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Hong Kong – New Companies Ordinance Has Implications For Directors.

11 November, 2013

 

The New Companies Ordinance (the New Ordinance) is the most comprehensive overhaul of Hong Kong’s company law in the past 20 years. It has four objectives, namely, to enhance corporate governance, ensure better regulation, facilitate business and modernise the law. The principal changes relating to directors in the New Ordinance, which will come into operation in 2014, are highlighted below.


Codification Of Directors’ Duties


Currently, directors duties, namely fiduciary duties and duties of care, skill and diligence, are primarily governed by common law. To keep in line with international standards, the New Ordinance codifies a director’s duty of care, skill and diligence. The fiduciary duties of a director, however, remain subject to common law.


The New Ordinance adopts a mixed objective and subjective test in the determination of the standard of care, skill and diligence expected of a director. A director must exercise the reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:

 

  • The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same function as the relevant director (objective standard)
  • The general knowledge, skill and experience that the director has (subjective standard)
 

Accordingly, in deciding whether a director has breached the duty of care, the additional experience and knowledge of the director as well as the standard of a reasonable director holding the same office will be taken into consideration.


Restricting Corporate Directors


The New Ordinance also enhances accountability and transparency by requiring a private company to have at least one director who is a natural person. At present, public companies and private companies that are members of a group of companies of which a listed company is a member are prohibited from appointing a body corporate as their director. There are no restrictions regarding other private companies.


Companies will have six months to comply with this new requirement. The Registrar of Companies has the power to direct a company to appoint a director who is a natural person. If a company fails to comply with such direction, the company and its responsible person commit an offence and each is liable to a fine.


Indemnification Of Directors


The rules governing the indemnification of directors are also clarified. Previously, it was not clear whether a company could indemnify a director for his/her liability to third parties.
The New Ordinance provides for this for the first time. A company is allowed to indemnify its directors against liabilities to third parties in the course of performing directors’ duties and exercising power. The following liabilities, however, cannot be covered by the indemnity:

 

  • Criminal fines or penalties imposed by regulatory bodies
  • Defence costs of criminal proceedings where the director is convicted
  • Defence costs of civil proceedings against the director by or on behalf of the company or a related company in which judgment is made against the director
 

To enhance transparency, there is also a requirement for a company to disclose the indemnity provisions in the directors’ report and make them available for the members to inspect upon request.


Ratification Of Directors’ Conduct


The New Ordinance further provides that a director’s act may only be ratified by disinterested members of a company passing an ordinary resolution in a general meeting. This scope of ratification includes acts or omissions of a director amounting to negligence, default, breach of duty or breach of trust. The rationale behind this initiative is to prevent conflicts of interest and possible abuse of power by interested majority shareholders in ratifying the unauthorised conduct of directors.

 

Clyde & Co

 

For further information, please contact:

 

Mun Yeow, Partner, Clyde & Co
mun.yeow@clydeco.com

 

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