Fiduciary Duties of Directors

A “director” of a company, as defined by the Companies Act, encompasses any individual who serves on the board of the company. This definition extends to alternate directors, prescribed officers, and individuals who are members of a board committee or an audit committee, regardless of their membership status on the company’s board. This designation is crucial because directors bear the responsibility for actions taken on behalf of the company.

Obligations and Legal Responsibility

Being appointed as a director of a company entails significant obligations and legal responsibilities. Failure to uphold these responsibilities can result in personal liability and prosecution. Directors may face criminal sanctions, including fines, imprisonment, and disqualification from serving as a director in the future if they fail to perform their duties.

While business inherently involves taking calculated risks to achieve potential rewards, and directors may occasionally make decisions that result in financial losses, these duties and potential liabilities should not deter directors from making the necessary decisions required for business growth and success.

Section 76 of the Companies Act outlines the standard of conduct expected from directors, mandating that they act honestly, in good faith, and in a manner they reasonably believe to be in the best interests and for the benefit of the company.

Director’s Liability

A director may be held liable under common law principles for breaching fiduciary duties, resulting in any loss, damages, or costs sustained by the company. This liability applies to breaches of duties as specified in Sections 75 and 76 of the Companies Act, any other provision of the Companies Act, or any provision of the company’s Memorandum of Incorporation.

A director of a company is liable for any loss, damages, or costs sustained by the company as a direct or indirect result of the director having:

1. Acted in the name of the company, signed documents on behalf of the company, or purported to bind the company or authorise actions by or on behalf of the company, despite knowing they lacked the authority to do so;
2. Allowed the company’s business to continue, despite knowing it was being conducted in a manner prohibited by Section 22(1) of the Companies Act (which states that a company should not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose, or trade under insolvent circumstances);
3. Participated in or approved an act or omission by the company, despite knowing it was intended to defraud a creditor, employee, or shareholder, or had another fraudulent purpose;
4. Signed, consented to, or authorised the publication of financial statements that were materially false or misleading, or a prospectus, or a written statement as outlined in Section 101 of the Companies Act;
5. Attended a meeting or participated in a decision under Section 74 of the Companies Act and failed to vote against:
   • The issuance of any unauthorised shares, despite knowing they were not authorised under Section 36;
   • The issuance of authorised securities, despite knowing the issuance was inconsistent with Section 41;
   • The granting of options to any person under Section 42(4), despite knowing that the shares for which the options could be exercised, or into which the securities could be converted, were not authorised under Section 36.

 

Conclusion

Directors can defend their decisions by demonstrating that they fulfilled their obligations to act in the best interests of the company and exercised the required care and skill. This includes showing that they took reasonably diligent steps to be informed about the matter, accessed accurate information, had a rational basis for believing that their decision was in the company’s best interests at the time, and had no personal financial interest in the matter.