Hong Kong Common Law

Hong Kong is a major international business and financial centre. As to improve Hong Kong’s competitiveness and attractiveness therefore the Government launched a major and comprehensive exercise to rewrite the Companies Ordinance (“CO”) in mid-2006. And it is called Companies Bill which gazette on 14 January 2011 and introduced into the Legislative Council on 26 January 2011. Inside, it states that directors’ duty of care, skill and diligence should be codified. The law need to be develop through the evolving law.

And the Legislative Council formed a Bills Committee to scrutinize the Companies Bill. Director’s duties can be divided into two parts: fiduciary duties and the duties of care, diligence and skill. Companies bill just rewrite on the part of the director’s duty of care, diligence and skill when the fiduciary remain unchanged and follow under the common law as usual. In the common law position regarding directors’ duty of care, skill and diligence, it has not a standard to follow. It is no provision in the current CO and it is not so clear.

Moreover, it is mainly concerns about the experience and knowledge of the director. So that’s a difficulties to measure what level of the skill the director has since it is too subjective. There is nothing to ensure the company is under managing a right director to create the good quality of outcome from the company. Do they have the competence to run the company business perfectly? What profession or qualification do they own? Are those profession or qualification related to the feature of the company or can it helps handle the business running in a right way?

In Re City Equitable Fire Insurance Co Ltd (1925) UK, the company loss and the liquidator sue the director but he fail because the articles provided that the directors were exempt from liability unless caused by their own willful neglect or default. It’s hard to definite the willful neglect or default. The case shows that the director does not need to perform a great skill to operate the company but base on their qualification and experience. Their conduct should just judge with the relative profession skill for the comparison.

For example, if the director has a profession on the accounting qualification, then he will be judge the qualification only with the accounting task but not any other type of task within the company. But if the profession the director own has been unqualified, it will become a lower standard of competence. It is the problem about what skill should be required by the director. It is possible that the director should perform a great work if their professional is not related to the company’s duty. It can shows that the director have the appropriate skill to handle the company works.

Second, the directors are not supposed to look after the running of the company operation in every minute. They just concern the macro-status of the company running therefore they should just attend some meetings when they need to attend from whenever they think the company needs them. The general duties should not carry by director on every time. It shows the problem of director’s care and diligence. Third, based on the articles of the company and the needs of the business, the official needs to perform the tasks honestly even the director left and the work is undone.

It is about the problem of director’s diligence. On the other hand, the Companies bill states that a director must exercise reasonable care, skill and diligence, at the standard 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. It is a better guideline for the director to follow and clarify.

In Dorchester Finance Co Ltd v Stebbing (1989) UK, there was three directors: S,P and H worked in a money lending company. S worked full time for the company and have made some unrecoverable loss. P and H were rarely working in the company but three of them are sued by negligence and liable to make goods of the company losses. It states that whether the director is executive or non-executive director should also pay attention and be liable to the company duties even the director is not profession on the related type of duties or without sufficient qualification and experience.

There are not the excuse for the director to avoid the responsibility to the duties of care, skill and diligence to the company. There is not difference between the director and non-executive director’s duty. Codification can improve clarity and certainty for company management and members. It can keep the company running smoothly under the director who has the required skill, care and diligence. Some countries under the common law like UK, Australia and Singapore has already codified some director duties of care and skill in their common law.

In conclusion, I think that the director duties of care, skill and diligence should be codify and the mixed method of subjective/objective test to the director and non-executive director should proceed. Although the general knowledge, skill and experience that the director has are important but it does not mean and performed that all directors have sufficient skill to meet the requirement to management the business. People do the things with the limited rules to meet the basic standards for the requirement the company needed is better than the director thought they are with sufficient level of behave they provide.

Since the punishment will appear if they do not meet the standard. The codify of the duties of skill, care and diligence can also avoid the director remove the responsibility should be made to the company. It can reduce the negligence to the loss made by the directors. Some said that it may affect some directors with highly experiences and qualified of the directorship in some Hong Kong Companies. I believe that any rules can insure the company have a good running should be accept by the company director.

Since the test are mixed subjective and objective, there is a equitable test to measure the skill the directors own. The duties of care and diligence can also perform by the director’s behave under a standard. Hong Kong may not have enough experience of codification to judge and support this but there are some case are provided from some countries under the common law such as UK. It provides the details of the duties the director should follow. Furthermore, it is a little difference between the director and the non-exclusive test as the test are divided into two parts: objective and subjective.

It is appropriate and mature to follow a rules of fully codification at this moment and it is a good idea to set the guideline to codify the duties of care, skill and diligence then to follow a not clear standards to measure the directors duty. Because we can not easily identify a person from the experience and knowledge, it can just perform after they did some works or decision that could improve the company or not.

But the subjective and objective test to the director’s or non-exclusive director can reflect the qualification of them and let the shareholder, creditors or may be investors to understand and having confidence to let the company business under managing by the right person. The companies law propose a better rules can make Hong Kong market has a improvement under this new ordinance. And the common law’s guideline must has a conflict with the new companies ordinance. That will make a huge unclassified and misunderstanding to the relevant person to follow. So the common law position should be replaced by the new Companies Ordinance and better keep the principles of the common law.