LW3902 The Law Relating to

Companies

1) General Introduction and

Corporate Personality
 I. Intended Learning Outcomes
On completion of this course, students
should be able to:
• describe & explain the basic principles of the law
relating to companies;
• recognise & identify how company law principles are
relevant in the provision of professional services to
clients in the disciplines of business and accounting;
and
• apply the fundamental & basic principles of company
law to client problems that may arise in the context
of an accountancy practice and in business.
 II. Teaching Plan
1.Introduction: Corporate Personality
2.Business Vehicles
3.Nature & Types of Companies
4.Lifting the Corporate Veil
5.Corporate Constitution
6.Contractual Effect & Alteration of Memo. & Articles
7.Promoters and Pre-incorporation Contracts
8.Control of the Company
9.Directors and Directors’ Duties
10.Majority Rule and Protection of Minority Shareholders
11.Protection of Outsiders
12.Share and Loan Capital & Winding Up
13.Auditors and Accounts, Company Secretary, Regulatory Bodies
 III. Assessment
• Continual Assessment (40%):
– Contributions to tutorial discussions: 20%
– Written Assignment / Coursework: 20%

• Examination: 60% (2 hours; Open Book)

• To pass this course, a student must obtain
a minimum mark of 30% in both
continual assessment and examination,
with an overall mark of 40% or above.
 IV. Company Law?
What is law? Nature and functions of law
a)Law may be defined as rules of human
conduct, imposed upon and enforced among
the members of a given state.
b)Law as a regulator (e.g. banking regulations,
company regulations), norm-setting (e.g.
criminal law), provider (e.g. welfare legislation)
and facilitator (e.g. law of contract or property).
What is a company?
• Under Hong Kong laws, business organisations may
be incorporated or unincorporated.
• Incorporation is a legal process through which
corporate entity status is obtained. Once
incorporated, an organisation is a legal person.
• Unincorporated organisations such as
proprietorships and partnerships are not legal
person.
• In Hong Kong, a company is a form of business
organization formed by incorporation under the
Companies Ordinance.
Accountants and business professionals

• Why do business professionals such as

accountants require a knowledge of the law?
 V. Incorporation
Incorporation is a legal process through
which corporate entity status is obtained.
 Incorporation can be done through
registration under the Companies
Ordinance.
Other Forms of Incorporated Organisations

• Cooperatives (合作社) incorporated

under Co-operative Societies Ordinance
• Trustee (受託人) companies
incorporated under Registered Trustees
Incorporation Ordinance
• Owners’ incorporations (業主立案法團)
incorporated under Building Management
Ordinance
• Common Types of Unincorporated Organisations

• Proprietorship (Sole traders)

• Partnerships (Two or more traders)

• Joint Venture Partnerships (Two or more companies)

• Common Types of Incorporated Organisations

• Companies incorporated under the Companies Ordinance

– Hong Kong Companies

• Companies incorporated outside of Hong Kong, and

registered under the Companies Ordinance – Non-Hong
Kong Companies
• Don’t confuse registration with
incorporation!
• Registration is part of the incorporation
process, and it is necessary:
• (i) under the Companies Ordinance (CO) for
companies incorporated outside of Hong
Kong which “establish a place of business”
in Hong Kong; and
• (ii) under the Business Registration
Ordinance (BRO) for companies “carrying
on business” in Hong Kong.
Listed Public Companies
• Companies may “go public” by applying
for listing on the Stock Exchange of Hong
Kong (SEHK) which is managed by the
Hong Kong Exchanges and Clearing
Company (HKEx).

• For listing requirements, see the HKEx

Listing Rules (LRs) at www.hkex.com.hk
• 1. Main Board Listing Rules;
• 2. Growth Enterprise Market (GEM) Listing
Rules.
 VI. Registration & Compliance
The Business Registration Ordinance (BRO)
requires that the business(es) of persons, both
natural and legal, be registered for
identification and tax purposes.

Guidance with regard the interpretation of

“persons” and activity which comes within the
meaning of “business” can be found in the BRO
and Inland Revenue Ordinance (IRO).

One of the major factors to consider regarding

the formation, operation and termination of a
business organisation is the compliance
obligation.
1.Regulatory Framework

• Common Law (case law precedent)

• Statutory Law (legislation, i.e. Hong Kong

Ordinances e.g. CO, BRO, IRO …)

• Company Memorandum and Articles of

Association

• Rules, Regulations and Codes of the SFC

and HKEx.
2. Common Law
• Much of the law which regulates corporate behaviour
today is found in legislation. However, common law
remains an important part of the regulatory
framework as reference to case law precedent is
often essential for:

• a)Regulation of matters not covered by legislation,

e.g. the standard of care expected of directors and
other corporate officers;

• b)Interpretation of statutory provisions, e.g. to

ascertain whether a company incorporated overseas
has “established a place of business in Hong Kong”.
 VII Doctrine of Corporate Personality

• Upon incorporation under the Companies

Ordinance, a company (unlike partnership) is
a separate legal entity from its members
or shareholders.
• This means that the law treats the company
as a separate “person” distinct from its
members or shareholders. It is often
described as an “artificial person” or a
“body corporate”.
• The concept of separate legal entity is
closely related to the concept of limited
liability as illustrated in the leading case
Salomon v. Salomon & Co Ltd [1897] AC
22.
• A company has legal capacity to hold property.
Property owned by the company belongs to the
company itself, not to its members, creditors, or
a shareholder who effectively owns all the shares
of the company. [Macaura v. Northern
Assurance Ltd. (1925) A.C. 619 HL]

• A company has the capacity to enter into

contracts with any other parties and make a valid
and effective contract with one of its members. It
is possible for a person (as its principal
shareholder and sole director) to wholly control a
company and be an employee of that company.
[Lee v. Lee’s Air Farming (1961) AC12]
• A company enjoys perpetual succession.
Its existence is not affected by the death,
bankruptcy or mental disorder of its
members.
• A company has the capacity to take legal
proceedings in its own name.
• The liability of the company is distinct
from the liability of the members of the
company.
VIII Separate Legal Entity (1/9)
• Salomon v. Salomon & Co Ltd [1897] AC22
• Facts: Mr. Salomon operated his business as
a sole proprietor initially. When the business
became good, he formed a private limited
liability company and subsequently sold his
boot manufacturing business to the company
for ₤39,000 and became a majority
shareholder & director of the company.
• The company paid him ₤29,000 by cash and
share in the company. The company further
borrowed the remaining ₤10,000 by issuing
“secured debenture” at the value of ₤10,000
in his favour.
 Separate Legal Entity (2/9)
• He as a secured creditor had the right to
be paid before other unsecured creditors
if the company went into liquidation.
• The company later was liquidated and it
owed money to both the secured creditor (Mr.
Salomon) and the unsecured creditors
(suppliers).
• The assets were only sufficient to satisfy the
secured debentures held by Mr. Salomon.
Thus, the unsecured creditors would get
nothing.
 Separate Legal Entity (3/9)
• Issues: The unsecured creditors argued that
the secured debentures in favour of Mr.
Salomon were invalid because he was the
person who controlled the company and,
thus he and the company were the same
entity, and Mr. Salomon should be
personally liable for the debts incurred by
the company.
• Held: The House of Lords rejected the
unsecured creditors’ arguments. The court
ruled that once a company was
incorporated, it was a separate entity with
its own rights and obligations,
independent of its shareholders.
 Separate Legal Entity (4/9)
• Shareholders would not be liable for the
debts incurred by the company (except to the
extent of the amount of the shares they
subscribed).
• Accordingly, the debentures issued in favour
of Mr. Salomon were valid. Since he was a
secured creditor, he was entitled to be paid
by the company before the unsecured
creditors.
• There was no evidence that Mr. Salomon
had behaved fraudulently. Had he done so,
the case would have been decided differently.
• The principle of separate legal entity was
further developed in a number of cases
subsequent to Salomon v. Salomon & Co Ltd.
 Separate Legal Entity (5/9)
In Macaura v. Northern Assurance Co. Ltd. [1925],
• Macaura personally owned a timber estate and
subsequently incorporated a limited liability
company and sold his timber estate to the company.
The company then became the owner of the timber
estate and Macaura became the majority shareholder.
Macaura also used his personal money to finance
the company and became one of the unsecured
creditors of the company.
• Shortly after the sale, Macaura purchased insurance
policies in his own name with Northern Assurance
Ltd. covering the timber against fire. Two weeks later,
almost all of the timber was destroyed in a fire.
Macaura then brought the claim on the insurance
policies.
 Separate Legal Entity (6/9)

• The court held that Macaura had no insurable

interest in the timber as he was only a majority
shareholder of the company, but he did not own
the timber. The timber was owned by the
company, a separate legal entity, independent
of its shareholders.
• If Macaura had arranged for the company to
purchase the insurance policies, the loss of the
timber would have been covered by the
insurance policies.
• The principles established in Salomon were
applied to deal with the question of a person
acting for and in relation to a company in various
capacities.
 Separate Legal Entity (7/9)
• In Lee v. Lee’s Air Farming Ltd. [1961], Mr. Lee
formed a company to carry on his business of
spreading fertilizers from the air. He held
2,999 of the 3,000 shares. He was appointed
sole governing director by the company’s
Article of Association and also was employed at
a salary as its chief pilot. He died in an
aircraft crash while flying for the company.
• His widow claimed workers’ compensation
against an insurance. The issue was whether
there was a employee /employer relationship
between Mr. Lee and his own company. If such a
relationship existed, then the widow was entitled
to the compensation.
 Separate Legal Entity (8/9)

• The lower courts held that he could not be a

“worker” when he was in effect also the
employer.
• The Privy Council, following Salomon’s
approach, held that the company and the
deceased were separate legal entities, and the
company was able to employ the deceased as an
employee.
• It further pointed out that although the deceased
was making all the decisions for the company,
they were the company’s decisions, not the
deceased’s. The deceased was only acting as the
company’s agent.
 Separate Legal Entity (9/9)
• Thus, it is well established that a company is
an artificial person with a separate legal
personality and it can make contracts, take
legal action, be sued and own property as a
natural person.
• As the company is a separate legal body, it
will continue to exist despite a change of
owners (members). It has perpetual
succession unless it is finally wound up and
dissolved. It is not affected by either the
death or the bankruptcy of its members.