Law relating to business and

companies

SEMINAR 6
(REVISED SLIDES)
DIRECTORS AND DIRECTORS’
DUTIES (I) 1
Directors

▪ Function of the board .

▪ Requirement for directors:
- Public companies: minimum of 2 (s 453
NCO).
- Private companies: minimum of 1 (s 454-
455 NCO).

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Appointment
▪ First directors: ss 67-70 (Schedule 2) NCO, s. 453, 454, 455 NCO;
▪ Subsequent appointment of directors (Reg 22 Model Articles)
▪ “(1) A person who is willing to act as a director, and is permitted by law to do so, may
be appointed to be a director—
▪ (a) by ordinary resolution; or
(b) by a decision of the directors. “

Notification to registrar: ss 67-70 NCO.

▪ Registrar's index of directors: s 647 NCO.
▪ Company's register of directors: s 641-647 NCO.

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Qualifications

▪ Age: s 459 NCO .

▪ Bodies corporate: s 456 NCO .
▪ Undischarged bankrupt: s 480 NCO.
▪ Disqualified persons: Part IVA NCO .

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Disqualification orders: Part IVA

▪ Operative provision: s 168D of Companies

(Winding up and Miscellaneous Provisions)
Ordinance)
▪ Grounds for disqualification:
- 168E: certain indictable offences
- 168F: persistent breaches of Ordinance
- 168G: fraud or breach of duties
- 168H: unfit to manage companies
- 168L: fraudulent trading.
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Regulation 25, Model Articles
▪ 25. Termination of director’s appointment

A person ceases to be a director if the person—

▪ (a) ceases to be a director under the Ordinance or the Companies (Winding Up and
Miscellaneous Provisions) Ordinance (Cap 32) or is prohibited from being a director by
law;
(b) becomes bankrupt or makes any arrangement or composition with the person’s
creditors generally;
(c) becomes a mentally incapacitated person;
(d) resigns the office of director by notice in writing of the resignation in accordance
with section 464(5) of the Ordinance;
(e) for more than 6 months has been absent without the directors’ permission from
directors’ meetings held during that period; or
(f) is removed from the office of director by an ordinary resolution of the company.

Other factors see: Lee Tak, Samuel v Chou Web-hsien [1984] 1 WLR 1202

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Who is a director?

▪ Implications of being deemed as a director:

see, eg, Corporate Affairs Commission v
Drysdale (1978) 141 CLR 236.
▪ Validly appointed directors.
- Executive and non-executive directors .
▪ Shadow directors s 2
▪ Reserve directors: s 454-455.
shadow director (幕後董事) , in relation to a body
corporate, means a person in accordance with whose
directions or instructions (excluding advice given in a
professional capacity) the directors, or a majority of the
directors, of the body corporate are accustomed to act;
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Powers of Directors: How Does
Board Act
▪ relation to company
▪ Division 1, Part 3, Model Articles
▪ Common Law: directors can only exercise their powers
collectively by passing resolutions at properly
convened meeting of the Board
▪ Quorum
▪ Unanimous action
▪ No power to act individually but articles usually enable
delegation to committees or managing director cf:
Mitchell & Hobbs (UK) Ltd. v Mill [1996] BCLC 102

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Directors' duties: scenario
▪ X Ltd is a financial investment co.
▪ Its executive officers are highly paid.
▪ But the company has been incurring losses as a result of
poor business and investment decisions, combined with a
general down-turn in the market.
▪ The losses are hidden from the company accounts though.
and the non-executive directors are therefore not aware of
the problems.
▪ Eventually the auditors suspect corporate wrongdoing, and
a liquidator is appointed. The extent of the co losses are
now revealed.
▪ Who suffers?
▪ Shareholders, creditors, employees, clients.
▪ Should the executive directors be held responsible? The
non-executive directors?

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Directors' duties: policy issues

▪ Why might it be important to impose duties

on directors?
▪ What might be a problem if the duties
imposed are too strict?

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Directors' duties

▪ Equity.
- lncludes fiduciary duties .
▪ Common law.
- Contract.
- Negligence .
▪ Directors as fiduciaries: owe duties to company.
- Directors are not trustees: lower standards
imposed on directors compared with trustees.

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Directors' duties

▪ Care, skill and diligence

▪ Act in good faith in best interests of
company
▪ Exercise powers for proper purposes
▪ Avoid conflicts of interest

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Care, skill and diligence

▪ Sources of duty:

▪ Equitable duty
▪ Contract (contract between company and
director)
▪ Tort of negligence

▪ What is the standard of care….

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Re City Equitable Fire Ins Co (1925) Ch
407
▪ Directors must exercise reasonable care that an
ordinary man would exercise on his own behalf .
▪ Director need not exhibit a greater degree of skill
than may be expected from a person of his
knowledge and experience .
▪ Director not bound to give continuous attention
to co .
▪ For duties that can be left to another official, a
director is usually justified in trusting that
official to act honestly (unless something
suspicious is going on) .
▪ Duties will depend on circumstances of
director's position and nature of company.

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Standard of care
▪ Low subjective standard?
- Re City Equitable; Re Cardiff Savings Bank
[1892] 2 Ch 100; Re Brazilian Rubber Plantations
and Estates Ltd [1911] Ch 425 .
▪ Higher standard today? Minimum objective
standard?
- See objective aspects to test in Re City Equitable.
- Development of objective standards in tort law
(negligence).
- Policy reasons: changed commercial conditions
and roles of directors.
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Modern English cases: examples

▪ Re D‘Jan of London (Lord Hoffmann) .

▪ Dorchester Finance v Stebbing (Foster J):
▪ Finance co had 3 directors, S, P and H
▪ S worked full time for the co
▪ P and H (both accountants) rarely visited, did
not manage, and left pre-signed cheques
▪ No board meetings held
▪ S lent money which was not recovered
▪ All 3 were negligent and responsible to make
good co's losses (executive or non-executive)
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Law Wai Duen v Boldwin [2002] 4
HKC 403
▪ Issue: rights of (non-executive) directors to
inspect company's accounts .
▪ CA: such rights necessary for directors to carry
out their duties .
▪ Executive directors and non-executive directors
have the same responsibility in law as to the
management of the company’s business .
▪ Including responsibilities with regard to the
finances of the company and as regards
accounting to the shareholders for the
company's finances .
▪ Limits on ability of directors to divest
responsibility through delegation.
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AWA v Daniels (1992) 9 ACSR 383

▪ AWA managers carried on currency

transactions that resulted in losses
▪ Losses undetected by auditors
▪ AWA sued auditors, who claimed
contributory negligence of AWA managers
for failing to appraise Board of Directors of
Anderson's concerns re exchange
▪ Held: Board allowed negligent management
that caused part of loss.

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AWA V Daniels (1992) 9 ACSR 383

▪ Duty arises both in equity and in tort .

▪ Modern standard of care higher than in Re
City Equitable .
▪ Minimum objective standards .
▪ Subjective aspects of test - standard can
vary depending on:
- Whether director has held himself out as
having special skills or experience
- Size and business of company.

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Summary: standard of care
▪ Standard of care in HK: unclear in the past. Now follows NCO s465
minimum objective standard.
▪ One view: Law Wai Duen v Boldwin Construction as supporting
▪ subjective test in Re City Equitable.
▪ Alternative view: a higher standard today in equity and/or tort.
- Dual objective/subjective test.
▪ Equitable duty:
- Re City Equitable imposes minimum objective standards
- Modern approach under English and Australian cases, and see
comments of Rogers VP in Law Wai Duen v Baldwin Construction [2001]
4 HKC 403
▪ Negligence:
- Base Metal Trading Ltd v Shamurin [2005] 2 BCLC 171
- AWA v Daniels; Re HIH Insurance Ltd (2002) 41 ACSR 72 at 166-8; ASIC v
Rich.
▪ Contract.
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Summary: director's position in
the company
▪ Can a higher or lower standard be imposed depending
on the director's position in the company?
▪ All directors (inc . non-executive directors) are subject
to the same duties: Law Wai Duen; Dorchester Finance;
AWA v Daniels .
▪ A higher standard might be imposed due to the special
skills or experience of the director: Re City Equitable
Fire Ins Co; AWA case .
▪ Also it may be that the position held by the director in
the company (such as chairman of board) could raise
the standard: ASIC v Rich; Re City Equitable Fire Ins Co.
▪ Ratification Chingtung Futures Ltd (in liquidation) v Lai
Cheuk Kwan [1002] 2 HKC 637

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Delegation by directors

▪ Re City Equitable Fire Ins Co

▪ AWA case:
- relaxed approach of Rogers J rejected by
CA
▪ Directors appointed to represent a
particular field of expertise: can they rely on
others in relation to other aspects of the
company's business?
- AWA case
- Law Wai Duen v Boldwin Construction.
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