BMGT 323: COMPANY LAW

DIRECTORS

Introduction
“The directors are a body to whom is delegated the duty of managing the general affairs of
the company.  A corporate body can only act through agents and it is of course the duty of
those agents so to act best to promote the interest of the corporation whose affairs they are
conducting”.

Directors are said to be the brain of the company and occupies a pivotal position in the
structure of the company, and since the directors are the brains of the company; it is only
when the brain functions that the corporation is said to function.

Board of Directors is given the powers to manage and run the company. Cap. 486 together
with the articles bestows powers to directors to manage.  Members have no right to interfere
with such management; in fact, if members interfere; the directors have a right to bring an
action against the members to restrain them.

The directors have an express right to manage the company, but if the management want to
interfere with the Board, then they have to convene an extra ordinary general meeting and
alter the constitution of the company to allow them interfere.

“If you want to interfere in the management of the company's affairs, convene a general
meeting and alter the company’s constitution by passing a resolution obliging the directors to
act the way you want”.

Case Law: Automatic Sef Syndicate Ltd vs. Cunningham (1906)

By its articles of association, the general management and control of the company was vested
in the directors, subject to regulations as might from time to time be made by extra ordinary
resolutions. In particular, the articles of association conferred on the directors the power to
sell or otherwise deal with any property of the company on such terms as they may consider
fit.  The members at a general meeting passed an ordinary resolution forcing the directors to
sell certain property of the company on certain terms.  The directors refused to the effect that
it was directive and therefore declined to sell.

It was held that the company’s constitution conferred upon directors the general powers to
manage the company, and in particular to decide when to sell the property of the company
and on what terms.

Notwithstanding the fact that powers to manage the company have been given to the
directors, the members have a right to intervene and take away such management: -
a) Where the directors are improperly using the name of the co. in litigation.
b) If the B.O.D. itself cannot function due to one reason or another the members may
intervene. There were two members who were also directors of the company. A
conflict arose which rendered them impossible to even communicate face to face and
the only communication was by way of memos.  One member went to court
petitioning for winding up under the clause “just and equitable”.  The court agreed
with the application, but it was observed that:- “If it had been possible to have

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 separate members from these two, the court have ordered that they take up the
management until a new team comes in”. In another instance, (Foster vs. Foster),
there was a disagreement and as a result there was a deadlock in voting.  The court
said that under those circumstances where the directors are unable to exercise powers
conferred upon them by the company’s articles, the company/members in a general
meeting would take over the management and appoint a new team.
c) Where the directors have acted ultra vires, the powers granted to them or the company
itself: - The management can ratify that which the directors did in excess of their
powers. For example, if the articles might have conferred upon them some powers but
they have exceeded the powers; in that eventuality, the management can take away
those powers. Secondly, the company did not have the kind of powers the directors
exercised, and therefore did not give them powers.  In this case the members can
intervene and remove those directors.

Meaning of a Director

“A director, includes any person occupying the position of director by whatever name
called”.
“A director may be identified by the functions the person performs even though he may be
named differently, for example, Jaduong, Munene and so on.

A director may therefore be defined as, “a person having control over the direction, conduct,
management or superintendence of the affairs of a company”.

What is the position of a person occupying the position of a director but is not duly
appointed, is he still a director?

A person, who acts as a director performs the functions of a director although not duly
appointed and occupies the position of a director, is a director. This is supported by the
phrase “by whatever name called”.  This does not limit the meaning. In fact it extends its
meaning to include a person who performs the functions as a director though called by
another name.

Section 181 also supports the above case in that if a person is not validly appointed as a
director, but acts as one and the appointment is later on discovered to be defective, anything
that he has done is valid notwithstanding an irregularity in appointment of such a person.

APPOINTMENT OF DIRECTORS

Every company shall have at least two directors while every private companies and every
other company registered before 1962 shall have at least one director.

The actual number of the directors would initially be decided upon by the subscribers of the
memorandum (promoters) and until so determined, all of them shall be the first directors.

The company from time to time by ordinary resolution increase or reduce the number of its
directors.

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The following are the various stages of appointment of directors: -
      (a)  The first directors of the company.
      (b)  Subsequent appointment of directors.
      (c) Appointment to fill a vacancy.
      (d) Appointment of alternate director.
      (e)  Appointment of Managing Director.

(a)  First Directors

The names of the first directors shall be decided in writing by the subscribers of the
memorandum of association or a majority of them. They are usually appointed by promoters
of company and normally their names are indicated in the articles of association.
If promoters do not appoint the first director, then the people who subscribe to the
memorandum of association will become and be regarded as the first directors, until proper
appointment is done.  They shall hold office until the directors are appointed at Annual
General Meeting. The articles may also provide that both the number and the names of the
first directors shall be determined in writing by the subscribers to memorandum.

(b)  Subsequent Directors

The subsequent directors are appointed by the members in general meeting beginning from
the first annual general meeting at which all the first directors retire from office and the
members are given the first opportunity to elect directors of their own choice. The retiring
directors are however eligible for election.

At the second annual general meeting, one third of the directors are to retire from office, the
ones to retire being the ones who have been longest in office since their last election.
As between persons who became directors on the same day, those to retire shall be agreed
upon amongst themselves otherwise it shall be determined by lot.  One third of the board
shall thereafter retire by rotation annually.

(c)  Casual Appointment/vacancy

The Company’s Act permits the board of directors to fill a vacancy in the board or to get an
additional director to join the board for practical reasons provided that the appointment does
not cause the number of directors to exceed the limit imposed by the articles.  The person
appointed this way will hold office until the next annual general meeting.  He will then be
eligible for re-election, but his appointment will not be taken into account when deciding on
the directors who shall retire from office.

(d)   Alternate Directors

An alternate director is one appointed by another director to temporarily represent him during
his absence or inability in the Board of Directors.  This power can be exercised only if it is
permitted in the articles of association. The common law rule “delegatus non potest
delegare”, states that a director has no authority to appoint an alternate director.

However where the article of association is silent about the appointment of alternate director,
a director can still appoint an alternate director.

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When a director appoints an alternate director, he may indicate the powers which such an
alternate director may exercise on his behalf and those which he may not, for example, he
may participate in Board meetings and sign documents but not more than that.
He cannot hold office for a period longer than that permissible to the original director in
whose place he has been appointed.
The alternate director may be another director or an outsider.  If he is a director, he would
have the vote of the absentee in addition to his own vote.

(e)    The Managing Director

A Managing Director is part of the subsequent directors.  It is governed by company practice

because it is always a company’s affair.  The Act itself does not contain direct provisions on
the appointment of a Managing Director. It is found in the articles of association, not the Act.

A Managing Director who by virtue of agreement with the company, or of a resolution passed
by the company in a general meeting, or by virtue of its memorandum or articles, is entrusted
with substantial powers of management.

A director so appointed shall not whilst holding that office be subject to retirement by
rotation but his appointment shall be automatically terminated if he ceases due to any cause,
to be a director.

A Managing Director like any director can be removed at any time from office by a general
meeting irrespective of the fact that this duration of his appointment is not yet over.  But
where his services have been terminated in breach of his terms, he is entitled to claim
compensation.
Managing Director receives compensation as may be determine by directors.

RESTRICTION ON APPOINTMENT

There are various restrictions which the Act imposes on appointment of directors and these
restrictions must be fulfilled for one to be appointed as director.

(1)        Appointment by Articles

The Act states that a person shall not be capable of being appointed director of a company by
the articles unless, before registration of the articles, he has signed and delivered to the
registrar for registration a consent in wanting to act as a director and either: -
a) signed the memorandum for a number of shares not less than his qualification shares,
or
b) taken from the company and paid or agreed to pay for his qualification shares
c) Signed and delivered to the registrar for the registration, an undertaking in writing to
take from the company and pay for his qualification shares.

These provisions do not apply to: -

a) A company without share capital.
b) A private company.
c) A company which was a private company before becoming a public company.

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(2)        Qualification Shares

It shall be the duty of every director who is by the articles of the company required to hold a
specified share qualification and who is not qualified to obtain his qualification within 2
months after his appointment or within the shorter time as fixed by the articles.

The Company’s Act provides that the director shall vacate office if he fails to obtain his share
qualification or ceases to hold the required number of shares

Case: R vs. Camps (1962) Court of Appeal for E.A.

The respondent, in his capacity as a director of a company, had been charged with several
offences under the companies Act.  Although the directors of the company had under article
96 of the company’s articles of association duly appointed him to be the director and he had
acted as such, he never acquired the required share qualification but in a statutory return,
subsequent to his appointment, he was shown as a director which was fixed at one fully paid
up share in his own right.

The office of the director shall be vacated if a director ceased to hold the number of shares
required to qualify him for office or fails to acquire the same within 2 months after his
appointment.

The court held that as the respondent had never possessed or acquired his qualifying share,
his appointment was invalid and that there were no cases for him to answer.

It was also held that the respondent was never even a de facto director and that in any event a
de facto director was not criminally liable as a director under the Company’s Act. 

Against that decision, the Attorney General appealed to the High Court and the case was
dismissed but on further appeal, the High Court held that: -
i. The word “director” in the Company’s Act includes a de facto director.
ii. The respondent was duly and validly appointed a de jure director but he ceased to be a
de jure director two months later as he failed to acquire his share qualification within
that time.
iii. If the respondent acted as a director after the expiration of two months from his
appointment, he was then a de facto director and he was a director for the purpose of
those sections of the Company’s Act which it was alleged he had contravened. 

“Appeal allowed, acquittal set aside”.

Therefore if a director does not vacate office but continues to act as a director, he ceases to be
a de jure director and becomes a de facto director.  A de facto director is incapable of being
reappointed director of the company until he has obtained his qualification shares and, he is
liable to a fine for everyday that he acts as a director of the company.

(3)        Age Limit

No person shall be capable of being appointed a director if at the time of his appointment: -
a) He has not attained the age of 18.
b) He has attained the age of 70.

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 This provision does not apply if the company’s articles provide otherwise or a special notice
of the resolution was given to the company.

The Company’s Act, defines “special notice” as a notice given to the company not less than
28 days before the meeting at which the relevant resolutions are to be moved.

(4)        Undischarged Bankrupts

If a person who has been declared bankrupt or insolvent by a competent court and who has
not received his discharge, acts as a director of any company, shall be liable to imprisonment
or to a fine or both.

(5)        Fraudulent Persons

The Company’s Act, empowers the court to make an order restraining a person from being
appointed, or act as a company’s director for a period not exceeding 5 years if: -
a) The person is convicted of any offence in connection with the promotion, formation
or management of the company, or
b) in course of winding up, it appears that the person had been guilty of fraudulent
trading.

(6)        Individual Voting

The Company’s Act, provides that the appointment of directors of a company which is not a
private company is to be voted on individually, unless a motion for the appointment of the
two or more persons as directors by a single resolution was agreed upon by the meeting
without any vote against it.

A resolution moved in contravention of this provision is void even if no objection is moved. 

The aim of this provision is to prevent a company’s members being virtually forced to vote
for directors who they do not want.

QUALIFICATIONS OF A DIRECTOR

There is no requirement in the Act that a director must hold shares, but more frequently, the
articles provides that no person shall act as a director unless he holds certain number of
shares or stock.
If the articles of association contain a provision that the qualification of a director shall be
holding a specified number of shares, then The Company’s Act, provides that:-

i. Each director must acquire and retain such qualification shares within two months
after his appointment or such a shorter time as may be fixed by Articles.
ii. The warrant payable to bearer will not count for the purpose of qualification shares.
iii. If he fails to acquire qualification shares within 2 months he automatically ceases to
be a director.
iv. He cannot be reappointed director unless he has obtained his qualification shares.
v. If he acts as a director after expiry of 2 months without taking qualification shares, he
is liable to a fine every day until he stops acting.

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Retirement Age

Every director is required to retire from office shortly after 70 years and no one should be
reappointed after that age-but this does not apply where the appointment is made or approved
in Annual General Meeting after a special notice has been given.

It does not apply to private companies unless they are subsidiaries of public company.  The
act also fixes the minimum age and states that no person is capable of being appointed as a
director if at the time of his appointment, he has not reached or attained the age of 18.
Bankruptcy also disqualifies any person from holding office as a director.

Effects of Disqualification

Whether a director holds qualification shares or not, the company will be bound to third
parties for the acts of such directors until the effect in appointment or qualification is
disclosed.

POSITION OF DIRECTORS

(a)        Directors as agents

The directors are elected representatives of shareholders.  They are in the eyes of law agents
of the company and the general principles of agency regulate in most cases, the relationship
between the company and its directors.

The directors are more than agents- they have in certain matters, independent powers.  They
are not bound to consult shareholders in all matters.  Power vested with directors, they and
they alone can exercise these powers.

(b)       Directors are not personally liable as agents

Where the directors of a company act on its behalf, they are personally liable for contracts
which they make provided they act within the scope of their authority and they do not make
contracts in their personal names.
It was held that “whenever an agent is liable, directors would be liable, where the principal
would be liable; the liability is the liability of the company”.

The directors are personally liable when:-

i. The contract is in their names
ii. They use the company name incorrectly e.g. by omitting the words Ltd & Plv. Ltd.
iii. The contract is signed in such a way that it is not clear whether it is the agent or
principal who signed it.
iv. They exceed the powers given to them by memorandum and articles of association.
(c)        Directors as Employees

Although directors are agents of the company, they are not employees or servants of the
company for being entitled to privileges and benefits which are granted under the company’s
Act to employees but there is nothing to prevent a director from being a servant of the
company under a special contract of service, which he may enter into with the company.

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Palmer’s statement gives an insight into this matter. He states that, “Directors are not as such
employees of the company or employed by the company nor they are servants of the
company or members of its staff.  Directors can, however hold salaried employment or an
office in addition to that of his directorship which may for this purpose make him an
employee or servant and in such a case, he would enjoy any right given to employees as such
but his directorship and his rights through that directorship are quite separate from his rights
as employee”.

(d)       Directors as Trustees

Directors are treated as trustees of the company’s property and money and of the powers
entrusted to them.

Directors are the trustees of the company’s money and property in the sense that they must
account for all the company’s money and property to refund to the company any of its money
or property which have been impropriety paid, that is, not to pay dividends out of capital.
Company property includes confidential information and beneficial contracts meant for the
company.

The following points in regard to confidential information are worth noting:-

i. The information itself must be confidential- nothing public.
ii. The information must have been communicated to the directors or it has reached them
in circumstances obliging them to treat it as confidential.
iii. The directors must have made an unauthorized use of that information, for example,
converting it to their own use.

The court went a length to explain and define the scope of directors’ duties with emphasis on
the protection of company’s property:-
i. A director as a fiduciary is under an obligation not to profit himself personally from
the property of the company.  More so in a situation where his interest is likely to
conflict with those of the company to which he is appointed a director.
ii. Directors as fiduciaries, if they use the property of the company thereby making
profits, must be honest enough to account for this profit to the company.
“Men who assume the complete control of the company’s business must remember that they
are bound to protect the property of the company.  They are not at liberty to sacrifice the
interests which they are bound to protect, and while ostensibly acting for the company, divert
in their own favor business which should properly belong to the company they represent”.

Incase director s are guilty of a distinct breach of duty of which they took to secure the
contract which was meant for the company, whatever benefit they must have obtained must
be regarded as being held by them on behalf of the company.

Directors are however not trustees in the real sense of the word because they are not vested
with the ownership of the company’s property.  It is only as regards some of their obligations
to the company and certain powers that they are regarded as trustees of the company.

The directors are really only quasi trustees because:

i. They are not vested with the ownership of the company’s property.
ii. Their functions are not the same as those of trustees.
iii. Their duties of care are not as onerous as those of trustees.

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True position of directors according to Jessel, M.R. in Forest of Dean Coal Mining Company,
observed that, “Directors have sometimes been called as trustees or commercial trustees and
sometimes they have been called managing partners, it does not matters much what you call
them so long as you understand what their real position is, which is that they are really
commercial men managing a trading concern for the benefits of themselves and of all the
shareholders.  They stand in a fiduciary position towards the company in respect of their
powers and capital under their control”.

DIRECTORS REMUNERATION
For technical reasons the directors are not regarded as employees of the company of which
they are directors.  They therefore have no right to be paid their services unless there is a
provision for payment in the articles.

The Company’s Act, provides that “remuneration of the directors shall from time to time be
determined by the company in general meeting”.

Provided the resolution has been passed, the remuneration is payable whether profits are
earned or not.

The remuneration payable to the directors of a company is determined by the articles of the
company or by a resolution passed by the company in general meeting.

The directors have no right to be paid for their services and cannot pay themselves or each
other or make presents to themselves out of the company’s assets unless authorized to do so
by the instrument in writing, for example, articles or by shareholders at a properly convened
meeting.

If directors are not entitled to remuneration and they pay themselves remuneration out of
company’s funds, they may be compelled to restore it even though they acted in good faith
and honestly believe that the payment was permissible.

Directors may be paid traveling, hotel and other expenses properly incurred by them in
attending company’s business.  In the absence of such a provision, a salaried director is not
entitled to expenses incurred by him as they are usually covered by his remuneration.

The remuneration payable to director is a debt from the company, and a director may sue the
company for non-payment.
Incase of absence or inadequacy of profits, it can be paid out of profits with approval of the
company.

Powers of Directors

The powers of directors are usually set out in the articles, and quite frequently there is a
clause entrusting the management of the company’s affairs in the hands of directors and
possess the following powers which enables them to carry out their functions:-
a) To enter into contracts on behalf of the company.
b) To engage or dismiss employees.

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The directors’ powers may be restricted by the articles, for instance, some certain acts shall
not be done by them unless they first obtain the sanction of the company in general meeting.
Where such provisions exist in the articles, failure to obtain the sanction may render the
company not bound by the acts and the directors then become personally liable to the third
parties.

If a director has an interest in any contract which is being considered by the company he must
usually declare his interest when the contract is being discussed.

A director is said to have declared his interest not when he states that he has an interest but
when he states what his interests are.
The disclosure should be made at the time the contract in question comes before the Board of
Directors for discussion.
Disclosure is only valid if it is made to sufficient number of directors who are themselves not
interested in the contract.  In a case of three directors, if two are interested and declare to one
who is not, it is invalid.  This is because the directors who are interested are incapable of
voting in the issue and since they are a majority, there is no quorum to which the disclosure is
made. Quorum in this case means sufficient number of directors who are not interested in the
contract.

Legal effect for directors for non-disclosure of interest

The consequences are two fold:-

i. Statutory consequences.
ii. Common Law consequences.

At common law, the contract itself becomes avoidable at the option of the company, that is,
the company can decide to continue with the contract or not or repudiate.  If the director in
question has made secret profits on that contract, he must refund the same to the company.

In statutory consequences, such directors shall be liable to a fine.

ASSOCIATE DIRECTORS
A company may appoint one or some of its employees to its board of directors.  Such
appointment is primarily intended to provide employees with a forum where they can express
their views on the company’s operations, programmes or policies.  Employees who are
appointed are usually called “associate directors”.

CORPORATE DIRECTOR
Although the statutory restrictions on appointment of directors tend to suggest that only a
natural person can be appointed as director, in practice it is not so.  Holding companies
appoint themselves directors of subsidiary companies with a view to securing and
maintaining complete control of the subsidiaries. This has been made possible by the fact that
there is no provision in the Act which prohibits the practice.
The body corporate would appoint a natural person whom it has formally authorized to attend
board meetings on its behalf.

DISQUALIFICATION OF DIRECTORS

The Company’s Act, provides that the office of director shall be vacated if the director: -

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 i. He has ceased to be a director by virtue of Section 183, that is, he has failed to     take-
up prescribed shares within two months of his appointment or under Section 186
which lays down the minimum and the max age for directors.
ii. He becomes bankrupt.
iii. He becomes prohibited from being a director by reason of any order made under
Section 189 (restraining fraudulent persons from managing a company)
iv. He becomes of unsound mind
v. He resigns his office by notice in writing to the company.
vi. He is absent without permission for more than 6 months from meetings of directors
held during that period.
Regarding resignation, it was held in Premier Cinema Co. vs. Ennion that a verbal notice of
resignation which is given to and is acceptable by the general meeting is effective and cannot
be withdrawn. This is because the general meeting would be deemed to have amended the
company’s articles by deleting the words “in writing”.  But if an oral notice of resignation is
given to and accepted by the board of directors, it would be invalid since the directors cannot
legally alter the company’s articles of association.

Regarding absence from board meetings, it should be noted that it does not say that the
director in question shall vacate office if he “absents himself”. Such would disqualify the
director if the absence in question was voluntary.  The office would be termed vacated if the
director has not been in office even if on medical grounds as per McConnell’s claim.

A person may also cease to be a director for other reasons as follows: -

i. Death.
ii. Retirement by rotation under articles.
iii. Dissolution of the company.

VACATION/REMOVAL OF DIRECTOR
A director may leave office either by vacation or by removal.

(a)        Vacation

This is the voluntary quitting by a director.  It can happen any time during the director’s
tenure of office for any reason such as ill health, age, agreement with the Board of Directors,
bankruptcy, ceases to hold qualification shares, of unsound mind, is convicted by the court of
an offence involving moral turpitude absents himself from meetings, restrained by the court
from being a director and so on.

(b)       Removal of Directors

Removal means being forced to quit the position of a director. A director can be removed
by:-
i. Operation of law
ii. Company itself

If a director is in breach of his statutory qualification, the consequence is that the law
operates immediately to remove him. Secondly, when the company goes into liquidation, the
directors ceases to hold office.

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The Company’s Act, provides that a company may by ordinary resolution remove a director
before expiration of his period of office, not withstanding anything in the articles or in any
agreement between him and the company. A company may remove a director by ordinary
resolution after giving a notice. 
 
It is vital to note that the Company’s Act, requires that the company observe the rules of
natural justice which insists that a man shall not be condemned unheard. The company must
send a copy to the director concerned who is entitled to speak in his defence.
A removed director may claim compensation for the loss of office.

Compensation for Removal

The Company’s Act, provides that nothing in the section shall be taken as depriving a
removed director of compensation or damages payable to him in respect of termination of his
appointment as a director.

This provision would enable a managing director to sue the company for damages for
wrongful dismissal if the effect of his removal as a director was to prematurely terminate his
appointment and was inconsistent with the contract.

COMPENSATION FOR LOSS OF OFFICE

a) The Company’s Act, makes it unlawful for a company to make to a director any
payment by way of compensation for loss of office, or consideration for or in
connection with his retirement unless the particulars of the proposed payment are
disclosed to the members and approved by the company in a general meeting.  This is
necessary because the directors when negotiating the terms of the proposed settlement
would be dealing with one of their own and might as a consequence give inadequate
consideration to the interests of the company.
b) The Company’s Act,   provides that it shall not be lawful to transfer any part of the
undertaking or property for the purpose of making any payment to a director by way
of compensation for loss of office or on retirement unless particulars are disclosed to
the members of the company and approved by the company in a general meeting.
c) If a payment is made to a director as compensation for loss of office or on his
retirement, he must take reasonable steps to ensure that the particulars of the proposed
payment are included in or sent with any notice of the offer given to the shareholders.
If this is not done, the director holds the payment on trust for the persons who have
sold their shares as a result of the offer.
d) The Company’s Act, imposes a duty on directors to disclose payments for loss of
office, made in connection with transfer of shares in a company. This section provides
that such payment should be proposed with a transfer as a result of:-
i. An offer made to the general body of shareholders.
ii. An offer made by or on behalf of some other body corporate with a view to the
company becoming its subsidiary or a subsidiary of its holding company.
iii. An offer made by or on behalf of an individual with a view to his   obtaining
the right to exercise or control of not less than 1/3 rd of the voting powers at the
general meeting.                       

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Loans to Directors

The Company’s Act, renders unlawful any loan made by a company to a director.  It is also
unlawful for the company to guarantee or secure a loan given to a director by any other
person. These restrictions do not apply to:-
1. A private company, or
2. A subsidiary company whose director is its holding company or
i. Payments made to a director to meet expenses incurred or to be incurred for the     
purpose of the company, or to enable him to perform his duties, or
ii. A loan by a money lending company of a bank in ordinary course of business.
Loans to them must be disclosed in the account laid before the general meeting.

DUTIES OF DIRECTORS

The duties of director are usually considered under two broad categories, namely: -
i. Duties of care, skills and diligence.
ii. Fiduciary duties.

(1)        Duty of Care, Skill and Diligence

Directors should carry out their duties with reasonable care and exercise such degree of skill
and diligence as is reasonably expected of persons of their knowledge and status. The
directors are not liable for mere errors of judgment.

Case Law: Brazilian Rubber Plantation Estates Ltd (1911)  

In this case, the directors of the company decided that the company should invest in some
rubber estates in Brazil.  They accordingly issued a prospectus inviting members of the public
to come forward and subscribe for the shares and debentures of the company, the purpose of
invitation being to raise money from the subscription in order to finance the rubber estate
project.
In the prospectus they declared to the prospective investors that the project in question for
which subscription were being invited was viable or had potential success. Soon after
subscription the project turned out to be a failure and the company was wound up.

The subscribers brought an action against the directors for inserting a misleading/false
statement in the prospectus upon which they had relied or acted upon to their detriment.  In
their defense, the directors claimed that they had acted in good faith.

It was held that the directors were not liable because they had made an error of judgment
about viability of the project and in making the judgment, they had applied the care and skill
that men of experience were expected to apply.

Where a director makes an error of judgment, he will be absolved from any liability so long
as the judgment he made or decision he took and considering all surrounding circumstances
came from past experiences and knowledge which he had; but if a director fails to exercise
due care expected of him in the exercise of his duties, he is guilty of negligence.

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Standard of Care

The standard of care, skill and diligence depends upon the nature of the company’s business
and the circumstances of the case.
The standard of care depends upon:-
i. The type and nature of work.
ii. Division of powers between directors and other officers.
iii. General usages and customs in that type of business.
iv. Whether directors work gratuitously or remuneratively.

Case Law:  City Equitable Fire Insurance Co. Ltd

The directors of insurance company left the management of the company’s affairs almost
entirely in the hands of B, the managing director.  Owing to B’s fraud, a large amount of
company’s assets disappeared.  B and the firm in which he was a partner had taken a huge
loan from the company and the cash at the bank or in hand included £7,300 in the hands of
the company’s stockbrokers, in which B was a partner. The directors never inquired as to
how these items were made up.

It was held that the directors were negligent, though the articles protected them from liability.

Romer therefore observed that “in ascertaining the duties of a director, it is necessary to
consider the nature of the company’s business and the manner in which the work of the
company carried out amongst the directors and other company officials”.

In Dovey vs. Cory, a director was held not liable for negligence merely because he had failed
to verify false information regarding the company’s accounts which he had been given by the
company’s manager and managing director.
The court stated, “The business cannot be carried on upon principles of mistrust.  Men in
responsible positions must be trusted by those above them, as well as by those below them
until there is reason to distrust them.  We agree that care and prudence do not involve
distrust”.

(2)        Fiduciary Duties

As fiduciaries, the directors must: -

a) Exercise their powers honestly and bonafide for the benefit of the company as a
whole.  But if for example the power to issue further shares is exercised by the
directors, not for the benefit of the company but simply and solely for their personal
aggrandizement and to the detrimental of the company, the court will interfere and
prevent the directors from doing so.

     (ii)  Not to place themselves in a position in which there is a conflict between their duties
to the company and their personal interests.  They must not make any secret profit out of their
position and if they do, they have to account for it to the company.

Case Law:  Cook vs. Deek (1916)

Three directors of a company obtained a contract in their own names, under the
circumstances which made it breach of trust by them, and constituted themselves trustees of
the contract of the company.  By their votes as holders of ¾th of the shares, they induced the
company to pass a resolution declaring that it had no interest in the contract.

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It was held the directors were liable to account to the company for the profit they made on the
contract as in equity, it belonged to the company.

Case Law: Regal Hastings Ltd vs. Guilliver (1942)

R. Co. Ltd owned one cinema and wanted to buy two others with a view to selling the three
together.  It formed a subsidiary company to buy the two cinemas.  It was however unable to
provide the necessary finances.  As such, its directors themselves subscribed for some of the
shares in the subsidiary company. The cinemas were acquired and the shares in R Co. Ltd and
the subsidiary sold at a profit.

It was held that the directors must account to R. Co. Ltd for the profit they made because it
was through the knowledge and opportunity they gained as directors of R.Co. Ltd, that they
were able to obtain the shares.

Case Law: Burland vs. Earle (1902)

Burland, a director of a company, bought a property for £21,564 at a public auction.  He
subsequently sold it to the company for £60,000.  The shareholders brought an action against
Burland for restoring the profit made by him out of resale of the property to the company.

It was held that Burland was not liable to pay to the company the profit made by him because
there was no evidence whatsoever of any mandate to Burland to purchase on behalf of the
company, or that he was in any sense a trustee for the company of the purchased property.

But where a director is under mandate to purchase some property for the company, he is in a
sense a trustee for the company of the purchased property.  If he purchases the property in his
own name and then sells it to the company at a higher price thus making a profit, he is liable
to account to the company the profit earned.

(3)        Duty of Disclosure

Except with the consent of Board of Directors, a director or his relative or any firm in which
he is a member or a director, shall not enter into any contract with the company for the sale,
purchase or supply of goods.  Even in case of urgent necessity contracts, consent must be
obtained.  It is the duty of the director to disclose to the Board the nature of his interest in any
contract or arrangement entered into

(4)        Duty to act honestly

A director must not act in manner trying to make personal gain out of a transaction in the
name of the company.

(5)        Meetings of the Board

A director is not bound to attend all meetings, but he should obviously attend as many as
possible.

(6)        Delegation of Authority

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A director has duty not to delegate his functions except to the extent authorized by the act or
the constitution of the company.

Can a director be liable for the mistakes of his colleagues?

A director absented himself from Board meetings for 20 years and during this period, his
colleagues paid dividends out of capital.  The shareholders brought an action against this
particular director arguing that by absenting himself, he was acting negligently because had
he been attending the meetings, he would have discovered that dividends were being paid out
of capital.

It was held that this director was not negligent in absenting himself unless there were
circumstances warranting non-abstention.

Exceptions to this Rule

Whether a director must attend a Board meeting or not is a question of fact.  His compulsory
attendance depends on the exigencies of the company’s life.  If he is a member of committee
of the Board, he must attend or is reasonable expected to attend meetings of that committee to
deliberate on issues at hand because by being placed in that committee, his input is
considered important.

If a director is so expected to attend but he fails, then such a director is negligent.

Can a director be allowed to delegate?

The directors are bound by the principle “delegates no potest delegata”, that is, a delegate
cannot sub-delegate- even then, the exigencies of business allow a director at times to
delegate his duties, though he cannot delegate all his duties.

However, at times a director can rely on other officers in the company to perform those
duties.  He shall not be held negligent in such cases once he is satisfied that the various
officers of the company are manning those duties property, and he shall not be held liable for
negligence in such cases.

INSIDER DEALING

Insider dealing is understood to cover situations where a person buys or sells securities when
he is in possession of confidential information which affects the value of those securities. 
Furthermore the confidential information in question will generally be in his possession
because of some connection which he has with the company whose securities are to be dealt
in.  He may be a director or a professional advisor.

Section 33 of Capital Markets Authority Act (Cap 485 A) prohibits insider dealing.  The
objective of this prohibition is to promote and facilitate the development of an orderly, fair
and efficient capital market in Kenya.

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The section imposes criminal penalties and gives statutory right to an aggrieved shareholder
to claim compensation if he suffers loss from the transaction, under Section 34(3).  If the
person guilty under Section 33 profited from the offence, but those harmed cannot practically
determine the compensation payable, it shall be made to Investor Compensation Fund
established under Section 18(1) of the Act.

Section 33(9) provides that a person is connected with a company if he occupies a position
that may reasonable be expected to give him access to “price sensitive information” by virtue
of:-
i. Any professional or business relationship existing between himself and that body
corporate, or
ii. His being an officer or a substantial shareholder in that body corporate, or in a related
body corporate.
The Company’s Act, prohibits “a connected person” from communicating that information to
any other person whom he knows or has reason to believe, will make use of the said
information to deal in listed securities.

The object of The Company’s Act, is to prevent a connected person from “tipping” another
person with the intention that the person “tipped” shall deal or cause another person to deal in
the relevant securities.

The Company’s Act, provides that any person in contravention shall be guilty of an offence
and shall be liable to a fine not exceeding Sh. 500,000 or Sh. 1,500,000 for a body corporate. 
These fines are to be doubled on any subsequent conviction.

LIABILITY OF DIRECTORS

(1)        Liability to Outsiders

Directors are not personally liable to outsiders if they act within the scope and powers vested
in them.  The general rule is that wherever an agent is liable, those directors would be liable,
but where liability would attach to the principal only, the liability is the liability of the
company.
The directors would be personally liable to third parties in the following cases:
i. They contract with outsiders in their own personal capacity.
ii. They contract as agents of undisclosed principal.
iii. When the company is ultra vires the company.

In default of statutory duties, directors shall be personally liable to third in the following
cases:
i. Misstatement in prospectus
ii. Irregular allotment
iii. Failure to repay application money if the minimum subscription is not subscribed.

(2)        Liability to the Company

The directors shall be liable to the company in the following cases:-

i. Where they have acted ultra vires the company, for example, they have applied the
funds of the company to objects not specified in the memorandum or when they pay
dividends out of capital.

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 ii. When they have acted negligently –negligence may give rise to liability, there need
not be fraud.
iii. Where there is a breach of trust resulting in a loss to the company, they are bound to
make good the loss.
iv. Misfeance: - Willful misconduct or willful negligence.

(3)        Criminal Liabilities

The act provides penalties by way of fine or imprisonment particularly when directors omit to
comply with or contravene certain provisions of the Act.

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