What are the Duties and Responsibilities of a Company Director in Kenya?
As a director of a limited liability company in Kenya, there are certain statutory duties and obligations imposed on you by the Companies Act, 2015. Fail to meet these obligations and you risk being fined, prosecuted, personally held liable for the debts of the company, or being disqualified to hold directorship office in another company for between 5 to 15 years. These risks are particularly severe where a director is involved in unlawful, or illegal conduct when the company is insolvent, or where such conduct is discovered during a company liquidation.
To enable you avoid liability, kindly find a brief explanation of the key duties and obligations of a company director in Kenya.
What are the Duties of a Limited Company Director?
In law, a director is the directing mind and will of the company. The board of directors is therefore responsible for the day –to-day management of the company. The board is, inter alia, required to make policy and operational decisions to ensure the company meets its strategic objectives and legal responsibilities.
Seven Duties of Directors under the Companies Act
The Companies Act 2015 has codified the common law duties of the directors and buttressed them by giving them statutory sanctions for non-compliance.
To act within their powers
Company directors are given certain powers to enable them to manage the company. Nevertheless, these powers must be employed in promoting the best interests of the company as set out in the company’s constitution and not to further directors’ or other third parties’ personal or other collateral purposes or interests.
To promote the company’s success
Under section 143 of the Companies Act, a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. In so doing, the director must have regard, inter alia, to the likely consequences of any decision in the long term, the interests of the company’s employees, the impact of the operations of the company on the community and the environment, the need to act fairly as between the directors and the members of the company; and the need to foster the company’s business relationships with suppliers, customers and others. Nevertheless, where a company is insolvent the director’s duty under this head shifts to the interest of creditors of the company rather than its members (shareholders).
To exercise independent judgement
Under section 144 of the Act, a director has a duty to exercise independent judgment. Therefore, though a director may seek professional advice before making decision, he or she must exercise independent judgement and not subordinate their power to the will of others or blindly follow such advice. Nevertheless, in certain situations a director may be required to act in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its director or in a manner authorised by the constitution of the company.
To exercise reasonable skill, care and diligence
Under section 145, in performing the functions of a director, a director of a company must exercise the same care, skill and diligence that would be exercisable by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions performed by the director in relation to the company and with the general knowledge, skill and experience that the director has. Failure to act with a certain degree of competence for the benefit of others could give rise to negligence claims to compensate the company for mistakes the directors make.
Duty to avoid conflicts of interest
Under section 146 of the Act a director must avoid any situation where he or she has or can have an interest that directly or indirectly conflicts with or may conflict with the company’s interests. This duty specifically applies to a director exploiting any property, information or opportunity. This as an absolute duty and it does not matter whether or not the company could take advantage of that property, information or opportunity. Non-compliance is a serious breach of director duties and criminal action could ensue. However, there will be no breach where the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.
Not to accept a benefit from third parties
This is provided for under section 147 of the Companies Act and is part of a broader duty that a director should not profit from his position as a director without the company’s knowledge and consent. Company directors must work to promote the success of the business and should not accept a benefit (e.g. gifts, secret commissions, bribes or inducements) from third parties arising from his position as a director or which are intended to induce the director to act or not to act in a certain way. Therefore, offers for corporate hospitality or gifts should be regarded with caution as benefits provided to a director with the intention of winning new business could be considered a bribe. Besides being sanctioned in the Companies Act, such conduct may also be regarded as an economic crime and therefore sanctionable under the Bribery Act, 2o16, the Penal Code and the Anti-Corruption and Economic Crimes Act,2013.
It should be underscored that there is no breach where the benefit cannot reasonably be regarded as giving rise to a conflict. Moreover, benefits conferred by the company (and its holding company or subsidiaries) do not fall within this duty.
To disclose any interest in a proposed transaction or arrangement
Under section 151 of the Companies Act, a director must declare to his company board (for private company) and to members within seventy-two hours (for public companies) the “nature and extent” of any direct or indirect interest he may have in any transaction or arrangement to which the company is or may be a party. For public companies, if a proposed transaction or arrangement with the company, or a transaction or arrangement that the company has already entered into, is for an amount, or for goods or services valued at an amount, that exceeds ten percent (10%) of the value of the assets of the company (as certified by external and independent auditors) the declaration shall, inter alia, also be made to the members of the company at a general meeting of the company.
A director must update any declaration if it becomes inaccurate or incomplete (although this may be unnecessary where a company has already entered into a transaction or arrangement). Nevertheless, there is no breach where a director is unaware of his interest or the transaction or arrangement to which the company is a party. In addition, a director need not declare an interest if he is unaware of a possible conflict or if his interest cannot reasonably be regarded as giving rise to a conflict.
Fiduciary Duties of a Director
Besides the foregoing, a company director’s duties extend to the company’s finances especially in relation to the preparation, presentation and filing of the company’s annual reports and financial statements at the end of the financial year. Although this duty may be delegated to professional accountants, it is the directors who are ultimately responsible for ensuring that accurate books of accounts are properly kept and that audited financial statements are presented for approval by shareholders during the company’s AGM that gives a true and fair representation of the company’s financial position.
Directors are also responsible in ensuring that the company complies with relevant taxes and other statutory deductions legislations and that appropriate returns are filed in time and applicable taxes or contributions paid.
What constitutes a breach of fiduciary duty?
There’s any number of different actions a director can take which could constitute a breach of fiduciary duty. These include: –
- Failing to comply with the company’s constitution or acting for an improper purpose.
- Failing to make a business decision in good faith and in the best interest of shareholders (or creditors where a company is insolvent).
- Placing a personal interest ahead of the company’s interest.
- Employing or using company’s property, information or opportunity to gain an advantage for themselves or a connected party.
- Engaging in conduct which is detrimental to the interest of the company with the intention of obtaining a personal benefit.
- Using their position to engage in a conduct that enable them to gain an advantage for themselves or a connected party (such as a family member) to the detriment of the company.
What are the Potential Penalties for Failing to meet your duties as a Director?
A director who breaches their duties can be subjected to various legal sanctions including an order for account or restitution by the company. Where the directors are unwilling to take action against the wrongdoer, one or more shareholders can institute a derivative action on behalf of the company against a specific director or directors. Equally, under Part XXX of the Companies Act, the director could be the subject of an investigations by the Court or the Attorney General and thereafter prosecuted by the Director of Public Prosecution (DPP) for any offences arising from such investigations.
The consequences for breach of duties as a director include:
Disqualification as a director – Part X of the Act provides for disqualification of directors for breach of duty and this can range from 5 to 15 years. This is reserved for serious cases such as fraudulent behaviour, failing to file returns or properly maintain accounting records, fraud or breach of duty committed while company is in liquidation or under administration and serious statutory breaches and violations.
Personal liability for company debts – Directors that allow their company to trade while it’s insolvent could be made personally liable for the repayment of company debts.
Removal from office – Under section 139, the company may, by ordinary resolution at a meeting, remove a director before the end of the director’s period of office, despite anything to the contrary in any agreement between the company and the director. However, a special notice is required for a resolution to remove a director under this section and appoint a replacement director at the meeting at which the director is removed.
Damages or compensation for financial losses incurred – Where appropriate, the director can be pursued through the courts for an action for tracing of assets or order for account, potentially leading to the loss of personal assets.
Setting aside transactions – Transactions that were entered into which were not deemed to be in the best interests of the company can be rescinded or cancelled.
Criminal fines – Offences which are most likely to attract criminal fines relate to the failure to file documents at Companies House either on time or at all.
Author: Cyrus Ndiritu Maina