The company being an artificial legal person can only conduct its affairs through human beings termed directors. Section 2 of the Companies Act defines a director as including any person occupying the position of director by whatever name called. In Forest of Dean Coal Co [(1878)10 Ch. D 450] it was said that directors are commercial men managing a trading concern for the benefit of themselves and all shareholders in it ; that they stand in a fiduciary position towards the company in respect of their powers and capital under their control. In G.E.R. Lyco v. Turner Lord Selborne L.C. stated : ‘The directors…trustees or agents of the company-trustees of the company’s money and property ; agents in the transactions which they enter into on behalf of the company.’
Although directors are not vested with the ownership of the company’s assets as trustees are in law, they are in certain respects in the position of trustees for the company:
- In relation to money which comes into their hands or which is actually under their control, they have always been held liable to make good moneys which have been misapplied, on the same footing as if they were trustees ;
- They are in the position of trustees as regards the exercise of all powers which they are authorised to exercise on behalf of the company e.g allotment of shares, making calls etc ;
- Their fiduciary position precludes them from allowing their interests to conflict with that of the company
5.2 Board of Directors
Companies are managed by directors elected by members. The board of directors is responsible for the day to day management of the company; Article 80 of Table ‘A’ provides, inter alia, the business of the company shall be managed by the directors.
Sec. 177 of the Companies Act every private company must have at least one director and every public company must have at least two directors.
- Appointment of Directors:
They are appointed by the members of the company. Article 75 of Table ‘A’ provides that the first directors shall be determined in writing by the subscribers of the memorandum of association or a majority of them and until such determination the signatories to memorandum shall be the first directors.
- Restriction on appointment
Individual voting – Under Sec. 184(1) of the Act, directors are voted to office individually. However, two or more directors may be voted together if a resolution to do so has been agreed to by the members present with no vote against it.
Consent – Under Sec. 182(1) of the Act, a person is not capable of being named as director by the articles or named as proposed director by the prospectus or any other statement unless he has delivered to the registrar for registration his written consent to act as such. The consent must be signed by him or his duly authorized agent.
Share qualifications – under article 77 of table ‘A’ the company may in general meeting prescribe the number of shares a person must hold to qualify for appointment as director. If no such prescription is made no share qualification is necessary.
Age – Under Sec. 186(1) of the Act, a person is not qualified for appointment as director unless he has attained the age of 21 years or has attained the age of 70 years. A serving director who attains the age of 70 retires on the conclusion of the next AGM. However, he may be re-appointed if consent has been given by all members.
Soundness of Mind – to qualify for appointment as director one must be of sound mind. Under article 88 of table ‘A’, the office of director must be vacated if a director becomes of unsound mind.
Un-discharged bankrupt and insolvent persons – Under sec. 188(1) of the Act an insolvent person or one declared bankrupt, by a court of law, must not be directly or indirectly involved in the management of a company’s affairs without leave of the courts. If appointed director, the appointee is liable to fine not exceeding Ksh.10,000 or imprisonment to a term not exceeding 2 years of both.
Disqualified persons – Under Sec. 189(1) of the Act, the high court is empowered to disqualify a person for appointment as director for a period not exceeding 5 years if:
- He is convicted for all offences relating to the promotion or formation or management of the company.
- In the course of winding up it is discovered that he was a party to the carrying on of the company’s business for any fraudulent purpose or with intent to defraud its creditors or creditors of any other person or was guilty of fraud or breach of duty towards the company.
If a disqualified person is appointment director without leave of the court, he is liable for a fine not exceeding 10,000/- or imprisonment for a term not exceeding 2 years or both.
Minimum number of directors – the Companies Act prescribes the minimum number of directors a company may have. A public company must have at least two while a private company must have at least one.
Loans to Directors
Under Sec. 191(1) of the Companies Act it is generally unlawful for a company to give to its directors or provide guarantees or security for loans made to its directors.
However, this restriction does not apply in the following circumstances:
- If the company is private.
- If the lending company is a subsidiary and the director is the director of its holding company.
- If the lending of money or giving of guarantees or securities is the ordinary business of the company and the same is lent or given in the ordinary cause of such business.
- If the funds are necessary to enable a director meet expenditure, incurred or to be incurred for purposes of the company or to enable him properly perform his functions as an officer of the company.
Such a payment must be approved by members in general meeting through a resolution failing which the directors are liable to indemnify the company.
5.3. DIRECTORS’ DUTIES
Director’s duties fall into three broad categories:
- a) Duty of care, skill and diligence
- Duties of loyalty and good faith.
- Statutory duties
- a) Duty of care, skill and diligence.
Case law is emphatic that directors owe their company a duty of care, skill and diligence. The principles or rules governing directors duty of care, skill and diligence were formulated by Romer J in Re City Equitable Fire Insurance Co. (1925)
- A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
This standard was applied in Re Brazilian Rubber Plantations and Estates where it was held that the directors were not liable in negligence if persons of their knowledge and experience could not have acted otherwise.
- A director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature to be performed at periodical board meetings and meetings of any committee of the board upon which he happens to be placed. He is not however bound to attend all such meetings though he ought to attend whenever in the circumstances he is reasonably able to do so.
Re Marquis of Bules the president of the company attended one board meeting in 38 years. It was held that he was not liable for the wrongs committed by other directors, as he was not bound to attend all the meetings.
- In the absence of suspicion a director is entitled to assume that officers of the company performed their duties honestly. He is entitled to rely on information provided by trusted servants of the company.
Dovey v. Cory
A director consented to certain irregularities by relying on information provided by other officers of the company. It was held that he was not liable in negligence as it was reasonable for him to rely on the information.
- b) Duties of Loyalty and Good faith
These are the duties of directors developed by the law of equity. They are therefore equitable duties and fall into four categories: –
- Act Bona fide – Directors are bound to act in good faith in what they consider to be for the benefit of the company. It was so held in Teck Corporation Ltd Miller
They must exercise power in good faith. Regard must be had to existing and future members.
- Unfettered discretion – Directors must approach all company matters with an open mind. They must exercise their discretion to the full. Decisions must be taken after deliberation. They cannot agree in advance on how to vote at future board meetings.
- Proper purpose – Directors must exercise powers for the particular purposes for which they are conferred (given). Powers must not be exercised for improper purposes (extraneous). It was so held in Re Smith & Fawcett ltd,
Punt v. Symons & Co.
Directors misused their powers to issue shares. The act was held to be an invalid act.
However, if an improper exercise of power by directors is ratified by members in general meeting it becomes a valid Act of the company as was the case in Bamford v. Bamford.
- Conflict of Interest – Directors must avoid conflict of interest. They must not without the company’s consent place themselves in circumstances in which their personal interests and their duties to the company conflict. Conflict of interest generally arises in the following circumstances:
- If a director has a personal interest in a contract made by the company.
- If a director makes a secret commission or profit.
- If a director is actively involved in two or more companies which are competing in business.
5. Disclosure of profits
This refers to any personal advantage enjoyed by a Director over and above his entitlement by way of remuneration. Directors must not benefit by virtue of their position unless such benefit has been disclosed. They must therefore not make any ‘secret profits’.
A secret profit may take the form of a bribe, secret commission or a benefit arising from the use of information obtained in the course of ones employment. Any secret profit made without disclosure must be accounted for to the company failing which the company is entitled to recover the same.
Regal (Hastings) Ltd v Gulliver
The former directors of the plaintiff benefited from the sale of shares they previously held as directors. It was held that in equity the benefit belonged to company and they were liable to account.
A similar holding was made in Industrial Development Consultants v Cooley
The defendant was a former managing director of the plaintiff co. The company had been discussing the possibility of taking up a certain profitable project. The defendant resigned his office to take up the project which the company was interested in. He did not disclose the true reason for his resignation to the company It was held that he was liable to account.
- Statutory Duties:
- Ensure that proper books of accounts are kept and balance sheets and profit and loss accounts are prepared
- Keep a register of its members
- Make an annual list and summary and sign the copy of the annual return provided to the Registrar and the certificate as to any balance sheet included
- Send to the Registrar a notice of conversion of shares into stock or of consolidation or division of shares
- Call an annual general meeting every year within the proper time
- Send to the Registrar copies of special and other resolutions
- Keep a register of directors and secretary and notify changes
- Take care not to allot shares until the minimum subscription is subscribed ; and
- State in every balance sheet the amount paid by way of underwriting commission until write off.
5.3.1. Liability of Directors
A director may be held personally liable in respect of transactions entered into on behalf of the company in the following circumstances:
- If he has exceeded his authority.
- If he has acted fraudulently.
- If the company was formed to pursue an improper or wrongful purpose. And he was fully aware of this
- If he has acted for a company that does not exist i.e. illusory company.
- If he has personally bound himself to liability.
- If he acts negligently.
- If he makes a secret profit.
5.3.2 Remedies against Directors
These remedies are available to the company and third parties, if directors are guilty of breach of duty to either party. Remedies include: –
- Injunction .
- Damages or compensation
- Recovery of profit or account.
- Rescission of contract.
- Summary dismissal if authorized by the contract of engagement.
5.4. OTHER OFFICERS OF THE COMPANY
5.4.1. Managing Director
The office of the managing director is created by the articles to facilitate the day today management of the company’s affairs.
Under article 107 of Table A; ‘Directors may from time to time appoint one or more of their board to the office of the managing director for such period and on such other terms and conditions as they may deem fit.’
A serving managing director is not subject to retirement by rotation but ceases to hold office if for any reason he ceases to be a director.
Under article 108; A Managing Director receives such remuneration by way of salary commission or participation in profit as the directors may determine.
Functions of the managing director
The duties and powers of a managing director depend on the contract of engagement. However article 109 of table A, ‘Directors may entrust and confer upon a managing director any of the powers exercisable by them, to excise personally or with the board.’ However the board may vary, revoke or withdraw all or any of the powers conferred upon the managing director. as was the case in Holdsworth and Co. v. Caddies.
5.4.2. Company Secretary
The office of company secretary is created by the Companies Act under sec 178(1) ‘Every company must have a secretary. If the office is vacant, its functions may be discharged by an assistant or deputy sec, if any, or a delegate of the board.’
Under Article 110 of table A, the company secretary is appointed by the board for such period and on such other terms as it may deem fit. The board is empowered to remove him from the office subject to the terms and conditions of the contract.
To qualify for appointment as secretary one must either;
- be an advocate of the high court
- hold the CPS certificate
- Possess such other qualifications, which qualify him for appointment.
- Where a company has only one director that director is disqualified from being the company secretary.
- A sole director of a corporation which is the sole director of the company
Legal Position of the Secretary
He stands in fiduciary position in relation to the company
He owes it basic fiduciary obligation. Therefore he must act in good faith and avoid conflict of interest.
Status of the Secretary
During the 19th Century, the company secretary was regarded as a mere servant of the company.
Harse and Bunnet v. South London Tramways (1889); Lord Esker observed, “A secretary is a mere servant. He is to do what he is told”.
However his position has since changed and the company secretary is now regarded as the Chief administrative officer of the company with wide powers to bind the company.
Panorama Developments Ltd v. Fidelis Furnishings Fabrics Ltd (1991) Lord Denning observed,
“But the times have changed. The company secretary is a much more important person than he was in 1887. He is an officer of the company with extensive duties and responsibilities he is no longer a mere clerk.”
Duties and Obligations of the Secretary
His duties depend on the size of the company and the terms of employment. His principle obligation is to ensure that the affairs of the company are conducted in accordance with the articles, memorandum, the Companies Act and the general law.
However, his specific duties include;
- Filing the annual returns.
- Registering charges of the company.
- Publishing the company’s name as appropriate.
- Certifying transfers.
- He is the custodian of the company’s common seal.
- Issuing notices to members.
- Monitoring company registers.
- Facilitating inspection of registers and the minute book of General meetings.
- Receiving notices on behalf of the company.
- Taking minutes at general and board meetings.
Liabilities of the Secretary & Remedies against the Secretary
These are similar to those of the Directors discussed in 7.1.5 and 7.1.6 above.
This is the Corporate Assembly. It is a meeting of all members of the company including the auditor.
The general meeting which is held annually affords the shareholders an opportunity to question the management and participate in the decisions making process of the company
- Division of power between the General meeting and Board of Directors
During the 19th Century it was generally believed that the general meeting was the company. Directors were viewed as agents of the General Meeting whose only task was to implement resolution of the general meeting. However the law subsequently changed and from the beginning of the 20th Century it was acknowledged that the general meeting and the board were the principal organs of the company capable of exercising the company’s powers. Whereas some powers of the company can only be exercised by the board others are only exercisable by the general meeting e.g. the board is empowered:
- to make calls
- recommend dividends
- recommend bonus shares/issue
- pay interim dividend
- appoint managing director
- appoint the company secretary, etc.
The general meeting on the other hand is empowered to:
- Elect directors.
- Appoint auditors
- Declare dividend
- Authorize a bonus issue
- Alter the memo or articles, etc.
The law governing division of powers between this organs is that a power is vested in one organ the other must not interfere with its exercise unless the power is being abused, exceeded or exercised contrary to the articles.
5.6 Doctrine of Constructive Notice
This doctrine is to the effect that persons dealing with a company are deemed to know the contents of its public documents e.g. memos, articles, special reductions, etc.
They are deemed to know the extent of the company’s capacity. This is because these documents are registerable with the registrar and are open to inspection by any person who cares to inspect them. However, the doctrine of constructive notice operates negatively in that a party can only rely on a provision of the articles if it has actual notice of its existence. It was so held.
Rama Corporation v. Proved Tin & General Investments Ltd
The Articles of the defendant company indicated that a single director of the company could not authorize an action. However the articles also permitted the board to delegate powers to committees of the board of one or more members. In this case no delegation had taken place. The Plaintiff’s firm contracted with a single director of the defendant company. The firm had not inspected the articles of the company. The company repudiated/breached the contract and the firm sued. The company argued that the director had no authority to Act. It was held that the Plaintiff could not rely on the article permitting delegation to the board since it was unaware of it. In the words of Slade L.J.
“There is no positive doctrine of constructive notice. It is a purely negative one.”
5.7 Indoor Management Rule – Rule in the Turquand’s Case
This rule relates to the liability of the company for Acts of its officers. It is based on two questions.
- Can a company escape liability by pleading internal irregularities?
- Are third parties bound to satisfy themselves that rules of internal management have been complied with before dealing with a company?
These questions were answered in the negative In Royal British Bank v Turquand; In this case the Articles empowered directors to borrow on the bond such monies as were authorized by an ordinary resolution of members in general meeting. Directors of the company borrowed from the plaintiff bank without any resolution being passed. After the company went into liquidation the Plaintiff bank sued the liquidator for the amount due. The liquidator disclaimed liability on the ground that the borrowing was irregular. However, it was held that the company was liable since the Plaintiff was not bound to satisfy itself that the articles had been complied with.
The court formulated the so called “Indoor Management Rule’ as follows.
- A third party dealing with a company in good faith is entitled to assume that it is acting within its constitutional powers.
- He is not bound to satisfy himself that rules of internal management have complied with.
- He is entitled to assume that officers of the company who are held out by the company as particular sort of officers are the officers concerned.
Freeman & Lockyer v. Buckhurst Park Properties Ltd
The Articles of the defendant company created the office of Managing Director. However, at the material time none had been appointed. One director with knowledge of the others purported to Act as managing director. He engaged the Plaintiff firm to work for the company. The firm was not paid for services rendered to the company. In an action to enforce the contract, the company disclaimed liability on the ground that the director was not its Managing Director and hence had no authority to contract on its behalf in the said contract
It was held that since the company had held out this director as its managing director the plaintiff was entitled to assume that he was its managing director. The company was estopped from denying its representations.
The indoor management is justified in two grounds:
- It is fair to third parties who deal with the company.
- It facilitates commercial transactions.
5.8 Organic Theory (alter Ego Doctrine)
This is the identification theory which attempts to connect the living to the non-living. It is a principle of company law which imputes the thoughts and deeds of responsible officers of the company to the company. Their state of mind is deemed to be the state of mind of the company. Under this theory, knowledge of the responsible officers is deemed to the company’s knowledge.
Lennards Carrying Co. v. Asiatic Petroleum Co. Ltd
Where the managing director of the defendant company had knowledge that the boilers of the ship were faulty but let it set sail and as a consequence the ship and its cargo were lost. It was held that the company was liable for the loss as it was aware of the faulty boilers. The managing director’s knowledge was attributed to the company.
SAMPLE EXAM QUESTION
Arthur, Beatrice and Charles are the Directors of Dynamic Development plc, a company whose main objects are to engage in the business of computer software development and ‘any other business which, in the opinion of the Directors is in the interest of the company’.
In November 2007 the company was appointed by Fred, a computer games software designer, who wished to sell one-half of his interest in certain products which he has designed but not yet launched on the market. At a meeting attended by all three Directors and Fred the possibility of such a joint venture was discussed but rejected by the company on the grounds that, given the volatile nature of consumer demand and the fast changing nature of the computer games market, the venture was too risky. In January 2008 Fred approached Arthur, Beatrice and Charles with a view of obtaining their personal involvement in the venture. Arthur declined but Beatrice and Charles accepted Fred’s invitation. They incorporated a new company, Zenco Ltd with Beatrice and Charles each holding one-half of the issued share capital in the company; they were also its two Directors. This arrangement was not disclosed to Dynamic Development plc.
In April 2008 Dynamic Development plc was taken over by Pro-Computers plc and Arthur, Beatrice and Charles were replaced by nominees of Pro-Computers. The new Board has now learned of the Zenco Ltd project and that the initial investment made by Beatrice and Charles has tripled to Kshs. 150 Million.
Advise Dynamic Development plc.