Remedies for the Members and Explanation of the Plaintiff and Irregularity Principle in Company Formation Hong Kong

The possible discrimination of minority directors from the majority cannot be negated and there is the need to establish proper grounds for such situation. We have already discussed the doctrine of Majority rule, which states that decisions of the members will be done and ratified if majority endorses it. For the situation where there is the consensus of majority members, then such decision is the binding on the company, so does on the minority members and thus considered as the will of the company. As in the corporate world, uncertainty is the foremost expectancy and hence there can be the possibility that majority members can take decisions to detriment the minority members. For the situation where majority members are also the majority directors, then there is no uncertainty in the possibility that board might get company enter into the transaction from which company may suffer and as they also have the majority in the general meeting and in the board then such mal-practice of majority can easily be ratified. To prevent such unfavourable circumstances and abuse of power by the majority, legislation provides remedies to the minority members, more specifically. It has been held that for any abuse of power by the director, members through the consent of majority can remove that director but for the situation where minority members are the victims of any discrimination by the majority. Cap.622 which deals for the issue to create company Hong Kong, contains certain provisions which allows minority to seek for the remedies against the discrimination of majority. Part 14 of Cap.622 specifically entails about such remedies as:

  • Div.2 has the provision for Unfair Prejudice Remedy.
  • Div.3 injuncts restriction on the certain conducts.
  • Div.4 allows for the statutory derivative action.
  • Div.5 allows for the inspection of company’s records.

Apart from these remedies, Div.4 of Pt.4 entails more remedies and certain remedies for the members. In addition to this, common law also contains some remedies for the minority members and these remedies can be obtained through:

  • Common Law Derivative.
  • Conferred Personal Rights to the members.

Choice of proper action initially depends on the affirmation of the fact that whether the action, against which remedy is deemed to be sought, affected the company or personally to the member? It is noted that distinction between these two is hard, but where this distinction was made then where the corporate right is infringed then member can go for the remedy as per the Div.3 Pt.14 of Cap.622 and for the situation where the personal rights were infringed then proceedings for the remedies could be initiated as per Div.2 Pt.14 of Cap.622 or any remedy as per common law, whichever best suits the situation. The possible outcome of the action depends on the type of remedy, member sought for.

There are different perceptions on the provision of remedies to the member that it may prone to the abuse of power and may affect the independence of director’s privilege to decide and oversee the affairs of the company and negates what been decided to create company Hong Kong. But, factually speaking, this provision would in fact ensure transparency in the company and on the positive side it must be taken as the beneficial tool for improving and sustaining corporate governance. Though members as the whole have the powers to take notice and take appropriate actions in case of any misappropriation in the company, but still conferring individual powers to each member would let them take part in managerial affairs of the company and eventually would improve the overall managerial scope of the company.

For the situation where there are closely held private companies, there probability of dispute occurrence isn’t negligible, for such disputes, law of member’s dispute can help settle these corporate disputes. For example there can be the situation where dispute exists between company’s proprietors in the case, suppose for the winding up or the ways to exit the company, then law of member’s remedy can play its arbitrary role and help in settling of dispute between these proprietors through the remedy for the company’s winding-up on just and equitable grounds or where the issue is regarding the provision of exit from the company, law of member’s remedy could also facilitate, settle this dispute through the remedy of unfair prejudice.

Statutory Protections of the Minority Members in Companies Ordinance

To make sure that majority does not abuse the rights of minority after starting a company in Hong Kong and to make sure the enactment of minority’s rights, following statutory provisions are mentioned in Companies Ordinance:

  • Instead of Simple Majority Voting system, special resolution is needed for the important corporate matters such as, Alteration in Company’s articles, winding-up of the company, retrieval or reverse purchasing of company’s shares and the reduction in corporate capital.
  • Court’s sanction is required for the matters where company’s decision will affect its creditors such as for the situation where shares will be issued on the value less than its nominal value.
  • For such members or shareholders who own 5% of company total paid up shares and have the voting right in general meeting, can put forward the requisition of calling meeting, to the directors and they are supposed to take convening requisition seriously.
  • For the requisition to consider resolution in the company’s next AGM, there is the condition that such requisition should be put forward by the members holding 2.5% of total voting rights or any those 50 members who owns on average, shares of worth $2000 per member.
  • To inspect the company’s record, members representing 2.5% of total voting rights or any number of member or five members possessing shares of worth $100,00 per member, can seek the court to grant order regarding inspection of company’s record.
  • Dissentient member has the statutory right to seek court to grant the cancellation of any resolution, the subject of which is the alteration of company’s objects or the variation in rights of any class of shareholders or any scheme of arrangement.
  • For any 100 members or the members holding 10% of company’s total issued shares, request can be made to the financial secretary to initiate investigation of company’s affairs.
  • Non-complying members or the members who do not go in the favour of take-over offer after starting a company in Hong Kong, in case of successful take-over, those non-complying members would be given the right to be bought out.
  • Where the affairs of the company are being conducted in completely unfairly prejudicial manners, then Section 168A allows members to seek relief from the court.
  • The statutory derivative action mentioned in the Part IVAA     allows the members to intervene in the proceedings of the company for any act or event of misfeasance.
  • Just like members have the right to show their contradictory sentiments, for the event involving offer to buy back the shares, any member who do not agree or comply with this offer has the right to be bought out.
  • Member has the right to seek for any relief from the court by filing a petition to order winding-up of company.

For any act which contradicts with the companies ordinance or company’s articles, or any persuasive act, offer or conduct to compel others to do so or any other matter involving the possibility of breach of fiduciary duty, any member, executive of the company or the financial secretary or any other whose interests are prone to be abused and affected, can seek the legal help to plea court for an injunction.

Explanation of the Irregularity and Proper Plaintiff Principle

Not every act be considered as the discrimination against the minority in Hong Kong company setup service thus the need for laying out such principle was felt in the Foss’s case and thus the following two principles helps in restricting members to seek redressal for any inappropriate conduct or act in the company, these two principles are based on:

  • Irregularity Principle.
  • Proper Plaintiff Principle.

Restriction as per Irregularity Principle

As per the classic definition of irregularity principle, member cannot sue or complain against any discrimination merely based on informality or irregularity. This restriction is for such informalities and irregularities which can easily be cured or can be rectified by the voting in general meeting and where there is no uncertainty in the intentions of majority members. This can best be understood by the court’s observation in the case of Re Hong Kong Sailing Federation, where several motions were put forward before the general meeting for approval or denial through voting but eventually denied by the overwhelming majority votes in the favour of denial. The member, who votes in the favour of the motion, sought court’s help to invalidate the general meetings proceedings as there was the breach of company’s articles on the procedure of polling. Hon’ble denied to grant relief with the observation that though there were irregularities but those irregularities are not of such extent where proceedings of the general meeting could be declared invalid. Court supported this denial with the argument that the extent of irregularity that happened could easily be ratified by the ordinary resolution hence on such a pity point and in the presence of alternative solution, court cannot declare whole of the general meeting’s proceedings, invalid.

Restriction as per Proper Plaintiff Principle

As per this principle, company is the legitimate plaintiff and not any member, to sue or complain against any act of the directors which regards to the breach of their fiduciary duties. This can either be taken as the case where company is the legitimate party to plea before the court to award the redressal for breached duty as company is the one concerned entity whose rights have been infringed. This legal standing can better be understood with the legal position of court in the Foss’s case, where two shareholders approached court to order action against directors who breached their duties. Court denied their plea and reported that, shareholders does not have the legal standing to request proceedings against the directors, instead company can do so.

It is noted that, this matter can sometime be complex in assessing the credential of the legitimate grieved party, this can easily be solved by clearly mentioning in the company’s articles about the legal authority for such actions to be taken in Hong Kong company setup service, to be conferred to any of corporate organ. Generally, such legal authority is conferred upon the board of directors and thus holds the legal position to initiate any such legal proceeding and wherever directors decides to go into the legal warzone, then such decision of directors would be called as decision of the company, itself.

Like any other corporate matter, there are certain exceptions in the Proper Plaintiff Principle. Apart from the fact that this principle does not allows the individual to initiate proceedings however under certain provisions of the Common Law and Cap.622, any member is independent in initiating legal proceedings against any wrongdoer, on the behalf of the company and this exception must be made available only in special circumstances. Wherever such exception is exercised, it would be treated as the action as per “Derivative Action”.

Possibility exists that any situation may occur which falls outside the border-line of Proper Plaintiff Principle such as for the situation where the Common Law or Cap.622 confers personal rights to the individual or the member to act. Because, for such conditions member’s personal rights has been infringed and thus he or she stands the proper ground to seek relief against the actions of wrongdoer. As it is evident from this provision or exception, whatsoever would best suit, that this is not what the classic essence of Proper Plaintiff Principle implies as it held company the legitimate victim and not any member, but common law supersedes this on the grounds where personal rights are being or has been infringed.

Summing up Proper Plaintiff & Irregularity Principle

It seems as if Proper Plaintiff Principle follows the doctrine of separate entity and it be argued well that both principles have the justifications on following basis:

  • These principles restrict the multiplication of actions against the same issue for number of times.
  • Instead of allowing individual member to seek for action against any mis-conduct, company stands the legitimate position to seek for the reasonable grounds to assess whether to act or not.
  • For the situation where majority declines the legal proceedings, court should not intervene especially where the issue can easily be cured with most of the general meeting.