Topic 3

Management and administration of a company (I):

Directors and company secretary

TOPIC OUTLINE & SUMMARY (PART II)

1. Director’s duties

Duty to act in good faith for the benefit of the company

Re Smith & Fawcett Ltd
Akai’s case
Passport Special Opportunities Master Fund LP v eSun Holdings Ltd

Duty to exercise powers for proper purposes

Howard Smith v Ampol Petroleum
Wong Kam San v Yeung Wing Keung

Duty to avoid conflicts of interests

Regal Hastings v Gulliver
International Development Consultants v Cooley
Bhullar v Bhullar
What should directors do? Model Articles disclose and cannot vote

Statutory Duty of care

Companies Ordinance (Cap 622), s.465
Dorchester Finance v Stebbing

2. Insider dealing

Civil provision – handled by the Market Misconduct Tribunal

Criminal offence

3. Disqualification of directors

Discretionary disqualification
Disqualification on conviction of indictable offence (Cap 32, s.168E)
Disqualification for persistent breaches of specified provisions (s.168F)
Disqualification for fraud, etc., in winding up (s.168G)

Compulsory disqualification
Duty of court to disqualify unfit directors of insolvent companies (s.168H)

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DIRECTOR’S DUTIES (1) – THE DUTY TO ACT IN GOOD FAITH FOR
THE BENEFIT OF THE COMPANY

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That being my view on the question of law in this case, it only remains to consider
the issue of fact which has been raised. It is said that on the evidence before us we
ought to infer that the directors here were purporting to exercise their power to
refuse a transfer not bona fide in the interests of the company but for some collateral
purpose, namely, the desire of the leading director to acquire part of the shares for
himself at an under-value. … In the present case the principal director has sworn an
affidavit which, if accepted, makes it clear that, whether rightly or wrongly, the
directors have bona fide considered the interests of the company and come to the
conclusion that it would be undesirable to register the transfer of the totality of these
shares. Accordingly, on the evidence I am satisfied, as the learned judge was
satisfied, that there is no ground shown here for saying that the directors' refusal has
been due to anything but a bona fide consideration of the interests of the company
as the directors see them. …

Source: Hicks & Goo’s Cases and Materials on Company Law, 7th edition, 2011, by Alan Dignam,
pp.269-270

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DIRECTOR’S DUTIES (1) – THE DUTY TO ACT IN GOOD FAITH FOR
THE BENEFIT OF THE COMPANY

Akai Holdings Ltd (in liq) v Thanakharn Kasikorn Thai Chamkat (Mahachon)
[2008] HKEC 874

“… Ting, the chairman and chief executive officer of Akai, caused Akai to obtain a
loan from the Thai Farmers Bank (TFB), with the loan funds used to repay the
liabilities of another company (Singer) that were owed to TFB. Ting also caused
Akai to grant a charge in favour of TFB over certain shares owned by Akai as
security for the loan. Akai did not have any equity interests in Singer but the two
companies had a common controlling shareholder (STC Canada) which owned 43
per cent of Akai and 50 per cent of Singer. Ting owned 45 per cent of STC and was
the chairman and CEO of that company, and was also a chairman and director of
Singer. When Akai defaulted on the loan, TFB enforced its security and later
claimed as a creditor in the subsequent liquidation of Akai for the balance owing.
The liquidators of Akai brought proceedings against TFB to set aside the loan and
security agreements. Whether the liquidators could succeed depended in part on
whether Ting was in breach of fiduciary duty owed to Akai. At first instance, Stone J
held that Ting was in breach of duty by failing to act in the interests of Akai in respect
of the loan and security transactions. Those transactions placed on Akai a
considerable debt burden of another company, in which Akai had no equity interests.
This was held to be plainly to the financial detriment of Akai. Stone J’s decision on
TFB’s liabilities was reversed on appeal but his Lordship’s conclusions of breach of
fiduciary duty were affirmed by the appeal courts.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
pp.275-276

Passport Special Opportunities Master Fund LP v eSun Holdings Ltd [2011] 4

HKC 62

“… Burma J observed that ‘the court should not set itself up as a tribunal to which
disgruntled litigants can appeal against the commercial decisions of the board’, but
held that if the board’s decision was reached with no consideration at all for a clearly
relevant factor, then the decision is open to challenge. A breach of the duty to
consider relevant factors and exclude from consideration irrelevant factors renders
the exercise of the directors’ power voidable. In that case, the directors caused the
company (eSun) to enter into a placement agreement with a broker. eSun indirectly
held interests in itself through cross-holdings with another company (Lai Sun
Development). The effect of the share allotments was to dilute the interests of Lai
Sun Development in eSun, which resulted in a net reduction in the value of the
assets of eSun. The court held that the failure of the board to consider the adverse
financial impact on the company of the placements amounted to a breach of duty to
take into account relevant factors. However, the court declined to set aside the
allotments as innocent third parties (allottees) had already acquired property rights.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
p.284

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DIRECTOR’S DUTIES (2) – THE DUTY TO EXERCISE POEWRS FOR
PROPER PURPOSES

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Topic 3 Materials Page 6
Source: Sealy & Worthington’s Cases and Materials in Company Law, 10 th edition, 2013, by Len
Sealy and Sarah Worthington, pp.333-336

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DIRECTOR’S DUTIES (2) – THE DUTY TO EXERCISE POEWRS FOR
PROPER PURPOSES

Wong Kam San v Yeung Wing Keung [2007] 2 HKLRD 267

“… certain directors of the company purported to allot 9,900 shares to a new

shareholder, effectively diluting the 100 per cent beneficial ownership of the existing
controller of the shares in the company to 1 per cent beneficial ownership. The
shares were issued at par value of $1 per share. The Court of First Instance
rejected the directors’ argument that the shares were allotted for the purpose of
raising funds an found that there were no commercial justifications for the share
allotment in circumstances where only $9,900 were raised and where the 99 per
cent interest in the company was worth a great deal more than that value (the
company having assets with market value of RMB938 million). The court held that
the purpose of the allotment was to replace the existing majority shareholder with a
new majority created out of the allotment and that this was a breach of fiduciary
duty.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
p.285

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DIRECTOR’S DUTIES (3) – THE DUTY TO AVOID CONFLICTS OF
INTERESTS

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Source: Hicks & Goo’s Cases and Materials on Company Law, 7th edition, 2011, by Alan Dignam,
pp.397-399

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DIRECTOR’S DUTIES (3) – THE DUTY TO AVOID CONFLICTS OF
INTERESTS

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Source: Hicks & Goo’s Cases and Materials on Company Law, 7th edition, 2011, by Alan Dignam,
pp.401-402

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DIRECTOR’S DUTIES (3) – THE DUTY TO AVOID CONFLICTS OF
INTERESTS

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Source: Sealy & Worthington’s Cases and Materials in Company Law, 10 th edition, 2013, by Len
Sealy and Sarah Worthington, pp.373-376

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DIRECTOR’S DUTIES (3) – THE DUTY TO AVOID CONFLICTS OF
INTERESTS

Model Articles for Public Companies Limited by Shares

Regulation 15 (Conflicts of interest)

(1) This article applies if—

(a) a director is in any way (directly or indirectly) interested in a

transaction, arrangement or contract with the company that is
significant in relation to the company’s business; and

(b) the director’s interest is material.

(2) The director must declare the nature and extent of the director’s interest to the
other directors in accordance with section 536 of the Ordinance.

(3) The director … must neither—

(a) vote in respect of the transaction, arrangement or contract in which the

director is so interested; nor

(b) be counted for quorum purposes in respect of the transaction,

arrangement or contract.

Model Articles for Private Companies Limited by Shares

Regulation 16 (Conflicts of interest)

Same as Regulation 15 in Model Articles for Public Companies Limited by Shares

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DIRECTOR’S DUTIES (4) – THE STATUTORY DUTY OF CARE

Companies Ordinance (Cap 622)

Section 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.

Duty of care requires monitoring company’s performance

“Directors are not necessarily involved in the day to day management of the
company’s business, but the duty of care of directors … requires them to monitor the
company’s performance and the general affairs of the company. This requires that
[as per Daniels v Anderson (1995) 16 ACSR 607]:

• Directors must have a rudimentary understanding of the business of the

company. They should become familiar with the fundamentals of the
company’s business.

• Directors must keep informed about the activities of the company. Directors
do not need to be engaged in detailed inspection of day-to-day activities, but
there needs to be a general monitoring of corporate affairs and policies.
Directors would be expected to attend board meetings regularly, and board
meetings need to be held as often as required in the circumstances to enable
the board to carry out its function properly. Directors also need to ensure that
the board has available means to audit the management of the company so
that it can satisfy itself that the company is properly run.

• While directors are not required to audit corporate books, they should
maintain familiarity with the financial status of the company by a regular
review of financial statements.”

Source: Law of Companies in Hong Kong, 2nd edition, 2015, by Stefan HC Lo and Charles Z Qu,
p.322

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DIRECTOR’S DUTIES (4) – THE STATUTORY DUTY OF CARE

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Topic 3 Materials Page 18
Source: Company Law in Context: Texts and Materials, 2 nd edition, 2012, by David Kershaw, pp.426-
428

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INSIDER DEALING (CIVIL PROVISION)

Securities and Futures Ordinance (Cap 571), Part XIII, Division 1

Section 245 (Interpretation of Part XIII)

(1) In this Part, unless the context otherwise requires-

insider dealing means insider dealing within the meaning of section 270;

market misconduct means-

(a) insider dealing;

(2) In this subsection and sections 246 to 249 and Division 4, unless the context
otherwise requires-

inside information, in relation to a corporation, means specific information

that-

(a) is about-

(i) the corporation;

(ii) a shareholder or officer of the corporation; or
(iii) the listed securities of the corporation or their derivatives; and

(b) is not generally known to the persons who are accustomed or would be
likely to deal in the listed securities of the corporation but would if
generally known to them be likely to materially affect the price of the
listed securities;

Section 247 (Connected with a corporation (insider dealing))

(1) For the purposes of Division 4, a person shall be regarded as connected with
a corporation if, being an individual-

(a) he is a director or employee of the corporation or a related corporation

of the corporation;

Section 249 (Dealing in listed securities or their derivatives (insider dealing))

For the purposes of section 245(2) and Division 4, a person shall be regarded as
dealing in listed securities or their derivatives if, whether as principal or agent, he
sells, purchases, exchanges or subscribes for, or agrees to sell, purchase, exchange
or subscribe for, any listed securities or their derivatives or acquires or disposes of,
or agrees to acquire or dispose of, the right to sell, purchase, exchange or subscribe
for, any listed securities or their derivatives.

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INSIDER DEALING (CIVIL PROVISION) (CONT’D)

Securities and Futures Ordinance (Cap 571), Part XIII, Division 2

Section 251 (Market Misconduct Tribunal)

(1) There is established a Tribunal to be known as the Market Misconduct

Tribunal which shall have jurisdiction to hear and determine in accordance
with this Part and Schedule 9 any question or issue arising out of or in
connection with the proceedings instituted under section 252.

Section 252 (Market Misconduct Tribunal)

(1) Subject to section 252A, if it appears to the Commission that market

misconduct has or may have taken place, the Commission may institute
proceedings in the Tribunal concerning the matter.

(3) Without limiting the generality of section 251(1), the object of the proceedings
instituted under this section is for the Tribunal to determine-

(a) whether any market misconduct has taken place;

(b) the identity of any person who has engaged in the market misconduct;
and

(c) the amount of any profit gained or loss avoided as a result of the
market misconduct.

[Note: The Market Misconduct Tribunal is empowered to impose a number of orders

or penalties under s.257.]

Securities and Futures Ordinance (Cap 571), Part XIII, Division 4

Section 270 (Insider dealing)

(1) Insider dealing in relation to a listed corporation takes place-

(a) when a person connected with the corporation and having information
which he knows is inside information in relation to the corporation-

(i) deals in the listed securities of the corporation or their

derivatives, or in the listed securities of a related corporation of
the corporation or their derivatives; or

(ii) counsels or procures another person to deal in such listed

securities or derivatives, knowing or having reasonable cause to
believe that the other person will deal in them;

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INSIDER DEALING (CRIMINAL OFFENCE)

Securities and Futures Ordinance (Cap 571), Part XIV, Division 1

Section 285 (Interpretation of Part XIV)

(1) …

(2) In this subsection and sections 286 to 289 and Division 2, unless the context
otherwise requires-

inside information, in relation to a corporation, means specific information

that-

(a) is about-

(i) the corporation;

(ii) a shareholder or officer of the corporation; or
(iii) the listed securities of the corporation or their derivatives; and

(b) is not generally known to the persons who are accustomed or would be
likely to deal in the listed securities of the corporation but would if
generally known to them be likely to materially affect the price of the
listed securities;

Section 287 (Connected with a corporation (insider dealing offence))

(1) For the purposes of Division 2, a person shall be regarded as connected with
a corporation if, being an individual-

(a) he is a director or employee of the corporation or a related corporation

of the corporation;

Section 289 (Dealing in listed securities or their derivatives (insider dealing offence))

For the purposes of section 285(2) and Division 2, a person shall be regarded as
dealing in listed securities or their derivatives if, whether as principal or agent, he
sells, purchases, exchanges or subscribes for, or agrees to sell, purchase, exchange
or subscribe for, any listed securities or their derivatives or acquires or disposes of,
or agrees to acquire or dispose of, the right to sell, purchase, exchange or subscribe
for, any listed securities or their derivatives.

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INSIDER DEALING (CRIMINAL OFFENCE) (CONT’D)

Securities and Futures Ordinance (Cap 571), Part XIV, Division 2

Section 291 (Offence of insider dealing)

(1) A person connected with a listed corporation and having information which he
knows is inside information in relation to the corporation shall not-

(a) deal in the listed securities of the corporation or their derivatives, or in

the listed securities of a related corporation of the corporation or their
derivatives; or

(b) counsel or procure another person to deal in such listed securities or

derivatives, knowing or having reasonable cause to believe that the
other person will deal in them.

Securities and Futures Ordinance (Cap 571), Part XIV, Division 5

Section 303 (Penalties)

(1) A person who commits an offence under this Part is liable-

(a) on conviction on indictment to a fine of $10000000 and to

imprisonment for 10 years; or

(b) on summary conviction to a fine of $1000000 and to imprisonment for 3

years.

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DISQUALIFICATION OF DIRECTORS

Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

Section 168D (Disqualification orders: general)

(1) In the circumstances specified in this Part, a court may, and under section
168H shall, make against a person a disqualification order, that is to say an
order that he shall not, without leave of the court-

(a) be a director of a company;

(b) be a liquidator of a company;

(c) be a receiver or manager of a company's property; or

(d) in any way, whether directly or indirectly, be concerned or take part in

the promotion, formation or management of a company,

for a specified period beginning with the date of the order.

Section 168E (Disqualification on conviction of indictable offence)

(1) The court may make a disqualification order against a person where he is
convicted of an indictable offence (whether on indictment or summarily)-

(a) in connection with the promotion, formation, management or liquidation

of a company; or

(b) in connection with the receivership or management of a company's

property, or any other indictable offence his conviction for which
necessarily involves a finding that he acted fraudulently or dishonestly.

(2) …

(3) The maximum period of disqualification under this section is, where the
disqualification order is made-

(a) by a judge of the Court of First Instance, 15 years;

(b) by a judge of the District Court, 10 years;

(c) by a magistrate, 5 years.

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DISQUALIFICATION OF DIRECTORS (CONT’D)

Section 168F (Disqualification for persistent breaches of specified provisions)

(1) The court may make a disqualification order against a person where it
appears to it that the person has been persistently in default in relation to the
specified provisions.

(2) On an application to the court for an order to be made under this section, the
fact that a person has been persistently in default in relation to the specified
provisions may (without prejudice to its proof in any other manner) be
conclusively proved by showing that in the 5 years ending with the date of
application the person has been adjudged guilty (whether or not on the same
occasion) of 3 or more defaults in relation to the specified provisions.

...

(4A) In this section—

specified provision means a provision of the pre-amended Ordinance, this
Ordinance, or the Companies Ordinance (Cap 622), requiring—

(a) any return, accounts or other document to be filed with, or delivered or

sent to, the Registrar; or

(b) notice of any matter to be given to the Registrar.

(5) The maximum period of disqualification under this section is 5 years.

Section 168G (Disqualification for fraud, etc., in winding up)

(1) The court may make a disqualification order against a person if, in the course
of the winding up of a company, it appears that he-

(a) has been guilty of an offence for which he is liable (whether he has
been convicted or not) under section 275 [fraudulent trading]; or

(b) has otherwise been guilty, while an officer or liquidator of the company
or receiver or manager of its property, of any fraud in relation to the
company or of any breach of his duty as such officer, liquidator,
receiver or manager.

(2) The maximum period of disqualification under this section is 15 years.

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DISQUALIFICATION OF DIRECTORS (CONT’D)

Section 168H (Duty of court to disqualify unfit directors of insolvent companies)

(1) The court shall make a disqualification order against a person in any case
where, on an application under this section, it is satisfied-

(a) that he is or has been a director of a company which has at any time
become insolvent whether while he was a director or subsequently;
and

(b) that his conduct as a director of that company, either taken alone or
taken together with his conduct as a director of any other company or
companies, makes him unfit to be concerned in the management of a
company.

(2) For the purposes of this section, a company becomes insolvent if-

(a) the company goes into liquidation at a time when its assets are
insufficient for the payment of its debts and other liabilities and the
expenses of the winding up; or

(b) a receiver of the company is appointed,

and references to a person's conduct as a director of any company or

companies include, where that company or any of those companies has
become insolvent, that person's conduct in relation to any matter connected
with or arising out of the insolvency of that company.

(3) …

(4) Under this section the minimum period of disqualification is 1 year, and the
maximum period is 15 years.

[Note: Schedule 15 to Cap 32 provides matters for determining the unfitness of

directors.]

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