Tightened rules should expose dodgy directors

PROPOSED amendments to the Companies Ordinance regarding the disqualification of company directors should prove more effective in deterring misconduct.

Last week, the Executive Council approved the Amendment Bill on Chapter 32 of the Companies Ordinance after consultation with professional and trade bodies.

The Bill, which legislators will debate on April 21, was well received by financial professionals who said the provisions would improve the integrity of companies.

Under existing law, the courts may - on specific grounds - issue an order prohibiting a person from being a company director for not more than five years.

A person who has been director of two companies which have gone into liquidation within five years of each other can also be disqualified.

One influential group, the Standing Committee on Company Law Reform, believes that these provisions are subject to the same weaknesses and enforcement difficulties as were the UK Companies Act 1981 and the Insolvency Act 1976 before they were amended.

For instance, the committee points out that Hongkong's provisions do not prevent a person from allowing a company to become insolvent, forming another company and carrying on much as before, leaving a trail of unpaid creditors.

Another weakness is that while the law gives the court maximum discretion, it provides little guidance as to the specific circumstances of non-compliance or abuse that would merit disqualification.

Under the proposed amendments, it would no longer be a pre-condition for disqualification that a person must be a director of two insolvent companies within five years.

Instead, an order could be made if the person was or had been a director of a company which had become insolvent and their conduct as a director of that company was deemed unfit to manage it.

The amendment also provides for the Financial Secretary to apply for a disqualification order against a person who has been a company director on the basis of information obtained from an investigation of the company's affairs.

All this amounts to a further tightening of the responsibilities of Hongkong company directors and will do much to bring Hongkong into line with other financial centres such as London.

The stock exchange listing committee has also adopted some recommendations on tighter corporate governance contained in a consultative paper issued to industry players.

The aim is to create a better regulatory environment.

Recommendations include forcing listed companies to take two independent directors on to their boards and making professional advisers liable to sanction if they fail to take listing requirements into proper account in formulating their advice.

According to sources, the exchange is keen to have the rules in place within two years.

Whereas the exchange proposals relate only to listed companies, the changes to the Companies Ordinance would cover all directors.

It is to be hoped that the Bill makes its way through the legislative process unscathed.