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Being appointed as director of a company is rewarding. But with great powers, come great responsibilities!
In this guide, we look at directors’ duties in Hong Kong companies. We strongly advise you to get familiar with such duties before accepting to take the position of director of any company in Hong Kong.
Act in good faith
The director’s duty to act in good faith for the company is the cornerstone of its position. A director shall always act honestly and sincerely, with appropriate judgment. This is also known as acting bona fide.
A decision made in good faith is a decision taken genuinely for the benefit of the company. When making a decision, the director shall honestly believe it to be in the best interests of the company.
In other words, a director shall always give priority to the interests of the company before one of its shareholders. The director shall treat all shareholders equally and not favor one shareholder over another.
Practical tip: Before making any decision as director, always ask yourself whether the decision is in the company’s sole interest.
Make proper use of power
A director shall act within the scope and the terms of the powers granted to him/her. He/She shall not exceed these powers. The scope and terms of a director’s powers are normally detailed in the company’s constitution documents, shareholder resolutions, and shareholders agreement (if any).
A director should always be clear about the scope of its powers before acting.
A director shall also always use its powers properly, for the sole benefit of the company and not for private gain. Using the director’s powers for a personal benefit is considered an improper purpose.
Practical tip: When taking any action, check that (i) it is within your scope of powers (ii) it is not primarily motivated by your private interest.
A director is often required to sign documents or take actions in a short notice or at times when he/she is traveling. It is therefore common for a director to delegate part of its powers to someone within the company (senior management) or a third party (company secretary, attorney).
Before delegating any of its powers, a director shall always:
- Ensure that he/she is authorized to delegate such powers (based on the company’s articles of association or shareholder resolutions)
- Verify the capacity of the person to whom the director’s powers are delegated
- Prepare a proper document for the delegation of powers. This is generally known as power of attorney. The power of attorney shall include information as to the scope and term of the delegation
A proper delegation of powers normally protects the director. However, it is always recommended to review and confirm the actions taken by the beneficiary of the delegation of powers.
Practical tip: Verify that you are allowed to delegate your powers before doing so. Properly documenting the term and scope of any delegation of powers is absolutely crucial.
Exercise directors’ duties with care, skill, and diligence
A company’s director shall always act with care, skill, and diligence. This means the care, skill, and diligence expected by a reasonably diligent individual who:
- is a director of the same company in the same circumstances
- holds the same position held by the director
- has the same responsibilities as the director
There is no single standard of care, skill, and diligence that applies to all directors. Various factors are taken into account to appreciate whether a director has satisfied this duty. This includes:
- type of company
- nature of business (for example, certain activities may require a particular skill set)
- experience and skills of the director
- size of the company
- allocation of work among board members
Practical tip: keep yourself informed of the affairs of the company. Carefully review any document before signing it (especially the company’s audited accounts). Properly document and keep a record of your work as a director (notably in the minutes of the directors).
Address potential conflicts of interest
A director occupies a position of trust in the company. He/she shall never confuse its personal interests with those of the company.
There is no specific definition of a “conflict of interest.” Generally speaking, a conflict may exist where a director’s personal interests collide with the interests of the company. This includes actual or potential conflicts. Here are a few examples:
- a director will personally profit from a proposed deal
- sitting on the Board of a direct competitor without informing the company
- using the information to take advantage of a business opportunity that belongs to the company
Practical tip: Avoid putting yourself in situations of conflict of interest. Always take a step back and consider whether your decisions/actions are in the company’s best interest. It is a matter of good faith and common sense.
Disclose transactions involving a personal interest
A director shall not be involved in any transaction where he/she has a material interest.
A director shall proactively declare to the board/shareholders any direct or indirect interest in a transaction involving the company. The director shall also refrain from voting on such a transaction.
This duty is even stronger in the context of listed companies. Such companies have to maintain a detailed register of all the interests disclosed by directors.
Practical tip: Protect your personal liability by proactively declaring any personal interest that you may have in any transaction involving the company.
Do not abuse of directors’ powers
A company’s director shall never use its position to gain a personal advantage, to the detriment of the company.
This duty is closely linked to the obligations of acting in good faith and avoiding conflicts of interest.
Practical tip: Abuse of powers is a very broad principle. As a director, make sure that you could not be blamed from abusing of your powers against the company itself, but also its shareholders, employees, or business partners.
No use of property or information for personal interests
A director shall not use the company’s property or information for personal interests. This duty is also related to the obligation of avoiding conflicts of interest.
Practical tip: Take a step back and consider if your actions could be considered as primarily serving your personal interests. In case of doubt, disclose any direct or indirect personal interest to the board and the shareholders.
Personal benefits from third parties
A director shall refuse any benefits or gifts offered by a third-party in relation to his/her director’s position.
There are exceptions to this principle. In the event that (i) the company consented to the relevant benefit by ordinary resolution, (ii) the company conferred the benefit itself, or (iii) the benefit is necessary for the proper performance of your obligations as a director.
Practical tip: Do not accept gifts or benefits from third parties if they seem motivated by your position. If in doubt, simply refuse or consult with the company’s board and/or shareholders before acting.
Comply with the company’s articles of association
Any and all decisions of a Director shall be taken in accordance with the company’s Articles of Association.
In addition, a director shall always pay attention to the following:
- the Hong Kong Company’s Ordinance Cap. 622
- the various resolutions of the General Meeting of the shareholders and the board of directors
- the possible limitations to a director’s powers as expressed in its letter of appointment
Practical tip: A Director shall always consider whether his/her actions contradict or exceed the powers granted to him/her.
Maintain proper accounting records
A Director must ensure that the company’s accounting records are properly and timely maintained. He/She shall also verify that the accounting books give a true and fair view of the affairs of the company.
While a director is not an accountant, he/she is expected to understand the overall financial situation of a company. For example, a director shall not allow a company to take a loan if it is close to bankruptcy.
Practical tip: Do not approve any financial records if you do not understand them. Protect your personal liability by seeking external professional advice.
There are many duties and obligations attached to the function of director. This is the case in Hong Kong as well as in any other jurisdictions.
However, most problems can be avoided by applying common sense, good faith, and proper judgment. Consult with the board or the shareholders when facing difficult decisions or potential conflicts of interest.
When accepting a position as director, make sure that the scope of your powers (and their limitations) is clearly defined. Also, make sure that all your decisions as director are properly documented.
You have not yet registered your Hong Kong company or opened your business account?
You have not yet registered your Hong Kong company or opened your business account? Check our step-by-step guide to registering a company in Hong Kong in 2020.
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