The Companies Registry of Hong Kong recently published its
updated guidance on directors' duties with eleven
principles. By way of background, the responsibilities and
liabilities of directors of Hong Kong are mainly derived from
common law, with certain specific obligations imposed by statutes
(the bulk of which are set out in the Companies Ordinance, Chapter
32 of the laws of Hong Kong ("Companies
Ordinance')) and the companies' constitution.
The duties of directors can be broadly classified into two
categories: fiduciary duties, and duties of skill and care.
Although Hong Kong case law sets out and elaborates in detail on
most of the salient principles under the two broad categories, but
case law tends to be complex and inaccessible to the general
public. As an attempt by the Government Companies Registry to
provide a ready reference guide for those serving as directors, the
Hong Kong Companies Registry first issued "The
Non-statutory Guidelines on Directors' Duties" in
2004 ("2004 Version"). The 2004 Version is now
recently updated and retitled in July of this year as "A
Guide on Directors' Duties" (the
"Guideline"). The Guideline summarizes salient
principles of directors' duties and is a good reminder for
Hong Kong companies and directors to adhere to them in their
everyday management of their Hong Kong companies. Extracts of the
eleven principles of the Guideline are as follows :
Principle 1 - Duty to act in good faith for the benefit of the
company as a whole. A director owes a duty to act in good faith in
the interests of all of the company's shareholders, present
and future.
Principle 2 - Duty to use powers for a proper purpose for the
benefit of shareholders as a whole. A director must exercise his
powers for a proper purpose and the primary and substantial purpose
of the exercise of a director's powers must be for the
benefit of the company.
Principle 3 - Duty not to delegate powers except with proper
authorization and duty to exercise independent judgment. Except
where authorized to do so by the company's constitution
(i.e. memorandum and articles of association) or any resolution, a
director must not delegate any of his powers. He must also exercise
independent judgment in relation to any exercise of his
powers.
Principle 4 - Duty to exercise care, skill and diligence. A
director must exercise care, skill and diligence that would be
exercised by a reasonably diligent person with (i) the general
knowledge, skill and experience that may reasonably be expected of
a person carrying out the functions carried out by the director in
relation to the company; and (ii) the general knowledge, skill and
experience that the director has.
Principle 5 - Duty to avoid conflicts between personal interests
and interests of the company. A director must not allow personal
interests to conflict with the interests of the company.
Principle 6 - Duty to enter into transactions in which the
directors have an interest except in compliance with the
requirements of the law. Where a director has a material interest
in any transaction to which the company is, or may be, a party, he
must not, in the performance of his functions as a director,
authorize, procure or permit the company to enter into such
transaction, until he has complied with requirements and duties
imposed by the law. The law requires a director to disclose the
nature of his interest in respect of such transaction. Under
certain circumstances, the constitution of the company may also
prescribe additional measures, such as approval of other directors
or members in respect of the proposed transaction.
Principle 7 - Duty not to gain advantage from use of position as a
director. A director must not use his position as a director to
gain, directly or indirectly, an advantage for himself, or someone
else, or which causes detriment to the company.
Principle 8 - Duty not to make unauthorized use of
company's property or information. Unless authorized by the
company in general meeting, a director must not use the
company's property or information, or any opportunity that
presents itself to the company, of which he becomes aware of as a
director of the company.
Principle 9 - Duty not to accept personal benefit from third
parties conferred because of position as a director. A director
must not accept any benefit from a third party, which is conferred
because of the powers he has as a director or by way of reward for
any exercise of his powers as a director, unless the company has
consented to it by ordinary resolution, or where the benefit is
necessarily incidental to the proper performance of any of his
functions as director.
Principle 10 - Duty to observe the company's memorandum and
articles of association and resolutions. A director must act in
accordance with the company's constitution as well as the
resolutions that are made in accordance with the company's
constitution.
Principle 11 - Duty to keep proper books of account. A director
must take all reasonable steps to ensure that proper books of
account are kept so as to give a true and fair view of the state of
affairs of the company and explain its transactions.
By comparison to the 2004 Version, the Guideline mainly updated
Principle 4 to better reflect modern trend. In both versions,
Principle 4 covers the duty to exercise care, skill and diligence.
Under Hong Kong common law, the test for the standard of care,
skill and diligence is a subjective one, i.e. such skill as may be
reasonably be expected from a person of the particular
director's knowledge and experience . This subjective
standard has been widely criticized as being "too
lenient" by today's modern standards. In the US,
the standard for duty of care of a director, for most states that
have adopted the Model Business Corporation Act, is an objective
one, namely such degree of care that a person in a like position
would reasonably believe appropriate under similar circumstances.
The new Principle 4 now contains a twofold objective/subjective
standard which is closer to the modern judicial stance taken
towards the determination of the standard of care expected of
directors. The objective test is the minimum standard. It can be
adjusted upwards to reflect any special skill, knowledge and
experience possessed by a particular director (to reflect the
subjective test) but cannot be adjusted downwards to accommodate
someone who is incapable of attaining the basic standard of what is
reasonably expected of the reasonably diligent person carrying out
the same function. The Hong Kong Government is currently
considering to codify this twofold standard in the upcoming
revisions to be made to the Companies Ordinance in order to replace
the corresponding common law rules and provide consistent statutory
guidance to directors.
The Guideline stresses that the eleven Principles are of equal
importance and are by no means exhaustive of the duties of
directors. All Hong Kong directors are encouraged to review the
role and duties of their directorship in more detail under all
applicable laws. Breach of directors duties may result in civil
and/or criminal sanctions and may even lead to disqualification
from acting as a director. Accordingly, we take this opportunity to
remind clients and directors of Hong Kong companies to refer to the
full text of the Guideline and other relevant Hong Kong
publications such as the "Guidelines for
Directors" issued by the Hong Kong Institute of Directors
and the "Code on Corporate Governance Practices"
issued by the Hong Kong Exchanges and Clearing Limited.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.