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In the case of HMM (Hong Kong) Ltd v Ma Chun Kit [2022] HKCFI 1153, the Court of First Instance (CFI) held that a senior employee who was not a company director may still owe fiduciary duties to their employer, depending on their job role and functions.

Background

HMM, a subsidiary of a Korean publically listed company (Parent Company), was responsible for settling the invoices of the Parent Company in respect of its business in the South China region. Ma Chun Kit (Ma) joined HMM in 1992 as an accounts clerk and worked his way up to the position of deputy manager of the Account Department from 2011.

As deputy manager, Ma had authority to approve payment instructions at level two of a three-tier authorisation process, and was one of three system administrators responsible for applying for and setting up online banking tokens for HMM which were used to authorise payments. The other two system administrators were HMM's Managing Director and General Director.

From 2009 to 2016, Ma misappropriated over HK$387 million (Sum) from HMM across some 262 bank transactions. Ma instructed staff to request funds from the Parent Company to settle invoices. Only a part of the funds received from the Parent Company were used to settle invoices as Ma transferred the remainder of the funds into his personal bank account. Ma was able to override a three-tiered authorisation process by wrongfully making use of the Managing Director's and General Director's online banking tokens to authorise the payments to himself.

Upon discovering Ma's actions HMM launched an internal investigation. Ma was summarily dismissed in 2016 and HMM reported the matter to the police. At the criminal trial, Ma was convicted of four counts of theft relating to the same bank transactions the subject of the present civil proceedings and sentenced to 15 years' imprisonment.

HMM's civil proceedings was for restitution of the Sum on the grounds of unjust enrichment, with alternative claims for damages and/or equitable compensation (with compound interest) for conversion, breach of confidence, breach of implied duty of fidelity, breach of fiduciary duties, and an account of profits.

The Legal Principles

This article will focus on the claim for breach of fiduciary duties. It is well-established that directors owe their companies fiduciary duties – but what about employees? This is important for employers, since some employees will be entrusted with important and/or sensitive duties (such as handling money).

Hong Kong's position on this matter was succinctly set out in the CFI case of Leader Screws Manufacturing Company Limited v Huang Shunkui [2021] HKCFI 14, which was heard last year. The facts of that case are similar to this case. There, a senior employee had responsibility and control over her employer's money and she misappropriated over HK$9 million from her employer.

That case referred to the following principles:

  1. As a starting point, an employment relationship, in itself, does not attach fiduciary duties.
  2. A fiduciary duty is likely to arise "where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognize, that the fiduciary will not utilize his or her personal position in such a way which is adverse to the interests of the principle (sic).That expectation is assessed objectively, so it is not necessary for the principal subjectively to harbour the expectation, nor for the person alleged to be a fiduciary to subjectively consider himself to be undertaking fiduciary duties."
  3. In this sense, much depends on the employee's role and functions.
  4. Senior employees or managers have been held to owe fiduciary duties to their employers when carrying out the specifically assigned duties. However, where an employee has been entrusted with the company's money or diverts company money for his or her own benefit, he or she will likely owe a fiduciary duty in relation to that money, even if only a junior employee.

The Court's Decision in the HMM Case

The court in the HMM case followed the Leader Screws case and confirmed that: 

"While an employment relationship does not automatically import fiduciary relations, a senior employee or manager, depending on his role and function, can be held to owe fiduciary duties to the employer when carrying out those duties. Where an employee is entrusted with the company’s money and diverts it for his own benefit, he would likely be in breach of the fiduciary relations…" : Leader Screws Manufacturing Company Limited v Huang Shunkui [2021] HKCFI 141, paras 46 to 49."

On the facts, the court found that Ma was entrusted with the task of settling third party vendors' invoices and also played a significant role in the operation of HMM's bank accounts. Ma was found to owe fiduciary duties to HMM in the payment authorisation process, and was in breach of such fiduciary duties.

Why is it Important to Establish Fiduciary Duties?

It is (sometimes) important to differentiate whether an employee has breached a contractual duty (under his employment contract) from a fiduciary duty because this will affect the remedies available to the employer.

If the employee has merely breached a contractual duty, the employer will only be able to claim for damages they have actually suffered. This can be difficult to prove where, for example, the breach is the employee diverting business away from the employer. However, if the employee has breached fiduciary duties, the employer may be able to seek equitable relief and seek an account of the profits made by the employee from their breach. This will not be assessed by reference to the loss suffered by the employer but by the gains made by the employee from their breach.

In Artical Printing Factory Limited v Ho King Ngai (HCA 305/2009, unreported dated 8 April 2011), the court found that the defendant employee owed fiduciary duties to the plaintiff employer. The employee, as sales executive of the employer (which was engaged in the printing business), made use of his position within the employer and ordered printing works to be produced by the employer's factory. He then sold the goods at a low price to an intermediary company in which he had a 60 percent interest, which then on-sold the goods to other customers at a higher price. The court held that the employee was accountable to the employer for the secret profits made from the on-selling, even though the employer had not adduced any evidence to show that customers of the intermediary company would have placed orders with them, and accordingly did not show that the employer had suffered any loss or lost out on any profits. The motive of the employee is irrelevant: the employee would still be accountable to the employer for the profits even if he thought he had acted in the best interests of the employer.

Takeaways for Employers

Few types of employment relationship will give rise to fiduciary duties. However, some do depending on the employee's role, duties and functions.

Where an employee is entrusted with more important or sensitive job responsibilities an employer will want the employee to discharge fiduciary duties. For these roles, it will help the Court's assessment of whether the employee owes fiduciary duties as well as manage the employee's expectations if those duties are set out in the contract of employment. This may include setting out in the contract of employment the following obligations:

  • not to put themselves in a position where they or anybody else's interest might conflict with the duties owed by them to the employer,
  • to act in the best interest of the employer,
  • not to be engaged in or concerned with any other business of the employer, and
  • not to profit from their position.

If these duties are set out, even where the court does not find that the employee owes fiduciary duties, the employer may still be able to point to a breach of express contractual duties.

The judgment is available at the following link:

https://legalref.judiciary.hk/doc/judg/word/vetted/other/en/2016/HCA000619C_2016.docx