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What is expected from a director?

What is expected from a director?

What is expected from a director?

Wednesday, 11 February 2015 17:26

Tracy Yip and Henry Fung

The director’s duties can be classified into two broad categories: fiduciary duties, and duties of care, skill and diligence. In the old days, the duties of care, skill and diligence were mainly found in case law. The level of care to be expected of a director was the care that an ordinary person would exercise on his own behalf. Additionally, a director needs not in the performance of his duties, exhibits a greater degree of skills than may reasonably be expected from a person of his knowledge and experience. This means that his conduct was judged against that of a reasonable man with his qualification and experience (Re City Equitable Fire Ins Co (1925), UK). Clearly, this subjective test as contained in old case law are too lenient nowadays for upholding good corporate governance. On 3 March 2014, the New Companies Ordinance (Cap. 622) (“NCO”) has come into force, and section 465(2) has codified the directors’ duties of care, skill and diligence in the performance of their functions and the exercise of their powers.

Section 465(2) of the NCO
Reasonable care, skill and diligence mean the care, skill and diligence that would be exercised by a reasonably diligent person with-

(a)    the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; (i.e. THE OBJECTIVE TEST) and

(b)    the general knowledge, skill and experience that the director has. (i.e. THE SUBJECTIVE TEST)

This section of the NCO is actually modelled on section 174(2) of UK Companies Act 2006. It reflects the judicial trend to adopt a mixed objective and subjective test.
Today, what is required of directors will vary and depend on:-

  • the types of directors (i.e. functions carried out by the directors);
  • the types of companies; and
  • the sizes of companies.

In 2006, the UK Government explained the mixed test with the following example:

“A non-executive director who is a lawyer by profession but not employed by the company in that capacity would not be expected to act as if he were the legal adviser to the company. But he would be expected to use his general legal knowledge to look at things when carrying out his functions as a non-executive director of the company.” (Hansard, HL, GC col 284 – col 285 (6 February 200) and Hansard HC Comm D, col 602 – col 604 (11 July 2006))

Therefore, the objective test provides a minimum standard of care of a director and cannot be adjusted down. The subjective test, however, provides a standard of care that can vary depending on whether the director has held himself out as having special knowledge, skills and experience. As such, a higher standard of care will be placed on a director who is appointed due to his special knowledge, skills and/or experience when comparing to those without such knowledge, skill or experience.

In the UK, Weavering Capital (UK) Ltd (in liquidation) and others v Peterson and others [2012] All ER (D) 46 (Jun), the defendants were found liable for the manipulation of figures and misleading of investors in the fund. The Chancery Division found that one of the defendants had been in breach of his duties to the company as director by having failed (i) to acquire a sufficient knowledge and understanding of its business, (ii) to satisfy himself in respect of the details and propriety of the swaps, and (iii) to act with reasonable care, skill and diligence.

While the NCO has codified the duty of care, skill and diligence for directors, it does not state the consequences of breaches of this statutory duty. Therefore, the common law rules and the equitable principles will continue to apply in assessing damages when a breach to this statutory duty has occurred.

Conclusion

A modern corporate expects more from its directors for upholding good corporate governance.  The codified statutory duties of care, skill and diligence under the NCO seems to improve the clarity and certainty for company management and members. However, there is an argument that words like “reasonably expected” can be subject to different interpretations. Furthermore, Hong Kong has still not codified any directors’ fiduciary duties into our NCO. The fiduciary duties of directors is about the directors acting in good faith in the interests of the company, exercising their powers for proper purpose, and avoiding conflicts between their personal interests and their duties as directors. It remains to be seen whether or not the Hong Kong government will codify the directors’ fiduciary duties in the near future.