Officer shall be the functions assigned to them by this Ordinance and any functions that the Corporation may assign to them.

  27. By Registration (Registered Companies) • Formed by registration under the Companies Ordinance (Cap. 32). • Registration is the most commonly used means of forming a company and virtually the only method now used to form a trading company.

  28. S. 4 (1): "Any 2 or more persons, associated for a lawful purpose may, by subscribing their names to a memorandum of association (which must be printed in the English or Chinese language) and otherwise complying with the requirements of this Ordinance in respect of registration, form an incorporated company, with or without limited liability."

  29. Classification of Registered Companies • Limited liabilities vs Unlimited liabilities • "Limited Liability" refers to the liability of the members, not the liability of the company. • The company will always be liable to the full extent of its debts. • The liability of the members, whether limited or unlimited, is to the company, not to the individual creditors of the company.

  30. Unlimited Companies • Members have unlimited liability (If company is being wound up, members can be made to contribute to the company’s assets without limit to enable it to pay its debts.) • Cannot be public companies. • Can be set up with or without a share capital. • Not subject to the same restrictions on alteration of capital as other types of company, and do not normally have to file annual accounts.

  31. Companies Limited by Guarantee • Members agree to contribute a specified amount to the company’s assets in the event of the company being wound up. (Total amount payable by all members is called the "guarantee fund") • Members do not have to pay anything as long as company is a going concern - so company has no contributed capital. • Companies limited by guarantee are not usually formed for business ventures.

  32. Companies Limited by Shares • The most common kind of registered company. • Members of the company take shares issued by the company. Each share is assigned a nominal value - the amount that must be paid to the company for the share. Members may also agree to pay an extra amount - called a premium.

  33. When the company is registered, its memorandum must state the total nominal value of all the shares it is going to issue (called the registered capital, or nominal capital or authorised share capital). The memorandum also states the number of shares to be issued: e.g. 10,000 shares of $1 each = registered capital of $10,000.

  34. Liability of a member (shareholder), when the company is wound up is limited to the amount, if any, of the nominal value of his shares which has not been paid. ( A shareholder is also contractually bound to pay any premium which has not been paid). • Shares are normally partly or fully paid for when issued, so company will have a contributed capital.

  35. Companies Limited by Shares may be Public or Private • Section 29 provides: • "the expression "private company" (私人公司) means a company which by its articles- (a) restricts the right to transfer its shares; and (b) limits the number of its members to 50, not including persons who are in the employment of the company and persons who, having been formerly in the employment of the company, were while in that employment, and have continued after the determination of that employment to be, members of the company; and (c) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

  36. If a company's articles fail to satisfy the requirements of section 29, it is a public company. • Private companies have no authorised minimum share capital.

  37. Listed Companies • Apart from satisfying the rules setting out the requirements for a company to list its securities (including shares) on the Stock Exchange of Hong Kong, the company must not be a private company.

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