Duties of a Director
- Posted by admin
- 29 August 2012
- Company Secretarial
Duties of a Director
Under common law, directors are regarded as fiduciaries and therefore owe fiduciary duties of care to their companies of which they are directors. The Companies Act, Cap 50 also state certain duties of directors which mirror their general duties in common law. Section 157(1) of the Companies Act states that a director shall at all time act honestly and use reasonable diligence in the discharge of the duties. Section 157(2) of the Act also state that an officer or agent of a company shall not make improper use of any information acquired by virtue of his position as an officer or agent of the company to gain an advantage for himself or for any other person, or to cause the company to suffer a disadvantage.
Section 157 of the Act does not purport to be an exhaustive statement of the law relating to the duties that directors owe. Therefore section 157(4) provides that the section is in addition to any other rule of law relating to the duty or liability of directors or officers of a company. Essentially section 157 renders those duties mandatory while the duties at common law are capable of exclusion by agreement between the company and its directors. In section 157(3) of the Act, a breach of sections 157(1) and 157(2) renders the officer or agent liable to the company for any profit made or any damage suffered by the company as a result of this breach. A breach of these sections is an offence.
Duty at Common Law to Act in the Best Interests of the Company
In the exercise of their duties, directors must always act in good faith in what they consider is in the best interests of the company. When the acts of directors are in dispute, the courts do not substitute their own judgment for that of the directors. All that the courts are concerned about is whether the directors have acted honestly in what they (and not the courts) considered to be in the company’s interest. There will be doubts on the actions of the directors if the decision is one that no reasonable board would have arrived at.
It should be noted though that the directors’ overriding duty is to the company. However, section 159 provides that in exercising their powers, directors are entitled to take into account the interests of the company’s employees as well as the interests of its shareholders. This is also the position at common law since the members collectively do in a sense comprise the company, notwithstanding the company is a separate legal entity. The entitlement to have regard to the interests of employees is also a sensible one since advancing the interests of employees will often be in the best interests of the company.
There are also circumstances where directors must have regard to the interests of creditors. Generally creditors have no interest in the company’s assets. A creditor who wishes to collect the debt owing to him from the company must bring a claim against the company. Since there is an absence of an interest in the company’s assets, the directors of a company need not consider the interests of the creditors when making business decisions. However, when a company is not able to pay its debts, and is thereby effectively insolvent, then the interests of its creditors must be taken into account. Creditors of an insolvent company are entitled to appoint a liquidator. In liquidating the assets of the company to cash the creditors are entitled to be paid before the members of the company. In such circumstances, directors must ensure that the affairs of the company are properly administered and that its assets are not dissipated or exploited to the prejudice of the creditors.