A new Companies Ordinance (CO)2 came into effect in Hong Kong on 3 March 2014, which introduced a number of changes to the law on directors’ duties.
For the first time, the CO codified directors’ duties of care, skill and diligence. It has also prescribed a dual objective and subjective test for determining if there has been a breach of those duties.
The CO requires directors to exercise a level of care, skill and diligence commensurate with that of a reasonably diligent person carrying out the functions of a director in relation to the company (the objective portion of the test), while at the same time exercising the general knowledge, skill and experience they possess (the subjective portion of the test).
The CO clarifies that the duties of care, skill and diligence are owed by a director of a company to that company alone, and that they are to apply equally to shadow directors.
The remaining common law duties will stay uncodified, for now.
The new CO also codifies circumstances in which a company is able to ratify conduct of a director that is negligent, or that otherwise represents a default, breach of duty, or breach of trust in relation to the company. The decision to ratify such conduct can only be made by resolution of the company’s members.
The CO also clarifies that companies are permitted to indemnify their directors in respect of liabilities to third parties, subject to narrow exceptions. Indemnification is not permitted where the director is liable to pay a criminal fine, or a penalty for non-compliance with a regulatory requirement.
Companies are not permitted to indemnify a director for negligence, default, breach of duty, or breach of trust in relation to the company or an associated company. The company can, however, procure D&O insurance for the benefit of its directors to cover such liabilities.