Guide to the Types of Breaches which Lead to the Unfair Prejudice Remedy for Hong Kong Open Company

There are different types of breaches which lead to the award of Unfair Prejudice remedy after obtaining business registration certificate Hong Kong. 

The general view about the award of Unfair Prejudice remedy in case of negligence or mismanagement says that just on the basis of the fact that company is a small family company, this does not mean that company is in a quasi partnership and the relation among parties is that of a mutual trust and confidence, during the operations of the company’s business.

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However, there is the need that after obtaining business registration certificate Hong Kong actual relationships between the companies should be examined so as to ensure the proper provision of facts and figures before the court and all requirements of justice shall be furnished. 

There is the possibility that after Hong Kong incorporation of company, in question, could have been in the quasi partnership at the time of its inception but subsequent to its establishments company may change its status from a quasi partnership company to a purely commercial footing so in this way any appropriateness to the equitable consideration that subsequently give rise to the legitimate expectation, would end.

As quasi partnerships provide the grounds for the equitable considerations to come into effect so as to restrain the basic understanding that pins the association of two parties with each other. But if company is not in a quasi partnership then this does not mean that there would be some harm to the petitioner’s case. 

But it is normally said that there should be some sort of personal relationship between the parties so that equity can intervene. 

Court of Final Appeal held that it is not mandatory nor does this sounds quite real that permanent personal relationship shall exist such as of mutual trust and confidence, with a state entity or state’s institution which entered into association or agreement through a joint venture as such personal obligation could not be exhibit by the state and thus such setting would be of transient nature and the parties requires not to relied upon this as the position held by the individual is temporary and likely to be replaced by his/her predecessor in such state owned entities.

 In addition to this it would also be difficult to establish the extent of personal relationship in the context of a large public companies and firms because the relationship between the parties is solely of a commercial nature.

In the case of Luck Continent Ltd, Court of Appeal held that there is unfair prejudicial act arising from the breach of understanding with the shareholder of the company as per which company would maintain its listing status in the Stock Exchange.

 But when facts were evaluated it came to know that there is no such agreement or understanding exist between the shareholder and the company however investor invested and thus acquired shares of the company on the implicit agreement which says that company should maintain its listing status. 

Court of Appeal took the view that as long as shareholders are the privy to the agreement, lack of personal relationships amongst the shareholders of the company does not depreciate nor deprives shareholder from exercising their legal rights which they should exercise in case of breach, irrespective of the fact that equity does not holds here. 

So here, agreement between the company and its shareholders that company would maintain its listing status shall be operated as being legitimate and would be a binding upon members inter se as other agreements or understandings are binding on them. 

Leave to appeal to the Court of Appeal was granted on the basis of a question which asks that whether the equitable consideration which restricts exercise of legal rights arises as the result of the personal relationship between the shareholders inter se and if it is so then does any tripartite agreement which demands maintenance of listing status exists between the shareholders inter se as well as is the company capable of giving rise to the personal considerations of the shareholders which would subsequently affect the exercise of strict legal rights by the shareholders. 

However, this appeal was dismissed without any consideration made on the part of court because change occurs in the shareholding doctrine of the company which subsequently rendered the dispute of the company or to the company.

As far as evidence on the part of petitioner is concerned, petitioner is required to establish that the alleged agreement or understanding exist in fact, so that complaint conduct could be made subject to the breach of understanding. 

There is no need for the agreement or understanding to be express but the after the Hong Kong incorporation of company, expectation held by the petitioner would also not be sufficient especially the expectation which all the parties of agreement take for granted, keeping in view the spirit and knowledge upon which they were cooperating. 

Normally it is difficult to prove such understanding which are outside the scope of company’s constitution and where the relevant parties set out their own set of rules and govern the matters as per the rules defined in general shareholder agreement. However, this does not mean that justified existence of complex written agreements does necessarily excludes the probability of existence of some other agreements between the relevant parties, either express or implied.

Exclusion from the Management of Company

If for any situation any proper elected official or director after new company registration in Hong Kong is excluded from the management of the company then any such act shall be declared an unfair and prejudice conduct because it contravenes the constitution of the company and thus on this basis this conduct would be called as an unlawful conduct. 

But if director is removed from his/her office as per the procedure mentioned in the constitution of the company then such exclusion of director shall not be called as an unfair and prejudice conduct because first of all it does not contravenes the constitution of the company and secondly elected director is not supposed to remain in his/her office, permanently and general meeting has the entitlement to remove any director under the provisions of Cap. 622 and constitution of the company.

But consider the situation where new company registration in Hong Kong was formed on the basis of personal relationship of mutual trust and confidence such as the quasi partnership then exclusion of director from the management of the company shall legitimately be called an unfair and  prejudice conduct because in such partnerships, investors contributes in the capital of the company and becomes member of  the company on the principle understanding that he/she shall be allowed to participate in the managerial affairs of the company.

 This not a myth and number of cases pertaining to companies in quasi partnership reveals that for such companies, exclusion from the management shall be called an unfair and prejudice conduct.

It must be noted that not only the actual removal of director from the management of company shall be called as exclusion from the management, instead there are other forms of such exclusions such as excluding director from the decision-making process and not consulting him or her regarding corporate operations of the company. 

There is the one technical point which says that if director is removed from his/her office on the grounds of some wrongful conducts then such exclusion from management shall not be the one amounting to unfair and prejudice conduct.

Issue of Non-Participation in the Company’s Profits

Merely on the justification that company has not declared dividends of the amount which reflects profits of the company, then such negligence shall not be called as unfair and prejudice conduct because prima facie decisions regarding the payment of dividend is the commercial one and only directors are entitled to take decisions such commercial decisions because they are the one who are responsible to cater commercial needs of the company. 

But on the contrary court accepted that if there exist long term policy of not paying dividends on the account of accumulated profits then such non-payment of dividend shall be considered as the conduct which is unfair and prejudice because there is no sound commercial justification for such dividend policy.

There is the one technical point and this thing must be examined while considering such matters; for the situations where the failure to pay adequate dividend occurred at the same time when excessive remuneration was being awarded to the directors or directors allegedly paying themselves such excessive remunerations then in these situations court will be more willing to find a way through which it would legitimately be established that directors were improperly distributing themselves with excessive remuneration, at the expense of those who are not even the directors of the company.

Normally it is thought that dividend policy that prejudices the petitioner under statutory provisions are either due to the fact that:

  • Directors are in breach of those fiduciary duties where they are supposed to act in the interests of the company.
  • There is the implied breach of those terms which directs to continue affairs of company in a particular way.

Generally speaking members provide capital to the company on the understanding that they will receive profits upon their contributed amount through the payments of dividends. Legal commentators say it to be the example of universal expectation where members has the legitimate hold on the company on the basis of equitable intervention.

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Issue of Alteration of Company’s Constitution

If articles of the company are altered through the method mentioned in Cap. 622 then generally it seems that there is no probability of this alteration to be unfair and prejudice but possibility exist that this alteration could have been an unfair and prejudice to the minority. 

Such category that is where it is supposed to be harmful to the minority, should be understand in the situation where alleged conduct could have been restrained through the equity and thus can be regard as the contravention to the universal expectations of the members, as bestowed by the statutory provisions.

Any such alteration which is invalid as per the provisions of common law then that would also be held invalid as per the script of Section 724-725 of Cap. 622. But, Justice Peter Gibson accepted in the case of ex p Schwarz, alteration of articles could still be proved to be unfair and prejudice to the interests of minority even if this alteration does not falls within the common law test, introduced and discussed in the case of Allen.

 Legal commentators say that if some sort of genuine benefit is expected to the company, if articles would have been altered, provided that this benefit shall not solely be awarded to the majority shareholders then this alteration or prejudice shall not be held unfair to the interests of minority shareholders.

However, where the question is that, whether such alteration be beneficial to both parties and that nature and degree of benefit caused to the company and the prejudice suffered by the minority shareholder is the question in this case then court may be wiling to intervene as per Section 724-725 of Cap. 622, merely to protect valuable proprietary rights of the members such as right to vote.

Let’s clear this out by referring to the case of Shears where the alteration deals with the conflicts between shareholders rather than for the interest of company but in fact hypothetical member, who is neither a majority member nor a minority member, was found to be beneficiary of alteration.

The discussion is getting elaborative and tiresome, let’s sum up our discussion with the general view that; prejudice to the minority shall only be unfair if majority seeks benefit from alteration, in a way which is purely outside the scope of what relevant parties decided to take part in the managerial affairs of the company and thus became members of the company.