Reserve V.S. Alternate V.S. Nominee Director, What are the Differences?

Setting up Hong Kong companies, precisely the private company limited by shares is the first step of starting a business domestically or overseas. If you are the director and the shareholder of your new company on draft, you have to be aware of the particular positions of your company, namely as Reserve Director, Alternate Director, and Nominee Director. Let’s take a look at their meanings and functions.

Reserve Director

If you set up a sole-director company, how can your company continue to run if you die in an unfortunate event?

To tackle this adverse situation, you can complete the nomination of a Reserve Director of your company in advance. 

According to section 455 of HK Companies Ordinance, a private company having only one director may nominate a natural person who is at least 18 years old as a reserve director to act in the place of the sole director in the event of his or her death. The nominated reserve director will automatically take the position of the death director, so the company preserves its continuity. On the contrary, the nominated Reserve Director ceases its nomination automatically when the company has appointed additional director(s); the number of directors is two or more.

For example, the nominated reserve director will receive the same level of remuneration once he or she takes office from the deceased director.

Although the nomination is optional per law, the law can override anything in the company’s article. Per the law, your company can complete the procedure by passing a resolution at a general meeting and take effect accordingly.

The company must submit a Notice of Change of Reserve Director

(Nomination/Cessation) (Form ND5) to notify the Registrar of the Companies Registry within 15 days after the nomination/cessation of the appointment of the reserve director.

Here is the summary of the reserve director:

  • Nomination (and cessation) of reserve directors is under section 455 of the Companies Ordinance (CO)
  • Only the company with sole-director can nominate a reserve director.
  • The reserve director must be a natural person of at least 18 years old.
  • The reserve director becomes the director when the director dies.
  • The nomination is not mandatory, but the Companies Ordinance has a provision in the procedures of nomination (and cessation) of the reserve director, despite anything in the company’s article.
  • Reporting to the CR of any changes related to the reserve director is mandatory.

Alternate Director

Are you too busy to manage your company? If yes, there is a practical solution for you, namely the appointment of an alternate director. You may officially authorize an agent on your behalf to represent you, as an appointer, to carry out your duties and responsibilities. In other words, the appointed agent by you is an alternate director of your directorship during your absence or unavailability.

Per the HK Companies Ordinance, the limited companies are eligible in appointing alternate directors. However, whether the company allows the appointment of alternate directors is determined in the company’s articles. If your company’s articles do not include such expression, you are not able to appoint an alternate director. 

If you plan to enable the function of alternative in your company, the company’s articles are the only governing documents. The procedure for appointment an alternate director is set out in the articles. Commonly seen in other private companies, the appointing director can appoint

any other existing director or person as his alternate by a resolution passed by the board of directors. The articles usually have included that an alternate director has the same rights as his or her appointer when the alternative director makes any decision. 

As people usually deem an alternate director as the appointing director for all purposes, the liabilities arose to the directors and their alternate directors may be confusing to people outside of the company. Therefore, section 478 of the CO states that, firstly, the appointing directors are vicariously liable for acts of their alternate directors unless the company’s articles contain any provision to the contrary; secondly, the alternates are personally responsible for any illegal action or omission.

An existing director can be appointed as the alternate director to another director of a company. If this arrangement happens during a director meeting, the same director will have double voting power.

The company must submit a Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) to notify the Registrar of the Company Registry within 15 days after the appointment/cessation of appointment of the alternate director. 

Here is a summary of alternate directors:

  • Limited companies may include provision about using alternate directors.
  • If the provision of alternate directors is present in the company’s articles, the articles should state the rights of the alternates and the procedure for their appointment and cessation. Otherwise, per section 478 of the CO, an alternate director is deemed to be the agent of the director who appoints the alternate director for every purpose.
  • The articles must provide that the appointment and termination clause for alternate directors. Usually, passing respective resolutions by the board of directors is sufficient. 
  • Reporting to the CR of any changes related to the alternate director is mandatory.

Nominee Director (and, nominee shareholder)

Per HK company law, there is no official position named as “nominee director”. However, it is a popular terminology across the field about company formation and incorporation. So, what is it representing? And, what does it mean to the people seeking for it?

Advantage

In short, privacy.

As we are a company registration firm, we can say that the majority of our clients are afraid of the number of their details exposed to the public when they take the role of director or shareholder of HK or Singapore companies. Their names, residential addresses, and passport numbers are required by the registries and are available for public access. So they appoint a proxy, an agent, or a nominee to act as their company’s members on their behalf, to hide their real identity from the public.

A business contract binds an appointer and his nominee. The nominee lends his name to the appointer to act as a member of the company for a fee. In addition, a legal document named Power of Attorney (POA) scripts that the nominee hand all his power and responsibility of being a member of a company to his appointer, and he will only exercise his duty according to the direction of his appointer.

Disadvantage

Although the law in HK, Singapore, and other common law jurisdictions do not ban the involvement of the nominee in business activities, both the nominee and the appointer are facing relatable risks.

The nominees are still responsible for the offence as the consequences of their action, regardless of the POA; The appointers lack measures to monitor their nominee’s activities. If the nominee breaches the POA for his gain, such as selling the company’s share without the authorization of his appoint, the appointer has weak legal ground to claim his lost. It is because the nominee is the official member of the company from the government records.

At least, the appointer’s identity is not confidential to the law enforcers and the financial institutions, due to the enactment of Significant Controllers Register regime on the company level and the robust due diligence procedures among banking and finance industry, in the wake of global actions to fight against tax evasion, money laundering, and terrorist financing.

For the SCR regime, which is under the HK companies law, the company is responsible for recording every natural person who is holding 25% or more power of benefit of the company. The contact information and status of all controllers are storing in an internal document, namely Significant Controllers Register, which the law enforcement can inspect it anytime on request. In the case of appointer-nominee relationship, the nominee has to express its position and the identity of his appointer. Otherwise, the nominee is held legally responsible for the apparent omission of his appointer, who is the real controller behind the company.

Regarding the due diligence requirement of financial institutions (FI), people also refer it to Know Your Client policy, which instructs FIs must understand the background of their financial account holders. Under an appointer-nominee arrangement, the nominee is never taking part in the activities of the company, so he is not eligible to represent the appointer to complete the due diligence process, resulting in rejection of account opening or termination of the existing account. Fulfilling with the FIs, the appointers inevitably unveil themselves as the controllers behind the nominee.

Verdict

If you are running a one-man company in HK and looking for a way to continue your business in case of accident, appointment of a reserve director to you is essential.

For the usage of alternate directors and nominee directors, it is often complicated since it happens in companies of distributed ownership, such changes in directorship requires proper communication with other stakeholders to avoid dispute.


Questions of alternation of directors of your Hong Kong companies? AsiaBC Company Secretarial Services can be your guide. Feel free to contact us now.