Directors Duties (Lo & Qu Ch 8)

1. Directors duties
(1) Equitable duties of directors
a. Kao Lee & Yip v Koo Hoi Yan Donald 2003 3 HKLRD 296, 312-313
- Duty to act in good faith in the interest of the company
- Duty to exercise powers for proper purposes
- Duty to avoid conflicts of interest
- Duty not to make secret profits
- Duty not to misappropriate company assets
(2) S.456 CO (Cap.622): Duty to exercise due care, skill and diligence
- ***NOTE Can breach more than one duty at the same time
(3) Part 11 CO: other provisions, e.g. conflicts of interests
(4) Further restrictions under Listing Rules (ch 14A) for listed companies

1.3 Person subject to directors duties

1.3.1 De Jure directors are subject to directors duties;
(1) alternate directors are treated as de jure directors during period they act in
place of their appointers
1.3.2 De facto directors: subject to same duties of de jure directors (Ultraframe v
Fielding)
- S.2 CO: director definition includes de facto director
1.3.3 Shadow directors: Director duties apply to them
(1) S. 2 CO doesnt refer to shadow directors, but other provisions refer to shadow
directors (S.3 CO)
a. Yukong Line: shadow director owed fiduciary duties to company; not followed
by Ultraframe
- ***NOTE S.465(5) CO expressly applies to shadow directors
1.3.4 Corporate directors
(1) Body corporate subject to same duties as natural persons
(2) Can be de facto (Aktieselskabet Dansk Skibsfinansering 1998 3 HKC 153) or
shadow directors (Re Hydrodam 1994 BCC 161)
(3) Directors of body corporate can be de facto or shadow director
1.3.5 Executive officer
(1) Executive officers owe fiduciary duties but not as extensive as directors
unless senior

a. Lister v Romford: Owe company a duty of care in carrying out their functions
b. Kao Lee & Yip: Employees owe fiduciary duties to the company
c. Canadian Aero Service: senior officers (vice president and president) owed
duty similar to directors
- Maybe justifiable to impose duties similar to directors on senior employee if e.g.
exercise greater management power than non-executive directors who meet in
board only once a year
1.4 To Whom are the duties owed
a. Foss v Harbottle: fiduciary duty and duty of care is owed to the company
b. Percival v Wright: duties not owed to individual members
c. Peskin v Anderson: special circumstances where director owe fiduciary duties
to individual members based on general principles of fiduciary relationships
- E.g. act as shareholders agent selling their shares (Briess v Woolley)
d. Cole v Myers: Depends on shareholders dependence on directors for
information and advice

2. Duty to Act in good faith in the interest of the

company
2.1 General
(1) Acting in good faith
a. Re Smith & Fawcett: Directors must exercise powers in good faith in what they
consider is in the interest of the company
b. Akai Holdings 2008 HKEC 874: Akias chairman caused company to grant loan
to company S which the chairman is also chairman and director there; held breach
of duty to act in interests of Akai
(2) Acting contrary to constitution
a. Akai Holdings: Ting failed to comply with constitution by not disclosing conflict
of interest; held breach duty in act in companys interest
(3) Other examples
a. YJK Co Ltd 1999 HKEC 700: Dismiss staff to paralyse company operation after
owner raised suspicion of directors diverting business
b. Re Artshop 2007 HKEC 1859: Cause company to grant unsecured and
interest-free loan with no fixed term of payment to director himself for personal use
c. Menno Leender Vos 2009 HKEC 1952: Cause company to sell properties at
gross undervalue to associated persons
(4) Where person is director of more than one company
a. Fitzsimmons v R: duty to act in good faith in interest of company not reduced
by conflict duties owed to 2nd company (Should disclose conflict and take action to
prevent damage to 1st company)

b.Fitzsimmons v R: if conflict of interest is irreconcilable, proper action is

resignation

2.2 Meaning of interest of company

2.2.1 General
(1) Means interests of members as a general body (Parke v Daily News)
a. Hutton v West Cork Railway: Cannot make significant gifts to employees to
financial detriment of shareholders
b. Dawson International: Directors doesnt have to focus on short-term profits of
existing shareholders and can act in long term interest of shareholders as a whole
(2) Can provide benefits to employees and others
a. Hutton: Directors can give benefit to employees provided its for benefit of the
company
(3) Attractive remuneration to employees can be consistent with duties,
e.g. maintaining key persons, giving to charities for reputation
(4) Companys constitution and objects can shape duty: e.g. directors of
charitable companies required to act to promote companys objects without need to
seek profits to financially benefit members (CAS (Nominees) Ltd)
(5) Duty where different class members or groups of members:
a. Mills v Mills: Duty to act fairly as between different class and groups of
members (Passport Special Opportunities 2011 4 HKC 62)
2.2.2 Corporate Groups
(1) Directors duty to act for benefit of company rather than other
companies in group (Akai Holdings)
(2) Derivative benefit might suffice
a. Charterbridge Corp v Lloyds: if benefit to corporate group or related
companies also flow to company in question then no breach
- E.g. Parent gives financial support for subsidiary
2.2.3 Nominee directors
(1) Duty to act in interest of company not appointer
a. Scottish Co-op v Meyer: duty of Nominee director to act in interest of company
not appointer
b. Hawkes v Cuddy: nominee directors can by agreement owed duties to
appointer or employees, but such duties cant detract from duty to company (i.e.
can take appointers interest into account)
2.2.4 Companies in insolvency and interest of creditors
(1) Where company is near insolvency, directors must take into account
interest of creditors
- Tradepower v Tradepower 2009 HKCFAR 417: at or near insolvency directors
need to take into account interest of the creditors

- At/near insolvency creditors interest becomes companys interest

- Duty to act in interest of company is not directly owed to creditors, i.e. cant bring
action for breach
(2) Duty arises near insolvency/doubtful insolvency/ action would
jeopardise insolvency (Nicholson v Permakraft)
a. Grove v Flavel: duty arise when poor financial situation (in arrears of creditors
for 120 days and failed to get bank loan)
b. Chingtung Futures 1994 1 HKLR 95: duty arise when proposed expenditure is
so significant that it threatens continued existence of company
(3) OBJECTIVE test of whether director took into account of creditors
interests
a. Tradepower: Even if directors subjectively acted honestly, still a breach
a. Chingtung Futures: if directors fail to take reasonable care to protect
company from risk of insolvency
b. Nicholson v Permakraft: if directors ought to have known likelihood of loss to
creditors
(4) Whether breach depends on size of transaction and company financial
situation
a. West Mercier Safetywear: repayment to internal creditors in preference to
external creditors can be a breach
- Internal creditors: directors/shareholders who are owed amounts in capacity as
creditor
b. Facia Footwear: decision of directors continuing trading didnt amount to
breach since creditors only change of full payment was a refinancing scheme that
requires company to continue trading.

2.3 Subjective or objective test?

(1) Subjective test as to whether directors put their mind to whether
interest of company
a. Regentcrest plc v Cohen: If directors honestly believe an act/decision is in
terst of company, generalluy no breach even though belief mightve been
unreasonable
- Business Judgment Rule approach in Common Law
b. Howard Smith v Ampol: courts do not review merits of board decisions
c. The Bell Group v Westpac: but if decision is clearly detrimental to company/
no reasonable director would made in interest of company
(1) Subjective test with objective elements
i. Duty to act in interest of company has both subjective and objective
elements
a. Charterbridge: breach depends on whether an intelligent and honest man
as director of company couldve reasonably believed the transactions were for
benefit of company regarding whole circumstance
b. Akai Holdings: HK Court preferred Charterbridge approach

(2) Directors must consider relevant factors and exclude irrelevant factors
a. Hunter v Senate Support Service: must take into account relevant and
exclude irrelevant factors
b. Passport Special Opportunities 2011 4 HKC 62: held if board decision was
reached with no consideration at all for a clearly relevant factor then decision is
open to challenge; decision becomes voidable
(Share allotment to dilute majority shareholder but failed to consider adverse
financial impact)

3. Duty to Exercise Powers for Proper Purpose

3.1 General
(1) Howard Smith v Ampol: directors must exercise powers for proper purpose

3.2 Determining purpose: look at articles

a. Howard Smith: Provision is construed in context of articles as a whole
3.2.1 Power to deal with companys assets
(1) Assets of company must be used for corporate purposes (Re Lee
Nehrens & Co)
3.2.2 Power to allot shares
(1) Power to allot shares given to raise capital not destroying minority
a. Howard Smith: there may be occasions where directors fairly and properly issue
shares for other reasons
b. Whitehouse v Carlton Hotel: Cannot issue shares to destroying or creating
majority
c. Wong Kam San 2007 2 HKLRD 267: allot 9,900 shares to dilute 100%
ownership of existing controller to 1%. Held purpose was to replace majority
shareholder and a breach.
(2) Mere fact that company had considerable funds doesnt mean
allotment not for proper purpose
a. Passport Special Opportunities: held company had considerable funds
doesnt mean allotment not for proper purpose
b. Howard Smith v Ampol: held breach of duty by allotting shares primarily to
reduce shareholder of existing shareholders
(3) Exceptions
a. Whitehouse v Carlton Hotel: (Obiter) in special circumstances dilution of
existing voting power might be legitimate purpose, e.g. when statutory provisions
make a particular spread of voting power compulsory or commercially essential
b. Kirwan v Cresvale Far East Ltd: no breach, even if dominant purpose is
obtaining control, if company has need of capital to avoid liquidation and only
venue to capital is through share allotment.
3.2.3 Other power affecting control
(1) Defeating takeover by other means

E.g. Poison pill Agreement (shareholders right to be issued shares at price

significantly below market)
(2) Whether defeating takeover amounts to breach of duty
a. Howard Smith v Ampol: breach if purpose of defeating takeover is to preserve
directors own position out of self-interest
b. Darvall v North Sydney: It would be legitimate for directors to act with dual
purpose of in interest of company and defeating a takeover offer.
c. Darvall v North Sydney: no breach if director by causing company into
transaction for benefit of company even though transaction also has effect of
defeating a takeover bid
- As a general principle, directors of a listed company wouldnt be entitled to take
action for purpose of depriving shareholders of the opportunity to consider a
takeover offer (Howard Smith)
(3) Public Companies: Takeovers Code
- General Principle 9: directors of a target cant, without general meeting approval,
take action effectively result in bona fide offer being frustrated or shareholders
being denied opportunity to decide on its merits
(4) Private Companies: directors more latitude restrictions on transferring
shares
a. S.11(1)(a)(i) and s.29(1)(a) CO: AOA must impose restrictions on right to
transfer shares
(5) Appointing additional directors for purpose of entrenching control is a
BREACH
a. Tsang Wai Lun Wayland 2009 5 HKLRD 105: directors appoint new directors
up to max. under articles to entrench control, believing it was in interest of
company. Held even though acted in good faith, breach of duty
3.3 The purpose for which a power was exercised
(1) Purpose of exercise of power is question of fact
a. Howard Smith: Court look at all evidence to determine directors subjective
state of mind to find the purpose
b. Passport Special Opportunities: E.g. in assessing credibility of directors
purpose in allotting shares, consider companys financial position, reality of need for
funds and effects of allotment upon shareholders
(2) If director acted properly the fact he personally benefitted doesnt
render power invalid (Hirsche v Sims)
(3) If more than one purpose, breach if substantial/dominant purpose is
improper (Howard Smith)
a. compare Whitehouse v Carlton Hotel: exercise of power invalid if
impermissible purpose was causative, i.e. but for its presence the power wouldve
not been exercised.

(4) Multiple purposes: linearly connected purposes

a. Whitehouse v Carlton Hotel: exercise of power invalid if impermissible
purpose was causative, i.e. but for its presence the power wouldve not been
exercised.
- Even if the ultimate purpose is legitimate
(5) Independent purposes which was substantial
a. Harlowes Nominees Pty Ltd: no breach as substantial purpose was to
improve financial position of company even though had effect of frustrating
attempts by existing shareholder to obtain control
b. Pine Vale Investments: no breach as directors issues shares to purchase
business but frustrated a takeover bid
(6) Timing not necessarily determinative of what directors purpose was
(Pine Vale Investments)

3.4 Good Faith of Directors

(1) OBJECTIVE test: breach even if directors acted in good faith (Howard
Smith v Ampol)
a. Hogg v Craphorn: mere fact directors acting for benefit of company doesnt
mean conduct cant be impugned.
- Can breach duty to exercise power for proper purpose even if no breach of duty to
act in good faith for benefit of company

4. Conflict of Interests
4.1 General
(1) Director must avoid conflict of interests
4.2 Conflict Rule
4.2.1 Equitable duty
(1) As fiduciaries directors mustnt put themselves in position of conflict
(Kao Lee & Yip)
a. Boardman v Phillips: Conflict arise if theres real sensible possibility of
conflict or real or substantial possibility of conflict
- Can contract with the company PROVIDED informed consent of the company
b. Aberdeen Rail v Blaikie Bros: duty can be breached even it transaction is fair
to the company (Man Leun Corp 1981 HKC 407)
(2) Transactions involving conflict of interest
a. Blaikie Bros: Duty also applies to transactions between company and director
AND company and partnership which director is a partner
b. Transvaal Lands v New Belgium: Duty applies to between company and
another company director has pecuniary interest (as shareholder) or has a
conflicting duty

(3) No-conflict rule applies if director is in another company even if

adverse interest is small
a. Transvaal: director was also director of another company in transaction, didnt
vote at board meeting to approve transaction, but didnt disclose fact hes director
there. Held transaction set aside
- Held even a small shareholding in other company need to be disclosed
b. Phillips v Boardman: a more relaxed position that only conflict of interest if
significant or substantial possibility of director being swayed by some personal
interest or loyalty
(4) Non-disclosure of conflict
a. Belgian Band v Sino Global 2005 HKEC 1414: director mortgaged companys
property for a bank loan in favour of another company which he had interest, and
didnt disclose. Held breach of duty. Bank cant enforce mortgage as it had notice of
breach.
(5) Transaction with close relative of director might BREACH
a. Newsgate Stud Co v Penfold: not necessarily conflict in every case where
company transacts with close relative of director, question is whether theres a
real risk of conflict between duty and personal loyalties
(6) Fairness of transaction not a defence
a. Newsgate: if theres such a real risk, onus on director to show transaction is in
best interest of company
(7) Person who is director of two companies GENERALLY breach of no
conflict rule if no consent from them
a. Marshonaland: Equity doesnt prevent person from being appointed director of
more than one company, even in rival company
b. Hivac Ltd: normally implied term in employment contract director will be
prevented to engage in business in competition (Kao Lee & Yip)
4.3.4 Disclosure and approval by the general meeting
(1) No breach of no-conflict rule if approval by general meeting
a. Man Luen Corp: partnership dealing with company, partners also directors,
disclosed at board meeting; held necessary to disclose to and get approval in
GENERAL meeting; breach
(2) What is adequate disclosure:
a. Coleman: nature and extend of conflicting interest, gains director would make if
such information is material to companys decision whether or not to enter into
transaction
(3) At common law director-shareholders not prevented from voting at
meeting
a. Beatty: director whore also shareholders can vote at general meeting despite
the conflict

4.2.4 Modification of duty under AOA

(1) Articles can require disclosure be made to board only
a. Man Leun Corp: AOA can modify to require disclosure to Board only
b. DEG v Kooshy: Must disclose to board together as a body not piecemeal
disclosure to individual board member
c. Woolworths v Kelly: If conflicting interest of the director is evident from
materials known to the board, might upheld validity of disclosure even if no formal
declaration
d. Fairyoung Holdings: absence of record of declaration in minutes of meeting is
not conclusive of non-disclosure, court will consider all evidence
(2) Table A in Cap 32: reg.86 provides if director has material interest in
companys business:
i. Must declare nature of interest at meeting of directors
ii. Must not vote in respect of the contract; if director does so, vote is disregarded
iii. Director not counted in quorum
(3) Certain exceptions to voting restrictions in Table A
- ii. and iii. doesnt apply to certain transactions (reg.86(2)(a)-(d))
- Can vote if only interested as an officer or shareholder ((2)(d))
- Arguable that reg.86 impliedly dispenses with need to disclose to GENERAL
MEETING
(4) Model Articels under Cap.622 S.78 CO
- Requirement of disclosure arises if director has material interest in any
transaction, arrangement or contract with the company that is significant in relation
to companys business:
i. Director must declare nature and extent of interest to other directors
ii. must not vote in that matter
iii. Must not be counted for quorum for that matter
(5) Public Companies: disclosure for interest of entitles connected
- S.486 CO: disclosure obligation arises for interests of entities connected with the
director
(6) Exceptions to voting restrictions in Model Articles:
- Similar to reg86(2), but exceptions in reg86(2)(d) not reproduced in the Model
Articles

4.3 Disclosure of interests Companies Ordinance

(1) CO Cap622: statutory requirement to disclose material interest
- S.536 CO: Director who, directly or indirectly, has a material interest in
transaction, arrangement or contract with the company must declare nature and
extent of interest to directors
- S.538(1)CO: Disclosure must be made at a board meeting or by written notice to
other directors
- S.538(4): Can give general notice for a category of contracts which hes
interested

(2) Main changes of disclosure in Cap 622 (8.087)

(3) Informal disclosure principles applicable to statutory disclosure
(4) Statutory duty applies in addition to equitable duty
- S.536 CO supplements general law and doesnt replace equitable duty to
disclose in general meeting
- Man Leun Corp: Articles cannot waive S.536 requirement

4.4 Remuneration
(1) Directors CANT sue company to pay them benefit unless AOA provides
so
a. Guiness v Saunders: cant cause company to benefit themselves or appoint
themselves to salaries position unless AOA allows (Tam Po Leo 2011 1 HKLRD 537)
b. Model AOA (private) art. 17(1): director can hold office or place of profit
under company as the directors may determine
c. art. 26: remuneration is determined in general meeting
(2) Companies Ordinance largely does not regulate remuneration
- AOA can dispense member approval for directors remuneration
- S.4 Companies (Disclosure of Information about Benefits of Directors) Regulation:
requires disclosure of directors emoluments in financial statements but only the
aggregate not individual amount
(3) For listed companies some degree of shareholder control over
remuneration
- R.13, 68 Listing Rules: approval in general meeting required for directors
service contracts for duration over 3 years (which requires 1 years notice for
termination or equivalent compensation in lieu of notice)
- App. 16, para 24 Listing Rules: listed companies must disclose directors
emoulments on named basis in financial statemeds
- Listing Rules r.3.25: listed companies must set up remuneration committee,
which members are to be independent non-executive directors (committee sets
remuneration packages and recommend to board)
(4) Non-director executive officers remuneration
- Listing rules has no requirement to disclose remuneration of non-director executive
officers
- App. 16 para 25 Listing Rules: must disclose in the accounts aggregate
amount of remuneration of 5 highest paid individuals in the company for the
financial year
- Corporate Governance Code para.B.1.5: companies to disclose remuneration
to senior management in annual reports

4.5 Loan to directors and similar transactions

4.5.1 Loans
(1) Prohibition against loan to directors without approval
- Equitable fiduciary duty prevent loans to directors without member approval/AOA

authorisation
- CO Cap32 s.157H(2): company prohibited to directly/indirectly loan to director of
company/holding company, or guarantees or security for loans by 3 rd party to
director
(2) S. 500-504 CO Cap 622: Loan to directors permitted if approval by
members
- CO Cap32 s.157HA(2): This member approval exception only applies to private
companies
- Approval: notice requirements, and ordinary resolution
- S. 496(2)(b), 496(5) CO622: For public companies/private companies which are
subsidiaries of public companies, there must be disinterested voting
(3) Where loan given to director of holding company approval by members
of company and holding company required
- Ss.500(2), 501(2), 502(2), 503(2), 504(2) CO622
- Ss. 500-504(3)(b): Holding company is vote in approval at subsidiary level
4.5.2 Quasi-Loan and credit transactions (8.098-8.113)

5. Misuse of assets and information, and secret

profits
5.1 Profit Rule
(1) Director must not profit:
a. Regal Hastings: must not without approval obtain benefit through position as
director or by reason of opportunity or knowledge from position as director
(Kishimoto v Akio 1996 1 HKLR 196, 278 (CA))
(2) Profit rule and conflict rule
- In most cases breach of profit rule will also breach conflict rule
a. Regal Hastings: court suggest profit rule is independent from conflict rule
b. Kao Lee & Yip: the two rules are not always common and each has distinct
features
(3) Secret commissions or bribes caught by profit rule
a. Boston Deep Sea Fishing: bribery and secret commission in transactions for
companys acquisitioin of goods or services breach of profit rule
b. Shaw v Holland: profits to directors by issuing shares to themselves below
market price BREACH
c. Real (Hastings): allotments made with promoters below market value BREACH
(4) BREACH even if director acted in good faith (Regal (Hastings))
a. Regal Hastings: Doesnt matter that company could not have attained profit or
suffered no loss
b. Boardman v Phillips: mere use of knowledge/opportunity comes to fiduciary in
course of position as fiduciary doesnt necessarily make fiduciary liable to account
for gains

c. Chan v Zacharia: Directors liability to account wouldnt arise if unconscientious

to assert it, to avoid unreasonable and inequitable applications of equitable
doctrines

5.2 Misappropriation of company assets

(1) Breach if director misappropriates assets
a. RE George Newman: directors have no power to make presents to themselves
or others out of companys assets
b. Maxwell (No.2): BREACH when director caused company to transfer for free
shares held by company to another company which director had interests
c. Re Texgar Ltd: BREACH when misapplied company funds to pay salaries of
office in another company owned by director

6. Diversion of Corporate Opportunities

6.1 General
(1) Diverting business opportunity can breach conflict or profit rules of
both
a. Regal (Hastings): BREACH if divert business opportunities to themselves or
associates
(2) Liability to account can arise even if company couldnt have taken
advantage of opportunity
a. Regal Hastings: Even if directors acted bona fide and company suffered no loss
b. Fexturo Pty Ltd: if BREACH, open to courts to consider issues of fairness in
deciding what relief to grant and what allowances may be given
(3) Business opportunity is companys
a. Re Texgar: Director developed the company business in first place and
companys business in essence his own; held rejected argument and Business
opportunity is companys.
(4) Liable to account even if come across business opportunity in personal
capacity (Chinese United)
a. Chinese United Establishment 1997 2 HKC 212: liable for diversion of
corporate opportunity if enter into engagements which directors can have personal
interest conflicting with interests of company
(5) Duty to communicate to company if opportunity is relevant to company
a. Bhullar v Bhullar: director bought adjacent property without telling company
(but in board meeting said didnt want to acquire any more properties). Held
director was under duty to communicate to company, whether company couldve
or wouldve taken the opportunity is not the point
(6) Not necessarily precludes from taking up opportunities outside scope
of companys business
a. Kao Lee & Yip: Liable if opportunity is of concern and relevant to company,
having regard to existing business operations of company and potential

business company is pursuing or contemplating.

b. Aas v Benham: if outside scope of companys operations directors cant be
precluded
c. Re Allied Business: But if opportunity comes to director in capacity as
director, even if outside scope of business and company wouldve not been
interested, still need companys informed consent
(7) Directors cannot obtain opportunity by resigning
a. Canadian Aero Service: if resignation is influenced by with to acquire
opportunity or if its the position with the company rather than a fresh initiative that
led to the opportunity (Kao Lee & Yip)
(8) Director not precluded if its not Maturing Business Opportunity
a. Kishimoto v Akio: if opportunity is entirely speculative not mature at time of
resignation, director is not precluded
b. Canadian Aero Service: precluded if maturing business opportunity even if not
yet reach stage of having a specific contract
c. Kishimoto: mere prospect of future business is insufficient to come within
maturing business opportunity
d. Kao Lee & Yip: Whether its mature is question of degree depending on e.g.
stages reached in discussion, initiative by the fiduciary, timing and reasons for
resignation
(9) Accumulated knowledge, skill and experience can be used for own
profit after resignation
a. Kishimoto: can use such knowledge, skill and experience acquired during
their directorship after resignation (Kao Lee & yip)
(10) Authorisation by general meeting subject to fraud and minority
shareholder remedies
a. Regal Hastings: if material disclosed to general meeting and approval, NO
BREACH
- Interested directors can vote at general meeting if theyre also shareholders
(11) IF company decides not to take opportunity
a. Peso Silver Mines: if Board bona fide decides not taking opportunity, director
not precluded to use opportunity for personal gain (here board rejected opportunity
and 3rd party pursues director further in directors personal capacity)
(12) Boards bona fide rejection sufficient to enable director to acquire it
a. Regal Hastings: doesnt seem to have such general principal that director can
use the opportunity
- The view that board approval is sufficient is contrary to general principle that,
unless AOA provides otherwise, general meeting approval is required to
absolve director from breach of duty (Beatty)
b. Benson v Heathorn: prima facie, a company is entitled to disinterested advice
of its directors

c. Bhullar: A board resolution cannot absolve director if opportunity is

within companys existing operations or contemplating (Bhullar)

7. Duty of Care, Skill and Diligence

7.1 General
(1) Equitable duty and duty under tort of negligence (Kao Lee & Yip)
- The equitable duty is not a fiduciary duty as such
(2) S.465 CO 622 Statutory duty of care of directors
7.3 Standard of care
(1) Directors only liable if negligent
a. Re City Equitable Fire Insurance Co: NO BREACH if simply some error in
judgment which leads company to suffer a loss; only if directors are NEGLIGENT
(2) Must take due care when making decisions; duty includes oversight of
com[anys affairs and can be negligent omissions
a. Vrisakis v ASC: in exercising reasonable care, legitimate for directors to
balance foreseeable risk of harm against potential benefits that could reasonably be
expected
7.3.1 Standard under general law
(1) Duty is to take reasonable care
a. Daniels v Anderson: Reasonable care means degree of care an ordinary man
might be expected to take in circumstance on his or her own behalf, or degree of
skill, care and diligence ordinary prudent man would exercise under similar
circumstances
(2) English cases: Subjective Standard of Care
a. RE City Equitable Insurance: director need not exhibit greater skill that may
reasonable be exepceted from a person of his or her knowledge and experience
b. Re Brazilian Rubber: can be director of rubber company in complete ignorance
of rubber without incurring responsibility for the mistakes which results from such
ignorance.

(3) Modern position: Minimum Objective Standard

a. Re DJan of London: director duty of care is reasonably diligent person having
both
(i) General knowledge, skill and experience that may be reasonably expected of a
person carrying out same functions as are carried out by that director in relation to
the company; and
(ii) General knowledge, skill and experience that the director has
(4) Hong Kong accepts minimum objective standard
a. Lau Wai Duen 2001 3 HKLRD 430, 434: obiter that RE City Equitable

(subjective test) is duty of care for directors in HK; but noted RE City Equitable
standard is open to review.
b. Dorchester Finance: executive and non-executive directors have same
responsibility in law as to management of companys business (Lau Wai Duen
followed this case)
- This implied there is a minimum objective standard
c. RE Barings: directors have duty to acquire sufficient knowledge of companys
business, even if directors delegate, must still supervise discharge of the
delegated functions. (Re Copyright 2004 2 HKLRD 113, 124 followed this)
(5) Director under service/employment contract
a. Lister v Romford : implied term (if not expressed) that director possesses
reasonably competent skills for that position and would exercise reasonable care
and skill
b. ASIC v Rich: standard is objective expected of a person appointed to that
position
c. Daniels v Andersion : if appointed for particular skills, may expressly/implied
require director to meet the standards reasonably expected of a person having such
skills
7.3.2 CO Cap622 Duty of Care
(1) New statutory duty replaces general law duty
- S.465(4): replaces general law duty
(2) Standard of care
- S.465(2): must exercise skill, care and diligence would be exercised by
reasonably diligence person with
(a) General knowledge, skill and experience may reasonably expected of person
carrying functions carried out by director in relation to the company
(b) General knowledge skill and experience that director has
- Para (a): sets out minimum objective standard (Brumder v Motornet); cannot be
lower than this
a. Re Produce Marketing Consortium: the standard set with reference to
functions of the director in that company, position held by the director and
responsibilities of the director, and nature and type of the particular company
(3) Cases under general duty: arguably courts will use cases under general law
for interpretation
(4) Cap622: shadow director owed duty of care
- S.465(5): Shadow director owes duty of care
- S.465(6): Holding company is not regarded as shadow director of subsidiary if
directors (or a majority of them) of the subsidiary are accustomed to act in
instructions of the holding company
(5) Statutory remedies same as general law:
- S.466: remedies for breach of statutory duty same as under general law

7.4 Oversight or monitoring duty

(1) Duty of care requires monitoring companys performance (S.465 and
general law)
a. Re Barings: directors are required to
(i) Basic understanding of business of the company
(ii) Keep informed about activities of the company; not necessary to have daily
inspection but needs to have general monitoring of corporate affairs and policies
(iii) Have to attend board meetings regularly
(iv) Not required to audit corporate books, but should maintain familiarity with
financial status of company by regular review of financial statements
(2) All directors, including non-executive directors, to meet minimum
requirements in monitoring management of the company
a. Lai Wai Duen: directors, including non-executive, must meet minimum
requirements in monitoring management of the companys business and finances
b. Re Barings: Can delegate functions and trust managements competence and
integrity to a reasonable extent, but has a duty to supervise the discharge of the
delegated function
c. Re Westmid Packaging Services: Cannot abrogate responsibility entirely
d. Daniels v Anderson: cant escape liability by being figureheads, sleeping, or
passive directors
e. Daniels v Anderson: If directors knew or by exercise of ordinary care should
have known, any facts that awakes suspicion and put a prudent person on guard,
then degree of care commensurate with the evil to be avoided is required
(3) Directors duty greater than simply representing particular field of
experience
a. Law Yuen Duen: Each director has duty greater than that of simply representing
a particular field of experience and cannot absolve themselves entirely from
responsibility in relation to companys financial affairs or in relation to management
of the company
(4) Can be breach of duty if company doesnt comply with legal or
regulatory requirements
a. Lai Wai Duen: Director liable if negligent in failing to ensure company complies
with legal or regulatory requirements that apply to the company
b. ASIC v MacDonald: negligent by allowing company to make false/misleading
statement about stock market
(5) Examples:
a. RE Rontex Intl Holdings: Failure to carry out due diligence
b. Dorchester Finance: failure to supervise, by signing blank cheques
c. RE DJan of London: signing inaccurate documents; directors might be excused
from reading a lengthy document but here its a very short one

7.6 Exercise of independent judgment

(1) Independent judgment and must not fetter discretion

a. Lai Wai Duen: Directors cannot blindly follow instructions of another director
b. Tam Po Kei 2011 1 HKLRD 537: shareholders are entitled to have its officers
independently consider and decide the companys affairs
(2) Can have advice of others and delegate
(3) Cant fetter their discretion
a. Boulting: cannot fetter powers by binding themselves in manner that leads
them to disregard their duties or to act inconsistently with them
b. Motherwell v Schoof: any such contract that fetters powers wouldnt be
enforced by court
c. Fulham Football Club v Cabra: but can commit themselves to undertake
necessary future actions to carrying out of the transaction

8.1 Remedies
Breach of fiduciary duty gives equitable remedies, e.g. rescission, restitution of
property, account of profits and equitable compensation
- if a threatened breach of duty, an injunction
- Company seeks compensation if breach of duty of care via damages or equitable
compensation
(1) if breach of fiduciary duty, transaction voidable at election of company
a. Transvaal Lands: company right to rescind contract if director failed to disclose
conflict of interest
(2) If improper purpose, act voidable
a. Howard Smith v Ampol: improper allotment of shares set aside by court
(3) If transaction entered into without authority, act is void
a. Akai Holdings: director failing to disclose conflict interest didnt have authority to
bind company, void.