Definition of Unfair and Prejudicial conduct in Hong Kong company establishment


To make sure that after company formation Hong Kong no abuse or misuse of provisions be exercised, it is required to know that what are the conducts that falls within the jurisdiction of unfairness and prejudicialness. So, to remove this uncertainty and let our readers fairly know about the true conducts of unfairness and prejudicialness we shall throw some light on the definition of the unfair and prejudicial conducts. Behold! done with company formation Hong Kong? Then before moving forward, let’s make one thing clear that petitioner shall only be held eligible to the remedy under Section 724-725 if and only if the complained conduct falls within the jurisdiction of unfairness and prejudicialness. If the petitioner fails to establish the justifications pertaining to the unfair and prejudice nature of the conduct, then remedy as well as petition shall be struck out.

Definition of Unfair Conduct

As per the classic definition, unfairness is defined as any conduct which has the scope and nature of unjust, unfair or being not equitable. Case of Re Taiwa Land Investment Limited, Justice Fuad defined the word unfair as:

The conduct may be held unfair if it is found to be inequitable, unjust and unfair to the petitioner or any member or company itself.

Courts observed that for Hong Kong company incorporation legislative establishment of Hong Kong replaced the word “unfair” with the word “oppression” to free courts from the technical uncertainty regarding legal rights and conferring of those powers which are just and equitable. In addition to this, courts noted that provisions should be applied flexibly so as to meet the circumstances of cases and acknowledge the conducted mischief. There is the need to implement this provision in the liberal spirit because it is meant to acknowledge the wrong and mal-practice rather not to depreciate the victims from the sought remedy merely on the grounds of some technical flaws.

Definition of the Prejudice Conduct

For the definition of prejudice, we will again refer to the case of Re Taiwa and as per that definition:

Any conduct which amounts to the injury, detriment or damage to the victim or petitioner, shall be regarded as Prejudice Conduct.

Any damage to the financial interest of the member shall fall within the jurisdiction of prejudice such as the devaluation of the shares, which are in possession of the members. Any jeopardising of the shares of the members as well as any damage which the member incurred in his or her credential of being the member of the company shall also be perceived as prejudice to the interests of the member. One example for such infringement could be the situation where personal rights of the member, which are awarded by the constitution of the company or companies ordinance, are being infringed and on contrary which could have been protected by the doctrine of equitable consideration.

Misappropriation is very common in corporate world and controllers of the company are the ones who usually more prone to be involved in the misappropriation of the company’s assets after Hong Kong company incorporation. But abuse is abuse even it amounts the loss of a penny to the member. For example, assume that members of the company were prejudiced by the controller of the company due to the misappropriation of company’s assets though the impact of this misappropriation wasn’t huge because minor devaluation of member’s shares occurred, but still the matter stands eligible to be brought before the court.

It is said that not all breaches of duties of the director should be accused with charges of being unfair and prejudice. For example, director made a decision and subsequently the action were supposed to be so causal that it was held unfair and prejudice to the interests of the members, but legal perspective said that; if the act did not affect company’s financial standing neither altered position of the members then there is no ground to hold such act unfair and prejudice. Most importantly, Trivial breaches of legal obligation does not tend to give rise to prejudicial act however any breach which amounts to the contravention of member’s rights and powers as conferred by the ordinance as well as constitution of the company, then such breaches could well be regarded as important for the court, to be put forward for serious consideration.

Legal Reference

After getting introduced to the definition, scope and nature of both terminologies i.e. Unfair Conducts and Prejudice Conducts. We shall now refer to different legal remarks by the courts and legal commentators so that clear picture could be drawn in front of readers.

Court held doctrine of unfair and prejudice conducts for an open company in Hong Kong to be wide and communicated that it is not solely of discretionary nature. Hence while deciding for the matters pertaining to Unfair Prejudicial Remedy, court’s decision should not reflect what an individual think would be fair to decide while awarding and restraining sought remedy. Instead, court should apply the concept of fairness and prejudicialness as per its essence judicially, and in accordance with rational principles. Lord Hoffman in the case of O’Neill formulated notion of fairness and later authorised them, while hearing the same case in the House of Lords. Lord Hoffman stressed on the understanding of true essence of unfairness principle. His Lordship suggested that while deciding for the cases of Unfair Prejudicial Remedy, concept of unfairness should be considered and understood in commercial context. For the commercial context, his lordship entailed following two points:

  • Company in question, transact with the association of persons formed for an economic purpose and also that, the terms and conditions of the association are completely aligned with the constitution of the company, as well as in the contract of shareholders also.
  • In the development of company law, law of partnership was considered so that treaty shall be proceeded in equity and as the contract of good faith.

Continuing his remarks His Lordship communicated that:

These entailed principles for the notion of fairness concludes that member who petitioned in the court for relief, shall not ordinarily be entitled to such relief if this has been established that there is no breach of any such terms or any provision which gives instruction about continuing affairs of the company. So, it is mandatory for the petitioner to prove that breach of such term, which gives message that affairs of company be proceeded in this way, has been done so as to be entitled for the sought remedy. However, second point leads us to the conclusion that it can be damaging and unfair too, for those who are controlling affairs of the company, if they rely upon their strict legal powers, on the grounds of equitable consideration. So, this clearly sums up the issue that not every time wrong doing be made prone to unfairness, instead unfairness may also be tend to occur while using the rules in the manner which on contrary equity would regard as an act of good faith. But, where it is obvious that breach was made in contravention to set rules and regulation then there is no question on the enactment and award of Unfair Prejudice Remedy.

So, it now has been established that Unfair Prejudice Remedy will always come in action whenever the conduct is done which tends to infringe the legal rights of the member, especially those rights which are given either by the ordinance or by the constitution of the company. This is not the absolute rule and Unfair Prejudice Remedy shall also be invoked, where equity intervenes to give effect to those acts or conducts which suppose to be done via true intentions of the parties involved, through the restraining of legal rights. This principle is warmly welcomed in Hong Kong after open company in Hong Kong and on account of instructions of the Hong Kong’s Court of Appeal this principle has been accepted and held applicable to the concerned cases in Hong Kong.

If we talk about the decision of O’ Neill, one group comments that decision of Hon’ble court tends to narrow down the scope of unfair prejudice to the cases where there is the breach of provisions of company’s articles and ordinance, or the breach of statute, or the breach of terms of the agreement or contract or any deed, which restrains the petitioner to confine his or her legal rights, on the grounds of inequitable consideration. Such interpretation may be based on the remarks of Lord Hoffman which were in turn based on the Lord Hoffman’s reference to the principles mentioned in the case of Ebrahimi which operates on the basis of legitimate expectations or an understanding between the parties in the quasi-partnership as these situations are best suited to the circumstances of “winding up of company on just and equitable grounds” and “Unfair and Prejudice conducts”. In addition to this, script of judgments appears to be in agreement with narrower scope of the concept of unfair and prejudice conducts. Lord Hoffman seems to be in agreement with the remarks of court in the case of Re Astrec (BSR) plc, where the Hon’ble court communicated that in order to give rise to the equitable constraint based on the legitimate expectation, it is mandatory to establish the personal relationship or personal contract of any kind between the party or side which seeks to exercise legal rights and the party or side which seeks to restrain exercise of legal rights, which would in fact effect the conscience of the party which seeks to exercise legal right.

However, if we talk about the perspective of other side, for the case of O’Neill, we shall find that second view says that court’s decision has not restrained concept nor tends to narrow down the concept of unfairness. Legal commentators held this perspective to be quite legitimate and states this interpretation as the correct one. Where on the other hand, Lord Hoffmann also found to be in favour of this and stated himself in the decision that:

To me, exercise of rights in breach of some terms and conditions of the agreement or any other breach of legal obligation, would not be enough to entitle the conduct to be eligible to hold the proceedings of Unfair Prejudice Remedy and that matter be called unfair and prejudice.

Lord Hoffmann accepted that other circumstances of unfairness which are based on the equitable principle, shall also come in the jurisdiction of statutory provisions. One such situation can be the one where equity tends to restrain the exercise of those powers which are conferred by the company’s articles, which can be outside the scope and can be held in contemplation of the parties, when they became members of the company. For example, consider the situation where certain events ends the continuing association between two parties on account of event being causal to the basis upon which these two parties entered into association between each other. It may be unfair if one shareholder or the party keeps on insisting on continuation of association because majority is using their legal rights to continue the transactions of association which is in fact damaging to the minority and thus they are not agree in continuation of this association. You may wonder that as it is found to be harmful to the minority then there will be no question on continuation of this association but in general, probability of legal implications hasn’t been ended yet. Hence it doesn’t matter if doors of the Unfair Prejudice Remedy have been closed, petitioner still has the room to apply for the remedy on the grounds of elucidation of the equitable principles. Because this does not restrain the exercise of powers in good faith but not beyond the threshold where such exercise may be made subject to unfair and prejudice conduct and held to be proven contemplation of the parties, when they joined the company as members.