AF5511

Regulatory Framework

Lecture 4

Law of Agency

1
 Lecture 3: Law of Agency
Lecture
• Duties and Rights of the Agent
• Rules that render the company liable even when directors acted with
defective, or even without, authority (contracts)
A. The doctrine of apparent (or ostensible) authority
B. Common law: Indoor management rule (Turquand’s Rule)
C. Statutory law: Companies Ordinance sections 116-119
• Regulators and Regulations
• Licensing and Registration

2
Directors and Outsiders

3
 Principal-agent relationship
Principal

Laggard

Agent Third party

Egaorgan
college

4
 Triangular Relationship

Principal

Authorize Contract Formed

(by agency (through the act
agreement) of the agent)

Agent Third Party

Represent the principal
to form a contract 5
 Definition of Director

• Director (董事) includes any person occupying

the position of director (by whatever name called)
(CAP 622 s.2(1))
• The articles of a company may use the term
governor or manager.

6
 KEE
Delegation of Powers Within the Company

• It is the source of CORPORATE POWERS: it

Company has the right to take all steps necessary to
carry on business

BOD
• The company makes a PRIMARY DELEGATION
OF CORPORATE POWERS to the BOD

d • The BOD makes a SECONDARY

Board Agents DELEGATION OF CORPORATE POWERS to
of the individual directors and officers

Directors Third
Party
7
 SEE SEE
Liability of Company and its Agents Against Outsiders
(third parties)
Principle: company is the principal and directors (and managers) are agents
• company (principal) acts through its agents
• agents carry on business with outsiders for and on behalf of the
company (principal)
• company bears liability for the actions of the agents affecting outsiders
• agents are not liable
BIRGER
KEEFE
8
 Basic Assumptions
The liability principle relies on basic assumptions:
1. agents act for and on behalf of the company
2. agents make true representations to outsiders
3. agents act with actual (explicit or implicit) authority
4. agents have no defective attribution of powers
Examples
• But do these assumptions always hold in real world? Uniforms
• What would happen if we relaxed these assumptions? Namecards
• Would the principle of liability change?

9
Duties of an Agent
Objectivetests Frguenest
• To follow principal’s instruction
• Personal performance
Have
• To exercise his duties with due care and skill subjectivetests argument
• To avoid conflict of interests
• To account to the principal
• Not to make secret profits
• Not to take bribes and secret commission

10
 Duties of an agent: Duty of care and skill

• An example where an agent acted negligently:

• Vincent is employed as an insurance broker by P Shipping Company.
He buys insurance for a ship owned by P. The ship is destroyed by fire.
However, the insurance policy does not cover damage by fire.
• Vincent has failed to exercise due care and skill, for such clauses are
usually inserted in insurance obtained for ships.
• Vincent has to pay damages to P.

11
 Duties of an Agent: Conflict of Interest
• Armstrong v. Jackson(1927)
• A employed a stockbroker, J, to buy some shares in a company.
• J sold his own shares in this company to A.
• When A discovered, he applied to the court to set aside the
transaction.

• Held:
• A could rescind the contract. ‘It matters not that the agent sells the
shares at the market price or that he acts without intent to
defraud.’

12
 Duties of an Agent: Conflict of Interest
• Richard Ellis Ltd v. Van Hong-toun (1987)
• RE, an estate agent, acted for the seller of a flat for a commission of
0.5%.
• VH wanted to buy the flat and RE gave him a document stating that VH
had to pay 1% commission.
• After VH bought the flat, RE claimed the 1% commission.

• Held:
• RE could not act for two principals with conflicting interests without
explicit consent of both principals.
• VH had not agreed RE to be the agent of the seller.
13
 Duties of an Agent: Not to make a secret profit

• Boston Deep Sea Fishing v Ansell (1888)

• A director of BDSF held shares in other two companies.
• He accepted bonuses and commissions from these two companies in
consideration for BDSF placing orders with them.

• Held:
• The director should account to BDSF for the bonuses and
commission he had received, together with interest.

14
 Rights of an Agent
BEEK
• Indemnity
• Indemnity from his principal for the liability incurred or money spent in
the performance of his duties.
• Remuneration
FAETH
• Lien
EERIE
• An unpaid agent has the right to hold on to the principal’s property
which has lawfully come into his possession.

FIEF
15
 Termination of Agency
• Ways to terminate
• By the acts/agreement of the parties
• By operation of law

• Effects of termination
• Agent no longer has authority to act on behalf of the principal.
• If the third party is not informed, apparent authority may apply.
b 2A E FED IT 80 v2 apparentauthority542
Apoopet LAEI 16
Rules that render the company liable even when directors
acted with defective, or even without, authority (contracts)
A. Agency law: Apparent or Ostensible Authority
• Freeman Lockyer v. Buckhurst Park
• Hely-Hutchinson v. Brayhead

B. Common law: Indoor management rule

(Turquand’s Rule)
• Royal British Bank v. Turquand (1856)

C. Statutory law: Companies Ordinance

sections 116-119

17
 ftp
Authority of the Agent
• Express authority
82
• Given by the principal to the agent by express words
• Implied authority
REEF FEAR
• An agent has the authority to do what is reasonable to do in order to carry
out his duties effectively.
• Example: solicitors and barristers enter into certain agreement on behalf
of their clients.
• Apparent / ostensible authority MAKE FIX
• The principal’s words or acts give the impression to the third party that an
agent is authorized (but in fact that the agent is not authorized).
18
 DisclosedPraga
Principal’s Relation with Third Party
beg133820FEEL
• Agent’s contract for a disclosed principal BE3482858
• The contract is binding on the principal and third party
• Agent cannot sue or be sued under this contract

Ii
• Agent’s contract for an undisclosed principal, generally
PEESSEEEHO L
• Agent can be sued by the third party
• Principal/Agent can sue the third party
G JEFETEEIKE'S
AS93 53 408
EBOLA253 It
HE IS BI EI 19
 J 2 I

A. Ostensible Authority
• Situation:
☑ the agent enters into contract for and on behalf of the
company with an outsider, but
☑ the agent lacks actual authority to enter into this contract
because this authority has not been conferred to the agent
by the primary rules of attribution; outcome: the contract
does not bind the company but binds the agent personally
☑ general rules of attribution supplement (ostensible authority)The third
doesn't
the primary rules (actual authority) in order to protect party
outsiders in good faith for the actions of agents without
whatbops
authority; agent acting with ostensible authority binds the it on
company family
toyour
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 Leading case
Freeman & Lockyer v Buckhurst Park Properties

Buckhurst Park Ltd

GM

BOD Service Freeman

Kapoor
4 Directors Contract & Lockyer

AA

21
 needto know therelationship
Freeman & Lockyer v Buckhurst Park Properties
Buckhurst Park
Properties
[Principal]

Freeman &
Kapoor
Lockyer
[Agent]
[Third Party]
22
 Freeman & Lockyer v Buckhurst Park Properties
• Mr Freeman and Mr Lockyer sued Buckhurst Park Ltd and its director, Kapoor,
for unpaid fees for their architecture work on the ‘Buckhurst Park Estate’.
• BP’s articles said that all four directors of the company were needed to
constitute a quorum. Kapoor had acted alone (as if he were a managing
director) in engaging the architects, without proper authority. BP argued it was
not bound by the agreement because K was not authorised to enter into the
transaction.
• Held:
• BP was bound to pay F&L because the director had apparent authority.
• The representation was made by the appointment of the director into his

the
position, whose office would normally provide powers of authorisation;
the company had the power to appoint its own directors.
• The third party i.e. architects were induced into carrying out the work by
the representation of the company that the director had authority and the
company was not prohibited (by way of its articles of association) from
23
entering into contracts such as that with the architects
 Freeman & Lockyer v Buckhurst Park Properties
Apparent
• How do we identify the existence of ostensible authority?
• Legal principle: An outsider can invoke the doctrine of ostensible authority if
all three conditions are present:
✓ 1. Representation: Company’s representation that the agent has
authority to bind the company.
✓ 2. Authority: That such a representation was made by a person or
persons (i.e. board of directors) [agent] who has actual authority.
✓ 3. Inducement: The outsider [third party] relied on the representation
to enter into the contract.
Freeman & Lockyer (A Firm) v Buckhurst Part Properties (Mangal) Ltd (1964)
24
 Hely-Hutchinson v. Brayhead
Brayhead Ltd.
[Principal]

Mr. Richards Hely-

(Chairman, CEO, de facto Hutchinson
managing director)
[Agent] [Third Party]
25
 Hely-Hutchinson v. Brayhead
• Mr. Richards (agent) was the CEO, chairman and de facto managing
director of Brayhead Ltd (Principal). HH (third party) injected money
into Perdio. Richards guaranteed repayment of money and indemnified
HH’s losses. Perdio Ltd. was taken over by B but Perdio went into
liquidation. HH sought to enforce the guarantee and sued for the
losses he had incurred. B refused to pay on the ground that Richards
had no authority to make the guarantee and indemnity contract in the
first place.
• Held:
• Richards had apparent authority to bind Brayhead.
• Actual authority may be express or implied.
• Implied actual authority may be inferred from the conduct of the
board in acquiescing in the agent without express authority from
the board. 26
 Apparent Authority
• Summers v Salomon (1857)
• The principal employed his nephew as manager to run his jewelry shop.
• The nephew regularly made order on behalf of the shop.
• A left the shop but obtained further jewelry in the name of the shop and
then disappear.
• Held: The principal had to pay for the jewelry as the supplier did not know
that the agency was ended. The principal has represented that the nephew
had authority from the previous dealings.

company
management
insideyour
27
 M Port É
B. Indoor Management Rule in favor of an outsider
• Situation: É
• agent has actual or apparent authority
• irregular process of conferment of authority to agents in the process of
delegation of corporate powers Outsider is having
• outsider enter into a contract with the agent blindfaith on the
• outsider is unaware of such irregularities (good faith)
• Presumption of regularity: agent
• the internal rules of the company regulating the conferment of authority
have been complied with (Northside Developments Proprietary Limited v
Registrar-General and Ors (1990))
• An outsider dealing with the company in good faith is entitled to presume
the internal procedures of the company have been complied with and the
agents had that authority.
• Effects: outsiders are protected as the contract binds the company 28
 Condition
outsider need
Applications of the IMR the
to be ingood
Indoor Management Rule can be applied in the following situations.formthat
❑ Absence of formal authorizations by the GM theyhavenot
• Brom any
An outsider dealing with the company is entitled to assume the
internal procedures of the company have been complied with
(Royal British Bank v Turquand (1843-60)). EIFFEL
❑ Irregular authorization (lack of quorum) (County of Gloucester Bank has
v Rudry Merthyr Steam and House Coal Colliery Company (1895)) enterinto
❑ Irregular appointment thetransistor
• An outsiders have no right to insist on proving internal
compliance (Mahony v East Holyford Mining Co Ltd (1875)).

29
 IndoordhnagenestRule
Royal British Bank v Turquand
Company Gapersondealing in
acompanymayassume
internalprocedure
that
any
GM contained in thecompany's
constitutions hadbeenproperly
complied with

BOD Directors BANK

AA

30
 Royal British Bank v Turquand
Coal Mining and Railway
Co.
[Principal]

Two directors Royal British Bank

[Agent] [Third Party]
31
 Royal British Bank v Turquand
• Mr Turquand was the manager (liquidator) of the insolvent coal
mining and railway company. The company had given a bond to
RBB. The bond was signed by the company’s two directors and the
secretary under the company seal. RBB sued T for the repayment of
money borrowed on a bond.
• The company argued that the bond was not valid because, under its
constitution, the directors had power to borrow up to an amount
authorised by an ordinary resolution in the general meeting. But no
such resolution had been passed. BondFFF 4g
• Held:
ftp.D
• The bond was valid in favour of a third party i.e. RBB as it was
bemafdde
entitled to assume that such an authorisation had been obtained
even though it had not.
32
 Extemptions
IMR NOT Applicable
Indoor management rule may NOT be applied in the following situations.
• The outsider knows about the irregularity in the internal management of
the company (Howard v Patent Ivory Manufacturing Co (1888))
• Outsider puts on inquiry but does not conduct any enquiries to clear
doubts and make sure that there is no irregularity (changes in mandate
notified to the bank) (B Ligget (Liverpool) Limited v Barclays Bank Limited
(1928))
• Other situations: Fraud
• _______________ cheating
• _______________ documents
illegal
33
 law too heartsider
third
C. Statutory law: Companies Ordinance sections 116-119

Transaction or act binds company despite limitation in articles etc.

(s.117 CO)
(1) Subject to section 119, in favour of a person dealing with a company

FEI
in good faith, the power of the company’s directors to bind the
company, or authorize others to do so, is to be regarded as free of any
limitation under any relevant document of the company.

34
C. Statutory law: Companies Ordinance sections 116-119
Transaction or act binds company despite limitation in articles etc. (s.117 CO)
(2) For the purposes of subsection (1)—
(a) a person deals with a company if the person is a party to any transaction or any
other act to which the company is a party;
(b) a person dealing with a company is presumed, unless the contrary is proved, to
have acted in good faith;
(c) a person dealing with a company is not to be regarded as acting in bad faith by
reason only of the person’s knowing that an act is beyond the directors’ powers
under any relevant document of the company; and
(d) a person dealing with a company is not required to inquire as to the limitations on
the power of the company’s directors to bind the company or authorize others to
do so.
35
C. Statutory law: Companies Ordinance sections 116-119

Transaction or act binds company despite limitation in articles etc. (s.117 CO)
(5) This section does not affect any liability incurred by the directors, or any
other person, by reason of the directors’ exceeding their powers.

36
Regulators and Regulations

37
Regulators of the Securities Market
Three-tier Regulatory Structure

Financial Services and the Treasury

Bureau (FSTB)
Set / Update the law

Securities and Futures Commission

(SFC)
Implement / Enforce the law

The HKEx Group

Operate the market

38
 theregulator of Sto
SFC is
Securities and Futures Commission (SFC)
• The Securities and Futures Commission (SFC)
• is the statutory regulator of the securities and futures markets and derives
its investigative, remedial, and disciplinary powers from the Securities and
Futures Ordinance (SFO).
• has a statutory duty to supervise, monitor and regulate the exchanges and
the performance of their listing-related functions and responsibilities.

Logo was introduced in 2018

39
 Securities and Futures Commission (SFC)
• The SFC’s work can be divided into five areas:
1. intermediaries;
Kkk
2. investment products;
3. listing and takeovers;
4. market infrastructure and trading; and
5. Enforcement.

40
 Securities and Futures Commission (SFC)
• The SFC is divided into four operational divisions:
• The Corporate Finance Division: listing matters, administering the Takeovers and
Mergers Code and Share Repurchases Code, overseeing the Stock Exchange's listing-
related functions and responsibilities, and administering securities and company
legislation relating to listed and unlisted companies.
• The Intermediaries and Investment Products Division: devising and administering
licensing requirements for securities and futures, and leveraged foreign exchange
trading intermediaries, supervising and monitoring intermediaries' conduct and
financial resources, and regulating the public marketing of investment products.
• The Enforcement Division: conducting market surveillance to identify market
misconduct for further investigation, undertaking an inquiry into alleged breaches of
relevant ordinances and codes, including insider dealing and market manipulation, and
instituting disciplinary procedures for misconduct by licensed intermediaries.
• The Supervision of Markets Division: supervising and monitoring activities of the
exchanges and clearing houses, encouraging the development of the securities and
futures markets, promoting and developing self-regulation by market bodies.
41
 Regulation on Securities Intermediaries
• Regulation: SFO (the Securities and Futures Ordinance)
• Regulator: SFC (the Securities and Futures Commission)
• Aspects of regulation
– Licencing
– Fitness and properness of persons acting as intermediaries
(refer to Fit and Proper Guidelines (January 2022)
– Financial resources of intermediaries
– Restrictions on business activities
 Enforcement by SFC
• SFC is empowered by s.182 SFO to investigate and enquire into
circumstances where misconduct or breaches of relevant laws or
regulatory standards is suspected.
• SFC is also empowered by s.194 (for licenced persons) and s.196 SFO (for
registered institutions) to take disciplinary actions against intermediaries
who are found to be guilty of misconduct or otherwise not fit and proper
to be licensed or registered.
• Disciplinary actions include reprimands, revocations or suspension of
licenses or registrations, ban from the industry and pecuniary penalty.

43
 Banks performing securities activities
• All entities engaged in banking and deposit-taking activities must be
‘authorized institutions’ (AIs) 5588Liaisedbonks E
• Regulation: Banking Ordinance (Cap.155) motitution
authorised
• Regulator: HKMA E 53
registered monitor
• Securities activities of banks A
– All AIs must also be registered as ‘registered institutions’ (RIs) with SFC
in order to carry out securities activities
– Co-regulated by HKMA and SFC (mainly by HKMA)
– Individuals performing securities services for RIs are not required to be
licensed or registered with SFC (e.g. bank staff working in the securities
dealing department)
44
Licensing and Registration
 Typical Financial Intermediaries
• Banks
• Securities firms
• Insurance companies

As of end 2019,
• 7,437 licensed entities, including securities brokers, futures dealers,
investment, advisers, fund managers and their representatives.
• 114 registered institutions, including banks, engaging in regulated
activities such as dealing in and advising on securities and futures.

46
 The Relationships Between Market Participants

• Broker – Client: Agency

• Broker – Broker: Sell and purchase contract
• Adviser – Client: Contract for supply of services
• Asset Manager – Investor: Trustee and Beneficiaries / Limited Partner and
General Partner / Shareholders of a company
 Fitness and Properness
• s.129(1) of the SFO sets out a number of matters that the SFC or the Monetary
Authority (MA) (as the case may be) may consider relevant have regard to -
(a) the financial status or solvency;
(b) the educational or other qualifications or experience having regard to the
nature of the functions which, if the application is allowed, the person will
perform;
(c) the ability to carry on the regulated activity competently, honestly and
fairly; and
(d) the reputation, character, reliability and financial integrity

• Fit and Proper Guidelines (January 2022)

48
 Code of Conduct
• The Code of Conduct (August 2022) is a general code that applies to all
licencees
• It is a principle based code
• GP1 Honesty and fairness
• GP2 Diligence
• GP3 Capabilities
• GP4 Information about clients
• GP5 Information for clients
• GP6 Conflicts of interest
• GP7 Compliance
• GP8 Client assets
• GP9 Responsibility of senior management
49
Restriction on carrying on business in regulated activities
(s.114 SFO)
• s.114(1) Licence is required.
(a) carry on a business in a regulated activity; or
(b) hold himself out as carrying on a business in a regulated activity.
• s.114(2)
(a) a corporation licensed under section 116 or 117 for the regulated activity;
(b) an authorized financial institution registered under section 119 for the
regulated activity; or
(c) a person authorized under section 95(2) for the regulated activity.

50
 ÉE on38
Restriction on carrying business in regulated activities
(s.114 SFO)
• s.114(4)
(a) a licensed representative who carries on for his principal a regulated activity for
which the representative is licensed;
(b) an individual—
(i) who carries on for a registered institution a regulated activity for which the
registered institution is registered; and
(ii) whose name is entered in the register maintained by the Monetary
Authority under section 20 of the Banking Ordinance (Cap. 155) as engaged
by the registered institution in respect of the regulated activity; or
(c) an employee of a person authorized under section 95(2) for the regulated activity
who performs any regulated function in relation to the regulated activity for
which the person is so authorized.
51
Restriction on carrying on business in regulated activities
(s.114 SFO)
• What amounts to “carry on a business”?

• It is a question of fact to be decided on a case-by-case basis

• The court may consider some degree of “system, repetition, and continuity” and
not merely an isolated transaction

52
 Regulated Activities
• Schedule 5 to the SFO stipulates 10 types of regulated activity.
❑ Type 1 Dealing in securities
❑ Type 2 Dealing in futures contracts
❑ Type 3 Leveraged foreign exchange trading
❑ Type 4 Advising on securities
❑ Type 5 Advising on futures contracts
❑ Type 6 Advising on corporate finance
❑ Type 7 Providing automated trading services
❑ Type 8 Securities margin financing
❑ Type 9 Asset management
❑ Type 10 Providing credit rating services

53
Type 1 Dealing in securities
• “dealing in securities”:
• Making or offering to make an agreement with another person, or
inducing … any other person to enter into … an agreement
• For or with a view to acquiring, disposing of, subscribing for or
underwriting securities; or
• The purpose of which is to secure a profit to any of the parties
from the yield of securities or by reference to fluctuations in the
value of securities.
• Among other exemptions, Type 1 Licence is not required when a licensee
for Type 9 performs an act solely for the purposes of carrying out that
regulated activity (under Type 9).

54
 What are securities?

• Securities are defined in Sch 1 of SFO, including:

• Equity type of interests (e.g. shares);
• Loan type of interests (e.g. bonds);
• Interests in Collective Investment Scheme;
• Structured product;
• But does not include:
• Shares and debentures of a private company
• MPF schemes;
• ……
• See Worksheet Q2

55
 Type 4 Advising on securities
• advising on securities means-
(a)giving advice on-
(i)whether;
(ii)which;
(iii)the time at which; or
(iv)the terms or conditions on which, securities should be acquired or disposed of; or
(b)issuing analyses or reports, for the purposes of facilitating the recipients of the
analyses or reports to make decisions on-
(i)whether;
(ii)which;
(iii)the time at which; or
(iv)The terms of conditions on which, securities are to be acquired or disposed of
56
 Exemptions under Type 4
• A corporation which gives advice or issues analyses or reports solely to wholly owned subsidiaries or
its holding companies (wholly owned) or other wholly owned subsidiaries of the holding company.
• A solicitor, a counsel, a certified public accountant or a trust company advising clients on securities,
future contracts or corporate finance, OR issues analyses OR reports as part of an advice given,
wholly incidental to their professional practice
• A person giving advice or issuing analyses or reports through-
(A) a newspaper, magazine, book or other publication which is made generally available to the public;
or
(B)television broadcast or radio broadcast for reception by the public, whether on subscription or
otherwise
• A person licensed under Types 1 gives such advice wholly incidental to the carrying on of such dealing
activity
• A person licensed under Type 9 provides a service of managing a portfolio of securities or futures
contracts under a collective investment scheme for another person and gives such advice or issues
such analyses or reports solely for the purposes of providing such service
57
 Type 6 Advising on corporate finance

• advising on corporate finance means giving advice-

(a) concerning compliance with or in respect of SFO, Listing Rules, and Takeovers
Code; or
(b) concerning-
(i) any offer to dispose of securities to the public;
(ii) any offer to acquire securities from the public; or
(iii) acceptance of such offers, but only in so far as the advice is given generally to
holders of securities or a class of securities; or
(c) to a listed corporation or public company or a subsidiary of the corporation or
company, or to its officers or shareholders, concerning corporate restructuring in
respect of securities.
58
 Exemptions under Type 6
• A corporation which gives advice solely to its wholly owned subsidiaries or its
holding companies (wholly owned) or other wholly owned subsidiaries of the
holding company.
• A solicitor, a counsel, a certified public accountant or a trust company gives
advice wholly incidental to their professional practice
• A person giving advice through-
(A) a newspaper, magazine, book or other publication which is made generally
available to the public; or
(B)television broadcast or radio broadcast for reception by the public, whether
on subscription or otherwise
• A person licensed under Types 1 gives such advice wholly incidental to the
carrying on of such dealing activity
59
 Type 9 Asset management

• “Asset management”
– Real estate investment scheme management; or
– Securities or futures contracts management.
• A person licensed or registered for Type 9 regulated activity
• provides a service of managing a portfolio of futures contracts under a
collective investment scheme for another person, and
• gives such advice or issues such analyses or reports solely for the
purposes of providing the service
• A fund manager may also engage in marketing activities relating to
those funds under his management.

60
 Type 9 Asset management
• “Asset management” includes:
• Real estate investment scheme management; or
• Real estate investment scheme management means providing a
service of operating a collective investment scheme for another
person where the property that is being managed under the
scheme consists primarily of immovable property and the scheme
is authorised under SFO, s 104.
• Securities or futures contracts management
• Securities or futures contracts management means providing a
service of managing a portfolio of securities or futures contracts
for another person.
61
 Exemptions under Type 9

• Providing services solely to wholly owned subsidiaries or holding

companies (wholly owned) or fellow subsidiaries of the holding
company
• Solicitor, counsel, professional accountant or trust company advising
clients which is incidental to their professional practice
• Persons licensed under Types 1 and 2 and giving such advice wholly
incidental to the carrying on of such dealing activity

62