The law of directors keeps check and balance on the acts of director and regulates their actions so that their conduct and decisions may benefit the company in the best of its interest.

Issue of Corporate Governance

Just on account of director’s incompetency and wrong decisions, company as well as its shareholders could collapse or may suffer the loss which could have been avoided through timely and correct decisions on the part of corporate directors. Due to these circumstances, issue of corporate governance has gained much importance in past few decades, specially after the 2007-08’s economic crisis in the world and corporate collapse of American corporate giants has raised serious questions on the regulatory laws to cater corporate governance and risk management. We shall now look into some of legal proceedings regarding much debated issue of corporate governance.

Case # 1:

In the history of Hong Kong corporate formation, Peregrine case arose due to the Asian Financial Crisis of 1997 and this case was proceeded as per the Section 143 of predecessor companies ordinance which now have been re-enacted as Section 841 of Cap.622, this case reported of the circumstances where company was vulnerable to the predicted market collapse and as the company had long term investments and illiquid trading assets which made the company more vulnerable to collapse if the predicted financial crisis comes into existence. Management did not take much anticipated decisions as the company was being governed on highly informal grounds, having the single decision maker- the chairman of the company. As a result of these management deficiencies, in January 1998 company was defaulted on the grounds of un-paid loans to the Indonesian borrower.

Case # 2:

Akai’s case is considered to be the biggest corporate collapse in Hong Kong, till now. In 2000, Akai Holdings, which was a listed company in Stock Exchange with the business involving production of electronic goods and production of SINGER sewing machines. On the account of $1.1 billion owed to the creditors of the company upon liquidation, Akai Holdings became insolvent and their insolvency is still the biggest corporate collapse in Hong Kong’s corporate history. Prompt investigation by liquidator and Police revealed corporate fraud on the part of company’s chairman who was involved in shipping of company’s assets out of the company.

It is noted that the main reason of director’s non compliance with their managerial or authoritative control is the lack of ownership and realization of control over the company. It is seen that in the companies where director is the sole owner and the director of the company, director’s performance is commendable, that’s may be of the reason that director’s interests are aligned with the interest of the company. Where in addition to directors there are other shareholders too, if director holds the majority shares of the company, then discrimination of minority shareholders is very much visible on the part of directors. For the situation where the interests of company’s managers and interest of owners diverges, economics commentators state this as “agency cost”. Law of directors’ duties provides way to reduce this agency cost by restricting directors not to act in their personal interest at the expense of the company.

There is the need of proper regulatory mechanism to bound directors to act in the best interest of company rather than protecting their own interests. Hong Kong does not have any corporate investigation task force or any full fledge regulator who may look for the corporal misconduct and determine the corporate culprits.

Fiduciary Duties of the Directors

It is a well-established fact that directors were taken as the agents or trustees of the shareholders and the company in the Hong Kong corporate formation, as the case law also implies of this. But later, the perception was getting prevailed that directors are neither the trustees of the company or shareholder nor they are the agents of the company when they act in the capacity of board of directors. Thus, taking directors as agents or trustees would make them liable to some fiduciary duties. Basically, fiduciary duties implies of the sacred relationship between the director and the subject, such as company in this instance, merely of confidence and trust. The law recognizes the certain categories of fiduciary relationships such as relationship of:

  • Director and Company.
  • Trustee and Beneficiary.
  • Agent and Principle.
  • Solicitor and Client.

All these categories vary slightly in terms of scope of duties, however the general scope and definition of fiduciary remains intact which explains Fiduciary duties as the duty performed by its exerciser for the benefit of the one to whom he or she owes fiduciary duties.

Director’s fiducial duties as per certain sources of law

Following are some of main director’s fiduciary duties in Hong Kong in the eye of general law:

  • Director’s duty to act in the best interest of the company.
  • Director’s duty to exercise his or her powers for the benefit of company.
  • Avoiding any conflict of interest.
  • Must not make any secret profit.
  • Duty not to have the mal-intention for company’s assets.

After mentioning the director’s duties, there is the categorial standing of proscriptive director’s duties and non-proscriptive director’s duties. Proscriptive duties are the ones which fiduciary cannot do and the non-proscriptive duties are referred to be positive actions which fiduciary must bring out. Australian High Court laid out that fiduciary is supposed to act upon only two proscriptive duties, the first one is to avoidance of conflict of interest and the second one is the restriction to make any secret profits. But in Westpac Banking Corporation’s case, Western Australian Court of Appeal objected this perspective of high court and noted that, duty to act in the interest of the company and to exercise his or her powers for the company’s benefits also counted as fiduciary duties of the directors. Situation here in Hong Kong’s legal constituencies is quite un-clear as evident from the comments of Gummow NPJ in Moulin Global Eyecare Holding’s case. So, the general perception of legal commentators is that both proscriptive and non-proscriptive duties should be taken simultaneously as both have the vital instruction for fiducial and hence breach of both proscriptive and non-proscriptive duties should be counted as breach of fiduciary duties on the part of the directors.

As we discussed Section 465 of Cap.622 after Hong Kong incorporation services, which imposes duty of care, skill and diligence on the part of the directors. This duty is applicable in case of any act of offensive negligence from the directors. There is the possibility that instead of breach of one duty, director can amount to more than one breaches of duties while exercising their fiduciary duties. Pt.11 of Cap.622 makes conflict of interest its subject. Apart from these companies registry issued “Guide on Director’s duties”. This guide is not basically any law, instead it looks forward to aware directors about their duties and is intended to spread awareness amongst the directors.

Categoric division of directors with respect to their duties

We already discussed this categoric division in previous discussions, lets take the overview of it and get it linked with the on-going discussion.

Duties of De-jure Directors

De jure directors are subjected to the provisions of general law and statutory provisions which makes, directors their subject. Whereas Alternate directors are the appointee of de jure directors and act in the absence of their appointer hence subjects to all the duties of the appointer.

Duties of de facto Directors

De facto directors also have the same liabilities and duties as that of de-jure directors instead of the one difference that they are covered by those provisions of Cap.622 which makes only those the subject which satisfies Section 2’s definition of directors for Hong Kong incorporation services.

Shadow Directors

Shadow directors generally does not cover the Sections 2’s definition of the director hence there is no provision in Cap.622 which makes them their subject. However, certain provisions in Cap.622 somehow makes them their subject, such as provision which imposes responsibility for the liabilities. Legal proceedings do discuss and cater them as visible in Yukong Line Ltd of Korea’s case, where Toulson J communicated that shadow director was the controller of the company, hence in this context, he owes fiduciary duties to the company. But in Ultraflame (UK) Ltd, Fleming J declined to impose liability on the shadow director by communicating that: in Yukong’s case, responsibility was imposed because shadow director was controlling the company, which is not observed in this case. However Fleming J accepted that where shadow director exercises powers beyond its jurisdiction, fiduciary duty owing to the control of company’s assets would be imposed on him or her.

Corporate Directors

As far as the issue of corporate directors is concerned, they are made subject to the same fiduciary duties as de facto or shadow directors would subject to. There is another situation in which, director of the corporate director would be considered as the de facto or shadow director of the company in which corporate director is serving as this scenario, the former will be made subject to the duties owed to the latter.

Duties of Executive officers of the company

It is the matter of fact that those executive officers, who are not the director of the company are subjected to the same duties as that of a director including that of fiduciary duties. For the employees, duty of care is imposed and as the matter of fiduciary duties is concerned, nature and scope of fiduciary duties on the part of employees differ from that of directors. In the decision of Canadian Aero Services, it was noted that two individuals were appointed as president and executive vice president of the company after set up company in HK. Thus they were the part of higher management of the company. So, amounting to this managerial position they were owed same duties to the company as director would owe. Imposition of fiduciary duties to the senior executives of the company can be justified with the argument that such senior executives in public companies have larger managerial role than the non-executive directors which have the role of just attending the meetings of board of directors.

It must be noted that duty of care as mentioned in Section 465 of Cap.622 makes directors their sole subject. However, other executives, officers and managers are subjected to the duty of care under common law.

Who will be made liable to the owed duties?

All fiduciary duties and the duty of cares are owed to the company solely. Thus, in this capacity can begin legal proceedings against any violator of such fiduciary and duty of care.

Generally, directors do not owe any fiduciary or any sort of duty to the individual members after set up company in HK. However, situation may arise where director is the agent of shareholder in the sense that it bought shares from the shareholder by acting on behalf of the company. So, in such circumstances, directors owe fiduciary duties to the shareholder. As the general perception does not held director to be liable to the shareholders or the member of the company on his or her fiduciary duties, hence circumstances must be evaluated and thus application varies case to case. Certain considerations like:

  • Shareholder’s dependence on the director regarding information and advice on investment.
  • Does the relationship of trust and confidence exists?
  • Significance for both, director and the shareholder, in this understanding.
  • Extent of the positive action taken by the director to promote this transaction.
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