Not more than 1000 words for each answer of the five questions (essay questions will be uploaded separately)
Question 1 (50 marks)
Steven has just taken over a business from his uncle, who died a year ago. The business deals with interior design and was originally owned by his uncle as a sole proprietor under the name Oldboyz & Co. Steven wants to expand the business by injecting more capital into it and hiring more designers. Kenny, Steven’s brother, has shown an interest in the same area and Steven also wants him to join the business. The brothers are now considering setting up a business organization to purchase the business of Oldboyz. The most important concern of the brothers is that, in case the business declines, they should be protected from any liability of the business, or at least that their liabilities should be limited. They only have minimal knowledge about setting up a partnership or a company limited by shares, and they need immediate advice. Of the two brothers, Steven is the one who is specially gifted in interior design and he attracts a lot of wealthy clients.
Advise the brothers about the following issues:
A.) Based on a detailed analysis of the nature of a partnership and a company limited by shares, compare the advantages and
disadvantages of each and recommend the most suitable form of business organization to meet the needs of the two brothers.
B.) Assume that the brothers choose a company limited by shares to carry on the business of Oldboyz and that such a company has already been set up accordingly. Kenny, who holds 50% of the 2 LAW B868 Corporate Law shares in the company, owned an office premises together with some graphic machines that he sold to the company. He insured the premises and its fixtures/contents under his personal name against the risks of fire and flood. One night, when a black rainstorm signal was hoisted, the premises and the graphic machines installed inside were totally destroyed by rain. Kenny tried to claim damages under the insurance policy, but the insurance company refused to honour the claim because the ownership of the premises and its contents/ fixtures did not belong to Kenny.
Based on the legal principles established in Salomon v A Salomon & Co. Ltd  AC 22 and other relevant case(s), analyse and comment on Kenny’s chance of success in his claim.
Question 2 (50 marks)
A.) Explain in detail the common law concept of capital maintenance and its consequences by reference to the principles laid down in the case of Trevor v Whitworth  12 App Cas 409. Comment on how the Companies Ordinance operates to preserve the concept by reference to provisions governing capital alteration and reduction as well as buy-back of shares by a company.
B.) D & E Limited (‘the Company’) is a private company, which is in the business of trading toys. Donald and Edward are the shareholders, and they were also the only directors of the Company. Donald and Edward each hold 5,000 shares. Each share is worth HK$1.
Donald, when concluding a contract on behalf of the Company, had obtained secret profits without disclosing his interest to the Board of Directors.
One of their major clients recently introduced a promising business opportunity to the Company through Edward. Edward found this new business opportunity an attractive project which would likely turn out to be successful. Instead of referring the new project to the Company, Edward established his own company to commence the work.
Meanwhile, Donald began to dislike the style of management of Edward and arranged to issue new shares to Fred, who was Donald’s close friend. As a result, Edward’s shareholdings had been diluted and the shareholding proportion fell from 50% to 20%.
Analyse this case in detail and comment on whether Donald and Edward have been in breach of any of their fiduciary duties to the Company.
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