The new Hong Kong Companies Ordinance (CAP. 622) comes into effect on March 3, 2014. It had increase the legal liability of Directors for both Public and Private companies.
Being appointed as a Director is a significant responsibility. With responsibility, comes liability.
Since a director is essentially the custodian of a company, they are accountable to shareholders, third-party, potential investors, creditors, employees, suppliers, customers, competitors, and of course to the regulators.
Lawsuits can be bought for various reasons: Insider trading, misrepresenting the financial health of the company, anti-trust or unfair trade practices, negligence … just to name a few.
Of course, Director is not the only one face with liability. Officers are at risk as well.
The new Companies Ordinance did not clearly define who is considered as an officer, it uses “Responsible person” in a broad sense. CEO, CFO, head of department, managers can fall within the definition of Responsible person, thus share the liability.
But perhaps, the most important changes to the Ordinance is:
- 1) The company are forbidden to compensate Directors on their liability to the company, and
- 2) Only under specific circumstances can a company provide compensation to a third party on behalf of the director
It means Directors are now personally liable for their wrongful act. Face with such substantial liability, where can a director or officer turn to protect themselves?