The duties of directors of Hong Kong companies

Wednesday 23 November 2016

By Debby Davidson, Business Development Director - Asia

Introduction 

Every Hong Kong-incorporated private company should have at least one individual director, but what does it mean to be a director and what are the tasks and responsibilities?

The Hong Kong Companies Registry has issued a guide on directors’ duties and the Hong Kong Institute of Directors has also issued the Guidelines for Directors, though these guidance notes do not have the force of law. The corporate regime relating to directors in Hong Kong is contained in statutory legislation (the Hong Kong Companies Ordinance or ‘CO’) and in common law case law.

In March 2014, the new CO came into force after being enacted in July 2012. Under it, some changes were implemented in relation to directors’ duties, enhancing the clarity of regulation in Hong Kong. This article looks at some of these changes in relation to:

  • Appointment of directors
  • Powers of directors
  • Responsibilities of directors
  • Proceedings at meetings of directors

The appointment of directors

The general rules relating to the appointments of directors are relatively simple and straightforward.

First of all, there are no requirements for the director to be a resident of Hong Kong. However, there are restrictions - with the new CO, it is required that every private company must have a minimum of one individual director.

Previously, directors were required to make disclosure of their residential address and identification number in documents filed with the Companies Registry for public inspection. With the new CO, the directors can provide a correspondence address and a residential address. While the correspondence address can be available to the general public, the residential address and identification number of the directors remain confidential.

Powers of directors

The general power of managing the company is usually vested in the directors and, generally, the directors may exercise all powers of the company.

Under the CO, certain powers may only be exercised by the shareholders, including:

  • Alteration of the company’s articles
  • Financial assistance for the purchase of shares
  • Unlisted companies buying back their own shares
  • Reduction of capital, granting directors’ rights to allot shares
  • Variation of class rights
  • Appointment and removal of auditors
  • Voluntary winding up of the company

Other than these statutory exclusions, most other powers (unless otherwise stated in the articles of the company) may be exercised by the directors.

Responsibilities of directors

Generally, directors only owe a duty to the company as a whole and to the shareholders as a class but not to any individual shareholder of the company. However, if the directors have actively made themselves agents of any individual shareholder, in this exceptional circumstance directors may owe a duty to that particular shareholder.

Previously, the directors’ duties were classified into two categories: fiduciary duties and duties of care, skill and diligence. However, the new CO does not address directors’ fiduciary duties such as:

  • Duty to act in good faith in the interest of the company
  • Duty to exercise powers for proper purpose
  • Duty to avoid conflicts of duty and interest

Duties of care, skill and diligence differ from the more rigid set of fiduciary duties as they require directors to exercise reasonable care and skill in the performance of their functions and the exercise of their powers. The duties of care, skill and diligence are typically portrayed as relatively lenient, compared to the more onerous and rigorously enforced matrix of fiduciary duties owed by company directors. A traditional laxity of application and a benevolent, sometimes almost indulgent, judicial attitude has done nothing to contradict this image.

With the new CO, it should be kept in mind that companies are now prohibited from indemnifying directors for their breach of duty of care, skill and diligence owing to the company.

The new CO also introduces the notion of a responsible person. Any director who authorises, participates in or fails to take all reasonable steps to prevent a contravention of the new CO will be held liable.

Proceedings at meetings of directors

There is no statutory provision setting out how often directors must hold meetings. However, each year in a general meeting directors must approve a directors’ report containing financial information such as the profit and loss account and the company balance sheet for that financial year. Therefore, directors must have at least one meeting per year.

There is no provision requiring directors’ meetings to be physically held in any particular place; nevertheless, one point to note is that the place of directors’ meetings is usually classed as the place where the control and management of the company is exercised which determines the tax residency of the company. The tax implication of this needs to be appreciated as a company (whether incorporated in Hong Kong or elsewhere) which is ‘managed and controlled’ in Hong Kong would, prima facie, be a Hong Kong tax resident and its Hong Kong-sourced profits would be assessable to Hong Kong tax.

However, if a company is incorporated in Hong Kong for the purpose of taking advantage of Hong Kong’s growing network of double tax treaties, then such company needs to ensure it is a Hong Kong tax resident (i.e. managed and controlled from Hong Kong) in order to gain exemptions under the double tax treaties.

Conclusion

To summarise, the key considerations following the updates are:

  1. There are no requirements for the director to be resident of Hong Kong but the appointment of corporate directors has been restricted with the new CO.
  2. Do you want the directors of your Hong Kong entity to have certain powers that are only exercisable by the shareholders under the CO? If so, the articles of association need to be specifically tailored to allow this.
  3. Directors should consider the new duties imposed upon them under the new CO.
  4. Where do you want your company to be tax resident? Management and control location must be considered.

Contact

For more information about Hong Kong directorships, please contact Debby Davidson