A Director's Duty of Loyalty and the Relevance of the Company's Scope of Business: Cheng Wai Tao v Poon Ka Man Jason

Abstract

The Hong Kong Court of Final Appeal has utilised a ‘scope of business’ inquiry to delineate the boundaries of the no‐conflict rule for the company director. Such an inquiry is directed at discerning the realistic ability of the company to exploit any particular business opportunity and a strict capacity approach is eschewed, at least where the no‐conflict rule is concerned. The decision is premised on a bifurcation between the no‐conflict and no‐profit rules, suggesting that the tests to determine breach of these fiduciary rules are not necessarily the same, thus permitting a more nuanced consideration of directorial breaches.

The Dangerous Dichotomy: Abandoning the ‘Proscriptive’ and ‘Prescriptive’ Classification of Fiduciary Duties and the ‘Proscriptive Limitation’

“…While the 'proper purposes' duty largely restricts the actions of directors by ensuring they do not act for an 'ulterior purpose', 113 it may also be characterised as prescriptively requiring directors to 'act' in accordance with their conferred powers. 114 For example, it may oblige directors to act 'properly' when exercising their power to issue shares, and not to do so for an impermissible purpose such as to control shareholder voting power. 115 When voting on a proposal for the company to purchase land or an asset, the proper purposes duty prescriptively compels directors to act 'properly' in doing so -for example, by ensuring that the transaction is not approved to simply further their own, or other parties', interests.…”