Qualification - Higher National Diploma in Business (RQF)
Unit Name - Business Law
Unit Number - Unit 7
Assignment Title - Running a business with related legal concepts
Learning Outcome 1: Explain the basic nature of the legal system
Learning Outcome 2: Illustrate the potential impact of the law on a business
Learning Outcome 3: Examine the formation of different types of business organizations
Learning Outcome 4: Recommend appropriate legal solutions to resolve areas of dispute
Assignment Brief - Case Scenario:
You are a solicitor and working in a famous legal professional consultancy firm as a legal consultant. One day, your potential client, Marvin Lee, who is planning to open a café chain store in Hong Kong and asking for your legal advice for related issues. Meanwhile, he is seeking an appropriate place for his café restaurant and preparing to employ working labour and office staff for his business running. But he does not know whether there are certain ordinances for monitoring the recruitment, health and safety for working environment. He has lots of inquiries about the problems in opening his business.
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The report is a consultancy report provided to Marvin lee who plans to open a café chain store in Hong Kong. Marvin Lee has asked the legal consultant to provide legal advice on certain issues in relation to the café chain store. Marvin Lee is in search for an appropriate location for the café and plans to employ working labour and office staff to run his business. He needs consultancy on Labour law of the city or any other provision which mandates any kind of ordinances to monitor the recruitment, safety and health for the working class. Other queries include understanding the legal system of Hong Kong and the differences between civil and criminal law in the city and the role of the Hong Kong Government in law making along with the judiciary of the city, understanding the tort issues and consumer protection ordinances to avoid unnecessary liabilities in future, competition ordinances and ensuring employee safety against any related regulation of the government. Since his data would run with the support of computing literacy, he would need guidance on security and data protection concerns and knowledge of contract law for employment contracts with his various staffs. He further needs guidance on the form of business to be registered and set up. The options available with him are Sole Proprietorship, partnership, Company etc.He also needs legal solutions for different types of disputes in the areas of employment, commercial property issues and corporate and commercial issues. Lastly, the advisor is required to explain Mr. Lee the terms of citizens advice and role of Alternate dispute resolution also known as ADR in Hong Kong. All these concerns of Martin has been discussed in detail in the below segments of the report with adequate discussion and relevant solutions.
You are hired and are preparing to answer his following questions. A formal and detail business report with related legal concepts are required to submit to him according to his request:
1) He requests a clear and detail of legal environment / system of Hong Kong and the differences between civil and criminal law. How does the role of Hong Kong government in law-making together with the justice system and the organization of the judiciary. Therefore, a precise structures of HK jurisdictions and the structures of the court together with a series of legal knowledge, such as statutory law, common law and equity and the principles of company law and contract are required to introduce to Mr. Lee.
Advice in relation to legal environment of Hong Kong:
Hong Kong's legal system provides a stout support to its free and competitive markets. As it is known Hong Kong has an entirely separate legal system from the Mainland of China. The city has an independent judiciary and its own legislative framework (Chan, 2019). It has a court system to ensure that all contracts made are enforced and there is an effective resolution of any disputes which arises. To set up a company or business too, the legal procedures are minimal.
As between the civil and criminal laws, the civil proceedings are instituted to offer protection and recuperate properties or to enforce obligations while the criminal law described under HKSAR aims to conquer crime and punish the criminals. Civil proceedings in Hong Kong can be set up by the Government against individuals and private companies or by private companies or individuals against the Government. It can also be instituted by individuals against other individuals. In case of a civil proceeding, a jury is present to determine the standard of proof which is based on the balance of probabilities and presented by the plaintiff or the defendant. Contract Law, Law of Tort, property, revenue, family and administrative are all covered by the regulations of Civil Law in Hong Kong (Cheung, 2013). While the contract law is related to agreements made between individuals or corporations as a part of their daily business, concerns in the law of tort arises due to breach of duty of care which is owed by one person to another. The law of property rules over ownership and rights of properties which include all kinds of properties like land, building, trademarks, copyrights and patents. The administrative law aims to protect citizens from the abuse of power of public bodies or even the Government. Family laws relate to concerns like divorce between couples, custody of children etc. Lastly, Revenue law is designed to regulate assessment and recovery of duties and taxes.
Amongst the above mentioned Civil Laws, the laws which shall apply to the Café Business of Mr. Martin is some manner or other are the Law of Contract, Law of tort, Property law, Administrative law and Revenue law.
Criminal laws on the other hand is the sole responsibility of the secretary of Justice of the HKSAR Government. The secretary's decisions are prime in the decisions of criminal law cases. The secretary decides whether the evidence is apt to support proceedings and if yes, is a prosecution required in public interest. The secretary of justice is not bound by the executives of the Government. Serious criminal issues include murder, rape, manslaughter, robbery, drug offence etc. Mr. Martin may face situations of criminal cases required to be filed against others in case a robbery etc. occurs at the café which is why he is required to understand the process of proceedings clearly.
In all, there are several laws of China which are applicable to Hong Kong too which are covered under the Basic Law of the city of Hong Kong (Barrow and Cheng, 2019). The government structure of Hong Kong follows a hierarchy where the Chief Executive is also the head of the HKSAR. The basic law entrusts the Government of Hong Kong with the power of preparing and introducing bills, motions and legislation in the Hong Kong SAR or Special administrative region. The chief executive along the executive council is entrusted with the task of implementing the Basic Law, budgets, signing bills and promulgating laws and declaring the dates of their being effective. The HKSAR's legislature is the Legislative Council which has a specific method of formations as guided by the Basic Law. This law provides specific procedures for movement of bills and motions. The legislative council thus prepares bills and budgets, makes laws, approves budgets and public expenses incurred and monitors the overall work of the Government of Hong Kong.
The various sub-laws under the Basic Law in Hong Kong are the Common law and Rules of Equity, Statutory Law, etc. The common law and rules of equity jurisdictions contain a list of reported cases which have over the years been handed down by judges (Chung, 2017). These cases describe the legal principles of freedom of speech, freedom from arbitrary arrest, freedom of assembly etc. These case laws have now been underpinned with the provisions of the Basic Law. The statute law in Hong Kong is a local law by way of which legislation is made under delegated powers known as subsidiary legislations.
If Martin plans to open a new company in Hong Kong, it shall be governed by the new Companies ordinance which was started in 2004 which brings new and progressive amendments to the previous legislation. Company related matters are important because they impact the core issues of company formation and their manner of operation. Legislations of insolvency, winding up and disqualifications of officials etc. are still governed under the old legislation of the Companies ordinance (Lau, 2000). The contract law, on the other hand would bind Martin as the legal owner of the business to fulfil the contracts else he may be lead to civil proceedings. Thus, with an overall understanding of the various types of laws and the areas covered by each, Martin me start his operations keeling in mind to abide by all applicable statutes.
2) When Mr. Lee starts his café business, fundamental negligence in tort issues and consumer protection ordinances are required to recognize in order to avoid certain unnecessary liabilities being arisen in future. At the meantime, competition ordinances in Hong Kong are also required to introduce to him in ensuring a fairness competition during the business operation. Also health and safety issues for his employees/labours are required to set up in order to ensure all employees inside his organization are under protection and without against the related regulation of Hong Kong government.
Guidance related to tort issues, consumer protection ordinances, competition ordinances and employee issues:
Liability under tort is not strict in Hong Kong. For consumer protection, Hong Kong has several ordinances which include the consumer good safety ordinance and the sale of goods ordinance. If a customer is delivered faulty or unsafe products, he or she may file proceedings against the business unit who may be liable for fine and imprisonment both depending on the circumstance (Huang, 2018). The fine may go as high as HKD 100,000 for first conviction and up to five times the fine for consequent conviction. Martin needs to understand that he may suffer a civil liability in instances of the tort of negligence if he is unable to take adequate care of his employees ensuring safety precautions in the kitchen as well the restaurant area. If he fails to comply with contract terms as agreed with the employees, suppliers or any third party, he may be liable to breach of contract. Further, if he supplies food that does not meet specific requirements of sale of goods ordinance under Chapter 26 of Hong Kong Law, he may be liable for breach of statutory duty. If a claimant, proves in the civil court that Martin or his café owed a duty of care and breached the duty which lead to the claimant's injury and has caused injury and damage to the claimant due to the negligent act of Martin, then he shall be dragged to the civil court for such breach of law (Mariani, 2017). Under tort, the liability is not very strict, injured parties can only claim recovery of negligence or breach of contract of the defendant. Under the Sale of Goods Ordinance, if defective product, which in this case could be bad quality of food is found, then Martin will be liable to the buyer for such goods or services. He can also be liable in tort for such act or negligence on his part in such cases.
Coming to the Competition Ordinance (Under CAP 619), the ordinance prohibits Competition restrictions in the city through three rules. This ordinance is fully effective since December 2015. The first conduct rule and the second conduct rule prohibits anti-competitive agreements and abuse of market power respectively (de Lemos and Loureiro, 2018). These rules apply to the entire Hong Kong economy. Lastly, the merger rule which prohibits anti-competitive acquisitions and mergers applies only to licence holders covered under the Telecommunication Ordinance.
The conditions of employment in Hong Kong are covered under chapter 57 of labour legislation and known as Employment Ordinance. Ever since the enactment in 1968, it has been providing substantial benefits and protection to employees. The benefits and protection includes wage protection, paid leaves, rest days, holidays with pay, sickness and maternity allowances, paternity leave, long service payment, severance payment, protection against anti-union discrimination and termination of contracts with employees. The law strictly prohibits children under fifteen years from working in industrial undertakings (Ebisui, Cooney and Fenwick 2016). The employment agencies are required to obtain a licence from the labour department to undertake job placement business.
With respect to taxation, there are salaries tax, profits tax, property tax and stamp duty in Hong Kong. The taxation system is very simple.
3) As Mr. Lee's business will be running with the aid of computing literacy, therefore, a set of software security and data protection issues must be under consideration for his guidance.
Software and data protection issues
The date protection legislation in Hong Kong is covered under CAP 486 as the Personal Data (Privacy) Ordinance also known as PDPO. The ordinance dates back to 1996 and has issued various guidance and notes on its application. Failure to comply with PDPO will lead to unfavourable actions against the data users before the commissioner. In Hong Kong there are legislations that impact data protection for example, a few laws allow government bodies to access personal data of users. They are even allowed to disclose personal data. Section 44 allows the Commissioner to acquire individual data if required for an investigation. Apart from this, there are other Ordinances like the Interception of Communication and Surveillance Ordinance which allow authorities to intercept database and carry out surveillance or require employers to furnish employee information. Laws like anti-money laundering and counter terrorist financing also provide authorities and regulators the power of disclosing financial crime information. Apart from PDPO there is no other law which protects IT data in Hong Kong.
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4) Since Mr. Lee will recruit a team of employees, including restaurant attendances and office administrative staff (e.g. for accounting, marketing, management and human resources departments), a detail and precisely contract law concept (e.g. employment contract, dismissal, redundancy and discrimination ordinances etc.) must be catered to him.
Contract Law Concept for Employee
As per the Employment Ordinance, the employment contracts can be verbal as well as written. In both the cases, the employees benefits and rights are protected by the ordinance. The employment ordinance in Hong Kong provides many benefits and protections only to continuous employees or workers by way of continuous contract. The contract terms may specify or not specify contract period. That is, it may be open term or fixed term. An open term contract is deemed to be for a month and renewed every month. Agency workers hiring is not very common in Hong Kong and employers can terminate employment easily. Probationary periods do not have any restrictions and employers need not provide any notice before ending the employment contract. Moreover, there are no laws on working hours in Hong Kong. However, there are deemed statutory holidays, annual leaves and one day for rest in a week. Employees are eligiblefor paid annual leave of upto fourteen days and sickness allowance of upto 120 days. Maternity leaves extend upto ten weeks while paternity leave is provided for five days.
Currently, the minimum wage in Hong Kong since 2011 is 34.50 HKD. This is expected to increase to 38.50 HKD. The default pension plan also known as mandatory provident fund is compulsory to be enrolled into within the first sixty days of employment. Minimum contribution for employer and employee individually is 5% of employee income subject to a cap of 1500 HKD. Any discrimination, with regard to sex, marital status, family race, disability, etc are strictly prohibited in the city. Any disputes in employment contracts or breach of employment Ordinance are covered under the jurisdiction of Hong Kong Labour Tribunal. No legal representation is allowed in the Tribunal. Employees can freely join unions. However, union representation is quite low. No competitors can make offer of employment to employees of their competitor. Terminating employment is very simple in Hong Kong. Minimum notice period ranges from 7 days to a month as per contract terms. If there is any unreasonable dismissal, wherein the employer dismisses the employee without a valid reason, the employee can claim remedy as per the employment ordinance. Thus, Martin has comparatively, lesser obligations with respect to employment ordinance, unless he breaches any of the statutes.
5) As Mr. Lee is still considering whether he should set up the firm in form of sole proprietorship or in partnership/limited companies, you are required to distinguish the differences (advantages & disadvantages) of these three types of companies. A detail set up procedures in forming a company including registration, raising capital and liquidating process are required to illustrate for Mr. Lee's consideration.
Type of Registration:
Martin has an option to register his café business as sole proprietorship, partnership or company which are all covered under the Companies Ordinance. Types of companies or business firms are sole proprietorship which has minimal requirements. Private limited liability Company which is the most popular and suitable for various business types, public limited company suited to large business houses, general partnership where partners bear full liability and limited partnership where one partner has unlimited liability. The Ordinance, aims to improve business environment in Hong Kong. There have been relaxations with respect to preparation of documents, accounts and audit, share capital transactions, appointment and duties of directors and administration of companies.
Martin should opt for sole proprietorship as it is the simplest form as the liabilities are minimal in Hong Kong legislation as mentioned in the ensuing paras. In case he opts for limited liability, then the cost involved would be much higher. Public limited company is recommended after certain years once the business gets established into a chain of outlets.
If Martin opts for a company registration, he needs to follow the following steps:
• Choose the type of company and decide the name.
• Deliver the application for registration through the E-Registry or CR E-Filing application electronically or a hard copyin paper format to the Shroff at the fourteen floor of Queen's way government office (Yeung, 2017). The documents include incorporation form NNC1 or NNC1G, articles of association and a notice to be made to business registration office.
• On approval, the certificate of incorporation and document of business registration can be downloaded or collected.
• Once, the registration is done, the user needs to visit the trade and industry department website to obtain licences, permits and approvals for different kinds of business operations.
In case of a corporate registration, funds can be procured through issue of equity shares, preference shares, debentures and bonds. Martin can also consider long-term debt as a source of funding.
On liquidation, a liquidator is to be appointed to carry out the process of liquidation. He ensures that the books of accounts are closed and majority of the shareholders have consented to the liquidation through an extra-ordinary resolution passed at share-holders meeting. There may be mandatory winding up too by the high Court of Hong Kong SAR if the company is not able to clear its debts, or the court finds it equitable and just to close the company or the court has resolved the same through special resolution.
6) As recently there have been lots of negative news about the failure of faithfulness among some companies' directors, you are required to write for the role of the shareholders, a usual practice in appointing directors, company secretary/auditor and their responsibilities.
Practice of appointing Director's, Auditors and Company Secretary:
A director can be appointed in a company registered in Hong Kong by way of passing an ordinary resolution to that effect or by a unanimous decision of other directors. The shareholders need to ensure that the directors act in the best interest of the business. A director has the power on company affairs and business as per the provisions of Companies Ordinance and Articles of Association. A director may be disqualified under law if he fails to fulfil his duties as a director. If a director commits severe misconduct, he may be prosecuted under the civil or criminal law as applicable. The Companies registry includes the Director's name, passport information and residential information while registering a director for any company. If the director fails to comply with his duties and responsibilities as a director, he can be removed as a director by passing an ordinary resolution in the shareholder's meeting. The information of removal of a director is to be notified to the Companies Register within 15 days of such removal.
As per section 131(1) of the Companies Ordinance, all Hong Kong companies are mandatorily required to appoint auditors. The first auditor can be prearranged before the first annual general meeting and hold office till the end of the meeting. If the auditor is not appointed, he can be appointed at a shareholder's meeting. An auditor can be re-appointed at the next annual general meeting (Yu, 2005). The duties and responsibilities of auditors include auditing the books and records of the company, auditing the profit and loss account and balance sheet and identifying any risk of possible threat or issue like misstatement, fraud etc. and ensuring that the financial statements present true and fair view. If the auditor fails to comply with his duties, he can be dismissed from the role of auditor and a new auditor can be appointed at the next meeting.
7) Highlight the general legal solutions for different types of dispute, such as:
- Area of employment (e.g. health & safety and equality of pay claims, compromise and severance agreements, wrongful or unfair dismissal claims);
- Corporate and commercial disputes, e.g. breach of contract, contesting a damages claim and dispute between directors;
- Commercial property problems, e.g. commercial lease transactions, real estate and investment properties.
General legal solutions for disputes:
With respect to dispute resolution, Hong Kong is a leading centre. The city has a strong legal system with a lot of professionals, a good geographic boundary, connects with the Mainland of China and government support. In case of any dispute between the employer and employee, the same is covered under the employment ordinance. Similarly, director disputes are covered under Companies Ordinance. The plaintiff can reach out to the civil or criminal court as applicable and file a suit. He needs to provide a proof of his complaint. There are certain statutes like regulation of minimum wage, fixing thresholds for holidays and working hours etc. which ensure pay parity, and health and proper safety of employees. In case of disputes, the company owners are left with no choice than to terminate the services of the particular employee in HongKong. The termination process is quite simplistic. In case of disputes of contracts relating to damages claim etc. the court shall have the final decision to decide on the defendant's fate. However, equal opportunity is provided to the plaintiff as well as the defendant to put forwards their defending statements. The Property Law covers property issues in Hong Kong.
8) Also explain the terms of Citizens advice and the role of Alternative Dispute Resolution (ADR), e.g. specific tribunals or the role of unions etc., to your potential client if there is any dispute occur during business operation in future.
Terms of Citizen's advice and role of ADR:
In case of any disputes, People in Hong Kong can get legal advice and assistance in the court. The affected person may reach out to the Legal Aid Department for legal aid for proceedings to district courts, upper level courts or magistrates' courts. Residents as well as non-residents in Hong Kong can claim dispute resolution aid from the Legal Aid Department (Tam and Ip, 2017). The various courts are Districts Court, court of first instance, court of appeal, court of final appeal, magistrates' courts, mental health review tribunal and Coroner's court. The two legal aid schemes are Ordinary legal aid scheme to cover civil cases. And supplementary legal aid scheme. An applicant needs to pass the worth and merits tests to successfully apply for any legal aid.
In Hong Kong, the common forms of alternate dispute resolutions are Arbitration, Mediation, conciliation ad counselling. Mediation is the most conjoint form of dispute resolution. ADR's are therefore, voluntary and private processes wherein a third party is appointed to solve the dispute with the consent of the two parties. As compared to litigation, ADR's cost effective and saves time. Because of the confident nature, ADR's have the power of preserving business relations between disputed parties. The trade terms of ADR's remain confident with the third party and the two complaining parties. Thus, ADR's are better than litigations and are cost-effective and provide definite solution.
Having understood the various laws and ordinances applicable in Hong Kong, Mr. Martin can build a business plan to start operations as soon as possible. He needs to consider the various risk and reward alternatives before finalising the plan. If any disputes arises, they should be tried to be solved through ADR's. Parties should avoid rushing to courts to resolve disputes. Thus, an overall understanding of the laws shall help Martin to flourish in his business.