Company Law Assignment 1: Promoter Duties and Share Buybacks

This Company Law assignment analyzes two key scenarios. The first involves Hugo, a promoter of Utopia Ltd., and examines whether he breached his fiduciary duty by selling an office unit to the company at a profit without full disclosure. The assignment applies the principles from cases like Erlanger v New Sombrero and Gluckstein v Barnes to determine Hugo's accountability. The second scenario concerns Grant's proposal to increase the company's capital by allocating shares to Elizabeth for a jewelry business. It explores the suitability of redeemable shares for this temporary capital raise. The assignment then shifts to share transfer procedures, outlining the required steps and documents under Hong Kong's Companies Ordinance for John to transfer shares to Lulu. Finally, it addresses how the company can buy back Tom's 20% shareholding, referencing relevant provisions and procedures under the Company Ordinance.

Running head: COMPANY LAW
COMPANY LAW
Name of the Student
Name of the University
Author Note

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Question 1
Issues
a) The issue in this regard is that whether Hugo has caused the violation of his duty as the
promoter of the organization known as Utopia Ltd.
b) The issue in this case is regarding the distinction between preference shares and
redeemable shares and which kind of share would be suitable for the proposed allocation
of shares to the outsider named Elizabeth.
Rules
a)
Any individual who shall be considered as a promoter is presumed to be in a fiduciary
locus to the organization and shall bear all the responsibilities in relation to accounting and
disclosure. A fiduciary is considered to be an individual who is in the locus of confidence and
trust and such individual is accommodated to act and perform for the benefit of another.
Rule in relation to disclosure of gains and profits made by a promoter was provided in
the case of Erlanger v New Sombrero (1878) 3 App Cas 12181. In this particular case, an island
was bought by E, along with the right and privilege in relation to mining of minerals. E
established an organization and the directors of the organization were instructed by E.
Afterwards, the directors of the organization entered into a contract or an agreement on behalf of
the organization regarding the purchase of the island from E for a considerable amount. Profit
was made by E. The business involving minerals did not turn out to be a profitable or lucrative.
Later on, the organization filed a suit against E, stating that it was the responsibility of the
1 Erlanger v New Sombrero (1878) 3 App Cas 1218

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promoter to completely disclose his interests. The promoter should disclose any profit that may
be earned by him. It has been stated that the promoter shall be made accountable if any profit is
made without informing the organization. It was held that the directors were not independent of
the promoter. E violated the fiduciary responsibility, hence, the contract made in relation to the
sale and purchase of the island might be cancelled.
A rule was provided in the case of in Gluckstein v Barnes (1900)2 relation to revelation of
profits by a promoter. In this case, the promoter revealed certain part of the profit in the
prospectus, which was made by him by the sale of an asset to the organization. However, the
promoter did not disclose the total and actual profit that was made by him by the sale of the
asset. It was held by the court that the promoter must disclose or reveal the total and actual profit.
If such disclosure or revelation is not made by the promoter then the promoter shall be
accountable for the violation of his fiduciary duty.
b)
Redeemable shares are considered to be the shares that are issued on terms that the
organization would or might, purchase the shares back on a certain date in the future. The date
might be specified. For instance, the redemption of the shares will be possible after four years
from the date on which the shares are issued. In many cases the date might not be specified. The
redemption shall be possible according to the discretion of the director. The redemption price of
the shares may or may not be similar to the issue price. The redeemable shares may also be
redeemed at any particular time at the option of the organization. This is frequently done in case
of the non-voting shares that is given to the employees, because when the employee leaves the
2 Gluckstein v Barnes (1900) AC 240

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organization, then the shares of that employee may be taken back at the nominal price of those
shares. Certain statutory restrictions are provided in relation to the redemption of shares.
In case of Preference shares, these shares generally have a privileged or preferential right
in relation to a fixed or static sum of dividend, which is expressed or articulated as a percentage
regarding the nominal worth or price of the share. The dividend in relation to the shares may be
either cumulative or non-cumulative. In case of preference shares, the dividend is generally
restricted or constrained to a fixed or static amount, however sometimes the preference share
may partake or be in the nature of participating. In such cases, the share may participate or
partake in profits that may be beyond the static or fixed dividend.
Application
a)
In the given scenario, Hugo is an individual who is the promoter of the organization
named Utopia Ltd. After the formation of the organization, an asset of the office was sold by
Hugo, which had been bought by him in the year 2012. The purchase price of the asset was three
million Hong Kong Dollars. Hugo sold the asset at five million Hong Kong Dollars. Hence, a
two million Hong Kong Dollars profit was made by Hugo. Grant is an individual who is the
director of the organization as well as the accountant of the organization. While conducting an
annual review of the accounting statements of the organization, Grant discovered about the
transaction in relation to the sale of the office unit. The transaction was accepted by Grant
because of the prime area location of the office.
Applying the rule as stated in the case of Erlanger v New Sombrero (1878) 3 App Cas
12183, it may be said that Hugo should have disclosed the facts in relation to the sale of the unit
3 Erlanger v New Sombrero (1878) 3 App Cas 1218

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of the office and the profits that he made from that sale. Even if Grant accepts such transaction,
he cannot be considered to be independent of the promoter. Hugo may be made accountable for
the profits that he made from the sale of the office unit. The contract of sale that Hugo entered
into might be cancelled also.
Applying the rule as stated in Gluckstein v Barnes (1900)4, it can be said that Hugo
should disclose the actual profit that he made in relation to the sale of that particular unit of the
office. In the given scenario, it is evident that Hugo did not disclose the sale of the unit of the
office and the profits that he made from such sale. Hence, Hugo may be made accountable for
such profits.
b)
In the given scenario, Grant proposes to upsurge the cash capital of the organization by
allocating new securities or shares to an outsider individual named Elizabeth. This proposal is to
establish a jewelry business in the Middle East. However, it is not the intention of Grant to
increase the issued capital of the organization perpetually. Grant intends to reduce the issued
capital to its original position after there is sufficient flow and distribution of cash and profits in
the organization in order to maintain and administer the jewelry business of the organization.
It may be said that, allocating redeemable shares to Elizabeth would be best suitable. In
the given scenario, Grant does not want to actually increase the issued capital eternally. Instead,
Grant just wants to raise the issued capital for the time being to assist the establishment of the
jewelry business of the organization. Hence, Grant may allocate redeemable shares to Elizabeth
at the option of the organization, so that later on, when Elizabeth may leave the organization,
then the shares of Elizabeth may be taken back from her at the nominal price of such shares.
4 Gluckstein v Barnes (1900) AC 240

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Conclusion
a) In conclusion it may be stated that Hugo has caused a violation of his duty and
responsibility as the promoter of Utopia Ltd.
b) To conclude, it can be said that Grant may allocate redeemable shares to Elizabeth in
order to maintain the original position of the issue capital of the organization.
Question 2
Issues
a) The issue in this regard is that what procedures must be followed by John and what are
the documents that may be involved while transferring shares to Lulu.
b) The issue in this regard is that how the organization may be able to buy back the 20%
shares of Tom, as per the provisions of the Company Ordinance (Cap. 622) and relevant
cases.
Rules
a)
The Companies Ordinance of the nation of Hong Kong, provides the procedures in
relation to the transferring of shares. This Companies Ordinance also provides the series of
documents that must be maintained and submitted during the transferring of shares5. The
procedure in relation to the transfer of the shares includes the following points:-
 Firstly, it must be made sure that whether any of the pre-emptive rights have been
surrendered or satisfied.
5 Companies Ordinance (Cap. 622)

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 Secondly, the “Share Transfer Form” must be arranged properly and must be signed by
the transferee, that is, the purchaser, as well as the transferor, that is, the seller.
 The original shares and the “Share Transfer Form” must be presented to the organization.
After the presentation, one has to wait for the approval of the Board of Directors in
relation to the transfer of the shares.
 The agreement of sale and the “Share Transfer Form” must be prepared and arranged for
the purpose of stamping.
 When the shares that are to be transferred has been stamped and the particulars of the
purchaser has been confirmed for the purpose of registration into the register of the
organization, then it becomes a proof that the shares belong to the shareholder or the
shareowners of the organization.
In the procedure for the transfer of the shares in any particular organization in the nation of
Hong Kong, a proper documentation is mandatory. The information and the documents that are
stated below are absolutely essential for the process of the transfer of the shares in relation to any
particular organization of the nation of Hong Kong. The required documents are as follows:-
 The authentic copy in relation to the up-to-date audit record or report within the time
period of a number of six months.
 A copy or a duplicate in relation to the identity card, passport and the address of the
residence regarding the new shareowner or shareholder, that is, the transferee.
 The name of the transferor, that is, the seller.
 The amount or quantity of shares that are to be transferred.
 Resolve and determination of the circulation of the dividends, if any such dividends
exist.

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 Information regarding property, specifically the land property to be precise, if such
information exists.
 The agreement in relation to the purchase and sale, if such agreement exists.
 The audit record or report of the subsidiary and the up-to-date management and
administration accounts and financial records that have been certified.
 A copy or a duplicate regarding the articles of association in relation to the
organization.
Generally, the process in relation to the transfer of any number shares of an organization
in the nation of Hong Kong, takes approximately three to five working days, to reach
conclusion6.
b)
As per the new Company Ordinance [Cap. 22], all the organizations are permitted to
provide a sum or an amount for buy-backs from the stored capital of the organization. This
opportunity is subject to a requirement for creditworthiness or solvency7. The procedures and the
requirements for buy-back of shares are as follows:-
 As per the provision in section 259 of the Ordinance, it is mandatory for the directors of
the organization to sign a solvency and creditworthiness statement or declaration for any
payment from the stored capital of the organization. The directors shall sign the NSC17
form.
 As per section 258 and section 260 as provided in the Ordinance, it is mandatory for the
organization to permit a special resolution within a number of fifteen days from the date
6 Leung, Alice, et al. The Hong Kong Companies Ordinance (Cap. 622): Commentary and Annotations. Sweet &
Maxwell, 2015.
7 Companies Ordinance (Cap. 622)

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in relation to the statement or declaration regarding solvency or creditworthiness. The
special resolution must be delivered or conveyed to the Registrar within a number of
fifteen days for the purpose of registration.
 A notice in relation to the relevant information must be published by the organization in
the Gazette. A notice may be published by the organization in any particular newspaper
or in more than one newspaper containing the relevant information. Another method is
providing a written notice to all the creditors of the organization, having the relevant
information. The notices mentioned above shall have the same effect as that of the
Gazette Notice. The aforementioned notices shall be provided or published according to
the statutory time period. The NSC17 form shall be conveyed to the Registrar for the
purpose of registration immediately after the day on which the organization publishes and
exhibits the Gazette notice or the notice published in the newspaper or when the notice is
provided to the creditors, whichever notice is given effect to earlier. The provisions
regarding the aforementioned notices is provided in section 261.
 Any particular creditor or any member of the organization who may not approve such
buy-back, shall within the time period of five weeks, from the date on which the special
resolution is given effect, make an application to the relevant court for the withdrawal
regarding the resolution. The provisions in this regard is provided in section 263 to
section 265.
 The payment from the stored capital and the buy-back or the redemption in relation to the
shares shall be given effect to within a timeframe of five to seven weeks regarding the
passing of and permitting the special resolution. It may be subject to any specific order of
the court provided in this regard. The above provision is provided in section 258.

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 According to section 270 of the Ordinance, the organization shall convey a return in
relation to the NSC2 Form to the Registrar for the purpose of registration. The
conveyance must be made within a timeframe of fifteen days from the day on which the
securities and the shares are provided to the organization8.
Application
a)
Applying the rules as provided in the Companies Ordinance regarding the transference of
shares, it can be said that John, the director and the major shareholder of Phipps Ltd, while
transferring the shares to Lulu, may follow the procedures of the transfer or transmission of
shares as provided in the Companies Ordinance of the nation of Hong Kong. Even the documents
and the manifestations in relation to such procedure must be filed by John accordingly.
b)
Applying the provisions of the Company Ordinance in relation to the buyback of shares,
it may be said that in the given scenario, the organization may purchase back the 20% shares of
Tom, by following the appropriate provisions in relation to buyback of shares as provided in the
Companies Ordinance [Cap. 622].
Conclusion
a) In conclusion it might be stated that John, the director and the major shareholder of
Phipps Ltd, while transferring the shares to Lulu, may follow the procedures of the
transfer or transmission of shares as provided in the Companies Ordinance of the nation
of Hong Kong.
8 Companies Ordinance (Cap. 622)

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b) To conclude, it can be said that in the given scenario, the organization may purchase back
the 20% shares of Tom, by following the appropriate provisions in relation to buyback of
shares as provided in the Companies Ordinance [Cap. 622].

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References
Companies Ordinance (Cap. 622)
Erlanger v New Sombrero (1878) 3 App Cas 1218
Gluckstein v Barnes (1900) AC 240
Leung, Alice, et al. The Hong Kong Companies Ordinance (Cap. 622): Commentary and
Annotations. Sweet & Maxwell, 2015.