Personal rights in case of Fraud on Minority Members and as per the Statue for Company Incorporation Hong Kong


Basically, the word “Fraud on Minority Members” seems to be quite unfortunate. It is believed that fraud is not the relevant and proper word to use here however the legislative demands of its usage in corporate sense. So, the word fraud in corporate sense is defined as:

Abuse of the powers by the person(s) responsible for corporate affairs of the business or generally are in control of the company.

Despite of the fact that different implications are imposed for the exercise of personal rights after getting out of the question of how to open a company in HK but generally it is thought and considered that minority member can invoke personal actions as per the general law for the situations where majority members allegedly acted for the mis-conduct and fraud on the minority members. Such doctrine related to the fraud on minority is based solely on the general equitable concept of fraud which restricts the majority members to exercise those powers and act in the way, which enables majority members to indulge in the activities and decisions which paves the way of fraud to the minority members. In addition to this and to prevent the situation of fraud towards minority members, majority members are restrained from using those powers which are beyond their scope and are not justified thus wouldn’t amount to abuse of conferred powers, so that grounds for the fraud on minority be diminished. Generally speaking members are not considered as fiduciary towards transactions with each other nor they owe any sort of fiduciary duties to other fellow members of them and thus prima facie allowed to vote for their personal interest at general meeting in a company incorporation Hong Kong. But general equitable restraints still would be implementable on the majority members to prevent them from securing personal gains from the concerned member nor they would be allowed to get unprecedented gains with the veil of allowable voting rights for the personal interests in the general meeting, which would be out of the scope of conferred powers and also would be inconsistent with the contemplated objects of power. The principle which deems to prohibit members from altering the articles of the company, except of the fact where matter is thought to bona fide for the company, should be seen in the wider spectrum of doctrine of fraud on minority which primarily focuses on the restriction or restraining of powers of the majority members. Another relatable example for such situation would be the one, where majority shareholders in the general meeting, passes a resolution through which authorisation of issuance of shares was made merely to dilute the holdings of minority shareholder in the company.

For the case of Hiew Fook Siong, Court of First Instance accepted the principle that shareholders are not generally fiduciaries and hence owes no fiduciary duties to the Hong Kong company establishment and thus on these grounds it is not a necessity of the member to act bona fide for the company and in the best interest of the company. But, Court of First Instance also showed consent to English standing for the case of Estamnco (Kilner House) Ltd where English authorities established that the doctrine of fraud on minority requires that the powers of the general meeting be made subjected to the equitable consideration, to prevent the situation where these powers may be exercised for the unjust purpose against the minority member in a particular way. On account of presented facts and after examination of these facts, court held that doctrine of fraud on the minority basically does not restricts and restrain general meeting to exercise its legitimate power of removing particular director from his or her office. Legal commentators states this decision to be legitimately arguable and presentable because it is not the legal right nor the prerogative of the director to remain in office as long as they wish, nor they are allowed to decide who to be remain director of the company and whom to be removed from directorship, as these are the legitimate powers and sanctity of the general powers to decide for such matters.

For the case of Sunlink Int’l Holdings Ltd, Harris J accepted that equitable constraint on the powers of majority is quite legitimate and enriched with sense and for such situation, court has the legal standing to intervene in the matter and restrict particular shareholder(s) so that the alleged person do not destruct economic standing nor the corporate sanctity of the minority or any other shareholder for no rational reason, by his or her exercise of vote. For the same case, Court ordered injunction to restrict majority member or shareholder where the alleged person through his voting right deems to inject capital of the company which is in liquidation and thus such act of opposition from the alleged shareholder would eventually cause company to be de-listed from the stock exchange and henceforth such exercise of votes by the alleged shareholder would disable company to acquire the last feasible and applicable rescuing option.

Personal Rights of the Member as per Statute

After answering the question of how to start a company in Hong Kong, there are numerous provision and legislations which bestows exclusive and statutory rights to the member(s) of a Hong Kong company establishment and such statutory rights of the member(s) are:

  • Member(s) has the right to restrain company from such act which amounts to the contravention of objects of company’s articles and would let it to exercise those powers which are not stipulated in company’s constitution.
  • Member(s) has the right to inspect company’s record and if due to any reason they are not allowed to exercise their such right, they me seek the help of court to allow them to inspect company’s record.
  • Member(s) has the right to receive company’s balance sheets or financial statements.
  • For the circumstances where company is being winding up or deems to be wound up, member(s) has the right to apply to court as petitioner to consider him or her as the contributory to the winding up of the company.

In reference to the above-mentioned rights, member has the right and thus entitled to the enforcement of these statutory rights and if due to any reason they are not given these rights then member(s) shall be considered eligible to seek court’s help to confer him or her these statutory rights, regardless of what majority members decide and will of majority shareholders. But for other rights which prima facie seems to be the rights conferred by statue then question may shall be posed on the scope of member’s eligibility and credential to apply to the court for the enforcement of statutory rights, which are under question. For the circumstances where passed resolution deems to invalidate the statutory rights of the members and falls within the jurisdiction of violation of the statutory rights of the member such as the right of the member through which he or she can demand for the holding of poll at the general meeting. But generally it is argued that such violation could have been prevented by the Irregularity Principle entailed in the case of Foss, provided matter in question is of the nature that even though invalidation  of resolution, consent of majority would not have been changed and that majority’s decision would remain the same in the newly called meeting, even if proceedings to held resolution invalid be commenced or decided.

Not only these are the conferred powers to the members, there are more statutory rights that the company’s legislation confers to the members of the company. Such legislatively conferred rights by the company, centres towards the provision of remedy to the members for any wrong or fraud done to them, through the exercise of their (members) personal actions. These exclusive and corporal legislatively conferred rights include:

  • Right to seek for the Unfair Prejudice Remedy.
  • Right to have the winding up of company furnished on just and equitable grounds.
  • Rights to invoke Statutory Injunction.

Statutory Protection of the Rights of the Minority

Companies ordinance provides certain protection to the minority shareholders after crossing the barrier of how to start a company in Hong Kong, to safeguard their rights and to ensure that majority might not abuse the minority shareholders through the exercise of their powers. Such Statutory protections are:

  • Rather than the ordinary resolution, special resolution is required for important matters such as Alteration in the company’s constitution, providing financial assistance to any one for re-acquiring the shares and acquiring of new shares. It must be noted that special resolution will only be considered effective and valid if it has been passed with majority votes.
  • Court’s sanction is required for the special circumstances such as matter which directly affects the company’s creditors. For example, selling company’s shares at the value less than the nominal or market value or reduction in the capital of the company.
  • Victimised member is allowed to seek court’s help to get the resolution cancelled especially when the alleged resolution deems to alter the objects of the private company, any matter deems to variate the class rights or for any such matter where private company approved a redemption of its capital.
  • Any member who holds 5% of the shares of the company, is entitled to move the requisition to the directors to convene the general meeting. But if directors fail to convene the meeting, requisitioning member is independent in convening meeting in his or her personal capacity.
  • Those members who hold 2.5% of the total shares of the company and so the voting rights, may requisite the resolution to be considered at the next annual general meeting of the meeting. If any 50 members of the company who have paid $2000 at average against their acquired shares, those can also put forward such requisition.
  • Regarding inspection of company record there is the statutory requirement which says that only those members are eligible who either own 2.5% of voting rights in the company or any members, not less than 5, who have paid up capital of $100,000 each, against their acquired shares.
  • Regarding the investigation of the affairs of the company, 10% holders of the company’s shares may apply for the appointment of investigator for this matter, to the Financial Secretary of the company.
  • If due to any reason, take-over is successful, any member who does not supports such action may have the right to be bought up.
  • Members who thinks that matters of the company are being carried out in completely unfair prejudicial manner, he or she may invoke Section 168A or the Unfair Prejudice Remedy to get relief from such un fair operations of the business.
  • Member of the company is entitled to intervene or bring up the proceedings of derivative action as per the Part IVAA of the ordinance for any act of misfeasance.
  • In case if general offer to buy back or re acquire the shares of the company is somehow successful, all those members who do not consent with this success nor backs off such offer, may have the option to be bought out.
  • For the winding up of company, any member in favour of winding up may move the petition in the court for winding up of the company.

For any situation as per which any attempt or act to contravene company’s constitution or companies ordinance, any persuading offers or act of convincement be evident or any sort of breach of fiduciary duties is visible then Financial Secretary of the company or credit or any member of the company whose rights have been or are being infringed and affected by such conduct or act, may apply to the court for the grant of order of injunction.