How Director can act in the best interest of the company after company formation HK

Directors are supposed to act bona fide to the company, i.e., they must consider company’s interest, the foremost choice in every matter. There can be the possibility where the director of one company is the director of second company, which actually is the competitor of first. It is noted that, director’s duty to act in best interest of company would not be affected by the stake of director in the second company. Instead director is required to take extra steps towards the benefit of first company to ascertain his or her loyalties to the first company, which must not be altered or effected by the second company after company incorporation HK. At the minimum director is required to disclose his or her conflict of interest. But Australian court believes that extent to which director must go in disclosure, varies case to case. It is believed that extra steps by the directors towards the benefit of first company may fall within the jurisdiction of fiduciary duties of his or her owed to the second company, so if the conflicting situation prevails, the possible solution of this conflict is merely, a resignation of director.

Explaining the interests of the company

We have been reading a lot about the director’s actions to be best in the interest of the company. But, the phrase is not ordinary and proper definition, jurisdiction and implication of it needs to be understood.

General View

Interest of company is basically the interest of its members or shareholders and here benefit will nothing but of monetary value and they deem the maximisation of company’s profit. So, in this context, directors are required to act to the best of their knowledge and abilities for the interest of company, so as shareholders, after the company incorporation HK. It must be noted that, the only focus of investors is of financial histogram. Thus, they do not merely need short term investment plans to get the elevated profits but looks for the long-term investment plans and thus director is entitled to act in best of their interest to safeguard their investment and financial compensation against their invested capital in the form of profits.

The above-mentioned intention is not what comes in director’s duties and thus apart from looking for company’s interest or the shareholder interests they should also look towards their employees and appropriate benefits should also be awarded to them. So, in this context benefits or bonuses should be given to the employees to motivate them their employer cares for them and if they contribute to the company they would get the share out of what company has gained through their hard work. Promotional offers for the customers could also be beneficial, to retain the customer’s capital and to attract new customers too. Giving charities could also enhance company’s reputation in the corporate world. So, this can be inferred that not just shareholders, director should see the corporate operations in the broader spectrum and take actions, what he or she thinks that would benefit the company.

Where the acts of directors do not alter the corporate structure of the company, nor it affects the members as whole, instead the decision of the director affects rights and interest of members against each other then duty can be imposed on the director to act fairly with all shareholders of the company, either majority shareholders, minority shareholders or any particular class shares holder.

Directors Duties towards Corporate Groups

There can be numerous companies within one corporate group. Each company in corporate group is free to get into transactions like transfer of assets, providing with loans and guarantees with other company of a same corporate group. So, in this condition, risk exists on the part of the directors to breach the fiduciary duty owed to the company, they employed at. As per the classic law and general perception, director should only be concerned with the functions and interest of the company, of which he or she is director. On the basis of seeing company as a separate entity, directors are supposed to protect and act only for their respective company, not for the benefit of corporate group.

But, for the condition where any transaction benefits the whole of corporate group and the effect of this benefit is being trickling down to the company of the concerned, then the concerned director would not be subject to the breach of his or her fiduciary duties. The prominent example for such scenarios is the transactions between the parent company and its subsidiary. Here upon the corporate success of the subsidiary or the child company while being in Hong Kong holding company formation, parent would also benefit from this corporate success as it provided subsidiary. Legal commentators for the ease of communication, call it a “Derivative benefit” and found the establishment of this legitimate transaction quite tricky as the case of Akai Holdings itself demonstrates such condition.

Issue of the Nominee Director

Certain legal provisions allow directors to appoint a nominee of them in the company’s board of director. This is often exercised by the external shareholders of the company. For instance, Company went into contract with three shareholders, each one holding equal number of shares. Then they may be allowed to nominate one person to be their nominated director and thus be included in company’s board of directors. General perception conceives the perspective that nominee would act for the benefit of the appointor but legally and factually, being the director of the company of whom he or she is a director, the concerned director should act in the best interest of the company rather for the interest of his or her appointor or any Hong Kong holding company formation.

There is the slight relaxation for the nominated director to protect the right of his or her appointor, but that protection must not compromise the interests of the company, of which they are director. Such sentiments were perceived by English Court of appeal in the case of Re Neath Rugby Ltd (No.2). It was observed that scope of fiduciary duties of the directors can be moulded as per the terms and conditions of the agreement, parties went in. But this restriction must not be abused, abuse in a way that the nominated director would always look for the benefits of his or her appointor rather if to protect the rights of appointor, fiduciary duties he or she owes to the company of which he or she is a director, must not be compromised. Hence the sanctity of Principle of Fiduciary Duties must prevail and any act on its concealment would subject to the legal binding on the violator.

Issue where company is prone to Insolvency

For the situation where company is near insolvency or where it has become insolvent, fiduciary duties of the directors would be owed to the benefits of company’s creditors. This is because of the fact that general perception combines interests of the company as that of its shareholders and where company has become insolvent, there is nothing left for the shareholders to claim upon, as there are already insufficient funds to pay to all of its creditors and there will be nothing shareholder could recover in case of company’s insolvency. For the directors, the duty to act upon the best interest of the company has now been modified for the benefits of the creditors but there is one considerable point that, though directors are made bound to act for the benefit of the creditors, does not mean that creditors could take any action against the director because the general law does not allows the creditors to take legal action against any director, instead liquidator would be allowed to take action in the course of mis-conduct on the parts of the directors, during winding up of company.

There are two tests to determine whether the director is subjected to the fiduciary duty or not. Cooke J in Nicholson’s case communicated about the jurisdiction of the Objective Test and he said that: objective test could only be applied in the situation where substantive evidence reports of payment to the prejudice of the credits when the likelihood that it was for the loss, about which directors already knew and hence breach of duty be applied on them. Thus, on merely these grounds, director can not escape the liability for the reason that he or she does not know about the company’s financial paradigms.

About the Subjective test, English court of Appeal provided for the grounds where this test can be applied. As per them, subjective test can be applied in the situation where there is the establishment of the fact that director did not went into breach of his or her fiduciary duty as they had good faith and took decision with pure intention and upon the certainty that it would not be prejudicial to the creditors.

Legal commentators believe that, the assessment of intensity of director’s breach of duty depends on the company’s financial standing and size of transaction, director went in.

Akai’s case, is found to be the eminent cases of Hong Kong’s corporate crashes. Mr. Ting was the chairman of Akai Holdings and in this capacity, he borrowed some money as loan from Thai Farmers Bank (TFB) to pay the imposed liabilities of SINGER, owed to the Thai Farmers Bank (TFB). Ting presented some shares of Akai Holdings as the security for loan to the Thai Farmers Bank (TFB), though Akai did not have any equity interest in the SINGER but on the grounds that both Akai and SINGER had common controller- STC Canada who owned 43% of Akai and 50% of SINGER. Mr. Ting himself owned 45% of STC Canada and was the chairman and CEO of it. Mr. Ting also had an additional portfolio of Chairman and Director of SINGER. When Akai was defaulted on that load, Thai Farmers Bank (TFB) enforced its security and claimed as its creditors for the balance owed by the Akai to Thai Farmers Bank (TFB). Justice Stone held that: Mr. Ting failed to fulfil his fiduciary duties owed to the Akai by getting into wrong transaction by obtaining loan and company’s assets as security for the company, in which Akai doesn’t have any stake. Although Justice Stones decision in this case reverted but the conclusion of considering Mr. Ting involvement in breaching of his fiduciary duties, in Hong Kong corporate formation, kept intact. Legal experts thinks that Mr. Ting was found to be in breaching of his fiduciary duties owed to the Akai Holdings because, he did not presented the intention to take loan and granting Akai’s shares to the Thai Farmers Bank (TFB) as security for loan before the board of directors and thus did not took approval from them and hence on this conflict of interest, Mr. Ting’s conviction on the grounds of breaching of fiduciary duties is legitimate. Legal commentators outlined few horizons, where directors could involve in breaching of their fiduciary duties by taking into accounts different cases before the court, the possibilities include:

  • On raising owner’s suspicions in the faith of directors for company’s operations on the grounds that, directors were seemed to transfer the business to their self. Directors outraged and terminated the staff company to halt the company’s business operations.
  • Director issued loan to himself by the company for his personal use. Terms and conditions of loan did not have any fix time period for repayment, was interest free and unsecured.
  • Director sold the properties of the company at the undervalued market price to the person who was actually associated with the director and court regarded this auction as “sham auction”.
  • Directors act to engage company in an illegal tax evasion scheme, which upon revelation imposed certain liabilities, interests and penalties on the company in the Hong Kong corporate formation.
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