New Hong Kong Companies Ordinance: Directors' duty of care, skill and diligence

01 Nov 2013 | Newsletter/briefing

WHEN IN FORCE: 3 March 2014

COMPANIES AFFECTED: All Hong Kong incorporated companies

NEW PROVISIONS: Part 10 of new CO: ss465-466, s473


SUMMARY OF CHANGES

  • at present, the general common law and fiduciary duties of directors are based on case law. When determining whether a breach has occurred, the terms of a company’s memorandum (if applicable) and articles of association and of any service contract with the relevant director will be relevant. Standards of behaviour as set out in the Listing Rules will also be relevant for breach by a director of a listed company. The Hong Kong Companies Registry’s Guide on Directors’ Duties gives an overview of these common law and fiduciary duties
  • the new CO codifies the directors’ duty of care, skill and diligence in the performance of their functions and the exercise of their powers. The other common law and fiduciary duties remain uncodified
  • the new codified duty of care, skill and diligence has an objective test and a subjective test
  • the objective test for the standard required of a director is "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". This objective test provides a minimum standard of care and cannot be adjusted down to accommodate someone who is incapable of attaining the basic standard
  • the subjective test provides for the standard expected of a director to be adjusted upwards. Where a director is appointed due to some special knowledge, skill or experience, then a higher standard of care will be placed on him compared to those without such knowledge, skill or experience
  • the provisions regarding a director’s duty of care, skill and diligence under the new CO extend to shadow directors
  • the consequences of breaches of the statutory duty of care, skill and diligence have not been codified, so the common law rules and the equitable principles in respect of breaches of the duty will continue to be relevant
  • some contraventions of these provisions may be capable of ratification by way of shareholders’ resolution (by disinterested shareholders or with the unanimous consent of all shareholders)
  • the fiduciary duties of directors remain in case law and are not codified under the new CO. Directors’ fiduciary duties include:
    • acting in good faith in the interests of the company
    • exercising powers for their proper purpose
    • avoiding conflicts of duty and interest

IMPLICATIONS FOR PRACTICE

  • while the new CO codifies the duty of care, skill and diligence for directors, the principles remain similar to the current position (although the existence of an objective standard has been clarified)
  • a director should continue to carry out his duties to the company in compliance with:
    • the new codified duty of care, skill and diligence
    • the uncodified fiduciary duties owed to the company
    • the obligations and parameters set out in the company’s articles of association and the director’s service contract
    • (for listed companies) the standards of behaviour set out in the Listing Rules


For related publications, see also: New Hong Kong Companies Ordinance Tool Kit.

Contacts

Lisa Chung (partner)


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