Type of Breaches that Result in the Award of Unfair Prejudice Remedy in Hong Kong Company Establishment


Not every breach and violation should be called as breach which may amount to the duty of unfair and prejudicial conduct. Hence, there is the need to stop abuse of this provision because it is the last possible and feasible option for the victim to stop unfair and prejudicial conducts after create company Hong Kong. Following are some of the breaches which may amount to the award of Unfair Prejudice Remedy.

Breach of Constitution of the company and agreements

Lord Hoffman in the case of O’Neil remarked that after create company Hong Kong any breach of constitution or agreement with the shareholder shall amount to the conduct of unfairness and prejudicial and would be entitled for the award of remedy. Lord Hoffman says that, if to be specific then violation of any such terms upon which parties agreed that; affairs of company shall be proceeded this way then violation of such legal understanding would have the standing for the award of Unfair Prejudicial Remedy on the grounds of commercial unfairness. For the reference, cases of Re Harmer Ltd, Re A and BC Chewing gums Ltd, Re Mediavision Ltd and Re Bondwood Development Ltd may be consulted.

However, this does not mean that every unlawful conduct should be called as unfair and prejudicial conduct hence on this ground any technical irregularity or any trivial infringement should not be called as unfair and prejudicial. Proceedings of the case of Wong Man Yin reports that court must be vigilant in protecting those clauses of deeds and those provisions of company’s constitution, violation of which results in unfairness and prejudice towards the interests of members, in case of agreement with the shareholder while for the case of constitution of company, reported conduct infringes rights of company. If due to any reason breach of particular clause of article does not amounts to the unfair and prejudice conduct but after set up Hong Kong limited company if this violation is frequent then such conduct should be considered for the Unfair Prejudice Remedy.

Breach of Fiduciary Duties

The duties which are entrusted upon the directors of the company by the members of the company are usually called as fiduciary duties and if director is found to be violating these terms and duties then there will be no bargaining on imposition of penalty or duty between the member and the company, thus as per the principles set out in the case of O’Neill duty of unfair and prejudice remedy shall be imposed. For example, to set up Hong Kong limited company terms of the contract or the constitution of the company regards following conducts as unfair and prejudice:

  • Involvement of director in making secret profits.
  • Directors involvement in the diversion of the corporate business.
  • Conduct of director involving misappropriation of company’s assets.
  • Breach of such duties which requires director to act bona fide in the interests of the company.
  • Where director exercised his/her powers for some improper purpose.

It must be noted that, it is not necessary that only these breaches could lead to the imposition of duty and articles of company, or the terms of the agreement either can alter these provisions or add some new. In short, what constitution of the company as well as terms and conditions of the agreement entails as fiduciary duties then violation of even single of them shall lead to the duty of unfair and prejudice remedy. This clearly sums up that not every violation should be called as unfair and prejudice to the interests of either member or the company itself and if for any case evidence exists that breach of duty has occurred, even then this does not ensure that unfair and prejudice remedy shall be granted. Thus proper evaluation of the circumstances should be carried out even though the questioned conduct falls within the statutory provision and not under unfair and prejudice conducts. But breaches such as misappropriation of company’s assets is intrinsically prejudicial to the interests of the company and falls within the jurisdiction of statutory provisions. Even tough such violation did not have quantifiable impact on the shareholder’s financial position nor on its possesses shares, even then it shall be called as violation of statutory provisions.

It is possible that conduct which is prone to being called as unfair and prejudicial could have been ratified by the general meeting through the majority and there is the possibility that this ratification could seal the interests of minority. Thus, it is said that any such ratification would not bar Section 724-725 of Cap. 622 to intervene and provide remedy. If for any case such ratification would be made then such conduct would be called as the conduct, exacerbating the unfair and prejudice conduct.

As we know that breaches of fiduciary duties involve wrong done to the company and in this way company is the one which suffer damage and loss, but members are also entitled to receive remedy for such unfair and prejudicial conduct under Section 724-725 of Cap. 622, provided petitioner does not side line the proper plaintiff principle, as elaborated in the case of Foss, to obtain the remedy or damages for the incurred loss, in favour of the company as per petition of  Section 724 of Cap. 622.

Award of Excessive Remuneration to the Director(s)

After establishing a business in Hong Kong payment of excessive remuneration to the directors is generally considered as misappropriation of company’s assets and where the director is also the shareholder of the company then such excessive remuneration would be categorised as unlawful return and in general both types of practices would be called as conduct which is unfair and prejudicial. Ascertaining its technicality, Deputy Judge Poon in the case of Re Ching Hing Constructions Co Ltd summarised the applicable principles as follows:

  • Payment of those excessive remuneration to the directors shall be called unfair and prejudice conduct where such payment is made so as to detriment those members of the company who are not directors or hold any executive position.
  • If the controlling directors of the company award remuneration to themselves through the scheme other than conventional schemes who has standards for the award of remedy and specifically deems to distribute profits of the company then such abusive way of payment of remuneration should exclusively be dealt as the conduct purely unfair and prejudicial to the interests of the members who are not directors of the company.
  • To determine that whether the quantum of emoluments was excessive court may apply the objective test, with reference to the commercial context. As such objective test would ensure justice and ensure that no abuse of this provision shall be done.

However during the proceedings Deputy Judge Poon accepted that if the directors of the company continue to transact in the situation where company is going through financial crisis and there is no chance and so does the probability that company would return to profitable stage and prospects of it would improve and company shall restore its profitable status, then court is independent to draw interference that decision of the director is improperly influenced by their desire to continue their services and remain controlling the company. In this case any drawn remuneration and other benefits shall be connected with the prevailing and occurred circumstances.

Mismanagement in the Business of the Company

For the situation where complaint of mismanagement in the company, by the petitioner is only of the essence where only grounds for such allegations is just the difference of commercial judgements between the petitioner and the controllers of the company then for such circumstances unfair prejudice remedy cannot be invoked. Same goes for the situation where allegations involve poor management decisions and albeit such poor decisions lead company to suffer loss, then unfair and prejudice remedy shall not be granted nor shall be invoked. Although such conducts could prove to be prejudicial to the members, but it would not be unfair as members invest in the company knowing that nominal value of their shares depends on the competence of the management and they assume and perceive the risk that management may not be highly qualified nor competence. However, such acts of mismanagement may not amount and nor provide the basis for the court to enforce statutory provisions, on its discretion. Instead such acts are seen in the longer spectrum of act of unfairness where they are considered in the overall context concerning affairs of the company.

However, where there are serious managerial irregularities and serious mismanagement of the extent that it involves self-enriching practices then court may fairly regard such irregularities to be unfair and prejudice conducts. Court should test the extent of mismanagement through the objective test in reference to general objective test of unfair prejudice. The complaining act is equally held liable for the breach of duty of care, skill and diligence, as per the subsection 724-725 of Cap. 622, even if it seems to be equally eligible for the breach of fiduciary duties. But isolated breaches of duty shall be barred from the imposition of duty of unfair and prejudicial conducts until and unless it is potentially serious and demands proceedings of unfair prejudice remedy to continue.

Breach of Understanding

What we have discussed above, are legal powers and duties and apart from these legal duties there is another broader category for the situations of unfair and prejudicial conducts, as discussed in the case of O’Neill. They consider those equitable considerations which make it unfair and inequitable for those who are conducting affairs of the company, to rely on their strict legal obligations. On example for such situations could be the circumstances where it would in addition to the articles of the company, memorandum of understanding was signed at the time company was formed and now during operations of the business it would be unfair for the parties, who went into such understanding or promise, to exercise their legal duties in a way that it contradicts the provisions of memorandum of understanding and shall be declared as breach of understanding and the promise. However, for such technical issues, equitable considerations could come to rescue, and equitable considerations can be applied to restrain both parties from breaching this understanding and promise even though both parties are not in a position nor such understanding and promise could be enforced as a matter of contract. It must be noted that not only those contracts or promises or understandings went in, before the inception of the company instead any understanding or promise made during life of the company shall have the same status as of the understanding before inception of the company and thus it would be unfair if member be allowed to ignore it.

Now let’s comes towards the way through which such equitable considerations could be applied. For the application of equitable consideration in relation to promises and understandings which are not exclusively discussed in the articles of company nor are mentioned in the constitution of the company, it is required that certain extent of interest or relationship that are personal of some kind should be present among the group which is looking to implement its rights that are legal and the group which is looking to detain implementation of such rights. The justified fact that company is a small company or a private company, is itself sufficient for the import of equitable consideration in this context.

It should be noted that, after establishing a business in Hong Kong association must be continued on the grounds of personal relationship such as mutual confidence or any quasi-partnership company because for such related setting, relationship between the parties is quite analogous to that of being in a partnership.