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Subject: Business Law , Accounting

Question 6 (25 marks) Arton Limited (the "Company') is a Hong Kong private company limited by shares. The Company adopts model articles for private companies as its articles except the following modification: The managing director of the company is authorized to sign any contract for no more than $2 million. Any contract exceeding $2 million has to be approved by the board of directors of the company. There are four shareholders in the Company. They are John, Ken, Lulu and Mo. Each of them owns 10,000 issued shares of the Company. All of them except Mo are also the Company's directors. According to the audited financial statements of the Company, the issued share capital was $4 million. John has not been formally appointed as the managing director, but he always acted like the managing director of the Company to negotiate contracts on behalf of the Company. The other two directors were aware of this, but they had never raised any objection to this practice by John since most of these contracts were profitable. John borrowed $3 million from Fortune Bank and signed a loan agreement with the bank on behalf of the Company. He also decided to allot 50,000 shares to some potential investors. Nelson, a potential investor, would like to take up 10,000 shares at $100 each. However, he did not have enough cash and John would like the Company to lend $0.5 million to Nelson. Required (a) Advise the Company on whether the loan agreement with Fortune Bank was enforceable against the Company by referring to company law and agency law (12 marks) (b) Advise the Company on whether it may lend $0.5 million to Nelson who would like to take up 10,000 shares of the Company (13 marks)