Monday, 28 September 2015

DIRECTORS – DUTY OF CARE AND REMEDIES FOR BREACH

Directors have sometimes been called trustees, or commercial trustees.  Sometimes they have been called managing partners; it does not much matter what you call them as long as you understand what their true position is, which is really that they are commercial men managing a trading concern for the benefit of themselves and all the other shareholders; they are bound to use fair and reasonable diligence in the management of their company’s affairs and to act honestly.

In relation to company property, a Director’s position is similar to that of a trustee in that a Director controls the company’s assets and exercises his power for the company’s benefit, and not his own. Company property includes not only money and physical assets, but also intangible assets and confidential information such as trade secrets and details of business opportunities.

As trustees, Directors must account for all such property over which they exercise control, refund any money improperly paid away, and exercise their powers in the interest of the company and not in their own sectional interests.

A Director is also an agent for the company. The company, not being a natural person can only act through other persons. He acts on its behalf and owes the core of his duties to the company as a whole, and not just to its shareholders.

More importantly, a Director stands in a fiduciary relationship towards the company and must observe utmost good faith towards the company in any transaction with or for the company. A Director must at all times act in what he believes to be the best interest of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed. He must do this in such manner as “a faithful, diligent, careful and ordinarily skillful director” would act in the circumstance. This duty of care is owed towards shareholders, creditors, and employees.

Fiduciary duties include the exercise of power for proper purpose, not to make secret profit, not to fetter his discretion, to act in accordance with the company’s Memorandum and Articles of Association and the avoidance of conflict of interest. Questions have been asked as to the practicality of requiring a Director who is representing a significant shareholder on the Board not to fetter his discretion.

Such a Director would typically vote as directed by his principal. However, the rationale of this legal requirement is to ensure that decision making in the Boardroom is based on objective reasoning and not influenced by narrow considerations. The ability to “not fetter his discretion” is the hallmark of a Director able to exercise independent judgment.

A Director should not allow personal interests to conflict with his duties and responsibilities as a Director. A conflict of interest occurs when an individual is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other and it typically manifests when an individual’s private interest interferes in any way or appears to interfere with the interest of an entity to which he owes a duty. It is inevitable that Directors will occasionally face situations of potential conflict of interest whether directly or indirectly.

Directors should promptly disclose any real or potential conflict of interest that they may have regarding any matters that may come before the Board or its Committees. The disclosure by a Director of a real, potential or perceived conflict of interest or a decision by the Board as to whether a conflict of interest exists should be clearly recorded in the minutes of the meeting at which the notice of interest was made.

A Director should abstain from discussions and voting on any matter in which he has or may have a conflict of interest. Some Boards expect that such a Director to leave the Boardroom when the matter is being discussed. This is not necessarily best practice to the extent that Directors should be sufficiently objective to discuss a matter in which one of them is interested – even with him in the room.

The consequences of breach of a Director’s duties include, imprisonment, fines, removal from office by shareholders and disqualification from holding the office of a director in a publicly quoted company. A Director will be personally liable where he receives money by way of a loan for specific purpose on behalf of the company and with intent to defraud, fails to apply the money for the purpose for which it was received.

Directors will also be personally liable where individually or collectively, they have acted beyond the authority conferred upon them by the company’s Articles of Association; acted in breach of the Companies and Allied Matters Act or other legislation; acquiesce in the company carrying on business recklessly; sign or authorize the publication of false or misleading financial statements. Directors can also be sued for losses suffered by the company as a consequence of breach of their fiduciary duties.

Directors and Officers Liability Insurance (D&O) is yet to catch on in Nigeria.  D & O is provided to attract competent professionals to take up Board appointments without fear of personal financial loss. However, insuring against losses suffered by Directors as a direct consequence of negligence in performing their oversight functions or wrongful acts and misrepresentation in financial statements is not in consonance with the key corporate governance principle of accountability. (businessday)