Assignment Submission Important Note and Company Law Questions

You must use word processing software (such as Microsoft Word) to prepare the assignments, and submit the assignments via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date. Failure to upload an assignment in the required format to the OLE may result in the score of the assignment being adjusted to zero.

Hugo was the promoter of Utopia Ltd (‘the Company’) which conducts general trading business. The Company was incorporated on 1 July 2018. After the Company was formed, Hugo sold an office unit which he had purchased in 2012, at the price of HK$5 million. Hugo made a profit of HK$2 million, as he had purchased the office for HK$3million.

Grant is an accountant and is also the director of the Company. When Grant was conducting an annual review of the accounting statements of the Company, he found out about the office sale transaction. Overall, Grant accepted the transaction because the office is located at a prime commercial site.

Grant intends to increase the Company’s cash capital by allotting new shares to Elizabeth, an outsider, because he wants the Company to develop a jewellery trading business in the Middle East. However, Grant does not want the issued capital of the Company to be increased permanently. He intends to reduce the issued capital back to the position before allotment once there is sufficient cash flow or distributable profits available for running the jewellery business. Please answer the following questions.

1. Advise Grant on whether Hugo had breached his duty as promoter of the Company with regard to the sale of his office by reference to the ruling under Erlanger v New Sombrero Phosphate Company (1873). (25 marks)
2. No prohibitions or restrictions in respect of the allotment of redeemable and preference shares are stated in the articles of association of the Company. Advise Grant on the differences between redeemable and preference shares, and suggest which type of share would suit the intended allotment of shares to Elizabeth. (25 marks)

John and Tom hold 80% and 20% shareholdings respectively in a company limited by shares named Phipps Ltd (‘the Company’). John is the only director. The Company operates a coffee shop in Yuen Long. Recently, John wanted to sell half of his shares to Lulu. His reason for doing this is that Lulu has a good business network and, if she becomes a shareholder of the Company, Lulu would use her network to promote the business. Tom agrees to John’s intended sale of his shares to Lulu.

Tom recently encounters financial difficulties and wants the Company to buy back his shares with payment to be made from the Company’s issued share capital. John does not agree to the buy-back proposal since he believes that it is against the law.

1. Advise John on the procedure and documents involved in effecting a transfer of shares to Lulu. (25 marks)
2. By reference to case law and relevant sections in the Companies Ordinance (Cap. 622), advise on how the Company could buy back Tom’s 20% shares.