Corporate Law Article Reviews – Essay
A) i) As mention in the Articles of Association (AA) of Fastdollar Limited, a director should obtain the approval from the Board of Directors before binding the company to any contract exceeding the value of
HK$250,000. However, in this case, one of the directors, Albert, signed a contract on behalf of the company that exceeding the amount mentioned in the AA without consulting the other directors of the company.
Therefore, the internal company procedure had not been completed before Albert signed the contract. By applying the Turquand’s rule, the contract is still valid and legally bound to the company. In Royal British Bank v. Turquand (1856) 6E. & B. 327 , the company issued a bond under seal, but the articles said that ordinary resolution should be obtained and the board of director did not fulfill this requirement. The court held that the contract was valid as the outsider would not be expected to know of the irregularity. They could assume that all the internal regulations had properly carried out. In this case, since the Megacomputer is an outsider, it should not know that the internal procedure of the company and so Turquand’s rule can be applied. The contract is valid and legally bound to the company. However, the company can then sue the director in breach of AA since AA is a statutory contract between the company and director which limiting the power of the director. The company can claim for damages that is the different between the value of the contract and the allowed value stated in AA.
A) ii)
Belinda, as a shareholder, according to the rule established in the case Salomon v Salomon & Co Ltd(1897) AC 22, (1985-9) All ER Rep 33 , is a separate legal entity to the company. Debts of the company are separate to those of Belinda. Therefore, she is not personally liable to the contract with Megacomputer. Under Section 157B (1), a company can remove a director by ordinary resolution. As a director, she may call a general meeting and give a 14 days’ notice of the proposed resolution to all the shareholders. As a shareholder, she has voting right in general meeting and can either ratify the action of Albert or remove him. If there is more than 50% of the members agree to remove Albert, an ordinary resolution is passed and Albert will be no longer the director.
B) i)
In this case, since the company made no profit and what had distributed as dividends to the shareholder before was not the distributable fund and this was unlawful. In the AA (Table A) of the company, art 117 provides that no dividend shall be paid otherwise than out of profits. Also, in section 79B, it provides that a company’s profits available for distribution are its accumulated realized profits less its accumulated realized losses . In this case, it is obvious that other funds of the company was wrongly used for dividend purposes as there was no profit available for distribution, s 79M makes all shareholders who knows or has reasonable grounds for believing that it was paid out of undistributable funds, are liable to repay it to the company . Therefore, in this case, the members should repay the dividend they received.
B) ii)
The auditors will be liable to their client in both contract and tort if they act in breach of their duty of care. Under s 5 of the Supply of Services ordinance Cap. 457, an auditor will owe an implied contractual duty to do his work with reasonable skill and care. The degree of care and skill depends upon the circumstance of each case and an auditor is a watchdog rather than a detective. He does not guarantee that the book give the true picture of the company’s affair . In Re Thomas Gerrard & Sons Ltd. (1968) Ch.455, it shows that the standard applied to the auditor is of the careful and competent auditor who will exercise reasonable skill . In this case, Fastdollars can either choose to sue in contract or in tort which is the most benefits it. Both actions are objective test. If the company sues in tort of negligence, the test of proximity is needed to show that the auditor knew that the shareholders would rely on the audited reports for taking out large mortgages to buy of new flats. Besides, the company must establish the existence of a duty and breach of the duty. A majority loss arises as a result of the breach is also necessary for suing auditor for negligence. In this case, the interest expense in the large mortgages may be the majority loss to the shareholders. However, if this was the problem of the company that causing an error in its account but not the auditor, and the auditor practiced with reasonable skill and care, company cannot sue the auditor as the auditor can rely on the company when there is no ground to arise reasonable suspicion.
B) iii)
Under s 131 (6), a company can remove an auditor from office at any time by passing an ordinary resolution . If the directors propose to remove the auditors, they may call a general meeting and give 14 days’ notice to all the members. However, if the shareholders of the company propose to do so, a special notice is required under s 132 (1). The members must give the notice at least 28 days before the meeting and the company must then give the members at least 21 days’ notice of the resolution. In s131 (5), it provided that when there is a vacancy arises due to removal of the auditors before the expiration of his term of office, the directors or the company can make an appointment in a general meeting to fill the vacancy. Special notice is required for a resolution at general meeting to fill a causal vacancy.
C) a)
Donald is the shareholder, director and also the company secretary. As a director, he can call a general meeting and give a 14 days’ notice of proposed resolution to all the shareholders. According to Section 157B (1), a company can remove a director by ordinary resolution. As a shareholder, he has voting right in the general meeting. If Albert, Belinda, and Donald all agree to remove Charles, an ordinary resolution is passed and Donald will be no longer the director.
C) b)
There are several duties that a director is owned to the company. They are fiduciary duties, duties of skill and care, duty to act in good faith for the benefit of the company, duty for exercise their power for proper purpose and duty to avoid a conflict of interest. In this case, Charles, as a director of Fastdollar, he owned a clothing design studio. As we are difficult to find sufficient evidence to prove that the two companies are competing businesses, the company cannot sue him in breach of conflict of interest. As mentioned in this case, other directors considered that Charles was not wholeheartedly committed to the company and he was sometime absent in board meeting, but only these evidences were insufficient to show he is in breach of the director duty. Therefore, in the company’s position, it cannot sue Charles as there is no sufficient evidence to show that he is in breach of director duty. What the company may do is to remove him. Under Section 157B (1), a company may by ordinary resolution remove a director. An extraordinary general meeting is convened and a notice of 14 days is given to all the members of the company. If more than half of the shareholders agreed to remove Charles, that is an ordinary resolution is passed, Charles will be no longer the director of this company.
C) c)
The company can buy back its shares. As mentioned in ss. 49I-O, it permits a private company with authority in its articles, to buy back its shares otherwise than out of its distributable profits or the proceeds of a fresh issue, that is buy back out of capital . In this case, the company can only buy back its shares out of capital as they made no profit, and this is what allowed in AA.
Sequences of procedures are provided for a private company that purchases its shares out of capital. First of all, the payment out of capital must be approved by special resolution and the payment out of capital must be made between five and seven weeks after the date of the resolution. Then, a statutory declaration must be made by directors that specifying the permissible capital payment. The statutory declaration must be accomplished by an auditor’s report. Within a week after the date of resolution the company must publish a notice in the Gazette stating that a) the company has approved the payment for the purpose of buying back its own shares, b) the amount of the permissible capital payment and the date of special resolution, c) that the directors’ statement and auditors’ report are available for inspection at the company’s registered office, d) any creditors may within five weeks following the resolution apply to the court to stop the payment .