Directors Duties Financial Difficulties Hong Kong: What to Do as a Director if Your Company Is in Financial Difficulty
- Ravenscroft & Schmierer
- Aug 2, 2020
- 3 min read
Updated: 3 days ago
When a company encounters financial difficulties, directors are subject to increased legal scrutiny under Hong Kong law. Decisions made during this period can have serious consequences, including personal liability, regulatory action, and potential disqualification. For this reason, directors must have a clear understanding of their legal duties and the risks that may arise when managing a company in financial distress.
Directors Responsibilities and Potential Liability
Responsibilities and liabilities of directors come from various sources, including the Articles of Association of the company, case law, and statute law. Non-compliance may expose directors to civil proceedings, criminal liability, and possible disqualification.
1. Do Not Walk Away From Problems
As soon as directors become aware of their company’s financial difficulties, they should seek professional advice, especially from the company’s auditors.
To make appropriate decisions, directors require access to and review of the latest management accounts and relevant paper trails. The paper trail shall include the preparation and approval of detailed board minutes, which demonstrate that directors have taken appropriate steps, participated in board meetings, and considered relevant information and potential actions.
Directors should also seek professional advice from the company’s lawyers and a licensed insolvency practitioner. It is rarely advisable for directors of companies in financial difficulties to resign. Remaining on the board generally enables directors to continue discharging their duties rather than being perceived as walking away from problems.
2. Maintain Records and Keep Paying Wages
Directors shall meet the following requirements:
Take all reasonable steps to ensure the company keeps proper accounting records;
Pay MPF contributions; and
Pay wages to employees.
There are various situations in which company directors may be held liable for offences committed on behalf of the company. Directors may commit offences, and risk fines or imprisonment, if they fail to keep accounting records or fail to pay MPF contributions and employee wages.
3. Personal Guarantees Risk Liability
Directors of closely held companies often give personal guarantees in respect of banking facilities. When making decisions on whether the going concern basis of accounting remains appropriate, directors should consult guidance issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
Where a limited company with uncertain creditworthiness enters into a business transaction, counterparties may require shareholders or directors to sign guarantees due to the company’s limited liability.
By signing a guarantee, shareholders or directors become personally liable for the relevant debt or compensation if the company fails to perform its payment obligations.
Directors may only avoid liability under a personal guarantee in limited circumstances, such as where they can prove they were misled or coerced, which is generally difficult to establish.
Before signing any document containing a guarantee, directors should carefully review all terms and conditions and, where appropriate, seek legal advice.
How Ravenscroft & Schmierer Can Help?
Ravenscroft & Schmierer advises directors and companies on legal duties arising during periods of financial difficulty, including governance obligations, exposure to personal liability, and risk mitigation under Hong Kong law.
The firm provides guidance on dealing with auditors, insolvency practitioners, and key stakeholders, as well as compliance with statutory and corporate governance requirements. Directors seeking clarification on their responsibilities in financially distressed situations may contact us.
FAQ: Directors Duties Financial Difficulties Hong Kong
What are a director’s duties when a company is in financial difficulty?
Directors must continue to act in good faith, exercise reasonable care and skill, and ensure compliance with statutory and fiduciary duties when a company experiences financial difficulty.
Can directors resign if a company is insolvent?
Resignation is generally discouraged, as remaining in office allows directors to continue fulfilling their duties and managing potential risk exposure.
Can directors be personally liable for unpaid wages or MPF?
Yes. Directors may face personal liability, fines, or other consequences where obligations relating to wages or MPF contributions are not met.
What is the risk of signing a personal guarantee as a director?
Signing a personal guarantee can expose a director to personal liability if the company fails to meet its obligations.
Should directors seek professional advice during financial distress?
Yes. Seeking advice from auditors, lawyers, and insolvency practitioners is an important step in fulfilling directors’ duties and managing risk appropriately.
How can Ravenscroft & Schmierer assist directors of distressed companies?
Ravenscroft & Schmierer works closely with directors to help them understand their legal obligations, evaluate personal risk exposure, and take informed and defensible steps during periods of financial difficulty.
Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
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