As part of the moves to implement the revamped company law in Hong Kong, the new Companies Ordinance (Cap.622) (“CO”) came into effect in March 2014.
Although there is case law and the Guidelines on Directors Duties issued by the Hong Kong Companies Registry, there has long been an absence of statutory description of directors’ duties in Hong Kong. However, with the enactment of the new CO, the statutory requirements of directors’ duties are now partly codified to enhance the clarity of regulation in Hong Kong.
We focus the spotlight on the important changes in relation to directors’ duties under the new legal framework.
1) Abolition of disclosure of directors’ identification numbers and residential addresses
Under the old CO, directors were required to make disclosure of their residential address and identification number in documents filed with the Companies Registry for public inspection.
The new CO requires directors to provide a correspondence address in addition to their residential address. While the correspondence address will be available to the general public, section 49 of the new CO now allows the withholding from public inspection of the residential address and passport or Hong Kong identity card number of company directors. Access to directors’ residential address will be limited to certain specified persons only, such as public bodies and public officers.
Section 54 of the new CO also provides that the above personal data of directors contained in documents delivered to the Companies Registry after the commencement of the new CO will be kept confidential and will not generally be made available for public inspection.
2) Directors’ duty of care, skill and diligence
Section 465 of the new CO now statutorily requires a director to exercise reasonable care, skill and diligence which would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience which would be reasonably expected of any director (i.e. the objective test); and
- the general knowledge, skill and experience that the particular director has (i.e. the subjective test)
The court will apply these two tests in determining whether a director has discharged his duty of care, skill and diligence. By virtue of section 465 of the new CO, directors will be subject to a higher standard of care under the subjective test if they possess special knowledge, skill and experience. It should be noted that the above statutory standard will also apply to a shadow director of a company.
However, it should be kept in mind that companies are now prohibited from indemnifying directors for their breach of duty of care, skill and diligence owing to the company under section 468(3) of the new CO.
The new CO does not follow the U.K. position in addressing directors’ fiduciary duties in their work, which will remain largely governed by case law. Such fiduciary duties include directors’ duty to act in good faith and in the best interests of the company at all times, avoiding conflicting interests and exercising his/her power for proper purpose.
3) Disclosure of directors’ interests
Under the old regime, directors must disclose the nature of their interests in “contracts or proposed contracts” with the company which is of significance to the company’s business.
Section 536 of the new CO now extends the ambit of disclosure to cover any “contracts”, “transactions” and “arrangements” of the company in which the director has material interests. In addition, directors of public companies (including listed companies on the Hong Kong Stock Exchange) must also disclose any material interests of their connected entities.
The statutory requirement under section 536 is that disclosure of both the nature and extent of a director’s interest must be made to the company if the director ought reasonably to be aware of their interest. Again, section 540 of the new CO provides that such disclosure requirements will be applied to shadow directors.
4) Director’s liabilities as a “responsible person”
The old CO provides that any officers (including directors) of the company who are in default can be liable. However, a director is only held accountable if he/she “knowingly and willfully authorises or permits the default”.
One of the major changes under the new CO is that section 3 introduces the notion of “responsible person”. This means, any director or officer of the company who “authorises or permits, participates in, or fails to take all reasonable steps to prevent” a contravention of the new CO will be made liable. In practical terms, this means a director may now become liable even if he/she has no knowledge or willful contravening conduct but is reckless as to the default of the new CO.
In effect, the threshold for establishing various possible offences against directors is lowered under the new regime. Directors should be aware of the increase of their exposure to potential liability with the new formulation of “responsible person” arising out of the new CO. Directors are, therefore, advised to revise their Directors’ and Officers’ Insurance (D&O Insurance) so that its coverage will extend to any contravention of the new CO.