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Submitted by // K Bowers, Partner / Solicitor Advocate
28 April 2017


Can a company continue to conduct financial transactions in the face of winding-up proceedings by its shareholders? 

Background

In Harbour Front Ltd v Money Facts Ltd [2017] HKEC 249, Fonfair Company Limited ("Company") was the subject of an unfair prejudice petition. The Company has two shareholders, and each shareholder (both being companies) is owned respectively by two brothers. There is a long-running dispute between the brothers over the control and management of the Company, and in April 2015, one brother ("Petitioner") presented an unfair prejudice petition ("UPP") to the Hong Kong Court seeking relief from conduct by the Company which he alleged was prejudicial to his company's interests as a minority shareholder. The Hong Kong Courts have a wide discretion to award relief in the event of a successful unfair prejudice petition, with the usual remedy being a 'buy-out order' for one party to buy out the shares of the other. In this case however, the UPP was drafted to include a winding-up order as an alternative remedy. Consequently, the Company's assets were frozen (and could not be disposed of) pending the hearing of the Petitioner's application for the appointment of Receivers. It was in these circumstances that an application for a Validation Order was made to the Hong Kong Court ("Validation Order").

Validation Orders are sought where a company wishes to conduct financial transactions (e.g. access its bank account to pay employees) whilst its assets have been frozen as a result of winding-up proceedings. In this case, a Validation Order was sought to enable the Company to renew a recently-expired lease on a piece of Company-owned property ("Property"). The Petitioner objected to the application for a Validation Order primarily on the ground that the manner in which his brother had dealt with the expired lease was one of the matters giving rise to the UPP in the first place and that consequently, the application should not be granted until the issues underlying the UPP have been determined.

Solvent companies with ongoing businesses

In assessing an application for a Validation Order, the Hong Kong Court will first consider whether the company is solvent

It was held in Re Wah Yin Cheong Co Ltd [2003] HKEC 892 that the weight attached to the opposition to an application for a Validation Order is very different in circumstances where the company is solvent with ongoing business as compared to the situation where a winding-up petition is presented on the ground of insolvency. Where a company is solvent with valuable ongoing business, the directors should be allowed to continue to operate that business normally, and without close supervision by the Court.

In the present case, the Court was satisfied that the Company is an ongoing business that was solvent on both a net profit and cash-flow basis.

The Hong Kong Court will also consider the nature of the company's ongoing businesses

An exception to the general rule on non-interference with the discretion of directors may exist where there is an underlying dispute between the shareholders that goes to whether or not a company should continue in its current form, and where it is possible that the value of the company's assets will be depleted if it is permitted to continue trading. To determine whether a particular case falls within the ambit of this exception, the Hong Kong Court will identify the precise nature of the Validation Order that it is being invited to make.

In the present case, the Court found that it would be artificial to view the proposed transaction as "anything other than a straightforward commercial decision to continue with an existing commercial arrangement" in view of the fact that the Company's "sole activity is holding the Property for profit", and given that there is "no suggestion that the rent is materially out of line with the market rent". Therefore, the Court saw no reason to refuse the Validation Order on the ground that the Petitioner was concerned about purported connections between his brother and the prospective tenant of the Property.

Opposing an application for a Validation Order

As held by the Hong Kong Court in this case, "an application for a validation order is not an opportunity [for shareholders] to argue about the wisdom of a proposed transaction [by the Company]". The Hong Kong Court is generally unlikely to refuse to make a Validation Order in respect of a solvent company with valuable ongoing business, because the responsibility of managing the business of a company is entrusted by the company's articles of association to its directors. However, this is not a hard and fast rule in circumstances where the Hong Kong Court will also take into consideration exceptional circumstances and factors such as whether the proposed transaction falls clearly outside the company's ordinary course of business, and whether there is proven bad faith.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // K Bowers, Partner / Solicitor Advocate
25 April 2017


The new European General Data Protection Regulation ("GDPR") - Why you should care!

Introduction

The new GDPR (Regulation (EU) 2016/679), set to come into force throughout the European Union on 25 May 2018, will replace existing data protection laws throughout Europe and bring about significant changes and enhanced regulatory requirements that could possibly have a significant impact on businesses around the world, irrespective of their location.

What are the key changes?

1. Extra-territorial applicability

The GDPR will apply to all EU and non-EU companies processing the personal data of data subjects residing in the EU ("Data Subjects"), regardless of the their place of establishment, location and whether the processing takes place in the EU, where the activities relate to offering goods or services to EU citizens (irrespective of whether payment is required) and the monitoring of behaviour that takes place within the EU. Non-EU businesses processing the data of EU citizens will also have to appoint a representative in the EU.

2. Increased penalties for non-compliance

The maximum fine for companies in breach of GDPR will be increased to 4% of their annual global turnover, or €20 Million per infringement (whichever is greater).

3. Consent

Requests to obtain consent of Data Subjects must be given in a clear, intelligible and easily accessible form, using clear and plain language, with the purpose for the data processing attached to that consent. It must be as easy to withdraw consent as it is to give it.

4. New data breach notification obligations

Companies will be required to notify the relevant European data protection authority of a data breach which is likely to "result in a risk for the rights and freedoms of individuals" within 72 hours of the breach coming into light. Companies will also be required to notify the individuals affected without undue delay where there is a high risk to the individuals concerned.

5. Strengthened Rights of Data Subjects

Data subjects will enjoy expanded rights, in particular: -

• Right to Access: The right to obtain confirmation as to whether or not their personal data is being processed, where and for what purpose. Companies will have to provide an electronic copy of the personal data without charge;
• Right to be Forgotten: This entitles Data Subjects to have the data controller erase their personal data, cease further dissemination of the data and potentially have third parties halt processing of the data; and
• Right to Data Portability: This entitles Data Subjects to receive the personal data concerning them, which they have previously provided, and have the right to transmit that data to another controller.

6. Legal requirement to implement "privacy by design"

Companies must take a proactive approach to ensure that an appropriate standard of data protection is adopted from the outset when designing systems. More specifically, data controllers "shall...implement appropriate technical and organisational measures…in an effective way…in order to meet the requirements of [GDPR] and protect the rights of data subjects".

7. Appointment of Data Protection Officers ("DPO")

Companies will be required to keep an internal record and appoint a DPO to implement and monitor compliance with the GDPR, where the core activities of data controllers or data processors consist of processing operations which require regular and systematic monitoring of: -

• Data Subjects on a large scale; or
• special categories of data; or
• data relating to criminal convictions and offences.

Take-away points

As preliminary measures, companies should:-

• Review current data protection systems and establish clear, internal regulatory policies and procedures to avoid committing any data breach.
• Set up an appropriate system in order to react promptly to any data breach and comply with notification requirements.
• Review and update privacy notices and policies to ensure they are written in clear and plain language, and easily accessible.
• Conduct regular training for employees on the handling of personal data.
• Ensure that third party data processors also implement GDPR-compliant security measures.
• Seek legal advice, where necessary.
• Most importantly (and needless to say), never forget about the rights of Data Subjects and know your obligations!
• The extra-territorial impact of this EU Regulation means that it will have a significant impact upon Hong Kong companies doing business in Europe.

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

 

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Submitted by // K Bowers, Partner / Solicitor Advocate
24 April 2017


An unreasonable decision or an understandable degree of caution?

Introduction

This case concerned the supply of fresh water and drainage facilities to the ground floor of Tak Bo Building (''Building''). The Plaintiff was the registered owner of a shop unit on the ground floor of the Building, and the Defendants were the incorporated owners of the Building (''IO'').

The Plaintiff claimed that the IO had breached the Deed of Mutual Covenant (''DMC'') by its refusal to consent to the Plaintiff's proposed works to install water pipes to its premise.

Background

When the Building was designed and built in the late 1970s, no fresh water or drainage facilities were provided to the 35 individual shop premises on the ground floor. If the owners of the shops on the ground floor required water, they used the toilets on the ground floor which were connected to the Building's main fresh water and drainage system.

The Plaintiff became the registered owner of a unit on the ground floor of the Building in 2009 and applied to the IO for permission to connect water pipes to its premises. The IO considered the request, but refused it.

Regardless, the Plaintiff proceeded with the work. The Plaintiff engaged a licensed plumber to carry out works involving the drilling of 2 holes through the concrete canopy which ran around the outside of the Building at the ceiling level of the ground floor shops. The plan was to run the pipes along the surface of the canopy across the common areas of the Building. The Plaintiff conceded that these works commenced without the consent of the IO, the Water Supplies Department (''WSD'') or the Buildings Department (''BD''). The works came to a stop when the plumber unintentionally shut down all of the water supply to the commercial premises on the upper floors of the Building, resulting in complaints and police involvement. Nevertheless, the Plaintiff asked the IO to reconsider its application, which the IO refused for a second time.

Construction of the DMC / Right to Access Main Pipes for Water and Drainage

The Plaintiff applied for a declaration that on a proper construction of the DMC, it had a right to access the main pipes of the Building for water and drainage, so long as there was no damage done to the Building, or inconvenience, nuisance or annoyance caused to other occupiers. The Plaintiff also claimed that it was an implied term of the DMC that consent could not be withheld unreasonably by the IO, and that the IO had breached the DMC by doing so.

The IO argued that the DMC did not give the Plaintiff any right to connect up to the Building's main pipes for water and drainage and that even if it did, consent for the Plaintiff to do so was not unreasonably withheld by the IO. The works carried out by the Plaintiff were illegal as they contravened the Building Management Ordinance (''BMO'') and the DMC and they did cause damage to the Building.

The Court examined clause 3(c) of the Building's DMC in this regard, which states as follows:

"3. Each owner shall hold his part of the said building and the said premises subject to and with the benefit of the following rights privileges and obligations namely:-...

(c) The free and uninterrupted passage and running of water sewage … to his part of the said building through the … pipes … which now are or may at any time hereinafter be in under or passing through the said premises and building or any part or parts thereof.
"

The Court ruled in the IO's favour that in interpreting clause 3(c) of the DMC, the phrase ''may at any time hereinafter'' only refers to the possibility that the IO decides in the future to put in new piping. Only then would the owners of the shops on the ground floor have the ''benefit of running water'' through pipes. The Court also ruled that access to running water could not be seen as essential given the fact that over 90% of the shops on the ground floor had functioned perfectly well without water for 37 years. On a proper construction of the DMC, there was no right as contended by the Plaintiff as the Building plans specifically excluded water supply to shop units. The BMO does not contemplate a situation where a plaintiff acquires a right to encroach on the common parts of a building.

Was the IO's refusal to consent unreasonable?

Both parties agreed that the burden was on the Plaintiff to prove the unreasonableness of the IO's decision not to consent to the Plaintiff's request. The court considered the following factors in finding that the IO's refusal was a reasonable one:-

(i) the only plan submitted by the Plaintiff in support of its request was a plan prepared by a licensed plumber showing the proposed pipes joining the main pipes. Contrary to the plans, the pipes went directly and independently into the gutter next to the main drainage pipe;
(ii) the Plaintiff's application stated that an application to the WSD had been made and approval had been given when it had neither applied to the WSD nor been given approval;
(iii) the IO's concern for the safety of the Building if holes were drilled in the concrete cantilevered canopy on the first floor of the Building;
(iv) the lack of detail of the intended works in the Plaintiff's requests prior to the commencement of the works;
(v) the legality of the proposal pursuant to the DMC; and
(vi) the proposal lacked detail and was not ''in keeping'' with the established rule of the arcade's business, which was a ''one off'' application and involved a plumber drilling holes in the canopy.

Accordingly, the Court ruled that it was ''…not persuaded that it [the IO's decision] has been proved to be unreasonable. On the contrary, an understandable degree of caution would be a better description.''

Consent of the BD under the current regime

The Court also considered whether the works, if carried out now, still required the BD's consent given the exemptions provided to ''designated exempted works'' and ''minor works'' from the necessity of the BD's consent under the Building (Minor Works) Regulations (''Regulations'') (Cap 123N) which came into effect in 2011. Upon considering expert evidence, the Court held that the drilling of holes in the canopy did not fall under the List of Designated Exempted Works under the Regulations in that it would reduce the structural strength of the canopy and increase the ''stress'' or ''load'' on the canopy.

The Court further held that the installation of drainage pipes which ran from the opening in the canopy along the surface of the canopy to the main drainage pipe at the rear of the Building did not fall under Class III Minor Work of the Regulations as it would involve connection to the main pipes.

The Court also examined whether the installation works already carried out by the Plaintiff caused damage to the Building as a result of the IO's expert's observation that there was a crack in the concrete running from near the drilled holes to the outer edge of the canopy. Although the Plaintiff's expert's opinion was that it was likely to be a thermal crack unrelated to the installation works, the IO's expert's view was that the likely cause of the crack was the installation works. The Court held that it was not possible to rule on this issue but considered that given the location of the crack it would be risky to exclude the IO's expert's opinion.

More importantly, the Court commented that ''Should the same or a similar situation arise again any prudent applicant would be well advised to submit detailed plans to the BD and ask the question "do we need your consent for these works or do they fall within the 'minor works' regime or 'designated exempted works'".''

Conclusion

This case shows that the Court places a lot of weight on whether details of proposed works are provided to the IO, the accuracy of the applicant's proposal, and the proposed works on the Building's safety in determining whether the IO's decision was a reasonable one. A cautious approach should always be taken by incorporated owners of a building when considering applications which might pose any kind of threat to a building's safety.

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

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Submitted by // K Bowers, Partner; M Withington, Partner
21 April 2017


BPE Solicitors v Hughes-Holland [2017] UKSC 21

Background

The Supreme Court decision in BPE Solicitors v Hughes-Holland [2017] UKSC 21 is of particular interest to solicitors and their insurers as it clarifies a principle from South Australia Asset Management Corporation v. York Montague Ltd [1997] A.C. 191 ("SAAMCo") which is often misunderstood.

In SAAMCo, a case concerning a negligent overvaluation of a property, Lord Hoffman made a distinction between (1) the duty to provide information to enable clients to decide on a course of action; and (2) the duty to advise clients what specific course of action to take.

The Supreme Court in BPE Solicitors v Hughes-Holland [2017] UKSC 21 recognised that damages awarded under the SAAMCO principle maybe "mathematically imprecise", however it is "essentially a legal rule which is applied in a robust way without the need for fine tuning or detailed investigation of causation".

Facts

Mr. Richard Gabriel ("Mr. G") lent £200,000 under a loan agreement to Whiteshore Ltd ("Whiteshore"), a property company owned by Mr. Little ("Mr. L"). The loan agreement provided for repayment on 12 March 2009 of the full amount plus £70,000 interest. The loan was secured against Whiteshore's intended development property by way of a first legal charge. BPE Solicitors ("BPE") were instructed by Mr. G to draft a loan agreement between Mr. G and Whiteshore. Mr. G believed the loan would be used to assist with the cost of property development. However, Mr. L used the money to pay off another loan. The property was never developed and Whiteshore defaulted on the repayment.

Mr. G enforced his charge to sell the property at £13,000, which meant Mr. G made no recovery. Mr. G brought a claim against BPE, alleging that the loan agreement had been negligently drafted and that BPE had failed to advise Mr. G that the loan would be used to discharge Mr. L's other debts.

Lower Court's Decision

The Court at First Instance held that, although BPE had no duty to advise Mr. G of the commercial risks of the development, they were in breach by failing to advise Mr. G of the intended use of the loan. Had BPE informed Mr. G of the true intended purpose of the loan, he would not have entered into the transaction at all, and no loss would have been suffered.

The Court of Appeal reversed the decision and held that BPE were only liable for the foreseeable consequences of providing the wrong information to Mr. G. BPE was not under a duty to advise on what course of action to take or the commercial risk of entering into the loan agreement. There was no evidence that Mr. G's investment would have resulted in a return or an increase in value in the property. The Court of Appeal reduced the damages to nil.

Supreme Court's Decision

On appeal, the Supreme Court agreed with the Court of Appeal. The judgement was handed down by Lord Sumption with the remaining four Lord Justices of the Supreme Court agreeing, that the loss suffered by Mr. G would have been suffered even if he had been fully aware of the circumstances of the transaction. Although BPE were negligent when they drew up the loan agreement by stating the incorrect purpose for the loan, they were only responsible for failing to resolve Mr. G's misunderstanding about the intended use of the funds. In any case, Mr. G did not suffer any loss which was attributable to that misunderstanding. It was simply a bad deal for Mr. G. BPE were not liable for all of the losses which flowed as a result of Mr. G's own commercial decision to lend money.

• Clarifying the SAAMCo Principle

Lord Sumption held that the SAAMCo principle was a tool to distinguish the (i) loss flowing from the fact that as a result of the professional's negligence the information was wrong; and (ii) loss flowing from the decision to enter into the transaction at all. Lord Sumption clarified the two types of advisors as follows:

(i) Advisor of Action: The advisor is responsible for taking into account all factors which will impact on the decision to take a particular course of action. If a factor is negligently ignored or misjudged, and proves to be paramount to the decision to take that course of action, the advisee is entitled to recover all losses flowing from the course of action. The negligent Advisor of Action is liable for the overall riskiness of the transaction.

(ii) Advisor of Information: The advisor is contributing a limited part of the information for the advisee to make a decision. The process of considering other relevant factors and assessing the overall commercial merits of the transaction are matters for the advisee. The adviser's overall duty does not extend to the decision itself and therefore the negligent adviser is only liable for the financial consequence of that particular information being wrong.

Conclusion

Professionals have often fallen into the general 'failing to advise' category, making them liable for all recoverable loss. Lord Sumption explained that valuers as well as conveyancers are providers of 'information', supplying only a specific part of information upon which a client will base its decision. By contrast, an investment advisor advising on whether to buy or invest in a particular stock is regarded as giving 'advice'. This case establishes that conveyancers are Advisers of Information, not Advisors of Action. As a result, conveyancers should not be liable for all losses, but only for losses which flow as a direct result of that negligent information. This is useful, in particular for valuers and conveyancers, when determining whether certain losses fall outside their duty of care.

This decision provides a useful clarification of the SAAMCo principle and is likely to have an impact upon ongoing and future professional negligence claims in relation to the determination of the issue of what damages are recoverable.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; intellectual property; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.


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