Regulations for Unfair Prejudice Remedy for set up Hong Kong Limited Company


Section 168A basically refers to the Unfair Prejudice Remedy and was introduced in 1978 for Hong Kong company and overseas company registration Hong Kong and considered as one of company laws reforms which follows the model developed and prevailed in the United Kingdom.

In England, on the recommendations of Cohen Committee, provisions pertaining to this matter was enacted and introduced as Section 210 of Companies Act 1948. Section 210 intends to address the complaint regarding oppressive conducts in the affairs of the company and deems to grant the relief to the victims of such oppressive acts or conducts. Courts elaborated the concept of “oppression” as the act or conduct which is harsh, burdensome and wrongful and also involves the lack of probity. Such provisions were considered as quite restricting as there are very few instances where relief was granted as per this provision, in England. The Jenkins Committee was considered to be critical of this approach and recommended some amendments in the prevailing provisions. As per the proposed amendments, relief shall not be restricted to be awarded only for the situations where there is evidence of lack of probity instead it should also be granted for the circumstances where there is visible departure from the standards of fair dealing and evidences of violation of the fair play, through which members entrust their money to the company, are apparent. Provisions in the Hong Kong centres towards this recommendation and perceive it to be quite appealing and this is the reason that enacted provisions in the Hong Kong reflects of this approach. Subsequently, United Kingdom’s provisions were also amended to adopt the concept of Unfair Prejudice Remedy, in the Companies Act of 1980. 

For the span of time and years prior to the introduction of Unfair Prejudice Remedy courts have been relying upon the doctrine related to the winding up of the company on just and equitable grounds which is thought to be quite drastic remedy but rather quite a feasible remedy and alternative to prevent members from the state of continued dissension. But now situation is totally opposite to what it supposed to be in the past and post 2004 era marks of wider and kinder remedies available to both Hong Kong and Non-Hong Kong Companies or any overseas company registration Hong Kong and members of both of these kinds of companies can benefit from these remedies.

Statutory provisions are not only available to the minority members but subjected to certain conditions, majority members can also benefit from these provisions and get relief because these remedies are of discretionary nature and court thus expect from the majority shareholder that they will move forward and through the gesture of goodwill, would intend to end the unfairly prejudicial conduct, for the matter in question. The range of available remedies spans up to:

  • Restraining directors or the members of the company to commission any act or conduct.
  • Proceeding might be brought in the name of the company against the alleged person, as per the directions or understanding of the court.
  • Receiver may be entitled to be appointed to any part of company’s assets or the property.
  • Court can order to regulate the affairs of the company or any regulation be pertaining to the purchase of member’s shares, by any member of the company or the company itself.
  • Members whose rights have been infringed, court may order the compensation or damages in favour of the members who are the victims of Unfair Prejudicial Conduct.

By referring to the majority cases, it is thought that Unfair Prejudice Remedy is considered as the last available remedy for the settlement of disputes within private companies. From this, it can be well conceived that it is not for the companies whose shares are listed in the Hong Kong Stock Exchange or any stock exchange.

If we look for Unfair Prejudice Remedy in the Cap.622 we will find that Part 14 Div.2 of the Cap.622 deals with the Unfair Prejudice Remedy, more precisely, Sub section 723-727. In the predecessor Companies Ordinance, it was enacted as Section 168A (repealed) and now Unfair Prejudice Remedy is available under Section 724 of Cap.622 and as per this section, remedy will be available if:

  • Company’s affairs are being carried out in the unfair prejudicial manner towards the interest of any one or more members.
  • The act proposed or have been done seems to be of unfair prejudicial nature to the company.

But before getting into details of what does Section 724 has to offer, first let’s get into the depth of Section 168A(repealed) of Predecessor Companies Ordinance. So that comparison could be drawn, and analysis be served effectively.

Explanation of Section 168A

Predecessor Companies Ordinance implemented Section 168A to resolve the matters related to Unfair Prejudice Remedy in set up Hong Kong limited company. As per the Section 168A, any member of the company can apply to the court for the enforcement and actions as per Section 168A where he/she sees that affairs of the company are being conducted or have been proceeded in completely unfairly prejudicial manner and thus interests of the company as well as its members are being or have been infringed, including that of plaintiff, applicant or the petitioner.

Applicant is required to apply to the court for actions pertaining to Section 168A via Petition and it is observed that for many cases, applicant petitions for the order of action as per Section 168A as an alternative to the orders related to the winding up of questioned company.

Format of the Petition 

After the company formation HK and in the case of petition, there are certain elements which the petitioner must include pertaining to invoke Section 168A, and for the validity of such petitions it is required for the applicant to show that:

Interest of the Petitioner

This is the requirement of prime importance as nearly half of the filed petitions which complains of unfair prejudicial conduct, are merely for the exclusion from the management. For the examination of interest of the petitioner, sufficient test will be to look at the terms and conditions of the contract. If the terms upon which petitioner became the member of the company, binds member to participate in the managerial affairs of the company then any attempt to exclude from this obligation will be considered equivalent to the act which impacts the interest of his/her as the member of the company. However, non-members are excluded from this obligation and test.

Extent of being affected

To determine the extent to which victim claims to be affected from the unfair prejudicial act, it is required for the petitioner to show that there had been the kind of conduct which contravenes his/her interests. Critically speaking, once the proceedings has been started, Section 186 does not allow unilateral withdrawal of application merely on the grounds that petitioner does not want to continue the proceedings, any longer.

Relation to the affairs of the company

If the allegations include the course of conduct which is in complain, then it can be objectionable hence it is required for the applicant or the petitioner to show that activities involved in the alleged conduct have caused prejudice to the member qua member.

Unfair Conduct

It is required for the petitioner to establish that complaint conduct is unfair, and this can be proved by showing that:

  • Breach of terms, upon which member’s agreed that company’s affairs shall be conducted.
  • Use of rules and regulations in the way through which such exercise of rules or regulation shall amounts to the unfairness and so does the good faith. For example, carrying out the affairs of the company in equitable considerations, which may be legitimately unfair for those who are running affairs of the company on their legitimate legal rights towards their contribution in the company.

Example of the Unfair Conducts

Following are some of the acts which shall be counted as unfair and prejudicial:

  • Any conduct involving misappropriation and the diversion of the assets of the company.
  • Any conduct through which shares of the company be issued or allotted merely to dilute the interests of the petitioner or any other member(s) of the company.
  • Any conduct involving mismanagement in the corporate establishment.
  • Any conduct through which infringement of Statutory Rights is done.

Apart from these, subjected to the presented circumstances, evidences and facts in the case, following inequitable conducts may also be considered unfair:

  • Removing any executive or director from his/her office.
  • Depriving any member of the company, from his/her dividend.
  • Any conduct amounting to the alteration of the constitution of the company.
  • Destruction of any underlying or those relationships which are bona fide and in the interest of the company.

For the case of Re Broken Ltd circumstances reports towards the situation where minority shareholder complains of the situation where he was excluded from the management of the company and that business of the company had been diverted to another company and thus affairs of the company has wound up to its detriment. After presenting the evidences and facts, plaintiff sought an order from the court to allow the winding up of the company on just and equitable grounds and if such order can not be given then in alternatively his entitled shares should be bought out. During the proceedings, majority shareholder showed consent to the winding up of the company, but they argued that it will be the abuse of power if proceedings of Section 168A be commenced. It was held in the court that plaintiff has made out this case to be prima facie of the nature of unfair prejudice and thus made this case entitled of full hearing so that this may be established that what would happen if relief be granted. An order to purchase shares of the petitioner would sound more legitimate rather than ordering the winding up of company. It was believed that such valuation of shares would be preferable and thus would entitle liquidator to take on the proceedings against majority shareholder. On these grounds, proceedings pertaining to the Section 168A should be commenced.

Script of the Section 168A was amended in the 1994. This amendment was made through an ordinance (Ordinance No. 72 of 1994) and this amendment clarified the issue of relevant conduct and clarified that relevant conducts may include the past activities and introduced the generality of the word “members”. Section 168A was further amended in 2004 through the Ordinance No. 30 of 2004 and this amendment extended the scope of Section 168A to Non-Hong Kong companies as well as to all setting up a business in Hong Kong as a foreign and also extended powers of the courts and came into effect in July of 2005. But, the clear definition of the word “unfair prejudicial conduct” was still missing.

Matter of Quasi Partnership

Court communicated that Section 168A can be applied to give relief to the shareholders for the matters pertaining to the quasi partnership where probability exists that personal relationships of the parties may infringe or prone to any hurt. Quite similar views were presented in the case of Re Company (1983) UK and Justice Vinelott communicated in the case pertaining to the winding up case that: it seems unlikely to me that legislature could have intended to exclude the scope of Section 168A, in the position of Mr. Embrahimi in the case of Westbourne Galleries. This decision in easier word could have been narrated as the one where shareholder being in the quasi partnership has been excluded from being involved in the management of the company then he/she (plaintiff) may apply to the court for relief under Section 168A.

Effect of Unfair Prejudicial Conduct on Intra-Member Relation

This matter has been open to debate that whether any conduct related to unfair prejudicial act amounts to restrict or not to restrict the relationship between the members of the Hong Kong company or anything related to setting up a business in Hong Kong as a foreign. Lord Granchester QC communicated that; grounds for the existence of Unfair Prejudice Remedy shall only be found if the complaining act deems to diminish or jeopardise the value of the shareholder’s shares.