By Amit R Gadhia
Advocate and Solicitor
In the recent few years we have seen an explosion in the number of extensions of directors’ titles, some very strange and bizarre. There are the known and coveted director’s titles of president, chief executive officer, managing director but some less known titles like director of talent and happiness and director of agile delivery. Some of these titles with their accompanying jobs command a six-figure salary. The titles are sometimes given to add status to senior executives.
In the legal context how is a director defined and what are the duties of a director?
Under the Companies Act 2015 (the Act) of Kenya a “director”, is defined as
(a) any person occupying the position of a director of the body (by whatever name the person is called); and
(b) any person in accordance with whose directions or instructions (not being advice given in a professional capacity) the directors of the body are accustomed to act.
The main categories of directors known in law are executive directors, non-executive directors, de-facto directors, shadow directors and alternate directors.
A de facto director is a person who has not been formally appointed but who is ‘occupying the position of a director’. A shadow director is any person in accordance with whose directions or instructions (not being advice given in a professional capacity) the directors of the body are accustomed to act. The duties and responsibilities of each category and definition of directors will be examined in later series of articles.
In this article we will be examining general and specific duties of directors under the Companies Act 2015. Whether or not a director has been formally appointed as a director, the general and the statutory duties are applicable. Any failure to adhere to the statutory duties can sometimes result in criminal sanctions imposed against both the company and the director concerned to a fine of up to one million Kenya shillings.
DIRECTORS GENERAL AND SPECIFIC DUTIES UNDER THE COMPANIES ACT 2015
Directors’ duties arise in different ways
– General duties arising under the Companies Act 2015
– Specific duties arising under the Companies Act 2015
GENERAL DUTIES UNDER THE COMPANIES ACT 2015
These are largely a statutory restatement of the common law and equitable rules. Indeed sec 140 says:
(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
(4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
SPECIFIC DUTIES UNDER THE COMPANIES ACT 2015
1) Duty to act within powers.
A director of a company must:
(a) act in accordance with the company’s constitution, and
(b) only exercise powers for the purposes for which they are conferred.
Any person who is appointed and accepts the title of a must ensure they are well versed with the constitution of the company which are the articles of association of the Company. The articles of the company are a legally binding contract between the directors and the Company.
2) Duty of director to promote the success of the company.
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct,
(f) the need to act fairly as between members of the company.
This duty of director to promote the success of the company is similar to section 172 of the UK Companies Act 2006. The current UK Corporate Governance code 2018 (the UK code) which came into effect in July 2018, among the main changes enables greater board engagement with the workforce to understand their views.
This duty under Kenya Companies Act 2015 requires the directors to engage with a wide spectrum of stakeholders ranging from employees, suppliers, customers and members of the public so as to promote the success of the company.
3) Duty to exercise independent judgment.
(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting:
(a) in accordance with an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors, or
(b) in a way authorised by the company’s constitution.
4) Duty to exercise reasonable care, skill and diligence.
(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with:
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.
5) Duty to avoid conflicts of interest.
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
6) Duty not to accept benefits from third parties.
(1) A director of a company must not accept a benefit from a third party conferred by reason of:
(a) his being a director, or
(b) his doing (or not doing) anything as director.
(2) A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.
(3) This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
(4) A person who contravenes this duty commits an offence and is liable on conviction to a fine not exceeding one million shillings.
7) Duty to declare interest in a transaction or arrangement.
This is contained in two parts (a) and (b).
(a) Proposed transaction or arrangement.
(1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
(2) The declaration may (but need not) be made:
(a) at a meeting of the directors, or
(b) by notice to the directors in accordance with:
(i) Notice in writing; or
(ii) General notice.
(3) A director need not declare an interest:
(a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
(b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or
(c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered:
(i) by a meeting of the directors, or
(ii) by a committee of the directors appointed for the purpose under the company’s constitution.
(b) Notice of interest in existing transactions
(These provisions largely echo those for proposed transactions)
Where a director is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section.
This section does not apply if or to the extent that the interest has been declared (duty to declare interest in proposed transaction or arrangement).
A director who contravenes this section commits an offence and is liable on conviction to a fine not exceeding one million shillings.