Introduction
Apart from the changes in relation to fair dealing by directors under Part 11 of the new Companies Ordinance (“New CO”) as illustrated in our newsletter issued in December 2013, Part 10 of the New CO also concerns directors.   This issue highlights the key initiatives under Part 10 of the New CO in relation to directors.

Restriction on corporate directorship in private companies
Under the current Companies Ordinance (Cap. 32) (“CO”), all public companies and private companies within the same group of a listed company are prohibited from appointing a body corporate as their director. However, such restriction does not apply to other private companies.

Corporate directorship is attractive in that it facilitates incorporation and management of companies set up purely for asset holding purposes. However, it may not be conducive to good corporate governance as the delegate of a corporate director may change from time to time, which causes difficulty in ascertaining who was responsible for the conduct of the business of a company. Furthermore, as the delegate of a corporate director is not personally a director of the company, his duties are not owed to the company, it would be difficult to attach liability to him for acts or omissions prejudicial to the company.

The New CO strikes a balance between the need to enhance corporate governance and the legitimate need for flexibility by maintaining the restriction on corporate directorship in public companies, companies limited by guarantee and private companies within the same group of a listed company. The New CO introduces a new 1 natural person director requirement for other private companies. 

The New CO prescribes a 6-month grace period upon the commencement of the New CO for existing private companies to comply with the new requirement. Existing dormant companies need not comply with the new requirement until they cease to be dormant.

Codification of director’s duty of care, skill and diligence
Hong Kong currently adopts the subjective test in determining the standard of care, skill and diligence expected of directors; i.e. a director does not have to exhibit a greater degree of care and skill than might reasonably be expected from a person of his knowledge or experience. There has been a judicial trend towards the use of a “mixed objective/ subjective test” in determining the standard of care, skill and diligence and other common law jurisdictions have codified this duty.

The New CO has followed suit and has codified the duty of care, skill and diligence, adopting the “mixed objective/ subjective test”. A director must exercise care, skill and diligence, the standard of which would be measured by the care, skill and diligence which would be exercised by a reasonably diligent person with:

1.          the general knowledge, skill and experience that may reasonably be expected of a director (the objective test); and

2.          the general knowledge, skill and experience that that particular director has (the subjective test).

The objective test sets the minimum standard, which can be adjusted upwards to reflect any special skill, knowledge and experience possessed by a particular director but cannot be adjusted downwards to accommodate someone who is incapable of attaining the basic standard of what can reasonably be expected of the reasonably diligent person carrying out the same function.

Ratification of conduct of directors by disinterested shareholders’ approval
At present, ratification of acts or omissions of directors generally requires shareholders’ approval. There is no prohibition against interested shareholders from voting in favour of ratification of unauthorized conduct of directors appointed by them. The New CO improves the current law on ratification by incorporating an additional requirement of disinterested shareholders’ approval. A company which wishes to ratify the conduct of a director which amounts to negligence, default, breach of duty or breach of trust in relation to the company must obtain disinterested shareholders’ approval by resolution. The votes in favour of the resolution by the following persons would not be taken into account:-

1.          the director in question;
2.          any connected entity of that director; or
3.          any person holding shares of the company in trust for that director or that connected entity. 

The scope of “connected entity” has been widened under the New CO, for details, please refer to our newsletter issued in December 2013.

It should be noted that the disinterested shareholders’ approval requirement does not apply when every member votes in favour of the resolution.

Power of the Registrar to give directions relating to the directors’ appointment
The CO prescribes the minimum number of directors for private companies and public companies. In default, the company and every officer in default are liable to a fine. 

The minimum number of directors requirements are replicated in the New CO. The New CO empowers the Registrar of Companies (the “Registrar”) to give directions to a company requiring it to appoint director(s) in compliance with the relevant statutory requirements. Non-compliance with the Registrar’s direction is an offence and the company and every responsible person of the company will be liable to a fine of HK$100,000.

Rules on indemnification of directors against liabilities to third parties
The CO prohibits a company from providing exemption from, or indemnification against any liability of a director of the company owed to the company or a related company in respect of his negligence, default, breach of duty or breach of trust in relation to the company or a related company. A company is also permitted to indemnify, or purchase insurance for, any director against liability incurred in defending any successful proceedings.

Except for the above, there is no provision under the CO which provides for a director’s right to be indemnified against liabilities to third parties. The scope of such director’s right is not clear. The New CO extends the scope of prohibition against provision of exemption or indemnification under the CO to cover indemnities for a director of an associated company. “Associated company” in the New CO has the same meaning as “related company” in the CO, which means a subsidiary or holding company of the company, or a subsidiary of such holding company.

The New CO further enhances certainty by stipulating the scope of permitted indemnities against liability incurred by a director to third parties. Such indemnity must not cover the following:-

1.          criminal fines;
2.          penalties imposed by regulatory bodies;
3.          defence costs of criminal proceedings where the director is found guilty;
4.          defence costs of civil proceedings successfully brought against the director by the company or an associated company;
5.          costs of unsuccessful applications by the director for relief. 

If a company provides any permitted indemnity to its directors, it must disclose such permitted indemnity in the director’s report and make the permitted indemnity provision available for inspection by its shareholders and provide a copy to any shareholder on request and upon payment of a fee.

Conclusion
The initiatives outlined above do not only concern directors, but also companies, particularly in terms of its administration and operation. As such, directors, being the controlling minds of companies, should keep abreast of the changes brought about by these initiatives and should seek professional advice when in doubt.

For enquiries, please contact our Corporate & Commercial Department:

E: cc@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.