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LW5962 LAW RELATING TO BUSINESS &

COMPANIES

SEMINAR 6: DIRECTOR AND DIRECTOR’S

DUTIES (I)
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Directors
• Function of the board
• Model Article (Public Co) s2, (Private Co) s3
“Subject to the Ordinance and these articles, the
business and affairs of the company are managed by
the directors, who may exercise all the powers of the
company.”
• Requirement for directors:
• Public companies: minimum of 2 (s 453).
• Private companies: minimum of 1 (s 454-455).
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Appointment
• MA (public) s23, (private) s22
23. Appointment and retirement of directors
(1) A person who is willing to act as a director, and is permitted
by law to do so, may be appointed to be a director—
(a) by ordinary resolution; or
(b) by a decision of the directors.
(2) A director appointed under paragraph (1)(a) is subject to
article 24.
(3) An appointment under paragraph (1)(b) may only be made
to—
(a) fill a casual vacancy; or
(b) appoint a director as an addition to the existing directors
if the total number of directors does not exceed the number
fixed in accordance with these articles.
(4) A director appointed under paragraph (1)(b) must retire
from office at the next annual general meeting
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Appointment
• Notification to registrar: s 67-70.
• Registrar's index of directors: s 647.
• Company's register of directors: s 641-647.
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Qualifications
• Age: at least 18 (s 459)
• Body corporate: s456-458
• s 456
(1) This section applies to—
(a) a public company;
(b) a private company that is a member of a group of companies
of which a listed company is a member; and
(c) a company limited by guarantee.
(2) A body corporate must not be appointed a director of the
company.
(3) An appointment made in contravention of subsection (2) is void.
• s457
(1) This section applies to a private company other than a private
company that is a member of a group of companies of which a listed
company is a member.
(2) The company must have at least one director who is a natural
person.
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Qualifications
• Undischarged bankrupt: s 480
• Disqualification orders: Part IVA of Cap 32
• Conviction of certain indictable offences (s168 E)
• Certain breaches of Cap 32 or Cap 622 (s168F)
• Fraudulent trading or other fraud in winding-up (s168G
and 168L)
• Conduct of directors rendering them unfit to manage
companies (s168H and 168J)
• Other grounds specified in the Articles of
Association or individual contracts
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Vacation of Office
Model Article (private) art. 25, (pubilc) art. 27.
27. Termination of director’s appointment
A person ceases to be a director if the person—
(a) ceases to be a director under the Ordinance or the Companies
(Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) or is
prohibited from being a director by law;
(b) becomes bankrupt or makes any arrangement or composition
with the person’s creditors generally;
(c) becomes a mentally incapacitated person;
(d) resigns the office of director by notice in writing of the resignation
in accordance with section 464(5) of the Ordinance;
(e) for more than 6 months has been absent without the directors’
permission from directors’ meetings held during that period; or
(f) is removed from the office of director by an ordinary resolution of
the company.
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Who is a director?
• Definition s2: director (董事) includes any person
occupying the position of director (by whatever
name called)
• Appointed directors (de jure directors)
• De facto directors: Corporate Affairs Commission v
Drysdale (1978) 141 CLR 236
• Drysdale was appointed a director to fill a casual vacancy.
His appointment was not considered at the next general
meeting. According to the articles, he is no longer a
director. However, he continue to participate in the
management as if he is a director. The court held that,
despite the defect of his appointment, he is deemed to be
a director.
• De facto director is covered by s2 of the definition of
directors. A de facto director is one who carries out the
function of a director, but has not, for some reason, been
validly appointed.
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Who is a director?
• Shadow director (幕後董事) s2
“shadow director ….in relation to a body corporate,
means 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”
• Reserve directors: s 455.
(1) If a private company has only one member and that
member is the sole director of the company, the company
may by a resolution passed at a general meeting,……,
nominate a person (other than a body corporate) ……. as
a reserve director of the company to act in the place of
the sole director in the event of the sole director’s death.
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Types of directors
• Executive director
• Executive directors are full-time employees
• Non-Executive director (NED)
• NED are part-time, outside or independent director. They
serve as a check on the executive directors’ control of
company management. For listed companies, at least 1/3
of the board should be NEDs.
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Powers of Directors: How Does the Board Act

• Directors can only exercise their powers

collectively by passing resolutions at properly
convened meeting of the Board
• Quorum: MA (public) s9, (private) s11
• Written resolution: MA (public) s 17-19, (private) s8(2)
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Powers of Directors: How Does the Board Act

• No power to act individually but articles usually
enable delegation to committees or managing
director.
MA s34. Powers of managing directors
(1) The directors may entrust to and confer on a managing
director any of the powers exercisable by them on
terms and conditions and with restrictions they think fit, either
collaterally with or to the exclusion of their own powers.
(2) The directors may from time to time revoke, withdraw, alter or
vary all or any of those powers.
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DIRECTOR’S DUTIES
- DUTY OF CARE
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Directors' duties: scenario

• X Ltd is a financial investment co. Its executive officers
are highly paid. But the company has been incurring
losses as a result of poor business and investment
decisions, combined with a general down-turn in the
market.
• The losses are hidden from the company accounts
though and the non-executive directors are therefore
not aware of the problems. Eventually the auditors
suspect corporate wrongdoing, and a liquidator is
appointed. The extent of the co losses are now
revealed.
• Who suffers?
 Shareholders, creditors, employees, clients.
 Should the executive directors be held responsible?
How about the non-executive directors?
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Directors' duties: policy issues

• Why might it be important to impose duties
on directors?
• Agency problem
• What might be a problem if the duties
imposed are too strict?
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Directors' duties
• Directors as fiduciaries: owe duties to
company.
• Fiduciary: A person undertaking to act for or in
the interests of another in the exercise of
powers or discretions which affects the interests
of the other person in a way where the latter
would be in a position of vulnerability vis-à-vis
the fiduciary.
• Fiduciary duties aim to ensure that the fiduciary
exercises his or her powers in the interests of
the person to whom the duties are owed.
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Directors' duties
• Duty of Care, Skill and Diligence
• Fiduciary Duties
• Act in good faith in the interests of the company
• Exercise powers for proper purposes
• Avoid conflicts of interest
• Not to make secret profits
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Duty of Care, skill and diligence

• Sources of duty:
• Originally arose in
• Equity: Equitable duty of care imposed on trustees
• Common law: Tort of negligence
• Contract: service contract between company and
directors
• Now a statutory duty under CO s 465.

• What is the standard of care….

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Historical approach to directors’ duty of care

Re City Equitable Fire Ins Co (1925) Ch 407
• Directors must exercise reasonable care that an
ordinary man would exercise on his own behalf .
• Director need not exhibit a greater degree of
skill than may be expected from a person of his
knowledge and experience. (subjective
standard)
• Director not bound to give continuous attention
to co
• For duties that can be left to another official, a
director is usually justified in trusting that official
to act honestly (unless something suspicious is
going on)
• Duties will depend on circumstances of
director's position and nature of company.
Historical approach to directors’ duty of care
Re City Equitable (1924)
(1) A director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected
from a person of his knowledge and experience. A director of
a life insurance company, for instance, does not guarantee
that he has the skill of an actuary or of a physician. In the
words of Lindley M.R.: "If directors act within their powers, if
they act with such care as is reasonably to be expected from
them, having regard to their knowledge and experience, and
if they act honestly for the benefit of the company they
represent, they discharge both their equitable as well as
their legal duty to the company": see Lagunas Nitrate Co. v.
Lagunas Syndicate. It is perhaps only another way of stating
the same proposition to say that directors are not liable for
mere errors of judgment.
(2) * * *
per Romer J. [1925] 1 Ch 407 at 428-429
Historical approach to directors’ duty of care
Re City Equitable (1924)
(1) * * *
(2) A director is not bound to give continuous attention to the
affairs of his company. His duties are of an intermittent
nature to be performed at periodical board meetings, and at
meetings of any committee of the board upon which he
happens to be placed. He is not, however, bound to attend
all such meetings, though he ought to attend whenever, in
the circumstances, he is reasonably able to do so.
(3) In respect of all duties that, having regard to the exigencies
of business, and the articles of association, may properly be
left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to
perform such duties honestly.
per Romer J. [1925] 1 Ch 407 at 428-429
Modern approach to directors’ duty of care
Re D’Jan of London Ltd (1994)
“In my view, the duty of care owed by a director at common
law is accurately stated in s 214(4) of the Insolvency Act
1986. It is the conduct of -
• 'a reasonably diligent person having both - (a) the
general knowledge, skill and experience that may
reasonably be expected of a person carrying out the
same functions as are carried out by that director in
relation to the company, and (b) the general knowledge,
skill and experience that that director has.”
• per Hoffman LJ at 563
Modern approach to directors’ duty of care
Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)
“The insolvent trading cases demonstrate that ignorance is
no longer necessarily a defence to proceedings brought
against a director. In some respects, at least, the director
must inform himself or herself about the affairs of the
company ….”
(per Clarke and Sheller JJA, at p 664)
Modern approach to directors’ duty of care
Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)
“…. a director, whatever his or her background, has a duty
greater than simply representing a particular field of
experience. That duty involves becoming familiar with the
business of the company and how it is run and ensuring
that the board has available means to audit the
management of the company so that it can satisfy itself that
the company is being properly run…”
(per Clarke and Sheller JJA, at p 666)
Modern approach to directors’ duty of care
Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)
“We are of opinion that a director owes to the company a
duty to take reasonable care in the performance of the
office. As the law of negligence has developed, no
satisfactory policy ground survives for excluding directors
from the general requirement that they exercise reasonable
care in the performance of their office.”
(per Clarke and Sheller JJA, at p 668)
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Hong Kong Case

Law Wai Duen v Boldwin [2002] 4 HKC 403
• Issue: rights of (non-executive) directors to inspect
company's accounts .
• CA: such rights necessary for directors to carry out their
duties .
• Executive directors and non-executive directors have the same
responsibility in law as to the management of the company’s
business .
• Including responsibilities with regard to the finances of the
company and as regards accounting to the shareholders for the
company's finances .
• Limits on ability of directors to divest responsibility through
delegation.
• The opinion on director’s duty is obiter dictum, not
ratio. Make reference to Re City Equitable, but at the
same time stated that the standard in Re City
Equitable is too low. Court’s position is unclear.
Duty of care placed on statutory footing (effective from March 2014)
CO s 465 Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care,

skill and diligence.
(2) Reasonable care, skill and diligence mean the care, skill
and diligence that would be exercised by a reasonably
diligent person with—
(a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the
functions carried out by the director in relation to the
company; and
(b) the general knowledge, skill and experience that the
director has.
***
Duty of care placed on statutory footing
CO s 465 Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care,

skill and diligence.
(2) Reasonable care, skill and diligence mean the care, skill
and diligence that would be exercised by a reasonably
diligent person with—
(a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the
functions carried out by the director in relation to the
company; and
(b) the general knowledge, skill and experience that the
director has.
***
Duty of care placed on statutory footing
CO s 465 Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care, skill and

diligence.
(2) Reasonable care, skill and diligence mean the care, skill and
diligence that would be exercised by a reasonably diligent person
with—
(a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the director in
relation to the company; and
(b) the general knowledge, skill and experience that the director has.
(3) The duty specified in subsection (1) is owed by a director of a
company to the company.
(4) The duty specified in subsection (1) has effect in place of the
common law rules and equitable principles as regards the duty to
exercise reasonable care, skill and diligence, owed by a director of a
company to the company.
***
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The relationship between the objective test and

the subjective test
• Beatson LJ pointed out in Brumder v Motornet
Service and Repairs Ltd [2013] 2 WLR 2783 (for the
purposes of section 174 (2) of Companies Act (UK)
2006) that:
“prima facie, the objective standard will apply.
However, the subject standard (provided in CA s
174(2)(b)) will displace the objective standard
(provided in CA s 174(2)(a)) “where the particular
director under consideration has greater knowledge,
skill and experience than may reasonably be
expected.”
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Summary
• Standard of care in HK:
• unclear in the past.
• Now follows CO s465 minimum objective standard.
• A higher standard might be imposed due to the special skills or
experience of the director
• All directors (including non-executive directors) are subject to
the same duties: Law Wai Duen; Dorchester Finance
• Duty of care requires monitoring co’s performance
• Must have rudimentary understanding of the business of the co.
• Must keep informed about the activities of the co. Must take
reasonable steps to make sure that reasonable safeguards are in
place. (risk management)
• Should maintain familiarity with the financial status of the co by a
regular review of financial statements.
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Ratification of the breach

• Ratification by the company (s473)
(1) This section applies to the ratification by a company of conduct by
a director involving negligence, default, breach of duty or breach of
trust in relation to the company.
(2) A decision of the company to ratify the conduct may only be made
by resolution of the members of the company.
(3) If such a resolution is proposed at a meeting, every vote in favour
of the resolution by a member who—
(a) is a director in respect of whose conduct the ratification is
sought;
(b) is an entity connected with that director; or
(c) holds any shares in the company in trust for that director or
entity,
is to be disregarded.
• Cannot ratify the breach if the co is insolvent: Chingtung
Futures Ltd (in liq) v Lai Cheuk Kwan Arthur [1992] 2 HKC 637