What are the conducts which affects interests of the members after HK company registration?


In the Hong Kong company formation not every unfairness be made subject to legal proceedings as from the legal point of view it would burden up the judicial system as well as it can depreciate the corporate governance seem due to being easy to abuse powers. One such example is the act where majority member has the authority to resolve the disputed matter through the exercise of their voting rights and if there is the state of deadlock even then being in majority, majority member can settle the dispute. In such circumstances, if majority member seeks the help of court to get relief merely on the grounds that majority members are entitled for the relief as per Unfair Prejudicial Remedy and such conduct of them will be considered as abuse of conferred rights as they hold the credentials to resolve the matter in board and restrain involvement of court.

Thus, on account of this there is the need to entail specific conducts which affects interests of the members so that true disputes be brought before the Hon’ble court after the establishment of Hong Kong company formation. To fall within the statutory requirements, the impugned conduct should affect the interests of the members or any one member, including the petitioner. Before the amendments, this section can only be invoked if it affected some parts of the members and thus any conduct which proves to be unfair and prejudicial to the interests of all members, do not falls within the jurisdiction of section concerning Unfair Prejudicial Remedy. In short, minority members were entitled to apply to the court for the grant of relief and that majority members were debarred from the exercise of such powers. This created a lot of certainties in the corporate world especially within the members of corporate groups as despite of being majority shareholder of the subsidiary they cannot get relief for the infringement of their rights as parent company usually controls the corporate operations of the subsidiary. Hence, to remove this uncertainty both UK’s and Hong Kong’s legislative establishment decided to amend section pertaining to Unfair Prejudicial Remedy and clarified that; if the conduct proves to be unfair and prejudicial to the interests of all members, or part of members or any single member then victim shall be entitled to apply to the court for the grant of relief as per Unfair Prejudicial Remedy.

Meaning of the word “Interest”

As we defined the legitimate conducts, eligible for the relief as per Unfair Prejudicial Remedy. So, there is also a need to define what really does the word “interest” implies? What are the acts, conducts and matters which are counted as interests of the company or of the member(s) and what are conducts which are not eligible to get relief? Following are some of the interests of the members or the shareholders in the corporate world:

  • Financial Interests of the members in term of the true value of their entitled shares.
  • Interest in the profits of the company as per his or her entitled shares on the grounds that company gained this profit while continuing business with his or her share, in effect.
  • When company is being wound up, interest of the member shall be counted against distribution of company’s surplus assets as per his or her entitled share.

Legal commentators thinks that whenever the word “interests of member” after business registration Hong Kong, is called then it does not strictly covers the legal interests, rights and powers of the members instead it expands to the wider spectrum of the member’s interests and thus court should consider the matter in the sense of equity. So, the definition of interests of the members can be concluded on the argument that;

Members may have more than one interests in the company although the general perception perceives financial interest to be the only interest but in fact financial interest is not itself the only interest and the scope is quite wider.

Issue qua member

Court felt it necessary to interpret the statutory provisions so that the conducts affecting interests of the member after business registration Hong Kong shall be interpreted. Court communicated that prima facie member should not and may not be able to rely on the provisions and script of Section 774 of Cap.622 communicates that conduct shall affect the interests of the members if:

  • Interests are of employee of the company.
  • Petitioner is the director of the company.
  • Creditor of the company.
  • Landlord or tenant.
  • Licensee of the premises where business is being conducted.
  • Service provider to the company or of a company.
  • Consultant to the company or of a company.
  • Person is doing business or involve in any sort of dealing with the company.
  • Any interest which is in relation to the personal affairs of a member rather than affairs of a company.

Apart from all these, court deems to take a broader view in this matter on the grounds of equitable consideration so that no injustice or unfairness be done to any party and disputed matter be settled systematically and legally. Let’s understand this with the help of an example and suppose that after starting a company in Hong Kong, an investor went into joint venture and in pursuance of the agreement of joint venture, investor not only invested for the subscription of shares of the company but also invested for advancing loan capital then for this situation investor ought not to be precluded from the grant of relief merely on the grounds that investor shall be entitled to the relief only in the capacity of a loan creditor but not in the capacity of a  member. Take another example where the person invested in the small private company by providing capital and instantly became the member of the company. Intermediately such investment was done on the grounds that this investor would be entitled to participate in the managerial affairs of the company, removal of any member from the company’s board and any decision to exclude any one from the management of the company then such entitlement would be considered as the one which affects the personal interests of the member in the company.

The equitable considerations which are relevant to the statutory provisions shall be applicable only when the petitioner has become the member of the company or is continuing the membership of the company. So, in this context any arising prejudice shall be considering as departure from the terms, agreement or any deed through which he or she became the member of the company and hence his or her suffering shall be regarded as the suffering in the capacity of a member.

Conducts which affects the Personal Interests of the Petitioner 

As we discussed earlier about the credentials of the application, Thus, as per the requirements mentioned in the Section 724 of Cap 622 it is mandatory that the act complained of, should be unfair and prejudicial to all the members of the company or if such unfairness and prejudicialness was done to the parts of members then it is mandatory that the petitioner should be included in those who are the victims of this unfair and prejudicial act. Thus, on grounds of this it can well be sought that if the prejudice and unfairness is done to the member(s) of the company but was neither unfair nor prejudice to the petitioner itself then application of the relief as per Unfair Prejudicial Remedy, wouldn’t be relevant and chances exist that it will be struck out.

For the situation where petitioner holds shares of the member on the trust of another then any act of unfairness and prejudicialness shall be considered unfair and prejudicial to the trustee too because he or she was acting on the trust of beneficiary. Let’s understand it with the help of an example and suppose that Mr. X held Mr. Y, the trustee of his shares after starting a company in Hong Kong then as per the prevailing convention Mr. Y would have an interest as of a member while protecting value of the shares owned by Mr. X because it falls within the jurisdiction of duties he owes to the Mr. X. Thus, on these grounds any act which contravenes the obligations and rights of the shareholder, would similarly contravenes the right of Mr. Y, hence such conducts would legitimately be held unfair and prejudice to the interests of the Mr. Y.

But for the situation where trustee held shares on the trust of the person who is the respondent in the proceedings of award of Unfair Prejudice Remedy and that proceedings are being proceeded on account of complaints against the respondent then for this situation trustee would not be held liable to the award of remedy against unfair and prejudice conduct. Because in this condition the harm caused due to the unfair and prejudice conduct would not be of the extent that it may harm the interest of the respondent’s beneficiary and no sound ground exists to claim that the alleged conduct seems to be unfair and prejudicial to the interests of the plaintiff.

Assume the situation where the person who brought proceedings of Unfair Prejudice Remedy or deems to bring, is basically the trustee, personal representative or any other person who is beneficially interested in the trading of shares, in the capacity that credentials of him or her to be the trustee or personal representative shall arise in the situation where episode of member’s death occurs. Then for this situation extent of remedy shall be different and scope of remedy shall be limited as it would be necessary to ascertain that whether member filed petition before his or her death or petition was filed after his or her death by trustee, personal representative or any other beneficiary of his or her. This restriction is due to the reason and one argument that that probability exist that certain conducts could have been unfair and prejudicial to the interests of deceased member but won’t be unfair and prejudicial to the interests of the petitioner. For example, assume that deceased member is expected to take part in the managerial affairs of the company so that equity could be maintained and his or her investment’s equity would be protected. So, this example clarifies one thing that personal obligations of the deceased member cannot be transmitted to the petitioner.

Format of the Petition

Following is the standard format of the petition by the minority, subject to the circumstances it is open to be modified;

To the High Court of Hong Kong

The humble petition of [name of the [petitioner] showed as follows:

  • The [company’s name] was incorporated in the month of [name of month] as per the Companies Ordinance.
  • The registered office of the [name of the company] is located at [address provided to the Companies Registry].
  • The nominal capital reserves of the company are $[amount] with [number of shares] shares, each of value $[amount]. The amount of capital which either has been paid or credited is $[amount].
  • The company has the rights, powers and privileges as that of a natural person and that objects of the company are [list of all objects, in possession of company].
  • [Provide allegations, on ground of which Unfair Prejudice Remedy is sought].
  • In these circumstances, petitioner states that affairs of the company are being carried out in the manner completely unfair and prejudicial to the interests of parts of members, including the petitioner.
  • Your petitioner humbly prays as follows:
  • (a) Company’s repurchase of those shares which are in the name of the petitioner, from the petitioner, at the value as decided by Hon’ble court.
  • (b) Or any other order or remedy, which court deems appropriate that should be awarded to fulfil the alignments of justice.