Excuse me, but are you a Director ?

March 12, 2016

Shareholders do not have much power within a company. They may act like a “boss” whenever they visit but are not really bosses because they don’t really have powers to make decisions in the company. They certainly cannot order the staff around.

The real power within the company lies with the Board of Directors. And in case you don’t know, the Board makes all management decisions, not the shareholders. In only very limited cases does the Board need to consult the shareholders (e.g. when the Board wants to sell substantially all the assets of the company).

Because of the powers they wield, the law imposes on directors of the Company certain duties.

First, the law imposes on directors a duty to exercise reasonable care and skill in undertaking his responsibilities. The standard of skill and care is one that may reasonably be expected from a person of his knowledge and experience. So if you are not skilled to be a director, don’t be one.

Second, unlike shareholders, directors of a company are “fiduciaries” and therefore must always act in the interests of the company.  This duty manifests itself in two broad ways.

a. the Companies Act imposes a duty on all directors to declare any potential conflict of interest to the Board. Hence, if you own a business which competes with Company A’s business or which will benefit from your being a director of Company A, you have to declare that to the Board of Company A if you are appointed its director. You cannot get around that duty by transferring your business to  your wife, son, step-son/daughter, adopted son/daughter. Breach of that duty is an offence punishable by a fine of $5000 or a jail term of up to 1 year.

b. a director shall not use his/her powers for personal benefit, collateral purposes or improper purposes.

Third,  the Companies Act imposes on all directors certain other administrative duties. The following is a summary:
a) complying with the instruction of ACRA to change the company’s name;
b) complying with required procedures for reduction of share capital;
c) ensuring the registration of transfers of shares and issuance of share certificates;
d) ensuring the registration of charges;
e) maintaining a registered office;
f) ensuring the publication of the company name;
g) obtaining approval of company for the disposal of company’s undertaking or property;
h) securing the appointment of qualified persons as secretaries;
i) ensuring that all registers or statutory books are kept and up-dated;
j) for a public company: filing the statement in lieu of prospectus, holding of statutory meeting and preparation and filing of the statutory report;
k) calling for Annual and Extraordinary General Meetings, and convening of meetings;
l) ensuring the registration of certain resolutions and agreements;
m) preparing and lodging the Annual Return with ACRA;
n) keeping of proper accounting records;
o) tabling of accounts, balance sheet and directors’ report at the Annual General Meeting;
p) ensuring that dividends are only paid out of profits;
q) making a declaration of solvency, in the case of voluntary winding up by members; and
r) appointing the first auditors.

What happens when a director acts in breach of his duties? Well, it depends on what are the breaches.

For a start, the company can sue the directors for damages or for the return of specific property or secret profits they have made. In addition, a director who is guilty of an offence of failing to declare his interests, failing to act honestly and use reasonable diligence or making improper use of information shall be liable on conviction to a fine not exceeding $5,000 or to imprisonment for a term not exceeding one year. At common law, the exercise of a power by a director in breach of his duty may be declared invalid and therefore void, by the Court.

I can go on but I won’t. As always, I hope you liked this blog entry. Watch this space. Next up will be something about joint ventures.

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