Directors are responsible for managing the affairs of their organization. In this respect, they must act with care, skills and loyalty in the best interests of the company, its shareholders, its employees and its creditors. If not, they could be subject to criminal or civil proceedings.
Legislation differs from one country to another, yet the above principle is valid everywhere in the world.
In Hong Kong, legislation is pro-business and setting up a company takes only 2 days. However, that does not mean that directors are free to go and run a business the way they want without any liabilities.
We have asked a few experts from the legal and finance industry to explain more details about what directors in Hong Kong are personally liable for and how they can insure themselves.
I – What does the legislation say for directors in Hong Kong?
There are 3 main types of rules in Hong Kong under which liability of directors can arise:
- The new Companies Ordinance (Cap. 622) (“new CO”) came into effect March 2014. It codifies directors’ duties of care, skill and diligence. In exercising his duty of care, skill and diligence, a director is required to exercise the care and skill expected of a person carrying out these functions (an objective test) as well as bearing in mind his particular knowledge and skill (a subjective test).
- Other fiduciary duties originate in the common law. It includes duties such as acting in good faith, using power for a proper purpose, avoiding conflict of interest, not making secret profit or not making unauthorized use of company’s property and information.
- Some of the specific Hong Kong legislation includes cases whereby directors will be held personally liable. As instance, under the MPF scheme, directors could be held personally liable if they fail to enroll employees in an MPF scheme.
II – In what cases directors in Hong Kong are personally liable?
We have asked Damien Laracy from Hill Dickinson for his opinion. Damien sees two major types of directors’ liabilities. Firstly, “internal” liabilities whereby directors can be found liable to compensate the company for the financial loss suffered as a result of directors’ breach of duties. Some examples include lack of monitoring of a credit risk of a client or a misrepresentation.
Secondly, Damien sees some “external” liabilities whereby directors and officers may also be personally liable under the new CO and the Securities and Futures Ordinance (Cap 571) (“SFO”). For example, where a director knows or ought to have known that his dormant company has entered into certain transactions, he will be personally liable for any consequential debts and obligations of the company under the new CO. And a person commits an offence under the SFO if he, in purported compliance with a requirement to provide information under the SFO, knowingly or recklessly provides information which is false or misleading in a material particular.
Other than the above, we have met as well with some experts from the restructuring industry in Hong Kong. They all confirm that when a company is in financial difficulty in Hong Kong, claims against directors are available to the liquidator or to company’s creditor in several different ways:
- Misfeasance – misapplication of money or property of the company
- Wrongful trading – conducting business of the company knowing the financial difficulty of the company
- Transaction at under value
The above are real threat for the personal asset of the directors.
III – How could the director protect themselves against possible wrongs?
- Company Indemnification
According to TL Lim from Mayer Brown a company is prohibited from indemnifying the director for liability to the company itself or an associated company (see section 48 of the CO). However, section 469 (1) of the CO expressly allows the company to indemnity directors for “any liability incurred” to third part provided certain conditions are met. Relevantly, section 468(4) permits the company to buy directors and officers’ insurance cover for its directors against liability to the company or related company as well as any liability incurred in defending any civil or criminal proceedings for negligence or default to the company or related company. For further details, please click here to access the study from Mayer Brown.
- Directors and officers’ insurance
Considering the above, TL observes that directors must therefore rely on the protection afforded by Side A of the D&O insurance.
As a general idea, the purpose of the D&O insurance is to provide financial protection for corporate executives against the consequences of a wrongful management act. It will cover as well the defence costs in the legal action and importantly provide for the advancement of defence costs.
Directors are not immune to personal liabilities in Hong Kong. If you have any questions in this respect, please don’t hesitate to send us an email with your contact details. You can also visit our website to find out about the other insurance services we offer.