In the world of business, directors play a crucial role in ensuring the success and smooth operation of a company. In Hong Kong, like many other jurisdictions, directors have specific duties they must fulfil. Understanding these duties is essential for anyone involved in company management or considering a directorship position.
In this guide, we’ll take a closer look at the key aspects of directors' duties in Hong Kong, including their responsibilities and legal obligations.
Understanding Company Directors and Shadow Directors
Before diving into the nitty-gritty of directors' duties, it's important to understand who exactly falls under the category of a director. In Hong Kong,
a director is defined as an individual appointed to perform the functions of a director, irrespective of their title.
This includes de facto directors, executive directors, and non-executive directors.
Let's take a closer look at the different types of company directors:
- De facto directors are individuals who may not have been formally appointed as directors but are effectively acting as directors. They may have the authority to make decisions on behalf of the company and are therefore subject to the same duties and responsibilities as appointed directors.
- Executive directors are individuals who hold both a managerial and directorial role within the company. They are actively involved in the day-to-day operations and decision-making processes. Their responsibilities may include strategic planning, financial management, and overseeing the company's operations.
- Non-executive directors, as the name suggests, do not have a full-time operational role within the company. Instead, they provide independent oversight and guidance to the executive directors. Non-executive directors often bring valuable expertise and industry knowledge to the board, contributing to the company's overall governance and decision-making processes.
- A nominee director allows you to have someone else’s name on the board instead. Read this article to find out how to go about choosing a nominee director.
Now, let's turn our attention to shadow directors. While they may not have an officially appointed position, they are individuals whose instructions or wishes the directors of a company are accustomed to following. In other words, they exert significant influence over the decision-making process, despite not holding a formal directorial position.
Shadow directors play an important role in shaping the direction and policies of a company. Their opinions and guidance are highly regarded by the appointed directors, and their influence can be instrumental in determining the company's strategic decisions. However, it's important to note that shadow directors also bear the same duties and obligations as formally appointed directors.
Understanding the concept of shadow directors is essential for both appointed directors and shadow directors themselves. The law treats shadow directors as if they were formally appointed directors, holding them accountable for their actions and decisions. Therefore, shadow directors should be aware of their potential liabilities and ensure they act in the best interests of the company.
What Are the 10 General Directors' Duties?
In Hong Kong, directors are bound by a set of general duties that aim to ensure their actions align with the best interests of the company. These directors' duties include the following:
Act in good faith
The duty to act in good faith means a director needs to make decisions with honesty, integrity, and a genuine belief that their actions serve the best interests of the company. This fundamental principle underpins all other duties and forms the basis of a director's responsibilities. There could be penalties otherwise, especially when it comes to document filing in Hong Kong.
Use power for a proper purpose
Directors wield significant power within a company, but they must only use this power for legitimate, intended purposes. In other words, directors should not exploit their positions to achieve personal gain or cause detriment to the company.
Avoid unauthorised delegation of powers
Although it's often necessary for directors to delegate certain tasks, they must not shirk their responsibilities. Directors are responsible for the overall governance of the company and should ensure that any delegation is carried out responsibly and within the company's governing framework.
Exercise care, skill and due diligence
Directors are expected to execute their duties with a level of care, skill, and diligence that a reasonably prudent person would exercise in similar circumstances. They should remain well-informed about the company's affairs, make judicious decisions, and always act in the company's best interests.
Annual returns should be front of mind for a Hong Kong director. Find out more here.
Avoid conflict of interest
Directors must avoid situations where personal interests may conflict with their duty to the company. If a conflict of interest arises, it should be promptly disclosed, and directors should not participate in decisions where they have a personal stake.
Avoid unlawful personal financial gain transactions
Directors must not engage in transactions or activities that could result in unlawful personal financial gain. Such situations could potentially harm the company and damage its reputation, as well as attract legal penalties for the director.
Avoid unauthorised use of company property or information
As stewards of the company, directors have access to company assets and information. They must not misuse this privilege for personal gain or any purpose not authorised by the company. This includes not disclosing sensitive company information without proper approval.
Do not accept any personal benefit from third parties
Directors should not accept personal benefits from third parties based on their position as a director. This could range from bribes to gifts or favors that could influence their decision-making or cause a conflict of interest.
Obey the company's law
Directors are bound by the company's constitution and must comply with all relevant company laws, policies, and procedures. This includes local regulations, the Companies Ordinance in Hong Kong, and any other laws applicable to the company's operations.
Keep accounting records
Directors are responsible for ensuring the company maintains accurate and up-to-date bookkeeping and accounting records. This duty is essential for the transparency, accountability, and financial health of the company. Accurate record-keeping also facilitates decision-making, planning, and compliance with tax and other regulatory requirements.
Directors must keep these duties at the forefront of their decision-making processes, always ensuring they act honestly, responsibly, and in the company's best interests.
The 3 Important Legal Duties of a Director
Duty of care
The first legal duty of a director is the duty of care, which requires directors to demonstrate reasonable care, skill, and diligence in their decision-making processes. This duty means that directors must make informed decisions based on careful evaluation of the available information, taking into consideration the interests of the company and its stakeholders.
In practice, this duty involves conducting thorough research, seeking professional advice when necessary, and staying up-to-date with industry trends and market developments. Failing to exercise due care may result in personal liability for the director.
Duty of loyalty
The duty of loyalty requires directors to prioritise the company's interests over their personal interests and avoid conflicts of interest. Directors must act honestly and in good faith, disclosing any conflicts of interest they may have in a timely manner.
It's crucial for directors to maintain transparency and ensure that any transactions or decisions they make do not benefit them personally at the expense of the company. Breaching this duty can lead to legal consequences, including personal liability or even disqualification as a director.
Duty of obedience
The duty of obedience compels directors to comply with the law, the company's constitutional documents, and any resolutions passed by the company. Directors must act within their authorised powers and refrain from exceeding them.
This duty reinforces the importance of adhering to the company's established rules and regulations while ensuring that all directorial actions align with the legal framework governing their operations. Directors who disregard this duty may face severe penalties, including fines and potential disqualification.
How Do I Appoint or Remove a Company Director?
The process of appointing a company director involves several steps to ensure a smooth transition and legal compliance. First, shareholders must pass a resolution to appoint a new director. The appointee must then sign a written consent indicating their acceptance of the directorship position, and the company must file the appropriate forms and update its records with the relevant authorities.
If a situation arises where the removal of a director becomes necessary, say if they are in breach of their directors’ duties, the company must follow proper procedures as outlined in its articles of association and relevant regulations. Generally, removal can occur through shareholders' meetings or a director's resignation.
It is crucial to consult legal professionals or refer to the company's governing documents to ensure proper adherence to the removal procedures.
What Are the Fiduciary Directors' Duties?
In addition to the general duties, fiduciary duties apply to directors who hold a special position of trust and confidence within a company. These directors owe a fiduciary duty to act in good faith, avoid conflicts of interest, and exercise their powers solely for the benefit of the company.
While the general duties apply to all directors, fiduciary duties place a greater emphasis on acting selflessly and in the best interests of the company, safeguarding its assets and reputation.
Directors, Stay Diligent
Directors are essential figures in the business landscape, occupying positions of responsibility and authority. Understanding and adhering to directors' duties is crucial for the sustainable growth and success of any company. By acting in the best interests of the company and fulfilling their obligations, directors contribute to building a responsible and trustworthy business environment in Hong Kong.
Remember, if you're unsure about any aspect of directors' duties or legal obligations, it's always wise to seek professional advice from Osome.