Under section 157A of the Companies Act (CA), the management of a company is vested in the board of directors (which the CEO is usually part of) except those that requires the company to exercise in general meeting (S157(A)(2)).

While the normal day-to-day management may be delegated to executives via a delegation of authority / approval limits approved by the Board of Directors, directors have to make business decisions that are in accordance with their duties under the law. Otherwise, they may face civil liability lawsuits, criminal penalties and/or be subject to removal from the company.

Statutory Duties

These consist of duties found in the legislation e.g. the Companies Act (“CA”).

1.       Duty to disclose interests in transactions

Under section 156(1) of the CA, a director is generally required to make a disclosure at a directors’ meeting if he is interested in a transaction or proposed transaction with the company. This disclosure is not required and stated under S156(3):

  1. Where “the interest of the director consists only of being a member or creditor of a corporation which is interested in a transaction” and
  2. If the interest of the director may properly be regarded as not being a material interest. 

S156(4) of the CA lists down certain exceptions as to when a director will be found not be deemed to be interested or to have been at any time interested in any transaction or proposed transaction. They are:

  1. Where the transaction or proposed transaction relates to any loan to the company that the directors have guaranteed or joined in guaranteeing the repayment of the loan or
  2. Where the transaction or proposed transaction has been or will be made or for the benefit of or on behalf of a corporation is deemed to be related to the company that he is a director or CEO of that corporation.

Besides disclosing the nature and extent of his interest in an entity that is transacting with the company (S156(5)(c)), the director must also disclose the nature, character and extent of any conflicts with his directors’ duties that may arise due to his holding any office or possessing any property at a board meeting or send a written notice to the company (S156(6)). 

The declaration or written notice by the directors shall be made as soon as he becomes a director or CEO or after he commenced to hold the office or to possess the property (S156(7) & (8)).

Under S156(15) of the CA, failure to disclose can lead to a fine not exceeding $5000 or to imprisonment of a term not exceeding 12 months.

2.      Duty to act honestly and use reasonable diligence

Under S157(1) of the CA, directors have the “duty to act honestly and use reasonable diligence in the discharge of the duties of his office”. The directors may exercise all the power of a company except any power that the CA or the Constitution requires it to exercise in a general meeting (S157(A)(2)).

Specifically, it is stated under S157(2) that a director “shall not make improper use of any information acquired by virtue of his position as officer or agent of the company to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the company”.

  1. If found guilty of breaching the provisions, under S157(3) of the CA, a director is liable to the company for any profits made by him and any damages suffered by the company (S157(3)(a)) and
  2. A possibility of criminal offence and can lead to a fine not exceeding $5,000 or to imprisonment for a term not exceeding 12 months. (S157(3)(b))

 

Common Law Duties

Common law duties consist of duties that have been recognized in past legal cases. The common law duties may overlap with the statutory duties. These common law duties apply to all directors, whether they are residents or non-resident or foreign directors and regardless if they are executive or non-executive directors.

3.      Duty to exercise power in good faith for the interests of the company

Directors owe a fiduciary duty towards the company, and so they must act in the interests of the company. These fiduciary duties can be summarized as follows:

4.      Duty to avoid conflicts of interest

A director must not place himself in a position where his duty to the company and his personal interests may conflict.

If a director encounters a potential conflict, he has to make disclosure to the shareholders and obtain their approval.

For example, a director is not allowed to steal a business opportunity that he comes across through his position as director without the informed consent of the company.

S156 of the CA states that a director shall make a disclosure at a directors’ meeting if he is interested in a transaction or proposed transaction with the company.

Examples of conflict of interest include:

  1. Where the director uses the property or money of the company to make a profit for himself
  2. Where the director uses the information acquired by virtue of his position to make an improper profit for himself
  3. Where the director uses his position to make a profit for himself
  4. Where the director sells or purchases property from the company without disclosure to the board of directors
  5. Where the director obtains a profit via a transaction which he is concerned on behalf of the company without full disclosure to the board of directors.

 

6.      Duties of skill, care and diligence

Failure in these duties can result in directors being sued for negligence.

Common law duties require that directors exhibit a degree of skill and diligence that may reasonably be expected from a person of his knowledge and experience. As for the duty of care, directors must take as much care in the affairs of the company as he would reasonably take in his own affairs.

The above are some of the main duties associated with directors. Further analysis will involve examining the facts of the cases to determine what exactly can constitute the company’s interests etc.

Other Duties

Aside from such general definitions of duties, there are more specific restrictions or negative duties that the directors is not allowed to do.

For example, S162 of the CA deals with loans to directors. The default position is that a company cannot make a loan to a director subject to certain exceptions. In the event that a loan is made in violation of the provisions, the directors who authorized the transaction will be liable to indemnify the company against any loss suffered by the company. The directors will also be liable for criminal offences.

These negative duties (e.g. registering of charges) can be found by looking for the relevant transaction in the statute e.g. the Companies Act.

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