Topic 3
Management and administration of a company (I):
Directors and company secretary
TOPIC OUTLINE & SUMMARY (PART 1)
1.
Division of powers between directors and shareholders
 Model Articles  management power is vested in directors, subject to
shareholders’ special resolutions
 Shareholders do have some important powers
 When board cannot functions, powers revert back to shareholders
(shareholders’ residual power)
2.
Appointment of directors
Initial appointment
Companies Ordinance (Cap 622), ss.453, 454 – named on incorporation form
Subsequent appointment
Model Articles – can be appointed by shareholders or directors
 If appointed by shareholders, no time limit as to length of appointment
 If appointed by directors, appointment is only up to next AGM
3.
Vacation of directors
Retirement by rotation
Model Articles for public companies (only)
 All directors must retire at first AGM, then 1/3 at each subsequent AGM
Vacation of office
Model Articles  bankrupt; IVA; mentally incapacitated; resign; etc.
Removal by members
Companies Ordinance (Cap 622), s.462 – can remove by ordinary resolution
4.
Powers to act for the company and protection of outsiders
Common law (CL) indoor management rule - Royal British Bank v Turqand
 But rule does not apply if third party has actual or constructive notice of
irregularity
Statutory indoor management rule
Companies Ordinance (Cap 622), s.117 – very similar to the CL rule
5.
Authority to act for the company
 Actual express authority
 Actual implied authority – Hely-Hutchison v Brayhead
 Apparent (ostensible) authority – Freeman & Lockyer v Buckhurst Park
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DIVISION OF POWERS BETWEEN DIRECTORS & SHAREHOLDERS
Table A of the Previous Companies Ordinance
Regulation 82
Subject to the provisions of the Ordinance, the memorandum and articles and to any
directions given by special resolution, the business and affairs of the company shall
be managed by the directors, who may exercise all the powers of the company. No
alteration of the memorandum or articles and no such direction shall invalidate any
prior act of the directors which would have been valid if that alteration had not been
made or that direction had not been given. The powers given by this regulation shall
not be limited by any special power given to the directors by the articles, and a
meeting of the directors at which a quorum is present may exercise all powers
exercisable by the directors.
Model Articles for Public Companies Limited by Shares
Regulation 2 (Directors’ general authority)
(1)
Subject to the Ordinance and these articles, the business and affairs of the
company are managed by the directors, who may exercise all the powers of
the company.
Regulation 3 (Members’ reserve power)
(1)
The members may, by special resolution, direct the directors to take, or
refrain from taking, specified action.
(2)
The special resolution does not invalidate anything that the directors have
done before the passing of the resolution.
Model Articles for Private Companies Limited by Shares
Regulation 3 (Directors’ general authority)
Same as Regulation 2 in Model Articles for Public Companies Limited by Shares
Regulation 4 (Members’ reserve power)
Same as Regulation 3 in Model Articles for Public Companies Limited by Shares
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DIVISION OF POWERS BETWEEN DIRECTORS & SHAREHOLDERS
Examples of shareholders’ important powers




The power to alter articles (ss.87 & 88), including the objects (s.89)
The power to appoint auditors (s.396), except the first auditors
The power to remove directors (s.462)
The power to alter share capital (s.170)
Shareholders’ residual powers
Where board cannot function effectively general meeting may exercise residual
powers of management
“Where the board is not in a position to function effectively, the general meeting may
exercise residual powers of management.”
Circumstances where no board or it cannot act
“There is no effectively functioning board if there is no board in existence or if the
board, although existing, cannot act for various reasons. One of the reasons why
the company is without a board may be the failure of the company to convene an
annual general meeting in the previous year(s) to make necessary appointments to
the board. The board is unable to function where it is impossible for a board meeting
to be quorate. It may be impossible for the board to be quorate where, for example,
one of the to opposing factions on the board refuse to meet; or where directors have
vacated office and no fresh appointments have been made to have a sufficient
number of directors to meet the quorum requirements.”
Wide approach in Hong Kong as to general meeting’s reserve powers
“In the Hong Kong case of Miracle Chance Ltd v Ho Yuk Wah David, the Court of
Appeal appears to have taken a broad view on the scope of the general meeting’s
reserve powers. The company in that case was a corporate joint venture with one
shareholder (Gao) holding 65 percent of the issued shares and the other (Ho)
holding the remainder. Ho refused to attend both a board meeting and a general
meeting called by Gao to consider proceedings against him, the former. Gao
nonetheless sought to institute the proceedings in the name of the company on the
basis of a written resolution consented to by a majority of the votes of shares entitled
to vote thereon (namely his 65 percent of the votes), as permitted by the articles.
The Court of Appeal accepted that the general meeting would have power to institute
legal proceedings in the name of the company where the board is unable to act.
Rogers JA observed that ‘if the board is ineffective, the power which in effect has
been delegated by the Articles to the directors reverts to the person or persons who
delegated, namely the company in general meeting’.”
Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.214-216
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APPOINTMENT OF DIRECTORS – QUALIFICATIONS
Companies Ordinance (Cap 622)
Section 459 (Minimum age for appointment as director)
(1)
A person must not be appointed a director of a company unless at the time of
appointment the person has attained the age of 18 years.
Section 480 (Provisions as to undischarged bankrupt acting as director)
(1)
A person who is an undischarged bankrupt must not act as director of, or
directly or indirectly take part or be concerned in the management of, a
company, except with the leave of the Court by which the person was
adjudged bankrupt.
APPOINTMENT OF DIRECTORS – INITIAL DIRECTORS
Companies Ordinance (Cap 622)
Section 453 (Public company and company limited by guarantee required to have at
least 2 directors)
(1)
This section applies to—
(a)
(b)
a public company; and
a company limited by guarantee.
(2)
The company must have at least 2 directors.
(3)
With effect from the date of incorporation of the company, the first directors of
the company are the persons named as the directors in the incorporation form
delivered to the Registrar under section 67(1).
Section 454 (Private company required to have at least one director)
(1)
A private company must have at least one director.
(2)
With effect from the date of incorporation of a private company, the first
directors of the company are the persons named as the directors in the
incorporation form delivered to the Registrar under section 67(1).
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APPOINTMENT OF DIRECTORS – SUBSEQUENT DIRECTORS
Model Articles for Public Companies Limited by Shares
Regulation 23 (Appointment and retirement of directors)
(1)
A person who is willing to act as a director, and is permitted by law to do so,
may be appointed to be a director—
(a)
by ordinary resolution; or
(b)
by a decision of the directors.
(2)
A director appointed under paragraph (1)(a) is subject to article 24.
(3)
An appointment under paragraph (1)(b) may only be made to—
(a)
fill a casual vacancy; or
(b)
appoint a director as an addition to the existing directors if the total
number of directors does not exceed the number fixed in accordance
with these articles.
(4)
A director appointed under paragraph (1)(b) must retire from office at the next
annual general meeting following the appointment.
Model Articles for Private Companies Limited by Shares
Regulation 22 (Appointment and retirement of directors)
(1)
A person who is willing to act as a director, and is permitted by law to do so,
may be appointed to be a director—
(a)
by ordinary resolution; or
(b)
by a decision of the directors.
(2)
Unless otherwise specified in the appointment, a director appointed under
paragraph (1)(a) holds office for an unlimited period of time.
(3)
An appointment under paragraph (1)(b) may only be made to—
(a)
fill a casual vacancy; or
(b)
appoint a director as an addition to the existing directors if the total
number of directors does not exceed the number fixed in accordance
with these articles.
(4)
A director appointed under paragraph (1)(b) must—
(a)
retire from office at the next annual general meeting following the
appointment; or
(b)
if the company has dispensed with the holding of annual general
meetings or is not required to hold annual general meetings, retire from
office before the end of 9 months after the end of the company’s
accounting reference period by reference to which the financial year in
which the director was appointed is to be determined.
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VACATION OF DIRECTORS (1) – RETIREMENT BY ROTATION
Model Articles for Public Companies Limited by Shares
Regulation 24 (Retirement of directors by rotation)
(1)
At the first annual general meeting, all the directors must retire from office.
(2)
At every subsequent annual general meeting, one-third of the directors for the
time being must retire from office.
(3)
…
(4)
For the purposes of paragraph (2), if the number of directors is not 3 or a
multiple of 3, then the number nearest one-third must retire from office.
(5)
The directors to retire in every year must be those who have been longest in
office since their last appointment or reappointment.
(6)
For persons who became directors on the same day, those to retire must be
determined by lot, unless they otherwise agree among themselves.
(7)
At the annual general meeting at which a director retires, the company may
appoint a person to fill the vacated office.
Model Articles for Private Companies Limited by Shares
No equivalent regulation
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VACATION OF DIRECTORS (2) – VACATION OF OFFICE
Model Articles for Public Companies Limited by Shares
Regulation 27 (Termination of director’s appointment)
A person ceases to be a director if the person—
(a)
ceases to be a director under the Ordinance or the Companies (Winding Up
and Miscellaneous Provisions) Ordinance (Cap. 32) or is prohibited from
being a director by law;
(b)
becomes bankrupt or makes any arrangement or composition with the
person’s creditors generally;
(c)
becomes a mentally incapacitated person;
(d)
resigns the office of director by notice in writing of the resignation in
accordance with section 464(5) of the Ordinance;
(e)
for more than 6 months has been absent without the directors’ permission
from directors’ meetings held during that period; or
(f)
is removed from the office of director by an ordinary resolution of the
company.
Model Articles for Private Companies Limited by Shares
Regulation 25 (Termination of director’s appointment)
Same as Regulation 27 in Model Articles for Public Companies Limited by Shares
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VACATION OF DIRECTORS (3) – REMOVAL BY MEMBERS
Companies Ordinance (Cap 622)
Section 462
(1)
A company may by an ordinary resolution passed at a general meeting
remove a director before the end of the director’s term of office, despite
anything in its articles or in any agreement between it and the director.
(4)
Special notice is required of a resolution—
(a)
to remove a director; or
(b)
to appoint somebody in place of a director so removed at the meeting
at which the director is removed.
(9)
This section is not to be regarded as depriving a person of compensation or
damages payable to the person in respect of the termination of—
(a)
the person’s appointment as director; or
(b)
any appointment terminating with that as director.
Section 463
(1)
On receipt of notice of a resolution under section 462(4) to remove a director,
the company must forthwith send a copy of the notice to the director
concerned.
(2)
The director (whether or not a member of the company) is entitled to be heard
on the resolution at the meeting at which the resolution is voted on.
(3)
If notice is given of a resolution under section 462(4) to remove a director, the
director—
(a)
may make with respect to the resolution representations in writing to
the company (not exceeding a reasonable length); and
(b)
may request the company to comply with the requirement specified in
subsection (4) in relation to the representations.
(4)
The requirement specified for the purposes of subsection (3)(b) is—
(a)
if the company receives the representations on a date that is more than
2 days before the last day on which notice may be given under section
571(1) to call the meeting [21 days in the case of AGM or 14 days in
any other case], the requirement—
(i)
to state, in every notice of the meeting given to the members,
that the representations have been made; and
(ii)
to send a copy of the representations to every member to whom
a notice of the meeting is or has been given; or
(b)
if the company has not sent a copy of the representations to every
member to whom a notice of the meeting is or has been given, the
requirement to ensure that the representations are read out at the
meeting.
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POWERS TO ACT FOR THE COMPANY AND PROTECTION OF
OUTSIDERS – THE COMMON LAW INDOOR MANAGEMENT RULE
Source: Company Law in Context: Texts and Materials, 2 nd edition, 2012, by David Kershaw, p.124
for the facts; Sealy & Worthington’s Cases and Materials in Company Law, 10 th edition,
2013, by Len Sealy and Sarah Worthington, p.125 for the judgment
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POWERS TO ACT FOR THE COMPANY AND PROTECTION OF
OUTSIDERS – EXCEPTIONS TO THE COMMON LAW INDOOR
MANAGEMENT RULE
Rule does not apply where actual or constructive notice of irregularity
“The rule is a presumption of regularity designed to protect those who are unable to
or who are not in any reasonably practicable position to ascertain whether all the
proper procedures in the internal management of the company have been complied
with. However, a person ‘cannot presume in his own favour that things are rightly
done if inquiry that he ought to make would tell him that they were wrongly done’.
Accordingly, the rule cannot be relied on by a person who has actual or constructive
notice of the irregularity. …”
Constructive notice: circumstances such that person ought to have investigated
internal management complied with
“… The idea of constructive notice in the present context is that, if the circumstances
are such that the person, if acting reasonably, ought to have investigated whether
the requirements of internal management were complied with, then failure of the
person to take reasonable steps to ascertain the true position will lead the courts to
impute to the person notice of the irregularity. A person may have constructive
notice by failing to make the types of enquiries which are usual for the type of
transaction concerned based on custom and practice.”
Constructive notice: put on inquiry
“Also, if a person is aware of circumstances which ought to have led the person to
make further enquiries (here, the person is said to be put on enquiry), if the person is
negligent in failing to take reasonable steps to ascertain the relevant facts, then the
person will be treated as having constructive notice. A person may be put on
enquiry where there are unusual circumstances that ought to arouse suspicion, but
whether a person would be put on enquiry depends on all the particular
circumstances. The very nature of a proposed transaction may put a reasonable
apprehension that the transaction is entered into for purposes unrelated to the
company’s business and from which it appears to gain no benefit, then the person
dealing with the company may be put on enquiry.”
Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.551-552
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POWERS TO ACT FOR THE COMPANY AND PROTECTION OF
OUTSIDERS – THE STATUTORY INDOOR MANAGEMENT RULE
Companies Ordinance (Cap 622)
Section 117
(1)
Subject to section 119, in favour of a person dealing with a company in good
faith, the power of the company’s directors to bind the company, or authorize
others to do so, is to be regarded as free of any limitation under any relevant
document of the company.
(2)
For the purposes of subsection (1)—
(6)
(a)
a person deals with a company if the person is a party to any
transaction or any other act to which the company is a party;
(b)
a person dealing with a company is presumed, unless the contrary is
proved, to have acted in good faith;
(c)
a person dealing with a company is not to be regarded as acting in bad
faith by reason only of the person’s knowing that an act is beyond the
directors’ powers under any relevant document of the company; and
(d)
a person dealing with a company is not required to inquire as to the
limitations on the power of the company’s directors to bind the
company or authorize others to do so.
In this section—
relevant document, in relation to a company, means—
(a)
the company’s articles;
[Note: Section 119 restricts the application of s.117 in respect of charitable
companies.]
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AUTHORITY TO ACT FOR THE COMPANY
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Source: Company Law in Context: Texts and Materials, 2 nd edition, 2012, by David Kershaw, pp.116119
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AUTHORITY TO ACT FOR THE COMPANY
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Source: Sealy & Worthington’s Cases and Materials in Company Law, 10th edition, 2013, by Len
Sealy and Sarah Worthington, p.125 for the facts; Hicks & Goo’s Cases and Materials on
Company Law, 7th edition, 2011, by Alan Dignam, pp.249-250 for the judgment
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