Business Associations

Directors
Eva Tam 2023
Directors
 ‘Manages the business and affairs of the company (Model Article 3(1))
 A director includes ‘any person occupying the position of director (by
whatever name called)’ (s2(1) CO)
 De jure director
 De facto director
 Shadow director (s2(1) CO)
 A person in accordance with whose directions or instructions the
directors, or a majority of the directors, of body corporate are
accustomed to act
 Exclusion – persons providing professional advice

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Types of Directors
by Functions
 Types of directors by functions (e.g. executive &
non-executive directors etc.)
 Executive director
 A director who carries out executive function in the
company and is usually a full-time employee of the
company
 Non-executive director
 A director who is not an employee of the company or
holder of an executive office
 Such a director would usually devote part of his time to
the affairs of the company as an independent
adviser/supervisor
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 Types of Directors by
Functions (2)
 Alternate director (Model Articles 28 & 30)
 A person appointed by a director to act in his place if
the latter is unable to attend meetings or otherwise
function as a director
 Can only be appointed if such power is provided for in
the articles
 Generally another director or a person approved by the
Board
 Regarded as directors in law
 Reserve director (s2(1) CO)
 Sole member/director private company
 To act on sole director’s death
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Requirements & Qualifications for
Directors – Private Company
 At least one director and at least one director who is a
natural person (ss454(1) & 457 CO) (note the difference for
company limited by guarantee s453 CO)
 No corporate director allowed if private company is a
member of a listed group (s456 CO)
 Qualifications required of directors (ss459 & 480 CO)
 minimum 18 years of age
 not an undischarged bankrupt

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Appointment of Directors
 First directors named in incorporation form are
automatically appointed as directors from date of
incorporation (s454(2) CO)
 Subsequent appointment of directors
 by member’s ordinary resolution (Model Article 22(1)(a))
 by the Board (Model Article 22(1)(b))

 Register of directors

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Termination of Directorship
 Retirement:
 Unlimited period when appointed by members (Model Article
22(2))
 Until next annual general meeting when appointed by
directors (Model Article 22(4))
 Removal (s462(1) & (2) CO)
 By members’ ordinary resolution “despite anything in its
articles or in any agreement between it and the director”

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Termination of Directorship (2)

 Under Model Article 25, a director vacates office if he:

 ceases to be a director under CO or CWUMPO or prohibited from being
a director by law (e.g. disqualification order)
 becomes bankrupt or makes any arrangement/composition with his
creditors’ generally
 becomes a mentally incapacitated person
 resigns from office of director
 has been absent from directors’ meetings without permission for more
than 6 months
 Validity of acts of director (s461 CO)
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Division of Powers –
Power of Directors
 Subject to specific provisions in CO (e.g.
allotment of shares), to be determined
by the Articles
 Model Article 3
“the business and affairs of the company are
managed by the directors…”
 Model Article 5
“the directors may, if they think fit, delegate
any of the powers that are conferred on them
under these articles … to any person or
committee”
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Board of Directors – Decision-making

 Directors to act collectively as a Board via a majority vote

at a directors’ meetings or unanimous decisions of the
directors (Model Articles 7(1) & 8) (see below)
 Reference to ‘directors’ generally refer to directors acting
collectively as a Board
 Individual directors act by or under the authority of the
Board (Model Article 5)

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Meetings of Board of
Directors
 Check Articles for board proceedings

 Notice
 Length of notice required
 If silent, must be ‘reasonable’:
Toogenburger [2007] HKEC 171

 Quorum
 Two directors (Model Article 11(2))

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Meetings of Board of
Directors (2)
 Voting
 By majority of votes of directors at
meeting (Model Article 7(1))
 Unanimous decisions (Model Article 8):
 all the eligible directors
 written resolutions
 Flexibility of mode of participation in
directors’ meetings (Model Article 10)

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Directors’ Duties
 Fiduciary duties – common law
 Note: Different in UK - statutory codification in the UK Companies Act 2006
 Duty to act with reasonable care, skill and diligence (s465 CO) –
statutory codification of common law duty
 Other statutory duties and duties specified in directors’ service
contracts
 To whom the duties are owed
 The company
 Individual shareholder(s)?
 Creditors?

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Fiduciary Duties
 Duty to act in good faith & in the interests of the company
 Duty to act for proper purpose
 Duty to avoid conflicts of interest
 Duty not to make secret profits
 Duty not to misuse or misappropriate company’s assets
 Duty of confidence

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Duty to Act in Good Faith and in the
Interests of Company
 Primarily subjective test: Hutton v West Cork Railway Co (1883) 23 Ch D
654
 Where directors have put their minds to the matter
 Directors must exercise their discretion bona fide in what they consider (not
what a court may consider) is in the interests of the company – “business
judgment” rule
 ‘Interests’ generally means the interests of the company as a commercial
entity, and by reference to the interests of its shareholders (present &
future) as a whole
 All classes of shareholders to be treated fairly
 Corporate benefit
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Duty to Act in Good Faith and in the
Interests of Company (2)
Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62
 Castleford, a company within a corporate group, gave a guarantee to
the lending bank. The directors in deciding to give the corporate
guarantee only considered it in the interests of the corporate group as a
whole. They did not give separate consideration to the interests of
Castleford
 Objective standard when no evidence that the Board has considered the
interests of the company
“an intelligent and honest man in the position of a director.. could
have reasonably believed that the transactions were for the benefit of
the company”
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Duty to Act in Good Faith and in the
Interests of Company (3)

 Duty to consider relevant factors and exclude from proper

consideration irrelevant factors

 Duty to exercise independent judgment: Law Wai Duen v

Boldwin Construction Co Ltd [2001] 3 HKLRD 430
 directors’ access to company books
 a director cannot absolve himself entirely from responsibility
in relation to the company’s financial matters or management
of the company and defer to the other directors
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Duty to Act for Proper Purpose
 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

BULKSHIPS AMPOL
HOWARD
SMITH

55%
- Ampol made a
takeover offer
RW MILLER Proposed allotment of 4.5 mil
- Howard Smith
(HOLDINGS) LTD shares
made a competing
takeover offer

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Duty to Act for Proper Purpose (2)

 Caselaw develops a four-stage test:

[Link] the power whose exercise is in question
[Link] the proper purpose for which the power was granted to the
directors
[Link] the ‘primary’ or ‘substantial’ purpose for which the power
is exercised – question of fact
[Link] whether that purpose is proper or improper
 The test is an objective one - could be breached even if
directors acted in good faith or genuinely believed acting for the
benefit of the company
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Duty to Act for Proper Purpose (3)

 More examples:

 Allotting shares for the purposes of replacing existing majority

with a new majority: Wong Kam San v Yeung Wing Keung
[2007] 2 HKLRD 267

 Appointing new directors to entrench management control and

prevent a hostile takeover: Tsang Wai Lun Wayland v Chu King
Fai [2009] 5 HKLRD 105

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Duty to Avoid Conflicts of Interest
(‘No Conflict Rule’)
 Directors not to place themselves in a position where their interest and
their duty to the company may conflict
 Potential transactions involving conflicts (not exhaustive):
 Transactions between the company and its director
 Transactions between the company and a partnership of which the director
is a partner
 Transactions between the company and another company in which the
director is a shareholder/director
 Objective test - ‘Real sensible possibility of conflict’: Poon Ka Man Jason
v Cheng Wai Tao (2016) 19 HKCFAR 144
 Could be breached even if transaction fair to the company
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Duty Not to Make Secret Profits
(‘No Profit Rule’)

 A director must not, without the company’s approval,

obtain any benefit or gain by reason of or through their
position, e.g. secret commissions and bribes
 ‘No profit rule’ independent of the ‘no conflict rule’?
 No profit rule is focused on misuse of director’s position for
personal gain which can be in a situation where there is no
conflict of interest
 Separate and independent duties

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Duty Not to Make Secret Profits
(‘No Profit Rule’) (2)
 An inflexible rule, not a
defence that:
 the director acted in good
faith and in the interests of
the company; or
 company could not have
obtained the profit; or
 company has not suffered
any loss

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Diversion of Corporate Opportunities

 A form of misappropriation of corporate assets (where

directors apply company’s assets, including information, for
their own benefit or for the benefit of third parties)

 There may be overlap between the ‘no-conflict rule’ and

the ‘no-profit rule’ but they remain separate and
independent - Kao Lee & Yip v Koo Hoi Yan & Others [2003]
3 HKLRD 296

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Diversion of Corporate Opportunities (2)

Regal (Hastings) Ltd v Gulliver & Others [1967] 2 AC 134

DIRECTORS
OF REGAL
REGAL
LANDLORD Acquired
(HASTINGS) LTD
Leases of shares in
cinemas the
subsidiary

AMALGAMATED

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Diversion of Corporate Opportunities (3)

 A diversion of corporate/business opportunity – directors took

away opportunity for Regal to take up shares in Amalgamated

 Directors must account for the profits they made from the sale
of their shares in Amalgamated even though
 Regal was not able to take advantage of the opportunity
 Regal did not suffer any loss
 No evidence that the directors acted in bad faith

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Diversion of Corporate Opportunities (4)

 Still ‘business opportunity’ -

 whether the company was able to take up the opportunity
- Regal (Hastings) Ltd v Gulliver & Others [1967] 2 AC 134
 the business opportunity came to the director in his personal capacity; engagements
where the director has or may have a personal interest in conflict with the company
- Chinese United Establishments Ltd v Cheung Siu Ki [1997] 2 HKC 212 –
opportunity arose before formation of company
 ‘Scope of business’ test - Directors can take corporate opportunity which is
clearly outside of company’s scope of business operations but opportunity needs
not be identical to company’s endeavours, only needs to be “sufficiently in the
same ballpark”
- Poon Ka Man Jason v Cheng Wai Tao & Others (2016) 19 HKCFAR 144

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Diversion of Corporate Opportunities (5)

 Former directors - depends on whether opportunities have arisen at the time

of resignation
 ‘Maturing business opportunities’
 director took business opportunity after resignation was not liable as
business opportunity merely speculative and has not matured
- Kishimoto Sangyo Co Ltd v Aiko Oba [1996] HKLR 196
 whether a business opportunity has matured or not is a question of degree
(factors include prolonged fresh initiative of fiduciary after resignation;
stage of discussion of business opportunity; timing; reason for resignation
etc.)
- Kao Lee & Yip v Koo Hoi Yan & Others [2003] 3 HKLRD 296

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Diversion of Corporate Opportunities (6)

 To be absolved from liability, should have obtained

Company’s authorisation
 in advance
 must be informed consent with disclosure of material facts
and approval by company’s ordinary resolution

 Board’s decision not to take corporate opportunities is not

sufficient

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Disclosure of Interest

 Common law requires a director to disclose interest to

shareholders, otherwise:
 contract voidable by company against a party who has notice of
director’s breach of duty
 secret profits (if any) to be accounted for by directors

 Disclosure required even when interest is small if there is a

significant or substantial possibility of the director being swayed
by the interest

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Disclosure of Interest (2)

 Disclosure of material interests to the board (s536 CO). Duty arises when:
 director’s interest is material
 contract of significance to the company’s business
 Disclosure of the nature and extent of personal interest to the other
directors
 Criminal offence for non-compliance (s542 CO)
 Does not affect common law rules (s536(6) CO)
 Statutory duty of disclosure to board is in addition/supplemental to the
common law duty to disclose to members: Man Luen Corp v Sun King
Electronic Printed Circuit Board Factory Ltd [1981] HKC 407

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Director’s Duty of Care

 Traditional view
Re City Equitable Fire Insurance Co [1925] Ch 407, Romer J’s
formulation of a subjective standard
 Modern view
Dorchester Finance Co v Stebbing [1989] BCLC 498 – signing
of blank cheques by 2 directors
 s465 CO

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Statutory Duty of Reasonable Care, Skill
& Diligence
 S465 CO
 Statutory codification = in place of common law rules and equitable
principles
 Applies to shadow directors (s465(5) CO)

 Standard of care
 Objective standard – “the general knowledge, skill and experience that
may reasonably be expected of a person carrying out the functions carried
out by the director”
 Subjective standard – “the general knowledge, skill and experience that
the director has” – only applies if increases the standard of care
 Implications (Gower’s, paras. 16-15 to 16-20)
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Breach of Duty of
Care – Examples (1)
 Basic contents of the duty:
 Take due care and exercise independent
judgment on behalf of the company
 Oversee and monitor the company’s affairs, and
avoid any possible negligent omissions
 Examples:
 Inadequate risk management: Chintung Futures
Ltd (in liq) v Arthur Lai Cheuk Kwan [1994] 1
HKLR 95
 Failure to carry out due diligence: Re Rontex
Intl Holdings Ltd [2010] HKEC 413
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Breach of Duty of
Care – Examples (2)
 More examples:

 Signing inaccurate documents: Re D’Jan of London

Ltd, Copp v D’Jan [1994] 1 BCLC 561

 Approving inaccurate financial statements: ASIC v

Healey (2011) 83 ACSR 484

 Lack of supervision: Dorchester Finance Co Ltd v

Strebbing

 Not exercising independent judgment: Law Wai Duen

v Boldwin Construction Co Ltd
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 Remedies for
Breach of Duty
 Injunction
 Setting aside of transactions
 Restitution
 Account of profits
 Damages
 Civil consequences/remedies for
breach of duty of care (s466 CO)

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Relief from Liability

 Ratification by shareholders (s473 CO)

 ratification for negligence, default, breach of duty or breach
of trust BUT not fraud
 ordinary resolution with interested votes being disregarded
 Indemnity provision (ss468(3) & 469 CO)
 provision for a company to indemnify its directors for
negligence, default or breach of duty or breach of trust is
void, except for specified indemnity in s469

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Relief from Liability (2)

 Insurance (s468(4) CO) permitted for

 liabilities of director for negligence, default or breach of duty or breach
of trust (except for fraud)
 liabilities incurred by director in defending any proceedings taken against
him for negligence, default or breach of duty or breach of trust
(including fraud)
 By court order (ss902 & 903 CO)
 is or may be liable for misconduct
 acted honestly and reasonably
 ought fairly to be excused in view of all circumstances
 in line with ‘business judgment’ rule
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