Directors’ Duties

Introduction

Acting as a director of a company allows an individual the opportunity to participate in the leadership and governance of the organisation. This position can be very rewarding as it enables the director to work with others to achieve the overall objectives of the company, which can be both personally and professionally fulfilling. However, it is essential to consider the potential risks and liabilities involved before committing to this role and to carefully assess whether it aligns with one’s personal and professional goals.

Directors’ Duties

Who does it entail?

In addition to de jure directors (officially appointed directors), shadow directors are also subject to director’s duties. Under the Companies Ordinance, shadow director is defined a person in accordance with whose directions or instructions (excluding advice given in a professional capacity) the directors, or a majority of the directors, of the body corporate are accustomed to act.

The Companies Ordinance (Cap. 622) does not make any distinction between executive director and non-executive director. However, case law both in Hong Kong and UK have suggested that the application of duties / steps that one would take may differ.

Responsibilities / liabilities of directors

The responsibilities and liabilities of directors derive from various sources, including statue law (including Companies Ordinance (Cap. 622); Securities and Futures Ordinance (Cap. 571); Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)); common law; the constitution of the company; certain applicable rules and regulations.

As set out in the Guide on Director’s Duties published by the Hong Kong Companies Registry in March 2014, the general principles of directors’ duties include:

Duty to act in good faith for the benefit of the company as a whole;
Duty to use powers for a proper purpose for the benefit of members as whole;
Duty not to delegate powers except with proper authorization and duty to exercise independent judgement;
Duty to exercise care, skill and diligence;
Duty to avoid conflicts between personal interests and interests of the company;
Duty not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law;
Duty not to gain advantage from use of position as a director;
Duty not to make unauthorized use of company’s property or information;
Duty not to accept personal benefit from third parties conferred because of position as a director;
Duty to observe the company’s constitution and resolutions; and
Duty to keep accounting records.

Directors may be subject to additional duties:

Trust – although directors are not technically acting as trustees, but when a director misappropriated or misapplied the assets of the company, s/he would be subject to personal liability for breach of fiduciary duty or breach of trust.
Personal liability – directors might be exposed to personal liability in the event that the company becomes insolvent.
Employee – in the event that the directors are also employees of the company, they may be subject to additional duties as employees of the company.

Who do they owe their duties to?

It is commonly misconceived that directors’ duties are owed only to the company itself. Directors also owe duties to past and present members of the company – whereby members are able to bring derivative action against directors for breach of duties. Furthermore, when a director assumed particular responsibility, such as to act on behalf of certain member of the company or represented certain information to a third party about the company, additional duties would be owed by the directors to such third party or member of the company, pursuant to which a third party or a member may bring an action, against the directors. Peskin and another v Anderson and others [2000] EWCA Civ 326; and Coleman v Myers [1977] 2 N.Z.L.R. 225.

In recent cases, in particular, BTI 2014 LLC v Sequana SA and others [2022] UKSC 25, English courts have held that directors would also owe a duty to consider creditor’s interests.

Do Directors’ duties finish upon end of their tenure?

Many directors consider that their duties would expire upon cessation of their tenure. However, it is not entirely correct. For instance, directors should avoid applying information obtained in relation to the company during his/her tenure for his personal gain.

Key takeaways

It is imperative for one to consider the risks involved before assuming any directorship; and to adopt proper procedures to minimise one’s legal risks and exposure. If you wish to find out more about this article or how we can help, please contact:

Alfred Leung, Partner(E: alfredleung@hkytl.com; T: 852 3468 7202)