How directors after starting a business in Hong Kong can save themself from the liabilities for breach of duty?


As we have been discussing that and apart from discussion factually speaking, no act of director can every time be seen as suspicious because corporate world is nothing but a wonderland for innovators and risk takers. So, possibility exists that what legislation is considering wrong, facts or intentions of the director negates such observation. So, there must be something which could save such risk takers and true corporate executives from the liabilities to be imposed on them for breach of duty or duties.

Company’s Ratification of Director’s Act or Decision

Company has the prerogative to save director from the liability to the company for his or her any act which is expected to be falling in the jurisdiction of breach of duty, by ratifying director’s act or decision. Board of directors usually don’t have the power to ratify director’s act, however, if company’s constitution allows board to do so, then they may exercise their power of ratification of any such act of their fellow director which may be counted as breach of duty on his or her part. If the company’s constitution does not have any provision to give the power of ratification to the board or mention nothing in this respect, then in such scenario members have the right to ratify any act of director, only in the general meeting and through ordinary resolution. There is one thing to keep in mind to held ratification to be valid that, disclosure of all material facts be furnished in the general meeting.

Case of Hogg presents of the circumstances where director improperly used their power in issuance of shares. Court held that such improper exercise of power on the part of directors could have been ratified by the members in the general meeting. Like Hogg case, similar affirmation was made by the court in Bamford’s case.

Section 473 of Cap.622 gives direction on whom to vote and whom not to. As per this Section, any associated person or interested director is not entitled to vote in the resolution pertaining to the ratification of director’s act. All those, who are either the person associated with directors, his or her nominee, directors associated with him or her and any connected entity of the director is not entitled or allowed to vote on the motion which is moved to ratify act of director which is prone to breach of duty.

For the members there is restriction that they cannot ratify any act of the director which is basically unlawful and has been prohibited under the common law or statue law referring to start up business Hong Kong. Even if the ratification is done unanimously in board meeting or the general meeting even then court has the power to make any such ratification null and void which is deeming to be dishonest and illegal such as going into the transaction which amounts to the fraud or any irregularity. Similar situation was reported in the case of Lai Cheuk Kwan’s case, here circumstances reports of the situation where Ching Tung Futures (CTF) was the solely owned by Mr. Lai and he was also the chairman of the company. Subsequent to the stock market crash of October 1987, CTF went into liquidation with more than $83 million owed. CTF sued Mr. Lai on the grounds that he breached his duty of care by trading unsecured accounts and as a result company went into liquidation. Mr. Lai defended himself by arguing that his trading practices were ratified by the company hence claims stands no legitimacy. Court mentioned in its decision that Mr. Lai’s conduct was not capable of ratification as he had jeopardised the existence of the company.

For another case of similar situation that is the case of Aveling Barford, both transferee and transferor company, involved in selling and purchasing of property was owned and operated through a common controller- Mr. L. Justice Hoffman held that exercise of selling property by AB ltd to the P ltd was not the legitimate as this selling and purchasing of property was just to benefit Mr. L with the unauthorised return of capital as the corporate entities can take assets out of the company either through dividend or leave by the court and hence neither through the voluntary disposition of the assets. Hence on these grounds, such selling and buying setting between two companies is unratifiable and ultra vires the company.

For the situation where directors act was causal that it caused company to get into insolvency or any loss of company’s assets while the company already has been insolvent, then the members do not have the power to ratify any such act of directors to save them from the liability for breach of their duty.

It is the general view or more precisely a perspective that, to start up business Hong Kong as members of the company, the general meeting are the corporate organs they can ratify any act of the director which falls into the jurisdiction of their fiduciary duties or any other breach of duty or duties. As long as there is no possibility of company’s infringement or biasness of creditor’s interest, up till then members have every right to ratify director’s act. In the case of Tam Po Kei, circumstances report of the director’s misappropriation of family run business by improper distribution of company’s assets. Harris J noted in this case that, permanent managing director of this family run business agreed to pay remuneration to the executive director and on the grounds that, this managing director was in fact the patriarch of the family and all the family member, who were also the shareholders of the company affirmed his authority and control on the company, thus Hon’ble Judge accepted that unanimous consent doctrine relieves director from the liability of breach of his fiduciary duties.

There are generally two restrictions on the ratification of members for director’s act of breach through un-unanimous agreement of the members. First restriction is on such ratification which is supposed to be done via special resolution, as per company’s constitution, then any ratification through ordinary resolution would be made null and void. Second restriction, if majority ratifies any act which amounts to fraud or any mis-conduct of fiduciary duties, then minority remedies are supposed to have strong grounds for existence.

Indemnity Clause and Exemption from the Liability

To refrain over protection to the directors for extra protection for breach of their fiduciary duties, it is needed to draw some border lines. Because, it is possible that articles may provide veil to the directors for excessive misappropriation of their fiduciary duties if there is the absence of any statutory requirements. To address this concern “Greene Committee” in 1925, recommended some statutory provisions to outline the scope of director’s liabilities to the company. Section 467-469 of Cap.622 are the provisions which are legislated upon the recommendations of Greene Committee, from these sections, Section 468 specifically renders any voiding of the directors’ act, as mentioned in company’s constitution:

  • The provision which deems to exempt director from the liability, which would have been imposed in case of director’s breach of trust, fiduciary duty and the negligence, default, to the company.
  • The provision which indemnifies the director against the imposition of the liability, which would have been attached to the director for his or her act of negligence, tort or breach of trust and fiduciary duty to the company.

Factually speaking although statutory provisions tends to invalidate the ratification for some cases, as stated above but general perception negates this, and practical circumstances reports that they actually do no invalidate ratification. This might be due to the fact that, emphasis has been put on the need to interpret above-mentioned sections in true of their sense and thus clear wordings of the circumstances is required so that no overriding of principles of common law on ratification may not occur. It the matter of further explanation that Section 468 only concerns the situation where there is probability of exemption by the company. It does not make such non-contractual arrangements its subject which allows director to insure him or her from the third party.

The case of Movitex Ltd provided of same circumstances, where company’s articles allows the director to contract with company only in the case where he or she has disclosed about his conflicting interest and for such case concerned person would not be allowed to vote neither his presence would be counted for consideration in the quorum. As per the Article 100(iv)quorum and voting restriction does not applies to the contract where prime concern is of directors’ executive services of the company. Hence, court held that company’s articles does not exempts the director from any kind of liability for his breach of trust or duty but he may have been conferred with “excused liability”.

Obtaining Insurance

Hong Kong company establishment is permitted to get its officers or any other employee, such as company’s auditors, who are prone to the liability arising from the breach of duty, trust or negligence, insured so that in case liability is imposed upon them, insurance would cover that liability. Section 468(4) prohibits the insurance for the case where liability is imposed due to the director’s fraud. As far as Section 468 (4)(b) is concerned it allows for the insurance of the director for the case where there is legal cost in continuing legal proceedings for the company is involved, irrespective of the fact that director is found liable or not. Generally it has been seen that, insurance companies often exclude the policy of insurance for the cases involving corporate frauds.

As per the Section 469 of Cap.622, company is allowed to pay indemnity to its director regarding proceedings against any third party, provided such indemnity is not provided for the liabilities, imposed on director pertaining to any criminal proceeding, regularity penalty or the proceeding where director is unsuccessful in getting relief from the conviction or imposed liability.

Grant of Relief from the Court

Foster J in the case of Dorchester Finance Co Ltd communicated that, court can grant relief to the director in Hong Kong business formation where there is the evidence that:

  • Director was honest in conduct and transactions.
  • Director reasonable fulfilled his or her fiduciary duties.
  • Director ought to be excused fairly.

Same was the summary of what Section 902-904 of Cap.622 underlines for the way to seek relief from the court.

Relief on the grounds of Honesty

It was held in the decision of English Court of Appeal for the case of Bairstow that, as the trial judge held director liable on the grounds of misappropriation in which he presented the financial standing of the company to be much greater profitable than it was factually, and such act falls within the jurisdiction of dishonesty. So, the director’s plea to grant relief is overruled as their act was not honest and decision of Trial Judge was sustained.

To assess whether the act of person makes him honest or not in the Hong Kong company establishment, there is the “subjective test”. It must be noted that subjected shouldn’t be made so flexible and so easy to mould and manipulate that everyone forms their personal standards for evaluating the honesty or dishonesty of the subjected person. Nor, does it mean that any person who falls below the standard of hypothetical honesty test would be considered dishonest. Rather, it demands that person should be considered dishonest if his or her act falls within the jurisdiction of dishonesty standards of the reasonable person, irrespective of the fact it the subjected person thinks that he or she was honest in their act.

Relief by acting Reasonable

To get the relief from liability on the grounds of reasonability, person must show that his or her act was reasonable in dealing and didn’t committed any dishonesty or breach of duty. In the case of Re Claridge relief was granted to the director as it was noted that he acted honestly the transaction he went in was based on the legal advice it received.

Section 902-904 of Cap.622 provides for the way to get relief from liability if the negligence he or she accused of, was technically minor and hence couldn’t be regarded as “pervasive and compelling”. However, legal commentators states that, determination and grant of relief depends on the presented circumstances of Hong Kong business formation and standards may deviate case to case.

Relief where excuse was ought to be fair

It is not every time possible that relief be granted for all the situation where director has acted honest as well as was reasonable in act. For he situation where there is the evidence that director or subjected person misused or manipulated company’s assets for the detriment of creditor, there court can deny the grant of relief from the imposed liability.