LG1 (Business Vehicles and Transfer of Businesses in Hong Kong)

LG1 (Business Vehicles and Transfer of Businesses in Hong Kong) 1

1. Types of Business Vehicles 2
(1) Sole proprietorship 2
(2) Partnership 2
A. Creation of a Partnership 3
B. Partners’ liabilities to 3rd parties 3
C. Limited Partnership (non-examinable) 4
D. Partnership property 4
E. Partners’ duties inter se 4
E. Dissolution 5
(3) Companies 5
2. Choice of business vehicles 6
3. Registration of businesses (Business Registration Ordinance, Cap. 310) 6
4. Transfer of businesses (Transfer of Businesses (Protection of Creditors) Ordinance, Cap 49) 6
(1) Three types of transfer of business (rmb to include this part in Q4 revision) 7
(2) TBO - applies when transfer of business 8

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**Only focus on Private companies limited by shares for the purpose of CCT.
**Stamp duty question must appear in Q1

Objectives
This lecture will cover:
1. the different business vehicles in Hong Kong; and
2. the transfer of businesses in Hong Kong.
N.B. You should bring to class a copy of the Transfer of Businesses (Protection of Creditors)
Ordinance (Cap. 49 of the Laws of Hong Kong)

Suggested reading
1. “Acquisition of Shares and Businesses in Hong Kong” (Second Edition) by Jessica Young
(read Chapter 8 on the Transfer of Businesses (Protection of Creditors) Ordinance and
para.3.025-3.027 of Chapter 3 on business registration.
2. Also read Chapters 9-11 generally on business transfers, and Chapter 1 on choosing
between share acquisition and business transfer)

Further readings
3. Jessica Y K Young, Acquisition of Shares and Businesses in Hong Kong, 2nd edition, Mid
Isle Publications Limited (2014), Chapters 1 and 8-11
4. Stefan H C Lo and Charles Z Qu, Law of Companies in Hong Kong, 3rd edition, Sweet &
Maxwell (2018), Chapter 1, Westlaw Asia electronic resources
5. Rebecca Ong, The Transfer of Businesses and the Protection of Creditors in the Hong Kong
SAR (Part 1 and Part 2), March and April 2006, Hong Kong Lawyer
6. Halsbury’s Laws of Hong Kong, LexisNexis

1. Types of Business Vehicles

Syllabus
Three principal types of business vehicles in Hong Kong:-
(1) sole proprietorship
(a) nature
(2) partnership
(a) nature
(b) creation
(c) partnership agreement
(d) partner’s liability to third parties
(e) limited partnerships
(f) partnership property
(g) partners’ duties inter se
(h) dissolution
(3) companies
(a) nature
(b) UK companies legislation
(c) Hong Kong companies legislation

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(1) Sole proprietorship
● = a type of business entity (一盤生意) which is owned and run by ONE individual

● also known as sole trade/ proprietorship

● no distinction between the owner and the business

● Business entity is NOT a legal entity (incorporated)

● All assets are owned by the owner.

● All debts are the owner’s and must pay them in his own capacity, i.e. unlimited liability.

● no formalities for setting up proprietorship, but general requirement to register the business
with the IRD (Business Registration Office)
○ pay a simple fee, get issuance of business registration certificate

(2) Partnership
● PO s 3 - two or more persons carrying on business in common with a view of profit
○ essential element: partners must engage in a business
■ must be a joint operation for gain

■ not religious/charitable purposes

● PO s 6 – “firm” refers to partners collectively (persons constituting the partnership); firm

name = name of partnership (a short name for the partners themselves)
● *partnership is NOT a legal entity, but the partners (natural persons or companies)
○ e.g. joint venture between construction companies
○ but civil procedure rule allows partnership to be sued/to sue as a firm ⇒ no
need to name all the partners (just a procedural convenience)
● partnership is a contract
○ comprises of terms that govern the relationship governed by rules of equity and
common law
● Partnership Ordinance is only declaratory
○ s 47: the rules of equity and common law applicable to partnership shall continue in
force, except so far as they are inconsistent with the express provisions of this
Ordinance
○ i.e. the Ordinance only declares what those rules of equity and common law are and
codify these laws
● 2 types
○ general partnerships
○ limited partnerships

A. Creation of a Partnership
● Whether a partnership exists depends on intention of persons involved
■ Factors to be taken into account – PO s 4
■ (i) joint and common ownership of property (x in and of itself determinative)

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 ➢ ownership for the purpose of carrying out the business

■ (ii) sharing of gross returns (x in and of itself determinative)

➢ not taking into account expenses

■ (iii) sharing of profits (prima facie evidence!!)

➢ gross returns – expenses

2. Each partner may contribute property, labour and/or skill to the partnership

3. Operates on and bound by terms as set out in the partnership agreement

■ terms in the PO s 26 will apply, but can vary those terms pursuant to s.21:

● equal share in profits (s.26(a))

● equal contribution towards losses (s.26(a))
● indemnity to partners from firm for payments and personal
liabilities incurred in ordinary and proper conduct of the
business or for necessary preservation of the partnership
business or property (s.26(b))
● 8% interest on advance (s.26(c))
● no interest on capital contribution (s.26(d))
● entitlement to take part in management (s.26(e))
● no remuneration (s.26(f))
● no incoming partner without unanimous consent (s.26(g))
● majority rule on ordinary matters but unanimous decision on
change in nature of business (s.26(h))
● keeping of partnership books at place of business which every
partner may have access to and inspect (s.26(i))

■ **imperative to cover these terms with the client in respect of a particular client
4. only requirement – must register with the BRO
■ can run a business registration search
■ copy of BR application form --> business vehicle + name of partners

B. Partners’ liabilities to 3rd parties

● Agent - A partner is an agent of the firm and other partners
● Binding acts of partner - Acts of each partner in the usual course of business bind the firm
and other partners unless:
1. He has no authority AND
2. The person with whom he is dealing with knows
i. partner has no authority; or
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 ii. does not know/believe the person to be a partner
● Jointly liable - Partners are jointly liable for contractual obligations of firm – PO s 11
○ Partners are jointly + severally liable for torts – PO s 12
● New partner - Incoming partner not liable for anything done before he becomes a partner –
PO s 19(1)
● Retiring partner - retiring partner does not cease to become liable for existing debts and only
become not liable by agreement with other partners and creditors – PO s 19(2)&(3)
● Liability arising out from holding out as partner – PO s 16
■ one represents himself/knowingly allows himself to be represented as a partner
■ representation can be verbal/ written/ by conduct
■ actual reliance on the representation
■ may be sued by person to whom the representation is made and who has acted upon
the faith of representation
5. “firm” – refers to partners collectively
■ allowed to sue the partners in the name of the firm --> do not have to find out all the
partners and name all of them as defendants
■ firm can also initiate legal proceedings only in the name of the partnership, without
having to the name

C. Limited Partnership (non-examinable)

6. statutory creation, must be registered at the Companies Registry (a central register of all the
LP created under LPO) – LPO s 7 limitations to a limited partner under the LPO
■ only liable to the extent they have contributed to the partnership → main
advantage of limited partner
■ not permitted to take part in management → cons
■ does not have power to bind the other partners
■ there must be at least one general partner (i.e. unlimited liability) in a limited partnership

D. Partnership property
7. must be held and applied by partners exclusively for purposes of the partnership and the
partnership agreement – PO s 22
8. partnership property can be property brought into the partnership or acquired for the
partnership – PO s 22
9. property bought with partnership monies is deemed to be partnership property – PO s 23
■ may have disputes:
■ when partnership is dissolved – whether some of those property can be returned to
partners (personal property or partnership property)
■ partnership is not a legal entity – may create some difficulties
■ e.g. 10 partners – not practical for all partners to execute docs, open bank
accounts etc

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 ■ to have one or more of these partners holding the property on behalf of the
partners, or have bank accounts to be opened in the name of a few partners on
trust for others

E. Partners’ duties inter se

■ partners are fiduciaries and owe each other fiduciary duties → higher standard of
conduct towards persons in this relationship of trust and confidence
(i) duty of good faith and honesty
(ii) duty of loyalty
➢ not to make private/secret profit – PO s 31

➢ avoid competing with firm – PO s 32

■ whether partners are fiduciaries
■ practical matter, does not make much difference what you call them

■ focus: what duties they owe

E. Dissolution
1. Subject to agreement:
■ expiration of fixed term, if entered into for a fixed term
■ completion of a single adventure/ undertaking, if entered into for a single adventure/
undertaking
■ notice, if entered into for an indefinite period of time – PO s 34
■ death or bankruptcy – PO s 35(1)
■ need to make special provision agreeing otherwise to avoid dissolution and
reforming the business (takes time)
2. At election of other partners, when partner suffers his share in partnership to be charged for
his separate debt – PO s 35(2)
■ [automatic dissolution] when a partner charges his share in the partnership to secure
his own debt, partnership does not dissolve
3. Illegal purposes – PO s 36

4. Dissolution by court (PO s.37)

■ partner found lunatic
■ partner becomes permanently incapable of performance
■ partner guilty of conduct calculated to affect prejudicially the partnership business
■ partners’ willful and persistent breach of partnership agreement
■ partnership business can only be carried on at a loss
■ just and equitable grounds
■ apply “just and equitable grounds” cases from CWUMPO section

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(3) Companies
● Artificial person - a legal entity + a creature of statute

● Incorporation requirements
○ certain individuals come together to form the legal entity does not mean incorporated
company (can be partnership/sole proprietorship)
● Liability - Under Cap 622, liability may be limited or unlimited
○ limited by shares/guarantee
● CO applies to companies that issue shares or not - CO applies to companies that issue
shares or that does NOT issue shares
○ “owners” → members
○ “shareholders” → only for companies with shares issued and have to
contribute on dissolution
● Cannot act on its own - **although company recognized as legal entity, company
cannot act pro se (on its own) → must act through persons in certain designated
roles (shareholders, directors, agents of company)
● Brief structure:
○ must have a company secretary + registered office + AA
○ may own and operate its own business/assets

2. Choice of business vehicles

● Factors to consider:
○ nature of undertaking - whether intend to have limited liabilities or unlimited liabilities
○ size of undertaking - people involved in the undertaking
○ payment of tax

3. Registration of businesses (Business Registration Ordinance, Cap. 310)

● Nature
● Registration requirements
○ Register business/ trading name
○ Register - BRO Cap 310
■ businesses need to be registered with BRO of IRD within 1 month of
commencement of its business – BRO s 5

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 ■ the company is deemed to have made a business registration application
when incorporation papers are filed with the Companies Registry - s 5A BRO
■ each business consider to have main place of business + other “branches”
○ Business/ Branch Registration Certificate - Levy is the fee you pay that contributes
to Protection of Wages on Insolvency Fund
■ apply for pay out on insolvency (made out from payment of these business
registration fees)

4. Transfer of businesses (Transfer of Businesses (Protection of Creditors) Ordinance, Cap

49)

Syllabus
1. Nature
2. Transfer of Businesses (Protection of Creditors) Ordinance (Cap 49)
● Purpose of legislation
● Transferee’s liability for the debts and obligations of the transferred business, s3
● Transfer notice
● Limitations and exemptions
● Practical ramifications
—---------------------—---------------------—---------------------—---------------------—---
Summary for Transfer of Business
1. Scope/ applicability: only transfer of business/ incorporation of new business, NOT share
purchase
2. If applicable, general principle: transferee liable for ALL debts, except
a. Transfer part of business
b. Transfer Notice (3 situations)
i. Time (between 4 and 1 month)/ (within 1 month before date of transfer)/ (after
date of transfer)
ii. Completion (i.e. one month after published) in appropriate manner (i.e.
formality, ppt slide 36)
3. Even if liable, transferee may limit liability by
a. Transferee liable for creditors’ debt to be indemnified by transferor
b. Transferee at mots liable for an amount equal to the value of the business he paid
for the business
c. No proceedings may be instituted against transferee more than 1 year after the date
of the transfer

(1) Three types of transfer of business (rmb to include this part in Q4 revision)
1. Business purchase - owner directly sells the business (all the assets which pertains to the
business) to transferee so that purchaser can operate the business in the same way

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 ● TBO applies every time if you have business purchase
● identify all the assets (tangible: execute docs to convey legal title, physically deliver,
assign any contracts company entered into eg IP rights) required to operate the
business
● owner of the business can be sole proprietor/partners/company
● [buy assets not the company] 🡺 can cherrypick assets

2. Share purchase - by way of transfer of shares in the company (*2 LG on this )

● share acquisition
● shareholders transfer the shares to transferee
● [buy the company which owns and operates the business] 🡺 cannot cherrypick assets,
take whatever assets and liabilities belongs to the company

3. Incorporation of a business

● when scale gets larger

● form a limited company with sole proprietor/partners subscribing for nominal shares just
to set it up
● then the business will purchase the business
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 ● sole proprietor/partners owning all the shares in the company which owns and operates
the business

(2) TBO - applies when transfer of business

● comes into play when business is transferred by way of transfer of assets which constitutes
the business
○ does NOT cover transfer by way of share acquisition
● Purpose - to prevent fraudulent transfer of business which leaves creditors without any assets
to satisfy their claims against
○ creditors may not know
● Protection - no need to prove dishonesty/intention to defraud creditors
● if certain procedures are not undertaken in accordance with the Ordinance, the transferee will
assume all the liability of the business
● Presumption - transferee shall become liable for all the debts and obligations arising out of
the carry on the business by the transferor (s.3(1) of TBO)
○ Exceptions:
1. s.3(2) part of business - transferee shows that only a part of the business
was transferred and he purchased such part of business in good faith and for
value without knowing
■ but what constitutes “business”?
➢ BNP Paribas v GC Luckmate Trading
■ business providing fishmeal
■ bank takes action against liabilities owed against a bank
■ first level – judgment by Reyes: (i) transfer of assets is not in
and of itself a transfer of business; (ii) consideration of facts
in a case must have regard to substance and not form; (iii)
main question: whether EE was put in possession of a going
concern (eg fishmeal business), ie EE put in a position able
to operate the same business? (iv) taking into account the
whole circumstances
2. s 4 Transfer notice (**a way for transferee to avoid liabilities)
■ 3 types of notice:
1. s.4(1) - Issue notice and becomes complete at the date of
transfer - where notice of transfer is given “not more than 4
months, not less than 1 month before date of transfer, and has
become complete (but not just published) at the date of transfer –
liability ceases
■ new buyer will not be liable because of the completion of the
notice (not because of issuing of the notice)

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 2. s.4(2) - Issue notice before date of transfer but not become
complete - Notice of transfer given but notice has not
become complete at the date of transfer → liability ceases
only upon notice becoming complete
3. s.4(3) - Issue notice after completion of transaction
→ Notice of transfer is not given before or at the date of
transfer – s 4(3) → liability ceases only upon notice
becoming complete

○ When does a notice become complete

➢ complete upon expiration of 1 month after notice published in the required
manner – s 4(4)
➢ if proceedings instituted before transfer notice becomes complete 🡺 TN deemed
incomplete pending the final determination of such proceedings – s 4(5)
○ Transfer Notice (comply with s.5 requirements)

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 1. Must contain (i) certain particulars of parties (name of transferor and transferee)
and (ii) nature of business to be transfered, name and office address of the
business to be carried on
2. Clear express statement of “liability shall cease…”
3. Signed by both parties
4. Published in Gov gazette and in any 2 Chinese language newspapers and one
English newspaper as may be approved
● limitations and exemptions
○ Transferee to be indemnified by transferor - s 6
○ limitation of transferee’s liability to amount equal to value of business he has paid
for the business
■ BNP case: transferee appealed, but did not appeal on business but on the
applicability of s8 – argued they have paid for the business, so liability
should be limited to amount they paid (USD 1) because liabilities of
business far exceeded its assets, so putting a value USD1 can be justified
■ creditors were not paid
■ what the ordinance wants to protect (where creditors are out) just because
of transfer of business
■ CA: under these 2 sections, (i) payment to transferor – must not be
nominal, must be an amount that makes sense, (ii) payment to
transferor’s creditors to satisfy their claims – paying USD 1 without
payment to creditors is absolutely not, will not allow transferee to be rid of
liabilities on the basis of s.8
○ s.9 – no proceedings may be instituted against transferee under TBPCO more
than one year after the date of transfer
○ exempted transfers (usually related to bankruptcy) – s 10
■ Official receiver/trustee in bankruptcy
■ liquidator of company other than voluntary liquidation
■ person selling under a charge which has been registered for not less than
on year at the time of transfer
■ court order
■ executor or administrator

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 ■ operation of law
● practical ramifications
○ TBPCO only offers limited protection
■ if EE complies requirements accordingly under the Ordinance, he does
not take up the liabilities of the business
■ cannot substitute any of the caveat emptor (buyer beware) principles on
due diligence which DD must
■ only protects creditors so it does not assume liabilities
■ in transfer of business, usually the transferee may only wish not to
assume certain liabilities (but not all)
➢ if EE gets rid of all liabilities and just gets all the assets --> the
existing connections may not be retained if he is not willing to deal
with the liabilities
○ **discuss with client a possibility that they can be rid of the liabilities of old
business, but unlikely in most businesses that need to go on with the support of
creditors and suppliers
■ likely choice of buyer is to assume the liabilities
■ only may not want – by agreement with transferor for OR to indemnify EE
for liabilities that EE does not assume (where the price will reflect this)
○ Rebecca Ong – on the BNP Paribas case

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