Explanation of Legitimate, Universal and Personal Expectations in a set up Hong Kong Limited Company


The conducts in a company which although seems in good faith and the powers being exercised, sounds quite legitimate. While doing business in Hong Kong multiple things and scenarios are to be kept in mind while deciding matter pertaining to Unfair Prejudice Remedy. Now we shall divert our discussion towards these strange and unique circumstances, where right thing becomes wrong and wrong becomes right.

Explanation of the Legitimate Expectations

There can be the situation while doing business in Hong Kong where equitable consideration makes it unfair for the member or director or any party to exercise their legal rights which are neither illegal nor anything beyond the scope of company’s constitution. Such situations are usually referred to the “Limited Expectations”. Such expectations are unavoidable and if due to any case they are denied being in action or the person in charge for such exercise of powers denies to exercise then possibility exist that such conduct could be called an unfair and prejudicial conduct. For example, consider a situation where after open company in HK member is legitimately expected to be involved in the management of the company, thus any act which amounts to, his/her exclusion from the management shall tend to be called as unfair and prejudicial act.

Lord Hoffmann however regrets that he and his other colleagues might have wrongly introduced the term “legitimate expectations”, in the petition pertaining to the proceedings of Unfair Prejudice Remedy. For instance, possibility exist that the term “legitimate expectation” may shall be abused and shall be used in the circumstances where this term does not intend to operate, on account of flexibility this term offers. Realising this danger, Lord Hoffmann clearly describes the situations where this term is supposed to be use and tries to remove ambiguity on his part. Lord Hoffmann communicated that:

For the situation where, equitable principles of the type (mentioned in the judgement) makes it unfair for the party to exercise their legitimate and conferred rights by the articles of the company. Then this is the consequence of the equitable restraint rather shouldn’t be taken as the cause of the equitable restraint. The concept and nature of term “legitimate expectation” should not be let to lead its open and independent life and owing to which it gives rise to the equitable considerations for the situations which do not even has application of the traditional equitable principles.

So, as long as the scope of legitimate expectation be held confined then as per the remarks of Lord Hoffmann in the case of Phillips the term “legitimate expectation” shall tend to be referred in special circumstances especially where the provisions and obligations of Section 724-725 would be afforded by the members of the company. While we discuss the scope and nature of “legitimate expectation” we usually distinct it and narrow it down to the universal and personal expectations, provided legitimate expectation is supposed to be applied for Unfair Prejudice Remedy.

Explanation of the Universal Expectation

This term is basically the further classification of “legitimate expectation” and is usually refers to the expectations which are normally held by the members of all companies after opening a business in Hong Kong and which are legitimately protected by the Section 724-725 of Cap.622. The prime focus behind this distinction was to categorise the situation. The situations which Universal expectation covers, include:

  • Universal Expectation deems to cover the situation where provisions of companies ordinance have been infringed.
  • Universal expectation would arise for the circumstances where there is the breach of equitable duties under general law. Such as the breach of fiduciary duties.
  • Universal expectation would also arise in the situations where member is expected to participate in the profits of the company.

All above mentioned expectations are expected to arise in the situation of any sought statutory remedy such as the one delineated in the case of Phillips. Such expectation may arise either due to the reason that such remedies forms the part of associations upon which person becomes the member of the company or that such remedies involve the exercise of those strict legal rights, the exercise of which, equity shall regard as contradictory to the contract of good faith. The situations which comes under the jurisdiction of universal expectation tends to stay inapplicable to the company which is in a quasi-partnership or any relationship which involves personal relationship of trust and confidence established after open company in HK.

Explanation of the Personal Expectation

As universal expectations generally make corporate affairs its subject. All those personal obligations which includes personal relationships and all the personal dealings involving mutual trust and confidence between the parties, falls within the jurisdiction of Personal Expectations. It must be noted that matters pertaining to personal expectations shall be protected by the Section 724-725 if and only if there are special circumstances. Such as the matters of quasi-partnership where justification exists regarding intervention pursuant to the principles of equity.

Objective Test

To assess that whether the complained act is really unfair and prejudicial, there is the objective test whose parameter is called as “bystander”. This will ascertain the consequences of the conduct and then reasonable bystander would tell us that whether the alleged conduct is unfair and prejudice to the interest of the members or not? Let’s make this concept clear by referring to the example of Australia. In Australia it is thought that objective test says assumes that directors will reasonable furthers the corporate affairs of the company, irrespective of the extent of burden, disadvantage and disability, their decision shall impose and subsequently address their minds with the question that whether the alleged decision is unfair or not?

There is no restriction on the petitioner to show that the person who went into transaction had the prior knowledge that the impugned conduct is unfair and prejudice to the petitioner or in short, there is no need to show that both the petitioner and the person who engages in the impugned conduct, knew the conduct to be unfair and prejudice. This is not in any sense deems to depreciate the subjective state of mind of the one who is controlling the company and held him to be irrelevant because evidences that alleged person had bad faith and evidence of his/her motives would be a key evidence to bring the matter in consideration and determine that whether the complaining act is unfair and prejudicial to the interests of the members, part of members or to the company.

Issue of Isolated Acts

As per the former oppression remedy it was held that isolated acts do not falls in the jurisdiction of statutory provisions but there must have been, and some legal experts says that there were some course of actions for the conducts which are wrong and tends to infringe the rights of members. But predecessor companies ordinance and more specifically Section 168A (2) clearly states that; remedy is available irrespective of the fact that the alleged conduct either consists of series of isolated acts or one single isolated act. If we talk about present companies ordinance then there is no such wording in the Section 724-725 of Cap. 622, but it is a well-known perception that there was not any legislative intention to alter the provision related to isolated acts. Thorough reading of the Section 724-725 tells us that, although not the same but Section 724(1) of Cap. 622 communicates somehow the same message and the script of Section 724(1) of Cap. 622 says that any actual act or omission of the company or done on behalf of the company…. Hence this clearly shows that it does not clearly mentions the term “isolated acts” but message is quite similar to what, definition of “isolated acts” implies and prima facie it seems that existing law has the same effect as that of a pre-existing law.

Now law critics raise a very serious and technical issue and says that, there may be a question on the scope of an act or omission “of company” and “on behalf of company”, they reckon if this scope is narrower than the scope of an act “in the affairs of the company”. Legal commentators comments that, even if there is the difference in the scope of an act “of company” or “on behalf of company”, the scope of Section 724(1) of Cap. 622 is wide enough to cater the conducts prone to isolated acts.

Issue of Past Conducts

It was also the issue which left unaddressed in the past companies ordinance thus no remedy or relief of any kind was depreciated for the cases where the complaining act occurred in the past. Cap. 622 took care of this flaw in predecessor companies ordinance and the Section 724(1)(a) refers to acts which are being or have been conducted in the manner unfair and prejudicial. Thus, any action which has been remedied and is now over, can still be raised again as per the statutory provisions even though remedy for the unfairness has already been awarded at the time of petition. However, for the question that the matter for which relief is sought, has already been remedied, this is up to the discretion of the court whether or not to award the relief. Even if the past conduct has been remedied in the past and as of now it does not holds credentials to recur then it will be upon the discretion of court to grant any remedy, if it deems appropriate.

Issue of Proposed Conducts

Like the rest of sub-categorised conducts, for the proposed conducts there was not as such provision. However, Law experts that previous companies ordinance did not exclusively mentioned proposed or threatened conducts but still there was some authority, but generally speaking statutory provisions didn’t cater the proposed or threatened conducts. But there is the case law of that era which reports that if there was no provision for it, neither there was any restriction on such acts in the provision. Irrespective of the fact that ordinance didn’t tells of proposed act, such conducts could still be caught where there is the evidence that decision has been taken to carry out the conduct and where the intention has been showed to carry out the specific conduct. Same is what Section 724(1)(b) of Cap. 622 suggests that any proposed act or omission of the company whether done by the company or on behalf of it, is now covered with legal veil.

Issue of Minor Acts

For the minor acts there is somehow some sort of benefit of doubt and any conduct done by the individual in their personal capacity may escape the liability of unfair and prejudicial conducts. But for the situation where such individual acts were taken together and amounts to some collective conduct then for sure, such act shall amount to the unfair and prejudicial conduct.

Conducts which applies to all members of the company

So far we have discussed the conducts which somehow relates to the part of members, any particular director or any individual person but there are certain conducts which applies collectively to all members of the company after opening a business in Hong Kong. Case of Scottish Co-operative Wholesale Society reports of the circumstances where court held that there are certain acts which potentially comes under the umbrella of statutory provisions irrespective of the fact that conduct applies to all members and that all members have suffered the same extent of prejudice caused by that particular conduct. Lord Denning states that:

Even though the oppressor oppresses his as well as other colleagues of him or her thus destroying the values of his shares as well as devalued others shares, shall be entitled to the remedies of Statutory provisions.

This view of Lord Denning was endorsed by the Hong Kong’s courts and script of Section 724(1)(a) of Cap. 622 reports of same. Although there is the possibility that despite of being uniform to all members, unfairness shall still be done to the part of members because actual impact of the alleged conduct on these members might reports to different circumstances and treating them uniform to other will be unfair to these members.