Individual Liability for Contravention of the Hong Kong’s Competition Ordinance and Ten Recommendations for Avoiding it

Background

It has been five years since Hong Kong Competition Ordinance (the “Ordinance”) first came into effect. Since then, the Hong Kong competition law has gradually grown into a more developed, full-fledged and mature regime. This year has been a particularly meaningful one in its development, with several “firsts” including the first infringement notice issued and the first judgment on the calculation of pecuniary penalties.

The enforcement focus of the Hong Kong Competition Commission (the “Commission”) is by no means limited to corporate entities. It also set its eyes on the personal liability of individuals involved in the contravention of competition rules under the Ordinance. In two recent enforcement actions, Competition Commission v. Kam Kwong Engineering Company Limited & Others and Competition Commission v. Fungs E & M Engineering Company Limited (both involving renovation contractors engaged in market sharing and price-fixing arrangements in relation to the provision of renovation services to public housing estates), the Commission brought enforcement actions not only against the renovation companies but also the individuals involved, seeking to impose on them pecuniary penalties and director disqualification orders.

The Commission recognises that a company’s infringement necessarily involves individual wrongdoing and, in many of the cases published so far, appears to be focusing on singling out individuals and seeking to impose sanctions. After all, companies act through individuals, and directors or senior management all have a role to play in establishing and maintaining an effective competition law compliance culture within companies.

The Commission is likely to continue its efforts in bringing action against individuals and seeking to impose sanctions on them in their personal capacity in appropriate cases. In light of this, in this update, we provide an overview of the risks posed to an individual under the Hong Kong competition law regime and things that one may do to reduce such exposure.

Individual Liability under the Ordinance

1. Pecuniary Penalty
   
   

   Pecuniary penalties imposed on companies that contravene competition rules are not new, but a company director and officer also needs to know that they can be imposed on them as individuals if they contravene or are involved in the contravention of the competition rules.

   The term “involved in a contravention” is widely defined in the Ordinance, encompassing “attempting to contravene”, “aiding, abetting, counselling or procuring any other person to contravene the rule” and “being directly or indirectly, knowingly concerned in or a party to the contravention”. This empowers the Commission and the Competition Tribunal (the “Tribunal”) to cast a very broad net on all individuals involved in a contravention, and possibly hold them personally liable if they have overseen, taken part in, or signed off an arrangement that is later deemed to be a contravention of the Ordinance or if they have wilfully ignored information that suggests a contravention is occurring.

   Although those who are directly involved in the day-to-day management or supervision of a company appear to be at a higher risk of being regarded as “involved in a contravention”, those holding non-executive roles cannot assume they will never be held personally liable for contravention of the competition rules. Based on the experience of foreign competition law regimes, the Commission may reasonably expect non-executive officers to play their part in procuring compliance by:

   • Asking the executives appropriate questions;
   • Challenging actions of the company where appropriate; and
   • Ensuring appropriate compliance methods have been adopted to prevent and detect breaches of the competition law within their organisation.

   Importantly, the liability is genuinely personal in the sense that the money to pay any pecuniary penalties imposed will have to come from the employees’ own pockets since section 168 of the Ordinance expressly prohibits a director, employee or agent from receiving indemnification from their companies against their liability for paying a pecuniary penalty or the costs of defending an action in which they are convicted or ordered to pay a pecuniary penalty.
   
   

2. Disqualification Order
   
   Liability under the Ordinance may also take the form of a director disqualification order, a tool that is also made available under other Hong Kong regulatory regimes such as the Securities and Futures Ordinance (Cap 571) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). The concept of a disqualification order should be no stranger to directors of Hong Kong companies.
   
   A disqualification order under the Ordinance bars an individual from being a director, liquidator, provisional liquidator, receiver or manager of a company’s property, or from being involved in the promotion, formation or management of a company (whether incorporated in Hong Kong or carrying on business in Hong Kong) for a period of up to five years.
   
   As illustrated above, the scope of functions that a disqualified director is barred from performing is broad. Regardless of the job title, an individual under a disqualification order basically cannot perform any kind of management function in a company, which would likely strike a heavy blow to the career development of that individual and cause serious disruption to the business operations of his company. Further, the consequence of not complying with a disqualification order is dire: it is a criminal offence, with the maximum penalty on conviction on indictment being a fine of HK$1 million and two years’ imprisonment.
   
   The Ordinance empowers the Tribunal to make a disqualification order when (1) the company has contravened a competition rule and (2) the Tribunal considers that the person’s conduct as a director makes the person unfit to be concerned in the management of the company. When determining whether a director is unfit, the Tribunal is required to consider matters like whether the director has contributed to the contravention and whether the director failed to take any action to prevent a contravention when he should have known or suspected that a contravention would have occurred. This in turn imposes a duty on directors to keep aware of their company operations, and to take steps when appropriate to investigate potential contraventions. Turning a blind eye to a blatant contravention is not acceptable and will not help exonerate the director even if he as a matter of fact does not have any actual knowledge of the occurrence of the anti-competitive conduct.

Recommendations

Individual exposure to liability under the Ordinance is real and imminent. Compliance with the Ordinance is more than a corporate responsibility, as it also places liability with company directors/executives. In light of the obvious risks, we set out 10 things that one can do to reduce risk of personal exposure:

1. Understand the Anti-competitive Conduct Regulated under the Ordinance
   
   

   Apart from hardcore cartel activities such as price-fixing and market-sharing, other types of anti-competitive activities such as information sharing among rivals and aggressive pricing strategies by companies with a strong degree of market power are also regulated under the Ordinance. One should have a basic understanding of all types of regulated anti-competitive activities to avoid finding oneself accidentally involved in contraventions without even knowing.
   
   

2. Understand the Consequences One May Face in Case of Contravention
   
   

   It will have a deterrent effect if one understands the types and magnitude of consequences that an individual or a company may face when acting in contravention of competition rules under the Ordinance.
   
   

3. Understand Your Rights
   
   

   When facing investigation or enforcement action brought by the Commission, one should make sure that he understands his rights under the Ordinance, including that he or his company may apply for leniency (immunity or guaranteed reduction in penalty) or enter into cooperation and settlement arrangements with the Commission.
   
   

4. Cultivate Compliance Culture at the Management Level
   
   

   In a company’s day-to-day operations, one should consider using a top-down approach by making compliance checks on competition rules as part of the health check box to tick before making business decisions, signing off arrangements or taking action.
   
   

5. Sufficient and Regular Training to Employees
   
   

   All employees should receive sufficient and regular training on the scope, impact and compliance methods of competition rules to enable them to identify and address or remediate any potential or actual contravention.
   
   

6. Internal Competition Compliance Policies
   
   

   A company should have a written code of conduct in place setting out, among other things, competition compliance policies that every employee should familiarise themselves with and follow.
   
   

7. Internal Whistle-blowing System
   
   

   Equally important is an internal whistle-blowing system through which employees may report any actual (or potential) contravention of competition rules so that a company can cease and/or remediate the contravention at the earliest possible opportunity.
   
   

8. Appointment of a Competition Compliance Officer
   
   

   It is advisable to appoint a director or senior manager to be a company's designated compliance officer responsible for compliance with the competition rules throughout the company.
   
   

9. Public Statement of Competition Policy
   
   

   A public statement setting out a company’s basic competition law compliance principles can help to show the public and business partners that compliance with competition rules is part of the company culture and an essential element of doing business with the company. The public statement can be posted on the company’s website of the company or form part of its terms of business.
   
   

10. Competition Audits
    
    Competition law audits can help identify weak links (if any) in business processes and operations that are prone to contravention of competition rules. Identifying potential issues helps to implement corrective or improvement measures earlier. Further, knowing that an external party will come and review their work usually results in employees being more alert and committed to companies’ competition compliance policies in their day-to-day work.