Since March 2014, any ongoing tasks related to the management of a company must be carried out in compliance with the legal obligations outlined in Cap.622, rather than general legislation. This shift is due to the fact that the legal provisions of Cap.622 take precedence over the general law, and any future legal actions must adhere to the legal stipulations of Cap.622.
According to Section 465(2) of Cap.622, concerning Hong Kong companies, directors are expected to fulfill their duty of care, skill, and diligence. This section of Cap.622 specifies the qualifications required for such individuals:
a) They must possess the necessary general knowledge, skill, and experience expected of someone acting or serving as a director of the company.
b) The standard outlined in (a) represents the minimum objective standard for individuals in such a position within the company.
It is essential to note that the standards defined in (a) and (b) constitute the minimum standard for directors and cannot be relaxed or compromised in the case of directors with inadequate qualifications, skills, experience, or other attributes. These standards generally align with Common Law principles related to a director's duty of care.
The UK counterpart of Section 465 further extends this perspective, stating that if a director seeks professional advice from a corporate consultant or expert, any potential breach of their duties must be examined in light of the circumstances.
Similar to other directors, shadow directors are also held to the same obligations and standards. The only exception is when a holding company should not be considered a shadow director of its subsidiary solely because the subsidiary's directors are acting on the instructions of the holding company.
Supervisory Duties of Directors:
Directors are not expected to involve themselves in the daily operations of the company. Nevertheless, their duty of care requires them to oversee the company's operational matters. As per Section 465:
- Directors should understand the company's business model and be familiar with the fundamentals of its operations and business.
- Although directors are not required to monitor the company's day-to-day activities, they should stay informed about the company's activities and issues.
- To ensure the smooth functioning of the company's affairs and business operations, board and general meetings should be held regularly, and directors must ensure that adequate facilities are available for managerial audits.
- While there is no requirement for directors to conduct a company audit, they should be acquainted with the company's current financial status by reviewing its financial statements.
It is crucial for all directors, whether executive or non-executive, to meet these minimum monitoring requirements. They may delegate their powers to the reporting team, provided they find them trustworthy, fair in transactions, and of upright character. If directors are not informed about any matters, it may indicate that something is amiss, and it is their duty of care and diligence to investigate the issue promptly. In cases where directors are aware of the facts and any irregularities or malfunctions come to their knowledge, the level of care required under the Hong Kong company registration mandate either swift action or the director's duty, should they fail to act in a timely manner, despite their prior knowledge.
As discussed earlier, directors must possess the necessary skills and qualifications. In the realm of business operations, this does not exempt directors from their supervisory or oversight responsibilities based solely on their appointment, be it due to competence or a managerial basis. Once appointed as directors of the company, each board member or director bears responsibility for the company's financial, managerial, and operational affairs.
In the event that the company fails to comply with the law or any regulations essential for starting a business in Hong Kong, the directors would be held accountable for such failure and could face allegations of breaching their fiduciary duties to the company, as director negligence would be evident. In a notable case involving ASIC (Australian Securities and Investments Commission), the company's directors were found to be negligent as they made false statements to the market and failed to fulfill their legal obligation to disclose transactions in accordance with the disclosure and listing rules of the stock exchange. Consequently, the high court held the directors personally liable for any losses the company would incur in terms of compensation or penalties due to their negligent actions.
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