Types of Directors (1) – Executive and Non-Executive Directors

This note sets out the position of the executive and non-executive director under the Companies’ Act, 2019 (Act 992).

An executive director is a director who holds any other office or place of profit in the company (other than the office of an auditor)[1]. In other words, the executive director is a director who also acts as an employee of the company. The phrase “office or place of profit” means that the director receives salary, commission, share of profits, participation in pension and retirement schemes, or any other means that the directors may determine. Executive directors, in large numbers, are often found in small companies where the directors share among themselves the existing roles in addition to the office as directors. The converse is also true. For the executive director, it is important to note that his office comes to an end when his role as a director comes to an end.

The non-executive director is the opposite of the executive director. In some other literature and jurisdictions, they are referred to as the independent directors (even though this term is very doubtful in cases where the constitution of the company requires that directors must also be shareholders). In any event, non-executive directors are independent to the extent that they are not involved in the day to day running of the affairs of the company. They do not devote all of their time to the business activity of the company. They are simply “part-timers”.

The distinction between executive and non-executive directors have led some to conclude that the liability of an executive director is different from those of the non-executive director. This thinking comes from the point of view that part-time directors cannot share the same responsibility as full-time directors.  This view, archaic as it is, is supported by commentaries such as the sixth edition of Gower’s Principles of Modern Company Law by Paul L. Davies. In there, P.L Davis asserts that: “(non-executive) directors are expected to do little or nothing other than to attend a reasonable number of board meetings and, perhaps, some of the committees that the board may establish. As such they will be modestly rewarded by directors’ fees resolved upon by the company in general meeting”.

The validity of this view has been called into question. In Dorchester Finance Co Ltd v Stebbing[2], the non-executive directors were held to be liable on the same basis as the executive directors and it was held that the scope of the duty of skill of a non-executive director should be determined subjectively by reference to that director’s own skill and experience and a duty of care should be determined objectively by reference to the standard expected of the ordinary reasonable man. According to Foster J: “For a chartered accountant and an experienced accountant to put forward the proposition that a non-executive director has no duties to perform I find quite alarming.” In Lexi Holdings (in admin) v Luqman[3], the English Court of Appeal noted that non-executive directors cannot rely on their inactive participation in the company to avoid liability. Finally, in Moulin Global Eyecare Holdings Ltd (in liquidation) v Olivia Lee Sin Mei[4], a non-executive director was found liable for losses incurred by the company as a result of the non-executive director’s inability to exercise care and skill in the performance of his functions.

[1] Act 992, Section 183(a)

[2] [1989] B.C.L.C. 498.

[3] [2009] EWCA Civ 117

[4] [2019] HKCFI 1715

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