Holding a position as a director is typically sought after due, no doubt, to the purported esteem, perks and compensation.
Under the Companies Act, shareholders of the company have the power to appoint its directors. Directors are appointed for the purpose of managing the business and affairs of a company, but with that duty comes significant responsibilities. In this Article, we set out some of the duties, obligations and responsibilities imposed on directors by our local Companies Act.
Duty to Manage
The primary role of directors is to manage the business and affairs of a company. However, shareholders of a company may reserve certain decision making to themselves in a unanimous shareholders agreement. In such case, the role of the directors may be limited. Otherwise, the board has broad discretion over the running of the company’s business. While day-to-day functions are likely to be delegated to management, directors are required to monitor and oversee the business and its operations. To meet this monitoring obligation, a director’s regular attendance and participation at a company’s board meetings with a view to ensuring that the company meets its strategic objectives and complies with its statutory obligations is important.
Duty of Care
Our local Companies Act imposes a duty of care onto directors with respect to the company. Directors are required to “act honestly and in good faith with a view to the best interests of the company” and “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. Importantly, in considering the best interests of the company, directors are required to have regard both to the interests of the company’s employees as well as its shareholders.
The fiduciary duty imposed by the Act requires directors to, amongst other things: act in the best interests of the company, act in a manner which would not exceed their powers, not act illegally or dishonestly, not make decisions for their own personal gain or interest, and not compete with the company.
The statutory duty imposes a high standard for the conduct of directors who remain liable to the shareholders and other stakeholders of the company for their decision making. In circumstances where a board’s decision-making results in losses for the company and doubts arise surrounding whether such decisions were made with the best interests of the company in mind, it would be for the company itself (or a liquidator in winding-up proceedings) to pursue a claim for breach of trust against the directors.
In determining whether a director has complied with his/her fiduciary duty, a court will likely apply an objective test, that is, whether a reasonable person could have believed that the particular act was in the best interest of the company. However, company law also recognizes that the success of a business usually requires the decision makers to take reasonable and rational risks. A director will therefore typically be considered to have satisfied his/her duty of care if he/she:
- took diligent steps to become informed in connection with the matter being considered;
- does not have a personal interest in the matter or, otherwise, any such personal interest was declared in accordance with the statutory requirements; and
- had a rational basis to believe that the decision was in the best interest of the company.
This standard is often referred to as the ‘business judgement rule’ and it is reflected in the provisions of the Companies Act dealing with the entitlement of directors to an indemnity from the company. Such provisions establish that a company may indemnify directors against all losses incurred by him/her in respect of any claims against him/her by reason of being a director on the company’s board. However, the Act provides that such indemnity may only be applicable where, amongst other things, the director “acted honestly and in good faith with a view to the best interests of the company”.
Conflicts of Interest
The Companies Act imposes certain requirements on directors in circumstances where conflicts of interest arise in the course of their management of the business. The Act requires a director to promptly declare any interest which he/she (or any of his/her related parties) may have in a material contract entered, or to be entered into, by the Company. Where such an interest exists, the legislation requires such director to withdraw from the meeting at which the contract is being discussed and to abstain from voting on such matter.
The intent of the legislation is clear: a director is obligated to put the interests of the company ahead of his/her own personal interests.
In circumstances where a director fails to declare his/her interest in a material contract, the company is entitled to apply to the court to set aside the contract on such terms as the court may see fit. Moreover, while there is no direct personal liability borne by a director for such a failure to disclose, there is a risk failing to do so could cause such director to breach his/her duty of care and fiduciary obligations owed to the company.
Directors may also be held personally liable in circumstances where a company continues to carry on its business in a manner which recklessly disregards the company’s obligation to pay its debts and liabilities or the insufficiency of the company’s assets, to satisfy its debts and liabilities. In such circumstances, the liquidator of a company on a winding-up may apply to the court to hold the directors (or any other officers of the company) personally liable for all or any of the debts or other liabilities of the company.
These are some of the most significant duties and potential liabilities which a director faces under company law. Where a company is a public company or is regulated under the Financial Institutions Act, Securities Act or Insurance Act, the burden is even greater with there being substantial potential liabilities imposed on directors where such a company fails to meet the standard of conduct and compliance set out in such legislation.
There are some best practices which a Board and its directors should adopt in order to mitigate potential exposure to liability under the Act. These include holding regularly scheduled board meetings which have clear agendas and properly recorded minutes evidencing that the directors have met their duty to manage the business and affairs of the company. Declarations of personal interest in contracts should be properly recorded by the company’s secretary and retained in the company’s records. Reports on operations and business from a company’s management should be produced and made available to the Board. The Board should be open to seeking advice from independent experts where necessary in connection with material transactions or decisions.
In short, the risks and liabilities faced by directors can be great and, in certain circumstances and industries, may well be a far greater burden than a privilege. However, directors who have a clear understanding of the business of the company, keep up to date on the company’s business and financial affairs, actively participate in the management and oversight of the business and deliberately consider the best interests of the company will be able to demonstrate the proper discharge of their statutory duties.
Disclaimer: This Document Provides General Guidance Only And Nothing In This Document Constitutes Legal Advice. Should You Require Specific Assistance, Please Contact Your Attorney-At-Law.