Remedies for the Director’s Breach of their Fiduciary Duties and Duty of Care, Skills and Diligence in Hong Kong corporate formation


For the situation where director(s) breached their fiduciary duties, compensation like rescission, amount of profits, equitable compensation and restitution of property can be sought out. Where director intimately breached their fiduciary duties, injunction can be sought. For the breach of duty of care, company can seek for remedies like damages via common law, against their incurred loss.

Injunction:

Such remedy is invoked in the situation where director hasn’t carried out any act of breach but instead anticipated to breach his or her fiduciary duty while doing business in Hong Kong. With injunction, director will be suspended to act to prevent company or business suffer from his or her misappropriate acts.

Rescission:

This remedy can be sough in the situation where director did not disclose his or her personal interest in the company, with whom transaction is being carried out or planned to be carried out in future. In such situation, company has the right to make this contract voidable to act upon and eventually abandon this contract.

One such example is the case of Aberdeen Railway Co, where Blaikie Bros entered into contract with the Aberdeen Railway Co regarding manufacturing of iron chains for the railway company and when Aberdeen Railway Co came to know that Chairman of their board is in fact the MD of plaintiff, they abandoned this contract and in consequences of which Blaikie Bros sued them to enforce the contract. Court denied accepting their pray and declared abandoning of contract, a legitimate setting because of conflict of interest of Board’s Chairman.

Damages:

Even if it was an individual act or joint act, all those involved in the breach of their duties will be held liable to the company, in whatsoever capacity they breached the duties that is either jointly or individually. Damages are the most suited remedy for the situation where directors breached their due duty of care. Possibility exists only in exceptional circumstances, where shareholder also suffer a loss, apart from the loss of their stakes in the company. Where such exception exists, shareholders can separately sue the directors of the company for their respective loss, exclusive of what they lost in the form of their shares/ stakes in the company.

Amount of Profits:

Although directors are not basically considered as company’s trustees but as soon as they are found in any misappropriation with company’s assets they are held liable to the company on the same grounds as trustee would have been made accountable because trustee is not supposed to gain profits from the company’s property. Chadwick LJ in Harrison’s case said that; as soon as director assumes the office of director, his or her duties towards the company’s property are same as that of jurisdiction of trustee towards the trust. The powers are conferred on the directors regarding dispensation of company’s property and hence these properties should only be used in the best interest of the company, not for the personal gain of director. That is the reason, breach of fiduciary duty is imposed on the director in case of any misappropriation of company’s property.

Even if the third party is managing or overseeing company’s properties, then in case of any misappropriation they would also be held liable for the amount of misappropriation to the company.

Avoiding Transactions

Where there is the establishment of the fact that director breached his or her fiduciary duty, then company has the prerogative to make such transaction void on the grounds that director failed to disclose his or her conflicting interest in the transaction, company is entering into. For the situation where director misused his or her powers for the improper purpose such as inappropriate allotment of shares, in such situation transaction or such act of the director can be held invalid. In the situation where director entered into contract without any authority on his or her part, then such contracting act of director can be made invalid because even in the presence of conflicting interest in this contract or transaction, director went into contract without any authority. Case of Akai Holdings present of the same situation where director failed to disclose his conflicting interest in the contract, company is going into. So, the court of first appeal held this contract of the director as void because firstly he failed to disclose his conflicting interest, secondly, he does not possess the competent authority to make the contract binding on the company.

Recovery of Company’s assets for the breach of duty

For the case where director through breach of his or her fiduciary duty, acquired the company’s property in his or her personal acquisition, then company reserves the right to recover that property from the violator of fiduciary duties on the grounds that director was supposed to act as the trustee towards company’s assets hence no personal gain can be sought from company’s assets while doing business in Hong Kong.

Remedy of Accounts of Profits

In case where the director has illegally gained profits or gain of any nature by breach of fiduciary duty then, company reserves the right to make the violator liable for the payment of any profit or gain he or she makes by breach of duty, to the company. It doesn’t matter whether company suffered loss from this mal-practice of director or not. Where there is the establishment of such fact, director is bound to pay the acquired profit or gain to the company.

It must be noted that amount of profit is a personal remedy that and not of proprietorial or any sole proprietorship HK nature. For example, company cannot be made entitled to acquire the property of the accuser or the director who breached his or her fiduciary duty merely on the basis that the subjected person has acquired this sole proprietorship HK asset or fund by misappropriating the company’s assets or funds. For such cases, claims of company for the equitable account are justified. But, where there is the mere establishment of the fact that director acquired specific property by misappropriating company’s funds or assets then for such case constructive trust duty can be imposed on the accuser and relevant legal proceedings could be initiated. Evidence reported in Bhullar’s case, points towards the fact that directors acquired specific land through misappropriation of funds and thus on the imposition of constructive trust duty, court ordered directors to transfer acquired land to the company. For the situation where evidence affirms of any bribery, then similar duty can be imposed on the accuser to obtain the amount paid in terms of bribe and be credited to the company.

It depends on solely on the circumstances before the court to determine breach of duty. For instance, possibility exists that court may validate directors act of misappropriating the company’s profits or assets to obtain personal profits or assets for the fiduciary duties, director is giving to the company as his or her time, skills and diligence to the company. But this allowance is subjected to extremely exceptional and unusual circumstances because possibility exists that this may prone to the abuse of fiduciary duties on the parts of the director for the situation of conflicting interest or any violation of fiduciary duties.

For the situation where director sell property to the company and such contract was affirmed by the company and neither was cancelled by the company then the privilege of company to obtain remedy of “Account of profit” will be lost as the company itself endorsed the contract and hasn’t invalidated it. Such claim of the company can only be entertained if director acquired that particular asset during the time he or she was in fiduciary duties owed to the company. Situation can be made quite clear by referring to the legal proceedings of Man Leun Corp, here directors of the company were involved in the selling of raw material to the company and were held liable to be accounted for “Account of Profits” to the company, despite of the fact that they shared sentiments of establishing their own company to supply goods to the company however decision was in compliance with the light of general principle which validates company’s claims to “Account of Profit” if director acquired any asset or any saleable item during their fiduciary terms with the company.

Issue of Equitable Compensation

Possibility exists where it is not possible to recover misappropriated assets or any other gain from the director, which he or she has acquired by breach of his or her fiduciary duty. For such situation, court can order director to compensate company with the monetary equivalence of the loss company incurred by the improper acts of the director, enough to held company back in the position, where it could have been if misappropriation of its assets or funds could not have been done.

Apart from monetary company, equitable compensation can be applied to the accuser for any loss that company suffered from mal-practice of director. For example, company had to purchase a property which was much higher than what the market price of that specific property was. So, for such cases apart from recovering the extra payment company paid, from the director, equitable compensation may also be sought from the director to pay company the stamp duty or any Hong Kong company setup cost it had to go through for such a higher priced property.

It must be noted that equitable compensation can only be bestowed for the cases where there is sufficient evidence of breach of fiduciary duties, and those who would not have been occurred but by a breach of duty.

Remedy for the breach of duty of care by the director(s)

As the Section 465 entails the duty of care but remedy for the breach of duty of care can be sought through the remedies as per the general law.

Compensation for the incurred losses

Where there is the evidence of director’s negligence, company can seek for the compensation against its incurred loss from the director. Where there is a breach of equitable duty, compensation can be seek in the form of equitable compensation from the court and where there is the evidence of the tort compensation in the form of damages can be sought from the court through common law.

General view considers both modes of compensation no different from each other. However, English Court of Appeal conceived that although compensation parameters are somehow same in both but still there is the slight difference in both as per which compensation awarded for the equitable compensation is either of restitutionary or restorative nature while for the loss it is of compensatory nature.

Compensation through “Causation”

As per this perspective, company can only seek for the compensation if it is the established fact that the loss company incurred, was solely due to the director’s breach of his or her fiduciary duty. Principle of Negligence in Common Law demands the examination of the circumstances that were the breach of duty, director is accused of, was so causal and harmful that plaintiff incurred loss solely because of such improper and offensive act of director. To ascertain the certainty of causality of director’s breach, there is the test known as “But-For” test.

Case of Gold Ribbon Pty Ltd reports of the circumstances where company was a moneylending company and went into liquidation because of non-compliance of borrowers with their loan agreements and thus defaulted with Hong Kong company setup cost in vain. It was noted that many of directors were found to be involved in the fraudulent activities and obtained loans from the company and the appellant was itself a non-executive director and along with other directors of the company they did not complied with the lending practice and it was thought that this non-compliance is the main reason of company’s liquidation. Queensland court of appeal held that:

The company’s loss is not solely due to the negligence and tort of directors but non-compliance with rules and regulations contributed to such an excessive loss for the company in the form of liquidation. Court then applied “But-for” test for this particular situation and found that: if evidence of compliance with the rules and regulations and so adoption of proper lending procedure could have been made, then there can be the question of appellant’s breach of duty but as per the reported circumstances where proper lending procedures were not exercised, so there is not enough evidences to hold appellant for the breach of duty.