Topic 3

Management and administration of a company (I):

Directors and company secretary
These suggested answers are longer than what students are expected to give in
examinations. The purpose of the suggested answers is meant to help students in
their revision and learning. The suggested answer may not contain all the correct
points and students should note that credit will be awarded for valid answers which
may not be fully covered in the suggested solutions.

Answer 1

Under regulation 82 of Table A, the powers of management of the company’s

business and affairs are conferred on the board of directors.

The management powers vested in the board include the power to sue on behalf of
the company: Miracle Chance Ltd v Ho Yuk Wah [1999] 3 HKC 811.

As no board resolution has been passed, then prima facie the legal proceedings
have not been properly instituted.

Where the articles confer management powers on the board, the members generally
cannot usurp those management powers and cannot control the board’s exercise of
its powers: see Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906]
2 Ch 64.

However, under the current version of Table A, regulation 82 allows the general
meeting to pass a special resolution to give directions to the board in respect of
management members. George and Peter would not have sufficient voting power to
pass a special resolution though (unless David does not attend the general meeting).

The members in general meeting also have reserve or residue powers which can be
exercised when the board is unable or unwilling to act. In Miracle Chance Ltd v Ho
Yuk Wah [1999] 3 HKC 811, the Hong Kong Court of Appeal held that where there is
deadlock between board members, the members in general meeting can exercise
the power to commence legal proceedings in the name of the company.

Accordingly, the members’ resolution in the present circumstances would be

effective for the institution of the proceedings against David.

Answer 2

A company may be an ordinary resolution passed at a general meeting remove a

director before the end of the director’s term of office: s.462(1).

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Special notice is required of a resolution to remove a director: s.462(4). This means
that notice of the intention to move the resolution must be given to the company a
least 28 days before the meeting at which it is moved: s.578.

Accordingly, the members may give special notice to the company in accordance
with the above provisions for the company to convene an extraordinary general
meeting for removal of Miranda from office.

A copy of the notice must then be given by the company to the director: s.463(1).

The director may make with respect to the resolution representations in writing to the
company, and may request the company to send a copy of the representations to
every member of the company: s.463(3), (4).

The director is entitled to be heard on the resolution at the meeting at which the
resolution is voted on: s.463(2).

S.462 does not have the effect of depriving a director of compensation or damages
payable to the director in respect of the termination of his appointment as director or
any appointment terminating with that as director: s.462(9). Even if Miranda is
removed from office at the general meeting, she would be entitled to damages from
the company for early termination of the contract.

Answer 3 (borrow company loan but used for personal purpose)

The board of directors has power to enter into a loan contract on behalf of the
company: Table A reg 81. As a board resolution was passed authorising the loan
and authorising Leslie to enter into the contract on behalf of the company, prima
facie the company is bound.

However, no notice of the meeting was given to three of the directors, and
accordingly the board resolution would be invalid: see eg Toggenburger v
Beauforte [2007] HKEC 171.

If the internal management rule (or rule in Turquand’s case) applies though, the
resolution may still be effective to bind the company to the contract. Under this rule,
persons dealing with a company in good faith may assume that acts within its
constitution and powers have been properly and duly performed, and such persons
are not bound to enquire whether acts of internal management have been regular:
Royal British Bank v Turquand (1856) 119 ER 886. Accordingly, application of this
rule can mean that the lender is not bound to enquire as to whether proper notice
was given to the directors for the board meeting. The lender is entitled to assume
that notice was duly given. On this basis, the lender could enforce the loan contract
against ABC Ltd.

However, there are exceptions to the internal management rule. If the person
dealing with the company has actual or constructive notice of the irregularity, then
the person cannot rely on the internal management rule: Irvine v Union Bank of
Australia (1877) 2 App Cas 366; Re Moulin Global Eyecare Holdings Ltd [2009] 4

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HKLRD 203. Constructive notice may arise where the nature of the transaction or
the circumstances known to the person dealing with the company would put a
reasonable person on enquiry: Wong Kam San v Yeung Wing Keung [2007] 1
HKLRD 267. There is no indication in the facts of the question that the lender has
actual notice of the irregularity, but there is an issue as to whether it has constructive
notice. It could be argued on behalf of the lender that the mere fact that not all the
directors attended the board meeting is not suspicious, as it can be common for
meetings to be held without all the directors attending. On that argument, the lender
would not have constructive notice. On the other hand, the facts are similar to Re
Moulin Global Eyecare Holdings Ltd, where the court held that there was
constructive notice. The court accepted that the circumstances called for heightened
alertness and caution on the part of the lender, where the original request was for a
“personal loan” was where only the related directors had attended the board
meeting. In addition, on the present facts, the lender previously had only dealt with
the managing director when loans were given to the company, and this may be
another factor which should cause a reasonable lender to make further enquiries as
to whether the loan was properly authorised.

There is also a statutory indoor management rule under s.117. Subject to s.119, in
favour of a person dealing with a company in good faith, the power of the company’s
directors to bind the company, or authorise others to do so, is to be regarded as free
of any limitation under any relevant document of the company: s.117(1).

“Relevant document” includes the company’s articles: s.117(6).

The limitation in the present situation is the notice requirement for board meetings.

The lender is a person “dealing with the company” within s.117(1). There is no
indication of a lack of good faith on the part of the lender. Accordingly, it seems that
the lender could also rely on s.117(1) to enforce the loan contract against ABC Ltd.

Answer 4(director buy luxury, H is not D2D director)

Luxury Properties Ltd (“LPL”) would be liable if Harriet had actual or apparent
(ostensible) authority to purchase the champagne as an agent on behalf of LPL.

Actual authority is of two types: express or implied. An agent has express actual
authority if the agent is expressly conferred with authority to enter into the
transaction for the principal. An agent has implied actual authority if the authority is
implicitly given by the principal – for example, an appointment to a particular office or
position would implicitly carry with the appointment the usual authority attached to
that office or position: Hely-Hutchison v Brayhead Ltd [1968] 1 QB 549.

An agent has apparent authority if the principal (or an agent of the principal having
actual authority) makes a representation to the third party that the first mentioned
agent has authority, and the third party relied on the representation to enter into the
contract: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480.

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In the present situation, there is no indication that Harriet has express actual
authority.

Harriet is a director of LPL. However, an individual director does not have implied or
usual authority to enter into contracts on behalf of the company merely because of
the appointment to the office of director: Qualihold Investments Ltd v Bylax
Investments Ltd [1991] 2 HKC 589 at 593.

Executive officers may have some implied authority to contract for the company
within the scope of their managerial responsibilities, but Harriet is not an executive
director.

On the information given in the question, there is also no indication that there was
any representation of authority giving rise to apparent authority.

Unless there is some representation from the company that Harriet has authority to
contract, then Wine Co cannot enforce the contract against LPL and so LPL would
not be liable.

Answer 5(Fong, secretary, rent car for bro, buy equipment, on behalf of co.)

Whether XYZ Ltd is bound to the contracts depends on whether Fong has authority
to bind XYZ Ltd to those contracts.

Fong is the company secretary, and it is within the usual authority of a company
secretary to enter into contracts which come within the day-to-day running of the
company’s business of an administrative nature – eg employing staff or hiring cars
for the company’s use: Panorama Developments (Guildford) Ltd v Fidelis Furnishing
Fabrics Ltd [1971] 2 QB 711. Applying this decision, the hire of the rental car would
be within the usual authority of a company secretary, and therefore XYZ Ltd is bound
to the contract with the car rental firm.

As a company secretary’s usual authority to contract for the company is limited to

contracts of an administrative nature, Fong would probably not have usual authority
to contract with the third party for the purchase of the equipment.

If Lam has actual authority to purchase the equipment, then Lam can delegate that
authority to Fong, and accordingly Fong can bind the company to the contract with
the third party for the purchase of the equipment.

However there is no indication in the facts of the question that the board of directors
(which has authority under Table A regulation 82) has given express actual authority
to Lam to purchase the equipment. Also, prima facie a director acting individually
does not have usual authority (nor implied actual authority) to enter into contracts for
the company: Re Haycraft Gold Reduction and Mining Co [1900] 2 Ch 230; Re
Marseilles Extension Railway Co (1871) LR 7 Ch App 161 at 168; Qualihold
Investments Ltd v Bylax Investments Ltd [1991] 2 HKC 589 at 593. Directors
appointed to a particular management position may have usual authority or implied
actual authority to contract for the company within the scope of that position, but Lam

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was only appointed as a sales director and it seems that he would not have usual
authority (nor implied actual authority) to purchase the manufacturing equipment.
Accordingly, Lam would not himself be able to confer any authority on Fong to enter
into the contract, and the company is not bound.

Agents can bind the company on the basis of apparent authority. That is, where the
company has made an express or implied representation to the third party dealing
with the company that a person has authority, and the third party relies on that
representation in entering into the contract purportedly with the company, then the
company will be bound to the contract: Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480. Lam has made a representation to the
third party that Fong has authority. However, if Lam does not himself have authority
to contract with the third party, then his representation is not binding on the company
and is not effective to give rise to apparent authority on the part of Fong.

Answer 6 (allotment of shares to investors)

Directors must act in good faith for the benefit of the company: Re Smith & Fawcett
Ltd [1942] 1 Ch 304. Directors would not be in breach of this duty if they subjectively
believe that the transaction is in the interests of the company.

Directors must exercise their powers for proper purposes: Wong Kam San v Yeung
Wing Keung [2007] 2 HKLRD 267. This duty can be breached even if the directors
subjectively acted honestly. The court applies an objective test to determine whether
the purpose of the directors is a proper purpose or not.

If the directors exercise their power to allot shares for the purpose of altering voting
power or to dilute existing shareholders, then there would be a breach of the duty to
act for proper purposes: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 832.

Raising finance for the company is a proper purpose for the power to allot shares,
but this is not necessarily the only proper purpose for this power.

There is no information given as to what were the directors’ purposes in the share
allotment. If, for example, the directors subjectively believed that the allotments
were in the interests of the company and that the allotments were for the purpose of
raising capital, then there would not be a breach of the above duties.

However, directors must also exercise their powers with due care, skill and diligence:
s.465. It requires the directors to act to a reasonable standard that is objectively
determined.

There could be an argument that the directors have breached their duty of care if the
allotments meant that the company has incurred losses as a result of the dilution of
company’s indirect interests in itself.

It has also been held that directors must take into account relevant factors and not
take into account irrelevant factors when exercising their powers: Passport Special
Opportunities Master Fund v eSun Holdings Ltd [2011] 4 HKC 62. In that case,

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based on similar facts, the court held that the failure by the directors to consider the
impact of the allotment on the financial position of the company meant that the
directors breached their duty to take into account relevant factors.

Although there is a breach of duty by the directors, the court will only invalidate the
share allotments if the persons receiving the shares had knowledge of the
circumstances constituting the breach of duty: Passport Special Opportunities
Master Fund v eSun Holdings Ltd [2011] 4 HKC 62.

Answer 7

The various issues on which you should give your advice are as follows:

In Fan has transferred funds out of the two companies to entities controlled by him,
then Fan would be in breach of fiduciary duty.

Fan’s conduct can be characterised in different ways.

Directors are under a fiduciary duty not to apply company property or assets for their
own use or for the use of entities connected with the director: Hutton v West Cork
Railway Co (1883) 23 Ch D 654; Re George Newman & Co [1895] 1 Ch 674. This
duty is also seen as a part of the duty to avoid a conflict of interest.

Use of the companies’ assets for the benefit of the other entities controlled by Fan
rather than for the purposes of the companies will amount to a misappropriation of
the companies’ assets in breach of Fan’s fiduciary duty. The conduct would also
amount to a breach of the no-conflict rule. There will be a breach of these duties
regardless of whether Fan was subjectively dishonest.

Directors must also exercise their powers bona fide (in good faith) in what they
consider is in the interests of the company: Re Smith & Fawcett Ltd [1942] 1 Ch 304.
The test is essential subjective, but if a director does not put his mind to the matter
as to whether the transaction is for the benefit of the company, then the director will
be in breach of duty if no reasonable director would have considered the transaction
to be for the benefit of the company. If Fan honestly thought that what he was doing
was for the benefit of the companies, then there is no breach of duty (but this may be
difficult for Fan to establish on the evidence).

Directors must also exercise their powers for proper purposes: Howard Smith Ltd v
Ampol Petroleum Ltd [1974] AC 821; Wong Kam San v Yeung Wing Keung [2007] 2
HKLRD 267. The test is objective. Using the companies’ assets for the benefit of
other entities with no benefit at all to the companies would amount to a breach of this
duty, regardless of the subjective bona fides of the director.

Directors must also act with due care, skill and diligence in carrying out their
functions: s.465. Even if Fan has not acted in bad faith, he has arguably breached
the duty of care owed to the two companies as an executive director by entering into
transactions that are clearly not for the benefit of the companies.

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Answer 8

The various issues on which you should give your advice are as follows:

Chan would be liable to the company for breach of his duties as director.

Under the misappropriation rule, directors must not apply corporate property for the
directors’ own benefit: Re George Newman and Co (1895) 1 Ch 674.

Chan’s use of the company’s funds for his own purposes would amount to a breach
of the misappropriation rule and breach of his fiduciary duties as director.

Accordingly, Chan would be liable to compensate the company for the company’s
loss of the funds.

Under the no-profit rule, fiduciaries (including directors) must not misuse their
position for their personal advantage, and thus must not obtain any benefit or gain by
reason of or through their position as director of the company or by reason of some
opportunity or knowledge resulting from their position as director: Kao Lee and Yip v
Koo Hoi Yan Donald [2003] 2 HKC 113.

The no-profit rule covers what is sometimes referred to as the corporate opportunity
or business opportunity doctrine, namely that directors can be in breach of duty by
diverting business opportunities away from the company to themselves: eg Regal
(Hastings) Ltd v Gulliver [1967] 2 AC 134.

Where there is a breach of the no-profit rule, the director would be liable to account
to the company for the profits obtained: Kao Lee and Yip v Koo Hoi Yan Donald
[2003] 2 HKC 113; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.

It is arguable that Chan should be liable to account to the company for the profits
obtained from his property investment activities.

It is now known from the information given in the question whether the property
investment opportunities came to Chan’s knowledge in his capacity as director of the
company. If he did acquire the information about those investment opportunities as
a result of his position as director of the company, then there would clearly be a
breach of his fiduciary duties in taking up the business opportunities for himself
without the company’s approval.

Even if the information did not come to him in his capacity as director, it appears that
if the business opportunity is one of potential concern or relevance to the company,
then the director has a duty to pass on the information to the company: Industrial
Development Consultants v Cooley [1972] 2 All ER 162. InvestmentCo Ltd is in the
business of property investment, and thus the property investment opportunities
would be of concern to the company. Accordingly, Chan had a duty to pass on
information about those business opportunities to the company, and a failure to do
so and his taking advantage of the business opportunities for his own benefit would
amount to a breach of fiduciary duty.

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Hung was not a party to the wrongdoing by Chan. However, there is an issue of
whether Hung would be liable to the company on the basis of negligence.

Directors have a duty to act with due care, skill and diligence and must take
reasonable care in the exercise of their functions: s.465.

Under earlier case law, it was held that directors need not give continuous attention
to the company and may delegate functions to other officials and trust the officials to
act honestly in the absence of suspicious circumstances known to the director: Re
City Equitable Fire Insurance Co Ltd [1925] Ch 407.

However, under more modern cases, the courts have held that non-executive
directors are subject to the same duties at law as executive directors: Dorchester
Finance Co Ltd v Stebbing [1989] BCLC 498; Law Wai Duen v Boldwin Construction
Co Ltd [2001] 4 HKC 403.

Under this modern approach, non-executive directors cannot simply delegate their
functions entirely to executive directors. Non-executive directors need not engage in
a detailed inspection of day-to-day activities of the company, but they must be
involved in a general monitoring of the affairs of the company: Daniels v Anderson
(1995) 16 ACSR 607. All directors must be familiar with the financial status of the
company by a regular review of the company’s accounts, thought they are not
required to themselves audit the accounts: Daniel v Anderson (1995) 16 ACSR 607.

On the present facts, there is some possibility of Hung being liable in relation to
Chan’s wrongdoing. If Hung did not undertake any monitoring role at all and if he did
not review the company’s accounts at all, then it is likely that he would be in breach
of his duty of care owed to the company. However, if Hung did act in a supervisory
role and if he did review the company’s accounts, then he might not be regarded as
having been negligent. If Hung had reviewed the company’s books and accounts in
circumstances where a director with the basic knowledge of accounting matters
reasonably expected of all directors could not have seen the problems in the
company’s accounts, then it is unlikely that Hung would be in breach of his duty of
care owed to the company.

Answer 9

Under Securities and Futures Ordinance (SFO) s.291(1)(a) (which provides for an
offence of insider dealing), a person connected with a listed corporation and having
information which he knows is inside information in relation to the corporation shall
not deal in the listed securities of the corporation.

The company in the present case is a listed company and so SFO s.291 can apply.

A “person connected with a listed corporation” includes a director of the corporation:

SFO s.287(1)(a). As Daniel is a director of the company, he is within SFO s.291(1).

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The definition of “inside information” in SFO s.285 covers, inter alia, specific
information about the corporation which is not generally known to the persons who
are accustomed or would be likely to deal in the listed securities of the corporation
but which would if it were generally known to them be likely to materially affect the
price of the listed securities.

The information in the present case about the significant losses would be within the
definition of “inside information”.

It is likely that Daniel would have known that the information was inside information
within SFO s.291(1).

“Dealing in” listed securities includes the selling of the securities: SFO s.289. This
element is also established in the present case as Daniel has sold the shares.

Accordingly, it is likely that Daniel has committed the offence of insider dealing under
SFO s.291(1)(a).

Answer 10

The four major grounds for disqualification are:

1. Conviction of an indictable offence in connection with the promotion, formation,

management or liquidation of a company; or in connection with the receivership
or management of a company’s property, or any other indictable offence his
conviction for which necessarily involves a finding that he acted fraudulently or
dishonestly (s.168E of Cap 32).

2. Persistent defaults relating to the Companies Ordinance requiring any return,

account or other document to be delivered to the Registrar (s.168F of Cap 32).

3. Fraud – in the course of winding up or in relation to fraudulent trading under

section 275 of Cap 32 or has otherwise been guilty, while an officer or liquidator
of the company or receiver or manager of his property, of any fraud in relation
to the company or of any breach of his duty as such officer, liquidator, receiver
or manager (s.168G of Cap 32).

4. Unfitness – involved in running a company that became insolvent as a result of

the conduct of the director (s.168H of Cap 32).

Schedule 15 to Cap 32 provides matters for determining the unfitness of directors.

Part 1 of the Schedule 15 lists out matters applicable in all cases, while Part 2 of the
Schedule 15 lists out matters applicable where a company has become insolvent,
e.g. breach of fiduciary duty or other duty in relation to the company; misapplication
or retention of the company’s money or other property; failure to account for the
company’s money or property; failure to comply with the requirements of the
Companies Ordinance with regard to keeping registers and making and filing an
annual return.

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Answer 11(a)

Every company must have a secretary: s.474(1).

The director of a private company having only one director cannot also be the
secretary: s.475(2). Otherwise, it is possible for a director to also act as the
secretary: s.475(1).

The secretary may be a natural person, in which case the secretary must be
ordinarily resident in Hong Kong: s.474(4)(a).

The secretary may be a body corporate, in which case the body corporate must have
its registered office or a place of business in Hong Kong: s.474(4)(b).

Details of the company secretary must be lodged with the Registrar in the
incorporation form (Form NNC1) when the application is made for registration of the
company: s.67(1). The person named in the incorporation form as the secretary
becomes the first secretary upon incorporation: s.474(2).

Where there is a change in the particulars of the secretary or where a secretary

ceases to hold office or a new secretary is appointed, then notifications have to be
made to the Registrar: s.652.

The company must also keep its own register of secretaries, containing particulars of
the company secretary: s.648.

If the office of secretary is vacant, the directors can authorise an assistant, a deputy
or any officer to act generally or specifically as the company secretary: s.474(5).

A provision requiring or authorising a thing to be done by or to a director and the

secretary shall not be satisfied by its being done by or to the same person acting
both as director and as, or place of, the secretary: s.479.

Answer 11(b)

The secretary is the chief administrative officer and has administrative

responsibilities in relation to the operation of a company.

The secretary’s functions include:

 arranging meetings;
 preparing minutes of meetings of the company;
 maintaining the statutory books;
 filing statutory returns with the Registrar;
 ensuring compliance with statutory stock exchange requirements;
 registering share transfers.

A secretary usually has the power to bind the company to contracts of an

administrative nature, such as the hiring of cars for the use of company employees:

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Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2
QB 711.

The secretary is an officer of the company and therefore liable to penalties in that
capacity if he omits to carry out his duties as imposed by the Companies Ordinance.

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