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Functional Classification and Qualification of Directors with Guide to Rules and Criteria for their Appointment after Company Incorporation Hong Kong

“Body corporate director can be appointed, provided at least one director of the subjected company, a natural person.”

In this article, we shall discuss the types of directors which are functionally different from others as well as general qualification to be director along with discussion on rules of their appointment as per Hong Kong company registration service.

Role of Managing Director in Hong Kong business formation

After Hong Kong company establishment, Managing director is appointed by the board of directors of the company to perform his or her duties as the chief of the company. Basically, managing director will be the director of the company, while being the employee of the company at the same time. Officially, there is no tenure for the management director and thus have no retirement on his part. Managing director plays a key role for keeping the company running after Hong Kong company establishment. Its domains consist of overseeing company’s daily affairs and to supervise the executives of the company while for the precise role of it, legislation leaves it up to the company to decide his or her role in contract of his or her employment as a MD of the company. There is another widely used term of “Chief Executive Officer” but legally and operationally, it performs the same function as does the managing director.

Role of Executive Director and Non-Executive Directors

The only distinction between the executive and non-executive director is that: Executive directors are the full-time employees of the company however non-executive directors do not share the full-time commitment with the company, thus called as part-time or independent directors. Non-executive directors are found to have wider spectrum in company’s business affairs and take decisions in the favour of company by utilising their respective expertise and experiences of corporate world. Apart from this they do keep a check on executive directors and thus ensure transparency in the company.

As per the Hong Kong’s listing rules of Stock Exchange, there must be three independent executive directors in company’s board or at least one-third of company’s total board composition. It must be remembered that, non-executive directors are subjected to the fiduciary, care, skill and diligence obligations.

Role of Alternate Directors

If the articles of company allow, then there is the permission to appoint a person in place of the existing director, who would attend meetings in the event of director’s absence, such appointee will be regarded as the Alternate Director.

As per the Section 478(1) of Cap.622which pictures the Hong Kong business formation, the permission to appoint alternate director is subjected to the provision of such clause in company’s constitution. Alternate director will be considered as the agent of the director and if any act of tort is committed by him or her in his or her capacity of alternate director, then the director who he or she has replaced, will be liable for his or her such act of tort. However, personal liability is imposed on alternate director for any omission.

In Anaray Pty Ltd’s case, alternate director attended meeting on behalf of his appointee and voted for the resolution, where he personally had the interest. The matter went in court and plaintiff argues that articles of the company prohibits directors to vote on the issue where they have personal interest and prayed before court that on this basis, alternate director must be disqualified from voting. Supreme Court of New South Wales held in this case, there is no clause in company’s articles which allows for the appointment of alternate directors and narrative of treating the said alternate director to be the agent of appointor was rejected by the court.

It is the general perspective that, alternate director has same rights and authorities as that of a director, but facts present that, alternate director cannot be made subject to his or her directional duties and responsibilities until and unless he or she assumes so. Alternate director also has no status if his or her appointor is present at the meeting.

Role of a Nominee Director

Nominee director is appointed to protect and oversee interests of particular stakeholder by a party in joint venture, government bodies or a creditor. They are expected to perform their duties in accordance with understandings as per which nominee is expected to show loyalties towards the person, other than company.

Role of a Reserve Director

In case of private company, a sole director of the company can nominate anyone of 18 years of age and not an employee or director of the company, to be a reserve director, to act in place of his or her in the event of his or her death. However, a person will not be considered as a reserve director if:

Ø He or she resigned from the position of reserve director.

Ø General Meeting has cancelled his or her nomination.

Ø The director against whom he or she was nominated, no more remains the sole director of the company.

Qualification of a Director

Facts reports that, there is no general educational and professional requirements for a director however greater managerial expertise are expected from the director. In history, popular personalities were appointed as directors to attract the investors, but modern law does not have educational or professional requirements for a director.

Age Factor

A person having age of 18 years or more, can be appointed as the director of the company. However, company’s constitution can determine the maximum age limit.

Ineligibility for Bankrupts

There is prohibition under Section 480 of Cap.622 for company incorporation Hong Kong,to appoint a person as director, who has been bankrupt, however if still such appoints is made then the person will personally be liable for the debts and other liabilities of the company from the day he or she assumed his or her office. In addition to this, a person against whom disqualification orders has been issued, he or she would also not be eligible to appoint as a director of the company.

Courts Clearance

Previous Company Ordinance has the provision to allow, ineligible person to be appointed as company’s director subjected to its clearance from the court within two months of his or her appointment.

Status of Body Corporate Director

There is the prohibition to appoint body corporate as company’s director, for public companies. However, public companies have the exemption and they can appoint body corporate as their director, provided there is at least one natural person as company’s director.

Rules and Criteria for Director’s
Appointment

Now we shall discuss the criteria and rule to be kept in mind while appointing a director.

Minimum Numeral Requirement

There is the compulsion for public and companies limited by guarantee to have at least two directors whereas there is relaxation for private companies to have only one director with the provision to permit he or she to nominate the reserve director, which would act as company’s director subsequent to his or her nominee’s death.

As per the Hong Kong business registry, Registrar office can direct company to appoint director or directors to meet the minimum statutory requirements, where they see falling composition of director’s lot as compared to minimum required numbers of directors. If the said company, does not act on Registrar office direction within the specified time period i.e. one to three months since communication from the Registrar office, then this non-compliance of the company and its responsible person would be considered as an act of offence.

Title of “Initial Director(s)”

The name of the persons, mentioned in the incorporation form, will be regarded as company’s initial directors after the establishment of company, subjected to the written consent of the said person.

Retirement Policy

As per the model articles, initial directors are required to be retired in 1st Annual General Meeting of the company and then at every subsequent Annual General Meeting, one third of directors are to retire from their respective offices. If the total composition of board is not exactly three or multiple of three, then any number nearest to one third of total board’s composition are to be retired, with the allowance to be eligible for the re-election. It is the requirement to appoint the new director(s) in the same general meeting, in which predecessor retires. They will be appointed via ordinary resolution as per the mechanism mentioned in company’s articles. For the private companies, model articles do not outline the procedure for director’s rotation, but general meeting reserves the right of appointment through ordinary resolution. It must be noted that, where the number of directors has been decreased to two, then neither of them will retire provided they adopted Model Articles. For the private company’s Model Articles, there is no compulsion for directors to retire on rotation, but general meeting can specify time period of appointment in ordinary resolution while appointing the director.

Rules for proposal through a resolution

In case of a private company or a company limited by guarantee, motion of resolution for the appointment of two or more directors in a single resolution cannot be made, provided such resolution was passed by the general meeting with the full majority’s vote. This is to ensure member’s right, not to reject other appointees for the one un-wanted person/ appointee.

Concurrency in Appointment

The power of appointment can be vested to board of directors or general meeting, however where deem appropriate, can be vested concurrently to both of corporate organs. If the appointment is made by board of directors, then the appointee can hold the office till subsequent general meeting only. However, general meeting can reappoint the said person after Annual General Meeting.

Communication to the Registrar Office

Registrar office must be informed within 15 days of appointment, about the appointment of director along with his or her credentials such as name, address and Identity card number, statement by the appointee declaring that he or she has attained the age of 18 or more and accepted his or her appointment as company’s director. Apart from notifying Registrar office, update must be ensured in company’s register of directors.

Appointment of Managing Director

As far as appointment of Managing Director is concerned, board of director may make appointment for the tenure and terms & conditions they seem appropriate. If Company’s articles permit, director can appoint an alternative director to act or attend meetings in his or her event of absence.

Can Outsider be a Director?

Outsider can too appoint a director, following the contractual terms. Subjected to the provision in company’s article, the firm/supplier contributing towards capital or debt finance can nominate their directors but there is the possibility that court may not allow the nominee to hold the office of director, for his or her credentials non-compliance with the legal procedure or social reputation. However, directors can delegate their power to let the supplier or contributor of debt finance to appoint their director, so that they may protect their interest against the supplied debt finance. Where the matter is concerned to Joint Ventures, then subsequent to the shareholder’s agreement joint venturer may appoint its director.

Under age Director

Any natural person of age 18 or above can become the director of the person. However, if any under age or minor is made the director of the company then he or she will be made liable under any applicable section or clause of Cap.622, Section 459(3) of Cap.622 says the same and prohibits any of age less than 18 years to become the director. Circumstances in UK reports that minors were appointed the directors of the company to benefit from the immunity they have for prosecution.

Body Corporate and Director-ship

There is prohibition on appointment of body corporate as the company’s director for public companies and companies limited by guarantee. Private companies can appoint them as directors, subjected to the presence of one natural person as its director. There is the suggestion to prohibit their appointment in private companies because of transparency and accountability issues. Lack of transparency can give rise to the possibility of financial abuse such as Money Laundering which can be as easy and win-win situation for body corporate directors. On the contrary there can be legitimate purposes, for instance in the event where director of the company is out of the country then corporate body director may sign or authorize projects/ initiatives on his or her behalf. Apart from nominating body corporate director, Corporate Service Providers can also provide directorial services more efficiently. Section 457 of Cap.622, also tries to maintain balance and supports the situation discussed earlier by stating that:

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