Question 1 (25%)

In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34, Cozens-Hardy LJ stated at p45:

[I]f you once get clear of the view that the directors are mere agents of the company, I cannot see anything in principle to justify the contention that the directors are bound to comply with the votes or the resolutions of a simple majority at an ordinary meeting of the shareholders. I do not think it true to say that the directors are agents. I think it is more nearly true to say that they are in the position of managing partners appointed to fill that post by a mutual arrangement between all the shareholders.

Of course, Cozens-Hardy LJ made such statements in the context of the case he was considering. Without referring to the context of the above cited case, critically evaluate the statements made by Cozens-Hardy LJ quoted above in the context of the Hong Kong Company Law.

Question 2 (25%)

The Prosperity Holding Limited ("Prosperity Holding") was incorporated in Hong Kong by Mr. Chan Tai Man in 1963. It functions as the holding company for a substantial number of subsidiaries, collectively called the Prosperity Group, which mainly engage in the pharmaceutical business. In the early 1980s, the Prosperity Group acquires the exclusive patent of a pain killer drug. To enjoy tariff advantage in the EU market, the Prosperity Group incorporated a limited company in the United Kingdom called Prosperity UK Ltd ("Prosperity UK") and vested the exclusive patent in it. To market the drug in the North American market, another limited company in the USA called Prosperity USA Inc. ("Prosperity USA") was incorporated in New York. In acquiring the exclusive patent of the drug, the Prosperity Group spent a huge sum of money which was amortized over a period of 30 years.

In the early 1990s, some research findings suggested that the pain killer drug of the Prosperity Group has a side effect of causing permanent damage to the liver, though more extensive research would be required for validating this. In light of such findings, the Prosperity Group reacted with a contingent plan with the worry that the group's image would be affected by the drug and future litigation against the group may also

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arise. The contingent plan consisted of a series of action as follows.

A BVI company called Fortune Corporation was incorporated. The exclusive patent of the drug was transferred from Prosperity UK to Fortune Corporation through contract novation. Another limited company called Proficient (HK) Limited "Proficient HK") was incorporated and took over all the marketing functions of the pain killer drug. It was also planned to dissolve Prosperity Hong, Prosperity UK, and Prosperity USA in due course for two purposes, namely: to protect the Group's public image by distancing the Prosperity Group from the selling of products which were perceived to be hazardous to health; and to minimize the harm caused by future litigation.

To minimize operation costs, Fortune Corporation and Proficient HK shared the same office. Their operations were served by the same staff members. A service contract was executed between Proficient HK as service provider and Fortune Corporation as the service user. Service fees were settled through current accounts maintained in their accounting ledgers with no actual cash flows. All day to day business operations and communication were carried out by Proficient HK as agent but all contracts for the pain killer drug were entered into in the name of Fortune Corporation. The office used by Fortune Corporation and Proficient HK was a property owned by Prosperity (HK) Ltd, a local subsidiary of Prosperity Holding. A lease between Prosperity HK as the landlord and Proficient HK as the tenant. A sub-lease was executed with Proficient HK as the sub-landlord and Fortune Corporation as sub-tenant.

Subsequently, it was proved by further research findings that the pain killer drug was really causing harm to human liver. A series of litigation against Prosperity USA were started before it was put on liquidation. While the majority of the actions were settled privately, a group of plaintiffs succeeded in obtaining a judgment in their favour from a USA court. Led by one men called Mr. Harrison, these plaintiffs commenced a litigation in Hong Kong against Prosperity HK, Proficient HK, and Fortune Corporation. Among other things, the plaintiffs argued that Prosperity HK should be held responsible for the judgment against Prosperity USA because Prosperity USA, Prosperity HK, Fortune Corporation, and Proficient HK effectively were belonging to one single economic entity. Prosperity HK thus had a de facto business presence in the USA. In the circumstances, the plaintiffs argued that the corporate veil between Prosperity HK, Prosperity USA, Proficient UK, Fortune Corporation, and Proficient HK should be pierced because the entire corporate structure amounted to a sham or mere facade for the concealment of truth and for avoidance of liabilities.

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Advise the Prosperity Group in the context of Hong Kong law.

Question 3 (25%)

The Wong's Family had been operating sanitary wares business in Hong Kong for many years. Likewise, the Chan's family had been operating local transportation business for many years. Due to the marriage of John Wong and Mary Chan, the two families entered into a partnership in the 1980s. The partnership created very good synergy and the business of the partnership has expanded rapidly. At the early 1990s, the two families incorporated a private limited company called the Wong-Chan Company Limited ("Wong-Chan") and used it as the vehicle for operating sanitary ware distribution business. As the business grew bigger and bigger over the years, additional members from the two companies were allotted with shares and became members of Wong-Chan. At the time of this action, there were altogether 14 shareholders. The company's net worth was about HK$200million.

By a resolution passed in an EGM, a loan for HK$10million to Mary Chan without any security was approved. Mary Chan was holding 5% of shares in Wong-Chan. The Chairman of the EGM was Oscar Wong, who was the eldest son of Mary, the biggest shareholder who alone held 45% shares of Wong-Chan, and the Managing Director if the company. During the EGM, Oscar decided that voting on the resolution was to be done by showing hands instead of by poll. No members in the meeting had requested for voting by poll. The resolution was approved by a majority. There was sufficient quorum for the EGM but not all of the shareholders in person or by proxy were present. Money from the loan was to be deposited directly into the bank account of Peter Wong, who was not a member of the company but the smallest grandson of Mary. As a matter of fact, several similar open loans without security by the company to other members of both families had been arranged before.

Prior to this EGM, the Wong's and the Chan's families were having arguments on one development project. The Chan's family was of the view that the project was too risky and Wong-Chan should not proceed with it. Oscar, however, greatly supported the project and with his substantial shareholding, the resolution to proceed with the project had been passed as another resolution in the EGM.

After the loan was granted but before money was transferred to Peter Wong's bank account, seven family members of the Chan's family (without Mary Chan) who collectively were holding 30% of shares in of Wong-Chan were extremely unhappy.

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Among other things, they were of the view that:

-the loan made up a significant proportion of the cash assets of the company;

-no security was provided for the loan;

-granting a loan without knowing what purpose it was for amounted to an improper use of the company's funds and was not for the benefit of the company;

-the majority shareholders who consented to approve the resolution refused to inquire into the purpose, the manner, means and mode of repayment of the loan; -the Chairman of the EGM was acting in concert with the other shareholders in the EGM and conspired to defraud the company;

-Mary only held a small percentage of shares in Wong-Chan and there was an insinuation that she was not even the ultimate beneficiaries for the loan because the loan money was to be deposited in her grandson's bank account;

-the approval of the loan was against the best interest of the company.

The Chan's family threatened to bring an action to Court for an injunction to prohibit the Wong-Chan from depositing money into Peter Wong's bank account. Oscar as the Managing Director of the company responded by saying that the loan had been approved by majority in general meeting and hence ignored the threat.

Advise the Chan's family.

Questions 4 (25%)

Sunny Shine Company Limited ("the Company") was incorporated under the Companies Ordinance (Cap 622) on 23 May 2015 as a private company limited by shares. The shares were equally owned by Johnny Mok ("Mak"), a Hong Kong permanent resident and Mr. Yukio Hashi ("Hashi"), a Japanese. Model Articles for private companies under Cap 622 were adopted.

Hashi was residing in Tokyo and only travelled to Hong Kong on occasion. Mok and Hashi had known each other for many years before they formed the Company together because both of them had been working in the trading of vehicles and motor parts for a long time. Prior to the incorporation of the Company, Mok and Hashi entered into a shareholders agreement (the "Shareholders Agreement"), within which it was agreed among other things that:

1. (a)a limited company would be set up in Hong Kong to carry on the trading of vehicles and motor parts all over the world (the "Business");
2. (b)the Shareholders Agreement was entered into by Mok and Hashi on the basis 5

of mutual co-operation, trust and confidence and that each of Mok and Hashi undertakes to use all reasonable commercial efforts to promote and carry on the Business;

(c) the board of directors (the "Board") of the Company would consist of two directors, one to be nominated by Mok and the other to be nominated by Hashi;

1. (d)Mok and Danny Yu ("Yu") (an ex-assistant of Hashi who would be employed by the company upon its incorporation) are to be appointed as the directors of the Company upon its incorporation;
2. (e)both Mok and Hashi would to be appointed as authorised signatories for the operation of the Company's bank accounts; subject to the following restrictions:
3. (i)either signatory would be sufficient for effecting banking transactions
4. for the purpose of or in connection with the operation of trade finance activities associated with the Business subject to a limitation that any specific transaction shall not exceed the transaction (or contract sums) in aggregate pursuant to and under such transaction and/or contract;
5. (ii)prior board approval must be obtained before except for drawing of sums less than $50,000 for the purpose of dispensing with the company's general expenses.
6. (iii)The above restrictions on account operation are referred to collectively as the "Account Operation Restrictions".

Upon incorporation, the Company established five banking accounts with the Hong Kong branch of the Sumitomo Mitsui Banking Corporation (the "Bank") in the name of the Company (all accounts are collectively referred to herein as the "Bank Accounts") and for such purpose, both Mok and Hashi are appointed as authorised signatories.

It was the mutual understanding of Mok and Hashi (though not concluded in writing) that Hashi be responsible for trading with overseas buyers through its sales network and Mok would be responsible for locating manufacturers and suppliers of vehicles in Mainland China.

The Business was satisfactory until the year 2018 when it began to drop sharply. On or about 18 July 2018, Yu noted from the draft financial statements of the Company for the fiscal year ending 31 March 2018 that a sum of $116,454 recorded as "entertainment expenses" had been incurred by Mok. When informed of this, Hashi asked Mok to account for such "entertainment expenses" and in particular, to explain

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why such "entertainment expenses" were incurred at a time when the Business began to shrink. Despite repeated requests by Hashi, Mok failed and/or refused to provide to Hashi any explanation for such "entertainment expenses". Thereafter, Mok started behaving in an uncooperative manner towards Hashi in relation to the Business and to the affairs of the Company. Among other things, Mok refused to allow Yu to access the company documents, the accounting documents in particular. On 19 March 2019, Mok expressed his unwillingness to work for the Company anymore and informed Hashi his intention to put the Company into a dormant state, with effect from 1 April 2019 (the "Notice").

Since the Notice, there had been several occasions where Hashi requested for Mok's involvement in some new orders from the existing customers of the Company. Despite Hashi's repeated requests, Mok refused to engage in the Business or to provide any help to the Company.

During November 2019, Hashi noted several unauthorized withdrawals from the Company's bank accounts for which no prior Board Approval was obtained. When Hashi complained about these unauthorized withdrawals, Mok did not respond at all. In view of such hostile and uncooperative manner of Mok, Hashi was obliged to wait and see how Mok propose for resolving the stalemate leading to distrust between Hashi and Mok in relation to the Company's matters.

On 27 January 2020, Mok through Brilliant & Co., the solicitors acting for the Company since its incorporation, wrote to Hashi's solicitors, Smart & Co, acknowledging the existence of a deadlock situation between Hashi and Mok and proposing the termination of the co-operation between Hashi and Mok pursuant to the terms of the Shareholders Agreement by offering to sell to Hashi his shares in the Company (the "Offer"). Despite repeated requests, Mok has failed and/or refused to provide to Hashi terms and conditions of the Offer. Mok did not respond to any enquiry made by Hashi subsequently.

Advise Hashi.