The High Court of Hong Kong has in a recent case held that a director (“Director”) who resigned from his directorship in order to take up a full-time paid position as financial advisor in the same organisation was in breach of his fiduciary duties, despite disclosure of interest and approval of such engagement (“Engagement”) by the board of directors. Consequently, the Director was liable to account for all remunerations made to him during the Engagement as financial advisor on challenge by the members.
The issues the High Court had to consider were, among other things:-
After thorough consideration it was held that:-
The case confirms the liability to account for profits can arise from a fiduciary taking advantage of the opportunity of his office. It also highlights the point that a director cannot avoid liability by subsequently resigning in order to take a personal gain.
The rules governing fiduciary duties are so strict and inflexible that a mere disclosure of interest according to the articles of association would not be sufficient to prevent avoidance of a contract by the company or liability to account for profits. This case can be contrasted with Article 86 of Table A of the previous Companies Ordinance (Cap.32) as well as Article 17 of the Model Articles of the current Companies Ordinance (Cap.622H) where both provisions expressly specify that the contract will not be avoided and the director will not be liable to account for profits realised in a transaction with the company in which he has a personal interest. Care should therefore be taken when drafting articles of a company to address a conflict of interest situation and to spell out the intended consequences flowing from it, according to the intention of the shareholders. The fact that the articles merely allow a Director to vote on conflicted matters after disclosure of interest cannot be taken as conferring the necessary approval for the Director to keep his profits earned out of the conflicted matter.
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