Director’s duty of care, skill and diligence in Hong Kong business formation

History reports of lenient approach towards the directors for any misappropriation in their conduct because as we discussed earlier, key personalities or celebrities were appointed as companies director to attract the investors and subsequently rise in company’s capital and may be that was the reason corporate expectations and managerial duties were not much expected from them. But, in today’s modern corporate world, high standards have been raised against expectations from the directors and they are expected to operate in the excellency of their professional, corporal and managerial expertise to smoothen the business operations of the company. There must be one thing which needs to be assured and that is, the rules should not be made so complex that it pardons directors to exercise key exercise of entrepreneurial practice- the risk taking, to look for new horizons of capitalism and elevation of business ventures and hence legislation should understand that in the corporate world, risk taking is essential and so directors cannot be made inevitable for any risk taking avenues.

When duty be invoked?

Equitable and common law give rise to the origination of duty of care. Equitable law basically does not cover the basic doctrine of fiduciary duty as it has nothing to deal with the vulnerability and risk associated in the relationship of director and company, instead it deals with the duty imposed on trustees. For the invoking of common law, it originates in any act of tort or negligence.

Eminent countries like United Kingdom and Australia had laid down fiduciary duties to open company in HK and the duty of care on the part of directors in their legislation. However, as far as condition of Hong Kong is concerned there is lack of consensus on inclusion of duty of care in the legislation hence government proposed to deal such matters with the general law and Section 465 of Cap.622 imposes minimum objective standards on the directors and regards duty of care as the statutory duty.

Standards for the duty of care

Duty of care will be imposed only if there is any negligence on the part of director. If there is any error in directors judgment due to which company suffered any sort of loss, then it wont be counted as breach of his or her duties.

Duty of care basically can be best understood in two broad spectrums. First one emphasis on taking measures to ensure extra care while taking decisions for the company. To determine whether the action of the director was legitimate, it is necessary to look for the possible consequences of his or her decision, in subject, could have on company, its employees, members and creditor’s prospects. The second one gives the direction to oversee managerial affairs pursuant to the particular decision and can there be any implication of decision in subject of director’s overall determination on company’s prospects or would it refrain from any act of negligence?

Standards for the duty of care in General Law

General Law imposes same duties of care, skills and diligence as it imposes on the common person. Hence, what degree of care is expected from the common man, same would be expected from the director.

In Baker’s case, Justice Romer entails the propositions pertaining to director’s duty of care:

  • Director is not expected to exhibit higher for the qualities or the qualification which is expected from him or her. Where there is the evidence of negligence on the part of the director, his or her act would be compared with the reasonable person of the expected intellectual and capabilities. For instance, if director is qualified to be an accountant, engineer, lawyer or other then his or her performance will be evaluated against relevant profession. However, in case of unqualified director, competency may drop.
  • Director is not required to intervene in every matter of the company or if to be very precise he or she doesn’t need to give attention to every affair of the company except the matters presented in board or general meeting. Similar is the for the meetings, he or she is not bound to every board meeting however this is required to be reconsidered for the case of executive director(s), who are basically the employees of the director.
  • If company’s articles allow or if there is the absence of any suspicion, left out duties could be assigned to any official who seems to be honest and fair, any such act of the director would be justified.

Quite similar propositions were suggested by Parker J in Secretary for Trade and Industry’s case, where he modified proposition of Romer J by stating that, director has the legitimate reason to oversee company’s affairs and his or her extent of duty discharged will depend on the role of his or her in the company’s managerial affairs, which may vary case to case and thus generality cannot be adopted nor can be applied.

Hoffman LJ in Re D’Jan of London Ltd’s case accepted the credential of duty of care to be exercised by the person having following credentials:

  • Possession of similar skills, knowledge and experience as it could have been expected from the person functioning as company’s director.
  • The relevant experience, skill and knowledge of being the director of the company.

Generality of the concept demands the matter related to duty of care to be left upon the court and legislation to decide for. But for the jurisdiction of duty of care for the executive and non-executive directors is quite clear in the light of above discussion. However, if legal standing of Hong Kong should be concerned then generally it can be said that Hong Kong Courts sets out minimum objective standards pertaining to director’s duty of care.

Roger VP acknowledged Romer J’s ruling in Re City Equitable Fire Insurance Co. Ltd  and stated the propositions of Romer J to be the classic exposition of the duty of care expected from directors but he found these propositions to be very narrow in present circumstance to open company in HK and operate it, hence acknowledged decision of Dorchester Finance Co Ltd as this imposed same responsibility to all the executive and the non-executive directors in the legal proceedings as the responsibility of them for the managerial affairs of the company.

Kwan J showed consent with the observations of the Parker J in Secretary for Trade and Industry’s case, which has been discussed above. Anthony Chan J agreed with the above mentioned verdict of Hoffman LJ in Re D’Jan of London Ltd. It seems as if Hong Kong Court’s perceived that whenever any such be brought before them, despite of having minimum objective standards, overseas cases related to such matter could be sought as per the reported circumstances.

For the situation where appointment of director is brought with any contract or any arrangement to incorporate HK company, then there will be an implied term in the contract which certifies director’s possession of particular skills, care and qualification as per the requirement. Where the director is appointed merely on the basis that he or she possesses particular skills, qualification and experience, then such appointee is expected to comply with those skills, qualification and experience as any similar person could have been expected to possess.

Duty of Care in Cap.622- Statutory duties

After March 2014, now any proceeding related to duty of care is to be carried out in the lights of Statutory duties in Cap.622, instead of general law. This is because statutory provisions of Cap.622 supersedes the general law and any future legal proceeding be continued as per the statutory provisions of Cap.622.

As per the Section 465(2) of Cap.622 to incorporate HK company, director is expected to carry out due duty of care, skill and diligence and this clause of Cap.622 entails credentials of such processor to be of the person who:

  • Possessed the required general knowledge, skill and experience as of the any similar person who is expected to act or acting as the director of the company.
  • The standard set out in (a) is the minimum standard objective, expected from the person of such position in the company.

It must be noted that, the standard laid down in (a) and (b), entails the minimum standard objective requirement for the director and cannot be relaxed or compromised in case of director’s poor or inadequate qualification, skill, experience or anything. The fact stands arguable that the standards laid down here are basically the one, possessed by Common Law related to director’s duty of care.

The UK counter part of Section 465 further extends the view to the matter where director(s) has sought professional advice from any corporate expert or any professional, then the possibility of director’s breach of duties must be subjected to the proper examination of the circumstances.

Just like other directors, shadow directors are also subjected to the same obligations and standards. Except for the condition where Holding company would not be considered as shadow director of its subsidiary merely on the fact that directors of subsidiary are acting upon the instructions or directions of the holding company.

Monitoring Duties of the Director(s)

However, director(s) are not supposed to involve in daily activities of the company but still, duty of care demands them to oversee company’s operational matters. So, as per Section 465:

  • Directors must understand the company’s business model and thus should be familiar with the fundamentals of company’s operations and business
  • Though director does not need to be inspecting the daily operations of the company, but director must be kept informed about the company’s activities and issues.
  • To ensure the smooth functioning of company’s affairs and business operations, board and general meetings should be held time to time and director must make sure the adequate grounds available for the managerial audits of the company.
  • Although there is no requirement for the corporate audit on the part of the directors but they must be familiar with company’s current financial status through review of the company’s financial statements.

There is the matter of notice that all directors whether executive or non-executive must satisfy these minimal monitoring requirements and may delegate powers to the reporting staff, whomsoever they find trustworthy, fair in transactions and honest by nature. If nothing is being intel to the director then this points to something suspicious that something is going wrong and it is directors responsibility and is his or her duty of care and diligence that he or she must inspect for the issue. But, for the situation where directors knows the facts and any discrepancy or mal-functioning was into their knowledge, then to start up business Hong Kong degree of care demands either abrupt action or the liability on the director, if he or she failed to act in time despite of their prior knowledge.

As the former part of our discussion entails directors to have the required skills and qualification, in corporate operations this does not pardons director to escape from his or her managerial or monitory obligations merely on the basis that he or she was appointed just because on expertise neither on managerial basis. Once appointed and made director of the company, each and every board member or director is responsible for company’s financial, management and operational affairs.

In case the company fails to comply with the legislation or any rules or regulations, necessary to start up business Hong Kong, then directors would be held responsible for any such failure and would be made subject to the breach of their fiduciary duties owed to the company, as the negligence on the part of directors is quite evident. For the ASIC’s case, company’s director were found to be the subject of negligence as they made false statements to the market and didn’t acted upon the legal obligation to disclose transactions as per the disclosing rules and listing rules of the stock market. Thus, trial court held directors to be personally liable for any loss company will incur in terms of compensation or any fine, because of their negligent practice.