Duties Of Directors: Mitigating Liabilities

The duties of directors are inherently complex. The complexity surrounding directors’ can be attributed to three interconnected reasons. First, the duties of directors are contained in several laws, including: (i) the Companies Act, which sets out the general duties of directors; (ii) the Civil Code, which contains provisions regulating agents, mandatories and fiduciaries (all of which relate to the juridical character of directors); (iii) a range of laws regulating financial services operators, including credit and financial institutions, insurance companies, investment services companies, trusts and company services providers; and (iv) a range of non-regulatory statutes including the Income Tax Act, the Value Added Tax Act, the Social Security Act, the Employment and Industrial Relations Act, and the Occupational Health and Safety Authority Act.

Duties of directors are also set out in the memorandum and articles of association as well as in any agreement entered into between the directors and the company. Secondly, the different nature of the duties of directors adds to the intricacy of the matter. Some duties are of a mere civil nature, while others impose criminal liability. There are also different duties which apply when the company is insolvent or approaching a state of insolvency. Thirdly, duties differ according to the type of company (for example, private companies, public companies, listed companies and state-owned companies) and the sector in which the company operates (such as the financial services sector).

This complexity can be daunting, especially due to the risk of personal liability that directors may face if they breach their duties. Broadly speaking, directors can be found liable under the Companies Act (including for breaches of the general duties of directors, liability for administrative offences and liability for offences arising when the company is insolvent) and liability under legislation other than the Companies Act (including liability for administrative fines and criminal offences).

How can directors mitigate the risk of personal liability arising from breach of duties? While specific measures may be applicable depending on the type of duty that is violated, some measures can be regarded as universal. The universal principles are axiomatic in nature; many of them are derived from the Code of Principles of Good Corporate Governance for Listed Companies. They include: (i) only accepting to act as director if fellow directors are honest and competent; (ii) ensuring that the proper composition of the board taking into account the size and type of company and the sector within which it operates – this may involve the appointment of non-executive directors including the appointment of female directors; (iii) not allowing an overbearing or passive chairperson, chief executive officer or managing director to dictate matters without appropriate challenge; (iv) holding regular formal and informal meetings; (v) constructively challenging corporate strategy; (vi) seeking where appropriate legal and professional advice; (vii) organising and attending training sessions both internal and external; (viii) devoting enough time to the company and keeping oneself informed; (ix) ensuring dissents are properly recorded in minutes; (x) leading by example – this includes acting lawfully, fairly and in a trustworthy manner; and (xi) being aware of the nature and extent of their duties and the consequent liability.

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