Company Law (HK):

Would the issue of redeemable shares to Ken suit his investment purpose? If so, explain the relevant provisions in the Companies Ordinance (Cap 622) with regard to the authority for issue of redeemable shares and also give a brief account of the funding rules for share redemption.

Case:

Edith Kwan and Jonas Chiu were engaged in partnership business in the business of importing fruits from Japan for wholesale to retailers, including supermarkets and convenience stores. Recently, they planned to expand into the retail business by setting up a retail outlet in Yau Ma Tei. They had instructed their lawyer to establish a company limited by shares known as EnJ Ltd (the Company) for the new business. It adopted the Model Articles of the Companies Ordinance (Cap 622) as its articles of association. Edith and Jonas each own 50% shareholdings of the Company. They have injected HK$5 million as share capital. Both of them are the directors of the Company.

A month before the Company was duly incorporated, Edith found a fruit supplier from Japan, due to cash flow problem, offered to sell Japanese red apples at a discount. Edith thought that it was a good bargain and without letting Jonas know, she signed a wholesale order contract for Japanese red apples with the said supplier in the name of the Company. After the Company was incorporated, Jonas found that the general wholesale price of the Japanese red apples was 10% lower in comparison with order price obtained by Edith. Jonas is wondering if the Company many cancel the wholesale order contract or not.

Several years ago, Edith and her husband had set up a company called Nono Ltd (Nono) in Hong Kong for sourcing and importing EnJ mango grown in Philippines. Unknown to Jonas, Edith has begun to buy EnJ watermelons from Nono on behalf of the Company at a higher than market price after the Company was incorporated.

Jonas has recently invited his good friend, Helen Li to join the Company as a shareholder. A resolution was passed in the last general meeting authorizing the board of directors to approve the allotment of ordinary shares to Helen. She now owns 8% of the issued shares. Helen is planning to migrate to Perth two years later. She wishes to know if the Company can lend money to Jonas to enable him to purchase her shares because she knows that Jonas does not wish shares of the Company to pass into other hands. Helens brother, Ken Li is interested to join the Company as shareholder. Ken aims for short term investment and does not want his money be locked-in the Company for a long time.

On the other hand, Jonas approached a bank for money lending. The bank approved the loan and a floating charge was created in favour of the bank over all the assets of the Company.