Member’s Personal Actions for the Conducts of Wrong to both Company and Member(s) after Hong Kong Limited Company Registration

Despite of the fact that members have been conferred at some personal actions against the conduct which deems to infringe their rights or powers. But while examining the eligibility of the sought remedies pertaining to personal actions of the members there is the need to ascertain the certain restrictions imposed on the members. After Hong Kong company registration service, such restriction would be imposed on the members on the account of complaining conduct was as injurious and harmful to the company as it was to the members of the company. Following are some of the conducts which seems to be of the extent which regarded as injurious and harmful to both the company and the member(s) of the company:

  • Despite of the fact that members incurred factual loss or the corporate injury through the questioned conduct. But, the extent of loss or infringement of company’s rights seems to be larger than the loss, caused to the member. It can also be taken as the fact that the loss incurred to the member, basically falls within the jurisdiction of infringement of company’s rights and thus member does not hold the proper credentials and eligibility to invoke personal actions of the members. For such situation, member is said to suffer a “reflective loss”.
  • The conduct, in question, infringes both the rights of the member(s) and the company and that member’s loss seems to be the reflection of the loss incurred to the company. In this situation, remedy awarded to the company, shall entitle member to get compensated for his or her personal loss. There is the speculation that this situation will give rise to the separate cause of actions for both company and its member(s). However, this is suggested that members still be prevented and advised not to bring an action for the situation reflecting “No reflective loss principle”.
  • There can be the situation where questioned or the concerned conduct, infringes both company and the members but the loss caused to the member is neither reflective of loss incurred to the company nor it is identical to the loss of the company. For such situations, member is entitled to bring personal action against the personal loss incurred to him or her by the questioned conduct.
  • There can be circumstances where although company has suffered sort of harm, but the extent of the loss incurred by the member in his or her personal capacity does not vest authority to the company, through which it can invoke any action. Hence, in this situation member(s) is entitled to seek any remedy or the recovery against the loss incurred to him or her by the conduct, in question.

Circumstances where Member does not have any Cause of Action

After Hong Kong company registration service, where the wrong occurred, so as to harm or infringe the rights of company such as by breach of fiduciary duties by the director or where third party is liable for any tort or breach of contract, then justification of the member that he or she suffered loss on the grounds of devaluation of his or her shares in the company, does not amounts to the sufficient reason to invoke personal action and nor the loss of the company be considered as loss of the member through any reflective loss or anything else. Case of the Prudential Assurance Co Ltd reports the explanation of English Court of Appeal for such circumstances and their explanation reports that; member’s loss must not be considered separate and distinct from that of company’s loss. The principle explained by the English Court of Appeal says that:

The shareholder’s rights are confined to his or her issued shares and generally any conduct prone to the wrong, would not affect the issued shares because shareholder’s rights are still enacted towards his or her issued shares. Yes, it is true that shares would have been devalued as the company’s assets have been reduced. This is the reason, member’s shares have been devalued and member interpret it as the loss caused to him or her by the wrong doing, but in fact it is basically the loss incurred or occurred to the company. You may be wondering that, after the payment of Hong Kong business registration fees, if member’s loss is the reflective loss as it is the loss caused to the company then why member would not be allowed to invoke personal action? The answer is quite simple and straight forward, as the loss, member claimed to have been caused, is basically the result of loss of company’s capital, so this implies that devaluation was basically the product of such corporate loss. This gives us the clear understanding that, value of shares is categorically associated with the fortune of the company and this is the reason member is not allowed to justify loss with such circumstances because it is quite possible that company would have recovered this loss and whenever company would restore its former financial position, member’s shares would restore its value too. Thus, merely because member suffered reflective loss, he or she is not entitled to present this reflective loss as the cause of action(s).

This principle does not only apply to the circumstances dealing with the devaluation of the shares, issued to the shareholder, after the payment of Hong Kong business registration fees, instead it is applicable to all other justification of the Reflective loss, where applicable. Such as, justification subjecting the loss of dividends which could have been paid or declared to the member if wrong would not be conducted. Apart from this, any loss of payment which would have been paid to the member if company does not be made deprive of its entitled fund and such deprivation was the outcome of wrong done to the company.

Circumstances where Member have any Cause of Action

For the situation where both company and the member suffered safe loss and the member’s loss is not distinct and separate from the loss of the company, instead his or her loss is reflective of the loss of the company. Then for such circumstances, member is not entitled to bring an action, for the recovery of this loss.

Referring to the case of Prudential Assurance Co Ltd, circumstance reports of the situation as per which, subsequent to the Hong Kong incorporation services, plaintiff alleges two directors of the company for the fraud and through such fraudulent activity and the breach of their duties. These two directors were found to be involved in the provision of misleading information to both general meeting and the board about the transaction concerning acquiring of certain assets for the company and this purchase was made at the price, much higher than the market price. Thus, on such justification plaintiff sought derivative action on behalf of the company and the personal action for the injury and infringement to his personal loss. For the personal action, Court of Appeal noted that preposition was misconceived. Court of Appeal however accepted that directors were found to be in breach of their fiduciary duty as they failed to advise the general meeting in good faith. Thus, on the account of unfairness, this cannot be treated as fraud however for such mal-practice and concealment of truth and facts, shareholder reserves the right to take any action pertaining to the recovery of loss, which he or she incurred by the wrong conduct such as expense in attending the meeting. But for the loss, which is of reflective nature such as the loss caused because of the devaluation of the shares or any other loss which is the reflection of the loss, caused to company, plaintiff or the member would not be entitled to recover a loss for such outcomes.

This principle was endorsed by the House of Lords in the case of Johnson and the House of Lord unanimously rejected the ruling of New Zealand’s Court of Appeal in the case of Scott where New Zealand’s court of Appeal made member’s entitled for the recovery of the loss for the loss which of reflective nature. Legal commentators’ comments that such restriction is made to discourage double recovery from the creditors and deems to protect them against personal action of the members for the same issue for which they are liable for the payment of compensation to the company. Such scenario may enable members to receive the compensation and company would stand uncompensated. However, the issue of double recovery was recognised by the New Zealand’s court of Appeal and they put burden of avoidance on the trial judge. Lord Hutton in the case of Johnson communicated that true essence of “No Reflective Loss Principle” presents that it would be preferable to decide the matter pertaining to double recovery, at a latter or subsequent stage by the trial judge. However, Lord Millet denies this view of Lord Hutton and says that matter of double recovery and the prevention of the members to receive recovery is the matter of principle and it would be prejudicial to settle this matter upon the discretion of the trial judge and it would be wrong to let member proceed with the action and leave the matter of double recovery upon the discretion of the trial judge and settlement of this at the later stage.

View of Hong Kong’s Legal Doctrine

In Hong Kong, after the Hong Kong incorporation services, case of Landune presents of the situation where rules against the reflective loss was applied. The circumstances of this case reports of the situation where subsidiary of the Landune Int’l Ltd (the parent company) purchased shares in another company at the nominal value higher than the price, at which concerned company’s shares were being traded and this concealment of truth was made by the vendor. For completion of this transaction, parent company (Landune Int’l Ltd) provided shares loan to the subsidiary so that purchase of shares be facilitated. The two directors of the parent and the subsidiary company was alleged to be involved in this trading and transaction with the vendor. Later on, one out of these two directors petitioned against this transaction as the creditor of the company on the grounds that company is not able to repay the debt, it owed to the directors, so the proceedings for the winding up of the company be commenced. Landune Int’l Ltd sought to strike out the petition on the basis of “cross claims” and argued that plaintiff was involved in the fraud done to the company and that the wrong doers must be held liable for the award of compensation to the company. After all this presentation and examination of the fact, Court of Appeal upheld the decision of the Justice of Kwan. Kwan J in her decision communicated that:

Landune Int’l Ltd should be barred as per the rule against reflective loss and shall not be held entitled to recover the incurred loss from the director and also that, the cross claims should not be treated as defence of the Landune Int’l Ltd, to prevent winding up of the company.

Court of Appeal said that, even for instance we assume that Landune Int’l Ltd sought to get relief against the alleged claims, even then the loss Landune Int’l Ltd actually suffered is basically the reflective loss thus such independent cause of action is not being entertained for this particular case. Court of Appeal further communicated that prima facie it seems as if subsidiary company is entitled for the award of remedy, compensation or the recovery of the loss as the shareholder loan issued by the Landune Int’l Ltd for the purchase of shares is legitimately, the subsidiary’s loss. Hence, it would be good and appropriate if subsidiary seeks and eventually be successful in recovering the incurred loss from either its directors or the vendors.

So, in this reference it seems that “No Reflective Loss Principle” is applicable in Hong Kong.