Director Responsibilities: The Risks of Acting as a Director

John Caruana  -  21/November/2016

Every Company under Maltese law is managed by the board of directors, which may consist of several persons or even a sole director. The role of a director carries a significant level of responsibilities and duties, which cannot be contracted out of. In fact the law states that the term ‘director’ refers to a person ‘carrying out substantially the same functions in relation to the direction of the company as those carried out by a director’. This means that for an individual to be considered as a director, it is not always necessary for their name to appear in the memorandum and articles.

By law, a director is deemed to be an agent, a mandatory and a fiduciary of the company by the very nature of his role and activity and this role is shared with any other directors if any. As a general principle, directors are liable for their actions, jointly and severally and thus it is essential that in a large board, all the directors are aware of what the entire board is doing. The two exceptions to this rule are: when a director has been assigned  a particular duty, he himself shall only be liable; and a director shall not be liable for the acts of his co-directors if he proves: either that he had no knowledge of the breach of duty before or at the time of it happening and that on taking cognizance of it, he indicates at once his dissent in writing; or that knowing that the co-directors intended to commit a breach of duty, he took all the reasonable steps to prevent it.

There can be different types of directors constituting a company, including executive directors who participate in the day-to-day management of the company and non-executive directors who have an advisory or supervisory function; de jure directors who are appointed formally to the board and de facto directors who although are not formally appointed to the board, still perform the acts or duties of directors; and shadow directors who are normally behind the scenes giving instructions on how the company should be run.

The directors always have discretion when coming to decide about a company’s affairs, with the only limitation being if a reservation in favour of the shareholders is done either in the Companies Act or in the memorandum and articles of the company. However, notwithstanding such discretion, the acts of a director must always be on behalf of the company and in its interests. Even if a director is appointed by a particular class of shareholders, he would owe his duty to the company and not to such shareholders.

A director’s duties are commonly divided into two broad categories: general and special.

The main general duties of a director can be further subdivided into two: the duty of loyalty and the duties of care and skill. With regards to the duty of loyalty, this entails that a director must not only act in the best interests of the company but he must also act honestly and in good faith and he must use his power for the purpose for which the powers have been granted and not for any other purpose. Moreover, it is a director’s duty to declare his interest, if there is any, in a contract or proposed contract with the company, and he must not, in any scenario compete with the company which he works for, unless he has its approval.  On the other hand, when dealing with the duties of care and skill, the Companies Act establishes a twofold test: an objective test and a subjective one, to determine whether a director satisfied his duties in this regard.

With regards to the special duties of directors, these include the keeping of statutory registers and minute books, duties in relation to filings with the registry of companies, duties in relation to record keeping and other duties relating to the appointment of the auditors and specific duties dealing with the liquidation of the company.

As a special consequence of the obligations given to the directors of a company, the laws imposes personal liability in specific cases of wrongful and fraudulent trading by a company, in which the latter, is deemed to be a criminal offence and bears criminal penalties including a maximum prison term of 5 years and up to two hundred and thirty three thousand euro fine. Both cases may arise in a liquidation of the company when it transpires that the directors either ought to have known that there was no reasonable prospect of recovery but kept on trading (wrongful trading) or that the directors acted in such a way as to defraud creditors (fraudulent trading).

A person accepting the role of a director in a company must thus not take such appointment lightly. The role is one which entails vast responsibilities and can lead to substantial liabilities due to the specific responsibilities owed to the Company, the shareholders and other third parties involved with the Company.

At KSi Malta, we can provide your Company with professional and experience directors to assist you in the running of your business. Should you require any assistance, kindly contact us. 

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