Role of Directors
The Companies Act seeks to establish a balancing act between allowing a series of checks and balances on the powers of directors, thereby restricting the possibility of abuse, whilst ensuring that the centralised management function, which rests directly with the directors, are not lost.
Article 136A of the Companies Act was a relatively recent development and sought to crystallise the duties of the directors. Similarly, amendments to the Civil Code, set a number of ‘fiduciary obligations’- whereby directors would be regarded as ‘fiduciaries’. Fiduciaries, are characterised by the following characteristics:
- owe a duty to protect the interests of another person, or
- hold, exercise control or powers of disposition over property for the benefit of other persons, including when he is vested with ownership of such property for such purpose; or
- receive information from another person subject to a duty of confidentiality and such person is aware or ought, in the circumstances, reasonably to have been aware, that the use of such information is intended to be restricted.
The director is due to the very function of his office, a fiduciary, as his main duty is to protect and act in the interest of the company. At the outset it is also important to establish, that albeit, a director may be appointed by any shareholder having more than 50% of the voting powers in the Company, the director owes an allegiance to the Company first, and not to the shareholder/s who may have appointed him. This is a pivotal point – as the director must always act impartially and in the best interest of the Company, and ultimately his tenure in the office of director, hinges upon, the correct carrying out of this function.
As the persons vested with the legal representation of the Company, the directors often have secondary duties. A moot point, is whether directors have a general duty towards creditors of their company. The underlying rationale is that directors must act legally and in the best interests of the company, and therefore the directors’ duties towards creditors would be subordinated towards the primary duty of preserving the advantage of their company, save of course, the general and undiminished responsibility of acting lawfully and diligently. This provision, acts as a general monitor to curtail directors from acting fraudulently against the creditors of their company. Any acts of wrongful trading, fraudulent practices, misconduct, serious mismanagement by the directors, would therefore run directly contrary to the interests of the company, since the directors would be exposing the Company to a grave risk, with potentially far-reaching consequences.
For this reason, the law provides deterrants for directors acting unlawfully, setting forth a number of personal liabilities for directors. The Income Tax Management Act, for example, sets forth that all persons involved in the running of a company (therefore the directors) must do their best to effect payment of income tax, lays down that directors and managers of every company, shall pay tax out of the property of the company but that they shall be personally liable for payment if they had in their possession any property belonging to the company, which could have been used to pay the tax then due.
Likewise, the Social Security Act, states that “where anything required to be done under the Act is to be done by a company, such thing shall also be required to be done personally by the directors and managers of such company.”
Duties of directors
As a general rule, the main duty of directors is to act honestly and in good faith in the best interests of the company, to promote its well-being, to exercise due care, diligence and skill, not to engage in self-dealing and not to misuse their powers.
The litmus test for achieving the aforesaid goals, are ones based on “common sense” i.e directors must act in good faith in what they consider to be in the interest of the company. Again, the very wording, interest of the company precludes the directors from acting in the interest of individual shareholders. Therefore, all shareholders, must irrespective of class, number of shares held etc; be treated equally.
Conflict of interest
The other basic principle is that directors must stay within the powers granted to them – in other words they cannot misuse their powers. Therefore, the directors must stay within the parameters set forth in the Memorandum and Articles of Association which may require the signature of more than one (1) director or the inclusion of reserved matters in the articles of association – whereby certain decisions would be subject to the pre-approval of the general meeting.
In order to ensure that the decisions undertaken by the directors are done in the interest of the shareholders, it is essential to ensure that the directors do not have personal interests at stake in resolving matters for and on behalf of the Company. Clearly, self-dealing would create a conflict of interest between the duties that the directors owe to the Company and their personal interest. In assessing potential conflicts of interest, the test would again be one based on sensibility. If the director recommends to use the services of a company in which he has a personal stake, this may be perceived as a conflict of interest. However, if the services acquired are objectively of high quality, and the director may use his personal standing to secure better commercial terms for the company, then this would not necessarily constitute a breach. Nevertheless, it would be strongly advisable, to circumvent any possible debate as to the intentions of the director, that the latter discloses his interest to the shareholders prior to the carrying out of such transaction.
Article 145(1) of the Companies Act requires every director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company, to declare the nature of his interest to the other directors, either at the meeting of the directors at which the question of entering into the contract is first taken into consideration, or, if the director was not at the date of that meeting interested in the contract or proposed contract, at the next meeting of the directors held after he became so interested. In default, the director shall be liable to a penalty. This article cannot be derogated upon by express changes to the Memorandum and Articles of Association to the contrary.
The duty of the director is therefore to disclose such interest. Thereinafter whether he is able to vote in favour of such resolution, is a matter that depends on the drafting of the articles of association. It is possible for directors, who have duly notified the other directors or shareholders of their interest to vote in the resolution – even if the most advisable stance would be to abstain altogether.
No Profit Rule
Directors are also bound by the “no profit” rule. The Companies Act specifically prohibits directors from:
- making secret or personal profits from their position without the consent of the company;
- making personal gain from confidential company information; and
- using any property, information or opportunity of the company for their own or anyone else’s benefit.
At the outset, it must be clear that directors may take a remuneration for the office that they hold in the company, as well as any additional services rendered to the Company. What is however prohibited is that the director derives any personal profit from any transaction / asset derived from an activity of the company / owned by the company, thereby reducing the company’s benefits. The most manifest illustration of this principle would, for example, be the director making personal use of the company’s property as if it were his own to further his own personal wealth, rather than those of the company.
Misuse of information
Closely linked to the aforesaid, is the notion of misuse of information. A director cannot, in the carrying out of this office, be made privy to information, and adopts policies, to divert interest to his own personal capacity in lieu of the company. A director acting in his capacity, has to disclose any advantage to the Company first and foremost, and then irrespective of the decision, desist from using this information for his own personal gain.
In other words, directors must refrain from taking business opportunities that belong to the company. The directors have a fiduciary obligation during their tenure in office, and arguably, even after their resignation / removal from office. Therefore, a director should not engage in commercial business doing, to which he is privy, and which would be in direct / indirect competition with the company in which he holds office. And this rationale, should persist, even if the director discloses such opportunity to the board of directors and shareholders, and such decision is not acted upon by the Company.
Benefits from third parties
Article 136A(3)(d) of the Companies Act prohibits directors from obtaining benefits in connection with the exercise of their powers, except with the consent of the company in general meeting or except as permitted by the company’s memorandum or articles of association. The word “benefits” is deliberately nebulous and is to be taken to constitute all possible gains, whether pecuniary or in kind.
Clearly, the director should ensure that he does not carry out any act which could run counter to the interest of the Company. The most manifest example of divided loyalties, which would be incompatible with the post of directors would be the carrying out of acts that are in direct competition with those of the company on whose board he sits.
Article 143(1) of the Companies Act, specifically states that a director “may not, in competition with the company and without the approval of the same company given at a general meeting, carry on business on his own account or on account of others, nor may he be a partner with unlimited liability in another partnership or a director of a company which is in competition with that company.”
It is worth noting that this prohibition would not subsist, if this interest is disclosed to the general meeting. The rationale of the legislator was therefore to ensure transparency at all times. It would be then, up to the shareholders, to evaluate, whether the position disclosed by the director, would be acceptable to the Company, or whether his position would be in the light of such disclosure, untenable.
Furthermore, this provision should be limited to the main or general trading activities of the company. The Memorandum and Articles of Association of Maltese companies tend to be drafted, purposely wide, to ensure the maximum flexibility possible in the operations of the company. In practice, it is customary to include ancillary provisions, aimed solely as consolidating the operational side of the company e.g. powers to open bank accounts, powers to appoint mandatories, to acquire intellectual property etc; It is maintained that no conflict would arise if the director carries out trading objects privately, or with a third party, which trading objects, would otherwise be deemed to be ancillary in nature.
It is also important to note, that it is possible for a director to hold shares in a competing company, without necessary triggering off the prohibition set forth in the aforesaid Article 143 of the Companies Act. The role of the director would still be tenable insofar that he is merely a shareholder and not on the board of directors
Article 143(1) of the Companies Act, actually allows directors to compete with the company, as long as shareholders’ have knowledge thereof and have approved it. Such consent may be limited in duration e.g. for one year, or unlimited, insofar as the director retains his office. Approval, prior to the commencement of the competing activity is essential, or if this activity has already commenced, prior to appointment of the director, then approval should be sought concurrently to appointment. Although, possible, it is however, difficult to see how a director can, in practice, reconcile concurrent posts, with the obligation of maximizing the profit of each company, that he holds an office with.
Any breach of Article 143(1) carries far-reaching consequences, as the company may, undertake an action for damages against the director, with interest, or demand payment of any profits derived in contravention of the rule.
Prohibition of loans, guarantees, provision of security and compensation for loss of office
Article 144(1)(a) of the Companies Act prescribes that it is not lawful for a company “to make a loan to any person who is its director or a director of its parent company, or to enter into any guarantee or provide any security in connection with a loan made to such a person as aforesaid by any other person”.
It is possible to derogate from the aforesaid, provided the following conditions are met:
- when, with the approval of the company in general meeting, such loan, guarantee or security is given to provide the director with funds to meet expenditure incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties; or
- in the case of a money-lending company, the lending of money or the giving of guarantees in connection with loans made by other persons.
Furthermore, a company is also prohibited from making any payment to any director by way of compensation for loss of office or in connection with his retirement from office, unless particulars with respect to the proposed payment (including the amount thereof) are disclosed to members of the company and the proposal is approved by the company in general meeting.
None of the said prohibitions, set forth in Article 144 apply to private exempt companies.
Duties of care and skill
By virtue of relatively recent amendments, Article 136A(3)(a) of the Companies Act now provides that directors of a company are “obliged to exercise the degree of care, diligence and skill which would be exercised by a reasonably diligent person”.
Therefore there are two standards of duties that are inherent in the office of director:
- The objective test – the knowledge, skill and experience that may reasonably be expected of a person, carrying out the same functions as are carried out by, or entrusted to that director in relation to the company – in other words, the performance of the director is to be assessed in accordance to the standards that a director carrying out the same functions in a company in the same line of business, would reasonably be expected to perform; and
- The subjective test – the knowledge, skill and experience that the director has to achieve in the carrying out of his duties – the knowledge, skill and experience which the particular director actually has. Therefore, a well qualified and experienced director is expected to perform in accordance to the standards of a similarly qualified director.
Directors are also subject to a long list of administrative duties, mostly arising out of the Companies Act. Most of these duties are derogated to the company secretary. The more important of these administrative duties that would apply to directors may be summarised as follows:
- Duties to file notices and returns
There are a number of notices and returns that need to be filed with the Maltese registry of companies – these include the Form K (changes amongst directors and legal representation); Form T (notice of share transfer) Form T1 (notice of pledge of shares) Form T2 (notice of termination of pledge of shares); Form H (notice of allotment of shares). They are also to file an annual return once every year.
- Changes to memorandum and articles of association
The directors are bound to notify the Maltese registry of companies of any changes to the memorandum and articles of association. The directors are also obliged to file an updated version of the memorandum and articles of association every time that a change is made.
- Obligations regarding accounts and accounting records
Directors are obliged to retain proper accounting records so that the financial position of the company can be properly ascertained. As as rule, the accounting records should be kept in Malta for at least ten (10) years. Moreover, the directors are obliged to prepare a profit and loss account and a balance sheet once a year and to have these financial statements audited by the company’s auditors. The directors are then obliged to lay the financial statements before the annual general meeting for the approval of the general meeting. After the annual general meeting, the directors must file a copy of the accounts with the Malta registry of companies.
The directors are obliged to keep, and regularly update, a Register of Members and a Register of Debentures.
- Minutes of meetings
The directors are obliged to keep minutes of general meetings and of meetings of the board of directors.
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