How to form a company in Hong Kong as an agency ?

Piercing the Corporate Veil: In the context of Fraudulency and role of Agencies

This article tends to unleash the reasons of using doctrine of Piercing Corporate Veil before you consider how to form a company in Hong Kong, for the incorporation established solely for any fraud, illegality or any offensive act with reference to legal proceedings.

Prosecution of Re Derby

Darby and Gyde knew of how to form a company in Hong Hong and then formed a Company A and were the directors and shareholders of this company. Company A got licence for mining by paying small sum of money and in the mean time they established a new company, Company B, which was promoted by Company A. After acquiring license, they proceeded to sell the acquired license to company B, where public invested for the debentures of company B. Darby and Gyde substantially benefited from profits of these transactions, there was disclosure in the prospectus of Company B that it will be promoted by Company A and thus Company A will be liable for Company B’s profits but there was no disclosure about Darby and Gyde, being the front men of these companies. This non-disclosing may be primarily since, Darby and Gyde were famous frauds and if they may expose their identity that they were behind these companies then, seeing their track record no one would be ready to deal with them. Observing all these facts and proceedings, Court established that by concealing their identity and pretending the company to be of good standing having the money of public, invested, they showed their mal-intention and thus court ordered to pierce the corporate veil of Company A to hold Darby and Gyde liable to Company B for the profits they obtain.

Prosecution of HKSAR v Leung Yat Ming

In the case of HKSAR v Leung Yat Ming, where husband and wife who knew how to register a limited company in Hong Kong bought a house rent allowance from their boss with declaring that, property is neither owned by them nor their any relatives and do not have any business interests in the property. It was later, found that, the house, against which they obtained house rent, is owned by the company whose owner is husband and being controlled through a nominee shareholder and nominee director. Court convicted the defendants under Prevention of Bribery Ordinance (Cap.201) and stated that defendants deceived its employer and gave wrong information and declaration that he and his wife have no financial interest or benefits in the property thus corporate veil should be pierced and exercised and appropriate role of company’s controller should be determined as well.

Prosecution of Secretary for Justice v Lee Chau Ping

In this case of Secretary for Justice v Lee Chau Ping, one of the defendant who also knew how to register a limited company in Hong Kong was arrested due to the involvement in drug trafficking. The defendant was absconded and then confiscation orders were issued against the defendant as per Drug Trafficking Ordinance (Cap.405). Court ordered against the properties of company owned by defendant because one of the company’s property was being used for drug activities like use for the purchase of equipment and chemicals required for the manufacturing of ICE. Court thus ordered to pierce the corporate veil as company was being used for the criminal activities.

Clarification of “fraud” pertaining to incorporation

As does, there exists distinction between evading and avoiding of liabilities, same does apply to the company’s incorporation. Not every company is incorporated for fraud, distinction must be made, and fact be understood that, person may establish different companies to own different ships so as to minimize the risk of fraud and to confine the liabilities of each company in respect of each ship. For example, owner of a carpark, can incorporate company, and company was formed to contract with employees and there is no fraud involved.

It has also been said that, where directors are found involved in any mal-practice or any fraud, then in case of piercing of corporate veil, directors will personally be liable for their misconduct, irrespective of the fact that they were acting as an agent for the company.

Role of Agencies

It must be noted that Agency who do know how to register a limited company in Hong Kong does not holds the proper ground to invoke piercing of corporate veil just on the base of the argument that shareholder holds the principal rights and liabilities for the company. It is very much obvious from the case of Salomon v Salomon that if the shareholder holds all the shares of the company and have the managerial control over the company, then this does not mean that company is shareholder’s agent. However, exceptions may exist, so proper examination of the situation is advised.

In the case of Re FG (Films) Ltd, here British company deem to call it the maker of the movie and let the movie be called British, circumstances presented before the court and court held that, real company behind making of this movie was American and the British company was nothing but an agent for the American company, hence the movie will be American and not British. Such cases do refer to invoke piercing of corporate veil on the basis that there is concealment of facts, involved,

There exists the possibility that parent may act as an agent for subsidiary, just as it happened in CSR ltd v Young, here agreement between the parent and subsidiary took place, under which parent has full authority and control over management, business operations which involved mines of asbestos. As the parent has direct role in business operations, court held that parent owed a duty of care for the worker and for breach in duties, liable to the victims of asbestos related disease.

In Adams v Cape Industries plc, situation presented as: Cape was a UK based company with its subsidiaries involved in mining of asbestos. Cape has a wholly owned subsidiary in USA named NAAC to market asbestos in USA, Cape then put NAAC to liquidation as per the lawsuit filed against the subsidiary from the victims of asbestos disease, so Cape formulated new company named CPC whereas they also promoted incorporation of a company named, AMC. Cape’s subsidiaries were selling asbestos in the USA through AMC their mere intention was to continue the sale of asbestos in the USA with the identity of Cape and its subsidiary hidden. Court of appeal held in its verdict that there is obvious concealment of truth and AMC does not have any office or employees. But it is noted to treat AMC as agent for the cape subsidiaries instead of invoking Doctrine of piercing of corporate veil.

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