Question

Question Hong Kong Law
(Company Law)

Lawrence, Michael and Nigel are shareholders and directors of Prosperity Ltd which is a retailer of hi-tech products. Each of them holds sixty-five, twenty, and fifteen per cent of the company’s shares respectively. Being often away on an overseas holiday, Lawrence rarely attends the board of directors’ meetings. During the year 2019, Lawrence sold the company’s product to his friend at a price which is substantially lower than the market price and he secretly obtained from his friend commission of $25,000. Prosperity Ltd has been negotiating a business deal with Wealthy Ltd for sourcing a piece of automated equipment at an attractive price, but the deal went off because the company did not have sufficient funds. Lawrence then set up his own company which managed to enter into a contract with Wealthy Ltd to purchase the same equipment. Michael and Nigel later found out about this by themselves. They were unhappy with what Lawrence has done and they want to bring an action against him. Lawrence is planning to ratify his conduct at the next general meeting.

Required: Advise Michael and Nigel as regards Lawrence’s breach of duty as a director of Prosperity Ltd.

A detailed solution is appreciable!

Answer 1

-A director is a statutory officer whom manages a company , represents its nterest and work hard to make it succeed. A director ows fiduciary duties towards the comany.

-A director has the following duties-

1.Act in good faith

2.Use power for a proper purpose

3.Do not delegate power except with a proper authirization

4.Exercise care, skills and due deligence

5.Avoid Conflict of interest

6.Do not make transactions involving personal gain

7.Do not abuse power

8.Do not use company's property & information if not authorised

9.Do not accept any personal benefit from third party

10.Obey the company's law

11.Keep accounting record

12 . Take part in company activity & decision making

-Fiduciary duties is a legal term for the responsibilities of a director to act honestly and loyally on the befalf of the company.

- When a company director breaches his fiduciary duties towards the company, then the company can bring a claim against such director.

-Section 724(1)(a)of the CO allows member/members of a company to present a petition to the court if the company's affairs have been conducted in a manner prejudicial to the interest of the company or the members.-

-According to Section 725(2) and 726 the court may pass the following orders-

• an order restraining the continuance of the conduct of the company’s affairs mentioned in the petition;
• an order that proceedings that the Court thinks fit be brought in the company’s name
• an order appointing a receiver or manager
• any other order the Court thinks fit, whether for regulating the conduct of the company’s affairs in future, for the purchase of shares of any member of the company by another member of the same company, for the purchase of shares of any member by the company and the reduction accordingly of the company’s capital, or for any other purpose
• an order for the company or any other person to pay any damages that the court thinks fit to a member of the company whose interests have been unfairly prejudiced by the conduct of the company’s affairs or by the act or omission;
• an order for alteration of a company’s articles and
• Removal of the director

In the given case Lawrence has breached the fiduciary duty by-

1. Not attending the BOD meeting [ No active participation]

2. Making personal gain

3. Using company's assets without authorization

4. Accpeting personal benefit from third party and

5.Abuse of power

in this case , Michael and Nidel, who are the shareholders and directors, have two choices-

A. Make Civil proceedings in the name of the Company against Lawrenec for his breach of duty and for loss to the company

AND

B.They both as a shareholder can make a petiton under section 724(1)(a)of the CO.