Personal liability
imposed on officers
General Rule:



concept of separate legal entity applies
directors are agents of company
company liable as principal
1
Exceptions under statutes

Section 93(5) of Cap. 32

(5) If any officer of a company, or any person on its
behalf
(b) issues or authorizes the issue of any business letter of the
company or any notice or other official publication of the
company, or signs or authorizes to be signed on behalf of the
company any contract, deed, bill of exchange, promissory note,
endorsement, cheque or order for money or goods, wherein its
name is not mentioned in manner aforesaid;
he shall be liable to a fine and shall further be personally
liable to the holder of the bill of exchange, promissory
note, cheque, or order for money or goods, for the
amount thereof, unless it is duly paid by the company.
2

Section 26 of the Bills of Exchange Ordinance (Cap.
19)
Where a person signs a bill as drawer, indorser, or
acceptor, and adds words to his signature, indicating
that he signs for or on behalf of a principal or in a
representative character, he is not personally liable
thereon; but, subject to section 26A, the mere addition
to his signature of words describing him as an agent, or
as filling a representative character, does not exempt
him from personal liability.
3

Section 26A of Cap. 19:
(1) A person who makes, accepts or indorses a
bill for, in the name of, on behalf of or on
account of a company shall not be liable in
respect of that making, acceptance or
indorsement where, on a proper construction of
the bill as a whole, that making, acceptance or
indorsement is a making, acceptance or
indorsement of that company.
4

Cases for reference:
Cheung Yiu-wing v Blooming Textiles (1975)
 Kwok Wing v Maytex Trading Co (1977)
 Jenice Ltd v Dan (1993) UK

(Pages 7 and 8 of Textbook)
5

Section 275 (1) of Cap. 32:
(1) If in the course of the winding up of a company it appears
that any business of the company has been carried on with
intent to defraud creditors of the company or creditors of any
other person or for any fraudulent purpose, the court, on the
application of the Official Receiver, or the liquidator or any
creditor or contributory of the company, may, if it thinks proper
so to do, declare that any persons who were knowingly
parties to the carrying on of the business in manner
aforesaid shall be personally responsible, without any
limitation of liability, for all or any of the debts or other
liabilities of the company as the court may direct.
6

An assignee who has given valuable
consideration, and acted in good faith and
without notice of the fraud, cannot be subject to
a charge declared by a court under section 275(1)
of Cap. 32.
7

Every person who was knowingly a party to the
fraud is also guilty of an offence under section
275(3) On indictment: unlimited fine and 5 years
 On summary conviction: $150000 and 12 months

and
may be subject to a disqualification order under
section 168L for up to 15 years
8

Dormant company’s “relevant account
transaction” – directors are liable for debt and
liability which arises from that transaction.
9
Personal liability to pay
compensation


General rule: officers of company are not
personally liable for breaches of contract or
torts committed by a company
Exception:
Acting in fraudulent manner/ not in good faith
leading to breach of contract by company
 Procuring or directing the commission of a tort
 Specific statutory provisions

10
Section 40 of Cap. 32:
“where a prospectus invites persons to subscribe for shares in or debentures
of a company, the following persons shall be liable to pay compensation to all
persons who subscribe for any shares or debentures on the faith of the
prospectus for the loss or damage they may have sustained by reason of any
untrue statement included therein, that is to say(a) every person who is a director of the company at the time of the issue of
the prospectus;
(b) every person who has authorized himself to be named and is named in
the prospectus as a director or as having agreed to become a director either
immediately or after an interval of time;
(c) every person being a promoter of the company; and
(d) every person who has authorized the issue of the prospectus.
11

Section 276 of Cap. 32:
“If in the course of winding up a company it appears that any person who
has taken part in the formation or promotion of the company, or any past or
present officer or liquidator or receiver of the company, has misapplied or
retained or become liable or accountable for any money or property of the
company, or been guilty of any misfeasance or breach of duty in relation to
the company which is actionable at the suit of the company, the court may,
on the application of the Official Receiver, or of the liquidator, or of any
creditor or contributory, examine into the conduct of the promoter, officer,
liquidator or receiver, and compel him to repay or restore the money or
property or any part thereof respectively with interest at such rate as the
court thinks just, or to contribute such sum to the assets of the company by
way of compensation in respect of the misapplication, retainer, misfeasance,
or breach of trust as the court thinks just.”
12
Abuses of incorporation
(lifting the corporate veil)


Separate legal personality of company operates
as a shield - the courts will not normally look
beyond the façade of the company to the
shareholders who comprise it.
The screen separating the company from its
individual shareholders and directors is
commonly referred to as "the veil of
incorporation".
13

Situations where the law is prepared to examine
the reality which lies behind the company façade
- this is described as "lifting" or "piercing" the
corporate veil.
14


National emergency: Daimler Co Ltd v
Continental Tyre & Rubber Co (1916)
Where the company is formed principally as a
sham to evade existing liability or to defeat the
law:
Gilford Motor Co v Horne (1933) – director used
company to mask business
 Bakri Bunker Trading Co Ltd’s case (1986) – no
fraud involved in one-ship company, court did not
lift veil

15
Good Profit Development Ltd’s case (1993) –
overlapped identity of director and shareholder did
not justify lifting the corporate veil
 China Ocean Shipping Co’s case (1995) – court
refused to lift corporate veil of group of companies
 Ord v Belhaven Pubs Ltd: “in the absence of
impropriety, sham or concealment in the
restructuring of a group of companies it would be
wrong to lift the corporate veil in order to make the
shareholders of a company liable instead of the
company itself.”

16

Corporate used as a device to conceal criminal
activities:
Re H (1996) – evasion of excise duty
 Secretary for Justice v Lee Chau Ping (2000) –
confiscation of company’s assets controlled by drug
trafficking offender
 Gencor ACP Ltd v Dalby (2000) – Director’s
diversion of company asset to an offshore company

17

HKSAR v Leung Yat Ming – using company as a
cloak for deception
18

Where a holding and subsidiary relationship
exists –
General rule: recognise separate legal entity
 Except as a result of statutory provisions reflecting
public policy

Group accounts
 Investigation of company affairs by inspector

19

Winding up of limited liability company which
was transformed from a partnership
20

Director’s liability under section 101E of
Criminal Procedure Ordinance for offences
committed by the company

Consent or connivance
21
Promotion and incorporation

Promotor:

“one who undertakes to form a company with
reference to a given project, and to set it going, and
who undertakes the necessary steps to accomplish
that purpose”
22

Whether someone is acting as promoter of a
company is a question of fact rather than a
question of law.
23
Duties of Promoters

In the 19th century, it was common for
promoters to sell their own property to a newly
formed company at an inflated price, or to
acquire assets for the company and receive a
commission from the seller
24

Courts impose a fiduciary duty on promoters
similar to that imposed on agents.

A promoter must disclose any profit or potential
conflict of interest to either:
(i) an independent board of directors, or
 (ii) existing or intended shareholders.

25
Remedies for Breach of Promoters’
Duties


Where promoter has sold his own property to
the company, without disclosing this - the
company can rescind the contract and recover
the purchase price.
Erlanger v New Sombrero Phosphate Co (See
page 27 of Textbook)
Right of rescission is lost if restitutio in
integrum is not possible or if there is
unreasonable delay
26

The promoter may have to account to the
company for any profit he has made.
Gluckstein v Barnes (See page 27 of Textbook)
27

The company may be able to sue the promoter
for damages for breach of fiduciary duty.
Re Leeds & Hanley Theatre of Varieties (See
page 28 of Textbook)
28
Payment of Promoters



A company cannot enter into a contract before
incorporation - so a promoter has no legal claim
against the company for fees and expenses.
If a promoter receives benefits, they have to be
disclosed.
In practice, promoters are usually the directors
and they receive expenses in that capacity.
29
Pre-Incorporation Contracts

A company has no contractual capacity prior to
incorporation - so contracts cannot be made on
its behalf.
See Kelner v Baxter (1866) on page 29 of
Textbook.
30

Section 32A(1)(a) –
Where a contract purports to be made by or on
behalf of a company at a time when the company
has not been incorporated, the contract is binding
on the person purporting to act for the company.
 A promoter is both personally liable and entitled to
enforce such a contract.
 Provision does not apply if there is agreement to the
contrary.

31
Incorporation

Section 4(1) “Any one or more persons may, for
any lawful purpose, by subscribing his or their
name or names to a memorandum of
association … and otherwise complying with the
requirements of this Ordinance in respect of
registration, form an incorporated company,
with or without limited liability.”
32

任何一名或多於一名的人士，可為任何合
法目的而藉在一份組織章程大綱 . . . 內簽署
其名字，並藉遵從本條例中關於註冊的其
他規定，成立一間具法團地位的有限法律
責任公司或無限法律責任公司。
33
Registration documents



Memorandum of association
Articles of association
A statement certifying compliance with the
Companies Ordinance as regards registration
34
Certificate of Incorporation

Conclusive evidence that:
All the requirements in respect of registration have
been complied with, and
 The association is a company authorised to be
registered and duty registered.

35