Unfair Prejudice Remedy as per the Cap 622 for Company Setup in Hong Kong


The provisions of unfair prejudice remedy as mentioned in predecessor companies ordinance were discussed in previous article because it is thought that it is the only option left for the victim to seek relief and thus there was the need to go into comparative analysis so that after company registration Hong Kong legal aspirants as well as readers would get to know what Unfair Prejudice Remedy offered in the past and how this last hope improved in course of time.

The provisions in the Section 168A were redefined in the Part 14 Div.2 of Cap 622 and Section 723-727 subjects the matters related to Unfair Prejudicial conducts. As per the script of Section 724(1) of Cap 622, any member of the company may apply to the court for relief if the alleged matter involves:

  • Conduct which shows that affairs of the company are being continued in the matter completely unfair and prejudicial to the interest of member(s) and company itself.
  • Any proposed or carried out act which is done on behalf of the company or by company, which is or would amount to the act of unfairness and prejudicial nature.

It is noted that there are minute differences between the prevailing provisions and the predecessor provisions, related to Unfair Prejudicial Remedy. But, both provisions are much similar. Let’s have a look on the slight changes in the script of Section 724 of Cap 622 from that of its predecessor provision:

  • Section 724 gives the clarification of the conducts, which shall amount to the unfairness and prejudicialness.
  • Section 724 clarifies the scope of remedies; which court can grant via its order.

In Hong Kong, provisions of Unfair Prejudicial Remedy cannot restrain the statutory right of the victim or member(s) to invoke proceedings of Unfair Prejudicial Remedy after company registration Hong Kong. This argument is supported with the legal proceedings of the case of Team Y&R Holdings Limited where Hong Kong’s Court of Appeal upheld the decision of the trial judge in which trial judge refused to enforce the exclusive clause in the contract which deems to fetter the statutory right of the member(s) to commence the proceedings of Unfair Prejudicial Remedy, on the grounds of public policy.

Hong Kong is one of those countries which allows operations of foreign registered companies in the geographical jurisdiction of Hong Kong and allow starting a business in Hong Kong as a foreign. So, in this context a valid question arises that on what type of companies would provisions related to the relief as per Unfair Prejudicial Remedy, would apply? Legal Interpreters comments that provisions pertaining to Unfair Prejudicial Remedy would apply to both Hong Kong and Non-Hong Kong companies and no contrast or discrimination shall be furnished in granting reliefs to the members of the company, whether member of Hong Kong or any foreign incorporated company starting a business in Hong Kong as a foreign.

Eligibility for the Application of Unfair Prejudicial Remedy

Not every person is entitled to commence the proceedings of Unfair Prejudicial Remedy and thus there is the need to disclose the credentials and the eligibility criteria for the person who can commence the proceedings of Unfair Prejudicial Remedy. As per the Section 724 of Cap 622 following persons are eligible to commence proceedings of Unfair Prejudicial Remedy:

  • Registered member(s) are entitled to commence the proceedings, irrespective of the fact that member(s) holds the shares on the trust of other.
  • Past members also have the standing to bring actions pertaining to Unfair Prejudicial Remedy, provided that the plaintiff or the past member was the member of the company at the time when alleged conduct amounted to the unfair and prejudicial nature.
  • Personal Representative, trustee or any other person who is beneficially interested in the shares of another member of the company and that before the death of that another member, the interested person became the member of the company.
  • Financial Secretary is also entitled to commence proceedings of Unfair Prejudicial Remedy, provided such action by the Financial Secretary was followed by the investigations of the inspector or via exercise of power which requires furnishing of documents as per Cap 622 Pt 19.

After HK company formation it is important to keep in mind that; equitable owners are not entitled to apply for the actions pertaining to the Unfair Prejudicial Remedy, including those who are beneficial holders as per the Central Clearing and Settlement System.

If no application for the relief is put forward by any member of the company then Securities and Futures Commission is entitled to put forward application against the action which is unfair and prejudicial to the interests of the member(s) and company in HK company formation. Such entitlement to seek the orders for the relief or any other remedy which court deems appropriate, is authenticated by the Section 214 of Securities and Futures Ordinance (Cap 571) and should be exercised only for the listed companies.

If Petitioner is not a Minority Member

There is no such restriction in the legislation that proceedings can only be put forward by the minority member and thus majority is also entitled to bring proceedings for the Unfair Prejudicial Remedy. For instance, if petitioner holds 50% of shares of the company even the he or she can bring proceedings against the other 50% shareholders on the grounds that conduct of these 50% shareholders is unfair as well as prejudicial to their interests and that matter could not be settled because such conduct of these shareholders created deadlock in the company. Restrictions shall only be imposed on the majority members if the impugned matter could have been solved or shall be ended on the exercise of majority voting powers by the majority members.

Rules on the Conduct of the Petitioner

There is no requirement for the petitioner to apply to the court with clean hand as not every human is error free. However, any improper or wrongful act of the petitioner may amount to the situation where court may be reluctant to grant the relief, it thought should be given, even there is the evidence that act, or conduct was prejudicial but on the grounds of improper act of the petitioner, court might not award the sought remedy. For the situation where actions brought by the petitioner is based on the relationship of trust and confidence, then any inequitable conduct of the petitioner shall be the act which caused breakdown of relationship then court might barre the relief, it considers should be awarded. It is not necessary that causal link should exist between the alleged misconduct on the part of petitioner and the conduct subjected to the unfairness and prejudicialness, so that petitioner be debarred from the relief, for which he or she shall otherwise be held entitled.

To determine which act or conduct of the petitioner shall be considered as the cause of depriving him or her from the sought relief, there is a simple test which says that; the misconduct or the alleged conduct of the petitioner should be weigh against the conduct of defendant or respondent and if test shows that act or conduct of the petitioner is not as serious as respondent’s conduct and that no justification exist for the conduct of respondent then remedy shall be awarded to the petitioner, of which he or she entitled of. On the other hand, if the conduct of petitioner reports of more serious than conduct of respondent then court is independent and thus entitled to restrain petitioner from the award of sought relief or remedy.

For the circumstances where petitioner, petitioned merely for the collateral purpose and that no genuine justification and object exists behind application of relief for the Unfair Prejudicial Remedy then court must strike out this petition on the grounds of abuse of power. Delay is an important factor in legal proceedings and mostly it is used for the abusing purpose. Although delay in bringing up proceedings pertaining to the Unfair Prejudicial Remedy is not itself regarded as ground to debar the entitled relief to the petitioner but where court finds that respondent’s act is not in fact unfair especially where petitioner accepted such position of respondent without protest and is aware of the benefits, which would arise from the complained act or conduct.

Rules regarding the Affairs of the Company

Section 724(1)(a) of Cap 622 exclusively deals with the matters related to the affairs of the company. There is the need to understand the true essence and scope of phrase “affairs of the company”. Classic definition suggests that affairs of the company are defined as; conducts or acts involving goodwill of the company, company’s profits or losses and extends to the assets of the company as well as the contracts, company went into. Legal commentators said that the scope of the “affairs of the company” are not merely confined to the business matters of the company but in fact its scope is extended to the capital structure of the company, dividend policy of the company, voting rights of the company, consideration of the takeovers and mergers offers and any other matters which are to be  presented before the board of the company, for consideration. The scope of “affairs of the company” are also extended to the conduct involving external corporate activities of the company, affairs related to the internal management of the company and all those matters or conduct of the company as well as exercise of those corporate powers as mentioned in the constitution of the company, which might amount to the conduct unfair and disadvantageous to any member(s).  the provisions of the Section 724(1)(a) are also applicable on any such person who is taking part in the decision as well as the corporate conducts of the company, either in the capacity of de jure or de facto.

Distinction 

There is sort of established between the acts of the company and the acts of shareholders or the directors of the company in their personal and private capacity. The case of Re Ka Ka Realty Ltd elaborates of this distinction and in this case, petition was filed concerning family run business. Justice Kwan communicated that the conduct of respondents in response to the file petition does not gives enough grounds to evict petitioner from the family home, as such conducts of the petitioner are not thought to be the acts as the director of the company or does not give evidence of any act made on behalf of the company. In addition to this Justice Kwan found such conducts to be the breach of pre-emption agreement as per which existing shareholders has the right of pre-emption when any shareholder deems to transfer his or her shares and thus on these grounds considered this to be the acts, which does not constitute the conducts concerning affairs of the company. There is another reason for declaring this act as breach of pre-emption agreement since this purchase of shares does not amounts to the act or conduct which could have been affected by the company or on behalf of the company.

Situation of Corporate Groups

For the situation of corporate groups or the companies with common shareholders it is necessary for the shareholder to show that; the complaint act in the petition is in relation to the company, in question. The act which is complained of, must be done by the subject company in its corporal capacity or on behalf of it. But, here is where the burden of care is put on the court that it should properly look at the business realities of the circumstances rather than only taking the legislative approach because possibility exists that the affairs of one company may co-relate with the affairs of the other company of the same corporate group. This co-relation can easily be understood because it is obvious that the affairs of the subsidiary shall co-relate with the affairs of the parent company due to the control and interest of the parent in the subsidiary company. The acts of the parent company which would be the conducts of the subsidiary includes:

  • Control over the financial affairs of the subsidiary.
  • Act of the parent company in the detriment of the subsidiary.

The conduct of the board of the subsidiary to let such conducts of the parent company to be carried out shall be considered as the conduct pertaining to the affairs of the subsidiary.