Understanding the Categories of Directorial Duties

Every company is an artificial person in law and thus it does not have its own mind and soul. In order to operate a company, it is necessary that the same must be governed by officers. A director is an officer of a company and every company director is an authorized representative of a company. Apart from having a very crucial position in a company, there are several duties that are enshrined on a director. In Hon Kong the duties of the company directors are divided into broad categories. It is important to understand the difference amid the two:

1. Fiduciary duties – In the leading case of Poon Ka Man Jason v Cheng Wai Taothe true interpretation of the concept of fiduciary duties is explained. It was held that when a director is consider to be comply with fiduciary duties, then, there are several duties that are engrossed within such duty, that is,
2. Duty to act in good faith;
3. Duty to act in the best interest of the company
4. Duty to act for proper purpose;
5. Duty not to use own discretion at the cost of the company;
6. Duty to avoid any situation which results in conflicts of interest amid the director and the company itself;
7. Duty to make sure that not to indulge in any act that results in any kind of competition with the company;

In the leading case of Rock (Nominees) Ltd v RCO Holdings plc (in liq.) & Ors it was held that whenever a director has breached a fiduciary duties then the company itself can bring legal proceedings against such defaulting director

1. Duties of care and skill – Whenever the directors are indulge in any action, then, it is necessary that reasonable care and skill must be furnished while catering such duties. It is derivation from the common law duty of negligence. The duty of care and skill must be performed as what a normal prudent man will act in the similar situation. The duty of care and skill has 2 elements:
2. That the level of duty must be marked with a standard of a normal prudent man in the similar situation;
3. If the director posses special knowledge or skill then, the compliance of duty must be governed as per such expertise and the level of standard us higher.

As per Wai Duen v Boldwin Construction Co. Ltd the director must apply their own independent judgment before complying with the duties of skill and care.

The facts reveal that E&G Limited is a company which is registered in Honking. The company deals in trading second hand vehicles. Edward and George are its two directors. Now, both George and Edward are found to be in violation of the directorial duties.

Edward – violation of fiduciary duties

Edward is expert in cultivating relationship with customers of E&G.

Edward is approached by Howard and he desires to sell his car to the company @ HK$100,000. Edward believes the offer to be profitable immediately (without seeking permission from George) accepts the offer and pays the cash to Howard. Howard is interested in taking cash on behalf of the company. But, Edward refused and submits that the cheque book of the company has just been misplaced.  Later the car is resold by Edward to a friend of his niece for HK$130,000 thereby making profits which are not in the knowledge of George or the company. The transaction is not recorded on the books of the company.

Now, the acts of Edward are carried on in order to make secret profit at the cost of the company. The acts of Edward are in conflict with the interest of the company and he chooses to prevail his own interest at the company cost. The acts are not in the best interest of the company and are not for proper purpose. He uses his own discretion for his own benefit and thus there is complete violation of duty of good faith and faith.

George – violation of duty of care and skill

George is an expert in 2^nd hand car market and is an experienced car mechanic.

Also, George is approached by Jane who wants to sell her coupe. The car of Jane was highly modified and George is aware of the same. An offer is made by Jane to sell the car @ HK$130,000. George believes that he can resell the car and earn a profit of several tens of d thousand dollars. The cash is paid by the company to Jane. George later found that the modification work is defective and he is doubtful as to why he was not able to detect the defect initially because of the fault, the company has to bear the loss of HK20,000 to redress it just to make the car run normally. The car is still not working properly. The car is finally sold for HK$80,000, thus making a loss of HK$70,000.

Now, George being a director has dual responsibility. Firstly, George must act as per a reasonable person would have acted in the given situation. But, the acts of George are below the level of care and skill that is expected from him. On the pretext of earning high profits he did not checked the modification of the car properly. Being, being an expert the duty that is exercised by him must be of high level. But the acre that is taken by him is not of much category resulting in falling short of what can be expected from a normal prudent man in the like situation.

Thus, there is clear breach of duty of care and skill on the part of George.

Reference List

Journals/Books/Articles/Journals

Conventuslaw, ‘Hong Kong Breach Of Fiduciary Duties Of Company Directors: Unfair Prejudice Petition And Just And Equitable Winding-Up?’ (2017) https://www.conventuslaw.com/report/hong-kong-breach-of-fiduciary-duties-of-company/. Accessed on 25^th October 2018.

Edward Tong, ‘Directors’ Statutory Duty of Care: Companies Ordinance’  https://www.hkiaat.org/e-newsletter/Apr-15/technical_article/PBEIV.pdf. Accessed on 25th October 2018.

Robertsonsshk, ‘Hong Kong Directors’ Fiduciary Duties’ (2017) https://www.robertsonshk.com/en/news/hong-kong-directors-fiduciary-duties.  Accessed 25th October 2018.

Case Laws

Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144

Rock (Nominees) Ltd v RCO Holdings plc (in liq.) & Ors [2003] EWHC 936 (Ch).

Wai Duen v Boldwin Construction Co. Ltd [2001] 3 HKLRD 4