Corporate Finance : Hong Kong Corporation

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Corporate Finance : Hong Kong Corporation

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Corporate Finance : Hong Kong Corporation

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Question:
Describe about the Corporate Finance for Hong Kong Corporation.

Answer:

1(a): In this case, Mark and Nick set up a company. Both of them are ready to invest 1000 Honk Kong Dollars in the company. Mark paid cash to the company whereas Nick does not have sufficient cash to pay. First Mark invests his money in the company and then company gives the cash to the Nick. Following are the entries of balance sheet[1]:
Balance Sheet as at …….
(In Hong Kong Dollars)
Non- Current Assets
Loan to Nick                              1000
Current Assets
Cash and cash equivalents         1000
Current Liabilities                              0
Net Current Assets                           2000
Current Liabilities                              0
Total assets less current liabilities     2000
Equity
Share capital                 2000
Reserves                      0
Total Equity                        2000
(b) According to creditors of the company liquidated position of the company is weak because of loan granted by the company to the member. Company does not have enough cash because the company already gives a loan of 1000pounds to the Nick who is the member of the company. Insufficient cash creates an obstacle in day to day business of the company.
2: Constitution of the company and other sources describe the responsibilities and duties of directors towards the company. If a person does not fulfill his duties towards the company, then such person is liable for civil and criminal proceedings and disqualified from the position of the director of the company. Following are the general principles of the director’s duties[2]:
It is the duty of the director that director act in the interest of the company. In other words, director owns a duty of care towards the shareholders of the company. Directors must do all the acts which are in the interest of the company.
It is a duty of the director that they use their powers for the benefit of the members and the company. In other words, director must not use his power for some other purpose or for his own personal benefit. If it is found that directors use his power for the benefit of his own or for some other purpose then effects of his decision can be set aside. This duty of director can be breached even in case when director acted in good faith[3].
Directors must not delegate his powers to some other person and he must take independent and informed decision in relation to any matter.
It is the duty of the directors of the company that they exercise their duties with care, skill and diligence. In other words:
It is expected from the director of the company that they have general knowledge, skill and experience to act as a director of the company.

In this case Supastore plc has taken over the management of Luckless Ltd, a department store situated in London. Kevin, the former managing director of the company regularly purchase the material from the store of his old friend, despite of the fact that he could get better deals from other stores. He is in the impression that his friend gives him the best deals. In this case Kevin does not fulfill his duties towards the company with care and diligence. As mentioned above it is a duty of the director that he exercises his powers only in interest of the company and not for any other purpose. This duty is breached even director acted in good faith.
On other side Jane, the director of Luckless Ltd, appointed the Luke for the appointment of staff in store. Jane was not aware of the fact that Luke involve in criminal conduct for dishonesty and Luke appointed his friends who stole the material from store and bribe the Luke. In this case director does not take informed decision and does not exercise their duty with care and diligence.
3: Tools like separate legal entity and limited liability are very important for the company. These two tools separate the company from other forms of business. A new and separate legal entity is comes into existence from the incorporation of the company. Company is an artificial entity. It has separate identity from the persons who take steps to incorpoate the company and from the members of the company. Company is not a natural person and provisions of Act defines the acts which company can or cannot do, the 2006 Act states[4]:
According to Section 16(1)(2)(3)[5] of the act says from the day on which certificate of incorporation is received , all the persons who become subscribers of the company and members of the company are considered as body corporate by the name mention in certificate of incorporation.
Ownership of company is separated from the investors of the company. Earlier business was run either by the sole traders or partnership firms. In these forms of business individuals alone own the assets of their business and they are personally liable for the debt of the company. There are the drawbacks of sole trader and partnership:
Owners of these forms of business are personally liable towards the creditors of the company.
Owners have unlimited liability
Investors do not invest their capitals in the business in which they are personally liable. Separate legal entity is a tool which safeguards the investors of the company. Members of the company are not personally liable towards the creditors of the company. Creditors can sue the company for their debts not the members or directors of the company.
As stated above the owner of other forms of business is personally liable for all the debts of the business. Concept of limited liability was introduced to safeguard the investors from unlimited liability of the company. According to this term members of the company are liable for only that amount which they have invested in the company.
Section 74(2)(d)[6] of Insolvency Act 1986 states that member is liable towards the company limited by shares only up to that amount which is unpaid on the shares of the company. In other words if the shares of the company are fully paid then members of the company has no liability towards the debts of the companies, and if shares are not fully paid then members are liable up to the amount of unpaid shares.

References:
Companies Registry, ‘ A Guide On Directors’ Duties’, https://www.cr.gov.hk/en/publications/docs/director_guide-e.pdf, (accessed 14 September 2016).
Companies Registry, ‘Part 16 Non-Hong Kong Companies Division 1 Preliminary’, https://www.cr.gov.hk/en/companies_ordinance/docs/part16-e.pdf, (accessed 14 September 2016).
Hawksford, ‘Hong Kong Corporation – A Guide for First Time Entrepreneurs’, https://www.guidemehongkong.com/incorporation/topics/hong-kong-corporation-entrepreneurs-guide, (accessed 14 September 2016).
Insolvency Act 1986 s74
Legal Aspects of Corporate Finance, ‘Unit 1 Incorporation and the Corporate Constitution’, P 1-34.
Nelson, L. C. Y. & Stephanie, M. Y. W., ‘ sample financial statements 2013/14’, 2014, https://www.nelsoncpa.com.hk/slidepdf/sfs-20140317.pdf, (accessed 14 September 2016).

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