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Directors’ liability for corporate offences

There are various situations in which directors or other officers of corporations will be held liable for offences of the corporation. Sometimes, liability may extend to members where the corporation is managed by its members. This is based on the notion of control, consent or connivance they have over the acts of the corporation. Under section 101E of the Criminal Procedure Ordinance, where a person by whom an offence under any Ordinance has been committed is a company and it is proved that the offence was committed with the consent or connivance of a director or other officer concerned in the management of the company, or any person purporting to act as such director or officer, the director or other officer shall be guilty of the like offence.

Fraud or dishonesty based offences

The Court is usually prepared to lift the corporate veil where the corporate structure has been used as a vehicle for criminal activities or to perpetrate fraud. Controllers of companies cannot avoid liability by hiding behind the corporate shield. There are specific instances under the Theft Ordinance for fraud or dishonesty based offences aimed at controllers of companies.

For example, section 20(1) of the Theft Ordinance imposes liability on any director, manager, secretary or any person purporting to act in such capacity for offences under sections 17 (obtaining property by deception), 18 (obtaining pecuniary advantage by deception), 18A (obtaining services by deception), 18B (evasion of liability by deception), 18D (procuring entry in certain records by deception), 19 (false accounting) or 22(2) (suppression of documents) where the offence is proved to have been committed with his/her consent or connivance. Further, under section 20(2), where the affairs of a body corporate are managed by its members, the section shall apply in relation to the acts and defaults of a member in connection with his functions of management as if he were a director of the body corporate.

Other instances short of fraud or dishonesty

The imposition of criminal liability on directors and other officers extends to offences short of fraud or dishonesty. For example, a director, manager, secretary or other similar officer of the body corporate may be criminally liable for the non-payment or late payment of wages under section 64B of the Employment Ordinance. Liability is established if the non-payment or late payment of wages of the body corporate was committed with his consent or connivance or was attributable to any neglect on his part. The offence is punishable by up to 3 years imprisonment and a fine of $350,000.

Interestingly, negligence which has traditionally been a concept under civil tort law has been imported to the criminal context. In other words, a director or other officer may be held criminally liable and possibly imprisoned for negligently failing to pay employees’ wages on time, absent any intentional or deliberate wrongdoing on his part.

It is not an excuse for a director not to pay wages where the company is in a parlous condition and the funds were deployed in an attempt to salvage the company instead. In HKSAR v Li Fung Ching, the Court took the view that this amounted to a “calculated decision to break the law” and the “very antithesis of a reasonable excuse for non-payment”. The Court found that the director had connived in the non-payment of wages because she knew the wages had not been paid and she gave priority to other expenses. The director took no step to prevent the non-payment of wages. Accordingly, the director was convicted and fined $110,000 and the Court of Final Appeal refused to grant leave to appeal before it.

In HKSAR v Wong Yuk Tung, the directors’ case was that the company’s factory had been destroyed by fire as a result of which the company was unable to pay wages on time. One of the directors had apparently disposed of some of his personal assets to assist the company. The employee spoke highly of the director. However, the Court upheld the conviction against the directors on the basis of an inference that there could not have been a reasonable excuse for the non-payment of wages since there was a significant credit balance in the company’s account.

More recently, former Hong Kong Mercantile Exchange chairman, Barry Cheung, was sentenced to 6 weeks imprisonment after pleading guilty to failing to pay an employee more than $300,000 in wages.

However, the cases so far have not directly addressed the question of negligence and the standard of care expected of directors to avoid liability under s64B. This is particularly important in the context of a large company where the directors may not be able to monitor the payment of wages on a day to day basis. Further, given the clear indication in Li Fung Ching that an attempt to salvage a company in financial hardship is no excuse not to pay wages on time, it is unclear the extent to which this offence will impact on a director’s decision to salvage a struggling business or simply to close down the business, and the impact this will have on employees. It is also unclear whether an employee’s consent or willingness to accept deferred payment of wages, as opposed to being forced out of work, would constitute a reasonable excuse for late payment.

There could be greater clarity on some of these questions after the trial of HKSAR v Ip Ka Po for the late payment of wages by Asia Television Limited which is due to be heard next month. In this regard, an indication from the Courts on the balance of interests between the stakeholders, including employers, directors and employees will be welcomed.

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