In Grand Field Group Holdings Ltd v Chu King Fai and others HCA771/2009, a statutory derivative claim was commenced by a shareholder of the Plaintiff company in its name against eight former directors for breaches of fiduciary duties, under section 168BC of the Companies Ordinance (Cap. 32).

The basis of the Plaintiff’s claim was that the Defendants caused a subsidiary of the Plaintiff to be set up and registered in Shenzhen and then caused HK$50 million to be transferred to it, which was used by the first and second Defendants to provide rolling facilities to companies related to or controlled by them. It was also alleged that the first Defendant had sought improperly to influence other directors of the company, through bribes, to vote at board meetings in ways favourable to him and his family.  On an analysis of the facts and oral evidence in the case, the Court rejected all of the Plaintiff’s claims.

In relation to the bribery claim, the Court had regard to the legal principles set out in Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 and Mohammad Jafara-Fini v Skillglass Ltd & Ors [2007] EWCA Civ 261 and held that, when determining a claim of bribery, the burden is on the Plaintiff to prove the allegations of corruption and where the allegations are very serious, very cogent evidence is required. It was held that the Plaintiff failed to discharge this burden as the evidence was essentially hearsay and therefore little, if any, weight could be attached to it.

In respect of the other complaints of breach of fiduciary duties, the Court cited Extrasure Travel Insurances Ltd & Anor v Scattergood and Anor [2003] 1 BCLC 598 as authority for the principle that a director owes a fiduciary duty to the company to exercise his powers (i) in what he honestly believes to be the company’s best interests, and (ii) for the proper purposes for which those powers have been conferred on him. The Court clarified that mere incompetence is not sufficient to establish a breach of fiduciary duty, but it could give rise to a claim for breach of the tortious or contractual duty of care. The Judge further explained that “[f]iduciary duties are concerned with concepts of honesty and loyalty, not with competence.  Accordingly, a director is not in breach of his fiduciary duty if he honestly, but unreasonably and mistakenly, believes he is pursuing the company’s best interests.” In Extrasure, it was also established that in a claim that a director did not exercise his powers for the proper purpose, it is unnecessary for the Plaintiff to prove that the director was dishonest, or that he knew he was pursuing a collateral purpose.  Instead, the Court must apply an objective, four stage test:

  1. identify the power whose exercise is in question;
  2. identify the proper purpose for which that power was delegated to the directors;
  3. identify the special purpose for which the power was in fact exercised; and
  4. decide whether that purpose was proper.

Counsel for the parties were in dispute as to whether, in order to establish a breach of fiduciary duty against a director, a Plaintiff must prove both (i) that the director did not honestly believe what he was doing was in the company’s best interests and (ii) that the powers conferred upon him have been exercised for an improper purpose, or whether it is enough to prove just one of these. The Judge held that establishing either of these two limbs would be sufficient to establish liability on the part of a director, while incompetence alone would not be sufficient to establish a breach of fiduciary duty.

Take-away points

This judgment provides useful guidance on the elements that are required to establish liability for breach of a director’s fiduciary duty. The key points to take away are:

  1. Proof either that the director did not honestly believe what he was doing was in the company’s best interests or that the powers conferred upon him have been exercised for an improper purpose will be sufficient to establish liability for breach of fiduciary duty;
  2. A director will not be liable if he honestly believes he was pursing the company’s best interests, regardless of whether that belief appears to be unreasonable or mistaken;
  3. Incompetence is not enough to breach a fiduciary duty, though it might be sufficient to demonstrate breach of the contractual or common law duty of care owed by a director to the company.