In the recent case of Grand Field Group Holdings Limited v Chu King Fai and others HCA 771/2009, the Court of First Instance was asked to decide on the extent to which an exercise of the powers conferred on a director may constitute a breach of the director’s fiduciary duty owed to the company.

Background
The present action was commenced by one of the shareholders of Grand Field Group Holdings Limited, a company listed on the Hong Kong Stock Exchange Limited, through statutory derivative action against eight of its former and present directors. The plaintiff claimed against the defendants, amongst other things, for bribery and breach of fiduciary duties owed by the defendants to the plaintiff. In particular, the plaintiff complained that the defendants had caused a subsidiary of the plaintiff to be set up and HK$50 million to be transferred to it so that the money could be used by the 1st and 2nd defendants to provide rolling facilities to companies related to or controlled by them. The plaintiff further complained that the 1st defendant had sought to improperly influence the directors of the plaintiff to vote at board meetings for the benefit of the 1st defendant and his family, by, amongst other things, adopting a practice of paying the directors money for attending meetings.

The plaintiff alleged that the directors had acted in breach of their fiduciary duties owed to the plaintiff and the payments (which the plaintiff alleged to be corruptive in nature) were wrongfully received by the directors and the defendants are liable to account to and make restitution for such payments to the plaintiff.

This article will focus on the plaintiff’s claim against the defendants for the breach of their fiduciary duties owed to the plaintiff.

Breach of fiduciary duties
The legal principles governing directors’ fiduciary duties were not disputed by the parties. As was held in Extrasure Travel Insurance Ltd & Anor v Scattergood and Anor [2003] 1 BCLC 598, a director owes to his company a fiduciary duty to exercise his powers (i) in what he honestly believes to be the company’s best interests, and (ii) for the proper purposes for which those powers have been conferred on him. Mere incompetence is not a breach of fiduciary duty, though the same may give rise to a claim against the director for breach of the tortious or contractual duty of care. As such, a director is not in breach of his fiduciary duty if he honestly, although unreasonably and mistakenly, believes he is pursuing the company’s best interests.

On the other hand, whether a director has exercised his powers for proper purposes calls for an objective assessment and the court must apply the following four-stage test in this regard:

1.         identify the power whose exercise is in question;
2.         identify the proper purpose for which the power was delegated to the directors;
3.         identify the special purpose for which the power was in fact exercised; and
4.         decide whether that purpose was proper. 

The court in the present case clarified that it was only necessary for a plaintiff to prove either that the director did not honestly believe what he was doing was in the company’s best interests or that the powers conferred on him have been exercised for an improper purpose, in order to establish liability on the part of the director.

Turning to the facts of the present case, the court focused on the background and context against which the plaintiff’s complaints were made. Of particular importance was the fact that during the period when the alleged wrongful acts of the defendants occurred, the 1st and/or 2nd defendants were acquiring shares in the plaintiff with their own funds. They have invested a total of over HK$130 million in acquiring the shares in the plaintiff. Further, there was no evidence that the 1st and/or 2nd defendants and/or any related entities were short of funds or in need of rolling credit facilities. On the contrary, the court took the view that it lacked commercial sense for the 1st and/or 2nd defendants to have invested over HK$130 million in order for them to benefit from the alleged use of the much smaller amounts involved under the plaintiff’s complaints.

Against the aforesaid background, the court held that there was no merit in the various claims put forward by the plaintiff and the defendants had, throughout, in fact acted bona fide in the best interests of the plaintiff and for proper purposes. Further, the plaintiff failed to substantiate its bribery claim against the defendants and the court rejected the plaintiff’s claim in this regard accordingly.

Based on the aforesaid reasons, the court dismissed the plaintiff’s claims against the defendants with costs.

Conclusion
In light of the court’s clarification in the case above, it is essential that whenever a director exercises the powers conferred on him, he must hold an honest belief that it is for the best interests of the company and the exercise of power must be for proper purposes.

Although mere incompetence is not of itself a breach of fiduciary duty, directors must remain vigilant and act reasonably whenever they exercise their powers as they may still be liable for any tortious or contractual claims against the directors, especially in light of the codified directors’ duty to exercise reasonable care, skill and diligence under section 465 of the new Companies Ordinance.

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.