3/31/2024

LW4657/LW5657 Company Law II

Revision

Professor Alexander Loke

School of Law
City University of Hong Kong

April 2024

Company law from the perspective of …

the relative priority of claims
Asset value

Secured debt V1
$20m $30m V2
$50m
Unsecured debt
Debt
$60m
Senior debt $40m V3
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ $100m
Subordinated debt

Preferred shares

Equity
Common shares
100 shares

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The competing interests in a corporation

Preferred shares

Common shares

Secured debt
Directors and officers
Company
Unsecured debt

Senior debt
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
‐‐‐‐‐‐‐‐‐‐‐‐
Subordinated debt

Assets
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The competing interests in a corporation

Class B shares
Preferred shares
Class A shares

Common shares
Common shares

Company Company

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Equity

Convertible
Preferred shares Class A shares (preferred/class)
shares

Class B Shares

Common shares Common shares Common shares

Some issues relating to equity

1. Transfer of interests in equity
2. Competition between equity holders
3. Strategic action by majority holders against
minority holders
 Statutory checks e.g. CO s. 180
 Greenhalgh v Arderne Cinemas (1946)
 Cumbrian Newspapers v Cumberland Co. (1987)
4. Capital maintenance norms in:
 Reduction of capital
 Self‐acquisition of shares
 Financial assistance in acquisition of shares
 Dividends

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Debt

Secured Debt

Senior Debt Convertible?

Subordinated
Debt

Private investment

Parties
Process

Investor A
Shares

Corporation Investor B

Investor C

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Public offering

Parties
Process

Investor A
Shares Reg
Investor A
Investor A
Investor A
Investor A
Investor A
Corporation Investor A
Investor B Investor A
Investor B Investor A
Investor B Investor A
Investor B Investor A
Investor B Investor A
Investor
Investor B
Investor B A1002
Investor B
Investor B
Investor C Investor B
Investor C Investor B
Investor
InvestorC Investor B
Investor
C32 B3045

Why disclosure?
1. The policy tension between disclosure and
exemption.
2. Consequences for non‐disclosure or
misleading statements
3. Disclosure (a) initial public offer; (b)
continuous disclosure.
Caution: be careful to distinguish between the two.

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The requirement for a full prospectus

vs exemptions (safe‐harbours)
How do these dovetail with HK’s aim to be
an international financial centre?

USA EU

AU
CHINA
HK

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Exemptions 1:
Exclusions from the definition of ‘prospectus’
i.e. these offer documents are not considered
prospectuses: para (b) in definition of
‘’prospectus”+ Seventeenth Schedule

Small Offering Offers to no more

(≤ $5m) than 50 persons

Offers with min. Professional Qualifying persons

consid. (≥$0.5m) investors (ESOP)

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Exemptions 2
Exemption from the prescribed
requirements found in s. 38

Securities equiv.
Rights issue to currently listed
securities

Continuing Listing Obligations under SFO Pt XIVA

The norm: s. 307B

(1)‐A listed corporation must, as soon as reasonably
practicable after any inside information has come to its
knowledge, disclose the information to the public.

Exception 1 Exception 2
Exception 3
Prohibited Incomplete Other exceptions
Trade secret
disclosure proposal

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Debt (lenders):
The scramble for higher priority
1. The fundamental nature of loans ‐
the debtor‐creditor relationship

Lender promises to lend ($P )

Borrower promises to repay ($P + i )

Debt (owing to trade creditors):

The scramble for higher priority
1. The fundamental nature of the
debtor‐creditor relationship

Supplier provides goods

Borrower promises to pay ($P)

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Debt: different types of loan

agreements
It’s not difficult and really quite simple.
Consider the following:
(a)Term loan
(b) Revolving credit
(c) Syndicated loan
(d) Club loan

Debt (lenders and trade creditors):

The scramble for higher priority
Priority through proprietary interest
over assets
What assets?
• Fixed assets (e.g. real property,
equipment)
• Inventory
• Accounts receivable
• Intellectual property

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Company law from the perspective of …

the relative priority of claims
Asset value

Secured debt V1
$20m $30m V2
$50m
Unsecured debt
Debt
$60m
Senior debt $40m V3
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ $100m
Subordinated debt

Preferred shares

Equity
Common shares
100 shares

Secured Debt
Charges and other security interests
1. Types of consensual security interests
Cf. quasi security interests e.g. retention of title
clauses
2. The analytical structure

1. Agreement
2. Attachment
3. Perfection
4. Priorities

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Secured Debt
Charges ‐ registration
1. Why the statutory requirement for
registration?
2. What is registrable?
E.g. compare (a) assignment of a debt; (b) charge
over a debt.
3. Why do parties desire a particular
characterisation of the security interest?
(Hint: consider the vulnerabilities of the
floating charge.)
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Secured Debt
Charges ‐ priorities
1. Type of property
2. Whether legal or equitable
3. Whether fixed or floating

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Debt
Contractual protections
Examples
1. Negative pledge clauses
2. Restrictive covenants
 liquidity ratios
 debt ratios etc
3. Subordination agreements
4. Provision for receiver/ receiver and
manager
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Liquidation and winding up

1. Types of winding up
2. Winding up for inability to pay debts
under s. 177(1)(d)
3. The liquidator’s role

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Augmenting the assets available for

distribution
For example:
s. 182 Void property dispositions
s. 265D Transactions at an undervalue
S 266 Unfair preferences
s. 267 Invalidate vulnerable floating charges
s. 268 Disclaim onerous contracts etc
s. 275 Directors’ liability for fraudulent trading

Note amendments to Part V Div. 5 Subdiv. 2

effected by Ord. No. 14/2016
• Commencement date: 13 Feb 2017
• Saving provisions in Cap. 32 s. 328 and
Schedule 26 (s. 30) (inserted by Ord. 14/2016 ss. 176 and 177
respectively)
 Broadly, the new provisions do not apply to transactions entered into
before the commencement date of the amendments.
 Therefore, the old law continues to apply.
E.g. 1. Transactions at an undervalue entered into before commencement
date not affected by s 265D
E.g. 2. Floating charge created before effective date governed by old s 267

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Ambit of clawback provisions

“Associate”:
s. 265B/265C

• Individual
• Company
“Connected person”: Cf. Non‐connected
s. 265A(3). person

Impacts on:
(a) Time covered in Relevant Time: s. 266B(1)
(b) Presumptions. E.g.
(a) Element of ‘unable to pay its debts’: s. 266B(2)
(b) Element of ‘Desire to prefer’ in U/P: s. 266(4)

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The competing interests in a corporation

Preferred shares

Common shares

Secured debt
Directors and officers
Company
Unsecured debt

Senior debt
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
‐‐‐‐‐‐‐‐‐‐‐‐
Subordinated debt

Assets
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Schemes of Arrangement
1. Avoids the tyranny of the minority
2. Statutorily provided court sanctioned
procedure for cram‐down on minority.
Understand the rationale behind the various
requirements e.g.
 notice and disclosure
 classification of members/creditors

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Getting from…
Proposal to enter
into arrangement

Number >50%
Value > 75%

to … Court sanction
(s. 673)

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The unique use of the provision liquidation

regime for the moratorium (stay)
Cap 32 s. 186

• Re Legend International Resorts Ltd [2005] 3 HKLRD 16 at 92 (CFI,

Kwan J):
“… it is within the jurisdiction of the court to appoint provisional
liquidators to explore, formulate and pursue a corporate rescue.”
• Re Legend International Resorts Ltd [2006] 2 HKLRD 192 at 203 (CA,
Rogers V‐P):
“The power of the court under s.192 is to appoint a liquidator or
liquidators for the purposes of the winding‐up not for the purposes
of avoiding the winding‐up.
• Re China Solar Energy Holdings Ltd (No. 2)
[2018] 2 HKLRD 338 (CFI)
Purposes of winding‐up include securing the assets; reorganization
may continue even if the asset have been secured.

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