Matter note: director duties and governance

A wholly foreign-owned subsidiary in Hong Kong looks like a simple entity on paper. One parent, one board, one set of accounts. The reality that arrives on day two of operation is more demanding: the directors of that subsidiary carry personal obligations under Hong Kong company law that cannot be delegated upward to the parent group, and those obligations run to the company itself – not to the shareholder sitting above it.

Directors of a Hong Kong subsidiary owe duties under the Companies Ordinance (Cap. 622) and the common law – including the duties to act in the interests of the company, to exercise reasonable care and skill, and to avoid conflicts of interest – regardless of who appointed them or where the parent group is incorporated. Those duties apply from the moment of appointment and continue until the director formally vacates office.

This matter note sets out an anonymised cross-border engagement in which the gap between a parent group's internal governance assumptions and the actual legal position of its Hong Kong directors became the central problem. The note covers the situation and the constraint, the legal issue identified, the route chosen, the sequence, and the transferable lesson for groups operating across the Greater China corridor.

What was the situation, and where did the constraint originate?

The client was a mid-market industrial group with its principal operating assets in mainland China and a Hong Kong subsidiary used as the treasury, contracting and intercompany-lending vehicle for the group's offshore transactions. The Hong Kong entity was incorporated under the Companies Ordinance (Cap. 622). Its two directors were senior employees of the parent, appointed at incorporation and carrying out instructions relayed from head office in a third country.

The constraint was structural. The parent's internal governance model treated the Hong Kong subsidiary as a pass-through vehicle. Instructions on treasury movements, contract execution and intercompany pricing came from the parent's finance and legal teams. The Hong Kong directors signed what they were told to sign. No independent board process existed at the subsidiary level. No formal record of director decision-making was maintained beyond the execution copies of the relevant documents.

This arrangement is common. In our cross-border corporate practice, we see it across subsidiaries incorporated in Hong Kong by groups from continental Europe, the Middle East and the CIS states. The parent group's home-jurisdiction governance expectations – where a subsidiary director may legitimately act as a conduit for shareholder instructions – do not map cleanly onto the Hong Kong position. That mismatch rarely matters until something goes wrong. Here, something did.

A commercial dispute arose between the Hong Kong subsidiary and a Mainland counterparty under a series of supply arrangements. The counterparty raised a set-off claim that, if sustained, would have left the subsidiary with a material net liability. At that point the parent's external counsel, based outside Hong Kong, flagged that the directors of the subsidiary might face personal exposure if the subsidiary entered into a proposed settlement that was, on its face, commercially disadvantageous to the company – even if the group as a whole benefited from the settlement terms.

What was the legal issue and why did it require separate attention?

The core issue was the conflict between the directors' duty to act in the interests of the Hong Kong subsidiary as a distinct legal entity, and the parent group's preference for a commercially expedient resolution of the wider dispute.

Under Hong Kong common law and the Companies Ordinance (Cap. 622), a director's primary duty is owed to the company of which he or she is a director. That company is a legal person separate from its shareholder. Where the company is solvent and trading normally, the directors' duty runs to the members collectively. But that does not mean the directors must simply do whatever the parent instructs. Where a transaction is structured to benefit the parent at the cost of the subsidiary, the directors of the subsidiary cannot shelter behind a shareholder mandate.

The Significant Controllers Register kept by the Hong Kong subsidiary – a requirement under the Companies Ordinance in force since 1 March 2018 – accurately identified the parent group as the ultimate beneficial owner. That was not in dispute. What was in dispute was whether the directors had, over the preceding period, properly documented their own decision-making process or whether they had simply executed group instructions. The answer to that question determined whether, in the event of litigation against the subsidiary, the directors were exposed personally.

There was a second, related issue. The proposed settlement involved an intercompany payment from the subsidiary to an affiliated entity in the parent group. The directors needed to be satisfied that the payment met the requirements for a transaction with a connected party under Hong Kong company law – and that it was made on terms a reasonable director of an independent company would accept. No such analysis had been conducted before the engagement.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

If your Hong Kong subsidiary operates under a similar instruction-based governance model, and a dispute or restructuring event is approaching, the window to regularise the director decision-making record is open now – before the litigation or regulatory trigger arrives. To discuss the position, write to us at info@lockhartyip.com.

What route was chosen and how did the sequence run?

The engagement was instructed by the parent group's general counsel, who recognised that the parent's external advisers – competent on the law of their own jurisdiction – did not have the Hong Kong company-law mandate needed to advise the subsidiary directors directly.

The first step was a governance audit of the Hong Kong subsidiary. We reviewed the minute books, the register of directors, the Significant Controllers Register, the existing resolutions and the director appointment and service documentation. The audit confirmed what the parent's counsel had suspected: the formal record showed execution of transactions but no evidence of independent director deliberation. There were no conflict-of-interest declarations on file. The intercompany-lending arrangements had been documented at the parent level but not formally ratified at the subsidiary board level.

The second step was to advise the directors individually on their personal position. This is a step that is sometimes resisted by parent groups, who prefer a single instruction chain. We explained the structural reason it was necessary: a director who receives advice through the parent's counsel and then acts on it is not receiving independent advice. If the transaction is later challenged, the absence of independent advice is itself a factor in the exposure analysis. The two directors took independent briefings, separately from the parent's process.

The third step addressed the proposed settlement. We prepared a board-level analysis for the subsidiary that set out the transaction on its own terms: the claim, the likely range of outcomes in litigation, the value of the settlement to the subsidiary as a standalone entity, and the conflicts-of-interest check for the intercompany element. The directors considered that analysis at a properly constituted board meeting. They asked questions. The minutes recorded the substance of the deliberation, not just the outcome.

The fourth step was the connected-party review. The proposed intercompany payment required the directors to confirm that it was made on terms that a company acting in its own interests would accept. We mapped the payment against the subsidiary's own financial position and against the arm's-length comparables available on the record. The directors then made their decision – independently, on the documented basis.

The turning point in the matter was the third step. Before that board meeting, the directors were exposed: their file showed execution without deliberation. After it, the file showed a process a court could examine and find defensible. The substance of the settlement was the same. The procedural posture of the directors was entirely different.

What was the outcome and what does it transfer to similar situations?

The settlement was executed. The subsidiary entered into the agreed terms, and the intercompany payment was made under documented board authority. No litigation followed against the directors personally. The parent group revised its internal governance protocol for the Hong Kong subsidiary, introducing a standing process by which the subsidiary board formally considers and records its decision-making on material transactions, without waiting for a dispute to force the issue.

The transferable lesson is straightforward. A Hong Kong subsidiary is not an instrument of the parent. It is a separate legal person governed by Hong Kong company law and the common law. Its directors are personally accountable for decisions made in its name. A governance process that treats the subsidiary as a pass-through entity is not a governance process; it is an undocumented risk, and that risk crystallises exactly when the group is least prepared to manage it – in the middle of a dispute or a restructuring.

Three elements define good subsidiary governance under the Companies Ordinance (Cap. 622) and the common-law position in Hong Kong. First, independent director deliberation: the directors must actually consider transactions, not merely execute them. Second, conflict documentation: where the subsidiary transacts with the parent group or an affiliate, the conflict must be identified, declared and managed. Third, a contemporaneous record: the minutes of a board meeting are the directors' primary protection. Minutes drafted after the fact, or not drafted at all, offer no protection.

For groups operating through Hong Kong subsidiaries across the Greater China corridor – where the Mainland counterparty, the offshore holding entity in the BVI or Cayman Islands, and the Hong Kong operating entity are all part of the same group structure – the governance gap is structural. The parent's home-jurisdiction lawyers are not positioned to close it. The subsidiary's directors need separate, Hong Kong-focused advice, and they need it before the event that makes it urgent.

If an earlier governance approach has left a gap in the subsidiary director record – or if a transaction is pending that raises conflict or connected-party questions – a structured review can identify the exposure and the steps still available. Write to us at info@lockhartyip.com.

For a broader view of the corporate counsel practice and the cross-border work we handle for groups operating through Hong Kong, including related structural matters affecting offshore holding entities, see also our note on supply and manufacturing contracts with Cayman Islands parties and our guide to structuring supply arrangements involving Cayman Islands counterparties.

Related practices

Corporate Counsel – governance, subsidiary structuring and cross-border corporate advisory
Holding Structures – BVI, Cayman and Hong Kong holding-entity design and maintenance

Frequently asked questions

How long does director duties and governance in a Hong Kong subsidiary usually take?

There is no fixed timeline, because the scope depends on what the governance audit reveals. A subsidiary with no prior board process and several years of undocumented transactions requires more structured remediation than one with a working minute-book and a clear director record. In our cross-border corporate practice, an initial governance audit and a structured board briefing for a single Hong Kong subsidiary can ordinarily be completed within a few weeks of instruction, assuming the company records are accessible. Ongoing governance support – standing advisory, board-meeting facilitation, conflict management – is a continuing matter. Parties should verify the current position and the documents before acting.

What does the route look like for director duties and governance in a Hong Kong subsidiary?

The route typically runs in four stages. First, a governance audit of the existing company record – minute books, director registers, the Significant Controllers Register, and transaction documentation. Second, independent briefings for the directors on their personal duties under the Companies Ordinance (Cap. 622) and the common law. Third, a board-level analysis of any pending or recent material transactions, including conflict-of-interest and connected-party checks. Fourth, remediation of the existing record and implementation of a standing governance process. The cross-border dimension – where transactions run to Mainland counterparties, offshore holding entities, or both – is addressed at each stage.

What is the first step in director duties and governance in a Hong Kong subsidiary?

The first practical step is a review of the existing company record held by the subsidiary – or, in many cases, held by the parent group on the subsidiary's behalf. That review identifies the gap between the formal documentary position and the actual decision-making process. It also flags any pending transactions that require immediate board-level attention before they are executed. Where a dispute or regulatory event is already in progress, the first step is an assessment of the directors' current personal exposure and the protective steps that remain available. To begin that process, write to us at info@lockhartyip.com.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.

Matter note: director duties and governance in a Hong Kong subsidiary