Directors and officers

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

In Hong Kong, there are currently no ‘wrongful trading’ or ‘insolvent trading’ provisions (similar to those in England or Australia) that would allow the liquidators to bring an action against directors for trading after a time when they knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation. At present, Hong Kong law provides only for fraudulent trading, (ie, carrying on the business of a company with intent to defraud its creditors).

At the time of writing, the Companies (Corporate Rescue) Bill, which the government plans to present to the Legislative Council in 2021, will include an ‘insolvent trading’ provision that allows the court to declare (on application of a liquidator) a director responsible for insolvent trading and liable to make a contribution to the insolvent company’s assets.

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

The company’s officers and directors will not generally be personally liable for obligations of their corporations unless they have entered into personal guarantees of those obligations. However, the company’s officers can be held to be personally liable to contribute to the assets of the company for any one of the following reasons:

  • misfeasance or breach of any fiduciary or other duty (section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O); or
  • fraudulent trading: section 275 of the C(WUMP)O, which provides that where it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare (on application of a liquidator or any creditor or contributory of the company) that any persons who were knowingly parties to the carrying on of business in that manner are personally responsible. This section is not limited to directors and officers but applies to anyone who has been involved in carrying on the business of the company in a fraudulent manner. It is necessary to prove actual dishonesty.


Also, where a winding up is commenced on, or within one year after, the date on which payment out of capital was made in respect of the redemption or buy-back of any of its own shares, the directors who signed the solvency statement in relation to the payment out of capital could be jointly and severally liable with the past shareholders to contribute to the assets of the company (section 170A of the C(WUMP)O).

The remedies against some of the above claims that may be brought against the directors are designed to be compensatory for the liabilities incurred by the company.

The company’s officers can also be criminally liable under sections 271 to 277 of the C(WUMP)O for fraud, misconduct, falsification of the company’s books, material omissions from statements and false representations. They are also liable to disqualification from being a director of any company for up to 15 years under Part IVA of the C(WUMP)O.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

There are no specific defences set out in either section 275 (fraudulent trading) or section 276 (misfeasance or breach of fiduciary duties). Directors typically seek to establish that the elements of the relevant claim are not made out.

The Companies (Corporate Rescue) Bill provides several statutory defences to liability for insolvent trading. These defences may be available where the director had taken all reasonable steps to prevent the company from incurring the debt, or where, when the debt was incurred, the director believed in good faith that the debt was incurred for the purpose of retaining the company to a state of solvency, or that the debt was incurred for the benefit of the company and that the company was likely to return to a state of solvency.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

The directors of a company owe a duty to act in the best interests of the creditors (as opposed to those of the shareholders) of the company in the ‘twilight period’ (ie, when a company is insolvent or on the brink of insolvency (see the English case of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, cited with approval in Re Peregrine Investments Holdings Ltd [1998] HKCFI 644)).

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

The directors’ powers in relation to the company cease on the appointment of the liquidator in a members’ voluntary liquidation (MVL) or creditors’ voluntary liquidation (CVL), except where their continuance is sanctioned:

  • in the case of an MVL, by the company in general meeting or the liquidator (section 235 of the C(WUMP)O); or
  • in the case of a CVL, by the committee of inspection or the creditors (if there is no committee of inspection) (section 244 of the C(WUMP)O).