Directors’ Liability worldwide in Hong Kong

In Hong Kong, directors owe the following duties to the company:

• uncodified fiduciary duties derived from common law, such as the duties to act in good faith in the company’s interests, to avoid conflicts between personal interests and the company’s interests, to exercise powers for a proper purpose and not to make secret profits;
• a statutory duty of care, skill and diligence codified under the Companies Ordinance (Cap. 622);
• specific duties imposed by the Companies Ordinance (Cap. 622), such as the duties to keep accounting records and to lay financial statements before the company in a general meeting.

When a company becomes or is likely to become insolvent, the directors’ duty to act in good faith in the company’s interests shifts from the interests of the shareholders as a whole to the interests of the creditors of the company as a whole.

In case of breach of such duties, a director can be liable to civil or criminal proceedings and can be subject to disqualification from acting as a director. Under the Companies Ordinance (Cap. 622), a “responsible person”, that is an officer or shadow director who authorises, permits or participates in the contravention can be held liable for non-compliance. A shadow director is a person in accordance with whose directions or instructions the company’s directors or a majority of the company’s directors are accustomed to act.

In Hong Kong, a civil action for breach of duty may be taken by:

• the company itself, acting via its board of directors;
• one or more shareholder(s) who may bring a derivative claim on behalf of the company.

In addition, a shareholder of the company may initiate a claim for unfair prejudice if:

• the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the shareholders generally or of one or more shareholder(s); or
• an actual or proposed act or omission of the company (including one done or made on behalf of the company) is or would be so prejudicial.

In an insolvency context, the official receiver and the liquidator, and, in some circumstances, a creditor of the company, may bring an action for misfeasance, fraudulent trading or voidable transactions.

In Hong Kong, there are various situations in which a director may be held criminally liable. Below are examples of corporate offences for which a director may be held criminally liable:

• under the Companies Ordinance (Cap. 622), a director may incur criminal liability in case of failure to keep statutory registers or in case of provision of financial assistance by the company for the purpose of acquisition of the company’s shares;
• under the Employment Ordinance (Cap. 57), a director may incur criminal liability where the non-payment or late payment of an employee’s wages was committed with the director’s consent or connivance or attributable to the director’s neglect;
• under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), once a company is or is likely to become insolvent, a director may incur criminal liability in case of misfeasance, fraudulent trading or voidable transactions.

Depending on the type of allegations, a complaint can be lodged with relevant government departments and enforcement agencies such as the Companies Registry, the Hong Kong Police Force, the Official Receiver, the Securities and Futures Commission, etc. After a complaint is lodged, the decision to investigate is at the discretion of the relevant government department or enforcement agency, usually based on its level of confidence that legal action may be commenced. In case an investigation is initiated, the author of the complaint may be invited to give a witness statement and provide documentary evidence in support of the claim. After the investigation is completed, the relevant government department or enforcement agency has the discretion to take prosecution action based on the evidence gathered and whether it is in the public interest to pursue a prosecution.

In Hong Kong, limitation periods for civil cases are governed by the Limitation Ordinance (Cap. 347). The limitation period depends on the type of claim:

• for breaches of contract, the limitation period is generally six years from the date of the breach for simple contracts, and 12 years for actions based on a deed;
• for fraud, the limitation period is generally six years from the date on which the plaintiff has discovered the fraud or could, with reasonable diligence, have discovered the fraud;
• for negligence, the limitation period is generally six years from the date on which the damage is sustained;
• for tort claims, the limitation period is generally six years from the date on which the cause of action accrued, although for tort claims giving rise to personal injury it is three years from the date of on which the cause of action accrued or the date of the plaintiff’s knowledge of the injury.

Regarding criminal cases, there is generally no time limit to commence the prosecution of indictable offences. For summary offences, the limitation period is generally six months from the date of commission of the offence, unless otherwise specified in the relevant statute.

A company can put in place a directors and officers liability insurance, to protect its directors and the directors of its associated companies against:

• a director’s liability to any person for negligence, default, breach of duty or breach of trust, except where the liability arises from the director’s fraud;
• a director’s liability incurred in defending any civil or criminal proceedings against that director for negligence, default, breach of duty or breach of trust, including fraud, regardless of whether the liability arises from the director’s fraud.

Under the Companies Ordinance (Cap. 622), there is no distinction between executive, non‑executive and independent directors. Non-executive and independent directors are subject to the same statutory and fiduciary duties and liabilities as executive directors.

However, Hong Kong courts may take into account the nature of the director’s role, the fact that the director is a non-executive director and the director’s professional skills and knowledge when determining whether the director complied with its duty of care, skill, and diligence.

In case the instructions of a holding company have always been followed by its subsidiary, the holding company may be considered as a shadow director of its subsidiary. In practice, liability does not arise merely because a holding company appoints the directors of its subsidiary. The holding company will only be treated as a shadow director if the subsidiary’s board of directors is accustomed to act in accordance with the holding company’s directions or instructions.

If the holding company is considered as a shadow director of its subsidiary, since directors’ duties apply to shadow directors, the holding company may be liable in case of breach of directors’ duties.