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Directors – Appointment & Removal

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Malta Company Directors – Appointment & Removal

There is no definition of “director” in the Companies Act. The Companies Act merely states that a director, is “any person occupying the position of director of a company by whatever name he may be called carrying out substantially the same functions in relation to the direction of the company as those carried out by a director”.

With the exception of companies with securities listed on the Malta Stock Exchange, which only allow individuals to be directors, corporate directors may also act as directors.

Therefore, the director is not necessarily the person evidenced in the Memorandum and Articles of Association of the Company, but is effectively any person who carries out the role of director. This includes shadow directors – a person who undertakes this role shall be held liable to certain prohibitions, duties and liabilities, as if he were a director indicated in the Memorandum and Articles of Association.

Executive and non-executive directors

Although the Companies Act makes no distinction between executive and non-executive directors, there is in effect an implicit distinction.

Executive directors are those directors vested with the actual daily management of the company. These directors carry out executive functions, e.g. in the financial / marketing aspect of the business and very often have an employment contract with the company.

Conversely, directors who are not involved in the actual day-to-day management of the company and as non-executive directors, and their role would be of an advisory or supervisory nature.

Alternate directors

The articles of association often provides for the appointment of alternate directors. An alternate director is appointed by an existing director and is usually entitled, under the articles, to perform all the functions of his appointer as a director in his absence.

The appointment of alternate directors is in practice a useful development – and allows to circumvent logistical challenges when the directors may not be present to exercise their duties. The right to appoint alternate directors must be specifically catered for in the articles, and the alternate director cannot exercise powers in excess of those allowed by the directors in the Memorandum and Articles of Association. Practical issues that arise in drafting this power, is to whether the alternate director can be appointed solely for the purpose of attending board meetings or to exercise his functions vis-à-vis third parties outside board meetings.

Alternate directors, when so appointed, are subject to the same obligations of directors under general principal of laws. The role of alternate directors is in practice curtailed in the case of licensable activities – the general practice being that the appointment of alternate directors would be possible, conditional to the approval of the regulator. This is in practice a sensible insertion, as the first directors are subject to the probity of the regulator to ensure that they are ‘fit and proper’ to exercise their functions. It therefore follows, that the persons appointed as alternate directors, should have the necessary skills and expertise to also fill in this appointment.

Appointment

The first directors of the company are set forth in the original memorandum of association. The Companies Act requires the memorandum of association to state the number of the directors, the name and residence of the first directors and, where any of the directors is a body corporate, the name and registered or principal office of the body corporate”. Evidence of this by means of a passport copy or identity card has to be delivered to the Maltese registrar of companies.

Where a director is a body corporate, the name and registered or principal office of the body corporate must be indicated in the memorandum. Very importantly, the company registration number of such corporate entity have to be included therein, and evidence thereof be submitted to the registrar of companies. In practice, this scope may be achieved with a certificate of good standing, a certificate of incorporation or extracts of registry. It would also be advisable to request copies of the Memorandum and Articles of Association of the Company, to establish who are the person/s vested with the legal representation of the corporate director. This is important not only for the execution of board resolution, but also on more practical issues, such as the opening of the bank account.

Number of directors

The Memorandum must also specify the number of directors, and in practice that is achievable in two ways i.e. either by setting a fixed number e.g. three directors or a range e.g. one to six. The latter is the preferred option, and helps circumvent potentially thorny issues of when the number of directors falls below the threshold indicated in the Memorandum e.g. resignation, removal or death of the Director.

It is also possible to set a maximum limit of directors, as well as a minimum, albeit this number can never fall below the threshold set forth by the Companies Act (in the case of private companies one and in the case of public companies two).

Subsequently, it is possible to appoint directors other than first directors, and this procedure is typically set forth in the articles of association. The appointment of directors can arise at the annual general meeting of the company when all the directors retire from office, and new directors are appointed by means of a “rotation of directors”.

The appointment of directors of a public company requires additional formalities. The first directors must manifestly signal their consent to their appointment, by submitting a signed declaration to this effect. This declaration is not required where a company converts from a private to a public one.

It is important to clarify that that directors are to hold office from the annual general meeting at which they are elected until the end of the next annual general meeting. Directors are entitled to re-election by the shareholders, and insofar that they are not removed by the general meeting, there is no need to submit a notification to the Registrar of Companies by means of a Form K.

Where no such provisions are set forth in the articles of association, the normal method of appointment is by means of an ordinary resolution of the general meeting. In this case, the aforesaid Form K should be submitted to the registrar of companies, in order to render the change, effective vis-à-vis third parties. The filing of the Form K may be undertaken by the new director, even though this role is usually derogated to the company secretary. The filing of the Form K should be filed within fourteen (14) days from the change thereof. Filing, after the said fourteen days is possible, and shall be equally valid, however, monetary fines may apply.

Qualifications of Directors

The Companies Act does not set a prescribed level of expertise i.e – any minimum academic qualifications or experience. In practice, probity is ensured by means of self-assessment. As it is the shareholders who appoint the director, they should be the one who select an individual with the requisite skills and expertise to adequately manage their interests in the Company.

The performance of the director shall be evidenced in the presentation of the director’s report that must form part of the audited financial statements, and the directors must lay these audited financial statements to the scrutiny of the shareholders. This acts as a safety-valve, allowing shareholders the possibility of not re-appointing a director, whom they perceive has underperformed in the carrying out of his functions.

There are however certain requirements re: qualification requirements that apply to companies listed on the stock exchange, whereby directors, must be individuals (corporate entities expressly excluded) must be composed of persons “fit and proper” to conduct the business, as well as being honest, competent and solvent. A similar provision applies to other licensed entities in a number of regulated sectors such as banking, investment services, trusts, insurance etc; and this is a sensible provision to ensure that only individuals with sufficient skill and learning are appointed to hold the office of director.

Disqualifications

The Companies Act does however set a number of rules, whereby an individual may be disqualified from holding the office of director. Examples for disqualification include if the director:

  • is interdicted or incapacitated or is an undischarged bankrupt;
  • has been convicted of any of the crimes affecting public trust or of theft or of fraud or of knowingly receiving property obtained by theft or fraud;
  • is a minor who has not been emancipated; or
  • is subject to a disqualification order made under the Companies Act.

 Disqualification orders

An application for a disqualification order may only be filed by the Attorney General or the Registrar of Companies and the Court may make a disqualification order against any person who:

  • is found guilty of an offence under the Companies Act (other than an offence punishable only with a fine);
  • who has infringed any requirement of the Act with the consequence that the person become liable to contribute to the assets of a company or becomes personally liable for the debts of the company (such as wrongful trading or fraudulent trading); or
  • if the Court is satisfied that such person is or has been a director of a company which at any time has become insolvent and that his conduct as a director of that company makes him unfit to be involved in the management of a company.

The duration of a disqualification order may range from a minimum of one (1) to a maximum of fifteen (15) years. It must also be stated that the performance of the director is irrelevant. If the company is dissolved because of adverse trading conditions encountered by the Company, but the director has acted in a correct manner, within the parameters set forth by law, then this would not render the director subject to a disqualification order.

The effect of a disqualification order is that the person made subject to it shall not, without the leave of the court be

  •  a director or company secretary of a company;
  • a liquidator or provisional administrator of a company;
  • a special manager of the estate or business of a company; or
  • concerned in any way, whether directly or indirectly, or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.

Any person who, while contravenes the aforesaid disqualification order, shall become guilty of an offence and be liable on conviction to a fine of not less than EUR 46,600 or imprisonment for a term not exceeding three (3) years or to both such fine and imprisonment. A register shall be kept by the Registry of Company and open to the scrutiny of any interested third party.

Sole director and company secretary

There are also statutory prohibitions that apply. With the exception of exempt companies, it is not possible for the sole director of a company to also be its company secretary. This prohibition also extends to the sole director in a body corporate, which is the sole director in a company. In other words, a company cannot have as its sole director a body corporate whose sole director is company secretary to the company.

Share qualification

It is possible to set provisions in the articles of association whereby the directors must hold a minimum name of shares in the company – a practice referred to as “directors’ share qualification” and this is justified as an incentive for the directors to have a personal stake at hand, and to dedicate all their powers to ensure the success of the company. The provision of share qualifications must be specifically catered for in the memorandum and articles of association, and the director must either:

  • sign the memorandum for a number of shares not less than his qualification; or
  • sign and deliver to the Registrar for registration an undertaking in writing to take from the company and pay for his qualification shares.

In default the director must vacate this office, if he fails to obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the memorandum or articles of association.

Age

Contrary to English Law, there is no upper age limit, and directors may retain their office over and above pensionable age. The only age restriction is minimum one, which applies to minors not emancipated to trade.

Vacation of office of directors

A director holds office until his term of office expires, or he becomes disqualified from holding office, or resigns, dies or is removed. On the occurrence of any of these events, the director automatically vacates office. Strictly speaking the vacancy of the directors, is independent form the filing of the aforesaid Form K, even if the filing of the said Form K is there to give the vacancy effect vis-à-vis third parties.

The vacancy may occur in a number of manners, as follows:

Expiration of period of office

The memorandum or articles of association of a company may authorise the appointment of director for a specific period. On expiration thereof, he shall automatically cease to be a director.

Disqualification

If a director becomes disqualified by law or by the memorandum or articles of association from continuing to be a director, he automatically vacates office, without the need to submit a resignation.

Resignation

A company is free to resign from office at any point in time, and this resignation is valid and effective as from the date it is penned and notice thereof duly served. Normally, the most common way to serve notice of resignation is through the chairman or company secretary, however, equally valid ways is to tender resignation during a board or general meeting. It is possible to specify how notice thereof would be deemed to be served in the Articles of association.

Death

An obvious reason for vacancy of office is the death of the director. Directorships are personal appointment and the office of director cannot be inherited by the heirs in title of the deceased director.

Removal

A pivotal article in the Companies Act is Article 140 – whereby every company retains the power to remove any director before the expiration of his period of office by a resolution taken at a general meeting of the company and passed by a member or members having the right to attend and vote, holding in the aggregate shares entitling the holder or holders thereof to more than fifty per cent of the voting rights attached to shares represented and entitled to vote at the meeting.

The provision of Article 140 shall stand irrespective of any provision to the contrary in the Memorandum and Articles of Association and cannot be derogated upon by private agreement. The wording of Article 140 is also important, in that it links the resolution to voting rights, thereby allowing the possibility of weighted voting, to regulate the removal of directors.

When due notice is served that a member intends to move a resolution for the removal of a director in accordance with the provisions of article 140 of the Companies Act, the director concerned my be informed and the director shall be entitled to be heard on the resolution at the meeting. This is an essential pre-requisite, to the extent that a resolution in writing passed by the shareholders shall not serve to remove a director. The scope is to allow a director the possibility of making his statements, but this shall of course not deter from the final effect, that is to remove the director.

Furthermore, it is important to note that the removal of a director by the Company does not deprive the director from the right to compensation or damages that he may be entitled to in respect of the termination of his appointment as director or of any other appointment terminating with the termination of his appointment as director. This would typically refer to instances whereby the director would have a contract of service or employment with the company.

The Filing of the Form K

In the event of any change amongst the directors, the company is obliged to send to the Registrar for registration a return of such change (the Form K). This from is usually signed by the company secretary. Although it can also be signed by the directors, it cannot be signed off by the director vacating his office.

Contact one of our officers for advice regarding Directors – Appointment & Removal and/or to initiate the incorporation of a Maltese registered company and start reaping the full benefits of an onshore, low-tax, EU jurisdiction. Simply fill in the contact box below or contact us by email on enquiries@fbsmalta.com or by calling at +356 2338 1500

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