Personal Rights as per the Articles of Association for Hong Kong Company Establishment and the Avenues where rules against Reflective Loss hold Invalid


Before getting into the discussion let’s refresh our memory cells and get into the explanation of the nature of the cause of actions where actions of plaintiff are different from that of company after addressing the question of how to incorporate a company in Hong Kong.

Rule against the reflective loss will still be valid if nature of the cause of actions of the plaintiff is different from that of company’s cause of actions. Let’s clear this out with the help of an example, consider a situation where director holds shares on behalf of the member and while trading these shares, director obtains the profits on shares amounting to the breach of his / her fiduciary duties owed to the company and that such breaches also amounts to the breach of trust owed to the member, on behalf of whom he / she is trading the shares and mal-intentionally obtains profit. In these circumstances, beneficiary’s claims against the alleged directors would be barred, for the situation where loss suffered by the member or the legitimate beneficiary of the shares, is reflective of the loss suffered by the company. It doesn’t matter if the claims of the plaintiff or the victim of this mis-conduct is brought up in the capacity other than the member of the company.

Rule will be applicable for the settings where claims have been brought up by the plaintiff on behalf of the employee such as concerning the payments of pension, which could have been paid by the company if company had not suffered the loss. Rule will also be applicable if the claim is brought up in the capacity of the creditor of the company for the repayments which company could have managed to pay if it doesn’t undergo the loss of its own. Rule will stand applicable and valid as long as the claims remain intact, regardless of the form of the sought relief, concerning any duties or levies which company could claim for itself. It is usually considered that even thought the claims of the company could have been met by the defence of the defendant or the defence of the person who committed wrong but plaintiff could still be restrained to go into the proceedings for the personal claims as per the no reflective loss principle regardless of the fact that issue of double recovery and the creditor’s claims is not being arising. However, this issue stills need the consideration in the Hong Kong as the matter is not yet settled that whether this rule applies on the circumstances where defendant that the plaintiff seeks to sue is different from that defendant which company deems to sue.

Situations where Rules against the Reflective Loss does not Apply

After getting out of the question of how to incorporate a company in Hong Kong and for the circumstances where the loss of the member and the company is distinct and separate from the loss of the company, member is entitled to pursue his / her personal actions for such circumstances. To determine and examine the situation to affirm the understanding that loss of member is distinct and separate from the loss of member, Court of Appeal introduces and subsequently applied the test, to determine whether the alleged loss enables company to compensate, once it recovers its own loss. Such financial loss of the member which company could have paid to them if itself does not suffer a loss, is regarded as reflective loss. Basically, a loss which member have sustained to deem to sustain due to their inability to recourse the company’s capital or funds, which company could not have sustained itself, will be considered as the separate and the distinct loss. This can better be understood by referring to the case of Gore Wood and Co, where the plaintiff who was also a shareholder of the company deems to brought a personal action against his solicitor, on the basis of the argument that solicitor is found to be in the breach of duty of care, owed to the company and to the plaintiff. The extent of duty of care owed personally to the plaintiff arises from the same facts as it was for the company. The House of Lords struck out plaintiff’s claims for the payment and the award of compensation for his loss, on the grounds that company would have paid the sought compensation to the plaintiff’s pension fund if it did not suffer the alleged loss by the negligence of the solicitor. The House of Lords denies award of compensation because such pray falls within the jurisdiction of reflective loss, but The House of Lords accepted the concept of enhancement or increment in the pension fund and thus enhancing value of the pension, if company could had been able to make the pension payment thus accepting this loss, a separate and distinct loss.

The rule against the reflective loss would also be held invalid if the sought remedy by the plaintiff for the incurred loss is not reflective of the loss caused to the company. For instance, consider a situation where court has allowed members to exercise their personal actions to restrain the company from the issuance of shares and diluting the voting powers of the members, even for the situation where the alleged mis-conduct is also being suffered by the company such as breach of fiduciary duties owed to the company. If any sought remedy or the cause of action by the members amounts to any proceedings of injunction or the declaration then for such circumstances issue of double recovery nor the problem of the damage to the interests of the creditor, arises.

For the case when company does not pursue its claims for the compensation but the member goes into the proceedings regarding claim of wrong done to them, then even though the loss caused to the member is of reflective nature that is, the loss of the member is the reflection of the loss incurred by the company, then member shall be entitled to pursue his / her claims for the incurred loss. This situation can be made clear by referring to the example where defendant contracted with the member of the company regarding sale of goods to the company and while being in this trade agreement defendant was found to be in the breach of contract. Through this breach of contract defendant caused loss to both company and the member. Even though it seems that the loss member incurred was the devaluation of the shares because of shrinking of company’s assets and thus loss is meant to be the reflective loss, but member would still be entitled for the recovery of loss from the defendant even if company does not commence the proceedings of recovery of loss from the defendant.

Courts however understand that there is some limitations on the application of the rule against the reflective rules and so does what proceedings of number of cases implies. Assume the situation where the person who have done wrong to the company, disables company to pursue or take any action against his / her mis-conduct through any wrong mean or any mis conduct then in this situation plaintiff holds the credentials and so does the eligibility to commence proceedings against the wrong doer for the recovery of compensation of his / her personal loss. However, this limitation or exception was depreciated by the Lord Millet NPJ. Lord Millet NPJ in the case of Chan Chun Hoo, before the Court of Final Appeal, communicated that principle against the reflective loss can only be applied if company either fails or denies to sue the wrong doer for the cause which led it to the loss. In addition to this, if the company settles the matter which is prone to any wrong doing or the mis conduct, with the wrong doer, on the considerable and quite generous terms, even this does not justify the disapplication of the rule against the reflective loss.

Personal Rights conferred by the Company’s Articles

As discussed earlier and as per the Section 86 of Cap.622, articles have the status of contract under seal between the company and each member, between member and other members of the company. As per the Section 86(2) of Cap.622 required at the time of HK company registration services, articles are enforceable as the contract by the company towards each member of it, by the members towards the company and by the member against other members of the company. Before the enactment of this provision court allowed the members to bring the proceedings for the enforcement of the constitution as the statutory contract, but certain limitations are imposed on such exercise by the members to restrain the probability of abuse. Most importantly, members are required to exercise such statutory provision for the enactment and enforcement of their personal rights conferred by the constitution of the company, as opposed and contrary to the rights conferred on the corporate entity as a whole.

It is thought that, distinction between the personal rights and the corporate rights is not very well maintained by the rights conferred by the constitution of the company. One possible definition of the personal rights can be that; personal rights are the propriety right or the proprietorial nature in the setting up sole proprietorship in Hong Kong associated with the shareholder of the company and that is the basic and the most fundamental distinction between the corporate rights and the personal rights. Another perspective gives the view that will it be appropriate for the settlement of particular dispute with the majority consent? Or something else is supposed to be adopted for the settlement and resolution of such disputes. But it has strongly be found that such tests do not always promise the certainty of resolution. Let’s clear this out with the example, suppose that some rights such as transfer of shares, are of proprietorial nature in the setting up sole proprietorship in Hong Kong needs to be settled with the personal rights as such matters would be more complex and less certain for the rights conferred under the corporate constitution. While as far as second approach is considered which concerns the resolution of the matter as per ordinary majority, then for such approach there would be more questions on the grounds that how one can determine that whether or not it would be appropriate to settle the matter as per majority consent or through the ordinary majority.

In light of the difficulties enlightened by the case laws. SCCLR emphasised that legislation should be so clear and easy for the common man to understand that he or she can easily proceed to enforce his / her personal rights, as mentioned in the articles of association, memorandum of the company. Basically, these are the recommendations which led to the enactment of the legislation which is today prevailed and enacted as the Section 86(2) of Cap.622, required for the HK company registration services, while for the matter concerning with the locus standi, it seems as if it now not necessary to distinguish between the conferred personal rights and the corporate rights, as mentioned in the constitution of the company because members have the legitimate and legal standing to enforce all such provisions of the constitution, especially the provisions concerning with procedural matters.