Do senior executives who are not directors owe fiduciary duties to their employers?
Introduction
All
employees owe duty of fidelity to their employers; all directors owe fiduciary
duties to their companies. Can senior
executives or employees owe fiduciary duties to their
employers and, if so, when? In a recent judgment in HMM (Hong Kong) Ltd v Ma
Chun Kit [2022] HKCFI 1153, the
Court of First Instance (“CFI”)
reaffirmed that senior employees, who were not company directors, may owe
fiduciary duties to their employer company depending on their role and function.
Duty
of fidelity
Duty of fidelity
(and sometimes referred to as “duty of loyalty”), which is implied in all
contracts of employment by the common law, may be broadly interpreted to mean
an employee’s duty to act loyally, in good faith and in the best interests of
the business that employs them. Duty of fidelity includes protecting
the employer’s confidential information and trade secrets and to use them only
in the furtherance of their work, and not to compete with their employer. It also includes notions such as honesty, obedience, diligence,
competence and care.
Fiduciary
duty
A fiduciary
relationship is one of trust and confidence. A fiduciary owes another person
(beneficiary) fiduciary duties, and he is bound by the “no-conflict” rule and
the “no-profit” rule. Under the “no-conflict” rule, the fiduciary must not put
himself in a position where his interest conflicts the beneficiary’s interest.
The “no-profit” rule provides that a fiduciary must not profit from his
position as a fiduciary. A director owes fiduciary duties to the company,
including:
1.
duty to act in good faith;
2.
duty to avoid conflict of interests between his personal interest and the
company’s interest; and
3.
duty not to make secret profits.
To put simply,
directors have to act in the best interests of the company.
What
about senior executives or employees, who are not company directors? Do they owe
fiduciary duties to their employer company? CFI said it depends on whether
there is a legitimate expectation between the employer and the employee, and
the employee’s role and function.
HMM (Hong Kong) Ltd v Ma Chun Kit
[2022] HKCFI 1153
Facts
The
employer, HMM (Hong Kong) Ltd (“HHM”),
was a subsidiary of Hyundai Merchant Marine Company Limited (“Hyundai Korea”), a public listed
company in Korea. Hyundai Korea carried on the business of cargo and logistics
services worldwide. HHM
was responsible for settling Hyundai Korea’s invoices for its business in the
South China region.
Ma
Chun Kit (“Ma”) was HMM’s employee. He
joined as an accounts clerk in 1992 and was gradually promoted over the years. In
April 2011, he became the Deputy General Manager of HMM’s Account Department. As
deputy general manager, HMM entrusted Ma with the authority to approve payment
instructions at the second level of a three-tier authorisation process. He was also
entrusted with the responsibility of being one of three system administrators,
who was responsible for applying for and setting up online banking tokens for
HMM that were used to authorise payments.
Ma
abused his position. Between 2009 and 2016, without HMM’s authority, Ma transferred
over HK$387 million from HMM’s bank accounts to his own bank accounts via 262
bank transactions. Ma wrongfully made use of the other two system
administrators’ online banking tokens to effect online transfers to his bank
accounts. Ma had
also abused his role as system administrator, where he re-configured the
standard three-tier authorisation adopted by HMM and altered it to require only
one level of authorisation to approve the payment instructions.
After an internal investigation, Ma was caught. HMM summarily dismissed Ma and reported the
matter to the police. In December 2020, Ma was convicted on four counts of
theft and was sentenced to 15 years’ imprisonment.
Legal principles
When
assessing whether Ma owed a fiduciary duty to HHM, the CFI followed the
principle set out by in another CFI’s judgment in Leader Screws Manufacturing Company Limited v Huang Shunkui
[2021] HKCFI 141, paras 46 to 49:
1.
An employment relationship, in itself, does not
attach fiduciary duties.
2.
Fiduciary duties are likely to attach to an
employment relationship where one person is in a relationship with another that
gives rise to a legitimate expectation, which equity will recognize, that the
fiduciary will not utilize his or her personal position in such a way which is
adverse to the interests of the principal.
That expectation is assessed objectively, so it is not necessary for the
principal subjectively to harbour the expectation, nor for the person alleged
to be a fiduciary to subjectively consider himself to be undertaking fiduciary
duties.
3.
Much depends on the employee’s role and function.
4.
An employee entrusted with the company’s money or
diverts company money to his own benefit, is likely to owe fiduciary duties in
relation to the money, even if he is a junior employee.
The
CFI confirmed that:
“While an employment relationship does not automatically import
fiduciary relations, a senior employee or manager, depending on his role and
function, can be held to owe fiduciary duties to the employer when carrying out
those duties. Where an employee is entrusted
with the company’s money and diverts it for his own benefit, he would likely be
in breach of the fiduciary relations.”
Decision
Ma
was entrusted with the task of settling third party vendors’ invoices and also
played a significant role in the operation of HMM’s bank accounts. CFI found that
Ma owed fiduciary duties to HMM in the payment authorisation process, and was
in breach of such fiduciary duties. Ma was also in breach of his implied duty
of fidelity by misappropriating the assets of HHM.
Takeaway
An employment
relationship does not automatically give rise to fiduciary relations. An
employee may owe fiduciary duties to the employer in relation to parts of his
job, where the employee is entrusted with certain responsibilities that gives
rise to a legitimate expectation that he will not use his position in such a
way that adversely affects the employer’s interest. This expectation is to be
assessed objectively and much depends on the employee’s role and function.
Generally
speaking, fiduciary duties may be attached to a part of an employee’s job where
the employer has minimal control over the actions and decisions of the employee,
and has to rely on the employee to make such decisions in the employer’s best
interest. This is particularly the case where an employee is entrusted with the company’s
money or diverts company money to his own benefit.
It is important for
employers to note that the remedies available for a breach of contractual duty
by an employee (for example, breach of employment or duty of fidelity) are
different from a breach of fiduciary duties.
Generally, an
employer will only be able claim damages (i.e. monetary compensation) that they
have suffered from employee’s breach of contractual duties. However, if the
employee concerned owes fiduciary duties to the employer and he has breached
such duties, the employer may claim equitable relief and for account of profits
made from such breaches. In other words, the employers will have the options of
not just going after the loss he suffered but the employee’s gains from breach of
fiduciary duties.
In August, our
employment practice group will be giving a webinar relating to senior executive
and board-level employment law. We will cover topics such as “Do senior executives or employees owe fiduciary duties to their employers?” and other related topics.
Please come and join us.
For enquiries, please
feel free to contact us at: |
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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. |
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Published by ONC Lawyers
© 2022 |
