LW3902 Law Relating to Companies School of Law

City University of Hong Kong

Tutorial Question for Week 6: Director and Directors’ Duties I

X Ltd is a medium sized insurance company which has suffered trading difficulties in the past year.
The financial problems have not been reflected in the company’s accounts, as they have not been
properly prepared.

A is the CEO and director. B is a retired accountant and serves as the chairman of the board of
directors. C is a non‐executive director. C does not have any skills in accountancy and financial
matters, and he has always relied on the interpretation of the accounts put to him by A and B.

On a recent occasion, the board passed a resolution acquiring a re‐insurance business from Hawk
Assurance Co. A and B hoped the reinsurance business would bring revenue to X Ltd. C agreed to
the transaction at the board meeting on the basis of the proposal put forward by A and B at the
meeting. Both A and B stated on the board meeting that there was no need for seeking professional
advice on the value of the assets of Hawk Assurance. They were confident on their own judgment
as both were qualified accountants and both have more than 20 years of experience in the insurance
industry.

It turned out however, that A and B were overly optimistic about the reinsurance business and that
X Ltd paid an excessive price to purchase that business. This contributed toward the insolvency of
X Ltd. An angry creditor has made a winding up application to the court and Adam has been
appointed as the liquidator.

Advise Adam whether A, B or C are in breach of their duties to the company (if any).