Personal liabilities for company secretary Hong Kong

Posted by sohail khatri on October 1st, 2018

Discussion about the Ratification of contracts &about company’s and personal liabilities

We have established in our last blog relating to some issues for company secretary Hong Kong, the existence and legal status of pre-incorporation contracts now the question may have been arising in your mind that how does will this ratification comes into existence? What about the liabilities imposition on any individual or company. Concern Noted! Stay with us and you’ll find your query entertained.

Who can ratify contracts? Can a company secretary Hong Kong do it ?

Authority of ratification like a company secretary Hong Kongmust be established first, so let’s read what legislation or Hong Kong business registrysays about the authority who can ratify contracts. Section 122 (3) of Cap.622has mentioned about where to obtain ratification and it allows company to ratify the contracts made before incorporation and makes board of directors, the competent authority to ratify the pre-incorporation contracts. Legislation by Hong Kong business registrylaid down the procedure to follow, under which board of directors will pass a resolution and upon passing of that resolution, contract will be ratified. Does not have the board directors and have “a one-man company”?there is the provision for it too where any person acting on behalf of the company can authorise the pre-incorporation contracts.

Steps of Ratification

As for any other formal matter, there are set of rules, procedures to follow, same applies there too. As the Section 122 does not outlines the steps for ratification, some corporate examples show it to be done by any act, word of conduct.Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty ltd, exemplifies this provision, where ratification took place just by the director’s payment.

Fung Pui Yi Irene v Motivics Co. Ltd, reports of the situation where promoter of the company signed three years rental agreement to initiate the business of restaurant at the premises. Owner of the premises knocked the door of justice and asked for the compensation against the circumstances where Mr.Tan, a director of the company did not pay three months rent and even denied company’s involvement in the contract. Sounds too selfish and un-professional but Judiciary is after such culprits and so court acted through Land Tribunal and directed Mr. Tan to comply to the contract by showing his WhatsApp message where he showed acknowledgment related to company’s contract and thus through this act, Tribunal held this contract to be effective.

The plaintiff inPoon Yee Kon v New Paradigm E- Technology Ltd sought legal help where she reported that she entered into employment contract with the promoter of the company, yet to be incorporated. She was pledged to be the senior staff member of the defendant and were optioned to get 8% of company’s issued share. According to her, she exercised her duties after company’s incorporation, but the firm could not perform contractual obligations.Courtnoted that as they wrote a letter to plaintiff, confirming enactment agreement hence contract has been ratified.

There is the serious matter of attention where every act of company must not be taken as the act of ratification.Quilliam J communicated during the prosecution ofDevelopment Finance Corp of New Zealand v McSherry Export Kilns Ltd, that: not every deliberate action of company be confused with act of ratification as some actions can be to make some uncertain formalities, a certainty. As registration of debentures by the servants registered debentures just to meet the statutory requirement and should not be confused with act of ratification.

There is the provision which allows principal to ratify the pre-incorporation contract because the authority to act on behalf of principal was given by him or her, thus has the absolute authority over promoter and his or her approval would stand intact.

Lyon J in Kevroy Pty Ltd v Keswick Development Pty Ltd, communicated that, in the absence of clear legislation ratification should take place from the date of incorporation, despite of the fact if it was made before incorporation.

Contrast in Hong Kong and Australian perspective of Ratification

Just as before, Hong Kong legislation by Hong Kong business registry contradicted with English laws, with the perspective of Ratification it contradicts with Australian perspective. Australian Section 131 (1)says:

“If a person enters into or act on behalf of company, into contract before its incorporation, then upon incorporation, company is bound to comply with the terms and conditions of contract.”

Contradiction between Hong Kong’s and Australian perspective exists here where Australian law puts liability on the company, on the contrary, Hong Kong’s law imposes personal liability on the person acting on behalf of company.

Communicating ratification to third party

Section 122 (3) believes in Right to information and thus imply responsibility on the principal to communicate about ratification in due timewhereas there is no compulsion to communicate if ratification is to be done through, as act of principal would eventually tell third party about ratification.Provision in legislation allows presentation of resolution in board meeting and get it authorised there. But there is provision for secret lovers, hence no legal biding on you to communicate about ratification.

Personal and Company’s Liabilities to the Pre-incorporation contracts

As discussed earlier, Section 122 (2) imposes personal liability to the person, who entered into contract as an agent or promoter of the company, so if company discontinues enforcement of contract even then that person would be liable for the continuation and enforcement of contract.

But there is good news for you, if you sensed mal-intention of the firm and decided to distant yourself from firm. Because subsection 122 (1)-122(2) will only be triggered if the person stills imports to act for the company, which is much evident in the case of Bay v Illawarra Stationery Supplies Pty Ltdhere court held all four promoters to be personally liable to the contract.

Still want more to save yourself from personal liability? It is possible to exclude personal liabilityas per Section 122 (2),for which it is mandatory to state clearly in the contract to exclude personal liability to the person acting on behalf of the company.But if person signed the contract with the phrase that “for and on behalf of company” then there would be no personal liability exclusion, otherwise chance to waive off personal liability stands available.

There is another way to save you from personal liability and that is to make it assignable and include provision where it would elapse if not exercised within due time. By having such provision, you will safe yourself from personal liability if company does not ratify contract upon incorporation or due to any other reason. When company ratifies the pre-incorporation contract, it becomes the party to the contract which means that liability is impose on it and if company does not enforce contract, then third party can take legal action against the company.

Section 122 (4)introducesBreach of Warrantyunder which personal liability will be imposed in case, breach of warranty establishes. There is also a scenario as per which, plaintiff would not get any compensation if the company becomes solvent nor it can file damages for personal liability, in such scenario of insolvency.