10/12/2024

LW4656/LW5656 Company Law I

Directors’ Duties

Prof Virginia Harper Ho

School of Law
City University of Hong Kong

October 2024
Acknowledgments to Prof Alexander Loke

Review
1. Company as an legal person which needs to act through
human actors.
2. The human actors in corporate organs :
a) the shareholders in general meeting; or
b) board of directors.
3. Division of power within a company: from agency theory
to constitutional-corporate theory. Usual articles:
a) “the business and affairs of the company are managed by the
directors…” Model (Public Co) art. 2/ Model (Pte Co) art. 3;
b) Members’ Reserve Power - Model (Public Co) art. 3/ Model
(Pte Co) art. 4

Board’s Management – information; decision-making

power Monitoring - Appoints, oversees, supervises
the executive officers
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What is the legal procedure for the appointment of a director?

Answer: Examine the articles of association of the company.

Model articles (public companies)

Model articles
23. Appointment and (public
retirementcompanies)
of directors
(1) A person who is willing to act as a director, and is permitted by law to do so, may
be appointed to be a director—
(a) by ordinary resolution; or
(b) by a decision of the directors.
(2) ...
(3) An appointment under paragraph (1)(b) may only be made to—
(a) fill a casual vacancy; or
(b) appoint a director as an addition to the existing directors if the total number
of directors does not exceed the number fixed in accordance with these articles.
(4) …

Parties have freedom to craft the model articles to

suit particular needs. E.g. Joint venture company

Definition of Director
CO s 2
director (董事) includes any person occupying
the position of director (by whatever name
called);
CAC v Drysdale (1978) 141 CLR 236
Definition extends to de facto directors

Karla Otto Ltd v Bulent Eren Bayram [2017] 2 HKLRD 124

Difference between a de facto director and a shadow director

What is a “shadow director”? See Cap. 622 s.2

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Fiduciary Duties
• No Profit Rule
• No Conflict Rule
• Act in good faith in the best interests of the
company
• Proper Purpose Rule

The no profit rule

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)

Regal

Capital £5,000

Regal £2,000 500 shares each @ £1

• D1
• D2
Amalgamated • D3
• D4
• Gulliver (Chair) - nominee
• Garton (former solicitor)

Acquire 2 Shares were sold 2 months

cinemas later for profit of £2 16s 1d
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The no profit rule

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)

1. Bona fides irrelevant

2. The no profit rule

“The rule of equity which insists on those, who by use of

a fiduciary position make a profit, being liable to account
for that profit, in no way depends on fraud, or absence
of bona fides …” (p. 144G)

3. What steps could the directors have taken to

secure the profit?
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The No Conflict Rule

Transvaal Lands Co v New Belgium (Transvaal) Land and
Development Co [1914] 2 Ch 488

 vote
Samuel
 disclose 11,062 shares
(5%)
 voted
Harvey
 disclose 1,000 shares
(as trustee)

Transvaal T bought Lydenberg shares from NB New Belgium

(Plf) (Def)
T sold forfeited T shares to NB

Plaintiff sought to rescind the transactions with Def

Held: Rescission available.
Basis? (a) breach of no conflict rule, plus (b) Def (third party) had notice
(Agent’s knowledge attributed to the company: p. 499)
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The No Conflict Rule

Transvaal Lands Co v New Belgium (Transvaal) Land and Development
Co [1914] 2 Ch 488

Learning Points:
1. The nature of the no conflict rule.

““As trustee it was his duty to do his best and make the most of
the trust estate for his cestuis que trust, and as beneficiary his
interest was to do the best he could for himself; but in either
case his duty or interest, as the case might be, would conflict
with the duty which he owed to the company of which he was
director.”(p 501)

Fairness of the deal is irrelevant. (p. 502 and 512)

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The No Conflict Rule

Transvaal Lands Co v New Belgium (Transvaal) Land and Development
Co [1914] 2 Ch 488
Learning Points (cont’d)
2. ‘Contracting out’ of the no conflict rule by the AOA is permissible. Its
conditions must be strictly complied with

“98. No contract or arrangement entered into on behalf

of the company with any directors, or any firm of which a
director is a member, shall be avoided, nor shall such
directors be liable to account to the company for any
profit realized by any contract or work, by reason of such
directors holding that office … provided he discloses the
nature of his interest; but no director shall vote in respect
of any contract in which he is concerned” (p. 488)

See art 98 AOA: p. 488, and dictum on 492 and 505.

NOTE: for HK, see Man Luen Corp v Sun King Electonic Printed Circuit Board Factory Ltd
(1981, HK High Court, Fuad J)

3. (Implicit) Third party who contracts with knowledge of the conflict liable
to have the contract set aside. (p. 499)
Comment: see also Belgian Bank v Sins Global Intl Ltd [2005] HKEC1414 (TB 8.074). 10

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The No Profit Rule & Constitutional Adjustment

Imperial Mercantile Credit Association v Coleman (1871)
“83. The office of a director shall be vacated if he
contracts with the company, or is concerned in or
participate (sic) in the profits of any contract with the
company, without declaring his interest at the meeting of
the directors at which such contract is determined on or
work ordered, if his interest then exists, … and no director
so interested shall vote at any meeting or on any
committee of the directors on any question relating to
such contracts or work.”

“[The rule that a trustee may not profit from his position], like any
other rule of the Court, is open to contract between the parties, for
it is not a principle the benefit of which parties cannot waive by
express and direct contract for the sake of other advantages which
they suppose they derive.”
- per Lord Hatherley LC (p. 570)

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Fiduciary Duties and Their Constitutional Adjustment

Woolworths v Kelly (1991) 22 NSWLR 189 at 207
1. Approval by members at a general meeting.
In re George Newman (1895); Woolworths Ltd v Kelly (1991) 22
NSWLR 189; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)
HK: see similar dictum in Man Luen Corp v Sun King Electonic Printed Circuit
Board Factory Ltd (1981, HK High Court, Fuad J) (AoA not provided)

2. Disclosure to directors simpliciter insufficient

• AOA must allow for vote by disinterested directors. Transvaal Lands Co v
New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488
3. Member approval waivable in AOA. Transvaal
4. Compliance with the requirements of AOA critical.
Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558

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Conflict of interest and duty – corporate opportunity

Queensland Mines Ltd v Hudson (1978)
Privy Council, on appeal from NSW

Managing director
Factors Co 3/1961 – 12/1971
(Korman)
Hudson
$
License to mine iron
Queensland ore
Mines Ltd Tasmanian State
Government
Funds problem

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Conflict of interest and duty – corporate opportunity

Queensland Mines Ltd v Hudson (1978)
Privy Council, on appeal from NSW

1. Whether ‘real sensible possibility of conflict’

2. Whether opportunity appropriated with the
informed consent of Queensland Mines.

“The board knew the facts and decided to renounce the

company’s interest, whatever it was, in the Tasmanian
iron ore venture and assented to Mr Hudson doing what
he could with the licenses at his own risk and for his own
benefit...And the facts of this case are that , with the fully
informed consent of the Queensland Mines board, Mr
Hudson was left on his own, for better or for worse, with
the Tasmanian licenses… ” (p.10)

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Conflict of interest and duty – Corporate opportunity

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1
Supreme Court of Canada

Managing director
Cropper

License to mine iron ore

Peso Silver
Mines

rejected Dickson offer Dickson

Prospector
• Sought to sell 3 groups of claims in Mayo
District (126 in total)
• Speculative & unproven 15

Conflict of interest and duty – Corporate opportunity

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1
Supreme Court of Canada

“On the facts of the case at bar, I find it impossible

to say that the respondent obtained the interests
he holds in Cross Bow and Mayo by reason of the
fact that he was a director of the appellant and in
the course of the execution of that office … When
later Dr Aho approached the appellant, it was not in
his capacity as a director of the appellant but as an
individual member of the public whom Dr Aho was
seeking to interest as co-adventurer. “
per Cartwright J

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Remedies and Causation

Kishimoto Sangyo Co Ltd v Akio Oba [1996] 2 HKC 260

KJP
Senior Mgr of KJP
Oba Managing director of KHK

Pilot plant in Taiwan

KHK Prime
View

Liquid crystal manufacturing equipment

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Remedies and Causation

Kishimoto Sangyo Co Ltd v Akio Oba [1996] 2 HKC 260

• Confidential information: disclosure and use

(no finding)
• Profit: no finding
• Breach of duty of fidelity - causation
“These [production project] contracts were nowhere in sight
when Mr Oba left the company at the end of October 1993; all
that existed at that time were the contracts for the pilot plant
which, as everyone had hoped, might lead to substantial
contracts for the production line later on. There were no
contracts on which equitable relief could bite. Can the mere
prospect of future business come within the concept of a
‘maturing business opportunity’, as formulated in Canaero? In
my judgment, the answer must be no.” (pp 278-279)
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Statutory reinforcement of a director’s duty to disclose

Companies Ordinance (Cap 622) Part 11 Div 5

536-(1) If a director of a company is in any way, directly or

indirectly, interested in a transaction, arrangement or
contract, or a proposed transaction, arrangement or contract,
with the company that is significant in relation to the
company’s business, and the director’s interest is material,
the director must declare the nature and extent of the
director’s interest to the other directors in accordance with
sections 537, 538 and 539.
***

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Statutory reinforcement of a director’s duty to disclose

Companies Ordinance (Cap 622) Part 11 Div 5

How is the declaration to be carried out?

538-(1) A declaration to directors under section 536 must be—

(a) made at a directors’ meeting;
(b) made by notice in writing and sent by the director to the
other directors; or
(c) made by general notice by the director.
***
[See remainder of s 538]

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Statutory reinforcement of a director’s duty to disclose

Companies Ordinance (Cap 622) Part 11 Div 5

1. Offence: s 542
2. Civil consequences?
Hely-Hutchinson v Brayhead (1968) (Lord Pearson, Lord
Wilberforce)
Guinness plc v Saunders [1990] 1 All ER 652
Lord Templeman Lord Goff of Chieveley
Lord Keith of Kinkel Lord Griffiths
Lord Brandon of Oakbrook
Lord Goff: (After citing Lord Pearson in Hely-Hutchinson)
“On this basis I cannot see that a breach of s 317 … had itself any effect on
the contract between [the parties]… As a matter of general law, to the extent
that there was failure by Mr Ward to comply with his duty of disclosure
under the relevant article …, the contract between him and Guinness was no
doubt voidable under the ordinary principles of the general law …”
(at p 665a)
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Statutory reinforcement of a director’s duty to disclose

Woolworths v Kelly (1991) 22 NSWLR 189
“However, it simply seems to me that in the present case,
where no declaration or statement by the respondent to his
fellow directors could possibly have given them any
information about his interest in the pension scheme which
they did not already have, it cannot plausibly be suggested
that s 123 remained unsatisfied …”
per Samuels JA (at p. 213)

Cf.
“The word ‘declare’ of itself imports a formal statement …It is not atypical of
society to accompany such decisions by a degree of formality which calls the
attention of all participants to their importance.”
per Kirby P (at 198-199)

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The relationship between the director’s statutory and equitable

duty to disclose
Man Luen Corp v Sun King Electonic Printed Circuit Board Factory Ltd (1981)

Suit for account of profits

Directors

Def Co Plf Co
(Supplier of goods)

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The relationship between the director’s statutory and equitable

duty to disclose
Man Luen Corp v Sun King Electonic Printed Circuit Board Factory Ltd (1981)

(1) The organ to which the disclosure is to be

made (board vs general meeting)
(2) Statutory requirement is mandatory
(3) Compliance with statutory obligations does
not mean there is compliance with equitable
obligation.

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Fiduciary Duties and Their Constitutional Adjustment

Woolworths v Kelly (1991) 22 NSWLR 189 at 207
1. Approval by members at a general meeting.
In re George Newman (1895); Woolworths Ltd v Kelly (1991) 22
NSWLR 189; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL)
HK: see similar dictum in Man Luen Corp v Sun King Electonic Printed Circuit
Board Factory Ltd (1981, HK High Court, Fuad J) (AoA not provided)

2. Disclosure to directors simpliciter insufficient

• AOA must allow for vote by disinterested directors. Transvaal Lands Co v
New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488
3. Member approval waivable in AOA. Transvaal
4. Compliance with the requirements of AOA critical.
Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558

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Recall: The No Profit Rule & Constitutional Adjustment

Imperial Mercantile Credit Association v Coleman (1871)
“83. The office of a director shall be vacated if he
contracts with the company, or is concerned in or
participate (sic) in the profits of any contract with the
company, without declaring his interest at the meeting of
the directors at which such contract is determined on or
work ordered, if his interest then exists, … and no director
so interested shall vote at any meeting or on any
committee of the directors on any question relating to
such contracts or work.”

“[The rule that a trustee may not profit from his position], like any
other rule of the Court, is open to contract between the parties, for
it is not a principle the benefit of which parties cannot waive by
express and direct contract for the sake of other advantages which
they suppose they derive.”
- per Lord Hatherley LC (p. 570)

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Statutory Limitation on Ratification of Certain

Breaches of Duty
473-(1) This section applies to the ratification by a company of conduct by a
director involving negligence, default, breach of duty or breach of trust in
relation to the company.
(2) A decision of the company to ratify the conduct may only be made by
resolution of the members of the company.
(3) If such a resolution is proposed at a meeting, every vote in favour of the
resolution by a member who—
(a) is a director in respect of whose conduct the ratification is sought;
(b) is an entity connected with that director; or
(c) holds any shares in the company in trust for that director or entity,
is to be disregarded.
(4) Subsection (3) does not prevent a member specified in that subsection
from attending, being counted towards the quorum for, or taking part in the
proceedings at, any meeting at which the decision is considered.
***

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Limits to exemption of directors’ liabilities

CO s 468
468-(1) This section applies to a provision contained in a
company’s articles, or in a contract entered into by a
company, or otherwise.
(2) If a provision purports to exempt a director of the
company from any liability that would otherwise attach to
the director in connection with any negligence, default,
breach of duty or breach of trust in relation to the
company, the provision is void.
(3) * * *

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Duty to Act bona fide (good faith)

in the Best Interest of the Company

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Duty to act bona fide in the interest of the company

In re Smith and Fawcett Ltd (1942)

J Fawcett
N Smith
(d. 26/2/1940)

4001 shares Offer: 4001 shares

(1) buy 2000 shares
(2) register 2001 shares

Fd Fs Art 10: The directors may at any

2000 2001 Co time in their absolute and
uncontrolled discretion refuse to
register any transfer of shares …
Motion:
rectification of register – insert Fs (executor) as holder of 4001 shares
“… the article is drafted in the widest possible terms, and I decline to
write into that clear language any limitation other than a limitation
which implicit by law, that a fiduciary power of this kind must be
exercised bona fide in the interest of the company.”
Lord Greene MR at p. 308 30

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Duty to act bona fide in the interest of the company

Bishopsgate Investment v Maxwell (No. 2)
(1993, EWCA)

Ian Maxwell
Co

Action in breach of
fiduciary duty

“If a director chooses to participate in the

Shares management of the company and exercises
powers on its behalf, he owes a duty to act
Shares bona fide in the interests of the company. He
must exercise the power solely for the purpose
for which it was conferred. To exercise the
power for another purpose is a breach of his
Shares fiduciary duty.”
-Hoffman
31 LJ

Test for whether the duty is satisfied:

“The proper test, I think, in the absence of actual

separate consideration, must be whether an
intelligent and honest man in the position of a
director of the company concerned, could, in the
whole of the existing circumstances, have
reasonably believed that the transactions were for
the benefit of the company.”
Charterbridge Corp Ltd v Lloyd’s Bank Ltd [1970]
Ch 62 at 74, per Pennycuik J

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Directors’ duty to act bona fide in the best

interest of the company

When the company approaches insolvency, the duty extends

to a consideration of the interests of the creditors.

“On the facts of particular cases this may require the directors to
consider inter alia the interests of creditors. For instance, creditors are
entitled to consideration, in my opinion, if the company is insolvent or
near insolvent, or of doubtful solvency, or if a contemplated payment or
otherwise course of action would jeopardize its solvency…. To translate
this into legal obligation accords with the now pervasive concepts of
duty to a neighbour and the linking of power with obligation. In a
situation of marginal commercial solvency, such creditors may fairly be
seen as beneficially interested in the company or contingently so… in
such cases, the unanimous assent of the shareholders is not enough to
justify the breach of duty to the creditors. …The foregoing principles
relate to actions by the company against directors, whether or not in
truth brought by the liquidator.”
Cooke J in Nicholson v Permakraft (NZ) Ltd (in liq) (1985)33

Acts in the best interest of the company Creditors’ interest?

where company is near insolvency…
Kinsela v Russel Kinsela Pty Ltd (in liq) (1985)

Co K

property
Lease 3+3

Issue: whether the shareholders can

ratify the breach of duty by directors 34

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Acts in the best interest of the company

where company is near insolvency…
Kinsela v Russel Kinsela Pty Ltd (in liq) (1985)

Learning Points:
• Limits of shareholder ratification power per
Bamford (though not ultra vires) See p 730
• Approves Nicholson v Permakraft (NZ) Ltd (in
liq) (1985)
• Subjective or objective test?
• Remedy?
Question – What about near insolvency?
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Acts in the best interest of the company Creditors’ interest?

where company is near insolvency…
Chingtung Futures Ltd (in liq) v Lai Cheuk Kwan Arthur (1992)
Bokhary J

Arthur Lai
(s/h) Defence:
course of action impliedly
ratified by shareholders

100%
Defendant – account
Arthur exec responsible for
Co
Lai account 0 – loss
$83.97M.
Suit for breach of duty
Trading account
1987 October stock • Inadequate margin
market crash • overexposed
Issues:
(1) Was there in fact ratification?
(2) Ratifiable? 36

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Directors’ duty to act bona fide in the best

interest of the company
West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250

Dodd
Co
(no $) Dodd = director

Debt repayment 100% Property rights

perspective: Creditors’
West right to claim against
Mercia the assets of an
Dodd = director
insolvent company
(has $) ~Kinsela v Russell
Kinsela Pty Ltd (in liq)
(1986) 4 NSWLR 722
at 730

Held: When the company is insolvent, the interests of the

creditors over[ride] those of the shareholders.
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Acts in the best interest of the company Creditors’ interest?

where company is near insolvency…
BTI 2014 LLC v Sequana SA [2022] UKSC 25

10 years

2009: Dividends declared 2018: Company AWA

and distributed to its only goes into insolvent
shareholder Sequana liquidation

Issue:
Whether the directors were liable for breach of duty toward the
company when they distributed the dividends in 2009?

Argument:
Directors had not considered or acted in the interest of AWA’s creditors.

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Acts in the best interest of the company

where company is near insolvency…
BTI 2014 LLC v Sequana SA [2022] UKSC 25

Held: The duty to consider the interest of a

company’s creditors (as a whole) is only triggered
when:
• (per Lord Reed PSC and Lady Arden) the company
was insolvent, bordering on insolvency or it was
probable that the company would enter into an
insolvent liquidation or administration, or
• (per Lord Hodge DPSC, Lord Briggs and Lord
Kitchin JJSC) the directors knew or ought to have
known that insolvency was imminent or it was
probable the company would enter into an
insolvent liquidation or administration;
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Duty to Exercise Power for Proper Purposes

(the proper purposes doctrine)

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Duty to Exercise Powers for Proper Purposes

Hogg v Cramphorn (1967)

Directors plus
supporters

37k shares B launches takeover bid

(out of 126k shares) Pref shares 25s
Ord shares 50s
Co

Plan to defeat B’s takeover bid

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Duty to Exercise Powers for Proper Purposes

Hogg v Cramphorn (1967)

Directors plus
supporters
B launches takeover bid
Pref shares 25s
37k shares Ord shares 50s
(out of 126k shares)
Held: (1) no power under art. 13
Co to confer shares of more than 1
Loan to purchase
Pref shares
vote;
(2) Power to issue shares is a
fiduciary power. If exercised for
improper motive, liable to be set
Trust for aside.
5,707 pref shares
employees with 10 votes each
(3) It is immaterial that director
believed in good faith that the act
was in the interest of the company.
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Duty to Exercise Powers for Proper Purposes

Howard Smith v Ampol Petroleum (1974)
Privy Council, on appeal from NSW

A+B A
Bid for remaining
Shares $

55%

M LTD

Directors: “A’s bid too low H

… recommend rejection” $$$

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Duty to Exercise Powers for Proper Purposes

Howard Smith v Ampol Petroleum (1974)
Privy Council, on appeal from NSW

A+B A
Bid for remaining
Shares $

55%

To assist H’s takeover…

M LTD
H applied for and was
issued 4.5m c/s
H
Consequences: $$$
1. M Ltd had capital
2. A+B 55%-> 36.6%
3. H positioned to takeover co
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Duty to Exercise Powers for Proper Purposes

Howard Smith v Ampol Petroleum (1974)
Privy Council, on appeal from NSW

Action by A:
(1) Challenge the validity of the share issue to H
(2) Rectification of share register to expunge H’s
allotted shares.
Trial judge:
(1) Directors no motivated by personal gain or to
retain positions;
(2) M Ltd needed capital
(3) Primary purpose was to reduce the proportionate
holding of A&B so that H could take-over the
company
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Duty to Exercise Powers for Proper Purposes

Howard Smith v Ampol Petroleum (1974)
Privy Council, on appeal from NSW

“[I]t must be unconstitutional for directors to use

their fiduciary powers over the shares in the
company purely for the purpose of destroying an
existing majority, or creating a new majority which
did not previously exist …[t]o use their fiduciary
power solely for the purpose of shifting the power
to decide to whom and at what price shares are to
be sold cannot be related to any purpose for which
the power over the share capital was conferred
upon them.”
(p. 837-8)
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Duty to Exercise Powers for Proper Purposes

Eclairs v JKX Oil & Gas plc (2015) UK Supreme Court

Kolomoisky & Bogolyubox

(known raiders)
JKX Oil & Gas Eclairs 47 million shares / 27.55%
LSE listed

Zhukov & Ratskevch

Glenary (known raiders)
19 million shares / 11.45%
Russian oil
business

Eclairs’ + Glengary’s strategy:

Be obstructionist – Depress share value - dislodge present management -
buy over control – realize potential for personal gain.
Board: Prevent Eclairs from voting.
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Duty to Exercise Powers for Proper Purposes

Eclairs v JKX Oil & Gas plc (2015) UK Supreme Court
1. Disclosure notice under CA (UK) S. 793.
Shareholder obliged to disclose:
a. legal ownership;
b. beneficial ownership;
c. whether party to any agreement for the
acquisition of interest or shares, or exercise of
any rights attaching to shares.
2. Sanction for failure to comply: voting rights,
dividend payments.

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Duty to Exercise Powers for Proper Purposes

Eclairs v JKX Oil & Gas plc (2015) UK Supreme Court

CA2006(UK) Pt 22 + AOA art 42

• Art 42(1)(j) Board entitled to treat the notice

as non-compliant “where the board knows or
has reasonable cause to believe that the
information provided is false or materially
incorrect”.

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Duty to Exercise Powers for Proper Purposes

Eclairs v JKX Oil & Gas plc (2015) UK Supreme Court
• What is the nature of the proper purpose
rule? A rule of construction, or an
independent legal rule?
• How does one ascertain the proper purpose of
a power conferred by the articles?
• What is the causation test to be applied?
Primary or predominant purpose: (a)
weightiest purpose; (b) but… for.
Lord Sumption + Lord Mance, Lord
Lord Neuberger Clarke and Lord
Hodge
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Duty to Exercise Powers for Proper Purposes

HK: Wong Kam San v Yeung Wing Keung (2007)

100% beneficial ownership

P1
Note:
1. EGM invalid – why?
2. Board meeting invalid – why?
X 3. Improper purpose
4. D5 not bona fide purchaser

D3
Board decision
Co

Allot 9,900 x $1 51

Ratification of Directors’ Act Beyond Proper Purpose of the

Power Conferred
Bamford v Bamford (1967)
Bidder

Co Directors

Plf Allotment of
(Shareholders) 500,000 shares
Sought declaration that allotment was invalid
• Not bona fides Distributor
• Improper motive (to block takeover bid)

Held: Even if directors had acted in bad faith and from improper motive in
making the allotment of 500,000 shares, shareholders at general meeting
could waive the breach and validate the voidable allotment.

HK: comports with CO s. 473

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Directors’ Duty of Care: Sources under General Law

Duty of care

Equity Common Law

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Historical Approach to Directors’ Duty of Care

Re City Equitable (1924)

(1) Duty of skill pegged at director’s personal

circumstances. No objective
benchmark/threshold.
(2) Duties of an intermittent nature … at board
meetings. Not bound to attend all meetings.
(3) Duties largely delegable. May trust agent in
absence of grounds for suspicion.
See Romer J. [1925] 1 Ch 407 at 428-429

54

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Modern Approach to Directors’ Duty of Care

Re D’Jan of London Ltd (1994)
• The problematic insurance proposal (non-disclosure)
• Misfeasance summons under Insolvency Act 1986 (UK) s 212
Issue: Whether the court should exercise its powers under s 727 to relieve the
director of liability (whether wholly or in part).
Held: Appropriate to exercise the power here.

“In my view In my view, the duty of care owed by a director at common

law is accurately stated in s 214(4) of the Insolvency Act 1986. It is the
conduct of -
'a reasonably diligent person having both - (a) the general knowledge,
skill and experience that may reasonably be expected of a person
carrying out the same functions as are carried out by that director in
relation to the company, and (b) the general knowledge, skill and
experience that that director has.”
per Hoffman LJ at 563

55

Modern Approach to Directors’ Duty of Care

Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)
[read pp 656-668]

Losses from forex

transaction (Koval)

AWA Ltd

Negligence suit
(failed to inform
board of
weaknesses in
CEO Hooke control system)

(Contrib negligence under Auditor

NED 1946 Act) – whether CEO Daniels
and NED were ‘liable in
respect of the same
damage’ suffered by AWA 56

28
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Modern Approach to Directors’ Duty of Care

Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)

1. Origins of the director’s duty of care in equity

 Akin to trustees
 Developed distinct from the common law of
negligence
2. Nature of duty
 Subjective level of skill
 Allowance for passive directors
 Not negligence in the common law sense.
3. Why the low standard?

57

Modern Approach to Directors’ Duty of Care

Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)

“The insolvent trading cases demonstrate that

ignorance is no longer necessarily a defence to
proceedings brought against a director. In some
respects, at least, the director must inform
himself or herself about the affairs of the
company ….”
(per Clarke and Sheller JJA, at p 664)

58

29
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Modern Approach to Directors’ Duty of Care

Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)

“…. a director, whatever his or her background, has

a duty greater than simply representing a particular
field of experience. That duty involves becoming
familiar with the business of the company and how
it is run and ensuring that the board has available
means to audit the management of the company so
that it can satisfy itself that the company is being
properly run…”
(per Clarke and Sheller JJA, at p 666)

59

Modern Approach to Directors’ Duty of Care

Daniels v Anderson (1995) 16 ACSR 607 (NSWCA)

“We are of opinion that a director owes to the

company a duty to take reasonable care in the
performance of the office. As the law of
negligence has developed, no satisfactory policy
ground survives for excluding directors from the
general requirement that they exercise
reasonable care in the performance of their
office.”
(per Clarke and Sheller JJA, at p 668)

60

30
 10/12/2024

HONG KONG: Now Statutory Duty of Care Codified

CO s 465 Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable
care, skill and diligence.
(2) 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; and
(b) the general knowledge, skill and experience that
the director has.
***

61

HONG KONG: Now Statutory Duty of Care Codified

CO s 465 Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable
care, skill and diligence.
(2) 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; and
(b) the general knowledge, skill and experience that
the director has.

62

31
 10/12/2024

HONG KONG: Now Statutory Duty of Care Codified

CO s 465 Duty to exercise reasonable care, skill and diligence
(1) A director of a company must exercise reasonable care, skill and
diligence.
(2) 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; and
(b) the general knowledge, skill and experience that the director has.
(3) The duty specified in subsection (1) is owed by a director of a
company to the company.
(4) The duty specified in subsection (1) has effect in place of the
common law rules and equitable principles as regards the duty to
exercise reasonable care, skill and diligence, owed by a director of a
company to the company.

63

Directors’ Duty of Care

ASIC v Rich (2003) 44 ACSR 341

One.Tel
(listco) Liquidation

ASIC G (Chairman)

Action for contravention

of statutory duty of care • chartered accountant with
substantial experience.
[Corporation Act (Cth) s
• founding director.
180(1)(b)] • chairman of One-Tel’s Finance
and Audit Committee.
64

32
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Directors’ Duty of Care

ASIC v Rich (2003) 44 ACSR 341
1. Duty of care cast with an element of objective
standard (“care and diligence that a reasonable
person would exercise if they … occupied the
office and had the same responsibilities”: s
180(1)(b))
2. Specific responsibilities delegated and peculiar
skills a person possesses elevate the standard of
care.
3. Room to rely on others – but framed by the duty
to keep oneself informed of the affairs of the
company.
65

What standard of care under Hong Kong common

law?
1. Law Wai Duen v Boldwin Construction Co Ltd
(2001) (see Rogers VP)
2. Wong Luen Hang v Chan Yuk Lung [2012] HKEC
592
3. SFC v Yin Yingneng Richard [2015] HKEC 86 (not
assigned; TB 8.143)
• Accepting minimum objective standards as applicable in Hong
Kong per Re D’Jan of London, Daniels v. Anderson
• Cayman Islands law applied; noting that HK has same director
duties

66

33
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Standard of care under Hong Kong common law

Law Wai Duen v Boldwin Construction Co Ltd [2001] 4 HKC 403

Issue: rights of (non-executive) directors to inspect company's

accounts.

CA: such rights necessary for directors to carry out their duties
– Executive directors and non-executive directors have the same
responsibility in law as to the management of the company’s business
(obiter). Following Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498)
– Limits on ability of directors to divest responsibility through delegation.
– Includes responsibilities with regard to the finances of the company and as
regards accounting to the shareholders for the company's finances.
– Reference to Re City Equitable, but at the same time stated that the
standard in Re City Equitable is too low.
– Notes acceptance in of objective (“ordinary man”) standard of care in Re
City Equitable Fire Insurance Co Ltd [1925] Ch 407

67

Standard of care under Hong Kong common law

Wong Luen Hang v Chan Yuk Lung [2012] HKEC 592

Shareholder deadlock. W&T (Camp 1 shareholders, incl former D) sue

other Chan Brother directors (Camp 2 shareholders) in derivative
litigation
Issue: Were Chan Directors negligent in approving a third-party
settlement (writing off debts owed to the company by its major
customer?
Held: No – court defers to business judgment
Learning Points:
• Objective assessment of decision – reasonable in circumstances
• All directors (including NEDs) subject to same duties (following
Dorchester)
• Derivative action appropriate for breach of duty of care (as well
as fiduciary duties)

68

34
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Private International Law

(Directors’ duty of care & conflict of laws)
Base Metal Trading Ltd v Shamurin [2005] 2 BCLC 171

Collapse of the USSR

Rs corporators

Breach of duty of care –

speculative trading
BMTL
(Guernsey incorporated S
co)

Non-ferrous metal trade Tx on the LME

between Russia and the
West

Private International Law

(Directors’ duty of care & conflict of laws)
Base Metal Trading Ltd v Shamurin [2005] 2 BCLC 171

• Governing Law?
• Can it be varied contractually?

“It is not open to the company and the director to

contend that they have contractually varied the
liabilities imposed by the law of the place of
incorporation by the terms of a contract for the
appointment of the director governed by some other
law, unless it is also shown that the law of the place of
incorporation would allow this.” (p. 191)
70

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Statutory Regulation of Dealings with Directors

71

Prohibition of Loans etc

Companies Ordinance Pt 11 Div 2 Subdiv 2

500-(1) Without the prescribed approval of its members, a

company must not—
(a) make a loan to—
(i) a director of the company; or
(ii) a body corporate controlled by such a director; or
(b) give a guarantee or provide security in connection with
a loan made by any person to—
(i) a director of the company; or
(ii) a body corporate controlled by such a director.
***

72

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Prohibition of Loans etc

Companies Ordinance Pt 11 Div 2 Subdiv 2

See also ss 502-504

Exceptions: ss 505-512
Consequences: ss 513-515

73

For corporations listed on

HK Exchange Listing Rules the HK Exchange

Directors’ Service Contracts

13.68 An issuer shall obtain the prior approval of its shareholders of the issuer in a general
meeting (at which the relevant director and his associates shall not vote on the matter) for
any service contract to be granted by the issuer or any of its subsidiaries to any director
or proposed director of the issuer or to any director or proposed director of any of its
subsidiaries which:
(a) is for a duration that may exceed three years; or
(b) in order to entitle the issuer to terminate the contract, expressly requires the issuer
to give a period of notice of more than one year or to pay compensation or make
other payments equivalent to more than one year’s emoluments.
The remuneration committee of the issuer (if any and provided that such committee has a
majority of independent non-executive directors) or an independent board committee shall
form a view in respect of service contracts that require shareholders’ approval and advise
shareholders (other than shareholders who are directors with a material interest in the
service contracts and their associates) as to whether the terms are fair and reasonable, advise
whether such contracts are in the interests of the issuer and its shareholders as
a whole and advise shareholders on how to vote. An independent non-executive director
who has a material interest in any such contracts shall not sit on the independent board
committee. 74

37
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Connected Transactions
HK Exchange Listing Rules ch 14A
Rule 14A35 Announcement
14A.35 The listed issuer must announce the connected transaction as soon as
practicable after its terms have been agreed.

Rule 14A.36 Shareholders’ approval

The connected transaction must be conditional on shareholders’ approval at a
general meeting held by the listed issuer. Any shareholder who has a material
interest in the transaction must abstain from voting on the resolution.

75

Companies Ordinance s 903

Court may grant company officer etc. relief in proceedings for
misconduct
(1) This section applies if, in any proceedings for any misconduct
against a specified person, it appears to the Court
that the person—
(a) is or may be liable for the misconduct;
(b) has acted honestly and reasonably; and
(c) ought fairly to be excused for the misconduct, having
regard to all the circumstances of the case (including those
connected with the person’s appointment).
(2) The Court may relieve the specified person, either wholly or
partly, from the liability on any terms that the Court
thinks fit.
***

76

38